Experience with angel investing, how to receive fundraising, getting the series A, evaluating risks, what entrepreneurs need to do, and success for start up companies by Steve Shwartz.

And also, Steven, a member of New York angels and angel ambassador for, which are to Pre large angel investor organizations and your groups.

And this type is, we'll talk about raising those forty million dollars for device for you, two and being an angel investor specifically during these times.

How shoot, founders reach out to angel investors and how to make sure that the dynamic doesn't really stop them from investing. And so, Steven, Alaskan helped by you giving us some background on yourself and on device. Forty two.

That sounds good constantly. Yeah, so I, I started my career as a post doc at Yale University. Karen haven here in Connecticut area where I live Co,
founded three companies in the early eighties and nineties,
one of which had an and ninety six,

the second one,

we raised a ton of money and that one fails.

And the third one became one of the.

Sorry,

I was just basically yeah,

yeah,

in the third one became one of the leading business intelligence products of the nineteen nineties,

but I had to take the out of the product description.

Because the second winter had it in the late nineteen eighties after that, that company are required for the first time, and started angel investing and about two thousand.

I let the angel investor round of of tango was a board member and later was the chief technology officer.

We were Tango from zero to two hundred million and it was the six best of of twenty eleven along the way.

I hit join the angel investor forum of Connecticut based angel group around two thousand and five New York angels around two thousand and nine. And then twenty twelve, after after leaving Tango, I retired for the second time.

But it didn't last long, because I ran into my Co, founder of device, forty two who had a great idea for a new company. And I, I, I jumped in with them.

The two of us printed up Co, working desk in New Haven. We wrote the code. We did the sales just the two of us. Either of us put in any money.

Just a lot of sweat equity and after two years we had eighty customers in twenty countries and about

a half billion dollars of recurring revenue. And that's when we raised our series.

A, at the end of twenty fourteen about, I think we raised three million dollars and went on and started hiring a team and ramping up.

We became cashflow positive in about a year and a half later and remain cash flow positive the whole time until February.

Twenty nineteen when we were acquired by a private equity firm that put in about forty million dollars. Some of that went to pay out some, some prior investors and just recently.

I, I've retired again from device forty two, and now that we built out into a management team, and it's, it's doing it's, it's gotten to be a fairly big company and.

Sorry, retired again, and I just finish the book on artificial intelligence. It's gonna be published by fast company press next February. Nice. That's actually a very, very same background.

Three times already that space. So, let's talk first about this you mentioned, which is, it was just you and your Co founder, neither of you put a money on the table.

It was just sweat equity, as you said, when was the point when you decide that, you know, it's time for us to raise money it's time for us to increase our team. We're not capable of doing it by ourselves anymore.

Yeah, so essentially.

We got to a point where we had proven the model, the technology was developed, you know, we had eighty, eighty customers. So it was, it was clear.

There was a market for the,
a,
for the technology,
and we had to make a decision, you know,

we had to,
you know,
decide whether to build a lifestyle company and,
you know,
having a,
have a goal of just,
you know,
growing it to where we could take out huge amounts of money every year,

but never never really grow it really big for,

or bringing investors and grow much more quickly.

We debated it back and forth. And we finally decided to bring in investors.

So that we could ramp up the team, start delegating some of the, a lot of the things we were doing and and grow much faster.

And essentially,
that's what happened the,

we triple that revenues and in twenty fifteen more than doubled in twenty sixteen doubled again in twenty,

seventeen double again twenty,

eighteen,

and doubled again the twenty nineteen.

The SIM, impressive group. That's really impressive. But basically, you broad your company from zero to basically Series A, by having just to CO founders. That's it. That's it. Right.

That's that's really impressive. That's very, very, very impressive. So what's your advice to founders who are probably some teams? I mean, most teams don't really have the capability on, you know, building everything by themselves.

They probably don't have such a nice mix of CO, founders, where everyone's covering some specific topic and together. They can actually cover a lot of them. So, what's your advice to those people once that time to start raising?

If they're not able to really bring the company to Series A, by themselves, where do you think they can actually start at least reaching out to investors to start preparing those connections with investors?

You know, it is an annual investor. I hear that a lot.

Well, we just don't have anybody on the team that can do the technology or, you know, you know, I tell entrepreneurs that they really need an experienced CEO. Well, we don't have an experience.

I'm right out of school and my answer is always, well, you know, this is one of your first challenges, you need all those things on your team.

So, go out and get, how am I gonna pay for them? Oh, figure it out, you know, if you can't figure out how to build a team or how to get the right people on the team and it doesn't need to be a big team. It shouldn't be a big team. All right right.

These are the biggest these aren't the biggest hurdle. You're going to encounter and in growing the company, you know that device for you to. We had all kinds of all kinds of challenges.

That that we had to brainstorming and figure out, and it'll be the same thing and every at every other company. So, you know, entrepreneurs figure it out.

That's a good point. Right? So your advices first figure out the team and then you can actually start reaching out to investors. Right?

Right. And maybe maybe building the team includes reaching out to some investors. Maybe. Right.

Maybe, you know, some people may be, you have friends and family who knows, you know, a lot of what you have to do is, you know, reach out through your network. You know, you can, you can try cold calling.

The difficult thing with cold calling is everybody's available on LinkedIn.

So, you know, I, I'll get, you know, fifteen people contacted me on LinkedIn every day, you know, and then not even the not, even in my field.

So it was kind of hard for me to try to help everybody, you know, somebody reaches out to me for help on an AI company.

You know, I'm I'm, I'm more likely to, you know, to find some time for them, because, you know, I have some, some expertise there.

So we've touched onto those just out of college ceo's and actually a large chunk of my audience are those young, first time entrepreneurs. So, what's your advice to them? Where should they start their process?

Should they start by going to meet ups and trying to find their Co founders? Should they try starting by talking to their college friends and seeing if anyone is interested in working on their idea? Where's the where should they start? Basically.

Well, I think at first first they should make sure that they have a, that they're solving a real problem and that's that's kinda hard to do when you're right out of school.

For me, the, the best entrepreneurs one who who've been in a field. They had a problem, they couldn't find a solution.

So, they went out and solve the problem themselves and now want to sell that and I want to sell that solution for the rest of their.

So, the rest of the people in there in their field, you know, for someone coming, right? Out of school. That's that's gonna be tough to do, but, you know, that's number one. You've got to make sure you're solving a real problem. Not something that just.

Looks good on looks good on paper so I would actually,

I would actually recommend to would be entrepreneurs coming out of schools to get get some real business experience first,

you know,
join a startup with to,

even if they fail or join a big company and and start looking around for business problems that would help that that company move forward.

That's great acts. Yeah, so, you know, so so first yeah, you you gotta find a real problem to solve.

And now what you need to do is think about how to reduce the risk, fear investors, which will, which is also reducing the risk to yourself.

You know, what when investors look at a company, they're looking at what the risks are obviously, they're looking at the financial plan that's presented but one of the risks to that financial plan.

So,

you know,

the,

the,

the biggest risk that you really don't ever like to have to take is,

especially in a,

in a technology and the it company software company,

which is really nice,

you know,

you don't wanna take the technology risk.

You don't you don't really want to invest in somebody. Say I've got a great idea. Well, we haven't built the technology. We've just got a prototype. The second is the market risk.

So, if you could build a really great product, but it might be the opening of buy it. So, yeah.

You know, investors like to see some of that market risk reduced by I'm having some, some early sales and even sales aren't that great.

An indication is, you can always find.

You know, five or ten or departments will buy anything and you customize it and it doesn't mean you have something that's gonna work for the whole market. And then there's execution list, you know, as an investor.

I fallen off with technologies that I've invested it. One of them came out of Carnegie Mellon. It was a friend of mine was the chairman Department started the company.

It was fabulous technology, but no experienced entrepreneurs and they just did everything. Well, it was an AI technology that I invested in, that I thought was really going to be an ad tech.

It, you know, it was a really simple idea when after invested. I realized that the entrepreneur everytime they described it was this big, complicated explanation. And what you've got. Is this really simple thing?

It's you can describe it in two sentences. And now so, that's why, I think in terms of execution risk any some experience on the team.

And and ideally, that experience should be this, this, the CEO. Because when you,
when you run a startup,

you're constantly confronted with challenges you're constantly making decisions if you make the wrong decision,

you're,
you're,
you're going to learn off the rails,
you really need somebody who's been there before and,
you know,
been to the school of hard knocks and learned some lessons.

Right, right, right that's that's a good point. And you mentioned, but you are doing angel investing several times and you remember of two large angel groups. So, let's talk about that. What do you personally liked investing?

And it's clear that it's but is there anything else that you investing? Unfortunately so right I have I have these rules and I always break them.

You know, I I tend to one one rule is I only want to invest in.

Business to business software software, the more I know about the field, the more comfortable I should feel feel in investing in it.

And then I look at technology risk market risk and execution risk. I E, whether you've got an experienced CEO, now, it's hard to find, you know, all of those things.

And a lot of times I,

I end up investing in things that just sounds great to me,

but I really shouldn't have invested in them because I don't have personal knowledge of,

of any of those risks.

I I invested in a in a company that made a a great system for people to a practice for bands to practice muse it without making any noise.

You know, they were headphones on it, you know, but, you know, I, I, I didn't, I just didn't know anything about that business. It sounded good to me, but a lot of times it sounds good too. Partly because you don't know anything about it.

I mentioned,
you know,
a bunch of the ones that failed,
I can't think of a single failure where I,
I kicked on my checkboxes and I should say my, my.

My two investments this year, so far or in biotech, which, I don't know, it's and about by broker. Alright. Great. Yeah, I've seen that. I've seen that problem with several angel investors.

They just love the idea. They don't really know much about the field, but they're like. Okay, I want to support that. That happened to me a couple of times, too didn't work out. Well, so I hope I learned lesson for the future will show, so I just feel right.

Yeah, and a lot of times on these.
The nice part about being a member of an angel group is that you may not know a lot about the field, but other people who,
you know,
and respect in the group,
do know a lot about the field and,
you know,
that was the case with those two biotech investments.

You know, we'll see, you know, if they work out, maybe I'll change my rules. That's true. They don't work out. I'll probably continue to break them. Yeah, that sounds like a good plan. So what's your major source of the deal?

So, how do you find it with deals? Is it mainly through those two and your groups or do you get a lot of inbound that you look at? Where'd you find those deals?

Yeah, it's a hundred percent through the two angel groups. When I had more time.
I would I would go to meet ups or presentations,
or we're listening places where entrepreneurs presented and, you know,

I would I would bring those deals to the angel groups.
I haven't really had time to do that now. So it's solely through the angel groups.

Got it so, let's talk about investing now during this dynamic. A lot of investors just waiting for us to. So no one really knows what's gonna happen after the quarantine is over. So really very few people actually invest hearts. Yes.

Right now, is it the same with you or are you actively investing? Now? I'm actively. I'm actively investing. I I don't see a lot of reason to wait for the dust to settle.

Valuations are a little lower lower. I'm not looking to use covet as an excuse to put the squeeze on a company, you know, in my in my business career.

I've always believed that when when approach is best, and I've tried never to squeeze anyone for the best deal that maybe when I buy a car.

So, yeah, I think, you know, deal by deal.

There are gonna be some companies that aren't really affected by cold, but there's something with some companies that are helped by covet and there's gonna be some companies that, you know, unfortunately, coven makes them a really bad investment is it?

It really affects them. So, you know, you have to look, you have to look case by case, right? That's true. So how she founders reach out to you in terms of how should they get in touch with you to get.

That check from you specifically,

should they go through the group make sure that they get to present in front of the investment can be from the members or should they just go straight to you and you will help them get to the end yeah,

no.

You know, I mean, unless it's unless it's a topic that I really have, I'm really interested in, you know, like a, I, they should apply straight to the angel group.

I think I think applying to an angel group is good experience for entrepreneurs because.

You know, you get you kinda get to learn what.

You know, what all the checkboxes are, and ideally before you apply to an angel group. You know, you go on the Internet you read up about what angel groups are looking for you read up about how to how to write a pitch deck.

And again, if you if you can't do either of those things, if you can't read up on is you can't create that step. You're really not ready for funding.

Yes, that's true. Indeed. So, let's talk about the pitch deck. What do you think are the three must have points in the basics of the things that you really want to see on the beach deck? Yeah.

So so, let's see, I would say the first thing is.
How does the product address? The market need? That's the first thing I listen for.

And that's what I want to be convinced of because, you know, if, if you're not really addressing a real market proven market needs, none of the rest really matters.

You know, and then I wanna know.

Where is the technology? Is it done?

You have just have an MVP how much tech risk is there and then a proof in the market,

or is there,

you know how much market risk is there still and then what's the competition?

It's part of the market risk. And.

You know, is it prior start of success on the team preferably in the CEO and then finally apologize you said three things this is about seven what's the deal how much you're raising?

What's the evaluation be specific?

You know, you're, you're, you're not gonna, you know, a lot of entrepreneurs will come in and you just leave it wide open and hopefully get a good deal, do some research, you know, you know, come in with what you're looking for.

You know, if you wanna come in a little bit, I can a little bit you're coming with a fair deal. I, I, you know, the angel groups aren't usually my groups aren't aren't gonna try to if I do if it's if it's fair. Yeah.

Right. That's great. Advice and I was actually wondering we touched on to the topic several times, which is March validation. And what do you think is a number all for visually the, the size of the sales?

That is good enough to prove that, you know, there is some sort of market fit. How much revenue should the company bring? And, of course, it's depends on the, on each company, it's unique cases each time.

But is there like standard things that you think, like ten sales, hundred dollars each? So, which makes it one thousand? So, month over month revenue.

Do you think that's good enough as a marked validation where it's not.

Yeah, no, that that's a great question. And, of course, it's gonna be different, depending on the market. You're right. Share consumer product that you're selling over the web. It isn't even so much the number of sales.

It is a, are you showing growth is showing up? Yep. Showing good growth and and is it, is it a type of growth that can be choosed with cash?

And B, to B sales B, sales are a lot tougher. And the reason is, you can always get a sale by going out to a company and customizing your solution for them.

And you can do that five times, maybe even ten times, but you can't grow a company that way.

So, if you, if you have less than less than ten of those are B to B sales, the investors are always kinda wonder how much customization you're doing for each one and.

You know, whether you can get to the point, we don't have to do any customization at all.

Which is, you know, what you're what you need to really to really grow, but if you're doing B to B sales, it's gonna be very hard to generate a lot of sales.

Especially if if each sale requires a fair amount of selling without a sales team. So, it's kinda it's kind of a catch twenty two and investors understand that.

On the other hand, if you're doing sales over the web, like, Raj, and I did a device forty two, you know, there's no reason why you can't thousands of sales right? That's that's a great point.

And I'm personally not the biggest fan of, I think just because of that reason, it's not sometimes it's just really, really hard to scale. So, let's move on to the three mistakes that you see during the presentation.

So we've talked about the three must have points. Now,
let's talk about three must not have points that you, but you see,

so,
I would I'd be willing to bet that,
that,
you know,
half or more of the angel investors you talked to.
We'll we'll say number one is that entrepreneurs come in with evaluation. That's too high.

And, you know, there's the problem with evaluation is too high, is that, you know, you know, you might be able to negotiate somebody down to a reasonable evaluation. But when it comes to the evaluation, that's way too high.

We kinda look at it. And you say, so you don't want to go through all that due diligence and then find out that they're gonna be really stuck on that evaluation.

So that's a big turn off for me. The second one I would say is.
Not listed in competition, especially when it's easily found on Google. I, I, I find it very frustrating here.

An entrepreneur say what we really only have one competitor and then you do a Google search, and they were.

A bunch of you.

And then, I guess not explaining the use of funds. A lot of entrepreneurs come in and they say, yeah. What we're gonna take the funds and put this percentage towards tacking this percentage towards marketing.

But that's not really what we mean by explaining the use of funds. I wanna know where is this round the financing gonna take you.

You know,
it,
when we raised our series,
a device forty two,
we set to investors,
you never need another round the finance and and we did, we became cashflow positive,
you know,
to a point where we saw that we got acquired and they, you know,
the,

the private equity investors decided to put more money into to do some aspects of growth, but it wasn't it wasn't it wasn't necessary.

Other entrepreneurs will come in and they'll say, okay, you know, if I tech firm, I come in and say, I, I need to. I need to get to this stage of.

Well, we'll get it'll get us to this stage of it's in the evaluation process, or it's gonna last eighteen months that at which point we're gonna raise a series B at this evaluation.

And at that point, we'll have this number of say, this, this amount of revenue. And so on and so forth,
that that's that's that's what you wanna say,
because that enables and invest to go in and say,

okay is that critical do I believe that is is the technology where it needs to be to get there's a market in place,

you know,
what's the execution risk?

Yeah. So I, I would say those are the three things evaluation competition and use of funds. Right? That's actually a great advice. Especially the last one. I think that's very important.

And here, we're moving onto the last question of this episode, which is a call to action. Was that one thing that you want the listener to do? As soon as the episode is over so one small step that should bring them closer to success.

Yeah, great question. So I would say before raising money, entrepreneurs should take an honest look how much tech market and execution is they have.

And you can value the company accordingly, or wait and figure out how to reduce those risks.

That's a great answer. That's a good cool. It's not like a huge, huge amount of work, but it's it's an important thing to understand exactly how much you're risking. And investors like to see that.

If you are risky, to be honest with them. Alright, so don't try to bullshit your investors they will find out eventually.

So we'll wrap it up thanks a lot Steven for for this episode I really loved it love great advice love, especially the, last the last chunk of it, or discussed your personal investment preferences. So, thanks a lot for sharing that with us and taking the time to do this.

Oh, my pleasure. This was this was enjoyable. Happy to hear that.