Venture Capitalists Tell The TRUTH • 7

00:00:00 PR's his but you know don't take Venture money I wouldn't recommend that try to bootstrap your company as far as you can go ultimately ideas are diamond a doesn't right there's so many ideas out there it's execution and I think more so resilience right like you get beaten down you just do it again you get beaten down you get do it again you know what is traction we want to see paying customers that aren't your roommates your family your friends the cost of starting a business has gone drastically

00:00:25 down I I somewhat disagree how should a Founder think about who to listen to and who to not listen to even the right people can give you bad [Music] advice hey everyone super excited uh to have you back VC unfiltered uh for another episode we had demo day back in the middle of October with all of our portfolio companies but in tandem with that we'd like to keep the education piece going and so we ended up running two VC panels at the exact same time on both ends of it here is one of those panels with our principal Griffin and a

00:00:59 bunch of incredible guests to start off I'd love for everyone just to give kind of an introduction on yourself and your firm as well as maybe how you came to be the c or some background that led you into VC awesome I'll start off uh Marshall Smith uh General partner and co-founder of steamwork Ventures uh we invest in mature seed to series a B2B and B Toc SAS um with higher probability outcomes uh happy to get into that uh later uh we wrapped up fund one earlier this summer uh which was all around

00:01:35 health wealth and sustainability still focused on software uh not afraid of product but very low Capital intensive product never thought I'd get into Venture uh my background is in wealth management so started off traditional Finance uh managing uh core ETF strategies for high net worths uh financial planning retirement planning love the building of businesses and the manage agement so became the COO of an raia here in Los Angeles and helped them scale from managing 250 million to about 1.3 billion in 5 years and as coo really

00:02:14 oversaw all aspects of the business uh from asset allocation to HR compliance been through many SEC audits operations HR uh you name it was involved with it uh saw really a need as we were hiring and building uh and launched a fractional coo business and so I was setting up wealth management firms for Breakaway advisors those leaving the big wirehouses the big Banks could come in again completely TurnKey uh takes a couple months to negotiate your way out at some of these large firm so could build the complete ra for them soon as

00:02:50 they were ready flip the switch transfer over clients and move on uh that led to working more and more with just startups on the operational side of things again love building businesses uh love getting my hands dirty uh so I was getting introduced uh to more and more startups uh again Founders could focus on raising capital and product and I could focus on the back office uh processes repeatable processes procedures uh and so forth and that led to uh meeting uh my current partner uh who was a Serial entrepreneur

00:03:26 with multiple exits and we just loved working together we were Consulting we were doing Angel Investing uh obviously my background in wealth management and we just wanted to expose more and more people to venture and help Founders as entrepreneurs operators and Executives we've done it through every business cycle possible over the past two decades and again just love working with Founders and and building business and then as far as uh kind of stage that you guys are investing in right now so we're

00:03:59 what we call CH seed to series a uh we look for obviously companies that are in Revenue that uh have a client base not just uh friends family and so forth we really want to help accelerate that growth they're typically 12 to 18 months from a series a we use our background as entrepreneurs uh operators to really help accelerate that growth uh not just come in with capital but come in with our Network trusted third parties advis visors uh corporate connections and so forth awesome thank you for having me by

00:04:36 the way um and also thank you to the founders you all did a great job here um so I'm Blake Caldwell uh CEO of Founders boost also Founders boost fund we invest in uh early stage preed uh stage companies we have a A preed or sorry pre accelerator it's a lean preed stage accelerator we have alumnist here tonight call on in a bit but um I've always been driven by a passion or you know I guess the last decade of helping um early stage Founders get to their destination without taking Equity without charging figure out ways to help

00:05:09 them get farther with the resources that they need and we we built Founders boost with an accelerator we're in 20 different regions globally um we essentially have been able to scale this out and which has driven a uh pretty large deal flow that allows us to not only provide this support with our kind of nonprofit model but um now also have access to Fantastic Founders who essentially have I guess I guess I'd like to call it a reverse accelerator model where we can now come and invest in these companies having seen them I'm

00:05:42 sure some questions kind of go into you know what we like about these types of Founders but um that's our base model um I'm driven by The Passion of helping Founders uh I go back to I guess I'll at least mention John's Hopkins I think there was a some H this my background in computer engineering um biomedical engineering and uh I've always had a diverse set of passions went into uh software engineering and ended up doing consulting and started working in the Lean Startup methodology and fell in

00:06:15 love with that uh over a decade ago and from there I haven't looked back uh worked with an organization called up Global which uh you may know as startup weekend um it's kind of hackathons for business figuring out how to help that early stage founder um and that team get to that next stage um which was a pretty big gap from a you know hackathon weekend all the way to uh accelerators into VCS and so we developed one of the uh a pre accelerator obviously we're in pre- accelerator here we were the

00:06:45 earlier doopers of that name um but really kind of figuring out how to be that um Gap in the ecosystem um and from there we've been a part of tech stars and eventually launched Founders boost and been doing that now for seven years absolutely love it um we have been kind of adding to it as well now we're partnering with with different organizations we run this program cheaper essentially accelerat cheaper than anybody else so we're trying to figure out how we can support larger organizations um to do that and um I

00:07:16 think actually today it's it was announced we are uh running accelerator programs for the city of Glendale as well um had a grant out there we just got um were able to accomplish and so we're excited to expand not only just you know across the the world but here in Southern California too um and uh this is uh my passion so excited to talk about it with you all and did I miss anything I think you got it I think you nailed it all right thank you for taking us through that uh morrice yeah hey everyone thank you for having me um I

00:07:48 guess first and foremost uh we have a fun called bam Ventures here based in La we've been active for about 10 11 years we're on our fourth fund just to kind of Hit the CRM fillers we write 500K checks into the earliest stages of companies from pre-seed to seed um and we do consumer consumer technology so everything from your away suitcases Albert sneakers all the way to nerd wallet H guide to scopely to honey before that I was a Founder randomly happened to fall into Medtech worked on a product that basically helps opioid

00:08:25 addiction sold that close to 10 figures before that I was a designer by trade worked in automotive um worked at Ferrari worked at Porsche build Porsche's incubator and that was kind of my roundabout way into Venture like what is this Venture Capital thing you get to do multiple companies at once like how fun is that excellent it sounds like the traditional paths to venture are uh not so much on this stage which I think is a good thing for the most part I know in the previous panel uh we kind of talked

00:08:55 about the LA ecosystem um and more macro so I wanted to dive into a little bit on the diligence side of things um I'm sure each of us have a little bit of a different process here but looking at um kind of when you guys go through diligence what do you think are the most important aspects uh in relation to your stage that stand out uh or that would be the most kind of indications of success all right I'll jump in um you know as we have a few different evaluation periods one into our pre accelerator the other

00:09:26 into the fund I think you know from the perspective of the fund you know we have the luxury of getting to know the founder and being under the hood with them and that is easily the um you know knowing the founders that's like what we're looking for like that's the biggest thing are they going to be able to take it because we invest in preced right there's such a long journey ahead um and can you see these Founders making the steps they need to take are they able able to you know return to um you

00:09:55 having made the progress that you might expect of them um and in that I think the EAS you know the more simple answer um that we can also look for both of our evaluation periods are coachability so those that are like willing to take advice and you know obviously everybody was receiving a lot of advice but choose the good advice respond to it and um either explain why they're not doing something um that you suggested because they have they figured something else um or that you may think you're wrong but

00:10:25 being able to have a conversation and um and move forward so so uh I know not a typical answer but coachability is one of the ones I love you know something that's important to us is not chasing Optical value and and really looking for companies that have tied product they're solving a product a problem that have product Market fit Revenue paying customers and clients that's important to us uh and then the other thing just to build on kind of what you said coachability is we do a lot with what we

00:10:57 call self-awareness in the due diligence process process and how we tailor our questions and um kind of analyze the feedback from the founders we want to be able to obviously give advice we want to work with the right partners and we don't want people that just you know do what we tell them to do uh but we want to have that conversation and we want to work with Founders that um don't believe they know everything right as a investor I don't know everything I don't know how to grow every type of business um I can

00:11:30 admit that and we want Founders to admit that too when they need help we want to be able to help them when we bring in trusted third parties we want to be able to you know uh make sure they're taking that advice um but not just acting on it so self-awareness is another thing we look at uh as well yeah I think I doubl down on kind of that founder theme for us it's really very founder focused right like ultimately ideas are dime in a dozen right there's so many ideas out there it's execution and I think around

00:12:01 execution it's more so resilience right like you get beaten down you just do it again you get beaten down you get do it again like top of mine right like I we had a company last November they're like yeah we're going to try like our last thing if this doesn't work like we've been doing it for two years if we don't generate any meaningful Revenue we're just going to return Capital right it's just not worth it it's a slug of a kind of motion and then that worked and now they're doing about 2 million in Revenue

00:12:30 a week right and so from there to that in close to a year um I would say majority of Founders would have given up earlier right they would have gone through 10 iterations and then given up and it's like maybe it's the 11th one you never know how far you get so I think in our process it's really about the person it's like hey who are you we want to know like who your best friend is we want to know you know what's the biggest fight you've had with your parents and how you've come that it's really about

00:13:02 the founder so then kind of based on what both you guys had said maybe more from a Founder perspective looking at advice both you know from investors from everyone else that loves to give Founders General opinions kind of whether they're experts or not how should a Founder think about who to listen to and who to not listen to you know when there's a World of Noise um and maybe how do you guys think about delivering that advice I I have this on top of mine cuz I just got an email where I'm going to have a really

00:13:33 hard conversation with the founder on my way home um but I think the advice part is I noticed at the beginning when I started I gave a lot of advice up front to Founders that I wasn't going to invest in or didn't invest in and then it's like 6 months later I get an email oh my God I executed on what you told me to do like it's not working like what do you mean like I just had a whim of a thought in a zoom call and like I guess my word has much more power than what I thought it did right so it's like

00:14:04 I'm very much an investor hat in those meetings um I think advice should only come from stakeholders right like if you have no stake in the business it's very easy to tell someone like oh you should totally try this and like well do this and that but if like you're not impacted by that decision like it doesn't matter to you so it's like being impacted and having a stakeholder I'm a firm believer in like bringing on advisors that are helpful I know it takes up a little bit of equity but they're incentivized right and I'm

00:14:35 all for that surround yourself with people you trust uh obviously you know people that have a stake in it um want to do what's best for you and them and take all different opinions we all come from different backgrounds people have grown different types of businesses and then you know digest that and do what's best uh for your company and what you think is going to help you grow and scale and and get you to where you want to be noise comes in a lot of forms and a lot of like different phases it's like

00:15:02 you know should you be focusing on this aspect of social media and somebody's going to tell you who does that cuz they're in social media that that's the most important thing or PR whatever so I think it's also coming back to I think something Petra said was the you know focus on what your immediate goals are obviously focus on your customer but like think to your your goals of like what you're trying to achieve and what you're trying to get um your company to and and help use that to kind of direct

00:15:28 you and essentially turn out all the other noise that's out there um and from there it's it's what they they just said you know the right people and also know that even the right people can give you bad advice um in intentionally unintentionally or it's good advice it's just you know there was some other information out there like we don't know everything um and so that's the going back to going out there and working on it and being like hey this doesn't work but yeah don't wait 6 months to get back

00:15:56 to somebody on that pivoting back then to the Ence process Marshall you had mentioned uh you know revenue and or traction uh as kind of something that's very important when you're when you're going through that process also something that can outweigh you know a lot of red flags if there's significant traction at the same time probably something that Founders like to get the most creative with when when demonstrating that you know I I'd like to ask all you guys what do you consider you know what is traction what is not

00:16:27 traction and you know how strongly do you view that when thinking about investing in a company paying customers um yeah we want to look at uh obviously Revenue we want to see paying customers that aren't your roommates your family your friends we want to see that there's uh an actual real uh product and a market for it um there's willing customers to pay for your solution and it's solving a problem that they have and so we're looking at all that stuff and you know there are investors that do seed pre-seed it's

00:17:02 just not where we are we don't really want to chase ideas uh we want the that business because we can help accelerate and grow it rather fast yeah I mean traction does come in various forms I think I love when founders do get creative with it in you know an accurate effective way um the you know because you don't always have paying customers you don't you know it's awesome when you do it makes it a lot easier for us but you know Partnerships I thinking about where the most impactful um you elements are each of these little

00:17:32 pieces of traction like there are a lot of forms of traction even just team growth right visors these are all just ideas of drisking your business and helping us understand like you know I guess with that increasing the value of your business all these little pieces and so we do being that we are one of the earliest steps in you know support organizations um in the kind of the funnel we do have to you know look at that in all those different pieces and so um I'm not going to Discount any of them but you know you're also not going

00:18:00 to you know you're looking at lines not dots I think is you know I'm sure all of you heard like that matters right so like you really do need to dig in and we have to dig into like what they're trying to say try not to if I was going to give advice to a Founders like try not to Opus skate what's actually happening there cuz like we're going to get to the bottom and that's just going to turn us off um try and to make it our lives Easier by giving us accurate like but you know show that those small

00:18:25 little growth periods and that that's useful because we can see you're going to go and then when we talk to you again you know in a month or whatnot hopefully that's just a little bit bigger and a little bit you know farther of a jump yeah I think on on that note we we Define traction more as momentum right it's like it's great if you got a thousand customers in a week it's not so great if you did it in a year right and it's I think it's the momentum and that's also how fundraising rounds happen right it's this like oh

00:18:53 they might be in they might be in they might be in okay we're all just let's go right instead of this like oh maybe maybe maybe like dragging things out doesn't help anyone um and traction the for us is defined in momentum we invest earlier than you know most of the time it's like yeah we have some traction we have some revenue of like our test pilot with some XYZ but it's the momentum and the interest right so it's more of Lois it's the Cadence at which things are happening like ideally from our first

00:19:22 meeting to our check it's like a 3 we 4-we process in that we've gotten two investor updates where like you've doubled or tripled you're inbound or you like traction is happening at a high Cadence I would say one thing I really like is stickiness so if you can see that that there's like a very passionate user U base that's really using your product like it's that's that's exciting to us excellent and then you know alongside traction or Revenue uh we often hear a good team matters especially the early stage what are you

00:19:54 investing in you're investing in a team you know if if any of you guys could kind of lean into that a little and Define you know what really makes a good team is that logos is that previous experience um I'd like to hear how you guys kind of Define that I guess to start right we rather take pry product with a great team than vice versa I think most people will because your product's going to change right from iteration one to iteration X like it's just completely different like it's harder to Define what makes a great team

00:20:23 right I think what doesn't make a great team is very homophilous teams right so homophilous is basically for those that don't know is the term that is used to define someone that are of like kind right so it's like you are all roommates and you all did your MBA and you're three co-founders it's like where do you share like you all share the same skills right ideally it's like you went out of your network or out of your inner circle to find your co-founder that has a technical skill you're a salesperson you

00:20:53 need a marketing person so like you build a team around different set of skills I I mentioned it before and I'll double down down on the self-awareness and it's um you know understanding and knowing that you don't necessarily know everything taking advice um whether that's good or bad and and having the conversation um and trying to grow the business uh off of that information is extremely important to us you know our first fund was health wealth and sustainability so uh just pick on healthc care worked with a lot of

00:21:26 doctors obviously brilliant people uh working on some uh world changing uh products and they couldn't get out of their own way they haven't scaled a business before they haven't um had to deal with HR issues or product issues things like that and so simple questions you know are you willing to uh move over to be a CTO uh and uh bring in a CEO that scaled a medical device company before and seeing that response and you know just one example is absolutely not you know I'm the only person who can do

00:21:58 this um and that was just a kind of a turnoff for us and was like we you know we wish you the best uh we really want you to succeed uh but you didn't even have that conversation and even if it's just you're wrong um I want to know why I'm wrong and I'm wrong often so just having that conversation uh with the founders is important and I think that makes for a good uh management team and a good founder I mean this it's a hard question you know what makes a great team but you know or at least where to start but the

00:22:30 I think two important traits are their their chemistry and you know their cohesiveness like can they work together I think his point of like are they doing different things is is really critical like you want to get as much of the business covered as possible and also the different insights and you pair that with a good chemistry you've got a really powerful team just like right there ready to go and especially if they have a an understanding um of their domain you however they achieved that but really understanding their domain um

00:23:02 and hopefully they're all interested in really becoming excited by that domain too not just a CEO have any guys made investments in a company where either the founder or the entire co-founding team doesn't have specific domain expertise so Brian are the founding uh partner of the fund he founded Legal Zoom Honest Company shazzle um and now he started a company called Arena Club apart from Legal Zoom where he was a trained attorney um on his company right diapers he he was not an expert in diapers after

00:23:34 building Legal Zoom um shazzle with Kim Kardashian like he he was definitely not an expert in you know buying and selling shoes um and again now in Arena Club right he's he's not an expert in trading cards right and so I think it goes back to what I said earlier the the execution rights um it's like and also to the founder like what makes a great team it's like there's a sense of obsession and needs to happen right and it's like I can execute or I hire to replace myself right so he's incredible at building

00:24:08 teams of building businesses and I think it's a very different skill that is required to build a business than to be a technical person I would say if they didn't have expertise surrounding themselves with those experts right having advisors uh working with accelerators that have those type of advisors um fractional Executives third parties uh there's always been someone there that has that expertise and and maybe the founder knows how to scale businesses knows product knows something like that and the advisor is

00:24:39 more on the you know medical side of things or or fintech side of things so surrounding yourself uh with those people is very important I think anybody can become an expert in any industry just if you find a Founder that's really passionate about it and yeah I've invested in companies that with Founders that were not originally in that space and they became experts and they've done amazingly well um but they were passionate and they did the right things to to learn it and so um but by the time I when I invested in them I felt like

00:25:11 they were experts in the field so kind of making sure that the their why is sound as far as why they started that company Andor you know have the passion to do it for the next five to seven years just to kind of zoom out now a bit uh I know in the last panel there was some talk of secondaries uh all of us you know being predominantly early stage whether it's seed or or a um you know IPOs is a little bit higher bar uh m&a is a little bit tighter potentially some changes coming there but you know other than the

00:25:45 oneoff um you know either ultra high net worth person trying to you know buy a steak in Uber or something like that is there a way to actually have a secondaries Market that becomes scalable and it's actually a realistic option as far as liquidity for early stage investors other than kind of just a oneoff two things have happened in the last like 2 three years call it Market collapse whatever you want to call it um there's been this like crazy emergence of call it a PE type secondary funds that have been

00:26:18 growing and mostly because funds still have to deploy Capital funds still have to return capital in order to raise their next fund so you have to understand the fund cycle and so these funds are like hey you know I want to can I buy your entire portfolio one at a 50% discount and at least you have DPI to then go and raise another fund right and so we've seen a lot of that secondary activity and as a other than that if you're just looking for actual gains we don't do secondaries because it's kind of We're the friendly

00:26:53 VC we're with you till you die and like you know your business than we do and like you either hit a home run or you don't and that's kind of our model I think we're a little different in that cuz we have a much larger portfolio than most um so we live on that like some go to zero and some hit a home run and you know what is that signaling to your portfolio Founders if you are selling off shares early or or potentially yeah no one's going to like it right it's like we're not against it um but you

00:27:22 know it's more about the timeline right like the the longer it goes like we're trying to get in early and so the returns can still be very very high and so we're not trying to just offload companies and use it for that purpose it's more we're hitting our multiples and like you know hopefully um you know the fund will maybe it's time we're we're open to it's in our our um uh you know how we set up our fund and I think things are changing too like the opportunities are there but that's not our primary approach um and uh you know

00:27:51 so we're not against it I also do think that the second a market is good I I know funds that are you know that's all they do right like but yeah they come in at I think B and exit at C or come in a and exit at B like they're they're out they're done and it's a it's a great model and it works yeah I know I know funds that will have a clear strategy I think they're a public about it so it's FJ labs in based in New York they'll take nearly every secondary and always sell 50% that's just very simple it's

00:28:19 like we'll take it out and 50% if it goes up great you save 50 if it goes down great you sold 50 like 50 is kind of a nice number we don't do secondaries but but um a lot of the due diligence process that we're looking at is companies that don't need multiple rounds of equity financing maybe one or two rounds maybe some debt uh and then an acquisition uh from there from a a PE firm or uh a merger or so forth so you know a lot of the founders we work with are are happy with a00 $300 million exit

00:28:53 uh our LPS would be happy we would be all happy so we're not necessarily chasing uh a home run on on every bet we don't necessarily need an IPO we don't need a unicorn uh we're looking for a number of uh doubles and triples and and so forth and just getting a solid return the cost of starting a business has gone drastically down productivity per employees has gone drastically up or you know with the Outlook of AI should continue to go up does that leave kind of a you know great opportunity to continue in the early stage and

00:29:30 potentially a later stage uh you know are there going to be enough companies to put very large fund allocations into um you know versus sitting in the early stage and a company only raises a seed or an A and and they're able to grow from that point is what do the future I guess the question will be what do the future of you know later stage Capital look like as far as getting into deals that may not need capital I think I I somewhat disagree that it's gotten cheaper to start a business because every service

00:29:58 provider will charge you for something and employees are more expensive and I think you're going to find a lot more like big founding teams low Equity Founders that like hey I'm going to give you Equity because we need need someone to be an expert in this thing I think funding rounds are going to be bigger and later always like everything's going to be dragged out later um that's just because cost of doing business for me in my mind has gone up a lot even though it seems easier to do a business to

00:30:30 actually be successful I'll use cpg as an example it's now cheaper to sell through Amazon than it is to go with ads direct to Consumer right and that used to be the other way people like we're avoiding Amazon because like oh it's predatory they take 30% it's like oh because your CAC through Instagram is like 60% right and so I think it's gone up doing business I think it really depends on the type of business right um sustainability climate some of these projects take billions of dollars to get

00:31:01 off the ground right uh software uh companies or software B based companies maybe not so much right you don't need as much Capital you don't need as many employees um to kind of grow and and scale that business so it's it's really dependent on the type of business and um but you know it's it's PRS his but you know don't take Venture money I wouldn't recommend that try to bootstrap your company as far as you can go um and take on you know a strategic investor someone that you trust um someone that you want

00:31:36 to get to know and work with for a long period of time or just keep trying to to get it going on your own from doing proof of concept I think that that's probably a little bit cheaper and you can get some things done um which is great for startups to get going um if you're talking about you know building your own llm you know and having to run that and manag it gets kind of a little bit more expensive um but yeah I'm seeing that you can get a lot more done it's just also the bar is a set higher across the board too

00:32:05 hopefully um but uh yeah I'm I'm excited for it I think it's great for startups I'm also a little bit fearful given you know it's not the same era that we had back in you know the the big incumbents were um not ready for the the onset of you know technology of mobile and all that um now that they are for AI and it's kind of a big bar to kind of jump over it's kind of a moving maret so I'm just coming from a startup perspective of like um but there's tons of opportunity to be had out there awesome

00:32:35 bars still open downstairs uh appreciate everyone for coming out and have a great night thank you