Startup Fundraising Tips from a Venture Capitalist with Rich Maloy

Hello everyone, can you hear me? I believe so. But well, welcome to Ask an Investor Anything. Thank you for joining us. We had about 300 registered people, so we hope to get enough people, and also you can get together later after this session. We are excited to welcome Rick Malloy. He's a managing partner of Springtime Ventures. Well, I'm Lara. I will be the host today. I am part of the Founders HQ team. And yeah, I would love to first get to know more of Rick. So Rick, please introduce yourself and also about Springtime. What is the investment thesis of Springtime Ventures?

Awesome. Thanks, Lara. Great to meet you and great to be here with you. Thanks for having me, everybody, from the Founders Institute community. Um, my name is Rich Malloy. I'm managing partner at Springtime Ventures, also the host of the VC Minute podcast. Uh, and for me, brief, brief background for me is my first career was in corporate finance, my second was in sales. Both of those were in New York City, and then I moved out to Boulder in 2011. And so I've now been out here for 14 years after 14 years in Midtown And, um, I have been a part of the startup ecosystem ever since. I've been an unpaid founder and an underpaid employee. I've been a community organizer and a community leader and a corporate sponsor and a management consultant. And as I was leaving my corporate sponsor role, I was catching up with some folks, and this one guy that I'd met a year earlier had this crazy idea to start a venture fund, and I joined him. And that was the start of Springtime Ventures in 2017. So Springtime is a seed stage fund. We are based in Denver, Austin, and Atlanta. We have 3 partners. We're finishing up— we have 1 more investment to make out of our second fund, and then we're going to bring our third fund online next month. So fingers crossed. That's, uh, it's a whole nother story, right? Uh, fundraising for a venture fund. Um, we invest in the USA and we invest in the seed phase. And we only invest in fintech, logistics and supply chain, and healthcare. Software only in those industries, and we'll invest across the whole US. That's a quick background, uh, and I am here to answer your questions about venture capital, fundraising, and whatever else you all want to talk about today.

Awesome, Rick. I, I actually have a question on your investment thesis. So you, you've talked about investing in the US So I have two questions, like, do the founder needs to be a resident in the US, or does the founder need to be present in the US? And are you just investing in US companies that tackle US market?

Yes. Yeah. So thanks for asking that. And yeah, we look at it as three legs to the stool. And so the founder, uh, it has to be based in the US, they have to be incorporated in the US, and they have to be primarily targeting US-based businesses.

Awesome. Perfect. Well, you've shared with us that you are a host in a VC Minute podcast. So you actually share a lot with the different audience, not only founder, but, you know, founder and VC audience about fundraising tips. So I would love to know more of what is a common mistake that you see founders do over and over and what is the best way they can avoid this? Common mistake?

Yeah, totally. The thing that I have learned from other founders and that I see as the biggest mistake is most founders don't run a structured, organized process. And so this is— there's a— the longer answer here is that the best fundraisers build up their process and build up everything that they need ahead of time and go to market in one big push. Right, whereas most founders put together a pitch deck and they're so excited about it, and then they take it out and talk to a couple of investors and get some rejections and maybe get some one or two pieces of feedback and retool the pitch deck and then reach out to a couple more investors and then back to the pitch deck and back to the customers and then back to the investors. And they do this, and before you know it, you're in market fundraising for 3 months, 6 months, and it comes across my desk and I look at it and I say, oh, this is interesting, and I send it to a buddy of mine that specializes in that area, and they say, oh, they're still fundraising? I met with them in May. I can't believe they haven't brought their round together yet. Bad signal. Uh, the best fundraisers, what they do is they will start putting their materials together, and the materials are the pitch deck, the pro forma financials, um, and then as well as any other additional information that your, your investors may need. But primarily, right, you need a pitch deck You need some supporting materials, you need pro forma financials. They'll take that pitch deck out and start getting feedback before they ever talk to an outside investor. They may go to, go to your VC friends, go to your friends that are at accelerators, go to your friends that have— your founder friends that have fundraised before. Go get feedback. And if you have existing investors, get feedback from them. Get feedback on your pitch deck. While you're doing that, you also want to start building out a list of found— or excuse me, about start building out a list of VCs to target. The important thing is that you use a CRM. It's not important what the CRM is. In fact, you could do it in Google Sheets. I know great fundraisers that, that do this in Google Sheets. Airtable has, has platforms for this. FI probably has a platform for this, I don't know. Um, but, uh, build out a list of investors that you want to target, and then also do the work to find out who can connect you with those potential investors. and you really do have to scour your network for this. You get all of this stuff ready before you go out to fundraise. So now you have your pitch deck built, you have at least one or two rounds of feedback on your pitch deck, you know who you want to go out to, you know who's going to connect you to those folks that you want to go out to, and then you can go out and hit the market and start, and start soliciting. And you want to try to structure your day around focused fundraising. If you have a co-founder, let them know that you're going to be heads down for the next 3 months and that they need to be the one running the business and that you're going to be fundraising. When you book your meetings in with, with investors in as quick succession as possible, meaning 3, 4, 5, whatever, how many ever meetings you can get per week, per day, your feedback cycle is a lot faster. You start to hear the same questions over and over again. After about 7 or 8 meetings, you'll probably have heard 80% of the questions that you're going to hear. You'll also know where you're on your back foot, and so meaning that, uh, where you don't have good answers or concerns that potential investors have. And so you'll know how to overcome those objections or address them before they become a problem. And so your, your learning cycle becomes a lot shorter when you're in a more focused fundraising time frame. So do the work up front, build out a system, build out a process for yourself, and then go hit the market hard. When you do it in dribs and drabs, it only hurts you in the long run.

Awesome. Some people say it's calendar density, right? It's all about it, right? Um, so it's interesting, uh, you to, to bring this because in Funding Lab— so it's a post-program of Founder Institute— we all, all those nitty and gritty secrets of, you know, coming up with your fundraising strategy and, um, and going out there and fundraise. But on the same note, we had a question here, um, and I'd love to address this question. So on the note of having like common mistakes being done, um, what do you usually see is a common mistake while pitching to investors if you are a founder?

So it's, uh, talking too much, not reading, not, not listening, and not asking questions, right? So you, you know, you want to build some rapport, you want to understand where the investor is coming from. I love when founders start out by asking me questions, right? You know, even if it's just, you know, I'd love to hear the springtime pitch, right? And tell me about this. And then What are you looking for in a fintech investment, right? What gets you excited? What was the last investment that you said yes to, and why did you say yes to that? All right, get some context on what this person on the, on the other side of the camera is looking for from you. Um, and so ask those questions and then give your pitch, and give your pitch in a succinct manner. Read the room, um, and don't just talk at me for 20 minutes. Because I'm gonna try and pay attention, but I'm probably not gonna stick with you for 20 minutes straight, right? Get to a couple of big points. If you see me lean in about something, pause there and say, "What do you think about that? What's your take on that?" Another practice I heard, this was actually from the investors, the partners at Hanna Gray, Kate and Jessica, they take every pitch call with potential LPs together, and while one is pitching, the other is watching. And they're just watching the, uh, the investor, the potential LP, to see when he picks up his phone, you know, when they start to daydream, when she looks away, looks down at her keyboard, right? To see when they're disengaging. And they provide that feedback to each other in a, in a recap. But even if you're not pitching with your co-founder, at the very least, you know, go for 5 minutes, talk for 5 minutes, pause for questions, engage your audience. This should be a conversation and not a lecture.

Great tip. Well, another question we have here is, what are the signals or milestones that a founder should hit before it makes sense for them to fundraise? We have a couple of questions around that. But we'd love to hear more of your thoughts.

Yeah, you know, there is no one answer for this, so I can't give you, uh, you know, I, I can't give you, I can't give you a straight answer because, because it's different for every investor, it's different for every business. My joke about, uh, about revenue is, is that it's never enough, right? And so if you're pre-revenue, get some revenue. You cross the— there's an old, old post from almost 20 years ago called The Penny Gap. Get somebody to give you a penny for your products. And I'm a big believer in crossing the penny gap. But then once you cross the penny gap, then now you have the problem where people are giving you revenue, and now the clock is ticking. And now every investor is going to want to see how much revenue do you have and how fast is the revenue growing. And so great, you did $1,000 of MRR, okay, and what do you— what did you do next month? Oh, you went down to $500,000. You went to $2,000. Well, $2,000 is okay. Sure, you doubled it, but that doesn't mean much on $1,000. Oh, now you're at $15,000 MRR. Now you're at $100,000 MRR. Really, how are you going to go from $1 million to $5 million? Because now you need $5 million to raise a Series A or whatever it is, right? It's more like $3 million to raise a Series A. But, and so, you know, so it's never enough, right? There, the milestones are always moving. I call this the VC treadmill, right? And once you get on the VC treadmill, it only gets faster and it only gets steeper. But there are things that you can fall back on in order to overcome not having enough traction, right? And so the number one thing is the vision. You wanna pitch your vision, right? Mike Maples has this great quote. He was the founder of Floodgate Ventures, one of the OGs of the seed investing, one of the people that created the category of seed investing. And he says, great founders are like time travelers. They come from the future to tell us what the world is like with their business at full scale. You have to be that time traveler. You have to show me the future of your product at full scale. And you have to sell me on the vision of why this works and why you're the person to do this and how this is all gonna come together and why now is the time and you are the team. So, you know, you can also think of them as levers, right? The less revenue you have, the higher the vision component that you have to sell and that you have to pitch. And practice this, right? Try pitching to yourself. Try pitching. We do it at Springtime. We pitch to each other about how does this sound, right? As we're going to go out and fundraise, or we are out fundraising, right? And so we have to pitch our vision, and we are looking for the same thing from founders.

Excellent. Yeah, that's all that I talk about with founders. It's like you should trust your vision. At the end of the day, people are betting on your vision for anything that you want to deliver. So you have to be able to talk about that. Yeah.

So I'll double down on that. My friend Eric Marcoulier, multiple-time startup founder, he's a Zero to One guy. Now he's a CEO coach. He says that The number one job of a founder is to sell the vision, right? And so, because you have to— when you sell the vision, you sell it to investors, you sell it to customers, and you sell it to employees, right? And so, like, the job of a CEO is never run out of money. And how do you not run out of money? You either get funding or you get customers, right? And all in— and you have to build a great team, right? And so you have to sell the vision. You're constantly selling the vision. To, yeah, to everybody.

Yeah, true story. Well, well, let's move to another question. But what are the red flags that usually make you pass on a deal? Is that anything that you can share in regards to the, maybe the founder, but maybe the product and anything else?

Sure. I mean, there's some basic ones of any sort of overhyping, deception, uncovering anything that's, that is, um, uh, you know, this public knowledge that's, you know, that, that is problematic. Um, you know, these are, uh, you know, these are, I think, sort of the basic red flags. Um, you know, one of the other ones is burning too much money, burning too much capital, right? Just passed on a startup that I thought was a very compelling business. They'd raised a lot of money, thought they had product-market fit, went through $6 million, did not have product-market fit, needed to raise again. $6 million is a lot of money for a seed stage company. And my partners just said, Rich, we don't care how cool the product is. I was like, we have no trust that this founder can responsibly manage money. Like, so, you know, we believe that everybody deserves second chances, but sometimes it has to be with somebody else's money. And so I got shot down on that one, which is fine, right? But that is also a— but that's also a flag. You know, I think that also lack of follow-through, lack of follow-up, right? We said— you said you would do something. Did you do it right? You said you would send me something. Did you send me something? You were going to send me some more materials. You know, lack of communication. Is a, is, you know, is a, is a big red, big red flag. Yeah, I'll pause there. There's one of the, the last thing I'll say is I have a lot of little yellow flags, and when the yellow flags add up, that becomes a red flag, right? Like you get 2 yellow cards, you get, you get a red card.

I have a little more, let a little bit more than, than 2 yellow cards go through, but, but, you know, Okay, then it's allowed to have like a founder who you think is great, it fits your investment thesis, but it has like a yellow flag.

Yes, or we gotta, you know, yeah, I mean, look, we've pushed through, we've pushed through, um, a number of things, sometimes successful, sometimes not. Um, you know, uh, the— this again comes down to the founder, believing in the founder, believing in the vision. Being willing, because look, nothing is perfect, right? None of these— no, you know, you, your startup has got something that you don't want me to bring up or that you don't want to talk about, right? Every startup has that, right? Every business has that, right? And so that's, that's okay, right? What you have to do is you have to be able to deal with that in a professional, forthright manner that where you can be honest with, with a potential investor about whatever that situation is. Uh, co-founder that that is not part of the team anymore, is debt equity on the cap table. Hey, look, we really need somebody to restructure this cap table. I mean, that's not a first-call conversation. That's a second or third-call conversation, right? But, you know, but those things are out there and they happen. And we've been part of rounds that have restructured cap tables a couple of times. We've been a part of— we made a new investment into a down round for a company because we've been tracking them for a couple of years and we knew that was the right move. I mean, heck, our fourth-ever investment is a company called Sondermind. They're a marketplace for mental health therapists. They're worth over $1 billion. And we were the only Colorado investor that would invest in them. And so we either knew something that everybody else didn't know, or we were too dumb to know something that everybody else knew. But it turned out to be that it was a great founder with a great investment and a great business. And whatever other people have been hung up on in the past. We didn't have that. And so we were, so we saw something clear in his vision and moved forward with it.

Awesome. I have a question here. I think it's interesting to share. So how, what do you do as a founder if an investor says to you, oh, this is already being done when pitching your startup? Yeah.

Yeah, first I would ask, you know, for an example, because they may not understand your business. Right. And so, so that's the, that's the first thing. Right. And so then also you don't just go straight into blind pitching and telling them the things that they think that they already know and they're not listening. Right. Tell me about who you see that's been doing this or give me an example or what aspect of our business. Right. Even if they don't want to name names and like if you ask me to name 6 startups that were competing with you, I, might not even be able to name one, but you say, what aspect of our business do you see a lot of, right? And make sure that you have clarity around, uh, around their concern, right? And then again, I, I, you know, I hate to repeat myself, but, uh, this is something— repeating yourself is something that you have to get used to in, uh, pitching startups. Uh, in fact, I'm going to take a sidebar on this one right now. I had a sales manager, uh, that used to say Um, show them the fish, tell them it's a fish, hit them with the fish, show them the fish, tell them it's a fish, right? And so you just repeat and repeat and repeat, and it might be the thousandth time that you've said Springtime Ventures is a seed stage fund based in, you know, Denver, Austin, and Atlanta, right? But it's the first time they've heard it, or it might all— it might be the second time that you've said it to them, and it might only be the first time that they've actually heard it. So understand what the actual objection is underneath there, and then go into why that your business is different and is truly differentiated, right? And differentiation is extremely important, right? And so, um, uh, you know, and so be ready to talk about those. Yeah.

Um, and I think probably everybody knows, but Fundraising is a very hard process. It's very draining. So do you have any advice for the founders that, you know, sometimes they feel that they can't do it, that it's taking a lot of their time? So how to keep up the energy and confidence in this process?

Yeah, for sure. You know, I'm a big believer in mental health, and so you, have to take care of yourself, and you have to make sure that your, that your needs as a human being are being met, right? If, um, you know, if you need to spend time with your family, you need to get off of the computer, you need to go have a workout, you need to have good sleep, balance, uh, find that balance. Take care of yourself first and foremost. It will give you more resilience. And so, um, and I've— there have been— I did a whole week 2 weeks maybe on founder mental health, uh, in the VC Minute. And so there's some structural things that, that I would recommend, right, around structuring your day and have dedicated time for meetings, have dedicated times for no meetings, have dedicated times for, for workouts. A friend of mine says structure gives you freedom. I have a very structured calendar— excuse me— and so that in that calendar I know that I'm going to cram all of my meetings into Mondays and Tuesdays. Wednesdays I'm going to take no meetings. Thursdays has a, has a structure. Thursdays is usually my in-person days, Friday mornings, more meetings, Friday afternoons, never meetings, right? So that's just my personal one. But, and so that's just on the surface level, right? About creating time and creating space for yourself and make sure that you're putting space for yourself in there. Because if you don't have that resilience internally, then that will come through and you will not be able to do this in the long term. Next is I think that you need to celebrate victories and celebrate small wins. Um, and this could be an example of this that, that I do is I have a little system where, um, I give— where I have— I've created a little system to give points to myself for, uh, for different activities on the fundraising front. Researched potential LPs, reached out, asked for introductions, Supported my partner. My partner Matt is the main fundraiser, so he does 90% of the fundraising, but supported Matt in different ways on his fundraising efforts. Had a meeting, had a first meeting, had a follow-up meeting, sent follow-up materials, right? And so that I can see these small little steps that I'm taking, even if the big goal and the big step is not going to be seen, we're not going to see results for it for another month. And we've been actively fundraising for 6 months, right? Even though we haven't asked for a single signature yet. But that's just VC side of funding. And so celebrate your victories, celebrate your small wins. And then finally, you know, I would say that you need to remember why you're doing this, right? And this is where VCs want to back somebody that is a missionary, not a mercenary, right? We want to back somebody that has deep faith and conviction in what they're doing. And If there's some way that you can remind yourself about the importance of your mission and what it means to you as a person, as a human, then that's something that you can fall back on when you're getting rejection after rejection, you know, and, you know, evaluate yourself along the lines of, did I take virtuous action today?

Yeah, great advice. I just pasted here on the chat for for you guys want to check out the VC Minute podcast. Yeah, you can explore the page. I have another question also about long-term relationships. So for the first-time founders out there, and it's very common for founders to have first-time founders, how do you usually start and build relationships with investors? Yeah, yeah.

You know, this is, um, uh, the— this is— I'm going to go back to an— to another piece of VC fundraising lore called Lines Not Dots. And apologies if you've heard this one, right? But just in case you haven't, Mark Souster wrote this in 2008, maybe, um, right? That actually might have been 2018. Regardless, right? No, actually it was before that. Um, but if you and I have one interaction, I have a dot on my, my mental map of you, right? And if we have two interactions, now I have two dots, and now I can draw a line between those two dots, right? And so you need to have that first interaction. You need to get in front of that investor. And I think that, um, uh, it's perfectly okay to be preparing for the fundraise to have a conversation, right? If you get a warm introduction, somebody wants to talk to you Great, we're not fundraising yet, but let's, let's talk and, you know, have a, have an initial conversation. And then from there, right, how often do I hear from you? Do I ever hear from you again? Do you reach out 2 years later, right? This is a matter of, again, having a system, having some sort of a CRM that you can track and understand who you've talked to, remember who they are, what you, what you talked about. And follow up with them. Um, another, another easy thing that you can do— easy, quote unquote, right— is, uh, have an investor update list and send out, uh, send out updates. When you're actively fundraising, you could do them weekly. When you are not actively fundraising, monthly or quarterly or, or every other month. Find a cadence to send out investor updates and, uh, and get those out there so that when the next time comes that you're fundraising, maybe we only had that one meeting But I have a stack of emails that I can go back and look through and see, oh wow, this person, you know, has sent me 6 updates, uh, over the last year, and they're fundraising, and they're in my sweet spot, and let's talk about these things that were in your updates. And so, uh, and you know, and if you really hit it off with an investor and you, you know, do some due diligence and, uh, you have a couple conversations and maybe they pass, maybe they ghost you But take that as a pass, right? When the next time comes around, you know, reach out. I think it was Benjamin Franklin that said that if you want to make a friend, ask a favor.

Yeah, that works a lot. Asking for feedback and sometimes you get investment, right? Yeah, it happens a lot. I had an experience. We have this company that is raising Series A, PaskPro, and I reached out to some investors on their behalf. And just today, I impacted them like in the beginning of August, just replied today.

Yeah.

So, yeah, so it happens. Sometimes the investor will not answer. So identify it as maybe a pass, but they can reply to you back and they are going to check if you're following up with them. But you can also So stay polite and say, hey, if you say— if you don't say anything, I'm considering it a no, then I will not follow up, uh, anymore.

So I love that. I love that tactic. I was actually going to suggest that. And in sales, you call this the takeaway, right? Oh, it looks like you're not interested in this. I'm just going to take it away, right? And exactly, Lara, what you just said is exactly how you want to phrase it, is like Hey, thanks for your time. It looks like you're not interested. I want you to know that I'll stop bothering you about this and I'll keep you updated in the future. That's it.

Great. And the updates is something that we also teach in Funding Lab, 'cause this is a way for you to low-key keep them interested in what you're building, even though they at first didn't really interested in you at the moment. So, um, I have another question here. Um, what are the 3 most important things that you look when deciding to invest? So you shared a little bit about the founder's vision, so that could be one thing, but what are the other 2?

Yeah, so we are looking for a founder with deep domain expertise building a, uh, truly differentiated product. Um, and so, you know, there's— it's, it's hard to find truly unique things in the market. Um, and so when we come across them and they're businesses that are being led by founders that have domain expertise, uh, then we're really— that, that really piques our interest, right? And so, um, the domain expertise is, you know, is that, that aspect of that you don't have to learn the business on my dime. And especially in fintech, healthcare, and logistics, you know, these are pretty heavy entrenched industries. It's not enterprise SaaS— not to diss on enterprise SaaS, right? But it's not like you can— or even, you know, yeah, I don't— no matter what I say, I'm not going to say— I'm going to offend somebody here. So, you know, I think that some— having some regulation in some industries and having some, some you know, having to touch atoms makes a difference in domain expertise. And so that's something that's important for us. And look, that's not important for everybody. There's some investors out there that specifically want to invest in first-time founders or first, you know, fresh out of school or college students or things like that. And they have a thesis that only somebody from the outside can truly disrupt an industry. And so everybody has different theses on those. And then, you know, For us at Springtime, we, you know, we believe that an investment into the business is an investment into the CEO. So we want to be sure that we're investing in good people, in people that we believe in, and people that we believe are really going to bring this future to life. And so that vision piece is wrapped into, is this a great leader? Is this somebody that is going to take this company from $0 to $1 billion, right? So we're looking for those things, those soft, softer things, if you will.

Excellent. Yeah, and it's important to tell that there are other funds and investors that might be interested in funding first-time founders and outlier students and those kind of things. Um, I— well, there are, uh, the most upvoted question here from the audience Maybe you can give some tips, but I would love to first ask, does Springtime Ventures follow or lead investments?

We prefer to not lead. We have led or co-led before, but we have a process that we run whether or not there's a lead in place.

Okay, so probably you know where, where do founders usually find warm introductions?

You have to scour your network. I mean, you really, you really do. And you— and if you don't have a network, you have to build a network. The best way to build a network is in person, to go to some of these events. And you don't necessarily have to buy a $5,000 ticket to Money 2020. I don't. Uh, and so, uh, you know, um, and so you could, you could lobby con, as the, as the saying goes, right? Just go to the area and go find the parties and the events to go to and go meet folks. But you have to build your network. You have to be ready to— you have to be ready to scour your network, and you have to be ready to ask for introductions. And I'll tell you what I do, what I did, and using LinkedIn Sales Navigator. And I know there are tools out there that will do this for you, we just don't pay for them. And as a founder looking to fundraise, you probably don't have the budget for these tools either. I thought they were expensive. Um, what I, what I did was I made a— like, I was looking for strategic, uh, fintech LPs, and specifically at major fintechs. And so I made a list of all of these major fintechs, right? And then I would, um, then I would go through using LinkedIn Sales Navigator and I would find executives from a certain level or above. And if I was 2 degrees away from them, I would add them to, um, I would add them to my target, uh, contact list. I forget what it's called, but I would add them as a target. And then for every meeting— and so then I had this massive— I had these massive lists, right? 100 people on this list and 200 on that list and 150 on another list. And every time I would, would have a meeting with, with somebody, I would go into LinkedIn Sales Navigator, I would put them in, and then I would add in who are the, like, there's a way to search for who are their contacts that are already on my target contact list. And so then I could go, and this is a great story. I was in one of our, we have one institutional LP. All of our investors are individuals, and they're an investment bank in New York City and wonderful people called Needham. And, uh, and so I'm in their office in New York, and, uh, I say to John, who invested in us, I'm like, uh, John, you know, I noticed that you were, uh, you know, that, that you're connected to so-and-so, um, and I was hoping that you could make an introduction for me. And he's like, who? And so I brought it up and I showed him, and he goes, oh wow, I didn't realize he, he worked there. I just, I played tennis with him at the club.

Right.

And, you know, and just a minute earlier I'd said, oh, well, you know, who do you think I should be talking to for potential LPs? What a stupid question, right? Who should I be talking to? I don't know, Rich, go— why don't you, why don't you just walk down Wall Street and see, right? Instead I said, I said, hey John, can you introduce me to so-and-so, right? And it didn't even occur to him, but because I had done all of this work ahead of time, I identified one person, he made one introduction, ended up not being a fit, but that's okay, right? You never know unless you ask. That's what my grandma always said.

Yeah, excellent. Yeah, in FundyLab, we teach that sometimes it's someone that recommended you and then introduced you to the right person and that this person that maybe they just funded you in the second round, the third round, but then this person connected you with 5 others and then these 5 others. Might lead to something. So it's kind of like this dot that can create a lot of other dots. And we literally show this image because it's a true story.

Yes. You know, I'll add another piece here, right? And this was— oh my gosh, I am— it's not Rachel, it's somebody else from my podcast. I'm completely blanking on her name. Rescripted. Abby. Abby Mercado from Rescripted. She had 60 angel investors in her, let's call it seed plus round, right? She got— she took $5,000 checks, $10,000 checks. She was a member of a sorority and looked up everybody in that sorority that had that on their LinkedIn profile and just started emailing people and contacting people and finding contacts into folks. And She lived in Colorado but grew up in Dallas-Fort Worth. And so she pitched it to the Dallas-Fort Worth Angels group, right? And she just, she really, really scoured her network and was willing to take checks of all sizes to bring this funding round together for her. It ended up getting her business across the line and helping her through a difficult pivot from really from a SaaS business into a media company. And has been, you know, has been doing well since then. So, um, you know, you just never know where you're going to find connections, but you have to look. It's not easy.

Awesome. We have a question here. Um, well, if you are a first-time founder, you probably are a scrappy founder, so I would love to know if you have any tips on low to no cost game-changing tools that founders can use to maybe validate their business or even launch?

Um, uh, Google Meet to meet with potential customers, right? Go talk to potential customers and get feedback. Don't overbuild. Focus on what you need to build and do that by understanding your customer's true pain, your understanding who your true customer is, and understanding their true pain. Um, from a productivity standpoint, um, I use, uh, you know, again, like, you could use Google Sheets for a CRM. Um, a fun tool— this is a, this is a maybe not exactly what you're asking, but I just started using a voice dictation, uh, app called Whisperflow, and it's amazing. It has changed the game for me for responding to emails. Um, I can actually see the bottom of my inbox now, which I never was able to before. So I'm not sure if that's what you were asking. You know, the game-changing piece has to come from you, right? So if you want to dive in and get some more specific about tools, we can do that.

Great, deep, deep advice. Great. I actually have a recommendation. So we are having— Foundering City is hosting a Vibe coding bootcamp on September 16th. So I will paste here on the chat if you guys are interested in checking out. So the Vibe Coding will be focusing on Lovable. So Lovable is kind of the most hyped no-code platform to build applications out there. And you can, you know, build with a few prompts. So it's very—

Lovable is sick. I mean, I use it personally and I've built 3 different apps for myself personally. And it's a ton of fun. Oh my gosh.

So yeah, there you have it.

Yeah.

Um, yeah, I, I have other questions here. Um, so when it comes to talking to investors, Rich, um, when do you usually talk about valuation? Do you usually talk about valuation in the first meeting or, you know, past the due diligence?

Yeah, as a founder, sure. I mean, I would not bring it up in the first meeting. I would wait for an investor to ask. You want to go as far as you can with an investor getting more and more interested and leaning in more. Now, a smart investor is going to ask you, and if you know what you're going to raise, we, you know, you can say, look, we're raising, looking to raise $2 million. Right. Um, and we're willing to take what the market will bear for our valuation. You know, we don't have a range in mind, but we don't want to get overly diluted. And these are good generic answers if you don't have a term sheet, um, and will keep you out of specific price negotiation, um, and keep the conversation moving forward, right? Uh, And so, um, our last investment that we, that we made, um, I almost didn't take a first meeting because the founder said he was looking for a $20 million, uh, post-money valuation, and the final post ended up being $13 million. So, uh, when I talked to him about it, he said, well, that's, you know, what I put, but, you know, willing to take, you know, what, what the, you know, what the term sheet is that somebody puts out. It's like, I don't have a term sheet right now, so, you know, we'll see where it lands. He's like, I'm willing to be flexible. I said, okay, cool, good. But, um, keep that flexibility open until somebody wants to put, uh, put a number down on paper for you, right?

Yeah, a teacher of mine said that how much costs a company, it's how much someone is willing to pay for it. Uh, so you have to be flexible. And in Funding Lab, we always teach founders that you have to think of a range. Okay. So you're willing to stay within this range. And yeah, so you'll know, we'll be sure that you're sticking to your range, and then you're going to be reasonable.

Yeah. I want to, I want to talk about ranges too, right? And that. So my sales career was doing tech staffing sales. This is back in gosh, 2004, I think I started. And I was a top producer in the world for a big company. And, um, and the thing with the range was if I was talking to a, to a customer and, and the customer said, yeah, I'm looking for somebody like, you know, between 60 and 80, I'm thinking 80, the customer's thinking 60, right? And I talked to a candidate, or my recruiter would talk to a candidate, and they're like, yeah, I'm looking for something in the 50 to 70 range, like Recruiters thinking 50, candidates thinking 70, right? And so when you talk about ranges, you know, that you have to be aware that you are anchoring that investor to the bottom of that range, right? And so if you say, I'm looking for 10 to 12 million, they're thinking 10 and you're thinking maybe 11, maybe 12, right? 10 at the worst case. Um, and so I'm not saying don't say a range, right? Just be aware of what you're saying and the impact that it has. Yeah, I said 10 to 12. I could probably get, you know, start at 10 and get them down to 9, right?

Awesome. Um, how do you usually assess a market potential? Um, when, when, you know, you probably check a lot of business deals out there, so how do you usually assess the market?

Um, do you mean from a competitive standpoint, from a TAM standpoint?

How do you mean TAM standpoint?

TAM, yeah. I have a joke about TAM. Uh, it's, it's this VC contrivance. Um, and my joke is it stands for That Aspen Money. Uh, and Lara and I were joking, talking about this earlier about Aspen, right? And if you don't live in the US, Aspen is, uh, this ultra fancy ski town in the mountains in Colorado where the houses start at $5 million and go up to $500 million. And so TAM is that Aspen money. Is this market big enough that I can finally buy that house in Aspen? Is really what TAM stands for. And it's such a stupid VC contrivance. What really matters, right, is— but you have to play this game, right? Because every VC wants to see a TAM slide, whether or not they want to admit it or not, right? Really what you're getting at is, where am I starting? What does my market look like when I start? And how do I grow my market? How do I visualize? How do I bring this, expand the market that I am selling into? And so again, coming back to vision here, right? But this is not just the, Let me try and think of a good example of a TAM expansion. I mean, Sondermind is a really good example because in 2018, we weren't talking about— only the startup community was talking about mental health. And maybe not even every startup community, but mental health was something we had been talking about in the startup community in Boulder for years. And so the market for that was a lot smaller. And then COVID happened, right? Maybe we got lucky, but then COVID happened and mental health was thrust into the national spotlight, right? And so the, and so the market for people that go to see therapists and that are willing to talk about seeing a therapist and are actively seeking a therapist grew. And it wasn't just because there's more people in the population. It was because there was a spotlight on that particular problem. And so when you get down to it, it's, look, we're starting here with this customer, with this product, right? And then when, when once we've nailed this with the product market fit, then we can expand our pie by expanding our product like this and expanding our customer base like that and expanding in this direction. And here's how we open up the rest of the world. And that's the vision that you need to fulfill.

Excellent. I think at the end of the day, the VCs are looking into the power law, right? So I think addressing the market piece of it, it's understanding how further as a business can you go, right? So, yeah. So we have other question here. I think it's an interesting question. So if you are a founder, but you don't have a technical co-founder, how do you usually perceive as an investor? A startup that is developing the product through maybe a software house?

Um, it depends on the product. And, and so if you have domain expertise— again, this is important to Springtime— but if you have domain expertise, then you can shape that product in a way that suits what you've learned about that market. Um, and I think that also you can show how you have been able to manage that outsourced development side of things, right? A lot of folks that don't know, that don't know product development, that don't understand technical use, how to develop, how to build products, um, overbuild and end up spending too much money and never get a finished product from an outsourced development firm. So being able to talk about that. I think also being able to talk about the pipeline that you have for potential CTOs, or what you're looking for to bring on, or even if you want to flip the disadvantage on its head into an advantage, is, um, is that, you know, I don't need to— I don't need to bring on a technical CTO co-founder. Once we get rolling, I can hire a VP of Engineering in order to build out this, this, you know, this smaller, more focused team. Um, the danger is, is that if you're building a technical product and you don't have the technical team, then I think you are really on the, on your back foot, and that is going to be extremely difficult to sell to a potential investor. Because something that is, that is— so if you're building an AI product and you don't have an AI co-founder, you don't have a, you don't even have a technical co-founder, I'm having a hard time believing that you're, that, that you're going to be able to bring this vision to life because you don't even have the technical side of an inherently technical product.

Excellent. I have a question here more about, um, also as an investor, and I think it's interesting to kind of like answer this question to give you, the audience, a glimpse of how the venture capital world works. But, um, if you invest a dollar each, how much do you expect to get back from this investment?

Um, yeah, we run a return the fund analysis on every potential investment that we make, and we do it at 50% dilution, right? And so if I am— so if I'm investing in you, I need to believe that I can return $25 million from my half a million dollar check at 50% dilution. Right. And so, and then from there I take that and I say, okay, what does that mean from a valuation, from an endpoint valuation, right? And then what is a multiple that's being paid on startups at the billion-dollar valuation level and, and above, right? Maybe 3x is market, 3x on revenue is, is market right now. Maybe it's 5x, maybe it's 8x or 10x. For some really hot sectors. Maybe you're a low margin business. And so this is in logistics, right? Low margin business, the multiple is going to be lower. So do I believe that then? So then I take that and I step that down so that I figure out what the revenue is that you need to have in order to have that billion dollar valuation. And then do I believe that you can achieve that revenue? Where is that revenue coming from? How does that compare to the revenue that you have now? And how many customers do you need to have? How big does the ticket— does your ticket price need to increase? Your ACV, your LTV, right? I mean, how big does that need to be? And so I'm looking at these things trying to figure out, is this even possible? And so that's where I start to— that's the— and this is all just back of the napkin, right? And we're all dreaming together here because if I do invest, then I sure as hell hope that you're going to 10x your, your, uh, your ACV and 100x your customer base.

Yeah, that's the dream. Um, I also invested in a crypto asset and I 4x'd, and that was my— it was pure joy because it was like, oh, I 4x'd an investment.

That's amazing. That's amazing. And Laura, do you, do you talk about the difference between angel investors and venture investors at your bootcamps?

Yeah, yeah. What we usually say is that angel investment, it's usually someone that is interested more in you as a founder and you as a problem. And the institutional investors and venture capitalists, they're looking for if you are in a global market, if you can grow 100x. So they, they have more criteria to the investment and the angels usually do not. Um, so yeah, yeah, but I would love to hear your, um, your concept.

Yeah, I, and I think the, the distinction that I would make here is around the psychology, as I always like to talk about the psychology of investing and that founders need to understand the psychology here. And, um, uh, our We made an investment in 2019 and got a 3x sale, and they sold a year later in 2020 for 3x what we put in. Do you know what that did for our, uh, you know, for our fund? It did practically nothing. Um, and, and so as an angel investor, you get 4x on a crypto investment, that is awesome, right? That is seriously great because every penny of that goes into your pocket. It, right?

Yeah, yeah, right.

Whereas I need to, I need to 3x net, I need to 4x my entire invested capital, right? And so getting a single 3x is not that great because if, if I make 25 investments, I'm gonna get nothing on 15 of them, maybe 18 of them, right? And so the psychology around that is very different. And this is the power law, right? This is why VCs are swinging for the fences, looking for those fund returners. When we were first starting Springtime, my wife and I were having dinner and I was trying to explain to her about, or I was explaining to her, about how all of this works, right? I'm like, okay, we'll take this. And I took a napkin, right? And it was a paper napkin. And I was like, this is the entire ownership of the company. And then I folded it down and I was like, here's this, here's this portion, this 20% portion of this napkin that is sold to the investors, right? And then I folded it some more and then I had to tear off a piece. And I was like, and this is Springtime's portion of this napkin. And then I folded some more and tore off this tiniest little corner. I was like, this is our portion of that business when it sells. And it was microscopic. And I was like, the only way that this works is if that napkin is the size of this restaurant. And she was like, that was— that's a very good explanation. So there you go. Here's to big napkins.

Awesome. Um, loved, loved the analogy. Um, so Since we are talking about how VCs work, we could also talk about maybe exit strategy. So when you're talking to a founder, or, um, yeah, you're betting on a founder, do you usually, um, like when they talk about having an exit strategy, or do you actually encourage them to have a path to grow even more?

I, I want everybody that is an investor, that is a founder on this call, when you talk to VCs, I want you to never ever say the word exit, ever, right? When you talk to angels, angels are going to ask you, so how do I get my money out of this, right? So when do you exit, right? Because angels want you to exit so that their risk goes down, because the longer you're alive, the higher your chances are of— well, not the higher, but the longer you're alive, the more chances are there of a company spontaneously failing. Never ever say exit to a venture investor, especially at the seed stage. It has no place in a seed stage business, right? You're building this business because you want to change the world, not because you want to sell it in 5 years, right? And if you want to sell this business in 5 years, then I'm not your guy, right? And most VCs are not going to be your people. And so, you know, this is the missionaries, not mercenaries, right? Show me that you believe in this and that you believe in this vision and that you're going to stick with this. Because there is no such thing as a straight uphill, you know, move, right? I mean, you see these in the news, right? You see Lovable and you see these AI companies and these billion dollars that they're raising, right? That is one company out of hundreds of thousands of companies. For everybody else, it is a hard rocky road. For venture funds too, it's a hard rocky road. And so I need to know that you are going to, be on that road and that you have the grit and the tenacity to stick with it. And the only way you're gonna do that is if you believe in that vision. So if you're telling me about how you're gonna exit your business in 5 years, I'm out. In fact, it used to be a hard pass for me. And I am embarrassed to say this, but it was a trick question that I had. And it was actually Abby Mercado from Rescripted that called me out on it on LinkedIn. So good for her. But I would ask founders like, where do you see this business in 5 years? And if they said anything about exit, I was out. I was done. It was a hard no for me. Um, and so don't talk about exits with VCs.

Interesting take. Um, do you think that it's tricky because it's about— so, so that for you, you're reading that the founder is more interested in making money than anything else?

Yeah, I think that, um, uh, I, I think that you— that, uh, that we're starting— we're at the starting line with our, uh, with divergent interests, right? I would rather this take 12 years and I get 100 times my money than it take, um, 3 years or 1 year and I get 3x my money. And so, uh, and so we start out just the slightest bit diverged. As you go down, we're going to be, we're going to be very far diverged. It also has to do with, again, as I mentioned, the, the difficulty of this, of what you're undertaking. And if all the— and if the reason that you're doing this is so you can make money and get rich, then, uh, you're not going to have the grit. I don't believe that you will have the grit to stick with it through the really hard times. I think you'll constantly be looking to see if that exit door is creeping up on you and, and look for that opportunity when it gets hard.

Interesting. That's a whole conversation, right? But let's move to another question. Like, how do you feel about pivots? Do you think that if a founder pivots, it is something that they— so for how long should they pursue a business model if it doesn't reach product-market fit?

Yeah, um, I think that pivots are part of the business and they're part of the game here. And, um, you have to know, you have to have some foresight into some, some ability to look down the path and say what we're doing is going sideways and it's not going up, right? And know if you have levers to pull in order to make that go— business go up, right? And if not, then you need to go and look at, is this the right business? Is this right product? Is this the right product for this market? Are we talking to the right types of customers? Um, and you have to balance all of that while you're actively developing in one direction talking to customers, pitching VCs, considering their input, fulfilling on that promise. Um, and if you— and if you're at a point where it's clear that it's not working, then a pivot is absolutely necessary. And if it looks like it's not working and you're not sure, then you should have some trusted advisors, including your board and folks not on your board, and have a conversation around pivots. We, you know, the example I gave of the company that I just passed on today, actually, that burned through $6 million before they realized the customer they had, and they did truly hit an inflection point. And it's obvious in the numbers. I mean, they're going to finish the year probably at $3 million ARR, but they They spent too much money to get there, maybe, right? I'm, you know, not deeply in that business, but you sure as hell spent $6 million in a year and a half. I mean, that's a lot of money. So we had another business that we did invest in. We passed— no, we got actually— I think that we got— they cut us out of their seed round back in 2019, I think, in our first fund. We were a small check, small fund. We weren't strategic. They had a lot of smart money around the table, and they pursued a business that ended up being a low margin. Actually, it ended up being, you know, very high negative margins. They were losing their ass on their business, and the board kept pushing them to pursue, to continue to pursue this business. The board, with an independent director and a VC director, kept pushing them to pursue this negative high negative gross margin logistics business. And finally, the CEO told everybody, he's like, look, we are out of money and you're not putting any more money in. And so this is the business that we need to pursue, and it's this software-only version. And we invested on that round actually, and so we missed all the pain of the other rounds. But it was a hard pivot, um, and it ended up being a great thing for the business.

Excellent. Always trusting then the CEO's vision, right? Um, I would love to stay more, Rick, and yeah, share a lot of your stories with the audience, but we have to close. Please, Tewrick, thank you very much again for accepting our invitation and joining us today. But the audience, it's more than welcome to stay. Also, we close this session, we'll see tables, virtual tables, so you can join this table and network with the rest of the audience. Audience with us. Okay, so yeah, thank you everyone for joining. Yeah, and see you next time.

Yeah, I'll just add that, um, you know, time is our most precious asset, and I'm grateful that you all would spend some of it with us today. So thank you, Lara, for your great questions. It sounds like we have a follow-up discussion about exits to have at some point. Um, and so, uh, I would encourage all of you founders to listen to the VC Minute, quick advice to help startup founders fundraise better. Each episode is about 2 and a half minutes long. It's just one thought, and go on to the next, go on to the next one. Um, and I would stay and socialize and network, but I have a commitment to my family to have dinner with them tonight. And so thank you all for your time.

Excellent. Thank you again, Rich.