The Hidden Costs of Capital

Today’s Serial Entrepreneur Secrets Revealed episode is a special feature from The Complete Entrepreneur, hosted by Michael Gilmore every Thursday at 5 p. m. Eastern on Clubhouse. This special crossover session brings together the insights and energy of both podcasts, offering a unique perspective on the entrepreneurial journey.

Get ready for an inspiring blend of stories and strategies to enhance your own path to success.

The cost of raising money. We call it the stress of raising money. It’s not just about the cost of raising money. It’s about the stress and the emotional aspects that go along with raising money. And that’s what we’re talking about today on The Complete Entrepreneur. Our host is Michael Gilmour, who comes in from Australia. And he has a different perspective on entrepreneurship.

And this show has a different perspective. Cause this show really talks about You know what it takes to be an entrepreneur from the human side from the when you are really alone as an entrepreneur and you’re trying to figure things out and you don’t always have a lot of support and it takes more than just strategy.

It takes more than just figuring out your KPIs. It also also takes a human side to it. It takes the The emotional, the stress, the um, let me tell you this, raising money for me, that was probably one of the most stressful things I ever did. I did um, I did an IPO, I did uh, venture capital, I did, I did all of it.

And you’re putting yourself out there, you’re sticking your neck out there, you’re sticking your concept out there, and you’re pitching. And I don’t know about you, but I don’t like rejection, I never have. Hey Michael, welcome! So good. So good to be here. It really is. So we’re trying to dissect your topic a little bit here.

Like it’s all about raising money and, and the stress of that, you know, not every, we’ve got entrepreneurs in this audience and including myself who love running businesses, who love strategy, who love working with people, but we just, we don’t like it. We’re afraid of it, Michael. Yeah, look, it’s an interesting one.

Yeah, this topic and it’s one I thought to be really worth exploring. And once again, as the complete entrepreneurs, it’s not about the process of raising cash or how to do a better pitch and all that sort of stuff. Um, we can explore a few of those things, but it’s more like, what is the journey that entrepreneur actually goes on?

And this is what the Complete Entrepreneur is all about, Colin, and I’m looking forward to today’s topic so much. This is a show that’s at 5 p. m. Eastern time every single Thursday, and it’s great to have all these wonderful people in here with us. And if you think of someone who’s going through this process right now, a fellow entrepreneur, then invite them into the room.

I think this is going to be a, the next hour is going to be riveting. And if you’ve got something to contribute, then we’d love to hear from you. Like, what is the cost? What was it like for you to raise money? What was the journey you went on? What was the rollercoaster you went on? We’d love to hear from you.

So stick your hand up and let’s have you up on stage. In the meantime, Colin, just before we get started into things, what’s going on with startup. club? Like it seems to me like we’re just about at the million, the million, um, uh, members, right? Yeah, we keep, we keep getting closer and closer, although we’ve expanded our membership on platforms like Entree and on LinkedIn and other areas.

Uh, The, the, the, the fact is we have a lot of really cool speakers coming up. Uh, tomorrow’s our monthly newsletter goes out, and if you want to get a copy of that, go to startup.club and sign up to the email list. And we have some very interesting speakers. Uh, tomorrow. If you’re have ever thought about starting an e-commerce business, we have one of the, the, um, the, I guess, most prominent experts in the e-commerce space.

Who’s gonna talk to us about that from two to three o’clock. At three o’clock, we’re doing a master class. It’s the only time you can ever see this master class free. And it’s something that our team’s been working on with slides and present, you know, and PowerPoints and all week long. I’ve never delivered the speech before on, on, um, catching the AI wave.

But I am so looking forward to this. If there’s one area of expertise that I have in my life, it is really about how do you catch a wave? And we’re going to break that down. And I’m using my mentor, Jeffrey Moore, who interviewed for the book, Start, Scale, Exit, Repeat. He was in the book and, uh, he actually helped me break it down.

But I took it to another level. So, we’re talking about Jeffrey Moore’s concepts and then concepts that I’ve implemented over the last 25 years that are not in Crossing the Chasm or inside the Tornado. Which is interesting. So it’s actually really building on the theory of how do you catch a wave? Yeah, that’s, that’s going to be an absolutely riveting session, Colin.

I’ve got to say something about AI though, so I have to interrupt you there. Ian, I’ve been using AI. I’m a developer, um, programmer, as well as CEO of a company, all that sort of stuff. And I’ve been using AI continuously in development. Colin. Yeah, so I think you’re dropping, yeah, I think you’re still dropping out there, Colin, so I’ll fill in the gap until you get into a better, better zone with your phone.

But yeah, I’ve been using AI continuously with development and let me tell you the thing I have found is the biggest difference. Is that if I have a problem with programming and I put it into Google and I ended up at like stack overflow or one of these great developers or websites, fantastic sites, you’re going to read up a whole lot of things.

Okay. What’s the possible solution to this problem I’m working on. And that pops the answer, and I’ve done a whole lot of reading. Uh, but let’s imagine I don’t get the query in Google just right. Then I’ve got to go ahead and sort of think, Okay, how do I rephrase the question in a different way? Um, so hopefully I get a different results in the search listing.

And you do that like sometimes six or seven times or something like that. But what Google’s doing is it’s just taking your statement in isolation. Now compare it against say, uh, AI. So the other day I was, um, doing some development using AI as a tool on the side. And I said, look, I need this solution. Can you give me a possible solution?

I need it to solve this problem. And the AI goes, here’s the answer. And I look at it and say, well, it’s not quite the answer I’m after. I did go along and say something like, it’s, I’d like it to be changed like this. I just sort of like talking and it goes, Oh, this is the, here’s the answer. And I’m looking like, yeah, thank you for doing that.

Oh, can you do this as well? And so what you’re seeing is it’s a dialogue. It’s not like a Google search where everything’s in isolation. I found I was having a dialogue with a research assistant helping me as I went along and solve the problems and the programming problem problem I was working on and to me, that was just.

Um, I know I’ve used AI before for different things, but just click with me, Colin, that each of the, the things I was doing, we’re not in isolation, the AI knew we were having a conversation, and that was just. Uh, it was phenomenal, so it completely changed also the way I then approached ai. A lot of people approach AI as if it’s like a super duper Google.

No, I, I didn’t, I I don’t do that anymore. I like, I’m having a conversation and I’m wanting to go along, get the answers I need. Anyway, Colin, I wanted to add that in before you get started. Today’s topic of the cost of raising money. I’m not sure if you’re back into a zone for your phone as yet. I think I am.

I think I am.

I’m driving to my Tesla right now. We’re driving home and, uh, yeah, like I just, let’s just go back to that raising money and the AI thing. I mean, we can go on and on. We can derail. Oh, I could go on forever on that. But let’s talk about raising money. Let’s talk about the stress of it. Let’s talk about You know, the, the, the idea that you put yourself out there with a business plan and people might reject you.

And if you’ve been in, if you’re in the audience, come on, come on stage, join us. And, and really, let’s talk about this because I actually think that you can identify that you’re going to be stressed out about this. You’re going to be nervous. It’s probably in my life, one of the most nerve wracking things I’ve done, but I’ve raised tens of millions of dollars for companies.

And I’ve done it, uh, despite my nervousness. Was that the best way to put it? What do you, what do you think about this, Michael? Yeah, it’s interesting, like, I’ve raised millions of dollars of venture capital. And, um, after the last time I did that, I said I would never do it again. Um, and that was just my, my approach, um, to it.

I, I, I found it was quite a traumatic experience. Um, and when I look back on it in hindsight, I’m much older now. I look back at it and I can sort of say, okay. The, one of the fundamental things that I needed to appreciate is the say, the person you’re trying to get money from as such is not necessarily rejecting you as a person they’re rejecting the business plan and that they’re saying it’s not for them, um, and sometimes it depends on your own attitudes and everything like that, they may reject you as a person and they may be very blunt about that, that you’re uninvestable because some people are uninvestable.

Um, Colin, and that, that it’s, and if you get told you’re uninvestable, you need to really think about, um, how you, how you’re not just doing the pitch and everything like that, but what is it that makes you uninvestable? And that’s a huge amount of introspection stuff. But I want to push it back one step, Colin, is that I find businesses typically when they’re raising cash, they’re in one of three modes.

Uh, the first mode is. I’m just launching. I think I need to get some cash, raise some cash so that I can take the first step in this great long journey. And you’re, you’re going to the angel investors and all that sort of stuff. And they’ll extract their pound of flesh, or you’ll go to friends and family and things like, uh, or whatever.

So that’s the first, the first stage. So it’s like, there’s a lot of excitement and that sort of thing because you’re going to raise cash. And one of the first things, a lot of those, um, particularly early investors will do because they’re. Normally, normally they’re not sophisticated investors, like I said, friends and family and stuff is don’t want to know things like how much are you actually paying yourself and try to minimize that and all that sort of thing.

So like keep you really hungry and that can be like quite intimidating, Colin, because they’re invading your private space. Like if I went up to say Carmen right here, say Carmen, so how much do you earn? How much do you earn? I want to know. And there’s Sava, uh, in the audience here. Tell me, I’d like you to explain to me exactly how much you earn and why you earn that much or something.

That’s really personal stuff. And so you’re sitting down there with friends and family and everything like that, and they can see exactly how much you earn. You’re putting a business plan in front, you’ve got a cash flow and everything like that, and you’re suddenly very vulnerable. And it can be nerve wracking.

So that’s the early stage. I think the second, second stage is you’ve got some traction and you’re wanting to expand for growth. And, uh, so you’ve got to prove a concept and all that sort of stuff. And now you’re probably going to go to the more sophisticated event, um, investor who, Is going to tip in a more substantial amount of money and you’re going to be suddenly encountering things you have no idea about such as, Oh, we need to rewrite the shareholders agreement or, um, we need to go along and, uh, put, put all sorts of things like belts and braces around the, the, the contractual side.

Uh, and what they’re trying to do is minimize their risk and all that sort of stuff. And so it, once again, that is, becomes very intimidating. And you then have your lawyer say, um, I’m not your lawyer. I am the company’s lawyer. And you sort of think, well, isn’t that the same thing? No, it’s not. That actually isn’t there.

They’re trying to work on behalf of the company. So then I think the third stage Colin that we can begin to explore Is is that that horrible stage when your company’s running out of cash and you’ve got to raise money quickly That to me is probably the most terrifying thing and companies can be thrown into those positions um Not because of anything bad they’ve done.

It could be like economic circumstances. Um, it could be the interest rates on these skyrockets. Uh, it could be a whole variety of things. Suddenly a large customer defaults on you and you’ve still got to pay the wages. Uh, there could be a whole lot of reasons why that occurs, but you’ve now got to go and prostitute yourself before some sort of investors.

And you really, I. I was in this position one time, uh, about 25 years ago. And I felt like I was prostituting myself, Colin. And, um, and trying to raise cash in those circumstances, I would never do it again. Uh, it was, it was soul destroying. It really was. Um, and that left a scar on me, uh, that period of my life.

Um, and so I think there’s those three areas anyway, of cash raised and then they all have different personal and emotional quotation marks, traumas associated with them. Um, I’m not sure if you can see him anymore, Colin, I think there’s a myriad, but if I put them in three big buckets, um, they’re, uh, that’s what, that’s really what, what they are to me anyway, but they all leave you in different emotional states, that’s for sure, as an entrepreneur.

What do you think, Colin?

Michael, I am with you, uh, right now. Um, yes, look, it is, it is emotionally very straining. Uh, let’s start, let’s start unpacking a few of the things that you talked about. Uh, first is a lot of stress comes from pitching. Because, uh, to the wrong people. We need to learn how to pitch to the right people. Okay, let’s go back 2006, did my IPO, it was an S 1, we went public on the Toronto Stock Exchange, even though we had to do an S 1 in the U.

S. Cause we’re a Delaware corporation and, uh, uh, we went under the ticker symbol H, which was pretty cool. It’s a single letter. I sort of liked that. Uh, we pitched RBC, TD were our underwriters and there’s a third underwriter. I can’t remember the name now. Heywood. Heywood Securities. So we had three underwriters.

RBC was the main and we pitched to 20. Give me a second here. I’m getting the numbers straight. We had 38 pitches. We did like 32 pitches in Canada, uh, six cities throughout Canada, very conservative environments, uh, maybe a little bit similar to Australia, a lot of oil and gas, a lot of that. There are a lot of the people we pitched to were, um, like in many different cities throughout Canada.

Businesses. And then we went down to the U S we went to Boston, New York, Chicago. Um, and we pitched to six institutions in those cities and guess what our close ratio was, Michael. We closed. We closed six institutions for the IPO. And 3 of them were in Canada. So it’s like a 10 percent close ratio in Canada and 3 of them were in the United States, a 50 percent close ratio.

And what that taught me was that if you’re pitching to the wrong group, the wrong people, the, if, if, if they, and then you get that rejection, it’s really, you made the mistake of just going in and identifying a potential investor. You can’t just all investors are not equal. All investors are different. The vast majority of investors, uh, really hate to lose money.

Okay, let’s just start with that premise. A lot of investors who begin to focus on particular areas, like, in our particular case, it was, um, a software as a service. Uh, creative revenue model, which, by the way, today is like the number one model to be invested in. Um, but that being said back then, it wasn’t as popular.

And so when you are trying to pitch to you, I don’t care who it is, if they don’t feel comfortable with the model, or they’re not comfortable with, it’s not the space they live in. It’s gonna be a very hard pitch, but if it is the space they live in, it’s gonna be a very easy pitch. And so that’s sort of the first lesson I learned about pitching was simply, Get the right Rolodex.

Make sure you’re pitching to the right people. We talk about a lot about that in the book, Start, Scale, Exit, Repeat. Just so you know, we go in a lot of detail about raising money and, uh, and that was probably one of the first lessons I learned. There’s three or four other ones behind that, but I’d love if you’re in the audience, you want to come on stage and talk about your Your horror story of raising money or your or how you actually get you actually raised money And it turned out pretty good, and I’ve got some pretty cool stories to tell Carmen’s coming on stage now, but I’ll Add her up there.

Yeah Colin um I think the The question I would ask you is did you have like a merchant bank? Coordinate all these meetings and things like that like in the case when I was raising cash. I had a merchant bank Um, investment bank, sorry, uh, Richard bank, investment bank who coordinated, um, a lot of the investment meetings and things, um, and where, where I would do pitches and so forth.

Um, and in the end we had a multinational corporation invest in my company at the time. Uh, but that’s a longer story, but yeah, so they coordinate means when you’re saying get the right Rolodex and things like that. Um, is that. More advising your investment bank, bankers who coordinate all the pitch pitch sessions.

Um, is that really, um, working more closely with them? Sorry. Okay. I mean, like it’s, it’s universal. I mean, yeah, it was RBC and it was pretty high end. Yeah. They messed up by pitching us, putting us into too many situations with my dogs in the background here. Sorry. Um, but they, they messed up by putting us in too many meetings.

I mean, they’re for RBC, TD, you know, those big companies stop because they put us into too many meetings where, where investors weren’t interested in what we were trying to pitch and then they got us into the United States and they were interested. So it was like, it was a very different, it was just very.

Eye opening to see that you really need to pitch your concept to the right people. If you’re an e commerce vendor pitch to e commerce investors, you know We brought paw. com into venture atlanta three years ago, and we got slaughtered It was because they all didn’t care about e commerce. They wanted Accretive revenue models.

Um, so that’s just the first the very very first lesson is let’s make certain we’re pitching to the right people Okay. That’s number one. And there’s more lessons from that, but I know we got Carmen on the stage as well. So Michael, I’ll let you handle it. Yeah, not a problem. Yes, it is. It is getting in front of the right people’s absolutely critical.

And sometimes it’s working with your investment bankers like that. In your case, it was IVC to make sure you are actually doing the right pitches, because let me tell you, doing a pitch takes a huge amount of effort. Um, and emotional energy and trauma in some cases is doing those pictures. So it, it takes your eye off the operational side of the company.

Yeah. So, um, it’s, uh, it is quite a drain, uh, doing that, but Carmen, it’s great to have you here up on stage, Carmen. It’s fantastic. And by the way, Carmen, I actually don’t want to know how much you earn. Hi, Colin. Hi, Michael. Um, so I’ll share real fast a little bit of our experience. Of course, we are very much a more an early stage startup.

Uh, we are a marketplace and 100 percent all the things that you guys are saying apply. Now, um, we raised the family and friend round. We raised 170. From family and friends, and then we, you know, did a lot of the steps to create our MVP, um, and get our trademark, uh, of course, become a corporation and all of those things.

And then we go on to their angel brown, um, that has been, uh, frustrating because again, what you’re saying, you have to pitch to the right people, but at the same time, I look at it like a practice, right? Even if it’s the wrong person. Still an opportunity to talk about my company and answer questions. So, you know, you can look at it in a positive way, but you don’t want to do that too much because it is draining.

But at the same time, you start meeting people in the, in the space, in the startup space. And in more, I am in San Diego, but in most cities, it’s a small community and people tend to know one another. And the word gets out, you know, in a positive or negative way. Also, the people that may not be investing in your, um, space may be able to refer you to somebody who does, and then a referral is priceless, right?

Uh, we know that, that’s, that’s just a huge win. Uh, so we continue to do that. We are in the process right now. Um, and yeah, it’s, it’s not easy, but it’s definitely worth it. It, it can happen. Don’t lose faith. One of the things that I would advise is to get a platform where you can, uh, organize your follow ups because after you start talking to so many people, you lose them, you lose their contact information, or you forget the conversation, and then there’s no follow up.

So, uh, you want to You know, continue to send out reports about updates. It could be negative. It could be positive. It doesn’t matter. Um, but have a platform where you can do the follow up. And there are 2 or 3 that are very good and not that expensive. So, the follow up and then also how calling you were talking a lot about.

Talking to the right people. So how do we find those people? How do we know who is invested in what? Thanks guys. I can just ask you a few questions. You said you raised 170, 000 from friends and family. Um, what was it like doing that to raise 170, 000 from friends and family? Did you feel there is a big obligation towards them?

Well, I look at it like this. Um, there was a time where Facebook was just an idea, right? And the people that came in early, of course, made a huge, uh, profit. So I look at it like that. I believe in our product. And so I share with my family and friends so that tomorrow they can come to me and say, How come you didn’t tell me about it?

How come you didn’t, you didn’t think I was good enough? To come in with my five or 10, 000. So I see it more as an opportunity to them. Of course, yes, there is a sense of responsibility to them, but that’s a good thing because it keeps me, pushes me, you know, even during the difficult times, it’s like, nope, I cannot give up on them.

I can’t go back and say I quit. So that’s becomes a positive. Yeah, one of the interesting things I find in raising family friends when I talk to different entrepreneurs is that there’s an obligation, there’s almost like an unwritten obligation towards them. Um, that if, if let’s imagine the company goes down, uh, you did your best, you had a go at it, it goes down and all the family and friends lose their money.

Then you end up in this really Awkward situation with them and, and, uh, the talking to other entrepreneurs, they found themselves in situations where suddenly the family and friends are saying, pay me back my money. Um, is, is that something you find as a bit of a burden as an entrepreneur? Or is it like very clear you’ve lost your money?

That’s all there is to it. See you later. Well, so that’s where it’s important to have a clear communication with them and let them know this is a risk. You may lose your money. Are you okay with that? And also always work with people that that is extra money to them. You know, if you know, hey, I just put it away or, you know, I got some extra money and I’ll put it with you, then that’s okay.

But don’t take money from people that are barely making their rent. That’s that’s that would not be appropriate. Um, so, so far, no, some nobody has asked for their money back. Uh, I think probably because we keep up with the reports. We send them out 4 times a year. And we let them know the good and the bad.

And so they know there’s something, I think the, the problem is when you go quiet and there’s complete silence and they don’t know what happened, um, that could add to that, but so far, no. Yeah, that’s great. Great to hear Carmen. Cause I know it’s, it’s, um, uh, some entrepreneurs have expressed even on, on this show that, uh, it’s quite, uh, emotionally taxing.

Like you go to the Christmas party and suddenly people are wanting to talk to you about the business. And for instance, I actually employ, uh, my brother in law in, in one of my businesses. And, um, uh, we make a point for instance, of never talking about work at family functions and things like that. And we said that there’s, there’s boundaries.

And I sometimes wonder whether, um, uh, when you’re raising love capital, and by the way, love capital is the cheapest sort of capital you can possibly get. And it’s quite often the best capital when you’re raising sort of love capital from friends and family and things like that. Sometimes it comes with strings attached and just depending who it’s from.

Like some people are like, yes, it is a risk and all that sort of stuff. And others. Uh, they can, they can extract their pound of flesh. Uh, Colin, have you, have you seen this sort of thing happen where, or, or you’ve heard when you’re talking to other entrepreneurs, that’s the case or, or is it the case? Sorry.

Sorry. Carmen. Yep. Sorry, I just wanted to add that it’s very important to have a contract in place. It is a goal where you are investing so you don’t get in any kind of trouble and the terms are clear. So we use the safe, the one put together by Y Combinator. And that’s very easy. It’s not that complicated, especially for the early rounds.

So you can go online and just find the safe document and use that for your first round. Um, so yeah, make sure that it is signed. A comment you have just shared. One of the most important pieces of wisdom out for all the entrepreneurs in this room is that when you’re particularly raising from friends and family, you still have a contract.

You still have a contract in place and, uh, and so they’re signing off. It becomes more formal and more serious for them as well. Don’t just take their money and put it in the bank account, but have that contract and which outlined the responsibilities and getting Y Combinator or something like that, look, that’s, that’s wonderful.

It sounds to me like you’re doing it exactly the right way. They’re coming and keeping, keeping your shareholders informed. Form on a quarterly basis is really, really important. I must admit, I do exactly the same thing. I happen to do it on a monthly basis. We have a monthly cycle, so I keep my shareholders informed, um, all the financial reports and all that sort of stuff, and they can just go and get them.

They can see them. And, um, yeah, it’s all very, it’s very above board, very transparent and it’s a good way to do business. Yeah. And you want to keep that report really short. One page. Yep. Yep. Very short. Yep. Doesn’t have to be long. It’s very, very short. Yes. So, um, saying I’m still alive. Right. That’s exactly what they want to know.

They can’t, they’re not in the details of your business on a daily basis. So they just want to know you said hi and it’s one page. Yeah. And I’ve also found is that the reason why they invested Carmen is because of you. Mm-Hmm. more than the business They believe in you, Carmen. Yeah. They like, yeah, it’s exactly right.

And so you’ve gotta re you. You’ve gotta respect that. Yeah. Yeah. So, Colin, do you have anything? I’m hard to resist. . . So Colin, do you have anything to add to what Carmen was a sharing name? Yeah, I got quite a lot to add in this conversation. Uh. Yeah, we talk a lot about it in the book. Um, look, my first loan from my mother was 12, 800 in 1993.

8 percent interest. I paid it back and I paid it back with interest. I did not ask for an investment. I would encourage new entrepreneurs to think about, uh, getting loans from the friends and family when you’re first starting out. I know it’s unless, unless you’ve got a, an uncle that’s rich or an aunt that’s rich, that really is comfortable with the idea of putting money out there.

But my mother was not. And, uh, my father died at a young age. So we were, we were very poor family. So the fact of the matter is I was borrowing money from her and whether the company succeeded or not, I was going to pay back that loan. Now, fortunately I was able to pay back that loan. And three years later, she invested a hundred thousand dollars in my company.

In the company that my brother and I started, and she made a lot of money from that, and several years later, she invested again, uh, a couple hundred thousand dollars, and she made a lot of money, and she made millions, and, um, that’s good news, like when, but I actually talk about this in the book, Stars, Scale, Eggs, Repeat, about what we want, I call it the mom test.

When do we want to bring our mom into an equity investment? And well, at that point, that’s when we can bring our friends and family, and that’s when we can really ramp it up. But if we’re not willing to bring our mom into the investment, then we need to think differently about how we do the investment.

And, um, that mom test is really all about proven our concepts. And now all we need to do is accelerate with, it’s like throwing gasoline on a fire and believe it or not, most investors would rather be investing at that stage at a much higher valuation, 10 million, 20 million, 30 million valuation, as long as they know they’re investing money as an accelerant, not as a proof of concepts.

Just follow me for a second here. The human nature is we hate to fail. We hate. Yeah, there are a few that really do like maybe the early, early stage, the gamble, you know, like you go to go to a casino. Think about the roulette table. You know, if you put your number, if you put all your money down on one number, what’s your odds of winning?

It’s pretty low. Nobody wants to do that. So we’ll play red. We’ll play black. We’ll play the 1 to 12. We’ll play. We’ll play different things on that table. And investors are similar. The nature of investors is they want to succeed. You can, if it’s an investor succeeds, two, three, four X, they’re happy, right?

Don’t get me wrong. Venture capitalists want 10 X. I know that. Um, but the fact of the matter is if they can succeed, they’re happy. If you tell an investor or a prospect, or even a friend, friends and family and say, Hey, I have an idea, give me a hundred thousand dollars and let me see if it works, it could give you a hundred times your return on investments, right?

Yeah, it’s still leery of that. They’re still very, very leery. Yeah, that’s not going to happen. That’s right. They’re not going to invest in a situation like that. So, I mean, that, that is that and then safe investments, Carmen, you’re, you’re dead on. It’s probably the best structure, simple, um, give me a second or safe, uh, for future equity.

Uh, simple. Oh my gosh. What’s the acronym? Carmen? Simple Agreement for Future Equity. Thank you. Yes, I got it. Something like that. I got it. Exactly. I got it. And they, and they made it simple. That’s right. Yeah, they made it simple. And what’s good about it is there’s not a lot of legals involved in putting that together.

Uh, I will caution many. I’ve invested in many, many companies and I don’t do safe investments for early companies because basically you’re saying as an investor, you take all the risk. I’m curious for your opinion on this one. You’re pitching me. I’ll take all the risk for a concept or an idea, but I don’t even own it.

I only get a, a 20 percent discount to the, uh, venture raise or the next raise the next round. Um, and to me, that’s like, I take the risk, but I don’t get the upside. Now you can put a cap on that. And that’s where I, Talk to a lot of entrepreneurs, uh, who are doing using safes to be realistic about the valuation and, uh, put a reasonable cap so that for instance, if it’s 20 percent below the next round, but, uh, 10 million cap, and you’re already evaluation before 3 million, it can be a lot.

More enticing because you want to sell the future. You want to sell the upside. Don’t be too greedy on a race. Like, you know, you can’t do that, especially if you’re an early tech startup or an early company, you can’t be too greedy. You’ve got to, um, I love the idea of safe, but I also love the idea of a cap.

Carmen, I want to hear from you and then we got to move on. Yes, I think you’re correct. It’s a tricky. It’s a trick, right? Because it’s a tricky matter because sometimes they tell you, uh, you want to make your, you want to make you look, I’m sorry, you want to make your company look like it’s a big company, not a tiny, you know, little thing.

So they say, ask for a lot. Uh, you know, if you need 500, ask for a million. If you need, 200 ask for 400. So, and there are other people say, like you said it, no, be conservative and, and just be real with the numbers.

I think the other thing is look at it. Yes, right. So have a discount on it’s it’s in the document. So you have a discount and Yeah, you know what it all boils down to the idea and the team um Also, you want to make sure that this document is legal in your state It may not be because it was it’s good in california, but I don’t know So just double check because you don’t want to get in trouble and you know have to go to litigation and all of that but um I think I think Yeah, I think Carmen and Colin, as well as like the amount of money you’re raising and everything like that is be realistic around your valuations.

Um, like when you’ve got literally nothing but an idea and say a piece of paper, which is a business plan, and you sort of put it like, oh, it’s a 20 million company, then is it really? Is it really like be realistic about your valuations? Um, and that’s one thing I would very caution, but forgetting the mechanics of it, I think that the interesting look thing to look at, and we’re going to come down to Jason in a second thing to look at is there’s all different ways of raising cash.

From investors, and there’s many sections on that. I’m very interested in exploring just the whole, um, just the emotional journey you go on as an entrepreneur. But anyway, so let’s take a look at that. But first of all, I want to hear from Jason. Jason, it’s so good to have you back on The Complete Entrepreneur.

Welcome to the stage, Jason.

Jason, if you’re there over to you, it

looks like Jason has gone away for now. So we’ll come to Joe, Joe. It’s good to have you here on the complete entrepreneur. Love to hear your thoughts on the topic of the cost of raising money. I appreciated how you guys said once you’re in your startup community, you realize that everyone knows everyone.

Fact. True. Feels very real to me. Um, the other aspect, I’ve been warned over and over, if you do a safe and a, sorry, if you do a priced round and a discount, um, you’re almost throwing up a warning flag that you don’t know what you’re doing. You’re either only doing a discount on a future priced round, Or set the price.

Okay, let me try to understand this a little bit better. Let me try to understand this a little bit better. So you’re saying, so now, safe investors are a, you know, a future agreed a discount to a future offering. Right? You agree with that. So, so, you’re okay with that, right Joe? Yeah, but at that point, I don’t think the founder knows what the valuation of the company is.

And that’s kind of like an interesting aspect. That’s almost like the team’s coming faster before you could even realize what the value of your market was. Yeah. So this is where, and I’m famous for doing this, sorry. Um, when I’ve invested in some of these companies, Uh, I actually pushed the, uh, The, the cap down.

So, for instance, I did a, uh, accounting software, uh, company a few years back and she was raising money and, um, it was a pretty, very successful, pretty, pretty successful company. Uh, but it was the valuation she had on the, on the cap was pretty lofty. I’m like, no, I’m not willing to do it. I pushed her. I ended up pushing her down.

I don’t think she was too happy about it. Ended up pushing it down to like 15 million or something like that. And, um, and the fact is as an investor, sure. We’ll put money in. We want discount to the next round that will convert that, uh, debt to equity, but we also want upside and, and I’m now I’m speaking on the other side, by the way, I really live on, on the entrepreneur side, not on the investor side.

But I’ve been doing that. I’ve been doing that over the last few years. I’ve invested about 20 companies. So I actually I want all entrepreneurs to benefit and enjoy the The valuations they can get from what they can do, but greed is a problem. And, and also when you push your valuation too high, a lot, there’s something called liquidation preference in, in the venture capital and, and other concepts, and they might actually agree with your evaluation.

But if you don’t deliver on that valuation, it could be a problem down the road. So sometimes going too high can be a problem. Obviously going too low. I mean, we saw shark tank. I mean, let me see that show. All of us see that. I’ve seen the show. It’s a disaster. It’s crazy. It’s insanity. You 20, 30 percent of your company away.

For what? Like, that’s just insane. Now, there is some marketing benefit, like, we’ll, we’ll give Shark Tank a pass, right? Because there’s a lot of marketing benefit that goes on there, and that’s the upside, but I would never give away 20, 30, 40 percent of my company in the early stages. Think about that. It’s like giving up 20, 30, 40 percent of your life.

That you’re being taxed for that period of time. Now, there is an alternative, and SAFE is a good alternative, but I just, I just suggest that you do put a cap in place. Yeah, I, I, I agree, I agree with Colin. Like, um, it’s, it’s, it’s one of those challenging things, you know. The other thing to look out for is ratchets.

Like, uh, quite often an investor will say to you, if you meet this target, which you have set in your business plan, then, um, this is my equity versus if you meet, if you don’t meet the target, they have all sorts of ratchets up and down and all that sort of thing. And the problem I see with a lot of that is that drives the business in the wrong way.

Is that let’s imagine you have a large opportunity, uh, but it’s going to take a little bit longer or something like that to attain that opportunity. Um, but it’s not going to deliver results according to this fictitious one when you’re raising capital. Then you may pass on the large opportunity because you don’t want to go along by be diluted or something like that.

There’s all these weird, wonderful things that can be done. And the number one thing I always try to look for is this. Number one thing is keep your shareholding registry clean. Don’t have, I, I’m, I’m a view Colin. Uh, it could be different in the us uh, from Australian perspective, keep your shareholder registry clean.

Don’t have all different classes of shares all over the place and, and have all sorts of different sort of agreements. What will change the shareholder, the capital structure of the company if something happens. There’s all these weird things which make it more and more impossible for you to raise capital into the future and just bring, like I said, it drives the business in the wrong way.

Um, so what’s your view, Colin, just on, you’ve seen, you’ve probably seen this where people make the companies uninvestable, um, because of all these other different sort of considerations investors have to take into account. That’s really a Canadian Australian thing. I’ve seen that happen a lot in the stock markets with preferred shares and whatnot.

In the U S they tend to be a little bit more common shares. Uh, yeah, you might have an exception like Google or, or Elon Musk or, or Facebook, Facebook went and did it. Did they? Mark Zuckerberg. Yeah. But yeah, but not everyone’s a Mark Zuckerberg. That’s the thing. Well, they diluted the CFO out of existence when he raised capital.

Yeah. Well, that was a different, that was a slightly different situation, but the, but the reality is that most of us are coming out there with common shares and, and, uh, and I, I do believe that a shareholder base. Is very important to your success. Uh, you can actually use your shareholders to work for you for free.

Let me, let me go back to 2012. You remember this, Michael? Uh, we had 30 days to raise 7 million to participate in an auction for dot club dot clubs and alternatives. com. net. org. And, uh, we launched, uh, the offering I went to, by the way, no broker on this one, this, this was like post my IPO years, blah, blah, blah, no broker went to, um, my, uh, 37 linked in contacts, reach out to them.

And I was very particular who I reached out to with a, with a, with a, with a, um, teaser. Would you like to receive the, um, uh, not S1, the, uh, private placement memorandum, uh, the reg D filing that we’re, we’re, we’re doing to raise money for a doc club and we closed 26 of the 37. No broker, no liquidation preference, Carmen, and no liquidation preference.

It was all direct common shares. And we were able to close that with zero revenue. Just a concept and it happened for a few reasons. One was we had a really, really well written private placement memorandum with a law firm that we worked with. Two is it was a good story. Michael, you know, the story dot club and, uh, and we had the ability to apply for the application for that TLD.

We want it. Uh, and we ended up selling it nine years later to go daddy registry for a huge massive profit. So all the shareholders made and made out made a lot of money on that particular company But the fact of the matter is here. I am Raising money for a business and i’ve no broker I got 30 days to raise seven million dollars and we were able to pull it off And we did it simply by doing a reg d filing In the United States with a private place, a member of memorandum.

I’m sorry. I don’t want to confuse people in the audience. This is not as complicated as it sounds. And again, I know I keep preaching the book, uh, That, uh, that we published in October 3rd, but it really details every form of financing in the book, the right financing for the right situation. Uh, and the book starts scale, exit, repeat number one, 13 categories on Amazon.

Very cool. Uh, but it, it really, really breaks it down. So if you really want to understand that, that was, that’s probably the simplest, fastest way you can understand it. It was actually a law, a lawyer, uh, who was on clubhouse, who I got to know very, very well, who also wrote a book on the same topic or similar topic, raising money for the right situation.

But the fact of the matter is you can raise money without liquidation preference. Liquidation preference. Let me give you another. Okay. Let me flip that story a bit. I’m now working with a company. Company’s been in business for 15 years. The founder owns about a third of it. He’s been kicked out of the company.

I took over his board seat, actually. And I was came in to try to turn the company around. They raised 60 million of venture capital. Today, the company’s worth maybe 10 million, maybe 15. Like, the fact of the matter is, if the company were to sell today for 15 million, this founder gets zero. Hang on, Colin.

I just need to interrupt you there. The founder raised 60 million and is now with 10 million. A venture capital. Yeah. You’ve got to be kidding me. Okay. So, but here’s the funny thing, Michael. What if there was no liquidation preference? What if he actually still own, he still owns a third of the company.

And what if they sold the company for 20 million? He still walks away with 6 million. It’s not too bad after, I mean, it’s not the best in the world for startup, but you know, it’s not too bad after 15 years, but guess what he’s walking with now. Zero. See, you don’t know this, Michael. 70 and Carmen, 75 percent of venture backed companies fail.

Just, just think about that for a second. Why? 75 percent of venture capital companies fail. We all think we hit the lottery when we get venture capital. Yet three quarters of the people who hit the lottery walk away with nothing. Zero Zippo. That’s the reality of the situation.

Yeah, that’s, that’s a scary stat, but I think that you’re absolutely right though, is that, um, the other thing I found is that just the whole journey with raising capital, uh, for the entrepreneur is, is quite. It’s quite challenging. Yeah. To be sitting in a VC’s office and that sort of stuff and, um, and doing a pitch to them, just the whole, you’re normally waiting in the, uh, in the lobby or something like that, whatever.

And then you get ushered into this room and you got to do a pitch and you got like, uh, a few, not very long, typically to do the pitch. It’s, um, it’s probably one of the most intimidating things. Uh, you can actually do and depending upon the circumstances in your company, um, they’ll be able to sniff out of this blood in the water.

So if your company is like really needed to raise cash, they’ll, they’ll know. They’ve seen a thousand of these pictures and they know straight away. Okay. Your company’s bleeding cash. We’re going to screw you for an unbelievable deal. And you, you feel like in yourself and I use the word prostituting, like it’s almost like, please, sir, can I have some more from your Oliver twist?

Like, please, please. I just need to go along and get a little more cash because of this horrible situations before me and the, and, and the VC sitting there going like, yeah, that’s, that’s not my problem. My problem is to give a good return to my shareholders. Therefore. Um, you’re about to get screwed to the wall, if anything, you know, and it’s, it’s really tough on the entrepreneur.

Um, it’s, it’s a tough situation, um, to, to actually go through that, um, and just emotionally deal with it. Um, yeah, Cameron. Yes, I’m sorry. I agree with what you’re saying, but it can also be turned around, right? We can also say, Hey, my, you know, in the faith that we have in the understanding and the potential that we have about our company.

So I think that if we have a really clear, especially, you know, really understanding the market, really understanding what the possibilities are. And so I think that changes it, right? Um, that changes our attitude. And we go in there with confidence. And, um, and yeah, I think that helps a lot if, if the, if the founder is confident that gives confidence to the investor.

Oh, you know, I completely agree with you completely agree with you, but what happens if the founder is struck is really struggling because so let’s imagine you didn’t get a big payment because someone defaulted and so you’ve got to raise cash for the next 14 days or you don’t make payroll. Some, some disaster befalls you, right, then it’s the, the, the founder can be confident.

Yes. But, um, it can be really difficult emotionally of how do you wrestle that through common? I think that’s a really big challenge for some, some founders because the reality of business is sometimes stuff happens and it’s not pleasant. And you’re suddenly in, you’re suddenly in a position, uh, where you never want to be like personally, I, I’m, I’m on the view that every, every business should, um, should go along and, uh, get to a stage where they’ve got a chunk of cash in the bank so they can, they’re never in that position ever again, where they’re forced to instantly raise cash, but that’s not always possible.

Exactly. That’s not always possible. Yes. So I hear a lot that. When you don’t need it, don’t wait because that also shows prudence, right? That you’re prudent enough with your company where you have. Um, you know, some kind of, uh, reserves, so I, you know, they say race when you don’t need it, which makes almost no sense.

But yet that’s, that’s how it’s done. And I think the other thing, it goes back to relationships, right? If you have built their relationship with your early investors, and you have an emergency, they have already. You know, uh, invested in you, they understand the business and they can see that this is a normal, just a normal everyday way, um, business that can happen.

You lose a contract, you know, you have something that didn’t go right. So you can go back to the early investors. I think that would make sense. They go right. I agree. Yeah. I completely agree with you. In fact, as Colin was saying earlier, he was saying that having, having a, um, a set of good investors is so important because, you know, sometimes, particularly in the early stages of a business, things happen.

And you need to, may need to go back to them and sort of say, Hey, this happened. We need to raise a bit more capital and that sort of stuff. And that’s just the reality. And if they’re reasonably sophisticated, like I know Colin, uh, many of the ones in club work, then they’ll just understand that they will understand that.

And some of them will, will then partake in another round, you know, to, to obviously propel the company forward. I want to hear, come back to Jason, come down to Jason just there. Um, Jason, uh, I’m not sure if you’re there yet. You. Do you have anything to share on this topic?

Looks like Jason’s still away. Okay, he’s probably working hard in his business like we all need to be working hard. Yeah, exactly, but I want to, I want to unpack you guys are like, killing like three or four or five different topics in like two minutes here. Oh, I mean what? There’s so many speeches. Every investor can sense When you’re running out of money, we don’t want to do it.

Carmen, you’re right. We don’t want to do it. On that note, I would love to offer a resource and I would love some feedback on this resource links in chat, but it’s a five year business plan with a cap table infusion. Okay. Uh, Joe, uh, I was just jumping in with the concept of, you don’t want to like. Raised money when and they all sense blood they can smell blood.

All right, but joe i’m curious I want to hear more from you. Can you restate that? I haven’t done the ebit of calc on it yet, but I used to do the profit and loss statements for Lots of money for a bit Um, so I created a cash flow five year runway plan with a separate spreadsheet, which is a cap table Multi dilution cap table.

And so if you put the month that it Money injects into the company. It shows up on the five year business plan, or if you divest, it shows where it’s taken out of the company in the five year, um, runway model. Is this a unique model of investing that you’ve designed? Cause it’s rather unique to me. Yes.

I’m a chemical engineer and, uh, money is easier than chemistry. Okay. So you’re so, so, so let me try to follow this. So you’re, you put money into the company. Uh, so you’ll commit to a certain amount, I presume. You commit. You put money in, you gain shares, you pull money out, you get out shares. That sounds almost like, uh, Dual entry calculator.

Yeah, but you’re gonna have some SEC issues with this. Because you’re moving, you’re moving stock in and out. I, I, I, I would, I would, I’m curious how you, have you thought about the SEC? I, I, I think it’s, Correct me if I’m wrong, Joe, this is, this is not for that purpose, but it’s more like a sophisticated, um, uh, cashflow, uh, cashflow model.

Um, and so you can actually see the results going in and out across time, across the next five years. Is that correct? Correct. That way you can run your, uh, your runway. Yeah. See when money gets injected in for multiple round dilution. Um, not that you’re changing shares, but it could technically do that math if it needed to.

Yeah, that makes perfect sense. But, um, let me say, uh, Sadly, I can’t believe the time. I just realized it’s, it’s, um, 58 minutes and, uh, we’re coming to the end of this time, which is, um, uh, which is, which in some ways is a little bit sad, but it means we’re hungry for more for next time. Um, but just as we close that Colin, yeah, definitely one last comment or something like that.

Um, look, I mean, oh, we got superior just jumped on stage. Superior, and we’ve got like, yet 60, 60 seconds only, Superior. You just jumped on stage last minute. Any thoughts about this topic that we’re going on, uh, or can we close it up here? Uh, yeah, I think, I think that it’d be a lot easier for, um, small business entrepreneurs to raise capital once the regulatory market returns to some semblance of normalcy after we get these old decrepit, uh, Loser liberals out of office.

Yes, guys, and we close our borders because we’re allowing millions of these fucks to just walk across our border That’s not helping anything either. So yes borrowing money as a business owner is harder than ever because yes We’re flooding the country with illegals and we have an incompetent sleepy, you know, little girl.

Got it. Got it Yeah, we know we’re trying to keep this apolitical or not like the startup club’s not political We understand where you’re coming from. And, uh, um, look, I know we got a lot of people want to come on stage right now, but we do have to close this down. Uh, it is a live show. You can see that and we do this every.

Thursday, five o’clock Eastern. And this particular show is going to be syndicated in podcasts on the, uh, start scale, exit, repeat network, uh, which, uh, we, uh, if you have, if you’ve seen it, we’ve got about 150 shows out there right now, tomorrow, if you ever wanted to start an e commerce business, we have the expert on tomorrow at two o’clock Eastern, and at three o’clock, uh, I am delivering.

The, uh, uh, masterclass for free on entree. So it’s a new platform called entree and I’m delivering it for free. It will not be free after I deliver it tomorrow. You have to have a pro membership to get it. And the topic is catching the AI wave. And our team has been working all week on putting together a presentation that we’re going to deliver.

And this comes right from the book. 100 percent from the book, Start, Scale, Exit, Repeat, which came out on October 3rd, and we interviewed Geoffrey Moore, who wrote Crossing the Chasm, Inside the Tornado, and tomorrow we’re going to reveal what it takes to catch an AI wave, and how you can win. with that wave.

Michael, thank you very much. It’s been a great show. It’s good being here. It’s been good being here, Colin. And it’s always wonderful having, uh, Cam and Joe, and also superior here a minute. And, but the audience there is, yeah, you’re the reason why we do this. Exactly. You’re the reason why we do this. And it’s always wonderful to have you here.

I’m going to jump into a meeting right now and accelerate my business. So I hope You’re doing the same next week. I’m actually traveling next week. So I’m not sure Colin, what’s going to be going on. I put the, the, the, the schedule there. I passed it to, to Mimi, but, um, yeah, so I’m actually, we’ll, we’ll, we’ll keep rolling.

We’ll keep rolling with it. Uh, absolutely. So I look forward to seeing everyone, um, after I finished my, my ventures of traveling, being up in the air and so forth like that, and God bless you all and have fun in your own businesses. See you later. Bye.