Welcome to Tech Stuff, a production from iHeartRadio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with iHeartRadio. And how the tech are yet? You know, there's been an awful lot of talk about tech and money recently, whether we're talking about cryptocurrencies or the collapse of Silicon Valley Bank a SVB. Plus there's been talk about how the startup trend is kind of in a bit of a slowdown right now due to investors being a bit more cautious in order to protect their money in a time of economic uncertainty. Plus, you've got high interest rates on loans, which contribute to a desire to wait for things to improve before investment money starts flowing like wine once again. So I thought I would actually do a Tech Stuff Tidbits episode about the different types of funding in startups in general. But we are of course interested in tech startups because honestly, I find the stuff confusing at times, like how does an idea for a business end up getting the support it needs to actually become a thing? And I figure we can take this episode by talking about the various stages of funding that a startup will typically seek and what each of these stages means. So let's say you've got an idea for a new tech business. Maybe you plan to make an app that detects which spots in town are just on the verge of becoming trendy, so that your users can jump in and be super cool by going all Instagram on these spots before they blow up as trendy spots. So you could be a tastemaker. You know, you're really stylish, You're ahead of the curve, and it's all because you have the spidy Sense app that tells you win some place or object or thing or fashion or whatever is about to really take off. It's an idea, so dumb it can't fail anyway. You got this idea, But how do you actually turn this idea into a business. Well, you're gonna need some starting capital. Maybe you are limiting costs by doing the classic Silicon Valley story of launching out of a garage. Your initial offering might be built on top of your own computers. Well, that's not going to work for very long, because assuming your idea actually does catch on, you're gonna need way more computer power and storage in order to scale your business. So, assuming you're not independently wealthy and willing to pour your own money into this venture, what do you do? Well, one thing you could do is apply at an incubator. So, an incubator is an organization designed to provide resources to fledgling startup businesses. There are different types of incubators out there. Some require a little more established business than others. Some incubators, if you come in with a great pitch, will bring you in even if all you have is an idea. Not many, but some will. And so you come in with this idea and you pitch it to the incubator, you go through the application process and they say, excellent, you can be one of the businesses that we incubate. So assuming that you do that, then you can get access to resources that can include stuff from office space to mentorship and classes, to networking as a building, connections with potential partners and investors and team members, that kind of networking. Usually the incubator takes some equity in your business as a result, so they have some ownership of your business, and the incubator often has input to some degree, sometimes a lot of input on the evolution of your business because the incubator is giving you access to these resources and in return, you are expected to make something out of your idea. But the only way you can do that is if you put the work in. So incubators are great resources for some types of startups because you can easily have a situation where you have folks who are really good at coming up with ideas right, or maybe they're really good at coding, like they're good at the building part, but maybe they have little to know business experience or expertise. They don't know how to start a business. They don't know how to run a business and keep it successful. They don't know what it takes in order to keep the lights on well. At an incubator, startups can learn the ins and outs of business itself. They can the foundation for what will be a company further down the line, So startups can start to learn how to do things like draft business plans and to form a team, both a team of people who are making the thing that you're offering and the team that oversees that. They can start to make out a hierarchy plan for their organization. All this kind of stuff that is required for a business to have the best chance to succeed. Now, it's not that every startup has gone through this. There are some that have gone through a very haphazard approach and through all logic should have failed, but somehow didn't. But generally speaking, these are the sort of things you need to do if you want to have a good chance of being around for more than a couple of years. There are a few different kinds of incubators. As I mentioned, a lot of colleges have incubator organizations, so you might have student and or faculty taking on a really big part of running those operations. There are also corporate incubators. Google had one called Area one twenty, so once upon a time you probably have heard this. At some point, Google had this policy in place where employees were allowed to dedicate up to twenty percent of their work week to their own projects, with the one qualifier being that the projects should ideally be something that could potentially benefit Google if it pans out well. Area one twenty served as an incubator for projects that had a lot of promise and gave employees the resources they would need to further develop their ideas and potentially see the mature into a business of their own, so it wouldn't just become a Google product, it could potentially become a Google spinoff. Google, by the way, abandon the twenty percent time project back in twenty thirteen, so that is not a standing at Google anymore. They still do incubate businesses, but it's a slightly different approach now. Now similar to an incubator is an accelerator. So incubators help startups at the earliest stages of development, perhaps before there's even a business idea that has formed around a product or service idea, right, so it may be at the earliest stages of germination for a business, whereas an accelerator typically is for a startup that already has established the business part, at least the rudimentary elements of a business part. And so an accelerator takes a startup business and, as the name suggests, accelerates it on its way to scale up to becoming a larger business that it will need to be in order to be a success. Incubator, on the flip side, is a place to help develop and earth of business, but both incubators and accelerators helped startup companies find funding, and this kind of brings us to the first real round of getting capital for your business, which is called seed capital or seed funding. And this could happen before you get into an incubator, probably before you get into an accelerator, or it could be part of that process. Part of what the incubator is trying to help you do is to secure seed funding. This is the initial round of funding the startup needs in order to become a thing. It's what pays the bills and helps the startup establish the basics and start to do things like registered trademarks, you know, have an office space, make payroll for the initial group of employees while they further develop their idea. But it's the earliest, earliest stages. You're not necessarily doing business yet. You may not even be a publicly known entity yet. You might still be kind of a developing, in secret kind of company. Often seed funding comes from people who are close to the folks who are behind the startup, So this could include friends and family, former or current employers, that kind of thing. And in return for providing some of the seed capital for the business, the investor receives some equity or percentage of ownership of that business. So if the business succeeds, there will be an eventual payout, But it's entirely possible that seed capital investors are supporting a startup not because they're hoping to get a big payoff down the line, but rather they believe in the people behind the project and they want to support them. So it's important because a lot of these startups they fail. More than half the vast majority of startups do not succeed. So often we're talking about people who are taking on a financial risk because they believe in the people behind it or they want to s support them. Also, we're typically talking about pretty modest amounts of money in the long term, Like later on, when we're talking about Series ABC funding, you're talking about the tens of millions of dollars or more. Now we're talking about, you know, maybe hundreds of thousands of dollars, which is still a lot of money, but in the grand scheme of things, is much much smaller. Now. Seat capital provides funding that otherwise would be off limits to a startup. I've talked about in episodes that I mentioned with Silicon Valley Bank that it's really hard for startup businesses to secure like a business loan because they might not have anything they can put up as collateral. They might not have any track record they can point to as showing their ability to make a successful business. The business itself might not really exist yet. There might not be an easy way to explain where revenue is going to come from. They may not be able to generate any revenue for a while, So the loan can be seen as being too risky, and seed capital can end up taking over that spot, because I mean, where else are you going to get the money to get started? And really it's usually just enough to establish the earliest days of the business so that the founders can actually seek additional investment. So you can almost think of it as the money that a business needs in order to get seen by the next level of investors. And we'll talk about them after we come back from this quick break, all right, Before I move on to venture capital funds, because that's ultimately where we're headed for this next bit of the discussion. There is one kind of special early investor that I could mention at this stage. Investors who typically can step in at the seed funding phase or perhaps the next one, and that is the angel investor. So an angel investor is usually a high net worth individual h and WI. It's someone who has a lot of liquid assets at their disposal. That's a way of saying, if someone's got a whole lot of cash they can throw around, or at least it's someone who could very quickly get hold of a mountain of cash that they could throw around. Angel investors sometimes provide seed money to startups. If the amount is less than a million dollars, then they may just loan the money to the startup and the startup will pay back the angel investor with interest on top of the loan at some later date, assuming that you know they have the money to do that. But if it's more than a million dollars, angel investors typically will take a stake in the company. They will take part ownership of that company, and then they know they typically have a lot more say in how things develop from there. So as a founder, you have to start making these decisions of how much control do I want to seed to the people who will give me the money that lets me pursue my dream. And it's a difficult question to answer. It's really up to the individual. Angel investors take on a huge amount of risk. Like I said, the majority of startups will fail within five years. Only a few ever developed beyond being a small business and reach a point where they can hold their own initial public offering or IPO, or they get snapped up by some bigger companies. So angel investors and other seed capital investors are pouring money into something that statistically is kind of a long shot. Some angel investors actually band together to create angel networks. This spreads the risk out across a group of people. It also allows them to pool resources, so you're not pouring as much of your money into individual investments. You know, it's part of a pool of money that other people are contributing toward. It also means that you're dividing up the equity you have in that business. But you know, the lower risk means that, yeah, maybe you are investing money into stuff you believe in, but you're not going to see that money come back, but maybe it'll be slightly less than if you were just going in by yourself. All right, So the startup receives the seed funding, maybe it's an incubator with the founders learning how to structure and run a business. On top of receiving the resources they need to develop their idea. Further, whatever the case, they are now ready to attempt to secure a loan, which they might also do later in the structure. So like loans typically don't really become a thing until you're past the seed funding stage at least, and usually it's after you've done Series A or maybe even Series B funding, or you instead of looking for a loan, you face venture capital investors, or maybe you do both. So Silicon Valley Bank would be an example of a financial institution that used to take a chance on tech startups before the bank collapsed, so they were known to offer loans to businesses when other more established banks wouldn't. And you know, tech investors would also turn to SVB to take out loans in order to invest money into startups. So SBB played a very important part in the early stages of funding for tech startup companies. Sometimes it would be actually after Series A, so we'll get to that in a second. Let's talk about venture capital investors. These are groups of private investors who you know, it could be a single person, but it's usually a company that has a bunch of people as their clients who contribute money to the venture capital firm that then uses that money to invest in various startups and jump in after seed funding. The venture capital investors out there, many of whom our long time players in the financial world, are the ones who pour significant money into a startup. We're talking about the tens of millions in some cases, or you know, obviously you have things like unicorns where you're talking about crazy amounts of money being poured into a startup. The funding is intended to really accomplish two goals. One for the investors. Ideally it will represent a return on investment at some point where you will make more money than what you put in at some point further down the line, assuming that things go well. But the other thing it's meant to do is to provide the startup the support it needs to get on a path toward that success, to further establish the business, to allow it to grow and to scale so that it can start to really become a success, to attract the talent it needs, to produce whatever the product or services at a level that is sustainable and profitable, and hopefully reach a point where the company can have a big payout to its investors, which could come in the form of an initial public offering that is the company goes from privately held to a publicly traded company, or it gets acquired or merged with another company, and in that process there's a transfer of money that ends up being a big payout to the early investors. In either case, the investors end up getting back their investment plus a healthy return on top of it. It may not be in the form of cash with initial public offerings, it might be in the form of additional shares of the company. Venture capital companies are also betting on long shots, but the general ideas that while most startups do ultimately fail, some will succeed, and if you're really wise with your investments and you have a wide enough spread of those investments, then hopefully the successes will more than make up for the failures. If you lose a million dollars on startups that ultimately fizzle out, but you make ten million dollars on the one that went to the moon, well you could say that it all paid for itself at the end, right, like you made a huge profit. That's not how it always works out, but that's how the game is played now. Startups might seek multiple rounds of venture capital funding. They typically do. It is typically required before a business can really establish itself to a point where it can really become a success. So the first round, usually called Series A funding might happen when the startup is still kind of figuring out its place in the world. Part of what determines the funding rounds is that venture capitalists try to figure out a valuation for the company. Valuation essentially means how much is that company really worth? And worth is It's a subjective thing. There are actually different ways that you can come at a valuation for a company, and it's not necessarily that one way is better or more legitimate than another. It all depends upon your perspective and the point that you take, the approach you take, But it typically involves things like figuring out like how experienced is the team in charge. If it's a team that has a series of wins in its past, that's going to add to the value the perceived value at least of the company. How good is its business plan? What assets does the company have at its disposal? These are all different questions that kind of contribute to it, and then ultimately the investment community figures out, well, we estimate that the value of this company is x amount so that's what the investments kind of reflect. The investments reflect the perceived value, like what is the future of this company, what could it be worth five years down the road, And that ends up informing investors. It's not always right. There are a lot of companies that end up, in hindsight, having been highly overvalued and investors board way too much money in that. Again, with hindsight, you could say, man, there was just never any chance that that business was going to realize the value that was poured into it. Like if someone's poured a billion dollars into a company and there's just no way that that company is ever going to be a true billion dollar company in the sense of it it's really worth a billion dollars, Well, that's a big loss. It also means that you're inflating a economic bubble, and if that bubble ever deflates or pops, then you're going to see a huge collapse. We saw this with the dot com bubble, and you know, you could argue that we've saw it or we're seeing it now, like we're seeing the deflating part now, But that's more complicated because it involves other economic issues as well. Anyway, when you're going through Series A funding. As a business, you might actually still be trying to figure out things like basic stuff like, Yeah, I've come up with a product or service, but is there a market for that? Right? What is the market for this thing I'm creating? Is? Does one exist? If not, can I create that market? You know, if you have something that addresses a challenge or a problem, then that's one thing. Right. You could say, Hey, this thing I've created, it solves this problem you have, and it does it better than anything else out there. Well, then you say, okay, there is a market for this. The question then is how big is that market? But it might be a case where you say, the thing I have of solves a problem you didn't know you had, and maybe it really is a problem. Maybe it's just that you're doing something differently than you had before. Maybe the way you're doing it differently is better, or maybe it's not. Here's the crazy thing. The success for the business doesn't necessarily matter on whether or not the projects or service really is better than existing stuff. A company might succeed or fail completely independently of that. Because life is not fair. Okay, we're going to take another quick break when we come back, I'm going to wrap this up and talk a little bit more about the process of funding. Okay, So we were still talking about series A funding, where venture capital companies come in. So typically you might have a single venture capital company acting as an anchor here, and maybe a few other venture capitalists come in and also invest in a Series A round. Series A rounds typically are not ginormous. They can be in rare occasions. For a while it seemed like that was just going to be the trend, but that was when people were getting real loosey goosey with their money. But often there it's not small because we're still talking in the tens of millions of dollars, but small lur Then subsequent rounds of funding would be so you hold your Series A funding and you typically have maybe one or two anchors that hold that down. And this is you usually don't see a lot of other like larger financial institutions jumping in at this stage. It typically is still venture capitalists because we're still talking about a pretty risky kind of investment. Some of those investments will have like a set amount of time on them when they're supposed to be paid off, and the startup will have to pay back that investment with whatever return on top of it was promised. But then there's usually more than one round of funding. Series A helps establish things, but it's not unusual to see a Series B round of funding. This is where you might see a couple more venture capitalist companies get involved. You still may not see that much from larger financial institutions at this stage, but it's if a company seems to have promise that it's on a forward momentum, then you might get a little bit more in the investment community pouring money into Series B. This typically is really focusing on scaling up a business and making sure that it can meet a global demand. Really important for tech companies, right, because a lot of tech companies digital company needs. They're not limited by geography, right. It's not like they're making a physical thing that they can only ship to certain places. They're making a digital product that at least in theory, could be accessed pretty much anywhere where you have a connection. You want to be able to scale your business so that you can meet the global demand, which means you've got to have access to all that compute power, storage power, all that kind of stuff in order to do that not have your service just crash whenever there's a spike in demand. So Series B is really typically focused on scaling a business up, but you can also have a third round, a Series C round of funding. At this stage you might start to see some larger financial institutions start to come on board if again the company looks like it's on the right track, that there is high hope that this is a company that is going to firmly establish itself. You can even have further rounds. You can have Series D, series etc. There's no real limit to how many rounds of funding a company could hold, except the limit being, you know, whatever the investment community is willing to do. If you're getting to a point where you're seeking, you know, the tenth round of funding, you might have investors saying, I don't think I'm ever going to get my money back if I pour it into here, because if you've taken this long to try and establish a business, it may just be there's no business to establish. So this is also a round Series B Series C where you start to see banks take a slightly more acceptable risk in loaning out money to these companies. So Silicon Valley bank might be more involved in something that's going through a Series B or Series C round. So then you have to talk about what these investors actually own. They might own debt, so in other words, they hold the debt that the startup has, and the startup needs to pay that debt back. So what you hold is an IOU and eventually the company is going to pay that IOU out to you, or you own equity in the company you own, you have some sort of ownership of the company itself. Now, with debt, you can actually buy and sell debt, right, you can sell your debt off to someone else. Maybe you sell it off at cost or maybe at slightly above cost, and the person who's buying it is hoping that the debt in fact does get paid out ultimately with whatever return there might be. And meanwhile you can walk away. You have sold off your debt that you held for this startup, and you've got your cash, and you can then invest it in something else if you like. But this gets outside the experience of the business itself, Like this sort of activity can happen around the business and it doesn't necessarily directly affect the business. So that's almost its own episode But then you're talking about what is the end goal of all of this, Well, I mean a couple. One is that the business actually becomes a revenue generating entity. But investors typically want to see one of two things happen. They want to see a privately held company become a publicly traded one through an IPO or initial public offering. This is when you go through the extensive process of having your company scrutinized to determine what the value is, you set a price for the shares and the number of shares that you're going to put out on the market, and you start selling shares to the general public. Investors at that point may get a big payout as a company goes public, or they, like I said before, maybe awarded with shares on top of whatever percentage they owned in the company as part of the equity they held, and that's like the big payout for investors, or one of them. The other, of course being when a bigger fish comes along and buys up a private company and as part of the acquisition price, there's a payout to all the investors, which again includes a return on top of the investment. Those are the two goals for the investors. And that's kind of why I get real cynical about the startup and investment communities, because I've seen a lot of startups that appear to exist only for the purpose of getting snapped up by some other company, and that strikes me as unsustainable in the long run, like it's not providing actual benefit. It might provide employment to people, which is good, right, but if no one ever figures out how to take the central premise of this business and make it into something meaningful beyond employing people, it starts to look like it's just hollow. To me. There are people who are really well known for being serial entrepreneurs who will come up with a business idea. They'll go through those early stages of getting seed funding and venture capital funding, grow the business to a certain point. Then they just want to bail and do it all over again. And the cynical part of me thinks that it might be because it's one thing to come up with an interesting idea and to get people excited enough in it to give you money, but it's another thing to grow that into a stable business that can continue to grow and to profit, and that the skill set for the person who's great at creating that initial germ of an idea and the person who's leading the big company and providing that stability. Those are two different skill sets, and not everyone has them, so I guess it's not necessarily a bad thing to be a serial entrepreneur. I mean, there can be some really great companies that grow out of that. But I don't know. There's something about Henry Higgins music man huckster stuff going on in that world. Not everyone is a huckster, obviously, but it feels a bit like the fast talking salesman who is setting up a big sale and then bailing out of the town before having to pay the piper. I'm using a lot of different metaphors here and then doing it all over again. I don't know. Maybe I'm just thinking like music man slash Doc Terminus from the original Pete s Dragon or whatever. In my head, that's what every single startup founder is like. They're they're dressed in a equated outfits and doing fast talking pattern songs. Probably not how it actually pans out, but I'm okay living in that fantasy anyway. I thought it would be interesting to talk about this because the way that this world works is important. It has has shaped the tech industry significantly since the nineteen eighties at least, and I think it helps us understand where we are now and how the products that come to us, how those were able to exist, how they were able to get to a point where we could actually see and use them in the startup world obviously, I mean, it's a totally different story for long established companies that are you know, their own foundational pillars in the tech industry, like your intels and your ibms and your you know, AT and ts and whatnot. But yeah, I kind of wanted to to look this over. I think it's an interesting way to get some insight into this and understand some of the issues going on within the tech sector. All Right, that's it for this Tech Stuff Tidbits episode. Hope you are all well, and I'll talk to you again really soon. Tech Stuff is an iHeartRadio production. For more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows.

Welcome to Tech Stuff, a production from iHeartRadio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with iHeartRadio. And how the tech are yet? You know, there's been an awful lot of talk about tech and money recently, whether we're talking about cryptocurrencies or the collapse of Silicon Valley Bank a SVB. Plus there's been talk about how the startup trend is kind of in a bit of a slowdown right now due to investors being a bit more cautious in order to protect their money in a time of economic uncertainty. Plus, you've got high interest rates on loans, which contribute to a desire to wait for things to improve before investment money starts flowing like wine once again. So I thought I would actually do a Tech Stuff Tidbits episode about the different types of funding in startups in general. But we are of course interested in tech startups because honestly, I find the stuff confusing at times, like how does an idea for a business end up getting the support it needs to actually become a thing? And I figure we can take this episode by talking about the various stages of funding that a startup will typically seek and what each of these stages means. So let's say you've got an idea for a new tech business. Maybe you plan to make an app that detects which spots in town are just on the verge of becoming trendy, so that your users can jump in and be super cool by going all Instagram on these spots before they blow up as trendy spots. So you could be a tastemaker. You know, you're really stylish, You're ahead of the curve, and it's all because you have the spidy Sense app that tells you win some place or object or thing or fashion or whatever is about to really take off. It's an idea, so dumb it can't fail anyway. You got this idea, But how do you actually turn this idea into a business. Well, you're gonna need some starting capital. Maybe you are limiting costs by doing the classic Silicon Valley story of launching out of a garage. Your initial offering might be built on top of your own computers. Well, that's not going to work for very long, because assuming your idea actually does catch on, you're gonna need way more computer power and storage in order to scale your business. So, assuming you're not independently wealthy and willing to pour your own money into this venture, what do you do? Well, one thing you could do is apply at an incubator. So, an incubator is an organization designed to provide resources to fledgling startup businesses. There are different types of incubators out there. Some require a little more established business than others. Some incubators, if you come in with a great pitch, will bring you in even if all you have is an idea. Not many, but some will. And so you come in with this idea and you pitch it to the incubator, you go through the application process and they say, excellent, you can be one of the businesses that we incubate. So assuming that you do that, then you can get access to resources that can include stuff from office space to mentorship and classes, to networking as a building, connections with potential partners and investors and team members, that kind of networking. Usually the incubator takes some equity in your business as a result, so they have some ownership of your business, and the incubator often has input to some degree, sometimes a lot of input on the evolution of your business because the incubator is giving you access to these resources and in return, you are expected to make something out of your idea. But the only way you can do that is if you put the work in. So incubators are great resources for some types of startups because you can easily have a situation where you have folks who are really good at coming up with ideas right, or maybe they're really good at coding, like they're good at the building part, but maybe they have little to know business experience or expertise. They don't know how to start a business. They don't know how to run a business and keep it successful. They don't know what it takes in order to keep the lights on well. At an incubator, startups can learn the ins and outs of business itself. They can the foundation for what will be a company further down the line, So startups can start to learn how to do things like draft business plans and to form a team, both a team of people who are making the thing that you're offering and the team that oversees that. They can start to make out a hierarchy plan for their organization. All this kind of stuff that is required for a business to have the best chance to succeed. Now, it's not that every startup has gone through this. There are some that have gone through a very haphazard approach and through all logic should have failed, but somehow didn't. But generally speaking, these are the sort of things you need to do if you want to have a good chance of being around for more than a couple of years. There are a few different kinds of incubators. As I mentioned, a lot of colleges have incubator organizations, so you might have student and or faculty taking on a really big part of running those operations. There are also corporate incubators. Google had one called Area one twenty, so once upon a time you probably have heard this. At some point, Google had this policy in place where employees were allowed to dedicate up to twenty percent of their work week to their own projects, with the one qualifier being that the projects should ideally be something that could potentially benefit Google if it pans out well. Area one twenty served as an incubator for projects that had a lot of promise and gave employees the resources they would need to further develop their ideas and potentially see the mature into a business of their own, so it wouldn't just become a Google product, it could potentially become a Google spinoff. Google, by the way, abandon the twenty percent time project back in twenty thirteen, so that is not a standing at Google anymore. They still do incubate businesses, but it's a slightly different approach now. Now similar to an incubator is an accelerator. So incubators help startups at the earliest stages of development, perhaps before there's even a business idea that has formed around a product or service idea, right, so it may be at the earliest stages of germination for a business, whereas an accelerator typically is for a startup that already has established the business part, at least the rudimentary elements of a business part. And so an accelerator takes a startup business and, as the name suggests, accelerates it on its way to scale up to becoming a larger business that it will need to be in order to be a success. Incubator, on the flip side, is a place to help develop and earth of business, but both incubators and accelerators helped startup companies find funding, and this kind of brings us to the first real round of getting capital for your business, which is called seed capital or seed funding. And this could happen before you get into an incubator, probably before you get into an accelerator, or it could be part of that process. Part of what the incubator is trying to help you do is to secure seed funding. This is the initial round of funding the startup needs in order to become a thing. It's what pays the bills and helps the startup establish the basics and start to do things like registered trademarks, you know, have an office space, make payroll for the initial group of employees while they further develop their idea. But it's the earliest, earliest stages. You're not necessarily doing business yet. You may not even be a publicly known entity yet. You might still be kind of a developing, in secret kind of company. Often seed funding comes from people who are close to the folks who are behind the startup, So this could include friends and family, former or current employers, that kind of thing. And in return for providing some of the seed capital for the business, the investor receives some equity or percentage of ownership of that business. So if the business succeeds, there will be an eventual payout, But it's entirely possible that seed capital investors are supporting a startup not because they're hoping to get a big payoff down the line, but rather they believe in the people behind the project and they want to support them. So it's important because a lot of these startups they fail. More than half the vast majority of startups do not succeed. So often we're talking about people who are taking on a financial risk because they believe in the people behind it or they want to s support them. Also, we're typically talking about pretty modest amounts of money in the long term, Like later on, when we're talking about Series ABC funding, you're talking about the tens of millions of dollars or more. Now we're talking about, you know, maybe hundreds of thousands of dollars, which is still a lot of money, but in the grand scheme of things, is much much smaller. Now. Seat capital provides funding that otherwise would be off limits to a startup. I've talked about in episodes that I mentioned with Silicon Valley Bank that it's really hard for startup businesses to secure like a business loan because they might not have anything they can put up as collateral. They might not have any track record they can point to as showing their ability to make a successful business. The business itself might not really exist yet. There might not be an easy way to explain where revenue is going to come from. They may not be able to generate any revenue for a while, So the loan can be seen as being too risky, and seed capital can end up taking over that spot, because I mean, where else are you going to get the money to get started? And really it's usually just enough to establish the earliest days of the business so that the founders can actually seek additional investment. So you can almost think of it as the money that a business needs in order to get seen by the next level of investors. And we'll talk about them after we come back from this quick break, all right, Before I move on to venture capital funds, because that's ultimately where we're headed for this next bit of the discussion. There is one kind of special early investor that I could mention at this stage. Investors who typically can step in at the seed funding phase or perhaps the next one, and that is the angel investor. So an angel investor is usually a high net worth individual h and WI. It's someone who has a lot of liquid assets at their disposal. That's a way of saying, if someone's got a whole lot of cash they can throw around, or at least it's someone who could very quickly get hold of a mountain of cash that they could throw around. Angel investors sometimes provide seed money to startups. If the amount is less than a million dollars, then they may just loan the money to the startup and the startup will pay back the angel investor with interest on top of the loan at some later date, assuming that you know they have the money to do that. But if it's more than a million dollars, angel investors typically will take a stake in the company. They will take part ownership of that company, and then they know they typically have a lot more say in how things develop from there. So as a founder, you have to start making these decisions of how much control do I want to seed to the people who will give me the money that lets me pursue my dream. And it's a difficult question to answer. It's really up to the individual. Angel investors take on a huge amount of risk. Like I said, the majority of startups will fail within five years. Only a few ever developed beyond being a small business and reach a point where they can hold their own initial public offering or IPO, or they get snapped up by some bigger companies. So angel investors and other seed capital investors are pouring money into something that statistically is kind of a long shot. Some angel investors actually band together to create angel networks. This spreads the risk out across a group of people. It also allows them to pool resources, so you're not pouring as much of your money into individual investments. You know, it's part of a pool of money that other people are contributing toward. It also means that you're dividing up the equity you have in that business. But you know, the lower risk means that, yeah, maybe you are investing money into stuff you believe in, but you're not going to see that money come back, but maybe it'll be slightly less than if you were just going in by yourself. All right, So the startup receives the seed funding, maybe it's an incubator with the founders learning how to structure and run a business. On top of receiving the resources they need to develop their idea. Further, whatever the case, they are now ready to attempt to secure a loan, which they might also do later in the structure. So like loans typically don't really become a thing until you're past the seed funding stage at least, and usually it's after you've done Series A or maybe even Series B funding, or you instead of looking for a loan, you face venture capital investors, or maybe you do both. So Silicon Valley Bank would be an example of a financial institution that used to take a chance on tech startups before the bank collapsed, so they were known to offer loans to businesses when other more established banks wouldn't. And you know, tech investors would also turn to SVB to take out loans in order to invest money into startups. So SBB played a very important part in the early stages of funding for tech startup companies. Sometimes it would be actually after Series A, so we'll get to that in a second. Let's talk about venture capital investors. These are groups of private investors who you know, it could be a single person, but it's usually a company that has a bunch of people as their clients who contribute money to the venture capital firm that then uses that money to invest in various startups and jump in after seed funding. The venture capital investors out there, many of whom our long time players in the financial world, are the ones who pour significant money into a startup. We're talking about the tens of millions in some cases, or you know, obviously you have things like unicorns where you're talking about crazy amounts of money being poured into a startup. The funding is intended to really accomplish two goals. One for the investors. Ideally it will represent a return on investment at some point where you will make more money than what you put in at some point further down the line, assuming that things go well. But the other thing it's meant to do is to provide the startup the support it needs to get on a path toward that success, to further establish the business, to allow it to grow and to scale so that it can start to really become a success, to attract the talent it needs, to produce whatever the product or services at a level that is sustainable and profitable, and hopefully reach a point where the company can have a big payout to its investors, which could come in the form of an initial public offering that is the company goes from privately held to a publicly traded company, or it gets acquired or merged with another company, and in that process there's a transfer of money that ends up being a big payout to the early investors. In either case, the investors end up getting back their investment plus a healthy return on top of it. It may not be in the form of cash with initial public offerings, it might be in the form of additional shares of the company. Venture capital companies are also betting on long shots, but the general ideas that while most startups do ultimately fail, some will succeed, and if you're really wise with your investments and you have a wide enough spread of those investments, then hopefully the successes will more than make up for the failures. If you lose a million dollars on startups that ultimately fizzle out, but you make ten million dollars on the one that went to the moon, well you could say that it all paid for itself at the end, right, like you made a huge profit. That's not how it always works out, but that's how the game is played now. Startups might seek multiple rounds of venture capital funding. They typically do. It is typically required before a business can really establish itself to a point where it can really become a success. So the first round, usually called Series A funding might happen when the startup is still kind of figuring out its place in the world. Part of what determines the funding rounds is that venture capitalists try to figure out a valuation for the company. Valuation essentially means how much is that company really worth? And worth is It's a subjective thing. There are actually different ways that you can come at a valuation for a company, and it's not necessarily that one way is better or more legitimate than another. It all depends upon your perspective and the point that you take, the approach you take, But it typically involves things like figuring out like how experienced is the team in charge. If it's a team that has a series of wins in its past, that's going to add to the value the perceived value at least of the company. How good is its business plan? What assets does the company have at its disposal? These are all different questions that kind of contribute to it, and then ultimately the investment community figures out, well, we estimate that the value of this company is x amount so that's what the investments kind of reflect. The investments reflect the perceived value, like what is the future of this company, what could it be worth five years down the road, And that ends up informing investors. It's not always right. There are a lot of companies that end up, in hindsight, having been highly overvalued and investors board way too much money in that. Again, with hindsight, you could say, man, there was just never any chance that that business was going to realize the value that was poured into it. Like if someone's poured a billion dollars into a company and there's just no way that that company is ever going to be a true billion dollar company in the sense of it it's really worth a billion dollars, Well, that's a big loss. It also means that you're inflating a economic bubble, and if that bubble ever deflates or pops, then you're going to see a huge collapse. We saw this with the dot com bubble, and you know, you could argue that we've saw it or we're seeing it now, like we're seeing the deflating part now, But that's more complicated because it involves other economic issues as well. Anyway, when you're going through Series A funding. As a business, you might actually still be trying to figure out things like basic stuff like, Yeah, I've come up with a product or service, but is there a market for that? Right? What is the market for this thing I'm creating? Is? Does one exist? If not, can I create that market? You know, if you have something that addresses a challenge or a problem, then that's one thing. Right. You could say, Hey, this thing I've created, it solves this problem you have, and it does it better than anything else out there. Well, then you say, okay, there is a market for this. The question then is how big is that market? But it might be a case where you say, the thing I have of solves a problem you didn't know you had, and maybe it really is a problem. Maybe it's just that you're doing something differently than you had before. Maybe the way you're doing it differently is better, or maybe it's not. Here's the crazy thing. The success for the business doesn't necessarily matter on whether or not the projects or service really is better than existing stuff. A company might succeed or fail completely independently of that. Because life is not fair. Okay, we're going to take another quick break when we come back, I'm going to wrap this up and talk a little bit more about the process of funding. Okay, So we were still talking about series A funding, where venture capital companies come in. So typically you might have a single venture capital company acting as an anchor here, and maybe a few other venture capitalists come in and also invest in a Series A round. Series A rounds typically are not ginormous. They can be in rare occasions. For a while it seemed like that was just going to be the trend, but that was when people were getting real loosey goosey with their money. But often there it's not small because we're still talking in the tens of millions of dollars, but small lur Then subsequent rounds of funding would be so you hold your Series A funding and you typically have maybe one or two anchors that hold that down. And this is you usually don't see a lot of other like larger financial institutions jumping in at this stage. It typically is still venture capitalists because we're still talking about a pretty risky kind of investment. Some of those investments will have like a set amount of time on them when they're supposed to be paid off, and the startup will have to pay back that investment with whatever return on top of it was promised. But then there's usually more than one round of funding. Series A helps establish things, but it's not unusual to see a Series B round of funding. This is where you might see a couple more venture capitalist companies get involved. You still may not see that much from larger financial institutions at this stage, but it's if a company seems to have promise that it's on a forward momentum, then you might get a little bit more in the investment community pouring money into Series B. This typically is really focusing on scaling up a business and making sure that it can meet a global demand. Really important for tech companies, right, because a lot of tech companies digital company needs. They're not limited by geography, right. It's not like they're making a physical thing that they can only ship to certain places. They're making a digital product that at least in theory, could be accessed pretty much anywhere where you have a connection. You want to be able to scale your business so that you can meet the global demand, which means you've got to have access to all that compute power, storage power, all that kind of stuff in order to do that not have your service just crash whenever there's a spike in demand. So Series B is really typically focused on scaling a business up, but you can also have a third round, a Series C round of funding. At this stage you might start to see some larger financial institutions start to come on board if again the company looks like it's on the right track, that there is high hope that this is a company that is going to firmly establish itself. You can even have further rounds. You can have Series D, series etc. There's no real limit to how many rounds of funding a company could hold, except the limit being, you know, whatever the investment community is willing to do. If you're getting to a point where you're seeking, you know, the tenth round of funding, you might have investors saying, I don't think I'm ever going to get my money back if I pour it into here, because if you've taken this long to try and establish a business, it may just be there's no business to establish. So this is also a round Series B Series C where you start to see banks take a slightly more acceptable risk in loaning out money to these companies. So Silicon Valley bank might be more involved in something that's going through a Series B or Series C round. So then you have to talk about what these investors actually own. They might own debt, so in other words, they hold the debt that the startup has, and the startup needs to pay that debt back. So what you hold is an IOU and eventually the company is going to pay that IOU out to you, or you own equity in the company you own, you have some sort of ownership of the company itself. Now, with debt, you can actually buy and sell debt, right, you can sell your debt off to someone else. Maybe you sell it off at cost or maybe at slightly above cost, and the person who's buying it is hoping that the debt in fact does get paid out ultimately with whatever return there might be. And meanwhile you can walk away. You have sold off your debt that you held for this startup, and you've got your cash, and you can then invest it in something else if you like. But this gets outside the experience of the business itself, Like this sort of activity can happen around the business and it doesn't necessarily directly affect the business. So that's almost its own episode But then you're talking about what is the end goal of all of this, Well, I mean a couple. One is that the business actually becomes a revenue generating entity. But investors typically want to see one of two things happen. They want to see a privately held company become a publicly traded one through an IPO or initial public offering. This is when you go through the extensive process of having your company scrutinized to determine what the value is, you set a price for the shares and the number of shares that you're going to put out on the market, and you start selling shares to the general public. Investors at that point may get a big payout as a company goes public, or they, like I said before, maybe awarded with shares on top of whatever percentage they owned in the company as part of the equity they held, and that's like the big payout for investors, or one of them. The other, of course being when a bigger fish comes along and buys up a private company and as part of the acquisition price, there's a payout to all the investors, which again includes a return on top of the investment. Those are the two goals for the investors. And that's kind of why I get real cynical about the startup and investment communities, because I've seen a lot of startups that appear to exist only for the purpose of getting snapped up by some other company, and that strikes me as unsustainable in the long run, like it's not providing actual benefit. It might provide employment to people, which is good, right, but if no one ever figures out how to take the central premise of this business and make it into something meaningful beyond employing people, it starts to look like it's just hollow. To me. There are people who are really well known for being serial entrepreneurs who will come up with a business idea. They'll go through those early stages of getting seed funding and venture capital funding, grow the business to a certain point. Then they just want to bail and do it all over again. And the cynical part of me thinks that it might be because it's one thing to come up with an interesting idea and to get people excited enough in it to give you money, but it's another thing to grow that into a stable business that can continue to grow and to profit, and that the skill set for the person who's great at creating that initial germ of an idea and the person who's leading the big company and providing that stability. Those are two different skill sets, and not everyone has them, so I guess it's not necessarily a bad thing to be a serial entrepreneur. I mean, there can be some really great companies that grow out of that. But I don't know. There's something about Henry Higgins music man huckster stuff going on in that world. Not everyone is a huckster, obviously, but it feels a bit like the fast talking salesman who is setting up a big sale and then bailing out of the town before having to pay the piper. I'm using a lot of different metaphors here and then doing it all over again. I don't know. Maybe I'm just thinking like music man slash Doc Terminus from the original Pete s Dragon or whatever. In my head, that's what every single startup founder is like. They're they're dressed in a equated outfits and doing fast talking pattern songs. Probably not how it actually pans out, but I'm okay living in that fantasy anyway. I thought it would be interesting to talk about this because the way that this world works is important. It has has shaped the tech industry significantly since the nineteen eighties at least, and I think it helps us understand where we are now and how the products that come to us, how those were able to exist, how they were able to get to a point where we could actually see and use them in the startup world obviously, I mean, it's a totally different story for long established companies that are you know, their own foundational pillars in the tech industry, like your intels and your ibms and your you know, AT and ts and whatnot. But yeah, I kind of wanted to to look this over. I think it's an interesting way to get some insight into this and understand some of the issues going on within the tech sector. All Right, that's it for this Tech Stuff Tidbits episode. Hope you are all well, and I'll talk to you again really soon. Tech Stuff is an iHeartRadio production. For more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows.