092: Venture Capital and Investing with Sam Cates

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Sam Cates: @SamCates | GE Ventures

Show Notes:

  • 02:01 - What Corporate Investing Looks Like
  • 03:48 - Presenting Ideas For Funding
  • 09:01 - Democratizing Venture Capital
  • 10:17 - ICOs and Cryptocurrency
  • 13:53 - Evaluating Companies to Fund
  • 21:09 - Investing in Potential Competitors
  • 24:42 - Looking For Funding as a Company
  • 28:04 - “Mentoring” Ideas/Companies
  • 30:07 - Monitoring/Evaluating Company Metrics
  • 32:47 - Putting Together a Basic Business Plan
  • 36:05 - Making Choices: Investor and Company-wise

Resources:

Transcript:

CHARLES: Hello everybody and welcome to The Frontside Podcast, Episode 92. My name is Charles Lowell, a developer here at The Frontside and I am your podcast host-in-training kicking it off in 2018. [Inaudible] of our first episode. We’ve got Elrick also joining us. Hello, Elrick.

ERICK: Hey. How you doing, Charles?

CHARLES: I’m doing well. I’m doing well. You having a good new year so far?

ERICK: Yeah, it’s great. There’s a snowstorm passing through today. So, I’m going to break in the New Year shoveling.

CHARLES: Let us know if we need to parachute in some shovels for you.

ERICK: [Laughs]

CHARLES: And then with us today, we have Sam Cates on the show who is… a lot of times we have developers on the show. He’s actually a venture… what would you describe yourself as?

SAM: Yeah, I’d say I’m a venture investor with GE Ventures. So, on the corporate investing side.

CHARLES: Okay. Now, I didn’t even know that GE actually had a corporate investing side. Is that pretty common for a large company?

SAM: You know, it’s becoming increasingly common. I think in 2015 there was actually a peak of activity coming from corporate venture capital groups. And I’ve only seen the number of firms escalate since then. Although the dollars invested stays pretty consistent. But if you look at a lot of big companies, particularly in the common tech world like Cisco, Google, Intel, they have historically had large venture firms inside of themselves. And then GE and a lot of other industrials have since followed suit. We’ve been at it for about five years and we see it increasingly.

CHARLES: And so, have you been with them since the beginning?

SAM: Yeah, just about. I’ve actually been with GE for about nine years now. So, I was on the operating side in a number of the industrial businesses before I joined GE Digital and then GE Ventures. And so, it was just after GE Ventures got kicked off.

CHARLES: Oh, that’s exciting. So, what is it… now, we actually got connected to you through one of the companies that you actually invested in. It’s something that we use and we’re very interested in. Why don’t you tell us a little bit about what your job looks like on a day-to-day basis and what companies you invest in?

SAM: Sure. I really focus a lot of my time on Internet of Things companies. So, that’s a really big trend that GE has been a part of and a leader in over the past few years. And so, we spend time investing in companies that are directly working with GE or playing in similar spaces to us. And so, Elrick and I actually met at a hackathon for one of those companies. And I always like to use that as an example because it’s a good one, to demonstrate the kinds of investments we make. And that’s Resin.io. I know you guys have done an episode or two talking with them. But that for example was a ‘Series A’ investment that we made about two years ago. And then company essentially helps developers build connected products. And so, that’s something that GE cares a lot about. We had people inside the company who found the product and loved it and that’s actually how we met.

CHARLES: When you say ‘Series A’, can you give a brief overview of what the different stages of funding of a startup might be?

SAM: Yeah, yeah, certainly. So, maybe if I take a step back and answer your original question on what I do on a day-to-day basis. A lot of my job is meeting with all kinds of new companies, whether they be early stage, usually things that would be seed funding – and we’ll go into what some of those things mean – all the way through the late stage which would be companies that are maybe on the border of going public or are already profitable. And so, if we go into what kinds of investors there are, I think that’s probably an interesting subject to talk more about. But they’re a whole wide variety. When I said ‘Series A’ I just meant a company that was at what we would call the ‘Series A’ stage, and the letters act just like you’d expect. So, there’s ‘Series A’, ‘Series B’, ‘Series C’, and so on. And they all, they tend to look similar at those stages in terms of sizes and progress. But there is a range, and no two company is the same.

ERICK: In today’s world, it’s very easy for people to create a startup. They can write some code and they can either come up, get a Raspberry Pi or some microcontrollers or whatever it is, and either do an IoT startup or a software startup. Now, when you get to the point where you have an idea and you kick it off initially, how do you go about then saying, “Let me get some funding.” How do you even get funding?

SAM: Sure, yeah. And to your point, there’s a huge range of technologies that are making it easier to start almost any kind of company. It’s a great time to be an entrepreneur, whether it be 3D printing for hardware products, all the technologies that you were mentioning, AWS, all this stuff is contributing to reducing the cost to allow companies or people to create companies. And so, once people have gone out and experimented with some of these things and built what they think is a product the market wants, often if they require more money which may be for acquiring customers through things like Facebook Ads or simply doing further product development to make sure the product is somewhere that more customers could use it, often they can’t finance it just through their own revenue. And so, there are typical stages and types of investors that people go approach looking for money.

ERICK: Okay. What are those Series? I remember you mentioned something like a ‘Series A’ investment. So, initially when you’re looking for an investment, is that where you would… category you would be in as a startup looking for investment? They would consider you a ‘Series A’ startup?

SAM: Well, I want to caveat and just say every company is different. So, I see companies that…

ERICK: Gotcha.

SAM: Start out at a much later stage because they’re able to bootstrap to that point. And bootstrap is the word that I use for a company that funds its own investment. They get paid by customers and they use that money to continue building the product. But if I talk about the range of types of financing a company may go for, I think the way that most people categorize this, first people often raise from friends and family or angels. And so, it’s just money to get off the ground and maybe to pay the rent while you’re doing some of that experimenting we were talking about. And then commonly after that is a seed round. And a seed round tends to be a little more institutional. So, it’s maybe a more formal set of funds who exclusively invest in companies that are often pre-revenue but they have a product, or at least the beginnings of a product. And so, that’s a really common category of investors. And then you get to ‘Series A’ and the letters can escalate from there to the point where…

ERICK: Gotcha.

SAM: There can be some later rounds when they’d be ‘Series F’ or even beyond, I guess.

CHARLES: Right. So now, what are generally the terms on these? So, for my angel investments or my seed investments, I assume what distinguishes these is essentially how much ownership of the company you’re getting for how much money. And those kind of, those change as the product solidifies.

SAM: Yeah.

CHARLES: And the potential becomes more visible.

SAM: Yeah, it’s a wide… and again, these are all… the venture is a world of ranges. There’s a really wide difference between the two ends of any spectrum. So, I’ll just talk in generalities though. So, I think the latest report that I’ve seen at least for an annual basis was PitchBook’s 2016 report. And they were laying out some of the medians. So, for seed stage deals I believe it was something like one and a half million dollars raised was the median on a pre-money valuation of six and a half million. And that just means the company is worth, investors say the company is worth six and a half million dollars today. And we’re going to give you a million and a half dollars invested at that price.

CHARLES: So roughly, a sixth… they would take a sixth of the company then in return?

SAM: Yeah.

CHARLES: Okay.

ERICK: Ah.

CHARLES: Okay.

ERICK: Okay.

CHARLES: I see. That makes sense. So now, back to Elrick’s original question. If I’m, I’ve got my product. Or I’ve got this idea. I’ve written some code. I’ve turned it into a prototype product. Maybe I’m moving through these various stages. What type of VC am I going to be looking for? How do I actually find the right type to be talking to? I guess what types are there even?

SAM: Yeah. And one part… we mentioned a lot of the technologies that are making it easier to start companies. One part that also makes it easier is the proliferation of financing options, whether it be even more investors in these traditional structures we talked about like seed and A. And then there are other options that are emerging, things like you see a lot of people raising through what they call Initial Coin Offerings or ICOs. And then there are also things like AngelList which are attempting to democratize the investing process, make it more accessible. So traditionally, a lot of the seed A, B investors, they tend to be network-based, which can be a challenge for a lot of people that are maybe not in Silicon Valley or not a part of that network already. And so, one thing you can do is obviously go search databases that are on the web, things like Crunchbase. It’s a free resource. It has a lot of deal history for investments that people have made. And it’s a great resource for knowing, “Okay, this investor cares about these things.” And then in addition to that, there are also platforms that people can put their companies on. Like I mentioned, AngelList. And that’s somewhere that you can list your company, you can meet investors, and they actually have some backend to actually support the investing process as well.

CHARLES: So, there were two acronyms in there, or two specific technologies.

[Chuckles]

CHARLES: You talked about ICOs which I assumed that you said it was Initial Coin Offering. Not like insane clown offering.

[Laughter]

CHARLES: Which I would love to see. And then AngelList. So traditionally, these had been very network-based which brings to mind the capitalists of Old England or whatever where there’s a bunch of people with cigars in a room and I realize it’s not actually like that. What are each of these things? The AngelList and the ICOs? And how do they democratize that process?

SAM: It’s funny you should mention the old times. I think a good example of that is there are a lot of stories about the founding of General Electric. It’s a 126-year-old company and back then it was largely, it was Thomas Edison working with I believe was JP Morgan to get it off the ground. And so, today there’s still a bit of the network piece you’re mentioning. But I think of AngelList as a place that you can essentially market to investors. If you think about the types of people that are on there, it’s people that are looking to invest money in early stages in startups. And I’m not a big user of AngelList because I tend to be investing a little bit later. So, I really recommend anybody who’s interested, just go check it out. It’s I believe just Angel.co.

CHARLES: And what about an ICO?

SAM: So, an ICO is a more modern one. And it’s kind of fraught with some concerns around regulations and transparency today. But I think since Thanksgiving there’s been a massive wave of conversation about cryptocurrencies. And an ICO is essentially a way of creating your own cryptocurrency. The way I always explain to people, I love the analogy that people make around, think of it like I want to go build an amusement park. And in that amusement park, everything, rides, food, everything, is going to be denominated and payable in Sam-bucks.

CHARLES: Ah, right.

SAM: And… [Chuckles] And so, my options…

CHARLES: [Laughs] That makes sense.

SAM: Yeah. And my options are I can go to a bank and borrow money, I can go to investors and say, “Hey, give me the 10 million dollars it’s going to take to build it,” or I can just go to the people in the place where I’m building it and say, “You want this amusement park to exist? Why don’t you pre-buy these Sam-bucks?” And each one is going to cost a dollar today. And we create this universe of Sam-bucks and they’re essentially valuable once you can use them in the park. And there are certainly exceptions. There are other versions of cryptocurrencies and other uses for them. But that’s a conversation for another day.

CHARLES: Ah, mm.

SAM: I think that’s just a good, easy way to understand it.

CHARLES: Oh no, I like that. It’s like, well not quite like carnival tickets. But yeah, that’s something that everyone’s familiar with. Same thing as the Xbox Marketplace. Very similar thing. So, the idea is you would buy a bunch of Sam-bucks… you would get them at pennies on the dollar, so to speak, today.

SAM: Yeah, right. By the time it opens, maybe a hotdog would cost just one Sam-buck.

CHARLES: Right.

SAM: Whereas, when it’s coming in, we’d have to spend five dollars to get that one Sam-buck. Right, the idea being those people who got in early will be rewarded. And you can see it’s like a further extension of a Kickstarter or something else that you’re allowing people to pre-buy into a network.

CHARLES: Right. Right, okay. I can see that.

ERICK: That’s very interesting. [Laughs]

CHARLES: And so, it’s got a range of options too, because if you’re really interested in the services you can go ahead and spend them on the services and get a lot of value that way or you can actually trade for someone who does want the services if you don’t.

SAM: I think that’s exactly right. And it’s just, the one that I think I would just caveat is there is a huge amount of concern at the moment, and maybe concern is too strong a word, but uncertainty around one, what are the value of these coins, these tokens? And two, how will governments react to something that looks potentially like a security or a currency? And so, that’s something that still is being worked through. And even though they haven’t figured that out there’s still a massive amount of money being raised through these ICOs.

CHARLES: [Laughs] So, it does beg the question. Why is a cryptocurrency necessary? Why not just use Xbox Marketplace points? Why not just say, “Here are Sam-bucks.”

SAM: [Chuckles]

CHARLES: And there’s a row in my database.

[Laughter]

CHARLES: That’s your balance of Sam-bucks.

SAM: So, I think we’re about to get way beyond the [inaudible]

[Laughter]

SAM: But I think the argument would be that some of these things are better decentralized. So in my example, you’re right. That might just make more sense. But I think there are some examples around cryptocurrencies that are supporting a network of decentralized services where a centralized database historically was inconvenient or didn’t provide the amount of transparency that people were looking for.

CHARLES: Right, right.

SAM: And so, that’s a topic for a whole other podcast.

CHARLES: Yeah, right. No, it makes sense.

SAM: [Laughs]

CHARLES: I think it’s a matter of scale, right? If you’re going to be just buying services but if you’re going to have secondary markets where you’re trading in this currency, I can see that. So, let’s… [Chuckles] We’ll reel that back in.

SAM: [Chuckles]

CHARLES: And ask a question that occurred to me. So now, we talked about your day-to-day. What exactly, when you’re looking at a company to basically give money to, what are you looking for? What are the things you’re like, “Oh man, I want to throw dollars at this company,” versus, “Mm. I’m going to keep them and give them some feedback and send them on their way.”

SAM: There’s always a set of factors that we evaluate. And I think the waiting is probably different for different types of investors. And then there’s I’d say for me as a corporate VC being a part of GE, there’s an extra lens which is, how is this relevant to GE? What does it mean for GE to be an investor? But if I think about just the kind of general industry lines it’s: team is a really big one. So, who’s building this company? Do I believe in their ability to reach this vision that they’re laying out for me? Another one would be technology. What have they actually built? Is that hard to build? Do the things they want to build in the future, will those be hard to build? And do they have the skills and the people to do it? Then their technology, maybe an extension of that would be intellectual property. And besides intellectual property, just defensibility of a business in general. So then, you start thinking about, can somebody else just come along and to the same thing? Because if so, then maybe there’s not a strong advantage in what the company has done so far. And then lastly, it’s also just traction. How far along are they? How much have they proven the ability to execute on the plan that they’re laying out?

CHARLES: Right.

ERICK: So, you’re a corporate investor. So, there’s other types of investor like an institutional VC? What are the differences between an institutional VC and a corporate VC and the other types of VC? Potentially what they’d be looking for, in terms of what they wanted best.

SAM: Yeah. So, I think generally I categorize investors as institutional or corporate. And corporate [inaudible]…

ERICK: Yeah.

SAM: Corporate or strategic. And then there are people who exist on a spectrum there. But generally, an institutional means this is a group that is raising money from a set of limited partners who are the people who invest in the fund that are pension funds or wealthy individuals. They’re large pools of institutional capital and their pure purpose is to earn return. And they may have a certain focus because they believe in this part of the market, or they like this kind of company or the stage of company. But essentially, their job is to return more money to the limited partners of that fund that were put in. That’s their role in the world. And then on the corporate side, if we go the most extreme version of corporate VC, this is a group that is a part of a larger corporate. They’re investing that company’s money. So, in this case for me it’s GE. I’m investing GE’s money into these startups. And that means that I only have a single backer being GE. And I also maybe have a different lens, because my purpose is one, to earn financial return. I want to go out and I want to find good companies. I want to earn returns just like the other institutional venture capitalists. But I also have the goal of, and the strategic goal may differ by company, but for me it’s about how can I help GE advance? How can I help GE understand a market? And how can GE be helpful to this company in achieving their goals? And so, for each company we use that lens as well, as a corporate.

CHARLES: What I’m hearing is that you want to invest… I guess the thing is you can experience return that’s not just cash. It’s not just dollars. You’ll experience return in raising the ocean of the business that GE is in, right? So…

SAM: You said it much better than I did.

[Laughter]

CHARLES: Well, it’s all… paraphrasing is actually easy.

[Laughter]

ERICK: Oh, yeah.

SAM: An important skill.

CHARLES: That makes a lot of sense. So, the question I have then is, you said you were looking for companies that kind of swim in a specific ocean. And each company is farther along. Are you usually finding this company I want to work with, like you are going out and finding them? Or they’re coming to you looking for investment? Or is it really just, depends.

SAM: So, we call that part of the process sourcing, sourcing investments. And they come from all over. So for us, there are a few different ways. One is we tend to be thesis-driven. Meaning we go out and we say, the world is changing in this way and therefore we’re interested in this kind of company. And so, we’ll proactively go out and research. We’re also, I mentioned, a little later stage. So, I don’t tend to do seed investments. I tend to do ‘Series A’ and more often ‘Series B’ and later. So, companies that have often already raised a seed round or raised a ‘Series A’ round. So, I can actually search databases to say, “Okay, in the last two years who has raised a seed round or ‘Series A’ round and these other things I’m looking for whether it be location or tied to investors or other things.” So, that’s one way of being proactive is saying I want to go out and look for companies in this space that look like this. And that can be either like I mentioned, desktop research like searching the web, searching databases. Or it can be just going to conferences, right? So, on thing we spend a lot of time on in the IoT world is artificial intelligence and machine learning. It’s been a big, big topic over the last year that a lot of people have invested in. So, we may go to different conferences that focus on that topic, meet lots of people that are working on it. Some companies, some individuals that are either investing in or advising their companies. And we’ll talk to them. What companies are rising out of that space that we should be looking at? What technologies are changing in that space that we should be thinking about? And just trying to get smarter so that we can make the right investments and help the right companies find their way to work with GE and make our products better and help them advance their own enterprise.

CHARLES: Are you investing with a mind that eventually GE might acquire this company and integrate it into GE itself? Or is it really just, “Hey, we’re just going to take a part of it. We’re going to have maybe a seat on the board to be able to steer a little bit. But we’re pretty much going to let it be its own thing with its own autonomy and go where it was and just benefit through those secondary and tertiary effects.”

SAM: Yeah, acquisitions from our portfolio by GE happened. But they’re certainly not the explicit goal or our focus. I know we’ve had one, maybe two of our portfolio companies acquired by GE, one that I was directly working with called Bit Stew. So, we made the investment in the company. It was with the goal of using their data management platform for a lot of our applications. And at some point in working with GE and GE Digital, they decided, you know, this would make sense to be a part of GE. That wasn’t why we made the investment. But it did end up being acquired by GE. And I know the team is doing really well. And it’s been at GE for about a year now. So, it does happen. But when I said one or two, that’s versus a portfolio of a hundred plus companies.

CHARLES: Right.

SAM: Since we started investing. And so, that’s not what we’re looking to do every time. Much more often it’s about again, how does the company make GE more competitive and a better company, a better place to work. And then how do we help them advance their goals? Whether it be bringing them developers, or finding them other routes to market, or just being a customer.

CHARLES: Right.

SAM: So, that’s really how we think about strategic value. There’s a lot of different ways to create it.

CHARLES: Yeah, I’m curious. Because it seems like also in a lot of these companies you’re investing in potential competitors. Extensively you’re operating if not in the exact same market, maybe very similar markets. There’s a little bit of overlap. And so, you’re kind of investing in potential competitors, right? So, where’s the balance of here we’re funding our competitors versus we’re going to move into these markets ourselves.

SAM: Yeah, and funding of “competitors” can happen. I think that we talk about that more in theory and say, “Oh sure, we’d be willing to fund a company that’s out disrupting the space that we’re playing in.” And we do that. It’s rare that you see startups that are directly head-on competing with much more established companies like GE or other industrials or even other consumer companies. They don’t take these companies head-on because that’s not a way that startups have been successful in the past, right? We talk much more about disruption and saying, how is this company doing something that may indirectly compete with GE? So, you think about things like, for anybody that’s not familiar with GE… actually, a lot of people associate us with our appliances which we actually don’t manufacture anymore. That’s [inaudible].

[Chuckles]

SAM: We sold that business a few years ago. Almost everything we sell is like big, heavy industrial equipment. So, we sell aircraft engines, locomotives. We sell gas turbines, wind turbines. So, here and there a couple of things that do power generation. One trend that’s affecting that industry is distributed generation of energy, energy storage. And those are parts of the market that are a less significant part of GE’s business than say, heavy-duty gas turbines that sit in a power plant and generate a massive amount of power. And so, if you look at that and say, “Wow, GE Ventures is out funding storage companies. Does that mean they’re funding competitors?” Well, it means that we’re funding innovation that may disrupt the future of our business, but that’s part of being a VC and that’s part of the value that GE Ventures brings to GE.

CHARLES: Right.

SAM: We’re out there looking at markets before they’re large enough or in scope for GE.

CHARLES: Mmhmm, right. And so, yes you’re disrupting the space but then you’re going to be a part of that disruption and have strong connections to those markets if you need to actually migrate your business completely over to them. That’s kind of what I’m hearing.

SAM: Yeah, absolutely. Better to disrupt yourself, right?

CHARLES: [Chuckles]

SAM: And be a part of the ecosystem in the future because I think the future happens with or without you. And it’s really key that we get out in front of it and a part of that, a part of that discussion, a part of that process.

CHARLES: And so now, you’ve been saying that this is, GE, this has been pretty explosive? There’s a lot more happening through GE Ventures. There’s a lot more happening in other companies globally, having these corporate ventures. Where do you think the balance is going to lie to say, “Hey,” I’m just going to throw out some numbers, just for theory here, it’s like, “10% of our business is essentially this distributed network of semi-autonomous or mostly autonomous startups. And then we have our core business.” Does that stabilize at 50/50? Does it stabilize at 75% the other way with GE essentially becoming a capital management company? Or is it somewhere in the middle?

SAM: So, GE Ventures will never be a meaningful part of GE’s revenue, a meaningful part of its business as a percentage. The overall venture industry is full of funds that are on the order of like, bigger funds are on the order of, in the billions. The single-digit billions. And GE itself is a much, much larger company. Well over a hundred billion dollars in enterprise value. So, I think GE Ventures will always be a small part of the company financially. And the impact will be largely felt through how we help the rest of GE navigate the future.

ERICK: You said that sometimes you go and look for companies, startups to invest in or sometimes startups come to you or come to a VC looking for funding. Now, I’m a developer or a startup founder. And I’m going to look for funding. What are some of the mistakes or pitfalls that you see that startup founders or people with an idea fall into when looking for funding that you can help them avoid?

SAM: Yeah, and we do see companies that come to us. So, I mentioned a lot about how I go out looking for companies based on a thesis or a set of relevant factors or relevant things for GE. But we do have a number of inbound requests. People know some of the bigger VC brands. They know GE the big company. So, we do get inbound interest and we also get referrals from networks of VCs and some are employees and other things. But for the companies that are seeking us out, the ones that are going out looking for funding, there are some things that are really well-known in Silicon Valley and other places, or you could research online and find, but may not be obvious at first. And so, I think the first one is, who are you talking to? What investors are you seeking out? Depending on what stage you’re at, what kind of business you’re in, you have to understand what the landscape of potential investors are and which ones might be interested in a company like yours. So, I think there are tons of good mentors that can help people navigate that. Maybe less commonly outside of Silicon Valley, in Boston, New York, in the places where you have traditional venture ecosystems. But you see a ton of resources available online whether it be things like Fred Wilson’s blog, AVC.com, or Crunchbase, TechCrunch. You can read and understand and from headlines tell what people care about. And I think that’s fundamentally a really important first step. You don’t want to waste an hour talking to somebody who will never… this is somebody that invests in really late-stage growth equity companies and I’m coming to them for my first investment. That’s not going to work. So, I think finding the right people, step one. I think when you’re going through the process of pitching and talking about your business, the pitfalls are all about understanding the strengths and weaknesses of your business and where you are today. And so, for every company, that’s different. But I think just being open and honest versus glossing over a lot of the risks, these are all really risky companies. If they were easy, then you’d have a lot more competition. And so…

[Laughter]

SAM: I think that’s one thing that I see, too. You have some company that comes in and say, “Look, here are the parts I’ve figured out and here are the parts I still have to figure out.” And that’s a really good conversation to have. There are other companies where they say, “Look, we’ve figured the whole thing out. We just want you to give us some money.” And I don’t think a lot of investors necessarily buy into that. And certainly, there are investors of every stripe. So, I may be speaking too broadly. But I think that’s a really important part of the venture investment process, right? You’re looking not just for money but also for counsel and for somebody that you’re going to work with over the next, sometimes seven years or longer.

CHARLES: Yeah.

SAM: [Inaudible] going to be on your board and participating. So, it’s a really important part.

CHARLES: So, you’re looking, you’re actually looking not necessarily for all the answers but you’re looking for the questions that they’re asking, too.

SAM: Yeah, absolutely. And demonstrating they understand the ins and outs of the business. And that they have the capacity to carry this onto that next stage and hopefully beyond.

CHARLES: Mmhmm. So, now you said something that caught my interest there that you work with some people sometimes seven years. You enter into these long relationships. Do you generally ever do any type of, I want to say almost like… mentoring might be too strong of a word, but in the pre-investment, in other words before you actually invest in a company, do you ever work with them to prepare them for investment to say, “Hey, I think there’s potential here. Work on A, B, and C and then let’s talk.” And you have this image in your mind. You go, you pitch to an investor, and it’s either thumbs up or it’s like thumbs down and you never talk to them again. Versus, is there some ground in between where there’s a conversation that evolves that eventually ends up in an investment being made?

SAM: Absolutely. I think one of the parts of this industry is even when I’m not an investor in a company, I may know a company and say, “It’s not a fit for me for GE Ventures but I still think that we can provide help.” It’s one of the things I love about tech and about venture in general, is that people are often willing to pitch in, even when they don’t have a direct financial incentive. And so, I see that a lot whether it’s helping a company where we’ve met them and we later see an opportunity and say, “Oh, you should go and talk to this company or that company.” And then often, we may see a company that’s pitching us ahead of where we would typically invest. Maybe they’re looking for a ‘Series A’ but given the space that they’re in or what we’re doing at the moment, it may not be the right time for us. And so, we’ll continue to track along and keep up and get updates. Some companies do a really good job of actually providing proactive updates and sending out monthly or quarterly reports to investors they’ve met with before. I think there’s a wide range of ways that founders do this. But it is a really good way to keep people interested in the prize. And then when you come back and say, “Hey, now I’m out raising my ‘Series B’,” that’s not a surprise. I knew that you were hitting these milestones, that you were doing everything you said you were going to do. And you’ve demonstrated a level of credibility that really adds to the pitch that you made the first time around.

ERLICK: You said something, metrics. So, a venture capitalist, after they make an investment, what are some of the expectations that they may hold this startup that they just invested in… what are those expectations that they may hold them accountable for? Or those metrics that they’ll be looking at?

SAM: Yeah, so I think some of the really high-level ones that are common across businesses, generally growth is a really big one. So, I almost said revenue. But I wanted to caveat…

[Laughter]

SAM: And say growth could mean different things. It could mean number of developers. It could mean number of downloads if you’re an app. It depends on what the business is. But I think growth is a huge one. Growth is a really important, that top line, that’s what’s going to drive a lot of the value in the business. And then below that, demonstrating that you can hit the milestones around things like margins. So, how profitable is each unit you’re selling? Or how profitable is each customer? And lastly, how are you doing managing your spend? So, that’s great that you’re earning the right amount of money for each customer, but are you doing it by… do you have a massive number of employees and offices and all the things that are too expensive to allow you to use your money wisely as you reach the next stage? And so, those are the big milestones. It’s really just growth, margins, and operating cost or burn rate as we call it.

CHARLES: Mmhmm. So, that sounds like a lot of work to actually evaluate these companies. Do you do your due diligence once you’ve already moved in pretty solidly into the process?

SAM: Yeah, these processes can move really fast. And depending on the timing, generally it’s, you jump in, you learn as much as you can, as fast as you can, and you make a decision so the company can move on. I’ll say there’s a lot of work that goes into considering and deciding which companies to spend more time on, both for us and for them. We don’t want to waste a company’s time evaluating, going through more meetings, if it’s not a really strong candidate for us. Because they could be spending that time better with other investors who are a better fit. And I’m not going to pretend to like the evaluation part. I have a lot of respect for the amount of not just work but of a person’s energy and really, their life goes into these companies. And so, I think the hard part is building the company. And so, it’s hard for me to say that evaluating is a hard part. I’m trying to understand as much as I possibly can in a month or two. I’m not going to know as much about the business as the founder does. And I’ll be wrong a lot. I may miss something and not understand, whether it’s because I don’t see the market but it’s there or because I have some underlying assumption about the way things should work that they don’t meet. And I think that that’s something that investors have to come to grips with. You try and get as smart as you can as fast as you can, but you’re not always going to get to the right answer.

ERLICK: You said that it was growth, spend, and profits were some of the metrics. That is almost all of the essential components of a business plan. I remember one time, one of our previous conversations, you emphasized how important it was for companies, or even at just a simple startup, to put together a basic business plan. Is that something that you can elaborate on a little?

SAM: Yeah. So, most companies show up with a pitch deck. So, they have a set of PowerPoint slides and then they have a set of materials behind that where if you go deeper into an area they may have a white paper about their technology and they may have an Excel financial model that explains why they have these expectations about what growth and margins and all those things will look like. So, there are all of those pieces that come together into a business plan. The business plan could be written or it could be that PowerPoint. But very traditionally, it’s a PowerPoint or some kind of presentation that is shared in person. There’s usually a version that’s sent in advance to confirm that the company and the investors should meet. And then once you clear that bar, there’s a deeper presentation that often you’ll give to either one or a set or a whole team of investors. And you’ll go through and explain why it is you think this is a good investment opportunity for them and why you’d like to work together. And then you have a discussion about whether that’s a good fit, about some of the underlying assumptions, and come to either a set of next steps for the diligence or a decision that it’s not the right fit, it’s not the right time to take the relationship further with more diligence and that kind of stuff.

ERLICK: Yeah, because I see… well, I know a few people that have startup ideas and they kind of put the business plan on the back burner and put the actual prototype more at the forefront. They say, “Oh, we can worry about the business plan later.” [Laughs]

SAM: [Chuckles] Well, I think… there’s something to be said to that. There’s something to be said for product and growth winning. So if you… Let’s start at the early stages. If you have something that’s working and that’s really obvious, you may not need a…

ERLICK: True.

SAM: To go raise money. It all comes down to, do you have enough to get enough investors interested to raise the round that you want to raise? Because you want to have enough investors involved, enough demand, that you can be selective about who you want to work with and on what terms, right? So, what valuation and how much of the company am I giving them, and all of those things. So, if you can do all of those things with nothing but an app and one chart that shows a hockey stick of growth, that’s awesome.

CHARLES: You’re hot.

[Laughter]

SAM: Often it does require much more and a much longer plan. So, even if you say, “Look, it’s growing like crazy,” there’s usually some set of questions behind that. So, that’s great. Your free app is growing like crazy. How are you going…?

[Laughter]

SAM: To get paid for that? And you’ll talk about that. And you’ll say, “Here are the things we’re planning on doing,” or here are the assumptions that we’re making. And the more original, the more unique the business model is, the more discussion and explanation that may require. And that’s where the business plan and a pitch deck come in handy, because it’s a really good presentation aide or pre-reading to get to that answer faster.

ERLICK: So, this evaluation it seems, is a two-way street. The VCs evaluating the company and also the company or the startup evaluating the VC to know whether it’s going to be a good relationship.

SAM: Oh, absolutely. Yeah, the best companies have choice. They have a number of investors who are interested in funding them. And certainly, that might be different at different stages or at different times, depending on what’s going on in the economy and in tech and in other places. But generally, VC is a very competitive industry. I’m trying to sell my money and services as an investor versus other options that you have. And so, while it’s maybe not as competitive as only one of us can buy the company like in an M&A situation. There are often more than one investor. There’s still a very intense set of competition around, okay, who’s going to be involved in the deal? How much money will they be able to invest? So, that’s something that really can come in handy for founders.

ERLICK: And what was that you just said there? M&A situation?

SAM: Oh, sorry. When a company is being bought. So, when a company is being bought, it can look kind of like a fundraising process, but instead of selling a part of a company, you’re selling the whole thing. And so, in that case, obviously it’s a competitive situation where there’s only one winner. And this is a different process. Often, the rounds that we’re a part of, we’re not… we’re buying a minority stake just like any VC. We may be buying 5% of a company, 10% of a company. And often we’re being joined by other venture investors. We really actually commonly partner with the institutional firms and they’ll take a board seat. We’ll invest alongside them and be an observer on the board and provide counsel. And so, it is a very competitive process. And that, while M&A is a winner-take-all, there is one buyer who is ultimately going to own this company going forward, the investing process for a venture is much more collaborative. But it is still competitive, because there can only be so many investors in one company.

CHARLES: And you want to choose the right one on both… the right set. Alright. Well, I think we’re running up against time. This has been a fascinating conversation into an aspect of our industry that really is providing the fuel that drives so much of this forward. So, I guess I’ll close by asking you, already talked about Resin. We had them on the podcast. We love them. Are there any conferences or products that you’re investing in that you feel like our audience might want to know about or anything like that?

SAM: Well one, you mentioned Resin.

CHARLES: Yeah.

SAM: I know you guys have been a good friend to them and Elrick and I met at their hackathon. I would recommend to anybody, go try it out. It’s a really cool way to play with hardware products. I am not a developer and I required a lot of help from Elrick at the hackathon.

[Laughter]

SAM: But at the same time, it is something that almost anybody can pull out of a box and start playing with. So, I think that’s a great one. The episode you did on them were fantastic. So, I really enjoyed those ones. I’d say in general, I’m always out looking to meet new companies that are going to benefit from working with GE. I spend a lot of my time not just trying to invest but also trying to find partnerships for companies that we’re looking at within GE, either selling to us or working with us. And so, if somebody thinks that there’s an opportunity to do that, then I encourage them to reach out. Because I think there’s a ton of opportunity. It’s a really big company that really has a ton of opportunity for other partners.

CHARLES: Alright. If they wanted to reach out, how would they get in touch with you?

SAM: Yeah, I think maybe the best way to initially make contact, I tend to be pretty active on Twitter. So, my handle is just @SamCates. S-A-M-C-A-T-E-S. And you can also learn more through our website. If you’re curious about some of the businesses I mentioned, so just GEVentures.com. And it’s about to go through a whole refresh. So, go check it out.

CHARLES: Alright. Well, fantastic. We will definitely look for that. And for everybody else, you can get in touch with us on Twitter at @TheFrontside or send us a line at info@frontside.io. Thank you everybody for listening. Thank so, so much Sam, for being on the podcast.

SAM: Yeah, of course. It was a blast. I’m a big podcast fan and I’ve really enjoyed catching up on your episodes.

CHARLES: Ah, and thank you Elrick, always.

ERICK: It was great.

SAM: Elrick, when you finish building your Raspberry Pi Battleships, I want to play.

CHARLES: [Laughs]

ERICK: Oh, yes. Yes. It’s in the works, man. It’s in progress.

SAM: Alright, I’m waiting.

CHARLES: Alright. Well, take it easy, everybody.

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