TSP065 | Stephen Hall – Transcription
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John Livesay:
Welcome to The Successful Pitch Podcast. Today’s guest is Stephen Hall. Stephen works with the Department of Defense that has a half-a-trillion dollar budget. Imagine solving a problem that big that you could tap into that kind of budget. He said, “Imagine it’s basically 10 to 15 Walmarts,” as far as the size of it. He also is very involved with the Pasadena Angels and shares with us what they’re looking for in founders. Someone who’s passionate, someone who has a big problem they’re solving and a recurring business model. But, most of all, it’s all about the team and it’s all about those warm introductions. He said, “A great team can prevent burnout.” Enjoy the episode.
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Welcome to The Successful Pitch Podcast. Today’s guest is Stephen Hall. Stephen is in Los Angeles, like I am, and we were referred to each other by mutual friends, which is always the best way to meet people. Those warm introductions are everything. Stephen is the co-founder of ORockCloud, which is a data security company. He’s also a member of Pasadena Angels. Stephen, welcome to the show.
Stephen:
Thank you John. Thanks for having me on the show.
John:
It’s a pleasure. I always like to find out from people — you have some interesting background here with the Department of Treasury and the IRS, and all these things. You went to USC — tell us when you were at USC. Did you always know that this is the direction you wanted to get into? Being an investor and doing startup stuff in the world of security?
Stephen:
Yes. When I was at USC I had several mentors, one of them is Mr. Ellis which is now the dean of the USC Marshall School of Business, and he comes from an entrepreneurial family. So, I learned early on that I would love to invest in startups or invest in projects that can solve big problems. And that’s what I’m here today to do is I’m passionate about solving big problems and taking an idea from literally an idea on a napkin to artilization, whether it’s through the federal government or through the private sector.
John:
I love that. Do you have any examples, right off the get go, Stephen, of something that was a napkin that became a reality?
Stephen:
Sure. So, from an investment perspective, building a real estate portfolio in my career — we built a portfolio of properties, whether it’s rental properties, industrial properties, stores facilities, townhomes, things in that nature. So, to enter that process, it’s just a mechanism of finance and organization with local municipalities to take your vision and execute the vision, and obviously in order to execute it, you also need the private sector to be able to participate and support the infrastructure.
So that’s an example, and also through my career I’ve been an accountant and enrolled agent advising literally thousands of small business owners on how to take their ideas from an idea out of the garage all the way to commercialization, whether it’s products that’s on the home shopping network or chocolates that are in Costco, t-shirts that are sold in Walmart. I mean, you name it I’ve experienced the processes of taking it from idea all the way through — whether it’s a big box, whether it’s Amazon.com distribution, or if it’s a DoD distribution.
John:
I love that image of from a garage to shelf, whether it’s Hewlett Packard or Steven Jobs at Apple. It’s such a great American analogy and I think sort of unique to our culture in a way. What things would you say are the number one or two common pieces of advice you find yourself giving startups at the beginning regardless of what it is they’re trying to do from a financial standpoint?
Stephen:
Number one is making sure you’re passionate about the problem you’re solving. That’s one because it’s a long road to get you the liquidity event of more positive cashflow. Number two is making sure you’re solving a big enough problem to whether there’s a huge need for it.
John:
Yes. So that there’s some scale and ROI for the investors, right?
Stephen:
At both, scale, ROI for the investor, and more importantly you can afford, as an entrepreneur, to staff up, to hire people, just to take some of the burden off your shoulders as you grow, because the biggest challenge is for entrepreneurs or founders is the burnout phase.
John:
Yes. Talk to us a little bit about what that burnout phase is. Does it start from day 1 or does it get — like the trough of despair, I’ve had people talk about that, I’d love to hear your thoughts on the burnout phase and how to avoid it.
Stephen:
I think it’s personality-driven, but I think it all comes down to support. As long as you have good positive support of people around you and a team that are experts in their area, so that what you’ll have to carry the burden, it makes it a lot easier to go from point A to point B.
John:
You know, I’ve heard many people talk about the importance of a team but I’ve never heard anybody connect the dots like you just did, so we’re going to tweet that out, “A great team helps prevent the burnout,” which is so true and something probably investors are looking at in the back of their head is “Is this team going to work together?” Not only to be productive but help each other from burning out right?
Stephen:
Absolutely.
John:
Tell us about the Pasadena Angels. I see you joined that back in 2013. What makes Pasadena Angels different from other angel investment groups and what kinds of things do the Pasadena Angels like to invest in?
Stephen:
Great question. Pasadena Angels are — it’s an amazing network of brilliant people that are risk takers. More importantly, they’re calculated risk takers that are literally experts in every field that you can imagine.
For example, I’ve worked with some angels that are retired patent attorneys that used to do medical device patents, all the way to biochemist from Caltech that can tell you when there’s a new startup talking about Biology. They need them to explain it in Layman’s terms of what the founder is trying to convey to us investors.
So it’s a brilliant group of people that they’re from every skill set imaginable that really collaborate and work together to help underwrite the potential investment sect come through or pitches that we review.
Pasadena Angels has a variety of appetite as far as what you want to invest in. So, what we mean about that is every investor comes in through a different set of lens. So, we’re a voluntary organization, and what I mean by that is every angel has the right to participate or elect out of participating in a specific team.
John:
Got it.
Stephen:
Personally, I’ve been more focused on recurring revenue technology models.
John:
SaaS, kind of stuff?
Stephen:
Yes. SaaS, absolutely. SaaS driven models or a model that solves the problem that orders a need in an industry niche.
John:
Do you find yourself investing in people within a 150 miles of Pasadena? Would you like to invest in those kinds of companies that are in the semi-California area? Is that a criteria?
Stephen:
No, it’s not a criteria.
John:
Oh, great!
Stephen:
It’s not a criteria. Criteria really comes down to the idea itself. I mean the team the entrepreneur has behind them, and that’s really a criteria. Where we live geographically is not a criteria.
John:
Nice. Some angels feel that they only like or comfortable with getting to see the people on a regular basis and I’m glad to hear that that’s not an issue. What is the average range of investment that the Pasadena Angels make and is it important if you guys to be the first? Or do you care?
Stephen:
That’s a good question but I’m going to give you a very broad answer.
John:
Sure.
Stephen:
So, in some cases we’ll be the seed investor, and in other cases, we’ll co-invest with other angel groups on models that are late seed series A opportunities. When I say series A opportunities, what I’m referring to is that the valuations are treated like a seed round, which is always a positive point for the angels to mitigate the risk/reward scenario.
John:
So you guys can be anywhere from, I don’t know, a couple of hundred thousand dollars up to a million depending on what the idea is and where the company is?
Stephen:
Correct. So, for example, there’s one offering right now to where I believe there’s going to be a $600,000 in funding but we’re going to be co-funding with some other angel groups through the distribution channel.
What’s unique about the Pasadena Angels, specifically, is that some of the members of the angels have their own incubation funds as well.
John:
Oh, interesting. Okay.
Stephen:
So they’ll co-invest themselves and eventually plus their funds.
John:
Right. Nice. Oh, that’s great. I’ve never heard of that before. I love that. So, obviously, this show is called The Successful Pitch. So, Stephen, what do you look for when someone comes to pitch at you at the Pasadena Angels? What are the key things that make a good pitch for you?
Stephen:
The key items are: One, is the problem a big problem to solve? Two, based one the problem that we’re solving what’s the size of the marketplace? And three, is the revenue model supporting the problem — is it a recurring revenue model? And finally, four is the team. Who’s behind the team to solve this problem and what are their backgrounds that make this problem exciting to solve? So, that way, the team, when they carry this torch from day one, they’re able to finish the race.
John:
Got it. Finish the race. It is a race. And the best way, I sort of eluded to at the way you and I met through warm introductions. Time and time again I can’t emphasize this enough, for me personally and just everything I see is the importance of your network. I’m guessing that warm introductions are you and the other angels’ favorite way to have people approach you, is that accurate?
Stephen:
Yes absolutely. Absolutely, and also as an angel, sometimes when we see a model of that’s not ready whether or not solving for big enough problem where the revenue model is not in place, we maybe turn down the investment opportunity through the angel network. However, we’ll end up mentoring the entrepreneurs to help them get to the next phase of their evolutionary process with their model. Because so many as entrepreneurs will come back a second or third time and pitch the same model, but then by the third time, they’re seasoned and their experience with what we’re looking for. Then, at that point in time, we may, potentially, invest in their model.
So, just because we say no to some entrepreneurs, doesn’t necessarily mean that we would disengage, it just means that you might want to reinvent what you’re referring to. Potentially, if some of the angels are passionate about the problem you’re trying to solve, they’ll mentor you.
John:
Wow, how great. What is the other project that you’re working on that’s equally exciting? Tell us about what’s going on with Orange Rock and the Cloud platform in particular.
Stephen:
Yeah. What’s exciting is this project is called ORock Cloud, and what we have done is we’ve commercialized a very secure cyber security system, and their main target audience is the Department of Defense.
John:
It doesn’t get bigger than that, does it, Stephen?
Stephen:
It does not, but the Defense’s budget is literally a half-a-trillion dollars.
John:
Oh, my God! Let me wrap my head around that for a second. Okay. Nice, okay.
Stephen:
And we’re by far the largest notary budget globally and by far — The way to look at it is, the Department of Defense is literally 10 to 15 Walmart’s inside of one.
John:
Oh, my God! What you just did there is a great example for all the listeners. If you’re going to talk about something, a problem, a size, I’m always about becoming a storyteller, and you just gave us a reference.
Imagine 10 to 15 Walmarts, to get a sense of how big the DoD is. Boom! Suddenly I get that, but without that it’s hard for me to imagine how big the DoD is, so thank you for that analogy and thank for that example of great storytelling.
Stephen:
You’re welcome. So, what’s nice and exciting about this problem — well, not very exciting, it’s exciting for us to solve the problem but it’s not exciting for us citizens that are all experiencing breaches. For example, locally, at the UCLA breach of some medical records for citizens of Los Angeles have been breached, or your credit card information through Target or Home Depot have been breached, and we’re excited to be able to create a system to minimize the breaches. We can’t guarantee that no one will hack you, but we could definitely minimize the breaches.
In fact, our goal with this system is to be able to protect the highest level of systems of defense, and we’re currently going through the validation phase called FedRAMP, and FedRAMP is the equivalent of the FDA for healthcare. So when you have a drug in healthcare, in order to distribute to a Rite Aid or a Walgreens, you need to get approved by the Federal Drug Administration to be able to distribute to the public. Well, Congress created another department called FedRAMP, and FedRAMP is basically the FDA for cyber security.
John:
Nice.
Stephen:
And we’re in the final phases of validation, we’re in processes we speak and we’re about 60 days away from validation from this agency to be approved to redistribute, to resell our product to every agency in this side of government.
John:
Holy cow! Can you give us a timeline? When did you come up with this concept? Did you get funding to get this far? And when do you hope to get this completed by?
Stephen:
Good question. So, we started the process about 36 months ago, and we self-funded. Us three co-founders have self-funded this opportunity through the seed round of $600,000. In fact, we took down the product twice. We were comfortable with the third version of this Cloud product to distribute to the federal government.
We’re currently in a series A round right now raising $4.5 million, and I have $4 million in commitments and capital raise, and I’m now having a remaining $500,000 to complete in this series A round of financing.
John:
I would imagine that because of your track record and because you’re an investor, and you put your own money in, that the people who are giving you money for the series A are so much more comfortable because everybody has got lots of choices of what to invest in, right? Should I invest in, Stephen and this big problem, who is an investor himself? Because one of the things I love to talk to the listeners about is if you’re a founder, and you can show empathy for the investors, that sets you apart from 90% of the pitches they’re going to hear, don’t you think?
Stephen:
Absolutely. Take it a step further. With the Department of Defense, we’re considered a small business and, more importantly, we have a team of resellers. So we’re choosing the channel resell model so, that way, we can minimize our cost of general and administrative expense.
We have procured some amazing resellers that have 3rd year real Rolodexes within the federal government. A typical contract in this arena is $6 million. So the goal is to achieve through the small business procurement division to achieve at least $7 to $15 million worth of revenue in 2016 strictly from the federal government.
John:
That’s an amazing recoup on your investment. Really, really fast. Obviously that’s a great ROI, right to off the bat. Mostly, people talk about, “Well, it’s going to take me 12 months, 18 months to break even, and then I’ll start making –” you’re off the gate running with those kind of big contracts.
I would imagine that there’s some applications outside of the government. For example, the Sony email hack, right? I think companies like that would be desperate for the solution.
Stephen:
Absolutely. In fact, in London we have three locations. We have a location in Los Angeles, a location in New York. Secaucus, New Jersey, and we also have a third location that’s opening in the next 30, 45 days in London. We have a team of 200 resellers on the ground in London that are ready to go live to distribute our cyber security product throughout the European region.
We forecast our revenues between a — it’s a wide range right now between a million and 10 million. Depending upon the distribution, and the domino effect of the resell network throughout the European region.
John:
One of the things when someone pitches in an angel or series A is talking about your competition, and what makes you unique and the barrier to entry. Can you give us a sense of your competition in this very huge market, but a very niche solution?
Stephen:
Absolutely. The number one competitor would be the Amazon web services, AWS and the Amazon GovCloud. Amazon is a massive company with massive resources. They’ve done a great job being the first to market about seven years ago. As marketplace, they were, in fact, the number one — the first Cloud company to go to scale in the marketplace.
However, Amazon is also a conglomerate. They’re focused in retail, as we all know, life there on entertainment, they’re on pretty much every sector we can think of. They’re not bespoke like we are. They’re laser-focused on solving security at the highest levels of government and that’s our main focus. That’s our main differentiator, is that the way set ourselves. We’re not all things, all people. We’re very focused on just a highest level of security that’s needed.
So, think of it. The best way to think of us is when you store items, you store your kid’s crafts and things to that nature in a box in a garage. But, if you had your grandmother’s picture from 1820 when she was a child, or great grandparents, you may want to put that in your safe deposit box that’s fireproof, that’s irreplaceable items. That’s what you want to think of a safe deposit box of your digital needs.
John:
See, you did it again there. It’s so fantastic for the listeners. I have to make sure that everybody heard what you just did. You gave us a competitive advantage, we’re going to tweet that out, “A laser-focus is a competitive advantage,” and then secondly you took that concept and gave us another story. Imagine if you’re in your garage and you’ve got places to put your kid’s stuff but then you have these family heirlooms, you don’t want them all in the same place, you need to differentiate them, and that’s what having a laser-focus does. And you make a full circle. I see the competitive advantage and I’m thinking, “Okay, why is that important?” and before I can even be wondering about that question, you answer it with a story. When people do that, what you just did Stephen, is the way to get people to say yes to your pitch.
I don’t know if you’ve been trained to do it or if it’s just natural, but since I train people to do it, when somebody does it, it’s like watching Meryl Streep act. If you’ve been an acting teacher you can say, “Oh my God! Look at what she did there and there and there.” That’s what it’s like talking to you. It’s boom, boom, boom. It’s just so great. I love it.
Stephen:
Thank you. It comes from the 20 years of experience and many mentors. I always recommend all the listeners to try to find somebody that you can identify with and get some mentorship, because the mentorship is priceless to get you from point A to point B.
John:
Right. So, that goes right into the whole concept of how important it is to be coachable as a founder, especially, we’re going back to the Pasadena Angels example, if someone comes and pitches you, and they’re not quite ready to problem’s not big enough, they don’t have a good enough story. You like them but not the idea. You’re willing to mentor them but only if they’re coachable, am I right?
Stephen:
Absolutely. In fact, coachability is a key item for my personal underwriting. If an individual is not coachable, I more than likely will pass on the deal just because there’s so many opportunities out there that life’s too short and I want to be able to enjoy the conversation I’m having with some folks versus having to have an adversarial conversation just to get a deal done.
John:
Right. I mean, you can’t emphasize that enough. Your likability, your flexibility, and yet you have to come across confident but coachable at the same time. For so many people, it’s one extreme or the other, and even learning how to be coachable is something you can be mentored on, right?
Stephen:
Absolutely.
John:
It’s amazing how that all ends. Stephen, is there a book that you like to recommend to people either about life or business before we wrap this up?
Stephen:
A book? I was not prepared to answer that question.
John:
That’s okay.
Stephen:
One great book, I mean it’s a simple book, it’s Rich Dad Poor Dad, talking about changing your thought process from working to saving and solving problems. I love that book. It’s a basic book but it really sets a foundation in your mindset of what you’re dealing as far as your day-to-day life, as well as influencing your peers and your relatives and friends and family and neighbors, et cetera.
John:
What’s the title of it again?
Stephen:
It’s called Rich Dad Poor Dad.
John:
Oh yes. Sure.
Stephen:
By Robert Kiyosaki.
John:
Yep. I knew it well. Fantastic. We’ll be sure to put that in the show notes, and Stephen, how can people follow you on social media? What’s your Twitter all that good stuff?
Stephen:
I guess I should set up a Twitter account. The easiest way to follow me would be to shoot me an email.
John:
Okay. Got it.
Stephen:
That will be the easiest way to get a hold of me.
John:
Nice. Alright. Is there any last piece of advice or insight that you want to share with people? I love how you opened with being passionate about what you’re doing is the number one thing and solving it big enough problem, those are obviously key things and it’s so exciting to hear the inside scoop on what’s going on with the DoD and security. Any last thoughts that you want to leave our listeners with?
Stephen:
The last thought would be, again, having a great team. If you’re going into a scenario that you’re passionate about and there are experts in the field, don’t hesitate to pick up the phone and talk to those experts. Never think that any expert’s too busy.
What I’ve learned over the years is every expert that there are — many experts have passion in their field and they’ll always make time for you. All you have to do is ask.
John:
Nice. Great. We’ll definitely inspire everybody with that last one. Thank you so much for being on the show.
Stephen:
Thank you John. Thanks for having us.
John:
Thanks for listening to The Successful Pitch Podcast. If you liked the show, please go to iTunes and write a review, and encourage your friends to write reviews too. It really helps get the word out.
You know, people say that the longest distance is between someone’s mouth and their wallet. People can tell you they’re going to invest, but when it comes time to write the check, they don’t do it. So, how do you get people to say yes and then follow through? Visualize yourself on the left side of a riverbank and you have to cross the river, and on the other side of the river is where the funding happens.
So, first, you make up your idea, 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. So, if you want some help getting funded faster with less frustration, go to my free funding webinar, sellingsecretsforfunding.com/webinar, and sign up and get in depth information on how you can get funded fast. Thanks.