For the Past 30 years Bob Karr has been both an active angel investor as well as in business development founding and growing some of the most powerful networking groups in Silicon Valley. His current company, LinkSV is an online information service providing curated, detailed information about the senior team, board members, key partners, customers, angel, institutional and VC funding on companies in Silicon Valley.
This episode we talk about:
- What are some of the usual questions that you ask the entrepreneur?
- Practical advice for entrepreneurs to connect with Angels?
- Have what angel investors looked for in startups changed over the years?
I would like to thank Brett Sharenow who made the introduction allowing the interview to happen.
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Pre-Intro 0:00
You’re listening to the Silicon Valley podcast.
On today’s show, we stand with Bob Karr, who has been an active angel investor, as well as in business development, founded and growing some of the most powerful networking groups in Silicon Valley. His current company, LinkSV, is an online information service providing curated, detailed information about the senior team. Board members, key partners, customers, angels, institutional VC funding and companies in Silicon Valley. On this week’s episode, we talk about what are some of the usual questions VC and angels ask entrepreneurs, practical advice for entrepreneurs to connect with angels and has what angel investors look for in startups changed over the years? This is much more on this episode of the Silicon Valley podcast. Now let’s start the show. Enjoy.
Intro 00:52
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 01:09
Bob, thank you for taking the time today to be on Silicon Valley.
Bob Karr 01:13
I’m happy to be here.
Shawn Flynn 01:14
Now, Bob, you’re 78 years old, going on 30. Can you tell us a little bit about your time here in Silicon Valley, your career, everything up to this point?
Bob Karr 01:24
I was born in San Mateo. And I went to college locally, and when you get out of college and you’re not ready to become a doctor or a nuclear physicist, you have to figure out a career. My father was a doctor and he suggested to me, once you go in the insurance business, because you’ll meet a lot of interesting people who have challenging careers to have to buy insurance. So, I did that and I started out initially and in the life insurance business that didn’t intrigue me, went to the benefit business, was did that for a number of years. And I gradually shifted over to the liability business, which was directors and officers liability, general liability, that sort of thing. And I did that with all with one company. We were the largest regional firm in California. We got acquired by a combination of Transamerica, Sedgwick and Fred S. James. And so I stayed with one company for basically my entire career. I had a great experience. We had 500 people in San Francisco. I was responsible for sales, marketing, business development. So I personally was involved in producing a whole bunch of a lot of technology companies because my focus was on the technology sector, biotech and medical companies. And so, I had a I had a really nice experience. And that’s what I did until I until I retired in Silicon Valley. You never retire. You reload. And so since I had been an active angel investor in companies and was really curious about companies and I learned a lot about companies, insuring these companies when they were getting started, I became curious about beyond the business risk. I was curious about the opportunity risks. And so I, as I say, invested in some companies. So that’s what I did. And that I wanted to see what I could do more after I after I decided to retire. And so my secretary, back in the days when you actually had secretaries got me started on DOS on a little computer, which again, we moved over to Excel, and then we actually built a program for my company, for my own program. So, I was what I was doing was I was trying to teach people how to be more respectful of the community. They were calling out for business by learning about them. So in the old days, you had to learn it in annual reports, today you can learn tons of stuff on the Internet. So I wanted to create a digital history of the Silicon Valley, which is my goal, which I what I’m currently doing.
Shawn Flynn 03:37
So then what does Silicon Valley represent to you? What is Silicon Valley?
Bob Karr 03:42
Well, you start early enough when we are sitting in San Mateo. We say goodbye to our neighbors because they are leaving. They were moving to Los Gatos. This was back at about 1953. That was like a million miles away. Goodbye. Have a good have a great life. And of course, when I first started work in Santa Fe and then was commuting to San Francisco to start my career in the insurance business, there was no highway to 80. There was luck and you had a road. So you could imagine driving to some San Jose, to San Francisco. Silicon Valley was all orchards at the time. And I was out calling on companies when Intel had 10 employees back in the late 60s, early 70s. Right. So, I was here at the very beginning of the birth of Silicon Valley. And if you think about where it all happened from, this was basically Arthur Rock and Dan Rock convinced Sherman Fairchild to start Fairchild Semiconductor out of Fairchild Morphed all these companies got Intel, a national and all these companies. And that was the Silicon Valley. We were we were a semiconductor industry back in the early days. And out of that came the software industry that developed software to serve all these semiconductor companies, companies like Kadence on and on and on. So out of that, out of the software technology grew the early stages of the Internet because people software backgrounds recognize the opportunities. And a whole other era started. But it was very small, very close knit. But this is the valley has changed a lot. Now we’ve got Google and Facebook and tons of these companies that are just change the whole landscape here. So I’ve seen it from the very beginning. But it’s interesting because the Valley had the luxury of having Berkeley, you know, Cal Berkeley, Stanford, Santa Clara so that is a great university, ecosystem environment, it had a lot of people that with a lot of wealth that were interested in investing. And so is the right climate. This whole venture capitalist grew out of all this. So it just it morphed. It just it happened. And now, of course, it’s happening other parts of the country. But certainly you can’t you don’t replicate Silicon Valley overnight.
Shawn Flynn 05:42
I mean, you’ve worked and mentored many startups. when you are mentoring someone, what are some of the usual questions that you ask that entrepreneur?
Bob Karr 05:51
So let me clarify my involvement. I was involved with a lot of very early-stage companies. Companies at the formative stage. And so I had a chance to meet a lot of founders have comments for them, they could be could be young or old. It wasn’t the age. It was where they were and what they were trying to accomplish. And so anybody that had anything to contribute that was valuable, people appreciated. So it’s not like I was coaching a company that already raised ten million dollars was on their way. So, what happens when companies are first getting started? They have this big dream about what they want to go do, and they probably haven’t done enough homework. They have underestimated what the market’s all about, how many other people they’re competing with. All these kinds of things are out there. So I’m probably coaching them about have you done your homework? Have you been able to figure out who the who else is in this space? What are you going to do about raising capital? Have you thought about some timelines? There are a million things to get them to think about? And of course, when I was first getting started, I was probably all more excited. But what they were doing as I got older and more thoughtful was probably asking better questions. And of course, as I as I made investments that didn’t work out, you know, it’s like in the venture capital industry. I mean, they expect to have one big hit out of 10. They expect to lose money in companies until they find the big opportunity. So, the angels are much the same way. You’re hoping that you’re going to make some that. Of course, you get excited, but every investment early on and some don’t work out and some do. So you learn a lot along the way. And as I learned a lot, I became more discerning the questions that I ask. But generally speaking, what am I concerned about? I’m concerned about their startup experience, because if they’ve come out, for example, coming out of IBM and they’ve had a lot of luxury, of a lot of support, they don’t recognize what it takes to start a company. You’ve got to grab a broom. You’re eating cold pizza two o’clock in the morning. You’re trying to convince somebody to get started with you. There are all kinds of challenges that you have. You don’t realize all the time that it takes to do all that. And you haven’t had these experiences with all the support you’ve had before. So, you become a little wary of people were coming out of larger environments with a lot of support. You also want to know about what their passion for the project is, because as you get around, you talk to people who started companies, a lot of these companies were started because some entrepreneurs were personally inconvenienced about something and they start checking it out and recognize, if I am inconvenient so a whole category of people be inconvenienced. So it’s amazing how these companies have gotten started that way. And I think that what’s happened a lot early on, that things have changed now that because anyway, what the problem you’re trying to solve? And what that means is, are people really, really willing to pay for something? It’s. And by the way, getting a beta customer and somebody to come on to try your product because you know them and to give them a big discount is a lot different than talking. So you don’t know, trying to get to meet that somebody you don’t know and getting them to pay full price. I think people might be fooled, might be fooled a little bit by the early success they have by people acknowledging that they’re on the right track. When you try to go out and get customers, you don’t know. So what again, the acquisition costs of getting customers, how difficult is that? And I don’t think people recognize how much turnover there is with salespeople and people who try to hire. And it’s very, very discouraging. When you brought on somebody you thinks can help you get from point A to point B, and from their perspective, it’s just an it’s just another business and it’s not working. And so while you’re out preaching the company in the cafeteria to where we’re going. Half the people in the in that meeting might be already getting the resume based prepared and looking for other opportunities. And you probably know what I’m talking about. So, your passion is important, but you have to get a lot of other people to share your passion. All these things are very difficult. So then again, I talk about prospective customers and how you get customers. It’s really difficult. it’s a long road. And so I’m probably listening more carefully than I have in the past about the customer acquisition discussion, the cost of getting customers, how you’re going to do that. How easy it is or difficult it is to engage somebody in a conversation. You’re basically trying to start conversations with people and see where all that goes.
What’s the state of the competition and you people underestimate that because if you’re excited about something, it’s probably because you’ve learned about a general discipline or segment is happening. Other people are really are realizing the same things. So, a lot of people are getting started in space, are also stealth. You don’t even know about. Which also brings up a subject a little further down my mind. But I think successful entrepreneurs are also thinking about building their technology into the path of the acquirers. Because think about this. Everybody in Silicon Valley is going to get acquired if they’re luck. There’s only three about thirty-five IPO a year and a good mark. So last couple of years, 35 to 40, IPO is in a bad market. Seven to 10. That means every company out there is looking to be acquired. Couple of thoughts on that. People are building their technology to the platform where they acquire. So what platform is Microsoft using? Where is Amazon? Where is Google? What’s going on? Because you want to be able eventually present something in a way that’s going to make it easy to acquire. I learned that early on when a guy came to see me who was who I really respected in the valley, and he came to see me as he probably said, let’s have a cup of tea because we’re already closing down, right. Their idea was to build with windows the very bottom. You can type something in like talking to Siri, whatever. You okay. Now you’re just talking about on your screen lit up. That was their idea. But of course, Microsoft got into it and they didn’t have a business. So you have to be I have to understand the business you’re going to get into and how you can get run over it very easily. In fact, I know that you interviewed Schmuel several months ago. I happened to love Schmuel. Schmuel spent 16 years at Motorola on the dark side where Schmuel was doing was being able to figure out how they’re just going to run over some small company. From my insurance back. I know that you have a duty just to defend your patents. And in doing so, young companies are lucky to get enough money just to get a patent. Get one started, let alone defend it, right. So Motorola, they can roll over anybody. And so to the day companies, they’re not they’re not concerned about patents necessarily. It’s a murky road out there. As an investor, we’re all looking for a company that has a great patent or a great idea that you can think you can protect. So it’s tough out there. That is what I’m saying. So, the IP discussions are important, but I’m not sure how much you can really defend anyway. Then you get into the costs of getting a company started. What is your burn rating? For example, can you reach the milestones? What can you accomplish between now and the time you’re going to raise money? What can you show the next investor? My discussion earlier with you before we started about Mexico. What can you show this investor that you’ve accomplished to now and what you’re going to accomplish between the A and the B round? Everybody wants to know what these milestones are going to be, and they want to see if you can if you can reach these milestones. I mean everything to me, by the way, making commitments and following through on commitments is very important. Where I initially start a conversation with somebody, do they follow through or they say, thank you, they get back to me. That whole pattern of having a commitment and following through with a commitment is important. It’s very important you’re trying to show your investors that you set out with his ambitious goals and you actually reach them. And of course, the whole process of raising capital is much more difficult than people think because, you know, you hear a lot of stories how all these kids are coming out of Stanford, out of dorm rooms. But what’s happening is, is that Silicon Valley Sandhill Road has seeded there early. Their A round in their earliest rounds to the angel community because all these kids are coming out of dorms and they either have family capital or they’re getting it from their friends. And they have a lot of contacts and historic Internet companies in their dorm room. And the VC are finding that they don’t have enough to bring to the table, be on capital. These kids already have connections. So that’s why one of the reasons you’re seeing the venture community move toward the later stages, they’re looking for bigger hits because they have a lot of competition starting in these early rounds with lots of other people, because after all. If Google was coining a millionaire on a daily basis, let alone all these other companies, think how many young people are coming into a lot of liquidity early on. And they have very big Rolodexes and a lot of ideas. So, we say in Silicon Valley, you know, in L.A., people are running around with a script in their back pocket. In Silicon Valley, I can assure you everybody has at least two companies in their pocket with an idea or two. Again, in the entrepreneurial community, if you’re a doctor or a dentist or you work Bernsen young or you work with a company where you have a lifetime career, that’s great. You stay there. But if you’re in technology, the way technology works. Gosh, the Life-cycle technology is used to be. Years ago, it was seven years. My brother Howard was a major headhunter, executive search guy favored by the VC community. Seven years was just the right time because we were there long enough to make major changes and have a big contribution. If you are there for too long, you don’t have the audacity or the willingness to accept about changing. But now, the cycles down to two years or even six months. Because today I think you’re hired on a project, help solve a problem. Then maybe you decide to stay full time. Think about that. So salespeople move pretty quickly. So a lot of people are moving quickly because I see it’s just not there. It’s amazing the rate of change here what happen to people. So people, you know, are starting to it’s more important now peoples for people to manage their own brand. Companies have a brand. We’ve talked about brand earlier. People have to have a brand. They have to know that their company could be sold right up from under them because all of a sudden up came an opportunity. Going back to our comment about start-ups and getting started. So, you’re building your company to be acquired at some point? I mean, that’s what happens if you’re lucky. If you’re unlucky, you closed the company down. So if you’re lucky in your in the path of growth and the good opportunity, some company decided that they needed you a whole lot more than you recognize. That brings up my friend John Majeski from the company we’re starting, a corp called Portola Valley Ventures. Don came out of Lenovo and they really lost their big opportunity because Lenovo is no longer investing, because of this, Chinese companies aren’t investing the states any longer. So they’re getting together. I’m actually the chairman of that company and we’re looking for exciting companies who have probably maybe a million dollars of run rate, have a product. But, you know, they’re stalled. They’re tired. The founder just lost a couple of key people. He doesn’t have the wherewithal, the finance, to make it go further. He’s not the new kid on the block. He’s probably four years old, but he’s got some good IP, right. So, John, in the course of all his travels and with all his contacts, John came out of Dell. HP has global context at SAP and Ericsson and all the major companies that are at the highest levels. We’re looking for. We’re looking to pair up companies that have we think are parallel. Interesting in their own habit. They’ve done A someone else’s done B and together becomes a great opportunity. And we think we can greatly increase their strategy and their valuation by creating a new company in the middle and building and building something in the center with a little dedicated staff from both sides. We’re actually launching our first company opportunity this month.
Shawn Flynn 17:26
Interesting, can you talk? Maybe not so much about the first company, but that idea that A plus B equals a greater C.
Bob Karr 17:35
I mean, sure, I mean, literally speaking. Everything is about the valuation of a company. we worked really hard. And you’re hoping as someday that your shares are going to be valuable. Companies have to have their shares more viable to keep the people they’ve got and attract new people. They can’t be a flat company. That’s what Silicon Valley is all about. Even if you say, look, I’m enjoying having this nice, nice little business. It’s great. I’m home. I can have some free time. It’s all good. It’s almost not good enough because you’re trying to grow the company, you’re also looking at a market opportunity, market opportunity, opening and close at any space you’re looking at. The window’s going to close at some time, or maybe you have an early edge and an early edge in the market. So, wherever you are. Time is of the essence. Right. And so you’re always trying to attract the right kind of people. And you’re always looking. You’re always a day late, a dollar short, because you never have enough capital unless you have unlimited capital, which doesn’t happen to most of these emerging companies. So the timing’s important, attracting people’s import. And so think of yourself as a composer. Geez, if you could if you’re a composer, it’s all working smoothly, then you’re the next great Google. I mean, things just happen for you. And this does happen. Investors see a great opportunity. They tell their friends at VCs about you. And then all of sudden you’re attracting world class talent and world class everything and you’re on a good path. But for everybody who gets on a great path and gets a lot of a lot of funding and a lot of great people, it’s a rocky road for a lot of other people. So this goes to and this is because creates turnover and creates stress, creates anxiety, creates illness because it’s so alluring. It’s a huge opportunity. But, you know, it’s in front of you. So, because what I do at LinkSV, I see these resumes all day long. After all, we have 15,700 companies in our dataset. I see companies exiting, coming and going all the time. And you wonder what’s going to happen to them well. Because they just didn’t quite make it. They missed the opportunity. So, or they’re there too long and the people left and went to the next technology is coming back to all these things. This is this is not we’re not in we’re not in Ohio. We’re here. This is California. This is Silicon Valley. So it’s a fast track business. And so the people come in it, all these young people, they are they get accustomed this to this fast track environment. You know, the other things about getting a company started. And when I talk to young company, really, I want to know where they are in their family situation. How does their spouse or their significant other feel about all the time they’re going to spend on this project as opposed to walking on the beach with their dog and all the things they have for avocations?
Shawn Flynn 20:12
How do you go about finding that information, because, I mean, in California you can’t really directly ask your newlywed, are you expecting kids or is it just a regular coffee talk where you get to find out more information about?
Bob Karr 20:27
Well, I would take issue to some degree. I mean, I thought I mean, why couldn’t I have somebody? Look, I’d like to talk with you about how well you’re positioned to take this leap. What you’re telling me is you’re going to be leaving Microsoft or leaving such and so you can start a company. Recognizing that, you’ve already said it’s going to take a lot of time. Are you really prepared and are the people who are in your life? Are they prepared for the amount of time that you’re going to be able to devote? This could be your children. It could be your spouse. Could be your mom and dad. Whatever. Are they prepared for you to make that kind of contribution, that kind of commitment? And by the way, how are you fixed financially because your investors are going to want to see. How much capital you’re putting into the company, the capital and time and energy? So where are you? And by the way, are you able to go without paycheck? For how long until you have enough funding where you’re able to earmark some money? From your investors to actually get some pay yourself out of this, you’re going to be making your own capital contribution. Where are you on that? That’s perfectly OK to ask those kinds of questions. And I would be uncomfortable if somebody. Thought that all of a sudden they were going to raise a bunch of money and that money was going to go to their paycheck right off the bat. Listen, I invested in a company years ago. Where two months after the company got the money from us, we saw these two guys on the cover of a Santa A is a business journal, both leaning on their new Beamer’s. How about threw up on the spot? That money was supposed to go into building the company. These guys took out I mean, talk about getting a lesson. In fact, that was a company mistake I made investing in a company where the co-founder of Apple, who I will think of his name in a second. It wasn’t a Steve Jobs, it was Steve. Steve Wozniak. Had invested in the company, well, with Steve Wozniak, the money was it was a throw away. May have been whatever. I thought Steve was involved so it will be pretty exciting. Well, that was by my worst investment because these guys had no experience of running a company and had Beamers or whatever. So you learn as you go. But anyway, you have to be prepared for a lot of rainy days and you have to have a pretty good. It to be pretty balanced, pretty steady as you go to be able to recognize it’s not as easy as it sounds.
Shawn Flynn 22:51
Are those similar questions that the entrepreneurs would ask their investors? How are you doing? Are you okay financially?
Bob Karr 22:59
Absolutely, because that’s a whole other story, because it’s one of things I do with my own Web site. I mean, I have a lot of I’m talking to a bunch of people that are founding companies, and I offered to help them find capital. What do we do? We go in and we use a keyword with everyone. Everybody here is looking for somebody with domain expertise. Nobody’s going to invest in your company if they don’t understand it. I have a friend right now whose company I like there in Bitcoin. I just I don’t know enough about Bitcoin. And I just wouldn’t I would never be comfortable enough. And here’s an out. I never want to be the smartest guy in the deal. I’m the smartest person around that deal. I know I’m in the wrong environment. Right. So I get a chance to invest in a lot of small companies. What I’m looking for. Is a group of advisers that they’ve attracted. Who really like this company, it doesn’t mean they’re investing, but it means the entrepreneur has met them along the way and they’re getting some time and energy. They well could invest. They well could go on the board. But right now they may just be on the advisory board. So maybe that could be a trap. Maybe he’s just collected some people. I probably want to talk to them. I want to see what their commitment is. This gets into a conversation. We’re going to have some a little bit later about where I’m involved in this right now with this other company called Circular Systems. But.
Shawn Flynn 24:15
Before we go into that, are there any other questions that get brought up during your mentor and time when you’re working with startups?
Bob Karr 24:22
I want to know who else they’ve attracted, who want to be co-founders with you. Is it just you working at home with a full time with two or three of your friends are working three or four hours, working full time for other jobs and doing moonlighting at this or as somebody else taking the leap of faith with you on this? So I’m a little more attractive when, by the way, there’s two or three people who are really committed and they’re equally passionate. If that answers your question. I want to know their roles going to be in the company, because if everybody thinks they need to go on to become the CEO, that’s already a warning sign because one of things that’s going to happen in the company, if you’re successful, is you’re not going to be the CEO for very long. Because that means with success, we need to bring in somebody who can take this company to the next level, and that’s all about leadership. That’s when John what’s his face came at Apple. He had no experience with computers, but he was, he came out of Pepsi-Cola. He knew about branding, John, come on the second. And you’re seeing it more and more in Silicon Valley that the leadership position. Of being able to attract press major mark, major customers, Major Everything is not something you have experienced for. This is not happening today. This has been happening for years. I see it all day long. I’m looking at resumes and building his files and whatever to see the person who starts the company picks out a role for her himself. If he is technical person, he probably becomes the CTO. Most of these companies, by the way, most companies that get started are started, started by a founder who has a good overall general sense. And then the technical person is called the CTO. He or she becomes the CEO and that person becomes this the CTO. And then as time goes on, the best of these CEOs brings in a CTO, probably between the B and C around, when all of a sudden we’re attracting customers great around the capital and they recognize they meet. They need to move aside if they had to be squeezed out without that understanding. That’s a mistake. That needs to be a process early on, something to kind of look forward to and to make intent to make a greater contribution after all. You have a huge amount of a stock in the company. You’re dying to be successful. So my philosophy be, how can I help? What role can I have? Okay. And if the person is not is not fitting in well, then they’re probably just eased out. First, they go on the board for a while they stay on and then gradually they are eased out. But in a lot of very successful situations, they’re there for a long time. They can make in a contribution.
Shawn Flynn 26:54
What areas do you find founders or companies having the most problems or the most questions?
Bob Karr 27:00
Well, I think if somebody came in to the company, started a company with a very strong ego and a very strong sense of self, where the I was used for the very beginning and not enough, we and me and we and team, that’s already probably an indication of a burgeoning problem. And that can happen, by the way, where that person was very, very strong from the very beginning, very, very hard to replace and was making a very good contribution of the company. But as a company grows and starts to spread their wings, I think maybe that could become a problem overrun or over time. Today being 2020. I’ve met a lot of very young people. The instructor was young, but a lot of people recognize the importance of team and want to share that. And to think it’s become better over time. But ego absolutely gets in the way. That’s one very big thing. And maybe industries I’m not sure to be. I’m not sure that’s energy specific. I’m thinking off the top my head, however. We don’t see a lot of semiconductor companies any longer. For example, they’re not getting started. Takes a lot of capital to start these companies. I think this formation of companies is much more around the Internet and software because there’s so much growth. And by the way, as we’ve grown, all these companies think of all the alliance potential alliances that are out there 20 years ago as an Internet company. Maybe all of all you could go to was Microsoft and Oracle. Well, today there is so many companies out there that are growing that have big time marketplaces. So many choices that now and with the use of search optimization and all the things that are going on, it’s just it’s people that understand branding. And so now you’re what you’re trying to do is to match up your technology with a need. And that kind of gets back again to my buddy, who’s starting a company where we’re matching companies together, who has contacts at the highest level. So he taught me something the other day. We talked about a little more in depth. About where a bigger valuation come from, a bigger valuation could come from LSAP when all of a sudden they have 250 companies in their portfolio. If you’re building a small little company in Campbell, California, in the backroom of some small little place with a couple of light bulbs, there are three engineers working and that technology could complement a whole bunch of companies that SAP doing. Believe me, they’re willing to pay a big premium for what you’re doing. So, one of things that we know is we’re looking for the big needs that Microsoft has, an SAP has on all these companies have. And we’re looking to find companies that are that are moving into those areas and we can match up companies. To get a premium from a company, a lot of things has to happen that certainly one of them is that what you are building is complementary
Shawn Flynn 29:54
As an angel investor, what some advice you can give to entrepreneurs to connect with angels?
Bob Karr 29:59
If you need potential investors and you start blowing of steam with them. They’re going to sit back and think twice, a little bit. You need to be humble. You need to be a good listener. You need to be able to ask good questions and maybe listen to the answers, maybe the next question should come out of the what you learned and what they talk to you about, as opposed to a script you have with the five questions you want to ask. That would apply to anybody, a service provider or anybody else. Be a good listener. They may be giving you a clue in what they told you as opposed to what you thought you were going to automatically ask them. So that’s important. I think you have to be prepared to be able to defend yourself in a conversation about this great market space you’ve got. Because after all, you’re talking about a business opportunity and why it’s important. Why you could make great headway there. When I say defend yourself. Think about all the other companies that are also going into that space and why they would talk to you when you’re small. And why would a very large company want to spend the energy to consider you when really you don’t have enough scalability for them? I mean, you need to have a better understanding of what not just in your perspective, why would they want to do business with you and what kind of context you have to get? How are you going to break into those companies, who can help you to get into that thing? Is there a lot of IP involved in what you’re doing? You need to protect yourself. Just lots of things. And so I think when you’re getting started, you’re so enamored with what you’ve where you are now and the opportunity you have maybe haven’t given thought to some of the challenges. Now, the people who are investors have probably been down this road before and they understand the things that are going to sidetrack a company. And if you haven’t given some thought. To these challenges, then maybe you’re a little naive. So you may be giving a good answer to a question, but maybe you haven’t thought about something that’s beyond the pale that you should be thinking about. So is there and they’ll probably be good listeners and show you a lot of respect and interested. But you may walk away happy, but they may feel that you didn’t. You were a little naive. You just never know. And of course, a lot of these investors today are a lot more sophisticated than they were 20 years ago. After all, I was a co-founder of the Angels Breakfast Club. That group was a group of I would say some B minus and C level VCs ball boutique VCs. We had six, seven or eight of them, a bunch of people that were in-between jobs that have had good positions. They were CEOs and C level people who we invited to participate in higher level service providers. That would be it could make meaningful contributions. We were acknowledged by Wilson Sonsini, the major law firm, and they gave us free facilities and conference and was wonderful. We went there and coffee and bagels and had great facilities and we would typically have 40 to 50 people that came to a meeting and we’d have three companies present at each meeting. And what I remember later on, looking back on that was, these companies made nice presentations, but I what I realized later was all these companies getting started had not gone to war together. The people, they were going to be part of the company who had great resumes, but they weren’t. They hadn’t eaten a lot of cold pizza together two o’clock in the morning. It was weak recruiting people from here and here and here. And things were going to go do. They didn’t have the market penetration. So, look what happened in the dot com era. We were talking to companies who were forming companies that bombed out because they didn’t have real world experience. They had these great ideas. And, of course, the Internet was getting was really exciting and they were going to conquer all these worlds. But it wasn’t with a lot of seasoning, was all excitement, what it is they were going to go do. Cut it 20 years later. Of all these, angels who invest in these early stage companies got burned. So now they’re a lot more cautious about the deals they’re doing. They’ve learned from these experiences. They’re looking for a lot more experience, real world experience. They’re asking better questions. And of course, today, the Internet is much more out there, much more diverse, lot more opportunities, and so you should be able to have a real story to tell, threaded together how you’re going to do it versus what it was them. And so I’ve learned a lot. And if I’ve learned a lot, I know everyone else has to. So I think it’s a good bet. I think the Angels. I think there’s a lot more angels out there. And that’s good because you need to find people with domain expertise who understand what you’re doing, because after all, if you’re out there pitching to a lot of Denison doctors and you raise the money, I’m now the smartest guy in the room. That’s not good. Right. And so you need to have some anchor tenants, some anchor investors who understand this because they’re the foremost people who are going to then attract maybe the A run investors because they want to know who you attracted to your company, who’s in and who are the smart investors. And they’re going to want to interview them and see what they’re what’s going on, just like right now. I am being interviewed by some investors in the neighborhood. So that’s important. So, that’s the good news is there’s a lot more angels and smarter. The bad news is they’re a lot smarter. They can ask the tougher questions they’re going to be able to see through some things you’re doing. So it is tough because you are. Where are you right now? Tell you where you are. You have decided together you have about three months of cash in the bank. If you’re lucky, you need to raise the money by. It’s now the beginning middle of February. If you can’t raise the money by May one, you’re probably off to close your business down. Your cash is running out. You’ve made some commitments to some people. Were you strung along? You want to pay and get on board? It’s dicey out there. So that’s kind of the environment. And unfortunately, all these young companies getting started do not pay enough to the concept of what they have to do to raise money. They’re all behind. They’re all behind. They need to recognize the biggest job they have along with this good idea, is the raising capital to be in lockstep with the need you’re going to have for capital and they’re invariably behind the eight ball now. And so who wants to be in a situation? We’re going to be up against it in three months from being out of cash. And what does that tell a potential investor who is even interested? Are they in a position to strike a big bargain? Absolutely. If you’re sitting or knowing the company only has 60 days a cash. You can drive whatever bargain you want; you ever watch the sharks on TV? Shark Tank. What’s that all about? These people are begging to give up 40 percent of their company for a hundred thousand dollars or whatever. So you can see the challenge out. So believe me, from day one, you need to be making a lot of contacts with a lot of people with capital.
Shawn Flynn 36:47
But tell me more about what the investors are looking at. That may have changed over the years or even yourself as an investor.
Bob Karr 36:55
How about this? Every company is looking for every company needs it needs to be thinking about an exit strategy. Well, what companies are being formed today where the exit strategy is probably within could be within a year or easily two years. Certainly companies in that are Internet based. If you’re building a company for the Internet and you can line up potential companies to partner with. That’s where the big money is. Now, again, there’s a lot of companies in every space. Go look at these spaces. If you’re building something for the recruiting industry, I can go into LinkSV and put the keyword recruiting and bring up 75 companies doing something, recruiting the travel space. Look at all the companies doing something there. Do you pick the space, the education space? They’re very crowded, so you better have something that’s really unique. Now, if you build something unique, it’s really good. That’s pretty cool because not only are there a lot of very sophisticated. Major public companies in education are recruiting with a lot of emerging companies with great technology. So, again, you’re building something that someone else is going to be willing to pay a lot of money for because it’s going to make them just that much more valuable. And they’re at a point, by the way, they have, where they may be a C round company looking to raise 50 million dollars and a few, if they can buy you for five million bucks, is way more than you ever expected. And for a very important niche in your company. Not only do you have a product, but you have a team on the ground ready to go. They can go out. They can put you right in. And that commit you very easily so I’m probably all a bit biased about this because I’ve watched it go from a different set of companies being semiconductor companies to now the Internet. So I’d even say it’s a lot of that. I’d say the Internet is the number one. And again, I’m just one person. But certainly this is a place to build companies rapidly, ploy them rapidly, get market penetration wrapped and get acquired rap. The second area would be it would be software. I mean, after all, is a lot of these companies and in the Internet are built with a software platform. Look at the whole medical field, the medical software, the what you used to think of companies, medical companies will now all these medical companies have a software component to it. So I think that the software platform, which is much, much in green of all these Internet companies anyway and software in general has a very big play. And beyond that, I’m not sure I think of those two areas as just permeating the Internet, permitting communication companies. Those having software, Internet as a component is to me what this valley is all about now for growing companies rapidly, deploying them rapidly and getting high valuations and getting exit strategies. Now, the other component of all this is a global aspect of all this. You’re not just selling your products today in California, in Silicon Valley or the United States. You’re selling your companies globally. So being able to execute globally. Look at your own experience is really important. So having a global platform, having a global product. So first, you know, you execute, you sell locally, then you sell nationally, then you sell globally. So if I’m talking to prospective company that has a pathway to success includes a global marketplace, that’s pretty exciting, too. So you begin to kind of ask these questions. Look for all this. And that’s what I’m thinking anyway.
Shawn Flynn 40:24
So you’d mentioned before an angel group that you had formed about 40 members that would get together, see three companies at a time.
Bob Karr 40:32
They would talk, they would if they would allow three companies project what they’re doing to a group of investors and then we individually could subscribe. And you asked earlier or you were going to ask about, you know, types of investing organizations. And so an angel could be a member of maybe Sandhill Angels and maybe Sandhill Angels makes their investments with Investment Committee. And so you invest that way into a fund. There are other groups that you write your own checks where they bring people need to make your own decisions. My own background and again, everybody looks at from their own experience. So, I never really got involved with groups were where Investment Committee was making the investment. I would write a check to that investment group, but that’s only me. Maybe I would have liked doing it the other way. So from my perspective. I’ve got a chance to get to know companies really early on and now particular through my kids who are really involved, so. And so I’m investing really early on. So at that point time, I’m coming in later on with a group of investors that heard about a company.
Shawn Flynn 41:32
What are the advantages or disadvantages of investing in a group or a syndicate such as you’d mentioned, Sandhill Angels or what these other angel groups here in the Valley versus just write your own check and doing your own due diligence?
Bob Karr 41:46
If you’re involved in Sandhill Angels, but I think there’s a lot of light or certainly the Sandhill life angels. Any of these groups, they have a lot of a lot of people in those organizations with a lot of expertise. Those members. In the last category, they knew a lot and they could collectively, they know a ton of stuff. Way more than I know when they start interviewing companies to present to them, it’s clear that they’ve already vetted a bunch of companies. They’re all excited about them. Or they think there’s great promise and they can bring to the table a lot of people that with expertise pretty rapidly. So as they get excited about these companies, by the time they go to invest, I’m sure a lot of people with expertise have at different roles in talking to different people in those companies, looking at the market space and looking at them. Clearly, that’s a big deal. And so I’m sure that angels are attracted to that. I mean, there are angels for it, I mean, if you look the makeup of the angel community, for example, let’s talk about angels. It’s started out very early on, of course with a lot of doctors and dentists and people with what personal wealth wanted to have some excitement in their life. And then a Silicon Valley grew. And people in the Silicon Valley companies made money. Then we’ve minted a lot of millionaires and they wanted to invest. And this is a very big group with a very big appetite. It’s grown rapidly. I mean, gosh, I couldn’t even begin to think out. Fathom how many. Say what? On our site, we have eight thousand five hundred angels. And we don’t have them all. There’s a lot. So there’s probably twenty-five thousand angels in Silicon Valley who are capable of writing a check for hundred thousand dollars. The number of doctors and dentist has probably hasn’t grown a lot, but the number of technology people has grown immensely. Now who are these people? Certainly as you’ve grown a company, you’ve had a liquidity event in your company. The people who make money in Silicon Valley are very busy starting their next company. But along the way, having some liquidity, they’re interested in starting to invest. And there’s also, by the way, a whole cadre of people who are not starting companies that are millionaires inside of Google, inside of eBay, inside of inside of Cisco and whatever. And they’re very high as so highly sought after, because after all, if you can attract the CTO of you name it, company, big company to be on your board, that’s a really big deal or to be an investor. These are people I talked about earlier that you want to have as part of your company, because if I get a chance to invest in that company and that CTO is on the board, I’m looking right now at a company where the CTO of a very large company in Las Vegas, it happens to be in very large gaming company. And the CTO is completely he’s a full tech geek, knows a million people. Boy, if he invests in this particular little company I’m looking at and wants to be on the board, that he said, that he wants to be on the board, be active. I’m way more friends in this company right now than I was when this young guy asked me to take a look at the company. So all these people in the valley don’t have to be starting companies. Many of them are sitting right now in very strong positions and they get sort of after all the time and they have their pick of the litter as to what companies they’re going to invest in and what companies that they’re going to sit on the board. When I see John Chambers at a Cisco sitting on the board of some small company with five billion dollars of valuation and they’ve raised ten million dollars, I already know that John Chambers have the pick of the litter. So I’m kind of a captured sea because I’m I catalogue all this stuff. So I’m looking at very emerging little companies. So I’m in a spot, too, without even knowing about the company. Why are these people showing up in these companies? Why does some worldwide head of the head of sales and marketing for Symantec shows up at a small company and John Chambers is showing up there? Something’s got to give. Something’s happening. They’re all out there. So these small companies, have they can distinguish themselves. By attracting these companies that they can’t. That may be a problem.
Shawn Flynn 45:47
And we’re going to end part one of this two-part episode right here. Now stay tuned for next week’s episode where we’re going to be talking about how can parents encourage their children to become entrepreneurs? What is LinkSV? How to create a network that leads to be an able to access anyone? And what advice does Bob have for people to have fun in life? This and much more on next week’s episode of the Silicon Valley podcast.
Outro 46:15 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.
