Venture Capital with Stephanie Choo | E012
Understanding funding options and if VC money is a fit for you.
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, talks with Stephanie Choo, Partner and Head of Investments at Portag3 Ventures. Portag3 Ventures is a venture capital firm that specifically invests within the fintech financial technology space. Stephanie Choo explains what venture capitalists are, how to approach them, what they are looking for, and how to know if you are someone who should be taking on venture capital.
Episode Highlights:
● 01:14 – Stephanie Choo describes what Portag3 Ventures does.
● 03:03 – What is a venture capital firm?
● 05:38 – What would make a business not be a good fit for a VC?
● 09:31 – Portag3 Ventures are looking for 10x returns or more on their investment.
● 11:18 – Stephanie talks about the automated pizza business play.
● 13:05 – What are VCs typically looking for in businesses to show them to convince them to invest?
● 18:42 – Stephanie explains what they want to see in a business’ team and their innovation.
● 23:38 – Be able to prove what is proprietary, protected, or defensible about your product or service.
● 25:30 – When a VC is ready to invest, what is a term sheet, and what goes into that?
● 28:12 – What are other misconceptions about venture capital firms that businesses should be aware of?
3 Key Points
1. Venture capital firms are sources of capital for certain early stage businesses that are very high growth that are generally technology orientated and scalable, typically with a venture portfolio approach.
2. Venture capital may not be for you if you are a cash-generating cash-flowing business that is not particularly scalable and not growing by 100% or more a year that doesn’t have an exit strategy and isn’t planning to return capital in about 10 years.
3. Most venture funds look at the strength of a company’s team, why now is the right time for this business, and what problem does the business solve.
Tweetable Quotes:
● “Portag3 is a global fintech-specific venture fund. We invest across seed Series A and Series B. But, we’re really looking for companies in the fintech space that are going to transform the future of financial services.” – Stephanie Choo
● “We typically invest at the stage where companies have what is called ‘early market fit,’ which means they have early traction. They’ve got customers. They’ve got some revenue.” – Stephanie Choo
● “They are investing on what is called the ‘power law basis,’ which is a very small number of your portfolio will end up generating 90% or plus returns for you.” – Stephanie Choo
Resources Mentioned:
● Facebook – Jason Pereira’s
● LinkedIn – Jason Pereira’s
● FintechImpact.co – Website
● jasonpereira.ca – Website
● Linkedin – Stephanie Choo’s
● P3vc.com – Website Portag3
Full Transcript:
Intro: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. Now your host, Jason Pereira.
Jason Pereira: Hello and welcome to the Financial Planning for Canadian Business Owners Podcast. I'm your host, Jason Pereira. Before we get started, as always, just a reminder to sign up for my newsletter at jasonpereira.ca. Now onto today's show.
Jason Pereira: Today I have Stephanie Choo, partner at Portag3 Ventures. Portag3 Ventures is a venture capital firm that specifically invest within the fintech space, the financial technology space. However, I didn't bring her in specifically for that. What I brought her in for was to have a conversation about what venture capitalists are, how to approach them, what they're looking for, and how to know if you're someone who should be taking on venture capital. With that, here's my interview with Stephanie.
Jason Pereira: Hello, Stephanie.
Stephanie Choo: Hi, Jason.
Jason Pereira: Thanks for taking time to come in.
Stephanie Choo: No worries. Glad to be here.
Jason Pereira: Thanks. So Stephanie Choo of Portag3, tell us about Portag3 Ventures.
Stephanie Choo: Portag3 is a global fintech-specific venture fund. We invest across seed series A and series B, but we're really looking for companies in the fintech space that are going to transform the future of financial services. So we typically invest at the stage where companies have what's called product market fit, which means they've got early traction, they've got customers, they've got some revenue, but we will often or sometimes make exceptions for companies a little bit earlier than that, where we have really strong conviction in a space or in a team that we've known for a long time.
Stephanie Choo: We invest globally, which is, I think, one of our differentiators, so North America and Western Europe, and, finally, we've got a set of LPs that include institutional LPs, but also a number of corporate strategics. I think one of our big pieces of value add is that we have a full team dedicated to creating partnerships. That could be commercial partnerships, distribution partnerships between our LPs that are financial services-oriented and our fintechs. So, really, our belief is that we want to create ecosystems, and connecting different players within that ecosystem will create outsized value for everybody.
Jason Pereira: Yeah. That makes a lot of sense. So you're not just about the investment portion about it. You're helping them not only do they have product market fit, but, basically, get the right partnerships to get their product in the market, and everybody wins. Those are also investors in the fund.
Stephanie Choo: Absolutely.
Jason Pereira: So it makes a lot of sense. So the reason I brought you in is, normally, we talk fintech, but this is not specific to fintech. It's more so about, for lack of better term, talking to VCs. So, essentially, what is a venture capital firm, and how can the listeners, who may be in a position where they might be a right fit for that, basically come to a basic understanding of what that experience looks like? So let's start off again with what is a venture capital firm? What is it you guys do specifically?
Stephanie Choo: A venture capital firm is a source of capital for certain kinds of early-stage businesses. There's a lot of different VC funds that are specific to sector and specific to stage, but, at the highest level, they're capital providers to, generally, very high-growth companies that are generally also technology-oriented and scalable in their business model.
Stephanie Choo: VC funds invest almost exclusively on what is called a venture portfolio approach, which is unlike other sources of capital, like private equity. The VC market looks to make bets, bet/investments, in a portfolio ...Jason Pereira: [crosstalk 00:03:55] bet scenario.
Stephanie Choo: Yes, that's right, in a portfolio approach, which means that they're looking for, generally, billion- or multibillion-dollar outcomes, and they expect, depending on what stage you're investing in, 50 to 90% of their investments to fail.
Jason Pereira: Yeah.
Stephanie Choo: It's really they're investing on what's called the power law basis, which is a very small number of your portfolio will end up generating 90% or plus returns for you.
Jason Pereira: Yeah. You're swinging for the fences every time, striking out plenty of times, but if you hit the home runs, that's all it matters, right?
Stephanie Choo: That's exactly right.
Jason Pereira: Yeah, and that billion-dollar opportunity more than makes up for all of the eight companies that you bought on at the same time that went nowhere.
Stephanie Choo: That's right.
Jason Pereira: Yep.
Stephanie Choo: I'm generalizing across lots of different stages, and that failure rate and survival rate is going to change depending on how early or late you invest. But even the latest stage investors in the VC space will say that that is how they invest.
Jason Pereira: Yeah. There's still a lot of risk, right, within that. Some of that's just not the risk of the company failing. It's a matter of the company goes public, and maybe they end up not making money, because they bought at too high of value. You were talking about, "We work earlier."
Stephanie Choo: Yes, that's right.
Jason Pereira: Yeah.
Stephanie Choo: It's a really high-risk asset class.
Jason Pereira: Yeah. Yeah, because, I mean, it's not a public market, right? So you do not have all the players in a public market, creating a clearing price that, hopefully, is efficient. You guys are working with your numbers or calculations, making your best educated guesses, but it is one that, regardless of that, there's still a lot of risk to these businesses, and there's a lot of risk to you, putting up the capital at whatever valuation you think it's worth.
Jason Pereira: So it's not for everybody. We talked about who it's for. So let's talk about who it's not. Why would a listener who's got a business that's growing well not be looking towards dealing with a VC or would not be a good fit for a VC?
Stephanie Choo: Yeah, I think that there's a lot of ... I'm a very passionate believer that you should match the kind of business that you are to the right source of capital, and venture is not the right funding source for, I would say, the majority of businesses out there. If you are a cash-generating, cash-flowing business that is not particularly scalable and maybe not growing 100% or more, year over year, venture may not be for you.
Stephanie Choo: I think there's lots of great businesses out there that fit that profile that can find other sources of funding, being either debt or other sources of maybe private equity-style funding or angel funding that is not suited well to the venture capital sphere.
Stephanie Choo: I would also say, even if you could potentially be ... and, as we were talking about earlier, there's certainly a spectrum of kind of what are called lifestyle businesses, all the way to scalable venture businesses and everything in between. Even if you could potentially raise venture, there might be a lot of reasons why you might not want to. I kind of explained already that venture firms ... I explained a little bit of the structure of venture firms, and maybe one other thing I'll mention is that it's important to note that our LPs expect a return.
Stephanie Choo: So the investors that invest in venture funds want a return at some point in time, and if you want to hold your business and potentially pass it on to the next generation, or it's a business that you want to run for 15 or 20 years in your life, venture is not the right funding source for you ...
Jason Pereira: Not the world for you. Yep.
Stephanie Choo: ... because they will expect an exit. A typical fund life in the venture world is 10 to 15 years, 10 to 12 years. They will expect an exit in the life span of their fund so that they can return capital to their investors.
Jason Pereira: It's not a multigenerational play.
Stephanie Choo: That's right. So your business should, ideally, find an exit within the next 10 years, and that means a sale or an IPO or a swing at the fences to a sale or an IPO, which might mean a zero.
Jason Pereira: Yep.
Stephanie Choo: I think, as someone who has taken venture capital, you will be asked real quickly ...
Jason Pereira: Expected to take ... Yeah.
Stephanie Choo: ... and expected to find a way to exit and return capital within the following 10 years. That is not what every business owner aspires to, and I certainly don't think that is what every business owner should aspire to.
Jason Pereira: No, I mean, when people start looking for the exit from day one, sometimes that's a very bad sign. Other times, it's just it depends on the nature of the business. I often say that you guys are basically rocket fuel. So if someone needs rocket fuel, because the only thing preventing them from growing that business is the capital, because they have something highly scalable and very profitable, and they're reinvesting 100% of whatever they're making, if they're making money, back into the business, you guys are the solution to that, potentially depending on other dynamics, as we discussed.
Stephanie Choo: Yeah, and we will certainly ask for our companies to reinvest. So pushing to profitability at the early stages is not something that we typically are looking for.
Jason Pereira: Yeah.
Stephanie Choo: That, again, is going to sometimes be at odds with certain kinds of businesses that could, in fact, be profitable if they didn't reinvest.
Jason Pereira: Or people who just can't get their head around that.
Stephanie Choo: That's right. That's right.
Jason Pereira: Right? Like trying to say, "You know what? I'm not even going to run a profit. I'm going to run a loss on an annual basis." It's not just tech companies, right? If anyone's read Phil Knight's book on the origins of Nike, it's called Shoe Dog, and he was constantly being told by his financers, "Start holding on to some capital." He's like, "Are you kidding me? I'm growing at this rate. Every penny I have is going into buying more inventory and bringing it in and pushing it out," because he was growing so fast.
Stephanie Choo: Yep.
Jason Pereira: He risked his company several times over, but if he hadn't, would he be where he is today? Right?
Stephanie Choo: Yep. That's right. One other structural thing to note is, depending on the stage, we're looking for generally, at the early stages, seed series A, which I could explain what those categories mean, we're looking for 10X plus return on our capital. I think that's important to note as well, because if you sell your business, if we buy a stake in your business, we're expecting, at the later stage, minimum of three times, at the early stages, at least 10 times, often more, we're looking for the 100 and 1,000 times return on our capital.
Jason Pereira: Yeah.
Stephanie Choo: So that gives you some sense of what kinds of exits matter, and, typically, that's going to be in the billion-dollar range to make a fund. So there's some real structural issues at play that really drive our investment decisions, but also not only our investment decisions, but also the kinds of companies that we choose and the kinds of paths or trajectories that we expect those companies to be on.
Stephanie Choo: That's not to say that 100 million ... Again, if you're investing earlier, maybe $100, $150 million exit can be exciting, but part of the issue is you will need to continue to grow and continue to meet a certain trajectory to raise additional venture dollars.
Jason Pereira: Yeah, and I've been told that by several people in that world, where the job of any VC-funded company is to get the next round of funding. Right?
Stephanie Choo: Right.
Jason Pereira: Your goal is, "I've taken this money in." The next goal is, "I know I've got, quote unquote, runway, enough money to last me for X number of months, based on our plan. I need to get the business to a point where the growth is satisfactory enough to other VCs or the same VCs to give me more money to get to that next stage," and so on and so on. Yeah. It's no wonder that this type of business is more attracted to technology and software, because, hey, software scales infinitely, right? You've developed a code, and it can be copied a million times over for next to no marginal cost. Right? So it makes a lot of sense.
Jason Pereira: So we talked about who makes sense and who doesn't make sense, in terms of a VC funding, and we give you examples, like, for example, Joe's Pizza. I opened up a pizza shop. I'm not going to seek VC funding, unless I've revolutionized how pizza gets made in some way, shape, or form.
Stephanie Choo: Ironically, there have been a lot of famous recent examples of pizza shops getting funded. I would say ...
Jason Pereira: Okay. That's a side story. What?
Stephanie Choo: There is a side story behind that. I mean, one of the latest, hottest trends, which this is not my domain ...
Jason Pereira: Is this the automated pizza play?
Stephanie Choo: Yes.
Jason Pereira: Okay, that makes sense.
Stephanie Choo: There's the automated pizza play.
Jason Pereira: Yeah.
Stephanie Choo: There's also, I would say, there are a number of cloud kitchens ...
Jason Pereira: Yes.
Stephanie Choo: ... pizza being one of the easiest categories of food to actually make in small, contained spaces.
Jason Pereira: Yeah. So these are restaurants that don't actually have a forward-facing frontage.
Stephanie Choo: That's right.
Jason Pereira: It could be in the middle of an industrial complex, but they're just delivering via Uber Eats or whatever else it is.
Stephanie Choo: That's right.
Jason Pereira: Yep.
Stephanie Choo: So they are virtual kitchens, where there's no actual storefront.
Jason Pereira: Yep.
Stephanie Choo: You develop a brand.
Jason Pereira: Yep.
Stephanie Choo: There's a lot of new distribution angles out there. Because you don't have to run or manage the front of house in a restaurant, it actually becomes, quote unquote, a lot more scalable.
Jason Pereira: Travis Kalanick got into this, didn't he?
Stephanie Choo: Yeah.
Jason Pereira: Yeah.
Stephanie Choo: That's his big ...
Jason Pereira: Next play, yeah.
Stephanie Choo: ... next venture is, if you think about the logistics of Uber and what he was able to build there, I think this is a natural extension.
Jason Pereira: We're further up the funnel. But yeah, so I picked the worst example of pizza, but that's hilarious. So you know what? There you go. Even pizza, with the right implementation technology changing the game, that can actually be a venture fund that attracted the venture companies.
Jason Pereira: So we talked about, again, who should and who shouldn't in general. Let's talk about how to talk to someone like yourself. So, basically, they get an introduction. They get an opportunity to speak to a VC. What is it you're looking for that company to deliver to you to make it look compelling, besides the asymptotic growth curve?
Stephanie Choo: Yeah, and I think it really depends on the stage of company. Every VC will look for something different, but I think there's some core fundamentals that are being evaluated. One, and the first and foremost, everybody says this, is the team. We look for teams that have a track record, generally, in excellence of some sort. It could be within their industry. It could be outsiders challenging an industry, but we're looking for a track record of success. Repeat entrepreneurs, we're often looking for entrepreneurs with exits.
Stephanie Choo: A company might pivot its business model 100 times. It might even pivot the space that it's operating in 100 times. But what doesn't, ideally, change, fundamentally, in what you're investing in is the team. So that's the number one thing that I think most venture funds will say that they look for or invest in.
Stephanie Choo: We then, obviously, look at the business itself. Is this a business we believe could eventually become a multi-hundred-million dollar or billion-dollar business? I think a lot of factors go into that. Is this a market that we think is interesting? Why now? So why is this the time that there's an opportunity in this particular space?
Stephanie Choo: Then I would say, in that as well, we look at is this actually solving a problem? Because there's a lot of really interesting technology out there that does not solve any actual problem.
Jason Pereira: Yes.
Stephanie Choo: That's, I think, one of the big things that we look for, is is there a pain point that is so viscerally held by a potential customer base that this does not need to be sold, that there's just latent demand for whatever it is there is?
Jason Pereira: Yeah. "Here. Shut up and take my money. It's that important to me."
Stephanie Choo: That's right.
Jason Pereira: Yeah.
Stephanie Choo: "I will pay any amount."
Jason Pereira: Yeah.
Stephanie Choo: I think that's one of the key things that we look at, and I think you can see that in a lot of different ways. You can see that in early customer traction. You can see that in a group of crazy evangelists for the product. You can see that in product reviews. You can see it in talking to specific customers. I think those are the things that we're really looking for.
Jason Pereira: Yeah, and it makes sense. I mean, a lot of that makes sense. Ray Kurzweil specifically talks about how a lot of ideas are not bad ideas that fail. They're great ideas. The problem is that the timing is wrong. Right?
Stephanie Choo: Yep.
Jason Pereira: If you look at a lot of the companies that are unicorns now, that's a privately-funded, private company that's worth over $1 billion, a lot of those ideas were ideas that actually existed back during the dot com bubble and failed miserably.
Stephanie Choo: Yep.
Jason Pereira: Then now the timing's right. The technology's right. The social understanding of what can be done is right. That makes perfect sense.
Stephanie Choo: Yeah. Users might not have been ready, previously.
Jason Pereira: Yeah.
Stephanie Choo: I think there's a lot of examples where customers ... Instagram, Twitter I think are great examples, where there were many businesses that were started before then that were very similar, but I think you end up having ... There are moments in time in which ... I mean, in our segment, I think online banking, mobile banking, digital-only banks, that has kind of been the trajectory of what we've seen at consumer readiness around being able to be willing to trust a digital-only, mobile-first bank, that this is your money.
Stephanie Choo: I think the bar for trust is super high, and I think that's part of the reason why we believe that there's a generational opportunity to invest in fintech now, is the consumer readiness is there. They see the experiences that they're getting in the other apps in their phone and the other kind of areas of their life, and they want that convenience in their financial life. I would say 10, 15 years ago, even though the Internet was around ...
Jason Pereira: The iPhone wasn't. Now mobile changed that game massively.
Stephanie Choo: Exactly, exactly. So there's a confluence of actual technological changes, but also consumer readiness is different, and trust is different, especially after 2008, I think. There's a number of reasons we believe that now is the time.
Jason Pereira: Yeah, the big towers aren't necessarily the safe thing.
Stephanie Choo: Exactly.
Jason Pereira: I can trust someone who's a smaller player. I still remember a major Canadian bank coming out with their own online offering, as an online-exclusive offering, back during the dot com bubble. It was late '90s, early 2000s.
Stephanie Choo: Yep.
Jason Pereira: So far ahead, and it went nowhere. Right? Then it was just like, "Yeah, it's a cool thing. Let's put ourselves on there." People just weren't ready for it. I mean, the number of people back then who would put their credit card number on a website was infinitesimal, compared to now.
Jason Pereira: So yeah, and I had this conversation around paradigm changes on my other podcast. Just to share a story, I've had this conversation about voice as an interface, and way off track here, but voice as an interface and people saying, "Well, look at the stats. No one's using it. We are used to visual interfaces." I say, "Yeah, that's nice. That's us. Okay? But my daughter, at 18 months, pushed the button on my Apple Watch and started going, 'Blah, blah, blah, blah.'"
Jason Pereira: I was just like, "Okay, she's, she's growing up with voice as an actual UI."
Stephanie Choo: Yep.
Jason Pereira: To her, just shouting it out is going to seem like nothing, and my son loves giving my HomePod or my Alexa ... Just triggered a bunch of Alexas. He just basically loves giving them instructions on playing music or telling jokes or whatever else. Right?
Stephanie Choo: Yep.
Jason Pereira: So that's the same kind of example. Right? It takes almost a generational change to get used to that, and I think, yeah, what you guys have done is smart, because your timing is quite nice on that.
Jason Pereira: So you look at the team first and foremost. People behind any business is always the most important thing. You hear these stories about companies getting funded off a slide deck, and I like to say, more often than not, that usually doesn't happen. What is it you're typically looking for from them at the time that they sit down with you, beyond the people?
Stephanie Choo: So just to make a comment on the slide deck, that rarely happens.
Jason Pereira: Very rarely.
Stephanie Choo: Again, I don't want to generalize, because there are some founders that are able to do that, and that might happen if you approach what is typically a pre-seed fund that specializes in investing in teams. Again, we're looking for some very specific things. You increase your chances of that happening if you are a repeat entrepreneur with an exit. Then yes, you could absolutely raise capital.
Jason Pereira: Yeah. If you're one of the PayPal mafia who's done this twice now.
Stephanie Choo: That's right.
Jason Pereira: You're going to go, "Oh, really? You're doing something new? I don't want to see the slide deck. Here's the check." Right? In some cases.
Stephanie Choo: That's right, and I think there are a very small number of people who could do that.
Jason Pereira: Yes.
Stephanie Choo: It is absolutely true that it happens, but with a very select few people.
Jason Pereira: Exactly.
Stephanie Choo: I think we're looking for, as I mentioned, so team. I think we're looking for something that solves a very specific pain point or problem which can manifest, which, again, we can see via product metrics, revenue metrics, customer engagement metrics. Those are all things that we're looking for.
Jason Pereira: So it better be done. There better be something done and proven in terms of a use case.
Stephanie Choo: Generally, yes.
Jason Pereira: Yep.
Stephanie Choo: Generally, at the stage that we invest in, and, again, there's a lot of other companies that invest in different stages, we're looking ...
Jason Pereira: Yeah.
Stephanie Choo: If you can't show some reason why your technology or whatever, your business, should exist and why it should solve a problem, I don't think it's going to be easy to find an investor. Then I would say, typically, we're looking for kind of a market or a business that's going to have a trajectory to being a large business. That generally means there's something scalable about your model, and if we can't see that, then it's, again, very hard to attract a venture investor.
Jason Pereira: Yeah.
Stephanie Choo: So there needs to be a compelling story behind that about why you think this can scale to be a $100 million revenue opportunity without being ... Again, there's different kinds of venture funds. We're typically looking for capital-light business models, which is what a software company is.
Jason Pereira: Yeah. They're not buying giant factories or anything like that.
Stephanie Choo: That's right.
Jason Pereira: They're employing guys on a floor or people on a floor that are basically sitting there, in front of computers, and they're just punching away.
Stephanie Choo: Yes, there generally is a strong technology component to whatever business it is, although, again, there's so many exceptions that have been and are still venture funded.
Jason Pereira: Yep.
Stephanie Choo: All of the consumer venture platforms which are direct-to-consumer brands, a lot of them have raised a lot of venture dollars that are valued over $1 billion today and that sell X direct-to-consumer, contacts, glasses, suitcases, mattresses.
Jason Pereira: These things are all things I order online myself from companies like this.
Stephanie Choo: What have you.
Jason Pereira: Weighted blankets, lately. Have you seen those?
Stephanie Choo: That is also a big trend, and I think all of these purport to have some technology underlying why they are, why they could be venture-scalable. I think we haven't seen that many exits yet, so time will tell if these will be venture businesses. I think the truth is, if you invested early enough, you're probably fine, but that is a trajectory that we're looking for, and I think it's often underpinned using technology, but that doesn't necessarily mean that it has to be a technology-first or technology-only company that will attract venture.
Jason Pereira: Yeah. Sometimes it simply is, "I'm going to sell X on the Internet a different way, by using what are models that other people aren't using traditionally."
Stephanie Choo: That's right. To attract a buyer or customer.
Jason Pereira: Exactly.
Stephanie Choo: Yeah, there are venture capital-funded businesses that [crosstalk 00:22:21] as well.
Jason Pereira: We talked about Casper earlier. I mean, the company that sells mattresses direct to your door and does so online and predominantly got its, basically, recognition through social media marketing, podcasts, all of it stuff that traditional mattress companies were just not doing or were just not doing as effectively.
Stephanie Choo: Yeah, and I would say that their innovation, they would say, happens, A, on the marketing side, which you've already identified, but also on the supply chain side, because they have been able to really ...
Jason Pereira: Yeah, absolutely.
Stephanie Choo: ... they would say, cut costs by going direct to factories, cutting out the middleman, cutting out the storefront costs. So by going direct to consumer, there's many different steps in the value chain that they've been able to cut out, which has allowed them to provide a at least similar style product for a fraction of the price.
Jason Pereira: Yeah. One of the things a fintech-funded enterprise said to me once was, when he was talking about what he learned in this entire process, he goes, "I don't think I started off respecting the venture capitalists' money the way I should have." They all hear these stories about the pitch deck you sold to companies, right? They think that, "Okay, these guys are just going ... You're willing to lose money on eight out of ten? Take a flyer on me." It's not that, right? It's exactly what you're saying. It's that, no, you have to have proven something. You have to have proven that it's already got some sort of fit and that there's massive potential.
Stephanie Choo: I would add one other thing, which is also important, as we've talked about the example of mattresses being sold online. I think the moat, that's another thing that ...
Jason Pereira: Oh, yeah. Strategic moats.
Stephanie Choo: ... I think a lot of people end up looking for. So what do we mean by that? It means what is proprietary, or what is protected or defensible about either your business model or your actual product? Because it could be a big, scalable business, but you could be inundated very quickly with competitors, which will drive your pricing power down and puts you into a commodity business, eventually. We've seen lots of examples of that, to where ...
Jason Pereira: Casper's a perfect example of that. There's so many online mattress companies now.
Stephanie Choo: It's quite easy to be a "Me, too," and I think one of the double-edged swords of technology is that it's advanced to such a rate that you could build anything, actually, pretty quickly with a good team of engineers. My personal belief is that brand actually is defensible. It's just very capital-intensive to build.
Jason Pereira: Yeah, I mean, some of the businesses you've invested in, such as Wealthsimple, spent a lot of time on marketing, and it's about being that top-of-mind default to people. Right? Brand is defensible. Coke has proven that.
Stephanie Choo: Yes. Yep.
Jason Pereira: Warren Buffett talks about moats all the time. Again, he says I could take the valuation of Coca-Cola, start a new company, and I would never be Coca-Cola, because I don't have the name and the recognition and the brand of it. So yeah, very important.
Jason Pereira: So when we get to the term ... So you guys decide that you want to basically invest in something. What does that negotiation look like, in terms of let's define what a term sheet is and what goes into that? Then what, besides price and percentage, are being negotiated in this conversation?
Stephanie Choo: Yeah. Even before I get to that ...
Jason Pereira: Sure.
Stephanie Choo: ... I'll have to make one more quick [inaudible 00:25:23] before you ...
Jason Pereira: This is hilarious, because so often on this podcast, people are like, "You jumped forward a little bit too fast." So by all means, correct me. Correct me.
Stephanie Choo: Just another point that I probably should have mentioned earlier, before you go sit down with the VC, you should probably have done a little bit of research on what it is that they focus on.
Jason Pereira: Yes.
Stephanie Choo: I only invest in fintech. I get a lot of inbound pitches for things that are not in my field.
Jason Pereira: Just scattershot.
Stephanie Choo: Just look at their portfolio. Understand what it is that they do. Understand if they have a competitive company in their portfolio.
Jason Pereira: Yep. True.
Stephanie Choo: That might preclude them from investing, as it is. But I think understanding if they invest in the stage of company that you are, and it's always good to meet people sooner rather than later and build a relationship with them, but have some cursory research done would be the other thing that I would say.
Stephanie Choo: Now, going to terms, I think the negotiation is, I would say, can be pretty standard. There's a pretty standard set of CBCA documents that most funds will use. So key terms, obviously, number one thing is price, which impacts dilution, so how much of your business you own. That is obviously, I would say, the headline thing that people end up negotiating, or companies and venture funds end up negotiating.
Stephanie Choo: There are a lot of philosophies on this. A lot of people will say, "Take the right partner, because it's like getting married. It lasts longer. This relationship lasts longer than" ...
Jason Pereira: Than some marriages.
Stephanie Choo: ... "some marriages." I would say board structure and governance is another big part of the negotiation. So who ends up on your board?
Jason Pereira: So oversight controls a big thing.
Stephanie Choo: Oversight and control, so what rights and privileges the board actually has, what consent rights the preferred shareholders have. That ends up being probably the second most negotiated thing in the term sheet, and then the third, which kind of goes to part one around price is the amount that you're raising and what the structure of ... The amount of capital, the total amount of capital, and the minimum and maximum amount of capital that that can be raised in a given round ends up being part of the mix as well.
Stephanie Choo: I would say those are the three most probably negotiated things, and there's lots of other ...
Jason Pereira: Yeah, there's tons of other terms.
Stephanie Choo: Other terms and minutiae.
Jason Pereira: There's a few books that people can read if they're interested in this that I'll attach to the show notes. So yeah, so, basically, that covers a fair amount there and provides some guidance there. What else should people know when dealing with VCs that are just kind of misconceptions or misunderstandings that people have?
Stephanie Choo: Yeah, it's a good question. We've talked about a couple of them already. One of them is "I can go and raise on a PowerPoint." I think the second is it takes a lot longer than you think, and we tell all ... Even our companies that have gone through this multiple times, sometimes there's an amnesia that comes into play, but give yourself six to nine months' runway. You never want to leave it too late. It takes a really long time, and it is highly time-consuming, even if you've gone through the process once, even if you already have a relationship.
Stephanie Choo: I think a lot of people don't realize how much effort and time it takes away from actually running your business. That's another reason not to take venture funding, by the way.
Jason Pereira: There's the distraction of it. Yeah, yeah.
Stephanie Choo: It can be a massive distraction, and it often is. It often requires a full-time person thinking about fundraising, and that's lots of time that you are meeting with investors and pitching. That's all time that you're not spending working on your actual business and growing it. I think it's a big challenge that founders have, is to balance the two, because if you're spending a full year fundraising, that's a full year that you're not growing and managing your business actively on a day-to-day level. So I think it is a grind, and it's not necessarily a super enjoyable experience all the time.
Jason Pereira: No.
Stephanie Choo: But, at the same time, I think you only need one yes or sometimes a few yeses.
Jason Pereira: Yeah, or at least one big key yes that other people are going to say, "If they're in, I'm in." Right? To some degree.
Stephanie Choo: Yes, exactly. That's another great point, which is I would spend as much time as possible upfront finding people who can lead and who are willing to put a term sheet down, because finding followers is pretty easy. Finding a lead and somebody to take conviction in your company and set terms is going to be difficult.
Jason Pereira: Yeah, I mean, especially when certain funds get to certain levels, it just becomes almost a default for other ones to say, "Okay, if they're in for this much, we're definitely going to tag along. No problem."
Stephanie Choo: Yep. Exactly.
Jason Pereira: "You've done all the due diligence work. I'm in." But yeah, it's a funny ... Just from personal experience, talking to founders that I know, just saying, "Hey, let's catch up for drinks or whatever it is," and they're like, "I'm in the middle of a funding round." I'm like, "Okay, so when are you hoping to close?" "Three months." "Okay, I'll talk to you in four."
Stephanie Choo: Yeah.
Jason Pereira: Then you talk to them. It's like, "Well, I've got about 24 or 36 months' worth of runway. So I get to work on product for the next 12 to 18 months. Then, right after that, I'm back on the parade, trying to basically raise more funds for the next round." So yeah, it's time-consuming.
Stephanie Choo: Yeah, most definitely. I would say, again, it's not for every business.
Jason Pereira: No.
Stephanie Choo: That's one of the key considerations that I would make if I were in the shoes of an entrepreneur, trying to consider if they should run after venture funding or not.
Jason Pereira: Yeah, no, and there's other options out there, as we discussed. There's private equity. There's search funds, which I hope to talk about in the future, day two. But, I mean, frankly, if you're the right kind of business, partnering with people such as yourself is ... Frankly, trying to get to where you want to get as fast as you possibly can before someone else gets there, it's going to require the right partnerships.
Stephanie Choo: Yeah, and there's also bootstrapping, which is using your savings to get to profitability on a business. I think that's the ...
Jason Pereira: The old-fashioned way.
Stephanie Choo: That is the old-fashioned way.
Jason Pereira: Yep.
Stephanie Choo: I feel like there are great businesses that end up having fantastic exits that start that way as well.
Jason Pereira: Oh, yeah. The number of business owners that I know that are sitting on multimillion-dollar enterprise, it's not billion-dollar, but they get into the eight figures and close to the nine, and they started with their own bare hands out of their house. Right? It happens, and it can't be underestimated how much work that is. Yeah, so it does not need to be fast and highly scalable. It can be highly successful otherwise.
Stephanie Choo: That's right.
Jason Pereira: Yep. Excellent. So thank you very much for taking the time. Before we go, where can people find you and hopefully only bug you with ones that are fintech-based that you're looking for, that they listened to this entire podcast and are like, "I'm a fit for that"?
Stephanie Choo: Yeah. So if you're a fit, so you can find us on a number of different channels. So we're on, obviously, LinkedIn and Twitter. Probably the best way to reach me is just to shoot me an email. So we've got an info box at info@p3bc.com that we monitor very regularly. So if you've got an interesting company, you please feel free to reach out.
Jason Pereira: Fantastic. Thanks yet again.
Stephanie Choo: Thanks, Jason.
Jason Pereira: Take care.
Jason Pereira: So that was my interview with Stephanie Choo of Portag3 Ventures. I hope you enjoyed that, and if you are a company that's highly scalable and in the fintech space, you're definitely going to want to reach out to them. Until next time, I'm Jason Pereira. Take care.
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