In today’s episode, we have NFC’s very own. Kirsten Suddath. Kirsten is a General Partner at Next Frontier Capital. For the first episode of Season 3 are doing a crash course in Venture Capital - a “VC 101”. We are breaking down all the Alphabet soup of VC terms, the different positions in a Venture Capital firm, where the money comes from, and what kind of companies/founders are right for Venture Capital investment.
Here’s a closer look at the episode:
Resources:
NFC Website: www.nextfrontiercapital.com
NFC LinkedIn: https://www.linkedin.com/company/next-frontier-caiptal/
Kirsten Linkedin: https://www.linkedin.com/in/suddath/
Kirsten Twitter: https://twitter.com/KirstenSuddath
In today’s episode, we have NFC’s very own. Kirsten Suddath. Kirsten is a General Partner at Next Frontier Capital. For the first episode of Season 3 are doing a crash course in Venture Capital - a “VC 101”. We are breaking down all the Alphabet soup of VC terms, the different positions in a Venture Capital firm, where the money comes from, and what kind of companies/founders are right for Venture Capital investment.
Here’s a closer look at the episode:
Resources:
NFC Website: www.nextfrontiercapital.com
NFC LinkedIn: https://www.linkedin.com/company/next-frontier-caiptal/
Kirsten Linkedin: https://www.linkedin.com/in/suddath/
Kirsten Twitter: https://twitter.com/KirstenSuddath
Kirsten 00:00
Who makes for a great startup founder, venture bankable startup founder. Here's some of the things that he found, which I found really interesting. I feel like the myth is that, you know, venture bankable startups are founded by like college dropouts. It turns out, the data actually shows that, you know, half of unicorn founders are over the age of 35. Right. So these companies are getting started, you know, mid to, you know, until later in somebody's career. Second thing he found that I think is really pretty interesting and sort of, like antithetical to what you'll hear from a lot of VCs is that the majority of founders for these unicorn companies didn't have any directly relevant work experience in the industry that they were disrupting.
Les 00:59
This is Found in the Rockies, a podcast about the startup ecosystem in the Rocky Mountain region, featuring the founders, funders, and contributors, and most importantly, the stories of what they're building. I'm Les Craig from Next Frontier Capital. And I gotta say, I cannot believe it. Here we are. 26 episodes later. Already launching season three. It's here. Thanks for joining us. I mean, Kirsten, can you believe this season three already? I am so sorry. I'm getting way ahead of myself. I have not even introduced her yet. And I'm already calling her out. Our guest today is NFCs very own. Kirsten Suddath. Kirsten is a General Partner at Next Frontier Capital. And I gotta say, Kirsten, I just I love today's episode, this is going to be so great for so many people out there. And we're doing this based on some of our listener feedback from season two, we've decided that, you know, we really want Found in the Rockies to be for everyone, no matter what your knowledge of venture capital is, or knowledge of startups and how they work. So we thought it would be great to have our first episode of season three be a little bit of a breakdown of venture capital, call it a VC 101 or sort of a crash course of sorts. So Kirsten, today, I get to play the dummy. And you get to play the expert. Totally, totally typecasted this one for sure. But I'm super excited. Before we begin, though, why don't you tell our listeners a little bit about your story and your path to becoming a venture capitalist.
Kirsten 02:39
Sounds great. Thanks, last. And first. It's great to be on today. So I'm also excited for this episode. And yeah, so just a bit about me and my background. I'm just going to kind of start at the beginning, I started my career working in startups, I kind of lucked into my first role, which was running dispatch for a clean tech company, which was recycling used cooking oil, as if and selling it as a feedstock primarily for biodiesel is called recycOil. And I absolutely kind of caught the bug right away, I loved it, and spent a number of years at that company helping grow that company and also with those founders. And then, you know, fast forward a couple of years, same group, we decided to start a local food distribution company called SOURCE Local Foods, which was kind of filling a gap in the market. You know, for local value added producers, ranchers, you know, farmers needing to get their product from their location into the hands of, you know, grocery stores and restaurants. And you know that that story is probably a long one for a different time. But it ended up ended up kind of failing at the end, despite amazing revenue growth and growth of the business due to a failed financing. And that was really my first taste with venture. And so at that point, was going back to get my MBA at CU Boulder, really to learn a lot more about finance, you know, the beginning of my career, I was in operations. And while I was doing my MBA, I spent a bit of time at Zayo as a MBA intern, just a little bit after their IPO. So for me, that was a really fun time and other fast growing Boulder startup in the telecom space. And, you know, being able to see something a bit later stage for me, it was really eye opening and also very confirming, despite that being a fantastic company that my passion really lies at the earliest stages of a company. And so I ended up at the end of my MBA deciding to join an early stage company called flytedesk, and they had just finished the TechStars boulder accelerator program. And they're a company really targeting a new model for college journalism, helping national brands find advertising space and opportunities. to reach students on college campuses. And you know, right when I started, we were raising our seed round. I was there for four years as head of operations and finance, learned a ton through that experience, and ultimately decided to step away and join TechStars as an entrepreneur in residence, which for me was really the pivot into investing. And so there I worked alongside Natty Zola, and Malte Witt, which at the time, was the team at TechStars Boulder and helped them source the 2020 class. And just really caught the investing bug at that point, ended up joining Blackhorn Ventures in Denver after that as a senior associate. And Blackhorn is a really interesting, fantastic firm, you know, we did a lot of transactions while I was there, anything from pre-seed, all the way into sort of early growth, very industrial technology focused firm. So I think I had a great that kind of background and fit for them, and love the work that I did while I was there. And then about almost two years ago now got introduced to Next Frontier Capital. And for me, my heart really lies in the Rockies. And so I think it was a fit from day one. I've been with the firm now for about a year and a half, and started as senior associate and then at the end of last year joined as a Partner. So yeah, thrilled to be here.
Les 06:22
Such such an incredible path already. And, you know, I think I speak on behalf of everyone at Next Frontier when I say but you know, the best is yet to come. I mean, just amazing work you're doing every day. So anyway, but let's get into the meat. Thank you for the background. So, before we do, though, I gotta say there's one criterion that really set you apart in the draft picks of who should be on this episode to talk about this. And it was really the fact that you gave the most convincing talk ever, on SPACs. Do you remember this? Yeah, I got it. I gotta tell our
Kirsten 07:03
Notorious SPAC presentation.
07:06
I gotta tell our listeners, we gave Kristin gave a SPAC presentation at our LP update her first year at the firm. And you know, just the reviews, and I'm being completely serious, like best best SPAC presentation ever. So that's unfortunately that
Kirsten 07:23
Controversial topic for sure. Venture 101 should be less controversial I think.
Les 07:28
Yeah, exactly. And frankly, I mean, that's not going to be a relevant topic topic probably for about another 30 years. Again, when it comes back in the cycle. So we'll just have to put that on hold. So today, VC 101. So Kirsten, high level definition of venture capital, I'm going to try my my kind of high level definition. Venture Capital - it's that thing I saw on Silicon Valley, the TV show in Shark Tank. That's my definition. Pretty good.
Kirsten 07:55
Pretty close. Yeah.
Les 07:58
All right. Tell us what is it? What is this this VC thing?
Kirsten 08:02
Yeah. I mean, honestly, some of the basics are all right there. It's, uh, you know, venture capital is a really a tool that startups can use to help grow their company more quickly than they would have without the tool. You know, and that tool is generally money and a team of people. Right. So that the VC investors themselves at the very high level? Yeah,
Les 08:29
I like it. And so, you know, we often hear when we, when we, you know, we hear of venture capital, it's people talk about funds, a fund one, fund two like, what, what is that? That's, and I assume that's the money piece of this. But just more detail, or just just just more understanding of like, Where does this money come from? How is it allocated to investments, that kind of stuff? What's a fund?
Kirsten 08:53
Right? So, obviously, we're talking, you know, there's the venture capital firm, which, you know, at Next Frontier Capital, it's that branding, Next Frontier Capital, it's the people, you know, you myself, the other partners at the firm, and all the people that make up the firm, and then we raise funds. And, you know, I obviously have not been around for the whole history of Next Frontier Capital. But we're currently investing out of our third fund. And funds are raised by you know, it's a pool of capital. And it's raised from LPs, which is Limited Partners. So LPs for short. And limited partners come in all different shapes, sizes, varieties, you know, and a lot of it depends who the LPs are, a lot of times depends on the size of the fund. Right? And so if, you know the, you know, funds could range anywhere from, you know, a couple of million dollars, all the way to, you know, in the billions when you look at some of the recent large funds being raised, and so when you think about it at the earliest stage of, you know, a small fund, a lot of those limited partners, LPs, are going to be individuals, they're generally at least accredited investors. And there's a, you know, a definition of that. And they all agree to commit a certain amount of capital, maybe it's, you know, $200,000 into the fund, which is, you know, their investment into that fund. And then, you know, as a firm, we're going out and raising from multiple LPs, you know, as you get into larger fund sizes, you know, those LPs may be super high net worth individuals, they may have family offices, they're also multifamily offices, you know, and then as you move up the stack from there, there's institutional capital, and that could be a university endowment. You know, it could be a pension fund, it could be a state fund. So these are much larger pools of capital, that are also making commitments to funds but generally much larger, right? They, they would have, you know, instead of $200,000 commitment an individual makes into a small fund, they may want to make a $50 million commitment into a fund of 500 million or more.
Les 11:23
Got it? I'm glad, by the way, I'm super glad you clarified the definition of LP. I've been using it on the show all last season, and I was referring to my vinyl collection. But I'm glad I got some clarification. But I mean we float these terms around a lot, right? LP, GP? And GP? That's another one. Could you? Could you talk about that? Like, what? What's the GP?
Kirsten 11:44
Yeah, just General Partner. And when you look, again, back at the firm level, and all of the people that make up the firm, you know, a general partner is usually one of the more senior, you know, folks at a VC firm, they're at the partnership level, you know, they have ownership in the funds. And, you know, they're usually the decision makers around investments, you know, Managing Director would be a similar title. And, you know, it's a little bit specific to each firm, how those titles get used. And then, you know, if we just stick on this topic for a second, you also have a number of other titles that you frequently see within a venture capital firm. On the investment focus side, usually, you know, sometimes you'll see kind of starting at the most junior level Analyst, and then Associate and then Senior Associate and then Principal. And, and then on the non-investing side, sometimes you'll see, you know, a platform, kind of Head of Platform person, that that's a person that's helping to build community and connection, and provide value to the portfolio companies that the firm invests in. And then, you know, sometimes you'll also see operational staff, you know, Operations, you know, CFO we just hired recently as CFO at Next Frontier Capital. And these are folks that, you know, just like any other company, we also have the same kind of administrative and operational needs. And they help with those.
Les 13:17
Sure. And I've noticed too, with with some firms, they have different types of partners outside of general partners, operating partner venture partner, what what does all that mean? Or what's the purpose of that?
Kirsten 13:32
Well, that's a great question. And it's somewhat firm, specific. Yeah, I wish I could give you a clear answer here, the best thing to do is to really validate what what it is that they're focused on with that, you know, the individual. But most often, you know, a Venture Partner is somebody who's going to be very focused on making new investments for the firm. And they may not be full time with the firm, they may have other responsibilities outside of the firm that they are a Venture Partner with. And then Operating Partner, again, depends on the firm, but often, these are partners that work with portfolio companies. And so at some firms, they may also make investments, but they often have operational backgrounds, sit on boards, help those companies grow and scale.
Les 14:23
Great. What about LPs? Are they ever making investment decisions here?
Kirsten 14:28
No. So typically…
Les 14:31
They’re not? They're given they're giving all their commitment to these funds. They don't get they don't get a say and what what the where the money gets invested?
Kirsten 14:39
Yeah, it's it's typically, it's the partnership, right, the general partners and managing directors, and each firm again, is different, but they you know, there's certain you know, there's an investment committee or a partnership meeting, where those decisions are getting made, and in some cases, LPs may sit in those committees, you know, and most funds also have something called a LPAC, which is LP Advisory Committee that may help the partners with fund strategy. You know, fundraising, you know, maybe helping to clarify where there's potentially a conflict of interest, you know, that could sometimes arise at the fund level. So, you know, there are limited cases where LPs are helping make investment decisions, but by and large, it is the partners of the fund making those decisions.
Les 15:36
Great. I mean, talk about alphabet soup of maybe we should call this the alphabet soup of venture capital, these all these LPAC, LP, GP, it's great, but it but this is what, this is what we want to do today. So this is great. How about so tell us a little bit more about the mechanics of like, how often are these funds being raised? Like our LPs, like writing checks, the day that a fund is raised? Like, how, what are the mechanics of how this stuff actually happens?
Kirsten 16:05
Yeah, that's a good question. So what happens is the partnership will decide to raise a fund, and then they will spend time, you know, just like a founder, talking with potential LPs, like a founder talks with potential angel investors or VCs, we spend time as partners talking with potential LPs, and we're pitching the fund, you know, just the same as a company is pitching their company. And, you know, we're talking about the strategy of the fun, you know, for NFC, it's a Rockies-focused fund, we love investing in founders in the Rockies, you know, we have a certain stage we like to invest at, and we have reasons for all of that. And so that's kind of what we're talking about with LPs, then when we get to enough of a critical mass, we have a first close on the fund, you know, again, just like a founder raising a round, they have a first close of their round. Most funds, you know, sometimes the fund is raised all in one close, but often it's not. And so you have multiple closes as long as kind of a year later. And at that time, the LP is committing a certain amount of money to the fund. But it's not all sent, or what we say “called” at this at the beginning of the fund. So just to make math really simple, let's say an LP commits $100 to the fund. As a partnership, we're going to call that $100 over the 10 years of the fund.
Les 17:36
Oh, so a fund lasts 10 years,
Kirsten 17:39
Oftentimes 10 years, sometimes longer. Okay. And so they may expect to, you know, you know, again, as this fund fund specific, but they may expect to maybe spend 25% of that in the first year. It's possible, right? Sometimes a little more, sometimes a little less, and
Les 18:00
$25 of their $100 commitment, they would have to actually write a check for perhaps in that first year. Okay.
Les 18:08
Right. Right. And this is something that's talked about with LPs, right, like what the expectation is, right? Because it depends a little bit on the funds strategy. Yeah, but that $100 is going to be called, you know, the bulk of it will be called in the first handful of years in what's called the investment period. And that's where the fund is making its new investments. Some of it will be called after the investment period, which is typically two to three years, sometimes as much as four years is kind of the investment period for fund. And after that investment period, that fund can make additional investments in existing portfolio companies for that fund, but they cannot make new investments out of that fund. Right? And so the LP money that $100 At the end of the investment period, probably 60 to 70 to 80 of those dollars are called at that point. And then the remaining dollars may be called in years, just say 3-10. If we do a follow on transaction, which means that we invest in a, in a company, we've already made a prior investment in or it will be called for management fee, which is how as as, as GPs we get paid our salaries. Is through a management fee?
Les 19:31
I was wondering how this was going to pencil out. Okay, so there's a fee. On top of that, is it based based on what's called typically or what's committed in terms of the LP?
Kirsten 19:43
It's based on what's committed. So again, if we go back to the $100, that the LP committed to our imaginary fund, usually the fee is about 2% is kind of industry standard two to two and a half percent depending on the size of the fund. And that's an end annual fee. And so that's called annually. So on $100 commitment to the fund $2 would be called if it's a 2% fee each year.
Les 20:10
So, so we should probably change the phrase that like the only things that are certain are death and taxes and also VC fees too those are. There's a
Kirsten 20:21
Yeah, we could add that to the list. Yeah.
Les 20:24
Wow, what a list to be on, but it's important, it's really important highlight because like, that's the that's how you operate right, as a firm is raise fees.
Kirsten 20:32
Right. And so if we go back to then the fund, we said, Okay, have fun, may have an investment period of, say, three years, just to pick a number, for example, then the idea is that the firm the park, the partnership, at the end of three years, decides to raise their next fund, so that they can always be making new investments into companies.
Les 20:58
Well, why, why wouldn't? Why you've got 10 years of a fun life, like why why wouldn't you just invest for 10 years, just keep investing new investments out of the same fun? Why Why isn't that a VC strategy?
Kirsten 21:11
Yeah, well, obviously, each investment takes time to get to an ultimate exit, which is where you know, the money is returned to the to the fund. And so, you know, if you think about the average lifecycle of a company, if we invested at year 10 into a new company, but the fund is only meant to be 10 years long, that doesn't give that company much time to get to an exit.
Les 21:36
Great point. Great point. So speaking of exits, how, like, what's, how does who makes money on this? Or how does, how does an investment, right Ben get harvest, and what sort of the returns model of this these sorts of fund structures?
Kirsten 21:52
Right. So when we make an investment, we get in return for the money we give to a company, we get stock, typically equity in that company, and that stock is private. And what that means is, it there's no market for it, right? At least yet. And so we hold that we are long term holders in equity owners in the company. And that stock is only worth something to us when there's a what's called a liquidity event or an exit. And those, you know, that might be the company gets acquired, right, or they get bought by a bigger company that is looking, you know, to fill a need that that company fills in, or it could be that company has grown big enough where it makes sense for them to go public, you know, they could go public via an IPO, you know, or 12 months ago via SPAC.
Les 22:52
Let's not go there. I know you want to go there, because you're good at it.
Kirsten 22:56
Let’s save that for another time. And you know, and then there's some, you know, the details and some nuances to all of that. But those will turn what is ownership or equity, or private stock into a company into cash or liquid stock public stock for the fund. And then those dollars are returned to our LPs, which is how we earn a return for our investors. So they come into the fund, and then we generally deem them a distribution, which means that we say we return them back to the LPS. And once you know, if we go back to our simple math, again, $100 LP commitment, maybe in you know, $500 fund, to make the math simple. When we return that money, our goal is to obviously return the full $500 that we raised initially, but then also to give them a return on that money, right? So we want to, you know, maybe a 3x to a 5x, somewhere in there would you know, 5x would be a phenomenal outcome for us, you know, over that 10 year period. And for us as partners once we return more than the full fund, so five, once we returned that that first dollar over 500, we get into what's called carry. That's, it's how it's our upside. It's how we align incentives between the general partners and the investors. Right. So we get upside when we get past the initial fund that's raised, right. So on that next dollar that 500 And first dollar that we return, if our carry is 20%, which again, you know, two and 2% management fee 20% carry, you'll hear that sometimes it's kind of the standard, then 20 cents goes to the partnership and 80 cents goes to LPs.
Les 24:56
I see. So in one Generally, what's sort of the target? Like what what, what would an expectation on a venture like return be on a fund?
Kirsten 25:07
Yeah, and this is going to be a little bit stage specific. But but, you know, kind of our stage 3x, you know, so $500, fun returning $1,500 total, is what we're targeting.
Les 25:24
I see. Now, what you just described sounds like private equity to me, is it?
25:31
Yeah, private private equity, you know, it's as a large umbrella category includes venture capital, right. But then you also hear that private equity firms. And there is a little bit of a distinction there. So venture capital firms, when we make an investment into a company, we're taking a minority position, that just means that we are not going to own you know, we're typically going to own you know, 15% to 20% of the company would be our target. And we may join the board, we can get into that a little bit later, as well. But we're going to be a long holder, you know, we're expecting, you know, an average of seven years or more, you know, is how long it's going to take this company. And we're often coming in, you know, an early stage venture capital, we're coming in very early into the company. With private equity. Again, there's lots of different shapes and flavors and sizes. But I think the main things that distinguish are private equity will take both some minority but also majority positions, where they may come in and invest in the company, and they want to own more than 50% of the company. And so they may do that by providing liquidity for prior investors or founder liquidity, or just come in with enough capital to own that amount. And then their hold periods are generally shorter, you know, so they probably would like to see an exit in the three to five year time horizon. And they're generally not coming in as early as venture capital. Right. And so the risk profile, they may also like to 3x, their fund, over, you know, as their expected outcome, but the risk profile is different, because they're coming in later on with kind of different mechanics.
Les 27:28
Makes sense? Good. Just good distinction. So you mentioned this minority, you know, venture capital, typically taking a minority position. So essentially, as I understand it, now, to boil it down, venture capitalists write write checks, they take minority positions, so they really don't have any control. So then they just kind of walk away and wait for like, good things to happen. Pretty much it? How does this work then?
Kirsten 27:54
So when, when we, you know, go back to what we're buying, right. So we issue a check to a company and in return, we get stock, but we actually get a really specific type of stock, which is called preferred stock. And so this is stock with bells and whistles. And exactly what those bells and whistles are, is negotiated for each deal as as part of the term sheet. And, and, but, you know, they do include some provisions that allow the venture capital firm, certain, it's really, sort of, again, protective, things that we're allowed to do to protect our investment. We know fundamentally, when we make an investment, like we're, we're investing in the people, the team, the CEO, we believe in their ability to lead this company forward, we have no interest in being an executive in the company. Right. But what we do want is we want, you know, things like information rights, we want to be able to know how the company is doing, we want to be able to see financials, right? We want a board seat, right, so that we can be part of the voice in the room, you know, a voice around the table of the strategy of the company of helping the CEO, be the best executive, you know, that she can be. And, you know, and then, you know, we also want, for example, pro rata rights, right. So these would be the ability to continue to invest in that company, as that company raises additional rounds. So we could spend an entire episode on terms and on the term sheet.
Les 29:41
You know what, maybe we'll have to do a part two…
Kirsten 29:45
We might we might have to do. There's a great book written by, you know, some local Boulder gentlemen: Jason Mendelson and Brad Feld and it's called Venture deals So it's basically like your textbook on the term sheet and all the terms what they mean. And as a founder, what you should care about, and what the end what the VC is going to care about, as well.
Les 30:10
We'll post a link to venture deals in the show notes. So if you're a listener, and you want to learn more, and I completely agree with you, it's definitely the the primer, the best I've read on Yeah, and those sorts of things. Cool. So okay, so now I understand, VCs are are doing a little bit more than just writing checks. They're creating value. So I so as I understand it, you just described venture capitalists are raising funds, they're making investments, they're adding value to those investments. And they're selling those investments, they're liquidating anything else? Like, as from a spectrum perspective?
Kirsten 30:49
Yeah, that really captures the bulk of it, right? I think we could probably spend a little bit more time on on boards, right, you know, since we're our audiences, kind of founders, and you know, founders that are thinking about raising capital, and sometimes, you know, when they get their first venture capitalist, it may be their first board experience, as well. So at the earliest stage, you know, when you think about a, an early stage VC fund that's doing precede, you know, the first round of capital into a company, they may not create a board at that stage. If you think about, you know, an early stage fund is a small fund, they're going to be making a lot of different investments, smaller investments. And so, you know, joining a board is a big responsibility. And it's a big time commitment for a venture capitalist. And it's, if you're making a lot of investments, you may not have the time, and it may not be wise for you to join all of those companies boards. And so, yes, go ahead.
Les 32:05
I'm sorry, I used to say, I like I like what you just said about being on a board as a big responsibility. And I think sometimes that's lost on folks. Could you maybe talk a little bit why, you know, both as a, as an as a GP at the firm, as a steward of the investment, and as you know, as a fiduciary to the company, can you talk a little bit about those two roles? And why both of those are important?
Kirsten 32:30
Yeah, absolutely. So fundamentally, the board has two roles. The first is financial responsibility of the company, right. And so they are working with the CEO to make sure the company stays solvent, right, that it has enough cash to meet its obligations. The second, which is a very formal, formal role, right. The second is to hire or fire if necessary, the CEO. That's the the board's other role. And so those those are big responsibilities, you know, like, if you're on a board that is going through a bankruptcy, there's, you can actually have some personal liability around that as a board member, right. And so it's, it's not a role to be taken lightly. And those are really the two primary functions. Now the in practice, right, when we're sitting on boards, these companies, you know, they're startups, but they've often just raised capital. And so what we're doing is we're working with the CEO, on how to allocate that capital, how do you spend the money you just raised? Right, who are you going to hire? What's the long term strategy for the business? What's the next plan for the you know, what's the plan for the next 12 months? What are the key issues that are happening in the company right now, those are the types of discussions that are happening at the board level. And that as a board member you're participating in now as a VC, we hold the board seat for preferred stock. So if you think about the ownership of the company, you know, usually like between the seed and the Series A, that's when boards get formed for a company most of the time, right? Sometimes you'll have a board before that. At that stage, it's great to have a three person board. And depending on the, you know, I see equally common, the makeup of those three people could either be to, you know, founders or common holders, and one preferred holder, or what we call a balance board, which would be one founder, usually the CEO, one preferred seat, which would probably be the VC and then one, it's called an independent, which is somebody who's neither a founder nor an investor, but brings an outside perspective that's really useful. It could be a network, it can be experienced something like that. So those are the usual ways that you see a board seed Series A. And then as the company ages and matures and raises additional capital, the board sizes grow as it's appropriate, but it's usually still an odd number. Because when you, you know, again, you don't often you're not often having to vote if you need to fire a CEO, but that is part of the board's ultimate responsibility. And so it's important to have sort of that tiebreaker vote.
Les 35:27
Makes sense. And so it's, so it's all about representation of the share classes of classes of shares, as well as ballots. Makes sense. Great. So we've got, we've got funding, we've got a board. We've got, we've got a company like what? Well, maybe we should, maybe we should go back before we go there. And, like, who needs VC in the first place? Like when we're talking about? I am a company, I'm a founder, Should I raise money? Because what's gonna happen is I'm gonna get all this stuff, I'm gonna get funded, I'm gonna get a board, I'm gonna get, you know, growth. But how do I know if it's right? For me? Who need it?
Kirsten 36:05
It's a great question that can stitch together a lot of what we've been talking about, right? You know, back to like, the super high level definition that we started with, it's a tool for founders, that helps them grow their company with a goal of growing their company more quickly than they would have been able to otherwise. And, and so when you think about who needs it, these are companies that either the, the product, what they're trying to build, is, can't be funded otherwise, right? Like you can't sell it immediately to earn revenue and Bootstrap. You know, it's too complicated or requires maybe it's a hardware and it requires money. It can't be funded through, you know, founder money, not all founders have money to put towards starting company, and it can't be founded. It starts initially funded by non-dilutive funding, like grant funding, research funding, that kind of thing. And so it's, you know, it's some, it's sometimes those those things end up being the beginning of what ultimately becomes a venture capital company. You know, but it's, it's a tool for founders that don't have a different way to bring in the capital that they need to start the business at this at the start. That would be your precede write your pre seed funds. Then when you move into kind of seed Series A, at that point, usually there's an idea around who the target market is for this business, right? There's probably a product and MVP, maybe even some early revenue traction, right, the product has been sold a little bit, it's in market. And at that stage, who should raise venture capital, I think is like most simplified by thinking about the business, and can that business generate a long time down the road? Can you see that business generating $100 million of revenue? Right? And if the answer is yes, and there's an idea, right, of how you can get there, then I think it's appropriate to go target venture capital funds. Now $100 million of revenue is a lot of revenue. Right?
Les 38:24
Yeah. I was going to start a paperclip company, I that's probably not going to be venture backable.
Kirsten 38:31
I don't know people use a lot of paper clips. So…
Les 38:36
Okay. See, maybe yeah, maybe prove me wrong. Okay. But But yeah,
Kirsten 38:40
if he's telling the right story, and you brand it the right way. Then you go viral on TikTok, I mean, I am an optimist at heart.
Les 38:48
I love it. Yeah. And he probably put a web three thread in there. And maybe it's like, I could sell a, you know, yeah, some sort of Yeah,
Kirsten 38:56
But yeah, has, you know, like, can you see a lot of scale in this company. And, and if you can, then I think venture capital is a great tool for you to pull to pull down, right, and to try to raise if you can't, then I think there are other types of funding that could be available to you. And the worry that I have for you as a founder is if you can't see your business getting to that scale, and you spend time trying to raise from venture capitalists, it just might not be a good use of your time. Because you may hear things like, you know, you know, fantastic idea, but I'm worried the market’s too small, right? Or I'm worried the business can't you know, if we go back to like the life cycle that we like to see a company grow big in seven years to 10 years, sometimes longer. But if this company is going to take, you know, 20 years to get to that scale, and then it's not quick enough, right? So there's kind of these two things, which is speed and size.
Les 39:55
Interesting, important consideration for sure. Well, what if what if I'm a founder that can see the scale? But that's just not what I want? I don't I don't want it I just want to run this business like, you know, obviously sounds like I shouldn't raise venture capital, but should I just shut it down? I mean,
Kirsten 40:12
No, I mean, the majority, I mean, venture capital is a great tool for a such a small percentage of companies that get founded. There are so many businesses, and I consider all of the people working in those businesses, entrepreneurs, that are starting companies, and a very small percentage of those should be funded by venture capital, and the rest, you know, will, you know, hopefully be really successful businesses, for those entrepreneurs, and create a lot of cash in a good position in life, you know, for those founders in, you know, can often honestly lead to like a higher quality of life, because it's not as it doesn't have the same level of intensity as raising venture capital. And so, I think that's a good point that as a founder, I think it's important to look at your, your motivation, and your vision for where this company goes, you know, if we go back briefly to the beginnings of my story, you know, I worked in two companies, you know, one didn't need venture capital, and the other we tried and failed. And so that was ultimately the demise of the company. And, you know, both both are startups. Yeah, they're being run by entrepreneurs, and are creating value in the ecosystem. And, you know, the goal is to make money as well, and have an impact. And not Yeah, just not all, not all companies should raise venture.
Les 41:41
Great, great examples, and very well said. We're just about out of time, and I wanted to maybe talk a little bit about accelerators. But I think we're going to have to save that for part two, because I, there's going to be a part two. But what I'd like to conclude on because I think it's sort of a natural progression of the conversation is, so I'm a founder, I now understand how venture capital works, I decide that it is for me, and I'm ready to go get after this. In your opinion, what makes for a good founder of a good VC backed founder? What makes a founder investable?
Kirsten 42:22
Yeah, it's a great question. And there's definitely plenty of opinions and myths here. And my style is really more to look at the data. Luckily, I didn't have to do that. Personally, there's a great book that I think was published last year, called Super Founders, written by Ali Tamaseb, we can link it as a potential resource as well. And he gathered and analyzed over 40,000 data points, when he looked at kind of, I think it was around 200 billion companies. Sorry, 200 billion dollar companies.
Les 43:03
I was just going to say - that's a lot of companies.
Kirsten 43:08
Not that many companies. Companies that, you know, achieved tremendous scale, and were these sort of these unicorns. And he broke down the data around who founded them to try to, you know, get solve this or answer this question, right? Like what who makes for a great startup founder, venture bankable startup founder. Here's some of the things that he found, which I found really interesting. I feel like the myth is that, you know, venture bankable startups are founded by like college dropouts, it turns out, the data actually shows that, you know, half of unicorn founders are over the age of 35. Right, so these companies are getting started, you know, mid to, you know, until later in somebody's career. Second thing he found that I think is really pretty interesting and sort of, like antithetical to what you'll hear from a lot of VCs is that the majority of founders for these unicorn companies didn't have any directly relevant work experience in the industry that they were disrupting,
Les 44:18
Ah, that's quite a mythbuster.
Kirsten 44:21
It is quite a mythbuster. So there's actually no positive correlation and again in the data set that he looked at between prior industry experience and scaling of big company. Third, one another mythbuster no disadvantage to being a solo founder. I feel like you hear a lot of advice early on, like go find multiple founders. And personally, I think it's wonderful to build a company with others because it could be a pretty lonely journey otherwise, so there may be some kind of personal value there for me, but the data shows there's no disadvantage to being a solo founder. This one I think, is makes sense to most people, which is that 60% of billion dollar of billion dollar companies are started by repeat entrepreneurs.
Les 44:18
Wow, that's significant.
Kirsten 45:15
Many of whom have already had at least one $50 million exit under their belt. Right? And this to me makes sense.
Les 45:22
Yeah. Well, I wonder too, if there's a an aspect of correlation there versus causation, certainly some causation. But it's sort of like, well, if you had a $50 million exit, that means you're funding your next idea pretty, pretty sustainably for in the early stages, right?
Kirsten 45:41
Yeah, I also think there's an element here, which is, you know, when you go through that first company, and you have an exit of, you know, 50 million is not small, right, that's a, that's a decent outcome. It's not huge for venture capital. But still, you've built a company, if you've generated revenue, most likely, you've created value built a team. So there's definitely I think, learning that comes with that, and things that you'll do differently the next time. But also, along that journey, you built a network of executives, people you'd love to work with, again, funders, you know, other venture capitalists, maybe even some later stage firms, and all of that, because of the nature of the way the industry works, helps you move faster than next time. And again, back to like, you know, using venture capital to scale quicker. If you, you know, raise a seed round, and you need to go hire your executive team with that round, you may already have those folks in mind, right, and they may already want to work with you. And so that process is quicker, you can build the product quicker, get to revenue quicker, you need to raise your next Series A round, you already have 20 people, you can go and speak to about it, you don't have to spend that time finding those firms, you know, figuring out how to reach them, you know, all of that work, you can do it quicker, and, and you're already bit of a known commodity as well.
Les 47:07
You can do it quicker, kind of like if you're a first time founder, and you need to accelerate your network a little big. But that's just a teaser for when we talk about accelerators next time. Well, Kirsten, this has been so much fun. I just want to thank you for giving just such a wonderful kind of breakdown. And I gotta say, we’ll let the audience judge, but I don't know you may have topped that SPAC performance on this one. I promise I won't mention it again on this episode. But as a GP with Next Frontier Capital based in Boulder, Colorado, I want to thank you and and that, because now our audience knows what GP means. So thank you for today. And why don't you just conclude by telling our listeners a little bit more about where they can find you online?
Kirsten 47:58
Absolutely. I love to meet new people founders at any stage of the journey, including folks that are interested in getting involved with venture capital themselves in their career. Probably the easiest way to get a hold of me is if you check out either my Twitter profile or my LinkedIn, I have a link to open office hours, which I hold each week. And you could book time directly with me and we can chat live. Or I can be you know, obviously reach to those platforms as well. But getting time directly with me on my calendar is probably the easiest.
Les 48:34
Thanks, Kirsten.
Kirsten 48:38
Thanks.
Les 48:39
Thank you for listening to this week's episode of Found in the Rockies. You can find links in the show notes or go to NextFrontierCapital.com to get transcripts, links, and contact information for today's guests. If you like what you heard and want more, please don't forget to rate review and subscribe to get notified as our new episodes drop every two weeks. We'll see you next time.