Press play to listen, or check it out on your favorite platform:

About Tony Shipley

Tony Shipley is a founder and Chairman of Queen City Angels (QCA) based in Cincinnati, Ohio. QCA was one of the first angel groups formed in the Midwest and is an inaugural member of Angel Capital Association (ACA). He is also Chair Emeritus of ACA and the founder of the Angel Investor Foundation.

During his business career, Tony has founded and/or invested in over 120 start-ups or early-stage companies including direct investments and the family of Funds he co-manages. Tony has served on various Boards of startups and early-stage companies and fulfills the role of mentor and/or Board observer for other QCA portfolio companies.

Tony started his business career as an engineer for Monsanto Company, located in Pensacola, Florida. He decided to depart the large corporate environment and joined a startup in Cincinnati, Structural Dynamics Research Corporation, as an Industry Marketing Manager. He left SDRC to co-found Anatrol Corporation, a mechanical engineering related business. Following Anatrol, Tony founded Entek Scientific, a software company providing mechanical engineering application packages, and built that company into an internationally recognized supplier of plant machinery monitoring systems. Entek was no. 414 on the Inc. 500 list and was sold to Rockwell Automation in 2000; Tony started his angel investing activities that same year.

Tony has a B.S. in industrial engineering from the University of Tennessee and an MBA from the University of Cincinnati. He has served on many non-profit Boards and has helped launch various non-profit business development organizations.

Episode Highlights

Why rigorous due diligence is the single biggest driver of investor success
The key attributes every investor evaluates before writing a check
How founders can turn diligence into a powerful discovery and learning process
The real reason uncoachable founders rarely get funded
How to make “greed overcome fear” when pitching investors
What every deep tech and life sciences founder must prove before investors say yes
The two make-or-break deliverables that define fundable milestones
What investors really look for in your market sizing (and why your TAM might be irrelevant)
The hidden art of building investor confidence through your sales strategy
How to build a moat that actually matters—across SaaS, life sciences, and advanced materials
Why founders underestimate the due-diligence deep dive into team dynamics
Common red flags on your cap table that kill deals before they start
The investor’s inside view on SAFE agreements—and why most angels won’t touch them
The one preparation habit that makes founders 10x more likely to get funded

Links and resources

Queen City Angels (QCA) – Leading angel investment group recognized for its structured, data-driven approach to early-stage investing.
Angel Capital Association – The official site offering educational resources, standards, and guidance for angel investors and entrepreneurs on best practices in fundraising and due diligence.
QCA Founder Do’s and Dont’s – A special QCA resource offered to Invisible Ink listeners

Interview Transcript

Shubha K. Chakravarthy: Tony, welcome to Invisible Ink. We’re so delighted to have you here today.

Tony Shipley: Oh, delighted to be with you. Thanks for inviting me.

Shubha K. Chakravarthy: Awesome. So, I know you’re the chair of Queen City Angels. Queen City is known nationally. I know you were ranked second on one of the CB insights for the top angel groups. I also know personally that you’re one of the most rigorous diligence processes in angel investing. So I know we’re going to talk a lot about that.

But just out of personal curiosity, why has due diligence been such a personal priority for you? Why are you so enthusiastic about this?

The Importance of Due Diligence

Tony Shipley: Well, it goes back to the founding days of our group. We were founded by five engineers. So we all had a very process oriented background and we started out writing some simple standards that helped us do due diligence.

The whole process or the idea was how can we make a process out of this so that we can replicate it and that other people in our group can do it, with as little pain as possible and get through the process and give us some type of consistency in the process. As time went on, we did a very detailed strategic plan maybe a decade ago, and we decided to refresh our entire approach to standards and so we ended up with a new standards committee and they took it to heart.

They decided that all the bits and pieces that we’ve put together for doing due diligence, we would capture all of that put it into a guide and then the guide would be available to all QCA members so that they could look at everything that we do from initial, top of the funnel deal inflow through screening, due diligence, post-investment governance, then a whole bunch of other topics.

If we exit, what’s the waterfall look like? And then we’ve probably got hundreds of references that we built into this guide. So any member coming into our group can read that guide and essentially understand how we do all the things that we do. And one of the things that I mentioned that we were looking for is we wanted to influence outcomes.

So we thought the best way that we could do that is do a better job at due diligence which would hopefully help us pick better companies to make investments in. Then that is actually what is manifest. Because when I look at our data from the last 10-year period, going back to our fund five, which is a 2016 generation fund, the failure rate that we’ve had in that fund and the successor funds six, is remarkably different than failure rates that we had in previous funds.

For example, in fund five we did 20 companies and probably 40 rounds of capital in those 20 companies. And to date, we have only had two companies that we have written off. We have returned about 85% of investor money and the remaining companies are all doing reasonably well, some of them doing extremely well.

We have one or two that are suspect at this point but when I look at that number of failures, it’s had a marked difference in terms of how we go about doing due diligence and how we use that due diligence to pick the right companies for us to make investments in. So it’s helped from a consistency standpoint. It’s helped so that people understand the details of how we go through due diligence, and of course, it’s impacted the outcomes that we’ve experienced through the use of consistent due diligence.

I know this is a long-winded answer to your question, but one other thing that I’ll mention on this is we really got it down to 28 attributes that we are looking at in a deal. And one of the things that we struggled with, and I think most people that are investing in this stage struggle with, is this notion of how you score each attribute.

And, just as an example, you and I are looking at a deal and you look at the management company and think, wow, these people are rock stars. I rate them a five, and I look at them and think, well, they really just rolled out of bed, they’re really probably a one and a half.

So what we ended up doing was developing a scoring rubric where we wrote out the definition of a one, three, and a five, and then they can interpolate for a two or a four. But it gave people a great way to score each of the attributes. And again, that led to more consistency in terms of how we were scoring deals.

Shubha K. Chakravarthy: Awesome. I love it. I know you’ve done hundreds of deals and you’ve probably looked at a big multiple of that. Is there any surprising insight or something that you’ve learned that most investors and especially founders don’t realize or don’t understand?

Tony Shipley: I would love to claim that we have the secret code on how to do all this, but I think really what it boils down to is it’s a lot of hard work but it’s having a defined process that people can follow and give us the right answer on whether or not we should make an investment in a company.

Founder Mindset and Preparation

Tony Shipley: But I think one of the things and you touched on, you’re probably going to touch on this a little later, but one of the things that makes the process work much better is when a founder embraces the process, when they come to the meeting with a mindset that I’m not the smartest person in the room. I’m going into this with an open mind. I always used to tell my kids, minds work better or work like parachutes—they work better when they’re open. So go into it with a complete open mind.

Obviously with a point of view. We want people to come to the meeting with a strong indication of what they’re trying to do, the real-world business problem that they’re trying to solve, how they’re orchestrating their company to address that business issue, how they’re going to take it out to the marketplace, how they’re going to scale it. All those kinds of things that we would normally see in a presentation, but also as they go through this, have a healthy dose of intellectual curiosity and a healthy dose of critical thinking.

And if people come to the meeting, to our meetings with that type of mindset, at the end, we end up with a much better due diligence document. Our investor team feels much more comfortable with it. We learn a whole lot about the founder and their team because we’ve been through this process with them. And it gives us a high degree of confidence that these are people that are coachable.

Because one of the things that we’ve discovered and I’m sure every group has a bunch of knockouts but one of the key knockouts for us, if we feel like the founder and/or their management team is uncoachable, that’s a big knock. That’s a big red flag for us and something that we would elect to take a pass on a deal.

So being open-minded and taking that input, having a great point of view, coming to the meeting prepared—that’s another key thing that some people think they can roll out of bed and just come to due diligence and do okay. That really never ever works. And being prepared today, there’s so much information out there.

You could go to the ACA website. You can go to your favorite AI engine and ask them, how do you do this stuff? How do you get prepared for a meeting? How should I be thinking about this? What kind of questions can I anticipate? I mean, there’s just so much today that founders can avail themselves of that 20 or 30 years ago, you kind of had to make it up as you went.

I think back to the days when I was an entrepreneur raising money. There were no guides. There were no books. There was no internet. In fact, we didn’t even have the internet at that point. You kind of had to make it up as you went. But today there’s a myriad of helpful tools that entrepreneurs can use to help them get prepared to go through a screening and/or a due diligence process.

Creating Excitement and Overcoming Fear

Tony Shipley: The goal should be how do I create enough excitement that from a screen standpoint, they want to take the next step? And then in due diligence, what you’re trying to do as an entrepreneur is get them excited enough about your idea, your business plan, and the opportunities that you can bring. One of the attorneys that I worked with a long time ago who was a deal guy that eventually came to work for my company reminded me that your goal is to create a situation where greed overcomes fear.

Because when you’re sitting there as an investor, you’re thinking about all of these negative things. I mean, the marketplace may not accept this, the product may blow up, something may happen to the management team, and so on. So you’re trying to address those in such a way that you give the investor team a sense of comfort that you’ve thought about these issues.

We don’t expect an entrepreneur to have all the answers. In fact, if you as an entrepreneur come in and pretend to have all the answers, that’s another red flag. And we say that’s probably a person or a team that’s uncoachable and a deal that we would take a pass on.

But we put a lot of emphasis on that whole process because we get a chance to learn about the founder and his or her team. And we get a chance to learn about the journey that they’ve been on because invariably what comes up are issues, problems that they have had to encounter along the way. And our immediate question is, well, how did you respond?

What did you do in that case? So it gives us some insight into how they are thinking about problem-solving. And there’s no startup in the world that didn’t have all kinds of issues. So the key to that is how are you going to respond in a timely and cost-effective way to get a solution that allows that company to move forward? And so we get some feel for how the founder and his or her team are thinking about how to solve real-world business problems.

Shubha K. Chakravarthy: So that’s a fascinating setup and I’m going to dig in on a couple of aspects there that I find pretty fascinating.

One is this whole point around it’s a discovery tool for you more than just checking a box and saying, hey, I’m going to check your IP filing, or whatever the case might be. I’m trying to learn more about you to see if there’s a relationship that can exist.

So, in that spirit, what are some of the biggest issues that you’ve seen from a due diligence process where a company may have looked perfect on paper, but something came up in the due diligence process and you were like, this is not going to work? Can you give us some examples, stories, things that pop up to the top of your mind?

Industry-Specific Due Diligence Issues

Life Sciences

Tony Shipley: That is really a function of the industry sector that we’re looking at for that company. So it’s going to be different if it’s a B2B SaaS company.

Shubha K. Chakravarthy: Let’s say life sciences.

Tony Shipley: Yeah, if it’s a life science company, one of the things that we’re going to look deeply into is the intellectual property that they’re bringing to the table. Because without intellectual property, you can’t protect whatever that idea is. And as you know, in the life science space, it’s years to get to a commercialization stage.

And in most of these deals, it’s tens of millions, if not hundreds of millions of dollars to get to that commercialization stage. Of course, in a lot of these deals, we’re never going to see the company all the way through to commercialization. We’re going to hopefully get it to a point that we can exit somewhere along that timeline. But if they come to the table and they haven’t tried to protect their intellectual property, if they don’t have patents or patent pending on the technology that they’re trying to bring to the table, that would be a big red flag and most definitely one that we would take a pass on.

Also, I think life science is different than other market sectors in that the experience of the team really does matter. And to say that you’re a software person and you’ve got a SaaS solution, in many cases you can develop that pretty quickly. I know in the days my company was an enterprise software company, so you had to invest millions and you had to write millions of lines of code. Today you do that with hundreds of thousands of dollars.

You can come up with an MVP and you run that MVP out to the marketplace and you start to test it with prospective customers to see if the dogs are going to eat the dog food once the final product is developed. The life science space, however, is different because we’re, again, probably never going to get to the end product, but we need to have a team that we have confidence in. I think it’s more important in a life science space to have a more complete team. Not only the top scientist or the technology person, but that’s probably going to be different than the CEO of the company, for example.

In some cases, it’s one and the same, but in many cases, it’s a different person. Someone who understands the regulatory path, for example, and most unlikely, that’s not going to be a full-time person. It could be a fractional person, or it could be a consultant that you’ve hired to come and work with the company, and then someone who understands the reimbursement strategy and how you’re going to go about doing that.

Then someone who understands the market, how are you going to go out and do all the preliminary work that has to be done, even in the clinical trial phase, all the marketing work that has to be done to get the patients lined up and get the right clinical organization working with you to run the trials. The list goes on and on. So I think it’s a more complete and probably a more seasoned team when you try to bring those types of technologies to the marketplace.

Shubha K. Chakravarthy: Got it. One other thing on that and then I want to see how to set up this whole due diligence process from a founder’s perspective. You said the goal of the founder is to get the investor’s greed to overcome their fear. Are there patterns or tips or things that you’ve seen founders do over and over again regardless of the sector where they’ve got you to that place where greed has overcome fear?

Tony Shipley: Well, the one lesson we learned early on was we did a deal where the company was being founded by three sales types. So they come in, they make the pitch, we go through due diligence and we look at the company. But what are salespeople trained to do?

Shubha K. Chakravarthy: Sell.

Tony Shipley: Sell. So they ended up selling us on their notion of what they were planning to do and we got enamored with their sales skills. And we candidly didn’t pay enough attention to the other attributes of the deal. Was it a reasonable technology? Yes, it was.

The technology was a system that automatically captured keywords that an ophthalmologist was making during the eye exam. And the whole notion was, if you can capture this so that at the end of the exam you’ve got the report and the prescription, everything that you need, the ophthalmologist could end up seeing more patients and hence increase the revenue stream.

This was an idea that happened sometime in the 2005, 2006 kind of time period. So it was truly novel at that point to come up with this kind of a solution. But candidly, we didn’t pay enough attention to look at the system or the process that was in place at an ophthalmologist, and what did we have to disrupt that workflow? That’s another thing that a lot of entrepreneurs don’t pay attention to.

They think if we build the best mousetrap, the world will be a path to our door to buy the mousetrap. But what they don’t realize is that in businesses, all businesses are set up with workflows—how they do stuff. And if you’re going to disrupt that workflow, especially for a significant number of their employees in a way that they’ve got to be retrained and redo things that they’re currently doing, you could have a solution that is five times better than the one they’re using.

But unless you can show how they can implement that in a timely and cost-effective way, that’s going to be a hard way to dislodge the incumbent. And in some cases, the incumbent is a manual process or some other technique that they’re using. So figuring out how you’re going to introduce that in a way that you can roll it out and customers can adopt it into their workflow so that it’s as seamless as possible and done in a short period of time, and as cost-effectively as they possibly can. I think a lot of entrepreneurs don’t think about that rollout process that’s needed to roll their technology out to a customer.

Shubha K. Chakravarthy: One other thing. So, you know, you talked about this ophthalmological solution and how you got sold without looking at the due diligence. Now clearly a good investor group or investing organization like yours now has the defenses in place to protect yourself against being oversold. So if I’m a founder who’s dealing with a group like yours, how do I then set up myself for due diligence in a way that I can still have a shot at having your greed overcome your fear?

Tony Shipley: So, these 28 attributes that I mentioned to you, they’re divided into seven categories. So when we set up a due diligence team, there are people assigned to each of those seven categories. So it’s not like one or two or three people that’s trying to do due diligence on the entire deal. We bring a financial person in to look at the financial statements.

We bring sales and marketing people in to look at the sales and marketing plan and technologists to look at the technology plan, and the list goes on. So we’ve got various people and we’ve got a big enough group now, and with enough skills embedded in the group, that we can pick the right people. And we’ve got an AI engine that helps us look at the background that our entrepreneur, our investors have, and match that in a more meaningful way with that particular deal.

So we get qualified people that have that experience and the skill sets to help us do due diligence. So the deck’s not stacked against you if we only have a sales type trying to look at the entire thing. So we’ve kind of spread the workload out and it helped us get through due diligence in a more effective way. But coming back to what I said earlier, this whole notion of being prepared, and we help an entrepreneur because we send out a list of 72 questions that we’re asking.

So there’s a lot of time that’s spent in getting prepared to come in and do the due diligence. And the ones that have the most success in that process are the ones who take this and handle it in a serious way. They don’t just feed it into their AI engine and have the AI engine create some answers to the 72 questions. I mean, we can obviously read that and see what they did, but it’s people that are looking at this. Because at the end of it, we want to get to a positive yes.

So we want to increase the win odds for an entrepreneur. So we do everything that we can to try to position the entrepreneur to do the best job that they can when they get that opportunity to come and present. And when they get that opportunity to go through due diligence. And if they get through due diligence, it’s a pretty, maybe a 5% or 10% opportunity that they’re going to be funded, which is much, much higher than VC rates, for example.

So addressing that in a meaningful and serious way will prepare them for a better answer. And the ones that come out on the other side that we say no to, if they have addressed this process of due diligence and handled it in a way, like a parachute—minds work better when they’re open. Invariably, they come out on the other end, and even if we say no, they thank us for the process because they have learned so much more about the business.

And as you know, one of the things that everybody’s doing is you’re building your business plan based on assumptions. So we want to test the validity of those assumptions. And if I’m a founder, I mean, what better way than having 8, 10, 12 people who have experience take me to task on all these assumptions that I’ve made so that I have a better feel? And invariably, people will come out of this and they will adjust their business plan based on the feedback that they got through this due diligence process.

To me, that’s a winning strategy. It helps us if we make the investment because we know so much more about the business. It’s better structured in a way to get them to the next level of success, and it helps us improve outcomes to get to do better deals for our investors.

Shubha K. Chakravarthy: That’s a great setup, and I want to dive into some specific aspects of due diligence so that founders can be better prepared and more aware of what’s coming.

So let’s talk about the approach and mindset. So let’s say I’m a first-time founder in a STEM field or a deep tech field. I’m heading into my first outside raise. What’s the smartest way to think about diligence and how should I prepare myself so that I maximize my odds of success?

Tony Shipley: Well, I’ve touched on some of those in terms of going online. I mean, there are just so many ways today, and in our city, at one time we had 11 accelerators. We have one incubator. Go start networking with these people. I advise entrepreneurs to network in the community, find people that are other entrepreneurs that you can talk to, to glean from them the process that they went through.

How did they overcome some of the objections? How did they position their company? So there are so many people that you can go talk to and network with in the community. So I highly recommend being engaged even if you’re in a city that doesn’t have all the things that we have in our city, there’s no reason why you can’t virtually start to meet these people.

And there’s lots of ways of doing that. But start to network with people to help glean from them how they went through the process, how they structured it, and what were the things that they did that created a winning argument that got them to a yes from an investor.

Shubha K. Chakravarthy: So it sounds like it’s a lot of hearing the real-life, flesh-and-blood stories to strengthen whatever you may have picked up from reading online or watching videos or asking ChatGPT or what have you, right? It’s really the stuff of what happens in real-world experiences, it sounds like, is a big part of that preparation.

So, okay. So let’s dive into some of the specific areas. We talked a little bit about technology and IP, particularly if you’re talking about deep tech and STEM-type startups. We did touch on life sciences, so we don’t need to talk about that. But outside of life sciences, if you’re talking about deep tech and STEM, what’s the real proof that you’re looking for to test the actual technology and the IP, and what’s the role of patents, and how far do you go beyond the patents to test whether this is a defensible technology that can win in the market? Can you talk about that?

Tony Shipley: Good question. The four sectors that we invest in are life science, B2B SaaS, advanced materials, and advanced manufacturing.

Advanced Materials and Manufacturing

Tony Shipley: So advanced materials and advanced manufacturing will be more akin to life science because sometimes they’re just starting with basic science, and they’ve got some indication that it will work for whatever the application is that they’re trying to address. But in a B2B SaaS company, we would expect at least a minimally viable product, which means that they’re beyond the pre-seed stage. So in our group, we’re not investing these days in pre-seed. There are other groups who will make those kinds of investments.

That’s the earliest stage in my opinion, one of the earliest or the biggest risks that you can take. But looking at a minimally viable product that they’ve put together, and then we would like to see them out in the marketplace with that MVP, talking to prospective customers to get their feedback—what do they like and dislike about it? What do they need to add to it to make it more meaningful to the end customer?

And then getting some market information. What do they think about the value that they’re delivering with this product? What’s the value proposition? If I’m a customer and I buy your product, what’s the value proposition that I’m going to derive from your product?

So I think having an entrepreneur that can speak in those terms – I realize that this is a real-world business problem. Whatever it is, we’ve developed a minimally viable solution for that problem. We have been out to the marketplace and we have talked to a number of potential customers; here’s what they have told us about the solution, and here’s what they have said about potentially buying the product and using it.

To the extent that they come more prepared with that type of data, that type of information, it’s more likely that they would get funding from our group. Now, there are groups that will fund earlier—basically two people in a garage, the science project, for lack of a better term—but our group is not funding at that level. We are in the seed and the seed plus and the Series A round.

Shubha K. Chakravarthy: So can you talk about the advanced materials and the advanced manufacturing? What are you looking for? How are you testing the technology and the IP there?

Tony Shipley: Yeah. It’s more along the lines of how you think about a life science company, because we’re in a couple of advanced material companies right now. They came to us with essentially post-science project and some indication because they’d been out talking to people in the marketplace, and they said, “We have this science, we have this chemistry for a new product, or we have a material that if you add to your material can do A, B, C, and D. And we’ve got this type of feedback from the marketplace.”

So they did some market surveys to figure out what the needs were, and they could articulate the problems with the current solutions that were in the marketplace. So they knew what the issues were. They knew if it was a cost issue, a performance issue, a quality issue, whatever it might be.

They knew enough about those applications that if they could develop their product and get it into commercial use, they could resolve those issues. In our case, in those couple of advanced material cases, we had people with enough experience and skills in our group that they could talk to them on a science-level basis and get an understanding of what they had, how they envisioned using that, and if they got to a solution, what it could mean in terms of changing the world. And some of these materials are truly world-changing kinds of ideas.

And so I think, even though we couldn’t see and touch the material and we couldn’t see it in the application, having the entrepreneur understand enough about what the business issue was that they were trying to solve, the product issue that they were trying to solve, and speaking with authority, with conviction, and they’ve done enough homework that it led us and our internal experts to believe that they knew what they were talking about.

And then pushing back our people would push back, obviously and they would test their knowledge and skills about what they were professing to do till we got to a point that we were comfortable enough that, okay, we’ll take a risk. And then in those cases, you tranche money in—you don’t write one big check. Because these are deals that typically start at putting $500,000 or a million or more in, and then they’re going to quickly need millions more to take it to the next level.

So you’ve got to be pretty confident that they’ve got something that’s pretty decent that they’re working on. Then the other key to that is if you give them a million dollars, what are the two or three deliverables that they’re going to hit? Because we know more money’s going to be needed.

So we have to be able to demonstrate to the current investor team, because we expect them to write a second check and the new investors that are coming to the table, that there’s enough there by virtue of these key metrics that they hit with our existing investment, that they will write a check to take the company forward.

And if they miss on those initial objectives, it creates all kinds of issues for us and them. So we spend a lot of time working with people to understand what the key metrics are, and then from a board perspective, post-investment-wise, we want to keep the company focused on achieving those metrics because those are the fundable metrics that allow the company to go forward.

Shubha K. Chakravarthy: Awesome. So the two main takeaways that I took from this discussion were, number one is if I’m a technical founder going to due diligence, I have to be able to defend my science to a scientific person, and I have to be able to translate the science into a big compelling market opportunity to the businessperson on the investing team. That was number one.

And the second big takeaway I took was I have to be able to propose deliverables or milestones that are A, very objectively measurable, and B, have a very direct tie to being fundable when the next round comes around, because in most of these cases, there’s a clear need for—it’s a high-capital-intensity kind of business. Those are the two big takeaways. Did I get that?

Tony Shipley: You stated those in a much more elegant way than I did.

Shubha K. Chakravarthy: You did the work. I just did the summarization.

Market Opportunity and Business Model

Shubha K. Chakravarthy: Next, I want to go to the market and the business model. So we’ve both seen founders who love to show the big bubble charts with the huge TAM and the tens of billions of dollars. But when it comes down to the wire and you’re going to have to write a check, how are you assessing market opportunity and what should the founder do to prove an attractive market?

Tony Shipley: Yeah, this TAM, SAM, SOM thing that everybody walks in with in their deck—everybody’s been coached to put that in their deck. We have just recently spent some time trying to write out a better definition for what those are. Because they’ll walk in the door and say, “TAM is $55 billion, and there’s really no other major competitor in that marketplace today.”

So you start scratching your head thinking, how did it get to 55 billion if there’s no other major competitor? And what they do is they think about the end application of their product and they look at that market.

And so TAM in that case is totally irrelevant. And so what we’re trying to do going forward is to coach founders when they come in on a meaningful TAM, a meaningful SAM, and a meaningful SOM. And we’re going to pay more attention to the SOM portion of that the addressable market that they can actually service.

That’s where we’re going to dig in and try to get more detail. And that’s going to be an area that we expect that founder team to have some pretty interesting knowledge about how they put that together because we know that especially the TAM portion of it is just going to be some wild guess that’s totally irrelevant to anything out there.

But I think as an industry, that’s one of the things that we can do as investors is to help coach people to think about coming up with meaningful TAMs, SAMs, and SOMs. But the addressable market that they’re going to initially go after is key.

Then we’d like to see if you add feature A and B and C, does that take you over into the SAM opportunity? And how much additional market opportunity would you have at that point? But we’re also in the SOM portion of it, we are looking at what’s the moat that you’re bringing to the marketplace. If you don’t have a definable moat, one that you can clearly articulate, you’re going to end up being a me-too product.

You’re going to end up being a company that’s going to have a difficult time getting funding because nobody really likes investing in me-too, unless you think you can knock off number one and number two, whatever’s out there. But that’s a tough road to go. Remember we talked about workflows and how entrenched current solutions are and how you displace those can be a real challenge.

Shubha K. Chakravarthy: So to break it down and make it more granular, right? I’m a founder. I’m trying to put together a market estimate that’s going to get you excited as an investor. What are the specific elements you’re looking at and what coaching would you give to the founder to say, come in, here’s what you need to do to come in with a credible SOM and SAM number?

Tony Shipley: Well, on the SOM part of it, if you come in and you tell us that the SOM is $20 million, we’re most likely going to take a pass. Because you’d have to get 50% of 20 to make it interesting.

So there has to be some threshold level of the market that you are attempting to address unless you’re trying to create a whole new market. And then there we would have another way of looking at that. But what we’ve learned in that case is when you’re trying to be a market definer, you’re trying to define a market—that generally equals longer time and much more money.

So we’re trying to look at some reasonable time period to implement your product, get it out in the marketplace with a reasonable moat around the product. And so having something that they can define and some way for us to protect the product is really important. You asked me a follow-on question.

Shubha K. Chakravarthy: Yeah, so I’m trying to figure out, like, let’s say I come in and I say my SOM is, I don’t know, a hundred million, how are you going to dig into that and how are you going to push me to defend that?

Tony Shipley: The way we’re going to think about it is what portion of that can you get? And then if you tell us, well, we can get 10% of 150 million or become a $15 million company. How can you go out if it’s already 150 million? You’ve got to be—either you’re going to have to expand that 150 to 300 or you are going to take some other share.

So we have to understand your strategy in terms of how you’re going to roll this out. And then, at the end of it, if you’re a B2B SaaS company, for example, we know what the metrics are. So if you’ve got ARR $10 million and your retention rate is 99%, we know that we can sell your company probably for $50 to $100 million, so we’re going to be interested.

But if you’re a $5 million ARR company and your retention rate’s 60% or some crazy number, you’re going to be hard-pressed to even sell it because probably other solutions out there are better than what you’re bringing to the marketplace. So thinking about how to get to a reasonable percentage, how you’re going to attack it either through market expansion or market share, that’s really going to be important and how the team has thought about doing that.

And then another important part of that is who is on the team that can think strategically in those regards. So a lot of founders can’t, they are technologists, and they don’t understand sales and marketing.

Sales Skills and Vision

Tony Shipley: Let me digress for just a moment. I just lectured at the University of Cincinnati Entrepreneurship Program this week. One of the fair questions I like to ask them is, because everybody’s sitting there, they got this negative notion about salespeople.

They think of the used car salesperson. So the first question I ask is, how many people in the world are selling something? And a lot of them sit there, and they’re like deer in headlights. But most of them are saying or some of them are saying, or like, yeah, everybody. So the following natural question, of course, is what are you selling initially?

And the obvious answer is you. So what I encourage founders to do is to think about acquiring sales skills because you’ll need the ability to sell your idea to investors, to bankers, to employees, to customers, anyone that’s affiliated with your company. You need that skill. And today, selling is truly not so much an art like it was many years ago.

There’s a lot of science today in how you effectively sell something. Adding that to your list of attributes as a founder, I think is vitally important, whether you’re the chief salesperson or not, whether you recognize that you are the chief salesperson. And I think back to the early days when I set up the last company, we had people that would run through brick walls for our company even though we were a five or ten-person company because they loved the vision.

We were able to paint a vision for where we were going in this company, that they wanted to be a part of it, even sacrificing salary and compensation and other things to be able to come to work for this company because of the vision that we had painted in terms of what the product was going to be and how we were going to take it to the marketplace. And the list went on. So really good founders think like that.

They think about how do I paint that vision to bring all these people along with me? And in the early days, when we were doing angel investing, we would have founders show up and stand up on the board and start diagramming equations for their whatever product it was that they were trying to develop.

And early on, we started both an angel bootcamp and an entrepreneur bootcamp. We’ve run an entrepreneur bootcamp for 25 years now. We’ve run it once a year. It’s a two-day event. And our whole goal there is to teach people how to think about putting together a venture-type business and how you present it, how you cover all the bases that you have to cover to put together a plan for a venture-oriented business.

So when they get that golden opportunity to get in front of an investor, we want them to have the best opportunity to get the yes.

Shubha K. Chakravarthy: So I’m totally sold, you sold me on the sales skills, but I’m going to come back to the SOM just to wrap that up for a second.

You said that you have to have the strategic skills as a CEO because you have to convince you, as the investor, to say, “Hey, I’ve got a plan that’s credible for me to capture this $100 million, whatever target I’ve set up for the next five, seven years.”

Is that a combination of me telling you that, look, I understand that I need to capture these three segments, and this is how I’m going to go after them, meaning some kind of a channel-segment combination? What are you looking for in that strategic view?

Tony Shipley: Well, again, it depends. It depends on the kind of business. So the enterprise software business that I ran, we had every sales channel. We had direct sales, we had OEM distributors, we had channel distributors. We sold into 100 countries around the globe. So we couldn’t have direct sales in all those countries.

We were a 400-person company. And so we had to think about how do we go to market? What’s the go-to-market strategy for a company in our industry? So it depends on the industry that you’re in and the typical sales channels that you would use to get it out to the marketplace.

So as an investor, I want to get some level of comfort that you understand those sales channels and how you would potentially penetrate each of those sales channels to get out to the marketplace. Are you going to be a US-only company because that’s how, that’s the best way to start and that’s the low-hanging fruit? Or do you have a solution that could really be an international solution?

In our case, in the first six or seven months, we were selling internationally because nobody else in the world had what we sold. And many people in the world recognized they needed it. And we had experience from a previous company so that we knew how to set those international channels up and how to attract people to come to our company to help us get that product out into the marketplace.

So if you say you’re going to sell internationally, you got to have some experience and understand how you do that. One of the things you don’t want to do as a founder is get so diluted and whatever those three or four key metrics are that you lose track of that and go off and chase all kinds of other things and spend your time and money on chasing things that are not going to materialize, and they take attention away from those top two or three or four things that you have to get done to get to the next level.

Shubha K. Chakravarthy: Got it. So the takeaway for me is there is no real meaningful market size conversation without also a credible strategy as to how you’re going to access that market in some kind of reasonable timeframe, right?

So then you brought up one other thing, which we didn’t talk about yet, this question of moat.

We talked so much about who the competition is and what your moat is. In your view as a professional investor, what makes for a good moat, and how do you check for that through the diligence process?

Tony Shipley: Again, it depends.

Shubha K. Chakravarthy: On the industry.

Tony Shipley: So what does it depend on? If you’re a life science company, it depends on your intellectual property. It depends on how novel the idea is. If you’re a B2B SaaS company, it more than likely depends on speed to market and what the market noise looks like, how many other potential competitors are out there.

But it also depends on how can you layer your product onto somebody else’s to create even more value. Because what we’ve discovered, I remember in the early days, we would take software companies into the world’s largest consumer product company in our backyard, whose name I won’t use.

Shubha K. Chakravarthy: It starts with a P, but I won’t say anything.

Tony Shipley: Yeah, and they would look at it and say, “Hmm, that’s interesting.” But we have these five or six platform technology providers, and we expect them to have that embedded in their technology. So they wouldn’t buy a standalone solution. So understanding how a prospective buyer buys their technology, and does it have to be integrated into a platform, for example, before they would buy it, and at what level.

I mean, big corporations have much different standards and requirements than a $10 million or $50 million or $100 million or some mid-size company. They have a different level of attributes that they’re looking for when they make a buy decision.

Sales and Marketing Synergy

Tony Shipley: So understanding who you’re selling to, and what the requirements are in the marketplace, and how you sell to those people, and your go-to-market strategy. That includes the marketing portion of it, not just the sales portion. Because one of the things that we’ve discovered, one of the biggest reasons for failure in this space is people’s inability to sell stuff.

They have the best plan in the world, but they can’t go sell it. They can’t get the customers to give them an order for product, which is, when they think about it, it’s the best form of capital in the world. It’s non-dilutive. I mean, fund your business with non-dilutive capital and we’re all happy. And then getting back to the marketing portion of it, the goal of marketing is to create at-bats for the sales team.

So how are you going to create some emphasis, some excitement around your brand? What’s your brand stand for? And why should people pay attention to your brand relative to somebody else’s? And how are you going to create those at-bats for your sales team so that when they go in, they’ve got a reasonable chance of closing that order? So having somebody thinking strategically about the marketing aspects of your complete go-to-market strategy, I think is really important.

A lot of people will say, well, I have a sales and marketing VP. Companies that I’ve run, I had a VP of marketing and a VP of sales because I thought those were different skill sets that were required to handle those types of activities.

Shubha K. Chakravarthy: If you’re a seed stage, you might not have the budget, or actually, frankly the bandwidth, you don’t have enough work to justify a VP of marketing or VP of sales. That’s my first question. My second question is, I do have a pushback on the brand. It’s very easy for me to say, hey, my competitive moat is my brand, but as an investor, if I were an investor, I would be very leery of that because it’s very easy to say and

Tony Shipley: Early stage. You’re an exec. And you hit the nail in the early stage. You hit the nail head.

Building a Strong Team

Tony Shipley: And generally speaking, the founder’s going to do a lot of the work we just talked about. That’s why it’s important to expand that skill set. And if you’ve been in the laboratory developing the mousetrap, go network with people that have the skill set that you don’t have.

Where I lectured to the business school on entrepreneurship, they have another building, 1890, where all the engineers hang out, go down there and hang out with them. You might find a technologist who has a great idea and you have the business skills, and you form a team to bring the right skills to the table.

And the other thing is, I mean, this is an old worn-out story, but all the coaches use it, and in the word team, there’s no I, right? So thinking about a team approach to rolling out your idea is much more fundable than if you come to the table with just you, or you and one or two other people.

And I know it’s tough, but at least that’s something to think about. If you’re a pre-seed company, you’re probably going to be in that stage, two people in a garage. You haven’t done all the stuff that we’re talking about but you need to find, put together a plan that helps you address those kinds of issues.

And then be thinking about the other people that you need to bring to the team so that when you’re out there networking, you’re thinking about the requirements I’m going to have, and you start to build those relationships so that when you do have the funding and you do have the need, you’ve got Tom or Betsy that you can go talk to that can potentially fulfill that need for you in your company, sometimes just on a fractional basis, other times on a full-time basis.

Shubha K. Chakravarthy: Got it. While we’re talking about the team, I just want to see if you can maybe touch a little bit more of, from a due diligence perspective, on what you would push, where you probe specifically on the team part of it. You just want to talk about that a little bit.

Due Diligence on Team Dynamics

Tony Shipley: Yeah, that’s one of the seven major attributes that we have, and we’re trying to understand, and I don’t have the list, the four or five questions we ask in that area but we’re trying to understand how they operate. And some of that has to do with talking to references and going back to the marketplace and looking at their history.

And the other thing that we can do is create scenarios, things that could happen, and ask them, how would you address this issue? This such and such pops up. You have a co-founder, and he’s not coming to work regularly. What are you going to do? How are you going to handle that? So at least get people thinking about these kinds of issues.

But having a list of questions, which we do, that gives us some insight into how the person or the team thinks about HR and personnel issues and people issues. One of the things that I learned early on was, generally speaking, it’s not a good idea to hire your best friend or a relative to work for your company because there’s a thing called The Peter Principle, and invariably they bump right up against the Peter Principle.

And then you have to have an uncomfortable conversation about what they’re going to do in their next job. And of course, Thanksgiving could be a month later, and you see them at Thanksgiving. It makes for a really uncomfortable position at that point.

Shubha K. Chakravarthy: I just want to touch on that a little bit. So from a team perspective, I’m hearing you talk about two dimensions, and you didn’t talk about a third. So first dimension is really, is this team experienced? Do they have the domain expertise?

And you talked about the reference checks, you talked about the background and all of that stuff. That makes sense. Then you talked about the behavioral part, kind of like a job interview, like if you face this conflict, if you face that issue, how would you deal with it? And you get a sense of how they think and how they would operate in those difficult circumstances. Got that.

What you didn’t talk about, which is something I’ve heard is a major issue for startups going under, is co-founder disagreements and potential areas where there’s a difference in opinion in terms of, I think the startup should go this way versus this way, or pursue this market versus that market, or prioritize this product versus that. What’s your take on that and how do you diligence that part of the team?

Tony Shipley: I’ve actually been a victim of what you’re just talking about. I had, in the first business that I set up with two other guys, we were essentially equal partners. And one day the two partners decided that they wanted to go in a different direction than I wanted to go. So we had an uncomfortable conversation, which led me to founding another company, and which turned out to be an infinitely better opportunity.

So rather than dwell on all the issues that had caused me personally, I was thinking about how am I going to take everything that we’ve done and repurpose that in a way that we can take some of these ideas forward? So that invariably happens, and that’s where the founder, the person, the CEO, the one that’s in charge, has to make a critical decision.

That will be a very uncomfortable, probably the most uncomfortable decision that you’ve made. And I had to fire. I had to fire a partner in another business. So these are very uncomfortable decisions that you have to make, and then to execute that decision is really uncomfortable.

But you have to think about the greater good of the company. And your job as CEO is to protect that company, to protect the employees that work there, and to protect the access of your product and service to the customers that are paying you money. So that’s a key role that CEOs have to perform. And so we’re trying to get to an understanding of whether or not the person has the moxie, the gravitas to make those kinds of decisions.

Now, in the last company that I ran, we had a process where it would take a few days for us to decide to hire somebody, but the last step in the process was we had an industrial psychologist who knew our company, who knew the culture of our company, who knew how people were successful in our company.

And the last step before we made the offer was to be Hank’d. The person’s name was Hank. So we had to go be Hank’d before we would make the offer. And he would dig deep into some of these kinds of issues. And in most cases, we had covered the bases in our own internal interview, but in a handful of cases, something would pop up that would convince us not to hire that person.

Because at the end of the day, what we were looking for was an environment where people would be happy. When that opportunity clock went off in the morning, we wanted them to jump out of bed with a smile on their face and come to work with that smile. Because what we discovered was, if they come to work like that, we’re going to have more customers and more and happier customers than if people are all sour, working with and talking with our customers.

And so we wanted to make sure that people understood what the requirements were. And that’s one of the things about hiring people as the company goes forward, thinking about a hiring process is, I think, really important. And a lot of people think, oh, I’ll spend 20 minutes hiring this, interviewing this person and make a hiring decision. And there’s some stats that show that even HR professionals, in many cases, within seconds, literally seconds, have decided if we’re going to hire somebody or not before they’ve even interviewed them.

We thought that was an awful approach and it led to high turnover, led to unhappy employees working in the company, and it led to dissatisfied and unhappy customers. And so I always viewed it that, especially in an early-stage company, you were making a bet-the-ranch decision when you hired somebody.

So having a process you think about and go through to know who you’re hiring and what you’re hiring them for and what the expectations are, so if they come to work, what’s going to be the mark of success after 90 days? What do you expect them to have achieved? And at the end of one year, where do you expect them to be?

Then having a roadmap that you can talk to them, whatever the frequency is, weekly, monthly, so that you see how they’re progressing along the lines of what you’ve set up that would lead them to success in your business. So that whole notion of hiring people and selecting team members, by the way, going through that type of a process, I think leads to better team members, and in our case, led to very low attrition. Even though we had 400 people, we were low single digits in attrition in our company.

Shubha K. Chakravarthy: So, from a startup success perspective, but also from a diligence perspective, it sounds like a really thorough investor would actually probe into these kinds of things to surface any simmering potential future disagreements of the kind that you talked about. So I guess a lesson for me as a founder is, let’s make sure we cover the bases and we have those conversations before we go into due diligence.

Tony Shipley: Yeah. No, I think that’s a very fair statement. In fact, I would definitely have those kinds of conversations because, if they’re doing a thorough investigation through due diligence, you’ll be asked those questions.

Shubha K. Chakravarthy: Got it.

Tony Shipley: And that gets back to what we talked about earlier, coming to that due diligence meeting prepared to have an engaging conversation, to show that you may not have the entire answer but to show that you’ve at least thought about the issue, that builds investor confidence.

Shubha K. Chakravarthy: Got it.

Tony Shipley: You show up in these meetings and oh, well, hey, that’s a great idea. I hadn’t thought of that one.

Shubha K. Chakravarthy: Not a good look, right.

Tony Shipley: It’s not a good look. But I mean, that happens too. I mean, everybody hasn’t thought of everything. You know, that’s why you have a team, to help you think of these things. And I think that’s the benefit of bringing an investor on as part of the board member and having an industry expert as part of the board. I think that’s the role that they can fulfill for you.

Financial Due Diligence

Shubha K. Chakravarthy: Then the next area I want to talk about is financials. So can you talk high level about how you diligence financials for a startup before you invest?

Tony Shipley: Well, we have a financial team, and we have a fractional CFO that works with the group. And we go through the financial spreadsheet that they’ve put together. We look at the assumptions that they’ve built into that. And we like to have this spreadsheet constructed in a way that we can do sensitivity analysis on all the assumptions that they put together.

Because one thing we know for sure, they will never hit that spreadsheet. The only question is, which way are they going to miss? And we know, based on the 120 companies that we’ve invested in, 99% of the companies miss on the low side. That’s history. We know those are facts.

So we have to be able to do some sensitivity analysis to say, okay, if you miss on revenue, or if the costs get out of control, or this happens, that happens, how’s that going to impact your cash requirements? Because what we’re looking for is making sure you don’t run out of money and hitting those key metrics that you promised to hit with the money that you brought in that round.

Shubha K. Chakravarthy: Has it ever been that financials have been a reason for you to kick a company out of consideration?

Tony Shipley: It could have been. I don’t, I can’t think of a case where it was only financials. If it got down to just the financials, we could adjust those. But there’s other, more serious things that we look at. Is it really a real problem that you’re solving? You’re adding value? Is our value proposition, all those kinds, the risk profile, all those risk profile things that you have to look at. We can help them with financials too. That’s a service that we provide to entrepreneurs.

Shubha K. Chakravarthy: One other thing, because this is like a favorite part for me, which is this question of how financially astute a CEO needs to be. So you are clearly not the CFO, but you need to have a mastery of what the numbers mean for you, because that’s the target that you’re shooting for. How critical is that for you when you’re evaluating a startup and a CEO?

Tony Shipley: You have to have at least a talking level of the numbers. You don’t have to be able to get down to the last penny on whatever the assumptions are. But a talking level at the revenue level, a talking level at the cost level, and then what’s that EBITDA number look like, and what kind of runway does that provide you as an entrepreneur before you have to go raise more money?

What’s your burn rate? And you should know that. And so there are a few key numbers that a founder should know and should have a working knowledge of those numbers. Again, we don’t expect people to come in and be CPAs and be experts, but we expect them to at least have some indication of what’s the sales look like for the next one or two-year period.

Generally speaking, what’s my cost structure going to look like? What’s my spend per month? How’s that going to throttle up or down? And what’s the runway that I have with this raise?

Shubha K. Chakravarthy: Are you also looking at fluency with the levels in terms of, if my cost goes up, like rough rules of thumb that says, hey, if my raw material cost goes up 10%, generally what it does to my margin is X, or is that too much?

Tony Shipley: At the really small companies, that’s probably too much, because all these are, they’re just assumptions or guesses. The older the company gets, the longer it runs, the more information it gathers and the more things it knows, then we expect the financial statements to be more steeped in reality. And those early stages, we know what we got. We got a bunch of guesses.

Shubha K. Chakravarthy: Fair. Fair enough.

Tony Shipley: We also know that in most cases, they’re going to be optimistic, and they’re going to miss. And so they’re going to miss on two things. They’re going to miss on the amount of money that’s required and the time it’s going to take them to do what they think they can do.

Shubha K. Chakravarthy: Fair enough.

Tony Shipley: Yeah.

Shubha K. Chakravarthy: So the last big thing, unless I miss something, is in terms of legal and structure issues.

Cap Table and Fundraising Strategy

Shubha K. Chakravarthy: I don’t want to go into overly legal things, but specifically I want to talk about three things, or two or three things. One is a cap table. So just kind of, it’s not just a legal thing, but it shows you how they have thought about fundraising and how mature they are and how sophisticated they have been about raising money and the future problems it could cause. Can you talk about how that figures into your due diligence process?

Tony Shipley: Yeah, if we, they show up at a cap table of one person on the cap table, that’s an issue because it means they don’t have a team more than likely, and they haven’t thought about empowering people to be a part of that and giving them a part of the future success of the company. And to the extent that they’ve thought about setting up an ESO plan, which we’re going to insist on.

Because if you hire key people, you’re not going to be able to pay a market rate more than likely in terms of compensation plan. So you’re going to add something else, a sweetener that would persuade them to come and work for you.

So having a working knowledge of what it means to have an ESO pool and to think about at what levels would you compensate somebody, a VP of engineering in a startup gets 3% or 4% or 5% or whatever. I’m just making up numbers, but having some working knowledge of how that would pan out. And then when you do future rounds and you have to have other people, how are you going to refresh that cap table to ensure that you’ve got enough shares that you can continue to bring people on?

And the other thing that we think is very important, especially in pre-seed and seed companies, is incenting your board members and your advisors. And I know when we write a term sheet, it’s a company, it is a deal that we’re leading. We’re putting a provision in a term sheet that our board member gets some portion, small portion of the ESO shares.

We need the best people that we can get to do it, and we’re going to infringe on their time, and it’s an extra step, extra thing that they have to do. So we have to add a little bit of icing to the cake to get these best people to raise their hand to say they’ll do it. And it turns out that it’s in the benefit of the company and the investor team.

So having them think broadly about how they manage the cap table and how that cap table is going to change going forward. And if you bring another round on, if you raise a million, now you’ve got to have 5 million. What’s that going to do to the cap table? That gets back to managing the expectations for the next round and hitting those key metrics so that we have what’s called an up round. In the worst case, we want a flat round and all cases we want to avoid is a down round.

Shubha K. Chakravarthy: Absolutely.

Tony Shipley: So we want to have enough ammunition in terms of things that we have done and achievements in the company that when we go raise money, it’s an up round. So even though we give up ownership percentage, the economic value of the remaining percentage is greater than when we raise the new money.

Shubha K. Chakravarthy: And are there issues in terms of, sometimes we have naive founders who have taken perhaps, you know, money on terms or from, you know where I’m going with this.

Tony Shipley: I’m laughing because I brought that up the other night too, and I caution people when you’re taking money from a relative or someone, a friend in that FFF round. Don’t tell them your baby is so pretty that it’s worth $20 million and give them a fractional percentage or one or 1% for $10,000 or $50,000.

Because that’s going to be another uncomfortable conversation when the real money people come in and now you want to raise a million dollars and you talk to people like us and we say, yeah, no, that $20 million pre-money number that you said, that’s really closer to five. And then you have to go back and talk to those early-stage investors to say, sorry.

So you have to find a way to fix that problem because you’re going to have some really unhappy people. So we, and again, in today’s world, there’s no excuse for not knowing how you can price these deals. Go to the Angel Funders report and look at, see how people are pricing deals.

I mean, there’s a lot of data out there. Go talk to people in the community who have raised money, talk to investor teams, how they think about these things and how they would price them. So there’s lots of ways to getting a decent handle on what that pre-money number is. And start with a reasonable number.

Because that’s a definite knockout. You walk in the door and you tell us that your two, two people in the garage idea is worth 10 million. It’s a no.

Shubha K. Chakravarthy: And one other question on the cap table, right. So we’ve talked a lot, or I’ve talked a lot to many founders and other guests on the podcast where if you have a, like five SAFEs when you come into a seed round or some big, crazy number of SAFEs, that’s an automatic knockout because it’s just impossible to figure out what the impact on the cap table is going to be. Do you have any words or thoughts on how that impacts your due diligence as you go through and towards a funding decision?

Tony Shipley: In our group, we don’t fund SAFEs. So when we get into a deal that has SAFEs, they have to be converted.

Shubha K. Chakravarthy: Okay.

Tony Shipley: And we have, and I mean, everybody wants to do a post-money SAFE that protects the investor. But when we get to conversions, that can be a problem. Because we had one deal where we were the company had raised one or 2 million, I’ve forgotten what it was.

We led a round of 6 million, and they had a couple of people who had SAFEs who wanted their post-money percentage. We said, that’s not happening. So you can either give in and take the money on a reasonable conversion. They said, no. And then finally when they realized we were going to walk away, they said yes.

So it creates problems. But if it’s a pre-seed company, I see there is a way to use SAFEs. But I, again, I think that founders should think about strategic use of SAFEs and not put valuations all over the map. Not have five SAFEs with five different side letters with different things that you’ve committed to.

And that’s the other thing with SAFEs is that a lot of these investors are doing SAFEs and then they’re putting a side letter in effect that covers all the things.

Why did you just do that? Why didn’t you just use a convertible note and have all those terms and conditions built in the first place? But when you start to raise serious money in a deal, most investors that we work with will not do SAFEs because we have to have the deal structured in a way from a governance standpoint or a reporting standpoint.

All the things that you would expect to see in an early-stage equity round have to be in place because when you go get the next round, you get a venture round, they’re not going to sit there and help you clean a mess up. So the more you can structure a deal so that it’s investor-friendly when you need that bigger round of capital and the VCs, or we just led a $22 million round, and that’s a lot of money and we had to have this company completely structured in a way that we could raise the money.

But we now had going to do a $70 million round, we’re not going to lead it. Somebody else will. But everything has to be orchestrated in a way that it looks like a venture deal with market terms and conditions, and to the extent that you’re atypical on market terms, it just creates more negotiation and messes that the entrepreneur eventually has to clean up. So you’re coming along with six SAFEs and six different sets of notes and terms and conditions. That’s a mess. Clean it up before you get to serious investors.

Shubha K. Chakravarthy: Got it. So we’ve talked a lot about a lot of different things and you’ve provided some amazing information. Do you have any last words of wisdom? You talked about how you need to be open, I get the points around networking in your community, understanding the reality of what happens in due diligence and how you set your startup up for success.

Final Words of Wisdom for Founders

Shubha K. Chakravarthy: What would you close with if you had to leave our founders with two or three actionable insights that they can do tomorrow morning?

Tony Shipley: I think we’ve covered them, but just to summarize what they are, really understand your business and what you’re trying to do. Be prepared and be prepared with anybody you talk to. Have a 30-second elevator pitch. You go to a cocktail session, and someone says, what do you do? Oh. In 30 seconds, you should be able to nail what you do.

So have a 30-second, a five-minute, and then an X-minute kind of a presentation as you can do. And the elevator pitch should be so practiced and so smooth that it does what you want it to do, which is set the hook for the follow-on question or comment—tell me more. So being prepared at all times to articulate what it is you’re trying to do in your business.

And you never know who you’re going to talk to. That could end up being a funder or a supporter or a customer. You never know. So being prepared. And then, I guess another thing that’s getting back to those sales skills that I talked about, doesn’t mean that you’re going to be the order taker, but it does mean that you understand this whole notion of what it means to effectively position you and your company and your product in all these constituents that are going to be a part of your organization. Then, I’m not sure what the third point is, but you know, generally speaking, be prepared at all times.

Shubha K. Chakravarthy: Awesome. So this has been an amazing conversation. I’ve learned too, and I know our founders will learn a ton too. Is there anything that you wish I’d asked but I didn’t?

Tony Shipley: I love that question. When I interview people, that’s my closing question in an interview—is what questions, though, would you have asked that I didn’t ask? Marvelous question. I love it, but I don’t have anything at this point. It’s been fun talking to you. I hope this has been beneficial and that if some founders have some questions, you can always come back and we can get some answers for them.

Shubha K. Chakravarthy: Fabulous. Thank you, Tony. This has been amazing and we really appreciate your time.

Tony Shipley: Shubha, thank you. Have a good day there.