How to Finance Your Startup

How to Finance Your Startup

>>To my left is Lindsay
Karas Stencel, who is the COO and fund manager of Launch NY. This is Julie Lenzer, the
chief innovation officer at University of Maryland. And at the far end
is Allie Burns, the CEO of Village
Capital, and also previously with Revolution’s
Rise of the Rest Fund. So I wanted to start
off and just have each of our panelists give a
little bit of background on who they are, what their
organization is about, and a little bit of their story. [inaudible] Lindsay?>>Sure. So yeah, hi, everyone. Thanks for coming today. So my name is Lindsay
Karas Stencel. I wear a couple hats every day. So I’m the COO and fund
manager for Launch NY. Launch NY is a 501(c)3 venture
development organization focused on bringing venture capital and
growing high-growth startups in the 27 westernmost counties
of the state of New York, because all of the capital
tends to go to New York City, but turns out there’s more
to the state of New York than just New York City. So we work really hard there. We have the — we had the
tenth most active seed fund in the country last year. And we are seeking to
beat that this year. We have 14 transactions
closing in the next two weeks. So buckle up, it’s
going to be a fun ride. In addition to that, I’m
one of the managing partners and chief legal counsel
for a venture capital firm out of Columbus, Ohio
called NCT Ventures, where we are an early-stage
venture fund always looking for the next cool thing. So that’s a little bit about me. I’m a recovering attorney. I’m licensed in multiple states. So that’s always fun, too. [ Laughter ]>>Good. Well, I’m Julie Lenser. I’m a recovering entrepreneur. I’m also a recovering
government appointee. I used to be the
director of the Office of Innovation and
Entrepreneurship. So do we have any Regional
Innovation Strategies i6 Seed Fund winners here? Anybody that’s won those grants? No? That’s [inaudible]. There’s lots of –>>I know.>>Opportunity.>>Yeah.>>I told you there was.>>Right.>>Just to give you an idea,
the Office of Innovation and Entrepreneurship,
we help fund and build entrepreneurial
ecosystems across the U.S. And, in fact, I believe it’s been $57
million that we’ve put into play as grants to communities across
the U.S., which I was able — I was there for two
and a half years. I was part of the Obama
administration and had to leave at noon on January 20th. But that’s the way
that works, always. So I am now the chief
innovation officer at the University of Maryland. I decided, because government
wasn’t a big enough problem to try an entrepreneur, that now
I’m going to take on academia. It’s worse than the federal
government in many ways. I’m not lying. There’s a lot of barriers. And that’s why they
need entrepreneurs, because we are possibility
thinkers, we’re persistent, we keep trying to find a way. And that’s what I’m
trying to do in academia. How can academia — my
job at the university is to unleash innovation, so for
students, faculty and alum. So we’ll talk more about some
of the things that we’re trying to do and some of the things
we’ve done in the past. So thank you.>>Hi, I’m Allie Burns. I’m not sure yet what
I’m recovering from, but [inaudible] in a few years. And I’m saying hi to the
folks who can’t really see. So I run Village Capital. We provide support to seed-stage
entrepreneurs, both in the form of investment readiness
training and access to capital. And we look for entrepreneurs
who are sitting in what we call investor
blind spots. So we look for entrepreneurs
who are trying to solve a specific
set of problems. When you look at the most
valuable companies in the world, the sort of so-called
unicorns, less than 20% of them are actually solving
problems in areas that matter for us to have healthy
and productive lives. So areas like education,
financial inclusion and financial health,
food and agriculture. And we’re looking for
entrepreneurs who are trying to solve these really
hard problems to increase economic opportunity and provide environmental
sustainability. And we also look for
entrepreneurs who are outside of the three states who get
75% of most venture capital. So New York, California
and Massachusetts get 75% of U.S. venture capita and
50% of global venture capital. And we also look
for entrepreneurs who are underrepresented. Less than 10% of venture capital
goes to companies founded or co-founded by women. Less than 1% of companies
founded or co-founded by
people of color. So there’s a lot of opportunity
that has not yet been tapped when it comes to investing
in early stage companies that we’re really
excited about providing. Over the last nearly
ten years we’ve trained about 1,200 entrepreneurs. And through our seed-stage
fund we’ve made about 100 investments. So we’re not quite as
busy as some of the others on the panel here, but we do
have a very active portfolio. Really excited about
both the attraction that these companies are
getting, and the impact that they’re making
in the world.>>Awesome. I think that’s a great leadoff. One of my initial
questions was, you know, Allie already stated the
fact that gets cited a lot, which is that the lion’s
share of venture capital in the U.S. is located in
three markets: New York, Boston and San Francisco. And I think we have a very
unique group of panelists today, entrepreneurs and investors,
who have a view of all of the financial opportunities
outside of those markets, and at a very national level. So I guess the first question
I wanted to ask, you know, each of you, if you could give
us your input, is, you know, tell us what’s outside of those
three areas that you’re seeing. Help us get into the
mindset, you know, of what you’re looking at, and
how they value investments. And just give us kind of
a perspective on that.>>Sure. So I’ll jump
in, because I spend a lot of time running around the
Midwest of the United States, the flyover states, if you will. You know, we like to
look at it this way. The west coast has the internet,
the Midwest has the things. And if you think about where
a lot of technology is moving, be it robotics and AI and things
of that nature, and you have to transport those — you know,
transportation, all that stuff, the Midwest, if you’re
located say in Central Ohio, you can get to 80% of
the U.S. population within one day’s drive. So for us, that’s an amazing
opportunity, because, you know, you can get to all of those
great places very easily, and you can transport,
be it your good, your product, whatever. But on top of that, the cost of
living is dramatically reduced. So when we look at
investment opportunities out of the west coast, and
I’m not knocking my west coast counterparts, but it’s
dramatically more expensive to pay developers and teams out
on the west coast than it is, you know, in Western New York
or Central Ohio or, you know, be it somewhere in Indiana. So it’s an opportunity to be
able to take the same amount of capital and, theoretically,
double the amount of output that you can do. So, you know, where you’d hire a
coder for 250 in San Francisco, you can hire them for
150 in Central Ohio. And you think about
the value there. I will say we also are much
more realistic about valuations. We’ve got that good old
Midwestern mentality. So we want people to
not only, you know, tell us the opportunity that is
there, but we want them to kind of prove it a little bit, too. So we have much more realistic
metrics that we tie to, as opposed to just tying to,
“Hey, we’re buying a percentage of business,” as you might
see in some other places. We’re saying, “Okay, what’s the
actual value you’re creating based on each milestone in
each investment tranche,” if you will. So lots of opportunity
in the Midwest. A pitch for Columbus, Ohio. Forbes last stated
that Columbus, Ohio was the number one city
for startups in 2018 in October. Cincinnati was number six. And there’s a laundry list of
other folks, you know, between, you know, the Mississippi and
Nevada that were also named. So I challenge you to
look in those areas, too, because I think there’s a
ton of investment opportunity for any person in this room.>>It’s funny, because
I will actually — my business was seeded
in Dayton, Ohio –>>Yeah!>>And Cincinnati, Ohio,
because Procter & Gamble was my sugar daddy. Hey-oh. So –>>Hey-oh.>>Great. The more that
I travel across the world and across the country
what I see is that good ideas are
not just relegated to a certain demographic
or geography. There are great ideas
everywhere. And being at the
university, I see — we have a faculty member who
has cured multiple sclerosis in a mouse. We have someone who is
creating a quantum computer that is competing
with Google and IBM. There are amazing
things going on. And this is just the
University of Maryland. There are amazing research and
ideas all across the country. What they don’t have perhaps
that someone in Silicon Valley, Boston or New York might have, New York City I think
also has this, is the density of
talent in capital. But it’s not just
about the capital. It’s also about the
talent, to your point. It’s about finding the
workforce that you need to develop your company. It’s about finding
the business expertise when you have the idea. Just because you have the idea
doesn’t mean that you’re the one that should be the CEO. And we see this especially
within academia. Faculty members think they want
to be the CEO, until they have to start making payroll and
have to do all this boring stuff that has nothing to do
with their research. And so I would say that I
think there’s actually more opportunity outside of these
capital-intensive areas because there are great ideas
that just need their ecosystem to cultivate and bring
the resources to them. And that’s to your point is where the good deals
are actually. Yeah.>>Julie, it’s funny
you mentioned P & G, because I think one of the other
advantages of sitting outside of maybe some of the major
tech hubs is connection to — particularly in the
sectors where we invest, connections to strategic
partners. So corporates to universities,
when you’re solving a problem in healthcare being in
Nashville, which is a huge hub for healthcare and health
systems, or in Houston, there is a huge opportunity
to be able to tap into those strategic partners,
both in terms of customer base, but also in terms of thinking
about where are you going as you build your
company towards an exit. So there’s a big –>>Yeah.>>Advantage to being –>>The best capital for any
company is a paying customer.>>Exactly.>>It’s the truth.>>Well, and we have our
additional panelists. This is Tim Hwang, the
founder and CEO of FiscalNote. Tim, do you want to tell us
a little bit about yourself, and what the inspiration was
for starting your company, and how you fundraise thus far?>>Sure, yeah. So apologies for
being late here. I just got off a
flight from Dulles –>>Who –>>Not an hour ago or
so, an hour and a half. So a pleasure to be here. You know, my name,
as I said, is Tim. I founded a company called
FiscalNote, actually originally out in Silicon Valley. And moved the company
here in Washington about five or six years ago. We are now the largest
technology startup here in the District of Columbia. We have raised just under
about a quarter-billion dollars in venture capital investors
like Mark Cuban, Jerry Yang, Steve Case, NEA, first round,
and a whole host of other folks. You know, I think that, you
know, we started our company with thesis that, you know, we could apply artificial
intelligence into a wide variety of different sectors, starting
with legal, but now pushing into construction, real
estate, healthcare, oil and gas, pharmaceuticals and the like. We have operations both here
in D.C., but also, of course, around the country in New
York, Louisiana, St. Louis, Los Angeles, and then
internationally in India, Korea, South America, as
well as in Hong Kong.>>Wow. I think on that note,
did you see any differences in the geographic
locations that kind of made you change your approach
in terms of how you fundraised?>>You know, we are very
blessed to have a wide variety of institutional investors
from not just around the U.S., but actually around the world.>>Yeah.>>Actually, one of our largest
institutional investors is Temasek out in Singapore, which has been making
a substantial amount of investments in both
American companies as well as global companies. So I think that one
of the things that I’ve consistently found
is that the availability of capital is quite wide and
diverse, and not just in terms of geographic opportunity,
but also in terms of the types of capital that are out there. So, you know, certainly,
there’s, you know, very expensive equity
capital that exists in the form of venture capital. You know, the funds have
specific return rates that they have to surpass. But there are quite
a wide number of different capital
partners that can exist, whether its corporate
strategics, family offices, sovereign wealth funds,
you know, different pockets of different strategies that
different private equity funds or hedge funds are using. So for a variety of different
purposes, whether it’s been for acquisitions or for
growth capital for, you know, credit financing, whatever it
is, we’ve been able to sort of tap into multiple
different streams of capital in different parts of
the capital structure.>>That’s great. Lindsay, I wanted to
ask you a question. So you’ve personally led, I
believe this number is right, over 1,200 seed and
early-stage deals?>>Yeah.>>So I wanted to talk to you about investing at
the seed stage. I mean, I think we
[inaudible] –>>Sure.>>Talked a lot about
venture capital and kind of those Series A,
Series B rounds. But I think a lot of high
impact investing also happens at the seed stage. Can you talk –>>Yeah.>>A little bit about that
and what you’ve learned?>>Yeah. So seed-stage
investing if you — just to kind of map out the
spectrum, it’s pre-seed, which I call, like, the F-cubed, which is friends,
family and fools. Okay? Because your grandma gave
you, like, five grand to try to get your business moving. And then there’s seed. And that capital is used to
actually seed the business, and figure out, “Okay,
is there something that is possibly scalable here?” It’s incredibly high risk. So it is a volume game. So you can expect that
80% of the investments that you make aren’t
going to go as planned. That said, getting into seed
is incredibly important. One, if you look at some of
the seed-stage investors, will take a company like
Pinterest, for example, someone who put $50,000 into
Pinterest now has $250 million in their bank account. Okay? So just like drink
that in for a moment in time. Whoo! So it’s exciting
in that regard. But it’s actually incredibly
impactful if done right. So the reason I’m so passionate
about seed-stage deals is because if you think
about building a house, you have to lay the
foundation appropriately, because everything you build
on top of that is going to, you know, push back
down on the foundation. So in order to set companies up
for success, I’m a huge advocate of making sure that those
companies have market-standard deal-style terms. You know, a lot of companies
in seed, they’re trying to be real scrappy, and they’re
thinking, “I’m taking out money from this person
and that person, all these different terms,”
all wonky and whatever, it just makes it unattractive
to a future investor, because sometimes
investors are lazy. And so they look at it
and they’re like, “Well, you got 19 notes out there, all those different
terms, hard pass.” So for me, it’s about
setting up these companies in a very strategic way, so that
when a future investor comes and says, “Oh, my gosh,
this group of, you know, investors they worked with
this company to say, ‘Wow, they really laid the groundwork
to not only develop the base of the company, the team, et
cetera, but now they’ve set it up so they’ve made it attractive
for a future financing, ” so that you’re more
likely to attract capital which in turn should drive down
— in at least my portfolio, drive down that 80%
failure rate. So, yeah, we’ve had a — we’ve
had a lot of success in that. And you get to see
tons of stuff. At Launch NY anyway,
we’re industry agnostic. So I invest in anything from
life sciences to ed tech to you name it, everything
in between. So it’s been a really wild ride. But it’s a lot —
it’s a lot of fun.>>Can totally imagine. Allie, do you guys
at Village Capital — do you do it the
seed stage investing, or are you a little
bit later on?>>We do. We’re largely
seed stage. And that can vary. So we invest both in the
U.S. and Sub-Saharan Africa, India and Latin America. So seed stage can vary based
on the market, both geography and the sector that
we’re investing in. But, typically, our first
check is $50 to $150,000. And then we, obviously, have some capital
reserved for follow-on. And one of the things
that we talk about a lot that’s important at the seed stage is
building social capital. There are a lot of entrepreneurs
who may have a great network, may have connections, may have
the friends, family and fools, but not all of them do. And so how do you get
a business started, how do you get a business
going if you don’t have access to the financial capital? And sort of really focusing on how do we help
entrepreneurs make connections to social capital that can turn
into financial capital later on I think is critical
at the seed stage.>>Yeah, absolutely. I was curious to hear
from all of you, you know, some of your success stories. A lot of you — you
know, you all work with entrepreneurs very closely. So, you know, what are some
of the lessons learned, some of the success
stories you’ve seen working with entrepreneurs who
have raised capital well, or maybe the inverse,
not so well? What are some of
the pitfalls there?>>I think one of the
companies I was invested in — I almost call it death
by 1,000 paper cuts, because she never raised
enough at one time. It was always 25 here,
50 here, 150 there. And she spent her whole time —
and I would love to hear, Tim, your opinion about how much time and energy it takes
to fundraise. And so if you’re always
fundraising, you’re not focused on the business, or
you’re really just diluting your efforts. And so I would say from a — you know, from an
advice perspective, you know, thinking bigger. If you can build
a bigger picture and raise a larger
tranche of money, making sure that
you need the money. I mean, don’t just raise
money to take money, because, as he said, equity capital
is the most expensive kind. But looking at the
different ways that you can properly
capitalize your business. She did finally find an exit. She was acquired. But she had — you know,
constantly she had customers, she had contracts, but she
didn’t have the cash to deliver. And that’s — a lot
of people miss that. You can go out and get
customers, but you also have to have the cash to be able
to deliver on your contracts. And so I would love to hear —
I mean, the amount of time to –>>Yeah.>>Raise money.>>Yeah, I mean, I think the
advice that I give to a lot of early-stage founders is that you don’t want
to waste your time. And so, you know, every
investor, you know, given their fund restrictions,
their LP relationships, whatever it is, has a
very specific strategy that they’re deploying. It could be, you know,
certain check size, certain ownership stake,
it could be certain stage of company, whatever
the case is. And what a lot of founders do
is they get really excited or, you know, they start
along this warpath of trying to raise capital. And they start having
all these conversations. And it’s just a complete waste
of time, because, you know, their company’s strategy doesn’t
fit with the fund strategy –>>Right.>>That the investors
are trying to deploy. [inaudible] there’s nothing
wrong with the business. It’s just that they
need to be very targeted about their messaging,
as well as the strategy that they have going
out to market.>>Yeah. And, actually, that’s
something that we spend a lot of time helping entrepreneurs
on as well. We say we’re teaching
entrepreneurs how to speak investor. But, essentially, a lot
of times what happens in this situation
is an entrepreneur and an investor will meet. An investor can’t say exactly
why they’re not going to invest, they’re just like, “This
isn’t a fit for my strategy.” An entrepreneur hasn’t
articulated clearly what milestones that they are
striving toward in order to be a fit with that investor
at some other point in time. And so providing — one
of the things that we try to do is provide a framework
where an entrepreneur and an investor can
sit across the table, and be speaking the
same language — Whether or not that’s a
fit at that particular time where they’re building a
relationship for the long term, being able to articulate as an investor what
milestones you’re looking for at what particular
stage, whether it’s in team, whether it’s in vision,
product market fit, ability to scale, et cetera. And same goes for
the entrepreneur: How do I identify the
milestones that I’ve reached and that I’m building towards? And being able to have that common language I
think is something that’s really important.>>I think the fact that you’re
getting investors to say “No, thank you,” that’s huge,
because most investors won’t. They’ll just say — you know,
they just — they won’t say — rarely say no, because
they don’t want to pass up. But they don’t say,
“Yes,” either. And so you kind of keep — I don’t know how many
entrepreneurs, “Oh, yeah, we’re going to close this. We’re going to close this. We’re going to close — ” do
you have a term sheet yet? “Well, no. But they’re really interested.” No, they’re just
not that into you. [ Inaudible Speaker ] It’s true in startups, too.>>Yeah.>>And then to kind of go off
some of that, I think some of the things that not only
are we trying at Launch NY, we help entrepreneurs, but
we also are an investor. So we’re like a kinder,
gentler investor, if you will. But the biggest thing
we’re looking for, and I would advocate that anyone
who’s thinking about investing in this room is looking
for, I call it grit. You know, we can have an
argument about whether that is learned or
you’re born with it. I believe you’re born with it. Either you have it
or you don’t have it. And fundraising is hard. There’s a lot that goes into it. You know, every time you think
you’re going to cross a line and you hit a hurdle, some
people just aren’t able to cross over that one additional
hurdle to make that additional leap or step. You know, I just
got off the phone with an entrepreneur a day
ago that said, “I need $11,000 to finish up my prototype,
and then I can do this. And I’m going to tap into
this $10 million market.” So I was like, “So
let me understand. You need $11,000 and you’ll get
$10 million, theoretically?” He said, “Yeah.” I said, “Have you
done everything? He said, “Yeah, I’ve
tried everything.” I said, “Did you sell your car? Did you sell your house? Did you sell your furniture?” You know? Like that’s the kind
of stuff you’re actually looking for in an entrepreneur. Not that they have
to actually do it, but are they willing
to take that leap? Are they willing to take
that additional step? You know, look, I’m
not advocating that people all liquidate their
homes, but I am advocating that they are willing to say, “I
believe in this business so much that I am going to go
ahead and I’m going to sacrifice these things
that mean something to me, because at the end of the
day, I’m going to be able to buy 30 more of them if I actually hit these
milestones and do whatever.” So, you know, for me, I’m really
looking for those entrepreneurs. And they are diamonds
in the rough. Like, that’s also why
there’s an 80% failure rate, because not all entrepreneurs
have the grit to be successful. And so you really have
to dive into that team and those entrepreneurs
and say, “You know, do you guys have
it or do you not?” And that’s hard to tell. And sometimes you don’t find
out until you’re married. [ Laughter ]>>Hence, the 80%.>>Yep, uh-huh, yep.>>Good point. Julie, this question’s for you. You run a very diverse
array of programs at the University of Maryland. You run Tech Transfer
two incubators, Small Business Development
Center, an Angel fund I believe. Can you talk to us about kind
of the spectrum of capital that you see at the state
level, and then even from your perspective
back in government at the national level available
beyond maybe just strictly venture capital?>>Yeah, sure. So we’re very fortunate in
Maryland to have early-stage, like, translational
research dollars, which come from the state of
Maryland to fund great research that maybe needs a prototype
or a Minimum Viable Product to get it further down the pipe. And that’s — not
all states have that. I believe Ohio has that. I know that Virginia has that. There are a number of
places that have that. But people — and
these are grants, so you’re not having
to give up anything. We also help a lot
of our entrepreneurs who have a technical company — a technical company with Small
Business Innovation Research, SBIR. They call it America’s
seed fund for a reason. And we’re actually
hosting the SBIR Road Tour in Maryland in September. And, yes, it takes a long
time to get the money. And, yes, it’s competitive,
but so is fundraising. And this is non-dilutive
capital. And so we see a lot of SBIR. You know, you can get — you
can get overburdened going after a bunch of
pitch competitions for 10,000, 15,000, 25,000. There’s pros and cons,
because, as you said, it gives you credibility. The SBIR program gives
you a lot of credibility. So you have to really
balance that out. You know? I’ve seen companies that are all sizzle
and no substance. So you just have to always
do that check to make sure that you’re getting
a bunch of PR, but there’s actually
something behind it, and you’re making
traction with your clients. And so we try to
really encourage — we did have one professor who
had invented a way to make wood as hard as steel, and also
to make wood transparent. And this was published
in Nature magazine. And he got an unsolicited
term sheet from Silicon Valley
for $1.2 million. And we said, “No, don’t do this. It’s too early.” Because he would have had
to give up everything. And there are other types of
non-dilutive capital available. And so really understanding
and being curious to your resourcefulness. Right? I love the thing that if
you’re not willing to put all of your stuff in, why
would you ask somebody else to put their hard-earned
capital in? Right?>>Yeah.>>So exhausting
every opportunity.>>Yeah. And, Allie,
you at Village Capital, there’s quite a work that you
guys do beyond the seed stage investing, also looking at kind
of more alternative financing. Can you talk a little
bit about that in case the audience
isn’t familiar with it?>>Sure. And I was glad,
Tim, that you brought up there are many different
paths to financing your company. A venture capital sort of
captures all the headlines. But the reality is
it is less than 1% of companies ever
access venture capital. So we’re particularly
interested — yes, we do have a fund
that invests typically in equity structure, but
we’re particularly interested in emerging momentum around
alternatives to equity. So a couple of the companies that we’ve supported
have had line-of-sight. And I’ll actually talk
about a specific company. There’s a company called
Spensa Technologies. It’s an ag tech company
in Lafayette, Indiana. And they’re basically a
hardware and software solution to allow farmers to reduce
the use of pesticides by better measuring the number
of insects in the field. And when they came
into our portfolio, they already had
actually paying customers. So we were in a position
where we were able to say, “Instead of providing an equity
investment, why don’t we look at something like
a revenue share?” And, essentially, we took a
percentage of top-line revenue until they had a target that —
they were paying us back until, and they actually raised
a Series A on top of that. So they paid us back early. We participated in the Series A.
And the company was later sold. And so we’re really
excited about the return. But the reason why revenue share
worked for them at the time, it was much more
founder friendly. We weren’t taking a
percentage of the company. They already had, again,
line-of-sight into revenue. And there’s an emerging
sort of school of thought that there is an opportunity
to make decent returns for investors, sometimes better
than the seed stage class, by investing in companies
who actually have revenue, and are building their
businesses based on real revenue versus just reinvesting
in growth. So there’s a company
called that is running an
experiment right now with about eight companies
specifically looking at how do you take a
venture-like approach to building companies using this
more revenue share-based model. So there’s a lot of really
interesting things happening in this space –>>Yeah.>>For sure.>>Definitely. Tim, I was curious about
the decision that you made to move your company
from Silicon Valley to D.C. Though not exactly
the same, I imagine a lot of audience members are
considering doing a soft landing in the U.S. And, you
know, relocating is hard. It’s a tough decision. Can you talk about, you know,
why you made that decision, and, you know, even how you
found the investors moving from Silicon Valley to D.C.? Two very different markets.>>Yeah. You know,
a lot of people who know me very well will
know that I am a very, very anti-Silicon Valley person. There’s a whole host of reasons. And I won’t get into all those. But I think that,
fundamentally, what it came down to was customers. And we wanted to be
close to our customers. We are a B2B enterprise
software company. You know, we do have a
lot of customers here in the Washington region. We started off in our — and
our first product was a legal AI product. And so Washington
being, of course, the highest concentration of
lawyers, I think in the world, was a natural fit for us. You know, there are
pluses and minuses from being outside The Valley. I actually have not found that technical talent is
the largest challenge. I found that sales and marketing
talent is probably the hardest. And, generally speaking,
you know, Silicon Valley does
have substantial amounts of technology business
expertise, you know, given the concentration
of companies like Oracle, companies like Salesforce
that have built very, very sizable companies. And the challenge, of course, I
think is when you’re very small, you know, when you have
sort of ten, 20, 50 folks, I think it is easier to
find a team that can fit and that can work together
and scale a business. Once you start trying to
hire at scale, you know, at the 200 mark, the 500
mark, the 1,000-person mark, it is substantially more
difficult to attract talent and to try and build
an organization. Particularly this is a challenge
that we have now which is, you know, mid-level or sort
of L3, L4-level managers. You know, the reality is
that if you are a, you know, high-flying manager at
Salesforce or IBM Oracle, you’re probably at the
peak of your career. You know, you’re probably ten,
15, 20 years into your career. You know, you’re
crushing sales quotas. You’re sort of delivering
for your organization. And so for a scaling
organization it’s actually substantially difficult to try
to track that level of talent, especially if you’re trying
to move them from outside of their core markets. So I actually go back and
forth on this quite a bit, because we — you know, I
think that in the long run, it was definitely the best
thing for us at the time to move out of The Valley
into Washington. Great for our customers. Got the business off the ground. But to be honest, and
I’ll be very honest here, I sort of slowly see our
organization scaling some of our operations back onto
the west coast, particularly as you start scaling
the company. And it’s just largely because
that L3, L4-level talent is, you know, substantially
difficult to come by. It’s also one of the reasons why
we sort of looked very globally as we scaled our operations. But, you know, definitely,
you know, as a startup in the early stages
of our company, I think you can start
a company anywhere. You can start a company, you
know, in an [inaudible] market. You can start a company in a non-Silicon Valley,
non-New York market. But I think that the scaling
challenges are definitely, you know, segregated
and separate from the startup
challenges for sure.>>Yeah. And can you
talk to us about kind of when you made the decision
to make the leap in terms of doing — you know, basically
seeking out equity investment in your company, and how you
found those initial investors?>>Yeah. So we bootstrapped our
company in the very beginning. You know, it was summer savings. And I started the company,
we were 21 years old, straight out of college. And, you know, we’re
literally — we went out to Silicon
Valley not because there’s anything
special about Silicon Valley, it was just because that was,
like, the right thing to do. And, you know, we
maybe bootstrapped, you know, 20 or $30,000. You know, we were
living out of a Motel 6 because we couldn’t
afford an apartment. And so –>>That’s great right there
I would say [inaudible].>>It was up until our
fifth employee, you know, we were living out
of this Motel 6 room. And it was two guys, you
know, sleeping on a chair and one person sleeping
on the floor. And that was basically
our first office. But I do remember I think we all
had a discussion one evening, and we were just talking
about the company. We had gotten maybe 20
or 30 beta customers. One of them had just
contracted [inaudible]. And I was saying, “Guys,
we really need to — we need to raise capital
for this business. We can’t keep doing this. This is pretty unsustainable.” So we have a little bit of a —
a little bit of an unusual story because we actually —
I went on Google, like, I cold-emailed Mark Cuban. So I went on Google,
searched Mark Cuban’s email, shot him a cold email,
and then literally within 45 minutes he responded. And he wrote the
first, you know, $740,000 check into
the business.>>Wow.>>Wow.>>And then from
there, you know, Jerry Yang and Steve Case and –>>That’s great.>>NEA sort of syndicated
onto the [inaudible]. So I wouldn’t say that we
— we’re definitely lucky, because we didn’t have to — we didn’t have to go
to the full roadshow, if you will, for our seed round. What I will say in retrospect
is that it was very painful and very expensive to
have to give up that much of the business that early on. And, you know, when you
— when you — when you — when you start getting into the
late stages of the business, and you start thinking about
exit or IPO or whatever it is, the formula is very simple. It’s how much of the
business do you own and how much is the
business worth? And the reality is that those
early, early stages, you know, the first seed Series
A is where you give up the biggest chunks
of your company. And so I was telling this to
another founder last weekend that if I were to do it again,
I would definitely have waited out a little bit longer, you
know, to sort of, you know, force less dilution
on our management. And I think, you know, the
seed round was, you know, I think very frothy when
we raised capital probably in 2013 or so. Series A was where it
got very, very difficult. They called it the
Series A crunch. Right? So there’s such a
wide availability of Angel and seed capital,
particularly, you know, in the last couple of years. But the number of institutional
Series A investors has actually not grown substantially. And so you have this massive
funnel of companies coming in. And then the bar just
consistently goes up for companies to raise
institutional capital. And every year when
I talk to founders, it seems like the
bar keeps going up. And I’m not sure we
would have been able to raise Series A maybe
a couple of years ago. But that bar just keeps
moving up, you know, for each of the later stages. And so it does — it’s a forcing
mechanism in my opinion for you to have more disciplined
operations and more capital efficiency. And that’s something
that we’ve — you know, I think we were very,
very cognizant of, you know, very early on in the business.>>Yeah. You know,
you’ve mentioned one thing that you would do differently. I’m curious if there’s anything
else in the fundraising process, because I think now you’ve
raised over 50 million, you’re a Series D. Curious,
you know, just for individuals who are looking to finance their
company what big lessons you took away from that?>>I think that — I
think that founder — I mean, the big lesson is that
founders really just think that there’s only
one type of capital. And as we’ve scaled our
business, you know, we have — we played every level of the capital structure
like an orchestra. Senior debt, subordinated
debt, convertible notes, preferred equity, common
equity, basically straight up and down, you know. And then, you know, working
directly with governments on government grants, on
working on AR type financing, on recurring revenue-type
facilities, on revenue share agreements,
joint venture agreements, licensing agreements, whatever
it is, to access capital, you know, both from a capital
structure perspective as well as from an operating
perspective. And this is why I
tell our managers and our executive team every
quarter when we do sort of an operational overview of
the business, which is that, you know, as we get closer and
closer to this exit period, it is a very, very
simple formula. It’s how much of the
business do we own, and how much is this
business worth? And we just keep reminding
ourselves, you know, as we sort of think about
our own financial outcomes. And so, you know, I
think from a capital and fundraising perspective,
really thinking critically about did I exhaust all the
alternative forms of capital that are available to me. And now I actually
think that, you know, equity capital is the last
resort of capital financing. You know, when we go to
finance an acquisition or we go to raise, you know,
another round of capital, whatever it is, you
know, we think, “What are the cheapest forms
of capital we can get first? And then what’s the last
stage we can get to?” And so even, you know, as we
consider a public offering or whatever the case
is, you know, a lot of my colleagues
just bypass the entire capital market. And they said, “We’ll
just do a direct listing. We don’t need — we don’t
need to raise capital. And once we do the
direct listing, you know, we’ll go raise, you know,
cheaper forms of debt capital,” or whatever the case is. So, you know, I think
thinking very creatively, not just about your
business, the product, but also about the
financing mechanisms are — it’s probably the biggest
thing that at least I would do, you know, over again, you
know, from the very beginning.>>Yeah. That’s fantastic
advice. Well, I wanted to open it up
to questions from the audience, if any of you have specific
questions for these guys. Yeah, go ahead. I think there’s a microphone
over here as well if you’d like to speak into that. [ Inaudible Speaker ] I think so, yeah. I think it should be on.>>Hi there. My name’s Tom Tyler
[assumed spelling]. I’m from Elites, part of the
London Stock Exchange group. We support growing businesses
expanding internationally. I concur completely with
Lindsay’s point about Ohio. We decided that Ohio is
the right place for us to start our business
in the United States.>>Yeah.>>So we are welcoming and encouraging all the
international companies that we work with to come to
the United States and it happens to be Ohio is where we
started in Columbus. And I think I’m meeting some of your colleagues later
this week actually.>>Oh.>>But my question was really for international
companies coming here, especially in the scale-up
phase, what percentage of your allocation
of capital is going to international companies? And is that a growing
portion of the capital that you’re investing?>>So my capital through Launch
NY is focused on companies that base themselves
or have offices in the 27 westernmost counties
of the state of New York. So that’s sort of an economic
pull to draw them there. I mean, they could
start in Taiwan, they could start wherever,
but they have to relocate to the Launch NY territory to
receive investment from there. Then on my, you know, more
traditional venture capital side of the house, you know, we for a long time were very I
would say regionally focused. And that being in the
Midwest, because we believe that venture is a contact sport. But what we’ve started to do
is bring on venture partners that focus on very
targeted areas. So it allowed us to sort
of broaden our depth across the globe slowly. So we’re actually moving
more into what we call like Pacific Rim, you know, into
Singapore and stuff like that with our next fund that
we’re seeking to raise. So in terms of allocation,
it’ll probably be, you know, 15% of the portfolio that’s
more international based. But we do always kind of
say, “Oh, how do we also draw that group more into, you know, our normal home base
of call it Midwest?” Like, even if we can get you
to Chicago, we’re still excited about that, because we can
get in the car and show up at your door in four hours. So whether something’s going
really well or not as well, we can still find you. But, yeah, so to
answer your question, probably 15% in international. But if someone relocates to
our more traditional zones, then that’s where
we spend our money.>>So from our perspective,
so we have two things. We have something
called a momentum fund, which was about $10 million. It was carved out of our
endowment, which is based on being located kind of —
it’s a place-based investment. But we also have a
soft-landing incubator, an international incubator
that is a soft landing. So it doesn’t have to be
your world headquarters, but your U.S. headquarters
have to be located in Maryland to qualify for these
investments. But we are in the process of — I’m trying to get the
bureaucracy out of my way. We’ve had interest in
raising an alumni fund, which would be international. But the affinity would be that
you have one or more founders that was from the
University of Maryland. And we would invest
in you no matter where you are in the world. So there usually has to
be some type of a thesis around it’s either a problem
you’re trying to solve, or some type of an affinity. There is a lot of the I’ll call
them economic development types of funding, which can be tricky. And Maryland has gotten
a little tripped up in that in the last year. But it’s possible. You just have to
be very transparent and consistent and fair. And that’s part of
what we’re working on. So we’ve kind of got both.>>Awesome. Any other questions
from the audience? Yeah, go ahead. You can use the microphone
if possible maybe.>>Hello. My name
is [inaudible]. I am the co-founder of
the startup [inaudible]. I want to ask about how
do you define scalability in innovation projects
and in innovation idea from the investor perspective? Thank you. [ Inaudible Speaker ]>>Go for it.>>Go ahead.>>Well, certainly, scalability
can be defined differently depending on the market and the
sector that we’re looking for. You know, I would say for
us we look at companies who can capture at least
a billion-dollar market over the long term. And at, obviously, a
percentage of that. That’s a typical seed stage
definition of scalability. Different investors will tell
you what scalability looks like over time. Venture investors
are usually looking for that scalability
a lot faster. And, again, going back to the
sort of alternatives to equity and finding more
patient capital, if you have an innovation that may take you a
little bit more time to get into a very entrenched
market, whether it’s, you know, a government-dominated market
or something like healthcare, more patient capital may
look at that scalability at the same figure, but give you
more time to reach that scale. [ Inaudible Speaker ] So I don’t know if
theirs would –>>No.>>That’s good. [ Inaudible Speaker ] Yeah, go ahead.>>[inaudible] thank you very
much for the explanation. I was wondering about a Latin
American business or what kind of [inaudible], like, [inaudible] activities
[inaudible] in terms of, you know, [inaudible] some
seed there, like Argentina or some countries like
Chile [inaudible] –>>Thank you.>>[inaudible] involved and
more active in this type of investment and ideas.>>Okay.>>I can talk about
that [inaudible] –>>Yeah.>>[inaudible] done quite
a bit of in Latin America. And we actually have
offices built in Bogota and in Mexico City. And we see a lot of
energy and enthusiasm, both in the financial inclusion,
financial health, FinTech space, there’s a lot of interesting
things happening there, and in the healthcare space. So there’s a — for
example, we’re invested in a company that’s working
on a telemedicine solution in Costa Rica, for example. And that’s something that is
very translatable to the U.S. So those are two sectors
that we’re excited about in Latin America. Lots of activity. We first started in Mexico. But we see lots of energy
and activity in Chile, in Colombia and Argentina. So we’re really excited
about those markets as well. I mean, the reason — so
this is actually an answer to an earlier question. We invest in companies
that are seed stage. So usually they’re really
focused on their home market. But the reason that they’re
interested in working with us is because, ultimately,
they want to scale globally and we have access to
these other markets where we invest in,
including in the U.S.>>[inaudible] thank you.>>Yeah.>>[inaudible], did they put
your company in Mexico City?>>Village Capital.>>Village Capital?>>Yep.>>Thank you. [ Inaudible Speaker ] [ Inaudible Speaker ]>>I saw one hand
in the back there. Oh, behind you.>>Right there.>>Yeah.>>Behind you.>>Hi. This is Mangeesh
[phonetic]. I’m founder of a large
solution private limited. We are invested to
Mumbai, India. And ours is actually a
cybersecurity company. There are only three
companies worldwide who made invention
in terminal security. Our company is one of them. So we established in 2012. We are doing very well in India. I have two questions. How this invention be funded? That is one. And do you have any
central agency located here in Washington, D.C. or — and — or state agency which will help
us to grow in this country? Thank you.>>So I know we have a
cybersecurity soft-landing incubator associated
with the University of Maryland Baltimore
County, UMBC. I’m happy to give
you information. They’re in partnership
with Northrop Grumman. And they’re right
down the highway from the National
Security Agency, NSA. So there’s a lot of
cybersecurity within Maryland, because we are so
government central. So happy to share. It’s specifically
for cyber companies.>>There’s also a
cyber accelerator in Northern Virginia
called MACH37, too. So you might be able
to [inaudible]. Not to not fear people
away from Maryland first.>>No, it’s all right. No, I’m not one of those.>>Hello. My name is Christian. And I have a question. What is a number of companies
that are selling services and you invested in them
rather than products?>>Yeah. So –>>And percentages.>>Sure. Typically, especially when you’re seeking equity
capital, and I’m going to specifically only talk about
that in this instance right now, it is a little bit harder
to get that type of funding when you are a services-focused
business, because typically
services-focused business only scale with humans. And humans are expensive. So it becomes a little
bit challenging. So if there is a play where yes,
you have to add humans for sales or marketing, et cetera, but
there’s an efficiency play with technology that’s going to
expedite the growth, you know, yeah, so maybe there
are services associated with that technology, but
the technology is actually the driver. That company is substantially
more likely to get investment dollars. That said, if we go
back to what some of the other folks have
been talking about, if you’re not looking for equity
capital and maybe you’re looking for straight capital or, you
know, maybe your financing — or, you know, investing in
humans that are, you know, people of different ethnic
backgrounds, et cetera, there might be programs that
offer substantial amounts of funding, sometimes even
grant dollars to bring on those individuals and
help grow your business. So in my portfolio, typically,
I’m not a services business. I am either — I either have
products or I have technology. So that’s — but that’s in
specifically my portfolio.>>I started my company
as a services company. And then we developed software
that we retained ownership for. And we sold to other people. So that arrangement, I didn’t
have to give up any equity for that, because I had — my
customer funded the development. But my arrangement was
I gave them a royalty when I sold it to
other customers. So I would always — I tell services company if
you’re looking for an exit, services companies are great. You can build great
big services companies. And I’m going to guess that if
you’re solving some problems in a specific market, there might be some
equity capital for you. But if you want to eventually
sell for some multiplier, usually I think that services
companies aren’t a huge multiplier, yeah, if you want to
create some type of a product. But I’m guessing — do you guys
have any services companies in specific solving problems?>>We don’t have any sort of
traditional services companies. But we do have a number
of companies that started out as services businesses,
saw an opportunity to build technology,
particularly in the workforce space. So we do a lot of
work in education. We’ve sort of evolved our ed
tech investing to adult learning and workforce development. And that’s a sector
we see a lot of people who started services
businesses saw an opportunity to build the tech platforms in.>>Yeah, [inaudible]. Yeah. [ Inaudible Speaker ] Use your [inaudible].>>Oh, sorry. For sure everybody
knows [inaudible] and you know [inaudible]
and their failure actually. How would you consider investing in a product that’s
already existing and it’s similar
with [inaudible]?>>So, yeah, that –>>Show me the science.>>So, yeah, right. You know, there was
a — there was — what happened in the
[inaudible] situation was that there was a lot
of hype and a lot of sheep following
other sheep not knowing where the first sheep
were going. And so, you know, there
wasn’t one failure. There was systemic
failure in that situation. So initial folks doing due
diligence didn’t do due diligence the way due
diligence should be done. They didn’t dive in and say,
“Okay, walk me into the lab so that I can see how
this thing is unfolding, watch the output,
see end result.” Instead, they allowed a very
dynamic individual to kind of say, “Look over
here,” while, like, something went out
the back door. And all of that. So, you know, that kind of
story gets a lot of press, because it is scandalous, it
is sexy for the press to talk about this, you know,
negative, horrible thing where $9 billion were lost. And that’s awful. But there are definitely
ways to avoid that situation. And the best way is
to do your homework. You know, we do due
diligence for a reason. We vet technology. And it seems annoying
to entrepreneurs, but we’re doing it because
we take other people’s money and we give it to you. We have a fiduciary
responsibility to do the right thing. So when someone comes and
says, “Let me, you know, look under the hood and
vet this technology,” just agree with them. Let them do it, because they
actually want to prove, like, “Yeah, they said it
was doing the thing and it’s doing the thing. And I want to invest in
this and give it money.” So at the end of the day, systemic failure,
unfortunate story. It’s going to make for
a great movie, you know, if it hasn’t already started. I don’t know. But –>>Yeah.>>You know, it was just — it
was problematic from day one.>>Actually [inaudible] speaking about the [inaudible] already
existing in [inaudible] –>>Sure. So –>>Want to make it a
startup here in U.S.A. so.>>So same thing. We’re going to go
ahead and we’re going to vet that technology. We’re going to examine it. You’re going to bring — you know, you’re going to
reach out to an investor. You’re going to say,
“Hey, I have this product. It does x, y and z.” We’re going to test
that it does x, y and a. And if it does, awesome. And if it does not, we just
want to know what went wrong, and if it can actually
do x, y and z eventually. [ Inaudible Speaker ]>>Hi. We are on the
FinTech [inaudible] company. Are you considering
the not startup company in its original country,
but here in the startup, and how you are approaching
the [inaudible] tech within the FinTech for as a
separate line of business? [inaudible], like,
[inaudible] –>>Sure. And so is [inaudible]
differentiated from FinTech? I mean, I think it depends on
what your business actually does and the problem that it solves
within [inaudible] or FinTech. Those things tend to kind of bleed together
in some capacities. But maybe in some things they’re
very much different lines. So I think as you’re
evaluating how you’re talking about your company, you know, is your end customer insurance
company or is it, you know, banking provider or
is it someone else. And that’s going to help
you kind of delineate and clarify your story more,
so that way you can explain, you know, I’m an insurance
[inaudible] company in the FinTech space or
I’m a FinTech company or I’m an [inaudible] company. And I will tell you any of those
right now is probably a fine answer, because those
are all hot spaces. It’s just making sure
your story is clear.>>And I would also add as —
this is where having a partner on the ground here — so we’ve
had a number of companies that are not startup companies
in their home country, but who come here to start
their U.S. operations. And one of the important
things about finding a partner on the ground, either a
soft landing or an investor, is that they can help
you translate your market from your home country
to the U.S., because it might be
structured differently. There might be different — for
example, in the United States, our state led — you know,
our states mandate water. Right? So a company that’s
done a water solution in a country will come
to the U.S. and realize that there are different
regulations from state to state, and how do you navigate that. And so I would suggest
that if you have — if you have an existing
company that you’ve had success in your country, it still is
helpful to have a U.S. partner who can help walk you through
the difference in industry, in your demographics,
in your customer base, because there probably — and
even cultural differences, because there probably
are quite a few that you might not be aware of.>>Just on that note, if
I can make a small plug.>>Yes.>>We actually do have
a part of our operations that invests pretty
substantially in foreign businesses that
want to do joint ventures in the artificial intelligence
base here in the U.S.>>That’s good.>>And so, you know,
between, you know, a million and five million dollars we will
finance, capitalize, you know, these existing joint
ventures with, you know, larger businesses that
want to come in to the U.S. and apply some of their sort of core operations
[inaudible] the case is. And so, you know, our pitch,
of course, is, you know, we can structure those
either as, you know, equity-based joint
ventures where, you know, you retain majority
of the ownership. We will also do sort
of structuring as revenue share agreements
or IP licensing agreements. And so there’s a wide
variety of different ways in which both our company,
as well as a wide variety of American companies, can
partner with foreign businesses who want to do business
in the U.S.>>Absolutely.>>Great.>>Right. That’s good to know.>>I think we’ve got time
for one more question.>>Hi. Yes, my name is
Alan [assumed spelling]. I’m from Vietnam. And my company’s in
Vietnam, [inaudible]. We have over 16,000 employees. And we currently move to
about four or five countries. This time I’m coming to
U.S. to look for a partner that we can — because in our
construction business we have a lot of connection in building
new city, new urban areas. And the real estate market
in Canada and Vietnam is — well, [inaudible] both Canadian and Vietnamese very,
very effective. Like, you can sell all your
products even before you launch it. So that’s how good
the market is. And I’m just wondering if
any of you had the connection to any investor that interested
in investing in new tech city, like real estate plus high tech,
like, smart city and a new way of constructing home and towers
that save, like, 40, 50%. So I’m just waiting
— I’m just wondering if [inaudible] any investors.>>So I would tell
you to answer yes. But I would also
tell you to look — when you’re looking at the
U.S. there’s a number of cities that are focused on what we
call smart cities initiatives. Columbus, Ohio is
one of those cities. [ Inaudible Speaker ] So an example they won a grant from the Department
of Transportation. And then that was matched with
$500 million of private dollars. So there is money in this space. And so I would tell you let’s — you know, let’s just have a
quick discussion after it, because, you know, I
know [inaudible] –>>Thank you very much.>>Yeah.>>And I also –>>Yeah.>>Just very quickly, if
you haven’t already looked at investors who are
building out funds focused on opportunity zones –>>Yes.>>So if the — [ Inaudible Speaker ] Legislation part of the
most recent tax legislation, you know — you’re nodding your
head like you know what it is. So there’s a lot of interest
in real estate right now in the U.S., because of the
opportunities [inaudible] –>>Last thing I would say also
is National League of Cities. That organization
is kind of the hub for all the major
smart city efforts. And they could probably do a
great job of connecting you with the right people, too.>>[inaudible] very much.>>Yes? One more. All right.>>Hi. This is [inaudible]. I am from Pakistan. And my company is a
$95-million company. And 70% I am supplying
to the [inaudible] of America [inaudible]. And have already established
a company in New Jersey. My showroom is in New York. If I — we have already
started the company just to get the [inaudible] and
for the online business. If it [inaudible] we will invest
$5 million into your country, because we are already working with the chain stores
of America. So how much can you offer
us and at what markup?>>Ooh, yeah, that’s tough. I mean, so it’s hard to
give an answer like that without knowing tremendous
amounts of detail. So I think as you’re
talking to any groups who you’re discussing your
business [inaudible] –>>I’m already supplying
to Walmart and many children’s
stores [inaudible] –>>Sure.>>I’m very much familiar. And they all know me very well.>>Yeah, and I understand that. But it’s hard for someone
to price your deal. So they’re still going to
have to vet your business. And they’re going to have
to go through, you know, what is your total
business worth, so that they can actually
price that deal with you. [ Inaudible Speaker ] Well, I know. But then there’s margins. There’s a whole bunch
of other things. People actually don’t always
love Walmart, because they push down margins so hard that, like, you don’t actually
make a lot of money. And maybe you do.>>From a supplier
perspective, yeah, no.>>Yes. And so there’s
so much detail that goes into that financial model
that we’d have to understand, so I think, unfortunately, no one here could probably
answer that question. But with greater detail
and understanding, I’m sure everyone
on the panel could.>>Yeah.>>Yeah.>>And, unfortunately, your company is worth
whatever an investor or an acquirer is
willing to pay for it. And I’ve had this argument with
professors that said, “Well, I put $16 million of
research into the company.” It’s like, “Yeah,
investors don’t care.”>>Yeah.>>Yeah.>>All right. Well, thank you all so much. Let’s give a round of
applause to our panelists. Thank you. [ Applause ]

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