Trevor Newberry: Thank you everybody for being here. We’re really excited to kick this series off. This is the first of what will hopefully be many sessions.  I am first and foremost going to turn it over to Shegun to tell everybody just a little bit about Harmony Venture Labs, why we’re here, and what we do.

Shegun Otulana: We are Harmony Venture Labs, and the idea is we have really three core “legs of the stool.” We have a venture studio, which is where we take ideas that we believe should exist in the world—either internally generated ideas or ideas from founders, primarily very early-stage ideas. If it’s an internally generated idea, we turn them into products that turn into companies, we fund those ideas, build around them, and then have them execute to become successful companies.

The reason why we exist is, I personally believe Birmingham is a city that is continuing to build startups and I believe we can have a core group of people who can have great ideas and then go execute on those ideas. So that’s what the studio does—we come up with an idea, we create the idea, and we validate it in the market. And then we have the part of HVL that is around acquiring existing SaaS companies and turning them into Birmingham-based companies and making them part of the Birmingham ecosystem. We have some parameters around the kind of companies we look at primarily digging into SaaS businesses.

The third part of HVL is Advisory Services—both inward and outward. What that means is we have a core team at HVL who advises and works closely with the HVL-affiliated companies to help them grow and scale. The advisory team at HVL works with external companies that are beginning to get traction in their stage of development. We take our own “playbook” and execute on it for those companies to help them find success. So, the core theme here is really our own growth and growth of the tech ecosystem. What we believe at HVL is that if we look decades down the line, we would have been a big facilitator in creating billions of dollars in value here in Birmingham and even be a place where startups grow. So that’s what it’s really about.

Trevor Newberry: Thank you very much for that. Today we’re talking about fundraising in the context of startups, and this is one of the questions that in my consulting career and continuing into working with HVL comes up time and time again. How do I get money? What does this process look like? What do I need to do? It’s a fraught time for a concept at the early stages, and those kinds of decisions need to be considered very carefully. So that’s why we started with this topic. I’m going to start with Shegun—give me some of the most common misconceptions around fundraising that are held by early-stage startups and their founders.

Shegun Otulana: There are a lot of common misconceptions around startups. Especially that there is a tendency to take on an exception and make it the rule. I don’t know which ones I would say are the most important misconceptions, but I would say some of the ones I’ve seen is the idea that “my idea is so good, it’s going to get funded.” There are lots of good ideas out there, but there’s really nothing special about it, and funding is going to be hard for you, especially if you’re a first-time founder and this is your first rodeo.

The focus of your job is to deal with the product and get customers, not raising money. People need to go into this with the realization that your idea may be great, but you’re not the only person with great ideas. The process of fundraising is not easy. It’s very hard. On the flip side, some people think, “I have no network, so I can’t raise money.” Having a network makes it easier to raise money, but not having a network makes it slightly harder to raise money. And the way some people know how to be successful at making money is to bet on the person. Investors look at this person and say 1.) this idea is solid 2.) this person can build a team around themselves to execute on this idea and 3.) they can disperse connections to successfully build the product. That is what investors are looking for. Investors will ask themselves, “Can I trust this person’s character? Do they have resilience? Do they have a growth mindset? Will this be somebody that we can learn together and help each other?”

Really, everything starts from your pitch deck. To be honest with you, not your business plan. I think it’s important for you to have the business plan but the pitch deck is actually the first thing you need. Don’t come at it with a lackadaisical attitude. It needs to be top quality—your deck to an investor is the first product that you’ve built. That’s how you want to think about it. If you just go to somebody cold, you have to have credibility somehow. Investors know that there is no perfect way to build a company. What they want to know is, do you really believe in what you want to be?

Hunter Strickland: Yeah, all of that is good. I think that one of the misconceptions is I see first-time founders thinking that fundraising is the hard part of their journey. I tell people all the time that fundraising can feel all-consuming when you’re going through it. But ultimately, closing something like a seed round really just kind of gets you to a starting position. It gives you the space to then go do all the hard things that is going to be required of you. People building processes, selling your product to customers, developing your product to meet a real market need– all of those are the real hard things. Although to a founder who has limited resources, it can feel like fundraising is the big mountain to climb. And once you’ve climbed that mountain, it’s a little bit smoother sailing. Fundraising can give you the space to have more options, but all the other tasks, once you’ve kind of climbed that mountain are challenges in and of themselves.

Shegun Otulana: You also don’t have to raise. And sometimes you go to invest, and investors look at your business and they’re like, well, this business either doesn’t have to raise money or doesn’t have to raise money yet. You have to accept that too and look at your business. There are all kinds of ways to fund the business and if you have a way to fund your business through your customers, that’s actually the best way to go.

In today’s world, there are tools like Pipe. If you go to Pipe.com, you’re able to start getting revenue from customers and you can have funds that are non-dilutive. That, and access to family and friends to help you prove out what you’re trying to do before it’s too risky. So, you have to think creatively– to not just think, “I have to go raise money.” There are various ways to go about it.

Trevor Newberry: Something that you said leads me next into the concept that fundraising can feel all-consuming, but really there is other work that needs to be done that sort of leads down that path. What kinds of things do early-stage companies really need to be focusing on to prepare for raising money? What are the critical paths they need to be intently focused on?

Hunter Strickland: There’s a couple of paths for this question. The first thing every founder should know is, “when do I run out of cash?” Then once you assess your current resources and your constraints, then you say, okay, if my cash runs out on this day, then what are my options to prolong it? Shegun touched on it already but the best way to give yourself more runway is to bring in revenue, which gives you more oxygen. Your second option is to cut expenses. Your third option is to raise money.

There are several early-stage signals, but the first one in terms of the areas of focus is really nailing the problem. Too often, if you skip this step and you assume the problem or assume everyone feels the same pain that you’re feeling and you haven’t done the really dirty work of getting out of the building and talking to customers and really identifying their pain points in a very acute way, there will be a problem.

You’ve got to really live with the customers. Investors are going to detect if you haven’t and they’re not going to act favorably to a bunch of assumptions. They want to see how you have validated and that you have a mastery of the problem that you’re trying to solve. Lastly, that you have actually built a product or started down a path of building a product that offers an effective solution to solve the problem.

The whole, “framing your activities in the earliest days,” is around identifying the problem and sort of creating the solution and then validating that problem-solution cycle with real customers. There’s really no better signal than getting folks that you don’t know to pay for the solution. You can whiteboard it all day long, but if you have an early version of the product in the field and it’s solving a problem and customers are paying, you’ve done something right.

Trevor Newberry: That’s interesting. It reminds me a lot of the work that I do in the validation process and in a sense, contextualizing fundraising around a runway, right?

When you skip those early steps, you actually make the problem worse. You force yourself into a position of having to raise money earlier than you need to, potentially diluting your ownership of your product and company earlier than you need to, because you’ve skipped some steps that you can do relatively inexpensively, but often take a lot of work.

Trevor Newberry: What are some of the milestones and signals that it’s time for someone to start looking for money?

Shegun Otulana: People give you money because they want a return on their money. The big mistake people make when thinking to raise money is, they raise money because they need money. Well, that’s not the view of investors. You have to realize that people want to give you money when there is a clear milestone in front of them, which would lead to a higher value for the money they’ve given.

Obviously, there are always exceptions, but people don’t give you money because you don’t have the money to do what you want. They invest money because you’ve got something repeatable. Your output is clear, and they know their money is going to help you get X input and you’re going to produce X out of your next milestones. And those milestones are going to increase the value of the business. People give you money for that. It should be clear why people buy your product–clear enough that they’re telling other people about your product.

If you need money, you can try to get lucky and find that an investor and spend your time doing that or you can find other ways to keep your day job if you have to. Investors don’t want to, for example, give you money so you can pay yourself a salary while you see if your idea is going to work. How does that add value to their money? It doesn’t.  And that’s why sometimes it is easier to get friends and family around the idea first to help prove certain things out. In a nutshell, you have to have clear milestones, clear input and output, and clear value creation activities to show where the money is going to go towards for investors to want to give you money and for you to want to go raise money. Otherwise, you’re about to be irresponsible with other people’s money.

Hunter Strickland: That was good. A clear and coherent path forward of, “here is how we’re going to deploy this capital to boost your value and the company’s value,” is important.

Trevor Newberry: It sounds to me like we’re really all batting around the same bush here. In that those early steps, those early-stage validation steps, building an MVP, doing it relatively inexpensively, delivering some value, and finding traction really is the first and primary focus. But that “input-output” is a really good way to think about it.

Shegun Otulana: Sometimes that means you totally rethink the problem you’re trying to solve. I’ve heard people comment, “I know what I want to do, but I don’t know how to do it. I need money to go hire somebody to build it.” Maybe the first thing you want to do is actually convince somebody to come to join you on the journey and that person becomes your co-founder. Then you both figure out what you do in the meantime that gives you a little revenue to be able to validate something for the first stage. You then have to be creative around getting to your final destination beyond just money and think about what problems you need to solve as you go along.

Trevor Newberry: That’s half the fun of the startup process–at least I think so. I enjoy that. Sometimes the world of fundraising and the different tools and strategies is confusing. Let’s discuss the top two or three fundraising strategies that are most appropriate for an early-stage concept. Let’s assume they’ve got an MVP in the field and there is a clearly defined input and output. What do we want to start thinking about now? It’s time to put some gasoline behind us.

Shegun Otulana:  You need to have certain standards at this point such as good bookkeeping. It’s very important because this is going to catch up to you later if you’re randomly taking money from people, but you don’t know the terms under which you’ve taken money from those people. And then in the future, you’re going to run into problems because they are going to say, “who owns the company and what do they own?” And this is something that must be clarified.

You can go through debt that converts to equity, which is what you get with a convertible note. A convertible note just means “I’m giving you this one. But we’re not setting a price on the equity of the business, but in some future term due to some future event, this money, this note that I’m giving you that is debt.” Now that may have interest on it and may have other terms. For example, the convertible note may have a discount on the future value of the company that the note converts to. Convertible note holders do not own any of the companies.

Then there is a safe note, which is like a convertible note, but a very paired down convertible note. A safe note just means it is a simple agreement for future equity. I’m going to give you X and with these X dollars, I want to talk to have equity in the future. And then you have a price around, which is when you really say, my business is worth $3 million and I’m selling 1% of it. You need to pick one of these standards. You can also go raise debt–which is risky for startups, especially early-stage startups. And you’re personally on the hook for the debt.

I would recommend that if you’re talking to an investor who doesn’t understand these terms, that you either explain it to them first, before you do, or you don’t take their money. Because the last thing you want is for this person to think you’re going to be paying them dividends and then there are no dividends. And I’ve seen this. I’ve seen somebody give money to a startup and then the person needed the money. And it’s like, “I can’t, I need that money back– I have another issue.” That’s not how it works, so you have to make sure that at least the person understands what they’re getting into.

If no convertible notes, you can raise from friends and family, you can raise from institutional investors, you can raise from angel investors across the board. These days you have vehicles that will give you the funding that is non-dilutive and non-debt.  Typically, that means you’re already generating revenue and they can use your revenue projection to say, “if they were going to give you X and you paid down over time, or we’re going to proof on, and I’m going to take any equity in your company, it’s not a debt.” So those vehicles are beginning to show up in the market.

Hunter Strickland: I’m a big fan of the convertible debt structure because it allows you to punt on your valuation before the company is ready to properly be valued. So, you know you’ll have a solid valuation based on the financials. What I ran into was that I had some high-net-worth individuals who wanted to invest but they weren’t really fluent in tech startup investing, so the convertible note concept was not something that they were very familiar with.

What I found was that explaining convertible debt to these prospective investors who were ready to sign checks, they couldn’t wrap their mind around the concept. So, I would just say for a founder, work with an advisor, an attorney, someone who can really equip you to not just understand the investment vehicle but also the strategy. You should be so fluent that you can clearly articulate it to a novice who really needs help understanding what happens to their dollars when they invest and what the expectations should be.

Back to my example, we ended up having to shift to a straight equity round, which is just what people understood. I think that has changed and I think Birmingham with the influx of capital into the tech startup ecosystem creates more fluent investors. You hopefully shouldn’t get a lot of glazed-over eyes when you mention something like convertible debt, which is good. That’s a sign of progress for the whole tech community. The point is, whatever path you decide to choose, make sure you can clearly communicate and set the expectations. A confused investor is first of all, not going to invest and worse, invests through the confusion. And then you’re just prolonging the problem and setting yourself up for a major issue down the road.

Trevor Newberry: That is excellent. Thank you for that. My thought is, when bringing in external funding into your concept, you now have someone else who has a stake right in your business. I’m interested to hear your thoughts on how this might change the focus and the culture of a company? What kind of impact does that have on the team and how the team operates together and how their mission and objectives are aligned?

Hunter Strickland: The first thought is that closing a funding round– typically those dollars are going to be deployed to a certain end that you have articulated on the front-end to the investors and, and hopefully communicated, at an appropriate level to your team so that there is no surprises. And so, the dynamics of the team are likely going to change regardless. If you are a small team, you close a seed round and then your team adds headcount, doubles, or triples.

Your role as the founder is going to take on a different look and typically your co-founder or the earliest employees who you’ve brought on, their roles will likely change as well. That has an impact on culture, especially on the dynamics of everybody’s role and how they see you as the founder, how they interact with you. I would start by giving a 30,000-foot view of expectation setting both with your team and with your investors. And then be honest with yourself about how your role will be evolving when you take on this capital, and once you really start to accelerate executing on your strategy. Some of this can be resolved on the front end when you hire people. You want to hire people with a growth mindset—especially early on—who have an expectation that at some point you’re going to raise money and they’re along for the journey.

They may not know exactly what to expect, but at a high level, they’re not shocked when you say, “Hey, we’re going to go from X headcount to 3-X.” You want to screen for that on the front end, as best you can, and then just be transparent in your communication about what the plans are because it’s all going to evolve. Each funding round and each milestone typically brings some team dynamic changes, and you want to try to do your best to set the right expectations as early as possible.

Shegun Otulana:  Just think of another scenario where you’ve brought somebody on to the company, they know they’re getting paid the market rate and then you go raise a lot of money and then they ask, “can you double my fee?” When that happens, you did something wrong upfront. What you want to do to really prevent that is to make sure everybody’s “in” the process in terms of what you’re trying to raise and what you’re going to do with the team. That might include that you’re going to top off the team– and the investors should probably know that too, because then if you run out of money because you spent it all on paying the existing people, you still have to execute on the problem. Most people know they are making a sacrifice in pay being part of a tiny startup but will most likely be compensated with equity.

It just needs to be clear. Knowing that if it is not clear, it is going to become the source of pain. There will be a day when people start feeling like what they thought the money was going to be for, especially if it’s personally affecting their lives and they’re putting in certain sacrifices, it’s not what the money is for. You have to share the sacrifice. If everybody’s sharing the sacrifice, you and your co-founders, then you have to be clear about what you’re going to go accomplish with these resources. And it’s very important to bring the team along. You may not be able to bring the whole team along at the larger company, but your leaders should still know what’s going so they can help manage that. At HVL we probably have less of a problem with this. We internally fund our own ideas and then accelerate the growth.

Trevor Newberry: Anything on either of your minds? Hunter, do you have anything that we didn’t cover that you’d like to add to the conversation?

Hunter Strickland: One thing that we talked about earlier is about these “misconceptions.” Another one that I think is interesting is that there’s a misconception that when all investor dollars are the same amount, they have the same value. In other words, if you have investors A, B, and C, and each offers you $50,000, those sound equal, but maybe investor A has domain experience and a network that can really help you execute on your vision. It sounds obvious, but there’s strategic value beyond just the monetary value. But the other thing I want to caution people about is, you don’t want to take on investors that for lack of a better word are just jerks or who have a personality conflict that’ll result in your co-founder and this investor being oil and water for the next five years. That’s going to make you miserable.

There’s nothing wrong with making an evaluation of the right investors who you want to bring onto your team. Just like an early-stage hire. You want the right people on board. And that includes the investors who can add strategic value and who are going to be assets and allies and not going to be constantly butting heads. It’s not about just a bunch of people who always agree with you. It’s about an infrastructure of trust and alignment on the vision. If you get the wrong one in a position of power, it can constantly be a source of stress. And so that’s just something to keep in mind.

Shegun Otulana: I would add that it’s okay to raise gradually. If you really do see that you want to raise, don’t pause the life of your business to do so. If you can raise gradually over a period of time and use it to actually execute on the business, you can actually increase the value of your business for those who will come later. If you find out that the fundraising journey is a tough journey for you, yet you’re able to get some traction, then that traction is enough to show value creation. Show value creation and now you’ve shown people that you can actually increase the value of the business. Secondly, 99% of the time, unless you’re in a studio setting like HVL, your investors are not the “doers.” They can help you ideate. They can help you make connections. But at that board meeting, whenever you raise that money, there’s going to be a lot of action items that come out–you go do those action items. There are some investors who would go above and beyond for you and actually even do the work, but that’s not how it typically works.

Trevor Newberry: I really appreciate both, Shegun and Hunter, of your time. I think this has been a really valuable conversation. If you are interested in talking to us about your concept, it would be great to have you introduce yourselves and learn more about you and your idea. You can find us by following us on LinkedIn. You can also reach out to us via our website www.harmonyventurelabs.com. With that, I really appreciate everybody’s time. And we’ll talk to you next week at our next Launch & Learn.