In this episode, we discuss the process of raising private capital for a technology startup in 2022. Frank interviews Ian about the recently closed funding round for Keep, an early-stage tech company focused on car security and monitoring. Ian shares how he chose who to pitch, their concerns, and the unique challenges of doing this during an economic downturn.
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How We Raised $2,800,000 In A Terrible Market
Ian, you son of a bitch. How are you?
I’m doing good. We are wrapping up. Our last wires are hitting on our latest fundraising round for Keep Technologies, our technology startup. It’s like herding cats at the end, just like it was for us when we raised money on real estate deals. It is no different. Lots of text follow-ups, “Did you send the wire? Could you sign that sub agreement we sent you three times?” Lots of that are going on right now. Paxon is in the deal. He was well-behaved. I feel like he was trying hard to stay off of our show. He did a good job.
The last time you raised money for Keep, how much did you raise last time?
The first fundraising round was $4 million.
I put in $250,000, but I wasn’t smart. I gave some of it up to some people. I wanted to be nice to people. I was third from last to have my wire in. Ian was like, “I hate to call you. I know you’re busy. You just had a baby but we send that wire.” I became the Mark Zupan of that. He was always dead last in contributing to us. This time, I still haven’t sent it, but Carl’s sending it. We’ll get that in.
I was like, “What is it, the end of the year?” He is like, “No, this week.”
I’m used to working on 30-day cycles. I’ll get a team by the end of the month. First off, tell our audience what your dad said the first time you saw him after you got him to put a little schnitzel into the first deal.
I saw my dad twice in the last few months. He always asked me, “How’s that thing going with Ian? Has that thing gone tits up yet?”
We’re going to lose our ass on this technology company.
He never asked to lose your ass. He goes, “Is this thing on tits up?” Let’s do this, Ian. What is Keep Technologies? We’ve talked about it here before, but let’s give us a quick overview.
We are rebranding to Keep Vehicle Monitoring, similar to what SimpliSafe would do for a home. We’re a hardware and monitoring company. We have a device that plugs into a cup holder. It’s got 15 or 16 now accepted utility patents. The device is similar to what Ring does for home security. It has multiple sensors. It has a camera. If you get close to a car, if you’re a thief, it is going to warn you by chirping at you and flashing bright lights. If you open the door, a loud ass alarm is going to go off and a camera will start to roll. You will be notified as the owner of the car on your mobile where you can see a live look at who is messing with your car. It also has a GPS. We offer different monitoring packages just like you would with a home security system.
For those of you that are listening and not walking, would it protect the Mickey Mantle, Willie Mays, and Hank Aaron cards that are over your left shoulder if they’re in your office?
Not in the office. If I left those cards in my car, I would feel a lot better. I would certainly be notified if someone got close to my car. David came up with the idea four years ago. We’ve been all in on this thing for three years. We seated it first, and then two years ago we closed on the first capital round. Now, we are at a point where we are shipping our first 250 devices to pre-order customers we’ve been taking. We have about 50,000 in pre-order revenue. We’ll be shipping those devices in December 2022. This round that we raised is to run a production run of 3,000 units, market them, sell them, ship them, and continue our payroll along before we take out a big raise with venture capital.
Let’s talk about this. Where are we in product development?
The product is suites. We have production units right now that we’ve been testing with all of our employees. Our last pieces right now are in working with our manufacturing partner to be able to ship products out. Our manufacturing partner is in Taiwan. We’re following up on the last bits and pieces of getting the production cycle finished. We’ve got 10,000 lines of code written. Our app is complete. Our product is pretty much ready to go here in about 60 days and ready to ship. From there, we’re going to use those 250 early users to give feedback.
I want to get into that in a second. There’s been a major process. You wanted to ship these units. I want to go through this quickly because this is fascinating. When were you initially supposed to ship your first units? What happened with the supply chain? What did you end up doing with your pre-orders? I want you to talk about how you specifically used the phone and what that reaction was like. I told people the story and they couldn’t believe it.
There have been two major delays for us. When we first took the $4 million, we were running to try to ship some products by the following December. We got to the spring. It was getting to a place where we weren’t proud of the product we were going to ship in December. We were asking ourselves, “Why was December so important?” “We told our investors we were going to do it,” but it was like, “We didn’t tell our investors we were going to ship a crappy product either.” That whole challenge was engineering. We were having to cut too many features out to get the product ready to send to people.
When we started taking pre-orders right around Black Friday of 2021, we told people we would ship in July. That was the whole thing. We got to around April and May, and it became clear that our engineering challenges were too great to be able to ship in July. We didn’t have enough time to get the product completely to have it produced. There were some supply chain issues in there, but it came down to the fact that the engineering was more challenging than we had anticipated. We had to go back to those 250 customers and say, “July is not happening. It’s going to be December. We need six more months.”
Incredibly, only three people have canceled out of that whole group, which is awesome. That goes to show you the power of early adopters. People that early on the innovation curve are used to waiting, doing Kickstarter, and buying pre-order products. I talked to every one of those customers personally. I called every one of them on their cell phones. Some of these people would talk to me for 30 minutes about how much crime is in their area, and why they liked our product. We got a ton of good feedback. We got some goodwill by being honest with people and talking on the phone.
There are a few things here that I wanted to talk about that is fascinating. What we’re talking about is not the Keep process. I’m interested to talk about the cost because the cost had come up and it’s come back down. That’s not what we’re doing on this particular episode to talk about that later. What I want to drive in instead is how you raise money and how you do it easily. What Ian did that is fascinating is he physically called these purchasers himself. Ian picked up the phone, had 250 people to call, and was lamenting, “I don’t know if these people are going to yell, scream at me or what.” He physically called them himself. When he introduced himself as an officer in the company, the reaction he got was incredible. What was the reaction like when people knew who you were?
We want them to know we appreciate them, David and I both. David is our founder, a brilliant guy. This was his idea. This was his baby. He started an idea and then you get people sending you money. When you get those first customers, you know how that is. You are appreciative. You want to make them happy. You want to do everything. I felt like it was important. David reached out to a number of people too and said, “A cofounder is calling you. I’m an equity owner of this company. I want you to know that we take this seriously. We’re sorry that we didn’t get it out.”
People are great. They were like, “We’re happy with what you’re doing.” More than anything, they bought based on an Instagram ad or a Google ad that we ran. They bought through credit cards on their phone. No one ever calls anyone anymore when you buy stuff online. Getting that call made them feel important. Asking questions about why they bought it and what was going on, you could see people felt more comfortable that this is a real company.
If I’d have sent texts or emails, a lot of people would’ve canceled. A lot of them would say like, “Where’s your office based? How many people?” We have 6 to 7 engineers working on this in Atlanta. You tell them the story and they’d be like, “That’s cool.” You can tell them the founder’s story. People like being in on something new also. If we do make it big, they could say, “I was one of the first buyers of that product.” This type of person likes that.
There’s a side to it for the buyer of the product. What we’re driving up is the investor, the person who feels comfortable putting money in with you like, “I’m going to be in for well over $300,000,” which is not an insignificant amount of money for most people. You picking up the phone and making that call stands out. It’s going to relate to something I’m going to ask a little bit later.
I’ll tell a quick story. I have a dear friend. Our family went and stayed with him and his wife in Colorado. He likes bourbon that you can’t buy at the store anymore. I went on the internet and I bought him two bottles of bourbon. It cost me $800 to buy two bottles of bourbon. I ordered it on July 7th, 2022. It still isn’t here. Not only is it not here but the website is also now closed down. They stole my $800. Now it’s like, “Go to Shopify.”
This is a fucking fool’s errand. I got robbed of $800. What is unique here is the owners of this company. For a product that costs 1/4 this much, one of the owners who’s a busy guy called and wasn’t in a rush. Ian told me stories about speaking with this woman who’s a bartender, whose car has got broken into in Florida several times. It was unique. When you were done with those phone calls, what did you feel?
It’s fun. In today’s world with direct-to-consumer or D2C, many of your orders can come without ever having talked to a customer, especially on $200 products, it’s now $300. For a product like that, you’re not used to talking to someone. For us, it was great because David and I got a lot of intel on who was buying, what cars they owned, how many were used cars, how many were new cars, and how many were expensive cars. I learned about whether they’d ever been broken in for. We learned about business owners.In today's world with direct-to-consumer, many of your orders can come without ever talking to a customer. Click To Tweet
Here’s what I’ll tell you, Frank. Like you, I have a lot of money into this deal and I’m raising money. Unlike you, you have a couple of people. I’m sure you’re worried about, “I hope my dad makes money in this.” You brought some friends in on it. You want them to make money. You feel a little bit of that. I’ve raised now $3 million or $4 million from my friends and family alone, and from people to whom my reputation matters to me.
When you ask me how I felt after talking to them, I felt like we were on the right track. I felt like we were putting the right solution together. Any startup owner needs to do this. You need to test your idea. Why did you buy it? What did you think of the price? What do you think about the monitoring cost that we’re thinking of? Every conversation I had reaffirmed that we’re tackling the right problem and we have the right solution.Any startup owner needs to test their idea. Click To Tweet
We talk a lot about investing. What I think makes a lot of sense is you got a horse and you got a jockey. The horse in this instance is the product. The jockeys are Ian and David, who are people that have incredible reputations that take things seriously. One of the things that I told the people that I invested with the first time around, I brought them in. I said, “Do you want to put some of your hard-earned money into this deal?” When there was a product delay, I shared it with them. I said, “Ian physically called all 250 of these early adopters himself.” They’re like, “Seriously? How long did that take him?” I’m like, “It took him two weeks.” They’re like, “No shit.”
It’s longer than that because a lot of people don’t call you back. It was 4 to 5 weeks. I called them all, but you were waiting on phone calls back.
The total amount of time, but the phone time was a couple of weeks’ worth of work to physically talk to human beings and do that. This matters and it matters this way. Ian and I were talking about, “Should we do this?” We did an episode about me. I couldn’t sleep because I have an overhead that was about $700,000. Most normal people don’t have that kind of overhead. Ian thought it was interesting.
I joked to Frankie. I said most people wake up in the middle of the night thinking, “Did I leave the back door open?” Frank wakes up in a panic remembering that he has a $700,000 overhead, “My payroll, it’s a recession.” When Ian Matthews wakes up in the middle of the night, I’m like, “Did I leave this stove on? Did I leave that out? I’m going to go check.” Not Frank, it’s $700,000 of overhead monthly.
To someone like me who has a huge overhead, I’ve raised a bunch of money. I remember there was an article written in the local business paper about someone who raised $1.2 million. I can do that in a text message. Most things that I do and when I raise capital is I raise it on a fixed asset where someone has a deed of trust. They have a mortgage. If I got eaten by a shark, they gave me $1 million but it’s tied to this particular building, and then it becomes their building through foreclosure. I have to perform.
You have a floor. I raised money with you, for you, and myself on real estate. I can say the land is probably worth this. Here’s what the building is. It generates this revenue. I got this lease, which is an asset. Here are other things in the area. We could lose money on it. There’s a floor because you have these assets that you could always liquidate and give everyone their money back. Whereas in a company, the floor is zero.
This is a tech startup and this is speculative. It could go wrong. In my instance, most things won’t come back to zero because it’s back with Earth and it’s back with a building with a structure on it. If the structure got burned down, we have insurance. We’re going to get most of it.
Tits up on a bad real estate deal. When we joke about tits up, it’s like you lose 30%. That’s as bad as it could get unless you bought it horribly.
You don’t do anything and you collect a coupon every month from rent. I know how to raise money for a fixed asset. I’m good at it. At one point, I had $15 million out of private, which is a shitload of money. I’ve never conjured up or gotten people behind a figment of imagination. We think it’s going to be something. The first raise was something that was a concept, and for the second raise, we’re almost ready to produce a product. What is fascinating is this because I don’t know it. What’s the difference between how you raise money with me and how you have to raise money here? How did you do it? How did you sell the vision? Some of the people that invested with you besides our parents are older. The technology has got to be confusing. How did you paint the picture?
In the first round, the challenge was we barely had a working prototype. When you ask for money, people say, “What are you going to do with the money?” That first $4 million was all engineering. You and I know, Frank, you could spend $4 million of engineering and not get anything like, “I guess we couldn’t invent it.” Think about all the money spent trying to invent the first combustion engine or the first light bulb. If that hadn’t been commercialized, that could have just been poof. You spend money on salaries. That was the big risk of we have to invent this and it has to work.
I remember telling you this. I feel strongly that there’s a big problem, that there’s not a product like this. The risk is, can we do all the things that we’re setting out to do because we’ve not invented this yet? We’ve got bits and pieces of it working on a prototype, but those two years were going to be spent on engineering and building a team to do that, and to a little extent, proving the market. At the time we raised $4 million, we had not advertised anything. We had done some primary market research. That is valuable where you pay a third party to survey people and ask about what they would pay for a product and security, and that kind of stuff. Until people start putting their credit cards down, you don’t know. Those things we had to prove with the $4 million.
When did you raise the $4 million?
Two years ago.
In those two years, a lot of things have happened. We have a product. We’ve had Coronavirus. We’ve gone up and down in pricing, but we’re less than 90 days away from shipping units now. We’ve gone from something conceptual to we’ve taken the concept to reality. The reality is it’s in Ian’s car. I’ve seen it. In addition to being in Ian’s car, it’s in everybody else that works at Keep’s cars. They are testing it and it’s about to go to that early adopter market in the next 60 to 90 days.
Since then, in those two years, the bulk of our progress that I’m proud of is the work of David and Jonathan, our CTO, and our engineering team. They’re incredible. They’ve invented a product that has never been done before. It’s got a cellular module in it. It’s an iPhone without a phone in it. It connects to you. It’s got sensors that have to pick things up back and forth. The alarm had to be honed in right. The devil’s in the details of how this works. You’re right. It’s on my device.
When I talk to a potential investor, I can say, “This damn thing works.” When I walk up, it chirps at me. I can tell you the installation took me two minutes. It’s smooth. The app is beautiful, the way it’s working. I couldn’t say any of that because I didn’t know if we could pull it off two years ago. I believe in the product. Now, our challenge is getting the product out there and testing it on a mass level. When I talk to people now, I don’t even know if it’s pitching when you invest or if it’s just offering an opportunity to get in.
These are people that I care about. If this weren’t to work, I want them to know, “Here are all the risks that I worry about. Here’s the risk of how you could lose money.” I want everyone to know that. Now when I talk about, “We’ve de-risked the product side or our product works. We’ve de-risked understanding if there’s a market for our product because of what we’ve done with our marketing and our direct-to-consumer. We know there’s a market for it. We know we can acquire customers much lower cost than we have because we’re getting people to buy this thing knowing they’re going to have to wait for 6, 7 or 8 months to get it.
Imagine what’s going to happen when we can ship the thing in two days. Right now, on our website, we’re like, “You just pre-order. You’ll get it months from now.” Most people aren’t into that. I’m able to tell people, “Here are the risks at $4 million. We’ve taken them off the table. Here are the current risks that we’re facing. One of which being it’s a recession. Can people afford to pay this?” We feel pretty good about some of the payment options we’re doing. That’s how I approached a lot of people about what we are going to do. We went out to get $2.5 million.
That $2.5 million now is a clear path. It’s muddy saying, “It’s engineering, the $4 million.” That was harder, especially for some of the people that know nothing about tech that are older. What does engineering mean? It’s electrical, programming and coding. You’re getting over their head a little bit, but we got to build this product. Now it’s, “We’re going to go manufacture devices at cost x. We’re going to get 3,000 and we’re going to market the hell out of them, advertising costs, marketing and shipping. We’re going to sell these and get $1 million in revenue. That’s going to take us to our next big venture capital raise.
For me, it’s a clear path of what we’re going to spend this $2.5 million on. It’s much clearer than the first time. About half the people that got in on this raise were in on the first round. They were just as excited to get in. We wanted to bring other people in who missed the first raise. We brought a lot of different people into this deal because I look at it as more investors is better than less. There are more people out there that could help us. Bigger contacts that are selling it and telling people about it.
This is interesting. The first time you raised capital, what was your collateral like? You need to pitch deck when you raise money. What was different about your pitch deck the second time?
If you remember the initial decks, there were 3D renderings of what the product could look like. When we went through it. At that time, we had no website. We had no social media following. Now, we go out and we say, “Go to our Instagram. Go read all the comments of people engaging.” We have 6,000 followers on Instagram. They’re an engaged group. They’re into it. We have 2X or 3X that on TikTok. Our YouTube page continues to grow. We have 1,500 people following. They engage in all of it. We can show you videos of our product working and demos at the CES conference that we went to where people loved it.
What was different about our collateral is I could show you real customers spending money, interacting with it, and the product working. It went from concept, a bunch of things that we drew in CAD on a computer to actual real videos and pictures of the product doing its job and doing what we said it was going to do, and real customers engaging and interacting with us. That was by far the biggest difference between the two raises in being able to communicate where we were in our mission.
Without naming them, there was a skeptical person the first time. He was an older guy that we talk about privately quite a bit, who has enough money to fund this whole thing. Who was your most skeptical person the second time? Compare and contrast those two people. Was there little skepticism the second time?
The first time there was a lot of skepticism. There were more people that said no because of the collateral. You had to use your imagination. The second time, we accomplished a lot of the hardest part, in my opinion, which was building a product out of nowhere. That’s 90% of the work we’ve done for the last few years. David’s engineering team are figuring it out and doing it. The second time, I didn’t get as much. Honestly, there was a lot of open interest. Part of this is what is worth talking about a little bit. When you do a real estate deal, it’s not like you call someone and say, “I’m Frank. I buy residential real estate.” These are people that ongoing know that you are consistently buying and making good decisions.
A lot of the people on my list have known I’ve been working on this. They’re friends of mine that I talk to on a regular basis that ask, “How’s that tech company of yours going?” I share with them a video. I show them something. Maybe they tuned in to this show and we’ve talked about it before. There’s a bunch of people like that that were interested and told me, “If you guys ever raise money again.” It’s almost like when we started de-risking it, they started seeing it as less and less of a risky play. They saw my enthusiasm growing as we were selling it and they were like, “It’s a little different. You’re a little farther along that I would be willing to invest.”
People have been starting to tell me over the past year, “If you do that again, I would like to get in.” I had that list in my head that I can’t think of someone on this round that gave me a hard time because I would’ve said, “It doesn’t sound like it’s for you.” I felt like I had to sell much harder, even with you on the $4 million, “Here’s where we’re at. Here are the things we’ve thought about. Here’s what I’m worried about than this round.”
Let’s get into this a little bit. I’m not a business guy. I’m a real estate guy. I didn’t go to Harvard. I don’t have an MBA. This is probably stuff that people with MBAs or who went to Harvard that are smarter than me understand well. I don’t. There was the book called The Accidental Billionaires. It’s remade as The Social Network. This is a movie, but it’s how it played out. What they did is with nefarious means, they delevered several people on purpose and they diluted their stock down in order to push them out.
The point of it is I didn’t understand that until I read that book and until I saw the movie. In layman’s terms, what they do is there’s an initial offering and initial value. Whenever you want to raise more money, you need to go through and restructure what you’re building. You have an asset that you’re borrowing against. What I would love is some clarity on how you raised money the first time, what the value was based on, how the money was raised the second time, how did the equity come about, and how was it levered. Are the people in the first time getting a better deal than the people that are getting the second time? Is it even? Where did the equity come from? How did you structure it? It’s complicated. People will be interested in how that works.
The first $4 million, we raised from private capital. People cut us a check or wire us money. They get a piece of the business. That gives them a certain percentage in the company. We value the company at $16 million. Anyone that argues valuation at that point, you try to go with comps in the market. I remember Ring had raised something similar to $4 million in a $16 million valuation. We had multiple comps saying, “It’s the way tech works. It’s a fast-growing company. It’s an aggressive multiple on what we think we can be.”
David’s the founder. He’s the one that put a lot of his seed capital sweat equity into it. He came up with the idea. He’s going to have a large percentage of the company. The idea is that’s probably going to get whittled down over time as you raise more and more money. We had this initial bank of $4 million that was in. That’s 25% of the company. I had percentages of the company as a cofounder with David and a seed investor and someone that was helping him promote the round.
This time around, it’s a little bit unique what David did because the engineer had gone slower than he had expected. He felt strongly that he was going to give up this slice of equity. He was going to give it to the new investors. With the $2.5 million we were raising, we’re keeping our valuation the same. $16 million pre with the $4 million. It’s a $20 million valued company. What David did is he gave up 10% of his equity and gave it to the new investors. What that means is the initial investors that went in on that $4 million were not diluted.
He did that to not dilute those investors. Like David, those are his friends and family. His brand matters. David has a big percentage of the company as it is. He felt like it was the right thing to do. That was his decision. I had no stake in that. He made that decision himself and he felt strongly about it. None of the initial investors was diluted. David diluted himself.
When we go raise from venture capital to grow this company to $200 million, $300 million, $400 million valuation which is our goal, you have to go take out $10 million, $20 million, 30 million swaths of money from either the venture capital or at some point, you can get creative with debt. You need to get creative with debt. It’s similar to getting a mortgage. You have to show you had income and profits. You can’t do debt early on. It’s venture capital. They’ll want a percentage of the business. That means everyone will get diluted when we go to venture capital. We’ve told everyone that from the get-go, “Your percentage of the company goes down.” The idea is you’re adding to the total enterprise value of the company over time.
You did a good job of explaining that, but I’m going to explain it back my way. Maybe it’ll be clear for those that don’t completely understand it. The concept first, has little value at the first raise. They use anecdotal data from other companies. They came up with where they were in the process versus where the current multiples were. They thought if they could raise $4 million, the company had a $16 million valuation. The $4 million plus the $16 million is a $20 million company based upon where they hope to be.
We are still in the hope to B phase. What David did is he took some of his equity and he made it common stock. The company still has a $20 million value. Some of that came from David’s pie so they didn’t have to take the value of the company up to dilute the other members. Everybody in the deal is still getting the same. The people who are getting in now are still early adopters. People like me are re-upping. We’re getting a little bit bigger portion of the company, but we didn’t get rewarded by being early. The people coming in now get penalized either. There are different ways than that.
When we go to the next round, which is the VC round, this is what happens. We’re bringing in VC, but if VC brings in their money, the $20 million company now becomes a $50 million, $75 million, and $100 million company. There’s going to be more common stock, but at the same time, the value has gone exponentially up because of the addition of what’s going to be a strategic partner with money.
We can talk about some of the strategic partners that Ian and David are talking about, but that’s how this process works. In real estate, I buy things as low as I can buy them. I know what the current market value is. I try to be under that when I acquire. I know that with value-add, it can be more. This is the same process. It’s a concept versus a piece of real estate, but the process is identical.
It’s layers of risk and what are you willing to pay for the capital. When you’re a startup like the first $4 million round, that’s like Angel investing. It’s friends and family. It’s a funding round. It’s risky. We’re saying we’re going to try to invent a brand-new product and we think we can do it the next time with this amount of money and we think people will buy it. If I’m an initial investor in that, I’m buying David and I’m buying me to another extent.
When they’re buying me, they’re probably buying more of I trust the network that Ian usually hangs out with. If it’s someone that didn’t know David and I’m saying, “Trust me, I’ve worked with them a long time.” That’s a lot of, “Do I believe in the operators to go execute on a good idea that I liked the idea?” You tell me it feels less risky the second time because I’m like, “Frankie, I’ve sold $50,000 of it and the damn thing works. It’s in my truck. It works well.” It had to have felt a little less risky for you to send me a wire on this one than the first one.
Why don’t you ask me that question? Why does it feel less risky to me? It’s not that you convinced 250 people on the internet to write you a check for $200. That almost means nothing to me. The fact that there are 250 people who are willing to buy something that they’ve never seen before is not a proof of source that I’m going to latch onto. I do like the fact that there are some sales and there is a market, but if there are only 250 buyers, that to me means very little. I don’t know.
The things that do matter to me are this, the text messages back and forth about different things that you’ve shown me about the device. “I don’t like this piece. There was a cord that comes through that I don’t like.” Ian goes, “That’s a real thing.” He stopped what he was doing. He wrote it down and they’ve addressed it. The fact that it’s in Ian’s car, Ian is a pain in the ass to deal with. I split a cow with him and his wife, and I still don’t hear about how shitty the cow was.
If Ian is going to embrace a product and he’s excited about a product, I know he has a high bar. When my dad asked me, my dad put $50,000 in, which is not an insignificant amount of money for a man who’s an electrician that doesn’t make a lot of money. It’s like Ian’s dad buying baseball cards. This is a big investment. I could say, “Dad, Ian’s got it in his car. Ian’s using it. The whole company’s using it. They’re proof sourcing it that way. They’re making changes to it.” You guys sat down with Shaq. Shaq was like, “Instead of the cup holder, why don’t you do it in the rear-view mirror?” They’re like, “That’s version two.”
We’re so much further along. What I see is this, I want to invest in companies that are adapting. In a lot of instances, when you manage people, it’s this. There are people who want to get shit done and there are people who want to be right. You guys want to get shit done. You guys want to get in there and build a product. You want it to be right, but you’re not like, “This must be the product because this is how it started.” You’re adapting. What I see and feel is a product that’s better than I thought it was going to be based on when I first invested to now. That’s who I want.
That’s the right jockey. That’s who you want to ride because there’s iteration, smart thought, and process. It’s properly managed. Those are the things that I’m starting to see and feel. The product isn’t even out yet, but there are multiple things that are different than we thought they were going to be a couple of years ago because this is a better answer. That gets exciting.
With raising capital, so much of it is gut and less about science, especially when you come down to something like this. A number of people that I’ve raised money from have been in real estate deals with me. I’ve always paid them on time. I’ve always done what I said I was going to do. There is a large number of people here that have worked with me in some capacity at one of my companies or somewhere else. My personal brand matters there that they see I’m a hard worker and I don’t go into anything half-ass, and that when I tell you I’m going to do something, I normally do it. I’m normally someone that cares a lot about how other people feel about my word.With raising capital, it is more gut and less about science. Click To Tweet
They have some of that halo that you get of, “I’ve worked with him before.” If you’re going to invest in something like this, I’m personally someone that would rather invest in someone I know or trust. That’s why I’m invested so heavily in this because I feel the same way about David. He’s an incredibly smart guy and he works his ass off. I’d also say I have an advantage. I live in a town that has a high discretionary income. I live in one of the richer towns in the country. What does that mean? I coach. There are at least five people in this deal that have given me $100,000 whose kids I have coached before in baseball or soccer or something else. These are folks that interact with me all the time.
If I’m willing to trust someone to be around my kid all the time, I’m probably willing to trust money with them too if they seem like someone that makes good decisions. If you’re raising the money, 1) Do you have a good idea? Do people think the idea is good? I couldn’t go raise money because I coached your kid and I had a shitty idea. That wouldn’t happen. The idea still has to be good. They have to believe in it. 2) Does the promoter have a track record of making good decisions with my own money and in my career? Am I someone who surrounds myself with people? When I raise money for your real estate deal, there were a bunch of people that never heard of Frank Cava, but they also know that I don’t hang around with jackasses and I don’t invest in people that aren’t of the same cloth that I am.
Probably you felt the same way about David. If I go get David to go invest in Westwood, he didn’t know you from Adam. David Muller invested in your real estate deal. What does David know? I don’t surround myself with idiots. I only work with people that I trust. He cut me a check. He didn’t think twice. I did not have to sell him. He’s like, “Are you in?” I’m like, “I’m in large.” He’s like, “I’m in.” It’s that fast. A little bit of you was you knew if I thought this highly of David, he’s probably a pretty talented dude, and I wouldn’t put my time and money into it.
We’re going to get to a point of wrapping unless we missed something, but I want to say something quickly. Ian had a job. He quit it. He’s been on his own now for over four years. He’s discretionary where he spends his time with the exception of this show.
That’s true. I would think there would be a demerit against me in raising money like, “Why do you do that?”
He’s had something funny every once in a while. Ian is incredibly discretionary in where he spends his time. When he came to me and said, “I’m going to put 3 to 5 years of my life into this,” this is someone who’s a very highly compensated executive-level person who walked away from tens of millions of dollars because he valued time. If you see someone like that who values their time enough to invest it into something, there’s something there. What is critical is this, for those of you that are tuning in, it matters who you hang around with. It matters where you go to work and who is employed there. That’s how Ian and I met. That’s how Ian and David met. A lot of these things are relationships over time.
Who do I raise money from? People I’ve worked with, people who raised me, people who are in my network, people who see me go to work every single day and typically, people who start small. Here’s a couple of hundred thousand bucks. I’ve performed. A couple hundred thousand bucks become $500,000, and $500,000 becomes $1 million. It’s those things. There are a few things that are critical as we get to a wrapping point. You invest in people you believe in. One of the reasons Ian is incredibly great at raising money and why I bring him into deals, and I usually have to give him a little bit of extra sweetener to get him in because he does value his time, but he’s great at communication.
What we do together, he typically makes fun of me in our communication, but we do quarterly communication in everything that we do together. People know where they stand in the deals. I’ll get a bunch of texts like, “Ian is so funny.” The point is they know where they stand, and then you have to have reach. Right now, the reach is smaller because it’s only $20 million with $6 million raised. It’s going to get bigger. When we get to that point, we’ll have a different conversation. We’ll probably bring David on because then you’re going to have to raise money a slightly different way. The foundation is the same, but who you’re raising it with and that relationship will change. Those are three of the big things that are critical whenever it is that you want to raise money.
You asked a little bit earlier how much I sell. On the initial one, I did a little bit. On this round, I did zero selling. I didn’t want anyone in here who wasn’t excited. I didn’t want someone texting me every month, “How are things? Where are sales?” I needed to know that if you were putting in $50,000 or $100,000 or someone put in $500,000, if you’re putting a lot of money in, was it a lot of money to you? Were you going to be nervous about it? Were you going to be asking, “How do I get it back in a year or two?” It couldn’t be the money you needed in the next 4 or 5 years. I wouldn’t put someone in where I felt like this was stretching them past their point of they should be investing.
You and I have done multiple deals together. There are sixteen people in the Westwood portfolio. There are a couple of people we talked to. They’re trying to scrape together some cash and we’re like, “This might not be the right thing for you.”
Also, the right time.
I had someone in this deal who was like, “We had a $250,000 minimum.” I could tell $250,000 was a stress point. I’ve raised money before. I don’t want someone calling me every day or every week or every month. I pay those people back and I replace it with someone with more patient money. When we asked that person, it was like, “Why don’t we take you down from $250,000 to $100,000? We’ll share it together. We’ll package you with a few others and get that to $250,000 to get to the minimum.” This is critical. Who you raise money from matters. They need to understand what they’re getting into and what the expectation is.Who you raise money from matters. Click To Tweet
When we say to them, “We’re going to communicate with you quarterly,” you do it. You tell them what’s happening. This is the timeframe. You set the right expectation. You communicate and you deliver when you say you’re going to deliver. You stay on track. Most people have forgotten 90 days ago we wrote them a check. They’re going to get another check in ten days from us. On schedule, it shows up on the 21st, and an email will go out. That is how you can do a small raise that becomes an enormous raise over time. If you look at it being the same people that are in this deal twice and deal with me, just under $3 million. That’s $12 million from yours and mine’s concentric circles. That’s how it was raised. You do that because you have a track record.
It’s important when you raise that you talk about the skin in the game you have. Anyone who’s thinking about putting money in, I say, “I got my own money in. I could get burned too. I could be wrong. I could lose all this. I want everyone to know that this is a tech startup. It could go to zero. There’s a floor because of our patents and because of this.” We’ve thought through that risk. With friends and family, I’m almost telling you all the stuff I’m worried about more than I’m telling you all the positives. I don’t want you to look back if something went wrong and we were terribly wrong about this and be like, “You sold that so hard.”
I want you to know everything I’m worried about and that everyone else is worried about so we’re all understanding, “We got into this. There’s a high ceiling. This is going to be an exciting ride, but let me tell you, it’s a rollercoaster of a tech startup. There’s going to be some lows where we’re freaking out a little bit.” I want that to be there. I want you to know the skin in the game. I don’t want you in here if you’re going to be stressed.
I had a few where it went back and forth. They were asking, “Could you load it?” It was like, “Maybe the timing is not right.” There’s nothing wrong with that. People have their money put in different places and whatever, but that’s important. The last thing I’ll say is there are tranches of this. Frank and I can go raise $4 million for a real estate deal, but if Frank and I wanted to go raise $40 million for a real estate deal, we’re not going to the same people. Frank and I are going to professional money. They do care about our track record to an extent, but it’s much less personal.
That’s what I was talking about earlier with the VC. It’s a whole different conversation when we go to that next level.
That’s when metrics matter. That $4 million is based on relationships. Do I trust these guys? Do they have a good track record? $2.5 million, same. We got more than $2.5 million. We went to $2.8 million. We probably could have done $4 million or $5 million if we pushed. We got that. The next will be venture capital. We’re going to fly out to California and meet with a bunch of people in Silicon Valley. They are not going to give a damn that we’re good coaches in baseball and we’re good dads and we have a good track record of being hard workers. They’re going to ask about our sales, our acquisition costs, our lifetime revenue on average out of a customer, and what our bill of material is. Metrics now matter. It’s the same as buying a stock.
You’re not asking all the questions you ask here. You want to know about revenue, profit and earnings. With every tranche of either debt or equity that we go to take after this, the metrics will keep getting more and more important. For this raise that we took, we got to go show that we sold $1 million of product and our acquisition costs were realistic and it made sense and people are paying for the service. There’s no more we’re good guys and we work hard and we have a good track record. Our goal is to kick ass in the next twelve months, then go to venture capital and raise $10 million to $20 million. You have to have metrics.
There’s a horse and a jockey. The jockey got us this far. The jockey is the relationships, the communication, the things that we’ve talked about, and the baseball coaching. The horse is going to become the product. It’s going to become the real thing that wins the race, which will take us to where we hope to get to, which is an exit where someone buys it. That is the VC stuff. There’s no heart. That is a heartless fact-based sale.
I work with someone now who’s in the process of trying to sell their business or a portion of their business to VCs. What VCs do is basic. Someone said to me, they’re like, “It’s equity. We can default on it. There’s no recourse.” I’m like, “Go default and see how little recourse there is.” There’s recourse. They’re going to come to find you wherever the banana tree you’re laying under. They’re going to ask you for their money back. It’s not going to end until you get it back or they got a piece of your ass. These are high stakes. This is interesting. I never thought of it in his terms. This is the typical story. This is how every story starts. Jeff Bezos started no different. The money he got to start Amazon is from people he went to college with, people he worked with, and his parents.
They gave him three rounds.
Steve Jobs and Steve Wozniak, it’s the same thing. The reason you raise it from friends and family first is they are the most willing to give. They believe in Ian. They coached with Ian in baseball. They see Ian every day. They trust him. There’s another side of it that’s critical. They’re willing to trust and step back and let things marinate and grow.
If Ian had VC money, he would’ve had pressure and timing. Pressure and timing may have made them make a bad decision. Ian may not have been able to call all 250 of those clients. They may have had to push that product out six months early and it was the worst product because they had this ticking time bomb behind them. What they did is set this up smartly. It’s the right people in the deal who aren’t antsy about the investment. That gives this enough time to marinate, to properly be cultured and grown. It goes to that point, but not too soon because that could ruin it.
You don’t go to venture capital right away because they won’t do it. We’ve talked about Shark Tank a few times. Shark Tank wants to know, have you shipped it? The last thing I’ll say is Frank was excited to see the product in my car and me using it working. What venture capital wants to see are those 250 people saying, “This product is awesome.” “Where’s your product reviews? What are customers saying about the product? How much social proof are you getting? Are they posting videos if it stopping thieves online?”
You can see Frank take what you said about me and the other employees of Keep using the product. Multiply that by a hundred when objective random people that bought the product are using it and raving about it and love it. That’s when the whole thing could take off. The horse and jockey, I love it. The horse is everything now. Our horse is our device. It has to do what it says. It has to delight people. People have to love it. That’s partly why we’ve delayed so long. We didn’t want to put a product out that people wouldn’t be crazy about because you only get one chance to make that impression out there.
Is there anything else before I get a wrap and tee you up?
What I want to talk about is this, at some point in the future, there’s going to be a VC conversation. I’ll probably be asking Ian questions because I’ve never done it. I can’t lead an interview because I don’t know how that goes. I don’t do it. I do with commercial banks, but it’s different. What I can tell you is this. In a concept, a real estate deal, and a startup, there are a few things you must have. First, you need a product, a proof source, an audience, and a product that solves a problem or adds value. If you have those things and you try to raise capital, your reputation and how you communicate matter tremendously. That is how you can do this.
Let’s talk about this from a couple of different perspectives. I started what is now a $100 million real estate business with a little bit of my money and some money from my parents. I found a few people locally who saw what I was doing, got excited about it, and lent to me. Most of that money is gone. I’ve got less than $10 million in private money and $40 million in public money or bank money because I’ve gotten more official. I’ve also traded down interest rates significantly because of proof of concept. I was with my son. He goes, “Dad, what are those?” I had a stack of envelopes this high in my kitchen. I’m putting my fingers together and it was 8 inches tall letters.
These were all from note holders of mortgages where I was current. I was paying the bills and they still sent me 75 letters. I joked to my son, “These are the mortgages I’m currently on.” They’re going to come after us and there are real stakes if we don’t pay. In the beginning, I had my parents on a balloon note with no end because I needed some forgiveness. That’s how the process goes. If you do a good job, you pay everybody back, you build a reputation, and it grows and grows. What we’re talking about here, together, we’ve raised 15 million on a couple of different deals just by using the things that we talked about there.
What’s fascinating is the strength of personal brands that we talked about a little bit. We raised more than $2.5 million. We did it in a few weeks and we did it during a scary time in the stock market. Stocks are cratering. The economy is collapsing a little bit. We’re going into a recession. Most people are nervous. What’s interesting is I thought that was going to be a problem for us. We were both a little nervous about going into this raise. It wasn’t a problem at all. Part of it is people are a little bit disgusted with the stock market.
A lot of people were like, “If I’m going to put $100,000 into the stock market, which is falling apart or into some people I know and trust.” I’d rather probably go the other way. If I’m going to lose some money, I’m losing it now in the stock market. I would rather go here. There’s more upside in doing this. That was one lesson learned for me. I thought that was going to be a problem, the recession. It turned out it was almost the opposite for us.
If you look at most of those companies you’re talking about tech startups, a lot of them were founded during recessions and down periods. It’s going to be a good time for us to poach some engineers from the big guys who are doing layoffs. With interest rates doing this, it’s going to bring inflation down. Our input costs are going to go down. For us, we’re not sweating the fact that it’s a down market. It’s going to be more challenging to go to venture capital when their bets are not paying off. They’re going to be a little more skeptical.
It comes down to if we have the metrics and we have the revenue, we’re going to be able to raise from venture capital because there is always someone willing to invest in something that’s working just like you can find banks easily when people are paying the rents. When they’re not paying the rent, that’s when you don’t get the money. That’s when you got to go back to mom for the balloon note. When they’re paying the rent, you can go get a low-interest rate from the biggest firm in the world because you’ve de-risked it.If we have the metrics and revenue, we'll be able to raise from venture capital because there is always someone willing to invest in something that's working. Click To Tweet
I’ll close with this. The horse and the jockey, knowing who you’re investing in and all those things make a lot of sense. One of the reasons that Ian and David had an easier time raising capital now is also this. The process is better. We’re further along, but smart investors and people who know these guys also know this. In a recession, the second most valuable asset that most people own is their car. If you look at the statistics in recessions and the timing is perfect here, the average age of the car owned by America goes up in recessions because people protect and keep. They buy a new set of tires and change the oil. They don’t go buy a new car. They put $800 into the car and they keep riding that thing into the ground.
The other thing that happens in recessions a lot of times is people start doing irrational shit. People don’t have jobs. They start ripping things off. People need to protect their cars because there’s a need. This all comes together in a confluence. It was a reason why when Ian said, “We’re raising capital,” I’m like, “I’m in.” I was willing to give him more than he asked for because the timing is right for this. We’re in an exciting time for the product.
The problem is only growing. There aren’t any solutions out there that we think are superior to what we’re trying to do. It’s going to be a fun couple of years. For me personally, it’s gratifying. I can’t wait to share what we’re going through over the next couple of years and all the challenges that we’re having to overcome. My friends are now part owners with me, which is cool. Maybe next time we have to disappoint a bunch of customers. I’ll give Frank 50 people to call for me, “Frank, you need to make some calls. You’re an owner.”
I’ll outsource it.
The more equity I give Frank, the more I’m going to start bringing Cava Companies into the mix, “Can I borrow that lead source generator you got?”
Before Ian asked for likes and whatnot, the only thing that would make me more happy than getting a Keep device in the mail is more baseball cards.
More crappy baseball cards. I can’t wait for you to tell me how they look homie. If you are new to our show, hit that subscribe button and turn on the notifications. If you’ve been tuning in for a long time, quit making me beg, give me that five-star review with some choice comments.
We’re on fire. We got all kinds of new reviews flying in.
Frankie, it’s good hanging out with you.
It’s always a pleasure, Ian.