E-Commerce secrets to scale

020 - Tips on Raising Venture Capital with Jeff Erickson

020 – Tips on Raising Venture Capital with Jeff Erickson

E-Commerce Secrets To Scale is a marketing and entrepreneurship podcast that revolves around hearing the stories and strategies of successful entrepreneurs and e-commerce professionals to uncover scaling secrets that will impact your online store.

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Tanner:

This week on the show, I have Jeff Erickson, director of business development at Carta. Jeff and I talk all about how he built and eventually sold his business, as well as some tips for early stage founders on raising venture capital. Jeff is an awesome guy. You’re going to love this episode.

Welcome to the show Jeff. I’m so excited to have you. Go ahead and introduce yourself to the audience.

Jeff:

Yeah, thanks Tanner. I appreciate you having me on here. My name is Jeff Erickson. I currently serve as the director of business development for Carta which is a cap table management software solution and transaction platform. Just kind of cool. I’m also a founder. I’ve started a company, had an exit and love working with entrepreneurs, founders, sit on the advisory board of a number of companies and that’s kind of me.

It actually felt like a startup within a startup.

Tanner:

Awesome, man. So let’s go back to the very beginning of your career. Can you tell us your story?

Jeff:

Sure. My story, I came out of the University of Utah with an MBA and joined an investment company here locally, thinking that that was what I was going to do. I was going to just be in investments. All of that, that was the career path. I did my MBA in finance and about four years into it, one of the partners at this investment firm, they left to go to a startup and he ended up taking me with him. So I was like employee number 15 at this startup, during the .com boom and bust and fell in love with the startup culture, you know, just the mindset, all of that.

And so, we raised a couple of big rounds from inside partners and some other folks and had things going at the point where we were eclipsing the sales of our biggest competitor and really getting traction in the market. And we were kind of all thinking that our stock options, we were going to cash in on them and we all going to retire. And I’m pretty young at that age at that time. And obviously that, you know, that was kind of during that .com area. And we ended up hitting the bubble and seeing the bubble burst and, you know, all of our dreams came crashing down with that. The company survived. It had to change direction and do some different things, but it gave me a taste of kind of the startup world. And I went off and did some consulting, joined another startup that, you know, we had some different products that we were kind of rolling out.

And at the same time, my wife had this crazy idea that she wanted to do. And so I said, yeah, go for it. I didn’t think it would ever turn in it to a whole lot, but her little venture ended up being pretty significant, to the point where I helped her raise some capital. And we brought on a strategic partner and started a company called Uppercase Living that scaled to about $40 million in sales over the course of about four years. So we had a pretty strong growth pattern there for short period of time. After that, you know, we sold the company and I took a little break and then ended up joining Carta. So it’s kind of a quick summary, I guess.

Tanner:

Awesome. So how long was your hiatus?

Jeff:

I took about a year and before I joined Carta. Actually Carta came to Salt Lake city and opened up an office here. And it’s kind of funny because it actually felt like a startup within a startup because at the time Carta was based at San Francisco, had a couple of different offices and they brought in the, or when they opened up the Salt Lake city office, we had just a handful of people in this coworking space down on state street. And we quickly grew to like 60 people in this coworking space. And it was just chaos but a ton of fun. And it did, it felt like the startup world at a early stage startup, even though we weren’t as early as some of the other startups.

The key thing that we did was we shut everything down for about three months.

Tanner:

Yeah. That, that does sound like a lot of fun. So let’s take a minute and talk about Uppercase Living. What were some of the obstacles that you’ve faced while growing that to, you know, 40 million in revenue?

Jeff:

Oh, man, I think early on one of the things we saw really is that, you know, we had just a couple of machines and we had to scale somehow, so much material. It was a vinyl lettering company. And so we could produce so much per day. And in order to scale that we had to have somebody manning the machines and physically switching everything out. And we quickly realized that just was not scalable. And so as the demand continued to grow and we were running into production issues, we finally hit a point where we had to say, okay, this isn’t scalable. What do we do? And at that point we had, we had brought on a strategic partner that was a technology company and they put in some capital, we put in some capital.

The key thing that we did was we shut everything down for about three months. It was one of the hardest decisions you could make, thinking that we’ve got this momentum going and we can’t lose that, but we also, you saw, and it was, you know, thinking as far as strategic partner, they kind of helped us see that we could actually put technology in place to make it so we could scale it. And if we didn’t do that, we were going to implode. And so that was a hard decision, but it was the right decision in hindsight to where that’s what made it so we could actually scale, is we shut everything down, got the technology in place, we were able to automate a lot of the processes, you know, put a platform in place that could then grow and scale. And if we hadn’t done that, it would have been a disaster.

All you have to do is tell engineers that something’s not possible and all of a sudden, they’re pretty excited about solving the problem.

Tanner:

Wow. Yeah, that’s crazy. And it just goes to show how important it is to have a scalable process within your business. Right? And so after three months, you shut down for three months, is that how long it took to get that automated equipment in and start running with it?

Jeff:

Yup. Yeah, like I said, our investors that came in, they were a technology company and so part of their investment was the technology that they were bringing. And it was interesting because some of the machines that we had acquired, we went to the manufacturer and told them what we wanted to do. And they said, yeah, that’s not possible. And we wanted to connect them all so that they were all connected and we could automate all this. And, you know, having a technology partner, we threw that out to the engineers and all you have to do is tell engineers that something’s not possible and all of a sudden, they’re pretty excited about solving the problem. So they were able to do what the manufacturers said was not possible and made it so we could scale on a larger scale than anyone thought possible.

Everyone has luck, whether it’s good luck or bad luck.

Tanner:

Yeah. That’s a really amazing story. So, Jeff, what would you attribute your success to over the years?

Jeff:

Oh, man. You know, I think looking back one of the keys, I would say, would be putting yourself in a place to where you can take advantage of opportunities when they come up and being ready for that. I think there were a lot of times where, you know, if we weren’t in the right spot or even frame of mind you can miss out on opportunities pretty easily. It’s a lot easier to take risks when you’re kind of prepared on the backend. So I think that’s something I would look back on.

Tanner:

Yeah. So a lot of people always talk about this element of luck when it comes to, you know, scaling a business and being whatever your definition of successful is. But, I always say it’s about putting yourself in positions to where you can get lucky. And I think putting in that work, not only yourself, but your business is how you create those opportunities for luck to happen.

Jeff:

Totally agree. Yep. I think, you know, there’s no doubt that there’s luck involved in a lot of things, but everyone has luck, whether it’s good luck or bad luck. A lot of that has to do on both sides on how you handle it. So I mean, if you, if you read Good to Great, go back to that book and you, you know, the studies that they did on, on luck in there. Interesting.

Tanner:

Yeah. I couldn’t agree with you more so moving towards what you do now, you mentioned you’re the director of business development and Carta. I’m sure there’s a lot of people listening to that probably have never heard of Carta but they really need to, right? So can you explain how Carta helps early stage founders?

Jeff:

Yeah, absolutely. I mean, that’s actually something that drew me to Carta was working with early stage founders. And what Carta does just in its most basic sense is it helps to keep track of who owns what in the company. So it’s managing the equity and traditionally, you know, you’d go to an attorney, they would draft up your documents of who owns what and then they would issue out paper stock certificates so that you would have them as a founder and then you’d give paper stock certificates to your investors or co-founders, and then you’d roll out a stock option plan for your employees and you’d them paper stock certificates and everything was done in paper and kept track of on a spreadsheet.

Well, you can imagine that as you get more and more investors and more and more employees where you’re rolling out, you know, option plans and there’s vesting schedules associated with it. And there’s different preferences with your different investors. They have different terms with their deals and other investors. It gets pretty complicated, pretty fast. And so Carta created this platform where it keeps track of all of that information in one place. And I always think of it from the investor side, as much as the company side, but if I’m an investor and there’s a company that is not keeping tabs on it’s a cap table or not keeping things up to date that concerns me. Because I mean, that’s my equity that they’re tracking. I’m going to obviously track it on my side, but you’ve got to have a way to keep everything in one place. And so you see that investors now are actually requiring a lot of companies that they invest into get on a system like Carta just so that they know that things are kept track of in an orderly manner.

But you know, on the company side, Carta makes it easy for founders as well because you’re issuing everything digitally or electronically. So when you’re rolling out a stock option plan to employees, all of the vesting schedules are kept in the software platform and your employees can actually log into their own Carta accounts and see where they’re at in the vesting process. They can exercise their stock options when it comes time for that. It really makes the whole experience for the founder, the company for the employees, for the investors so much more efficient and for the attorney as well. Attorneys are probably our biggest source of referral business because they want their companies or their clients using a system like Carta.

Venture capital is not the only source of capital out there.

Tanner:

Yeah. Yeah. I mean, you guys are definitely solving a huge problem for sure. But something that you’re really good at is raising capital. Right? So I want to talk about that for a little bit. What are some not-so-obvious aspects of raising capital that maybe some early stage founders aren’t aware of?

Jeff:

Yeah, I would say one of the things is a lot of founders think that they have to raise venture capital. Venture capital is not the only source of capital out there. I think that why you default to that is because, you know, typically a bank’s not going to give you a loan unless it’s got collateral backing it and maybe a personal guarantee from you. And a lot of founders are thinking well, and do I want to take that risk and put my home on the line or any of my assets? The fact is that if you’re not, then I wouldn’t expect an investor to either. So I think as a founder, you have to put something at risk, but venture capital can be a good way to leverage that and say, okay, I’ll put some in and I can go raise money, but there are other ways, I mean, there’s revenue for different types of businesses.

I mean, if you’ve got a company generating revenue, there’s revenue based financing that’s available, there are other forms of financing. If you’ve got inventory and you’re a consumer products company, you might look at different types of financing. The one thing that founders don’t realize when they go down the venture capital path is that as soon as you raise venture capital, you are now on an investor’s timeline. And that investor, when you’re talking about venture capital, they’re not looking for, you know, a two or three X return on their money. They’re looking for a 10 X return on their money. And that means, you better be on a growth path that over the next, you know, five to 10 years you are – this is your life and you’re going to be growing quickly. And there’s a lot of pressure to that. It’s not for every company. Not every company is a 10 X growth company and so you don’t want to force yourself into that. And also not every entrepreneur is a 10 X entrepreneur, a two or three or four or five X return for a lot of companies is fantastic. But it may not be a great investment for a venture capital company.

Tanner:

Yeah. And that’s really good advice. Another thing I’d like to mention is, you know, everything seems to change as soon as you had got VC money on board. Now, the direction of the company changes, you see pivots all the time, because now you’re not trying to grow your vision. You’re trying to satisfy your investors.

Jeff:

Yeah, yeah. It is a different ball game. You’ve got to realize that it’s not just the venture capitalist, so the venture firm that you go in and partner with, but it’s their investors. They have investors that are investing in their fund, that they have a financial responsibility to get a return for those investors. And so they’ll get pressure from their investors that can flow down to you as a company operator. And so you might, I mean, there are instances where the right decision for the VC firm may not necessarily be the right decision for the ultimate success of the company, or even the less risky path to go as an entrepreneur. So, I mean, you’ve got to kind of take that into consideration as you go down the path for, you know, raising venture or a different type of capital as well.

Put your funding plan in place and model that out.

Tanner:

Yeah. And that’s a good point, I guess I’ve never really thought of it like that. I’ve always just thought of, you know, you’ve got one head honcho VC investor that is just down your throat about something, but I didn’t realize that they would also be taking investors through their funds. So that makes a lot of sense. So what do you think is a big mistake that you see a lot of founders making when it comes to raising capital?

Jeff:

A great question. I think something that’s really common, especially early on is founders will raise that initial capital through like a safe agreement, a simple agreement for future equity or a convertible note type of agreement. Where you’re not necessarily setting a value on the company, but you’re kicking it down the road a little ways. And, you know, that’s great. I mean, there’s definitely a place for that. But what happens too often is founders will stack those notes and they’ll just keep raising more and more on these comfortable notes, not realizing the real impact that that’s going to have on the dilution of their own equity.

And so, for example, you might raise, you know, say, okay, we’re going to raise a million dollars in a safe note and you have some other additional investors that come in and say, well, we want to participate too. And you’re giving them a 20% discount, which is pretty standard. So they get a 20% discount off of the round that you’re going to raise in the future. So if you’ve got, now you’ve got another investor that wants to come in and you say, okay, yeah, that’s great. Let’s take more money. More money is better. What you have to realize is that that money that you’re taking, if you don’t need it right then, then you’re giving up a 20% discount on the next round that you’re going to raise. So if you’re six months out from raising your next round, you might want to look at waiting. At the same time, you kind of have to balance that with, you need to make sure you raise enough that you have the runway to get to that next step. And that you’re not just raising a small amount that’s gonna put you in fundraising mode three months from now, to where you can’t focus on growing the business.

So there’s a real art to that, but something that founders have to be very careful of is leaving those convertible notes open too long and raising at the same rates as they progress along those lines. There are tools out there, including some stuff that Carta has, that helps founders to model out there safe notes or convertible notes so that they can kind of see what the impact of that’s going to going to look like. So a piece of advice I would give is to put your funding plan in place and kind of model that out and see what that’s gonna look like at your A round, at your B round and do those models. So, you know, the impact that’s going to have, and it doesn’t surprise you in the future in terms of your dilution.

Focus on what you’re good at and let others focus on what they’re good at.

Tanner:

Yeah. Awesome, awesome advice. So Jeff, what would you say your secrets to scale are?

Jeff:

Oh, secrets to scale? One thing I would say is surround yourself with great people. You know, and I think too many founders get stuck in this mode where they have to control everything. The great founders that build long lasting businesses and successful businesses, they’ve had to learn to, you know, focus on what they’re good at and let others focus on what they’re good at. So hiring the best talent that can take you to the next level. While at the same time, you’re growing as a founder and learning as you go.

Yeah, I think both of those things are super relevant and super important. At the same time, a founder can also sometimes be the thing holding back a company from being able to scale. If they think that they’re the one that has to do everything or they have to learn everything in order to do something even. If you bring in the right folks and let the company benefit from the experience and knowledge of others, experts, I think that’s a secret to scale for sure.

Tanner:

Yeah. I love that. I think surrounding yourself with people that are smarter than you as a founder is probably the best thing that you can do. And if you surround yourself with those types of people, then it’s really easy to delegate to them and not have to do everything yourself because you actually trust them. Right. And, you know, sometimes it just comes down to letting go just saying, Oh, what’s the worst can happen? You know, business outgrows its founder. It always will if you’re doing it right. And if that’s not the case, then you don’t have a business, you have a job.

Jeff:

Good point. Yep. Good point.

Tanner:

So, Jeff, I really appreciate you taking the time. Is there anything that I have not asked you that you think might benefit the audience?

Jeff:

You know, the other thing that I think I would add, just to wrap things up is, always be networking, always be looking at places and opportunities where you can add value. You know, and it kind of goes towards that paying it forward, but, you know, networking with good people and surrounding yourself with good people, whether they can contribute to your personal success or not – surrounding yourself with good people, I think is super important and something I’ve found. It’s not only helped in terms of success in business, but also in life. You know, making connections is what life’s all about. So I would highly encourage people to get out and broaden your networks. Surround yourself with good people and, you know, make that a goal and put effort behind it.

Tanner:

Yeah. I love that Jeff. That’s how we met right? Through networking. And so this is proof that good connections come from that. Anyways, what’s a good way for anyone listening to get in contact with you?

Jeff:

LinkedIn is probably the easiest feel free to look me up on LinkedIn. And if somebody wants to reach out to you, Tanner, feel free to give them my email address, but that’s probably the easiest way to reach me.

Tanner:

Awesome. Well, thanks again, Jeff. I really appreciate it.

Jeff:

Thank you, Tanner. Great to catch up with you.

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