"You Have to Distinguish a  Startup  From a New Business" says Paul O’Brien

There are countless articles on the web that talk about what investors look for when funding your startup. Normally they all focus on similar things:

• A stunning pitch deck
• Solid financials
• Market opportunity
• A founding team with the “X-Factor”
• Execution capability

All of which are, undeniably, important. But even if you think you have everything figured out, the numbers don’t lie. Few startups successfully raise capital and even fewer get a good deal.

So what’s different for the founders that do secure funding? What secrets do they know that the rest are oblivious to?

To find out, I sat down (virtually) with Startup expert Paul O’Brien, CEO of MediaTech Ventures, to take a closer look at the hidden details behind startup funding and the information you absolutely need to know that often lurks beneath the surface.

About Paul O’Brien

Q: Can you tell us a bit about yourself and what you do?

A: I grew up in the midwest of the United States when the economy was rough there. Then I ended up in Silicon Valley when Yahoo, Google & Facebook emerged so I’ve experienced both sides of an economy. And how an economy, how a workforce and how entrepreneurs can actually suffer if there isn’t an intentional investment in the entire ecosystem, the entire economy.

So I live now in Austin, Texas. And as the United States is shifting — because of cost it’s shifting a lot of attention from the coasts to other parts of the world. Most of that in the US is coming to Texas. So Texas is largely considered a future hub of innovation for the entire US, and frankly the entire world.

And so here, now, I serve that economic development to help venture capital make more meaningful investments in innovation. I do that very distinctly in the media industry. We focus on everything from podcasting technology to the next Hulu, to the next Spotify, to what’s going on in the video gaming business.

Q: How long have you been advising startups on investment and economic growth?

A: I’ve been doing this work in a broad sense for, [smiles] how old am I, maybe about 20 years back in Silicon Valley. I started my career at Yahoo and so essentially when I was done with Yahoo I worked with Hewlett Packard for a couple of years. And then I started working with startups so it’s been quite a while that I’ve been working with startups seeking Venture Capital funding in particular.

Q: Do you focus on Pre-Revenue or Post-Revenue Startups?

A: They are very very different areas of focus. I think the mistake that most founders and service providers make is they treat startups as though pre-revenue and post-revenue work, mentorship, and priorities are all the same. They’re not.

What we do at MediaTech Ventures is we work through incubators, and we run an incubator of our own, to work with that pre-revenue sort of “Seed stage”. What I mean by that is we work to develop methodologies for programs, companies, and even cities and countries, that enable us all to better support those early founders at scale.

Frankly, most founders and most startups at that earlier stage all tend to need the same advice and direction, maybe with some nuance [smiles]. But frankly, that early-stage tends to have all of the same issues.

I more personally work at the later stage, essentially the Series A & Series B stage which is why we use the word venture capital so distinctly. I tend to work with Venture Capital funds and firms and their interests in particular. And, of course, VCs don’t participate at the seed stage and hence they’re very different stages to be working. I tend not to work beyond that. I don’t work Series C, I don’t work very much with larger companies or in M & A (Mergers & Acquisitions).

“I think the mistake that most founders and service providers make is they treat startups as though pre-revenue and post-revenue work, mentorship and priorities are all the same. They’re not.”

Q: So your main focus is VC, but do you also make introductions to Angel Investors & Private Equity?

A: Yes, our main focus is Venture Capital funding, and not because we can’t work with others. Certainly, private equity participates at every stage, mostly later stage but really every stage.

The distinct difference, of course, is that a Venture Capital firm and a fund has a fiduciary responsibility to invest. That’s why the thing exists, they’re obligated to invest. And the partners there have no choice. The limited partners don’t give money to a Venture Capital fund just to sit on it. So it’s a very distinct stage and tends to focus at the middle.

Private Equity is very different because, of course, private equity can do whatever it wants! [laughs] It can completely ignore startups if they’d like to. So, I tend not to work there just because private equity has too many differences, too many nuances.

I work with private equity as it pertains to our sector, to our industry in particular. So we work with a lot of media industry private equity. But unless they’re focused on the media industry, we don’t bother. Because they can be all over the place. Whereas Venture Capitalists tend to have all the same expectations at a certain stage.

To answer the question more explicitly we tend not to make introductions to Angels because of our thesis on how best to do that and how that should work. We do make introductions to Venture Capitalists. We don’t broker deals, I don’t believe in getting paid a percentage of equity to connect VCs. We certainly do make introductions, I believe that startups that are worth being funded ethically deserve to be known to investors who want to invest in startups. So we try not to monetise that happening and we make introductions as best we can at the venture capital stage.

What we do at the angel stage, or seed stage is actually the opposite. We have a database of a lot of seed-stage media startups and instead, we enable the Angel community to actually see that a little bit more transparently. So basically instead of introducing Angels, because of our thesis about how and why to connect with Angels, we instead more aggressively promote and expose what seed-stage startups are doing so that angels are aware of it and consider them if they want to.

The Hidden Details When Funding Your Startup

Q: An early-stage startup has a lot to do and one of the things you need is capital. Do you think it’s meaningful to have investors on board who are experts in startups and/or a specific sector and can provide connections (Smart Money)? Or do you just need someone who can give you a cash injection?

A: It’s a great question. That’s a question that I talk about nearly every day with people. Here’s Why:

First, you have to distinguish a startup from a new business. A new business is not a startup. A new business knows its business model. A new business can make money right now. A new business, a restaurant or an agency, for example, is not a startup. They can go and sell to customers immediately. And in that context, your clarification makes some sense. Should you go talk to a bank? Yeah! Of course! [laughs] Should you find a business partner who’s an investor? Absolutely! Because we can go capitalise this business and make money with it right now.

Startups are not at all the same thing. And it’s very important that the industry, and the world, appreciate the distinction. It tends not to because the word “startup” is very popular. Everybody wants to call themselves a startup because it’s sexy. But we can’t! It’s not the same thing. A startup does not know its business model — a startup by definition does not know how to make money. And there’s nothing wrong with that — that’s the definition of a startup: “I have an idea, I have a technology, I have a patent, I have something with which I cannot make money right now because I don’t know how to yet. We haven’t figured out how to yet.”

“A new business is not a startup. And it’s very important that the industry, and the world, appreciate the distinction. It tends not to because the word “startup” is very popular. Everybody wants to call themselves a startup because it’s sexy. But we can’t! It’s not the same thing.”

My favourite example of that is something that recently happened: ridesharing.

Lyft was not a startup (at least not the way most should think of it as one). We called it a startup but it wasn’t. Because the startup in ridesharing occurred years before that.

Lyft was the second mover — “A new business in ridesharing”. So Lyft was definitely not a startup because they looked at what Uber did and just did the same thing. And, of course, throughout the world, we have a bunch of people trying to create ridesharing apps and local businesses for ridesharing. None of those are startups because we already know how the business of ridesharing works.

So, a startup being net new, always… always the biggest mistake founders make is they try to raise capital to start. Here’s the bottom line: no startup in the history of the world can raise money just to get going. Unless you’re Elon Musk, unless you’re Mark Zuckerberg, no one is going to give anybody money just to start something.

So startup finance has to start with:

• Their own savings
• Their own debt
• Friends and family

Period. The research is there, the reason the average age of success for a startup founder is 45 years old, and not 20, is that they have savings and have money to spend. Period.

“No startup in the history of the world can raise money just to get going. Unless you’re Elon Musk, unless you’re Mark Zuckerberg, no one is going to give anybody money just to start something.”

Q: That’s really interesting, there’s a couple of examples that are a bit different that might change the perspective, which is: Imagine if you find a problem in the banking industry, which is one of the most highly regulated industries, for instance. Here’s an example: In Italy, if you want to sell any kind of financial product to a consumer you need to have a banking license, no matter what.So, imagine I have found a problem and the solution is a financial product. But I need to be a bank — and a banking license costs millions. So do I wait until I have millions in my pocket to start it, from that perspective? When it’s a startup that can’t launch without big capital to start, does your view change?

A: No, not at all. A bank knows how to make money. If you are doing the exact same thing that the banks are doing, go get your million dollars, open up a bank and do that.

If you are being innovative. If you’re trying to work in Fintech and you happen to need to be licensed as a bank in order to do that? Well, no one is gonna give you money to take that risk. No one is gonna give you $2M to try to create some new fintech company just because you have to have a banking license. Because if your fintech company fails I’m out two million bucks because you didn’t just go start a bank. They are two distinct things.

Now, I love that you’re asking this because that’s why there are people like me who work in this idea of “Venture Development”. Which is a hybrid of economic development and venture capital because the point your making is actually a massive problem in the world today. What you’re pointing out is that many ideas, many entrepreneurs simply can’t start because of regulation. Because of the way things have to happen. Well, why does it have to happen that way? Can we work with the city or the country, can we work with the government and change it? Because what you’re really trying to do is not the same as a bank.

It’s insane for anyone to invest in that. And hope that it works. You’ve got to build something first. So here’s the more deliberate answer to the question on investment for an early-stage startup: Say you put 100k into your fintech thing, what might that look like out of your own pocket? You gotta incorporate, you probably should build a website, you need a couple of co-founders, there are legal expenses etc. There are still some basic things that everybody has to start with because nobody’s gonna give you money to do that. That comes from, again, savings, debt, friends and family, etc.

Then you can seek some Angel Investors. An Angel Investor, explicitly, should be someone who is an executive in the industry that you intend to work in. Because an Angel by the classical definition is largely a patron. They’re more of a philanthropist than an investor. It’s somebody who understands what you’re doing, they really like it, they probably made a lot of money doing something similar and they wanna help you. [smiles] They’re very likely to lose the money, at this stage.

So you go to the investor and you’re able to say “Look I think this is a brilliant idea, I’ve built some of it. I haven’t built all of the tech yet but I built a website and look, with this website I can show you that I have 10,000 people who want this thing.” And now it’s pretty easy to raise Angel funding.

Most startups don’t do that. They chase that Angel Investor first and they aren’t gonna give you money just to get going — it never happens. More importantly, then, as you get to that Venture Capital fund the same expectations are in place. A Venture Capitalist expects that you raised Angel funding. The Angel Investor expects that you put some of your own money into it.

So if you don’t do either of those things in progression it’s incredibly difficult to raise Venture Capital money because no one’s taken any risk before them. So a Venture Capital fund certainly has no interest in having a conversation with you to get you going if you haven’t had conversations with anyone else who’s willing to invest — including yourself.

Q: Does the CV of the founding team really make a difference when it comes to fundraising & is there a perfect founding team persona?

A: Unequivocally yes — in the first case.

My point about Elon Musk; Elon Musk can go and raise money right now for anything he wants to do, so it certainly does. We are fooling ourselves if it doesn’t. The 45-year-old can more capably raise money than the 20-year-old it’s not unfortunate, that’s not even age discrimination — that’s just a pragmatic reality. If somebody’s going to take a risk they’re gonna take that risk on the person who has experience.

Related: Are You Too Old To Start A Business and Be A Great Founder?

So absolutely yes — and you see that time and time again, in fact, one of the Techstars directors shared that point in a keynote a long time ago. Someone asked him “What do you guys look for at Techstars when you fund a startup?” and he said “We look for five things: One Team. Two Team. Three Team. Four Competitive Advantages. Five Market Opportunities. But his point was that he would invest in the team alone.

The perfect team as far as I’m concerned is three people, and they don’t need to be the three co-founders, but it is essentially three distinct roles. You need to have somebody who brings the resources. They bring enthusiasm, the audience, the vision. They bring extra money. There’s that person — number one.

Number two you need the person who’s focussed on the marketplace. The industry, the customers, the partners, the investors. And then, number three you need the person who can deliver. Engineers, maybe, they build it, they work on the supply chain etc.

Whatever those three things mean to your company. And my experience is that if you’re missing one of those three things you’re at a severe disadvantage. And, typically, if you want to add the titles to it, that’s the CEO — whose only job is to bring the resources and make sure everybody else has what they need. Number two is the CMO. Number three is the CTO, but that’s very tech-focused so that number three is whoever builds what it is that we’re doing.

“The perfect team as far as I’m concerned is three people: somebody who brings the resources; the person who’s focussed on the marketplace and the person who can deliver — CEO, CMO and CTO.”

There’s an old economist by the name of Peter Drucker who helped coin the above appreciation. He said that after those three things everything else should be considered a cost. You don’t have operations, you don’t have finance, you don’t have customers, you don’t have anything else until those three people have built something. Those three roles are your investments. You’re investing in creating value with those three roles in particular. Hence it’s the perfect team. Hence if you have it investors are more likely to be interested.

Related: 7 Traits to Consider if You Want to Find the Perfect Co-Founder

Q: How would you determine Valuation? To be a bit provocative, valuation in the US seems to be a bit higher than in Europe — what’s your view?

A: This is another favourite question of mine because we talk a lot with South America and with Asia in our work and the same issue exists that valuations just seem to be different.

First the easy answer. At a Seed stage, the company is worth half of what it cost to build it. Founders hate when they hear that, but it’s true. If it costs me $100K to build something, since I’ve already done it, someone else can do it for half of that. So frankly, that’s what it’s worth — at the Seed stage. At your seed stage say you put $200K into something, you’re worth half of that ($100K), maybe, you can go raise a couple of hundred thousand dollars at your Seed stage and that’s how the math works out.

“At a Seed stage, the company is worth half of what it cost to build it. Founders hate when they hear that, but it’s true. If it costs me $100K to build something, since I’ve already done it, someone else can do it for half of that.”

Now, post Seed stage revenue starts to become a consideration, as it should. The easiest way to think about it is whether it’s service-based, tech-enabled or a platform. Google is a platform, Amazon, Salesforce, Uber — all platforms.

Tech-enabled is like a production company or a really sophisticated agency — an organisation that uses technology but they don’t depend on it — they use other peoples technology. The first case is a consulting group or a freelance person — a service business.

They are three distinct things and they are important because it’s easy then to do just a multiple of revenue. A service business is worth two to three times its revenue. A tech-enabled business is worth five to seven times. And a platform is worth maybe 12–20 times its revenue.

Venture Capital funds tend to be looking at 20x valuations and if you can’t get there it’s just not worth having a conversation with a Venture Fund. That 20 times multiple is what it takes a VC to get to the kinds of returns that enable them to cover the losses in their portfolio.

So you get the basics, here’s where it gets a bit different, this is also why I’m in venture development. It’s a fun discussion (smiles). The issue is this — two things to keep it simple: number one, we could say this provocatively, people are dumb [laughs]. Here’s what I mean, it naturally costs six or seven times as much money to do business in Silicon Valley than it does in Austin, Texas, for example. Therefore, because people are dumb, a Silicon Valley-based company will be valued more than the one in Texas. Only because it looks like it costs more.

Now, that’s a very broad generalisation, but it is generally true. And it creates a problem because what happens then is you get investors in other parts of the world that are not as expensive who will say to founders “You aren’t worth that much, you don’t need to raise that much money.” because as far as they’re concerned, from their perspective, it doesn’t need to be valued so greatly.

In order to compete with a company in Silicon Valley that raises $4M at a $15M valuation, we can’t just raise a million bucks and be worth $6M. We simply won’t look like we are worth as much. Even though, or even if, we’re actually worth a lot more. So, it really screws up how the economy works to not appreciate that first point: Where you live, where you raise money and what it costs to be there actually matters.

“Because it costs more to do business in Silicon Valley a company there will be valued more than one in Texas. It really screws up how the economy works to not appreciate that where you live, where you raise money and what it costs to be there actually matters”

The other consideration is the government consideration. Korea, for example, invests in seed-stage startups and they don’t get value based on that because it’s government money. So in a place like Korea startups are naturally valued lower at a Seed stage for no reason other than they actually just didn’t raise investment, they got money from the government. So it screws up our perception of things. And it has nothing to do with whether or not they are valued appropriately. It has to do with the way early-stage money goes into things.

So, with that in mind, in Europe or in other places of the world to what extent are other forms of capital available and how does that change how things are valued? In the US, because of New York Los Angeles and Silicon Valley — some of the most expensive places in the world, that’s why it looks like things are valued so much more. Because based on where they are it just happens that way. It doesn’t mean they should actually be valued that much it’s just a circumstance of location — to a great extent.

Q: Aside from the team, what other metrics do you look at when deciding on an investment. Are there any particular ratios or KPIs you focus on more than others?

A: It depends on the stage frankly — number one. And number two I could add that it is more important for founders to appreciate that percentages and deltas — changes are the KPIs. That way of looking at metrics matters so much more than looking at counts.

Most founders report counts in their pitch decks, you know “The market is this big…” or ”We have this many users…” I don’t give a sh*t how big the market is, I don’t care how many users you have right now. What I need to know is: What is the percentage of that? What is your share of that? What is your conversion rate on that? And I need to know how much it’s changing, I need to know how much it’s growing, how much you’re growing relatively. The best advice I could offer, for the sake of a quick answer, is: focus on percentages and deltas — changes — not just raw numbers. Then, it depends on the stage and the industry you’re investing in.

“Most founders report counts in their pitch decks… “The market is this big…” or ”We have this many users…” I don’t care. What I need to know is: What is the percentage of that? What is your share of that? What is your conversion rate on that? And I need to know how much it’s changing. I need to know how much you’re growing.”

Q: That leads us nicely onto the next question. Do you look at pure growth potential or a solid business model? Is there one that holds more weight than the other?

A: Again, it depends on the stage. For that pre-seed stage startup: pure growth. There is no business model. There is no proven business model. That’s a very important point to stress. If this is a startup seeking investors, the definition is there is no business model. So it is wrong to imply, to infer, to suggest, to advise that a pre-seed startup has a business model that they’ve proven — [smiles] because it’s bullsh*t. So it is pure growth.

Now, as they mature, right, as they move to those later stages it shifts. So your Series A stage is roughly: “We think we have a business model, we’re now gonna prove it.” So it’s starting to shift. We still wanna see growth of course, but now we need to start seeing conversion rates and evidence of retention and lifetime value and referral rates. I need to see proof.

Then your Series B plus stage shifts back to massive growth. “Now that we’ve figured out the business model lets just focus on growing that market, growing those customers, growing those partners as fast as we possibly can.”

Q: What’s the portion of the equity that investors should aim for to increase the probability of success? There are three dynamics here.

There is a financial dynamic, of course, the more you have of that company, the more absolute value you can bring home. But there are two other factors. If the fund takes 90% of the business, then the founders are not as incentivised to run the business.

So there’s a human factor that all founders should always be motivated to run the business. There’s also a control metric. Which is, if an investor gets 51% from day one then the investor becomes the entrepreneur — it’s no longer just help that the investor is giving the founder to run that business. So, of course, there is a generalisation but do you have in mind at each stage is there a percentage that you think is fair to negotiate for these three dynamics to be in harmony for both the investor and the business.

A: It’s never that simple. It depends on valuation, and that is determined by the market, not the investor. The investor is agreeing to a valuation, essentially. So, it depends. I think what is important to point out, and share is that we tend to let the “typical” circumstances suggest that that’s how it should be done, and that’s the mistake. Here’s what I mean: A typical circumstance is that at that seed-stage you’re giving up maybe 30% of the company to investors. That’s typical. You absolutely want to retain more value of the company as the founders — you never wanna give up control to investors at that stage.

The problem is though then that almost implies that investors should be seeking 30%. Well, that’s not right. Sometimes it’s 10%, sometimes it’s 20%, sometimes it’s 40%. My point is just because there are norms and averages it doesn’t mean that that’s what the investors or the founders should be thinking about.

What’s more important is that the investors and founders think about your bullet points. They should be thinking about control. As an investor If I get a board seat then that’s different. I don’t need as much equity control if I’m on the board, frankly, because then I have a legally binding vote about the executive team. So there’s that balance. On top of that, there’s certainly a valuation balance. There’s a balance of whether or not the investor has experience in that space — is it dumb money or smart money.

There’s a consideration of whether or not the investor can follow on the round. Is he going to invest in a future round? Because if he’s not, as a founder, I don’t want him to have as much equity or as much control. I’m gonna need to find other investors because, clearly, it can’t just be him. It’s all of those subtle questions about the return, the financials and the valuations and the control, the board seats and so forth that actually matter more than simplifying it and saying here’s 30%.

Of course, generally, you want to maintain the 50%, the majority, as long as you can. But even then that’s not necessarily true. If it’s Sequoia capital, and because of who they are they’re more likely to enable your success, I’d give up a little more equity.

From the founders perspective stress this point: Do you want to own your company or do you want it to be successful? I’m happy to replace myself if somebody else can make my company more successful — I’ll get out, [laughs] Because I want it to work! And that’s another important, but subtle, point as well because the investors don’t necessarily wanna hear “I will not leave my company no matter what. I have to be the CEO and I have to maintain 51%.” Well, what am I doing by saying that? I’m just eliminating a lot of investors who won’t invest in that

“Generally, you want to maintain the majority share as long as you can. But even then that’s not necessarily true. Do you want to own your company or do you want it to be successful? I’m happy to replace myself if somebody else can make my company more successful — I’ll get out.”

Q: In that scenario, you replace confidence with arrogance basically.

A: Yeah exactly. I mean, a lot of founders do believe it. And that’s fine. But the point is you’ve got to be more clear on those kinds of things than you do on what that percentage of equity will be — because it depends.

I’ll take that money from Sequoia. I won’t necessarily take it from a fund that can’t help us as much. I might take their check but I won’t necessarily replace myself because they want to. What do they know? They’re just a check!

Q: The next question is about due diligence, and it’s a two-parter. Firstly, how long should due diligence take as an investor? What do you look for, what are the biggest red flags? And on the other side how do you think founders should perform their due diligence on investors — what should they be looking for and what are the red flags for them?

A: There is a long answer to this and I have an article where I go into detail on this extensively: Overcoming Obstacles: How Startups Prevent a Hiccup in Due Diligence.

But maybe the short answer is, it actually shouldn’t take that long to do due diligence, and typically doesn’t. So that might be a red flag for a founder — if it’s taking forever, why? This stuff is not complicated.

It’s going to vary by person, of course, because it’s going to depend on their experience. So I tend to look at public indicators — are the founders on LinkedIn, what does LinkedIn say. Google Analytics — show me your data. I don’t care what your financial statements say, show me the frickin’ data, public stuff. I wanna see evidence of what you’re telling me — number one. Number two: I wanna see the models, then I wanna see your financials and your Pro-forma — I wanna see your roadmap. Number three: I wanna talk to some points of reference. I wanna talk to partners and maybe some customers — and it’s really that simple. It can be elaborate, but as long as that stuff is in place it doesn’t take long — a day at most, frankly.

“Do you have points of reference? Do you have Google Analytics? If not, why? Why would you start an online company and decide not to measure anything?”

Red flags from an investor, quite simply, is if any of that stuff doesn’t exist. That alone is a red flag. If you don’t have any points of reference — why not? You should be able to go and get that right now. Do you not have Google Analytics in place? Are you insane? [laughs] Why not? I don’t care if you don’t know what to do with it. I don’t care if you don’t know how to read it. Why would you start an online company and decide not to measure anything?

Don’t get me wrong the red flag is not if it’s accurate. As an investor, I know your financials are not accurate — but if you don’t even have them — if you don’t even have models? Come on, are you just making shit up? So just put them in place. Get it done now and it’s easier to raise capital.

Q: And from the founders’ side when vetting the investor? Is there something that founders should look at in order to make due diligence?

A: The easiest answer, to add to what I said is, number one: if it takes a long time. It shouldn’t take a long time. You can tell if an investor knows what they’re doing or not if it takes them forever. And that’s also a good indicator of their interest. If you’re genuinely interested you will get through that due diligence right now and get back to the founder because it doesn’t take that long — why would it take you two weeks?

Number two would be if the investor doesn’t have questions or advice based on what I already mentioned. If they don’t look at your data and go “Well have you thought about this, or have you thought about that?” It’s a red flag in the sense that it tells me that that investor probably doesn’t even know what they are looking at. Or that they don’t really understand my business. They might just be going through due diligence for the sake of the exercise.

They should be able to have a conversation with you about what’s there — “Hey Paul, I see your financial model says this, but what happens if that happens?” Or even “How confident are you that this is accurate?” because a smart investor already knows it’s not accurate so they should be able to come back to you and say “Do you think its 50% above or 50% below?” Then I would feel comfortable, as a founder, that the investor knows what they’re doing. As opposed to somebody who takes all that material and just goes “Great! Here’s a term sheet.”

Q: On the term sheet, besides the number of shares and exchange of money, there are other, very necessary, clauses that can be tricky for founders. I’m talking about liquidation preferences, ratchet clauses, anti-dilution rights, drag along and so on. Do you believe that these are always important for investors at every level? Or is there different importance at certain funding stages for these legal clauses — other than just purchase of a number of shares?

A: It all matters more at the earlier stage. Whatever happens, whatever is contracted, whatever our terms say at that earlier funding stage dictates everything else that can happen next. That’s the easiest way to answer it. All of those possibilities really require, frankly, that you have a decent startup lawyer. And I mean startup lawyer, not just a lawyer.

You also need a pretty good advisor who has got experience in your sector with startups. For example, if I was your advisor because you need a startup guy but you have a Fintech company I probably can’t really advise you very well on all of the considerations because I don’t know what they are. I don’t work in Fintech. So, just because I’m a startup person doesn’t make me a good advisor to exactly what you are doing.

The same notion should be said of a lawyer. Just because you have a business lawyer doesn’t mean they have any idea how to deal with startup terms and considerations. Most business lawyers I talk with don’t even have a grasp of how cap tables work, for example.

So make sure you have those two people in particular because everything — the valuation, the drag along, the dilution preferences, who’s got the board seats, all of that actually dictates how, and if, and from whom, you might be able to raise capital next. A lot of VCs just won’t get involved under certain circumstances. So you want to make sure you address those things first.

“Whatever is contracted, whatever the terms say at that earlier funding stage dictates everything else that can happen next. You need a decent startup lawyer.”

The VCs care less because at that point you’re a little bit more established. And the VC is investing in the return on investment — they’re not investing in the risk. There is a presumption that there is going to be an exit here, they presume that the lawyers and the angels and so forth have already figured out those terms in a way that’s going to make the business work or not. Which is why those angels matter more before the VCs.

Q: That goes back to what you were saying that if you are starting a business that already has a business model figured out then it’s kind of easier to make money. But if you don’t, you need to be a lot more careful and go after the smart money — the people that know what they’re doing — because it can have an effect on future fundraising.

A: Precisely, precisely that.

Q: How frequently do you think a founder should communicate with their investors? Conversely how much time should an investor dedicate to a startup post-investment?

A: The expectation? At least monthly. A lot of startups don’t even do it quarterly. So at the very least quarterly. But frankly, it needs to be more than that — there’s your simple answer. You should have at least one monthly investor relations email and board meeting — period. Like I said a lot of people don’t do that — and there’s no harm in doing it more.

Now, here’s the consideration, honestly it depends. Depends on whether or not they’re on the board, whether or not they know your business. It depends on how much of the cap table they’re involved with. For example, if you get into equity crowdfunding as a founder, you might have a thousand investors. Should you communicate with them frequently? Maybe? But they can be a pain in the butt! [smiles] I mean, a thousand different people wanting updates and they each have a tiny amount of your company, maybe not.

Or are they on the board? Are they the chairman of your board? Well then probably weekly, quite frankly! Or are they an investor who really knows your industry? Again, probably weekly because you want them to be up to date on whether or not they can help with partners or PR as well as a lot of other things. Of course, substantial investors, genuine investors frankly, do want to work on your success — they’re not just a check.

It’s why that bank money, to take it back to the start of our conversation, really isn’t applicable at seed stage to an actual startup. A bank is only interested in getting their money back — no matter what. So they don’t actually have any interest in you making the right decisions and getting partners and getting people and so on and so forth. They can’t help you with that. They’re not going to help you with that. They have an interest in it but all they really care about is whether they get their money back. If they don’t, if your company fails, they’re first in line to recover whatever they can.

“You want to keep investors who really know your industry up to date weekly. Genuine investors can help you and want to work on your success — they’re not just a check.”

So in a sense, you don’t want those kinds of investors because they’re going to push you and force your focus onto making money at a stage where it might not be appropriate to make money. You want to communicate with the investors, who are focused on your success as a company and your ability to exit an IPO so that you can deliver a return for the investors. And that may or may not look like revenue.

Q: Paul thank you so much. Before we close the interview is there anything you would like to add on your side?

A: Sure, I may as well add this so it’s a little clearer what we do. Maybe I would put it this way; especially now the world has gotten much closer, gotten much smaller. We are all forced to experience what the internet means to our business, every business — consumer packaged goods business, restaurant business. The internet is suddenly relevant to everyone. And so here’s what it means, if we are now in a global market it is increasingly important to focus on your industry, not your stage. You don’t work in technology. Technology is not an industry. Finance is an industry — If you’re in fintech you’re in the finance industry. If you’re biotech — you’re in the healthcare industry and so on…

Q: So, technology is a vehicle to get somewhere but it’s not the industry itself?

A: Correct! My company is in the media business, we are not a technology company. We are media tech, so we focus on innovation in the media business.

My point is it’s even more important, as a founder, you focus on the industry you’re in. In a global marketplace, the fact is there is a lot more noise, a lot more advice that could be misleading — people who want to help but probably can’t. Frankly, a lot of investors have a lot of access to capital but what you don’t want is the wrong capital. Or the wrong advice about capital.

Or you can focus on exactly what it is you’re trying to develop. Finance, health or media etc. Find those people, connect with those people in that sector. Because in that sector you’ve got mentors and advisors and investors and angels and VCs and companies all in a path, incubators, all in a distinct sector that can help you the best and if you’re not doing that then frankly you’re setting yourself up to fail.

The fact is that the distinct sector has a whole bunch of resources, a whole bunch of capital, a whole bunch of experience that knows what you can do and what you should do. Focus on finding that and working with that rather than the more generically applicable “we are just a startup programme that can help everybody” or “I’m just a startup investor who can help everybody” that’s never true. Find the niche that’s applicable to what you’re doing and everything will get much simpler.

“In a global marketplace, the fact is there is a lot more noise, a lot more advice that could be misleading. Find the niche that’s applicable to what you’re doing and everything will get much simpler.”

Thank You, Paul

I really appreciate Paul taking the time out of his busy schedule to share these valuable insights with me. But what are your thoughts on this interview? What other questions would you like to know the answers to when it comes to startup?

This post was originally published by Paolo Dotta, Co-Founder at Altar.io.