Unlocking Secrets To Early-Stage Startup Success With Scott Kelly, Part 2

 

Watch the episode here

 

Listen to the podcast here

Welcome to another episode of The 7 in 7 Show with Zack Ellison, which features full length interviews with the world’s leading investors in innovation.

Episode #13 of Season 2 features Scott Kelly, CEO of Black Dog Venture Partners, Host of VC Fast Pitch, and Strategic Advisor to TCA Southeast.

Scott Kelly is a 30-year fundraising, marketing, sales, training and publicity veteran. Scott has raised hundreds of millions of dollars in capital for disruptive companies, garnered national media coverage for hundreds of regional and national brands and generated hundreds of millions of dollars in revenues for the companies he has represented.

He has also trained over 1,000 salespeople and has taught marketing at the university level in the United States and Europe.

In this episode, Zack Ellison and Scott Kelly discuss:

1. Importance of Team in Early-Stage Investing: Emphasis on evaluating the team behind a startup as a critical factor for investment decisions.
2. Market Research and Problem Identification: The necessity for entrepreneurs to thoroughly research their market and identify real, scalable problems.
3. Investment Processes and Principles: Key principles for early-stage investing, including the importance of team, technology, IP, and market potential.
4. Pitching and Fundraising Effectively: Tips for making successful pitches, including clarity, storytelling, knowing your numbers, building relationships, and understanding investor expectations.
5. Role of AI in Investment and Business: Discussion on the impact of AI and machine learning on businesses and the importance of having AI expertise in investment teams.
6. Venture Debt: An overview of venture debt, its benefits, and how it complements equity financing for later-stage startups.
7. Global and Sectoral Trends in Innovation: Insights into emerging markets and sectors, including AI, decentralization, and global innovation hubs.

Unlocking Secrets To Early-Stage Startup Success With Scott Kelly, Part 2

Importance Of Hooking Investors In Pitches

Welcome to the second half of the conversation with Scott Kelly, CEO of Black Dog Venture Partners. You said earlier about the goal being to get the next meeting is important because in a short period of time, whether it’s 1 minute, or 3 minutes, or 5 minutes, or even an hour, you’re never going to be able to get the whole story out there. Being able to hook the investor and get them excited about learning more is the key. To your point, I think telling a story is mission-critical to do that. In addition to all the things that people should do in pitching, are there things they should not do?

Some of the phrases that we probably both dislike to hear is, “If I get 1% of the market.” Don’t use those phrases. Don’t do it. The reality is, you’re probably never going to get 1% of the market. We just want you to generate enough revenue to provide an adequate ROI upon exit. Don’t use those kinds of phrases. Don’t say that you’re going to be a unicorn. Never ever say you don’t have competition. You have competition. The pencil is competition to this computer. You have to have a true understanding of what competition is. Those are some of the critical things that you should say in your pitch.

I agree with all those. In terms of putting on our hats as investors, say that we’re sitting at the VC Fast Pitch competition. What do you think investors should be looking for? What signals should they be looking for with such short pitches?

I think the things they need to realize when they see a pitch is they want to know someone has practiced the pitch and knows it internally. They need to be able to talk freely about it. We have entrepreneurs that we tell they should use 7 or 8 slides. I can tell you some of the best pitches were people talking for five minutes with no slides. They were able to engage and inspire with just their ability to talk about the business. That’s the thing that I look and other investors look for.

We’ve talked about this a couple of times already, know your numbers. Know your SOM, TAM, LTV, and your profit margins. Know those things because those are the things that determine profitability, and profitability determines success and ultimate exit. At the end, I think you need to be personable. I would like entrepreneurs to be confident, but not arrogant, because, again, we’re still dealing with people and human beings and personalities. You can have a great pitch, but if you piss off an investor, next. Don’t be a jerk.

 

 

That’s a great one, and I think of it as being easy to deal with in all regards. You don’t need to be the funniest person or the most likable. You don’t have to be the most charismatic, but you just have to be easy to work with and make things easy. I run into that all the time where there are folks that I think are smart, got good ideas, and maybe they’ve even got good execution capabilities, but then trying to partner with them becomes such a labor that it is not worth it.

To your point earlier, there are so many possibilities and opportunities out there for both startups and investors. If that fit isn’t there and there’s too much friction in the relationship, there’s no point in going on with it. Unless it’s like the world’s best idea that nobody else is doing, and that’s not going to be the case. I think that’s key. I wrote an article relatively for Built In, which is a website that caters to tech founders.

It was about how to pick the right investors to partner with, but it works both ways. One of the things that founders should look for in an investor are investors that are easy to work with. If they’re going to call you all the time and ask you stupid questions, and they don’t know your business, know your model, and they’re not used to working with the stage that you’re at. That’s going to be painful. It works in both directions. Establishing that rapport, trust, and ease of working with somebody is so important.

This goes back to what I was saying earlier about milestone-based, financing, and not knowing until you get into the negotiations and not knowing everything until you’ve given them money. If they’re a pain in the neck to deal with before they have your money, they’re going to be even harder to deal with once they have it. I agree with you too about the idea of arrogance versus confidence. Having a lot of confidence is important, but there’s also no room for arrogance because there’s always competition.

There are always people that we could deal with that aren’t arrogant. Being friendly, affable, and fair is important. I always go back to this acronym called FAT. It’s easy to remember, Fair, Aligned, and Transparent. That’s what I want out of every relationship. If you’re not all three of those things, you’re certainly not going to be somebody I want to deal with.

Early Stage Investing Is About People, Not Numbers

That also builds trust because if you’re fair and you’re aligned in your expectations and your goals, and transparent about how you’re doing things, both good and bad, then that will build trust, and that can help to scale a relationship. One of the underlying themes I’ve been thinking about a lot is early-stage investing is not about numbers. All the numbers are funny numbers. You may come up with them, and they should be based on some reasonable assumptions, hopefully.

The reality is the numbers don’t mean anything. It’s all about the relationships and the quality of people. That’s what makes early-stage investing so difficult. It doesn’t matter how good you are as a financial analyst. You’d be better served as being a good psychologist in a sense, being able to analyze the person as opposed to the balance sheet or the income statement. I want to talk about some big picture thematic items. I’m curious to think about this.

With the global startup ecosystem continuing to grow as innovation grows faster than ever, adds more value than ever. We’re going to see a change in the structure of how companies are funded, how investors are matched with founders. You’re on the forefront of this because you’ve been doing a lot with different organizations that you run or have leadership roles. Where do you see early-stage investing headed structurally in terms of the fundraising process and the company scaling process? Is there anything structural that you see changing?

It’s already begun to happen quite a bit. Crowdfunding has become something that nobody paid attention to, becoming a very good form of raising capital. The reality is that if you have a company that has a lot of customers, a lot of fans. Why not get them engaged as investors? That’s a trend that’s going to continue to grow, and it’s grown exponentially. I think it was 2007 when the Jobs Act was passed. I was at a pitch event in Las Vegas, and everyone didn’t think it was the way to go.

Now, you’re finding funds are raising money through the crowd. That is probably one of the trends that’s continued to escalate and becoming even more significant. With some of the changes in legislation in the crypto space, the tokenization of assets and using decentralization to raise capital. They had their short run, shortfall, and I think their second act is beginning again.

Be confident, but don’t be arrogant. A great pitch can be ruined by arrogance. Share on X

I think that’s a great point. This idea of crowd fundraising brings up another thought around marketing and the ability to market digitally via social media mainly. That’s something that wasn’t there before years go. It wasn’t there almost at all. It’s been just expanding exponentially. Now you’ve got folks that are able to create a brand and create value from that brand very quickly in some cases and scale it with almost zero marginal cost.

One of the things I’ve been thinking too is when I evaluate early-stage companies, I’m looking a lot less at the technology because I think that’s become more commoditized. If you think about programming, that’s going to get replaced largely by AI because that’s something that a machine can do better than a human.

Programming is just translation. It’s literally translation, and that’s going to go away. Therefore, the founders that used to become the unicorn builders who were programmers mainly or had a tech background, to me, that’s not that valuable. That’s pretty much commoditized. Almost anybody can do it. Machines can do it more cheaply years from now.

I don’t even think programmers are going to have much usefulness at all. I know that maybe some people will push back on that. We’ll see in five years if I’m right or wrong, but I can say this, if you can market effectively, I’ve seen people that have become a hundred millionaires who don’t even have a product that is useful in any way. The product is them. That’s what I’m looking for more than ever. Can this person market effectively? If you can do that, it’s so cheap to do. I’m curious what you think.

You have equity-based crowdfunding, but you have reward-based crowdfunding like Kickstarter and Indiegogo. If you think about this, if I’m an investor and someone was able to raise hundreds of thousands to millions of dollars pre-selling their product, they’ve demonstrated product-market fit while they raise capital in an efficient need. That goes a long way to encouraging me to make a commitment to them and other investors. I think crowdfunding has a three purposes.

It’s a cost-efficient, non-dilutive way to raise capital, or a reduced-dilutive way to raise capital, in some cases. It helps ride product-market fit or determine how to your product-market fit as you go to market. It creates great PR opportunities and exposure opportunities. Anybody who has a product to sell should at least consider that if they have an audience to sell it to.

Great points. Related to the fundraising aspect, another theme that will be relevant is more diversification in the funding universe. Historically, it was VCs that were doing almost all of the investing in earlier-stage startups. There are friends, family, and the angel, which is oftentimes high-net-worth individuals, but if you think about Series A through Series D companies, that was almost all VC.

Diversifying The Funding Universe Beyond VCs

Now I think you’re seeing a lot more family offices and more institutions that have built their own venture arms or maybe don’t even have a venture arm, but they can still do direct investments in certain deals that they like if it’s strategically aligned. One of the things I’ve been thinking a lot about is how that’s going to change the industry because we’re going to have a lot more dollars coming from different places, which also means that the model of pitching will differ as well.

It won’t just be, “If I want to build a startup, I’ve got to go out to Silicon Valley, meet some people from Stanford, and go out to Sand Hill Road.” That model still works, but that’s changing because you can raise capital now via crowd fundraising. You can raise money digitally pretty easily on a Zoom call. You can access global investors much more easily. These are all themes that have been building for years, but we’re starting to get to the point where it’s changing rapidly.

I agree. It’s interesting you say that because I have found the reality, in all frankness, when I do these VC Fast Pitch events, the well-known investors draw the crowd. It’s the pickup truck millionaires and billionaires that make the investments. They’re not beholden to limited partners. They make their investments. One of my favorite books when I was young was called The Millionaire Next Door. It talked about the pseudo-athlete versus the true athlete. For startup investors and startup entrepreneurs, you don’t judge a book by its cover.

 

You don’t have to go to Stanford to be rich, with respect to Stanford. I think you’re right. There’s going to be a lot of different ways and resources. There’s a lot of different ways of structuring. There’s royalty-based financing and venture debt. Entrepreneurs have to explore other ways beyond traditional venture capital, even angel investment, because there are, as you said, a plethora of different ways and a plethora of different entrants into the market.

I want to talk a little bit about venture debt to help educate folks that might not know how it works. Let’s talk a little bit about what that is. It’s not for early-stage companies typically. It’s usually for companies that have revenue but, in your view, knowing thousands of founders, how could venture debt be helpful to them?

At the end of the day, your goal is to maintain the integrity of your cap table and maintain the integrity of your ownership in that cap table. For one, from that standpoint, it’s extremely valuable as you get to a later stage. Secondly, it provides a level of flexibility that you may not have with venture capitalists. You may not have the same onerous covenants or other aspects to it.

It is going to be somewhat more based on the value of the revenue stream or the value of the balance sheet versus some of the more esoteric scenarios to some extent. I think it provides a real opportunity to build a business. In frankness, probably even in this market, the cost of capital is going to be significantly less than going after equity. The reality is, don’t be afraid of a coupon.

That’s a great way to put it. It’s a nice complement to equity financing. There are a lot of misconceptions about venture debt. Sometimes companies that haven’t been able to raise equity in the size or the price that they want will then seek out venture debt. It’s not an option for those types of companies. It’s not rescue financing. In other words, it’s financing for the companies that are doing well and therefore, have earned the ability to access this type of capital.

It is a lot cheaper than equity capital. The average interest rate on venture loans is mid-teens. It’s not cheap. This is not the US Treasury. These are early-stage companies that are oftentimes not profitable or barely profitable. Mid-teens is quite fair. The venture lenders will also take a little bit of equity upside. That’s a good thing because it aligns interests over the long term. Remember, I was talking earlier about this acronym FAT, Fair, Align, Transparent.

If the lender didn’t have any equity in the business, then all they care about is getting their money back on the loan, and wouldn’t care about the long-term success of the business. The idea that the loans are paired with some equity participation is in the best interest of the founders because now they know that the lender is not there just to give them money for the short term. They’re there to fund their longer-term growth and have a vested interest in their long-term success.

That’s one of the things that a lot of people don’t understand. Lenders are long-term investors, too. The loans might only be 3 or 4 years typically, but the equity participation can be in perpetuity essentially. The other thing I want to add around, just the idea of optimizing a cap table is, it’s important to have a diverse cap table. One of the things I’ve been hearing a lot from founders is that they’re disappointed in a lot of their VC investors.

The VCs push them to raise a lot of money and then spend a lot of money to get that top-line growth to be growing 50% or 100% every year, but they weren’t profitable. When the companies then went out to raise money in months and weren’t able to anymore, or certainly were not able to anywhere close to their previous valuations, they realized quite quickly, “Our business might die because we’re not profitable. The only way for our business to survive is to raise external capital, which we now can’t access.”

A lot of founders that I’ve been talking to are pretty disenchanted, in a sense. They’ve got to take accountability. They made the decision to take the capital, so they can’t blame it on the VCs that gave them the money. The reality is, there’s a big shift happening now where founders are much more inclined to bootstrap longer, have a diverse capital table, and a diverse set of investors. Some might be strategic, or much longer-term focused like a family office, or lenders that are providing them debt capital, and some might be traditional VCs.

Early stage investing isn’t about numbers—it’s about people and the relationships you build. Share on X

Having that diverse base helps de-risk them. It also gives them more perspective because they’re getting input not just from VCs that are hyper-focused on growth, but they’re getting input from a lender who might say, “I’m okay with you growing slower if you do it in a way that reduces risk and is more sustainable.” That’s one of the things I’ve been advising a lot of founders to think about, how to diversify their cap table and get the right types of investors early.

That’s even before venture and even early stage dealing with angels. It’s paramount. What I tell entrepreneurs and when they’re out there seeking investors, there are three qualifications, the ability, interest, and knowledge in the space, and their strategic fit. You don’t want dumb money. Unfortunately, I found in my past that some of the smaller angel investors are the ones that are, quite frankly, the biggest pain in the butt.

Avoiding The Wrong Type Of Investors

You have to have that idea of being strategic about that and building a cap table properly from a strategic standpoint, and looking at debt as a complement to equity. At the end of the day, you want to make sure that you provide something that’s mutually beneficial to all concerned in the company.

I wrote an article for Built In called Founders, Here’s What to Look for in an Investor. It’s basically helping them identify the right types of investors. The four things that I highlighted as desirable traits were aligned, vision, and values. I think that’s important. To your point that you brought up, having a network and domain expertise that’s related to what that specific company is doing. Having financial credibility is big, especially at the early stage. There’s a lot of tire kickers that are not going to write a check.

They’re going to ask you a million questions and use up a bunch of your time. Ultimately, they’re not going to write a check. A lot of these folks are identifiable, especially in my world. I go to a lot of conferences that are institutional investors and large family offices. There’s probably 10% of people there that I see at every conference that have probably never written a check in their life. They’re what I call Fake Family offices. Everybody knows who they are.

They’re a huge waste of time. When they want to talk to me, I don’t have much to talk about with them. I’ll have a beer with them, and then I’m out. I’m not going to spend any time telling them what I’m doing in my business because they’re never going to do anything. The other thing I would say that’s important is experience with similar stage companies. Running an investment fund like I do that’s a closed-end drawdown fund. It’s very different from a liquid ETF that’s publicly traded.

I’ve got investors that love the idea of venture debt, but they don’t understand the structure of the investment. Despite being told or having the opportunity to read everything about it, they don’t do the work, then they don’t understand why there’s not liquidity because it’s a five-year lockup. That happens a lot with founders, too. They get investors that don’t have experience with that type of company and that stage.

With early-stage companies as you know, they’re going to change their plans 50 times. They’re going to miss their projections in perpetuity. They’re going to have a lot of mistakes. Instead of getting worried about that or pissed off about it as an investor, you have to realize this is an opportunity to help this company through hard times with mentoring, strategic introductions, and strategic capital. Those are four of the things that I think about. What are some things that you think about that founders should watch out for with investors like red flags?

Especially at the early stage, you need to do as much due diligence as them as they do on you. You need to know what’s the source of their capital, are they truly an accredited investor, and do they have the ability to take a 100% loss and keep going. The reality is, there’s a lot of people that make a lot of money but know nothing about angel or venture investing. It’s important to ask those questions. I was told many years ago by a former boss, “If you ever want to enjoy Thanksgiving dinner, don’t invest family money.” I think there’s some real wisdom to that.

Now, in the beginning, you may have to go after family, but you need to be ten fingers on the table, fully disclose, and tell them, “You’re buying a lottery ticket or a scratcher. We may hit the jackpot, but the likelihood is we’re not,” and be okay with that in the beginning. I think that’s paramount when you’re talking early stage.

 

If the investors don’t have experience, they need to know and understand. You probably need to educate them on the risk factor and the dynamics of investing in early stage so they can do it. The last thing you want is someone losing money, wanting to get back, and then creating more problems. The reality is there’s no do-overs. That’s important in your due diligence, especially in the early stage.

It’s so tough, because when you’re a founder, you need capital. Sometimes the only place to get it is the wrong type of investor. You don’t realize until it’s too late. There’s never a sign on their forehead that says, “I’m going to be a pain in the neck and be miserable.” I wish. We need to figure out a test for that and then stamp them on the foreheads.

Saying no to money is a very difficult thing for entrepreneurs to do.

Exactly. To your point, doing the diligence upfront and being thoughtful around it, and also developing the relationship before you take the money. Again, it goes back to the idea of milestone-based financing. It’s the same concept. Let them show you and put them in situations where they’re not telling you but showing you, let them reveal themselves. Sometimes that means taking a smaller commitment upfront. They might say, “I love what you’re doing. I want to put in a million dollars.” Maybe you take less than that.

Also, this is probably the most important thing, in many respects, when you’re going to enter a contract with anybody or take an investment, figure out your exit options before you enter. Make sure that if things don’t go well, you can exit and it’s not going to be incredibly painful to do so. It might cost you money and certainly cost you something. Whether it’s time, money, or energy, but if you can get that exit structured in advance, that makes it so much cleaner. That’s probably my biggest lesson learned as a founder myself. Every contract I look at, the first thing I look at is, “How am I going to exit this?”

You make a valid point because I tell everybody, especially with entrepreneurs, getting the money in is the easy part. Getting money out is the difficult part.

I’ve got two more questions. The first is, how should investors think about accessing innovation as an asset class? How can they do so safely and effectively?

How Investors Can Access Innovation Safely

I think the reality is, as I mentioned before, align yourself with experts in the space. First, align yourself with the people that understand the technology from both a practical short term and long term. Secondly, if you’re not willing to get educated, as I said, build the people around you that are getting educated in the space. I forget what the ratio is now, but several years ago, they said the entire knowledge in the history of the world doubles every 270 days. I’m sure that’s probably every seven days now. You have to be open to knowing what you don’t know and finding a way to get educated or find people that are educated.

Future Themes For Investors To Consider

Great points. Last question of the day, what themes do you think are most important for investors to be thinking about over the next 3 to 5 years?

AI is going to be extremely important. Decentralization is extremely important. Those are things that are moving forward, and they’re moving at breakneck speed. Also, there’s got to be some real understanding of different geographies that have opportunities. Look at India, Africa, Central and South America, and other markets that are creating some great innovation. Global has always been something important, but it’s becoming more important because technology is going to make the world small.

Crowdfunding isn’t just about raising capital—it’s about engaging your customers as investors and proving product-market fit. Share on X

It continues to do that. Artificial intelligence and machine learning are going to be something that’s going to be life-changing. It already is in some respects and seem to be so. Especially in the States, with the change of legislation, the whole decentralization of finance and the economy is a theme that’s not going away.

For folks that want to get in touch with you and attend VC Fast Pitch, talk about what you’re doing at Black Dog Ventures, or learn more about TCA Venture Group. What’s the best way to do that?

You can go to BlackDogVenturePartners.com or VCFastPitch.com. You can find me on all social media channels at @BlackDogCEO.

Scott, I appreciate you coming on. It’s like a wealth of knowledge, especially when it comes to the early-stage space. I feel like we could talk about this all day.

My pleasure. Thank you for having me.

You’re welcome, Scott. Thanks again for joining. Thanks, everybody, for reading this episode.

 

Important Links

• Zack Ellison on LinkedIn
• Applied Real Intelligence (A.R.I.)
• 7 in 7 Show with Zack Ellison on Apple
• 7 in 7 Show with Zack Ellison on Spotify
• 7 in 7 Show with Zack Ellison on YouTube
• 7 in 7 Show with Zack Ellison on Amazon Music
• Scott Kelly on LinkedIn
• Black Dog Venture Partners
• VC Fast Pitch
• Built In
• Kickstarter
• Indiegogo
• The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
• Founders, Here’s What to Look for in an Investor
• TCA Venture Group
• @BlackDogCEO on Instagram
• @BlackDogCEO on X
• 7 in 7 Show Disclaimer

 

About Scott Kelly

Venture Capital, Marketing, Sales and Leadership Professional. College Professor
I am the Founder and CEO of Black Dog Venture Partners.

Black Dog Venture Partners is a business accelerator that provides access to funding though our network of 13,000 investors, business development though our network of 40,000 business partners, sales/marketing and executive coaching services for disruptive companies. BlackDogVenturePartners.com

We also host our VC Fast Pitch Events that connect startups with the nations top investors. VCFastPitch.com
Proud father and owner of “Melvin” our black dog and company mascot.

Specialties: Venture Capital, Angel Investing, Private Equity, Business Development, Marketing, advertising, event promotion, social media, online marketing, public relations, publicity, mobile marketing, mentoring, discipleship, leader development, consulting, angel investing.