Scaling Startups with Purpose: Jonathan Bragdon’s Blueprint for Capital-Efficient Growth

Eric Dodds 00:06
Welcome to the data stack show.

John Wessel 00:07
The data stack show is a podcast where we talk about the technical, business and human challenges involved in data work.

Eric Dodds 00:13
Join our casual conversations with innovators and data professionals to learn about new data technologies and how data teams are run at top companies. Welcome back to the show, everyone. We have a great time planned today, because my friend Jonathan Bragdon has joined us for the show. And Jonathan is the founder of capacity, which is a VC firm, and they have a very unique approach that I’ve loved learning about recently, but you also have a background in data and technology, so we have tons to cover. Thanks for joining us. Jonathan,

Jonathan Bragdon 00:52
yeah, great to be here. Thanks.

Eric Dodds 00:55
Here. All right. Well, give us a brief background. You started in tech and now you’re a VC, so give us the 32nd connect the dots.

Jonathan Bragdon 01:05
Yeah, sort of eased into tech through consumer packaged goods, a little bit like way back in the day, even 2000s and barcodes and trade marketing, but eventually ended up deeper in tech doing ’em, simulation, modeling, some data science, some IoT stuff. Built a few companies, a couple ventures back, a couple weren’t and then started to do a little bit of studio, of a studio inside one of those companies. Never got that far. Really wanted to get into doing a fund to accelerate a studio, and ended up going over to the dark side after that company founded the fund about four years ago.

John Wessel 01:48
All right, that’s great. So before the show, we were talking a little bit about a few different things. One of the topics I’m excited to dive into is what matters. So if you’re saying you’re one of our listeners at your early stage startup, what matters, other than your financials and growth plan, like maybe some of the obvious things, but what actually matters when you’re growing your business, if you’re looking to raise money? So we want to talk about that. And then what are some topics you’re interested in digging

Jonathan Bragdon 02:14
into? Yeah, I love to talk about that. I love really early stage companies, but ones that have gotten a little bit of revenue along the way. And so the obvious conversation is, how does the interaction with the customer happen? But more basic than that is, what problem are they trying to solve, and what’s the founder obsessed with? And then how do we move back from that? And for me as a VC, yeah, I get really interested in, how do you find those things? And so a lot of the even the language around tech investing overlaps, and Eric and I were talking about this a little bit, just so there’s a tech stack, but there can also be a capital stack. And so I get pretty deep into the capital stack. So it’d be fun to talk about

Eric Dodds 02:58
that too. Awesome. Well, let’s dig in.

John Wessel 03:00
All right, let’s do it.

Eric Dodds 03:02
Jonathan, I’m really excited to chat with you. This will, in many ways, be a reflection of a lot of the conversations we’ve had. You know, over the last year, as I’ve learned about your approach and your background and so tons to talk about from the VC side. But can we go back to your early days, because I don’t think we’ve actually covered like CPG Nielsen type data much on the show, and so maybe you don’t want to go back into your history that far, but I do, because I think it’s really interesting, and I know John has a bunch of questions about that. So will you entertain us and just tell us, what were you doing with that data, and what was it even like to work with that data?

Jonathan Bragdon 03:45
Yeah, I don’t know how entertaining it is, and it doesn’t come up in conversation much with packaged goods. Consumer packaged goods. Back. This was 25 years ago. This is 90 990-899-2000, the way we had to interact with the customer was looking at purchase data, and then purchase data was basically what went through the register, and how do you record each of those purchases? And so there were holders of that data that pretty much monopolized that. And you know, Nielsen, IRI, I was another one. I can’t remember what that was, what that stood for. We had to buy a lot of data for that data and then analyze it. And it was not real time. It was, you know, weak. We get weekly data in, and then we would use that to drill down into regions and types of stores, grocery stores, you know, convenience stores, what have you, and figure out how to compete for shelf space, just using and so, what sold through? How many turns? How if we sat next to a competitor, could we go out? You know, could we out sell them? Did promotions really push the needle? And so. A real lag on the time of data, but that also gave us a lot of time to do beautiful charts and put big presentations together for big brands that we could and big buyers of the actual product. So the pace was definitely different, and the source of data was pretty limited, but it was fascinating for me to watch that you could take purchase data from every single register in, in our case, in the country, and just still basically sell points out of that. So that was my first experience doing that.

John Wessel 05:37
Yeah, that’s really interesting. Can what like, what level of detail? Was this like a sale, transactional level of detail with, like, who bought it? What was it like, that level of detail? Or is there some kind of, like, aggregation,

Jonathan Bragdon 05:51
it was before you got it, for the most part, but it also depends on how much you paid? Yeah, of course. Right? So, I mean, the first experience I had with it. We were at a place where they were based in Florida, and I remember watching this presentation. And, you know, there’s still it was a green screen computer monitor that had a map of the US. And the person who was presenting us was looking at buying data. It’s like, well, pick a state, I picked a state, and then it would show just the state. It’s just a line, right? Just a line, and you would drill all the way down. It could drill all the way down to like, hey, there’s five stores in this city. Pick a store, and you’d pick a store, and it would pull up a, you know, the floor plan. And then you would pick an aisle, and it would pull up a planogram, which is where all the bags of product would actually shelf, and it was just boxes, right? There was no you didn’t see what they were. You just saw UPC codes, like just the numbers in those little boxes, and we’re talking about this. And one of them bleaked. So wait, what was that? Well, it just went through the register, so it was real time into their system. But it was highly shrouded data all the way out to whoever could actually use it. And, you know, obviously not back to it was even shrouded all the way to, you know, who we were presenting to as a supplier. Pretty fascinating. And this is, you got to remember, too. This is like 2099 2000 there were so many companies. I remember there was a Wired magazine ad that had customized UPC symbols. They were sending out, you know, barcode readers that were exclusive, that you couldn’t use on different types of barcodes. Everybody was doing proprietary, yeah, yeah, reading stuff, and it was almost like having your own custom browser to look at secret websites. It was like that ridiculous, but

Eric Dodds 07:48
It’s fascinating. One term you used, Jonathan, was really interesting to me, and I may get this wrong, but you said the way, the main way that we interacted with a customer, or the interface of the customer. It was very personal, right? Like that. It was sort of a conduit of how you had a relationship with these customers that you know, your company has a hard time interacting with directly, other than the fact that they pick your product off a shelf and, you know, run it through a register. Can you speak a little bit more to that, as it just that term really struck me, right, because you’re fighting for shelf space, but the way that you talked about it was a relationship with your customer, which I think is a really important concept when you’re thinking about data, because especially with the proprietary nature, the shrouding by these people, creating scarcity so that they can monetize it, you still seem to retain the idea that the main point here is that we actually have some relationship with the customer. Yes,

Jonathan Bragdon 08:46
That’s a great question. I mean, packaged goods company, then you really only had two ways to figure out customer response to your product. I mean, one, it was that you could do these little surveys and get togethers, where you would literally put people in a room and feed them products or show them stuff and observe how they reacted. It cost a ton of money to do that type of analysis. The other was buying activity. Like, did they buy it or not? And, yeah, how often do they buy it? Those are really just the two ways to pull the data. So from a for us, you know, everything distilled around customer activity, so it was pulling either the way a customer said they were going to act, the little survey things, or how they actually acted. And how they actually acted was the only way we could sell products to those that were putting it on the shelf. So because if we got data, enough data to show this type of customer in this area, this location within this type of store, actually bought things this way, and bought our product more than the other product. Project, and we could justify a bigger, you know, a bigger sale to that distributor, retail, yeah,

Eric Dodds 10:05
yeah, man, it’s wild. I think about, like, the entire integrated, you know, systems around, like Shopify and square and, you know, that do point of sale, but it’s like, end to end. You know,

Jonathan Bragdon 10:19
it’s crazy, yeah, well, faster into more locations. I mean, that’s really the difference. Yeah, better data.

John Wessel 10:27
Well, and it’s funny, because I think you said so that’s been roughly like 25 years. I mean, obviously we’ve taken some steps forward, but I don’t know, like, that’s actually pretty impressive to have, at least for their system to be fairly real time data into their system, and from a data quality perspective, and from a like, data like unification perspective, like, it’s kind of a monopoly, right? So there’s only a couple of companies that do it. They’re in the business of, like, they sell this data. So it’s in a lot of ways, they’re more motivated for it to be higher quality and useful. Then maybe they’re more like, the more the place we are right now where there’s lots of competition in the space and there. And, you know, Stripes is really about the payment processor and customer experience and most increased checkouts. The data is there, but it’s a little more secondary. Same for Shopify, they want to, like, drive conversion rates and such. The data is a little bit secondary. So it’s interesting to be there. I suspect there may be some steps back with some of the data quality pieces of it, or just the focus, right? Because now you have like, 10 times as much data, but people may be even more confused about which data is valuable.

Jonathan Bragdon 11:30
That’s why we have companies like yours.

John Wessel 11:36
Great point, great point. Yeah,

Jonathan Bragdon 11:38
but I do think that it was a little more of a simple question of how you own the market, because for them, it was, if you own the point at point of sale data, you own the market. Yeah, you had the most, you know, Price Strength to charge, and everybody else was depending on that data to run their business. Yep, yeah,

Eric Dodds 12:01
Okay, well, that was thank you for indulging us. Thank you for indulging us. Okay, now you gave us a brief overview in the intro, but from CPG to serial entrepreneur to Vc, so can you just give us the, like, two or three minute version?

Jonathan Bragdon 12:26
Yeah, so I thought about jumping into building a tech business, I was brainwashed into thinking, well, to build a business, you’ve got to go raise money first. Let’s go. And that’s what I did on the first, first go round. I learned, over time, there’s lots of ways to fund a business, and even a fast growing business. And so I learned a lot of different types of ways to pull capital into a business, which is basically, how do you get money to grow before a customer gives it to you? You know, there’s that capital gap, cash gap, right? If you can pull the Revenue in as you’re growing and make enough capital efficiently enough to grow really fast without outside capital, then you’ve just found the Holy Grail. That’s what you should do. But so I had to learn through a bunch of different variations of that. And again, some base plants and some worked but I think for me, it was an eye opening piece to it. I realized what we learn as founders, especially tech founders, is usually a very small portion of reality when it comes to funding, right? It’s the sexy high growth, you know, big venture firms, big exits to big names that make great headlines. And a lot of the people that I met along the way made a ton of money building a fast growing business and selling it, and it was all really quiet like headlines, right? And that fascinated me as well, because both of those paths work. So when I, the last company that I was in, started to build a studio model inside of that we, you know, we ended up building 323, products, two companies, and I wanted to build a fund to really accelerate those out of the studio. And ended up selling out of that before getting to the fund. And so that gave me a little bit of runway to start experimenting with things. And so my experiments, I was just obsessed with, how do you find fast growth companies? Does it have to be the way VCs have always done it? Is that a subset of a bunch of different things like, what are the deal structures? What Do you think? All of it. And so I just looked at it the way I looked at a startup, which is, let’s just experiment, and let’s be able together, pull some capital together. Let’s do 10 investments. Let’s play around the deal structure. Could, you know, we get into the complexity of that, but I just want to see what works. And what didn’t, and the stuff that worked, we pulled into fun too, and we’re running with it. So that’s how I didn’t look at it differently. I mean, I was naive again, thinking, Oh, I’ll start a venture fund. Like, how hard could it be? That’s

Eric Dodds 15:17
like the entrepreneur who did it. It was the, want to say it was the someone from Nvidia, maybe, where they asked him, like, would you go? Would you do this again? And he was, like, Absolutely not. Like, it’s way too hard. It’s way too hard, but you do it because you don’t know what’s going on, right?

Jonathan Bragdon 15:37
I think that’s how when you look at founders, when I look at founders, you do look for that little bit of colorblindness, right? It’s, I don’t see the world as it is. I see the world as I want it to be, right? Yeah, and you forget, even if you’re a second or third time founder, you forget just how damaging it is. You don’t get out of building a company unscathed. Yeah, there one gets injured. Talk to my wife about this too. It’s Kevin. I think when women have babies, it’s incredibly painful and crazy and chaotic, and lot of them do it again,

John Wessel 16:19
yeah? The third time Yeah. Fourth time,

Eric Dodds 16:22
yeah, totally. Oh, sorry. Go ahead. Jen,

John Wessel 16:25
yeah. I was just gonna ask about this before we move past this, I want to ask about the venture studio model a little bit with, you know, words thrown around a lot. Love your definition of it, and then just maybe learn from doing that for a while. What did you like about it? Would

Jonathan Bragdon 16:40
Do you not like it? Yeah, I’m not the best one to learn from this, because I had so few iterations on it. We were just borrowing that Google model of pulling really smart people off the line for a half day and working on Bravo. It turned into products, and a lot of it, there’s a lot of things that we could build, but did not have as much to do with the, you know, what, the trajectory of the company and so, but the skill sets were there to actually solve some problems that that might apply or might not. So it was more of a Skunk Works approach. It wasn’t but ours was what a lot of the studio models that are out there now are much more focused. And I like a lot of the models that are in place that are really just engineered around the actual problems in the companies that are relevant, as opposed to just the side, kind of a side studio. You still see some of that, but I just, I think it’s more of a it’s almost like a big company’s hobby as opposed to building a real studio and but we’re seeing a lot, I’ve seen a lot of really amazing work in that space. I look at it from a deal structure standpoint, like, how much of a studio, you know, how much equity should they take or not take? How much of a team should they contribute to each of the companies? Like, how much did they hang on to it? When? How do they graduate? How do they get like those mechanisms, you know, the devil’s always in the details. And so the way those studios work is pretty poor. Matt Max pie. You probably He’s all over the place. He talks a lot about venture studios, and you probably he’s a good one to listen to, kind of a and he’s pulled a lot of people into the conversation, so I’ve been watching him a lot as

John Wessel 18:26
well. Yeah, I gotta throw it to Eric too. Since you, you’ve planned, oh yes, like any war stories or learnings for people?

Eric Dodds 18:35
Yeah, we started. I mean, it’s kind of, you know, I accidentally after starting a company and then selling it, accidentally started consulting, which is how I met you, John, and accidentally hired people, and so accidentally started a consultancy, you Know, without really intending to. And but I’m entrepreneurial, you know, in my bones and so, you know, running a services business wasn’t, I mean, it was kind of fun to figure out the business model, because I like nerding out on, you know, how do you make different business models work? Yeah, but it wasn’t the, you know, running a service business, once you kind of figure that out, it’s not the most exciting thing to work on on an ongoing basis. And so and the people that I started the company with were actually those that I sort of ended up starting the consultancy with, looping in my co-founders from the previous company. And of course, all of us were like, okay, like, this is really just a way for us to, you know, sort of figure out the next idea. And so we incubated a couple ideas, and one of them had serious legs. We just chose the worst possible industry, which is ad tech, just a horrible market, yeah, you know. But it was based on basically some stuff that I had figured out from, you know. Marketing standpoint previously, and was very helpful. And so I thought we should just productize this, because there’s, I think, a huge market for it. But I would say, as I think about it, there are two, two major things that I reflect on as I look back at that experience. One is that there are lots of different models, but I think you need someone who really thrives as an operator, of as an operator, and has a high appetite for complexity, because all the things that Jonathan just mentioned are non trivial, just from running a business and thinking really critically about setting expectations in different parts of the business. Because the concept sounds so great, but the reality is, everyone wants to work on the cool startup thing, right? And yeah, and he’s gonna make money while someone’s got to make money. Everyone wants a piece of the action if there’s some sort of event, you know, and that’s totally doable. But I think people go, sorry. I say people, that’s not accurate. I significantly underestimated how talented of an operator and leader you need to be in order to make that work really well. You can do it, but it’s very hard because there are a lot of variables there. So that’s one, I think the other thing is that and actually another, there’s a group in Indianapolis, a guy named Christian Anderson, who’s the VC as well. He had a company, I think it was called studio science, maybe. And then the fund is called high alpha. High alpha might be actually the studio. Anyways, Christian Anderson is a great guy. Hi. Alpha has some real meaning, I mean, they’ve done some really great work. He actually, I was talking with him about venture studio stuff, and he brought up a great point, which Jonathan also mentioned is the earlier founder obsession. And I think that’s such a key ingredient. And it’s really easy to think, Oh, well, we can just kind of have people thinking about this problem, you know, or I’ll spend half my time doing it or whatever. And the reality is, for a lot of people, startups are so hard, it’s just not enough. I don’t think so, right? And so having someone in there who is completely obsessed with the problem, and that’s all they think about every day, I think, is a really critical piece of the puzzle, just because the startups are so hungry for that, and they really, you know, sort of a key ingredient. So I don’t know that’s those are my takeaways,

Jonathan Bragdon 22:45
but I almost feel that because I’ve talked to a lot of, I’ve talked to a number of people that built venture studios, and the ones that they’re always hard to your point, but the ones that look at it like an assembly line, like we’re gonna, be, we’re gonna have this very talented group come in, or they’re gonna build this and it’s gonna move to the next stage, and then they’re gonna build this and it’s gonna move to the next stage inevitably. Don’t work like it’s not an assembly line. You gotta have some obsessed, you know, maniac who’s so focused on the problem, but has access to the team and to be a product owner, like all their all that stuff in one to make it work. That’s so hard. Yep, those are long cycle things.

Eric Dodds 23:30
They’re not short, yeah, yeah. It’s not like, yeah, I get that it’s interesting that you mentioned that, Jonathan, because it’s so tempting. Investing is an assembly line either, but there are mathematical equations that you know tend to work out right if you invest in X number of companies, and some percentage of those get X amount of return right. And so you sort of, and there are different ways to do that, with VC, and we’re going to talk about those in some of you know, in a minute. But you have a mathematical framework for that, and it’s you. It’s so tempting to apply that to the studio model, right? We’re going to generate X number of ideas and, you know, and it really doesn’t work that way. I think that’s a great way to describe it. So John, let us know if you end up doing that with favorable data. Okay, well, let’s Okay. I want to talk more about your approach to investing in some of the unique things you do at capacity, but as a way to get into some of those details, tell us about the capital stack.

Jonathan Bragdon 24:32
So I’ll try to keep this simple, because I could talk for hours about this. This is my obsession. This is what I cannot let go of 24 hours a day when I started experimenting with a fund acting like a VC, I should say, or acting the part with a whole lot of imposter syndrome. You know, you spend a lot of time talking to founders, but you’re trying to figure out whether you should invest in them. It’s always a one on one binary outcome, or whether they’re a fit for the fund, right? And that is the job. Let’s figure out the selection process. Does this fit? Is there a lot of potential here, and does it fit with our thesis, and will it build out our portfolio and all of that? But the binary nature of that was frustrating for somebody like me for a lot of reasons, not the least of which was, I’ve got some vocational add, and I want to solve a number of things, not just have one super smooth process that gets repeated all the time. So for my own mental health, I just started talking to founders about the type of capital they should be raising, even if it doesn’t fit, yeah, VC in general, even not even just our fund and those 20 minute zoom this is during the pandemic. There are 20 minute zoom calls just stacked, like those conversations distilled into this concept of, you know, a check is not a check. Yeah, you’re hiring money. And every type of capital allocator that’s putting money into a company has different expectations, there’s different time frames, there’s different outcomes, different multiples under interest rates or what have you. Those are like skill sets, like talent that you’re hiring to build the company you’re hiring money to build a company. And so what really fits, and it’s and there’s never one answer, because a company is a living, breathing thing, and it changes over time, and so capital needs to shift. And if it starts really early and there is no revenue and there are expenses. A bank is not going to touch you any of you’re just kind of having a really hard time. Your choices are really limited, and a big portion of those become equity angel investors. Maybe you’re lucky enough to know how to go to apply for a grant, or if you get into a pitch competition, or something that’s less dilutive, but that’s typically where you sit. But a lot of times, if a company has moved down the path experiment a little bit and had a little bit of revenue, not even not a lot, their options start to open up a little bit, and they can actually diversify some of the capital that is coming in. And, you know, revenues, a little piece of it, but not enough. But they might be able to get a contract with a company that then they can finance that contract a little bit along the way without giving up part of their company, or maybe that goes side by side with a number of angel investors. And so they’re okay, but they don’t have to raise as much money, because they’ve got other types of capital on the stack. So those conversations kind of opened my eyes. And I realized talking to founders, it opened most founders’ eyes that there’s, there’s a whole, there’s a whole bunch of different ways to capitalize a company. You know, it’s not just, Hey, I gotta learn how to pitch. No, you gotta figure out how to hire money. That’s the cat, the capital stack. And then over time, it shifts, like when we invest in companies, a lot of what we’re looking for as a business model that is both fast growth but also capital efficient, which is now cool again, apparently it really wasn’t. Yeah, like, are you even in venture if you’re looking for capital efficient models? Thank goodness. But we go a little bit further, and we’ll even look for companies that may only need one more venture round after hours and that’s it, because there are other types of capital that could stack in or it’s capital efficient enough that it really does generate enough to to even, while bridging even and growing really fast to continue to generate, generate enough to cover that growth. And those models are definitely out there. You know, 90, you know, 93% of the Inc 500 were not venture backed. There’s lots of ways to grow really fast.

Eric Dodds 29:02
Jonathan, could you give us a story about one or two of your portfolio companies where it was maybe, you know, not necessarily a typical deal structure in traditional VC sense, and then they didn’t take a traditional path of sort of, you know, just following the alphabet down in subsequent rounds, you know, trying to increase the valuation in each round. Can you just tell us a story of a company that sort of followed, maybe an atypical path where capacity was part of the story? Yeah? So,

Jonathan Bragdon 29:36
So one, we’ll have to get into a little bit of deal structure, maybe I’d love that. It’s all right. So pretty much every fundraiser that ends up going into Vc is, you know, there’s the math that needs to work. Every company needs to potentially be a really big win, because so many. Fail the winners for all the losers. And that’s a venture right? And so that gets pounded in your head as that’s the venture capital model. And so you have to pitch to that, and you have to have a business model that works for that. And so you see a lot of companies contort themselves to that model. They’ll build out even portions of their business model. So it looks more V like more of a VC fit. And we did have a founder that that talked a lot about, they were just obsessed with their own finish line. And like, I don’t know it could be a billion dollar company, but what if I wanted to sell it for 20 million? Like, is there? Is there a way to make that work from a VC standpoint? Like, typically, no, but we’ve been experimenting with a couple different deal structures. One is one called redeemable equity rates, and the way that works is every company that we’ll invest in, we want them to aim for that next round to grow really fast, but have a model that’s capital efficient enough that they’ve got optionality at that point. So when they’re raising the next round and a round, they’re not raising just to necessarily survive, it’s purely to go towards growth and acceleration, and that’s relatively rare, but that’s what we look for. But in some cases. In this company’s case, it definitely worked this way. They didn’t advance to the next round. It wasn’t because, but it was basically because the founder didn’t like the valuation, like their valuations were dropping off the table and like, Man, this is we’re going to give up too much. We could survive for a while. We don’t have to raise a bridge round after this. Let’s just kind of hang them there, and because our deal structure included a redeemable equity option, like what we do, if they don’t raise that next round, they start redeeming back our equity right at what’s at a multiple, so a little more than what we little higher valuation than what we put it in, so we get a little bit of return. But then we get to work with them along the way. So most of those companies in a venture fund, if you look at a portfolio and say, there’s 10 companies, the one or two at the top that raised more money, get all the attention from the fund, because that’s where all the terms come from. Company three through six or seven, fantastic companies. They get no attention from a venture fund because they haven’t raised more money. There is no markup. The venture fund can’t show on their paperwork that they’re worth more, so they can’t raise more money for the next fund. So they just sit there and the fund manager typically hopes they don’t have to spend too much money melting it down at some point, because they never raise more money. In our case, we’re getting a little bit off the we’re getting a little bit at a time going back where they’re redeeming our equity rates, which gives us, from a fiduciary standpoint, we can put time into the company and work on their next inflection point, and if they end up in a year later, a year and a half later, they may have redeemed back a little bit of our equity, right? But then they go to the next round. Then we convert everything we have into that round, and we just keep going. So that little hiccup that kills a lot of companies because they can’t even drown we’ve turned that into a value creation model so that we actually increase the return on the fund. That way, we could return just the middle of that portfolio. We could return the whole fund if they just don’t, if those companies just don’t die. Yeah, and we’re sitting on the same side of the table. This is what I love is as I always, I mean, I think I’ll always think like a founder, they can sit on the same side of the table, and we think about growth, because growth increases the returns, whether they raise more money or not. So that’s, and that’s, you know, plan B. Plan A is raised according to the plan and just goes to the moon and sells for a billion dollars. But there is no plan B in VC, typically. So we, we have a plan B. So that’s so we’ve had, and, you know, the fund is young enough to where that that’s a specific example, but there’s multiple we have out of those first 14 investments in the first fund, you know, we had, you know, if we had it went just like the power law expected to, you know, two, three, raised more money. The next group, it’s six that were deeming some equity rights. There’s two of those that are actually looking to raise more money. So it’s exactly the way you lay it out on a, you know, on a spreadsheet, which makes me happy, yeah,

Eric Dodds 34:42
Now, really, I want to talk about evaluating companies. And I know John has a couple of questions on that front, but really quickly, we just talked about VC in your approach to, I mean, I just love the concept of, like, I. You know, the middle set of companies that are great companies, but you know, they sort of languish and unfortunately die a lot of times in a traditional venture model. But you mentioned that there’s lots of ways to capitalize a company. Can you speak to that for a moment and give some examples of companies who maybe started with VC money, or maybe started with a different type of capital. And just lay out some of those options. When you think about the capital stack being far beyond just VC, yeah, if you can

Jonathan Bragdon 35:31
segment out types of capital, you know, VC angel investing, that’s called risk capital, for a reason. I mean the failure rates are really high, but hopefully that’s justified by how you know how big the exits are. So that’s a big bucket of capital. It’s risk capital if you go all the way to the other extreme, which, by the way, if you do raise VC money, it’s like hiring somebody on your executive team like they’re not Levy, yeah, either permanent until some kind of liquidity event exit, or whatever it is, go to the other extreme of that, and you have, you know, hey, I have a contract for dollars, but I need to, you know, hire somebody to kind of work through this thing, and it’s going to cost me 20 grand over the course of two months to do this. But instead of going back to the market trying to raise equity for some really specific things, you’ve got a contract, you can monetize that. There are funding groups that will take a contract, especially from a big customer, and say, I’ll give you 4050, 60% of that now, and you pay me back with an interest rate, you know, in 60 days, 90 days a year, whatever it happens to be, but you at least pull the revenue from that one deal forward in time so that you can, so you can actually produce on it. And that’s like hiring a temp like it’s not, you’re not giving up ownership. It’s not a long term thing. It’s very specific to one contract, right? Get it done in the middle. There’s everything from, you know, a whole lot of different types of debt, traditional stuff, you know, bank debt, which you’re not going to qualify for until you’ve had a relationship for 342, years at least, and usually longer. So they’ll actually give you a letter line of credit and it’s going but there’s also some more flexible ones that come out of groups called CDFIs, and they’ll they’re a little more flexible with banks. They’re still regulated, so they still have their limits, but they can usually do things the banks can’t, and then you’ve got SBA loans backed by, you know, the government, pretty much all of those, you know, they’re going to ask for personal guarantees. And so there’s some other things that you’ve got to really think about, when you’re hiring that money again, expectations and what are you committing to. And then there are things like, you know, revenue based finance, which you’ve seen, and, you know, you know, there’s a bunch of different versions of this, all across the board, but, you know, some can be just as little as, hey, you’re, you know, you’re selling $200 you know, you know, a week out of your online thing, and they’ll give you, you know, 40 bucks, and then you pay that back. You know, it’s, and it’s and it’s just coming out of stream of revenue, and then, or be all the way up to where it looks almost like venture where a revenue based finance group will say, we’ll give you this much money, you’re going to pay it back over time, a little bit at a time per month, based on how much your revenue goes up and down. But we want a multiple out of that, whatever that is. And most of those don’t even have a maturity date on it. Some of them do. It’s just really how fast you grow. And there’s grants, and, I mean, there’s probably five main buckets, and then there’s 80 permutations inside of that, just depending on what you’re trying to build and what you have. And if you’ve got an asset, you can get debt against that asset. And that can be as simple as $100 a month in sales, or a contract, or a building, or your HELOC on your home, or, you know, there’s all kinds of stuff that you’re dead against. And the equity side is really based on, tied into ownership, somehow, into the company. So, yeah, it’s a big stack. Yeah, if you can figure out a way to be less diluted, the bigger that you get, the more ownership you’re going to have in the company at the end of the day on a sale, or at least the more control you’re going to have in that ultimate outcome of that company. Yeah, because what do you have? One thing, I get pretty, we actually lay a lot of this out with founders and the math side of this, the more money you raise, the more difficult it is. We call it the exit aperture actually gets smaller and smaller, because if you raise the money, everybody can make a whole lot of money at a smaller sale, like a. They sell, sell for $20 million and you’ve only given up 10% of the company. You can make a lot of money off of that, right? If, but if you’ve raised, you know, $50 million none of those VCs are going to let you sell until there’s a pretty big multiple, right? Yeah, when you’re and then they’re going to get all the money first, and then again, a split above that. And so that number just gets bigger and bigger, and the bargain is higher and higher. And a lot of founders don’t realize that. I didn’t realize how here I was, until it came to an exit time. So yeah,

Eric Dodds 40:32
yeah, it is kind of interesting. I’m thinking about, you know, raising money, which I’ve, you know, done far less of the new Jonathan, but it is as Yeah, as a founder, you kind of think, I’m okay, I’m gonna raise this VC money. And you kind of think about the beginning and the end, but you’re not really thinking about the middle, which is actually the most crucial piece of it, right? Because that’s where, you know, all the dilution happens. That’s where, you know, expectations are set on valuation. And you know, all aboard conversation, all the board conversations, exactly, yeah,

John Wessel 41:10
I’m curious about, like, founder VC, fit, right? Because you mentioned a while ago, like, hey, once you get involved, like, you know, this person’s, it’s, you know, it’s an executive, some of some on your board that’s gonna have an opinion, right? So, like, maybe some, you know, behind the curtain, a little bit, like, what are some, like, maybe positives and negatives, where, like, this, like, some, maybe something you’ve seen in the past, like, there was a lack of a fit between the founder and the VC, and that was one of the, like, core reasons, like, why this thing, like, didn’t work, or maybe a positive example of, like, hey, this was a really good relationship, and this really contributed to the success of this, you know, particular thing.

Jonathan Bragdon 41:51
Yeah, great question that there’s, there’s probably two, two segments to that. One is the financial vehicle. Does it fit, like the deal structure? Does it fit what’s actually being built? So that’s a mechanical one, but what you bring up is a big one, which is the personal, like, you’re not actually getting an investment firm, you’re actually engaging with people. And so take it away from a relationship. And of course, as you know, because every VC you’ve ever talked to, every VC adds value. That just goes with the territory. Yes, right? Exactly yes.

Eric Dodds 42:34
Whether you want them to add, they will add some kind of value, whether you want them to or not.

Jonathan Bragdon 42:43
And yeah, it could be positive or value,

John Wessel 42:44
value defined by them. Yeah,

Jonathan Bragdon 42:48
That’s right. So, that part of it is you need to, it is like hiring in that’s the closest analog I can think of, because it’s not just a personality. Do you get along are they, you know, but you’re thinking through, well, not just, oh, they have a really big network, or they have a really deep knowledge in this vertical that I’m in, you’re you’ve got to think the layer past that, which, you know, to what Eric was talking about, that middle time frame. What do they do with those assets in the middle time frame? Is there a network, here, network, at that point, do they open it all the way up? Is there? T’s highly accessible, you know, is there a sense of, we know that our incentives are slightly different because of our roles, but we want to, but, but we want to stay on the founder side of the table as much as possible, until we can’t, like those kind of conversations usually don’t come up on the front end, because founder certainly has not. You know, it’s an old thing where a VC sees it 100 times, a founder sees it for the first time. Yeah, so. So setting, setting expectations early on is pretty key. So asking really point blank questions of a VC is pretty important because it’s a job interview like you’re as a founder. You’re interviewing them. They’re also trying to figure out if they want to work with you. But how important

Eric Dodds 44:19
is? I’m going to use the term worldview, and I’ll explain what I mean a little bit by that. And this is, again, based on my limited experience, but a startup gets pulled in so many directions. And a classic example is you have interest from a gigantic company that could be a logo that’s an inflection point for the business, but you know, you’re going to build some products that really wasn’t a major part of the original vision, and doesn’t you know those are extremely strong forces, and that can be a real friction point with investors, because they want you to get that logo to create. The inflection point. But if you have a shared worldview, then there can be some discipline to say no, we all agreed to what our view of the world is, and why we are going to say no. Sometimes. Is that an important dynamic from your perspective?

Jonathan Bragdon 45:18
It is. It’s hard to rebake what’s going to happen in that, like it’s hard to create litmus tests around that, but one way, there are natural tension points along the way for an investor whose fiduciary duty to their investors is to maximize the outcome financially, right? And so they actually have a legal requirement to make decisions that a founder might not like, like a lot of us have seen this before, where, wow, we just got an offer. Somebody is going to buy our company at 10 million and that would, I won’t have to worry about sending my kids to school, and I won’t have to worry about, you know, my mortgage, right? Investors, like, no way. Like, we’ve, I can’t, there’s, there’s no upside. You know, it’s a natural, just tension when that happens, though, you know, that’s one example. Those things are going to happen, you know, multiple times along the journey. Yep, you last any period of time. So I think one of the ways to align some of that is to make sure as much as you can that the thesis of that fund is really aligned around the problem the company is trying to solve, not just the financial outcome. I mean, they have to be aligned around the financial outcome for sure. But if they’re really obsessed with the problem you’re trying to solve, as well as a fund like the thesis is tied to that too, then I think that goes a long way towards alignment along the way. Like, because, because when you get into tension points around financial outcomes, you can at least align around, like, well, how much more of this problem do we want to solve, or how deeper do we want to go? Yeah, all right, at least if there’s some common ground

Eric Dodds 47:09
there, I think that’s a great way to put it, and such a great point on the fiduciary responsibility, because in that situation, the ideal outcome is that there’s alignment on we believe that there’s a much larger outcome in the future, right? If we focus on the problem.

Jonathan Bragdon 47:26
And I think it’s important for founders to really think through what their finish line is as well. Yeah, the finish line for a VC is to optimize as big a number as possible, right? For a founder, if the finish line is, Look, all I want to do is sell this thing for $20 million and take 10 off the table. That better come up in one of the first conversations, yeah, or it’ll come up in a really painful way later, right? So finish really do need to align as much as you can, even though nobody knows what the finish line

Eric Dodds 47:59
is, sure, yeah, you just want to be successful. Okay, well, we’re nearing the end of our time together. Unfortunately, this has flown by, but John, you had some really good questions. We were chatting before the show about evaluating companies, and this sort of circles back to some of the technical aspects, especially in the early stage, but evaluation. So John, dig into that a little bit, because I loved the questions you were asking.

John Wessel 48:23
So on the you know, regarding the financials and growth we were talking about that earlier. So those are the two obvious things, what do the financials look like for a company? What’s the growth trajectory?

Jonathan Bragdon 48:33
What?

48:34
So one of the questions, what are some less obvious things that maybe you look for? And then part two, specifically on the technical and data front, like, what are some things that you look for as far as technology and data?

Jonathan Bragdon 48:46
Great questions, and really it’s down to the core of, what are you doing as a venture fund? So if, if you’re investing early, you’re not, you know, you’re not doing a forensics run through a product and trying to figure out how much technical debt there is, and you’re not really at that point yet, you’re trying to figure out, Is there a process there? Does the team have experience? Do they know the flow that they’re going to run through? But really what you’re looking for is, how do they make decisions. Yeah, and you’re looking for this, what is the what, what’s the Guiding Light process, but also what’s really the priority? And if the team is again obsessed around solving the problem, and they’re also, there is an actual process around doing experiments on the problem, getting feedback directly with the customer. That’s the main thing that you’re that. That’s the main to, even from a technical standpoint, that’s the main thing you’re looking for, because if they’re too in love with the product, it’s like having arthritis. You can’t, it doesn’t move like they’re solving the problem. You know, the problem is going to grow, and then if the product’s going to grow and evolve and become this, you know, amazing thing over time, it’s constantly going to change, because it’s a living thing. So you’re looking for caretakers of a product who are obsessed with the problem, like how to welcome a caretaker and build and grow and evolve a product, even if it’s a completely different two years than it is today. So technical stack, tech stack, for sure, like, how do they have something that’s scalable, but can it evolve? Can it adapt? Is there, you know, the cycle? Is there? Weekly cycle? Is there? Sprint cycle, whatever the, you know, whatever process they’re using to run through. Is it a proven way to do things? Do they have experience doing it? Have they done it as before, and is it? Does it look? Do they look capable of doing this, you know, even in the face of, you know, problems coming up over and over again? Because number one is number one job for an entrepreneur, and especially a product owner, number one job. Bullet point number one is to solve problems. Solve problems. So is the process there to do it and do they understand that the tech enough now there’s secondary stuff you want to make sure you do want to do forensics enough so, you know, yeah, they’re not, you know, is, is the open if they’re using open source stuff, is a really open source, or is there some proprietary invitations to it? Are they or, you know, things like that? But I think early on, you’re worried less about, you’re worried less about what the product is actually able to do, and you’re worried more about the practice of building the product and improving the product and talking to the customer. So it’s, it really is more of a process investigation that early, once you get into, you know, once there’s a bunch of customers, now you’ve opened it out right? How do you know, how do you how’s your bug list? You know, what the roadmap looks like, and like all the rest of that stuff. And then you can interview customers. Go, is this aligned with it was go, being and so you can really do some checks against reality at that point. Oh, yeah, yeah. I’ve

John Wessel 52:20
I had this conversation a few times recently . Hey, if you’ve got really great people and really well defined, solid processes and your Tech’s are a little outdated, that’s a great scenario for you. Like, updating tech. If you have really great people and good processes it is not so much of a problem. But if you’ve got, you know, already, you’re starting to build debt, because people talk about tech debt all the time, but you also kind of have this like, process debt, of like we, you know, we’ve got lots of, you know, silos around processes, and you can end up with people that, of like, we’ve got people in the wrong seats. So if you’re, like, laden with debt, and all three of those areas, those, because I, you know, we’re a lot in, like, modernization efforts like that are so hard to even do. Sometimes you figure out where to start. Like, which thing Do I even, you know, start working on? That’s

Jonathan Bragdon 53:11
the priority piece, right? How did it make it, how does the team make decisions as it will go through the series of S curves? Because it’s building a series of scars like, oh, that works. It’s going really fast and, oh, we’re getting out over our scheme now. We’ve got technical debt now, wow, our onboarding process is just stupid every manual, and we’ve got to figure that out. So you slow down your growth a little bit to make sure that if you don’t have a process or a team that can handle that, that you’re never going to be the kind of company that a VC is going to invest in. So I don’t know what all the litmus tests are, but just because, again, I’m new at this. I’ve only been on the side of the table a little bit, but the series of questions that get asked are more in those areas than tell me, you know, let me see some of your, let me see some of your code, right? Yeah, it makes sense.

Eric Dodds 54:04
Jonathan, so last question, maybe last question. I say that, and then usually, why? But I want to speak to you. I’ve loved this conversation because it’s, you know, it’s atypical of of some of the conversations we have on the show, but I really hope it’s spoken to our listeners who maybe have always dreamed of starting a company, who are interacting with technology every day, and they just say, man, like I can’t stop thinking about a world where this pain point that I have every day in my work is filled right? And they’ve thought, okay, maybe I should just build that. What would you say to those listeners who are at the very beginning of their journey thinking about starting to build a company?

Jonathan Bragdon 54:53
Great question. A couple things. One, one of the biggest i. Most common mistake I see is somebody obsessed with the product as it’s built, and that can be a really good craft, and they’re really proud of what they put together as a product, and there is a sense of the problem that it’s solving. But if the problem is not the center of all of it, then it will, it just will not grow and develop. You know, a craft is, by its nature, will not doesn’t change very fast. It takes a long time to create something. And this, the business that we’re in is about, how fast can you actually adapt and shift and change to to fix, to solve the problem that we’re focused on, and so being obsessed with the problem, I think, is number one. If you can’t sleep at night because the problem is something that you just have to fix, and you’re not holding tightly the way to solve it, that’s you’re already in the top 10% of founders that I would talk to. I think there’s the other piece of that closely related, is solving that problem valuable enough to a lot of other people beside you? You may have some special inside knowledge because of your experience and where you’ve worked, what you’ve built before on how to solve it, but that needs to get married with. You know, how valuable is that? That activity, like, if it’s not in a lot of time, well, this is better than solving this better than the competition. It’s better, okay, but does that make somebody buy yours instead of theirs? Usually, that’s a 10x kind of a you’re not going to buy something unless it’s way better and easier, faster and all the above. And I think a lot of founders and I’m in that grid too, get, get lost in the but this one’s better, and it’s built better, and the codes, like all that stuff, like, it’s just, it’s superior. Well, yeah, well, it’s not, somebody’s not buying this as fast or as quick, or doesn’t care about the problem as much as you do. And the only way to solve that as a new founder, or want to be you want to build a business, is to just run the experiments. Run and, you know, secondary, even if you’re not building a product, just run the experiments without a product. Like ask the questions, if this, what about this? Would you buy it? This? Is this problem really big? Like, if there was something that did this, like all of that stuff, or sign ups, you know, you know, give us your email if you’re interested in solving this problem, like that. That’s just really basic stuff. And you know what the feature said is coming off of that? Yeah,

Eric Dodds 57:52
I love the concept of craft as somewhat of a litmus test. And I faced this before too, even some of the problems that I’ve thought about solving, even to some extent, the ad tech stuff that I was talking about, looking back when I think about craft, I realized, well, you know, some of that stuff was swimming in a very small pool of people who had figured out a very powerful way of doing something, but there actually weren’t that many, right? I mean, it was pretty advanced, and it was like, This is amazing, right? And it can create incredible results. But the number of people who have gotten to a level of sophistication where they’re looking for something like that, it’s like, Huh, well, there actually aren’t a ton of people who are operating at that level, you know, which is a craft thing, that’s great. I love that.

Jonathan Bragdon 58:45
And it’s a blind spot thing too. It’s like, it’d be like, if you’re an amazing woodworker and you decided you wanted to solve a transportation problem, so you’re going to build a car out of wood, and do things with wood that you just did, it seemed like it was impossible. What does that mean? Does that mean building a new industry? No, there’s a bunch of other crafts that probably should have gone into building a car, right? Yeah, I had, what would somebody want a car for? Like it’s the quality of it is not the only criteria. Yep.

John Wessel 59:20
Now what boats are in again, though? Yeah, so I don’t know, maybe cars,

Eric Dodds 59:28
I love it, all right? Well, Jonathan, thank you so much for your time. This has been such an awesome conversation. I learned a ton. I hope our listeners learned a ton, and listeners, if you end up taking some of Jonathan’s advice and starting a company, reach out and let us know we would love to have you on the show. The datastack Show is brought to you by rudderstack, the warehouse native customer data platform. Rudderstack is purpose built to help data teams turn customer data into competitive advantage. Learn more at rudderstack.com.