The Exchanges

Q And how can a startup determine whether a project is a success or not? Is that based on download figures? Is that based on revenue? What would you suggest, and how do you know when something's successful enough to carry on?

A So we are primarily B to B software investors at Hyde Park Venture Partners. So our, our greatest measure of, uh, product market fit and value proposition is fundamentally revenue. And so, you know, for us, it's primarily revenue, but, but that means a couple things. So in the earliest stages of a startup, that's, can you get someone to pay for your product? Um, and then it's, can you get more than one someone? So, Five, six, seven, 10, 15, a hundred customers, depending on your price point, to really prove, hey, you didn't just build this for one person or one company, you built it for a bunch. And then the next, the next, uh, measure is, can you get those people to buy it again? Can you get them to renew? Um, and, and at this point, you know, these three steps of first revenues, uh, multiple revenues, and then renewals are often driven by the founders themselves, and the next step is, can you train a salesperson, um, to go do what the founders did and sell that product? If you can get through those four steps, Um, you know, you've generally got a business that is, uh, that has got real product market fit, and that is approaching a stage where it can scale.

AI assessment note: “our greatest measure of, uh, product market fit and value proposition is fundamentally revenue”

Q Now, can you start by giving us a little background about yourself and how you made your move into the VC industry?

A Yeah, you bet. I started, I started life off as a mechanical engineer and, uh, worked, uh, practiced for about five years making a assortment of different products, and at one point, you know, realized, boy, it would be, it'd be awesome to know, um, more about who I'm making these for, why, and how they're sold, and really to understand the mechanics of all the other parts of a business besides the engineering, and so I went to business school, and, Had the fortune of interning for an angel group in, uh, uh, in Chicago called Hyde Park Angels, and around the time I was graduating, um, had, had spent about a year by then, um, investing actively in building a relationship with the guy who ran the group, uh, named Ira Weiss, and the two of us decided to raise a fund, um, and of course that takes some time, so I worked as a consultant for a few years while the two of us Uh, had many, many, many meetings with, uh, many, many awesome investors who ended up backing us, and in mid-twenty-eleven started, uh, started investing, um, or late-twenty-eleven started investing full-time.

AI assessment note: “interning for an angel group in, uh, uh, in Chicago called Hyde Park Angels”

Q And how can a startup determine whether a project is a success or not? Is that based on download figures? Is that based on revenue? What would you suggest, and how do you know when something's successful enough to carry on?

A So we are primarily B to B software investors at Hyde Park Venture Partners. So our, our greatest measure of, uh, product market fit and value proposition is fundamentally revenue. And so, you know, for us, it's primarily revenue, but, but that means a couple things. So in the earliest stages of a startup, that's, can you get someone to pay for your product? Um, and then it's, can you get more than one someone? So, Five, six, seven, 10, 15, a hundred customers, depending on your price point, to really prove, hey, you didn't just build this for one person or one company, you built it for a bunch. And then the next, the next, uh, measure is, can you get those people to buy it again? Can you get them to renew? Um, and, and at this point, you know, these three steps of first revenues, uh, multiple revenues, and then renewals are often driven by the founders themselves, and the next step is, can you train a salesperson, um, to go do what the founders did and sell that product? If you can get through those four steps, Um, you know, you've generally got a business that is, uh, that has got real product market fit, and that is approaching a stage where it can scale.

AI assessment note: “our greatest measure of, uh, product market fit and value proposition is fundamentally revenue.”

Q Absolutely. So we've got the runway now. We've got the runway. We've got the hype. Now we need some sales. What's your approach to startup sales and how does this alter your approach to investing?

A Yeah, that's a, that's a great question. So our number one rule in, in startup sales, and when we evaluate a company, is that the sales cycle has to be much, much shorter than the funding cycle. And so, generally, for a company that, you know, is raising 18 to 24 months of runway, we don't like to see sales cycles that are any longer than three to four months. There's a lot of reasons for that, but, but the, the simplest one is, if you imagine, um, you have a sales cycle that's six to 18 months, and you have an 18 months runway, the likelihood is you're gonna run out of cash before you ever sell anything. So, in terms of going into an investment, we look for sales cycles that, that tend to be Uh, you know, three to four months long. And then the other thing is, You know, it's really critical to have a strong technical founding team. And of course, you know, there, there are, um, stories abound of companies that have built products that quote unquote sold themselves like, you know, Dropbox and, and other self-service software products. But in, in reality, most companies, um, that sell software to businesses, they, they actually have to sell it. The product does not sell itself. And so, um, We look very carefully on founding teams for a strong, um, sales capability, a strong sales background, and that's something we learn a lot about in, in the, um, in the get-to-know-you process…

AI assessment note: “our number one rule in, in startup sales, and when we evaluate a company”

Q And you said earlier that time is the oxygen. So, digging a little deeper on this kind of eighteen-month runway theory, can you break this down into the three steps stated, and what are they, and what are comprised within this eighteen-month runway?

A Yeah, no, absolutely. So, eighteen-month runway is what we consider being the minimum that a startup should raise, regardless of stage, um, whether it's a seed stage, or whether it's a series A or a series B, um, And, you know, the, the reason is that you typically have a plan designed, uh, going into that raise. So what you plan to do with the money, um, and what that will lead to in terms of if you're a B to C business downloads or, or usage, and if you're a B to B business revenue. But what we see so many times is that the first plan you try, the plan A is not successful. And unfortunately, if you, if you work backwards, um, if you want to close around 18 months from now, you have to start raising it about 12 months from now. And if you want to start raising 12 months from now, that means you need to have, uh, successful metrics 12 months from now, which means you, you need to start executing on the plan that gets you those metrics at least six months from now, and preferably 12. So if you give yourself 18 months, uh, under that thinking, um, and you start at month one, and you try something and it doesn't work, you still have another shot at a plan B. So months six through 12, You can go execute your plan B, try to drive some traction and revenue, uh, whatever the key metrics are, and then have the story to go fundraise. If you're in an unfortunate situation of only having …

AI assessment note: “if you want to close around 18 months from now, you have to start raising”

Q And you mentioned, obviously, hype and maximizing hype around your business and your startup. What do you think startups can do to maximize the hype around their business in the kind of hugely populated sea of startups that we have nowadays?

A Yeah, that's, I mean, there's different types of hype. I think there's kind of, you know, national hype or broader stratospheric hype, which is largely driven by PR and getting coverage and And, um, you know, we've seen some companies be very good at doing that. Uh, a lot of the times it, it depends on the, the, um, how interesting the story is. So to give you an example, one of our, one of our best companies, Farmlogs, has had a lot of attention and a lot of kind of stratospheric hype because it's in, um, ag tech, which has become a pretty hot space, and it's an incredible story because it's two young, um, uh, Farm boys who went out and started a software company that's become a big success, and so they get a lot of coverage. Um, so, so one way to get that stratosphere coverage is to really have a story that's exciting for people. Um, and another great example in the Midwest was Groupon some years back who had a very, very young founder, and he was kind of the press guy, right? He was always out there. But then there's also local hype, and I think local hype matters a lot because ultimately, You raise money locally, you hire people locally, and often you get customers locally, and I, I see that hype as being engendered largely kind of in word of mouth based on your hiring, um, based on how your employees speak about your company, and so having really strong culture, a really s…

AI assessment note: “one way to get that stratosphere coverage is to really have a story that's exciting”

Q And now we've kind of walked through the wave theory. Let's talk maybe about, we've had the runway, we've had the hype, we've had the sales. Let's talk about the VC funding and the relationship with VCs. How can a startup know when they're pitching to a VC and they're getting rejected? Are there any signs or sayings that VCs have to subtly reject companies?

A Yeah, I think, um, In as nice a terms as possible. Yeah, I think you should assume you're getting rejected until the check shows up. So I, I know one, uh, multiple time backed venture CEO who, who says it like that. Now, obviously that's kind of hyperbole, but. You know, the, the question is, are you seeing a heightened level commitment happen relatively quickly? And that means you have a first meeting. At the end of that meeting is, is the partner or associate, depending on who you're talking to, saying, hey, I want to get you in front of my partners. Um, at that partner meeting, do they ask for, uh, specific information and delineate next steps? Um, so for example, we want to look at, uh, your customer data and crunch numbers on that. And then if that looks good, we want to invite you to a partner meeting. And then if you go to a partner meeting, are they saying, okay, we're going to have two days and then we will either issue a term sheet or not. In other words, commitment at the end of this, I mean, look, it's like any type of selling, um, at the end of any meeting with a VC, you should be looking for next steps and commitment on those next steps. Most of the time, there won't be that kind of commitment. It'll be something like, let me talk to my partners. Or let me think about it, or things, things like that. In any, any type of communication, um, such as those, uh, is bas…

AI assessment note: “It'll be something like, let me talk to my partners... is basically a no.”

Q Absolutely. So we've got the runway now. We've got the runway. We've got the hype. Now we need some sales. What's your approach to startup sales and how does this alter your approach to investing?

A Yeah, that's a, that's a great question. So our number one rule in, in startup sales, and when we evaluate a company, is that the sales cycle has to be much, much shorter than the funding cycle. And so, generally, for a company that, you know, is raising 18 to 24 months of runway, we don't like to see sales cycles that are any longer than three to four months. There's a lot of reasons for that, but, but the, the simplest one is, if you imagine, um, you have a sales cycle that's six to 18 months, and you have an 18 months runway, the likelihood is you're gonna run out of cash before you ever sell anything. So, in terms of going into an investment, we look for sales cycles that, that tend to be Uh, you know, three to four months long. And then the other thing is, You know, it's really critical to have a strong technical founding team. And of course, you know, there, there are, um, stories abound of companies that have built products that quote unquote sold themselves like, you know, Dropbox and, and other self-service software products. But in, in reality, most companies, um, that sell software to businesses, they, they actually have to sell it. The product does not sell itself. And so, um, We look very carefully on founding teams for a strong, um, sales capability, a strong sales background, and that's something we learn a lot about in, in the, um, in the get-to-know-you process…

AI assessment note: “sales cycle has to be much, much shorter than the funding cycle”

Q And you mentioned, obviously, hype and maximizing hype around your business and your startup. What do you think startups can do to maximize the hype around their business in the kind of hugely populated sea of startups that we have nowadays?

A Yeah, that's, I mean, there's different types of hype. I think there's kind of, you know, national hype or broader stratospheric hype, which is largely driven by PR and getting coverage and And, um, you know, we've seen some companies be very good at doing that. Uh, a lot of the times it, it depends on the, the, um, how interesting the story is. So to give you an example, one of our, one of our best companies, Farmlogs, has had a lot of attention and a lot of kind of stratospheric hype because it's in, um, ag tech, which has become a pretty hot space, and it's an incredible story because it's two young, um, uh, Farm boys who went out and started a software company that's become a big success, and so they get a lot of coverage. Um, so, so one way to get that stratosphere coverage is to really have a story that's exciting for people. Um, and another great example in the Midwest was Groupon some years back who had a very, very young founder, and he was kind of the press guy, right? He was always out there. But then there's also local hype, and I think local hype matters a lot because ultimately, You raise money locally, you hire people locally, and often you get customers locally, and I, I see that hype as being engendered largely kind of in word of mouth based on your hiring, um, based on how your employees speak about your company, and so having really strong culture, a really s…

AI assessment note: “one way to get that stratosphere coverage is to really have a story that's exciting”

Q Ok, so other than a children's book, which would you suggest?

A Um, So there's a book called Thinking in Time, and I won't remember what the author is, uh, in, and it's about, um, it's basically about how historical analogies, um, provide strong guidelines to making decisions, um, in the present and in the future, and also to how analogies can be broken down and, and very often don't apply. I think as a, as a VC, we see a lot of analogies that people make between their business and, um, And someone else, you know, some giantly successful business like eBay or Facebook, or nowadays you hear, um, it's Uber for this or Uber for that. And so often those analogies don't actually hold when you dig into them. And this book is, uh, is basically about that.

AI assessment note: “So there's a book called Thinking in Time”

Q And now we've kind of walked through the wave theory. Let's talk maybe about, we've had the runway, we've had the hype, we've had the sales. Let's talk about the VC funding and the relationship with VCs. How can a startup know when they're pitching to a VC and they're getting rejected? Are there any signs or sayings that VCs have to subtly reject companies?

A Yeah, I think, um, In as nice a terms as possible. Yeah, I think you should assume you're getting rejected until the check shows up. So I, I know one, uh, multiple time backed venture CEO who, who says it like that. Now, obviously that's kind of hyperbole, but. You know, the, the question is, are you seeing a heightened level commitment happen relatively quickly? And that means you have a first meeting. At the end of that meeting is, is the partner or associate, depending on who you're talking to, saying, hey, I want to get you in front of my partners. Um, at that partner meeting, do they ask for, uh, specific information and delineate next steps? Um, so for example, we want to look at, uh, your customer data and crunch numbers on that. And then if that looks good, we want to invite you to a partner meeting. And then if you go to a partner meeting, are they saying, okay, we're going to have two days and then we will either issue a term sheet or not. In other words, commitment at the end of this, I mean, look, it's like any type of selling, um, at the end of any meeting with a VC, you should be looking for next steps and commitment on those next steps. Most of the time, there won't be that kind of commitment. It'll be something like, let me talk to my partners. Or let me think about it, or things, things like that. In any, any type of communication, um, such as those, uh, is bas…

AI assessment note: “let me talk to my partners. Or let me think about it... is basically a no.”

Q And now I'd love to dive into your wave theory of the predictable and repeatable nature of startups. You say it's crucial for startups to innovate, test, and sell quickly. Why is that for you?

A Yeah, I mean, I mean, I'm certainly not the originator of that idea. I think, you know, lean startup methodology is, has become, uh, fairly commonplace in, um, the institutional knowledge and practice. Um, but, you know, the biggest thing is you just time, fundamentally time is money. You know, that your, your time is, uh, is really the oxygen of your startup, and that's all defined by how much money you have. And so you cannot, um, kind of die on the sort of ideas that don't work. And, um, the teams that we see being successful, uh, will test strategies, put a bound, uh, put a boundary on how long they're willing to spend on it, um, without it being successful and, and then move on to the next thing. And that's measured in weeks and months in a successful startup, not in quarters and years.

AI assessment note: “fundamentally time is money. You know, that your, your time is, uh, is really the oxygen”

Q And you said earlier that time is the oxygen. So, digging a little deeper on this kind of eighteen-month runway theory, can you break this down into the three steps stated, and what are they, and what are comprised within this eighteen-month runway?

A Yeah, no, absolutely. So, eighteen-month runway is what we consider being the minimum that a startup should raise, regardless of stage, um, whether it's a seed stage, or whether it's a series A or a series B, um, And, you know, the, the reason is that you typically have a plan designed, uh, going into that raise. So what you plan to do with the money, um, and what that will lead to in terms of if you're a B to C business downloads or, or usage, and if you're a B to B business revenue. But what we see so many times is that the first plan you try, the plan A is not successful. And unfortunately, if you, if you work backwards, um, if you want to close around 18 months from now, you have to start raising it about 12 months from now. And if you want to start raising 12 months from now, that means you need to have, uh, successful metrics 12 months from now, which means you, you need to start executing on the plan that gets you those metrics at least six months from now, and preferably 12. So if you give yourself 18 months, uh, under that thinking, um, and you start at month one, and you try something and it doesn't work, you still have another shot at a plan B. So months six through 12, You can go execute your plan B, try to drive some traction and revenue, uh, whatever the key metrics are, and then have the story to go fundraise. If you're in an unfortunate situation of only having …

AI assessment note: “months six through 12, You can go execute your plan B”

Q And how did you find the transition from, kind of, mechanical engineering academia to investing?

A Well, you know, I think the, you know, the, the, the part of engineering that's transferable to investing and, uh, both looking at investments and, and also managing in an investment portfolio is the problem solving part. Um, but I think that's a, it's a fairly abstract, um, abstract leap. Uh, certainly I wasn't a software engineer, probably should have been given what I, what I do now. Um, the consulting work was probably a little bit more transferable Uh, in the sense that, you know, as a consultant, you spend, um, one to, one to four months at a time looking at an industry and hopefully learning just enough with, with just enough of a different viewpoint than the company you're working with to, to provide some value and unique perspective. And that's very much what I do on a daily basis with the investments we make and the investments we consider.

AI assessment note: “the part of engineering that's transferable to investing... is the problem solving part”

Q And now I'd love to dive into your wave theory of the predictable and repeatable nature of startups. You say it's crucial for startups to innovate, test, and sell quickly. Why is that for you?

A Yeah, I mean, I mean, I'm certainly not the originator of that idea. I think, you know, lean startup methodology is, has become, uh, fairly commonplace in, um, the institutional knowledge and practice. Um, but, you know, the biggest thing is you just time, fundamentally time is money. You know, that your, your time is, uh, is really the oxygen of your startup, and that's all defined by how much money you have. And so you cannot, um, kind of die on the sort of ideas that don't work. And, um, the teams that we see being successful, uh, will test strategies, put a bound, uh, put a boundary on how long they're willing to spend on it, um, without it being successful and, and then move on to the next thing. And that's measured in weeks and months in a successful startup, not in quarters and years.

AI assessment note: “fundamentally time is money. You know, that your, your time is, uh, is really the oxygen”

Q Ok, so other than a children's book, which would you suggest?

A Um, So there's a book called Thinking in Time, and I won't remember what the author is, uh, in, and it's about, um, it's basically about how historical analogies, um, provide strong guidelines to making decisions, um, in the present and in the future, and also to how analogies can be broken down and, and very often don't apply. I think as a, as a VC, we see a lot of analogies that people make between their business and, um, And someone else, you know, some giantly successful business like eBay or Facebook, or nowadays you hear, um, it's Uber for this or Uber for that. And so often those analogies don't actually hold when you dig into them. And this book is, uh, is basically about that.

AI assessment note: “So there's a book called Thinking in Time”

Q And how did you find the transition from, kind of, mechanical engineering academia to investing?

A Well, you know, I think the, you know, the, the, the part of engineering that's transferable to investing and, uh, both looking at investments and, and also managing in an investment portfolio is the problem solving part. Um, but I think that's a, it's a fairly abstract, um, abstract leap. Uh, certainly I wasn't a software engineer, probably should have been given what I, what I do now. Um, the consulting work was probably a little bit more transferable Uh, in the sense that, you know, as a consultant, you spend, um, one to, one to four months at a time looking at an industry and hopefully learning just enough with, with just enough of a different viewpoint than the company you're working with to, to provide some value and unique perspective. And that's very much what I do on a daily basis with the investments we make and the investments we consider.

AI assessment note: “consulting work was probably a little bit more transferable”