Investor Connect – Where You’re Raising Capital Matters

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You see a lot of these startups that have raised a seed round and now they’re ready for their next round, what do you think are some of the biggest challenges they face when they go out to raise those follow-on rounds of funding? What mistakes do you see people making?

Hall Martin; Investor Connect

I wonder if they’re mistakes that the startups are making, or if they’re mistakes or experiences that different startup ecosystems are perpetuating in what they’re doing for a business or startup.

What I think we typically see is that depending on where that startup grew up, if that startup grew up in New York, or that startup grew up in Silicon Valley, or that startup grew up in Austin, frankly, they tend to get different advice, they tend to get different perspective from the community and that advice is not right nor wrong, frankly, that advice is attuned to how that particular region tends to work.

Paul O’Brien recently had a chance to chat with Investor Connect’s Hall Martin, to offer to listeners a perspective on media innovation and how ecosystems and economies can develop and mature to serve investor interests. Investor Connect is a program under the Texas Open Angel Network which is a 501(c3) non-profit dedicated to the education around startup funding.

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In New York, for example, you’ve got a lot of investment banks and bankers. We’ve got Wall Street and you likely know a lot of finance professionals; and so, the numbers, and the performance, and the financials, and the models and so forth, are expected.

You’ve gotta know the math, you gotta know the numbers.

And that’s correct, but it’s also not necessarily what other regions in the world are familiar with and looking for. And so, the mistake that’s made is often, as a startup matures, they are still fixated on the advice and the experience that they had where they are, and they don’t appreciate that when you get into that next stage – that Series A and Series-B stage – frankly, you have to start talking to other markets to raise capital, just because you need access to other investors. As you start talking to those other markets, you’ve got to appreciate that they may have completely different experiences and expectations with regard to what happens at that next stage.

For example, my experience in Silicon Valley is that a Series-A round really isn’t about getting the math right, it’s really not about getting the financials properly, and frankly, it’s not even about showing revenue nor showing that you can get customers. The Series-A round in California, in my experience, is almost more about showing that there’s a sizeable enough market and that you know how to achieve and secure and compete in that market, so that from there, you can start to figure out how to grow a business and make money.

And of course Texas has a little bit of a different experience from that. So I’d encourage as you’re moving to that next round, you almost have to think about where you’re raising capital and the expectations or the experience or the conventional wisdom of that region of the world, so that you can speak to it; so that you can speak on their terms, not because their terms are right, not because New York’s way is better or worse, or Silicon Valley’s way is better or worse, that’s absolutely not the case, but it is valid to appreciate that where they are means that they have different experiences. They have a different perspective on how this works, and as long as you speak to those terms or the mindset that folks have – depending on where they are – makes it a heck of a lot easier to have a conversation that gets right down to brass tacks, right, gets right down to the details of what you’re hoping to accomplish when you’re raising money, or, if you’re in the investor seat, as you’re hoping to deploy capital in a way that’s meaningful, appreciating where that experience comes from.

Well, that’s good advice. It used to be everybody went to the Bay Area or New York, but now there’s many other places you can go to and there, the regional differences start to come up in a big way and you need to navigate those waters carefully because there is money to be picked up in all of those places, but, the way you do it is different for sure, and language and the seed, Series-A, Series-B methodology is also defined differently as well. That’s always a little bit confusing too.

That’s exactly the way to characterize it, simply. It’s not too dissimilar from appreciating that raising capital for a healthcare startup or a health-tech startup, frankly, is not the same as raising capital for a FinTech startup. The advisors, the way that those companies go to market, the fact that they’re both gonna have regulatory challenges, the fact that there are outside factors that impact how those companies work and how they do business, really differs, really varies the expectations in the way that they go to market when raising capital. Same is true by stage, same is true by region of the world, because there are different regulations, considerations, experiences, partners and so forth to have, in financing and funding these companies.

Well you’ve done a lot of work in the media-tech space, not been up on it lately. What’s new in that space and how do you see it evolving?

It was about six weeks ago perhaps – Fred Wilson was in the news with a bit of a headline that said, “If there was anywhere to be investing at this point, it would be the media industry” (it’s on our Twitter @mediatechvent); a really nice affirmation that there’s something going on in the media industry that the venture capital community should pay attention to.

And I think what Fred was referring to isn’t media per se, in a sense that anybody usually conceives of it. A lot of times when we say media, people immediately think of news media, or social media. We tend to get this myopic, tunnel vision on our personal experience or our personal perspective on what media means. When we refer to media in what we’re doing and what I think Fred Wilson was referring to, is that media really just refers to the content. The film, or the podcast, or the video game, or the written content – if it’s a news media site, or a social media site, or even a book-publishing site, if you will – those are all just forms of media and one thing can be said with the highest degree of certainty we can imagine, is that media will always play a pivotal and critical role in our world. It shapes our culture, it shapes our economy, it shapes what we know, it shapes how we connect with people and so, a fact, whether or not the economy is strong or the economy is weak, there will always be demand for media, in some context. It could be entertainment, it could be news, could be connectivity.

And so, what we’ve seen in the last year or so, is affirmation of that, is validation of that. A lot of the big companies’ increasingly looking to how to participate in more innovation. A lot of the private groups, public funds, grants, federal money, looking at what to do about and how to participate in the media industry at large, because you know that the media industry plays an important part in what we all do. And in turn, venture capitalists follow media and increasingly look, saying something like, “This media space, in particular, is something in somewhere where we absolutely always have to pay attention, because we never know from where the next Netflix, or Atmosphere, or Electronic Arts will come.”

These are all media-technology companies.

You never know from where the next one’s gonna come. It could come from the Ukraine, and if we’re not paying attention to how quickly media evolves in order to create value with that content, if we’re not paying attention to it, we, very easily and quickly can miss – as investors a substantial opportunity that will completely transform the way the industry works.

What new technologies do you see coming up in the media-tech space? It seems like there’s a lot of challenges with it, with what’s truthful, what’s fake news and who owns that, who controls that and so forth. What do you think are the solutions for that from a technology point of view?

The media business has always been exuberant about, frankly, about very forward-thinking things, very, almost disruptive things. And I share that thought, to point out that it’s been exuberant about those things to a fault, frankly, that it’s always been so forward, that in a lot of respects it takes our focus, takes our understanding and our appreciation off the more pragmatic and practical technologies.

Over the past couple of years, the media industry has been very, very hot on things like blockchain, and artificial intelligence, and bots. Things that are still wonderful innovations and a direction that we will, eventually and increasingly, go. Those technologies are still so far in front of us that we’re not quite there yet. We’re not quite seeing blockchain, as an example; we’re not quite seeing that kind of infrastructure or technology as the solution to all of these things that we’re desperate for in media. Things like intellectual property control, and rights ownership, and payments – managing payments for content creators – we’re really not seeing any sort of AI, or machine learning, or data solution for fake news. There’s a lot of exuberance that we could possibly say to fix this question of fake news in the future, but, we’re really just not there yet.

So what are the practical technologies? Well one, a lot of excitement and enthusiasm for marketplaces, frankly, that – if your thinking about the media business in a much more gig economy, or workforce context – the workforce is flushed with designers, and photographers, and videographers, and content creators, and book authors, musicians, all of these people with incredible talent that’s meaningful to the workforce, and there’s really no where or way for people to easily find and hire them; there is no marketplace. And so, there’s a lot of emphasis on the idea of the marketplace, number one.

Number two, distribution is a practical, pragmatic technology. How do we enable media producers, investors, content creators, how do we enable these people to more effectively and efficiently, reach much larger audiences? But we’re not talking about things like TikTok, or Instagram, or influencers – where we see a lot of attention in the media business – what I mean is, moreso the platforms that enable us to reach many more, across channels – it’s referred to as multimedia or omni media – across many different forms of media and many different channels as quickly as possible.

Number three is related to the second point. Number three is that we’re seeing a lot more investment in understanding how media can be replicated across many different forms. If I produce a video on YouTube, well, why isn’t there also a podcast, audio podcast? Why isn’t there also a written version of the video so that if somebody just wants to read it, right, they can, very easily? How do we enable many other creators and producers and so forth, to very quickly be – what’s referred to as this multimedia format – so that wherever the consumer, wherever the audience wants to consume, they very easily can. There’s no reason I have to watch a video because you only produce a video. There’s no reason I only have to listen to a podcast through my smartphone. I could, or should be able to listen to it on the radio too and tune in to an AM station in the morning, during my drive time, and listen to it that way. How do we streamline and make that much more possible for people?

Well you mentioned Fred Wilson and he also blogged recently about the fact that new technologies tend to run in 15-year cycles. We had the mainframe world, and then we had the PC world, and then we had the mobile world and then we have now the cloud world, but, we’re running near the end of that 15-year window. What do you think the next 15 years will look like and what will be the vector? Will it be – ’cause now though, almost everybody in the world is connected at some level – what is the next stage you think it’ll come up? Do you think it’ll be media focused?

Will it be media focused? No, again, I think media is the content associated with whatever that might be and that media comes in many different forms. A tweet is media, but Twitter itself is not necessarily media – granted it is, so maybe it’s a poor example – but hopefully everybody appreciates my point. I don’t think media is the next phase. We might refer to some of Peter Drucker’s study back in the ’70’s and ’80’s, that media is really just critical piece of every company; Coca-Cola’s in the media business, frankly. Well, moreso a brand and an advertising company that just happens to sell a sugary soft drink that everybody wants to buy. But at the end of the day, the question is whether or not they can move and influence the media in order to do that. So I don’t think media is gonna play as prominent a role as it might sound, given the work we’re doing.

I think the answer – and I hate being too predictive ’cause that’s not necessarily how I think – but I think the answer might lie in one of two things. Either, a much more open-source world. There’re a couple great, great quotes – and unfortunately I can’t quote them, but I’m sure if you Google them, we’ll dig them up pretty quickly – a couple great quotes about the idea that open – source is the greatest competitor that every founder has. That there’s always someone, somewhere else in the world, creating a more open-source version. A more free, a more accessible, a more collaborative version of whatever it is that you’re doing. And so, you get this notion that open-source is gonna eat the world, open-source is gonna enable the world, depending on your perspective I suppose.

So I think the next phase could be a little bit more of that direction or, I really love the notion that what’s really happening – I think this is very valid – what’s really happening is that the next phase of technology is going to very simply be platforms.

Amazon is a platform, Uber is a platform, Tinder is a platform, Facebook is a platform. These companies that are dominating sectors, dominating entire industries, are really just platforms on which other businesses and consumers and companies, on which businesses and consumers and companies can more effectively and efficiently transact and connect. And I think we’re gonna see a lot more platforms in political tech, in real estate, in transportation.

We’re gonna see platforms in education. Texas is a wonderful place, I think, for all of us to focus, for that reason that Texas, if you think about it, it’s historically been a very traditional set of industries. The space industry, agriculture industry, real-estate industry and so forth, that Texas is a place where we’re seeing the fact that all of these traditional industries are realizing what the internet can do and we’re starting to build these platforms that enable the entire industry – an entire sector or segment – to transform, to change and become, all at once, to become a marketplace, and a data company, and a distribution vehicle for all of the participants in that given industry.

Well, if you look at the current platforms we have now and look at the big tech, Amazon, Facebook, Google, they all have platforms. The challenge is once you use that platform, you’re locked into it. You can’t disengage and take your data with you and go somewhere else, you leave that behind. And so, one solution people propose under the name Web 3.0, is that you should not break up big tech, but redefine the platform in such a way that you can, as a user, disengage, take your data, go somewhere else and re-engage with another platform – or many other new platforms that could come up – because now, you’re at some level portable with what you’re doing and you control your data and you control where you want to go. There’s not, with big tech, there’s not that many choices out there today, but in the future, there could be many. You think that’s where it’s going to go?

I want it to go that direction and I am enthusiastic and exuberant in saying this to you and to your listeners, that if anyone agrees with that, please, let’s talk, because the only way we’re going to get there is to start collaborating in the direction.

Here’s a different way to answer it: Remember when Netflix launched and you put together a list of the DVD’s -back when Netflix was still just distributing DVD’s – put together the list of all the movies you wanted to see; at some point, and I had a list of 300 movies on my, send-me-in-the-future kind of thing that Netflix had.

And I remember thinking, back then, how frustrating it was that I couldn’t take that exact same list and just drop it over in Amazon, to have a list of the movies that I would love to have someone buy me, or drop it over in Hulu, when Hulu emerged. And say, “All right, here’s the list of movies I want to watch. It’s the same list no matter where it is. It’s the same list of movies I wanna watch. Can I drop it over there?” Notionally, the same idea applies to Amazon: I’ve written a review for a product on Amazon. Why isn’t my review on every other platform where that product exists? It should be. It’s the same review, no?

But I vehemently agree with you that we people create content, we create information, whether that’s information about ourselves, or it’s information about other things, it’s still our information — It’s still Paul O’Brien’s perspective about the world and data about himself, and whether or not I own that is almost an irrelevant question, which I think gets in the way of the discussion today. We’re talking about who owns the data, yes?

Does Netflix own that data, or Amazon own that data, or do I own the data?

Well, honestly, I don’t even own my own data. That concept almost needs to be squashed. I can’t own my data. It’s data.

Someone else helped to make it available, someone else helped create it, etc., but it is my data It is data about me, so why can’t I do whatever I want with it and bring it wherever I want? And I think the direction, I think the answer lies in what we just talked about, that I think what we’re gonna see emerge are what you might think of as “people platforms,” or even open-source data sets about people.

Because at the end of the day, can we force a Facebook, can we force an Amazon to give me all the information it has about me, to let me move it somewhere else? Well, yes, sort of… because only within the United States can we establish a law that makes that a requirement. Dozens and dozens of other countries, I don’t even even know how many other countries are, right, but we actually live in a global economy and the internet is a global platform. So we can’t really think of the solution as the world requiring that every brand on the internet ensure that I can do whatever I want with my information…just won’t happen. There will be countries and places and laws and governments and so forth, that don’t care and don’t want to participate in that ideal, but, I can conceive of how people can start to create their own open-data sets and we can start to develop this platform in which my information and my opinions and my friends’ and so forth, are actually on the Paul O’Brien open-data stack, and if I want to give that to Facebook, or I want to give that to Amazon, I can, and if I don’t want to, I don’t have to.

I think what we’re gonna see is more options, more of an opportunity for folks to decide, for themselves whether or not they want brands and internet properties to have the information, or if they want to limit the amount of information that is given to them. It’s gonna be an exciting future ’cause we do have these questions of privacy, and security, and data portability and so forth that are exciting to talk about, they’re exciting to discuss, but we tend to miss the fact that legally – with regard to enforcement – they’re incredibly challenging questions and then frankly, with regard to the technology, they’re also difficult questions for us to uncover and so, yes, the next five, 10 years are going to be very heavily focused on what we all can do with information about ourselves and the information we create.

Do you think that will come out of the startup community? You’ve talked about the topic of specialization for startups and investors. Let’s talk more about that aspect of it and how that’s important to startups and investors.

I do think it will come out of the startup community and I think it will come out of the startup community in the sense that it almost must, that, if this is a government-driven initiative, quite frankly, we’re gonna have governance-oriented expectations. We see that in things like GDPR in Europe and we see things like that with CPC, excuse me, CCPA in California, wonderful intentions, wonderful initiatives, right, the right direction, but at the end of the day, they’re gonna be oriented to that particular part of the world and the laws pertinent to that particular world. So I think it’s difficult for us to conceive of how a government-funded or government-driven innovation program, or R&D project or some such, could actually solve this kind of question, number one.

Number two, I think it’s fair, I think it’s valid to appreciate that companies aren’t necessarily gonna solve it either. I mean, at the end of the day we have to be frank in the fact that we live in a capitalist economy – for the most part – and companies do have the rights – and responsibilities – the right to manage their brand, and the technology, and the products, and the investment they make in such a way that it delivers shareholder value. And so, until that changes, companies are gonna focus on what is most important for them. It’s valid to say they’re probably not gonna create these open-data sets for people to do whatever they want with their information because that information is valuable to those companies; that’s not wrong. I think it’s important that we appreciate that.

This is gonna come out of the startup community in the sense that it’s going to take some entrepreneurs and some technology folks who see the need for this, see the demand for this, and understand how it could be done.

And as “entrepreneurs” – quotes, as “entrepreneurs”, these people are folks who don’t necessarily play by the rules when we know the rules can be broken. We will find a way to do this. Startups will find a way to do it differently, do it better, maybe do it wrong, frankly, but that’s the point of startups; startups make mistakes sometimes. That’s how we uncover new innovations and new opportunities.

Someone is gonna sit down and say, “You know what, the entire world needs a way to enable people to do what they want with their information, and control it, and give it, or take it, or monetize it. Frankly, if someone wants to monetize their data, by all means. It’s gonna take somebody who sits down and does that and then really conceives of how that’s technically possible, how it will matter to everyone throughout the world and will actually work in a way that the companies then, and the governments then, will want to participate and support that, right, in a way that it will benefit everybody involved.

And that’s why I think it’s an important conversation for us to have in the venture community, in the funding and financing ecosystem, because it’s only through the support and the encouragement and the resources that investors can bring to bear, that the startups and the entrepreneurs and the founders are going to be able to make the investments of their time, and their experience, and their technology, make the investments of what they’re doing substantially enough, to actually make such a monumental thing come to life and work.

It’s a conversation that we’re having frequently throughout this year.


NOTE: Investor Connect is a program under the Texas Open Angel Network which is a 501(c3) non-profit dedicated to the education around startup funding. Hall Martin is the principal contact, and may be reached at https://www.investorconnect.org/contact.
Music: https://www.bensound.com.

Hall T. Martin is the Director of Investor Connect which is 501c3 non-profit dedicated to the education of investors for early stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Paul

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