WEBVTT - TechStuff Tidbits: How Tech Startups Get Funding 0:00:04.400 --> 0:00:12.360 Welcome to Tech Stuff, a production from iHeartRadio. Hey there, 0:00:12.360 --> 0:00:15.920 and welcome to tech Stuff. I'm your host, Jonathan Strickland. 0:00:16.040 --> 0:00:19.239 I'm an executive producer with iHeartRadio. And how the tech 0:00:19.400 --> 0:00:22.520 are yet? You know, there's been an awful lot of 0:00:22.560 --> 0:00:26.560 talk about tech and money recently, whether we're talking about 0:00:26.600 --> 0:00:32.880 cryptocurrencies or the collapse of Silicon Valley Bank a SVB. 0:00:33.560 --> 0:00:36.320 Plus there's been talk about how the startup trend is 0:00:36.400 --> 0:00:38.680 kind of in a bit of a slowdown right now 0:00:38.800 --> 0:00:43.279 due to investors being a bit more cautious in order 0:00:43.320 --> 0:00:46.160 to protect their money in a time of economic uncertainty. Plus, 0:00:46.200 --> 0:00:50.280 you've got high interest rates on loans, which contribute to 0:00:50.720 --> 0:00:57.400 a desire to wait for things to improve before investment 0:00:57.440 --> 0:01:00.720 money starts flowing like wine once again. So I thought 0:01:00.720 --> 0:01:04.360 I would actually do a Tech Stuff Tidbits episode about 0:01:04.360 --> 0:01:08.440 the different types of funding in startups in general. But 0:01:09.040 --> 0:01:13.360 we are of course interested in tech startups because honestly, 0:01:13.440 --> 0:01:16.920 I find the stuff confusing at times, like how does 0:01:18.400 --> 0:01:22.720 an idea for a business end up getting the support 0:01:22.720 --> 0:01:26.560 it needs to actually become a thing? And I figure 0:01:26.600 --> 0:01:29.160 we can take this episode by talking about the various 0:01:29.200 --> 0:01:33.720 stages of funding that a startup will typically seek and 0:01:33.760 --> 0:01:37.440 what each of these stages means. So let's say you've 0:01:37.440 --> 0:01:42.440 got an idea for a new tech business. Maybe you 0:01:42.560 --> 0:01:45.720 plan to make an app that detects which spots in 0:01:45.800 --> 0:01:48.680 town are just on the verge of becoming trendy, so 0:01:48.760 --> 0:01:51.600 that your users can jump in and be super cool 0:01:52.000 --> 0:01:56.360 by going all Instagram on these spots before they blow 0:01:56.480 --> 0:01:59.280 up as trendy spots. So you could be a tastemaker. 0:02:00.000 --> 0:02:02.240 You know, you're really stylish, You're ahead of the curve, 0:02:02.480 --> 0:02:05.559 and it's all because you have the spidy Sense app 0:02:05.640 --> 0:02:09.799 that tells you win some place or object or thing 0:02:10.639 --> 0:02:13.639 or fashion or whatever is about to really take off. 0:02:14.000 --> 0:02:17.600 It's an idea, so dumb it can't fail anyway. You 0:02:17.720 --> 0:02:21.079 got this idea, But how do you actually turn this 0:02:21.200 --> 0:02:26.200 idea into a business. Well, you're gonna need some starting capital. 0:02:26.680 --> 0:02:30.560 Maybe you are limiting costs by doing the classic Silicon 0:02:30.680 --> 0:02:35.240 Valley story of launching out of a garage. Your initial 0:02:35.280 --> 0:02:38.679 offering might be built on top of your own computers. Well, 0:02:38.840 --> 0:02:41.160 that's not going to work for very long, because assuming 0:02:41.680 --> 0:02:44.640 your idea actually does catch on, you're gonna need way 0:02:44.639 --> 0:02:48.520 more computer power and storage in order to scale your business. So, 0:02:49.080 --> 0:02:53.959 assuming you're not independently wealthy and willing to pour your 0:02:54.000 --> 0:02:58.440 own money into this venture, what do you do? Well, 0:02:58.440 --> 0:03:03.600 one thing you could do is apply at an incubator. So, 0:03:03.680 --> 0:03:08.120 an incubator is an organization designed to provide resources to 0:03:08.320 --> 0:03:12.839 fledgling startup businesses. There are different types of incubators out there. 0:03:12.960 --> 0:03:19.079 Some require a little more established business than others. Some incubators, 0:03:19.120 --> 0:03:21.639 if you come in with a great pitch, will bring 0:03:21.680 --> 0:03:24.160 you in even if all you have is an idea. 0:03:24.480 --> 0:03:28.240 Not many, but some will. And so you come in 0:03:28.320 --> 0:03:30.360 with this idea and you pitch it to the incubator, 0:03:30.400 --> 0:03:33.160 you go through the application process and they say, excellent, 0:03:33.680 --> 0:03:37.320 you can be one of the businesses that we incubate. 0:03:38.120 --> 0:03:41.520 So assuming that you do that, then you can get 0:03:41.560 --> 0:03:45.320 access to resources that can include stuff from office space 0:03:45.680 --> 0:03:51.160 to mentorship and classes, to networking as a building, connections 0:03:51.160 --> 0:03:55.080 with potential partners and investors and team members, that kind 0:03:55.080 --> 0:03:59.880 of networking. Usually the incubator takes some equity in your 0:04:00.080 --> 0:04:03.520 business as a result, so they have some ownership of 0:04:03.560 --> 0:04:08.400 your business, and the incubator often has input to some degree, 0:04:08.680 --> 0:04:11.480 sometimes a lot of input on the evolution of your 0:04:11.480 --> 0:04:15.920 business because the incubator is giving you access to these 0:04:15.960 --> 0:04:20.599 resources and in return, you are expected to make something 0:04:20.680 --> 0:04:22.560 out of your idea. But the only way you can 0:04:22.600 --> 0:04:25.120 do that is if you put the work in. So 0:04:25.400 --> 0:04:29.320 incubators are great resources for some types of startups because 0:04:30.000 --> 0:04:32.600 you can easily have a situation where you have folks 0:04:32.600 --> 0:04:35.479 who are really good at coming up with ideas right, 0:04:36.000 --> 0:04:39.479 or maybe they're really good at coding, like they're good 0:04:39.480 --> 0:04:42.760 at the building part, but maybe they have little to 0:04:42.839 --> 0:04:46.560 know business experience or expertise. They don't know how to 0:04:46.560 --> 0:04:48.279 start a business. They don't know how to run a 0:04:48.320 --> 0:04:50.560 business and keep it successful. They don't know what it 0:04:50.600 --> 0:04:54.560 takes in order to keep the lights on well. At 0:04:54.600 --> 0:04:57.680 an incubator, startups can learn the ins and outs of 0:04:57.760 --> 0:05:03.120 business itself. They can the foundation for what will be 0:05:03.240 --> 0:05:07.240 a company further down the line, So startups can start 0:05:07.279 --> 0:05:10.080 to learn how to do things like draft business plans 0:05:10.240 --> 0:05:14.119 and to form a team, both a team of people 0:05:14.120 --> 0:05:17.200 who are making the thing that you're offering and the 0:05:17.240 --> 0:05:21.200 team that oversees that. They can start to make out 0:05:21.360 --> 0:05:24.480 a hierarchy plan for their organization. All this kind of 0:05:24.520 --> 0:05:29.080 stuff that is required for a business to have the 0:05:29.080 --> 0:05:32.160 best chance to succeed. Now, it's not that every startup 0:05:32.200 --> 0:05:35.280 has gone through this. There are some that have gone 0:05:35.279 --> 0:05:40.239 through a very haphazard approach and through all logic should 0:05:40.279 --> 0:05:44.880 have failed, but somehow didn't. But generally speaking, these are 0:05:44.880 --> 0:05:46.359 the sort of things you need to do if you 0:05:46.480 --> 0:05:50.200 want to have a good chance of being around for 0:05:50.320 --> 0:05:53.440 more than a couple of years. There are a few 0:05:53.480 --> 0:05:56.080 different kinds of incubators. As I mentioned, a lot of 0:05:56.120 --> 0:06:00.880 colleges have incubator organizations, so you might have student and 0:06:01.080 --> 0:06:03.599 or faculty taking on a really big part of running 0:06:03.600 --> 0:06:08.280 those operations. There are also corporate incubators. Google had one 0:06:08.320 --> 0:06:12.120 called Area one twenty, so once upon a time you 0:06:12.240 --> 0:06:15.440 probably have heard this. At some point, Google had this 0:06:15.600 --> 0:06:19.280 policy in place where employees were allowed to dedicate up 0:06:19.320 --> 0:06:23.279 to twenty percent of their work week to their own projects, 0:06:23.279 --> 0:06:27.240 with the one qualifier being that the projects should ideally 0:06:27.279 --> 0:06:31.720 be something that could potentially benefit Google if it pans 0:06:31.760 --> 0:06:35.839 out well. Area one twenty served as an incubator for 0:06:36.000 --> 0:06:39.760 projects that had a lot of promise and gave employees 0:06:39.760 --> 0:06:42.560 the resources they would need to further develop their ideas 0:06:42.560 --> 0:06:45.760 and potentially see the mature into a business of their own, 0:06:46.120 --> 0:06:48.960 so it wouldn't just become a Google product, it could 0:06:49.000 --> 0:06:53.520 potentially become a Google spinoff. Google, by the way, abandon 0:06:53.600 --> 0:06:57.560 the twenty percent time project back in twenty thirteen, so 0:06:57.880 --> 0:07:01.680 that is not a standing at Google anymore. They still 0:07:01.720 --> 0:07:08.080 do incubate businesses, but it's a slightly different approach now. 0:07:08.520 --> 0:07:13.640 Now similar to an incubator is an accelerator. So incubators 0:07:13.680 --> 0:07:18.200 help startups at the earliest stages of development, perhaps before 0:07:18.240 --> 0:07:23.720 there's even a business idea that has formed around a 0:07:23.760 --> 0:07:27.640 product or service idea, right, so it may be at 0:07:27.640 --> 0:07:31.400 the earliest stages of germination for a business, whereas an 0:07:31.400 --> 0:07:34.960 accelerator typically is for a startup that already has established 0:07:35.680 --> 0:07:39.600 the business part, at least the rudimentary elements of a 0:07:39.640 --> 0:07:44.720 business part. And so an accelerator takes a startup business and, 0:07:44.920 --> 0:07:48.840 as the name suggests, accelerates it on its way to 0:07:49.080 --> 0:07:53.800 scale up to becoming a larger business that it will 0:07:53.800 --> 0:07:56.320 need to be in order to be a success. Incubator, 0:07:56.520 --> 0:07:59.440 on the flip side, is a place to help develop 0:07:59.520 --> 0:08:04.520 and earth of business, but both incubators and accelerators helped 0:08:04.520 --> 0:08:08.440 startup companies find funding, and this kind of brings us 0:08:08.440 --> 0:08:11.480 to the first real round of getting capital for your business, 0:08:11.480 --> 0:08:16.280 which is called seed capital or seed funding. And this 0:08:16.320 --> 0:08:20.559 could happen before you get into an incubator, probably before 0:08:20.560 --> 0:08:23.320 you get into an accelerator, or it could be part 0:08:23.720 --> 0:08:26.560 of that process. Part of what the incubator is trying 0:08:26.600 --> 0:08:30.880 to help you do is to secure seed funding. This 0:08:31.000 --> 0:08:34.240 is the initial round of funding the startup needs in 0:08:34.360 --> 0:08:37.800 order to become a thing. It's what pays the bills 0:08:38.160 --> 0:08:41.640 and helps the startup establish the basics and start to 0:08:41.640 --> 0:08:49.439 do things like registered trademarks, you know, have an office space, 0:08:50.040 --> 0:08:54.199 make payroll for the initial group of employees while they 0:08:54.240 --> 0:08:57.839 further develop their idea. But it's the earliest, earliest stages. 0:08:57.880 --> 0:09:00.480 You're not necessarily doing business yet. You may not even 0:09:00.559 --> 0:09:04.280 be a publicly known entity yet. You might still be 0:09:04.360 --> 0:09:07.640 kind of a developing, in secret kind of company. Often 0:09:07.679 --> 0:09:10.040 seed funding comes from people who are close to the 0:09:10.040 --> 0:09:12.559 folks who are behind the startup, So this could include 0:09:12.559 --> 0:09:17.080 friends and family, former or current employers, that kind of thing. 0:09:17.480 --> 0:09:20.319 And in return for providing some of the seed capital 0:09:20.360 --> 0:09:23.800 for the business, the investor receives some equity or percentage 0:09:23.800 --> 0:09:27.600 of ownership of that business. So if the business succeeds, 0:09:27.840 --> 0:09:31.800 there will be an eventual payout, But it's entirely possible 0:09:32.360 --> 0:09:35.480 that seed capital investors are supporting a startup not because 0:09:35.520 --> 0:09:37.720 they're hoping to get a big payoff down the line, 0:09:38.240 --> 0:09:41.000 but rather they believe in the people behind the project 0:09:41.520 --> 0:09:45.600 and they want to support them. So it's important because 0:09:45.640 --> 0:09:48.720 a lot of these startups they fail. More than half 0:09:48.840 --> 0:09:53.840 the vast majority of startups do not succeed. So often 0:09:53.880 --> 0:09:56.360 we're talking about people who are taking on a financial 0:09:56.440 --> 0:09:59.440 risk because they believe in the people behind it or 0:09:59.440 --> 0:10:02.720 they want to s support them. Also, we're typically talking 0:10:02.880 --> 0:10:07.920 about pretty modest amounts of money in the long term, 0:10:08.000 --> 0:10:11.600 Like later on, when we're talking about Series ABC funding, 0:10:11.760 --> 0:10:14.600 you're talking about the tens of millions of dollars or more. 0:10:15.400 --> 0:10:18.400 Now we're talking about, you know, maybe hundreds of thousands 0:10:18.400 --> 0:10:20.200 of dollars, which is still a lot of money, but 0:10:20.280 --> 0:10:23.720 in the grand scheme of things, is much much smaller. Now. 0:10:24.360 --> 0:10:27.360 Seat capital provides funding that otherwise would be off limits 0:10:27.360 --> 0:10:30.160 to a startup. I've talked about in episodes that I 0:10:30.240 --> 0:10:33.440 mentioned with Silicon Valley Bank that it's really hard for 0:10:33.440 --> 0:10:37.040 startup businesses to secure like a business loan because they 0:10:37.120 --> 0:10:39.319 might not have anything they can put up as collateral. 0:10:39.720 --> 0:10:42.160 They might not have any track record they can point 0:10:42.240 --> 0:10:46.800 to as showing their ability to make a successful business. 0:10:47.720 --> 0:10:50.719 The business itself might not really exist yet. There might 0:10:50.760 --> 0:10:53.760 not be an easy way to explain where revenue is 0:10:53.760 --> 0:10:55.840 going to come from. They may not be able to 0:10:55.840 --> 0:10:59.120 generate any revenue for a while, So the loan can 0:10:59.160 --> 0:11:01.840 be seen as being too risky, and seed capital can 0:11:01.960 --> 0:11:05.000 end up taking over that spot, because I mean, where 0:11:05.000 --> 0:11:07.320 else are you going to get the money to get started? 0:11:08.480 --> 0:11:13.080 And really it's usually just enough to establish the earliest 0:11:13.120 --> 0:11:15.400 days of the business so that the founders can actually 0:11:15.480 --> 0:11:18.200 seek additional investment. So you can almost think of it 0:11:18.200 --> 0:11:20.520 as the money that a business needs in order to 0:11:20.600 --> 0:11:23.760 get seen by the next level of investors. And we'll 0:11:23.760 --> 0:11:27.200 talk about them after we come back from this quick break, 0:11:36.080 --> 0:11:39.880 all right, Before I move on to venture capital funds, 0:11:39.920 --> 0:11:42.760 because that's ultimately where we're headed for this next bit 0:11:42.760 --> 0:11:46.320 of the discussion. There is one kind of special early 0:11:46.400 --> 0:11:50.320 investor that I could mention at this stage. Investors who 0:11:50.400 --> 0:11:54.080 typically can step in at the seed funding phase or 0:11:54.120 --> 0:11:58.199 perhaps the next one, and that is the angel investor. 0:11:58.559 --> 0:12:01.760 So an angel investor is usually a high net worth 0:12:01.960 --> 0:12:06.640 individual h and WI. It's someone who has a lot 0:12:06.679 --> 0:12:10.559 of liquid assets at their disposal. That's a way of saying, 0:12:11.080 --> 0:12:13.040 if someone's got a whole lot of cash they can 0:12:13.080 --> 0:12:15.800 throw around, or at least it's someone who could very 0:12:15.880 --> 0:12:18.120 quickly get hold of a mountain of cash that they 0:12:18.120 --> 0:12:22.760 could throw around. Angel investors sometimes provide seed money to startups. 0:12:23.080 --> 0:12:26.560 If the amount is less than a million dollars, then 0:12:26.600 --> 0:12:29.560 they may just loan the money to the startup and 0:12:29.600 --> 0:12:32.880 the startup will pay back the angel investor with interest 0:12:32.960 --> 0:12:36.400 on top of the loan at some later date, assuming 0:12:36.400 --> 0:12:38.439 that you know they have the money to do that. 0:12:39.280 --> 0:12:42.160 But if it's more than a million dollars, angel investors 0:12:42.280 --> 0:12:45.520 typically will take a stake in the company. They will 0:12:45.559 --> 0:12:50.640 take part ownership of that company, and then they know 0:12:51.679 --> 0:12:54.040 they typically have a lot more say in how things 0:12:54.120 --> 0:12:57.840 develop from there. So as a founder, you have to 0:12:57.840 --> 0:13:00.840 start making these decisions of how much control do I 0:13:00.880 --> 0:13:04.719 want to seed to the people who will give me 0:13:04.760 --> 0:13:07.800 the money that lets me pursue my dream. And it's 0:13:07.840 --> 0:13:11.359 a difficult question to answer. It's really up to the individual. 0:13:12.240 --> 0:13:15.320 Angel investors take on a huge amount of risk. Like 0:13:15.360 --> 0:13:19.080 I said, the majority of startups will fail within five years. 0:13:19.920 --> 0:13:25.520 Only a few ever developed beyond being a small business 0:13:25.559 --> 0:13:27.320 and reach a point where they can hold their own 0:13:27.360 --> 0:13:31.520 initial public offering or IPO, or they get snapped up 0:13:31.520 --> 0:13:35.360 by some bigger companies. So angel investors and other seed 0:13:35.360 --> 0:13:40.120 capital investors are pouring money into something that statistically is 0:13:40.320 --> 0:13:43.680 kind of a long shot. Some angel investors actually band 0:13:43.760 --> 0:13:48.080 together to create angel networks. This spreads the risk out 0:13:48.200 --> 0:13:50.240 across a group of people. It also allows them to 0:13:50.280 --> 0:13:53.120 pool resources, so you're not pouring as much of your 0:13:53.120 --> 0:13:57.120 money into individual investments. You know, it's part of a 0:13:57.160 --> 0:14:00.400 pool of money that other people are contributing toward. It 0:14:00.440 --> 0:14:03.280 also means that you're dividing up the equity you have 0:14:03.360 --> 0:14:07.600 in that business. But you know, the lower risk means that, yeah, 0:14:07.600 --> 0:14:10.760 maybe you are investing money into stuff you believe in, 0:14:11.160 --> 0:14:12.760 but you're not going to see that money come back, 0:14:13.040 --> 0:14:15.000 but maybe it'll be slightly less than if you were 0:14:15.040 --> 0:14:19.400 just going in by yourself. All right, So the startup 0:14:19.400 --> 0:14:24.000 receives the seed funding, maybe it's an incubator with the 0:14:24.000 --> 0:14:26.480 founders learning how to structure and run a business. On 0:14:26.520 --> 0:14:29.960 top of receiving the resources they need to develop their idea. Further, 0:14:30.840 --> 0:14:33.160 whatever the case, they are now ready to attempt to 0:14:33.160 --> 0:14:38.000 secure a loan, which they might also do later in 0:14:38.040 --> 0:14:41.640 the structure. So like loans typically don't really become a 0:14:41.720 --> 0:14:44.440 thing until you're past the seed funding stage at least, 0:14:44.480 --> 0:14:47.440 and usually it's after you've done Series A or maybe 0:14:47.480 --> 0:14:52.920 even Series B funding, or you instead of looking for 0:14:52.960 --> 0:14:56.640 a loan, you face venture capital investors, or maybe you 0:14:56.640 --> 0:15:01.000 do both. So Silicon Valley Bank would be an example 0:15:01.040 --> 0:15:04.000 of a financial institution that used to take a chance 0:15:04.040 --> 0:15:07.800 on tech startups before the bank collapsed, so they were 0:15:08.040 --> 0:15:11.320 known to offer loans to businesses when other more established 0:15:11.360 --> 0:15:15.920 banks wouldn't. And you know, tech investors would also turn 0:15:16.000 --> 0:15:18.800 to SVB to take out loans in order to invest 0:15:18.840 --> 0:15:22.000 money into startups. So SBB played a very important part 0:15:22.760 --> 0:15:26.440 in the early stages of funding for tech startup companies. 0:15:26.720 --> 0:15:29.400 Sometimes it would be actually after Series A, so we'll 0:15:29.440 --> 0:15:31.760 get to that in a second. Let's talk about venture 0:15:31.800 --> 0:15:38.160 capital investors. These are groups of private investors who you know, 0:15:38.480 --> 0:15:41.600 it could be a single person, but it's usually a 0:15:41.600 --> 0:15:46.360 company that has a bunch of people as their clients 0:15:46.440 --> 0:15:50.400 who contribute money to the venture capital firm that then 0:15:50.560 --> 0:15:54.560 uses that money to invest in various startups and jump 0:15:54.600 --> 0:15:58.400 in after seed funding. The venture capital investors out there, 0:15:58.400 --> 0:16:04.000 many of whom our long time players in the financial world, 0:16:04.400 --> 0:16:08.200 are the ones who pour significant money into a startup. 0:16:08.200 --> 0:16:11.120 We're talking about the tens of millions in some cases, 0:16:11.240 --> 0:16:14.440 or you know, obviously you have things like unicorns where 0:16:15.240 --> 0:16:18.680 you're talking about crazy amounts of money being poured into 0:16:19.080 --> 0:16:24.520 a startup. The funding is intended to really accomplish two goals. 0:16:25.040 --> 0:16:29.600 One for the investors. Ideally it will represent a return 0:16:29.680 --> 0:16:32.000 on investment at some point where you will make more 0:16:32.040 --> 0:16:36.000 money than what you put in at some point further 0:16:36.080 --> 0:16:39.440 down the line, assuming that things go well. But the 0:16:39.520 --> 0:16:43.000 other thing it's meant to do is to provide the 0:16:43.120 --> 0:16:47.600 startup the support it needs to get on a path 0:16:48.440 --> 0:16:53.520 toward that success, to further establish the business, to allow 0:16:53.560 --> 0:16:56.120 it to grow and to scale so that it can 0:16:56.160 --> 0:17:00.480 start to really become a success, to attract the talent 0:17:00.840 --> 0:17:05.560 it needs, to produce whatever the product or services at 0:17:05.560 --> 0:17:12.600 a level that is sustainable and profitable, and hopefully reach 0:17:12.640 --> 0:17:15.560 a point where the company can have a big payout 0:17:15.560 --> 0:17:18.439 to its investors, which could come in the form of 0:17:19.280 --> 0:17:22.679 an initial public offering that is the company goes from 0:17:22.760 --> 0:17:27.160 privately held to a publicly traded company, or it gets 0:17:27.200 --> 0:17:31.320 acquired or merged with another company, and in that process 0:17:31.920 --> 0:17:34.439 there's a transfer of money that ends up being a 0:17:34.440 --> 0:17:37.560 big payout to the early investors. In either case, the 0:17:37.600 --> 0:17:40.280 investors end up getting back their investment plus a healthy 0:17:40.320 --> 0:17:41.840 return on top of it. It may not be in 0:17:41.840 --> 0:17:45.080 the form of cash with initial public offerings, it might 0:17:45.119 --> 0:17:48.200 be in the form of additional shares of the company. 0:17:48.880 --> 0:17:52.679 Venture capital companies are also betting on long shots, but 0:17:52.720 --> 0:17:56.480 the general ideas that while most startups do ultimately fail, 0:17:56.840 --> 0:18:01.160 some will succeed, and if you're really wise with your 0:18:01.200 --> 0:18:04.920 investments and you have a wide enough spread of those investments, 0:18:05.359 --> 0:18:09.320 then hopefully the successes will more than make up for 0:18:09.520 --> 0:18:12.879 the failures. If you lose a million dollars on startups 0:18:12.920 --> 0:18:15.880 that ultimately fizzle out, but you make ten million dollars 0:18:15.880 --> 0:18:18.840 on the one that went to the moon, well you 0:18:18.880 --> 0:18:22.160 could say that it all paid for itself at the end, right, 0:18:22.160 --> 0:18:24.600 like you made a huge profit. That's not how it 0:18:24.640 --> 0:18:28.480 always works out, but that's how the game is played now. 0:18:28.520 --> 0:18:32.359 Startups might seek multiple rounds of venture capital funding. They 0:18:32.400 --> 0:18:36.720 typically do. It is typically required before a business can 0:18:36.800 --> 0:18:41.320 really establish itself to a point where it can really 0:18:41.359 --> 0:18:45.160 become a success. So the first round, usually called Series 0:18:45.240 --> 0:18:48.120 A funding might happen when the startup is still kind 0:18:48.119 --> 0:18:50.600 of figuring out its place in the world. Part of 0:18:50.800 --> 0:18:54.520 what determines the funding rounds is that venture capitalists try 0:18:54.600 --> 0:18:59.040 to figure out a valuation for the company. Valuation essentially 0:18:59.040 --> 0:19:03.960 means how much is that company really worth? And worth 0:19:04.080 --> 0:19:07.480 is It's a subjective thing. There are actually different ways 0:19:07.520 --> 0:19:10.000 that you can come at a valuation for a company, 0:19:10.320 --> 0:19:14.399 and it's not necessarily that one way is better or 0:19:14.440 --> 0:19:17.800 more legitimate than another. It all depends upon your perspective 0:19:17.840 --> 0:19:21.240 and the point that you take, the approach you take, 0:19:22.200 --> 0:19:25.600 But it typically involves things like figuring out like how 0:19:25.960 --> 0:19:28.840 experienced is the team in charge. If it's a team 0:19:28.840 --> 0:19:33.080 that has a series of wins in its past, that's 0:19:33.119 --> 0:19:35.959 going to add to the value the perceived value at 0:19:36.000 --> 0:19:39.639 least of the company. How good is its business plan? 0:19:40.080 --> 0:19:44.920 What assets does the company have at its disposal? These 0:19:44.920 --> 0:19:47.320 are all different questions that kind of contribute to it, 0:19:47.359 --> 0:19:52.200 and then ultimately the investment community figures out, well, we 0:19:53.320 --> 0:19:56.159 estimate that the value of this company is x amount 0:19:56.240 --> 0:20:01.399 so that's what the investments kind of reflect. The investments 0:20:01.400 --> 0:20:05.159 reflect the perceived value, like what is the future of 0:20:05.160 --> 0:20:08.720 this company, what could it be worth five years down 0:20:08.760 --> 0:20:14.199 the road, And that ends up informing investors. It's not 0:20:14.240 --> 0:20:16.840 always right. There are a lot of companies that end up, 0:20:17.000 --> 0:20:23.000 in hindsight, having been highly overvalued and investors board way 0:20:23.080 --> 0:20:27.640 too much money in that. Again, with hindsight, you could say, man, 0:20:27.720 --> 0:20:30.840 there was just never any chance that that business was 0:20:30.880 --> 0:20:35.399 going to realize the value that was poured into it. 0:20:36.400 --> 0:20:39.760 Like if someone's poured a billion dollars into a company 0:20:40.119 --> 0:20:42.080 and there's just no way that that company is ever 0:20:42.160 --> 0:20:45.240 going to be a true billion dollar company in the 0:20:45.240 --> 0:20:48.200 sense of it it's really worth a billion dollars, Well, 0:20:48.200 --> 0:20:51.240 that's a big loss. It also means that you're inflating 0:20:51.280 --> 0:20:55.880 a economic bubble, and if that bubble ever deflates or pops, 0:20:56.440 --> 0:20:59.520 then you're going to see a huge collapse. We saw 0:20:59.520 --> 0:21:02.320 this with the dot com bubble, and you know, you 0:21:02.359 --> 0:21:05.960 could argue that we've saw it or we're seeing it now, 0:21:06.320 --> 0:21:10.600 like we're seeing the deflating part now, But that's more 0:21:10.640 --> 0:21:13.720 complicated because it involves other economic issues as well. Anyway, 0:21:16.240 --> 0:21:18.800 when you're going through Series A funding. As a business, 0:21:19.000 --> 0:21:22.800 you might actually still be trying to figure out things 0:21:22.840 --> 0:21:25.520 like basic stuff like, Yeah, I've come up with a 0:21:25.560 --> 0:21:29.800 product or service, but is there a market for that? Right? 0:21:29.920 --> 0:21:33.399 What is the market for this thing I'm creating? Is? 0:21:33.560 --> 0:21:37.680 Does one exist? If not, can I create that market? 0:21:38.359 --> 0:21:41.800 You know, if you have something that addresses a challenge 0:21:41.880 --> 0:21:45.600 or a problem, then that's one thing. Right. You could say, Hey, 0:21:45.640 --> 0:21:49.720 this thing I've created, it solves this problem you have, 0:21:50.160 --> 0:21:52.760 and it does it better than anything else out there. Well, 0:21:52.800 --> 0:21:54.480 then you say, okay, there is a market for this. 0:21:54.640 --> 0:21:56.919 The question then is how big is that market? But 0:21:57.000 --> 0:21:59.560 it might be a case where you say, the thing 0:21:59.600 --> 0:22:03.400 I have of solves a problem you didn't know you had, 0:22:04.160 --> 0:22:07.080 and maybe it really is a problem. Maybe it's just 0:22:07.160 --> 0:22:10.840 that you're doing something differently than you had before. Maybe 0:22:11.320 --> 0:22:15.000 the way you're doing it differently is better, or maybe 0:22:15.080 --> 0:22:18.439 it's not. Here's the crazy thing. The success for the 0:22:18.480 --> 0:22:23.480 business doesn't necessarily matter on whether or not the projects 0:22:23.560 --> 0:22:28.120 or service really is better than existing stuff. A company 0:22:28.200 --> 0:22:32.600 might succeed or fail completely independently of that. Because life 0:22:32.720 --> 0:22:35.720 is not fair. Okay, we're going to take another quick 0:22:35.720 --> 0:22:38.240 break when we come back, I'm going to wrap this 0:22:38.359 --> 0:22:41.679 up and talk a little bit more about the process 0:22:41.800 --> 0:22:54.640 of funding. Okay, So we were still talking about series 0:22:54.720 --> 0:22:58.160 A funding, where venture capital companies come in. So typically 0:22:58.600 --> 0:23:02.240 you might have a single venture capital company acting as 0:23:02.280 --> 0:23:05.600 an anchor here, and maybe a few other venture capitalists 0:23:05.920 --> 0:23:10.000 come in and also invest in a Series A round. 0:23:10.359 --> 0:23:16.560 Series A rounds typically are not ginormous. They can be 0:23:17.400 --> 0:23:19.919 in rare occasions. For a while it seemed like that 0:23:20.000 --> 0:23:21.879 was just going to be the trend, but that was 0:23:21.960 --> 0:23:24.800 when people were getting real loosey goosey with their money. 0:23:26.280 --> 0:23:31.160 But often there it's not small because we're still talking 0:23:31.200 --> 0:23:33.640 in the tens of millions of dollars, but small lur 0:23:34.119 --> 0:23:39.240 Then subsequent rounds of funding would be so you hold 0:23:39.240 --> 0:23:42.840 your Series A funding and you typically have maybe one 0:23:42.920 --> 0:23:45.920 or two anchors that hold that down. And this is 0:23:46.600 --> 0:23:48.639 you usually don't see a lot of other like larger 0:23:48.840 --> 0:23:52.320 financial institutions jumping in at this stage. It typically is 0:23:52.359 --> 0:23:54.879 still venture capitalists because we're still talking about a pretty 0:23:54.960 --> 0:23:58.919 risky kind of investment. Some of those investments will have 0:23:58.960 --> 0:24:01.120 like a set amount of time on them when they're 0:24:01.160 --> 0:24:06.760 supposed to be paid off, and the startup will have 0:24:06.880 --> 0:24:10.960 to pay back that investment with whatever return on top 0:24:11.000 --> 0:24:15.320 of it was promised. But then there's usually more than 0:24:15.359 --> 0:24:20.120 one round of funding. Series A helps establish things, but 0:24:21.000 --> 0:24:24.640 it's not unusual to see a Series B round of funding. 0:24:25.359 --> 0:24:27.280 This is where you might see a couple more venture 0:24:27.520 --> 0:24:31.760 capitalist companies get involved. You still may not see that 0:24:31.880 --> 0:24:36.800 much from larger financial institutions at this stage, but it's 0:24:37.240 --> 0:24:40.159 if a company seems to have promise that it's on 0:24:41.000 --> 0:24:44.080 a forward momentum, then you might get a little bit 0:24:44.119 --> 0:24:47.359 more in the investment community pouring money into Series B. 0:24:48.040 --> 0:24:51.120 This typically is really focusing on scaling up a business 0:24:51.920 --> 0:24:55.640 and making sure that it can meet a global demand. 0:24:56.359 --> 0:24:58.720 Really important for tech companies, right, because a lot of 0:24:58.760 --> 0:25:04.400 tech companies digital company needs. They're not limited by geography, right. 0:25:04.440 --> 0:25:08.320 It's not like they're making a physical thing that they 0:25:08.320 --> 0:25:11.760 can only ship to certain places. They're making a digital 0:25:11.760 --> 0:25:15.440 product that at least in theory, could be accessed pretty 0:25:15.480 --> 0:25:18.480 much anywhere where you have a connection. You want to 0:25:18.520 --> 0:25:20.640 be able to scale your business so that you can 0:25:20.720 --> 0:25:23.639 meet the global demand, which means you've got to have 0:25:23.720 --> 0:25:26.639 access to all that compute power, storage power, all that 0:25:26.720 --> 0:25:29.639 kind of stuff in order to do that not have 0:25:29.720 --> 0:25:33.400