Decision Vision Episode 81: Should I Pay to Pitch? – An Interview with Nathan McDonald, Keiretsu Capital
Keiretsu Capital’s Nathan McDonald joins host Mike Blake to discuss pay to pitch and how Keiretsu’s model is structured for better outcomes not only for investors but for the company receiving investment. “Decision Vision” is presented by Brady Ware & Company.
Nathan McDonald, CEO, Keiretsu Capital
Nathan McDonald is a Managing Partner and CEO of Keiretsu Capital. Nathan brings a unique entrepreneurial business and organizational development background developed during many years of hands-on, active leadership and operational experience. As one of the Northwest’s leading organizers of entrepreneurial and investor relations-focused media and funding events, he has facilitated scores of engagements and successfully promoted hundreds of privately financed high-growth companies.
Nathan co-founded and currently leads as president of the Northwest Region of the Keiretsu Forum global angel investment group. He wrote the business plan and designed the organizational structure, which led to the initial license agreement with global Keiretsu Forum. He recruited the team, implemented policies and procedures, and designed and coordinated multifaceted events. As part of his overall regional growth strategy, he created and implemented controlled expansion activities in Seattle, Bellevue, Boise, Portland and Vancouver, B.C. Nathan’s leadership and personal networking skills combined to quickly build the region into the fastest-growing angel investment group in the nation, adding over 600 investor members and facilitating over $132 million in funding for 215+ companies.
Nathan has dedicated much of his career to stimulating growth-stage capital investment, beginning as lead organizer for the Northwest’s most successful venture funding conference which delivered over $30 million in funding for 15 growth companies in 2000. As co-founder and managing director of the Investment Forum, he produced the highest-quality educational programs, social events, and investment forums in the region in collaboration with more than 35 industry groups and hundreds of different sponsors. Nathan co-founded an industry-leading showcase event and media piece which attracted over 500 of the region’s most influential investors and CEOs to recognize and celebrate their accomplishments.
Nathan is a graduate of the University of Washington Michael G. Foster Business School with a Bachelor of Arts degree in Business Administration & Finance with an emphasis in entrepreneurial leadership and venture finance. He has been a consistent supporter and volunteer for his alma mater, serving as a sponsor and judge for the UW Buerk Center for Entrepreneurship Business Plan Competition for many years and currently serves as President of the UW Entrepreneur Alumni Network. Nathan and his wife, Brianna, live in the Wedgwood neighborhood in Seattle with their two young sons, Evan and Wyatt.
Michael Blake, Brady Ware & Company
Michael Blake is Host of the “Decision Vision” podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
“Decision Vision” is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at firstname.lastname@example.org and make sure to listen to every Thursday to the “Decision Vision” podcast.
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Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:21] And welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owner’s or executive’s perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:39] My name is Mike Blake and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full service accounting firm based in Dayton, Ohio. With offices in Dayton, Columbus, Ohio, Richmond, Indiana, and Alpharetta, Georgia. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta for social distancing protocols. If you like this podcast, please subscribe on your favorite podcast aggregator. And please consider leaving a review of the podcast as well.
Mie Blake: [00:01:04] So, today’s topic is one I’ve been looking forward to ever since the opportunity came up on the radar screen relatively recently. This came together very quickly, which is great, sort of behind the scenes if you see the sausage being made. I’m not sure that our extraction from the Vietnam War took as much negotiating as getting some of our guests on. But this was was pretty user friendly. And I’m very glad about that because it has to do with something that I like to think, anyway is in my wheelhouse, which is startups and funding startups.
Mike Blake: [00:01:43] And if you happen to be in Atlanta or if you like Atlanta, you know, funding a high growth startup is hard. I mean, it’s hard everywhere, but it’s really hard if you aren’t in kind of one of the hot spots where venture capital is an innate part of the culture. And particularly – well, actually, no. I’m going to take that back. Because when I did background research for this interview, I actually learned some things that changed some things that I thought that I knew – corrections with things that I thought that I knew.
Mike Blake: [00:02:20] It is tempting to think that because we are in a second tier capital market here in Atlanta that paid a pitch, which is our topic today, would thrive. Because, you know, our ecosystem, although, it has improved immensely in the last 15 years, is still kind of hit or miss. There’s still kind of pockets. In Atlanta, there are certain kinds of deals that are very, I think, easy to get funded if you have a good company. There are certain kinds of companies, on the other hand, at least in terms of the industry and the maturity that are very difficult to get funded.
Mike Blake: [00:03:01] And so, when I’ve held my office hours, when I’ve given talks, even when I teach at Georgia Tech, I’m asked a lot this question of, you know, there’s this organization in town, Organization X, that says they can put me in front of a room full of investors. But they want $20, $100, $1,000, $10,000 to do it, you know, should I do it? And it’s a tough topic, particularly, if you’re a startup company. If you’re getting in front of a room of real people, chances are that’s not going to be cheap. I mean, that’s a precious opportunity and a precious asset. But at the same time, you know, for startups, by definition, capital is tight. So, you know, you don’t have the luxury, frankly, of outspending your mistakes.
Mike Blake: [00:03:57] And so, this discussion pay-to-pitch, will sometimes, frankly, get very animated. And I’m really glad that we have the chance to address this head on in this particular program. My view as to try pay-to-pitch, I think it depends. But we’re going to start a conversation in a minute with the individual who runs one of, maybe, the preeminent investor gathering facilitation groups around the country called Keiretsu Forum.
Mike Blake: [00:04:35] And we do have at least one chapter in Atlanta. I believe they meet up in Alpharetta, if I’m not mistaken. A guy is a friend of mine by the name of Barry Etra, I think, is their current local executive chairman. And I think they’ve managed to gain some traction here. So, let me get to that preamble, because I don’t want to waste time with me talking. We need our guests to talk because that’s how we learn.
Mike Blake: [00:05:00] And joining us today is Nathan McDonald, who is the CEO of Keiretsu Capital and chairman of Keiretsu Forum Northwest. And he is joining us today from the beautiful city of Seattle, or, at least, thereabouts. Keiretsu Forum is a worldwide investment community of capital, resources, and deal flow with over 50 chapters on three continents comprised of accredited private equity angel investors, venture capitalists, and corporate institutional investors. Keiretsu Forum has invested $750 million dollars into over a thousand companies, Keiretsu Forum and Keiretsu Capital are ranked as the most active venture investors in the United States, according to Pitchfork. I did not know that.
Mike Blake: [00:05:42] Nathan McDonald is CEO of Keiretsu Capital and has been since 2014, fostering closer ties between Keiretsu Forum angels, the institutional investor community, and Keiretsu Forum portfolio companies. Keiretsu Capital provides access to proprietary deal flow by investing alongside the angels, providing additional capital to complete rounds and acting to source follow on capital where appropriate. Under Nathan’s leadership, Keiretsu Capital has launched four co-investment funds and now manages over $30 million from over 180 Keiretsu investors and over 160 portfolio company investments. Nathan has also co-founded and currently serves as chairman of the Northwest Region of the Keiretsu Forum global angel investment group, the largest chapter in the group.
Mike Blake: [00:06:26] Nathan earned his Bachelor of Arts degree from the University of Washington, Foster Business School in Administration and Finance, with an emphasis on entrepreneurial leadership and venture finance. He serves as president of the Buerk Center Entrepreneur Alumni Committee. I hope I pronounced that right. Nathan McDonald, welcome to the program.
Nathan McDonald: [00:06:44] Thanks, Mike. Really great to be here. Great topic. Decision point is very important for entrepreneurs and there’s a lot of them along the way. So, excited to talk about fundraising and all the different ins and outs of how that works here for you guys today.
Mike Blake: [00:06:59] So, let’s get into it. And some of our listeners are familiar with the startup community. Some are, frankly, not. So, I want to start with a very basic question, which is, why do organizations like Keiretsu Forum exist? I think you’re, if not the preeminent, one of the preeminent organizations. But there are lots of others that are localized. What’s the market need or what’s the pain point that Keiretsu Forum and organizations like you are addressing?
Nathan McDonald: [00:07:32] Mike, to give a little background, and I’ve spent the last 20 years researching angel groups and building angel groups supporting the ecosystems. And it all started at the University of Washington when I was getting my bachelor’s degree there and studying entrepreneurship during the dot com craze, when things were evolving rapidly. I did a research project on the formation of formal and informal angel groups here in the Seattle area. I got a chance to learn the history of angel investing here in the northwest as well as across the country, and how angel groups came to be.
Nathan McDonald: [00:08:04] It really started in the late ’90s based on the Texas Capital Network in Austin. That was a model that the SBA put out and they created a government backed ACE-Net. They created an angel group in every state. They tried to streamline and organize capital formation. This is obviously pre-internet, you know, back when people actually physically got together and mailed letters to each other to raise capital. It was even more challenging than it is today in terms of finding and discovering folks who may be interested in investing in companies. Most of those groups failed, but a few went on and did well. The band of angels got started in the Puget Sound Venture Club. Another kind of early angel groups got going in the ’90s.
Nathan McDonald: [00:08:46] And since then it’s been a phenomenon that’s expanded. And there’s about 250 active angel groups in the United States today. And then, there became the formation of angel groups and angel networks where you have the different organizations working together. And the challenge that they address is really early stage capital formation. And while we’re a country that has tremendous wealth, the allocation of that wealth towards early stage startups is very slim. It’s less than three percent that make any kind of angel investment of all the accredited investors in the United States. And it’s really one half of one percent that are ones that actually write checks that are 25, 50K that you normally associate with kind of active sophisticated angel investors.
Nathan McDonald: [00:09:27] Well, there’s lots of wealthy folks in every community. There’s lots of wealth. The allocation of that wealth on entrepreneurial ventures is very small, because it’s fraught with challenges. And unfortunately, the most likely result of folks doing angel investing is they lose all their money. And as those of us who’ve lost money, no, it’s not a fun experience. And there’s a lot of other things we’d rather be doing with our time than losing our capital, and our time, and our efforts.
Nathan McDonald: [00:09:53] So, you know, coming together in a group allows all of us to be better investors. That’s why Randy Williams, our founder of Keiretsu, who started the organization 20 years ago, he was tired of losing money on his angel investments. So, there’s got to be a better way. And really leveraging the idea of mind share, of swarm intelligence, of bringing smarter people together around him so that he could evaluate the opportunities. And what turned out is that everybody benefited from that philosophy of sharing experiences, of being able to look at these opportunities, help the entrepreneurs, help improve the quality of the deal flow, get the due diligence done, and help create a much more sustainable process for investing.
Nathan McDonald: [00:10:33] So, you know, different groups have different focuses, different size. It’s kind of all over the board. But in general, they’re all geared towards trying to help support entrepreneurs and help support investors come together in somewhat of an organized way that provides, hopefully, a great experience and, hopefully, ultimately great returns on that collective time and effort.
Mike Blake: [00:10:55] So, you bring up an interesting point that I’d like to kind of underscore here, and this may be a record that I go off script. I normally, at least, get two or three questions in. But that notion that, you know, a lot of investors do lose money. You know, these are high risk investments. That’s why the high return is there. And the challenge or the unfortunate side effect of that is that, you know, if you’re dipping your toe into your first investment and then it doesn’t go well, the likelihood you’re going to try again is very small.
Mike Blake: [00:11:31] And so, there’s a vested interest in building an ecosystem, I think, where you’re offering even increasingly better opportunities, you’re sharing resources, and making sure that those first couple of investments, if not home run successes that’s not realistic, but at least make sure give you the best chance not have them be disastrous. So that if, at least, the original investment is more or less return, that the investors will then try again. Because that’s what you need, I think, to really gain traction and momentum in the angel investing space. And as you said, to ensure that that foundation capital remains available and, we hope, expands. What do you think about that?
Nathan McDonald: [00:12:17] That’s exactly right, Mike. And that’s been the arc of my career the last 20 years to try and build that, and create that, and institute those best practices. Because what we’ve learned is that the key drivers of superior return are, you know, number one, proprietary access to deal flow where the deal flow comes from. Number two, due diligence. You know, 80 to 100 hours of due diligence for a company. And then, having angels that have expertise in those markets involved with those companies, having great communication, great support, and then having access to follow on funding.
Nathan McDonald: [00:12:46] But from an investor point of view, you’ve got to be diversified. So, if you make five investments, the highest likelihood is you’re going to lose all your money. But if you make ten investments, you double your chances of having a successful exit. And if you get up to 20 to 30 investments, then you start to be diversified to where you’re going to get the market return of the 27 percent IRR that they talk about. And that’s why it’s so important that people have access to a lot of good deals so that they don’t put all their eggs in one or two baskets. And again, folks get lucky, right? I mean, you hit one deal and that does happen.
Nathan McDonald: [00:13:21] But by and large, if you look at hundreds and hundreds of angel investors and their experiences, you know, obviously, folks always love to talk about the winners. And you hear about those folks in the media and this and that. But what you don’t hear about is the other 90 percent of the folks who just lost all their money and decided maybe they’d rather play golf or travel than, you know, try and help mentor startups and those types of things.
Nathan McDonald: [00:13:43] So, it really takes an entrepreneur who want to on behalf of the investors. They don’t do this to make money. They’re doing it because they want to give back. They’re entrepreneurs themselves. They built and sold companies. They appreciate how hard the journey is. The grit it takes to be successful. And they want to come alongside those entrepreneurs and help them. And with angels, it’s a lot more than money. It’s a relationship. It’s expertise. It’s all the things that they do to help these companies grow. And it really is that whole combination of the entrepreneur DNA, the angel DNA that allows that solid foundation to be set. Which, like you said, dramatically enhances the chances for success and avoiding those early failures that nobody likes to write a 50K check and lose their money three months later. You know, talk about a slap in the face. I mean, “Yeah, thanks.”
Mike Blake: [00:14:27] That’s an expensive education, right?
Nathan McDonald: [00:14:29] Yeah, it is. You avoid one bad investment and you paid for ten years of being a part of an organized group. So, it’s definitely worth participating with a group working together. The dues for doing so are vastly outweighed by the benefit of all the things that come with it. If you’re going to engage in this kind of investing and invest 200K or 300K a year in angel deals, it’s great to be part of a group. Be part of multiple groups.
Mike Blake: [00:14:55] So, can you take us through, please, what a pitch looks like? And I understand that there’s a vetting process and you can certainly explain exactly how that works. But at some point along the line, there’s a moment at which a capital seeking company is going to have an opportunity to make a presentation in front of folks that have the capacity and, at least, theoretical desire to write checks into those kinds of investments. Can you paint a picture of kind of what that looks like?
Nathan McDonald: [00:15:35] Yeah. Sure thing, Mike. You know, you’re always pitching your company. As an entrepreneur, you’re working on your pitch to your customers, to your advisors, to your seed investors, your friends and family. So, that’s definitely the entrepreneurial art, how do you present your story, how is it compelling. We’ve got a lot of information and content around how to do that well. And there’s a lot of that available on the internet. Actually, my wife is putting on our presentation training as we speak here. Again in the time of COVID, how do you raise capital now that it’s virtual? It used to be one thing where you go in a room and present and a lot of the communication was body language. Now, you present and it’s literally through Zoom. It’s a whole new world. So, we kind of have, you know, what I’ve done for 20 years and then what we’ve done the last three or four months.
Nathan McDonald: [00:16:19] But, basically, the idea of the pitch is to generate interest. And that’s kind of a misnomer. You don’t just pitch and get checks sent in. The goal is to engage people’s interest, engage their passions, clearly articulate what you’re doing, why you’re doing it, why there’d be benefit for people to be involved with it. And people are really evaluating you. Who are you? And why would I want to be involved and work with you, and build relationships, and be able to help? Do I support the journey? Do I support the mission? Do I support the impact? Is the technology compelling? Is there a big market? And all those questions that have to be answered during the pitch presentation.
Nathan McDonald: [00:17:00] But, ultimately, it’s really an impression. It’s a gut reaction. There is some pattern matching that happens with it. Obviously, folks who’ve been successful before that resonates more. But we’re always looking for the underdog too. We’re looking for that brand new innovative breakthrough idea. You know, what is the core business? Is this compelling? Is there an opportunity? And is it something I want to learn more about?
Nathan McDonald: [00:17:22] And so, the pitch is all about generating that interest, usually presenting in front of a group of 30, 40, 50, 60 folks depending on the event. And there’s initially, usually, a deal screening where you’re pitching to a screening committee or some kind of a group that’s going to evaluate whether to get through to the full membership. And then, after you do the presentation to the full group, you generate interest, of course. Then, there’s follow on presentations and pitches that go on for weeks and months as you syndicate and present to multiple groups and get your due diligence completed. And that’s an ongoing process that gets refined. The pitch does get better. It’s not a one time kind of make or break deal. You keep evolving and getting better at your public speaking skills, at your presentation skills.
Nathan McDonald: [00:18:08] That’s one of the reasons we work with a lot of life science companies is because they’re constantly raising money. And the CEOs of those companies that are good, you know, learn early in their careers how to raise capital. And then, they’re constantly practicing because they’re constantly raising capital. Whereas, the tech companies, they raise money and then execute and then they’ll come back and raise money again. But it’s not kind of as intensive of a thing all the time as it is with a lot of the life science deals we work with.
Nathan McDonald: [00:18:34] So, you know, the pitch is really important, but that’s kind of the tip of the iceberg. That’s what you see above the water. Everything below the water is what’s real important in terms of making an investment decision. The pitch is just to kind of get to that next step to be able to dig deeper.
Mike Blake: [00:18:50] You know, I think that that distinction you just made between biotech and silicon-tech is really insightful. And I’m probably going to steal that. But you’re right, I do much more work on the silicon side than I do on the carbon side. But, you know, with biotech, you kind of constantly raise money. And then, as you keep raising incremental round, you know, the investor is going to ask, “Well, how much closer are you to getting a product out?” “Well, we’re not sure yet.” That’s the nature of the beast.
Mike Blake: [00:19:24] Whereas, with silicon, it’s, “Well, since the last round, you know, we’ve now gone from an alpha to a public beta. And we’ve got X number of customers. And we’ve got a SAS model that works.” A very different kind of ongoing fundraising conversation, I guess. I really never thought of it that way.
Nathan McDonald: [00:19:47] Yeah. It’s very different for consumer products companies or cleantech companies. The industry you’re in and kind of the fundraising norms within those industries are really dry. Because, again, all these businesses are different. And then, if you have a local business or if you’re doing real estate, you know, real estate pitch, which we do real estate alongside fintech, cleantech, impact, consumer products. I mean, we’re looking at all kinds of things all the time. So, it makes it a lot of fun. And there’s a lot you can gain from trying to kind of look across industries in terms of how do you pitch and how do you pitch well.
Nathan McDonald: [00:20:20] Watching life science companies pitch are some of the best actual pitchers that you’ll watch out there. Whereas, tech companies can get by with great tech. And a lot of investors in tech are kind of wowed by the tech itself. So, the business and the other components sometimes aren’t as important, particularly early, early stage. They’re necessarily more interested in the innovation and the compelling nature of it then. And so, trying to make a more holistic look at where you are in the spectrum, where you are in your fundraising and business evolution, and how that matches up with the typical risk reward scale. And with life science, it’s much more regulated and data driven, as you said. So, it’s just kind of a whole different set of markets.
Nathan McDonald: [00:21:04] But as entrepreneurs, we can always learn a lot by just, you know – the best thing if you want to go raise money, you’ve got to watch people pitch to raise money that are raising money. And that’s the best way to learn. That’s why we love having entrepreneurs as guests to attend and see the presentations, because they get to see what the big leagues look like. They get to see what companies that are raising four, six, eight million bucks. You know, get a chance to look at what that looks like. And, oftentimes, that happens behind closed doors. Obviously, we don’t get access to the VC boardrooms. We don’t get to see the the board decks and those pitches. So, you know, how do you see what success looks like? And we’re very open about how we do what we do in that regard to give entrepreneurs the idea of what successful funding presentations look like.
Mike Blake: [00:21:49] So, I think the most frequent image we have or I have, anyway, of the entrepreneur seeking to raise capital is the person in Silicon Valley that goes to the right Starbucks, to the right bar, or whatever. And I’m sure you’re familiar with that vision, too. And I guess I call that kind of the DIY market. And the question I want to ask is this, is that image kind of a romanticized version or image of the capital seeking entrepreneur? Or is there still a lot of successful DIY fundraising out there? And if so, how do groups like Keiretsu then sell or convey a value proposition that, “Hey, rather than DIY, plug yourself into this community and we can help you do it better.” Does that question makes sense?
Nathan McDonald: [00:22:54] Yeah, it does. I mean, as an entrepreneur, you are your network. So, you’ve got to be DIY from the beginning of your entrepreneurial journey. You’ve got to be building your network. And, obviously, pre-COVID, that was pretty straightforward. Tons of meet ups, events, accelerators, all kinds of programs to go to and get to know people. Let them get to know you and have your pitch, your story why what you’re doing is compelling. And that’s great for just building your base network, your friends, your family, advisors, other entrepreneurs. There’s nothing to replace that hard work of just hard core networking and understanding how that process functions
Nathan McDonald: [00:23:31] And then, when you get to the point where you’re moving beyond that phase where the friends, family, kind of the initial 100,000 to 500,000, you can raise the capital that way. Again, you’re looking for maybe five to ten investors. I mean, that’s pre-COVID, reasonably doable. Now, in the virtual world, you know, I feel for those folks. And I’ve heard a lot of stories, you know, kind of the raw tech startups couple of guys in a garage. They don’t really have access to those coffee shops anymore to raise that extra 50K a month to keep them going. And they’re having a rough go of it, because a lot of the capital today is going to portfolio companies and companies that are a little further along. As we can understand, I mean, just the factor of the market.
Nathan McDonald: [00:24:13] But when you look to go to your local entrepreneur group, investor group, most every community has a little bit more of an earlier stage groups. We have eight angel groups here in Seattle, most of which skew towards the earlier stage. And they have open coffee and they have opportunities to do office hours and to get to know those folks and to raise capital. But a lot of those investors are putting in small amounts of money. They’re putting in 5, 10, 15, 20K. And they’re trying to do that across to be diversified. They’re trying to make, you know, ten 5K investments a year. And for a company that just needs to raise 50K, 100K to get started, you can do that.
Nathan McDonald: [00:24:54] When you get to the point where you’re in the go-to market phase, you’re looking to raise a-half-a-million to three million. Your product is done. You’ve got some customers. You got some traction. That’s when the challenged point really kicks in, because you need to access more sophisticated investors that are going to validate your business at a higher level, you know, get the due diligence completed, and be able to syndicate out. And at that point, getting in a room with 250 investors to do that on your own and match it up, I mean, pre-COVID, you may be able to do that over a-year-and-a-half. But now, post-COVID, there’s really no way to do that.
Nathan McDonald: [00:25:29] So, it’s really interesting how things have continued to evolve as everything is virtualized. And much like it did during the dot com craze, things reorganize themselves. And that happens every year as we have economic upturns and downturns and wealth is created and wealth is destroyed. And we’re seeing that even today. It continues to evolve. And, obviously, entrepreneurs, they got to be able to evolve with it.
Nathan McDonald: [00:25:53] So, it’s hard to raise money. There’s nothing easy about it at all. And accessing investors is just step one. And obviously, that’s kind of the ticket to the game, you know, generating interest, getting due diligence done, getting your deal terms, getting your structure correct so you get capital in. There’s lots of ways to to strike out. And the road to success is narrow and very competitive with other entrepreneurs that are also seeking those same dollars. So, you know, entrepreneurs have to get out there. They have to compete like crazy and give it your best shot. And that’s all you can do and hope that what you’re doing is going to attract the right folks for bringing success to your journey.
Mike Blake: [00:26:35] Yeah. And I think it’s a good thing that capital is scarce, too. It would be scary the things that would be out there if it weren’t. At some point, I’d like you to kind of talk about the timeline, because I think that’s very important in terms of the integrity of your process. My understanding is that you don’t charge a fee as soon as every entrepreneur walks to the door. If I understand correctly, your method really is you vet them first to see if you’ll take their money, basically, and invite them into your your process. Is that correct?
Nathan McDonald: [00:27:19] Yeah. We originate the majority of our deal flow from within our group, so that is kind of a misnomer. I mean, obviously, folks can apply and we get 30 to 50 applications a month. But the majority of the companies we end up work with are ones our members are already working with and that we’ve been tracking and working with for three to six months. So, again, a relationship with a group or members of a group, it begins early. And we track companies we help. We have hundreds of community partners that we support. And then, they refer deal flow to us when they get to the right stage. And then, entrepreneurs are always welcome to come and attend, and view, and see how things work. And then, we offer a lot of education.
Nathan McDonald: [00:27:57] But you’re right, we don’t charge any application fees. A lot of groups will charge a couple hundred bucks just for those 30 to 50 that come in over the transom. You know, we don’t do that because we don’t want to have an expectation and we’re very value driven. And so, if it’s too early or if it’s just not a fit, that’s great. We’ll refer them off to our community partners or other groups if we can.
Nathan McDonald: [00:28:16] The deal screening is really important for us. We have about 50 members that evaluate the opportunities and they vote either invite, delay, or deny against the deal flow. And typically, of the seven or eight companies that present a month, two or three will be invited through. And that’s really what is the confidence builder for us and for the entrepreneur to understand, “Yeah. The investors are very interested.” They want to engage 25 or 30 active investors saying, “Yes, I’m interested. Yes, I think this is ready for the forum.” There’s always a little bit of coaching, a little bit of polishing, a little bit of deal terms of work, due diligence prep, process prep that needs to go into it. But that’s our big validation factor that, yeah, it’s worth the investment of the time, the capital, the resources, the 80 to 100 hours of work on due diligence. And that we’re likely to get a good result.
Nathan McDonald: [00:29:02] And unless there’s a big red flag that pops up, you know, down the row, there’s an IP issue, there’s a founder issue, there’s a capital issue, or something else, which, fortunately, only happens maybe five percent of the time. Our screening is quite good. And we love having a very high funding rate. I mean, we keep it over 75, 80 percent in order to make sure we have lots of very happy customers. And then, they come back and syndicate across our network. Because once we get due diligence done, then that’s when the victory lap begins and the companies can syndicate. And we have another 35 angel groups that are part of our syndication network for those deal flow to go through.
Nathan McDonald: [00:29:40] So, we have a lot of downstream distribution that once they put in the front end work, get the due diligence completed, get the capital around going. Then, the key is, how do you syndicate and finish off the round? Because any one angel group in any one city can do 200 or 300 grand in funding. But if you’re trying to raise $8 million dollars, that ain’t going to get her done. You got to get it done there. Plus, then syndicate to another five to ten groups in order to be able to get that full capital raised.
Mike Blake: [00:30:06] You know, and I want to underscore that point and make sure I heard it correctly. So, of the companies that make it through that due diligence, you’re saying 75 to 80 percent of them ultimately get funded.
Nathan McDonald: [00:30:23] So, of the companies that participate in our forum meetings, it’s about a 75, 80 percent funding rate. The vast majority – if you’re going to go through our process, we’re basically mutually committing to getting the due diligence done. We have a full time due diligence director. That’s all he does 40 hours a week. He’s our chief cat herder. You know, basically, eight to 12 people on the due diligence teams organizing the reports, the formatting. And it’s a six to eight week effort. It can take longer. But we commit to put our full effort into that.
Nathan McDonald: [00:30:54] So, there’s the initial set of presentations. There’s 50, 60, 70 folks that express interest. There’s a due diligence team that then goes to work. Due diligence reports created. They come back for an update and then they syndicate from there. So, it’s definitely a long term engagement with the entrepreneurs. And we’re always doing what we can to try and help move things along as best we can, as best as the market will bear.
Mike Blake: [00:31:18] And I think that’s a very important distinguishing point, because I have observed other groups that have a somewhat different model, where the model is, you know, passed a couple of thousand dollars. I’ve seen this as high as $3,000 to 4,000. We’re going to put you in a room full of investors. Here’s your shot. Here’s the microphone. Go. And unsurprisingly, the funding rate of those exercises is quite small. In fact, close to zero. I want to come back to one of those points in a second.
Mike Blake: [00:31:53] But as an observer, I can tell from the moment I get in, there’s not a legitimate investor in that room. And you can tell that the companies are not only not worthy of funding. They’re probably embarrassing themselves in real time as they present. But it sounds like your model is very different, where you put a lot of work into the front end to make sure that by the time it gets in front of your general membership, that that company – you have a high level of confidence that company is ready for prime time. And you’re not asking for money until that point.
Nathan McDonald: [00:32:33] Yeah. It’s exactly right. I mean, the competence of the CEO and their fundraising, I mean, that’s everything. If they’re competent and they believe they’re going to be successful, you know, and most entrepreneurs do raise capital, built, and sold multiple companies. They’re just like, “Yeah. Let me add it.” The fact that you guys have an organized process, even better. But unfortunately, I mean, there are a lot of entrepreneurial meet up and pitch events that are out there that, you know, every entrepreneur needs to do their due diligence, whether it’s your attorney or accountant. Anywhere, you’re going to spend your precious resources.
Nathan McDonald: [00:33:03] You know, even an offshore development firm that says they can build your app for 20 bucks, you know, I mean, “Yeah. Right.” I mean, there’s a sucker born every minute and there’s lots of ways to lose money as we know in business. And you’ve got to do your due diligence on all your advisors and service providers. I mean, I know law firms, they’ll charge you 20K just to do your docs and give you a term sheet. And then, they say, “Oh, yeah. You’ll raise money.” “Yeah, Right.” Lawyers screw up more deals and charge for the privilege than anybody.
Nathan McDonald: [00:33:33] So, you know, we’re all about trying to support successful, realistic, sustainable funding ecosystems. And we’re proud to partner with a lot of angel groups that do a great job with what they can and how they do it. And, you know, the kind of the startup pitch night type thing, I mean, we don’t see that very often anymore. I mean, in order to attract real investors, you got to have great deal flow. I mean, these people have real limited attention spans. And if you put stuff that’s ill prepared in front of them, you know, it’s like a revulsion. I mean, there’s like, “I got lots of better things to do with my time and it’s very precious.”
Nathan McDonald: [00:34:09] So, for us, we’re very guarded about the opportunities that get access to our group, because that’s our brand. That’s our service not only to our angels, but now we’re working with hundreds of family offices. And these groups are very sophisticated and there are downstream capital. So, ultimately, the continuum works from the early stage to the mid-stage, to the Series B round, to the Series C round. I mean, it’s a big continuum of investor customers.
Nathan McDonald: [00:34:37] And that’s what we want to line up for our companies, is that once you’re in that track, you’ve got great access to deal flow, great access to customers, great access to follow on funding. And it’s just a testament that about half our portfolio companies are also family office backed now. And that makes a huge difference for them. Once a startup gets a $50 to 500 million balance sheet behind them, it makes things a lot easier. And if you don’t get the due diligence done up front, you’re not going to get to the point where you going to be able to do that.
Mike Blake: [00:35:09] I’m glad you brought up the point about family offices. That’s an area where I’ve spent a fair amount of time in my practice. And one of the things, I think, makes family offices so important in this segment of the investment market is that they have potentially an unlimited time horizon. Right? I think that one of the things that actually hurts venture capital is that because funds have a finite life, in some cases, it’s just not a long enough time period, particularly, for the later investments in the funds life for those investments to fully bake, basically. But because family offices don’t have that constraint, I think it makes them very powerful venture type investors. And we’re only seeing the start of that.
Nathan McDonald: [00:36:00] It is the most exciting thing I’ve come across in 20 years. You know, the last three years we spent – just like I did 20 years ago evaluating the formation of angel groups, we spent the last three years tending all the family office events and really trying to understand this phenomenon. But yeah, 20 trillion coming down. And a lot of it wants to allocate the impact in tech. And there’s such a symbiotic relationship between the angel investors that have the entrepreneurial expertise and the family offices that have the wealth.
Nathan McDonald: [00:36:27] This is the future of entrepreneurial finance. It’s not an ivory tower VC driven thing. That game will continue. And for folks that want to play that, great. But the alignment between the angels and the family offices is so remarkable. And we’re already seeing it pick up here and there. And it’s a great symbiotic relationship. But it’s traditionally been very siloed and and very localized.
Nathan McDonald: [00:36:51] And so, we’re starting to see through our Keiretsu family office efforts and others, you know, we’re bringing those family offices into the fold to invest alongside the angels at the levels they want. And they are patient capital. And they’re not looking to overly dilute the companies. And they’re not making a management fee. And they’re not trying to just shut a company down because it’s not going to hit their unicorn hurdle. And all the other destructive things that people don’t talk about very much in the VC industry.
Nathan McDonald: [00:37:18] But, you know, honestly, VC shut down more companies than they successfully grow by a factor of probably 10 to 1. And we don’t have that happen too much here in the Seattle market. But here in California, I hear about it all the time. Where you got a great opportunity. They had a brazen venture funding. They pivot the model. You know, they do this, they do that, and they just shut it down. And all the folks who put in all their time and effort end up just losing everything because it didn’t quite meet, you know, the one term sheet controller’s best interest. And I think that’s just so destructive to the community.
Nathan McDonald: [00:37:52] And I’m fortunate that with family offices coming in, you know, we’re the most active venture investor in North America because we’re really good at what we do. In order for us to move up the charts in terms of the dollar volumes, we need the family offices to come alongside us and start writing the bigger B round and C round checks. And we’re starting to see that now. We just had a $16 million round completed. We just had a $13 million round completed. We’re starting to see them take some nice bites of the apple, which is, for me, having done this 20 years, you know, it’s really exciting to see that full kind of capital spectrum come to bear and really have a lot of co-investment partnership potential to it.
Mike Blake: [00:38:32] So, years ago, I ran a nonprofit here in Atlanta called Startup Lounge. And it was a nonprofit. We actually called ourselves Venture Communists. But what we were trying to do is not in a presentation scenario, but put people that we thought were high potential entrepreneurs with true capital providers that we would vet. And we do our best to screen people that got into our rooms, basically a big cocktail party to just initiate those one-on-one conversations. I’m not saying one model is better or worse than the other, but it’s a preamble to saying that the biggest challenge we had at Startup Lounge was vetting investors to make sure they legitimately, (A) had the capital to invest. And (B), we’re there to invest.
Mike Blake: [00:39:19] And the reason that was a challenge for us is because, as you can imagine, being in that room, if you’re a CPA, you’re a wealth manager, you’re an attorney, you know, talk about business development heaven, right? And you want to be in that room. But that can frustrate both the legitimate investors and the fundraisers alike. I got to imagine that’s also something of which you’re very aware. You must have a process to that new entrance into your investor pools to make sure that they’re, frankly, on the level. Is that true?
Nathan McDonald: [00:39:57] Yeah. The non-solicitation policy is the most important thing. And I kind of take it for granted, you know. But just relative to groups, if you have sponsor driven groups that are there to serve the sponsors and the solicitation needs, then your group is going to fail. And if you have investors there and they’re getting solicited by wealth managers or by, gosh, someone selling them an insurance policy or something, I mean, you know, they’re out the door. Same with the entrepreneurs, they don’t want to get solicited.
Nathan McDonald: [00:40:24] And again, we’re all looking for business. We’re all trying to build relationships. And we all want to be involved in companies. So, there’s nothing wrong with folks being involved. But it’s very precious when companies are in the fundraising mode. Look, the impostor syndrome of folks, “Yeah. I write a 5K investment and I’m an angel investor. But I’m mostly here to sign a contract to pay me 20 grand. And I’ll invest 10 grand back.” You know, I mean, that kind of stuff happens here and there. Obviously, we kick anybody out who we get wind of anything like that happening.
Nathan McDonald: [00:40:53] But, you know, we do reference checks, we do background checks. The members pay a fee to be a part of the group as well. And it’s not inexpensive. So, if they’re not going to be active, you know, they’re not going to renew their membership and continue to invest. We track their investments every quarter. We report our data to PitchBook every quarter. So, we’re finding out, you know, people are active or not. And if they’re not, then they kind of cycle out. And we’re always obviously looking to add new capital
Nathan McDonald: [00:41:19] And it’s a ton of hard work to add 60 to 80 new investors a year to complement the folks that become inactive after two to three years, for whatever reason. It’s a constant need to refresh the capital availability. And it’s a ton of work. I mean, we go through 50 potential new members a month, you know, and five end up joining. So, it’s a funnel on the other side when we’re talking about marketing and trying to recruit investors to make an allocation to this type of investing. And most of them have lost money. And they’re like, “Well, tell me how I’m not going to lose money.” It’s like, “Well, you know, I can’t tell you you’re not going to lose money. But I can tell you you can have a lot more fun and we’re going to do it together. And at least we’re all going to lose money together if we do.”
Nathan McDonald: [00:42:02] So, you know, you try and get through that. But, you know, it’s tough. A lot of these people get very cynical very quickly because, you know, entrepreneurs say one thing, do another. And it doesn’t take many of those experience where some say, “Look, I got better things to do with my time. I don’t need to be here, you know, getting duped.” And so, that’s why the screening, the due diligence, all those things are so important to make sure the investor experience is high quality. So that you keep the people that, in fact, are the serial entrepreneurs, the true blue folks that are great about helping and supporting the entrepreneurs through the good times, the bad times.
Nathan McDonald: [00:42:39] And it really is a self-selection process. So, once you have the culture of your group established, it kind of has a certain energy to it. And it repels and it attracts. And that’s what’s a lot of fun. Folks that come right in just love it. It really resonates. The core values align, great, boom. For those that have their own agenda, have their own thing they want to accomplish, they pretty quickly realize that’s not going to work here. And they move on.
Mike Blake: [00:43:05] So, do your presenters typically fit a profile of somebody that is very experienced, have been there, done that, maybe they’re on their second or third company? Or is it more likely to be somebody that is doing their first company? Or is it some mix of the two and you really can’t say?
Nathan McDonald: [00:43:28] Probably half the folks that participate and present are members of the group. So, by definition, they’re angels or entrepreneurs that built and sold several companies, and they’re doing their next thing, and they’re coming through. So, by and large, the companies ended up making it through the full process are typically ones who raise capital, who have a track record of success, who understand the fundraising process and understand the value of what we do.
Nathan McDonald: [00:43:53] For earlier stage entrepreneurs in their career, it’s tough. You know, it is a lot to learn. And it takes just a certain amount of time and mileage to be able to get to the point where you’re able to compete with the big boys. You know, NFL football, Major League Baseball, you know, there’s reasons why those folks can swing and hit a curve ball over the fence. It’s because they’ve worked at it a very, very long time. Whereas, if you and I got up there, it’s not going to be nearly as pretty.
Nathan McDonald: [00:44:20] It’s the same thing with entrepreneurship. When you have a competitive environment, you’re competing as a first time entrepreneur against successful entrepreneurs. And that means you’ve got to surround yourself with just a fantastic advisory network or network co-founder team. It’s all about team, team, team. So, if, in fact, you’re someone who’s developed something and you’re in that founder role, you know, we’re really going to evaluate the founder factor. And whether you’ve separated yourself from the business in terms of understanding what you need to be to be successful as a go-to market company. It’s a lot different than what you need to develop a product and get some initial customers.
Nathan McDonald: [00:44:56] So, you know, we’re certainly very attuned to that. Again, we’re always looking for the underdog and for that person who’s got the breakthrough idea. We’re happy to surround them with love and be able to support their vision. And, you know, over the course of the year, maybe 10 to 20 percent of the entrepreneurs that go through are more the earlier first time entrepreneurs. But, you know, 70 to 80 percent of the entrepreneurs are definitely ones who’ve, you know, built and sold a few companies along the way, typically.
Mike Blake: [00:45:24] We are speaking with Nathan McDonald, who is CEO of Keiretsu Capital, about the decision on whether or not to participate in a pay-to-pitch opportunity. Another question I have and I think our listeners will be interested in is, how do you handle confidentiality? You know, you’re dealing with a lot of intellectual property, heavy companies. Obviously, it has to be disclosed at some point. You’re not going to have a lot of success pitching a black box. But at the same token, you know, protecting intellectual property is not easy and it’s rarely cheap. How do you manage that process in a way that balances the need for information of your investor community with also the need for protection for your participants?
Nathan McDonald: [00:46:24] For the secret sauce, it’s really important that the entrepreneurs have an — property strategy for protecting it, for patenting it. Who is advised in that? So, we do a lot of due diligence on exactly that, making sure there is a good framework in place for the company to record, document. Having that sustainable differentiation, having that freedom to operate, and the ability to prevent competition from coming right after you is very, very important. And our due diligence process accounts for that. We often have IP attorneys that are involved on our due diligence teams doing those reviews.
Nathan McDonald: [00:46:54] If necessary, they’ll go under NDA for looking at that. If funds have not yet been filed or there’s some underlying secret sauce. The specific members of the DD team will go under NDA for that. But we don’t sign NDAs for the general presentation or the pitching for capital. I mean, it’s all about trust. And if you don’t trust yourself and your processes and, you know, if you say, “Oh, you got to sign an NDA for me to tell you what you’re going to do,” I mean, obviously, that kills trust right out of the gate.
Nathan McDonald: [00:47:23] So, you need to know who you’re talking to. You do need to make sure you have good IP counsel and a good IP strategy. But, you know, having those things in place generally allows the question that will come up at every single presentation, you know, how are you going to protect what you have and prevent competition and create a good exit? So, it’s a very important consideration for entrepreneurs to make sure that they’re set in that area.
Mike Blake: [00:47:48] We are running up against our time limit here, unfortunately. And as usual, I didn’t get to all the questions I would like to ask that I think our listeners would like to hear about. If a listener wants to contact you about more information, maybe about the Keiretsu Forum itself or even just, you know, maybe they have an opportunity to do something like this elsewhere, would you be willing to talk to them? And if so, how can people contact you?
Nathan McDonald: [00:48:16] Yeah. We do a number of online events every month as everything’s virtualize now, so folks are welcome to attend our presentation training, our due diligence training, our other online informational meetings. And as I mentioned, welcome to come as a guest. You get a chance to see what deal flow looks like that we’re looking at through the Keiretsu Forum group. So, they can reach out through keiretsuforum.com or our website here in the Seattle, k4northwest.com. It has our event calendar. And my email, email@example.com.
Nathan McDonald: [00:48:46] And, also, for those interested in learning more about Keiretsu Capital, which is our top off fund. Once due diligence is done, the funding round is being completed, we come in and provide top off funding and syndication. That information is available at keiretsucapital.com along with our portfolio company details and things like that. So, we’re very open. It’s easy to find us on LinkedIn and through our online groups and events.
Nathan McDonald: [00:49:11] And, Mike, great to be with you. Great questions. Great discussion. I appreciate your passion for how these things come to be and how we can help entrepreneurs along their journeys. I’m happy to come back. I’m sure there’s a few other topics we could probably dig into as well.
Mike Blake: [00:49:26] Very good. Well, I will take you up on that. That’s going to wrap it up for today’s program. I’d like to thank Nathan McDonald so much for joining us and sharing his expertise with us today.
Mike Blake: [00:49:35] We’ll be exploring a new topic each week. So, please tune so that when you’re faced with your next executive decision, you have clear vision when making it. If you enjoy this podcast, please consider leaving a review with your favorite podcast aggregator. It helps people find us that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.