What is Venture Capital?

Kathryn Finney: Brian Jez- Brian doesn't just write checks, he builds ecosystems. From growing a $98 million fund at KEC Ventures to co-founding the worldwide suppl- Why can't I say that? Brian Aoaeh: It's a lot. Actually, you should keep this because the people will roll on the ground and laugh at the worldwide supply chain federation. Kathryn Finney: Worldwide Supply Chain Federation. Okay, I can read. I really did go to school. really, trust me, I went to school. was a while ago, but I was there. Okay, let me do this again. Brian Aoaeh: Why didn't you just go to any school, Kathryn You went to Yale. So we know you care. We know you care. Kathryn Finney: Yeah, got a yo edumacation. I should be able to like read stuff. Okay, let me do this again. Brian doesn't just write checks, he builds ecosystems. From growing a $98 million fund at KEC Ventures to co-founding the Worldwide Supply Chain Federation, a 10,000 strong global community, Brian works and lives at the intersection of tech, logistics, and investment. So if you're looking for money for your business or interest in venture capital and not sure how to think about investment, This episode is for you. Let's get into it. Hi, Brian. Brian Aoaeh: Yep. Hi, Kathryn. How are you doing? Kathryn Finney: I am so well, so full disclosure, I've known Brian forever. I think we met, what year are we in? 12 years ago? 12, 13 years ago? Brian Aoaeh: was, yeah, yeah, 12 years ago, 2013, late 2013. Yeah. Kathryn Finney: 2013, you were at KEC, you spoke at Focus 100. Focus 100 was a conference that the organization I founded and led, called digitalundivided Navidad, held each year. It kind of gathered all the people of color, basically, in tech. It was a precursor to AfroTech. It was a precursor to a lot of stuff. Brian Aoaeh: Yeah. Yeah. Yeah. Yep. Yep. Yep. Yep. Kathryn Finney: And you were one of our speakers, I think the first year was like you, Issa Rae, Omar Epps. was just like very much, I shook a tree and this had a hodgepodge of there. And so we met and you are probably the smartest person I know about investment and thinking about investment. And particularly from an entrepreneur standpoint of like, what is investment? What does that mean? Brian Aoaeh: mate People, yeah. Thank you. Thank you. Mean. Kathryn Finney: mean to you as an entrepreneur. And so let's just jump into it. What the hell is venture capital? Brian Aoaeh: Mm-hmm. So venture capital is a form of outside investment that an entrepreneur can seek to help them grow their business. But there are a few things that every entrepreneur should know. The venture capitalist provides capital in exchange for an ownership stake in the company. depending on the type of venture capital, it's likely to be a minority stake. So that means they own a smaller portion of the company at the outset than the entrepreneur owns. Over time, if the entrepreneur raises more capital from venture capitalists or outside investors, it can get to the situation where the entrepreneur owns less of the company than the investors in aggregate. But at the outset, let's say you're raising your first round of venture capital. It's very likely just using an example that the entrepreneur owns 75 % of the company. Venture capitalists own 25 % of the company. So overall, the entrepreneur still has control. And the idea is that the entrepreneur uses this capital to help them build a business. So this is working capital. that you can use to hire people to design your product and so on and so forth. From the entrepreneur's perspective, what this also means is you now have people that you are responsible to in some way. You've accepted their capital and the implicit promise is that you are going to do whatever you can to grow that capital significantly. when it's venture capitalists. When it's an angel investor or some other types of investors, they might be happy with. Kathryn Finney: Yeah, what's the difference between an angel investor and a venture capitalist? Brian Aoaeh: So an angel investor is putting their own money to work. So if Katherine is an angel investor, Katherine is putting her own money to work. So Katherine might be happy with three times her money as an outcome, five times her money as an outcome, 10 times her money, Katherine would be very, very pleased. Four, who would be very, very pleased? Kathryn Finney: Kathryn would be very pleased. Brian Aoaeh: For the typical venture capitalist, right, we are going to other people. So Brian is coming to Kathryn, and this is a real example, because you're an LP in every fashion. Kathryn Finney: Yeah, full disclosure, I'm a limited partner, AKA investor in Brian's Fund. Brian Aoaeh: in refashioned. Yeah, yeah, yeah. And you're one of our very first. Without you, we wouldn't be in business. So I come to you and I say, hey, Kathryn, I have these brilliant ideas. I have access to these brilliant founders. And I have this magical ability to pick which founders to invest in. Rather than you doing all this boring work, why don't you outsource it to me? give me the capital, I will be responsible for making the investments. And some years from now, I'll come back with very, very attractive returns. So I need to make investments, generate returns, and return some capital to you. For that reason, I probably need outcomes that are much more than three times the money we've put in, perhaps much more than 10 times the money we've put in. In many cases, the reality is that early stage venture capitalists are looking for outcomes of 100x, 200x, 300x, 1000x, just because at the very early stage, is, know, the entrepreneur has not yet actually built a business. Kathryn Finney: So let's break that down a little bit. And for those who don't know, round, because we're get really granular into like these terms that you often hear. So when you're raising a round in venture, that simply means basically a time period in which you're raising money. So your round is, round simply means I'm raising money under this specific time period. And round, Brian Aoaeh: Mm-hmm. Mm-hmm. Yes. Yes. Yes. Yes, yes. I'm raising time period, yes. Kathryn Finney: And rounds are usually divided and although this has kind of changed a little bit in recent years, but it's usually divided into different steps. So you have pre seed rounds, which is usually when you're right at idea, you may not have, you may not have anything at pre seed. Right. That that's one round. the, the round after that is seed. So seed is you usually have some traction. You might have something built. Brian Aoaeh: Mm-hmm. Yes. Yes. Yes. Mm-hmm. Yes. Yes. Kathryn Finney: You might not have what we call product market fit. You may not have proof yet that people actually want to buy what you're buying at scale. You might have a couple of customers at seed and usually have a couple of customers, but you don't necessarily have proof that it's scalable, right? That you can, and then you have series A and at series A that's usually when people have their first, what's called institutional investors, right? And institutional investors are Brian Aoaeh: Yes. Yes. Yes. Yes. Kathryn Finney: larger funds, larger venture funds. It could be corporate partners who may be tracking you for merger or acquisition. They might want to buy you at some point. So they start to invest in you so they can be a part of and learn from you. That usually happens at series A. Series A is the hard round. It was at one point fairly easy to raise at pre-seed and seed. Series A was tough. Brian Aoaeh: Yes. Yes. Yes. Acquisitions, yes, yes. Yes. Tough, Kathryn Finney: tough because again, those are institutional investors and they're looking at that point, you've got to have some real traction. You have to be like running. You got to be cooking with grease as they say, right? You got to be really, really running because they're going to want to invest a sizable amount because they're going to need to invest a sizable amount. And if you are not scaled and they can't invest a sizable amount. And then after that, you really start to head into what's called growth stages. That's when you are like, you are basically a corporation at that. Brian Aoaeh: Yes. Yes. Yeah, yeah, yeah, yeah. Yes, sizeable amount. Yes. growth stages. Kathryn Finney: point. And that's series B, C, D, you're generating millions and millions of dollars, tens or hundreds of millions of dollars in revenue. You have millions of customers. You are really out there. And so just so people understand what we mean by rounds. Brian Aoaeh: Yes. Yep. Yep. Yes. Yes, yes, the way to think of a round, just as you explained it, is you're raising a specific amount of money within a set period of time. You'll use that to hit some milestones. And depending on what happens, you might decide at some point in the future to raise another round, which is another specific amount of capital at a specific point in time. No, that's completely okay. Kathryn Finney: I don't even know where this is coming from. my gosh, that is so weird. Brian Aoaeh: Let's go, let's go, fine. It wouldn't be 2025 if something isn't happening, right? We're all working from home and things. Kathryn Finney: This is gonna be like the craziest interview, cause it's like... And you know, it was Christian who was, it was my son who was like, I'm like, and I, it's so funny. was, we have a Instagram post where I talk about during COVID and I don't, and I was in a meeting or interview. might have, you might even been on it. And like Christian walked in on his underwear and was like wanted a sandwich. And, and I was like, Brian Aoaeh: Yeah. You Kathryn Finney: And I didn't know he was behind me and they were like, yeah, there's someone behind you, Kathryn. Were you, was it you? Were you on there? And I turned around and he's like in his drawers, just like wanting a peanut butter sandwich. And it was, I was talking about markets or I don't know what it was like, know, markets and investing and whatever. And this dude is behind me. He was four, like in his tighty whities. Brian Aoaeh: That's how much it does. That wasn't something I wanted. I'm laughing. I'm out! Kathryn Finney: Like I need a sandwich. I know you're talking about markets and stuff and that's great. That's great. I just want a sandwich from you. Can you stop for a moment, get me a sandwich and I'm going to go up and watch whatever I'm watching at that point. But so it's really funny that you do that. So going back to the conversation about venture, one of the things I think for people to understand is like what type of Brian Aoaeh: Yeah, all these important things, but I need, just need, I just need a sense. need stuff. I bet, yeah, yeah. Do you? Yeah. Kathryn Finney: businesses venture capitalists invest in? And so, like, can you just be a small business brick and mortar? Like, who does venture capitalists invest in? Brian Aoaeh: We're looking for businesses that I describe as high growth, high growth, high scale businesses. at some point, these are businesses that can grow really, really fast. And they can grow really fast, not because of the direct efforts of the people in the business. Kathryn Finney: And what do we mean by high growth? Like, how do we define that? Brian Aoaeh: So there has to be something about the business model that at some point, it doesn't have to be at the very beginning, but we have to believe that at a certain point, things are going to coalesce such that even if the team itself is not working that hard, this business is continuing to keep growing really, really fast. And that's the point at which people start to talk about product market fit. It's like, we can't explain how the business is growing this fast. we can't explain where all these customers are coming from. We can't explain how all this revenue is being generated because it clearly is not just our marketing and our sales and whatnot, right? Like our efforts are completely, there's no great correlation between what we're doing and the results that we're getting. And that can be very difficult for, That can be very difficult for entrepreneurs to understand because these businesses aren't the businesses that we run into every day. There's only one Google. There's only one Apple. There's only one SpaceX. There's only one, pick whichever, there's only one Oracle. Pick whichever big business. There's only one McDonald's. Kathryn Finney: Yeah. Brian Aoaeh: There's only one McDonald's, there's only one Chick-fil-A. So, high growth businesses don't always have to be technology businesses and otherwise they don't always have to create a new technology. But there has to be something about what they're doing. Maybe they use technology to facilitate their operations and that's some sort of IP that is internal to them or maybe they've figured out a way to do the work that they're doing that others have not, which gives them the, or maybe they have a brand that everybody just loves for whatever reason. There are different ways that this can happen, but those are the businesses that venture capitalists are interested in because again, the goal, my goal is I put a 50K, 100K check into a business, 25K check into a business. And if it multiplies a thousand times, then I've returned my fund. I've returned the fund. You will be very happy. You will brag about me at cocktail parties. And I will take my carry and be very happy as well. Kathryn Finney: I'd be very happy. Yes. I think that's a really important point because I get asked a lot about, you know, venture capital, especially as an investor, right? And I aim to invest quite a bit. I aim to invest a lot and also venture invest. And. There's a lot of founders who don't understand how venture capital works and how we make money and and our own unique economics of venture capital, right? And. Brian Aoaeh: Hmm. Yeah. Kathryn Finney: So when a founder comes to me or an entrepreneur comes to me and says, I have this business and one of the biggest mistakes I say, and we can, let's talk about some of the big mistakes that we hear founders make. One of the first mistakes small business folks say to me is, you know, I'm really building a legacy. I'm building for my family. And as a human, I love that idea. As an investor, I'm not investing in you. Brian Aoaeh: Mm-hmm. Yeah. Yeah. Kathryn Finney: because my goal is not to help you build for your family. My goal is like, I need an exit because I've got to return to the people who invest in me. And venture funds, what most people don't understand is a venture fund is a company in many ways. And it's a limited partnership, meaning that it's a company, the fund. So you have the firm, right? You have a venture firm that often runs multiple funds. Each fund is set up as its own. Brian Aoaeh: family now. Yes. Yep. Yep. Yeah. Funds. Yes. Kathryn Finney: company. It's a limited company, hence the name limited partnerships. And it's a partnership between, you know, high net worth people, foundations, other people, and the folks running the funds who are called general partners. The general partners. And those who are investing are called limited partners, they're called limited partners, because again, it's a limited company, usually, venture funds are 10 years, and that's it. Brian Aoaeh: Yes. Yes. Right, my ship. Yeah. Right, the general partners, yeah. Yep. Yep. Kathryn Finney: There's a limited company at the end of the 10 years, everyone gets their money back or no one gets any money, whatever it may be, it's 10 years. And so when you understand that venture capitalists have investors that we have to return at a rate that's greater than the stock market. And the reason why we have to return at a rate greater than the stock market is because people are locking in their capital for 10 years, right? Our investors locking in their capital for 10 years. Brian Aoaeh: But yeah. Great, yeah. Yeah, for 10 years. Kathryn Finney: and they could have put that in Microsoft and generated anything and generated a good return, let's say for argument, say an eight to 10 % return each year. So whatever you do as a venture capitalist, you gotta beat the eight to 10 % return they could have gotten, right? If they just kept it in the regular stock market. So that's why VCs are so. Brian Aoaeh: Yeah, anything. that's what I'm putting. Return, yeah. Yeah. But yeah. Yeah. Market. Kathryn Finney: pressuring founders to scale and to do things because we don't get return. We don't get to get back to our investors if you don't have a return. Like I need you to exit and get a liquidity event. Liquidity event meaning somehow the stock that I have in you, the ownership I have in you turns into cash, right? I need you to turn that into cash for me. And so when you say to me, Brian Aoaeh: L is our limited partners. Yeah. Yeah. Yes. you yeah turns into cash exactly yeah yeah yeah Kathryn Finney: I'm building a legacy for my family. That tells me this is never going to turn to cash for me. This is great. Maybe we can end. And if you are a founder who is interested in legacy building, I do not want to discourage that at all. But venture capital is not the funding for you. That's not the funding for you at all. Brian Aoaeh: Yeah, that's amazing. Yeah, yeah. And I'll tell you a story. At KEC, I met with this founder who was building software for restaurants, so restaurant tech. And I'd helped turn around the restaurant prior to meeting him. And so I said, you know what, I know this industry, this isn't for me, but he was persistent. Eventually I agreed to take him. Well, and so then I asked him, what would success look like for you? And he got really excited. He said, you know what? An $80 million exit would be amazing. So he was thinking about an exit. But he was raising, I think he was raising something like a $2.5 million round. And I was thinking we could do half of that. And we would maybe own less than 10 % of the company with a check that size. And so I put my pencil down and I said, an $80 million exit does not work for us. And he looked very confused. As I explained to him, know, this is going to be the round you're raising is going to be about 20 % of your company. We will get maybe 10 % of that. So half of the 20%. And if you exit, for 80 million, then this is how the math works. It's really not worth our time. And he tried to persuade me that it was a math, like, no, no, no, no, no. If you're thinking on $80 million exit, this is what it's going to. It doesn't rise to the 10, 20, 30, 100 times the capital that we put in, which is. Kathryn Finney: And the reason why you're looking for companies like that, because there's gonna be companies that fail spectacularly. And so you need the big, the wind's gotta be big to cover the losses. Brian Aoaeh: yes. Yes, they have to be yes to cover. Yeah. Yeah. For example, and I know you're going to cringe when I say this, but I make it very clear to our LPs that my baseline assumption is that half the portfolio will go to zero. We try very hard to prevent that from happening, but you know, the world is what it is. And so we start with the assumption that half the portfolio will go to zero. Kathryn Finney: Yeah. Brian Aoaeh: So if half your investments are going to go to zero, then just as you said, the ones that win have to be so enormous that it makes up for all the losses. And I think that's also something that's difficult for people who aren't in venture to understand. Wait, why will 50 % of your portfolio go to zero? Kathryn Finney: Aren't you like trying to invest for, but that's, it's high risk, high reward, right? You are investing in the startup space and there's an understanding that things are gonna fail, especially depending on where you invest. So the earlier you invest, the more likely it's gonna fail, right? If you're at pre-seed seed. Now, I would say venture has changed quite a bit. So when we were in fund one with Greenhouse, Brian Aoaeh: Yes. Yes. video. Right. It's going to fail. Kathryn Finney: You know, there was an appetite for more pre-seed. This was like 2020, 2021. There was more of an appetite for pre-seed and seed and founders didn't have to have enormous amounts of traction. Now you can't get a dollar if you don't show some sort of traction. And then traction may mean that you have people utilizing and now paying for what it is that you're building. You've got to have people pay. Brian Aoaeh: you Mm-hmm. some sort of traction. some results. Kathryn Finney: If they're not paying, it's a hobby. It's a hobby. Another challenge I see founders do is that they get so enamored with their idea and their company and they're not coachable and don't want to listen to feedback. And I was saying to a founder, Sid, you know, first of all, I've been where you've been. You've never been where I've been. Like you've never been an investor, but I've been you. I've been an entrepreneur. Brian Aoaeh: Yep. Yep. Yep. Mm-hmm. Mm-hmm. Yeah, yeah, yeah, yeah. Kathryn Finney: And then two, you have to understand as an investor, I meet with hundreds of companies a year. So I'm looking at this at a very global level. So if you're telling me something, you're very on the micro level, you're very much building your company, your heads down, focused. I'm seeing from a global level. So I'm telling you, and here's examples of what I'm seeing that, someone else is doing this idea, they're executing it really well. You're a little bit late and so you're not going to be able to really execute it, at least at the Brian Aoaeh: Focus, yeah, your idea, yeah. Mm-hmm. Mm-hmm. Kathryn Finney: level that they're executing because they're way, way ahead of you. And you're arguing with me about how you're different, but I'm like, I'm telling you, I'm sitting at this global level. And so for founders, the other mistake is not being coachable and not listening and not understanding, particularly from your investors who again are sitting at a more global level and have a vision of kind of what's out there, you know, listening to the feedback and then also determining what feedback to listen to. Brian Aoaeh: ahead of you. Mm-hmm. Yeah, yeah. True, listen to. and that's a great point because on the one hand, you know, when you're doing something that hasn't been done before, because VCs, venture capitalists, are not investing in someone who's starting a new restaurant business. By and large, that's not, maybe if it's a new concept altogether, but most early stage VCs are not investing in someone starting a new... Kathryn Finney: Yep. That's more private equity. Yep. Brian Aoaeh: restaurant. So typically we're looking for something that no one else has solved this problem. You're solving the problem in a very new and unique way. And so just as you said before, the likelihood of failure is really high. On the other hand, if you do succeed, the likelihood of the success being outsized is also relatively high. And so in a situation like that, there's a fine line between complete stubbornness and not listening to any feedback whatsoever. And as you said, being able to have a conversation to debate points and counterpoints intelligently. And then as a minority investor, for the entrepreneur to go off and make a decision, that they believe makes sense because the entrepreneur will always have more information than we have about the specifics of their company. You're absolutely right. At the macro, at the very high level, we're seeing more things. Do you know about these competitors? Do you know about what's happening in this other market? Do you understand how the regulatory landscape is changing? But specifically, especially about their IP, like what is it about your IP? that makes you so sure that you're going to win against your competitor who has more capital, has more customers, has five years ahead of you and so on and so forth. And if you can't communicate that to me in a persuasive way, then we're just wasting, we're just wasting, we're just wasting our time, If it's just, we're better, we're smarter. Well, no, that's not convincing enough. Like tell me specifically why what you're doing. is going to overcome all those disadvantages that you seem to have. Kathryn Finney: And that leads to another, it leads to another challenge I see. I just had a conversation with an entrepreneur who's gonna be on one of our episodes where she was talking about meeting with, having a meeting with a big entrepreneur. She was meeting with the founder of Honest Tea, which sold to Coca-Cola for several billions of dollars. And they were in this meeting. Brian Aoaeh: Mm-hmm. color. Yeah. Kathryn Finney: And she was so proud of herself because she got all this press and stuff. And he said to her and she's a founder of color. She said he said, you have more press than you deserve. And one of the things we heard and I talked about about how founders, particularly black founders and specifically black founders, we are very media, but we get a lot of press because we drive eyeballs. But that press. Brian Aoaeh: Mm-hmm. Yep. Kathryn Finney: there's a tendency to confuse the press with validation. Like it can confuse the press with business and the press isn't translating business. Oftentimes it does not translate into business. And I've had founders be like, well you don't know anything because you know, such and such just said that I was wonderful. Like such and such magazine or publication. And yeah, but they're not buying your product though, boo. Like, I mean. Brian Aoaeh: Mm-hmm. Exactly, Such and such buying your product and then cutting a check. If they're not, it's a waste of everyone's time. Kathryn Finney: Well, we're in this media. Does that drive sales? If it doesn't drive sales and you're just, it's you're, just being on TV and having fun. But if it's not driving sales and it's no reason to have that. And I've seen a lot of founders get hung up on the external validation at media and being invited to speak and all this other stuff. And one of the conversations I had with a founder of ours, um, Ashley wisdom, who founded a company called health and her hue. And I remember I was headed to. Brian Aoaeh: Yeah. Mm-hmm. Mm-hmm. Yeah, yeah. Kathryn Finney: South by Southwest, this must have been like two or three years ago. And I was like, I'm gonna meet with some of our portfolio companies, are you coming? And she said, no, because my customers are at this health conference held by JP Morgan that was happening at the same time. And she's like, I'm gonna go be where my customers are at. And I was like, that's, and I said to her, that's exactly what I wanna hear. Like when you're an investor, like. Brian Aoaeh: And yeah. Customers are, yeah. Yes, that's it. Yeah. Kathryn Finney: There was a whole, and I remember we had other members of our portfolio who were there who were like so excited to be invited to like a TI party. And I'm like, and their companies no longer exist. And we did very small investments in them, but I was like, is TI gonna buy your product? Like what does going to this TI party, how does this help your business? Because that's what I care about. Brian Aoaeh: Yeah, no. No. Yeah. Yeah. Part it, yeah. Yeah. Yeah. Kathryn Finney: Right? Like that's what I care about. If I invite you to come to a party or event with me, I'm inviting you because I want you to make a connection to someone there. I want you to meet. There's a possibility not to just go out and party. Yeah. I and so. Brian Aoaeh: Connection, yeah. Yeah And it's an important point. think sometimes, I'm very sympathetic to entrepreneurs and those of us building venture funds from scratch, we're entrepreneurs too. It is really hard to keep hearing prospective customers say no. And it's really hard to keep hearing prospective investors say no. And so you get to a point where you're so sick of hearing the notes that any validation at all gets you running. But you know what I'm not saying don't seek any validation whatsoever. Yeah, once in a while, if this is what's going to keep you going, if this is what's going to keep your passion for building the company going, once in a while, yes. But the focus has to be, just as you said, what's going to drive business was going to drive revenues was going to drive adoption. What's going to ensure that I keep solving problems for my existing customers in a way that makes it possible for me to get new customers, right? Because that's how the business is going to grow. And you know what? In some cases, if that means talking to the media, then by all means talk to the media. In some cases, if that means presenting at a conference, then by all means, but Kathryn Finney: I disagree with you. I'm gonna push back on that. I don't think you should talk to the media for at least the first year or two. I don't even think you should talk to the media until you have product market fit. I don't think you should have any conversations until you have product market fit. Because at that point, when you know that people want your product and people are buying it you have some idea of what they're buying and why they're buying it. Brian Aoaeh: fundamentally you have to. Okay. Yeah, that's a fair point. That's a fair point. That's a fair point. That's a fair point. BANG IT Kathryn Finney: then you understand what type of media you actually need, right? And the media you need to drive sales. It's not, this is the thing for new entrepreneurs that can be really hard. And I just remember back when I was first starting in entrepreneurship, your customers don't care about you. Like you are not important. What they care about is, you solving a problem for me? They don't care that you're in, Brian Aoaeh: You actually need, yeah. Their problem, yeah, their problem is what they care about, yeah. Yeah. Kathryn Finney: essence and stuff. mean, unless your business is being an influencer and even then, you know, your customers are looking at you for a certain reason, understand why they're looking at your content, but you're there for them, not for you. And that can be so hard for early entrepreneurs. It's almost like a self-centeredness of like not understanding that they're there for you to sell something for them. That is why. And if you Brian Aoaeh: Mm-hmm. Mm-hmm. Mm-hmm. Yes. Yes. Kathryn Finney: think back even to the things that you use. Like why do you shop at Whole Foods? Why do you, prior to all the mess it got in, why were you at Target? Right? It was, know, Target's sales specific. I wanted to find good products that I felt good about that were stylish. I'm very into fashion and style, right? So Target solved that for me. There was no other big box retailer that allowed me to do that and also get groceries at the same time. Brian Aoaeh: Mm-hmm. foods. Mm-hmm. Mm-hmm. Mm-hmm. about, yeah. Mm-hmm. Kathryn Finney: or you're a busy mom and you need to go into Walmart because Walmart has groceries. has, you can get, you know, draws for your kid that likes to interrupt meetings. Like you can do all sorts of things, right? And it's a one-stop shop and it's sales that for me. I don't have to go to a bunch of different stores. I'm just, saves time for me, but solution oriented. And I think what happens when you have media too soon, you start to think it's about you and you get very geeked up about that. Brian Aoaeh: Mm-hmm. Yeah, true branches. Yeah. You, yes. Yes, yes. So I agree with you. The media that I have in mind when I'm thinking of startup founders talking to media is very specific. I am talking to media about how I solve problems for my customers, right? In other words, it's a way for me to talk to customers that I might not be able to reach. The media that's like, Look at Brian. He is the first blah, blah, blah. No, no, no, Kathryn Finney: Mm-hmm. Brian Aoaeh: That's good media. yeah, yeah, yeah. So I think we're saying the same thing, just from different, yeah. Kathryn Finney: That's good media. And I mean, and this is from, you know, I've been on every list. I mean, they've created lists that I've been on every name a list. I have been on it. Name an award. If someone's like, you got I did an interview recently and the person was like, you know, I'm just not going to read this whole bio because this is like, I would literally be here for half the interview reading about all the stuff. So I've gotten all the stuff, right. Brian Aoaeh: Let's spread your face. But yeah. Yeah. Yeah. Kathryn Finney: But at the end of the day, I've always looked at media as like, how is it driving sales? Is it driving book sales? Is it driving awareness for our fund that helps us get access to better founders? Is it helping our founders? So a lot of media, our portfolio companies, I would actually bring them with me. Or if I was speaking, we require one of them to be on stage too. And so what is like driving my bottom line? this helping that? Brian Aoaeh: Yeah. Yep. Yep. Yep. Yep. Yep. Yep. stage. Kathryn Finney: And like, am I talking? Because it can get very easy to get wrapped up into it. So as we think about venture capital and we had a conversation about sort of the basics of it, where does venture capital sit in the financial stack? You are an entrepreneur, you have this great idea. Where does it sit in relation to like bank loans or, you know, other friends and family asking your mama to loan you some money? Brian Aoaeh: Yeah. Talk, yes. Kathryn Finney: Where would you place venture in that sort of financial spectrum? Brian Aoaeh: I would say venture should be one of the very last options that a founder should consider. Just because it is so specific and if you are not careful, you will waste a lot of time chasing venture when it's not ideal for the business that you're building. So at the point where Kathryn Finney: Why? Brian Aoaeh: you have a sense that what you're building is going to fit the parameters that venture capital capitalists are looking for by all means talk to venture capitalists but before then it's a waste of time i've had many many conversations with founders where at the end i tell them you know what this isn't this isn't a venture scalable business i don't think this is i think you should use these other options if it's possible, right? So if you have friends and family who can invest, that's one way to go. If you're still employed and you can do this on the side while earning a paycheck, that's another way to go. You don't have to do this full time if it's still uncertain which way it's going to go. Not every new business can win bank loans, but if it's the sort of business where a bank loan of some sort as possible. That's a viable way to go. Some states might have grants for people starting new businesses. That's another path to explore. And then, like I said, if you've explored all those things and gotten to a point where you're starting to see the signs that this can be a high growth, high scale business, great. At that point, come talk to us. Because the other thing that founders don't realize is, and going back to the validation thing, my God, I had, you know, a hundred phone calls with VCs last week. Well, VCs are in the business of talking to founders. Kathryn Finney: Exactly. Let's talk about that a little bit because what a lot of people don't understand is one of the metrics for VCs that we share with our investors is the number of meetings we took. That's actually a metric we measure. So a VC will always take a meeting with you. You will get a meeting. You will get a meeting. Brian Aoaeh: Yes. Yeah. If my calendar is open, I'm likely to take a meeting. Kathryn Finney: Because what they need to share with their investors is I took a thousand meetings and from that thousand meeting, we will get down to 50 companies we went into due diligence with and due diligence is meeting that we're digging into your numbers and who you are and all this other like a background check. And from that we invested in 10 and they need to say that to show that we are talking to a bunch of people. is an actual metric that is shared. Brian Aoaeh: Yeah, do it with. Yeah, numbers, yeah, yeah, yeah. Okay. Yeah. Metric. Yeah. Yeah. Yeah. Yeah. Kathryn Finney: with investors of how many people we're talking to. So when a VC says they're gonna take a meeting with you, that means absolutely nothing. It is not exciting. The number of founders who would be like, well, I had a meeting with this person. I'm like, of course you did, you're being tracked. And then you're usually meeting with a junior analyst or someone there, or I had a meeting at blah, blah, blah. And it was like, yeah, because they need to put that as people, they need to justify. Brian Aoaeh: It means absolutely nothing. Yeah, yes. Yeah. Yeah. Kathryn Finney: doing the work that they had a meeting with all these different people. And so, yeah, and I think too, going back to our conversation about what is high growth, if you don't think your business is going to 10X revenue or actually 10X is a low number for number of customers, particularly if you have a freemium model, then you need to not think about venture capital. Brian Aoaeh: Yeah. Yeah. Kathryn Finney: I'm just throwing that number out to give a baseline for people. Like if your company is in what we mean by high growth, meaning you've got to be growing so fast that you cannot keep up. It can't be that I went from five customers to seven. That's not high growth. That's not high growth. Now, if you're in a B2B situation where they're high value, like, you know, the clients and the customers are, you know, million dollar contracts. Brian Aoaeh: so fast. Keep up, yes. Yeah. To seven. No, that's not high growth. That's not high growth. Kathryn Finney: then then you don't maybe need to go to next. But even 10 X of like that, that again, I would say is in the same sort of space of like within and it needs to be within like a year or two time period. That's the other thing. This is not indefinitely. Brian Aoaeh: to yeah yeah yeah And even in the business to business context, right? Sure, perhaps you're not bringing on new customers at the same rate, but are you growing your revenue within the customer you have? Right? So they started with you. Initially it was, we're going to sign up for this number of licenses. And that is, you know, maybe $200,000 a year. And then they loved it so much that within the next six months, it's now $500,000 a year. And then a year after that, it's a million dollars a year. then you couple that with bringing on new corporations or new businesses as customers. that's where the growth happens. Kathryn Finney: Yeah, yeah, and I think that's really important for people to understand. And so that leads to the next conversation of how do VCs make money? How do we get paid? And I always think when you're partnering with someone, it's important to understand how they get paid and why they get paid. Brian Aoaeh: Paid, yeah, yeah, yeah. So we're paid in two ways. The first way we're paid is an annual management fee. And that's a small percentage of the size of the fund. So let's say a hundred million dollar fund, 2 % is the industry standard. So every year that fund manager would be paid $2 million for managing the fund. And that, just to keep it simple, that's for the 10-year life of the fund. Kathryn Finney: That's $2 million a year for 10 years. Brian Aoaeh: a year for 10 years. And that $2 million is, you know, salaries, rent, travel, any legal that's required for managing the firm, those sorts of things. That's where the budget for running the firm. Not the fund. Yes, because those are two different things. Kathryn Finney: And legal for managing the firm, not the fund, because those are two different. Yeah. Brian Aoaeh: And then, so now you make a pool of investments, let's say your portfolio is, don't know, 20, 30, 50 companies, you manage those. At the end of the 10 years you exit, let's say things have gone well and you turned that hundred thousand dollars, that a hundred million dollars into five hundred million dollars. So first out of that five hundred million dollars, you take the first hundred million dollars and you give that back to the LPs. and say, thank you for giving us this $100 million to invest. Here's your $100 million back. So now there's $400 million remaining. Of that $400 million, 80 % goes back to the LPs. So that's $320 million. And then the general partner, the venture firm, gets the other $80 million. And that will be split between the people in the firm. and some they'll have some formula for determining how that is split. But that's the way we get paid. Kathryn Finney: So as VCs, you get paid on the front end and the back end. You get a management fee each year that allows you to manage. And depending on the size of your fund, you can figure out how much the management fee is. And that's really important for founders to understand that because there's a lot of micro funds. Like technically, Genius Goals is micro fund. Brian Aoaeh: Yep. Yep. is. Yeah. Yeah. Refrashing, refreshing. I call refrashing a nano. A nano fun. Kathryn Finney: A nano fund, not even micro, it's like nano, right? And so you can figure out how much we get paid and that it's not a lot of money because we have to pay everyone else out of that too. It's not like we get to pocket that. And so where we get the pocket, our returns is when you win, when you sell. And again, why, when you say to me, I'm building from my family, my legacy, or why wouldn't you say to me, well, I think this could be, you know, in a couple of years, a million dollars, where I'm like, I can't invest in that. Brian Aoaeh: Yeah, yeah, yeah. Yeah, it's not my kind. Yeah. Kathryn Finney: because I'm never going to make money, like ever. And now you can get a sense of why venture is structured the way it is and why it's really not best for 90%, or 99%, I would say, of companies. It's just not a good option. And so people can sort of let go of this. I do think venture has done a really interesting job of marketing itself. Brian Aoaeh: food. Yeah, 99 % of companies. Mm-hmm. Kathryn Finney: Venture has marketed itself as this sort of sexy finance sort of thing because of the amount of capital and because it really is some of the most flexible form of capital out there, right? So people get very, very sexy and sexy and you can do money and you can make these decisions. But as investors, especially in the early stage, how do you think about merging your gut instinct with data? Brian Aoaeh: Yes, yes, yes. Kathryn Finney: because we're both pretty analytical people. You're a lot more analytical than I am. I'm more gutty and you're more analytically. Analytically is not a word, but we'll make it a word today. And gutty is not a word either, but we'll make it a word today. Like, how do you marriage that as an investor? Brian Aoaeh: Yeah. Yeah. So at the early stage, it's tough. At the early stage, it's tough because based on where we expect these companies to go and the point at which we first invest, really isn't a lot of information to justify the investment. That being said, I think it's a combination of understanding the market and what opportunities that creates. Understanding what problems the startup is solving and trying to figure out is this pain deep enough that if they succeed in solving it, there will be a lot of customers that gravitate to, or a lot of users that gravitate to what they're doing, to what they're selling. And then, you know, what's the revenue model going to be? How are they going to make money? So it's one thing to solve a problem for the customer, right? That's the delivering value to the customer. But then how do you capture some of that value, right? And is the pie going to be big enough for this to become a big business? At the early stages, there's very little hard very, very hard. There's some hard data to go by, but not that much. And so it's more, what's the word? It's more a lot of qualitative analysis and less the number crunching spreadsheets and spreadsheet models type of thing. I know there are people who do like, they'll do like comps analysis and comparable deals and whatnot. But again, at the early stage, ideally you are investing in something that hasn't been done before. And so there shouldn't be any good comps. If there are very, comps, you're probably going to lose money. Kathryn Finney: that's really important. Then you should go invest in their comps. That's a really good point. think it's particularly for entrepreneurs to think about. When you're investing very, very early, you're investing in something that hasn't been done before. So if you come to me, or it may be done, but it's not been done well. There's also, right, it hasn't been executed. So if you come to us, know that. The other thing I say to people is don't come to me unless you have a business model. And meaning that you... Brian Aoaeh: than before. Well, yes, yes, yes, yes, yes. Mm-hmm. Kathryn Finney: you have a business model that you're going to be executing against. Like you have an idea of how you're going to make money from the very beginning. It doesn't mean that you're implementing that, but you know, it's like, here's how we're going to make money. And that business model makes sense. And there's some evidence that the business model has worked before, maybe not in the exact industry, but there's some evidence. because you just saying, well, this is really great. And this person featured me in whatever magazine. That's not enough for me to be. Brian Aoaeh: Yeah, yeah. make money. Yeah. Yeah. Yeah. Yes. sense. Yeah, no, that's not enough. Kathryn Finney: what is called conviction. That's the thing with VCs where we need to get the conviction, meaning we have strong beliefs that this is going to succeed because again, we answer to other people. We answer to investors and we have to sell ourselves to these investors and they're gonna push back on some of the decisions that we made. And so we need to have conviction that this is a good decision. Brian Aoaeh: Yes. Yeah. Yeah. Yep. Yep. Yeah. LPs are sometimes not shy in letting their GPs know. I think that was a bad investment. You are a nice LP. Kathryn Finney: Mm-hmm. But not me, I'm a nice LP. I'm a warm and fuzzy LP, I'm very nice. I think I'm a nice LP. I try my goal and even with investments, my goal is like to help you get to the point where we all can win. And so me being harsh, that doesn't help us win. That doesn't help me win. It doesn't help you win. So what can we do to win? Brian Aoaeh: Yeah. So to be fair, it's more like, at least the way that I interpret it, is help me understand I don't see this. And so when I get questions, I say, here is why we think this makes sense. Here is where we still have questions. And so it remains to be seen if. Kathryn Finney: Yeah. Brian Aoaeh: how those play out. And here is what we feel we can do to address the areas where we have questions. So you don't have to know all the answers. Yeah. Kathryn Finney: And you don't have to know all the answers to entrepreneurs. One of the best things to do is so there's two things advice I give founders about like working with investors. So one, if you don't know something, say you don't know it and don't try to pretend like you do, especially if the investor is pretty well versed in the space because they'll know your line. So just say, you know, I don't know, but. Brian Aoaeh: Mm-hmm. Yep. Yep. Mm-hmm. Mm-hmm. Kathryn Finney: You know, in our next meeting on Tuesday, if you're available on Tuesday, I like to swing back and give you an answer that does a couple of things. One, it shows that you're humble and coachable. The other thing, it gives you a reason to talk to them again, which is you always want to be getting to your next meeting. I think that's so, so, so, so, so important. The other thing is there's nothing better to shut up a VC who's like poking holes in you. Brian Aoaeh: Yeah. Yeah. Yes. Again, yeah. Thank you. Kathryn Finney: than to have a really well laid out appendix where they're like, well, what about this? And you're like, I have a slide for that. I'm so glad you asked that. Let me pull up slide number 79 that has, you know, do you want me to go even more detail? And that will shut us up. It will shut us up. like, OK, OK, I see you. Brian Aoaeh: I'm so glad you asked that. You You You Kathryn Finney: And then also make sure that you put some effort into your pitch decks. For those of you who are, are startups, pitch decks are basically your business plan. Nobody does business plans anymore. I mean, in fact, I tell founders, don't waste your time on a business plan. If you need, if somebody's demanding it, just use chat GPT to write something, tell them what your business is. There's no, like I, I'm not going to read it. I'm not going to read it. other people might, you know, love to read business plans. I'm not going to read past the front page. Tell me your. Brian Aoaeh: Correct. Just praying, Does. Mm-mm. Yeah. Kathryn Finney: You know, real basics, like what's your, your AIR, what's your customer, what's your, your cost of goods sold if you are a consumer product, like what is, um, you know, your engagement, like give me six months of data so I can see what's kind of happening, uh, and ask questions myself. Like I don't, like your pitch deck is cause I, everyone's going to put the best version of themselves. So that it's not going to really tell me much is going to maybe give me basic information about who you are. Brian Aoaeh: Mm-hmm. Happening. Mm-hmm. Information, yeah. Kathryn Finney: but I'm not gonna get information to help me make a decision. And I'm gonna need this data to make these decisions. But I think one of the things that we sort of wrap up for founders and entrepreneurs to think about is venture capital is not for everyone, right? I think that's what we kind of hit on. If you are not... Brian Aoaeh: decision. Yep. Mm-hmm. Kathryn Finney: rapidly growing. If you have no interest in rapidly growing. And when people think of rapidly growing, think of that old IBM commercial for those of us who were alive, where they had, it was this beginning of the internet and it was this team at a startup office and they put their site online. And at first they only had like one customer, then it went from one to a hundred and then went from a hundred to a thousand and went from a thousand to million. They're like, oh, we better get IBM. Brian Aoaeh: Rapidly growing. Hmm. Kathryn Finney: That was like the commercial because it was like scaling so quickly. If what you're doing is not going to scale like that, like rapid, mean, to thousands, to millions, to millions of dollars within a really quick time period of a year or two, do not seek venture. It's just, it's going to make, it's going to, it's, and we're seeing now the startup world littered with a lot of companies from 2020 who received money. Brian Aoaeh: Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Kathryn Finney: not enough to really be successful, but received money so that, to be really honest, VC Funds wanted to have a black person on their cap table because their limited partners who are pension funds, who often have a sizable number of their pensioners are people of color. We're like, why aren't there people like me being invested in? So they rushed out and got the nearest black person. Literally, some of them rushed out and got the nearest black person and invested. Brian Aoaeh: Yeah. Yeah, yeah. Yeah. Yeah. Yeah. Kathryn Finney: but not enough for that company to be successful, not enough of the wraparound services just so that they could say they had this person of color on their cap table. And so again, you gotta be careful with this validation that people give you because it doesn't mean anything. And so... Brian Aoaeh: Should be successful, yeah. Yeah, that's a whole other, that could be a conversation on its own. That could be a conversation on its own. Yeah. Kathryn Finney: about that. And again, as someone who's had all of the awards, like think of an award. I got it. And that has rarely translated into any financial impact in any of my businesses. I can tell you that the only thing in my last book, I can tell you what drove sales. was being on Simon's the next podcast that drove sales. And and Brian Aoaeh: Yeah. Yeah. Yeah. Mm-hmm. Mm-hmm. Kathryn Finney: basically marketing within my own ecosystem in terms of our newsletter and stuff like that. That's what's driven sales, but like all the other stuff didn't drive any sales. It really, really didn't. So thank you so much, Brian, for joining us. It's always so good to talk venture with you and to sort of break it down for other people. So that's a wrap on today's episode of Build a Damn Thing. Thanks, Brian. If you took away, yeah. Brian Aoaeh: system. Yeah. Thank you. Thank you. Thank you. Thank you. Thank you, Kathryn. Kathryn Finney: If you took away something powerful from today's conversation, and I'm sure you did, especially on thinking about venture and whether or not that's right for you, be sure to subscribe, share this with anyone who is interested in fundraising or building their company and leave us a review. Until next time, I'm Kathryn Finney, reminding you to keep building the damn thing. Thank you.