52. The Hunt for Investors, Part 2 (Mark Peter Davis)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Mark Peter Davis of Interplay Ventures joins Nick to cover The Hunt for Investors, Part 2. We will discuss the remaining questions including:

  • When an entrepreneur gets a first meeting w/ an investor, what should they do, and conversely, what should they avoid doing in that meeting?
  • After initial meetings, let’s say the entrepreneur has some indications of interest… what due diligence materials should a founder consider and prepare for?
  • How do you advise entrepreneurs w/ regards to deal terms, valuation and maintaining the appropriate level of control?
  • Tell us about the Founder Catch 22, and what should entrepreneurs do about it
  • You’ve written a lot about failure on your blog; can you talk about what you’ve learned and/or any lessons for entrepreneurs or investors.
  • Can you talk about some of the things you’re currently up to and most focused on?
  • If we could address any topic in venture, what topic do you think should be addressed and who would you like to hear speak about it?
  • What’s the best way for listeners to connect with you?

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Fundraising RulesGuest Links:

Key Takeaways:


1- The Search for Investors

Mark suggested that entrepreneurs spend less time looking at an investor’s website and their advertised thesis and spend more time looking at their portfolio.  What companies have they invested in?  What stage and sector are the startups at investment?  And Mark stressed the importance of the Pre-investment process.  He talked about how this exercise is a bit of a game and part of the game is to build relationships early-on.  If one is connecting with investors long before a fundraise, this gives the investor an opportunity to get to know and build comfort with the founder, the concept and the sector.  Mark said that, “it’s the little things that signal a level of competence, that makes it less scary to give them your cash.”  When an investor can trust an entrepreneur to follow-through on their assertions, they may just ask if they can invest before a formal fundraise begins.
2- Syndicate Construction
Mark suggested that founders build three types of investors into their syndicate.  There should be one party that is the trusted resource for the entrepreneur.  Another party that will de-risk future financings.  They could be a smaller investor, but maybe they most often cut a large check at Series A.  And the third investor type that he suggested is one that can take operational friction out of the plan.  Maybe they have expertise in the sector, the market, they have strategic contributions on the fundamental growth drivers for the business or have been an operator in a similar context.
3- The Three Necessary Components of a Fundraise
  1. The Bait:  The executive summary.  Doesn’t need to fully explain your business.  Just needs to address the basic characteristics of the business.  Sector, location, team bios, raise amount, traction.  The goal at that stage should just be to get a meeting.
  2. The Presentation:  The powerpoint deck.  More detail than the exec summary.  Includes a deeper dive on the previous elements plus some additional elements.  If you’d like to read more about what’s necessary in the standard pitch deck, you can check out the previous tip of the week called, the Elevator Pitch, that was covered on the episode with David Brown.
  3. The How:  This is the operating model, not the financial model.  It illuminates the key drivers of value and the key cost centers.  What’s the cost of customer acquisition in X channel?  What’s the recurring and lifetime value that each customer contributes.  With this detail it’s very easy to understand the go-to-market strategy, what acquisition data is known and what still needs to be tested.  This illuminates the key levers that the founder will pull in order to drive value and justifies the cost-side actions and need for outside capital.
And remember that the result of a successful go-to-market plan is market share capture.  Not the other way around.  The strategy should not be to go out and get 1% of the $10B market… the discussion should be about how the startup goes out and wins customers… with the result being share capture. 



Tip of the Week:  Tips for Fundraising Entrepreneurs



*Please excuse any errors in the below transcript


Interviewer: So when an entrepreneur gets a first meeting with an investor, what should they do and conversely what should they avoid doing in that meeting?

  I think the key, and there’re dozens of answers to this I think the key in their first meeting is understand that your objective is to get a second meeting. It’s kind of like the same lesson what the executive summary and the one pager. You got to think about the fundraising process as a sequence, you’re always trying to get to the stage and then eventually by virtue of that you’re close to deal. If you’re trying to close the deal at every stage, you can come on too string, you might be all you’re trying to talk too fast to force too much information in. In the first meeting you wanna get people an eighty twenty understanding of what you’re doing, how you’re doing it and you wanna go through kind of the story. The team background should build up to a pin point that they saw which release to a solution or some pricing structuring which if you do the bottom of math naturally translate to a market size because you got a price point you want to quantify how many customers are out, you can multiply and you start thinking about who else is doing it. How you compare to them? There’s a lot of new answers on each of these things that you should deal it as the right way, not a really a wrong way but there is a generally a way people expect to see it. SO for example just to take an anecdote, on the competition slide there’re some people who’d like to show tables of features, So they’ll say alright. There’s five companies, there’s nineteen features and here are the check boxes and I meet at the most checkboxes. I think that’s a really bad way to present how you are differentiated only because that looks like an arms race like alright you look at the companies like alright so they can check this box and the same zero model. This is very tactical whereas you need something with two by two. You can start to show kind of strategic difference if you frame it right. “hey we’re coming up with a different approach”, and that translates to a different experience or different barrier, something that’s a little bit more compelling and sustainable. So each of these segments has kind of their own story and they are covered in the book but there is getting each slide right thinking about it from the right direction. So some people down the competition slide will just simply list their competitors not talk about why they are better. That’s in missed opportunity. It seems like that. Things not to deal with my favorite example is2:11 amazingly I don’t know one out of thirty forty founders, founding teams will argue in the meeting. That doesn’t seem like the team is there. It’s kind of 2:22 in a line.

Interviewer:  Argue with each other or argue with the investor.

 No with each other. They say well we don’t think about it that in some of them crack each other a little bit. It starts to be clearly kind of they haven’t figured it all out.

Interviewer:  Recently I was at a pitch event and I thought the entrepreneur was gonna jump across the table and strangle the investor.

 Hey look you know, I don’t know, no investors knows at all, I figure it whenever I’m meeting an entrepreneur. The entrepreneur knows way more about their company than I do and I’ve seen a lot of investors. I think they feel maybe that because they’re looking a lot of companies. They have to have expertise that’s probably impossible to have across such a broad range of sectors. So I can see that being frustrating for some entrepreneurs and you got to need a little humble pie to go through the process but I think the best investors know like there’s no, if you’re looking at 400 in this three segments and it’s given you, you don’t know as the guy has been in there for ten years. You might see patterns, you might have tips but I expect entrepreneurs to be smarter in their space then I am. I’ll be looking for patterns across spaces. So yeah I can see that’s definitely frustrating for folks and I think entrepreneurs have to go into the process knowing there’s egos because there’s people involved. The industry has set some VC’s that they feel like they need to. They are tend to be experts even when they aren’t. That’s just the social dynamic other which is the strange one. SO that’s just part of the reality unfortunately.

Interviewer: So after initial meetings what say the entrepreneur has indications of interest? What should a founder consider and prepare for with regards to the due diligence phase?

 The key is to have those documents upfront. There’s gonna be a bunch of other stuff people might ask for. VC’s really vary in a level of diligence they do. Especially 4:05 round are happening so fast to so many small investors now used to be a legal scrub happened or we turn through every page of every employment agreement. We are not seeing that to the same extent people aren’t doing tech diligence the way they used to. They just show we can build it most of the time unless it’s a really, until the whole thing hinges on some complicated never before existing technology. So I don’t think you need to do a lot of prep other than the three documents. I’d focus on running the company and then as things come up I’d say the key is to be responsive to accelerate the process by getting people the information they access any quickly but probably not worth doing hours and hours and hours and hours of documentation prep before you’re ready. Now that’s said if you’re weak ask VC’s early on “hey what you guys doing the way of diligence when you look for?” They may say “hey we get serious we’re going to wanna turn all these rocks over so if could start categorizing part of your legal documents in a certain way if you haven’t already”, whatever that’s not a bad thing to do but I feel like increasingly in the very early stage it’s not a core part of the game.

Interviewer: How do you advise entrepreneurs with regards to deal terms, evaluation and maintaining the appropriate level of control?

 So it’s funny. I think that there’s really a , I know if they count except always coding a range of there’s not that many, there’s only like six seven or eight terms that are really negotiated in a term sheet and although rests it kind of standard and for my experience there is usually a founder friendly deal or investor friendly deal on the deal almost everyone does on each term and so very little of it actually in the early stages really is much about negotiation although entrepreneur might be anxious about it, it’s far more about whether you are in or not as an investor. The other mistake sitting entrepreneurs do make that said is they focus exclusively on evaluation. I think that’s because it’s the easiest thing to grasp. It’s a number, defects of illusion and illusion matters for sure but there are other facts here the people should be thinking about. They should be thinking of four dynamics whether it’s a balance board or founder control board, those things typically vary with the market dynamic. How path of market is for the entrepreneur space and how hard it is in general and varies by stages while so I’d say that seven or things that seems to be kind of a cultural norm based on also probably the region of this country you’re in for the venture market there on how these deals get done and if you’re paying attention you’re doing research, the negotiation should be super complicated. I think the thing is to get a good mentor early on. I did mention before; one of the things, this is with 6:39 in here for folks to know, interplay when we’ve created a number of companies we’ve cofounded twenty companies to this point, ten of them are companies that are designed to provide the core foundational services that all entrepreneurs need. I found that when I was CEO of my last company I couldn’t find service providers who kind of build for us by us. They were people from the tech or startup community. They didn’t build services and that made sense. They wanted to use fax machines, the list goes on. So we reimagined all of the major plays in that sector, in the services side and build them and so they become very much a platform for material percentage of all venture back companies in the country now. So those include, we have in trans brokerage, we’ve got accounting and finance, marketing, consultants, business development consultants, we’ve educational platform, commercial real estate for shopping7:29 , people find offices, recruiting, software development and product. We have legal services and I’m in a blank on one or two, the list goes on but I’d say is you don’t need to know exactly how to negotiate or read Alma base but if you surround yourself with the right advisors early on, it’s not that complicated and people who know the norms, they can do this off the cough. So just get that support, if you get that support you solve whether there are three year service providers or mentors and advisors, doesn’t matter but if you don’t have the great network of advisors and girls already which a lot of folks don’t, you can get it just by getting some grace tour like for example people pick up #Nomad or #Founder Shield or folks in #Common Legal, Those are three of the companies  we’re involved with and the guys who run those companies are veterans in the startup scene and tell you yeah you should have, this type of part is preferred at this stage in the game or not based upon the market where you’re located, how many VC’s you have and here is what’s unreasonable to ask for.

Interviewer: Mark can you tell us about the founder who catch 22 and what entrepreneurs should do about it?

 Yeah I think just there is this frustrating point. I talk to dozens of founders each week or reaching out to pitch but I don’t say; hey look this is interesting but we’ll be probably interested when you’re a little further along. Very common you get nimnal back saying; I get it I’d love to be further along myself but we need to have money to make progress. The thing is every entrepreneur stays to that and so there’s this catch 22 and that you need money to make it up further but to need to get further to get the money and that’s challenging. The reality is many people before you, before the entrepreneurs who were starting now have dealt with the came conundrunk and they found scrappy ways to get through it. So there’s a number of solutions. You can go out there, you can get early stage. People who come in very early they don’t write very small cheques but you got to be the scrappy tenacious person to find them. Sometimes people who generate some revenue help fund the business and they go find they customer and they’ll do some unorthodox deal structure that they never do in the future where maybe a customer is paying for development or other things, there’s a consulting component to it. Whatever it takes the key is to be creative and persistent and aggressive about trying to go out and build it and if you can’t do that and give to that catch 22, you really may not be the right person to get to handle the company at least in the early days. So if that’s the case, go get help. Find another cofounder. If you can’t find the cofounder rather writing on the wall maybe you should join someone else’s company.

Interviewer: You’ve written a lot about failure on your blog. Can you talk about what you learned and/or any lessons for entrepreneurs or investors?

Mark: Yeah I’d say look failure’s part of the game. When you start a company I think you need to have the mindset that you’re going to fail in reasonable probabilities of any for your take. The reputation is people try to jump in and they say; I’m starting a company, they’ll announce it to everybody that will use a launch party and they don’t really have any feedback on the anterior yet and the six month 10:25 it’s going nowhere. They know they’re already gonna fail but there some more to fight because they publically committed to seen this thing through the logo for a long period of time and drag it out. I very much think the mind set needs to be a little different. Every venture you’re doing is an experiment until it’s not. Throw it out there sell it , see what happens and it ends up working you’ve got a business but until you have a business you have an experiment and I like to call it an experiment. I think it’s easier to go and tell them; hey we’re experimenting with this and it didn’t work out. No one cares. That’s a lot different than doing the exact same operation saying hey we started a company, it didn’t go anywhere, just sounds worse. So yeah I think failure is a big part of it. I think failure is good I mean right now we are doing pretty well, things are working in interplay. We’ve got a machine and we’ve got some profitable companies, we’re building and growing and I point to the things we are doing well and where they all come from and all of the things that are working for us come from my prior failures. So I think you gotta go with that mindset. You gotta accept it. The best entrepreneurs will experiment, rapidly experiment and fail a bunch. Be cool with that, message to the market humbly that they are experimenting because they expect us to be  fail and if you do that you’re gonna come out the other cycle , while bunch of lessons learned, may be something sticks and then you have  company.

Interviewer: Yeah we had #Steve Blank on the program.

Mark: Yeah he is the father of this.

Interviewer: Right, he was talking about how this is the only industry where failure’s celebrated and you can actually go out and raise more money after you’ve failed.

Mark: Totally but that’s said it’s still rather celebrated, it’s mortifying for entrepreneurs. I’ve lost people’s money. It was horrific, sleepless nights, massively embarrassed. It’s very hard. The key is it’s only in your head. You have to know no one else cares that you failed, you do. Of course your investors’s in want of those money but they new when they’ve been betting on early stage thing that it’s risky. You have to come out of it with your chin up and in you put yourself back out in the market, you realize no one else cares. You are the only one with the shaky voice talking about that, everyone else is focused on their own thing. Thank you, back on the horse, that’s the way it works.

Interviewer: Mark can you talk about some of the things you’re currently upto and most focused on over at interplay.

Mark: Yeah so again we’re rounding out the full suite of services for startups. We’ve got a whole slew of them. I recommend folks to listen to the power chaos, check out venturejuice.com. It’s a website we’ve made basically easy to sign up for all the different services the folks need in one place. We’re building network, got a number of tech companies we’re building. We’re looking for CEO’s sales people. We are hiring something like five to ten people a month for the companies we’ve cofounded. So if you’re out there looking for a gig let us know. If you’re an investor, all kind of common investing stuff, let us know and if you are an entrepreneur building a company or you’re looking just for capital, reach out, we are actively deploying cash. So we’re kind of fighting a multi firmware and because it’s fun and we can.

Interviewer: Is venturejuice sort of a virtual version of the startup foundry?

Mark: Yeah I’d say it is a, the foundry has things outside of the source components. We’ve got a number of tech and mobile place better not service in the startup community. Got introduced to stills a down 13:39 to those ten companies and what with a click of a button you get the intro to the guy into your accounting and your taxes for you, look into your insurance, look into your legal work plus after development recruiting. We’ve the leadership community. All of those things are there, very easily accessible and we just think it’s, we have people coming out at us, they didn’t realize all the things are under one roof or is easier to tap into as they are and now of one page, you can see it, you can click it, you can be on your way.

Interviewer: If we can address any topic in venture what topic do you think should be addressed and who would you like to hear you speak about it?

Mark: I don’t have a good answer to that. I think the ecosystems, they are around for forty fifty years and continuing to evolve in very interesting ways. It’s democratized in very powerful ways both by geography, of resourcing innovation around the world now and by in terms of who can participate both on the investing and the founder side. Founder side as capital requirements come down, investors as the laws have loosened up. So I think that there’s probably a hundred topics right at the best person to pick which topic we should be focusing on. I love watching and evolve. I think the bit the macro story which is happening is the human race just getting better in awaiting and improving the standard of living. That’s awesome and to behold a place small part of it in have that be my career is just a dream come true for me and I think the folks who share that passion or into the innovation economy, to keep perspective on what’s going on and you get out weeds, your day to day job and all the book politics, it’s pretty amazing to watch what’s happening around this. It’s changing tasks and in ways that are very inclusive and cool that have not existed in any time before in history.

Interviewer: So Mark what’s the best way for listeners to connect with you?

Mark: I’m super accessible, you can give me at MPD which is my twitter handle, you can come to interplay.vc. We’ve got a form at the bottom. I read and respond to everything that comes in. I 15:34 up of my email address out there just to avoid spam box but very very easy to get a hold up so you can come to the front door and just knock and we’ll answer.

Interviewer: Well Mark we really appreciate what you’ve created with the fundraising rules book and all the content on your blog. Best Wishes with everything and interplay ventures and thanks so much for joining us today.

Mark: Thanks for having me Nick. This’s awesome, take care.