# Venture Capital Myths: Why 77% of Funded Startups Get Written Off

Channel: MicroConf
Video: https://www.youtube.com/watch?v=7klibkFTWOI
Duration: 46 min
Language: English
Words: 7839
Transcript page: https://viewrankai.com/tools/youtube-transcript/7klibkFTWOI

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[0:00] I I have a bunch to get through, but mostly what I want to get to is I want to set the stage for what I hope is some very useful Q&A and discussion towards the end. And so, I'm going to be moving fast through these slides. However, Rob and Sophie and everyone are going to make sure that these and Zander will make sure that these slides are available to you after the event, so that you can go through and check my work. A lot of what I've done here is relatively new research, which is me just aggregating lots of other things to make some salient and I think

[0:32] significant points. Um and I am going to tell you so, uh Am Am I worth listening to on a on the venture capital topic? Because I am after I published Lost and Founder, uh I talked to a few venture investors on unrelated matters related to like boards I was on. And And they were like, "What What were you thinking? You will

[0:58] never be able to raise money again." To which my response was, "Yeah, that's kind of the point. I'm cool with that." Uh so, do I Do I still know what I'm talking about? And And I was obviously uh at Moz for many, many years. Um and venture-backed CEO there uh for a long time, raised lots of money, pitched a ton of firms, tons and tons of trips to Sand Hill Road and Silicon Valley and a little bit to Boston and New York and uh I have done some investing myself, some some in VC-style funds and some in

[1:33] accelerators. Uh I I don't do Geraldine and I don't do my wife uh don't do any venture-style investing anymore. Um and on the board of a few venture-backed startups and uh also obviously TinySeed, which uh which has been wonderful. And uh I have interviewed and continue to stay in touch with many, many venture-backed um CEOs and founders over the years. So, hopefully I a reasonable breadth of

[1:59] experience. Uh, these days I am the co-founder and CEO of two companies, neither of which are venture backed. Uh, they're both alternatively funded. I'm I'm going to talk a little bit about that. My my hope is that it is interesting to you both as potentially something you might think about for current companies or future companies, and also something that might

[2:20] be interesting to you as investors. Because I would argue that for me personally, I do not have uh, tens or hundreds of millions of dollars, and so I cannot place an appropriate number of bets to get venture outcomes that would statistically match or beat the S&P 500. That is a huge problem. I think there are a lot of people like me. A lot of people in this room probably are technically qualify as accredited investors, but could not place the statistically, uh, relevant 500 bets on startups that that

[2:57] you need to get a venture style outcome. So, what are you going to do? All right. I am going to give VC world a pretty hard time, and I think if you are watching this talk and you are venture adjacent or friendly, uh, you you might be thinking like, oh, I suppose Rand, you're saying you'd do it so much better. And that is not what

[3:19] I'm saying. What I'm [laughter] What what I'm saying is that the whole damn system's wrong. It really is. I think from top to bottom, the asset class and structure, the incentives that it creates are fundamentally wrong. Uh, if anyone here hasn't looked up the history of venture capital and how it got started, it's basically because of a tax break that was lobbied for by some

[3:43] rich people in the 1970s. Um, and that tax break enables the venture asset class, uh, to sort of function without that without that um, the the capital gains exception for venture style investments almost no venture firm would meet or beat the market. We'll we'll talk about how many actually do in a minute. All right, so first myth the first myth is that venture is not available to everyone. In fact, almost every venture capitalist would say I've heard this many many times. I think it's like a quote that they're taught in VC school and they have to say it kind of like reading you your Miranda rights

[4:21] when you get arrested in the United States. Uh and that is that venture is wrong for 99% of companies but for the very best 1% which you could be. You could be if you're not a silly little lifestyle business. Psh. You know, then we are for you. Well, uh I look I looked at a bunch of stats and data. I'm going to go relatively quickly through these in all the sections and and wrap up with my conclusions on each of them. So, less less than about 1% of pitches according to the several stats out there that I could find where where VCs actually publish these or research them

[5:00] lead to successful funding. That probably doesn't surprise anybody here. Location matters a ton. So, the best founders only live and work in three cities which is deeply weird but I guess yeah, that's why everybody moved to those three cities. Educational background matters a ton. The best founders almost exclusively go to a few private, a couple of public, and the Ivy League

[5:25] universities. The best founders are men. They're all men. Uh yeah, women not good founders apparently. I I am not speaking as what I believe. I'm telling you what the venture statistics prove. There is more venture funding over the last 20 years has gone to men named John. Then all women combined. That includes women co-founded

[5:54] companies. You might argue, "Well, there's a lot of Johns out there." And and much like the New York City Police Department, I agree. Um [laughter]

[6:11] [panting] Look, was it a funny joke? I think so. All right. I Okay. Um So, Geraldine Okay, here's what happened. So, we're in New York on on Saturday night and I finished the presentation. I show it to Geraldine, my wife, who's a humor writer. She has a She has a book out which which just became a best seller, which is super exciting. And she [laughter] she looked through the slide deck and she's like, "Yeah. Well, I don't know." Anyway, so

[6:36] she punched up a lot of this. If you're enjoying yourself, it's all thanks to her. Um And you might have heard for the last I have definitely heard for every year that I've been in venture world, "We are committed to investing in more women." From every VC I've ever talked to. I guarantee you've heard this as well. I bet every article, every time they're on stage, they're like, "We are

[6:58] looking for more great women founders. We're trying to get more gender balance." [laughter] And then you know the stats have not improved since 2005? Like in 20 years, they haven't gotten any better. It They're so full of Just kills me. Apparently, the best founders are and always have been men. I It's just weird. But surely surely this this these biases won't extend to any other financially dubious forms of

[7:30] discrimination, right? No way. Couldn't be. Nope. Yeah, it turns out if you are not white or Asian, venture is not for you. And by the way, when I say white or Asian, a very particular kind of white or Asian, right? You have to live in the right places and go to the right schools. Almost every uh successful venture successful venture founder, meaning uh had an exit that returned their investors minimum return requirements, almost every one of those came from a wealthy family. It is much like looking at Hollywood and trying to find an actor, like a leading actor, who was not related to any other famous

[8:10] people in Hollywood. You will not find them. And that is That is pretty frustrating cuz I think the wonderful thing about entrepreneurship to me, the thing that was amazing, right? Like my Who was this? My great-grandfather came to the United States, right, fleeing the Nazis, started a tailoring business, and then, you know, my my grandfather was able to start as a as an engineer as a result of that, and then my dad was an engineer, and now I get to be an entrepreneur. And like that uh that feels kind of like the the dream, right? The hopeful dream of the United States. And American entrepreneurship can be amazing,

[8:44] but sadly, in in the last few years, uh our you know, whatever, ability to become wealthy, to change your wealth status in this country uh over generations has has dipped below that of Japan, which, you know, Patrick could probably tell us. I don't see him, but I'm sure he's in here. Uh yeah. [laughter] Patrick could probably tell us

[9:07] traditionally not very high. So, that's I I don't feel great about that. Percentage of white founders is rising again. That's great, you know. [laughter] I May Yeah, that feels weird. It's not just that, right? So, even if you are like, "Well, you know, I'm white or Asian and the right kind of white or Asian, and I think I could fit in there." Yeah, but if you live in the wrong places or you went to the wrong schools, or you didn't come from the right families, you're still kind of out of it. It's It's odd. Like the age thing is really odd. That's one of the deeply strangest

[9:40] things to me about venture biases. So, I am sure there are a couple of you in the room who are thinking what nearly every VC has said to me whenever I've brought this up. Oh, well, that's a pipeline problem. Is it? Is it now? I'm sure let's go look at all entrepreneurs in the United States and see Let's see what the stats

[10:08] show us. Well, let me see here. Four in 10. This has been stable for 25 years. That number So, almost 40% of all entrepreneurs women. Uh share of uh race and race and ethnicity, quite a bit more balanced, massively more balanced than what you see. In fact, closer to the population statistics of the United States. And age, turns out there are much more older founders than what venture investors are investing in. So, [laughter] so uh what I heard very often and what you will hear in the quiet back rooms and restaurants of uh the right parts of San Francisco is that well, you know, they're building something

[10:55] impressive, but I don't think that founder is blue flame enough. Have Has anybody else heard this term bandied about? It's like when a flame burns at their brightest and venture investors often use it to refer to a 20-something man who has no kids and therefore no obligations. This is going to exclude a bunch of other, right, people who otherwise might have

[11:19] qualified for this. And I [laughter] I just think they suck. Like this is just Man, I [laughter] I I I know what this is called, right? Like what what what it's all called, what this is all called is pattern matching. It's basically a well, Mark Zuckerberg and Bill Gates and Jeff Bezos and Drew Houston and you know, whoever, they all fit these archetypes, which I would argue were biases created from the

[11:48] start. And you know what? It's fine. I think this is fine. If venture world wants to take this little piece of the entrepre neurship world, we can create our own. We can create our own opportunities and our own types of funding. That that is something I very much hope to do with the rest of my career. So, I have noted venture capitalist principal Seymour Skinner asking the

[12:15] hard questions. Am I out of touch? No, it's the facts that are wrong. Thanks, Seymour. All right, number two, myth number two. Companies that don't raise venture are going to get crushed by the companies that do. I've heard this a lot and I've been scared of it. I remember those years at Moz when we couldn't raise our second round even though we were doing quite well and we were scared out of our minds that some other company at every company that was in this Moz was in SEO software for those who aren't familiar and I remember being scared out of my mind that at every board meeting that some

[12:53] other company would raise $10 million, $20 million and then we would be screwed, right? We wouldn't be able to compete anymore. You know who ended up beating Moz? Two companies that did not raise venture. In fact, the one that went public, SEMrush, didn't raise venture until they were over $60 million in revenue. They had already beat us by the time they

[13:14] raised their first round. Ahrefs still has never taken venture. Both of those companies, I don't know what Moz's financials are today. I've been part of the company for a while, but both of those companies significantly larger. So, I went and looked, you know, what are the what are the stats here? 43% of companies that have IPO'd since venture funding started are venture backed or venture backed. That's 57% who were not. That's a lot of non-VC

[13:41] IPOs. Uh this was very nearly the only resource that I could find that um looked at the winner-take-most theory and tried to validate it. And I'm I'm not going to go deeply into it. Although you can do so while I attempt to figure out this water bottle. And uh this is obviously a, you know, uh Thomas just took a a dozen sectors at random that he picked out and then tried to look at them to to stats it. So, what I went and did is I looked at public market stats for uh essentially monopoly or duopolies owning 80% 70% plus of the capitalization in a market. And you can see the stats

[14:31] there and and go dive into them uh at like at your leisure, but essentially when you when it when you boil it down, and I did not do a deep analysis of every venture backed uh company, but very very few sectors in the public markets have one or two dominant sectors, which is good. This means that antitrust hasn't like completely collapsed entirely. It is not uncommon to find about five, maybe four, uh public companies in a sector who together have

[14:59] 70 to 90% of the market cap. And over of the public market cap, right? In a in a particular sector. Over the last 20 years, uh for sure, 10 to 20% of startup markets, for example, search engines, right? Have had one or two big winners um that made the VCs 80% of their exits. But of the ones that you might think of, right? Airbnb would be one that you'd think of in travel, but but actually there are 50 or 60 travel sector startups that have made their venture

[15:32] investors well over that 10x 20x mark. To- tons of them out there. Uh and in almost every one of these markets, there are companies like us operating. Smaller companies doing millions or tens of millions of dollars of revenue and operating successfully. I I I I really feel like this is a myth. I think when I see a company taking venture financing, there have been a couple in the audience research software space who have taken venture. The two so far that have have not been on our radar as competition at all. One of them seems to

[16:08] have kind of collapsed. And And I think that's because startup failure rates are insane. Insane. So, raising venture puts you on the path to success. Whenever whenever anybody I do this, too. It's a little performative. I don't know why I continue to do it, but somebody posts on LinkedIn, "We raised $5 million for our company, you know, from this fancy VC." And what do you What do you

[16:34] do? Congratulations. So happy for you. Can't wait to see what you guys do with it. All that. Yeah, well, okay. Uh I won't dive into these stats, either, but I I have the reference links for you to show you sort of rates of startups shutting down, which is extremely high. And at a portfolio venture fund level, uh it is even higher. So, what I did is I aggregated all these stats, the best ones that I could find. I made sure to get ones that are old enough to give me 10-plus years of data. And then I I kind of put together like these this graphical series, which I'll I'll

[17:13] represent graphically here. So, gray, written off as a loss. Blue, dark blue acquired for below a minimum rate of return, which is usually about 3x. And a lot of those are are 1x, right? Essentially, the the investors get their money back, but not much else. And then acquired for more than 3x and unicorn status. The unicorn status is problematic because a unicorn does not mean an exit. It just means that

[17:37] somebody valued it at a billion dollars. So, average expected outcome, this is using stats from 1,120 companies funded from 2008 to to 2010. And 77% written off as a loss, 20% acquired for less than 3x, 2.2% acquired for So, my old company, Moz, is a is a weird story. Because this is being recorded, I will save the exact details for if you

[18:10] want them in Q&A or in the hallway. I had to sign some paperwork saying that I would not reveal how much Moz was sold for, but I can tell you, and you could look it up from the IP from the public filings of the company that bought Moz, which is a public PE fund, that the number would have been in this blue bucket, light blue bucket for our early stage investors, but in the dark blue bucket for our later stage

[18:37] investors. And then unicorn, 0.9%. Okay, so you know, there's sort of that one in a hundred shot. Then you take it to the fund level and you ask how many venture funds, if you were to invest in a hundred venture funds, how many of them would get you market rate of returns? And [laughter] the answer is

[19:00] really bad. Really, really bad. 5% 5% over over a 10-year period, 15-year period, I think is the the limiter there. Return more than 3x, which is essentially what you'd need to beat the S&P 500 statistically. You should just buy an index fund. Like it's weird that LPs keep putting money into venture funds. They There's

[19:25] only a few that that beat it. And Ralph Wigam is just shocked. That's me fail investing? Uh but it's real. It's real. All right, number four. Without venture startups would wither and die. Of course we would. And and I think this this belief is quite common, right? Like a lot of I have friends who are venture investors in in Seattle and on the West Coast and um they're I don't think they're bad

[19:55] people. I I tell them that all the time. I'm like, I don't think you're bad. I'm arguing against your asset class, not you. Like you're a good person who's doing the things that you think are right. And very often that is because there's this genuine belief that they're helping the companies they work with. I bet they are helping the companies that they work with. When when Foundry and Ignition invested in me, I man, I was over the moon for them. I cannot tell you how good it felt to be validated, to feel like I had someone to lean on and talk to about all this stuff, the mentorship, the the network,

[20:28] right? And connections of like, do you know anybody? All right, so here we go. This is small business This is all business failure rates in the United States. Uh this is from 2018, so we're looking at 2013 to 18 here. And uh these are in a bunch of different sectors. So you can see the survival

[20:52] rate of companies. Starting a company is a risky operation. Granted. I've started a few LLCs that I that never made a dime of revenue and then I just closed them down cuz I ended up not wanting to pursue that business. Those are in these stats, right? Cuz this is coming from the uh Small Business Administration in the United States, which records this. So, we're we're not getting perfect data here. I couldn't find anything that looked at only revenue-producing or tax-paying companies, unfortunately. I think that's an opportunity for someone

[21:20] in the stats world. And then I found um from the National Angel Capital Organization, so these are companies that are funded by at least one angel, which doesn't which doesn't necessarily mean that they've raised venture, although almost all of these are attempting to raise venture. Um overwhelming. In fact, I believe in the stats there, they say that more than 90% of the companies are pursuing venture, but they they've raised an angel round, right? Via like AngelList

[21:47] or something like that. Okay, so Can anybody spot the weird math in this?

[21:58] Yeah, yeah, yeah. That that What? Wait a minute. At the end, there are 19 active companies from 188 total companies in year one. That doesn't sound like 35% to me. No, the 35% is counting the survival rate from only the previous year, which is so sketchy. This is like What's the subreddit that puts sketchy graphs up there? Someone should submit this cuz

[22:24] this is just manipulative as hell. Anyway, I went and did the actual math for you. There you go. Percent of startups that survived each year, it is it is 10%. 90% failure rate over 5 years. This actually aligns almost perfectly with the ability to raise next round stats uh that I got for the 90 to 2010 cohort, so a 20-year cohort um achieving IPO or an acquisition of any size. Acquisition or IPO of any size,

[22:53] and you can see the stats there. When your friend posts on LinkedIn, "We raised $5 million," what you really should be replying is oh, I'm so sorry for you. I I I wish that things could have gone better. Like that is heartbreaking. It's probably going to your next few years are probably going to be incredibly intense and stressful and almost certainly result in a not

[23:19] great outcome. [laughter] You are in danger, Ralph. I'm sorry, buddy. All right. But unfortunately, there's no other way to raise money, right? Like this is it. Thank God I'm at MicroConf. If this were TechCrunch Disrupt, I would be getting like pushed off the stage and thrown out of the building and I have a very weak physique, so I

[23:41] would be unable to resist that. These are painted on. Um There's no other way to raise. Well, [laughter] this is my only AI-generated slide in here from I think I used OpenAI. Which you can really tell right there. So that is that is some high-risk-ish that is happening uh in this OpenAI slide. No wonder you had to raise $11 billion. Like you got you got some some sketchy things going

[24:15] on. So uh for those of us who don't want to raise venture or who are looking for alternatives, there are a lot of alternatives out there. They are not nearly as well marketed. They do not receive the publicity and they absolutely don't receive the status. Right? The prestige that Sequoia put money into me, Benchmark put money into me, Andreessen's behind me, Bessemer is

[24:43] behind me. Those names, it's like getting your name in the New York Times, which is just a gaming platform right now. I don't know if you've seen the stats. Like essentially their subscribers just play games. Nobody reads their news, which I think is why they can get away with being wrong all the time. Um and I my guess is that these ones are probably familiar to you

[25:07] to to most of the people in this room. Like we know what they are. We we might have considered them. They have There's positives and negatives. Some people I think would really benefit from these and this one might not be as familiar. Um although as as Rob is so kind to always point out um around Tiny Seed. The the Tiny Seed funding structure is uh inspired by and sort of based on how we funded SparkToro, which sounds innovative until you realize that uh it's actually how a lot of venture firms are funded and built and it is how a lot of Broadway shows and restaurants and law firms are built as well. So,

[25:46] I'll I'll share some of the quick details in there not because I get anything from it, right? Obviously, if you use We have open-sourced our funding documents. I asked our lawyer to like put them together so you could download them if you want, uh use them, save yourself some some legal funds. I think someone I talked to last night was like, "Oh yeah, those are those docs are great. We used them." Um and uh the the basic structure is we raised $1.3 million, which I think today would be considered a seed round maybe, but for Moz in 2007, that was our our series

[26:18] A was 1.1. Um most of these people were in my personal and professional network. So, lots of people lots of people like yourself, to be honest. Founder salaries were capped until we repaid our investors. So, for the first four four and a half years that Casey and I were running the business, my my co-founder Casey Henry um

[26:40] and I started it in June 2018. Uh it took I guess it took almost exactly four years to repay that money and then we we able to um get our salaries to 2x the Seattle software average which is great. I I love that. If we want to make more we have to pay dividends. And the dividends go pro rata. So, our investors own approximately 26% of the company. We were we were five I think we were five million pre No, sorry. I think we were four million pre-money 5.3 post-money

[27:16] valuation. And uh we are building up our cash reserves right now even every month. It's very nice. Even in even in not so great months, the cash balance goes up considerably which is great. And then we we pay dividends every couple of years probably. We don't have to, right? If we're like, "Hey, we

[27:36] want to keep investing in the business. We want to use all the money to grow it." blah blah blah. We can raise another round if we want to. Lots of freedom and flexibility. If we ever sell the company, uh investors and founders get pro rata percent of ownership now that we've done the payback. If that hadn't been the case, it would be like a participating preferred scenario where the investor could get that their money back and then

[27:58] and then participate as well. Uh our essential goal is that we optimize for profitable long-term growth. [sighs] I I'm going to tell you the biggest thing the biggest life change between Moz which was you know 200 people and in doing north of 50 million dollars of revenue and venture backed and and this I This gentleman I I apologize. Uh you has on the back of his laptop the exit

[28:27] strategy is death. And I just you know what? That for You're not one of the stickers. Oh my god, you're amazing. [laughter] I don't That's beautiful incredible timing. I just [laughter] I can't uh I can't tell you how much I love this. Anyway, that is uh that is amazing. So, right traditionally, there's all there are a whole bunch of things, but one of the biggest freedoms that that came from this profitable long-term growth, you know what I never did with Moz? What I never did with my first startup in all the 17 years, I never lived up to the promise that I

[29:03] made. I promised my mom, who was my co-founder, I promised my team, all the hundreds of people who worked for me, I promised my investors that we would beat the rate of return that our investors needed and that people would make money from that. And that is not what happened. Despite all the relative success that is described to Moz, it failed. It failed to meet the

[29:30] promise that I made. And SparkToro has already succeeded. It's insane. Because we made a reasonable promise, a promise that had high odds of being delivered on. I I don't think there's an amount of money you trade that for. That feeling is incredible. So, traditional startups, right? Fundraising is is sort of core to the model. Like, you have to raise the next round cuz you're spending fast, you're trying to get growth at all costs. We we don't need to raise future funds. I would be shocked if we ever raised a

[30:01] future fund. It's also true that recurring revenue, you know, in a SaaS business at least, recurring revenue is the most important thing. Recidivism doesn't count. Um SparkToro has an insanely high churn rate, but every month 15% of our customers are customers who've been customers before. So, what's our true lifetime value over 10 years? It's way bigger than, you know, the $1,000 or whatever that

[30:24] ProfitWell shows. To us, all revenue is valuable. Last year, Amanda started a program. Amanda's our the the third person at SparkToro. She's our VP of marketing. She's incredible. You should try and get her to speak here if you can. She's off the charts uh smart. And And her her idea was like, "Hey, why don't we do sponsorship? We have a huge email newsletter that goes like 100,000 people. Let's do an email sponsorship." She made us an extra 40

[30:48] grand of revenue. At Moz, that would have been useless revenue. At SparkToro, every dollar is a dollar. I love it. Growth rate, right? Growth rate, we we don't have to care. Our growth rate has fluctuated dramatically. This month it looks amazing. Last month it was pretty bad. It's fine. Does it Right? We're not

[31:07] trying to raise that next round. Uh business I do love building things for customers and only caring about what they think. Let me tell you, man, those board meetings at Moz where it was like, "Hey, you need to take your eye off the like core SEO ball and stop trying to like build features and things that your customers want because we need

[31:27] to reach this new bigger market." Kill me. Hate it. Uh cash reserves at at a traditional venture-backed startup means there's there's high risk, right? Anything goes wrong, you're going to do layoffs. It's going to be quite painful. SparkToro, we we could have a bad year or two and we could just decide Mhm. Uh [laughter] I don't have a special guest behind the stage, but it's possible that someone pops out. Uh and and the pace of life is very much in venture world designed to sort of burn you out, right? It is it is designed to get that blue flame quality. I obviously I fit the model,

[32:09] right? Yeah, I was young, white, no kids. I I still don't have kids, but uh you know, didn't live in the right cities, but close enough in Seattle. And we're not alone. There are a bunch of people trying to do indie startup thing. I've linked to to Bryce's from um he he used to run IndieVC. Now now he's I think about to launch something new

[32:31] called Bryce VC. Uh but his sort of thesis on the indie era of startups is a quite a good read. Obviously, Tiny Seed, you know, Calm Capital and Fund, there's a little confusion, Rev Up, uh Smash, a number of others. And a few companies I I didn't put everyone's logo on here who's done this, but Seattle Ultrasonics is a um a kitchen technology company that launched in Seattle, raised a couple of million dollars using SparkToro's uh funding structure, and they are operating in a very similar manner. It's It's just basically one one person then a team of contractors and stuff, but and they're building some some incredible

[33:06] stuff. All right, number six. My last couple of myths here. Venture's the only way to get rich, the best and only way to get rich. And how do these salaries These salaries are nice. They are They are not problematic. They put you in the, you know, top 60-70% of earners in the United States. Those are pretty good. Uh You can see what the distribution of venture-backed CEO pay

[33:31] looked like the last few years. To be honest, it's lower than I was expecting. I don't know if y'all have looked at these numbers uh recently, but I um I expected it would be higher that, you know, when when I was on the board of directors uh after I stepped down as CEO, the the new CEO who replaced me was uh making

[33:51] on the far right end of that. Uh so, yeah. But, most most funded CEOs are going to be in here. Uh you can also see what some data from FAANG companies looks like. They are almost entirely out-earning all of their venture-backed CEO peers. Very compelling to work at one of these big companies, make the make the big bucks, and that number is which it's one of those weird things when you realize like, "Oh my god, I'm dramatically out-earning my venture-backed CEO self at $50 million of revenue with a huge company." And like,

[34:27] this is weird. This feels crazy. And kind of awesome. Um All right, last last myth. Oh, I'm sorry. I'm a little over time. Uh you are not a serious or impressive founder unless you raise venture. I don't know how to argue against this. I really don't. There's no stats or data. I can tell you that until I raised venture, I did not feel like I was good enough. And granted, I was raised by uh you know, a guy My dad would even as a kid My dad would introduce me to people, right? Like at at a party and be like, you know, he This is Rand. Uh

[35:04] you know, he's a high-potential, low-achiever. Not um That is That has stuck with me. My My We had to take my dad off life support a couple weeks ago, uh which was which was quite intense. And we never reconciled. Like we never We never had a good relationship. We didn't have much relationship at all uh

[35:25] the last 10, 15 years. Anyway, I love all of you. I'm your hype man. You rock. Doesn't matter whether you are Drew Houston on stage at TechCrunch Disrupt, which is what I used to want to be. I wanted to be worshipped. I wanted to have that network. I want to get invited to those parties. And like, I don't know, fly on those private jets and get to hang around with rich I have hung out with a lot of rich

[35:54] I will tell you. Um it's weird. I don't do it that much. Now, what I want This is This is a photo taken Saturday night in New York City. Uh these are our friends, Shawn and Caroline, and that is our niece, Delaney. Geraldine and I um took her to New York so she could look at NYU cuz she got into NYU, which which we got to pay for, which is

[36:18] That feels awesome. Oh my god. [applause] Feels amazing. I just uh I I want I want more of this. Shawn and and his um and his mom are actually So, he's he's an actor. He's been on a bunch of Broadway shows and he's he's trying to do his own play. He's a uh indigenous uh Native American guy, Blackfeet tribe, and and he's trying to put together this like indigenous musical and raise money for it, and I was like, "Fuck yeah, I want to write a

[36:44] check for that." All right. So, that said, let's do some Q&A. Uh I think we have like eight or nine minutes left, and um I'm happy to talk about anything that's of interest in this presentation or anything uh around it, but I I threw some topics up in case those are of interest as well that I didn't get to in the slides. And uh yeah, thank you so

[37:05] much. Yeah. Oh, yeah. [applause]

[37:16] Thank you for your presentation, Rand. I'm over here to your left. Oh, hello. Yes. Hi. Um I appreciate this. This is great. Um can you talk a little bit about the trade-off between being solely bootstrapped versus getting this funding? I know Rob talks a lot about how money as a bootstrapper can save you years of your life. Um I like the Zapier story where they got this $1.1 million funding and they never dipped below like $200,000, and they bootstrapped the rest of the way, and now they're like a multi-billion dollar company. It seems like that's the right way to go, but what are the downsides of that and why I

[37:49] should bootstrap purely from the start instead of getting any kind of money at all? Oh, man. I So, I'm going to say I I think that bootstrapping is incredibly impressive. I'm always blown away by people who can do it, but I I have never done it, and I don't know how. I mean, obviously, SEOmoz was was tech It was technically bootstrapped, but it was it was debt funded. Like, we took out a bunch of credit card loans and bank loans, and then could not meet the minimum payment requirements and had to do all sorts of shady, shoddy things to get around that. Um, but I don't I don't

[38:24] have a great answer to like how do you pull that off? That is uh yeah, that's hard. It If I had to say something on the topic, I would say if you can raise money, you should you in a way that is palatable to you. I would urge people who don't come from family money to do that because even with SparkToro, I didn't have the money to to do this, right? Like we needed health insurance. Health insurance is a

[38:52] fortune. We we needed money to buy data. The data was expensive to get and acquire. We needed time to like get the product built and to acquire customers and all of that. I very frankly, if I had not been able to raise money for SparkToro, I couldn't have afforded to do it on my own. Casey couldn't have either. And we would have had to get jobs or I don't know. I'd do consulting or speaking or something like that, you know? Yeah. So,

[39:20] it it was impossible for me. My question, I guess, is related to the SparkToro funding. Um generally, like how much ownership are you giving up? And then the other thing I like about you know, bootstrapping is the autonomy that you get. Like when you take an investor are you taking in a board seat or how much

[39:40] oversight do you take on? Yeah. Uh great question. None. They have Granted, I I want to recognize that I was in a very privileged position where I where I could really dictate terms. I reached out to 41 investors and got 35 yeses. I didn't even have to send a second round of emails to people, right? So, it was like a very clean and clear process. We got a lot of 25 to $100,000 checks from folks. Um and and commitments quite quickly. Uh what I would say about the ownership and control. So, ownership, like I said, it's about 20, 25, 26%

[40:18] that's owned by our investors. Um with Scott's company, the one I mentioned, Seattle Ultrasonics, I believe the numbers are a little lower. I think investors own 20%. He raised it a little bit of a higher valuation because he'd already gotten the patents approved for sort of his invention. Uh and this is it's totally variable, right? So, I I know a few people who raised $150,000 on a $250,000 valuation, give away like

[40:46] 40% of their company in a similar thing. So, it's all over the place. What is not all over the place is no board of directors, no real oversight or control from investors. The only thing they really have is veto power over future fundraising um or over a sale that doesn't return their money their money to them if you

[41:07] haven't paid them back. Those are the only veto powers that they've got. Pretty I will say all the years we've been running SparkToro, I have never gotten a "Hey, how's it going? Like, what can we do this?" They're always happy to help when I reach out, which is awesome. It's kind of the dream scenario. So.

[41:25] Yeah. I think there was Yeah, a couple, three more. Hello. Back here. Hi. I got this. Uh thank you for the presentation. This is great. Uh when you show the salary of the startup of CEOs, uh I suddenly feel like I'm not at par like as a co-founder of our company and a CEO. And the CEO we took less salary than our employee. Uh I suddenly feel better. Maybe this is a tough time most of co-founder CEOs have to go through. But uh my question is I see when your revenue reach 1.5 million-ish, seems magic happen. Uh your salary like a triple or four times what you were

[42:08] making before. Um I definitely want to reach there, but my question is uh I see the revenue increase, but how you balance obviously when you have increased revenue, what's the your size of your team back then, the scaling issue, and also what are you paying for your employee, and what you invest for future business, like how you balance out those, still keep a healthy happy team, and also investment, but at the same time finally make

[42:42] your CEO pay a happy level. Yeah. Okay, so these are all challenging but good and fair questions. I'll I'll try and answer quickly so I can get to a couple more, which is in before we repaid investors, SparkTour was quite profitable, but after the investor repayment, essentially it's not that my the amount of my salary grew to it is that the amount that I'm taxed on because of how the LLC is structured, right? So the profits of the business are extremely high. We are only three people. We've been three people for I think Amanda's been on board almost three years. It'll be three years in June. So the team has stayed incredibly

[43:27] small, and we love it that way. We do have lots of contractors. We work with people all over the place. Asia does our, you know, user and customer research. We have someone who does graphic design stuff for us and visualizations. We have someone who does taxes and accounting, legal, all of that kind of stuff, but

[43:42] they're all contractors. The business is quite profitable because our data costs, while high, spread over, you know, a couple of sources that we pay for over the course of a year, it's still only about a hundred, hundred and twenty thousand dollars. Casey's the only engineer. He I have tried, people. I have tried. If you meet him and you talk to him, and "Hey man, you should hire another engineer. It's pretty risky having only one person with access to the code

[44:10] base." This This is maybe my only complaint about SparkToro is I wish we I wish we could hire just one more person. Um but yeah, in in terms of the salary, keeping people happy, so we pay Amanda considerably above, I think, market rate for what a startup marketer would make. Casey historically was not thrilled with

[44:30] his Seattle software engineer number. Now he's like so happy. He's like over the moon happy, right? Question. Uh so you raised was it 1.3 million? Is that what your slides showed? How did How have you used that money with only a team of three? Like what has that money gone to? Why did you need so much and how have you Yeah, so uh SparkToro took 18 months to

[44:51] get from funding to launch. Um the vast majority of of the use of that funds we spent down to about My memory is we had a little over $400,000 left in the bank account. That was mostly um all the expenses related to like, you know, incorporations and setting up the business and and lawyer fees and

[45:11] um health insurance, salaries. Uh those were the two biggest expenses, health insurance and salaries, for sure. And then data acquisition costs. We did not spend a a dime on marketing. I spent the first 18 months and I would strongly encourage everyone, anybody who's thinking about doing a new thing, spend the first 18 months essentially building up the audience. So about 12,000 people were subscribed to the SparkToro email uh like, I want to get notified when this thing launches, when we when we finally release the product, April 2020, not a great time to launch, but um when we finally release the product, that is what allowed us to get to

[45:47] profitability about 6 months later, right? Cuz essentially we had lots of people who knew what the product was trying to accomplish and were interested in it before we ever launched. I basically spent all my time doing that and Casey spent his time building engineering stuff. That That's where the costs those first 2 years came in and then since then it you know since

[46:07] October 2020 it's been profitable. [applause]

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