Secrets of Equity Crowdfunding – Interview with Nathan Rose
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Episode Summary
Nathan Rose is from New Zealand but calls himself a digital nomad and lives all over Europe. He’s written a new book on equity crowdfunding, not only for the US but multiple countries across the world. He also gives out a tool at the end to use for equity crowdfunding that you’re want to be sure to listen to and start using right away. Nathan talks about how fund raising and marketing can be done simultaneously with equity crowdfunding. However, there are some downsides compared to Angel Investing and he goes into what those are.
Listen To The Episode Here
The Secrets of Equity Crowdfunding – Interview with Nathan Rose
Welcome to The Successful Pitch. Today’s guest is Nathan Rose, who is originally from New Zealand, currently talking to us from Budapest, and calls himself a digital nomad, which I just love so much. Nathan has a background in investment banking and he went to school in New Zealand and now is the director of Assemble Advisory, which has raised over $11 million. They are equity crowdfunding experts. He takes information and modeling and makes it easy for company founders. They know the market, they know it works and most of all, they can get you results. He is the author of a new book coming that is called Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. Nathan, welcome to the show.
Hi, John. It’s a great pleasure to be here.
Nathan, I always like to ask my guests, how did you get into crowdfunding, in your particular case? When you were studying at university, crowdfunding was probably in its infancy and certainly nowhere it is today. How did you go from being investment banker to being an expert in crowdfunding?
What I really saw when I founded Assemble Advisory was that these startups weren’t being adequately served well enough.
The path of crowdfunding that I help with is actually quite similar to investment banking. When I was working in New Zealand, we would do a variety of deals, some bonds, some rights offers, but the path that I really enjoyed most was the early stage initial public offerings. That was growing companies, entrepreneurs with big dreams and big ambitions. Equity crowdfunding has a lot of similarities with that. It’s startups at an earlier stage. What I really saw when I founded Assemble Advisory was that these startups weren’t being adequately served well enough. The investment bankers wouldn’t generally bring their skills to bare because they needed to pay for the big expensive officers in downtown. Startups couldn’t afford those sorts of fees. There was this ground swell of entrepreneurs coming through with equity crowdfunding, which weren’t being served. That’s where I saw the opportunity to provide the services around that.
We’re always talking about who do you help and what problem do you solve when you give a good pitch. Can you describe what you’re doing in those terms?
I suppose a good example would be an entrepreneur from a sales background or from a technical background who wants to do equity crowdfunding but doesn’t know the market, doesn’t know the different platforms. Because there are a lot of them, especially in equity crowdfunding. The rewards crowdfunding which is important to distinguish here, the Kickstarters and IndieGoGos, which most people are familiar with. Really you would use one of those two platforms in the majority of cases. With equity crowdfunding, it’s much more country specific so therefore if you’re a UK company, you use one platform, if you’re a US company, you use another platform, if you’re a New Zealand company, you use another platform. It’s all subject to different securities regulation. The typical case of who I’d help would be an entrepreneur, a growing company that wants to do equity crowdfunding but needs some help to in terms of communicating their story, approaching the platform and ultimately getting funded.
What would be the main reason somebody would decide to get funded through equity crowdfunding versus an Angel for example, an Angel group?
I think there are advantages and disadvantages to both, we can go into that.
Yes, please.
I think one of the big advantages of equity crowdfunding over Angel groups is the ability to do fund raising and marketing at the same time. When you think of the startup, those two things, getting marketing exposure and raising funds, are usually number one and number two on the list of things to do. Until now, they’ve always been viewed as separate activities. When you pitch into a VC or to an Angel, you’re inside a closed shop and there’s not a lot of publicity there. When you’re doing an equity crowdfunding campaign, it’s out there in the public and a lot of people can be attracted, not just through their investment dollars but through other partnerships too.
[Tweet “Equity Crowdfunding has the ability to do fundraising and marketing at the same time.”]
Great. All right, let’s take a deep dive into this because it’s fascinating to me. I believe it will be to our listeners. You have the choice of doing friends and family obviously, then you have maybe you actually do a little rewards crowdfunding to get some proof of concept. Now, you have to decide whether you’re going to pitch to Angels with a pitch deck and all that good stuff and do it live ideally with a warm intro. Or if you’re going to use an equity crowdfunding platform in your particular country. Is there only one per country? Tell us how do people find where to go.
That’s a very good question. There are multiple crowdfunding platforms in each country. As it turns out, they tend to have network effects happening with each platform, as in the bigger ones tend to get bigger because they attract most of the investors and they attract therefore most of the biggest companies and end up getting bigger by that process. How to find them? That’s actually a really difficult thing right now. It’s something that I’m trying to solve in terms of helping people to get more knowledge about which platforms are out there and what the different strengths and weaknesses are. In the US where most of your listeners may be from, there are a couple I can talk about. There’s WeFunder, which is by far the largest right now. They’re responsible for the first title III crowdfunding offer to raise a million dollars. There’s also Republic, which is born out of Angel List as the equity crowdfunding phase of what Angel List do.
Let’s just take a minute on that. How fascinating is that, everybody? That a lot of people think, “I’m going to put my little pitch deck up on Angel List and hope for the best.” But now Angel List has said, “Ooh, we want to get into the equity crowdfunding business as well so we’ve birthed our own called Republic,” if I heard you correctly.
That’s right.
Are a lot of people doing both or do you recommend people do one or the other?
In terms of?
Doing a listing on Angel list and a listing on Republic equity crowdfunding.
I see. Generally, you don’t really have to choose.
That’s what I thought.
You have to decide which platform makes the most sense because running concurrent offers gets really messy really quickly. We can maybe talk about some of the disadvantages.
Sure. Let’s talk about what’s the downside if it’s all, gosh, if I’m going to raise money and get marketing, why wouldn’t everybody be doing that and not do anything to Angels anymore? There must be a reason to not do it and just do the Angel route. What are your thoughts on that?
You got to do a lot of the things in the background before you get ready to go.
I think the biggest reason is if you’ve got one Angel who’s ready to write a check for you. It can be done a lot more quickly. An equity crowdfunding is not just a case of putting your campaign on the sites and waiting for the internet to shower you with money. There’s typically a two or three months process that goes on behind that to put together all the author material, the video, drum up your supporters. It’s a launch, it’s a marketing campaign. You got to do a lot of the things in the background before you get ready to go. Whereas an Angel can be a lot quicker and cleaner for the companies.
Interesting. I’ve heard the phrase from my business partner, Judy Robinett, that with crowdfunding, you have to bring your own crowd. Do you like that? Do you think that’s true?
I think that is true for some platforms but not for all. This is one of the things that I always tell the entrepreneurs that I work with. There’s a really big difference in between the various platforms because the real value add of an equity crowdfunding platform is the audience that they bring to you. Bring your crowd along, that’s great. Any crowdfunding platform can do that and facilitate the payments and the process and then all that stuff. The bigger platforms are going to give you the added benefit of having their investors who are sitting there waiting for new investment opportunities to come along.
Instead of crafting a pitch deck per se, when you’re going to pitch an Angel group or VC, depending on whether you’re seed or series A, you’re talking about having videos created on the equity crowdfunding platforms, correct? Is that in lieu over the pitch deck?
It’s more as well as I think.
As well as.
You’re still going to have to put together a pitch deck and actually that pitch deck takes more of a longer form because the idea is that you’re seeking small amounts of money from lots of different people. You have to be able to tell your story completely. Because when you’re pitching to Angels, you’re in front of those Angels and they’re getting to ask you questions. There’s still that ability in the online forum but the information has to stand on its own much more in equity crowdfunding because you can’t go around shaking hands with everybody who’s going to pledge $100 at a time. That’s why the videos are so important.
A pitch deck for an Angel group typically, it’s ten slides, ten minutes and a ten minute Q&A. How much longer is a pitch deck that you recommend on an equity crowdfunding and how long should the videos be?
[Tweet “You need to be able to capture people’s attention quickly.”]
I’ll say about two to three minutes is right for a video. You need to be able to capture people’s attention quickly and then convince them to go into the offer in more detail. The video is like the hook if you like. You don’t want to make it too long, you need to make it attention grabbing. I think if there’s one area that you should spend a bit of money on, which is never a thing that startups like to hear especially when they’re trying to raise funds, get a professional video done for sure. It makes the big difference.
Nathan, would you agree that it’s really important not to spend your two minutes, three minutes on a video giving just a product demo? That’s not what people want to see in a pitch for Angels. I’m assuming, that’s not what should be in a video for equity crowdfunding. Am I right or is it a product demo?
I think you’re absolutely right. You’ve had a lot of experience with this too, John. Of course founders are very very experienced normally talking about the features of their product and selling their product but they’re least good at selling their whole business model. You’ve got to excite people about the investment opportunity too.
Terrific. One of the things in chapter three, you talk about is equity crowdfunding right for your company. You’re quoting Nathan Lawrence who raised over 800,000, is it New Zealand dollars on Snowball Effect?
That’s right.
He said, to raise that kind of money, I don’t think people think about equity crowdfunding as raising that seed round of money. When you raise it with an Angel group, that can take a while too because you have to get in front of the right group and then there’s due diligence, which is anywhere from, I don’t know, 45 to 90 days depending on how fast you go back and forth and come up with the terms. How long is a typical equity crowdfunding to raise that kind of $800,000 mark, let’s say?
It’s fairly interesting. There are I think three phases involved. There’s the phase where the offer is actually open. That would be 30 days or 45 days typically. For a lot of people, that’s all they see and they don’t see the preparation that went into that to get that campaign to go live. Before that 30 to 45 days, there’s a preparation phase where you’re putting together the video and getting all the content together. I would say that would be about two to three months that you need to budget for that or up to six months. It can easily blow out depending on how much resource that the founder can put into it and answer emails and so on. An interesting anecdote that I’ll share with you is a company called Monzo in the United Kingdom. They actually closed their crowdfunding round for a million pounds in 96 seconds, 96 seconds it was done. They’d raised their one million pounds.
All right. Let’s hear how that happened.
When you think of who was investing, it was their customers.
The funny thing is, that makes a nice headline. 96 seconds, a million pounds. Really, it was a year in the making that whole campaign. When you think of who was investing, it was their customers. Having that user engagement at the core of everything they did was what enabled them to ultimately raise in that 96 seconds.
That’s really the bring your own crowd in action right there. Your own crowd is your customers and anytime your customers become your investments in any kind of platform, you have a win and other investors want to join in because they figure if your customers want to invest, you really have figured out something that people want.
The parallels with Angel Investing are quite strong in that regard. No one in Angel Investing wants to be the first one in, but once the first one does go in or they can sense that there’s some kind of momentum in the offer, then everyone jumps in really quickly. When I said before that for the bigger platforms you can rely on their audience to some extent, that’s true but you got to generate your own momentum first. If you’re working with a big established platform with a big audience, if I could just throw a number out there it would be something like 50-50 in terms of the crowd you need to bring yourself and then the rest of the crowd will follow along with you. If you can bring that initial momentum to bare.
Let’s go back to this 800,000 round. I’m sure that wasn’t just a bunch of people pledging 100 bucks. Because typically when you raise 800,000 with Angels, it’s 250 here, 300 there, that kind of stuff. Is that how it works or is it much smaller amounts that add up to 800,000?
It can be both is the short answer. There’s a company called Haughton Honey again in the UK who raised very large numbers of small amounts of money. But there are other ones out there who put their minimum investment amount right up at 20,000. That means that you’re not going to get the crowd to come along and you’re going to just effectively do an Angel round or VC round but do it through the efficiencies afforded by the crowdfunding platform.
Would you say that when you’re raising that kind of money, 800,000, that it is typically one or two people starting off on 100,000 and then other people following with similar type sized offers?
I would say there’s a very well established thing in the equity crowdfunding world which is the concept of a lead investor. Crowdfunding absolutely has a higher rated success when you can bring an Angel investor along into the round. Effectively, they anchor the round, they might put in 25% of the round themselves and before the offer has opened, they’ve done things like negotiate the valuation, negotiate the offer terms. Make their name and the experience they have in the industry public. In that way, the people who want to just chip in $100 or $1000 can say, “Hey, there’s this really smart Angel investor here who knows what he’s talking about, who’s put their own money behind it and come up with a valuation that they’re happy with.” For mom and dad investors who find it difficult to value early stage companies, and even the professionals do find it hard, they can then follow on and invest with the Angels, which I think it’s a really good way to do it.
If I understood you properly, one way to go is to do the normal route of have a pitch deck, use your network or hire someone to get you in front of the right Angel investors. They come in and they say, “You know what, instead of having my Angel group fund this whole round, let’s go with an equity platform and I’ll give you this amount of money. I’ll be the lead investor for equity platform as opposed to the lead investor for other Angels.” From there, you start getting other people in.
Yup.
Now, doesn’t that make the cap table very complicated because you’ve got all this people putting $100, $1000 there and you’ve got to give equity each of those people? Does it cost you to have to give away more equity when you do it this way?
The valuations being achieved through equity crowdfunding are somewhat higher than pure Angel or VC rounds.
I think there’s two questions there. It doesn’t mean you have to give away more equity. I think the answer’s no. I think actually in general, the valuations being achieved through equity crowdfunding are somewhat higher than pure Angel or VC rounds.
That’s good to know.
The reason for that is when you go through an equity crowdfunding platform, often there’s more standardized documentation and you as the entrepreneur can set your own terms and then the crowd either follows along or doesn’t. The successful rounds are sometimes getting better terms. The other part of your question was about the messy cap table. There are ways to mitigate that. One of the ways is through a nominee structure, as in all of the smaller investors will end up becoming a holder in a nominee company, which I’m going to explain quickly. It means that that nominee company will vote and make decisions together. If you’re a company founder and you need some kind of shareholder resolution or you ultimately going to sell the company, then there’s just one nominee company that needs to vote and the provisional nominee manager will take care of all the investor communication for you.
Interesting. Now, is that based on a majority rules or is it the one guy who’s supposedly the professional decides for everybody?
Generally, it’s majority roles.
Got it. Let me ask you also about the cost because you write about this. There’s a price tag attached to using an equity crowdfunding agency. Is that like a broker taking a percent of the money they help you raise with Angels and VCs?
The crowdfunding platform will take a cut but generally that percentage is based on success. The fees that founders are really concerned about are the upfront costs, like getting your video done, legal work, anything like that which will be charged regardless of your success or not. It really depends on how much hand holding you need. If you can find the platform yourself, you’ve got a huge email list, which means you can just get the investors to come along or maybe you had someone in your team who’s good at the social media and the video and you can self produce all of that. The cost can be very low. If you need more hand holding by professionals, then yeah, the costs can mount up to, I’d say that maybe in the US, something like $15,000 or $20,000 might be typical, maybe less than other countries where there’s a less a restrictive regulatory regime.
I wanted to ask you one of your earlier comments about don’t expect to just put your stuff up on the equity platform and expect the magic of the internet to do all it’s work and people are just going to find you with your cool pitch deck and engaging video. What else do people need to do besides bringing their own crowd to that platform to market this?
I think you need to make the investment itself step up because you’re going to do a lot of outreach in an equity crowdfunding campaign and people need to see something good there when you direct them to the page. Otherwise they’re going to click away, never to return. I think being good at telling your story, this is exactly the same stuff as you’ve talked about on your podcast many times. Having a clear story about what the problem is, how your company solves it, why people should get excited about your uniqueness and your positioning, how it’s going to make money, all that good stuff.
[Tweet “Have a clear story about what the problem is and how you solve it.”]
Bringing your crowd to the offer, there’s so many ways to do that. I think one mistake that people make is they rely on social media too much. They think that it’s got the word crowdfunding in its name so you can run it exactly like a Kickstarter or an IndieGoGo campaign where if the product is itself just cool enough it can go viral through tweets and shares and likes and all that stuff. I think in equity crowdfunding, it’s more important to go to pitch events that the crowdfunding platform will organize.
Got it. Let’s take a moment and just pause there. That’s a really good piece of information. A lot of people will say, “I know there’s Angel groups that have meetings,” but there are actually equity crowdfunding meetings that you can go to and encourage people to go check out your platform without having to literally pitch them. I’m guessing you’re probably going to have to pitch them a little bit to intrigue them enough to want to go check out your platform. Is that right?
Yeah.
Those events?
The way that one of those events would typically work, there’d be maybe you and five other company say that are giving a short introduction and you hope that you can excite people and that audience enough that they go into your page. By the way, at those events, they do get the chance to shake your hand.
How do people find out about those events, Nathan? Is it just googling it or are there something to belong to?
Those events are organized by the platform themselves. Again, the US is a few years behind some of the rest of the world, which is unbelievable really given the home in Silicon Valley and the whole startups scene. The UK and the rest of Europe is actually quite a bit more advanced in terms of this sort of thing. There’s some places that you can find these crowdfunding pitch events. If you’re in London for example, you could sign up to the Seeder’s Blog, Crowd Cube, Syndicate Room, those are three of the big platforms in that market, or else just ask your local startup incubator or accelerator.
That leads me to the question about your insights on the title III law passing here versus what’s going on to the rest of the world. What are your thoughts on that?
It’s fantastic firstly that the US is now part of the equity crowdfunding revolution. A title III crowdfunding allows a startup to raise a million US dollar in any twelve month period. There are a few extra restrictions compared to more liberal regimes like New Zealand and the UK, but at least it’s a start and we are seeing some money being raised. One of the things that’s in place in the US for example is that ordinary investors who don’t make the sophisticated high net worth threshold, as in people who basically aren’t really rich. They can only put in $2000 maximum into each crowdfunding offer, or five percent of their annual net income. That’s in place. I guess that means that if you were in a comparable market, you could have more people putting in amounts greater than 2000. In the US at least, retail investors can only put in that 2000 in each offer.
Typically within an Angel group, if they already have one type of person they’re investing in, they won’t take on a competitor. Is there anything within certain platforms in equity crowdfunding that they say, “Oh, we’re already funding something that is in healthcare for, whatever, Doctors on Demand. We can’t have another one going on concurrently.” How does that work?
Because they’re on the site, they can see your offer too.
This is a bit like the IPO window back from the investment banking days, which was that each company would try to find a slot where they’ve got the attention all to themselves. I actually think the opposite is true in equity crowdfunding because if you’re on the platform at the same time as a bunch of other offers are, then it’s actually positive because you’re going to get the benefit of everybody else’s outreach efforts and everyone else’s audience that’ll maybe go to the platform for your competitor or for other companies, which aren’t even related to you but are just crowdfunding at the same time. Because they’re on the site, they can see your offer too.
Is there some barrier so your competition isn’t seeing all of your secrets? Because a lot of founders are so paranoid. Obviously investors don’t sign non-disclosure agreements, but do they say, “We already have this. You can’t come on here.” I’m not 100% understanding the yes or no to that.
I think the answer is no, that you will be subject to other companies coming on at the same time.
You have to put enough out there without giving away your “secret sauce”. You can say how, you can say what you’re doing, but you don’t necessarily have to go into that much detail on how you’re doing it unless you want are competition to see it. Would that be fair?
Right. We talked about advantages and disadvantages of equity crowdfunding. I think this is another of the disadvantages. If you are not comfortable with your business’ whole revenue projections and business model and what you think of the market and what you’re doing and strategy being out there in the public domain, then equity crowdfunding isn’t for you.
Got it. Much like people go from a seed round from Angels to series A with VCs, are you seeing a lot of people go and get their seed round up to a million dollars from equity crowdfunding and then VCs are more than happy to fund that just like they would an Angel round?
I think there is still something of a negative stigma around it from some Angels and VCs, as in if the cap table is messy, like a nominee structure hasn’t been used, then they might be a little more hesitant. But I will say that their perception is changing. Some Angel and VC companies, this is just true of the economy in general, some people just don’t like new ways of doing things. In Europe at least, we’re seeing that they’re becoming more comfortable with us. If they want to get access to the best companies and some of the best companies are using equity crowdfunding. Ultimately John, a VC will invest in a company no matter how messy all the structuring is if the company is a great company.
Has a huge potential and traction and a good team and all the other good stuff. I love storytelling, Nathan. I’ve saved your story about how you wrote the majority of your book in a small town in Georgia. Tell us that story.
That is Georgia, the country. Not Georgia the state.
Okay. Tell us where Georgia the country is for those of us who may not know.
Georgia is located north of Turkey and south of Russia, around the Caucus mountains, just between the Black Sea and the Caspian Sea, which is not the typical place to hang out. The reason for going there was to get away from it all for a couple of months while I wrote the majority of the book. It was successful. Two months in a little hideaway where no one knows you, it’s a good way to get a lot of work done.
I bet. Really focused. Nathan, how can people follow you on social media? Do you have a website you want to direct people to?
Sure. The website is AssembleAdvisory.com and within that is the page on the book, which is out now, AssembleAdvisory.com/book. That’s Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. If you’ve heard this podcast episode and you want to know more, then now that’s available on Amazon.
Great. What is your Twitter handle?
My Twitter handle is @Assemble_ADV.
Okay, let’s repeat that for everybody. @AssembleADV.
Yup, short for advisory.
All right, great. We’ll put all this in the show notes. Nathan, thank you so much. Is there any one last bit of advice or thought you want to leave our listeners about equity crowdfunding or just being an entrepreneur in general?
I’ll share one tool if that’s okay, John.
Yes, please.
The tool is Thunderclap. Thunderclap allows you to prearrange social media shares. If you’ve got a crowdfunding campaign coming up and you want people to share the word on Facebook and Twitter, you can get them in the weeks and months leading up to your company actually launching to pre-commence on Thunderclap. That way when your campaign goes live on the arranged date, everyone tweets and Facebook shares at exactly the same time.
Brilliant. That’s a great, great thing to do. That’s bringing your crowd to the crowdfunding. There it is. Love it. Thank you for that great tool. Thank you for writing this book. Thank you for sharing your expertise with us. It’s been a pleasure.
Thanks, John. Thanks for the podcast and everything that you do too. It’s been great.
Thanks, Nathan.
Links Mentioned
J Robinett Enterprises
John Livesay Funding Strategist
Equity Crowdfunding
Assemble Advisory
Nathan’s Twitter
Crack The Funding Code!
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Apple v Samsung – Tom and Tracy Hazzard
Posted by John Livesay in podcast | 0 comments
Episode Summary
Tom and Tracy Hazzard are product designers and design experts of Hazz Design. They’ve collectively designed and developed over 250 products, which has generated over $1 billion in revenue for their retail clients, and counting. Their entrepreneur experiences are taught in a Harvard Business review course in 26 universities around the world. Tom and Tracy are the hosts of the 3D printing podcast, WTFFF?! They are the experts in talking about everything to do with innovation and design. In this episode, they talk about the latest ruling by the Supreme Court in Samsung V Apple and how that impacts people who have a design patent and their valuation.
Listen To The Episode Here
Apple v Samsung – Tom and Tracy Hazzard
Today, The Successful Pitch, I have a bonus episode of two really smart and really nice people named Tom and Tracy Hazzard. They’re based in Orange County, California, just down the road from me in LA. They’re product designers and design experts of Hazz Design. They’ve collectively designed and developed over 250 products, which has generated over $1 billion in revenue for their retail clients, and counting. They hold over 37 utility and design patents with an unprecedented 86% commercialization rate, which is double the national average.
Their entrepreneur experiences are taught in a Harvard Business review course in 26 universities around the world. Both Tom and Tracy have their products in all the major retailers, wholesale clubs, electronic boutiques and office super stores. Their bestselling mesh office chair has been in Costco for over four years straight.
Tom and Tracy are the hosts of the 3D printing podcast, WTFFF?!, which you have to know 3D podcasting to understand what that is, which is ranked number one in iTunes with over 45,000 listeners monthly. Besides being featured on numerous podcasts and publications like Entrepreneur, Forbes, Wired, Fortune, Small Business and CNN Money, Tracy pends a regular featured Inc column on innovation and I’ve been fortunate enough to be in one of her columns.
They are the experts in talking about everything to do with innovation and design. I asked them to record a special episode with just the two of them talking, as if you’re eavesdropping in on their personal conversation like you would on their 3D podcast. In this case, they’re talking about the latest ruling by the Supreme Court in Apple v Samsung and how that impacts people who have a design patent and their valuation. I think you’re really going to love this episode. Enjoy.
It occurred to me the other day that listeners of The Successful Pitch podcast, especially the founders that listen to the podcast all the time might be very concerned about the Supreme Court ruling, Apple v Samsung, about design patents and its affect on their valuations and their pitches.
I think it’s a valid thing to be concerned about, especially because there is, as of now, no real official test yet as to how liable Samsung is for their infringement of Apple’s patent.
Or how much less Apple gets in the process.
Apple v Samsung: This has been a patent battle playing out in the system for several years now.
Let’s go over it a little bit. This has been a patent battle playing out in the system for several years now. Most recently, I think in the summer of 2016, Samsung was held liable for patent infringement of the iPhone with their Samsung phones. This is over a design patent, which really dictated the outside ornamental look of the Apple iPhone. Samsung was found to have infringed on that patent with the outside ornamental design of one of their Samsung phones.
Then Apple was awarded a huge sum of money. We’re talking very, very large. In Apple v Samsung, Apple was awarded a huge sum of money originally, a staggering $548 million. Samsung was hoping to get $400 million of that back. They’ve appealed it to the Supreme Court saying, “Just because the outside design is the same, we shouldn’t have to be liable for all the profits of our Samsung phone because there’s so much more in it in terms of electronics and software and other things that really represent a lot more of the profits that they make on their phone.”
The idea is that something that’s an ingredient in the sales process and one of many reasons why somebody would buy an Apple phone and then Samsung happened to copy, in this particular case, isn’t a reason to get 100% of the profits of the sales of those items during that time period. That’s what they’re talking about, whether or not they should sub cut up the profit, divvy it up based on the percentage that that might have an impact on.
Honestly, that seems reasonable to me as someone who has a lot of patents and understands what goes into a patent and how big a role it plays in a product. It seems to me logical that just because Samsung copied, intentionally or not, the look of the iPhone, doesn’t mean that that look was completely responsible for all the profits they got. They have their software, their technology, their user interface, operating system, etc.
Exactly. There’s lots more reasons why you buy an iPhone versus a Samsung phone. The thing is though is that right now, while this was actually a very, very quick ruling by the Supreme Court and the decision was very clear. The process by which it’s going to be determined and used as a rule of thumb as to how to divvy up the profits and how to decide what that percentage is that’s liable is now been dropped down to the lower court that made the original ruling, which is leaving a lot of uncertainty. That’s maybe why there’s a little bit of concern, anxiety in the founder community, especially those that are depending their valuations on these patents. Because the decision here changes the valuation that your design patent, if you have one, might be valued at in that process.
The Supreme Court, I guess, declined to issue a ruling on a test or a measurement. How do you decide how much of the profits should be owed to an infringer who infringes on a design patent that represents a portion of the value of the profits of the product? The lower courts are going to have to resolve that test. That’s going to take sometime. Eventually, they will come out with a test. I’m hoping that will be a very good thing because then we’ll all know what the potential liability is in this kind of a situation.
Apple v Samsung: We’ve always treated design patents as more of maybe an offensive strategy or even a defensive strategy in certain cases.
It’d be great if it’s extremely clear. That’s hopeful thinking though. I really want to step back and start talking about this from our perspective. We have 37 patents pending and issued in the mix and probably I think close to 25 of them are utility and ten or twelve of them are design.
We don’t really rely heavily on design patents. They’re there, they’re in the mix. In practice, we’ve never treated them with a high valuation before. We’ve always treated design patents as more of maybe an offensive strategy or even a defensive strategy in certain cases where we’re plugging some holes and surrounding the utility patent with good other patents. We call it a patent fortress strategy.
That’s where we’re really building a large base of intellectual property around a certain product. Sometimes there’s a utility patent involved and other times we want to add design patents to that to make it a stronger defense against a potential infringer. Other times, there are appropriate situations where you may just want a design patent on your product. They are limited in what they can protect, but if the ornamental look of your product is really critical to the identity of your product and the success of your product, then a design patent maybe very useful for you.
We use that patent portfolio or fortress strategy that we use, we use that because it builds a higher valuation across many things. It’s like a risk assessment on a portfolio. When you have one single patent, then there’s this higher risk factor that gets mixed in by whoever is doing the valuation or the investment valuation and considering it and looking at that. When you have a mix of things that are in various states of issue, some of them might be provisional, some of them might be filed, some of them might be issued, when you have a mix of those things, it makes it harder for them to assess you at that high risk state. Some of it is more balanced here, some will likely issue, some will likely be defensible. It gives you more options and it gives you a better valuation overall and that’s what we found.
This Apple v Samsung lawsuit does show us that design patents can be very valuable.
Still, what this Apple v Samsung lawsuit does show us is that design patents can be very valuable. Even if the courts end up saying, “Apple, you have to give back some of that $548 million to Samsung because you don’t deserve all the profits they got from their phone,” certainly, Apple is going to get to keep a lot of the money that they got. At least $100 million probably or more. It was certainly a worthwhile endeavor to those who …
Worthwhile patent to have filed.
To have filed and then also to litigate. Samsung, let’s face it, the major competitor to Apple, probably did want to make their phone look as much as an iPhone as they could because they didn’t want the look of their phone to be something that would keep people from buying a Samsung phone.
In this case, once you’ve defended this once, it’s also a deterrent to future infringers and more knockoffs get settled quicker than go to court. That’s really the other important part of what they’ve done here. I want to go back to as a founder or a patent holder standpoint, really what you can do to help yourself and protect yourself and address some of these valuation issues that you’ll have as you go into that.
Really the thing that we found over time is that when you go to file a design patent and when you include a design patent in your patent portfolio is to dial it in and make it very specific on one element. You might file, and this is exactly the case of what Apple did, is they filed one on the shape of the overall phone, they filed another one on the shape of the icons. They had a different design patent for the shape of the icons that were on the home screen of the phone. By divvying up all of those design patents and not doing all in one is an extremely important strategy. We learned this the hard way on office chairs.
We have.
Or our clients have, I should say.
Us and our clients have both learned, for sure. We have experienced a client that had a design patent on the entire ornamental design of an office chair. Mostly, especially on the upholstery stitching of that because that was a unique look that they wanted to protect. They filed it, the design patent got issued and then a competitor knocked off that chair completely with one slight detail difference.
Which what constituted about a ten percent or less change. It wasn’t really major.
I would say less, quite honestly. From my perspective at the time, I thought this is really enough of a knockoff that this company will surely be found to have infringed by the courts. This case actually did go all the way to court, to trial, the whole thing because both sides, I guess they wanted to fight about it and they couldn’t agree. There was just one difference in stitching on the back side of the chair, because this design patent included not only the appearance of the upholstery from the front but also the back. There were many, many drawings covering all the elements of this design. The competitor added one stitch seam on the back side of the chair to the knockoff that did not exist in the original. Very surprising to me, the jury came back and said that the competitor did not infringe on the design patent because of that one additional stitch change, that it was not considered the same design. Personally, I didn’t agree with that. That’s what the court found.
Apple v Samsung: All the elements are broken up into multiple design patents.
Since then, the strategy has always been, in this particular case with office chairs, is we file one patent for the chair back, another one for the chair seat if necessary, the arm pad design if it’s different, the base of the chair. All the elements are broken up into multiple design patents. Now, it’s more costly to file, but in this particular case, you would have, now, with this new ruling, you would have more of an opportunity to stop someone from infringement based on just an element.
Or certainly a better ability to recover damages from a company that clearly did copy your design. By breaking it down to the upholstery on the upright back cushion of the chair, and you can even break it down into the front side, the front face of that cushion design if it’s really unique, and then the back side separately or don’t even file a patent for the back side if you don’t want to, that if somebody then incorporates that design into their design, the rest of the chair could be different and they could still infringe. We had made a recommendation to another client of ours at a later time to do the same thing. We came up with a unique design for an upholstered pattern. It was the hallmark element or signature design element of this chair design that ended up being a very successful design in Staple stores across the country. We then recommended to our client they file a design patent for that.
They refused because they thought design patents weren’t that valid, weren’t that valued. They refused on it. A year later, Staples decided to buy direct and cut our client out of the loop. They lost $4 million of value for that one single chair because they didn’t file a design patent and couldn’t stop Staples from making it. What would’ve been a few thousand dollars, under five probably for filing a design patent, they lost $4 million a year.
It was really a short sighted decision. Our client learned the hard way unfortunately. Going forward then, they were all the wiser. If they think they have a product that is going to succeed well and it has a unique element, then they could protect it. Because it’s true, we have witnessed a company like Staples. In fact, actually Staples, even though they wanted to go around the supplier and direct source of product, if there was a patent involved, they stayed away from it and they didn’t do it. In this case, they probably would have kept buying the chair from our client had there been a design patent.
It just would’ve been too risky to go at it.
Very unfortunate.
That’s where we talk about offensive and defensive strategies to using patents. In this case, I think that this ruling actually only reinforces it. Even though it’s not known what the test will be by that lower court yet, we think this is really critically important for those of you out there pitching and worried about valuations, which are so fuzzy anyway at the early stages of business when you’re really in your early seed stages or just beyond your market proof stages. These kinds of things create the company value that someone’s buying into.
They’re buying in more to the idea, they’re also buying into something that’s an asset of the company. Having these patents and having multiples of them, including design patents, make or break that valuation for you and that investment for you. We really want to encourage you to continue to do those. Don’t be discouraged by the design patents, that they have lower value and they’re not worth doing. There are so many reasons that they are worth doing and you should continue and move forward with that plan.
Apple v Samsung: Intellectual property portfolios, patents in particular, add tremendous amount of values to a corporation.
Absolutely, I agree with that, Tracy. There’s just all kinds of evidence, certainly in our experience and in other business experience that you can read out there in the media, that intellectual property portfolios, patents in particular, add tremendous amount of values to a corporation, especially when they’re seeking to be acquired. We encourage really an offensive and in some cases a defensive patent strategy. I agree with you. This case just shows that there is a value for the patents, that the courts do recognize them. They’re just talking about where does it begin and end.
Semantics of dollars.
Having that defined at some point hopefully will be a very good thing and it won’t be so ambiguous. Unfortunately, if any of you end up in a patent litigation at some point, it won’t be as much of a unknown. “If we get down this and get a ruling in our favor, is there really going to be any money there?” I think there can be and there will be proper tests for determining what that value is.
Clarity of standards can always help settlements happen quicker so that there’s less likely to be litigation involved in the process because it’s been ruled all the way up at the top, at the high courts. We want to encourage you to do that. We really hope that you have a successful pitch and that patents become a strong part of that asset that creates that success level that you have. We thank John for inviting us on the show and we really appreciate it. If you need to contact us in any way or ask us questions about that, please reach out to John directly and we’d be happy to answer them for you.
Thanks for listening everybody. Hope you enjoyed this. This has been Tom and Tracy on The Successful Pitch podcast.
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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.
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.
[Tweet “CrowdSmart: You have to be able to show traction.”]
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.
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.
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.
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.”
[Tweet “CrowdSmart: Try hard to get honest feedback.”]
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?
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
J Robinett Enterprises
John Livesay Funding Strategist
Crack The Funding Code!
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