PODCASTS / E69
Dr. James Richardson
Welcome everybody on this set. So I have my new friend, Gregory Shepard of BOSS Capital Partners. He’s an investor, entrepreneur, savant, whatever you want to call him. I have brought him on the show, I don’t have a lot of guests as you know, I brought him on the show for the next two episodes to talk about how you can align yourself properly with investors, knowing their dark side before you get into relationships with them. Thank you Gregory for coming on the show.
Gregory Shepard:
You’re welcome. Thank you so much for having me. I really appreciate it.
Dr. James Richardson
Now, do you have a super brief bio? Your bio was so fascinating to me.
Gregory Shepard:
Yeah. I mean the whole thing goes back. My mom was a nun. My dad was a priest. They left a church to foster and adopt. I grew up with a lot of different types of people. I have autism, dyslexia, dysgraphia, dysmorphia, synesthesia, and savant syndrome. I hate that they say savant syndrome drives me crazy, but anyway, I didn’t have any money. We lived in tents for a while, while we were trying to build our house on the property. I grew up hard and I was in like 10 high schools. Got I kicked out of high schools. I wasn’t a fit anywhere. I barely graduated from high school. So I started accomplishing an annual challenge every year, since graduating from high school things like I wrestled an alligator. I climbed the rock face of El Capitan, stuff like that. And then I started businesses when I was in high school.
Gregory Shepard:
I started selling Rubik’s cubes and showing people how to solve them and then charging to sell them and stuff, and then moved all the way up until I sold my business, two businesses to eBay as part of a 925 million transaction that won for private equity awards for transactions between 250 and a billion. And then I started talking to universities and then I created this thing called BOSS, which stands the Business Operating Support System. With autism is you want to create processes for everything. That is now becoming a book that’s coming out next year. And I have all these articles and there’s a school that they’re teaching it now at universities. And that’s my thing.
Dr. James Richardson
Wow. Greg has been a busy guy.
Gregory Shepard:
Thank you.
Dr. James Richardson
While I was reading 10,000 pages a week for no particular reason in grad school, he was doing stuff. All right. So we’re here to talk about how one aligns with investors. So Greg, you have written about this and I’m going to shut up here, but my prompt, if I want to call it, that is, could you share with my listeners what you feel are the core variables of alignment that you need to get right as a founder?
Gregory Shepard:
Yeah. First of all, the thing you have to realize, there’s a lot of people that argue with me about this, but you have opposite outcome objectives, right? Meaning the only thing you have in common is that you and the investor both make money when it exits. Right? But that is a very thin commonality. The more thick commonality is the fact that they want to make as much as they can. And that means that comes out of you. So when you’re taking money and you’re getting dilution, I mean, they’re looking at those numbers when you’re an investor, you’re looking at dilution, dilution, dilution, over and over. You’re looking at the valuation. If it’s low enough that you can get a good piece of the company. In that way, you need money. But in order for you to get money, you have to take dilution, which is in the control of the investors.
Gregory Shepard:
So you are not aligned there at all. So it’s good to make sure that people understand that is a good starting place, that you need to understand that they’re not your friend, but you need them. Then you have to understand the way that they’re thinking. So if your valuation of your company is lower, then when they invest, they get a bigger piece. If they have preferences, these are things like for every a hundred thousand, they get two X preference, meaning that they invest a hundred thousand, they get $200,000 or they get a first right, so if there’s a round coming up, they get the opportunity to put another round in or more money in, at a preferred rate. There’s all these things, these different preferences. The first thing is that they are very heavy on preferences usually.
Gregory Shepard:
From their perspective, they’re going to tell you, “Well, it’s really high risk.” And it is from the standard numbers. One out of every 10 succeed, 90% failure rate. So there is a risk associated with it. But at the same time, there is also the opportunity side. So you have to understand who you’re talking to and their outcome objectives. And their outcome objectives is to make the most money they can on every deal that they invest in because they factor in the fact that nine out of 10 fail. So they need one to pay for the nine that failed. So they’re piling money in they’re doing everything they can to try to make one pop. And the rest of them just sort of burn off. They don’t need to burn off. They just do because usually from the push from the investors.
Gregory Shepard:
So the investors are like, “Take money, take money, grow, grow, do this, do that.” And they’re just giving them all this advice. And the entrepreneurs like, “Okay.” I mean, you’re going to say no to money when you don’t understand the consequences. And then boom, you turn around your company’s overvalued. Meaning it’s worth less than the amount of money that you’re putting in and understand that the investors want to get five to 10 times return, usually at least three to five times their return. So if they invest a million dollars, they want $5 million. So even though you took a million, you have a $6 million now, a new nugget that you need to hit in order to make them profitable. And that grows the valuation until the valuation is big enough that the amount of money they put in is more than the company will be worth when it’s sold. And then they leave and they leave you high and dry, and then you’re screwed and you go out of business.
Dr. James Richardson
You’re unexitable. I have a question for you, Greg, because you’re deeper into this and it’s literally a hypothesis for me observing investing in the CPG world. But do you feel there’s a value to founders who knowing where they fit, so sort of what their darling status is in the portfolio of an investment firm? Like where they fit and this could be after the investment too, are they the one? Are they the one that the managing partners think is just going to be it? Because they all have these biases. I mean, if you go have coffee with them, go through their portfolio, there’s one or two that they’re just obsessed with irrationally.
Gregory Shepard:
Yeah.
Dr. James Richardson
Is it worth knowing that? Because my sense is those are the ones that get really pressured.
Gregory Shepard:
It’s worth understanding that they have an overall thesis. So if you’re trying to raise money, you have to understand what their thesis is. So yes, they have some theory about how they’re making investments that are better than everybody else in certain verticals, in certain markets, blah, blah, blah. And that’s why the investors should go to them. And that’s why the entrepreneur should go to them and so on, so forth. So you have to understand that. And if you go into some VC or angel groups or whatever it is, wherever you’re getting your investment capital from and you don’t understand their thesis, then you’re not going to be a darling. First of all right? If you understand their thesis and you fall into it, then you have a potential being a darling. But nothing is a darling until there’s big growth numbers. Even at the compromise of the overall business.
Gregory Shepard:
Airbnb and things like this, they happen all the time because of investors because the investors are the one pumping it up. Not usually the entrepreneurs, even though the entrepreneur’s the one who takes the fall. You see these huge fumbles and these huge fumbles come from some greedy people and some people that are just opportunistic trying to grow the value of a business. But because the investors don’t understand from a practitioner’s perspective, what a business is, what it’s made out of and how it functions besides what they learned in school. Most of them went to some fancy school. They got out, they got into investing and they right away learned investing and they didn’t learn about business itself, like how to actually build a business, what things like key performance indicators are. They have vague ideas of these things.
Dr. James Richardson
Yeah. I talk about that in my book, which has pissed off many people.
Gregory Shepard:
Yeah. And they’re really terrible for advice. Majority of the time, it’s good to listen to them to understand their perspective. But that doesn’t mean that should be your perspective. And it doesn’t mean that you should change your business to work the way they think it should work.
Dr. James Richardson
I think that’s a really cool variable there, which is learning how to speak to their perspective without mindlessly following it. Right? Because that’s a political, that’s like the board deck, it’s a thing. And that thing is not this. And I’ve seen the difference because I’m a consultant. So I see the board deck and then I see the interns.
Gregory Shepard:
Yeah. And they’re very, very different because the board deck is the presentation in the way that they want to see it, teach the investor how you want to communicate with them.
Dr. James Richardson
Nice.
Gregory Shepard:
Instead of let them dictate to you how … So basically one of the things I tell people is I say what’s in a board deck? Okay. 95% of it are financial numbers, right? And financial numbers, by the time you see them, the process of creating those financial numbers started typically six to 12 months earlier. By looking at the financials, you’re telling the board, by looking at the financials, you’re driving down the car, looking at the rear view mirror. What I would like to show you are the things that produce the financials. And by teaching them that using KPI, lagging and leading indicators and KPIs and things like that, you can show them what is creating the revenue.
Gregory Shepard:
When you do that, then you start to get financial backing in the areas that you want with their support. Instead of having to put together a board deck and saying, “Allocation of funds is going to go here and here and here. And then you just do whatever you want afterwards.” You have to tell them how you think. You have to explain the way you do things. Otherwise, their advice is going to be wholly sided on the way they think. And that’s how a lot of really bad situations happen. Do you know when you have a conversation with somebody and you’re halfway through and then they go, “I got it. I got it.” But there’s more-
Dr. James Richardson
That always makes me nervous.
Gregory Shepard:
Yeah. That’s what investors do often. You start talking, they go, “Okay. Okay. Okay. I got it.” What they mean is that they understand the mechanical numbers in their way of thinking. It doesn’t mean that they understand you. And that doesn’t mean they understand what you’re trying to do with your business. It just means that they have gotten the information to surmise their thesis on whatever you’re talking about. So you have to make sure that you understand that you have to be careful that you don’t give them the information that makes them think that they have all the information because then you’ll be cut off.
Gregory Shepard:
I’ve never had it happen to me where somebody, you give an investor information and they don’t figure out how to turn that around and hit you with it somehow. They’re cataloging a list of things that they can use to maneuver down the line. One of those things is like, if they know you’re going to need money and they want you to do something or they want to get something from you, then they wait to throw that leverage down until you need money. And then they do it. And so they’ll space out the rounds and they’ll do different things. Some things with preferences to put you in a situation where you have to get the money from them. And in order to get the money, you have to do certain things.
Dr. James Richardson
Yeah. I think what people need to take from Greg’s comments so far is that investors, regardless of what they say on a fucking podcast or in a panel area, they’re managing a financial game because that’s their expertise.
Gregory Shepard:
Yeah. A hundred percent.
Dr. James Richardson
So you have to understand that that’s the only thing they care about. In fact, they’re being ball busted back at their office with their LPs on Wall Street, all about that. So that’s the only thing that concerns them. So when they start telling you what to do with your consumer marketing campaign and these guys, I’ve seen guys that get all sorts of crazy ass ideas about shit they know nothing about. That’s all part of the financial game as well. The only reason they’re bringing it up is because of that.
Gregory Shepard:
Yeah. Like you, they have certain things they have to show like you have to show your investor certain things. They have to show their investor something. They’re a middle man most of the time. Now they’re saying, “Okay, we have to show off this company to our LPs. Tell me what I need to show them.” But to give you a better perspective on this, you have to understand because I always think about follow the money. If you’re a VC, you’re making two and 20 and two and 20 means you’re making 2% off the money you’re managing for the investors and 20% override on whatever you make over the hurdle, the hurdle being however much the investor put in. So that tells you a lot right there. There’s nothing in there about how successful you are or how to look out for the entrepreneur. It’s just straight up. They don’t lose money if you go out of business as an entrepreneur. They don’t lose money. Their investors do.
Dr. James Richardson
You’re right. Yeah. No, it’s the weirdest thing, isn’t it?
Gregory Shepard:
So what they’re after is getting more money to manage because they make that 2% off the money they’re managing. The only thing they’re trying to do is show numbers that’s going to allow them to get more investors into their funds so that they can collect more of that 2%. The 20 over the override is only good if it’s a big number, which is why they’re all trying to push you to those big numbers. So if you-
Dr. James Richardson
Somebody has to get there.
Gregory Shepard:
Yeah. So if you understand the financial mechanics of how these places function, then you get their motivations and their motivations tell you when you’re transparent with them, how they’re going to utilize that information.
Dr. James Richardson
Before we wrap up the variables of alignments, the little piece here, I want to just toss out something to get your reaction. I have this growing belief, conviction, at least that the good investor for amateur clients and I generally work with amateurs in the industry, but amateurs who are got a killer innovation, the market has delivered them sort of above average traction and now they need to raise some kind of funds to invest in growth and staff, for that person who doesn’t have industry experience and a lot of connections usually, certainly not investor knowledge. The good investor is often just a rich angel.
Gregory Shepard:
Yeah. A lot of times.
Dr. James Richardson
And I just wonder, why would you ever want to work with an investor who thinks they have a lot of industry knowledge when you are an amateur with no experience working with them? You know what I’m saying?
Gregory Shepard:
Yeah.
Dr. James Richardson
Doesn’t that violate the car sales, car buyer, asymmetry law?
Gregory Shepard:
Yeah. Yeah. I mean investors’ role are if they don’t have the subject matter expertise or the vertical subject matter expertise, what I mean is like marketing, like functional area expertise, marketing operations. They don’t have any of those things and they don’t understand your vertical deep and they can’t connect you with people, they need to invest the money and they need to let the entrepreneur move.
Dr. James Richardson
Maybe it’s because I have Asperger’s and I don’t like a lot of complex relationships in my life, but that’s all I would ever want. I don’t want to get into arguments at a board meeting with some guy who thinks he knows better than me because he’s-
Gregory Shepard:
They all think they know better than you.
Dr. James Richardson
Right. But I wouldn’t sign a deal with that person just personally. I have no time for that attitude in my life.
Gregory Shepard:
Yeah. I would be very cautious about the kind of, yeah. I tell people all the time, I’m like, “When you take an investor, it’s like getting married, you have a relationship that is going to maintain with this person-“
Dr. James Richardson
Except it’s a marriage where you know you’re getting divorced as you start. It’s so weird.
Gregory Shepard:
Yeah. And the divorces can be even more ugly than a marriage divorce, right? I mean, because they can just destroy you. You have to be really careful about who you’re choosing. You have to understand who they are and I would, “Can I ask other places you’ve invested in?” And then I would call those entrepreneurs.
Dr. James Richardson
Have long conversation.
Gregory Shepard:
And I would say, “Hey man, I’m thinking about taking these guys on as an investor. And I want to see what your experience been like between you and I.”
Dr. James Richardson
But how easy Greg is it to get the failed investment? Because you want to talk to the people that nothing happened, right? Who’ve invested with-
Gregory Shepard:
That’s really-
Dr. James Richardson
You know.
Gregory Shepard:
Usually they’ll tote about all the investments they made and then they’ll put all the ones that they sold. But sometimes when they don’t work, it’ll just disappear and there’ll be no comment about it at all.
Dr. James Richardson
It’s a lot of networking to find the majority of their investments that went nowhere and then talk to those guys, the behind.
Gregory Shepard:
Right. Because those guys, they don’t want to be seen as somebody that failed and the investor doesn’t want to be seen as somebody that failed. So it’s in both parties’ interest to just hide the whole thing, but you can find them.
Dr. James Richardson
I think what Greg is and I agree you got to push hard for that, I think it’s really important. And people give up too easily on them, what I would call vetting, like the way you would vet an employment candidate.
Gregory Shepard:
Yeah. And you have some real, like you have to understand your business, what I call the North Star of your business very clearly, so you can judge the type of investor that you’re taking on up against the principles that are in your North Star. I’ve played ball with a monster Silicon Valley guy who I thought was a friend. And he was so cool the whole time as a friend, everything was going good. The deal was supposed to be 5% of the exit. They had put some preferences in there that at the time seemed reasonable that it would hit a certain amount of money.
Gregory Shepard:
And it would be 1%, 2%, 3%, 4%, 5%, depending on how much the company sold for and the data that I had looked at at the time, this was a transaction where there was other companies and stuff, but the data that I found said, “Yeah, we’ll easily be able to hit this number.” So I agreed with that scale up offer. But then it turned out that the data that I was looking at was flawed. Right? But it took just as much work as it would’ve the other way to turn around this business and sell it. And I did that and I ended up getting less than 1% because of that structure instead of the investor adjusting and saying, “Well, the data that we originally agreed on was wrong.” They said, “No, a deal’s a deal.”