We're so grateful for the feedback that we've received from so many of you, the encouragement you've shared, and the questions you've asked. And today, we're going to attempt to answer one of those questions. 

Fundraising is such a critical part of the entrepreneurial journey. It can be scary and uncertain and overwhelming at times, but it's, quite literally, a part of the job. So, we're going to talk to Jake Thomsen who is a Partner at Sovereign's Capital leading the venture practice, which means he is interacting with entrepreneurs all the time, so he knows what works, what doesn't, and he's going to share with us a bit of both...

Episode Transcript

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Henry Kaestner: Welcome to the Faith Driven Entrepreneur podcast if you're an entrepreneur driven by your faith or want to be driven by your faith, then you're in the right place. The best way to stay connected is to sign up for our monthly newsletter at Faith Driven Entrepreneur Dog. This podcast doesn't exist without you, our community. One of the things that the community has asked us for is helping connecting them with Like-Minded faith driven investors. We're in the process of launching Marketplace, a new platform to present your venture and connect with like minded investors that are serious about honoring God as you are everything from philanthropic to market rate deals from here in the U.S. to emerging markets. Check it out at faith driven investor ERG Sports Marketplace. While you're there, please send us any thoughts you have about how this podcast might better serve you or any questions you might have about being a Faith Driven Entrepreneur.

Jake Thomsen: So much of the world understands myself in those ways, but we as believers in the soul, also as a part of us, I think we need to believe in soul keeping and health care for the soul. And there are so many things we can unpack. There were two things that I would say about entrepreneurship in general, but especially fundraising, because it's such an intense time. First one is the role of rest. All right. The role of Sabbath, the idea of taking one day a week, which was John Tyson calls one of the best gifts from God that we're really bad at accepting of the Sabbath because it's so Life-Giving and beyond just being restful in of itself. It's, I believe, one of the few ways that we really train our hearts to trust God. And what I mean by that is we can believe in our heads all day long that God's in control and he doesn't need me to do my work. And yet I don't often feel that to be true based on my behavior. Right. But there's a certain connection between the head and the heart that really is connected by behavior. Whereas if I believe God's in control and then I lean into that truth by giving up a day and saying, look, I don't need to be poor myself in my work today, then, and that's a behavior that recognizes that truth, that then over time we see just affects our hearts and shapes our hearts to be able to feel the truth. The guys who control a little bit more.

Rusty Rueff: Welcome back, everyone, to the Faith Driven Entrepreneur podcast. I'm Rusty. Hey, we're so grateful for all of the feedback that we received from so many of you. The encouragements you share are great and the questions you've asked are fantastic. And today we're going to attempt to answer one of those questions that comes up all the time, fundraising. You know, fundraising is such a critical part of the entrepreneurial journey. It could be scary, uncertain and overwhelming all at the same time. But it's quite literally the part of the job that we have to do. So we're going to talk to Jake Thompson, who is a partner at Sovereign's Capitol leading the venture practice, which means he's interacting with entrepreneurs all the time so he knows what works, what doesn't. And he's going to share with us a bit of both.

Henry Kaestner: Let's jump in now with Jake, welcome back to the Faith Driven Entrepreneur podcast. Very glad to have you on. We have a real special guest, my partner, Jake Tostin from Sovereign Capitol Capital. Jake, welcome to the program.

Jake Thomsen: Thank you, Henry. Thank you, guys. It's awesome to be here with you.

Henry Kaestner: This feels a bit like a conversation with friends, of course, because it is just that we all know each other and and we're going to be tackling a really important topic today that a lot of people have called in and asked about. And it's something that is such a part of an entrepreneurial journey about the process of trying to figure out whether we should be raising money or not, what kind of money to raise, what kind of vehicles to think about. All of that is what we're going to be tackling in this episode. And we probably won't get to all of it. Maybe we'll end up doing over a couple of different episodes. But there's no better guest that I can think of to help us understand how to navigate through the fundraising process than Jake Thompson. Jake leads the venture practice's sovereign's Capitol sovereigns. Capitol is an investment fund that invests in Christian led companies in Southeast Asia and then primarily in the United States and does so cross venture deals and then also lower to middle market deals. And Jake runs our practice to invest in fast growing venture deals and as such sees tons of plans, talks to tons of entrepreneurs and has done that now for years. And Jake, just excited for you to share with us what, you know, some of your experiences. And so let's go ahead. And actually, before we get started and get into that, want you share and just give a quick flyover and maybe it's not so quick, but give a flyover about how God has worked in your life. How did you get to where you are right now? Hmm. Yes. THOMPSON And where does he come from?

Jake Thomsen: Yeah. Jake Thompson comes from a little town called Kailua, Hawaii. And going on from there early on, just always had a lot of sincere interest in technology, kind of early adopter, I remember, and kind of mid 90s in high school back when it was not a good thing. For your coolness factor, do we have an email address or something that you weren't really admitting to in the computer lab? Auspine you got an email address? I got an email address making friends like that. And that just always a part of kind of my orientation of the world. But early on, I started off in commercial banking, just running a small corner of a big company, doing everything around sales, service operations, compliance, kind of running the business. And you mentioned how God works in my life. And one of the bigger turning points for me was really muddling along, not really having a strong theology of work, and yet just through his grace, having a number of experiences that showed me how he could use business leadership to bring renewal to people's lives, to communities. Just really, really poignant stories that came out of that phase where I walked out about four or five years in those leadership roles, just really connected. Hey, there's a place for business in the way that God wants to use it. So from that point, I got a little bit more entrepreneurial kind of thinking. What does it look like to have entrepreneurs who are motivated by this faith, not just a big company where you could kind of had to be a personal motivation, but actually running a company based on that. So I got a little bit more into the social enterprise space, always for profit, always early stage, often technology, never faith based. That would always have kind of values driven. It was in that world doing some consulting, working for a couple of startups that led to a gig with a larger consulting company, that it was more of a product management role of product development role because this consulting company had more data scientists and anybody else in the world than they were using those for servicing clients and said, well, hey, why don't we actually create some products such as an Internet of Things team lead in the business side of that, doing everything from connected devices, hardware, software, big data, kind of that whole thing. And that along the way, really great events I've had. I love the business side and had this vision for how God can use it. I love working with entrepreneurs at various times in my career. I'd probably look to spiritual gifts and think, oh yeah, now I've got that one. I've got I've got leadership here or this or that. I'd say the older I get, the only one I'm deeply convinced of is encouragement, encouragement. A big deal to both given her see for me and just work with entrepreneurs and bringing some tangible skills outside perspective, being able to encourage and equip and then get in the technology space. You know, about five years ended up joining sovereigns because those things really all came together when there was a need that sovereigns have somebody with some of that background and so joined on about four and a half years ago. Then, of course, with the guys ever since. And then great privilege of it and other people mentioned beautiful wife. We're living down in Durham, North Carolina, just moved back. We're in Washington, D.C. for about seven years. And so this is our long term place. We expect the year for a while and we're really excited about it.

Henry Kaestner: That's awesome. Also, I think it's fair to share the fact that you like beer. Right? And it was actually partially your love of beer that brought us together maybe eight or nine years ago when you're getting your MBA at Duke. And we had people over the house to have a beer together and then to learn from somebodies life experience. Right. In the original inklings.

Jake Thomsen: Yeah, that's right. It's funny when I tell that story, it's usually your love of beer that brought us together just because that feels good, but absolutely true. Yeah. If I was looking at ten years ago this month, our mutual friend Peter had connected us. So I need you around. And I came down to business school on their own and then rest was history.

Rusty Rueff: Yeah. So you go to business school because Henry was around. Was that how you chose your school?

Jake Thomsen: I can neither confirm nor deny.

I'm sure that's not the case and I'm sure that if I were to have an influence on it, although I got to tell you, I did teach Sunday School to Duke students for quite a long time. Kimberly and I both said, Jake knows me well enough, of course, to know that I'm much more of a Carolina fan than a Duke fan. Yeah, but I love Jake anyway. And if you're tracking along at all. Luke also went to Duke and so did Mike Schneider is part of the early 70s. And so I've surround myself with lots of Duke guys and I'm a better man for it. I must admit it.

Jake Thomsen: That's right. Is good dynamics on the team. I'll tell you, I'm surprised as much as you talk about, well, Duke mascot's the blue devil. How can you get behind that? So let them win your Sunday school as a big step for you. That's encouraging.

Henry Kaestner: It was it was a big step to tell us. So you're at Sovereign's Capital. Give us a one on one. Give us a flyover about cap tables and pref stacks and European versus American, maybe you to European waterfalls, but just talk to us about what are the things that an entrepreneur is confronting. They've got a business. They feel that guys put something in front of them to do. They're excited about it. They'd like to grow it. They think that a way to accelerate that growth is to raise capital. And yet they also, you know, I guess is kind of an intimidating experience because they realize that they're going to be bringing somebody on board. You know, they've heard some good stories about venture capitalists. They've heard some bad stories about venture capitalists. Help an entrepreneur who's listening to this just kind of get an overview, give them a framework, give them a context through which to think about kind of the nuts and bolts of fundraising.

Jake Thomsen: Yeah. And I was thinking about this of how to make this exciting and less clinical.

We'll see where on that spectrum we end up landing. But maybe a good way to step back and talk about what that arc of running the company look like. Why do you even need fundraising? Then maybe we can break it down to the different steps in different series of raises and things like that. We can start there now, I think give us a framework to dove in on a whole lot of details, maybe even to the point of American and European waterfalls and fun stuff like that. So the step back, of course, as you mentioned, entrepreneur Faith Driven Entrepreneur feeling called to start something right to join the work that God is doing out there in the world in some respect and going out there and getting it done. And on the one hand, you have the starting point at that very beginning. Let's call that today. You have an end point of what that looks like and maybe that's five, seven, ten years down the line. That could be an exit where a company is bought by another one. It can be an IPO as an exit event. It could just be getting profitable and starting to issue dividends. Right. To pay various stakeholders and investors and the rest. But there's in some ways you can think about there being a beginning and an end to that story. Now, along the way, you're building the business, right? Many businesses, an idea, ideas really isn't worth anything. And yet a Facebook and Uber, many years down the line of ideas and execution, all sense worth a whole lot. Right. So even maybe I'll start by looking at the financial lens. The more you grow and the more you sell and the more customers you have and all the rest, you're growing in value over time. But to get there, you've got to spend right. You've got to hire the team, develop the product, have licensing agreements, whatever it might be for your core business. And usually that spending comes before the payoff of revenue and down to the cash and the rest. And so at a high level of the fundraising journey for an early stage entrepreneur, we're talking mostly kind of venture stage or venture type of asset class. It's going to be a series of raises. As you build out your company, you prove something out and you show, hey, the company has staying power. There's real opportunity out in the marketplace and kind of get enough money to get to that point and then raise money, chart the course on what that next point looks like to raise to get there. And it's a series of those fundraisers over time as you're growing the value in the company and creating value for for yourself as an entrepreneur, for your team, for the investors along the way, it's a high level. That's why you start to fundraise and Praxis good.

Henry Kaestner: So, Jake, as we go ahead and we get started in talking about fundraising, one thing it's really important to mention, of course, before we go into the nuts and bolts of this fundraising episode, is that there is a discernment process to go through about whether it should even be fundraising at all. Ironically, I am partners with you and several others in a venture capital fund that invests in Faith driven entrepreneurs. And yet I never was able to successfully raise venture capital, though trying really, really hard. I'm grateful for the fact that we went over 40 and venture raises it bandwidth. I think that God in his sovereignty loved us through that process and we were ultimately just being willful rather than faithful. But I think that it is important that any entrepreneur listening to this understands that you don't necessarily need to raise venture capital or raise any capital at all to be successful and to do all the things that God has laid out in advance for you to do. And I mention that because twenty years ago I kind of bought into that lie. I thought you had to raise venture capital if you were ever going to scale and you're ever going to really amount to anything. I thought that customers and employees would need to see a venture backed company for it to have any type of real staying power. And I think that I was wrong. And yet, of course, as a partner in a venture capital fund. I believe that it does fit in a great role and can be a great service and come alongside and help entrepreneurs and venture capital is not necessarily a bad thing. But before we go too much further down the road, you want to make a quick comment on that and then we'll go ahead and spend the rest of our time on this episode for OK, we've now made the assumption you want to go and pursue outside funding. Here's a framework to think about it.

Jake Thomsen: Yeah. And my own commentary to affirm that it's uncanny how well the analogy of marriage applies to bring on a capital partner. Right. You discern and get married, and if so, who do you marry? And you try to divorce that over time and see different aspects of them. And of course, you commit there's a honeymoon period. Good times are great during the hard times. You hope that you have good communication and a commitment to the relationship and there's just so much that applies there. But apply it to our conversation. There really is that step that just like in marriage, we often take for granted of the instruction to discern should we be getting married, kind of counting the cost because you bring on a capital partner, there are a lot of expectations and we're talking mostly about or we do a sovereignties mostly on the side of the house, early stage technology investing. And so you are signing up to a model where investors, they go for hits. Right. So either they're expecting a whole lot of those businesses to not work out, but the ones that do have to be 10, 15, 20, depending on the stage that they're getting in that. So there are a lot of expectations that come from that. So there absolutely needs to be a discernment process. Both is just something you feel called to this type of business that needs capital to close down on a couple of months ago, where a company, because they're incubated inside a much larger company, they were able to take it a little bit more slowly. They were able to build something right the first time. And now that they're spinning out, there's no technical debt. They're thoughtful about it. They've had these conversations incubated, but it's because they didn't have this. We got to grow to a certain point by certain time. They had a few years to kind of figure this out and in that time frame to build a foundation for really solid company. And while that's a unique situation, standalone companies who are able to be capital efficient and not bring on those investors, I think that's a very legitimate thing to wrestle with, that everybody should, because it's hard it's hard to have them all sometimes jokes and albatross around the neck, having to be the investor. That's kind of thing. I was three years in. We got another three to six to really get our return. That can be a tough thing. But if you're going to have an albatross, you'd want it to be Jake Thompson. Yeah, yeah. He's an albatross. I'll tell you good jokes and get a beer with you or something.

Rusty Rueff: OK, so Jake, now we're going to dove in and let's go through every stage of funding, including the nomenclature, right. So people get sort of hung up. All right. So let's start with I've decided I'm going to take venture outside money. And now we hear about friends and family around or we hear about seed round. So dissect that for us. If there's a difference, talk about that. And then what does that round of funding, where does it get you?

Jake Thomsen: Yeah, great question. So I'd probably structure it very similar to that. What are the different rounds? What are you looking to do during that round and then what are the different sources? Because I think a lot of those overlap wouldn't try to delineate them. And actually before I do that, I will call out to that. There's some flexibility here. This morphs over time across regions in the last week, maybe hit on some of that, but to start at the very beginning. So you're sitting somewhere with a napkin and you got the idea and scribbling it down. And that's the beginning of what you really feel called to build a company first stage. I would delineate as the idea stage. Right. It's early on you're trying to flesh out is there even some kind of demand here? And so during that stage, which is typically self-funded, I mean, this is where oftentimes you see somebody working nights and weekends just kind of bring some flesh around an idea, maybe trying to find a partner, setting some expectations with his or her spouse. But that's simply bootstrapping. That's what we call bootstrapping. Bootstrapping. That's right. Yeah. It might be self-funded in the sense that you're doing on the side. It might be that maybe you do quit and you're relying on your savings for a little bit, but you're trying to both have a sense of where the business should go, even build a prototype, which is not a minimum viable product. Right. Prototype can be a wireframe drawing that just kind of walk through what it is. But you have something to say. This is what it's going to be like. You know, oftentimes these days, maybe just some commentary on that. It is so cheap and easy to start a company these days that is very rare that we see that being funded from the outside, even friends and family. Right. This is what used to be twenty thousand dollars to have a website up fifteen years ago, Nagase Squarespace, which is forty bucks a month. And a bunch of infrastructure like that has evolved that if we see somebody who's raising money, especially from a fund at that stage, usually that's a bit of a yellow flag or red flag because it should be able to kind of get that done. Generally, that's the idea stage you get into what I call it precedes stage, right. So once you're in the idea stage and you have a vision for what it could be a prototype, then you want to actually build a minimum viable product. You want to build something that somebody can't just see what it looks like. They can experience what it would be like. Right. It doesn't mean it's the final app if you build an app or final product, if it's something physical, but it's at least something very similar. Right. You start to engage it so you can go out to your customers and get a lot of market feedback because the best information you'll ever get is getting something out there quickly and getting that feedback for it. Right. Classic lean startup type of mentality. So during the stage you want to raise you want to get to that minimum viable product. You want customer discovery, right? You want to go out there and hear from customers? Yes. This is a pain point. This is validated and that's going to inform what your minimum viable product looks like. And basically come out on the end of it and be able to say, all right, we've got something that we can now go forward and build, measure, learn, right, get some market feedback, change something about what you're doing, get it back out there in the market and have that be a repetitive process so you can continue to get better and better at providing the value that the market is looking for in your product.

Rusty Rueff: So, OK, so now we're going to go and we're going to bring some capital in, talk about the structure of capital at this point. You know, I mean, there's like terms that people some known, some don't convertible debt safes, you know, what is there and what should you do?

Jake Thomsen: Yeah. So at this point, you probably maybe bootstrapping a little bit, but starting to get into friends and family around crowdfunding is getting more prevalent these days. We can talk about that, even incubators and accelerators. But to your point, the actual vehicle, whoever it is coming in and believing. Yep, I think there's something here like the minimum viable product. I like the market validation typically at this stage, and there's no right answer here. But typically you do something like a convertible note or a safe note, which is essentially saying maybe to step back, very vanilla standard investment at this stage of equity. Right. There's a percentage ownership of the company and you have that percentage going forward with a convertible note is is saying, well, we don't really know what that valuation should be, because if you're going to get a certain percentage of the equity, you want to price it right.

Maybe at that stage your company is worth five million dollars and you brought in a million dollars. So you gave away just 20 percent of your company. Right. One divided by five. And that's how you figure out that pricing is to say, OK, we're going to break that into a number of shares in the rest. That's pretty hard to do because at this stage, there's not a lot to go off for. The valuation maybe should be two million, maybe should be 10 million. You know, a bunch of reasons why six months later the company could look totally different. And so in some ways, with that lack of information, you're kicking the can a little bit on doing the work to come up with the right valuation using something like a convertible note or safe. And what those say is we think the company's worth about six million. So we're going to put what we call a cap on it, six million. And so come the next round in 12, 18 months, whatever it might be, if we actually have a round that is much higher, maybe it's 10, 15, 20 million dollar valuation for that round. But we're going to convert. And as though we had priced at six million dollars, we're going to price at the cap of that note. But now, if a lot of the risk that we were worried about materializes and the next round is valuing the company at two million dollars, well, then we're going to convert in that next round as though it were a two million dollar valuation during our round. So the point there is we think it's six, but it's so early we don't really know. So let's have a structure that we can account for. The risk that could be much higher, could be much lower, but that we can right size wants to see a few more cars flipped over when we know the company was kind of actually worth we can convert in at that amount. That's typically how a convertible note works. That's more debt. And so there's interest typically that accrues safe notes came out of whiskey and other leaders. Y Combinator, it's much more down to friendly in the sense of there is an interest that's accruing no real right answer. Oftentimes where they do a convertible note or safe, it really comes down to who your investors are, what they're comfortable doing, even how much negotiating power you have. If you have a whole lot of investors that are coming in interested, you want to go with the safe note? Well, chances are that's it's going to clear the market. And so those are a couple of the very common ways that we see it earlier on.

Rusty Rueff: And then to the point of interest rates, what are you seeing in the marketplace on the interest rates of the convertible debt?

Jake Thomsen: Yeah, so the shift over time, I'd say right now it's the last thing we did was seven percent. I think it's pretty typical that we see four to eight right now. Probably six would be the average we're seeing right now.

Rusty Rueff: OK, good. So we've come through this stage and now we think we've grown the company to a point in our product and we've tested some market things. We think we can go get institutional money, define institutional money for all of us. And when is that moment that someone should think about institutional capital and what's that first round of capital size wise kind of look like?

Jake Thomsen: Yes, what you're describing is more the seed round. So we went from idea stage precede and now we're sort of squarely in the seed. And typically you kick this off when you have the minimum viable product. It's been out there enough. You have some validating points. You have uses statistics. How are my customers using this?

And I've really shown there's a lot of value has come to them. You see your churn perhaps if you're a fast company or that that that's come down enough that you can say, hey, people really care about my product and I've reached what many folks would identify as product market fit. Right. There's a need out in the market. I've got a product that will actually fit that need to address that need. And so the seed stage is really to make that repeatable.

Right. You have some processes that that just need to be built out and kind of get out there and to sell. And so the funders for that, you'll still see a few. And a lot of these sources from early on kind of persist. Right. Some folks will still go out and look for accelerators that might be able to help them, like a TechStars or Y Combinator or an ocean or Praxis. There are angel groups at this point really. See, this is where you start seeing a whole lot of angels. So high net worth individuals that are coming in anywhere. I mean, we see angel checks anywhere from ten thousand dollars all the way up to 250 or so. And these are syndicated rounds typically in venture. Right. Which means that there's a syndicate, many folks coming in to make one round. And so you'll want a lead investor. Who are setting terms, they're going to say maybe it's a convertible note, again, like here's the cap, here's the interest rate, they're going to set those terms. The rest of the syndication comes in on those terms and that together is going to be around. And so you start seeing some a lot of seed stage funds, just classic venture capital folks that are coming in. And they just they really get how to build a company at this stage, just like D.C. typically will specialize because you have to be really good at a certain industry or size. You start as a seed stage investor. You got all the relationships with the series folks. So as they grow, you can make those introductions. And so you start to see folks that funds that really focus on the seed stage. And we talk about how much money you raise. What's the valuation? It's shocking how much this changes over time. I mean, even four years ago when we were investing versus now, you know, the valuation. Just give you an idea for Sask companies. We can talk about how we use multiples and where valuation comes from. But the valuations basically have doubled just in the last two or three years because there's just so much activity on this side. And so right now in the seed stage, you're typically looking at a valuation anywhere from three million to six million right in there. Now, that can go higher again based on type of company where it is Y Combinator, for example. You know, typically companies will come to that that accelerator and a number of weeks later, they're going to market for about ten million dollars is kind of the average for Y Combinator, right. That's a Bay Area type of valuation is pretty common. And so you kind of see the anywhere from a few million all the way up to 10 million in the valley. And you're raising a couple hundred thousand to a couple million. Typically at a very high level, we would see 10 to 15 percent of a company being given up in the proceed stage, more like a 20 percent in the seed stage. And so if you're valued at ten million dollars and you're raising two point five million, well, that's kind of right in the range. So it's usually you want to raise an amount based on partially the dilution that you'll take. Right. That's at least one of the big factors that you're weighing, because we haven't mentioned that yet. But if you've got a company that's worth a certain amount and you raise three times that in cash, all of a sudden you've given away the control of your company. Right. Somebody else now owns three fourths of your company. So that's something that you're weighing. But those are some of that high level valuations in amounts that we see at the seed stage.

Rusty Rueff: Perfect. I just want you to run through, you know, ABCDE if you can. But I do want you to find one of the thing because I think people hear it all the time. What's a super angel.

Jake Thomsen: Yeah, super angel. That is some I mean to oversimplify someone that is somewhere between an angel and a VC fund in the sense that they're an individual, but they invest very frequently. They have seen a number of deals so that they're able to have a solid pattern matching. I mean, quite frankly, you know, the angels can be just incredible partners as you go and build your company. What we see is there are a lot of folks who maybe they really haven't been in the industry, but they've made some money and now they're really excited to invest in startups. So they may not be the most value added in terms of having the pattern matching, giving advice, although they've had solid corporate experience, perhaps, whereas the super angel is somebody who has had those reps, they've seen those companies, they're investing. They have, again, very frequently. So they're a little bit more of a higher value add type of category when it comes to offering rolled up sleeves, hands on help as you're building your company.

Rusty Rueff: Great. OK, now take us through A, B, C, and if there's a D, yeah, yeah, yeah, let's do it well.

Jake Thomsen: And maybe one thing I'll do because it might be helpful.

I get a question on this a lot, but I mentioned crowdfunding and what we're seeing now. I just I get a 30 second overview of, you know, there's a jobs act back in 2012. I mean, before that. But that was operationalized around 2012, 2013. And so every day, noncredit investors, essentially investors that aren't worth a million dollars or make two hundred thousand dollars a year, which is what the government says, hey, these are folks that can invest in startups and some of that's changed over time.

But where crowdfunding allows is for either credit investors or noncredit investors to participate in the wealth creation of startups. It's something the government is very interested in. So you see platforms like we fund and we've got good friends that we fund or seed investor republic that are making that available to entrepreneurs can go open up around and have a whole lot of individuals just pile in to get them around and have that come together. And generally people always ask, is this worth checking out or not? I'd say it's exciting. That's when the most exciting parts of what is going on is having crowdfunding growth.

But oftentimes institutional investors will look at that and they'll be a bit of selection bias for them. Will they say, well, gosh, this entrepreneur couldn't go out and raise money on their own, so they had to go to this crowdfunding site. And that's true oftentimes. But a lot of times it's just there are a lot of reasons to do crowdfunding.

You know, number one, especially if you're a B2C type of company where you're serving individuals and you can turn your investors into advocates, you maybe they're even decision makers at the buyers that you have, you know, where somebody can have a real emotional connection with your company and they can be involved in it in a unique way because now they can invest 100 bucks, thousand bucks, whatever it might be. That's a really neat thing. We had one entrepreneur we partnered with that he'd been building his company. He actually raised enough to get going, but he had so many people who were in the industry. He built a solution around VR productivity of virtual reality, productivity. He went out and opened it up.

And there's so many people within his family and his church in Bayor is actually his customers have been asking, is there a way that I can invest in your company? So he opened it up and that was a great reason to be doing that. So. Are solid reasons, it's going to be a good experience. It's still the wild, wild West and figuring some of that stuff out. But crowdfunding is something worth considering, especially in the early stages around kind of precede and see. So I want to hit that real quick. OK, so we finish to see now we've got some repeatability. We can say, yep, we've got product market fit given idea. You can just make that a little more tangible. Product market fit is just that. There is that alignment with what the market needs. Superhuman is one of the leaders in this space and they've got a quick little survey to say, well, hey, if you pull your users and 40 percent said they'd be very disappointed or have stronger feelings if you were gone, well, hey, that's product market fit. So there's no real scientific way. That's just an example of you feel like you're out there. People are responding and you've got a real business solving a real need.

Then that point you've got the unit economics in place, which just simply as you sign of something to bring in the customer and they're worth something else to me. Am I not spending more than they're worth or am I actually setting it up so that we can scale this thing now because each user is profitable, even if my company isn't. And so once you to that place, that's generally where you want to raise a series was the quote unquote pour gas on the fire type of moment. You want to level up and hire the right executive team. You want to get your your marketing, your sales, really want to scale. What you've identified is special in what you're doing. And typically around here, around the stage, you get these funds, maybe even venture debt. So this is a classic maybe at a million dollars, two million dollars and recurring revenue. I think last year or this year, the average raise around the stage is about 12, 13 million dollars. And you're looking at valuations anywhere from 15 million to 30 million or more than the average is about twenty, twenty two so far this year. And so you raise the money to deploy to go pour the gas in the fire and you're looking at DC funds, a lot of very household names right now. You start talking about Andreessen Horowitz or others, a bunch of folks who have been on the podcast to it, the classic let's sit down. You're going to pitch their team, go through a number of rounds and just try to raise that and again, typically have a lead doing 40, 60 percent of the round. And you're going to talk to so many different investors and so many of them will say, oh, no, I love it. You guys are doing is incredible. Let no one get a lead. Right. And there are reasons why that's completely legitimate. Sometimes that might signal a lack of conviction on their side. And so they're looking to see, hey, is there a signal of a high quality lead coming in, but you're going out and you're trying to pull together, lead the syndicate. So venture debt is another thing we start to see around here around the stage where if you raise five million dollars in equity, oftentimes there will be a bank like a bunch of them that are out there Macfarlan you get the next day, you get the next day that you announce that the venture debt.

Yeah, that's right. That's right. Hey, I read on the Primark report, you raise a bunch. Let me give you some of that to know.

We always say we're structured is like any other debt that you think of in the sense of eventually going to start paying each month. Right. But these are early stage lenders, so they know that it's high risk. And so on the one hand, they're going to make that payment less onerous. But they're also have some warrants to participate in the equity warrants or options for a company. Right. Where you have the option to invest, but not the requirement to. We always say sovereigns with equity got the right idea. You can be patient, but with debt, you've got to have the right idea and the right timing, because if it takes longer than you think and you're starting to pay debt like it's pretty tough on your cash flow. So that's another thing that we usually see around here as a non venture capital investor.

William Norvell: One of the things that I've always found is like sounds like an amazing idea, right? If you take a company, this is burning money month over month, just burning cash, and you should put a giant piece of debt on top of it. That just sounds like a phenomenal idea.

Jake Thomsen: Yeah, I'll tell you. So around the stage two to that point, William, we're seeing a lot more creative, I'd almost call them hacks, creative financing mechanisms that people are using.

You know, there are more and more of these organizations. They're not really banks. And in some ways, I guess they are, but they're lending based on revenue. Right. Are based on something else. So it takes way longer. You don't have much revenue.

Well, you're not to have to pay these guys back until you start actually growing. And that can be based on anything that's repeatable in your business. These types of companies can start to finance whether that's, you know, SAS recurring revenue or even you can get a loan to do the marketing for SAS. And they know that there's going be some kind of a payoff of a certain amount of those customers converting. You get repaid then or ecommerce rate, factoring where you have your working capital, your inventory or your accounts receivables that say you get a loan for your account receivables when they come in, you actually pay that company back.

So it's going to be more and more of those types of solutions, which I really like because they're creative. They're tied to the actual activity, the business. Right. They're not just tied to some arbitrary timing that all of a sudden the Pied Piper is going to be catching up and all the rest. So that's something we see as easy because you stack up a whole lot of debt when you just don't know when it's going to happen to these banks they want the money back to. Right. So they're they're also making sure that you've got a real business that's growing all the rest. So hopefully there's a good alignment over there.

Rusty Rueff: And what gives you the demarkation for that? We don't need to go through all the stages. But to be round, I think people are curious about, you know, OK, I took this around and I've got institutions that are invested in me and should I take more, you know, and who do I take more from?

Jake Thomsen: Yeah, so at the end of the series, you're pouring gas and fire, you're growing typically we see a B when there's something about the company that's ready to kind of grow up and get to the next level. Right. And so senior team is a perfect example of that. Oftentimes to be where you're bringing in maybe it's a professional executive to help out the CEO or maybe the CEO says that I'd rather be a CTO and deputy chairman. And so bringing the CEO, I think it was around the stage that, for instance, Eric Schmidt came in for Google was kind of modern day equivalent of what we'd call a Series B today. And so it can be built around at that team. It can be to expand the reach of the business, maybe see some ancillary opportunities that you can build on a core platform what you have. But it's not a drastic change. You know, later on, you can say, well, hey, we're the market leader in, you know, website commerce. OK, great. Now let's go raise money to monetize that through a bunch of loans that we can make through our platforms, all of our users. Right.

It's not quite that strategy shift, although you will see some adjacent markets and mostly rounding out the team that we see and you give it a high level Series B, I mean you're typically raising twenty five to thirty five million dollars.

It can be anywhere from 30 to 60 million on a valuation these days. I think the average is right around sixty actually at least in Silicon Valley. And we're starting to see two even as early as this is, more and more private equity funds are going upstream. So you have a bunch of funds that are raising lots of money and they're seeing some opportunity on the venture side. And so if they're going to deploy it, they need to write bigger checks. And so sometimes easier for an entrepreneur to get a little bit higher valuation, raise more money with some of these private equity players. You start seeing less traditional. Historically, lenders that are coming in are investors that are coming in that you typically wouldn't have seen for another couple of series. So to be yeah, you're really trying to build that team, expand the reach and raise a whole bunch of money to do it.

William Norvell: It's awesome. Thanks for walking through that, Jake and I to kind of see and kind of some version of the same maybe some different players come in, but more or less the same. And one of the things I've heard you talk about is learning by osmosis and being friends is some version of a lot of entrepreneurs show up and they don't know what those rounds mean. And I've heard you talk about how the core of that is basically you're taking enough money and you have, you know, 12 to 18 months to prove certain things. And the goal of that money is to do specific things. And typically a well seasoned entrepreneur will have those in their mind. Right. I need twenty million dollars to invest in these three things. So when I come back in eighteen months, you're going to see that I've achieved X, Y and Z. And that's what makes me ready for the series B as well, that I actually hit some of those milestones the prior round that you allowed me to have. So as I was reflecting, as you were talking on one of those, are there other best practices and this falls in the FAA? Q Or when you ding an entrepreneur's deck or something, you probably read ten of these a week. Right. One of the things that people should know if they're listening and they're going out for that first round or maybe second round is some things that you would say, hey, these are just things I find myself saying over and over and over again to entrepreneurs on the trail. And every venture capitalist is going to be looking for this.

Jake Thomsen: Yes, so that's a good question.

You know, there's so much variety among investors in what they're looking for that we usually will kind of stick to the way you put it best Praxis. One thing we talked a little bit about this, of finding the right type of partner is just making sure that that your business model matches your financing model. Praxis gets to what we were talking a little bit about earlier of if venture needs to have high growth, high profitable companies.

Well, if your company builds physical goods and low margin, you're not going to scale quite like that. Well, the business model, what you're doing doesn't match the financing model of venture. So you just got to make sure that those are going to align and you got to pick the right kind of a family office, maybe its other types of lenders. Right. So kind of getting that match is definitely something that if they're talking to us, we always want to validate that, because I tell you, the worst place to be from my perspective, is on the other side of the table from an entrepreneur. We try to structure everything so that we're sitting on the same sides and the company does well and everybody benefits. And when it doesn't, everybody partakes in that.

And so if they're coming, all of a sudden they were mentioning investing in venture, but it doesn't quite match that and doesn't really come out till three, four or five years down the line while said we get to a place that just isn't very redemptive in my mind.

William Norvell: So we always want to make sure those that match from both sides also as well as we come towards the end of our episode, I want to dig into one thing that we probably haven't gotten to as much is the faith driven side of things. I'm going to pull a teaser out for Episode two with Jake Thompson. Jake Thompson is by far one of the most thoughtful people I have ever encountered when it comes to thinking through how to faithfully align capital, how to think about product design, how to think about the renewing of all things in God's world, and how to do that through cultural change agents such as entrepreneurs. So teaser for next episode where we get to dig in with Jake on what he's developed and something he calls his theory of change of entrepreneurship. And I can't wait for our audience to get that. But on this specific point, where is the faith driven piece jump into this fundraising process and talking to venture capitalists and going through these different rounds? Have you seen that play out with different entrepreneurs? And what would be some encouragement or advice you would pass along to people listening?

Jake Thomsen: Yeah, I would look at that in two types of buckets. And the first would be behaviors at the margin that we would all probably sit around and say, oh, yeah, that's something that Faith Driven Entrepreneur should do. Right.

Kind of the reliance of prayer, for instance, this is a hard process, is an intense process. It's having a full time job of fundraising, plus a full time job of running the company and seeking the Lord constantly. And that through prayer is something that we call out right. Easy things like integrity in your numbers, in your deck where you unique people in that we see the image of God and somebody else. And we know that by honoring that person, by caring for that person like that is worship because we're honoring the image of God in that person. And so there's a special role for relationship, right. For it to be able to look at somebody and and see the story, see the narrative, see the brokenness, see the beauty in all that. And I think that makes for more unique, genuine relationship still so shrewdly. Right. Because not everybody would would reciprocate in that same kind of way. But I think there are few things at the margin that the way that we do it is different. But I do identify something a little bit more fundamental, too, and that is that as faith driven entrepreneurs and faith from people, we believe in something called soul. Right. We believe there's kind of this shoptalk because of the operating system of your mind, your body and of your heart. And I'll tell you, Silicon Valley has gotten it right in the idea of just caring for ourselves. Right. Self care in the sense of how those other three. Right. And you hear all the time, make sure you don't stop exercising. Right. You're not going to be quite right if you're not keeping up on taking care of your body or the way that mindfulness is just swept the Bay Area. Just culture in general. Right? Like, hey, how do we we focus so that our mind just isn't running rampant. We can focus our thoughts and be a good steward of our minds. And even just the way that we're all trying to destigmatize, just go and talk to somebody, write therapy, kind of just to keep the heart encouraged and in sharing with somebody else. And so much of the world understands myself in those ways. But we as believers in the soul, also as a part of us, I think we need to believe in soul keeping and health care for the soul. And there's so many things we can unpack. There were two things that I would say about entrepreneurship in general, but especially fundraising, because it's such an intense time. First one is the role of rest, right? The role of Sabbath, the idea of taking one day a week, which was John Tyson calls one of the best gifts from God that we're really bad at accepting of the Sabbath because it's so Life-Giving and beyond just being restful in of itself. It's, I believe, one of the few ways that we really train our hearts to trust God. And what I mean by that is we can believe in our heads all day long that God's in control. He doesn't need me to do my work. And yet I don't often feel that to be true based on my behavior. Right. But there's a certain connection between the head and the heart that really is connected by behavior. Whereas if I believe God's in control and then I lean into that truth by giving up a day and saying, look, I don't need to be poor myself in my work today, then, and that's a behavior that recognizes that truth, that then over time we see just affects our hearts and shapes our hearts to be able to feel the truth. The guys control a little bit more and think that that connection more generally is something that I would call out just as part of entrepeneur soul care, the connection of ideas and heart. And maybe just a hit on that one more layer with the recipes is I'll speak for myself knowing that. I mean, I would claim that the biggest priority is my life or your relationship with the Lord. And then. And care of my family and then my work is the close, number three is a number three in there. And yet if I'm in a period where the hours are way too long, we're taking up the mindspace and I'm just pouring myself into something, maybe even for a period, sacrificing intimate time with the Lord or loving my family really, really well, that I'm acting as though work is the most important thing in my life and eventually my heart starts to feel it. And so there's a certain way that our schedules become our habits become our identities. And so to protect our identities, I think we need to be sure to protect both our habits and our schedules, especially an intense time like fundraising. So my kids would be really simple, like Sabbath, just arrested day of rest, some rhythm of rest that be being important. And second thing around social care that we see a whole lot is this idea of intimate community. There's this fantastic Christian psychologist named Kirk Thompson and he writes about the intersection of spiritual habit and neuroscience. And so interesting the way he talks about just scans of the brain and what happens in our spiritual lives and the rest. He's got this idea of shame, which he says as a result of the fall, we all feel a degree of shame. And that comes out and I'm not quite good enough. I'm going to fail. And everybody's judging me, imposter syndrome, all those things that entrepreneurs more than the average population feel. And you see that in a bunch of the mental health statistics. Well, of course, as is when you're scanning the brain, you can see that part of the brain's shame just firing on a regular basis for all of us. And we all try to pretend it's not there and put on a constant exterior and all the rest. But the only thing that consistently diffuses it is being truly known by somebody and being truly loved back. Right. There's a certain way that the love of Christ is modeled in the love of others, our peers, when we can truly be vulnerable and be loved back. And so sovereigns, we love groups like C12. Missy Wallis, I know is on the show talking about the entrepeneur support groups that she does. And Praxis has a strong element of this or just that community piece, because that's so easy to just when you're on the fundraising trail, when you're going hard, just not how those times of just intentionally being known, because it's only when we're loved back that we're really going to be resilient, that we're going to, I think, more easily grasp the identity that we are loved sons and daughters of Christ. So rest intimate community. Those are things that just it's hard to sacrifice and stay healthy on the fundraising trail and entrepreneurship in general. Those are a couple of things, maybe more fundamental that I call a Amen I'm in.

William Norvell: Those are awesome thoughts and bridges in our last section here is we do come to a close. We always love to bridge our guests and our listeners and a couple of different ways. And the first ones we would love to invite you to share what gozman places on your heart there is word could be the season, something you've been meditating on. Could be life, could be this morning. And then also, if you wouldn't mind sharing anything that our audience could be praying for you for as you're out on the journey, we would love to get that as well.

Jake Thomsen: Yeah, that's kind of. Thank you. I'll tell you, I had an answer for the first question two days ago, but yesterday it changed. One of the verses that had been deeply encouraging to me is Zephaniah 3:17, which is: The Lord your God is with you. He is mighty to save. He'll take great delight in you. He will quiet you with his love. He will rejoice over you with singing. And that's been meaningful for me in different areas of my life, for different seasons of my life. The thought, the creator of all things is so excited to know us and to be with us that he rejoices with singing. He just almost can't contain himself or even the fact that he delights over us, with just some my own bents and background of the rest. It's not really easy to believe that God loves me. Sometimes I have a hard time thinking he likes me, right? But no, he loves us and he likes us. He delights over us. So that's been meaningful for me.

Yesterday I dropped my kids off at their Halloween parade. They're 3.5-Year-old-twins, they were kind of scared. They're asking all these questions, do I march and how do I go about it? And it was really cute. But also as a father, you know that I want to protect them on it. And so I got them off and my wife's out of town. So I'm out there. And because of the days of social distancing, they're in a class of ten. They're only doing one class parade per day. So you had like seven parents sitting there on the stairs and this dreary day in North Carolina. And these kids like walking by. And beforehand, I just thinking, like, man, my kids are a little bit scared on this. I want them to just enjoy it and feel love. And that verse just came to me and I thought, you know, I'm just going to rejoice over my kids in this moment. I'm going to hopefully have them lay the groundwork to experiencing that kind of love of God through that love of their earthly father. So I felt so dumb. But, man, when they came around the corner, just like throw my hands in the air, just cheering for him, clapping all the other, I had a mask on, so not everybody recognized me a little bit easier. But that was a moment that that verse came back to me and that's just meaningful and now I'm kind of meditating on it all over again.

Henry Kaestner: You mean he had a mask on like it? covid mask. Not like a Spiderman mask. Yeah. I was imagining you with, like a Spider-Man mask, and that's why I laughed. It was cool with Spider-Man. So it was both. Yeah. OK, all right. Good. I feel better. Thank you.

William Norvell: That's awesome. I was just you're the first person to bring Zephaniah on the podcast I believe. Yeah. So that's always a win. That's a great verse isn't it. It is, no.

Henry Kaestner: William has a great friend named Matt right now who sent yesterday a note to me along similar lines about a spiritual mentor he had. That's a Nepalese Christian who had encouraged him to rejoice over the fact that God loves us and to rejoice in our salvation. You know, it's just another take. And just concept of just finding joy and where do we find joy? Jake, I think he did such a great job is that we find joy by knowing that we are loved and we want to be loved and should be loved and are loved by the creator of the universe who delights in us. And then that in turn allows us delight in him and to delight in our salvation. You know, I don't spend a lot of time thinking along those lines, like, am I really delighting you? I know that God delights in me and my delight in finding joy in my salvation. Is that kind of my operating, like how I'm thinking about today? Most of the time it's not. So I'm really glad that you brought that up.

Jake Thomsen: Yeah. And quickly on the last one, William, so, you know, we just made a big move from Washington, D.C., where we're seven years down to Durham, North Carolina.

That the birthplace of sovereignty, actually. And so there's just, you know, doing that selling house, buying a house. My wife's pregnant, our third, our kids going to school. I mean, there's just so much happened during this time of covid that I say just prayers for us. Getting into routine in a rhythm and settling is something I would covet. Absolutely.

William Norvell: Amen brother, Amen, thank you so much for joining us today. Thank you so much for sharing your wisdom and your thoughts on so many thanks. We can't wait to have you back. I know I did the teaser. I'll do it again. I can't wait to have you back to talk about the theory of change and how the four part gospel leads to the renewing of all things and how entrepreneurship can be a key cog in the wheel.

So thank you so much for joining us. Thank you guys for a privilege to be here with you. Thanks so much for joining us on today's show. We hope you enjoyed it. We are very grateful for the opportunity to serve you the larger Faith Driven Entrepreneur community, and we want to stay connected. The best way for you to do that is to sign up for our monthly newsletter at Faith Driven Entrepreneur, ERG. And while you're there, we want to hear from you. We derive great joy from interacting with many of you. And it's been very rewarding to see people come to the site and listen to the podcast now for more than over 100 countries. But it's even more important to us that you feel like this is your show and that you'll help make it something the best equipped you on your entrepreneurial journey, one that you're proud of and one that you're going to share with others. Hey, this podcast wouldn't be possible without the help from many of our friends. Executive producer Justin Forman and program director Johnny Wells. Music is by Karl Cowell. You can see and hear more of his work at Summered Drugstore.com Audio and editing by Richard Bahle of Cornerstone Church in San Francisco.