Shawn Flynn 0:00
On this week’s episode of the Silicon Valley podcast, we revisit some past episodes where we receive some amazing advice from entrepreneurs around startups. Now, this advice can either make or break your startup depending on whether you use it or ignore it. Now, I got some other information for everyone. We’re right about to announce some exciting news for the podcast. Everyone should find out in the coming weeks. But until then, let’s start this week’s episode of the Silicon Valley podcast. Enjoy.
Announcer 0:31
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 0:49
There’s basically like too much stuff for a founder to think about. So how should a founder? What should they be focusing on when they’re just starting or growing a company?
Brett Sharenow 1:01
That’s a great question. A lot of my clients get stuck in that exact situation. They’re focusing on their widget, whatever it is product or service. And they need to focus on the widget in order to be able to build it and design it, manufacture it and then market and sell it. The difficulty is that they have to be able to be in the details of the tactics. And the good founders and the good CEOs doesn’t matter whether it’s a startup or a bigger company that’s looking to expand, they need to be able to move between strategy and tactics easily. And I found that most founders are stuck in one or the other. Many founders or engineers, like they came up with a fabulous idea. And they have something that’s amazing. And they can talk about all aspects of it and how much it weighs in the color and what PMS colors on it, and how does it work, and how much power does it use, and all those kinds of things. Those are the details, they need to also be able to get above the details and deals we were talking about a couple of minutes ago, with the strategy components. There are also CEOs and founders that are the reverse. They are the strategy people. And they come into the office every single day with a new idea, or two or three or four. And in that case, there’s a situation where the team looks at what they’re doing and says, Wow, they just came up with all these ideas. But what happened to the ideas that they came up with 234 days ago. So that that’s where that all fits in, needs to be taken into account when you’re looking at strategy, compelling case for customers and how you run the business.
Shawn Flynn 2:56
So how does the founder know or CEO, that this strategy is even going to work?
Brett Sharenow 3:03
That’s, that’s probably the biggest place that companies fail when they’re starting. When you develop a new product or service, and I’m going to use product from now on, but service can be substituted. When you develop a new product, you have an idea of what this product is going to do. And hopefully, you’ve got the three C’s, you have a compelling case for customers, and you are solving a problem that either is known by the majority of the population, or that may not be known, but you know is there and your thing is going to solve it. The iPhone is that example. People weren’t even aware that there was a problem with cell phones until the iPhone came out. And then they realized, wow, I can do email and text and all these other things navigate on my phone. So really important. But the key piece then that comes in is the business viable? In other words, can you do everything you need to do with this business, and return a bottom line profit and return on investment to whomever has invested in the company, be it yourself putting your own money and to start the ketchup company that we were talking about or be at a product where you’ve got investors coming in, and you’re trying to grow it very, very large, a billion dollar total available marketplace kind of thing, something like that. So that has to be taken into account. The piece that needs to be done is once you’ve got your strategy, you need to build what I call a strategic financial planning model. Some people call it a financial model. I like strategic planning because, by definition, the strategy must be incorporated into the financial model. And the financial model must relate to the strategy. So that as you put those two things together strategy and financial model, they’re influencing each other. So to know that the business will work, you have to build what’s called a bottoms up financial model, which means you are building the model based on individual units that you’re selling, it’s relatively common for a startup company to build a financial model from top down. That means for the ketchup example, again, they look at the marketplace, and they see that there is this many bottles of ketchup sold in their geographic area for a year. And it’s valued at this many dollars. And they think, based on the quality of their ketchup, and what they’ve got that they can get, let’s just say 5% of that market within five years. So they take a percentage of the revenues for that product, multiply by 5%. And there they go, they have their revenue number. And then they put their cost of goods sold, what it’s going to cost them to manufacture that ketchup, including the direct product costs, the indirect product cost, labor, shipping, any kind of licensing that’s required taxes, all those kinds of things. And then there’s sigma, sales general and administrative, which includes marketing and maintenance and operations and all that, then they come up with a number. And that financial model may be, let’s just say 25, or 30 lines, in an in a Microsoft Excel spreadsheets.
That kind of model is great for checking whether your assumptions are okay. But it would never work to really look at a business strategy and let you determine is this really going to work. And it will never work for raising money capital from either venture angel or PE private equity investors. For that you need a bottom up model, where you’re going to look at how many bottles of ketchup, can you sell in each geographical area for each week at each farmers market, and you build from there? And how many people do you require to do that, wow, I need this many people at my booth to sell it. I need this many people at the back end packaging it, I need this kind of sales and marketing this many bodies, this much marketing and sales cost to do it, this much publicity. And you literally build from the ground up. That kind of a model will let you then assess whether your strategy will work. So let’s say you build the model and you realize, wow, this business isn’t profitable as it currently exists. And it’s not profitable for year one or year two, and it’s not profitable for year three, four, or five. So the financial model at that point tells you, you either need to change your strategy, or you need to do something else with the business including not started, right, that happens, some businesses fail, majority of startup businesses do. And it’s because the financial modeling wasn’t done well upfront. To tell the founder, look, the strategy you’ve got probably won’t work. So let’s go ahead and do something different. So that’s the way you know whether a strategy is going to work. And of course, no has quotes around it. financial models forecast; we’re doing our best to forecast what’s going to happen. And the financial model that allows you to forecast what you think will happen, and how you’re going to deal with what happens going forward. So it’s an integral part of the strategy, you must have strategy, you must also have the strategic financial planning model.
Shawn Flynn 8:18
Now your company today you’re working with startups to fortune 100. companies. Can you talk a little bit about what you’re doing working with these companies? And how is it different working with a startup and working with a huge conglomerate?
Mark Brinkerhoff 8:34
startups are, are very interesting in that usually there are entrepreneurs, 12345 people, sometimes more, but most the time is that small. They’re usually very knowledgeable in one area, and maybe not so knowledgeable, and many others like business in some cases, or marketing or sales or manufacturing. So they come with a great idea, and a light bulb over their head and don’t know the steps to go forward. The way we deal with them is more of an educational approach. I’ve done a bunch of videos, you can see him on our website in this regard, because I get questions that are repeating very often. How do I do this? How do I do that? How’s the world handle these things, I did videos on the help of my son, put them on our website. So you can see them. There’s probably 15 different videos there on how to do development. And those are for the entrepreneurs and startups. And then there’s a mid-range client of ours who tends to have a lot of the infrastructure they’ve done it before. They’re very well-funded. And they’re innovating in an area maybe like telecom creating 5g systems, which are a big part of our future. They know what they want and need just to execute on a very small piece of a big program. In the case of an entrepreneur or a small startup. They have a need almost everything so we educate and connect them with those resources and fill a lot of those gaps ourselves. In the case of the midrange company. We see their gaps very specific Typically they’ll write up a statement of work for us, which is a rare thing with an entrepreneur, we follow that statement of work and address their needs as quickly and accurately as we can. And then hopefully they hire us again in the future, not happens often. The fortune 100 companies are yet different. Again, they have very large bureaucracies, and they have gateways for small businesses like mine to get through before you can get work there. And without naming too many big companies, a number of them, once you get through what I call the gauntlet, their master service agreement requirements, that’s the term often used, there’s other names for it, then you get on their approved list and their pursuit of you is through internal means. So you get into their internal network, they look for that resource internally, they know who the approved vendors are. And it shortens their delivery time for a service or product they might procure.
Shawn Flynn 10:56
It’s quite different. Okay, I guess going back a little bit further, can you talk a little bit about your company what it actually does? Because I think there is a little gap there between, we work with all these companies, and this is actually what we do for these companies?
Mark Brinkerhoff 11:12
Great question, I should have covered that sooner. As a mechanical engineering company, we do mostly product designs and equipment designs. Now what’s that mean? It could mean that we create an X ray cancer therapy machine for a very large company that does that. They would create core technology. And we would create all the components around it, for example, covers, electronic enclosures, cable designs, mechanisms, things like that. We do the industrial design, which is the aesthetics, look, feel, image, ergonomics, usability partners who do software and hardware, meaning electronic hardware, we do the mechanical hardware bar resource team, there’s 10 of us in my company. And there’s up to 10 contractors who work with us all the time. And so what we do is we figure out the gaps a customer has, and then we fill them with talented resources to meet their needs. To do that we have a shop makes things we have a machine shop, we have a 3d printing room. between those two, we create things that didn’t exist before. 100 times a year, at maximum. So far, we’ve done way over 1400 projects, and it’s been a busy life just at fusion, our customers range, like we talked about from one individual all the way up to fortune 100 companies. The way it works is it’s all through the network. We really don’t have a billboard out on 237, or anything like that everything exists as relationship from one person to the next. I hate to say it, but it’s kind of like the virus spreading. Right? It spreads by close contact? Well, I think business actually spreads the same way. Fortunately, business is a good thing where the virus obviously isn’t.
Shawn Flynn 13:00
You talked about the executive team building their brand and being ambassadors. What are ways that a startup can get noticed online right now with all the massive amount of content out there.
Jenny Huang 13:12
I work with a couple of early stage startups, we talked about those concepts. One of the things that we talked about was using viral marketing. You know how Dropbox and I using that Dropbox, their early, early stage, they did a video that was titled Dropbox explained to us a very unconventional way of creating their video, it was like a two minute thing, as us just cut out these papers serve and that motion kind of thing. So it’s like a cartoony, it’s not cartoony, but it’s very interesting. There’s a name for that. But I forgot, I actually watched it not too long ago, is different from video that you would see from a company actually using it outside professional production. Because those are way too professional for me. Do you have a viral video that could actually draw some attention to it? Put on your website, send it out when you do your pitch to every customer that you get in touch with and ask your foot in the door. Because a lot of times people get so inundated with information. I would just rather have watched a two minute videos I get Oh yeah, I got the concept. I said and it was well explained. It tells exactly why you need to use Dropbox.
Shawn Flynn 14:17
How does one through this the video and that how do they build an emotional connection with their customer? I right now, everything I see online is just flashes. It’s there and it’s done. But I don’t feel that connection. Like I did. Maybe growing up where you’d see that hamburger that serial ad or that word? You know it make you so happy. But no. Is there a way that a startup or an early stage company can build emotional connection between their product and the customer?
Jenny Huang 14:48
I think that we’re all humans. I think the best way is to really humanize your brand. Right? When I say humanize your brand, I didn’t want to take on what you said about when you see those commercials about the hamburgers that makes you mouthwatering, I want to say that Cray, something that connects with the human emotions, whether it’s a success story of someone that you helped you through your product and tell a story. A storyteller is really powerful. Instead of selling features and widgets and make it really transactional, will you reach deep inside? How the users tell the story and how your product helped them buy in a way that lift them up and help them be better? Or take them to a different place? Not just startups. I think even recently, I saw a couple ads ran by what does that help company Boucher? Right. identificado. It was, I think they started out last year in October, but I was on TV did a day and was watching it, they had two ads, one ad that talks about what is blue, it was a real simple ad, they have a theme song, I think it’s an American dream, it would just say a flash of showing what blue is and what blue was not. You get it? It is simple tasks with imagery. And it just really pulls out the emotions. And then another one that they did was supporting the frontline workers, just reminding us not to forget about them. Because I think those COVID had impact so much, sometimes we forget. And then when we’re in the trenches, we just get things right. And sometimes we have to be reminded, again, I think those types of things that really touch on what’s currently impacting us, could also be emotional.
Shawn Flynn 16:24
And one thing I wanted to add, you interviewed this show for a newspaper article, and it’s gotten a lot of attention. How can a startup, reach out and get interviewed for articles? How can they get some media attention for them without paying the big dollars to a PR company?
Jenny Huang 16:42
That’s a good question. for startups. If you want to be interview by a publication, I think first you had to look at your product and what market you’re in and go and do a little bit of research and see what publications widing topics that are closely related to your product. You should also make sure that your topic is kind of newsworthy, right? Because if you’re a market providing product that is serving a solving immediate needs or a near future needs, it meets a trend, think about kind of the newsworthy angle, right? Is this the right timing for it, and also the right timing for your companies to get that kind of exposure, you know, would say a lot of publications, the way there are group is or local publications, there are publications that reach the regional level. And also there’s some that are national. So I think if you want to sort of manage exposure a little bit, you could start with some local, regional, go to the big ones as you get better. And when you look at publication should really study their editorial calendar, you know, they all have one is on their website and kind of see what they focus on. Sometimes they might have topics that fit what you want to talk about or to be interviewed for. Sometimes they don’t you study you could say Well, hey, I see. You got this great audience and these great contents, but I’m seeing there’s something that’s missing. How about we you make a proposal, right, I have a we come and share this information. And that’s how I got started with the Los Altos town crier. Two years ago, I was looking at my paper, there wasn’t a column on marketing. So I pitched to the editor. He sent me to someone and then they came back and said, Well, hey, you know, I think probably looking at my background and say, in addition to marketing, can you also include technology, and also startup because you work with a lot of startups, I said, Sure. Let’s blend all that in is interesting, because it just like you launching your podcast, I need to have an anchor guide to help me launch my first article. So I work with Oscar Garcia, he was a former CEO of the amount of Chamber of Commerce. So I was going I wrote an article about social media, you know, when you actually when also when you pitch the papers is either it is an article that you want them to interview you for, or something that you could write, and you can also pitch to them. You can why not when you also pitch to them.
Shawn Flynn 18:58
So you had mentioned calendars for it. So there’s two questions there. The calendar for the newspaper and also social media calendars for startups. I’ve heard that term quite a bit. Could you talk about maybe what the differences of these calendars are, what the social media calendar is, and go into more detail.
Jenny Huang 19:16
Okay, so the editorial calendar is actually for the press as to guide them so that they can focus what topic they could feature for the whole year. And usually these are prepared, like six months or even 12 months in advance. If you want to talk to them, you actually really should pitch to them, like six months before they write that focus on that topic. I think the same thing could apply to social media but writing social media accounts is much more dynamic. It needs to be tied into your company marketing style, overall marketing strategies, because I don’t think are your marketing. Of course right now in the pandemic well online, you know, digital media, social media as much as more carries more weight, but in a non-COVID time, bringing back the brand building question that you asked earlier. Also building emotional connection is to make sure that your social media also calendar that calendar should also encompass some offline activities and enable you to engage your audience offline. I think we miss tradeshows. You know, can I go to trade shows anymore? Can I go to networking happy hour anymore. So those facetimes are not there, take those away and try to replace with social media, that digital touch can be a little bit different, right? I don’t think your social media, social media calendar should be set on monthly basis, because I think, and also weekly basis, depending on how complex of company or part before that you have, right, I think if you have a you have a small company, you might have fewer products is easier to manage. But I think if you have multiple, I think laying out a social media calendar will benefit your team, because you’re going to need to assign people to focus on it. And depending on where you’re playing, right, and social media channels, there’s like, up to 1020 different ones. I think the main ones that depending on if you are b2b or b2c company, LinkedIn, Twitter, Facebook, Instagram, Pinterest, YouTube, Reddit, and some of those things are still really relevant because they have eyeballs right now. They’re really mature channels. So I think you should have some allocated time to dedicate what topics you’re going to focus on, pick a topic. So let’s just say like hypothetically, that if you want to plan out an annual social media calendar, probably should have certain topics that you focus on, that’s tied closely to your company’s product roadmap, because you want to focus on the products that you’re going to bet on. And for the year, which one is going to drive revenue, right, you might have some new releases, or you might have some established products that you still want to keep it there, because they’re still revenue drivers. And from there to show you a little social media calendar for each one of them. They might be overlapping between products. But I think if you have like a little mini plan, where each product line is on what channel you can focus on, let’s say for just focus on LinkedIn, Twitter, Facebook, Instagram, and then decide on what topics you can have. And really kind of stage out your post, determine that frequency is how often you post and make sure when you post don’t run, I think when you do get involved with social media, right? engage, I favor more engagement than like just posting and hoping to have light versus really engage with your audience and what your followers.
Shawn Flynn 22:28
So companies normally either accelerated or dive bombing, or at least that’s kind of how it seems in the startup world when their dive bombing, is that when they’re typically missing their taxes, and how much more does this accelerate the problem?
Scott Orn 22:42
You know, it’s actually more missing your taxes is more of a symptom than a cause, I would say it’s a signal that there’s not enough institutional control. And emphasis put on like having a healthy organization and healthy culture. So when I see companies that are doing that, I know they need to make a cultural shift. The company is dive bombing is usually dive bombing because they raised a lot of money, and the dogs are not eating the dog food. Or maybe they grew too fast, like you’re seeing with a lot of the SoftBank companies right now, like they just they took something and tried to hyper scale it in a way that just wasn’t gonna work or didn’t work. And so there’s a lot of there’s a lot of money has been wasted. And so those companies usually probably had pretty good institutional control before, but then they tried to go to like another level of growth, and they couldn’t handle it like that organization could not handle growing that fast and absorbing that much capital. So that’s kind of like the company gift to kind of be careful what you ask for in terms of raising a bunch of money and growing really fast. Because most companies cannot handle that. It’s rare to have a Facebook that can actually like Mark Zuckerberg, how that plays together with tape, but he did it. Now. They’re incredible. There’s not too many companies that can absorb that. But one symptom of not having strong organizational control and culture is like really missing your financials or missing your projections or not doing your taxes, things like that.
Shawn Flynn 24:00
Can you talk a little bit about what venture debt is? And maybe some advice or best practices in that area?
Scott Orn 24:07
Yeah, so venture debt is a compliment to venture capital equity. And so the typical use case is a startup will go out and raise, you know, 5 million or $10 million in equity and preferred shares. And so those investors have put in money that doesn’t need to be paid back. It’s equity, they own part of the company. And a nice little compliment to that would be getting a little bit of extra money in the form of debt because it’s less dilutive to help lengthen the company’s runway. In the startup world. You’re all about hitting your milestone. So when you pitch a VC, you’re probably saying, Hey, 18 to 24 months, I’m going to hit X y&z milestone so for a SaaS company, you might be 10 paying customers. For a consumer company, it might be a million users or something like that. There’s something that everyone’s going to look at and decide that this company is worth funding. In the end, the next venture capitalists are going to come in, well, not hitting your milestones is a really, really painful Because the insiders have to keep funding the company, which they don’t want to do, or they may just throw up their hands and say, I’m not going to fund the company more than it goes out of business, right. So if you’re a savvy entrepreneur and 70, VC having a little bit of extra runway, a little cushion, or an insurance policy in the form of venture, that’s pretty powerful. And typically, the terms on venture debt, there’s kind of two buckets of venture debt, but usually it’s you give up a little tiny bit of equity, like 25 basis points, or 50 basis points in the company. So kind of what you’d give like a director level employee at your company, so not a lot, and then you’re agreeing to pay interest and principal back over time to get the lender back of their money. And to drive an interest return for the lender, the lender is excited, because if this turns out to be a Facebook, or a really big one, then that equity, even though it’s not a lot, it’s gonna be really, really valuable. So the firm that did Facebook VTi, I think made two or $300 million on $2 million dollar loans. But that equity kick was so high that it may, it may, they’re fun. And so there’s lots of stories like that Google Juniper, we’ve done some outlasted some really huge ones is really awesome. But you also are sometimes going to lose money as a lender, because not all startups hit their milestones, not all companies can actually raise the next round. So some of those equity pops are also going offset losses. But from a founder’s perspective, the great thing about it is it’s less dilutive than equity, you probably sold 20% of your company to get whatever amount of capital you just raise in equity, this you’re selling 25 basis points or 50 basis points. So very, very small amount, but you are trading off, the lender will have the senior lien on the company. So they get all their money out first, before the investors get their money out in the end before the common starts participating. And they’re going to just be a little bit less flexible than equity investor would be. But an all in all, I recommend that companies do venture debt. And we can talk about some of the ratios that you should think about some of the pricing if you like.
Shawn Flynn 26:50
Yeah, actually, I would like to talk about that. But I’d also like to ask if they’re in first position with the lien, what is the lien on? Is it on IP or because a startup probably wouldn’t have as many assets?
Scott Orn 27:01
That’s an awesome question. And you’re exactly right. Startup doesn’t have that many assets. But they are developing something interesting, intellectual property wise. And so you will typically get a lien on all the assets. Sometimes the startups negotiate a what’s called a negative pledge lien on the IP, meaning, the lender doesn’t have the lien on the IP, but no one does. And so it’s a little bit of inside baseball here. But when there’s an asset that doesn’t have a direct lien on it, like IP in this situation, then when there’s a liquidation of the company in that company’s assets, all the creditors participate in the proceeds of that specific asset with no lien on it in a pro rata way. So say a lender has $2 million outstanding, and there’s another $200,000 of payables like the gardener, and the accounting firm, and the bakery down the street that does the weekly cupcakes. And whatever else you can think of that you might owe money as a company, well, the total pool of unsecured creditor claims then would be $2.2 million, 2 million plus the 200,000 unsecured. And then that means that the lenders, the lender, lenders would participate on a 10 to 11%, rate 10 to 11 ratio of the proceeds. So essentially, every $9 out of every 10 on the proceeds of that IP will actually go to the lender, even though they weren’t secured in that specific asset, because they’re going to be the biggest lender in the company by a lot. Usually, they’re still going to get most of the proceeds on intellectual property. This is one of those ones where it’s like a lot easier when you’re looking at a spreadsheet, and you can actually just see the numbers, but the big takeaway is the venture lender is going to benefit the most, and by far the most from any liquidation of the assets, far and beyond any other creditor. And until the venture lender is actually paid back, the venture capitalists and their preferred equity and the common which is usually the management team, the founders are not going to participate at all. So you got to clear that debt. Like if you sell your company for 5 million, but you only have $5 million of venture debt outstanding, then the equity folks and the common equity are not going to get anything.
Announcer 29:08
Thank you for listening to the Silicon Valley podcast. To access our resources, visit us at the Silicon Valley podcast calm and follow our host on Twitter, Facebook and LinkedIn at Shawn Flynn SV. This show is for entertainment purposes only. before making any decisions consult a professional.
