Starting and Growing a Successful Business

WestCoast

Hummingbird
Gold Member
^ very interesting and I get it. It seems like you are A heavy handed angel investor meaning you put large amounts in on guys you can evaluate well. Ie: not like other angel investors who will make very small bets $25-100K into a lot of extremely high risk candidates.

The best part is you're exactly like every other successful person I know. You don't talk about things you have never done before.

I am still curious about your thought process though. If you were asked to do that.

---
Where am I going with this?

As we all know paypal's creator funded Facebook with it's first $50K right?

I can't even comprehend how he made this decision back then and it still puzzles me today.

It is certainly not luck when you're plucking out the best guys multiple times in your life so I really wonder what that "knack" is. We would all be rich.

Similarly Zuck was offered a salary of $1M by Microsoft before he even went to college, so clearly two very elite people knew something.
 

Gringuito

Woodpecker
Gold Member
WestCoast said:
As we all know paypal's creator funded Facebook with it's first $50K right?

I can't even comprehend how he made this decision back then and it still puzzles me today.

It is certainly not luck when you're plucking out the best guys multiple times in your life so I really wonder what that "knack" is. We would all be rich.

Similarly Zuck was offered a salary of $1M by Microsoft before he even went to college, so clearly two very elite people knew something.

I would like to know how he does it as well. Maybe if you meet someone like Zuckerburg in person it's just obvious. My way is much harder with having to build a business and make profits.
 

WestCoast

Hummingbird
Gold Member
^ good stuff. All makes sense based on your experience because you said your first failure was a cash flow issue and that was necessary to make your first break. So it ties with how you think about investing in general.

Thank you for all the answers.
 

Hotwheels

Crow
Gold Member
Hef said:
WestCoast said:
^ i already personally answered this question. On the "whatsapp" thread on EE.

27B messages in a day securely converted. Wwt posted a hint as well but I gave up on the thread a while ago and will no longer give more information on the deal/technology and or valuation.

I will, answer the last part though. No there is no cussing that is big media bullshit. It is more like poker and passive aggressiveness. It is "intense" but not yelling, cussing, blackmailing etc. that is for children and the 99%.

---

Anyway, I hope gringuito can provide more color on how he evaluates people, hence my little set trap sales force question but that's again explaining the "knack" which is god awfully difficult to do.

--

Edit: I find it appropriate that I just hit 3,000 posts and personally owned myself by giving long winded responses to a guy who has 6 posts....I am ashamed of myself right now lol.fucking mobile! Roosh please find a way to put post history on mobile I will pay you for it!

Good night guys!

That thread is so long. I'm loathe to read it. But thanks for pointing it out.

The above and the 35 questions post is telling.

You don't want to work for it, but rather have it spoon fed to you like the vast majority out there.

And, like the vast majority, it's unlikely you will take action even if given every last bit of information on a platter.

If you can't even take the time to read a thread why would anyone want to take the time to help you?
 

Hef

Pigeon
Gringuito said:
Let's get back on topic. Abnormal, if you rewrite a list of more focused questions I'd be happy to answer.

Hef said:
What do you know about how tech startups at various levels or progress are valued by angel investors or VCs?

I'm an angel investor so I can't speak about how VCs do it. I really like what WestCoast said about value is important not valuation. When I'm valuing a company I look at it as an investment. What that means is that I'm considering how much money will I tie up for how long with what kind of return and at what risk. For example, say I have to invest $5M into a company and the possible exit is 4 years away. I look at the comparable companies in the market and any recent M&A activity. I look at the total market size and how much of it they want to grab. I really look hard at the management team. Have they raised money before and sold a company before. I like to ask them for references and at least one person they had to fire. By talking to someone they let go you get a more honest feeling for who they are. I don't believe what a fired employee says, it's more about the temperament of the CEO doing the firing.

I take all that into consideration and I determine the risk of losing my money or it being stuck in the company for much longer than I would like. I use this to back into what kind of return I need to get from the $5M to justify the investment. From that I get what percentage of the company I need to get that return.

This is an overly simplified case just to explain the process. In reality there are normally existing investors by the time the company gets to me and there are other angels as well. We all jockey for position and for our best interests. It's a fun game.

Hef said:
What goes on in the room during the negotiations? Are people from both sides friendly or are they cussing at each other?

As WestCoast said it's formal and a bit tense but never openly angry. You both have your group of lawyers and accountants in a large conference room. Sometimes I sit there thinking about how much money I'm spending each minute while all the lawyers argue about some minute wording of an obscure section of the agreement. It's often really fun. Most business owners are great people to be around and know how to use humor to diffuse situations.

Thank you for answering my questions.

What you've said above is quite similar to what other investors say: look hard at the management team, have they raised money before and sold a company before, high exit probability, etc.

Makes total sense but what I see are first time entrepreneurs/founders with no experience raising money or selling a company are getting funded left & right. From what I've read, Zuck got a 500k seed for FB and I'm even seeing seed rounds in the millions (I'm guessing these higher figures are for startups with a solid mgmt team that have experience you mentioned above).

I am in the same boat as Zuck: no experience raising money or selling a company. I am in the process of raising money and would like to know how the other side thinks; what their process is, so I can prepare myself going into these meetings.

A lot of what I've heard so far do make sense - that there is value in the specific things mentioned: management team, market size, market position, etc. For example, a startup with a founder that has no experience: $500k seed, a startup with an experience mgmt team: $5million. I've also heard that startups in Silicon Valley get higher valuations than in other areas: $6-10 million valuations vs $4-6 million or lower in other areas.

WestCoast's "knack" question is good and I think it even applies to business owners/company founders/entrepreneurs who are looking for funding. Being able to go into a funding meeting with investors knowing how to hack the investor's "knack" I think is quite valuable.
 

Hef

Pigeon
Gringuito said:
Hef said:
As for evaluating newhires/people, I think it's very hard to tell from an interview, or even three. I'm a firm believer of trial periods (1-3 months). I want to see what happens when the rubber meets the road.

This is true, you'll never know how good someone is for your company until after they are working. Depending on your company size and if the person is a protected class, letting a person go after their trail period can be expensive.

For sales people it's important that they bring clients with them. In my markets the sales cycle is a bit long so a trial period is less effective. You can look at the sales pipeline reports all day but closing is what matters.

Good point on letting employees go if they don't perform up to par.

I'm currently hiring right now and I set things up so they are independent contractors to start. So, one month contract would set up the first trial period. If they pass that, then second contract would be for 3 months then 1 year contract if they pass. Expected performance is outlined on the contract so if they don't perform, then they're in breach of contract.

After 1 year, I plan to continue with contracts but give them company ownership if they fully finish each 1 year contract. This way it's a rolling set of vesting periods. Instead of a one time 4 year period for all the marbles, every year they'll get something like 1/5 of that. This way, if they leave after 4 years, they've only vested 1 year of equity. I'm thinking this prevents staff from leaving right after the vesting. Kinda like golden handcuffs.

What are your thoughts on this setup?


In my markets the sales cycle is a bit long
Sounds like the enterprise software market.
 

Hef

Pigeon
I was reading Peter Thiel's wikipedia page and it says that he invested $500,000 for 10.2% of Facebook. I get the $500k - but 10.2%? This tells me that they're crunching numbers/using a formula. Otherwise, it would just be 10%. Thoughts?

An MD for a $100 million tech fund at the now defunct Bear Stearns described his investing style to me this way: that he was at a party and he was just walking around trying out the different hors d'oeuvres. $500k here, $5 mil there...same as throwing darts.
 

Hef

Pigeon
Hotwheels said:
Hef said:
WestCoast said:
^ i already personally answered this question. On the "whatsapp" thread on EE.

27B messages in a day securely converted. Wwt posted a hint as well but I gave up on the thread a while ago and will no longer give more information on the deal/technology and or valuation.

I will, answer the last part though. No there is no cussing that is big media bullshit. It is more like poker and passive aggressiveness. It is "intense" but not yelling, cussing, blackmailing etc. that is for children and the 99%.

---

Anyway, I hope gringuito can provide more color on how he evaluates people, hence my little set trap sales force question but that's again explaining the "knack" which is god awfully difficult to do.

--

Edit: I find it appropriate that I just hit 3,000 posts and personally owned myself by giving long winded responses to a guy who has 6 posts....I am ashamed of myself right now lol.fucking mobile! Roosh please find a way to put post history on mobile I will pay you for it!

Good night guys!

That thread is so long. I'm loathe to read it. But thanks for pointing it out.

The above and the 35 questions post is telling.

You don't want to work for it, but rather have it spoon fed to you like the vast majority out there.

And, like the vast majority, it's unlikely you will take action even if given every last bit of information on a platter.

If you can't even take the time to read a thread why would anyone want to take the time to help you?

I just flipped thru Everything Else and found that thread on the 3rd page. It has 5 pages. It's like making someone search for a needle in a haystack.

I do think I could have responded better by simply asking for the link to the specific post.

It is however an interesting thread and I'll probably read it in its entirety at some point.
 
Gringuito said:
I'm an angel investor so I can't speak about how VCs do it. I really like what WestCoast said about value is important not valuation. When I'm valuing a company I look at it as an investment. What that means is that I'm considering how much money will I tie up for how long with what kind of return and at what risk. For example, say I have to invest $5M into a company and the possible exit is 4 years away. I look at the comparable companies in the market and any recent M&A activity. I look at the total market size and how much of it they want to grab.

- Wow, for a "start up", I think of $5mm as a successful Series A round. (like, maybe $5mm to $15mm). I typically think of angel investing as passing the hat for $100k to $250k size checks, with most of the due diligence based on trust. This is especially so because there usually isn't anything that you can base a valuation on (unless you want to get into a protracted game of "he said / she said").

- No way in hell I'd invest $5mm as a minority investor. 51%+ or discussions would stop. (At this point, I'd rather round up more capital than put $5mm into a minority position).

Of course, I understand that $5mm is just an example. But, in reality to stroke a personal check of that size without taking a majority position...serious balls.

Again, I will never understand tech. Crazy business. The gold rush mentality of making absolutely zero for three years with a 5% chance of going gang busters just blows me away.
 

Gringuito

Woodpecker
Gold Member
anonymous123 said:
- Wow, for a "start up", I think of $5mm as a successful Series A round. (like, maybe $5mm to $15mm). I typically think of angel investing as passing the hat for $100k to $250k size checks, with most of the due diligence based on trust. This is especially so because there usually isn't anything that you can base a valuation on (unless you want to get into a protracted game of "he said / she said").

The $5M was just an example but it brings up couple a good points. First, investors are looking long-term. I'm not thinking about the first round of money they are asking for. I'm thinking about all the money they need until the exit. Don't expect to get all this money given to you at once. And there may be milestones that you're required to meet. When I was thinking about the $5M it was all the rounds put together from all the investors until exit.

Second, there are different types of angels. Everyone is trying to minimize risk in their own way. Some will do many small investments spread around with less due diligence. Others do fewer deals but with more scrutiny. Other angels are looking for provide experience and contacts not just money.

anonymous123 said:
- No way in hell I'd invest $5mm as a minority investor. 51%+ or discussions would stop. (At this point, I'd rather round up more capital than put $5mm into a minority position).

I couldn't agree more. I'm in the fewer deals better quality camp. I also reduce my risk by maintaining control where I can. Calling myself an angel may have been a misnomer because I don't always invest like that. Sometimes we start a discussion about investing and I end up with control of the company. Remember controlling interest isn't always the same as % ownership. You can create different types of stock to suit your needs.
 

jariel

Hummingbird
Gold Member
A big thank you to Gringuito for this thread.

A lot of guys don't know, all the game he's giving you in this thread, most sucessful guys won't share it, yet they like to call themselves "mentors" because it strokes their ego. These "mentors" will have lunch with you, respond to your e-mails, etc. but never really do anything that could possibly help you get to where you want to be.

So with that being said, again I say thanks to him for taking the time to share his knowledge and perspective for anyone who wants it -- I especially appreciate it because I'm at this stage of my life right now, and the information is valuable.
 
True that % ownership and degree of control are separate. But, they are highly correlated and control costs more. If an equity investment requires $5mm, I'd rather pay more for control or skip equity and structure as debt. (but, not in tech...I think I'd rather walk if I couldn't take control).
 

Gringuito

Woodpecker
Gold Member
anonymous123 said:
True that % ownership and degree of control are separate. But, they are highly correlated and control costs more. If an equity investment requires $5mm, I'd rather pay more for control or skip equity and structure as debt. (but, not in tech...I think I'd rather walk if I couldn't take control).

We're in agreement but how would you suggest structuring $5M as just debt? Assume the company is small with negative cash flow and an existing line of credit from receivables. I've seen more of a debt & equity mixture. I encourage you to give your perspective. I'm just one person with just my experiences. My way certainly isn't the only way and most likely isn't the best way. It's fun because there's always something new to learn.

I've been trying to give the 30,000 foot view without getting into the details to limit confusion. I've skipped debt as financing but it's really important. In addition, many companies that I see have existing debt and stock structures that have to be fixed to move forward. I haven't talked about how best to structure your company for sale later on (C vs S vs LLC, keeping it clean, basis step-down, agreements for key employees).

One big area is scalability. I don't know how may times I'm pitched an idea from an existing company that wants to grow. They give a presentation about doubling the size of this group, tripling the size of the sales team etc. They don't add in the management overhead needed for these new hires. They underestimate how long it will take to get them up to speed and how much disruption to the existing workforce training will take. They don't know how ready the existing employees are to take on management roles. Some of the smaller companies need to learn about EEOC rules as you get larger. Evaluating how a company can really scale up is a big part of determining a good vs bad investment.
 
First, although the $5mm number is an example, the order of the magnitude of the investment actually is important. $5mm without a majority stake implies a $10mm+ valuation. To get to these numbers, it better have positive cash flow. (Again, unless in tech...but, I leave this to the crazy bay area community to figure out why some of these companies pull the valuations that the do!).

To try to answer your question, if we assume we are looking at a company that needs a $5mm to $10mm infusion (per our previous examples), then the first and most important step for me is to look at use of proceeds. Second is growth. Unless there is some kind of blowout opportunity (rare), and it isn't a majority position, then as an investor you can get to the same place with debt. In particular, if you see a good opportunity that looks like there is a solid 25%+ revenue growth for the next several years, but no chance of an IPO anytime soon, then debt I think is the best vehicle to make sure you hit payback.

I'd probably start with the following:
- $100k for legal fees, etc. up front
- 5% upfront fee (really just reduces net proceeds available to company)
- 5yr term
- 12% coupon (paid quarterly)
- 5% warrants / equity
- Critical to have a good termination value schedule (meaning, if they payoff early that you still get everything you were hoping for and potentially a little more)

Then, get ready to get into a fight over the warrants/equity. You probably lose this, so you put in a 5% to 10% backend success fee in lieu of equity.

Of course, I'm putting this out there in a vacuum, but there are three key take-aways: 1) unlike a minority investor, you force distributions with the use of the coupon, 2) hedge your position to hit payback earlier, 3) if there is no huge IPO event or other big deal...then you are setup to hit a 18% - 22% return with the above with a much higher likelihood than a minority investor (with the minority investor having higher hopes but not a great chance of actually having a good outcome).

And, can't say this enough...I don't think this works in tech. You need positive cash flow with "block and tackle" growth opportunities. Pixie dust and hoping to be "in the right place at the right time" won't work with this type of deal.
 
@Gringuito

I have to say this is truly biblical knowledge. I don't want to keep giving you a hard on with compliments but thank you for your time. As a young hustler and budding entrepreneur I appreciate your insight.

I understand you stick to a specific area as far as investing goes. It seems you have considerable skill and experience in the Tech world(which is the sweet spot right now) However, how often do you use your gut instinct whether it's about hiring a sales director or investing in a startup or are more calculating. I understand you are more conservative now as you've already achieved considerable success but I'd like to get an idea of your approach when you were swinging for the fences with your first large company.

@Anon

Praise for your insights as well. I'd like to direct the same question at you if it is appropriate as I do not know about your experiences.
 

paninaro

Pelican
Hef said:
I'm currently hiring right now and I set things up so they are independent contractors to start. So, one month contract would set up the first trial period. If they pass that, then second contract would be for 3 months then 1 year contract if they pass. Expected performance is outlined on the contract so if they don't perform, then they're in breach of contract.

After 1 year, I plan to continue with contracts but give them company ownership if they fully finish each 1 year contract.

This is a good setup for you, but not so great for the prospective employee. Depending on the field and job market, it may be difficult to get star players this way -- if the same star player can go to another company down the road and get a salaried position right away.

Depending on the jurisdiction you're in, you can usually fire an employee without any cause in the first X months they've worked there -- typically 3-6 months. So you could still take someone on as salaried and then just fire them 2 months in if it's not working out, with no explanation nor severance needed.
 

JayD

Woodpecker
Thanks for making this thread Gringuito. I've been reading your posts and others and there are certain terms that I don't fully comprehend. Are there any websites or books for required reading?

As someone who aspires to be a business owner and financially dependent in the future would you recommend working under small businesses to learn the flow or just start a business and learn as you go?
 

fortysix

Woodpecker
Gold Member
JayD said:
Thanks for making this thread Gringuito. I've been reading your posts and others and there are certain terms that I don't fully comprehend. Are there any websites or books for required reading?

As someone who aspires to be a business owner and financially dependent in the future would you recommend working under small businesses to learn the flow or just start a business and learn as you go?

Hey --

Just wanted to really recommend the E-Myth by Michael E. Gerber.

http://www.amazon.com/E-Myth-Revisi...-1&keywords=emyth+revisited+by+michael+gerber

Helped me with the mentality as well as the technicalities of starting a small business.
 

DVY

Ostrich
Gold Member
@Anonymous123- Thanks for the great writeup. I am guessing you work for some sort of mezzanine fund. Whats your rationale for the 5% up-front fee?
 
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