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The math doesn’t work

If you are starting a business, you’ll probably need some money to do things like buy a domain, or build a website, or order some equipment, or make some samples. Sometimes founders have money to put into a business. Sometimes they raise it. Last week, Monique Villa offered some insight on her perspective as an investor with Modern Capital, seeking to connect with startups in the Southeastern region of the country. Your letter this week is in the same vein. Phil Shmerling’s career is centered around the relationship between founders and funding. He created a valuable network of angel investors to fund startups outside of healthcare. Now, at Studio Bank, he seeks to help entrepreneurs of all backgrounds and financial paths to find solutions they need. Meet your five minute mentor, Phil Shmerling.

 

Phil Shmerling, Founder of InCrowd Capital & SVP, Relationship Manager of Studio Bank

 

PS: A well-known problem in our region is access to capital for early-stage companies. I think part of the issue is lack of knowledge about where that capital should be coming from. Only 3% of companies are funded by venture capitalist and organized angel groups, but in my experience, 99% of companies think that is where they are going to get funded. That math does not work. I started InCrowd in part to solve this access to capital problem. Even the companies in the 3% that could raise from VCs or angel networks could not find funding in Nashville, unless they were in healthcare. With Nashville’s flourishing tech market, many of the companies I worked with at InCrowd were outside of healthcare, and we were able to back 14 companies through our angel network and fund. Now at Studio Bank, in addition to working with the those 3% of companies that might need advice about a capital raise or introductions to VCs and angels, I am also able to help the other 97% of companies identify where their funding might come from. That could be bootstrapping, customer financing, pre-selling products, crowdfunding, and in some cases, bank financing. I can now work with 100% of companies, rather than just 2% or 3%, and find ways to do what I love – helping entrepreneurs find the resources they need to succeed.

PS: When I started InCrowd, I knew that I was going to meet heavily with mentors and advisors. Back then, I thought that I would get good advice from some people and bad advice from some people, and it would be clear to me what direction to take. Through experience, I realized that some people gave me great advice that took me in direction A, and some people gave me great advice that took me in direction B, and some people gave me great advice that took me in direction C. I learned that the hardest part about being a founder was that you are going to get great advice from different people, and it will take you in vastly different directions. It is up to you in the end to decide what direction to take. I love getting input from as many places as possible, but I found through experience that it was much more difficult to choose a path for the startup than I thought it would be.

PS: An advisor of mine once recommended that I take two hours out of one of my days each week to “brainstorm.” It was time to focus on strategy, growth, setting and measuring metrics and thinking about changes I needed to make. There would be no email, no calls, and no working “in” the company. That “brainstorming” time became so vital to me, that I actually expanded it over time to two days each week, for three hour sessions each time!

PS: I do not think that stakeholders in our community realize what it really takes to build a robust funding community in Nashville. They think that you can just convince some VCs to open offices here and all of our problems are solved. It is not that easy, and it is a 20 – 30 year process to get to the target we want to hit for startup funding options. Here is how that works. You start with a few enterprising individuals who start a great company (self-funded or funded by local investors). That company gets sold for $10 – $20 million. Those founders and their investors get involved as angel investors, and with their funding and experience, they help the next wave of entrepreneurs build companies worth $50 to $100 million. Those founders and their investors build a venture fund of $50 to $100 million and invest in companies that need larger investments to build high-growth, scalable businesses that sell for several hundred million dollars. Then you get the large VCs. That process takes 30 years – as it did with healthcare in Nashville, which now has a very robust funding environment, and as it did in Silicon Valley. We have started to see some of those early, $10 to $20 million exits, and those founders are now in the angel investment community. They are now investing in the next wave of startups that will have the $50 to $100 million exits, and so forth. I think we are coming up on the end of the first 10 years of a 30-year process that will eventually lead to much larger funding sources that can handle larger, coastal-style VC investments. I do think it is great to build awareness of the growth we are seeing in the tech community in Nashville with coastal VCs. However, I think for now it is better to sell Nashville as a great place to launch a Southeast focused investment practice, due to our geographical proximity to the best markets in the south. That way we can go ahead and have them here when we are ready. But we need to focus on supporting the local investors who back those early-wave companies, which are not going to be on the radar of coastal VCs. And for the few that are, they will find their way to the VCs, with or without our promotion.

PS: My success has been heavily dependent on the numerous mentors and advisors who have helped me and supported me throughout the years. In alignment with the response above on getting advice from many different people, I always had an attitude of: if the idea failed, it was because I executed poorly; if the idea succeeded, it was because someone gave me great advice. That was not just lip service I paid to mentors – it was truly the case (i.e. ideas failed because of mistakes I made, not because the idea was bad). I think taking the blame for failure and giving out credit for successful ideas has allowed me to maintain close relationships with a large number of people. Without them, I would surely have failed.

 




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