On today’s show we are happy to chat with Conor Riley, who is a Principal at Global Capital Markets, Incorporated. This company is a full-service investment bank focused on facilitating transactions within the middle market. He has advised on a wide array of mergers and acquisitions across multiple industries. Conor has contributed to structuring growth capital, debt, and equity placements. He is also the current CEO of Luxie, Inc. a luxury cosmetics company, specializing in high-end, vegan, cruelty-free make up brushes.
In this episode, you’ll learn:
- How does a company know when they are ready to raise capital?
- What happened within the capital market in 2018 with many of these IPOs?
- What are the roles of an investment banker for working with startups?
- What are the different types of capital and how some are better than others?
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Books and Resources
- Connect with Conor Riley on LinkedIn.
- Follow Conor Riley on Instagram.
- Find out more about Global Capital Markets.
- Check out Luxie Beauty.
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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 show, we have Conor Riley, who is a Principal at Global Capital Markets, Incorporated, which is a full-service investment bank focused on facilitating transactions within the middle market. He’s advised a wide array of mergers and acquisitions across multiple industries, as well as structuring growth capital, debt, and equity placements. We talked about: how does a company know when they are ready to raise capital? What happened within the capital markets in 2018 with many of these IPOs? What are the roles of an investment banker for working with startups? And what are the different types of capital and how some are better than others? So stay tuned for this amazing and informative episode of Silicon Valley. Enjoy.
Intro 00:44
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 01:07
Conor, thank you for taking the time today to be on Silicon Valley.
Conor Riley 01:11
Welcome, Shawn. This is an honor.
Shawn Flynn 01:13
Conor, we’ve had guests on the show in the past who have talked about crowdfunding. Guests have talked about public companies. But we haven’t had anyone really talk about that stage in between the A round to maybe C round, D round. And what happens in that process. You’re an investment banker here in Silicon Valley. Can you talk a little bit about your background? And then maybe segue into that question?
Conor Riley 01:36
Sure. So, I’m born and raised in the valley. Most of my professional career was focused here in financial transactions, I’ve run funds, I’ve raised money. I’ve pretty much done it all at this point. My most recent position was as a Principal at Global Capital Markets and I currently sit as CEO for Luxie Beauty. And in the course of the last 20 years, I’ve helped a number of companies raise money across a variety of transactions: A rounds, B rounds, and C rounds. I think the majority of financial transactions that occur fall into this range and most companies are somewhere between friends and family or unlicensed crowdfunding and an IPO. And that most equity transactions that occur sort of hit this kind of an enterprise.
Shawn Flynn 02:27
Can you talk about what those different rounds are, A round, B round, C round? Kind of what capital raise is that for each round?
Conor Riley 02:35
So there’s no real pre-determined financial criteria for any of these rounds. Generally, the rounds are sequential and predicated on the A round being your first real true capital raise from an institutional group, and the B, C, D and subsequent rounds are the next offerings after that first one. So generally speaking, most firms are looking at companies that have some kind of proof of concept and existing revenue, and are on the path to profitability or showing some kind of profit. And generally speaking, you want to have an enterprise value of somewhere between $10 and $20 million when you go out and raise money for the first time.
Shawn Flynn 03:20
That enterprise value, how did they calculate it? Because a company in their A round, probably doesn’t have that much revenue at that point, right?
Conor Riley 03:28
Well, hopefully they do. But generally speaking, there’s all kinds of different ways to calculate that. Everything from discounted cash flow analysis to multiples in the space, comparative analysis using recent transactions to benchmark the value of companies. But generally speaking, evaluation is about as good as the paper it’s written on. And it falls down to the appetite of the investors and the company itself to sort of prove their merits. Generally speaking, though, you want to at least show that you’re capable of delivering a product And that you’ve moved beyond the early-stage kind of friends and family, amateur hour, and that you’ve really got a mature product that you can bring the market. You’ve got the salesforce in place to do that. And you’ve got the engineers and operational capabilities to deliver that once you get the sale.
Shawn Flynn 04:17
You’d mentioned comparing other transactions. If you’re a company, for example, Uber or Lyft, when there were really no other companies at that time…
Conor Riley 04:28
Except the other one.
Shawn Flynn 04:30
Yeah, the other one. Who do you compare yourself to?
Conor Riley 04:33
Well, every entrepreneur thinks that they’re a snowflake. And the fact is that they’re not, there’s a whole universe of comparative transactions, maybe not necessarily in your space. But you can always find someone that may be outside of your space, but is in sort of a similar stage in their life cycle. Maybe they’ve they’re dealing with similar business issues, and you can look at that and extrapolate what that might mean for you and your enterprise. So when you’re looking at kind of generating revenue around an app that’s dependent on a multitude of factors, you can look outside of that specific app that you’re creating, and especially if there’s no clear-cut competitors, and look at other people that have done similar things. And that might be in technology, that can be in FinTech, that can be in consumer products. But even with a new revolutionary product, it doesn’t necessarily mean that your business is going to, you know, turn everything on its ear and you usually can find other comparative transactions out there.
Shawn Flynn 05:33
I also have to ask the entire capital raise process, for an A round B round, C round. What are the steps involved? What does that look like?
Conor Riley 05:43
Well, the only good capital is the organically generated cash flow. Everything else is awful. And I don’t say that lightly. Most people are kind of attributing that A round or B round, to kind of the panacea of all their business needs, and the reality is that whatever troubles you’re facing, only become kind of magnified when you receive that initial sort of tranche of capital. If you have weak financials or weak accounting systems, that’s going to be magnified. And you’re going to spend an inordinate amount of time clearing up your operational hurdles as that capital gets deployed. If you have a weak sales force, suddenly, you’re not going to be able to meet your goals and have to spend time developing your sales force. So all of this capital is really there so that you can sharpen your business and invest in growth. And the capital process itself is really designed for new money to come in and grow your company.
Conor Riley 06:40
So a lot of founders, you know, might borrow a lot of money from friends and family and make the promise to them that they’ll repay that money when they raise that initial venture round, only to learn that all of their friends and family will have to be converted into equity and that there’s no payout for them until the company becomes more profitable. The process is itself pretty simple. The first thing to do is establish kind of what your business plan is, how profitable you’re going to be, what the financials look like, and try to start establishing some kind of a roadmap going forward. Once you have that roadmap, then you can really identify the capital needs that you have. And then you can go out to the market and start working with different investor groups and start putting that pen to paper and figuring out where to source the various capital components to deliver on your business model. And a lot of people don’t know what capital is available, kind of gets all lumped into the venture world. And the reality is that there’s venture capital, there’s venture debt, there’s all kinds of different funding tools and financing tools. There are asset-based lenders, there’s long-term debt strategies that can often do wonders for a company and not necessarily hurt them in terms of taking a big chunk of equity at a point when the company has sort of yet to get their legs under them.
Shawn Flynn 07:58
So what recommendations would you give to a company that’s looking for some capital, when you just mentioned all those other potential options?
Conor Riley 08:08
Well, I think the first thing for a company to do is really get educated on the capital markets and set realistic expectations in terms of the amount of capital that they really need a raise. So most companies, when they are just engineering an idea, they are out trying to raise $2 million to build out their entire staff to do all the different things that they need to do, to basically go to market. And that’s really unreasonable, because at the end of the day, if you’re preparing for a capital raise, try to do as much work pre-raise as possible. Realize that when that money comes in, a lot of it is going to be eaten up on legal fees and then on expansion plans for the business. It makes sense to maybe kind of stage that in. My advice would be really to identify the milestones and benchmarks that you need to both deploy capital and that will dramatically increase the value of your company. And most of the value drivers for a company are tied on the revenue side, instead of the IP side. I think it’s important to note, particularly in Silicon Valley that we get hung up a lot on IP. But at the end of the day, its revenue and revenues, what drives businesses.
Shawn Flynn 09:15
So can an investment banker sit down with a founder of a company and kind of help guide them and get their company prepared for later on to help them raise capital?
Conor Riley 09:26
Absolutely. The benefits of working with an investment banker is really to navigate such an inefficient market. You know, you think with all of these capital sources, and all of these deals on the table would be a relatively efficient market. But the reality is that it’s incredibly inefficient. Most founders that are putting a deal together don’t have access to the investors. And most investors that are looking to get a deal done may not have visibility into the entire ecosystem of deals being done. So having someone that can act as an intermediary really adds a certain efficiency to the market that will help you get as much money as you can at the best valuation possible. They also can pull from relevant transactions in terms of developing value, they can offer guidance in terms of what stage you are really at, and how much money to raise. And a good investment banker will caution their clients against raising too much money too quickly. Because you could essentially be looking at control change transactions or things that will kind of take the entrepreneur founder out of the driver’s seat. So my advice would be a good investment bank or a good corporate attorney, someone that’s going to make sure that the i’s are dotted and t’s are crossed really can go a long way in helping a founder.
Shawn Flynn 10:45
What are some issues that arise when you first sit down with the A founder?
Conor Riley 10:50
They are crazy people, that generally tends to be the problem. Founders are insane. And I think you have to be I mean, I think you have to be a crazy person to be living in the most expensive part of the world and say I’m going to give up my steady paycheck and start something that is going to be an app that 13-year old’s use. And I’m going to bet my entire life on that. So obviously, you’re dealing with, and that’s an extreme example. But I’d say that the biggest issue is that the perception and the reality are often so different, that even a good founder that’s relatively grounded, just one of the visibilities in terms of like, where the transactions really are in their space. And so often, you’ll have a founder that says, “Well, I saw XYZ company raise $10 million, and my technology is better than theirs. So I want to raise 25.” And it’s like, well, XYZ company was already profitable, and they had institutional guys in the deal.
So you don’t have anything except for this IP, which is great. But we need to work on something that’s going to be more staged, that you can start delivering on some milestones, start showing some revenue or at least show some interest in this IP today. We can take this to the next level. And so I think that from the founders’ side, as long as they’ve got good counsel from both bankers and attorneys, they can kind of bring themselves to the reality of the market. And you know, they may have some limitations in terms of where they’re willing to go with that, which is fine. But I think that ultimately, the hardest thing with working with founders is getting them to get on board with the reality of the market. And that may mean that the market timing is just not a good time for that founder to enter the market and raise money. But I’d rather have somebody put a deal off then have unrealistic expectations on getting a deal done.
Shawn Flynn 12:39
You mentioned IP, intellectual property, patents, trademarks. Can you talk a little bit about that? And you’d mentioned that maybe they aren’t as valuable as some people might think. But just the value overall.
Conor Riley 12:52
I think it’s always good to protect your IP, protect your trademark, and make sure that you’re doing everything that you can to button that up. It’s a nice thing to be able to represent to investors that the unique thing that you’re saying you’re doing is actually unique. And it’s a nice way to show them that you’ve done the legwork to protect what you’re building. And that you’re positioning that in a place where it really will create value in the long term. And I think those kinds of indicators are things that people look for. And obviously, if you’ve got a strong enough idea and something that they can turn into a business, they’ll want to capitalize on your business and capitalize on that IP so that they can envelop it into whatever plan they have.
Conor Riley 13:36
So when I say that, it’s not necessarily what you want to build a deal around. It’s just because a lot of times these firms are purchasing IP and not necessarily investing in the growth of IP. And if they are investing in the growth of IP, it’s usually like, “Hey, founder-engineer, we really like you. We really like what you’ve built. We’re going to buy this IP. We’re going to fund your company but all of the operations, financial and otherwise are going to be our team.” So if we’re posing the question of here’s an independent entrepreneur that’s building a business and they want to maintain their independence, and they’re looking at an institutional A round, and then later B and C, they really need to pay attention to the business drivers outside of the IP, or else they could just end up selling their IP at a very early stage.
Shawn Flynn 14:23
You have also mentioned deals where they’re already institutional investors. Can you talk a little bit about the different types of investors that might be interested in investing in early stage companies?
Conor Riley 14:34
When we look at institutional investors, we mean people who are professional investors who have a fund or pool of capital and that can come from you know, a venture fund that has a bunch of insurance companies, as their family office that has some rich family somewhere that hired professionals to go out and put their money to work. They can come in a private equity firm that’s looking to get involved in companies a little earlier in the lifecycle. There’s a number of different kinds of institutions out there whose primary job is to invest money. And the importance of that is when you have an institutional investor in a deal, it’s kind of like a hard backstop in terms of later rounds coming in and wanting to push things around. Everybody, when they’re coming into a financial transaction, they’re saying, “Hey, look, I’m writing you a big check. And these are the things I expect. I don’t like your valuation; I want you to come down there. I don’t like the way your options are structured. I don’t like the way that you have this…”
You know, there’s a multitude of things that they may want to have done. And if you have nothing but Aunt Sally and Uncle Joe in your cap table, you’re going to have to deal with them. But if you have another firm, another institution, then that institution essentially is setting the standard for subsequent rounds, which is why it’s so important to find a solid, you know, solid partner for that A round because they’re going to be setting the pricing for your B and C round.
Shawn Flynn 16:01
Can you talk about the difference right there of the solid backer, first Aunt Sally, Uncle Joe and maybe term sheets and how that looks like in negotiations?
Conor Riley 16:12
You know, institutional people, this is their job day in and day out. I think it’s worth noting, like, let’s open the conversation a little broader than just, you know, Aunt Sally and say you’ve got these high net worth individuals that are running around here that are interested in investing in companies. You’ve got the smaller institutional guys or smaller funds that might be really interested in early stage companies. And then you’ve got kind of your marquee venture groups, and even some private equity groups that are moving a little earlier into the lifecycle of the business. And you’ve got all these guys out there. And when you start putting together term sheets, now generally the term sheets are about the same, they have the same components. This is what the stock is worth. This is what the company’s worth. These are sort of the standard terms associated with what might be going on if there’s some kind of conversion, if your preferred, if your comment. Different kinds of ways to own equity.
So it’s relatively similar. As you move to the more institutional players, they obviously have their way of doing things. And it’s relatively rigid. When you get into sort of the smaller funds, they may work with you a little more, which is good and bad. And then when you get into the high net worth guys, they may be investing because they like you, and not really paying too much attention to the terms, which doesn’t really sound like that bad thing, except you may suddenly take on a huge investor and leave something out or forget something that they really wanted that they forgot to tell you. And that can lead to trouble. So that’s why I always say, have good legal representation that’s going to create some consistency, cross whatever term sheets you’re looking at. And when it comes to negotiating what the terms are, it basically comes down to the dollars you’re going to take in, the equity you’re going to give up and then the use of proceeds, how you’re going to use the money
Conor Riley 18:00
The dollars in an equity out those are very hard-set fast things, the use of proceeds is a little more wishy-washy. There’s a ton of term sheets that go out where it just says, you know, working capital or operating capital, without really calling out the specifics of what that is. And you know, that’s done for a reason. You may be developing your business plan; you may not necessarily want to commit to something that you’re not sure about.
But ultimately, you have to look very closely at how you are using those dollars so that you can be sure to hit your valuation numbers on the next round, and that you don’t have to go back out to your investors with your hat in your hand saying, “Hey, I invested in this new team of engineers and it’s great, but we don’t have any salespeople. We are running out of money.” I think that when it comes to negotiating, it’s really good to kind of don’t necessarily think that the first round is the end all and be all of negotiating. People that are coming in on your A round, they’re institutional guys, they’re taking a big risk here, they got to make sure that from their risk assessment standpoint, that the juice is worth the squeeze. So anyway, so it’s like, okay, take less money, you have less exposure that way, give some equity up to them, you’ll get good guidance from them, and then work with them in terms of how you’re building and executing against the plan. And try to get some really experienced people on your board, get really experienced people in the company that can help you grow and scale.
Shawn Flynn 19:29
Are there any typical amounts of equity given up each round? Or the A round is 20% equity or 25%? Is there anything standard?
Conor Riley 19:38
There’s nothing really standard. So you know, every deal is a standalone deal. From a fund standpoint, you want to take on as much equity as you can. You want to have as much control as you can. You want to control the board; you want to control the reporting. You want to get into understanding how they’re going to be managing certain components of the business without necessarily intruding on the day to day as an entrepreneur. You don’t want to have the funding component and the compliance after closing. It can be such a distraction from the core business that you can’t focus on the growth of your business.
But all of that kind of gets worked out on a deal by deal basis. And, you know, I think that for an A round, people are investing for as much as 40% of a company all the way down to 10% of a company. A lot of times, someone that might have been working really hard on developing their IP, or getting some sales guys out there, or however they do it. And then suddenly, you know, their sales guys are out there selling a product and someone else launches a competing product. And you realize, “Oh, my gosh, the only way to push this forward is to get enough working capital and to really establish ourselves as a dominant player in the space.” Or you’ve got great IP, and you have been relatively quiet on the sales side. And now you’re realizing, “Oh my gosh, we have this next big hurdle that we have to jump and we need the cash to do that.”
Conor Riley 20:56
And so it’s all about the risk versus reward and there’s some funds that might have beyond just the money they’re investing, the expertise in the space, access to people, access to sales channels, and the ability to come in with everything from elements on the revenue creation side, attorneys on the IP side, and operators to flush out the operational components of the business. And that kind of situation, the checks size that they write, and the equity they get might be slightly different. So every transaction is different. This again, comes back to kind of the professionals involved guiding the founder through the process so that they can really get a true apple to apples comparison.
Instead of these very different offers that might be, “Hey, we want to make an investment in you. We’re going to get rid of your operations here. We’ve got our team in wherever and we’ll fold you into that and help the business grow. It’s very cash efficient, and here’s all this other, you know, the bells and whistles with our deal.” It might look really appealing and there’s another guy saying, “Hey, I’ll just invest in you locally here in California, and this is my offer.” And you’re suddenly saying, “Wait a second, the cash amounts are dramatically different here and one I have to move, how am I getting folded under? And then this guy’s saying he wants to give me money, but I don’t have to move. And I don’t really understand how this all works.” So this is where you need somebody who can say, “Okay, let’s sort of equalize these offers. Let’s take the ambiguity out of that and really make a comparison. And also try to figure out what the overall capital strategy is. And whether these things will set you up for the B round that you want, or whether this is creating a different exit strategy.”
Shawn Flynn 22:39
You mentioned controlling the board, can you talk about what a board for a startup looks like? The people you might want to have on it? Just an overall explanation.
Conor Riley 22:50
The board is really the governing body of the company. So everybody thinks that the CEO runs the company and that’s really true. The CEO us responsible for running the day to day components of the business, for being able to execute the strategy and whatever the business plan is, and grow the business. But the board is the one that is really governing the business. The board is the one that adopts motions to embrace business strategies, to give the authority to the CEO to pursue different goals, whether that’s a new market or a new technology. The board also authorizes dollars that can be allocated to different development platforms. And the board also insulates the company from controlling shareholders. So you’ve got your shareholder base and the shareholders elect the board. And the board is then empowered to govern the company and to make those kinds of critical strategic decisions. And the reason why people want to have a seat on the board is so that their voices are heard, and having a position on the board allows you to give your input on all of this on whatever the growth plan is. And so that’s why a lot of people, that’s why most institutions will require a board seat or two.
Shawn Flynn 24:11
An early-stage company, A round or B round, how many people are on the board?
Conor Riley 24:16
I think one of the things that’s important is the quality of the board. It really sets the tone for the entire company. And the quality of the board will also give an institutional investor a level of comfort. So in our example, let’s say you’ve done the friends and family round, and you’ve got Aunt Sally on your board. Well, she’s not really a credible representative of the four. And then you go into the industry, you get some good people that have been there, done that. Maybe they sit on the board of a few other companies that have gone the distance. Those are the people that understand how businesses grow. They understand what it takes to grow a business, and those will give sort of the institutions greater comfort. Now, the number is not as important as the quality of the people. So generally, most companies have three to five board members when they’re looking at their A round. And when you start closing your A round, then you might have five to seven as you move towards your B to C, and a lot of that just comes in getting quality people on your board that can help advise in the growth.
Shawn Flynn 25:23
Investors after they invest in a company, do any of them want board seats? And is there a conflict of interest there that they might not do what is best for the company? They might want to do what’s best for their fund?
Conor Riley 25:36
Yeah, that totally happens. So you’ve got all kinds of pressures, like when you’re running a fund, it’s not a fun thing to do. Like you’re not just like, “Hey, here we go. I got $500 million in the bank. I have been invested in some cool companies. Life is good.” And you’re just cruising around getting free lunches. It’s a really, really challenging job. You’ve got high watermarks to hit or you’ve got equity returns that you need to generate. You’ve got a very short window to seed the fund or make all the investments. And then you’re harvesting where you’re looking at getting out of whatever you’ve invested in, in five to seven years. So if you invest in a company that’s going to just change the market, it’s got this great IP, it’s got this hotshot sales guy, great, great staff, and you make your investment. And then they have to retool their product that takes two years, the sales guy leaves, so you have to replace him. That’s another year. Now you’re looking at like, “Oh, my gosh, I’ve been in this thing for three years. I’ve got two years before I got to liquidate my position. And this company’s not doing anything.”
So then you have to come in and say, “Guys, look, I’m on the board. This is what we’re going to do.” You may as a fund manager, you may guide the company to do what they need to do to get towards a transaction, when the company may not be at a place where it will maybe have the best value, because you’re saying, “We’re at the end of the road here. Your time is up. I need my money back or I sell.” And that’s where there may be a conflict of interest, but at the end of the day, there should be good alignment. And it’s more often than not that the early stage investors can structure deals to get out if they have to. And you, as the board or founder, just need to administrate what’s going on the capital side of the fence so that if you know a fund has a five-year horizon, and you’re three years in, it might be a good idea to take them out to lunch and be like, “So what is this going to look like?” And work that out with them.
Shawn Flynn 27:32
Very early in the interview, you’d mentioned about other forms of capital raising, such as venture debt. Can you talk about the other types of capital out there?
Conor Riley 27:41
I think equity is really something that’s overly focused on because it’s kind of the brass ring of funding. People want a venture fund to invest in equity. There’s no obligation on the founder to repay that. It’s just cash that comes in and you’ve got this great partner that owns part of the company. You’ve got cash now that you can deploy into your operations. But the reality is that giving up a huge chunk of equity really early in the lifecycle of the company may not be the best thing to do. And so there’s a lot of companies that are out there that say, “Well, I need capital so that I can make my product.” Well, there’s inventory finance for that. Okay, so what does that mean? That means somebody is writing you a check so that you can create the inventory you need, so you can go out and sell it, and then you repay them the money and it’s kind of expensive money because it’s only secured by the inventory. But it may be cheaper than the equity. And generally speaking, it’s not necessarily unlimited. But as your sales grow, you can grow the amount of money that you tap, fund the inventory, or maybe you have, you’ve got some path to market and you’ve got some need for additional dollars coming in. And that’s where you can look at a venture debt fund.
Conor Riley 28:57
So maybe you’ve got some early stage venture money in and you need to raise more money. Well, these venture debt guys will sort of look at the pre-existing venture fund that is in the deal as a check. And they’ll check that box and then they’ll take some equity on top of interest to loan you money. So they’re a very small equity interest, but they’ve given you a big piece of working capital that then you are obligated to pay back. So those are just two examples.
Conor Riley 29:27
And then you have invoice finance, factoring, purchase order finance. You’ve got all kinds of different creative debt structures out there and all kinds of different people that work in those spaces. That can create some kind of blended capital structure that’s really equity efficient. This is something to consider when you’re going to market and you don’t have enough capital to really fund your growth. But you do have interest you know, the sales are there and you’re saying, “Well, geez, if I go out and raise this money, my enterprise value is much too low to take any of those deals, if I only had, you know, half a million dollars, or $2 million, or $3 million, or whatever it is that I can grow this company.” Then some of these other forms of capital might be more attractive. And there’s people that are sitting around there that have received POs. And they’re sitting there saying, “Why I wish I had the money to deliver against this PO.” And it’s like, you don’t have to raise equity. Yeah, it’s one of those things where when you become more familiar with all of the different capital tools that are out there, you can really get creative in terms of how to build a structure. And these are things that allow you to fund your growth without depending on that A round and position yourself better so that by the time you’re going for that A round, you really have that strong $10 to $20 million valuation.
Shawn Flynn 30:46
Would you recommend that a founder have an investment banker, kind of on retainer to ask these types of questions to or how would an early-stage company be able to seek advice?
Conor Riley 30:58
I think any good investment banker would be available to run these questions by. I don’t think it makes sense to hire an investment banker or put them on retainer, until you’re really confident that there’s a deal to be had. I think you want to go into that capital raising process and formed. And so if you call five different investment bankers and you ask them similar questions, and you kind of start building your knowledge in the space, and seeing what sort of transactions can be out there, then I think it’s a good thing to work in. And the other thing too, is that for early-stage transactions, there’s not many investment bankers out there. Most investment bankers would rather work with mature companies that are being purchased from a larger company or doing some kind of an IPO or some kind of an exit.
So when you are looking at an A round for an investment banker, most transactions that they work on are $100 million plus, and there’s the lower middle market of maybe $25 to $50 million in terms of transaction size. But then when you get below that, and you say, “Okay, well, we’re worth $20 million, and we’re going to go out and raise five, and we need someone to help raise us five.” For an investment banker, it may not really be worth their time, because those are typically done through private placements. And maybe you’ll get one institution that will take on like 60% of the round. And then you’re raising it for a bunch of other things. And there’s all kinds of SEC and FINRA restrictions that govern these firms that may be prohibitive in terms of what they can do. So you know, as a founder, I think it’s good to just ask the questions, let them steer you to the right professionals, and really try to get educated on where you are in the capital process and how to move forward.
Shawn Flynn 32:43
If a company were to be acquired, that mergers’ acquisitions, how different is that the investment banker role versus first capital raise?
Conor Riley 32:51
Well, the mergers and acquisitions piece, the founder has built their company to a point where now it’s time to exit and they’re going to sell. There’s a very clear process, there’s a process where first the banker would come in, do all the due diligence, put everything together, build out the data room, figure out who likely would be interested in that deal. Given their access to the market and their visibility into the market, they’d put together sort of a selected group of buyers and start working on what the valuation might be, confirm that with the client, and then they go out to the market with it.
And once that’s out in the market, the idea would be to bring in as many bidders as possible to move the price upward for the benefit of the client and the transaction. With a capital raise, it’s a little less defined, because you’re not selling a company, you’re basically just moving the pieces together so that this company has the capital, the means by which you can grow. And so when you go out into the market there, you’re doing your best to price set, you’re doing your best to give them all the information they need, but it’s a little different than going to a strategic buyer and saying, “This is yours. Are you interested in it? This is how much we’re thinking, can we move forward?” It is slightly more nebulous process but it’s something that still benefits from a real finance professional going into, making the assessments on what the value drivers are, bringing as many potential investors to the table as possible and getting the sign off on the pricing structure and valuation.
Shawn Flynn 34:25
2017-2018, what was your opinion of all the ICO, initial coin offerings, out there for the companies that did them?
Conor Riley 34:31
I think that they’re a huge liability. I would not recommend that anybody do an ICO. I think they’re nothing but trouble. And I think soon, most of the companies that did those ICOs are going to have ginormous problems with the SEC. And with anybody that bought those. My feeling is that with blockchain and with some of these new coins and new trading instruments and essentially, new securities that have been developed. There’s nothing really new about them, other than it’s sort of a neat way to issue securities. And I think that a lot of people bought into the hype of these coins because they saw what Bitcoin was doing. They saw what some of this other sort of more established coins that were sought after were doing and think, “Oh, you know, Joe Smoothie Shop Coin looks just as good.”
Conor Riley 35:22
But the reality is that just because two things are like electronic coins, or I don’t know how, what the parlance is for it, but imaginary, but one is highly sought after, and globally sought after and commands a huge value. And the other one might have an artificial value associated with limited demand right now. Like it’s not a good way to run an offering. No institution is into it. I was approached by a company this last year, they had two classifications of stock. One was normal common shares. The other one was B shares that they had done all the work so that they could do an initial point offering. We took that out, every single investment group, every single one, even ones that were hardcore in a blockchain were like, “We’re not doing an ICO. That is crazy talk.” I know it’s been done. And maybe I’m an outlier here. But I just think it’s a way that clever people that are not in finance bypass some laws from the SEC. And I think at the end of the day, the SEC always wins.
Shawn Flynn 36:25
What about cannabis? Federally, still illegal, but here in California and many of the states, its billboards are everywhere. Do investment bankers want to touch deals like that?
Conor Riley 36:36
Well, there’s a lot of cannabis transactions that are starting to get that momentum beneath them. And we’re hearing rumblings that some large tobacco groups are starting to make some pretty big acquisitions in the space and think that large scale AG deals have always been attractive. And there’s plenty of bankers out there that are pursuing that. There are even people that are so-called experts now in the cannabis space, which is great. They must be quick learners because it’s only been around for a few years. But in terms of the sort of general availability of bankers, or any kind of deal, whether its initial coin offerings, cannabis deals, moon colonies, whatever it is, there’s probably an investment banker out there, just as some lawyers are very good craftsmen and understand how to protect you.
There’s plenty of lawyers that are out there chasing ambulances, and that’s just a fact. And the reality is that there’s a lot of guys that are running around that might be an investment banker, but they may not really be a good one or they may not be knowledgeable or they may be trying something new, which is fine, but I would stress that if you’re involved in pursuing an initial coin offering or a cannabis deal or anything that requires some kind of special expertise, do your homework. Vet the banker. Don’t assume that because they’re a banker, they have any access to the market or any additional knowledge that you may have. I mean, it’s just you got to do your homework. And we’re seeing that with solar deals, we saw that with the green energy deals, we saw that with everything.
There are so many different kinds of deals out there that require a little bit of a specialized skill to understand what the values are, what the risk factors are, and can really understand who is going to be the best qualified buyer or investor. And if you bring in an investment banker, that might be a really good investment banker but not understand the space, then they may be able to do sort of the normal things, building out the due diligence, making sure that the corporate governance is where it needs to be, you know, advising you in terms of board creation, and maybe some valuation numbers, and they might even be able to pull some relevant transactions, but then the wheels are going to fall off when it’s time to bring a real buyer to the table. So I think that there’s no shortage of investment bankers in the world and that really requires any founder, anybody who’s going to engage an investment banker, to do their homework and really make sure that they know what they’re talking about.
Shawn Flynn 39:08
Are you seeing any trends in the valley right now?
Conor Riley 39:12
In terms of trends, there’s always the big tech deal that’s on the horizon, there is the big AG deal. There’s the startup nation. There’s all of the same stuff going on right now, that was happening 10 years ago. So from my standpoint, you know, obviously, I’ve moved into running this beauty company. So that’s my primary focus, I’ve noticed that consumer product brands are going through the roof and that the market is starting to cool. I think that people are preparing for some inflation that’s coming on the horizon. I think that some of the valuations that we’re seeing are starting to cool off a little bit. And I think that there’s sort of a hesitancy with the money that’s on the sidelines of whether they want to get in now or whether they want to wait. And so I think that, you know, that’s sort of a fun, management question and a bigger question than necessarily what’s going on in the valley. I think that it’s a good time for founders that are out there looking for money and looking to find that capital partner, it just means like always, there’s a lot of competition for that dollar. And you got to come correct. You got to have your plan; you have to know what you’re doing. You have to have your IP, you have to have your sales strategy, you need to have your proof of concept, you need to have so much more.
Conor Riley 40:27
Some A rounds, we’ve been talking about it being sort of this, like, “Oh, we’ve got an enterprise value of $10 to $20 million.” Well, the marquee venture funds are investing at $50 to $75 to $100 million enterprise levels. Some of them have moved out of the A round space altogether and are investing in B or C round or even later. So it’s really, I don’t think this is anything new. But if you’re going to raise money, you got to have your ducks in a row.
Shawn Flynn 40:55
You’d mentioned move into later rounds. What do you think happened this last year? With all these crazy valuations before IPO, and then suddenly just drop in, and maybe your opinion of We Work?
Conor Riley 41:06
I think one of the things that we saw, a really hot capital market. And one of the things that’s kind of emerged is that most venture funds are actually getting out prior to the IPO. And they’re able to do that because there’s been this emergence of crossover funds. And crossover funds are essentially people that understand the public markets, understand a company’s desire to go public, and will basically cash out the venture guys, and help underwrite the IPO. And so these crossover funds, they’re basically responsible for driving this trend, because they’ve given a viable out for the venture guys that want to get out prior to the IPO. And they allow the venture guys to get out at a valuation point that’s tied to the IPO. So it basically allows the venture guys to get their 10x, 20x return. The crossover funds only want like a 3x to 4x return, which is what they’re able to do. They have control over both sides, the pre-IPO and the IPO pricing.
And then when they get it out there and it’s out in the market, sometimes it doesn’t go so well. And sometimes the public is not seeing the return or doesn’t understand the business model. And then that kind of changes things. And the price starts sliding. And I think that eventually is going to have an impact on how these crossover funds work, and what kind of deals they’re looking at, because obviously, any stakeholder in a company is not going to want to see the stock slide after an IPO. And I think it’s also going to mean that the founders and the people that are involved in those deals are going to start looking at other transactions. And I don’t think we necessarily need to walk into the mechanics of an IPO but I think it is worth noting that there’s a premium that’s paid by strategic buyers. That premium is largely avoided by people that are looking at these crossover platforms as a bridge into the IPO space. I think you’re going to see maybe more consideration paid to a good strategic buyer, that’s going to help make sure that the business continues to grow.
Shawn Flynn 43:17
So you’re thinking there might be less IPOs and more acquisitions in that later stage to strategic buyer?
Conor Riley 43:25
Yeah, I think that certainly there’s massive companies that might go public, they’re almost too big to be gobbled up by a strategic buyer. But there were plenty of IPOs that were done that where the value wasn’t necessarily there on the other side of it. And I think that there’s a lot of interested buyers in the world that can use that data, that can use some of the components of these companies, and they may be willing to buy it. So I don’t know, I mean, I don’t know what these crossover funds are going to do. I think that model is broken. I think if things started fleeting, and the capital markets are cooling particular the public markets, then who knows? I mean, Brexit.
Shawn Flynn 44:05
Brexit is going to happen a lot easier.
Conor Riley 44:07
Well, not easy? Yeah, I don’t, it’s sort of the common thing. Every analyst seems to throw it into everything… and Brexit.
Shawn Flynn 44:16
The crossover funds. So it sounds like they’re not doing too good. What happens to those in the future?
Conor Riley 44:23
They did something that was really clever. They weren’t greedy, they understood the IPO process. And they understood the need for most of these venture funds to get out prior to that. And so they were able to figure out a way to come in and work with the venture funds to give them the liquidity event that they need, and then work with the public markets to get a return. And the closer you are to the exit, the more control over that you have. So it’s just a simple matter of saying, “Okay, what are the shareholders of this company really want so that we can get a chunk of that? Okay, let’s write a check for that. And then what do we think we can get on the other side? Let’s do our homework there.”
And once they felt comfortable that, you know, they could generate that return, then they write the first check. And then they get the second check. I’m super oversimplifying the process. By the way, that’s sort of the concept of it. It’s a very, again, these, these guys are people that understand a process and a need. They’re not greedy. They’re not trying to get like a 10x return or 2 x return. And they’re able to mitigate a lot of their risk by controlling that exit. So it’s a really smart move. And smart guys are always going to find a way to do business. I hope that they can figure out a way to keep that model going. Because I think that, you know, maybe that model has been over extended to bring some companies in, that either went out too early or had a business model that wasn’t proven or may not have got the goodwill from the investing public that they should have gotten. But I know there’s plenty of companies out there and I think that what they do as a business is an important tool to have in our capital ecosystem.
Shawn Flynn 46:00
What about companies from overseas, coming to the US to list on public exchanges or come to the US to try to raise funding? I don’t want to say trade war here. But are you seeing any impact any changes of what’s going on?
Conor Riley 46:14
Well, I think the most notable impact or change was really sort of, you know, 2008, 2009, 2010, when a number of companies came over here, and basically just were frauds. And they were able to do what’s known as a reverse merger, where they find a US company that is listed in trading, and then that company buys the much larger operating company, thereby giving the operating company the appearance that they’re this trading entity. And then that trading entity would issue new stock out to the investors and furnish them with financial reports. And then it was difficult for the SEC and the powers that be to really identify whether or not these reports were accurate. And so the reports would drive the market and the market would be driven up. And then when everybody found out it was a giant fraud, there was really no recourse because all the money had been taken offshore.
Conor Riley 47:15
Now, it’s much harder to do that, number one. And number two, the investing public is much more aware of cross border transactions. The world is a different place. And when a company is looking at coming to the US, they’re doing it because the US capital markets are really the most dynamic in the world. And we have the greatest ability to generate liquidity, and also the greatest ability to raise new sources of capital. There’s kind of a tried and true roadmap in terms of how to do that. So if there are investors that are in anywhere in the world, and interested in doing that, there’s plenty of pathways to find global investors here in the US. There are ways to incorporate a US entity that can serve this market. There’s a lot of different ways to do that.
Shawn Flynn 48:07
I want to ask, how does a company actually know they’re ready for that A round?
Conor Riley 48:12
There’s no real set time. But I think you have to look at what it really takes to start a business and particularly a startup because I know that there’s a concept that it’s just an idea and having a startup, bootstrapping something, and then getting it ready to get some crowdfunding in, getting that interest and then looking to further develop the business so that you can go to market and get the growth capital so that you can… But one of the things that I think really requires some thought is understanding what it takes to start a business and really what it takes… It’s not just having an idea. You have to have an idea. Yes. You have to know how to execute against that. You need to have a business plan. You need to have a strategic plan. You need to know where your business attribution channels or revenue generation channels are going to be, you need to identify what the cost is associated with working with those channels. And you can’t just know them like, “Oh, I’m going to, you know, work with Oracle, and they’re going to write me big checks.”
You need to know the level of granularity that you can bank on, because your investors are going to be banking on that information. And when you start down the path of creating a business and having these pieces in place, they can’t be theoretical. And the more concrete that they become, the easier it is to raise money and the higher evaluation you can justify. And so when you say, you know, that’s a great question, when am I ready for the A round? It’s when all of your business plan and strap plan has solidified into really a concrete set of milestones and benchmarks that people can write a check against. And it’s really not until you have that when you can’t say specifically who it is you’re going to call that’s going to write you a check for your first dollar for that first piece of product.
Or if you don’t really know the engineer that’s going to help finish that product. Or really when the timing is for that patent to be done, when you don’t know this stuff, you really can’t go out into the market, you really can’t have those kinds of conversations. So I’d say one of the biggest takeaways, I think, from any entrepreneur that might be listening to this is focus on the concrete fundamentals, build milestones and deliverables that really are going to be core to the business. If you’re talking to someone and they’re rolling their eyes, or they have questions, really try to understand what their questions are, and flesh out your plan so that you can deliver something to them.
Shawn Flynn 50:47
What’s your opinion of the companies going through accelerator incubator programs and coming out of it to then raise huge next rounds?
Conor Riley 50:55
It’s interesting. I think that if you’re a company that’s been accepted into a batch or into some kind of program. And that program has a certain level of cachet in the valley, it might position you to get the meetings that you need to raise that next round. But ultimately, there’s a lot of entrepreneurs that raise big rounds, whether they’re in a program or not in a program. And I think that it comes back to have you answer the questions or not? And a lot of these accelerator programs, what they really force their participants to do is answer the hard questions and build out those key milestones and benchmarks. And the capital that they’ve given their participants, it really doesn’t amount to much, but the experience and access is really what these companies are coming for. So certainly, it can help a company. But I also feel that a lot of these programs are so competitive, and overly competitive. And I feel that if you’re a company that has a good idea, and you know that you can build a business around it, it’s better to just go out and build a business than be distracted by some kind of accelerator program.
Shawn Flynn 52:02
What are the next steps for you? And how did you get to where you are right now?
Conor Riley 52:06
So I transitioned out of investment banking to take a role in a small growing privately held company, I moved from being the principal at Global Capital Markets to the CEO of Luxie beauty. I really think that the consumer product space and particularly branded products have grown significantly over the last couple of years. And it was, it was an area of focus for me. And so when this opportunity came to really take the helm and run this company, I jumped at it. Since I’ve been leading the company, we’ve grown from only selling primarily in the US and Canada, to shipping to over 200 companies globally. We’ve got four different facilities, one in Germany, one in the UK, one here in the US and then one in Singapore. We’ve been in a huge growth cycle for the last 18 months which has been a lot of fun and of course has come with a number of challenges.
But it’s really been so much fun and as strange as it might sound, I’ve fallen in love with beauty. I love the beauty space, I love makeup, I love all of that. At the end of the day, I feel that it’s such a privilege to be able to sell something that people use, and it makes them feel good. And so most of my day is spent talking about different ways to help people feel good. And to give back. We’re the only beauty company that has a partnership with the World Wildlife Fund, which is, I think that’s a pretty huge thing. It’s been interesting, and it definitely has put me in sort of on the other side of the table now, where before I was focused on being an intermediary, raising money. Now I’m sitting there as a CEO, and really the steward of the company evaluating these capital deals and working with third parties, working with intermediaries, working with different people and kind of doing that from the real stress and perspective of an executive at one of these companies, but it’s been so much fun.
Shawn Flynn 54:03
And how can people find out more about you and your company?
Conor Riley 54:07
https://www.luxiebeauty.com/ or follow me on Instagram @conorluxie
Shawn Flynn 54:12
Great, Conor. Thank you for taking the time today to be on Silicon Valley. We look forward to having you here in the future. And look forward to hearing about all the progress on your current company.
Conor Riley 54:22
Great. Thank you.
Outro 54:24
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.
