Jon: So Peter, where were the all events? The Auckland podcast is number one and we're number two right behind it that we just said.
Peter: That's why I said, Thanks to you listeners. Thanks to you guys, all five of you that rank us in that order.
Jon: This week we've actually tripled downloads per day on an on average 2 to 3 extra normal downloads are. We're about to the point I was talking.
Peter: Like a big deal down. I'm not it must be like an expert in podcasting.
Jon: I'm not expert in podcasting.
Peter: Hey, everybody. If you need help with your podcasting, head up, Jon. He will make you.
Jon: No, no, I don't. no, no, no. I've been advised that there was a startup that I was advising. They're like, We're going to create a podcast. And McGuire How does it fit? Like run me through the financial numbers, How many people need to listen, how much it's going to cost to get those listeners, what that's going to do your revenue.
Peter: I think so many people start podcasts and the like. It's a lot of work and I'm not really growing and they shut it down, I think.
Jon: So here's how I look at podcasting. So I think there's that too. I think they don't realize how much work it is, but I think the people who win are the people who generally don't know how to quit. And number two, they get really good mentors. So maybe a shout out. There's a guy named Tyler Stallman different parallel universe, but he talks a lot about cameras and gear and he's been very inspirational to me.
Jon: And for this podcast.
Jon: Casey Neistat would say, Do not let the gear get in front of the story, right? Yes. It matters, though.
Peter: I think you just tell yourself that to feed your camera addiction.
Jon: But you make these cameras are five years old.
Peter: I so those are we talk about what we came here to talk about.
Jon: I don't know. These people aren't who our cameras are, how to how to grow a podcast.
Peter: So you know, are you going to start do like a course that so how to start a podcast.
Jon: Inside joke that Peter and I have is people who claim they're so successful, they start selling these courses and that's where they start making a lot of money off the whole form of that.
Peter: Yeah, it's like you like me, it's like, Hey, we started this podcast and we got, you know, tens of thousands or hundreds of thousands of downloads or whatever. And now we're going to like, monetize it with our course or.
Jon: Buy our course for 100 bucks so you can learn how to start your own podcast. Like what did they do? How did they get there? And they're just stealing probably someone else's podcast. But here's is the point. I was talking about some of the day about when do you monopod monetize a podcast? And it's something we've like from a business partnership, stuff like Peter wants to monetize it.
Jon: I'm like, I don't want to monetize, but I.
Peter: Was like, I just want to get rich off the podcast. Now I want to monetize that because I want more resources to make better content. Okay, But anyways, go ahead.
Jon: But the point was I was like, you need to have about this many monthly downloads before I think you start monetizing. And I'm like, Whoa, we're over halfway there now.
Peter: We're almost there and can get rich.
Jon: And we haven't really we didn't I don't think we really took the podcast seriously until like four months ago. Like we did podcasts and would publish or publish once a month and now it's going. And the next thing I'm really excited for is I think we're about to the point where we're going to get indexed or prioritized by Google, and then our downloads should significantly be, you know, much higher than they are.
Jon: Now that I can go at code base, you can clip the University Growth fund, create a podcast.
Peter: We'll just make tons of money selling our how to Start a venture capital podcast course.
Jon: No, I think the thing I like about podcasts is like because Peter on I realize we get asked these questions all the time and it's a way for me, it's about helping people at scale has always been the thing. How do you help people, things like that? That's one of the fun ways. It's one of the big side effects or motivators for me.
Peter: So I'm just here for the free water bottle.
Jon: One other free water bottle.
Peter: And I haven't finished this on. I'll let you know.
Jon: Dr. Pepper is my next favorite over Diet Coke by the way, I've been living off of caffeine today. So anyways, we were going to talk about is venture capital good for small businesses? Nope. Next question. Next question. So let's go into like the why or hows. So how many of the companies that are pitching you, Peter, are small businesses.
Peter: In terms of what definition in terms of like the Small Business Administration's definition of a small business? I mean, the vast majority, vast majority.
Jon: So I was with a VC, I was at a conference and I got to keep this VCs name confidential, but he was literally complaining about all the people who pitched to him for funding. He says that was never a good fit, and in my.
Peter: Mind they never a good fit because like they're strategically not it like they don't fit the fund strategy or is it because they just shouldn't be raising venture.
Jon: Money? They should not be raising venture money. Got it. Like I hear it too. There is someone there was a so without mentioning names or like, Hey, how do we were talking to like a podcast agency? Or I was, Hey, how do we grow? This is like, John, I want to hit you up afterwards because we're thinking about raising money for my podcasting agency.
Jon: In my mind, I'm like, Why? Why would you ever raise money for a podcasting agency? Yeah, it's never going to happen. There's no IP, like maybe unless you're going to become like a gimlet, you know, Gimlet Media, where they created a bunch of shows, but that's a different fit. And again, maybe even not a fit like gimlet, raise VC funding and exit it, but that's probably an anomaly.
Peter: Yeah, I think it's more of an anomaly. I think it was like there was a there was a period of time where you could raise money and have an outcome with podcasting and when that was exactly when gimlet raised. But I think generally it's not venture back Apple right?
Jon: Yeah. So gimlet raised the founder came from was it This American Life? Was it this American Life?
Peter: Yeah. It came from NPR.
Jon: NPR. So he had huge background, created a bunch of shows. But I wonder, like a lot of these these publications like venture beats that we think are just crushing it, they're not that good of a business models, and they've been crushed and affected heavily the from Facebook's advertisement model and others. They just they don't have the power they once had and I think a lot of them used to make money off the publications and events, and they primarily are now having publications to drive people to events.
Jon: But aside citing but so but again, like if I were to create a venture beat competitor product you know, there's not a good, good reason to pitch Peter or others.
Peter: Yeah. I mean, I think for the most part, media businesses are not great venture deals.
Jon: I think if you're trying to create an agency, most agencies aren't good deals like there is a local, not a local, a local VC fund. So it's very public album funded Andela, which was it's like another dev slash staffing company. But again, that I look at as being like an anomaly. Yeah, it's not a meal service. Companies don't get funded by VCs.
Jon: They might get privately funded.
Jon: Firm like Angel and then they're taking usually.
Peter: But frankly they don't need a lot of money. Honestly, I don't know. Jon's like, I could do a lot with some more money.
Jon: I mean, Europe if you wrote a check.
Peter: But the flipside is like you didn't need money to start your company, right, Or to grow it. Frankly. Like you go out, you get set, you you get customers and then you get a developer and you match them with those customers. Right?
Jon: Like you're way oversimplifying what's happening here. The back end here does not know code base.
Peter: But no, but, but tell me I'm wrong. But that is like the essence of the business model. The essence of a software model is you go in, you write up, you build a ton of software, you build a product because you can't sell anything until you have a product, and then you go sell and acquire customers, right? Correct.
Peter: And so you need the money upfront in order to build the actual product. There are a lot of products where like you don't need to build anything, right? And then there is this other question of like, okay, well there are some cases where maybe you're participating in a niche that small enough that you can even like get your customers to pre-fund or to fund your development.
Peter: And so like you can cover that. But if you want to go after like a really big market, you still have to raise a bunch of money to scale and grow and achieve like, you know, big, huge outcomes.
Jon: Yes, we do a code base, we give our clients, we started we gave them really good discounts in order to frontload security deposits to reduce risk. But they're like, Sorry.
Peter: For making your business sound like it's crap. No, that was not my point. No, no, no, no, no, no. Point is, is that like you're missing your.
Jon: No, I think you just don't understand. You're in your mind. It's super simple. And there's a lot that goes on, especially at the stage where code base is at. But again, code base seven figure business, not venture back in the current model.
Peter: So why isn't it venture bankable?
Jon: So code base is not venture packable in my mind, because it's one it's a service company. Most service companies aren't.
Jon: A lot of it's the margins. You know, most staffing companies generally net 10 to 35%, if you're lucky.
Peter: It's not the margins. There are lots of low margin businesses that get a.
Jon: Lot of margins. It's also not highly scalable.
Jon: I think if code base were to go after the turnkey com or top tail model, that's a much more scalable model and that's where we have started. In fact, one of my friends joked at me, Liz laughed. He's like, John, the same amount of time you've grown code base. Someone built TRANSCOM and grew it to $1,000,000,000 company in five years.
Jon: What have you done in five years? And like, screw you, I but they but it's a very, very different model. Their online marketplace. Investors love our online marketplaces. They don't. And most service companies crumble.
Peter: Well, because if you think about like where does your core asset.
Jon: The core asset code base, I would say it's the team, the collective, but you'd price it. To me, it's not scalable. And I don't know, maybe I should let you answer this.
Peter: I think the big thing is that like when you think about value creation, right, the value that's being created a code base, right, is your developers are they're creating value for your customers, right? And that value creation walks out the door every night. And so theoretically, like you don't control those people because it's not like they're slaves, right?
Peter: And they are holding the value of the business in a real way, right? You also add value to the business by going out and selling and getting customers and managing people and like operating the business. Like there is value there too, but the core value is being created ultimately that you are selling to your customers as what your developers are building.
Peter: And if you want to offer more, you essentially want to create more value for more people. You have to hire more people. That makes it less scalable versus a software business where if I want to offer, I want to create more value for more customers, I don't have to create anything more and it doesn't cost me anything more, right?
Peter: It does, but only at the margin, right? Like I got to get some little more servers space and I can help more and more and more people. And that asset that I have does not walk out the door. I own it. It is my slave. Yeah. So effectively.
Jon: Right. That code base, it's like Twitter you can lay off what is it not lay off or encourage 80% of the staff to leave. And the business, for the most part, continues to run.
Peter: Right? So like, those are like the big things is like if I'm investing as a VC into a company, what am I actually buying? Well, if I'm if I'm investing in your firm, what am I actually buying? I'm kind of buying like the brand name and the reputation at the end of the day, right? Correct. Because I'm not I don't own the employees.
Peter: They could just leave right? Like I could buy the business and the like. I don't want to work for Peter. Right. Or like, whatever. And they could leave and there's not much I could do about it.
Jon: Mean mass resignation.
Peter: So so those are some, some of the issues but those aren't all of the issues around like what makes a good venture bankable deal. Other things are like is it defensible, Right? Can somebody else replicate what I do and if they can, what? The problem with that is that ultimately, as a venture capitalist, you want to invest in monopolies and like monopolies are like, there's a dirty word, but the reality is, is every company that's like successful worth its salt as a venture backed company, it's striving with all of their might to become a monopoly because the big winners are all monopolies.
Peter: Google is a monopoly. Facebook is a monopoly. Uber is a monopoly, right? Like Amazon is a monopoly. It's a monopoly. And like 50 different areas, right? Like they're all these big giant monopolies. And the reason for that is that if you are a monopoly, you make bigger profits and then commoditize businesses. And so if you've got a lot of other competitors, ultimately you're all going to be competing on price and you won't generate the big the big profits.
Peter: And as a VC, you need your investments to be in companies that are going to get really big, dominate their space so that there won't be any competitors so that they can have monopolistic power to generate huge profits. Because when that happens, they get valued very highly, even if they're not generating huge profits today, if they position themselves to be able to generate huge profits in the future, other investors will see that they will value those companies highly and as a VC will make a ton of money if you're successful.
Peter: But building monopolies is insanely hard. And so most companies are not they're not able to do it, and they're not able to do it because they don't have the right business model. They don't have the right people, right? They're not operating in a market that's sufficiently large enough to generate big profits. They don't have a business that's scalable right?
Peter: So, I mean, you really need like defense ability, You need the right people, you need a big market and you need scalability. And so that's why most VCs invest in things like software, because it typically will check a lot of those boxes. And when VCs don't invest, it's because they're like, this is not scalable or this is not defensible, or this business model is like really interesting, but you're not the one to run it, which is really hard to hear, right?
Peter:
Jon: Luckily I have not heard that yet, so yeah.
Peter: So and when I say you, I don't mean you, John.
Jon: Maybe my business partner in Texas is saying that to me right now.
Peter: But if you're sitting in there and you're thinking like, I should raise venture money, you should actually yourself like, do I have these four things right? Can I be a huge monopoly someday? And if you can't, you should not raise venture money, in my opinion, into.
Jon: Like, what about angel money? Are you are you classified angel or private equity is part of venture?
Peter: I think it depends on how you define angel money. Yeah. If you're talking like friends and family that are kicking in money to help you start your company and get it off the ground. Right. Like if I came, you were going to start code base and you were like, Hey, Peter, I like I need a little bit of money to help get this started.
Peter: And I kicked in some money. Would I technically be an angel? Maybe. But like in my mind, I'm not your traditional angel because I'm not anticipating you to go out and raise a series A and so on and so forth. Like, I'm just giving you money to help you start the thing. And I would want to structure in such a way that I felt like I was going to get paid back in some way or form.
Peter: Whether that was as a loan and you were going to make debt payments to me or whatever, or as like dividends that you were going to pay out. Right. So I think in those cases, sure. Like friends, family, fools, SBA loans, credit card loans, like all of that stuff, totally reasonable. And probably where you should spend your time starting your business.
Jon: Yeah. Okay. The competitors of code base fundraising typically are raising from angels. Yeah. Or strategic partners. Yeah, definitely not. Andela and top talent hiring again, very different models because those are more marketplaces.
Peter: And more like recruiting than anything else.
Jon: We're there. They're keeping the talent and taking a percentage like 2% of the deal of everything that goes to their platform. Yeah, and there can only be so many marketplaces which is why it was interesting that turn hit at the space. But I think if you talk about venture and include private equity. So here's the question. Are you at some point code base would be interesting to a PR firm?
Jon: Sure. Yes or no at what point? But it would never be interesting to University Growth Fund unless I became a marketplace or something else.
Peter: Yeah, because a private equity firm will back, you know, non venture bankable businesses. So once they reach like a sufficient scale, but here's the million private equity, they don't care about building a huge business that has massive monopolistic power and the ability to generate huge profits. You don't care about that. What they want is like super boring, steady defense, like steady cash flows, right?
Peter: That's what they want because their whole underwriting model is essentially like, I'm going to buy this thing with some portion of equity, some portion of debt. I'm going to use the cash flows of the business to pay off the debt that's going to generate the bulk of my return. A lot of private equity investors would argue with that and be like, No, we're all about value creation, blah, blah, blah.
Peter: But and those can generate like substantial pieces of their overall return. But if they're being honest with themselves, the bulk of the return is going to come from using leverage. And so they need like solid, steady, recurring cash flow businesses. So for them, when they look at a company like a code base, they would say the real value here is the contracts that you've got, right?
Peter: If you've got these contracts, it's really hard to switch out because, you know, a switch out and it takes me six months to like 6 to 12 months to really switch to a new provider. Like those are really high switching costs. So the contracts they have are great and as long as they're operating efficiently, they're generating good, solid, steady profits.
Peter: I can then use that to underwrite how much debt I take on and use that debt or use those cash flows to pay off the debt. So in that case, sure, like they could they would totally find it interesting to invest in you guys once you reach a certain scale. Yeah.
Jon: So if you look at private equity, the subject of the venture capital code base could be early from like an Angels perspective, perhaps an angel. But it's more of like, you know, they're probably looking more to help a friend out, although everyone wants return. Or the second part would be private equity and a VC. A traditional VC would never touch code base.
Jon: Right. Unless my model changed. Right. Or they saw they're like, Hey, code base will be the next Robert half, right?
Peter: Which by the way, is fine. Like, you can make a ton of money selling to a private equity fund.
Jon: I'm just going to give examples that the audience can relate to or research and say, Hey, does does my model fit? So we've talked about podcast, but.
Peter: They're going to want you to get big enough that they have confidence that your cash flows are steady. Yeah. So if you're too small, they're going to be like, Well, you're not large enough to justify or to convince me that those profits you're generating are like steady and consistent over, over the long run.
Jon: Right? But a private equity fund could go to a code basement, like they're like, Hey, you're at 25 to 50 million. That's what a firm might come in or they may come through and say, Hey, there, they might look for a developer, companies with 100 to 300 devs and then bundle a bunch of together.
Peter: Yeah, they could roll them up too.
Jon: Which is awesome. All that.
Peter: You do. But it's in simplistic. But it's interesting. Just going back to what you said on like the 25 to 30 million is that if you're thinking 25 to 30 million revenue, they could care less about the top line revenue number. What they care about is the EBIT number, the cash flow number. So if you're and you could be a lot smaller, I mean, you could be at like 5 million of EBITDA and be interesting to some private equity players.
Peter: That is pretty small. But to your point, like, yeah, then there's this other play where private equity investors will basically go and roll up a bunch of them. And the idea there is that a larger company is going to be less risky than a smaller company and and therefore should have a pay like a premium, a valuation premium.
Peter: So you buy up these small ones, you integrate, you roll them all up together into a really big company. And without doing anything else, you've now taken something that was small and risky and turned it into something that's large and less risky and therefore should be more valuable, even if, like revenues don't increase or are better said, like cash flows don't increase and generate a return that way too.
Peter: Right. And those are some of the different levers that private equity funds will use to generate additional outflow or return on their investment. And yeah, we did do that on Simple. Yes. Okay. So I mean, that's a fair call out. I would say like generally the simplest model is not really venture packable.
Jon: Would you do another one?
Peter: Simplest like so. So for those that you don't know, simplest, simplest is basically like a systems integrator for Salesforce of the year, a company you want to use, Salesforce you want, you don't want to just like out of the box. You want something that's more customized solution. You would hire somebody like Salesforce. Salesforce come in and help set it up, deploy it, train you when you're staff on how to use it and get you up and running, integrate all the appropriate things, etc., etc..
Peter: So in a lot of ways, like same challenge, right? Like your assets walk out the door every day, blah, blah, blah. What? I do it again. I would do it again with the right people. I think what was interesting about simplicity was Ryan Westwood is a phenomenal entrepreneur and was able to build a culture that was so good and so strong that the assets, the value creators, right, did not walk out the door and.
Jon: Leave and yet great.
Peter: Contract. And he had good he had great contracts. But even those contracts like it wasn't like they were they weren't the same contracts as like a code base. I would argue code base has better contracts, right? Because you're just coming in and setting up Salesforce, right. And then you're kind of done. There might be some like ongoing training and some ongoing management, but it's not the same as like having like offshore devs.
Jon: And so I think the margins in his model are better.
Jon: Assuming you can keep someone staffed or utilized at least 80% of the time.
Peter: Yeah, I think the other thing that he did really well, so he did a few things really well. One of those things is he built an incredible brand that was able to produce like consistent, high quality results. And so customers were coming back. And so part of the investor of what you were investing in was the simplest brand that had real equity value when it came to sales.
Peter: And then the other thing is he did this whole rollup strategy to where he'd go to the smaller competitors, he'd buy them and roll them in, and this is where the culture became super important, is because he was able to retain a lot of those people that he had acquired. So one of the challenges is if you just went and bought these companies, but then everybody left, you lose all the value of what you had bought and so you needed like this really strong culture and this really strong brand in order to make the whole model work.
Peter: all of that said, all of that said, and I love Ryan and I like simplicity, a great outcome for us and like all those things and simple as sold for a very good number. It still never like achieved that huge massive monopolistic success.
Jon: Why did you invest in it? Because I feel like it's still like, understand your model. Yeah. It doesn't match up with most VCs.
Peter: Yeah, I mean, I think that's fair. I mean, if you look at those four things that I talked about, one of them is, is this the right person? And sometimes backing the right person can make can make the difference. Okay. So here's the other thing about VCs. I know you're smiling at me like you're so full of crap.
Jon: I'm not surprised that you that way. I mean, I like I really like Ryan. I think his charisma is like it's off the chart. It's like Hulk Hogan charisma. Like you can command a room, command an audience. So I'm not fault. I'm like, I think the audience wants, like, the whole point of this podcast is what people get in your brains.
Jon: I'm not judging you. I'm like, like what button can I press? Okay, You know, like vomit, more valuable stuff.
Peter: Well, I mean, the thing is, is that, like, all VCs lie at the end of the day, right? They're like, we only do enterprise SAS, Right? But don't pay attention to this consumer products deal. We did our year, right? So yeah, like those four things in a typical world city of raise venture money. Probably not right but but he also but he was like very like intentional about how he was doing it and making it work, right?
Peter: He was like, okay, we're going to build this really incredible brand. We're going to roll up all these companies. We're going to establish ourselves as like the go to services writer, and then we're going to sell to one of these, you know, large shops like emphasis who they ultimately sold to, but they could have sold to in structure Ryan or a whole bunch of others.
Peter: Right. And so it was like a very clear plan and strategy. And you had him and it.
Peter: Strategy that could execute and pull that off.
Jon: And had he not said he's going to roll up, he probably would not have done it.
Peter: If it hadn't been him, if he hadn't had the role of strategy yet, had like a very clear exit path. Right. I mean, it had a lot of these things. We wouldn't have done it.
Jon: Okay. Totally fair. Those are not things that are in the current code base model. What other businesses you often get pitched that should not be pitching you?
Peter: Well, I'll tell you like one thing that kind of bugs me sometimes is people that are pitching me and the idea is kind of interesting, but they haven't done any of the hard things to like, you know, validate the business or try to grow it on their own. They're like, if I just raised money, then it would solve all my problems.
Peter: But the reality is there are so many hard things that you can do as an entrepreneur that don't cost any money. They cost time, guts, like, you know, skill. And so oftentimes, like entrepreneurs, like I tell them, like you should just don't raise like go do some hard things, get some more traction, get some more people on your team that are exceptional.
Peter: Right? Demonstrate to me as an investor that you are really good, like you are a really good founder that can do hard things and run through walls. And then I will give you money so you can run through more walls right? So that's not like a specific type of business. That's just kind of a pet peeve. That's like sometimes I see that.
Jon: That is not fully baked.
Peter: It's not so much that it's not fully baked. It's like there are so so for example, they'll come and they'll be like, Well, we need to raise this money in order to get like this amazing person to join the team. And I'm like, Love is really that compelling of an idea. Then they would just join the team, right?
Peter: And in like, like, I get that that is super hard to do. And it's like really easy for me to sit in my seat and be like, Well, you should just go do it. But the other part of me is like, But I see companies all the time and have funded. A lot of them have that have gone and done that right.
Peter: So yeah, it's hard, but you're competing against people that have done.
Jon: It, but they're and they're bringing in industry experts, The industry expert sees it and doesn't need the paycheck to convince them that it's worth the risk.
Peter: Yeah, because they can see the vision is going to be massive and or you know, the entrepreneurs are just so good at communicating that vision that they join. Right? And then you're like, Sweet, I want to back this entrepreneur because they're incredible at communicating this vision not just with me, but of employees and customers and support other companies.
Peter: And, you know, I think most consumer products, businesses should not raise venture money largely because margins are usually too small. And it's really hard to forecast revenue. And your you're ultimately at the whims of a lot of other platforms when it comes to customer acquisition. So you they're like selling wholesale. So then you're dependent on your your wholesale channel to, to acquire customers and keep buying from you.
Peter: And they have their own incentives to like basically screw you over and then or alternatively you're, you're at the mercy of Facebook and Google and advertising dollars, right. Or influencers or whatever your strategy is. So I think for most companies doing consumer products, they shouldn't raise venture money. And the other thing is that a lot of them don't need to raise venture money because there's just so many ways to start a product.
Peter: A product company of the state you don't need you don't even need to have product to start generating sales or consumer products business.
Jon: I would not want to create a CPG company.
Peter: I think any company that you know, even though I just said how much I love simplicity, I think the vast majority of companies that are services should not raise venture money for all the reasons we talked about. I think the other companies that I see that like I know companies that are like so so there's two types of this.
Peter: One is like it's a it's a it's a 1 to 2 development, right? So if you read like 0 to 1 by Peter till it's 0 to 1 is like this huge innovation and then 1 to 2 is like an iteration of that innovation. So like I remember early on in my career I met with this company that was they were like, there are all of these like Airbnb competitors out there right?
Peter: There's Airbnb, VRBO, you know, or Gharbiya. And then there were a whole bunch more at the time. And, and they were like, what we do is we are a platform that sits on top and we funnel all of them into one place. So we're like a portal for them. And it's like, Yeah, that's probably not going to be successful yet in large part because your the companies that were under them were all, all had the ability to become very monopolistic like Airbnb.
Peter: And then that was just going to narrow it down to like really one option, a portal sitting on one option or two options. It's not super compelling, right? Doesn't have a ton of value. So companies like that where they're just like iterative, they're just like marginally better, but not like massively better. And then the other one is, and this is closely tied to it is just companies that are like, it's like a me too.
Peter: It's, you know, it's like, dude, there's like ten other companies doing this already. You're going to launch like yet another mental health company, you know, And it's like, ooh, that's going to be tough because there already are a lot of mental health companies and like your marginal difference is not going to be enough to displace like the number one player.
Jon: What are your thoughts about the like, for example, the banking industry? We're seeing a lot of banks now target ethnicities.
Peter:
Jon: Is that a valid business strategy or is that a fad?
Peter: So like affinity? Neobanks Which I backed one.
Peter: you know, honestly, when we backed this other one, I really thought, like, there was some interesting angles to be had there. And I think there are still some depending on the demographic. But what I've found at least is that as you start growing and it's really hard to compete with larger banks that have a lower cost of capital and and a whole lot more features and stability.
Peter: And once people lock in with a bank, it's really hard to get them to switch and actually use your product on an ongoing basis. So, yeah, I don't know. I think, I think it's doable, but I think it's tough. Okay, I know there are a whole bunch of other businesses that people I mean, here's the other thing.
Peter: If you talk to like 30 to 40 VCs and you can't get something done, it's either like I.
Jon: Thought the number 100 if to talk to 100,000.
Peter: I don't think it's quite a hundred. But, you know, it's probably in the range of 30 to 40. If you talk to 30 to 40 VCs that can actually write a check in your business and they don't invest, it's either you or it's the business. And if they get excited about the business, then it's probably you.
Peter: Right. If they're like trying to understand the business aspects of it and like, get interested and then like they like working with you more and more and then like they decide not to do it, the good chance that it's, you know, so I don't know. I see that too, where I'll meet with a company and I'm like, It's a cool idea.
Peter: And I could see how some somebody else could pull this off, but not this, not this particular individual.
Jon: Here's a side question. So if see that turn me down in the last 12 months. Yeah, I pitch the firm. Yeah. And this is a friend of the firm. Yeah, but you know something of a partner. And I'm like, okay, I got to know. I mean, I got a no answer. Not like I got. I know what the answer is.
Jon: And then I hit up my friend at the fund and said, Okay, I know you guys have passed, but now I want you to tell me, friend advice and find that you passed. And it was interesting because the first 20 or 30 minutes of the conversation, it was all about, Hey, John, the world's not ready for scheduling yet.
Jon: I went to him and said, This is why this is your main reason for rejecting. Yes. You really guys know where my pitch deck? Nowhere in that. And I told that answer and then he went on another 5 minutes pontificating how the world wasn't ready for it. And I said, It's not ready. We're not we're not pitching that at all.
Jon: That's not our pitch. Like, why are you getting this? And it made me wonder, like, what are these? What are these actually latching on to see?
Peter: I view in there, I don't know, 100%. So if you're listening, I'm not and I love the guy, but I don't have any insight here. So I could be.
Jon: Wrong and it could have been my fault.
Peter: But I think what what probably happened is they looked at your pitch and they were like, this has been done before. And it's it's like he.
Jon: Anchored somewhere else. So.
Peter: Well, let me finish. So I think he was like, this has been done before. So to make it interesting, it would need to be AI driven. We're not ready for a driven stuff. Okay. Very.
Jon: Very, very possible. But then I finally ran up through it. I'm like, I could just be a feature. We could just turn, you know, when it's ready, we can just turn it on. We're just about building a community under a bright light. But and then he's like, Okay, I get it.
Peter: But then he's still wasn't interested in investing.
Peter: But but, but I think I think, though I got to maybe it was really a I don't think this is an interesting idea.
Jon: I got. No, no, no, no, no. So the the the endpoint and I've often debated this. Yeah. The when we finally were able to like take put on our real take up our, our put on our boxing gloves and just go like pound it out. I ended up with okay I see where you're going, I like, I see the five models you're looking at.
Jon: I like this one that you really seem to like. And he says you're probably too early for us maybe. And I'm like, okay. I was looking at it for more feedback and I'm like, Hey, I got I got somewhere right now. You know, if I ever find this pitch, I probably could raise off this.
Peter: Yeah, there you go. So you already knew.
Jon: You know, it's about getting feedback, but we just like as we're talking about which business that should or shouldn't raise, I took a tangent because I've got I feel I'm self-diagnosed ADHD of how often when you're pitching someone, are they anchoring on something that has nothing to do with you that you've never brought up and that's the reason you reject it.
Jon: And it might just be, Hey, in this industry, the next innovation is no.
Peter: That's totally happens, right?
Jon: Because they don't tell you this and you don't know and like.
Peter: Yeah, but, but that works for and against you because sometimes VCs will be like they'll, they'll skip a few steps ahead and like have this vision of what the company could be and get excited about that and then fund that even though the company is not actually there or never actually ends up there or has any desire to ever end up there.
Peter: Right. And then the VCs is all like, Well, what about this thing? And they're like, Well, we never talked about that thing. And we're like, But that's why. That's right. So yeah, I think I think that definitely happens. But if that happens, probably what happens more often is the VC hears your pitch, they immediately like tie it to some other company that they've heard and they're like, No, I've heard this pitch before, or they just start making assumptions.
Jon: And again, super. It was a super valuable feedback session. And most VCs don't open up like, Hey, here's my thought right now.
Peter: Because there are no rewards to giving.
Jon: Feedback. that's the hardest part about this podcast. I'll sit with a founder and they'll be like, Give me advice. And like I had a one lunch meeting this week and we're not gonna say when we recorded this. So the founder can't like anchor to it, but like it was the worst idea ever no intellectual IP. I think it was an interesting concept, but I just feel like I feel like today markets act a certain way and there better be a very good reason why you think the market's going to change.
Jon: And they were just using existing technology. And I'm just like, and you start giving feedback and they start fighting you. Yeah. And I'm just like, I don't know how to respond here because he wants feedback. He's earning. He's not paying. No.
Peter: He doesn't want I don't want feedback. He wants confirmation.
Jon: Yeah. How do you handle that, Peter. I don't know. Like this podcast.
Peter: Mostly I just don't give a lot of feedback. I feel like as every time I get feedback, I get argument on a war or I get like the silent treatment, like, this guy's an idiot, okay? Like, okay, great. Rarely do I get a Hey, thank you. This was good feedback. And help me understand like how I'm communicating this like wrong or, you know, areas where I need to sharpen my pencil, like, almost never get that right.
Peter: And the other thing is that like there the other reason there's no incentive to get feedback is because as a VC, like sometimes the feedback is like, your baby is ugly. But maybe your baby will grow up into a swan, right? And then I want to invest, but I want to piss you off and tell you your baby's ugly.
Peter: Because maybe when it starts looking good, I want to invest. And I don't. I want you to have, like, warm and fuzzy about me still. And so it's a lot easier to just be like, wow, you know, it's just not a fit for us right now. But stand out because, you know, maybe maybe you end up doing those hard things that I want you to do.
Peter: And once you've done them, then you start looking more attractive and then I'll fund you then. Right. And I don't want to burn that bridge before you've done those things. But, you know, sometimes sometimes I wonder, like, how many voices have been like the reason why entrepreneurs have ended up being successful, Like VCs, like rejections, where it's like, I'll show them.
Peter: And now they have this chip on their shoulder, which I think is actually super valuable for most entrepreneurs. Like pretty much like all successful entrepreneurs. But I have a chip on their shoulder sometimes, okay, because it drives them, right? You have to have something that's like driving you. And, anyways, yeah, I just. I just wonder how many VCs of, like, you know, pissed off some entrepreneur and the others chip in.
Peter: They got to prove, you know, they got to prove it to everybody, that they're. They're going to make it work.
Peter: But if you're an entrepreneur, you should take you should take rejection. You just add it to your. Yeah, that chip on your shoulder.
Jon: The hard part is when he actually sent me a link of his app working and I wanted to throw up. Was that that.
Peter: Wow, that's pretty bad.
Jon: And I'd have to do it without divulging stuff. I have to tell more. And then he'd be like, You'd be as shocked as I was.
Peter: The problem is, is that people, people have to be in a certain place in order to take feedback and where it's useful. And most of the time when people ask for feedback, they're asking for validation, not for feedback.
Jon: Yeah, I think what he was looking for is validation might is good, and I want you to introduce me to my next investors. What he did not bring up. Yeah. And I would never put anything he had done yet in front of them.
Peter: Yeah. It's just very the into a certain extent it would be nice to be able to tell them that without ruining the relationship because he's probably thinking, is this baby still good looking and he's going to waste the next several years of his life. Pursuing something that ultimately go nowhere.
Jon: But maybe if I told them, he just wouldn't have pivoted. Also, I don't know enough about the space, Right?
Peter: Well, if he the reality though is that if you did tell him that and he's looking for validation, not true feedback, then it wouldn't make a difference. Either way. You just be wasting your breath and damaging our relationship.
Jon: I just need to figure out how to roll out of that scenario. Not burn, burn, not be like. I don't know. I don't know about this based.
Peter: On sometimes that's what you say.
Jon: It's just not ready.
Peter: So if you asked John for feedback and he's like, I don't know. I don't know the space, Yeah. Good luck. Then. You know that he actually thinks your baby is ugly.
Jon: I mean, maybe my criteria is, hey, I'll I'll be willing to introduce you, but for the most part, unless you're at 10,000 in revenue per month or more, or unless you're growing at like, say, 17% a month or more on certain metrics or have like 100,000 monthly active users, you know, most VCs right now aren't going to invest in you unless they already have like an existing relationship.
Jon: Yeah or like a sponsor brings you in. And these stories about people who are raising off of just a pitch deck, there's always a back story that we don't really know.
Peter: Yeah, well, yeah, usually that the back story is that they've built and sold multiple companies before.
Jon: And they don't tell you that they're like, but they tell you that the sexy.
Peter: This pitch deck raised $5 million with zero traction.
Jon: But you don't realize they've already sold in the space. Yeah. Or they have like a rich uncle who's putting money in and then other and then other investors want to tag along and they're really buying that network with the rich uncle. Yeah. And the rich uncle is doing it for non, you know, from our altruistic waste reasons, helping power numbers divvy is a good fit.
Jon: Now we'll see who makes it to the end of the podcast. Should we scrub that one out? I don't know how.
Peter: How controversial you want to be.
Jon: I want to be honest. No BLEEP that one out. But there's we know there's a local company exited and I think there was the was it the uncle or the dad? Dad was a huge funder of it that made it pop.
Peter: Well, did he make it poverty to make it like have the potential to be successful?
Jon: So you've talked about like Joe going to I mean, was.
Peter: He just like an angel? Right.
Jon: An angel. But with the reputation. Yeah. You take out if you just take the cash and not him would not have been funded, in my opinion.
Jon: Because you've talked about the example that you are going to tax. But yeah. And you're like, who made who? Yeah. And in this other example, the the.
Peter: Father made the company.
Jon: You know, he gave it all the inertia. It Yeah. At least from my perspective, I could be wrong.
Peter: No I think the founders I think the founders had a lot of like great qualities to pull it off.
Jon: But. definitely great, great qualities. Didn't mess it up. I mean, that's one of the most unspoken.
Peter: Just don't mess it up.
Jon: Yeah, just not messing it up.
Peter: It's kind of true. Like some of the my best investments are in companies where it's like. It's like it doesn't even matter who runs it because of the, the, the product they've built and the pain point they're selling is it's like there's such good alignment there and it's just like you just need somebody is not going to screw it up and they'll do well, although the best deals.
Peter: Superior. All right. Well, venture is all about rarity.
Jon: And this is turned into a 47 minute podcast.
Peter: They were still awake.
Jon: I don't know. All right. Well, thanks. Go to venture capital lot of FM and you can subscribe follow And we'd love to hear your feedback and we have a Slack community. So you want engage with us. It's like the best place to connect.
Peter: If 45 minutes wasn't enough, check out our Slack channel.
Jon: All right. Sounds good. Thanks, guys.
