John & Tyler go over the Carta Q3 Pre-Seed Analysis

There's a company we know that raised $5 million and they were less than a year in business and all the founders were making $250,000 a year. And that company in less than a year shut down and burned the money. Can I share a term I've coined the unicorn whirlpool where you can get stuck on the unicorn path and be sucked into a vortex or a whirlpool and it can really destroy your company. Uh Tyler and I frequently meet with entrepreneurs who raised a boatload of money too early, having to grow into their valuation, didn't happen. The board with all these investors on it makes them do weird things. Even sometimes fires the founder as the CEO and the company just goes into a death spiral. It next rock. Welcome back to the Startup Ignition podcast. We are so excited to be holding this episode today. It's turning really cold in Utah, so we are bundled quite up. And we are in the middle of December here. And I'm your host, Tyler Richards, and I am with my co-host, my partner, uh, my dad, and what else? My personal startup mentor, um, and many other things, John Richards. And today we are very excited to talk about, um, a couple of startup topics, mostly within the preede realm because we have no guests today. It'll just be me and John talking shop about venture, about startups, and about how what we're seeing in the market. So, >> and we are the Startup Ignition Podcast. I'm not sure you said that. >> Okay. Yeah. Welcome back to the Startup Ignition podcast. There we go. There. There's the line. Um, but before we get into the data and before we get into charts and what we're going to talk about today, I want to loosen things up and get into an icebreaker that I'm going to um do with my dad here. You're going to spring it on me. >> Yeah. We're going to do something that he doesn't know about. Um, but we are going to do a fill in the blank today. Okay? So, I'm going to give you five to seven scenarios and or lines and I want you to fill in the blank. Okay? You ready? >> Here we go. We're going to go through them quickly. >> The fastest way for a founder to lose a $500,000 preede round is blank. >> So, once they've got the money, how they burn it. Okay. The fastest way to lose a 500,000 preede round is to start building your product and hiring lots of tech people and or premature marketing where you start making collateral have a marketing person trying to spend money to go to trade shows and do marketing advertising and you haven't found product market fit or done any testing. So to summarize is scaling it and then trying to nail it. Premature scaling. But the two areas that burn the most money and where people lose it is starting to build product tech salaries and people consultants and offshore people, dev shops, whatever. And the other thing is marketing when there's nothing to market. >> Yeah. Okay. So premature scaling. Yeah. >> Okay. >> Here's number two. A founder's superpower is actually blank. A founder's superpower is actually understanding the customer that he is targeting. And he can walk up to a whiteboard and explain to you and me a day in the life of that customer and what he his problems are, what he needs, and how his product is going to change their life for the better. >> All the way up to what they eat for breakfast. >> Yeah. And just so superpower is >> intimately knowing their customer. Yeah. We'll call it founder market fit. They have a healthy obsession and they know their customer super super well. >> Yeah. Yeah. Okay. Um number three, a pitch deck is not complete without blank. >> A pitch deck is not complete without a go to market strategy >> laid out and say what what investors there's lots of stuff problem solution size of market team. team. Team is really important, of course, too, but half of the pitch deck should be saying, "Here's how we're going to sell this and sell it well >> and and and really detailed because I feel like a lot of founders just like superficially go over that and they're like, "Oh, yeah, we're just going to pay an influencer to market our product." Let's give you an example. Like for instance, a lot of companies will come and say, "Oh yeah, we're going to go after the SMB market, small and medium businesses." Well, I have a lot of history of that. Going after the SMB market is extremely hard and needs lots of people, whether you have premise sales reps or telemarketing sales reps or however you're reaching them or trying to do it through digital marketing. Trying to go reach the millions and millions of SMBs is a really hard undertaking. And we can't just have one slide say, "Oh yeah, we're going to go after the SMB market." We go, "How are you going to go after the SMB market? What is your plan? What are you going to do? How do you have any experience in doing this?" And that's because typically it's very it's a huge market and it's expensive to reach them because it's so big and there's so many of them. You have to have a huge sales force or a lot of marketing dollars to do that. And it's like okay, we're not going to fund that kind of activity. You have to be more precise, more detailed than how you're actually going to efficiently reach them. >> Let me tell you one other fun story that bothers me on this too is just about when they say, "Oh, we're going after the enterprise market." So bigger companies, larger companies, we're going after the enterprise market. But then I asked them, okay, what validation have you done? And who have you gone and talked to? And they say, well, it's really hard to get in to talk to our target market. They're like director level VPs or sea level at big corporations and they can't uh seem to find a way to get in to ask them if their idea is a good idea. If this product or service existed, would they be interested in it? What things can they learn from this their target market? And so I go, "Okay, so hold on for a minute. You're saying it's really hard to get in and talk to them just to validate. >> Do they like it to validate?" >> But then they say their whole sales plan is they're going to get in to sell those people. Okay. So I go, "Uh, if you can't get in to validate, how are you ever going to get in to sell?" Okay. Yeah. Anyway, that's just a funny thing that pops. >> So you just really Okay. Okay, to summarize number three, a pitch deck is not complete without a go to market strategy and slide because if you don't haven't worked through the steps and that journey, you're never going to be successful. You need to show us or any VC or any investor how you're actually going to reach the customer, capture the customer, sell the customer, right? >> Yeah. It can't be superficial either. When I all the time when everything's looking good and I ask an investor, why didn't you invest in that? They go, I just did not believe that team convinced me that they could actually sell this. And if your answer is we're just going to have raise lots of money and just reach the market by spending marketing dollars. I mean any any any big boy any per any competitor that's already in the market can can do that. So you need to be a little bit more uh creative in that so much money. If you're just going to buy customers you need a lot of money. You have to have a product that sells itself and has a strong word of mouth. Yeah. >> Okay. Here we go. Now the inverse. If we could ban one slide. This is number four. If we could buy banan one slide from all pitch decks forever, it would be blank. >> One slide. One slide. Um, well, for me, my pet peeve is when they just spend too much time on the problem and the product. So, it would be a super superfluous slide that drones on too long about the solution and the product. Entrepreneurs are generally so in love with their solution and product because they discovered this problem, they've devised a solution and they have think their products all that when again this is back to the last question. They spend so much time on those and not enough time on go to market. Let me let me add to that. So I think what you're trying to get at is like going into the details of the problem and the solution and the product that's at hand. But what founders need to realize is that pitch decks are not, you know, marketing collateral. We we're not a customer of what you're pitching to us. We want to understand the business opportunity at hand, right? We want to know, okay, what have you found the problem solution and what's the business model that you're going to be able to capture, deliver, and take to market to make money, right? So, we're not a customer, we're an investor. And so, don't hand us like a 10 slide deck of how great your your product is basically treating us like you're wanting to sell us as a customer. There's two different things there. And I think a lot of founders really make that mistake often. >> Can I can I tell a great story really quick? Okay. So, there was a company called Clear Play here in Utah invented a DVD player that edited >> This is showing your age. >> Yeah. Edited movies on the fly. Okay. >> Okay. Interjection real quick. My kids don't even know what a DVD is. They don't even know what a DVD is. >> Okay. DVD. Okay. I'm not going to explain that. Anyway, so they edited movies on the fly on a DVD, meaning taking out content that the parents or family wouldn't want in there for when their children watch a movie. So anyway, this DVD player uh was a great invention and actually I one time helped them get 22 millionaire investors into a room and they spent 45 minutes on the problem and and just defining the problem. And I go, "Come on, get that's 60 seconds. Show a bad scene from a movie. show a play on your DVD player that it's edited and cleaned up and they'll be all over that and excited and they took 45 minutes just saying, "Oh, Hollywood's bad. They put bad stuff in the movies." And so it 11 of the 22 walked out, never even got to the solution or the pitch and the go to market. It was crazy. And that they corrected that afterwards, but that's just mistakes entrepreneurs make. >> Yeah. >> Yeah. Because I I we get it. You're passionate. You're excited about the solution and the product and all the features. what you're going to do. But again, it's like that like one slide, one slide done. >> Investors see a lot of pitches, a lot of deals. They get problem solution product really fast. >> Yeah. Yeah. If but then again, if your solution and your problem is really complicated and you have to explain background to get to the problem or get to the solution, sure, that makes sense to spend a little bit more time, but but make sure it's not a marketing pamphlet. >> They should have backup slides for the Q&A session where they can get more in depth if that's what those investors want. Some investors do, some don't. >> Yeah. Okay. >> Um Okay, last one. We are going to skip forward here because we're spending so much time on this, but I'm going to do one more. Okay. >> Oh, we're teaching on the way. It's good. Okay. >> Okay. The moment we know a founder is going to be successful is when blank. >> The moment we know a founder is be successful is when blank. Well, there's different times and different moments I think. >> What's the first one that pops into your head? >> Uh when they start having revenue and sales. I mean, that's a great one. Uh, I don't know. That's >> the one that popped into my head just now is when the founder is willing to almost do anything to to see success. And what I mean by that is a lot of times we'll see founders coming in here that look at fundraising as a way to basically support their lifestyle or their um living, which is great. every founder. I'm not saying everybody needs to eat beans and sleep on a mattress, but I'm saying every dollar that you're paying yourself from your fund raise is taken away from the operations and the potential growth of the the business. So I think when a founder is willing to say yeah I am going to pay myself 60k 50k 40k because every dollar that I know that I'm saving from salary is going towards growth marketing product whatever it may be and I know those kind of founders have what it takes to be like okay when times get really tough because times are going to get tough then I know that that founder is going to push through and stay with the startup and make sure they get over the saying is you know that you've overcome one major hurdle that they can clear the path to be on the path to success. >> Yeah. Yeah. I just think that's like a really big high potential for success. >> That's a huge characteristic of successful startups and especially in the way that we're investing. we see um because you know we're not huge check writers you know we're sub 1 million check writers first checks into companies and you know again that money that money can go really quick but I see the biggest thing is usually salaries and HR >> let's tell one funny story we're not going to name the company or the investors even though there's many as a bad example or a good example I just want to say let's look at the antithesis of this there's a company we know that raised $5 million and they were less than a year in business and all the founders were making $250,000 a year. >> Yeah. >> Okay. And that company in less than a year shut down, closed down and burned the money. That's crazy, but it happens. >> And that and that that can totally happen because once you get a check from an investor, from us, from a VC, from anybody that's investing in your startup, you have the operational and the management power to do whatever you want with that check. Unless a VC is going to be an ogre come in and say here's your cap salary and here's what you can spend on yourself or here's what you can spend on HR >> and there are those provisions in a lot of later stage but in precedical you know and we try to be as f founder friendly as possible like I I think people are really shocked when they hear the the the setup and the terms and the things that we do and don't do that are very in favor of the founder and so we just don't want to be in that kind of situation where we feel like the founder is going to pay themselves 250k the next day that we give them the check. Well, now we got to tell them a couple things that make us unique. Like one of the big unique things is we don't take a board seat. >> Yeah. >> Um >> we got a phone call just yesterday about someone who is absolutely shocked that we don't take board seats. >> Yeah. The bottom line is we believe that in the preede realm that it's your company. You're the expert on this. We aren't the expert. We don't want to run this company. And if we're investing in you, we trust you at the preede level. I understand why a series A investor wants a board seat, of course. But a preede or an angel investment, a board seat, >> it's not needed. >> And and and actually to add to that, I feel like it actually hampers the progress in the growth of a company. Like if the if you have to have investor approval to do things >> or just feel like somebody's breathing that we don't want to be that we want a CEO who's in total control of his company and makes it happen. Anyway, that's our feeling. >> Yep. All right. Thanks for playing my game. Yeah, that that is the icebreaker for today. Just fill in the blank startup edition. Good. If you got more, let's do a couple more. But >> well, let I want to get into the podcast today because we have a really long report that I'd like to go over that I think everybody in the audience and listening and watching will find really, really relevant to what they're doing. >> That's the most recent report from Pitchbook. >> No, from Carta. From Carter. >> There is a pitchbook one. >> Sorry, Carter. >> Yeah. So, today we're breaking down the state of preede. Um, Carter's brand new Q3 2025 data report. >> Let's explain who Carter is and do a shout out to Carter. >> Sure, go for it. So, Carta uh his original name was ES-shares if people don't know that from the dotcom era, but uh Carta is probably the largest back office for venture funds. If you're running a venture fund and you don't want to have a full staff, it they'll be your back office. They also help companies, all sorts of companies, startups, whatever size also manage their equity. Uh so, cap table management, stock certificate, digital stock certificates, the whole thing. They do a lot more things too. They have 419A valuations that are probably some of the best pricing in the business. Yeah. And so Carta does a lot of things and our uh fund >> uses Carta for its back office. And so that's Carta. And so they see probably more than any other company the highest volume of deals and what's really happening inside. And then a macro way they take that data and provide these reports. >> Yeah. So it's really cool. They see all of these de uh these deals because they're literally managing those deals on their platform. And all the startups that are wanting to manage their cap table and these fundraises and the equity within their their startups, they're they're voluntarily putting it on their platform. So they say, "Hey, we have access to all this data. We have thousands of tra of transaction level insights that we could compile and basically show thousands and thousands of deals happening and show what's happening in the market." So, let's get into it. That's what we're going to go over today. Um, to see what's actually happening in the market because I thought it was really insightful and really cool. Um, so our goal today is to simply just decode the data, look at it, and see what's going on and give you guys a higher confidence level to feel what's happening in 2025 and as we roll into 2026. So, here we go. So, you can go to this um report. It's really simple. Just go to carta.com um/data/stateof preedQ3205 full report. Just go search that and Google that online. It'll be the first link that you find. And that's the report we're going to go over today. Uh and this was released back in on November 18th. So it it's a it's pretty pretty relevant. Um but the first thing that I noticed that when we were going over this report was the very very first graph. If you go to the very first graph, um it says uh that preede funding will actually declined in Q3 2025 by cash raised and deal count. So Q3 dropped to 965 million from Q2's 1.19 billion and Q1's 1.21 billion. So, deal count dropped from 6,548 deals to 5,660 deals. >> And this is for the United States. >> This is for the United States. So, that this is not a crash. I feel like it's just a seasonal correction, right? Like I I feel like as we head into, you've always said this, as we head into fall and we head into holiday season, VC's, >> that was third quarter, second quarter going into third quarter. Yeah. There's an unwritten rule a little bit in VC and that is August is vacation month. August is the month you travel with your kids and summer vacation for venture capitalist. So there's going to be less deals done in August and fourth quarter is going to be the same way because it's that way from Thanksgiving to New Year's. >> Yeah. And so that I think plays a little into that. >> So yeah, less deals were done, less cash was was was invested. But at the same time, I think 2025 is overall up from 2024. And I >> it better be. >> No, it is. I I'm just saying up until election day 2024, 20 uh 2024 was looking pretty dismal. >> Yeah. I I just I just also think that founders need to stop like narrative chasing and just stick to fundamentals anyways. Like I don't I don't find this >> Well, by the way, you mean if you have a good deal, in other words, if you've got a great problem you discovered and you've devised a great solution, you validated it, and you have revenue and it's starting to grow, it doesn't matter what the economy is like, you're going to get funded. >> Yeah. So I that's what I'm saying is just like don't pay attention to like the macro the macroeconomies micro movements cuz it's not that impactful. >> So okay and and plus you can't time the market. I think we've talked about this a 100 million times. You you don't know when it's going down. You don't know when it's going up. And by the time you're probably reading all this data it's doing something different anyways. So um okay number two. And we discussed this. I we talked about this um something that we saw and this was on um the graph of that there's there's a bifurcation. So there's a in preede specifically that there's actually a ton of tiny rounds and a few monster ones and not a whole lot in the middle going on anymore. Um, and what kind of stands out to me is that under $1 million rounds are actually up and one plus $1 million rounds are slightly down, but over 40% of preede rounds are actually under 250K. Yeah. So, basically, this speaks to an episode we did a while ago that's gotten us a lot of attention, which is >> unicorns versus elephants. And it's really a lot of people resonated to it and uh spoiler alert we are kind of elephant builders not unicorn builders and there's a lot of things also can I share a term I've coined which is the unicorn whirlpool where you can get stuck on the unicorn path and be sucked into a vortex or a whirlpool and it can really destroy your company. Uh Tyler and I all the time in the last three years, when I say all the time, frequently meet with entrepreneurs who raised a boatload of money too early, got cut in that whirlpool, having to grow into their valuation, didn't happen. the board with all these investors on it makes them do weird things even sometimes fires the founder as the CEO and the company just goes into a death spiral and it's happening we see it all the time they come to us wanting us to help save the company that's not what we do um in terms of investment um it's just we we'll we'll mentor and help people through the situation but yeah it's tough and that that chasing unicorn is really uh tough a matter of fact in prepping prepping for our boot camp. Last week, I did some research and it turns out that of all startups, you have about a.1% chance of making it through that process. Very, very low. >> No, it's small. And so um but an elephant where you keep control of your company, you grow revenues nicely and you have an exit for a lot less valuation, but you own many multiple times more of your own company by the time the exit is a nice lifestyle and a nice outcome >> and actually attainable. >> Yeah. and and the lifestyle for the six to 10 years you're doing that is nice compared to to the go go go get big get fast grow fast raise money and the pressure from the board of directors to perform and hit your numbers it's just tough >> I think this this this kind of barbell market that that this bification is >> yeah yeah this that's showing is that it's like you're raising these smaller rounds 40% of all preede rounds are under sub 250K, which means that these are kind of like realistic validation rounds. Like as a preede founder or as an early stage founder of a startup, what the last thing you need to do is go raise millions of dollars on an idea that you don't have PMF or feel completely validated in because if you do, you're going to waste that money and have nothing at the end of the day to show for it. >> Let's share our experience. Well, I just think that the market is get is is kind of realizing that if 40% of all preede rounds are under 250K, I feel like founders are saying, okay, like, hey, if I'm not ready yet, it's the dumbest thing to go and act. >> Large big funds have to deploy a lot of capital to and they have to get huge returns. Um, matter of fact, one of those stories, the company that raised, you know, well over 10 million, probably prematurely took on debt on from a bank on top of it. Um there was the largest investor that's on the board of directors told them right before the shutting down of the company saying even if this you know sold for 350 million or even 750 million it wouldn't be we wouldn't consider that a good outcome. Yeah. And that's just unbelievable. Right. >> That's just so deflating for a founder. Hey if this sold for 350 or 400 million that wouldn't even be a win for us. It's like what this is. >> Yeah. So just a different just a different way to look at it. So yeah, I I think it' be really interesting to tell a couple stories from what we've seen just to tell people what we're seeing out in the field. And that is we have taught a lot of people that, you know, for around, >> you know, call it $400 to $600,000, you can get almost any software startup off the ground and create massive value on just that much money by being using your ingenuity, lean startup methodologies and doing things the right way. And it's just incredible the value that you can create doing that. And then there's people that don't buy into that and don't really care for that. That's okay. And they come and then they go raise like one and a half, two million. And then about 9 months later when we're checking in, they've like squandered half that money and take a major pivot cuz their product market fit wasn't there. And we go, so you you you gave up all the equity to get one half 2 million. You burn 1 million of it. And then all a sudden you have to take a major pivot and almost start over again. >> Yeah. I think just this there's this massive shift because this this sub 250k preede 40 45% of all preede rounds is just really sticking out to me and it's just a massive shift towards capital efficiency which 5 years ago we were not seeing we were seeing very inefficient capital and very inefficient fundraising and so I I I like this and that is the message that we give to most founders but I I want to cap your statement with if if they don't want to do that that's fine. We don't we don't want to force a strategy on them that they don't believe in. But our pattern recognition, I've been investing for 10 years. He's been investing for 25. Like, we've seen this game play out. >> This is another one we do uh that we're a little different on. We give a term sheet and say, "Go tell others what our term sheet is and what the terms are we're doing and shop it around." Okay? And guess what? >> If you get a better deal, fine. That VC or that investor has found that. We gave you what we think you should do and what we feel the value is and we will actually salute you and we'll take you to dinner. >> Yeah. No, I just I just had this conversation on Tuesday at a large annual event that we usually do and um two brothers that came through our boot camp uh were had an awesome idea and we were so excited. >> We're on the verge of a term. >> Yeah, we were so excited post boot camp through after their cohort to to get to a deal. Um, and you know, we kind of floated out terms of what we were thinking and the shape of the deal and they were excited, but then they went and we said, "Hey, go and shop this around cuz we don't want to be an impediment if you can go and get a better valuation or a better deal." And they did and they went and got a better deal. And we reconnected on Tuesday post all of that. And he was like, "Hey, we're so thankful for everything." >> So, we were instrumental in helping him get there. >> And I told him, "Hey, no hard feelings." >> They told a lot of people >> like, "Did we want to invest?" Yeah, we wanted to invest. But if we didn't and you guys got a better deal, hey, lot of people at our annual meeting that >> if they hadn't gotten our mentoring, they would probably do that. That's what they said. But and we'll have to see how it all turns out. But that's just and we're super happy for them and they're great guys >> and you guys know who you are. So, um >> yeah. Okay. So, that's that's that's about the bifurcation, the barbell market. We're seeing small rounds but then high conviction bigger rounds, but there's been less of those. And so again, the market is shifting towards capital efficiency and like micro capital, which is really cool. >> We'll have to see how it all turns out, right? Y. >> Okay. So, the next one here is how many checks does it really take? There's a graph, I think it's like the fourth graph on on the report that most preede deals involve at least a few individual checks. Like we're seeing more in the preede more. >> Are you talking about checks or just separate investors? >> Separate investors and checks to make up the round. So what stands out on this graph is under 250K you're seeing on average about three investors commit to that 250k. >> So they're doing 50 75. >> Yeah. They're doing like angel, you know, rounds where you're getting multiple angels to come in. Then on a 500k to 1 million, it's about four investors that are committing to that. So it act the number actually raises the higher you get. And then as you go on 1 million plus, it's four investors. two and a half million plus it's five investors 5 million it's six investors so about every >> that makes that's what I would have guessed something like that yeah >> yeah so I'm I'm just saying kind of founders overestimate how many investors that they actually need you know I I feel like that happens a lot but they underestimate how many conversations they have to have to get to that to those three four five six commitments so that's >> hey you're you're making me think of some tips we should share with those that don't even get into this kind of conversation and how they could be careful because we have a lot of listeners um that are entrepreneurs that you know just don't run in these circles and maybe get the chance to even do this and that but they need to raise that 150 to 250,000. So a couple tips that we'll give you is be very careful taking check sizes much under 25,000. like you take 5 10 15,000 from friends and family and different things like that that will actually hurt you in the long run if you do become successful and have to get into the main um path of venture capital ecosystem that you just that getting your cap table the ownership structure full of a bunch of small investors is just not wise and doesn't play really well but also um a thing about you can have nonacredited investors what I mean by that is people that don't have a million net worth not counting their home of investable assets or whatever. You can all go look up the definition of a credit investor, but you're allowed if you file for regggd to have a good number of unacredited investors. But my advice is always don't take any unacredit investors. It's just not worth it for the long hall. Maybe maybe your father, your mother, a super close close relative that's not accredited. You take a little bit of money as you do that first 100 to 250,000 or something like that. But taking any kind of arms length person that's unacredited for a small check is not going that the only thing that can happen there. Nothing much good is going to come from that and a lot of bad can come from that. Does that make sense? >> Yeah. Let me double underline this. You don't need 50 checks to fill a preede round. Please do not do that because that's a really common misconception. Most in most founders come out there and say, "Oh, I can just do 10 grand here, five grand here, 25 grand here." Like my dad was saying, that's going to really hurt the long run of your company and really mess up your cap table. So, you don't need 50 checks to fill that preede round. You need one to three to five good ones and then you're solid. But you do. So, don't overestimate how many checks you need and don't underestimate how many convers how many conversations you have to have. We could talk about this for the next 30 to 60 minutes on the good and bad and ugly that happens from all this and what could happen. We don't have time. >> Oh yeah. But one one more thing I want to un double underline is like a lot of founders think that they can go talk to five to 10 people and get a check. No. You need to be talking to 80 to 100 to 150 it to get those three to >> if you want to close a 500,000 $750,000 preede round. >> Yeah. They just they underestimate how many conversations they have to have. So, >> but contrary to that, one of our portfolio companies went out to get a follow-on round, talked to two investors and got more money at a higher valuation than expected. Why? Why did they get that? Because they were killing it. >> Yeah. So, there's a lot of things that go into that, but if this is your first money in, just just expect to do more volume than you think. A very famous entrepreneur here in Utah one time told me um when he raised money and I congratulated him. He goes, "Yeah, that was our 41st conversation. >> Not just conversation, but in deep, you know, more than just superficial conversation, 41st venture capital firm that they had to work with and they finally got on the 41st one." >> Right. Okay. Um let's another one here from this report. Again, we're looking at the the state of preede from Carter Q3 2025. And this talks about the dominance of safes. It's now absolute. The data here is 88 to 92% of all preede rounds are using safes and convertible notes have collapsed. Um, equity rounds have collapsed. >> We know why convertible notes have collapsed. Yeah. You know, section 1202, the qualified small business stock. Really quickly for the listeners, there's an incredible tax incentive or >> we've talked about it on this podcast a lot, >> but a lot of people might be new listeners now. We've 6xed our listeners and subscribers. And so um so uh basically qualified small business stock exemption also known as section 1202 means if you invest in a early stage startup or one of the founders early stage startup and it's a Ccorporation and you actually own the stock and hold it for more than 5 years. There's incredible tax benefits. Right now it's currently the first 15 million per shareholder would pay no tax at the federal level and in most states no tax at the state level. It's unbelievable benefit and everybody wants to go for that. So convertible debt does not work. All the holding time of convertible debt does not count towards the 5-year holding period. and uh but uh actual stock does and right now safes are m the IRS has said we reserve the right to change our mind later but for right now they're allowing safe holding period to be counted in that 5 years. >> Yeah. Yeah. And so safes are dominant and they're everywhere. Um and we understand that we we actually prefer and like equity rounds because it puts the founders >> price rounds. Yeah. >> Yeah. price rounds because it puts the founders and us as the VCs on the same side of the line. Um, and that's what we like to see. Um, but at the same time, we understand that safes are dominating and that there's reasons why founders like them and why they're so founder friendly. >> Yeah, >> they're just easy documents and and they are very pro-founder uh pro entrepreneur in a lot of ways, but at the same time, >> you need to also do your research. If you stacked up too many of them, there can be problems that come from them. But at the same time, we don't want to beat up anybody about that and that's fantastic what they want to do. Uh >> and honestly, most most founders are very flexible when we have that conversation. They say, "Oh yeah, save for a price round." Like honestly, to me, it's the it's the same thing. And because we just use simple equity terms and >> societ you brought that up though, I think it's good for us to educate a little bit here. So, let's talk about the major vehicles. Convertible note is a loan >> that has to be paid back or converted to equity. >> There it's a spectrum. loan to um uh uh equity. >> Yeah. No, but it's it's a loan that there's a trigger event just like a safe. Many of you know about safes. And it's just a loan and it's going to get deferred into equity at the next qualifying round. It's exact same as safe. What a safe is is basically like convertible debt, but it never has to be paid back in cash and it could be triggered to convert to equity. And that's why right now the argument is that's more like equity than debt. So, we're going to count it equity. Accounts towards the qualified small business stock exemption holding period. And so, that's safe in that. And then a price round. What we mean by that is you're actually selling to an investor actual stock and they hold that stock right after they buy it and they own that stock. Those are the major vehicles being used right now. It um and in preede, yeah, it's early and you go talk to friends and family and get some friends and family to invest. You can grab a safe document off the internet. You The scary thing is a lot of people don't go to attorneys and they do this, right? They just do it and they sign a safe and that's a dangerous practice. We would never encourage you to do that without an attorney. But anyway, >> yeah, I mean, and and notes are still being used. It's just there there's less and honestly >> convertible notes. Yeah. >> And and but safes obviously dominate and it does depend on the sector that you're in, right? The report goes over that. Um >> only 32% of biotech are notes, which is much larger than the general overall preede round. Yeah. >> But then in SAS, it's only 5% are notes. So it it depends on the industry and sector that you're operating in, what that market is used to and what they want to see and do. So it does depend on what vertical you're actually >> more sophisticated investors in biotech because biotech's hard for uh investors to really >> grapple with and understand and so they're going to be tend to be more sophisticated investors. The more sophistic uh the reason they would do a price round, they want to get in and lock in that earlier price. The reason why a fiscal investor would do debt is because they know that debt is superiority. Uh meaning it gets paid back first before equity. And so they like the control position. That's just the way it is, >> right? Um okay. Okay. There's Let's scroll down in the report. Keep going with us. Follow along if you'd like to pull up the report. We are going to look at graph number seven now on the report. And graph number seven goes on and talks about the geography of preede and that geography actually still matters. And that's because the west dominates preede investing. We know this. It's been around for 10, 15, 20 years. Um the west is around 50% of all cash in preede versus you know other geographical locations in the US like the northeast which is New York and you know >> region or the south. Yeah. >> Well Midwest the smallest which is about roughly 5% of all cash and preede deals. So, you know, depending where you're geographically located, there's just more cash and there's more investment. >> So, there's more gamblers in the west. Is that because Nevada's out here? Maybe. So, >> even though Silicon Valley still drives preede capital by a large amount >> and they're gamblers >> and and you know what what where we're based here in Utah, you know, it's we actually are doing a lot of investing and a lot of deals and a lot of startups per capita. We've talked about this before on the podcast where we're based out of here in Salt Lake City and south of Salt Lake City and in Utah Valley Provo Orm area. We have the most amount of startups per capita more than anywhere in the country. We have the most amount of unicorns that have been birthed here per capita over anywhere in the country. And so I feel like geography does matter. Obviously, we're very biased because we're here and we can see it and feel it. But at the same time, I do think Carter's data here shows that where you are, you know, getting investment conversations, where you're located, where you're talking to VCs does matter. So, of course, that's why we, you know, an interesting footnote is we've been doing our boot camp for 10 years and there's been times when people from other states, about a third of our boot camp participants are from outside Utah. And uh and this last one was about 40%. Uh and they come out here and they go, "Wow, there's a lot happening out in Utah." And they actually moved to Utah. It's crazy. just some of the key stats on that how we can demonstrate that you know Silicon Valley is still king is um the Bay Area had $746.8 8 million in preede >> of that 900 some million. Yeah. >> And well um I can't remember >> there was like 900 some million. >> Yeah, something like that. But now these numbers are not adding up. So I'll have to look at the graph again. But then it says followed by New York then followed by Boston then followed by LA and then followed by DC. Um and again it's what I was touting with Utah as per capita. Obviously these mass massive metropolitan areas. >> I don't know is the 900 million right? Because let's go back. There's no doubt that friends and family and early stage investing from friends and family that's not tracked by anybody anywhere is the largest every year of the amount of money going into >> I don't know did I say 900 million I did if I did that was wrong or that was for another graph I don't something else yeah I think that was wrong but to let you know >> these numbers just from the top five areas are are well over a billion so >> the amount of money for series A and beyond venture capital compared to like seed and preede and all that. It's the later stage you go, there's less overall dollars going in. Actually, uh right now, especially since 2014 and the advent of crowdfunding, we just don't know the numbers. I'm sure there's estimates out there, but the amount of early stage investing by friends and family, angel investors that's not tracked by any good mechanism dwarfs all of the other investments. I mean, there's just so much. I mean, only 3% of startups get venture capital. >> Yeah, it's if you're raising and on the trail to raising, kudos to you. And and we're trying to give tips here on how to best make that most efficient and how to do it efficiently and effectively. But at the same time, um don't beat yourself up if you're actually having these conversations cuz a lot of startups don't. >> Hey, hey, fellow general partner and our venture fund and partner in all things startup, let me ask you this. Do you agree with this statement? We are actually more interested in anything than helping founders be successful and have good outcomes. >> Yeah. >> Second to that would be helping them get a great investment from venture capital. >> Oh yeah. I know I >> primary we just want them to be successful. >> Y >> second they should get a good funding round if they need it and put it to good use. And then third would be us. Is are we a great >> fit >> partner for you? Yeah. Okay. Yeah. Okay. I think that's how I look at it. >> Speaking at speaking on those preede sectors and depending on you know your sector if it's safe or convertible node or or priced rounds. Um there's also a graph in this report from Carter that talks about the sectors that are dominating as far as getting the most capital put thrown into them and SAS still dominates. Yep. >> Right. We can see on the graph here that 1.162 billion this year has gone into SAS. Um, next is hardware, then healthcare, then biotech, and then crypto and web 3 is still prominent. Um, but way below that of SAS. And I just want to point that out because there's so much talk about, you know, is SAS still the king business model? Is it still worth investing in? Is SAS dead? Is AI going to take over the reign of SAS? And I think that's because this report is kind of combining AI and SAS together because AI most of it is still actually SAS and subscription model. So okay, can I be the old sage guy for a second? We have to remind everybody how this all works. When disruptions come along, they get overhyped and then they actually crash and then they have to find their level of productivity in human society. This is a recognized pattern. The Gartner hype cycle is the name for it. You can look up Gartner hype cycle maybe throw up a chart on it. But what happens I can just tell you fax machines were invented in the 1920s to30s and it took till the late 80s till they were in people's offices. The microwave oven was invented and working. It took 19 years before it was in people's kitchens. Every disruption to a major thing takes time and gets over inflated first and crashes and does this. AI is going to be the same way. all these things. So, and you have to understand there's still incredible things and opportunities to sassify or webify processes that are done either with paper and pencil or Excel. And yes, AI is going to be a part of it wrapped in a SAS container. And that's how I believe it's going to be for a good long time period. And that's just because that's how things evolve as gone and things get overhyped and that they're going to crush things. When I was a yellow page print publisher, I was told two years from 1994 1996 the internet about 1994 was where people started hearing about it. It wasn't until '96 that Netscape went public. But in '94 95 people were saying yellow pages will be gone in two years dead, wiped out. It took and they're still here, but it took >> 20 years before that was even semi-true. Okay. And so we have to realize this. So my point on this is like you and I have an one of our latest investments in our fund. super excited and I don't know if we want to share it but I'm just gonna tell you in one of the biggest most important things in all of human existence one of the most important things of all there it's highly regulated and all of the compliance and regulation around it and the participants in that ecosystem have been doing manual paper and pencil or excel reports even today to comply with US federal requirements to participate in that industry and we have a startup that is sassifying it and how exciting how excited are we for that company? >> So, but you're saying the point is is that there's still industry that needs to be sassified. >> Yes. Yeah. >> Yes. And and it's amazing when we did our due diligence and called up customers and how much they said, "Oh my gosh, this is incredible. It's lifechanging." >> Yeah. This is I'm just saying those opportunities are out there. Entrepreneurs know that there's lots of money to be made taking paper and pencil and Excel spreadsheets and cesifying. >> Yeah. And a lot of founders say that was 10 15 years ago. No, it's still happening. We just invested in one. And but I think this card of data is cool because it really shows where the capital is is flowing so that founders can really understand, you know, the the sectors that are getting that are still attractive to investors today. And SAS is still king. But just know if you are in SAS that also means that's the most competitive sector as well that you are competing against a large amount of preede opportunities. And so just make sure that you have a a valuable opportunity and paint that picture very clear. So you have to have a great idea. No doubt about that. Yep. >> But that's 1% 99% execution. You have to be the founders that can take that great idea, that great product market fit, and all the validation work you've done and now you got to go execute. That's why we just can't look at the idea and the potential for product market fit. We have to look at does that founding team have what it takes >> and and just make sure your differentiation is crystal clear. So, whatever it is that is different from all the other deals and opportunities, not just from your competitors and what you're doing, that has to obviously be there. But I'm saying do something different so that your SAS deal is more attractive than another SAS deal. Because a lot of founders, what they say is like, "Oh, come on. Like, just take this small little bet on us. Like, we're looking for, you know, 450K, 500K." It's like, I understand how attractive and how what you're doing, but you got to understand, we see 2,000 deals a year, and we see a lot of opportunities. And to stick out, even just with our little old venture fund of 2,000 deals a year, you know, you have to be doing something really, really special and really show the opportunity that's at stake and at play. >> Yep. >> Okay. Um, you know, I think this has been a great conversation. Go read the full report. I think we need to, you know, you go analyze it. go look at it so that when you if you're going to fund raise, you need to be aware of the market. You need to be aware of what's going on. You need to be educated in who you need to talk to, how you need to talk to them, and then you can shape your deal into one of those amazing opportunities that we talked about so that you stand out and you actually get an investment. Um, any other things you want to talk about today from that report or anything that stuck? >> No, I'm just going to I I think since we're talking about preede and doing this report, Tyler, why do you and I stick with preede? I've been venture investing for 30 plus years. Oh, I said 25. Okay. 30. >> Yeah. Okay. >> Yeah. I don't want to date you. You date yourself. >> 25 to 30, whatever. Yeah. I'm Okay. But um and all the people that when we were doing angel investing and all that, which was pretty early and all that, very few of us stayed in that because it's rough and tumble and can be really risky. And it is risky. Yeah. And so most investors migrate to the later stages, which has to do with your geography, the East Coast, the Midwest, the South. We have Silicon Valley out here and it's kind of spread out to the rest of the West and so we're more taking gambles and and there but they're calculated risk but there's a lot of low tolerance for risk in the other parts of the country which is why it's different like that >> and why have I stayed and now you've come into it >> and stay we have some good friends that have stayed in it and we all do really well and precede you have to do it right and correctly and you have to stick with it and you have to know the game you will get burned earned if you try to do preede investing and don't know what you're doing and an angel investor or a person that is uh just you know got a little money now and they say I want to get into early stage investing you have to do a good number of them you can't just put all your money into one or two companies and pray that they work out you this is there's a whole we have a whole >> strategy very detailed on how we make preede investing work and get and get outsized returns >> it's a very disciplined approach you have to return though, we're seeing 20, 40, 60 times our money coming back, but we also have a lot of failures, ones that totally lose all their money. But it works out in the end because we know what we're doing. And hopefully over the time, if you listen to this podcast, you'll pick up skills not just how to be a good entrepreneur, but then the day when you want to start being an investor, how to do investing right, because that's happened to me. There's been about I'd say a good dozen in the last few years of people that got exited after all my mentoring and they you know got success then came out and said hey John you also need to teach me about how to be a good early stage investor and that's the principles I'm just warning people two ways one >> the investment of preede >> preede you better know what you're doing y >> and number and number two it's an incredible place to play though when you know what you're doing >> right right so um and I want to cap that with It's a dis. It's very disciplined. You have to stay very disciplined. And I think that was our kind of strategy. >> And even us sometimes we've caught ourselves not being disciplined. >> Yeah. But I think that's was our shining star moment when a lot of the VCs in 2020 2021 were going hog wild. You know, we stayed disciplined and and you know, we're kind of seeing >> no investments for two years. >> Yeah. We're seeing the benefits from that. So, we plowed money in before 2021 and then rode that wave up, got exits, and then when everything crashed in 2022, we got back to plowing money into companies. Yep. >> Okay. I want I want to summarize this episode. Thank you for watching. I want to summarize though that this Carter report in summary is that there's still a lot of capital out there and capital's not going away. And I think what we need to do is is look at the flows into preede specifically for these early stage entrepreneurs. But the capital is concentrated, the capital is disciplined. Um it's selective and it's really tethered to real traction. I think the the overall trend we're seeing here is that preede and founders and investors are becoming more capital efficient in the early stage. >> And what did I and what did I teach at our annual meeting earlier this week? I said after preede by the way at preede yeah we're kind of buying into your vision we are a little bit yeah but after preede it's not about your vision it's about your traction >> it's about metrics >> you you better have growing revenue and low churn >> and what is what is what does a famous thought leader in the in the startup world ash mora say he says the only only metric that matters is traction when you get into the later stages when you go seed a b all that matters toract Our capital is traction. Exactly. So, okay. All right. >> Um, thank you for tuning in. >> Come come hang out with us online. Come follow us on social media. Subscribe to our YouTube. Get the notifications. We We appreciate all the support. You guys have been amazing keeping us motivated to keep going and doing this podcast. It's almost been a year. We're going to complete a year here. Is it really next month? >> What is this? Are we in the 30s on episodes? Yeah, this is uh I want to say this is episode 38. >> Wow. >> Yeah. Okay. So, we're getting there. So, and we're doing it because we're seeing as how many people are liking it. >> Yeah. It's so fun. >> Yeah. Honestly, I think the coolest thing is even when I was building my own startups and people would come in and come up to me and tell me how my product helped their life and everything and you know, you still get that all the time >> and even as an investor, oh, thank you so much for investing in me. If it wasn't for you and your mentorship, I wouldn't be where I was. But I think one of the coolest thing that I get out in the wild is like, hey, I listen to your podcast. And I'm like, really? that that blows my mind. >> I I'm getting calls from all over the country saying everything you're saying resonates with me. I've been looking for a mentor or help like you. It's awesome. >> Yeah. So, it's just it's just we really appreciate you guys. We really appre appreciate everybody listening. Tell your friends about it. Subscribe. Yes. Follow us. So, hopefully this episode helped clarify that state of preede. And thank you so much for tuning in. And we are out. Rock next to Rock next to Rock.