Golden Triangle Angel Network

"Yes you need business plans and those sorts of things but anyone who's been in these industries knows a lot of those business plans is less about the plan, because the plan will be garbage within, you know, 30 days to six months... Because things change, it's more the thought process that you went into in developing the plan in the first place. So it's the process of creating the plan that demonstrates to an investor whether you're a serious person or whether you know you have weaknesses in certain areas of your your team or yourself as a CEO or a founder."

- Jon Oberholzer

Jon outlines what he looks for in a start-up

Talk Takeaways

Jon Oberholzer gets real with Jeffrey as they discussed the importance of honest plans and how it’s important that the start-up team recognizes both their strengths and weaknesses when making a pitch. It not only shows their authenticity but it also displays the teams’ humility and understanding of what they need in order to grow their business.

Jon also discusses the verticals he is interested in, the roles he plays as an angel investor, and his insights on investing during the time of the pandemic.

About

Jon Oberholzer has been active in the Waterloo Region tech community for over 25 years. A graduate of the University of Waterloo (B. Math ’95), Jon has served in a variety of technical and managerial rules at Research In Motion and Waterloo Maple Software. He is currently the Manager of Intellectual Property at Dejero, where he was an early employee and investor. He is also an active angel investor.

The full #OPNAskAnAngel talk

Jeffery:
Awesome well welcome everybody today we are speaking with Jon. And John I’m going to say your name last name but i want to make sure i don’t say it wrong is it ober osler?

Jon
Holzer. Holzer. Head woodsman in German. Yes Oberholzer.

Jeffery:
Ober holzer. Okay awesome well we don’t want to mess that up especially when we’re sound biting that won’t sound very good so everybody welcome. We are at OPN and today we’re going to be diving right into and learning a lot more about angel investing yet again and Jon’s going to walk us through that but Jon why don’t you give us an idea, a little bit about yourself, some background. Just to kind of shape this conversation today.

Jon
Sure. I’m a tech investor and employee out of the Waterloo area, Waterloo grad. I have been involved in angel investing for technically maybe seven or eight years but probably a little longer than that when you look at what my first investments were back in back in the 90s when i kind of got into the industry.

Jeffery:
Awesome and I guess what is the reason you decided to get into angel investing? What was the traction? What drove you into?

Jon:
It well if you go back to my early investments, what really got me into startup and startup like companies is the job that i had out of out of university so I worked at a company called Waterloo Maple as a co-op for several years. During the time i was a co-op I wasn’t allowed to own shares because you had to be an employee to own shares at that time so the minute I became a full-time employee i jumped in there and bought whatever shares I could technically not an angel investment in normal sense, and they weren’t a startup, and they’d been around for a few years, and had maybe 25-30 people at that time; but the idea of I want to be a part – a partner in whatever it is that I’m spending my time on was a real idea. Then a little later on I went to Rim where i didn’t need to purchase any shares because you got options at that time. That was a big thing in the late 90s. I spent 10 years, they were 10 very successful years and then took a little break. Moved on to a company called DJiro and that was where you’d probably have my very first real angel investment in in around 2009. So I started there as employee, was getting some shares as an employee, getting paid out that way because we were really three or four people at that point. And from there… actually that was great.. We were getting paid in shares but they had to have cash to pay the other part of my compensation and we had to hire other people so they need to do some raises. So that’s when I kind of got engaged in it a little more deeply. Had a few years then without making any new angel investments but moved into G-Tan through in 2011 or so as the result of an of another round of investment in DJiro where you needed to be a member of an angel group in order to get matching government funding or whatever the story was at the time. So I magically became an angel investor at that point and from there started to invest in a lot of more local startups .

Jeffery:
Oh that’s awesome. And is there, while you’re going through this process, was there, you obviously started earlier on by doing this through employment, then it became a bigger piece you started to enjoy it, really wanted to have more of a stake in what you’re working in. But then obviously spreading this around what was the real driving force behind it? Was it because having an ownership stake? Or was it something else?

Jon:
Initially, it was the ownership stake but as you get on in your career, you find that you realize that you’re not going to be able to do everything. And I enjoy deep commitments at the places i worked at, you know, i’m not somebody who just is in and out within a year or what not. So in order to kind of have a broader range of experiences, angel investing for me is a way to use a way to accomplish that. I’m involved in a lot of tech companies, directly or indirectly in ways that I couldn’t be if i was simply an employee. So for me that was a real motivation to get more deeply involved. And there’s an element once you get a certain place in your career, of setting up the next generation of startups and businesses. If someone hadn’t done what I’m doing now back in the 80s, the companies that i started with in the 90s wouldn’t have existed. So there is that element of it too. And for me while i will i have a relatively broad, within canada, geography that I would invest in a lot of them do flow out of the local community here in Waterloo.

Jeffery:
Well that’s great. And being a tech guy myself as well, I looked at it pretty much the same way when i was working in early stage companies, bringing them into Loblaws even though they may not have really wanted me to. But i got so much traction from it. I never, at the time, could invest. But man as soon as I got out, that’s all I could think about. How do i actually help more and invest in some of these companies because from a grassroots standpoint, it not only creates jobs but it drives a lot of the industries and you get to learn a lot more. And how else can you learn if you’re not just in depth with all of them. So that’s pretty cool, that you’re doing that. I find a lot of tech guys kind of have their way of trying to get in beside the tech and figure out how they can grow and learn and add extra value to them so that’s awesome. So in that kind of last 10 years that you’ve been kind of shifting around, investing and doing that, what’s the favorite part that you have, what really makes this work for you?

Jon:
I enjoy interacting with the entrepreneurs. Often pre-investment is is when you spend the most time with them. For better or for worse, sometimes, they’re just not as interested after they have your money but and sometimes they’re just growing and moving and but having been involved with the local angel group for again the better part of eight or nine years, and spending time working in the selection process for the companies that come forward, I really enjoy that some of the really really early stage and helping them shape their idea a little bit and shape the way that they talk about it to to investors that is something that i really enjoy. And as you mentioned the learning aspect of just new technologies, new areas of technology that you don’t get into, if you’re focused on one company when you’re the one you’re at it. A lot of tech people you can get focused on that one thing, and very deeply, because that’s your nine-to-five job and you don’t get exposed to other things that are going on in the marketplace and in technology without kind of seeking it out – and by working with the startups, you really do get to see you get to see the future in a certain way.

Jeffery:
Right. I really like the idea that you you’re working with them in early stage, really early on. Helping them shift and shape those ideas and, then probably go to market within a year or whatever that time period is. A lot of people don’t really find that part the best to get into because it’s the hardest part. You’re really spending a lot of time with the entrepreneur to figure out how to shape them through, their business, their modeling either financial look outward or forward-looking, documents all these things a lot tougher for someone to grasp. Big fan of that as well, but I think that it really does help shape that entrepreneur going forward but then when they start that next company, they’re going to come to you for that too right, so you really are getting a really advanced structure with these early stage guys and women that are launching companies so that’s pretty exciting. Is there a is there a number of companies that you look at investing in per year? Do you do it more as filling gaps in a portfolio? What kind of — is your structure on when you look at investments?

Jon:
The number of companies, there is some variation, it’s not like i set out at the beginning of the year to say i want to invest in only this much or i’m only going to put this much capital forward. It tends to work out that it’s somewhere between zero and, in my case, as many as four. Usually less than that but maybe one or two new companies a year. And as as your portfolio builds over the years, that number doesn’t necessarily go up, it goes down because you end up making a lot of follow-on investments to your existing companies. So with with a lot of angels, where they are in their portfolio is going to depend on how many companies they’re actually going to be seriously looking at.

Jeffery:
So in that and you mentioned that you have follow-on, so is there a percentage that you look at inside of all of your investments? You set aside 30 percent or again this is just i’ve got a bucket of money and I’m just going to figure out how i do it each year and if some go into reinvestments versus new then that’s what I do.

Jon:
The latter. it’s really opportunistic and you don’t necessarily go in saying i’m going to reserve three times my initial investment in this company. Because the way i tend to invest is with other angels, through angel groups, so you have other capital along with you in that round. I typically avoid being the loan investor because i don’t have enough capital to do that right and you need to understand as you get into these companies that both as the entrepreneur and as the investor that they’re going to need more capital. In fact the successful ones almost always need more capital. So you need, you do need to factor that into your your investment style and also you don’t know necessarily which follow-on investments are going to be because the company’s doing very well and you know that the valuation may have gone up greatly and you may decide not to participate in that in that deal because it’s not as an attractive evaluation. Other times the company’s prospects may be excellent but because of a cash crunch you need to get in there as a defensive mechanism just to defend the rest of your investment.

Jeffery:
Now that’s smart. You really do have to kind of play it by ear because some companies will be doing well and you might see that it’s at 10 million but they’re closing the round -they don’t really need your money. So you can shift over to the ones that are a little bit more uh desirable in the sense that maybe they haven’t got to the 10 million yet but they need that next round to get it closed. And sometimes that follow-on investment you make actually probably will help them, because it helps other investors come on too right, it really de-risks it by seeing that you’ve come into multiple rounds, and they believe that if you believe in this herd mentality as well if Jon’s in twice and he’s coming in again i better follow suit and jump back into that as well.

Jon:
And that definitely happens at times. At other times when I even when I’m not investing, i’ll still give the other investors my honest opinion of where things are at and how the entrepreneurs are to work with. So it’s important for the entrepreneurs to communicate well with their investors because even if that investor is not going to give you more money in a future round, they will know other investors who they can either encourage to give you money or encourage not to give you money.

Jeffery:
Yeah. No, that’s a good point. Is there any verticals right now that you’ve been really focused on in the last little bit because of covid but just in general that you really like?

Jon:
I tend to avoid the hot sectors like that. So i mean you know if you look back over the last five years, you’ve had things like driverless cars, cannabis, blockchain, you know and some of these things come up as big hot areas and a lot of the it’s a lot of it is hot garbage. The companies that come out because it’s just um they hear there might be money in this and let’s all run into this. So i tend to shy away from some of that stuff just because it doesn’t necessarily turn out that well. Right, it gets a lot of people excited but you really have to when there’s a lot of companies especially going into those spaces, now you have the risk of selecting the right company because when many of those companies are looking for money, they’re not all going to survive and now you’ve just, you may have the right sector, but you picked, you know, two or three of the wrong companies and you messed up that way. With me it’s it’s less about the vertical itself. You do tend to gravitate to things you understand to a certain extent, so certain types of technology, communications, video, things like that, in my case, because i have that background. Those are things that i might look at a little more seriously or be of more assistance to my fellow angel investors as they explore those those opportunities. Having said that, you don’t necessarily limit your vertical. Sometimes i’ve had things that are kind of off-the-wall that I’ve invested in. Sometimes successfully, sometimes not. Just because it was an interesting new thing and i wanted to have some exposure to that new industry some of that you can get by just by analyzing the companies and seeing different business models. sometimes you don’t, sometimes you need to actually jump in and see how it unfolds. If there’s any, it is for me, it’s less of a question of the type of vertical, it’s it’s sometimes the type of business and the type of market. So I tend to be more interested in this B2B place rather than B2C place. Or if there is an ultimate consumer angle it has to be driven by somebody else, not not by the entrepreneur because, I again, some of these become moonshots or everyone is going to have one of these things that I have well they’re probably not, that’s probably that’s a very low probability bet. If it’s a b2b play where i can understand why a business would save money on this or help them with their sales or whatever I know there will be a market for it. You don’t have to worry about developing the market because the need for it within that industry will be obvious. The upside may not be as massive at first, although even then you can find that once you develop that technology for one market, you can adapt it for something else where some of the BDC plays or a consumer product play or a mass application of some sort that’s a really, you’ve really got to believe in the entrepreneur and their connections in order for that type of thing to to be appealing. Because usually they end up sputtering out in my experience.

Jeffery:
So you’re really trying to figure out is, you know if it’s when they’re in this early stage is there adoption and if there’s a possibility of broader adoption in a business sense that if this can get picked up and utilized in Toronto, then it should be able to do the same thing in New York, same thing in Madrid, wherever that might be? So you kind of have to look at a broader view of where this potentially can go in order for you to really want to dive into this and say, “you know what, okay, I get where you’re coming from and I can see it going here so let’s dive in and really start to explore this more because there’s a bigger opportunity here.

Jon:
Yeah, and sometimes that may be location, sometimes it may be by industry, but there has to be enough of an initial industry where i can say “yes, it makes perfect sense that somebody in this business would want this product because it helps them in an obvious way”. And it’s not merely a fashion thing which is some of the B2C stuff, where it could be maybe take off but maybe it won’t and it can often take a lot of money in the marketing of it. And again back to the verticals, a lot of times I, you know, I”m not interested in pure marketing place i’m not interested in branding plays that’s just not my thing. Some investors love that, I don’t I’m more into something that’s more interesting technologically and has some, again, obvious benefit and obvious use.

Jeffery:
Is there any while you’re going through this process, figuring out that it’s got some larger broader markets when you’re starting to jump into the dd side and going into due diligence, is there any materials or things that you have to really see before you’ll make any sort of commitment?

Jon:
There’s a standard package of things and depending on the angel group you’re dealing with they’ll give you a whole list. It might be two or three pages of stuff. Anything from basic corporate information, have you gotten incorporated? Basic things – if you’ve got basic employment, agreements with your key people, have you got a basic understanding of what the share structure really is versus what you think it might be with your co-founders. If those things aren’t dealt with and clear and then forget it. I mean there’s no point getting involved in it. Yes you need business plans and those sorts of things but anyone who’s been in these industries knows a lot of those business plans is less about the plan, because the plan will be garbage within, you know, 30 days to six months whatever. Because things change, it’s more the thought process that you went into in developing the plan in the first place. So it’s the process of creating the plan that demonstrates to an investor whether you’re a serious person or whether you know you have weaknesses in certain areas of your your team or yourself as a CEO or a founder. Some of that can come out in those sorts ofdocuments right where you’re not even thinking about some basic areas of the business. But most people wouldn’t obsess on that stuff, those are those are things that you can easily get back and forth with questioning but anything to do with existing finance if you have other debt, if you… those kind of low-level corporate things. If you don’t have that stuff forget it. Right? Because now you’re just taking a massive risk. The other way I reduce risk there with the due diligence process is again by working through angel groups and other investors right, because I have certain areas of expertise, I have certain areas where i know nothing. I can read a financial statement but that’s not my area of interest and it’s not my area of experience. So i know that there will be other people in the group who may have those areas that they’re interested in. I can look in IP in a fairly detailed way because i have that kind of background. i can look at the tech in a certain way because i have that kind of a background and i can provide great assistance to my fellow angels in looking at those areas. So for me it’s less about you know everything in the due diligence room, I don’t need to necessarily look at everything in the due diligence before writing a check but it kind of needs to be there.

Jeffery:
Yep, that makes sense. Well, you’re crossing off all your t’s and dot your i’s just to make sure that all the information is there. So if you do need it you can go through it but the things that matter to you the most are going to be, around probably, the model, the user, or.. the sorry, the ceo and all those other pieces other attributes. Is there a timeline that you look for when you’re making an investment? Like you want to close this off relatively quickly? Or you kind of just go with the flow? Is there something people should look forward to?

Jon:
i would have i avoid things that are real quick. Like I mean, you make those mistakes early on when you’re investing sometimes. oh you got to get in now, oh it’s a minimum of 50,000, oh it’s…. no yeah… you know again I’ve learned those lessons, in some cases the hard way, fortunately not too many cases the hard way. But the idea for it, for an entrepreneur is you do not push too hard on the investors, so that means you need to be, as an entrepreneur you need to be way ahead of the game. You cannot go a month or two before you think you need the money or before you’re going to run out of money, and ask for money because the odds of everything coming together aren’t that high. The reality is an angel investor, I don’t need to write you a check ever. Right. And it’s not like that I have some power over you, you don’t need to have me as an investor either but the reality is you still need money, I don’t need something to invest in as an angel, that’s different than say a VC in some cases where that’s their business. They’re going to have to put money into businesses over time because otherwise the VCs don’t make money because that’s how they make money from people. As an angel it’s a completely different thing. So if i’m completely put off by the the speed at which you want to do something, you know that may just kill the deal right there. I understand, again, having been on the other side of it that there are times when you need to close more quickly but the way you make that happen is by having your due diligence material ready. By having your pitch done up front and by, you know, communicating well with the potential investors and not waiting until the last minute because you’re really living dangerously when you do that. I it usually takes at least after a major pitch, it would take at least a month, or two before everything closes. Especially, especially if it is your first investment and you don’t have, you have never gone through a shareholder agreement those sorts of things. We didn’t really talk about the due diligence portion but those are things, especially for the first timers, if you have not done those before, sometimes the the speed of the thing is now back on the entrepreneur because they don’t know what to do because they’ve never even considered these things before and they’ve got potential investors throwing all these clauses at them, in different terms, and that can slow things down. So know what kind of what you’re looking for upfront and that’s hard for an entrepreneur because you have to be focused on your business, core business first. But you’re going to be raising money all along so the more you can kind of learn about different aspects of financing before you need to know them, the better off you’ll be when you’re in that situation. So yeah, several months always and if you’re actually haven’t even engaged in angel group yet for instance, you’ve got to add another couple months to that so you want, you need to be looking six to nine months probably before you need the money and you may need it before you know precisely what you need the money for or precisely when you’re going to need the money or and how much money right because all that is going to be negotiable and changeable based on what’s going on in your business, and based on the investors that you actually are able to get interest from.

Jeffery:
Yeah. I think you really kind of put this together in a nice little package but you’re right, there are so many moving parts and not only is the entrepreneur having to learn and figure out how to run their business, they also got to figure out how investing works, what are the types of terms ,what are the documents, and all of those things all have to coincide with i got to be here in a year and in order for me to get here, I’m going to need a year to figure out how to go through all these pieces, raise some coin, and if it takes me a year, man, i almost should start raising money before I even started to really get on the street and sell my product. And it is crazy how much time it takes to do all that, but well said ,i think he kind of nicely layered that out so inside of this the DD you’ve got this business, you’re structured, it’s ready to go, you start to dive in, you’ve gone through all the paperwork everything’s kind of in that dropbox folder, you’re going through it all what are the other characteristics that you look for in a deal that really stand out for you? Is it team, is it the CEO, is it the product, what things do you really want someone to focus in on when they’re coming to Jon, saying “Jon, I want you to invest in me” and they’ve got to have these things lined up?

Jon:
The CEO and the team are definitely major areas of concern or interest in considering any investment beyond the normal due diligence materials. In some ways is something you can’t necessarily if you’re already at that stage, there’s nothing you can do about it. You are who you are. But knowing who you are and knowing where your weaknesses are is very important. Because the reality is any entrepreneur who comes in front of any investor is going to is going to have certain blind spots, the team is going to have blind spots and you need to have some idea as to what those blind spots are so that a you can have the humility to ask for help from whoever the angel investors are. Far too often, I find particularly amongst technical founders and you get a lot of that here in Waterloo, where it’s a bunch of people who are highly technical, they have no one who has any concept of accounting or sales or any of those things but they don’t seem to understand that they need to know those things. Right. If you know that you need to know that, any kind of team you know can work. Right. But and on the other side of the equation if you’re weak technically but you have an idea and you’re a go-getter and you want to start a business, you’d better know that you don’t know certain things about tech and you need to be able to communicate that in a way that tells the investor that you’re aware of that rather than letting the investor figure that out for themselves. Right. You don’t spend your time when you’re pitching to an investor saying here’s all the you know, i have 10 minutes with you, here’s nine minutes of all the bad things about my company, will you invest in me? But you better spend a minute or two of that answering the questions preemptively with your own narrative about the things that i’m probably going to ask when i’m actually going through the investment process. So if you can kind of seed that and and know what your weaknesses are and be able to kind of again shape that conversation, you’re going to be in a better position than if you pretend these things aren’t existing or hoping that i’m not going to notice. I probably will notice and if I think that either a you’re playing me and you just have this big hole and you’re not telling me or that you just don’t even understand that you’re in this hole that makes it far less attractive to invest in you.

Jeffery:
So you’re pretty much saying just to open up pandora’s box. Make sure you’re sharing a little bit of everything there are weaknesses, it’s not a bad thing to share the weakness that you have but allow everybody else to make their own decision from that versus when everything hits the fan and now you’re relinquishing information that you’re not good at finance or you’re not good at technical side or you have no sales you thought you would and now you’re just a platform that no one’s visiting because you didn’t look at all aspects of the business.

Jon:
Yeah, yeah. And again even the process of going through and determining those weaknesses is going to help you shape the narrative, right? And it may help you shape the questions that you have, or the type of it’s much better if you can say “here’s an area where we’re weak in, Jon, do you know anyone or do any of you investors — if you could help us in this area that would be great.” Okay, because as an angel investor makes me feel good, makes me feel smart – okay and i mean i’m not saying you butter all the investors up all the time because we can see through some of that too. But it makes me see oh i can add value here, i can add value to this person by introducing them to somebody else or here’s somebody i know who’s currently not employed in this area but they’ve had this expertise I can help bring them in. You know short term, part time whatever to help you through this problem so you can kind of rocket the business forward once you have some of these things taken care of.

Jeffery:
No, i love that the the weakness, as you mentioned, it kind of helps you build that narrative. I love that line but it also like that when you shifted that to sharing what that one weakness is it allows for other people to find ways to help. And i think a lot of entrepreneurs tend to not show any cracks until the cracks become too big and then it’s irreversible and then you’ve kind of got yourself into a bad position but showing these cracks, I think, we’re a good thing and what we try to do with some of uh the startups when they’re pitching is we always try to steer the pitch deck by leaving one or two doors open in the pitch deck for questions. Because then those allow you to speak to them and be able to share more about where you can use help and then the investors on the outside who were just interested in your company, they now have a reason to reach out to you because you’re compelled to want to help somebody if you open a door for that help to occur and if you try to hide it then no one will ever want to have an interest so you kind of almost want to have those spots in those cracks because then people will say hey I know this person that can help you with this and now you’re going to feel more comfortable that people have an interest in what you’re trying to achieve because they find a way in.

Jon:
And i mean those of us who’ve gone through this in, from a startup perspective okay and not every angel investors have, some are strictly from finance or this or whatever other area and they’re perfectly valuable angel investors and it can be extremely valuable especially if you’re a tech person and don’t have that background. But for those of us who have lived through that, i have seen either ourselves or other founders go through hassle after hassle after hassle. We know how hard it can be right and we know that there’s not going to be one hurdle there’s going to be 50 hurdles and if you actually understood all those hurdles you probably wouldn’t do this in the first place because you’d realize how hard it is but the fact that you can even identify the first few hurdles, okay is again a part of the resilience that you need to have as an entrepreneur because we know you’re going to run into these problems. If you’re just totally oblivious to it, and not willing to consider the weaknesses that are there, then again, that tells you something about that entrepreneur. And as an investor if i don’t have confidence that this person will be able to deal with this whatever the hurdles are that are going to come up and the ones that none of us know about well why am i going to invest in them because there’s just going to be problems there.

Jeffery:
Agreed no that’s very valid. While you’re kind of making your way through this due diligence now, and you’re learning a lot more about the entrepreneur, you mentioned this earlier that you won’t go alone in investing. Will you lead around to kind of help move this forward and find the right investors?

Jon:
Help move it forward yes. What that looks like, again, depends on the deal. In some cases that will happen more in maybe in companies i’ve already invested in, where i can help move it forward by you know sharing my experiences with it. In other cases you know i mean I’ve led rounds that turned out to not be rounds, right, because i would be the lead investor in something and part of my role was to say we’re not doing this deal because we found this or that or assessing interest. So different people in the angel groups are more natural at that sometimes. Sometimes it’s the biggest checkbook that takes the lead, sometimes it isn’t, sometimes that person isn’t necessarily the best person to drive the lead they’re just there to write a check. It really depends on the situation and the group of people you’re interacting with, so I don’t object to having to lead around but i don’t necessarily need to i don’t feel that if there’s someone else who has skills especially if they have skills, back to the topic weaknesses, if they have skills that i don’t have that might be more applicable to this entrepreneur and in this deal then by all means jump in and lead.

Jeffery:
Well that’s great. And interesting that you say that, in a deal that we’re working on right now, I’ve never, well I guess, in a way we lead the deals that we’re in because we’re structuring this startup to be ready for the investment. Once everybody else jumps in, if someone’s coming in with a higher dollar, awesome, but we’re leaving it in the sense that we’re going to invest so we’re lining it up properly for everybody, we’ve got all of the paperwork, due diligence all that good stuff. But it’s interesting in this last one and this comes through all of these different interviews that I’ve been doing. i’ve actually been matching up, I’m like okay this industry, this option has come up, this business i really like it and i’m trying to close on them. So I’ve actually started to reach out to people that actually have an interest in this space and said “hey look, here’s a way we can do this, you can come in through here we’ll go in and do it this way that way they win they get the launch, they’ve got 18 months of runway, everybody’s happy”. Where I’ve never done that before because everybody just pulled in and you got to work with everybody who’s there, in this case everybody’s not pulling in as fast, so now i’m trying to pull different levers, I guess, to get those people that are really honed into that type of industry and bring them in. And I’m finding actually that it’s a lot easier, so because i know that this is a focus for you man it’s so easy to call you and say “hey i got this really good company does this… They look at you and like yeah love it I’m in. And that was so much easier than trying to buckshot spray and herd everybody in and try to go through the funnel so yeah very valid point for sure. So now you’ve gone through this, you’ve got people lined up, everything’s good, do you have any preferred terms?

Jon:
Terms i would prefer under ideal circumstances would be comments. I’m happy to go alongside the entrepreneur unfortunately given some of the market conditions and again having learned the hard way, sometimes you have to have certain protections. So sometimes it could be in the form of a convertible where you technically stand in front of the folks and there’s some time sensitivity to it, right. So i’m going to keep earning interest or if you know which i’m not going to collect as interest, i’m hoping to collect it in whatever discount I get later because if if you’re not doing well i’m not i’m going to lose my money, and if you are doing well i have the advantage of you’re going to want to do well more quickly as the entrepreneur. So things that have a time component like that can be helpful for an investor not not because again we think we’re going to get our money back in a loan situation but because it puts the pressure on the entrepreneur to get their act together right you’ve promised us all these things, if you don’t do them the way you said you were going to do them that’s great, I’ll leave the company so i mean there’s a little bit of pressure there. Other terms that i have seen that I like… I don’t like prep shares per se because the cap table gets complicated enough later on when people come in but i have found that things that allow me basically a free upgrade to whatever the next round is can be attractive to a lot of angels. Because that way I don’t have to worry about negotiating and grotesque detail right now. Okay. so it’s not it’s not like a safe but it is safer for me as an investor to know that i’m not going to get totally hammered by some VC when you’re desperate for money. You’ve kind of gone out, you know you have control of the board, you have control of everything, and you’re just going to hammer me with terms and they’re going to get multiple time liquidation preferences and they’re going to get all this stuff thrown in their deal and i’m just going to get crushed, right. And you know the management or they may get, you know, options magically thrown at them, you know a buddy-buddy style by the VC and i’m just getting killed as an investor. So those sorts of things that offer me some protection in the next round are good. That some of that is in the deal itself, some of that is in the shareholder agreement, in the way that’s shaped right so that I’m not getting that i can at least participate in these things as they as they happen. But no, I mean I’ve invested in various kinds of deals I have somewhere, i have craft shares, I have some convertible debentures, i’ve had some that are straight commons.

Jeffery:
And you’re pretty much even keel with all of them as long as there’s a value for you in the next round and you’re also able to make sure you’re not being backdated per se to a VC that comes in. So you’re making sure your rights are still maintained in that shareholders agreement or in the equity that you’re getting if it’s pref shares or if it’s convertible note whatever that might be.

Jon:
Yeah and I mean i don’t object when a VC maybe has a non-participating pref where if things go badly they get out first. But you know and i’m probably going to lose anyway but if they win i object to the ‘they get the first two or three cuts at it’ before i see anything . Right now, I”ve taken all the risk at the low end and i’m not getting anything at the higheend because the really high end is probably not going to happen just probabilistically they, the VCs, will sell you that and they’ll sell you that by, i don’t want to be anti VC, but they have their job to do and they but they know all the knobs and dials to turn, to get you to do what they want you to do. They do this all the time. And they know how to “manipulate”, this maybe a harsh word, but work the entrepreneur so that they too define it what the entrepreneur wants. If the entrepreneur wants a magic number, that’s you know 100 million valuation or 200, they can make that happen. They’ll get it somewhere else, in a way that’s probably going to hurt the early investors but they can make whatever they want happen just by twirling knobs in the deal. That goes back to why i want some of the protections and I think some of the particularly, from some of the US guys who come in, they have their own way of doing things, and as Canadian investors, we want to make sure that we’re not just being used as first capital and not getting to participate with when things go well.

Jeffery:
Exactly, and then losing the value. Do you look at taking aboard seat at all?

Jon:
In some cases yes, not necessarily me personally. Again, back to the situation of who is who among the investors makes the most sense right. And again sometimes it will be the person with the most money will make that rule and will decide well they want to be on the board. In other cases, it really is a conversation among the investors to say who is the best person for this board, what is the goal that they need, what is the governance need that they have, and let’s make sure that person with that set of skills is on there and that person may change over time. It often doesn’t. You know, we’re not necessarily as good at that as we should be, as far as swapping out investor reps on the board but definitely it has to be a consideration. This really goes back to the due diligence stuff and into the some of the shareholder stuff and the governance stuff. Sometimes early entrepreneur, entrepreneurs of early stage companies aren’t interested in hearing about a board, they don’t want to hear about that, they don’t want anyone telling them what to do. The whole reason that they got into a company is that they could have their own way and do whatever they wanted, well that’s not connected to reality. The minute you take money there’s going to be other voices that you need to hear. And again back to the humility and understanding what your weaknesses are you’d be a fool not to take some of the advice of some of the people in a board context right. Sometimes it’s helpful just to have a different set of people looking at your problems from a slightly different perspective of the company and if it’s all insider board members and the board is just the three or two or three founders or whatever — that usually is not a good board. That’s when you’re too invested in the day-to-day stuff to really be able to to make the kind of decisions and to see alternatives that the investor board member might see.

Jeffery:
No, I agree. You certainly do need to make sure you have outside perspective and once you start to grow and you get into that maybe a half million or a million dollars of AR you probably want to make sure that your board’s increasing that you’ve got more than three people that are not internal, all internal, so maybe getting up to that five. One of the things that we always say is that if we’re on your board at the early stop onset, that within two years we should be off your board because you should be looking at bringing in people that are fitting in the space and fitting in the revenue side of things of where you’re hitting because those targets continue to grow and we’re there to get you to that 2 million AORR. And then after that, you know we should be moving out and you should bring in someone that’s there to get you to 10 million. Those are the the different things that entrepreneurs need to realize that it’s not bringing a board on that’s going to be there forever, you want change, you want someone to come in with a different perspective, so that’s uh that’s great. And is there, you know, based on the way that the markets have been shifting to date, is there anything that you’ve been really heavily focused on and think that entrepreneurs can look at going forward or is it kind of business as usual, keep building where you’re in or is there a hot spot that you think is the next thing to look at?

Jon:
For some people to shift around too quickly and say oh we’re going to change our entire focus to working from home because that’s a thing now, well it’s a thing now it may not be a thing in three months so again. Back to the chasing or chasing your tail thing, i don’t i don’t like that as an investor if it’s too hot I’m not interested, right. Iff it’s too much of a case of you’re just trying to make yourself marketable, by turning yourself, into the next big thing that may not be a great plan and for some types of businesses that would make no sense anyway. Just because of the nature of their product you see what you really need to do right now, i think is to come up with a plan that’s going to get you there with less money or shorter like smaller amounts of money because then i would say the climate is probably not the greatest for the next few months at least. a lot of people will be sitting on their hands. i’ve had probably the biggest year I’ve had, but that’s one investment in an existing company. Right and at that point once that’s done i mean which it is, my capacity for new deals this year is probably very low. And my interest is very low because again i know there’s gonna be a lot of companies coming that are too interested in getting money because they’re desperate, right. They’re really at the end and you know, you want to be careful about getting in those situations yet. The other thing i’d say is understanding that just as the stock market is a market, the startup market is a market, okay? And you, just because you think you could have got, you know, this valuation six months ago or a year ago because you heard somebody say something and all companies with this much error are not worth this much money. That you’re really looking for trouble when you go down that road because the market is changed for everything. And the bottom can fall out of the startup market in times like this because the super high risk investment becomes somewhat unattractive just by comparison to the fact that i could go out to the public stock market and buy other more established companies at a discount to what they were. So you have to understand that’s going to hit this market, worse than the public stock market. The public stock market’s going back. This is like the tip of the iceberg thing and all this other investment money is coming in underneath it .Suddenly, you become a lot less interested, you’re the marginal dollar for a lot of investors because again yes i’m an angel investor but i’m also an investor investor. I’m not going to put all my capital into startups. That would be crazy. So that element of the market is going to be a challenge for people and just the liquidity aspect right. So a lot of angel investors simply from the perspective of liquidity are going to say, they’re going to look at their investments now and say, okay I got caught in a bit of a trap here I don’t want to be putting all, committing all, my money to something that i’m not going to see that money again for 5, 10, 15 years in some cases, right. I mean people don’t understand how long some of these cycles are for these companies. So those things are really going to make it harder to raise money for the next little while, I suspect. So you need to have a plan that maybe gets you smaller chunks of money, okay, because it could be partly that may be the only money available. But also because you’re going to have to take a haircut on your valuation in some cases. You’re going to have to accept some terms you don’t want to accept. So be prepared to do that with a lower ask is probably better for you in the long term, right. You may have to grab in a couple chunks over the next couple years and to be able to adapt as market conditions change. We could get into the fall and things could be all wonderful again, the pandemic is pretty much over, and everything’s kind of back to normal and we have a v-shaped recovery and people are free with their wallets again. That could be the case right, and in fact that case tech companies might be interesting because again tech companies have held up pretty well through this through this period. Or, it could be a different scenario, none of us knows. Okay, the governments that are now spending money like crazy are going to have to find money to pay for that stuff at some point in the next year or two. And i know that a lot of angel investors people in those situations are going to be very concerned about some of the decisions that they’re going to be making that are probably going to be again politically popular for them but they’re going to hit the very people that are going to be providing the seed capital. And again not to get too hooked up on the politics of it, but I mean as an investor i’ve invested money over the past five ten years on a number of these companies. If finally, one of them turns out really well and in the meantime the government has radically changed the tax regime for instance, all that gain that i thought I was getting a good chunk of, it will evaporate and then that’s going to put people like me and angel investors in general in a bad mood for taking those kind of long-term investments. What is the point of taking those risks if the government is going to mess around like that. So none of that has happened yet, but there’s going to be some trepidation for committing a lot of new capital until some of that stuff is clarified which may not happen for another six months to a year. So as people may not be willing to make as large a bets as they have been so you’ve got to you need again to adapt your plan to recognize that money may be dry for a while and that may impact your expansion plans for your company, your launch plans, the locales you’re going into, and also again the size in the nature of the asks that you’re gonna be making over the next little bit.

Jeffery:
So you really do need to sharpen your pencil, look at this as that we’re going into a recession, pull back a little bit on your ask , figure out how you can get yourself to go the next six to eight months and then figure out from there how you get to the next six to eight months but do it in small increments. Build in the cash that’s going to help you float and grow. But looking at different verticals, looking at different areas that you can get investors to come in from, but also where you can get sales from to keep the sustainability of your business. So that’s valuable, so to kind of end up, and our last kind of question that we’re going to throw at you right now s looking into your crystal ball, because i’m going to come back in a couple years and we’re going to have another interview to see if you were able to hit the crystal ball moment but where do you see the markets going in early stage investing in the next 12 months and then where do you see us in the next three years? i know we’ve talked about the high in the sky, you know where can we go, where’s the sector and you you alluded to earlier that you don’t want to get into things that are hot and flashy right now, but are those hot and flashy things going to be where we’re going to be in the next three years? Are they going to take a taper into something big? And i’m kind of just looking for your kind of 12-month thoughts and then the three years?

Jon:
The the next 12 months as I’ve indicated might be a little challenging. i really think there could be and some of this has been happening for the last few years. okay, so it’s not simply this is just brought it forward and focused it so I mean you found in the last few years companies that have been going down looking for VC money have needed larger revenues before they were getting it. So money was starting to get a little tighter over the past few years. Anyway, okay and this is just basically you know again wiped a lot of it off the plate because a lot of people have lost a lot of their wealth or what they perceived to be their wealth on paper. So they’re just not going to be willing to make those investments. I would be fairly cautious over the next 12 months. Again, if we do get a v-shape recovery, you may see towards the end of that 12 months things get back somewhat to normal and maybe a little bit of pent-up demand. But again, unless people have, the markets have gone up, and people have the capital to invest, the pent-up demand idea, is not really going to be there. It’s not like i need to buy two companies now instead of making one investment that’s not how that’s going to work. In three years I don’t see there being a problem with the market. i think that you know three to five years from now, long term, this is still a good way to invest and it’s a good thing to do. We need startups if we don’t have them that the next wave of companies won’t be there and as we look at, you know, revolutionary technological changes and um the need for greater productivity which is really suffering across the economy. In general, right, i mean these sorts of areas are going to be of interest. Yes, you’ll get some weird verticals that you didn’t think of that may jump up out of nowhere. You’ll get other verticals you know, we’re on zoom right now we don’t need 50 zooms like we did going in now and saying i’m going to switch my model to be like a like a zoom. Well we don’t need that we already have that so if you’re jumping into it out to a hot area, it can be very dangerous because it’s so hot that I now I don’t believe that you’re actually going to make it right because there’s going to be so many other competitors for you. So I, again, i’m the wrong person to give you a good answer on that because again i’m not the one who’s too interested in any particular murder and getting into the hot market. i tend to avoid that because i don’t really know what they’ll be again. Using the best examples of driverless cars, five years ago we were told by 2020 we’re all gonna be driving driverless cars. Well that was obviously insane at the time but you know it looks even more insane now. But we don’t even have driverless buses but never you know and subway trains in some cases, never mind you know driverless cars, doesn’t mean those technologies aren’t awesome. And that there aren’t some sectors within there that will build technology that will go into whole other areas but that’s how it tends to happen. Right, you’re working on some specific problem and are able to adapt that technology into something that may be completely different than the vertical you thought it was going to be valuable for. But broadly speaking in the long term, yes this is still going to be an area you’re going to want to be in. It’s just for the next 12 to 18 months i would suspect money might be a little bit harder to get and you’re going to have to accept lower valuations that’s how that works.

Jeffery:
I guess there’s going to be that the strong will survive and you’ll have to find ways to make sure generating revenue and using that revenue to support your business as you grow. So there’ll be a sure a lot of industry shifts and changes, a lot of companies going under, and then there’s going to be a lot of new companies that are going to sprout out from it because they’re going to find the strength in the misses that occurred and clean that up a little bit better. So you’re right there’s going to be a lot of change and maybe everything will be driverless in the next five years. But I think that just like weed and everything else they came in with this highly aggressive number that everybody was going to do x and the outcome was maybe only two percent of people did x. But i think that’s the whole purpose of hyping a market and trying to generate as much value out of something that doesn’t exist. And you just have to be aware of that so that you don’t get pulled into the wrong direction and find something that really does solve a problem and that’s an industry that’s going to last forever is that if you can find a way to be profitable every year you’re going to grow and you’re going to be sustainable. So I want to thank you Jon very much, for all of your insights today. As i do show lots of notes, I’m a big fan and thank you again for everything that you shared. We will be putting something together over the next four to six weeks. We’ll let you know when we do put that out but i appreciate all the insights, information and sharing. You’ve got a lot of great stuff there and once again thank you very much for that.

Jon:
You’re very welcome

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