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KP Unpacked
Join serial entrepreneur KP Reddy for conversations and discussions around innovation, technology trends, and AI for startup founders, innovation catalysts & investors focused on the built environment (and beyond!)
KP Unpacked
The Investor Psyche
This week's conversation is a treasure trove for founders eyeing the horizon of innovation and the built environment sectors, ready to make strategic leaps without compromising their vision. We shed light on the tightrope walk between adapting to investor demands and holding steadfast for the ideal financial partnership, all while navigating through R&D to commercialization. KP, with his seasoned insights, illustrates why patience isn't just a virtue but a necessary strategy when seeking a VC who truly grasps the high stakes of their investment.
This episode is an essential listen for entrepreneurs hungry to understand the investor psyche and master the art of securing funding that doesn't just get them off the ground but propels them into the stratosphere.
Want more discussions like this? You can connect with KP Reddy at https://kpreddy.co/ and follow him on LinkedIn https://www.linkedin.com/in/kpreddy/!
You are listening to KP Unpacked with KP Ready, a weekly dose of insights for innovators and startups from the built environment and beyond. Want more discussions like this? You can connect with KP Ready today at kpreadyco that's K-P-R-E-D-D-Y dot co. And additionally follow him on LinkedIn at wwwlinkedincom. Slash I-N slash KP Ready. Again, that's spelled K-P-R-E-D-D-Y.
Speaker 2:Hey, welcome back to KP Ready Unpacked. This is my opportunity to ask KP Ready every Wednesday afternoon. Hey, kp, when you posted that on LinkedIn, what were you thinking about? What inspired that post? What was it that led to you writing what you wrote on LinkedIn? If we've never met before, my name is Jeff Eccles, I'm a senior advisor and the head of marketing at KP Ready and I'm joined today by KP ready. He's the founder of our organization. He's also the founder and CEO of Shadow Ventures, kp welcome. Glad you're here today hey, jeff, how's it?
Speaker 2:going. It's going well. I was reading through this post and I know that many people in the world of venture capital and startups people that are interested in innovation for the built environment are going to be really interested in what you wrote here. So I thought maybe we could unpack your post about fundraising, absolutely all right. So, as I'm looking at this right now, as we're recording this, you posted this a day ago, which means probably, if my calendar were on the right day, probably April 23rd. You need to be KP ready, R-E-D-D-Y. You won't be sorry that you did, but go back to April 23rd and you can find this post. I'm going to read it and then KP and I are going to discuss it. We're going to unpack it here. So it starts out.
Speaker 2:It says fundraising is a very difficult task for startup founders. Unfortunately, it can be one of the most important tasks for your startup to be successful. Unfortunately, it can be one of the most important tasks for your startup to be successful. However, in a lot of cases, there is a minimum amount of capital required to get through an R&D phase towards commercialization. If you can't raise that minimum amount, it may not be worth starting the company. This is a fairly common issue with startups and high technical risk in startups is secondary markets like Atlanta, where I've observed this a lot. I'm sure other secondary markets have a similar issue. Someone described to me a saying that applies to this construct making great ideas good.
Speaker 2:Let me explain a scenario where you probably shouldn't bother starting. This is going to get interesting here. A founder has a great idea for a fully autonomous robotic road paver. They study the market and it's massive. They need $5 million to get a working prototype and another $50 million to have full commercialization and an initial production run. They pitch a bunch of angels and VCs. They get interest from a local VC that asks what can you do with $1 million? The founder now has a choice to make Go back and build a business where $1 million could work. Great idea to mediocre idea or keep fundraising. The right answer is to say no, thank you. This is where, if you are in a secondary market, you will conclude that you either move to SV or give up Silicon Valley or give up ie. It's enough money for a cupcake, but not enough for a full cake, so you'd end up with a half-baked cake.
Speaker 2:The issue with taking the $1 million is that you're now committed. An investor that operates this way doesn't have the right mindset and the network is likely to be of investors with their same mindset. So while you raised money, you will struggle to raise more. You won't make enough meaningful progress to demonstrate capability to warrant a new investor being excited. It's also likely that you raised the $1 million at a lower valuation and you can't justify a much larger valuation to raise $50 million. So you're in no man's land. Unfortunately, this investor with the wrong mindset may say absurd things like go get some revenue.
Speaker 2:Venture capital is a high risk, high reward business, the type of business that aligns well with VC principles. It's very difficult to course correct from this point. I've personally made this mistake. It's tough because, as a founder, you are impatient and you want to get into your startup full time. Picking your first VC investor can be the biggest decision you make, and sometimes the decision is to turn down the wrong money and be patient for the right money. By the way, I am the right money for many founders, but I'm the wrong money for the majority of founders. So all of that is super interesting. I really like the way you close that out with that last statement. But let's unpack it. What's the big takeaway here?
Speaker 3:It's just that let's take a step back of what's happened in the last 10 years. We've had a zero interest rate environment and so investors were looking for yield wherever they could get it, because sitting in the bank was zero, which led to a lot of venture tourism People that didn't understand the venture model, that had capital to allocate and could raise money, because people were saying, hey, let's see where we can get yield, and venture capital might be one of them. You saw the same thing with real estate. Now that you're back at I mean, rates are low still, I think, but the hurdle rate, the risk-free hurdle rate is now 5%. I can get 5% with no risk. And so now we're back to a normalcy where you need to have people that understand that they're taking lots of risk with the opportunity to chase a higher yield, and so, as the hurdle rate has come up, you now have to take real risks. So what I'm saying is VCs back to a normal state where it is high risk, high reward. The challenge people have and I've seen this in Atlanta a ton where we don't really have a ton of VCs in Atlanta, and when you have guys like me that invest mostly outside of Atlanta, that doesn't really help anything. I'm part of the problem outside of Atlanta. That doesn't really help anything. I'm part of the problem that you had this great idea and it's like, hey, for me to like get the product, finish the R&D, take on the technical risk, I need $5 million. And people say, well, I'll give you $500.
Speaker 3:And unfortunately the entrepreneurs, they lose conviction because they just want to get going right. And I always say there's parts of the startup process that require a lot of patience, which a lot of founders just lack. That it's like it requires both fortitude and patience. And then there's times in the cycle that require impatience and fortitude. And so this is a point where don't get started unless you have the right foundation, because you kind of can't go back and fix it. And they get in this mindset that like, oh no, no, I'm just going to go and raise the money, I'll show people progress and based on that I can raise money. And the reality is you can't Like you foundationally have kind of messed up the business. And so I see this a lot. I see it a lot in local markets and you know, it's kind of like I tell people all the time if Jeff Bezos tried to raise money in Atlanta, he'd still have an online bookstore.
Speaker 3:That's what it would be right. And so I think there's a real thinking around this that there's a minimum capital required to actually build products that matter. There's a lot of products that aren't hard, right, the app stuff, the pure play software, and that's the world of what we call market risk. Right, but when it's technical risk, you have to go. The failure is not that the market doesn't exist. The failure is that you can't figure it out, and you see that. You see it in pharma, right, it's not a function of is there a market for the cure for lung cancer? Yes, there's a market for that, but can you do it Right? And so you see that technical risk side, it just requires a bare minimum to get going, and I think a lot of founders need to be a little bit more patient about setting the right foundation of the right investors, because that will really matter in your success.
Speaker 3:Says that looks a founder in the eyes. That wants 5 million, that needs 5 million bucks to execute on their plan and has the gall to say what do you do with 500? Which I've seen I've been in the room with these things Is like that person if you put them on your cap table, they are not going to be that helpful. You know your next investor really looks at who are the previous investors and what's their reputation. I have a very storied reputation as being a little bit aggressive, a little bit tough says what's on my mind and for a lot of later stage VCs they're like well, if KP like invests in this company, he's kind of a jerk and if he invested that means that he saw something right. He saw something. It doesn't mean that I'm right, it just means that I saw something. The bar and the filter is a little bit harder than others. So you know, versus a person that owns a few restaurants, that has an extra few bucks, that watches too much Shark Tank, right, write to a check.
Speaker 2:Nobody down the line when you have to raise more any more money respects that person even if you watch shark tank as reality, showish as it, I mean, you still see this playing out, right, you get an offer from three of the sharks, and, and at some point the sharks are starting to argue, and, and, and one of the sharks is going to point out something similar to what you're saying right Now. They're, you know they're, they're slicing and dicing and, and, uh, you know taking, taking more and less, and, and things like that. But you often see that even on that show. So I hear the lesson about patience and we see this going all the way back. You know this.
Speaker 2:This, this is not necessarily that applicable to the point of time that people are in our incubator. You know, many of the people that are in our incubator are a little bit earlier than this, but we still see, even, you know, and I think it's part of the, I think it's part of the entrepreneur condition, right that impatience that I. I've got this great idea. I'm, I'm really I'm hyped about it, I'm enthusiastic about it, I want to go, go, go. And even, you know, in our incubator when we're assigning people to make 10 or 20 qualified customer discovery calls a week. Oh, I just want to get this out. I just want to do this. No, you've got to, like you said, you've got to build this foundation.
Speaker 1:Yeah.
Speaker 2:You said that and I thought well, everybody knows that right. All this is innovation for the built environment. These are architects and engineers and contractors. Even in fast track construction, we start with the right foundation, so I think that's a really good lesson. Is there also a lesson here in terms of where you're looking for investors?
Speaker 1:and flat free pricing, regardless of your annual construction volume.
Speaker 3:Visit wwwjetbuild and get started today.
Speaker 2:Remember that startup that went out of business for doing too much. Customer discovery no.
Speaker 3:Right. So you know. So I think it's that type of patience. It's just really important. But yeah, I mean your first investor really defined your first like real investor, not friends and family money. It really sets the tone and the stage for your future. And while a great investor is not everything as a founder you still have, there are great investors that have put money behind great entrepreneurs and still fit, which is also a lesson.
Speaker 3:You have a bunch of smart people with a bunch of track record and they still can't get it together. I mean, it's a tough business. This is a tough, tough world. So I think it's really just a function of be patient and talk to lots of investors, just like you do customer discovery. Maybe we need a class around investor discovery, right Like, because I think it's a very similar thing. Just like you have product market fit, there's like founder investor fit, and it's just so. I mean, it's just so critical in terms of not just the money, the future money you might need, and what you expect and what you want to hear from them. And I see it on board calls that I'm on, where there's board members that were like maybe the friends and family investors and they ask all the wrong questions and when the founder needs to raise more money, they're zero helpful. So yeah, we need to do a $5 million round next. They don't know who to go to, they don't have any relationships, and so I think you know that patience around fit.
Speaker 3:And there's also a thing, a dynamic, where you have to ask yourself how much capital in total do I need to raise? Not do I want to raise. How much do I need to raise for the entire life of the business until it turns profit. And if the answer is $50 million or $100 million, super critical. If you say, actually, the most I'll ever need to raise is a million dollars, it's not as critical, right in terms of worrying about the next round and the next round. And that's one of those questions. I'll tell you, as founders, that a lot of times they don't have the answer Like how much total capital do you need to raise to get to profitability? I, how much capital do you need until you no longer need any capital? Right, you know?
Speaker 3:now that doesn't mean you don't take capital. You might take capital because the market's going well and you want to do more marketing and it's worth the delusion to take on more capital to grow faster. 100%, that's optionality, right. Having the option to raise money is different than needing money to survive and build out the business, and so what I say is just like that patience and fortitude around really saying, hey, this is the right match. And I think that so many founders with great ideas do it wrong and then they're done. Yeah, like in my own experience too. Then what happens? Then you have an investor that says absurd things, go get revenue.
Speaker 3:And in one of my startups, what I did because I made the mistake, I went and started a consulting business. I didn't have a product to sell yet I started doing consulting because, okay, I can do that, I have smart people working on my product, don't have enough money to finish it, so let me go do consulting. And then, guess what? Then you build up a consulting business and you never have time. This idea that like, oh, I'm going to build this consulting business, it's going to generate cash and then I'll go work on my product. That never happens. Now your investor's like oh my gosh, you're getting revenue in. Oh my gosh, you're profitable. Keep doing more of the same.
Speaker 2:Yeah, you're in a trap.
Speaker 2:You're in a trap.
Speaker 2:Yeah, you mentioned the investor discovery and obviously you know this, but if you're a founder out there listening, or even a VC or somebody else, I mean, one of the things that we do in our incubator is that in every one of our workshop days, we have startup stories, so we bring in founders, but we also have VC stories.
Speaker 2:Have startup stories, so we bring in founders, but we also have VC stories, so we bring in VCs and the founders that are going through the incubator have a chance to listen to and ask questions and basically interview VCs to learn more about building their startups and raising investment and what's important from the VC point of view. So, if you're out there and you want to know more about the incubator, of course just reach out to us and and we we're happy to talk about both corporate and and traditional or independent startups that go through our, our incubator. But this is, these are the kinds of lessons that you can learn. You know, having having KP is is one of the main facets of our, of our incubator, and also, just just in this ecosystem here, anything else that we need to, we need to unpack here. I mean, I think we've covered a lot of it. Uh, I know that we've touched on some of this a little bit before, but I think this is a really good lesson, uh, for founders out here to pay attention to.
Speaker 3:Yeah, and I want to say it's like um, if you're one of our members in our online community, just DM me in the community. Please do not email me. I already did a thousand emails. Do not DM me on LinkedIn. The nice thing about our community is it's a smaller group. It's not, you know, I don't get hammered nearly as much, but DM me in the community and I'm happy to, like you know, happy to help you, maybe mitigate against a poor decision.
Speaker 2:There you go, there you go. The offer is out there. You heard him go over to the Catalyst Network that's our online community and DM KP there he's. He's very active in that community and he does respond to the the direct messages there, as do I. So, if you know, if you want to reach out to me and you, you could even reach out to me on LinkedIn if you wanted. But I have the same sentiment about email, so let's keep it in the DM, so I'm not going to read back through the entire post. You can go find it on LinkedIn Again.
Speaker 2:April 23rd, kp posted this and it starts out saying that fundraising is a very difficult task for startup founders. Unfortunately, it can be one of the most important tasks for your startup to be successful. However, in a lot of cases, there's a minimum amount of capital required to get through the R&D phase towards commercialization. If you can't raise that amount, it may not be worth starting theization. If you can't raise that amount, it may not be worth starting the company, and you can read on from there. There's a great example in here. It's a very good lesson here. I'm pretty sure that if you've been listening throughout this whole conversation, that you've learned a lot from KP about the ins and outs and the dangers of, you know, making the mistakes, going too low and maybe connecting with the wrong VCs, so make sure you keep that in mind as you are pushing your startup forward. Kp, thanks, as always, for joining me today and unpacking this post for me.
Speaker 3:All right, thanks, jeff.
Speaker 2:And for all of you out there, thanks for listening. We'll be back again in the studio, so to speak, recording another KP Ready Unpacked and, as you're listening to this on the podcast, we do this live inside the Catalyst Network. Right now, kp and I are actually on on video. We do this live and and um uh, everybody in the network in our community has an opportunity to listen in and ask questions, and that we can do a q a at the end of the recording session here. So that's one of the benefits of joining joining our online community as well you can get in on the conversation at the end here. So, to all of you out there listening, we appreciate you listening, of course, follow us, share the episodes, everything, and we'll be back here again next week with another episode of KP Ready Unpacked. Thanks, everybody.
Speaker 1:Want more discussions like this. You can connect with KP Ready today at kpreadyco that's K-P-R-E-D-D-Yco and additionally follow him on LinkedIn at wwwlinkedincom. Slash I-N slash. Kp Ready. You next time.