Mastermind Peer Groups for Startup CEOs Raising Capital

The PLAN COMMIT WIN? Methodology, when applied in a peer groups for startup CEOs setting, can significantly improve the interaction and help get your company funded.

Recoding of Webinar from October 11, 2017. Larry Kesslin, Chief Connector at 5 Dots and Co-Author of BreakPoints: Where Businesses Get Stuck…And How They Get Unstuck, will interview Patrick Henry, CEO of QuestFusion about the value of mastermind peer groups for CEOs and how to apply the PLAN COMMIT WIN? Methodology in such a setting. Some of the key value for startup CEOs includes peer guidance on:

• Raising Capital
• Scaling a Business
• Exit Strategies: M&A and IPO

Larry Kesslin is a serial entrepreneur and the founder and Chief Connector at 5 Dots, a company that helps other companies grow their businesses. Larry has spent the last 25 years helping companies grow their businesses in part by building and facilitating peer accountability groups. He is the co-author of BreakPoints: Where Businesses Get Stuck and How They Get Unstuck. Larry’s focus is to help other people build more purpose driven lives while at the same time being successful. Larry is a member of Rotary International and a board member at U-TOUCH, an amazing organization changing the trajectory of young people’s live in Uganda.

Larry:       You have a really strong background in working with companies and building companies. Today, I want to focus on three different areas. I want to focus on entrepreneurship and what that means to you. I want to focus on money. It’s important.

I wrote a book called Break Points and we left out one break point. There are several break points in the book. We consciously did not include money as one of the break points because cashflow and money is a constant. There is no break point around money. Money is always there. We had seven other issues, and money.

When you talk about a business, money and cashflow are always issues that we need to deal with. The last thing is the project that we’re working on together, which is about developing peer groups and how that has affected your life. When did you start QuestFusion? How have you gotten here? How is it going for you?

Patrick:    We were in the process of selling Entropic Communications, my last product company, at the end of 2014. I unwound my position there. I put up the QuestFusion shingle in early 2015. The first six months, I thought, “I’ll mentor some people and see what I’m going to do next. Do I want to run another product company? What do I want to do?”

As I got into the latter half of 2015, I realized there was something here. There was a potential business here. It’s difficult with startups because they don’t always have a lot of money. Sometimes they have no money. Trying to create a business model around that has been challenging, but I’m a believer.

I’m also a believer that I can provide guidance and counsel to young companies, growth companies and companies that don’t need to raise any more capital but they’re looking for an exit. I have a lot of experience there. In early 2016, we launched the revised, new and improved QuestFusion website. It was around two years in earnest where I’ve been actively blogging, speaking and coaching and mentoring companies.

Larry:       What services do you offer to your clients? What does that look like?

Patrick:    The focus is strategic guidance to startups. That breaks down into a couple of different areas. The first is one-on-one coaching and mentorship. I can work in an advisory role, which I consider an end-to-end project. It’s something where a company is working on a particularly thorny issue related to acquiring new customers, entering a new market or spinning out a new business. It’s very company focused.

The next thing I can do is work with individuals more in an executive coaching mentoring role. I do a lot of that. I do some pro bono and some with companies that are more established.

We’re also trying to launch this new business around peer groups. I think there is a big opportunity there. It’s something that I’ve found valuable in my career. Then I offer virtual coaching, which is part of what we call the Plan Commit Win? Membership. I wrote a book, Plan, Commit, Win: 90 Days to Creating a Fundable Startup.

We brought that book to life through a set of virtual coaching seminars that you get when you become a QuestFusion member. We’re starting to add additional content. I’ll do interviews with young entrepreneurs and let them ask me questions, and coach them through a live coaching session. We’ll also have some other cool content on there as well.

Larry:       What does the word “entrepreneurship” mean to you? When you think about your entrepreneurial journey, what does it bring up for you?

Patrick:     You have the traditional entrepreneur, someone who starts a company. They are a company founder. You have a creative idea. You decide to start a company around it. I think that’s the traditional entrepreneurship model. I’ve never been a company founder, other than with QuestFusion. I’ve always been brought in, sometimes in an earlier stage and sometimes at a later stage. I was brought in to be the adult supervision, even though I was young when I started doing it. I was someone who brought a set of processes and partnered with the founders to create or turn the initial product into a business. Successful entrepreneurship is more than about having an idea or an initial product. It’s about building a business, building a business model and creating a company, not a just a product, into something that has incredible value.

Larry:        I’ve done a lot of work for people who have never been on the entrepreneurial side, such as corporations. I’ve explained to them what it feels like to be an entrepreneur. I used the concept of risk versus reward. The risk equals potential reward.

Most people who have never started a business before, have always had jobs as an employee, don’t understand the idea of potential risk and potential reward. They always know what they’re getting. For me, 25 years ago, I said goodbye. I traded five days a week for two days off for 50 weeks a year to get two weeks off. I just didn’t want to do that. I’ve been on that beginning side. I think there are multiple pieces to the entrepreneurial journey.

You bring up an interesting point. The person who starts the business is not always the right person to run the business. In my case, I would have been better off getting out of the way five years before I said goodbye to my business. I wasn’t an operator. I work best from the time the product is identified to the time the market is identified. I have a product. I have a market. I need to turn it into a company.

Then I need to hire a management team. That’s where I love. Once the management team is hired, I say, “Okay, go build a company.” I didn’t have fun with that part. I love the creative side of it. Where do you see your fit in that continuum?

Patrick:     Although I’ve been involved as an advisor, I haven’t done things from the ideation point. I’ve been a mentor with creative types. I’m creative in a different way, more from a business standpoint. They are creative product-type people. I’ve worked with them on smart ideation. As far as companies that I’ve run, I’ve been in as early as post-seed stage. You’re past the bootstrapping friends and family. Maybe they’ve just completed a seed round. Maybe they’ve just completed a Series A. I’ve worked at larger corporations that had explosive growth.

Then they were struggling with what to do next. I’ve come in at a senior role, helping those companies. It wasn’t a traditional turnaround where the business was failing, but stagnation had occurred. How do we get out of this mess that we’re in? Prior to hypergrowth, they haven’t put processes into place.

They have the infrastructure and processes of an early-stage startup, like an infant, when they’re now an adolescent. They have the inability to cope with what’s going on around them.

Larry:       I think we both know Brian Smith, who is a good friend and the founder of UGG. He has this line that I love, “You can’t convert to adults.” There are a lot of people who start businesses and you want it to be an adult. I’m one of them. I had a business for 20 years, then I said goodbye and started from scratch. I thought, “I want this to be mature already and it’s not.” That’s a hard process to live through. It’s not easy.

Patrick:    Startups are a team sport. It’s all about the people. You always want to promote from within and have everyone rise with the company if possible. You have someone who is a smart sales manager or director of sales. If they’re achievement oriented, they want to be a VP of sales. You want to support their career goals and aspirations.

Sometimes, you’re growing so fast that the person’s ability to get to the level that you need, in the time frame, is impossible. Then you have to hire from outside. It’s dynamic. You mentioned putting the management team in place. In Entropic, we went from pre-product and pre-revenue to very successful first product, some acquisitions and additional products and market segments. We took the company public. We were on rev 2.5 of the management team at the time that we ended up selling Entropic to Max Linear.

Larry:       Did you read Doug Tatum’s book, No Man’s Land?

Patrick:    No.

Larry:       In the late 80s and early 90s, Tatum was the consulting group for companies between 50 and 125 employees. I love working with founders. Once you put a professional management team in place in a company, I’m not needed. I’m a swiss army knife. I can do a lot of different things. There are certain things that I do really well. I’ve seen lots of different pieces of things.

The earlier you are in a company, and the more flexible skills you have, the more valuable you are as the company grows. With that shift from 50 to 150 employees, the people who got you from 20 to 50 employees as a leadership team are typically not going to get you from 50 to 100. That’s really painful as a leader, to say goodbye to people who have put their heart and souls in for you. I’ve had many conversations coaching CEOs. Is it your job to take care of your people? You have to take care of your company first.

Patrick:    By taking care of your company, you’re taking care of the vast majority of people. I’ll give an example with Entropic. We had a guy that I worked with 30 years ago at Advanced Micro Devices. We worked in marketing together. Then he built his career in sales. He came in as our sales vice president early in the company and did a fantastic job.

He was the perfect hands-on sales manager, with a VP title, because he was the head of sales. As we continued to grow, he was running out of his experience level to take the thing to the next level, especially with multiple products. We had people all over the world on different sales teams. You had to manage the managers. I offered him the head of North America position, which would get him back into the scale. He was not interested.

He said, “I want to be running sales somewhere.” I said, “That’s awesome.” We parted ways. We’re still friends today. Some people like being a big fish in a small pond. Some people are okay being a role player. It all depends on who you are and what you want in your career. I support that. Open and honest communication and having a dialogue with people is important versus an undermining, manipulative agenda. I’ve always been direct about those kinds of things.

Larry:       It comes back to what you’re doing today. It’s this whole concept of helping people through their journey. There are lots of roles that we can play. My last company was borderline between coaching and consulting. People say, “What’s the difference between coaching and consulting?” I’ll ask you how you see it.

Patrick:    It gets back to consulting and advisory services. QuestFusion has that component. It’s based on my experience primarily around strategic marketing. I’m not a human resources consultant. I’m not an attorney. I’m not a CFO. If you get into thorny issues around product development and product marketing, I’m a product guy.

If you have things related to product positioning, those are problems that I can help management teams and CEOs with. They’re typically finite. Maybe it’s a two-month or six-month engagement. It depends on the project and the complexity. To me, that’s consulting. That’s advisory services. Coaching is much more intimate. It’s about working directly one on one with a person.

For me, it’s typically an executive, CEO, company founder or business owner. They’re struggling through a various set of issues, some personal and some business. I can be a sounding board to allow them to vent and provide some feedback. More importantly, I ask questions to help the clarify their own thinking around things. To me, that’s what coaching is about. Within coaching, there are at least two types. I’m sure there are more for coaching experts. There are some people who have been coaching their whole career.

I’m an operating executive. The way that I see myself is a head coach, defensive coordinator, offensive coordinator. I have other friends who are what I would call HR coaches. They do what they call strength coaching. Coaching has evolved over the years. They help people focus on their strengths. They do 360-degree assessments. They take people through a set of instruments. They assess peoples’ skills, strengths and weaknesses. Then they use that framework for giving feedback to the person or executive to help them grow their strengths and hire for their weaknesses. I’m sure there are many different philosophies around that side of coaching. That’s not what I do. I’m not an expert at that. I’m an expert at building companies.

Larry:       I think we’re aligned with this. I’ve always said that coaching is helping someone on their own journey. Consulting is giving them the answers they need to solve the immediate problem right in front of them. Sometimes in coaching, it’s important not to consult. Even if you can solve their problem, maybe it’s their journey to go through that problem themselves. Learning the lesson yourself is a lot more powerful than someone giving you the answer right away.

Patrick:    It’s the old lesson of teaching someone how to fish versus providing them with fish. Ultimately, a good coach takes someone through that journey. My answer isn’t always the right answer. It’s an answer that worked in a situation that I can relate to someone. For the CEO who is running the company, it’s their baby. It’s their life. They have to make the decisions. I can provide some context based on my experience of what happened to me. They shouldn’t necessarily do it the same way that I did it. Maybe their context is different. Maybe the people involved are different.

Larry:       That’s where peer groups come in. I’ve run peer groups for 20 years. One of the challenges that I find is what I call “bar talk.” Someone sits down with a person for the first or second time. They get to know them. They’re fascinated by their experience. They’re fascinated by the stories they tell and where they’re coming from.

The reality is, behind it, there’s not a whole lot of meat. When you meet them for the first time, you get all of this sage advice. It’s typically just that. Very rarely do you meet the true grizzled entrepreneur who will be so forthcoming with all of their information to solve all of your problems. In a peer group, you have time to get to know people. For me, the opportunity is to let time take its course. If you’re going to join a peer group, you’re not looking for answers today. You’re looking for an infrastructure for when that time does come, when you really need help. Then you know the other 10 people at the table. You understand their frame of reference. You understand where they’re coming from. Has that been true for your experience?

Patrick:    Yes. It reminds me of a line from the movie Spy Game. It’s a movie with Robert Redford and Brad Pitt. He has a bunch of secret files that he gives to a secretary and says, “Burn these if I give you a text or a phone call.” She asks, “What’s the deal?” He said, “When did Noah build the ark? Before it started to rain.” That’s peer groups.

Once you’re in the midst of a very difficult dilemma or problem, your ability to hustle and put together a peer group isn’t possible. You do it before it rains. You do it when you can build those relationships over time. Inevitably, with every company, the proverbial shit does hit the fan. I think peer groups are even more important for CEOs. I think they’re important for everyone.

As a CEO, you really don’t have peers. You can’t tell your management team everything. Even if you have friends on your management team that you take into your confidence, there are some things that you can’t talk to those people about. You can’t tell everything to your board. I’m an advocate of providing transparency to your board. It’s not necessarily going to be a collaborative discussion around things.

Boards typically expect you not only to come with problems but to come with solutions when you bring up those problems. Having peers who have done what you’ve done is important. You want to have people around the table where some are behind you and ahead of you with different experiences with building businesses.

There is immense value in having that group of people, especially if you’ve gotten to the point where you can really trust each other and you have that level of intimacy where you can be genuine about what’s really going on, not only in your professional life, but in your personal life. As a person, all this stuff ties together. Having friends and colleagues that you can talk to about these things becomes very important.

Larry:       You mentioned the word “mentoring” before. We talked about coaching, consulting and peers. Give me clarity on how you see mentoring.

Patrick:    Mentoring is similar to coaching. I think I’m more of a mentor than a coach. People use them interchangeably. To me, a mentor is a guide. It’s someone who has been on the journey that you’re on, but they’re several steps ahead of you on that journey.

They can point things out like, “Watch out for this pothole. Watch out for this falling tree. I’ve seen how this turns out. Based on my experience, I’ve tried three different ways of solving this problem. These are my results.” I’ll give you an example. I’ve run three different product companies, plus QuestFusion. I’ve been a CEO four times. I’ve also been a Section 16 officer in a large corporation where I had an employment agreement. I’ve had four different employment agreements.

Boards will always tell you that you don’t need an employment agreement. I’ve needed it three out of four times. Three out of four times, some element of my employment agreement was invoked based on something. When you are a CEO running a company, especially as you start taking outside money, you need to have the clarity about what should and shouldn’t be included, what’s important or not. It took me the third time before I knew what I was doing, to some extent.

I’m still learning things every day. I have a friend who is behind me in the journey. He’s run a couple of different companies. This is the first time that he’s had to put an employment agreement in place. He has new board members. I sat him down and said, “Here’s my experience. Get a great attorney.” I gave him three different attorneys with different personalities, but who are all experts in the space.

Larry:       When we look at mentorship, I imagined in my head when I was young that I would find THE mentor. In my mid-50s, now I’m saying, “I’ve never found THE mentor but I’ve found mentors who have different expertise in different areas that I’ve needed.” Have you found the same thing? I’ve always been looking for that sage, that person whose life looks like what I imagine my life to be. I’ve never met that person.

But I’ve met individuals with skill sets and wisdom in areas that I’ve needed. I told my brother, “I’ve never found a mentor.” He said, “Larry, you have more mentors than anyone I’ve ever met.” The idea of mentors versus a mentor is a shift as well. I had this idea as a young professional that I would find that one person. I think it’s a lot of people rolled up into one ideal.

Patrick:    The only risk I see in that is that people shop for an answer that fits with their thinking. They have a pool of seven or eight people. They talk to each of these people. They give their story. They find the one that is most in line with the decision that they already wanted to make, and they go with that.

One of the most important things about being a mentee or someone who is being coached is to open your mind. The best way to do that, in my experience, is instead of your natural way of thinking, try to think the opposite. Try devil’s advocate. Try to put yourself in a position where you can be receptive to feedback that maybe isn’t in alignment with the way that you traditionally think. That’s where real learning can occur.

As long as you don’t get into this mode of shopping for the answer that you want to hear, I think having multiple people is good. In my experience, I’ve always had one main go-to person throughout my career. That person has changed. There might be a specific situation where I say, “I’m in the deep end of the pool here. I’m beyond my depths. I need to bring someone in who can help me navigate through this water.”

I’ve had that experience. Those engagements are typically finite. It might be a three to six-month engagement where you’re working with someone on a particular problem. Those have been very valuable. That’s typically the more traditional coach person, the strength coach person. I have four times in my career where I’ve done 360 feedback. There are consistencies but there are also differences.

Amanda:   Carmen wants to know if you need an agreement with co-founders.

Larry:       Yes.

Patrick:    I think it’s a very good idea to have that. I’ll give you an example. I was negotiating an employment agreement with one of my companies, with the lead board member who was assigned to work with me on this. At one point, he was prickly about it. He said, “Don’t you trust us?” I said, “This isn’t about trust. If I didn’t trust you, I wouldn’t come to work for this company. I trust you with my career.

This is about clarifying expectations. Just like you ask me to sign a proprietary invention non-disclosure agreement, I’m trying to clarify expectations in case different things happen so that we know what the go-forward looks like.” You see this quite frequently with close friends or family members. Things go well for many years. Then things bust apart at some point.

They can get very negative and destroy families and all sorts of relationships if you don’t have clarity on how things unwind in the event that they do. You can’t predict everything but there’s a standard set of things that typically happen around ownership and severance. You should be able to articulate what makes sense and what’s fair for everyone when everyone is in a cool head situation versus a heated situation.

Larry:       I’ve always said that businesses do well when there’s just enough money. When there’s not enough money, it’s stressful. When there’s too much money, everyone gets greedy. The buy-sell agreement between owners and founders is very important. One of the places where people make mistakes is, if it’s a family, they might hire one lawyer to do the contract for everyone.

If there is a dispute, that lawyer becomes irrelevant because they can’t represent both parties. If you’re going to do a buy-sell agreement, or some type of agreement between founders, each person should be represented by their own counsel. If anything were to happen in the future, they can be defended individually. I’ve run into situations where that caused a tremendous challenge. They went through something called a reverse triangular merger, which I hope no one has to go through. You just don’t know. Money makes people act funny.

Patrick:    You see that in spades when you are running a public company. When the stock price goes down and you’re messing with someone’s pocket book, people act very angry and irrational to a level that you wouldn’t expect. It’s the same way in marriage. A lot of problems and divorces are related to money. People have a lot of sensitivity and emotion around these kinds of things. Clarifying those things becomes important prior to the heat of the moment.

Larry:       We talked about early-stage company startups and where their money goes. We’ve talked about coaching, consulting, peer groups and mentoring. Do they have the money to invest in these things? Should they? Where do you see that fit into this whole process?

Patrick:    From a QuestFusion perspective, there is a tiered set of services. There is an affordability model for anyone who is an entrepreneur and wants to get strategic guidance. I do a lot of free stuff, like this webinar, blog stories, videos, contributed articles for Entrepreneur, Inc, Fast Company and Huffington Post. I provide a lot of information for free. I have a book. It’s $15 on Amazon. If you are an Audible member you can listen to it unlimited. If you’re a Kindle Direct person, then you can read as many ebooks as you want. It’s all in that less than $20 affordability range.

The QuestFusion Membership is $29.99 a month or you get a discount of $300 if you join for a year. We will probably give a student discount at around $19.99. It’s very affordable. In terms of peer groups, it steps up to the next level. It’s hundreds of dollars per month. Advisory services or coaching, depending upon the engagement, is typically thousands of dollars.

This is where people get wrapped around the axle on many decisions. They look at the cost versus the value. It could be that I’m not everyone’s cup of tea. That’s fine. It could be that I’m not clearly articulating the value proposition.

I know from my experience and from working with other people that the value that I’m providing is worth the investment that you would be making. It will either save you several multiples of the investment or help you make several multiples of the investment. It doesn’t pay immediately. That’s the thing about coaching, peer groups and mentorship. It takes time.

I was talking to one of the guys that I mentor now. He’s at a seed stage. It might not be the right time for him to join a peer group. He might not have the money. It might not make sense at this point in time.

I told him, “At some point, you should definitely do this. Do you want to wait until your Series A? Do you want to wait until you complete your seed round?” I explained to him the value, why it’s important and why it’s different than just working with me. I’m a mentor. I’m a guide. I’ve been down this journey before. But if you’ve ever been in a peer group that’s well facilitated, you’re going to get feedback from multiple angles, people who have walked different paths and done different things related to that journey.

Sometimes you don’t know what questions to ask. Sometimes you get more clarity during the questioning process. Let’s say it’s a $600 investment per month. You’re not going to get $650 back in one day for your half-day investment every single month. But over a period of 12 to 24 months, something is going to happen where you will either save tens or hundreds of thousands of dollars or you will make hundreds of millions of dollars based on little things that you might not have been able to pick up if you weren’t in that group.

Larry:       You mentioned something earlier that I want to come back to. It’s key for the whole peer group thing. It’s this idea of trust. Trust is not earned immediately. You have the investment of time. That’s one of the things that I talk to clients about all the time. I looked back at the history. I’ve facilitated hundreds of peer sessions. They are anywhere from a half-day to a day-and-a-half long. Some are two-hour workshops at a conference. With the company that I helped start, I created some of the best friendships I’ve ever seen. This is because of the intimacy and depth of the relationship that comes from this trust. If you can’t share with your lawyer, accountant and leadership team, and your spouse is tired of hearing about it, where else do you go? Where do you find that person who has empathy at a level that you need?

Patrick:    Unless your spouse is also a business owner or CEO, they can be a gentle sounding board about your thinking but not about the nuts and bolts, blocking and tackling things related to the business.

Larry:       I’ve talked to children of dual entrepreneur parents. Their whole life is all business. If you are married to a spouse that you do work with, or they have their own business, a life separate from business is also important as well. There is ability to separate your personal life from your business life in our culture. We were talking earlier about achievement. We are a very achievement oriented culture. Is that always the best thing for us? Should we be chasing, winning and capturing the flag?

Do you have some ideas for people about what they should expect from a group experience? What did you get from your experiences? What were some of the highlights?

Patrick:     The things that have been most valuable for me is when you are willing to be the most vulnerable. It could be something in your personal life. I’ve been divorced. I’ve had personal lawsuits that I’ve been involved in. I’ve had ups and downs in my companies. At the end of 2008 and the beginning of 2009 at Entropic, we were going through the worst global recession since the Great Depression.

I found out from my board that I was personally responsible for the meltdown of the global economy. When things are good, relationships are easy. When things get difficult, relationships get tense. Everyone has their own egos and pressures. Being able to get together with a small group of people that you know, like and trust, you can relate what’s going on with you. They can ask you questions. Sometimes the initial problem that you bring up isn’t the real problem. It’s the tip of the iceberg. They can probe through that and speak from their experience.

If someone has been married for 30 years and they’ve never gone through a divorce, even those people have probably had rocky moments in their relationship and they can talk from their experience. At a minimum, you can walk away feeling like you’ve been heard. Many times, you walk away with some tips that could be incredibly valuable in how you proceed down the path.

Larry:       I want to ask you about your experience around money. Money is the key driver for most of these companies. Where does money come from? Does it grow on trees?

Patrick:    If you’re a trust fund baby, theoretically, that’s possible. I was an entrepreneur at a very early age. I ran a 50/50 lottery on my junior high school bus. I did eventually get competition after a couple of weeks, so the product wasn’t highly differentiated. I came from a working-class family. I’ve worked hard my whole life. I wanted to go to engineering school. I worked my way through engineering school.

I worked in the technology industry as an engineer, and then as a technical salesperson for many years. I got an MBA. I worked through the process. Many young entrepreneurs who are starting businesses in their teens and early 20s, and they’re not trust fund babies, they have to find a way to bootstrap initially. Maybe they can do it off their credit cards. Maybe they can get their parents or friends to invest.

That very early stage is typically bootstrapping, using your own money or relying on friends and family. You have to get the business idea at least proven to a certain point before outside investors that don’t know you will be willing to put money in. They will have to get to know you to a reasonable level. These are typically angel investors that would do a seed round of investment.

Larry:       What is an angel?

Patrick:    An angel is a high net worth individual. The government specifically defines an accredited investor. These are people who are willing and financially able to make multiple investments, sometimes as small as $10,000 but typically in the $25,000 to $50,000 range on a per investment basis. Then you have super angels. These are typically very high net worth individuals.

They could be in Silicon Valley or other part of the country and the world. They are multi-millionaires several times over. They can make a half-million dollars or $1 million investment in a single company, sometimes more. That’s the angel category. It’s an individual who has money and is willing to make big bets in early-stage companies. They might be in seed stage.

That is past the bootstrapping stage where you’re raising a financing round that could be in the range of $250,000 to $500,000. They are willing to take some risk with you. Some angels are more passive. They are going to sprinkle their money around on ideas they think are good. Some are much more active in terms of wanting a board seat or being more intimately involved in the company.

Larry:       In your experience, what are the angels most interested in? Is it the product? Is it the idea? Is it the people? Is it the terms of the agreement? What is most important for them?

Patrick:    You want to find a business idea at an early stage that makes sense. Even more important, you want to have a founding team where you feel, even if it doesn’t fully make sense, they will be able to figure it out and fix it. It’s about the person. You learn about the person by questioning them about their idea.

A person’s thought process is revealed by how they describe what they’re doing from a business idea and business model standpoint. Maybe the idea is so breakthrough and they’re a technical genius that will revolutionize the world. Some people will invest in those people.

Ultimately, they figure if you achieve the breakthrough, then you’re going to be able to put the team around it. The angel might say, “I’ll help you build a team around it.” It might also be someone who has a platform to a breakthrough idea. They are super smart and creative in terms of breaking through market barriers. In either one of those cases, you have to believe in the person, in their credentials and credibility.

Larry:       Does every business need to raise money?

Patrick:    No, most don’t. The vast majority of companies, what venture capitalists call lifestyle businesses, is what the rest of the world calls small to medium sized businesses. They don’t need to raise outside capital. They can fund out of their own cashflow based on sales and what they’re doing.

Even breakthrough ideas that are online platform ideas, they are very creative entrepreneurs that don’t have the product yet. They will run Facebook ads and try to sell a product that doesn’t exist, and see how much interest there is around it. Then they’ll do the product development afterwards.

Larry:       Kickstarter and all of these platforms have made it possible to do that. In the past, you didn’t have those opportunities. When we talk about money, we talk about the seed early stage and angels. Now we have internet offerings and ways for people to raise money cost effectively.

What happens in the next stage? The world you lived in was not that early stage seed round. It’s the next stage with the Series A. You’ve gotten some money. You’ve gotten a product built. You’re going to market. You’re growing. Now you really need some investment capital from people who are either strategic or pure money. We can talk about the difference between the two and where that takes you. How do you get through that process? Let’s start with Series A.

Patrick:    Things have changed since I was running companies and raising private capital. A lot of traditional venture capitalists have moved downstream. They are doing Series B investments and some Series A. They all say they still do seed rounds, but I haven’t seen a venture capitalist do a seed round for a very long time. There is typically participation at a Series A level.

The gap has been filled with super angels. Sometimes super angels are also partners in a venture firm. They decide, “This is too early for my venture fund but I’ll put my own money into this deal.” A lot of it depends on how much money you need to raise.

If you’re approaching a billion-dollar fund, like Red Point, Sequoia or Kleiner Perkins, they have a limited number of partners. Those partners make a limited number of investments. The dollar amount that they invest has to be sufficient enough that it has the potential to move the needle for the fund. Those companies aren’t interested in making a $100,000 investment.

Finding the sweet spot where you fit, how much you need to raise, why you need to raise it and what you’re going to accomplish by raising that much over the next 18 to 24 months is very important in the fundraising process. That will allow you to determine who your target list should be. If you’re dealing with venture firms, they have a particular theme that they’re focused on. They may invest in biotech, green technology, brown technology or red technology.

Sometimes they invest in sports and lifestyle companies. You need to understand domain expertise and their vertical markets. How do they manage those investments? There is a variety of different things to consider. A Series A is typically in the $2 million to $5 million range. It can be a lot larger than that. You work backwards from that and say, “My lead investor needs to put in $1 million or more. Who is capable of doing that? Do they have the money? Are they interested in investing in this type of theme?”

Larry:       Talk about a strategic investor versus just money.

Patrick:    Historically, crowdfunding like Kickstarter and Indiegogo is pre-sales of a product. Now we have these crowdfunding platforms with the JOBS Act. This applies to the United States and Canada. You can raise equity financing and sell stock using crowdfunding to do that. When you shift gears to strategic investors, these are typically larger corporations that are ecosystem partners, suppliers or customers. They somehow touch your business.

Larry:       They have an interest in your success.

Patrick:    Yes.

Larry:       It will help the company that’s investing the money or the person. I’ll give you an example of a company. They’re building clean rooms to do bio packaging. Their major investor has 10 different companies that need the packaging done. That’s a strategic investor who will use the company that he’s investing in to service 10 of his existing investments.

Patrick:    Exactly. There is an alignment between the strategic investor that can potentially make an investment. Sometimes the strategic partner has a venture group within their company. Intel was an early company that had Intel capital. Sysco has a venture arm. Verizon has a venture arm.

At Entropic, we raised a lot of strategic money in addition to money from venture capitalists. It’s always better, from my perspective, if you can do non-recurring engineering or pre-sales. It’s something where you don’t sell stock. You can get those companies to put money into your company without giving them stock. If you do need to give them stock, the strategic investors typically won’t lead a financing round.

They want someone who is a purely financial investor to price the round and set the deal terms. You want to have those people you can drag along into a Series A or Series B. A lot of them don’t want to get involved at an early stage. Series A companies are more mature now than they used to be. In that Series A and Series B stage, talk to your biggest strategic partners to see if they’re potentially interested in making an investment. That can be a source of capital.

Larry:       Businesses need cash to run their business for lots of different reasons. This can come from selling product, which is the number one way to me, that most people underestimate. They say, “I need to raise all this money.” I say, “Why?”

Do you have a product that sells, that people want? Are you going to use other people’s money? Are you using other people’s money to pay yourself so that you don’t have to sweat through the process?

I’ve met some companies that were looking to raise money to service the business. Prove that the product works first. Make it so that this product is so attractive that you need money to grow, not to survive.

Patrick:    One of the primary questions that I ask when I’m dealing with entrepreneurs is, “What are you going to use the money for?” If they want to pay themselves a big salary as opposed to betting on the equity and the stock price rising, there is a disconnect for me. I understand that sometimes people have to take care of their families. If there’s no sacrifice involved and I’m the only one taking the risk, that’s a problem for me.

Larry:       How many people do you see who are looking to raise money that shouldn’t be? Do a lot of companies come to you and say, “I’m looking to raise money and you ask them why now?” I don’t think most people understand the difference between debt and equity, and how to raise money in an effective way that doesn’t dilute them so that they end up with nothing.

Look at Shark Tank and these other shows. People are coming in who own 25% of their own company because they sold the rest. What are you working for? You have a job. You work for someone else. I’ve worked with more lifestyle entrepreneurs who are making less than $100,000 a year who think they’re building this big thing. They are better off being employed with the risk that they have. They have outstanding debt. They’re signing personally on credit lines. They don’t realize how much risk they’re putting themselves in.

Let’s get back to the concept of debt versus equity. When you started to raise money, you started getting money from larger strategic investors to use against something other than the equity in the firm. How did you do those deals?

Patrick:    First, you have to identify your DNA. What kind of company are you? Are you a company that has the potential to drive through a period of accelerated growth? If you’re compounding annual growth rates in 20% to 30% over a five-year period of time in a big market, that’s a company that should consider raising outside capital. If you can avoid it, even better. If you can sell fund, that’s always better.

You asked how many people come to me to raise money that shouldn’t. It’s not that many. I don’t get a lot of lifestyle entrepreneurs. I have friends with small businesses and I help coach them through business problems. They’re typically not trying to raise capital. Most of the companies that I deal with have some ideas.

There are a lot of bad ideas but they’re trying to grow something really big. From a DNA standpoint, they are really trying to do something that could potentially be venture backed. The timing of raising money and the timing of how much money to raise is typically out of alignment with what’s possible. Then I get a lot of people who come to me when their back is against the wall. They’re missing payroll. They’ve run out of money.

They say, “Can you help me?” I say, “I’m not a faith healer. I can’t lay my hands on your company and heal it.” As a founder, CEO and business owner, you need to be able to look over the horizon. It’s one of the most important things you need to do. Sometimes the shit hits the fan. If it’s something that could have been avoided based on your ability to put the right things in place, it’s hard for someone to rescue you. This is unless it’s one of my kids. Then maybe.

Larry:       Let’s get back to your book. You wrote a book called Plan, Commit, Win. How do you take the methods that you talk about in your book and apply it to some of the things that we’ve been talking about?

Patrick:    The book is based on the blogging, videos and analytics around what I was writing about. I would write about a variety of different entrepreneurial topics. I did this for about a year. I saw what people were reading and most interested in. Most of my entrepreneurial audience is very interested in raising capital. How do you do it? There is this mystery around it.

My belief is that great companies get funded. Instead of saying, “Here’s my bag of hacks on how to put together the right executive summary or investor pitch, the fundamentals need to be there first.” That stuff is in there, too. This is not designed for early-stage or seed stage companies. It’s for companies raising their first institutional round of financing.

There is a chapter on smart ideation. Lean startup and lean innovation is about doing the same stuff, but doing it more quickly to test the market and get some feedback. It’s the scientific method. You state a hypothesis, test the hypothesis and see if things work. I think there is still incredible value in doing those things and getting something into people’s hands. They can taste, smell and feel it. You get that real-time feedback.

As you start to get revenue, you have products. You’re looking to raise institutional financing. Raising outside money, especially an institutional round, is a process, not an event. You’re typically meeting these prospective investors over a five to seven-month period of time. There will be multiple touch points. They will be engaging you on what you say versus what you do. “I see your lips doing this but I see your feet doing this.”

If they’re not in sync, there’s a problem. Here is a set of structures that I’ve used and refined in my career to help have a process to talk about those things. This is my market. This is the customer base. This is my unique value proposition. This is my competitive advantage. You need to go through a three-year planning process. Every VC will want to see a minimum of a three-year plan. Then you have to break it down to the next 12 months, both financially and with key milestones.

You will be judged and measured based on that. Those same things are going to occur after you have an investment. Many of those people will be on your board. They will still want an annual operating plan, an annual budget and your KPIs. They will measure you against that. Plan, Commit, Win is a book that takes the simplest blocking and tackling that you would learn in an MBA or from running companies for decades like I have.

Take all the fluff off it. This is the essence of what you need in order to run a business and get it funded. Those same processes continue to follow forward even as you become a public company. You will still have to go through the same things. The book goes through some of that as well. When you go through that period of rapid growth, what’s important during those times?

When you go from that single product, market and customer to having multiple products and verticals, it’s a different set of decision processes. Every experience that I’ve had, and everything that I know about those topics, are not in the book. You can give people a framework. People say, “Aren’t you worried that no one will ever use your advice?” That’s 5% of what I know. Everything is situation specific.

Then I talk about some of the most important things about running a company, which is about building your team, having a culture of accountability and execution. In the last part of the book, we talk about the process of raising money. What does a presentation look like? What does an executive summary look like?

If you haven’t done all that other stuff, your ability to put that together is just a myth. You have no concrete basis to put that presentation together. The content of the presentation is, “Here’s my product. Here’s my business model.” Then, if someone believes that story, they want to know, “Why you? Why now? Why this team?”

You have to be able to explain those things as well. You need to have both. You need to have a great team that you can trust and believe in. You know they can execute. But you also need a business model that you can believe in as well that will make you money.

Larry:       If we go back to the original conversation that we had around groups, you’re looking to use the Plan, Commit, Win framework as a model for everyone in the group to build their presentations around and to compare businesses to each other, through a common framework.

Patrick:    You can use whatever framework you want. Since I’m familiar with this and it’s worked, I’ve been on boards of directors and had other CEOs and board members implement this and appreciate it. One of the hardest things to do, if you’re looking at a presentation and trying to learn the framework and how someone is communicating in addition to the content, it becomes very difficult. If you can standardize with something that most VCs and board members are familiar with, this is a way to do it.

Larry:       One thing we haven’t talked about yet for the group process is the idea of accountability. Within your company, you’re accountable to your employees. You’re accountable to your board. But there’s something different about being accountable to your peers. What has your experience been with that?

Patrick:    It goes back to intimacy, trust and transparency. I’ll give you a related but not exact story. Whenever I’ve run a company that’s gotten to a certain scale and you have a marketing team, you go through your planning cycle. They come to you with their story, which is typically a fictitious story. They’ve already put so much spin on it that you can’t tell the real essence.

Do me a favor. Don’t spin the story. Just give me the facts. Just give me the painful truth. Then I can decide if I want to put a spin on it. If it’s already spun, I might try to spin something on top of it. I don’t mean lying, but trying to position things. You highlight some of the good things and “hide-light” the rest.

If you’re investing in a company that’s going IPO, there’s this thing they put in the S1 called risk factors. If you read the risk factors of every company, you would never make an investment at all. You have to highlight the good stuff. That’s what I mean by “spin.” In peer groups, assuming the level of trust, transparency and vulnerability exists, then you will cut right through that.

You’re going to get feedback much more quickly and directly than you would otherwise be able to do. It’s from people who do what you do and have had similar experiences but not the same experience.

Larry:       When we did our trial last week, we experienced the difference between facilitation and coaching while in a group. What are your thoughts around that?

Patrick:    I think there is value and benefit in both. The challenge with coaching within a peer group is that you don’t want to take all the oxygen out of the room, even if you are the most senior person. You need to learn to keep your mouth shut and allow the group to participate.

Otherwise, it’s like you’re the CEO and this is your management team. Make sure that everyone participates. Make sure that people are not over or under participating. That’s the most important thing in a peer group. If you have a self-directed group with no facilitator, having a facilitator is most important. You can have what I call “token passing.” You move to a different facilitator each time you meet.

That person has to say, “I’m going to be a facilitator. Here are the ground rules. I’m not going to participate when I’m the facilitator.” I think facilitation is the most important part. It is incredibly valuable to have people around the table who are maybe a little ahead of the rest of the group, who can play the coaching and mentoring role. They just can’t take all the oxygen out of the room.

Larry:       There’s no question. The challenge within a peer group is domination. It becomes a soapbox for certain people. That can kill peer groups. Some of the best solutions come from people that you’d never imagine them coming from in a group. Over time, I’ve found that you can put a disparate group of people in a room and they will blend. They will learn from each other. They will grow from each other. Is there anything that you want to tell the audience of entrepreneurs to leave them with?

Patrick:    The latest topic that I wrote on is about failing fast. There is this big thing in the industry about failing fast. To me, it’s more about succeeding. Focus on success. If you’re in business just to fail fast and take some learning from it, you’re probably not going to learn that much.

Most of the learning comes from struggle, grinding and working through the most difficult problems. There is this tendency for people to give up too quickly. Entrepreneurship is hard. Life is hard. There is a struggle involved in it. You’re not driving on a perfectly paved road all the time. There are a lot of potholes. There are a lot of bumps. You have to grind it out.

I don’t know any successful entrepreneurs who haven’t had to go through that grinding process. They remain optimistic and focused even in the midst of difficulty. I’m not saying that there is never a time to fail. I think this idea of success or failure is a misnomer.

I talked in the article about baseball. A base hit is not a bad thing. The best players in the world only get on base 30% of the time. Getting a single is okay sometimes. That’s not a failure. If that’s the right outcome for your company, what can you learn from that? Did you make a little bit of money? Did you make your investors money? Hopefully you’re not striking out all the time. Get on base. Continue to work hard. Continue to stay positive. Don’t give up too easily. There are too many entrepreneurs who give up too easily.

Larry:       Winston Churchill said, “Never, never, never quit.”

Amanda:   There is one last question. How much equity do super angels look for on average?

Patrick:    In any given funding round, a seed round being the exception, you typically do it as a convertible note with a discount over whatever the Series A is going to be. An alternative to that is, Y Combinator has a so-called safe agreement. Most seed rounds are done based on that. If you do have a set of investors and your convertible note is getting so complicated that it looks like a priced round, then it’s better to do it as a priced round.

I’ve seen ownership stakes anywhere from 10% to 35% of companies on any given funding round. You have to work backwards on a lot of it based on how much money you’re trying to raise. Can you justify the valuation based on some set of metrics? The earlier you are, the more difficult it is to present that information credibly. That’s why a lot seed rounds are done as convertible notes.

It’s very difficult to price those rounds. It’s more of a percentage basis. It depends on how far along you are. That’s why I think it’s always better to wait longer, if possible, before raising outside capital. Then you can have more credibility in your story. You can state a hypothesis that is easier to test. You have people take a discount off your numbers. At least you’re having a conversation based on what kind of value you have. Thank you.

This is Patrick Henry, CEO of QuestFusion, with the Real Deal…What Matters.

This article originally appeared in QuestFusion.