CrowdSmart – Interview with Fred Campbell

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Episode Summary

Fred Campbell is a serial entrepreneur, and knows a thing or two about raising capital. In the early 90’s, he was having trouble raising funds for his e-card greeting network, but with enough persistence, eGreetings.com grew rapidly and became a worldwide top-20 website, with 13 million registered users. Today, Fred is the CEO and co-founder of CrowdSmart, a platform that enables user-generated scores and reviews of startups by alumni, investors, and customers. Listen in to find out what it takes to raise $40 million in capital.

Being the First to Market – Fred Campbell

Hello. Welcome to The Successful Pitch. I’m honored to have Fred Campbell, the CEO at CrowdSmart, as our guest today. Fred has raised over $40 million in various startups from Angel investors and VCs. He’s clearly an expert on how to do it. He has a business degree from Berkeley and his MBA from Stanford. He’s been involved in a number of very successful startups obviously. We’re going to ask him to walk us through some of that. What he’s doing now is fascinating in the world of artificial intelligence and helping people decide which startup to invest in. Fred, welcome to the show.

Thank you, John. I appreciate it. I’m thrilled to be here. As I was just telling you a few minutes ago, I love what you’re doing. You’re doing great work. I’m happy to be part of it.

I appreciate that, Fred. Let’s take people back. You have such a fascinating history. There was quite a bit of time, which I’m always fascinated, between getting your business degree from Berkeley and deciding to go to get your MBA from Stanford. About eleven years or so. What was the motivation there to take that much time? Because a lot of people maybe take a year or two and then they get their MBA or some people go right away. There must’ve been some compelling reason for you to say, “I’m getting my MBA.”

It’s a great question. I’m sure it’s unique for every person out there. Similar to what you were describing, I had planned to leave Berkeley, get a couple years in public accounting, get some practical experience, and then go back and get my Masters. I had started a non profit while I was at my public accounting firm, back then it was called RCM. Now it’s called probably Ernst & Young or something like that. That nonprofit, called the Christmas Carol Charity, turned into quite a large event in San Francisco. The company was getting clients as a result of that effort. It wasn’t intended for that, it was intended as a charitable effort to help Toys for Tots program.

TSP 090 | CrowdSmart

CrowdSmart: I got a job opportunity with an investment company to be their chief financial officer when I was 26.

As a result, the company was getting a number of clients. I was getting promoted quite fast. I made manager in four years. They were keeping me around, providing me incentives just to keep me there. Then I got a job opportunity with an investment company to be their chief financial officer when I was 26 or something like that. It was a wonderful opportunity. I kept that trajectory going for a while until I got to a place where one of my early companies, I sold it, I made some money and said, “I’m going to use that money to go pay for my Masters.” I just thought it’d be a good time for me to make that pause. Stanford is obviously a wonderful university. It worked out great.

My only personal issue is being out of school for eleven years, they made me go through what they called Math Camp. It was a great experience because I got to meet all the older people that were part of the Stanford, about 30, 45 people. Eight ended up being my lifetime friends. It was a great experience as well from that point. Plus, I’m very good at math so I can do the work that took the rest of the classmates all day, I can get it done in an hour, so I went and played golf at the Stanford golf course.

You are everybody’s favorite friend with your accounting background, I’m sure. Let’s talk about what you did with Egreetings, which was basically inventing the digital greeting space in 1993 and how you grew that to one of the world’s top 20 websites with 13 million registered users. That was a huge number back then. Today, people would be thrilled to get that. The last great IPO of 99. What was that experience like and what did you learn?

That was a roller coaster ride. It was just a ton of fun. For listeners, it was also, early on, it was really hard to raise money for that company, very very hard. Any of your listeners that is developing something new that has not been done before, you’re going to get 99% of the people that are going to look at what you’re doing and scratch their head and go, “Why would I want to send a digital greeting?” I would get this from VCs often. Back then, they were 99% men. They would say, “Look, I don’t even get my wife a paper greeting card. Now you want me to send her a digital one? She would divorce me.”

It was a wonderful ride. Some of the tricks that I’ve learned, I learned from Egreetings, as to how do you get the market validation earlier in the process so you can raise that money? Because I had so much early market validation for that company, I knew that it was going to be a big success. We positioned ourselves in the marketplace and with investors to turn that into, like you said, a top 20 website. On a typical day, we would ship about 10 million digital greetings. At one point in time, it was the most significant media company on the internet. Our content was the YouTube of its day. There was a lot of aspects to Egreetings that are relevant to this day in terms of, for your listeners, how do you raise money.

There’s two things that pop out from what you just said to me, Fred. One is, if you’re in a market that technically doesn’t have any competition because you’re the first to market, how do you handle that? The second is, it seems like you handle that by showing traction. Is that accurate?

I think that’s probably more so this day and age for entrepreneurs. You have to be able to show traction, especially if your product has somewhat close competition, you have to be able to distinguish yourself from a pure traction point of view. If your company is really, it’s a cutting edge company that’s doing something that nobody else has done before, you’ll get some investor interest. I’ll talk about that. Finding an investor, early stage company that doesn’t exist, it’s creating new space, is truly like finding a needle in a haystack, finding that investor who’s willing to … Who’s already got the idea in mind. There are techniques, like what you’re doing right now in this podcast. There are techniques of turning that equation around and making sure that needle can find you.

I love that. We’re going to tweet that out. Let’s have the needle find you. How are some of techniques, Fred?

Entrepreneurs inevitably are enamored as they should be with what they’re doing with their product. Building the next great thing, whatever that thing is. Their job is really about evangelizing that great thing. They need to think about their job from a point of view of, how do I get this out to the world? Inevitably, when you’re doing something that’s really innovative, you’ve got to this internal conflict going on, which is, “I don’t want to let the cat out of the bag too early. That’s a terrible expression, excuse me. I don’t want to reveal my secrets and let somebody else steal them. I’m going to keep them close to my chest and I’m going to be selective about who I talk to about it.” That doesn’t work.

From my experience, that does not work when you’re building a truly innovative company. Four of the seven companies that I’ve done are, they’ve never existed on the planet before. I remember coming out of a meeting one time, we were introduced to some of the folks there. They were doing some innovative stuff, we were doing some innovative. I left, walked out with my partner, and we had kept things pretty close to the vest. We walked out and he said, “Did you learn anything in that meeting?” I said, “No. Not a darn thing.” He said, “Neither did I. You know what, let’s try a different approach and just walk in with an open kimono.”

Walk in and reveal where we are and take the risk of losing it. At least, people will be able to embrace what we’re doing and maybe help us. That’s what I found. I’ve had another professor, a mentor of mine, say to a group of startup founders, “I tell you what, take your best idea you have and find the competitor who you think is the most aggressive. I will pay you $100,000 if you can get that company and that competitor to do what you’re doing.” Sell it to them, see if you can do that. They’re doing so many other things that they can’t do what you’re doing. They’re going to let you prove the market first and then they may jump in.

I love that. Let’s talk about that a little bit. I have so many people come to me that I work with that are so afraid of someone stealing their idea. I keep telling people, it’s about the team that executes the idea, not the idea. Investors don’t sign NDAs. More importantly, like you were saying, even if you talk to an investor and they have a competitor within their portfolio, a really good investor with integrity is not going to steal your ideas and give it to someone in their portfolio.

No. That’s exactly right, John. It is really is a paranoia that entrepreneurs have that they don’t need to. There’s no really empirical evidence that I’ve ever seen that would say that that’s true.

Great. Let’s jump in to yet another one of your wonderful companies you started, which was Lexy, the pioneer mobile platform for creating short form talk audio, which obviously I’m a big fan of, we’re doing a podcast. I’d love to hear about how to TalkRadio and Pandora all became in sync there.

TSP 090 | CrowdSmart

CrowdSmart: Once you’ve had some success, it is easier to raise money.

Lexy was to TalkRadio what Pandora is to music, except the major difference was Pandora is a consumption platform. You use it to listen to your favorite music or to discover music. Lexy, you could use your phone to create TalkRadio content and then broadcast that out to your social media and other places. Lexy was, again, a pioneer in its space. We were, as far as I know, the first mobile based audio podcast or audio creation platform on the internet back in 2004. Partly because of the Egreetings’ success, and that’s one of the things that you know John, that your listeners probably are aware of. Once you’ve had some success, it is easier to raise money. It clearly is. People are betting on the jockey at that point in time.

Lexy was, and still is quite frankly, I’m surprised that nobody has done that company. That company was focused on doing some really fun stuff. We did a number of test markets to find out was the content that point in time really focused around … Was it sports content? Was it entertainment based content? Was it the long tail content, just people listening to whatever? What we discovered was that sports was really the key thing there. We were going to enable the sports personalities who were maybe not big enough to have their ESPN program but were clearly personalities which would pull a large crowd, like coach Calipari, now the Kentucky basketball coach, and coach Beoheim.

For the, I think the March Madness 2006 or 2007, I forgot now. Just dumb luck, we had five of the elite A coaches Lexy casting that just made it through the finals. The company was growing with 30% to 50% month on month. Our numbers were the classic hockey stick. I had raised, at that point in time, about $6 million of capital. It was an ad based business, wasn’t a lot of audio ads at that point in time. We were not generating substantial revenue even though we had … At that point in time, we broken in the top 15,000 websites in the planet. We were then growing very nicely.

The great recession came along and I was trying to raise a series B. That was the first and only time I’ve ever had in my life, hopefully won’t happen, where I could not raise money. That’s probably topic for a different conversation. I did not do what I needed to do as a CEO. I had a staff of 20 and I was running at a capital and I should have downsized the company. I should’ve let a lot of people go and made sure that my capital could sustain the company at least at a neutral place for a heck lot longer. It was a lesson. It was a very very difficult lesson for me to learn.

The big takeaway is you have to make those hard decisions in order to keep the company alive sometimes. Let’s take a dive in to, since you’ve got so much experience in raising money successfully. Thank you for sharing that. If someone like you had trouble, it makes other people not feel so bad if they’re having trouble. What differences do you see that investors are looking for in the different pitches that you give between a seed round and a series A round? Obviously, there’s some traction differences. I’d love to have you just expand upon, besides hitting milestones, what are they looking for?

We both have been at this for a while. I can tell you that raising money for each of my companies, this is company number seven right now, is that … Even for an experienced CEO, raising money off of a napkin, those days are gone. There truly was a time back in the 90s where you could raise a lot of money off of a single piece of paper. You can’t anymore, you have to have traction. What we’re seeing now, at the detriment to some extent of the entrepreneur, is what used to be the traction needed to get the series A. Hard customer revenue, key metrics, product … However your key metrics are defined, maybe downloads of your app or whatever. Those are now the seed round.

TSP 090 | CrowdSmart

CrowdSmart: Raising money off of a napkin, those days are gone.

Seed investors have the luxury now of investing in companies that are already getting the traction that, ten years ago, would’ve been a series A investment round. That continues on. What you have to bring to the table for each round, now to get series A money, you need to show some very serious revenue traction. You might even need to be approaching a point where you’re 10 million revenue annual for a million a month run rate. The bar has gone up a lot. You hear this where you got this funding gap between the seed and the series A.

Here’s the numbers that we’ve accumulated, is that at any one moment in time right now, there’s about 300,000 startups in United States looking for capital. There’s about 70,000 of those that will get seed funding on average about half a million dollars. That’s about $30 billion a year around that number that are getting seed capital. Only 7,000 of those will go on to have any exit or follow on funding. It’s a very inefficient market right now in terms of, there’s a lot of capital for seed investment, that’s a good news for entrepreneurs. There’s a lot of startups competing for that. About in a quarter, 1/4, will get some seed financing. Unfortunately, only 10% of those go on to be successful. They’ll run out of money before they will be successful.

That leads right into my next question, which was going to be, how did you come up with the idea for CrowdSmart? Because it seems to me that’s the problem you’re solving, would that be right?

That is the problem we’re trying to solve. Because you need to show metrics in order to … We can go back to this if you want to. If you take some of the strategy of letting the needle find you, then you will get some funding. There’s enough money out there. If you got a decent idea, you’ll probably get some funding. You get one swing at the plate as a seed founder. You better have you ducks in row when you get that money. Because the clock’s ticking down and if you don’t show some serious traction to get to that series A, you will not get your follow on funding. You just won’t. It just won’t happen. There’s too many good deals that VCs are looking at these days that is stacked against you.

What CrowdSmart is intended for, what we’re doing is we’re working with, right now we’re working with communities. You need to be associated with a university, an accelerator or be in the hunt at one of the investments aggregators or one of the groups of Angel investor groups. We’re working with these communities in part because we tap those communities to get feedback in the aggregate of what they think the probability of your company is to be successful and how you can improve upon that probability to be more successful.

Our premise is, it’s kind of a “duh” once you hear it, it’s like, “Of course.” If you can aggregate and take any, I’m just going to pick something out of thin air. You can pull together a thousand drones that fly around. If you could put enthusiasts, knowledgeable experts, whatever, people who want to use that, you can pull them together and you have some new product for a drone. Either a new drone or maybe a new GPS aspect of a drone, whatever, maybe camera, GoPro. If you could aggregate the knowledge of that community, you’ll have a much much better sense for what the market need is and what a good solid product market fit would be. How do you tune your product to fit the needs of the market? If you had all that information. In our day and age of being totally interconnected, there’s really no reason why you can’t get that information earlier in the life cycle of a company. That’s what CrowdSmart does.

For me, if I was pitching, I would say CrowdSmart takes artificial intelligence plus real time intelligence of people in social media to help startups show they have a product market fit to make their funding more predictable and desirable.

TSP 090 | CrowdSmart

CrowdSmart: We combine human and machine intelligence to turn qualitative feedback into quantifiable predictive information.

That’s great. You’re hired. That’s exactly right. We combine human and machine intelligence to turn qualitative feedback into quantifiable predictive information. That’s what we do right there. The other thing on top of that is that if you do get that information together and you … Essentially what the system creates is the FICO like score for startups. If you think of it as a FICO and you get a score of 700, you could go online right now, I’ll literally use that analogy just for a second. You could go online right now with a score of 700 and you can get a bank loan, new credit card or whatever, without them ever seeing you. The same would be true for your FICO score for your startup. If your score is solid enough, we will put money in your company.

Wow, nice. I love that because what you just did there Fred, was show people how to make an analogy that people instantly understand what your company does. We do FICO scores for startups. Boom, that’s your tagline. You don’t have to be in the startup world to understand what that is. That’s what everybody needs to have when they pitch, whether it’s a tagline or the one sentence, really easy to understand way of grabbing people’s attention. Where do you stand on storytelling? Do you give examples of how before someone used CrowdSmart they were struggling and now after using it they’re getting better results?

We’ve got a number of use cases and stories about that. Just to confirm what you just said, one of my investors in Lexy was Peter Guber family, which is major media personality in Hollywood. I sat down with him, he was introduced to us as, “This is what Lexy does.” I sat down and the first thing he said to me was, “Tell me a story.”

He’s the guy that run Sony with Jonathan, Batman and all that.

You’re absolutely true what you’re saying about being able to convey the … To merge both sides of your brain. People make investments from an emotional maze. They use logic then to basically validate it. You never will get somebody to invest in your company if you just purely go from a logical, this make sense point of view. You just won’t get more than threshold. Being able to convey that message in … We create FICO score for startups. That kind of thing, that’s a nice tagline with the emotional connection behind that. That’s part of what the story is.

For us, the story is almost no startup has come on the platform. This is a typical path for a startup. It can be discouraging for startups. They come on the platform and they’re incredibly enthusiastic about what they’re doing, they love what they’re doing and we love what they’re doing. We ask the community to give them feedback, honest, direct feedback. They almost always, the equivalent FICO score, they’ll score between 450 to 500, which probably will not get you a decent credit card basically with that analogy. Inevitably, the startups are heartbroken and about half of the startups will say, “I just need to ask a different group of people.” They didn’t get it. They didn’t understand what I’m doing. It’s not my problem, it’s their problem. They’ll act defensively.

Oh my gosh, I’m so glad you brought that up Fred. So many times when I’ve made introductions to investors, I’ll have founders, when they get a no, they say, “That’s just not the right investor.” I’ll say, “No, no, no. That’s what all of them are going to tell you. Your valuation’s too high,” or whatever the problem is.

Pitching is an art. Every pitch you need to consider as pure practice. Physicians, attorneys, they never say, “I perfected law. No, “I’m practicing law.” You as an entrepreneur are practicing your pitch all the time. How do you get better? You got to get feedback. Unfortunately, most people give feedback in a live setting or even follow on setting, the sandwich approach. “I like this. I didn’t like that. I don’t like this.” Entrepreneurs love it because they go, “I got two out of three. That’s pretty good.” No, get rid of everything that’s not in the middle. You need the substance which is unfortunately is almost always in the middle of the sandwich. What did they say? Why didn’t they like the deal? Why didn’t they connect with the deal? Do your damnest as an entrepreneur … VCs are notoriously bad at this. Angle investors are a bit better. Try hard to get honest feedback. When you get that standard letter, which basically say something like, “Not quite for us. Keep us informed, we may be interested in the future.”

The polite no.

That’s the polite no. There’s no advantage for them to basically do something that might piss you off. Hell, you might actually make something that they want to invest in. Try really hard to get that negative feedback. As Elon Musk has said, the only feedback he goes after is the negative feedback.

Interesting. Let me ask you about CrowdSmart a little bit more. Two questions, you can take them one at a time if you want. One is, how do you make money? Two, how do founders apply to be part of CrowdSmart to get that FICO score?

I’ll answer the first one, we make money … I’m almost tempted to say the old fashioned way. Our business model is threefold. Primary way we make money is to invest in the best startups. We work with family offices, institutional investors and corporations that are looking for strategic investment. Or family offices that want to support their universities. For example, the very first family office we were associated with was a very wealthy individual whose got his name on the library at UCLA and a number of chairs.

He wanted to support the entrepreneurial efforts at UCLA. He was investing in UCLA startups that achieve this FICO score of 700 basically. He now, by the way, has said, “I like this. I like the startups. I like the deal flow you’re giving me so I actually wanted to see everything. I’m willing to invest in everything.” We charge basically half of what VCs charge. We charge a small management fee and a small carrier interest. That’s part of our revenue stream. As somebody said to us recently, “You are the ultimate seed investment platform.” Seed investment is a 90% gut, 10% data, we’re going to make it 90% data, 10% gut.

How great. I’d love to see that on a slide and reverse the images. That would make people really get it. That’s so great.

Because we’re relying upon, basically, crowdsourcing wisdom, crowdsourcing due diligence that we expect to be able to make on the order of a thousands investments a year. We’re looking to put in about a billion dollars a year when we’re at full scale probably four or five years from now. That’s one way. The other way we make money is that we do license the technology. If you’re not strategic to our investment interest, for example we’re working right now with four Japanese universities. The Japanese government has put up a billion dollars to invest in startups. It’s a job creation economy stimulus program.

These universities each have been given a quarter billion dollars to invest in the best and brightest from the university. They don’t know how to do that so they’re using our platform to figure that out. We charge for companies that can use our platform. That’s another thing. The third way we make money is to sell the data. We aggregate the data across … We’re really the only platform that will have presence at all of these different … Right now, we’re at UCLA, UC Berkeley, Sky Deck, University of Michigan and a whole bunch more that we’re in the process with right now. We can aggregate startups across that platforms. Series A investors can better target who they want to put their money in. That’s a subscription fee for accessing the data.

Fantastic. The other question is, how do founders … Do you fund seed round or do you only fund series A? How do people even get a FICO score? Do they apply online?

TSP 090 | CrowdSmart

CrowdSmart: To get people to tell you your idea is really good when they really think it’s stupid, it’s almost impossible.

First of, we’re happy to be the first money in. We believe in our data. If you are part of an accelerator, then you can automatically qualify. If you’re not part of an accelerator, then you can use the platform. You go to CrowdSmart.io, you sign up. You’ll be invisible basically. You have to go out and get a minimum of 40 points of data, 40 individuals. We’ve heard this before, John. Wouldn’t it be easy, they can just put it up on their social media. They get to ask their friends to score, basically stuff the ballot box and they qualify. It’s amazingly hard to do that. To get 40 people to tell you your idea is really good when they really think it’s stupid, it’s almost impossible. You will learn in the process whether or not you have a mark by just tapping your own community.

I can totally validate that. You can’t get 40 people to write you a great review on iTunes for your podcast if they don’t believe it.

They don’t believe it. They just will not do it. We say, “Here’s the tools, go out in your own community. If you can get 40 of your friends and family, mentors, coaches, whatever, to rate you and rate you above a seven basically out of a 10 and give the reasons for that, we’ll elevate you to the same status that you would if you got into Y Combinator.

Nice. This has just been so great, Fred. You’ve been so generous with your insights, your information. How can people follow you personally? What is your Twitter handle?

It’s @FredCampbell. I do most of my posts on LinkedIn. If they do search for Fred Campbell CrowdSmart, they’ll be able to find me.

Fantastic. I can’t thank you enough. You’ve been a great guest. I love how the needle in the haystack find you. That’s one of my favorite all time quotes. I’m looking forward to watching you continue to help startups and shift that 90-10 data logic gut thing. It’s fantastic.

Likewise, John. You’re doing a great job. At some point in time, we’re going to combine our efforts so we can make your material available to all of the startups in our platform.

That would be amazing. I would love that. Thanks, Fred.

All right, John.

 

Links Mentioned

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John Livesay Funding Strategist

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