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0:00:20 I’m Frank Chen.
0:00:23 Today I’m here with Scott Cooper and we’re doing a three-part series.
0:00:27 You’ve landed in part two, which is all about fundraising.
0:00:32 What we’re going to do is dig into the mechanics of how you work with a VC during the fund
0:00:36 raise process, how you interpret the terms of the term sheet, and hopefully this will
0:00:42 give you a sense of how you can actually have a meaningful dialogue with a venture capitalist.
0:00:47 We produce this video for the same reason that Scott wrote this book, which is as venture
0:00:49 investors we do this day in and day out.
0:00:54 We will see thousands of entrepreneurs will write dozens of term sheets, whereas you may
0:00:56 end up doing this once in your life.
0:01:01 And so we wanted to help you understand some of the terms and the art and the science that
0:01:02 go into fundraising.
0:01:05 All right, so let’s get right into it.
0:01:06 Why do I need to be a Delaware C-Corp?
0:01:11 Like what’s special about Delaware and what makes other entities hard to fund from a VC’s
0:01:12 point of view?
0:01:16 Yeah, so there are lots of varieties of, you know, kind of organizations of business you
0:01:17 can do.
0:01:19 There’s C-Corps, there’s things called partnerships.
0:01:24 The main reason why you do a C-Corp and why it’s in Delaware, quite frankly, is there’s
0:01:26 a lot of just legal precedent there.
0:01:29 Delaware had kind of made themselves kind of the home of businesses many, many years
0:01:30 ago.
0:01:34 And so it makes people like us and lawyers feel comfortable because we know that there’s
0:01:39 hundreds of years of, you know, kind of legal precedent that says, hey, if this thing happens,
0:01:40 this is what happens.
0:01:41 And things are fairly well settled.
0:01:45 So you could certainly go other places, but Delaware is pretty good.
0:01:46 The C-Corp does a lot of things.
0:01:49 I think the main advantage of a C-Corp is it allows you to have lots of shareholders.
0:01:53 And so if you’re going to grow over time, you’ll want to do that.
0:01:56 It allows you to have kind of different classes of shareholders, right?
0:01:59 So one of the things we’ll talk about probably is the fact that you as an entrepreneur might
0:02:03 hold what are called common shares, whereas the VC investors might hold what are called
0:02:04 preferred shares.
0:02:08 And Delaware has a very well-established legal framework for us to have different shares
0:02:11 that have different types of rights associated with them.
0:02:14 And then ultimately, if you go public, you know, kind of the way public investors are
0:02:17 used to, you know, investing in and taking public C-Corps.
0:02:21 And so it’s a much easier and quite frankly, just more seamless way to think about kind
0:02:24 of starting with ultimately quite frankly, where you want to end up.
0:02:25 Got it.
0:02:26 So the rails are well-defined.
0:02:27 That’s right.
0:02:29 And I don’t have to, like, place my own trails with a machete.
0:02:30 That’s right.
0:02:31 You can do a trail on this one, right?
0:02:32 Exactly.
0:02:33 Right.
0:02:34 Every now and then we do get some entrepreneurs who come in here and want to do it.
0:02:38 And they’ve got lots of interesting reasons, but so far I haven’t heard a really compelling
0:02:39 one.
0:02:40 Fourteen reasons.
0:02:41 I need to be an LLC.
0:02:42 Exactly.
0:02:43 Right.
0:02:44 Okay.
0:02:45 Good.
0:02:46 All right.
0:02:47 Let’s pretend I’m still working at a company.
0:02:48 Yeah.
0:02:49 Let’s call it BigCo.
0:02:50 Yeah.
0:02:51 And I haven’t incorporated yet.
0:02:55 I need to make sure that whatever I do is protected, my old company is going to come
0:02:56 after me, right?
0:02:57 Yeah.
0:03:01 This is one of those things where I would say a little foresight can go a very, very
0:03:02 long way.
0:03:07 So what the VCs will worry about when you come to pitch them is you’ll say, “Hey, I’m
0:03:08 working at BigCo.
0:03:11 And oh, by the way, in my spare time on nights and weekends, I developed this wonderful new
0:03:15 product and now I’d love you, Ms. VC, to kind of fund it for me.”
0:03:18 And the first question that’s going to go off our heads is, “Okay, wait a second.
0:03:22 Do you actually own that technology or could there be some theory under which your existing
0:03:25 employer says, “Hey, I may own that stuff?”
0:03:30 You may remember this whole case that happened with Uber and the company called Waymo, right?
0:03:35 Where Waymo was part of Google and then a number of people left and ended up at Uber.
0:03:39 There was this whole question about whether kind of the principle of that company had
0:03:44 basically taken some kind of proprietary knowledge outside of Google and kind of given it to
0:03:45 Uber.
0:03:48 And the challenge with these cases is you’re kind of proving the negative, right?
0:03:54 So in that case, Anthony Lewandowski, who was the person, he had to prove that he didn’t
0:03:55 take anything, right?
0:03:58 As opposed to them proving that he did take something in many respects.
0:04:01 Now, the law doesn’t actually work that way, but in practice and perception, that’s the
0:04:02 way it works.
0:04:07 So our best advice on this stuff is, look, if you’ve got a great idea, number one, don’t
0:04:10 ever use your work laptop for any of these things, right?
0:04:12 So have some physical separation.
0:04:15 And when you really get to the point where you feel like, “Okay, now it’s really, this
0:04:20 is a real thing, either take a leave of absence from your company, quit your company, do whatever
0:04:21 you do.”
0:04:24 Because the last thing you want to do is find that you’ve come up with this wonderful idea,
0:04:28 but you’ve just been sloppy and all of a sudden you just can’t find a way to commercialize
0:04:30 it anymore.
0:04:31 Got it.
0:04:35 And then let’s get into the question of how much money should I raise?
0:04:38 And there’s a couple of Twitter questions around it.
0:04:41 So beginning with, do I even mention a check sign?
0:04:43 Should I come with an ask or do I let the VC tell me?
0:04:44 Yeah.
0:04:45 Yeah.
0:04:46 Let’s talk about the broad question.
0:04:51 So the simple answer to how much money to raise is, how much money do you need to accomplish
0:04:54 the objectives that you will need to accomplish to be able to raise the next round?
0:04:57 And I know in some ways that sounds funny, but kind of the best advice I think we give
0:05:02 entrepreneurs is, if you’re raising your Series A round today, you should be at that point
0:05:06 in time thinking about, “What’s the pitch I’m going to give the Series B investors?”
0:05:09 And then essentially work backwards and say, “Okay, for the Series B investors to be compelled
0:05:14 by what I’m doing, what milestones, what objectives will they need to be able to see?
0:05:16 Therefore how much money will I need to do that?
0:05:18 How much time will I need to do that?”
0:05:22 And that’s kind of the way to kind of back into your amount of money.
0:05:27 And the answer to the Twitter question is, “Look, absolutely, you should tell the VC’s
0:05:30 what you want and you should be able to articulate for X amount of dollars.
0:05:31 This is what I can do.”
0:05:36 And oh, by the way, if you gave me X plus 50%, I could do this much more.
0:05:40 And part of the exercise, I think, for you and your VC partners to do is to say, “Okay,
0:05:44 what is the right amount of money that doesn’t dilute us too much today, but gives us kind
0:05:48 of enough degrees of freedom that when we go for that next round of financing, somebody
0:05:53 will come in and put more money in at a higher price, hopefully, than kind of we did this
0:05:54 first round.”
0:05:55 Got it.
0:06:00 So if I’m raising a Series A of financing, I need to start this whole sort of mental process
0:06:02 with, “What’s the Series B investor want to see?”
0:06:03 That’s exactly right.
0:06:04 That’s how you start.
0:06:08 And I think that’s the best mental framework to think about it because if you remember,
0:06:12 if you think about from the perspective of the VC, who’s going to do the Series A, that’s
0:06:15 what they’re worried about is, “Okay, do I believe this person can accomplish enough
0:06:18 so that we can continue this ride?”
0:06:23 And for you as the CEO, you care about that too because the best thing you can do is to
0:06:27 have this very nicely, monotonically increasing valuation and share price over time.
0:06:32 I tell the story of the book, which I know you’ll remember when we were at Loud Cloud.
0:06:35 And Ben Horowitz and I spent a bunch of time raising this very large round.
0:06:40 We raised $120 million and an $820 million post-money valuation.
0:06:44 And so we walk into this all hands thinking that we’re heroes and everybody’s going to
0:06:46 clap for us and tell us how smart we are.
0:06:51 And we get this very muted silence and it turns out that everybody was upset, not because
0:06:52 we didn’t raise at a very high valuation.
0:06:54 In fact, our last round was about 60 million.
0:06:59 So we raised at whatever that number is, 12, 13, 14 times our last round.
0:07:04 But the company down the street from us, Storage Networks, had raised at a billion-dollar valuation.
0:07:11 And so I tell people that story just because so much of company success and employee engagement
0:07:15 is a function of these external benchmarks that people think about.
0:07:19 And so that’s why thinking ahead to the next round is important because as much as you
0:07:23 want to focus on accomplishing the objectives for your business, you also want to set yourself
0:07:27 up so that you can continue to show progress to your employees by demonstrating that kind
0:07:32 of a new investor values the company at a higher level than your prior investor did.
0:07:33 Interesting.
0:07:37 So that’s the perfect segue to this other Twitter question, which is, how often do you
0:07:41 find that founders pushing too hard on high valuations end up hurting themselves?
0:07:46 And so maybe talk about structurally, what happens if you get too high a valuation in
0:07:47 this round?
0:07:50 Because on the face of it, it’s kind of like, look, too high a valuation means I suffer the
0:07:51 less solution.
0:07:52 I own more of this company.
0:07:53 Victory.
0:07:54 Right?
0:07:55 Like why is that not always victory?
0:07:56 I agree.
0:08:01 But honestly, this is a very hard thing as a VC to talk about because look, the immediate
0:08:04 reaction from an entrepreneur, understandably so, is, well, of course you want the valuation
0:08:08 to be lower because that’s right, it’s in your own financial interest to pay as little
0:08:10 as possible and own as much as my company.
0:08:15 And I won’t fight that argument, which is that’s true, but let me at least try to make
0:08:18 the pro case for why I do think entrepreneurs should care about this.
0:08:22 And I think it goes back to kind of the story I just mentioned, which is, if you think about
0:08:26 running the business, you’re the CEO, you’re telling your company, okay, hey, good news,
0:08:29 we just raised $5 million from Andrews and Horowitz, okay?
0:08:31 Now, here’s all the things that we’re going to accomplish.
0:08:34 Here’s your objectives, here’s what we’re going to do in terms of hiring, here’s what
0:08:39 we’re going to do in terms of customer acquisition, and hopefully you’re executing all those, right?
0:08:45 And so 18 months comes down the road and you say, great, we’ve accomplished all those objectives.
0:08:48 I’ve been telling my employees, they’re right on track, and then all of a sudden I go out
0:08:52 to raise money and I run into this buzz saw where a new investor says, hey, congratulations
0:08:53 on all that.
0:08:58 But by the way, I think you actually overvalued your company at that last round, and so even
0:09:04 though all of your metrics have doubled from where you had said they were, I’m only willing
0:09:07 to pay 50% more for the company or something like that, right?
0:09:10 And there’s reasons why that may happen that are outside your control, right?
0:09:15 So maybe the market has changed and we just now value companies differently, and of course,
0:09:17 there’s nothing you can do about that.
0:09:21 But what you can do is at least derisk the situation and say, okay, if I accomplish the
0:09:26 things that I set out to accomplish, do I believe the market will reflect that in how
0:09:27 they value the business?
0:09:31 And it’s really hard as a CEO to imagine going up and doing it all hands when you’ve
0:09:35 been telling everybody all along, everything’s great, and now you have to kind of tell them,
0:09:39 oh, by the way, it’s not that great based on some external metric.
0:09:43 And even though it’s only one metric, these are important data points that unfortunately,
0:09:47 for better or worse, do have psychological impact on how the employees feel about their
0:09:50 progress, on how you think about recruitment and retention of employees.
0:09:56 So it’s a hard balancing act, of course, to happen, but in general, the idea of kind
0:10:01 of having a stock price that goes up and down all the time is more probably kind of disheartening
0:10:06 to the company than kind of something that where the progress of the business also is
0:10:08 reflected in the progress on valuation.
0:10:11 Yeah, it’s hard because there’s sort of an emotional moment, which is I’m negotiating
0:10:13 this round of financing.
0:10:14 That’s right, exactly.
0:10:17 And I want to preserve as much ownership as I can, and it’s harder to think about the
0:10:18 long-term consequences.
0:10:19 Absolutely.
0:10:20 Right, yeah.
0:10:21 It’s a very hard thing.
0:10:24 And look, as I said, this is a hard tension between entrepreneur and venture capitalist
0:10:29 because in one level, the incentives are different, which is at the point of time I’m investing
0:10:30 as a venture capitalist, yes.
0:10:35 If I could invest less money for more ownership, that’s better for me.
0:10:39 Where we are aligned is that it’s not good for either one of us if we end up in these
0:10:43 situations down the road where kind of we can’t raise more money or we can only raise
0:10:47 more money at a substantially lower value than we thought because that has both emotional
0:10:50 and economic implications for both of us.
0:10:51 Got it.
0:10:55 Let’s talk a little bit about the form of investment.
0:10:59 And so you can raise a priced equity round or you can raise a convertible note where
0:11:00 there’s no price.
0:11:03 So you have a recommendation in the book and maybe walk me through it.
0:11:06 Yeah, so I talk in the book a lot about convertible notes.
0:11:09 You’ll hear this term if you’ve been in the YC world of something called a safe, which
0:11:14 is basically just a fancy way of saying it’s a piece of debt that ultimately converts into
0:11:18 equity at some predetermined price in the future.
0:11:20 They’re very good because they’re very simple.
0:11:22 There’s very low legal costs for doing them.
0:11:27 The paperwork’s very easy and all that is good and I’m all for efficiency and cost.
0:11:31 The failure case that I’ve seen, unfortunately, with a number of entrepreneurs is in some
0:11:35 respects because in number one, it’s so easy to raise money on a safe.
0:11:39 You often find people do what are called rolling closes, which is usually on a priced round
0:11:41 we’re like, this is your date, right?
0:11:43 Get your money in by June 30th or else you’re out of this deal, right?
0:11:48 And the safes have this very nice convention, which is I can close one on June 30th and
0:11:51 I can kind of do one on July 31st, I can kind of keep doing it.
0:11:53 And that’s very good and convenient.
0:11:58 The problem is never along that way does the entrepreneur see the actual capitalization
0:12:03 table of what is it going to look like when all those safes convert into equity.
0:12:07 And so several times we’ve had entrepreneurs come in here and it’s kind of sticker shock
0:12:12 when we give them an offer on the A round and then we actually kind of build the capitalization
0:12:16 table out of that and they realize that they inadvertently sold more of the company than
0:12:20 they had realized based upon this kind of concept of these rolling closes of notes.
0:12:26 So I’m not against safes, I would just say if you do it, this is kind of a failure case
0:12:27 that I think happens.
0:12:32 And I think you can accomplish the same efficiency goals with there’s a thing called series seed,
0:12:34 which is a very, very lightweight way of doing an equity deal.
0:12:38 So I just would encourage entrepreneurs to make sure if they go that route, they really
0:12:43 do pay attention and understand how much of the company they’ve sold and don’t kind of
0:12:48 find themselves kind of all of a sudden frightened one day when they realize kind of how much
0:12:51 money they may have given away in the company.
0:12:52 It’s very tempting, right?
0:12:56 Because the reason that you do a rolling close with these safes is, oh, I found the perfect
0:12:57 advisor.
0:12:58 That’s right.
0:13:00 Or I found the perfect early customer who wants to invest.
0:13:02 Or I found somebody else, right, a friend or family.
0:13:04 And so it feels convenient.
0:13:05 Yeah, it’s convenient.
0:13:06 Right.
0:13:11 Yeah, arbitrarily why we should have these kind of specific hard closes at different
0:13:12 times.
0:13:13 But yeah, it is convenient.
0:13:14 And again, it’s got a lot of value.
0:13:15 So I don’t want to suggest it’s never the right thing.
0:13:21 But I think it’s something to be aware of and make sure that you consider as an entrepreneur.
0:13:23 So let’s imagine I go through this process.
0:13:24 I’ve assembled my pitch deck.
0:13:27 I’ve got an offer and now I’m evaluating offers.
0:13:32 Yay, I’m in this enviable position evaluating term sheets.
0:13:36 So you talk a little bit in the term sheet about sort of the economic parts versus the
0:13:37 governance parts.
0:13:40 And so maybe let’s talk about each of them in turn.
0:13:47 So on the economic parts of my term sheet, maybe let’s talk about what is this thing
0:13:49 called, liquidation preferences?
0:13:50 What is this?
0:13:53 Yeah, there’s a whole several chapters in the book on this.
0:13:54 So I’ll give you the 30 second version.
0:13:58 So the simple way to think about liquidation preference is just the order in which money
0:14:00 comes out of the company.
0:14:03 So a liquidation is a fancy way of saying hopefully not an actual liquidation where
0:14:06 we’re saying now the company, but hopefully a sale of the company.
0:14:08 But it could certainly be the former as well.
0:14:12 And so what that means is who gets their money and in what order.
0:14:16 And generally what happens in venture fencing is the money that I invest as a venture capitalist
0:14:21 has what’s called a liquidation preference on it, which means my money comes out first
0:14:24 relative to the monies that would be owed the common shareholders, which is typically
0:14:26 where the founders and the team.
0:14:27 That’s right.
0:14:34 A simple example, if I invest $10 million and let’s say we sell the company for $10 million,
0:14:38 typically I will have $10 million worth of liquidation preference, which means all 10
0:14:43 of that money comes back to me and unfortunately for you and your employees, you have nothing.
0:14:45 And so that’s kind of the simple way to think about it.
0:14:53 It’s fairly common in venture deals, but typically it is kind of capped by just the amount of
0:14:56 money that the venture investors have put into the company.
0:15:01 And what’s kind of the most entrepreneur friendly liquidation preference formula that I should
0:15:02 live with?
0:15:05 There’s so many different kinds of liquidation preference.
0:15:08 Participating prefer non-3x, right?
0:15:09 So what’s the most entrepreneur friendly?
0:15:12 The most entrepreneur friendly and the one that I think generally predominates quite
0:15:16 frankly, particularly in Silicon Valley is what you would call a 1x non-participating
0:15:17 liquidation preference.
0:15:21 If you break that apart, 1x just means one times the money we put in, right?
0:15:25 So I don’t get two times my money, I don’t get three times my money, I get my $10 million
0:15:27 in that example we talked about.
0:15:31 And then non-participating means I don’t get to do what’s called double dipping.
0:15:35 And what double dipping means is not only do I get to take my liquidation preference
0:15:41 off, but then I also get to share in the proceeds that reflect my percentage ownership of the
0:15:42 company, right?
0:15:48 So in an example where let’s just say I put in $10 million and I own 25% of the company
0:15:54 or something like that, if I had participating preference, I would get my $10 million first
0:15:56 and then there’d be 10 left over, right?
0:15:57 Because we sold it for 20, there’s 10 left over.
0:16:02 Then I would also get 25% of that additional $10 million, fundamentally, you know, and
0:16:06 I say this the book, like I think that’s very unfair to the entrepreneurs and to the common
0:16:10 shareholders because liquidation preference is really intended to protect your downside.
0:16:11 And so it’s not obvious to me-
0:16:12 Something’s gone wrong.
0:16:13 Yeah, right.
0:16:16 Once you’ve kind of gotten your money out, it’s not obvious to me why you should also
0:16:20 participate in the upside and obviously take money away from the founders or the employees.
0:16:21 Yeah.
0:16:26 So when I hear my friends complaining about deals with structure, I guess this is an example
0:16:29 of deals with structure, like unfair liquidation preferences.
0:16:35 Right, unfair liquidation preferences, other structures sometimes you see is things, there’s
0:16:39 something called anti-dilution protection, which is again a basic way to say, “Hey, look,
0:16:44 if we later in the future raise money at a lower price than we raise today, it kind of
0:16:47 trues up the venture capitalist to a certain extent.”
0:16:52 And there’s a very common one, which is called weighted average anti-dilution, which is fairly
0:16:55 common, but there’s also a very egregious form of that, which you sometimes hear called
0:16:56 a ratchet.
0:16:59 And what a ratchet is, is really a complete price reset.
0:17:04 So it says, “Hey, if today I bought shares at $2 a share, and tomorrow you sell shares
0:17:09 at $1 a share, my $2 price converts to the $1 price,” meaning I literally get double
0:17:12 the number of equity ownership in the company than I thought.
0:17:18 And so you’ll see structure like that is sometimes happens when kind of people are trying to balance
0:17:20 off valuation with some of these other rights.
0:17:23 And that’s really a lot of what I try to point out in the book, is that it’s very hard to
0:17:26 look at these in isolation because they all have some kind of economic value.
0:17:30 So if you’re going to push on valuation, you might expect a venture capitalist to push
0:17:32 on some of these structure items.
0:17:35 And so the big advice that we always give entrepreneurs, and I echo this in the book,
0:17:38 is the simpler you can keep it the better.
0:17:42 And so if you’ve got one deal that’s got a lot of structure at this price, ask the
0:17:47 question for a lower price, what would a deal that’s a clean deal that doesn’t have all
0:17:52 the structure look like, that’s often quite frankly the advice that we give to entrepreneurs.
0:17:58 So I can actually get myself in trouble by sort of taking the highest post money because
0:18:02 of all of this structure and how does the money come out in these scenarios.
0:18:05 Yeah, I think there’s two risks that you always have to think about when you do the structure.
0:18:09 One is just, you’re potentially postponing the inevitable, right, which is you don’t
0:18:13 really know what the impact of these things will be until you have that next financing
0:18:14 event, right.
0:18:18 And so, look, the world may be perfect and you may never have to, you know, everything
0:18:21 may go up and to the right, which we all hope, but that’s not always the case.
0:18:25 And so, you know, a great example of this was, this is public information, but when Square
0:18:29 went public, they went public at $8 a share.
0:18:32 Their last round of financing was at $16 a share.
0:18:36 And those $16 investors had this full ratchet that we were talking about.
0:18:41 So, those $16 shareholders basically got issued two times the number of shares to bring their
0:18:42 price down to eight.
0:18:47 And so, all the existing shareholders obviously bore the brunt of that incremental, you know,
0:18:48 dilution from those shares.
0:18:49 So that’s kind of thing number one.
0:18:53 Thing number two is just, and this is why we always say keep it simple, is everything
0:18:56 you do today has the risk of creating precedent for the future.
0:18:58 And so, you may think, hey, look, you know, you and I are buddies.
0:19:01 This is, you know, I’m giving you these special rights because we’re friends.
0:19:05 But when that next investor comes in and looks at the paperwork from the previous round and
0:19:09 sees that you gave that stuff to the other investor, you know, the likely outcome is
0:19:10 they’re going to want the same thing.
0:19:13 And now you start to kind of get the cumulative effect of some of these things, which can
0:19:15 be, you know, pretty harmful at one time.
0:19:16 Right.
0:19:19 So, every subsequent investor is going to kind of want the same deal with a prior investor
0:19:20 or better.
0:19:21 Yeah, exactly.
0:19:22 Right.
0:19:23 You have to think into the future.
0:19:24 That’s exactly right.
0:19:25 You have more than one shareholder.
0:19:26 Yeah.
0:19:27 And you just don’t know how much negotiating leverage you’ll have at that time.
0:19:30 So, you don’t want to set yourself up to kind of start by having to defend or walk
0:19:33 away from a deal that you did prior.
0:19:34 Got it.
0:19:38 So, we’ve come back to the idea that, like, when I’m raising the Series A, I need to really
0:19:42 think about Series B and Series C and Series D, right, sort of like the sequence of investors
0:19:43 that I’m going to need.
0:19:44 That’s right.
0:19:50 I should sort of think through the entire financing plan before I start fundraising for
0:19:51 the Series A.
0:19:52 I think that’s right.
0:19:55 Yeah, look, I mean, you know, you want to kind of project as much foresight as you can,
0:19:58 recognizing that, look, markets may change, you know, kind of the financing environment
0:19:59 may change.
0:20:01 Those are things out of your control.
0:20:04 What’s in your control, at least, is to have a thoughtful plan for if I accomplish these
0:20:09 things, is that likely to lead to, you know, a favorable financing situation.
0:20:13 And if I make sure that I don’t kind of load up my terms with all kinds of crazy bells
0:20:16 and whistles, hopefully I set myself up for success.
0:20:17 Right.
0:20:19 So, it sounds like on the economic side of the term sheet, let’s keep it simple.
0:20:20 Yeah.
0:20:23 It’s sort of the big advice and think about the subsequent investors.
0:20:24 Absolutely.
0:20:27 I mean, so don’t do something abnormal early because that’s just going to bite you later.
0:20:31 Let’s talk a little bit about governance, the governance side of the term sheet.
0:20:35 So maybe the first question is, I heard that Google and Facebook have these dual class voting
0:20:38 shares and then, like, the founders have ultimate control.
0:20:39 That sounds good to me.
0:20:41 Like, don’t I always want that?
0:20:43 I want 10 times the voting share.
0:20:44 Right, exactly.
0:20:45 Does anybody else?
0:20:47 We do get some entrepreneurs, even, in the private markets who come ask us for that.
0:20:51 So, the important thing, I think, to think about in these, the idea, by the way, behind
0:20:55 dual class shares, for people who don’t know, is that literally shares have differential
0:20:56 voting rights.
0:21:00 Like, in the Facebook and Google cases, you’re right that Mark Zuckerberg and Larry Page
0:21:03 and other founders have kind of, you know, a high vote stock, which means they have more
0:21:07 influence on corporate matters and then everyone else has a low vote stock.
0:21:12 The reason those exist in the public markets is out of concerns of kind of potential misalignment
0:21:15 between long-term versus short-term incentives in the market, right?
0:21:19 And so, in a company like Facebook, let’s use that, you know, Mark probably has all
0:21:23 kinds of product ideas that he wants to execute over the next three, five, 10 years.
0:21:24 Those will all take time.
0:21:25 They will cost money.
0:21:29 There could be quarter-to-quarter gyrations in his expenses and revenue as a result of
0:21:31 these product plans.
0:21:34 And the main reason why somebody like that puts in dual classes, because he wants to
0:21:39 be able to make sure that if there are investors who are more short-term oriented, they can’t
0:21:42 out-vote him and say, “Hey, look, I don’t like your product strategy because of kind
0:21:44 of these short-term gyrations.”
0:21:48 The reason why those tend not to exist in the private markets is we’re all completely
0:21:50 aligned, which is none of us have liquidity, right?
0:21:54 So, we can’t, you know, in general, in many times we are prevented from selling our shares
0:21:55 legally.
0:21:59 So, there’s no liquid market, and we have a time horizon that’s consistent with the
0:22:01 entrepreneur’s time horizon, right?
0:22:04 You know, we don’t care, you know, obviously we don’t care about what they do quarter-to-quarter
0:22:07 other than to the extent it just represents them not being able to manage the business
0:22:09 in a way that makes sense.
0:22:14 And so, that’s why you tend not to see them in private markets.
0:22:17 What we’ve done with many of our companies is as they get closer to going public, we
0:22:21 have agreed with them that, okay, having these dual-class shares when and if you go public
0:22:26 is a good thing to do, but we haven’t done that, obviously, in the private markets.
0:22:27 Got it.
0:22:32 So, my first board members will likely be sort of either my co-founders and then my
0:22:33 early investors.
0:22:34 Right.
0:22:38 At some point, we’re going to go on a quest for an independent board member, and how should
0:22:39 I think about that?
0:22:40 When do we do that?
0:22:41 Why do I need one?
0:22:42 Who should I look for?
0:22:43 Yeah.
0:22:47 So, most boards you’re right are, in fact, most boards at the beginning don’t have independent
0:22:48 board members.
0:22:49 You’re right.
0:22:52 So, if you’re a co-founder and then typically as part of a venture capitalist coming into
0:22:56 your company as an investor, you will generally give them a board seat.
0:23:00 The reason I think independence are important is you want to have kind of balance on the
0:23:01 board.
0:23:05 And so, one of the phenomenon that we’ve seen over the last 10 years is a change in the
0:23:08 board structure in that it used to be that the venture capitalist would outnumber the
0:23:14 common shareholders, and that was of concern to many founder CEOs because it gave the venture
0:23:17 capitalist kind of the unilateral right in many cases to be able to remove the CEO if
0:23:19 they didn’t like them.
0:23:23 Over the last 10 years, that’s really shifted, and more of our boards have more common shareholders,
0:23:29 more founder and employee-led board members than they have preferred shareholders.
0:23:34 And that’s understandable and fair given some of the kind of changes we’ve had in governance.
0:23:39 The idea, though, behind an independent is can we find someone who is kind of not representing
0:23:42 either just the founders and not representing the preferred shareholders, but someone who’s
0:23:45 going to take a more neutral and expansive view of the business?
0:23:51 And so, I think it’s hard to probably do it early in your days, but as the board grows,
0:23:56 maybe as the board gets to four or five people, having an independent or two will be valuable.
0:23:59 And I think most people who’ve done it have gotten great value out of it, and oftentimes
0:24:04 they’ll look for an industry expert in the domain they’re in, or maybe they’re looking
0:24:08 for, hey, we need more sales and marketing help, and so let’s bring in someone who has
0:24:10 kind of expertise from an organizational perspective.
0:24:13 So those are the characteristics we tend to see with independence.
0:24:19 And as I approach an IPO, if all goes well, it seems like it’ll be expected that I have
0:24:20 an independent board member.
0:24:21 That’s exactly right.
0:24:22 One of the checklist items for going public.
0:24:23 That’s right, yeah.
0:24:24 So you’ll see this with companies, right?
0:24:26 When they go public, there are the different exchanges.
0:24:32 NASDAQ and NYSE have what they call listing rules, which require some number of independence.
0:24:35 They require some number of financial experts to be able to sit on things like the audit
0:24:36 committee.
0:24:39 So it becomes much more prescriptive as you go, and so you’ll often see a company kind
0:24:44 of, you know, T-minus one or two years leading up to an IPO start to kind of augment their
0:24:47 boards to satisfy these listing standards.
0:24:48 Got it.
0:24:51 Let’s talk a little bit about pro-rata rights.
0:24:54 So there’s going to be this element in the term sheet that says, here are what my existing
0:24:59 investors can be expected or are allowed to invest in subsequent rounds.
0:25:02 So how should I have that conversation with an investor?
0:25:05 What kind of pro-rata rights do I want them to have, and so on?
0:25:09 So it’s pretty typical when you do a fundraise that, you know, kind of one of the things that
0:25:13 we as venture caps will ask for is exactly this right, and what it means is it’s the
0:25:17 right for us to invest additional dollars in the next round of financing in order to
0:25:20 preserve the economic ownership that we already have in the company, right?
0:25:25 So if I own 25% of the company today, this gives me the right to hopefully put more money
0:25:29 in later such that my 25% kind of stays, you know, in and around that.
0:25:30 At a higher price?
0:25:31 Because I’ve made progress?
0:25:32 At a higher price, right?
0:25:34 So in general, it’s a very good thing.
0:25:39 Now, pro-rata rights become more challenging in the very, very good case, which is a nice
0:25:43 place to be, but, you know, if you are just executing phenomenally well and you’ve got
0:25:47 a new investor, you’re going to raise money and a new investor comes in and says, “Hey,
0:25:51 I want to put a bunch of money in, but for me to make my business model work, I need
0:25:53 to own a certain percentage of the company,” right?
0:25:57 Because if you go back to where we started from our last session, so much of what the
0:26:01 venture capitalist incentive is, can I get a Facebook, can I get a Google, and, you know,
0:26:03 there’s kind of two big cardinal sins in this business.
0:26:06 One is you miss one of those companies, you don’t invest in them.
0:26:09 The other is that you invest in it, but you don’t own enough of it so that when it gets
0:26:12 to be Facebook, it still doesn’t meaningfully change your economics.
0:26:16 And this pro-rata thing is kind of an example of the latter where that new investor may
0:26:19 come in and say, “Hey, look, I’m going to give you all this money, but I still only
0:26:24 own 3% or 4% of the company, and so, hey, I want you to go back to your existing investors
0:26:27 and tell them, ‘Don’t do your pro-rata, but let this new investor do it.’”
0:26:30 Now, admittedly, it’s a good problem to have, right?
0:26:32 Because it means we’ve got people who are bound, you know, kind of pounding down the
0:26:34 door to let us in.
0:26:36 But that does create tension.
0:26:40 You often see this even in the series A to seed side of things, that seed investors feel
0:26:44 like many times that they get compromised, and that the A round investors are trying
0:26:46 to kind of prevent them from doing pro-rata.
0:26:50 So it’s a very common thing to have, but I think it’s something where it puts you as
0:26:54 a CEO in a situation where you may have to manage kind of conflicting incentives among
0:26:55 your investors.
0:26:58 And so, you know, you just need to kind of go in eyes wide open, and hopefully you’ve
0:27:02 got a good enough dialogue with your existing investors where you can say, “Hey, let’s figure
0:27:05 out some compromise here that makes sense where everybody can feel like they can walk
0:27:08 away happy from the table.”
0:27:10 And what should I expect from my existing early investors?
0:27:14 So somebody invest in my A, should I expect them to be along for the ride and do their
0:27:18 pro-rata in the B and the C and the D all the way?
0:27:21 Yeah, you know, different firms have different philosophies on this.
0:27:25 You know, the way we do it here is, if we’re the A round investor, our general thinking
0:27:29 is that, you know, unless something dramatic happens with the company, you know, we should
0:27:32 expect that we’re going to participate pro-rata in the next round of financing.
0:27:35 We think, I think that’s kind of generally the convention in the industry.
0:27:38 On that, though, the answer for most firms, and we treat it the same way, is it’s kind
0:27:42 of an independent decision at that point in time because, you know, the dollars can get
0:27:45 very, very big and, you know, kind of, you have to think about, you know, how much do
0:27:47 I own at what kind of cost basis.
0:27:51 So I think it’s an important conversation, actually, to have with your VC when you take
0:27:55 money from them because you certainly don’t want to kind of, you know, miss set expectations,
0:27:58 you know, between the two of you, and you also want to be able to make sure when you
0:28:03 go raise money that you’re not creating some signaling effect otherwise where the new investors
0:28:07 are expecting your existing investor to participate and the fact that they don’t do it, they read
0:28:08 as a negative signal.
0:28:12 That can happen sometimes if you haven’t kind of had this conversation and, you know, already,
0:28:14 you know, set the right expectations up front.
0:28:15 Yeah.
0:28:18 So I need to be clear with you as soon as you put your money in.
0:28:22 I can count on you for the next round, or maybe the round after that, but like we should
0:28:23 just be on the same page.
0:28:24 That’s exactly right.
0:28:25 Yeah.
0:28:26 Great.
0:28:27 Good.
0:28:28 So last few questions on sort of governance.
0:28:32 Let’s talk about stock restrictions, like what are they, how should I think about them?
0:28:33 Yeah.
0:28:37 So this is one that’s come up more often because of this phenomenon now that companies are
0:28:38 staying private longer, right?
0:28:42 So it used to be not a big deal because companies about, you know, six years or so from founding
0:28:44 was kind of the median time to going public.
0:28:46 Now we’re talking 10, 12 years.
0:28:49 And so the things that you want to think about as a founder is two things.
0:28:53 Number one is, what are my investors going to do?
0:28:56 And so often you will see that investors will have restrictions on their ability to sell
0:29:00 shares and those come in lots of different flavors, which we won’t go into detail, but
0:29:01 you can read about on the book.
0:29:03 And then the other question is, what do you do about employees, right?
0:29:07 Because you’re probably going to have employees who will have fully vested their shares, some
0:29:09 of whom will have left the company.
0:29:11 And you know, this is one is a tough one to navigate, right?
0:29:15 Because on one level as a CEO, you know, I think you want to, you know, you want to
0:29:19 get flexibility to your employees, particularly the ones who are still, you know, at the company,
0:29:21 right, doing great work.
0:29:25 The thing you want to be careful about though is making sure that those shares don’t kind
0:29:29 of take up demand that would otherwise exist for people to buy shares from the company,
0:29:32 where the cash would come into the company, and therefore allow you to kind of raise money
0:29:33 and grow the business, right?
0:29:37 So if you think about this at some level, there may be a finite amount of dollars that
0:29:40 all the investors are willing to put in this company.
0:29:44 And if you have employees share sales competing with sales that you’re making as the company
0:29:48 to try to raise money to put in your own coffers, there can be a kind of a tension there.
0:29:54 And so more generally these days, we see fairly restrictive provisions here, which is most
0:29:58 companies try to kind of, you know, say, “Hey, look, if you’re going to sell as an employee,
0:30:02 you need the consent of the company,” or something like that, so that you kind of have more control
0:30:07 over the timing and also the volume, potentially, of these purchases.
0:30:12 Thinking about employee incentives, since this is sort of part of the discussion, my
0:30:17 friends who are doing longer vesting schedules or back-loaded employee options instead of
0:30:22 sort of, you know, one 48th over four years, they’re doing, you know, 10, 20, 30, 40, right,
0:30:26 to incent people to stay longer, how should I think about those types of incentives?
0:30:27 Yeah.
0:30:29 You know, there’s lots of discussions on this right now.
0:30:32 The short answer is I’m not sure there’s yet a real change in convention.
0:30:35 I think most people are still doing the pretty straight four years.
0:30:40 The big change that you may have heard about from some people is normally when you leave
0:30:44 the company and you’re vested, you typically have about 90 days to either exercise your
0:30:47 shares or you have to forfeit them.
0:30:51 And because of this elongation of companies staying private, a lot of companies now have
0:30:54 extended that period and they say, “Hey, look, we’re going to give you a year or two years
0:30:58 or something because we recognize there’s not a liquid market in the form of an IPO
0:31:02 to be able to sell them and we know it’s expensive for you to come out of pocket to have to exercise
0:31:03 your options.”
0:31:07 So, there’s probably more creativity, I would say, happening on that side, less creativity
0:31:11 on fundamentally rethinking whether we should have just a different investing schedule overall
0:31:14 that reflects, you know, kind of the fact that companies are staying private longer.
0:31:15 Got it.
0:31:19 So, if I wanted to be as sort of maximally employee-friendly as possible, I’d be extending
0:31:22 the time that people can choose to exercise their contracts.
0:31:23 That’s exactly right.
0:31:24 Yeah.
0:31:27 And, you know, the only thing that, you know, and we’ve talked about this in some of our
0:31:32 blogs, the only thing to think about there is that means that those shares, you know,
0:31:36 those shares will be what’s called an overhang, meaning that, you know, kind of they’re sitting
0:31:37 out there.
0:31:40 You don’t really know if they’re going to get exercised or not, but, you know, sometimes
0:31:43 in the alternative, people might not have exercised them.
0:31:46 Those shares can be returned to the company and the company could use them, obviously,
0:31:48 to issue new options to people.
0:31:52 So, there’s a, you know, a very emotional, understandably so, and a very kind of deep
0:31:53 debate on this.
0:31:57 But, yes, in the perfectly employee-friendly case, you would extend it out as long as possible
0:31:59 to give people the maximum time period.
0:32:00 Got it.
0:32:01 Great.
0:32:04 Thanks for talking to us about all of the economic and governance terms.
0:32:08 The term sheet can be very intimidating, so I’m glad you sort of went through it and
0:32:09 demystified it.
0:32:10 Thanks, Frank.
0:32:11 All right.
0:32:12 Congratulations.
0:32:16 You’ve survived to the end of part two, where we talked about understanding fundraising
0:32:19 and the terms that go into a term sheet.
0:32:23 Hopefully this gives you a sense of all of the mysterious terms you’ve now seen, maybe
0:32:28 for the first time, when a term sheet has arrived.
0:32:31 Next up, we’re going to do part three of our series.
0:32:35 And part three is all going to be about living with your venture investor over a long period
0:32:36 of time.
0:32:41 So, you might actually have the same person on your board of your company for 10 years,
0:32:49 and so Scott has great tips for how to understand the bends in that relationship and how it
0:32:55 will change over time, and we’re going to dig right into three concrete scenarios that
0:32:59 you might end up encountering, one in which you are winding down your company, one in
0:33:03 which you’re selling your company, and one in which you are actually going public.
0:33:06 Congratulations, and we’ll see you at part three.

0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
0:00:22 I’m Frank Chen and today I’m delighted to be here with Scott Cooper.
0:00:23 Thank you for having me.
0:00:26 Scott and I have known each other for 15 years, maybe longer.
0:00:27 Maybe longer.
0:00:28 Yeah.
0:00:32 In the Hard Things book because we were both in that loud cloud and we’ve been here at
0:00:33 Andreessen Horowitz.
0:00:34 This is our 10th year?
0:00:35 Yeah.
0:00:36 Yeah.
0:00:38 Is this the longest you’ve ever held a job?
0:00:39 It is now.
0:00:40 I think about it.
0:00:41 Right.
0:00:42 It is for me.
0:00:43 A lot of thought-offs were if you include the HP acquisition.
0:00:44 That’s true.
0:00:45 Like if you add all those together.
0:00:46 Yeah, but almost, yeah.
0:00:47 10 years at a single entity.
0:00:50 It’s like the longest for me.
0:00:52 So Scott is our managing partner.
0:00:55 He was the first employee at Andreessen Horowitz.
0:00:56 He is also my boss.
0:00:59 So this is great that you’re here.
0:01:05 Somehow in the midst of a fundraise and managing the firm, you went off and wrote a book.
0:01:08 And so we’ll talk a little bit about that today.
0:01:10 I try to stay busy.
0:01:11 Right?
0:01:12 Yeah.
0:01:13 So here’s what we’re going to do today.
0:01:20 I’m going to pretend to be a startup CEO who is raising money and I get a free reign
0:01:25 that asking any question I want about the fundraising process about how I should think
0:01:28 about how much to raise and who I’m working with.
0:01:31 And Scott has promised to candidly answer all these questions.
0:01:34 So this should be a huge treat for people who are thinking about raising money for their
0:01:36 own startup.
0:01:41 We also have some questions from Twitter that we’re going to interleave into this conversation.
0:01:43 So it’s not just me.
0:01:48 Scott hosted a Twitter ask me anything this morning and we had some questions come up
0:01:52 that we wanted to treat with a little more depth.
0:01:53 And there were some questions we couldn’t get to.
0:01:54 Yeah.
0:01:57 We got all into a package here.
0:02:01 The three segments that we’re going to use to talk about the startup journey are basically
0:02:03 the chapters in a startup.
0:02:07 So we’re going to talk about how do I figure out which venture capitalist I want to work
0:02:08 with?
0:02:09 How do I raise money?
0:02:11 And then how do I build my company?
0:02:15 So after the fund raise, the venture capitalist typically takes a board seat and then our
0:02:16 relationship changes.
0:02:18 So we’ll sort of ask questions about that too.
0:02:19 So you ready?
0:02:20 Sounds like fun.
0:02:21 You ready?
0:02:22 All right.
0:02:23 Let’s do it.
0:02:24 Fantastic.
0:02:25 So how do you pick a VC to work with?
0:02:27 Like, why does the world need VCs?
0:02:29 This was also a question that we got on Twitter.
0:02:34 How are the VCs helping the world address the most urgent problems that the world has?
0:02:35 Yeah.
0:02:36 So it’s funny.
0:02:40 So there was a time where the world needed VCs because the VCs had the money.
0:02:44 And so if you needed to actually raise money, that was definitely the way to go.
0:02:48 And that was kind of most of actually the first 30, 40 years of venture capital from
0:02:51 kind of early 1970s to mid 2000s, I think was characterized by that.
0:02:55 People will scarce the VCs had it and therefore you went to the VCs to get the money.
0:02:56 Yeah.
0:02:57 And so the banks wouldn’t lend it to you.
0:02:58 That’s right.
0:02:59 Yeah, definitely.
0:03:00 Yeah.
0:03:01 So I mean, think of it if we even back up a step, right?
0:03:02 Think of VC almost.
0:03:07 I think of it as it’s capital, it’s risk capital that kind of has to exist because there aren’t
0:03:10 alternative forms of financing that will actually finance those types of businesses.
0:03:11 So you’re right.
0:03:15 You know, we do have these things called banks and they do things called loans.
0:03:17 And there are plenty of businesses where people might say, “Hey, great.
0:03:20 That’s a perfectly good way to finance the company.”
0:03:24 The problem with loans is number one is obviously there’s some risky categories like startups
0:03:26 in general that they generally don’t like.
0:03:28 And then two is it’s not permanent capital, right?
0:03:31 So the idea of a loan, of course, is you have it for a period of time.
0:03:34 You pay some interest on it and then you got to obviously give it back.
0:03:39 And the theory of VC financing is number one, to finance those very risky assets, but also
0:03:42 to be able to kind of be what we call permanent capital in the business, right?
0:03:44 So that you never have to give it back to me.
0:03:48 I hope, of course, that you go public or something happens and I earn a return on that money,
0:03:51 but you know, you don’t have to think, “Hey, five years from now, just when my business
0:03:54 is starting to get going, do I have to kind of come out of pocket and basically repay
0:03:55 that money?”
0:03:57 Got it.
0:03:59 So let’s follow the money trail.
0:04:05 So if we need VCs to fund things that banks won’t fund, where do we get our money?
0:04:09 So we are lucky enough to have what we call limited partners.
0:04:12 And there’s a bunch of categories, probably the most prevalent and the easiest examples
0:04:14 are university endowments.
0:04:18 So we’re sitting here on Sand Hill Road, Stanford is just down the road from us.
0:04:23 So Stanford has an endowment where graduates have over time given money to, and the goal
0:04:26 of that endowment is how do I earn a return on that money?
0:04:29 Because I need to be able to help subsidize the high costs of college education and make
0:04:32 sure that the professors are all taken care of.
0:04:37 And so they build a whole portfolio of which venture capital is one component.
0:04:40 But venture capital is a very important component for them because it’s kind of their major
0:04:43 high risk, high growth, high returning asset category.
0:04:48 So if you look at Stanford, you look at Yale, what they’re saying is, “Hey, look, I need
0:04:52 to earn 25%, 30% annualized returns on this money.
0:04:55 Venture capital is one way where I can put a portion of my money there.”
0:04:58 All they’d put some money in stocks and bonds and things of that sort as well.
0:05:02 But basically, they effectively think of it as they lend us the money.
0:05:06 We take that money, invest in great entrepreneurs like yourself, and then hopefully some years
0:05:09 down the road, we give them the money back with some interest.
0:05:14 And the surprising thing is that they have a pretty big stake in private equity and venture
0:05:15 capital, right?
0:05:16 Yeah.
0:05:17 If they think about portfolio.
0:05:20 If they think about their portfolio construction and sort of how much a Yale or Stanford would
0:05:23 actually allocate to private equity.
0:05:24 Yeah.
0:05:27 So we talked about this a little bit in the book, but Yale was really kind of the founder
0:05:30 of what a lot of people call kind of the modern endowment theory model.
0:05:35 And the whole idea behind that is to have lots of different asset classes to provide
0:05:36 diversity.
0:05:38 And an asset class just means something to which you invest in, right?
0:05:40 So it could be real estate.
0:05:43 It could be literally like timber or oil and gas.
0:05:44 It could be public stocks.
0:05:45 It could be bonds.
0:05:48 It could be venture capital and private equity, obviously, or a component of it.
0:05:52 And what Dave Swenson, who’s the person who kind of has run the Yale endowment for I think
0:05:57 almost 30 years now, his basic innovation was he said, “Look, if I could find places
0:06:01 where there is imperfect information in the markets, there’s an opportunity for managers
0:06:04 in those markets to hopefully earn excess returns that you otherwise might be able to
0:06:07 earn if you’re just investing in public stocks.”
0:06:11 And so he said, “Look, what people like Yale and other endowments have is we have the benefit
0:06:15 of time,” which is the goal is for Yale to be existing in perpetuity.
0:06:19 And every year, of course, he has to give some money to the university to kind of pay
0:06:20 for annual expenses.
0:06:26 But he’s got a $30 plus billion kind of endowment that can live for the next 100 plus years.
0:06:30 And so that allows him to kind of invest in things like venture, which will take a long
0:06:31 time for them to realize.
0:06:36 But in return, that gives him exposure to hopefully imperfect markets that give him an opportunity
0:06:39 for return that’s much higher than other assets.
0:06:45 So he might have, for private equity and venture, venture’s probably almost 18, 20% of his assets.
0:06:50 And then if you layer on other private assets, he probably has kind of 40 plus percent, maybe
0:06:53 even 50% of his assets in the private markets.
0:06:55 And that’s a little bit higher than others.
0:07:00 But the idea is he’s just looking for abnormal returns, and he thinks the private markets
0:07:01 is a great place to get it.
0:07:02 Yeah.
0:07:03 So 40% seems super high.
0:07:08 That’s great news for an entrepreneur, because not only does David Swenson have a lot of
0:07:12 Yale’s management money tied up in this asset class, but people who have emulated Yale’s
0:07:15 portfolio strategy have also poured in money.
0:07:18 And so as a result, you’re a direct beneficiary.
0:07:19 That’s exactly right.
0:07:22 David Swenson saying 40% of my money needs to go into private equity.
0:07:23 Yeah.
0:07:31 And there’s a historical anomaly here, which was before the kind of mid-1970s, institutional
0:07:36 asset managers like Yale actually were prohibited from being able to invest in assets like venture
0:07:38 capital that were considered too risky.
0:07:42 And there were a lot of changes that came along the way, but basically there was this
0:07:46 thing called the Prudent Man Rule, which came in and said, “Hey, we think it’s actually
0:07:50 reasonable for pensions and other people to invest in these assets, as long as they do
0:07:51 it, of course, in a reasonable way.”
0:07:56 And that really opened up the floodgates in the mid- and late-1970s to venture in private
0:07:59 equity as a broad institutional asset class.
0:08:02 And you’re right, we’ve been the beneficiary of that for the past 40 years.
0:08:03 Yeah.
0:08:04 Great.
0:08:05 So there’s a pull of money.
0:08:11 David is chasing, and all the fund managers like David, is they’re chasing asset sort
0:08:17 of outsized returns uncorrelated with public stock market or sort of other asset classes.
0:08:18 So how does it work?
0:08:21 How did the great venture funds make their money?
0:08:24 And let’s talk a little bit about sort of batting average and slugging percentage.
0:08:25 Yeah, sure.
0:08:26 Yeah.
0:08:29 So we use this baseball analogy inside the book.
0:08:35 But the basic way to think about a venture portfolio is about half, 40% to 50% of what
0:08:38 we do, we’re going to get wrong.
0:08:41 And there’s this very euphemistic word that we have in this business, which I know you
0:08:44 and I’ve talked about called, you have an impaired asset, which is a very polite way
0:08:47 of basically saying you lost all your money, right?
0:08:49 But it sounds much better to say it’s impaired.
0:08:53 So you’ve got 40%, 50%, that’s for all intents and purposes is zero.
0:08:55 And then you’ve probably got 20% to 30%, where you make a little bit of money, right?
0:08:57 You might get your money back.
0:09:00 You might make two times your money, three times your money.
0:09:01 That’s a lot more fun.
0:09:02 But if you do the math, right?
0:09:07 If you’ve got 50% at zero and call it 30% at 2X, you can tell you’re still not even
0:09:08 back to one yet, right?
0:09:09 You’re still kind of…
0:09:10 You’ve not filled the pothole…
0:09:11 That’s exactly…
0:09:13 …that you’ve created for yourself by wiping out 40% of your portfolio dollars.
0:09:17 So basically what that means is the way this business works, the difference between success
0:09:22 or failure in this business means you’ve got 10 or 20% left of your investments that need
0:09:25 to basically generate 90% of your returns.
0:09:31 And so you have to find a Facebook or a Google or a Twitter or an Instacard or Airbnb where
0:09:35 you can earn 10, 20, 50, 100 times your money.
0:09:37 So it’s a very kind of skewed distribution, right?
0:09:40 So unlike kind of a normal distribution, right?
0:09:44 Where things are kind of normally distributed around a bell curve, you will hear people
0:09:47 talk about the concept of a power law curve for venture capital, right?
0:09:52 Which basically just means you have very small number of N companies that will drive the
0:09:56 very, very large portion of returns and then this very long tail, quite frankly, of companies
0:09:59 unfortunately that won’t move the needle on your economics.
0:10:00 Got it.
0:10:03 So let’s turn that into concrete advice for me as the startup CEO.
0:10:08 So what type of business is going to be attractive to somebody who’s optimizing their portfolio
0:10:09 for sort of slugging percentage?
0:10:11 Yeah, so that’s the right way to think about it, right?
0:10:16 So what you as an entrepreneur need to understand is what are the incentives that I have based
0:10:21 upon the incentives that my investors have given me, which is exactly that, which is to
0:10:25 continue the baseball analogy, I need to swing for the fences, I need to try and hit a home
0:10:26 run, right?
0:10:30 And so for you to determine whether venture capital is right for you, you have to decide,
0:10:31 okay, is that what I’m signed up for, right?
0:10:34 Is there, is the market I’m going after big enough to be able to sustain a company like
0:10:35 that?
0:10:38 And then even if it is on a personal level, is that the kind of business you want to
0:10:39 grow, right?
0:10:42 So maybe you decide, hey, you know what, I can build a really nice business here and
0:10:46 in two years, Google will come along and buy it for 30 or 40 or 50 million dollars and that’s
0:10:49 a life-changing event for me and my family.
0:10:51 And that’s a perfectly fine outcome.
0:10:55 There’s no normative, you know, kind of reason why you shouldn’t do that, but that’s probably
0:10:59 not the kind of alignment of interest that you would have if you took venture capital.
0:11:02 The venture capitalists would probably be disappointed with that outcome and they would
0:11:06 want you to kind of be playing for a much bigger opportunity and a bigger long-term vision.
0:11:07 Got it.
0:11:11 So the reason that they come to my board meetings and say faster growth, higher margins is right
0:11:15 because they’re trying to get the company to be as valuable as possible because they
0:11:20 need like a huge Facebook style return to cover up for all the mistakes they made.
0:11:21 That’s exactly right.
0:11:24 So, you know, unfortunately, we don’t necessarily know which of the companies at the beginning
0:11:29 are going to turn out to be in that upper right quadrant of returns and so everything
0:11:34 is kind of option value from a venture capitalist perspective and so they will be encouraging
0:11:38 you to kind of try to ultimately find ways to get your company into that return profile.
0:11:39 Okay.
0:11:43 So it’s important for me to understand that as I go fundraising the VC, which is there’s
0:11:47 going to be a situation where our interests don’t align if I don’t want to build one
0:11:48 of these enormous companies.
0:11:49 That’s right.
0:11:50 Yeah.
0:11:56 So, does it matter when I go raise money with a fund and here I want to talk about
0:11:57 the J-curve, right?
0:11:58 Sure.
0:12:00 So maybe explain the J-curve and then let’s talk about whether it’s important that I
0:12:01 understand that.
0:12:02 Sure.
0:12:05 So the J-curve, and you’ll see a beautiful picture of it in the book, is literally looks
0:12:09 like a J, which means you basically kind of have this dip and then, you know, it comes
0:12:10 up, right?
0:12:15 And so the concept of the J-curve is that in the early years of a fund, we are investing
0:12:16 money.
0:12:20 And the faster, if you’re a limited partner in my fund, you have negative cash flow.
0:12:23 So I’m asking you to give me money so that I can go and invest in what I hope is going
0:12:26 to be the next Facebook or Google or Twitter.
0:12:30 And so from your perspective, you are in the bottom shallow end of that J-curve where you
0:12:32 are negative in terms of the cash.
0:12:37 We hope after three, four, five years, you kind of cross the X-axis to start to generate
0:12:39 positive returns from a cash perspective.
0:12:45 So what that means is it’s mostly relevant for limited partners.
0:12:47 It has probably less relevance for an entrepreneur.
0:12:51 The only relevance for an entrepreneur is you want to have a general sense of where in the
0:12:56 fund you are and the investor is when you take their money.
0:13:00 So for example, if these funds tend to be 10-year lives, right?
0:13:05 So at the early days of the fund, if I invest in you and then two years from now, you have
0:13:08 to raise money again or four years from now, I probably still have some money left over
0:13:12 in my fund because I’m at the relative early stages of the fund.
0:13:16 Whereas, you know, if you come in and you’re five or six of my fund, I might have already
0:13:20 invested 90% of the capital and so when your next round of financing comes up, maybe I’m
0:13:21 out of money, right?
0:13:25 And so the J-curve probably is less relevant for you, but this concept of kind of where
0:13:29 are you in the time diversity of the fund is a relevant thing as an entrepreneur for
0:13:33 you at least have a sense of so you know kind of how long staying the financial power might
0:13:35 be of that venture partner.
0:13:36 Got it.
0:13:40 So sort of the further along you are, the more risky it is for me and that you might run
0:13:43 out of money for my next round.
0:13:44 That’s right.
0:13:46 And then all the other investors will start asking, “Hey, why is Andries and Horowitz not
0:13:47 filling up this round?”
0:13:48 That’s exactly right.
0:13:52 And hopefully if we’re doing our job well, we will raise another fund, right?
0:13:56 So we might have money now from a new fund to invest, but you know, none of that’s guaranteed
0:13:57 of course.
0:14:01 And so it’s just something to think about, you know, kind of at the margin as you consider
0:14:03 your venture partner.
0:14:06 You get money from your limited partners like University Endowments.
0:14:10 The general partners, do they also invest money in the firm?
0:14:12 And do I need to know how much they’ve invested?
0:14:13 Do I care?
0:14:14 Yeah.
0:14:15 Or do I not care?
0:14:19 Yeah, I think to answer your second question, you know, I’m not sure you care that much.
0:14:21 The general partners typically do invest.
0:14:26 It ranges anywhere from, you know, on the low end, 1% of the fund will come from dinner partners.
0:14:28 Some funds, it will be as high as 5%.
0:14:29 So it’s meaningful.
0:14:33 Again, it’s a little bit more the LPs care about it because they want to make sure, hey,
0:14:37 you’ve got some kind of, you know, stake in the game here and you’re not, you know, just
0:14:40 relying on other people’s money, but you also actually have, you know, kind of your own
0:14:41 money at risk as well.
0:14:46 And as funds tend to get older and more mature firms, I should say, and, you know, hopefully
0:14:50 the partners have done well and they’ve accrued some financial profits themselves, then, you
0:14:55 know, you tend to kind of see that 1% kind of shift up more over time as, you know, increasingly
0:14:58 larger percentages of the, you know, financial well-being of those partners goes into the
0:14:59 fund.
0:15:00 Yeah.
0:15:05 So in theory, a general partner who has, who has to fund 5% of a fund has more skin in
0:15:06 the game.
0:15:10 I’m saying, as an entrepreneur, I shouldn’t overweight that factor when I’m raising money.
0:15:12 I wouldn’t overweight it too much.
0:15:16 Number one, you certainly don’t, there’s no public place for you to find it, quite frankly.
0:15:18 You can always ask your venture capitalist about it.
0:15:21 You might be one of the few people, though, who’ve ever asked them that question.
0:15:24 It does go, you know, I think where it’s relevant as an entrepreneur is it goes a little bit
0:15:29 to kind of the staying power of the firm and how likely are they to be able to raise another
0:15:30 fund, right?
0:15:34 So the more the LPs feel like they’re aligned and, you know, kind of, you know, they have
0:15:37 some skin in the game, the more likely, you know, of course, the LPs will also think this
0:15:40 is a long-term partnership that we want to continue investing in.
0:15:44 That’s probably, again, the only kind of potential, you know, impact as an entrepreneur that that
0:15:47 piece of information might provide, you know.
0:15:51 Now aside from how much of their own personal money they have in a fund, there’s also this
0:15:57 notion you introduce in the book of GPs with economic interest only versus GPs with governance
0:16:00 interest in sort of the management company around the fund.
0:16:01 Does that matter to me?
0:16:05 Do I need to pick only one or the other or am I indifferent?
0:16:08 I think the most important thing, I think there is some relevance, but I’d say the most
0:16:12 important thing is more of a meta point, which is, you know, you and I both come from the
0:16:14 enterprise software world, right?
0:16:18 And for any of your viewers here who are used to enterprise selling, there’s always this
0:16:22 concept of enterprise selling of kind of, you know, who is your economic buyer, you
0:16:26 know, who is your kind of champion, your sponsor, the organization, and, you know, ultimately
0:16:27 who’s the decision maker, right?
0:16:31 And so the way I would think about venture capital is in the same, was in the same way,
0:16:34 which is there may be different partners who play different roles as it relates to your
0:16:36 fundraising process.
0:16:41 So ultimately part of your job is to map the firm and understand, okay, what is the decision
0:16:42 making process?
0:16:46 So at some firms, for example, maybe, you know, there are certain senior partners who always
0:16:49 have to sign off on the deal to get something done.
0:16:52 You know, here at Injuries and Horowitz, we do things differently, which is as long as
0:16:57 people follow the process, you know, consistently, you know, any single general partner has the
0:17:01 ability to ultimately make a decision to invest and go on the board of a company.
0:17:04 But understanding that’s important, you know, understanding, kind of, you know, if there
0:17:05 are differences.
0:17:11 So some people, you know, kind of use the term general partner to encompass, you know, different
0:17:15 job categories, you know, for example, here at Injuries and Horowitz, a general partner
0:17:18 to us means you can write a check and you can sit on the board.
0:17:22 And so if you understand that based on the different firms you’re acting with, you’ll
0:17:25 understand kind of the selling process in a way that I think will make it more effective
0:17:27 for you to try to close your deal.
0:17:28 Yeah.
0:17:29 So it is like enterprise sales.
0:17:30 Yeah.
0:17:31 To identify who you’re working with.
0:17:32 Yeah.
0:17:33 What budget do they have?
0:17:34 Who owns the budget?
0:17:35 That’s exactly right.
0:17:36 Right.
0:17:37 Yeah.
0:17:39 Rather than sort of narrowly asking the question, do they have governance rights in the management
0:17:40 company?
0:17:41 Yeah.
0:17:42 Yeah.
0:17:43 Yeah.
0:17:45 I mean, that’s more, quite frankly, sometimes, that’s more a symptom of how the firm is set
0:17:46 up.
0:17:49 But I think if you understand the decision-making process, then that will incorporate all the
0:17:51 information you really need to know.
0:17:57 And then comparing contrasts for me a little of the, I’m going to do Silicon Valley financial
0:17:59 investors like us versus sort of other categories.
0:18:04 So maybe talk a little bit about how our corporate venture capital general partner is
0:18:06 incented and is it different?
0:18:08 Like they probably don’t have limited partners, right?
0:18:11 Because the capital probably comes from their corporation.
0:18:15 And so what other incentive differences are there and how should I think about when do
0:18:17 I put those guys on the cap table if ever?
0:18:18 Yeah.
0:18:20 So corporate venture capital actually over the years has grown a lot.
0:18:23 So kind of, you know, it was never that prominent.
0:18:26 I don’t know the exact numbers today, but something like 15, 20 percent of deals often
0:18:27 have a corporate partner in them.
0:18:30 So it’s grown a lot over the last 10 years.
0:18:32 And so the answer to your question is, look, they vary a little bit.
0:18:37 So some of them, you know, like a Google Ventures, for example, is a corporate VC.
0:18:40 You know, Google is their only limited partner in that sense.
0:18:41 And so, yeah, you’re right.
0:18:42 They don’t have to go raise money.
0:18:46 Some corporate venture firms do have some external LPs, but most of them are kind of
0:18:49 captive to the corporation they do.
0:18:52 So it does change the incentive structure for them, right?
0:18:55 Because oftentimes they’re not purely financial investors, right?
0:18:57 So they clearly don’t want to lose money, and they’d like to obviously earn a living
0:18:59 on the profits from the business.
0:19:03 But ultimately it’s a diversification strategy for the firm to say, hey, look, there’s new
0:19:06 technologies that could come up and impact our business.
0:19:09 This is a way for us to kind of keep an eye on that technology.
0:19:13 Oftentimes it’s a pipeline for business development or even M&A opportunities.
0:19:16 And so I think there’s good and valid reasons to take corporate venture capital.
0:19:21 The big advice that we often give our companies is the thing you want to be careful about
0:19:25 is you don’t want to sell your business to a corporate before you’ve actually received
0:19:27 an acquisition premium for that.
0:19:31 And what we mean by that is, right, if I allow them to invest at a point where they own so
0:19:35 much of the company, that quite frankly it almost makes it impossible whether legally
0:19:40 or just from an external perception perspective that nobody else could ever buy my business,
0:19:43 you know, I’ve essentially kind of almost sold the company without quite frankly getting
0:19:46 paid what you would expect to get paid for the company.
0:19:51 So I think they can be great partners with kind of more limited economic interests.
0:19:55 You want to make sure they don’t have any rights, right, that would kind of cause, again,
0:20:00 other companies that might be interested in the company over time, either from a partnering
0:20:03 or an acquisition perspective to kind of be scared away.
0:20:06 But in that context, they can be very good partners.
0:20:11 So in my seat as the startup CEO, it sounds like the optimal ordering if I’m trying to
0:20:16 build like the biggest possible company that I can is try to find a financial investor
0:20:20 first who doesn’t, who’s not trying to buy me, right, they’re just trying to give me
0:20:25 fuel so I can build and then later maybe find a corporate investor or a set of corporate
0:20:28 investors who can go together into a round.
0:20:29 I think that’s right.
0:20:33 Or I think the third alternative is you could couple a corporate investor with financial
0:20:38 investors but probably just size them appropriately, right, where you might want to have the financial
0:20:42 investor have a slightly bigger stake and, again, make sure that the corporate investor
0:20:48 doesn’t have rights that might kind of deter future corporates from partnering or potentially
0:20:50 being an acquisition partner.
0:20:52 Keeps my flexibility as open as possible.
0:20:53 That’s right.
0:20:54 Option value high.
0:20:55 Yeah.
0:20:56 So, we let a question from Twitter.
0:21:00 So what are the return on investment pressures and time horizons for corporate VCs and how
0:21:02 do they differ from the ones you and I have at A16?
0:21:03 Yeah, they’re definitely different.
0:21:07 So the way ours work, right, just to understand it is, our funds tend to be about 10 years
0:21:12 long, right, as you know, and to be successful in this business over the long term, you probably
0:21:17 need to return two and a half to three times the money that the LPs give you over that
0:21:18 10-year period.
0:21:21 And 10 years is a little bit of an inside joke in this industry because actually even though
0:21:26 funds legally are supposed to expire after 10 years, they often go 12, 13, 15 years.
0:21:29 So let’s keep the fiction and stick with 10.
0:21:33 So over 10 years, you know, we need to basically generate those kinds of returns.
0:21:34 So it matters.
0:21:36 It goes back to the question you and I talked about earlier.
0:21:40 It matters a little bit about where are we in the fund when I invest in your company?
0:21:45 Because again, if I invest in your company late in my fund cycle, I might have pressure
0:21:49 to be able to kind of in a relatively short number of years before my fund expires to be
0:21:50 able to show some results from that.
0:21:52 And so that could have an impact.
0:21:56 The corporate partners, corporate venture partners tend not to have those constraints
0:21:59 because they don’t have to raise typically fund by fund.
0:22:02 They typically just are investing often off the balance sheet of the corporation.
0:22:06 And so therefore, arbitrary timelines are less relevant.
0:22:09 And as we talked about earlier, they certainly have some financial pressures, right?
0:22:13 I mean, I’d be hard pressed, you think, for a corporate VC to stay in business if they
0:22:15 always lost money on their investments.
0:22:19 But the primary goal in many cases is kind of not pure profit maximization, but strategic
0:22:20 maximization.
0:22:24 And so there’s other ways that they can effectively kind of generate a profit that don’t have
0:22:28 the same kind of financial constraints that a pure financial investor would have.
0:22:30 Got it.
0:22:33 And then two more questions from Twitter to sort of round out this section of, you know,
0:22:35 how do VCs work and how do I pick one?
0:22:37 Here’s a question from Varun on Twitter.
0:22:42 What’s the value of a specific advice and dedicated one-on-one help from a VC?
0:22:44 Since like, look, you can crowdsource all this stuff, right?
0:22:50 I can do a crypto IPO and then I can get some advice from Twitter and like, why do I need
0:22:51 you?
0:22:52 That’s right.
0:22:53 Well, it’s funny.
0:22:56 I talked about this in the book and you probably remember this quote, you know, our partner
0:23:00 Mark has always kind of asked us the question, are we the last dinosaurs basically, right?
0:23:03 So you know, we think we’ve got this incredibly advanced venture capital model and, you know,
0:23:06 maybe we’re just about to, you know, kind of be extinct as well.
0:23:07 The meteors are coming.
0:23:08 That’s right.
0:23:11 And so I think it does point to a very fundamental question that the, you know, the Twitter
0:23:15 user is asking, which is, what is the role of venture capital, right?
0:23:19 And so, look, my very simple answer is, you know, we used to live in a world as we talked
0:23:22 about at the beginning here where the venture capitalists had the money and that was, you
0:23:25 know, a very defined role they had, which is if you wanted the money, you had to go
0:23:26 there.
0:23:29 Today, look, money is, you know, we’re washing money, right?
0:23:31 And there’s venture capitalists, there’s hedge funds.
0:23:36 They’ll probably always be someone else who’s got more money than do we and a lower cost
0:23:37 of capital.
0:23:42 And so to me, the answer as to whether it’s ICOs or crowdfund or anything else, whether
0:23:46 those exist and whether venture capital in its current incarnation exists, to me is really
0:23:49 a function of whether venture provides something other than capital.
0:23:52 And you know, obviously, you know, since you’ve been here since the beginning, you know, the
0:23:57 whole way we set up entries in Horowitz, the way we did was to kind of invest in, you know,
0:24:01 100 plus people in addition to our investing team who day in and day out think about how
0:24:03 can we be valuable to our companies.
0:24:07 And you know, my personal view and obviously we live this every day in the firm is, you
0:24:12 know, for venture to be a viable entity for the next 10, 20, 30 years, capital loan is
0:24:16 not a differentiator and, you know, we will all have to find other ways to provide value.
0:24:22 And so I think to the, to the, you know, Twitter person’s question, he’s right, which is if
0:24:23 we don’t do anything else, then you’re right.
0:24:26 We’re no different than anyone else and you probably don’t need us and, you know, it’s
0:24:30 incumbent upon us to demonstrate the way actually have some other form of value.
0:24:31 Perfect.
0:24:35 And then last question in this section, broad strokes, how does the VC game look different
0:24:36 in 10 years?
0:24:37 We’ve been doing it for 10.
0:24:38 Yeah.
0:24:39 Yeah.
0:24:40 We’re looking forward to the next 10.
0:24:41 Yeah.
0:24:43 So I think if you look at the last 10, the biggest thing that happened was the introduction
0:24:47 of SEED as its own kind of investable category.
0:24:49 And you know, for people who are old enough to remember, you’ll remember these things
0:24:53 called angels, which were actually people who wrote money out of their own checkbooks.
0:24:57 You know, Ron Conway being a very famous one and even, you know, Mark Inves and Ben Horowitz
0:25:01 before they started the firm here, we’re doing that on their own.
0:25:03 That really changed the whole competitive dynamic.
0:25:06 I think for the next 10 years, I think you have a couple things that are going to happen.
0:25:10 Number one is, I think the competitive dynamic is going to continue to get even more challenging,
0:25:13 partly because of this issue we talked about that money is not scarce, there’s plenty
0:25:15 of availability capital.
0:25:18 I think the other phenomenon we’ve seen, which I think is going to continue, is this idea
0:25:21 of companies staying private much longer.
0:25:24 And so it used to be that companies would go public six, six and a half years after
0:25:25 they were started.
0:25:26 Now it’s 10, 12 years.
0:25:29 I don’t see any reason to believe that’s going to change.
0:25:32 And I think the third big thing that we’re going to see over the next 10 years is more
0:25:34 of a blending of private and public markets.
0:25:38 So today you have this interesting dichotomy, which is you’re private, you’re private,
0:25:41 you’re private and then we flip a switch and all of a sudden, you know, you’re public
0:25:45 and you know, you have a stock price and you have new investors and, you know, we ring
0:25:48 the bell at the stock exchange, all these fun things.
0:25:52 I think there is a continuum that we’re already starting to see and I would expect over the
0:25:57 next 10 years, you will see a more active secondary market, which means a resale market
0:26:00 for private stock that happens in the private markets.
0:26:03 But that is a little bit, you know, may have some elements of regulation, regulation might
0:26:06 look a little bit like a public market, but not quite all the way there.
0:26:09 And so that we have more of a continuum of a life cycle of companies as opposed to kind
0:26:10 of this very sharp.
0:26:11 This climatic event.
0:26:12 Exactly.
0:26:13 Right.
0:26:14 The day of where everybody takes the pictures.
0:26:15 Yeah, exactly.
0:26:16 So yeah.
0:26:17 All right.
0:26:20 So hopefully that gives you a great sense of how venture capitalists work, what their
0:26:25 incentives are, and this is going to help you pick the right venture capitalist for you
0:26:30 if you decide venture capital is the right way to put money into your company.
0:26:36 And now we’re going to move on to part two, which is about fundraising and actually getting
0:26:38 and negotiating term sheets.
0:26:41 So for those of you that will join us for part two, we’ll see you there.
0:26:51 [BLANK_AUDIO]

0:00:07 Here’s an oldie but a goodie from the archives from the Side Hustle Show Greatest Hits Collection.
0:00:10 This is your first virtual assistant.
0:00:18 How to bring on the right help so you can work on your business instead of in it.
0:00:19 What’s up?
0:00:20 What’s up, Nick?
0:00:21 Hello.
0:00:22 We’re here.
0:00:24 Welcome to the Side Hustle Show because no matter how productive you are, there’s still
0:00:25 a limit.
0:00:30 There’s a limit to your capacity, to your hours, and to your expertise.
0:00:33 And when you’re up against that ceiling, you’ve got a couple choices.
0:00:37 You can settle in like, “All right, this is my life now.”
0:00:40 Or you can ask for help in breaking through.
0:00:42 That’s what this episode is about.
0:00:46 Growing your team in such a way that you’ve got some breathing room in your schedule and
0:00:51 in your mental bandwidth to do the work that’s required of a business owner instead of the
0:00:56 work of the business doer to borrow from Shawn Marshall in episode 312.
0:01:01 Even though I’ve been hiring virtual help in my businesses since 2005, I’ve still got
0:01:02 a lot to learn.
0:01:07 And this is something that’s been on my mind this year as I think about where I want to
0:01:10 go with my current operations and who can help me get there.
0:01:15 To help me dive into this topic, I’m excited to welcome John Jonas and Nate Hirsch to the
0:01:16 show.
0:01:21 Joining them, they’ve got more than 60 virtual team members and have been practicing remote
0:01:23 management for more than a decade.
0:01:29 And it turns out they both run platforms to help you make your first virtual hire as well.
0:01:35 John heads up onlinejobs.ph, the largest remote job board and resume database for workers
0:01:42 in the Philippines, while Nate’s created freeup.com, it’s free with three E’s, a curated freelance
0:01:44 marketplace for workers all around the world.
0:01:49 I’ll tell you a little bit more about the benefits of and differences between the sites
0:01:53 as I see them having been a customer of both after the interview.
0:01:57 Stick around to hear John and Nate’s take on when it’s time to hire, how to find the
0:02:01 best talent for your budget, and some common mistakes to avoid.
0:02:05 Notes and links for this one, plus the full text summary with all the top tips from the
0:02:09 call are at sidehustlenation.com/virtual.
0:02:13 We begin this call with a trip down memory lane as I asked John and Nate to tell me about
0:02:16 their first hires and what it felt like to take that leap.
0:02:20 You’ll hear John first and I’ll be back with my top takeaways after the interview.
0:02:21 Ready?
0:02:22 Let’s do it.
0:02:30 15 years ago, I remember having this conversation with this guy who was so far ahead of me in
0:02:31 business.
0:02:33 I mean, I was working and I was fine.
0:02:36 I wasn’t making a lot of money, but I was working a lot.
0:02:39 And he says to me, “When you’re ready to start outsourcing, make sure you go to the Philippines
0:02:40 with it.”
0:02:44 And I was like, “Huh, that’s interesting and different.”
0:02:48 And he gave me some reasons why and gave me a reference to where I could hire someone.
0:02:53 And the time I debated, I went back and forth for a couple of months, actually, of like,
0:02:55 I don’t know if I can afford to hire someone.
0:02:59 He told me to hire someone full time and I didn’t know if I could or should or if they
0:03:01 could do good work or what.
0:03:04 And I ended up taking the leap because I tried a whole bunch of other stuff and it just wasn’t
0:03:05 working for me.
0:03:12 So I hired this guy full time and it was the single most liberating experience of my life
0:03:17 where all of a sudden I had this guy whose only job was to do whatever I asked him to
0:03:18 do.
0:03:22 And, you know, as a business owner, you’re doing so many things, you’re wearing so many
0:03:28 hats, and I was able to get a couple hats off of me and onto him.
0:03:33 And I had to teach him what to do, which was fine, which is one of the biggest things I’ll
0:03:38 talk about probably later, but after a couple of months of having him work for me, I realized
0:03:45 there’s two of me now, there’s two of me, because I’m now working more effectively.
0:03:51 I could focus on things that were better for the business, like making sales, and he was
0:03:56 doing the things that I was previously doing, which was such a big deal.
0:03:59 So John, what was the business you were running at the time and what were those couple hats
0:04:01 that you took off your head?
0:04:04 So I do remember the very first thing I had him do.
0:04:08 I do not like to write, and I don’t like the process that goes along with writing.
0:04:14 So I had tried previous to this, hiring people on Upwork to write articles for me, because
0:04:16 at the time, article marketing was super effective.
0:04:20 And it was just a big pain in the butt, like I hired this guy, spent all this time hiring
0:04:25 this person, he writes 50 articles, then it sends him to me, I have to check him for plagiarism.
0:04:27 Most of them were good, some of them were plagiarized.
0:04:33 And then as soon as I got them all right, I realized like, crap, he’s a writer.
0:04:34 That’s all he does.
0:04:39 And now all the responsibility falls on me to distribute these and link them and use
0:04:40 them.
0:04:44 And I was like, dude, I don’t want to do crap with these.
0:04:45 I don’t want to think about this.
0:04:46 I’m doing other things.
0:04:52 And so when I hired this guy full time, this was the first time I was ever able to take
0:04:57 a process off of my plate where I could teach him how to do the writing and how to do the
0:05:01 submitting and how to do the titles and the articles and the resource boxes and the linking
0:05:04 and how to link it to my website and to different pages of my website and how to link them to
0:05:05 each other.
0:05:12 And so it was the first time that like, this full thing got off of my plate and I never
0:05:13 had to touch it again.
0:05:14 Okay.
0:05:19 So you kind of had an SEO affiliate content type of business where it was like time consuming
0:05:24 to do that SEO writing, this article marketing type of stuff.
0:05:25 Nate, what about you?
0:05:27 What was your first hire like?
0:05:30 So I was running an Amazon business out of my college dorm room.
0:05:32 I got into Amazon at a very good time.
0:05:36 This was back in 2008 and I had a dropshipping business.
0:05:38 And with dropshipping, there’s so much that goes into it.
0:05:42 You’re responding to every email, you’re following every tracking number, you’re building relationships
0:05:43 with manufacturers.
0:05:46 This was before Amazon software too.
0:05:50 So we were repricing every product, taking down and putting products up, changing inventory,
0:05:51 all of that.
0:05:55 So there was a lot of manual work and I’m making money for the first time in my life.
0:05:57 And I’m doing everything myself.
0:06:00 And so I meet with an accountant to pay taxes for the first time.
0:06:04 And the first question he asked me is, when are you going to hire your first person?
0:06:05 And I kind of shrugged him off.
0:06:06 I was like, why would I do that?
0:06:07 That’s money out of my pocket.
0:06:08 I love doing this.
0:06:10 I can do it seven days a week.
0:06:13 They’re going to steal my ideas that they’re going to hurt my business.
0:06:17 And he just laughed in my face and he said, you’re going to learn this lesson on your
0:06:18 own.
0:06:21 Sure enough, my first busy season comes around the fourth quarter.
0:06:22 I’m not prepared.
0:06:23 I don’t know what busy season is.
0:06:24 And I get destroyed.
0:06:26 I’m working 20 hours a day.
0:06:29 My social life plummets, my grades go down.
0:06:32 And I get to the other side and I’m like, oh my God, the account was right.
0:06:34 I need to start hiring people.
0:06:40 So I post a job on Facebook and this guy in my business law class, he messages me wanting
0:06:42 a job and I don’t even interview him.
0:06:43 I hire him.
0:06:46 And he ends up being this amazing hire.
0:06:48 I start him off doing bookkeeping work.
0:06:52 So at the end of every month, we had all these transactions on our credit card and we would
0:06:54 have to input them into QuickBooks.
0:06:56 And I used to do that every single month.
0:06:59 And I remember teaching him how to do it and having him do it.
0:07:03 And then that month comes by, we did it on the first of the month or 30th of the month,
0:07:04 whatever it was.
0:07:06 And I just didn’t have to do it anymore.
0:07:10 And it was kind of like that revelation, like I can focus on high level stuff, that kind
0:07:13 of addiction that delegating has.
0:07:19 If you fast forward ahead to my first time hiring a Filipino VA, this was, I was in Florida
0:07:21 and a friend of mine told me about Upwork.
0:07:26 He actually told me about this VA he was using who referred her friend, her name is Chiqui
0:07:27 Ann.
0:07:28 She still works with me today.
0:07:32 And I remember getting her on emails and doing customer service because with dropshipping,
0:07:34 there’s so many emails.
0:07:35 What’s my tracking number?
0:07:36 This arrived damaged.
0:07:40 And I just remember training her up and getting her to do emails.
0:07:44 And I’ll always remember the first day that I woke up and I didn’t have to check my email
0:07:45 anymore.
0:07:46 That was incredible.
0:07:50 And I learned a ton about just hiring people in the Philippines in general.
0:07:53 I remember after her, I just had a bunch of people quit on me.
0:07:57 This kind of goes to what John was saying about just learning what it’s like working
0:07:58 with people in the Philippines.
0:08:02 They didn’t really like how direct I was and how I was right to the point.
0:08:04 And I really didn’t have an emotional side.
0:08:05 It was business.
0:08:06 This is what you do.
0:08:10 And that hurt me a lot of ways when I was hiring VAs for the first time outside of Chiqui
0:08:15 Ann, who for whatever reason was very loyal and put up with a lot of my nonsense.
0:08:17 She saw the diamond underneath.
0:08:18 Okay.
0:08:19 Now, this is interesting.
0:08:23 So it sounds like this is kind of probably around the same time frame, kind of this 2008-2009
0:08:28 time frame, which was around the time that I made my first VA hire as well.
0:08:35 And I actually went through a third party company because I either wasn’t familiar with Elance
0:08:40 at that time or Odesk at that time or just wasn’t comfortable making a direct hire.
0:08:45 So I found this company out of Karachi, Pakistan, which was at that time the largest city in
0:08:46 the world.
0:08:47 I never heard of.
0:08:48 20 million people.
0:08:55 And hired this guy, Waseo, to run pay-per-click ad campaigns for me on Google AdWords.
0:08:56 And it was fascinating.
0:09:02 Like, he’d work the night shift in Karachi and we’d be on Gmail chat all day and I’m
0:09:04 learning so much about his culture.
0:09:08 And he would joke like, “I know more about women’s shoes than anybody in Karachi.”
0:09:10 And it was just a fascinating experience.
0:09:15 But it was this kind of first taste of like, Nate, you said kind of this delegation and
0:09:17 like, “Oh, how empowering that can be.”
0:09:19 And John, you called it this liberating experience.
0:09:25 Like, I could go to the gym at 10 in the morning and work was still getting done.
0:09:27 And that was a big, light bulb moment for me.
0:09:30 Like, I didn’t have to be behind the keyboard at all the time.
0:09:32 For me, a couple of things triggered that.
0:09:35 And I had kind of the same fears of like, they’re going to steal my ideas, they’re not going
0:09:37 to do it as well as me.
0:09:38 Like, “Can I afford this?”
0:09:42 For me, it was, “When is the time to bring on help?”
0:09:46 It was this kind of question of, “Are you working on your business or are you working
0:09:47 in your business?”
0:09:50 And I was very much working in the business at that time.
0:09:55 On top of that, you kind of come to this realization, like, “I have a process for this.”
0:09:58 And even though it’s all in my head right now, like, I could teach somebody else how
0:09:59 to do this.
0:10:02 So if somebody else kind of looked over my shoulder, they could figure this out.
0:10:03 Like, it’s not rocket science.
0:10:08 But I’m curious, what was, you know, you’re working 20 hours a day.
0:10:10 So that was probably a red flag to bring on help.
0:10:14 But John, like, what kind of prompted you to say, like, “Okay, this is something that
0:10:15 I need to do?”
0:10:17 Here’s what really prompted me.
0:10:20 When I was in college, I had a conversation with my roommate.
0:10:23 And we were talking about what we wanted to do when we grew up, right?
0:10:25 And I said, “I wanted to run my own business.”
0:10:26 He laughed at me.
0:10:30 He was like, because he was an undergrad to go to medical school, which he’s a doctor
0:10:31 today.
0:10:37 And he was like, “Don’t you know that small business owners work like so much more than
0:10:38 everyone else?”
0:10:40 And I was like, “Well, I think I can do it differently.”
0:10:43 With all the optimism of a college student, of course.
0:10:45 Yeah, of course, right?
0:10:49 When I say something like that, I’m pretty sad I’m like figuring something out.
0:10:50 Because who wants to be a hypocrite?
0:10:55 Who wants to be that guy who, “Oh, yeah, you were going to be so awesome,” and whatever.
0:11:02 So what I tell most people today for when do you know is when’s the time to hire someone?
0:11:06 Because for me, at the time, it was like, “Dude, I don’t want to do this.
0:11:08 I don’t want to do this thing that I’m doing.
0:11:10 I hate this.”
0:11:11 So I had to try and find help.
0:11:17 What I’ll tell most people is if there is something that you’re doing that you could potentially
0:11:22 teach someone else, doesn’t matter how much work it takes you to teach someone else, it’s
0:11:24 time to hire someone else.
0:11:25 It’s time to hire someone else to do it.
0:11:30 Because if it takes you a month to teach them how to do it, after that, you’ll never have
0:11:31 to do that thing again.
0:11:34 If you’ve hired correctly, you’ll never have to do it again.
0:11:38 And that is the only way that I know of that you can buy time.
0:11:44 Yeah, it’s kind of this saw-sharpening moment where you have to take, again, you’re already
0:11:47 pressed for time, you’re already busy and say, “Well, now I’m going to take time away
0:11:52 from doing that thing to train somebody else to do it in the hopes of never having to do
0:11:53 it again.”
0:11:55 It’s going to take me this time up front.
0:11:57 It’s this investment in your future.
0:11:59 They’re the only way to buy time.
0:12:00 Anything to add on that?
0:12:02 For when is it time to hire?
0:12:03 There’s really two schools of thoughts.
0:12:07 The first one is exactly what John said, when it’s all these things that are just piling
0:12:11 up that are taking on your time, and the only way to get your time back is to pass those
0:12:13 tasks off to someone else.
0:12:17 How do you get five hours in your week back, 10 hours in your week back, whatever it is?
0:12:22 The flip side of it is I think the average entrepreneur is only good at one to three things.
0:12:26 Their core competency, maybe you’re good at sales or you’re good at content or whatever
0:12:27 it is.
0:12:31 As you get farther and farther away from your core competency, sure, you could take a six
0:12:36 month course to become a Facebook ad guru, but you can’t do that with every single part
0:12:37 of your business.
0:12:41 At some point, you have to hire people who are better at doing things than you are.
0:12:43 It could even be the small stuff.
0:12:45 Take the bookkeeping, for example.
0:12:49 I wasn’t necessarily great at just transferring information and making sure everything’s accurate
0:12:51 and double checking it.
0:12:53 That was very tedious for me.
0:12:55 That’s probably not my core strength.
0:12:59 I take someone else and I put them in it, and not only are they doing the job, but they’re
0:13:02 doing it better than I could have done it originally.
0:13:06 I think that was a big eye opener for me as well when I would give someone a task and
0:13:10 maybe not right away, but eventually they would do something even better than I could.
0:13:11 That’s very liberating.
0:13:13 It makes you want to delegate.
0:13:18 It almost makes you want to be a lazy entrepreneur, so to speak, really just toning in on what
0:13:22 are you the best at, what helps you scale your business, and finding ways to delegate
0:13:23 everything out.
0:13:30 What I’ve gone through in the past is a time tracking exercise or a time audit exercise
0:13:33 say, “Where is my time going today?”
0:13:37 What opportunities are there for delegation inside of that?
0:13:43 On the opposite side, what is not showing up in that time tracking exercise?
0:13:44 What should you be doing?
0:13:47 What would you be working on if you only have more hours?
0:13:53 What else to think about when you’re making that first move, so, John, you took the leap
0:13:55 and said, “Okay, I’m going to hire a full-time person.
0:13:56 As did I.”
0:14:00 It was like, “Okay, am I going to be able to keep this person busy?
0:14:03 Is this going to be, are they going to pay for themselves, and then some like, am I going
0:14:04 to see an ROI on this?”
0:14:08 Do you guys have any frameworks or recommendations for figuring out how many hours you might need
0:14:11 outside of perhaps that time tracking exercise?
0:14:15 Well, I spent five hours last week on this, so I can hire somebody five hours a week to
0:14:16 do it for me.
0:14:18 Yeah, I do.
0:14:21 It doesn’t matter, and I’ll tell you why.
0:14:26 My brother, one time, is running this business, and he’s overwhelmed, whatever, and he hires
0:14:27 this full-time person.
0:14:30 He says he didn’t have enough work to keep him busy full-time, then he comes back to
0:14:34 me three weeks later and was like, “Dude, I need to hire someone else.”
0:14:37 He was like, “Until you have someone else working for you, you don’t realize how much
0:14:41 there is to do or how much can get done.”
0:14:46 For me, there was a huge … I’ll just point out what you said that my first hire was full-time
0:14:48 and your first hire was full-time.
0:14:53 There is something different in hiring full-time, and this took me years to recognize.
0:14:58 Most entrepreneurs are working in their business, and you’re a grunt worker, which I was a grunt
0:14:59 worker at the time.
0:15:04 I was tweaking WordPress, and I was writing content, and I was doing Facebook, whatever.
0:15:08 It wasn’t until I hired someone else, and I hired them full-time, and that’s a big, big
0:15:09 deal.
0:15:14 I hired them an hourly, and you don’t care if they’re busy or not.
0:15:17 If you give them a task to do, they do the task, great.
0:15:21 If they’re done and you don’t have something else for them to do, you don’t care, which
0:15:25 allows you to continue doing whatever junk you’re doing.
0:15:31 If you hire someone full-time, if they’re not busy, that’s on you now.
0:15:35 That’s what fell on to me was like, “Oh, he finished this task.
0:15:36 Oh, I gave him this task.
0:15:37 I thought it would take him 30 hours.
0:15:39 It took him six.”
0:15:43 Now, I immediately faced with this thing of like, “Oh, crap.
0:15:50 I have to come up with something for him to do,” which right there is the shift between
0:15:52 working in your business and working on your business.
0:15:55 That’s the shift between being a grunt worker and being the CEO.
0:16:01 It forces you into taking a different role in your business so that now you have to work
0:16:03 on it rather than work in it.
0:16:07 For me, when you ask how do you figure out how much time to take, you don’t.
0:16:09 You hire someone full-time.
0:16:10 You can hire someone part-time.
0:16:12 That’s fine, but pay them a set salary.
0:16:18 What you’ll find is, you’re forced into becoming a better business owner.
0:16:20 Hourly doesn’t force you to do that.
0:16:23 More with John and Nate in just a moment, including how much you might expect to pay
0:16:28 for qualified help, and remember, these are $20, $19, so adjust those up a little bit,
0:16:35 and role-based outsourcing versus task-based outsourcing right after this.
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0:17:46 As business owners, we understand that good design and product packaging can be key to
0:17:47 growing your business.
0:17:50 And if your sales are lagging, a rebrand might be part of the solution.
0:17:54 Still, it can be really challenging to figure out how to even start the process.
0:17:59 If you’re asking yourself, “Is a rebrand really worth the effort and the cost?”
0:18:03 You’re going to want to check out a recent episode of a great podcast called This Is
0:18:08 Small Business with Andrea Marquez that walks you through the process of figuring this out.
0:18:13 The episode is called How Good Design Can Help Increase Sales, where I learned that
0:18:15 design is so much more than just aesthetics.
0:18:17 It impacts user experience.
0:18:19 It impacts brand perception.
0:18:21 And ultimately, it impacts business growth.
0:18:25 This is small business is full of practical insights that you can apply to your business
0:18:26 right now.
0:18:30 And it answers so many of the kinds of questions that all entrepreneurs have, like how to
0:18:35 build your marketing strategy, how to use email lists to increase revenue and tips to
0:18:38 accelerate small business growth, along with tons more.
0:18:43 So follow This Is Small Business, an original podcast from Amazon, wherever you listen.
0:18:44 Yeah, that’s interesting.
0:18:50 That shift from grunt worker to CEO and having somebody on the clock for you to say, “Okay,
0:18:54 I need to come up with something productive for this person to do,” kind of flips a switch
0:18:55 in your head.
0:18:58 You can’t innate anything on that because it’s like when we’re getting to budget in
0:19:02 a moment, but it’s like, “Could I really keep somebody busy full-time?”
0:19:05 It’s just a side hustle for me, even if I’m just working a few hours a week.
0:19:08 Would it justify bringing somebody else on for 40?
0:19:09 I can’t disagree with any of that.
0:19:12 I’ve hired plenty of people full-time, and it’s that same mentality.
0:19:14 I tend to do hourly.
0:19:19 This is my personal preference, and we have plenty of clients who do fixed price or salary
0:19:20 or whatever, too.
0:19:22 For me, I kind of like to experiment, too.
0:19:27 I just hired someone for lead generation, and I’m hiring them for 20 hours a week, but
0:19:28 I set that expectation up front.
0:19:31 Your mind for 20 hours a week, and same thing.
0:19:35 If they only have five hours of work to do, it’s on me to make sure that they get those
0:19:36 extra hours.
0:19:41 I would say most of my VA’s are full-time, although we do have certain things that are
0:19:42 part-time.
0:19:46 I’ve had people that have started part-time, and I’ve eventually increased them to full-time
0:19:47 as well.
0:19:50 Same type of mentality, slightly different approach.
0:19:54 I do agree that if you get someone where you’re like, “All right, I’m just going to use you
0:19:58 five hours a week,” it can just put you into something where you’re just constantly trying
0:19:59 to find work for them.
0:20:02 You’re not really taking everything off your plate.
0:20:07 I’ve seen people that have gone that part-time VA route, but they’re still doing every other
0:20:11 day-to-day operation in their business when so much more can be outsourced.
0:20:16 Then it also just becomes a budgeting thing, figuring out how much money did I actually
0:20:17 make last month?
0:20:20 What am I actually willing to invest into my business?
0:20:24 Maybe you want to be super aggressive, and it’s 40% to 60% of your profits are going
0:20:26 towards expansion and hiring.
0:20:28 Maybe it’s more conservative, and it’s 10% to 30%.
0:20:33 You can pick a number and go up and down 10% or 5% each month depending on what you want
0:20:38 to do and how your business is doing, but that’s the approach that I’ve taken.
0:20:39 Okay, that’s interesting.
0:20:41 I’ve never really thought about it that way.
0:20:48 I’m going to proactively invest 25% of the profits back into growth, back into the business.
0:20:51 I was like, “Hey, I made $10,000 last month.
0:20:52 Great.”
0:20:54 You don’t really think about it, or at least I haven’t really thought about it in that
0:20:58 way, so that is an interesting way to frame it.
0:21:01 Let’s talk about that budget for a moment.
0:21:07 Obviously, there’s some geo-arbitrage advantages of hiring in the Philippines.
0:21:10 That’s the specialty of onlinejobs.ph.
0:21:14 What kind of budget were you looking at, John, for that first full-time hire?
0:21:17 When I first hired, there was no place like onlinejobs.ph.
0:21:20 There was no marketplace you could go to to find people.
0:21:26 I went through an agency and I paid them $750 a month, and they paid the worker $250 a month.
0:21:27 It was great.
0:21:29 $250 was for a full-time salary.
0:21:30 Full-time salary, yeah.
0:21:35 That’s 15 years ago, so that’s not enough today.
0:21:39 I will say that I just hired someone to do some admin stuff for us, and I was ready to
0:21:46 pay her $500 a month, and she said, “I want to make $350 a month,” which I think is too
0:21:50 low, so we paid her $400 a month for full-time work.
0:21:51 Is that a decent living?
0:21:54 That seems absurdly low by Western standards.
0:21:57 It is absurdly low by Western standards.
0:22:00 I have 25 people now that work for me.
0:22:01 She’s definitely the lowest paid person.
0:22:07 The rest of them make between $450 and $1,500 a month.
0:22:13 Usually in the Philippines, people live with their parents, or they live with their spouse
0:22:15 and their both spouses work.
0:22:19 One of the great things about what both Nate and I do is we let people can raise their
0:22:24 own kids rather than having their parents raise their kids or a nanny raise their kids.
0:22:26 The wage isn’t the whole thing here.
0:22:31 It’s also a lifestyle thing for them where they get to see their family, where otherwise
0:22:36 they’re not, because the standard work week in the Philippines is six, 10-hour days.
0:22:41 I think that’s changing some, but still six, 10-hour days.
0:22:46 Usually people are working five, eight-hour days for us, and they’re often working from
0:22:47 home.
0:22:48 Yeah.
0:22:49 They’re able to do it from home.
0:22:54 They don’t necessarily have to pull a night shift at some BPO call center type of place.
0:22:55 Right.
0:22:57 So the $400 a month is a low end.
0:22:58 It’s low.
0:23:02 So usually that person is going to be living with someone else who’s also working.
0:23:03 Okay.
0:23:07 But in the $502,000 range, not unreasonable today.
0:23:08 Right.
0:23:09 Yeah, for sure.
0:23:11 It’s just about anything in that range.
0:23:17 Nate, are you saying the same thing or free up focuses on these more hourly workers rather
0:23:18 than full-time hires though, right?
0:23:19 No.
0:23:24 I mean, you can do fixed prices on our platform too, and they set their own rates.
0:23:29 My team VAs, I’ve got about 40 of them are in that $5 to $7 an hour for the most part,
0:23:33 but then I’ve got people that are team leaders that have been with me longer that make $15
0:23:37 plus an hour, and we do that intentionally, but we have people on our platform that’ll
0:23:41 hire a VA for the $500 a month or 800, whatever it is.
0:23:44 Our biggest thing is we just don’t want turnover.
0:23:48 And that’s not to say that people are definitely going to quit if you don’t pay them enough.
0:23:52 But for us, if a client comes to us and we introduce them to a freelancer, we want the
0:23:56 freelancer to only take a rate that they’re going to be happy with long term.
0:24:01 And we’ve just found that, yeah, if someone accepts the 400, whatever it is, if they’re
0:24:06 not 100% happy with it, it’s not that hard to beat or match it or have another client
0:24:07 come in and swoop them.
0:24:10 And the last thing we want to do is have that happen to our client base.
0:24:13 So we like to say that we’re fiving up.
0:24:18 But if the freelancer is good going below, whether it’s $4 or $3 or is good with a fixed
0:24:22 monthly rate, they’re more than happy to, they’re more than welcome to take that rate
0:24:26 as long as they’re good with the full time and that rate is not going to be an issue
0:24:27 going forward.
0:24:33 To bring up that point to illustrate, this doesn’t have to be a budget breaking move
0:24:34 in your business.
0:24:39 You can get somebody competent and qualified really affordably.
0:24:44 And that was one thing that was really eye opening to me 10 or 12 years ago as we were
0:24:46 just kind of getting started down this path.
0:24:53 And I should add too, there’s a thriving industry of work from home professional assistants
0:24:58 and contractors and freelancers in the United States, in Europe, like with salaries, $35,
0:24:59 $50 an hour up.
0:25:03 So that’s if your budget allows and you need somebody closer to home, you can absolutely
0:25:06 go down that path too.
0:25:11 One thing, and this is from Chris Ducker, his advice was to hire for the role and not
0:25:15 necessarily the task, whereas a lot of my hires have been for the task.
0:25:21 I need you to run this AdWords campaign, I need you to run this live chat customer support.
0:25:25 What do you guys think about that quote or that bit of advice to say, okay, you’re going
0:25:30 to be the customer support manager and in that role, one of your tasks is going to be
0:25:32 to manage this customer support.
0:25:38 But you have free reign over that kind of division or content area of the business.
0:25:40 Yeah, so I mostly agree with it.
0:25:44 I mean, with my customer service reps, it’s the same thing, we’re hiring with them for
0:25:45 the role.
0:25:46 They’re responsible for a lot of different things.
0:25:50 It’s not like you can only do email support and only understand email support.
0:25:54 If you don’t understand what’s going on in our software or certain questions or able
0:25:57 to do live support, you’re not going to succeed in that role.
0:26:01 Now, we also have other more standard, just do this task positions.
0:26:05 We have a lead generation process that we use for partnerships and to get on podcasts.
0:26:08 I’ve been doing the same thing for five plus years.
0:26:09 We have this process down.
0:26:14 We hire someone and the only thing they do is that task and it’s much less of a role.
0:26:15 It doesn’t really build into someone.
0:26:19 We actually have had someone who’s knocked that role out of the park and we’ve moved
0:26:22 them over to a different role and they’ve really taken that over, but for the most part,
0:26:24 that role is you do it.
0:26:29 I would say 75% of the stuff that I personally hire for is more of that.
0:26:33 This is your role, grow into the role, become a rock star of that role, but there’s other
0:26:38 situations that might not be necessary, especially as a young startup or maybe a startup that
0:26:43 just has their systems really down pat where it’s almost that McDonald’s style.
0:26:47 You’re standing here, you’re doing this and that’s what you’re responsible for and someone
0:26:52 else is responsible for step B and someone else is responsible for step C.
0:26:56 I have two situations, one of them is correct and one of them is not.
0:27:04 The situation where you hire for the role or you hire for the task is technical positions.
0:27:10 Anything webmaster, programmer, designer, something that requires some technical knowledge,
0:27:13 hire them for their skills in that thing.
0:27:19 Almost everything else though, even like a high end content writer would fall into that
0:27:21 technical thing.
0:27:27 Almost everything else, I say hire for their English because if someone speaks good English,
0:27:31 that means usually it means they think well.
0:27:35 That means they’ll learn well, you can teach them things well, they can do other things
0:27:37 well and English is one of the things.
0:27:44 The second thing that I say hire for is hire for their dedication to details, their attention
0:27:51 to details and then second, their reliability, like do they show up every single day?
0:27:54 So if they’re paying attention to details and they’re reliable, you can teach this person
0:27:57 anything you want and their English is less important.
0:28:03 Those are my criteria for role-based versus whatever because I’ve found that usually if
0:28:07 I find someone and they’re good, it doesn’t matter what they know individually, they’re
0:28:10 going to work on different things just like Nate said, you’re going to transition them
0:28:16 into something else because businesses change and I want someone who’s smart and who pays
0:28:20 attention to the details and who shows up every day and I can teach you this task and
0:28:23 then we can learn another task when business changes.
0:28:24 Okay.
0:28:29 Well, let’s dive into that because I think this is an important next step.
0:28:35 Now that I’ve itemized out what I could probably use some help with and I’ve gotten some ideas
0:28:42 on what that might take, how do you test for reliability before you hire somebody and see
0:28:47 if they actually show up every day or how do you test for attention to detail before,
0:28:51 yeah, I guess you could look at their resume for typos and stuff like that, but what goes
0:28:57 into your job descriptions for a new hire or like how are you doing that screening or
0:28:59 hiring process, John?
0:29:03 So for me, it’s not a matter of job description, it’s a matter of what do I do after I communicate
0:29:04 with them.
0:29:08 I’ll just tell you my process and lots of people have different processes and there’s
0:29:11 not a right way, but this is my way.
0:29:16 So once I’ve communicated with someone, I start interviewing them, I will ask them
0:29:25 one, two, four questions across five, eight, 15 emails during the recruiting process.
0:29:28 In there, I get to see all kinds of stuff.
0:29:35 So I would say my recruiting success is probably 80% where like 80% of the time I’m finding
0:29:38 someone, I’m picking a good person.
0:29:43 So when I’m doing this, I’ll ask them four questions, here’s an example, if you answer
0:29:48 three of those questions, what are the chances you only do three of the four tasks I ask
0:29:50 you to do later, right?
0:29:52 So there’s a good attention to detail thing.
0:29:56 If I email you and it takes you three days to respond during the recruiting process,
0:29:58 what are the chances it’s going to take you three days to respond after I’ve hired you?
0:30:06 I recently had one of my people refer me to his brother who I know is super, super talented
0:30:09 and I started interviewing him and it took him three weeks to respond to me and I was
0:30:11 like, sorry, dude, I’m done.
0:30:16 No, because if you do that during recruiting, chances are really, really high after I hire
0:30:18 you, you’re going to keep doing that.
0:30:23 So I’m seeing reliability, I’m seeing your communication, I get to see your handling
0:30:24 of English.
0:30:27 How do you handle English or English slang or, you know, it’s reasonable to fake your
0:30:30 profile, like have your friend help you write your profile.
0:30:34 It’s not reasonable to do that twice a day for five days in emails.
0:30:37 What type of questions are you asking in these emails?
0:30:41 I will ask everything, like where do you live?
0:30:42 Who do you live with?
0:30:43 How many kids do you have?
0:30:44 Are you married?
0:30:46 How much do you want to make?
0:30:47 What’s your past experience?
0:30:51 Tell me a situation where you’ve had something hard and how did you solve it?
0:30:53 Why are you the right person for this job?
0:30:55 Show me examples of your work.
0:30:58 Write a paragraph telling me that why you’re different than other people.
0:31:00 I don’t want to hear it because I’m dedicated and I work hard.
0:31:01 I don’t want to hear that.
0:31:03 Give me something unique.
0:31:04 All kinds of random crap.
0:31:08 Attach a picture of a pink Cadillac to the next email just to see if they’re paying attention.
0:31:13 So in that scenario, and I know a lot of employers do this, there’s three potential responses.
0:31:18 One is they ignore it, which is why I ask it because they’re ignoring a task that I
0:31:20 asked them to do that didn’t make sense to them.
0:31:21 And that’s crappy.
0:31:24 Two is they attach a picture of a pink Cadillac, great.
0:31:28 Three is they question you and are like, you asked for this, why?
0:31:31 That’s a silly thing.
0:31:32 Why are you asking for this?
0:31:33 That’s awesome.
0:31:35 When I see that, I’m like, okay, sweet.
0:31:38 You’re willing to question me, question my authority.
0:31:40 This is going really well.
0:31:45 And so through this process, you’re kind of narrowing down the candidates based on who’s
0:31:50 answering these questions well, who’s asking questions back to you and seeing who kind of
0:31:51 stands out.
0:31:55 And this is all before jumping on like a Skype call or a video chat.
0:31:57 No, it’s not.
0:31:58 I don’t do it.
0:32:02 So this is Philippine specific, the reason I don’t do it.
0:32:07 What I have found is that Filipinos are scared.
0:32:10 They’re shy and that’s what they call it.
0:32:12 They call themselves shy.
0:32:17 And really what it is in my experience is they are worried about disappointing you.
0:32:20 Like they’re a very pleasing culture.
0:32:23 And so if they’re going to disappoint you or make or they’re going to feel embarrassed,
0:32:26 they’d rather not do the thing at all.
0:32:30 And so getting on a call with you is one of those things where they know that they’re
0:32:35 going to understand you because they watch American TV and they’re fine understanding
0:32:36 English.
0:32:39 It’s they’re worried that you’re not going to understand them.
0:32:45 So I’ve had like two different situations of this where two of my employees, they were
0:32:49 already working for me, they were both super hesitant to get on a call with me.
0:32:51 One of them, I could barely understand him.
0:32:56 And we had never had a communication issue, but when we got on the phone, it was impossible.
0:32:57 He was a programmer.
0:32:58 The best programmer I’ve ever met.
0:32:59 So it didn’t really matter, right?
0:33:04 The other one, her English was perfect, completely flawless.
0:33:06 And she didn’t want to get on a call with me because she was so worried.
0:33:10 So my point with the nut, I don’t do Skype calls because what you’ll find is, and maybe
0:33:15 Nate has a different process, but you’ll have 10 recruits, you’ll ask them to do a Skype
0:33:16 call.
0:33:17 Six of them will schedule it with you.
0:33:23 Two of them will show up where of those 10, you potentially had 10 good recruits and this
0:33:26 isn’t for a voice position.
0:33:30 So how they speaking, which doesn’t really matter, and you just lost eight of them who
0:33:31 potentially could have been really great.
0:33:35 And now you’re down to a pool of two because you require a Skype interview.
0:33:41 John, I’m really happy you said that because I think a lot of people have told me I’m crazy
0:33:45 because I won’t do any kind of voice calls, any kind of phone call, Skype calls, Viber
0:33:49 calls, whatever, with any of my international staff really ever.
0:33:53 I keep everything on Skype message for a lot of different reasons.
0:33:57 But I mean, one of what you just said, most people just don’t want to do it.
0:34:00 And if it’s not a voice position, it doesn’t really matter.
0:34:05 Not only do I care about the speed of responses to emails, I care about speed to responses
0:34:07 to Skype messages.
0:34:10 And that doesn’t mean that they need to be available 24/7, but if I’m doing an interview
0:34:14 with them and we’re both there, we both show up and I’m shooting them messages and it’s
0:34:18 taking five minutes for a message to come in here and an extra minute and a half here
0:34:24 instead of quick responses along with the high level English skills that we both value,
0:34:26 that’s a huge red flag for me as well.
0:34:30 It’s really surprising to hear that, okay, we’ll just hire somebody over this written
0:34:32 communication, but sounds like you’ve got it.
0:34:33 Yeah.
0:34:37 I mean, most of our communication, our meetings and everything is all written via Skype.
0:34:42 It also just gives them a good way to go back and read things, everything’s in writing.
0:34:45 If you need to go back and say, hey, this is what we talked about, I don’t know if you
0:34:49 ever tried to get like six Filipinos on a Zoom call or something.
0:34:53 Someone always has an internet issue, things drop out, things get misheard, it never goes
0:34:55 as planned.
0:35:00 So this is interesting and this is not applied to your first hire, but once you have a team,
0:35:01 they’ll start doing things.
0:35:05 So my team insisted or came to me and asked me, can we set up a Slack chat so we can chat
0:35:06 with each other?
0:35:08 Like, sure, great.
0:35:10 I don’t really participate in it.
0:35:12 All of my communication is asynchronous.
0:35:14 I do it through email or I do it, I mean, we use Basecamp.
0:35:17 So almost all of it’s through Basecamp for project management.
0:35:21 So all of the communication is, I write a message, they write back when they’re available.
0:35:23 And sometimes we’re on at the same time and I’ll find that we’re doing it really quickly
0:35:25 together.
0:35:30 But for most of what we do, and every business is different where I don’t require instant
0:35:31 communication.
0:35:34 Other businesses will and yeah, Skype chat’s great.
0:35:35 We don’t do it.
0:35:37 And so like the phone call is completely unnecessary.
0:35:43 More with Nate and John in just a moment, including common hiring mistakes and when to let a low
0:35:45 performer go right after this.
0:35:49 What mistakes do you see people making on your platforms for hiring?
0:35:51 Maybe Nate, you can go first.
0:35:56 Yeah, I think the biggest thing is just setting the expectations right from the beginning.
0:36:00 I mean, it starts off with just what the communication channel is.
0:36:04 Someone might have five different clients and they each have one person like Slack or
0:36:08 Basecamp, another person like Skype, the other person only likes email.
0:36:12 And if you don’t take the time to set that expectation up front, a lot of times you’ll
0:36:13 run into issues.
0:36:17 I had a client this week where the freelancer came to me and they were like, “I don’t know
0:36:18 what to do with this client.
0:36:20 I’ve been messaging them over and over and over.”
0:36:24 And it turns out the client was waiting for a Slack message and the freelancer had no idea
0:36:28 that that’s how they were supposed to communicate even though he got a Slack invite like three
0:36:29 weeks ago.
0:36:32 So I mean, setting those expectations is definitely key.
0:36:36 What I like to do when I hire people is almost scare them a little bit.
0:36:40 Scare is probably not the right word, but I like to set the expectations very high.
0:36:41 This is how we communicate.
0:36:42 This is who you go to for this.
0:36:44 This is what constitutes success, failure.
0:36:48 I’ll tell them anything that I didn’t like from, let’s say that I got rid of a customer
0:36:49 service rep.
0:36:53 I’ll explain why, why it didn’t work out, what they were doing so that they have all
0:36:56 the information that they need to succeed.
0:36:59 And I would much rather have someone back out right at the beginning because they say,
0:37:00 “You know what?
0:37:04 I can’t meet those expectations,” then for me or my team to invest two or three weeks
0:37:08 into someone only to realize that they’re not the right fit.
0:37:10 Also into that is just personal preferences.
0:37:16 Any pet peeves that you have, I know for me and my team, one of my pet peeves is if someone
0:37:20 messages me, “Hey, Nate,” unless it’s like a friendly thing, but if it’s a business
0:37:24 thing, and then they wait for me to respond before they tell me what the issue is or why
0:37:28 they contacted me to begin with because there’s just a lot of people and that would take forever
0:37:32 for me to go back and forth in order for me to get the information that I need up front.
0:37:36 So one of the things I preach is get me all the information up front so that I can help
0:37:39 make a decision or help teach you whatever it is.
0:37:43 So really setting those expectations right from the beginning, that’s where I think a
0:37:47 lot of people go wrong in the hiring process where they just get further and further down
0:37:49 the line without being on the same page to begin with.
0:37:56 John, what about you as far as mistakes or unhappy customers of online jobs?
0:38:01 Yeah, so I see two things, and both of these have to do with exactly what Nate said, expectations.
0:38:05 So number one is trying to hire someone who can do everything.
0:38:09 I can’t tell you how many times I’ve gotten an email that said, “I need someone who can
0:38:16 build my website and make it look really awesome and put up a Facebook fan page for me and
0:38:21 change the graphic and then write 15 articles that are really professionally done and do
0:38:24 my AdWords marketing and create this custom programming thing.”
0:38:25 Like, “Dude, this person doesn’t exist.
0:38:26 I’m sorry.
0:38:27 This is silly.”
0:38:33 That’s one thing, like hiring people with expectations of like, “This is a magical person.
0:38:34 There’s no such thing.”
0:38:40 The second big mistake that I see is expecting perfection right from the start, like, “Hey,
0:38:45 I hired this person and you didn’t do this thing exactly how I told you to do it the
0:38:49 first time, and so you’re fired.”
0:38:53 So what I’ve seen over the years often is like, “I provided them perfect instructions.
0:38:54 Look.”
0:38:58 And when I look at the instructions, I’m like, “Dude, I don’t even know what you want.
0:39:03 So your instructions suck, but you think that your instructions are perfect and you expected
0:39:08 them to do it perfectly and you had zero tolerance for this and you fired them?”
0:39:11 That’s usually the mistake like, “This isn’t a magic bullet.
0:39:13 It doesn’t solve things overnight.
0:39:14 You have to work at it.
0:39:17 You have to create a relationship with the people you’re hiring.
0:39:18 It takes time.”
0:39:23 John, one of my personal favorites is when someone messes with VA and their only instructions
0:39:26 are “Find me profitable products on Amazon.”
0:39:27 That’s it.
0:39:28 Nothing else.
0:39:31 And then they’ll hire the VA for five hours and then they’ll dispute it and they’ll say,
0:39:34 “Oh, this person didn’t find me any profitable products and I have a whole canned response
0:39:35 for it and that.”
0:39:36 But you’re absolutely right.
0:39:41 I mean, you’re only as good as your directions and your instructions and that perfect person
0:39:42 that does everything.
0:39:43 You don’t even want to hire that person.
0:39:47 Let’s say, best case scenario, you hire a perfect person that can do all these different
0:39:51 tasks for your business and that person gets sick and that person quits on you.
0:39:54 You’re never finding a second one that’s going to be exactly the same.
0:39:58 So I think a lot of business owners need to get out of that mentality as well.
0:40:01 Yeah, or like, “Build me a website.”
0:40:02 Like what?
0:40:03 No.
0:40:04 That’s not…
0:40:05 No.
0:40:09 There’s so much thinking that goes on and that’s probably the other side of it is, and
0:40:10 this goes way back to the very beginning.
0:40:12 When is it time to hire someone?
0:40:16 Don’t hire someone expecting them to take over and run your business or to build your business
0:40:17 for you.
0:40:20 You should know what you’re doing in your business before you hire someone.
0:40:23 Like, you should have a reason you’re hiring this person and know what they’re going to
0:40:24 do.
0:40:26 And it’s the same thing for like, “Build me a website.”
0:40:30 You should know what is going into this website or at least you should be willing to think
0:40:33 through it and work with them through the issues.
0:40:35 Like, “Hey, I like this from this website.
0:40:36 Here’s why I want it on my website.
0:40:37 Put it here.”
0:40:42 Stuff like that because the “Build me a website” doesn’t work.
0:40:47 Well, on the flip side of that, when is it time to say like, “This is just not working
0:40:48 out.
0:40:49 Like, this person is not communicating well.
0:40:51 They’re not meeting expectations.”
0:40:55 Like, we’ve been through this training three or four times and it’s just like, they’re
0:40:56 not getting it.
0:41:00 Like, we never had to let somebody go who just wasn’t performing.
0:41:01 I mean, I definitely have.
0:41:03 I don’t think anyone has a 100% hiring record.
0:41:05 It doesn’t exist.
0:41:09 For me, it’s all about how much investment did I make into this person?
0:41:14 If I’m on week one and they’re not showing up on time and they’re not grasping it, I’m
0:41:15 probably pretty quick to partize.
0:41:20 Now, I’ve also had a situation where I had a bookkeeper for two years and he was an
0:41:25 absolute rock star and all of a sudden he started making mistakes and not following directions
0:41:28 and I sat down and I met with him and I tried to get to the bottom of what was going on
0:41:32 and I’m really happy I didn’t fire him because it turns out that he was just burnt out from
0:41:36 busy season and he needed a week and a half off and he came back and he’s been crushing
0:41:37 it ever since.
0:41:40 So, for me, I kind of look at how much time I’ve invested.
0:41:43 I also try to focus on what I can control.
0:41:48 If I hire three VAs and all three of them can’t follow my SOPs and are all struggling,
0:41:53 I probably need to take a look at my SOPs and how I’m communicating it and how I’m teaching
0:41:54 it.
0:41:55 So, there’s different factors there.
0:41:59 I think we’ve all heard the fire fast, higher, slow.
0:42:00 It’s kind of the same thing.
0:42:04 It all depends on how much time and money you’ve invested into someone but you also don’t want
0:42:08 to get caught up, “Hey, I’ve invested a month into someone so I’m not going to part ways
0:42:11 and then you end up two months in and they’re still not doing what you want.”
0:42:14 So, it’s kind of a fine line and a balancing act.
0:42:17 And it’s hard.
0:42:18 Firing sucks no matter where you are.
0:42:25 So, for me, when something’s not going right, especially in the Philippines, the first question
0:42:29 is, “What are you stuck on to that person?”
0:42:32 Because I’ve had the exact same experience that Nate has had.
0:42:38 I have this amazing programmer and he’s been so dang good for so long and then he stopped
0:42:40 working for like a month.
0:42:43 And I’m the type where I just want people to work and I don’t want to think about it
0:42:46 and it takes me a while to realize something’s not going on.
0:42:50 So, I approached him and said, “What’s going on with you?”
0:42:51 I was like, “Dude, what?
0:42:54 If he’s not working, I’m going to let him go.”
0:42:56 But I said, “What’s going on with you?”
0:42:59 And it turns out he was like, “I’m so sorry, sir.
0:43:03 I have this major eye problem where if I look at the computer for more than an hour straight,
0:43:04 I can’t see.
0:43:05 I go blind.”
0:43:06 Like, “Oh, crap.
0:43:07 That sucks.”
0:43:08 Yeah.
0:43:10 Like, “Hey, how can I help you work through this?”
0:43:13 He was like, “Well, I need this medicine and it’s hard to get and it’s really expensive.
0:43:17 Like sweet, let me help you buy this medicine so you get back to work.”
0:43:19 And he’s back to work.
0:43:20 And awesome.
0:43:24 But there is a thing of patience there of like trying to work through issues where a lot
0:43:26 of people just aren’t willing to do it.
0:43:30 If you’re not willing to do it, if you’re not willing to work through issues, then this
0:43:31 is hard for you.
0:43:39 Now, that seems exceptionally common where, “Oh, my wife’s brother is in the hospital
0:43:44 or there was a typhoon, which I guess you could verify,” or the internet was out, or
0:43:50 you just kind of get ghosted in certain situations and you’re like, “What, was it something that
0:43:51 I did?
0:43:52 Like, is this legit?”
0:43:55 And you’re halfway around the world and you’re trying to figure out, “Okay, is this person
0:43:58 just trying to get more money out of me?
0:44:00 Why did they all of a sudden stop working?
0:44:02 It can be kind of a frustrating situation.
0:44:08 Have you ever had that happen where it’s like, “Hey, I do not have been proactive about
0:44:09 asking him.
0:44:10 Like, “Hey, what’s going on with you?
0:44:12 You might never have found out.”
0:44:17 Or do you get these kind of sob stories and I don’t know, it’s hard to know what’s the
0:44:18 truth.
0:44:19 Yes, we all get them.
0:44:20 Nate, how do you deal with it?
0:44:21 Yeah.
0:44:22 We definitely all get them.
0:44:27 I mean, part of what we do that I think is that we do well is we almost set the expectation.
0:44:31 If you’re going to get on the free up platform, not working for me, just offering your services
0:44:34 in general, never mind on my internal team.
0:44:35 The communication is everything.
0:44:39 If you’re not communicating with clients, if the clients have to chase you, if my team
0:44:44 has to stop what they’re doing to reach out to you and reach out to your emergency contact,
0:44:46 you’re going to get blocked from getting more clients from us.
0:44:49 And we’ll make it right with the client, but that’s it.
0:44:50 So we all go through personal issues.
0:44:55 I know people in the Philippines sometimes get a bad rap for different things, whether
0:44:59 it’s they have an extended family or they’ve got power outages or stuff like that.
0:45:04 But we really set the expectation that, listen, if you’re supposed to work and you lose power,
0:45:08 the expectation is you communicate it up front to the client and you go somewhere where there’s
0:45:09 internet.
0:45:11 And if you can’t, you let us know.
0:45:16 And having strong internet, strong power is a bare minimum requirement to offer your
0:45:18 services on the free up platform.
0:45:20 So we kind of set those expectations.
0:45:24 I mean, if someone from my team just disappears for a week, most likely they’re not going
0:45:26 to continue working with me.
0:45:30 I mean, we just can’t have people that are just going to completely drop off the face
0:45:32 of the earth with absolutely no communication.
0:45:35 At the end of the day, what are you going to do?
0:45:37 I mean, we have people’s emergency contact information.
0:45:41 We’ve got, if someone referred to the platform, we can contact their referral.
0:45:44 But if someone disappears, I’m not going to go to the Philippines and chase them down
0:45:49 or I have this piece of paper, a legal agreement, like none of that’s going to happen.
0:45:50 There’s only so much you can do.
0:45:53 And we consider ourselves as pretty reasonable people.
0:45:57 If you have a personal issue, if something’s going on, let us know.
0:46:01 We’re going to problem solve and see if there’s a way to work around it.
0:46:04 But if you’re not going to communicate it upfront, then there’s not much we can do to
0:46:05 help you.
0:46:09 Do you put a contract in place to say, like, okay, here’s the expected hours, here’s your
0:46:14 payment terms, here’s what I do, spell that out upfront?
0:46:18 So with the terms of use of being on our platform, which is different, if you’re talking about
0:46:23 my internal team that, no, I mean, we’ve got our, so what I do is I lay out the expectations.
0:46:28 It’s not a contract, but I have it all in writing and I’ll have them write, I confirm
0:46:31 or I agree to everything as we go down.
0:46:35 So if there’s ever a question of, did we agree to this or you’re supposed to do this,
0:46:39 we have this conversation that we can go back to and it’s like, hey, you, you agreed to
0:46:40 this.
0:46:43 I mean, again, what am I going to do with a legal agreement with someone in the Philippines?
0:46:46 Or I’m never going to enforce that at the end of the day, but John might have a different
0:46:47 idea.
0:46:48 Yes.
0:46:53 I love it because I get this question all the time too, like, where’s the contract?
0:46:55 Like, no, you’re not going to enforce a contract.
0:46:56 No.
0:46:57 Yeah.
0:47:02 So off of that, I had a funny situation where I had this client who, she wasn’t happy with
0:47:03 this bookkeeping work.
0:47:06 And I knew this bookkeeper, this bookkeeper has been awesome.
0:47:10 He’s been on the platform for a while, tons of really happy clients.
0:47:14 And we paid out the bookkeeper and the client came back and she wasn’t happy with the work.
0:47:17 It was like $400 or something like that.
0:47:18 So I refunded the client.
0:47:19 No big deal.
0:47:20 The freelancer was happy.
0:47:21 He had other clients.
0:47:22 I checked in with them.
0:47:23 They were all happy.
0:47:26 But the client came back to me and he was like, I don’t want you to pay for this.
0:47:32 I want you to get the money from the freelancer and, and pay me from the freelancer.
0:47:34 And he was like, don’t you have these legal agreements?
0:47:35 Can’t you enforce this?
0:47:40 And I tried to tell her in the nicest way possible that I wasn’t going to force this
0:47:45 guy to send me $400 that I wasn’t going to hire a Filipino lawyer to go after him.
0:47:48 Like, none of that was, was realistic in any way.
0:47:51 And John, I’m sure you get very similar stories.
0:47:52 Yeah.
0:47:55 And usually we’re like you.
0:47:59 I mean, we’re trying to be nice about it, but in the end we just say, go away.
0:48:02 No, this is up to you to work this out.
0:48:03 Fair enough.
0:48:04 Fair enough.
0:48:09 Anything else to, to add on this dipping your toe into the outsourcing waters before
0:48:10 we wrap up?
0:48:14 I’m a big fan of experimenting like right now, I’m building kind of a biz dev team to handle
0:48:17 partnerships and I don’t have an exact SOP.
0:48:20 I probably wouldn’t have done this back in the day when I was hiring people for the first
0:48:21 time.
0:48:23 But I’m looking, I know the type of person that I want.
0:48:27 And once I hire them, I’m going to give it a few months and I’m going to experiment and
0:48:31 try different things and find someone that I actually work with and collaborate with.
0:48:33 And that’s kind of a more of an advanced thing.
0:48:37 I definitely wouldn’t recommend it, but don’t get in the mentality that you can only hire
0:48:40 someone if you have a ABCDE process.
0:48:45 Yeah, it’s strongly recommended, but there’s a time and place in your business to experiment
0:48:46 with different things.
0:48:49 And I’m a big fan of low risk, high reward situations.
0:48:53 If I hire someone to run my Instagram for three months, what’s the worst case scenario?
0:48:58 I lose a few hundred dollars and what’s the best case scenario is it starts up a brand
0:49:02 new revenue source and I build a presence there and don’t be afraid to experiment and
0:49:06 try new things as long as you’re in the mentality that some things work and some things don’t.
0:49:09 Nate and I are so similar.
0:49:13 My thing with this is, look, you don’t know if this works for you until you try it.
0:49:14 You’ve got to give it a try.
0:49:15 And it takes a leap.
0:49:19 If you’re working 50 hours a week, plan on working 55 hours a week for a couple of weeks.
0:49:21 It’s just part of it.
0:49:25 But then, if it works for you, the reward is time.
0:49:29 If it doesn’t work for you, you’re out a couple hundred bucks, right?
0:49:30 It’s not that big of a deal.
0:49:33 But to know if it’s going to work for you, you’ve got to try it.
0:49:34 You have to do something.
0:49:35 You have to take a leap.
0:49:40 Yeah, I think the bigger risk, aside from the time and the money, in my case, it was
0:49:42 opening the doors to the kingdom.
0:49:45 It was like, okay, here’s the AdWords account.
0:49:49 I mean, you could do some serious damage in there if you don’t follow directions or you,
0:49:54 I don’t know, change the password or lock out the credit card information or something.
0:49:58 And or it’s like, okay, I’m going to bring somebody in to manage my inbox.
0:50:01 It’s like, there’s some potentially sensitive information.
0:50:05 So there’s like, there’s the time and money risk, but there’s like the business and security
0:50:11 and like personal trust risk that can be hard to get over as well.
0:50:16 So kind of like that, framing it as like an experiment, like low risk, high reward hires.
0:50:20 And we should point out that like, people aren’t out to screw you over.
0:50:23 Vast majority of people, like they’re looking for honest work and they want to do a good
0:50:28 job and they want to have something that can support them and their family for a long term.
0:50:34 What is this leap to get over to like, especially if it’s your first time delegating to say,
0:50:38 okay, now somebody else is going to take over this for me.
0:50:48 FreeUp.com, F-R-E-E-E Up.com, freelance hiring marketplace and online jobs.ph for hires in
0:50:49 the Philippines.
0:50:51 And we should add too, like, you know, not just Philippines, but you can hire people
0:50:53 from all over on FreeUp.
0:50:56 Let’s wrap this thing up with you guys.
0:51:00 Number one tip for side hustle nation doesn’t have to be outsourcing related or virtual
0:51:04 assistant related, just whatever entrepreneurial wisdom you’d like to impart and we’ll let
0:51:05 you all kick this one off.
0:51:10 So what I found over the years is the thing that separates successful entrepreneurs from
0:51:12 those that are not is the willingness to think.
0:51:17 The willingness to think through hard things because business is hard.
0:51:20 It’s not just tell me what to do and I’ll do it.
0:51:21 That’s not how you run a business.
0:51:25 You have to be willing to think through problems and create solutions and that’s where the
0:51:26 hard work is.
0:51:29 The hard work isn’t in, “Oh, I work 80 hours a week.”
0:51:33 The hard work is in being willing to think effectively and create solutions.
0:51:34 Yeah.
0:51:35 Completely agree with that.
0:51:38 The thing I would add kind of a separate tip is just being able to prioritize.
0:51:41 It’s such an underrated skill as an entrepreneur.
0:51:43 You’ve got a million things you can do, all these different things you can tackle.
0:51:46 You can go after every social media channel.
0:51:49 You’ve got to figure out what comes first, what comes second, what comes third.
0:51:54 When a new idea comes up, you have to figure out where that slides in and the best entrepreneurs
0:51:57 just know how to prioritize and it kind of goes hand in hand with hiring.
0:52:01 You have to know what order to hire people, what order to get projects done and a lot
0:52:03 of times that’s the difference between success and failure.
0:52:04 Absolutely.
0:52:08 The willingness to think through hard things, what do you mean this is going to be hard?
0:52:10 If it was easy, everybody would be doing it, right?
0:52:17 Then the prioritization skill is absolutely critical both on this hiring front end just
0:52:18 in the broader business and life sense.
0:52:21 It’s like, “Hey, you vote your time with your priorities.”
0:52:23 Say, “I didn’t have enough time to get that done.
0:52:24 Be honest with yourself.
0:52:27 You prioritized something else for better or worse.”
0:52:34 John and Nate really appreciate you guys joining me and we’ll catch up with you soon.
0:52:40 In the early days of John and Nate’s businesses, they were wearing all the hats, content creation,
0:52:44 SEO, sales, customer support, and that’s how we start.
0:52:49 That’s totally normal, but as you grow, you might find some hats fit better than others
0:52:51 just as these guys have.
0:52:55 For example, Nate mentioned the importance of prioritization and really focusing on your
0:52:56 core competencies.
0:52:58 Like, where is your time best spent?
0:53:03 All right, my top three takeaways from this call with John, Jonas, and Nate Hirsch.
0:53:06 Number one is to buy time.
0:53:11 John called hiring the only way he knows to buy time, and they got me thinking about the
0:53:18 various resources at our disposal, time, money, talent, energy, and time is unique in that
0:53:20 it’s a non-renewable resource.
0:53:25 Once you spend it, it’s gone, unlike money where you can always make more.
0:53:29 The idea of buying time stood out to me as something incredibly valuable to buy.
0:53:31 What better to spend your money on?
0:53:37 As you go through the exercises of auditing your hours, what time could you buy back?
0:53:42 In most cases, I probably wouldn’t make a hire until you have revenue coming in to justify
0:53:48 it, but as soon as you do, that opens up this opportunity for delegation, this opportunity
0:53:52 to buy back your most precious non-renewable resource.
0:53:54 That’s takeaway number one, to buy time.
0:53:57 Takeaway number two is it takes a leap.
0:54:04 John described this mental shift, this liberating experience in forcing himself to start creating
0:54:08 systems to start trusting other people, to start delegating, and I liked Nate’s point
0:54:13 about thinking of your first hire as an experiment because you might not be the world’s best
0:54:14 boss on your first try.
0:54:16 I know I certainly wasn’t.
0:54:20 I remember getting frustrated with Waseo, my first hire, when it was taking him longer
0:54:23 than I thought it should to complete these tasks.
0:54:28 The truth was, I’d been doing them myself almost daily for years at that point.
0:54:31 My fingers could fly across the keyboard without even thinking.
0:54:37 I knew every inch of the website interfaces we were dealing with when it was all new to
0:54:38 him.
0:54:44 On top of that, the processes that I’d internalized through practice, through repetition, took
0:54:49 some time to get down on paper and to become similarly second nature for him, but it was
0:54:53 an important leap, that little experiment that I built up in my head to be a much bigger
0:54:58 deal than it probably was in terms of downside risk, but it was a really empowering one at
0:54:59 the same time.
0:55:00 That’s takeaway number two.
0:55:01 It takes this leap.
0:55:02 Think of it as an experiment.
0:55:09 Takeaway number three is it is better to over communicate since so much of our communication
0:55:14 is nonverbal, and you lose a ton of that in these virtual work arrangements.
0:55:19 I think it’s really important, as both John and Nate described, to be really upfront in
0:55:23 your communication and setting expectation for communication.
0:55:30 Some of my most aggravating virtual hiring experiences have come as a direct result of
0:55:36 slow or unclear communication, especially if someone is working a different time zone
0:55:37 from you.
0:55:42 It can slow your progress to a crawl if you can only send and receive a message or two
0:55:43 per day.
0:55:48 I remember working with this development team in India, which had almost no overlap with
0:55:53 my working hours, and it was something that wasn’t an issue during onboarding because
0:55:57 the sales team, of course, was working US business hours, but after they’d closed the
0:56:01 deal, the rest of the team, the technical guys, were not.
0:56:07 The part of this call about not doing a phone or Skype interview with a potential hire was
0:56:11 really surprising to me, as that’s always been a part of my process, but John and Nate
0:56:13 made a good case for skipping it.
0:56:16 Is it really necessary for some roles?
0:56:18 Sure, but for others, probably not.
0:56:20 Why make somebody jump through that hoop?
0:56:24 All this stuff is something you’ll learn as you go, but it was definitely interesting for
0:56:29 me to hear how these guys with big virtual teams go about it.
0:56:35 Now, as promised, I wanted to give you my two cents on online jobs and free up as a client
0:56:36 of each.
0:56:42 The advantages of online jobs, as I see them, are access to a wide talent pool, seriously
0:56:43 wide.
0:56:47 John’s got over a quarter million resumes in his database, and there are some cool filters
0:56:52 you can use to narrow down that candidate base, and like he mentioned, it’s a really
0:56:56 affordable option for full-time help, and that’s primarily what you’ll find is people
0:57:00 looking for full-time work or at least 20-hour-a-week work.
0:57:05 Once you make a hire, you’ll pay your assistant directly, and online jobs doesn’t take any
0:57:07 markup on the salary.
0:57:13 Instead, the platform charges a monthly membership fee to post jobs and to communicate with potential
0:57:18 hires, and that fee starts at $69 a month at press time, and of course, you can put
0:57:21 that on pause after you’ve filled the role that you’re looking for.
0:57:26 So great place to find ongoing support virtual employee type of roles.
0:57:31 Free up takes a different approach in that it’s a curated freelance marketplace, meaning
0:57:36 Nate’s team only approves the “top 1%” of freelancers to join.
0:57:43 Nate said the current makeup of his talent pool is about 40% from the Philippines, 40%
0:57:46 from the US, and 20% from the rest of the world.
0:57:51 I’ve started out from Nate’s background in e-commerce as serving other Amazon and e-commerce
0:57:54 sellers, but they’ve gone much broader than that today.
0:58:01 I’ve primarily used it for shorter-term project-based work, but you can find ongoing assistance there
0:58:02 as well.
0:58:05 What I like about free up is the speed of execution.
0:58:10 You can post your job, and the site is going to introduce you to candidates they feel are
0:58:15 a good fit within 24 hours, usually within just a few hours.
0:58:19 Then you can say, “Yes, let’s get started,” and it’s off to the races.
0:58:24 Building is done through the free up platform, and the site takes a small percentage of every
0:58:27 hour or of every project build.
0:58:31 Once again, you’ll find the full text summary of this episode with all the links mentioned
0:58:37 in John and Nate’s top tips from the call at sidehustlenation.com/virtual.
0:58:38 That’s it for me.
0:58:39 Thank you so much for tuning in.
0:58:42 Until next time, let’s go out there and make something happen, and I’ll catch you in the
0:58:45 next edition of The Side Hustle Show.
0:58:47 Hustle on.
0:58:50 As a side hustle show listener, I know you’re driven.
0:58:55 Otherwise, you wouldn’t be here, but I also know you can end up hustling and driving yourself
0:59:00 into exhaustion, overwhelm, and even burnout if you don’t stay anchored to why you’re
0:59:01 doing it.
0:59:05 That’s why I want to recommend another podcast that will massively support your side hustle.
0:59:08 It’s called What Drives You with host Kevin Miller.
0:59:10 Kevin’s a former pro athlete.
0:59:14 He’s a lifelong entrepreneur who started 19 different businesses.
0:59:18 He’s a father of nine kids, an author and a mountain adventurer as well.
0:59:23 He knows both the glory and the dark side of drive and has devoted his life to helping
0:59:28 people who want to drive further, faster, but also enjoy the ride every single day.
0:59:32 He brings on today’s most influential people in personal and business development to see
0:59:37 what drives them and get their guidance on the key ingredients that power our own drive.
0:59:41 If you want to fully harness your drive and find peace and fulfillment in the process,
0:59:45 go find What Drives You with Kevin Miller, wherever you listen to podcasts.