The Value of Mastermind Peer Groups for CEOs and Business Owners

The Value of Mastermind Peer Groups for CEOs and Business Owners

In this interview with Larry Kesslin, Chief Connector at 5 Dots, we discuss the value of mastermind peer groups for CEOs and Business Owners.  Larry is Co-Author of BreakPoints: Where Businesses Get Stuck…And How They Get Unstuck, will discuss:

– What you should look for when considering joining a mastermind group
– Where you can find the right mastermind group for you
– How joining a mastermind group can help you to achieve your goals
– How you can live a more purposeful life in you join the right peer group

Larry Kesslin is a serial entrepreneur and the founder and Chief Connector at 5 Dots, a company that helps other companies grow their businesses. Larry has spent the last 25 years helping companies grow their businesses in part by building and facilitating peer accountability groups. He is the co-author of BreakPoints: Where Businesses Get Stuck and How They Get Unstuck. Larry’s focus is to help other people build more purpose driven lives while at the same time being successful. Larry is a member of Rotary International and a board member at U-TOUCH, an amazing organization changing the trajectory of young people’s live in Uganda.

Patrick:     This is Patrick Henry, the CEO of QuestFusion with the Real Deal…What Matters. I’m here with Larry Kesslin. Larry has spent the majority of his career building peer mastermind groups. I’m delighted to have him here today. He’s lived on the East Coast most of his life and has been in San Diego for the last seven years. We met each other through some networking events here.

                  Larry is a serial entrepreneur and the Founder and Chief Connector at 5 Dots, a company that helps other companies grow their businesses. Larry has spent the last 25 years helping companies grow their businesses, in part by building and facilitating peer accountability groups.

He is the co-author of BreakPoints: Where Businesses Get Stuck…and How They Get Unstuck. Larry’s focus is to help other people build more purpose driven lives while at the same time being successful. Larry is a member of Rotary International and a board member at U-TOUCH, an amazing organization changing the trajectory of young people’s lives in Uganda. Welcome, Larry.
Larry:        Thank you, Patrick. It’s a pleasure to be here.

Patrick:     Tell me about your experience with peer groups and how you got started in that. What kept it going?

Larry:        I was working for the General Electric company back in the early 90s. I quit in the beginning of 1993. I met a gentleman who started a radio show about entrepreneurship in 1994. I joined him, and the internet started booming. The radio show was called Let’s Talk Business. It was a show that interviewed entrepreneurs.

We got to meet Richard Branson a couple of times in person, Wally Amos and Ken Blanchard, who wrote the foreword to BreakPoints. I got to meet some amazing people on that journey. We started to build this technology to allow entrepreneurs to collaborate online in 1995. We invested about $100,000 in software. We built this collaboration tool. About halfway through the project, we invited a dozen prospective members for our online community into a room. Imagine this, in 1995. I’m a degreed engineer.

We’re working with these small business owners. Halfway through the conversation, one guy raises his hand and says, “What’s email?” We’re talking about this collaborative space that we’re building. We built an Instant Messenger before ICQ was bought by AOL. It was a really cool project. I sat there and thought, “Houston, there is a problem.” I think we were way ahead of ourselves.

There were other people in New York and other places around the country that were starting to build face-to-face communities for entrepreneurs. I stayed away from the virtual collaboration world because of my experience back in the mid-90s realizing that, entrepreneurs are human creatures. They need human connection.

Ever since that point, we said, “If we’re not going to build an online community, what about a face-to-face community?” On my birthday in 1996, which is September 10th, we held our first community meeting of about 75 entrepreneurs in the room. We launched the Let’s Talk Business Network.

It was a network of entrepreneurs in New York City. That rolled into another opportunity. I was on a board in DC with a woman who was head of S&B Marketing at Lucent at the time. She said, “Larry, I have 1400 business partners that resell my phone systems. All we do is teach them the technology. Could you help them run a better business?” They were about to spin out a new company called Avaya, which is a known company today.

This was back in 2000. They did a roadshow called Avaya Live. They said, “Larry, can you come do a workshop in each of our 12 city tours?” I said, “The best thing for me to do is sit in a room, invite the owners in and have a roundtable discussion.” That’s what we did in 12 cities.

After the fourth city, I realized something. There were business models at the time like YPO and YEO, which is now EO and Vistage. There were all of these organizations that were all locally based. They would bring people into the same city that did different things.

Here I was in this community of people doing the same thing in different cities. I ended up launching a company in 2001, which was eventually called 4-Profit. We ended up bringing together people that did the same thing at different cities, versus bringing people in the same city that did different things.

Patrick:     You had people fly in for these peer groups?

Larry:        Yes.

Patrick:     How frequently would they do that?

Larry:        We started out with four times a year and one day. We realized that four times a year was too frequent. It came too fast. We ended up settling at three. We realized that, if we did a day starting at dinner the night before and going through to the next dinner, people had to be out of town for two nights. We moved it to start at noon on the first day and finishing by 3:00 on the second day.

If we did it in Chicago or Dallas, just about everyone could get in the day of and leave the night out. They were only out of town one night. We ended up doing three meetings a year. We had clients from all across the US. We sometimes had clients come from Florida. We had someone come from London.

We ended up aligning ourselves with the major manufacturers in the IT reseller world. We started with Avaya in 2001. In 2003, IBM hired us to build a program for their resellers and ISVs, or independent software vendors. In 2007, we launched a program with Sysco. In 2010, we launched one with ShoreTel.

We ended up building a team of close to 10 of us. We were doing peer group coaching. We had three sales managers, two leadership development resources, two ex-CEOs and a marketing manager. We could go into any one of those companies in that industry and help them transition their company for where they wanted it to go.

Patrick:     How many people were typically in a peer group in your model?

Larry:        We started out with eight and realized that the ideal number for our group was between ten and twelve participants per group.

Patrick:     How many people would show up at the quarterly meetings?

Larry:        At least eight or nine. The best meetings were when we had nine or ten people. We had meetings were things just happened. I ran the business through 9-11. We had meetings where less people came. Some of the best meetings were only four or five people.

People really got to know each other. Some people would video in. We could have some people participate virtually. I think the size of the group is important long term. There are certain times when having less people can be very effective for the people in the room.

Patrick:     Since you were in this peer collaboration space, you’ve studied some of these other models. We talked about Vistage and YPO. Talk about structured versus unstructured and what that means. Maybe people have heard of peer or mastermind groups. What are some of the fundamentals associated with these groups? What is some of the language associated with it?

Larry:        The mastermind itself was first brought up in the book Think and Grow Rich by Napoleon Hill. Napoleon Hill studied all the great readers of the first half of the 20th Century. If you look at Rockefeller, Ford and Carnegie, they all collaborated with each other. The more they collaborated with each other, the better their ideas got.

Napoleon Hill started researching all these people and said that was the model to greatness. In the late 80s and early 90s, it started to take shape. YEO was born. Doug Mellinger, Vern Harnish and a few others started YEO out of ACE, which was the Association for Collegiate Entrepreneurs. YPO is even older. There are barriers to getting into YPO and EO. EO is the Entrepreneurs Organization. You need to have over $1 million in revenue. For YPO, I think it’s $5 million, a certain number of employees and a certain history in business.

Both of those organizations are self-directed peer groups. They call them forums. The forums are run by the participants themselves. They can go through training. I know many of the trainers that have trained the groups to self-facilitate. If you look at Vistage, Renaissance Executive Forums, Sage and most of the other organizations, they have a professional facilitator or someone who has experience in running a business that is facilitating those meetings. The structure is pretty similar.

Most of the groups I’ve been to will break up their meetings into different components. The most important for me when I started a group, in the early stages of growing a group, was getting the group to get to know each other. The real leverage comes when you know the other people in the room, who has the history that you want to learn from, who is giving you ideas, and who is giving you facts.

I start every meeting by saying, “Talk from your own perspective. When you say something, say, ‘This is something I did’ or ‘This is something I thought about.’” They are very different. Just because you think about it doesn’t mean that it will play out the way you thought. I’d rather have people talk about things from their personal perspective of what they did versus what they think.

                  One of the most important things in any group is confidentiality. What is said in the room stays in the room. I’ve had people come back years later and say, “I talked to my wife about this.” Then you get together with that person and their spouse. Some information comes out that you really didn’t want to come out. We don’t want that. We call it pillow talk.

You have to keep the stuff in the room that’s said in the room. One of the most powerful things is to use a process. EO and YPO are very big on questioning versus stating, and the best way to get to the root cause of things. Typically, when an entrepreneur shows up in a group, the problem they’re bringing to you is not the problem. In many immature groups, someone brings in an issue, and they start trying to solve the problem. That’s typically not the problem. Most of them will go through a process where you’re asking a lot of questions to get to the root cause of the problem.

Patrick:     The Socratic Method.

Larry:        Exactly. Most of the people who are in peer groups that are not professionally managed will end up solving a lot of surface level issues without getting to the underlying core root of the problem. I’ve used this a lot. When I see people who are thinking about peer groups, I say, “I go to a conference. I meet a guy. He gives me some great advice.” I call that bar talk. You meet someone in a bar and you hear their story. Their story sounds great.

If you were to see them in a peer group over a year or five years, you would realize that story in the bar is just that. It’s a story. The reality is, the more you can spend time with people that you get to know and understand, you create a brotherhood. The different groups that have evolved over the last few years, I wouldn’t say there is a right way and a wrong way. I know some people in YPO, in a Vistage group and in an industry specific group, which is the business that I ran for almost 15 years. There is no right answer. There are just more places to get learning.

Patrick:     Based on my experience with what’s worked and what hasn’t, some of this goes back for 20 years. Some of it is over the last three to five years and the struggles with Entropic before we sold it, growing it and having challenges, and then also starting QuestFusion where I’m in this open landscape environment. It’s not industry specific. It’s more horizontal with various entrepreneurs doing various different things.

There are three legs of the stool in terms of getting other people’s help. One is having a mentor, which I’ve always had.

One is being in a peer group. If you’re part of a management team and it’s a high functioning management team, you have a built-in peer group there. As a CEO or business owner, there are things that you don’t want to and shouldn’t talk to your management team and board about, until the time is appropriate.

If you’re brainstorming with your board all the time, it’s not a good thing. You need to have solutions to problems. Yes, you have to bring up problems. I’m all for transparency. But if you’re constantly throwing problems on the table, that’s not leadership or management.

The final thing is open networking. I’ve gotten more refined models that work for me in the peer groups setting and in the networking setting. At your suggestion, I jumped to the three-question survey within my network. There was a lot of receptivity and answers to those questions.

It was really interesting for me. There was confusion about what a peer group really is. Is it networking? Is it an advisory group? Can you talk about that? When you talk to people about peer groups, do they generally understand what you’re talking about or do they think it’s something else?

Larry:        Most of them are confused unless they’ve been in one. Even if they’ve been in one, sometimes they’re different. If you look at EO and YPO, you’re forbidden from doing business with the other people in the group. That’s a code that you live by. With other groups, you don’t. I know there are certain groups in town where a lot of people are doing business with each other.

It changes the dynamic of the group. We had coaches that I hired to facilitate our peer groups. I didn’t want them coaching the people in the group. When you’re coaching a person in the group one on one, and then they come into the group, I did the same thing. I was a coach and I had people show up for the groups. The most amazing part is that they’d say one thing to me in a one-on-one session. Then they’d show up totally different for their peers, which is bizarre for me.

Patrick:     That’s not uncommon though.

Larry:        I show up as myself all the time, which gets me in trouble sometimes. But I’d rather be myself because then I always remember my story. Then I’m just me. A lot of these people are showing up as different people. I didn’t understand it. It’s the hubris, the ego showing up, versus the vulnerability.

The best groups are the ones where people get vulnerable. It’s the ones where people stop trying to be “the man”, “the woman” or the leader and just be a human. I use the term “human doing” versus “human being.” A lot of us show up as human doings. The most powerful groups are when people show up as their full selves. “I’m having problems at home. I’m having problems with my kids. I’m having problems with my wife, and this is all affecting my life.”

Patrick:     That doesn’t happen instantaneously in any team environment. It takes some time before trust develops. In your experience in the peer groups that you’ve run, how long does that take before people do show up more as human beings?

Larry:        I had a group that launched last year. One guy showed up so vulnerable. One of the other guys in the group said, “Oh my God. It is so powerful that you did that with people you barely knew.” It made the group show up more powerfully. I think there are certain people who just show up that way naturally within a group.

For the groups that we ran, we would do three meetings a year. It took a year for the group. We would do a meeting, a phone call in between, another meeting, a phone call in between, and another meeting. By the end of the first year, we had 90-plus renewal rates from those groups. People started to see the value of it and what it could be. It takes time. If you’re doing a monthly meeting, I would say you’ll know by the six-month point whether that group will really gel and which people need to go. I loved to try and put the right people in the room. What do those right people look like? What does the mix of the room need to look like?

Patrick:     What makes a good peer group?

Larry:        The participants make a good peer group, if you get the right people in a room. The facilitator is never irrelevant. They start to become the teacher of everyone. There’s a blend. I’ll go through the journey of an entrepreneur. When entrepreneurs are less than five to seven employees, at least in the world that I lived in, they were less sophisticated.

They started to grow through the process. When we dealt with companies, our smallest clients in our peer groups were 10 employees. We went up to 125-employee companies. In each group, we tried to build a mix between the bigger companies and the smaller companies.

Let’s say there are 12 people in a group. I think what makes a good peer group is that there are at least four or five people in that group that are truly your peers. The ideal is never to be the biggest or smallest guy in the group. You want to be somewhere in the middle. That’s what worked best for me and other people that I knew.

If you were always the biggest guy in the room, you needed to be more like a mentor because you weren’t going to get a lot of feedback. If you were the smallest guy in the room, you need to know when to shut up. The challenge I had with the small guys is that they had so much pain and would take up so much time that it didn’t affect anyone else.

When managing a group, if you’re going to bring smaller companies into a group with some bigger companies, you had to make sure the smaller guys knew their place within the group. They should do a lot of stuff one on one outside of the group versus taking group time.

Patrick:     With the three legs of the stool, they should have been working with a mentor as opposed to bringing every single thing to the peer group.

Larry:        Yes, because that’s the only place that they know. They are inexperienced in understanding what the journey looks like. The group is important. The facilitator makes the group more valuable. I’m a very loose facilitator. I like helping people get to the root cause of their issue. I’m not big on the whole closure accountability.

That was not a big part of my process, although, at every meeting I would ask people their biggest takeaway from the meeting and the top three things they want to accomplish by the next meeting. We’d follow up on that. There are some facilitators that are very strict. They go by a certain methodology. “This is what we’re doing every meeting.” That wasn’t me.

I hired people who did that. Some of those groups ran better. Some people liked the structure. Some people like the looseness better. When I’m running my own group, I like creatives. I like people who like to think out of the box. Those are the people who work best in the groups that I facilitate. I think a facilitator is important for the make-up of a group.

Every group is going to be different. The group itself is unique. What I’ve found on my journey is that we created some best friends. If you think about the business I was in, taking people from different cities that did the same thing, all around the same age, they grew up in the same industry and didn’t know each other well.

Patrick:     There weren’t conflicts because they were geographic-specific and there were territories. Even though they were in the same business, they weren’t competing with each other.

Larry:        Correct. Once I got to companies that were over 125 employees, they tended to be regional, if not half the nation. I could never find peer groups for them because they always competed with someone else. Typically, we were targeting 20 to 100 employee-companies. That was our sweet spot. That was the best place for me personally. I enjoyed the creativity of working with smaller companies. I left GE at 29 and vowed I’d never work for another corporation again. I’ve kept my promise.

Patrick:     It’s worked out well for you.

Larry:        It’s worked out pretty well. I have no complaints. I’ve been able to have a wonderful life. I looked at the whole working 50 weeks a year to get two weeks off. That didn’t work for me. I’ve had the freedom to do the things that I want to do by taking risks. To me, the entrepreneurial journey is all about risk.

Patrick:     Risk reward. You hopefully have the ability to judge risk reward better than the general person.

Larry:        That’s the challenge. Part of my last business, I was working with Sysco, IBM and major manufacturers and distributors. I did all the programming. What we developed as a team was called Understanding Your Partner’s Business.

I would talk to the manufacturers and distributors that had never run their own businesses before about what it means to be an entrepreneur. One of my last slides said that entrepreneurship is all about risk and potential reward. The more risk you’re willing to take, the more the potential reward. It’s not the more reward.

Patrick:     Not necessarily. You can take a ton of risk that has no upside at all. That’s discernment.

Larry:        I agree.

Patrick:     One of the benefits of being in a peer group is that you get the benefit of other people’s experience, not just your own. You get eight people in a room who are doing the same thing. You’re definitely going to get exposure to problems that they’ve run into. Maybe it’s not the ultimate solution.

When I’m coaching people, I tell them, “I’ve seen this movie before. I’ve seen it in three different variants. It always turns out the same way. You can go ahead and do it if you want to. That’s your call. It’s your business. But this is hopefully of some value to you. This is not what I think. This is actually what happened.”

Larry:        We talked earlier about the concept of the circle of knowledge. The circle of knowledge is all the knowledge that exists in the world. There are three pieces. The first piece is the stuff that you know. I know my name. I know my birthdate. I know where I was born. I know my wife’s name. I know her birthdate. Those are important things to know. The second piece is a little bit bigger than the first piece. It’s the stuff that you don’t know. I know that someone can get to the moon, but I have no idea how to get there. I know there’s such a thing as scratch golf. I know I’ll never do that.

Those are things that I don’t know, but I consciously don’t know them. The biggest piece, 99% of knowledge in all the world, is stuff that you don’t know that you don’t know. When you join a peer group, you see things that you never could have imagined in a business. I have some examples that are painful. I know some people who went off the rails because of things that happened in their business. They destroyed their lives because of it. They were things that were totally out of their circle of knowledge.

Patrick:     They would have been addressable if they would have had the knowledge and information available. It wasn’t unknowable. If someone had experience with those particular things, they could have benefited from that knowledge.

Larry:        No question. The people who got the most out of the groups were the people who showed up and really shared what was going on. There were people who showed up all the time, and they showed up as their story. Those are the people who kept coming back over and over again. They were nice people and they did good work. They built decent companies.

The guys who really built companies were guys who showed up and shared what was deeply going on with them, the things that troubled them, the things that got in the way. The group was there to support them on their journey and become their brothers. We created some best friends. I know that to this day. We had a trip in Chicago. I had a facilitator facilitating the group.

We had this dinner at a beautiful steakhouse. The guys went out afterwards. I went back to the hotel. I got the meeting the next morning and said, “Where is Tim? Where is another guy?” They said, “You didn’t hear?” I said, “Hear what?” They said, “Tim had a little too much last night and fell down a flight of stairs. He’s in the hospital.” These guys did so much together. They had so many bonding opportunities. They were gone for two full days with their tribe, and they didn’t get that very often.

There was a lot of camaraderie building. They shared intimate details about their businesses, which helped them immensely. There is real value in the experience and wisdom that a facilitator brings and that other people in the group bring.

Patrick:     Getting back to tools, in the 90s, we didn’t have all of these tools. Now we have this overwhelming plethora for tools and networks. I’m in a couple of LinkedIn groups. I’m in a couple of Facebook groups. I use Slack for my Inc contributed articles because Inc has everything on Slack.

I’ve used Asana with our software developers. Some people also think of those as mastermind groups or peer groups. Talk about that, the benefits and disadvantages as well as the difference between that and getting together with a group that you break bread with.

Larry:        You can’t replace human touch. The tools are really great for aggregating the information that’s collected. The tools are great for staying connected between face-to-face gatherings. But there’s nothing like sitting down and seeing someone’s eyes, their confidence or lack of confidence.

One of the challenges is dealing with teenagers and the lack of emotion that they can describe in a text. They’re responding to a text in a way that’s not the way the other person intended. There’s no way to discern emotion or body language through text. It just doesn’t exist. Data suggests that 7% of all communications are the words themselves and 55% is body language.

If that’s the truth, then how can the virtual world replace what it is that we can do in person? We’ve done video calls. I’ve tried just about everything. Other than Sysco’s telepresence or these fully immersive virtual communities where you can have people in different places, see each other and almost share a meal in a virtual environment, you’re still only getting a fraction of the value of a face-to-face community.

Patrick:     You’re not a believer in things like Zoom, which we use for our video conferencing? That is quite valuable. I’ve done these kinds of things with people throughout the world, like Germany and the UK. I had some great conversations. I agree with you. When you sit down with people, you’re talking with them at the break, and having a meal with them, the depth of relationship is much deeper. There’s no way to do that virtually. If you don’t get to know people, it’s tough.

Larry:        There was one guy in our group where everyone said, “I wish I was like Bob.” He called himself a stupid Texan. He was one of the smartest men I’ve ever met. He’s fourth generation business, in business for 100 years. He ended up buying a Sysco reseller down in Texas. He was the most inquisitive human being I’ve ever met in my life. He would talk to someone and say, “Tell me about yourself.”

On a video conference, there is no place for that dialogue to happen. On a break, Bob wants to know how your kids are doing. He wants to know about your wife. You do that at dinner and in between sets. That’s hard to replicate in a virtual world. To me, that’s where the depth of relationship happens. That’s where your judgement of who has value to what you’re doing comes as well.

You learn who someone is as a human being. That is critical. That’s hard to do virtually. I was just talking to someone yesterday who runs groups for CTOs here in town. They have 11 groups running, one of them virtual. It’s going really well. I could see a virtual group working really well for technical resources.

It’s not as much about the human dynamic. There’s something about the entrepreneur, the CEO and the owner of a business, where you live in such an isolated world that you don’t have a lot of people to talk to. Most people will share three major places. They’ll share all of their information with their spouse, their lawyer and their accountant. Their lawyer doesn’t run their business. Their accountant doesn’t run their business. Their spouse does not run their business. If they do, then you need some space outside of the business to have a relationship with your spouse, other than the business.

That’s where the peer group is insanely valuable. You can spend time with people that are dealing with similar issues. They have no vested interest in your business other than seeing you do well. They are there for you. It’s an informal advisory board, yet it’s a peer advisory board. They’re helping you and you’re helping them.

Getting an advisory board is also valuable. There’s nothing wrong with doing as many things as you can. The more information you have, the more knowledge you have to grow your business effectively. Business is not complicated; people are complicated. Business is where you find a product or service that you can sell for more than the cost you deliver. Deliver it effectively and take care of your clients.

Whatever that looks like for you, whether there is IP attached to it or not. At this stage in my career, I’m in my mid-50s. I’ve done enough service work. I’m looking at profit. I’m looking at stuff that you can sell. If I do a good job, I can sell lots of it, and it’s not me. I’ve sold me for 25 years.

Patrick:     Yes, it can be more scalable. There are service businesses that can be scalable as well.

Larry:        There’s no question. I’ve been down that road, too. What I’ve learned about myself is that I’m not an operator. I’ve learned where I fit. This whole journey has been just that. This is one of the things that a peer group is really powerful for if you do it in the right way. I do a lot of work around behavioral styles and helping people understand themselves.

Once they understand themselves, they can understand the dynamics of the group. The dynamics of the group and how a group interacts with each other is a metaphor for how their own companies are working. They’re going to see people in their group who act like someone in their company. I’ll give you the CFO/CEO/sales manager example. I have written so many blogs and articles around this. I’ve even had conversations with audiences about CFOs and financial people saying, “All sales people lie.”

I ask them, “Why do you thinks sales people lie?” They say, “When I ask them what happened at the meeting, he will say he doesn’t remember. As a CFO, I remember every conversation I’ve had for the last 20 years.” Most people believe that other people function the same way they do. Then I can see why a finance person gets pissed at a sales person. It’s the same thing with the dynamics with a CEO.

Patrick:     In that example, you have someone who likes to live in a black and white world dealing with someone who loves shades of gray.

Larry:        And they see 50 clients in a month. In my sales process, I have 15 to 20 questions that I start with. If I hit a chord on the third one, then I don’t get to four through twenty. I just go deep on that one. I don’t know whether I hit the fourth, fifth or seventh chord with that client. I really don’t remember because I’ve seen so many people since.

The finance person has no idea and can’t imagine living in a world like that. There is a lot of animosity. The same thing happens in your group. You’ll have owners who are finance oriented. You’ll have owners who are sales oriented. You’ll have owners who are operationally oriented. You start to see the roles of different people on your management team within your group, and you see how the dynamic works there. It’s a really good incubator.

Patrick:     As you know, I’ve been running companies for the last 18 years. This is my fourth company. That CEO and business owner role is very isolating, especially as you’re building a bigger business. You have lots of employees. You have your team. You have your board.

You have advisory boards. But there’s not one place you can turn, unless you have a true peer group of other CEOs and business owners where you can confide and have trust. I’ve also had some amazing mentors. It’s about the whole you. It’s about your life. It’s about the fact that your kid has a drug problem, you’re going through a divorce or you’re having difficulty in some aspect of your life.

It’s not just about the business. It’s very difficult to talk about those types of things in a business setting with your team or board. If part of the conflict is with your spouse, you can’t talk to them about it. Share your experience with this, with some of the peer groups that you’ve run and been involved with.

Larry:        The most powerful conversations we’ve ever had in groups revolved around those painful issues in people’s lives. One of my clients in Florida has a CFO. She just had a baby that they knew would have a hole in their heart. When you’re in a group with people like that, people know. They want to support you. They want to be there for you. It’s all about developing a support system. We were not meant to live on this planet in isolated boxes, yet that’s how we’re building our lives these days.

I had one client who boggled my mind. It took us a while to get him into a peer group. He finally joined and we started working with him one on one. I said, “How often does your leadership team meet?” He said, “What do you mean? We don’t.” He had been running a business for almost 20 years.

He had 95 employees. I said, “Tell me how this works.” He said, “Everyone comes to me with all of their problems. I try and solve them all.” I said, “Now I know why you’re stressed. You don’t have all the answers. How do you empower your team?” It’s like coming in at halftime with your basketball team and talking to each player, one at a time, and saying, “Go back on the field and play better now.”

There are ways that we see the world based on our own framework. You think, “Businesses must act this way because that’s how I was raised.” The truth is, in these groups, you get to see how other people function. We did a lot of reading. Every meeting, you would have to read a book. We only did three meetings a year. We brought in outside speakers to talk about everything from ESOPs to legal stuff. When you bring in outside experts who bring value to the group, then you start to build a dynamic and a reservoir of knowledge and wisdom.

I’ve seen situations where someone had a problem health-wise and their wife was dealing with something. In another city, there was an expert who was someone’s friend. Then they were on an airplane to that hospital the next day, getting that dealt with. You can’t replace things like that.

YPO is probably the most well-known for that. Their international network is amazing. I have a number of friends who are YPO members. I have a good friend here in town who has been in his own YPO forum here, and now he’s in a forum for transitioning to sales. They have forums for everything.

A lot of them are self-directed. One of the powers of self-direction in those groups is that you learn to be a better leader within your own organization by being a partial leader within the forum and holding other people accountable. All of the tools that you learn to self-facilitate will help you in your own company’s development.

Patrick:     Can’t you do that in a facilitated group, too? You can have a token passing where someone is virtually the leader for that meeting.

Larry:        We never did that. We had people host meetings. The facilitator was always the facilitator. We had a methodology. We used the Socratic Method when people brought up real problems and we did deep dives with people. We taught the group to question. People get smart. They start asking questions that are pointed, that don’t sound like questions, but they are.

How do you get that methodology built within a group? That’s the important job of the facilitator. The dynamics of the group are hugely important. When you have one bad person in a group, I would switch people between groups because I didn’t think they were a fit. There were some groups that were much more tolerant of people who spoke too much. There were some groups that were all about details and getting stuff done. Depending upon the territories, I had overlap in certain cities. I would move people from group to group periodically.

A group can get stale after a certain time without new blood. I have friends that have groups that have been together for 10 years. It’s the same 10 to 12 people. It gets deeper and deeper. You start talking about things that you never would have imagined to share with these other business people. That’s something that I’ve learned in my own life.

The more vulnerable I am in meeting people for the first time… I do a lot of networking and meeting people for the first time. I stopped asking what they do. If I like you based on who you are, then I’ll find out what you do, or someone will have already told me. I’m more interested in the person. Their business problems won’t always be business problems. Who are you? What makes you tick? What do you most want out of this business?

A business is a vehicle to meet the needs of your life. I don’t believe our culture functions that way. Our culture functions in a way that your business is your life. It doesn’t leave much room, especially coming from New York. One of the reasons I moved to San Diego is because I wanted to have a life. I didn’t want to have business, and then some time where I did some other stuff.

I had the freedom in New York, but I couldn’t find anyone to play with in the middle of the day, unless they were making millions. I wasn’t making millions. I was making a decent living. Everyone else who was making a decent living had a job. In New York, it’s 7:00 to 7:00. You get home for dinner.

Then you’re ready to go to bed and do it all over. That’s five days a week. You get a couple of days to play with your kids, and that’s it. In San Diego, I can find people to do anything I want, just about any day of the week. If I want to play tennis in the middle of the day, in the middle of the week, people live that way here. That’s part of their life here. That’s one of the things that attracted me, as well as the weather.

Patrick:     Talk about networking and accessing your peers’ networks. This is not in the sense of trying to do business with your peers or their networks. The expansion of the network seems to be one of the biggest benefits. Someone might know someone. I use LinkedIn for this. If I want to meet someone, I’ll look to see if someone in my network knows this person. In peer groups, it’s even more so.

Larry:        When you know what you’re looking for and you can articulate it clearly, people in the room will know something or someone. It all comes down to the fundamentals. If you look at Lencioni’s Five Dysfunctions of a Team, the foundation of it is trust. If you have trust, people will introduce you.

I don’t like joining other people’s network groups. There are 15 people in a room, and I will like three or four. Then there are 10 people I have to deal with every time I go to the meeting. I’ve always started my own. I always handpicked the people that I want to spend time with.

I’ll take the time to build it over a year or so, or more, rather than asking someone else if I could join their group. I just never found it valuable because I didn’t want to build trust with some of the people in the room. The foundation of trust is what makes everything work.

When you have that trust, people will open up everything to you. The more trust you have, the more genuine people will be. The more willing they will be to open up those relationships, whether it’s a doctor that they know, a potential client, a strategic alliance, a direction you’re going with a new part of your business. There are doors.

You seem to live in a pretty big world, as do I. But that’s not true of most entrepreneurs. Most entrepreneurs I’ve met live in very small worlds. They have the 20 to 30 people they know through their kids’ friends. Then they have their clients. Then they have a handful of people.

Patrick:     It’s changed for me over the last three years. When I was running a big, international company…

Larry:        You had no time.

Patrick:     No. I’m on an airplane 65% to 70% of the time, traveling, meeting with customers and employees in remote sites. It’s a different lifestyle. I did it from San Diego. I didn’t really benefit from the San Diego lifestyle in that period of time. I still enjoyed myself. I enjoyed what I was doing.

I’m very achievement oriented. It was gratifying in terms of a lot of the things that we were accomplishing. We were making money for a lot of people. It was a cool thing. Now I have a little more balance in my life. I love that, too. It wasn’t that I hated what I did before and I love what I do now. That aspect of being a CEO, especially a public company CEO is tough.

No one is going to feel sorry for you. At the same time, you find ways to deal with that through having the right mentors and peer groups. If you do networking, it’s typically networking within your industry. You just don’t have time. There have been a couple of times in my life where I’ve had the wide-open space opportunity, like when I went back to grad school.

I have an engineering undergrad. I worked for five years. Then I decided to get an MBA. Because I had no guilt about looking at other business opportunities, it provided me that wide-open feel to talk to different people. “Should I do consulting? Should I do investment banking? Should I go back into industry? If I go into industry, should I go into finance or stay in the operations and marketing side?”

That was a great time of my life. For someone like me, you have to get back to the productivity and achievement side of it.

Larry:        I’m almost in that same place right now. I said goodbye to the business I had for 19 years at the end of 2014 for a lot of reasons. I took six months off to travel the world with my wife and kids. I came back to San Diego two years ago and started from scratch. I had a really good idea of what I was going to build when I came back. It didn’t work out that way. Now I’m in a place where I say, “I have certain skills. What do I do with those skills?” I think most entrepreneurs don’t do that. They end up in a business. They end up doing whatever the business requires. They don’t learn to surround themselves with people who balance them.

There are all of these different issues. During a peer group, you can start to see them. I don’t know if you’ve ever read Patrick Lencioni’s books. He has nine different books. In each one, he talks about something in his life that was easy and something that was hard. It’s the perspective of the two. Why is one person’s life easier than the other?

It’s because they do the right things, and they do the right things right. Most people don’t know what that is because they’ve never run a business before. The most successful business owners tend to have had some bruises.

You mentioned how you told someone, “I’ve seen this play out before. I know it’s going to happen this way.” Sometimes people just need to learn the lesson themselves. No matter how much you tell them, “It’s going to work this way,” they still say, “I need to learn this one on my own.

Patrick:     Yes, which is fine. It’s their life. It’s their business. Let’s talk about the survey. You asked me to do a survey within my network of three questions. Have you been in a peer group? Are you in a peer group now? Are you interested in joining a peer group? A lot of people came in with anecdotal information. It’s split 50/50.

About half the people have been in peer groups. Some of those people haven’t been in peer groups as we’re talking about that. They’ve been in advisory groups. People had some experience with peer groups.

Only about 14% of the people surveyed are in a peer group now, yet 80% of the people are interested in joining a peer group. There is this disconnect. I pushed it a little further than that. I combined two questions together. Of those interested in being in a peer group, are they participating in a peer group now? Only 14% are. What’s the why beneath this. There are three reasons. I don’t have time. I don’t want to spend the money. I’m not sure I’m going to get value out of it. Talk to me about those three things and how you’ve addressed them in building peer groups.

Larry:        The easy answer about time is that you don’t have the time not to. I can save you more time. In the groups that we have, you’re going to spend about half a day per month. If I can’t save you four hours a month through the group’s efforts, then I’m an idiot. Cost wise, everyone has things they need to decide on when it comes to spending money.

There are lots of things that you can spend money on for the cost of a peer group. I don’t think you’ll find a more cost-effective investment in your business than a peer group. Some of the peer groups run as much as $1100 to $1200 per month. On the lower end, they are $500 per month. That is where you will see effective groups. You asked earlier about groups with no fee. I think people need to pay. Something for nothing has no value.

Patrick:     With all the research I’ve done around that, the level of commitment isn’t there if it’s not pay-to-play. Honestly, $500 is two reasonable dinners, as long as you don’t buy expensive wine. If you’re frugal, it’s about five dinners.

Larry:        It’s still not crazy. The value that you get from it, for most of the clients we’ve dealt with over the years, they would have one situation a year that would pay for their entire membership. Just about every member, every year, had that “aha” moment that made the entire investment worthwhile.

Patrick:     That’s been my experience, too. It’s the high impact element of things. I have a story that makes this point. My best friend lives in Saint Louis. We played high school football together. We’ve known each other for a long time. He is a mortgage broker. He built this massive mortgage business.

He was top 30 under 30 in Saint Louis, and then top 40 under 40. He got completely wiped out during the real estate downturn. He still has a mortgage business now. I recently bought a house here. I’m an independent business owner now. It’s very difficult even for doctors and lawyers here to get a traditional mortgage. I went to three different companies here.

Because of that relationship, and because he knows what he’s doing, he was able to get me a traditional mortgage at a reasonable rate and save me $100,000 over a period of five years. That’s the thing that I’ve seen with peer groups. It’s having an advisor. It’s having a mentor.

When you’re in a particularly difficult business situation and you don’t have a path, someone has an insight. It’s not like you get huge value every single meeting. There’s one thing. You say, “This will save me a couple million dollars,” or “This is going to make me $10 million,” or “I eliminate this massive amount of risk for my business that I didn’t even know existed.”

Larry:        I’ll give you another twist on that. In the peer group meetings, most of the people that I focused energy on felt guilty for taking time away from the group. The funniest part is, it’s the people who are participating in the process who get more value than the person we’re trying to solve the problem for.

You get to creatively think. A lot of times, you’re triggered by something that they’re going through that will let you see your business in a different way. The person who is going through the problem is going through the problem. They’re going to try and solve the problem.

Patrick:     You’re in the woods. You don’t have that 5,000 or the 30,000-foot perspective. That’s one of the things that I love about what I’m doing now. I get to leverage my decades of experience doing this with other entrepreneurs. I met with a guy yesterday. He wants to raise money. They have some litigation going on. His existing investors don’t want to put more money in.

I was able to give him some perspective on that. He had a gut feeling about it, but he was being pushed in a direction. Why do you want to do this now? Why not wait three months? These are the questions you’re going to get from someone that you’re asking to invest in this business. It’s not going to be a good conversation. You have to disclose this stuff. If you don’t, then it’s fraud. It’s interesting to have these types of conversations with people. He was so excited.

He came to retain me to help him with something. I said, “Three months down the road, if you still decide you want to work with me, I’m happy to help you. All you’re going to do now is spend money on something that isn’t going to address the issue that you have. You need to spend your effort on addressing this issue as opposed to doing this.” It was really great.

Larry:        It happens over and over again when people feel like they have no choice. What a peer group will teach you is that you always have a choice. There are some choices that are better than others. I wrote a blog this morning about this. I’ve facilitated 500 plus peer groups over 20 years. I’ve met a lot of business owners.

I’ve seen a lot of stories. It all comes down to the shortest path to the objective that you want. How do you get from where you are to where you want to go? It starts with understanding where you want to go. That’s part of the peer group as well. It’s about helping people clearly identify why they have a business. Most people don’t understand the impact that they have.

I saw more people who were better off getting jobs than owning their own business. They thought they had more freedom, but they really didn’t. They had more stress and responsibility. Their house was on the line. They didn’t realize how much pain they were in until someone said, “My life looks like this.” They said, “How do I do that?” Then you take them on that path of helping them.

Patrick:     Early in my career, in my 20s, I was involved in this workshop organization. We had peer groups associated with it. There were two things that they talked about. You have 360 degrees in a circle. When you’re making decisions, you only see 0 and 180. Having other people around you, you can see these other alternatives. Stand two feet away from a curtain. How many folds do you see? If you step back 10 or 20 feet, you see vastly more folds and opportunities. Accessing the mastermind, when more than one mind gets together, as long as you’re asking questions, listening and willing to learn, the world opens up.

Larry:        The biggest thing that I’ve seen in this process is the ego. You can let go of the ego and be okay with being yourself, let the answers evolve through the process. You don’t have to have all of the answers all of the time.

There is the client that I was talking about before, that never brought his leadership team in. He thought he was supposed to have all the answers. The truth is, you don’t. There is no way. There is so much information out there. There is no way that you can have all of the answers to everything.

Patrick:     It’s fascinating to me. Limited success combined with ego puts up a barrier. They say, “I am successful.” Think about how much more successful you could be if you had an open mind and were receptive to some of this other input. You need to have discernment. You get input all the time.

You have to put some of it by the wayside. Working with entrepreneurs throughout my career, there are some people who are incredibly hard headed and unreceptive to any kind of input. They have that ego and shell. I have a little of that inside myself. You need to have that drive.

You need to have that passion. But if you have it to the point where you can no longer learn, that becomes a problem. It usually leads to business failure or business mediocrity.

Larry:        And don’t join our peer group. We don’t want them in the group. They’re no fun. If you put the right people in a group, it’s a ton of fun. I enjoy the philosophical conversations of why. You look at Simon Sinek and the why behind it. You can do tactical stuff whenever you want to.

It’s very hard to get a group of really smart people together to talk about the things that matter most in life. That’s the piece that we avoid as a culture. As families, we’re living in a small nucleus. Our ancestors lived in large communities. As business owners, we live in this little world versus being part of a much bigger community that helps us on our journey. There are so many guides there. You asked me before about the size of a group and what makes a better group.

This is the thing that I’ve seen. It’s not an idea. I’ve seen the littlest guy in the room come up with the best opportunities and pursue things that the bigger companies will eventually adopt. It’s not the big that eat the small. It’s the fast that eat the slow. The faster ones are usually the smaller companies. If you’re in a group with smaller companies, you get to see some things where people can see results on really quickly.

If you’re a bigger company, you’re not going to see the results because you have all of these things to manage. You can watch littler companies do really cool stuff. You can say, “I see where he’s going with that. I can now adopt that into my business a lot easier than if I would have tried to do all those things myself.” There is some real value to having different sized companies as long as you feel that you have enough people in the group to be peers.

Patrick:     And a level of mutual respect.

Larry:        You can’t be in a group with people that you don’t appreciate.

Patrick:     That diversity does help, in age and size, as long as you feel like you can relate from a peer level. I learn things all the time from people much younger than me. They grew up a different way than I did. They can think of different ways to do things. One of my main software developers is in Poland. I’d never met him.

I had a two-year relationship with him, but I was able to meet him and his girlfriend. He’s one of the smartest software people in Poland. He was accepted into all of the special programs. Being able to hang out with him was so much fun. I’ve learned so much from him because of how he grew up.

His way of thinking is so vastly different than mine, and the guy is less than half my age. Every time I talk to him, I learn something. I really appreciate you being here today, Larry. We might ignite more peer group activity from this conversation. Based on the survey, there is a market need out there. Thank you, Larry.

Larry:        It’s been a pleasure

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

Aira is Improving Quality of Life for the Blind and Vision Impaired

Aira is Improving Quality of Life for the Blind and Vision Impaired

Interview with Suman Kanuganti, Co-Founder and CEO of Aira

Larry boards the bus using his white cane. With the help of her seeing-eye dog, Jane crosses the busy street. John, who is now a grandpa who has severely limited vision stays at home most of the time. Robert works in a office building and has a sighted person work with him to help with tasks that require eyesight. These are everyday occurrences in the United States and throughout the world today.

There are an estimated 20 million blind and low-vision people in the United States alone, according to the American Foundation for the Blind. What if there were a better way to help the blind?

Aira (pronounced Eye-Ruh) is using a combination of Google Glass type technology, location services, tie-in with other internet services and websites, along with a staff of certified agents throughout the country, is helping blind and visually impaired people to have better accessibility and more confidence. Aira’s vision is to goal is to develop leading technology and services that help remove the remaining barriers for the visually impaired, expanding their possibilities to live with greater confidence and independence. In a nutshell, Aira is improving the quality of life for the blind and visually impaired.

In this interview with Suman Kanuganti, the CEO of Aira, we discuss what Aira is doing to help remove barriers to the blind and improve efficiencies and quality of life to vision impaired individuals. Suman is an engineer by background, education and training. He is a graduate of the University of Missouri –Columbia, and the Rady School for Business at the University of California at San Diego. Suman worked at Catapillar, Wonderware, Qualcomm and Intuit before joining Aira. To get the company started, Aira joined the EvoNexus incubator.

Suman co-founded Aira in 2014. Aira is focused on developing transformative remote assistive technology and services that bring greater mobility, independence and self-confidence to blind and visually impaired individuals.

Patrick:     This is Patrick Henry, the CEO of QuestFusion with the Real Deal…What Matters. I’m here today with Suman Kanuganti who is the CEO and co-founder of Aira. It’s an interesting technology company in San Diego. Suman is an engineer by background, education and training. He also has a graduate degree in business.

He got his undergrad from the University of Missouri, Columbia. He’s a graduate of the Rady School of Business from the University of California, San Diego. Suman worked at Caterpillar, the big industrial equipment company. He worked for WonderWave, Qualcomm and Intuit before forming Aira.

Aira was founded in 2014 and is focused on developing transformative remote assistive technologies and services, enabling technology that brings together mobility, independence and self-confidence to the blind and visually impaired community of individuals. This is fascinating. I’m in San Diego and Aira was incubated at EvoNexus, where I’m an advisor and former board member. I was aware of the company early on. I thought it was really cool. I was always curious about how the business model would evolve.

Welcome, Suman. Where did you come up with the idea for Aira? How did that evolve?

Suman:      This was back in early 2014 when the smart glasses came out in the industry.

Patrick:     These are things like Google Glass?

Suman:      Yes, specifically Google Glass. I was a Google Glass explorer back then, so I got one. My co-founder got one. It was an idea of what a camera that is located right in front of your eye would do. It could enhance some of the things that you’re seeing or it could provide information for the person who may not be able to see. Interestingly enough, a good friend of mine named Matt lives in Denver, Colorado. We pitched the idea to him. We put together simple prototypes.

Patrick:     He is blind?

Suman:      He is a blind person. At the age of 33, he lost his sight. He is legally blind. He is a father with two lovely daughters. He’s a nice guy. He’s a funny guy. We used to talk quite a bit on the phone. We said, “Let’s do a Google Hangout using the Glass instead of talking on the phone.” I am able to see what he would see. I started describing things.

There was this moment of, it’s not just about holding up a phone and looking around on FaceTime. You are seeing whatever I can see. As he moves around, I am able to describe things around him. It is a much more intuitive way of gathering information. We see this from the point of view of the camera glasses. That was the initiation of the idea.

Patrick:     Did you take it from there and develop a prototype or a minimum viable product? Where did you go from, “This is cool?”

Suman:      It’s exactly as you said. We put together a prototype. I called a couple of my friends, engineers who are in the company now, to put together a quick prototype. It was as simple as streaming from the glass. Then we had an LCD screen, real time streaming from the glass, with two to three seconds of latency at that time. Then we did some experiments at home, at his house and also walked outside. That was pretty cool.

Everyone was describing things in his home. There was a photo of him on his refrigerator. He looked so young. He said, “You know what? I need to change that photo.” From there, I was finishing up my MBA at Rady School of Management, UCSD. I had two credits left. I chose this idea and worked with a professor to come up with a business plan.

That’s when I got an opportunity to double click on the market. What is the competition out there? How do people who are blind or have low vision gather information that is otherwise acquired visually? What are the ways or techniques that they use to get around?

Patrick:     What did you learn from that experience in terms of, not only sizing the market, but understanding the limitations of current solutions?

Suman:      Fundamentally, there is something called the orientation and mobility scale. It’s about training on how you perceive your world around you, the environment around you, without seeing. Most of the community goes through this training for navigating places without seeing with the aid of a white cane or guide dog.

You may have seen people with a white cane or guide dog. The dog is specifically trained to navigate. When you use a white cane, there are specific techniques on how you would perceive the information about your surroundings. It’s very similar to how you would look at things and go around it.

Technology is great and has come far. For example, interactive digital information. They use something called voiceover on the phone. It exists for everyone. I use voiceover quite a bit because now I can see information without having to look at visual screens. For people who want to try this, it’s a beautiful technology, not just for the blind and low vision.

If you think about the tools that are out there for the blind, we have the white cane and the guide dog. There are a lot of apps. There is an app to identify colors. There is an app to recognize text. There is an app to identify dollar bills. There is an app to identify objects. But there isn’t a comprehensive solution for someone to get up and go, without having to think about the other information that they’re missing.

Patrick:     Is that the biggest problem within the blind market? Is it the limitation of mobility? You’re confined to your house or a space. If you do get out, you have to go specific ways. If there is any change in the outside environment, that could be a big problem.

Suman:      Yes. It comes down to the scope of the environment. For example, you could get trained for navigating in a scoped environment. Let’s say we’re talking about your office campus. I would know anything and everything that happens in the office campus. Now I move from my office campus and go on a vacation to Hawaii. This is a new environment. There is environmental information. There is visual information. You would need to gather this in order to get around. Navigating is not necessarily the problem. It’s about the information that otherwise you are missing.

Patrick:     I was having lunch with my fiancée Amanda in downtown Delmar today. We were crossing the street. Some woman blew through the intersection, talking on her phone. Luckily, I can see. If I couldn’t see, I’d probably be dead right now. You can compensate for some of those things with the white cane and the dog, but this provides a greater sense of awareness, except for the latency issue. Have you gotten the latency down?

Suman:      Yes. Right now, we are talking about less than 120 milliseconds.

Patrick:     That’s fantastic. Before the interview, we were talking about the size of the market. Can you give the viewers a bit of insight around that? Most people don’t have a sense of how big or small the blindness market is.

Suman:      To your point, sometimes I feel that’s an advantage. To give you a big picture view, in the entire world, there are 280 million people who are blind or vision impaired. That’s almost 3% of the entire population. Here is an even bigger picture. The total disability market in the world is 1.2 billion people. That’s the size of China.

Specifically, we are targeting about 300 million people out of 1.2 billion people. Within the United States, the number of legally blind people is 22 million. It’s still huge. There is a wide spectrum of blindness. It starts from 2200, which is legally blind, all the way to totally blind. There are solutions specifically targeted for people with Stargardt Disease.

Patrick:     What is that?

Suman:      For example, there is this amazing technology called eSight. They use techniques with not just zooming, but…

Patrick:     What is Stargardt Disease?

Suman:      It is one of the macular generation conditions. It’s a degenerative disease. You lose your vision over time.

Patrick:     Does it get narrower and narrower?

Suman:      No, this is different. That is Retinitis Pigmetosa.

Patrick:     There are degenerative things that can happen, an accident or being born blind.

Suman:      Yes. If you think about market segmentation, like blind veterans, most of them, it is instant. Most of them lose sight because of an event. There are 175,000 blind veterans. That’s just within the veteran population. Most of the low vision to legally blind people are the people who lose vision at a later point in their life. As they get older, there are specific conditions that tax them. There are blind people who are born blind or lose their sight at one or two years old. It’s a big market.

Patrick:     In terms of quantifying it from a dollar standpoint, have you looked at that? How much money is spent on this problem either in the portion of the market that you’re going after now or more broadly?

Suman:      Within the United States, on a per year basis, there is a total of $146 billion spent.

Patrick:     This is $146 billion spent annually on assisting blind and legally blind people.

Suman:      I will break it down. Half of it is the research dollars being spent on finding a cure for a disease. That has nothing to do with technology. It is all about research and medical studies to find a cure for eye diseases.

Patrick:     That’s still about $70 billion. That’s a pretty big number.

Suman:      You can put aside $48 billion, which is economic loss. That means that there is 70% unemployment within the blind and low vision community. Again, this is because of lack of vision information. Then there is $22 billion spent annually towards providing sighted assistance in various different capacities. It could be an individual helping a sighted person.

It could be an elderly person who is getting sighted help as part of Medicare or Medicaid. It could be an assistant that an employer hires to help a blind employee to do their job more effectively. If you combine all of these numbers it comes to $22 billion.

We don’t have to incur the $22 billion as loss on a yearly basis. Now that you have the ability to get that sighted assistance whenever you want, on demand, without having to staff a sighted person to help, there is obvious economy subscale that you are getting. You have this sighted assistance distributed throughout the United States.

Patrick:     There is efficiency improvement because you have idle capacity all over the place. If you can more effectively use the available capacity, there are huge efficiency improvements.

Suman:      Yes. We call it sighted assistance or greater. Let’s say you are my sighted assistance. You can only see the environment in our view. For you to help me, let’s say I would like to get an Uber. Patrick, can you help me with that? You’ll probably pull up your phone and use your vision. The agents behind the scenes, besides the visual information, they have a lot of environmental information, map information, layout, integrations into Uber, Amazon, Lyft and so forth.

Patrick:     Talk to me about the product. You have the thing that sits on the person’s face. Then you have this behind the scenes blindness concierge market that you provide. It’s way more than that because it breaks it down to a more granular level than, “Get me a restaurant reservation.” Talk to me about that in layman’s terms when it comes to the product.

Suman:      We call it a mission control sight dashboard. On the mission control dashboard, it’s an app that sits on your desktop.

Patrick:     This is for the person that’s providing the assistance?

Suman:      We call them Agents. This is a sighted person sitting in front of the computer. They log into this magical mission control style dashboard.

Patrick:     Your wife was the first agent?

Suman:      My wife was the first agent. Larry Bock (Lawrence A. “Larry” Bock was an legally blind person and American entrepreneur who has aided in starting or financing 50 early-stage growth companies, with a combined market value of more than $70 billion. His firm invested in Aira, and he served on their board until his death on July 6, 2016) asked for the demo. My wife was the agent for that. We hadn’t even incorporated the company back then. He wanted a demo at in a Soup Plantation. We went to a Soup Plantation and we prepared everything. Once we were there, he said, “You know what? We are not going to Soup Plantation. We are going to a restaurant opposite there.” He was very funny.

She was the first person who talked to him and started to describe things in front of him much more naturally. He was hooked. He said, “This is not what I was anticipating.”

Going back to the dashboard, there are a good number of agents in the US. I’m sure there are calls going on right now. The user calls in. You accept the call. It’s as simple as that. When you accept the call, you will see the live video feed, less than 120 milliseconds, from the first-person point of view camera. The glass is streaming sensory information. It’s also streaming their location.

Patrick:     There is GPS capability built into the technology?

Suman:      Yes. You can imagine the sophistication. You walk into a restaurant and we pull the menu information automatically. That way, we don’t have to look it up. We have integration into public transportation services. If a user would like to get from Point A to Point B, there is information about navigating them. Also, we would have all the transportation options to get there.

Patrick:     Do you have other location-based things where GPS doesn’t work, like if you’re in a subway?

Suman:      For every user, they create a profile. They do have mechanisms ahead of time to tell us where they are headed. There is a calendar integration. Our agent also has built-in profile mechanisms. Based on the location, we associate certain data for that particular location. Public transportation is one map layout. A grocery store is another.

You can go on and on with many different kinds of data augmentation on the dashboard based on location and context. Let’s say I get something from Ikea. You can look at the instructions online. You would rather go to YouTube video and look at it rather than describe it. An agent doesn’t have the restriction to just use the video feed coming from the glass.

Patrick:     That alone is a massive market, even for people who can see.

Suman:      Finally, there are things such as Uber. We are integrated into Uber. Agents can push a button and request an Uber on a user’s behalf. They know the color of the car, the license plate of the car, the person’s name and face. When the car arrives for the blind person, it’s as simple as opening the door and sitting down. It’s a smooth experience. It’s amazing.

Patrick:     I know that you have revenue. You’re still private so you probably don’t disclose it. You’ve raised a decent amount of venture capital money. You’ve recently closed a Series B at $12 million. How far does that take you? Do you see a clear path to profitability? Where are you on the business side?

Suman:      It’s one of those businesses where it doesn’t feel so obvious where the money is, which is an unfair advantage. That is something we can invest in heavily. We want to find out how to make this affordable and make it available to the millions and millions of blind people out there. If you think about it, the unit economics as of today are still costly.

Patrick:     You don’t have the economy as a scale or economy as a scope yet.

Suman:      Yes, exactly. We do have multiple revenue streams or channels. It’s just not in a direct-to-consumer model. It’s a subscription model. We do have channels into the corporate sector as well as the public sector. The whole premise is that they payer could be multiple different people although the person who is ultimately receiving the services, or the value, is a blind or low vision person.

To put that into perspective, if you look at this technology, it’s innovative and augmenting a person’s environment. It uses smart glasses as an augmented reality application. It’s not in a constrained environment. It’s not in a healthcare setting or construction setting. It is out there in the world. That’s one of the reasons why our partnership with AT&T plays a big role. There are a lot of other market opportunities as well for our technology to play a big role.

Patrick:     It’s even bigger than the market size that you described. That initial focus of the blindness market and productivity improvement in the United States is the beachhead market opportunity. But then you can fan it out to other opportunities over time.

Suman:      That’s right. The blind and low vision market is a big market. Beyond that, there are additional markets that we can go after.

Patrick:     Let’s shift gears and talk about you. You’re a first-time CEO. You have a few years of experience doing this now. You’ve raised a lot of money and made a lot of progress. For the entrepreneurial audience, give us one or two key insights about starting and building companies.

Suman:      That is a tricky question. I don’t consider myself an expert. Just be open. There is a lot more to learn than what you already know now. I’m sitting here. We are having a conversation. I don’t consider myself an expert because I only know so much. I have yet to experience things.

If I were talking to a friend, I would say to keep an open mind. Learning will not stop. I think it is a continuous process. It’s not, “I am an entrepreneur. Now I know everything.” No. When you go to Series A, there is new learning. When you to go Series B, there is something else. I’m sure something else is waiting when we go to Series C.

Patrick:     It’s great advice. I agree. You should always be learning. You have the stuff that you know. You have the stuff you don’t know. Then you have the stuff that you don’t even know you don’t know. Having mentors and peer group interaction, keeping an open mind are all critically important. You need to have the thirst for learning.

Every successful entrepreneur that I’ve dealt with has that openness and receptivity to continue to learn. This has been awesome. I am here with Suman Kanuganti from Aira. They provide this amazing capability to improve the lives of blind people. It’s been terrific to have you on the show. Thanks a lot, Suman.

Suman:      Thank you.

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

Discussion about Navigating Rapid Growth in a Business Environment

Discussion about Navigating Rapid Growth in a Business Environment

In this discussion with Mason Matthies, Managing Director at Donnelley Financial Solutions, and Patrick Henry, CEO at QuestFusion, we discuss various challenges of managing rapid growth. This was a keynote speech at the 2017 San Diego Startup Week event.

Like all times in young growing companies, the CEO needs to focus on strategy, operations, people, and finances.  The challenges in managing through rapid growth highlight particular challenges in all of these areas.

 

Mason:      My name is Mason Matthies. I’m a managing director with Donnelley Financial Solutions. I’ve been working with private companies, helping them manage secure content and then ultimately file all the documentation with the SEC for 20-plus years. Patrick and I met when we were going through the Entropic project. There are some interesting stories that we’ll share. We wanted to come here and talk about managing through rapid growth.

Patrick is a serial entrepreneur, and Founder and CEO of QuestFusion, a San Diego based consulting company that provides strategic guidance to entrepreneurs and startup companies. Patrick is the former CEO of Entropic Communications where he took the company from pre-product and pre-revenue to a successful IPO on NASDAQ and an eventual billion-dollar valuation.

Patrick has raised over $200 million in equity capital for his companies and executed on over $2 billion in M&A transactions. He’s a regular contributor to Inc Magazine, Entrepreneur, Huffington Post and Fast Company. He’s the author of Plan, Commit, Win: 90 Days to Creating a Fundable Startup, which is available on Amazon.com, Amazon Kindle and Audible.

Patrick also loves working with entrepreneurs on their most challenging problems. He also enjoys golf, tennis, fine wine, snow skiing, angel investing and spending time with his family. You can also find Patrick on Twitter @QuestFusion.

Patrick:     When Entropic made the decision to go public in late 2006, we had gotten to the point where we were worth too much for our large competition acquisition target to buy us. We had a conversation with CBS in January.

They said, “We want to pay this much.” My board felt the company was worth this much. We decided that we already had a backup plan in the event that we didn’t sell the company. I still felt like we were subscale to run a public company, so we had an intent to buy another San Diego company called RF Magic. We bought the company.

There was a lot of process to get that acquisition done because it was a stock-based transaction. Both companies were private. We got it done in mid-June to July. Then we went to the SEC filing process, which took about three months. It was a little bit complex. Eventually, around Thanksgiving, we were ready to go on the IPO roadshow. This is when I met Mason.

Mason does all the financial printing. At the time, he had one competitor. Now he has zero competitors. It’s a great business to be in. We were at the airport, ready to fly to New York for the IPO roadshow. Our second largest end customer didn’t threaten to sue us but made these allusions like, “What would happen if you went public, and the Monday after, we filed a lawsuit against you?”

In the background, the bankers and lawyers talked about this. We pulled back from the IPO. All of the employees thought that I was on the IPO roadshow, so I couldn’t go back to Entropic to work. I worked at Donnelley for a week, spending half the time in Denver negotiating with the customer and the other half of the time with Donnelley. That’s how Mason and I got to know each other. He would order me lunch every day from really nice places. It was a great experience.

Mason:      The IPO is an interesting process. That is one of the other pieces that we’re going to talk about. When you’re going through that process where you file your information publicly—some of the rules have changed since Patrick did this with Entropic—you’re beholden to additional information that’s going to come out. Customers and other people might come out of the woodwork and threaten to sue you because you’re in a very public place at that point in time.

Patrick:     I’d known this guy for many years. I went up there to Denver on a redeye flight. He said, “We don’t trust you guys anymore.” About halfway through the negotiation, we’re in this room. At this particular facility, you need an employee badge to get out to go to the bathroom. He handed me his wallet that had an employee badge in it and a couple thousand dollars. It was his way to get his last pound of flesh while he had some leverage. They got it and we ended up going public.

Mason:      Today we want to talk about managing through rapid growth. Patrick and I were talking about the best way to present this. We wanted to make it more of an open forum. I’m going to start with some questions. Feel free to jump in.

How do you define rapid growth? What is that?

(We are talking about managing rapid growth.)

Patrick:     There have been three companies in my career where I’ve had the luxury of rapid growth. The marketing director of memory business at AMD, where we took the flash memory business from $1 million a quarter to $100 million a quarter over a three-year period of time. At CQ Microsystems, we took the video CD business and the DVD business from zero to several hundred million dollars over a two to three-year period of time.

Inc has a Fast 500. Deloitte has a Fast 500. We were part of the Deloitte Fast 500, which measures it over a five-year compound into a growth rate. It has to be 60% to 70% compound annual growth rate over that period of time. You’re growing very fast. There’s a lot of chaotic stuff that happens during that type of growth.

Mason:      What are some of the biggest challenges you find?

Patrick:     I’m assuming that most of you are CEOs and founders of companies. If you’re the CEO of a startup company, you have three main hats. You have to worry about the people. You’re building a culture. You’re building an employee base. You need to be worried about that all the time.

You’re worried about running the company and the operational piece. Then you worry about having enough money, or fuel in the tank to fuel the growth. Even if you’re going through this period of rapid growth and you’re not part of a larger company, you’re typically applying every dollar that you make back into it.

A lot of times, it’s more than that because you need to carry so much inventory. You need a big accounts receivable when you’re a small company, so you’re not getting the best credit terms. You are worried about all three of those things.

The challenges within managing rapid growth are still those same three things. But the focus moves from the core to the periphery. When you don’t have customers and you’re just focused on product development and R&D, that’s one set of challenges. But when you have customers and customer problems, you have a lot of problems on the supply chain side.

You also have it on the customer side where they’re complaining about stuff all the time. No matter how good things are, you’re always going to run into problems. You have to keep the product development engine going but you’re spending so much time out here. You have to do that. Otherwise, the whole thing breaks.

Mason:      Do you want to jump into money? That’s always a fun one. Based on what you’ve experienced with the different companies that you’ve worked in, what would you do differently? What hindsight do you have around money?

Patrick:     I’ve always had a bias towards making sure you have a little bit more than enough. I’ve never been fortunate enough to run a company that had tons of cash sitting around, where I needed a garden rake to clean it up. You need to have enough money and plan ahead.

A lot of the entrepreneurs that I deal with in my advisory business want to treat raising capital as an event. They think, “Now it’s time to raise money. Introduce me to your network.” A lot of times, they don’t have the toolkit necessary to go out and raise capital. Raising capital is a process. It’s not an event. Even in an IPO, which is the most accelerated version of that because there’s so much more money in the public markets, it’s a three-week process.

The process leading up to that is a good four to five months. When you’re raising private capital, it’s a five to seven-month process, whether you’re raising a seed round, a Series A or a Series B. You need to plan ahead and make sure you have enough runway so that you can make it through there and run the business. When you’re going through rapid growth, because the working capital requirements, you potentially have a lot of inventory requirements, if you have a product-based business. If you have a SAAS or software based business, you have a lot of things related to accounts receivable.

Sometimes, in a software business, that can be more problematic. You have these weird contracts that you’re in. People don’t pay on time. You have a bunch of different things you have to do. Making sure that you manage your cash is really important, especially managing through rapid growth.

Mason:      We talked a little bit about fuel in the tank and when is the right time to try and go public. That’s a little further down the line for a lot of people in the audience. In terms of doing an A or B round, can you speak to that type of thing?

Patrick:     I’m a proponent of, if you can avoid it, don’t ever take venture capital. You lose control of your life. You lose control of your company. There are some instances where it makes a lot of sense. If you need to raise $3 million to $5 million or more in a Series A, there are very few sources where you can get that amount of capital in the private markets.

You have to believe that you can drive a billion-dollar valuation, not just with that capital, but over the period of a Series A, B and C. That’s a different type of company. Not all companies are built that way. Prolonging that as much as possible, even if you have a company like that, is going to be to your benefit. Bootstrap as long as you can.

Get friends and family money. Get friendly angel money where people have really technical domain expertise in your company, they like you and what you’re doing technologically. That’s always good. When you start moving to that Series A round, there is a different set of requirements that venture investors are looking for.

A lot of folks that come to me to help them raise money say, “I want to raise $1 million.” I say, “That’s really hard. I can help you raise $250,000 to $500,000 from angels or I can help you raise $300,000 to $500,000 with some venture investors, but $1 million is a tough number.” You’re in no man’s land. You need to know what you want to do with the money, what milestones you can accomplish over the next 12 to 18 months. You raise money in 12 to 18-month increments. You have to think backwards with that type of plan and go from there.

Mason:      On the milestones piece, what happens when you don’t hit those milestones, and you have to go back out and ask for additional dollars? That’s always a challenge that lots of companies have to face.

(We are talking about managing rapid growth.)

Patrick:     No one ever hits all their milestones, I’m sorry. It just doesn’t happen. We all know that, in order for you to have a growth company, you need to have hockey stick revenue growth. I have this joke in the book about hockey stick revenue growth. They see these graphs all the time.

As an investor, I’m so excited to find out what the catalyst is that causes this hyper-growth. Then I’m completely disappointed and I might as well put an arrow that says, “The miracle happens here.” In the book, I talk about eight things that I’ve gone through that are catalysts. It’s one of those crazy things. If you’re in the right kind of market that does have the potential for explosive growth, there will be catalysts that make that happen.

You know it will happen but you can never predict it with complete accuracy. A lot of it is the explanation around it. Did you miss a milestone because you just made stuff up or is it because your assumptions were a bit wrong? Customers aren’t ramping here but they’re ramping here. We still have control and things are good.

Do your homework and know what the underlying triggers for those things. Some of those things would be, if you’re in a SAAS business, “I need to have 10,000 customers at this type of licensing or subscription level for me to get to the next level of validation and proof around this market.”

Maybe you only have 5,000 but there’s a reason why. Those can be valid reasons why things didn’t happen exactly as you expected them to.

Mason:      What about when the terms first come back from the VC? You’re all excited. You finally get someone who is interested to give you some money. However, they want a very big chunk of your company. Is there a formula that everyone seems to use? Is there a better way to manage that?

Patrick:     Typically, whether you’re doing a seed round, Series A or Series B, you’re going to give up somewhere between 15% and 25% of the company for whatever amount of money you raise. You have to work backwards with the amount of money you can raise. That determines the valuation. In a seed round, I see companies regularly raise $500,000 or even $1 million.

I have a buddy of mine who has raised $1.2 million in seed financing, in a convertible debt offering versus a priced round. He didn’t do it all at once. He did it over a two-year period of time. He’s had people write him $25,000 checks and $200,000 checks. You do see that happening. That typically doesn’t happen once you do your first price round, which would be a Series A.

Anytime I’ve gotten an initial term sheet, I was dancing in the hallways. It’s so exciting to have someone who is actually interested in investing in the company. You talk to so many people over so many months. Their natural bias is to say “no,” especially venture capitalists. They’re looking at hundreds of deals and hundreds of executive summaries. If you do get a meeting, they’re looking for a reason to say no.

Maybe it’s a stupid business idea. If it’s a good business idea, this is the wrong person or team. There is a lot of overcoming skepticism and setting expectations, exceeding them, setting milestones and meeting them over a period of months.

Anytime I’ve raised private money, there have been three or four significant touches and half a dozen other emails and phone calls before someone is willing to give you a term sheet. When that happens, a lot of it depends if you’ve done a priced round before. If you’ve done a priced round in a Series A, you want the Series B to be an up round. You don’t want the A guys to get diluted because they will get pissed off. That’s the most important thing.

Let’s make sure it’s at least an up round, and that the people who already invested are okay with what’s happening going forward. When you run into these write down situations, it gets very ugly. It’s a bad situation. It never works out very good. Sometimes a company gets shut down. Sometimes there is a washout of the existing investors. It’s never an easy situation.

Mason:      Let’s say that someone in this audience gets someone to join their board. How much should they expect them to participate in thought leadership around what they’re going to be doing with the company? Talk about dry powder and having the additional wherewithal to jump back in, in the future. How much should they worry about that if they might be getting a couple different types of offers?

Patrick:     Board seats are one of your most valuable assets as a founder or startup CEO. You have to be very picky about who you put on your board. As a private company, you might have a co-founder and it’s just the two of you on the board initially while you’re in the bootstrapping and friends and family phase.

Maybe you get some kind of high-powered angel investor that has a lot of domain or technical expertise in your area. Maybe you make them a board member. Typically, when you raise a Series A with venture capital, you are going to give up a couple of board seats. You want to make sure that you’re working with people who are going to be reasonable.

Deal terms outside of valuation are sometimes as important or more than the valuation. What’s important in valuation is that you’re looking at the end zone. Where do you want to end up, from an ownership stake, when you sell the company or take it public? You’re going to have a lot of bumps in the road during that period of time.

If you have something that has massive antidilution privileges or write downs, a lot of people are focused on the unicorn valuation, but any new money that comes in below a certain valuation completely washes out all the founders. You have to be very careful about that.

You have to be careful about corporate governance and who you get on the board. Are they going to be a reasonable person? A future investor will look at your existing investors and say, “I don’t want to work with that person.” They can be poison for your company to getting future investors. Have your eyes open around all of that.

(We are talking about managing rapid growth.)

Audience:  How many different boards have you been on?

Patrick:     Five.

Audience: Board of advisors, directors or a little bit of both?

Patrick:     Those are board of directors. I’ve been on some other advisory boards.

Audience:  Do you prefer one over the other?

Patrick:     Yes. I think being on the board of directors is more fun. You have a more active role. There is typically more involvement. There is regular involvement when things are good and then there’s very active involvement when things go sideways. To me, that’s part of the fun of it. Three of those are companies that I’ve run. Two were on other companies.

Audience:  There’s fun in it when it goes sideways?

Patrick:     No, it’s not fun if you’re a CEO and things are going sideways. You have board meetings every week and daily action items.

Audience:  What are some signs to tell if a venture capitalist is trying to take advantage of you versus trying to help you?

Patrick:     What do you mean by taking advantage?

Audience:  They are strong-arming you in the negotiation. If you’re a first-time entrepreneur, how can you tell if that’s happening? Are there red flags?

Patrick:     There are so many different deal terms, other than valuation, that are important. It’s important to get a good corporate counsel who has seen a lot of deals and has worked with VCs. They’ve worked on M&A transactions. They’ve worked on IPO transactions. They have real-time data. Then they will know what’s standard versus what’s not standard.

You can talk to them about that. Aside from that, there are rules of thumb. If you’re raising a round, you’re typically going to give up about 15% to 25%. I have people approaching me for angel investment and they want to give up 5% of their company. I don’t see how the numbers work around that. I don’t go in and say, “Give me 35%.”

If a VC if really interested in a company, maybe they’re going to push a little harder. It’s a negotiation. When you’re doing any negotiation, you want to create scarcity. If there is no scarcity, you will be taken advantage of most of the time. Will you be taken advantage of to the point that it’s predatory?

Maybe, maybe not. How important are you to the company? If you’re really important to the company, they’re going to want to take care of you. They will want to make sure that you stick around, and that you’re driving the business.

Audience:  Do you have a technique for creating scarcity?

Patrick:     I’ve never been in one of those situations where people are throwing money and term sheets at me. Everything is hard. You’re grinding. Having a good list, working the list, making sure you have good touch points, keeping in touch with people, don’t directly play people off each other are all good things. You’re trying to get that first person to come in.

In the venture industry, everyone is a follower. That is unless it’s Kleiner Perkins or Sequoia and they know the entrepreneur. They’ve done business with someone on their board before. All the rest of us are commodities. They have to figure out if it’s real. There is so much stuff out there as far as bad ideas or bad management teams. T

hey want to test us over a period of time. If they get to know, like and trust you, then there is a possibility that they get interested. Because of the way they think and the metrics they use, you’re going to get multiple people interested at the same time. Then you have to try and close. You try to get a term sheet.

Audience:  How much time can you expect someone to give you as a board member? If I put someone on my board, how many hours am I entitled to from them per month?

Patrick:     A lot of that is a good conversation to have with them prior to putting them on the board, based on what you want. I tell people, “If you want me as an advisory board member, I’m available by phone for an advisory board meeting every other month or once a quarter.”

Board members of private companies, you have some committee work, but the committee work is relatively light compared to a public company. Maybe they’re on the audit committee and they have to be available for a meeting once a quarter. They have to be available once every six weeks for board meetings.

When you’re public, it’s different than quarterly board meetings unless things are going bad. Then they’re having board meetings behind your back. Being available by phone, if there is a someone who is a real expert, you can have a handshake agreement up front.

You can say, “I want to be able to bounce ideas off you or ask you for an introduction.” You can clear that up front. If you want them to come in, work and do projects, if I’m on a board and someone says, “I want three months of your dedicated time to help me work through my product plan,” I say, “That’s not implicit within our agreement. I’ll do a consulting deal with you but that’s beyond the scope of being on your board.”

Audience:  How do relationships change as you go into A and then B? The growth and the people you’re working with, your colleagues. I don’t want to throw out particular titles. That is one of the most interesting challenges of managing. I haven’t seen it or experienced it. What are those relationships like and how do you manage the growth with them?

Patrick:     It depends on the individuals involved. Let’s say you have a VP of marketing or engineering. In the case of Entropic, I had a VP of sales. He was our first VP of sales. He was an awesome guy. He’s still a friend of mine today. He was great working with a team of five people and some reps, but he was the wrong guy to run a multi-national organization with managers all over the world.

There was a time when I knew it wasn’t going to work. I said, “We’re growing too fast. We need to make a change. I’d like to find a spot for you doing this.” He wasn’t interested so he decided to be a VP of sales somewhere else. You need to be honest with people in situations.

Here is another situation that you run into. I came into Entropic at a relatively early stage. They had product development but they didn’t have any products. They didn’t have any revenue. They had four founders, but one of them was sidelined when I got there. Three were left when I got there.

The guy who was the founding CEO, I had known him for 15 to 20 years when I came into Entropic. He’s a great guy. The other two guys are also great guys but they’re startup guys. What I mean by that is, when you want to start a revolution, you need anarchists. When you want to establish law and order, anarchists can be extremely disruptive.

Sometimes people aren’t willing to make the adjustment. When you’re in those situations, you have to say, “How much value is there versus collateral damage?” on a daily basis. The reason why I have so much gray hair, it’s partially hereditary but it’s partially from dealing with founders in three different companies. It’s challenging. Sometimes it works. Sometimes it doesn’t. We all made money.

Sometimes you have to part ways because it just doesn’t work. In Entropic, there was management team 1.0, 2.0 and 3.0 at various stages of the company. I was there 11 years. We were seven years as a public company. When we bought RF Magic, it was this blended management team. That was 2.0. We worked through that. We started getting bigger and doing a lot of acquisitions. It became a much larger company.

Audience:  I’m sure that everyone is different, but do you find that board of directors care about membership classes and e-shares, especially if the owner is 100%?

(We are talking about managing rapid growth.)

Patrick:     Yes, they definitely care about preferred versus common. They want to be preferred. They want the founders and employees to be in common stock. That’s part of the deal terms. What kind of preferences do they have with that preferred stock? As you get to different classes of preferred, like A, B and C, it really depends on the negotiation that goes on during that financing round.

With the Series A preferred, they don’t want the Series B preferred to have preferences versus them, but they will. How does the participation happen? There can be a lot of technical details that go on. That’s why having a good attorney really helps to work through that. Having a good finance person that sees a lot of deals is really helpful.

Mason:      How many people have raised money or are in the process of doing it right now? (10 people in the audience raise their hands.)

Audience:  Sometimes you have a bad management team. How do you figure that out? Often, people like the CEO hide what is going on in the company to the board.

Patrick:     Are you saying, as a board member or investor assessing the management team?

Audience:  Yes, as a board member.

Patrick:     Even if a board member is good, they get 90% of their information from the CEO. It’s hard to assess that. In the case of the companies I’ve run, they were established when I came in. The board had communication with the founders and me. I always provide a high level of transparency. I had my management team in board meetings. I had them presenting. If a board member does that, I think it’s a good thing. If the CEO does that without a board member asking, I think it’s a good thing.

There is a difference between managing the CEO and managing the company. In my view, the board’s job is to manage the CEO. If a board wants to manage the company, I’ll give them the keys to the car. I can’t do that. With limited information and not knowing what’s going on, you’re going to tell me exactly what to do? I can’t do that.

You always get that testing period in the beginning of a company. They want a lot of information so you write a 15-page memo that says, “This is why I did the negotiation this way.” You get their confidence so they know you’re not an idiot. Over time, you build trust with them. There are still those friction times. There is never a right answer. How do you defend yourself without becoming defensive? It’s hard.

Audience: I care about the people. I’ve seen really bad things happen with CEOs. We get people who are like CEOs, good business people who bring in the revenue, but they are destroying their company from the inside.

Patrick:     My opinion from being involved and living in Silicon Valley for 10 years is that boards care about performance. Performance is primarily about the top line and the bottom line. If things are good on the top and bottom lines, as long as someone isn’t psychotic, they don’t care. If they’re going to be embarrassed by a psychotic CEO, they’ll fire the CEO.

Audience:  With social media and other factors will board be more active in addressing issues with the CEO more proactively?

Patrick:     I think there is more of that. There are other influencers based on that. That is happening. You see it in sports. You see it in business. You see it all over the place. You’re generally dealing with a very homogenous set of board members. Ninety-five percent of venture capitalists are white guys. Most of them are between 35 and 65. Diversity really doesn’t exist. It doesn’t exist much on public boards either, although it’s getting better.

Over time, as those shifts change, some of the things I’m talking about will change. I’m just being realistic and tell you what I’ve witnessed. Henry Nicholas at Broadcom was crazy. But until the board was scared that they were going to get in trouble, then they finally took action. He did a great job in many ways. He built an incredible company.

Audience:  Quite often, when companies get to A and B rounds, they have one product. At what point do you start wondering if there needs to be a second trick? How do you manage that?

Patrick:     It depends on how good the first trick is. If you’re in the microprocessor business and you’re Intel, they had memories before that, but it was a great trick. It was a 20 to 25-year trick. In packaged software, Microsoft had a great trick. They had a side trick of the Office Suite.

In the packaged software business, that was a pretty good run. That was a 30-year run based on three products. Qualcomm, based on CDMA technology had a pretty good run. There are the unusual handful of companies, like Google and search. Google spends tons of money on all of this other stuff that doesn’t really matter. But search is what generates all the revenue and they have 85% market share.

I met Sergey and Larry at a Kleiner Perkins thing back in 2002 and Google had already been around for five to seven years at that point. They had a good 20-year run on search. Who thought search would be that valuable? It really depends on the company. How big is the market? How fast is the market growing?

How much are you able to differentiate yourself and continue to generate a lot of cash by doing that? Most companies don’t have that luxury. Broadcom was different. Broadcom had two products initially. They had cable modems and they had ethernet. By the time they got sold to Avago, they were in every communications technology on the planet. T

hey did have to do a lot of diversification. They did most of their diversification through acquisitions. It was the same way with Sysco. Sysco built up a company initially in routers, but then they did 50 acquisitions of smaller companies. I think it depends. In my situation, we had to come up with some other products. The technology business, and the chip business in particular, isn’t the good business it used to be 20 years ago. It’s much tougher. There is a lot more consolidation going on.

It’s really tough to build a chip company. With a software business, I think it’s still pretty good. It’s good to get to revenue and initial growth. It’s hard to scale on enterprise software beyond that because the established players are so big with the big companies that, getting channels to market and getting access to those customers is tough.

Mason:      Talk a little bit more about that with the operations piece. Going through rapid growth, focus more on the operations.

Patrick:     As a CEO, you have to go where the problem is, even if it seems like the minutia. I remember a situation in Entropic. We were ramping our business. Our suppliers didn’t believe our forecast. Our forecast ended up being under the actual volume requirements.

We were constantly on the phone with TSMC, which was our big chip supplier and Amcor, our packaging supplier. Amcor had this problem where we couldn’t get enough substrates. It’s the thing that they put the chip on top of before they put it in the package. First, my operations guy got on the phone with them. I said, “Who is the substrate manufacturer?” They said, “I don’t know. We have to look it up.” They looked it up.

I said, “Tim, let’s get on a plane and meet these guys to see if we can get more substrates.” We showed up at this place. They had never seen anyone like us. We were like gods to them, they were so far down the food chain. They had never met people who actually sell the products. We said, “We have this problem. Can you help us out?” They said, “Sure.”

The problem was solved in a week. Whereas, if we had just dealt with Amcor, it may not even be solved today. You have to jump on those things. You have to say, “Where is the pain point and what does this mean to my business? Where is this causing a problem?” It might seem stupid to go on a 14-hour flight to meet with your supplier’s supplier, but sometimes you have to do that, if that’s where the problem is. It’s the same way with customers.

Maybe they’re a midsize customer, but they can destroy your reputation. You have to go out and meet with them, find out what the problem is and give them face time. I’m a proponent of giving updates even when there’s no update. I get on the phone with a customer.

They’re so upset, so I get on the phone with them the next day. I say, “I just wanted to update you that we’re still working hard on it. We don’t have a solution yet but we’re focused on this. We’re going to solve this problem.” It’s not even an update but it makes them feel better because they know that I’m thinking about them.

Mason:      What about diversification of your product? Do you worry about product line diversification as opposed to having more focus on a second version of something that’s coming out in an iteration?

(We are talking about managing rapid growth.)

Patrick:     That’s a big topic. As an early-stage startup, I am not a proponent of going after these large, horizontal markets where you’re going to have 1% to 3% market share in this multi-billion-dollar market. I don’t think you can win that way. I’ve never seen a company win that way.

I think you have to carve out a target product market segment where you can have a dominant position. Get 100% of the market share and then maybe end up with 70% or 80% market share over time. Then island hop and get into adjacent markets or adjacent products over time. Build off that base.

When do you make those hops? It’s when the baby is not going to die anymore. You don’t have babies and toddlers that need caring and feeding every single day. They’re like teenagers. You still need to watch them like a hawk but you can have more babies and do other things. It’s hard for someone who is a great parent.

If it’s the first time you’ve raised children or started a company, that can be really challenging. That’s why I think Broadcom was very successful. When they did acquisitions, the CEOs of those companies stuck around.

The Henrys incentivized them, did the right things and let them run their own show. He was in everyone’s face, but at the same time, he had very capable managers who were running those adjacent product lines.

Mason:      Talk a little bit about that. I’ve heard you say before that building companies is a team sport. As you start to bring on additional people to raise these children, how do you think about doing that and keeping the culture the same?

Patrick:     I think it’s like the schizophrenia of being a startup CEO. You want to spend and invest a lot, but you also want to be frugal. You want to give your employees a lot of room to operate but you still have to know the details of what they’re doing.

You have to be in the details. There is that delicate balance. When people say, “What is your management style?” I say, “It’s situational.” If the house is burning down, I’m grabbing a bucket and hoses. We have to put this fire out. Whereas, if you’re building houses, it’s a different type of management.

It depends on the people. Sometimes it depends on the people on a certain day. Maybe Bob is like this on Wednesdays and then Bob is like this on Fridays. You have to manage him differently depending on the day of the week.

As you go higher up in management, instead of first-line management, you don’t run into those problems as much. I was a first-line manager for seven years before I became a manager of managers. You see all sorts of crazy stuff. You just deal with it and figure out what works and what doesn’t.

Audience:  We’re very small. There are three of us. We need to hire or bring on some people. What I tend to find is, I spend all this time training them and doing stuff, and then they don’t really do it. How do you realize when you’re better off to do it yourself or when you’re better off spending your time training people who may or may not work out?

Patrick:     There is this old joke. If you point the finger at someone, there are three pointing back at you. Is this a consistent problem? If it’s a consistent problem, is it you or is it them? That’s hard for me to tell. Are you not letting go?

Audience:  We’re small and we’re scrappy. You pay people in commission. They’re all gung ho. They tell you they want to do this. Then they waste your time. I say to everyone, “Please don’t waste my time.” I don’t call people if they don’t call me back. At what point should I just keep doing it myself?

Patrick:     You have to scale. When you’re scaling the company, you have to say, “What are the skill sets that I need to bring into this company? What do I need to get done?” Work backwards from that. Is this part of my differentiation? Is this part of my sustainable competitive advantage? Is it part of my unique value proposition?

If it’s that type of core competency, you hire a person. You find the right person who has that skill set. You bring them on board. Hopefully, if you’re a small company, they don’t need a lot of training. They might be a bit of a mercenary. Hopefully you’re able to hire for culture a little bit.

If you don’t hire for cultural fit with the ability to work up the team, you’re going to end up with a bunch of psychotics. Then you have 100 of them. Then you’re out of control. That’s most companies. When I’m interviewing executives, I meet with them at least four times, plus talk to them on the phone. I meet them at dinner. I meet with them at breakfast. I do something else.

I think, “Would I put this person in front of a customer?” I want to see how they are and if they’re someone I can work with. I need to be able to work with people. I’ve been on management teams where there are brilliant people but they hated each other. There was back biting. It was insanity. It wasn’t any fun.

Audience:  I do workplace culture and efficiency. In that case that you were talking about, what do you do in that situation? Who can set people straight and help lead the team better? You need to make sure that money is well spent, time is not wasted and that there’s no drama. People need to communicate. How do you work through that?

Patrick:     I’m not a huge believer in cultural change, especially for large companies. With smaller companies, maybe there is a chance. A lot of it is what the CEO and management team does, not what they say. People are watching your feet more than they’re watching your lips.

If they truly want to change things, they are in enough power and authority to make changes. I remember at CQ Microsystems, there was a big problem in our consumer business. I was running corporate strategy. The CEO said to me, “Can you jump in and help with this?”

I said, “I really don’t want to.” He said, “I want you to do it.” I jumped in and it was a mess. I had a 40-person team. You can’t fire 20 people. You won’t get any work done. You say, “This person is good but they should be in this role. This person is a disaster so I have to get rid of them.”

Over a year and a half, I cleaned it up. We went from 40 to 30 and we were much more productive. You can’t expect short-term fixes. It’s a process. It’s not an event. It’s not like I lay my hands on the company and it’s magically healed. I’m not a faith healer. This is hard. All of it is hard.

Like I said, I’m a grinder. I’ve never been in one of those positions where it was easy. I see over the horizon that we’re going to have a problem, so we have to solve problems to avoid some of the things that are coming down the road.

Audience: I feel like I hold back. It starts to move and I think, “We don’t know what we’re doing.” Is that normal? You see it launching and you hold back.

Patrick:     The unknown is scary. Maybe you feel, “I don’t have the skill set to do that.” Then get a mentor. Get someone who is a guide by your side, who has been through that, knows your business and does that.

That would be the best advice if you asked what I would do different. I would consciously develop mentoring relationships. I’ve been very fortunate that I’ve had some really good mentoring relationships that have just happened in my career.

Seek out the right people that you trust and respect, that have traveled the path before, that you can have a good dialogue with. I’m not everyone’s cup of tea. Having a mentor that doesn’t like your variety of tea is not a good thing. How are you going to deal with someone like that? You want to be able to listen to them and trust them.

Get in a mastermind group. Get in a group of likeminded peers and individuals. Get in an accountability group of six to eight people where you meet on a regular basis, at least once a month. Go through your business plan. Bounce off your business ideas. Do things like that. That can really revolutionize how you think and how you do work.

Mason:      Thank you, Patrick.

(We have been talking about managing rapid growth.)

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

Prepare Early for Due Diligence or Risk Your Startup Funding and Exit

Prepare Early for Due Diligence or Risk Your Startup Funding and Exit

In this expert panel session about Due Diligence at the 2017 San Diego Startup Week, the panel discusses the importance of due diligence in an M&A transaction and raising outside capital. We cover many of the key elements in due diligence, the process, the tools, and when to prepare for certain aspects of the due diligence process. The moderator of the panel is Jeremy Glaser, partner at Mintz Levin and co-chair of the firm’s Venture Capital and Emerging Company Practice Group. Panelist include Brent Granado, General Partner at Sway Ventures, David Crean, General Partner at Objective Capital, Patrick Henry, CEO at QuestFusion, and Walt Tendler, CFO at Mission Ventures.


 

Jeremy:     Thanks for being here. My name is Jeremy Glaser. I’m a partner at Mintz Levin. I’m the co-chair of our Venture Capital and Emerging Company Practice. I help companies raise money. I help companies buy companies. I help companies go public. I help companies get sold to turn you all into multi-millionaires. That’s always our goal. Thank you for being here. I’m going to ask the panelists to introduce themselves.

Brent:        I’m Brent Granado of Sway Ventures, a venture fund that was founded four years ago. We have offices here in La Jolla as well as in San Francisco. We invest specifically in software driven technologies.

David:       I’m David Crean with Objective Capital Partners. I’m one of the managing directors. I’m an investment banker. What does that mean? I sell companies. I buy companies. I help companies raise capital. I do some strategic advisory. I also do some licensing in partner. I specifically cover healthcare and life science but you can apply a lot of the same ideas to technology.

Patrick:     I’m Patrick Henry. I run a few different companies. The most recent here in San Diego was Entropic Communications. I joined in 2003. We took it public in 2007. We weathered through the downturn eventually building our valuation. I also do advisory work for emerging growth companies. I recently wrote a book called Plan, Commit, Win: 90 Days to Creating a Fundable Startup that you can find on Amazon, Audible and Kindle.

Walt:         Entropic is a chip company, right?

Patrick:     Yes, it’s a chip company.

Walt:         Who is the end user?

Patrick:     The cable operator. Basically, we enabled multi-room DVR. We have a chip that allows you to use the TV cable as a high-speed streaming media network for the home. Before our technology was available, you could only have a DVR in one room. If you wanted to have a second DVR, you couldn’t watch the movies from one to the other.

Jeremy:     And this has become quite ubiquitous now.

Patrick:     Yes. It’s in 70% to 80% of US homes.

Walt:         I’m Walt Tendler. I’ve been the CFO of a bunch of life science and tech companies. Several companies in San Diego. Three things typically happen. You get acquired, you go public or you go out of business. There aren’t that many that go public. That’s also why I’m switching from job to job. I’m not always chased out. I spent nine years working for two different venture firms.

I’ve been on both sides of the board, presenting to the board and as an observer-director for a lot of companies. I’ve drafted about 40 term sheets, which is not in the tool set for the average CFO. That was from the venture side.

We worked with Cooley at the time, which is where I met Jeremy. Cooley gave us a template. But for the terms that we wanted in the deal, participating preferred, follow-on rights and those kinds of things, we knew what we wanted at the early stage. It wasn’t just the lawyers doing it. It was us setting the terms.

I’ve seen this game before. We’ll try to explain to you why. I’ve seen a lot lately young CEOs that are really good with technology and companies, who deserved to run their company, but they don’t know what they don’t know. If you’re successful, you want some infrastructure and understanding of what someone will look for when you’re raising an institutional round of money.

What will someone look for when they come to acquire you? What should you look for if you want to make a small acquisition of a company? Sometimes you’re tying an anchor to your leg and you don’t know it. These are the kinds of things. As Jeremy said, it’s hard to make it exciting. As some of my fellow panelists will point out, it does get exciting in a bad way from time to time.

Jeremy:     Walt, you did a great job outlining where to deal with these matters, the different transactions. Brent, tell us a little bit about the cast of characters that will be involved in this process. It can be quite large.

Brent:        There’s generally a very large swath of individuals that are involved in this. The one thing that I would point out as we start off this diligence conversation is understanding that diligence starts the moment you meet the investor or the buyer. In that case, I’m reading everything you’re doing. I’m trying to figure out whether or not you know your business very well.

That comes with some general questions and then we move down the pathway. Your pitch is the start of the diligence. If you get past that, then it gets deeper. The players can be lawyers, the investor, yourself, CPAs and investment bankers. We have technical diligence folks that are involved as well.

On the engineering side, they will come in and take a look under the covers to see if what you’ve built is legitimate. It’s sometimes hard to tell depending on the technology. That is also stage dependent. If you’re really early stage, it’s an easy look. If you’re later stage, it takes much longer and can be quite a bit more painful.

Jeremy:     It’s a detailed process. There are a lot of different players looking at lots of different things. It needs to be structured and organized. Patrick, in your book, you talk about the importance of being structured and having a process in place so that they can manage it as opposed to react to it. Can you talk about the importance of having a process? Tell us a good story about where it didn’t happen and how much fun that was.

Patrick:     Most of my experience has been in raising money and buying companies, not as a banker, but as an acquirer of technology companies, especially with Entropic and CQ Microsystems. I’ve bought about 10 companies total between those two companies. There were a lot of M&A transactions. As was mentioned, the due diligence starts when you have that first conversation.

Some startup CEOs are so guarded with the information that you can’t have a conversation. You don’t have to give away the secret sauce but you have to get into a situation where you’re willing to show some transparency. It’s not necessarily the “how” but the “what” you do. Jeremy and I have done some video blogs around whether or not investors will sign a non-disclosure agreement. They traditionally won’t.

Maybe if they’re getting into the hardcore due diligence and they’re starting to look at the technology, but even then, probably not. You have to learn how to share information in a way that you keep people interested without giving away the secret sauce.

Another example was when we were selling Entropic to Max Linear. The companies knew each other very well but there was still, “What are your key milestones? What’s happening in the next quarter.” There is that measuring period. Anytime you’re selling a company, everyone says, “Is there something wrong? What’s wrong here? Why are you selling it now? Why are you raising money now?”

There are always these questions. We need money so that we can continue to grow. We need to scale up because we have complementary technologies. Together, we can do something bigger. Those are some examples of things that typically happen.

Jeremy:     I have a question for the audience. How many people have raised capital from outside investors? That’s good. Of those who raised your hands, how many of you did any sort of due diligence on the investor? Very few. By the way, don’t feel bad. That’s very typical. We always focus on diligence as someone looking your company, doing diligence on your company. But it’s really important to do due diligence on the investor. David, do you want to talk about that a little bit, how to go about with due diligence on the investor?

David:       Yes, that’s a two-way street. Not all money is green. You have to understand what they’re going to be asking for in return. For some, it’s $1 million for a certain share in the company along with other things. That’s very different from your non-sophisticated investor. That’s what I call dumb money. Do your homework.

They’re sort of giving you a colonoscopy and going through all of your information. Do the same thing on them. You are then showing that you have active interest in them as an investor or team member. You’re inviting them into your shop. Do your homework on them. It shows that you’re actively interested and you care about your business. It’s a lot of great planning.

We talked about transparency. Planning is really important. It sends a message to the investor. They will think, “This guy is really serious. This is not just some really smart guy with a biotech or technology company. He actually cares about his business. He only wants to invite in the best.”

Brent:        My favorite CEO that I’ve ever dealt with was the one who put me through the ringer on diligence. “I want to meet the other companies that you sit on the board of. I want to talk to other investors that you work with. How do you work together on the floor? What’s your exit plans? Can you help me raise money?” It was things like that.

Jeremy:     Walt, do you want to add anything about diligence and investors?

Walt:         No, I think we covered that. It’s a two-way street. You don’t always have the power. But if you do and you can be selective, it’s a long-term relationship.

Patrick:     Especially if they get a board seat. It’s important to know who you’re working with.

Jeremy:     There’s so much information that’s available to you, especially online these days. It’s amazing to me when people don’t do their due diligence. I’ll tell you a story. I won’t name any names. I had a client that was a very large investment fund. They had their money with a bunch of investment managers. They did not have a good diligence process.

I came in asking questions. As I was sitting in their office, I jumped on the NASD website and immediately found this investment firm that they had a lot of money in that had a lot of serious problems in the past. They had never even done that. When someone is going to be putting their money into your company, especially today, there are rules that the FCC put out called The Bad Actor Rule. You don’t want someone who is a “bad actor” to be an investor in your company or on your board. You should never take money from anyone without doing the minimum of a Google search. It’s amazing to me how often people haven’t even done that.

David:       I would extend that beyond just investing. If you’re raising direct or capital through debt financing. If you’re talking about strategics. If you want to do a deal with someone in your space or industry, whether it’s a licensing partner deal or through M&A. Do your diligence on them.

Why is this the right product or technology? Is this in the best industry of your company and shareholders to give it to Company X? Would it be more advantageous in terms of maximizing asset valuation to give it to someone else? Understand why you’re reaching out to them, understand what’s in it for you and for them.

Jeremy:     How many people in the audience are angel investors? The investor is the one doing a lot of due diligence on a company. I want to turn the focus so that you understand the investor’s mindset when looking at a company. Walt, let’s start with financial diligence. What is the investor going to be looking for? What does the company need to have ready?

Walt:         We’re talking about raising money, which isn’t quite the same procedure as when you’re selling the company. They want to know that everything is in line. What does that mean? To me, it’s obvious, but I’ve lived it for over 20 years.

Do you have agreements with all of your employees? Do you understand your cap table and what everyone owns, or thinks they own, in the company? Is that clean or are there questions? Are you organized? Are your financials current? Do they make sense? Can you explain them? Do you know the things that drive your business?

If you’re going to raise money, how are you going to use that money? How much do you need to get to an inflection point where you and the investors can then command a higher rate for the next round of financing? These are the kinds of things that you need to look at.

Jeremy:     Do they need an audit?

Walt:         Not necessarily. In the old days, I put together about 20 different loans from banks from Square 1 to Silicon Valley Bank to Republic. Whenever you had a loan agreement, it was nice because you had some money that you could use. I’ll give an example later where we had to use that money as our last runway before an acquisition to pay payroll.

One of the things the lenders often require now is that you have an audit. An audit is expensive. I started life as an auditor. It’s not necessarily of great value early in the life of the company. It depends. You may need to have one afterward, depending on the investor requirements. Yes, later on.

Jeremy:     You touched on projections. David, do you want to talk about projections, how they’re put together and how an investor will poke at those? I’ve sat through a lot of pitches where I’ve watched investors ask very specific questions about the projections, and you want to have the answer right there. If you’re not sure, don’t lie.

David:       It’s really important, not only from an investment standpoint but also looking at strategic companies. They say, “Thanks, you just showed us two or three years or your financials, your P&L, your balance sheet and cap table. That’s looking back. Now let’s project looking forward.” That’s going to start setting the table for valuation. We’ll get into this discussion about the pro forma.

What do you anticipate this technology, drug or device to look like in three to five years? You have to make some reasonable assumptions. You can’t fault the conclusion but we always go down to the assumption. People are going to chip away at your assumptions. How can you tell me that you’re going to get 30% market share? Get real. Do your homework.

Put forward a reasonable pro forma of about three years. What does this look like, looking at the competitive headwinds? That’s really important. It’s something that investors will look at. VCs look at it constantly. They’re going to say, “Are you kidding me? You’re telling me you’re going to take this much market share? It just doesn’t make sense. You have better technology out there.” Maybe there is a specific niche that you’re going after. Put forward a reasonable pro forma with solid assumptions. We’re going to whack away at the assumptions.

Nine times out of ten when I’m representing a client, I’m selling the story. If I don’t believe in it, I’m going to have a really difficult time trying to sell your story. Do a good job. Hire the best if you have to, in terms of market research. Work with your CFO to make reasonable assumptions on revenue growth and cost of goods. Make sure it’s reasonable.

Jeremy:     I need Patrick and Brent. Patrick, I’m going to have you play the role as investor because I know you’re also an investor. What are the business issues that investors look for? What are you kicking the tires on?

Brent:        I want to piggyback on the comment of the cap table. You want to understand who’s in your cap table and how you’ve designed it. If your law firm has designed it for you, you need to sit down and talk to them about that. I’m going to have a conversation with you about who’s on there and how you figured out the conversion to know if you understand your business.

The financial model as it relates, we see two to three years. Three years would be awesome. We don’t really see the third year much anymore. Defensible assumptions are beyond critical. Understanding the size of your market and the competitive nature that’s in it is important.

Recently, I’ve seen a lot companies that are not aware of their surroundings. I’ve been in meetings. I know that every one of you firmly believe that you are very different than what’s out on the market. But if I ask you who your competitors are and you tell me “no one,” that’s probably not good.

When you get under the covers and the diligence, I’m going to look at your corporate governance and see how you did your last round of financing, whether or not there were any out-of-the-norm preferences, whether it be for liquidation or [0:19:24.2] of the Series A or the Series C, other PIIAs, which are property agreements locked up with your employees. I can’t take the risk of knowing that you have a bunch of engineers working for you but they haven’t dedicated their IP to the company. That’s a major issue.

Jeremy:     I want to underline that one million times. From the moment you form your company, every person that comes into your company has to sign one of those. If you don’t, going to get them and filling in the gaps is a nightmare. It is the Proprietary Information and Inventions Agreement. They’re saying, “Everything I’m doing here belongs to the company. I’m not going to walk away with my technology.” It’s really important.

Brent:        I think that’s in relation as well to advisors, too. They sometimes get left out of the scope. The reality is, there is some value that’s being brought to the table by them as well, so you want to lock them up.

Jeremy:     Patrick, why don’t you talk about some technology reviews?

Patrick:     This is what I get about 90% of the time. Whether it’s the executive summary or the presentation, it is very product focused. It’s 35 or 50 slides that you couldn’t read if you were in the back of the room. It’s way too much information. A good investor presentation is 10 to 12 slides.

When you get into detailed due diligence, you have a cap table. You have your financials. That’s supplementary to the presentation. An executive summary should be one page. They are trying to shove way too much information, and the wrong information, into it. It forces the investor to parse through things, which is more challenging.

Have a one-page executive summary. Have an elevator pitch. Have a presentation, maybe two presentations. One is a deep dive and one is more straightforward. Instead of spending 90% of the time talking about the product, spend 20% of the time talking about the product and 80% of the time talking about the business.

Once an investor understands what the product is and what it does, it’s really about how you make money. How you make money is how I make money. They are the same types of questions. What’s the market? How is it growing? How are you addressing it? What’s the competitive landscape?

Who are your customers? Do you really understand your customers? What problem are you solving for them? Is it an urgent problem where they’re in excruciating pain? They’re waiting for someone to solve this problem and your solution alleviates that pain.

Do that in a way that people can understand at a visceral level. I’m more patient than most VCs. With VCs, it’s short attention span theater. If you don’t have their attention in the first five minutes, they’re looking at 200 deals and investing in three. You need to have this stuff at your fingertips and understand your business.

They want to know that you understand your business. This is how we make money. These are our customers. These are our competitors. This is how we have the competitive advantage. You will never get to due diligence if you don’t do that part first.

There are a lot of entrepreneurs who don’t do their homework in terms of really understanding their business model. I met with a consumer products company about a month ago. It was like a coffee conversation. They didn’t have slides. We just talked. They said there was no competition.

I looked on the web afterwards and there were about 25 better capitalized companies than this company. Either he didn’t do a good job explaining why his product was different or he’s incredibly naïve in what he thinks his product is versus the competitive landscape. At least do simple things like a web search on your product. If other products come up, you need to be able to explain that.

Brent:        I have one other item. It’s customers. One of the things that most people don’t truly appreciate is when we say, “Can we get three customers to talk to?” A lot of entrepreneurs freak-out about it. I understand that they want to protect the relationship, so they’re very hesitant on making that relationship.

At the same time, you need to understand that your customers know that this is coming. It’s a relief to them to hear that someone with a piggybank of dollars wants to put it into your company. It means that you’re going to be around much longer to service their needs. Don’t be so afraid to make that connection.

Patrick:     Prepare the customer for the call. There are many times where I will get on the call and the customer says, “Who are you?” Tell them, “This person is going to call you. These are the types of questions they will ask. This is my relationship with them. Answer as honestly as you can. We’re trying to raise some money, so try to be nice to us.”

Jeremy:     Here is a quick summary. There will be legal due diligence. There are contractual relationships. Do you have things well documented with employees and consultants? Do you have contracts with your customers? You need to do your financial due diligence.

You need to have all of your financials in order including cap tables. Most investors will take a deep dive look at your technology and will want to understand it, particularly around the IP protection. There will be a strategic fit review with the industry. They’re going to look at your management team. They’re going to do due diligence on your backgrounds.

They’re going to make sure you all work together and understand your history. They’re going to look at your different partner arrangements. If you’re in relationships, they’re not only going to look at your contracts, they’re going to look at the substance of those agreements.

Are they profitable? These are things they will want to retain or change after they come in. They are going to look at your sales pipelines. All these things are involved. As you can tell, it’s a very complex process. That’s going to be done whether it’s an M&A deal, a small angel round or a more institutional arearment.

Let’s turn our attention to M&A. We’ve mostly been talking about investors. Patrick, I know you’re a big fan of helping companies understand and let the diligence trickle out. Talk about that process. You’ve been through the M&A process quite a bit. David, you can jump in there, too. Between the two of you, you’ve bought and sold a lot of companies.

Patrick:     If you’re dealing with a strategic investor or a potential acquirer, it’s a different relationship than you have with a venture capitalist. You should have a non-disclosure agreement. Do not sign a form NDA from a large company without reviewing it. They can put things in there like residual melt.

Even if you write something down but they didn’t write something down, and they remember what you said, that doesn’t fall under the NDA. Have a good attorney that helps you review that stuff. Sometimes you don’t always get everything you want.

That means you have to be more cautious about how you talk about things. You can talk a lot about the “why” and the “what” without the “how” to get people interested. That gets to the market. That gets to the business opportunity. This is what we do. These are our customers. This is the problem we’re solving. You have to share some information.

You should do it under the context of an NDA. Even if you have an NDA, you should still be careful about what you share with someone that is a potential competitor. They’re ripping you off, but they’re doing it legally. I see big companies do this all the time.

They’ll get on an advisory board with a board observer seat. They’re basically collecting information to see if this is a market they want to get into, not necessarily to buy you, but to say, “We can duplicate this ourselves.”

At the same time, you can’t be like the CEO that I was talking about earlier. We tried to do a deal with her for two years. Every time we met, they were holding the information so close. We said, “Can you share a little bit about your roadmap and where you’re going?”

There was no ability to engage. You have to walk a delicate line and say, “In order to get some interest, I have to show them some information.” As you get deeper into the relationship and it looks like there is the possibility that you could do something with them, then you can share more information.

There are two types of NDAs. One is the general NDA. When you get into due diligence, there is a special NDA around that, around not recruiting each other’s employees. That’s another thing. They can come in and suck the braintrust out of your company. They could say, “These are the three people that are amazing. We’re just going to hire them and gut out the company.” I’ve seen that happen before, too. You have to be careful on how you share that information.

Jeremy:     Those are really important points. Just because you signed the NDA with a potential acquirer, especially if they’re a potential competitor, it doesn’t mean that you give them access to everything in your company. They’re going to ask for it and try to get it. You have every right to tell them, “No, this is what we’re going to talk about. I know you need to see my gross profit margin.” Trickle out the information enough so that they don’t walk away.

David:       When I start thinking about M&A, I have two mindsets. One is with private equity firms or VCs where I might take a different approach. If I’m talking about strategics, I like to sit down with the management team and say, “Tell me about your technology. What is truly proprietary here? What is a trade secret? What don’t I want to give away to a close competitor?”

It might be a formula or something to do with the manufacturing. It’s something you do that’s truly proprietary that no one else knows. I’m going to withhold that information. I’m going to be transparent. I go out in a very structured process. I’ll go out to 200 buyers all at once and try to get under NDA. I’ll try to get them to a letter of intent, an LOI. I may not give that proprietary information to everyone until I decide that I get to see the LOI. Then I’m going to give them access to that trade secret. I’m going to say, “You have 45 days to firm up your interest.” Now only one competitor has it, not 10 or 15. That’s the way investment bankers like to do it. It’s a very disciplined, controlled process. Only give out that information to the final one.

For example, I worked on a very well-known molecule called Botox. We used to support that business. We were doing a deal with six Japanese pharmas all at once. I took all six to the end zone. This was on a Thursday. On a Friday, I signed the deal with GSK. This was for the Japanese and Chinese territories. There is all that information and I let it out to GSK after I decided the other five were out.

They fell out for diligence and clauses in the agreement that I couldn’t live with. I gave away that final bit of information on Friday morning. I said, “You have two hours to take a look at it.” They signed. The other five didn’t ever see that information. That’s a technique that you can use, especially when you have a hot asset. You have to control that process. That was with strategic buyers. With VCs, you will have to be very transparent.

Jeremy:     I want to share a horror story while we’re talking about strategics. I had a client that was a medical device company. They were in deep due diligence with a very large medical products company. They were doing a deep dive on the technology. It looked like the deal was going to go, and then the deal died.

Lo and behold, within a relatively short period of time, this very large medical device manufacturer started producing a competitive identical product. We had an NDA, and we even had patents. Guess what? It was a little, teeny startup. How much does it cost to sue great bit, behemoth medical device company for breach of NDA agreement and a patent? It would be at least $1 million. They didn’t have the money.

It was really hard to find anyone to take it on a contingency. They were not able to. The company ended up going out of business. The big medical products company owns the product. That’s a real story. That can really happen. What David and Patrick are sharing with you is really important. Make sure you’re only sharing the most important information when you know you have a deal. You can’t take that risk. Even the agreements, and patents sometimes, won’t protect you because you can’t afford to enforce them.

Patrick:     It’s different around the world, too. There are different countries and different cultures. This is something that you have to be aware of. You have to go into things with your eyes open.

Audience:  The next level of the horror story. Two companies up in Foster City where all the life sciences are in discussions over lunch. They’re in due diligence. They went to lunch together. The founder talked a little too freely. That evening, he was information that a patent application had been filed by the guys on the other side.

They picked up just enough from the free discussion to say, “What a great idea!” They ran out and, because they had the resources, that day, they had a patent application filed. It was trade secret in the startup.

Walt:         What we’ve talked about is good. It’s at the high level. To fish, you need a line, a rod, bait and fish. Let me tell you how this works from the inside of the company. I was hired by a company called Personal Logic that was funded by a really eclectic group of investors. We had an early web application.

If you wanted a dog, a car or a cruise, you could use our selector and figure out what was best for you. The technology was really good. It was a really useful decision guide. They brought me in when they raised Series B. They raised $7 million. On day one when I went in, I had been a CFO before.

I knew that this company was never going to go public. It didn’t have that trajectory. If it was successful, it would be acquired. I said, “How do I plan for success?” From day one of going in there, I said, “Does everyone have an offer letter? Are the offer letters the same? Does everyone have a personnel file? Are there any issues with personnel? What about contracts? What about employee agreements? How about the benefits package? Is everything the same? Is everyone playing on the same level field?”

This is law in California. The CEO can’t have one package with a small company and the other employees have another package. Are all of these things in order? I’m doing this every day during my job. Do the financials come out on time? Do they make sense? If I gave out financials from last year and this year, do they track? Would someone see a coherent picture of the company if we had to do due diligence?

Lo and behold, we had a whopping $500,000 in income two years later with 37 people in the company. That’s not exactly break even. We’re close to being out of money. We’re running on fumes. I have a billion-dollar credit line from a venture financer that took some warrants.

Unlike the banks, they would let me borrow on one. Banks will loan you $1 million if you keep $1 million in their bank. I talk to so many bankers. I have $1 million from a venture financer. We were down to our last 50,000 and our last payroll. AOL came in with an offer over Memorial Day weekend. They were acquisition hungry. They sent a team in from Virginia.

I had everything in order, like the financing, the cap table and the employee agreements. Who are the key people? A big part of the deal was that they wanted the nine people who would guarantee they would stay for a year afterward. I had that all laid out.

Four days later, we went out for drinks. They said, “This was the cleanest due diligence we’ve ever done. Everything was ready.” I thought, “Yes, I didn’t have money to make the next payroll.” But I knew when I started that clean is better. That’s how you want it set up. A lot of young companies don’t understand how important that can be. If you can make payroll, you can still control the negotiation a little bit.

As soon as you can’t make payroll, I can’t say, “AOL, can you loan us $100,000 to make it to next week?” Your negotiating level is gone. From the inside, you want to make sure that someone is taking care of the planning for success. AOL made the acquisition for our half-million dollar a year company.

We got AOL stock worth $30 million. At the time, I was flabbergasted. It was before the internet startup days. Now you see it more often. That was a big deal because AOL tripled in the next year and we were locked up on that stock. You plan for success. You are an “overnight success” after four years of hard work. The same thing goes for a clean company. You’re clean for due diligence when you plan for it for two years.

Audience:  Because you brought it up, doing due diligence, these kinds of issues come out when you have only one or two weeks left to make payroll. Wouldn’t the potential acquirer use that information against you as a leverage point?

David:       Absolutely.

Jeremy:     And the investors, too. That’s why we tell companies not to run out of money.

Walt:         We had deep-pocketed investors. They didn’t want to write another check.

Patrick:     I’ve been in a situation where we were going to buy this company. We went through the process of the proprietary invention agreements. There were three contractors that had worked on a key project. The company didn’t own the intellectual property, so we passed.

We were ready to do the deal. When you start a company, what we call a lifestyle business where you’re going to grow a small or medium-sized business, you’re not going to have an exit. You’re going to have a cashflow business. They’re great businesses. Most of the economy is based on those kinds of businesses.

But you don’t raise outside capital for those. If you raise outside capital, the intent is to either sell the company or go public. If you’re going to do that, you need to have these things in place or you will get to the point where you’re ready to do a deal, and something is going to blow up. Maybe you can recover, and maybe you can’t. I came into a company that we had to sell. This was my second startup. It was a train wreck. Kleiner Perkins was in the deal. Connexum was in the deal.

They said, “We don’t want to put more money in. Can you sell this?” I said, “I don’t know.” We cleaned it up the best that we could but there was stuff missing. There were three employees that didn’t sign agreements. There were offer letters that were never signed. We were chasing people down, trying to get people to sign stuff so that we could sell this company. Fortunately, we were able to do it, but in many cases, as Jeremy said, you can’t get that stuff done.

Jeremy:     These are really great stories. We’re at a time period when it’s so much easier to do this right, and do it right from the beginning. David, talk about data rooms.

David:       If you have the money, spend time on an electric data room. It’s a great way of engaging financial sponsors or investors. It’s a great way of getting strategics involved. Now you’re reaching across either side of the Atlantic or Pacific. Everyone is looking at the same information.

You don’t have to send out a data package or an email and bulk up your servers. Everything is in one place. You’re managing it. Now I can control who sees what. That’s huge. It tracks things like, “Tom just touched this on this page. He sat on that document for 15 minutes.” Who else looked at it? It has “confidential” stamped all over it.

You can limit the ability to print. I don’t want people printing all of my stuff. I can control it. You can have it set to “view only” on the screen. There are ways of doing that. I am a big fan of it. I think it’s a great way of controlling the information. At the end of the day, I want you as the client or investment banker to control the information. I want it going through me.

I want to know who’s touching it and who’s seeing it. If I go out to 200 buyers, I don’t want to send all those emails out. I can’t control that.

Jeremy:     There are a lot of different options. I tell every client and every startup, from the day you start, we’re going to form your company. You have a certificate of incorporation. That goes into an electronic data room. Every single document, every time you sign it, every time it’s final, it goes into that data room. As you just heard, the investors are going to use it. The potential buyer is going to use it.

Imagine what Walt was talking about. Walt, I’m going to call you. Hi, I’m a founder. I just hired David. The buyer is coming in. They want to start doing due diligence. I need you. I need everything ready in a week. And you say?

Walt:         My rate just went way up.

Jeremy:     It could be done. There are resources, money, time and people killing themselves all night. But you will have mistakes. You’re going to find things that are missing. You’re not going to get them fixed in the time period. Don’t do that to yourself.

Walt:         If I came in, I have experience, and I’ve done this kind of thing before, I have zero institutional knowledge if I haven’t been associated with a company and working with you, I don’t know what I don’t know. I can’t possibly catch everything.

In the position that I was in with the company that was acquired by AOL, I should have known everything because I was there for a long time. And I did. If you hire a consultant at the last minute, it’s like saying, “Can you put up this house in two weeks because I’m going to have a party?” It doesn’t quite work like that if you’re building a house, even if you’re an excellent home builder.

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

Klyn Elsbury – The Untold Story of Success and Overcoming Adversity

Klyn Elsbury – The Untold Story of Success and Overcoming Adversity

Klyn Elsbury has experienced more adversity in her teens and twenties than most people experience in a lifetime. In this interview with Klyn Elsbury, the author of I AM___: The Untold Story of Success, we discuss her battle with cystic fibrosis, creation of an innovative company to recruit talent for companies, the writing of her book, and her new entrepreneurial journey into motivational speaking. Klyn is an amazing woman with and incredible story.

Klyn Elsbury the Untold Story of Success

In 2014, after being forced to quit her professional recruiting career due to excessive hospitalizations from complications of Cystic Fibrosis, Klyn Elsbury was confined to a wheelchair with her lung function plummeting below 40%. It was after a two-week hospital stay (just one of 5 that year) she set off on a six week road trip across the United States to visit friends and family she wasn’t sure she would live to see again. I AM _: The Untold Story of Success is a blend of raw emotion and inspiring wisdom. It draws a parallel between what it means to live as if every day is your last and what it means to create a highly impactful legacy through entrepreneurship and athleticism. She has since regained 30% of her lungs and currently lives in California with the love of her life. Together, they are the co-owners of Landmark Makers, a recruiting services firm dedicated to high-growth companies that offer workshops and recruitment services nationwide. Her story has been featured in numerous publications including Manifest Station, Zumba blog, and she has appeared on several shows including KPBS, NPR, Connected Women of Influence, and NBC Nightly News with Lester Holt. She is a nationally recognized speaker who will be presenting for the Entrepreneurs’ Organization at Alchemy in 2017.

Patrick:     This is Patrick Henry, the CEO of QuestFusion with the Real Deal…What Matters. I’m here with Klyn Elsbury. Klyn and I are both San Diego locals, but we hadn’t met each other. We have a mutual acquaintance and found out that we have a lot of friends in common. Klyn is from Iowa. I’m from Missouri. We know what it’s like to drive for hours and just see cornfields. A lot of good entrepreneurs come from that background.

Klyn is a successful entrepreneur. She’s built her own recruiting business called Landmark Makers. She has a very successful recruiting model. We’ll talk about that today.

She sent me a link to a speaking engagement for a SUE talk, which is like a TED talk. She talked about overcoming adversity with some of the things that she’s gone through.

In 2014, after being forced to quit her professional recruiting career due to excessive hospitalizations from complications from cystic fibrosis, which is a genetic disease, Klyn was confined to a wheelchair, and her lung function plummeted to 40%. After a two-week hospital stay, just one of five that year, she set off on a six-week road trip across the United States to visit friends and family because she wasn’t sure if she was going to see them again.

Take us on your journey. You went on the road. What happened at that point?

Klyn:          I wasn’t sure where my life was going to go, and if it was going to go on. It was all because there was this drug coming out that was thought to halt the progression of cystic fibrosis. When you’re born with something that’s genetic and a fatal condition, it’s almost a downward spiral.

This drug was thought to halt the progression but it couldn’t get approved. The price was $259,000 a year. My insurance didn’t want to pay for it. The drug manufacturer didn’t have any solutions for me. I was trapped in the middle, watching my health continuously decline.

That was what started the whole movement behind using my recruiting background and reaching out to people who I thought would be able to make a difference and help other people get access to the drug.

The journey started on the road trip to see friends and family. I had this idea of, “I don’t want to die. I don’t want it to be over,” but I didn’t know what to do. My back was against the wall. The only skills I had that I could pull from was reaching out to people, getting the message out there and seeing what would happen. When you have nothing, you have nothing to lose.

Patrick:     You were able to finally connect with Lester Holt and ABC Nightly News. You were on that program with him. Tell me about how that happened and the events that led up to that.

Klyn:          They reached out to me. It was Anne Thompson. She’s an Emmy award-winning producer. She’s a brilliant woman. She reached out to me and said she got a hold of the story, and wanted to know if I’d be open to doing an interview. I said, “Absolutely. Of course I want to do this interview.”

We kept having to postpone it. The last reason was because the Pope came to town. They couldn’t meet me because of the Pope. It worked out well because, by the time they could meet me, I was hospitalized again. They took the news crew all the way to the hospital. They shot everything in the hospital.

Within just a few minutes of it airing to 10 million viewers, the drug was magically pushed through. The paperwork was suddenly found. The manufacturer was suddenly willing to help. I’m not saying that I was the catalyst, but it was really ironic how everyting came together in the last 10 minutes of that interview. The drug was on my doorstep and on the doorsteps of up to 900 other people with CF in California within six days.

Patrick:     You were an activist of sorts. You really drove that thing. We talked about this off-camera. One of the things that’s critically important to you with your health is to exercise regularly. Maybe that doesn’t halt the progression of the disease but it keeps you healthy. Tell us about that. You were teaching Zumba and you were a personal trainer. What happened then?

Klyn:          It all started to funnel. At the time, I was teaching Zumba. I was training people but I was really bored. I couldn’t jump into a career because I had spent so much time in the hospital. The one drug that would help me wasn’t available. After the drug became available for me, I started thinking, “What else is out there?”

I wrote a book. “Habit” is one of the chapters in the book. Working out has always been a habit of mine that I think has led me to a level of health that I can enjoy. I deal with a lot of CEOs and entrepreneurs. If you’re not working out and taking care of your body then you’re not taking care of your mind.

If your mind isn’t sharp, then what’s happening to your company? I have always had a very healthy habit with exercise. It started to save my life. But I realized that exercise saves everyone’s lives. It’s not only if you have a condition.

Patrick:     The book is called I AM___: The Untold Story of Success. Pick this up. Is this available on Amazon?

Klyn:          It is.

Patrick:     I’m only halfway through it and it’s quite a read. I’m very excited to continue on with it. Klyn is an expert and specialist in the recruiting field and building teams. Team building is a foundation of building a great company. I talk about this in Plan, Commit, Win. If you’re a solopreneur, you can have a network of freelancers. Normally you have to build a team to build up a really big company. Talk to us about that and your unique approach on recruiting with Landmark Makers as well as how you help entrepreneurs.

Klyn:          I worked in an agency my entire recruiting career before I had to take a step back in 2014. I kept thinking that there had to be a better way to do it. It didn’t make sense that I was competing to send a bunch of resumes to a client. I was competing against my team and eight other companies. Naturally, as a salesperson, what am I going to do? I’m going to send you as many people as I possibly can, hoping that you’re going to pick one. Then I’m going to collect my fee.

I thought, “What if I come at it as if I work for your company?” Now that I’m working for your company, I get to know you. I get to know your unique situation. I get to know your company, the career itself, the leaders you already have in place and why it’s a place that people want to work.

Then I said, “Why don’t I find someone for that and create a customized process for you to do what I’m doing? If you never want to use another recruiting agency, you never have to. Now you’re empowered.” It creates a talent magnet for you, where candidates start showing up more.

They apply more so you have better retention with your ads. Then you have less turnover because everyone is happier. You’re getting the quality of people that you want because you don’t have to sift through 80 resumes yourself. That was how the idea was born.

It came out of what happened with the book. I started studying high achievers, entrepreneurs and CEOs. They all said that one of the problems in their business was finding the right people on their teams. That was something I had always done in my career. It just never clicked for me to take it to another step. Through the interviews and some of the stories that they told, it naturally had to happen.

Patrick:     Another key element that you cover in the book is overcoming adversity. That’s something that’s been a cornerstone of my personal life as well as my career. Some things are through my own ridiculousness. But with some things, adversity just happens.

Talk about that in terms of, not only your entrepreneurial and life journeys, but these interviews that you did with other successful people. What were some of their experiences and the commonalities in terms of overcoming adversity?

Klyn:          My adversity is spending most of my life in a hospital. I’ve spent more Christmases and holidays in the hospital than I have at home with friends and family.

Patrick:     You’re a living miracle. This is serious. Since you were a little kid, you knew that the end was going to be much sooner than most people.

Klyn:          Yes. I told you earlier off-camera, I dropped out of college because I didn’t think I’d live long enough to pay off the student loan debt. When you come to such dramatic grips with what your life means, you start to see patterns in other people’s lives, because we’re all connected.

I didn’t think my story was something worth sharing for the longest time. I love high achievers. I love entrepreneurs. I love CEOs. I love people in the investment community. They have these businesses. They’re a pillar of character for the community. They have these values. They’re authentic and genuine people.

Life happens. Let’s say that someone important on their team walks out or they had an expensive month and they’re not sure if they can float payroll. It’s that struggle. Through my interviews, I learned that we all have those dark days of our lives when we’re sitting on the floor. Maybe the lights are about to be turned off.

One guy wasn’t sure if he could feed his dog and thought about getting rid of him. I started thinking, “How is that any different from wondering if I’ll be able to feed myself soon?” I didn’t mean it as in to get food. I meant, am I going to need a feeding tube soon? His pain was real. He couldn’t bring himself to take that next step. Who knows how long he sat there on the floor.

I didn’t know if I could take the next step to get out of the hospital bed and start working out. It doesn’t matter the severity of the pain. It’s still real. It’s real for them in that moment. The book chronicles the deepest, darkest days of some of the most successful people out there. I said, “What was that deep, dark day?” Then I related it back to what a deep, dark day is like with a terminal illness. We all have that bond towards human achievement. That’s the real story. That’s what I wanted to encapsulate.

When you actively study human achievement, then you have to put what you study to work. You have to prove the idea. That was how my recruiting company was born. I took these patterns and applied them to real life. It all manifested and fed into itself. I didn’t have a business plan. I didn’t have the journey written out. It flew naturally together.

Patrick:     You run across so many people in your life, and everyone experiences adversity. When it happens, successful people seem to power through it. There is always a setback that puts you back on your heels. It’s emotionally difficult. You assess. Maybe you have some regret. Maybe you do some course correction. The successful people move on from that. They learn from it and move on from it.

Whereas, the people who are less successful or don’t achieve as much, it blows them up. Then it’s about blame. I hear people my age that are still blaming their parents for the way that their life is. It’s the craziest thing. I can’t comprehend that but it happens all the time, every day. In my twenties, I did a lot of personal development. I think the ability to take adversity and overcome it is really important.

When you were in the darkest days, what was the catalyst that made you move forward from that experience?

Klyn:          I’ve had about 100 interviews and I’ve never been asked that. I’ll talk about my darkest day. Before that, I was doing really well. I had a six-figure career. I bought a house at 23. For a college dropout, having a house at 23 and a six-figure career with a corner office was good.

I had to give it all up. I was watching my health decline. There was a point when I was in a wheelchair. I was visiting my family in Dallas, Texas. My lung function wasn’t high enough to fly back to California. It was too dangerous. I didn’t have insurance in Dallas. I didn’t want to be stuck with a $200,000 medical bill. I remember that we took my dog to the vet and said that he was sick so that we could get antibiotics from the vet that were affordable. The dog wasn’t sick. The dog didn’t take the antibiotics. It wasn’t animal cruelty, I promise. I just wanted the medicine so that I could hopefully get on a flight.

I remember taking phone calls from a couple of people. They asked what I was really working for in life. If I don’t stop digging my heels in, all the money in the world wasn’t going to mean anything. What is the purpose? What’s the significance? It’s not just the success.

I quit. I gave up. I initially thought, “I want to live in a mansion.” All the things that don’t really matter in life, I had to come to terms with that. That was what my life was about. How much could I keep up with the Joneses and impress everyone around me? How did my life look as opposed to how did my life feel?

On my darkest day, I remember sitting there and cashing out my investments. I didn’t know what was next. I had to go on disability for a while. I thought, “I’m 23 and I’ve lived everything. This is the end of the road.”

What brought me out of it was love, the one thing I didn’t think I needed. It was my mom, holding my hand. When you have 40% lung function, you can’t cry. When you cry, you cough. Then you’re reminded that you have 40% lung function and you keep coughing. It’s a huge ordeal.

My mom would sit there, hold me, let me cry and get out all the anger and frustration, and the pity party that we go through sometimes. At the end, she said, “Are you finished?” I said, “Yes.” She said, “Now what are you going to do with your life?” I said, “I don’t know.” She took me to the gym. That was probably the weirdest thing for a mom to do, but I think that’s what saved my life.

My dad was there for me. He’s a very loving man. He was there to coach me and push me. My entire life, I thought I had to live up to my dad’s expectations. He’s a successful sales guy, so I had to be a successful sales woman. But then I realized, when you get rid of the sales side, what is sales? It’s listening to someone else and helping them with what they want. All my dad wanted for me was to be happy.

When I got rid of all the stuff that I was trying to fill my life with, an insurmountable amount of love came rushing in. It came from friends and family. That’s what set me off on the six-week road trip. You come to alignment with who you are. That can lead to who you can be. That was what I learned the most. It’s the amount of love that’s out there, and I didn’t think I needed any of it. I thought I had it all.

Patrick:     There was this epiphany. You’ve recovered to a level where you can work now. You’ve restarted Landmark. You discovered this new potential journey that you’re on in terms of speaking engagements. Talk about that and the I AM___ journey.

Klyn:          I just love helping people. I love people. They’re fantastic. If you haven’t talked to one lately, do it. They’re wonderful. I’ve been very fortunate. I’ve had a lot of people reach out and ask me to speak for their corporations. I do day trips. I had a couple in San Diego where I spoke in front of their leadership team.

There is that business synergy there because I own a company now. I can talk about what it takes to create a high performing team. At the end of the day, the only reason a team is high performing is because of the love and emotion of the people on board.

I blend the stories of what it’s like to create a company from a hospital bed. I’m still hospitalized all the time. I spent 30 days in the hospital so far this year. It’s less than last year but it’s still something that I think about. Every time I cough, I wonder if I’m ready. It’s been too long. I blend a lot of what it takes to survive a terminal illness with what it takes to create a thriving business.

You wouldn’t think it, but there are synergies there. With that company, I’m doing the speaking gigs. I’m on podcasts. I’m doing book signings. I love it when people reach out to me on LinkedIn and say, “I read your book or heard your podcast.” I’m creating that awareness that I am a person. I want to connect with you. Everyone who has ever reached out to me has gotten a personalized response. I’m not automating that stuff. I want people to know that someone cares.

You never know where that person was when they decided to pick up a copy. It’s a heavy read. It made my boyfriend cry in the first few pages. To have someone read it, quote you and then reach out, they deserve that personal response. I think that love for humanity is why this brand is starting to take off and gain that traction. It’s new. It’s heavy, but it’s love. It’s also business.

Patrick:     So much in social media is just bots talking to bots. There are people who want to have a true human interaction, and be social on social media. We try to do that. I’m on Twitter. People are shocked that I actually talk to them and give them a personalized response. It’s the craziest thing.

There is so much truth in that. It’s about reaching people and touching them in a special way. There are people who have built incredible franchises. Tony Robbins is probably the biggest of late. He’s been doing it for a long time. More recently, you have Brendon Burchard doing the speaking thing.

Do you feel like you’re at a crossroads in your career with the recruiting versus being a circuit speaker? Are you balancing it? Are you not sure which way to go or are you going with the flow?

Klyn:          Even though it’s too distinct brands, I think they’re so closely related. It’s the same target market. It’s the same general feeling of finding high achievers, connecting with high achievers and introducing them to other high achievers. It’s very similar.

I don’t think it’s at a crossroads. I dedicate my time where there is the most amount of need that week. The great thing about having a team at Landmark is that they’re high achievers. What happens when you hire a bunch of high achievers? You get out of their way and let them achieve.

That’s freed up a lot of space to pursue this other side of it, which I’m starting to build out with other high achievers. It’s amazing what you can do when you put a bunch of great minds in a room. I’m equally passionate about both. I love both. Tony Robbins is a legend. He created this industry. I know that there were people before him, like Zig Ziglar, Wayne Dyer and Jim Rohn. These are the legends.

I was fortunate enough to hear Brendon speak at Alchemy last year. He’s a very talented guy. He gets it. It’s not that I want to be a circuit speaker. I want to go where I’m needed most and put out a similar message from both brands. Whoever identifies with it, they are able to capitalize on what they need the most.

Patrick:     I would go a step further and say that’s part of your unique value proposition. You bring that other part to the table. A friend of mine, Brian Smith who started UGG boots, a big part of his speaking engagements are related to his entrepreneurial journey. Talk about a grinder. He had to grind that out for decades. That’s what makes you unique to potential clients. You bring not only your personal perspective but the business perspective. It makes sense.

Klyn:          When we put a candidate in front of a client, we’re still putting a human being in front of a human being. I can’t just say, “You’re looking for a sales rep? Great. How many calls? You need 100? Great.” Instead it’s, “Why do you need 100? Where do you want your company to be? Why do you want it to be there? What type of personality traits are you looking to add to your team to get you where you want to be?”

Then you find someone who wants to work for a startup, a smaller company, and who has the same mindset. It’s more about the mindset. We say it’s a higher attitude and trained skills. The skills have to be there but we care about the attitude, the personality and the indications of a high achiever. That’s no different than what I speak about. I just talk more about the hospitalizations and creating the business despite the terminal illness. It has a very synergistic tie.

Patrick:     The team is the foundation for a successful company. It’s you and your cofounder in the garage. Most companies, as they grow, you have to build that team. I talk about this in Plan, Commit, Win. If you don’t hire for culture, culture will happen. It will happen in some way that you may not want or expect. Then it takes over on its own. Having that conscious awareness of what kind of team you’re trying to build, the ethics and structure are all important. Doing that consciously as part of the process of hiring is very important if you don’t want to wake up one morning with 150 people and think, “What the heck?”

                  I know that you will be speaking on September 16th at Alchemy from the Entrepreneurs’ Organization. Tell our entrepreneurial audience a little bit about that.

Klyn:          I’m very excited about that. I’ll be on the stage alongside Tony Hawk, Bill Walton and Chef Gordon. I’m excited to be at that level. It’s the same stage that Brendon Burchard spoke on. It’s really weird to see him and know that next year, I’ll be on that stage.

I know I’m supposed to have confidence. I do this all the time. The reality is, I think, “Are you serious right now? This is so exciting.” I was so honored that they invited me to speak. It’s going to be powerful. I want my slogan to say, “The best speaker you’ve never heard of.” I’m on a list with some pretty big people.

Here is my main focus. I’ve toyed with this idea so many different times. I want my life to serve as a reminder to help other people remember why they’re alive. When you think of that, it’s about creating a life plan the way you would create a business plan. We could all get hit by a bus tomorrow. We’re all terminal. I’ve heard it all and it’s true.

Patrick:     You have a different sense of urgency than most. It’s not only the way that you grew up, but going through that experience of being down to 40% lung capacity, that’s a wakeup call.

Klyn:          It’s a huge wakeup call and not many people wake up after that.

Patrick:     You think, “I’d better get my affairs in order.”

Klyn:          And we did. We went through the process of writing a will and getting an attorney. I went over who gets my investment accounts. Sometimes we get so distracted by the things that don’t matter, we forget what really does. My allotted time is 30 minutes.

In 30 minutes, I want to take the audience through a journey where they laugh and cry. At the end of it, they go home and become better whether they’re a spouse, a parent or a leader. I’m going to tie the personal side and the business side together, and how they can be the best that they can be while sharing examples from my story, from the book and from creating Landmark Makers. It will be a real, authentic human experience. It might be slightly above mediocre.

Patrick:     I think you’re going to be awesome. I’m very excited for that. We’re here with Klyn Elsbury. Her book is I AM___: The Untold Story of Success. It’s available on Amazon.com. Are there any parting words of advice for the entrepreneurial audience?

Klyn:          A bird sitting on a branch is never afraid of the branch breaking, because its trust is not in the branch but in her own wings.

Patrick:     I like that. How can people get a hold of you?

Klyn:          You can find me on LinkedIn.

Patrick:     Thank you so much for being on the program. This was fun.

Klyn:          Thank you.

Patrick:     This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters.

 

If you are interested in learning about the most important things in life and living your life to the fullest, you need to read Klyn’s book, I AM____: The Untold Story of Success.

Klyn Elsbury The Untold Story of Success

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

 

Raising Early Stage Startup Investment

Raising Early Stage Startup Investment

Interview with Rory Moore and Dr. Ron Reedy, Co-Founders of Peregrine Semiconductor

There are a unique set of challenges in raising early stage startup investment from family, friends, early Angel investors and strategic partners.  Most companies start with a bootstrapping phase from the founders of the company, but what happens when the founders that are ready to launch their idea but don’t have sufficient funds?

In this discussion with Rory Moore, the founder and CEO of EvoNexus, and Rory’s co-founder at Peregrine Semiconductor, Dr. Ron Reedy, we talked about the process of raising capital from friends and family, from early Angel investors, and from strategic partners.

Rory Moore was the seed round investor, co-founder of Peregrine Semiconductor Corp. (NASDAQ: PSMI), one of the world’s leading providers of radio frequency integrated circuits (RFICs) for the wireless communications and aerospace markets. Peregrine ships millions of chips every week to cell phone manufacturers around the globe. Rory was also the seed round investor and founding CEO of Silicon Wave, Inc., now owned by Qualcomm. Silicon Wave produced the world’s first Bluetooth chips. Bluetooth chips are now in billions of devices from cell phones to automobiles. Rory was a cofounder of e-Fire.com, Georg!a Now and Optical River. In 2009 Rory founded a pro-bono technology incubator called EvoNexus with Vice Admiral Walter Davis, a board member of CommNexus (now EvoNexus). A University of Michigan graduate, Rory continues to make angel investments in technology firms throughout the region. His other passions include unlimited aerobatic competition flying, scuba diving and surfing.

Ron Reedy, Ph.D. is an American businessman, scientist and researcher. He is most notably recognized for his work in the semiconductor industry where he advanced silicon on sapphire (SOS) and CMOS technology. In 1969, Reedy graduated from the United States Naval Academy in Annapolis with a BSEE. He then earned a MSEE degree from Naval Postgraduate School in Monterey. In 1983, he received his Ph.D. in EE & Applied Physics from UC San Diego. Reedy began his career at the NOSC (US Naval Ocean Systems Center) where he worked on silicon CMOS processing. In 1988, Reedy along with NOSC colleagues Mark Burgener and Graham Garcia published a research paper in IEEE Electron Device Letters that proved that SOS films thinned to 100 nm were suitable for application to high-performance down-scaled CMOS circuitry. It was with this advancement that Reedy decided to commercialize the technology. Their research findings were instrumental to the industry and have since been cited in 13 IEEE research papers and 58 patents. In 1990, Reedy co-founded Peregrine Semiconductor to commercialize the advanced technology. Peregrine became a fabless chip designer that was publicly traded on the NASDAQ until the company was acquired by Murata in December 2014 for $471 million. Reedy served as the company’s founding CEO and the company’s CTO before retiring in early 2015. Reedy now holds the title of CTO emeritus of Peregrine Semiconductor. Reedy sits on the Council of Advisors for UCSD’s Jacobs School of Engineering and its Gordon Leadership Center. Over the course of his career, Reedy has been listed as an inventor on dozens of patents,

Rory and Ron both have extensive experience in raising money for their companies and are also Angel investors themselves.  Some of the challenges and strategies for raising pre-seed and seed capital differ from the methodology outlined in my book, PLAN COMMIT WIN: 90 Days to Creating a Fundable Startup, but many are the same.  Some of the key topics we cover include:

  • Raising money from friends and family
  • Securing early Angel investment from key domain and technology experts
  • Working with strategic partners on operational issues for non-recurring engineering (NRE) revenue
  • Securing investment from strategic partners
  • Using early Angel investors to help with operational problems and partnerships
  • Transparency in dealing with private investors
  • Forming a board of directors

Check-out the interview for some unique insights and perspectives about raising early capital to launch and build your company.

Patrick:     This is Patrick Henry, the CEO of QuestFusion with the Real Deal…What Matters. I’m here today with Dr. Ron Reedy and Rory More. Both of them are good friends of mine and serial entrepreneurs.

They’ve held multiple C-level positions in multiple companies. They’ve been angel investors for a very long time. They’ve both raised a lot of angel investment money for some of their companies. They co-founded a company called Peregrine Semiconductor. They’re a wealth of knowledge.

I was on Rory’s board at EvoNexus. He was gracious enough to read an advanced reader copy of my new book, Plan, Commit, Win: 90 Days to Creating a Fundable Startup. One of the things that he mentioned was, the focus of the book is on your first institutional round of financing.

Once you’re past the bootstrapping phase and the friends and family stage, you’re ready to approach venture capitalists or very high net worth angel investors. There is a lot of work that goes into funding a company prior to that.

These guys both have a lot of experience with that. I thought it would be great for the entrepreneur audience to hear their perspective. Why don’t both of you give us more of your background and then we’ll jump into the questions.

Dr. Reedy: Rory and I go back to high school. We were basically juvenile delinquents. We have a long track record of getting ourselves into trouble. His parents always said, “You’re a smart guy. Maybe you’ll invent something. When you do, call us for financing.”

I didn’t know what that meant. I picked up the phone, called Rory and said, “I have this idea.” Rory said, “I’ll be over tomorrow. We’ll talk about it.” That’s how we got started on Peregrine.

Rory:         That’s true. Ron and I go back to the high school days. He went in the Navy. I went in the Air Force. We stayed in touch with each other. He ended up working at the Navy lab in San Diego, then called Naval Ocean Systems Center. He was running the microelectronics lab. I had owned some companies in Phoenix at the time. Ron indicated there was a technology in the Navy lab that had some commercial potential. But he needed angel money. He needed seed capital.

He also needed a co-founder. I signed up for all three. That got me to move to San Diego, found the company with Dr. Reedy and Dr. Mark Burgener, our third co-founder. That led to an exciting, new career for me personally. But it also led to reinventing myself as an individual, and ultimately to EvoNexus, the incubator.

Patrick:     Tell me about the original idea with Peregrine Semiconductor. Did it evolve over time? Tell us about the early years of the company.

Dr. Reedy: In hindsight, Mark and I had a meeting once. We both said, “We want to invent a new way to have a company fail.” That sounds idiotic. What we meant was, if it’s in a book somewhere, we wanted to learn from other people’s past experiences. If we were going to fail, we didn’t want to walk through an airport and say, “We just did what they told us not to do.”

Nowadays, they say, don’t start a company based on technology. Start a company based on products, markets, customers and outcomes. Now, almost the first question is, “How are you going to get out of this thing?”

Peregrine was a technology startup. It was at the very end of the era of what I would call the great era of semiconductor technology-based startups. They started because they wanted to do MOS. All of the great companies of the 70s and 80s were based on a semiconductor processing trick.

The fabless model changed all that. We were the end of an era. When I talked to Rory, I said, “I know how transistors work. I know how all this stuff works. But we have to figure out what to do with this technology.” That’s why I wanted a business-oriented co-founder. To me, whether Peregrine was a great startup or not, most great startups had a team that started it. You had Jobs and Wozniak. Neither of them gets Apple by themselves. You have Hewlett and Packard. You have Noyce and Moore. You can see it over and over again. I was smart enough to know that I only knew this piece of technology. I really needed business, finance and all the other things that Rory knew how to do. He had run companies. That’s why I reached out to Rory and said, “I need more than your first check. I need you to be involved.”

Patrick:     The data proves it out. I wrote an article for Entrepreneur about this very topic, why startups succeed, and why the vast majority fail. This was one of the big things. You need to have that combination of the business capability as well as the technical capability from a product standpoint. Very few companies make it if they don’t have that combination of capabilities.

Did you bootstrap this thing for a year out of your own pocket? Tell us about the early funding of the company.

Rory:         The early funding of the company was when Mark and Ron worked at the Navy lab. They were living hand to mouth as government service employees. They need someone to come in and provide seed capital but also some of the things he described with the business aspect, and access to other people’s capital.

Ron and I sat down and said, “We both have a lot of connections. Beyond my quarter-million dollars, who can we go to next?” We put together a list, including his family, my family and extended family. The first $1 million we raised was literally from family and friends. We did it in less than 60 days. It was a total leap of faith trust in the team.

Patrick:     This was a belief in you as individuals, and probably not understanding the idea that much. Peregrine was a very technology driven company. There could have been some friends and family that might have been engineers. The vast majority were betting on you as individuals.

Rory:         I think we had one engineer in the semiconductor world. That was his brother-in-law. But the rest of the investors really didn’t know the difference between chips and chocolate chips. But they believed in us, and what we presented we were going to do with our technology.

Patrick:     You put in friends and family bootstrapping money. How far did that get you from a time standpoint as well as proof points for the technology, and what you were trying to do as a company.

Rory:         It gave us the ability to start. It enabled Ron and Mark to quit their day job in the Navy. We had to have them full time. It enabled us to then grow a little team, myself, Ron and Mark. We added another person along the way. It allowed us the ability to create some chips at the Navy lab that we paid for. We basically used the Navy lab as a fab. That was unique.

Dr. Reedy: Yes, that was our first fab. I’m going to correct Rory a little bit. In addition to my brother-in-law who happened to be the guy running the Merced project at Intel, he was a very senior guy. He introduced us to Intel. Rory had a friend in Scottsdale who introduced us to a guy named Bernie Vonderschmitt who was the CEO of Xilinx. Bernie personally invested.

Patrick:     They were early angels.

Rory:         Bernie was in the B round.

Dr. Reedy: I met with Bernie before I left the government. He was a huge advisor to us. What we realized was that we had to figure out what we were going to do with this technology. We had the insight knowledge that, after 10 years and $10 million of government funding, Mark and I knew the technology absolutely worked.

We had built chip after chip. We could prove it. We didn’t have any nagging thoughts of, “What if this doesn’t work?” A lot of people have that. We owned a fab for 10 years at the Navy. I remember in the very early round we went to CES in Las Vegas. Mark and I had the advantage over Rory.

We knew the semiconductor industry and how competitive it was. Rory had the advantage over us that he didn’t. My edict was, “We’re CMOS. That’s the good news. It’s going to win over everything.” At the time, IBM would have told you, “No. You’ll never make a computer out of CMOS.” What I told everyone was that we were a specialty version of CMOS. When I talked with Bernie and others, I would say, “What can we do differently?”

We found at CES that radio was the next big thing. Computer wars were over. Intel won it. IBM lost it. Micro processing was going to win and there was this juggernaut in 1990. The rule was, do not do anything that anyone else was doing. The radio was not considered to be an important market, other than military.

Cell phones were toys for Hollywood starlets or real estate agents. We went to CES. Rory was highly skeptical. I was looking out a little farther than Rory was used to looking out. He wanted something a little nearer term. I said, “Everyone go around CES and take a pad with you. For every portable computer you see someone using, put a tick mark on your paper. For every portable telephone you see someone using, put a tick mark. We’ll add them up at the end of the three days.”

It was 42-to-1 cell phone over computer. That’s when we said, “We are going to be in the wireless market. The emerging opportunity is the cell phone. I know it looks farther out there but we can establish ourselves in CMOS in radios before anyone else. Then we’ll be different.” That was probably one of the things we did right. We anticipated that RF and wireless was where we were going to use this technology.

Patrick:     Did that first $1 million get you to a prototype or some type of minimum viable product?

Rory:         No, it did not give us a product. It got us to the next round. The next round, we raised $3 million.

Patrick:     This is where Bernie Vonderschmitt came in?

Rory:         Bernie invested. We had some smart people that invested. More of the angels re-upped than we originally acquired. It was a $3 million round, and it did get us into a fab beyond the Navy lab with IBM. First was TRW. They closed down on us before we got far enough along. They closed the fab and then we quickly moved to IBM in Rochester, Minnesota.

Dr. Reedy: The guy who got us into that fab was Bernie Vonderschmitt. Bernie was funding us by then. He believed our technology could help his products, FPGAs. Intel was funding us. Union Carbide was funding us. We reached NREs. That gave us a lot of credibility.

When the TRW fab closed, I said, “Bernie, where do we go?” He said, “You have two choices. Go to IBM for the best technology or you have to get to Japan for the best cost.” Those days, that’s where all the great foundries were. That gave us a roadmap. Unfortunately, it was this constant every two years, the fabs closed. We were just getting products out and the fab would close, which was our Achilles’ heel.

Patrick:     Getting back to the financing portion, it was based on your personal credibility to get the first $1 million in, primarily through friends and family. I really like what you were doing. You were seeding the idea with people beyond the first investors, from the time you had the first investors. A lot of entrepreneurs don’t do this.

They see fundraising as an event versus a process. As a startup CEO, even when you’re not raising a funding round, if you know you’re going to have to eventually raise more money, you should always be out there evangelizing, socializing and talking about the progress you’re making. Talk to us about that, Roy. What were you doing during that first year-plus when you were going through the first $1 million? How did Bernie get more excited about it over time?

Roy:           The individuals in that industry that also invested in this B round gave confidence to the early investors.

Patrick:     That’s why they re-upped.

Roy:           They re-upped. That also gave confidence to the strategic partners that we were talking to, like IBM. The NRE that we received from Xilinx and Intel at the time, we also got to leverage that.

Patrick:     Yes. You trade off other people’s credibility. These people believe in us, so we must be on to something.

Rory:         Right. It was about continuing to work the network. Ron and I used to feel that, if you’re not raising money, you’re not doing your job. You have to be raising money all the time as a startup. Even though you just closed a round, that next round has already started.

You have to put together an investor list that’s a pipeline. The pipeline changes. The pipeline could be all over the country. You have to go where the investors are. I’m going to guess that we had investors in 20 different states in the country. They were in the Midwest, on the East Coast and all over. You have to go where the investors are.

The other area where we did really well, even though we weren’t required to, we had shareholder meetings. Once a year, the shareholders would fly into San Diego. They would spend the night. We had actual stockholder meetings. We ran it like a public company.

We had newsletters that we sent out on a monthly basis with how we’re doing, highlights and low lights. They were not all highlights. Ron would hate to write a newsletter that said, “We just lost a fab,” but we would tell them that. Don’t hide it. Get it out. They trusted us. Then, when we had great news, they celebrated with us. It’s about investor relations. We had the best investor relations of any startup I’ve ever seen. That’s where a lot of startups fail.

Patrick:     Did you have board members beyond the founding team?

Roy:           Yes, we did. We had board members. His brother-in-law joined our board, from Intel. I had a chance to gain an investor in the A round who, at the time, was Chairman and CEO of 3M. He not only invested in the company, he joined our board. We did have a board of directors made up of shareholders.

Every board member we had was an investor as well. That was a requirement. If you were on our board, you also invested. The last question I wanted to have asked when I was seeking other people’s money was, “Has your board invested?” I wanted to say “yes” to that question.

Dr. Reedy: I think we did a good job early on of recognizing that corporate partners provide huge credibility. They provide resources that you can’t possibly afford to pay for. They provide a network. We had Bernie with Xilinx. I used to go up to Intel on a monthly basis.

After my meeting with the research people that were funding us, I got lucky enough that I met Gordon Moore through Lew Lehr, the 3M guy. He said, “I want you to come in here and tell me what’s going on in my own company.” I would be with Gordon Moore for an hour or two. I thought, “I can’t believe I’m in the room with the industry.” We kept it clean.

What these corporate partners did for us, the one thing they really don’t want to do is put in capital pay for the capitalization of your company. They’ll give you R&D to do something, but if you say, “I want you to buy five computers,” they will say, “No, that’s on you. That’s a balance sheet item. We’re funding you through.” They want an arm’s distance.

We relied on investors to put the equity in and corporate partners to do all this heavy lifting. IBM put in $5 million to $10 million worth of development. They refined our process from what we left the Navy lab with, which was an R&D process. They put in place an absolutely manufacturable process that Peregrine uses to this day.

When we had to go to the next fab, we walked in with four moving boxes full of documents. Those fabs wanted to do all of this due diligence. We said, “Here, read this. It says IBM on it.” They said, “We’re done. We’ll just do what they said.” Startup can’t do that. Even Xilinx can’t do that. They were fabulous. At the time, IBM was, and still is, the gold standard for technology.

We did a good job of understanding when and how to use a corporate partner. I think a lot of mistakes that young entrepreneurs make are because they want to go to an Intel and have them fund them, invest in them and promise to buy things. It’s just too hard for those big guys to do.

Patrick:     At Entropic, we did have a lot of corporate strategic investors, but it’s a different group than the actual operating group. If you can get a non-recurring engineering contract, NRE, from the actual people that are the customers or partners, in many ways, that’s more valuable.

There is this weird conflict of interest that exists as you get corporate strategics on your board or as board observers. I think there is value from a credibility standpoint. In either case, it’s good to get these companies that are potential acquirers and key partners involved in your company in some way.

Dr. Reedy: I would keep the two functions somewhat separate. For example, we gained an enormous amount from our corporate involvement with Intel, in terms of credibility and product. We asked for a license to the 486. They came that close to giving it to us.

Subsequently, Intel put in ten to the sevens of dollars in Peregrine. A few years later, that was Intel capital. A few years later, when Intel was fed up with their tax rate, they walked away from the whole investment. The net present value of the tax write-off is greater than the net present value they saw in our company.

We recognized that the investment was one thing. It was Intel capital. The due diligence and the support from what they were doing, we maintained that value for life. It’s not that there’s anything wrong with corporate money. It’s just that, especially nowadays, it is from an Intel capital.

Patrick:     We had both types. Comcast had their own venture group. Intel had their own venture group. Other companies, like Cox Communications, were family oriented businesses, even though they’re huge. They’re huge in media. They’re huge in cable. It was really the corporate guys. They didn’t have a venture arm. It was interesting.

It gets to the point of credibility with institutional investors, whether they’re corporate strategics on the investment side or strategic partners on the NRE side and co-development and partnership side. All of those things build your credibility.

Rory:         Qualcomm is a perfect example. That worked incredibly well. They had early funding from Sprint and South Korea Inc.

Patrick:     It was the same way with Broadcom. Broadcom had early investment from 3Com, Scientific Atlanta, General Instruments and TRW. In fact, they never had to raise venture money. That’s why the Henrys have maintained so much of their net worth. It’s because they never got venture capital involved in their company.

This was the mid-90s at this point. There were a lot of ups and downs with Peregrine over the years. Eventually the company went public and then was sold to Murata. Let’s fast forward to today. I want to get your perspective now that you’re on the angel investing side. We’re not in Silicon Valley.

Silicon Valley is unique in terms of how incubators, angel investors and venture capital works. There is an enormous amount of innovation and really creative companies outside of Silicon Valley. Rory, you’re involved in running EvoNexus, a major technology incubator in Southern California.

Ron, you’re involved in a variety of different angel investments. Talk to me about that. Based on your experience with what you’re doing today, what are some of the key points about attracting the right angel investors and corporate strategics.

Rory:         The technique to secure angel money has not changed at all. It’s still there. It’s still based on what we just described. How to raise angel money starts with friends and family, and their friends, credibility, showing the angels that you’re a really good steward of their capital. You’re keeping them informed. It hasn’t changed.

What’s changed is venture. That’s the big change. Venture, by and large in Southern California, disappeared. There used to be a number of large venture funds in Southern California. They have completely gone out of business. They’re no longer around. They’re no longer around because they didn’t return returns to limited partners. The venture funds in the Valley, there is only a small number of them that actually return the fund.

Patrick:     It’s primarily based on massive grand slam homeruns that more than make the fund. If you weren’t in Google, Yahoo, Facebook or some of these spectacular deals, you probably didn’t do very well.

Dr. Reedy: But that was their model. I always described it as a roulette wheel. In roulette, the average is 36 numbers. There is one on that board that’s going to pay 360 to 1. If you know that, you cover the board. The one pays it off. The big part of what’s happened to venture is that. The number of public companies are down. The number of startups are down. The statistics have changed. It’s more and more expensive.

Patrick:     That’s why they’ve moved upstream. The returns weren’t there. It was largely due to the amount of early investment, which was very high risk. The venture industry has become more like a bank and less like an aggressive equity investor. The amount of risks they’re willing to take is much lower. They still expect pretty spectacular returns.

Dr. Reedy: Rory said the angel game hasn’t changed much. He knows that better than I do because he’s so involved with it. I gave this advice to a group just this week. My absolute favorite book on this whole question of starting a company is still Bill Davidow’s book, Marketing High Technology. If I boil that down to four words, it’s be different or die.

That was one thing Peregrine had for it in spades. We were doing something no one in the Valley was doing. When I put down the risks and rewards, my number one risk was, “Our technology has such a terrible history. We’ll never get past that. We’ll get kicked out.”

It turns out, people were willing to listen. We got past that. We could easily articulate our difference. A lot of times, I’ll say to Rory, “How’s it going at EvoNexus.” He’ll say, “If I see one more app company come in here and say they’re going to open an app for the iPhone and flip the company for $5 million, I’m going to blow my brains out.” It goes back to, be different or die. Who needs another app? Why does an angel investor need to invest in something like that, given all the risks? They’re better off putting their money in a hedge fund and taking their risk-adjusted 10%.

Rory:         What’s happened in the Silicon Valley is the venture funds have moved away from early seed and A round investing to later rounds, B, C and D rounds that have been de-risked. That early stage money is coming from angels.

Patrick:     Yes, angels and super angels.

Rory:         They really are super angels. In my opinion, a legitimate angel here is someone that can write a $25,000 check and not have to call home to see if that’s okay. An angel up there can write a $1 million check and not have to ask his wife if that’s okay. These are angels who are worth $500 million or $600 million. They’re writing very large checks, very early on. That’s the difference. We don’t have that here.

Patrick:     I don’t think anyone has it to the level that Silicon Valley has it. It’s a unique situation in the San Francisco Bay area. I don’t think it will ever be duplicated. The ecosystem is too well established. You have so many top tier VCs. You have Stanford. You have Berkeley. You have so much talent, and the talent is very mobile.

There’s one thing that I’ve noticed. I worked in Silicon Valley for 10 years prior to moving to California to run a few companies. The maturity of the senior management capability up there is also so strong and mobile. When you’re building a company outside of Silicon Valley, it’s really tough.

You get to a certain level of the game. Bringing in the right talent is very challenging. There are companies like Illumina, the genome sequencing company that still has their headquarters here. I talked to Jay Flatley who was their early CO. He said half the VPs are in Silicon Valley. It’s because that’s where a lot of the talent is. It’s really fascinating how that works when you get to certain levels of scale.

Rory, you’re dealing with hundreds of entrepreneurs in your incubator. Is this understanding of how to raise friends and family rounds and angel rounds well established within the entrepreneurial community?

Rory:         No. There are seminars that the law firms provide. There are seminars you can get at other locations about how to raise angel money. The angel money has to be raised by the founders. You can’t broker it out. The founders and CEO have to raise the money. They have to understand the investor. This means sitting down at a dinner table at night with the investor and the investor’s spouse. If we didn’t have the spouse there, we probably weren’t going to close that investor. It’s a family decision at that level.

The investors that I see invest in companies at EvoNexus believe in the team. They know that the challenge is going to be huge. They know that there is going to be time to market. There are going to be competitors, but they believe in the team. I don’t believe that the current entrepreneur realizes how strong of a network they really have. They just have to utilize it.

It’s okay to ask your parents to invest, if they’re qualified investors and meet the Reg D requirements. It’s okay. In fact, they would like to invest. If they lose the money, it doesn’t matter. They’ve invested in you, their son, cousin or nephew. If you return their money and then some, now you’re really a favorite.

Patrick:     I have some friends that are venture capitalists. The only reason why they’re still my friends is because they’ve made money.

Dr. Reedy: Of the many hundreds of private investors we had, we could probably count about five or ten who really carried a grudge along with the fact that, for all of the things that Peregrine did do, it was not a great investment. It just wasn’t. That’s a burden both Rory and I carry around. We would have loved to have been like Google or Facebook. We just weren’t. The statistics are against everyone. We ended up not at the worst, which would be a washout. Rory taught me this. I said, “Who can we go to?” He said, “We have to go to everyone we know.”

Rory:         Everyone who is a qualified investor.

Dr. Reedy: You’d be surprised what people have. We went to teachers. Everyone has a chance. That’s what Rory said. He said, “Suppose you don’t go to your parents, your siblings or high school buddies. Suppose this is a homerun. How do you face them then? Don’t just imagine facing them if it fails. Imagine if it blows the doors off, and you didn’t offer it to them. You have both sides of that coin.” I thought that was interesting. It’s really their decision.

Patrick:     You provided transparency throughout. You had investor meetings. That’s essential. These are adults. These are people making decisions about what they’re going to do financially. You are good stewards of the money. Yes, there are challenges. That’s life. I remember in the early days of Intel, they almost went out of business. They went to six-day work weeks, ten hours a day. IBM was funding them because IBM couldn’t afford for them to go out of business.

Dr. Reedy: There was a 15% pay cut. In our presentations, I remember this was an interesting thing. I wanted to put in a lot of the risks. Rory said, “When people walk into a house, they don’t ask how low the floor is. They ask how high the ceiling is.” We had to compromise. The engineer in me, I wanted to say, “This is where the risks are.”

If you didn’t, we always got the most troubling question that we couldn’t answer. It was, “If this is so good, why hasn’t Motorola bought you?” The answer is, “You’re going to have to ask them.” They see it differently from their perspective. If they saw what you saw, they’d be doing it.

Patrick:     This has been fantastic.

Rory:         Can I ask you some questions?

Patrick:     Yes.

Rory:         You brought up a founding team. You mentioned Entropic, which was a terrific IPO in San Diego. What was it about the founders at Entropic that made them realize they needed someone like you?

Patrick:     There were four founders at Entropic. They were all engineers. When you have four engineers, they all take different roles. One is a CEO. One is the head of engineering. One is the head of marketing. One is the head of technology or business development.

It was the lead founder, Itzhak Gurantz, who saw, based on his experience of building other companies, that they needed someone complementary to him, to his team that had more of the business experience to take things to the next level from a commercialization standpoint.

I think that was a combination of board members, but also Itzhak being very receptive to it. I had two other companies that I had run where there was significant founder-itis. The board forced me into a situation versus the founder really wanting me there. That is always a bad movie. The movie always turns out the same way.

I was very sensitive to that when I was interviewing with Entropic. It was clear that Itzhak really did want someone there. We weren’t close friends, but we had known each other for over a decade. We knew of each other. I think that helped. We had a lot of relationships in common. We could talk about things.

He was a total gentleman, a brilliant technologist and still a great friend today. I think that’s a part of it. You need to have founders that really want to have you there. There is a clear partition of roles and responsibilities.

I think that’s one of the things that was clear with the both of you. You were very complementary in terms of how you worked with each other. You had that yin and yang. There are the stories about your optimism versus your conservativism.

I ran into that at Entropic. The engineers wanted the product to be perfect. I said, “It doesn’t have to be perfect. It just has to be better than everything else that’s out there. Let’s start selling some of this stuff.”

Rory:         That’s a great example of founders realizing that they needed something different.

Patrick:     This has been wonderful. Do you have any closing thoughts you’d like to leave for the entrepreneurial audience?

Rory:         If you have a great idea that you think is something that no one has done before, come to EvoNexus.

Patrick:     This has been wonderful. This is Patrick Henry, the CEO of QuestFusion with The Real Deal…What Matters.

PLAN COMMIT WIN: 90 Days to Creating a Fundable Startup is available for sale at Amazon.com.

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matter.

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