TSP020 | Matt Dunbar – Transcription

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John Livesay:
Welcome to today’s Successful Pitch podcast with Matt Dunbar who has his MBA from Stanford and tells the story of how he became an angel investor, because he had the itch to work for himself and get into the entrepreneur spirit. He said there’s four things to do to build your credibility with investors. Number one, don’t over hype. Number two, know your numbers. Number three, don’t dodge a question.

And finally, number four, the little things matter, including don’t have any typos on your slides, because all that distracts the investor and reduces your credibility and when investors are listening to pitches, they tend to be a little cynical, because a lot of them don’t work out, so you have to be building your credibility, making sure you have all that prepared in advance.

He said what makes a good angel investor is someone who is disciplined, diversified, and patient. He even shares what kind of return on investment his angel investors are looking for and gives us some really great ways to validate your economics and then the two of you, you and the investor, can start to dream together of how big the company can get. Enjoy the episode.

Hi and welcome to the Successful Pitch podcast. Today’s guest is Matt Dunbar who is the managing director of the Upstate Carolina Angel Network. Matt has a very impressive background starting with an MBA from Stanford where I have several friends that have the opportunity to go to Stanford, so I know what it takes to get in there and be successful. He’s been listed not once, but twice in Greenville’s 50 Most Influential People in the business magazine. He’s worked at various companies that we’re going to ask him about and he’s an angel investor, so he’s going to give us lots of insights onto what it takes to be an angel investor and then what he looks for when he hears a pitch. Matt, welcome to the show.

Matt Dunbar:
Thanks so much, John. It’s a pleasure to be here.

John:
Matt, I always like to start with our guests telling our listeners a little bit about their personal story of what made you decide to become an investor. Obviously you had some experience that I’d love to have you talk about, you know, you have so many choices with a Stanford MBA, congratulations by the way.

Matt:
Thank you.

John:
It’s very impressive. Did you know when you went to Stanford that that’s what your end goal was or did you have a little pivot there in your career?

Matt:
I did not. So just a brief overview of my background. I’m a native South Carolinian, grew up here, was an engineer by training, actually my career started as a chemical engineer with Eastman Chemical Company in North East Tennessee. I did that for a few years and decided I didn’t want to be an engineer for the rest of my life. I was more intrigued with some of the business challenges I saw inside the company, so I decided it was a good time in my life in my late 20’s to have an adventure and get a great education and I must have the only South Carolinian that applied that year and they let me somehow.

John:
Awh. I doubt that.

Matt:
So, obviously that was really a life changing experience, because one of the things I got from Stanford was just exposure to ideas and careers and businesses I had no concept of previously, including, for the most part, this idea of entrepreneurship. I had some notion of that, but I had worked for a big company and so it was really my first exposure to this whole idea of entrepreneurship, although I was there from 03 to 05, so we will still sort of in the aftermath of the bust.

I think Facebook was founded while I was in school, so this more recent wave of entrepreneurship and all the great progress that’s been made about lean startups and all the software we have today was really just in its infancy at that point in terms of the resurgence after the bust and so, I don’t think there was quite as much buzz around entrepreneurship on campus then as there probably is now, but it did open my eyes to that world.

The other thing it opened my eyes to, I also didn’t know anything about things like investment banking or consulting and frankly I was really impressed with my class mates that came out of that world in terms of their skill sets around their ability to analyze data, their ability to synthesize that and communicate it really well. I was really impressed with that skill set. So, I decided I wanted to pick up some of those skills.

So, I did go the consulting track after school, I did move to the South East. California was great. I had a great experience there, but my family and my roots are back in the South East. I miss going to function football games, so I wanted to move back to the South East.

So, I landed in Atlanta with the Boston Consulting Group and, again, picked up some of those skills that I was intrigued by, but mostly working for big companies. So, most of our clients were Fortune 500s, so great experience, learned a lot, but I still had an itch from my exposure at Stanford to the startup world. An itch to be more involved in entrepreneurial businesses and younger hybrid businesses rather than just the large established businesses that I had previously been involved with in my career.

John:
Let me ask you a question, that itch, it needs to be scratched, doesn’t it? You can ignore it for a while and some people either have it or they don’t and you’re obviously exposed to a lot of different kinds of people working in big corporate fortune 500 companies and some people, it never occurs to them, they have no interest in it, and sometimes there’s people like you who are sort of, you know, entrepreneurs, I believe is the term, right, where you’re working in a company, but you have the desire to eventually start your own company, so I’m always fascinated to hear that itch. It’s an interesting way to describe it.

Matt:
Yeah, yeah. It evolved for me. Again, it was something I didn’t have a concept of, I think, when I started my career, but the more I got exposure, the more I was intrigued by it and the other thing I think I observed over time as a chemical engineer, you know, you are trained to think in sort of a linear way, which I think lends itself to being in a large organization and sort of moving from point to A to B to C in a linear way and actually my time at Stanford, I came across some research on that by a lady at the Garden School named Saras Sarasvathy, who has working on “Effectual Thinking” (Effectual Entrepreneurship) and it terms out the engineer way of thinking and sort of logical linear steps isn’t necessarily the best way to think about a startup, because nothing in linear and nothing in known and everything is ambiguous and so it was some what of a challenging transition for me, but I was intrigued by it and wanted to learn how to think in more of a sexual way, as she describes it, where you are faced with uncertainty and ambiguity and you can try to create order from that chaos. I was intrigued from trying to learn that as oppose to a more well-defined scenario in an established organization.

John:
I like that phrase, create order from chaos. We’re going to tweet that out from the episode. That’s a great line and it also speaks to what I talk about with a lot of my clients who also have engineering backgrounds is, you talk about it in terms of logical linear thinking, for me I just refer to it as our left brain and the interesting thing is, you do have to learn a new skill set to become right brain story telling, because when you pitch somebody, people buy emotionally and back it up with logic. Tell us a little bit more, Matt, about your own journey from that left brain to right brain, if you will.

Matt:
Yeah, so again, I gotten some exposure to that world when I was in business school and frankly this is one of those serendipitous things you can’t predict. It just so happened, you know, I spent some time at BCG. I have been on the road traveling, picked up some skills I wanted and then life happens, I got married. My wife is from Oklahoma and she moved out to Atlanta where she didn’t know anybody and I was gone all the time and we were in our early 30’s and wanted to start a family and I always wanted to come back to South Carolina and try to contribute something here and so we just felt like it was the right time to make a move out of the big city in Atlanta and move back to closure to my roots in upstate South Caroline and start a family.

So, literally, I just started networking, sort of classical networking story, trying to leverage some contacts out here, and growing up here and literally, couldn’t have predicted and didn’t have any concept of this, really this idea of organized angel groups. I knew about angel investing, but I didn’t know really about organized angel groups.

I was fortunate and blessed, you know, sort of serendipitously I bumped into some guys that were interested in starting an angel group and Greenville, South Carolina at the time I was looking to move to Greenville, South Carolina. They needed somebody to run it. There aren’t many venture capitalists running around South Carolina or folks who had a lot of experience in the space who just so happened the timing worked out where they needed somebody.

I was really interested in this space and getting involved. So, long story short, I came on board and actually April of 2008, to start this angel investor group called the Upstate Carolina Angel Network and, of course, we didn’t know what was coming just a few months later in terms of the overall economy, probably good that we didn’t know or we might not have made the change we did, but really, it was just serendipitous that I bumped into these guys and couldn’t have predicted that this was what I’d do, but the timing was right and I was really excited about the opportunity to take a step into the entrepreneur world that had intrigued me for some time.

John:
You know that serendipitous that you refer to reminds me the definition of luck is when opportunity meets preparation.

Matt:
Right.

John:
And clearly the opportunity presented itself, but you had been so prepared for that from your schooling and your exposure and that itch that you had inside to make that happen. Let’s talk a little bit about the importance of timing. I just read something about how important timing is to whether a startup succeeds, even some people are saying that’s more important than the idea or the team. They were giving the example of Uber or Airbnb. The reason that’s so timely now is people are looking for ways to be economical or have additional income. What are your thoughts on timing in general?

Matt:
I think it’s critical and it’s certainty one of those things that’s really difficult to control, but there’s been a lot written about, you know, some of the fastest growing startups we see today that are attracting a lot of funding are really very similar ideas and concepts to businesses that went bust in the dot com bust. Really largely because the infrastructure was not in place.

We didn’t have global funds. We didn’t have ease access to on-demand type communications like that where you can have such a powerful device in your hand to get real-time access and real-time sharing and things like that. So, business concepts that made sense at the time, didn’t have the right infrastructure to make a viable business, where as today that infrastructure is there.

So, certainty I think timing is critical and certainty we see that even in our markets where, you know, we’re not likely to see the next Uber out of our market, but we do see the companies we’re involved with that certainty need to catch and ride the waves, so to speak, of technological adoption and consolation and things like that that if you miss that way on one side of another, you might miss an opportunity.

There’s some great research we lean on, we’re thinking about our returns and exit strategies that Peter put together. He’s got a great blog and some resources on early exits. He’s making the case that a lot of times angel investors in particular can sort of ride it over the top, so to speak, with the startup and timing gets away from you and you didn’t sort of strike when the market opportunity was there.

So, he talks about these waves of consolidation when certain technologies sort of get bought up in a wave by strategics and if you miss that wave, you may have really missed the chance to generate returns. What you have to do as an angel investor is stay in the game, obviously, and so timing I think is critical, for sure.

John:
You know, it’s interesting, you’re talking about this fear of missing out, which is what all that social media stuff is about, you know, they watch other people’s post on Facebook for example and it’s like oh, nobody wants to feel like they’re missing out on cool events and/or cool investments. Like me ask you a little bit about your particular angel network.

Matt:
Sure.

John:
Are you trying to convince people who are in your network that invest that this is a better investment than the stock market, that it’s more risky, less risky, or better returns? Can you give us a flavor of how someone, how do you determine to be an investor in your angel network?

Matt:
Yeah, great question and here’s how we think about it and talk about it in our market. What we envision ourselves doing is really making a market or a more efficient market, early stage capital, where historically where we have not had a very robust market. So, you know, you don’t think South Carolina when you think hot venture market, yet with the advances in what we know and in the lower cost of infrastructure to run companies now, we got some really talented folks here that can build successful companies on the backs of that lower cost infrastructure with a lean mindset in place, we can have really successful outcomes both for entrepreneurs and investors that really make a difference in a market that hasn’t historically have a lot of that kind of activity.

So, we talk to our investors about trying to make a market where we’re bringing together investors who have capital and expertise with entrepreneurs who are leveraging what they’re learning to create compelling new opportunities and we want to make that, reduce the friction in that market to bring those parties together and try to find viable startup opportunities for investors and then help those entrepreneurs be successful by paying the capital and expertise that our members bring to the table in helping them grow and so when we’re talking to our investors, we certainty lay out the fact that, look, this is an extraordinarily risky asset class, so you really need to think about this as a small percentage of your overall investment portfolio.

You need to think about being very diversified within this portfolio, because we certainty can’t predict which of the two percentage of our portfolio companies are really going to drive the returns of our portfolio, so you need to bring a disciplined, diversified, patient approach to this, because this is also not liquid, so you can’t just pull this out of the market any time you want, you’re locked up for, in our case, we look for three to five year exist strategies in most cases. So, we talk about all those dynamics while recruiting investors, but we also..

John:
I love that. Disciplined, diversified, and patient. Those are the three key criterion that it takes to be a good member of your angel network or anyone’s, I assume. I love those three words, thank you for that and then exit strategies, you said three to five years. So, that’s really key for our listeners to know and take away that the investors are looking for some kind of exit strategy in three to five years. Would you mind sharing with us what the typical investment is from your angel network?

Matt:
Yeah, so we’re relatively agnostic about industry, because we have a diverse set of members who come from a lot of different backgrounds, so we can bring to bare different expertise and leverage that network to evaluate a lot of different things, however, we don’t have just enormous amounts of capital laying around ere, so we do need pretty capital efficient startups. So, that does tend to lend itself to things like software and some plays in life science, more typically on sort of the side or the digital health side and then we do have – we’re a manufacturing economy here, so we like to look at startups that enable more efficient manufacturing processes whether it’s sensors or materials or analytics and instrumentation, those things can fit well.

So, we’re looking for capital efficiency or scalability that we think there’s a viable market for, nice exit for this company in three to five years on the backs of, you know, a couple rounds of angel investment. We do from time to time that will go raise larger venture money, but that’s just a more difficult proposition in our market, because there’s relatively little venture capital here and so we like to look at a strategy where angels, again, these are individual angels investing their own money, so they can’t be as patient as an an institutional investor or an LP in a fund, because this is money that they’re trying to either generate for their retirement or to leave behind to their family and so we can’t afford a 10 or 15 year hold strategy.

We often don’t anticipate venture funding behind our deals, so in that case we’re looking at that sort of scalability, can we get it to several million in revenue on the backs of a couple of rounds of angel funding and then is there a viable exit strategy in that three to five year range and if all those pieces come together and obviously we like the team and we think the market is there and the technology works, then that’s what’s likely to get a check from our folks.

On average, we’re investing, out of our group, a couple of hundred thousand dollars at a time, but in the last year we’ve created a statewide network of angel investors to aggregate more capital around our companies. Again, in the absence of other easy access capital, we’re trying to draw in more investors from around the state and increasingly, there’s an appetite for this kind of investor among folks who are here or moving here and so now we’ve got six angel groups across the state that we co-invest with and so we hope to be in a position where we can efficiently aggregate half a million to a million to fund these companies in a more, in a quicker timeline without having to go too far away to syndicate the rest of the round.

John:
Well, what’s interesting about that, congratulations on that incredible growth from 200,000 to all the way up to a million with this network you’ve created, is the scalability factor and also what’s unique, from what I’m understanding, is you’re looking for an exit strategy in three to five years, it doesn’t necessarily require series A round from a big venture capital. The exit strategy could come from your couple of rounds from the angels. What kind of, sometimes the big VCs are looking for, you know, a ten time return on their investment, right, they want that unicorn. What kind of return are your investors looking for? Three, four?

Matt:
We’ll often think about in terms of rates of return, so again, we’re not a fund, we got the luxury to think more in terms of IRR than ROI, because we don’t have the pressure, necessarily, to say hey, we’ve got to return three times this fund in order to raise our next fund. Part of what we’re doing is, again, making that market and people care about seeing this economic growth in our market, so while our primary objective is financial, you know, we also talk about having fun and doing good.

So, our folks understand that if we want long term job growth in our state, it turns out that all net job growth comes from startups, so they understand that there’s sort of a broader reason to do this. It’s not that that allows us to relax our financial hurdles, but we’re doing it for more reasons than just a pure, healthy, ROI-driven mandate that a venture fund has, but all that said, we still have to make money to do this. We have to make good money to do this, so our first stated objective is, we like to do deals we believe can generate a 50% rate of return.

So, if you turn that into an ROI, that’s about four times your money in three years or ten times your money in five years. So, if you can hit those metrics then that’s really what we’re looking for and we’ve had several examples of generating those kinds..

John:
Oh, good. I was just going to ask you if you can share one. I love that criteria. In three years, we like to see a four time return in investment and in five years, a ten time return on investment. So, yes, please, since 2008 till now, you must have some amazing success stories. Is there any that you can share with us?

Matt:
Sure. So, our very first exit was a company that actually moved to South Carolina with the help of some incentives through a program we have here. We actually passed on their angel round a time or two. We thought the price was a little bit out of reach for us, but the company got into a position where they had some serious acquisition interest. They did have a venture fund in the deal and basically the fund was out of money and they needed some money on the balance sheet going into the acquisition discussions just to make sure they had leverage there and so we were able to get a very nice liquidation preference on a convertible note.

We don’t typically like convertible notes, that’s a longer conversation I can talk about that a little bit more if you like, but we don’t typically like notes except in a situation like this. We had a pretty high confidence that there was a real acquisition discussion on the way and so in about four months between the time we invested and the time the acquisition closed, we made about 3.5 times our money, which when you do the math on that, that’s about a 280% rate of return.

John:
Yes, I’ll say.

Matt:
So, if we can find those kinds of deals, we’ll do them as often as we can, but that’s pretty rare. That was our first exit and our best rate of return exit date. Last year we had a company that we had invested in a couple of times that was bought by a European company in the medical diagnostic space. It’s a company that’s a great local story that grew, you know, on paper that deal is worth about 11 times what we invested. We’re still in the lock up phrase.

We still have a few months and it’s publicly traded by a European company that bought it, so it will ultimately depend on what the stock is trading at when our lock up is over, but that will probably be our largest ROI investment return today, but we’ve had several other exits that are nice and several others that have hit 40-50% rate of return on our money.

John:
How exciting. Let me ask you two questions. The first one is do you ever fund a startup that’s pre-revenue in the angel world? In your world?

Matt:
We do, we do, but we would like to be really, really close to revenue if we’re not already there, so we will only invest, in most cases, when we have pretty clear line of sight to being in the market and generating revenue and we’ve talked to customers, so we really talk about being investors at the go to market stage, so you might be in the market and generating a little revenue, but you might be just shy of that and we have a strong enough validation from our due diligence at the markets there and some revenues ready to come in, so that you can start burning customer cash instead of having to rely on investor cash. Again, because we can’t necessarily count on easy access to a lot of follow up capital.

John:
Sure. My other question is because the podcast is called The Successful Pitch. I would love to hear what you think a successful pitch is and tell our listeners what they should do when they come pitch someone like you.

Matt:
Sure, sure. Yeah. I talk about this a good bit in various venues. I teach a course in the MBA program at Clemson here in downtown Greenville and so this is a big topic of discussion in that class and if I had to distill it down to sort of one quick phrase and I can expound on that, is that when you get in front of investors, your key objective is to build credibility.

John:
Love it. Build credibility when you’re in front of an investor. That alone is a tweetable moment.

Matt:
Well, you know, obviously these investors are seeing lots of different ideas, some of which are pretty crazy, which is good. We like to see crazy ideas, because those are the things that really, you know, can make a big impact, but because of that, investors over time develop sort of the healthy skepticism about most of what they hear, because we know a very few percentage of the companies we see will be successful and so when you get in front of the investors, you are already fighting an uphill battle, because the bias they’re bringing to the table is that most of what we see is not going to work. So, any missteps you make that undermine your credibility as an entrepreneur are going to quickly put you in the bucket of, okay, this is one of the 98% we’re going to see that aren’t going to work.

So, with every step in your communication and when you’re pitching, you know, I try to remind my students and entrepreneurs we talk with, be building your credibility at every stage. So, that means a lot of things. It means, you know, don’t over hype yourself. It means don’t make claims you can’t backup. It means, know your numbers when you walk in there. We know that performance are guesses, but if you don’t understand your unit economics, you can’t really defend the financial of the business model, you’re going to have a hard time getting investors.

It means, you know, don’t dodge a question. If an investor asks you a question, if you don’t know, say you don’t know, and then add some context around that and don’t spend five minutes in a circuitous answer not directly answering the investor’s question, because that hurts your credibility and even small things like, you know, and this was really sort of drilled into me in my days at BCG, but little things on slides matter.

We don’t necessarily expect you to be a designer when it comes to building slides, but if you got typos or formatting is off or things just don’t make sense, it’s not so much that the merits of those things matter, but it’s a distraction and you don’t want me distracted thinking about why your slides look kind of unprofessional or something is out of order, what you really want me focused on is you and your story and so don’t distract.

You lose a little credibility where you allow distraction if you don’t pay attention to those little things. So, at every step it’s about building credibility so that you can get to the next step. In our case, you’re not going to get a check based on a presentation. What you’re going to get is an opportunity to go to the next step which is due diligence and continuing to build that credibility.

John:
That’s so useful, Matt. Let me just recap again. So, the keys to building credibility, number one, don’t over hype, know your numbers, don’t dodge a question, and make sure that you’re taking care of all of the little details from what’s on your slide to how you present yourself. It’s all from the minute you walk into the door, you’re selling yourself and establishing a brand image and don’t get you as an investor distracted or confused, because the minute you do your credibility goes down.

Matt:
That’s right.

John:
I’d love to have you expand a little bit, since you’re such an expert in it, in defending the business model numbers, so when you say, know your numbers and we know it’s all projections, they have to know a lot about their market numbers too and I hear one of the worst things people want to hear is, oh, if we just capture 1% of this market, we’ll be good. Don’t say that. So, can you tell us what’s a good example of knowing your numbers and being able to defend your business model? What should they have and what kind of research should they have done?

Matt:
Sure. Yeah, yeah. So another great question and I tell my students up front, you will fail this class if you tell me you’re going to capture 1% of the market and it’s going to be worth X. We want to build the distinction from the bottom up, so that in itself is an incredible, non-creditable approach. Hey, we’re just going to capture 3% of this billion dollar market and you’re going to make a lot of money. That’s great, how are you doing it? So, give them the bottom up story.

So, again, we know that we can’t predict the future. We know that. So, we know that any sort of top line pro forma is a conjecture, but what we can do is drill down on the unit economics. So, what are the costs, the input costs, to making and selling your product. You ought to be able to get a pretty good handle on that and then we ought to be able to get a pretty good handle what is the market willing to pay and again I think this is one of the beautifies of the whole lean startup.

There’s some really pretty simple, but powerful ways to go get some of that data from the market place and validate your assumptions around what your product is worth and so we want to see that. We want to know that you’ve talked to the market.

We want to know in our due diligence process that we can talk to those customers and reference that and understand what the willingness to pay is to solve a problem, so you ought to be able to get a pretty good handle on what those unit economics look like and then we can sort of dream together on assumptions we make about how that could grow and if it grows, what kind of capital requirements do we need to fund that growth and we look at our cash flows, because only again, you know, we have to – you know, the number one thing you have to do in a startup is not run out of cash, right, so if you have access to lots of venture money, that’s one way to not run out of cash. In our case, we don’t have necessarily deep pockets of venture money, so the best way for us not to run out of cash is go get customers. If we can validate the unit economics and dream together about how it can grow, now we can get a handle on what those cash flows might look like and whether there’s a viable, scalable opportunity for us.

John:
I’m going to make this a tweet. Validate the economics and then we can dream together. That’s a great line that you just said. Thank you. Well, the 30 minutes goes so fast when someone as smart and knowledgeable as you. So, before I let you go, I just want to ask you two more quick questions, one is what book, as a professor, do you recommend your students to read or our listeners to read that could have anything to do with start a business or just living your life better.

Matt:
That’s a great question, so many to choose from, maybe I’ll say two off the bat. So, if you’re an entrepreneur and you haven’t raised money before, you need to go read Venture Deals, Brad Feld’s book and his partner Jason, oh shoot, his last name escapes me, but Venture Deals by Brad Feld.

John:
We’ll put it in the show notes, don’t worry.

Matt:
Yeah, just the mechanics of what a deal looks like so you don’t fall into traps as an entrepreneur, not knowing what you’re signing up for in terms of turn sheets and then maybe one, this is one that’s sort of been on my mind lately, there’s so many to choose from, but one is a thought provoking book that I think has some insightful lessons both for entrepreneurs and investors and in life is Antifragile by Nassim Taleb. It’s both a philosophical and treatise, I think, but it has some really, really thought provoking points around how what really impacts our lives in the world or things we can’t predict and so how do you build systems that gain volatility rather than breaking in the face of volatility and that’s sort of the challenge of the start up and in many ways the challenge of life. So, it’s a great thought provoking challenging book that I think is worth a good read or two or three.

John:
What a great recommendation. Well, you’ve certainty been a very thought provoking guest. I can’t thank you enough, Matt. How can people follow you? I know that your angel network focuses mostly on the South East part of the US, but even if they’re not in the South East and they just want to learn from you, do you have blogs? Should people follow you on Twitter? What’s the best way for people to be aware of what you’re doing with your angel network or people are fortunate enough to live in your part of the country and want to eventually pitch you, what’s the best way to connect with you?

Matt:
So one of the things you didn’t hear me say in my background was marketing, so I’m not a great marketer or blogger or any of that, but we do have a Twitter handle @UpstateAngels is our Twitter handle. We’re not terribly prolific on that, but we do tweet from time to time. We do a series of articles on our local business journal, so you can get access to that through our Twitter handle or through our website, which is just UpstateAngels.com and then increasingly we’re actually hiring some help to help us do a better job telling our stories and providing some of this insight through the South Carolina Angel Network. So, SCAngelNetwork.com is where you’ll start to see more content from us.

John:
Fantastic. Thank again. It’s been a pleasure having you on the show, Matt.

Matt:
Thanks so much, I really enjoyed it. I appreciate the great questions and I’m happy to participate, thank you.

John:
Alright, thanks.