Ep. #1003 - How to Be A Startup Investor

Matt DeCoursey 00:00
And we’re back! Back for another episode of Startup Hustle. Matt DeCoursey here with Matt Watson. Hi, Matt.

Matt Watson 00:07
Take my money.

Matt DeCoursey 00:09
Well, I’m going to. At least that’s possible if you’re willing to invest in the startup. Because, you know, lots of stuff over here today. I think a dollar here and $5 there went down to the Coinstar and dropped off on my change. I’m ready, man. I’m locked and loaded. Sign me up. How can I be a startup investor?

Matt Watson 00:32
I think Startup Hustle has grown, and I want to invest in it.

Matt DeCoursey 00:37
Okay, that’s part of it. That’s part of what I want to, you know, to take your money on. So, before I do that, today’s episode of Startup Hustle is powered by FullScale.io. Because hiring software developers is difficult. Full Scale can help you build a software team quickly and affordably and has the platform to help you manage that team. Go to FullScale.io to learn more. You know, man, I look back. And you know, we were about 1000 episodes deep into this. And wow, on that, we started this whole series of podcasts. Episode two is titled Getting Funded Sucks because it does for startups. But on the flip side, it can also kind of suck for a lot of people learning how to be a startup investor. I think that’s a fair way to start.

Matt Watson 01:28
Well, I think this is a great topic because we usually talk about raising capital. But we don’t really talk about the other side of it as investors.

Matt DeCoursey 01:36
Yeah, and you know, I mean, you and I, we’ve both been investors and continue to be investors. We’ve invested in ourselves, we’ve invested in others, we’ve invested in funds, we’ve invested cash, we’ve invested sweat, we’ve invested work. I mean, there are a lot of different ways for individuals, groups of individuals, and even potentially, your company because I mentioned Full Scale, and we own Full Scale together. Full Scale has been an investor. So there are a lot of different ways that you can get into the startup game. But I think, you know, let’s, let’s start with a little, little, a little disclaimer here. So first off, we are not financial advisors, and anything we say on the show is, is just what we have come across. I think it’s fair to say because here’s the thing, if you’re going to invest in startups, wow, you better be ready because it is a very illiquid thing. You’d it’s not like on the Robin Hood app, where you sold your Apple bought your Apple shares at one stoplight and sold them at the next. Yep. I mean, is that fair to say?

Matt Watson 02:44
Yeah, and there’s especially if you’re doing early stage, there’s a huge amount of loss that goes on. So well, it’s risky. It’s risky, risky gambling.

Matt DeCoursey 02:55
But at the same time, depending on where you’re at, and if you pick winners, it can also be really lucrative; otherwise, not that many people would be doing it. I mean, there are billions and billions of dollars that go into startups now. And I don’t want to talk about, you know, when I hear people talk about companies that are about to go public, and they’re like in their startup, no, they’re not. Now, for the purpose of that conversation, we’re talking about early companies like early ones. And you know, now there’s a fact, you know, startup investing by average, investors became a lot easier in 2012. Because they did the Jumpstart Our Business Startups Act the Jobs Act, and which relaxed some of the Federal Security regulations. So I mentioned the Robin Hood app and buying Apple shares, those are publicly traded securities, and they have a different set of rules around them. And what’s and prior to that, you know, the Jobs Act, and also like the Security Exchange Commission voted in 2016, to adopt rules that made crowdfunding more possible. It was really hard. It was really hard for startups to get, you know, you basically just had to have rich people are rich funds, write your checks, and that was that wasn’t always a straightforward process, was it?

Matt Watson 04:17
Well, typically, you have to be an accredited investor. And you have to make a certain amount of money a year or have a certain net worth and, and yeah, so you’re, you’re trying to find accredited investors that can invest. And, as you said, the Jobs Act and some of these crowdfunding things have opened that up a little bit. So people who are not accredited investors can invest in things.

Matt DeCoursey 04:38
Yeah. So when we say accredited investor, the definition means you have an annual income of at least 200,000 or 300,000, if combined with the spouse, and that level of income needs to be sustainable from year to year. You can also have, there’s also, you know, net worth, meaning it can’t be the value of your home. So if you have others, you might have, and maybe you don’t have an income that’s high, but you might have a couple of million dollars in stock or something else. That’s, you know, basically, you’re not gonna, I think what they’re doing there is that with the, with the accreditation process is they’re trying to keep trying to establish a line at which some assumed the form of financial sophistication might begin.

Matt Watson 05:25
Well, you don’t want to go to your grandma and have her cash out or 401k and take her 50 grand or whatever and invest in your crazy startup idea. And then grandma gets screwed, right? Like, that’s the belief. Yeah. So I mean, those are the scenarios I think you’re trying to prevent.

Matt DeCoursey 05:40
Yeah. So that, you know, when the job X came, came through, and you know, here’s the thing is the stuff like this on the government level exists, meaning they want to relax this stuff because they want to see money come in, you know, new businesses, um, they fail a lot. But a lot of times, they don’t. And they create jobs, they create, they make purchases, they solve problems and lead innovation, and a lot of ways that, I mean, that’s America, man, USA. That’s kind of what we’re supposed to be doing. Right?

Matt Watson 06:12
It’s capitalism at its finest, right? And so, I think we could argue all day long that entrepreneurs do a better job of creating jobs, and the government does so true. On the other side, you have socialism and communism or whatever, right, that the government owns all the businesses and controls everything and all that kind of stuff. But as entrepreneurs, we do a great job of solving problems and creating jobs. That’s what the free market and capitalism are all about.

Matt DeCoursey 06:38
Yeah, my favorite is capitalism. And, you know, we don’t get into we don’t talk about sex, religion, or politics on this show. But, you know, when it comes to capitalism, I mean, I don’t know, I’ll just leave it as saying, I think it’s the cure for a lot of things. Because, you know, you look at something like NASA, like NASA doesn’t fly isn’t flying ships to space anymore. They’re gonna outsource it. Yeah, SpaceX, capitalism. Yes, capitalism has to work within a budget and make decisions that make business sense, not just like, hey, you know so that it can be a cure. Now, for those of you who listen to the show, you probably have the dream. Now, this isn’t alright. So we went through a lot of this now. I was just recently talking to someone I don’t need to name, but Matt and I both know, and, you know, it’s someone that’s made many investments and different stuff and said to me, he said, You know, it’s so hard for me to try to determine what I should make an investment in. And I said that’s normal. It’s hard because, realistically, there are a lot of options, a lot of things you can invest in. And how do you pick a winner? You know, Matt, though we’ve talked about this so much. And you know, I love asking people who you want to invest in, the jockey or the horse. It starts with the founder, if you want to be a startup investor, find great founders that you can tell stand out, but it starts, like be prepared to talk to a lot of putting yourself in front of a lot of opportunities.

Matt Watson 08:20
Well, one thing we should talk about is all the different types of channels that, as a startup investor, you can invest in, right? So yeah, being an angel investor, yeah, yeah, being an angel investor, or investing through different kinds of funds. And those are a huge help. I mean, if you’re just randomly going to starve events and talking to random people, it’s a lot of work. I mean, it’s an insane amount of work, especially unless you’re going to write a big check. I mean, if you’re going to invest 10, grand, 20, grand, 50 grand, like, you’re gonna have to talk to a lot of people, it’s a lot of due diligence, it’s a lot of work.

Matt DeCoursey 08:58
Invest out small, small investments like so, if you’re sitting here thinking, listen to this show, and you’re thinking $10,000 is going to move the needle and get you a chunk of equity somewhere, it won’t probably not.

Matt Watson 09:13
Yeah, I mean, there are angel groups that you can join that have some minimum thresholds, and some of them are kind of low. They might be down to 510-1000, which is the smallest, but usually, it’s going to be bigger than that.

Matt DeCoursey 09:27
But if 25, 50, 100, you know, and those are those now, those are common angel investment amounts are the thing.

Matt Watson 09:35
And those angel groups are great because they help.

Matt DeCoursey 09:40
Let’s sit down for a second. What is an angel group?

Matt Watson 09:43
So it’s, it’s a, it’s similar to a private equity or venture fund, some kind of investment fund, but they focus on the very, very early stage like seed stage, or sometimes series A stage depending on where you’re at in the country. But it’s usually some of the very early funds. And you know, people that have a business idea and have a little bit of traction and stuff, you know, or are pitching to these angel groups for investment. And there are a couple of them in Kansas City. And we also have incubators, which are kind of kinda related to this too. And those angel groups are great as an investor; they help screen all of it and do all the diligence, do all the work. And basically, I just, you know, get to look at the 20-minute version of it and say yea, or nay, I like this one, and I’ll put in 10, grand or 50, grand, or whatever it is, without having to like find the deals myself. They’re finding the deals, and they’re screening them. So they provide a huge amount of effort into me.

Matt DeCoursey 10:43
And they’re good for the startup for founders and startups because they can get an audience in front of multiple people that want to write Angel-type checks. So when we say Angel, this is the angel. These kinds of investments are free. They’re like individuals to you or to a startup founder. So here I come as a founder, and I’m ready to go talk to a group of angel investors, and there might be 20 people there. And I’m gonna give my pitch and my presentation. And what I’m really hoping for is that a few of them may be interested. And the cool thing about those angel groups and if you want to be an investor, I think this is a great place to start. Because you’re gonna be around other people that have probably written checks before you, like they have a little bit of experience, they’re going to. You’re going to kind of see what they like, what they don’t, what they’re interested in and not. And you know, and then sometimes it comes in groups, you know, so, you know, your $25,000 check might come with someone else’s 50, and another person puts in 100, there’s a guy with 10, you know, and now all of a sudden, that kind of lumps up to a reasonable amount and, and starts to make the reduce, it reduces the risk a little bit by just, hopefully, I say, reducing the risk, because, well, if you have more money, the idea is that it will at least take you longer to run out of it. I say that with a question mark and a dot dot dot because it’s always the way it goes. I think that’s a good place to start. And you, like you, said as the vetting process helps. As Matt said, just as if you’re just investing straight into businesses, and you’re going out looking for those opportunities, I think you’re gonna, if you don’t have experience, or you’re not familiar with the space, like, I think I could go do that. But I have, I’m pretty well versed in the space, but it’s hard. I need help getting myself in front of stuff. And it’s like, it’s the best, the best deals and opportunities in the earliest stages usually come from the companies that have yet to be heard of.

Matt Watson 12:44
Right? So and to continue talking about this, I would say there are probably three types of angel groups. You’ve got the investment club kind of groups, which might be the buddies from the country club or the poker buddies that kind of just pull some money together. It’s like some friends that do this, do some things.

Matt DeCoursey 13:00
Very common, by the way. Yeah, it’s very common.

Matt Watson 13:03
There’s a lot that now would be like, hey, you know, I find something I like, and I call Matt DeCoursey. And I call a couple of friends. And we, we kind of CO, invest in some things as buddies, right?

Matt DeCoursey 13:12
And then people call you later when they have an opportunity.

Matt Watson 13:15
Yeah, yep. So you get those kinds of deals, too. So if you know somebody who does that kind of stuff, you could sync up with them. And then you have like real angel groups, like in Kansas City, we have Mid-American angels, and there are groups like that all over the country.

Matt DeCoursey 13:28
Yeah, there’s probably there’s one wherever you’re, yeah.

Matt Watson 13:30
And then there’s, yeah, and so like in Kansas City, Mid America, angels, like I think just about anybody can join it. And the minimum investment size is relatively low. It might be five, grand, 10, grand, 20, grand, whatever. But then there’s another group in Kansas City that, like, we’re all the rich guys, the rich families go to, and that the minimum check there will be, like, 200 grand or something.

Matt DeCoursey 13:55
So there’s it has a lot of different types of investment, because in those that become a fund at that point.

Matt Watson 14:00
There. It’s there. There’s still kind of like high in Angel groups, though. You know, it there’s still fun, though, because meaning like there’s a fund manager or someone that is probably well versed in the whole process, all of it.

Matt DeCoursey 14:05
Yeah. And also has the discipline to know and understand and maybe realize, because here’s the thing is, if you’re new to the startup investment game, I’ll be honest, it’s all going to look a lot of it’s going to look like a really good opportunity in the beginning.

Matt Watson 14:28
Yes. Well, and that’s the benefit of these groups, right you go to these groups, and you’re gonna have a wide diversity of potential investors, just like you there and me. They have different backgrounds. And that’s where we can all work together collectively into. Oh, I like this. I don’t like this. Oh, I’ve experience in this industry, it’s a good idea. It’s a bad idea, whatever. And that’s where you kind of have like this herd of investors, and across the herd, they can also kind of help weigh in if this is good or bad, instead of you alone making the decision. You could also kind of get in a room with a lot of other smart investors and work together to kind of figure out, Is this good or bad?

Matt DeCoursey 15:06
Yeah, so let’s so you mentioned we mentioned like individuals, groups and funds and what we can expand on those a little bit, I do want to point out that, you know, you have these crowdfunding platforms now, that you know, and I actually pulled something off of our notes earlier, because I had some notes that were like reference, like IndieGoGo and Kickstarter, those aren’t investments that’s supporting a startup. And an investment is when you will yield a return that isn’t just a delivery of a product or a service, right? Like you have like, and, you know, I say, a return because it doesn’t always mean equity. So like, when Matt and I started Full Scale, and that’s the pandemic, we actually raised our own venture debt, which wasn’t true investments. Well, it was an investment in the form of lending. So we paid our lenders back or return and, you know, over a certain amount of time in amortized payments, but that is different. That was lending, not investing, because those people don’t own shares of the company. So understand, like, what your objective is, and what you’re doing, because some people don’t, you know, and, you know, as mentioned at the beginning of the show, this is very illiquid stuff, if you own 5% of the Startup Hustle podcast, that you don’t sell, or trade that@schwab.com, or, or Coinbase, or Robin Hood, or any of those things. So the thing is, it could be a very, if you run into, you should not be investing in startups if you think you’re going to need that money, or that asset ever.

Matt Watson 16:52
I’ve got several investments I made 10 years ago. That is, those companies are still going.

Matt DeCoursey 17:04
And I don’t know when and if I will ever get my money back, and some of them now. Are those shares from you right now?

Matt Watson 17:06
That would be nice if there was a way to do that.

Matt DeCoursey 17:09
I mean, there are some weak ways to do it. But here’s the thing. Oh, so. So your $10,000 investment, I could probably buy those shares from you. But by the time it was said and done, I’d probably have a $5,000 legal bill doing it.

Matt Watson 17:23
That’s for sure. Yeah, yeah. Yeah, there’s that. And that’s the thing you have the key. The most important thing, if you get anything out of this episode today, is if you’re gonna make a startup investment, you really want to spread it. What far and wide? You know you don’t, you know, if you’ve got 200,000 to invest or whatever, you don’t want to invest it all in one thing. Do you want to invest in, like, 10 things?

Matt DeCoursey 17:44
Yeah, I want to talk about some easy ways to do that or do something else. Sorry.

Matt Watson 17:48
And, you know, I’m a good example, this, I made several investments, you know, about 10 years ago, one of them has done really well, I think it’s 40x Probably returned for me. But it’s still illiquid, I still can’t do anything with it, but it’s up 40x. And now, when they talk about selling, I’m like, no, no, no, keep growing. You’re growing so fast. Like, I don’t want you to sell, like just keep going. Right? And then there are some other ones that are like, I have no idea what it’s ever gonna happen these things in a couple of weeks.

Matt DeCoursey 18:17
I’m pretty open about that. Like, and you know, we don’t want to throw up, some of these things are still in motion. But we’re like, I wonder if that’s going anywhere. But now we’ll the one that went for DX cover all the ones that didn’t? It will. Yeah, it will. And that’s how it works, people. I mean, that’s how it works at funds and other things. What is I’ll tell you something that isn’t risky math, finding expert software developers when you go to FullScale.io. You know, that’s what we do there. And it can make it easy to build a team quickly and affordably. And maybe if you just invested in a startup, have them go to FullScale.io. Because that fast and quick affordability of a team that has experience is well vetted, and a company that has the platform to help you run that team like Full Scale. So, you know, it only takes a couple of minutes to fill out what you need and find matches at FullScale.io. Now, you know that I have a good point there. Because that’s the thing that we’ve talked about so many times on the show, it’s very difficult in the earliest stages of a business to understand what you truly need from an expense structure. And if you’re investing in software companies, know that software developers, especially if they’re all in the US, are expensive, and can vary your supply and demand problem here in the US. So, you know, Matt, let’s talk about funds for a second because I don’t know if you ended up doing anything, but I did recently just put some money into scale VC which is a seed round, a seed stage startup fund out of Columbia, Missouri, go to scale hyphen, dot, skid scale hyphen vc.com. And you know, the reason I did that. It was like, I love the idea of getting involved in seed stage businesses I love the idea of seeing a return from that. What I don’t love the idea of is finding 20 of them to write small checks to Yes, it’s a lot of work and a lot to keep up with it, but it’s a lot of tax forms to collect assist a lot of shit to deal with. So there’s a lot of small funds, I mean, literally 1000s of them around the country, there’s, I mean, there’s five to 10 of them in my hometown in Kansas City, I don’t even know there might be more. But you know, when we looked at something like that, like that, that’s really appealing to me years later, I don’t think I would have been into that five years ago, but five years later, knowing what I know now, and just like, they do a really good job of finding good opportunities, but they also have, like, kind of a focused set of resources advice. It’s, it’s, I don’t want to call it a true accelerator because it’s a little different, but it’s adjacent to it. And, you know, I like that, because it’s, it’s, these funds also do a good job of putting the companies that they invest in, in front of other good opportunities, investors are the right people. And you know, you and I have both agreed to at least be mentors for a program like that. Yeah. And yeah, and see that and so, so that’s what I’m looking at. And I’m looking at something like that, I’m like, Oh, you’re gonna go find good opportunities. And, you know, they’re upfront, they’re like, you know, these are, these are risky, these are early, I’m like, Yeah, I got it, that’s fine. You know, but you’re lucky, they’re lucky these funds are looking for, to invest in 20 companies hoping that too at least to have that big return, and then maybe more have, you know, do okay, and the next thing, you know, years later, hopefully, adds up to more, and you’ve had some success with those kinds of investments. Right?

Matt Watson 21:54
I have. And one thing I want to clarify for people that are listening. So if you go the angel group route, which we talked about earlier, it’s kind of more of a choose-your-own-adventure, and you’re kind of more in control of it.

Matt DeCoursey 22:11
So you’re going to meet the companies, and you’re going to decide how much to invest. It’s kind of in some people have more fun with the work and your diligence yourself too.

Matt Watson 22:14
some people have more fun with that because a little is more hands-on. Now, the fund route that you’re talking about now is more of a tradition of, like, look, I sign up for fund X, I sent them $100,000, or they do capital calls every year, and I have to send them $50,000 for capital calls a year for three years, whatever it is, and then they do all the rest, I’m done, I walk away, I do nothing. And that is a great way to do it, where you just write the check, and you send them the money to invest in either a venture capital fund, a private equity fund, or a VC fund that is more startup-focused, like you’re mentioning like the seed stage funds, or these accelerator funds, like scale VC you mentioned. So those are the easiest way to do it, you just give money to the fund, and they do all the work. But if you enjoy being more involved in the process, the angel group part of it can be kind of fun.

Matt DeCoursey 23:07
So the flip side, and this isn’t necessarily fun. But yesterday, I spent a little time with the Launch KC people because they have a new group of grant recipients that are coming out now. Look for the stay with me here, listeners. So these grant recipients are going to get $50,000 a piece from the Kansas City Economic Development Corporation, which exists to spread out the butter like that and get some companies started. I think that those are good signal flares for a lot of people that want to be in startup investments. Like, look the year sit with Google at Google, you are sitting upon an embarrassment of riches. When it comes to ways to find good companies that are starting up, there are I mean, shit, even look at listening to this podcast, we give you a list of a city’s top startups every month. And those are vetted and researched by us, like, are we perfect? Like, are all those companies going to win? Certainly not. But my point is, is that thirst like, I mean, the info everywhere, it’s everywhere. And all you have to do is Google it and look at it. And you know, like there’s Y Combinator Tech Stars, you know, like all these things that have these early stage companies and, and to me, that’s validation, because you don’t get those awards. And you don’t get into those programs because you suck.

Matt Watson 24:38
well, figuring out those programs and creating a relationship with them is valuable because, like, take Y Combinator or Launch KC scale BC any of them. Once the companies go through that, they get out of it to do even follow on funding. They want to have these relationships with these potential investors to put them in front of too right so that you know if you can build those relationships with them, you can help get in getting in front of them as they come out of those accelerators. The other thing that I think we need to mention to people is, depending on where you live, there can be huge incentives to do startup investing as a certain in certain types of companies and certain types of situations. So like in the state of Kansas, there are Angel tax credits. And for certain companies that have signed up for that program and have qualified for it and done all the work. I am curious if they’re still doing it in 2022 or what the face of it is, but I did this in the past where so, for example, I could invest $100,000 and get a $50,000 tax credit. And so basically, I basically got 50,000, and not it not a tax, like right off, like deduction, no dollar or dollar credit. Now again, I have to be like paying a lot of taxes to be able to use the credit potentially. And I’m just using 100 dials

Matt DeCoursey 25:56
a lot. You have to number, you have to choose. And if you’re well, if you’re an employee, like if you’re someone that has a job, okay, so when that says you have to be making money, meaning like, Okay, so then what happens is the entrepreneur is in the first couple of years your business, you probably run a loss and you’re going to file your you’re gonna file negative income. Yeah, so you have negative income, and a tax credit doesn’t do shit for you. Right, but okay, so Reese, when I filed my 2022 taxes, I got $7,500 straight off of him because I bought a Tesla, right?

Matt Watson 26:32
Yep, that’s the kind of credit.

Matt DeCoursey 26:35
Like I literally watched the amount I had to pay because I owed I watched it go down by 75 $7,500. straight cash, dude, straight cash. So it’s with Kansas Angel tax credits, but for an example, that’s doubt as some, and you know, it’s crazy, because that, okay, I, I won’t say which one, but I explained to a mayor in the area that that even existed once, Dan, it’s like, and but that, and that’s kind of sagging has had in the video here. But the thing is these things are out there when you look at it. So in that particular case, they have a $50,000 threshold. And if a person in Kansas invested in an approved Kansas company, you could get up to 50% of their original investment back and a Kansas tax credit that could be used over a five-year period and also was transferable. Yeah, you can sell the credits. And so there are literally like marketplaces and people that do that, that owe a lot of attacks. And they will buy those things for like 80 to 90 cents on the dollar.

Matt Watson 27:39
So and the most wonderful thing about these tax credits is I don’t want to say they take away all the risk of the investor Sure. They take away half the risk right away. And then I think technically, even if you lost all the 100,000 you invested, I think you could write off the whole 100,000 later as a deduction. So it’s like I got a $100,000 deduction because the equity of that thing blew up. And I got a $50 credit. I don’t know, not financial advice.

Matt DeCoursey 28:05
No, I don’t think that’s right. And sorry, I actually, I think because, well, it depends. I think if you own true equity in a company, let’s talk about that for a second. Equity versus notes you need to start getting if you want to invest in startups. You have to know how it’s doing it, right, like how you’re doing it. So a lot of times, you will make an investment, and it’ll sit as a convertible note, which means you don’t own the equity yet. And in that particular case, if the company went belly up, you wouldn’t have a write-off. But if you bought 20% of a company, and it lost $100,000, and you own the shares, and that had a $100,000 loss in 2022, 20% of that loss would be written off on your tax on your refund because you would get what is known as a k one form that says your company lost 100 grand you own 20% of the shares. Now on the flip side, you should know if you also own equity and the company made money, you’re gonna get a positive. Yep, Phantom, inhaling, okay, once a positive, you may have a tax liability. Now, the best people to tell you all about this as your accountant or your financial advisor, not us. That’s the point. Neither one of us are either one of those. I want to keep putting that out there.

Matt Watson 29:19
Yeah, the point is to look for these types of incentives in different states and different cities. You know, again, getting plugged into the kind of a local startup entrepreneur community, you can ask these questions to kind of figure out these things exist, but they’re great,

Matt DeCoursey 29:33
I think. I think the way I phrased that, though, is correct. Now I don’t think it’s possible that what we mentioned with Kansas Angel tax credits could have a clause somewhere or something in there to de-risk some of that, but look for it. They exist. They’re out there. Okay, let’s we’re going to be remiss if we don’t talk a little bit about what the process looks like because we’ve talked about like how you can do it. I want to take one more second, though, and I want to talk about the vessels because convertible notes aren’t, well, they can become shares. So this can be real, and this can be confusing to people that don’t get it. So a lot of times when you make an investment in that, in the situation we mentioned, we might still need to own the equity, because it could be an iffy thing. So these convertible notes either exist as debt that may have to be repaid later, or it converts into shares. Sometimes that’s up to you. Sometimes that’s up to the company. And sometimes that’s up to a situation, like another investment coming in or a threshold or a timeline being met. And sometimes it’s a combination of all three of those things being needed.

Matt Watson 30:48
Well, and I, I had an investment I did a few years ago that was on a convertible note. And they never converted it. So it stayed as a convertible note for years. And then they sold the company. And so I had the option of basically taking my investment back plus, like, 6% interest or whatever, and getting all my money back, or converting it into equity, which largely got rolled into the new company. So I like on into the new thing I decided to roll on, because if I just took the money plus like 8% like it wasn’t a huge return. Versus I converted it, I got a lot more, but I could have this situation and just walked away.

Matt DeCoursey 31:24
Yeah, so that match refers to there as known and startup investment as a liquidity event. And that’s either an ACH was usually an acquisition. I mean, now, but on the flip side, you know, when I had Sandy Kemper from CTFO on the show in January, they had just raised like $200 million from, I think it was a soft bank. And that and 90% of that was brought in to create liquidity for their employees. Meaning, like, they did that because they were like, hey, they could go public if they wanted that they hadn’t. And I don’t know if I don’t know where they were out on that. But they did that because they had a lot of people that had been with the company earning shares. There are some actual marketplaces where you can buy peep employees, options, and shares, like vested shares. And these are companies that might not be public but are pretty well-known startups that might be on the path to that. Okay, so what we’ve all been talking about all of this that’s referred to as deal flow. Okay, deal flow as opportunities to invest. They were, however, come. I do want to highly suggest if you want to get in this game, see some pitches before you start swinging.

Matt Watson 32:42
Right? Yeah. And it’s a lot of work. How discipline? Yep, it takes a lot. If you’re invested in every opportunity that comes in front of you, you’re gonna get fucked.

Matt DeCoursey 32:47
It’s that simple. Absolutely. I mean, there’s no nicer way to say it. Sorry if you don’t like the F word, but if you invest in every opportunity, you’re gonna get fucked, because they’re not all winners.

Matt Watson 33:01
And I would say, if you’re doing this kind of the angel investor style, where you want to, like, pick and choose what you do, I would pick things that you know about, or you’re passionate about, you know, yes. Like, offer value. Yeah, like, I need to speak about software that largely had to do like for autism and stuff like that. It’s like, Oh, if you’re passionate about autism, like, you know, maybe that’s great for you, you know, I have people come to me, they’re like, Oh, do you want to invest in this real estate thing? And I’m like, No, I just don’t care about real estate. You just have to pick the kind of what you like.

Matt DeCoursey 33:34
then in multiple meetings and pitches with you, where both of us said that at one point. Yeah, we don’t know anything about this. This isn’t our play. I had that happen the other day. And then also I want to say Okay, so here’s a good example. So what does this say about me? I don’t know. Over the last six years, I’ve had three or four opportunities to be a compensated advisor at cannabis companies, okay, like various states or places? And I’ve said no every time, meaning like, Hey, be on our advisory board. You’ll earn some equity. The reason I’ve said no is not that I’m opposed to the business. I’m actually a big supporter. But it’s that it’s possible. I knew that it’s possible that as a startup founder, or someone who provides you may end up at some point having to attest in your other life outside of being an investor. You may run into a form Sunday that says that you attest that you are not involved with any businesses that are federally illegal, right? And cannabis, while it’s legal in a lot of states, is technically federally illegal. And I realized that that could be something someday somehow, and in fact, that house came up with some of the clients we have at Full Scale. So look at it like I would have ended up possibly owning like I would have given shares back at that point. because that would have been maybe it’s so this is part of the quote, due diligence process that you need to consider diligence is really important. If you’re going to put money into a company you should, you should expect that they would provide you with a financial outlook on what they have. What are you going to do with my money? Right? And, like, where are you at as a business? And I think it’s a major red flag. I wouldn’t invest in a company that wouldn’t be prepared to share that with me, would you?

Matt Watson 35:28
Absolutely. They should have some kind of plan use of funds forecast?

Matt DeCoursey 35:33
Yeah, can I see your balance sheet and your books? What’s your burn rate for some of these things, and are the more and more aggressive?

Matt Watson 35:38
They are, the wearier of them? I would be?

Matt DeCoursey 35:43
I’m not afraid of the aggressive side because I actually, you know, me, I’m a little bit of a riverboat gambler in that way. Because I don’t need you to be super conservative, either. But if you’re planning on spending the money really quickly, I need to know that more of it’s coming in somewhere. Yeah. And that also, if you have to quickly pivot or make some changes or cutbacks that it’s not going to kill everything you do, right? Yep. Yeah. Okay, we talked a little bit about structuring the terms and offerings. I don’t think we need to spend a lot of time on that. There are some past episodes where you can get into that. There are a lot of resources just here in the Startup Hustle podcast on these subjects and everything we talked about today. So I’m going to move on down the line legal paperwork, habit, no handshake deals.

Matt Watson 36:30
And usually people use safe agreements or simple convertible notes and pretty simple agreements. These days, people don’t use these really complicated like PPO agreements and stuff. They used us a long time ago,

Matt DeCoursey 36:41
a safe note, by the way, as a simple agreement for future equity. Google it. I don’t have time to talk about that right now. But that’s a reality that, that I like safe notes. Because what it does is for the earliest stage companies, they make a lot of sense because you’re saying, Hey, I don’t know what this is going to be worth yet, and neither do you. So it’s intended to be fair for the investor, the end, the founder, and the company. Right? Yep. Yeah, documents.

Matt Watson 37:09
That’s like how how to value startups is its own topic that we’ve done episodes on before.

Matt DeCoursey 37:15
That’s related to say, the safe note is intended to be like, it sounds safe, it’s safer because you might end up overpaying grossly over pain, establishing what it’s just no one knows what the actual valuation of the company, so let’s set some parameters around that. Okay, as I mentioned, get signed documents, and keep them, no handshake deals, people. And then, you know, a lot of times, you know, through this legal process, the funds it, like if I’m investing in a company, and I want to see that they have this whole process set up. So we’ve already talked about it, we, you and I, both became investors in lending standard, who’s been on the show multiple times, it has been a sponsor of the show, they have their whole, their whole process is set up everything. When you know, we knew here’s the price you’re buying shares at, here’s all of that. And it’s straight on down to, like, where to send the money, that money travels through appropriate legal channels, we have paperwork with it, they use, they use a platform called Carta to record us on the balance sheet. I think we also have some other options there. Like, doesn’t venture 360 or liquefy do some of that too? Yeah, venture 360 helps to lower stuff. Yep, yep. And then, and then once all that stuff’s in place, these vessels for finalizing your deal, get the funds to the company. But all of this I want to point out there’s a recommendation process here. I have literally, like at an arm’s length away, I have a file that I can pull out, and I have my paperwork from my lending standard investments. Same thing with scale VC. Same thing from Full Scale Giga Buck and everything else too. So. Yep. And the companies we’ve been on. So yeah. Alright, so now as we kind of, you know, as we, we come to an end, I love this topic. And I also like finding expert software developers for clients. So I want to remind everyone that that’s difficult and can be a challenge. Go check out FullScale.io. That’s what we do. We work with, you know, over 50 Different tech companies that we build teams from. Some of them have won, and some of them have 25. You know, like, we were prepared to help you with that. And, you know, this is these are the kinds of things like, do you know that companies that use offshore teams actually get higher valuations because they have higher EBIT? Margins?

Matt Watson 39:48
Probably.

Matt DeCoursey 39:50
Yeah. Well, it’s because yeah, it’s it’s cheaper. They’re stretching the dollar, and that’s effective use of capital, which is an important thing in early stage startups. So you know, another thing was All skills we have, we like to say people platform and process. We’ve got all three all ready to go turnkey system. Before we hit record, we were talking about someone we knew that. I mean, here’with s the thing, we our employees are in the Philippines. And we’re just joking that someone had shared with us about how difficult of a time they were having sourcing their own offshore talent. That guy, we have to talk to so many people. That’s what we do.

Matt Watson 40:23
Yep. Right, you have to, you have to screen and screen and me we interview hundreds of people a month. So

Matt DeCoursey 40:30
we’re about to win another award at Full Scale. By the time this comes out, we will have already made the Deloitte Technology 500.

Matt Watson 40:37
Nice. Young growing fast. Yeah.

Matt DeCoursey 40:41
FullScale.io. So now, on the way out, I mean, what’s it? What’s a brief moment of advice that you could give?

Matt Watson 40:49
I think, you know, depending on what your net worth is and how much money you want to invest in this kind of stuff. The angel, the angel group, part of it can be kind of fun because you kind of get more involved in it, you kind of pick what you want to put your money in, and whatever. Just make sure you pick multiple deals, don’t put all your money into a deal. Just say, Hey, I’m gonna invest, you know, 10 grand a month or whatever, over a long period of time. And I just keep spreading it around. Or just find a fund, just write them a check, and be done with it an easy way.

Matt DeCoursey 41:17
I think I mean, honestly, while it doesn’t sound as like, I mean, if you’re like, if you want to be all hobbyists and like, get involved in, like, get in the weeds, then maybe write some angel checks. I think the smarter play is the fund. Yeah. I mean, it’s the Diversified way to do it. I mean, you’re so I mean, I don’t mind saying, you know, I, I committed 100 grand to scale, hyphen, vc.com. That’s part of a $5 million fund that will realistically invest in 20 to 25. Companies, they’re going to reach x from 150 to like, 300 grand. So there are 20 to 25 swings. And now, here’s the thing, though, if one of those companies turns into a $100 million enterprise, I’m gonna find I’ll get a 5x.

Matt Watson 42:05
Yep. But it may take 10 years. The other side of it could take 10 years.

Matt DeCoursey 42:11
It could take 10 years. Yeah. And you know, I could end up with nothing. And you know, one of the things that I think is kind of cool, though, like you’ve received some checks along the way from funds, like when they, when they have a liquidity event at one of the companies that that money goes back down the stream. So, you know, like, Yeah, I think you actually received a pretty good one a few years ago. I remember I did. Yeah, that was in front of the flywheel one.

Matt Watson 42:35
Yeah, absolutely. Because I hadn’t invested in a private equity group here in Kansas City that had invested in a flywheel. And so when flywheel sold, I got a nice, nice big check. So it was a good day.

Matt DeCoursey 42:46
Yeah, that was, you know, we’ve had dusty on the show before, and that was, uh, you know, they’re up in Omaha, that was a big deal up in Omaha. It was, yeah, the great company doing neat things. And, I mean, realistically, I don’t think you probably would have had that opportunity outside of the fund.

Matt Watson 43:00
The fund was easy. It was easy. We just wrote a check something the money, and they’re really smart a really sophisticated private equity fund.

Matt DeCoursey 43:07
And yeah, and on the flip side, I’ve seen both of us write checks, individual checks, and deal with mild headaches that came along with it, and maybe not, and not quite the return that the fund might have written. I think that my key advice that I want to give, though, is back to that, you know, is see pitches, you know, here, and I mean that like in a baseball sensor terms, like don’t swing at the first pitch every time it might not be the best one. You have to in baseball. They refer to plate discipline, right? Those are batters that don’t swing at pitches outside of the strike zone. Pit hitters that are in the Hall of Fame have played discipline. Yep, flyers that never make it past double A or burn out in the major leagues after a year don’t have played discipline because once the word gets out that you swing, it pitches in the dirt. You don’t see any pitches in the strike zone yet, be smart. Use the legal stuff. There are a zillion signal flares up for companies that are already gaining traction. Just go out and find the articles. Listen to podcasts. They’re everywhere. Now I’m gonna go. I’m going to write a check to fun now. That’s what I came up with.

Matt Watson 44:26
All right, I’ll see you next week.