How Venture Capital Works with Tom McMurray Retired Partner from Sequoia Capital | Ep. 76 | Business Podcast
Summary
Tom McMurray is a retired venture capitalist from Sequoia Capital, angel investor and philanthropist.
Tom lays out how venture capital works, advice for entrepreneurs who are looking to raise money, and shares some great Silicon Valley stories from when he and his partners from Sequoia funded some of the largest companies in the world like Apple, Cisco, Yahoo and Google.
This is rare interview with Tom and a must listen for any entrepreneur with a startup or growing company looking to raise money.
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Brandon:
Hello, friends. Welcome to the show. Today we have an incredible conversation with Tom McMurray, a retired partner from Sequoia Capital, one of the top three venture capital firms in the entire world. Tom’s an angel, investor, philanthropist and my best friend. This episode is packed with H Pts for entrepreneurs who are looking to raise money, grow their company.
And Tom shares some really cool stories from his early days at Sequoia.
Like when him and his partners jumped into his partner’s station wagon, drove over, saw two guys who were building a phone book for the Internet. I won’t ruin who that is, but you know that brand and how.
Then they moved into their conference room, stole all of their chairs, and he and his partners had to kick him out.
Tell him to go get an office.
The rest is history and a whole bunch of other really cool stories about how these companies that we all know started in a spare bedroom, a trailer, a conference room from just an idea.
You’re gonna love this episode. I’m not gonna even waste any more time. Let’s get to it.
Welcome to build the business success secrets the only podcast that provides straight talk for entrepreneurs.
Whether you’re an entrepreneur, starting with an idea or growing your business, this show is for you. We’ll teach you how to build a strong mindset, powerful body and profitable business so you can achieve success. And here’s your host, Brandon. See white.
Tom:
Oh, by the way, I really figured out the world of venture capital. Oh, my God, this is so crazy.
I just have to tell you about it in your audience. But it’s just unfair.
I would say it’s a It’s a little bit like those freaking game stoppers.
I was like, Oh, my God, if you could do this, you’re gonna crush everybody in the business.
Brandon:
Well, you see?
Tom:
See how much the CEO of Chile made on Gamestop Know how much?
Brandon:
2.9 million billion.
Tom:
Two point nine billion?
Brandon:
Yeah, I was going to say I think you mean more.
Tom:
I saw a guy that made off of, like, $57,000.
Brandon:
He did.
Tom:
He made 49 million.
Tom:
Yeah, on game stock.
Tom:
Yeah, I I told I asked the vet, um that I asked you to get me on the Reddit Forum so I could figure out what’s going on so I can get in on it.
Tom:
Highly risky.
Tom:
Well, the guys look, I would put 100 k and they’re back at the first week in January.
Tom:
Like your earbuds Better.
Tom:
Okay, that’s what I was wondering.
Tom:
You got too much echo on that ceiling without panels.
Brandon:
Yeah, your back when you drink it, P T.
Tom:
Yeah, So, yeah, the But that the current CEO of Chewy or the original founder of Chewy Original Founder.
Brandon:
Oh, because he got on the Gamestop board, which sort of started everything.
Tom:
Yes.
Tom:
Yeah.
Brandon:
And then the Robin Hood traders who were backed by Sequoia and and recent Horowitz, uh, got intimidated by the Wall Street guys and shut down the traits trying to help the shorts not be punished so much.
Brandon:
I think Robin Hood is going to go out of business because of that.
Tom:
I think that was a terrible move.
Tom:
I mean, I got scared.
Brandon:
I understood.
Tom:
Jesus.
Brandon:
We’ve got all sorts of sound effects going on.
Brandon:
I didn’t I didn’t know unless you had sound effects.
Brandon:
I got a whole, uh, road castor pro.
Tom:
Really?
Tom:
Yeah.
Tom:
Yeah, it’s real.
Brandon:
It’s road road road.
Tom:
I don’t know if I I got a road.
Brandon:
You have a road, Mike for your camera.
Tom:
I got a road appointed Mike over here to that is the most incredible mike I’ve ever used.
Tom:
So I had my shotgun, uh, road mike on my camera, but I think I’m coming in off the audio on how to change that.
Brandon:
I leave it with what?
Tom:
You have the reason that that shotgun mike is going to, uh, go up over the thing.
Brandon:
So I already started recording because my podcasts are all about this conversation, so there’s no starter.
Tom:
Starter Stop.
Tom:
Uh, excellent on there.
Tom:
So I think for our audience Well, I want to get to why you think venture capital is unfair.
Brandon:
Not that you didn’t know that, Like, 40 years ago when you started, But, um, how did you get started?
Tom:
Because I think, uh, as you know, most people have this mystery venture capital sort of this mystery.
Tom:
That’s a secret society or whatever is of how it all works.
Tom:
But yeah, 1981.
Tom:
I was I worked for a small all PhD company in Seattle that came out of Boeing, and we solve the world’s most difficult problems under contract from the from usually the Defense Department and the Department of Energy.
Tom:
And anyway, we decided to start making windmills.
Tom:
And, um, we bought a license start manufacturing, and I got involved in it in terms of controlling the windmill.
Tom:
So I built the system that turned them on and turned them off and manage the tower output.
Tom:
But I had a background in fluid mechanics.
Tom:
So I got to give the pitch to the investors, um, about why they should invest.
Tom:
And I met this couple, uh, who managed someone else’s money.
Tom:
And they said, Yeah, we’d love to invest.
Brandon:
We spent six months a year in San Francisco in six months a year in the Bahamas, and I just decided that sounds like the perfect kind of job for me.
Brandon:
And so it took me six years from that date to get into venture business.
Brandon:
But every decision I made was was about getting there in terms of what I chose, and I did, because I knew I wanted to get on the finance side of technology, and I just, you know, I volunteered for venture funds.
Brandon:
I joined a bunch of startups.
Brandon:
I I probably still have the notes I wrote after that meeting with this couple.
Brandon:
I just thought it was a lifestyle that just and you know me.
Brandon:
I still love the Bahamas, So but one step backward, just so I obviously have the background, but you are a dean of students at Duke.
Brandon:
Before you came to Seattle for that start up, right?
Brandon:
No, no, this was straight out of school.
Brandon:
Out of school?
Brandon:
Yeah.
Brandon:
I went to Seattle and I worked on a submarine Russian submarines, torpedoes.
Brandon:
Then I got the wind energy business, and I ended up spend a lot of time on Wall Street, uh, pitching the investment groups to raise funds to cover the cost.
Brandon:
And they were incredible tax incentives back then, particularly in the state of California.
Brandon:
So I end up buying a gray suit, and then I used to go to Water Street and pitched the V.
Brandon:
C.
Brandon:
I mean, the bankers.
Brandon:
And when they had a technical question, I was technical enough to answer it.
Brandon:
So So this is after you got your PhD?
Brandon:
Yeah.
Brandon:
Yeah.
Tom:
So you make your So do you remember the couple’s name?
Tom:
I don’t But I have the paper somewhere in my office that I wrote on a little flip pad, I said, This is the best balance for me.
Brandon:
It’s super technical.
Brandon:
It’s, uh, lifestyle.
Brandon:
It’s, uh, working with super smart people.
Brandon:
It’s, uh, working, you know, with the construction.
Brandon:
It was everything I loved.
Brandon:
It was such a just sound like a great job.
Brandon:
So So how’d you get to San Francisco from Seattle?
Tom:
I was working for a startup company out of Minneapolis that was building a very high speed computer.
Brandon:
And to get the speed up, they actually immerse the circuit boards in liquid nitrogen.
Brandon:
And there was a conference in Reno.
Tom:
Every year.
Brandon:
We’re all the people who ran the biggest computer programs in the world showed up.
Brandon:
I used to go, and I met this guy named Steve Blank, who was a serial entrepreneur.
Brandon:
And, uh, he hired me to come work for his company Ardent computer in, uh, Sunnyvale in, uh, I guess, uh, 1986.
Brandon:
So I went to work there and learned about start business.
Brandon:
He taught me everything I know about that, and I was one of the techies that traveled around the world helping them sell boxes.
Brandon:
So that’s how I got San Francisco had that startup turnout.
Tom:
Uh, we, um it floundered for a long time just because it’s very competitive market.
Brandon:
We had a big Japanese investor, Caboto, who makes farm equipment who thought they wanted to get and the computer business and they they funded.
Brandon:
The company eventually bought it.
Brandon:
But by that time, I’d already left to join another, uh, startup called Key Computer, which was spun out of Lawrence Livermore Labs.
Brandon:
It was funded by, uh, Merrill Pickard in Mayfield.
Brandon:
And, uh, and I’ve done work for both of those firms before, while I was at are reviewing deals for him.
Brandon:
So you go to this company.
Brandon:
How long do you stay there?
Brandon:
And now you’re in the valley, though you’re in Silicon Valley at this time living in Palo Alto and and going to work.
Brandon:
Uh, we were there for a year.
Brandon:
Then we got acquired by Amdahl, which was the IBM clone mainframe maker.
Brandon:
Really super company.
Brandon:
And I lasted about six months.
Tom:
They got recruited by Sequoia to join the firm.
Brandon:
Well, how did that happen?
Brandon:
Because a lot of people I don’t understand how you get recruited for any venture firm, much less Sequoia.
Brandon:
They had a recruiter and, um, that they hired to look for a new partner and a new associate.
Brandon:
They had hired an associate every year, and I was the fourth associate in the last one they hired for 10 years.
Brandon:
And so the first was Mike Moritz and Doug Leoni that Mark Stevens.
Brandon:
And then they hired me, and they used the same recruit every year.
Brandon:
And his secretary had done a quick stint at Key Computer, and, uh, she suggested that he interviewed me as a possible uh huh associate for Sequoia.
Brandon:
So that’s how I got in the door.
Brandon:
And then the interview process took six months before they decided.
Brandon:
What was your first interview with Don Valentine?
Tom:
Or was that with somebody else?
Brandon:
The first interview was with Pierre Lemon.
Brandon:
I didn’t see Don Tilt toward the end, and that was after the recruiter interviewed me.
Brandon:
But I do remember when I reviewed my resume with sitting at dons, God rest his soul little table, he said, You know, you really are a selfish man, and I was sort of taken back by it and he said No, no, that’s a good thing in our business.
Tom:
What do you think he saw in your resume that he gleamed?
Tom:
That I think I was a quick study.
Tom:
And, uh, I think one of my real skills, by being an A systems engineer is being able to pattern recognition to take a lot of data in and put all the pieces together, um, and and come up with a with a hypothesis or a thesis for investing or or, in the case of my graduate work, how to solve a problem that was never solved before.
Brandon:
So the training was really good.
Brandon:
I’ve worked for Steve Blank had been in academics.
Brandon:
I had a lot of broad technical training and I had sort of smidgen of business exposure, and he was happy.
Brandon:
I didn’t have any more like it would’ve been a liability if I’d had an M B.
Brandon:
A.
Brandon:
I think in that, in this case, because they look for someone really technical to sort out some of their investment themes.
Brandon:
So was it.
Brandon:
So it’s fair to say you really weren’t interviewing you were having conversations with multiple partners and associates over six months or How did that go?
Brandon:
I interviewed.
Tom:
I interviewed everybody, some of them twice.
Brandon:
So the associates and all the partners there were five partners.
Brandon:
Yeah, uh, there was no easy entry into that firm you like?
Brandon:
I said they would.
Brandon:
They would think about it for a month and then call you back and say, Hey, we, like, talk to you again.
Brandon:
It was so that one is that that was they had five partners because Sequoia was still relatively compared to what they are today.
Brandon:
Small right back then.
Tom:
Yeah.
Brandon:
People only did one thing back then.
Brandon:
That was they raised capital.
Brandon:
They had four or five partners and staff, and all you did was find a deal.
Brandon:
Invest in working.
Brandon:
Now, now it’s a It’s a fully integrate, vertically integrated business, which I think is the real, and it’s changing rapidly in the U.
Brandon:
S.
Brandon:
And that’s something that talk about today.
Tom:
So, yeah, just five guys.
Brandon:
There was 12345 And, um, that was it.
Brandon:
Five total people that includes.
Brandon:
So that’s Don Pierre, Mike, Doug and Steve.
Tom:
No, no, It was Gordon Russell, Tom Stevenson, Gordon Gordon Russell, Tom Stevenson, Pierre LeMond, Don Valentine and there was another partner.
Brandon:
His name is David.
Brandon:
I forgot his last name, but he was a venture partner.
Brandon:
So they with all the senior guys.
Brandon:
And then I did interview with the associates, and I said, How do you determine where they’re successful if you work here?
Brandon:
Because I had no idea what they say.
Brandon:
Um, make money.
Brandon:
And it says it’ll take you five years to find out if you’re any good at it.
Tom:
You gotta go the full cycle from investing to either liquidity or failure to really know whether you can, uh, find deals, bring him in diligence.
Brandon:
Close, um, work, um, and exit them.
Brandon:
You know, you had to do all five steps to become a partner, and that was the So you got the job?
Brandon:
Yeah.
Brandon:
And how long were you an associate before you became a partner?
Brandon:
Three years.
Brandon:
They were racing Sequoia, Capital six.
Brandon:
And I became a partner along with Doug, Mike and Mark.
Brandon:
So all four associates moved up, uh, to partner status.
Brandon:
And did any partners leave in Sequoia Six.
Brandon:
Uh, Gordon, Pierre and Don, we’re not managing partners.
Brandon:
They got a big piece of the carry because we had to pay off the franchise fee, but they didn’t want the liability of working with us because they had done Cisco in 65 it all sort of got to where they felt really comfortable, what with what they could do next and didn’t feel much need for money.
Brandon:
So just the four of us and Tom Stevenson, who had worked at Fidelity for 20 years, was the fifth partner and it was our baby.
Tom:
So, um, we raised just 100 million, um, and went to work.
Brandon:
So let’s talk about yeah, I know you have some good stories about Yahoo and a bunch of other stuff, but can we talk about how venture capital really works?
Tom:
Because I think that, um And you taught me this, what, 22 years ago?
Brandon:
But, um, how it how it actually functions?
Brandon:
Because there’s this.
Brandon:
Entrepreneurs see venture capitalists as people who just have this checkbook, right?
Brandon:
And that’s the quote unquote allure because you can get rich.
Tom:
The the truth is, not all companies match venture capital and venture capital onto itself, actually does have a boss.
Brandon:
So can you talk about I know you went through the fundraising process in Sequoia.
Brandon:
Six.
Brandon:
How that really how it actually works?
Brandon:
There’s Yeah, well, the business is very simple.
Brandon:
You you There’s five steps to a successful investment and $100 million fund.
Brandon:
You might have 20 investments, and, um so you need You need five of those to be successful and the other 15 can all fail.
Brandon:
But you can still make the returns and make your limited partners the money they want to make and then be able to raise another fund and, you know, come back for it again.
Brandon:
But there’s five.
Brandon:
There’s five simple thing.
Brandon:
Excuse me.
Brandon:
You have to be able to raise money.
Tom:
You got to be able to create a deal flow and get into the best deals that are happening in your segment.
Tom:
And there’s only about 10 or 20 real deals done in the US that become a multibillion dollar players, so you have to really be able to see as many deals as you could.
Tom:
The third is you’ve got to be able to do the diligence and decide whether to invest or to walk from it.
Tom:
And that’s another set of skills.
Tom:
The fourth one is, um, managing CEO, helping higher fire strategy.
Tom:
Help them raise addition around.
Tom:
So you’ve got to get them.
Tom:
You got to build the company out, and that’s a You do play a role in that.
Brandon:
It’s very specialist, but you do.
Brandon:
And then the fifth is exit.
Brandon:
Whether it’s an, uh, I, P.
Brandon:
O or an acquisition, you gotta do all five of those things.
Brandon:
Well, to be a full partner in the firm.
Brandon:
It’s not like people get specialist like, Hey, only due diligence that that you might our associate for that or I only do exits.
Brandon:
I mean, everybody has to do all five.
Brandon:
You’ve got to be a to really have a strong firm, but you go to Let’s step back, just one.
Brandon:
I wanna unpack it a little bit.
Brandon:
You step.
Brandon:
You go to, uh, endowments and retirement funds, and they allocate a portion of their investment portfolio to venture capital and a bunch of other stuff.
Brandon:
Typically a.
Brandon:
We never did pension funds because they have set of regulations about public disclosure.
Brandon:
So it’s principally university endowments and foundations that you work and they have much more leeway and, um so they will typically allocate 5% of their endowments.
Brandon:
If you go to the Ford Foundation or Harvard or MIT, they have 5% that goes into venture.
Brandon:
And they just allocate that out, too.
Brandon:
Maybe 20 firms and, um and so they make that investment, you know, then they have a big chunk of public stocks and bonds have real estate.
Tom:
They have timber, oil and gas and all the other asset classes trying to blend out all the ups and downs of the global economy.
Tom:
Uh, doing that.
Tom:
So you try to find, uh, investors who are in for the long run who believe in what you’re saying and don’t ask a lot of questions.
Brandon:
So how do the economics for the adventure fund work Typical on $100 million fund?
Brandon:
Typically, uh, it’s called the two and 20.
Brandon:
So you take a 2% management fee every year to pay to operate the fund that pays your your salaries, your space, your travel, um, all your operating expenses for that So $100 million fund, you take $2 million a year.
Brandon:
Um, and over 10 years, you take 20 of that as fees into the partnership, which means generally got 80 to invest.
Brandon:
And if you say you make an investment of $1 million and, um, it returns 100 million, then it’s the general partners take 20%.
Brandon:
So the investors would get the 80 million and the partnership would get the 20 million, so two and 22% fee, 20% profit sharing.
Brandon:
And typically, that’s only after you’ve paid back the original capital to the investors.
Brandon:
Right.
Brandon:
So you have to get over that $100 million hurdle before you as the partnership get to participate in that 20% of the upside.
Brandon:
Yeah, We didn’t do it that way, but most firms do.
Brandon:
Now, I know you guys were special.
Brandon:
You told me about this thing.
Brandon:
Actually, if you remember, we were talking to Bob Finzi, who used to be a partner at Sprout.
Tom:
And there’s this thing called a claw back.
Brandon:
Yeah, that gets ugly, right?
Brandon:
Yep.
Brandon:
What happened?
Brandon:
Basically, if you lose, if you lose money down the road, you have to repay it.
Brandon:
And I do remember times when I wrote a million dollar check back to the limited partners for accumulated losses on the series of deals.
Brandon:
So, um, it’s a It’s a pretty fair.
Brandon:
I mean, given the returns or what they are, It’s a pretty fair structure, and you need the fees to to run the operation.
Brandon:
But I think there’s this perception that sometimes I mean, you always told me being a venture capitalist, great business, I mean the greatest job in the world, which I think, being an entrepreneurs as well.
Brandon:
Um, however, I think there’s this belief out there that venture capitalists have this free ride, and that’s actually not true.
Brandon:
If they lose money, they lose money to individually.
Brandon:
Yes, I Anytime we lost any time our limit departments lost money, I lost my share of that money because we put up, we put up our own.
Brandon:
We basically put up to 20 million.
Brandon:
We put up our part, which is I guess it’s only 1%.
Brandon:
So it wasn’t very much.
Brandon:
But yeah, I don’t I don’t think that I mean, there’s a lot of things you can worry about the venture business or any investment firm.
Tom:
But the real underlying thing is, if you’re an entrepreneur, is how do you, uh, figure out who you want to work with and what they can bring to the party and what the experience is going to be like.
Brandon:
So, um, there’s all kinds of structures for venture partnerships, but in the end, they don’t really affect the entrepreneur very much.
Tom:
No, I just wanted to demystify venture capitalists have this free ride, and they get all this money and they’ve got Falcon jets, which are nice, and all this stuff, but that they don’t have recourse.
Tom:
And the recourse is and the reason that they are so stringent and where I’m going with it is the reason the selection process is so hard is because the returns have to be incredible for them to make money.
Tom:
And to is their wallet is on the line, right?
Tom:
It’s not a free ride.
Tom:
You couldn’t get rich.
Brandon:
You can’t get rich being a partner in the firm.
Brandon:
You only get rich if you You hit home, runs singles and doubles.
Brandon:
You don’t get rich, you don’t.
Brandon:
You gotta hit hit it out of the ballpark to have a falcon jet.
Brandon:
So yeah, right.
Brandon:
And and going back what you said earlier.
Brandon:
If you make 20 investments, you need you know that some of those are going to die, and you need 5 to 1 to really hit the jackpot to pay back the fund.
Tom:
Yeah, so if you say you invested the 80 million and and and half the companies fail, then you’ve already lost 40 million.
Tom:
So that 40 million you have to turn into 200 million to double to get a tour.
Tom:
Its return on capital, which is a five x return on the actual invested capital.
Brandon:
So it’s a very pressured job.
Brandon:
Yeah.
Brandon:
I mean, it’s and it’s being lucky is such a small part of it.
Brandon:
Um, it’s more about just being in the right place at the right time and doing the work.
Brandon:
There’s no shortcuts in this business, and in many ways you have to build this, the one that I mean for many reasons.
Brandon:
I moved to Silicon Valley.
Brandon:
But it’s a real engine, and you always said that to me.
Tom:
You know, this place and other regions have tried, and they may achieve it someday, but it really takes a full engine for a company and a venture capital firm to really make real money.
Brandon:
Yeah, so?
Tom:
So those are two separate things So let’s talk about a few companies that that really didn’t need any venture capital help to become very successful.
Tom:
And the first one would be, uh, Cisco.
Tom:
They were when they started.
Tom:
They were to Stanford computer science technicians who figured out a way to make computers talk to each other.
Tom:
And they were shipping.
Brandon:
I think, the first million dollars of revenue they shipped out of their garage and they needed help, sort of growing.
Brandon:
But they had already found the product that already is basically a software company that needed a little metal box with some circuit boards to run the software.
Brandon:
But that was a really easy business, and it’s scaled up, and I think we put in two million, and I think we took off, like, four billion.
Tom:
We distributed $4 billion so that was a really big hit.
Tom:
Let’s just say that again.
Tom:
We’ve just given two million, and it was only invested capital in the company and we distributed to our limited partners four billion.
Brandon:
Yeah, and the company took off because it had no yes, yes, because it was in the right place at the right time.
Brandon:
Uh, they were They turned into a franchise company, Uh, they and for us as part of the Cisco Network.
Brandon:
Um, they we use them for diligence on any companies, and we probably invested in seven or eight networking companies that half of them Cisco bought the other half other companies bought.
Brandon:
But it was.
Brandon:
It was a slam dunk from day one because Cisco said, if they can do that, we pay 250 million for him.
Brandon:
So and as long as the company had his product, they didn’t really have to sell much.
Tom:
Didn’t even have to have a long product pipeline.
Tom:
They just had to get the first space.
Tom:
And the company is worth, you know, half a billion dollars or something.
Tom:
So in that case, right time right product with at a time when the market Yeah, yes, you could say that same way about clubhouse, that injuries and horror was just invested in north of a billion valuation.
Brandon:
If you look at that, that product does, it’s like Holy shit, this thing is going to be worth you know, 50 or 100 billion.
Brandon:
Well, let’s talk about a different one that I know you have.
Brandon:
Let’s talk about Yahoo because they were sort of the right time.
Brandon:
Right?
Brandon:
But they you guys first they were first.
Brandon:
So how’d that happen with you guys finding them and and And how did they use that capital?
Brandon:
And did they even need the capital in many cases?
Brandon:
Because I think you did a few rounds in that, right.
Tom:
Uh, so that’s that’s another uh, yeah.
Brandon:
Who is another network effect?
Brandon:
Sequoia been investor in Apple back in the early days.
Tom:
And then when Steve Jobs started, his got kicked out of Apple and started his next computer company, he came to us looking to raise money, and we passed.
Brandon:
But there was a guy who had come out of Adobe, who was going to build Microsoft office for the next box.
Brandon:
And so we thought that had a lot of promise.
Brandon:
If that box, if the if the next box took off, that’s a long story.
Brandon:
Why didn’t But it was just one person pretty much killed that company.
Brandon:
Uh, anyway, we invested, uh, next didn’t make it.
Brandon:
We lost our two million bucks.
Brandon:
And the founder of the software company said, I’m really sorry I lost your money There’s two guys over in the trailer at Stanford, and I think they’re doing the most amazing stuff I’ve ever seen.
Brandon:
You should go see him.
Brandon:
So Mike Moritz had gotten a call.
Brandon:
It also lost the two million.
Brandon:
We all jumped in his Mercedes station wagon and buzz down there.
Brandon:
And there are these two kids, David Filo and Jerry Yang.
Tom:
And, uh, we just said we’re investing.
Tom:
We didn’t even have approval from all the partners.
Tom:
But we said we’re in for 7 50 that’s how I got started.
Brandon:
And for the first year, those guys lived at school I offices.
Brandon:
They stole all the chairs out of the conference room for their meetings and out of our offices, and they drink all the coffee, and we finally threw them out and get your own place.
Brandon:
And, uh so they took off.
Brandon:
It was just, you know, they were the first.
Brandon:
There were several other players out there, but they were ahead everybody else.
Brandon:
And one of the things for entrepreneurs listening to this is at that point.
Tom:
Once you see a company taking off, you’re gonna pour gas on it with more money to help it continue and make sure it stays in the lead, right?
Tom:
Isn’t that part of the model?
Brandon:
Uh, in the in the old days around Cisco?
Brandon:
The answer was no.
Tom:
They had enough.
Tom:
They were profitable every year of their existence because that’s just the way it works.
Brandon:
In the case of Yahoo, yes, but not terribly.
Brandon:
Yes, because the Internet was driven by other other people who didn’t work for the company creating the network.
Brandon:
And we didn’t You didn’t pay them.
Brandon:
They just signed on in use Yahoo Search or the Yellow Pages or whatever, and then they, you know, Yahoo, mail, Yahoo, finance all the other pieces to it.
Brandon:
So as long as the as the users are creating the value and the mass that’s really valuable, then it’s really inexpensive.
Brandon:
Same would be for WhatsApp or Snapchat or some of these other ones.
Brandon:
What what really happens when you have to pour it on is when you’re doing those enterprise software companies where you have to, you have to front load everything, and you do have to raise money, massive amounts of money to to get the customers on board right, and you have to get up to where you get the critical mass and credibility in a stable product, too.
Brandon:
Grow the business.
Brandon:
So the best ones are the ones where the users create the value.
Brandon:
Same with yahoo.
Brandon:
The same with Facebook.
Brandon:
Um, Google.
Brandon:
They’re they all.
Brandon:
That’s why they’re all worth as much as they are and why they control so much of the planet right now.
Brandon:
Do you think that other types of businesses hardware, businesses, product, business, you know, uh, consumer product GoPro types?
Brandon:
Do you think those companies have the same potential as tech does today?
Brandon:
Or do you think that tech is really software that took media that you know, I was an investor in a company called Trans Lock and it was a micro transit company started in Raleigh, North Carolina, and I’d lost money on the Founders previous deal, and he called me up, and I think it was, uh, Salesforce invested.
Brandon:
I invested in one of the firm, and and they had a product where they had to install a box on top of every bus in the city or on a university campus, and then the software ran and told them when they shouldn’t move the buses around where they should go, and they guaranteed, like, 30 or 40% cost savings for, um, the customer.
Brandon:
So, uh, it was very successful.
Brandon:
And it was a very intensive pilot installed test train and the end they got bought two years ago by Ford at a very nice multiple for mobility because they were an underlying piece of how to manage a city bill on mass transit because they had put the work in.
Brandon:
So no, it wasn’t.
Brandon:
It wasn’t a, uh, unicorn, but But they went through all the steps, and it was a long process, and everyone made some good money.
Tom:
Um, and it was a very successful business, and they’re still there.
Tom:
Still are a foundation part of Ford’s expansion into, uh, sort of inner city transit.
Brandon:
So So they were a software hardware.
Brandon:
Do you think a just throwing this out there because I believe in general that tech given where we are in evolution or society or whatever, it’s tech and media that really are going to be where exponential growth, their space, and there’s all these other interesting things out there.
Brandon:
But if you are going to build a clothing company, for example, that’s a different model.
Brandon:
It’s very hard to scale that quickly, right?
Brandon:
It’s a different type of.
Brandon:
It’s got really different fundamentals because yeah, because you can build a clothing company, you can build a food company.
Brandon:
Um, and what you have is that ability to for design or whatever and and probably barriers to creating the product artist largest, some other businesses.
Brandon:
The problem is going to scale.
Brandon:
And the problem is always, uh, the requirement to build inventory to sell through a set of, uh, retail outlets or something particularly for clothes.
Brandon:
So most of those companies, a few of them, make it.
Brandon:
Most of them, uh, screw up the inventory and get bought.
Brandon:
Um, so it’s, I think it’s really hard business to be.
Brandon:
And unless you’ve got some revolutionary thing like Impossible foods are beyond meat are some of those that the market opportunities it’s in the hundreds of billions of dollars, and then then you get the big guys like, uh, the big chicken companies and the beef companies coming in and investing.
Brandon:
And if you produce something of value, they will just take you out for a good multiple.
Brandon:
Can you talk a little bit about the types of companies that venture capitalists look for and and what fits that model.
Brandon:
Because not every we just We talked about a little bit here, but I was like, When you look at a company, what are you looking for?
Brandon:
That fits the venture model that can give you that return.
Brandon:
Okay, it’s a good it’s a good question.
Tom:
So the first is, uh, was really if it’s a start up company is really five things, so the first one is going to address a big market.
Tom:
It’s got to be billions plus, so if the company does everything well, you know, it could be It could have hundreds of millions of dollars revenue, so it can’t just be a little niche products.
Tom:
Got a white thing like say beyond me?
Brandon:
Like I said, I don’t know what meat sales are on a global basis, but it’s probably $1500 billion a year.
Brandon:
The second is you gotta have a product that is differentiated.
Brandon:
It’s got to be competitive.
Brandon:
There can’t be anything else like it.
Brandon:
It’s got to be defensible either by electoral property or that your first and you can outrun everybody else.
Brandon:
Um, and there could be a service as well.
Brandon:
Third is just having a team in place, or at least people to have the founders to have real insight into what, um, what’s really going the marketplace and what it’s going to take to to take this product to market, to pivot if it’s not quite right, and to have the perseverance and talent to make that happen, the fourth is it just can’t take too much money.
Brandon:
Um, depending on the size of your fund.
Brandon:
Uh, if you got $100 million fund, you just can’t be.
Brandon:
And you can’t do a company that takes $400 million of capital calls.
Brandon:
You get washed out down the road because you can’t keep up.
Brandon:
I say the fifth one is the most important thing for for startup people is you need to find a partner that you really want to work with.
Brandon:
That if you’re doing a seed round, if you find a seed fund that’s going to invest in you, you can be living with your investor for 5 to 678 years, and it’s not like they go away there.
Brandon:
They’re in it.
Brandon:
So you got to like the people and feel like you can work with them.
Brandon:
And I don’t I don’t I was looking at reading some from Kleiner Perkins, and one of the younger guys went through these five things, and I think if you look back in 19 90 they were the same.
Tom:
The underlying things have not changed to make a successful business.
Tom:
No, I think, uh, you taught me people product.
Tom:
Same thing, but it was for it was people product financing team and then finance.
Tom:
Yeah, someone’s doing a biotech thing.
Brandon:
It’s going to take a billion dollars.
Brandon:
Like I said, if you’re if you’re a giant fund, maybe maybe take that on.
Brandon:
But you’re a $40 million seed fund.
Brandon:
You can’t.
Brandon:
You can’t play in that game just the later rounds or wash you out.
Brandon:
You know, you’ve talked about over the years, the people so and I know there was some stories I don’t know.
Brandon:
We want to talk about that one.
Brandon:
The guy was a criminal or whatever, but, um, what do you look for in the psyche of the arch entrepreneur, either, You know, solo founder, co founder team.
Brandon:
What are you really looking for in that person as it relates to a venture investable company?
Brandon:
Uh, well, some people just just have the drive and the passion, Uh, and just to wear with all the intelligence, to sort of be able to keep, you know, they can work down the ground to build out the product, that they can also go up 30,000 ft and see where where the company is going and where the competition is going.
Brandon:
And and as well as managed the team.
Brandon:
So it’s a broadside skills to be a great founder CEO.
Brandon:
And I would say, uh, on the technical side, I think that’s why the venture firms have moved into the talent business, too.
Tom:
Help train up their founders to be to stay a CEO and not get replaced by an operating person moved to chairman or CEO or something else.
Tom:
So you got to do all these things Well, uh, the best founders are ones who there’s two types of founders.
Tom:
Um, give you an example.
Tom:
Is the founder who has worked at, say, a semiconductor company and worked there for 10 years.
Brandon:
Train brought products to market done design work done production service and everything.
Brandon:
And in that case, this guy named Jensen, who showed up from L.
Brandon:
C Logic to Sequoia.
Brandon:
And he wanted to start a gaming company and build the chip sets.
Brandon:
And he called the company and video, and he knew everything that he need to know to build that ship and take it to market.
Brandon:
And I think he need to learn how to do was build a team around him to help in finance.
Brandon:
Uh, he didn’t do much in market because the chips are so far ahead.
Brandon:
I mean, he knew almost everything because he had spent those 10 years.
Brandon:
If you’re a technical founder and you come up with something, that’s just you’ve never worked an industry or something, you you need more help, and you’re gonna need to find a venture firm that can also help find co founding other partners or something to build out the team, that you have no skill to get the product to market.
Brandon:
So there’s different kinds of founders.
Brandon:
Clearly, someone like Jensen at NVIDIA was, you know, it took a long time for that stock to take off.
Brandon:
But you know, 20 years later, he still leads the category.
Brandon:
He’s a dominant force in gaming and, um, computing.
Brandon:
And then what would be the other type of founder who doesn’t work in industry for that long?
Brandon:
Oh, I think like like like, uh, Jerry Yang and David Filo.
Brandon:
They were just grad students at Stanford that said, Hey, man, we should just build a We should just build the Yellow Pages for the Internet and just search all these things and put all the guests if people can look them up without having to, you know, because they and it was a really simple idea.
Brandon:
But they they went through two or three CEOs, a different stages of building to help them build out because they never had any real interest and, uh, really becoming, uh, the CEO.
Brandon:
They were really enamored with the product and the technology and, um, in the marketplace what was going on because it was such a time of of innovation and change, whether it was Netscape or or all the other companies that came into that space in the in the mid nineties, before the crazy times began.
Brandon:
So you and I talked about this.
Brandon:
There was a piece.
Brandon:
I forget who wrote it from and recent Horowitz years ago about replacing founders as CEOs and should CEOs be replaced, um, at all unless they obviously lose their mind or something.
Tom:
And there’s different approaches and philosophies.
Tom:
I feel like over the years the venture business has adopted that the founders should be the CEO and drive it.
Tom:
And there’s been examples.
Tom:
Steve Jobs was one right where he got fired.
Brandon:
And clearly, you can’t just hire a CEO and bring them into Apple.
Brandon:
And you know, Apple was out of business.
Brandon:
And then there’s, you know, the guys over at Google who who took a break, and actually, Jerry, I think through some of those at Yahoo, Tim Koogle and a bunch of other guys were in there in between.
Tom:
And then Jerry came back and then ultimately, Jerry was fired by whoever.
Tom:
And then ultimately, Yahoo took a dip, got sold, and you could make an argument whether they’re successful or not.
Tom:
Um, I you know, I’m biased as a founder, so I tend to believe that founder should stay CEOs and I think Mark Zuckerberg Facebook is a good example of how to back fill yourself with an operator while still driving the vision.
Tom:
What do you think about all that?
Tom:
Oh, I I think in the old days when when it was a partnership of five guys and a bookkeeper, an accountant and some staff, we don’t really have the resources to that.
Brandon:
We never made the investment because of the fund size and the resources to build out talent, we relied on recruiters and that.
Brandon:
And as the business grew, I think we realized the founders need need to stay longer, um, and and and be trained up or back field or whatever.
Brandon:
And then that’s when, uh, like a dress and Horwitz or somebody hired up their in house recruiter there they have their training, people and stuff.
Brandon:
So when the venture firms were fully integrated, the idea was, Yeah, the founder is the blood in the vision for the company.
Brandon:
And keeping that person in the in the CEO spot is essential.
Brandon:
So we got to train them on what they don’t know and back felon with people who compliment their skill sets to build a fully here, a company that can go the distance.
Brandon:
So it was it was more just the venture business matured and understood that vertical integration, like in any industry, was essential to sustain yourself through, uh, over a long period of time.
Brandon:
Well, I think that’s a interesting insight, because I think entrepreneurs got angry in those early days that they were going to get fired and get replaced.
Brandon:
But really, as I listened to you, it was really a function of the venture firms capability to actually integrate.
Brandon:
It wasn’t that they it’s that that’s all the resources they had.
Brandon:
And I think you said so There were five of you at Sequoia with their wasn’t that you guys didn’t have a ton of resources back then and most firms didn’t.
Brandon:
In fact, right right there were.
Brandon:
There were just some recruiters you worked with, and and then when a company broke, for some reason, something broker didn’t change.
Brandon:
Um, times a killer on investing and also on companies, and we tried to fix things fast.
Brandon:
I mean, we couldn’t take six months and sort of weight, uh, and trying to fix the product or fix the team.
Brandon:
Or, you know, just see if the VP of engineering could actually deliver the product.
Brandon:
You needed.
Brandon:
You fix things fast because you’re burning your capital.
Brandon:
You are, uh, you know, you’re bearing the team’s capital.
Brandon:
And the long term, the only outcome, if you did move fast was dilution of everybody’s state founders team and investors.
Brandon:
So we just said we just that was as good as we could do.
Brandon:
And as the funds got bigger and we had more resources, they slowly built out to where, um there at least fully integrated.
Brandon:
And I don’t even think the venture firms are even close to being fully integrated today of what they’re going to be, um, in the next five or 10 years.
Brandon:
So, um yeah, it was It was just a necessity.
Brandon:
And, um, it wasn’t an insult against entrepreneurs.
Brandon:
It was merely a function of the business model and the time Time?
Brandon:
Yeah, they are.
Brandon:
The entrepreneurs still had their founders stake in the company.
Brandon:
If they got demoted and they hired a CEO, the founder, the idea was just going to be win win win.
Brandon:
It was a win for the founder.
Tom:
It was a win for the team, and it was a win for the investors.
Brandon:
It wasn’t it wasn’t he says if I can’t fix this and you can help me fix it, we gotta get someone from the outside else, my entire steak and all the team.
Brandon:
We all lock the front door through the keys in the mailbox and go home.
Brandon:
It’s over.
Brandon:
So the idea of the venture business is for to be a win win win business.
Brandon:
And that’s the only way it worked successfully.
Brandon:
And that Wind is really between the company, its customers and venture back would be its investors.
Brandon:
So the company does include the founder and the team customers got to get value.
Brandon:
Uh, you know all those threes, Gabby, Win, win win or else it doesn’t work.
Brandon:
So what do you think about other business types?
Brandon:
Meaning there’s, I believe, right.
Brandon:
The venture business depends on entrepreneurs without entrepreneurs.
Brandon:
There’s no venture business.
Tom:
So the venture industry has, um, used media and propagated the idea that if you don’t get venture capital or you get turned down, then you’re some way a subpart business citizen if that’s the way to say it.
Tom:
But that’s not really true, right?
Tom:
I mean, there’s a lot of people, and I know you, you have an interest in lifestyle businesses for people who, you know, maybe they do three million, and they throw off a million dollars a year.
Tom:
I mean, that’s That’s a good lifestyle, right?
Tom:
It’s not.
Tom:
The only way to build a business is venture capital.
Tom:
What do you What do you think?
Tom:
Well, I would say the big thing has been venture capital has changed.
Tom:
And, uh um, I think people like techstars that started these accelerators and now run on a 70 or 80.
Tom:
I’m investing more on their fronts around the world.
Tom:
I’m talking about Berlin, Paris, John Deere and company.
Brandon:
Uh, they run, uh, techstars Ron’s wanted Amazon headquarters.
Brandon:
It’s to basically bring anyone with entrepreneurial ideas, interests in some of the basic skill sets to be trained how to do it, the steps that you learn how to do it and also be vetted and tested against your product market fit.
Brandon:
So it has changed, and I think for the last, uh, since about 2000, I think Steve case from the Case Foundation in a o.
Brandon:
L.
Brandon:
It’s been another proponent.
Brandon:
I mean, it’s been a tremendous amount of global effort to engage entrepreneurs at all levels in all communities, from agriculture to finance to to food to help in education.
Brandon:
So the ecosystem is very robust these days in terms of if you have an idea, you can You can you can.
Brandon:
You can find a path forward and get a lot of support and some initial funding.
Brandon:
Um, and have your shot regardless of the Doesn’t have to be a rocket ship anymore, necessarily.
Brandon:
No, no, no, I don’t think so.
Brandon:
No one.
Brandon:
I mean, there’s, uh So just just as here’s a statistic that I looked up today before we had this call, Uh, and recent Horowitz has 325 active portfolio companies.
Brandon:
Um, today, uh, you give me an estimate of how many of those are public companies?
Brandon:
325.
Tom:
How many Republicans?
Tom:
How many out of all of that?
Tom:
So that’s 325 portfolio companies.
Tom:
Many of those republic.
Brandon:
Yeah, I’d probably say five.
Brandon:
14.
Brandon:
Okay.
Brandon:
Still low.
Brandon:
Yeah.
Brandon:
Yeah.
Brandon:
How many have been acquired by other corporations?
Brandon:
Any guess?
Brandon:
Hundreds.
Brandon:
60.
Brandon:
So that means look at the odds of, of, of, of, of the and they still have.
Brandon:
After that, the 14 9 Pos currently and 60 acquisitions.
Brandon:
They still got two and 50 companies that are still out there going away.
Tom:
No exit.
Tom:
So it’s much more likely that you’ll build something and you build a smaller company.
Brandon:
It will be acquired and scaled up by another company.
Brandon:
And and and and recent, Horowitz doesn’t just do I p o companies.
Brandon:
They’ve got 60 companies that got bought.
Brandon:
So that’s, uh, that’s actually a core part of the businesses acquisitions, because the I.
Brandon:
P.
Brandon:
O.
Brandon:
S are much more dependent on, uh, global economics and and a lot of the factors that VCs and the companies have absolutely no control over.
Brandon:
So, yeah, you can build smaller companies things and get acquired if you want, or just stay the course and build a company has a great cash flow and, you know, live the dream.
Brandon:
So here’s one a question that there’s this whole like proliferation on the Internet.
Brandon:
And there’s a movement, especially among millennials and whatever other generation, that everybody wants to be an entrepreneur, right?
Brandon:
It has this cool cachet, and, uh, it is a cool lifestyle.
Brandon:
It’s super hard, Um, and I actually find it and There’s also some people out there that say anybody can be an entrepreneur.
Brandon:
Anybody can do it now.
Tom:
Some of those people are selling products that their bias towards.
Tom:
But I personally find it insulting because I think that would be like saying to a venture capitalist, Anybody can be a V C and be successful or, you know, I could easily do that.
Tom:
I don’t think that this gets down to Can you teach?
Tom:
Entrepreneur?
Tom:
Can you?
Tom:
Can you teach entrepreneurship?
Tom:
I think is a different question.
Tom:
I think you can teach entrepreneurship, but can you teach someone to be an entrepreneur or do they just have this?
Tom:
Are they born with it, or can you teach it?
Tom:
Uh huh.
Tom:
Okay, so that that’s a complex question.
Tom:
I didn’t want to be easy, politically correct.
Tom:
I think everyone, everyone can learn entrepreneurial skills.
Tom:
And I think if you’re a line engineer at Ford Motor Company and they’re they’re going to go to all electric vehicles and 15 years, you can’t.
Tom:
You can go outside the box of what you’ve always done and suggest and design and try to educate other people in your team or your boss or the head engineering manager.
Tom:
How to do something better, Make the car, bring more value and functionality the customer for less cost.
Brandon:
So there’s a lot of layers in there.
Brandon:
If you’re going to start a stand alone company, put your life savings and make your family invest and Max out your credit cards.
Brandon:
I would say that you better have some skills.
Brandon:
Um, well, the skills are Are they in eight?
Brandon:
You gotta be.
Brandon:
You gotta be.
Brandon:
Yes.
Brandon:
Yeah, We We backed a company called Shaman Pharmaceuticals and this was a company that their products were found by going in the jungles of South America and living with the indigenous tribes and finding out the plants that they used to treat various diseases.
Brandon:
And then they were going to harvest the plants and bring them back and sell them as pharmaceuticals in the U.
Brandon:
S.
Brandon:
And that woman was amazing.
Brandon:
She maxed out like six credit cards, and she went down there, and it was the craziest idea in the world, particularly the videos of living in these straw tents.
Brandon:
But the company made it went public, got acquired later with its product pipeline, and that was a business that you had to be a real frigging engineer to do, uh, you invested.
Brandon:
Yeah.
Brandon:
So you can’t.
Brandon:
I mean, you can’t teach that, right?
Brandon:
I mean, I don’t even understand.
Brandon:
And I’m Lisa.
Tom:
That woman, she she just had a feeling.
Tom:
She said, I know how to do that.
Brandon:
I mean, it’s like that was way out there because I think she had two little kids and a husband, and we’re like, Wow, girl, you’re We were in awe, and we invested because the business was sound.
Brandon:
But it was like, Holy shit.
Brandon:
What a what a way to build a company.
Brandon:
You know, they wouldn’t tell them the what plants they’re using until they lived in the village for six weeks.
Brandon:
So Well, I gotta you know, you said something.
Brandon:
You’re like, Oh, I want to be politically correct.
Brandon:
Like is are we?
Tom:
I’m not.
Brandon:
I don’t I mean, I try to be as politically correct as possible, but by the same token, the truth is, not everybody can do every job.
Brandon:
You’re not entitled.
Tom:
I mean, right?
Tom:
Yeah, yeah.
Brandon:
Please take Tony Shoot.
Tom:
He just died recently, right?
Brandon:
He started Zappa’s right before that.
Brandon:
He did link exchange where we invested and Microsoft bought it for a quarter billion dollars in three years.
Brandon:
That guy was was bipolar cell, manic, never stopped.
Tom:
Super smart, uh, worked all day and all night and Medicaid himself.
Tom:
In the end, it caught up to him after he got fired from Amazon for being drunk at Amazon functions to the public.
Brandon:
So there’s some crazy people that are incredible.
Brandon:
Nothing.
Brandon:
But it takes that right like that.
Brandon:
That’s why it just it’s insulting me.
Brandon:
It’s super hard.
Brandon:
I mean, I think I think everybody I think we could even in government, I think even in the nonprofit world, I think teaching people how did not just do what they’re told but do what they think might make a difference is a great training to have and the level of execution by those people.
Brandon:
Uh, it does vary, and there’s clearly a bright line between who gets venture funded.
Brandon:
Who doesn’t?
Tom:
And that’s because when you get up to that level, you’re you’re playing pro ball, and you know what the attrition is from, uh, you know, junior high middle school football.
Tom:
To the pros, it’s It’s 1000 to 1 or something It’s no different than that, right?
Tom:
Yeah, and I I agree.
Tom:
I think you can teach.
Tom:
I could teach entrepreneurship skills to people, but can I teach the the 14 hour day that you got to put in and the stress of your credit card payment?
Tom:
Or I mean, that’s sort of something that you probably need to be a little bit crazy.
Tom:
Uh, well, let’s let’s go back to my other thing.
Tom:
There’s certain people that have worked in industry and done 90% of what it takes to run a startup.
Tom:
Uh, like Jensen from NVIDIA.
Tom:
You know, he’d done all the jobs he had moved out 10 years.
Tom:
He said, I want to build this next chip And the company said We’re not in the gaming business.
Brandon:
So he left.
Brandon:
He leaves and started.
Tom:
He starts a company leaving from where he took off from LSC.
Brandon:
Logic was the company.
Brandon:
Those guys, that’s a different business model is supposed to.
Brandon:
Someone just comes up and says, Hey, I’ve got a I’ve got a better way to to, uh, you know, he’s got to be some basis for your you willing to start that company.
Brandon:
You’ve got to feel like you know something someone else doesn’t know or you figured something out.
Brandon:
Um, so the market self selective, it always works out in the end, I mean, the best companies grow and get big, and the weak companies usually fade over time.
Brandon:
So so what questions?
Brandon:
Do you think an entrepreneur should ask a venture firm when they are?
Brandon:
A lot of times, entrepreneurs don’t do this.
Tom:
They go to the venture firm.
Brandon:
They pitched the venture firm.
Brandon:
They never asked the venture from questions because entrepreneurs believe that the money is the ticket to make their idea success.
Brandon:
So I think they forget that me depends on the type of entrepreneur you are.
Brandon:
Well, if I was going to come into you for venture to to make an and your adventure firm, you’re retired now.
Brandon:
But well, you actually had another venture firm which we can talk about.
Brandon:
But the the what questions should an entrepreneur ask any venture fund when they sit down with them to really interview them going?
Brandon:
I’m going back to what you said earlier, which is, or way back earlier in our conversation when you said, you know, if you go do business with a venture capitalist.
Brandon:
And you always told me that you’re getting married like they’re not going away.
Brandon:
Yeah, unless it will be an ugly divorce.
Brandon:
Yes, it doesn’t mean if it ends it.
Tom:
So So what if you were in entrepreneurs shoes?
Brandon:
Knowing what you know about venture capital, what would you suggest they ask?
Tom:
Oh, there’s probably three things that you really need to know is like I need to I sort of know what other companies like mine you’ve worked with and how you describe your working relationship.
Brandon:
How did you resolve issues with the founders and the team, and and And what were the biggest challenge?
Brandon:
You know, what were the biggest challenge that you as an investor faced in the business, similar to what I’m trying to start the second would be as who do you know in this space, Do you know and the other venture firms that invest who do you know on the exit side that likes this business?
Brandon:
I mean, you know, what’s your value added down the road?
Tom:
And the third is is, um uh, just more personality.
Tom:
Do we get along?
Tom:
You know, can we go out to eat lunch and talk about our kids.
Tom:
You know that that marriage side of it.
Brandon:
So there’s a lot of dimensions to having a strong partnership and also having a skill player on your team.
Brandon:
And you have to you need to figure that out before you don’t you don’t wanna somebody’s never you don’t want, uh, an investor.
Brandon:
It’s never done a deal anywhere near your space or at your stage.
Brandon:
Or, um, you know, it’s not solve the kind of problems that are essential.
Brandon:
Um, in this business, what’s the hardest question that you always ask an entrepreneur when you’re going to invest?
Brandon:
Because I know you have several.
Brandon:
Oh, let’s see.
Brandon:
Probably Probably the biggest one is, what do you worry about?
Brandon:
It’s just a character test.
Brandon:
It’s like, What do you worry about?
Brandon:
We worry about Saturday afternoon at four o’clock about your business, you know, what’s that persistent thing and what is it?
Brandon:
Um, is it solvable?
Brandon:
Um, is it because of you is because the industry is because of, uh, you know, you just want to, like, what do you worry about?
Tom:
But just a classic question.
Brandon:
What would, um, what would be a one.
Brandon:
Is there any one thing that you hear from a potential or a business that you might invest in?
Brandon:
That as soon as you hear it, you’re like, Okay, I don’t care.
Brandon:
I’m out.
Brandon:
Oh, if if oh, if they said we can’t, we’re not sure.
Brandon:
We I worry that we can’t make the product work there.
Brandon:
There you’re you’re dead and water.
Tom:
So I mean, part of part of of seed investing is you don’t always know whether the product is going to work when you put in your seed money.
Tom:
So he’s got to say I if the entrepreneur said, if this doesn’t work, I’ve got three other avenues we can pivot and work on to get a product acceptable to the market in which we can build a real business.
Tom:
But if it was like a crapshoot flip, you just go.
Tom:
You know, we’re not doing this.
Tom:
That’s a risk I’m unwilling to take for my investors money.
Tom:
So what are you doing now in venture capital?
Brandon:
I work for a see, uh, fun, and they focus in climate, food, education, fintech and energy.
Brandon:
Uh, and so I’m advising them on a wide range of issues.
Brandon:
about just from my my past experience in the business.
Brandon:
And then I’m involved in a climate fund, uh, that deals with public market securities and that operates on New York City.
Brandon:
So, climate, uh, focus is probably a key for mine and investing again.
Brandon:
Food, energy, education.
Brandon:
I don’t I don’t really do much in fintech.
Brandon:
Um, you think there’s money to be made in all those things because of the place we are in history on this sort of pivotal moment, so to speak, where oil starts to.
Brandon:
I mean, we’re big investors and Bob Warner and, um, that’s a big Detroit company, but they make all the transmissions for electric vehicles.
Brandon:
So sometimes it’s not investing in Tesla that we have been investors in Tesla.
Brandon:
It’s investing in some of the pioneering subsystems that will go in every electric car, no matter who builds it.
Tom:
You know, it’s I think, those have really big businesses, I think, uh, a lot of water treatment, because water is going to be in short supply.
Tom:
It needs to be managed tighter.
Tom:
It needs to just water supplies.
Tom:
In general, there’s a lot.
Tom:
There’s a lot of topics in the climate area that are.
Tom:
And I’m not talking about trying to stop ocean acidification there about technical solutions to solve problems that community, cities and governments have to solve.
Tom:
And those are your customers and you’re trying to, you know, it’s a new.
Brandon:
It’s a new, lower cost, less power intensive membrane to decide water huge.
Tom:
It would be a huge breakthrough if you could cut the power requirement by 10 to decide water in terms of energy usage, whether it’s oil and gas, solar, you know, whatever you think there’s a real movement in the world right now for this.
Tom:
I was reading an article the other day, and there’s been this whole thing that companies have to have a social responsibility component or that society doesn’t necessarily want to support him going to support them.
Tom:
You know, I think it’s got to be.
Tom:
I think it’s I think that’s the whole thing.
Brandon:
I think the social thing is the soft thing.
Tom:
I mean, let’s just go to the example so Starbucks and people go, you know, Starbucks buys a lot of coffee, you know, they actually run a major research facility in Costa Rica, and they are trying to understand the impact of climate change for coffee growers, and I think they may have, like, you know, 250,000 coffee growers around the world.
Tom:
They’re actually trying to solve the problem, to teach all them how to keep their family and small scale businesses going and not suffer the consequences of climate change.
Tom:
If in fact, they’re going to be severe.
Brandon:
So there’s a There’s a lot of, I mean, that’s that’s just that’s just good business, right?
Brandon:
That’s not that’s essence social about that, you can say clearly has a social benefit.
Brandon:
Uh, and Isar Bush has got over 500,000 suppliers, and they’re trying to teach every one of them how to grow hops and everything for half the amount of water they currently use, which again, it’s It’s a win win win, okay?
Brandon:
And I think those are the Those are the real.
Brandon:
It’s good for the people.
Brandon:
It’s good for the company, good for the planet.
Brandon:
And if it’s all good on, their investors are going to make money and everybody’s going to have a long career and that’ll help, you know everything works out.
Brandon:
So so now the social thing is just politically.
Brandon:
I mean, there are plenty of companies doing the right thing right now at global scales that are going to make the world a better place today and down the road.
Brandon:
All right, well, I appreciate you coming on.
Brandon:
I have one last question that I didn’t prepare you for, but I know you’ll be able to answer, which is three h p.
Brandon:
T s high percentage tips for entrepreneurs who are building companies from all of your years of seeing incredible success.
Brandon:
And while you’ve seen incredible success, you’ve seen some, uh uh, two bases and you’ve seen carnage.
Brandon:
So what would you give advice for entrepreneurs who are looking to start, grow and build and ultimately, maybe sell companies?
Brandon:
Uh, that’s good one, right?
Tom:
Didn’t warn me about this.
Tom:
Okay, so the first one I would do is I would if I had a product idea.
Brandon:
Uh, and I was I thought I could build it.
Brandon:
I’d probably I’d probably have a friendly cup of coffee with some early stage seed, venture person, and just say, Hey, I just don’t pick your brain.
Brandon:
I I have an idea I’m working on.
Brandon:
I’d like a little feedback.
Brandon:
I think if if I can make it go, I’d love to have you there.
Brandon:
So I think getting an outside validation or let someone else to ask you tough questions about what business you’re in and what the markets like of these deals getting funded, that would be a really good first one.
Brandon:
The second would be to Boy I I think the second would be trying to carve out how much time you can give this idea of a starting your company in the product.
Brandon:
Do I mean, are you committing a year to this?
Brandon:
You got enough money to live a year and not do anything?
Brandon:
Uh, you know, the time allocation to really be able to vet out your business to write the code of that in cases that, um so that being being prepared to go the distance if you’re going to make the if you’re gonna go the first step, you need to go the distance so that having someone to talk to that might become a partner and the third would be boy, you know, just from my experience, it’s like, uh if you have a family or a relationship or something Everyone needs to be on board.
Brandon:
You know, maybe maybe even mom and Dad.
Tom:
I don’t know, but but I think he really got to understand the the stress and the strain of working.
Tom:
I mean, when I was gonna start, we used to have staff meetings at 2 p.m. On Saturday.
Tom:
Yeah, we had 60.
Tom:
We had to.
Tom:
We had six day work weeks, 2 p.m. And and And I was actually took a 10% pay cut, so I mean, it was hard.
Tom:
I mean, I had Sundays off for my two sons.
Brandon:
That was it.
Brandon:
And it was It puts a lot of stress on that.
Brandon:
So you got to go the long run here.
Brandon:
So your family, your time and commitment and having some outsiders to help mentor you or guide you ask tough questions.
Brandon:
Those will be.
Brandon:
You’ve got to answer those three.
Brandon:
If you’re single, the third one doesn’t matter.
Brandon:
But that just is not the case for most entrepreneurs these days.
Brandon:
What do you What do you?
Brandon:
Uh, one bonus one, uh, that I want to ask you.
Tom:
You think of business plan is important.
Brandon:
I believe a you could a business plan composed of Tyne slides with very little riding on them would suffice to raise a seed round.
Brandon:
I I don’t I don’t really need any financials.
Brandon:
I mean, if if you’re investor doesn’t already know what the financials look like, then you already got a problem from day one.
Brandon:
I mean, after looking at 1000 business plans, unless it’s in the field, you know nothing about.
Brandon:
But you know what it costs to build software and hosted on AWS and everything else that the financials are for B C.
Brandon:
That that’s that’s not important.
Brandon:
We don’t believe they always ask that question.
Brandon:
Yeah, well, it’s just a character test.
Brandon:
You, you know?
Brandon:
What the hell are you doing?
Brandon:
But But if you’ve seen if you’ve seen 100 of these businesses in the last couple of years, you know exactly what the financials look like.
Brandon:
It’s just a test to see whether you you whether you have enough common sense to put a set of financials, that everything there’s nothing you know, like like your expenses never go up in your revenue doubles every year, just just more common sense yet.
Tom:
But it’s just a character test got you.
Tom:
Well, I appreciate you coming on on a Saturday, and I’m gonna have you back to talk about deal terms and how they work, because that’s a whole another element of venture capital for both the venture capitalist and the entrepreneur that most people never understood.
Brandon:
In fact, if it were, I mean, very complicated, I would say, as a young B C made lots of mistakes, all of us did just bad term sheets of bad documents.
Brandon:
It really that’s one place to get trained up.
Brandon:
I agree.
Brandon:
I mean, we we all made mistakes on that.
Brandon:
And you introduced me to Harry Glacier in the early days.
Brandon:
Who, uh, taught me the first thing he actually taught me about deal terms wasn’t about deal terms.
Brandon:
It was never run out of money.
Brandon:
And I thought that was an interesting piece of feedback that really scared the living crap out of me at the moment.
Brandon:
But, um, that is the truth.
Brandon:
So we’ll have you back talk about how term sheets work.
Brandon:
How?
Brandon:
Deal term, Uh, deal, terms, work, how, what they are and why they exist as importantly, right?
Brandon:
Not not as I got.
Brandon:
So thanks.
Brandon:
a lot, man.
Brandon:
Yep, yep.
Brandon:
Take care perfect.
Tom:
Thanks for being generous with your time and joining us for this episode of Build a Business success Secrets.
Tom:
Before we go, let me ask you a quick question.
Tom:
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Tom:
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Brandon:
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