On today’s show, we interview Brett Sharenow. Brett is a trusted advisor on raising capital from VCs, PE, and Angel investors, for start-up, growth, pivot, and exit. Since 1995, he has helped companies raise more than $750 million and have facilitated exits valued at more than $6 billion.
In this episode, you’ll learn:
- What happens in an analyst meeting?
- What is the “ladder” bump in valuation?
- How do companies plan out their go-to-market strategies?
- What are the 3 C’s that every company needs to have?
- What questions do Venture capitalists ask themselves when they are being given a presentation?
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Guest Brett Sharenow:
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Disclaimer to the Transcripts:
Intro 00:00
You’re listening to The Silicon Valley Podcast.
Shawn Flynn 00:02
On today’s episode, we have Brett Sharenow. He is a trusted advisor on raising capital from VCs, PE, and Angel investors, for start-ups, growth, pivot, or exit. Since 1995, he has helped companies raise more than $750 million and has facilitated exits valued at more than $6 billion. On today’s show, we talk about: what happens in an analyst meeting? What is the “ladder” bump in valuation? How do companies plan out their go-to-market strategies? And what questions do venture capitalists ask themselves when they’re being given a presentation by a startup? This and much more on today’s episode of Silicon Valley.
Intro 00:47
Welcome to the Silicon Valley Podcast with your host Shawn Flynn who interviews famous Entrepreneurs, Venture Capitalists and Leaders in Tech. Learn their secrets and see tomorrow’s world today.
Shawn Flynn 01:10
Brett, thank you for taking the time today to be on Silicon Valley.
Brett Sharenow 01:13
Thanks for having me, Shawn. It’s great to be here.
Shawn Flynn 01:16
Now, Brett, can you give our listeners a little bit of background of your career up to this point?
Brett Sharenow 01:22
Absolutely. I came to management consulting in a really circuitous route. I started off in my teens working with a master mechanic back in New York. This was a guy who could listen to an engine, put his hand on it, and tell you what was wrong. And at that point in my life, that was just fascinating to me. So, by the time I was 14 or 15, I was able to diagnose and fix things, which is essentially what I do today for businesses. After that work, I went on to get my bachelor’s in chemistry, did some chemistry development work for adhesives for a while, and then moved into product marketing and sales for the products that I was developing.
Those experiences taught me a lot about looking at the components of businesses and really understanding the technical nature of what happens with businesses. And I then went on to get my MBA. And in my first MBA course, I met a professor, who was my second mentor. His name was Lynn Morris. He was probably one of the top ten in the country in terms of dealing with business strategy and valuation. The course I took with him was the first time I had ever seen all the aspects of a business brought together: marketing, sales, human resources, economics. All the components he was able to bring together and have me and the class understand how businesses work.
I knew during that course that I wanted to work with him. I was working at a startup. At the time, the startup as many do, shut down. I went off and started consulting on my own. And about a year later, he called. I had kept in touch with him and he said, “I have a job with specific Telesys. That’s going to last about two weeks. I need help. Are you interested? “And I said, ”Wow a chance to work with you? Absolutely.”
Brett Sharenow 03:17
That two-week job turned into 10 years. During the time working with him, we started off doing a lot of Fortune 50 Consulting. And then we really got into the startup arena, a lot of the CEOs and vice presidents that were working with at the big companies, were being grabbed by the venture capitalists to do startups during the dot-com boom, and we were brought in to help them deal with strategy, raise money, grow the business and exit. And that was really my first entry into this kind of work.
Shawn Flynn 03:47
Tell me about your work exactly. What do you do?
Brett Sharenow 03:53
So when I look at working with companies, I’m typically working with the CEO, sometimes the CFO. Whether I’m working with a startup pre-revenue or company that’s in the low revenue kind of numbers $20 to $50 million a year, I typically look at three components that I work on. The first is the strategic financial planning model. The second is the outline business plan. And the third is some kind of deck that presents the business.
Brett Sharenow 04:23
If I’m working with a startup, and we’re looking to raise money, that deck is actually the investor deck. And it’s what the CEO presents to investors to convince them and get them excited about the business to put money in. When I’m working on those three components, the clients realize very quickly, that any change to one of the components causes a change in the other two components. So you can work on the details for example of the financial model. And if you make a change to the business, you change the price, you change the cost, you change how much capital you’re putting into the business for equipment. It changes the business plan and it also changes the investor debt. So I’ll work with clients on those three components, either building them myself, or coaching them as a trusted advisor through the building of those documents, to allow them to develop a strategy that’s compelling, to allow them to raise the money that they need.
Brett Sharenow 05:18
And of course, part of that raising the money is figuring out how much money they need, and when they need it, and where it’s going to be obtained. And then walk them through and shepherd them through the process of the actual raise. So figuring out which investors to speak with, what to tell the investors, how to tell the business story, so the investors get excited because they’re human beings.
While entrepreneurs and founders like to talk about the technical details of what they do, the investors really don’t care much about that until they understand the story of the business. I’m not talking about a fairy tale here. I’m talking about really what problem is this product or service going to solve? How is this solution going to be so compelling that customers want to literally rip it out of your hands because it’s so amazing? That’s what the investors need to understand. And that’s what the entrepreneur-founders need to do to raise money.
Once we do that, I’ll work with them on a growth strategy, which of course, was part of the raise strategy to begin with, figure out how to scale the business, and then work with them over months to help them as a trusted advisor, scale the business and then potentially exit at some point down the road. It could be a merger or acquisition or an IPO.
Shawn Flynn 06:38
So when you’re building these financial models or when you’re creating them, what type of questions do you ask or does the entrepreneur ask you?
Brett Sharenow 06:47
There are many. When I’m looking at building a financial model, or coaching the client through the build, the best financial models when I put them up on the board or on the screen in front of the team, and I walk through the model with them too, talk to them about the inputs that are there, the outputs that are coming. At some point, the best financial models, the entrepreneur-founder will look up at the screen, look at one of their key people on their team. And at the same time, they will smile, point at the screen and say, “That’s our business up there.”
Brett Sharenow 07:25
So, the key thing about building a strategic model is that the model needs to translate the business, the words of the business, what you’re doing, how you’re doing it and what the outcomes are into numbers. So, I’m asking the client all kinds of questions about the business. I really need to understand the business in a way that a client probably doesn’t even understand themselves. I find that when building a strategic financial planning model, the model will elicit questions that need to be answered that I may not know before and the founder may not know beforehand. And it can be anything from: what is the product makeup? What is the cost of goods sold? What happens when you take a product and instead of sourcing it in the Philippines, you source it in China. So how to take the product, the service and roll it through the business.
Brett Sharenow 08:21
One of the key things that comes up in the financial modeling is what’s a viable and valid go-to market strategy. It’s one of the things that most founders don’t address. Well, they understand the product, they understand how to build the product, they understand the equipment that’s going to need to build the product, but they really don’t grasp how challenging and difficult it is to take a new product to market. That’s all of the aspects of marketing, of sales, of the branding, of the organizational process to get the product out and to really have clients be excited about the product enough that they want to buy it. It’s one of the things that the investors, usually venture capitalists look for in a deck. How is this client going to take the product to market? And do I believe what they’re saying?
Brett Sharenow 09:14
So, the strategic model asks all those questions and really allows us to answer the questions and come up with the best strategy for the business. What does best mean? It means the strategy that produces the highest shareholder value for the firm, but that also takes into account how much money the business needs to run. Because there are times I work with clients where business looks great, but the amount of money that that business needs is not obtainable. The returns aren’t there, and therefore, there’s no way we’re going to be able to convince an investor to put that kind of money in.
So, at that point, we’ll look at recasting the strategy, figure out what we could do to get the business moving. Maybe it’s a slower path. Maybe it’s a different product or a lower priced product or something, to bring things to market more quickly, to bring in some more cash, to reduce the amount of capital needed. So, the model will tell us all of that. And it’s used to optimize the business strategy, at least the good ones to really show where the business is going.
Shawn Flynn 10:18
How should someone think about raising capital from a venture capitalist investor?
Brett Sharenow 10:24
It’s a very challenging piece to actually raise money from a venture capitalist. The reason it’s challenging is because founders don’t normally raise money. They run businesses, venture capitalists don’t run businesses, they provide money. VCs do that providing of money every single day of the year. Entrepreneurs-founders only raise money for a very short period of time, with a hopefully, in parentheses, when they’re building the business. So, entrepreneurs are at a very big disadvantage when it comes to raising capital. There are many standards that VCs require in order to give a company money. If the founder doesn’t understand what those standards are, they can be setting themselves up for either failing to raise the money or losing control of the business earlier than they would have liked.
I hear that all the time, founders are fearful about losing control. There are many aspects of losing control that they can run into, from not meeting the milestones that they need, from the let’s say the series A round, which is the first round of preferred stock that comes in from a VC to the Series B round. And if they don’t meet the Series B required milestones–and required, of course, is in quotes. That’s what they’ve told the industry they’re going to meet. They may not be able to raise the money at the valuation that they thought and there’s a whole cascade effect that can happen at that point, if they really can’t meet those milestones. So, that has to be taken into consideration.
They also have to take into consideration: can they meet the requirements that the VCs have for the return on investment? There are some standards that the VCs require in terms of timing, in terms of the rate of return, are they going to get back what they need, as VCs for their limited partners to put money into their firm? And can the entrepreneur do that? So there are many businesses that should be started. But VC money is not the vehicle to start them. It might be friends and family money, it might be bank loans, it might be they have to slow the growth down and simply grow the business on cash flow. So a founder really needs to consider what his or her business is, how much capital they need invested in the business and is a VC or private equity firm the right vehicle to grow the business.
Shawn Flynn 12:56
So then, what are some common mistakes that you see founders making when they’re trying to raise capital?
Brett Sharenow 13:03
We could go on for hours on that one. It’s unfortunate, but as I said earlier, founders are at a big disadvantage when it comes to raising money. The first mistake they can make is thinking that venture capital is the right kind of an investment for their business. So they need to understand that up front. What does the growth look like? How much capital do they think they need? What does the next two rounds of investment look like, not just the current one? There are many factors that come into play with regard to raising the first round and the valuation and dilution. The vehicle that they raise before the venture capital money comes in is quite important.
Some companies will actually go out and raise what’s called convertible debt, which is debt that comes in that converts to equity once the first round from a venture capitalist comes in. And the beauty about convertible debt is you can raise convertible debt without valuing the business. You really want to let the experts value the business. And the experts in this case for what we’re talking about are venture capitalists. A lot of founders will go out and bring money in and give stock for that money. It could be to friends and family, could be to an angel investor. The typical problem with that is once you give stock to someone up front for a specific amount of money, and by definition, that values the business in other words, it puts a price per share number on the shares.
If you then want to go out and get venture capital money, that valuation has been set by you before an expert investor has come in to set the value and what you’ve done may be okay, but in most cases, it’s probably not. So that’s why there are other vehicles that allow you to raise money without value in the business that normally gets recommended before you go out and raise venture money.
Brett Sharenow 15:01
There are a host of other issues that come up with regard to raising money. And it usually happens during the actual phase of the raise when you’re going out for money. Entrepreneurs frequently will overestimate revenues. I see this time and time again. I’d say probably over half of the clients I’ve worked with; they will put out their numbers that they think are obtainable. But a venture investor looking at the numbers knows, with quotes around knows, that they’re not.
So overestimating revenues happens all the time, underestimating expenses and capital requirements happens all the time.
And the problem with is not just that the numbers are wrong, but that when the founder raises money under a set of assumptions that is not correct. What happens usually is that the length of time needed to get to those numbers increases. So now instead of being able to meet your milestones, let’s say 14 months, you’re now in a situation where it’s going to take 24 months. And since you only had a set amount of money during your first-round raise come in, frequently, you’re in a situation now where you need more money than the investors are willing to give you at that point in time, because you didn’t do what you said you were going to do.
Brett Sharenow 16:28
I had a client approach me about four months ago, semiconductor startup, brilliant technology. I mean, quite brilliant, much better performing than anything out there in the current arena. And I was very impressed by that. They went out for money in a series A round about a year ago, and they raised $17 million, which is a lot for a series A. They knew that they needed, at the time, about $23 million. So that was $6 million shy of what they needed to actually produce the first chips. At the time, they decided to take the money.
So they took the $17 million. They went through their process, they got to the point where they designed the chip, all the computer simulation models showed it was going to work and do exactly what they said it was going to do. However, they were shy of the $6 million that they needed to produce the chips for that round. The problem of course with that is that when they got to that point of producing the chips, they didn’t have the money. So, they wanted to bring me in to help them raise a B round, to allow them to produce the semiconductor chips to show the industry what they could do, and then sail off into the sunset. Of course, the problem is that because they couldn’t meet milestones and justify the semiconductors at that point, they were going to suffer what’s called the down round, the value of the shares that they were going to be able to get where their B round was less than the closing share price at the A round. And that causes significant dilution effects.
Brett Sharenow 18:05
Most importantly, what happens is it causes emotional strife in the company. Employees have gotten very smart over the last 15 or 20 years about raising money. And they understand that there are things that you need to do to be successful with a startup. If they see a down round coming. In other words, they’re going to lose a lot of the value and the shares that they have. It causes all kinds of problems in the company. The boys don’t really want to produce at the level they were producing, they’re not going to be working the crazy hours that they were working for most startups. Emotionally, it becomes challenging. They’re not nearly as motivated. And down rounds are typically death knell for company not just because you’re losing dilution, but because you’re losing your key employee base that’s gotten the company to where it is today.
Brett Sharenow 18:57
So entrepreneurs founders really need to avoid being in a situation where they need more money in the following round, whether it’s A, B or C, it doesn’t matter, than they thought they were going to need. And if they do, and they haven’t met milestones, it’s going to cause them problems. Those issues come up regularly. And when founders start raising money, there are many gears that are turning at one time that need to be looked at to raise the round. The strategic financial planning model, the business plan outline, and the investor deck clue us in to make sure that we’re dealing with all of the variables we need to deal with, and making sure that the investors are actually raising the right amount of money that they have the time that they need to raise the next round, and meet the milestones to move on to B to C to D to whatever. So, when I work with a client, it’s not the current round that’s only important. It’s the following round that’s equally important. And what does the eventual exit look like so that we can justify to the investors that this is a good deal.
Shawn Flynn 20:12
So how can a company predict three to five years from now? That just seems kind of absurd.
Brett Sharenow 20:19
You’re talking about from a forecast perspective, right?
Shawn Flynn 20:22
Exactly. I mean, you’d mention a company running out of money before hitting milestones. But I mean, really, how can they plan that far in advance?
Brett Sharenow 20:31
Yeah, it’s a great question. I get asked that all the time. The founders don’t really understand what it’s going to take to raise that money, and how they can forecast to investors what they need. Most importantly, how they can forecast to themselves what they need that they can feel confident in. So one of the questions I ask my founders that I’m working with is, “Do you know what you’re going to have for lunch, three years down the road on Tuesday, June 2nd?” And they look at me with a puzzled look. And they’re like, I have no clue. Oh, okay, what do you have for lunch? Today? Let’s list out what lunches are right now. How do you do lunch? Do you do soup? Do you do sandwich? Do you do an energy bar? And we’ll come up with that list of things. Then we’ll start narrowing it down further. And they realize quickly that they can what’s called “bound” the answer for that timeframe in the future when they’re going to have lunch.
It’s the same thing that we do with a strategic financial planning model. We want to look at what we think may happen with the business in terms of let’s just say the number of units sold. We want to look at other companies out there that have had similar startup phenomena and products that are somewhat related to what’s happening. And we want to see how fast did they grow. What were the components of that growth? How did they get there? What did they do? What was their go to market strategy to get those revenues and the sales that they showed over their 3, 5, 8-year timeframe? And then we’re going to look at how this product compares with that? What can we do better to make the adoption rate, which is how quickly a company makes people buy the product, What can we do to make the adoption rate increase, so that the product is adopted faster than this other product? Or their market conditions that are happening that will automatically either increase or decrease the adoption rate?
Brett Sharenow 22:37
You know, the first iPhones that were sold, the adoption rate was relatively slow compared to what happens today. And it’s because the product is known. People know what it can do. There’s no mystery about it. Yeah, there might be a new feature, or a new AI piece or a new camera or a new LED for lighting up for photos. But at the end of the day, we can start to get a sense. So that’s a piece of what we do to try to forecast where the business is going to go. And over time then, you need a CEO or founder to adjust the business, as you see what actually happens. Look, we know that the numbers that are in the financial model aren’t right. By definition, they’re not right. But they are close to what we think is going to happen with the business. And when we look at the averages of unit sales, price per unit cost of goods sold, the general administrative costs, marketing sales, business development, the rest of the costs that are in there. If the model is produced well, on average, the model actually represents quite well what the business is going to do. So that’s how we will forecast.
Brett Sharenow 23:49
Now, if you’re out at your eight, that’s a ways in the future, especially with some of the technology and medical products that I’m working in right now. And it becomes much more of a crystal ball as to what’s going to happen out there. And this is the key thing about a business startup and raising money, you have to be able to convince the venture capitalists what they need to believe to put money into this business that will make them and their limited partners successful. So while your eight’s a crystal ball, they’re really focused on the round that we’re currently raising.
Again, let’s say it’s a series A, the Series B, when is it going to be needed? And how much money is in there? And do they believe that the market for this product is large enough that they can get the returns that they want to be successful? That’s the key. And if you can do that, you’re in great shape. Then you have to run the model, run the business, see how your actuals compare to your forecast, and then make adjustments over time. And that’s part of what we do and we’re looking at scaling the business and growth. I’ll work with the client to help them realize what’s happening in the business currently, what did we forecast, and what changes do we make do we need to make to make the business successful?
Shawn Flynn 25:08
So, when you’re working with one of these clients, or taking them on, I’ve heard that they need to have the three C’s. So, what are the three C’s that they need to have for you to accept them?
Brett Sharenow 25:19
So the three C’s are what I call a compelling case for customers. And it’s something I coined about five years ago, as I’ve been doing this and realize that founders need to have a product or service that is so compelling that clients and customers want to rip it out of their hands and use it or do something with it. And there are times that you know, that this particular product is going to be that. There’s nothing out there like it. There’s a need once the founder defines what that need is, and it’s this light bulb, of course, why didn’t I think of that? It’s so simple. I’m sure you can come up with examples of products that you’ve seen like that. And you say, man, that person did it, she was brilliant to come up with that particular idea, bring it out to market and run with it. That does happen.
There are other products or services that don’t seem so compelling off the shelf. And I’ll go back to the iPhone for a moment, when Steve Jobs introduced that, there were many pundits in the industry that said these guys don’t know what they’re doing. They’ve never built a phone before. They have no idea of phone technology. This thing that’s got a screen on it is going to be better than the regular phone that we’ve got? And if you go back and look at the original comments from that the original Apple show where it was introduced, it wasn’t thought of as a slam dunk. And the iPhone, of course, took off. So that’s the critical piece to the compelling case for customers: what strategy, what product, what service do you have, that is so compelling that customers want it.
Brett Sharenow 27:00
When I’m brought in by a client, that’s one of the things I look for, is there a compelling case for customers for the product or service? If my client can’t describe and articulate in a very short amount of time what the compelling case for customers is, that’s a red flag. That either means that there isn’t a compelling case and they think there is or that they don’t have it defined well, which does happen. Or that we need to really take on that strategy piece and figure out what needs to be done to make this product or service compelling, because that is what’s required to raise venture capital money, to grow a business, scale a business, and have a very significant exit. A compelling case for customers has to be there. And investors are really good at sussing that out. That doesn’t mean that every single investment that VCs put money into works, right? One out of 10 on average. Maybe two out of 10 for the best VCs really take off and fly. They are what we call home runs. So that means that 80% to 90% of those investments are middling or fail. And VCs are best at finding those compelling cases for customer businesses.
Shawn Flynn 28:18
To say that the company has the three C’s. Next would be the go-to market strategy, right? How do you plan that out?
Brett Sharenow 28:25
So go-to market, as we talked about earlier, is probably the most important or one of the most important things to be able to demonstrate to the VC community if you want to raise money. And candidly, it’s the one or two slides that is missing or the most poorly done in most raise decks. And the reason is, is because the go-to market strategy is incredibly difficult to formulate and articulate. Go-to market means what are you going to do to bring the product to market and how people want to buy it. And I’m working with a client right now. We can talk about buzzwords, we’re going to use social media, we’re going to use PR, we’re going to do in the old days, faxes. You can talk through a whole host of things that are buzzwords that may sound good for go-to market.
But fundamentally, the venture capitalists want to understand what specifically you are going to do to get that product and bring that product to market. They want to know if you’re using social media, what channels are you using? They want to know how you’re going to build a pyramid effect where Shawn buys the product. Is Shawn going to tell his friend Bob or his friend Sally that they have to go out and buy this? They really want to understand that you know the product and the market so well that of course you have a plan to bring the product out. It gives the VCs a very good take on who you are as CEO, how you think, because there are many products that come out from many different little startup entrepreneurial groups all over the country all the time.
Brett Sharenow 30:12
And it’s common that a venture capital firm will see the same product, or just a minor difference between product A and product B, from multiple startup teams. So what they’re really looking for is, is this CEO, is this team, the best to bring this product to market because they know there’s competition. So when they’re looking at a specific CEO, team, they really want to know how they think the go-to market strategy tells them that. It also tells them when they’re in a presentation and the venture capitalist partner asks a question about the go-to market strategy, how they react to changes in the marketplace, because again, the VCs know that whatever plan the entrepreneur has put in place, the key is that the external environment is going to change and cause something to happen to their original strategy. The partner wants to know, how does the entrepreneur think? What change are they going to make? So that this product, this strategy is going to be successful? No matter what happens in the marketplace?
Shawn Flynn 31:24
I’ve heard the term ladder bump in valuation. I’ve heard this thrown around. Can you explain a little bit of what that is?
Brett Sharenow 31:33
Sure. That’s a great question. That’s one of the things that a lot of founders don’t understand when they’re going to raise money. Let’s use an example. So this company has developed a new widget, and they’re going to go out and raise a series A round, and let’s say the post-money value of the company, which means the value of the company before the venture capitalists put money in, plus the money that the venture capitalists put in, that equals the post-money value. Let’s say that the post money value at the end of the series A is $10 million. At that point, the entrepreneur is probably going to need money in a Series B round, at some point down the road.
One of the considerations, of course, is when do they need that money? Do they have enough time to reach the milestones to get there? But what’s also key and critical is what is the valuation of the company at the point in time that they need the next round, and that 2x bump in valuation, that ladder as I call it, is the required increase in valuation that meets one of the venture capital standards in the business to move the business forward. So, in this case, a million-dollar post-money for their Series B round, they want to get a $20 million dollar or thereabouts pre-money value for the business when they go to raise the B. That tells the venture capitalists that the company has been successful at demonstrating the product, at demonstrating the market, at meeting milestones, and they’re willing to give them that 2x or 2.2x, or whatever the number is, bump in value.
Brett Sharenow 33:18
The reason it’s key is twofold. First, the dilution effects of the additional money are reduced because the valuation has increased. So now the shares are worth twice as much as they were before you can give out less shares to get the same money or more money than you got in the first round. That’s a big deal. The second piece is what we talked about earlier on the emotional side. The employees really know what kind of valuation is needed from the external perspective to be successful. So if a venture capitalist is coming in and they’re willing to give a 2x bump and value for the next round, could be the initial investment, could be a new lead for the Series B round. That’s telling all of the employees and the marketplace at large that this company was successful, going from series A to A Series B round. That has a big uplifting effect on employees. It makes it easier to retain good employees. It makes it even easier to hire great employees after that next round. And it keeps the business on a growth trajectory that the co-founder wants.
Brett Sharenow 34:34
Talking earlier, we talked about a down round in that 2x bump not being there. The same effect happens when you get a down round except the multiplier is significantly greater. So, if again, you have a round where you don’t get that 2x bump in valuation. Let’s just say it’s 1.7. The employees will start asking why didn’t you get a 2x. Company A over there who my friend works for they got a 2.2, why were you only able to get a 1.7. And the CEO will be asked that question at company meetings, the CEO is going to need to answer that question in a way that convinces the team that everything’s okay. The teams have gotten really smart over the years at valuation bumps and that trajectory of the company. And again, if the team thinks that the business is not on the trajectory that they were hired into, they start going to Company B, Company C, company D, who’s on a trajectory that they want to be on. So, it has a myriad of effects on the business, not just from a valuation on a stock and a dilution perspective. But sometimes more importantly, from the talent you can retain and the talent you can gain after that next round.
Shawn Flynn 35:47
So say a company has all the bells and whistles, checks off all the boxes. They’re looking for venture capitalist investors, what should they be looking for in a venture capitalist?
Brett Sharenow 35:58
So there’s two pieces to that question, really, there’s the question of who is the VC firm. And then there’s the question of the partner in the firm. They’re both important. The first thing they need to look at is they want a venture capital investor, especially at the series A round when their company isn’t known by anybody that has what I call domain expertise. They need a firm that has expertise in the product or service area that they’re specific in. It does a few things. It tells the VC that the founder has done their homework and is only going after or in their case is has gone after somebody who’s got expertise in this arena. It gives the founder a much easier time and higher chance of raising money when they go to a firm that knows the business domain.
So, let’s say you’re building Widget A as this VC firm had invested in another company in the past, that’s similar to Widget A. It might not be the exact same product; it might be an ancillary substitute related product. But it gives the founder and the venture capital firm a leg up. I don’t have to, if I’m presenting to that firm, teach them anything about the product, about the market, about the demand, that may all be known. I have to demonstrate that my product is unique, that my product fits into a portion of the market that has not been tapped, that my product is better than another product by 10 times, or is 10 times less expensive than another product in the space, or maybe both. Maybe it’s 10 times better and 10 times less expensive, which does happen. But if I go after a VC that’s got domain expertise, that process is much easier. So that’s piece number one.
Brett Sharenow 37:56
The second piece is that they need to find a partner in the firm that they can work with. Now VC firms just like any other company, they have people that work there, right? Their partners, their associates, their limited partners there, there are people in the firms that do the work. And not everybody in a VC firm is specialized in the specific area that you may be interested in. So not only do you have to define the firm, but you have to define the partner in the firm that specializes in your space. That’s the second piece.
Brett Sharenow 38:34
The third piece is that you have to figure out, can I work with this person? You’re going to be working with this person for someplace between five and 10 years, very closely. So, it’s very much like a marriage in that respect. You need to be sure that you can communicate with this person well, that they can communicate with you well, that you trust the person that when they tell you something, they’re going to do what they tell you, that when they tell you something about a competitor, you can trust that that information is true. So, you have to develop the EQ with that venture partner, not just the IQ or the intelligence with that person. Really, really important.
Third piece, which actually may be the first piece is you don’t ever want to go to a VC that has invested in a competitor, they might talk to you. And if they have a competitive investment in their back pocket that they put money into it public, and you want to come in and talk to them, they might talk to you and see what your product is and see how competitive it’s going to be. So you really need to ensure yourself that the venture capital firm that you’re seeking, or firms, does not have investment in a competitive or a highly substitute product to yours. In some cases, you may want to go after that firm because you believe your product is significantly different enough. And they have huge expertise, like, they invested in this widget, and you’ve got generation 2 of the widget. But the risk there is that their original company has generation 3 of the widget. And now you’re going to get trounced. So it’s really important that you look at that as well. All of those come into play for looking at the VC.
Shawn Flynn 40:21
So say you found the VC, say you found the right partner, and you get that first meeting. What does that look like?
Brett Sharenow 40:28
So the first meeting can go a couple different ways. If you’re really, really early in your process, you may not want to meet with a partner at the VC firm. You may actually want to meet with an associate at the firm. That associate will actually give you information and provide information that you need very early in your process, because you’re not ready to meet with a partner yet. So that’s an option. Meet with some of the associates. It may not be an official meeting or a formal meeting yet. Maybe out at a convention, or out at a place where this VC is putting on a keynote, or something like that.
The normal first meeting with an investor, when you’re looking to raise a round is with a partner. And you’ll meet with a partner, and typically one or two associates, MBAs, typically, they may be specialized in your area. They may know competitive products. But you’ll sit down and you will present your investor raise deck to this group. They’ll ask a lot of questions. They’ll want to know things that you have told them that they want more detail on, they may push back and say I don’t agree with that. How about these things? And they’re really testing to see what you’re about, what your mettle is, and what the business really is. That’s normally what a first meeting looks like.
Shawn Flynn 41:47
So during that first meeting, are there any ways that the entrepreneur can fail or are there mistakes that are common that that entrepreneur might make without knowing?
Brett Sharenow 42:00
So that happens all the time. And the VCs are really good at reading emotionally what’s happening for the entrepreneur, they know that most founders are nervous when they present a deck. That’s just common sense. So they give allowance for that. But some of the things that entrepreneurs do, or founders do that don’t work well is lying. It happens all the time, believe it or not. And it could be information on a slide where the source of the information is not valid as an option. It could be that, again, remember we talked earlier about overestimating revenues and underestimating expenses and capital? It could be as simple as that. It could be getting upset with the venture capital partner, or associate when they ask a question that they don’t think that should be asked. I write with quotes around it as the founder. And look, let’s face it, most founders, most CEOs have an ego. They have to have an ego to run a business, part of what comes with the package of starting a company, running a company. So there has to be some narcissistic nature to that person, not bad. It just has to be there for them to hold the flag and be out in the front leading and charging ahead.
Brett Sharenow 43:19
Frequently, however, when that kind of a person gets challenged, they can start getting angry and start pushing back in a way that won’t work for anybody in a relationship that needs to happen to raise money. So if that happens, and the venture capitalists see that, that’s not a good thing, as far as they’re concerned. It could be a great product and could be a fabulous service. The rest of the team could be great. They’ve done a lot of startups and all that. But if the founder comes back and really starts causing problems in their mind, this is just the tip of the iceberg. This is the easy part. How much are we going to run into down the road that they’re going to have to deal with together on a regular basis when problems happen, when pivots need to happen, when they need to change the business strategy? And venture capitalists know that if I’m having problems now, this is going to be compounded later. So the entrepreneur really needs to understand what’s going on for them, when they get asked questions and get pushback, and how they can relate in a way that would be acceptable to anybody that was pushing back on a business raise where they’re looking at raising that kind of capital.
Shawn Flynn 44:33
So say the meeting goes pretty good. And at the very end, the person they’re meeting will say, you know, they might be interested, you know, what does “might be interested” really mean to that entrepreneur?
Brett Sharenow 44:46
That happens all the time. The entrepreneur-founder has to remember that the venture capitalist is a human being. And there’s some parts of us that have trouble at times giving and delivering bad news. It’s challenging for many VC partners to say wow, that was a great presentation. I’m not interested. It does happen. And that’s what, as a founder you want to hear. And then you would follow up with great. Thanks for telling me that. Tell me why you’re not interested, is that the product is it the service? Is it me? Did you see something that looked out of whack? And that’s great information to gather. But in most cases, what will come back is, that’s interesting. We’re going to think about it. Or we might be interested, as you said, I like to tell my clients, the way to think about that response is they’re not interested. And the reason that that’s important is because you really want to push at that point to understand really, where do they sit?
Brett Sharenow 45:46
So, as the founder, if the venture capitalists said that to me, my comment would be great. What do you need to make a decision to take the next step? What next step would you like to take to get more interested? You need to ask leading questions to understand really, are they saying this is not for us? Or are they saying we might be interested but? One of the things that venture capitalists run into is the FOMO effect. And you’ve heard of it elsewhere, the fear of missing out, and how many investments has this particular partner missed out on? Because in the past, they said, we might be interested. And then that founder went and saw the next VC tomorrow, that took the step to take it to the partnership, and have the second meeting, and now they have a term sheet.
Most VCs have the FOMO. Most partners have the FOMO. And how do you deal with that is what’s so important. You really want an answer that says we’re not interested or thanks, but we’re not interested but it really doesn’t matter how it comes across. If it’s a no it’s a no. Or we are interested and these are the next steps that we or you need to take to move this along, to say the next step was let’s have a second meeting.
Shawn Flynn 47:06
What happens at that second meeting?
Brett Sharenow 47:08
Usually, for that second meeting to take place, the partner needs to take the business to the partnership. And that normally happens at a Monday partner meeting. Most venture capital firms have Monday partner meetings, it’s just become a standard in the industry. And if you presented a product to me, I really liked it. I will say to you, boy, this is great. I’m going to take it to the partner meeting on Monday, and I think I’ll have some time to present it, providing there’s not of course, six other companies that are of interest from other partners in the firm. I’m going to present to you to the partnership on Monday, and then I’ll have an answer for you on Wednesday. If we’re interested, and we want to take the next step.
That’s normally the way the second meeting happens. The second meeting then normally takes place between the original partner you met with, perhaps the associates that you met with and someplace people between one and three could be four other partners that are on the decision-making team of that venture capital firm. There are partners in the firm that are on the Management Committee that make those decisions. So, original partner, two or three or four other partners, you’ll come in and you will present again. You may present the same deck, you may present a slightly modified deck, which is normally what I would recommend, depending on what the original meeting highlighted.
If there were questions about a specific part of the presentation that they didn’t understand, you’re going to want to be fed up a little bit and demonstrate that you do have the background and the ground behind that, that you’ve got solidity. If they looked at your go -to market strategy, they were questioning that; if they really didn’t understand the financials, you’ll want to address that; if they had questions about for example, your capital equipment, and they didn’t think you had enough capital in there to run this business, you’re going to want to look back at your strategic financial planning model. See if the numbers are right. Hopefully by that point in time, you’ve got a very good handle and you know the numbers are right. But then you want to justify to them why the numbers are right so that you’re answering their questions that are probably going to come up before they even address them.
Shawn Flynn 49:19
So a VC will have questions that they say out loud, but I’m sure they also have questions that they say internally. What are those questions that a VC might be thinking about during a presentation that they may not ask? What are they telling themselves?
Brett Sharenow 49:32
The biggest question that the VCs have for themselves, is what do I need to believe about this company? So that if I put in my money, this is going to be a successful investment? That’s the biggest question that they’ve got. They are trying to determine if the market size is large enough. And hopefully you’ve addressed that in your deck. Is this team solid enough that they can execute in the way that they’re saying, is the product unique enough? Is it compelling, from their perspective to the marketplace to be successful? And in general, has this CEO reacted in a way that they can look at the CEO and say, Wow, she really understands the market, the product, the external environment, competition, which many CEOs miss. And we’re comfortable and confident that when daggers are thrown at her from the west, and the east and the south, she can run north and get away from them and move the business forward. Those are the kinds of questions that they’re asking as they go through. But fundamentally, they’re really asking if I put in the money that they’re asking for, will I have a home run, or will I have the potential of a home run, investing in this business?
Shawn Flynn 50:56
Can you share a couple stories or a story of a company that you’ve worked with that, you know, touches your heart?
Brett Sharenow 51:03
Sure. I worked with a company three and a half, four years ago now, that had a fascinating business model. The founder of the company was born and raised in India. And he knew the problems with electricity distribution in that country. It’s a vast country in terms of size. There are small villages scattered throughout the country. And he knew that most of those villages of the majority didn’t have electricity. They were actually running households on kerosene lamps. He knew the pollution that was happening indoors, what the families were breathing. He knew that the children were studying at night for tests, but with kerosene lamps, and he knew that there had to be a better way. He and his founding team developed what’s now called a mini-grid, which is an installation that provides electricity to small villages all over the world. And their mini-grid consisted of solar power, biomass, and batteries.
Brett Sharenow 52:15
So what’s biomass? Biomass is using rice husks, corn husks, corn cobs, parts of plants that are not normally consumed and converting that product into energy to drive a turban to create electricity. So they developed this hybrid mini-grid using solar, biomass and battery to provide power to these small Indian villages, 500 to 1000 people, and distribute electricity to homes. What’s amazing is that kerosene in India is very expensive because it has to be trucked to the specific villages that are hundreds, if not thousands of miles away from depots.
They were able to provide enough power enough electricity to provide a couple of LED or compact fluorescent light bulbs within houses and allow them to eliminate their kerosene lamps. They were also able to provide enough electricity to charge cellphones. Many villagers in these towns and cities were traveling miles to go charge their cellphones so that they had communication. And now they were able to plug their cellphones in at home. They also are providing power to small businesses, sewing shops, woodworking shops, post offices and hospitals, and all doing it in a way that was environmentally friendly, dramatically reducing CO2 emissions and dramatically increasing the health and welfare of the people that were living in the homes there.
Brett Sharenow 53:50
When I was brought on, this company had four hybrid mini-grids installed in India and Tanzania. They hired me because the chairman of the board and CEO knew, with quotes around it, that there was a way to really build out these mini-grids throughout the country and provide this amazing source of electricity in a way that was profitable, and could return decent money to the investors, at the same time providing a quality of life to the people in the villages. They brought me on to figure out, can we do this? How do we distribute hundreds and thousands of hybrid mini-grids throughout the country? I developed a strategic financial planning model and a business strategy to look at all aspects of that. How do you do this in the monsoon season? Do you need warehouses to warehouse the equipment? Where do you assemble the equipment? How do you test that everything is going to work before you deploy to the field?
All the systems that needed to be put in place to do this well had to be developed. Will they work? At the end of about a five month process, we came up with a strategic model that literally showed that they could deploy 5000 of these hybrid mini-grids throughout the country very profitably, very successfully, both for the investors and for the people that lived in the villages. And that allowed them to go out and raise $20 million from a variety of sources, alternate energy providers, and they have now built out something like 380 systems since then throughout the country. So that really touched me that I was able to help somebody like that and help the people in that area and help this company prosper and thrive.
Shawn Flynn 55:38
So Brett, to bring companies with the most cutting edge technology who are approaching you every day, what do you see in them or anything that you could share with us?
Brett Sharenow 55:48
So I think the biggest thing that is just starting, and some people will say what has started for a year or two is AI. Artificial intelligence that is coming out now is going to disrupt things that we have no idea. It’s going to disrupt yet forecasting weather, forecasting anything where we are trying to look at what’s going to happen next. The human brain is great, but it only operates at a certain processing speed. If AI is done really well, the speed of the calculations, the speed of the technology, the speed of the software that’s in there to figure things out… Five or 10 years from now, we’re going to see things that have changed that are absolutely incredible. The self-driving or self-driven cars that are out there. And I think Shmuel talked about that technology for artificial intelligence is going to be huge at driving things forward. So I think AI is going to disrupt a lot in the economy, a lot in technology, medical, high technology, and semiconductor across the board. Some of which we are just beginning to glimpse.
Shawn Flynn 57:03
So, Brett just alluded to Shmuel Silverman who was in episode, I believe, 24. The title was 2020 and Beyond: 5G Technology for listeners at home if you’d like to go back in our archives and check it out. And also, I want to thank Shmuel, who made the introduction to Brett, allowing today’s episode to happen. But, Brett, when people want to find out more about you and get a hold of you, what’s the best way to go about doing that?
Shawn Flynn 57:29
Let’s extend that even to review on any podcast platform: iTunes, Spotify, any of those. Write a review, get that meeting with Brett. And I can’t even tell you the value of that meeting. I mean, this is the guy that there’s a waitlist to get on his calendar. And this waitlist is all the top startups in the valley. So this is an amazing offer. So Brett, thank you for offering that to our listeners.
Brett Sharenow 57:29
Thank you, Shawn. Thanks for having me. It’s been great talking with you and going through some of the basics of what it takes to be hugely successful in the valley and throughout the rest of the world.
Shawn Flynn 57:29
Right. We look forward to getting you on the show again. Once again, thank you and thanks, everyone for listening to this week’s episode of Silicon Valley.
Brett Sharenow 57:29
The best way is to go to my website, which is https://www.broadscope.com/. And there’s a link on the page that they can go to https://www.broadscope.com/bookme. I’m going to provide your listeners with a 30 to 45-minute free session with me talking about anything that they like, with regard to what we’ve discussed today. So, startup business, raising capital, business strategy, anything that we’ve discussed today. And in order to do that, they have had to provide a review on the website of the podcast, and I will provide it free, no charge, 45 minutes session with me.
Outro 58:59
Thank you for listening to The Silicon Valley Podcast. To access our resources, visit us at TheSiliconValleyPodcast.com and follow our host on Twitter, Facebook, and LinkedIn @ShawnFlynnSV. This show is for entertainment purposes only and is licensed by The Investors Podcast Network. Before making any decisions, consult a professional.
