Entrepreneurship, fundraising, and practical advice for startup founders :: with Troy Henikoff

Hello everyone and welcome to Ventures, a show where my guests and I get to explore entrepreneurial stories, market landscapes, problem spaces, and examine together how new ventures might be able to be created, either for-profit, nonprofit, or personal ventures to benefit humanity. Really, the purpose of this show is to educate and inspire a new generation of venture builders and venture investors to make the world a better place. In today's episode, my guest is Troy Henikoff, and he's an entrepreneur and venture capitalist in Chicago. And it— and we take an extended period of time to hear his story as an entrepreneur starting multiple companies, experiencing acquisition events, becoming an angel investor himself, starting an accelerator, becoming a professional venture capitalist. And we also dive into the, the process of starting and building a new company. We in-depth get into how to think about your idea, how to validate that idea, different techniques to do that, how to recruit a team, how to actually build your product or service to bring it to market, how to grow that idea. And so you can iterate and successfully serve customers and acquire happy customers. And we also talk about the various flavors of funding. Your own money, friends and family money, angel money, venture capital money, and how you can think about raising money as you go along your journey as an entrepreneur. So if you're listening to this show, you can watch it by visiting wclittle.com, and there you'll see more extended show notes and links to all the various resources that we talk about today. And if you're watching this show, you can also listen anywhere that you get your podcasts. You could just search for Ventures. So with that, please enjoy this conversation with Troy Henikoff. All right, Troy, welcome to the show.

Oh, thanks, Will. It's great to be here. I wish I were there though. That looks way better than here.

Yeah, we have a good time out here. Anyway, glad to have you. Tell us a little bit about yourself. Some of those people listening or watching in may not actually be familiar with venture capitalists or what you, what you do all day. So curious to hear a little bit about your journey and kind of what you're up to now.

Sure. So I'm Troy Henikoff and currently managing director, one of the 3 managing directors of Math Venture Partners. I have 2 other partners, Mark Ackler and Dana Wright. But I think it's important to understand the history, and so I'm going to go way back. I'll try to do this fairly quickly, but I think it's actually an interesting trajectory. And when I was in— I'll go all the way back to when I was in college, and I never had thought that I would be either an entrepreneur or a VC. As a matter of fact, I didn't even know what the word entrepreneur meant because back then it wasn't part of the vernacular. People weren't talking about startups, etc. But as I got out of college and I didn't have an opportunity for the kind of job that I really wanted, a friend of mine said, well, why don't you start one? Why don't I start one? I laughed out loud and he said, no, no, no, I'm serious. You've done some software development the last couple of summers and I've seen the great work you've done. You've had 2 great referenceable clients already and you know what, my company's growing. I have 4 people. He was selling computer hardware and I need a new accounting system. I'll be your first customer. You can write my accounting system. And I had no idea what it meant to start a business. I hadn't known anybody who'd ever started a business. But I thought about it and I realized that the worst case would be if I did this for 6 months and hated it, I'd be 22 years old looking for a job. And so I decided to go for it. And funny part of the story was that was probably in April and I was talking on the phone from my room in college. And then I got to Chicago after graduation and in July, first week of July, I knocked on Michael's door and I said, hey Michael, I'm here. And he said, what are you here for? And I said, to talk about the accounting system. He said, oh, you mean this new Unix-based system I just bought? And he had totally forgotten that we had this arrangement. Now keep in mind, this was lesson number 1.

Yeah.

I had not even confirmed it. I hadn't sent him, you know, an email, a letter, a document, anything. I just had one phone call where he said, I'll be your first client. I'm like, cool, I got my first client. No contract. He had totally forgotten about the conversation. Ah, so I lost my first client before I was even in business but decided I was going to do it anyway. And I have to tell you, I said there was no email. Part of the reason for that is there was no email. This was 1986. So email didn't exist. But the PC was just becoming a legitimate business tool. And so there was a real need for software. And while there was some canned software, any business with any kind of sophistication did not have software available to run their business that you could just buy and put on the PC. And so I started doing custom software development, specifically network database applications. Day one, it was me. I was president, janitor, head developer, everything in between, working out of my parents' basement. But quickly, there was a real demand and we ended up— I say we because we doubled in the first year. I brought on a partner. No capital. I didn't know what venture capital was. This was all just growing from revenue. So doubled the first year, doubled the next year. We brought on 2 more people, doubled the next year. We brought on 4 more people. So we're doubling every year based on revenue and having to run a cash flow positive business because there was no investment coming into the company. But, you know, fast forward to 6 years into it and we had about a dozen professionals. We were doing work for companies like Abbott Labs and McDonald's. Oh, that guy Michael with the 4 people who was in the hardware business, it was called MPK Computing because those were his initials. But a few years later, he changed it to Computer Discount Warehouse and then CDW. CDW is one of the biggest publicly traded retailers today. So I watched CDW go from literally 4 people. I had met him 2 years before when it was him operating out of his kitchen. He's the only person I knew at the time who had started a business, but from 4 people to, you know, 4,000. And we wrote a bunch of software for them through the years and they sent us clients. It was a great relationship. Yeah. But we did a bunch of work for companies like those. But 6 years into it, one of our clients, Medline Industries, which is a manufacturer and distributor of medical supplies, bedpans, linen, syringes, you could think of it as a smaller version of Baxter. They had been a client. There's a long funny story behind it that I won't bore you with, but they ended up acquiring us because they wanted the capability to build software to sell and leverage their position in nursing homes and hospitals. And so we sold the company. I had a 5-year earnout. way too long. Don't do a 5-year earnout. I had a 5-year earnout, and I ran the software division for Medline Industries for those 5 years. At the end of those 5 years, we had software in 10% of the hospitals around the United States. So there are about 6,000 hospitals in the US in round numbers, and we had about 600, just over 600 customers. So about 10%, great penetration. And it wasn't because of us, it was because of the sales force that Medline had. Medline had a sales rep in every single hospital, every single week of the year, about 500 sales reps distributed across the country. And, and so they would hear of opportunities and then they would bring us in. And what was interesting was our little 50-person software company was responsible not just for our revenue, and we had nice revenue, we were cash flow positive, but when we sold software to the hospital, It was set up to be beneficial to Medline. And the way they did that was they said to the material manager who was making the decision, listen, this is going to be really expensive, but you don't have to pay us in cash because, you know, it's like $2,000 a month to lease this software. But if you move your business, the bedpans, linen, syringes you're buying from Baxter or Abbott or wherever you're buying them, to Medline, we'll sell you the same products at the same price and give you a 2% rebate. towards the software. So if you just move $100,000 a month worth of product sales to Medline, it'll be free. You won't have to deal with the VP of purchasing or the CFO and capital purchasing requisitions, any of that paperwork, and you'll be a hero because your hospital will be made more efficient. Why don't you just sign this 3-year agreement? And at the end of my 5 years there, I think that our division, Systemetrix, had locked up $125 million a year worth of bedpans, linens, and syringes in incremental sales for Medline. There's another lesson in there. When we sold the company, we sold it based on what the value was to us. You know, we had 12 people, we had modest 7-figure revenue. You can kind of come to a conclusion as to what you thought it sold for. Now imagine if you had known at the time what it was going to be worth to Medline, that Medline would get an incremental $125 million a year in sales. their core business. Now what do you think it was worth to Medline? Right. Had we understood that— so the reality is it was worth something to us and it was worth something way bigger to Medline. It's situations like these strategic buyers that make deals happen because there's a wide range of prices in the middle that's more than we think it's worth to us and less than they think it's worth to them, and the deal gets done. The problem is we did the deal really close to what it was worth to us. Had we understood how big, how valuable this was going to be to Redline, we could have held out. We literally could have gotten 10 times, 20 times. I don't know what the number is, but incredible multiple. So to those of you who are building businesses now, when you start thinking about exit, don't think about it in terms of what it's worth to you. That's the floor. You have to understand what the buyer is valuing and why they're buying it. Now, they, they are shrewd negotiators. They're very smart people. They never would have said, oh, we're going to buy you because we think we're going to add $125 million to our top line.

Okay.

They never would have given that away. You have to tease it out of them. And one of the things that I do is we work with our companies that are starting to think about exits is I always tell them that story and I always ask the question, why is the buyer so interested? Are they buying you for a multiple of revenue? Because if they are, you're not going to get any— you know that there's a narrow band of price in which you're going to get. But are they buying you for something more? Is there strategic value in it? What is the strategic value? And the technique is to ask them, say, you know, why are you interested in little old us? We're not that, you know, we're a tiny company. Why are you interested in it? Oh, we're going to make you big. We're going to— I don't know if I'm so interested. Oh, we're going to take you to the professional ranks. We're going to— this is going to be huge together. Really? How big is it going to be? And you let them puff out their chest and tell you how awesome this is going to be for you. You're going to be running a company. Your division is going to be $100 million worth of revenue in 3 years. Oh, really? Okay. Now, now I know the value. Now we can negotiate better. So, there was a big lesson in there. All that said, you know, it was, it was, we sold for too cheap and it was too long of an earnout. But it was an amazing experience because I learned so much from these people who had been running business. Remember, this was a business I started right out of college. I didn't have a business degree. I'd never taken an accounting class. I had a lot to learn. So, being able to work with some professionals and people who had done it before was awesome. And we're still friendly to this day. After Medline happened, I took a little bit of time off. Did— actually was out near you, did a bike trip from Seattle to Idaho, did a bunch of stuff, and then started thinking about what was next. I got sucked in by a good friend of mine, Harry Gottlieb, who had started a company called Jellyvision. At the time, it was a gaming company. They had a product called You Don't Know Jack. Many of you may know Jackbox Games today. That's kind of what it's evolved to. And I helped him build— he's— Harry's great. He took me out to lunch. He said, you know, we're thinking about building a software capability. They had outsourced the software previously. We realized we need to have that technology in-house. It needs to be a core competency. What should I be doing? And I gave him some advice. And a week later, he's like, can we go out to lunch again? I need some more advice. And then I give him some more advice. And he's like, you know, why don't you just come and do this? Like, you know how to do this. You're not working right now. You're taking a break. Like, come do this. It'll be fun. We'll work together. you know, take you a couple of months. And sure enough, after enough of that sweet talking, I did come on board. It took 18 months to set up, but I built out a team and then hired someone to run it ultimately so I could leave. But what I thought was gonna be a 4 to 6 month gig ended up being about 18 months. Jellyvision was an amazing place to work. Certainly in those days, that was the late '90s. They then pivoted and the core business took on a, a totally different feel. So instead of selling games, they took that interactive experience that they built for the games and they applied it to business, and they have a product for large companies that is called Alyx that automates the process of onboarding things like healthcare, 401s, where you want to have an interactive experience, but you don't want to have to hire an army of 23-year-old 23-year-old HR people who will all give different answers. So it's this cool computer experience where you come up and it says, oh, I see you're looking for health insurance. Well, are you single? Are you married? And you click married and it says, oh, married, really? Is there a pitter-patter of little feet around the house? And they make it fun and engaging ways to pull information out of you to get you the best product for your situation. And what's cool about it is that everybody gets the same advice no matter how big the company is. Tens of thousands, hundreds of thousands. And today, I think they supply over 100 of the Fortune 500 use their software for this stuff. But that was Jellyvision. Left Jellyvision on a whim. Well, left Jellyvision planned, but the whim was to start the first internet payroll company. So we had this idea. It was 1999. That people were paying their bills online, they should pay their employees online. At that point, whenever you paid an employee, you had to deal with either doing it manually by hand and paying federal taxes and state taxes at the bank, and it was horrible, or many people used a payroll service like Paychex or ADP. That involved a phone call with an operator at a mainframe computer telling them over the phone who gets paid what. Of course, things get lost in translation, the wrong numbers. You don't see how much comes out of your bank account until the checks show up 3 days later when the guy in the rusty little Ford Fiesta comes and double parks outside your office and runs up and makes you sign for the package. So you got to be there on payday. You can't take a vacation when there's a payday. You got to hand out the checks. And we thought, you know, we could disrupt this thing. With existing technologies of email, ACH, web, we could allow business owners to enter their own payroll. To see how much money is going to come out of their account before they actually hit the submit button and have it come out. So as an early-stage business, you know, many times you don't have enough money to cover payroll. Oh crap, we don't have that much. I'm not going to get paid this week. Right? Make those modifications, resubmit it, and then have everybody paid electronically. Have everybody's pay stub come via email, and you eliminate so much cost from the system and so much friction. You don't need the operators. You don't need the mainframe computers. The buildings they're sitting in, the drivers to deliver the checks, the printing presses, all that. None of that stuff. And so, we did. We launched in early 2000, and we were the first internet payroll company. Today, it seems obvious, right? We all— that's how we all do it. But this was 20 years ago. Yeah. And it was hard. There were a lot of things we messed up along the way, that's for sure. But we figured it out. And that was a fun journey. SurePayroll, ultimately, we raised about $17 million in venture capital. That was my first exposure to what is venture capital. And then it was a long journey. It took 11 years, but in 2011, we were sold to Paychex. And now SurePayroll is a division of Paychex. You can still go to SurePayroll. I have nothing to do with it anymore. I don't have a horse in this race, but— They're operating using our brand and continuing to grow. So that was SurePayroll. After I left SurePayroll about 3 years into it, because I'm an early stage guy, I love getting dirt under my fingernails, figuring stuff out, and in the discovery phase when you're having to, you're having to figure out client product market fit, you're building MVPs, you're testing. That's the stuff I love. On the phone with customers figuring it out, right? We got to the point pretty quickly where we had about 80 employees, and I had employees coming to me telling me the problems of the people they're managing. So manage— I was managing managers, and that's not me. I don't know if it's not me and I'm not good at it, or I'm not good at it and that's why it's not me, but it's not me. So I stepped aside. Michael Alter ultimately took the company for the next 8 and a half, 9 years and, and executed the sale and did an amazing job. And it's interesting because Michael is more of a delivery guy. If I'm a discovery guy, figure it out, pivot. He's a delivery guy, right? He was IBM sales, Harvard Business School, McKinsey operations. Right. Like he is, he is tweak those little dials and get it cleaner and cleaner, better, better, you know, more profitable. He's great at that. And he did a great job taking it from 80 to 280 employees and executing that sale. Now that said, he almost quit on me like 3 times in the early stage because early on we were pivoting all over the place to try to find product-market fit and it drove him nuts because he's not a discovery guy, he's a delivery guy.

Hmm.

Right? And you need both. Early stage is all about pivoting, figuring it out. So he went and set up a whole marketing team and a marketing plan and all this stuff. And then one day we realized it wasn't working and I just made the decision, marketing's not working, we got to go to direct sales. He's like, But I got all this stuff in flight. I don't care, shut it down. Tell the marketing company we're not paying them anymore. No more agency. We'll pay the last bill, we're done.

Right.

Like, we got to pivot to sales. We got these 3 little people sitting in an office that are killing it. They are just killing it selling directly. The economics work. We got to build a sales team. And he was pulling his hair out because this was, you know, he had worked really hard on it. But once the company got a little bigger and more stable and we figured it out, he was awesome. at refining, right? At delivery. How do we make this more efficient? So, learned a ton at SurePayroll. Took a little time off after SurePayroll. Spent some time— my daughter had been born. I think she was like 18 months old. I'd barely seen her. I was living the life of the entrepreneur. And then did a series of other companies along the way. A data company, a publishing company, a couple that didn't quite get off the ground. And then in 2010, really, I guess a little before that, but 2008, I was teaching, I was teaching entrepreneurship at Northwestern, and I had some students who went through my class and ended up going through Techstars in 2009 in Boulder, Colorado, and that was my first exposure to an accelerator. There were a handful of us who had been there at Boulder and saw this Demo Day thing. It was awesome what it did. That year, Techstars only had 2 locations. They had 10 companies in Boulder and they had 9 companies in Boston. Today they have like 55 locations, right? 550 companies a year or session. But of those 19 companies, 5 were from Chicago. And so, you know, Chicago, that's 1% of the US population, had 25% of the Techstars population. That was awesome.

That's great.

Except they all left and didn't come back.

Hmm.

And so there was a handful of us who were from Chicago, who were down there for Techstars Demo Day in Boulder, and said, we really got to do this in Chicago. And we started by asking Techstars if they'd come up to Chicago and start a Techstars Chicago. And their initial reaction was that, wow, that sounds awesome, but we're about to open 2 more locations, New York and Seattle, and we are just— we cannot take any more than that. Like, that is crazy. We're gonna have 4 locations. So we're too busy. You guys should do it, but, you know, it can't be called Techstars, but we'll help you, and we'll share best practices and docs and whatever. We'll help you. And so 4 of us ended up getting together and creating what we called Accelerate Labs, and 4 of us were the board members. One, Sam Yagan, raised his hand and said, I'll be the MD. I'll go run it. We had no idea what we were doing. I mean, we literally, we didn't have office space until 2 weeks before the program was set to start. And then we got office space. We're like, oh, there's no internet here. Ah, what are we gonna— and we tried to get internet as fast as we could, and it was like a month wait time. So the program's starting and there's no internet, and it's an internet accelerator. So I think it was Clear was the company that had these wireless modems that ran on cell signals. So we had 2 of those, one out the north side of the building, one hanging out a window on the south side, and we wired them up to some routers. And so— We had like 40 people in this office all running off of 2 little cellular modems. It's like 2 little hotspots for the first couple weeks. It was hysterical. It was a fire drill. We had to figure a bunch of stuff out on the way. We were a startup ourselves, but it went really well that first class. We had some great companies and some great entrepreneurs, and then we said, oh, let's do this again. And so we did it again and put more effort into it, had a space full-time that we didn't So we had a place we could have events in the offseason. Sam had to go because he was, he had been the CEO of OkCupid and they sold to Match.com and he had a big earnout. And so he said, I got this giant earnout. I can't go take 4 months off to run an accelerator. I gotta hit my numbers.

Right.

And he looked at me and said, will you do it? And I'm like, sure, I'll do it. So I started running it in 2011. We ran out of, location in the West Loop in Chicago in 2011. 2012, we moved into the brand new incubator space, 1871, inside the Merchandise Mart. We were one of the very first tenants there when they opened up in May of 2012. And then 2012, Techstars came to us and said, hey, we really like what's going on in Chicago. We saw this entrepreneurial activity. We think you could use some support. We want to have a presence there, but we really don't want to compete with you, Accelerate Labs. You're doing great. How about we join forces?

Hmm.

And so at the end of 2012, we, we joined forces. We became Techstars Chicago, and I continued to run that through 2016. Along the way, did a bunch of angel investments. I think 28 angel investments, helped spin up a different kind of venture fund, but a small little fund called Firestarter Fund in Chicago that was a bunch of angel investors who were also founders of tech companies, and we all put our money together and pooled it rather than forcing the entrepreneurs to come meet with all of us. Like, let's just pool it and write one big check. So we had a committed fund of about $6 million. Our checks were $50K to $250K generally. And, um, it was, uh, it wasn't the kind of fund where there are managing directors and one or two people who make decisions. We all got to vote on every deal. And that was fun. The Firestarter Fund has done quite well. We're done investing that. We've invested all our money, and everybody who is involved is off doing other things, a bunch of us doing other funds now. So there isn't a Firestarter 2 that's coming, but Firestarter 1, I think, was critical for Chicago ecosystem. We invested 90%, 95% into Chicago-based early startups, and it was kind of that bridge. And then in 2013, I got together with Mark Ackler, who had been the lead investor in SurePayroll and chairman of our board, and said, hey, we think there's an opportunity to start a fund and help more entrepreneurs in Chicago. We had— he was very involved in the ecosystem. I was in the middle of 1871 and running Techstars and teaching at Kellogg. And it just felt like There was so much activity going on. So we got together and started fundraising and went— launched live officially, did our first close in 2014 for Math Venture Partners. And I did both for a while. So '14, '15, and '16, I was doing Techstars and Math and still teaching one quarter a year. It was very busy. And it got to be too much. As our portfolio got bigger at Math, something had to give. And so I turned over Techstars, running Techstars, to Logan LeHive, who ran it for the next 2 years, and then he's off starting a company, and now Neil Sails Griffin is in his second year of running Techstars Chicago. Whew! Sorry that was so long, but I think it gives you— if the takeaway from the story is that I'm an entrepreneur first, built a bunch of companies, and I think of myself as an entrepreneur, and I relate to the entrepreneurs, and that I have evolved into investing in companies. First as an angel investor, 28 of those. Firestarter Fund, we did about 20 investments. Techstars, we invested in 70 companies between Techstars Accelerate Labs when I was running it, right? So 7 classes of 10. And now at Math Venture Partners, we've invested in about 50. So I've seen a lot, been on both sides of it. And I just love helping entrepreneurs, watching people grow companies and be successful.

It's an amazing story. Thanks for sharing. Lots to dive into there, but I want to, I want to get into some of the early, those early companies and talk a little bit there. But before that, I want to take a little bit of a sidebar because I personally have noticed, and many who know you have noticed, that you have an amazing ethic of give first. There's an enormous amount of generosity around you. I'm curious to hear a little bit about the story of where that came from. Have you always been like that? Where philosophically have you kind of come up with that? Because it's very impressive to those of us that know you.

Thank you. So give first, just to be clear, is— #GiveFirst is a phrase that I attribute to David Cohen who started Techstars, and I don't know if he invented it or came up with it somewhere else. And the concept of give first is that, you know, your willingness to help others without specific expectation of return. This podcast is an example of it. Will, you're not paying me to do this podcast. You didn't say, oh, if you do this podcast, I'll do this other thing for you. You said, hey, do you want to do a podcast and talk about venture capital? I'm like, sure, if you think it's helpful, I'm happy to. And what ends up— so there's no expectation of return. I'm not going to get anything for doing this specifically, and it may lead to something, it may not. But what I've seen over the years is that if I help a bunch of people, Whether it's, you know, help you with your podcast or, or something that I say today helps some entrepreneur who's listening, that if you do that enough times, it comes back multiple, manyfold. You know, there'll be some entrepreneur who hears something that I say and says, wow, I really relate to that. I want to talk to him.

Mm-hmm.

And they'll reach out to me through the Math website and they'll find that I have open office hours every Friday. And maybe they'll sign up for open office hours and we'll do a Zoom call and talk. And maybe, you know, you do 10 of those and one of those ends up being a really cool business and they say, wow, you've really helped me early on. I want, I want to show you my deck. Maybe you'll invest. And, you know, and eventually you end up being rewarded by having these amazing relationships that you've, that you've seeded along the way. And so I kind of view my job and what I do As helping a bunch of entrepreneurs. And the more entrepreneurs I can help, the better. And if you help enough of them, you're going to get the opportunity to invest in some of them. And you're probably— the more you help, the better your opportunities are going to be. And we're all going to win in the long run. So it feels very altruistic that I'm out there, you know, open office hours, anybody can come to my office hours, and I'll do podcasts and stuff like this. But, and it is, but I get something out of it. The first thing I get out of it is I love helping people. There's nothing I enjoy more than watching the trajectory. So I remember when you first came to Chicago, you had been in Seattle, you had some connections to Techstars, and you just introduced yourself, and I didn't know who you were, but we met. You said you're gonna help some Techstars companies. I connected you with some even before they got into Techstars. There was one from Ohio that I know you worked with pretty closely. And it just, it has been awesome to watch you go from a guy who's new to the city and didn't have many connections to building this network and PRODA and all you've done with helping other entrepreneurs. And that to me is the most rewarding part of what I do is watching others grow.

Hmm.

Right? And I learned from it. I've learned from watching you and seeing your experiences. A lot of times you learn from other people's mistakes. A lot of times you learn from other people's successes, and we all grow together. And we've never actually— I don't know that we've ever actually invested in the same company or done a deal together. It doesn't matter. The reward is watching the whole ecosystem grow, watching you grow. And, you know, it's a rising tide lifts all boats. And so my goal is to rise the tide, and directly or indirectly, it's going to help everyone. I don't know. Does that make sense?

Makes perfect sense. Yeah. And on behalf of the community that you've touched, a big, big collective thank you for that. So I'd love to go back to the, to the early stages of your, your first couple of companies there, right? When you get to the spot where you know that you have something, there's some semblance of you have a product and there's some market and some kind of fit there. How did you think about the dance between growth and product? Because that's especially in the early stage where you say earlier you have to pivot a ton. Like, what were some principles and philosophies that you had in that season of your companies?

Yeah. So, you know, I'll talk about SurePayroll for a minute because I can talk about it firsthand. There are lots of companies that I've helped that I can also talk about, but I can be more transparent with SurePayroll. So, we thought we definitely had something. And it just seemed like a no-brainer, right? We're going to remove all of this cost out of the system. No paper checks, no paper reports, no delivery people, no cars to deliver them. ADP at the time had 100 and— sorry, Paychex at the time had 114 regional processing centers and ADP had something like 10 million square feet of office space. We didn't need any of that. We served the whole country out of our little office in Skokie, Illinois. And so, we knew we could take a lot of cost out of it. And we also knew that it would be a better experience for the user, for the business owner. The fact that as a business owner— we were targeting small businesses. Our average company had 6.5 employees. So, small businesses. They didn't have to be sitting by a phone waiting for it to ring to get the call from the operator at one of the big payroll processing, you know, to answer the phone and— give the password over the phone and try to get that stuff. But they could do payroll anytime they wanted. They could see how much money was coming out of their account. There were just endless benefits. Yet it was a change, right? It was different from how people were used to doing it. So we had to convince them of that change. And it was frustrating at first. Like, we knew in our heart of hearts, this is the way it's gonna be. Everybody you talk to, you said, fast forward 10, 15, 20 years, everybody's gonna do payroll online. Yeah, but how are you going to make money today? And that was hard, and we struggled. And the, the other thing that was hard about it, the reason we had to raise so much capital, $17 million, was that, you know, so SaaS— so the term SaaS didn't exist in 2000. We were actually called an ASP, an application service provider, was the term. SaaS came out A couple years later. And so people hadn't really thought deeply about SaaS metrics and customer acquisition cost and lifetime value. And I remember vividly, we had a board, we had 4 investors that were venture funds, and we had a board. And in one of the board meetings, one of the board members was pounding his fist on the table and he said, you need to grow faster. Like, okay. And he said, and you need to cut your costs. Cut your cash burn. And I said, well, which one do you want? I want both. And I'm like, do you understand how recurring revenue works? Like, you know, for us, the payroll business, in easy to— in round numbers, we spent $1,200 to get a customer. And that customer paid us in round numbers $100 a month for the next 7 to 9 years. It was a great deal. We got our money back in just about a year, a little over a year, and we got 7 to 9 years worth of revenue. But if we increased our rate of new customers, if we grew faster, it was really expensive. Every 1,000 customers we added cost us a million bucks, round numbers. Oof. Right? You know, you want to add 10,000 customers, $10 million, and you don't get $10 million worth of revenue right away, right? And it was funny that today most entrepreneurs who've read anything about SaaS metrics and CAC and LTV and all that stuff understand it, and the investors all understand it, and we have much more sophistication But we had to fight this challenge of we wanted to show that we were growing, right? We wanted to grow fast, but we only had— we had limited cash and we wanted to have good economics and our investors didn't understand the interplay of customer acquisition and lifetime value initially. We got there. It was a challenge balancing that balance of rapid growth and cash flow and product. One of the things that we did that I think we did reasonably well was there was a lot of investment in sales. And so, so you, you see the roots of sort of MATH's thesis. So MATH's thesis as an— as a VC firm is that at the end of the day, the thing that matters is customers. And so our thesis is all around customer acquisition, and we're looking for companies that have an unfair advantage in customer acquisition. Well, I believe if you come to me with a new company and you have the ability to acquire and retain customers, the rest of it's easy. I can fix the rest of it. The hard part's getting customers.

Yeah.

And so, we have this maniacal focus on customer acquisition. So, in SurePayroll, we had the early parts of that thesis. When I say we, it was, you know, I was running it. Mark Ackler, my partner at Math, was chairman of the board, etc. So, it was a bunch of some of the same people. In that we put as much money and resources as we could into customer acquisition and retention. So we had far more salespeople and customer service people than we had developers. The product itself actually wasn't that difficult technically. You know, it's a web page, you got to enter some stuff, you hit submit, you send it to a payroll engine. Oh, we had to interface, we had a choice there. Do we build or buy? We bought a payroll engine that was proven with There are 4,000 taxing entities in the US. The process of calculating taxes and payroll, you've got to get that right to the penny. Right. But so we used a payroll engine and then we had to disburse the money. I mean, it was tech. There were some pieces that were hard. The actual operations are hard, but the technology wasn't that hard. So even when SurePayroll, I think when I left and we had thousands of customers and millions of dollars in revenue, I think we had 6 developers. Our development team was 6. We had as many as 25 salespeople, you know, another 25, 30 in customer service, and just 6 developers. It wasn't, it wasn't a business you were going to win by having a cooler tech product. You're going to win by having better sales and better customer service. And to that point, we actually started out with the tagline. The initial tagline was, SurePayroll, click, click, payroll's done. We're trying to say like, this is fast and easy, get in and out. Everybody hates payroll. Nobody likes to do payroll. And then we found that it actually was really more important that people felt taken care of. And so the tagline changed to SurePayroll, your payroll, our passion.

Hmm.

And we did some of the stuff that you see Zappos getting— Zappos did around customer service. Instead of measuring customer service agents by how many calls an hour can you take and getting them off the phone quickly, We measured them on satisfaction of the customer, and they could stay on one call for 8 hours if they wanted to, because the cost of— if we lost a customer, if you came to us with a problem and we couldn't solve that problem, we're going to lose you as a customer, and we'd have to spend $1,200 to get the next one to replace you. Well, guess what? 8 hours of a customer service rep's time, that's not $1,200. They're not getting paid $150 an hour. Right? So it actually is cheaper to take care of your customers and to keep them than it is to try to have really efficient customer service, risk losing them, and have to go get more of them.

Yeah.

So I don't know, there's some balance there. I don't know that I answered your question as directly because payroll wasn't really a super high-tech product. You know, at Jellyvision, we had more of an issue with the product because at the time, this was '90s, our product went on a CD-ROM. That's not like a web-based product where, oh, you find a bug and you update it and it's just no big deal, hit refresh.

Right.

Like when you print, and Jellyvision, I want to say by the time I left we had done about 5 million CD-ROMs had gone out the door, including not just You Don't Know Jack but Who Wants to Be a Millionaire for Disney, we built that. Mm-hmm. That's a lot, a lot to go out, and you can't just reprint 5 million CD-ROMs and try to get them to the right people. And so the quality control, the level of quality control we had to have in that process was much, much, much higher because the cost of a mistake was much higher. And it was, it was up to the point of where it was almost a problem. Harry, again, who I love, he's still a great friend today, had incredible Incredibly high bar for quality, not just quality in terms of bugs, but in terms of production quality, timing of the audio, the video. I mean, it was really awesome. But what it meant was he would not let it go out the door. So we would put a date, we're gonna ship on October 1st, and then, you know, he'd say, nope, too many things that need to be fixed, we're not shipping, not shipping, not shipping. And so one of the challenges that Jellyvision had in the early days was getting dates that we could actually hold to because Harry, as the CEO, was not going to let something go out the door that was subpar because the cost was just too high.

Right.

And today, when most things are shipped via posting to, to a server, there's a lot of value in getting stuff out early, getting feedback, fixing those bugs, and iterating. Our whole— the whole way we build businesses has changed because of it. And we're now— I mean, hopefully everybody out there who's building businesses read the book The Lean Startup, is following a lot of the lean methodology, iterating really quickly, You know, you're not writing 20-page business plans and executing along those lines. So yeah, it's definitely changed over the years.

Yeah, that's helpful. So what advice do you have for somebody who has a day job and they have an idea, right? Let's say it's for a software company, a software product like web or mobile. What advice do you have for them when they're thinking about it, they're stewing on it? How do you advise that person? Hypothetical person to, to take the next steps?

Yeah, so I love the Jobs to Be Done framework. If you got— for those of you who don't know about Jobs to Be Done, if you go to YouTube and you just Google Clayton Christensen milkshake, that's all I'm going to give you, Clayton Christensen milkshake, and watch a 4-minute video, it will all become clear. Clayton Christensen was kind of the grandfather jobs to be done. And it's a great short little 4-minute video. And if you like that, you'll end up going down rabbit holes of and getting lots more information on jobs to be done. But it's really critical that you understand what problem you are solving and for whom. And I use that jobs to be done framework all the time, whether I do it formally or informally. And then once you understand it, Then it's incumbent upon you to try to figure out how can you test this thesis about the job to be done as quickly and inexpensively as possible. And it doesn't have to be writing, you know, a huge set of software and completing the whole task. It can be mockups, it can be— there are paper versions, there are service versions. I mean, even back, I didn't know what jobs to be done was at SurePayroll. The Lean Startup hadn't been written. This is 10 years before The Lean Startup was written. But we actually did a bunch of this. We had this thesis that people would want to do payroll on the internet, but we didn't know. So what did we do? Our MVP, our minimally viable product, was to put up a series of web pages that people signed into in security and all that stuff and entered their information, and then they hit submit and they got a little text box that said, oh, we're processing your payroll, we'll email you as soon as it's ready. Email you as soon as it's ready? That's because a human had to go and pull the data off of the server that had just been saved, manually put it into a known payroll engine that would process the payroll, do all the reports, do all the ACH, and then take the results, copy and paste that back into the database on the web server, and hit a button, and you'd get an email saying your payroll's ready, and you'd come and look at it and, and be all happy that everybody paid, hopefully, etc. But the We didn't spend the money and the time to automate the hard part of the machine of the process. We had humans do it, do things that do not scale, right? And in the early days, the person who was our payroll manager, remember her coming in one, one week and saying, I have 10 payrolls to process today, stay out of my way. Like, she knew she had 10 companies that were going to submit their payroll and expect their answers. And that was like overwhelming to her. Today, I don't know how many companies SurePayroll has, but I'm guessing that this Friday we're going to process 30,000, and no humans will touch any of it, right? It all happens automatically. And we got there. We probably— we got up to 20, 30 companies that were customers before we had automated a bunch of those processes. Um, but so you do things that don't scale. So what your goal is, is you have an And then the next step is to have clarity around who is your customer and what problem are you solving for them. That's the jobs to be done portion. And if you have clarity around the— what the problem is and how you're solving it for them, then you try to create the minimally viable product, the least amount of work you can do to test whether or not this— customers are going to want this problem solved for them. And many times that can be done with manual processes and things that aren't nearly as fancy, you're not trying, you're not testing for gross margin efficiency, any of that. We're just testing, are the customers gonna want this thing? Going back to again, I think the big most important thing for success is being able to acquire and retain customers. Do the customers really care? Yeah. And if you read The Lean Startup, you'll see about smokescreen tests and about Wizard of Oz tests, and those are the sorts of things you can do on the web really cheaply and quickly. To determine that. You put up a page that looks like they're about to buy something, they think they're going to buy it, they might even type in their credit card number thinking they're buying it, and then say, oh sorry, we actually aren't shipping yet, but you got real data from real customers about the value prop, and you can A/B test different value props. You can put up one page that, you know, is touting the features, one that's touting the benefits, and you can see how differently, what different rates people click through. But you have to get to the point where you have some evidence that real humans want this problem solved and are willing to pay for it. And that's when you can then start thinking about investing real time and money into building software and building customer products, et cetera, et cetera.

So roughly speaking, in the software world, there's, there's, there's essentially consumer-facing products and marketplaces and business-to-business software. Is that— are those 3 rough buckets accurate, or would you— and I know there's sort of hybrids in between the 3 of those, but how do you think about the landscape of software companies thematically?

Yeah, that's true. We have a couple that are B2B2C, um, that are, are kind of hybrids as well. But, um, I think that's right. We generally bucket stuff and— yeah, and so we generally bucket stuff B2C, marketplaces, B2B.

Okay. And how— so for each of those, just those 3, roughly speaking, how would someone who has the idea, they're out there running lean startups, running the tests, how would someone think about whether— and this, I get this question a lot, and I'm sure you do too— how do you know when it's quote unquote validated? How do you— I know it's a little bit of an art form, but how would you advise people to think about, okay, I have something here, this is worth investing more of my own time and money And then we'll get to later when we should think about approaching investors. But I'm curious about the question of validation in those rough 3 buckets.

So entrepreneurs always, many, many, many times come to me with questions like this. They want an answer. They want a single number. They want something that's truth. And the reality is it's much more art than science. And it depends. And I know you're not gonna like my answer when I say it depends. But it depends. It depends on, you know, are you selling a product that costs $0.99, in which case I might want to see thousands of sales before I'm convinced, you know, sell, sell this chapstick 2,000 times and then maybe I'll be convinced that there's a market for it. It's only $2,000 worth of sales. Are you selling a product like a new computer that costs $2,000 per item? Right. You don't have to sell 2,000 of those to convince me people want them. So it depends on price, it depends on how considered a purchase it is. What I'm generally looking for in the early stages is early signs that the customers love the thing that you have, and that usually is engagement metrics,

right?

Yeah. And so I'm looking for, I don't know, I'll pick, I'll pick on this lip balm. If it were some sort of electronic lip balm, It's interesting that people buy it, but I really want to know how often do people actually use it,

right?

Because if I had early data, if I only had a couple dozen users, but I saw that the people who bought it used it 3 times a day religiously, every single one of them used it at least 3 times a day, there's incredible engagement. I have confidence that this thing is going to be great, right? And so those engagement metrics Are really, really important. I have a current but short story that might help shed some light on this. You all know what Peloton is. It's this fairly expensive indoor exercise bike that comes with a screen and interactive classes. And a friend of mine posted something on Twitter and said, hey, I'm thinking about buying a Peloton. I'd love some feedback. What do you guys think? And you basically got a bunch of people who said, I have one, it's awesome. I'm in the best shape I've ever been in. I work out more than I ever have. I love it, blah, blah, blah. And a bunch of people said, totally not worth the money. You should, you know, get a Schwinn bike for a quarter of the price, and if you really want to, get an iPad and put a video up there.

Right.

And what was interesting about that was the people who said it's not worth it were 100% people who had not owned one, and the people who had owned one were 100% said, it's amazing, I love it.

Hmm.

And so I reframed the question and put it out there. And as background, you should know I'm an avid cyclist. I actually do have a Peloton as well. But, and so it's a little near and dear to my heart. So I put it out there and I said, only for those people who have owned a Peloton, what advice would you give to someone who doesn't want to ride on the streets, blah, blah, blah, should he buy, you know, and can afford it, should he buy a Peloton? And 100% of the people who actually owned a Peloton and answered said, I love it, you should get one, it's changed my life.

Wow.

Of course, there were 2 people who piped in who didn't actually own one and wanted to give their opinion anyway. The reason I bring that one up is we all have probably heard how Peloton stock has gone up and how they've done well in the pandemic and all this stuff. But the early indications are when you sample people who actually own one, very few people Use them as clothes racks. Like exercise equipment in general gets used for like 3 weeks and then sits and people hang their clothes on it to dry. And like, it's right, and it sits in the basement and gathers dust. And for some reason they have some magic between the interactivity, the screen, the bike is well done, that people who own them generally use them and use them regularly. Every day, every other day, count how many classes they've done. In the people who responded in my Twitter feed, I can't tell you how many people said things like, oh, I bought one in March, I've done 187 classes on it.

Wow.

187, like they're counting. Well, Peloton gives you that data, right? And so seeing that, if I had seen that early interactivity, that early engagement, that would have given me confidence to invest in that company. Even long before it had the big numbers. Those are early indications of the big numbers.

That's gold. That's gold. Okay, so now let's say a founder is at that point where they feel like, okay, we got great engagement or some early traction sales depending on kind of their business model and the price and all the nuances that you talked about. How do you go about actually building it? How do you go about, all right, I need a team, I have a little bit of money, or maybe I need to raise a little bit of money. The actual execution of, I need to build this software product, because I, we hit— there are, and I'm sure you're aware of, tons of skeleton, tons of dead bodies, tons of graveyard stories of the process of actually executing at this phase. What kind of advice would you have for entrepreneurs that are, that are there?

Yeah, I really, really, really prefer teams where there is someone with technical prowess as part of the founding team. And that doesn't mean that person necessarily has to be able to code every line of code of it. But like, even at SurePayroll, so I was an engineer undergrad, a mechanical engineer, but I picked up software. I had a minor in software, but that was easy. And I coded. So, the first company for those 11 years, 6 years by myself and 6 years as our company, and then 5 years earnout, those 11 years, I was kind of the lead go-to person for technology problems, and I wasn't doing a ton of coding at the end, but I still got the tough problems, and I love solving problems. But ever since then, in subsequent companies, I haven't really done any development. I did a little bit of the architecture at SurePayroll, but I didn't write a line of code. But because I have enough experience with understanding how databases work, how architecture works, how the core technology works, how APIs work, etc., I feel like I under— I have a command of what can be done and what can't be done and roughly what things are going to cost and what they're not. I can, I could look at a software spec and be like, yeah, that feels like 2 man months worth of work or 2, you know, that's 6 people months worth of work, whatever. It's— I'm not exactly right, but I have an idea. I know what it's going to take to build, and that puts me in a better position. Even if I'm hiring developers or even if I hired outsourced. I prefer to see teams, most development done by the actual team itself. I want the people who are building it to know they're going to be responsible for supporting it and that, you know, they have some upside in it. And so my first piece of advice would be if you don't have that technical expertise to find a co-founder who does. It's really hard. The good people are paid a lot of money by the big companies.

Right.

You know, they're not going to give away their huge salaries to just come work on some idea for you. So you have to find someone who's passionate about your idea and has that technical capability. Now, you know, the lens is getting narrower, it's getting harder to find them, the target's getting narrower. But if you can, it's amazing how much can get done. And when I was running Techstars, we would only accept teams in Chicago when I was running it that had core technology as a core competency.

Yeah.

And the way I told it to the people, I said, you know, listen, we have a limited time. We only have 90 days in Techstars. You're going to go meet with a whole bunch of mentors. You're going to come out of some mentor meeting and be like, oh my God, we want to test this thing. And what I want you to do is be Oh my God, we got to test this thing. Will, you know what, you make, you make the coffee, I'm gonna order the pizza, we'll pull an all-nighter, we'll get this thing done.

Totally.

Or, you know, I got to go home and I'm gonna have dinner with the kids, but I'm gonna stay up after that and I'm gonna be coding and we'll have a sample in the morning, like whatever it takes to get it done.

Right.

What I don't want is to come out of that meeting and be like, oh, we got this great idea. I got to call the developer and see how much the estimate's gonna be, how much it's gonna cost, and when they can put it in their queue because Maybe they can get it done 3 weeks from now or 6 weeks from now.

Right.

Because they have other clients, they have other priorities. And if you're— it's so hard to start a business and you need to be able to test things quickly and you need to be able to iterate quickly. And so you need to have that capability on hand. Now, there were a couple companies that went through Techstars where they actually had an outsourced developer. What they did was, the deal was that person sat in the Techstars office right next to the founders. 40 hours a week for those 90 days.

Right.

That worked. You know, I don't— I still would prefer it to be someone who has a financial incentive in the form of, you know, owning stock or options and has upside in the company, but that was acceptable. But you have to be able to respond quickly. You have to be able to pivot quickly. And so, if you don't have those skills yourself, I think you really should try to find a co-founder who

So then the common question, how on earth, what advice do you have for people, the classic question, how do you find a technical co-founder?

Yeah, so I think this is, it's a problem, it's difficult, it's very, it's very much about the position you put yourself in. So if you think you're going to be starting a technology company or a company based in software, you should be That's much harder in a time of pandemic, but we'll talk about normal times. In normal times, you should be going to some of these meetups, you should be going to happy hours, etc., and starting to build a network of people who are like-minded, people who are working on projects like you're working on. There will be business people and software people and support people, there'll be all kinds of people there, but like here in Chicago at 1871, they had all kinds of events. In Chicago, every single day of the week there was an event you could go to. Some would be more fruitful than others. Think of it kind of like give first in that, you know, I said there's no specific expectation of return. You're not going to go into— you're not going to go to one of these meetings or go hear someone speak and be like, I'm going to find my developer tonight. But I know if you go and meet enough people and talk about your idea and what you're doing, you're going to find some people who are interested. And you're going to build a network of people who are interested, and then you're going to be able to cherry-pick from it. And it's important to get outside of your comfort zone. If you're a business person and you're not used to the, you know, you need to find people who are technologists, you're going to have to get outside your comfort zone. Maybe you go to a Ruby on Rails meetup and you sit in the back and, you know, you just listen, and a bunch of it's going to be gibberish, but you'll probably get some little pieces of it and you'll figure out who are the smart people And maybe, you know, afterwards when you're having a cocktail, you can go up and say, hey, you know, Mary, I heard you answer a couple of those questions. You seem really sharp. Could you listen to my idea for 5 minutes and just give me a little feedback? Right? And you can engage with people like that and you start to build these networks. But you have to get out of your comfort zone if you're looking for someone who's not like you. And by the way, speaking of not like you, this is an opportunity To start early and have a diverse team. Yeah. I was on a call yesterday where we were talking about the value of diversity and trying to, trying to put some numbers to it, make it monetary, but it's hard. But it's very, very, very clear that when you're trying to recruit people, that the broader net you can cast, the more people you could possibly interview, the, the better team you're going to ultimately get. And if you end up having a very homogeneous team that's a bunch of people who look like you, then you can't cross— cast a very broad net because people who don't look like them don't feel comfortable, aren't going to feel comfortable in that environment.

Yeah.

But early on, if you can get diversity in your team, one, you'll have— be able to cast a broader net. But more importantly, two, is that you'll have diversity of perspective. And when I talk about diversity, I don't just mean gender and race and religion, but diversity of experience, right? Because your consumers, your customers are not all like you as the founder. And the more diversity of experience you have in decision-making, I believe the better decisions you're going to make. And so this may mean, just like I said, getting out of your comfort zone, getting out of your comfort zone and going to to meetups at places with people who don't look like you. So if you are very much the business person, you may have to go spend time with the engineers. But it could also be people who don't look like you. You might go to a, you know, if you are someone like me, I'm Caucasian, right? May go to a meetup that's in the city that's going to have a lot more people of color and a lot more diversity in that way. Because you have to broaden your networks. And I can't stress enough how important I think diversity is in helping companies and helping organizations make better decisions and have better financial outcomes. So this is the time to do it. The earlier you do it, the easier it is. It's really hard when you have a homogeneous team of 20 people to say, okay, now we're going to flip a switch and change our culture. Culture isn't something you have. It's a way you act. Right. And you have to act that way from day 1. The way you act will attract certain people. Those people will mirror how you act and will reinforce it. And so, if you act in a way that's homogeneous and, and monolithic, you're going to have that. It's really hard to turn. But if you're more diverse from day 1, you're going to have that culture.

Love that. Super important message. Definitely appreciate that. So let's say you're the business person, you're attending the Backseat of a Ruby on Rails meetup, you meet the hypothetical Mary, and she's game. She's game to help tinker, help build, but she has a day job. How do you structure it? Because I know this is where a lot of problems come up because there are sort of promises and miscommunication and a lack of experience about how to actually execute from here. What advice would you have for business person and marry as they're thinking about building the early part of their company?

Yeah, so I'm actually helping a friend of a friend with this right now, and he has his day job. He just graduated from college. He's got a cool idea around music and the internet, and he's trying to put together— he had to grab a technologist. Now he's got a guy. He's like, I got someone to be my CFO. I'm like, CFO? You don't even have a company yet. Like, what's a CFO going to do? But he's putting together the team. And so, what we talked about yesterday when we were talking about this was how important transparency was and expectations are. And at the risk of offending people, I'm going to make a dating analogy. So, when 2 people are dating, if both people are really into each other, they're way up here, it works really well. Spend every waking minute together, right? They're like Never separated. And by the way, if there are 2 people who are in a relationship who are like, yeah, this is kind of a casual relationship and they're down here in terms of intensity, we'll see each other once a week, whatever, that works really well too. When you have a relationship where one person is really into it and one person's kind of casual, that's when they fail. And the same thing is true in business. And I use that analogy because it's usually visceral. People are like, oh yeah, I had one of those. That didn't work. I don't— whichever side you're on. Right. But same thing is true in business. And so, the advice that I gave this friend or friend of friend was make sure that your expectations of what this person, each person's going to do on your team and their expectations are aligned. So, in this case of the CFO for a very early company, they actually haven't incorporated yet. They're going to incorporate next week. So, super early. Like, I think it's probably a 2-hour-a-week job. Right. It's like pay a couple bills and at the end of the month fill in QuickBooks and like, what are you going to do? And the CFO has a full-time job that he wasn't willing to leave anyway. So that can totally work if you both sides say, hey, my expectation is it's a couple hours a week. Here's what I want you to do. And commensurate with that, since I'm going to be putting in, you know, 40 hours a week, you know, that's what our return is going to be. You know, so if I have 50% of the company, you should have— 50%. Probably 2.5. I made up those numbers, but you're putting in $120,000 at the time. You should have $120,000 at equity. If you have that conversation up front, then thing— and everybody agrees, it's so much easier. Where this fails is when the person coming in is like, yeah, I'm joining, I'm going to be the 3rd co-founder, thinking I'm going to get a 3rd of the company. And you're thinking, oh, they're going to work like a couple hours a week, they're going to get 1% of the company. That always fails. You have to have those conversations up front. And then I'd be remiss if I didn't say you all have to have founder agreements in writing. Yeah. You don't need lawyers. It can be a single sheet of paper that you both agree and sign to, or all 3, or however many you are, that talks about vesting of your ownership in the company, that talks about what happens if somebody leaves. Because inevitably, if 2 people start a company or 3 people start a company, one of them's probably going to have a change in life events and pull out. Yeah. So if 3 people started the company and one of them leaves after 6 months and the company is a wild success 10 years later, should they each get a third of the, of the profits? No. So how do you manage that? And we don't have the time to go into it today, but there are things called vesting agreements, and typically stock will vest over 48 months. You can choose longer. It could be 5 years, could be 3 years. But you have to have those agreements. And if you build the agreements when you're all neutral, so the agreement is, if one of us leaves, here's what happens. And you don't know if you're going to be the party who leaves or you're going to be the party who stays. You tend to build very fair agreements.

Yeah.

Because you could be on either side of the situation. If you wait until someone's thinking of leaving, those become very difficult conversations to have. And they end up with conflict. Yeah. So make sure that you have a founder— it can be simple writing, no lawyers, but what happens if somebody leaves? What happens if somebody goes and takes a full-time job but still contributes? What if they're part-time? What if they're— you have to think through some of this stuff. And what you're trying to do is align interests because as long as you keep your interests aligned, again, you can both be really intense. You can both be here, both be in the middle. You're going to do great. It's when you get out of line that you have conflict.

At what point should you get a lawyer though? Certainly at some point it makes sense. Where is that line in your mind?

Yeah, you know, at the point that you start putting in real money. So at the point at which— and real money is different for everybody— but at the point where it's, you know, you're investing real money in real time. So if you're giving up your day job or you're putting a couple thousand dollars in, you're going to have to do some stuff. You're going to want to create an entity. You're going to want to have a founder's agreement. You're going to want to have vesting. If you do, depending on how you build it, you got to do this crazy thing called an 83 election. Go look that up if you're starting a company, 83 election restricted stock, because if you mess that up, you only have a 30-day window to do it. It's an agreement with IRS. You can never undo it. It's really hard. But there— so lawyers can help you navigate some of the legal structure. What's more important to me at this early stage is that the founders are seeing eye to eye. They have a meeting of the minds and they, they all agree. In my very first company, when I brought on— I told you I doubled in the first year— I brought in a partner, Ed. And when Ed started, we— someone gave us the suggestion that we have a little founders agreement. And we did. It was one sheet of paper. We had no idea what we were doing. But, you know, I had worked for like 6 months with no salary and now he was coming in and he wanted to be kind of an equal partner and Said, okay, he'll work for 6 months without salary while I get paid. Like, he'll have, you know, that's how he'll pay in. And we specified what happens if the company gets sold at some point. And we had some concept of vesting. It wasn't very fancy. It all fit on one sheet of typewritten paper and we signed it. And when we sold the company 6 years later, we went to the sheet of paper and said, what does this say about how we split things up? And we split them up and I think it was 55-45 or Whatever it was. Realistically, and I would say this in front of Ed, he may listen to this. So, you know, when it comes to who built the company, like I was the CEO, I was the one who was leading the company, hiring the people, getting the clients, doing all that stuff. Ed is an amazing individual contributor. He's still a good friend today, but he really liked to sit and code and solve a problem. And so if you tried to value who built the company, I did 10 times the company building that he did. But we had agreed it was going to be 55/45. We looked at the paper, we said, this is how it is. There was no debate, there was no argument, there are no hard feelings. And that's how we split it.

Yeah.

And that was fair because that's what we agreed to. Had we not had that piece of paper, I— trying to value, like, what was your contribution to this company? What was my con— like, that would have been an ugly, ugly thing. It's almost like a prenup for a marriage.

Right. Yeah. So then, so then let's say you got something built, you have some signs of growth, you've done all the validation, Lean Startup, and, and you think you have something. How do you, how do you think about fundraising, approaching venture capitalists? How do you incorporate accelerators into that thinking? I know it's a huge conversation, but I'm curious just thematically how you, how you help advise teams.

Yeah. So let's go up to 40,000 feet. At 40,000 feet, so there are, there are certain stages that most companies go through. Not every company goes through every stage, and I'm talking about fundraising. You can skip stages sometimes. So initially, you usually self-fund it. So that means if you have savings, if you have credit cards, etc. For some people, that might be a couple hundred bucks. I've seen founders who've self-funded things with hundreds of thousands of dollars. They had a successful exit before, I'm self-funding it. Everybody is different, but self-funding. The next stage is generally friends and family. And that's when, you know, I've got something I'm really interested in, I need a little more capital to get this thing going, and you go talk to people who you know and try to raise a little bit of money from it. Again, friends and family could be people writing you a couple hundred dollar checks, it could be thousands of dollar checks, it could be Everybody's friends are different, have different amounts of wealth and risk. With friends and family, it's generally people who are betting on you. They may not even understand the business. They don't understand the structure, but they're betting on you. And they're like, I know this person, she's awesome. I'm willing to invest in her. I have faith in her. Please be careful if you take friends and family money, let them know this is super risky. The odds are it's not going to be worth anything. Don't take money that you think people can't afford to lose.

Right.

But that's friends and family. The next stage is angels. Angel investing is people who are generally sophisticated investors. They've done this many times, but they're investing their own money. When they're investing their own money, they can make investments for any reason they want. They could like the color of your shirt and decide to invest. They could really like the space you're in. When I was doing angel investments, there were 2 companies that I really thought this thing should exist. I don't know that I'll make any money on it, but I want to help it exist because if it has a shot of being in the world, the world will be a better place. I'm going to invest a small amount of money in it. It's my money, I can do that.

Sure.

Right, that's angel. And then the last category we'll talk about is venture capital. And this is professional investors who are investing other people's money. So, Math Venture Partners, we actually went out and raised money from a bunch of other people, and we have a pool of money like a mutual fund. That we then invest in companies. And we have a specific mission. We're investing in digital technology companies, early stage, etc. Just like if you invest in a mutual fund, it'll be for a specific purpose. But I'm investing other people's money. I can't invest Math Venture Partners' money because I like the color of your shirt. I can't invest it because I just want this thing to exist. My mandate is to return more money to them than they gave to me. They did it for a financial investment. So once you understand that, and again, you don't have to go through every phase. So SurePayroll, we put up our own money, and then we went straight to venture capital money. We decided this was risky. We didn't want to take friends and family money. We only wanted professional money. Usually there are more steps in there, but you have to decide what risk you're comfortable with, and you have to understand the investor on the other side, why they're investing. And that's why I make the joke about the angels and the color of your shirt. Like, it's more about the relation, as much about the relationship as it is the business model. Many times they'll want to be like, oh, that sounds like a cool idea, can I help you? Like, they want to mentor, they want to help, they want to roll up their sleeves. Some angels don't, but you have to understand the, the reason the investor is investing. When you get to VCs, there's only one reason they're investing, and that's because they expect to get more money in return. And they expect to do it at a low risk. The lower the risk, the better. I have a little video on the Math website that I call the Pot of Gold, and I think that the best pitches are ones where you talk about the problem and solution for a very small part of time. That's easy. And then you have to show the investor, the professional investor, this is how big the company's going to be worth. This is the pot of gold, how much it's going to be worth, and then show them a low-risk path to getting there. And you spend all of your time on that low-risk path to getting there. Like 60% of the pitch is all about the mechanisms, like, because if they believe this is going to be worth a lot of money and it's a low-risk path to a lot of money, they're going to write you a check, like, right? Yet so many entrepreneurs totally miss that and spend all their time, they spend 95% of their time talking about problem and solution. I want to show you the cool feature I built, problem, solution. But investors aren't investing in a solution. They're investing to make money. So you've got to show them, how much am I going to make and how much risk is there?

Yeah.

It's that simple. But so many people miss that.

So you and I co-wrote an article series on financial modeling. And this is something you and I both harp on. And I remember watching your lecture in one of your classes on it. And then just my jaw dropped to the floor. And I just was curious why all founders didn't do this. Maybe could you take just a couple minutes and explain why this is so important, and even at the early stages, why founders should be putting together a financial model?

Yeah, so financial modeling— and I continue to do these talks, I give it 30 or 40 times a year now, a lot through Zoom to Techstars cohorts, and I do it at Kellogg, and I, I did one in, uh, to a group in Tel Aviv last week. I mean, all over the world. So here's what I think about financial modeling. A financial model is a mathematical representation of the inner workings of your business. It's not a set of projections. The projections are an output from the model. And if you have a mathematical representation of how your business works, you can do simulation. It's sort of like a flight simulator for a pilot. Imagine if pilots didn't have flight simulators and they had to just get behind the wheel of a jet plane and hit go and like, let's see what happens, right? And they crash. That's really expensive. You die, right? But with a flight simulator, which they spend hours and hours and hours in, they kind of learn how the plane performs and what happens if I go into a nosedive and what happens if I do all this stuff. And then they take that and they apply that in the real world. And the financial model is very similar to that. You're trying to build a flight simulator for your business. If I spend more in marketing, how many more customers do I get? What did that cost me? How much more do I need in customer service? All of the inner mathematical inner workings. And if you've got that, then in Excel you can play with your flight simulator, see what levers work, what levers don't. Oh, it turns out putting money in this doesn't have any impact. I shouldn't do that. Oh, there's a lot of impact if I can change my, my conversion rate on web visits. Right, and you figure out what are the variables that matter, what are the drivers and sub-drivers of your business, so that you, when you get behind the wheel of the real business, when you're operating the real business, you can start to collect real data about how it's performing, put it into your model, your model gets more accurate, and it has a better ability of predicting the future, because if it now knows what all those conversion rates are and what the levers are and how much you're spending, and it actually gets Especially when you have large volumes of transactions. If you're B2B enterprise where you make like one sale every 6 months, it's hard to predict the future because there— it's very lumpy. But if you're either SurePayroll, which was B2B, but we had lots of little transactions, right? Lots of customers who paid us $100 a month. Or if you're B2C with large volumes, it is amazing how accurately you can see the future. Mm-hmm. And it really is like having a crystal ball and seeing the future if you have a really good financial model. I'm guessing, Will, you'll post some links to the series up there. Yeah. And I've updated— I should probably give you— I have some updated— an updated deck and some updated model Excel sheets that just are a little cleaner. And it— if you do this well, it totally changes, totally reduces the amount of risk there is in the business. And so when I see a new business, The first thing I do is start making a model of it. And sometimes it's a simple model, right? So if it's just an idea, you may have a spreadsheet that has like, you know, half a dozen rows and 10 columns, and you're just kind of like, what's it take to get to cash flow breakeven? How many sales do I need? What's the— okay, not very sophisticated, took you 20 minutes, but you like now have an idea of what the first step is in your journey as you go through these plateaus. And then if you start executing and you're like, oh, I think I know what this is going to feel like, like let's map out the next part of the journey. What does it look like with a little more resolution and granularity? By the time you're actually operating a business, raising money from venture capitals, you have a financial model that has, you know, 10, 15, 20 tabs, has historical data, future-looking data, and it's super accurate. You can see what actually happened, what's going to happen. It is one of the most powerful tools I know to predict what is eventually going to happen in your business, and that is power. That is knowledge that will make you more powerful. Because you can decide where to put your time and where to put your money.

Love it. I'll be sure to link to it in the show notes for sure. So I really appreciate your time. Last question, where can people find more about you, more about math? How can people find you online? Sure.

Yeah, pretty easy. mathventurepartners.com. And at mathventurepartners.com, we have a blog that has some great content. So Dana has been Doing a bunch of writing. Mark has been doing a bunch of podcasts with interesting entrepreneurs, and I do a bunch of these short videos that are generally 3 to 4 minutes long, like the one in the Pot of Gold. You'll probably put a link to the Pot of Gold, um, that are helpful tips for entrepreneurs. I have a few dozen of them up there now, and I'm gonna hopefully, even though we're in pandemic and I don't have my setup I had at the office, I'll start recording some more now as well because I have a backlog of ideas and things People, these are things that real people, real entrepreneurs have asked multiple times, and when I hear the same question over and over and over again, I'm like, oh, I'll just do a video about that and I'll put it up there. So there's a bunch of resources at mathventurepartners.com that I think could be really helpful, and they're all on the blog.

Love it. Appreciate it, Troy. Really, thank you for your time, and I can't thank you enough.

Well, great seeing you, and I hope to the entrepreneurs out there that Uh, this was helpful, and don't hesitate to reach out if we can be of more help.

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