Alan Fisher from Sandhill Angels on 3 Critical Goals for Startups Before Scaling
Thank you to Alan Fisher with Sand Hill Angels for joining the Liberty Ventures Podcast! Sand Hill Angels is a group of successful Silicon Valley technology professionals dedicated to the formation and growth of startup companies. Alan shares his insights as a seasoned entrepreneur and investor to help other entrepreneurs scale and other investors make better decisions!
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Alan Fischer Podcast Transcript
Alexander McCobin:
On this episode of the Liberty Ventures Podcast, I get to talk with Alan Fisher, a multi time successful entrepreneur, a very successful Angel investor who's Now chairman of Iron Speed Inc and very active with Sand Hill Angels, where Allan shares how his experience as an entrepreneur. Has allowed him to vet opportunities better and his experience as an investor has given him insights into how to build stronger. Companies he gives us a long list of recommendations for founders on what to do. The only one I'm going to share right now that I think is really important is to make sure that you are finding early traction with customers. That's the most important thing in order to figure out what customers will actually pay for and how you're going to scale. And then as an investor. He he gave us another litany of things that he looks for in companies, but the one that I'll share right now is that he looks at the real opportunity for the company to hit $100 million in revenue in the next six years with its current manager. The team that's the key question for him. There are others as well, but the those two I think are just so insightful and powerful for both founders and investors to consider, and he teases us at the end with how he's seeing the investing landscape change from the.com bubble back in the in 2000 to where we are right now and comparing that with where AI is or blockchain. Was five years ago. How to interpret those signals and make the most out of them? It's an incredible conversation. I hope you enjoyed as much. Frida. Alright, Alan. Thanks so much for joining us today for anyone who's not familiar with your background, I want to give you a chance to first share your experience your story so that everyone has perspective for the conversation we're about to have.
Alan Fischer:
Great. Thanks for having me. My pleasure. My background is like many entrepreneurs. I have a software engineering background. My degrees are in electrical engineering, got into the startup world fairly early in my career, had the opportunity to Co found and take two companies. Public back in the 90s, one was an early e-commerce company and the other was. A document management software company more recently have been in and out of the venture capital doing a lot of Angel investing, and I'm working on a fintech start up at the moment.
Alexander McCobin:
Amazing. Now what's really driven you throughout your career? Was it your love of engineering? Was it a certain problem that you wanted to solve? What's what's been your motivator?
Alan Fischer:
You know that's a good question. I think like most engineers, I just like to create things, invent new things, right. You know, 100 years ago we were called inventors. And that's what I like to do, develop new in my case software and Internet products.
Alexander McCobin:
Amazing having been an engineer for a long time, starting several companies. I'm curious for any of the other founders out there listening right now what have been some of the biggest, the biggest lessons you've taken from the from the companies that you've started and then I'll dive into a few other things with that, but. Let's just start with the lessons.
Alan Fischer:
Sure. Where where to start? I think the most important one when you start out with any idea, any venture. Is to work small. Keep your team very small. Keep the product very focused. Engage with your potential customers before you start doing anything. That's really a lesson in product market fit or as I like to refer to it, profit market fit. And I think it's very important for anyone doing a start up to. Make sure you've got some customer traction very early on with whatever product or service you're developing so that you know that you're on the right track. Almost all startups in my experience pivot a couple of times along the way and so that's why I always advise folks and try to. You pretty close to that myself, of keeping things very small from the get go. My current startup is just me and my Co founding partner, so it's just two of us. We don't have any outside investors. We can change course whenever we want or learn something. New and it keeps us very focused on customers. I I found a lot of companies along the way get excited. They raise a lot of money and then they got to market and find the market isn't where they thought, you know, they're not really solving a problem necessarily that people want to solve one of the two companies that I co-founded and took public. We funded all of our product development from customers. We raised no outside. Apple and the customers that kind of drove our product direction, they came to us asking for features we charge for that and kept the rights of course, and grew organically that way. So we were always very close to our customers throughout that process. So if there's just one or two things. Can advise keep it small and keep very focused and engaged with your customers from. You want.
Alexander McCobin:
Oftentimes, entrepreneurs learn this the hard way by either not being engaged with their customers or going a little too big. I'm curious if you've got any any stories from your time that have taught you these lessons.
Alan Fischer:
Yes, there was a company I was on the board of Back in the late 90s and they started out small, had some early customer traction and then went out and raised their very first round, which was. A 20 million. Dollar round. That was when.
And a time when money was very easy. Kind of like it was a few years ago here. And what happens when a venture capitalist gives you a large chunk of cash like that? He wants you to quote, put it to work and what that means is you go out and you hire a whole bunch of people and all of a sudden you've got internal. Chiefdoms and whatnot and you become less and less customer focused. One of the VC's on the the board. Josh Hankins from advanced Technology Ventures took the CEO out to lunch and said. You know. If we were smart, you would just let all your employees go except for the real core team. Focus on getting everything right and making sure you can get some customer traction and then start to spend the money and scale up. Of course, that's not what happened because the other. He's wanted to get big, fast and sure enough, it ended up. As many of these things do, we're seeing a lot of that in the market now. Today in my experience, you see a lot of companies that were able to raise a lot of money fast in 20/20/21. It started to come down in 2022 and you have a lot of crammed down rounds occurring now. Because of this, you know it's like you say you should husband. Your cash and work real hard to to make sure you've got product market or profit market fit before scaling.
Alexander McCobin:
And so much of that really is to help entrepreneurs remember that the customers are the customers. The investors aren't the. Customers and they need to focus on achieving that profitability and scaling that to have a thriving business rather than just thinking about the next funding round.
Alan Fischer:
I'm sure you see a lot of that as a venture capitalist, you get emails and under traction they list the amount of money raised or how close they are to filling their current round. That's not traction customers. Attraction revenue is traction, you know some metric of customer engagement is is traction letters of intent, proofs of concept. There's all manner of traction out that you can have, but fundraising is not one of.
Alexander McCobin:
That's right. And customer engagement really is key and knowing what your customers want in order to serve. It is critical how? Have you gone about being engaging your customers in the most effective way, not just seeing their purchases, but really understanding what they're looking for, how to improve your products and to be able to serve them most effectively?
Alan Fischer:
It takes a little time, but it's actually pretty easy. You've just got to pick up the phone or you've got to go out and meet them in person. And it depends on the nature of what you're doing. Of course, you know, sometimes it's a a phone call or something simple like that. Other times you need to. You know, perhaps get on a plane and go meet them. One of the companies that I founded was early Commerce Company, and we had some early, very low cost marketing look. And as we start to get sales, we noticed pockets of sales coming from a couple of places. One was a suburb of Saint Louis and the other was at Princeton, NJ. We got on the phone. And called some of those folks and said. You know, how did you hear about this back in 1995, before the Internet was well? Known this was very early. And sure enough, in both cases there was a company in Saint Louis, a suburb of Saint Louis, where one person bought a product from us, told the others that in her immediate work group that about us, they bought products and then you could see the expansion roll out from there. Same thing with Princeton years. It turns out that a parent at the Princeton County Day School. Bought a product from us, told other parents at this school and that's how the the cloud of customers emerged from that. And so just getting out there and talking to to folks I think is a big, big deal in the case of the other company that I co-founded, it was a very specialized product at the outset. Focused on pharmaceutical companies that were doing new drug or new device applications. And so many of those folks are clustered in New Jersey. As it turns out. And so you just go meet with those folks. And if you aren't in the pharmaceutical ecosystem, you wouldn't understand what goes into a new drug or new device application. But it's 50 to 100,000 pages of documentation and in our case they needed electronic help for assembling those very large documents. You might need an index table contents, you know, things like that. And that's part of what our product did, so. We wouldn't have even get. Tests. Anything remote about those needs and what the FDA was requiring in their case and what the cycle was of preparing these applications because as you may know, there's a limited time on patents of 17 years. And so it takes about 10 years to get one of these applications. Through the Patent Trademark Office and through the FDA. So if you can shave months off that, that's actually a big deal to your companies so that your clients. So once we understood that, we could work pretty closely with them and get them something that was spot on in terms of their needs. And again that that's you know such a focused industrial application. You wouldn't know about that unless you really got on the phone and talked to these people and work. What their exact requirements were?
Alexander McCobin:
Brilliant. Now you're not just an entrepreneur. You're also an Angel. Investor yourself. You're part of the Sand Hill Angels, and I am curious how much of your experience being an entrepreneur do you bring into your investing and in what ways are you doing? That.
Alan Fischer:
A lot. I think it helps me be a better investor that I am an entrepreneur and I think as an investor, it helps me make become a better entrepreneur as. Well, it really is a synergistic or mutually beneficial relationship. It's it's nice on one hand to see lots of pitches, how people do those pitches, what you like, what you don't like, what resonates with you. And so I can take that experience as an investor to the other side of the. Table as an entrepreneur. And understand. When the time comes to pitch investors, what resonates with them and and not because I've been on both sides of of the table, and again, you know, as as an investor you you kind of learn what to look for, what works, what doesn't work. And so it's a very synergistic relationship.
Alexander McCobin:
Now, as an Angel investor, there are three things that everyone says that you should look for. Of course, you look at the team, you look at the market and you look at the product or service, but everyone has their own unique methodology within that and you just mentioned, you've learned a lot about what to look for. So what are some of the things that you've learned to look for over your career? And that you pay attention to nowadays.
Alan Fischer:
You know, that's a great question. I think #1 to your point, is this a big idea? You want to avoid lifestyle businesses, so I always look for business opportunities that I think can generate 100 million in revenue in the 1st 6 to 8 years. Of course not every company. Is going to. Achieve that that has to be timing. The great team and so forth. But I look for big opportunities. And the second is can. The existing founding management grew that business to $100 million. I've learned over the years that you cannot hire an entrepreneur once you get to a certain size. You can certainly hand hire managers. But to to get it to that first stage, you know, the first, you know, 20 fifty, $100 million. That has to really be the founding team. So my litmus test there is if the circumstances were right, would I work alongside or for the entrepreneur? If that's not the case. It may be a great idea, but it's still going to be a pass for me. #3, as you've heard me mention, really is customer traction. I need to see some evidence. That they're out there engaging with customers, that there is a need for this, that I'm not just spending my money to see if there's any need for this, this product. I I want the company to have done that first. And as I've also mentioned, capital efficiency, have they? Been able to stretch a dollar as far as possible. Have they got their customers to pay for product development like like we did? I invested in a company through Sand Hill Angels back in 20/16/2017. And it was just a two person company that had a little under a million run rate in sales at the time they were outsourcing a lot of their operations and they were able to grow that company, break even profitably up to about 60 million before they were acquired. So capital efficiency is. Important I've mentioned profit market fit, can they make and sell this company profitably. You know, it's one thing to go raise 5 or $10.00 of venture capital to generate a dollar of revenue. That's, you know, just buying revenue. What you want to see is the economics the other way around. Can you, you know, raise a dollar of of money and generate 5 or 10 in revenue. And then I want to make sure there's a path to profitability. Amongst the. These opportunities kind of want to avoid the Peter Pan syndrome, where these companies never want to grow up and they just raise round after round after round and profitability is always two years in the future. I I want to see a path ultimately to liquidity there.
Key element of that is having a low cost. Sales and marketing. Regimen most really successful businesses I found in the early days have some unique way to get out to the market in a real low cost way that doesn't involve spending a lot of money on Google and Facebook ads. I think 2/3 of all. Venture capital raised ends up in the pocket of Google and Facebook in the form of advertising, so might as well just buy shares in Google and Facebook. I think. And and finally, there's a return on my investment. I was look to have, at least at an early stage, you know pre seed investment. Do I expect to make 20X return on my investment? As you know, this is a hit record. Business 1 success pays for eight or nine Donuts, and so you really have to have economics like that. So the the price has to be right, I think.
Alexander McCobin:
That is a phenomenal list for anyone listening to work with as an investor, and again, I'm curious. How you came? About these specific numbers like $100 million is such a specific number you're looking at, how did you get there? Is this based on some of some of those Donuts that didn't work out for you? Is this just what you've seen with ones that have succeeded or how have you gone? About creating this.
Alan Fischer:
You know, a lot of it comes from experience. I've I've had businesses that have that have gotten up to that size, where in 5-6 years we grew up to 600 million AR and I've had businesses that after 10 years I've been involved with that are at 3 million AR and that's what you want to avoid that these. And end up being lifestyle companies at the end of the day, these companies that have, you know, two to 10 million a year in sales, there's nothing wrong with these businesses. They can operate profitably or break even at least. But there's not going to be an exit for a company that size, you get a company that's up you know 2550 million or or north of that. Then there's usually an exit to be had, and the larger you.
Or become I think the better the exit that you have because you're going to get acquired by a public company at 100 million in sales if you're 10 or 20 million in sales, likely you're going to get acquired by a private company, some other venture capital backed company and those exits in my experience tend not to be nearly as rewarding. As the ones where you exit to a public company. So that's why I always look for big, you know revenue payoff, you know the the same thing I think when I say I want a 20X return on my investment. If you just look at the economics of Angel investing or venture investing. That you really do kind of need those economics to to pay off, because when you're investing pre seed as most Angel investors are, there's a high likelihood of failure out there, right? So you know you you've experienced this where you really at the end of the day don't know which of those 10 companies that you invested in. Is going to be the winner. You of course think everyone you invest in is going to be a big, big winner. But it just.
Alexander McCobin:
Of course. Are you investing in them?
Alan Fischer:
Investing you right. So it's, it's you definitely don't want to average down and I'm a big. Believer in the. Power law of investing, at least at the precede stage. You know Angel List did some research on this and they found that their investors that had larger number of companies in their portfolios. Had higher rates of return than those with just a. Handful, you just simply widen the aperture and you have a bigger chance. I think of catching those outsized companies, the the company, for example, I mentioned earlier that. Ran break even for nearly all of its life except for the one Angel round that we invested in. Exited to a public company and we made 62 times our money on that deal and a 62 X return pays for a lot of Donuts.
Alexander McCobin:
Yes, it does. Congratulations on that one. As we get ready to wrap up, I'm curious how has the investing and entrepreneurial landscape changed over your career and what do you see coming up that that other people might be missing right now?
Alan Fischer:
You know, I started Angel investing back in the late 90s, early 2000s was quite kind of quiet in the middle 2000s. I was very busy with the the start up of my own. And then got much more engaged. You know, about 2015 or so, and it's been kind of interesting to see the difference. Betweenthe.com era and now you know the the last 8 or 10 years back in the.com era, a lot of money was being raised and invested in companies that literally were just a PowerPoint, you know, business plan. Not. Not even a website. That that's really changed. Angel and VC's are almost uniformly investing in companies that are real. They have some revenue, you know, some some traction. On the other hand, I think there's a lot more money available out there now. Even today, after the crash in 2022-2023 and. I see a I see a bifurcation out there. If a company is still growing at A at a good rate, it's still raising money at 10 times projected yearly sales, right? You know, AR, you know it's, you know it's 2024 look like oh, we're projecting this and so you can get a 10. X valuation if. If you're only growing at 2030%, then you're going to have a cram down round and it's difficult to find investors, so it's become very bifurcated. But in my view, there's still a little too much money out there chasing dead. As you can see this in today's deal flow, the tsunami of AI related deals, I swear every pitch deck that seems to come our way and we look at about two hundred a month AI on it, you know it's it's like 5-6 years ago everything had blockchain stamped on it. And so you you see a lot of folks. Trying to ride the the wave, by the way, I think now is actually a good time to invest in crypto blocking companies because we've been through that. You know rain that height.
Alexander McCobin:
The whole time, like investing in the Internet again after 2001.
Alan Fischer:
Exactly. So you know, it'll be a great time to invest in AI in about four or five years, I think. And so, you know, while there, you know, and it feels like the AI wave is somehow biggerthanthe.com wave was a time, at least with the.com, you had a real diversity of companies. Out there. Just moving on to the Internet is what they were doing right now. There's so many folks focused on doing AI in a business to business type context. You got to wonder how many of these guys really are going to be successful. I don't know. There's there's very few of those, for example, that I've seen that I've liked. That to, like I said, I think while there are a lot of large checks raised back in the.com era, it it feels like there's even more money floating around now. But you know the. The upside is with revenue. There is hope of profit unlike.com with no revenue, there is no. Hope of profit.
Alexander McCobin:
Alan, this has been incredibly insightful. Thank you for sharing your experience and wisdom with the Liberty Veterans community today.
Alan Fischer:
My pleasure. Thanks for having me.