Jon: Welcome to the Venture Capital podcast. This is Jon Bradshaw with Codebase, Peter Harris with the University Growth Fund. I talk about the founder side. He talks about the VC side. We were we were harassed, not harassed by a dear friend this past week and they're like, You're not VC, you can be on it. Well, I did have a fund like ten years ago.
Jon: I've worked with heavily with investors for two or angel investors for two or three years, and we're the one I hit, the one that you and I had published. So that's what qualifies me for being here.
Peter: You know, what qualifies you is that venture capital does not work like in isolation, right? Do you want to be a VC? You've got to have an entrepreneur to back so.
Peter: There you are. And any podcast that claims to be venture capital that doesn't properly represent the entrepreneur side of it all, I think is like missing half of the equation.
Jon: And I'm a serial entrepreneur. I've been Lemoine was my first startup, so.
Peter: Yeah, you've been doing a long time. Plus you, you've worked with a ton of entrepreneurs, both at Codebase as well as like prior things you've done. So I think you qualify.
Jon: All right. Well, let's let's kick it off before I begin. If you go to a VentureCapital.fm, you can find us on YouTube, Spotify, Apple, anywhere. All the links are there. Instagram, TikTok, you name it. So do you want to kick off this episode or should I kick it off to tee it up?
Jon: So as Peter and I have been doing podcasting for this podcast, often this is a question that's come up again and again, in fact has come up many times throughout my career as I've been in the VC investing space. And the question goes along the lines of how valuable are venture services, the pros and the cons, and let's just kind of like take a deep dive in.
Jon: Who should who should do venture services, who doesn't?
Peter: So let's be clear. Like, what do you what do we mean by venture services?
Jon: So typically my understanding of venture services are instead of someone coming to you and saying, Hey, I'm going to give you $1,000,000 for 30% of your company, they might say, I'm going to give you $1,000,000 in services into your company in exchange.
Peter: And what if it's like a combination?
Jon: Yeah, I mean, that could be. But you would still have a venture services component. You'd have a cash component at a venture services company.
Peter: So like, maybe like a Y Combinator or Techstars or one of these various accelerators would count.
Jon: Did you consider Y Combinator venture services?
Peter: I don't know. I'm asking, do we do we include that in the venture services bucket?
Jon: I would not count Y Combinator.
Jon: Because the difference is, is they don't have actual individuals that they're assigning to your account. Okay. Y Combinator would come through and say, here's your $150,000 check for 7%. Hey, here's a convertible note for for 350 ks, you get a total of five and K Yeah. That convertible note or but but.
Peter: They do provide services, right? They have like the coaching, they have the demo day they have, but they have like guidance and mentoring.
Jon: Right? So I mean I guess if you ask.
Peter: So it just kind of varies in terms of what the services are, but you're saying is like, but I.
Jon: Would not look at them as ventures we're.
Peter: Giving you like coding support or outsourced CFO support or sales and marketing support, like and in exchange for providing that, we're going to take equity in the company and like the services are the real thrust, correct, of the like way in which they earn equity in the company.
Jon: Versus being at 50% or more cash.
Peter: Right, Right. And I also think that there's like a certain level of like some of the value. In fact, honestly, I think most of the value that a Y Combinator brings to the table is not the coaching, not the cash. It's the cash. Right. It's the selection of being like, yeah, I'm NYC Company and like, they only accept, you know, some de minimis amount of startups that actually apply.
Peter: I can't remember what it is these days, but for a while it was like 1.2% or something crazy like that. And so it's like, yeah. So if you're one of the, you know, 1% or less, then you must be somebody some somewhat interesting, right? But there's, you know, we've talked about this before, like there's a bunch of accelerators out there that honestly, I think people kind of waste their time on because they might they may end up taking equity.
Peter: They're not a particularly like strong brand and in some cases can be viewed as a negative brand. And then that ends up hurting you more when you go out fundraising.
Jon: Well, let's talk about Y Combinator for a second and just the perspective.
Jon: Like, I think when you when you look at I think the primary valuable value of any individual or venture services or investor that's on your cap table besides the value they provide is it's typically a signal to the next round. Sure. And to the next investor. And it's kind of the the snowball effect. Right. And Y Combinator, as time has gone on, they used to only accept ten companies hand-selected.
Jon: Yep. And I don't know who who the top companies were, but my guess is like Airbnb was one of them.
Peter: Airbnb. Dropbox, Big brand. Yeah, a bunch. Yeah.
Jon: And then as time has gone on, they've gone to more of the the spray and pray model where they're accepting 100 plus companies and that the signal.
Peter: Person, now they're cutting that back.
Jon: Yeah. They're not cutting it back. So I think my, my gut feel is they're losing the value and they're becoming like tech stars and everyone else.
Peter: Right. Right. And they want to be a little more.
Jon: And again, Techstars may or may not be a good thing, but like where.
Peter: About a year? I think Techstars is like, fine, It's just not as strong of a brand because it is somewhat diluted, right? Because they back so many companies, they have so many programs. But I think Techstars is a much better brand than, you know, a smaller regional accelerator.
Jon: I think 40 year old John Bradshaw would pass on Techstars, but 20 year old Bradshaw.
Peter: Would have done it.
Jon: I think would be a lot more value out of it.
Peter: Sure, sure. And look, I think venture services and accelerators in general can help people with less experience who are, you know, starting this out for the first time. but I also see, like, founders that, like, they've gone through like six accelerators, incubators, whatever they call them, right? And fortunately for them, a lot of them don't take equity, but a bunch of them do.
Peter: And so it's like cheers, like you've just given up a massive chunk of equity. And then when they go to raise, it's I don't know it like it just signals poorly to investors because well, it signals part of it, but also like kind of screws up your cap table because it's like, man, well, if you've already given out like ten, 15, 25% of your company and you haven't even raised a dollar yet because maybe you gave that to a to a venture services firm that didn't invest dollars, right?
Peter: They just gave services. if you haven't, like, been able to achieve meaningful traction off of those services, you're, you're at a bad spot because the investors are going to be like, okay, well you've given up 25%. I'm going to want 20% when I invest. The next investor is going to want 20%. The investor after that is going to want 10 to 15 and then ten, and then ten and then ten.
Peter: And like by the time you get to like a series B, the the founders so diluted that the series C investors are going to be like really scratching their head, wondering like how and like incentivized the founder to really go out and knock this out of the park. And the problem is, is that the series C investor doesn't even like get that far or it doesn't even get that far to the series C investor because the series a investor and even sometimes a seed investor, if it's an institutional investor, is already thinking about that outcome further down the road because they have to right.
Peter: Because they're swinging for like the company that eventually goes public. And if they're like, I don't know if this company can raise a series B or a series C because the founders are already massively diluted, that's a problem.
Jon: So let's get go more to venture services, not the accelerator model. Yeah, because Y Combinator and Techstars is more of an accelerator, right, then because they're.
Peter: Giving cash in addition to some services. But I think most would say, like, it's the cash and the cash that matter most. Not so much the service.
Jon: Aside in the seat getting stuff done.
Peter: Yeah, well, look. No, because they're just like, I mean, how much, how much coaching are you really going to get and how valuable is that at the end of the day that you couldn't have gotten if you just reached out to some people?
Jon: I think I think the challenge is, is people want access to networks and if you're younger, you don't have access. And there's that, you know, that mystique. I mean, like let's just talk about like over the week I was texting Josh James and I think a lot of people who are younger like, I mean the ten year old me.
Jon: If Josh James walked in a room I would have like.
Peter: So I guess here's the advice though for our listeners who are founders and that is like I get that these things can be mysterious, right? Or like, you know, shiny and, or, you know, you see like Josh James walk in and you're like, ooh, stars in the eyes. But I don't think you need to go through an accelerator to get access to those people for sure.
Peter: I think there are cheaper, better ways to do it. And as a founder, like, you should have like some confidence that you can pull it off without having to go that route. This is like people that come to me and they're like, Hey, I need to raise this money so that I can go and do X, Y, Z, And I look at X, Y, Z, and I say, You don't need money to do X, Y, Z, you just need to go do it right.
Peter: And it will be hard 100%. I know it's hard right to do those things, whether it's like I need to go get a customer. I need to get the CTO on board, I need to build a product freak, you know, like even building a product, like it just doesn't cost much money to build an MVP these days. And so, yeah, it's a hard yeah, it's hard and it sucks.
Peter: But you know who you know who gets funded, the people that do hard things. So anyways, I'll get off that soapbox.
Jon: All right, So but talk about if you're a founder.
Peter: Go build your own networks. You don't need you don't need somebody else to open up that door for you.
Jon: Yeah. I mean, for me, let's let's generally when it comes to better services just from a high level, if it's a deal with ya, I would pass.
Jon: I think it's typically it's us. I mean, there's a lot of reasons why is when you're building a team, you want someone who believes in you. And if the venture services company believes in you, that's awesome. They. They selected you. Sure, But they're now putting people in your team to perform the, you know, the services.
Jon: And they may or may not believe in you, or they may be assigned to you and wish they were involved on another company.
Peter: Yeah, well, and I think that's a good thing that if you're evaluating, working with a venture services firm, look at the people that are going to be working with you. Are they like, you know, people that demand very high wages and could work anywhere in the world or in for any company they want to like? Are they high quality individuals or are these people that are like super cheap, Right.
Peter: Interns, brand new out of college, no experience, right? Maybe they hustle, Maybe they don't. I think that's one thing that I would pay a lot of attention to because, yeah, look, if you're going to give up equity, that's like the most expensive thing. You know, form a capital. And so, you know, if you're going to give it up, you want people that are absolute rock stars.
Peter: And then I think the other thing is looking at how are they how are they incentivized? How are they compensated and what kind of alignment do they have? Because, you know, I know some venture services companies where they do put in money alongside their services, but when they put somebody to go work on your team, like they're on your team, like they are an employee of your company, they get compensated from your company.
Peter: They get equity in your company like they are tied in. And if you're looking at this company and it's like, Hey, they got a bunch of interns, none of them are getting like true equity in this company. None of them are like putting in the blood, sweat and tears and being compensated accordingly. Like, all you've got are like some pretty pathetic mercenaries, in my opinion.
Peter: You don't have, like, you know, true in, you know.
Jon: It's an expensive management fee.
Jon: Ventures. I mean, the way I look at it is I can go recruit a venture services firm.
Jon: And they may say, Hey, we're as part of our services, we're providing development help for you.
Jon: Or I could just go recruit a CTO, go direct. Yep. And then you've got a you've got a lot more control versus whatever the venture services company or firm decides to bless or not bless you with.
Peter: Yeah. Well I think to, you know, as a V.C. and like I want to invest in people that are part of the team, not just, you know, outsourced temporary help.
Jon: Yeah. I think one of the when I was working with the Uta Angels, one of the times I saw this play is the lead investor said, I'm going to put $100,000 into your deal. Yeah. Based on that person's recommendation. Again, this is like ten plus years ago. Yeah, they run around and everyone was ready to do the deal.
Jon: And then the last minute the lead investor said, Hey, I'm no longer going to give you cash, I'm going to give you venture services instead.
Jon: And if the deal luckily still went through in most cases in today's day, it would blow up the deal.
Jon: Why it blow up the deal? Because there's this belief of trust of putting cash where your mouth is. Yeah, that's the that's the belief. And if you're doing services, then like, what's the markup on the services? Where's the transparency we're getting? And it just creates a weird, weird power law for dynamics.
Peter: Yeah. Now definitely creates kind of this weird dynamic. and like, like on the one hand, like, it seems like it should make logical sense, like, hey, I'm providing these services that cost money and in exchange, like, of not charging you for these services, I'm going to take equity. but I don't know, I guess too, like, it depends on the amount you're giving up.
Peter: Like if you're giving up, you know, price something like sub 5% then like, okay, I can see that. but if you're giving up 1015, 20% like that is just, that's just way too much, for example. So I sit on that as I sit on the board of a company, I'm an independent board member of that company.
Peter: We're not investors. It's, you know, they asked me to be on the board and I agreed and they gave me a very, very small amount of equity in exchange for being on the board as compensation. Right. So in a way, like I'm providing services as opposed to investment dollars in the company and receiving equity in exchange. But like it's a very small amount, if that makes sense.
Jon: Advisorshares, it's like.
Jon: Advisorshares are usually considered differently. But again, I don't look that adviser shares as venture services.
Peter: That's true, although I got to be honest, I don't love most. I think.
Jon: That's a podcast for.
Peter: Another day. That's another podcast for another day. But I'm not a huge fan of Advisorshares either. Okay. I think they have a place. I just think sometimes entrepreneurs give away equity like candy and it should be the thing that they guard like the most carefully and keep the most sacred.
Jon: All right, so back to venture services. Yeah. So let's go. So the one example we gave is if, if, if an investor wherever swap out.
Jon: Cash for venture services I'd be, I'd run. Yeah I know in this scenario that'd be tough because it's your lead investor. What do you do You they're shutdown.
Peter: Yeah, but are they your lead investor anymore.
Jon: No, this wasn't mine. This is.
Peter: No, but I'm but my point is like, I'm, I'm saying like.
Jon: I'm just amazed that deal still went through. I'm really surprised.
Peter: But yeah, but what I'm saying is if if at the 11th hour the the end quote, end quote, investors like I'm swapping services for cash. Right? Are they even really a lead investor anywhere? I would I would argue that they're not.
Jon: So here's my favorite quotes about venture services that Zach odes taught me ten years ago. Yeah. Yeah.
Jon: He said You get what you pay for or you pay for what you get.
Jon: And my belief in that venture services because they have to do it, make a mark up, they try to find the cheapest people usually they can put in seats as a general rule. Yeah. You're, you're giving up a lot of equity for intern quality which if you have any success later, you're gonna have to rip it out and redo it, which is going to be a lot more expensive than just having the right team members to begin with.
Peter: Yeah. Yeah, I agree with that. And I also think that there's this element of if you're not going to like NYC, you're not even like even a Techstars, right? You got to be thinking really hard about like, what does the brand say about your company? I think about this in terms of like a lot of people over the years have asked me like, Peter, do you have an MBA?
Peter: And I'm like, No. And they're like, Why don't you have an MBA? And I'm like, Well, because frankly, at this point, like, I don't really need one. But the other thing is it's like at this point in my life, I'm going to, you know, an MBA at a top tier program is like a couple of hundred grand minimum, right?
Peter: And like two years of my life. And I look at that cost and I'm like, man, the payback is like, so long. And I and I've thought like, well, maybe I get like an MBA from like another school that's not as expensive. Something I could do nights and weekends. But here's the, like, sad truth about that is even though, like, it might end up being an interesting experience, it would actually be viewed as a negative for me.
Jon: And it'd be a negative for you.
Peter: yeah. Like if I went and got an MBA, like, nothing against. Nothing against like the University of Utah, right? Yeah. If you got a you got an MBA, they're like, Kudos to you. Like, I don't have anything against that. But for me, in my profession, if I got an MBA from the University of Utah, like it would be looked down on and it would be better for me to not have an MBA.
Peter: Okay, that makes sense.
Jon: We're getting a long ways away from the venture service model.
Peter: Well, let's bring it back. So what I'm talking about here, though, is that if you end up going to a venture services group, right. That does not have a strong brand, when you go out and you raise your next round, it's going to be looked down on, right? They're going to look at that and B and think to themselves, if this entrepreneur is really legit, they would not have gone to this venture services firm and therefore this entrepreneur must not be legit and I only back legit entrepreneurs.
Peter: Therefore, I'm not going to invest in this company. And whether that's like fair or not, I can't you know, I'm not going to opine on that. I mean, well, it's not fair, but it's just the way it is because as a VC, you see so many deals. You're looking for almost reasons to say no a lot of the time.
Peter: And so when you have like these red flags pop up, you're just kind of like, look, it's got some hair on it. I'm just going to pass and I'm not I'm going to look for deals that don't have hair in them. It's not my job to go out and fix fix these deals. Right. There's there's plenty of fish in the sea.
Peter: I'll just go find another one. So that's my point, is that like these brands, they kind of stick with you. And even if you don't like do, maybe you like, try to hide it. Every VC is going to want to see your cap table before they invest, and it's going to show up on the cap table and they're going to make judgments around like, you know, the caliber of people that you've surrounded yourself or institutions and what that has to say about you as an entrepreneur.
Peter: And that goes both ways, right? Like if you get a really great angel or a really great fund on your cap table, then that is going to be incredibly helpful. It's like a giant green flag for other investors to come in and support you later on down the road.
Jon: Definitely. Great. So one of the venture services groups can we mentioned by name Science out of L.A.? Yeah, I think that's a venture services firm that you approve of or no.
Peter: I don't know that I would necessarily say I approve of it. I think for the right entrepreneur it can make sense. So science, science puts in cash and then they also do a ton of services, like they take people, they put them in your company. They help run the company. They they dramatically increase traction and sales through their network.
Peter: but they take like 50% of the company. They take a huge percentage of the company. And their argument is we take a huge percentage because we add a ton of value. We are like a co-founder in the company and in many cases it's the partners. It's almost like a venture studio model where they're identifying a business opportunity and then they're finding an operator that that has really good fit and they're putting the two together, they're building a base, and then they're getting the company to a point where other investors can come in and continue to fund it.
Peter: But, you know, look, for some people like you should not do science because if you're not comfortable with them taking half your company right, then it's probably not a good fit. But if you are, then like they've done some really great deals over the years and have done really well.
Jon: So I know there is one venture services program where the the owner of the firm would become the CEO of your company. Yeah. And that you would quote unquote like earn the right back to be the CEO again and all the equity would be taken from you and you would have to earn all that equity back.
Peter: Yeah. What do you think of that? Feels kind of gross it.
Jon: I just. I didn't do the deal.
Jon: I mean, I was. I didn't, but, like, I just knew I would never approach that firm.
Peter: Yeah, yeah, yeah, yeah, yeah. I don't know, I. I mean, I can see the logic behind why a firm would want to do that.
Jon: But if you have no options and you're like, Look, I don't have the time, I don't have the network, the connections isn't even given. 40% of venture services spiked. Speaking the other side, you're better than nothing. Like, sure, you may not be able to fundraise, but you can get your first company under your belt and then go from there.
Peter: Yeah, but like, what are you getting out of that.
Peter: 60% of what, though? Like that's the problem. Like, if no one's going to fund you, can you get the company to a point where like it gets acquired or something? Maybe? I don't know. I don't know. I just think like 40% feels like a lot. You got to be like really confident that you're going to get that kind of value back out of them.
Peter: And that's the other thing is like most of these firms are like, Now here's the equity. Like we demand the equity upfront, right? And then we'll provide the services on the back end. Like that should be another red flag, right? Like when, when you hire somebody, you don't give them all their options upfront. Day one. Okay. Right. You string, you string that out over four years or whatever, right?
Peter: Your vesting schedule, they earn it, right? You should be doing something similar if you're going to go that route, you should treat them just like an employer. Be like, Great, we'll give you some options. You provide value. We will compensate that value.
Peter: Options and exercise the options right, just like an employee.
Jon: Okay, so what's the TLDR? Generally you would avoid venture services programs if you were to accept one, you would want to have one that gives you not only services but some cash. If you do take services, the services should have opt or vest, just like an advisory advisory shares or founder shares or Now, granted, there aren't sure different types of shares, but just labels.
Peter: You should have good alignment with the people actually providing the services. Right?
Jon: You're not getting interns?
Peter: Yeah. Make sure they're super high quality, right? Your equity is gold. And you, when you raise when you raise equity funding, it is the most expensive funding you can raise.
Jon: Right? When I had a of a friend in the fintech space and they were asking about a couple of venture services programs, I'm like, Don't do it. It's like, John, it's 1000000 hours of services. Yeah, I said, Here's the problem. Tell me who they're putting in your seats that actually has fintech experience. Yeah, and if they have fintech experience, I'm going to be much more interested.
Jon: If not, you're going to have to spend 3 to 6 months training them about the space to know how fintech is different technically from non fintech deals. And my guess is anyone that they'd recruit, you could have recruited someone ten times better.
Peter: Yeah. Yeah. I think the other like key punch line that I want people to take away, especially young entrepreneurs that maybe feel a little bit vulnerable here. and that is like, like, I know like starting a company is scary and these things seem like cheat codes, ways to like, get ahead faster. And I think the reality is that their.
Jon: Confidence boosters.
Peter: I think that they're not.
Jon: I had an idea to tell your students this week about it. He gave a founder 50% of a company. Yeah that isn't putting in cash. Yeah. Isn't adding any value yet. Yeah but I my argument was this individual makes you feel good and protected and safe when reality they're getting 50% of the company for doing nothing.
Jon: Other than saying hey, here's an idea, go work on it. Right. And, and that has somehow given you all the confidence to work together. Maybe a little harder.
Peter: Yeah. And I would argue you don't need that. You can do it. I believe in you. Just go make it happen. Do the hard things. Don't look for crutches.
Peter: It's hard. It's hard. But you can do it. Great Entrepreneur. Here's the thing. If you're doing, if you're on the entrepreneurial path, then you have to believe that what you are doing is going to make a dent in the universe and that you are going to make a dent in the universe. And you should carry that confidence forward and everything you do.
Peter:
Peter: Meme of that. Just just just making my dent in the universe here.
Jon: I mean, I think that's a big part. Maybe with venture services as as early stage founders, you don't have confidence. And I don't think the venture services program where they build it for you is the way to do it. I think. Hey, I.
Peter: Don't think it ultimately builds confidence.
Jon: I think confidence comes through doing. Yeah. So like the way I did is I found the smartest people in the space as I was interested in a family like Paul Allen. He built ancestry.com. I'm going to work with him for six or 12 months. He I got to work on the product team. I got to see how they did outsourcing, all those kind of things.
Jon: And I got to learn from experts myself. So then when I went to do it for for myself, I had a much better idea of what I was doing. Yep. Still figuring it out day by day, though.
Peter: Sure, sure. Everybody is right. But, you know, just go do it. Don't look for crutches. Don't look for things that, you know, you think will make it a little easier because it's like you said earlier, you get what you pay for.
Jon: Or you pay for what you get.
Peter: Or you pay for what you get. All right. Right.
Jon: Well, that wraps up this episode of Metro Services.
Peter: What do you think about venture services? Are we totally up here?
Jon: what, you talking to me or to the crowd? To the crowd? Yeah. Let us know in the comments. US Know your thoughts. If there are venture services programs that you've been through, let us know. Comment below. You know, share your good.
Peter: Experiences, bad experiences. What would you do differently? What are the your red flags if you were to evaluate one, knowing what you know now? Thanks, everybody.
Jon: All right. Thanks. Talk to you later. Subscribe to venture capital out of em. All the links are there.
