Connecting Investors With Startups With Hall T. Martin
Posted by John Livesay in podcast | 0 comments
Startup businesses must gather all the support it can in order to thrive, especially on the financial side. That’s why fundraising projects such as crowdfunding are an incredible venture every entrepreneur must try. However, without pitching to the right investors, all of these strategies would have been for naught. John Livesay sits down with Hall T. Martin, CEO and Founder of TEN Capital, to share how they guide startups in building their brand and finding the right investors for them. He explains what makes up an enticing pitch as well as the most engaging way to deliver it. Hall also discusses the power of convertible notes and how to build a good growth story.
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Listen to the podcast here
Connecting Investors With Startups With Hall T. Martin
This episode’s guest is Hall Martin, who’s an expert at connecting investors to startup founders. He’s all about looking at the next thing and not the last thing. He said, “It’s important that you’re solving a big problem that people are willing to pay for.” There’s a growth story he’s looking for when he decides he’s going to help a startup. What are their sales like? What’s the team like? What’s the product like, and where are they in the fundraising process? The biggest mistake he sees people making is not following up and not executing properly. Enjoy the episode.
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Our guest on The Successful Pitches is Hall Martin, who is the Founder and CEO of TEN Capital and the host of Investor Connect podcast program. He launched the firm as the Texas Entrepreneur Networks in 2009. In 2021, TEN Capital has over 12,000 investors in its network and has helped startups raise over $900 million. Mr. Martin serves as the Vice-Chair of the Baylor Angel Network and he previously led the Central Texas Angel Network as its first Executive Director.
Martin is also the host of the Investor Connect podcast and the Founder and Director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of startup investors. Hall is also a Founder and initial Managing Director of SKU, which is an incubation station and a consumer products good accelerator based in Austin, Texas. He also is the Adjunct Professor for the University of Texas, leading the Idea to IP program, which fosters startups.
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Hall, welcome to the show.
John, thank you for having me. I’m looking forward to this.
Yes, me as well. As we were saying, having moved here to Austin is exciting to get to speak to someone who’s been here for so long and made such an impact in the city and in the community. I know that you got your MBA here at the University of Texas. Before that, you were a Major in Computer Science. I remember those days in the ‘80s where it was all on cards, and you had to have punch cards and make them spit out. If you had one hole in the wrong place, it didn’t work. I would love to hear your own personal story. You can start anywhere you want. You can talk about childhood or when you started college. How did you get interested in the world of startups?
I went to undergraduate at Baylor from ‘80 to ‘84. That’s when the PC came out. I looked at the PC, and I said, “That’s going to be big.” Indeed, it was. I switched my career from being a Journalism major to being a Computer Science major because I wanted to be a part of that world. I always had an affinity for emerging technologies. I was always looking at the next thing, not the last thing. That’s the way I worked. When I graduated, I came to Austin to go to UT graduate school. I got an MBA there. I thought that was a great time to do it because the market wasn’t so hot just yet and I decided I’d get that done. That’s how I got to Austin back 30 plus years ago. I graduated and didn’t quite have a job yet, so I went backpacking in Europe for a month. I got a call from my family saying some company in Austin found your resume in a book and they want to hire you.
When I got back, I went and talk to them. They were a small company that was growing fast. It was entrepreneurial, and so I said, “This is what I want to be a part of.” I signed up, I joined them, and I was there for 25 years. It was a tech company that later went IPO in 1995. It had a big blowout and it’s great, and I kept working with that. Because the company went IPO and I was employee number 93, I started doing angel investing after that.
We had an angel group in Austin called the Capital Network that ran from ‘95 to 2002. They were tied to the dot-com world. When that went away, they went away with it. I made one investment through the group, I lost all my money and started to realize that startup investing is not as easy as it looks, but I was still interested in it. I started doing some angel investing on my own around Austin at that time. About 2006, the city did a restart and they called it the Central Texas Angel Network. I was the first member to sign up for it.
When you’re the first member to sign up for an angel network, you are automatically on the board in charge of membership. It’s a great honor. There’s no pay, but it’s great. I did that for two years. Two months into that, our director left, and so I stepped in and became the director of the group for the first two years that we ran it. We put in the processes, got it going, had a great time, got a 40X return for the investors. It was a lot of fun.
My undergrad at Baylor called me up saying, “We want an angel network out of our Alumni Association, can you help?” I said, “Okay, I’ll do that.” I stepped out of the CTAN role, and I went to help my alma mater help put their program up and running. I showed them how you do the membership, recruiting, and how you build the deal flow and all the usual things that go with an angel group. I got that up and going, and it became part of the Alumni Association where it’s about the student experience and about job placement.
[bctt tweet=”Be sure to follow up to get funded. Startups fail in the execution of their idea.” username=”John_Livesay”]
That’s one thing I learned in working with universities. It’s not about the money. I remember when I started CTAN, I went to the University of Texas to talk to the alumni director and said, “We ought to start an angel network here.” They were interested in that. Stanford and Notre Dame had one, but they didn’t have one. In the end, they had too many other things going on, but the big mistake I made was I walked in alone. You never walk in alone.
You walk in with a business school professor that’s going to be your sponsor. He’s going to own this thing. He’s going to keep you on the straight and narrow. You also walk in with five check writing alumni. If you bring those things, you can then build it. I learned the hard way that didn’t work. When we went to Baylor, that’s what we did. We got five check writing alumni and a business school professor, and we’re able to kick it off. Now, there are several 100 angel groups at universities around the country because there’s a real affinity between an investor and their alma mater.
What you’ll find is the why is not about making money, the why is about providing a give back to the university. You’ll find that people stay in those groups for a long time compared to the others. I started a third one in Williamson County, North of Austin. We were holding a deal flow in Round Rock, and it was a lot of fun as well. I saw the challenge that startups had in raising funding. What I saw was people coming in and they didn’t have the documents ready. They didn’t know how to pitch, and almost nobody followed up. Some did but the vast majority did not.
I started a company called Texas Entrepreneurs Network. After 25 years, I was ready to move on to my next career. I retired from my day job, and I started Texas Entrepreneurs Network. We were helping those startups raise money from Texas Angel Networks. We were helping them pitch, get their docs ready, and coach them. We did a funding forum series around the state. We got all the way out to Lubbock to El Paso and all the way around the state.
I had a theory that for every 10,000 people in the city, there was one angel investor. Lubbock had 100,000 people. There were ten angels, voila, there you go. We got out to the second-tier cities to do that process. There was one problem. It’s a big state and we’re driving everywhere. We decided to put everything online in the form of a funding portal because crowdfunding was starting to come into its own.
We did a portal style for a while and learned how that worked as well. We had an interstate license and did a whole bunch of breweries and wineries. That was a lot of fun to work with those guys because breweries have a real community flavor to it. We helped a group in Georgetown raise funding. They had almost 2,000 people come out to the opening, and I asked this guy, “Why are there 2,000 people at a microbrewery opening in Georgetown, Texas?” He said, “This is a German community. In 100 years, there’ll be two things left standing, the brewery and the bank. I want to be a part of the brewery because I want to leave a legacy here.” That was a neat vibe that went with crowdfunding breweries and so forth. We did a bunch of others as well.
After a while, we realized that crowdfunding didn’t help the tech companies and the healthcare companies. We wanted to get back into that. We hung up the portal, went back to working with the credit investors. About that time, we started getting calls from outside of Texas. I was getting calls from Seattle, Chicago, and the Bay Area saying, “I’ve talked to everybody in my area. I need more investors. I want access to investors. How do we do this?” We then changed the name to TEN capital and started running our program around the country instead of just around taxes. It kept growing ever since. Now, we have 12,000 investors. We’ve helped companies that went on to raise over $900 million over the years that we’ve been doing this, and we continue to grow and expand.
That’s quite a story. I love it. What I find interesting about what you’re doing with TEN Capital Network is you offer people the ability to figure out which program works best for them. You’re typically working with people who have some revenue, I would say, and have some experience. The biggest problem that I have seen and I tested this a little bit. I’m curious to see if you find this. Investors typically fund about 1% of the pitches they hear. They hear about 2,500 in a year and fund maybe 25, 24 of those 25 are from warm introductions typically.
Startup Businesses: Crowdfunding came up strongly during the pandemic because it was all online and becoming more and more accepted.
The biggest challenge is that the founders are in the wrong room. They’re pitching to people who don’t fund what their industry is, or they don’t have the warm intros. They then have a bad pitch. I remember talking to one investor, and she said, “We listened to this doctor go on and on for twenty minutes, and we still didn’t know what he did. Finally, I asked him some questions, and I said, ‘You fix holes in people’s hearts. Is that what you’re saying?’” “Yes.” “Okay.”
That need to be clear and concise is so important in a pitch. Few people know how to do it. In order to get in that 1% Club, you have to get the right pitch in the right room and then be able to answer some questions, as you said, the paperwork, and have everything ready to go to get the next meeting. You alluded to one of the mistakes you see people making, which is not following up. Having a sales background, that blows my mind, that they would not be organized enough to check back in or give you an update on what they’re doing and things like that. Let’s zoom out a little bit and start with, what do you look for when you hear a pitch?
The first thing I look for is, do they have a real market for it? Are we solving a real problem? The old painkiller versus vitamin test, are we solving something that we’re going to put money down for? It’s hard to get people to pay for it. They have to be needing that. The next thing is, like you said, I try to figure out exactly what they’re doing. I always coach them, “In five words or less, tell me what you do,” and I’ll state that at the beginning of your presentation.
If I don’t know what they’re doing, I don’t have context and it’s hard to focus. My mind is always wandering around wondering, “If they’re in health care, that would make sense.” You have to state that. I once read a business plan with 85 pages. I went through it twice. I went back to the guy and said, “This is great. What is it? What do you do?” They never actually stated it. They kind of talk around it. They have what’s called that curse of knowledge. They’re so close to it that they think everybody knows that when we don’t. There’s that aspect of it.
The thing I look for is a complete plan. They’ve got a complete team, they’ve got the team ready that can take it all the way through because the team is a key part of it. Have they put together a strong team is a big part. We look at post-revenue companies because I had too many people coming by with an idea, they would mess around with it for a while, and then they would drop it in. They need to be a little bit further along before they engage with my ambassadors. I look for some revenue because I want product validation and market validation. If the product works, then somebody will pay for it.
If you get into that stage, you’re ready for post family and friends fundraising. I do see a lot of people doing crowdfunding in that early stage and doing well with it. Crowdfunding came up strongly during the pandemic because it was all online and it’s becoming more and more accepted. The key thing there is, the average investment is anywhere from $100 to $500, so somebody’s transactionally putting in a bit of money off their credit card and it’s no big deal.
When they take the next step forward and they go to the angels or the venture capital, these guys are writing $25,000, $50,000, $100,000 checks. There’s a lot more due diligence that’s going to go on this thing. It has to be a little bit more solid. What I look for is what I call the growth story, which is sales, team, product, and fund raise. The core four are moving up into the ride because when I ran those Angel Networks, the ones who did raise money, 10% of them would come back and give us updates and reminders. Tell us more about it.
It’s part of building a relationship. That’s a little bit of it. You got to get to know people a little bit. Also, they were demonstrating that I’m meeting milestones. I’m clicking forward. It’s in the area that counts. Many startups want to talk about their forecast or they want to talk about how a competitor fell down or how big the market is. Those are things you’re not in control of. What you are in control of are the sales, the team, the product, and the fund raise. Intellectual property could be in there as well.
[bctt tweet=”If you don’t have a lead investor, start with convertible notes.” username=”John_Livesay”]
Investors are looking at how you’re making progress on those things that you’re doing. It took about four of those touches before investors would say, “I know what’s going on here. I can make a decision.” They say it takes seven touches to close a sale, so it takes seven touches to close an investor. That’s what we’re looking for. Do they have a growth story going? Can I see momentum going in the right direction here? There’s that aspect of it.
Let me break down what those are again. The growth story is how are the sales going, is the team strong and is it steady?
Is the product moving forward, and then the fund raises? Those are the core factors that go into driving a startup. You have to be moving your way through the beta to the MVP, through getting out there to generate some revenue. Has anybody put money down for this? It makes a big difference if they do. Team, have you built the right team? Are you adding more with affiliates, partners, board, and other people? Product, if you’re going from beta to MVP, version one, version two, and things are moving forward. Fundamentally, they’re execution level metrics because that’s where most startups fail. It’s not that they didn’t have the right idea or whatever. They just didn’t execute.
Can you execute? That’s the number one reason besides no follow-up.
You’re watching how these guys do before you write the check because afterward, it’s going to be hard. It’s going to take time, and can they execute afterward? You’re looking for a sense that these guys are making good decisions, they’re getting things done, and they can move forward. They are working on the right things at some level. They all make mistakes. Everybody makes mistakes. Nobody worries about that, but fundamentally, are we progressing?
That’s what I look for, the growth story. That’s what investors are trying to see. The last question is, do I want to be in the game with these people for a period of time? It’s because of the team. Do they have the right team? Are they smart and making good decisions? You do spend a lot of time with them. I once wrote a blog post that says, “Are you ready to get married?” At the time, I had found that people were in their startup investment longer than they were in their marriage on average.
About seven years is the divorce thing. You’re in a relationship with your investors longer than that.
In some cases, you are. I saw people doing variations on that theme in other ways. It’s a big decision. That’s the thing that most people don’t get about angel investing. People are in these deals for a long time. They are careful about getting into them, unlike crowdfunding where you’re putting in money and maybe it works, maybe it doesn’t, but you’re not in there working with them or helping them in many ways.
Startup Businesses: Startups must focus on the things within their control: sales, the team, the product, and the fundraiser. Intellectual property could be in there as well.
I’ve heard series A and series B is defined as how much money you’re raising? “We’re revenue, and we’re trying to raise $5 million, does that make a series A or series B?” From what I can see on TEN Capital Group, you look at it through a different lens of tell me how much money in revenue you have, and then we’ll decide whether that’s a series A or B? Is that accurate?
The challenge is everybody counts series A or series B differently. If you’re on the west coast, that’s one thing. If you’re in the Midwest, it’s another. I had one guy say, “Mom gave me a check and dad gave me a check so I must be on my series B now.” It’s the non-standardization around the nomenclature. What I tried to do is go back and say, “Where exactly is the business on the curve, so to speak?” When I go to investors, then I’ll be able to level-set them. “They got $1 million of revenue. They’re in their series A.”
How much does that range? Is that $1 million to $5 million typically, series A, or is it $3 million to $5 million?
Series A’s are typically $1.5 million to $5 million. Seed are $500,000 to $750,000. Pre-seed are $250,000. You don’t raise anything less than $250,000 because it looks funny. Series B is usually $5 million to $15 million, but you have $3 million of revenue. If you get back to what the revenue is, you can start to get a little bit back to how you might relate that to other deals you’re seeing because, by themselves, it is all over the map.
Let’s talk about valuation and convertible notes a little bit. Here’s the mistake I hear a lot. I don’t know if you hear this too. People overvaluing their company so they’re giving up little equity. It’s not based on anything. “Because the competition is this kind of valuation, even though we don’t have that revenue, we should be at that same level of valuation.” What are you looking for? Let’s talk about a convertible note so we don’t have to lock in a valuation based on raising, let’s say, $5 million, and figuring out what percentage of that is going to be. I’m curious to hear what your thoughts are around that, because again, it’s all over the map, right?
I always coach people, “We start with convertible notes if you don’t have a lead investor.” Some people want to come in and artificially set the price. I tell them that’s going to be hard to sell to other investors down the road if you don’t have a real lead investor or someone that put in. My definition of a lead investor is somebody that’s going to put in $100,000, $150,000, and they want equity. They’re going to sit down and take the time to properly value this, look at comps, the status of the business, and be able to make the case that it is what it is because you’ll need to sell that to other people.
We start with convertible notes because there’s a whole bunch of investors that are not going to take the time to do that. What you do is go out and start picking out $25,000, $50,000 checks from people that just want to be in the deal and rolling close. The money comes in and goes into business the next day so you can start to build the business. You’re looking for the right lead investor. When that guy comes in, you say, “I already have $300,000, $400,000 raised.” That’s great validation, there’s something there.
The lead investor says, “Good, I don’t have to raise the rest of it. There’s some interest in this already so I got a sanity check on this deal.” That’s why we start with convertible notes but with the idea that we’ll move to a price round when we find the right lead investor but you don’t know if that’s the 1st, 5th, 25th, 75th investor to walk through the door. I know many companies that live off of convertible notes for several years.
[bctt tweet=”Most people were in their startup investment longer than they were in their marriage on average.” username=”John_Livesay”]
You can raise too much convertible note money. Some people treat it like a credit card. “I need money,” go pull out the note and go and raise money. When you get to series A, that birdie comes home to roost because the series A investor wants 20% of the deal. If you’ve given away too much, it can be a tough time in that case. That’s the idea behind it. It starts with a convertible note. Even when you’re at series A or B, you start with a convertible note. Get out there and start talking to people. What you’re doing is setting up a flow of investors until you find the right lead investor and have that discussion with them as opposed to everybody that walks by because most people don’t want to do it.
Are there specific industries that you at TEN Capital like to invest in? Is it virtual reality or augmented reality? Is that artificial intelligence? Is it healthcare? Is it social media, or are you completely agnostic?
Generally, we like most businesses, half of our investors are tech-enabled. There’s a good section in there for health tech, FinTech, and EdTech. Most investors are tech-enabled businesses. They do look for recurring revenue platform-based businesses, the usual things. Twenty-five percent are healthcare specific. It is a big space with a lot of money and a lot of big exits out of it. We have done devices, therapeutics, diagnostics, as well as digital health. The therapeutics can be a tough space for angels and many VCs given the amount of money that goes into it, but the other spaces are fairly straightforward. Consumer product goods, there’s a tremendous amount going on in the CPG space with brand development, food and beverage innovations, and so forth.
That’s here in Austin, right?
Yes. I started an incubation station called SKU. It was an accelerator here in Austin. It still is. Most people are coming to Austin because they wanted to sell to Whole Foods. It was the premiere, it still is, in many ways. We were repackaging, rebranding them, and putting them into the brick and mortar channel, either Whole Foods or H-E-B in this area. Since then, it has shifted to be direct-to-consumer, there’s a lot going on in that space as well. Those are popular ones for us.
We are seeing more cleantech deals and climate change deals coming through, but those can be out of the range for angels pretty fast. We’re angel, VC, family office, and early-stage funding, so it covers a number of different areas that are out there. Every three years, you get a new type of startups, AR/VR, now you have mobility. Everybody’s got an eBike and a different way of getting people around, different methods for mobility.
There are other things coming out. Cybersecurity is a hot topic once again because of all the hackings that are going on. I learned in cybersecurity, every 3 to 5 years, you have another dozen devices you have to monitor, control, and measure. Now, they’re working on IoT, cars, and those types of things to protect. It’s great to be in the startup world because you get to see all these great new technologies going on. We try to work as much as we can across the board with all of them.
If somebody wants to explore working with TEN Capital Network, the website is so clear about who it’s for and who it’s not for. I thought I’d ask you to sum it all up for people to see if this is a fit for what they want to do.
Startup Businesses: Get out there and start talking to people. What you’re doing is setting up a flow of investors until you find the right lead investor.
Come to our website and we have a Click the Stars button and you go to our company page which shows what we offer. At heart, we’re investor relations and introductions. We’re not a broker. We’re not charging back-end fees. Back when I started Texas Entrepreneurs Network, I looked at becoming a broker/dealer, get a FINRA license and do that, but I found I had such a large network of angel groups and venture capital firms. Most, if not all, don’t allow brokers to be in the deal.
I went the non-broker route. We charge a monthly retainer. You look at the different levels that we have there, set up a call with us and we’ll talk to you about if your deals a good fit for our network. There’s no signing up online. You have to talk to us first because we want to make sure it’s a good fit and nobody is unaware of how it goes. That’s how we work. Sign up on the website for a call and then we’ll discuss your deal and look at it.
The TEN Capital Network is quite an impressive thing. What do you see that you’re excited about for the future? You mentioned a few new industries but is there any particular category that you are jazzed about?
The pandemic has given us a whole new set of care abouts. I’m excited about supply chain manufacturing and reshoring. We’re going to see a lot of hardware come back to the US. We’re going to see a lot of things with blockchain going after supply chain systems. I’ve never talked to a supply chain manager who didn’t just jump up and down on the table wanting blockchain because this is what he needed. It’s going to do well there.
The stock market is at an all-time high. In fact, the stock market is at an all-time high at least once a week these days. It’s a good market. There’s a lot of money coming out. I have investors coming in saying, “I have all this cash. What do I do with it?” If you’re ever going to start a startup, now is the time because you have a whole new startup cycle forming after the pandemic. You have money available to go after it. The ‘20s are going to be a great decade for innovation and moving things forward because the pent-up demand is going to explode across the landscape. The world is ready for something new and different. You feel that in the air. It’s great to be at the beginning of these cycles because that’s where you see some of the great startups form.
What an optimistic, wonderful way to end the episode. Hall, thanks so much for joining us. If anybody’s interested, check out TEN Capital Network.
Thanks for having me, John.
Important Links
- TEN Capital
- Hall Martin – LinkedIn
- Investor Connect
- Baylor Angel Network
- Better Selling Through Storytelling Method Online Course
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Find Who Else Cares About Your Startup with Laura Wagner
Posted by John Livesay in podcast | 0 comments
Episode Summary
Today’s guest on The Successful Pitch is Laura Wagner, who is the CEO and founder of Digitzs, which is changing the way we are going to pay for things. She assembled an amazing team of people from Apple and PayPal and even Kevin Harrington who was one of the original Shark Tank judges. She said, “Everybody wants to be needed and wanted. If you trust and like and admire these people to get them on your team first, then you show investors who else cares about your idea.” She was able to raise millions of dollars on equity crowdfunding platform, Crowdfunder, by having this amazing team of people who believed in her vision to raise money to get it built and now they’re on their second round of funding and have their first revenue coming in.
Listen To The Episode Here
Find Who Else Cares About Your Startup with Laura Wagner
Today’s guest is Laura Wagner, the founder and CEO of Digitzs, which is all about changing the way we pay for things. Laura has an incredible background in this expertise, she’s assembled a team of people from Visa, PayPal and Apple. Laura, welcome to the show.
Thank you, John. Happy to be here.
One of the things that make you so interesting is that you’ve won so many awards in equity crowdfunding. You have the first female founder to reach number one on the CNBC Crowdfunding 50 Index, and number one for the largest capital raised by a female founded company. Clearly, you know what you’re doing. How did you become such an expert in this?
It’s super new, crowdfunding. It’s odd to be called an expert in something that I’ve got about a year and a half in. That’s the opportunity for other people too. I challenge you to beat us on the number one spot. We started in 2015 around April. I’m so non-technical. I’m a non-technical founder. The story will make you chuckle a little bit. I remember the day we launched with Crowdfunder. We put out a press release and had the video ready. About three or four hours went by and I was totally bumped because there was no activity. I was on my Crowdfunder page. I’m like, “Nothing’s happening.” I called my Crowdfunder person, Katie, who I adore and she’s like, “Laura, hit the other tab. You guys have already raised $500,000 of interest in the first two hours.” I screamed. I was like, “Wow.” I was on the wrong damn tab. It’s funny that you call me an expert. It’s been a long road from there.
We’re always talking about how do you figure out a problem to solve that is big enough to start your own business. Can you share a story of how you had a frustration at McDonald’s in the paying business without having cash?
Who Else Cares: We just interviewed a people who owned McDonald’s to figure out their paying points and packaged it up in a very simple product.
That’s how I actually got in the payment space. I fell into it. I’m from Texas. My first day in LA, I tried to go to McDonald’s while I was moving and they only took cash. They wouldn’t take my Visa Check Card. I had to leave hungry, which totally got my attention. My next stop was ARCO ampm gas station. They had this weird thing I’ve never seen before where you pay with your debit card. You put in your pin number and they added a $0.50 fee. I’ve never seen that before. I called the phone number on the top of the pump and probably it’s just beginner’s luck. I asked the guy who answered the phone at ARCO, “Why don’t you guys do this at McDonald’s?” He said, “You’ll never get McDonald’s.” I’m like, “What if I did? Is there money in it?” He’s like, “There’s tons of money, but you’ll never get McDonald’s.”
I went down there to meet him the next day. I started learning a little bit about what was involved with payments. The money caught my interest, of course. It took about a year to get the exclusive marketing rights from ARCO to bring this into McDonald’s. We went after McDonald’s and we won out over 200 companies. We pitched free equipment, free everything. We pay you $0.50. We charge the customer an extra $0.50. We give you a dime of that. Everybody else, all other $1.99 were pitching equipment cost X, transactions cost Y. We just interviewed a bunch of people who owned McDonald’s to figure out their paying points and packaged it up in a very simple product or service and had tons of success.
We hear how important it is to be persistent. You have a very clever way of doing it, about leaving creative and fun voicemails, for example, as a way to stay in front of someone. Can you share that?
[Tweet “Who Else Cares: Leave creative and fun messages when you follow up.”]
That was how we got into McDonald’s. Once I had the marketing rights from ARCO, I started going after McDonald’s. It was important for that particular business at that time to walk that up first. I had to do that first. Once we had that in the bag, I started calling the West Coast division of McDonald’s. There was a wonderful woman, Rose Nash, who was Head of Technology. Rose was inundated with everybody and their dog trying to sell them credit card processing. I called her 29 times and I would leave crazy voicemails. One time I put my radio to the phone and it’s, “One way or another, I’m going to find you, I’m going to get you, get you, get you, get you.” By the time she answered the phone one day, she knew exactly who I was. I said, “A-ha.” She just started laughing. I said, “Don’t move.”
Actually, I went down there to Irvine, to her office, and we stayed in her office until 10:00 that night. I remember distinctly because they were vacuuming the floor, and we did not speak about business until the last fifteen minutes. We talked about relationships, losing weight, everything.
Swim with the Sharks Without Being Eaten Alive
If people haven’t ever read or listened to Harvey Mackay, Swim With The Sharks Without Being Eaten Alive, I was raised on that book. It talks about getting to know 69 things of the person that you’re pitching; the name of their wife or husband, the names of their kids, are their kids into soccer. It may sound manipulative, but it actually gets you on the opposite end of transaction. So many people these days are so transactional. Rose and I, we’re two human beings and we’re just talking about life. We felt good and secure with each other. That was enough for her to let me in at the ninth hour to pitch McDonald’s, when most people had been in line for a year.
If you want to have a successful pitch, get that relationship connection first because people buy ultimately from people they trust, like and know. If you don’t start the trust factor and the likability factor first, you’re never going to win. Now, speaking of winning, when you’ve launched Digitzs, you had to get amazing people on your team before you could even go on an equity crowdfunding platform like Crowdfunder. You have this great phrase about proving who else cares enough to be on your team. Can you share with us how you started your team at Digitzs?
David Jaques was the first CFO of PayPal. He’s the Chairman of our Board. Linda Perry, she ran Visa seventeen years. Edward Katzin sold his company to American Express and filed numerous patents for Visa. I always tell startup founders, you just have to absolutely get people who are way more important than you are and way more accomplished than you are. Surround yourself with those people. Because, at the first glance, if you have a household name, for instance, Kevin Harrington with Shark Tank was one of our investors. The way you go after those people is the same way, relationships.
I just let those people know how much I wanted and needed them to be part of my company. I think everybody likes to feel needed and wanted. That’s a basic human need. Everybody actually likes to be part of something new that they can be in the wanting with. It’s not that difficult. You just have to seek the right people out with the right expertise. Of course, you have to like them and you have to trust them. You have to admire them. If you have that formula, don’t be shy because you would be surprised. Don’t ask, don’t get.
[Tweet “Find out who else cares about your startup.”]
When you were putting this team together for Digitzs, did you look for people who didn’t have the same expertise that you did? I hear that’s a really important thing, that you can’t have three people that all know marketing.
One thing that’s really, really key is that I’m not a technical founder. The key when you’re not technical is to have a technical cofounder. Stacy Moore is my technical cofounder. She has built our platform from the ground up. I’ve known her 25 years. She’s also from Texas. She happens to live here in LA. She’s definitely a unicorn. She’s a strategist. She’s been a partner in every business I’ve had. She also is hands-on. Finding a technical cofounder is imperative to a non-technical founder.
Also, what’s really important here is investors, whether they’re in equity crowdfunding or Angel or VCs, they love it when the team has worked together before because it shows that you guys get along and that you have experience in the shorthand of communicating.
I have no idea why David Jaques still talks to me. He was involved in Pay Wherever which was a prior company that didn’t work out. He was involved and invested in, by the way. I actually think that’s quite key. Most of the folks on the team are people that I’ve had a relationship with and respect highly.
Would your advice be for someone before they go onto an equity crowdfunding platform, to have your team assembled first before you start asking people to invest in the money? As you said, they need to know who else cares.
Who Else Cares: It’s got to have some cache, because you’ve got to stand out.
Absolutely. It really needs to be somebody with some impact. Like with Kevin Harrington with Shark Tank or David Jaques, the first CFO of PayPal, or Linda Perry, who ran Visa for seventeen years. It’s got to have some cache, because you’ve got to stand out. If you threw a bunch of names out that nobody’s ever heard of and they haven’t done anything significant in their life, that is the instant decision somebody’s going to make about your company, which is unfortunate. Most of the time, people are judged that way.
Can you go back to the first $2 million you raised? Was that your seed round obviously, and you had your pre-revenue?
Pre-product. We were just literally an idea.
You have an idea, but you’ve got this amazing team with amazing backgrounds of big brands. If you raise the $2 million, the product will get built. Then will you get revenue from that seed round or is that just getting the product built?
Just getting the product built and getting a pipeline in place.
Obviously, you achieved those results to be able to have the second round, correct?
We achieved it enough to, yes, be able to move into the second round. We just literally processed our first dollar last week. We started this raise in May. It’s going on nine months ago, this $3 million, series A. The whole time we were doing that, we were pre-revenue but post-product.
Do you have a waiting list of people who want to be in? Because I’m very curious, you have certain reservations? Can you explain to us the reservations versus the round? That would really be interesting for the people.
That’s always really confusing to people. On the CNBC Crowdfinance Index, all they can pool in is reservations which are “interest.” If you stumbled upon our profile and you thought it looked interesting, in order to reach out to us, you’re required to either select a dollar amount that you might be interested in investing or not do that at all and just ask for docs. We have a back-end portal with Crowdfunder that we get a text if somebody makes a “reservation.” It goes into our CRM, which we love. It’s called Close.io which is the best CRM ever on the face of the earth.
Why is that?
It’s so simple. It’s ridiculously simple. Every CRM I’ve ever used in my life is just like, you want to buy a Maserati and they lift up the lid and say, “Look at this carburetor in here.” Who truly gives a shit? Nobody. The other thing that Close does is it integrates your email and it just becomes your inbox. It becomes a second inbox which, I don’t know about you, but everything I do is email-related. I can see who I own email to that stands out outside of my entire Outlook inbox. It just makes things super efficient. I highly recommend that.
Anyway, we then connect with the investor and set up a time for me to chat with them one-on-one, which I do. I’d say one out of four times, somebody’s not accredited, which right now, they have to be an accredited investor, which for those who don’t know, you have to have an income of over $200,000 a year or a net worth of a million dollars excluding your home. We do get a lot of outside of the US investors, which they don’t have to be accredited. I would say that a third of the folks who’ve invested are non-US citizens, which is awesome.
Is that because you’re in series A? Did the people have to be accredited investors to invest in your seed round?
Who Else Cares: The difference is when you start to publicly offer something, we have to get third party accreditation.
Yes, they did, because both are public, so they are 506(c) not B. We did a note round of 100k initially. Then we did a note round of 275k before we got onto Crowdfunder. Those were private 506(b). You still had to be accredited, but you can do a self-assessment. The difference is when you start to publicly offer something, we have to get third party accreditation. A CPA or an attorney has to vet that investor or sign a form, or the investor has to send us their tax returns. We have an obligation if we publicly solicit to make sure that we don’t harm them.
That’s not the case for everybody on other equity crowdfunding platforms or even within Crowdfunder. That’s the whole reason for the new law, is that people don’t have to be accredited investors to invest in some of these companies.
It’s still a pretty small percentage where you don’t have to be accredited. It’s getting better, but in order to do a Reg A raise, there’s Title III. I’m not an expert at this, by the way. There’s Title III and you can only raise up to a million dollars. There’s Reg A and you can go up to $50 million. It’s expensive to prep for either one of those raises. What I find when I’m talking to investors is they’ve assumed all crowdfunding is for everybody because of the JOBS Act. One out of four end up not being accredited, but they thought they could invest when we got on the phone. Two out of four hear the pitch and it’s just not right for them. One out of four ends up putting their money out.
The biggest challenge, if you’re not using equity crowdfunding is getting in the right room. You typically have to talk to a lot more people than one out of four to get a yes.
It’s a heck of a lot nicer experience to have somebody come to you than you going out to somebody. They’re actually interested. They are interested to the degree that they set up a call and hear a pitch. I’ve had a blast. It’s the only way for pre-product, pre-revenue companies to get any money these days candidly, outside of family and friends.
Thank you for explaining all this. $11 million out of $3 million that you’re raising. That’s just letting people know that there’s that much interest, but it hasn’t completed yet. You still have some money available to finish that round.
Whatever people show on these websites as the dollar amount, it’s pretty normal that about 20% or 25% of that gets in the bank.
Let’s hear about what it sounds like when somebody says, “I’m accredited. I’m interested. This is a fit for me. I’d like to hear a pitch.” How do you pitch them? With slides? How long is the pitch?
Never ever with slides. We send them an email with a deck and an FAQ and a very long email with as much as detail as we can. When I get on the phone with them, I’m just talking just like I’m talking to you.
I hear that time and again, Laura. Be a human, have a conversation, as opposed to memorizing a script that you can’t go off of. If somebody asks a question, you get lost because you aren’t able to have a conversation. The pitch deck, if you use them, is supposed to just be a frame of reference.
I had screwed up so many times on having a deck in front of me. Back in the day, I always joke that decks are so 2015, because it’s just a barrier between you and the other person.
You still need one. Obviously, you’re going to send them the deck. Sometimes, they probably have questions from looking at the deck, “I see on your competitions slide XYZ, or how did you come up with this valuation?”
A deck needs to be no more than ten slides and very large font, lots of pictures. These days, we are almost never asked for any other due diligence documentation, which is pretty outstanding when you think about it. It’s just the deck, it’s an FAQ, and me.
Have your financial projections changed dramatically from your seed round to the series A?
Who Else Cares: I think just being completely candid with investors is perfectly okay.
The seed round, we really were pretty clueless about what those projections really could be. But we were always very candid about that. I think just being completely candid with investors is perfectly okay. It’s okay to say you don’t know but you think. It’s like, we think there’s gold under the hills, but we don’t know until we get the money to buy the shovels and get our feet dirty. That was our pitch in the seed round. In this round, our projections, of course, projections always change. In tech, everything takes much longer than you think it will. But we also tell them that. I tell every single person, whether they’re accredited or not, that this is a huge risk and it’s a little step above going to Vegas.
Are you trying to get people to use Digitzs instead of PayPal? Is it like Uber versus Lyft? Can you give us a sense of what the pitch is?
We do not sell to individual merchants. If you drew three circles, left or right, on a piece of paper, on the left is where cards are swiped; liquor store, grocery store. On the far right is the experience you might have checking out of an Amazon shopping cart online. In the middle is everything else. In the middle is about five years old. In the middle are three buckets, since I’m from Texas. The first one is mobile apps like Uber. The second one is market places like Etsy. Third one are what we call platforms.
If you drew ten more circles at the very bottom, those would be the ten largest payment processors in the US. This whole page is about $5 trillion a year. In the US, $5 trillion a year is processed at just three card types: Visa, Mastercard and AmEx. It’s growing at 15% per year. It’s a massive, massive market. The middle is a trillion, the right side is a trillion, and the far left where cards are swiped is $3 trillion. We are sitting squarely in a middle market that’s less than five years old, that very few companies can compete in, just due to all kinds of legacy.
Our competitors are companies like Stripe, Vantiv and WePay. They’ve aligned with one of those ten. We’ve used up half of the ten that could even play in this market on the back-end. That’s one of the reasons why it’s so difficult. That’s my pitch. That’s literally the first minute or two of my pitch, to set the stage.
You painted a picture, which is what I tell people all the time.
I’m very visual.
Having people draw those three circles and they can instantly understand, “I know where I am.”
You’re also getting them kinetically. There’s an old saying, “Tell me and I hear you. Show me and I see you. Involve me and I understand you.” Involving them is drawing the circles. Get a piece of paper out, draw the circles. It’s a small thing but it works.
[Tweet “Who Else Cares: Involve them in your pitch so they understand at a deeper level.”]
Do you get questions or is one of your questions, what’s the exit strategy? Or is that too soon?
Always. They don’t invest unless they feel like there is a viable exit. Our exit strategy is actually to sell back to our processor or one of those ten processors at some point. 47% of the M&A transactions last year in the US were niche FinTech companies being swallowed up. Because companies like Digitzs have created new technology, are serving brand-new niches that are hard to serve based on legacy technology underneath them, it’s almost like we’re the electric cars and everybody else is the old gas model cars. But the gas model car factories have a lot of money and they’re going to want to buy the electric car companies.
Can you talk about your marketing strategy, the business model? People sometimes, “If we only get 1%, we’re going to be rich.” Clearly, that’s not what investors want to hear. They want to hear a bottom up strategy. What is your model? You have your first dollar. Are you targeting certain industries? Are you going after the middle circle Uber?
Platforms are what we target. Are you based in LA?
Yes.
Who Else Cares: We make the platform look like a payment processor. We eliminate the noise of the customer having to go get a merchant account.
If you get a parking ticket today in the City of LA, you’re going to go to CityOfLA.com. You’re going to hit a button that says “Pay Your Ticket Now.” It’s going to take you to another page inside the website. The company that hosts that page is what we call a third party platform. It’s no longer the City of LA. It’s a third-party that the City of LA has contracted with to take a payment on their behalf. It’s those platform that Accenture says are a top five trend for 2016. What happens is the platform guy goes to the City of LA guy, and he says, “Hey, City of LA guy, don’t build an elaborate website where you could take parking ticket payments. We’ve got all that software in the Cloud and we can make it look just like your website by tomorrow morning. By the way, we also charge the person using it $2, so it’s free to the City of LA.” The City of LA guy says, “That’s too good to be true. Where do I sign?” The platform guy says, “I just need you, City of LA, to go get a Visa, Mastercard and Amex account so we can connect all the dots for you, so when somebody pays the parking ticket, they see your name in their bank statement.” Unfortunately, half the time, the platform guy loses that sale.
With our API, when it gets to the point in that sale and the guy says it sounds too good to be true, he says, “Just come to our site, the platform site, enter a few piece of information and you’re ready to go in a second.” We make the platform look like a payment processor, so we eliminate the noise of the customer or the merchant having to go get a merchant account, which it’s never one place you have to go. It’s three places you have to go. Three different contracts they have to sign, a week or two of work. It’s a pretty big problem.
You’re solving a big time problem which also causes sales to be lost. By saving not only time, you’re increasing revenue for the platform, is that right?
We increase revenue a couple of ways. That $2 fee for instance. When the City of LA guys, before Digitzs, they would go and get a merchant account and come back to the platform. The platform would connect all the dots. Somebody pays their ticket for $100 and agrees to a $2 fee. $102 goes on that cardholder’s card and all $102 goes to the City of LA. The platform has to send the City of LA an invoice every month that says, “You did a thousand transactions. You owe us $2,000.” With our API, that $2 gets split off and paid directly to the platform next day. The $100 goes to the City of LA. We’ve eliminated their invoicing, which saves them money, clearly. The other thing is we also pay them a commission on the $2.93 that we charge the City of LA to process cards.
As part of your use of funds that you’re raising, is it all going to tech or are you going to be hiring a sales force?
No sales force. We have a brilliant cofounder on board, Ben Way. Ben has helped to launch 200 different companies. He’s advised the White House when he was a kid from the UK. He’s brilliant. Ben is an artificial intelligence internet marketing expert. We have an in-house expert that generates tremendous leads directly for me to have conversations with CEOs of these platforms.
That’s fantastic because a lot of people need sales people, and you’re doing a B2B play so you don’t.
Who Else Cares: Today, not at all worth it to hire a salesperson. It’s much more important to have leads coming into you.
Ultimately, we may have one person super seasoned out having very high level conversations. At this stage, we’re just still in the middle of product market fit. Hiring a sales person, what a waste of money. I’ve managed and hired sales people my whole life. I can tell you, usually in today’s day and age, not at all worth it. It’s much more important to have leads coming into you. Just like we have Kraft and their leads coming into us for investors. If you don’t have somebody replying to an email, showing there’s a need for what you’ve got, it’s a long road.
What’s your biggest surprise so far? I know we all have obstacles in our startups. What would you say is one of your biggest surprises that you didn’t anticipate that you could share with us that people could be like, “Maybe I should think about that?”
We pitched 50 CEOs of these platforms. They all said, “Sounds fantastic.” 27 of them said, “We’re going to do this. It’s amazing. How did you put this together?” When push came to shove, we found out 26 of them were not PCI-compliant, which is a security level that you need when you’re processing Visa, Mastercard and Amex on behalf of other merchants. We had to quickly regroup and build some tools to help non-compliant platforms use Digitzs. That was not something we expected. It was a big kick in the stomach, if you will. You just get over it and do what you got to do.
Let’s talk a little bit about you’re on the Board of a non-profit, A Sense of Home. How did you pick that charity? How does that relate to what you’re doing, if at all, with Digitzs?
It picked me. About a year ago, I was trying to get rid of a couch in my office, and just literally could not find a place for it. Stacey, my technical cofounder, said, “Why don’t you give it to A Sense of Home?” I had no idea who it was. I called them. They picked up my couch. The next day, I get an email with a family and about twenty people sitting around my couch in a house with a celebration. I was so impressed, I just called them back and I said, “What do you do?” They said, “We make first homes for aged out foster kids in Los Angeles.”
Who Else Cares: Our goal, by the time we leave, is to give them a sense of home.
I didn’t know anything about the foster care system at that time, but families get paid to take in foster kids. When they turn eighteen, they usually kick them to a curb because they’re no longer compensated for keeping them in their house. A good majority of these kids end up on the street or about a third of them end up getting what they call Section 8 Housing. A lot of them live on a mattress in an apartment for a year, until A Sense of Home comes along. What we do every Sunday here in LA is we literally, we did one yesterday, we go in with a truck and usually twenty volunteers and put in all donated furniture; everything from flowers to pictures on the wall, to everything in the bathroom and kitchen. Our goal, by the time we leave, is to give them a sense of home.
A lot of people will say, “How do you find the time to do that and launch this huge startup?” Most people will go, “I can either do one or the other. Or I will do that after my company’s sold.” You’re doing it concurrently, so it’s obviously inspirational. I think that’s the big question people have is, how do you find the time?
It doesn’t take a lot of time. It’s actually what I do for fun. You have to have some break from your work. These days, we’re all so cooped up in our homes or our offices with our computers. We don’t connect with people face-to-face. For me, it’s become a really nice way to hug a bunch of people all at one time on the weekend. It takes a couple of hours. I don’t do it every weekend. They asked me to join the Board, which I was so honored, because, Georgie, who founded A Sense of Home, just was honored to be a top ten CNN Hero just a few months ago. It’s a massive honor. They had a big gala that CNN does and she was on there. Richard Gere actually introduced her. Now, they’re getting tremendous traction. The idea is to duplicate it in multiple markets. It’s really been super amazing to watch.
How can someone follow Digitzs and you on social media? What’s the best way for them to keep track of what you’re doing?
It’s @LauraDigitzs on Twitter. We have a Facebook page. It’s Digitzs.com.
Do you have any books or book that you would like to recommend to a founder or someone who’s thinking about getting into equity crowdfunding?
Certainly, your book. I am going to write a book on our experience in equity crowdfunding just to help founders, because there’s a real formula to success. It’s not a complex formula. I think it’s one that people need to be aware of before they go down this road. It’s not for the faint-hearted.
Laura, thank you so much for sharing your expertise and time. We look forward to watching Digitzs change the way we pay for things.
You rock, John. Thanks a bunch.
Thank you.
Have a good one.
Links Mentioned
- J Robinett Enterprises
- John Livesay Funding Strategist
- Digitzs
- Crowdfunder
- Swim With The Sharks Without Being Eaten Alive
- Close.io
- A Sense of Home
- @LauraDigitzs
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TSP002 | How To Be A Power Connector – Interview with Judy Robinett
Posted by John Livesay in podcast | 0 comments
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Episode Summary
John introduces Judy Robinett to the Successful Pitch show. Judy Robinett is the author of How to Be a Power Connector as well as a consultant for business professionals and entrepreneurs. Judy talks about common mistakes entrepreneurs and startups make when pitching their idea to an investor, how to prepare for a due diligence check, how to expand your network, and much more on today’s show.
How To Be A Power Connector – Interview with Judy Robinett
Welcome to The Successful Pitch. Today’s guest is Judy Robinett. I’m thrilled to have her on the show. She is a startup funding expert and the author of the book, How to Be a Power Connector. She has so much expertise to share with us today. I want to welcome Judy to the show. Judy, can you just tell us about the importance of connecting, since that what’s your book is about?
How to Be a Power Connector by Judy Robinett
Absolutely. I learned early on in my career, I stalled when I hit the wall in the Fortune 100 Company and I thought, “What am I doing wrong? I’ve kept my head down, I’m working hard, I’m not getting anywhere.”Somebody pointed out to me that I really needed to increase my emotional IQ skills, i.e. networking, and that there’s always been this unwritten rule of success, that is your network equals your net worth.
When I became CEO of a public company and started raising money, millions of dollars, I’ve found out again that my network didn’t really help where I was so that I needed to build one that was deep and wide and robust so that I had access to the funds that I needed.
I was asked to vet a small unknown company in Park City named Skullcandy when Rick Alden at year three was broke and had product stocked in China and only one distribution channel. A Super Angel had asked me to vet that. I became very fascinated with the startup world, so now I do that. I can tell everyone that everything you need is attached to a human being. Humans have the deals, humans write the checks, humans get you in the door. Whether it’s the Angel investors, family offices, venture capitalist or even incubators.
It is absolutely critical that you improve your skills, particularly with strategic networking. The old school networking is dead. It used to be who you knew and what you knew. Now, it’s who knows you. It’s absolutely critical. It’s so easy now with LinkedIn and Twitter and the access that you have.
[Tweet “Old school networking is dead. Used to be who you knew and what you knew, now it’s who knows you.”]
Can you elaborate? That’s such an important point, I really want to hit it home. Old school is, it used to be who you knew and what you knew. Now, [to be a power connector] it’s who knows you. Of course, how [do] we get people to know us? Through social media, like LinkedIn. That’s the big point.
LinkedIn is critical. It’s 300 plus million professionals who all want to network through those wonderful groups. It doesn’t matter whether you’re looking for VC funding, Angel funding, go to private equity groups. All of those groups are represented and you can do a simple search.
The other one that I use extensively is Twitter. I’m just amazed who you can reach out to these days. When I did my book, I was all like excited. McGraw-Hill signed my contract. They said, “Judy, you’ve got to build a platform.” I was so naïve. I said, “What’s that?” Now, I’ve jumped in to Twitter heavily and I’ve been just amazed and really impressed with the people that are on it and how you have access now.
To be a power connector: There are people looking for money and the point is: where are they hanging out? It’s important.
Facebook is really historical. It’s about who you know. Twitter is about now. The future is really about Pinterest. The other big thing that I tell people as far as access is how important it is to join powerful groups. Every week or almost daily, someone writes to me and said, “There’s no money out there.”
I point out there’s seven billion people on the planet. 369 trillion in global private wealth. There’s no lack of money, no lack of opportunities. We, as humans, are like chickens, we flock. It turns out, we all have problems and we all have opportunities.
The millionaires, the people who are accredited investors, their problem is finding a good deal. What do they do? They hang out at pitching events and they are friends with the people at the incubators because they’re scouting, looking for a good deal because they don’t want their money stuck in a bank account earning 1.7%.
There are people looking for money and the point is where are they hanging out? It’s important. Now, a couple of other things I suggest to people when I first moved to Salt Lake City, somebody asked me if I would consider being on a finance committee for a local governor’s run. The guy didn’t win, but being on there is where I met my first two billionaires.
Just another short story, I met a fellow in Salt Lake and he had been recruited by a top wealth management firm. He came into this very conservative area and happens to be black and gay. Within two years, he built this tremendous book of business. Very successful. I said to him one day, “How did you do that? You came to town, you didn’t know anybody, you didn’t have any network.” He said, “I joined the symphony.”
He paid a little extra to go to the meet and greet and grab some snacks before the show started and rubbed shoulders with, guess who? All of his customers. You think about, where are the people hanging out that need a deal?
That’s such great advice. Go where the fish are, basically. If you’re targeting people who live a luxury lifestyle, investors, typically Angel investors, live a luxury lifestyle. They’re interested in art and they’re interested in music and they’re interested in culture. Join things that they’re interested in so you have a personal connection first [and can become a power connector]. Would you agree?
Yes. I hate robot presentations. You never walk up to a person and say, “Geez, I’ve got this great startup,” and blah, blah, blah. “I just need 1.5 million and I’m going to get a percent of the market. We’ll be billionaires.” People make connections first personally. It’s critical that you, even if you go into a pitch event, that you be you and you be real.
[Tweet “It’s critical that you be you and you be real.”]
Being authentic really is the key to making that connection. I talk to people all the time, and I have these clients, about the importance of people buy emotionally and then back it up with logic. Most people want to lead with the numbers as opposed to the emotional connection.
The numbers are all suspect, as you know. They’re usually based off of assumptions. It’s anybody’s guess. There’s two reasons a startup fails; number one is lack of customers, number two is lack of funding. You think about when you’re in one of those pitch events, your customers are literally those investors.
To be a power connector: Because there’s going to be hard times, you’re going to hit the wall. They want to know if you’re coachable.
It’s nice to hear about the Kool Aid and how great your Kool Aid, your product is, or what you’re going to do. But you really need to show them who you are, your character. Because one of the first things they look for is, is this guy honest? Because there’s going to be hard times, you’re going to hit the wall.
They want to know if you’re coachable and certainly they will look at your go to market strategy, what the ROI is. They want to know when they’re going to get their money back. Yes, be you, be authentic. If you can admit to some failings that have made pivots along your way, they’re going to say that you’re educated. They’re really looking for your judgment and your ability to think well.
That’s such an important point. We can’t emphasize that enough to the listeners, is the willingness to be a little bit vulnerable and not come across like you know it all and you don’t need any advice? That whole concept of being coachable is what allows people to say, “Oh, you’re not going to just take my money. You’re going to let me have some input and we’re going to share our combined resource of brain power to make this successful. I’m going to be a part of building this with you.” As opposed to, “I just want your money and goodbye.”
Angels don’t do that. The main reason that Angels invest honestly is they like to coach, they like to mentor, they like to be involved and use the experience that they have. I would say, if you’re just looking for money, that would be bad money. You can find out, there’s a lot of fools out there that you can get bad money from. You really want people to help you because, guess what? No man can know it all anymore.
Can you explain a little bit more about using Twitter to connect and reach out? Do you have a story of how you’ve done that or someone you’ve worked with? As opposed to LinkedIn.
My adopted son, Preston, said to me one day, “You need to start tweeting.” I remember saying to him, “140 characters, what do I put? I’m in the shower?” I started sharing quotes and information about venture capital deals and stats and other things. I’m interested in all things entrepreneurial.
People started reaching out to me. One lady, I was really impressed with what she was doing with social media, [I] ended up talking with her on the phone. She now handles my social media. I called her one day and I said, “It’s Sundance. I’m going to be meeting with Jean Davis. She needs some help with her social media outreach. Would you come out here?” She about passed out. She said, “Of course.” So she flew out. I’d never even met her at that point. This was just a Twitter meeting.
I have other Angel investors reach out to me. You end up seeing that people are so accessible to you. People contact me for interviews. Say, “I’ve got money in to invest.” Certainly, it is important to do that. Again, you can find the thought leaders. You can tell a whole lot about people by what they tweet about, what’s in their profile.
The same thing on LinkedIn. You can read between the lines, so it’s important in your network. Research shows that the two things we look for just almost instantaneously, number one is warmth. Because you don’t want stranger danger. The second one is the level of competence. The third characteristic I tell people to look for is generosity. Because just because someone can help you doesn’t mean they will.
[Tweet “Look for generosity but be weary, just b/c someone can help doesn’t mean they will.”]
It’s that generosity of spirit. Is it in their DNA? Are they someone who’s open to sharing ideas or at least a referral without needing something back right away? The warmth and competence. Those are three great takeaways for our audience. Warmth, competence and generosity is what you want to look for so that you get what Judy’s just described as good money of someone who’s going to be helping you get through the bumps on the road that will happen.
Some Angels are devils.
That’s a great quote. Some Angels are devils.
You have to be careful. Some Angels are devils, just like some ventures are vultures. 90% of high potential startups are funded by Angels and there’s roughly 700,000 in the United States. There’s 300 Angel groups that are active in the US.
I was a Managing Director of Golden Seeds, the third most active group. It’s 300 accredited women, some men, and we syndicated deals with 120 other Angels in early stage VCs. All of these groups, you can get online and look at the application. Many of them post what the due diligence is needed.
[Tweet “Some Angels are devils.”]
Let’s have you speak a little about due diligence because that’s one of your areas of expertise [as well as being a power connector]. What kind of due diligence are Angel investors looking for when they decide whether they’re going to pick a startup to invest in?
Usually, Angel groups have some guidelines. Some of them are very early stage and they will take just an idea. Some of them want to have proof of concept, so they want to see that you really have customers. The VCs say, “the dog that will eat the dog food.” They will have certain criteria before you even apply.
If you pass that criteria, then you usually come and give a ten minute pitch. The Angels get together and say, “This person looks good. Let’s see if they would be easy to work with.” What kind of valuation they’re expecting…
If you pass that criteria, the Angels get together and say, “This person looks good. Let’s see if they would be easy to work with.”
I tell people to be very, very open. Don’t march in and say you’ve got a three to five million valuation when you don’t have a customer. They’ll just say, “This is an amateur that doesn’t know what they’re doing.” Usually the dance is, “Can we work with this person, do they really have a good concept?”
As soon as they make the decision to go in due diligence, for instance Golden Seeds will put together a team and they will have a legal guru. They’ll have a couple of gurus that’s out of the specific industry so they can look at the stats, do the competitive analysis, the marketing.
A good place to go look is Techstars. If you look at some of the Angel groups, there’s actually a list. Tech has one I think that’s five pages of due diligence questions. They will look at your social security, they’ll look into your background, they’ll see if you’ve had previous litigation. Initially upfront, they’re looking to make sure there is, as you know, no hair on the deal.
That means that it’s clean. You’ve not gotten money from friends and family and cousins that isn’t documented. That you haven’t given away massive amounts of stocks so that at the end of the day, nobody’s going to make money, and particularly the investor.
They want to make sure that you’ve got IP protection or you’re in the process. You’ve got trademarks. There’s sections on legal. There’s sections on the competition, sections looking at the marketplace. They do go in to the founding team’s background, what is their expertise. That’s just some of the major ones.
That’s really helpful Judy. Thank you so much. I think that the real key takeaway and the consistent things that keeps coming up over and over again is when you first pitch, they’re looking at, are you easy to work with? Even when they’re doing the due diligence, they’re looking to make sure that you have integrity and you’re who you say you are.
If you’re pain in the butt, “Next.” There’s millions of deals out there. If you’re a know-it-all and smarty-two-shoes and think you’re valuation is sky-high, it’s too much trouble to educate you.
What is your criteria for what a good valuation is? A lot of people say, “I know all the numbers are suspect and I think I want X amount of money for this percentage in equity. Therefore, my valuation is this.” Do you have a formula that you say, “That’s unreasonable,” or this is really how to be conservative in your valuation?
The best book out there, and I recommend it to people, it’s out of print now, but Howard Stevenson was considered the godfather of the entrepreneurial world at Harvard. He is now retired and in ill health. He has a book that he wrote with a cofounder on Angel investing. It’s probably the best I’ve ever read. It’s really to educate Angels.
There’s a chapter in it on valuations and there’s the Chicago Method and all these different methods. At the end of the day, he said it really is what the investors are willing to do. They’re the ones that are going to call it. If you don’t want the money then fine.
He has a really good one that he liked and many people used it. You get points if you’re a founder who’s done it before. You have expertise, you have an advisory board, which shows that you are coachable and you realize you don’t know it all. You have customers.
You get so many points. I think it starts in at a 1.5 million valuation and moves up to the maximum of three. Now, that book was written many years ago. You can actually find stats of what the going valuations are, on the east coast and west coast. Those are the main two markets. You can certainly look at that.
It’s a combination of art and science. There is no formula. At the end of the day, it’s really, what are you going to do?
[Tweet “Figuring out your valuation is a combo of art and science”]
Art and science, great takeaway. The other thing I want to tap into, because you’re on, I want to have the listeners know about you a little more, you’re on Illuminate Ventures. Tell us a little bit about that and some of the other boards you’re on and advisories. So people have a real picture of what you do.
I’m an advisor on two venture capital early stage boards, Pereg in New York and our strategic arm is Nielsen. Just did the first portfolio deal. The one that I’ve been on the longest is Illuminate VC out of Menlo Park. It is in the top 10% of performers. It’s an interesting backstory. Cindy Padnos, who’s the founder, had $5 million. People sneered and said, “That’s not enough money to invest and you’re not going to do anything.”
She has her first unicorn in the portfolio and a couple of others that are valued it over a billion. An advisor we have, Ken Elefant of Intel Capital, Claudia from IBM Capital. You can go look it up online, and the same with Pereg. I’m also an advisor to Springboard, which was founded because women had such a difficult time getting in the VC doors or Angel investing doors.
Today, we’ve raised the companies that have been mentored and we teach them how to do a pitch and to go to market strategy. We’ve raised 6.6 billion, had eleven IPOs and probably more than 145 strategic sales at this point. That’s a not for profit. That’s another one that you can go online.
Another one we haven’t touched is crowdfunding. I would tell the listeners, if they want to learn about due diligence, go look up CircleUp. CircleUp is a little further up. You have to have a deal of three to five million already in sales. They’re very quick at financing so it’s later than early stage. They probably have the best documents online on due diligence that I’ve seen.
Oh that’s great. Crowdfunding. Thank you for that. That brings us back to the real challenge for so many people, whether they’re women or men, in Springboard or whatever it is. What do I need to have on my pitch that’s going to convince someone like you to want to take it to the next level? What are you looking for in a pitch that you could give suggestions to our listeners on?
I’ll send you some documents that you can attach in the show notes. I have a couple of sample pitch decks usually no more than fifteen slides. I certainly want to see what your product is, your value proposition. I usually tell people, if they can’t tell me the value proposition in one sentence, that they don’t have clarity, they don’t know quite [what] they’re doing.
I’ll give you an example, I’ve sat on the University of Utah’s Tech Transfer Center. I’ll never forget I’d hear pitch after pitch after pitch and we’d have people coming in and one guy go, “Yes. We’ve got this mechanism of action with this chemical and it’ll help blah, blah, blah,” and he goes on for 20 minutes. Afterwards, I said to him, “Why don’t you just say it fixes a hole in the heart?”
To be a power connector: Just tell me in one or two sentences, what this is, what it does, then you’re crystal clear.
If you can get sophisticated enough to get your messaging right off and tell me in one sentence, just tell me in one or two sentences what this is, what it does, then you’re crystal clear. A short slide deck and certainly has information on the product, the market size, the competition, a little bit on the team.
I particularly look at competition. There’s things that instantly ear mark you as an amateur. For instance, either have no competition or very little competition. Another question I’ll ask people is, “What’s your customer acquisition cost?” Usually, it’s deer in headlights. Your number one job is sales. Cash covers a lot of sins in a startup. The focus needs to be cash flow.
I do look for people telling me the truth. I’m looking for [people] that have good judgment. I’ll send you an article, Angels to Avoid. I’ll send you one on how to do a pitch deck. Another thing that I like to use with people, and most people have heard about it, is business model generation. It’s a one pager that you actually put, what is your value proposition, what is your pathway to a customer, who are your different customer segments. You can do it on one page. Usually, after you’ve worked through that, it really makes messaging easier. That’s an important one.
Judy, you’re certainly modeling for our listeners all the qualities that you say you look for in a startup. Warmth, competence, and your incredible generosity to share with everybody all of those things that you’ve just said, that we’re definitely going to post in the show notes about Angels to Avoid and your pitch deck tips.
What I find really fascinating that you talked about is the two reasons why a startup goes out of business. You had mentioned one, they don’t have customers. Two, they don’t have funding. Of course, it makes perfect sense that one of the key areas that I think a lot of people don’t prepare for is, what is the cost of your customer acquisition so that you don’t go out of business?
It ties it in full circle with what you opened the show with and one of your big tips that rarely get mentioned and what people are going to get asked during a pitch deck or [that] should be in the pitch deck to begin with. So you have an awareness of, “If we’re going to get customers through Facebook, this is what our CPN is and this is what our cost per customer is. Or we’re going to spend money here. This is how much it costs to generate a customer.”
It’s like, “battle plans are really good until you go to war.” It’s when you meet the customer that you find out that some of your assumptions are wrong or faulty. You may find out you could get more money by doing X, Y or Z. Clayton Christensen, again at Harvard, famous on innovation, says that research shows it takes three pivots before you get to the point of a consistent revenue stream.
You’ll find some customers, even if you have an LOI signed or you’re showing that there’s customers, that’s a big deal to investors. Because there’s gazillions of ideas out there. Just because it’s an idea doesn’t mean anybody wants it. That’s sad. I’ve met people who’ve spent three years, mortgaged their house and spent all their friends’ and family money and built something only to find that nobody wanted it.
[Tweet “It takes three pivots before you get to the point of a consistent revenue stream.”]
Nobody wants it. Three pivots, that’s a huge, huge takeaway for our listeners. The fact that you need such passion and perseverance to keep pivoting. Most people give up after the first pivot. Another huge percentage probably give up after the second pivot. If it takes three pivots on average before you really nail it and have something that people want, that’s a really surprising statistic I think for most of our listeners. To be aware that you have to show that willingness. That’s why investors love serial entrepreneurs so much. They have that tenacity.
They’ve learned. You learn from the market. The market talks to you. There’s a famous quote that says, “There’s more danger sitting behind the desk, writing a business plan.” You need to get out there, get out there with your folks. Big companies do this as well.
Viagra was a heart medication pill initially and then the nurses noticed this strange side effect. They did a major pivot. Now, the drug is available for women. It happens all across different industries, verticals. The same thing with the money, I’ve got to tell you, it just hurts my heart when people have a brilliant idea and can’t get funded.
Another story, In Salt Lake, I met a woman who had just a brilliant medical device. Very simple, nothing complex. It was a permanent birth control device. Little tiny thing and it could be done in a doctor’s office. Inexpensive, came as an RFP from China. Obviously, there’s customers all over the world. Women in Africa walk seven miles to have their bellies slit open. They use scissors to cut the fallopian tubes. No anesthesia. Many of them die.
This woman had looked for funding for eight years. I looked at it and I knew. I knew it could go and she could make millions. She was in the wrong room. I talked about this in my books. So many people I meet are in the wrong room. Whether it’s looking for funding, or the right employees. I said to her, “You’ve got two strikes. You’re a woman and you don’t belong to the local religion. We need to get you out of dodge.”
I took her to Golden Seeds in San Francisco and then to a group in Boston. We got half a million dollars in less than six months. The company sold two years later for millions. She had searched for money for eight years. She’d even mortgaged her house so she could cover her IP. I just want to tell people, the money is out there. You make sure that you get in the right room.
Lots of that in my book [How to Be a Power Connector]. If people want to just contact me, I happy to. We could do a second show John, and go into more of these.
[Tweet “The money is out there. You make sure that you get in the right room.”]
Sure. The book again, for everybody, is How to Be a Power Connector. It’s one thing to be in the wrong room, as Judy said. Then when you get in the right room, what do you say? There’s two steps. Get in the right room, and then when you’re in the right room, what do you say?
Exactly. You be real, you smile, say hello, shake hands, drop the elevator pitch. I was shy. I was bullied in junior high. I didn’t dare talk to people. Even in the corporate world, they’d have these events. I’d go late and leave early. I would hang out in the corners. I hated it. It turned out I wasn’t shy. I was worried about what would other people thought of me and did I add value.
It’s how I got Mark Burnett to endorse my book, and our friends with people on Shark Tank.
You be authentic. I’ll tell you a secret, if people just did this, I call it my two golden rules. After you share your story and you go, “I’ve got this startup and we’re going to do great things and I’m trying to find my seed round.” Then you say two things, “What other ideas do you have for me?” Number two, “Who else do you know I should talk to?” Those are golden. This is how I have billionaires on my Rolodex.
It’s how I got Mark Burnett to endorse my book, and our friends with people on Shark Tank. If you ask those questions, you will build your network up and out. That’s what you need, because on average, people know 632 people. You’re literally crowdsourcing from those people on the best people in their network for you to reach your goal.
That’s such incredible information. Clearly, it works if you have Mark Burnett endorsing your book [How to Be a Power Connector] and know people on Shark Tank. Let’s just repeat those two questions, if we could, for the listeners. The first one after you share your story is, what other ideas do you have for me? The second one is, who else do you think I should know?
Who else should I talk to? Who else do you know I should talk to?
[Tweet “Ask: What other ideas do you have for me? Who else do you know that I should talk to?”]
Who else do you know I should talk to?
Listen. The secret is, most people will help you. Research shows that if you’ve been raised in a lower to a middle class family, we’re taught not to ask. We’re taught to keep our head down, to work hard and magic will happen. It’s a fairytale. You have to learn to ask. When you ask, it’s simple.
You don’t walk up and go, “Dude, don’t you want to invest 800,000? My company valuated at 15 million.” You say, “These are my ideas.” People will help you if you ask. Most people are wired to help others and they like to share advice. This is really true with the Angels.
[Tweet “Research shows that if you’ve been raised in a lower-middle class family, we’re taught not to ask!”]
That’s just so great. Those Judy secrets [on how to become a power connector]. What other ideas do you have for me? Who else do you know that I should talk to? One of the key things to notice about those questions is they’re open ended questions. They are not yes, no questions. Make sure that if you don’t use her exact words, which I highly recommend you do, “What other ideas do you have for me and who else do you know that I should talk to?” that you make sure that any kinds of questions that you ask someone are not yes/no questions.
Are you interested? That’s a yes/no question. Now that we know Judy’s incredible secrets of how she gets, not only in the right room but once she’s in the right room, how does she get the right people to help her and not being shy to ask for help, i.e. being coachable, is a really key takeaway for everybody.
Judy in the last couple of minutes I just want to see if there’s any other suggestions you have for someone who maybe has an idea that doesn’t necessarily solve a problem. Because so many pitch decks are, “Here’s the problem, here’s the solution.” They have a new idea. Maybe it’s a game or something along those lines of not really solving your problem. How would you suggest someone pitch something along those lines?
Those are the brilliant breakthrough things, like Facebook. Clayton Christensen said you can’t really do a business model on something … Nobody asked for a light bulb. There are brilliant things out there. Again, I would surround yourself with advisors, find people who will really give you advice.
When you start sharing your story, you never ask for money initially. What happens is you’ll find somebody and they’ll go, “Oh my Gosh, I love what you’re doing. Can I help? Can I be involved?” Then you have champions. This is really important when you do Angel deals because Angels, like the rest of us, can be finicky.
You can do a great pitch and there’s one person in the whole group that goes, “I think that is just a stupid idea. I’m not going to do it.” If you’ve made friends with an Angel that’s involved in that group of taking them to lunch, then they stick up for you. They’re a champion in that group.
In Salt Lake, I just adore Adam Slovik. He has built and sold a company for a billion dollars. He’s one of my favorite Angels. I take people to him, like you’re mentioning, that have an idea just to brainstorm, help flesh out what would be the best way, and more importantly, which Angel group makes the most sense.
Also, in the VC world, all of those people. Tim Draper invests in Angel deals on the side. He has Draper University. You can go look at that. It’s important to get the people first. You can be honest and upfront. Usually, ideas like that come out of universities, research labs and sometimes just by a regular person. You can get resources at all the universities, at the community colleges, even the SPA offices. I would just make the rounds because there’s gold.
Something else I want to tell people is, we all have a network already. On average, peer research shows we know 632 people. I can tell you, 99% of the time, the answer that you need exists already in the network you have.
Just to another quick story, my agent called my one day and she goes, “Judy, I think you need to talk to Mike Muhney, he builds ACT software, sold it for $48 million. He’s the father of the CRM industry. He has this brilliant app called Vipor that’s for contacts. Keeping track of connections.” We get on the phone and talk. He flies to Salt Lake. I said, “Mike, I’ve never heard of your app. What are you doing for marketing? How are you acquiring customers?”
He talked for a few minutes and he looked really sad and he said, “If I could just get a story in Success Magazine.” I looked at him, I said, “Mike, when you go back to Texas, I want you to call Wendy, who I’ve only known for six months, who you’ve known for six years. One of our friends is Darren Hardy, the founder and owner of Success Magazine.” He literally almost fell off his chair.
I can tell you, this happens to me every week. You need to share your story with the people you’ve already got. My basic formula is quality relationships plus strategy to your goal. Quality relationships plus strategy. It’s important. People talk about be persistent, be scrappy. I met with a VC guy and he said, “If you can’t figure out how you get to me, you’re certainly not going to figure out how to get a customer.”
Besides using the network you have and getting in the right groups, the other thing I’d tell you is talk to strangers, every day. There’s probably millionaires walking by you. I met a guy that was a billionaire and he was in coveralls, work clothes. We only talk to strangers 2-3% of the time. If you think about critical, important people in your life, usually your spouse, they were a stranger at some point. We’re taught as kids, it’s just embedded in our head, strangers are danger.
[Tweet “We talk to strangers 2-3% of the time, important people in your life were a stranger at some point!”]
That works well as a kid, but not as an adult. Start practicing, just say hello, say hi. You start doing that because yes, very good things happen to you because of your working hard and planning. If you think about it, the most important things are usually luck and serendipity. That is all about positioning. You can make those things happen.
I love it. That’s such great advice. What a great quote that the VC said, “If you can’t figure out how to get to me, you probably can’t figure out how to get a customer.” That’s a great tip. As we’re wrapping up the show, are there any other book besides Howard’s book that you mentioned, Howard Stevenson’s book on due diligence, that would you recommend for startups who read, besides yours of course?
Art of the Start by Guy Kawasaki
Certainly, I do like the Business Model Generator. I’m going to send you the actual worksheets that are fine and it’s okay. I like Art of the Start by Guy Kawasaki. There’s two or three that I like. I’ll send you some of those so that it will help people.
That’s so nice. Thank you. Judy, this has been such an informative, jam-packed, full of incredible secrets, information and insights [about being a power connector] for our readers. The big one is, what other ideas do you have? Who else do you’ve know that I should talk to? Coming across authentic, being warm.
It’s just been such a great interview. We can’t thank you enough for your generosity and sharing your brilliance and your knowledge. Everyone should obviously pick up the book, How to Be a Power Connector. Judy has her own website, she’s a coach, she’s a speaker.
She’s clearly someone that you want to have in your own Rolodex so that you can network and really help her get to know you so that she could make a difference in your business. Judy, thank you so much.
People, feel free to reach out to me on LinkedIn or Twitter, my website. I’ve also been asked by so many people, I’m going to put together a eight week webinar on how to get funded.
Terrific.
I’ll probably interview you on it.
I would love that. That would be great.
Thank you. Listen folks, everybody out there, really, just do it, just reach out to people [and be a power connector]. They will help you, I promise.
Great ending. Thanks, Judy.
[Tweet “Just do it, just reach out to people. They will help you, I promise.”]
Links Mentioned
How to Be a Power Connector by Judy Robinett
Art of the Start by Guy Kawasaki
Judy’s Bonus Content
As you heard during the interview, Judy was incredibly generous with a whole list of attachments. I’ve made the files she mentioned available by simply clicking here to download.
Social Interaction and Health – Dr. Sudip Bose with Judy Robinett
Connect and create | Judy Robinett | TEDxSacramento
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