 Hello, and welcome to another episode of the Savvy Entrepreneur. Today we'll be joined by Rich Molloy, a good friend of mine, who is a venture partner at Springtime Ventures, as well as the VP of Engagement at Establish. Rich, how are you doing today? Good to see you. Thanks for having me today. I appreciate it. I appreciate you joining us. So, Rich, tell me a little bit more about how you got involved with entrepreneurship. Sure. I've been an entrepreneur all my life, I mean ever since doing baseball card shows back when I was a kid, and I remember my first business card when I was around 16. Probably around 16 when I had my very first business card and tried to make a business aside from mowing lawns and delivering newspapers and trying all sorts of other stuff, but my dad has worked for himself since I was three, and so I just grew up in that vibe of being around an entrepreneur. And so it's just always been part of my life, and in between jobs and changing careers I've always been able to fall back on just doing some consulting work, just go out and find some clients and do some work, and they turn into longer jobs. So I always tell people that my first career was in finance, and I was in corporate finance. I specialized in analytics and reporting, and my second career was in sales. I actually did tech staffing sales. And both of those careers were in New York City, and so I was in Midtown Manhattan for 14 years. And I always wanted to get into the tech startup world, and I dabbled a little bit in New York. I did one sales job at a tech startup in New York, but I really wanted to dive in deep on the tech startup industry, and I didn't want to do it in New York. After 14 years I was burned out, I was ready to head to the mountains, so I moved out to beautiful Boulder, Colorado, sight unseen actually, but I'd heard about this thing called tech stars, and I'd read about some other things happening in Boulder, and this was in 2011. And I've filled many roles in the startup community in the front range. I've been everything from an enthusiastic attendee to an organizer, to an early employee, to a founder, to a sponsor, and I did a lot of work for a while running the startup programs for SoftLayer and then for IBM, and now I am both a help big organizations find and engage with startups through established, and I get to invest in startups through Springtime Ventures. So how is your time at SoftLayer different than your time now at Springtime? I used to joke around that at Springtime that it was like playing VC, it was like playing venture capitalist, except that instead of giving startups money I was giving them credits to use SoftLayer servers, and there's nothing like that, but the only reason that I would make that analogy is that we were looking at SoftLayer, and SoftLayer ended up being acquired by IBM and became the IBM Cloud, but what SoftLayer specialized in was hybrid cloud solutions, and so you could have bare metal servers and with a cloud interface as well. And so there was a very specific niche of startup that we were going after, and so it was out looking for startups, and so it was all about deal flow, it was all about getting access to the best startups, getting access to them early, understanding what it is that they were doing, and seeing if they were fit for our program, and then if they were inviting them to be a part of the program. For a venture firm, there's a lot of nuance around venture, but one of the most important things is you have to have access to great companies, and you have to have access to that deal flow, and it has to be the startups and the deal flow that make sense for you and for your fund and for your thesis. And so while giving away free software, free server credits is nothing like venture investing, it was a nice segue because I was able to, when my partner Matt was coming up with the idea, and when he came up with the idea and was out trying to make springtime a thing and we were out trying to raise money from LPs, I was able to bring this national perspective and this broader deal flow perspective of, oh, I've seen that idea a dozen times and we see this a lot. Now that's really interesting and unique, and I could also put some systems in place and help organize efforts, but I was able to bring that deal flow perspective to the table. Rich, you hit a lot of really good points in that. Do you want to give more of a higher level understanding to our audience of what venture capital is and how you guys interact with business and how business and the community interact with you? Yeah, absolutely. Yeah, I think the important place to start when understanding venture capital is to understand how a venture capitalist makes money. And the first thing is to realize that in order to found a venture capital firm, you have to go out and get money from other people. And so, you know, as we were raising the fund fund one for springtime, we were in the same position as the startups that were pitching us. So as a startup, we would take a meeting with a startup that was pitching us and then the very next meeting, we would be pitching a potential LP, right? LP stands for Limited Partner. What the LPs do is they invest their money into the venture fund. And then what the venture fund does is it collects all of that limited partner money and they don't get a say in what you invest in, right? They're limited. That's the limited part of it. And so instead, they have to trust you and trust your thesis and trust your team that you're going to make the right investment decisions. And then you go out as a venture firm and you take that LP money and that now becomes your fund money and you go and invest that into startups. And you may have heard of the two and 20 model, right? And so what that refers to is the two is a two percent management fee and the 20 is a 20 percent carry. And so the management fee is the two percent management fee means that that the partners of the general firm, the general partners of the firm take two percent per year from the total fund and use that to manage the operations, pay the salaries, pay the travel expenses, pay for the software, computers, you know, meetings, whatever the case may be. But the 20 piece refers to how much the VCs, the general partners of the venture firm keep after they pay back their investors, right? So let's say we have a ten million dollar fund and we have our first exit and we get and let's say we get a million dollars back on that exit, which is, you know, for for a small fund is OK, right? The GPs get nothing out of that out of that one million dollars, right? Because we still have to pay back all of the LPs, ten million dollars. And then after we pay back that ten million dollars to the LPs, then everything forward, the GPs get 20 percent and they give 80 percent back to the LPs. So the LPs for them, this is an opportunity to make their money back and then make more and more of it. And the GPs are incentivized to make money on the on that 20 percent. And so everything over ten million dollars, the GPs are only making 20 percent on that. So that's that's the structure. Does that make sense? Yeah, absolutely. I'm glad that you are discussing this because so many people come to me and ask me about venture capital. One thing that many people don't realize is that VCs are very different. You mentioned your thesis. Do you want to go over your particular thesis at springtime and how that can differ from other VCs? Absolutely. So the, you know, as I said before, you have to convince LPs to invest in in you as a venture fund. And the way that you do that is you convince them that you have you have a great team, that you're going to make great decisions. But also you need to and also access to proprietary proprietary deal flow is is the VCs speak equivalent to startup saying proprietary machine learning algorithms. Right. Everybody says that they've got proprietary machine learning algorithms and every VCs says they've got proprietary deal flow. I think I even said that to you when I was pitching policy that we had proprietary ML algorithms. It's so it's so buzzy that it that it's lost all it's lost all meaning. Yes. And there's, you know, you know, is your machine learning really machine learning or is it just complicated if then statements, right? And then you can say the same to VCs, right? Is your deal flow really proprietary or you just, you know, have a big network like everybody else does. But one of the other pieces that you use to convince your LPs that you're a good investment for them is your thesis and to say we are only investing in certain things and we're only investing in these things because these are areas that we understand or this is our strong belief in why this is why this works. So it's just like, you know, Warren Buffett has his perspective on the market, on the public stock market. And this is no different than Warren Buffett has a perspective and Springtime Ventures has a perspective. I mean, you know, one could argue that Warren Buffett is better at investing, right? But, you know, Springtime is still young, we'll see. But but the perspective is that thesis, right? And so I'll share with you, for example, the Springtime thesis. So what we what we're looking for, I think about it as three pieces of the puzzle. And so the first is founders with deep domain expertise. So we want founders that have lived and breathe these problems and they know where they've got they've got the inside track connections inside of the industry because they've been in this industry for long enough, but they also know where the where the tracks are and where the pitfalls are so they can jump over those pitfalls and they can they can go around them and they can have the right connections. And so they're they're set up for success. We believe they're set up for success with that when they have that deep domain expertise. The next piece that we're looking for is truly transformative technology. And then the third piece is in a core industry in America. And those are and those are intergrate. There's a tightly integrated. They are integral to each other because first, it has to be a big enough market, right? And so this is another way that to think about how venture capitalists are thinking about investments. So if we put a pause on the Springtime theory, right? Let's talk, let's let's generalize again to VCs. You know, for a VC to make money, we have to return the whole fund. We have to pay back our investors, everything. And we can only do that when we own a small part of a company. So if we only own small pieces of lots of companies, we need one company or two companies to give us that entire return. And so if you don't as a startup, don't have that huge exit opportunity. And by huge, I don't mean 50 million. I don't mean a hundred million. I mean hundreds of millions of dollars of exit opportunity. I mean, the world is obsessed with unicorns, whatever. You know, but for a small fund like us, a hundred, you know, a return in the hundreds of millions would be a fund returner, right? So let's back that. Let's put that back on the Springtime. Well, we believe that one of the things that leads to a fund return opportunity is being in a big market. And so there's tons of potential customers that you could go after, right? Enterprise is a great example of that, right? And so if you're going after the automotive industry, you maybe have only two dozen, you know, brands worldwide, but they are, but they're a trillion dollar industries. So they're big industries. But then the tech, and this is the last piece, right? Is that tech has to be really, truly transformative and it has to be something that is going beyond just replacing spreadsheets, right? That you are, you could be replacing whole head counts. You could be, you could be enabling entire businesses. You could be creating new lines of business, creating new opportunities within companies. And so something that just didn't exist before. And now all of a sudden there's there are examples there of that. So I'll give you a quick example that ties all those pieces together. For us was a company called TrueCoach and TrueCoach we just recently sold. And so we had our first exit. It was a very quick exit, but we invested in TrueCoach in 2018. What they did was what they do is that they enable professional trainers, physical trainers to excuse me, they enable physical trainers to remotely manage their clients. And so there's no way for, if you're a physical trainer, there's no way for you to scale yourself, right? You've got to go show up at the gym with your client. You've got to get on the phone with them. You've got to coordinate. You've got to schedule, blah, blah, blah. Nothing was out there for a physical trainer to be able to engage with their clients at scale until TrueCoach came around. And so TrueCoach was founded by a husband, by, sorry, not husband and wife team, the husband and wife that had previously owned a gym. They had owned a CrossFit gym and a weight building gym. And Casey founded it and he was a gym owner, right? So he felt that pain and he was a physical trainer. He was trying to scale his himself to train multiple people all over the country, all over the world, right? And so he built TrueCoach in order to solve that problem. And then it was a core industry in America, physical fitness. And, you know, while the physical trainers are not necessarily core, the health and wellness industry is absolutely core. And there's a lot of private equity activity in that space. And then the last piece was it was truly transformative. And so that, you know, TrueCoach had a very short, quick exit. But that was a testament to the success of Casey Jenks and Robbie, you know, Robbie Jack at building that up. Congratulations on the exit. I know that's a big deal. So that's awesome. Congrats. Yep. Didn't return the fund yet. So, you know, we still got to get up to that. Baby steps, right? Baby steps. So in addition to having good, those three things that you alluded to, there's also timing. Companies are on different stages. Is there a particular stage that you guys look for? And can you talk about how the stage kind of determines a check amount and be a type of BC that you're going to be looking for? Absolutely. So we'll generalize that first, right, and talk about the stages. And the general, you know, going back maybe a dozen years ago, there was really venture capital started at Series A and then went out from there. So you hear Series A, B, C, D, right? Series A used to be the first institutional funding round, right? So before friends and family and everything before everything else, it was if you were raising money from venture capitalists, there were Series A venture capitalists. But what has happened over the last few last 10, 12 years is that there's a stage that happens before the Series A stage. And that's the seed stage. And that also used to just be one stage, right? It was just the seed stage. And what the seed stage was, it was a time when the startup was still searching for that scalable, repeatable business model. Two key elements there to a startup, right? Scalable and repeatable. And so in the seed stage, you're still funding a company before it has both of those pieces, before it's scalable and repeatable. They're searching for that right business model. They're searching for that product market fit. And so you're feeding dollars into that organization so that they can find that product market fit and then they can go on to raise their Series A and B and C and D and so on and so forth. And so that and now the seed stage has turned into a seed phase where there's multiple seed phases, right? There's even pre-seed, which is the angels and the friends, family and fools round, right? And then there's institutional capital and accelerators come in at that first seed where maybe a typical early seed round is typically what we see outside of the Bay Area. Like we're just going to take San Francisco and New York and we're going to leave them in their own little world, which is where they are. And that's fine. But the rest of the world, a typical seed round is say a $4 million pre-money valuation, maybe a $4 to $6 million pre-money valuation and you're raising anywhere from a million to $2 million on that valuation, right? And the valuation is just a kind of a made up number. It's kind of a, we all agree that this is kind of what we think the company is worth right now. There's no art or sorry, there's no science to it, little science, mostly art. And so in that early, so you have that early seed, right? And then you have the later seed and the later seed is anywhere from that 6 to that seed valuations up to $10 million pre-money valuations, raising $2 million on a $10 million pre, for example. And so those are, that's the phase and that could take you, it could be one year that you're raising money in seed valuations or it could be three years that you're raising money in seed valuations. And so in springtime, we've invested across the full spectrum of the seed phase. We've invested at the absolute earliest, earliest stages and we've invested at the absolute last, last money in, last seed round before the Series A opened up the next, you know, in six months or whatever. So we've invested across all of those. We typically write about 130k check size as our average check size. We also reserve the big portion of our fund, 40% of our fund is reserved for follow-on investments. And so that means when you go to raise your Series A, we're going to, we want to evaluate it and decide if we want to follow on, if we want to make an additional investment, which is always a good indicator for your, your next investors if your previous investors are following on. And plus that allows you to avoid dilution. Yes, absolutely, right? And so we, we being the investors, we can maintain our ownership percentage as we continue to follow on, right? Absolutely, right? Because if our ownership percentage shrinks with each round, then we need a larger and larger exit in order for us to make money, in order for our LPs to make money. And so if we're able to maintain that ownership, reduce our, you know, keep our dilution down. But if we're able to maintain our, the way I would think about it would be to maintain, to keep our ownership percentage, keep our pro-rata as it's called, and, you know, continue that in the later rounds until that exit comes. Given everything that's going on with COVID, what is the current state of venture capital? Yeah, man, it's such an interesting time right now. And I think there's a, there's a few things at work here. There are some very, very clear losers in this game, travel, events, you know, anything, anything in person, private equity firms that were previously gobbling up. We were just talking about this health and wellness, you know, gym related businesses and, and, you know, yoga studio and supporting fitness, anything supporting anything remote is booming. You know, there was a, a telehealth, telemedicine company that was, it was for vets that we looked at and we didn't, we did not end up investing in, but boy, oh boy, they just have investors beating down their door, trying to invest in them right now, excuse me. So you have some very clear losers in this space right now and you have some very clear winners. But yet that winner piece still is undecided, right? What's happening is, is that these industries that are getting off, getting all this attention, you know, Zoom is getting tons of attention right now, right? But, you know, telemedicine is getting a ton of attention and remote education and nursing. So for established, for example, we just invested in a company called Kamana Health and what Kamana Health does is it enables nurses to share their information for specifically traveling nurses to share their information more easily, make it more accessible and have them find the right jobs more, you know, find the right fits for them in job placements. And they're, they had 50% growth in their number of registered nurses on their platform in one month. And, you know, so, but yet, so, but yet, we still don't know who the winners are because we still don't know what's happening. We don't know what's coming in the next three to six months. And so the challenge, the onus falls on the startup for them to acquire those customers as quickly as they can and then hold on to them and ensure that they do have the right products so that they can maintain those customers. And so the state right now is they're still, you know, we were reaching a period coming into 2019, or sorry, 2019, we had seen some of the largest amount of seed stage investment that we had seen in a long time. And coming into 2020, there were still a lot of what's called dry powder, right? There was still a lot of capital that venture firms still had yet to deploy. And now what we're seeing is that venture firms are actually raising the bar for where they're going to make their investments unless they're in that hot category, right? If they're in that hot TELA, anything category, then that's one thing. Everything else, we've seen series A deals fall apart at the term sheet level because of everything happening. And they said, well, we used to take companies that had annual revenues here, but now we're going to raise the bar to here. And everything else is a wait and see. And so there's going to be a squeeze at that series A right now because there's still a lot of seed money out there that can be put out. And so the series A investors can afford to wait a little bit longer. You mentioned that you're also involved with established. Can you describe that entity and what you do there? Absolutely. So established as a consulting firm and we help big organizations find and engage with startups. So what we do is ecosystem development, if you will, at large. Some of our clients include the NASA ITEC program, AFWORKS, the innovation arm of the Air Force, Silicon Valley Bank and American Airlines or other corporate clients as well. So what we're out there doing is finding the right startups for these organizations to engage with. We have a program called Startup of the Year. And it's great to be a part of both springtime and established because as a venture capitalist, you say no way more than you say yes. And a great phrase that I love is our partner at springtime, Rick Patch, he says, no is the second best answer. And so you're laughing, right? Because the slow no is the worst. And this is a VC thing is that you drag out saying no and you never hear back from them and they ghost you. And so no is the second best answer. And so now at springtime, when we say no or even before we say yes or no to a company, I could say I have all these other resources for you through Startup of the Year. And Startup of the Year is a global startup network and competition. And we find all these great startups and then we present them with opportunities. Like for example, we have a special award for veteran founded startups. And so if you're a veteran watching this and you have a startup, we have a $10,000 cash prize for the dot US veteran startup of the year award. And that's brought to you by the people that own the dot US domain. But they want that dot US to really resonate as this is a US company. This is a company focused on growing the American economy. And so, and I'll add one other thing here about Aftwerx because Aftwerx is a great program that has, that is a fast contracting method to get the Air Force as a client. So you can get a yes or no from the Air Force within 60 days of applying. And it's a phased program that use SBIR dollars which is a small business industry research program. And you can get a $50,000 contract for three months and they will pay you to do customer discovery to find a paying customer in the Air Force. And then that takes you to a phase two. And the phase two can be anywhere up to 750,000 or up to 1.5 million. Excuse me, I think right now it's only up to $1 million. But this is a great way to have the Air Force as a customer and they're looking for, they're looking for businesses that you may not typically think of as working with the DOD, right? So it's not like source programmable guidance or missile systems or something like that, right? It's a great example as a company out of Austin, Texas called CareStarter. And CareStarter just helps families find the right resources that they need locally when they move to a new city. And this is a common problem with any military as you get moved to a different base and where's the best daycare? And where are the summer programs and what are the schools like and all this? And so this is something you wouldn't think of as being a DOD, having the DOD as a client but it's a great fit for what's going on. In fact, True Coaches actually had a phase two with the Air Force because they were enabling Airmen that failed their physical to get remote coaching support from the people at the Air Force Research Laboratory that managed the physical training program. So a lot of opportunities exist out there for startups and my job at both established and springtime is to connect startups with the resources they need to succeed. Great, Rich. So if a company was interested or is interested in applying to the established startup of the year program, what would you recommend they do and what kind of traction are you expecting your applicants to have? Yeah, absolutely. So we're at startup of the year, we're looking for startups that are beyond the idea phase. So you have to have at least a working prototype or a working online product all the way up to no more than five million in funding and total funding and less than six years old. So we're firmly in that seed phase for startup of the year and that you just go to startupofyear.com and there's an application on there and you fill out the application and we'll get you piped into the network right away. Great, for springtime ventures, we're looking for as I mentioned before founders with deep domain expertise, truly transformative technology in core industries and if you think you may be a fit then you can go to springtimeventures.com and apply there to learn more about us. Great Rich, I really appreciate the time today. For everyone else out there, if you are interested in applying to startup of the year, please click on the link below and we'll see you next time. Stay savvy.