TSP042 | Jason Best – Transcription

Posted by John Livesay in Uncategorized | 0 comments

John:

Welcome to “The Successful Pitch” podcast. Today’s guest is Jason Best. He’s the author of “Crowdfund Investing for Dummies,” but Jason is no dummy, that’s for sure. He is the Entrepreneur-in-Residence at UC Berkeley. He tells us a story about going to the White House back in 2012, and being at the Rose Garden ceremony when President Obama signed into law, the new changes that allow crowdfunding to be very different, and allow people to invest where it’s been like that for 78 years, and he had to overcome 78 years of, “It’s always been done this way. You can’t possibly change the law. You’re crazy.” Of course, he didn’t give up. It took him over a year with some other people to make this happen, but he did it. He said, “Crowdfunding is a new way to do a difficult thing.” I think you’re really going to enjoy listening to Jason’s passion and insights on crowdfunding around the world.

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Hi, and welcome to “The Successful Pitch,” podcast. Today’s guest is Jason Best, and he has that last name for a reason, ladies and gentleman. He is the general partner at Crowd Capital Venture Fund, he has global experience. He literally works with the World Bank, and he’s one of the 3 people that’s responsible for creating the crowdfund investment framework. He’s also the Entrepreneur-in-Residence at UC Berkeley, for entrepreneurship and technology. His background prior to crowdfunding is building and leading SASS companies. He has been covered and visited the White House. I’m not going to talk about his background anymore. I’m just going to get him right on the show. Jason, Welcome.

Jason:

Hey. Thank you so much for having me today.

John:

Jason, I always like to ask our guests to tell us, how did you get to be such an expert in crowdfunding and entrepreneurship? Can you take us back to what your early background was? I know you worked for some companies and have some great track records, but how did you get so passionate and become an expert in crowdfunding?

Jason:

Well, first, thanks for having me on the show. It’s great to be here, and I guess my passion for entrepreneurship really was somewhat accidental in the beginning. I was working for different companies in the healthcare and consulting spaces, and then in 1998, sort of when the internet was shiny and new, some friends of mine … I was living on the East Coast, and some friends of mine told me, “Hey, look. You’ve got to get out here. Move out to the West Coast and figure out this internet thing. It’s really awesome.” It was one of those moments where, I think one of the biggest things in my life that I’ve learned is the power of saying “yes.”

The power of saying “yes” is so important because there have been so many times in my life where I could have said “yes,” or could have “no,” and saying “yes” has almost allows brought with it good things. Sometimes, probably a third or a half of the time, it’s unintended good consequences, but it’s interesting. I said “yes” to the opportunity, I moved out to the West Coast with no job, settled in San Francisco and over the course of a few weeks, found a job and began building a career in tech startups in the healthcare space. I built some experience in that model, was very fortunate to be a part of a couple of successful healthcare technology companies that were venture-backed and that had different types of exits, whether they were acquisition, or merger, or one went public, and so it just had a chance to see, from the very beginning of how to start a business, working with the founders of these companies, all the way through kind of the exit of those companies.

In August of 2010, I was at a friends wedding and I was talking with another friend of mine who had been a successful entrepreneur, as well, about the fact that this was back during the financial crisis, and small businesses couldn’t get money, and neither could many successful entrepreneurs. So, we talked about the fact that, “Look, if you give away money on Kickstarter, if you can lend money to entrepreneurs in the developing world through Kiva, why can’t I, as a regular American, invest in businesses that I use every day, or entrepreneurs that I believe in?” That was sort of the jumping off point for us to say, “How can we change these 80-year securities laws?” They were written back when most people did not have a landline telephone in their homes …

John:

Wow!

Jason:

… To reflect how we live our lives today. I mean, we live our lives online, with mobile devices, and Twitter, and LinkedIn, and Facebook. We also, if you look at the rest of our lives, social media and the web has really revolutionized almost every part of our lives, and even every part of the financial system, except for the private capital markets, for the way, private equity, venture capital, angel investing, and now crowdfunding. Really, it was about, how can we open up these markets to use these new tools to make it more efficient, more effective for entrepreneurs to raise money? That’s when we started our campaign.

We wrote our framework originally to change the laws and look, everybody told us we were crazy. Everybody told us we were wasting our time because it was never going to change, but we had equal parts of naivety, and I guess, just entrepreneurial stupidity to just keep trying, and just to keep working on it. Over the course of 460 days, we took our kind of framework from an idea to being in the Rose Garden of the White House, to watching President Obama signing the Jobs Act into law.

John:

What a thrill. I mean, congratulations, and thank you on behalf of all the entrepreneurs out there for your tenacity, your focus, your willingness to fight City Hall, if you will. I mean, when you have been told that something has been like this for 78 years, you’re crazy to try and change it, there was something inside you that has to be inside all successful entrepreneurs that didn’t take, “No, this is impossible,” for granted. I really want to dive into that a little bit. Also, we’re going to tweet out the power of saying “Yes.” I mean, what you did reminds me of people coming to San Francisco for the gold rush, right? I mean, they said, “This is where the opportunity is. I’m going.” You did the same thing. Take us back to that moment, because I love to hear what it felt like to stand in the Rose Garden, because I think it’s so important to have these moments of certainty, when you realize, “Wow. I didn’t give up and look where I am now,” and what does it feel like?

Because if you can share what it felt like to stand in the Rose Garden, after 460 days of perseverance, I can only imagine that that will give our readers a sense of what it’s like to stand in that Rose Garden at the White House and watch the President signing something into legislation that’s going to affect all kinds of people. I mean, the impact that you had, and I think that’s what a lot of entrepreneurs do, is they want to make a dent in the world, and make an impact. Do you mind just describing what the day was like and what it felt like to stand there?

Jason:

I tell you, it was one of the most surreal experiences of my life, because especially since, when the law passed, it had passed the house, it went to the senate, we went to the senate to actually watch the senate pass the bill, as well, and because of procedural maneuvering, basically we were told that it was going to pass that day, so we went to watch it pass, and because of procedural maneuvering in the senate, it didn’t. It didn’t pass. All of a sudden, the bill just got locked up, and we were afraid. “Oh, my gosh. Is this going to mean that the bill’s not going to pass and all this work’s going to die right here?” So, there was about 24 hours where we were unsure, this could have died. It was a very, very low point, of thinking we made it all this way, against all these odds, and it was out of our control at that point, because it was really up to the White House and the senate what was going to happen at that point.

After a lot of meetings, and conversations amongst the people who get to make those decisions, the next day it passed. It passed with over 75% of the senate voting “yes,” and so that moment, going from the depths of despair to this moment of, “Oh, my gosh, it passed,” was amazing. Receiving the invitation to the White House was another very surreal moment. It was just kind of, and then to actually be that day where you walk up to the gate, they hand over your pass and then you go through four layers of security, including walking by these dogs that are smelling you for explosives and everything else.

John:

Wow.

Jason:

Then, you’re in, you walk through the White House, and then you walk out into the Rose Garden, and it’s just this place where there’s been so much history. They signed a Middle East Peace Accords there, they’ve had all sorts of dignitaries there. You’re literally just a few feet away. You can see in the windows of the Oval Office, and you can see the President sort of walking around the Oval Office prior to him coming out. It was an incredible moment. It’s a beautiful place. It was an incredibly sunny, warm day. There were only about 100 guests invited, and from the crowdfunding industry, in total there were, I think, 11 of us. It was an incredible thrill, because there were different parts of the Jobs Act, so different people involved in different parts were invited. It was a great honor to be among such a small number of people from the industry who were invited to join, kind of recognizing our efforts. It was just one of those moments that I’ll never forget.

John:

I’ll bet. Thank you so much. That’s one of my favorite stories I’ve ever heard. You did such a great job that riding that roller coaster from the depths of despair when you don’t think it’s going to pass, to it’s passing, and then being invited, and then going through all that security. I mean, I felt like I was there with you. That’s what good storytelling is, and when someone makes a good pitch, that’s a classic example of bringing something to life, so thank you for that, Jason.

Jason:

Sure.

John:

What has changed since this is now in effect from 2012 to 2015? Can you tell us what’s the impact of that being signed now? What’s the … There’s a new law in existence now, over 3 years. I’m sure there’s a lot of things you can point to that because of this now being signed into legislation, people are able to?

Jason:

There’s kind of several layers to it. I’ll try to go through them quickly. There’s three provisions in the Jobs Acts that affect how entrepreneurs can increase their access to capital. The first one that went into effect almost 2 years ago, because basically, the law went into effect and then it had to go to the SEC, and then the SEC has to then write the exact rules and regulations, so that takes time. Then, they’ve been rolling those regulations out over the last 3 years. In the US, first, about 2 years ago, accredited investors, or individuals with more than a million dollars of liquid net worth were able to being investing through crowdfunding online, and that has now funded well in excess of a billion dollars worth of startups and small businesses have now been funded through that channel in the United States.

John:

Wow. Let’s just take a second on that. Congratulations. I mean, I wasn’t expecting that to be that big in that short amount of time. That’s an amazing accomplishment in 3 years. A billion dollars, that could never have been …

Jason:

Well, it’s the accomplishment of a lot of entrepreneurs who have worked really hard to raise that money. It’s a testament to the fact, because people, a lot of times people say, “It’s too hard to do this. You can’t raise money online. People aren’t going to invest in strangers. People aren’t going to do these things.” There’s a lot of things we’ve learned. There were a lot of naysayers all with this process, even after the bill passed, saying how it wouldn’t work and it couldn’t work. The fascinating thing I’ve learned is if you give an entrepreneur an opportunity to raise money for their businesses, they will do what is required to raise that money, and I think it’s also really important for your listeners to know that crowdfunding is, I always say, raising money for business is always difficult. Crowdfunding is not an easy way to raise money, it’s just a new way to do a difficult thing.

John:

Oh, I like that. We’re going to tweet that out. “A new way to do a difficult thing.” To me, it seems like what you have been able to accomplish with your other people that you did this with, with this new law is you laid down the railroad tracks where there were no railroad tracks, and now it’s up to people to get on a train and take the ride, but they couldn’t take the ride if the railroad tracks weren’t there. Is that a good analogy?

Jason:

I think that’s a good analogy.

John:

Okay, great.

Jason:

I do. I think that, and the work that we’ve done, we’ve now worked in 35 countries around the world around these issues around entrepreneurship and providing access to capital. The UK and Australia were the first 2 countries to really make this possible. The US followed behind, and it’s really the UK and the US leadership on the issue, which is sort of, and the economic needs of different countries, who need to stimulate entrepreneurship and innovation and stimulation job creation are recognizing the fact now that these sorts of laws must be enacted. We’ve had the privilege of working with different securities regulators, and different government ministries and organizations on trying to think about how do you create the right regulation, and the ecosystem to enable these sorts of crowdfunding opportunities to exist in other countries.

John:

You know, it’s so interesting to me that the UK was a little bit ahead of us, and I heard on one of your Bloomberg interviews that you said that the UK is actually a little bit more sophisticated than the US, and I think people think Silicon Valley’s the heart of everything in the world when it comes to startups, and being ahead of the game. What is it about the UK that makes them slightly more sophisticated or substantially more sophisticated, I’m not sure, than the US, when it comes to crowdfunding?

Jason:

It comes down to the regulators attitude about it. The regulators in the UK, so the UK industry went to the regulators and said, “Here’s what we want to do. Here’s how we want to do it. Can we? And the regulators worked with them over a period of time, they built trust, and they said, “Yes, let’s do this, but you have to keep us in the loop. We have to know what’s going on, and if things go wrong, then we’re going to shut it all down.” They took a “can do” attitude and they took a very proactive attitude, the regulator did, in allowing this to take place. But in the US, the SEC was very clear that absolutely nothing could take place until after they had completed all of their rulemaking, and there was absolutely zero desire on their part to enable any sort of testing or piloting of these programs. The other thing that’s really made the UK more sophisticated, and there’s certainly ample opportunity for the United States to join this sort of direction, they’ve created tax incentives for individuals to invest in startups and small businesses, very substantial tax incentives, like if you have gains on your investments in small businesses or startups are tax free. You can write off your tax losses for investments.

John:

It really reduces the risk, doesn’t it? That’s what I’ve understood.

Jason:

It reduces the risk, and it also, it doesn’t eliminate you losing the money, it just says that the government is not going to hit you over the head. It’s going to allow you to recognize that loss in a substantial way. Also, just enabling the fact that the UK treasury department has a study that came out in July that said that 70% of small businesses that raise capital and crowdfunding increase their sales. Why? Because when you turn your customers into investors, they become your best brand advocates.

John:

That’s so great. “Turn your customers into your brand advocates,” right?

Jason:

Right. Then, also they said that 60% of those businesses added employees, so it absolutely does create jobs in the country.

John:

Yes. Well, there’s so many things that I want to ask you about. I want to have you talk to us, you’re involved with 3 wonderful things. You’re the co-founder of the UC Berkeley program on innovation, you’re general partner at this Crowd Capital Venture Fund, which I’m guessing actually invests in startups, and then finally, you’re a venture partner at Vector Ventures, which is based in Hong Kong. I know you’re really involved. You’ve been to Malaysia and everything else around what’s going on around the world. Pick one of those 3 things and let’s take a little dive into one of those.

Jason:

Sure. The opportunity with Crowd Capital Ventures is really an opportunity for us to invest in what we call the “ecosystem of crowdfunding.” We’re just making investments in the space that really trying to foster 1 of 5 sectors in the crowdfunding ecosystem. It’s not us investing in businesses that are raising money on crowdfunding platforms. It’s us investing in the infrastructure that makes crowdfunding work.

John:

Ah, the railroad tracks again.

Jason:

Yeah, the railroad tracks again, absolutely. Number 1, the crowdfunding platforms, and the secondary markets. Sector 2 are trust and transparency tools, so that more people can engage in the market. Sector 3 is data and analytics companies, so they can turn all this mountains of data into actionable information on these platforms. Sector 4, the money transfer, and this is where the block chain is going to intersect with crowdfunding. How do you move money between individuals and across borders? Then, the 5th is the white space.

John:

Let me just ask about the block chain a little bit. Is that Bitcoin and all that kind of stuff a little bit?

Jason:

Exactly. It’s how do virtual currencies like Bitcoin, interact with crowdfunding? How do you use those sorts of things in raising capital, and moving money in a lower friction way? How do you use the block chain to enable more trust between two parties who don’t know each other?

John:

Right, and then the 5th one was white space, you said?

Jason:

White space, which is just, I mean there’s is much innovation that has occurred in different industries that we never dreamed up until they were possible. You know what I mean? For example, if someone had told you 10 years ago that you were going to use a device called a smartphone to call a stranger to come pick you up in their car, take you across town, and then it was going to be charged automatically to your credit card, I mean, I would have said you’re crazy.

John:

Or, Airbnb. That’s the one that most say, “That sounds insane. I’m not letting strangers in my home.”

Jason:

Right, and now it’s a multi-billion dollar business. Those are the type of white space opportunities that will exist in this market, as well.

John:

Nice. All right, so what’s going on with … You’re such an expert in this, Hong Kong and Malaysia, and China, and how can startups learn from that, and do those international companies, whether it’s the UK or Hong Kong, do they ever invest in crowdfunding things going on outside of their country, or is it strictly pretty much local?

Jason:

That’s a great question. I think that there’s a couple of things to think about that. What’s happening in Asia, there’s a lot of movement across Asia into enabling crowdfunding. In China, in mainland China, crowdfunding both on the debt and equity side, so when we talk about crowdfunding, we talk about equity crowdfunding, or exchanging shares for capital, as well on the debt side, I see people call that peer to business lending, or peer to peer lending. That’s what we call debt-based crowdfunding. Both of those markets in China have exploded over the last 3 years, even though there’s no regulation around either of those markets yet, in China. The government says it intends to regulate the market in 2016, but the markets are multi-billion dollar markets already today. Korea has, earlier this year, legalized equity crowdfunding. We have Malaysia that has already legalized equity crowdfunding and that will launch at the end of this year.

Singapore is studying how to launch equity crowdfunding by the end of the year. Thailand will launch equity crowdfunding by the end of the year. Other countries are starting, as well. Hong Kong is moving fairly slowly compared to its neighbors. It seems to be moving very, very slowly on this, and probably will be one of the last markets in Asia to enable equity and debt crowdfunding, but certainly others in the region are moving quickly. There’s a lot of activity because the need for job creation, the need for entrepreneurship development, innovation development, is very high in that region.

John:

Do they only invest, like let’s say Malaysia, those crowdfunding, do they only fund founders that are based in Malaysia, or are there opportunities for other people in other countries to get access to that?

Jason:

I guess I’d say I’ve got a couple of answers to that question. Primarily, people tend to fund things in their own country, and the other thing that the statistics are telling us so far is that most of the investors, the Kickstarter and other product pre-purchase crowdfunding, people are much more willing take a risk on a $75 or a $100 item that they’re pre-purchasing. Obviously making a $5000 or $10,000 investment is a very different mix of decisions. What we’re finding is that early on, and I like to say we’re sort of at page 60 of a 1000 page novel when it comes to this market, so we’re still very early on. Then, people are investing in businesses of someone that they know, or someone who they know they know. Like, first or second degree LinkedIn connections. That’s really where primarily the investors are coming from today.

What we need are these trust and transparency tools that I talked about before that will allow people who might be your third degree LinkedIn connections, or unaffiliated to you, gain enough confidence to make those sorts of investments at distance. I would say that there is capital from other countries that are looking for investments in the US, however, those investments tend to be large companies, brand names, established organizations, rather than startups. I think that primarily, the focus really should be for startups here in the US to be looking for investors here in the US.

John:

Right. What’s interesting is, I love this analogy you gave that we’re early on, we’re on page 60 of 1000 page novel, I believe you said?

Jason:

uh-huh (affirmative)

John:

That’s a great example for everybody listening of what great storytelling is. Instead of just staying we’re early on, you created an image, so instantly we can see a book that’s 1000 pages, and we’re only on page 60. That resonates. That’s what you do when you make a successful pitch, and I think that’s a great example. I want to thank you for that, because it comes to you somewhat naturally, I’m guessing, but it’s not a skill that everybody has, and it’s part of the reason you were able to get this incredible feat done that has been undoing something that’s stayed the same for 78 years. It’s that kind of storytelling, people, that allows people to see your vision and see what’s possible before it happens.

Do you see, as we get further in the book, to keep that analogy going a little bit, like let’s say we’re on page, I don’t know, 500, that eventually down the road, let’s say someone’s been really successful here, and they want to take their idea to another country. Like, for example, Uber has certainly grown globally really fast. Do you see the day that when they want to open in Hong Kong that some Hong Kong crowdfunding would be funding Uber because it’s been proven in the US?

Jason:

Yes. I think that what we’ll see, broadly speaking, I think in the next 5 to 7 years, we won’t talk about crowdfunding anymore. It’s just going to be funding. It’s just going to be the way businesses are funded, because what we’re also seeing is the hybridization of funding. By that I mean, entrepreneurs who are using sites like Kickstarter or product pre-sale websites as a way to prove that they have a customer for their business, for their product. Then, with that proof of, “I’ve got 500 customers,” the conversation they have with angel investors is very different than if they go to an angel with a prototype, because they’ve already got customers. “People paid me money for this.” It gives you significantly more power in that conversation that you had before. Then, what we’re seeing sometimes is angel investors might say, “Look, we’ll match whatever you’re able to raise through an equity crowdfunding website,” so there’s an ability for angels and the “crowd,” today, that’s the accredited investor crowd, to be able to make this happen.

Another way that this hybridization of funding is taking place is one of the challenges with angel investors was angel investors acting alone. It’s a very difficult model, that’s why angel groups were formed. One of the challenges with angel groups is the friction is very high in actually completing a transaction. I’ve got to schedule a dinner, I’ve got to show up, I’ve got to listen to 3 entrepreneurs, I’ve got to get some emails back and forth, look at some documents, and sign a paper, and wire a check, and it’s just very, very, high friction. What we’re seeing are angel groups are beginning to use this technology of online funding in a private way, or even publicly, to be able to fund deals faster. It just saves a lot of time for the entrepreneurs, and it saves a lot of time for the investors. The nice thing about these platforms is it also provides a lower point of entry.

Typically in the US, angel groups require you to write a check of 25,000 or $50,000 as a minimum to make an “angel investment.” If you’re new to this world, even if you have a lot of money, that may seem a little steep as an experiment, but if you’re able to use a crowdfunding site, crowdfund investing site, like OfferBoard or Seedinvest or CrowdFunder or others, you’re able to say, “Oh, I’m going to go and look at” … “Maybe I’ll just make a $5000 investment, or $10,000 investment.” That allows me to try this out at a lower price point, gain experience, and then move up to more traditional sizes of angel check writing.

John:

I love that. You know, once you have that social proof, that hybrid you were describing, the matching, if angel’s are going to feel a lot more comfortable matching if they can see a lot of other people through crowdfunding coming in, and getting to 50,000 then their 50,000 doesn’t feel as risky because even if it’s 10 people putting 5000 in, it’s still 10 other people who have validated this and think it’s a good use of their money.

Jason:

Yeah. I mean, what we’ve seen over and over again is people talk about the fear of fraud, and look, fraud’s a very real thing and we have to do everything we possibly can to guard against it, but when we look at the data of the amount of fraud that’s taken place through crowdfunding, it’s an incredibly, incredibly small number. One study from the Wharton Business School found that they looked at all the Kickstarter campaigns that have happened, and there’s now been over 85,000 of them, and there has been less than one-tenth of 1% of those campaigns that were proven to be fraudulent. I’m going to say that again. Less than one-tenth of 1%.

John:

That’s pretty low risk.

Jason:

It’s a tiny, tiny number.

John:

Yeah, that’s great. Well, before I let you go, I want to ask you about your book, “Crowdfund Investing for Dummies.” What a great …

Jason:

Our friends like to joke that it’s really “Crowdfund Investing by Dummies.” Should have been the title.

John:

Nice friends.

Jason:

We wrote the book, Wiley, the publisher of the “For Dummies” series came to us, and after the passage of the bill and just thought it’d be an interesting topic for entrepreneurs, and we were thrilled to be asked, and so we wrote the book, and it’s been out now for a while. It’s available on Amazon, electronically, and also in physical form, and other booksellers, as well. What it provides is some very tactical, practical suggestions about how entrepreneurs should be thinking about raising money, and they’re are also some sections on the book for investors, for people who are considering investing through this new mechanism, because it’s important for investors to know that anytime you invest in a startup or a small business, it’s a high-risk investment, and you should only put a very small portion of your capital to work through that particular asset class. It’s a portfolio play, and you want to spread your risk among a lot of different types of assets.

John:

That’s great. We’ll definitely put the link in the show notes for people to click and buy it right away, because anything you write I’m sure is worth the investment. Are there any other books, Jason, that you really like to have founder buy, either about life or business?

Jason:

Well, I mean, I think one of the most important books that I’ve read in the last year has been a book by Judy Robinett about the power of connecting, and just the importance of this concept of networking kind of has an “ick” factor about it. It sounds very mechanical, and it sounds something that’s not authentic. I think one of the things about Judy Robinett’s book is it really takes the “ick” out of networking, and it really is an important book for every entrepreneur to read, because it talks about how you can utilize your network, connect authentically, deliver value to your network, and then receive value in return. I just think that it’s a fantastic book.

John:

It is. It’s called “How to Be a Power Connector.” I’ve had the privilege of having Judy on the show, and we are happy to promote her book again. It’s a fantastic book. She works with founders on how to get funded with her “Crack the Funding Code” program. There’s lots of valuable information around Judy Robinett, her book, “How to Be a Power Connector.” We’ll put that link in the show notes, as well. Jason, how do people follow you on social media? What’s the best way to keep track of your latest interviews, and blogs, et cetera?

Jason:

Sure. My Twitter is crowdcapadvisor, @crowdcapadvisor. Then, our website is TheCCAGroup.com. Both of those have a lot of resources available from them, and happy to stay connected both ways.

John:

Fantastic. Jason, it’s been a pleasure having you on the show. Thanks for sharing that amazing story about being in the Rose Garden, and congratulations. I know that we’re only on page 60 of our 1000 page book, so I can’t wait to see what next chapters bring, and what a great impact you make on the world.

Jason:

Thank you so much for having me. It’s been a pleasure.

John:

All right, great. Bye. Thanks for listening to “The Successful Pitch” podcast. If you like the show, please go to iTunes and write a review, and encourage your friends to write reviews, too. It really helps to get the word out. People say that the longest distance is between someone’s mouth and their wallet. People can tell you they’re going to invest, but when it comes time to write the check, they don’t do it. How do you get people to say “yes” and then follow through? Visualize yourself on the left side of a river bank, and you have to cross the river, and on the other side of the river is where the funding happens. First, you make up your idea, then you make it real, then you make it reoccur. Once you start dipping your toe into the water to get to funding, that’s where I can help.

I get you across that river faster than you would on your own, with a lot less frustration than you will get when you hear a bunch of “no’s,” and you don’t know why. If you want some help getting funded faster with less frustration, go to my free funding webinar, SellingSecretsForFunding.com/webinar, sign up and get in-depth information on how you can get funded fast. Thanks.

TSP041 | Alicia Robb – Transcription

Posted by John Livesay in Uncategorized | 0 comments

John:

Hi, today’s guest on The Successful Pitch podcast is Alicia Robb, who is a Senior Fellow at the Kaufman Foundation. She has her PhD in Economics, and she worked for the Federal Reserve Board. She talks to us today about what it’s like to work with the Co-founder of Portfolia, where they have created a rising tide fund, based on Alicia’s book, Rising Tide, where they have 99 women in this organization. Nine of those women are expert angel investors, helping the other 90 women learn how to become Angel investors, and then they work on finding Founders who are either female, or have a diverse founding team, get funded through their angel Investment firm. She talks about how important it is to know your numbers, especially when you’re talking to somebody who has a PhD in economics. Also, passion is extremely valuable, because they want to fund someone who has passion for what they’re doing, and knows what they’re doing. Enjoy the episode.

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Hi, and welcome to The Successful Pitch podcast. Today’s guest is Alicia Robb, who has her PhD as an economic professor, and she is a Senior Fellow at the Kauffman Foundation. She’s also worked at the Federal Reserve Board. The Kauffman Foundation has $2 billion in assets, and has a focus in education and entrepreneurship, so we’re really excited to have Alicia on the show today. Alicia, welcome.

Alicia:

Thank you. Great to be here.

John:

I always like to ask people about how did they get started? Did you know as a young child that you wanted to get your PhD in economics?

Alicia:

I didn’t. I did go into college, well it’s funny, quick story, went into college with a major in Multinational Organizational studies, which is International Business and Development, with a language focus. I went home at Christmas one year, my dad said, “Gosh I don’t know what that is. What’s your minor going to be?” I said, “Peace and Justice studies.” He’s like, “No, absolutely not. Go do something practical.” I ended up minoring in economics, which then I ended up majoring in economics, when I saw that everything we do is related to economics, From then on, I went to get a Masters, and a PhD.

John:

Wow. You make it sound so natural and effortless. Was there any stops in between the masters and the PhD program, or …

Alicia:

No, I went straight through.

John:

Wow.

Alicia:

I started grad school a little too early, so I quit and worked for an economic consulting firm for a couple years, and then I ended up starting again at University of North Carolina in Chapel Hill and went through the whole Masters, PhD at the same time.

John:

What was your thesis on for your PhD?

Alicia:

I actually looked at the impact of race, gender, and discrimination, on business performance in the United States, looking at how to measure and see what was driving the under-performance of women and minority owned firms.

John:

What conclusions did you find?

Alicia:

That was a long time ago.

John:

Oh, sorry. I don’t mean to test you, but …

Alicia:

I’ve done similar research, that’s been my research stream over the last 20 years. A lot of it is around financing, financial capital, and others are just not having the same levels of startup experience, industry experience, management experience, that can help you as an entrepreneur later in life.

John:

Those early experiences in education continue to be a key criteria whether you’re going to have a shot at this, yes?

Alicia:

Mm-hmm (affirmative). Yeah.

John:

What made you want to go work for the Federal Reserve Board, and what was that like?

Alicia:

I was finishing my PhD, and I had decided not to go on the market. They contacted me because of my dissertation, using census data, and looking at women and minorities, and financing. They actually wanted to interview me for a specific position there, working with the survey of small business finances. They actually recruited me, and so that wasn’t a difficult decision.

John:

I’ll say.

Alicia:

It was a great job, and great opportunity, and so I managed to finish and go right to the Fed in a pretty quick turnaround.

John:

What’s the one thing that people would be surprised to learn about working for the Federal Reserve?

Alicia:

I was at the Fed during the Greenspan days. I don’t know.

John:

Is it bureaucratic? Is it a bunch of PhD’s?

Alicia:

Is it bureaucratic? It is bureaucratic, and that’s one of the reasons I left. Yeah. They have a lot of issues there, and it was not the right fit for me. One of the great things about working for the Fed was working with 200 amazingly smart economists, and being able to just go to any door on your floor, and ask somebody a question, and someone would know the answer, because there’s just a whole bunch of really smart people working there. I’m hoping with Janet Yellen’s leadership, They will do bigger and better things, because it was quite a disappointment from … What’s the previous two chairmen?

John:

Is it a constant conversation about interest rates, and inflation?

Alicia:

It is with the macro people. I was actually in the micro group, so don’t ask me anything about interest rates, or …

John:

Okay. Fair enough.

Alicia:

I’d be guessing.

John:

I do want to ask you your opinion as someone who is a specialist in economics, separate from the Federal Reserve Board is, “Do you think we are in a tech bubble?” That’s all on the news, whether it’s on Vanity Fair, or all kinds of articles everyone’s reading about. What are your thoughts on that?

Alicia:

It depends on what you mean by tech bubble. I worry about some of the valuations that we’re seeing with some of these companies that are not profitable, let alone even having revenues, and I’m just not seeing the core value, that these valuations seem to be reflecting. I worry a little bit about that. No, I have hopes for the country and the world, because we are incredibly innovative, and I do think technology is driving a lot of positive, good changes, going forward. Just worried a little bit about the over-hyped valuations on some of these companies.

John:

Tell us, if you will, about what it’s like to be a Senior Fellow at the Kauffman Foundation, especially with your specialty in Entrepreneurship?

Alicia:

I ended up going to Kauffman because of my work with the Survey of Small Business Finances, and Small Business Finances translated into Entrepreneurial Finance, and they hired me to be the principal investigator on the Kauffman Firm Survey, which is “Longitudinal Study of Startups,” that we tracked over 8 years to try and better understand firm dynamics, financing, innovation. It was right smack in the middle of the economic crisis, so looking at how that crisis impacted small and growing young firms. I’ve been with them for about 10 years now, and it’s just been the most amazing experience. Ewing Marion Kauffman was a rags to riches, successful entrepreneur, that started Marion Labs, and ended up selling it later in life, and set up this Foundation to promote a more entrepreneurial economy, and create an enabling environment in ecosystem, where entrepreneurs could thrive and everyone could achieve the dreams that they wanted to. His focus was really always on education and entrepreneurship, because he saw those as the two channels that would allow for anyone to achieve their dreams.

John:

I love it. What are some of the success stories that you’ve worked on over the last 10 years?

Alicia:

I think we better understand early firm dynamics, and we understand the need to have timely, useful data, on firms and their owners to better understand challenges that they might face. I’ve since wrapped up the Kauffman Firm Survey. That ended in 2012, but we’ve gone on to now partner with the Census Bureau to annualize their survey of business owners. Now it’s going to be called the Annual Survey of Entrepreneurs. It’s going to be the first time that we have annual statistics on firms and their owners, but it goes into very detailed information from these owners on their financing, adherence or credit market, experiences, the challenges that they’re facing. We’re going to have a much better picture of entrepreneurship in our country, and what we can do to enable them to overcome barriers and challenges, so that we can help them grow.

John:

I loved it. Have you explain a little bit about one of the challenges around getting funded, because we’re all about trying to help people with their pitch, and finding the right investor. Has the research shown that it’s easier to get funded now that it was 10 years ago? How important is it for entrepreneurs to realize that they need warm introductions to investors, anything along those lines?

Alicia:

It’s definitely easier than 2008, when we had the crash. It’s important to note that very few firms actually get equity financing through venture capitalists, or angel investors. What we hear all the time is, venture capital backed firms,” but it’s 4,000 or 5,000 deals a year. That’s a tiny, tiny, fraction of firms. There was about $50 billion in 2014 that went to companies that raise venture capital, which was a huge increase over the previous year, which was more like $25 billion. The reality is that was still only 5,000 deals, whereas, angel financing is about $25 billion in funding last year, and that went to about 75,000 firms.

When firms, especially young firms, and startups, are thinking about accessing financing, the reality is only a small fraction actually get any equity financing, and it is really the friends, the family, your owner equity, that you put in, that are driving it. To a large extent, banks are providing debt financing. Now with crowdfunding, we’re seeing more opportunities for alternative financing. There’s a whole host of platforms that are providing debt equity. A lot of entrepreneurs are using crowdfunding platforms like Kickstarter, or Indiegogo to get non-dilutive capital to show market fit and product traction, that’s going to be attractive to banks and angel investors, and venture capitalists, down the road. We’re seeing a whole host of new opportunities for young companies to get financing.

John:

That leads right into what you’re doing with Portfolia, which I’ve read has been described as a better design angel list. Would you talk about that?

Alicia:

Portfolia is a equity based platform, where companies can raise equity from an investor community. I’m actually working with Portfolia to launch a angel fund and training program to drive more diversity in angel investing. This first project, The Rising Tide Fund, an angel trading program, I’m doing in partnership with Trish Costello, the Founder and CEO or Portfolia, where we’re going to bring together 99 women investors to have a fund where we pool our money together, and make 6 to 8 investments of $100K to $200K, in young companies. Of the 99 women, 9 are experienced successful angels with great track records, and 90 new and emerging angels that want to learn about angel investing, and how to do it, how to do it well, how to add value to the companies, and learn while investing, so they can hopefully go on and become really successful angel investors down the road.

Portfolia is focused on women led companies, and building a community of investors, women and men, that want to see more capital going to women led companies. Our program, The Rising Tide Fund, is not specifically targeting women led companies, but obviously, we know the research and know the diverse teams do better. We’re going to be very cognizant of that fact, and look for diversity in the founding teams of the companies that we fund.

John:

There’s so many great bits of information you just gave there. Let me start with the first thing, which I really am fascinated by, which, if I understood you properly, the 99 women that are in The Rising Tide Fund, 9 of them are experienced, and they’re going to be training the other 90, on what it takes to be a good angel investor. Is that accurate?

Alicia:

Correct, exactly. Although I will say some of the 90 that we have are pretty experienced in their own right, but the idea is a lot of them are new and emerging angels, who don’t have a lot of experience, that are looking for advising and mentoring by people who have done it successfully in the past.

John:

It’s a startup that’s helping people become investors, so that they can help other startups. It’s just so full circle. I love it.

Alicia:

It is a virtuous circle, because the more women angels we have, the more that ultimately women entrepreneurs are going to get funding, and become successful entrepreneurs, and then become angel investors, investing back into companies, themselves, after their exits. We need more women on both sides. We need more women investing, and we need more high growth women entrepreneurs, so this is a way that helps build that ecosystem.

John:

When women or other people who are part of a diverse founding team, come to pitch The Rising Tide Fund, and they’re looking for $200,000 is there a framework that’s a reasonable equity to give up for that dollar amount? Is there a ballpark figure, or a range that you give people?

Alicia:

No, because it really is case-by-case, and depending on where they are in their stage of growth. There are several firms that are very early stage pre-revenue, and that’s going to look different than companies that already have shown some product traction, that have revenues, that have a growing client base. Depending on where they’re at, that determines what the term sheet ends up looking like.

John:

Let’s say somebody who’s pre-revenue, but they have a good team, and they have a working product, is it typically, for $200,000, you tell them, “This obviously isn’t going to last you a year and a half, or anything, so you’re going to need to find other people to add to this round.” Is that the kind of thing that you like to work with them on?

Alicia:

For this fund, in particular, we probably will be syndicating with other angel groups. All of the 9 women are part of 1, or 2, or even 3, angel groups in the cities and states where they live. A lot of these deals are going to be in the $500,000 to $1 million range, so late seed, early A, and so we will be syndicating with other groups. Yeah, it is important for companies to realize that they have to think backwards from their end goal, because if you raise too much, and need to go on and raise more, then even a higher valuation, it really limits your exit options. Really thinking through what the next 5 to 10 years looks like, and working backwards to your first round of financing, is very important.

John:

I so agree. I’d love to have you talk a little bit about that, that whole concept of reverse engineering, if you will, and think backwards, which is, “How are you going to get these investors 3 to 5 time return on their investment in 3 to 5 years?” You need to have some concept of what your exit strategy is, even when you’re pitching for $200,000 to an angel? Is that right?

Alicia:

To realize that it doesn’t necessarily need to mean giving up equity. There are definitely firms, if you look and the Inc. 500, the vast majority of them never raised equity financing, and so it’s not necessary that you have to give up equity, in return for funding. If you can build a consumer base, if you can generate enough revenues to use your retained earnings, to feel your growth, or you can use debt financing, either through bank loans, or from crowdfunding, or you can use Kickstarter, or Indiegogo to launch your product base, and then use the funding from that revenue stream to fund your growth, you could get to a really, really, big company and sell it for a huge amount. That gives you a far better return than you ever could have gotten if you took the equity financing. Realizing that there are lots of ways to grow a big company, is really important for startups. It doesn’t mean you have to raise angel or VC financing.

John:

In the case of Rising Tide Fund, for that investment, and from Rising Tide, there would be some equity that investors would give, correct?

Alicia:

Of course. There’s this huge controversy, do you do convertible note, or do you do equity. In terms of the funding that we’re going to be giving, yes, we’re going to be looking for equity in return for that investment. We may be doing an initial term sheet that’s a convertible note, so that we don’t have to do that valuation right off the bat, and we can do it at a later stage, or we may ask for a certain amount of equity at a given valuation, at that time, but certainly yes. The kinds of investments that we’ll be making are high risk, and we want an equity stake in return for that investment.

John:

Of course.

Alicia:

The other great thing about The Rising Tide Fund is we don’t just offer a financial capital, we have 99 amazing women with diverse industry, and sector expertise, and entrepreneurial experience, and so forth. We have a lot of potential to add value in terms of the human capital that comes behind that money, as well.

John:

That’s everything, the connections, the experience, the possible people on your advisory board, all of that really is so incredibly … The key to a startup being successful is surrounding yourself with people who know what they’re doing, and fill some skill sets that you don’t have.

Alicia:

Exactly. It can’t just be your co-founders, it also has to be a broader network of investors, and advisors.

John:

Is there any advice you have for people pitching a rising tide fund? What do you think makes a good pitch, or are the kinds of things that you are looking for in a founder from a characteristic standpoint?

Alicia:

We’re looking for, obviously, the scalability that going to be necessary to offer us returns that are going to be attractive for our investment. Having a very good sound understanding of the market and the financials is going to be key. We’re sector agnostic. We have lots of different sector expertise among our 9 and our 90, so we are focusing on leading deals is a few sectors, but we’re pretty much geographically and sector agnostic, with just a few exceptions.

In terms of looking for a pitch, the way to get into finding out if you’re a fit for the fund is looking at the 9 lead angels on nextwave.ventures’ web site, that’s just nextwave.ventures is the web site URL. Looking at the 9 and figuring out who they are, which angel groups they’re associated with, and getting in through them, because they’re going to be the ones bringing the investment opportunities to the Fund. They’re the ones going to be leading due diligence, and ultimately making the investment decisions. In order to get in to see them, you need to find your way into one of the 9, and then register on Portfolia’s web site.

John:

That warm intro, and doing your homework, and really knowing what those 9 core women are like, what they like to invest in, possibly even talking so some of the other companies that they’ve invested in, to get some insights and advice, all that really sets you apart, don’t you think?

Alicia:

Exactly. Definitely.

John:

You said you’re geographic agnostic, which I love … I’ve read that angels tend to like to invest in people who live within 150 mile radius of them. Is that the case for Rising Tide, or not so much?

Alicia:

When we designed the program, we designed it just specifically so that we’d be geographically disperse. We have women in our 9 and our 90 across the country, everywhere from Texas, to Kansas City, to Boston, and New York to DC, to Florida, to California, and I’m in Boulder, Colorado. We’ve got the states pretty much covered. Angel investing does tend to be local, and that’s one of the things we’re trying to change, in building a community, and a network, where we can collaborate with people on the ground that are closer to our portfolio of companies. There’s a lot of great opportunities that are outside Silicon Valley, that are not necessarily getting funded, and we want to change that.

John:

That’s great. I know you’re the numbers expert, but I want to ask you a non-numbers question about what you think is important in a founder from a standpoint of being coachable, an agile learner, obviously confident. Is there anything else along those lines that you would give advice to the listeners about, when they’re pitching, in particular?

Alicia:

Passion is over used, but it does get at that idea of, “It’s hard to be an entrepreneur.” That’s the reason 9 out of 10 companies end up closing. It’s not easy. It’s not always sexy. It’s rarely sexy. It’s not always fun, and it’s really hard. It’s especially hard on the capital side, because you’re going to hear “No,” 99 times out of 100. That rejection’s tough. That whole idea of really passionately believing in your heart that this is something that has to get to market, that has to grow, that has to be successful, and you’re just willing to do whatever it takes to get it there.

That said, we want to see it being backed up with solid knowledge of your market, solid knowledge of the financials, and a plan of how you’re going to get from point A to point B, over the next 5 years. The passion’s not enough. You also have to have all the other tools to get you through.

John:

With everything being equal, people tend to invest in the person with the passion, because it’s all about the jockey, and not necessarily just the horse, right?

Alicia:

Exactly.

John:

When you talk about the plan …

Alicia:

You need products, you need some products.

John:

Do you also look for things that determine whether this is the team that can execute the plan, and look at their track record as a key criteria?

Alicia:

Definitely, and that’s where non-serial entrepreneurs can be at a disadvantage, because you don’t have a track record. Being able to understand what your strengths are, where your weaknesses are, and building that team that compliments your skill set, and having those things covered, shows a level of understanding and maturity that is a great signal. I don’t want non-serial entrepreneurs to be too discouraged, because it is … If you have a great idea, and you’re very passionate, and maybe you don’t have the whole team yet, but you know what you need and you can reach out to your investors and advisors to help you fill the gaps, is definitely a road to success.

John:

I also feel that having a story of showing your skill set from a different experience, working for another company, whatever, even if you don’t have a serial entrepreneur background, but you have skills, that show you can execute something, that those skills are transferable to your new startup. If you can craft a story that shows potential investors that you have the skills to execute something, even if it’s not from another startup, that, that is also really important to bring up.

Alicia:

Definitely.

John:

Terrific. Alicia, are there any books that you recommend people who are getting into the startup world, read either about, of course, the numbers and the market, or just about life in general?

Alicia:

There’s so much information out there, it’s information overload, I love … The Kauffman Foundation has its Founder School, and there’s just tons of videos, and so forth of insights from successful entrepreneurs. Startup grind has their library of videos, and so forth. There’s so many books out there, I don’t even know where to start. Things around the lean startup, and the startup communities, and so forth, are all good starting points. Just getting involved with your startup community, whether it’s a startup grind chapter, or One Million Cups, which is a Kauffman initiative, there’s meetups and so forth, all around the country, and it’s so easy to just become part of that community, and learn from your peers …

John:

That’s great.

Alicia:

… and those that are successful entrepreneurs, the recommendations that they give you will be just as good, if not better.

John:

We’ll put the links to the Kauffman School videos on the transcript, on the show notes. Tell us a little bit about One Million Cups. I think I know what that is, it’s such a great title, I’d love to have you explain it real quickly, if you would?

Alicia:

Yeah, the idea was that, “Great startups are built over a million cups of coffee because you never sleep.” It’s a Kauffman initiative, and there’s now 40 or 50 chapters across the country. It’s every Wednesday, at 9am, local time, and it’s usually 1 or 2 entrepreneurs come and present their current, or latest challenge and get feedback and thoughts from the startup community. It’s a great way to meet other people that are involved in the startup process, find employees, find investors, find advisors, and help companies get over some of their pain points.

John:

And generate some revenue for Starbucks.

Alicia:

Exactly,

John:

Alicia, how can people follow you in social media, and what other recommendations do you have for people reading your blogs, or anything else that you want to promote?

Alicia:

Yeah, I’m just AliciaRobb on Twitter, and then most of my blogging I do on Forbes, so if you just type in my name at Forbes, all of my blogs will come up, and you can just follow Kauffman’s account there. That’s who I blog through. You can find me on Twitter, or LinkedIn, so happy to help and chat with anyone who’s starting a Company, and looking on how to grow.

John:

Thanks for sharing your incredibly interesting background, and your insights, and I just think what you’re doing with Portfolia, and The Rising Tide Fund is exciting to get all kinds of people in all kinds of cities, the access and the knowledge to make a startup happen in more than just a few places.

Alicia:

Keep a lookout. We’re just getting started.

John:

I love it. Thanks for being on the show.

Alicia:

Thanks for having me.

John:

Thanks for listening to The Successful Pitch podcast. If you like the show, please go to iTunes and write a review, and encourage your friends to write reviews too. It really helps get the word out. People say that the longest distance is between someone’s mouth and their wallet. People can tell you they’re going to invest, but when it comes time to write the check, they don’t do it, so how do you get people to say yes, and then follow through. Visualize yourself on the left side of a river bank and you have to cross the river, and on the other side of the river is where the funding happens.

First you make up your idea, then you make it real, then you make it reoccur. Once you start dipping your toe into the water to get to funding, that’s where I can help. I get you across that river faster than you would on your own, with a lot less frustration than you will get when you hear a bunch of “Nos,” and you don’t know why. If you want some help getting funded faster, with less frustration, go to my free funding webinar, SellingSecretsforFunding.com/webinar, sign up, and get in-depth information on how you can get funded fast. Thanks.