Vince Hsieh of Cypress Growth Capital joins Nick to discuss Non-Dilutive Capital That’s More Flexible Than Debt, Why Ruthless Prioritization Leads to Scale, and the One Ingredient That Makes a Company Investable at Any Stage. In this episode we cover:
- Economic Benefits and Equity Components
- Loss Ratio and Investment Criteria
- Ruthless Prioritization and Team Building
- Impact of AI and Hardware-Enabled Software
- Advantages of Investing Outside Coastal Tech Hubs
- Common Fundraising Mistakes and Prioritization
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The host of The Full Ratchet is Nick Moran of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.
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0:18
Vince Hsieh joins us today from Dallas. He’s a Partner at Cypress Growth Capital, investing in emerging growth companies with a unique royalty-based model. Prior to joining Cypress, Vince spent 16 years starting, building, and scaling two SaaS companies. He co-founded Atlas RFID, later acquired by Hexagon, and helped build Geoforce, which exited to LLR Partners. Vince, welcome to the show!
0:43
Thanks for having me. Nick, good to see you as always, sir. So you have a unique model. But before we jump into Cyprus, tell us a bit about your backstory and your path to venture. Yeah.
0:50
So my path to venture was a little bit circuitous. I would say I grew up, unbeknownst to me, I kind of grew up around the space. My dad, growing up, was an investment banker, sort of in and around the deal making space. As a youth growing up, I spent the early part of my career, the first eight years in management consulting, working in corporate restructuring, where our clients were private equity firms that had underperforming companies distressed assets. They would hire us to come in, and my boss would be like the interim CEO to do a restructuring, turn around, on operations, finance, marketing, closing, warehouses, things like that. So my 20s is called it. I was working with private equity firms already on operational improvement initiatives for the early part of my career, for eight years or so. Then, to your point, I spent about 16 years as an entrepreneur and operator with two different Industrial Tech SaaS companies, both in which we eventually exited to private equity and then eventually strategics in the first case, the second one, a company based here in Dallas called geo force, our first institutional investor, about 12 years ago now, was Cypress growth capital. So the connection here is that I knew them as a portfolio company for many, many years. Worked together very closely. They helped us scale from roughly 5 million in recurring revenue when we invested to much more than that, when we exited the private equity then later I became a limited partner and now a general partner. For the last few years, joined in 2022 everybody is Cyprus, very similar to my background. I’ve been an operator. I’ve been an entrepreneur for many years before becoming an investor later in our careers. And we think that makes us well suited to sort of assessing entrepreneurs on the front end, having been in their seat before, but also kind of on the tail and after, we invest being able to provide a lot of guidance and counsel to them on entrepreneurial journey all the way from getting scale to mention exit to some sort of transaction. We’ve all been through that as entrepreneurs. We’re also as investors now, and so we feel that we can help them quite a bit on that journey. Tell
2:37
us more about that. So you’ve scaled two SaaS companies now. You founded and scaled two SaaS companies. So how does your experience as an operator shape the way you invest today, I
2:45
would say that everything in life probably works better. There’s some empathy involved, where you can see yourself or imagine yourself or you understand the other person’s point of view, their worldview, their mindset, how they operate, why they think certain ways and why they do that. So I think having been an entrepreneur operator for 16 years. Gives me some empathy. Obviously, every situation will different, but some little older business in tech space, at least similar goes to similar stages and challenges, no different than children, no matter where they are, and go through certain stages, from youth to teenage years, adulthood. I think it helps me cut through the noise as an investor and get to the gist of who the entrepreneur is, what the company is generally much quicker, just having been in the seat before and going to understand the lingo, but also kind of the what’s BS, what’s not, what’s going to work, what’s not, all that kind of stuff allows me and our team to go a little deeper in our assessment of companies pretty quickly, pretty early on. So we get to a definitive yes or no much faster, I think sometimes, than if you get into second analysis paralysis, because you’ve been an investor your whole career. And I think investors do that, but entrepreneurs appreciate it as much as we do, because their time is very valuable, we’re able to preserve that for them, being relatively quick with our decision making, very good.
3:52
So So Cyprus has this unique royalty based investment model. You also focus on what you call the emerging growth stage. First, you know, can you define what that stage is, and then talk us through your thesis and your strategy, you know, with this royalty based approach, what we’re
4:07
calling Emerging Growth in this case, and just be very point on this is revenue ranges. And call it 3 million, and lowest level to maybe 20 million, the high level, vast majority of the companies we’re looking at investing in are kind of five to 10, five to $15 million revenue, range of time we’re investing. They’re generally stage wise. They’re between kind of the bootstrap early friends and family, maybe Angel, maybe seed stage. So maybe at most, they raise either no money Bootstrap, or they raise some money from friends and family, maybe couple million bucks at most, or some light institutional money from like a seed investor or some sort they’ve done that. They’ve grown to, you know, 510, 15 million revenue. Again, mostly five to 10, though, and they’re before a big kind of growth equity, private equity type, major transaction. And we’re sort of the bridge between there. We’re sort of the bridge between those two stages. From the early stage, lots of people will give you money when you’re early or no revenue. When you want to raise a few million, maybe 4000 bucks, a few million bucks. Lots of people, where you’re 10 million plus revenue will give you 10 million plus of equity in the growth equity stage. But what if you’re like a few million in revenue and just want to raise a few million because you’re pretty capital efficient to get the next stage? That’s sort of been to answer your question, sort of a no man’s land. Historically, lot less funding because of fund size, really big, really small in general. So no one really funds that middle ground is driving so that’s where we play. It’s kind of emerging growth stage between that Bootstrap and seed. But before growth equity is our thesis, and that’s the underfunded space, and we can invest there successfully in terms of the model that we invest through. So
5:36
before we jump to the model then. So typically, in our portfolio of five to $20 million run rate business is going to be in your series B territory. You know, are these companies that aren’t taking the typical venture path because they’ve foregone, like, series a financing, yeah, and usually they’ve
5:53
either for gone to series A or have done maybe, like a small seed round of a million or two from infusion. But generally speaking, they’re pretty bootstrapped. They’re in the non coastal cities like Nashville, Dallas, Denver, Phoenix, places like that, where they can be a lot more capital efficient. So they generally have foregone, like a typical large equity route or series, a type transaction. We’re not preventing them doing equity. We’re a bridge for them to extend their runway a little longer without equity. So then when they eventually raise equity, they’re bigger. Better valuations, better terms, better everything, because they can delay doing every router. There are 1015, 20 million to doing their five or 10 million. Got
6:28
it and give us the broad strokes of this, this bridge in this royalty based concept, royalty based
6:32
financing is something that we pioneered about 15 years ago with Cypress fund one back in 2010 and as a reminder, I was a portfolio company and fund one back in 2011 and 2012 to one of the early recipients of this type of financing, we believe it combines the best of equity and the best of debt. At this point in their trajectory, equity is the most valuable asset or resource the company has because they’re growing so much they have so much growth ahead of them, given the markets they’re in, function point of growth they’re at and everything they’re valuable equity is extremely hard to give up at that point. They don’t want to do it. They don’t have to. So we’re providing them a hybrid equity debt solution that we think reminds the best elements of both. It’s like equity because it’s patient, provides guidance, like an equity investor might do, and you pay off the large amount of it and an exit transaction when you can afford to pay it off. That’s where it’s like equity, patience, guidance and big payoff and exit. It’s like debt because it’s non dilutive and has a cap cost that’s for different equity. The cost is, cap is certain multiple amount you invest. The high level we’re doing is we’re investing in a world based structure will give the company a few million bucks to invest in growth, primarily towards things like go to market and product. So the true growth initiatives not working capital. It’s for a business working and can work better and work faster, work more efficiently, work fast, grow faster, things like that. A true acceleration capital. We’ll give them a few million bucks an investment. They’ll pay us back via a monthly royalty. That’s a small percentage of the cash they collect from customers every month. So we can always afford the monthly payment, because it’s not tied to revenue. It’s tied to the actual cash that comes in the door from customers, but pays a small percentage month, but keep paying that royalty month until an aggregate they hit a predetermined multiple. They’re not being invested that starts generally at one and a half X. It can scale over time, in a few years, to call it 2x the
8:13
amount we invest in. And then the royalty tabs, yeah, at that point. And then you keep
8:16
paying that month royalty to pay it off. Once you paid it off, you’re done organically. That might take, you know, 510 years, depending on how fast you’re growing, but almost no one ever organically pays us off in 510 years. What almost always happens in all of our exit transactions, we’ve had over 35 or so in 10 plus years. Generally, what happens is, within a few years, called two to four years, they’ve grown so much with our capital, with our council, our support, they’ve grown so much that they’ve gotten to a scale where they are attractive to a growth equity investor, a private equity recap, and my two companies did, or an acquisition by a strategic buyer of some sort. So usually, in a few years, some kind of transaction happens, and they’ll pay us off early via that transaction. But it’s my earlier point, the payoff is time to transactions they can afford to pay off. Unlike traditional debt, where there might be a boom payment due in three years, no matter what happens the company, equity is a cap cost. So the general idea is that it’s significantly cheaper than equity if you’re growing rapidly. So in the time what we invested, you might have grown your equity value by five or 10x you’re only paying us back, let’s say 2x so it’s not cheaper than equity if you’re growing quite a bit, you’re also not giving up, you know, control, provisions, board seats, block and rice, things like that. You might with typical equity. You can delay all that a little later, when you can time it to the time that works for you. And then, compared to debt, it’s a lot more flexible price, a lot more optionality, because there’s no fixed monthly payment. There’s no fixed end date, which is a big deal. No like tranche due to three years or whatever. No guarantees, no personal no guarantees, no COVID. So very flexible for the entrepreneur. So it sort of makes this monthly payment that they can afford and time the exit of the big payoff to a transaction, but at a much lower cost in equity. So
9:47
if you compare it just side by side with debt, I can see a big advantage right debt. You got to pay a fixed interest, regardless of whether you have an up month or down month. You have to finish out your term you have interest, et cetera. And so I. Could see how this, on a pure basis, would be much more flexible and sort of palatable for founders than debt. What is the equity component? Are you adding a warrant, or what is the equity component? So
10:11
there’s two equity components. Yes, we generally have a small warrant that gives us some upside. Right now, our return is capped, or return is sort of fixed. No matter how well they do is sell for 50 million or 500 million. Our returns the same with the royalty profile, but the award gives us a little bit upside kicker to what’s called financially incentivized to help them with go to market and channel and product and capital strategy and other things that we spend a lot of time supporting companies with. So there definitely is a small warrant kicker involved as well. But in addition, Cyprus has the ability to do either companion or follow on equity in the right deals, where alongside our royalty, we might be able to put in some equity, depending on what their capital needs are. They might need more than we can invest via the royalty model and or they might want some founder liquidity, other various reasons they might want for some companion equity to our royalty investment. But our Brenna and modern investment truly is the royalty, as we’ve done for five funds across 15 years now and successfully over 60 companies now. That’s the bread and butter model. We also have the ability in certain deals to put in equity as a follow on after the royalty transaction. You can imagine sort of betting on your winners. They’re doing well, and now they want to raise a much larger equity round. We can do the leader be part of that as well, almost the typical growth
11:18
equity type investment. So how do you position this as a product to LPs? Right? Like it’s, it’s almost like a hybrid. It’s not like pure venture. I mean, the opportunities are venture, but the return profile and the structure of the investment, you know, it looks a little different. It’s something more akin to debt or private credit or something. So what sort of LPs are interested in? In, how do you position it as a product in this basket of alternatives? Sure,
11:43
it’s definitely sort of a middle ground. Is not a great answer. But you asked, it’s not equity, it’s not debt, it’s sort of right in the middle, and the return profile mirrors that middle ground I’m talking about here. The analogy we like to draw us to the baseball where the typical venture model is you’re gonna hit one or two home runs and you’re gonna strike out or minimal returns on seven or eight deals out of 10, let’s say. But the power law is, in fact, that you can get a good return that way. Typical debt profile is, if you want to keep an analogy going, a bunch of singles, no strikeouts, no doubles, just a bunch of singles on the debt deal. Typical debt deal, we’re typically competing with equity. 95% of time when someone’s talking to us, they’re also other options of growth equity or some sort of equity transaction, and we’re something that allows them to delay doing that equity round by a few years. Is generally how they look at it. Our return is more like a bunch of doubles. So there’s no home runs, even if the company’s a home run, and plenty of companies have animal runs. We’ve got companies become billion dollar companies. We’ve got companies sell for hundreds of millions of dollars to strategics. We’ve got plenty of homes in the portfolio. Our return will they pay us is cap that’s called a double. Our returns also kind of forward at a double fuel, because we’re getting a monthly royalty every month. So you have a four on your downside, you’re not going to be zero, because they’re paying your royalty starting in the first month, and as long as they’re continuing to generate revenue and collect money, they’re going to keep paying you every month. But you’re also capped on the upside, so sort of guaranteeing of a double on every single deal, but no strikeouts and no home runs. So for LPS, who want sort of a good hybrid mix, don’t want the higher level risk of venture or even equity, nor do they want the sort of CAP caps, truly cap return of debt. This is a good hybrid for them, because they can get upside from the royalty returning anywhere from one and a half to 3x on the royalty payments, but they also get upset on the warrant as well. It could be worth something meaningful on some of our transactions.
13:24
And how do you deal with loss ratio, right? How do you, how do you survive that on this industry, where most of these investments end up, you know, going to zero or being one axis, as you mentioned, if, if you’re having doubles on one side, you know, what is, what does the loss ratio look like?
13:39
So, knock on wood, we never had a zero on any deal, because, to my earlier point, on day one or month one, they’re paying a royalty month. And knock on wood across 15 years and almost 60 companies. And I don’t know how many royalty payments that is. You multiply it all out, no one is a royalty payment to us. You know, because they can afford it. It’s a small percentage of the cash that came in the door. If no cash came in the door that month, which I basically was possible they would pay us nothing that month if they collect more because customers prepay them or whatever happens, they pay us more. So they’ve never missed a payment. And solar loss ratio is almost nil. Just being transparent, we’ve had a couple companies much earlier, in earlier funds that didn’t do as well, but they still paid us back nearly 1x before they went out of business,
14:21
and you gave me, last time we met in Dallas, had a fun time out there, but you gave me kind of a the broad strokes on the economics of a deal for a founder and how much money that founder saves on the exit working with Cypress versus selling 25 30% whatever it is, at their A or B round. Can you just give us a quick example of what that could look
14:44
like? One example, I guess. Let’s say that someone wanted to raise $5 million and they raised 5 million bucks. And also they could raise 5 million bucks in equity or wherever, in the typical equity terms you let’s say that the highest level, the growth of revenue equals the. Cost of the equity. You know, if you double your revenue, your equity doubled as well. At a high level, your revenue multiple. And so our average company after we invest, this is across again, 50 plus companies which 30 plus have exited the average company that exited us after they after we invested, More than tanks their equity. Value from the call, 10 million, 100 million, 100 million enterprise value, 20 million, 200 million, it 10x equity value after we’ve invested. And so if they had raised equity for 5 million and they tax their equity value, high level equity would cost them 50 million. On average, our companies pay us back. Call it 2x in a few years. So on average would have paid us 10 million. So that delta of 50 million versus 10 million or $40 million cost capital goes entirely to shareholders, the founders or the early investors in the company. $40 million in that example, will come at least 5 million the royalty versus final equity. Now, to be transparent, the trade off is the equity payoff is nothing, nothing, nothing. 50 million an exit, our payoff is a little bit, little bit, little bit, little bit. 10 million total, right to get a 2x so there’s the cost. Is you can’t that literally, payments every month. Is not another hire you can make or not of the marketing trade show you can go to. Are you gonna save some of that to pay us? So you, instead of hiring 12 people, we can hire 11 people. You know, something wrong like that. There’s a trade off to it. But in general, most entrepreneurs are very bullish on equity. Things to be worth a lot, and they think they’re gonna 10 extra equity. So it’s gonna cost them 50 million. Or our thing might come cost them 10 million, in the example of raising 5 million. So that’s a very pointed example of the financial side of it. The other non financial, or more qualitative side of it is, you’re an equity investor. We invest equity as well. We all know there’s benefits equity as well. Down the road, there’s the control provisions, there’s blocking rights, there’s board seats, there’s redemption rights, all that kind of stuff, that there’s a right time and place for that. Potentially the company later, when they’re bigger, but maybe right now, with only five or 8 million revenues, not the right time of doing all that, giving up too much control the company, allowing somebody else that, blocking rights on a future transaction this early, might not be the right thing. So most of our entrepreneurs, there are other term sheets. Like when I was on the other side, we had like five or six equity term sheets and the one Cypress term sheet back in 2011 and we show Cypress because we wanted to choose our own destiny a little bit longer until we gave up that kind of board seat control equity, all that to an equity investor. So we needed now to kind of punt or delay that type of transaction to a time and evaluation and a partner of your choosing down the road, a lot more options. These are a lot bigger in general. Are there certain
17:23
unit economics or capital efficiency metrics or characteristics of the businesses that you’re focused on that allows you to achieve this very low loss ratio? Yeah. So
17:35
we focus very heavily on number one, the founder and the founding team we’ve been entrepreneurs. Do they have the resiliency, resources, smart, subject matter, expert, they have that to build it. Do they have the right team around them? All that kind of stuff? That’s by far the biggest criteria. But second behind that is your question on unit economics, capital efficiency. We’re not investing on the coast, in Silicon Valley in Europe, Boston. We’re investing in the Midwest, mid south, east, Southwest, places where $1 can be stretched further, many dynamics, including people and rent and things like that. So they’re generally pretty capital efficient. What do we look for at a high level? We’re looking to see like the retained earnings and or the money they raised today is that number less, less than the amount of run rate revenue they have now. If they raise a million to get to 4 million run rate, that’s decent. If they raise 4 million to get to 2 million run rate, that’s not so good, or as good terms of capital efficiency, in terms of so that’s kind of a quick hand that we look at is like either negative retained earnings or money raised compared to run rate revenue, in terms of unit economics, really the same stuff as everybody else’s, you know, LTV, CAC and retention and gross margins. You know, capital was cheap or cash was cheap earlier, a few years ago, it’s not so cheap now. So you really have to be efficient in terms of your margins. Have a profitable business they can run for the long run. Otherwise, we won’t. We don’t want to invest in it, but I still want to harbor the fact that our number one factor, though, is looking at entrepreneur and making sure that him and her and the team is the right one to scale the company. Because that’s also to
19:02
pick one key ingredient that makes a company investable at any stage, what would it be? Just kind of said to
19:09
the people, so I’ll still kind of see on that thread there, we were never going to make our fun on the deal terms, like we got an extra dollar valuation, or we negotiated this, this right, or that right, whatever. That’s not. It’s about the people being resilient, being adaptable, and learning how to pivot. As cliche as it sounds, the environment is choppy. They’re gonna be all operating and all entrepreneurs. Can they deal with that choppiness, the ups and downs and all that. So we’re really trying to assess that. And so if the person is that, and they surround themselves with a good team, then we know that we found a winner.
19:41
Talk more about the team component. I know that you’ve said that getting to a few million of revenue is an individual sport, but scaling is a team sport. So how are you thinking about founders, ability to attract, motivate and retain top tier talent? And how do you think about that component of going through the scale exercise? And. In building that team, yeah, so
20:01
they have to have a growth mindset or learner mindset, versus a fixed mindset or knower mindset. You’ve heard those terms before, meaning that they want to listen and hear opinions of other executives, other investors, other whatever customers, spouse, whatever it is. They have that first form to start with, that having that mindset allows them to say, Well, I do want to your point. This is not a this is a team sport now an individual, through brute force and hard work, and, you know, be some luck. And, you know, rising tide lifting, all markets can probably get themselves at a few million around you, kind of, quote, unquote, on their own. You know, founder led sales, minimal or non existent sales team, if you’re going to try to get from few million to 10s of millions of some sort of scale that’s repeatable and efficient. It’s a team sport, very much, very much team sport, different people with different disciplines. People are left brain, right brain, more organized, or this, or all that, you need to have a whole team around you. And so we really want to test for that, and to answer the question, how do we assess you know, this is the kind of person who can attract and motivate and retain an A team around him or her. The old adage that a players attract other A players and B players attract C players, that whole thing want to find that person. And a few things that we test for is like in conversations we have with them, if they bring other people to the call or the meeting, do those other people participate and engage as well if they do this, generally a positive sign. If it’s good stuff they’re saying. If they don’t, it might mean that other teams, the rest of the team, is incompetent, or the CEO doesn’t trust the rest of the team, neither wishes, which is good thing if they don’t trust them or they’re not competent. So we want to see that they’re participating in a part of the part of the conversation as well, and they want to be insightful and need things there. We also want to see if this person is going to attract other people to join their team. And they worked at x, y and z company, and they brought over the sales guy from there, the finance guy from there, or whatever they have people follow them there. But I’ll say the last thing I say the witness says we have this is one of our questions in our internal deal memos, is one of them is like, would you invest 100,000 of your own money in this company before we invest our funds money to it? The other one is like, Would you like this? You’re the deal captain saying, Would you want to work with this person in the next 510 years, or work for this person for the next 510 years? So if I can’t answer that, I don’t want to spend 510 years working with this person, probably nobody else would want to work with them either. So it’s a little space, but one of the tests, at the end of days, do I personally want to work with this person or for this person the next several years before I want to invest in them? Vince, when
22:31
you look back at companies that have successfully scaled, what’s one thing that they did early on that set themselves apart? I think
22:37
the number one thing that sets them apart again this early scale, I call it 510, 20 million in revenue trying to grow is something called ruthless prioritization, not just prioritization, but ruthless about your product roadmap, about your channels, about your geographies, about the people on the team, and we’re gonna spend your mind share as a leader in the company, or founder of the company, is ruthlessly prioritizing that to make sure that you’re doing the things that are the most important company and really succeeding at those, even at the expense of cutting some of the things are not as high priority. Of course, it’s really hard to be successful lots of different things. You’re this small, this resource constrained. It’s really got to pick a few stick those lanes and do well at those. Love it.
23:17
Love it. Many early stage founders struggle with prioritizing. Do you have an example of a company that ruthlessly prioritized the right things and and it led to some outside success? So okay,
23:27
everyone had a lot of outside success that you and I and everyone’s heard of, because I’m not gonna answer more portfolio companies, because I’m honest, most of our portfolio companies are trying to ruthlessly prioritize, so they’re not necessarily great at it. Yet, a lot of shiny balls are chasing things like that. We’re trying to corral him a little bit sometimes. The example is how I actually learned this term one of my classes from business school was an early employee at Facebook. He was in charge of sales when there were about 80 people, and was with him from about 80 people to call 8000 people. So massive scale of growth in the time he was there. He was in charge of worldwide sales or something. I invited him to come speak at one of my startups. We call sales workshops. Our sales team kind of motivate them. Here’s this guy who helps scale Facebook, whatever, and he had a great talk and fireside chat, I think. And then the one thing he left with everybody was this concept of ruthless prioritization with our sales team and the rest of our team. And what he was saying is, where I’m going to steal his story here is that even at Facebook, when we were going from millions to billions of dollars in revenue, even at Facebook, with seemingly unlimited resources, even we had to prioritize things that I mentioned earlier. So Facebook has to do it at billions dollars in revenue when their scale, why wouldn’t a $5 million startup have to do that? You know? I mean, so that sort of puts in perspective that even they do that, even Google has it prioritized. So you certainly need to prioritize your time and your resources.
24:45
Perfect. Vince AI is lowering the cost of building a business. How is this shifting the startup landscape, and what does it mean for companies in the emerging growth stage?
24:52
I think there’s probably two concepts here. One is that as the cost of building or the cost of scaling, it’s obviously cheaper. More they can raise less money, or no money, because the round size is going to be smaller. They can be tranched out over more time, or they don’t need to raise money period. So bootstrapping or light funding, or just raising a few million from Cyprus versus 10s of millions from something larger becomes more possible when it’s just cheaper to do things in general. That sort of feeds into the theme we talked about earlier. That’s similar between new sec and Cyprus of investing in the non coastal markets or things to be more capital efficient. That’s point one is the size of the deals can get smaller. You can just do more or less, so to speak. The second thing is that, and I’m not by any means the expert on this, but a lot of the foundational tools and the infrastructure for AI have been developed over the last many decades, especially last few years. The tools and infrastructure are there? The new thing to do now, which is what’s exciting for us as investors in the software space, is that business applications on top of those software tools can be enhanced and built. And that’s what we’re investing in. We’re not investing in the foundational tools. We’re investing in the business application that sit on top of those tools. And a lot more of those are being built. I would say, anecdotally, I’m trying to look this up. If five years ago, 80% of our deals were software. Now, probably 80% of our deals are more tech enabled services, and the tech enablement is AI, an AI layer that enables them to deliver a service to a pharmaceutical company for their marketing efforts in a better way than Saska ever do an AI tool that sits on top of medical records are being retrieved, but being translated now and summarized in a more efficient way for the law firm, the paralegals using that so a lot of our investment has been in the technical services world has been enabled by AI that direction. AI
26:28
as a service isn’t a very good acronym. Love it, though. No, I mean, it makes sense. Didn’t mean to interrupt. Go ahead and finish your thought.
26:37
Yeah, that was my two thoughts on that one. Perfect. And
26:40
then you’ve mentioned that a hardware enabled software like IOT and sensors is kind of an overlooked opportunity. What makes this sector compelling? And why do you think more investors should be paying attention? So
26:50
just for background, both of my Industrial Tech SaaS companies were a hardware enabled SaaS, meaning that there’s, in one case, RFID tags, in the other case, GPS devices are installed on physical equipment, and then our software, which is most around me, but the software is what was the value, right? But the hardware to enable the software no different, like your ring doorbell or your IoT device at home. So that’s my background, so I’m not still a bias here, but hardware is something that most software investors will try to avoid, because there’s working capital issues with buying inventory or hardware, there’s installation and maintenance and troubleshooting and battery life and a lot of difficult things that make hardware Well, quite frankly, hardware is hard, or it’s hard to deal with. But my opinion, obviously, again, bias him, having scaled to this is in the hardware enabled SaaS space, hardware is hard. And actually the good thing about it is it makes your product a lot stickier once you install the hardware and you’re good. Just use the home example. You got the ring doorbell bolted into your door, or whatever you’re using the ring software on your phone. How hard is it to change that out to some other software, some other hardware? You’re not going to do it. So once you get it installed in there, it’s great. I think it’s an overlook segment that most software investors or tech investors don’t like to focus on. It’s not as sexy. It’s capital intensive. You gotta deal with things like working capital and installation and field services and things like that. But those are all things that a few of us on cyber team have had experience doing when we were entrepreneurs. So I think we can uniquely it’s an edge for us, a unique edge for us to be able to support entrepreneurs that are building those types of companies. We’ve had a few investments in that space, around drone detection with sensors, camera based security systems for ranches, in the military, the robotic space, all the kind of hardware, software component,
28:31
yeah, we look at those opportunities too. And there’s always a distinction between hardware that is very hard to develop and it’s very sticky when you get it with customers, but in theory, could be easy to copy right? Like, maybe our Chinese counterparts that can reverse engineer it pretty quickly and copy it. And then there’s hardware out there that has some sort of sustaining, persistent, defensible moat to it. Like, how do you think about those two areas, and how do you not fall in the trap of a really hard build that somebody else is just gonna spin up a copy and eat your lunch.
29:04
So the two I was discussing my two SaaS companies, one was proprietary, and one was, let’s call them commodity hardware. The commodity hardware one with RV. We event RV, the unit comes much cheaper. They can get as far down as like $20 out of five cents a tag that’s called an RV tag, when a materials, a material tracking site for a construction company or something for there you we basically bundle into the software and service. So you’re paying X dollars a month, called 10s of $1,000 a month, for a site, and that includes bundled in the software, the hardware, the tags and the services component. So even though it’s a commoditized product, an indicator is buying for 30,000 a month. They will manage my materials on industrial side for me. And under the hood, that’s a solution, job site coordinator, yeah, job site where solution, a bunch of readers already type all that. The second company that was GPS tracking there, we actually, actually use some of Cyprus investment to acquire a company in Montana. Those developing GPS hardware for the military and the spy agencies. Call it the three letter SP agencies in Washington, DC, they were developing hardware for them. We acquired them with some of Cyprus money, actually to help them develop hardware just for us with oil and gas sector. And here it’s proprietary hardware that would be ruggedized, intrinsically safe, fully potted, fully sealed explosion rated to be set on a oil rig, set in a mining site, set in a place where the explosive things happening. You don’t want to blow something up because your device is not safe there. The battery’s emitting too much whatever it is, right? So we developed a priority hardware there that became a move for us. We spent lots of money developing it, but then, once we got in front of customers, that’s the only one we could buy. If you’re gonna put a GPS tracking device on oil rig in the Gulf of Mexico, you can’t put another device there. It has to be our device, ours, only one that’s been certified by the EU, the United States, by Brazil, Australia, for use on these race right? So we came and moved for us, and then that then unlocked all sulfur revenue.
31:00
Awesome. Vince, earlier, you said that Cyprus only invests outside the coastal tech hubs. What advantages are you seeing? I mean, we talked about cost, right, capital efficiency. Ai plays a role there. But you know, what are some of the other advantages to being outside of the valley, and what are some of the misconceptions that founders have about scaling outside the valley. So I
31:20
lived in California. I was born and raised in California. I lived in New York for a few years. New York City. Live in Texas now for the last 15 years, when I was in consulting, I was in Chicago for about four years. In Chicago, five years a week, I basically lived in Chicago four years. I lived in all four regions of the country. Is my point kind of the south east, the West, Midwest. And I think one big kind of misconception is this is sort of a coastal, elite type comment, maybe, is that there’s only smart people who can build this stuff in South Silicon Valley or wherever. But no, they’re all over the place. They’re in Iowa, they’re in Nashville, they’re in Dallas, everywhere. So town is dispersed. And obviously these days, town is mobile. You can move around, remote, all that kind of stuff. So that’s one. Two is, I would say that, I would argue that if you’re building a vertically focused type company, if you’re focused on music tech, you’re focused on health tech, you’re focused on ag tech, you’re actually better off being we’re in actual for music, or in the Midwest or AG, or certain pockets of the country for healthcare, where you’re closer to the customers, closer to the people who are in the ecosystem, closer to the supply chain, where it is, versus building it in San Francisco or bay area or building in Boston. So there’s actually an advantage to being in some of these markets. I think it’s Steve Case and the rise of the rest book and that whole revolution capital stuff, they talk a lot about that concept. It’s actually better to be in the other cities and closer to the customer base, iterate faster and go cheaper, all that. So we believe that, we think it’s underserved. All of our investments are in something like 20 states that are not on the coast, so the middle of the country, perfect
32:45
and Vince. What’s a common fundraising mistake you see founders make at the emerging growth stage, and how can they avoid it? So
32:52
coming to this stage are extremely resource constrained, not just money, but time. And money more important than time energy. We at cybers call it management attention units. I can be in a meeting, but I’m not even paying attention. I only have so much attention. And you can give to something, and I think at this scale, something that’s totally underestimated, and I know I do, and I raise money a bunch of times at the two startups, is that the enormous amount of time and energy it takes to do it, to go and vet all these people, to get down slightly to wherever they’re sucking you. You’re selecting them, go through a diligence process, close all that stuff. That’s an enormous amount of time for the founder and or the founding team, executive team. And the problem is that a resource constrained, and if it sucks them away from their day job, so to speak, of what got them there is good sales and good product and good customers. If they’re spending all the time working on the fundraise, they’re not as focused on sales and marketing and product and operations and Customer Success and Support, then the company deteriorates, and the worst thing you can do in a deal is miss your numbers. I promise you X dollars in q3 and I deliver under X dollars in q3 or try to close in q3 q4 so I think they underestimate that. They need to find time to my earlier point, ruthlessly prioritize, build out a team they could delegate to. To my point about building a team around them to support that otherwise the process will fail, either on the front end, they will find the right investors or during the diligence process or the closing process.
34:14
Perfect. Vince, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about so
34:21
I’d love to hear from Kelly Loeffler, the new head of the SBIC he got a point a few weeks ago. She SBA administers something called the Small Business Investment Company program, the SBIC program. Love to kind of hear about any changes or things you might want to do with that program. Kind of enhance its ability to more quickly find, you know, innovative tech companies in underrepresented areas, underrepresented founders as well. I’d love to hear your thoughts on that.
34:44
Vince, what book, article or video would you recommend to listeners?
34:47
So I just finished reading a book that’s a few years old called VC in American history. It talks a lot about sort of the history of venture type investing, even it’s not financial. Let’s call it in American history. Be all the way back to, like, whaling expedition centuries ago, where people would fund, you know, a bunch of boats that went out looking for good whales to get oil from and all that. And, you know, kind of very, very similar kind of return profiles as venture capital. So I think the thing is that most people think venture capital is, you know, decades old. You know, from 50 years old at most, but really it’s been around for hundreds of years. Not
35:22
all ventures are tech Exactly, yeah, love it. Vince you have any habits, tactics or behaviors that are a force multiplier? So
35:29
I was embarrassed to admit this, but I keep meticulously two massive task lists, one for work stuff, one for personal stuff, and literally, everything goes on this list, Google sheets that I can access on my phone, access on my laptop, access anywhere I think of it. I gotta take something out all the way home to I gotta, you know, reveal a blog to whatever everything goes on this list is meticulously prioritized and healthy is a forceful part. Make sure I get the most important things done first. Don’t drop any balls. But also kind of, this is sort of a weird thing to say, but if I had a few minutes of gap waiting in the doctor’s office or waiting to pick up a child or whatever, I have a few minutes to kill between things, I can look at my list and find something to knock off real quickly and feel productive. Great force will provide things, writing everything down and prioritizing and keep track of it.
36:19
How often do you reprioritize it daily?
36:24
So it’s COVID, COVID. So these are things I actually have to get done today. I can’t go home today, or can’t go to sleep today, until I’ve done these things to things that’d be nice if I got to it, but if it was the next week, it’s fine or whatever. And constantly, things get moved around. You know, reshuffling dual, but it really helps me make sure the right things get done in my personal and professional life. Honestly, for everything we’re tasked on sales of projects as well. But I’ve had that list going for I’m not kidding about 25 years, exact same format, everything that works really well. Love
36:56
it. And then finally, here Vince, what’s the best way for listeners to connect with you and follow along with Cyprus. I would
37:03
say LinkedIn for both me and Cyprus, but if you reach out to me on LinkedIn, include a note with how you found me or who connected you to me, and why you think meeting will be beneficial, because I like to actually meet with everybody I connect with on LinkedIn, whether through a Zoom meeting or in person. So give me sort of a reason why you think we should meet. I’m sure there’ll be one that we want and we can set something up.
37:23
Well, good. He is Vince Shea, and the firm is Cyprus. Vince, it’s been great getting to know you Sharon deals. I think you know, Cyprus is a very unique model. We don’t feature a whole lot of venture firms that have this approach. And while you know the capital requirements on the royalty side in real time. You know, it’s something that needs to be managed. As Vince articulated earlier in the interview, there’s a lot of money potentially to be saved with this approach. So while it’s different than new stacks, I just think it’s creative, it’s innovative, and I really appreciate you coming on and sharing it with us today.
37:56
Have a great time. Thanks a lot. Nick, thank you, Vince. You
38:05
all right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently. Thanks so much for listening.
