Paul: Welcome to another episode of The App Guy Podcast. I am your host, this is Paul Kemp. The show goes around the world and we interview the best experts that we can find, CEOs, founders running their own companies. Now, I'm often asked a lot about the funding side. There's a lot of challenges for startups and for anyone that's really involved in this disruptive marketplace, so I've got today a great guest. I'm gonna read you a quote from his website - I definitely recommend that you go and check it out, it's venturefirst.com, and there'll be full show notes on theappguy.co at episode 437. So let me just read this out, it's a message from the CEO and it says: "Innovation is the wild card that drives positive change in our society, economy and day-to-day lives. We are currently experiencing a new paradigm in economic expansion that is closely tied to disruptive entrepreneurs and their investors. At Venture First, we strive to facilitate this ecosystem by guiding companies through the minefield of challenges, while facilitating better communication and analysis for their investors." This is a quote from the CEO, John Shumate, and he is here as a guest on The App Guy Podcast, so John, welcome to The App Guy Podcast!
John: Thanks so much, I'm thrilled to be here, and looking forward to talking to you.
Paul: Help us to understand what you do first. What is Venture First and how is it helping startup founders/entrepreneurs?
John: Sure, so we really try to focus on, as you said, working with early stage entrepreneurs and working with investors into those groups. We do a few things. First, on the venture side, we've developed a really good relationship with angel investors and with venture capital groups, because we do a lot of their portfolio valuation. We value their company, we value their options, all that sort of stuff, so we already have a great relationship with those groups. Then on the entrepreneur side, we get them ready to fundraise, typically. You know, different entrepreneurs know different things, but we will help them with things like building their financial model, thinking about their growth plan, thinking about what sort of deal terms they should look for, trying to connect them with the right investors and make sure that they craft the right deal, and that they don't get completely screwed over on terms, those sorts of things. We also do some M&A activity as well, helping companies buy other companies, or helping these entrepreneurs, once they've been successful, sell their companies. So those are the big buckets.
Paul: Okay John, there's a lot to cover, and we're talking to the right audience, because these guys are always asking me about funding, about angel investors, getting warm instructions, but let's start first with the M&A, because it's a good indicator of economic activity. I'm wondering, are you seeing a rise in your M&A activity, or a slowdown? Tell us about what's happening in the M&A space.
John: I think overall there's been an uptick recently in M&A activity. I think there is a concern that there could be potential headwinds in the markets, and there could be a decrease in activity over the rest of 2016, though I'll tell you, for the most part, most of those statistics typically affect later-stage deals. I still believe that a good, early-stage deal, that's going to be sold to the right acquirer - which is typically a strategic buyer, not a financial buyer - I don't think any of those headwinds typically apply. If you are a disruptive company and your technology is changing the way people think about a particular industry or vertical, and somebody wants to buy you, to either eliminate you as a competitor or hopefully add you on to build something more synergistic, there's still going to have interest now, and there's still going to be a strong valuation place on it. So I don't think that should be a big concern for an entrepreneur right now.
Paul: Also, I was asking with the view that many of the listeners here do leave corporate jobs, the safety net of a nice salary, to go in and do their own startup, and often we try to predict whether we're in a bubble or not, and M&A does seem to sometimes give us a tip-off that we are. Do you feel like we are in an inflated environment, or do you feel like it's sustainable for the long term?
John: Well, it depends. I think there are different tiers. Typically, when you listen to CNBC or one of these stations that talk about whether we're in a bubble, they're typically talking about the stock market, public equity markets. I think there is, given economic conditions, probably some arguments that it's a tad inflated at the moment. Entrepreneurs, like most of the people listening to this podcast, are probably people that are wondering more about funding, or other deal activity, and their valuations in the early stage space. There's been a lot of talk about whether that's a bubble or not, and I bifurcate that a bit. I think if you look at the unicorns out there, the ubers of the world, who are driving these crazy valuations, I think it's pretty clear that some of those big boys are in a bubble. There is a certain hysteria that's chasing those deals, and it's not even necessarily a rational pricing event that's occurring, and people are just rushing to try to get to that IPO and get that initial pop that typically happens - it didn't happen on Facebook, but on most of them you typically get that initial pop, and that's what everyone's clamoring for. But I don't think, at least from a fundamental perspective, that that is a bubble that affects sort of the rest of us, that that affects your average early-stage company, average-sized early-stage company that has a nice growth trajectory. Now, I will tell you, to caveat that, I do think that the venture capital markets have a little bit of a trend where the limited partners - the investors in those funds - are starting to demand a little bit more accountability and showing some profits, instead of just continuing to build revenue and not show profits. So I do think there will be a little bit more scrutiny on valuations for the rest of the companies. There might be a little bit of a downtick, or a little bit of a normalization of that. But at the end of the day, if you've built an app and you're looking for an exit, and you're really doing a great job in disrupting things, I don't think it's gonna be a big driver, unless you're one of the unicorns.
Paul: Right, okay... Hopefully we've got someone who's running a unicorn listening to this, you never know; or potential unicorns. So let's talk about valuations. Actually, more appropriately, getting warm introductions to angels and VCs. A lot of people come with an idea, they have a business plan, they've got their pitch deck - how do you help get them warm introductions and help them with their pitch?
John: First of all, I think the best way into a VC or an angel investor is a warm intro. And that doesn't have to be me, you might be friends with somebody who's had a successful app that's been funded and had a successful event. Having them introduce you to their investor, they're obviously going to take a lot more interest in that. Or having another co-investor introduce you. Anytime you can get an introduction, it just carries a lot more weight. I had lunch with a VC today, and I was asking about how they get their deal flow. She was pretty honest, she said "Frankly, we barely look at anything that people send us over e-mail or on the company website, because we think so much of it is junk. But if somebody that we know introduces it to us, we take a look a hundred percent of the times." So I'm not saying don't ping those funds, because that's not always true, but if you can find a warm intro, do it. One of the things that we can do if you don't already have warm intros is we can search our contacts, search our database, try to think of who are the right investors, who are the right funds for you, and then we can make some intros to those. And those don't have to be exclusive, those can supplement other intros or other contacts that you have.
Paul: That's really helpful. Actually, I get approached quite a lot with seeking those warm introductions, and just recently there's a guy going over to San Francisco to try and raise a round. What type of money do you typically work with? If someone's listening to this and they have a particular target in mind, is there a certain size that you only work with? Tell us about that.
John: Frankly, we're doing a 30-million-dollar capital raise right now for a larger healthcare company. It's a pretty decent amount of bandwidth. I would think that if you're doing more than that, you're gonna be working with a more traditional investment banker in London or New York. Our sweet spot is working with anything from seed stage up to about series B. That's a pretty wide range. That's anything typically in US terms from a half million, up to about a five-million-dollar raise, our sweet spot.
Paul: Fantastic. And what preparation can someone do to help get on your radar, for example. What do they need to have in their resources? Give us some sense of what an entrepreneur needs to have to be prepared to have these talks with you to raise a half a million to a million dollars?
John: Well, to talk to us, really they need more of the business model and the technology expertise, and hopefully a good idea of how to make the pieces work. A lot of times we'll come in and help them put together their materials. We'll help them think through a very detailed financial model, which investors really like to see. And even if a group like us doesn't help, what an entrepreneur should really think about is not just saying, "Well, the market is this size, and if I get two percent of that market, it's gonna be a billion dollars", or whatever it is. What they need to think about is what does it take for me to get a sale? Is that click-throughs, is that introductions, how long is that sales cycle and what does it cost me? In that way, you can figure out how much capital you need to drive that sales line, and then typically, in most technology companies, the salary line is the big line. You have a bunch of hopefully intelligent, somewhat expensive developers on there, and you need to think of what your team really needs to look like. This is something that we can give some advice on, but you really need to figure this out. What does your development team look like, what does your sales team look like, what does the whole crew look like and when do you need to bring those people on, and what do they cost? Then, obviously, you need to think of your technology cost and all the rent, and other soft costs. Then we typically help build out a monthly financial model that shows how much cash you're gonna need to get where you need to go. And whenever erase, we always try to advocate raising for about 18 months worth of activity. If you raise more than 18 months, you're typically deluding yourself too much because by 18 months hopefully you've created enough value to increase the valuation a good amount. But if you get too much less than that in runway, you're always raising and you don't have enough time to run your business. So if you budget conservatively that you're going to take six months to do your raise, 18 months will make sure that you'll have a full year that you can just focus on your app or your business, and making sure that you're blocking and tackling, and getting the job done.
Paul: Some really golden nuggets in there, John, wonderful. Actually, a lot of the people listening are entrepreneurs that are building apps, that have apps. Do you have any easy way of valuing an app? I know it's a big question, but often it's quite difficult to value apps, given that we don't know where sometimes the revenue is coming from, but do you have any guide for us on how to value an app?
John: Yes, it's really difficult and it does vary from app to app. At the end of the day, these apps are typically going to be valued on some multiple of revenue. Most of the exits, at the end of the day, are going to be to some strategic who's going to roll you up into their cost structure, so I would probably focus less on these types of businesses, on the bottom line, or [unintelligible 00:15:15] or the cash flow; I'd really focus on the revenue line. At that point, depending on how fast-growing your app is and how exciting it is, you can be three to six times revenue, or sometimes the targets that you can be looking at. Something that doesn't have as much pop might be down in the two to three times revenue range. Now, there are some apps that you can really think about it more as a multiple of users, or heads, or views, or those sorts of things, but that really depends upon the industry that it's focusing on, it depends on the user group, and what I would recommend doing in those situations is look at the valuations of other similar apps in that space, and try to get an estimate of how many users that they have, and you can do the math to come up with similar multiples.
Paul: Actually, John, many entrepreneurs often - and it has been the case in the past - give away their app for free and go for users, go for growth... Are you seeing a lot of investors still go for that model where "Don't worry about the revenue, don't worry about the profit, just focus on growth and retention" - is that still the case, or is that changing?
John: I think that's true to a point. I think investors are fine with that initially, for the first couple of years, but I do think they want to start showing some revenue traction even in the mid-stage, and most importantly, I think they want to understand, at least mentally, what the path is to revenue. So if you have a freemium model where you say, "Look, we're gonna give this away to most people, but here's where our up-sells are gonna be, and by year three we're really going to be generating some revenue, and by year four it will start taking off" - I think that's great. If your story is, "This is a free app, there's no premium option, and we're gonna garner this number of users and by the third year in we're going to be an obvious acquisition target for this half dozen companies" - that's another story. But I don't think you want to have the story that just says "Hey, we're just gonna be free forever. There's not target/exit opportunity that we're looking for here, and no path to revenue." You need to spend some time thinking about that.
Paul: John, there's two more things we need to do before we say goodbye. One is that we often find that many people listening do leave corporate jobs, they're attracted to the startup world. You worked with a lot of entrepreneurs. You are a CEO of your own company yourself, and I wondered if you could try and give us some sense of what a lifestyle is like as an entrepreneur, as a CEO of your own destiny, and if you could try to figure out the types of people that are attracted to this kind of lifestyle. Does this make sense?
John: Yes, absolutely. Well, it's definitely different. I know that it can seem like a more risk-averse environment to be in a corporate job that might have a larger salary. However, I'd always point out in that situation that you're beholding to someone else and you never know when they might be acquired and your position might be eliminated, or they might not need you anymore, you're at the whimsy of what they're gonna do with your position. That said, there's a lot of things that are attractive about that, and it's very stable. I think what you'll find with people that do well in early stage environment is - I don't want to say they're risk-seeking, but they're definitely more risk-neutral. It doesn't bother them to see something different every day, it doesn't bother them that sometimes their cash position is going to be high, and sometimes they're going to be sweating whether they're gonna make payroll, and I tell you, that'll test your nerves very quickly, no matter who you are. But it's very interesting, I've seen people who have left large corporate environments and done very well in the early stage space. I've seen people who lost their jobs in the corporate environment and tried their hand at this and were very good at this. Then there's others who simply can't handle the nerves of it, and you do have to be Cool Hand Luke to a certain extent. There is absolutely higher reward in going this route, but there's higher risk. So if you can stay calm when everyone's freaking out, it's a good place for you.
Paul: I have to say, John, that I do have some empathy and feel about the stress that meeting payroll is. I actually did run a company before where I ended up putting payroll on my own credit card.
John: I've done it before. I haven't done that for a while, but early on I've done that before, I understand.
Paul: Yes, it's really interesting to hear you talk about that. Well, the final thing then is: in your role, do you have any particular resources or any online tools that we could be using to really help us out? What helps you out in your day-to-day role as a CEO of Venture First?
John: Sure, I can tell you... We were talking about valuations and what other deals look like, and I know a lot of times entrepreneurs are very interested in terms of a larger competitor's deal, or how that might affect them, but it's hard to get information on those private deals if it's not a public company, so there's a resource that I really like venturedeal.com. It's 25 dollars a month on the subscription, and what they do is they scrape the SEC filings in the United States for early stage companies, so you can look, by company or by industry, or by VC, and search deals that have been done, and a lot of times you can see some of the terms from those deals, and the investors who have invested in them. Which is really nice, when you say "Hey, I know companies A, B and C recently did a round with some large groups. I wonder if those groups would be interested in me." So you can go look and find the exact groups, how much they invested, what terms sometimes, and it will have their LinkedIn or their contact information, so it becomes a good target source for you.
Paul: That's a wonderful resource, absolutely. I'll put a link on the show notes, it's episode 437 for anyone listening, on theappguy.co
John: Yes, they fly a little bit under the radar, but they're good. I'm a big fan of a variety of different productivity tools. Our team uses Asana to track all our tasks and be organized as a team, and then we also use MixMax, which is a scheduling assistant, which instead of going back and forth about scheduling a call or a meeting, you can just send somebody your available time so they can pick it, and it's immediately on your calendar. So those are some more simple tools, but I find them very helpful.
Paul: That is wonderful. That reminds me, I did actually sign up to another service, that is artificial intelligent machine-learning to schedule your meetings.
John: I've seen an advertisement for that, and I found it very interesting. How did you like it so far?
Paul: I'm on the waitlist, which is really annoying.
John: I'm also on the waitlist. Maybe if we give them cred on your podcast here we can get off the waitlist.
Paul: Yes, I think it's x.ai. If you're listening to this, please get us on. I desperately want to try that, because it's really exciting.
John: I feel the same way.
Paul: Great. John, this has been a wonderful chat. I'll make sure that we put links to you and Venture First on the show notes, but in the meantime, how can people reach out and connect with you and your company? What's the best way of getting in touch?
John: Yes, e-mail is usually the best with me, and I'm firstname.lastname@example.org, and you can also follow me on Twitter.