How to Raise Capital From Investors For Your SaaS Startup - Ep#7 with Robert Gelb

Ever wondered how to actually raise capital from investors? Angels and VCs?

Recently I interviewed serial entrepreneur Rob Gelb on the StartupSauce SaaS podcast (Episode #7) and asked him.

Watch the full interview here: Raising Capital Tips for First-Time SaaS Founders - with Robert Gelb 

We discussed the ins and outs of raising capital, the common mistakes that first-time founders make when raising investment from angels and VCs and more.

Rob led his most recent venture HeySummit from 0-$1m+ in ARR in less than 14 months.

Aside from launching his next company, he's an advisor to early stage startups and founders, and is a Visiting Fellow at the University of St Andrews Centre for Entrepreneurship.

You can find out more about Rob and get in touch via his website RobertGelb.com

In this episode you can expect to learn about:

• How VC funds actually work
• The difference between a "power venture" startup and a normal startup
• Common mistakes and pitfalls founders make when raising investment
• How to prepare for your first investor meeting (with venture capital or angel investors)
• How to find and approach investors

Here's a short 8-minute clip from our conversation.

 

Also you might be interested in these:

• SaaS Cold Email Template: The "Four-Sentence Initial Email"
• How to Calculate SaaS Pricing (Models Included)
• How to Grow Your SaaS Using Other People's Audiences - StartupSauce SaaS Podcast #6 - Stewart Townsend

 

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[00:00:00] Rob Gelb: You should be going into these conversations as a potential equal. You shouldn't be thinking of a relationship as like, please, can I have some money? If anything, you are a prize that doesn't know that it's a prize yet. Really think about what these people are interested in. It doesn't need to be more complicated than you writing something for them to say like, Oh, this person's interesting.

[00:00:21] Rob Gelb: I want to talk to them. You need to be very careful of what types of rights that you're giving away to these investors and also what is motivating them. You should be only going to a VC if you have 

[00:00:36] Ryan Wardell: Rob Gelb. Welcome to the show. Thanks so much for having me, Ryan. So let's, let's start off with a really spicy intro question.

[00:00:43] Ryan Wardell: Um, what are some red flags that founders should look for when they're raising capital from investors? 

[00:00:49] Rob Gelb: So raising capital is this weird kind of dynamic where. It's, it, it sometimes feels like you are the product, uh, that some, and, or that, uh, investors are somehow, uh, being nice to you by giving you money.

[00:01:05] Rob Gelb: Um, and this dynamic is played on, uh, by unscrupulous investors in really, uh, uh, quite, um, frustrating and, uh, despicable ways. Uh, so. When you're, when you're going through any kind of funding round, uh, you need to be very careful of what types of rights that you're giving away to these investors. And also what is motivating the investors who are investing into your company.

[00:01:36] Rob Gelb: I think some of the red flags, uh, that, that investors. Uh, um, sometimes ask for, or some of the red flags that founders should look for when speaking to investors are what kind of follow on rights do they have? What kind of liquidation preference rights do they have? We can get into, to, to some of this later.

[00:01:58] Rob Gelb: Um, basically what happens when stuff doesn't go right? Or it doesn't go well. Um, what, what kind of rights do they have in terms of selling their shares, uh, to other, uh, to other entities, um, like most things, The fact of these existing is not necessarily a red flag, the intention behind and the way in which someone wishes to use these tools does, does matter and I've seen quite a few businesses get, um, completely bent out of shape, uh, in, uh, to put it mildly, uh, to, uh, utterly destroyed just because of very bad terms that founders didn't understand when they were signing onto them.

[00:02:38] Ryan Wardell: Can you, can you go into a little bit more detail about your liquidation preferences and, uh, just a little bit more. Yeah. Yeah. There's a lot of terminology in this world. So, yeah, 

[00:02:49] Rob Gelb: yeah, yeah. Okay. So I'll preface this by saying that a lot of these. Aspects are not actually in, in and of themselves a problem.

[00:02:58] Rob Gelb: A liquidation preference, for example, is where a, uh, a company has, or a company or an entity or an investor has preference to be paid back on the point of an exit or a liquidation. So let's just say you, uh, you've invested a hundred thousand. Uh, dollars into my company, but you have a very high liquidation preference.

[00:03:22] Rob Gelb: So before. I get paid out or before any of the other investors get paid out. You need your money back. Um, kind of like a very high ranking creditor. Um, but sometimes that liquidation preference has a multiple attached to it. So if my liquidation preference is two X, that means I need two times my investment before anybody else gets their investment out, which is If you're selling for 10 X, your, your, you know, your business.

[00:03:52] Rob Gelb: Great. That doesn't matter. Nobody cares. But if you are having to close the company or if you are being acquired but for, for, you know, just a little bit more than, than, than, um, was invested in, you could end up harming your other investors and you. Uh, as a founder, uh, if you had signed up to a liquidation preference and just didn't understand what that meant beforehand.

[00:04:15] Rob Gelb: Um, as I say, it's not necessarily, it's if, if, if, if an investor insists on liquidation preference, that in and of itself isn't bad, it's just understanding what that, what that actually means for different types of scenarios as not another thing is fees. Um, I'm really against fees. I don't think we're talking about VCs here, and I guess maybe we can go into it, but There are a lot of different types of investors.

[00:04:37] Rob Gelb: VCs is, uh, VCs, venture capitalists are one type of investor. And within VCs there are many different types of VCs. Like technically the term VC is just referencing the fact that a group of people are coming together. There's a formal entity and it is investing in you. Some people take that as like the highest level.

[00:04:53] Rob Gelb: Um, but, uh, you know, Andreessen Horowitz, who you might have heard of, is very different to, um. Uh, fuel ventures to, to, to some of these other types of entities out there to calm companies fund. Um, uh, technically they're both VCs, but they behave very, very differently. And they, they, they, they're motivated by very different things.

[00:05:17] Rob Gelb: Um, so when I say I don't like fees, I don't like fees when a VC is coming in and is trying to pass themselves off as a traditional VC, um, When you're talking to angel groups, angel syndicates, this is groups of angels that are going into things. Oftentimes they will have fees associated with them. Um, I don't like them, but, and when push comes to shove, if somebody is putting in money into your business, they should be putting it in because they think that they have a very small likelihood of, of making a shit ton of money, um, But, uh, uh, sometimes they'll have deal conversion, deal completion fees.

[00:05:51] Rob Gelb: Like they will charge you 5 percent of whatever the deal is coming in to go back to the entity, which is a bit silly, uh, but happens all the time. Um, those, those, those are a little bit, um, uh, more allowable than like, um, management and monitoring fees, which some of these funds try and do, which I really just hate, uh, where they ask you to pay them, uh, for a, um, uh, An observer, a board observer or something every year.

[00:06:18] Rob Gelb: Uh, and, uh, those are just, those are just tacky and, and I w I would try and avoid them and we'll get into ways in which you can engage in how to put yourself forward. Um, you know, uh, and how to put the best foot forward. But when you're going through this process and you're thinking, Oh, it's typical, I'm going to have to probably pay like 10 grand, 12 grand a year in fees to people.

[00:06:40] Rob Gelb: No, Absolutely not. Uh, and, uh, any, anybody who's interested in investing in you, but also demands that fee and says it's somehow crucial to their business plan or business, uh, operations, I would then question why you should be taking their money in the first place. 

[00:06:54] Ryan Wardell: No one's born with the ability or the knowledge about raising capital.

[00:06:58] Ryan Wardell: That's a learned skill. So tell me a little bit more about you and your entrepreneurial journey so far. And how did you learn about raising capital in the first place? 

[00:07:08] Rob Gelb: I started my first tech company in 20, end of 2016 and, uh, beginning of 2017. And it was a classic first time tech company idea that was incredibly poorly thought out when it came to how to actually turn it into a business.

[00:07:27] Rob Gelb: So it was in the consumer social space, uh, which is. A very, very challenging space to be in. And, um, if you're thinking of like Dunning Kruger, you know, the Dunning Kruger effect, you have this, like this, this part of the beginning called the Mount stupid, where you're, you, you don't know enough about, um, uh, a certain, certain topic.

[00:07:46] Rob Gelb: And therefore you basically assume that it's based on. It's relatively easy. I was totally there. And Mount stupid is incredibly important for a lot of founders, a lot of entrepreneurs, because it propels you to getting into something. You're like, how hard could it be? It's like, well, yeah, it's incredibly hard.

[00:08:00] Rob Gelb: And then that's why you fall into the valley of despair. And then slowly, as you become an expert, you then gain more confidence and abilities. I was totally amounts to it. So, uh, the idea was yeah. Uh, a private social networking site for families. So this was if WhatsApp was too busy and, um, if Facebook, uh, wasn't private enough, you could use this to share pictures of the baby in the bathtub, that kind of thing.

[00:08:22] Rob Gelb: And, um, as a, as an idea, I was still biased, but I thought it was not bad. Um, we, we had a potential revenue plan. We, uh, that didn't rely on advertising. We had all this kind of stuff, but we knew that in order to make it happen and make it work, this was going to be pre revenue for a long time. And in order to do that, you then needed not only some cash in order to survive, but a lot of cash in order to grow.

[00:08:46] Rob Gelb: And so from the beginning, we were like, well, the only way this is really going to work is if we took in a truckload of money. Um, and, uh, so. That's what spurred me into trying to figure out how that whole world works. I, even though I might have an accent, uh, that might, uh, indicate that I should, I should have a network.

[00:09:05] Rob Gelb: I have no network. I didn't know anyone who was a VC or a venture capital, like a, an investor, a sophisticated investor. And, um, and, and just had to figure out like how to do it, which I know we'll get into, um, and, and how to build that network. Um, it's not rocket science, but at the same time, it's also very easy to screw up, um, systematically if you're not approaching it a certain way.

[00:09:28] Rob Gelb: Um, so that was where I kind of cut my teeth in, in learning a little bit about how the world of VC works. That, um, That venture didn't end up, didn't end up working. We raised, we raised, um, mostly angel money, but we weren't, we weren't able to crack the VC, uh, we weren't able to get, uh, the, the, the investment that we needed to, in order to, um, really kind of expand our business.

[00:09:50] Rob Gelb: Not only expand, but like, give it a, give it a proper go. So after about two years, um, we, we stopped that. Um, then I went into, I, uh, a friend of mine who's a genius, uh, um, SAS builder, um, had this, uh, kind of side project. That he was thinking could have some, um, some potential. Uh, and he, uh, asked if I wanted to come in and like take it on and, and try and commercialize it.

[00:10:15] Rob Gelb: So that's called Hey Summit. Um, so I got involved. We, um, uh, put it on AppSumo. If you're familiar with most people listening, probably you're familiar with AppSumo, um, to test the market. Uh, did really well on that grew quite well, uh, as a bootstrap, uh, company. Um, and the product is a, uh, online events platform.

[00:10:35] Rob Gelb: It's still there, still going strong, um, but virtual events. And, uh, we were building, uh, in the, in the latter half of 2019 and growing quite nicely. And then 2020 happens and COVID happens and, you know, shit completely hits the fan. Uh, we go, we have to go from, uh, uh, five to 30 people in about a month and a half.

[00:10:56] Rob Gelb: Uh, we are doing some deals. We are selling to people like. 10 a month. Others were doing 100, 000 for a one off event. So there's our, our customer base is going haywire, like who's our customer, who's our, who's our market, all this kind of stuff. So we do end up raising, um, from VC. And that was a interesting process, especially coming from a bootstrap mentality and wanting to preserve some of that bootstrapped, uh, uh, kind of, um, DNA.

[00:11:22] Rob Gelb: Um, we, we also, we, we, uh, disagreed in terms of like how, like how we wanted to grow it. Um, and, um, uh, Ben, the original kind of co founder or the original founder of the, the, the, the, you know, the platform who wasn't necessarily in the business, but he's, he's, he's, he's incredibly astute with how, um, he likes, likes businesses to be built very much comes from that bootstrap mentality.

[00:11:47] Rob Gelb: I, in my head, I was like, Our, our competitors are raising a lot more than us. Like, why aren't we doing that too? And so it was a good, it was, I think it was a good compromise. We, we ended up raising, you know, uh, not that much, um, bit over a million, um, and then, uh, trying to build off from that and their pluses and minuses of that, which we can go into if you want, um, But the, uh, then, um, like, uh, a lot of things happened.

[00:12:15] Rob Gelb: We grew, um, uh, someone wanted to buy us. We had to, we had to restructure the company, uh, not restructure, like hard restructure, but we had to change the direction a couple of times. Um, uh, Uh, but, uh, it was a wild two years. Um, I ended up stepping back and Ben came back into the business at the, at the beginning of 22.

[00:12:35] Rob Gelb: Um, and then since then I've been helping, um, I've been, I've been working on like some early stage ideas and just helping other founders, uh, navigate the kind of investment, uh, scene. We were in a relatively fortunate position where we were in a very, very hot VC market. at at a specific time. So we had that, that, um, aspect of VCs actually contacting us and like contacting me and wanting to talk.

[00:13:02] Rob Gelb: So understanding how VCs approach this process has been really interesting because I just, I really, I can just ask them, I asked them like, why, like, why are you interested in us? And, and, um, putting, not putting them on the back foot, but like having them to justify themselves. And that's a really interesting process that I would encourage.

[00:13:19] Rob Gelb: everybody to go through when, when talking about, um, dealing with investors, which we can, we can get into as well. So that, that was my journey. And since then I've been, I've been, I've been helping mostly just, uh, uh, helping friends navigate both, uh, uh, their first proper round, um, multiple, like up to, up to about series a rounds.

[00:13:39] Rob Gelb: Um, and then also M& A some, some like micro M& A. So like, okay, you, you, you have this business now, someone might want to buy you. How do you, how do you navigate that mentality as well? Um, so that's, that's my, my background, uh, in a very long winded way. 

[00:13:55] Ryan Wardell: Fantastic. Well, look, I think it might be helpful if we, we, we start at the top and talk about how VC funds actually work.

[00:14:05] Ryan Wardell: Cause I think there's, there's a bit of mystery around that for someone who has no network, has never raised capital before, maybe read a book or two, but they, it's still a bit of a mystery to them. Um, VC VC funds work? 

[00:14:20] Rob Gelb: So VCs are, are, are technically they are. They are funds. So they are a group of LPs, Limited Partners, that come together, um, they pool their money and they, they have an entity and their, the, the fund is managed by fund managers.

[00:14:35] Rob Gelb: Those managers then are deciding, uh, where to invest this money, um, and, uh, in, in, in ways that might get them different, different, You know, levels of return. So on the, on the, on the top level, that makes sense. Right. Then when you split through, there are a whole bunch of different types of VCs, but I think what a lot of people think of when they think of VCs, they're thinking of like VCs that like to be associated with power venture and power venture means.

[00:15:00] Rob Gelb: That, um, you, you need that 10 X, 100 X type return. So I'll just talk about what those are specifically, because I think a lot of people need to, um, maybe, maybe misunderstand in terms of what their, what their motivation is. A lot of people think, why does an investor want to throw 5 million at something with no revenue, no nothing.

[00:15:20] Rob Gelb: And then if it doesn't work, they're like, Oh, well, that's fine. Like surely that doesn't happen. Um, and it does happen and it happens, uh, and, and the, the mentality as to why an investor thinks that way. And I was quite happy to say, well, maybe not quite happy, but like it's fine. Um, washing their hands of investment if it doesn't work as long as it's quick is in terms of how they work.

[00:15:42] Rob Gelb: So let's just say you have a hundred million dollar fund. Um, you, uh, your LPs are putting this in is it's the highest risk class for them, right? So your LPs are, are either. Uh, high net worths or their institutionals, maybe their pension funds, maybe their governments, maybe whatever they are. Um, and they're putting their money in a whole bunch of different things.

[00:16:01] Rob Gelb: And, um, uh, just like they could put their money in Amazon, they also can put a chunk of their money in, in you. And that's a high risk, um, high risk, uh, endeavor. Uh, but that means that the returns that you want to offer. Are pretty high. So there's this term called an IRR, an internal rate of return. And basically it's, it's, it's, it's a stand in for how well the portfolio is doing when you don't have access to like public markets, because, uh, if, you know, if I'm investing in Ryan Corp, it's probably not the case that Ryan Corp is a publicly traded company.

[00:16:34] Rob Gelb: So I don't know actually how much, like how much is, is it valued? How, you know, how much money is there? Um, But I still want to put some money in and I want it to, to skyrocket and in value. So even at least on paper, the stake that I have for my LPs is rising and, and, you know, rising quite a bit. Um, but a good IRR, a good internal rate of return is let's say, or like a decent one is about 30%.

[00:16:59] Rob Gelb: And what that means that 30 percent might, might not feel, um, super, uh, super high, but that means every single year. Is it that, that it's, it's growing at 30%. So that, that, uh, works out if you have a hundred million fund and you want a 30 percent IRR, usually funds last for about seven or seven or eight years.

[00:17:19] Rob Gelb: That means you as a fund need to turn that 100 million into 825 million. That's a lot of money that needs to be made in a relatively short amount of time. So if you have a hundred million dollar fund, um, That is you just returning like five times. Um, your, your, your, your investment, um, three times your investment.

[00:17:44] Rob Gelb: If you as an individual are like, Hey, I'm going to invest in something. I'm going to get three times my money back. You're like, Oh, that's great. That's great. We've, we've tripled in size for a VC. That's not great. That's, that's not hitting it. That's not going to towards that 30 percent IRR. Um, so that's why when a VC is looking, looking at companies, their, their percentages are, are really in their heads.

[00:18:06] Rob Gelb: Can this investment, is there a way in which. This investment can return our entire fund. Like is, is that even possible? And so when you're hearing about people saying, well, how can you get to a unicorn status? You know, in terms of your, your company's valued at a billion. Um, it's not, it's not just a flippant, uh, um, uh, Indicator.

[00:18:27] Rob Gelb: It's not just saying, Oh, we want it to be massive and balsa wall on, you know, go nuts. There's actually some thought behind it. So if your business, for example, if you're like, if you're building a business and you're like, we could totally make this into a 50 million business. That is an incredible number.

[00:18:42] Rob Gelb: Like that is an incredible value that might be incredibly profitable, might be great. It might also be completely wrong. For a VC, because it's, so the, the two aren't, aren't the same. I think a lot of people, um, conflate, um, a company is a great company because VCs pump in a whole bunch of money. That's, that's almost the opposite, like real companies that are growing really well and are profitable and are delivering returns or dividends are not of interest to VCs because the, the part of the market, the part of the risk market that they have, actually, they don't have time.

[00:19:19] Rob Gelb: For good companies, um, uh, and you know, solid companies in, in that, in that context, which I think a lot of people might be listening to, if you're listening and you have like a bootstrap company, you're, you're, you're, you're making good money. Um, and you're, you're growing, you're growing, you know, 10 percent every year, whatever it is.

[00:19:35] Rob Gelb: Um, and, uh, and you see that that is a good thing. There are so many other ways that you could then finance expansion or growth or risk than going to, to a VC. And I think that, that if though you should be only going to a VC, if you have, um, a massive market, if it costs a lot to access that market, right.

[00:20:01] Rob Gelb: And the thing that you're doing is eminently like, Um, scalable, and you have to do it very fast. Those three things, I think, mean that you are then in the sweet spot for VC, because if you aren't catching fire within a year, even if it's taken a few million to see if you've got cash, you caught that fire, it is far more efficient for a VC to then say cut losses and go and focus on any of these other bets that they've been putting on that do look like they're catching fire.

[00:20:28] Rob Gelb: And that's, that's why a good VC should not. be angry, upset, uh, um, uh, predatory. If what you're working on doesn't work out. Um, and, and I think that's why a lot of, a lot of founders, uh, get confused by cause they're, they're seeing big numbers and these are big numbers for them, but the VC just, it's not.

[00:20:49] Rob Gelb: And, and, and, and, um, it's not that they don't care about money. They do. They absolutely do. But it's, The time pressure is, is just as, as, um, as precious, if not more important for them in their, their, their journey towards trying to get to a 30 percent IRR. 

[00:21:05] Ryan Wardell: So if, if, if you raise capital at the start of the the end of the year and you haven't spent most of that capital, the VC is going to be more upset that you, they feel like, Hey, I gave you money to grow as quickly as possible.

[00:21:19] Ryan Wardell: You haven't done that. They're more upset that you've, you've, you've done that. Grown too slowly at the end of that year, as opposed to you've spent all this money. 

[00:21:27] Rob Gelb: Potentially it very much depends on the dynamics. Like I don't want to paint all VCs as being like, go, go, go, go, go. I think it's about the plan, but a lot of VCs will be attracted to you as a, as a company, if they think you are on this path and this path means you are going to go out and raise money every year.

[00:21:47] Rob Gelb: Every, you know, year to 18 months, um, and your valuation then is going to skyrocket and go higher. Um, for them, that's, that's very helpful because that's an increase in, you know, uh, that they can, they can point to in terms of their IRR. It's not that they're wanting you to do that at all costs, right? But for them, if you raise, raise money for them because you're, you're saying that you could be incredibly, like, Uh, there's a low chance of us being incredibly fast growth.

[00:22:16] Rob Gelb: They're like, great, then I am investing in your, um, in your journey to try and see if that's true. And when companies don't do that and they take the money and they're like, cool. So we're just going to sit for awhile and we're going to be good for like 10 years. That is. will come across as insincere as to why you wanted this money.

[00:22:37] Rob Gelb: And, and so, so oftentimes, if that was what was agreed on before, and that then turned out to, um, to transpire, yeah, you, you, you'd piss them off. Um, or, or you, you'd, you'd piss off a lot of them, unless that was part of the conversation and part of the journey and, you know, um, all that kind of stuff. Because, um, if you're on that venture path, if you're engaging with, you know, VCs, you're thinking I'm, I'm building this company is going really well.

[00:23:02] Rob Gelb: So therefore the next step is to just get a VC involved at that. If that's your brain, I would just say, hold right there. Um, if you're talking about wanting to get into VC and getting on that path, it is a path. So if, and for some businesses, that's great. That's actually what you want. You want to grow. At, um, uh, you know, incredible, uh, um, you want to land and expand.

[00:23:24] Rob Gelb: You want to, you want to grow your market share. You don't care about profitability as much. Uh, you know, just in terms of the long, in terms of the medium term. Um, and you are, you are up for getting investment every, um, every year or so. And you are also good with the dilution that will come with that investment.

[00:23:41] Rob Gelb: Um, if that's not what you want, then just, Don't assume that's like what you have to contort into in order to be successful. 

[00:23:48] Ryan Wardell: Can you change direction halfway through? Can you come in, raise a bunch of VC from the very beginning, change your mind and then decide, no, no, no, actually we'd rather, we'd rather bootstrap.

[00:23:57] Ryan Wardell: Or once you're on that path, you have to stay on that path. No, no, 

[00:23:59] Rob Gelb: no, no, no, no. Like there've been, there's been some, some good examples of that. So like, um, buffer, I don't know if, Folks are familiar with buffer and their story. Um, they went through. Angel pad, which is a pretty well respected, um, uh, accelerator program, uh, Postmates also went through it and a few other like kind of higher profile, um, unicorn direction companies, uh, went through it.

[00:24:21] Rob Gelb: I think they were definitely positioning that in their initial, um, investor, um, uh, cap table. seem to be on that trajectory. And then they, they decided they wanted to switch gears and they wanted to become, I think they want to eventually become like an employee owned company and they want to, they want to, they want to change things.

[00:24:37] Rob Gelb: And so, and they've written a lot about this. Uh, and, and they're quite open in terms of their, their whole journey, but yeah, they, they, they went that, uh, they went through that and they, um, they talked with their investors and they worked out a way in which they could buy themselves out eventually.

[00:24:51] Rob Gelb: Obviously investors are, I'm not saying they weren't. Pissed off or anything, but, but investors are people and they're humans. And if your heart isn't in it for the way in which it needs to be for them to get their, their exit is not usually in their best interest to be dicks. Um, and, and, and they, they are people, um, there's definitely, you know, could be frustration, but if you go in and you, you consciously say, you know what?

[00:25:22] Rob Gelb: I don't think the business is there. I don't think the unicorn business is here. A 50 million business is totally there. I think we're going to switch gears and try and articulate that. So let's have an open conversation about what that means for our relationship going forward. That totally happens. It absolutely can happen.

[00:25:36] Ryan Wardell: I know the, the, the VC landscape has changed a little bit in the last few years. What is the fundraising environment like right now? 

[00:25:45] Rob Gelb: The last few years has been a bit rocky, uh, for a whole, whole bunch of different reasons. Kind of post, you know, you can talk to the post COVID return to work. Uh, you can talk about the, um, The kind of financial, um, uneasiness, uh, with inflation and increasing of, um, uh, interest rates, you know, uh, wealthier people, uh, are less requiring of higher risk investments if the, uh, interest rates are high, uh, You will also have people who, who, who point to all sorts of different reasons why this is the case.

[00:26:21] Rob Gelb: You also have a correction by the VC market in general, um, from the amount of money that was in the system in, uh, up to 2021, uh, and. There was a lot of money, uh, a lot of VCs, a lot of cash going to startups and a lot of startups that maybe shouldn't have gotten the valuations that they, that they had. Uh, and they, they shouldn't have received the money, the money that they had.

[00:26:52] Rob Gelb: So this kind of overcorrection, um, Uh, combined with the general economic environment all come together to say that, yeah, it's been a bit tough for the past couple of years, uh, when it comes to VCs, um, especially in that period, like post seed where you'd have a company that would have raised at a much higher valuation before, and now the, there's not that appetite to invest.

[00:27:18] Rob Gelb: In the multiple of valuation that they would need in order to see a good like, um, a, a, a, a good indication for their existing investors. What that means in normal terms is money still is getting invested. Uh, angels are still investing money. Early stage VC is investing money. Mid mid range VC is investing money.

[00:27:41] Rob Gelb: They were holding, you know, they were holding a lot of dry powder for a little while. They are investing, you know, more now the sectors. Switched a bit less, there's less interest, still interest, but there's less interest in bog standard SAS, uh, that isn't, uh, uh, revenue generating. Uh, there's more interest in AI.

[00:28:01] Rob Gelb: That's the latest, you know, um, stick that the dog's interested in. There's less interest. There was less than interest in crypto. Crypto had a bit of a crash and the money that went along with investing in crypto reduced that depending on who you read. It. It looks like it's changing a little bit, but, uh, or that is coming back a little bit.

[00:28:22] Rob Gelb: VCs are usually a bit more hesitant. And ironically, they are more interested in, um, cash efficient and revenue efficient companies. Now, uh, you have a lot of, of things that VCs are saying that from a bootstrap perspective, you're like, no shit. This is how we think all the time. Um, but before a VC might say, um, growth at all costs, we don't care about profitability.

[00:28:46] Rob Gelb: We don't care about this stuff. Boom, boom, boom. Whereas now you're hearing those same people say, well, you know, you know, you want to be responsible, uh, you know, and, and, and you want to be growing. We want to see like, we want to see revenue growth, uh, and, and as a core part of the business, especially looking at series a.

[00:29:02] Rob Gelb: And so what you end up seeing is a lot of these, these, um, investment, um, Categories like seed, pre seed, series A shifting a little in terms of the types of traction and the types of, of, um, uh, evidence that they need in order to justify an increased investment. So, short version is, uh, yes. Uh, VC landscape has changed a little bit.

[00:29:28] Rob Gelb: It does seem to be coming back in terms of money is, is, is being available. Uh, it's pinching companies most in that post seed, uh, stage early stage companies, still, there's still quite a lot of money available. Um, and also VCs themselves are getting pinched, uh, by their LPs, uh, in terms of like, Are they actually delivering something that's of interest to them to invest in?

[00:29:50] Ryan Wardell: You used a word there, traction, which is, which is pretty interesting. That's where they get thrown around a fair bit. Um, what does traction mean? For an investor, 

[00:30:01] Rob Gelb: traction is the stand in of evidence that you are on the right track. That means different things to different people at different stages. So I think a lot of people might think traction is money and it could be, it could be money.

[00:30:17] Rob Gelb: It could be revenue. Uh, revenue is the best form of traction, but, uh, if you do have revenue, then it, then they're going to look at revenue growth. So how, how much are you growing? So as soon as you have revenue. You have to be very careful that you are, uh, growing it at a fast enough rate for someone to be satisfied.

[00:30:35] Rob Gelb: Um, but it doesn't have to be revenue, especially in the early or earlier phases. And, uh, depending on the type of, of investor that you're going, you're going to, uh, what evidence is there that, uh, what did that your hunch is being borne out, maybe that's user growth, maybe that's activity that, that, that people are taking, maybe it's bandwidth.

[00:30:56] Rob Gelb: In terms of how, what proportion of somebody's day is, are they spent on your app or tool? Um, it is, it is a way in which you can, you can say, you can show evidence, some sort of evidence that, uh, what you think is going to happen, uh, may indeed happen. So. If you're listening and you're at a, you know, pre seed stage, you are, which ironically pre seed stage sounds like you just have an idea on a napkin.

[00:31:24] Rob Gelb: Whereas now that's all been moved up. So you've been going for a little while and maybe you have, you know, you have, you have some revenue and you have all this kind of stuff. It doesn't mean that you're profitable. It doesn't mean that you're efficient. Um, but it means that if I'm an investor and you're walking me through this, And all of my little, little niggles of like, well, how do you know this?

[00:31:41] Rob Gelb: How do you know that this is true? Uh, you can then say, well, we don't know, but we're, we're, we're pretty comfortable, confident in thinking that, that, that we're on the right path to knowing that it's true because of X, Y, and Z. 

[00:31:52] Ryan Wardell: I had, I had a friend once who said it's, um, it's easier to sell the sizzle than the sausage.

[00:31:57] Ryan Wardell: So what, what he meant by that is exactly what he said. Once you, once you demonstrate that you're generating revenue. You're on the hook to demonstrate that you can grow that revenue very quickly. And you've got a pathway to doing that. Like, do you agree with that? His point was that, um, if you are going to raise, especially a first round of capital, you're able to get a better valuation and it's easy to sell it.

[00:32:17] Ryan Wardell: If you're just kind of dangling the potential in front of an investor, as opposed to, Hey, we're generating revenue. It's not much, but it's there, but we might be able to grow it. Um, or do you think you're better off generating revenue and using that as your traction? 

[00:32:31] Rob Gelb: Well, it's a good question. I think, I think, I think you talking to a lot of people, especially about the world of VC, you think of you start getting into like games and you're trying to play games and you're trying to understand the game that they're playing.

[00:32:43] Rob Gelb: Um, I really don't like that. I don't find that super helpful. I think when it gets down to it, that is a mask for how. How much conviction does somebody have in a particular idea or, uh, or a particular team? And so, um, I don't think it's true that like, okay, you have some revenue, but you don't have a lot, uh, therefore you can't raise.

[00:33:04] Rob Gelb: I don't, I don't think that's necessarily true. It's part of it is the story. Like why, why, why do you not have a lot? And that's an honest why not a, you know, why aren't you much better than this? It's more like, what, what is the reason? Are you doing a whole bunch of experiments and you're having a bit of revenue and you're actually actively saying, yeah, we could, we could, we could, we could pull that thread and we could get like, 10 X our revenue in the next two years, but we know that's it.

[00:33:28] Rob Gelb: It'll stop. And frankly, that's not as interesting to us as over here in this area, this shiny area that we think is actually a much bigger opportunity, but we, we, we can't access that yet. And so the reason why we want to. Uh, raise a chunk of money so they can go and access that and see if there's gold there.

[00:33:49] Rob Gelb: Um, so, so yeah, look at our revenue right now as proof that we know how to get revenue. If we want to, the, the, the revenue grosses is immaterial because the real opportunities over here, that kind of a narrative makes sense. Like it could make sense. And that also could be a good reason why you were wanting to raise capital from someone.

[00:34:08] Rob Gelb: Whereas, um, uh, a non power venture VC might look at that and be like, are you mad? Why aren't you, why aren't you going down and like making money, you know? Um, so, so it very much depends on, uh, on, on what it is that you, that you want. I don't think you, you need to raise with revenue. Revenue is the best.

[00:34:27] Rob Gelb: Indicator that there is something there, but you have to combine that with a story, the, the, the, the narrative and a really good bit of conviction in terms of like, why do you want this wad of cash? Why don't you go off and and extrapolate or extract all of the, the, the money that you can in this one thing so you can power that one thing, you know, later on, maybe you don't have the time.

[00:34:49] Rob Gelb: Great reason to raise capital. Then, you know, there's this opportunity. It's not going to be there for, for a huge amount of time because vultures and our, our invest, our, our competitors are looking at that too. And we just see that this is a massive opportunity comes with that, a whole bunch of bravado and silliness that sometimes people take, um, but you, you, you can still be quite successful with that, that, um, that approach.

[00:35:11] Ryan Wardell: Right. But you've got, you've got to have, if you are going after PowerVenture, then the, the, the story that you tell has to align with that whole, we're on this timeframe, we want to accelerate as quickly as possible. And the more closely it's aligned to that. 

[00:35:23] Rob Gelb: Yeah, exactly. I think some, some founders, especially Bootstrap founders are, find it hard talking with, with PowerVenture VCs because, um, you.

[00:35:34] Rob Gelb: You've, you are very eager to, to come across as competent and realistic and, um, that can come across very well. It can also come across as that your ambition is not as high as it may be, um, or that you have doubts when you're talking to this other person who does not know the business as well as you.

[00:36:01] Rob Gelb: And they are not necessarily seeing the inherent excitement and, and drive that you actually have. Um, I see this a lot where people will jump in and I was like this too. If I talk to an investor, I will talk. I will spend the whole time telling them why this is gonna, why this isn't gonna work. And. An investor who needs to, needs to figure out whether or not this may be the thing that returns.

[00:36:25] Rob Gelb: This may be the one company that returns their entire fund. Doesn't really want to hear that. They, they, they'll, they know that it's probably not going to work. They want to see all the different routes available for it to work, even the outlandish ones so that they can be like, Oh, cool. These guys are thinking about all sorts of different things.

[00:36:41] Rob Gelb: I am inspired by their energy. So an investor will rarely know the business or the sector as well as you, the investor does not need to know. And should not want to know it better than you. Otherwise they should be building their own company. What they want to know is they want to have confidence that you are the horse to back because you are obsessed with this thing and you are not going to sleep until this, the, you know, this thing, you know, gets built so that they can feel a lot more secure and increase their conviction that.

[00:37:09] Rob Gelb: Even if you figure out your way by going all the way around, you're, you're the one that that is worth investing in. 

[00:37:16] Ryan Wardell: What should you do to prepare for your first meeting with a VC? And what sort of questions should you ask them in that meeting? 

[00:37:23] Rob Gelb: Definitely look up the VC, like look them up on Crunchbase, uh, look them up on, um, I mean, you can look them up on, um, Bowhurst and some of these other ones, but crunch base is the easiest look and see what is their average investment amount.

[00:37:36] Rob Gelb: What do, what kinds of things do they invest in? All of the VCs will talk about their, their portfolios on their site, look them up, learn a bit about them. Um, if you've. If the VC has come to you, I think it's different as to whether or not you've, you've been introduced to the VC or the VC comes to you, um, or, or, or otherwise, but there are a few different kinds of questions and questions areas that I would just be up, um, keen on asking them anyway, just so that, that, that you're getting something out of the conversation.

[00:38:05] Rob Gelb: And it's not just them. Um, some of those are. Just asking a little bit about the fund. So, you know, tell me a bit about the fund. How far along are you, you know, uh, when, when you ask that question, you're talking about the length of the fund. If you are in year eight. Of a fund, uh, of an eight year fund, that means that they're, you know, not going to be around, you know, in, in, in, in a year, or at least they're not gonna be deploying.

[00:38:30] Rob Gelb: I mean, well, a year, eight and eight year fund, they're not going to be talking to you. Let's just say they were, they were, they were, uh, year four in, in an eight year fund. Um, and so, That might mean that they're, they're not necessarily going to be deploying a lot of new capital. Um, so, uh, you want to know, so, okay, so how much are you holding back?

[00:38:46] Rob Gelb: How much do you hold back for follow on? A lot of VCs will hold back, let's say 50%. So that means they will a hundred million fund. They'll invest the first 50 million. Um, and then they'll hold back. The second 50 million, or maybe usually they'll do 25 or 30 hold back, uh, the remaining 60 or, or 50, uh, so that when, so that they can follow their money and double down on the ones that are, that are, that are most likely to be able to return the funding.

[00:39:12] Rob Gelb: So asking them that question, it's not, it's not a, it's not a rude question to ask. It's just showing that you are interested in them. And it's an important question to ask because you knowing that this VC has a lot of, uh, if they soft circle half of their investment as a follow on, that's helpful. That's good.

[00:39:30] Rob Gelb: It also means though, that the next round, they're probably going to be good for Max double what they've, what they've put in. So, you know, that's good to know as well. Um, uh, what is their thesis? Are they a generalist fund? Uh, do they have a thesis? They probably will, will talk about their thesis a lot, but you know, you can ask them some intelligent questions on that.

[00:39:49] Rob Gelb: Like, you know, if they're general, if they say that they're generalists. Ask them why they're generalists. Like, why aren't you, why aren't you focused on things? Do you find that, that, that, that makes you less of an expert on different areas? Like what kind of value do you add if you're just a generalist, if they're, if they are a specific, you know, subject matter expert, okay, so what trends are you seeing?

[00:40:07] Rob Gelb: Like, why, why, why, why do you find. This space that we're in. So interesting. Who do you think are the, are the big players? Who do you think is doing it right? These kinds of, this kind of conversation, I think it's, it's, it's based off of the idea that you should be going into these conversations as a potential equal.

[00:40:23] Rob Gelb: You're not going in as some sort of, um, beta, right. Um, an investor shouldn't be, you shouldn't be thinking of a relationship as like, please, can I have some money? If anything, you are a prize. that doesn't know that it's a prize yet, that they might have a little potential to get on board with just before you like, Blast off.

[00:40:48] Rob Gelb: So you needing and on the flip side, you coming in and being a complete dick is also not, I think, very helpful. Uh, though some investors do actually respond very well to that of like you just being an ass and, and, and telling them all the stuff, all the shit they don't know. Yeah. I don't, I don't advocate for that.

[00:41:07] Rob Gelb: I think you should lean into your personality in terms of what is most comfortable for you. Um, but there is a difference between you coming in and showing your expertise and not being afraid to disagree and, and like rolling over and being like, Oh, yes, yes, sir. Absolutely. Absolutely. You know? Um, so when you're going into a conversation, I would prepare for it in that way.

[00:41:27] Rob Gelb: I'd be like, find out that, The stuff that you don't know about this thing that you, these people that you might be getting in bed with one day and just ask them, see what their response is like, you know, um, depending on who you talk to as well, I would, I would be, um, mindful of the information that you're giving out, uh, In VCs, you have different levels, you might have an associate or an analyst, then you might have a principal, you might then have a partner, a managing partner, um, people like that.

[00:41:54] Rob Gelb: Partners are the ones that usually make decisions or decision makers, and they are the ones that are probably going to be a lot more interesting to talk to. Um, associates will talk to 20 different companies, you know, 10 different companies a day, they're going to be writing up stuff, they're going to be making presentations, they're going to be tracking you.

[00:42:11] Rob Gelb: So anything that you say, they're just going to be Putting you on file. Um, if a partner wants to talk to you, that is a little bit more like, uh, I think a, a bit of a better indication that they are interested in being serious. And oftentimes, uh, or the, the one thing that you usually will not hear, uh, in, uh, through an investor conversation that I know is really irritating to people is no.

[00:42:34] Rob Gelb: Is this isn't for us if, and that can be super, super frustrating to founders. So when you are, when you are on a conversation, especially initial conversations, remember your time is valuable. You should be out there building your business and any, anything that these people are doing to, um, take you away from that is costing you money.

[00:42:52] Rob Gelb: So don't be afraid to be like, cool. So what's your process? Like how fast, how fast do you guys actually. You know, do this, uh, basically like, how are you not going to waste my time if you are interested in, in, in proceeding, you know? Um, and, um, last thing I'd say is that, um, as soon as the competition does weird things to people and it suddenly makes people in much faster than they previously purport to.

[00:43:18] Rob Gelb: To being able to be, so you will have VCs that say, well, you know, every month we have this meeting and then we'll get, we'll get all the, the, the, the different pitches in and then we'll talk and then we'll circle back and then we'll start having conversations about people. So the earliest we can like get an indication back for you from initial interest is about a month.

[00:43:34] Rob Gelb: And then you'll come back and say, Oh yeah, by the way, someone's giving us a term sheet next week and you'll get something, you know, the same day. Right. So, so it's, it's, it's, it is a little bit of this game, um, um, that you have to manage, but hopefully that gives a good. A few things that someone can, can, um, look into in terms of when they're, when, you know, when they're wanting to, um, chat with, with their first or second or third chat with these VCs.

[00:43:58] Ryan Wardell: How, how many meetings does it usually take or is there, is, you know, how long is a piece of string? Like, is it a. Is it, is it a one and done kind of meeting? Is it, you know, by the third meeting, if you, you know, it's like, well, it's the third date, you know, is, is, uh, is this going to happen or not? Like, is that, is it that kind of a dynamic or, you know, can you be talking to them for six months without, you know, You know, getting a commitment out of them.

[00:44:21] Ryan Wardell: Like, well, 

[00:44:22] Rob Gelb: yeah, I mean, it's all, it's all the above. And I think it depends on when you think, when you consider it starting. So like the best time to start making, building relationships with VCs is when you're not raising, when you're honestly not raising, uh, most, most, most times when founders get in touch with VCs, they're like, Oh no, we're not raising right now.

[00:44:41] Rob Gelb: But we might be in a few months, i. e. they are and they will be, um, but if you're honestly not and we can get into this in terms of the, uh, you know, a little bit later in terms of like tactics, but if you're honestly not like, that's a great way to just start building a relationship. You have to, you have to be mindful about the information that you're giving so that someone's like, Oh, Hey, yeah, we, we chatted three months ago and, and you said you'd be at this revenue level by now and now you're, you know, You're still at the same revenue level, like what's going on.

[00:45:07] Rob Gelb: So you, you need to be kind of mindful of that. But if you are actively raising, if a VC is actively interested, um, it, it, it can depend. Um, I mean, I, I have had situations where I've met an investor and I walk out with a check, which is, which is, I think, rarer than people like to think. Um, but, uh, but you know, usually it's like, Two or three calls, then you might have to meet with a few different, uh, a few different partners.

[00:45:36] Rob Gelb: And then if they were, you know, if they were to issue you a term sheet, then due diligence might, might take a few more calls or, uh, you know, a few more meetings. Uh, so it can happen very fast. There are some funds that pride themselves on making incredibly quick decisions, more likely that's in the States and more likely that's on the West coast of the States.

[00:45:53] Rob Gelb: Um, but, uh, or in the very early stages, like they have set. Set terms, set things. It's such a low likelihood, uh, or like, uh, such an early phase that yeah, we can, we can just put it in depending on the mechanism that you use as well. We can talk about safe notes versus investments. Um, that makes it, that makes things easier or harder or, Or it takes longer.

[00:46:16] Rob Gelb: So yeah, it is a little bit like a, uh, how long is a piece of string? I've seen deals, massive deals take like six, nine months to organize. Um, and also massive deals happen in, you know, a couple of weeks. Um, and, uh, and, and also smaller deals that just take forever. Uh, one of the things that you, so one of the big things that you can do as a founder to truncate that time is to just assume that it won't happen and build up.

[00:46:42] Rob Gelb: The, the, the alternative, uh, that will drive. So if you think of yourself as like, um, a canal boat, right between two locks in the canal, if you're in the middle of those locks and the water isn't equal on the other side, you try and open that, that door. It's just not going to work very well. Not going to work out very well.

[00:47:02] Rob Gelb: Whereas if you, if you make it so that both options, both directions are the, are, are, are, are as, as. Equal to your level as possible. It'll be pretty easy to, to, to be able to go in either direction. So if you are putting all your hopes on one VC to invest in you and you've been talking to them and nobody else, it's probably gonna take a long time because they're in the pole position.

[00:47:22] Rob Gelb: They can take as long as they want to see if you're, you're, you're the real thing. Also an M and a, if you're talking to only one person, one entity. So if you want to put, get, get, um, into more control, uh, or, or, or to take on more control of that process. It's not. Pushy trying to push them is trying to go off and just assuming that's not going to happen and come up with an alternative That will ironically drive them to action a lot faster 

[00:47:45] Ryan Wardell: How much equity should you expect to give up every time you raise capital the 

[00:47:49] Rob Gelb: generalized rule?

[00:47:51] Rob Gelb: Is anywhere between 15 and 25 percent Again, this is Incr. Uh, this is a big generalization. I'm making a whole bunch of assumptions, but it ends up being, especially in tech, especially in SaaS, especially in, in vc, when you're doing a full round, you are, you are expecting between 15 and 25%. So that's why just settle on 20%.

[00:48:12] Rob Gelb: That means that every time you go through a round, you are deluding yourself and the existing, um, you know, cap table by 20%. If you, you, I might also add another 10% on that. Um. Either before or after for option pool. Like if you're creating an option pool as part of that to retain and incentivize employees.

[00:48:31] Rob Gelb: Um, 

[00:48:31] Ryan Wardell: but, but in general. And are there any other common mistakes that you see founders make, especially the first time when they're raising capital and especially from VCs? 

[00:48:43] Rob Gelb: One of the areas that's. Complicated, I think, or maybe difficult to get your head around is the idea of valuation and how to value your company because, and especially when, ironically, when you're talking to unsophisticated investors, they can really set you on the wrong path.

[00:48:57] Rob Gelb: So just that, just that question that you, you, you just asked, what percentage should you be giving out? 20%, right? Pull that out there. What does that actually mean? It means that you are dictating the valuation of the company based off the amount of the percentage that you're giving out. That doesn't sound normal.

[00:49:17] Rob Gelb: Um, and it, it shouldn't be, but that's how it is. So, so, you know, realistically, if you have someone who wants to, if you want to raise a million, you need a million, uh, then you're going to be valued at about five. And that's how you get to that valuation of five. And you justify why it's five for in whatever way you want.

[00:49:41] Rob Gelb: That whole concept is weird. It's fundamentally weird because it sounds backwards and it is backwards. Um, but it is the only kind of, it is the only rational way to get around the fact that the company doesn't hold a huge amount of value, um, And until, until later, you are valuing the company on future potential.

[00:50:03] Rob Gelb: And it's very difficult to then make, make that up the problem that I think a lot of founders make or, or, or the, the. The challenges that they run into, especially if you're, if you're coming from a bootstrap background, you'd like real numbers. So you're like, well, how the hell am I justifying 5 million, 5 million, what?

[00:50:19] Rob Gelb: Five X my revenue. I'm nowhere near a million in ARR. Like how am I going to justify that? So that's a bit of a mind, uh, you know, uh, a mind screw. Um, but the, the, the other thing is miscalibrating. Your narrative and what it is that you want to do based off of what you think someone else wants to hear you're like, okay, I'm gonna I have a call with Sequoia and therefore I need to contort myself into this weird thing and come in there all brash and you know and try and pretend like I'm gonna be the next Elon Musk and all this shit and and and then When you don't like they maybe they're just interested in talking to you and also maybe you know They're not the right fit for you anyway, so it, it, it shouldn't matter.

[00:51:08] Rob Gelb: Um, uh, so, so that's the, that's the kind of the big thing of valuations and not understanding how valuations work and also contorting yourself. Unsophisticated investors screw people up by making it a bit more real. So you'll see, if you have a bunch of dentists that want to give a hundred grand because or 10 grand, they want to put 10 grand into your business, usually they end up saying, okay, cool.

[00:51:33] Rob Gelb: So what's your five year financial plan? Show me your, show me your EBITDA over, you know, the next five years, and I'm going to interrogate every single thing because this is my money. I'm investing it and all this kind of stuff, which I know it sounds normal, but like that is. That's not how PowerVenture or PowerVenture scale, um, or usually tech early stage tech works.

[00:51:55] Rob Gelb: And it's a fundamental misunderstanding of risk appetite and risk, you know, um, um, uh, viability. And some angel groups really screw up companies that way, um, because they're like, well, no, the maximum amount that you're going to be valued has to be like 300, 000. So we're going to then take, we're going to invest a hundred thousand in your business, and we're going to take 30%, 33 percent of your business.

[00:52:20] Rob Gelb: And then an investor looks and says, you, you want this to be a power venture business. You've, you've taken only a hundred grand and you only have two thirds of the business left. Ooh, that's not good. You know, if you're going to be going through round after round after round and diluting yourself, diluting yourself at some point, you're not going to have any more equity.

[00:52:38] Rob Gelb: So we're not, why would we be putting in like tens of millions into your business? If you're not. Motivated to stay. 

[00:52:45] Ryan Wardell: Yeah. So, so, so, so if you take a bad deal at an angel round at an early stage, that can potentially screw up your ability to raise capital from VC later. Yeah. 

[00:52:55] Rob Gelb: Totally, totally. Now, now, as with most things, there are ways around a lot of this stuff and some, sometimes VCs, and this is why, uh, this is another reason why VCs sometimes have a bad name or have a bad rap and are predatory or seen as predatory.

[00:53:08] Rob Gelb: Um, especially by angel investors, because they've probably experienced a VC coming in and cleaning up the cap table. There's this phrase, cleaning up the cap table. Uh, and that can be anything from getting people removed from the cap table and like wrapping them into something might be changing rights and behaviors and information rights that people have.

[00:53:28] Rob Gelb: It also just might be re reorganizing how much of the business certain people own. And that can be, that can be very, very important. That can be, if you imagine, like, let's just say you, you went from a 10% holding of a business that you invested 5K in, and now the business is taking off and Sequoia is interested and they come to you and say, man, Sequoia might invest like 10 million into my business.

[00:53:53] Rob Gelb: And one of the requirements is that you dropped to 0.2% and you, you might be like, F no. You know, so like the, the, but they might be doing that because they're predatory. But it also might be doing that because. The founder needs more of, they might feel like the founder's equity allocation is a danger, not only to, from their investment, they're thinking of the next investment round.

[00:54:21] Rob Gelb: If, if they don't, VCs want things to be as straightforward as possible, they don't want surprises and they want it to be easy for someone else. With even bigger pockets of them to come in on the next round. So if they see something that's not, that, that doesn't make sense or that it's weird, they're going to question it.

[00:54:39] Rob Gelb: So you, as a founder can then think, well, how much work can I do to try and minimize that to make it as easy as possible. And again, if someone really loves you. They're going to work with you. They're going to, they're going to, they're going to try and figure this out and help you. Um, but it, it ends up being, gets you into these very interesting, interesting problems where, um, you have a really, really crappy few angel rounds that you did and the founder is like, Just scraping 50 percent and they've only raised a hundred grand and now they, they really are catching fire and yes, it can totally screw up deals.

[00:55:12] Ryan Wardell: Let's change tack a little bit and maybe go deeper into some of the tactical stuff. How, how do you find investors in the first place? Investors are 

[00:55:23] Rob Gelb: naturally. Accessible, relatively accessible.

[00:55:39] Ryan Wardell: So final question, Rob, um, are there any other little hacks or tips or bits of advice that you give to founders to help them get more favorable terms? Having a good lead 

[00:55:51] Rob Gelb: that a good lead investor that you trust a lot helps make a lot of arguments because you can then blame it on the lead, right? Oh, uh, investor majority, uh, consents aren't being given, uh, I mean, uh, you know, lead Yeah, you know, that's what they want.

[00:56:07] Rob Gelb: Um, so actually making sure that you have a, have a good lead, um, super valuable thinking about things like not equity, not doing equity rounds, uh, and just doing, um, convertible notes, uh, at least for the early stage, like safe notes, safe notes are not in technically an investment. Um, they are, uh, safe notes in the States or over in the UK, um, advanced subscription agreements, uh, ASAs.

[00:56:32] Rob Gelb: Uh, but this is like a money, uh, money that is being transferred to your account that will, uh, do, do one of a few different things in the future. It might convert into shares. It might convert into a loan that you then have to pay back. Um, it, it, it might do a whole bunch of different things. Um, convertible loans, uh, convertible loans are great because they're You can have, as long as the loan is the same, or as long as the note, the legals, it's like a page, it's not very long.

[00:56:59] Rob Gelb: Um, you can have one open as long as you're using the same legal, uh, uh, and you don't have to wait for everybody to be ready to invest. If you're like, Oh, we want to, we want to raise like a million. Um, and we found someone who wants to put in a hundred grand, send them a docusign, they have to sign it, and then they can transfer you that hundred grand.

[00:57:17] Rob Gelb: Even if you don't have the other 900. So, uh, convertible notes are very cheap. They're very, very good way. You need to, to be mindful of them to make sure that the terms are good. Um, because that can screw people up. Uh, I think, um. Other hacks, uh, I wouldn't, I will, I wouldn't engage in the early, earliest phases.

[00:57:39] Rob Gelb: I would not engage in some, in like a professional, um, like financier, uh, someone whose job it is to introduce you to, uh, investors personally. I think at the later stages, absolutely. Especially with, with larger amounts and, and, and. And sector specificity, totally. It does make sense, but if you are just, if you're raising your first half million or a million or 2 million, uh, you really should be owning that yourself and owning that whole process yourself.

[00:58:05] Rob Gelb: And I think you will, it will end up finding that it's actually not as bad as you think it is. Um, uh, books, I have a couple of books suggestions. Uh, in terms of like, uh, learning a little bit more about it. Um, I think the, uh, there's a book by Oren Klaff called Pitch Anything that's really, really good.

[00:58:25] Rob Gelb: He's a psychologist and it's a, it's a great way of kind of articulating a much better way that I, I have about that need to establish yourself as a subject matter expert and not. Beta yourself or, and, and come in as, as an equal and establish that. Um, especially when, when speaking to investors, it's, um, it's, it's very, very good, very accessible.

[00:58:46] Rob Gelb: Uh, then, um, Founders Dilemmas, great book, uh, and, uh, Wasserman, uh, Definitely prompts the kind of conversations that you need to have with a founder, a co founder. If you're starting off, you need to make sure that you guys are aligned in terms of what it is that you want. If a 50 million exit is really sounds great to you, but your, your co founder is like, I want to, I want to do a billion or bust.

[00:59:10] Rob Gelb: Uh, Then you guys should talk about that and make sure that you understand what, what that means. Um, and, uh, it talks about control motivated people and wealth motivated people. And it's just, it's a really, really interesting, uh, book and it prompts some great questions. 

[00:59:24] Ryan Wardell: There, there has been so much gold in this man.

[00:59:26] Ryan Wardell: Thank you so much for doing this. That was, yeah, that was Rob. If anyone is interested in getting in contact with you, where is the best, what's the best way to find you? 

[00:59:36] Rob Gelb: You can go to robertgelb. com and, uh, you can connect with me there. I'm also on LinkedIn. I will, I will definitely, um, see you on there. Uh, you'll probably see some very embarrassing, uh, looking, um, uh, images of me in a cast and, and lots of, uh, cartoon pickles, uh, because that seems to be my life right now.

[00:59:55] Rob Gelb: Um, but yeah. Reach out. Happy to chat.