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[Podcast] Nomics’ Lead Investor on Growing Startups Outside the Valley w/ Patrick Meenan of Arthur Ventures (Ep. 0061)

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This post was last updated on December 6th, 2019 at 07:28 pm

Nomics' Lead Investor on Building Companies Outside the Valley w/ Patrick Meenan of Arthur Ventures

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Table Of Contents

Description

Today I’m joined by Patrick Meenan, General Partner at Arthur Ventures, a venture capital firm that invests in B2B software companies located outside of San Francisco. Patrick has been with Arthur Ventures since 2012. He’s also a board member at Nomics, the company that produces this podcast. 

Patrick and I go back quite a bit. He was involved in the first round of funding for my previous company, LeadPages, which went on to acquire an email service provider called Drip. We’ve sat on a board together for over six years.

I believe this interview is highly relevant to blockchain startups. Indeed, most blockchain startups are not in the Valley and even if they were, the standard playbooks wouldn’t apply to many of them because of the unique dynamics of this space. In this episode, we discuss methods and approaches for funding, growing, and operating a company outside Silicon Valley or even the United States. 

My conversation with Patrick is split into 4 chapters: 

  • Chapter 1: Lessons Patrick has learned investing outside the Valley
  • Chapter 2: Business operations
  • Chapter 3: Fundraising outside the Valley
  • Chapter 4: Investment opportunities in the blockchain space

Topics Discussed In This Episode

  • Patrick’s background prior to joining Arthur Ventures
  • The origin of Arthur Ventures
  • The first thing Patrick learned about early-stage investing
  • The danger of using a Bay Area playbook outside the Valley
  • How good companies share common characteristics
  • How Patrick finds opportunities outside of San Francisco
  • Different reasons why companies take capital
  • How Patrick evaluates a company’s growth prospects
  • Why Arthur Ventures prefers to be the lead – or only – investor
  • Mistakes that can derail a company’s growth
  • The right and wrong times to take liquidity
  • How entrepreneurs can find VCs outside the Valley
  • What to pay attention to in a term sheet
  • How to run an effective board meeting
  • Why it’s an encouraging time to be in blockchain

Quotes

"I learned pretty quickly that some of the most exciting venture capital opportunities are for companies that are generating real revenue and oftentimes don't need your money.” ~ @pmeenan1, Partner @arthurventures Click To Tweet "Focus on your business first… People get caught up and they think 'Oh I gotta go raise capital to be validated.' If you focus on your business, capital will 100% find you when you need it.” ~ @pmeenan1, Partner @arthurventures Click To Tweet “Just continue to think about how you can actually create a stable, long-lasting enterprise within this market, and if you're patient, you're probably going to come out great on the other end.” ~ @pmeenan1, Partner @arthurventures Click To Tweet

Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com and join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do not reflect the opinion [00:00:30] of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Today I’m joined by Patrick Meenan, who is a General Partner at Arthur Ventures and board member at Nomics, the company that produces and funds this podcast. Patrick has been with Arthur Ventures since 2012. Before that, he was in corp dev at Microsoft. [00:01:00]

Patrick and I go back quite a bit. He was involved in the first round of funding for my previous company, LeadPages, which went on to acquire an email service provider called Drip. Because of that, we’ve sat on a board together for over six years and have gotten to know each other over a pretty long time horizon. Patrick is also the lead investor at Nomics.

This conversation is notable not only because of the subject matter, but also because it’s a window into how Nomics operates and how we approach things at the board level. I wanted [00:01:30] Patrick on the show because of his wisdom around growing and building companies outside of the Bay Area. In a lot of ways, his views are contrarian, counterintuitive, and really fly in the face of conventional wisdom on growing venture-backed companies.

I believe this interview is highly relevant to blockchain startups. Indeed, most blockchain startups are not in the valley and even if they were, the standard playbooks just wouldn’t apply to them because of the unique dynamics of this space, which we’ll get to a little bit in this conversation. [00:02:00]

In this episode, we discuss methods and approaches for funding, growing, and operating your company outside of Silicon Valley and even outside the United States.

My conversation with Patrick is broken up into 4 chapters. In Chapter 1, we discuss lessons Patrick has learned investing outside of the Valley. In Chapter 2, we discuss business operations. In Chapter 3, we discuss fundraising when you don’t have the networks and network effects that the coast often provides. [00:02:30] Finally, in Chapter 4, we close our conversation by talking about investment opportunities in the blockchain space.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at Nexo. Here’s a word from them.

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Okay, back to our regularly scheduled program. Here’s my conversation with Patrick Meenan, partner at Arthur Ventures, Nomics board member, and all-around insightful dude. Enjoy.

[00:05:00] So Patrick, can you tell us a little bit about the origin story of your involvement in venture capital and also the origin story of Arthur Ventures?

Patrick: I started investing, be more formally involved in venture capital in 2012, which is when I joined Arthur Ventures. I’ve really been doing this for the last six years. Prior to joining Arthur Ventures, I was actually at Microsoft out in Seattle and there I was in their M&A group. I was working on the team [00:05:30] that bought and sold companies on behalf of Microsoft.

The unique time period I was there, which was 2008-2012, was this time where we actually started investing more than buying companies in that phase of Microsoft’s timeline. A lot of the work I was doing was really large investments, I call it $50–$100 million, and large commercial agreements with startups. And that’s really what got me into investing.

Before Microsoft, I just worked [00:06:00] as a technology investment banking analyst at a bank called Piper Jaffray, in their software investment banking group. So, the consistent story is just being in the broader software ecosystem and a mixture of M&A work, investment banking work, and then at Microsoft, investing. And really what caused me to go to Arthur Ventures was this really unique opportunity to join a firm, not at its founding, the firm was founded before I joined, but really at its infancy stage before it raised its first [00:06:30] formal fund.

Clay: I knew you were involved in corp dev activities at Microsoft. I didn’t know that you were selling companies. What does that look like when Microsoft acquires a company and no longer wants it or there’s a branch of the business that it thinks is a distraction and wants to liquidate? What does selling look like?

Patrick: Usually, what it would look like is we bought a company, just like you said, and there happened to be some part of the business that we didn’t want. They’re usually not that material, but the one I did was probably one of the more sizable divestitures they did. [00:07:00]

So back in the mid 2000s they bought a company called aQuantive, which was the number two player next to DoubleClick. So Google bought DoubleClick, Microsoft bought aQuantive. aQuantive had a bunch of different sorts of assets and one of them was an actual digital agency. So they owned a digital agency called Razorfish which was a pioneer in that space. Being Microsoft, we didn’t need an agency, so we actually ended up selling that division for $530 million to Publicis, which is one of the largest ad agency holding companies in the world. But that’s an [00:07:30] example of what it would look like.

Clay: That makes sense. I remember Razorfish back in the day, going to their web site and there was some crazy Flash animation thing going that people don’t do anymore.

Patrick: Absolutely, but they were really the pioneers in that space, so that was a process by which pretty much every big, large ad holding company was quite interested.

Clay: When it came to the large investments that you were doing, how much of that was simply trying to get a return on Microsoft’s huge balance sheet [00:08:00] versus some strategic interest?

Patrick: The motivation was not exactly what you would think. In the time period before I joined at Microsoft—again, this was like 13 years ago. I’m really dating myself here. Or maybe not 13, 11 years ago—they were buying about 30 to 35 companies a year.

A big proponent of that or a big cause of that was that a lot of the business unit owners would get what was called P&L relief, which basically said, “If you have your annual target as a business leader and you buy a company that’s losing money, [00:08:30] we’re not going to penalize you for that on your actual year-end numbers. Right around the time I joined, that ended. A big reason that ended was I joined in Fall 2008 when the financial crisis happened. So, everyone had a bigger focus on the actual P&L. Even though you have that constraint, you don’t lose the desire to make strategic decisions.

What we ended up doing with these big commercial agreements, but we wanted to invest so we didn’t have to consolidate the P&L. So the actual rules may have changed by now, but if you own more than 50% of [00:09:00] a company, you have to consolidate that company’s full P&L on your balance sheet. If, at the time, you owned between 20%–50%, you had to recognize your pro rata share. So let’s say a company lost $10 million in a year and you own 30%, you had to recognize a $3 million loss on your P&L. But if you owned sub-20%, you didn’t have any hairy control mechanisms or anything like that, you didn’t have to consolidate anything.

If you were able to find the right deal where you didn’t have to consolidate the startup’s P&L on your own P&L, [00:09:30] where you were able to do some really interesting commercial agreement stuff, that almost made it seem like you were getting a lot of the benefits you would have from buying a company, that was a pretty good model for us at that time. That was really the origin of why that happened, and again, things have totally changed since then. That context dates itself as of 2012, but that was why we were doing what we did.

Clay: When you referred to the commercial contracts with startups, that’s 100% around purchasing equity, not actually buying services from them. Is that correct?

Patrick: Oh no, it’s actually both. We invested in a company called AppNexus. [00:10:00] AppNexus is a really successful company. We invested, I think it was in the mid hundreds valuation or something like that. I think now the company’s been acquired by AT&T for at least a couple billion dollars. At that time, what we did is we invested in the company but then we also had an arrangement, our commercial agreement where we decided to push a lot of our ad inventory to AppNexus so they could monetize it. It’s just an example of we’re giving a startup a lot of benefits. We also want an equity stake in that startup at that time without having to buy it.

That’s really what the notion was. [00:10:30] So very little where we’re sitting around saying, “We think we’re going to 5X this capital in five years,” and that’s the motivation. It was, “We want to do a lot of business with this company, we want to have an equity stake in this company, and we definitely think we’re going to make money. But no one is really getting promoted because of some quick turn on an investment from a financial return perspective.”

Clay: What’s happening in terms of corp dev right now? And, what do see happening in this space that might be interesting to entrepreneurs? How has it changed since 2012?

Patrick: I definitely think [00:11:00] M&A activity is quite strong right now. I think that’s the broader headline versus what’s happening specifically within corp dev. I think that pretty much every large tech company you can think of as being very active right now. So it just feels like it’s a really great time, if you’re running a company, to have strategics that are interested in your company right now because again, they’ve got a strong propensity to move.

I don’t think anything necessarily from corp dev specifically is that notable. Most of these decisions, or at least what I think is more relevant [00:11:30] to entrepreneurs, is that most of these purchasing decisions that these large companies are making, very often it’s driven by product leadership or business unit leadership and the relationships that have been built up over a long period of time. So in most companies, I don’t think the actual corp dev person, is necessarily the right entry point.

Clay: Got it. So other strong partnerships at the senior executive level of the company are probably a good way to go or at least other senior leaders from the acquiring [00:12:00] company side.

Patrick: Absolutely. This stuff takes time.

Clay: Let’s transition to the origin of Arthur Ventures. We heard a little bit about your past. I think Arthur Ventures also has an interesting origin story. Can you tell us a little bit about that?

Patrick: Sure. Well maybe we should actually just state what Arthur Ventures even does for a context going into this story. At Arthur Ventures, we invest in B2B software companies that are located anywhere outside of San Francisco. The typical deal for Arthur Ventures is us [00:12:30] investing $2–$5 million of our own capital as the lead investor, often only investor, in companies with, call it $1–$5 million in revenue. We’re leading all of our investments, like I said. We sit on the board, everything like that, but the important thing there is that it’s all B2B software all outside of San Francisco and all post-traction.

The story of the firm, it was actually founded by my partner, James, and his uncle, Doug Burgum. Doug himself just had this really phenomenal success story of building a company [00:13:00] outside of San Francisco, in Fargo, North Dakota of all places. Doug was a part of the Stanford MBA class of, I always forget the class, but it’s 1980, 1981, or 1982, whatever class Malcolm Gladwell wrote about in his book Outliers. A bunch of the people at the right place at the right time.

Doug moves back to Fargo, North Dakota, after business school and he becomes the majority owner in a small company that was reselling computers in Fargo. There was basically one or two people writing accounting software code. [00:13:30] Doug took over that company with the help of some family capital. He was able to get some capital from his family to invest in Great Plains and starts growing this company into what was Great Plains Software, which was an accounting software company. Over the span of about 20 years, Doug is able to take this company, take it public in North Dakota, and it ultimately gets acquired by Microsoft for $1.1 billion dollars in 2000 or 2001.

The reason it’s such a unique story is that Doug basically just lived for the challenge [00:14:00] of building a very large company in a really unique part of the country. Since then, Doug’s done some amazing things. He was chairman of SuccessFactors until they sold to SAP and he was also chairman of Atlassian. Ultimately, he stepped down a few years ago because he had an opportunity to run for, and ended up being elected as governor of North Dakota.

Doug himself just has this prolific software background. He and James found Arthur Ventures actually back in 2008, as a family office to invest [00:14:30] in entrepreneurs in the state of North Dakota, to basically provide that seed capital that was not there for Doug many years before. They did that from about 2008 to 2012, was not overly focused from an industry perspective, some medical device, some software, and then ultimately when they realized B2B software is where they should really be focused, that’s around the time that I joined them.

We had a very strong mutual connection. The guy I was working for at Microsoft at the time was Doug’s [00:15:00] number two guy at Great Plains and it was really just this good timing thing where they said, “We want to raise a real fund, with outside capital, and we want to have somebody else come and run it with us.” That was basically what brought me here and I was really compelled by the unique background of the family when I joined.

Clay: I definitely think that Doug’s story and the story of Arthur Ventures is pretty incredible. Just to be involved in $3+ billion B2B SaaS exits, [00:15:30] I don’t know if anyone else has that track record, and to do that from North Dakota is ridiculously cool.

Patrick: Yes, certainly and I think it’s unique. I mean, I, by no means, was a part of the conversations but part of the reason that the guys from Atlassian—along with Excel because it was after Excel invested—were really interested in Doug becoming chairman of the company was that he had done that in a unique geography. Those guys were in Australia and they were really looking for someone who had that unique experience. A lot of people [00:16:00] know Scott Dorsey in Indianapolis. There’s been a few other examples of people that have really built billion dollar plus, successful software companies outside of major markets.

Clay: For anyone wondering, Arthur is spelled A-R-T-H-U-R. What’s the background of that spelling?

Patrick: Oh, fair enough. Yeah, people ask is Arthur a person. Arthur is a town. So Arthur is a town outside of Fargo, like 20 minutes outside. I think it’s between 300 and 400 people and it’s where the Burgum family grew up. [00:16:30] They also have a very successful family business, which is an agriculture business, that’s named Arthur Companies. That was the genesis of why we were originally called, Arthur Ventures.

Clay: Let’s kick-off chapter 1, which is about the lessons you’ve learned investing outside of Silicon Valley.

When you first got to Arthur Ventures and started investing, did you have a clear sense from day one that you needed a different playbook to be successful if you were going to do this from the Midwest? Or did you think you were going to follow existing precedent? [00:17:00]

Patrick: At the time, I basically view it as two things that I had to figure out. One, what does a great early stage company look like? And then two, what’s the best way to generate a return where you’re investing? I think that’s more of the geography thing. So, getting into what a great company looks like, I actually think that is really not that different across geography.

I had this expectation coming in. When you think of venture capital, you usually think about it as a company with no revenue, relatively [00:17:30] speculative, really, really high tech ideas. That was what I expected going in and I learned pretty quickly that some of the most exciting opportunities there are for companies that are generating real revenue and oftentimes don’t need your money.

I would say that’s probably the first thing I learned honestly from you because Leadpages was the first investment I ever made. Part of the reason that I made that investment was when we met the first time, there were a bunch of people talking on a stage about a bunch [00:18:00] of stuff, and you were the only one up there talking about real revenue, paying customers, and not needing money.

I would say that opened my eyes to what’s really possible in early stage investing, that you can actually find great entrepreneurs, great ideas, and great businesses at the same time. That was something that was very, very different than what I expected coming in.

From a geography perspective, I didn’t realize this right away, but I think one of the biggest mistakes that people make when they’re investing in geographies outside of [00:18:30] San Francisco is that they try to mimic a playbook that exists in San Francisco. They think valuation doesn’t matter because when Peter Fenton, an amazing investor in Benchmark says, “Valuation doesn’t matter,” I should do that, too.

They overlook the fact that Peter Fenton and Benchmark have several, several multibillion dollar public exits and they’re just incredibly special people. They take that same approach into their own local market and they’re just a little bit sloppy. They think that everything [00:19:00] is going to become a billion dollar company. They think it’s okay to lose half of their money. I think that is a very unique challenge that we were able to grab onto pretty quickly and realize that you can find a great company that’s growing really well, that’s really exciting, and you can also invest in a manner by which you can still make a great return off a realistic outcome, and you can make an exceptional return off of a special outcome.

Clay: You mentioned that the characteristics of a good company are the same regardless of geography, [00:19:30] but I imagine that companies that don’t have access to a lot of capital in their backyard or aren’t built in places where you can drive to one road and talk to almost all the VCs in one day—or I guess you can’t; there’s so many on that road—those businesses have different characteristics simply because of the constraints that exist within their respective geographies. 

What do you see when you’re looking outside the Valley? I imagine that a lot [00:20:00] of the companies that you’re looking for might not necessarily be looking for you or even know that it’s an option to raise venture capital, because there simply isn’t anyone they’ve ever spoken to that’s done it or any businesses near them that have done it. It’s just not something that they thought was in the cards. How do you identify those businesses?

Patrick: First let me validate what you just said. The typical situation that we run into is a 20%-ish [00:20:30] company. Let’s call it $1–$3 million in revenue. It’s being led by a very product-focused entrepreneur and it’s been about a three year path to get to that point. Then, they have started the business while they had another job or they likely just took their time to build this company because of what you said there wasn’t this option of immediate capital.

That individual, when we find him or her, are often in a very similar mindset of, “I’ve got a [00:21:00] couple of hundred K of cash in the bank. It feels like a miracle that I’m here at this point, but I’m just now starting to see how great this company can become. So, I’m curious about capital because I want to make decisions that I wouldn’t normally make if I was just bootstrapping. But I also don’t have time to fundraise. I don’t even have a pitch deck.”

That is the exact persona of the individual that we very commonly see, in the companies that we invest in outside of the Bay Area. They’re typically in large markets. [00:21:30] So they might be in Dallas and Atlanta or Denver. They’re not in Cedar Rapids, Iowa, or something like that. There’s still a lot of talent and ability to grow the company.

I would just say with that context, that individual is simply never going to be found through a traditional venture capital network-based investing model. Again, they’re not connected to anyone. They, they don’t have a pitch deck. They’re raw, man. They’re really raw. It is very unlikely that they’re a Harvard, Stanford MBA.

So, we’ve essentially had to build our firm in a manner by which we can go [00:22:00] find those entrepreneurs and about 90% of the investments that we make, we are the ones initiating contact with the entrepreneur versus the other way around.

Clay: I know a lot about what you described because it described me and Leadpages when you found us. I’ve seen a lot of companies that matched that template or look roughly like that. I imagine a lot of these people aren’t going to startup events. They might not even care about or be connected to the startup community or any of these events that people [00:22:30] go to. They’re pretty head down. Without giving up the special sauce, how do you filter for them at scale? If you’re looking outside Silicon Valley, that’s a whole lot of geography. What filters do you put up to catch these folks?

Patrick: We’ve been doing this long enough where now we’ve got a pretty large internal database of B2B software companies outside of San Francisco. We know what an Arthur Ventures deal is with our eyes shut. We’ve got plenty of examples where an entrepreneur picks up our email and they say that they arrive. [00:23:00] “Let us know when you’re in town sometime,” but I’m too busy to get on a phone call, and then we go to see them in person next week without the phone call.We intuitively know what it looks like.

So, all we’ve done is that we’ve come up with ways internally to look at data points that are out there about companies and essentially model out which companies are likely to be a stage fit with our firm. From there, we just overlay our own thematic opinions on what’s interesting. The reason I give that context is we’re not robocalling thousands of companies. We’re probably emailing something like [00:23:30] five to seven entrepreneurs a week.

That’s really it. The point is we’ve got large data sets, we’re always out looking for companies on a calendarized basis across markets, geographies, what have you, and we’ve just become quite good at distilling down from data. We can find about companies’ stage fit and then we just look really hard to find if there are other growth indicators about a company. Is there a press release? Did they maybe go to one actual panel?

That’s how we found you. You were literally speaking on a panel saying all sorts of crazy stuff and [00:24:00] in between there was, “I’ve got a million dollar AR company growing, 20% a month and I’m bootstrapped.” I remember when we first invested in Leadpages. I told myself, “If this isn’t what early stage investing is all about, I am going to absolutely suck at this job.” I’m glad it worked out.

Clay: I remember the initial outreach from you. At the time, I was and still am a curmudgeon about responding to associates. Up until then, any call I had [00:24:30] with an associate felt like they were just filling out a spreadsheet and asking a lot of really private and invasive questions. You just wouldn’t go to a party and say, “Hey how much are you making? What are your growth prospects?”

It’s just a weird thing to ask someone and then these associates would do it. You weren’t an associate, I believe, at the time when you made that investment but you sent me this email that was like crack cocaine for my entrepreneurial mind. It was just spot on. It was absolutely perfect and really spoke [00:25:00] to your understanding of where I was at. It was clear that you knew what made us tick.I still think to this day, that’s one of the things that sets you guys apart and is just incredibly impressive is your ability to put yourself in the shoes of the entrepreneur, without being so founder friendly that you’re not representing your own interests as well.

Let’s say you reached out to a founder and they just want to learn more. They really haven’t had someone reach out to them with a calibrated [00:25:30] email who understands where they’re coming from. Do you ever reach out to them actually hoping that they’ll take an investment to take money off the table because you’re worried about what an influx of new capital will do to their decision making? If someone’s existed a while with constraints in the middle of nowhere, they don’t have any friends that have raised VC money, they don’t have any peers that they can go to, they haven’t seen this play out over and over and over again, I think sometimes it can shock an entrepreneur [00:26:00] who has never even thought about this to all of a sudden, they have money in the bank, and they might change how they do things. Are you ever hoping they just take the money off the table or a portion of it?

Patrick: Yeah, I would it a different way. I think the most important thing to understand is why somebody’s taking capital. What I mean by that is we get concerned when we talk to an entrepreneur. They say, “I bootstrapped my way to $2 million in revenue. Everything’s been coming organically and inbound, and it just feels like now is the time. I’m going to [00:26:30] hire 10 sales reps and these are the milestones I want to hit over the next 18 months before the cash runs out.” To us, that’s a super scary reason to pay capital.

What we love to hear is, “Here are the two to three specific things I want to do and I don’t think I am able to do them unless I raise a little bit of capital. I’m still going to run a very capital- efficient business, but I might raise $3 million with an intention of spending $1½ million. I expect to be break-even around $1½ million and then be in a great position to [00:27:00] make my next decision.” That’s a great reason for taking capital.

We certainly have some companies, especially a little bit bigger companies that have proven that they can grow profitably and do take some money off the table. What matters for us is simply the why. If a company is super profitable and they just want to take a bunch of primary capital into the company without good reason, that’s weird. Why would you just want to delude yourself?

It’s really important to understand the why and that’s why we would also be nervous if a company that is [00:27:30] burning a lot of cash is like “I want to raise $2 million in secondary.” It’s just odd. So, it’s more about understanding the real driver behind the decision.

Clay: So, in terms of this chapter of lessons learned investing outside the Valley, it sounds like there’s some pattern-matching for the company you want to invest in that’s outside the Valley. There’s some pattern-matching for the entrepreneur. You have clear thinking on how they’re thinking about taking in capital and what they want to do with it. It sounds like [00:28:00] if you’re doing most of the outreach and most of these people are not involved in startup communities, that going down with Fred Wilson, Brad Feld blogging social media thought leadership path, that probably isn’t going to do a lot for you. Have you found that to be the case?

Patrick: Yeah. I mean it’s that’s for us specifically. I try not to be black and white on what works and does not work when you’re an investor. You have to come up with your own thing. But yes, if you’re going to be running an outbound model to go find entrepreneurs, [00:28:30] I would call it the minimum viable social media strategy, which is it’s helpful to have something so when they receive your email and they check you out, there’s something there, like it doesn’t look like you’re a nobody. 

Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by Nexo, which is by the way, another leader in the crypto space that’s located outside the valley. As someone who personally uses Nexo I wanted to point out a few things that I especially like about their crypto-backed loans. [00:29:00]

First thing. When the price of your collateral grows so does your credit line. Let’s say you borrow against Bitcoin when it’s worth $5000 each per Bitcon, but over the course of your loan, the price grows to $10,000. This means that the size of your credit line just doubled as well. I personally haven’t seen anyone else doing this, so I think this is pretty innovative and certainly difficult to pull off from an execution point of view.

A second thing I really like about Nexo is that you only pay interest on the amount you borrow. [00:29:30] I’ve seen Nexo competitors require you to take out loans and force you, essentially, to withdraw the full amount and pay interest for the full amount for the entire duration of the loan. With Nexo, you get a credit line and can borrow only the funds you need and pay them back whenever you want. So, take out the funds you need, when you need them, pay them back whenever it makes sense for you. Interest is assessed daily. Again, this just isn’t something I’ve seen other providers do.

The final aspect of Nexo [00:30:00] I’d like to highlight is that they give you the ability to borrow against a basket of crypto assets. For example if you post Bitcoin, Ethereum, and BNB as collateral to your Nexo account, the Nexo oracle calculates the real-time market value of those assets and adjusts your credit line accordingly. To my knowledge other providers in this space only allow you to borrow against one asset per loan.

Okay, back to the conversation with Patrick.

Patrick: But at the same time, the model that we subscribe to here [00:30:30] is not one by which we think it’s great to write a bunch of blog posts and hope that some bootstrapped entrepreneur happens to lift his or her head up and see our blog post and reach out to us. That works for some people, but that’s not what we’re going to build our careers on.

Clay: It seems like there are a lot of structures and support in Silicon Valley for getting a company to a liquidity event. There’s lots of acquires in that area. Most of the FANG companies are in that area. It’s perfectly likely [00:31:00] that you could meet someone at a networking event or hear someone at a conference next door that could end up acquiring your company.

When you think about this Venn diagram where in one circle you have companies that are successful and can work outside of the Valley, and then another circle that contains companies that can make it all the way to a liquidity event, what’s the sweet spot? I imagine that it’s quite possible for a company to be successful outside [00:31:30] the Valley to be growing organically at a nice clip, but there’s still quite aways that you need to go to actually return money to investors.

How do you go about predicting whether or not a company has what it takes to make it all the way? Is that simply about churn willingness of the founder, their vision for the future? How do you know that there is at least a possibility that you can get to the promised land with that company? [00:32:00]

Patrick: I view it across three different vectors here. The first is, is the company operating in an exciting market? That’s usually a relatively easy thing to analyze. It doesn’t need to be the most bleeding edge, “This company is a blockchain this, AI that, machine learning that,” you get the idea but would also give you something that’s like we’re investing in landscaping software. It’s got to be something that has some strategic sizzle to it.

The second piece is, is it a real business? [00:32:30] Does this company have the financial attributes that we think a large business can be built? When we look at that, we’re looking at how diversified is the revenue base? What are the sizes of the contracts? Contract size being an indicator for how meaningful that is. What is the retention of the business? If you look at a business and you say “They’re growing well, they don’t have customer concentration they’ve got great customers and they’re retaining them,” that’s pretty exciting.

Then, the third part is just the CEO. It’s the hardest part for us [00:33:00] to evaluate, at least at Arthur Ventures specifically, because we are investing in entrepreneurs that are a little bit more raw or more product-focused. We’ve been surprised time and time again, on how those individuals can grow and scale as people over the lifecycle of our involvement in the company. When I compare that to what might apply in more of the Bay Area, I think that there’s probably more lenience on the financial performance of the business. There’s probably a little bit more leeway if you’ve got a [00:33:30] really great thought leader entrepreneur in a super buzzy market. There’s probably less of a focus on the actual financial performance of that business for earlier takeouts of companies. I think that’s something that is a little bit harder for entrepreneurs outside of San Francisco to overcome.

Clay: And when it comes to an actual liquidity event where you can generate a return, do you think that the kinds of businesses that you invest in, are you more likely to see acquisitions [00:34:00] than IPOs or at least more likely than maybe a pool of similar investments from the Valley?

Patrick: That’s a great question. Yes, but we don’t concede that we would not have a standalone public company in our portfolio. Of the 15 companies we invest per fund, right now in each portfolio we can point to one to two companies that we think have the attributes to make it all the way.

I think what is different about us versus someone that might just [00:34:30] invest only in San Francisco, is that our model doesn’t require that to happen, in terms of gen generating returns to our limited partners. The main reason for that, Clay, is just loss ratios are different. Our loss ratio within our fund is dramatically lower than what you would expect from a San Francisco Series A venture fund, and because of that, we need less miracles to happen in order to generate the returns that we want to generate.

Clay: More more wins so each win doesn’t have to be as large [00:35:00] for you guys to make this work. That’s interesting.

Patrick: Yeah but we’re still having great outcomes. What we get really excited about is when we think a real business can be built, we have exit certainty to sell to a private equity firm if we have to. What the company is strategically interested in were the large acquirers, are also going to be sniffing around the company as well. When you can have those two things happen, really really nice outcome’s going to be had.

Clay: Let’s transition to chapter 2, which is advice for entrepreneurs outside the Valley. [00:35:30] Maybe a good place to start would be with your comment that when you decide to make an investment in the company, it’s important that you guys be the lead investor, and in some cases you’re the only investor. I can speak from some amount of knowledge of knowing that if you have VCs involved in a company that are coming from the Silicon Valley playbook, and you have someone like yourself where you’ve got a different [00:36:00] vision for how a company is going to make it across the finish line, that can create some conflicts. Is that an accurate assessment of why you guys would rather be the lead investor?

Patrick: I wouldn’t necessarily pit it as us against Silicon Valley or anything like that. The reason I say that is that we’re about the least anti-Valley firm you would ever meet. We have a ton of respect for the ecosystem. We just think it’s such a dynamic ecosystem that if you’re going to invest there, unless you’re like Union Square Founder Group you should probably look there.

So, the [00:36:30] comment around being the lead investor is more around managing multiple people’s incentives and alignments can be very hard for an entrepreneur. Like you said, one person’s really happy making seven times their money on a deal and somebody else wants to make 50. It gets really hard when the entrepreneur and one investor are really happy with making seven times their money and the other person basically systemically, because of their fund structure, needs to have a much bigger outcome.

Managing [00:37:00] those different alignments is very hard. We’ve found by us being the lead investor, it’s just easier to manage. The other reason that we do it is that it’s the product that the entrepreneurs that we talk to want. That, heads down, bootstrapped entrepreneurs don’t really feel like having to convince five people to say yes. They want to convince one person to say yes.

So, it’s really the combination of those two things has led us to just realizing it’s way easier if we’re the lead investor. That’s why oftentimes, we’re the only investor is a lot of these companies are bootstrapped, there aren’t other people there. [00:37:30] We’re not going to make them go find somebody else and we’re also not going to go bring in somebody else if we have the money and we believe in the opportunity.

Clay: I really believe that alignment at the board level is so important. Boards, in my experience, aren’t like like they are on television. There’s not a lot outright conflicts or things going to a vote. But there are different interests at the board level. When there is conflict [00:38:00] or just different ideas about what the company should or should not do, I think those show up in all kinds of odd ways when it comes to the operational management of the company, and it’s not the best thing in the world.

Let’s talk about the messy middle. You’ve found a company that you really like, you’re on the board, and they’ve just accepted some VC money. Now, there’s definitely more pressure, that’s there’s a commitment that comes with that. It’s not just something someone should take lightly. [00:38:30] Now, they go about continuing to grow their business. Their goal is to become a growth stage company and there’s this phase between often a long phase where you’re getting from “Oh […], this is working. I can’t believe that this didn’t die,” to some kind of outcome.

Do you think that messy middle is messier with companies outside the Valley? There isn’t a whole lot of people around who have grown companies from, let’s call it $3 to $5 million, [00:39:00] all the way to $50–$75 million. There aren’t a lot of middle managers orVPs that have seen this happen over and over again. Or do you think it’s roughly the same challenge?

Patrick: I would say, on the talent perspective, I always think about it as talent is an issue and also visibility is an issue, which I’ll get to in a minute. From a talent perspective I think it’s awash and I’ll tell you why. Yes, there is less supply of people in a lot of these markets than there would be in San Francisco in terms of people that have been there, done that, and have [00:39:30] relevant experience in a relevant company phase, in a relevant market, and have been successful that you can go recruit. There are more of those people just naturally in San Francisco.

I think the benefit of doing it outside of San Francisco is that you just have that loyalty. I think that’s what counterbalances it, so it’s harder to find people, but when you do, they’re not going to like every happy hour is not a career affair, where they’re meeting people and they’re jumping around every every year. So, I think the retention is easier there. I actually think the hardest part about what you call that messy middle is a lot of the companies that we invest in [00:40:00] have kind of become, I call it the hometown hero thing.

People rave about them because they’ve raised some money, it’s an exciting tech company. It’s not easy, but that path from $1–$10 million in ARR (annual recurring revenue), has less bumps in the road because things are coming naturally to the business. Then, it’s usually between $10 million and $30 million, is what I like to call the messy middle.

That’s when numbers get bigger, it gets harder to scale the company in both the people’s perspective and then just the broader customer perspective, and then [00:40:30] it naturally has some more bumps in the road at that phase. I actually think what’s so hard about that, is that it’s very visible to the communities in which these companies are being built. Whereas in San Francisco, there are startups everywhere. People are used to the up and down. If you’ve got a company that’s $15 million in revenue and they need to unfortunately let go of 15 people out of 120, that’s a headline making thing.

That’s simply not the case in some of these larger markets. I actually think that is [00:41:00] one of the hardest parts of that messy middle that you allude to for the entrepreneurs that we work with.

Clay: If you do a reduction in force in San Francisco and you’re a sub-$100 million company and you let go of 20 people, that’s nothing. If you do it in a smaller- or medium-sized market or really almost anywhere else, that can make the news. Just speaking from my own personal experience, the people you find are more loyal outside the Valley. There’s not a bunch of startups recruiting them all at the same time. [00:41:30]

But I think what is nice, at least of the times I’ve been to San Francisco and other tech hubs, is that I find I can go to one party and there’s a good chance that I’ll talk to someone who is really experienced in something that my company might need at some point. It’s much easier to find out what excellence looks like in different roles when you’re surrounded by people who have been there, done that. Maybe it’s harder to hire them, but you can get a little bit better at pattern matching just because of the variety of exposure [00:42:00] to people who have done different things in different ways in different roles.

Patrick: You’re totally right and that’s a big part of at least why I believe the entrepreneurs that have chosen to work with Arthur Ventures when they actually don’t need capital is because of being a part of a portfolio of other entrepreneurs outside of San Francisco that they really relate to. So, they can get on the phone with you or a great entrepreneur like Anthony James of Linux Academy and to hear other product-focused entrepreneurs that have scaled businesses really successfully, [00:42:30] and they’re being able to be a part of that and have that sort of community, for lack of a better word, that isn’t naturally there for them in their 10 mile radius.

Clay: CEOs tend to be interviewed a lot. They’re public facing by nature but it’s not always clear what a good VP of Product, or a good CFO, or a VP of Engineering looks like. It’s not like you can name a famous public VP of Engineering and be able to pattern match for that.

You’ve worked with [00:43:00] a whole lot of companies now. You’re on the board of a lot of companies. What are some of the common mistakes that you’ve seen these founders make, that can really hurt them in their business if they aren’t surrounded by this entire ecosystem? They’re going at it alone, they are the hometown hero, there are articles being published about them in the local rag, and they’re thinking they’re pretty hot stuff. What are some of the common mistakes that derail the growth of [00:43:30] the type of company that you invest in?

Patrick: It’s usually not the top line growth of the business. It’s usually the cash spend to generate that growth. A lot of times, an entrepreneur will be growing a business relatively organically. By organically, I mean they’re either using ad spend to drive conversions, or they’re doing content marketing, or webinars or whatever, and they’ve got an inside sales team that are converting the leads. So the point is that they’re not like an outbound [00:44:00] sales team.

And off the heels of that growth, they’ll raise capital. Then, they’ll realize relatively quickly, that in order to meet the expectations or exceed the expectations of the investors, that they’re going to start doing unnatural things to their business to chase more growth. They’ll take that capital and they’ll start doing things that they never would have done if they didn’t raise money, which is they hire 10 sales reps right away or they go hire a whole C-level executive leadership team. The next thing you know, that business is growing [00:44:30] at a relatively similar rate than it did before it raised money, but it spent triple.

That’s why a lot of the entrepreneurs that we work with don’t talk about cash burn timelines “Oh we’ve got 18 months.” We really expect that capital to potentially last and be their only run of capital if it needs to be. We try to avoid them making these unnatural decisions to try to chase something that’s not there. Now, that doesn’t mean we don’t want high growth. It’s just being very intentional about the decisions that you’re making in trying to grow your business.

Clay: Why is that? You’re the [00:45:00] only money in, often for the first round, and then the goal is that they won’t raise a B round or at least you’ve seen a lot of problems happen at that stage. What are the pitfalls of raising a second round?

Patrick: Let me just clarify the first the first statement. We have plenty of companies that have raised multiple rounds of capital. We don’t care if they raise more capital. We just want to be in a position where they don’t necessarily have to after our money. All that means is that we want them to be in a [00:45:30] position of strength so they can choose the right round, the right partner, and they’re not forced into doing it.

Again, I actually view it as our job to help guide the entrepreneur to what is a great investor for their company. The biggest mistake entrepreneurs make is they mismatch what the investor wants with what they can deliver. A great example of this is that we’ve had a company that was growing 50% a year. Some investor [00:46:00] came in and paid 10 times revenue for that business. It was in the $100 million evaluation range and that investor wanted a $1 billion outcome. This entrepreneur has a $10 million revenue business going 50% a year. That is a great business. It’s a great business. Absolutely a great business. But it does it does not match the return profile of the investor that they’ve brought on.

The reason that happened is that they didn’t have the appropriate conversations [00:46:30] around alignment, what do you expect, and what are you going to look for other than me? That’s really the only time I see that secondary piece of capital lead to issues. It’s usually around that exact situation.

Clay: I think that’s a really astute point. When someone goes to raise a first round, it was optional. I mean at least for the folks that you’re looking at. But the second you raise some money, now you have the opportunity [00:47:00] to run a deficit. If you get to a place where that’s just how you run your business, that there’s a monthly burn, you’re on a crash course with the inevitability of having to raise another fund just to stay afloat. That could force you to take money from someone where you don’t have alignment with them. I see that happen all the time. This is about optionality, it’s not about a [00:47:30] B round necessarily being bad.

Patrick: Yeah. No question.

Clay: What other advice might you have for entrepreneurs outside the Valley?

Patrick: I think the biggest thing for me would just be behind almost every really big funding headline that you read, and I’m not talking about the “So and so has raised a series A somewhere,” but think about companies like Qualtrics or Atlassian or whoever. Behind those big, big [00:48:00] fundraising headlines, where someone raises one big round of capital for $100 million, behind that is a phenomenal business. A phenomenal financial business. The point is, focus on your business first, and create a great company. Any capital that you would ever want in the world will come find you.

And don’t do it the other way around. That’s the part where you’ll see people get caught up and they think “Oh I gotta go raise capital [00:48:30] to be validated.” If you focus on your business, the capital will 100% find you when you need it.

Clay: Another thing that stuck out among what you were saying. is the cost of growth above and beyond your organic growth rate. Let’s say you have a business and it’s growing 50% a year. That’s what you were doing before you raised venture capital, so raise some VC money. [00:49:00]

How much do you think an entrepreneur should try and grow beyond their organic growth rate? What do you think about that? Is that cash there to do a bunch of measured experiments or growth experiments? We’ve had a lot of conversations about the increasing cost of growth above and beyond your organic growth rate.

Patrick: We always joke here and we don’t have quantitative data within the portfolio to back it up, but we always say 90% [00:49:30] of your cash burn is trying to add 10% to your growth rate, versus just what what’s organically available in the market. We certainly think that it’s a worthwhile exercise to figure out if you can grow faster than the organic growth rate in the market. And there are a lot of great reasons to do that.

We have some companies that have very clear outbound sales metrics, where you put in a dollar you know you’re going to get X. Those are really really clear. What we encourage entrepreneurs to do is to try things in moderation before really pushing the chips in. So, we think it’s a great idea, to your point, [00:50:00] to run tests. That test might be a different marketing conversion technique. It might be an outbound sales rep. Then, once it starts to work, just to step into it. Hire one person. Hire two people. Hire your third. Don’t just do these dramatic dramatic shifts in the business because to your point that’s exactly when you’re going to spend pretty much all your money in to grow 80% versus 72%. And that’s just really unfortunate.

Clay: As a side note here, I’m curious what your thought holistically [00:50:30] on outcomes in this space is? I know a few VCs that have had incredible records, but when you look at some of their largest wins, their largest wins are companies that went public and then later lost 50% of the value in the next year, or eventually went to zero and went bankrupt, but they were large wins.

I know in terms of doing your job and returning funds to your LPs, money is money. Do you feel [00:51:00] a certain sense of obligation to create lasting companies or work with founders to create lasting companies?

Patrick: Yeah. I think you put it well. Ultimately, what you’re measured on as an investor is the financial return of money out and money in. But certainly, there’s the pride aspect. Every investor wants to be able to point to a standalone company or a product that has a very long lasting value. I just think that’s something that everybody prides themselves in. [00:51:30] Even when you sell a company, even if you have a good outcome, it’s never as fun when they bought the company and a few months later, they shut down the product.

It’s much more impactful when they can say, “Yeah we bought the company and now it’s a business line.” I know that’s one thing that my partner, Doug, was really proud of. At this point, I’m probably going to get this wrong now, but up until at least very recently, if it isn’t anymore, Fargo, North Dakota was the second largest campus for Microsoft, more than even Mountain View, and there was about, call it 1500–2000 people that worked there. [00:52:00]

“Let me tell you the pride that that guy has, even though he hasn’t worked in the company for […] near 20 years.” When you’re driving by, you see that, you see people working there in the community, you see the product out there, which is now Microsoft Dynamics, that’s certainly a very prideful thing that people try to measure themselves on, no question.

Clay: What about scaling companies? I definitely see folks in the blockchain space that have gone out and raised in some cases over $1 billion before they’ve even shipped a product. [00:52:30]

Let’s crack open chapter 3, which is about fundraising outside the Valley.

How do you go about doing it or at least how to go about thinking about it. What do you see as good reasons and bad reasons to raise funding. When does an entrepreneur know that they’re ready?

Patrick: I don’t know if an entrepreneur ever really knows they’re ready, but I think a good reason to do it, like we were talking about earlier is that there’s just a very clear use for what you want to do with the cash. It sounds so obvious. but so often entrepreneurs just think, [00:53:00] “My business is of this scale. I should go raise money now.”

They don’t actually think about what they would do with the capital. Again, they might not even be burning it. But just think what additional hires or what additional bets would you make with the business, is probably the number one reason why you should do it. And why you shouldn’t do it is for any external validation or thinking it means anything about your future likely success as an individual or a business leader. Full stop.

Clay: What are your thoughts [00:53:30] generally on founder liquidity? When is that a good idea and when is it a bad idea?

Patrick: I think there’s liquidity as a concept and then amount. I think that liquidity when you have proven to be profitable is always an okay thing to consider. To me that’s the number one thing I’ll look at. If I meet a company and they are $4 million of revenue and $1 million of profit, and these things are out there. We’ve seen more profitable companies than that growing really quickly.

They absolutely exist. That would be an appropriate time where I [00:54:00] would understand that that entrepreneur didn’t want to raise a bunch of capital to dilute themselves, and were considering taking a little bit of capital off the table. When you’re burning money. in my opinion, is a pretty weak time to take liquidity. I just think of myself as an investor would be a little bit concerned in doing that.

Within our portfolio, liquidity usually presents itself the most when you’re around the $10 million in revenue. It is usually at that point where, either your existing investors or a new investor want the [00:54:30] CEO to take some liquidity, to ensure that he or she has the right mindset to go long without any major external pressure around selling early, in order to get the nest egg.

Clay: So, just to make sure that, if they’ve been meaning to buy a home or if there’s some…

Patrick: Student debt? […] 

Clay: Yeah. So they don’t take the first interesting acquisition offer that comes across the table, regardless of the valuation or if it’s a fair deal. Aside from looking at, reaching out to you [00:55:00] directly, let’s say an entrepreneur is outside the Valley, they’re thinking of running a fundraising process. Is it generally a good idea to reach out to VCs? How do you advise founders to go about doing this if they are interested?

Patrick: I think that there’s a couple of things that you do. I think one is, if you happen to know anyone that has been a successful entrepreneur, even in your local city, even if it’s a different business, go get their opinion first. Maybe people that they’ve worked with, their experiences, that [00:55:30] sort of stuff because that can just shortcut a little bit and get you some trusted advice.

I think the second thing is reaching out is absolutely okay. These days, it’s shocking how much information that you can find about an investor. They’ve got a social media presence, all their investments are listed on their web site. What I would coach an entrepreneur to do? Again, this is before we’re involved. This is like if you’re trying to raise your first round of funding, is to research investors that have invested in very similar businesses.

It’s really not that hard to find. If you’re a dev tools company, maybe there’s someone who’s a prolific dev [00:56:00] tools investor. You can craft a very tailored outreach to that person. Even though most San Francisco VCs even network-based invest, there are plenty of deals that can get converted in the outbound manner. If there’s not something there that’s market-relevant, try to find something that’s personally relevant. Maybe there’s a VC that went to college in your town. And there’s a reason they come back. They have some tie to the area.

There’s just a lot of different ways that you can shortcut that, [00:56:30] because they oftentimes think that entrepreneurs set their sights too low on what they can get with an investor, and they just default to hyper local. And I think that’s a real mistake to make. If there’s someone great, that is hyper relevant in your backyard, go for it, that’s terrific. But in absence of that, I would set the bar quite high.

Clay: Let’s say they’re a little bit down that process, they get a term sheet. What do you think is important in a term sheet or to look for in a deal, in terms of simplicity or even specific [00:57:00] terms? What does a good offer look like?

Patrick: I always laugh that everyone gets so focused on the valuation, that they overlook all the other stuff that actually matters. Most term sheets now are are relatively clean if you’re raising from a reputable firm, but the first thing you’re going to look at is the liquidation preference on the capital. Most venture deals are a 1X convertible preferred, which means if a firm gives an entrepreneur $3 million for 20% [00:57:30] of the company, at exit, that firm needs to choose between either $3 million or 20%.

If the company sells for $100 million, they’re obviously going to take their 20% because 20% is more than three. If the company sells for $1 million, they’re obviously going to take the full one, in that case versus taking 20% of one. That’s the trade-off that they would have to make.

It’s more like private equity-ish, terms that you might see is what’s called a participation feature, which means that firm does not have to make the choice at exit between $3 million and 20%. [00:58:00] They get $3 million and then another 20%.

So obviously the convertible preferred, which is more common, especially within more venture deals, is the cleaner option there. The next thing is you’re going to want to make sure it doesn’t have any funny stuff like dividends or warrants. Those are pretty rare at the early stage. They’re also going to want to look at anti-dilution which means how is that stock treated in the event that you raise future capital at a price lower than this. The term you want there is a weighted average, which means it matters how much stock you sell at a lower valuation [00:58:30] versus what’s called a full ratchet, which doesn’t matter if you sell a dollar of stock at a lower price. All my stock converts there.

Then the last thing—then I’ll just take a breath for a minute and can answer questions from you, Clay—is just protect the provisions. So this is where the firm puts stuff on the term sheet that they need to approve. This will say. “I need to approve you’re selling the company. I need to approve you raising more capital. I need to approve you raising debt above $250,000. I need to approve you increasing the option pool.” [00:59:00] You get the idea. That is essentially where, even if you’re selling minority equity where someone doesn’t have control, through those provisions, they have control over certain aspects of your business.

Clay: One thing I really appreciate about the term sheet I got from you is that it all fits on one piece of paper. That was super cool. I don’t know if I had ever seen that before.

Patrick: Yeah, we try to do that. The reason we did that is, if you look at a lot of firms’ term sheets, it’s like the anti-dilution language takes two pages, and we’re just like, “This is ridiculous, we can just say what it is,” so we try [00:59:30] to deliver one-page term sheets when we can.

Clay: Something that work for us and that I would encourage other blockchain entrepreneurs to consider is, when they are going to raise funding, there are a handful, although there aren’t a lot of VCs making investments in this space. I think it’s worth considering what your business fundamentally is. For us, our business was a traditional business. So, I opted and I was lucky enough that [01:00:00] Patrick wanted to work with me. To have Patrick on the board, there’s no other traditional VCs involved and everyone else is a strategic investor or someone that doesn’t play the traditional VC role. 

Coinbase Ventures is involved, Digital Currency Group is involved, and a bunch of other TokenSoft, a bunch of amazing people. But at the board level where alignment is absolutely important, there’s only one investor. I think it [01:00:30] behooves people in this space to really look beyond the names that you typically see in this space because there’s a lot of really experienced investors and they’re looking at fundamentals at the end of the day.

Patrick: And Clay, just one thing that I think you absolutely nailed it. Really, the companies, especially even within the space, you look at are they a pure play blockchain company that only appeals to crypto funds or what have you? Or like the way we looked at Nomics when we invested, we just thought [01:01:00] it was a derivative play off the market.

So, we decided it was this really interesting traditional Software as a Service web property component that really was just a part of a really exciting market. There’s no really different than any other company that we would invest in.

I imagine that there are a lot of companies in this specific space, that are similar to that. They probably do have a much broader universe of people that they can talk to. I just think that’s a really, really good point by you.

Clay: I think people in this space don’t realize that the universe of potential partners [01:01:30] or VCs they could work with is as large as it is.

What about, let’s say, post fundraise? Let’s say you’re an entrepreneur, you’ve never had a board before, and now you have a board. What do you think is important at the board level, for running board meetings? How should you think about them? What’s important, what isn’t in terms of, I guess any number of things, but including board size?

Patrick: Yeah, we usually try to keep it pretty small in the beginning. I think not dissimilar [01:02:00] from where we were talking about the liquidity expectations, the number one thing is to have immediate conversation with your investor. What are their expectations from communication? What do they want to be talking about? And if you can actually set that stuff up initially, you avoid situations where one person wants to communicate more than the other one, one person wants a certain level of data that the entrepreneur isn’t creating. you get the idea.

Assuming that there’s alignment there, the most effective board meetings are simply ones where you get the, I like to call [01:02:30] it the boring stuff, out to people ahead of time, just so they can read it. That’s stuff like the financials, the KPIs, what have you. And you can actually take your board meeting and call it a 90 minute-ish meeting, 60–90 minutes where you’re really talking about the strategic stuff in the business in areas where you actually want their opinion and you avoid it being just like a weather report, which is you’re reading stuff off a page or you have a board member that’s asking you about, “What happened to your cost of [01:03:00] goods sold line in the month of July?” That’s something that’s incredibly ridiculous and not a great use of time. That’s usually what I like to see. Keep it small, align on communication and just make sure that you keep things tight and strategically valuable to what you want to get out of it as an entrepreneur. 

Clay: One thing that we’re doing, and I’m really happy we did it, is you have direct access to our Google Analytics, to our accounting software, to our weekly internal [01:03:30] all hands dashboard, to our company Telegram community. I’ve definitely seen entrepreneurs and I’ve been in a place myself where I was feeling uneasy about some things in the business. Not lying about it or directly masking it, but trying to maintain a narrative that may or may not be the most accurate description of what’s going on.

It was important to me when we worked together that we have full transparency across the board and that you just [01:04:00] knew everything that’s happening. We actually share that the company level now. Everyone who’s involved, sees—unless there’s a super sensitive part of the board deck—the board deck, sees all the company metrics, financials, and numbers. They know how much runway we have, how much revenue we have, et cetera. I think transparency is one of those things that if you don’t have it from the very beginning, it’s really hard to retroactively do that a couple of years after the company’s around. There’s just too many surprises that [01:04:30] you haven’t dealt with along the way, necessarily. I’m a huge fan of that.

Let’s transition to chapter 4, which is about the investment opportunities in the blockchain space.

What do you think about the investment opportunities you’re seeing in this space? What advice might you have for an entrepreneur that’s operating in this space or a VC who’s making investments in this space?

Patrick: I think it’s actually a pretty exciting time right now. Right when we invested in Nomics, I felt like it was a death period [01:05:00] for your broader market.

Clay: Hey this is Clay cutting in from the editor’s booth to give some more context to what Patrick is saying. Nomics was established the end of 2017, when Bitcoin was at an all time high of around $20,000. We’ve launched the Nomics API and unveiled nomics.com, our crypto market data site in the spring of 2018.

In December of that same year, when Bitcoin’s price was hovering around $4000, we announced our Series A investment round led by Arthur Ventures. Also involved in the [01:05:30] round were Digital Currency Group, TokenSoft, Coinbase Ventures, Ben Davenport, PolyMath, and King Capital, whom when we raised, things were really looking kind of bleak for the space and we have come down quite a bit from the all-time high.

All right, back to the show.

Patrick: It certainly wasn’t the all time high of people being bullish on it, and I think through that process, I believe a lot of, waste is too strong of a word, but I feel like a lot of, maybe not so serious projects, or businesses, or investors probably left [01:06:00] the ecosystem.

Right now, I just think it’s a really encouraging time, where a lot of the people that have been building are building for the right reasons. That’s what I’m really excited about right now. My biggest piece of advice would just be, in addition to just the attractiveness of the market and the great long-term potential within the space, continue to focus on building a real business. Just continue to think about how you can actually create a stable, long-lasting enterprise within this market, and if you’re patient, [01:06:30] you’re probably going to come out great on the other end.

Clay: Well, that concludes my conversation with Patrick Meenan from Arthur Ventures. I hope you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you. [01:07:00]

I can say from our own experience that Flippening sponsorships work. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show, please hit us up via email at support@nomics.com.

Okay. That wraps up things for this week. Stay tuned for next week’s episode. Until then, take care. Good bye.

That’s it for this week. To sign-up for our free crypto investing newsletter, [01:07:30] listen to other episodes, or get the show notes from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics at nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to leave a five-star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcasts. Thanks for listening and see you next week.

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