Crack The Funding Code with Judy Robinett
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Crack The Funding Code with Judy Robinett
Crack the Funding Code: How Investors Think and What They Need to Hear to Fund Your Startup
I’m honored and thrilled to have a return guest. It’s a very rare thing on The Successful Pitch, Judy Robinett. She is the author of How to Be a Power Connector. She has a book called Crack the Funding Code. That book has all kinds of information on how to get your startup funded. Judy has been profiled in Fast Company, Forbes and Huffington Post. She is the super-connector who has an amazing network globally. Not only have people that are influential but investors from Angel groups to VCs. In over 30 years as an entrepreneur, she herself has served as the CEO for both public and private companies. She’s been on the advisory boards of Illuminate Ventures, which is an early-stage venture capital based in Menlo Park. She is well-connected literally around the world. Judy, welcome to the show.
Thank you so much, John. I’m thrilled to be here again with you. What you didn’t tell your guest is that you’re featured in my book probably because you’re the best guy I’ve ever worked with in my life on pitch decks and understanding what a true value proposition is. I’m excited to be here.
Tell your own little story of origin because that always is so impressive of how did you become this super connector and this expert in this ecosystem of getting startups funded?
I grew up in the same town where they filmed the movie, Napoleon Dynamite, so I was a nobody. I was shy as a kid and had been bullied. I very quickly figured out when I worked for a couple of Fortune 50 corporations that with keeping your head down and working hard, the thought was you’d get noticed. I found out you didn’t. I read the book, How to Win Friends & Influence People, and that helped me to understand the power of strategic networking to get any resources you need to get anywhere because there’s no lack of resources. There are billions of people on the planet. There’s $296 trillion of private global wealth. There’s no lack of money to get funded. What I learned was that most people are in the wrong room with the wrong story. Having been an investor for a number of years and then working with the VCs and accelerators like Springboard, which to date raised $9 billion, had seventeen IPOs and 185-plus strategic sells. I was so saddened when I would meet founders who had a great business idea, usually a solid business model. Unfortunately, they either met up with bad actors or they had felt like they’re running this endless rat maze trying to figure out where the cheese is. I decided I was going to help them figure that out.
When that happens, nine times out of ten people are doing both. Your expertise is getting people in the right room. I want to also say what I’ve observed is your skillset is so immense that you can get them in the right room at the right time. If you are not prepared when you have that opportunity to meet someone one-on-one or get in front of Angel Group or a VC for your ten-minute pitch and you haven’t done your due diligence, it can still all fall apart even if you are in the right room.
This happened to me. I was referred to a gentleman who has an amazing startup called Logical. He has investors and is doing well. He has proof of concept and 148,000 in sells, but he’s not pitched too high-end Angel groups or to early stage VCs. I started from where I usually do with people, “Send me your pitch deck. Send me your financials.” Nine times out of ten, in some level, they suck. I’m being clear and people have done a lot of work. The problem is they don’t know what they don’t know. The next two phone calls I make, one of them is to David Meister, who is a top CFO expert on pro formas for startups. David doesn’t charge a ton, but will go through all of those proformas, help you develop them if you need. He drills down to how do you mitigate risk as viewed by the investor.
[bctt tweet=”Mitigate the risk for investors.” username=”John_Livesay”]
You’ll hear all the time, “You’d better know your numbers.” He delves into your assumptions behind the business model. Usually, the second call I make is to you, John, because people have a hard time so much in the forest that they can’t see the trees. Particularly from an investor’s standpoint, the investors, number one, want to know what the exit is. How are they going to get their money back? How quickly? You have to mitigate risk as viewed by the investors. That’s usually where I start and that is how you get a good story. You can tell me what your business proposition is in two sentences. You have a pitch deck that speaks to the competition, you go to market strategy, who your team is, some of the basics. You’ve done your homework on the financials. That is getting the right story. You can be ready to get in the right room.
I love this concept that when you mitigate the risk, that’s when you get a yes from an investor because people have so much trouble having empathy for what the investor thinks and how many pitches they hear in a year. Can you share your observations? The statistic is only 1% of pitches get funded. Do you find that to be true? How do you help people solve that problem?
I don’t believe that. The majority of startups fail if you drill down, you find out they came from the Small Business Administration or some government agency. The truth is a business may not have failed at all. They may have reincorporated as a different entity. They could have sold to somebody else that made the business successful. It is tough. As Einstein said, “If you’re going to play the game, you’d better know the rules.” One of the big reasons I wrote the book was to help people understand there is no lack of funding. Different phases of your company require different types of investors. You usually start with friends and family. That’s the biggest pot of money that’s available. The next one is the Angel groups. People need to understand there’s no lack of these people.
There are 300 Angel groups. They’re equal from north to south to west to east. You don’t have to get on a plane and go to Silicon Valley or go to New York City. One of those little rules of the game is 75% of Angel investors will only invest in the state where they live because they want to be able to visit you, to coach you, and to help you. Understanding that piece of information and then going on Google and type in Angel groups in Utah, Angel groups wherever. You can do the same with family offices, which now have some 80% of them are now also investing in startups. Having that information, doing a little research, I often tell people to go look at New York Angels in New York City. They’re one of the best Angel groups in the world. They walk through what you have to have ready, what the application process is. If you do that, then you’re geared to be much more successful above that 1% who get funded.
A lot of getting in that 1% Club, so to speak, is having a warm introduction to get into that right room.
That is correct. A VC out of California once said to me, “Judy, if they can’t figure out how to get to me, they can’t figure out how to get a customer.” One of the reasons is people get bombarded with thousands upon thousands of business plans, models, and executive summaries. It comes from someone that they know, like and trust. If you put on the New York Angels that somebody has referred you to them, inside their group of 70-plus, you’re pretty well-assured that you’ll probably get a slot to get in the door. It absolutely helps. A key point is they also have to know you, like you, trust you before they’ll fund you. The number one thing is to start building those relationships.
You’ve often said that there are two big reasons why small startups fail; lack of customers and lack of funding. Can you speak to both of those?
[bctt tweet=”No competition means no marketplace.” username=”John_Livesay”]
This is a quote from one of the founders of Y Combinator. I’ll often meet people and they’ll say, “If I had the money.” The reality is they need the customer. Often people have what they think is a brilliant idea and it turns out it’s a hobby. It’s something that they wanted. It doesn’t necessarily solve the problem for a customer. Until people are willing to open that wallet and pay you, all you have is a hobby. The quicker you can get some funding in the door after you’ve got your customer. Focus on getting those customers in the door first, then it’s much easier to get funding because you have proof of concept.
As one investor said to me, “If you’re selling dog food, I’d love to see those dogs eating the food already,” which I love that image. One of the things you touched on earlier was the importance of competition. I have seen and heard with you sometimes people say, “I don’t have any competition.” One of the key questions that I think people need to be prepared for is what’s your secret sauce? What’s the barrier to entry? Can you tell us about your thoughts and experiences and maybe a story around that?
There are a few key sentences that if I hear them uttered, it tells me instantly that the people are amateurs. One of those is there’s no competition. If there’s no competition, there’s no market. There’s no need for your product or service. There’s always competition. It shows me you’ve not done your homework well. It’s absolutely critical to figure out who your competition is. I was in Belgrade for eleven days working with a couple of startups. One of them I’m already on their Board of Directors and own a part of the company. The second one is a new one to me. They arguably have something that is arguably the next step up from AI, artificial intelligence. Sure enough, three minutes into their pitch, they assured me they had no competition.
I always smile. I made them go do a little research. It turns out everybody from Microsoft, IBM and who else is also playing in this game and somehow could be construed as a competitor. The other thing they will tell me is they need money like the day before yesterday. They don’t see any need for an exit. The exit is the only way the investor gets their money back. This also was from this group. I said, “Nobody is going to invest because they want their money back.” They said, “We would consider doing a strategic sell.” The majority of exits in the United States are strategic sells. Another thing I have people do is get on PitchBook, which is free and there are several competing services that are like that. They can tell you who bought what company, who the competitors are. You can do it by Google, by industry to find out exactly who those competitors are.
Crack The Funding Code: Nobody can create a successful business by themselves.
You need to be able to talk about them in a way that is not insulting to them or coming across as arrogant. Let’s talk a little bit about how important it is. It leads right into the team. Your overall attitude and persona of confidence versus arrogance. Can you talk about what you’ve seen and how can people make sure they’re confident but not arrogant?
One of the biggest turnoffs to investors is a know it all. Investors will immediately say, “Go for it. Just not with me.” That shows that you’ve got a problem with your thinking. Nobody can create a successful business by themselves. That’s a big turnoff. It shows that you’re arrogant. It shows that you’re a fool. You think you know better than the rest of the world. That’s problematic because Angel investors invest. They want their money back, but most of them have been successful entrepreneurs themselves. They love to coach. They love to help you to get to that successful exit. Avoiding as we call it, hair on the deal, not making mistakes that are going to make you un-fundable or that you’ll never be able to sell the company.
My takeaway from that is to be coachable and confident when you pitch.
[bctt tweet=”Be coachable and confident when you pitch.” username=”John_Livesay”]
Being confident is fine but let me tell you, if somebody says, “I don’t know but let me get back to you on that,” that’s a much better answer than lying about it because these investors, many of them see a thousand deals a month. You’re not going to pull the covers over their eyes, but sometimes it’s fear. Everybody knows you’re broke. That’s why you’re there to get money. If you’re smart, you will agree that you want their expertise. You want more than their money. You can be confident. You can say very confident driven things. Also, if you show a little bit of humility and make a couple of comments like, “I hadn’t thought of that. What a great idea. Could we talk about that more?” job one is to build a relationship because you want the second date. They’re not going to meet you and then write you a check. They’re looking for a level of confidence.
They also look for a level of your character. Howard Stevenson who was the head professor at Harvard for many years for entrepreneurs wrote a great little book and it’s for investors. It’s how to pick deals. It’s a great one for people to look through and see what the investors are looking for. He said, “The first time someone lies to him, he’s out of there.” It’s like you would flush your money down the toilet, so it doesn’t matter how great your deal looks, what your ROI is. If there’s an inkling that you’re not telling the truth, you’re history.
Does the book go into some details, Crack the Funding Code, on how to prepare for due diligence once you’ve gotten a yes to make sure that everything is opened up?
Yes. We do have a section on that and probably one of the most important chapters is Chapter Nine, which is mitigating the risk as viewed by the investors. They want to make sure you can execute. They want to make sure you have a solid team. There are many execution risks. You had mentioned barrier to entry. My book does go in into that. It’s good for you to take your blinders off and pretend like the investor is your customer because, at this point in the funding process, the investor is your customer. You need to be open-minded with any concerns or any issues that they raised. This is from usually decades of experience that they have. Often, they’re trying to be helpful and then test you a bit to see what your response is because they want to take a peek under the hood at that character of yours.
In other words, do you get defensive right away or do you stay calm? One of the things I know that you’re all about is putting together a great team because the investors are asking themselves, “Why is this the best team to execute this idea?” Can you speak to the importance of having complementary skills on the team?
We start with a founder and hopefully, they’re a sales guy. If not, then you’d be needing a salesperson first because cash is king and you want that proof of concept that you have customers. I usually tell people to get somebody like David Meister as a fractional CFO because you don’t need a full-time finance person. It is good to have a high-level guy, who can help you as the company begins to grow. That’s important. Often you don’t have money to build out a lot at this point. You can put in your deck if you need a CTO, chief technology person, on or some guru. You can put this person is going to be hired upon completion of this round that you’ve already had interest from them. A rule important one in my mind is positioning the company for success.
Often you as a founder, you don’t have years and years of success behind you. Find two to three people who do have success. I helped a woman get the first CFO from PayPal on her advisory board. Another one I helped get a director out of Microsoft for fifteen years. It literally speaks volumes. People look at the company and go, “If this person is in, they’ve done the research, the due diligence, and they believe in this concept.” The other one is to surround yourself with service providers, your law team, your banker that have a level of expertise. I meet a lot of people and they’ll say, “I’ve got this great bookkeeper that put together my pro formas.” That’s not going to cut it, neither is your accountant. It’s very different getting pro formas done by somebody who understands startups. We engaged with Wilson Sonsini. They’re the number one law firm in the world for startups. It’s like that old commercial when JP Piper speaks, everybody listens and everybody turns. If you have a good banker, good lawyers, it looks like you’ve put together a solid team of people who can advise you. I’m leery. I don’t work with people who tell me they don’t need an advisory board. That’s right up there with, “I know it all. I don’t need any help.”
[bctt tweet=”Most people are in the wrong room with the wrong story.” username=”John_Livesay”]
Can you tell a story of how you were able to help a company get a good exit above what the valuation would have been on paper by assembling a good advisory board?
A company that I worked with out in Park City had developed a biomedical device for permanent sterilization that could be done in a doctor’s office very inexpensively. Initially, she had gone the rounds in Utah trying to find Angels. She kept hearing no. When I was introduced to her, I said, “Let’s up the game here.” I brought on one of Howard Stevenson’s protégés out of Boston, Eileen Shapiro, who has been a top consultant at McKinsey, has been an investor probably for 35 plus years. That helped. It turned out the relationship with her resulted in a much higher significant sell of the company than she would have had out doing it by herself. That’s why it’s so important to have people that are in the industry that you’re targeting. Lots of lawyers can write contracts. You want people who can also open doors for you, who have expertise in the industry that could help you find potentially strategic partnerships.
What would you say is the biggest mistake a lot of founders make who haven’t read Crack the Funding Code?
Probably the biggest mistake is trying to find love and trying to find money in all the wrong places. I meet people that feel like they’ve been kicked in the guts hard and everybody is telling them no. It’s because they haven’t done the match of where the money is, who’s got it, and who’s most likely to fund you. Often, they are missing a couple of components of the story. The big one is mitigating that risk as viewed by the investors. Locally, you can go to Score. You can go to the SBA, the Small Business Development Center. Your local college or university has professors, people who are experts on entrepreneurism. Find a pitch event and that’s where investors hang out. It’s also where people hang out that love startups. We’ll happily give you some advice.
Crack The Funding Code: The higher you go up that food chain in the venture capital world, the more sophisticated those investors are.
You have worked with so many powerful people from Kevin Harrington from Shark Tank to Mark Burnett, who produces Shark Tank and several other shows. You’ve also helped people get in front of a venture capitalist. Let’s say someone who wants to read your book, Crack the Funding Code, because they’re like, “I’ve got some seed round from an Angel Group. I’ve got some revenue, but I don’t know how to break into the venture capital world.” How different I should speak there versus an Angel group? I know Crack the Funding Code goes into that. Can you share some of those insights?
The higher you go up that food chain in the venture capital world, the more sophisticated those investors are, the tougher the questions will be. Back to looking at the New York Angels, then I would have you google White Star Ventures, a top VC firm that’s now global, started in New York. One of their best access has been The Shave Club, $1 billion-plus. You can Google early stage VCs. You can look and see what specifically they’re looking at. Many VCs are very niche focused. They realize they can’t do it all. There are ones that specialize in the oil patch, everything to do with gas and oil industry. There are ones that all they do is life sciences. There are other ones that only do the B2B play or the B2C play, business to customer direct. You need to have done your homework and understood the jargon of the VC world. One of them is the one you quoted, “Does the dog eat the dog food?” Another one, “Is there hair on the deal?” They want to make sure that there’s no potential litigation coming down the pack. That you’ve protected your IP if you have it. How you approach them is very different. There’s a chapter in my book on doing strategic networking that can easily move you forward.
In addition to being this amazing author and consultant to startups, you’ve also a speaker. You’ve spoken at NASA. The White House, you’ve been involved and invited to. Give us a little snippet of what kinds of speaking engagements typically are you called in for.
[bctt tweet=”Until people are willing to open that wallet and pay you, all you have is a hobby.” username=”John_Livesay”]
I’m usually called in on strategic networking. People needing to understand, “This is my goal. I’ve got A2B, but I cannot for the life of me figure out how to get from B2C.” This is another one of Einstein, my favorite quotes, “A and B, you can get there with logic every time. B to C usually takes imagination.” It boils down to strategy. You can create luck. People say to me, “You can’t create luck.” I’ll say, “Go stand on the train tracks for 24 hours. Tell me if you’ve got good luck or bad luck.” How you position yourself is absolutely critical.
The book again is called Crack the Funding Code. People can buy it on Amazon. It’s on Kindle and Nook and every place you can get a book. Judy, is there one last thought you want to leave our audience with about what they need to look for in Crack the Funding Code?
One of the biggest pieces of advice I’ll tell everybody out there is to kick fear to the curb. In Hebrew, there are two words for fear. The first one is when you think the sky is falling, for me, I’m running to my cave with dark chocolate. The second one is like you’ve stepped into this brighter, bigger space than you’ve ever been in. It’s fearful but it’s on inspiring as well. Everybody at some level deals with the fear. When I did my first startup, a franchise restaurant, I thought I was going bankrupt. I went to an attorney scared to death. I’m shaking in my boots. He said, “You’re not even close.” I said, “I’m broke. I don’t have any money.” He said something that changed my life. He said, “Judy, they can break you, but they never can eat you. Don’t let fear persistence wins time over time. It’s not the brightest person in the room. It’s the person who will learn and the person who keeps going.”
Judy, thanks so much. Thanks for being a phenomenal guest. I know this book is going to be a big success and help a lot of people.
Links Mentioned:
- Return guest – Judy Robinett previous episode
- Crack The Funding Code
- How to Be a Power Connector
- Illuminate Ventures
- How to Win Friends & Influence People
- White Star Ventures
- www.JudyRobinett.com
- Quantmre.com
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