12. Advising Early-Stage Startups (Glenn Gottfried)

So welcome Glen. Great to have you here, thanks for joining us.

Glenn:            Nick, it’s really great to be here and I really, sincerely appreciate that you invited me. When I heard you were going to be doing this and then you asked if I would be willing to do this I was you know honored by that fact; to be one of the first 10 or so that you’ve interviewed and I so I appreciate that.

Nick:               Absolutely Glen. So walk us through your background and how you first got involved in startup investment.

Glenn:            Yeah so I’m gonna try and truncate it because if you, your listeners would be bored to death if they actually heard it all and so I was thinking about that and figured out there’s 4 components to my background. Four components of my background that apply to what I’m doing today.

The first one and probably the most important one is I’ve been fortunate to lead the growth of multiple companies to exit. That’s been in a product, business development capacity or as a president/CEO. And so I’m an operator; whether; if you talk to a private equity firm they’re gonna say you’re an operating partner, you’re an operator.

What’s interesting is when you talk about leading companies through growth; it’s what startups are doing, okay. So I had that fortunate experience and I love the business of growing. That’s my passion. That’s my core passion and it happens to line up with my experience.

The second part is I have been an entrepreneur myself. And as a result I’ve gone through the process that these guys are going through; these individuals; these teams are going through; and having the whip sauce and the pivots and the things of that nature; the successes and the failures and the past as an entrepreneur.

I’ve also been fortunate that I’ve been a management consultant fairly early in my career after I got my MBA from Boothe and I was recruited away to a management consultant firm. And I got to do classic management consulting on strategy and marketing and organizational effectiveness for 5 years.

So I got to learn what it’s like to be a consultant. Advising, you know I bristles sometimes when somebody here’s what I do they go, “Oh you’re a consultant”. And I’m like, “No, no, no, no, no; wait a second”. And I’ll get into that a little bit later but there’re attributes of a consultant that do apply to being an advisor.

And the other part which will seem a little strange because you’re gonna say, “Well then how’d you get started?” But I’m fortunate in that I have mentored a lot of people in the past and that is accelerating the number, and therefore had the experience of advising and mentoring which makes me more valuable as times go on.

So if you looked at Glen Gottfried Inc. from just over 4 years ago where I exited the last company and made the conscious decision to do this. My own trajectory today is related to the startup of me 4 years ago and what I’ve been doing for the last 4 years.

I’m now reasonably well known in the community; but it’s taken 4 years to get there.

Nick:               Hmm.

Glenn:            Okay, so I’m no different from a startup. It’s why startups have hockey sticks because brand development takes time; experience takes time and I’ve devoted that time and energy to get there.

So those are, that’s my background. I could tell you more about the companies I’ve run but the crux, you know the nutshell is I’m in information technology, the application of information information technology software to solve business inefficiencies; whether that’s consumer or B to B.

Nick:               Perfect. Okay. So the topic today is “Influencing from Within – The Benefits of Acting as an Advisor”. So I mentioned sort of on the frontend into that Glen does a really good job of starting with startups early; working with them; taking an advisory capacity and then bolting that together with an equity position as an investor.

So before we jump in I’d first like to establish the stage and fundraising situations of startups that you often target and work with. When you first engage are startups in the fundraising process and if so what stage are they in or what are they considering raising?

Glenn:            So in this particular case I’d say companies are by design they’re outreaching, the founders are reaching out when they’re just starting to think about the fundraising or they’re heavy into it. It’s an interesting dynamic that once they’ve raised the funds and they’re past that, it’s rare that I get connected with them.

They could be in the middle. They might have raised half a million out of a million. They could be just in the early phase of trying to develop the documents but they’re definitely in a fundraising mode. Chicago; I purposely because of how my personal investment strategy runs and my time strategy, I spend a lot of my time with middle market companies on the board; and strategic advisor who pay cash and cash and equity.

When it comes to the early-stage-world; the startup-world I passively invest in BCD rounds where these are companies that are not, most of them or virtually all of them are outside the Chicago area where I have a passive stake. They’re much further along, they’re backed by some really you know heavy weights. And the ones that I look and focus on for the purposes of being an investor and an advisor, board member are going to be very early stage.

Nick:               Mm-hmm. And what sort of directional amounts are they raising at that early stage?

Glenn:            Well one of the first conversations I’m gonna have with them revolves around what do they need it for and therefore how much. But it could be anywhere from their initial seed to 3, $400,000 to a million and a half plus. Again you find that the; look at the; look at the entrepreneur, the business model, the market they’re in helps dictate how much money they’re raising and for what purpose and such.

And well we can get into more details on that but suffice, call it 300,000 to a million and a half although it could be more or less than those numbers.

Nick:               It’s always funny to me when you ask a startup how much they’re raising; they throw out a million and a half. And you ask why; you know, “What’s your burn rate? What milestones does it get you to?”

Glenn:            Right.

Nick:               And they have no answers for that it’s just like they’ve pulled it out of a hat so.

Glenn:            Yeah. What they hear is what the general market place has told them. “Oh you should be asking for this”.

Nick:               Yeah, Yeah.

Glenn:            And so that’s what they do and you go, “Come on guys”.

Nick:               Yeah well you know that’s atopic we could spend a whole ’nother hour on so maybe we’ll table that for another time but. Alright so before we address the why and the how of working with startups, let’s start with the where. So where do you find startups with strong potential?

Glenn:            First off, you’d earlier mention I do sit on; a judge; sit on these pitch events and things like that so a certain percentage of them do come from that environment. And I’m fortunate that several organizations view me as a qualified judge, panelist. And so that’s group 1.

I have developed good relationships with a number of the Angel groups in the Chicagoland area. Whether it be Venture Shot, Hyde Park, Heartland, West Sub-urban Cornerstone; they not always but they will invite me to some of them, particularly when it makes sense and it’s relevant.

The other thing and this is the one that Angel Investors or anybody who wants to be an advisor and wants to be an Angel Investor. I meet with so many early stage companies and I’m on the board of so many and advise so many at this point that I’m getting referrals directly to these founders who are like asking their cohorts, “Hey, who would you talk to?”; “Who should I reach out to?”

And so I’ll get introduced actually now and again. That goes back to been doing it long enough, my own brand is developing where I’m seeing things over the transom  that I’m not even out there looking for rather other Angel Investors are saying, “Hey Glen what do you think about this? Would you like to talk to the founder here?”; “Glen I think these guys, forget the money issue they need somebody who can help them move forward”. And they know that I will always give a founder 30 minutes.

Nick:               Whether you get an hour is dependent up on that first 30 (laughs)

Glenn:            (laughs)

Nick:               Yeah so;

Glenn:            It’s a very broad range that is available out there for any Angel Investor to go to. You get to pick. Some Angel Investors and I’ve actually had early discussions with new Angel Inv; or people who wanted to get into Angel Investing and they’re asking me that question.

And they’re being pitched by the Angel Groups to join their angel group and for some people that makes all the sense in the world. That’s really where they should be going. For other individuals they don’t need to go that round.

Nick:               And I think that’s a good endorsement for plugging into the startup environment, the ego-system wherever you’re at. If you’re gonna be a practitioner, if you’re gonna be a professional doing   this, so many strong weeds come through referrals. People you know. Whether it’s startup referrals; can be other investor referrals and we’ll talk about that another time too but certainly if you’re looking to get involved in a serious way you got to plug into the network. And like Glen said, you got to get your brand out there so.

Alright, so once you’ve identified a startup, what happens next in the initial engagement process?

Glenn:            I’m glad you call it an engagement process; you know both parts, because as I alluded to, I will take a 30 minute coffee with pretty much anyone. If I’m referred to them; I’ve seen ’em I’ll have that coffee. That 30 minutes is the start of a Go/No-go decision process that continues for a period of time.

In that first 30 minutes, number 1 – I’m sizing up the entrepreneur. My first hurdle in any involvement with anyone starts with the entrepreneur. Well on the jockey so to speak right. For any entrepreneur who’s listening out there, if you’re not open to; if you’re not coachable; if you’re not opening to listening and evaluation you’re never gonna get a second meeting with me or the likelihood drops off significantly.

So that first 30 minutes is that, but the same time that first 30 minutes of engagement process is learning about that business or if I already know about the business. I’ve seen a deck or getting a feel for it, for that founder. And them getting an opportunity to get a better sense of me, you know; because an investor advisor is a different thing from a pure investor.

You know. They, the founder’s side, if I want them to think of me as an advisor, it’s a 2 way street. If I’m just an investor and therefore I can be this arrogant whatever then I’m just a money person. And they can treat me as such. So it’s a 2-way street; very much so. So that’s stage 1 – it’s that 30 minutes/ 1 hour conversation with them.

My wife argues with me back and forth because I’ll; she doesn’t listen anymore or all that often to these hour-conversations ’cause she’s gotten tired of hearing of ’em. But routinely I’m gonna give some critical advise, suggestions, perspective in that one hour. She’s like, “you’re giving it away”. I’m like, “No I’m engaging in the process. If they find; if I think they’re worthy and I’ve given them some perspective that they find worthy it means we’re gonna have a follow up meeting.

Okay so in a lot of cases this is; you know that engagement process is delving into an issue that they are facing and providing a little you know framework. So I usually having these meetings and the first thing I’m saying, “What do you need? Why are you here talking to me? What is the most important thing that; or the top 3 things that you’re facing right now?”

And of course their initial reaction is money, most times; right I’m trying to raise money. I’m like, “No, let’s talk about a little bit more than that”. And when you start getting to the crux of it they start talking about their business model. They start talking about, they don’t understand this, they don’t understand that, they’re really looking for guidance and perspective.

And so that’s how our first hour meeting. And sometimes that first hour meeting, I’ve given my advice and counsel and they depart. And I’ll see ’em but there’s no investment there’s no advisor, that’s okay. As a matter of fact you’d be upset, I think, with me if I said every one of ’em leads to something. No it’s probably like with my current list that I’m engaged with probably have talked to 20 times, 30 times the number of companies that I’ve actually, ultimately  said yes to.

Nick:               Got it, so that’s sort of the initial meeting and then how does it go from there? How do you? You’ve talked about how you’ve sort of framed this advisor approach and you’re providing free advice.

Glenn:            Right.

Nick:               You know. You’re not charging startups

Glenn:            Right.

Nick:               To meet with you or

Glenn:            I wish I could

Nick:               (laughs) yeah

 

 

Nick:               So where does it go from there and how do you get to that point where either they’re approaching you or you are saying to them, “There’s a relationship here and there’s something we can do together?

Glenn:            It’s an excellent question. So at the end of that hour, hour and a half, first meeting where I’ve, may have been critical about a particular piece or made a suggestion for them to evaluate; number 1 – if I’ve done my job they’re probably reframing their own thought process and saying, “hmm, this is kind of an interesting guy here. He’s given me some really good, critical feedback and perspective. I got to cogitate on that”.

And that goes back to that first hurdle. Is that entrepreneur coachable? Do they listen? And so the really good ones are the ones probably that will make it to the next phase. Actually they do check back go back and they think about it and they’re gonna reach out to me. I mean always send a thank you and you know or they thank you, you know.

But that’s one of those gating factors. It’s not my job to pursue them per se but rather their initiative to go, “Hmm, this is the guy I should really establish the relationship with. And part of the reason for that is there are plenty of startups, plenty of great ideas out in the market place.

If it’s juts purely; if all you’re being is a pure angel investor putting money in passively, yeah, sort through and pick the best deals and put the money in and then see if they reward you. This one, that hurdle of them actually evaluating getting back to me and wanting that second meeting, is my first, is another assessment point of that entrepreneur.

If they’re willing to do that, that means there’s a connection starting. A relationship going beyond just I know him and you know we’ve spent some time together. So it’s a more passive approach. In that regard I don’t get, rarely do I get hot enough to me be the reach out point.

Now there are certain circumstances where after the fact, now they’re on my radar screen I may have a connection. I may have something come up you know, down a week, a month later that is relevant for ’em and I’ll give ’em that connection.

Again it kind of puts me back on their mind and I know they’ve got a lot of other things rolling around and so in some respects I’m the last thing they’re thinking about. But I also believe that our job you know when we’re doing this is that give back would be, “Hey I saw this, thought of you, here’s an article, here’s a connection. I’m not gonna tell you that it’s gonna work for you or not but here it is do what you want”.

So that second part, that second phase is 9 out 10 times they’re coming back to me and saying, “Hey can we meet further? Like what you’ve had to say. I have some other questions I need some other advice”. Then there you can then get into a very fast engagement relationship or you could take a long, long time.

I’ve mentioned like, well I’ve got a bevy of ’em. But one of them within 2 weeks after our first meeting was like, “Glenn I love your experience, I know you know this market, could be real helpful for me”. I saw what he did with the things I suggested and then basically within 2 weeks, “I’d like you to join our board of advisors”. Not in investment, this was just would you join our board of advisors.

And of course you know I’d done a little bit more diligence around it but said, “Yeah. Let’s get that next meeting talk about what that consist of”. It’s probably one of the fastest ones but that just happened recently.

Nick:               So you continue to work with them in an advisory capacity and help them with connections until it seems like they come back and say; and make you an offer to join the board?

Glenn:            Well sometimes; if sometimes I have to push I’ll make the request and finally like; it’s; for those of anybody who’s been in sales before;

Nick:               Sure.

Glenn:            Right. You know when, if you’re listening to the signals and so forth; you know when to do the ask, right; to close the deal. And so in some cases they’re the ones who initiate it but if things are stretching out and I think it’s time for me to pull the trigger and I think it makes sense then I’m the one who’s going to do the ask.

Now remember there are situations where I meet with somebody they don’t have all the documentation necessary to really go out and raise money. And so even though they think they’re needing to raise money; they’re actually well before that stage.

Those are ones I’m gonna pull the trigger faster, get them to either say yes or no because I’m not going to give them free advise forever, and essentially say but if I’m going to do this I need X, you know I need this or that before there’s even a dollar exchanging hands so I pull the trigger.

In other cases they have the documentation already formed; they already have some investors. And in those particular cases I recognize that I have to build the credibility with that founder, he already has investors and by doing so, developing that trust in relationship and add value. Now they’re much more likely to be open to, “This is our guy”; “This is the one we want as our advisor or board member”.

In most of the cases where I’m sitting on the board, I am the designate for the board position that’s voted by both classes of stock, in almost all cases. Even though let’s say on a million dollar raise, half a million has been raised to date, I end up becoming the at large board director. Not the designate by the preferred shareholders or that investing group, not by the founder but rather the one that is representing; the independent representative;

Nick:               Is that a challenge or is that just sort of legal having a right terms structure around your advisory position?

Glenn:            That’s a; if there’s a legal component to it which revolves around the you know shareholder agreements and the shareholding documents and things of that nature; and by the way I mean there’re certain situations where they’re only raising convertibles. So there is no convertible debt. So there is no board position for the convertible debt holders.

What the entrepreneur is looking at is, they need somebody who is supportive of what they’re doing but also provides that independent perspective that makes everyone comfortable, you know really comfortable. And that’s you know where I try to bridge.

I’m there for the entrepreneur and I’m looking out for their interest. But I also have a higher duty to the company itself, right. So yeah there will be situations we’re in raise of half a million convertible, I get named as the independent board member.

In other cases it’s a price ground preferred shares and I get named as the independent board guy. I go into the offering documents, they announce it and you know everybody’s like, “Wow, okay, great!”

So I pull the trigger; they pull the trigger.

Nick:               So help us understand what the key benefit for the investor is of taking an advisory position.

Glenn:            You know it was interesting when you presented the topic to me and I was thinking which one to take and whether this made sense. So I’m gonna taka step back and say, back to that earlier conversation point of experience versus passion. And first and foremost as an Angel Investor looking to be an advisor, if you don’t have the necessary chops and expertise, you’re doing both yourself and the company a disservice.

Nick:               Mm-hmm.

Glenn:            Okay. So the flip side to that is if you do have that necessary expertise, knowledge, network, whatever then the fact that you become an advisor means you get to better support the growth of this company that you put your hard-earned dollars into. And therefore you’re increasing; you should be increasing the likelihood of success of this company, which everybody you know, is a good thing. You’ve put your money into it.

So being the; you know the key benefit is you are providing. You have a seat at the table not just as some shareholder but you’re actively engaged. And the key benefit is both to you and to the company is that you’re fundamentally impacting where the company’s gonna go.

It’s up to the CEO and his executive team and so forth to execute. And you think about what board roles really are in a board of director’s role, you set policy; you set strategy; you approve strategy. You set and help and approve strategy.

If you have the necessary chops and expertise to help them, guide ’em on the right strategy, go-to market and where they’re heading and so forth, then you‘re letting them avoid mistakes, reducing cycle time, fewer pivots, connecting faster, giving them a business that the first client, the third client, the reference-able client, then you’re adding tremendous value to the situation.

I will; I hate meeting advisors who bring nothing to the table. And they actually make things more inefficient. I kind of reflect the story that if you talk to any other companies that goes through an accelerator; that 90-day intense practice where a hundred mentors, 200 mentors are the first 30 days they’re inundated with these guys right.

And I happen to advise one of the companies that went through, Tech Stars. And before they started I warned them I said, “You’re gonna get puller opposite. I mean puller opposite suggestions, recommendations. One’ll say this and the other’ll say that. So which is right?” And I said, “That is your job. That’s’ gonna be your job. When you finally have a company that’s either raising money or is in right in the middle of raising money but also going to the market and all that you don’t need puller opposite just because you got somebody who thinks it’s a great idea. Telling them, “Hey you should go this direction”.

That’s bad news because that just means the CEO is not executing and is getting whipsawed around. So that’s why I’ve a problem when you’ve got an advisor who doesn’t have that experience and so forth. They think they know what they’re talking about. It; but anybody can come up with the ideas; anybody can brainstorm and go, “Well maybe you can do this” or “Maybe you can do that”.

You got to have some basis as an advisor to be saying what you’re saying. It may be puller opposite of where they’re going. But if you have a basis for it, that gives the founder, the entrepreneurial team the understanding of what do we need to evaluate and why you’re making that kind of comment and that goes back to the first part about coach-ability.

I never tell anybody I’m gospel on what I’m saying. What I’m telling ’em is based up on my experience what I’ve seen, I think this may make more sense than what you’re currently doing.

Your job as the entrepreneur is to go assess it and not say, “Well no that’s not how it is” and give me no reason. No; your job is to go assess it and come back and say, “You know what Glenn? You’re wrong and here’s the reasons why”.

And guess what? In that process of telling me why I learn more about the company and the  situation and therefore I’m gonna become a better advisor. Or they come back and say, “You know you’re kind of right but not exactly the way you said it but I’m gonna make some shifts here all on that direction”.

Or in a rarer case they come back and say, “You know what, you are so absolutely correct. I wouldn’t have seen this, this would have been a blind spot to me and we’re making the change”.

And I’ve got a specific situation where the business model, I looked at it and I said; and I understood why the entrepreneur was talking about a subscription base model; because that’s the buzz word and that’s like, “Ooo”. All the non-experience Angels, so to speak, are saying, “Ooh I love subscription based models and you know how that works and blah-blah-blah -blah –blah”.

And my gut check was but that’s not how people value this particular service that they’re offering.

Nick:   Yeah; it’s got to be appropriate.

Glenn:            Right. And so I fundamentally whipsawed the guy. And he initially, he told me afterwards, he goes, “I really didn’t believe what you were saying, you know but I trusted you enough that I went out into the market place”.

He went and he talked to the market place and 90% of the prospective customers said they liked my model versus the subscription model. And it revolved around the value equation for the client. And oh by the way, the artifact of that is it actually doubled the total addressable market than what he was on.

Nick:               Yeah. When I talk to other investors about their engagements with startups I always encourage have them test, test, test.

Glenn:            Absolutely.

Nick:               You’ll find the target market and go out and ask ’em.

Glenn:            Absolutely.

Nick:               It’s so easy and it can avoid so many headaches and so many pivots later on. But we could beat that one to death for a day. Yeah its funny you bring up

Glenn:            So I hope I answered the question the key benefits on being advisor.

Nick:               Yeah.

Glenn:            I mean on some aspects I’m waving on and off. I’m basically saying be aware of yourself as an investor advisor. Fundamentally really evaluate yourself and rigorously evaluate yourself. Say, “Am I gonna add value to this situation?” you have to be the one who is honest with oneself.

The reason I say that is – founders raising money; money to them s their initial – it’s everything right? They will do things contrary to the best interest of them. Like bringing on advisor who doesn’t have the skills because they see that shiny check.

Okay, so they’re; behaviorally, most of them are not in that sweet spot of saying, “Who’s the best person”, right. And so the first part is you better; you yourself better have a very firm idea where you’re gonna add value.

And the beauty of that is, then when those situations do come up you know in your heart of hearts, you’re gonna add value. You’re gonna help accelerate the growth of that company. You’re gonna be better at helping the company raise funds. You’re gonna be better once the funding has occurred in guiding that team; helping them understand where they need to go and everybody gets rewarded as a result.

Nick:               In this ego driven business that we’re in, you find people taking these advisory positions and disciplines in verticals and they have no experience in them. It may be a natural tendency but I think the investor does themselves a disservice as well. Not only on the financial side but timing.

You can spend so much time, advising any individual startup. And if it’s not something in your real house then not only are you reducing their chance of success and your time to cash but you’re wasting your own time. So then you don’t have as much time to spend with the one that you should be advising or you should be investing in.

Glenn:            Absolutely Nick. Absolutely; and actually that raise; segues into another interesting point. When I do meet with founders and we talk about you know board advisor, board of director’s role, I’m very clear about articulating where my value is to them. So that they understand you know what they’re getting into and whether I fill a particular capacity or not.

We also then talk about who else is needed. We really look at and say, “Who do you need”, okay, “that’s not me but someone else?” Maybe they need somebody who’s a little better at finance; maybe they need somebody else who’s better at the marketplace, okay; who has done network in that existing marketplace, that.

’cause sometimes I’m brought because of my core general expertise not specific to a particular market or otherwise but the fact that I can mentor them to become better CEO’s, right. But in those situations I’ve got to help them find or they’ve got to find somebody who knows that industry like a rifle shot as an example.

Nick:               Is there a way that you distinguish between more board members and actual role players? So let’s say you need somebody who’s experienced in sales in a particular vertical right.

Glenn:            Yeah.

Nick:               How do you distinguish as an investor, you know this group needs a fulltime guy doing this; or this group needs a board advisor that has connections?

Glenn:            That’s a great question.

• Stage of company,
• where they’re at and the
• how much have they raised, raised at all,
• are they going to market now,
• are they still in the development phase of the technology product service, whatever that may happen to be.

Where quite frankly if they’re in that earlier phase I don’t think you need an outside salesperson. The founder better be or one of his co-founders better be that person ’cause they sell it better. And by the way there’s bigger trust from the buyer that if they say they’re gonna do something it’s gonna happen as opposed to the sales person.

So stage is critical and it goes back to my organizational effectiveness, organizational design, activities way back is if they are at that stage it kind of falls out very naturally as to whether they need the advisor to help ’em find,  to open the doors, or they need the actually hard-hitting salesperson.

Clearly if you have the product developed or the service developed and you’re now in the phase where, and you have your reference clients, you are more likely to need for example, that sales person who has the right connections, not as an advisor but as a fulltime role or whatever level.

So it’s a natural outcomes but its situation dependent like most of these things.

Nick:               And I’ve even situations here in town with companies that bring on an advisor, somebody who has a job maybe in the industry already but is a natural strategic advisor. In their own job they command few hundred thousand dollars. And I’ve seen them eventually take a position with the company.

As they got later stage they raised more money. Then they came on board you know in some sort of equity you know.

Glenn:            Yeah.

Nick:               And salary.

Glenn:            You know that is just such a great point of; some of the wanna-be Angels that I do end up meeting, in some cases they’re out of a job right. They’ve; and they’re viewing this as a mechanism to find job. But they don’t understand that they’ll never get paid the salary, particularly earlier on. And so they get this conflicted stage for them. They want to purport to be an advisor but they also are trying to get money. And they’ll put a little money in to get the seat at the table.

So that’s one of those caveat, you know the caveat of

Nick:               Caveat intern

Glenn:            Yeah.

Nick:               You know we do not recommend that so.

Glenn:            No but it happens more often than you might realize out there.

Nick:               Huh. Well the people that are most in demand naturally are gonna be the ones that are current practitioners and you know they got the current rolodex and they’re fighting the fight as they going.

So alright, anyway I didn’t want to lose sight of this but another peripheral benefit I guess you could call it, maybe not the key benefit is – when you’re an advisor early on sometimes you get you know equity in return for that. Sometimes you get a discount on the next round so.

Glenn:            One of my favorite topics

Nick:               So you and I talked about this the other day and you’ve got a good way of talking about tranches and sort of this evolutionary process of the fundraise.

Glenn:            Right

Nick:               So the fundraise itself isn’t static, you know there’s not always one set of terms. And that’s’ what every investor signs up for. Right there’s early investors that are taking on more risk than the later investors because typically the industry doesn’t function on escrow as it once did. So anyway can you provide some color and some insight on that?

Glenn:            Yeah so I’ll start with that 9; I don’t know whether it’s 9; 8 out of 10 times if it’s an active situation I actually don’t put money in right away. I get the role first, okay. In other words I’m not paying to play, okay.

Nick:               You’re smarter than me (laughs)

Glenn:            (laughs) I get the founder to agree that I fundamentally bring as an advisor/director, value to the table that is not related to putting cash in. Now there’s some other reasons for that as you and I previously have talked about which revolves around Angel Investing is just a piece of alternative investing which is just a piece of overall investing.

And so its s very small slice of the total and one has to evaluate their own personal situation and make sure you’re doing those right; allocating it properly. So assuming the engagement process has gone well and a trigger has occurred of either them asking and me accepting because I do turn it down on occasion; or actually more often than not because people will, a lot of times they come out more with an advisor request sooner than you want them to.

I will get engaged as a board member or as an advisor depending upon the circumstances and at that time we negotiate equity. Right at that time, whether that’s stock options, founder shares, I have gotten founder shares. I’ve gotten founder shares that I can invest; I’ve got up front founder shares with additional stock options; all manner of equity perspective without any money from my pocket going to them, okay.

That’s my method first and foremost of operation.

Nick:               Good for you Glenn.

Glenn:            (chuckles)  Now here’s what’s happening and part of the argument. When I join your company as an advisor as a board member I am adding value. Now the team is stronger. The valuation therefore of the company is going up. I want a piece at the valuation creaming coming on because of that impact, okay.

So it’s fair enough. It’s a reasonable argument and it’s honest and it comes across correctly and the entrepreneurs actually do get it. So let’s say I’m now advising, not on a board which is advising and some months go by and I’ve been helping them with their structuring of their documents. Their pitch documents or business strategy, their go-to market strategy and it seems like they’re now at that point where they can start doing some real fundraising. I mean the true Angel round.

In some cases they need a little bit of capital to bridge. Bridge between where they’re at right now and to show the investment community that they can go from Point A to Point B. And that Point B actually adds more value and justifies either the cap on the convertible note or the price of the round.

I’ll make a decision at that point as to whether they need that money, if they truly need that money to be able to bridge then I’ll make a decision on investing. But that’s when I have really harsh convertible, harsh in their terms, appropriate as an Angel Investor terms, relative to what I expect. Not with any bridge you should have.

Nick:               Absolutely.

Glenn:            Very strong terms

Nick:               Absolutely.

Glenn:            This is where I think most Angel Investors who I’ve met fall down. They don’t, they really don’t understand the full dynamics of the phases, the tranches that go on and therefore demand the right amount of discount, right cap rate whatever that may happen to be. And we talked about all these different ways, you had some real unique things that I loved and will start incorporating in my own you know negotiating convertibles. So that’s Part A.

Part B is – now you’re actually going out to the market place, now we are raising money from the angel community and sometimes the strategies have to revolve around tranches; first Angels doing the first hundred thousand. Let me just use an example of a half million round. And they’ve already raised some friends and family money before.

And now they’re going out to the market in a more professional capacity because they really are dealing with 3^rd parties who don’t have a relationship specifically and they have to show the economic value and the opportunity and so forth.

In a lot of cases I’m going to be seeing that first convertible. The first hundred thousand, the first fifty thousand gets a better discount even though you know it’s an artifact of how things operate that they’ll raise half a million dollars and now as you said earlier they’ll close. It’s a running close I suppose to an escrow and only breaks after they reach the half a million dollars, right.

It’s an artifact of what goes on today is – it’s a take it as it comes in and start working. Well in reality that means there’s a de-risking going on through time. The first ones in are taking the highest risk. So the really savvy investors, Angel; and I tell this to the ones who really have money and are trying to get out there ahead of the curb, is  – take a bigger discount; take a lower cap.

Reflect the fact that you really are about; you’re part of that half million dollar round but you’re signing that check over $50,000, you’re adding a lot of value to them right there and then. And therefore it should be reflected by the economic value, right.

Nick:               Right.

Glenn:            Either they’’ be first money in or be if you’re first money in you should be rewarded for it.

Nick:               Correct.

Glenn:            So this topic of valuation and negotiating the terms and all that is its own discussion; it’s its own course. You know when you had down here later as a topic in venture investing that you would suggest be covered, guess what? That is the series that should really be covered first and foremost and I think we as a group of Angel Investors.

The company holders hate me, the company founders don’t like me because of this – because I’m advising the Angel Investors on how much stronger to be on that part. So they’re kind; but they get you know that’s the funny thing, you know now I’m an advisor to ’em and I think you need give a bigger discount. I think you need to have multiple tranches. And because I really think you have to do your investors right and part of that is; and there’s a scarcity component. And there’s a, you know, it just increases the value equation for both sides.

Nick:               And you’re trying to get the startup funded right

Glenn:            Yeah

Nick:               So if they’re not offering fair terms then they fundraise extends for 2 years

Glenn:            Right

Nick:               I mean I see these guys doing these roll fundraising for years and years and yet the same pitch at every event

Glenn:            Yeah. I have a situation right now where the original terms was a million and a half, they closed about half million and started moving along. And they have gotten to another level. And through that process their education is much higher. We just cut the million and a half down to a million, okay, the round.

We’ll take a little bit of an oversubscription. So you know we’ll take 1.1, 1.2 million in totality. And it’s trying to reflect exactly that. And realization for the earlier investors and even these later investors that we don’t need quite as much money right now. We really need to focus not on the funded raise that’s taking 2 years but start moving forward.

And oh by the way, the artifact of it is – we’ll get to a point and if we’re  successful in getting to that point with now the million. The next round is not a 3½ million valuation but 6. And so all those other investors are going to go, “Great job, great job”.

Nick:               And they’re gonna want in on the next round as well.

Glenn:            Yeah. Yeah.

Nick:               Gotcha.

Glenn:            So by doing it the way that you were describing here you are accelerating or should be accelerating the speed. The later Angel Investors are getting in at a better price point or the correct price point; better risk reward price point for both the company and for them. And they’re respecting the thing and it’s interesting. Do you mind if a mention a company?

Nick:               Not at all.

Glenn:            Okay so one of the companies that I thought did a great job and this is one that I’ve more a passive investor than anything else was Advance Cooling Technologies here. Heartland Angels had put on a pitch event with them and Ron was kind enough, Ron Kershner was kind enough to invite me to it and loved the pitch, loved the entrepreneur, love the market they were in.

I don’t know, at that point I knew relatively nothing about med devices but I really liked the situation. Their offering document was crafted well. They had a close date, not a dollar amount but a close date that if you put money in by this date you got this discount and if it was after that date you got a different discount. And which was really smart on their part to do right from the get go

So they, and they’ve done things really, really right all along. They’ve accomplished; took them longer to get to some of their metrics. They’re now on another round raise right now which I think is close to closed anyway. Valuations have gone up. I sent a note actually to the, to the CEO saying, “You’re too generous on the pre that you could have gotten more”. And he was like, “Thanks for championing me but you know after discussions with the current investors and so forth I agreed not to be piggish about it and gave them a lower. And I respect that.

Yes they’ve done a tremendous job of following that curve, of who, when, how, what stage, valuation increases and minimizing the total capital invested as needed so that at any point in time if there’s a failure, there’s less loss to the market.

Nick:               Yeah I think that the reality is we hope that each of these startups are experts in their discipline and in their market but rarely are they experts in the fundraising process.

Glenn:            Right

Nick:               So that’s where they need folks/individuals to help them in an advisory capacity to make sure that it’s a fair balance and that they’re gonna attract enough investors at terms that make sense for where they’re at.

Nick:               Okay let’s close this out. Glenn from a strategic standpoint what would you encourage Angel and early-stage venture investors to keep front of mind as it relates to today’s topic?

Glenn:            I actually

Nick:               Besides everything we’ve covered.

Glenn:            Yeah besides everything we’ve covered. Strategic talks about when someone; different people have different meanings for strategy right. But the general way would be:

• What’s a current position of you and the company in the market place today?
• Where are the trends, the generalize trends and so forth moving forward?

That’s how companies evaluate and therefore:

• How do we attack this market place and grow as a result and
• What trends do we see happening so that we can be faster to a particular arena than someone else?

Well it applies to this too, kind of the same way.

• What is your personal core strengths and capabilities?
• How does that align up with the needs of that company that you’re talking about putting money in and being an advisor to?
• Do you have a short term ability to support ’em or is your expertise and capabilities something that will be long term? You know and when I say long term; 2 years. 3 years, 4 years along the path.

Earlier I made the comment about I’d get back to consulting, why I don’t like the term consulting because for being applied to me – is that consultants are brought in for specific issue, it’s transactional in nature. An advisor or board member is about really understanding the whole and the path.

They’re gonna be multiple issues come up and you want to be in a position of providing that guidance through all stages or at least reasonable stages of its development. And so strategic positioning or strategic standpoint is, if you bring that stuff to the table and it’s a clear match up; you, number 1 – should be able to get the equity economic value of being that advisor. And it’s not just the cash you put in, so its cash plus that. And that is where circling back to the core, that’s where you’re gonna get the most economic rinse for your time.

Nick:               Mm-hmm.

Glenn:            That is where you’re gonna get the best value for your time. That is where you’re going to; your investment multiple will go up more if you focus and concentrate that way. When you run too far afield it gets disbursed and your economic rinse are going to diminish as a result.

And time is money regardless; I mean it’s a cliché but the reality is, it is. So your hard-earned cash is real money but your time is also money. And if you spread it too thin you won’t get the ultimate total returns that you would anticipate.

Nick:               Great. We talked about this before covering the topic you mentioned sort o’ going much deeper on the series sort of nature of financing. But who would you recommend or who do you think would be great to speak on that topic? Any ideas?

Glenn:            Well first off I actually think our conversation that we had separately, that you’re actually; you’re far ahead than most people are, right off the bat. So I’m gonna give you a personal plug and say talk to Nick.

Nick:               (laughs)

Glenn:            You actually did a good job I mean. I was impressed with; I know I came up with some things that you said, “Wow I hadn’t thought o’ those; those aspects to it”. But you also add a couple things that I’m like “Oh you know what I got to incorporate into it”.

There are what I would call; I’m not gonna name names at this point; I don’t think that’s appropriate. There are various groups and people who had been doing Angel Investing for a significant period of time who’ve seen a wide range. And I would say those are the individuals you reach out to.

But as an Angel sort of speaking from the founder side be like – go to those individuals who are not your target organizations that you’re gonna raise money from. In other words, it’s hard to go into somebody and ask advice and counsel on pricing and terms and so forth if it’s the person you actually wanna raise money from.

Nick:               Sure.

Glenn:            What you’re gonna do and you should be doing as a founder; and also by the way Angel Group as Angel Investors again you know your markets and you are comfortable putting money into med tech for example. Go talk to some people who are not your typical both outside of med tech to get that perspective. If you’re in med tech you go to some of the other people who been around doing it before. And ideally you ask for examples in the past and you take a look at ’em.

But here’s the difference between angel groups and individual angel investors cutting it form the Angel investor side. Angel groups negotiate as a group not as an individual, right. And so if you were a member of an Angel group you’re gonna get the terms that are associated with how that team did.

And so by definition you’re joining an Angel group because they have more experience, etc. and supposedly they’re bringing to the table; you know that expertise. If you are an individual Angel investor hook up with individuals like yourself or others who have done deal flow, ask to look at the terms that they’ve received in the past and it’s an education process.

I am hoping to actually create a course on just this topic area at some point down the road here. We talked about that before this interview. And I think that’s an area that really does need a group of people who have experienced these getting together.

May be that’s what we need to do. Maybe you need to be the catalyst to say, “Hey I wanna get a group of Chicago Angel Investors who’ve done a fair number of deals who’ve advised on these deals. And let’s get together and talk about best practices on negotiation, negotiation terms and so forth”.

I won’t name names but I remember it was a funny situation of a founder handed me a term sheet that they had gotten from their attorney and there were two parts to it. Number 1 is – I recognize the term sheet, because actually it was just a cookie cutter of one that I had been involved in previously. And the other part though was – the attorney had left terms in that were negotiating against themselves.

You know, in other words it was actually too favorable for the Angel Investor. We got to that point through the negotiation process. So I’m sitting back going, “Wow this is bad”. So don’t look at necessarily the attorneys out there as being the experts in it. They’re not business guys. They write the term sheets; they address the risk factors.

Talk to those who really understand investing; really understand where this fits in the total; how the implications of a 30% discount versus a 20% discount on a convertible note will impact you when you do 10 of these deals. Not one, one by itself, uh okay but 10 of them though it becomes meaningful, that difference.

And so you know, I don’t know, that’s; I hate to say it but they’re times I feel like I’m ahead of the curve for most of these things just by the sheer in depth, how detailed, how ingrained I’m in a lot of these situations, that I’m seeing and I’m a little bit ahead of the curve than the average, you know than the typical Angel Investor.

Nick:               Yeah. I’m fortunate my brother is an attorney and we review terms and its amazing the things that jump out. And if you; fortunately he’s got a critical eye. He’s done billing contract so, we both catch things.

Glenn:            Yeah but, even then I mean you think about it. When you and I met before and I told you what kind of discount I got. And then that I had a term that if they didn’t raise x money by x time that my pre-money went down like by, like.

Nick:               Yeah.

Glenn:            80%.

Nick:               Contingent clauses yeah?

Glenn:            Contingent clauses. And you’re like, wow.

Nick:               Exactly.

Glenn:            Okay

Nick:               You learn so much from just working with other.

Glenn:            Exactly, exactly. So that would probably be the thing I’d say; is you know search out, find the strong reputation people. As an Angel Investor, other Angel Investors have no problem; you know they; we’re a special breed, special group of people here. Search them out; they’ll be welcoming in that regard.

Develop that network of those Angels and learn from each other and we’ll be stronger. And again the founders of companies are gonna hate me; but we’re gonna be stronger at negotiating the terms on these deals.

Nick:               Okay, so perfectly to finish it out. Recommending 2 connects with practitioners and Angels and investors. So Glenn what’s the best way for listeners to connect with you?

Glenn:            Earlier and I laugh and I was partially facetious and I said “Go talk to Nick.”

Nick:               (laughs)

Glenn:            And I did mean to use the gatekeeper. You know what? I’m on LinkedIn. It’s; find me on LinkedIn, send me a message, more than happy to give you the 30 minutes. Also as an Angel I’ll you know; my give back to the community. I’ll talk to anybody for a bit. So just search me out on LinkedIn, best way.

Nick:               Well huge thanks to Glenn Gottfried. Glenn you’ve been incredibly generous with your time with me. I always learn a tremendous amount when I meet with you. So it’s been a pleasure to have you on today.

Glenn:            No, appreciate it. Thanks.