 Hello. Welcome to Asia Pacific Business Strategies. This is a program that comes to you twice a month from a studio in Honolulu at ThinkTech. And what we try to do in this program is we try to show some of the leading people, companies, ideas, and the forces that are shaping the lives of people in the Asia Pacific region in general. So we've done a lot of programs that come in from Asia. We've done some programs that come in from California and the mainland of the U.S. And that's what we're going to be doing today as we're connecting with a gentleman, Robert Kramer's, in Encinitas, California. And Robert is one of the leading lights of the venture capital community in Southern California. If you're an investor looking to invest in small companies, growing companies, or if you're a growing company looking for a capital in Southern California, chances are you run into Rob Kramer's at some point. He runs a group called Intelliversity. And there's a lot of online activities and a lot of face-to-face activities, seminars. And Rob has been in the field for many years and he has experience in guiding entrepreneurs to the right investor and guiding investors to the right entrepreneur so that they match their expectations. Rob Kramer's, welcome. Good afternoon to you. Good to see you. I think it's afternoon for you, isn't it? It is, yes. So I wanted to start, Rob, with a short video off of your website that it's titled The Neglected 97%. So let's look at that video and then you know what it says. I'd like you to talk to us a little bit about who's neglected and why it's 97%. So this video says too many great companies don't get funded. Talk to us about the 97% The Neglected 97. Well, roughly 1% of companies seeking venture capital investment ever receive it. And roughly 3% of companies seeking private individuals, we call them angels, ever receive that. So roughly 97% of companies, many of them, maybe most are deserving, never receive funding to actualize their dreams and their ambitions. That's the neglected 97%. Why is that? The reason is, from personal experience, the whole model that both angels and VCs use to select companies is broken. They ostensibly do a great job of choosing companies that go through due diligence and vetting and all this stuff, and they still fail 90% of the time, at very most 80% of the time. In other words, the best VCs lose 80% of their companies in the first two, three years, lose them, they fail, they run out of money, they give up, same thing with angels. But what kind of system will tolerate a loss rate of 80 to 90% even after all the hard work they do to assess? Meanwhile, the other 97% of companies never even get a shot at the money. And I experience this is a broken model that I'm determined and my partners are determined to fix. So what's your prescription? How do we fix that, doctor? I need my, this microphone and headset is like a stethoscope, right? So I'm out of your heart. Well, there are really, we discovered two things wrong with it. One was that the selection process was wrong, all wrong, focusing on the wrong things. And we'll get back to that in a second. And by the way, we've proven now that we're right about that also. And this is important for the entrepreneur because once you know what's wrong with the system and how to fix it, you'll be much more likely to get an investment in your company. Secondly, it was the structure of the investment model that's used primarily either loans or later stage companies or buying stock equity shares as the early stage model distorts the entire process of investing because now the investors have to have a huge return because the selection model is broken. They know they only get one out of 10, maybe two that will ever pay off. So they've got to have this huge, gargantuan payoff 10 to 30 times the invested amount in order for the company even to be interesting. So we have two things broken. The selection model and the vehicle being used together make a market that leaves 97% of the companies out. That answer your question? Yes. Go back to that first one. How do we change the investor's model for how he evaluates companies? We're completely focused on the ability of the management team to scale revenues. If the product and market are chosen correctly, there are profits, but we're concerned with the ability of management to scale the revenues. Not to get more investment capital, but to scale the revenues. And the ability of a manager, of a CEO or founder to scale revenues is never examined by most investors. They look at the product-market mix, the growth of the market, and all those kind of factors, but they don't examine the human being. And the primary issue is can that CEO operate under stress during a rapid growth period? Most look really good in the boardroom and during the presentation. And so we invest on how they look in the old model. And then 18 months later, when they crack under pressure, and a variety of pressures occur at that point, then they show their real colors. We had to find and we have found a way to measure the ability of the CEO to scale the company under stress. And then you have growth in revenues, and then we can use a different model for investment. So what would that different model be, one that's focused on the scaling revenues? Well, once we can be assured to some degree of comfort that this team and this CEO can manage a company during a rapid growth under stress, then we can comfortably accept their projections of revenue growth. You see how the two go together? Sure. Otherwise, it's just fantasy. Well, if you can't manage the stress, then how do we expect you to actually achieve these projections? So Ron, how do you stress test the manager? Well, we have a program which is called Boot Camp, Entrepreneurs Boot Camp, which has been developed. And I'm now part of the team that delivers Boot Camp in conjunction with Shepard Ventures, a leading venture capital firm here in San Diego, who has three times success rate in selecting winning companies by using the Boot Camp than other VCs have. Lucky break that I ran into these folks got a relationship going. If they think just like Intelliversity has for a long time, you have to focus on the CEO's ability to scale under stress. And boy, once we found those winning characters, we can believe their projections, then we can pour money into them based on the revenues, not based on some kind of future M&A or IPO. So how does that structure work, the revenues approach? But remember it relies upon our ability to believe their projections, which is a human thing. But on that premise, we call those royalties, the revenue royalties, or royalty funding is what I prefer. The technology, the terminology aside, this is where we as investors receive a fixed and declining, usually, percentage of revenues for a period of time as a reward for our investing. The period of time and the starting and ending rates that are used are negotiable and dependent on the company and the market and the projected revenues. But the concept is that we're not buying equity, we're not buying stock. And this removes the human conflict from the equation. We are no longer concerned with putting pressure on the CEO to take the company to sell the company, which of course destroys the company, call it liquidity event for a reason, right? It liquidates the company. But now we take the company back to where its roots are, which is to create a sustainable vehicle for growth and for innovation. And we're only concerned with one thing, do they grow revenues, which we can help with? We have contacts and distributors and other outlets that we can bring to the equation. We don't have to worry about the expenses, which takes all the conflict out of the equation. If we're constantly worried that this company is taking first class seeds or blowing out salaries, etc., which hopefully they don't, then we're, that's the wrong way to think about a company. Because that's what profit sharing does. Now we're concerned with the wrong thing. And it creates a stressful relationship between the investor and between the investor and the entrepreneur. We want to create a productive, creative, forward-looking relationship between the entrepreneur and investor. And the only way to do that is to invest in revenues. And then as revenues spike and go up, we get a larger share. If the revenues don't take off, we guess and we just, we're patient, help out as long as we can. But it's a win-win relationship rather than a conflictual relationship. And is there some kind of guaranteed minimum? There can be. That's a negotiable position that you can have. What we want to avoid is too many guarantees like that because if the company needs longer to achieve the revenues that it projects, it would not make sense enough to drag, draw cash out of the company during that period of time. So we're in favor of minimizing the minimums or the minimum amount of returns we get. Instead, we're patient investors who want to see the company achieve its projected revenues. If it takes a little longer. So you do want to keep an eye on the expense line as well because obviously there's a limit to how many Maserati's you can have in the garage. But as long as you keep a reasonable collar on that type of expense, I understand what you're saying that you don't, that the investors don't have to be directly and immediately concerned on a day-to-day basis with how much is being spent. As long as there's a sufficiently adequate profit margin to sustain the company's ability. Yeah, we wouldn't invest in the company to begin with if margins aren't large enough. But we use a formula that the cost of client acquisition could not be more than a third of the net revenues of the company after cost of production, which in the case of a software company is zero. So we want we want the revenues to be at least three net revenues to be at least three times the cost of client acquisition. When I say the net revenues, I mean revenues over a three to five per period. What do you mean by client acquisition? That means a sufficient margin to cover the royalties. What do you mean by client acquisition? What does that term mean? Well, that's the advertising sales and other marketing costs to acquire a client. Okay. It's a very simple formula developed at MIT to predict which is very predictive as to which companies will succeed and which won't. If the net revenues over a five-year period exceed the discounted, by the way, for common discounting, exceed the cost of acquiring a customer by more than three, the highly likely to be a successful company. So, Rob, you're an investor for your own account and for your family's family office investment. And you also work with companies and entrepreneurs who need to find this type of formula. You put on a bootcamp, so you're kind of in the mode of being a coach and a torturer, I guess. It's both a coach and a torturer. 38 companies have been through the process. Uh-huh. Earlier on it was less mature and now it's very rigorous. And so far of those, well, way more than half have gotten there, gotten capped. Right. It's been very successful. So, and now we're in a position as we organize a new venture fund to put money into the winners for those that survive the bootcamp. Rob, we're gonna take a, we're gonna take a quick break here for a message from our kind sponsors and we'll be right back. Read aloud 15 minutes, every child, every parent, every day. And we're back now with Rob Kramer's at Intelliversity in California. Rob, I have a question now about the experience of the entrepreneur, the person who's put their whole life and all their eggs in every basket to bring a company so that it's ready for financing and they've identified a potential investor and they're getting into their VW to go down the freeway to make the pitch to that investor. Talk to me a little bit about the factors that determine the relative possibility of success and failure in that initial pitch meeting. What does that entrepreneur need to be primed with in order to ensure that he communicates effectively with that type of investor? Thank you for asking because George and I are real students of this subject matter and it's a key part of bootcamp. There are two things that you have to be aware of, weak messaging and wrong messaging. That people typically go on the out and they produce weak and wrong messaging and so we teach them to do the other strong and correct messaging. A weak message is a message that bores and confuses the listener. A strong message is one that they will remember to tell their partner the next morning. It's viral. It's exciting. It's more than exciting. It's exciting even the next morning. It's very important not to bore and confuse which means it has to be simple and black and white and it's counterintuitive because people just want to tell everything about their product and how wonderful it is and so on. That doesn't work. That comes later during due diligence. The second part is wrong messaging which means that the entrepreneur talking about his product or her product rather than about herself or himself. What works is establishing trust first. What works is strong messaging rather than right messaging is messaging about you as a person. Why are you are trustworthy and by trustworthy I mean why do you know that you can execute and scale the company under stress. What in your history proves that because that's what the investor is afraid of. Having experienced 90% of the investments fail they darn well know that you're likely to fail no matter how confident you are. So you have to overcome this barrier wall of distrust. It's prejudice against you that you're just a dreamer that can't execute and that's the proper conversation. Talking about your product makes you a used car salesman. We don't trust used car sales. So how do you come up with an effective viral statement that's just irresistible to investors. Well investors let's not talk about clients, customers, the general public, the press. Let's focus on what investors are sensitive to. What is the process for coming up with that? Everybody's drunk their own Kool-Aid so there's no way you can do it yourself. You have to work with others mentors, advisors, friends, other entrepreneurs. It takes typically five to six weeks we've found of trying different messages on groups until one resonates and the only way to go to do it is to find out what resonates. We've had people complete boot camp make their first investor presentation and then they dons upon them because it comes out of their mouth. What will resonate? What will become viral? It's very different than the first idea you had. You can't do it yourself. It takes a village. So in Southern California if you were looking to develop your viral message I guess you need a group of trusted people who are both receptive and critical. How do you find that group? Are there are there centers in Southern California where people can go to to get that kind of feedback? Oh certainly. Oh yes of course well our entrepreneur's boot camp does supply that. You're always in a group of observers every session giving their feedback. If you don't want to do the boot camp then Connect in San Diego offers a program called Connect that does and Sotys Lava LA Venture Association up in the LA area. There are a number of other programs that I wasn't prepared to provide you with all the names but you can find them online or just call me and I'll be happy to hook you up with the community of advisors that helps companies do this very thing. And you may already have some of those advisors in your circle. They may be board members, they may be family members, they may be school chums who have been successful who are willing to share some of their criticism. You need five or six people minimum and you really have to trust them. If they tell you that that message is not something they'll remember in the morning the following morning then you have to believe it. I don't know if we have time for this but I'll give you a good example of it. It's what if you're a fan of history what Franklin D. Roosevelt told Eisenhower when they were preparing for D-Day. This is controversial so but what he said when he said he had to have Eisenhower remember we said the Russians are coming. We have to invade France. We have to use General Patton as a diversion. The Russians are coming invade France use Patton as a diversion. That got Ike's attention because it was completely counterintuitive. They were coming up through Italy. It's a very simple viral message that Eisenhower was able to take to his people. Why are we doing this crazy thing called D-Day? Because we have to get to Berlin first. Because the Russians are coming. Because the Russians are coming not the Germans. I'm not trying to make this a political statement that's all history but it's an example of a simple viral message that no one could forget. So sometimes a viral message actually sounds counterintuitive right? At first blush and the idea I think is to challenge people's expectations and shift their mind into a new space where they're thinking out loud they're thinking well what the heck does that mean? Is that the sort of process you're looking for in a viral? Yeah so it's sometimes counterintuitive and it never expresses the full vision of the company. It's always a small part of it. It's the part of it that the listener will remember in the morning and will be excited to repeat. So so much for detailed mission statements and vision statements and so on. They bore and confused. They bore and confused. Yeah that can be in the executive summary that can be in the prospectus that it maybe doesn't belong in the first pitch meeting. Yeah the when you're the first pitch meeting you're not the entrepreneur is not really talking to a rational being. He's talking to this very early evolutionary part of the brain called the crocodile brain which is concerned with am I going to fight this person or run from them or am I going to mate with him? And it's very it's very subliminal and very it takes about 10 seconds 30 seconds at most for the listener to decide is this a friend or foe. So the VC is crocodile. The VC is crocodile better than a shark because that's another. What other what part of the brain do you actually want to be talking to not the crocodile brain? What's that pardon me? What's the preferred part of the brain not the crocodile brain the what should we be talking to? Well you want to get to the human part primate part but you also have to get through the dog brain which is concerned with who's who's the prize. You want to become like the dog whisper Bezer Romero I think his name is. It teaches that the the trainer has to become the alpha dog. Hold on a second. The trainer has to become the alpha dog and in the same sense the entrepreneur has to become the prize rather than the seeker. See because the the venture capitalist sees a lot of opportunities. So you want to have a way to draw people forward rather than chasing them. You want to get them to chase you in a sense. Ironically yes you want the entrepreneur to you want the investor to be so intrigued and entranced by your initial message that they are chasing you. You're the prize and that can't be done at a rational level. That has to be done at this subliminal level of frame what we call framing but it has to be the vision has to be so large and so impactful which is part of the viral message that the venture capitalist or the investor wants to be part of that. All right well Rob you provided us with some really valuable insight some great ideas and there's so much more obviously we can only cover so much in a few minutes but I think we've given a kind of a viral taste of what you and Intelliversity are up to and it'll be valuable to just about everybody who sees it and thank you once again Rob for your time and so long from Think Tech, Hawaii.