NY Launch Pod: Welcome to the New York Launch Pod, the New York Press Club award-winning podcast highlighting the most interesting new startups, businesses and openings in the New York City area. I’m your host and New York attorney, Hal Coopersmith and this episode we are talking about raising money. Whether you’re a new startup or have already raised money in the past,this episode is for you. We speak to Harlan Milkove founder of Foundational, a data driven company that prepares startups for venture capital fundraising and develops strategies for growth and investment. Here’s Harlan:
Harlan Milkove: Again, whether you work with a company like Foundational my company or not, you should make a list of who you think the best investors are. Don’t ask people like, hey who should I talk to? You should know who the likely players are, and then try to fill in all the connections through your network, you know, it’s much more effective to say, do you know these five people than it is to say what five people do you know?
NY Launch Pod: In this episode, we discuss common mistakes startups make when attracting capital, how you can avoid them and a whole lot more. But before we go to the interview, if you haven’t already remember to sign up for our monthly newsletter for unique content and insights at nylaunchpod.com and subscribe on your favorite podcast listening app. So with that, let’s go to the interview.
NY Launch Pod: So you think it’s a good time to receive venture capital funding?
Harlan Milkove: It is. So I think, you know, we were talking about this a bit before we got started. And interestingly enough, although everyone’s probably heard that deal volume is way down at the seed stage as much as 50% and kind of down across the board at all stages. What’s interesting is that the rounds that are getting done are at a higher median valuation, which indicates that valuations might’ve actually gone up at the same time, which sounds really weird. But then you take a step back and think about why that might be occurring. And we showed this in data that there’s a survivorship bias going on. And in fact, in other financial crises, things like this have occurred too, like the Russian debt crisis and things like that, where kind of the tier one opportunities actually go up in value because people still want to get access to that asset class, but there’s less viable things to invest in. When I say viable, I mean, companies that aren’t growing quickly, or maybe they’re touching a space that everyone’s scared of, but the few things that are remaining that are still growing are in spaces that weren’t negatively impacted. That’s where kind of all the dollars are trying to flood into. It’s actually pushing prices up. So for those that are fortunate enough to be benefited in that way, it’s perhaps the best time ever to raise venture capital.
NY Launch Pod: And how did you become an expert in venture capital?
Harlan Milkove: Yeah. So I guess I can share more about my background, but one of the things that we really pride ourselves on at Foundational is we let the data do the talking and we help our customers interpret that data. And we have a lot of experience doing that. And you know, the standard of being an expert is not as great when you have good tools, right? So my background prior to starting Foundational is I managed a market data engineering team at FactSet Research Systems. And I was in the news team where we processed SEC filings and other things like that and made it available to various finance professionals, mainly fixed income and public market data. And then I cofounded a commercial real estate analytics company called Reonomy, which did something very similar to FactSet in the sense that we were aggregating various public and private data sets about commercial real estate. But the difference is that it’s a totally different asset class, huge asset class commercial real estate, being something like $13 trillion annually, around $13 trillion as a whole, but they’re thin market assets. They don’t trade frequently. They’re hard to value. There’s no public exchange for them, although that’s kind of changing over time, as blockchain finds it’s footing and the analogs between commercial real estate investing and startups are actually quite striking, meaning that, startups are also thinly traded. They don’t get priced very often. They’re hard to understand. So very similar kind of market dynamics and in recent years, a lot more data about venture capital funding has been coming out, but it’s still really hard to answer certain questions that seem obvious about startups. Like for example, in real estate, you look at comps, it’s very, very difficult in the startup space to find good comps. And that’s because startups are sort of nuanced and other data sets don’t do a great job of helping you kind of split startups into cohorts like startups that are about the same age or startups that operate out of the same places or startups that are selling to the same industries or have the same business model or innovating with the same underlying technology. And what we’re doing is categorizing deal activity in that way, which as far as I know, we’re the only data set that attempts to do this. And we keep that data proprietary, but we package that with various services that help people make decisions based on this. Currently we’re all on the sell side, meaning startup founders, but we’re also developing buy-side facing tools, which would be completely DIY data access. So that’s kind of where we came from, where we’re going. So I don’t personally consider myself to be a foremost expert in venture capital, but I do think we have the best data when it comes to certain use cases. For example, again, looking at peers and identifying investors that are relevant for certain opportunities.
NY Launch Pod: So I think you’re selling yourself short, not considering yourself an expert in venture capital, but we can forgive that. You said that you help your customers interpret the data and the potential use cases for the data. Who are your customers in terms of the people that you’re helping for the most part and why do they come to you?
Harlan Milkove: I certainly know a bit about venture capital financing, but I’m just saying, you know, if you were to put me in the same room with someone else that had the same level of experience, I would say we have way better data than they do, but they might know more about the process. That’s all I meant. And I have a lot left to learn. And I’ll say that as well. So, who are our customers and why do they come to us for the most part? This is like the 90% case our customers are CEOs at early stage funded startups. But the level of funding they received is very early. Meaning maybe they’ve passed the friends and family barrier, like they’ve raised three to $500,000 before. But the amount that they’re looking to raise in their next financing, they’re all looking for another round of financing. And the amount of financing they’re seeking is usually between one and $15 million. And the reason for that, why they’re looking for us is basically investment banking, intermediaries finders. Those are not accepted in the early stage startup space. These are all the people that in theory could be very good at what they do, but they do not operate in this space and they don’t operate there for two reasons. Their business model doesn’t work because FINRA licensing is expensive and the deals aren’t that big in the earlier stage space. And then two culturally, a lot of venture capital funds outright refuse to work with anybody that’s going through a finder. So what that means is that CEOs are trying to take on a very difficult task of creating a marketplace for a held asset when they’re busy doing other things, right. They want to operate their companies, it’s hard enough without taking on a VC raise. So what we’ve built and why they come to us is we’ve built systems that are very efficient at helping them get information. They need to run their own venture capital raise. So when we work with them, sometimes we just give them data and present it to them and tell them what they should do next. Data being, here’s a list of investors, here’s information about the deals they do, here’s what we think you could raise from them, here’s how you should prioritize that. You know, imagine a really detailed report. We can also help them understand what peers have done from attraction perspective. So maybe, you know, another company with a similar business model, we can help them understand very specifically from an attraction standpoint, how many customers they had, roughly how much revenue they had when they raised a certain amount of capital that can help with prioritization and pricing and things like that. And then a little bit more hands on we’ve positioned ourselves kind of up market from accelerators, but downmarket from investment bankers, meaning there’s this large segment with some like 20,000 companies in it where we will basically help coach them through their venture capital raise, implementing the whole strategy all the way from planning to closing, but more in like a personal trainer capacity. Whereas accelerators take a more class based cohort based approach and the investment bankers, obviously being more full service, but not an appropriate solution for fairly early stage startups for the reasons I described.
NY Launch Pod: And what are the mistakes that companies make before, or even when they do receive venture capital?
Harlan Milkove: Well probably the first one is honestly they should start planning for their next capital raise as soon as they’ve cleared the last hurdle. It’s just part of a CEO’s job to bring in capital and the things that they should be thinking about kind of day one after the last raise is what are the metrics they need to hit to be in a good position for the next round, which is a comparables analysis problem, right? And the other one is they should know who the likely investors are in that next round ahead of time, which is also a market data problem so that they can start networking with them right away. You know, maybe just one conversation a week or even just two conversations a month, start to get those connections in place and put people on their monthly updates, things like that. So that they’re not trying to form all these relationships right at the time they need to raise capital, you know, really great reason why my prior company Reonomy where I was the technical cofounder. I remember very, very clearly. It was like the first board meeting after the seed round closed, the CEO, Richard Sarkis over there, he had as the final slide, a list of who all the Series A investors might be and that was maybe 36 names. And on that list, sure enough, was SoftBank who eventually came in later to lead the series, and that was the result of his proactive networking. He wasn’t running a formal process at the time, but because he was exercising those muscles as CEO, his investor relations muscles, making a good habit out of it, the serendipity occurred and we were able to get pretty good terms ahead of schedule. And it wasn’t a big distraction for him.
NY Launch Pod: So like someone in the House of Representatives starting their next fundraising campaign, as soon as they get elected, that’s something that you have to do in the venture capital world.
Harlan Milkove: Yeah. The good news, what do they have to raise like $30,000 a day or something like that? The good news is you don’t necessarily have to be quite as competitive as a congressional person.
NY Launch Pod: Just to unpack a little bit more in terms of the mistakes, someone who’s founding a company, they may not, and probably have not founded a company before. And if they are doing venture capital and doing a capital raise, they’re probably doing it for the first time, kind of going through those waters for the first time. What are some of the things that founders should know, just having known the industry or having seen many deals go through that founders normally say, you know what, I wish I had known X before raising money, I wish I had known this about venture capital?
Harlan Milkove: Yeah, sure. I can hit a couple of those. It’s a really good question. Things like these are like the gotchas. So, these are the things that come up when an investor says, I really love what you’re doing BUT, right? And you’re like, oh crap. I can’t go back in time and fix that easily again. Not to not so sound repetitive, but the metrics aren’t quite right. Like maybe you’re a marketplace and you’d have a 10% take rate, but the investors want to see 25% in your space. Not knowing that other companies like yours have a different business model and you look weird, right? That’s stuff you should have known when you formed your business plan and had time to fix it. And then you have to change your pricing model, go back, build six months attraction so that you can price it a different way. Other things, you know, things like cap table problems, which I’m sure you might’ve seen yourself. We’ve had companies that basically get through all of the various stumbling blocks to find the right investor, they discuss terms, and then the investor finds out that the CEO won’t own it. Or the co-founders won’t own enough of the company after the round closes for the incentives to be right. Or another one that’s not as common, but it happens a lot. And there’s things that, you know, of course you can clean up your cap table ahead of time, but it can be really tough, especially if you’ve had a cofounder lead, which is very common, very similar, kind of gotcha. Is not having a viable deal for an institutional fund. Meaning I think what can surprise a lot of founders is if you’re raising capital from a professional investor, right, they’re managing other people’s money, that’s all they do. They likely have a thesis where they have to own at least 10% of your company when they write a first check. And maybe it’s not quite 10%, but there’s a clear path where they can get to 10%. And I see a lot of founders go out there and they want to sell like 5% of their company at a Series A or something like that. And they’re just not talking to the right investors. If they’re not willing to sell more than a certain percentage of their company, another problem could be maybe that they want to do say a $5 million price round, similar idea, right. They raised $4 million on a convertible note and they just want to get like that last million, it’s just not enough of the round available to price it properly. So the only way they’re going to convert that note is if they greatly increase the value of their company, where they can then sell more of it, right. Where they can go back, maybe to one of their convertible note holders, they’ll do the due diligence, and hopefully they have enough of a pedigree where other people trust that value. You can just get really messy if there’s not enough of the company for an investor to buy in other words.
NY Launch Pod: And so how do you help founders avoid these gotcha moments? How do you foresee the future for them? Who’s doing those sorts of things for founders?
Harlan Milkove: Yeah. Well that’s I guess where the knowhow piece comes in, that you accused me of having before. So basically, you know, we’re not a law firm, we’re not the VC, we’re independent sell side advisors in that regard. So what we’ll do is we’ll sanity check, the proforma financials and other similar problems, maybe the projections are too low to be interesting to a venture capitalist, right? So we’re basically, we’re not the CFO, we’re not the lawyer, but we’re sanity checking all of the things that will be presented to investors to try to get in the head of how an investor would look at it and let the founder know what they’re in for before they stub their toes. So let’s just say there is a cap table problem. We’ll advise, we have lawyers we talk to all the time who understand startup problems pretty well, we’ll advise they talk to them, but really we’re just there as almost like the last line of defense before they go out there for the roadshow.
NY Launch Pod: You say that you’re pricing yourself slightly upmarket from an accelerator, but before an investment banker, what are some of the things that accelerators aren’t doing?
Harlan Milkove: Oh yeah. So I think accelerators have a lot of value. Not all of them write checks, but the best known ones do. So they’re great to be first checking investors they’re there. And they’re also good at a certain stage, but they have very rigid terms. Every now and then you hear about somebody negotiating like a lower dilution that, you know, a Techstars program or something like that. But in general, they really forced down their terms and they can be quite progressive for a company that has a little more maturity. So a lot of companies we’ve talked to they looked at accelerators, but they feel they’re too mature for those terms. And they don’t necessarily need that validation of being a venture capital backed company. And they already were venture capital backed, but they still want that strategic advice. So we’ve decoupled the filtering effect, decoupled the strategy from accelerators. We decoupled the strategy from investment banking. We just offer the strategy, right? So, you know, these other folks offer different things like banking services or filtering capital, right? So that’s one thing we’ve done. That’s different. And then from a process standpoint, we customize that for the founder and our goal is to actually give them time back, meaning we can kind of take some of that planning off of their plate so that all they have left to do is the pitching and the closing. Whereas with an accelerator that first of all, I think they’re great programs. I personally was a participant in a Techstars program, got a lot of value out of it, but it took a lot of time. The good news is my company was at a point where we had that time to commit and we were able to get the value out of it in return. But a lot of founders can’t do that.
NY Launch Pod: And for the strategy that you’re offering, how are you pricing that for your startups and for your clients?
Harlan Milkove: Yeah. And that’s why I think it’s important to know who you can serve and who you can’t. So I’ll tell you how we price and then who benefits from that. So the value proposition from working with us is saving a lot of time that you could have otherwise been spending on sales activity, or perhaps even reducing the number of months of burn between capital raises. So in order for that value proposition to makes sense to you, you have to be spending time in sales, or you have to have a considerable amount of burn. So if you’re the kind of startup that has extremely low burn, you don’t have any fixed developer costs or you’re pre-revenue, and you don’t have any sales to be doing, it doesn’t resonate as strongly, even though we can still add value. So the way we think about pricing is we want to price to about a quarter of the time that we save people. That’s how we think about it. So we have some bite-sized research offerings that are turnkey starting at $2,500. If we can solve a problem for you and a startup can afford that price point. And then more expensive offerings can get up closer to the $30,000 price point, but similar to how an attorney might make their services available to an early stage company, we can defer a lot of our fees. We don’t defer all of them because I think it’s important for someone to be investing in the process where they’re not necessarily going to do all the things you need them to do for you both to be successful. But we were able to defer pretty good chunk of it. And because we’re not investment bankers or intermediaries or anything like that, we don’t tie that to the success of a specific transaction. Instead, we tie it to the growth of the company. Whereas an attorney might make it time-based, meaning six months later you pay me or an investment banker might make that specific transaction based. We instead just base it on the company having more money or the company being acquired that kind of thing. And that’s how we’re able to kind of find that middle ground where we can charge an appropriate rate but work around the regulations that are in place.
NY Launch Pod: So you’ve talked a lot about strategy and this episode will air August 2020 COVID-19 is happening. What opportunities do you see there for startups? What are some of the strategies that they should pursue? Just circling it back to our original question, which is that it’s a great opportunity right now for VC. What are some opportunities that you see in strategies for startups?
Harlan Milkove: Specific to COVID-19 and the fact that it’s August, 2020?
NY Launch Pod: Not necessarily COVID-19, I’m sure that there’ll be a lot of founders who are solving problems related to COVID-19. So what are the strategies that you see for them kind of down the line?
Harlan Milkove: So if you’re a founder out there and you’re planning to conduct a raise starting after Labor Day, which is traditionally one of the highest seasons for capital raises, I think that you should ASAP start practicing your pitch with your close advisors and think about the investors in two groups. Those that could potentially lead the round and those that are more likely to follow somebody else’s terms. Again, whether you work with a company like Foundational in my company or not, you should make a list of who you think the best investors are. Don’t ask people like, Hey who should I talk to? You should know who the likely players are, and then try to fill in all the connections through your network and through the people and it’s much more effective to say, do you know these five people than it is to say what five people do you know? So, thinking about that list that you have in front of you, there should be a few hundred names on it because you know that not everybody’s going to want to write you a check and you have to prioritize, think about those investors that would not lead as maybe being a group you can stub your toes with meaning you get real feedback. They could be real investors in your company, but you want to talk to them before you talk to every potential lead investor, which there might only really be 50 that could viably invest at your stage in your space. There’s just not that many funds out there that’ll lead a round. And then, I think this is the thing that takes a lot of maturity to do, but when you hear that feedback, you’re going to start to hear common themes and those themes are going to tell you whether you have a green light or a red light, and it takes a lot of maturity to hear that you’re not in a good position for the amount that you want to raise and stop, but you know, if you think about the value of your time as a CEO, you could spend months talking to every investor out there learning that your company needs to be farther along. You need to recognize that before you spend months doing it.
NY Launch Pod: Anything else you want to talk about that we didn’t touch on?
Harlan Milkove: Yeah. So of course, hopefully you learned some things in that process where you get the warm fuzzies, right? Like, there seems to be a pretty good interest, both in the traction my company has and the amount that I want to raise. And then it’s off to the races. You’ve got to treat fundraising like it’s your primary job to drive momentum, create an auction effect in the race. Otherwise, you could be in a great position, then it could still drag on for months and you could have better things to be doing. Right? So those are the two things I would recommend to people entering the fundraising season. And outside of that, I guess, what do you do if you are a founder in a heavily impacted space, you started, you know, restaurant technology and all of your customers are out of business. That kind of thing. You’ve probably over the last several months, been looking for opportunities to pivot, but that said, you can only pivot so much. If you need to raise capital, you cannot wait. And you’re in a heavily impacted space. Just recognize that you’re probably not going to find too many first checks, new first checks to come into your company right now, because it’s just not the mandate of a venture capitalist to save your company. It’s to invest in things that are growing quickly. So you really have to be thoughtful with approaching your existing investors, making a compelling case for reasons to bridge the company. You’re going to launch a new capability and you need a little bit of funding to be able to do that. You’re going to form a few pilots based on a pivot you formed a few months ago. And then once you develop a new milestone, you’re going to go out there and then look for the new investors to lead the next round. But it can’t just be a story about, well, you know, given the status quo, we’re going to go out of business in two months. So you should invest. That’s just not a story. That’s not going to be exciting to an investor, even if they’ve already backed you.
NY Launch Pod: Well, that is a nice note to end things on Harlan Milkove. Thank you for stepping onto the New York Launch Pod and sharing your time.
Harlan Milkove: Thanks for having me Hal.
NY Launch Pod: And how do people learn more about you and Foundational?
Harlan Milkove: Yeah, sure. So we have a blog, we write about trends we’re seeing in the venture capital space. Go to foundational.nyc/insights. And if you want to chat about anything you’re working on with your own venture capital raises you can emai, me Harlan@foundational.nyc.
NY Launch Pod: And if you want to learn more about the New York Launch Pod, you can visit nylaunchpod.com for transcripts of every episode, including this one. And you can follow us on social media @nylaunchpod and if you are a super fan of the show, Harlan, are you a super fan of the New York Launch Pod?
Harlan Milkove: Sure am.
NY Launch Pod: If you’re a super fan like Harlan, please leave a review on Apple Podcasts. It is greatly appreciated and does help people discover the show.
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