TSP008 | Scott McGregor – Transcription
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John Livesay:
Today’s guest on The Successful Pitch is Scott McGregor. Scott has a fascinating childhood where he was literally, it was his duty to the world to make a difference and he’s been doing that his entire life. That concept of focusing on making a different as oppose as focusing on making a lot of money is what brings you satisfaction and gives you the passion that investors are looking for when they want to fund your startup.
Be sure to listen to Scott’s interview today, because he has an incredible story about a rocket that cost 10 billion dollars, yes, billion with a b, and wouldn’t be ready for ten years and hear how he was part of this incredible concept of getting this funded. Talk about a story of evaluation and getting a return on investment. He’s able to take that whole story telling concept of how that happened for a rocket and show how to make it even for an app where traction is sometimes more important than even having commitment, because you have traction, the commitment is probably already there as oppose to just having commitment without traction. Enjoy the incredible interview with Scott McGregor.
Hi and welcome back to The Successful Pitch podcast. Today’s guest is Scott McGregor. Scott is an adviser, co-founder, and consultant to tech startups based in Silicon Valley where a lot of great ideas and companies come out of. Scott, welcome to the show.
Scott McGregor:
Thank you. It’s great to be here.
John:
Scott, you have such a wide variety of experience where you advise startups on things that they need to know and do in order to be successful and you’ve lead teams doing things that seem impossible and coming up with innovations. I would just love to have you tell our listeners a little bit about your background. How does someone get to be you, basically? How did you get interested in text startups and what was your journey that took you from where you were to where you are now?
Scott:
Wow. Well, my journey probably started really early. I think it started basically when I was, you know, under the age of ten. About the age of eight, my maternal grandfather told me, he was very interested in science and technology, and he told me that with my last night, that I was part of what he called the Scott’s American inventive imperative. That’s a big phrase for an eight year old, but it fired me up and he said, you know, you have a duty to the world to go up and create. These Scott Americans have this tradition that creating new solutions that change our world and make it better and don’t mess it up!
John:
No pressure.
Scott:
So, I just always kind of lived into that and then when I was in my, when I was 16 I got involved into computers, so that was back in the early 70s, so I’m sort of the same generation as Bill Gates, Steve Jobs, and Steve Wozniak, a lot of other people that were kind of the founders. There wasn’t a lot of stuff preventing us from doing stuff, because none of it had been done. So, I’ve always sort of lived into the future at each step.
John:
I just love the fact that you were told at such a young age a sense of your identity and a sense of duty to the world to make a difference and clearly you’ve done that, but it’s such a key element for our listeners to take away. If they weren’t as fortunate as you have been to had somebody instill that in you, you can still put it in yourself and instill that in yourself the sense of who you are, so grounded and so focused that sense of purpose is really, I think, one of the key elements that makes a startup successful, would you agree/?
Scott:
I would agree. In fact, I would say the, one of the myths that it would be good for the media to dispel is the myth of the entrepreneur who is in it to make a lot of money. It’s a hell of a lot of work for low probability of making a lot of money, but there’s a lot of satisfaction. One of the things for me is I’m a co-inventor of web conferences and what we’re doing right now is, you know, an outgrowth of some of that technology that we did in the 90s and on the tenth anniversary of web conferencing, I read an article somewhere, I don’t recall where it was anymore. I wish I had a copy of it, but the author estimated that about one billion people had used some form of web conferencing in those ten years and that is one out of every six to one out of every seven people in the world. That’s a huge number and that’s in keeping with what my grandfather asked me to do.
John:
Yes, make an impact in the world.
Scott:
Now, interestingly enough, because of when we needed to raise money and the dot com bust and various different factors, I didn’t make very much money from that, but I have the satisfaction in knowing that a lot of people are doing business with other people around the world without having to get on airplanes to do it.
John:
Exactly.
Scott:
Their doing business with people they would never have done business with before and that’s amazing when we can go out and change the world in that kind of way.
John:
I love that story. Speaking of stories, you mentioned to me early before we started the show that you have this amazing story involving lots of money and a rocket. Can you tell us our listeners that story?
Scott:
Sure. I worked for a guy named Rick Giarrusso back in the early 2000s and prior to founding the company that I joined, he had been the CFO for a company called Rotary Rocket, which was founded in the mid 90s and at that point of time there was this expectation, Motorola had this plan for iridium that was going to be this ring of satellites and provide this all satellites telephone communication and there was this huge expectation that there was going to be high demand for telecommunications satellites in low earth orbits so we would all have satellite phones.
Now, as we can see now that’s not the way the future actually panned out and we wound up with cellphones rather than satellite phones, but of course, no body knew that then, but his task was, he had this idea for re-usable rocket and in fact most of the stuff that Rotary Rocket did is now wound up in the SpaceX type designs. The companies that have come together to put together the SpaceX rocket or the successors to Rotary Rocket, but his task was we need 10 billion dollars to go out and build this rocket and it’s going to take us ten years, you know, before it’s available.
John:
Talk about evaluation and taking a long time to get an ROI
Scott:
That’s right. So, you know, one of the questions is how do you do that? Well, the way you don’t do it is go out and raise ten billion dollars and build the rocket and then see if you make money. You gotta go out and have the, you can’t build the rocket first. With that much money, you’re going to have to raise money, so he did some really interesting things and everything that I’m about to talk about is clear in the context of the rocket situation, but it’s true for everybody that wants to raise money, even if all they have is a little app that they put in the app store. So, if you still need to raise money, this is a great way to think about it. So, the first thing he said is he said, in order to raise this money, I have to prove to our investors that we’re actually going to be able to sell it.
John:
Right.
Scott:
And that’s ten years into the future, so how do I do that? So, what he did was he looked at the numbers and they expected that by making this re-usable rocket, they’d be able to reduce the price of one pound of satellites in orbit by a factor of ten. So, it costs one tenth as much to put up a satellite as it does today. That’s a huge advantage, so everybody would like to have that, but that’s not today, that’s when the rocket is ready, but he went to – there were seven companies at that point of time that were creating telecommunication satellites and he said, look, I know you guys are paying NASA or other companies to go out and put your satellites in orbit.
I’d like you to sign a contract to buy space on my rockets that will put your satellites in orbit at a tenth of a price that you currently pay and I’d like you to do it so that when this is ready, you know, we have this contract, and I need to go out and get a billion dollars worth of contract to go out and do this and he went around to each one of these and they said, well, this all sounds great, you know, if this was available today, we’d certainty, we’d happily to give you all this business, but, of course, it’s not now. It’s ten years and a lot of things can happen in ten years, including competitors can raise that we don’t know about and other changes in demand.
So, we can’t commit ourselves to that. He said, well, that’s okay, here’s what I’d like you to do. I’d like you to sign a contract that says you’ll do this and you will have the right to cancel this contract any time up until the rocket ready. So, when the rocket is ready, you know, if you haven’t already canceled it by that point of time, you’d agree to do it at this price. One tenth of what you’re paying today.
John:
Well, that sounds, let’s stop there for just a second, because it’s so interesting. There’s a couple of things that you’re saying that are so valuable for everybody as you said, no matter where they are in the process. Number one is, really having a clear explanation of what problem you’re solving, even if it’s ten years from now and secondly, getting some traction and being able to show investors there’s a signed letter of intent here even if it’s for ten years from now. I love that.
Scott:
That is the amazing part of this. So, he got letters of intent from all seven companies. So, that’s 100% of the market, okay, but so then he took that money and if you’re trying to raise a billion dollars, that’s too much for Silicon Valley VCs.
John:
Sure.
Scott:
So, he went to Wall Street, to the Wall Street bankers and private equity markets and they said, he said, look, I’ve got a billion dollars worth of contracts here. I would like to factor these contracts and get my money, you know, get 80% of this price up front and they said, well, that’s all really nice and good, but they can cancel this contract. So, we can’t give you this money, give 80% on this money because what if they cancel it all, we’ll never get our money back. And he said, no, no, I get that. Here’s what I’d like you to do. I’d like you to go out and write up the loan and you agree now that you will give me this loan if I come back with contracts in which there’s cancellations insurance. If I can get cancellation insurance on this, you’d get paid anyways. So, that should satisfy you, right? But, I need you to go out and say that you’ll do this.
John:
Again, let me pause there for a second, because you’re giving such valuable insights and I just want to recap it for the listeners. Not taking the first no as the final no and going on, you know, actually listening to the objection and then having a prepared answer for that objection. I can’t emphasis that enough is to anticipate what the objection might be and then have a response to it that still makes sense for the investor to say yes. That preparation and that mindset is brilliant.
Scott:
There’s another thing I think is worth pointing out, not only has he done this twice where he’s got the note and then said, well, what can I get you to say yes to, but he’s actually got them to agree to something. It’s contingent, but it’s an agreement.
John:
Yeah.
Scott:
So, he got this agreement that if he could do that, but they all said like, yeah, but where are you going to go get cancellation insurance on a billion dollars? And he said, well that’s my problem, right? And they said, sure.
So, he went away and he went to (#14:12?) and he went and talked to the name and said, (#14:15?), and he said, I have got, look, I’ve got these contract, I’ve got all seven companies signed up to buy this stuff. I’ve got the loans already ready to go that will allow me to have the money to build this rocket and to satisfy these contracts, but I can only close these loans if I have cancellation insurances. Would you guys write this cancellation insurance. Wow, this is, you know, ten billions of dollars to do this, we would need a billion dollars policy and he said, okay, well, I can do a billion dollar policy, because I’m going to do it from this loan.
Now, I’ve already got this loan, that’s contingent on you saying that you’ll write me this insurance, so you know I can pay it, because here it is right now. So, he got the billion dollar insurance, he went back to the banks, said, you know, give me eight billion dollars on this ten billion thing, took a billion of that and put it to pay off the cancellation insurance that left them with a billion dollars for RND.
John:
Well, the joke is when you’re doing something that’s not that complicated, somebody says, well, c’mon, it doesn’t take a rocket scientist to make this happen.
Scott:
Exactly, exactly right.
John:
In this case it did take a rocket scientist to put this deal together almost as complicated as building a rocket except what I love is how global it is that you live Silicon Valley, you get what you need from Silicon Valley, the letters of intent, then you go to New York, to Wall Street, to get the investors, and then you go to London, literally, to get the insurance. So, it really does take a global effort to pull something like this off, so that kind of tenacity, perseverance, big picture thinking, that’s for sure, is what it requires whether you’re starting up with a rocket or you’re starting up with a mobile app.
Scott:
Right, so let’s come back and talk about the mobile app for a second. One of the things that people come to me and ask me be an advisor or a board member, work with them in some capacity or another, I frequently get people who are technologist, that’s not surprising being here in Silicon Valley, so our software developers and they say, I want to build this app and I need this much money so I can pay my developers and then in a year I’m going to have or half a year or something, I will have this app and we’ll put it on Napster and I’m sure we’ll make a lot of money. Okay, but I can’t start it, I can’t quit my job, I can’t do any of these things until I have, I can’t build this thing, until I have that money.
They want to go and talk to angels and VCs here in Silicon Valley and when they do they’re usually frustrated, because pretty much right now if you got a mobile app, most angels and VCs that I know that you could go to will say, well, that sounds pretty cool, it’s cheaper to development software these days. A number of people do it for free in their dorm rooms and stuff. You find someway to finance the building app and you put it on the app store and if you get 1000 people in the first 30 days, come to me, then I got a solution, because what I know at that point in time is that you got something people like, it’s just that only if you people know about it and one thing we do know is with money, we can buy advertising and create awareness and if it’s a great thing, so we can help you scale your company, but you gotta get us that far and then they go, oh, well, I still need the money to develop this or whatever.
Now, there’s another option today and this is the Rotary Rocket option and people don’t realize that and it’s KickStarter. Think of it, KickStarter is the same thing. You go to your customers first and you get them to agree to pay you before you build it, okay. So, this same model is a model I recommend to basically everyone. A lot of people get hurt building products and then they get take them to market and they don’t take off as easily as they think they were going to take off and they’ve used all the money that they’ve got and they’re not able to go out and raise the next money, because they don’t have the success they had. If they could go get the letters of intent first.
John:
From potential customers in this case.
Scott:
Of potential customers, okay, either collect money in advance the way you do with KickStarter or just get letters of intent and stuff. This will carry you so much further. You’ll already be having a relationship with your customer before the products built and you’re going to come to question starting building where the developers are going to say, well, we could go left or we could we go right here, what should we do? If you have no customers, you just make a choice, and you find out later. If you have a customer, you can go out and check with that customer and then you can use the fact that the customer said this and that’s what you did. Again, as more proof of traction and more market alignment, and that’s again going to make your investors, you know, potential investors much happier.
John:
You know, there are so many road blocks to getting an investor to say yes and you’ve identified a big one which is if you don’t know your customers or have any sense of traction or any kind of movement at all and just have an idea, there’s so many great ideas out there and it’s not enough.
Scott:
You’re right and well, it’s, I know in one of your previous podcasts, there’s a big discussion about how really ideas don’t really matter and it largely true that’s it’s all about execution and a lot of people think they got this idea and the value is in the idea and they undervalue that the value is actually in them. Their ability to execute and one of the things that leads to is, oh, I can’t tell anybody about this, because the value is in the idea. Well, if you can’t tell any about it, you can’t get anybody to help you.
John:
You’re the first person to say that. I love it so much. Let me just reiterate that, Scott, thank you for saying that. So many people are so paranoid that if someone takes my intellectual property, my idea, and duplicates it, then where am I? Right? What you really said to everybody is, you know what, you’re the value, not the idea. The concept of Uber versus Lyft and who got funded first and who gets to market first and all that stuff had really nothing to do with the concept as much as it did with who executed it first and I know there’s some proprietary stuff that everybody has, but if it could just reduce some of that paranoia by ten degrees, it would really help the stress level of the entrepreneurs realizing that the value is in them, that people like to bet on the jockey, not the horse, right?
Scott:
That’s right and again, I’ll tie this back to where will you get the best reassurance about that. It’s going to be from your potential customer.
John:
Yes.
Scott:
Right and the customers actually don’t know what the all the ideas are out there. They may not even know whether somebody else has the same idea. It doesn’t really matter. It matters that you’re in front of them right now and you can solve your problem or you can’t.
John:
Right, let me ask you something else. I was curious when you were talking about this scenario where somebody hasn’t quit their job and they’re going to an investor to build something. A lot of investors that I’ve talked to have said, look, if you’re not willing to put yourself into this 100%, put your own money into it, we’re certainty not going to put money into it. Is that your observation and insight as well?
Scott:
So, what I will say is this, I think that’s a story that sometimes people say because there’s really uncertainty about whether the person that or team can carry it off and has commitment.
John:
Commitment, yeah.
Scott:
And if you had traction, people stop carrying about it.
John:
Got it, right. It’s when you don’t have commitment or traction that’s…
Scott:
If you don’t have it then it’s like, let me come up with all the reasons why I’m worried you’ll never get traction.
John:
Got it.
Scott:
You’re going to take my money and you’ll never get there. Again, if you got that letter of intent earlier, but the other thing that happens is you have those letters of intent and you have those customers and stuff, that creates an incentive to you and you’re already feeling like I got commitments to my customers to these people, right? And that will create that, your willingness to go in and go deeper and stuff. So, I think that it’s almost, it’s almost backwards that it’s not that I need you to be committed so that you’re going to do this, but if you were that commitment, I wouldn’t have this question. I would know that because you would already be in this deep with your customers or with something.
John:
That’s such helpful information. So, it’s no longer the chicken and egg story so much as a parallel story. If you have the traction, you have the commitment, and if you don’t have the commitment, you probably don’t have the traction, basically, is what I’m hearing you say.
Scott:
In fact, another thing to think about when we talked about ideas and stuff. Another way to sort of think about this is that, let’s say, you are not an idea person. You’re a person just deep pockets. What would you think that you’d want to put money? Would you want to put money on some place where you could see that the players that are already out there are making money and you could back onto them or would you like to go out and put with somebody that’s never done anything.
John:
Yes, goes back to the team, right.
Scott:
Right. So, again, this is sort of where the idea that the funny things is until you make a lot of money, no body is actually interested in stealing your idea. Okay. They either smart enough to have ideas of their own and then they want to do it because it’s there idea. That might be similar, but they are driven by an internal thing or if they’re just really out steal somebody else’s idea, they want to steal one that they know works in the market place. Why should they take risk? What they’re thinking is, what is going to make me win is I can throw this money and we can out spend the other player, right.
John:
Yes, well, that leaves us with the whole concept of competition and how you view and just being aware of it, but I love what you said, until you’re making a lot of money, no one’s really interested in stealing what you have or your idea. It’s great.
Scott:
In fact, look at what Elon Musk has done. He has this idea for the hyperloop. He didn’t go out and say, this is such a cool idea. This idea of a pneumatic tube transportation system between San Francisco and LA. I’m not going to tell anybody about it. No, he goes and publishes detailed technical documents and advertises on his blog and tells everybody about and gives it to the world. What happens is a bunch of people around the country find this interesting, bunch of engineers and say, well, let’s go out and build a little prototype and then when they’ve done that, they say, oh, we don’t wanna go out and have Elon involved at all. No, they call Elon and say, hey, look, we loved your idea, we ran with it and stuff, we want you to be part of our team.
John:
Nice.
Scott:
So, if you really have a great idea, go out, preach it to the world, and get all the followers that are going to make it happen.
John:
That’s a great, great, that’s a great place to end. I mean, half hour goes so fast with people who have so many great stories and insights like you. Thank you for sharing that. I love that analogy.
Scott:
Welcome.
John:
In our closing comments to the listeners, is there any particular book that you really resonate with lately that you’ve, oh, that was really inspiriting or gave me some new insights that you would like to recommend?
Scott:
Yeah, one of my favorite books to recommend for entrepreneurs is a book called The Goal. I don’t have the book in front of me right now or the author’s name. The second author is Jeff Cox.
John:
We’ll find it and put it in the transcript notes. The Goal.
Scott:
And Jeff has also written probably my second most recommended one for entrepreneurs, which is called Selling the Wheel and Selling the Wheel is all about this issue that we talked about we’ve got this great technology, how do we get it from something that never existed in the world to something is, you know, in dispensable like web conferences.
John:
Love it.
Scott:
But in The Goal, he talks about using constraint management and the insider here is, if there were no constraints on your business, you would be instantly, you would be instantly and infinitely profitable, okay, you’re not, so there must be something that’s constraining your growth. When you understand what their techniques to go out and figure out what those constraints are and when you know what they are, you can do one of two things.
If it is a constraint you can remove, you can remove it. You can maybe get another machine or get another thing or get a replacement, move to a different technology. All of those things will allow your company to grow again. There’s some things you can’t remove. You can think for example sometimes regulations and sometimes there’s just laws of physics.
Then what you need to do is find a way to be as efficient as possible within those constraints and I find in startups that a lot of times people that I advise are thinking about, well, I want to work on this problem and this problem and this problem, but there are none of the problems that are currently constraining them. What that means is that they’re spending time and money, but they’re not going to get any benefit from it yet. So, this can really focus you.
John:
That’s so great. If you’re working on the wrong problem, you’re not making any traction. So, that’s a very important distinction. Make sure you’re spending your resources and your times and creativity first in defining what your obstacle is that’s constraining you. I love that. Thank you, Scott. Scott, how can people keep in touch with you. Should they follow you on LinkedIn, you have some blogs up I know.
Scott:
Yep, follow me on LinkedIn is a great way to keep up with me. I do post things there. I do share a lot of other materials that I get access to. I am open to people reaching out to me if they are looking for an advisor or board member or something.
John:
Great and I see you have your own website. Do you want to give that to our listeners?
Scott:
Sure, I actually have two websites. One is http://www.smcgregor.com/. You’ll learn about lots of things that I’ve done in the past and then there’s my consulting business which is SwiftDesignGroup.com and for companies that actually have product and technology and they are looking to expand outside of the US, I work with a couple called PointGreen.biz. They are interesting. We are a company that basically, we act as consultants to large companies in Europe and the Middle East. Sometimes they are telcos and mobile service providers and IT providers that can act as a distribution challenge for technology, but also have access to governments and hospitality and banking and many other kinds of industrial, you know, B to B type and customers. We’re looking for new technology. So, we help them find the technology they need and we help the technology companies find these customers.
John:
It sounds like you help people cut through red tape.
Scott:
We do.
John:
Yeah, that’s great. Scott, thank you so much for being on the show. You’ve been an incredible guest and I know our audience have gotten incredible takeaways and we look forward to following you and watching you continue to make an impact as you have so much and continuing in that duty to the world that you were told to do and we want to thank you for all the contributions that have made and will continue to make/
Scott:
Thanks so much. It’s been a lot of fun. Maybe there will be another time we can do this again.
John:
I love it. Thanks Scott.