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With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Lars Kamps, Intermix founder, diagrams how to raise a startup seed round

Posted on: 05/14/2019

Lars Kamp

Lars Kamp

Co-founder & Chief Data Engineer - intermix.io

Lars Kamp of intermix.io - Podcast Summary

Lars Kamps, Intermix founder, talks about how to raise a seed round for your startup. Hear about how Lars decided how much to raise, mapped out possible investors, and figured out how to structure his seed round.

Lars Kamp of intermix.io - Podcast Transcript

Scott: Welcome to Founders and Friends Podcast with Scott Orn at Kruze Consulting and before an excellent podcast, quick shout out to our sponsor, Brex. Brex is a credit card for startups, the first one ever. It’s fantastic. They don’t require a personal guarantee by the founder. That is a huge deal. Also has great integration with QuickBooks, which makes life easy for your accountant and finally they have really good rewards. They do start up centric reward, like bonuses on ridesharing and travel and eating out and things like that. All things that appeal to the whole team at a startup. So check out Brex and if you go through their sign up and type in Kruze, you get a discount. Hopefully you enjoy Brex and thanks so much guys for sponsoring the podcast. Thanks. Welcome to Founders and Friends Podcast with Scott Orn at Kruze Consulting and today my very special guest is Lars of Intermix. Welcome Lars.
Lars: Thank you Scott. Good to be here.
Scott: So we’ve worked together for a long time and become friends and Intermix is a really exciting company and you have volunteered, your content marketing genius is on display here because you’re like, “Hey, why don’t we do a podcast called how to raise a seed round.”
Lars: Yes, that’s correct.
Scott: And I was like genius. That’s like catnip for our clientele and all of the startup world. So we’re going to do that. Before we do that though, maybe give a little background on your career and then talk about Intermix. Intermix is a really cool company. We actually had Paul on, the CEO maybe like three months ago.
Lars: Yeah, and I think he talked about what we do.
Scott: But still, I think the audience needs to know what you guys do
Lars: Yeah. Okay. What I’d like to do is start with a little story around what we see in the market happening and I think if you drive over San Francisco, you see the words machine learning and AI and analytics popping up everywhere. Like today to be successful you need to be a data-driven company and for a data-driven organizations who face growing data volume and who struggle to make their data scientists productive because of slow queries and data availability issues, Intermix provides actual insights for a database called Amazon Redshift. We provide you with ongoing monitoring and we help you spot problems early and so unlike do it yourself solutions or hiring consultants, our product gives you personalized recommendations for individual queries so they run fast and that means data scientists can iterate faster and it makes your company much more productive with data. That’s what we do. Customers here in the city include companies like WeWork, Postmates, U2Me so big, large and a few public corporations as well. So yeah, that’s us and I think, given we’re talking about the topic here, we raised a seed round in 2018 and I guess today you want to know how we did it.
Scott: Exactly. Well, we want the playbook. But I think, real fast before we get to that, like Intermix is … I have the advantage of seeing your invoicing and revenue and you guys have the who’s who of … I think there’s a few other late-stage startups that you did in the name that are awesome. So the company is going places. It’s really exciting and for those who don’t know, Amazon Redshift is kind of like what the big dog and the data animal analytics category or how would you-
Lars: That’s correct. So the technical term is a data warehouse or more specifically, it’s a cloud warehouse. So the [inaudible], you’ll hear names like terra data and Oracle and as part of this massive shift to the cloud, companies are also trying to make more use of their data in The Cloud and they need a data warehouse. There’s a little bit more around that, but a key component is a data warehouse and Amazon Redshift happens to be the number one player in the market.
Scott: Yep, and so you guys are making people who use Redshift way more efficient and make them more successful, right?
Lars: Correct.
Scott: Yeah. Awesome. All right, is the intermix.io?
Lars: Yeah, we like to use interix.io in all of our copies.
Scott: Awesome, and you guys have also really good content marketing. I’ve been seeing pieces you’re writing online about, basically teaching people how powerful Intermix can be in conjunction with Redshift.
Lars: Yeah. It’s our biggest source of new leads and new prospects. It’s our content marketing. Look, every time … This is actually part of the conversation we should have today. Like what are the channels you need to figure out as a company where you can acquire customers. But my one recommendation is start early with writing highly specific content to your audience that helps them solve a problem. That’s what we did. So whenever you Google now Amazon Redshift, pick any combination, you will find us.
Scott: Awesome. I read Tomas Tunguz, the VC at Redpoint Ventures. He wrote a really interesting piece like three years ago and he said, content marketing is one of the few things that compounds, in the same way that money, like interest compounds and that always stuck in my head like ever. Even this podcast, people listen to this podcast two years from now and it’ll just keep compounding and be helpful to a lot of people.
Lars: It’s the one thing that I recommend everybody should just invest into, even before you have a website. Just start writing-
Scott: … And make yourself an expert in the category.
Lars: That’s correct. Yeah.
Scott: Awesome. All right man. So intermixed.io is where people need to read about you guys. So we outlined a basic workflow for our outline for this talk here. So the first part of raising a seed round would be what? Targeting the kind of venture capitalists you want in your business or should we start with building metrics and building a case to receive funding?
Lars: I would start categorizing yourself as a founder. Have you raised money before? Is this your first Rodeo or have you done it before?
Scott: And that’s a great way to start. So tell me, implicitly in that, I know where you’re going to go with this, but what are the different paths for the first time around versus the serial entrepreneur?
Lars: This is my first startup as a founder and Paul’s actually second startup as a founder. So we had a little bit of credibility and then both Paul and I, worked together at a previous startup, so we had operational experience to build a startup. We joined that company post series B, but we hadn’t done one together and I hadn’t founded one. So we came into this whole process as a team that hadn’t built one together before and it’s much easier from a marketing and sort of perception perspective when you walk in and you’ve done it before. Because even if you fail, there’s lots of learnings. I would even argue at that one. It doesn’t matter if you were successful or if you failed as long as you’ve been operating long enough. Then there’s a lot of lessons learned in building a company and so in our case, we didn’t bring that to the table and we were very much aware of that. What we did bring to the table is operational expertise, enterprise background. Our product we sell to the enterprise, so we know very well how to do that, build an integrated product and sell it.
Scott: You also felt this pain point at your previous company together, right? If I remember-
Lars: Yeah, there’s always a founding story, yes. The problem that we’re solving today is one that we had at the previous company. We worked for a mobile analytics company and our agents were installed on almost a billion of devices and we were trying to build a specific data service around it and we put all that data. Like for instance, we were able to tell you how many new iPhones were activated in LA in May, 2018-
Scott: That’s incredible.
Lars: Just to give you an example and so that’s valuable insight. So we’re trying to build a different cue around that and what we need is a data warehouse and we used Amazon Redshift and it turns out that 80% or 90% of the work in making these data services happen, is preparing and acquiring that data and it’s really hard and making it flow, it’s really hard. Making it fast, complete, accurate, all of that. It’s so incredibly hard. Running the algorithm once the data is there is easy. That’s the easy part. So we focused on the [inaudible] 90% make that really easy for you versus building something else for … That’s what we did.
Scott: You guys were able to go into this being like, “Hey, we understand the problem really well. We lived it.”
Lars: Yeah. Let me start with what we did. We left that company and we decided to do something together. We didn’t know what. We knew it was around data. We knew that and so we threw out a few hypotheses. You got to start with something and it was actually at the time, it was like the first thing, what do you do when you deploy a data warehouse? It’s empty. There was no data in there. The first problem you need to solve is put data into that warehouse, which means you need to build a data pipeline. The technical term is ETL Extract, Transform Load. I’m falling asleep as I heard that [crosstalk]. But that was the number … Keep in mind, this is like four years ago. So it’s-
Scott: But I think the other point you’re making probably is that you don’t have to have all the answers to start the company. You just need to know there’s a problem out there and then dig into the problem and find an interesting solution.
Lars: Yeah, that’s right. And you need to talk to your customer, you need to find customers. So what we did is we went out with a hypothesis. We went through our network, talked to people who were running data teams at large companies. In fact, Postmates was one of our first early Alpha customers and to cut a long story short, we went to all these companies and asked them, “How would you feel if we made it easier for you to get your data into the cloud, into your cloud warehouse?” And they said, “That sounds interesting but there’s a few existing players out there who do it okay. It’s not great, it works.” Because, “Okay, we might be able to build a better mousetrap. Would you be open to talk to us?” We ended up first building a better mousetrap to get data from A to B right into your club warehouse. But then the feedback that customers actually gave us as we started talking to them was, “Well, once it’s there, I can’t access it. It’s slow. The cluster goes down, my dashboards don’t show, I get yelled at over slack. This is my true issue.” And I was like, “This sounds very familiar. This is like a performance monitoring product, which we’ve built for mobile apps. Let’s do this again.” And so Paul had started drawing up these images in [inaudible]. Even on like, we would go in on a piece of paper and we would draw this stuff like this is what the curve would look like and all of a sudden you would get … I can’t describe this on the podcast, but you would be in the room with four engineers and this is like Silicon Valley engineers giving you a share of their valuable time. You see them leaning forward into the room and they go, “Yes, that’s it. Can you build that?” So we started building these prototypes and I’m talking about the process of building a product, but it’s a very fundamental components, I understand when you go out and raise money. Again, keep in mind-
Scott: It needs analysis. You got into the business thinking there’s something here. You did the kind of early deliver something to get their attention and then you got that kind of unlocked the real problems they have.
Lars: That’s right, yeah. And look, we couldn’t walk into any VC here in the … We quickly realized that. Look, VCs will talk to you all day because for them, it’s an interesting market intelligence. But we just weren’t able to walk in and say, “Look, this is our idea. We’d like to raise 2.5 or 3 million for a seed round and then we’re going to build it.” So our approach was, let’s find a problem both prototype, show that we have customers on it and have them pay a little bit and that’s what we did. So that was our approach and we bootstrapped for over a year. We didn’t pay ourselves a salary for over a year and which is quite an achievement when you live in San Francisco and you have family.
Scott: We’ve talked about this many times, but there was one year of Vanessa and I paid ourselves an incredibly small amount. It was very painful. But it’s incredibly focusing because you’re not fucking around. You know what you need to do and you need to execute.
Lars: Yes, and that is actually one key requirement when you go out raise money. You need to have quit your job. I’ve seen it many times. There’s a founding team, it’s maybe two or three founders and then the story goes, what was the third person? And so, she or he is still working and the minute we were going to have raised that person will join. And no, you can’t do that. That’s an absolute no. Either you’re committed or you’re not. So by the time we were going out to raise our first [inaudible] round, we had quit our jobs. We had bootstrapped for a year, we had a [inaudible] customers, we had a working prototype. That’s what we came to the table with and that allowed us to raise our first [inaudible] round.
Scott: And your first … I forget, but it was like $1 million, a million and a half, something like that.
Lars: It actually started with lots of lessons learned there as well. So I think one of the mistakes we did or one of the mistakes that I see others do as well, you’re trying to optimize for that [inaudible], early on and I would not recommend doing that. So one of the learnings we’ve had is that, the terms are always going to be the same as the early stage. It doesn’t matter if you have zero or a hundred or 250k, even if you have 100k in revenue, 800k, it doesn’t matter. If you fit the risk profile of a serious seed company, then those are the terms you’re going to catch.
Scott: Yeah. Because those investors all have a fund. They have to drive a performance on. They can’t tell who’s going to be successful at that stage and so they’re playing a giant portfolio theory and they need to have everything standardized.
Lars: Yeah. So that’s right. And we started out, we thought like 500k is enough and that was our first knee jerk reaction was like, “Look, that’s all we need and we’ll keep the lights-“
Scott: So you’d also been doing it cheaply because you hadn’t been paying yourselves at all [crosstalk]. 500K seemed like a lot of money probably but it wasn’t really [inaudible] anything.
Lars: Well, also because what happens then is that investors think, “Well, how long? What will I get with those 500k?” And so if you projected forward, it might not be enough to get you to your next round.
Scott: That’s actually … Sam says that. They’re looking at your runway and overlaying the milestones needed to raise the next round and they’re saying, “The milestones you might need are like five referenceable big customers paying full price” or something like that at that stage. And they’re saying, “I don’t know if this company can get there on 500k. Probably can get there on 1.5 because 500k might only be” … I’m just making up back of the envelope, but it might be six or seven months and for the average startup and this company might need 12 or 14 months. It’s also a little bit of a tell if the company’s not asking for enough money, because it might show that the entrepreneurs don’t know exactly how hard it’s going to be to hit those milestones. Does that make sense?
Lars: Yeah, that makes total sense. It’s spot on and we were very confident that we would be hitting a lot milestones with this 500k, but that doesn’t mean the other party is.
Scott: Yes, that’s a great point too. You may know that you really handle it, because you might have three POS in your pocket that are just about to get signed, but the VC doesn’t know that and there’s this giant game of asymmetric information between you and the VC. That’s hard for them to know, who’s telling the truth or what’s legit, what’s not.
Lars: Yeah. Well, luckily I have good friends in the VC community and they gave me open and honest feedback and they tell us just like, “Look dude, the way we look at it, it’s like what happens when you’re running out of 500k?” And so that was great advice from friends in the VC community. So what we did is, we actually raised a little bit more than a million in our first intro round. That actually included institutional money and by now you can probably tell I’m driven by my accent and I’ve written a pretty long, medium post or a post on medium on that. It’s more about Angeles syndicates, but in that post I talk about the funding better. I’d like map up all the sources of funds you can get. It’s family, it’s friends, it’s angel syndicates, institutional money. Maybe there some research grants. I write it out in the post.
Scott: I’ve got to turn that on. I haven’t seen that.
Lars: Yeah, I would recommend like map out all the people, all the entities that you can raise some money from. You’d be surprised how many sources you can identify there and where you can get money from. And so we collected money from people, from angels here in San Francisco, people who have worked for us or with us, trusted us, former colleagues and for them even, they didn’t even care about what it was that we were building. They said, “We know you guys, we trust you guys, here’s 100k.”
Scott: It’s another reason not to obsess overvaluation, because most of the time people are giving you your first money are like your friends and family and the last thing you want to do is screw them on valuation. You know what I mean? I’ve seen that before where it’s like, just get the money in [inaudible]. These are your friends and family. Let let them … If this is a wild success, they deserve to be set for life or whatever.
Lars: Yeah, and we actually said, no to a sizable number of people because we just felt like, “Look, it’s not worth it.” Then every time you see them, it becomes a board meetings.
Scott: That’s super important too.
Lars: Yeah, so there needs to be a personal distance. At least that’s how we looked at it.
Scott: I agree with that. Yeah.
Lars: Yeah, then we raised our first round on a safe note. Lots of lessons learned there as well. There’s all these different flavors of a cap and no cap, a discount, both a discount and a cap. We chose to go with a cap, which we said at the targeted amount for a seed round. We thought it’s going to be somewhere around 8.8 and lots of lessons learned there. If I had to do it over again or if Paul and I had to do it over again, we would probably go out with a note and just the discount. That’s why we would do. You get into interesting … We’re getting deep into cap table issues like calculating the number of shares pre and post, but my recommendation would be if you raise money on a safe, which is a great instrument to save money on, do it with a discount.
Scott: Yeah. The only thing … I’m curious, do you see a lot of companies not raising money on a note without evaluation or without a cap because pretty much every note I see, has a cap on it at the super early stage. There’s definitely companies that are, whether it’s a safe or a note are basically … There’s a few that are like superstar people or maybe super hyped up who do a no cap, but to me that that doesn’t … And maybe I’m wearing my investor hat right now from my house, but I never wanted to … It never felt right to me to not get evaluation associated with my money that was putting in now, because the more successful you are on my money, it actually hurt me because it drives up the valuation later. Does that make sense?
Lars: Yeah. It makes sense and that’s why you need to have that conversation up front, because you need to play all those scenarios. Looking at it from a founder’s perspective, I would just say, “Look, we’re going to raise a seed round and we’re going to give you a 15% discount or 20%, whatever.” Saved notes are a beautiful instrument because it’s allows you for a high velocity fund. If somebody says, “Yes, I’m in,” then you have them sign the note. The process that we pursued was, we would get the verbal commitment and we would line up the notes and when we had enough commitment, we would call in for the signatures and have them wire the money and then once you sort of have like more than 50% of your round together, everybody else falls into place. I think-
Scott: That’s a really important point, if you don’t mind me to interject. Especially there’s a group of preceding investors like Charles Hudson getting [inaudible] one and often when I talked to Charles, he’ll say … I think he did say us on the podcast, one of the biggest values he brings is actually setting evaluation. Because once you have like a lead term sheet or [inaudible] term sheet, there’s a bunch of friends and family and other people who are cool coming in on top of them, because they know a credible person. So to add what you’re saying, I would try to get one kind of signature person who can credibly issue terms, price the deal and they know that money will follow. It’s not easy, but it’s easier.
Lars: Yeah. Which is the approach I would recommend in your actual seed round. We’ve sort of did an angel round and it was a little bit on the higher end and if you have an option to price it, my recommendation is to price it. Just get it done and I think Mark’s sister has written about the two, like you find both cans. No, just to raise more on notes and I’ve seen that. You may know that I’m an angel investor too, so I see quite a few cap tables. I’ve seen cap tables after, we’re talking four or five years of raising money on different nodes and terms and that cap table becomes a blood bath. You pay the Piper later, either way.
Scott: And the blood bath is founder dilution problems, you’re talking about.
Lars: Founder dilution, complexity in managing the cap table, getting in signatures. It’s just a nightmare. So yes, if you can get a price around, that’s great. But we weren’t at that stage where we were doing an angel round and so we got … And I think that one of the things we should talk about on this podcast, is the process you need to run. It’s really a sales process.
Scott: Well let’s talk about it.
Lars: Okay, let’s talk about process. How to raise a seed round. How do you approach this? Okay. So first categorize your, have you raised money before or not? Have you done a startup?
Scott: And you went through them, haven’t done a startup before. The person who has, has it a little bit easier on the front end, especially if you’ve been successful, usually there’s a bunch of VCs who didn’t get into the previous company that want to be in it and then of course you can go back to the well, the people you made a bunch of money, So you can usually go right to like a series A or a large seed and just get it done because you’re walking in the room, you have credibility. So-
Lars: Yeah, for instance, I’ll give you an example. As we talk, there is an engineer at Lyft who just raised 15 million money.
Scott: That’s awesome.
Lars: … On commercializing an open source product that, that person built by Lyft.
Scott: Perfect, and they’re the ones who did it. They use it on Lyft-
Lars: Yeah, and why not? And VCs want to deploy capital. They want to write big checks. That’s the other inside. If you ask them for 100k check, it’s just like, it’s not worth the hassle.
Scott: Because they have a certain amount of oversight they have to do. They are going to be on so many boards and a small amount of money with the minimus ownership, doesn’t really move the needle for them at all.
Lars: That’s right. So once you’ve categorized yourself as a founder, have you raised? Yes, no. It allows you now, to approach the process and if you’re, let’s just say … We hadn’t done it before. Let’s just put ourselves into that category. So you need to show a little bit more proof, because at the end of the day, at the seed stage or if your seed stage, the investors invest into the team and an idea and then you-
Scott: … And the dream. The sales pitch is the perfect way of describing this, because you’re basically selling a dream and there’s not a lot of proof and everyone’s basically buying into you, like you are the product.
Lars: That’s right, and so that’s why you need to have a great story. Fundraising is all about storytelling. Before I did this, I worked 13 years at Accenture. From that time, I’m probably best known for having done the work that today’s called Accenture digital. That’s a different story. But back then we would work with clients. It was all about storytelling. Like you’re at point A now, there’s a big change in the world that impacts you and so you need to change too and here’s the promise land that when we achieve to point B.
Scott: We have the same thing here. We take care of all your accounting and taxes. You don’t have to go into a fundraiser not knowing if our numbers are incorrect or taxes are done. That is the promised land for our clients.
Lars: And so the big change for us, the big storytelling factor was, “Your data’s moving to The Cloud and it’s growing exponentially. So you need to be prepared. You need to have something that helps you track your data flows-“
Scott: … And the people you have working that data are super expensive and if they’re not utilized correctly-
Lars: Yes, the opportunity costs is huge. But you need to … Look, there’s enough material out there on storytelling and pitching. I will give you two resources. I would recommend you read Andy Raskin’s blog on medium and you go visit one of his classes here at general assembly in the city. Another book that I read is by Oren Klaff, pitch anything. I think those are the … If you ask me, what are the two top resources to learn about storytelling and pitching? Those are the two.
Scott: We’ll put those in the podcast [crosstalk].
Lars: Yes, and because a lot of entrepreneurs make the mistake, that’s what I see. They just go in with like … Let’s talk about what you should not do. You should not go to … If you Google vc pitch deck, there’s no shortage of results. And if you go to a websites like … What is it called? Is it like slide haven or-
Scott: Is it like SlideShare or something like that?
Lars: Not SlideShare. No, it’s one of these websites where you can buy ready bundled digital products, like a WordPress theme, PowerPoint theme. I think it’s called DigitalOcean, something like that. We can edit it in the notes. But there is ready-made pitch decks.
Scott: Really?
Lars: Yes, and they [crosstalk].
Scott: How is point people … So Clay has a good template. I always tell people, but it’s a little high level, but it’s a good template for people to use.
Lars: Yes. I know exactly what template would give, but that’s the structure and you will see it’s a storytelling approach. What’s changing and so do not go to one of these websites out there and download a digital pack. They look amazing with amazing teachers, the team, the vision, and the charts are all off the shelf. Do not do that. You really need to tell a story and a story has a few components. It has the big change. So the big change affects your world and that means your customers who are in that world needs to change and you give them … But then you have these little dragons or devils.
Scott: THere’s going to be tension.
Lars: Yeah, there’s tension. So this is what keeps you from getting to that promised land and here you are, you’re the startup and you have this magic wand. That was like Luke the Skywalker, where there is this lightsaber and that helps you to get to the promised land and the promise land consists of like three magic gifts-
Scott: … And you save money. You move faster and [crosstalk].
Lars: Something like that. That’s the story needed to tell and then a very important factor of that story is to understand the ‘why now?’ I think I know what pitch deck you’re referring to on Sequoia’s blog. They call that out as well. It’s the ‘why now?’ For instance, let’s take something like Instacart or Uber. Instacart is a great example, groceries delivered. That concept existed in 2000. It’s called Vet [crosstalk]. They flamed, went out of business and that’s a great example for ‘why now.’ The why now for something like an Instacart was like, you need three reasons for that, for the ‘why now.’ You need a technical reason, a technology reason, you need an economic reason and you need a social reason. These three together, they really drive the need for change and for Instacart was, again, social technology, economics, social change, there’s a-
Scott: People working more [crosstalk].
Lars: You have the millennials, they’re staying single for longer. They are willing to spend a little bit more money to have convenience. So that’s a generational shift. They don’t need to walk down to their grocery store-
Scott: I think dual working families too. Like dual parents working at the same exact-
Lars: You know that, yeah. [crosstalk].
Scott: That’s my life.
Lars: But that’s one large social change. The technology change was mobile phones, iPhones. With wet [inaudible], it’s in the name, wet. If you need to go to the computer to write. With Mobile Apps, you have mobile Apps in every person’s hands. The market got expanded by 10-
Scott: And the fulfiller people could do it. That was making the service actually much better because you can power.
Lars: Yeah, and the cost now, because of building all these digital supply chains and you all of a sudden had an economical way to deliver those groceries and-
Scott: It’s convenient for them and they can make some extra money and things like that.
Lars: So that’s the ‘why now.’ So that’s a big piece of the story you need to tell, ‘why now’ and if you don’t have an answer to at least two of them, you’re in a bad spot.
Scott: And from the VC’s perspective, the reason ‘why now’ is so important is because every good idea, they’d probably been pitched like 10 times on it and most of them had been on a fund that made a bet already in a previous fund on something like this happening and it didn’t work, because otherwise it would be solved. And so there’s this emotional hangover and credibility hangover at the fund from someone who’s going to say, “We tried that with X, Y, and Z company and it didn’t work already.”
Lars: Yeah, that’s right. We’ve actually had those investors. So you need to do your work, when you talk [crosstalk].
Scott: Yeah. These target the VCs, the right kind of VCs.
Lars: Yeah. So now you’re in a position where you have your story straight, you have your talking points and you need to be in sync with that pitch. And then people also make the mistake to like give a historical timeline of everything they’ve done. Tell them one thing that you’re known for. So now you need to raise these … You need to talk to VCs, to investors and that’s a sales process. So we did this by creating a list and that’s what you do in [inaudible]. You create a list of prospects and then you find a way to reach-
Scott: [crosstalk] prospects.
Lars: Yeah, exactly. I have been invested into this previously, who’s the best person I can reach out to, to get an intro.
Scott: The funds are usually pretty helpful. Once you get a good contact into somebody, the partners usually are pretty good at forcing you to the right person with domain experience internally.
Lars: Yes, that happens.
Scott: But it’s important to have a relationship or someone who’s kind of verified that, that partner trusts to open the door.
Lars: Yeah, that’s right and we started a, believe it or not, we had a list. We cast a wide net. We had a list of, I think 120 investors firms. It’s still somewhere on my Google drive-
Scott: I see those lists all the time.
Lars: Yeah. But you need to start … In classic enterprise software, you needed pipeline coverage of 301 and I would argue in raising funds, it’s more like 10 to work. You create this list, you start reaching out, you need to bucket them, show them people we want to raise from like, that is our dream.
Scott: And why. Because you need that ‘why’ to be able to get a good intro.
Lars: Right. But it’s like, I want money from that firm because I liked that investor, I liked their thesis. They have a great reputation and for instance, like for us it was important that there was no signaling risk in the EI, because some seed investors then sort of double up on the EI, sometimes they don’t. So that creates a signaling risk-
Scott: Signaling risk would be like a big series A fund, doing the seed and not refusing to do the A and that creates … I’ve seen that create [crosstalk] coming down as an investor has been tough.
Lars: That’s right. And that’s the reason why we actually said no to a few funds, who wanted to put money into a couple of our rounds. We said, “No, we’re not going to take your money here.” Cut the long story short, you create this list, 100 people, let’s use round numbers. Bucket them into, no way I’m going to raise money from these people, I’d love to raise money from these people, I’m not so sure if I will, but I might. Those three groups and then you start pitching to the ones that you don’t want to take money from to practice-
Scott: To get some practice.
Lars: Exactly and you learn. When you do that, you learn a lot and you adjust your pitch and then at some point,t you need to really accelerate. You need to … Then that’s when you start the sales process. You need to really put everybody into two week window, have the meetings and run a process.
Scott: And you can only really kind of sell the company once. It’s unlike a software product sang it many times, you’re selling a piece of the company. For the most part, what you’re really looking for is the lead and maybe some people who are followed, but you really need that one special person that you believe in and that believes in you. It’s kind of getting married. It’s very similar to getting married. Like it only takes one.
Lars: That’s right. Yeah, and in selling software, you can go back to the well. You can go back to the customer after quarter, two quarters, you’ve got a little bit more features. You can’t really do that for fundraising. We’re talking more about six months, one year. So you have one shot. Then you look, you have to be prepared to get a lot of nos and at the end of the process, that’s why you need to run a process and you need to go back to work and so either you raise money, which means you can go back to work or you do not, which means you also have to go back to work-
Scott: To somewhere else.
Lars: Well, somewhere else or you keep doing what you’re doing. If you want to keep bootstrapping, then that’s fine too. But at least you can focus back on your work again. I’ve seen this happening that people go in and “I don’t know. No, we’re just going to quiet one more customer. No, we want to get to this AR-“
Scott: Just get along in the tooth and then there’s a massive signaling problem to the VCs you’ve already talked to.
Lars: Yeah. So we ran a tight process. Our seed round, I’m sorry. So we raced across two rounds, an angel round and a seed round and the aims around was probably, I think less than three weeks and to end before, and by that I mean like sending out the first email, “Hey, let’s meet to money in the bank.” And the seed round is to [crosstalk]. Well, because you’re on a process.
Scott: You guys are also highly professional people, tons of credibility. I think the point I would make is you had done the work early in the process that we outlined, like building the story, proof points, things like that. You’d done it well.
Lars: That’s right.
Scott: You were able to raise in three weeks.
Lars: By the time we went out to raise money, there were no surprises. No, “Oh my God, we forgot this and that.” And I think the seed round end to end, we raised money from Encore Capital from Jeff Clavio. Fantastic, the seed firm-
Scott: He’s top notch. For those who don’t know, he rebranded that used to be Soft Tech. And so everyone knows Soft Tech and Uncork.
Lars: Yeah. I can go into details why we wanted money from Jeff and why we think he is a fantastic firm or his firm. There’s three partners now and I can go on and talk great things about Uncork. The whole team is just amazing. It’s an amazing firm.
Scott: So real quick, takeaways from the first meeting and then the partner pitch. Like any lessons from the other week, we’ve been going … I’d want to be respectful of your time.
Lars: You need to talk to people who could make the decision. And again, if you go out there on blogs, should I talk to an associate? Yes. No. And then sometimes associates or call themselves partners as well, there’s enough firms out there that have shifted to a model where they’re all partners. But you need to talk to the decision makers and we found it that … Again, you’ll find both sides of the stories. Like do you not talk to firms, only go into the process and so they are forced to make a decision and you just have to accept that they say no. We approach it a little differently. We establish the relationship, told people that were around we’re doing something and then it sounds-
Scott: That’s the way I recommend it. And then you turn the fundraising on-
Lars: … And then you turn the fundraising on and we did talk to-
Scott: It’s almost like pre-selling.
Lars: Yeah. We did talk to associates. There’s a couple of people-
Scott: I would too. You just need to know what you’re getting into and you need to be upfront with them and be like, “Hey, we need the next meeting. You need to have a partner,” that kind of thing.
Lars: We’ve met great associates at some firms and at that point also it becomes their interest to make you successful because they’re sourcing deals and they want to be known as the person that source that deal and you just got a timebox it. So yeah, process … What else? Yeah, obviously then you need to ask for the partner meeting. You need to understand what is your decision making process here and then, people go on vacation, all of that. And that’s why you need to run the process and just like, “Look, if we don’t have a decision from you by Friday, whatever the date is, then it’s over.”” Well, can we get?” “No, you cannot get one more week.” And that’s when you do that with a funnel of investors, when you have 30 of them. Then chances are that a few of them will say, “You know what? We’re going to do this.”
Scott: Yeah. And then you go after that first meeting, maybe a subsequent meeting to get the partners satisfied, maybe multiple subsequent meetings. Then you go to the full firm pitch. Where you basically pitch to all the partners and that is for me … Because I did a startup previously, it didn’t work. That was actually the most stressful thing to me, because I almost felt like I was doing performance art instead of having a conversation and it’s probably just a weakness or commentary on me. How did you think about that partner meeting with the all hands on deck?
Lars: It was okay. We had that meeting and we even managed every single meeting. We timeboxed every single meeting. All these meetings are scheduled for one hour and we said, “We’re going to be out of here after 30 minutes.” There’s nothing you cannot learn from us within 30 minutes and also, in some cases we had one firm that had a weird process. They said, “Yes” and then all of a sudden, they introduced another partner who was traveling and we thought … It was really weird and we blamed it on ourselves. Like, see, we dropped the … We didn’t manage the process here. We went into this meeting and what just happened? Luckily we had term sheets by then. But yeah, you need to manage that process.
Scott: I think what you’re really saying there though is build in some unpredictability. As much as you want to manage a process, they’re dealing with people and they’re dealing with people with big egos that have a lot of money and things like that. So sometimes there’s going to be weird stuff like someone took a vacation out of nowhere or whatever. It’s part of having a big pipeline and not relying on one fund that’s going to give you a term sheet.
Lars: Yeah, the round is not done until the money’s in the bank and a lot of things can happen before you have the money in the bank. And that’s why you need to plan for this and that’s where you need to have a wide funnel. If you have a wide funnel, you’re not desperate and so you can say ‘no’ and you walk away.
Scott: [crosstalk] you’re not desperate, which is really strong too.
Lars: And we were not. We had a product that works, we had great logos. We were growing said, “I would like to see a little bit more customer growth.” And we said, “All right, we’ll come back to you may be in the [inaudible]. That’s it.” “No, hold on.” “No, this is done.” They’re not going to change their opinion on you. They will not write. We’ve stood up after one. The shortest meeting was I think, 12 minutes. It was in Sharon Heights at a Starbucks. Our rule was like, “Let’s not meet at a Starbucks.” And for that one we made an exception. It was nice and quiet and that guy, after 12 minutes, it was very clear that was not a fit. So I just said, “You know what? It was a pleasure meeting you. But this is not a fit.”
Scott: And you’re right about them being willing to talk to you all day because they get tons of data from it. This is just part of their job. It’s like … And most people who are doing that professionally love to talk [inaudible] gregarious people and just that’s how they get their energy.
Lars: And in every single meeting we would start. Because typically the venture firm wants to talk about their firm. We said, “No, we’ll tell you what we’re doing and with that background, you can position your firm in a way that tells us like, are you a good fit for us? How do you help us?”
Scott: You also know before the meeting that you’ve done your list. It’s not like you need to be sold that.
Lars: Yes. So that’s the process. So make sure you get into the partner meeting, the decision making meeting, know what it takes for them to say “Yes, no” issue them with terms sheet.
Scott: Negotiating a term sheet. We have two more things covered. Negotiating a term sheet and then doing what you’re doing with the funds after close. Any high level of negotiating the term sheet tips or methodologies?
Lars: Well, you get a term sheet.
Scott: That’s the most important thing.
Lars: That’s the number one thing. And the funny thing is, once you have one, and again this comes to the process, you sent the subtle hint to everybody else who is still in the running, we have a term sheet.
Scott: Accelerates everybody.
Lars: Yes. And all of a sudden like, “What … I need one.” “No, you do not get one [inaudible].” So typically it’s an exploding term sheets, there’s some, it expires after week, so either you take it or you don’t.
Scott: Yeah. They don’t want it, they are term sheet [inaudible]. I don’t blame them.
Lars: Yeah. And I think you need to make a commitment. That’s totally fine.
Scott: You didn’t propose and then get like a week to think about proposing. I guess you do. But that’s a bad analogy.
Lars: But if you’re raising from them, then you should be prepared to say yes to them if they give you a term sheet. So we got a term sheet. We actually got two at that point and then we said, “That is, we’re going to move on.” And we took Jeff because we wanted him. We took Encore Capital. It’s just a great serious seed firm. It’s Stephanie, Andy and Jeff and then on the staff you have Ashley and Caden and it’s an amazing firm. So you have about four weeks to close the round and you still need a second fund to follow. Luckily we had our pipeline lined up, our existing investors we’re doubling up and-
Scott: It’s a great, strong signal to-
Lars: Yeah. But we made sure that was the case before we went in. Like, “Are you doubling down on us?” And everybody said yes. During the process you’re going to get due diligence, calls or you have to make references and they will also do background checks on you. And will do blind due diligence checks and The Valley is a small place. If you’ve done bad things, it’ll bubble up. Then the due diligence, which is an extremely expensive process, because you’re paying two law firms. So part of the negotiating the deal, then a term sheet is like … It’s not really about the valuation. Because those terms are pretty much preset. But there’s also things like, “Look, we’re going to cap” … Typically say you’re going to pay the expenses. Which translates to the [inaudible] and so-
Scott: You have to pay the investors legal fees?
Lars: That’s right.
Scott: And one other point on the term sheet, one thing I do think is you can move, especially a multiple term sheets, you can usually get them up a little bit on valuation and to make it palatable to them, to actually accept more capital, which then keeps their ownership position the same. But you’ve basically sold a little less of the company. Does that make sense?
Lars: Yes.
Scott: Because you’re right. You said this earlier, VCs like to deploy capital. That’s part of the business. Now in the seed market that’s a little different, because they have more formulaic [inaudible]. But like at the margin, you can negotiate a little bit and agree to take an extra $500000, which is probably what you want anyway. Because going back to your earlier point, don’t raise too little. There’s tons of companies that get the product released and they’re just starting to get some traction and they’re starting to run out of money. And so that extra little, “Hey I really want to work with you. You gave me an $8 million valuation, what do you think about making that nine? And I’ll take a two and a half million instead of 2 million” or something like that. And it makes everything work for everybody.
Lars: We did exactly that because there was more money on the table and when there’s money on the table, you take it. And so we did exactly that and you need to have a plan. You need to tell investors, “Here’s what I’m going to do with the money.”
Scott: Yep, and that’s super important too. Because again, we’re going back to like, they’re looking at the milestones and knowing they’ve done this like a hundred times, the good ones. And so they’re going to be like, “You need to raise a series A in 18 months. And you need to be doing a couple million dollars in revenue or something like that to get that series A.”
Lars: That’s right, you walk. Like in our case it was two dudes. You walk into that room and of course, your product looks shiny, your deck is great, you’re on top of your messaging and your numbers and everything looks great. And the customers who the VCs call on, [inaudible], which in our case they all did, they loved the product. But we all know things change. There’s a lot of change in the market. So the question is, will these two guys be able to deliver on the milestones so they can raise an A? That’s really what people care about.
Scott: That’s all that matters. Because the way venture capitalists think, is they get their ownership position in you, with their investment and they really need someone else’s money to come in the next round to power the company. They can’t just fund a company all the way through. They need that other person to come in.
Lars: That’s right. Yep. Keep going back to what a great firm Encore Capital is.
Scott: This is like a commercial for them. It’s amazing.
Lars: Hey, I can only recommend them.
Scott: That’s awesome.
Lars: Yeah, run the process and it’s amazing what pops up when you have … We had some angels who then all of a sudden, think they have worked in the funds. You have to deal with all of that, because also the term sheet expires once you accept and you sign it. There’s a finite period where you can complete the due diligence and it’s four weeks and we had our ducks in a row, you know that. Our balance sheet, everything was pristine-
Scott: Legal docs, everything-
Lars: Everything was there. They’re like well organized and have it … But it’s still there, “Hey, we saw you used Upwork. Can you send us an excel sheet of all the contractors you use on Opera, right? Yeah. It’s like that was an unknown.
Scott: Was that because of IP or was it about IP?
Lars: That’s right. Yeah, and so luckily having worked in enterprise software, we have ironclad agreements with everybody. It was still a fast seed round, but some other attorneys working on that and then you have the money in the bank when everything is clear and even there you have deadlines. So you need to file with the State of Delaware and there’s a wire cut off and everything. So there’s so many things like that can go wrong. We literally had checklists.
Scott: I think we actually just put up a couple of really awesome fundraising and M&A Due Diligence Checklist. So Google Kruze Consulting check funding checklist, M&A Checklist. But that stuff is critical, because you do forget a couple of things and the law firms actually, that’s their job is not to forget that stuff. So they’ll bring it up.
Lars: Yes. But you need to stay on top of it as the founder and the entrepreneur. Always ask ‘why?’ Well, it standard, why is it standard?
Scott: Yeah. They really need to [crosstalk].
Lars: This is not standard. So you need to ask. That’s how you do it. I think in summary is find your niche. Then you need to run a process. Find your niche, prepare a story, make sure the story works right and have supporters lined up in terms of customers, everything.
Scott: Even before that though, you knew the general area you’re going to go. You didn’t like power pointed out and have the immediate solution. You build something that got you into the market, that then allowed you to learn what you need to be built. I think that’s a huge … Because sometimes people are like, “I don’t have. I don’t know exactly what I’m going to do, so I’m just not going to start.” You actually kind of have to burn the boats, start with something credible and then you’ll find your way.
Lars: Yes, that’s right. Yeah. And we brought in revenue to the table. That was almost in hindsight, I don’t want to say it was a mistake, because you should charge for what you provide to customers. But then you have the set of investors who’ve started looking at this as a metrics-driven business. Well, are you going to hit your milestones next month? I was like, “I don’t know and I don’t care.” So they looked at it almost like a series B company and we just said, “Look, if you look at it this way, then you’re the wrong investment for us.”
Scott: I was going to say, you’re probably just talking to people a little too early for where they really were.
Lars: Well that company was a seed firm and it surprised us and we just, “Look, we don’t have time to waste.” You have to be confident enough that you say, “This is not a fit. We’re walking out of here. Thank you very much.” And the only way you can do that is if you have a big funnel of the other investors you can talk to, which takes us back to the process. You have to run the process. If you do not run a process, you either don’t raise money or you’re really lucky.
Scott: I think the process is everything, because otherwise you just have leakage everywhere and the good VCs who give you a term sheet early on or are about to give you a term sheet, don’t want things to drag on because that just means you’re getting your shit together or you don’t like them or you’re shopping the term sheet. It’s a really important signal that you mean business, you want to work with them and they’re going to sign that term sheet because, the person who gives you that term sheet and that partnership, has really gone back and spent a lot of credibility on you. To lose really sucks for that person.
Lars: Yes. They want you to win. They’re your best friends now. And then the money’s in the bank and it doesn’t stop there. So now there’s a few other things you need to do, an announcement. You need to go out there because now all you’re doing is … You’re doing two things. You’re building a business and you’re preparing for your next round. Then obviously, your investors have a network of people, but it’s like help you with messaging. It’s like if you … Do we know our product well? Yes, of course. But we’ve fall in love with it, so we need an outside person who helps you with messaging and PR and marketing. For PR, we used Magna [inaudible], a friend of ours, she’s amazing. She works at Box, Facebook and she helped us with the launch, the PR launch, everything. You need good photography. Otherwise, the Press is going to take some randomly [inaudible] and if I can recommend one to you, my wife, you took [crosstalk] policy. She’s done pictures for lots of founders and so you get a high quality, high res image.
Scott: What’s her URL?
Lars: youtookcamp.com but [crosstalk].
Scott: We’ll put it in there. There’s one of those things and we probably need them to tie this up because I let you go. We’re at 50 minutes now. This is really good. So I didn’t want you to stop. But there’s another thing, we’re shooting another podcasts, PR, the release, how to tell your story now [inaudible] funded and then the first board meeting. First board meeting is deserves it’s own podcast. Because people always mess that up.
Lars: I totally agree.
Scott: So Lars, thank you so much. Any parting words for the audience?
Lars: Well, I would say if you are raising a seed round and after listening to this podcast you have questions you can find me on LinkedIn, it’ll ask you for my email. It’s lawrence@intermix.io and we’re happy to share our experience and give you advice, look at your pitch tech and all of that. And then when you need a firm to do your finances, they should go to Kruze Consulting.
Scott: Thank you very much. I thought you were going to say when you need someone to help you with your Redshift.
Lars: Well that too, but you know that already.
Scott: But thank you for the shout out.
Lars: You need clean finances if you want to-
Scott: You really actually gave me a really good compliment, which I passed along Vanessa, which was, I think you said something like, “I didn’t get a single question on my financials” and that was like music to our ears. That was the ultimate compliment.
Lars: Because we paid attention to it too. It’s important for us, but-
Scott: We’re paying attention always for every company, not every managed teams is paying attention. And it was literally one of the nicest things anyone could ever say to us. So thank you for that.
Lars: You’re aware every 10th of the month our books are closed. It’s clean, pristine, no questions asked. That’s how we do it.
Scott: All right.
Lars: All right man. Thanks you.
Scott: Good job Lars at intermix.ao audio check out intermixed for help with the Redshift. And it’s like I said, I see the post, I know who you guys are working with is pretty awesome.
Lars: All right, thanks Scott. Thanks.
Scott: Hope you enjoyed that episode of Founders and Friends. Podcast. Quick shout out to Brex. The first startup credit card. Brexit is our sponsor and really appreciate their support. Brex has no personal guarantee for founders. That’s a really big deal. It integrates really nicely, a Quickbooks great rewards that are startups centric. It’s a really nice little tool and we are seeing it all across the crews, a portfolio of clients. So check it out. And again, if you go through the signup flow and typing cruise, you get a discount. So hopefully you’ll check out Brex. Thanks again for the support on the podcast. Guys. Take care

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