Dave started both of the major investing vehicles in Tampa Bay: Florida Funders and SeedFunders. Between the two, he's reviewed thousands of companies and seen them bloom and bust. In this episode Dave shares how those experiences have shaped his investment decision making. And there's no better way to make the wisdom go down than a top ten list.
A few weeks ago, we talked about your experience as an entrepreneur. You provided some advice to founders based on those experiences. You didn’t talk however, about your experience as an investor. I’d like to talk about that today, and hoping you can provide some observations to investors as well.
That’d be my pleasure. Where do you want to start?
Let’s start with Florida Funders, because that’s a jargon right now. How and why did you start Florida Funders?
Well, after I sold Chitester Management and Red Vector, I retired, but that didn’t last long. I started to look at starting some other companies. But nothing really motivated me. For example, I started a company called Vet Track which is continuing education for veterinarians. Just like Red Vector did for engineers and architects, but I was going after veterinarians, but I had no passion. Again, I’ve talked a lot about passion, and how important that is. I had no passion. So, I just closed it down. It would seem to me just more the same. Doing the same thing for a different industry. Really didn’t thrill me a lot. So, I looked at other options and trying to figure out what to do after my first retirement. But then in March of 2012, Congress passed the (JOBS) Act. Jumpstart Our Business Startups – the (JOBS) Act. That grabbed my attention. I knew how hard for startups to raise funds when I started Chitester Management and Red Vector. This looked like a real solution that I could really get into.
So, that’s when you started Florida Funders.
Not right away. Congress passed the (JOBS) Act, but the SEC had no desire to let unlicensed companies raise money for startups. They just pretty much ignored what Congress required them to do in six to nine months. They dragged their feet. And they had the right to rules, to how to implement this. But they just dragged their feet. Nothing happened, for over a year. This is a good lesson for investors actually, some things take time to develop. So, don’t rush forward, but don’t give up. Keep in touch with what’s going on in an area. If you have an interest in it, take the time to research it. Sometime the time might be right to actually make a move.
So, when did the time become right for Florida Funders?
Well in March, 2013 a year later. After the (JOBS) Act was passed, two companies in California: Funders Club and AngelList received what are called no action letters from the SEC. They both had submitted letters to the SEC, basically a business plan. And said, “Here is what we want to do.” They requested no action letters basically saying, “If we do this, we want to be sure that you don’t come after us for not being licensed.” Although, the SEC did not actually approve the concepts. They said they would take no legal action against either company if they stuck strictly to the plan that they submitted. This was huge. There was an interesting blog on a site called upcouncil.com. It was entitled, FundersClub Receives No Action Letter from the SEC – It’s on! And it was.
So, then it’s on for Florida Funders.
It took about six more months. I took the letters to my attorney and said, “Nelson, why can’t we do this in Florida?” he spent a number of months trying to get an answer from the state. They wouldn’t even return his calls. Finally, he said, “If they’re doing it in California, there shouldn’t be any issue in doing it in Florida, as long as you do the exact same thing they do. Don’t do anything different.” In September, 2013 I formed Florida Funders to use crowdfunding to make equity investments in startups. We actually became the third entity in the country after FundersClub and AngelList. Again, another lesson for investors here. You need to use vision to see what is going to be big and get in early.
How well was Florida Funders received then?
It was not well received at all, in the existing investment community in particular. Investors who held SEC licenses kept telling us that we were illegal. One said we needed to cease and desist before SEC shut us down. Another approached my wife Kathleen after we did a presentation. I think it was in Sarasota. He said he was going to report us for being illegal. Even other angel groups around the state, who were well established angel groups were saying that we were going to ruin the industry for everyone. We’re going to blow up the valuations. We’re going to invest in poor opportunities. And everyone is going to lose all their money, and it will scare away all the potential investors from startups. You really need to understand where your info is coming from. This is another lesson. Don’t listen to people who have something to lose if you succeed. That’s what was happening here. For example, would you listen to someone who owns a taxi company and says, “Don’t invest in Uber?” You have to look at the source. Since all these people who are saying, “You’re not going to succeed. You’re illegal,” but they had something to lose when we did succeed.
Obviously, you got Florida Funders off the ground, and started in investing. How did that go?
It was tough. We were looking at way too many deal opportunities. Every deal opportunity that came in front of us seeking funds, we wasted a lot of time. We had meetings, presentations, more review, more meetings. Another lesson for investors. You really need to have an investment thesis. And we did not, at Florida Funders. This was brand new to everyone. We just went out there looking for investments. You really need to narrow down your opportunities from the start. It saves a lot of time and efforts. You can narrow it down by industry, by stage, by product, by client type, by market. For example, you could say, “Our investment thesis is, Seed Stage for Medical Technology in Florida, or Consumer Products with a huge National Market, or, B2B Services in Scalable Technology, or Series A Investments in Financial Tech. You could combine a couple of those, a lot of those into your… But you need to have an investment thesis. And not just go after anything that moves.
So, once you have a company that meets your thesis and you want to evaluate it, what’s important?
In real estate it’s – you’ve heard this – location, location, location. In startup investing, it’s due diligence, due diligence and due diligence. Studies I’ve cited before show the amount of due diligence is a major factor in the eventual success of an investment in a startup. There are of course a lot of other factors to consider. But really, when you think about it, they’re all covered in the broad topic of due diligence. Examples would be – and I’ve talked about all these in previous podcasts: terms and conditions of the investment, valuation, the competition, the marketing plan, use of funds, the founder’s background. All those are things that need to be looked at, but they’re all covered in due diligence. Really, it’s due diligence, due diligence and due diligence.
Florida Funders starts to do more and more deals. It blows up. You get more and more investments. Then you retired again.
Yes, I did for the second time. I said before, I’m a startup guy. Florida Funders now needed operations expertise. Tom Wallace and Mark Blumenthal had invested the previous year. They came in on a day-to-day basis as chairman and CEO I believe, and I retired for the second time. Of course, this didn’t even last very long as the first retirement, however. In less than a year, I sent an email to Tom and I asked if there was any issue in starting a new investment firm. I was still an equity holder in Florida Funders. So, I wanted to make sure that there wasn’t any conflict of interest if I started a new investment fund. So, Tom says, “We don’t invest in those types of deals. The companies that we invest in now are not pre-revenue tech companies. They’re companies with revenue. They’re companies with clients. They’re companies with proof of concept.” So, he said, “I could start a new company. Then when I get those companies to the level that they invest, feed them up the chain.” That’s exactly what happened.
That’s when you started SeedFunders.
Yes, Florida Funders as I said moved on to companies who already had this revenue and proof of concept. It left a huge hole in the Florida startup ecosystem, because now, nobody was funding these pre-revenue companies. There were no professional investment firms concentrating on pre-revenue technology in Florida. There might have been some individual angel investors, but no professional investment firms. The investor lesson here is to, find opportunities where investment can fill a need and then jump right in.
Did you find starting SeedFunders was easier than starting Florida Funders?
Yes, by many factors. Some of the early Florida Funders investors jumped at the chance to be an early investor in another investment firm, with a different focus. Also, I learned my own lesson, and started with an investment thesis. As I said, Florida Funders didn’t have a thesis. With SeedFunders, I put an investment thesis in right away. That saved a lot of time right up front. There are a couple of lessons here as well for investors. One is to just piggy back on your previous investment experience. When you have experience doing something, just use that and piggy back on that. The other thing is, use your industry connections. Those are huge. The industry connections are huge in anything, but particularly in investing.
Florida Funders has been named the most active investment company in the south east. At SeedFunders – just over three years of investing – we have 44 partners, and made 35 investments. What do you point to as contributing to that success?
The two companies are actually structured differently: SeedFunders and Florida Funders, but both are really successful. For some different reasons, but one and the same reasons. Florida Funders is a crowdfunding site, but also raised a venture capital fund. SeedFunders is actually an angel group. The main lesson here is people. The common thing for both entities is the people. I’ve said this before. For investors to be successful, join an investment group. It’s a people to people relationship. The people in each entity is what makes them successful. Joining an investment group, networking with people is really a big lesson here for investors. There’s no better way to see a significant number of deals, and spread your risk out. So, people joining an investment group.
The second thing. At SeedFunders we’re also investing to make a profit like Florida Funders is. but we concentrate on things that are a social good. Companies that are doing social good that we invest in. We’re a small angel group. So, we have close relationships with these companies. And we like what we do. So, we want to have fun doing what we’re doing. Doing social good and making money.
Brilliant, any closing thoughts.
Actually, going through my list here I think I do have 10 lessons that I formed in what I just said. Let me maybe summarize. First of all, stay in touch as an industry or opportunity involves. As I said, you can’t just give it up, because the timing isn’t right. So, stay in touch. Keep doing your research. Second thing, use vision to see what’s going to be big. That’s one of the hard things. Really, if you do enough and you learn enough, you can get that vision to see what’s really going to be big and then jump in. Third thing – as I said – don’t listen to people who have something to lose if you succeed. That’s not the right people to be listening to. Next, you need to have an investment thesis. I can’t emphasize that enough. Fifth, due diligence, due diligence and due diligence. I’ve talked enough about that. Six, recognize opportunities and react. You’ve got to recognize when there’s an opportunity and react. Seventh, piggy bag on previous investment experience. Next, use your industry connections. Nine, it’s the people. As always, number 10, have fun and do good.