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Jon Bradshaw & Peter Harris

Peter and I provide anonymous feedback to a first-time founder. We talk about their revenue numbers, team size, and if this startup should attempt to raise venture capital.

VC Provides Anonymous Feedback

Peter and I provide anonymous feedback to a first-time founder.

We talk about their revenue numbers, team size, and if this startup should attempt to raise venture capital.

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Episode Transcript

Jon: All right. So Jon Bradshaw, Jon Peter Harris, he's with the University Growth Fund. I at one point had a very, very small fund and we are talking about venture capital stuff. How's that for a new intro? Let's do it. Go to venture Capital Dot after him if you want to check us out in any place we are on Spotify or on Apple Podcasts, we've got an email newsletter.
Jon: Venture capital firm.
Peter: Like and subscribe.
Jon: Out here. So let's talk. I had a lunch this week. All of this stuff will be confidential, so the individual won't get in trouble. But he was in a in a in a scenario. And I'm curious, Peter, what advice you would give this individual? Yeah. So this individual left a Fortune 500 company to start a to start his SAS company.
Jon: The company in the last six months has done about 40 can revenue they expect in the next 12 K they'll be at 100 K in revenue the.
Peter: Next 12.
Jon: Months, the next 12 months, 100 K like monthly.
Peter: ARR.
Jon: Annual recurring revenue. So it's like eight and I.
Peter: Be doing like, okay, in 12 and a year they'll be doing 8k a month.
Jon: Month. That's what they're expecting. Okay. They are in the fintech space. Okay. With a bit of ad tech. Okay. But I'm not going to get more to the model because I don't want to like, okay, like I look at all this has been confidential, but I think I can share numbers without sharing specifics. And he was debating what to do.
Jon: Everyone by him, I think, is part time. There's so there's five of them. Yeah. There are a lot of developer friends from a former company that are working together. Yeah. And he's full time is like the product manager, CEO slash sales guy. Yeah, they're now closing contracts at a much faster rate and so his.
Peter: At a faster rate but they still only plan on being at a hundred k R in a year.
Jon: But they're bootstrapping in you know how bootstrapping is. When I've worked most people can't give more than 10 hours a week. Yeah. And so he's like, what do you do? And so he doesn't want to raise until he can raise 2 million. No, I don't know if he could or couldn't raise 2 million right now. Why?
Peter: Why not? Like, why doesn't he want to raise until he can raise 2 million?
Jon: I think he thinks there's like when you come out, come out swinging and have the terms favorable and you're in your perspective. Okay. I've told him if it were me right now, I would raise a smaller amount, like 500 K That momentum is everything in venture and if you don't have momentum, someone else will, which he disagrees with, which is fine.
Jon: I mentioned and actually quoted you and said one thing that you taught me is that like you can struggle and you can spend for years trying to build something and then the market can change or someone else comes in. And if you don't have momentum like.
Peter: That, like your toast.
Jon: Your toast, you've got nothing. So momentum and dilution from taking on funding in my mind is worth it To be faster, to be at the front of the pack, things like that. So my takeaway from him is based on his revenue, I would say, Hey, I don't know how difficult this would be, but if you could raise 500 K from like someone like tiny C, you don't know if you know them, maybe a syndicate, a local syndicate might be a good way to get 250 500.
Peter: K You mean just friends and family, right?
Jon: For as a family, he's mortgage his house to make this happen. Yeah, but anyways, my point was is I don't think you could raise in the current market raise 1000000 to 2 million where it's the current.
Peter: Market super tough.
Jon: That supermarkets super tough for the end of June 2022. But my my thinking was to go and try to fundraise a little, especially because there's an edtech component and it's in the summer, which means I don't know how many deals they can close, he said. This summer is just a slower time for them.
Peter: Well, typically edtech is like when all the like all the schools make their purchasing decisions is in the summer. Okay, So but I don't know his model well enough to know it's a it's a.
Jon: Model.
Peter: In edtech like summer is when you make your money.
Jon: The difference is it's a freemium usage model. Yeah. So the decision is in my mind, unlike traditional edtech, stuff happens later on. It's because it's usage. Yeah, and that's one of the things that makes them unique. I'm going to run this podcast by him before we publish so I don't get in trouble in case we've said something we shouldn't, but we haven't said think we've been fairly anonymous.
Jon: Okay. And I think the other thing is because there's five of them and a lot of them are devout, they're developer heavy. His fear is if they only raise 500 K funding won't happen. So I think this is the big part because there's five of them. Their dev rates are in the U.S. or astronomical. Yeah, he'd have to raise a million just to cover probably their salaries for a year.
Jon: That doesn't count for budget, for sales and marketing or things like that at all.
Peter: Sure.
Jon: And so that's his that's a huge concern for him.
Peter: So what's his gating factor here? Is this gating factor like he doesn't have a product that he can really sell yet and he needs to hire engineers to finish the product? Or is that gating factors, sales and marketing.
Jon: Sales and marketing?
Peter: So so then why does he need engineers? He needs salespeople.
Jon: He does need a tech team. I would argue he could deal, he could run with a much.
Peter: Why doesn't he hire you to run that backend? The tech team.
Jon: I don't think they're big enough yet.
Peter: They can't afford you.
Jon: Know.
Peter: They can't afford to. You can't use you. Yeah.
Jon: Okay. We may have to edit that one out. I'm not I'm not turning this into a sales pitch for code base.
Peter: Well, okay. Whether they use you are not like, why don't they use someone like you're here? Like, why don't they use an offshore dev team? I don't. So I don't know. At the end of the day, it sounds like the problem is you see he's sitting on the fence.
Jon: Maybe so I would say they haven't done offshore because this individual has little to no experience with offshoring.
Peter: Okay, that's fine.
Jon: And this individual is specifically working with friends. So basically, to do to make that move, he would have to fire probably or let you four or five people go who've gotten it to this point.
Peter: Why does he have to be firing them? Why can't I just be like, Hey, thank you so much for your contributions. Here's some equity I can't afford you, right? I've got to go this other route right? At some point when I can't afford you, I'd love to hire you.
Jon: My other critique is that founding teams.
Peter: And here's the other thing.
Jon: Two or three people.
Peter: Here's the other thing. If what he is doing is not compelling enough to get one of those other people to also make sacrifices and join, then it may not be compelling enough for him to really spend the time.
Jon: And energy on. So hypothetically, without talking with their cap table.
Peter: Yeah.
Jon: And again, and this is why I think it's tricky for someone to come full time where they're at that revenue stage or less. They're going to want at least like 10%, especially if they're not getting like any salary.
Peter: Okay.
Jon: And so if you have four or five people, you know, let's say they do, they just split it five ways. That's like 20%. Is that 10% each?
Peter: Yeah.
Jon: And I don't know if they would do that. I mean, I think he's got too many people involved right now. I would just say you have one, you know, one for 20, one for 20. The the CEO founder should have like 60 for various like political or like reasons. I believe startups should be run by a dictator, not by like a by majority rules.
Peter: Sure. And I agree with that.
Jon: And you should trust the captain.
Peter: Yeah. Benevolent dictator. Right.
Jon: So I guess my my.
Peter: What's your question?
Jon: The question is, what do you think they should do? And I guess I'm going to say as a founder, what I would do is I think five is too many. I would try to get one or two of your jobs to come full time local. I would not try to outsource where you're kind of early. You might have a designer friend who kind of picks, you know, helps out a little, but their app didn't sound too extensive.
Jon: And and then this individual's job should be to sell and then they should try to sell to get a little bit further to try to get to, I don't know, at least five month ma before fundraising ideally, especially in this market and then try to raise a half a million around and really try to accelerate it. Okay. That's what I would recommend.
Peter: With knowing very little about the product, which.
Jon: Is totally fine.
Peter: So you might have things that you are saying to me and if your friend is watching this, like again, I don't know what's going on here. So this is just like when I'm able to glean it doesn't sound like he's got a product that's that compelling, to be honest. So when I think about like startups where it's like, you know, this is okay.
Jon: So my Death Star, I'm going to fly to my Death Star and correct you. This is how I look at this individual. When you learn to be a founder, it takes a lot of time. So they've been here for four years. I look at this individual as being poised to really go and slay it. They've been putting their.
Peter: But is this the product to do it? I'm not talking about the individual. I'm talking about the product.
Jon: So based upon one conversation, yeah, I think what the team has is compelling. I think it's interesting.
Peter: Okay. So if it's that compelling, I.
Jon: Think it's.
Peter: That compelling biography. Why are people not signing up for it?
Jon: I think because they're all I think because people aren't full time and they're learning. They're they're they're tiptoeing like most people do in startups.
Peter: Okay, Do you want my advice or No?
Jon: Yes. Let's hear your advice.
Peter: You're going to keep interrupting me. You're going to let me finish.
Jon: I'm trying to defend because I was really impressed by where they're at, because to get where they're at like that is hard work.
Peter: Okay?
Jon: It's a lot of sacrifice. And like I've been doing staff my entire life, Like, my first startup was a lot of my business successful for a 16 year old. My second business, it ultimately failed depending on how you looked at it. I looked at my third business, which just the second business, morphine and a pivot now. But that one we did like over.
Jon: Yeah, but then again in the time frame you like it. It's a lot of work to learn. Just like to run a venture fund. It takes a lot of time to learn how to start SAS company. And so what I would argue is, But just.
Peter: Because your baby is ugly does not mean you are a failure.
Jon: I don't think the baby is ugly. I don't know how pretty the baby is. Yeah, but I see I see all of the workings there that make it interesting.
Peter: Okay, so let's talk about product market fit first here. Okay. So there's basically like pre-market pre product market fit and post product market fit, right and pre product market fit, that's like your seed rounds. This is exactly where this guy is at, right? His company, he is out in the wilderness hunting around for product market fit. Right. And you're basically telling me he wants to wait till as 2 million bucks because he doesn't want to take the dilution that would come with having the lower valuation, having not found product market fit right.
Jon: Not no not fundraising is because he thinks unless all of them come full time, fundraising won't happen. But to get all of them to come full time, he's going to have to raise to the last 18 to 24 months. He's going to have to raise a million and a half to two and a half million with his current team.
Peter: Okay. Anyways, okay, so my point is.
Jon: You can totally disagree.
Peter: Is out in the wilderness, right? Hunting for product market fit and in my opinion, like what I would want to have before I raise money before I start like scaling all those things is I'd want to feel like the product is solving this huge pain point and starting to receive pull from customers. Right? And what worries me is that after a year of working at this, he's only going to be at like 100 K.
Peter: A.R. Right. This is like eight K am.
Jon: I think if they do it.
Peter: Like.
Jon: Better, they'll go fast. I don't know. It'll happen.
Peter: Right? I know. But like this is what he's forecasting so I haven't, he doesn't.
Jon: Like I don't know what's happening. He could be exaggerating. Sorry. Normally you cut me off, so I'm cutting you off. I'm. I think it's interesting.
Peter: Okay, So don't know, but I don't know enough about it to be able to say if it's purchasing or not. And all I know is what customers are essentially saying. Okay, What you're telling me is a year from now, customers are only going to be willing to pay him eight grain of eight grand a month, which to me doesn't seem super compelling, no matter if he raises everyone's part time, whatever.
Peter: Right. Like he's full time at a minimum. He's full time. Right? And at a minimum, he's mortgaged his house. So he's put at least probably 100, $200,000 of dev dollars into this thing. Right. Which from my perspective should be enough depending on the market rate, but should be enough to build an MPV that you can go out and sell.
Peter: And if that is that the minimum viable product?
Jon: You said MPV.
Peter: Sorry. And if you can build a minimum viable product MVP, right. That is actually solving a huge pain point. Then you should get customers that are signing up faster. Right now, it may not have all the features you want. It may not be perfect, it may break down all the time. But if it's really solving, if like if what you have discovered is this pain point that people are desperate to have solved and nobody is solving it, like that's what you want to get to, right?
Peter: And that's when you start to feel pull on your product. That's when you start to see the the early inclinations of product market fit.
Jon: And I think that's happening. But again, I'm not in the trenches.
Peter: Okay, Well, then in that case, if it's really happening, then he should feel like a year from now they're doing 200, 300 and 400,000 RR gap or have the potential to write. I don't know. It just to me it seems like.
Jon: So your thought as the baby's ugly and walk away or.
Peter: The baby's ugly and you need to keep kind of pivoting until you find something that works for your customers.
Jon: I do think, though, if the opportunity is really there and the team internally sees it, they should be willing to come full time and there they should be given options.
Peter: And that's the other reason why I worry that this baby is ugly, because the team is not willing to quit their jobs and do it right. They look at this and they're like, Hey, this is a cool idea.
Jon: Should be as hardest part of fundraising.
Peter: But hey, but look, you know, we talk about this all the time when I meet with entrepreneurs, there are so many things that they don't need money for it that are incredibly hard. But if you can do those hard things right, it becomes incredibly, incredibly impressive. And helps you fundraise. And one of those things is you have found something that is so compelling and you as a founder are so compelling that you can convince people to leave their $200,000 salary and join you and even kick in money themselves to make it work.
Peter: Right? That is insanely hard. And I won't even pretend that, like, I could do that right. Like, I think it is insanely hard, but but great, great founders pull it off all the time, right? And so to me, what what I'm hearing and granted, I don't have the context you have, but what I'm hearing is that the product's not quite there yet, right?
Peter: Yeah, maybe it's got promise, but it's not there yet because people aren't willing to, like, fully jump in. He's not willing to he doesn't have the confidence to raise the money yet. Right. But regardless of what you write, you give lots of excuses. But he's just not there doing it right.
Jon: Okay.
Peter: And the the revenue growth is frankly not really there. So what do you do from that to that point? I think there's two ways to look at it. One is he needs to either get off the fence, raise some friends and family, make money, do whatever it takes, hire somebody to help him and like go all in and make this work right.
Peter: Or he needs to keep hunting until he finds a product where until he's built a product that's got really good pull, he's got to he's got to be like product led marketing, right? Where people like they love the product because it solves this like huge pain point that they can't get solved any other way. Right?
Jon: So this is why I think I would do if I was on.
Peter: What you're saying. Yeah.
Jon: And I think you have a lot of good points and neither you are in the trenches. So this was just one line of conversation. Yeah. Is I would go to the current team and just say if you're not willing to come full time within the next month or two, thank you for your service. You're out. Burn the boats.
Peter: Okay. I don't think you have to be a jerk about it, but don't say it's not.
Jon: Yes.
Peter: Not burning. I think it's like, hey, thank you so much for your contributions. We're going to tighten things up and really focus on this. Right. And I need people that are like, it's that concept I need everybody on the bus sitting in the right direction, right?
Jon: It's that concept where if you have if you want have a baby, having nine pregnant women does not give you a baby faster. And I'm a big believer smaller teams can communicate more efficiently, especially if they're all fully invested and they don't have their full time job. The urgency would probably skyrocket. You'd probably get more done by just having a team of two or three of you than having a team of five working here or there getting together.
Jon: Yeah, it changes much more from, Hey, this is a soap, a social opportunity to we we are all going to live or die because I feel like the founder is in that mode. He's burned his boat, right? You know the phrase it's like the Vikings, like they won because they would go to a place to conquer that, burn the boat.
Jon: So it was either conquer or be conquered. You couldn't escape. You couldn't retreat. And I think if that mentality was there, you'd be far more productive across the entire board. Get from 42, pass 100,000 and you know a revenue mark or more and then go fundraise is probably how I would do it as I've like as I've noodle on it so I know I've contradicted myself in this in this thing but I do think you brought up some good points that I think any investor, any professional investor is going to say, hey, that people are timid, which would be a signal.
Jon: People aren't all in the people who have the best knowledge and who've been noodling on this problem for the longest time aren't all the way in. So why should I?
Peter: Yeah, which means either the team isn't the right team because they're not committed or the product's not there because of the product was there. People would be committed because they'd see it and they'd be like, Holy crap, this thing is going to like change the world and I got to be in on it. And people are still like, even when that does happen, they're still wrong a lot of the time.
Peter: So like as a VC, like, why would I ever touch something that isn't that? Do you know what I mean? Like where people aren't like jumping on board, burning their ships, like whatever it takes to make this thing successful? Because even if when they are, it is hard to make something successful, I think.
Jon: Have you read the book Start Stop small, Stay small. I think that the book focuses on like finding niches and.
Peter: Niches, riches and niches.
Jon: Niches. Yeah. The way I look at is their worst case scenario is I think they've found a niche. Sure. And they're just learning how to sell. And as he explained his approach to.
Peter: Well, is he going to build a business that sells driven or product driven?
Jon: And I think that's a problem right now is there are a product driven company that needs to be a sales driven company and probably a lot of the things they're working on that they think are neat could be dropped or should be dropped.
Peter: Yeah, could be. Especially if they're like working on stuff that's like cool and neat. Like nobody cares. What I care about is that solving a core pain point that people are going to pay for, right? Sometimes like will meet with companies and the company will be like, yeah, like we got this, this new technology and it's like we're cheaper than the competition so we can charge less than anybody else.
Peter: And I'm kind of like, Yeah, I guess that's cool. But you know, what's even cooler is if your technology is not only cheaper, but substantially better than anybody else and you charge more like your cost basis is lower than anybody else but your benefits to your your consumer or someone, your customer are so much higher that you can charge more than anyone else and you get walk away that big fat margin.
Peter: Right. Like that is the deal. I want it back.
Jon: And that would be curious because I think I think one of the challenges because there are currently a freemium model. Yeah. I think sometimes I wonder if freemium models, we like them because it's easier to like sell because we're sales driven. Yeah. And we should drop it so we can be more sells.
Peter: Yeah, but the reality is most freemium models don't work. I mean, that's but they, you know, a lot of people have studied this and basically shown that, like very, very few freemium models work.
Jon: So I should correct. They're probably more of a usage model than a freemium model.
Peter: Okay. So the more you use it, the more you spend.
Jon: Yes.
Peter: Okay. So again, that like, causes me all kinds of like, red flags because it's like if it's really solving a pain point, then people should be using it, like, nonstop all the time.
Jon: And I don't have the numbers with them.
Peter: And then that would drive growth. Right. So and that should drive referrals and that should drive like a lot of things. Now, look, there's two types of businesses, right? There's like a sales oriented business and there's product driven growth businesses. Yeah. Like, sometimes you have businesses. You can have businesses on either side that are really successful.
Peter: In Utah, we tend to have a lot of businesses that are really good at sales, right? And the product is, okay, let's be honest. Like guess it's just okay, but the sales motion is phenomenal, right? I think in Silicon Valley it's kind of the opposite where like the product is phenomenal and the sales motion is okay, right? So one of it is like one of the things is he has no like what kind of business is he, right?
Peter: Is he product driven or is he sales driven? And then decide accordingly? If he's sales driven, he doesn't need more tech people. He needs more salespeople. And the nice thing about salespeople is that they're cheap, right? It's like the old joke. Like there are only two kinds of salespeople. They're like new or they're good, right? So he could bring on people that are commission only, right, and get them going and generating sales.
Peter: Even if you had to pay out most of the revenue in terms of commissions, he would still be ahead because he would be getting momentum. Right. And the flip side is, if he wants to do product driven growth, then his product, his baby needs to look really good. Right? His product needs to be good and it should be driving very high usage should be driving high referrals.
Peter: It should be driving growth in terms of like you know, one person really loves it and they get their colleague to join and use it as well. And they're both using it tons and tons. And so revenue per client should go up, right? A lot of those kinds of things. So, I don't know, it sounds like I can't tell which one he is here either.
Peter: Right. So it's also hard to give advice from that perspective. But, you know, that's what I would say if if if you want to do product led growth, you need to figure out what are the things people are going to pay you for. Right. And you need to build that and you need to create this, like, incredible experience or you need to realize, like, our project is okay, but we're going to win by building out a great sales machine and he needs to go out and hire a bunch of salespeople and just push it.
Jon: Hard and I think he's discovered the go to market sell strategy that will define the business. Is it a dud? Is it, you know, a nice lifestyle business, or do we've got some do we have something more here?
Peter: Yeah. And look, if he wants to build a lifestyle business, there is nothing wrong with that. If he wants to build a small business right. Or riches and niches right, by all means, do it.
Jon: All right. Well, thanks for watching. This is the venture capital podcast, venture capital firm. Go to the home page. You can subscribe to us on Spotify, Apple Podcasts. Please give Peter six star review so we can make him famous.
Peter: That's my goal. Be famous.
Jon: Be famous. And if you guys are looking for funding, you know, hit up, hit a Peter, He just keeps cutting checks like nobody's business.
Peter: That's right. All right. Thanks for joining us.
Jon: Thanks, guys.