Charlie: [00:00:00] Okay. Welcome to the What The 3 Podcast where we tell you emerging tech founders what to do. Today, we have the episode on understanding the intricacies of valuing your company and products and maximizing your startup valuation at the front end. Um, we’ve got Sebastian Spitz here. I’m going to read a little bit of an introduction.
Um, so Sebastian, welcome to the podcast. Thanks for being with us today. A little bit of background on Sebastian. He’s a venture specialist with, uh, at Schaeffer’s corporate venture capital arm, but a rich history in automotive construction and electronics industries. Sebastian has spearheaded multiple in house startups, applying agile innovation and lean startup methodologies.
His career highlights include creating transformation, transformative business concepts, leading to major internal exits, and he’s deeply involved in emerging technologies such as. AI, blockchain, and [00:01:00] robotics. Notable companies include DuckDao, the Morpheus Network, and CV Labs. Beyond his corporate achievements, Sebastian is an active mentor and investor in the venture capital scene, shaping the future of tech with his forward thinking approach.
Join us as we delve into Sebastian’s insights on innovation and technology. Venture capital in today’s tech landscape. So thank you for being here with us today. So how are you doing?
Sebastian: Pleasure. I’m doing good. I’m doing good. Thanks. Thanks for the amazing intro. Uh, always make me blush. When people read out stuff like that.
You’re more than
Charlie: welcome. You’re more than welcome.
Thomas: Well, we’re certainly glad to have you here, man.
Charlie: Yeah. Yeah. And this is, this is one of those questions where everyone gets super hyped and it’s like, how do I, like everyone’s always talking about raising money. They’re always saying like, I need to raise my priority right now is raising every startup founder we talked to is like, yeah, if I could only raise more money, so for me, this episode is pivotal.
Um, and, and [00:02:00] genuinely something that, that people want to know the general answers to. I think we’re going to, let’s start at the beginning is the best place to start. So like, how did you get into emerging technology?
Sebastian: Yeah. So maybe for, for full context, Dan, so I started my career in marketing and then quickly ventured into the product management and innovation management.
Um, and that was actually the inflection point. And now we’re talking about like 13 years ago, 15 years ago ish. Um, so I always. Love lean startup principles and design thinking. Uh, it always felt for me that that is the right approach to work on products and innovation also, if you’re working in a big corporate, so not only if you’re a startup founder, but also if you, if you’re working in an established company.
Um, and, and, and that just felt like it was my world, right? So, uh, ever since I’ve, I’ve always driven projects, uh, and, and new product launches, like they were in house startups, uh, you know, be, be lean, be mean, uh, move quick and break [00:03:00] things. Um, and that just felt natural to me. And that’s also how I ended up being an emerging technology.
So I think the, the big switch came about eight, nine years ago when I was in the automotive industry. Uh, so my job there was basically building up. An internal unit, uh, that, that worked specifically like an intrapreneur unit, like internal startups. And we were tasked to look into mid to long term technology, technological enablers, right?
So not like the immediate stuff, but things that were like three years out, uh, or more, and actually like drive innovation in that field. And back then that was like. A wild mix of everything, which, which, uh, was really fascinating because it allowed you to dive deep into new technologies, different verticals, and just learn a lot in a very short time.
Uh, and that mainly those were back then like blockchain that was 2017. So blockchain was on everyone’s mind, uh, also in the [00:04:00] enterprise segments. So how, how could you use it for the automotive industry? How could you use it to secure supply chains and all of that? Uh, it was additive manufacturing, 3D printing, uh, also back then, uh, self driving cars, uh, was, was a big hot topic that was before it sort of became normal and we’re still not there yet.
Right. So there’s still some, some infancy issues, some, some teething problems when it comes to. Fully autonomous driving, uh, as Waymo, uh, and, and others have shown recently. But, uh, that was also like a big top of mind thing back then, like visual computing, sensor fusion, all of that. And of course, AI before AI was cool.
So mainly like visual computing in, uh, factory settings and manufacturing for quality inspection, or also visual computing object recognition for self driving cars. Uh, so a lot of that already was AI back then in the automotive industry. So those were. Exemplary fields that are looked into. Uh, and that’s also why I [00:05:00] stayed there.
Right. Because we had a lot of like instances where we didn’t have the competences in house. So we were also actively looking for startups and founders that could work with us as technology partners. So that what, that, that was ultimately what allowed me to really immerse deeply into startup ecosystems.
Uh, and yeah, I’ve stayed in those fields ever since.
Thomas: What was your first startup ecosystem in either Ai I, I’m guessing it was blockchain. What was your first one you, uh, you got? I kind of sunk into and rabbit holed in and didn’t come out a couple of years later. Yeah, it actually was
Sebastian: blockchain funny enough.
Uh, so now we’re talking like 2016, 2017. Um, and back then we were, that was like automotive industry, right? So we were exploring enterprise use cases, uh, mainly like supply chain application or securing vehicle identity and repair and maintenance records. Uh, Um, attached to a specific vehicle on the blockchain, uh, to basically create a more [00:06:00] transparent use power market, uh, and repair market.
So those were like some, some, some use cases we were exploring back then. Uh, and while after half a year of like deep diving and like really like scavenging the entire market and looking at solution providers, the, the result unfortunately back then was, it was just not enterprise ready, right? The scalability was not there.
Tech wasn’t mature enough to really be deployed at scale. A lot has changed since then, but basically after half a year of deep diving into solutions, speaking with founders and looking at the market, I came back and said like, yeah, there was interesting concepts, but it doesn’t feel like it’s really ready yet.
Uh, but I stayed there in my spare time. So basically just, you know, splurged more, uh, on my own time.
Thomas: So which, but you didn’t answer the question. Which one, which one was it? Because I’m actually interested because I know you for about four years. I’m actually curious which, which chain you kind of got involved with first, because I, I know there’s a number of chains you’ve been involved in, but which one was the first?
Sebastian: Yeah, back then it was Ethereum. [00:07:00] Uh, I think like, you know, that was like, uh, ICO mania, uh, and like, uh, tons of like new, new projects being launched in Ethereum and like the whole market was in a frenzy. Uh, and, and it’s also funny to look at that retrospectively because there is a lot of resemblance with AI right now.
Charlie: It feels like 2017 all over again, baby. Oh yeah. Yeah.
Thomas: Mostly the gen AI space. It’s insane. It’s like. Including all the rebrands of all the experts that within a year are now AI experts. Um, yeah, so, but, but, but Sebastian, like, you know, we’ve, we’ve talked about this quite a lot also, you know, off screen, obviously.
Um, and coming in 2017, like, as you said, the industry was completely different. You did this aside to stay, uh, what was that defining moment for you? Say like, Hey, should I really like this? Uh, I want to do something more with this. Um, and then I think also at some point, [00:08:00] like you also made that switch to kind of corporate venture capital.
But there were, I think a couple of defining moments where you’re like, Hey. I like this space. I want to stay here and I want to do something more with that than just you know, Uh fuck around and find out
Sebastian: Yeah You’re absolutely right and I think um, so for me, uh, it it was about crypto’s biggest strength Which is also its biggest weakness and that is community.
Um, so I was fascinated by how closely knit that ecosystem was and, and how strong the community was, right? It’s almost like, it’s almost like tribalist. Uh, so you have these different chains and then you have like the, the maxis of different chains and it’s almost like, it’s almost like political parties, right?
And
Charlie: you, you, you,
Sebastian: you, you, you, you, you, you sort of have to decide which, which side you’re taking, uh, which is. It’s a bit stupid, uh, and I think it softened up a little bit now. People are, uh, acknowledging that different, [00:09:00] different networks, different, different infrastructures come with different advantages and disadvantages.
And it’s more like an open minded, uh, uh, field right now. But still, um, it’s largely, Tribalist community driven and then hype driven, which that’s, that’s why I’m saying it’s also one of its biggest, biggest weaknesses, um, because some of the things that are happening, um, don’t really help with building credibility and trust, uh, in the, in the wider public space.
Um, so I think that’s, that’s also something that the whole web three culture and, and, and ecosystem still have to work on. It’s like, if you really want to have mass adoption, uh, there has to be some sort of like regulation. There has to be some sort of like, uh, self control, right? Uh, if, if, if, if you are mostly known for scams and, uh, basically like, uh, uh, flushing money down the toilet, uh, for, and then basically like, uh, hype driven meme coins that, Literally say they have no value and [00:10:00] utility and, and, and people still pump them up to like over a billion market cap, I mean, things like that.
If, if outsiders look at it, they’re like, Oh, okay. Wow. That, that seems to be like really trustworthy. Uh, let me, let me, let me trust my life savings, right? Uh, that’s, that’s, that’s unfortunately not how it works. Um, and it’s interesting because I just. Literally like, uh, look through, uh, something that’s Sequoia Capital recently posted, which was like a product market fit framework.
And they categorized, uh, new solutions and startups in three categories. Harris on fire, right? Like crowded market. Everyone wants it. Everyone’s aware of the problem.
Charlie: The
Sebastian: other one is like a hard, uh, I think they call it like hard fact, which means, um, everyone acknowledges that there is a problem, but people have just.
Gotten to you, gotten used to live with it, so they don’t really, you know, they’ve arranged themselves with the status quo. So you sort of like have to change habits. Um, and the other one is like future vision, which is like, you know, what the iPhone was back then, or what, what [00:11:00] Elon Musk did with Tesla back then before anyone was really realizing that there was a needed market.
And what I, what I’m saying, this is I think web three at large is still at this sort of hard fact place, right? Because. Yeah, we know that a lot of things in the financial system are broken, especially when you also look at data economy, there is a lot of things that could be improved, but people sort of have arranged themselves with it, right?
Jack, we, we’ve, we all using banks. We, we, we have come to the, come to acceptance for the fact that data is basically a good, that we can exchange and trade for services, like let’s say Google maps. Um, and we don’t really need to explore how to monetize it, for example. Right. So there’s a lot of like value promises that crypto has that are great, but it’s tough to change habitual feelings and accustomed like usage of things.
Uh, and if you want to do that, you have to create trust. Right. And then that’s, [00:12:00] that’s, that’s like what I’m saying. It’s like one of the biggest, biggest weaknesses of the market has. And I wish that that would change because it probably would not. For the better for everyone.
Thomas: No, and the, the question is when it will change and how it will change, right?
Like I think that’s always like, this is the ongoing discussion that I think. We have had now in, in different, uh, um, different discussions with our different, uh, uh, interviewees, I would say, uh, everybody kind of acknowledges this point, right? So to that point of us, I mean, like you’re now, like, if you have shifted heavily to, to, uh, corporate venture capital, um, and I think in a sense, like, you know, to term sheets, you’re writing a lot about that too.
Yeah. Um, why did you specifically move in that direction? And what, what, what makes this specific direction so interesting? And I know you’ve been advising companies as well in the past, and I think you’re still doing that. Uh, is that, was that part of that move that the interest kind of shifted towards [00:13:00] more.
Uh, corporate venture, or did that came from Scheffler where, where did that start and where is that currently? Because like, you’re still very deep in it, right?
Sebastian: Yeah. I think the, the investing bug got me when I actually immersed into web three. Uh, and that was like after the crazy bull run of 2017. Right.
So it wasn’t like, uh, Oh my God, I have to phone when. Oh, then it might’ve been a little bit of that. I won’t like deny that, uh, that, that, that might’ve been a little factor there, um, but Hey, I, I, I stayed interested throughout the depth of the Batman, uh, the, the, the bear market. Um, so, uh, there was that, but that, that’s when I initially started.
So I just love the process of like looking at startups, uh, like really like, uh, going in, doing the, do the gins and like, you know, Uh, speaking with founders, uh, like getting, getting a feel if the founder is the right person for the startup. If the team, uh, is basically has what it takes to, to take something to success.
And, uh, I started my investment journey in web three, right? So I helped ducked out, like evaluate [00:14:00] deals. And I basically, uh, helped them with their scouting network and basically managed a deal flow with them. Uh, and that’s, that’s, that, that was like my first touch point into. Venture capital, um, or, or like investing in startups, uh, both as an angel and like, uh, in a VC kind of manner.
Um, and I, I build up on that. So basically what I did, and maybe this is also useful advice for anyone who’s looking to venture into that field. Uh, I build up on that. I build up my network, I build like the relationships and the trust, uh, within a specific vertical. And then I also like, you know, took some educational classes, uh, with, with Oxford, for example, uh, there’s other vendors out there as well.
Um, and like really educated myself about venture financing, like the, the, the typical terms, the, the things you have to know if you want to go in that field. And, uh, when we moved to the U. S. last year, um, I, I solidified that, uh, helping Schaeffler. Uh, with their [00:15:00] venture efforts. So right now we’re not like deploying as a purebred fund.
Uh, it’s still, uh, deploying of balance sheet. Um, but it’s basically that the great thing about that is it’s, it’s more of a strategic angle, right? So it basically incorporates. Uh, all three options. We can either partner with a startup and like work with them, uh, and do projects together. We can just become a client of their solution if it’s mature enough, or we can invest in them.
Uh, like a couple of investments that we did over the last two years, when I, for example, an H2 green steel, uh, so that was like steel is one of the main components of our products. Uh, that was like a late, late stage to get a relatively sizable. Um, and then there was like two minority investments, for example, in like robotics and software companies, uh, at an early stage.
Uh, and the great thing is, you know, it allows you to really look into fields that are. Not that heavily discussed, uh, in, in public opinion, like, uh, industrial deep tech robotics, uh, [00:16:00] humanoids, exactly like, like applications that are maybe not on top of mind for the everyday user. But in my humble opinion, those will create the backbone for the next industrial revolution, if you look at it from a, from a manufacturing production standpoint.
Thomas: That’s a, that’s a big, I want to explore that one later, by the way, because that’s, that’s a really interesting, because you’re talking about what industry 4. 0 or maybe even 5. 0 kind of like, you know, You mean
Sebastian: like web 5. 0?
Thomas: We had a couple of very spicy takes from our cohost saying that like AI is web 3 now and Web4 might be like AI blockchain as the infrastructure.
Um, yeah, like we’ll see, we’ll see who’s right. Right. Um, so, but to your point, like, you know, you’ve been working and educating yourself. Are there, like, For over the last couple of years, what did you think if we, if you look specifically at Web3 and, and, and blockchain, like, are there things in a term sheet that you’ve seen [00:17:00] that were absolutely bonkers or were absolutely great?
Um, and things you, you kind of like, you know, are very common that everybody should do. And it’s crazy if you won’t.
Sebastian: Yeah, I think, um, the most. Outlandish part of most web three term sheets is usually the evaluation. Uh, like, uh, I mean, so there are a couple of elements that are like most of the time is not even included in web three term sheets.
Um, so like not, not a lot of, especially if it’s token based, right? So maybe prick a quick, quick disclaimer, um, or just throwing some words out there. Okay. So term sheet, uh, I don’t know if anyone knows what that is, who’s listening. So basically it’s, it’s what you get to sign as a startup founder when you work with a venture capitalist.
So it’s basically the terms of the investment. Um, and there is a lot of provisions usually either around the economics of the deal or the control, uh, [00:18:00] of, of, of the, the startup later on. Uh, and some potential side provisions that could be like inside letters or formulated into the term sheet. But basically it’s like, it’s like your contract that you signed between investor and startup.
Um, and a lot of provisions, for example, hover around like anti delusion rights, uh, like the, the kind of shares that you’re getting, like, is it preferred shares, is it like normal shares? Um, what, what, what happens, uh, with, with the distribution of, of, uh, liquidity when you, when you get into an exit, right?
Uh, and it’s like the preference, for example, the preparation, um, or like how is the board assembled? What happens in the next round? Like, do you have any like drag along tag alongs, uh, stuff like that? Uh, I briefly had a discussion with Charlie about that earlier. So we’re not going to like go crazy into detail and all of these things, uh, what we will do.
We will actually write some blog posts about that and some LinkedIn posts later on, uh, over the next [00:19:00] couple of weeks. Uh, and anyone who’s really interested in learning more about that, please just follow and like, you know, digest that and consume that, uh, because it just would burst the frame here to really go into the, uh, The detailed metrics, but, um, when it comes to, to web three, usually the, the web three term sheets for, for most parts are not even that sophisticated compared to like real equity investments.
Right. Uh, and, and reason being in, in sort of makes sense, especially if a token is involved. Um, I mean, if, if you’re talking about a token based investment. Um, since you have token generation events, uh, and since you have like, uh, immediate access to liquidity as soon as the token launches through, uh, DeFi or centralized exchanges, there is some aspects that you have to consider in a normal managed capital deal that just don’t apply to a token based startup.
Example, you invest in like a pre seed seed company, right? Like normal startup [00:20:00] equity based.
Speaker 4: Perfect.
Sebastian: Um, which usually means that. Unless you can sell your shares, whatever you bought at that point, a secondary is down the path. You have to wait until that company either gets sold or goes public and is traded as a stock before you can do anything with your investment.
Yeah, you need that liquidity event.
Charlie: The paper turns into real utility that you can then translate to whatever it is you want to use.
Sebastian: Exactly. And with, with tokens, usually that timeframe is a lot shorter because that, that liquidity event, if you get an early stage, that might be five, seven, 10 years out.
Now with, with most token based companies, uh, usually the liquidity event is like one year out or two years out, which also has one of the intricacies of Web3 deals, where Usually you put vesting schemes and, and, and, and cliffs on the investors and not on the founders. Well, the founders have a two, don’t get me wrong, but usually in traditional venture capital, it’s like, uh, the [00:21:00] founders are vested.
Right. So they, uh, you want to secure that they don’t leave their company early on, that they like stay at it for the next. Three to four years exactly for the reasons that we just mentioned. Uh, whereas in, in, in, in web three, usually the investors get investing, right? Like, so you’re basically your tokens are locked for the next two years so that you basically don’t dump your investment as soon as it like, uh, goes on the market.
Yeah. Uh, so that is one of the key differences, uh, which to your coming back to your question now. There is sometimes really outlandish and extremely weird provisions that some founders try to enforce. And, uh, luckily, um, the, the investment market in web three also has matured quite a bit over the last couple of years.
So you have a bit more experienced investors, um, that actually call founders out, uh, on that mass. And, uh, the power dynamics are a bit different, right? Because back then, [00:22:00] like when, when you had a hyped up project, similar to what was happening in JNI right now in the, in the real world, so to speak, uh, the valuations that were asked for were astronomically high, like we’re talking about.
30 million, 50 million or more valuations at like a seed, like pre seed sometimes, right. Without a product in the market, without any, any form of real traction. Uh, which is absolutely ridiculous. Uh, and, and people paid that price. Which usually didn’t end that well in the next bear market, uh, when the tokens finally unlocked basically Uh, so and
Thomas: even well and well in the next bull because by then generally they were already dead, right?
Well
Speaker 4: Actually not even that
Charlie: like even if your company survives and you’ve overvalued like you you’ve asked for too high a valuation And you need a follow on rounds. You’ve just hamstrung yourself. So let’s say hype cycle. You’ve then got your next level of the business, which is like, okay, I’ve [00:23:00] preceded or seeded at a ridiculous valuation.
I’ve then got to go back to the well, because I’m a technology business. And that first round of funding is to build the thing. Now I’ve got to sell it and actually grow it. No one can, no one’s going to invest at that valuation because the amount of the company that they’re getting for the value of the money that they’re giving you.
Like, they wouldn’t do they’re not gonna make that deal. That’s the biggest trap that I’ve, I’ve seen people with value. I only fall into 100
Sebastian: percent 100 percent and like, uh, if, if you’re a startup founder and, and, and you want to stay at this for a couple of years, right. Yeah. You should, there’s two things that should matter to you.
One, don’t get over diluted, right? Like don’t sell away too much of your company in an early stage, because if you have to stay at it for the next five or 10 years, just think of the psychological effect that it might have on you if you. Already have given, like, let’s say 70 percent of your [00:24:00] company away after year two or three, uh, how, how motivated will you really be to see this through for the next 10 years?
Exactly. Um, so that’s one thing, but on the other end of the spectrum, exactly as you said, uh, Charlie, like shooting for the stars early on, while you’re, while you’re Better make damn sure that you actually can deliver and follow on on that. Because if you can’t, if you ask for crazy high valuations, I’d like, let’s say a precede stage, uh, it’s going to be tough to keep that momentum up potentially, meaning you might be forced to like raise a down round afterwards.
And that is like, it’s, it’s not a death bill per se. But let’s just say it doesn’t have the highest appeal, right? Like it’s definitely
Thomas: not, it doesn’t feel good, right?
Charlie: Yeah. Yeah. It doesn’t, it doesn’t feel good. I completely agree. Um, so in the interest of time, we’re moving forward to advisor startup founders.
This is a section where we have pre prepared and sourced community sourced 10 questions. For our venture expert, [00:25:00] Sebastian. Um, as we proceed into this next segment, I do ask that you like subscribe and hit that bell button. It always helps us. And as we are doing this to educate and elevate, I really appreciate it.
So first question Sebastian, if we’re, now I know we’re, we’ve transitioned very nicely into understanding term sheets. If we’re going to dial this down, like for our core audience, we’re really trying to give that zero to one experience, that practical application. What are the most critical component, like your bare bones basics, like literally the terms to put into Google that you need to search for new founders that, That often get overlooked.
So, I mean, starting off at like type of share preferred versus common or, or any other kind of piece. Like what else our new startup founder audience needs to understand? Like, what should they be looking out for to start their learning journey? And then are there any gotchas that, that you’ve seen?
Sebastian: Yeah, I [00:26:00] think let’s, let’s, let’s break it down and make it easy.
So if you’re starting your journey, one, educate yourself about the type of investments, like the money pools that you can tap into, most likely you will start with family and friends and angel investors with that being said, educate yourself about, uh, the vehicles you can use to raise money. Right. Uh, as, as you said, so there is a couple of provisions and term sheets, but even one, one stage above that is.
What are we actually using to raise money? Um, in general terms, uh, you can, you can go venture capital route. You can go into like syndicated deals, or you can go into crowdfunding. Um, which is like the ICO or like the, the, the pre sales and crypto space basically, um, but in general terms, if you’re like at the start of your startup career, uh, at ground zero, most likely your first vehicle will be a SAFE or a SAFT.
Uh, SAFE is like a standard agreement for future equity. [00:27:00] The, the crypto equivalent for that is the same with t at the end, which is tokens instead of equity. Now, what’s happening in the crypto space, and you should also be aware of that as a founder, is that, uh, usually, uh, well, well, that, that we’ve seen more and more crypto companies going into equity fundraisers as well, and then basically offering token warrants.
Um, so the, the purebred token sale, uh, just. degree decreased over the last couple of years. And like investors also ask more and more for equity because it gives you a bit of a different leverage over the company, because now you can ask for a board seat and you can exert control, which you can’t if you hold tokens, because quite frankly, tokens don’t give you any control over the company.
Uh, it’s also something we will touch upon in a second. So first educate yourself about sources of money. And the different vehicles that you can use to actually obtain money. Um, so that’s number one. Uh,
Thomas: you might want to, want to [00:28:00] explain what a warrant is, because I think that a lot of our listeners, at least I remember a while ago that I was looking at it for the first time and I was like, a warrant?
What does that even mean? Maybe it’s good to explain that as well. Why it’s, why sometimes the soft comes with a warrant, sorry, the safe comes with a warrant.
Sebastian: Yeah. So basically what that means is, uh, you have sort of like a side provision that, uh, you entitle your investors to also receive tokens for their money.
So at the time of investment, they receive equity in your company, meaning they get shares. They own a part of your actual, uh, incorporation, uh, of your legal entity. Um, but when you do release a token down the line, you have to They are also to, uh, they are also entitled to receive that token. Uh, and now it depends how you put it in there.
Now we are going really deep into the term sheet. It could be pro rata. It could be that they have to purchase those tokens again at a specific price. So now you really have to like find the, define the conditions and agreements that you [00:29:00] put in there. But in general terms, it means it entitles your investors to any tokens you might issue in future.
Based on the provisions you outline in the term sheet. Okay, and so to Charlie’s point to round that up. So once you understood which vehicle you’re using. Note on that safe or like convertible notes, uh, usually, uh, sort of quote unquote, like they convert into shares. That’s why they’re called convertibles.
Uh, safe kind of is that as well. It’s like a promise for future equity, but, uh, both of those at the beginning are not equity per se. They convert into equity as soon as you have a first price round. And then price round is exactly where you distribute shares of your company. Um, there’s different types of shares.
Uh, Preferred shares, normal shares, basically. Um, so educate yourself about what, what does that mean? What are different kinds of shares? Um, educate yourself about, um, participation rights. [00:30:00] In preferred shares, educate yourself about, uh, an option pool. I think that is especially important if you really want to grow your company, because usually you have a stock option pools for your employees, which means as you can, you most likely can’t pay your employees as well as a Google.
Uh, an Apple or one of the hyperscalers can, so meaning, uh, you give lower salary, but you give them equity in the company as an additional contribution. Um, you should educate yourself about board rights, like board representation and like how investors can control your company and what it means if you have.
And investor as part of your advisory board or like part of your company, board of directors. Um, you should educate yourself about vesting, uh, about drag alongs, uh, or any, like additional, uh, consent rights that investors might get. Uh, and lastly, like warrants, as we just said, educate yourself about those, how to structure them, how to use them.
Um, [00:31:00] and I think that covers it all. The good thing is, so what we will do, uh, promise that to Charlie, we will write over time and like explain all of those things in more detail. There is a great resource, uh, that was published by HSBC, for example, that we can refer to. Pretty much covers it all because bottom line, what you should know, there is a spectrum for all of these things.
And usually there is on one side and extremely founder friendly spectrum, similar to valuations, uh, the higher the valuation, that. More friendly, quote unquote, it is to the founder because you’re giving away less of your company. And then on the other hand, uh, there is investor friendly provisions and terms, um, which usually come to fruition when we have a tougher market.
Like we had the last two years in manager capital, uh, that usually means that, uh, the power dynamics shift from founders to investors and investors can dictate, uh, Well, more harsh terms. Uh, but [00:32:00] reality is as a founder, you just have to be aware what you’re negotiating about, right? If you are absolutely clueless and go into negotiation, there is a high chance that the negotiation will not end in your favor.
Charlie: Yeah. Yeah. I think that’s, that’s a very nice way of putting, putting, bent over a barrel. Anyone seen Pulp Fiction? That, right?
Thomas: Yes.
Charlie: Well said. So, um,
Thomas: this is especially important for first time founders. It really is. And
Charlie: I think that you’ve just summarized that really well. Like type, like type of type of type of stock type of equity, how the options work.
I was interested, you mentioned this earlier, what was the wackiest set of special provisions have you ever seen put into a term sheet? This is my own personal interest. Like I’ve seen one where one guy’s like, I want a Nando’s black card. So Nando’s is like a chicken shop in the UK. You can buy these, like you have to call them and be like, I’m going to give you a hundred grand or something dumb, [00:33:00] but they just be chicken for life.
Like this is. This is something I’ve seen put in. What have you seen put in?
Sebastian: Um, so honestly, the biggest red flags that I’ve seen were usually around, uh, valuations and like basically, and that is all now we’re talking crypto, right? And like, uh, founders trying to impose. Completely weird provisions about vesting schemes, uh, and exclusive rights to them versus the investors.
Um, like, just as an example, right? Like basically allowing the team to liquidate the tokens. So that was like a pure token fundraiser, allowing the team to liquidate the tokens within the first two years and the investors have vesting over five years, right? I’m like, okay, so what does that tell me about your own?
Confidence in your company that you basically want to have a provision where you are allowed to sell off everything that you own within [00:34:00] two years and I have to wait five years until I can sell. I’ve
Thomas: seen people signing that shit. That’s the craziest thing. Yeah, yeah, absolutely. I mean, like, uh, Bull Run, what was it?
Three years ago, like 2021. Oh, people signed all the kinds of things. I was like, Ooh, like, I think you and I have seen some stuff coming. I was like, well, maybe not. Like, it does, it does happen. No,
Charlie: but
Thomas: yeah.
Charlie: Question two. This is the next question from the audience, from the community. It’s evaluation. How, like, again, practically.
How should a startup founder approach a valuation process with potential investors, obviously get your own legal team. Um, but beyond that bit, um, particularly in early stages, pre revenue phases, pre revenue numbers, like you’ve done your friends and family and guideline friends and family, if it’s a lot of money, 10 to 20%, I mean, I usually stick to tens, my [00:35:00] recommendation.
Um, and that, and also you’ve then got people on your side who are interested. Um, for your pre seed, if we were going to give like a, I mean, we’ve said you don’t want to go into your, your series A rounds with less than 30 percent of your company. If someone owns, if the, if the investor is owned 70%, you’re not going to be very motivated.
If you’re going into your series A, I’d say 60%, but this pre seed phase with you, you’ve done your friends and family, you’re about to do your first like venture capital raise piece. What would you, what advice would you give?
Sebastian: So I would definitely recommend do some research. Well, that sounds dumb, but you wouldn’t believe how many founders like in the beginning of the journey just won’t even bother like spending a day, like looking on Google and.
Sometimes it’s not even their fault because the, the, the VC industry is a bit, you know, [00:36:00] obscure and blurry and like it’s, it’s, it’s, it’s a private market. So obviously not all the information is publicly available. It’s not the stock market. Sure. But these days, like there was a lot of people on LinkedIn, but also on other media and forums doing a great job of creating transparency, uh, and, and giving founders the means to educate themselves.
So quite frankly. If you are serious about the zero founder, there is actually no more excuse to not spend some time and educate yourself and have some basic understanding of where the market is at a good source, by the way, like I can throw that out there is a Peter from Carter. Uh, he’s very active from LinkedIn and basically just go on carter.
com. Um, no, this is, by the way, I’m not getting paid for mentioning this, but like he, he just like really puts out. He puts great overviews and statistics based on the U. S. market for the European market. Deal room is good. Uh, they have some, some very good comparables for, for, uh, European based investments.
Um, [00:37:00] and a couple of things that you should bear in mind when you’re approaching this first is like, look at comparable valuations. Like see. What the valuation range is for your specific round, let’s say pre seed. Usually right now we’re talking about five to 15. I know that’s a broad range. More, it more hovers around seven, seven and a half right now.
So like you really have to be like Gen AI, uh, and like four founders from Ivy League, Elite, Unis, uh, with like X Google, X Meta, X whatever tags to, to call for like a 15 million round. But like, let’s say if you just average founder, normal founder, um, you usually like get into like a seven to maybe 10 million bracket or like a five to seven, depending on like, uh, your unique, uh, dynamics around the company.
Uh, whereas if you, if you’re going to seed, uh, right now we’re talking [00:38:00] about somewhere around on like from. 10 million to maybe 25, also broad range, I know, but there is like really a lot of factors in play, uh, that, that influence what you can actually ask for, but those are just some hallmark numbers. Uh, and here’s the thing, those also depend on your vertical, right?
So not every vertical has the same brackets and range. And that’s why I’m, I’m saying. Do some research, right? And I mean, uh, obviously I’m, I’m, I’m not Wikipedia myself. So I also do research and it’s part of like the job to keep informed, to stay informed about where the market is moving because the, the, the valuation ranges also change over time.
Right? So as I said, right now it’s an investor friendly market. So valuations tend to be on the lower side. Um, whereas if we go into a full blown hype and bull market and stocks flourishing again, maybe we are more on the, on the far right side of the spectrum, but you, you, you just [00:39:00] have to know that and you have to keep abreast.
And it’s also part of your duty as a founder. To have a general understanding and keep updated about the market dynamics. Uh, if you’re raising money, you know, if, if you’re a solopreneur, if you’re bootstrapping, none of that has to matter to you. Sure. If you don’t even want to raise money, power to you, kudos to you.
I really have deepest respect for that. Um, then you may be getting away with like, not educating yourself about that. But if you intend to go the venture capital round and like raise money from outside investors, it is actually your duty to at least have a minimum degree of knowledge of what you’re trying to do here also to protect yourself, right?
It’s like in your own best interest to have that knowledge. And I think, so those, those valuation ranges that I just gave, uh, those are important. You brought up a very good point with dilution. So what, what does that mean? Um, usually at the beginning pre seed, seed, you should [00:40:00] aim to stay under 20 percent dilution.
So ideally when you get out of your seed, uh, you still have 60 percent or more of your company, the more the better. Uh, because. At that point, usually what kicks in is then you also have to have the stock option pool for your hires. Uh, so that’s usually like 10, 15 percent or more, uh, depending on your specific structure of the cap table.
Um, so that means at that point, you’re already, sorry, that,
Charlie: that 60 percent is the founding team, right? Exactly. Not exactly 60%. Yep. One person
Sebastian: or one person. Exactly. Yeah. Founding team or one person. Exactly. Um, basically what I’m saying is when you reach series a, ideally you want to shoot for still having the majority shareholdership of your company.
Um, and that’s also what VCs will look at just to give you an interesting example, practical example, um, how a cap table can be messed up. We see that a lot in deep tech, uh, when [00:41:00] it’s about, uh, university spinouts. So especially European universities, uh, are not horribly bad and horrible. Uh, at making their spin outs investable for venture capital, like a lot of, uh, Universities and I’m looking towards the UK, but also Germany, uh, like to retain 20, 25, 30 percent or sometimes even more of equity in a spin out startup.
That, that is horrible. If you want to go on the venture capital route, like it makes it really unsexy to invest in startups like that. And there is these days, there’s definitely better, better ways to doing it. But moral of the story is be aware of your dilution. manage your cap table, learn some basics about cap table management, or get an advisor, get a friend, uh, get a contact that can help you with that.
Charlie: Absolutely.
Sebastian: Um, learn about the state of the venture market [00:42:00] so that you at least know if you’re asking for a lot, or maybe if you’re asking too little, just also to protect yourself. Um, and just learn some basic terms and terminologies, uh, to, to, to. To protect yourself and to make sure that you’re not getting the short end of the stick.
Charlie: Yeah. To add to that, I would also recommend a book called Venture Deals, especially super useful with trying to learn those terms. And, uh, I mean, for the price of 15 quid and depends how quickly you read a couple of days. You, you will get those terms. You will, especially us based mind you, where you’ll, you will understand the general terms of the terminology and where they’re, they, those, those experts have seen people get into situations, how they’ve had to get them out.
It’s, it’s a phenomenal resource that completely opened my eyes to the game as well. I mean, following on from that, uh, question three, and this [00:43:00] is a big one. I mean, big one, which is equity distribution. We, we’ve got a founder team. I mean. Our thesis here at, uh, WT3 is hacker, hustler, hipster. Um, that’s that, that, that term coined by the Silicon Valley startup market, your, your standard three man startup team.
What, uh, I mean, do you go, do you go even split sees? Like, how do you, like, who’d you, who’d you give more equity to? How does it work? Um, and, and how common is it for you to see an uneven split? Amongst startup founders.
Sebastian: I didn’t prepare that answer. So, uh, I don’t have specific percentages, uh, but I can remember that I, that I’ve seen statistics on the U S market, uh, like recently.
And, uh, funny enough, and this was surprising to me as well. Uh, usually you see uneven splits, like, uh, uneven splits are more common than even splits actually. Yeah. Uh, which, which might make sense, right? Like if, if you think about the [00:44:00] dynamics, how it usually works. So you either have. Some, some high school friends that do something together there, you might see more of an, of an even split.
Uh, but then other dynamics are you have like, uh, let’s say a technical founder who like, uh, research something and like already developed something as a breakthrough thing. And now need someone with business expertise and like, like, uh, the, the, the CEO kind of type. Then you would maybe argue that the CTO or like the technical co founder already brought in more.
So why would you give the same to the business guy and vice versa? It could be if a business guy, uh, like myself. So I’m, I’m, I mean, I can, I can code with GPT. Like I can, I can basically like instruct large language models to do what I want them to do. Uh, which is a blessing for me, by the way, but, uh, and I have a fair understanding of coding and how software works and I’ve been leading software projects, but, uh, I’m not a, I’m not a software engineer, right?
Uh, so that [00:45:00] means if I were to found a company, I would need a technical equivalent that can help me with the coding, um, which also, by the way, that is another very important tip for all founders. So if you are like me, uh, or maybe like Charlie and Thomas, I know about your software engineering skills. But if you are not a dedicated software engineer with like 10, 15 years of experience, so you’re in the same boat like me, um, you, if you have a software idea, if you want to build a digital product, get a technical co founder, like this is your first reality check.
If you can’t convince another person to join your cause. And be the technical co founder, maybe your ideas shit, or you’re lacking a vital skill of convincing other people, which, especially if you’re the business guy, that’s actually really bad because you will not only have to convince that guy, you will have to convince all your customers.
And investors down the line. So if you already fail at convincing your co founder, then you might want [00:46:00] to stop at that point and find a new idea, quite frankly. Um, so that’s, that’s, that’s another thing, but let’s just say you have a scenario where one of us, um, has a business idea and we already put in a lot of time researching.
So we have. We have the network, so we have the distribution advantage, right? We, we, we know our target market. We can basically immediately approach a couple of customers there. We’ve done our entire research over months. Uh, we know exactly how to position it, how to price it. We already have the entire business concept.
And now we just need someone to build this specific product that we already completely envisioned. Then you might argue it’s actually fairer if you bring on a technical co founder that a technical co founder might receive a bit less because that other person already went in there and did all the front loading and like already spent like months or years of his time doing this.
So I think it really depends on your unique situation, but long story short, it’s actually more frequent to see an uneven split than an [00:47:00] even split. Fascinating.
Charlie: Fascinating. That’s, that’s super interesting. It’s something that, um, I’ve been looking into a lot recently and for, and I agree. So for, but for, for first time founders, like you’re all starting, so it’s time, right, it’s, it’s amount of investments or, um, economist term.
So the cost of the opportunity foregone, like the opportunity costs, like I’ve already put in this, this, this amount of six months into this project. Now I’m going to bring someone on board to help me realize it. But that six months cost money, cost me the opportunity of doing something else. Um, if you’re all starting together at the same time, doing the same thing, even it’s what I’ve, I’ve seen the general consensus being, but as you say, whoever started first gets more, and I think that’s fair.
It makes a lot of sense. Um, with this, this, uh, this next question is a doozy and we’ve asked pretty much every financially orientated guest the same question. So [00:48:00] we’re getting our own consensus from already the community. Um, how would you get in touch with VCs without being bloody annoying?
Thomas: Or, or with, with, with being bloody annoying, but still get actually the contact, right?
Because that might just be the case. You’re,
Charlie: you’re, you’re essentially, well, the business metaphor is you’re essentially getting into bed with these people. You’re going to be talking like ideally the business goes well. You’ll be in like dependent on the VC funds. The time horizon in web three is three years, but three to five.
That’s a relationship, right? Like you’ve, you’ve got to not walk up and piss them off as a first impression.
Sebastian: Little fun fact for Trivia Night. Um, the average startup founder investor relationship lasts longer than the average marriage. Uh, so just keep that in mind. Um, that’s great. Uh, at least in the U S maybe the U S is a bit more trigger happy with divorces.
I mean, it probably would make a lot of lawyers around here happy, but, [00:49:00] uh, yeah, anyways, uh, that’s, that’s a different story. Um, no, but you’re absolutely right. Like, um, ideally your investor is like, sort of like a buddy mentor advisor, uh, and, and. Has your success in their best interest because they invest money in you.
So it should, it should be a mutually beneficial relationship. Um, and how to find them is, well, here is where, where it gets a bit weird. Uh, so if you look at social media, usually people post success stories on social media, right? It’s like all great. It’s like, you know, this, this, this amazing unicorn world.
We are all living in paradise. Well, that’s all happy. Um, Now, if you’re living in one of the startup hotspots, um, then it usually is going to networking events, uh, immersing in the ecosystem, knowing other founders, by the way, don’t, don’t be a transactional asshole. Like I have [00:50:00] to say it like that. Like if you’re, if you only go into an ecosystem, when you need something from the ecosystem, uh, you probably won’t get far, uh, you have to give a lot to get something back.
Um, and for that reason. You also should connect and immerse yourself with other founders. Not only will they help you with viable lessons that they learned themselves to prevent you from maybe making the same mistakes, but they might also connect you with people as they like you. Um, so splurge in the ecosystem, prepared to, to, to give something to the ecosystem and not only take from it.
Um, so that’s step number one. Step number two, if you don’t do that. Live where the ecosystem is. Uh, if you’re really serious about building a startup, you might want to consider moving to an ecosystem that has a, a densely knit network of founders investors, uh, because venture capital is a relationship business.
[00:51:00] It just is that way. Like, uh, yes, it is financially driven and yes, there are some analytical facts to it, but usually in early stages, specifically. It’s more of an art than a science. And it’s a lot about people. Uh, you, you invest in founders, you invest in the founding team, if you’re an early stage investor.
Um, and the only way to really get a read on a founder of founding team is by actually interacting with them. Um, so that’s where usually these warm intros and like these, these terms that you see hover around everywhere come from, and. But don’t be fooled, even with warm intros, it’s a brutal market, right?
Like, uh, the venture game is a game of probability. And, uh, it’s a game of outliers, uh, if, if you run a found. So you chance, you definitely have higher chances of hearing a no than a yes. If you approach an investor. So that it’s just a reality. Don’t be discouraged by that. Keep building, be resilient. Um, and ideally if, if you hear a no, [00:52:00] maybe ask why, because maybe you get some good insights What do you have to improve to maybe turn some of those into yeses, but, uh, generally what you should avoid as two ways, the warm intro that we spoke about, uh, what you should do.
We also spoke about to get those warm intros, right? Um, but. If you’re doing cold outreach, generally everyone would discourage you from just doing cold outreach, relying on that because your chances of getting a no are even higher than with warm intros. But if you’re doing it, maybe some, some, some basic tips of not annoying founders with, with like, let’s say the first, uh, investors with the first message, um, one, if you’re doing it on LinkedIn, um, Starting with a little bit of, of, of praise, good faith.
Yeah, that, that usually might work well, you know, you only have a limited amount of characters in your first LinkedIn message, so [00:53:00] maybe don’t start immediately selling shit to people with your first message. So that’s a general rule of thumb in life. If you, if, if, if you approach a stranger. Don’t just focus on selling them their shit.
Like, no one likes that. I mean, come on. You don’t even like that yourself, right? Like, so why would you do that to someone else? Another big no no, especially on LinkedIn, is coming into the conversation with, like, this great Oh, you know, I love what you’re doing. Synergetical. Have a conversation. And it’s always the same shit.
Like, you get that message. Wait for a day, and then one day later, you basically get this, uh, text vomiting message that basically has like, uh, a full paragraph full of, Oh, we’re building this. We’re looking for capital. It’s so amazing.
Speaker 4: Yeah.
Sebastian: And unfortunately 80 percent of the time it’s completely off thesis.
It’s absolutely like at least to my case, it’s something that is absolutely not relevant for me. Uh, and
Thomas: I did no research behind the person [00:54:00] that they’ve just, uh, network towards. Yeah. This is a big issue, uh, in, in this market.
Sebastian: Thank you. That, that was like, I was trying to segue into exactly that. Like if.
If you don’t know the other person, at least a minimum amount of research about that person and find out what they’re looking into. And that also applies for face to face. Um, so another big no, no. And I actually just recently posted about that because genuinely want to help founders like not do that because first impressions matter.
Let’s face it, right? It is sort of like dating. So if you completely mess up the first impression, uh, you might just not get a second chance. That’s the unfortunate reality. Um, and if you meet someone. Face to face in person, try to be charming, like try it’s, it’s, it’s sort of like a game of seduction almost, right?
Like, because you, you are trying to sell something, you’re trying to sell your startup. And you don’t do that by just shoving it down people’s throat, hoping that they, that they, uh, [00:55:00] uh, don’t suffocate on it. Uh, you, you, you do it by actually finding out why they might be interested in hearing more about your startup.
And I think one of the first questions that you can do at networking events, if you are like meeting an investor. Actually ask them about their interests, maybe even ask them a personal question, like just be a normal human being that tries to have a conversation with another human being and like not cut straight to like business, uh, and, and, and just be completely transactional.
The worst thing that can happen to you. And I’ve had this on a couple of occasions is, uh, you, so here’s the worst case scenario, right? So I’m picking like, I’m creating a story that includes all the. Things you should avoid. So people are talking in a network event. First, you interrupt the conversation.
You just burst in. Secondly, you don’t even care about what the person does. You don’t even ask them any question. You just immediately start vomiting your startup pitch into their face. Uh, and you do a five minute monologue without any pause. [00:56:00] And after that five minute monologue, uh, you wait for a reaction.
And at that point, the reaction might very well be, uh, sorry, this is just not an area that is interesting. Uh, right. Like it’s completely different vertical, wrong stage can be a couple of reasons that disqualify a startup right from the get go without, and there’s nothing personal that also far as don’t, don’t, don’t take that personal.
It’s not against you as a person, but like investors have to focus on a specific vertical stage, area, whatever they can’t invest in, in everything. Right. Uh, because you can’t, can’t be an expert at everything. Um, and then after those five minutes, when, when you finally have a chance to have a dialogue, um, You maybe tell them in a nice way, um, sorry, this is just not for me.
Really appreciate it. Great job. Uh, maybe you should talk to this person. Usually you try to be helpful and like direct them to someone else that might be interested or where it might be relevant. The worst thing that it can do if that happens is. You just one [00:57:00] up it and say like, wow, but maybe I can twist it around so that it’s relevant for you.
And say, and that happens actually pretty frequently, right? They sort of like try to then spin a narrative around their startup that makes it appealing to you. Even though you just told them it’s really not relevant for me. That’s bad because it’s also not good use of your own time. And it might actually annoy the other person even more.
Uh, so yeah. It also
Thomas: looks bad on you, right? Like, I mean, you’re selling without data and if you sell without data, that’s one thing. But then. Selling it, like changing your narrative, the narrative that you believe in, in order to get money, that’s kind of like selling yourself out. It will never, even if it works in the short term, it will never work in the longterm.
Because it’s not building the relationship, right?
Charlie: No, I would totally agree. I would say it doesn’t work at all because you’re showing zero conviction in your idea. Like, it’s just like, yeah, yeah, oh no, it does this, it does what you want. Like,
Thomas: wait, it really doesn’t only fans for hamsters. Wow. That’s [00:58:00] amazing.
Like, that’s exactly what I wanted to start. Like series B. Wow. Amazing.
Charlie: Um, so to summarize it’s don’t be a taker, build a karma bank, add, bring value, engross yourself in an ecosystem. If you’re really serious about it and you have the capability, Move closer to an ecosystem so you can up your frequency of exposure to it.
Uh, invert and think about all the things you don’t like when people are trying to sell you something and do not do those things and stick to your guns. Like you will get a lot of nos. I think one of the, there’s an article I read, uh, recently by YC, which was on average, you’re going to get 77 nos before you get a yes, just to make it real, tangible.
77 nos. That’s 77. If you’re lucky 15 to 20 minute meetings for a no, and to Sebastian’s point, ask why [00:59:00] every interaction is an opportunity to learn why don’t lose that opportunity. And Sebastian, there was investor relationships are how much longer the marriages do we have the, do we have the figures?
Sebastian: Yeah, I mean the. Let, let’s let, let’s just say you’re really going in early stage, right? So you probably stay connected with your, with your master for at least five to seven years. Uh, n now we could, we could be funny and look up how long the average marriage is in the US . Uh, it must be smarter, pretty.
Thomas: I’m, I’m pretty sure, like sure. The last 10 years, that average like with dropped steeply. So, you know, like, uh,
Charlie: in the interest of time, number five, we’re gonna, we’re gonna talk about cap table management. So if we were going to quickfire, how should early stage startups manage their cap table, particularly when planning for multiple rounds of funding?
Sebastian: Uh, number one, get an expert, get like, uh, someone who has done this before, who has experience and, uh, who can tell you the ins and outs. Number two, don’t get [01:00:00] over diluted. I think we touched upon that already. Uh, you want to stay motivated. Number three, uh, don’t create any weird provisions that are out of whack, uh, because they will definitely not bode well with, with any future investors.
Um, keep it clean, keep it simple. And lastly. Uh, don’t have too many investors on there. Like, I mean, you know, people argue back and forth on that, but general rule of thumb, if you have a lot of small checks, maybe pull them as a syndicate, uh, to like, just keep your top cap table clean and not have like a, uh, a rave party going on, on your cap table with like 500.
Charlie: Okay. Question six, exit strategies. What exit strategies should be considered while you’re structuring your financial terms? In the beginning phases of the startup.
Sebastian: Oh, are we talking, uh, crypto or, uh, uh, equity? We, we’re talking,
Charlie: we’re talking like emerging tech. So crypto and, or [01:01:00] AI.
Thomas: Okay. I was going to say both, both I think are valuable for our listeners.
Sebastian: Okay. So for the record, a rug pull is not a valid access strategy. Oh shit, that was
Speaker 5: my business idea. So wait, sorry, I thought it was a business idea. Well,
Sebastian: just want to put that out there. Uh, reality is, uh, the absolute vast majority of companies of startups exit by acquisition. So to the, to the order of like 80, 90%, uh, actually, sorry, more than 90%.
Um, Way more, uh, only like one or 2 percent actually make it to IPO because not every startup has the magnitude of doing that. Um, and honestly, if you’re a first time founder, um, you should just, just make up your rough mind how an exit could look like, but honestly, don’t waste time reminiscing about that because, uh, first of all, there is no guarantee.
Key and second. Honestly, it’s also not that sexy. If you [01:02:00] raise your pre seed round to come in and say, Oh, we’re going to exit the company in the next five years with this, and this is going to be the, uh, person acquiring us. It just really raises a lot of eyebrows when you think you already have your exit figured out before even getting your first customer.
Uh, so maybe focus on creating revenue first and then worry about exit. So it’s like general rule of thumb. Uh, but that being said. At least have it somewhere in the back of your mind and like have some sort of vision or acknowledgement that if you raise venture capital, investors require an exit. So you at least should understand what they are longing for to actually make an investment.
Charlie: That’s a really salient point. Understand who you’re getting into bed with also understands their investment horizon, meaning how long, how long has that fund been going for? Usually a fund On average, five years, three years. If they’re web three averages do your research, but [01:03:00] if they’re two years into a three year cycle, likelihood is they’re probably going to want to see money sooner than later.
Correct. Um, all right. So question seven, protecting interests, how can founders protect their interest and maintain control? And what are the gotchas when negotiating with venture capitalists?
Sebastian: In general, only raise the money that you need. Like honestly, uh, don’t over race like the, the biggest caveat or the biggest fallacy I’ve seen over the last couple of years in, in startup world and venture capital people treat.
Raising money as a goal of a startup.
Speaker 4: It’s
Sebastian: not like literally it’s not your goal is to build a successful, profitable business over time. And you need capital to do that. So getting capital is a means to a goal. It’s not your goal. Um, so don’t over glamorize your closing of your round, like, yeah, sure.
Shoot out that LinkedIn post or whatever it is that, that, that makes you [01:04:00] happy and brag a little bit about it. It’s a great accomplishment, but it’s not the goal of your company. Uh, so don’t see it as one and really only raise the capital that you need to get to the next stage, whatever that stage is. Um, so that already protects your interest because now you don’t over leverage on debt because while we are talking about equity investments, think of the investment that you get as debt.
You still owe the people shares and you still owe them a part of your company. It’s just a different form of that, really. Um, so the biggest, the easiest way to protect your interest is to only give as little away as possible and only raise the money that you need. And then there’s a lot of details in how to structure your cap table and your term sheets to actually protect your interest on an operational layer.
But we go into that, uh, in our blogs.
Charlie: On the blog. All right, cool. So number eight, milestones and funding. What milestones are critical to secure before you approach investors for a pre seed seed? And how do these [01:05:00] influence the terms set in the financial agreement? It’s like we’re talking traction kind of numbers.
Sebastian: So what I can only recommend here, because we’re talking about We could go into so many details right now. And, uh, the milestones really depend on the vertical you’re in. So B2B SaaS has different milestones. Then deep tech has different milestones. Then a B2C marketplace has different milestones than web3.
But generally think of all metrics that resemble traction. Usually the number one is revenue. Well, profitability, right? So there is specific, let’s say, revenue ranges that are expected. Let’s just say for a B2B SaaS, uh, seed round, usually you should be, you should be hovering somewhere around half a million to 1.
5 million in ARR, annual recurring revenue. Um, and. You also should show that you’re growing constantly. So another factor is how fast does that grow? So there’s like, there’s usually like a triple, triple, double, double, uh, stuff like [01:06:00] that. So basically you want to show that you are on a growth trajectory.
Um, and then there’s other things like capital efficiency, churn rates, uh, your capital burn, yada, yada, yada. So. There is a plethora of metrics that can be measured and the actual milestones that are expected per stage really, really vary by, um, by the actual type of startup we’re talking about. So web, web three, for example, it can be the, the TVL, right?
Like the transaction value that you see, uh, if it’s like a, an infrastructure play can be the number of users, like the wallets that are connected, um, Things like that, so you should really educate yourself about your specific vertical. And see what other companies has, have achieved. And honestly, there is great content out there.
So there is no excuse for you to not do that. Uh, and it’s actually not taking that much out of your time to like, just go down for a day and like do the research, um, [01:07:00] to find out recently what were rounds that people got invested in, what were like the typical milestones that they reached, uh, just as an example for deep tech.
Uh, It’s a lot about IP defensibility lab research, right? So it’s completely different than the typical B2B SaaS play, for example. So educate yourself. There is plenty of information out there. I can only recommend Google keywords. Metrics for startup fundraising, metrics per round. Uh, what’s like the typical benchmark numbers, uh, for, for each startup round.
Right. So there is a couple of keywords that you can search for that will help you find those out rather.
Charlie: And we’ll follow up on the blog. Um, okay. I feel that somebody’s
Thomas: pitching very heavily for the, for the blogs that are to come. I’m hyped.
Charlie: Yeah. I mean, we’re, we’re going to stick that HSBC stuff on there.
We’re, we’re going to really try and put, like, collaborate with Sebastian to really try and create that roadmap. Um, so because it’s longer than an hour [01:08:00] conversation, right? Um, so nine investor relations, this, we, we talked about this at length in the pre call, how people just get this wrong. Like what strategies should founders employ to effectively manage these relationships with investors?
As an investor, what do you want to see when, when you’ve already avoided some, some capital?
Sebastian: I think there’s two easy tips here. Uh, again, a lot more that we can follow up on, but the two low hanging fruits are update your investors. Like you wouldn’t believe how many startups actually fail on that. Uh, and basically.
Go completely radio silent and ghost their investors. Don’t be one of them. It actually doesn’t take that much to do a monthly update for your investors. Uh, and you should actually do that yourself to also keep track of your own progress with your team and everything. So you don’t have to do an extra update, just do whatever you do to actually steer your team and steer your startup.
Right. And just share that once a month, uh, that already can make a big difference and [01:09:00] create a lot of trust and confidence. And with that, you can also. Formulate concrete asks. Like if you need intros, if you need specific things from your investors, then use that regular update to ask him. And it’s easier to ask an investor.
If you keep them in the knowing, then to ask them, if you went radio silent for six months, and then out of a sudden resurface, uh, wanting something from them. You see that. Doesn’t go that well. Uh, because they actually might’ve forgotten you at that point, uh, since they probably have 20 other portfolio companies that they have to cater to.
And those companies might’ve been more active in keeping touch, keeping in touch with their investors. So just bear that in mind. Um, and other than that, it’s like, yeah, it’s about confidence and trust. Uh, it’s, it’s, it’s about keeping report open. Um, and. Also like being, being transparent with like your, your traction and like, you know, pointing out problems like that, that doesn’t, that can be an, an ad hoc basis.
It doesn’t have to be regular [01:10:00] updates. Um, but, uh, generally speaking, treat, treat your investor like an extended team member, careful. Don’t expect them to do operational work. They are not hired. Uh, like they, they, they won’t do your marketing strategy for you. Um, but if you have, you know, a pressing question where they might have experience or a network, uh, ask them.
Thomas: Yeah. I think that’s, that’s very often overlooked. People think, Oh, I have investors. So I shouldn’t come with my problems and challenges. It’s like, no, you should like, that’s why these people are generally strategic investment. Sometimes there’s, it’s just a check, but often it’s actual strategic investment.
So you can go to these people and say like, Hey, you are an expert in this particular vertical. Give me some perspective on this problem that I have, and because I can’t seem to solve it X, Y, Z. And. More often than not, they will say like, Oh, that, Oh yeah, we solved that 20 years ago by doing X, Y, and Z. You should probably try this or, Hey, I know somebody that can help you.
Let’s let’s connect you and let’s [01:11:00] get this out of the way. Exactly. Be, be open, be there. Don’t be afraid. I think also of your investors, because it’s very often they’re like, yeah, but you know, they invest a lot of money in us. Yes. They want to see you succeed. So that means that they’re really, really there to help you and not just to.
You know, like point you down and say like, Oh, you’re a complete asshole. Like, yeah, you’re really shit at your job. Now you’re a founder. Of course you make mistakes, but these people are here to help you. Right. But to the extent like they won’t do operational work for you.
Sebastian: Yeah. General rule of thumb.
Investors genuinely try to not make their investment go to shit. So you, you, you, you can leverage their intrinsic motivation of seeing you succeed.
Charlie: Well said. All right. So this is the last one. And I think it’s one of the. Springboard’s really into a very brief brainstorming session, depending on how much more time you’ve got Sebastian, but, uh, future proofing and, and this is where, I mean, when I’ve sat in these tables, it’s where we get interested.
We’re really starting [01:12:00] to, you know, you understand your vertical, you understand the vector to the market. But with emerging technology is rapidly changing and you’ve got to have well, where I get excited is an innovative business model, but the term that everybody uses is moats, right? So one of the, some of the, the frequent moats, the frequent business models.
That you’re seeing in the space right now, are there any frameworks that we can just, you know, list off one, two, three, that, that are investable, that are hot right now, that, that are things people should look at.
Sebastian: I might have an unpopular opinion on that. And I don’t know if that is like general consensus among the VC community, but it’s, it’s, it’s, it’s my opinion.
Uh, so unless you are in deep tech. Uh, where, uh, technological modes, uh, are still absolutely relevant. So IP trademarks, like you, you have technology that others don’t have, uh, simply put in like hardware, but also could be like, uh, it could be blockchain or blockchain is a bit hard because most of it is [01:13:00] open source and IP and open source is usually tough.
Uh, same, same, same applies to AI for some part. Um, honestly, I personally think right now we are moving to this point where the distribution mode, uh, will be the most important mode, uh, in, in the reason being is back then you also had brand modes, you know, like, you know, sales mode, stuff like that, all of that.
And in technological mode and software as well. I think that I see that vanishing more and more. Well, why is that? It’s because we, we are in a more fast paced society right now. Um, the speed and velocity of technological change is absolutely crazy. So if you have a, a. Small innovation in like in a gen AI application layer solution.
Chances are that that technological mode might actually not be there in six months anymore because the foundational models and the underlying technology has advanced so quickly. Um, and the other thing is I don’t, [01:14:00] I don’t know if people are still that much into brand loyalty. Honestly, I sometimes really question if that still is a thing.
Having a strong brand never hurts. Don’t get me wrong. But I don’t know if I would still consider that a real mode. Um, reason being is you can just be overtaken left and right. And the biggest and strongest mode these days that I see is distribution. Like, can you ship your product to the customer quickly?
Like, do you have the network, the channels to immediately reach your target audience? And then that’s one of the, honestly, that’s one of the reasons why personal brands and social media have become even more important because a lot of people use exactly that as sales channels for their products. Now, most of them are like consulting services and typical entrepreneur stuff and people sling their, their courses and like their educational content.
Fine. That’s usually not startup. That’s. Consultancy work, I would call it. Um, but, uh, [01:15:00] that being said right now, I would argue that’s the strongest mode you can have. If you don’t have, and on the flip side, if you don’t have a distribution mode, you’re going to have a hard time actually surviving as a startup.
Charlie: That was an excellent answer. Lots to think about there. Cool.
Thomas: Well, yeah, it’s, it’s, so like, you know, one of our brainstorm points was like, how do you retain that? Like, first off, valuable, like how valuable is it? And I think we just discussed it. But then how you retain it, right? Like definitely in a fast moving pace.
Uh, as we are in this industry, both blockchain and AI, um, is distribution enough or got the game harder because there’s the other side of it where, okay, you have distribution, you, you are being like, you have first mover advantage sometimes, which is great. Uh, if you’re being taken over, what’s next, right?
Like if you didn’t build out your brand fast enough or strong enough or your sales or everything like it, it’s, uh, Uh, I think it’s a really tough, [01:16:00] uh, balance at this point, right? Because everything moves so fast in this industry, it, it goes from literally, you mentioned it earlier, like, uh, meme coins, right?
There’s no value of it. Then I took the industry by storm. There’s a lot of theories why, and you know, people are bored and cetera, but it happened anyway. Well, there’s a lot of very strong brands out there that hold it. Most likely meme coins won’t survive, right? Although, uh, Shiba Inu, just, uh, like I found that out a couple of weeks ago because one of our clients is building on it.
Um, moved into Shibari and they actually have, have an, an ecosystem right now. I had no idea how did they start, you know, as a, as a trashy, no value token. Right. So, um, I think they have distribution and now they have brand loyalty. So there’s like, how, but how do you retain that? That’s a really hard piece, um, that I see.
Our clients sometimes struggle with it. Like, yeah, but our distribution is great or our technology is great, but how do we retain those users in the next, well, I normally would say two to five years, but in our [01:17:00] industry, definitely when it’s a bull run, it’s like six to 12 months, six to 18 months. Right. I don’t have an answer.
I’m very curious. Like, I don’t know how you guys look at this because for me, it’s, it’s, I think the current landscape that we’re in and maybe it’s because we’re insiders. I, I would not start a startup in, in this landscape because it’s so tough. It’d be personally, right? Like I’m not saying that I think a lot of people should.
Sebastian: I mean, there’s two good things about this. So, um, you actually just mentioned it. The way you retain that is by building strong communities and, uh, eliciting, uh, strong network effects that one reinforce, uh, Your revenues by recommendations, word of mouth, and basically your, your users becoming your fans, uh, and attracting even more users, um, by sharing it, engaging and like basically becoming like brand advocates, um, and networks create lock in effects, right?
So if you start building on one network, [01:18:00] you most likely won’t shift after six months because the switching costs would be too high. Uh, so it’s sort of like also creates a natural block. The other good thing is that while Gen AI creates so much noise and, uh, move so fast, um, which makes it hard to sustain a lot of competitive advantages or modes, uh, it also enables you to be a lot more efficient in building.
Uh, so I think, uh, we, Sam Altman said that, that we will see. Uh, unicorns with one person, like one, like one founder, one person, unicorns. I disagree with that statement personally, not because I want to disagree with Sam, but, um, I feel like there is more to building a long lasting company than just having a product that is then like basically developed, driven and whatever by AI.
Uh, but maybe I’m just too short sighted on that one point being though, is he has a very valid point in that, that, that companies can run. A lot leaner and more [01:19:00] efficient and faster, uh, supported by AI agents and by by automating. Tedious tasks that didn’t really contribute to the core value of a product, uh, using AI.
Um, and I think that that’s a strong narrative and maybe partly one of the reasons why we’re seeing these, these mass layoffs in tech right now, because, uh, sort of like even the big hyperscalers are preparing for that moment. Right.
Charlie: Yeah. My, my take is, um, if everything’s moving towards automation, lean the other way.
Your edge is the other way, it’s the other direction. So yeah, it’s, it’s not, it’s no longer manpower. I don’t have more men in my army. It doesn’t matter anymore. What matters is then quality people that can then activate on what it is you’re doing. So bigger karma bank, deliver more value to your community, generate more goodwill, put your face out there and help more people genuinely get involved and like, [01:20:00] you know, give of yourself to, to help people succeed.
That’s where I think the edge is like, what value is your product actually bringing? And then of course, speed, I think. It’s, it’s a fast market, be fast. I think it’s the other thing, like, I think Sebastian had a great point. Switching costs, churn, whatever nomenclature you want to use, are really low, right?
Like it’s, there’s no longer just Netflix. There’s Disney Plus, there’s Paramount, there’s HBO. What do I want to watch right now? Okay. It’s on Amazon Prime. We’re going to buy that for five bucks. It’s the same sort of thing. Like you now have options in a world where you had to have massive infrastructure to.
To build a project, whereas now call someone up like Thomas to build a POV rapidly and you’ve got a product. It it’s, it’s like you’re, you’re ultimately as you’re trying to find the edge. So I think it’s have a great team of people [01:21:00] behind you are helping you back that your network and their network, if you genuinely help them, these things compound, have a cargo bank of people that.
I mean, referring back to episode one, when we were talking to Ian, uh, sorry, we were talking to Tim, Karma Bank, like do enough good in the world and good will come back to you, hopefully, and genuinely network as much as you can. Like that’s that, like, I, I always refer back to the old school stuff. Maybe that’s cause I’m old, short sighted.
Thomas: You’re not that old, Charlie. I
Charlie: was going to say old sighted, that didn’t quite work, but short sighted is right. It’s it to me. I, I think that’s where I think people have to remember, even though like AI can do stuff quickly, is you haven’t spent 15 years learning how to be an accountant, haven’t spent 15 years learning how to be a lawyer 15, 20 years at the top of the game.
Sure, you can write some prompts, but you still gotta know the question to ask it.
Speaker 4: Yeah.
Charlie: You, you, you, you’re not gonna be able to learn all of the [01:22:00] stuff that you are gonna need to, to know. You’re gonna need to know what the questions are.
Thomas: And that’s, I think the point, because I think it’s the layers in between the expertise that AI is really good at, uh, um, well, making efficient and actually retain value, right?
So if my previous company, uh, these guys built. And, and, I don’t know, really, really great AI solution and you should check it out. Actually, I don’t think he can, because it’s mostly, I think they must be using an internal, but it was for building a project plans and, uh, sorry, a sales plans for, for projects, uh, leads that came in and how they built the agents in the backend was like, you know, they saved.
Like, I think like two, three weeks of sales just by using, utilizing the right agents. Which is super valuable. Uh, what was the, uh, the agent writing the project plans? No, but it was giving, getting all the information, summarizing it so that a human that was an expert actually could write these [01:23:00] project plans better.
And I think that that is value, but to both of your points, like, um, and maybe I’m playing a little bit like, um, devil’s advocate, I think community is super important in, in retaining that value. But if you look at. AI doesn’t have communities, right? Uh, so Jenny, I doesn’t have communities, old school data science doesn’t have communities.
It has customers. Um, and even if you have communities in emerging tech, like blockchain, most likely, I mean, and, and I’m maybe just saying something and, you know, the listeners can just attack me on this one, but I, I think that the value of that your community brings is adoption in your, in this, like in your, with your users, but it doesn’t get you to paying customers, right?
Like I, I am, I have a theory that most crypto, uh, enthusiasts are not using the, uh, uh, well, not using the products that they’re looking at that they’re hyped for a company for the, for the tech, but they’re [01:24:00] not always using it. And Liam, if you’re listening to this, Liam, Liam, our cohost, he is using all the new tech, which is really, really great.
But I think that he is at a disadvantage of like, most users are not like him. They’re most likely more like us three, right? Yes, we use MetaMask. Why do we use MetaMask? Because we want to buy, you know, a token, right? Do we really care about consensus? No. Is there a community around MetaMask? Probably. Will they, they bring more partnerships in?
Probably not. Do they count for the numbers that will bring more partnership? Yes. So it’s, it’s a bit like. What I’m, what I’m trying to say here is that on one hand, you have an industry that has a large community, but has never, I think, fully adopted a mainstream or mass adoption. And I’m not saying it’s not coming.
I think it’s definitely coming. On the other hand, you have gen AI that, uh, very quickly got into mainstream adoption. And [01:25:00] obviously this commercial, like it got commercialized really quickly over the last two years, like two, three years. And of course, AI is here for a long time. With no community. So what, like, and then on both sides, how do you retain that value?
Because on, on the crypto side, I think there’s a lot of value that’s not properly coming out. And on the AI side, I think there’s a lot of value that’s coming out, but that’s not going to be valuable in the next six months because they’ve been the first mover advantage is sometimes I think not even existing in, in gen AI land because it moves so fast.
So where, where, where do you sit? Where do you. You know, where do you go in this landscape? Right. Like, and again, uh, that was that’s the kit, right? So I might be, you just might say, Thomas, you’re talking out of your ass right now. You should stop talking right now, but that’s my perspective. I think
Sebastian: Charlie and I were both waiting for the right moment to, to, to say that.
Now, I’m just kidding. Uh, yeah, yeah, yeah, totally. Well, now you got, you got a great point there. Uh, [01:26:00] and while, while I wouldn’t necessarily agree with all those statements that there was a lot of valid points, I think, you know, there’s. There’s a couple of interesting points as well, when you compare Gen AI to crypto, uh, and then hype cycles.
Uh, so usually what you see, you see a bubble expanding, uh, and yes, I called it a bubble. Uh, yeah, you know, crucify me for it. Um, but usually what happens after the bubble bursts, you see contraction of the industry, and then you see the steady productivity growth. Same thing happened with the internet at this point.
com bubble, uh, same thing happened in the crypto industry, uh, 2017. I remember like there was literally a new Ethereum killer coming out every week. Right. Uh, none of them actually managed to live up to that claim, but it’s, it’s, it’s the same with, uh, Jenny. Realistically in large language models, there was a new GPT killer coming out last year, pretty much every month, right?
Oh, we have to spread new infrastructure. Look, look where they are right now. But [01:27:00] I think on the large language model side, we now see the contraction, uh, of like closed source and open source. Uh, and we’re going to reach that plateau of productivity. We are not there yet with Gen AI apps. Uh, I think that is way too bloated.
And quite frankly, unfortunately, crypto got into this bloated state again. Uh, I don’t have the numbers right now. I didn’t check it before this call. Uh, I think we have over 20, 000 different crypto tokens. So yeah, it’s
Thomas: still, it’s still around that same, uh, time of a number. Like it, it, it, it always kind of contracts and then expands back to 22k, something like that.
Sebastian: Yeah. And that’s, and that’s way too much because I would agree. I would argue that probably 90%, 95 percent of them absolutely do not. Like have a sustainable business model, uh, again, crucify me for that statement. But, uh, just the last seven years have shown me that a lot of them live on, uh, their community and the tribalism, uh, which is great, you know, great to have strong community, [01:28:00] but you are absolutely right.
You have to, you have to be able to create that jump from the community to real customers. Like, uh, and, and customers also have to come without the community while your community can help you find customers and can bring down your customer acquisition costs. Still, uh, your product will only succeed and survive if you are able to, uh, attract customers outside of your community.
Uh, cause at some point, otherwise your, your, your customer base will be very limited, uh, and it’s going to be hard to expand further. Uh, and if I think about it, you, you made a very good point there. If I think about the products that I’m using. I like Android, I have a Samsung smartphone, uh, for work I use an iPhone.
Um, I use them every day. I’m happy user of the products. Am I active in any of those communities? Absolutely not. Um, and like same [01:29:00] thing with, with, uh, JetGPT, actually there I am active in the community. I’m building my own GPTs. I’m like. You know, like looking into the, the developer forums all the time. Uh, but there is an interesting dynamic there too.
Uh, did you know that we have like over 3 million GPTs at this point, right? Like this, this marketplace of, of chat GPT is over 3 million right now. Uh, and I took fun and like reverse engineering some of them and like going in and basically like a prompt and checking them to like, uh, see the instructions, 90 to 95 percent of them are shit coins in crypto terms.
Like they, they literally have. Instructions that are like five sentences that literally all of us could do in like five to 10 minutes if we like put our mind to like creating this GPD. Uh, so there’s literally no USP, no mode or nothing yet. They are still number one in the GPT store for their respective, uh, verticals.
So it begs the question why, right? Brings me back to distribution mode. Because [01:30:00] they figured out an extremely smart way to position their GPT and get everyone to use it.
Thomas: But, but then once again, like, I’m very curious to see, okay, they will probably be there for the next three months, but what after those next three months, like, right, like this, this is where, how fast it goes.
Charlie: This is where I go, Thomas,
the community piece, I think is where you’re going to still loyalty and brand. And that’s where, so you have the initial value that you provide the Is positioned correctly to bring them in, but if they’re just a transactional buy, like I can buy bread, I’m going to use the English ones because I can’t pronounce the Portuguese ones, but I can get like Tesco, Sainsbury’s, Morrison’s, Lidl, Aldi.
I can buy bread at all these places. But the one close to my house is Sainsbury’s and I like the cookies that they sell better than the one to Aldi. Right. Then you start to like, Um, actually I quite like the bakery [01:31:00] there. I quite like, like, they, their gas is a little bit cheaper. Well, I, and then you get into the, well, I’ve now got points.
Thomas: Yeah, that’s a flywheel.
Charlie: I spent three grand on petrol. So I get the tier of points that make the 15 cents cheaper. And that’s community. That’s what I think. You’ve got that, that leverage. I mean, on the, on the balance sheet, they call that goodwill, right? Like you’ve got that element. of special sauce that says, I’m going to go to Sainsbury’s.
I’m going to go to AI product here that I identify with. And I, and it’s like to add something spicy. I genuinely think we’re in an age of identity for the obvious Hype Hype reasons, but also I really like a specific director. I really like a, Uh, you know, the specific show, like I identify with that. And I think we’re from the marketing point of view, going [01:32:00] into, uh, uh, like I use this suite of tools might be the extension to that or where that community piece is going.
That’s just putting it out there in the, in the ether.
Thomas: It’s interesting that you’re saying this and coming back to your loyalty card point. Um, there, there is a community around like an Aldi or, but do they know each other? No. Do they communicate with each other? Most likely not, but they all use, uh, the same loyalty.
They’re, they’re all loyal to the same brand, which is also, um, you know, our supermarket’s, the infrastructure of society probably. No, I mean,
Charlie: using the loyalty, like, like everyone knows No, but no to,
Thomas: but to your point, like, so, you know, you have the crypto communities where everybody, uh, speaks to each other and I think the.
The retention of value of an Aldi or like a loyalty cards of supermarkets is super valid. Like you go back because you get something right.
Charlie: Um, the metaphor for a value system that could be created around exactly. [01:33:00] And
Thomas: is there anything like that in crypto communities within blockchain? Right? Like are there loyalty card systems?
People are trying it now. But not like, you know, the actual, actual loyalty card, but like, what, what, as you said, like, okay, you know, your, your, um, blockchain A and you do, okay, you do DeFi, you do GameFi, you do, like, there’s no chain that does all of it and keeps all the people there. Uh, and that was been my biggest issue that I think we always said we need an aggregation of all these things so we can just, you don’t need 20, 000 chains, you need, I don’t know, a hundred maybe, right?
But how do you, how do you get these customers into the supermarket model where they don’t need to talk to each other? Again, my, my mom needs to start using blockchain at some point, right? Like that’s, that’s the mass adoption we’re all talking about. She don’t need to go into a community and figure things out.
No, she just gets a loyalty card and she goes, go do game. If I go to defy, go to social fight, like whatever fi it is, right? Like [01:34:00] without, so that transition, I think retains value of. What starts as I think an early stage community and, and to your point, like to your point, Charlie, and loyalty cards can have the highest tier of, of loyalty because you don’t need that community that talks to each other anymore, right?
But early
Charlie: stage blockchains, you do. I think that’s the moat, like, like to expand or metaphorically explain what, to add to what Sebastian was saying. That’s, that’s where I think, um, you have brand loyalty, like for example, Nike, there’s no reason those shoes could cost 150 other than the fact it’s got a Nike tick on it.
Thomas: That’s not true, Charlie,
Charlie: they cost 8 to 12 to manufacture. And then, you know, the rest of the budget goes into the store, you know, like shop bits out, it’s like really cool music, you remember that perfume they continuously spray as you [01:35:00] walk into the, you know, all of that kind of stuff is, is where the, the other a hundred dollars goes.
Um, but, but I think it’s, it’s that. Is where you’re going to say, you’re going to start to see technology businesses doing the same sort of thing is kind of where I, where I’m taking it.
Sebastian: To your question, Thomas, like where, where does that come in with that three, uh, this, this loyalty system. Right. I think actually like at the moment, how it is your wallets.
And your platforms within an ecosystem are sort of like this loyalty card. Uh, but unfortunately not in a good way. The only reason that they are that is because the friction and the switching costs are so high, right? Like, because if let’s say you engage in a specific ecosystem and you have like you, you, you hold the.
Token XYZ in a specific chain. Uh, you, you adjusted your tooling to that chain. So you have a wallet for that [01:36:00] chain. You have this and that, you know, your sites. So, and, and since all of that is so involving and time consuming, and this is also for the record, like even for people who has been in that space for five plus years, this is my, my cry to founders for the future.
For Christ’s sake, please, please, like think more about UI and UX and make it more convenient. If you really want to see like mass adoption, if I have to jump through this, like 10 step process to set something up, shit, like, I mean, first of all, no one reads instruction manuals, uh, especially not men. Women are a lot better with that, by the way.
Uh, like we just usually throw them away and then, uh, Go on this tantrum where things are not working. Um, but like if, if, if I have to have an instruction manual to, to, to use a software tool, um, and like have this like 20 step process that I have to follow just to like unlock the value that I want to get out of something.
I’m [01:37:00] losing interest after step two. And that’s usually when I have an adjourn, right. And yes, you create a lock in effect with that, and you retain the community by making it so hard to switch or making it so inconvenient. That’s not a real mode, if you’re honest. That’s just, uh, it’s just No, that’s a vendor lock.
Thomas: That’s a vendor lock. Yeah, exactly. Thank you. And I mean, like, and I think that’s the hard part of, well, that’s the hard part of Krypton. That’s the interesting thing about Gen AI because Gen AI moves so quick. There is no vendor lock because I mean, maybe on, on, on different, uh, LLMs, right. But, um, they will probably have their own ecosystem at some point as well, but it’s easier to replicate.
Crypto is, it loves vendor logs and calls it, no, it’s loyalty. It’s like, no, it’s a vendor log.
Speaker 4: Exactly.
Thomas: We’re going to get crucified for this one, by the way.
Charlie: I see spicy.
Thomas: All the maxis will roll out. They’re like, ah, so we’ll dogs the hell out of you now. Uh, yeah. [01:38:00] So, so, you know, I think. Retaining value is, will always change as we move forward, um, with emerging tech.
And I think as a founder, it’s really important to understand when to stick to your guns, uh, and when to pivot, right? Because your value that was definitely in the bull market, but that was six months ago, first mover advantage might have now been. Changed by either that the, the, the LLM or, or chain that you’re building on.
They just took your value and they said, goodbye, you are useless right now. Um, or if somebody else just is faster and quicker. So this market, you gotta be on edge, but also if something is good and if something works and you have the traction. Don’t change it if it’s not broken. So it’s, it’s a really, really hard balance to strike.
Uh, and I’m sometimes glad that I’m a technologist, uh, and, and not in business [01:39:00] operations or in venture capital because it is a really hard, hard world on a hard industry to, to work in. Definitely in the current, current market.
Sebastian: Green, look, look at what happened with, with, uh, Sora, right. When OpenAI, uh, released Sora, or announced Sora, they pretty much put 80 percent of text to video startups out of business.
And, and those received quite some considerable funding just like six months before that. Uh, so there might be some one or two survivors that can do something that Sora can’t do. But, uh, yeah, that, that’s just. The world we’re living in right now. So honestly, one of the biggest questions, if you’re building an AI, uh, and I said this before, uh, and, and I’ll say it again, like one of the biggest questions you should ask the founder is how big is the risk that one of the foundational model providers will just do my thing just at scale a lot easier.
And already with a hundred million users, uh, using that technology easily. [01:40:00] Switching them over to the new thing, right? Like, uh, because that is a real risk. If you’re, if your solution is too broad and this, this is actually like completely contradictory to, to anything that we see would normally think about.
Like you want to have this big TAM, this big addressable market right now, like with Gen AI, it’s, if your market is too broad, there is an extremely high risk of the foundational models, uh, just. Venturing into that application layer that you are building, uh, and basically knocking you out before you can even like, uh, build up, build up that community that he would need to survive.
Yeah. Um, and for, for anyone like sticking with us for this long, like one, one, one last nugget, uh, I’m going to drop, uh, because I just find it super fascinating. So there was this overview of average time to product market fit. Like really known like startups, like Canva, uh, Ram, uh,
Thomas: I’ve seen that. What was it?
Sebastian: Uh, uh, [01:41:00] slack, uh, fema. Yeah. Like, like, you know, like really well-known unicorn startups that have been around for the last 10 years sometimes.
Speaker 4: Mm-Hmm. .
Sebastian: Um, so the variety was from like six months to four and a half years of product market. Average was hovering around two to a half, two, two, two and a half years.
Now, if you say that you usually have iteration cycles every two to four weeks, just do the math, how many times you iterate. And I don’t know a single founder and talking with them about their startup when they reached market fit that didn’t pivot. I would even say you can, you can bet that about 90 percent of startups don’t grow big with the solution that they initially started with.
Look at Airbnb and all of them, right? Like, so. What that means is First of all, if you are not willing to, to let go of your initial concept, because you don’t see the market responding to it, uh, then you really should consider if you want to be a founder, that’s one, but to frame it more positively, um, [01:42:00] if you are resilient enough to stick with it for two, two and a half years, uh, going through a lot of bad times and hopefully also a lot of good times, then there is a high chance that you will see this inflection point where, where, where people are pulling.
There is two things in conjunction with. What we just said, one, Gen AI might reduce that time, uh, because you might be able to iterate faster and get to the point faster, but secondly, it’s also a real question that you should ask yourself, how defensible is the solution that I’m trying to build
Speaker 4: and
Sebastian: can it actually last for the next two or two and a half years without being out competed or completely replaced?
Because technology will move so fast that what I’m building right now will not be relevant in two years anymore.
Charlie: Amazing. Yeah. And I think I couldn’t agree more. I think the, the ease of, of creating, like the ease of creating the actual piece of technology can also lead to the ease of switching costs. Um, not only that, the, [01:43:00] you know, I just agree.
I was going to, yeah, pretty much like I was, I was just going to repeat the same thing. It is exactly that. Um, so this is the point of the show where we’re going to switch onto the Desert Island Essentials. Again, if you’ve listened this far and have enjoyed the nuggets so far, please do like, subscribe and hit that bell notification icon.
It really helps us spread the word. Um, so desert island essentials. This is basically, if you were going to, we, if we had a magic button and we could press it and send you back to your early twenties or mid twenties where you’re, you’ve got no bags, no black book, no special relationships with various different people who have influence in the space.
Um, you, you don’t have your current social media and your current following. Basically nothing. You were starting again. What are the five things that you would bring with you to that desert island to start your startup? [01:44:00]
Sebastian: So framing is starting a startup, right? Um, and for that, the absolute first thing that I would bring is a large notepad and pen.
Um, because, and like with large, I mean, like really thick, like a lot of pages, because you will probably like have to trash a lot of those pages. Um, but I, it really helps me scribble and write things down in my thinking process. Uh, and I think it’s, it’s an art that we seem to be. Be losing, uh, as AI moves forward.
But I think for me, it really helps me. Uh, I’d bring jet GPT or some, some offline equivalent, because it can just help you and your thinking process and basically get a sounding board for you. Right. Uh, Is that maybe an offline equivalent that is, uh, soon to be invented, uh, for it? What’s that?
Thomas: Clippy windows.
No, no obscure windows, uh, 2000 reference, but we still had the Clippy. No.
Sebastian: Oh God, that Clippy. I actually [01:45:00] thought you knew about a new Gen AI tool that I wasn’t aware of. Oh, okay. Okay. Uh,
Thomas: I wish, man, I wish I really wish.
Sebastian: I think Charles has a new AI.
Thomas: The day that I’m further ahead with this than you are, Sebastian, um, I’ll let you know.
Sebastian: No, then, uh, two books that I really like, uh, lead and disrupt, uh, by, by Charles O’Reilly, uh, and the lean startup. I think that’s still relevant. And, uh, ultimately to, to keep my sanity intact, a soccer ball or any form of ball that you can like, uh, uh, play around with, whether that’s a basketball or whatever, but so soccer ball was the most.
The, the, the immediate top of mind, because you usually don’t really need any, any additional equipment to, to juggle it and to do things with it. Um, reason being is I think if you build a startup, you, you, you really have to take care of yourself as well and you need the off time and you should not completely lose track of family, friends, and [01:46:00] hobbies, uh, because that’s, that’s really what keeps, keeps you in check mentally, uh, because it will be.
A lot of frustration, uh, a lot of time, like work time and lifetime spent into it. Uh, and so, so I think you, you have to compensate that with something that is just pure fun where, where it allows you to just shut off your brain for a couple of hours.
Charlie: Nice. Nice. I like it.
Thomas: It’s such a red thread, by the way, as well, Charlie, like we we’ve now interviewed so many people, they all say the same thing.
Charlie: Take care of your body, take care of your mind. Yeah, switch off. It’s, it’s amazing. Um, so thank you for being with us on the show. Sebastian, it’s been absolutely brilliant to speak to you. Um, we really appreciate having you on and, um, we’ve been what, three, the podcast where we tell you what to do next, Sebastian, please tell people where they can find you, where they can get in touch, where they can reach out.
Sebastian: Um, best places, LinkedIn, uh, happy to, to, uh, [01:47:00] have you in my LinkedIn following, which just, you know, send me a message, uh, reach out to me there. Uh, I don’t use any other social media, actually. Uh, no, no time for that.
Thomas: And, and the blogs that we’ve been mentioning will also be on LinkedIn, uh, as you are, you have been writing and are writing on a very regular basis about these topics on LinkedIn.
Charlie: Exactly. Thomas, you want to sign us off?
Thomas: All right. Well, folks, this is it for today. Uh, episode seven. Uh, take care. With Sebastian’s pizza. Thank you. Uh, we’ll see you with, uh, for the next guest next week. Um, I’m not going to tell you who it is, but it’s going to be great. Don’t forget to like subscribe and we love it.
If you repost, uh, our content because we put a lot of heart, uh, in this and we’ll see you next week. Thank you.
