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How to Navigate Startup Term Sheets, Valuation & Investor Expectations | Sebastian Spitzer | WT3 007
21 Plays11 months ago
"Valuation isn't just a number—it's your startup's future!" Join us for Episode 007 of What The 3, the no-nonsense podcast for emerging tech startups.
In this episode, we explore the art of startup valuation with Sebastian Spitzer, a Venture Specialist known for his strategic acumen in the venture capital landscape. Sebastian takes us through his journey from market analysis to his pivotal role at Schaeffler, where he specializes in optimizing startup valuations and structuring impactful investments.
He dives into the complexities of term sheets, how to value your company and products effectively, and strategic maneuvers that can significantly boost your startup's financial stature. Sebastian shares invaluable insights into what investors look for in valuations and how to position your startup for investment success.
Throughout the episode, Sebastian underscores the importance of understanding financial nuances, strategic planning, and mastering term sheet negotiations. He reveals his 'Startup Desert Island' essentials - five critical elements every founder should focus on to thrive in the competitive startup ecosystem. Additionally, Sebastian imparts the single most crucial piece of advice for entrepreneurs aspiring to maximize their startup's valuation in any economic climate.
This episode is packed with straightforward advice and deep dives into financial strategies that will resonate with anyone building a startup in emerging tech markets.
Recommended
Transcript
Introduction and Episode Overview
00:00:03
Speaker
Okay. Welcome to the What3 podcast, the podcast where we tell you emerging tech founders what to do. Today we have the episode on understanding the intricacies of valuing your company and products and maximizing your startup valuation at the front end.
Introducing Sebastian Spitzer
00:00:20
Speaker
We've got Sebastian Spitzer. I'm going to read a little bit of an introduction. um So Sebastian, welcome to the podcast. Thanks for being with us today. little bit of background on Sebastian. He's a venture specialist at Shafer's corporate venture capital arm. With a rich history in automotive, construction, and electronics industries, Sebastian has spearheaded multiple in-house startups, applying agile innovation and lean startup methodologies. His career highlights include creating transformation transformative business concepts leading to major internal exits, and he's deeply involved in emerging technologies such as
00:00:58
Speaker
AI, blockchain, and robotics. Notable companies include DuckDao, the Morpheus Network, and CV Labs. Beyond this corporate achievement, Sebastian is an active mentor and investor in the venture capital scene, shaping the future of tech with his forward thinking approach. Join us as we delve into Sebastian's insights on innovation and venture capital in today's tech landscape. So thank you for being here with us today. So how are you doing? Pleasure. I'm doing good. I'm doing good. Thanks. Thanks for the amazing intro. Always make me blush when people read out stuff like that. You're bored and welcome. You're bored and welcome. Well, we're certainly glad to have you here, man.
Challenges in Raising Startup Capital
00:01:39
Speaker
Yeah. Yeah. And this is, this is one of those questions where everyone gets super hyped and it's like, how do I, like everyone's always talking about raising money. They're always saying like, I need to raise my priority right now is raising every startup founder we talk to is like, yeah, if I could only raise more money.
00:01:55
Speaker
So for me, this episode is pivotal um and and genuinely something that but people want to know the general answers to. um I think we're going to let's start at the beginning is the best place to start. So like how did you get into emerging technology?
Sebastian's Career Journey
00:02:12
Speaker
Yeah, so maybe for for full context and so I started my career in marketing and then quickly ventured into the product management and innovation management. um And that was actually the infection point that now we're talking about like 13 years ago, 15 years ago ish. So I always love lean startup principles and design thinking. ah It always felt for me that that is
00:02:35
Speaker
the right approach to work on products and innovation also if you're working in a big corporate, so not only if you're a startup founder, but also if you're if you're working in an established company. um and and And that just felt like it was my world, right? So ever since I've i've always driven projects and and new product launches, like they were in-house startups, meaning you know, be be lean, be mean, ah move quick and break things. Yeah. And that just felt natural to me, and that's also how I ended up being an emerging technology. So I think the big switch came about eight, nine years ago when I was in the automotive industry.
Tech Innovations in Automotive Industry
00:03:13
Speaker
So my job there was basically building up an internal unit um that worked specifically like an entrepreneurial unit, like internal startups.
00:03:22
Speaker
And we were tasked to look into mid to long term technological enablers, right? So not like the immediate stuff, but things that were like three years out or more and actually like drive innovation in that field. And back then, that was like a wild mix of everything, which which was really fascinating because it allowed you to dive deep into and into new technologies, different verticals, and just learn a lot in a very short time. and that Namely, those were back then, like blockchain, it was 2017, so blockchain was on everyone's mind. Also, in the enterprise segments, or how how could you use it for
00:04:02
Speaker
automotive industry, how could you use it to secure supply chains and all of that. It was additive manufacturing, 3D printing also. Back then, self-driving cars was a big hot topic that was before it sort of became normal. I mean, we're still not there yet, right? So there's still some some infancy issues, some some teething problems when it comes to fully autonomous driving as Waymo and and others have shown recently. But that was also like a big top of mind thing back then, like visual computing, sensor fusion, all of that. And of course, AI before AI was cool. So mainly like visual computing in
00:04:43
Speaker
ah factory settings and manufacturing for quality inspection or also visual computing object recognition for self-driving cars. So a lot of that already was AI back then in the automotive industry. So those were exemplary fields that I looked into. And that's also why I stayed there, right? Because we had a lot of like instances where we didn't have the competences in the house. So we are also actively looking for startups and founders that could work with us as technology partners. So that one there there was ultimately what allowed me to really immerse deeply into startup ecosystems.
Exploring Blockchain in Automotive
00:05:17
Speaker
And yeah, I've stayed in those fields ever since. What was your first startup ecosystem in
00:05:24
Speaker
Either AI, I'm guessing it was blockchain. What was your first one you you got like kind of sunk into and and rabbit holed in and didn't come out a couple of years later? but Yeah, it yeah actually was blockchain. Funny enough. ah So now we're talking like 2016, 2017. And back then we were, that that there was like automotive industry, right? So we were exploring enterprise use cases, mainly like supply chain application or securing vehicle identity and repair and maintenance records and attached to a specific vehicle on the blockchain to basically create a more transparent used power market and repair market. Those were like some some some use cases we were exploring back then. ah And while after half a year of like deep diving and like really like scavenging the entire market and looking at solution providers,
00:06:16
Speaker
the The result, unfortunately, back then was it was just not enterprise ready. right The scalability was not there. The tech wasn't mature enough to really be deployed at scale. A lot has changed since since then, but basically after half a year of of deep diving into solutions, speaking with founders and looking at the market, I came back and said, like yeah, there is interesting concepts, but it doesn't feel like it's really ready yet. ah But I stayed there in my spare time. So basically just splurged more on my old dive. so which But you didn't answer the question, which one which one was it? Because I'm actually interested, because I know you for about four years.
Hype Cycles in Tech: Blockchain vs AI
00:06:51
Speaker
I'm actually curious which which chain you kind of got involved with first, because I know there's a number of chains you've been involved in, but which one was the first? Yeah, back there was Ethereum. I think like you know that was like ah ICO mania, and like ah tons of like new projects being launched in Ethereum, and like the whole market wasn't a frenzy.
00:07:10
Speaker
ah and And it's also funny to look at that, retrospectively, because there is a lot of resemblance with AI right now. It feels like 2017 all over again, baby. Oh, yeah. Yeah. and Mostly the gen AI space, it's insane. It's like, including all the rebrands of all the experts that within a year are now AI experts, right? Yeah. but but So, Sebastian, we've talked about this quite a lot, also off screen, obviously. um And coming in in 2017, as you said, the industry was completely different. You did this aside to stay.
00:07:49
Speaker
ah What was that defining moment for his allocation? I really like this. I want to do something more with this. um And then I think also at some point, like you also made that switch to kind of corporate venture capital. But there were I think a couple of defining moments where like, hey, I like this space. I want to stay here. And I want to do something more with that than just, you know, fuck around and find out.
00:08:14
Speaker
yeah Yeah, you're absolutely right. And I think um so for me, ah it it was about crypto's biggest strength, which is also its biggest weakness and that is community.
Crypto Community: Strengths and Weaknesses
00:08:26
Speaker
um So I was fascinated by how closely knit that ecosystem was and and how strong the community was, right? It's almost like tribalist. So you have these different chains and then you have like the the maxis of different chains and it's almost like it's almost like political parties, right? and plus yeah ah no you you You can't like both or you you you sort of have to decide which which side you're taking, which is a bit stupid and I think it it's softened up a little bit now. People are acknowledging the different
00:09:00
Speaker
different networks, different different infrastructures come with different advantages and disadvantages. And it's more like an open minded field right now. But still, um it's largely tribalist community driven and then hype driven, which that's that's why I'm saying it's also one of its biggest biggest weaknesses, um because some of the things that are happening um don't really help with building credibility and trust in the in the wider public space. yeah um So I think that's that's also something that the whole web3 culture and ecosystems still have to work on. It's like if you really want to have mass adoption, um there has to be some sort of like regulation. There has to be some sort of like self-control, right? If you're mostly known for scams and basically like ah flushing money down the toilet ah for and then basically like
00:09:55
Speaker
ah high-driven mean coins that literally say they have no value and utility and and and people still pump them up to like over a billion market cap. I mean, things like that, if if outsiders look at it, they're like, oh, okay, well, that seems to be like really trustworthy. let let Let me trust companies with my life savings, right? That's unfortunately not how it works. And it's interesting because I just literally like look through something that Sequoia Capital recently posted, which was like a product market fit framework. And they categorized ah new solutions and startups in three categories. Harris on Fire, right? Like Crowded Market, everyone wants it, everyone's aware of the problem.
00:10:38
Speaker
yeah The other one is like a hard, I think they call it like hard fact, which means um everyone acknowledges that there is a problem, but people have just gotten to you gotten used to live with it. So they don't really, you know, they've arranged themselves with the status quo. So you sort of like have to change habits. um And the other one is like future vision, which is like, you know, what the iPhone was back then or what, what Elon Musk did with Tesla back then before anyone was really realizing that there is a needed market. And what ah I'm saying, this is I think web three at large is still at this sort of hard fact place, right? Because yeah, we know that a lot of things in the financial system are broken, especially when you also look at data economy, there is a lot of things that could be improved.
00:11:22
Speaker
But people sort of have arranged themselves with it, right? We all are using banks, we have come to the home to acceptance with the fact that data is is basically a good that we can exchange and trade for services, like let's say Google Maps, um and we don't really need to explore how to monetize it, for example. right So there's a lot of like value promises that crypto has that are great, but it's tough to change habitual feelings and the custom usage of things. ah And if you want to do that, you have to create trust. right And then that's that's that's like what I'm saying. It's like one of the biggest biggest weaknesses of the mic it has. And I wish that that would change because it probably would for the better for everyone.
00:12:07
Speaker
Yeah, no. And the the question is when it will change and how it will change, right? Like, I think that's always like, this is the the ongoing discussion that I think we have had now in in different um different discussions with our different interviewees, I would say, everybody kind of acknowledges this point, right?
Corporate Venture Capital Insights
00:12:31
Speaker
So to that point, Sebastian, I mean, like you're now, like you have shifted heavily to a corporate venture capital. um And I think in a sense, like, you know, to term sheets, you're writing a lot about that too.
00:12:43
Speaker
ah Why did you specifically move in that direction and but what it but makes this but specific direction so interesting? And I know you've been advising companies as well in the past and I think you're still doing that. ah is that Was that part of that move that the interest kind of shifted towards more ah corporate venture or did that came from Scheffler? Where did that start and and where is that currently? Because like you're still very deep in it, right? You know, I think the the investing bug got me when I actually merged into Web3. And that was like after the the crazy bull run and of 2017, right? So it wasn't like, oh my God, I have to form a win. It might have been a little bit of that. I won't like deny that. that might have many little but than me um But hey, I stayed interested throughout the depth of the bear market. um So ah there was that.
00:13:34
Speaker
But that that's when I initially started so I just love the process of like looking at startups like really like going in doing the due diligence and like ah Speaking with founders ah Like getting getting a feel if the founder is the right person for the startup if the team is basically has what it takes to to take something to success and And I started my investment journey in Web3, right? So I helped Dachau like evaluate deals and I basically ah helped them with their scouting network and basically managed to deal flow with them. And that's that's that that was like my first touch point into venture capital um or or like investing in startups, ah both as an angel and like in a VC kind of manner.
00:14:17
Speaker
um And I built up on that. So basically what I did, and maybe this is also useful advice for anyone who's looking to venture into that field, I built up on that. I built up my network. I built the relationships and the trust within a specific vertical. And then I also like you know took some educational classes with both with Oxford, for example, there's other vendors out there as well. um And like really educated myself about venture financing, like the the the typical terms, the the things you have to know if you want to go on that field. And when we moved to the US last year, um I solidified that ah helping Schatler
00:14:59
Speaker
ah with their venture efforts so right now we're not like deploying as a purebred fund ah it's still deploying of balance sheet um but it's basically that the great thing about that is it's it's more of a strategic angle right so it basically incorporates All three options we can either partner with the startup and like work with them and do projects together We can just become a client of their solution if it's mature enough or we can invest in them Like a couple of investments that we did over the last two years when I for example age two green steel so that was like
00:15:31
Speaker
steel as one of the main components of our products. There was like a eight late stage ticket, relatively sizable. And then there was like two minority investments, for example, in like robotics and software companies at an early stage. And the great thing is, you know, it ah it allows you to really look into fields that are not that heavily discussed and in public opinion, like industrial, deep tech, robotics. It's a lot of deep tech. Humanoids exactly like like applications that are maybe not and on top of mind for the everyday user but in my humble opinion those Will create the backbone for the next industrial revolution if you look at it from from a manufacturing production standpoint
00:16:17
Speaker
that's ah
Web3 Term Sheets and Valuations
00:16:18
Speaker
That's a big one. I want to explore that one later, by the way, because that's that's a really interesting because you're talking about what industry 4.0 or maybe even 5.0 kind of like, you know, yeah you mean like Web 5.0? We had a couple of very spicy takes from our co-hosts saying that like AI is Web 3 now and Web 4 might be like AI blockchain as the infrastructure. Um, yeah, they're like, but we'll see, we'll see who's right. Right. Um, so, but to your point, like, you know, you've been working and and educating yourself. Are there like but over the last couple of years, what did you think if we if you look specifically at web three and and and blockchain, like, are there things in a term sheet that you've seen that were absolutely bonkers or were absolutely great? Um, and things you, you kind of like, you know, are very common that everybody should do. And it's crazy if you want.
00:17:10
Speaker
but Yeah, I think um the most outlandish part of most web3 term sheets is usually the valuation. like i mean true so So there are are a couple of elements that are sort of like most of the time is not even included in web3 term sheets. um So like not not a lot of, especially if it's token based, right? So maybe prick a a quick disclaimer, or just throwing some words out there. So term sheet, I don't know if anyone knows what that is, who's listening. So basically it's it's what you get to sign as a startup founder when you work with a venture capitalist. So it's basically the terms of the investment um and
00:17:55
Speaker
there is a lot of provisions usually either around the economics of the deal or the control of of the the startup later on and some potential side provisions that could be like in side letters or formulated into the term sheet. But basically it's like it's like your contract that you sign between investor and startup. And a lot of provisions, for example, hover around, like, anti-delusion rights, like the the kind of shares that you're getting, like, is it preferred shares? Is it like normal shares? What happens with the distribution and of of liquidity when you when you get into an exit, right? Like, ah and it's like the preference, for example, the preparation.
00:18:37
Speaker
um Or like how is the board assembled? What happens in the next round? Like do you have any like drag along, tag alongs, stuff like that. But I briefly had a discussion with Charlie about that earlier. So we're not gonna like go crazy into detail and all of these things. What we will do, we will actually write some blog posts about it and some LinkedIn posts later on over the next couple of weeks. And anyone who's really interested in learning more about that. please just follow and like, you know, i digest that and consume that because it just will burst the frame here to really go into the the the detailed metrics. But um when it comes to Web3, usually the Web3 term sheets for for most parts are not even that sophisticated compared to like real equity investments, right? and And reason being in sort of makes sense.
00:19:29
Speaker
especially if a token is involved.
Differences in Venture Capital Deals
00:19:31
Speaker
I mean, if if you're talking about a token-based investment, um since you have token generation events and since you have like immediate access to liquidity as soon as the token launches through ah DeFi or centralized exchanges, there is some aspects that you have to consider in a normal venture capital deal that just don't apply to a token-based startup, like example. You invest in like a pre-seed seed company, right? Like normal startup, equity-based. Which usually means that unless you can sell your shares, whatever you bought at that point, secondaries down the path, you have to wait until that company either gets sold or goes public and is traded as a stock before you can do anything with your investment. Yeah, you do that liquidity event, the paper are changed into
00:20:23
Speaker
real utility that you can then translate to whatever it is you want to use. Exactly. And with with tokens, usually that timeframe is a lot shorter because that that liquidity event, if you get an early stage, that might be five, seven, 10 years out. Now with with most token-based companies, usually the liquidity event is like one year out or two years out, which also has one of the intricacies of Web3 deals where usually you put vesting schemes and and and and cliffs on the investors and not on the founders. Well, the founders have a two, don't get me wrong, but usually in traditional venture capital, it's like ah the founders are vested, right? So they you want to secure that they don't lease their company early on, that they like stay at it for the next three to four years exactly for the reasons that we just mentioned.
00:21:10
Speaker
ah Whereas in in in in in web free usually the investors get investing right like so you basically your tokens are locked for the next two years so that you basically don't dump your investment as soon as it like goes on the market. yeah ah So that is one of the key differences ah which to your coming back to your question now. there is sometimes really outlandish and extremely weird provisions that some founders try to enforce. And luckily, um the the investment market and in Web3 also has matured quite a bit over the last couple of years. So you have a bit more experienced investors um that actually call founders out on their maps. And ah the power dynamics are a bit different, right? Because
00:21:59
Speaker
Back then, like when when you had a hyped up project similar to what was happening at GenAI right now in the in the real world, so to speak, ah the valuations that were asked for were astronomically high, like we're talking about. 30 million, 50 million or more valuations at like a seed, like pre-seed sometimes, right, without a product in the market, without any any form of real traction, ah which is absolutely ridiculous. and And people paid that price, which usually didn't end that well in the next bear market ah when the tokens finally unlocked, basically. It didn't even end well in the next bull, because by then, generally, they were already dead, right?
00:22:40
Speaker
Wow. I'm on that. I'm on that. Actually, not even that. Exactly. Even if your company survives and you've overvalued, like you you've asked for too high a valuation and you need a follow on round, you've just hamstrung yourself. yeah So let's say hype cycle, you've then got your next level of the business, which is like, okay, I've preceded or seeded at a ridiculous valuation. I've then got to go back to the well because I'm a technology business and that first round of funding is to build the thing. Now I've got to sell it and actually grow it. no one can No one's going to invest at that valuation because the amount of the company that they're getting for the value of the money that they're giving you doesn't add up. They're not going to make that deal. That's the biggest trap that I've i've seen people with value irony fall into.
00:23:31
Speaker
100%, 100%. And like, if you're a startup founder and and and and you want to stay at this for a couple of years, right?
Founder Advice on Dilution and Term Sheets
00:23:39
Speaker
yeah You should, there's two things that should matter to you. One, don't get over diluted. Don't sell away too much of your company at an early stage, because if you have to stay at it for the next five or 10 years, ah just think of the the psychological effect that it might have on you if you already have given, like let's say, 70% of your company away after year two or three. yeah how How motivated will you really be to see this through for the next 10 years? Exactly. um So that's one thing. But on the other end of the spectrum, exactly as you said, Charlie,
00:24:13
Speaker
shooting for the stars early on, well, you better make damn sure that you actually can deliver and follow on on that, because if you can't, if you ask for crazy high valuations at like, let's say a pre-seed stage, it's going to be tough to keep that momentum up potentially, meaning you might be forced to like raise a down round afterwards. And that is like, it's it's not a death blow per se, but let's just say it doesn't have the the highest appeal, right? let it It's definitely not. it tells us feel's your narrative right yeah yeah yeah It doesn't it doesn't feel good. I completely agree. um So in the interest of time, we're moving forward to advice to startup founders. This is a section where we have pre prepared and sourced community source 10 questions for our venture experts Sebastian.
00:25:00
Speaker
um well As we proceed into this next segment, I do ask that you like, subscribe, and hit that bell button. It always helps us. And as we're doing this to educate and elevate, I really appreciate it. So first question, Sebastian. Now, I know we we've transitioned very nicely into understanding term sheets. If we're going to dial this down, like for our core audience, we're really trying to give that 0 to 1 experience, that practical application. What are the most critical components, like your bare bones basics, like literally the terms to put into Google that you need to search for new founders that that often get overlooked. So, I mean, signing off like type of share preferred versus common or or any other kind of piece. Like what else that our new startup founder audience needs to understand? Like what should they be looking out for it to start their learning journey and then
00:25:56
Speaker
Are there any gotchas that ah you've seen? Yeah, I think let's let's let's break it down and make it easy. So if you're starting your journey, one, educate yourself about the type of investments like the money pools that you can tap into. Most likely you will start with family and friends and angel investors. With that being said, educate yourself about the the vehicles you can use to raise money, right? as As you said, so there is a couple of provisions and term sheets, but even one one stage above that is what are we actually using to raise money? um In general terms, ah you can you can go manage a capital route, you can go into like syndicated deals, or you can go into crowdfunding, which is like the ICO or like the pre-sales and crypto space basically. um But in general terms, if you're like at the start of your startup career at ground zero, most likely your first vehicle will be a safe or a saft.
00:26:56
Speaker
ah say if it's like a standard agreement for future equity, and the crypto equivalent for that is the same with T at the end, which is tokens instead of equity. Now what's happening in the crypto space, and you should also be aware of that as a founder, is that ah usually, well, that we've seen more and more crypto companies going into equity fundraisers as well, and then basically offering token warrants. So the purebred token sale ah just proportionally decrease decreased over the last couple of years and like investors also asked more and more for equity because it gives you a bit of a different leverage over the company because now you can ask for a board seat and you can exert control which you can't if you hold tokens because quite frankly tokens don't give you any control over the company. It's also something we will touch upon in a second. So first educate
00:27:48
Speaker
yourself about sources of money, and the different vehicles that you can use to actually obtain money. So that's number one. yeah You might want to want to explain what a warrant is, because I think that a lot of our listeners, at least I remember a but a while ago that I was looking at for the first time, and I was like, a warrant? What does that even mean? Maybe it's good to explain that as well, why it's and why sometimes the self comes with a war, so sorry, a safe comes with a warrant. Yeah, so basically what that means is you have sort of like a side provision that ah you entitle your investors to also receive tokens for their money. So at at the time of investment, they receive equity in your company, meaning they get shares. They own a part of your actual ah incorporation of your of your legal entity.
00:28:37
Speaker
um But when you do release a token down the line, they are also to they are also entitled to receive that token. And now it depends how you put it in there. Now we are going really deep into the term sheet. It could be pro rata. It could be that they have to purchase those tokens again at a specific price. So now you really have to like find the define the conditions and agreements that you put in there. but In general terms, it means it entitles your investors to any tokens you might issue in the future, based on the provisions you outlined in the term sheet. Perfect. okay And um so to Jali's point, to round that up, so once you understood which vehicle you're using,
00:29:19
Speaker
node on that, save, or like convertible nodes ah usually are sort of like they convert into shares. That's why they're called convertibles. Save kind of is that as well. It's like a promise for future equity, but ah both of those at the beginning are not equity per se. They convert into equity as soon as you have a first price round. And then price round is exactly where you distribute shares of your
Equity Compensation and Market Dynamics
00:29:43
Speaker
company. um There's different types of shares. preferred shares, normal shares basically. and um So educate yourself about what what does that mean? What are different kinds of shares? Educate yourself about um participation rights in preferred shares. Educate yourself about an option pool. I think that is especially important if you really want to grow your company because usually you have
00:30:09
Speaker
ah stock option pools for your employees, which means as you can't, you most likely can't pay your employees as well as a Google, an Apple or one of the hyperscalers can. So meaning you give lower salary, but you give them equity in the company as an additional contribution. um You should educate yourself about board rights, like board representation and like how investors can control your company and what what it means if you have an investor as part of your advisory board or like one of your company, both directors. um You should educate yourself about vesting, about dragalongs or any like additional consent rights that investors might get.
00:30:52
Speaker
Uh, and lastly, like Warren's, as we just said, educate yourself about those, how to structure them, how to use them. Um, and I think that, that covers it all. The good thing is, so what we will do, uh, promise that to Charlie, we will ride over time and like explain all of those things in more detail. There was a great resource, uh, that was published by HSBC, for example, that we can refer to that pretty much covers it all because bottom line, what you should know. There is a spectrum for all of these things. And usually there is, on one side, an extremely founder-friendly spectrum, similar to valuations. ah The higher the valuation, the more friendly, quote unquote, it is to the founder because you're giving away less of your company. And then on the other hand, there is investor-friendly provisions and and and terms.
00:31:40
Speaker
um which usually come to fruition when we have a tougher market like we had the last two years in manager capital. and That usually means that ah the power dynamics shift from founders to investors and investors can dictate, well, more harsh terms. ah But reality is, as a founder, you just have to be aware what you're negotiating about, right? If you are absolutely clueless and go into negotiation, there is a high chance that the negotiation will not end in your favor. Yeah. Yeah. I think that's, that's a very nice way of putting, it's been over a barrel. Anyone seen top fiction? That right. Yeah. Yes. Well said. So this is especially important for first time founders. It really is. And, and I think that you've just summarized that really well. Like type, like type of, type of, type of stock type equity, how the options work.
00:32:40
Speaker
I think it's interesting, you mentioned this earlier, what was the wackiest set of special provisions have you ever seen put into a term sheet? This is my own personal interest. Like I've seen one where one guy's like, I want a Nando's black card. So Nando's is like a chicken shop in the UK. You can buy these, like you have to call them and be like, I'm going to give you a hundred grand or something dumb, but they just be chicken for life. Like this is, this is something I've seen put in. What have you seen put in? Um, so ah honestly, the, the, the biggest red flags that I've seen were usually around, uh, valuations and like basically, and that, that is all now we're talking crypto, right? And like, uh, founders trying to impose.
00:33:24
Speaker
completely weird provisions about vesting schemes and exclusive rights to them versus the investors. yeah oh Like just an example, right? Like basically allowing the team to liquidate the tokens. So that was like a pure token fundraise, allowing the team to liquidate the the tokens within the first two years and the investors have vesting over five years, right? like like I'm like, okay, so what does that mean? Tell me about your own confidence in your company that you basically you want to have a provision where yeah you are allowed to sell off everything that you own within two years and I have to wait five years until I can sell. I've seen people signing that shit. that's the That's the craziest thing. Yeah, yeah, absolutely. I mean, like ah ah Bull Run, was it three years ago? Like in 2021, people signed all the kinds of things. I was like, ooh, like and' supposed to I think you and I have, so
00:34:17
Speaker
I see some stuff coming. I was like, well, maybe not fli not. It does. It does happen. No, wild. But yeah. Question two. This is the the next question from the audience, from the community. It's evaluation. How, like, again, practically, how should a startup founder approach evaluation process? with potential investors, obviously get your own legal team. But beyond that bit. Speak to David. Yeah. um Particularly in early stages, pre-revenue phases, pre-revenue numbers, like you've done your friends and family and guideline friends and family, if it's a lot of money, 10 to 20%. I mean, I usually stick to 10s, my recommendation. um and that and And also you've then got people on your side who are interested.
00:35:06
Speaker
um yeah For your pre-seed, if we were going to give like, a I mean, we've said you don't want to go into your your Series A rounds with like less than 30% of your company. but someone owns it ah If the investor has owned 70%, you're not going to be very motivated. If you're going into your Series A, I'd i'd say 60%. But this pre-seed phase, if you've done your friends and family, you're about to do your first venture capital raise piece, what would you what advice would you give? So I would definitely recommend do some research. Well, that sounds dumb, but you wouldn't believe how many founders like in the beginning of the journey just won't even bother like spending a day like looking on Google and
00:35:55
Speaker
Sometimes it's not even their fault because the VC industry is a bit you know obscure and blurry. It's a private market. So obviously not all the information is publicly available. It's not the stock market, sure. But these days, like there is a lot of people on LinkedIn, but also on other media and and and forums doing a great job of creating transparency and and giving founders the means to educate themselves. So quite frankly, If you are serious about the zero fauna, there is actually no more excuse to not spend some time and educate yourself and have some basic understanding of where the market is at. A good source, by the way, like I can throw that out there is ah Peter from Carter. He's very active from LinkedIn and basically just still on Carter.com.
00:36:40
Speaker
um No, this is it. By the way, I'm not getting paid for mentioning this, but like he he just like really puts out he puts great overviews and statistics based on the US market yeah for the European market deal room is good. They have some some very good comparables for for a European based investments. um And A couple of things that you should bear in mind when you're approaching this first is like look at comparable valuations. like See what the valuation range is for your specific round, let's say pre-seed. Usually right now we're talking about 5 to 15. I know that's a broad range, more.
00:37:20
Speaker
It more hovers around seven, seven and a half right now. So like if you really have to be like gen AI and like for founders from Ivy League elite unis with like X Google, X meta, X, whatever tax to to call for like a 15 million round. But like, let's say if you just average founder, normal founder, you usually like get into like a seven to maybe 10 million bracket or like a five to seven depending on like your unique dynamics around the company. ah Whereas if you if you're going to seed right now we're talking about somewhere around um like from
00:38:03
Speaker
10 million to maybe 25, also broad range, I know. But there is like really a lot of factors in play that that influence what you can actually ask for. But those are just some hallmark numbers. And here's the thing, those also depend on your vertical, right? So not every vertical has the same brackets and range. And that's why i I'm saying do some research, right? And I mean, ah obviously i'm i'm I'm not Wikipedia myself. So I also do research and it's part of like the job to keep informed, to stay informed about where the market is moving because the the the valuation range is also change over time, right? So as I said, right now it's an investor friendly market. So valuations tend to be a lower side. um Whereas if we go into full blown hype and bull market and stocks are flourishing again,
00:38:53
Speaker
yeah Maybe we are more on the on on the far right side of the spectrum, but you you you just have to know that and you have to keep abreast and it's also part of your duty as a founder to have a general understanding and keep updated about the market dynamics if you're raising money. you know if If you're a solopreneur, if you're bootstrapping, None of that has to matter to you. Sure. If you don't even want to raise money, power to you, kudos to you. I really have deepest respect for that. um Then you may be getting away with like not educating yourself about that. But if you intend to go the venture of capital round and raise money from outside investors, it is actually your duty to at least have a minimum degree of knowledge of what you're trying to do here. Also to protect yourself. right It's like in your own best interest ah to to have that knowledge. And I think
00:39:44
Speaker
So those those valuation ranges that I just gave, ah those are important. You brought up a very good point with dilution. So what what does that mean? um Usually at the beginning pre-seed seed, you should aim to stay under 20% dilution. So ideally when you get out of your seed, you still have 60% or more of your company. The more the better. Because at that point, usually what kicks in is then you also have to have the stock option pool for your hires. So that's usually like 10, 15% or more, depending on your specific structure of the cap table. Just to qualify that 60%. Sorry, that 60% is the founding team, right?
00:40:29
Speaker
Exactly. Not good. Exactly. 60%. Yep. One person. Or one person. Exactly. Yeah. A founding team or one person. Exactly. um So basically what I'm saying is when you reach Series A, ideally you want to shoot for still having the majority shareholdership of your company.
Challenges in University Spinouts
00:40:47
Speaker
um And that's also what VCs will look at. Just to give you an interesting example, practical example, um how a cap table can be messed up. We see that a lot in deep tech when it's about ah university spinouts. So especially European universities are notoriously bad and horrible ah at making their spinouts investable for venture capital. Like a lot of ah
00:41:16
Speaker
universities, and I'm looking towards the UK, but also Germany, ah like to retain 20, 25, 30%, or sometimes even more bra of equity in in a spinout startup. That is horrible if you want to go on the venture capital route. like It makes it really unsexy to invest in startups like that. And there is these days, there's definitely better and ways to doing it. But moral of the story is, Be aware of your dilution, manage your cap table, learn some basics about cap table management or get an advisor, get a friend, get a contact that can help you with that. Absolutely. um Learn about the state of the venture market so that you at least know
00:42:02
Speaker
if you're asking for a lot or maybe if you're asking too little, just also to protect yourself um and just learn some basic terms and terminologies to to well, to protect yourself and to make sure that you're not getting the short end of the stick. Yeah. so To add to that, I would also recommend a book called Venture Deals, especially super useful with trying to learn those terms and ah I mean, for the price of 15 quid and depends how quickly you read, a couple of days, you you will get those terms, you will, ah especially US-based, mind you, where you will understand the general terms, the terminology and and where they're they those those experts have seen people get into situations, how they've had to get them out. it's It's a phenomenal resource that completely opened my eyes to the game as well. I mean, following on from that ah question three, and this is a big one, I mean,
00:43:02
Speaker
big one, which is equity distribution. we We've we got found a founder team. i mean Our thesis here at WG3 is Hacker Hustler Hipster. That's that term coined by the Silicon Valley startup market, your your standard three-man startup team. one i mean do you go Do you go even splitsies? Who you give more equity to? How does it work? um and And how common is it for you to see an uneven split amongst startup founders?
00:43:35
Speaker
i Didn't prepare that answer so I don't have specific percentages, ah but I can remember that I that I've seen statistics on the US market ah like recently and ah Funny enough and this was surprising to me as well Usually you see uneven splits like ah uneven splits are more common than even splits actually Yeah, ah which which might make sense, right? Like if if you think about the dynamics how it usually works and so you either have some some high school friends that that do something together. there There you might see more of an an even split, ah but then other dynamics are you have like, ah let's say a technical founder who like ah researched something and like already developed something as a breakthrough thing.
00:44:22
Speaker
and Now need someone with business expertise and like like the the the CEO kind of type then you would maybe argue that the CTO or like the technical co-founder already brought in more so why would you give the same to the business guy and Vice versa it could be if a business guy ah Like myself, so i'm I'm I mean I can I can code with GPT like I can I can basically like instruct large language models to do what I want them to do ah which is a blessing for me by the way but ah and I have a fair understanding of coding and how software works and I've been leading software projects but I'm not a I'm not a software engineer right so that means if I were to found a company I would need a technical equivalent that can help me with the coding um which also by the way that is and another
00:45:08
Speaker
I think very important tip for for all founders. So if you are like me or maybe like Charlie and Thomas, I know about your software engineering skills, but if you are not a dedicated software engineer with like 10, 15 years of experience, so so you're in the same all like me. yeah you If you have a software idea, if you want to build a digital product, get a technical call for now. This is your first reality check. If you can't convince another person to join your cause and be the technical call for now,
00:45:41
Speaker
Maybe your idea is shit or you're lacking a vital skill of convincing other people, which especially if you're the business guy, that's actually really bad because you will not only have to convince that guy, you will have to convince all your customers and investors down the line. So if if you already fail at convincing your co-founder, then you might want to stop at that point and find a new idea, quite frankly. um So that's that's that's another thing. But let's just say you have a scenario where one of us um has a business idea and we already put in a lot of time researching. So we have we have the network. So we have the distribution advantage, right? we we We know our target market. We can basically immediately approach a couple of customers there. We've done our entire research over months. We know exactly how to position it, how to price it. We already have the entire business concept. And now we just need someone to build this specific product that we already completely envisioned.
00:46:36
Speaker
Then you might argue it's actually fairer if you bring on a technical co-founder that a technical co-founder might receive a bit less because that other person already went in there and did all the front loading and like already spent like months or years of his time doing this. So I think it really depends on your unique situation, but long story short, it's actually more frequent to see an uneven split than an even split. fascinating. that's That's super interesting. It's something that I've been looking into a lot recently and for and I agree. But for first time founders, if you're all starting, so it's time, right? and's It's amount of investments or economist terms. So the the cost of the opportunity foregone, the opportunity cost. like I've already put in this this this amount of six months into this project.
00:47:28
Speaker
Now I'm going to bring someone aboard to help me realize it, but that six months cost money. Cost me the opportunity of doing something else. um If you're all starting together at the same time, doing the same thing, even is what i've just I've seen the general consensus being. But as you say, whoever started first gets more. And I think that's fair. It makes a lot of sense. ah but this this ah This next question's a doozy, and we've asked pretty much every financially orientated guest, the same question. So we're, we're getting our own consensus from already the community. Um, how do you get in touch with VCs without being bloody annoying?
Networking and Building Relationships with VCs
00:48:08
Speaker
Like with, with, with being bloody annoying, but still get actually the contact, right? Because that might sort just be the case. Your, your, your essentially, well, the business bet metaphor is you're you essentially getting into bed with these people. You're going to be talking like ideally the business goes well.
00:48:24
Speaker
you'll be in like dependent on the VC funds, the time horizon in in web three is is three years, but three to five, that's a relationship, right? Like you've got to not walk up and piss them off as as a first impression. Little fun fact for trivia nine, um the average startup founder investor relationship lasts longer than the average marriage. So just keep that in mind. Oh, that's great. but At least in the US, maybe maybe the US s is a bit more trigger happy with divorces. I mean, it probably would make a lot of lawyers around here happy, but yeah, anyways, that's a different story. um No, but you're absolutely right. like um yeah Ideally, your investor is like sort of like a party mentor, advisor. and and and
00:49:14
Speaker
has your success in their best interest because they invested money in you. So it should it should be a mutual mutually beneficial relationship. um And how to find them is, well, here is where where it gets a bit weird. So if you look at social media, usually people stories and sort Right. It's like all great. It's like, you know, this, this, this amazing unicorn world. We are all living in paradise world. It's all happy. um Now, if you're living in one of the startup hotspots, um then it usually is going to networking events, immersing in the ecosystem, knowing other founders, by the way, don't
00:49:57
Speaker
Don't be a transactional asshole. like I have to say it like that. like if you're If you only go into an ecosystem when you need something from the ecosystem, ah you probably won't get far. You have to give a lot to get something back. um and For that reason, you also should connect and immerse yourself with other founders. Not only will they help you with viable lessons that they learned themselves to prevent you from maybe making the same mistakes, but they might also connect you with people as they like you.
00:50:29
Speaker
um so Splurge in the ecosystem prepared to to give something to the ecosystem and not only take from it. um So that's step number one. Step number two, if you don't live where the ecosystem is, if you're really serious about building a startup, you might want to consider. moving to an ecosystem that has a ah densely knit network of founders, investors, ah because venture capital is a relationship business. It it just is that way. like ah Yes, it is financially driven and yes, there are some analytical facts to it, but usually in early stages specifically,
00:51:09
Speaker
It's more of an art than a science and it's a lot about people. ah you You invest in founders, you invest in the founding team if you're an early stage investor. good um And the only way to really get a read on a founder or founding team is by actually interacting with them. um So that's where usually these warm intros and like these these terms that you see hover around everywhere come from. And but don't be fooled even with warm intros. It's a brutal market, right? Like the venture game is a game of probability And it's a game of outliers if if you run a found so You chance you definitely have higher chances of hearing a no than a yes if you approach an investor So that's just a reality don't be discouraged by that keep building be resilient
00:51:56
Speaker
um And ideally, if if you hear a no, maybe ask why, because maybe you get some good insights into what do you have to improve to maybe transform those into yeses. But generally what you should have avoid, there's two ways, the warm intro that we spoke about, what you should do, what we also spoke about to get those warm intros, right? um But if you're doing cold outreach, Generally, everyone would discourage you from just doing cold outreach and relying on it because your chances of getting a no are even higher than with warm intros. But if you're doing it, maybe some some some basic tips of
00:52:38
Speaker
not annoying founders with investors with the first message. um One, if you're doing it on a LinkedIn, um starting with a little bit of of of praise, good faith, yeah, that that usually might work well. you know You only have a limited amount of characters in your first LinkedIn message. So maybe don't start immediately selling shit to people with your first message. so That's a general rule of thumb in life. you if if If you approach a stranger, don't just focus on selling them their shit. like No one likes it. I mean, come on. You you don't even like that yourself, right? like So why would you do that to someone else? Another big no-no, especially on LinkedIn, is
00:53:24
Speaker
coming into the conversation with like this great, oh, you know, I love what you're doing, Synergetical, have a conversation. and it's always the same shit like you get that message wait for a day and then one day you basically get this ah text vomiting message that basically has like a full paragraph full of oh we're building this we're looking for capital it's so amazing yeah and unfortunately 80% of the time it's completely off thesis it's absolutely like at least in my case it's something that is absolutely not relevant for me
00:53:56
Speaker
ah and and I did they did no research behind the person that they've just networked towards. yeah This is a big issue ah in in this market. Thank you. that that was like I was trying to segue into exactly that. like if If you don't know the other person, at least a minimum amount of research about that person and find out what they're looking into, and that also applies for face-to-face. Another big no-no, and I actually just recently posted about that because Jenny, you want to help founders like not do that because
00:54:28
Speaker
First impressions matter, let's face it, right? It is sort of like dating. So if you completely mess up the first impression, ah you might just not get a second chance. That's the unfortunate reality. um And if you meet someone face to face in person. try to be charming like try it it's it's it's sort of like a game of seduction almost right like because you you're trying to sell something you're trying to sell your startup and you don't do that by just shoving it down people's throat hoping that they that they ah don't suffocate on it ah you you you do it by actually finding
00:55:05
Speaker
out why they might be interested in hearing more about your startup. And I think one of the first questions that you can do at networking events if you are like meeting an investor, actually ask them about their interests. Maybe even ask them a personal question, like just be a normal human being that tries to have a conversation with another human being and like not cut straight to like business and and and just be completely transactional. pain The worst thing that can happen to you, and I've had this on on a couple of occasions, is ah you So here's really the worst case scenario, right? So I'm picking like, I'm creating a story that includes all the things you should avoid. So people are talking in a network event. First, you interrupt the conversation you just burst in. Secondly, you don't even care about what the person does. You don't even ask them any question. You just immediately start vomiting. You start a pitch into their face. ah And
00:55:57
Speaker
you do a five minute monologue without any pause. And after that five minute monologue, ah you wait for a reaction. And at that point, the reaction might very well be, ah sorry, this is just not an area that is interesting, ah right? Like it's completely different vertical, wrong stage. can be a couple of reasons that disqualify your startup right from the get-go. There's nothing personal and that also follows. Don't take that personal. It's not against you as a person, but like investors have to focus on a specific vertical, stage, area, whatever. They can't invest in everything right it because you can't can't be an expert at everything. um and Then after those five minutes, when when you finally have a chance to have a dialogue, um
00:56:41
Speaker
You maybe tell them in a nice way. um Sorry, this is just not for me. Really appreciate it. Great job. Maybe you should talk to this person. Usually you try to be helpful in like. direct them to someone else that might be interested or where it might be relevant, the worst thing that it can do if that happens is you just one-up it and say like, well, but maybe I can twist it around so that it's relevant for you. is it and And that happens actually pretty frequently, right? They sort of like try to then spin a narrative around their startup that makes it appealing to you, even though you just told them it's really not relevant for me. That's bad because it's also not good use of your own time.
00:57:19
Speaker
And it might actually annoy the other person even more. So yeah, it also looks bad on that, right? Like, I mean, you're selling without data. And if you sell without data, that's one thing, but then selling it like changing your narrative, the narrative that you believe in, in order to get money, that's kind of like selling yourself out. Yeah, ah it will never even if it works in the short term, it will never work in the long term, because yeah it's not built in the relationship, right? I would totally agree. I would say it doesn't work at all because yeah you're showing zero conviction in your idea. Like it's just like, yeah, yeah. Oh no, it does this. It does what you want. Like, wait, it really doesn't only fence for hamsters. Wow. That's amazing. Like that's exactly what I wanted to start. Like series B. Wow. Amazing. Um, so to summarize, it's don't be a taker, build a karma bank ads, bring value.
00:58:14
Speaker
and gross yourself in an ecosystem if you're really serious about it and you have the capability move closer to an ecosystem so you can up your frequency of exposure to it. ah Invert and think about all the things you don't like when people are trying to sell you something and do not do those things. And stick to your guns, like you will get a lot of no's. I think one of the, there's an article I read ah recently by YC which was on average you're going to get 77 no's. before you get a yes, just to make it real, tangible. 77 nos, that's 77. If you're lucky, 15 to 20 minute meetings for a no. And to Sebastian's point, ask why. Every interaction is an opportunity to learn why.
00:59:04
Speaker
don't lose that opportunity. And, like Sebastian, there is investor relationships, or how much longer the marriage is? Do we have so we have the figures? Yeah, I mean, let let's let let's just say you're you're really going in early stage, right? So you probably stay connected with your with your own master for at least five to seven years. Now we could we could be funny and look up how long the average marriage is in the US. But it must be shorter than that. i'm I'm pretty sure like sure the last 10 years that average like was dropped steeply. so you know like ah In the interest of time, number five, we're going to we're going to talk about cap table management. So if we were going to quick fire, how should early stage startups manage their cap table, particularly when planning for multiple rounds of funding?
00:59:51
Speaker
ah Number one, get an expert, get like someone who's done this before, who has experience and who can tell you the ins and outs. Number two, don't get over diluted. I think we touched upon that already. You want to stay motivated. Number three, ah don't create any weird provisions that are out of whack because they will definitely not build well with any future investors. Keep it clean, keep it simple. And lastly, ah don't have too many investors on there. like I mean, you know people argue back and forth from that, but general rule of thumb, if you have a lot of small checks, maybe pull them as a syndicate to like just keep your cap table clean and not have like ah ah a race party going on on your cap table with like 500 people. Very nice, very nice. Okay, question six, exit strategies. What exit strategies should be considered
01:00:45
Speaker
while you're structuring your financial terms in the beginning phases of the startup. ah Are we talking crypto or ah equity? we're we're talking we're We're talking like emerging tech, so crypto and or AI. I was going to say both both I think are valuable for our listeners. Okay, so for the record, a rock pool is not a valid exit strategy. ah Shit. That was my business idea. Oh wait, sorry, exit strategy. I thought it was a business idea. but just Just want to put that out there. ah Reality is ah the absolute vast majority of companies, ex of startups exit by acquisition. So to the to the order of like 80, 90%, actually, but sorry.
01:01:30
Speaker
More than 90% Way more only like one or two percent actually actually make it to IPO because not every startup has the magnitude of doing that um And honestly if you're a first-time founder ah You should just just make up your rough mind how an exit could look like. But honestly, don't waste time reminiscing about that because ah first of all, there is no guarantee. And second, honestly, it's also not that sexy if you raise your pre-seed round to come in and say, are we going to exit the company in the next five years with this? And this is going to be the ah person acquiring us.
01:02:08
Speaker
It just really raises a lot of eyebrows when you think you already have your exit figured out before even getting your first customer.
Revenue Focus and Fundraising Strategies
01:02:15
Speaker
ah So maybe focus on creating revenue first and then worry about exit. So it's like general rule of thumb. But that being said, at least have it somewhere in the back of your mind and like have some sort of vision or acknowledgment that if you raise venture capital, investors require an exit. So you at least should understand what they are longing for to actually make an investment. listen that's That's a really salient point. Understand who you're getting into bed with also understands their investment horizon. ma Meaning how long how long has that fund been going for? Usually a fund on average five years, three years if they're web three. Averages do your research. But if they're two years into a three year cycle, likelihood is they're probably going to want to see money sooner than later. Correct.
01:03:09
Speaker
um All right, so question seven, protecting interests. How can founders protect their interest and maintain control? And what are the gotchas when negotiating with venture capitalists? In general, only raise the money that you need. Like honestly, ah don't over-raise. Like the the biggest caveat or the biggest fallacy I've seen over the last couple of years in in startup world and venture capital, People treat raising money as a goal of a startup. It's not like g literally, it's not. Your goal is to build a successful profitable business over time and you need capital to do that. So getting capital is a means to go. It's not your goal. um So don't over glamorize your closing of your round like, yeah, sure.
01:03:56
Speaker
shoot out that LinkedIn post or whatever it is that that that makes you happy and brag a little bit about it. It's a great accomplishment, but it's not the goal of your company. ah So don't see it as one and really only raise the capital that you need to get to the next stage, whatever that stage is. um So that already protects your interest because now you don't over leverage on debt because while we are talking about equity investments, think of the investment that you get as debt. you still owe the people shares and you still owe them a part of your company. It's just a different form of that really. um So the biggest, the the easiest way to protect your interest is to only give as little away as possible and only raise the money that you need. And then there's a lot of details in how to structure your cap table and your term sheets to actually protect your interest on an operational layer. But we go into that in our blocks. And the block. All right, cool. So number eight, milestones and funding.
01:04:52
Speaker
What milestones are critical so to secure before you approach investors for precede seeds? And how do these influence the terms set in the financial agreements? Like we're talking traction kind of numbers. So what I can only recommend here because we could go into so many details right now and ah the milestones really depend on the vertical you're in. So B2B SaaS has different milestones than DeepTech has different milestones than a B2C marketplace has different milestones than Web3. But generally, think of all metrics that resemble traction. That usually the number one is revenue or profitability, right? So there is specific, let's say revenue ranges that are expected, let's just say for B2B SaaS ah seed round.
01:05:40
Speaker
Usually, should be should you should be hovering somewhere around half a million to 1.5 million in ARR, annual recurring revenue. um And you also should show that you're growing constantly. So another factor is how fast does that grow? There's like this' usually like triple, triple, double, double, ah stuff like that. so Basically, you want to show that you are in a gross trajectory. um And then there's other things like capital efficiency, churn rates, ah your capital burn, yada, yada, yada. So there is a plethora of metrics that can be measured. And the actual milestones that are expected per stage really really vary by um by the actual type of startup we're talking about. So Web3, for example,
01:06:27
Speaker
It can be the the TVL, right? Like the transaction value that you see if it's like ah an infrastructure play can be the number of users, like the wallets that are connected, um things like that. So you should really educate yourself about your specific vertical and see what other companies has have achieved. And honestly, there is great content out there. So there is no excuse for you to not do that. And it's actually not taking that much out of your time to like just go down for a day and like do the research. and um to find out recently what were rounds that people got invested in, what were like the typical milestones that they reached. ah Just as an example, for Deep Tech, it's a lot about IP, defensibility, lab research, right? So it's completely different than a typical B2B SaaS play, for example. So educate yourself. There is plenty of information out there. I can only recommend Google keywords.
01:07:24
Speaker
metrics for startup fundraising, metrics per round. What's like the typical benchmark numbers for for each startup round, right? So there is a couple of of keywords that you can search for that will help you find those out rather quickly. And we'll follow up on the blog. Okay. I feel that somebody's pitching very heavily for the for the blogs that are to come. I'm hyped. Yeah. I mean, but we're going to stick that HSBC stuff on there. we're We're going to really try and put like collaborate with Sebastian to really try and create that roadmap. Yep. um So because it it it's longer than an hour conversation, right? um So nine, investor relations. this we mean We talked about this at length in the pre-call. I hope people just get this wrong. ah What strategies should founders employ to effectively manage these relationships with investors? As an investor, what do you want to see?
01:08:16
Speaker
like when when you've already awarded some some capital. I think there's two easy tips here. Again, a lot more that we can follow up on, but the two low hanging fruits are update your investors. Like you wouldn't believe how many startups actually fail on that and basically go completely radio silent and ghost their investors. Don't be one of them. It actually doesn't take that much to do a monthly update for your investors. And you should actually do that yourself to also keep track of your own progress with your team and everything. so
01:08:49
Speaker
You don't have to do an extra update, just do whatever you do to actually steer your team and steer your startup, right? And just to share that once a month. That already can make a big difference and create a lot of trust and confidence. And with that, you can also formulate concrete asks. Like if you need intros, if you need specific things from your investors, then use that regular update to ask them. And it's easier to ask an investor if you keep them in the knowing than to ask them if you went radio silent for six months and then out of a sudden resurface ah wanting something from them. Usually that doesn't go that well. ah Because they actually might have forgotten you at that point, since they probably have 20 other portfolio companies that they have to cater to. it And those companies might have been more active in keeping touch keep but in touch with their investors. So just bear that in mind.
01:09:40
Speaker
um And other than that, it's about confidence and trust. It's about keeping rapport open. And also being transparent with your traction and pointing out problems. That can be at a hot basis. It doesn't have to be regular updates. But generally speaking, treat your investor like an extended team member. Careful. Don't expect them to do operational work. They are not hired. like they they They won't do your marketing strategy for you. um But if you have a pressing question where they might have experience or a network, ask them.
01:10:24
Speaker
Yeah, I think that's that's very often overlooked. People think, oh, I have investors, so I shouldn't come with my problems and challenges. It's like, no, you should. like That's why these people are generally strategic investments. Sometimes there's it's just and and a check, but often it's actual strategic investment. So you can go to these people and say, like hey, you are an expert in this particular but vertical. Give me some perspective on this problem that I have and because I can't seem to solve with XYZ. more often than not, they will say like, Oh, that Oh, yeah, we saw that 20 years ago by doing X, Y and Z. You should probably try this or Hey, I know somebody that can help you. Let's let's connect you and let's get this out of the way. Exactly. be Be open be there. Don't be afraid. I think also of your investors because it's very often
01:11:08
Speaker
They're like, yeah, but you know, they invest a lot of money in us. Yes. They want to see you succeed. So that means that they're really, really there to help you and not just to, you know, like point you down and say, oh, you're a complete asshole. Like, yeah, you're really shit at your job. No, you're a founder. Of course you make mistakes, but these people are here to help you. Right. Uh, to the extent like they won't do operational work for you. Yeah, check general rule of thumb, investors generally try to not make their investment go to shit. So ah you you you you can leverage their intrinsic motivation of seeing you succeed. Well said. All right, so this is the last one. And I think it's one of the springboards really into a very brief brainstorming session, depending on how much more time you've got Sebastian, but so future proofing.
Importance of Distribution Moats
01:11:53
Speaker
And this is where
01:11:55
Speaker
I mean, when I've sat in these tables, it's where we get interested. We're really starting to, you know you understand your vertical, you understand the the vector to the market. But with we're we emerg emerging technology is is rapidly changing. And you've got to have, where well, where I get excited is an innovative business model. But the term that everybody uses is moats, right? So one of some of the the frequent moats, the frequent business models, that you're seeing in the space right now. Are there any frameworks that we can just, you know, list off one, two, three, that are investable, that are hot right now, that are things people should look at?
01:12:33
Speaker
I might have an unpopular opinion on that, and I don't know if that is like general consensus among the VC community, but it's it's my opinion. So unless you are in deep tech, ah where technological modes are still absolutely relevant, so IP trademarks like you, you have technology that others don't have, yes simply put. in like hardware, but also could be like ah could be blockchain, but blockchain is a bit hard because most of it is open source and IP and open source is usually tough. ah Same, same, same applies to AI for some part. um Honestly, I personally think right now we are moving to this point where the distribution mode ah will be the most important mode. ah but And then the reason being is back then you also had brand modes, you had like, you know, sales mode, stuff like that, all of that and and technological mode and software as well.
01:13:25
Speaker
I think that I see that vanishing more and more. well Why is that? it Because we we are in a more fast-paced society right now. um The speed and velocity of technological change is absolutely crazy. So if you ah have a a small innovation in like in a GenAI application layer solution, chances are that that technological mode might actually not be there in six months anymore because the foundational models and and the underlying technology has advanced so quickly. um And the other thing is, i don't I don't know if people are still that much into brand loyalty. Honestly, I sometimes really question if that still is a thing. Having a strong brand never hurts, don't get me wrong. But I don't know if I would still consider that a real mode.
01:14:15
Speaker
um Reason being is you can just be overtaken left and right. And the biggest and strongest mode these days that I see is distribution. Like, can you ship your product to the customer quickly? Like, do you have the network, the channels to immediately reach your target audience by, and then that's one of the, honestly, that's one of the reasons why personal brands and social media have become even more important because a lot of people use exactly that as sales channels for their products. Now, most of them are like consulting services and typical entrepreneur stuff and people sling their their courses and like their educational content. Fine. That's usually not startup. That's consultancy work, I would call it. um But ah that being said, right now, I would argue that's the strongest mode you can if you don't have. And on the flip side, if you don't have a distribution mode, you're going to have a hard time actually surviving as a startup. That was an excellent answer.
01:15:13
Speaker
Lots to think about there. Cool. Well, yeah, it's so like, you know, one of our brainstorm points was like, how do you retain that? Like, i yeah first off, valuable, like how valuable is it? And I think we just discussed it, but not how you retain it, right? Like, definitely in a fast moving pace, as we are in this industry, both of blockchain and AI. um is distribution enough is or got the game harder because there' there's the other side of it where okay you have distribution you you are being like you have first move advantage sometimes which is great if you're being taken over what's next right like if you didn't build out your brand fast enough or strong enough or your sales or everything else like it it's a I think it's a really
01:15:58
Speaker
tough ah balance at this point right because everything moves so fast in this industry. It it goes from from literally, now you you mentioned it earlier, meme coins. right There's no value of it that it took the industry by storm. There's a lot of theories why and you know people are bored and et cetera, but it happened anyway. Well, there's a lot of very strong brands out there that ah hold it. Most likely meme coins won't won't survive, right? Although Shiba Inu, I found that out a couple of weeks ago because one of our clients is building on it.
01:16:29
Speaker
uh moved into shibarian they actually have have an an ecosystem right now i had no idea how did they start you know as a trashy no value token right so um i think but they had distribution and now they have brand loyalty so there is like how but how do you retain that that's a really hard piece um that i see our clients sometimes struggle with they're like yeah but our distribution is great our technology is great but how do we retain those users in the next Well, I normally would say two to five years, but in our industry, definitely when it's a bull run, it's like six to 12 months, six to 18 months, right? I don't have an answer. I'm very curious. like I don't know how how you guys look at this because for me, it's it's I think the the current landscape that we're in and maybe it's because we're insiders. I would not start a startup in this landscape because it's so tough. Me personally, right? Like I'm not saying that
01:17:23
Speaker
I mean, a lot of people should. I mean, the there's two good things about this. So um You actually just mentioned it. The way you retain that is by building strong communities and eliciting strong network effects that, one, reinforce ah your revenues by recommendations word of mouth and basically your your users becoming your fans and attracting even more users um by sharing it, engaging and like basically becoming like brand advocates.
01:17:54
Speaker
um And networks create lock-in effects, right? So if you start building on one network, you most likely won't shift after six months because the switching costs would be too high. ah So it sort of like also creates an actual block. um The other good thing is that while GenAI creates so much noise and ah moves so fast, um which makes it hard to sustain a lot of competitive advantages or modes, it also enables you to be a lot more efficient in building. So I think we, in SAM Outland said that,
01:18:27
Speaker
that we will see unicorns with one person, like one like one founder, one person unicorns. I disagree with that statement personally, not because I want to disagree with Sam, but um I feel like there is more to building a long-lasting company than just having a product that is then like basically developed within and whatever by AI. ah But maybe I'm just too short-sighted on that. One point being though is he has a very valid point in that that that companies can run a lot leaner and more efficient and faster supported by AI agents and by i automating tedious tasks that didn't really contribute to the core value of a product ah using AI.
01:19:12
Speaker
um And I think that that's a strong narrative and maybe partly one of the reasons why we're seeing these these mass layoffs in tech right now, because sort of like even the big hyperscalers are preparing for that moment, right? Yeah, ah my my take is, um if everything's moving towards automation, lean the other way, your edge is the other way, it's the other direction. So if yeah, it's it's not it's no longer manpower. I don't have more men in my army. It doesn't matter anymore. What matters is then quality people that can then activate on what it is you're doing. so Bigger, calmer bank. Deliver more value to your community. Generate more goodwill. Put your face out there and help more people genuinely get involved and like you know give of yourself to help people succeed.
01:20:03
Speaker
That's where I think the edge is like, what value is your product actually bringing? And then of course, speed. I think right it's it's a fast market. Be fast. I think is the other thing. Like I think Sebastian had a great point, switching costs, churn, whatever nomenclature you want to use. I really low. like it's There's no longer just Netflix, there's Disney+, there's Paramount, there's HBO. yeah like What do I want to watch right now? Okay, it's on Amazon Prime, we're going to buy that for five bucks. It's the same sort of thing. like You now have options in in in a world where you have to have massive infrastructure to to build a project, whereas now call someone up like Thomas to build a POV.
01:20:49
Speaker
rapidly and you've got a product it's it's like Your your ultimately is you're trying to find the edge So I think it's have a great team of people behind you who are helping you back that Your network and their network if you've genuinely helped them these things compound Have a karma bank of people that I mean referring back to episode one when we were talking to Ian. ah Sorry, we were talking to Tim Karma bank like do enough good in the world some good will come back to you. Hopefully and genuinely network as much as you can. Like that's that, like I always refer back to the old school stuff. Maybe that's because I'm old short sighted. Not that old Charlie. Yeah. I would say old sighted and then quite worried, but short sighted. It's it to me, I think that's where I think people have to remember, even though like AI can do stuff quickly is you haven't spent 15 years learning how to be an accountant.
01:21:46
Speaker
haven't spent 15 years learning how to be a lawyer, 15, 20 years at the top of the game. Sure, you can write some prompts, but you still got to know the question to ask it. yeah thank you you You're not going to be able to learn all of the stuff that you're going to need to to know. You're going to need to know what the questions are for it to generate something. And that's, I think, the point because I think it's the layers in between the expertise that AI is really good at. ah Well, making efficient and actually and retain value, right? So at my previous company, ah these guys built a really, really great AI solution and you should check it out. Actually, I don't think you can because it's mostly, I think they must be using an internal.
01:22:31
Speaker
But it was for building ah project plans and, ah sorry, ah sales plans for for projects, for leads that came in. And how they built the agents and in the backend was like, you know, they saved like, I think like two, three weeks of sales just by using, utilizing the right agents, which is super valuable. What was the ah the agent writing the project plans? No, but it was giving getting all the information and summarizing it so that a human that was an expert actually could write these project plans better. And I think that that is value. But to both of your points, like um and maybe I'm playing a little bit like and devil's advocate.
Community and Brand Loyalty in Tech
01:23:10
Speaker
I think community is super important in in retaining that value. But if you look at AI, it doesn't have communities, right? ah So Gen AI doesn't have communities. Old school data science doesn't have communities. It has customers. um And even if you have communities in emerging tech like blockchain, Most likely, I mean, and and I'm maybe just saying something and you know, listeners can just attack me on this one, but like I think that the value of that your community brings is adoption in your, in this, like in your, with your users, but it doesn't get you to paying customers.
01:23:44
Speaker
like I i am have a theory that most crypto enthusiasts are not using the ah so not using the the products that they're looking at. they' They're hyped for a company for the for the tech. But they're not always using it. And ah Liam, if you're listening to this, Liam, liam our co-host, he is using all the new tech, which is really, really great. But I think that he is at this at a disadvantage. of like Most of us are not like him. They're most likely more like us three. Yes, we use Metamask. Why do we use Metamask? Because we want to buy a token. right Do we really care about consensus? No. um Is there a community around Metamask? Probably.
01:24:29
Speaker
ah Will they they bring more partnerships in? Probably not. Do they count for the numbers that been more bring more partnership? Yes. So it's it's a bit like what i'm what I'm trying to say here is that on one hand, you have an industry that has a large community but has never, I think, fully adopted a mainstream or ah mass adoption. And I'm not saying it's not coming. I think it's definitely coming. On the other hand, you have Gen AI that ah very quickly got into mainstream adoption. And obviously, this ah commercial like it got commercialized really quickly over the last two years, like two, three years. And of course, AI is here for a long time with no community.
01:25:08
Speaker
so but but like and And then on both sides, how do you but retain that value? Because on on the crypto side, I think there's a lot of value that's not properly coming out. And on the AI side, I think there's a lot of value that's coming out, but that's not going to be valuable in the next six months because they've been the first mover advantage is sometimes, I think, not even existing in gen AI land because it moves so fast. So where where where do you sit? where do you you know Where do you go in this landscape? right like and And again, ah
01:25:39
Speaker
devil's advocate, right? So I might be, you just might say, Thomas, you're talking out of your ass right now. You should stop talking, right? Well, that's my perspective. wow which I think Johnny and I were both waiting for the right moment to to to say that. No, I'm just kidding. Worth it. yeah yeah to Totally worth it. Now you're getting a great point there. ah and while while I wouldn't necessarily agree with all those statements. There was a lot of ballot points in there and like, you know, there's There's a couple of interesting points as well when you compare Gen AI to crypto and then hype cycles. ah So usually what you see, you see a bubble expanding. And yes, I called it a bubble. ah Yeah, you know, crucify me for it. ah But usually what happens after the bubble burst is you see contraction of the industry and then you see the steady productivity growth. Same thing happened with the Internet.
01:26:32
Speaker
Dotcom bubble same thing happened in the crypto industry 2017 I Remember like there was literally a new ethereum killer coming out every week, right? ah None of them actually managed to live up to that claim, but it's it's in the same with Chennai. I Realistically large language models. There was a new GPT killer coming out last year pretty much every month, right? Oh, we have to spread new infrastructure look look where they are right now, but I think On the large language model side, we now see the contraction of like closed source and open source. And we're going to reach that plateau of productivity. We are not there yet with GenAI apps. I think that is way too bloated. And quite frankly, unfortunately, crypto got into this bloated state again. if
01:27:19
Speaker
I don't know if the numbers right now didn't check it before this call, but I think we have over 20,000 different crypto tokens. Yeah, it's still it's still around that same time of a number. like it it It always kind of contracts and then expands back to 22K, something like that. Yeah, and that's and that's way too much because I would agree, I would argue that probably 90%, 95% of them absolutely do not like have a sustainable business model. Again, crucify me for that statement, but just the last seven years have shown me that a lot of them live on ah their community and the tribalism, which is great, you know, great to have strong community.
01:27:59
Speaker
But you are absolutely right. You have to you have to be able to create the jump from the community to real customers. like and and Customers also have to come without the community while your community can help you find customers and can bring down your customer acquisition costs. Still, ah your product will only succeed and survive if you are able to attract customers outside of your community. Because at some point, otherwise, your your your customer base will be very limited and it's going to be hard to expand further. And if I think about it, you you made a very good point there. If I think about the products that I'm using day in, day out, I like Android. I have a Samsung smartphone ah for work. I use an iPhone. I use them every day. I'm happy user of the products.
01:28:55
Speaker
Am I active in any of those communities? Absolutely not. um And like same thing with chat GPT. Actually, there I am active in the community. I'm building my own GPTs. I'm like you know like looking into the ah developer forums all the time. ah But there is an interesting dynamic there, too. Did you know that we have like over 3 million GPTs at this point? Right. Like there's this marketplace of chat. There's over 3 million right now. ah And I took fun in like reverse engineering some of them and like going in and basically like prompt and checking them to like see the instructions.
01:29:31
Speaker
90 to 95% of them are shit coins in crypto terms. Like they they literally have instructions that are like five sentences that literally all of us could do in like five to 10 minutes if we like put our mind to like creating this GPD. yeah So there's literally no USB, no mode or nothing yet. they are still number one in the GPT store for their respective verticals. So it begs the question why, right? Brings me back to distribution mode because they figured out an extremely smart way to position their GPT and get everyone to use it. Yeah. But, but then once again, like I'm very curious to see, okay, they will probably be there for the next three months, but what after those next three months, like, right? Like this, this is where, how fast it goes. This is where I go, Thomas.
01:30:19
Speaker
said the The community piece I think is where you're in a still loyalty and brand. And that's where, so you you have the initial value that you provide the customer, which is positioned correctly to bring them in. But if they're just a transactional buy, like I can buy bread. I'm going to use the English ones because I can't pronounce the Portuguese ones, but I can be like Tesco, Sainsbury's, Morrison's, Lidl, Aldi. I can buy bread at all these places. Yeah. But the one close to my house is Sainsbury's. And I like the cookies that they sell better than the ones at Aldi. Right. And then then you you start to like, actually, I quite like the bakery there. I quite like like they their gas is a little bit cheaper. Well, i and then you get into the, well, I've now got points.
01:31:07
Speaker
Yeah, that's a flywheel. I spent three grand on petrol, so I get the tier of points that make the petrol 10 to 15 cents cheaper. And that's community. That's what I think. You've got that that leverage. I mean, on the on the balance sheet, they call that goodwill, right? Like, you've got that element. of special source that says, um I'm going to go to Sainsbury's. I'm going to go to AI product here that I identify with. And and like to add something spicy, I genuinely think we're in an age of identity for the obvious high pipe reasons. But also, I really like a specific director. I really like a but you know the specific show. like I identify with that.
01:31:55
Speaker
And I think we're, from the marketing point of view, going into and ah like, I use this suite of tools might be the extension to that or where that community piece is going. That's just putting it out there in the ether. <unk> It's interesting that you're saying this and and coming back to your loyalty card point, um there there is a community around like an Aldi or, but do they know each other? No, do they communicate with each other? Most likely not, but they all use at the same loyalty. they're They're all loyal to the same brand, which is also, you know, are supermarkets the infrastructure of society? Probably. No, I mean, I was using the loyalty that like everyone knows.
01:32:39
Speaker
and that will take But to your point, like so, you know, you have the crypto communities where everybody ah speaks to each other. And I think the the retention of value of an Aldi or like ah the loyalty cards of supermarkets is super valid. Like you go back because you get something. Right. The metaphor for a value system that could be created around. Exactly. and Yeah. Is there anything like that in crypto communities within blockchain? Right. Like are there loyalty card systems? People are trying it now. But not like, you know, at the actual, actual loyalty card. But like, what, what as you said, like, okay, you know, ah you're, you're blockchain A and you do, okay, you do defi, you do game fi, you do, like, there's no chain that does all of it and keeps all the people there.
Adoption Challenges in Blockchain vs Gen AI
01:33:25
Speaker
And that was been my biggest issue. I think we always said we need an an aggregation of all these things so we can just, you know, you don't need 20,000 chains. You need, I don't know, 100 maybe, right?
01:33:36
Speaker
but how do you how do you get these customers into the supermarket model where they don't need to talk to each other again my my mom needs to start using blockchain at some point right like that's that's the mass adoption we're all talking about she don't needs to go into a community and figure things out no she just gets a loyalty card and she goes go do game fly go to defi go to social fight like whatever fi it is right like without so That transition, I think, retains value of what starts as, I think, an early stage community. and And to your point, like to your point, Charlie, and loyalty cards, kind of the highest tier of of loyalty, because you don't need that community that talks to each other anymore. well that Early stage blockchains you do. I think that's the moat, like, yeah, like the to to expand or or metaphorically explain what and ah to add to what Sebastian was saying.
01:34:30
Speaker
That's, that's where I think, um, you have brand loyalty. Like for example, Nike, there's no reason those shoes could cost 150 other than the fact was going Nike tick on it. That's not true, Charlie. Eight to $12 to manufacture. And then, you know, the rest of the budget goes into the store, you know, like shop fits out. Yep. It's like really cool music. You remember that perfume they continuously spray as you walk into the you know all of that kind of stuff is is where the other $100 goes.
01:35:05
Speaker
um but But I think it's it's that is where you're going to say you're going to start to see technology businesses doing the same sort of thing. It's kind of where i where I'm taking it. To your question, Thomas, like where well does that come in with Flap 3, this loyalty system, right? I think Actually, like at the moment, how it is, your wallets and your platforms within an ecosystem are sort of like this loyalty card. ah But unfortunately, not in a good way. The only reason that they are that is because the friction and the switching costs are so high, right? Like because if, let's say, you engage in a specific ecosystem and you have like you you you hold token XYZ in a specific chain,
01:35:55
Speaker
ah you You adjusted your tooling to that chain so you have a wallet for that chain you have this and that you know your sides. So in in since all of that is so involving in time consuming and it's also for the record like even for people who has been in that space for five plus years. This is my my cry to founders. For Christ's sake, please, please like think more about UI and UX and make it more convenient if you really want to see like mass adoption. If I have to jump through this 10-step process to set something up, shit like i mean first of all, no one reads instruction manuals, especially not men. Women are not better with that, by the way. like we We just usually throw them away and then ah go on this tantrum where things are not working. ah But like if if if I have to have an instruction manual to to to use a software tool,
01:36:50
Speaker
um and like have this like 20 step process that I have to follow just to like unlock the value that I want to get out of something. I'm losing interest after step two, and that's usually when I have an adjourn, right? And yes, create a lock-in effect with that, and you retain the community by making it so hard to switch or making it so inconvenient, but that's not a real mode, if you are honest. That's just, it's just- No, that's a vendor lock. That's a vendor lock. Yeah, exactly. Thank you. and And I mean, like, and and I think that's the hard part of, well, that's a hard part of crypto. And that's the interesting thing about Gen AI because Gen AI moves so quick. There is no vendor lock because I mean, maybe ah on, on, on different, uh, LLMs, right. But, um, they will probably have their own ecosystem at some point as well, but it's easier to replicate where crypto is, it loves vendor locks and calls it. No, it's loyalty. It's like, no, it's a vendor lock. Exactly.
01:37:48
Speaker
We're going to get crucified for this one, by the way. Spicy, spicy. All the maxis will roll out. They're like, uh-uh. So we'll dark the hell out of you now. um ah Yeah. So, so, you know, I think retaining value is, will always change as we move forward, um, with
Startup Adaptability and Product-Market Fit
01:38:09
Speaker
emerging tech. And I think as a founder, it's really important to understand when to stick to your guns ah and when to pivot right because your value that was definitely in the bull market but that was six months ago first move advantage might have now been
01:38:26
Speaker
you know, changed by either that the the the LLM or or chain that you're building on, they just took your value and they said, goodbye, you are useless right now. and Um, or somebody else just is faster and quicker. So this market, you gotta be on edge, but also if something is good and if something works and you have the traction, don't change it if it's not broken. So it's, it's a really, really hard balance to strike and I'm sometimes glad that I'm a technologist and and not in business operations or in venture capital because it is a really hard hard world or a hard industry to to work in. Definitely in our current market.
01:39:09
Speaker
We look look at what happened with with Sora, right? When OpenAI released Sora, announced Sora, they pretty much put 80 percent of text to video startups out of business. and And those receive quite some considerable funding just like six months before that. ah So there might be some one or two survivors that can do something that Sora can't do. But ah like, yeah, that's that's just the word we're living in right now. So honestly, one of the biggest questions if you're building an AI, And I said this before, and I say it again, like one of the biggest questions you should ask yourself as a founder is, how big is the risk that one of the foundational model providers will just do my thing, just at scale, a lot easier and already with 100 million users using that technology, easily switching them over to the new thing, right? like Because that is a real risk. if you're
01:40:04
Speaker
If your solution is too broad, and this this is actually like completely contradictory to to anything that we see what normally you think about, like you want to have this big TAM, this big addressable market. Right now, like with GenAI, if your market is too broad, there is an extremely high risk of the foundational models at just venturing into that application layer that you are building. And basically knocking you out but before you can even like build up build up that community that you would need to survive. yeah um And for for anyone like sticking with us for this long, like one one one last nugget that I'm going to drop, because I just find it super fascinating.
01:40:48
Speaker
So there was this overview of average time to product market fit of like really known like startups like Canva, RAM, what was it, a Slack, Figma, like, you know, like really well known unicorn startups that have been around for the last 10 years sometimes. this is um So the variety was from like six months to four and a half years of product market fit. Average was hovering around two to half, a two two two and a half years. but Now, if you say that you usually have iteration cycles every two to four weeks, just do the math how many times you iterate. And I don't know a single founder and talking with them about their startup when they reached for a market fit that didn't pivot. I would even say you can you can bet that about 90% of startups don't grow big with the solution that they initially started with. Look at Airbnb and all of them, right? like so
01:41:43
Speaker
What that means is, first of all, if you are not willing to to let go of your initial concept because you don't see the market responding to it, then you really should consider if if you want to be a founder, that's one. But to frame it more positively, um if you are resilient enough to stick with it for two, two and a half years, ah going through a lot of bad times and hopefully also a lot of good times, then there is a high chance that you will see this inflection point where where where people are pulling. There is two things in conjunction with what we just said. One, gen AI might reduce that time ah because you might be able to iterate faster and get to the point faster.
01:42:24
Speaker
But secondly, it's also a real question that you should ask yourself, how defensible is the solution that I'm trying to build? And can it actually last for the next two and or two and a half years without being out competed or completely replaced? Because technology will move so fast that what I'm building right now will not be relevant in two years anymore.
Closing and Final Thoughts
01:42:45
Speaker
and raise Yeah. And I think I couldn't agree more. I think the. The ease of creating the actual piece of technology can also lead to the ease of switching costs. Not only that, the... You know what? I just agree. I was just going to... Yeah, pretty much. I was just going to repeat the same thing. It is exactly that. So this is the point of the show where we're going to switch on to the Desert Island Essentials. Again, if you've listened this far,
01:43:19
Speaker
and have enjoyed the nuggets so far, please do like, subscribe, and hit that bell notification icon. It really helps us spread the words. um So, Desert are Island Essentials. This is basically if you were going to, we if we had a magic button and we could press it and send you back to your early 20s or mid-20s where you you've got no bags, no black book, no special relationships with various different people who i have influence in the space. um you You don't have your current social media and your current following. Basically, nothing. You were starting again. What are the five things that you would bring with you to that desert island to start your startup? So framing is starting a startup, right? um And for that, the absolute first thing that I would bring is a large notepad and pen. um because And like with large, I mean like really thick, like a lot of pages, because you will probably like have to trash a lot of those pages.
01:44:18
Speaker
Um, but I, it really helps me scribble and write things down in my thinking process. Uh, and I think it's, it's an art that we seem to be losing, uh, as AI moves forward. But I think for me, it really helps me. Uh, I'd bring jet GPT or some, some offline equivalent because it can just help you in your thinking process and basically get a sounding board for you. Right. Uh, I mean, as I said, maybe an offline equivalent that is soon to be invented, uh, for it. What's that? Clippy. Windows. No, no. Obscure, Windows 2000 reference, but we still had Clippy. No. Oh, God. That Clippy, I actually thought you knew about a new Gen AI tool that I wasn't aware of. Me too. Oh, okay, okay. I wish, man. I really wish. I think Charles has saved up for the new AI, bro. The day that I'm further ahead with this, that you are supposed to... I'll let you know.
01:45:19
Speaker
yeah No, then two books that I really like lead and disrupt ah By about Charles O'Reilly and the lean startup. I think it's still relevant and ah ultimately to to keep my sanity intact a soccer ball or any form of ball that you can like ah Play around with whether that's a basketball whatever but so soccer ball was the most the the the immediate top of mind because you usually don't really need any any additional equipment to to Juggle it and to do things with it um Reason being is I think if you build a startup you you you really have to take care of yourself as well and you need the off time and you should not Completely lose strike of family friends and hobbies because that's that's really what keeps keeps you in check mentally ah because it will be
01:46:06
Speaker
a lot of frustration, a lot of time, like work time and lifetime spend into it. And so so I think you, you have to compensate that with something that is just pure fun way where it allows you to just shut off your brain for a couple hours. Nice. Nice. I like it. yeah thinks It's such a red thread, by the way, as well, Charlie, like we've we've now interviewed so many people, they all say the same thing. Take care of your body. Take care of your mind. Yeah, yeah switch off. It's amazing. Um, so thank you for being with us on the show. Sebastian has been absolutely brilliant to speak to you. Um, we really appreciate having you on and, um, we've been what three, the podcast where we tell you what to do next. Sebastian, please tell people where they can find you, where they can get in touch, where they can reach out.
01:46:55
Speaker
ah Best place is LinkedIn. Happy to to ah have you in my LinkedIn following. but Just you know send me a message. Reach out to me there. I don't use any other social media actually. No and time for that. i but say and and And the blogs that we've been mentioning are will also be on LinkedIn. As you are you have been writing and are writing on a very regular basis about these topics on LinkedIn. but Exactly. Thomas, you want to sign us off? All right. Well, folks, this is it for today. Episode seven with Sebastian's Pizza. Thank you. ah We'll see you but the for the next guest next week. I'm not going to tell you who it is, but it's going to be great. Don't forget to like, subscribe, and we love it if you repost our content because we put a lot of heart in this and we'll see you next week. Thank you.