TSP069 | John Shumate – Transcription
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John Livesay:
Welcome to The Successful Pitch Podcast. Today’s guest is John Shumate, who is the CEO of Venture First. John has a degree from Wharton, but decided he didn’t want to take the normal Wall Street route, and now lives in Louisville, Kentucky, where he offers Wall Street quality at Midwest prices for advisory information on how to value your company. They also fund companies in the healthcare and tech world, and go all the way from seed to series B. He has great insights on how to make a great pitch. He said, “Have a collaborative conversation with the investor, and also sell yourself before you sell anything.” He said, “The number one reason startups fail is running out of cash.” He gives a really great suggestion on time frames, that you should get enough cash to last you 18 months so that you can focus for 12 months on just executing, and then the last 6 months, start your fundraising again. Enjoy the episode.
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Hi, and welcome to The Successful Pitch. Today’s guest is John Shumate, the CEO of Venture First. John is the CEO of Venture First and focused his career on working closely with venture-backed companies. He’s worked with hundreds of early and growth stage companies across many industries, many of them dealing with highly technical products or business models. He believes strongly in the use of carefully applied rigor to rationalize financial models, business plans, and valuations. He’s got over a decade of financial experience, including the buy side and the sell side of mergers and acquisitions, debt and equity capital raises, strategic consulting, complex financial modeling – very few people do that – business plan development, equity, and derivative valuation. John attended Wharton and we are so happy to have him on today. John, welcome.
John S.:
Thanks so much. Happy to be here and looking forward to talking to you about the entrepreneurial world.
John L.:
I want to jump in and find out how you got to be where you are. Did you know, when you went to Wharton, that you wanted to start your own VC firm? How did you get there?
John S.:
No, not at all. I mean, business has always intrigued me. You know, when I was a kid, I collected coins and baseball cards and was always hustling and dealing with different people as a kid, and I knew I always liked the personalities of people, I liked the interaction, I liked the stories that went along with it, and didn’t mind making a buck along the way.
So, that was all good, but no, I knew I wanted to head in that direction and that’s why I went to Wharton to get that sort of classical economic training, but didn’t know that I wanted to go in that direction. You know, Wharton, like a lot of schools, really try to mitt people out to go straight to Wall Street. If you’re not going straight to one of half a dozen, invest in banking shops there, or you don’t want to do that, they think you’re nuts. And it wasn’t exactly what I wanted to do, and they probably thought I was nuts.
So, I went to work for an incubator, B catalyst, back when I don’t think incubators were cool, or at least not as cool as they are now. That incubator, like many incubators, were flawed for a couple reasons, and I was there as we ended up turning it into more of a services group, more of an investment banking group working with earlier stage companies, and that’s how I got my sort of foray to ventures at venture capital groups and that whole ecosystem and I absolutely loved it, and ever since then, I’ve just been off and running in that room.
John L.:
I love what you said about the stories from the coins and the baseball. I collected baseball cards myself. Ernie Banks was a big one to get, but the importance of storytelling is everything when you’re pitching someone. So, let’s dive into what do you think some of the secrets are to having a good pitch?
John S.:
I think the biggest secret for having a good pitch is to be genuine. I think so many VCs, they see so many stale pitches that come across and I don’t care who you are, you’re not the first person to come up with an idea to try to revolutionize an area of healthcare or a piece of technology. You might have your own special twist, but more often than not, VCs are betting on the person. Everyone thinks that they’re betting on the idea, but they’re betting on the person.
You see this. There’s later stage funds that all they do — and these are later stage private equity funds. All they do is go out and fund individuals for whatever their new venture is. Because they know if they’ve been around the block a few times, they’re probably not going to screw it up, and even if there was a problem with the idea, they are not going to panic. They’re going to be nimble. They’re going to communicate well with their investor and they’re going to pivot and turn it into either a similar company or something completely different than it already is and they’re going to get a win.
So, they’re betting on the people. So, I always tell people, if you can go in and connect with the person you’re pitching to and have a real conversation, whatever that is. Maybe talk about their family, maybe share the same alma mater, maybe you had the same healthcare treatment. Maybe you go for the same sports team. Whatever it is, make a personal connection and sell yourself before you sell anything. I always start off with that: sell yourself and then get into the issue and what it meant to you to get into this venture, why it resonates with you and why you have a passion for it, and then it becomes so easy just to step into the pitch and talk about the business model.
When these guys challenge you and even if you have a perfect pitch, they’re going to challenge you because that’s what they’re paid to do, have a collaborative conversation. Let them feel like they’re cooking the soup a little bit with you even if you feel like you have pretty good ideas. Don’t get into a pissing match; don’t argue. Firmly hold your ground on your beliefs but have an intellectual conversation about it, and if you make it personal, you got a much better chance.
John L.:
I love so many things you just said. Well, we’re definitely going to tweet out “Sell yourself before you sell anything”. I’m a big, big believer in that, and “Have a collaborative conversation”. What a great alliteration that is because people think, “If I have a perfect pitch,” which there’s no such thing, “no one’s going to question me and all that other stuff,” but the whole point is you have to show you’re coachable to have that collaboration because people want to not just give you their money, they also want to give you their ideas and see if they like you, right?
John S.:
That’s right. Absolutely.
John L.:
So, what are some of the reasons you think most startups fail?
John S.:
There’s a variety of reasons most startups fail, but the biggest one is actually pretty simple: they’ve run out of cash. This is something that I preach to startups. You see so many people, when they’re initially raising their first round, and they love their idea, they’re confident that it’s going to work and that’s great, and they’re extremely concerned with preserving every percentage point of equity that they possibly can, and I’m not saying you want to end up with a goose egg when you sell the thing. You don’t. You shouldn’t be foolish about it.
You will hear successful entrepreneurs say, time and time again, “I wish I’d gotten a little bit more cash. I wish I’d have a little bit more room to pivot. I wish I’d gone faster.” So, I generally tell people, “Raise more money than you think you need, at least 20% more than you think you need, or probably three to six months more than you think you need if you think about it in terms of fund.”
John L.:
Got it. How long do you think somebody should plan for? Is it 12 months, 18 months?
John S.:
I generally advise people to do 18 months between rounds or at least between when they perceive a round. The reason is most funding rounds can be pretty drawn out even with a good company, whether it’s through negotiations or telling people your stories, and there’s this decent battle of attrition that goes on.
So, I like to tell people to budget six months for a raise. It might be faster, but you got to do six months for a raise, and the good news is if you do that, and you plan for 18 months, that gives you a full year just to focus on executing and you don’t have to worry about funding, and I’ll tell you what, having that funding distraction, as fun as it can be, it really is a big distraction while you’re trying to execute. You’re trying to have a full year’s important.
John L.:
So, let’s just do the math recap real quickly for everybody: get enough money to last you 18 months so you have a whole year to focus on execution, and then you have 6 months’ window to be executing and raising funds. So, it’s an 18-12-6. I love that little formula. Thank you so much for spelling that out for us. Since you’re an expert in valuation, I would love to just hear you talk about are we experiencing an early stage valuation bubble, and how does a founder decide how much they should value their company here?
John S.:
Yeah, it’s a great question, and you have a lot of economists and people in their early stage space talking about this frequently, and really, the short answer is, “It depends.” I think if you look at some of the larger household name ventures, right? If you look at the Facebooks, if you look at the Ubers, if you look at some of these big valuations and, sometimes, big IPOs, I think there can be an argument on some of them that there’s a bit of a pricing bubble. There’s just so many dollars chasing those ventures, it gets a little inflated.
However, I think if you look at, sort of, the rest of the pack, the rest of the good ventures out there, I really don’t believe there’s much of a bubble. Clearly, maybe there’s been a little bit of a hump here with some good economic times and maybe you’ll have a little bit of a dip if we have a little bit of a downturn. But, I think what we’re actually seeing is a new paradigm for how innovation occurs in the modern economy. What you’re seeing is a good amount of churn.
In the past, if an entrepreneur failed and had to close a business, they were sort of labeled a failure. This person is not someone you want to do business with. This is not a stigma, at least in the technology hub. It’s not in Silicon Valley, not in Boston, not in Research Triangle Park. This is not a stigma that sticks with people, and this is where you’re betting on the person again, right? It is expected that if you go through enough ventures, you’re not going to win on every one of them. If you take that lean startup approach and you’re going in and you’re doing your work, you’re going to realize some of these don’t work, or you’re going to realize that you have to pivot to something else and there’s a lot of change.
But, the good news with this new paradigm, as I would call it, is that it brings innovation to the floor more rapidly. By filling more quickly, it allows a new leaf to be turned over for those smart, aggressive entrepreneurs to go on and do the next thing. The companies that do make it, it allows them to get funding more quickly and come to the forefront more quickly.
If you think about the life cycle of a company, or even of a technology in its entirety, it’s much shorter now. If a hundred years ago, GE came up with a technology and took it to market, they could expect that technology to last, perhaps, decades before it started to decline and they had to either change the product or a competitor will come along and do something different.
Now, technology comes out so rapidly that it’s a rapid spike and sometimes that’s sustained, but there’s often a rapid decline after that when something replaces it. So, you get a lot of companies that are flash in the pans, and that doesn’t mean that they weren’t important technologies, but again, this comes back to why it’s important to have a really good leader in that venture, because even if you knock one out of the park, chances are, somebody’s going to be hot on your tail and you’re going to need to change what you’re doing or tweak it in some way to catch up with the trend.
John L.:
So, what you just said brings up an interesting question for me, which is when someone’s pitching you, when you’re making a decision whether you’re going to fund someone, not only are you looking at who they are and their track record and not associating any stigma to any past failures, as long as they have some successes in there, but how important is it to talk about a barrier to entry from competitors that they’ve thought that through.
John S.:
That’s a good question. I think different people have different approaches on this. To me, I typically am not looking for huge barriers to entry. The reason is, I think, most of the time what most people think is a barrier to entry can easily be worked around.
I remember this lesson back from when I had a summer position in college at Johnson & Johnson, and one of my roles was to support the engineering department for a particular line and make sure they were getting the budget and funds that they needed. I remember one of the engineers looking at a particular product that a competitor had a stranglehold on the patents and the designs on, and he said, “If you could give me a few hundred thousand bucks, we could engineer around this,” and I said, “There’s so many regulations. How does that make sense?” and he said, “Listen, if you’ve got a smart enough team and a little bit of cash and enough time, you can get around just about anything. You just got to play with the design.”
So, when somebody comes to me and they say they have this marvelous barrier to entry, I’m always dubious. I think there’s exceptions when that’s the case, but I really believe that, more often than not, it’s about who hustles the fastest, who’s going to beat the next guy to the punch, who’s going to alter their strategy and change and be nimble when they have to. I think that’s the most important
Frankly, I’ll tell you, a lot of people, it bothers them if there’s a competitor in the space. It doesn’t bother me that much if there’s a competitor in the space if you can offer some special twist. If there are competitors in the space, that tells me there’s a market for it. How are you going to be better and do better than those competitors is what I want to know.
John L.:
Right. What types of startups do you like to specialize in, or do you specialize in certain things?
John S.:
We’re more generalists. However, we obviously love anything in healthcare, a lot of technology, but frankly, we’ll look at some pretty, what I would call, boring ventures. Frankly, you’ll see some. Everybody wants these sexy adventures that have a flash in the pan, but I have no problem with what I would call “boring industries” and “manufactured” or the like that have some cash flow, have a lot of demand, and have longer sustainability curve than some of the technology.
John L.:
Interesting. Now, are you funding at the seed round or are you in series A? What is your niche there?
John S.:
So, we’re typically working with companies anywhere from the seed stage up to series B. So, we have a wider range than most of the guys in our space, but we really believe that you’ve got to laser focus in on having the right person and the right ideas, and if we constrain that to a very narrow niche, a lot of times it’s hard to find enough ventures to make it go.
John L.:
Have you a story that you can share with us of someone you found at a seed range and have been able to give them multiple rounds over a period of time since you’ve been in business since 2009?
John S.:
Yeah, there’s a great company that we’ve worked with. We just did a round with them here recently called Edumedics, and it’s a great company out of Louisville, Kentucky, and they are a disease management company, and that’s become a little bit of a journey we’re in this space, because a lot of the companies aren’t driving results, but they really are. The founder’s background, the CEO, Alice Shade, came out of the insurance industry and planned design and had a healthcare background and she really understood the ins and outs very well, and the other co-founder was a physician with a lot of hospital administration background.
Together, they’ve built this cool company, and what they do is they work with large self-insured employers or large Medicare groups who have large insured populations, and a lot of them typically have very high spend for chronic disease. So, 20% of their members might make up 80% of their spend. So, it becomes, immediately, very important to figure out a way both to control that spend, and simply, to have a healthier workforce. I mean, you’re going to have healthier people, you’re going to do the right thing by those people, and you’re going to get, frankly, more production out of them if they’re healthy.
So, what they do is they set up clinics, they do a lot of sophisticated data analytics to really zero in on a particular patient population and they give them some coaching, right? The guy who’s got diabetes and COPD and something else who doesn’t really go to the doctor that often and, just frankly, might need some basic medications and a little bit of coaching, you’d be surprised that a little bit of that can go a long way.
We’ve liked them a lot, so we got involved with them very early on and helped them do a round with some other angel investors, and then we’ve kind of continued to work with them and just helped them with a 4.2 million dollar round, and they’re on their way. They’re running fast.
John L.:
That must be so rewarding. Since you’re based in Louisville, Kentucky, are you mostly looking for people who are geographically close to you, or are you geographically agnostic?
John S.:
No, we’re geographically agnostic, for sure. We’re typically working with companies anywhere from Silicon Valley to Research Triangle Park. We’re mostly in the US at the moment. However, we’ve looked at some deals in Latin America, in the Caribbean, so I would say we’re opportunistic.
John L.:
Nice. What is your favorite way to have someone reach out to you? Is it through warm introductions? How do you find the founders that you want to hear a pitch from?
John S.:
Yeah, I think warm introductions are always the best. Any time you can really sleuth on your LinkedIn and get someone mutually respected to introduce you, it’s certainly going to get a lot more immediate attention. But, we try to do a pretty good job whether we get a cold call or an email from somebody who finds us online, or wherever they find us, it’s really important for us to get back and give good feedback.
John L.:
Well, that’s the southern Midwest polite manners coming through there. I love it. One of the things you said on your LinkedIn profile is that you offer Wall Street quality at Midwest prices. Can you elaborate on what services you offer at those Midwest prices for Wall Street quality?
John S.:
Sure. I mean, these are more advisory services. So, we do a lot of valuation work for early stage companies and for VCs, and some transactional advisory services as well. So, there’s other guys doing this out there who are good, but if you are a venture on the west coast, Silicon Valley Bank, for example, they do good work, but they’re usually 3x the price that we are, and we do a great job.
John L.:
I’ve interviewed a lot of investors on this podcast and I’ve never met anyone who does as many things as you do so well, which is everything from seed to series B, as well as being an expert in valuation, which leads me to a question of, what tools are you using to run your business and stay so organized?
John S.:
That’s a good question, and I’ll just say, for us, we try to do different things because we really believe in supporting the entrepreneurial ecosystem as a whole, whether that’s working with other investors or working with companies, and really supporting the entire ecosystem. We think that’s where you get the best squeeze.
But, you’re absolutely right. When you’ve got a lot of pieces flying around, you got to keep them organized. We’re certainly fans of all the Google tools and we use that for mail and for calendar, but there’s other tools as well. We like to use Asana to kind of keep all of our projects organized and we have a lot of people working on a lot of different projects. We can communicate on that and organize them and make sure everybody’s on point with what they need to do.
For scheduling, we really like Mixmax, which is a tool that allows you to embed your calendar availability or what you want to show someone is your calendar availability to set up a meeting. So, you have one email and someone clicks on it that allows you to, in one email, get a meeting scheduled instead of having four, five back-and-forths about when you’re available. So, we like that as well.
John L.:
Especially for time zones, that’s really helpful, isn’t it?
John S.:
Absolutely.
John L.:
John, is there a book that you would recommend founders read, either about financial valuation or just life in general?
John S.:
There’s a bunch out there. I think the number one for entrepreneurs, if you haven’t read it is “The Hard Thing About Hard Things”, and this is Horowitz’s book. You know, the guy has been very successful, both running an early stage company, and as an investor. He’s a little irreverent, which I like. It’s not a polished PC stuff, but there’s really good advice, and frankly, I think a lot of entrepreneurs, all of us need a support group when they’re going through stuff to see that other smart guys have gone through the same problems they have, and it’s not just them struggling, and this guy is very, very open about his struggles. Times that he’s completely failed in a company and how you pick yourself up, and you do the next one. I think that’s the most important thing for any entrepreneur.
John L.:
Great. Well, how would somebody follow you on social media? What’s your Twitter and all that good stuff?
John S.:
Sure. So, Twitter is @schumate_john, and you can follow Venture First on Twitter as well. If you go to venturefirst.com, that has a blog post in different articles. We’ve got some good whitepapers in different studies and some good data on there as well that entrepreneurs can read.
John L.:
Fantastic. Well, John, do you have any last minute or last thoughts that you want to share with the audience before we let you go? Any last minute startup tricks or anything?
John S.:
Just have a lot of fun. Try not to stress too much. Work on things that are really interesting to you and that you love, and don’t get too concerned when you hit a hurdle. Be flexible and reach out to folks in the ecosystem. The wonderful thing about the early stage ecosystem as opposed to, typically, later stage companies is people aren’t as specially guarded about information. They’ve been through the battles just like you have, and they want to help you out. So, enjoy the community of it.
John L.:
What a nice, upbeat ending. Thank you so much. You’ve been a terrific guest. We look forward to following you on social media and reading your blogs. Thank you for all your insights about what it takes to be successful, organized, and most of all, how to enjoy it and have fun. Thanks, John.
John S.:
Thanks so much.
John L.:
Thanks for listening to The Successful Pitch Podcast. If you liked the show, please go to iTunes and write a review, and encourage your friends to write reviews too. It really helps get the word out.
You know, people say that the longest distance is between someone’s mouth and their wallet. People can tell you they’re going to invest but when it comes time to write the check, they don’t do it. So, how do you get people to say yes and then follow through? Visualize yourself on the left side of a riverbank and you have to cross the river and on the other side of the river is where the funding happens.
So, first, you make up your idea and then you make it real and then you make it reoccur. Once you start dipping your toe into the water to get to funding, that’s where I can help. I get you across that river faster than you would on your own with a lot less frustration than you will get when you hear a bunch of no’s and you don’t know why. So, if you want some help getting funded faster with less frustration, go to my free funding webinar, sellingsecretsforfunding.com/webinar and sign up and get in depth information on how you can get funded fast. Thanks.