Issue 003: There's More Money for Startups than Ever in History

So how the heck do we get into that piggy bank? Let's talk.

Hey everyone, welcome to Issue 003 of The Startup Forum newsletter!

Edition Preface

I want to open this month’s edition by giving every one of you a mountain-sized THANK YOU. Not just for being a subscriber but for being the rare human being you are. One that aspires to learn, listen and grow, especially as an entrepreneur.

Entrepreneurs are a rare breed of human. Realizing true success as one can also be relatively rare indeed. So the fact that we, as entrepreneurs, chase our visions over mountains, cliffs, and streams is a journey only those brave enough to embark on and persist on one deserve its rewards.

Contrary to what many uninformed may believe, such a journey is different from the parties, endless fun, and buckets of cash flow it is misperceived to be. Instead, it is more a journey of self-discovery, life, lessons learned, and overcoming every possible barrier to achieving one’s dreams.

To say I am grateful, humbled, and truly privileged to have the honor of serving you with my insights and experience would be an understatement.

I just saw that The Startup Forum newsletter has reached 1,300 subscribers (!!!) between LinkedIn and Substack, and I will be honest in telling you I had an emotional moment. And you can ask my wife — I don’t have those moments often.

So thank you, and I say that from my heart.

With that said, and enough of the mushy stuff, let’s get down to business.

Edition Prelude

As I will always state, please know I write for you, not me. I write to provide all of you with a routine publication of informative and authentic insights that break down the world of startups so you can put these to practical use in your entrepreneurial journey.

If you’re reading this on LinkedIn or in Substack , please feel free to click below and download the Mobile App. There, you can read all newsletters and my other content as well. PLUS, you can directly chat with me within the app anytime. I would LOVE to hear from all my fellow entrepreneurs. You got questions? Bring ‘em on.

For now, we’ll keep this as a monthly publication. As more time allows from my end, I’ll see if I can publish more often.

In honor of breaking 1,000+ subscribers, but more so because you are just so awesome, I’ve decided to put together some pretty cool stuff for you all.

For those who may not know, I run an online 10 Step Start-Up School teaching first-time (and seasoned) founders and entrepreneurs how to properly start your startup. I’ve started taking portions of the larger book I wrote the course runs from, and decided to release segments that I think you’ll find useful into FREE mini-eBooks. My objective here is to help empower you for a stronger, more advantageous position in winning in your entrepreneurial journey.

I hope to have the first of that material available by the next Newsletter, so please stay tuned!

So, whether you’re a first-time or experienced founder, any range of startup investor (high net worth, Angel, or VC), or any professional industry servicing or providing help to startups, The Startup Forum serves all interests.

And, in case you may want to know more about myself as the Editor behind this highly profound publication, just click below.

About the Editor

With that, let’s rock this issue and see how some new value can be added to your life!

That Fat Little Piggy Bank

Let’s face it. The world right now is in a pretty big mess.

Governments are out of control, banks are out of control, the economy is out of control, and entire countries are wildly out of control.

As for all of us entrepreneurs, I believe we likely face our most challenging times in recent history.

Starting a startup, growing an existing one, or hitting the road to get funding, would seem to be an uphill battle against an avalanche.

This is also why it might seem odd for me to be raising my hand with excitement, happy to share what I think is probably some of the best news you will read in 2023.

I’ve already opened this discussion with several of my colleagues, a few wondering if I have been on some form of relaxing medication (not).

Being pragmatists, they’ve responded with skepticism at my optimistic assertion there’s “more money available right now for startups than ever in our history,” especially given volatile market conditions, unstable interest rates, and lending challenges.

Au contraire, my dear friends… au contraire.

Free diving into the riptides of this oceanic-depth debate, we first must examine what’s already soaking up the warm beach sun, while the world rotates in foul economic weather.

Capital Overhang

Speaking of basking in the sun, let’s discuss sunscreen.

I think sunscreen is one of the most useful inventions in modern history. I love sunscreen. Since I easily burn (and live in Florida), I’m a pretty big fan of a good quality, natural, or organic SPF 50-rated brand. Sunscreen is my go-to for keeping me from getting burned, and has served me well for many years on many shores.

For those who enjoy a bit of trivia under a beach umbrella conversation, an Australian chemist named Milton Blake formulated the first liquid UV filter in 1932. However, it was actually a Swiss gentleman by the name of Franz Greiter who got sunburned (and likely rather painfully) while climbing Mt. Piz that inspired him to create the first modern sunscreen product later in 1938, leading the way for commercialized sunscreen creams we now all have.

Today, sunscreen an $11 billion industry predicted to hit nearly $15 billion in 5 years(1 ).

Pretty big business. No doubt, because I buy a lot of sunscreen.

But why sunscreen? Because someone got burned. Then that someone solved how to never get burned again. Wise plan.

Unfortunately, getting “burned” is what investors struggle with daily. Namely, how not to get burned on investments, or as a result of where they place their hard-earned money.

In my opinion, investors already have a great sunscreen, but we’ll talk about that a bit down at the end. For now, let’s talk about the relentless heat creating that sunburn: Capital Overhang.

While that’s the formal term, we may hear it more casually as “dry powder.” Either are likely the most under-used and powerful words you’ll refer to when seeking private market capital.

Let’s define.

Both refer to the amount of "committed capital that has been given (or promised) to investment firms that have not yet been invested"(2 ).

Let’s say that again…

...the amount of committed capital that has not yet been invested.

That, right there, my friends, is your ticket to understanding a very important number.

A number that should give every entrepreneur a lot more confidence there is hope at the end of that very long fundraising tunnel.

Let’s quickly flip the calendar back several years to pre-pandemic.

Did you know that by the end of 2019, across all private capital markets, there was a total of $2.5 trillion in capital overhang, or dry powder?

Hold on… that’s right: $2.5 TRILLION WAS COMMITTED BUT NEVER INVESTED.

[ If you felt faint with that number, please…do be sure you’re seated for this next one…]

But what about now? Surely investors have reasonably wised up, become anxious to move out of that gridlock, and emerge swinging for the fences since COVID to put at least most that idle money to work?

Uh, no. In fact, the opposite, and painfully so.

The amount of capital overhang, or dry powder has now grown to epic proportions so high, that 10 years ago, these numbers, frankly, were not conceivable.

End of 2022: $3.7 Trillion(3 ).

That’s right. Three-point-seven trillion in COMMITTED BUT UNINVESTED MONEY.

That. Is. A. Lot. Of. Money.

A whopping mountain of cash end-to-end in US one-dollar bills making up a distance of about 357 million miles, or traveling to the moon and back about 750 times.

Enough to give every living human on earth about a $500 bonus.

In all seriousness, that’s a ludicrous amount of unspent cash lying around.

So, one now might ask, what in the world will happen with all that money?

Great question, but factually, who truly knows. HOWEVER, for startups, the right question to be asked is “how can I get my hands on it?”

Enter stage left, the new boss in town.

The “X-factor”

About 8 years ago, I worked in a fast-growing PE firm for a stretch, and also had my hands in a hedge fund and a handful of VCs. Now that I’m a partner in Commonwealth Capital alongside some people a lot smarter than me from Wall Street, the securities industry, finance, and Big Law, I’ve managed to come full circle in now understanding how this crazy private capital markets puzzle actually comes together.

And believe me when I say puzzle. But before I explain the “X-factor”, I need to put some paint on the canvas to give you the full picture.

For anyone who has worked in private equity or venture capital, you know that when dry powder starts piling up, the pressure on deal sourcing proportionally increases.

Investors, or Limited Partners, aren’t really interested in their portfolio money sitting around, collecting dust, not being put to work. So, if VCs and PEs don’t want to lose clients and partners, they must deploy cash and make deals happen in a timely manner. And, if Family Office staff want job security, they need to do the same, while ensuring existing investments are moving the profit needle.

But when dry power begins to really pile up, two things happen internally in a firm:

1. Inbound deal volume demand accelerates, putting extreme pressure on sourcing.
2. The filtering and deal selection cycle shortens to increase decision volume.

The upstream demand and downstream pressure create a centrifuge of circular internal flows, separating out at speed good from bad deals more rapidly due to an increased velocity, allowing funds to be decided on quicker and deployed sooner.

This “process” has existed for decades. It’s nothing new. And unfortunately is what created the “9 in 10 startups fail” mantra. Albeit an old school model by nature, that mass flow of pitch decks, presentations, and deal selection by VCS, PEs, and Angels have forced everyone into becoming “commodity processing centers,” no different honestly, than how HR departments do hiring.

Thousands in, but only a few make the cut.

“Natural law,” one may argue. But that too, is an archaic and legacy perspective, one already being disrupted and the topic of an upcoming newsletter.

Nonetheless, this is, unfortunately, the industry status quo by default. When you speak or work with nearly every VC, PE ,or Angel, they’ll all tell you the same thing: “this is a numbers game,” and each nearly swear by their own model as “the most effective” yet each with no real differentiating plans to change it.

Making matters worse for everyone, we now regularly read about founders-gone-criminal in freefall, banks collapsing, global crypto wars, rate hikes, recession fears, and the Great Inflation Debate.

All factors exacerbating the challenges of an already problematic private capital markets for entrepreneurs during challenging and volatile economic times.

The result? It has now given birth to an emerging “X-factor” for investors.

A new boss in town.

A new authority across nearly all investor decision-making.

caution

Not your normal, typical, do-a-bit-more-homework, or “let me think about it” caution.

This is a more foundational caution. One that a good majority of founders have never really taken that serious as recent as 2021 when raising significant capital, but one that will wind up closing doors on you from most investors now in 2023.

Founders have typically left this one up to their “finance guy” or deferred later in discussion during “due diligence” after hopefully dancing enough with a pitch deck to get attention.

Unfortunately, not any more. This investor caution has now been “bumped up in your inbox” to a #1, primary consideration.

financial safety

Now, before you go “whuuut…?,” let me explain. I can assure you, this could not be more accurately stated, and here’s why.

There has been a pretty serious investor pull-back recently in private capital markets from the cavalier days of throwing huge sums of investor funds around like cowboys in a rodeo trying to lasso a worthy stallion.

Things aren’t quite like that anymore. Investor sentiment is not even as it was as recent as 2021.

Investor caution for more ‘financial safety’ is not only alive and well, now that I am letting this cat out of the bag, it is also right there on the table in plain sight for founders and entrepreneurs to dominate.

Since I have always been the half-full glass of water guy, let me state this more clearly:

By recognizing this caution, learning how to tackle it, and dominating it in your proposals, your company is highly likely to have a mic drop moment and secure all the investment partners you need for your entire round.

Let’s Break it Down

That caution, openly stated to you or not by investors, is about your actual financial condition or state, and how that state measures up and ties into your equity value.

In other words, (a) you need to be front and center showing you know exactly what the heck you’re doing financially, (b) you know your balance sheet like the back of your hand and as good as your product, (c) you know the precise details of the equity instrument you’re selling, how and why, and (d) you know exactly how you are going to make it with your business through what’s going on in the world right now.

Put another way, if you walked in and plopped down a “Wall Street investor-level” package, as if someone from Goldman Sachs, Morgan Stanley or Merrill Lynch prepared your offering as bullet-proof financial model and securities package, the only conversation they’ll likely be having is “what took you so long to get this to us.”

That may sound overkill, but here’s the reality. Investors right now really, really want to know what’s going on BEHIND your curtain, a lot more than what you’re parading in FRONT of it.

And if you can crush that, you’ve knocked your funding request out of the park on your first swing.

Now, don’t get me wrong here. Sure, you have to have all of your other boxes checked. If not, you won’t even raise interest to get to your “behind the curtain” package.

And just to ensure we’ve not left those out, I’ve condensed 100+ books, 20+ years, 100s of investor presentations, dozens of videos, courses and thousands of conversations into a basic “crush it” checklist to make sure you know to have all these in place as well:

• Remarkable story, genuinely yours, and a true hook to catch the fish
• Killer pitch deck (problem-opportunity, solution-value prop, business model-competitive advantage, team-expertise, and capital-requirements, all about 6 slides; followed by market-validation, market-scope, marketing-GTM, and exact use-of-funds; and, if needed add traction numbers and your road map)
• No-BS business plan (starting with an executive summary, followed by a complete plan across all aspects of your business; here is where you’ll include either a Blue Ocean Strategy analysis or SWOT, as well as details on customers, better traction than Spiderman, dive into all key production and product details, and your full road map)
• Massive target area market, and evidence of how you’re entering a best-possible market timing
• More evidence you have an even more perfect product-market fit
• Revenues starting to climb like an anthill
• Already locked in with just the right industry partnerships
• You’ve already crushed it bootstrapping, friends & family, maybe some Angels, and now it’s time to either go big, or go home

These are foundational for every founder raising significant amounts of private market capital. And by the way, my entrepreneur career always includes lots of learning. I recommend keeping on hand our most valued books, as for me, they’ve become a staple of my own life. You can’t see my bookcase on the left, but here’s the ones I keep mostly within reach behind me at my desk.

Listen, I know founders still need to be great storytellers. Investors still need to feel confident you’re “the holy one” to take your company to the promised land. And any you pitch will normally want to see your potential as a unicorn-aspiring venture. All of these will remain characteristics across investor discussions.

However, those factors alone are no longer a guarantee of funding like they used to be.

As your audience has shifted, so must your script.

Right now is not a time to “be brazen”, “throw caution to the wind” or “crush your story to get the close.”

Folks, it’s time to tone it down just a bit.

Instead, shock and awe them as a rock star with your financial safety net, and catch them landing in it with a check in their hand.

Investors need to see the geeky glasses version of your business plopped on the table, wrapped in bullet-proof Kevlar, financially impervious to kryptonite. Crush them with expert level financial modeling, pro formas, a killer balance sheet, company financials, all attached to a mind-blowing power-play securities offering.

Do that, and all you’ll hear is a mic drop.

Do that, and you’re handing them something they were not planning for, and through a somewhat element of surprise, puts you in the driver seat of your deal and full control of what happens with your equity.

You also just removed a very thick set of glasses they no longer have to look at you through, called High Risk.

Most of all, you just set the tone to tell your story on a more stable financial and securities stage, so when you do discuss your incredible ideas, products, market, traction, team, and plans, they will astutely listen. Having investors scrambling to be first at your table is going to be far better than being ghosted after your 50th presentation.

Now, the billion-dollar question: how in the world are you supposed to put all that stuff together without spending a fortune in lawyers, accountants or consultants to do it?

I thought you’d ask. Let’s answer.

Getting That Mic Drop Moment

If you have already checked the aforementioned boxes and now all you now need is some Big Money love, then it’s time to step up and do the real work it’s going to take to actually get it.

At this point, entrepreneurs have one of three paths to journey into the professional, cutthroat world of raising significant amounts of private market capital.

Let’s examine.

INTERNAL is where I have found (by experience) most founders think they can win. But they don’t. Endlessly cIrculating business plans, pitch decks, chasing conversations, investors, checking all the boxes, and still being turned down presentation after presentation, is the norm. The frustration is real. I know. I’ve been there, done that, hundreds of times.

EXTERNAL is where a smart handful of you eventually turn, seeking use of outside securities lawyers, attorneys, professionals, accountants, but spending upwards of $50,000, $100,000 or more getting your company put together into proper financial modeling, pro formas and a compliant securities offering. Unfortunately even then, founders end up giving away too much equity, too soon, for too little, as they leave it up to “the experts” to figure things out for them. Sure, equity crowdfunding can work, and it is awesome and can bring incredible wins. But please realize, crowdfunding alone does not engineer your company to exit, and you may also find yourself challenged in securing a later, higher round Investment Bank, VC or Broker-Dealer that has no problem dealing with thousands of micro shareholders when it comes to compliance and governance.

HYBRID is where things are now moving into. Modeling your own business, your own offering, and doing your own fundraising is your best chance of getting that “mic drop” moment – as long as you know how. This means learning what Wall Street investors do behind their curtain, and doing that yourself with your company. This means institutional-level pro formas and financials with a securities offering that keeps you in control of your ownership and business when asking for the big checks. Factually, you know your business better than anyone, and so modeling your business yourself and presenting that, is the most economical and effective way to raise significant amounts of private market capital. And, you then build the confidence and trust in your company by huge players that you need, building the right investment partnerships, all the way to exit, staying in control of your equity the whole journey.

Let’s now examine the risk factors for all three paths.

The more expertise you bring in, the more you’ll spend a budget you don’t have, and this is can become very expensive.

Reversely never hiring critically needed expertise may save you high external costs, but you now maximize high risk of loss in equity by not offering the right securities instrument, or violating federal or state blue sky laws in your home-cooked offering, presentation, or wing-it business plan.

Right down the middle is about the best place you’ll want to be. Obtain the expertise through a program that teaches you exactly what the experts are doing behind the curtain and what VCs will expect, and then DIY to save both the high costs and high risk. A bit more work, but a fraction of the time and cost at the end of the line, saving you millions, if not tens or hundreds of millions in your own equity when you go public or sell your company.

Conclusion

While I could keep going on this topic for days, let’s roll everything up into the most important takeaways from this issue:

1. Trillions, not just billions, are piling up, needing to be invested. This means investors need a safe place to put their money and that means in your company, as long as they see it as a financially safe opportunity.
2. That same investor sentiment has now largely shifted. Investors want to see more financial safety in your business before writing big checks, ahead of your great dance with a pitch deck, product, and market numbers.
3. Entrepreneurs can absolutely access those billions––only as long as they know what that safety net looks like, how to build it, and present their business as the solution to catch the investor and the funds they need in it.

Finally, let’s close with a final comment on sunscreen.

I mentioned earlier about sunscreen for investors.

Well, we actually have it. It’s what you can use to protect both yourself and them from getting burned, and is how you can get those Big Checks. With that, here’s my shameless pitch for our EPEC Program? , tailor made just for you.

?I hope our program can help you too, like so many others it has helped already.?

See you next issue, and let’s keep working together to knock things out of the park.

Wrap Up

Have you enjoyed Issue 003 of The Startup Forum newsletter? Be honest, share your thoughts, and always let me know what you want to hear more of and how I can create better content for you!

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