Dave: Hey everyone, Dave here with another episode of the Phil Tech Connect Podcast. Today, for the first time ever, we have two guests, two for the price of one. Two people that I know and respect very highly. Josh is a Serial founder, ex-CEO of cybersecurity company Flashpoint. They were a global leader in threat intelligence. He has scaled from 0 to 100 million, raised 80 million from top-tier investors, and now lives in Philadelphia with his wife, two kids, and gold Doodles. On the other hand, we have David. David has been in the Philly Tech ecosystem for over 20 years. He’s been a tech investment banker at Fairmount Partners. He is currently the managing partner at Palm Venture Studios, which is a group of investors and operators looking to invest in distressed Tech-enabled startups across the US. They’re backed by a family office deploying a $90 million fund. If you got the hint, we’re going to be talking about raising money. It should be pretty clear from the BIOS that’s why we’re here. I have yet to have some guests on that can talk about this topic because frankly, it’s hard to come by. How are you guys doing? Are you ready?

Josh: I’m ready.

David: I’m looking forward to it.

Dave: Yeah, I’m pretty ready.

Dave: Raising money is, for those who haven’t done it, which is the majority of us, myself included, can be a bit of a black box. We don’t always understand. We think about the good side of raising money and having money that has been given to you to pursue your idea. But I know it always comes with strings and catches. So, what are some things that people don’t understand or expect about raising money? And I’ll jump in with one quick thing because I hear this a lot. It’s like a little pet peeve of mine that you, Dave, actually just said because you use the word somebody gives you money, right? And I just want to jump right in. I will let Josh answer the actual question. I’m going to jump right in and say nobody’s giving anybody money, right? It is very much a quid pro quo. It’s you’re definitely giving up a lot when you’re getting given money. So, Josh, let’s elaborate on that. What are the things that you give up when you are being given money?

Josh: Yeah, it’s not necessarily that you’re giving up. You’re giving up equity in the company, right? And you’re marrying someone in a way that is easier to get a divorce than to get rid of an investor, and vice versa. So, it’s really about having a strong relationship, and you’re giving up autonomy, right? Suddenly, you’ve got people who also have thoughts and feelings and desires, and a key piece of the fundraising process is, are those desires aligned? Because if they’re not, and you’re going into two different directions, then it can be really painful for everyone involved, even if the company ends up selling for more than you would have otherwise sold it by taking the investment. Because sometimes all these things fall in that maybe don’t get you as much as you thought by just not taking any capital at all. And so, some of the things that I see, especially like early-stage founders who’ve never raised money before, or and people just thinking about startups, I think there’s this myth that I just show up with a cocktail napkin and like some graphs drawn on it, and I show up, and I’m like, “Here’s my idea,” and someone’s like, “Oh my God, I got to give you $5 million to go do that idea.” It’s that yes, that does happen, in the same way that Lana Turner can get discovered in like a drugstore by an agent who walks by and sees her in the window or whatever, yes, those stories happen, but 99.9% of the time, it is very difficult to raise money, and the bar is much higher than “I graduated from a great school, and I’m smart, and don’t you like my idea?” It’s a long slog. So, I just wanted like that to me is a thing that people don’t understand. It’s just I have a great pitch deck. It’s not about just like a great pitch deck or a great napkin that you drew things on.

Dave: Yeah, I wonder if some of that misunderstanding comes about because maybe it used to be a little more like that or it was a little looser raising money, and now it’s gotten more difficult. David, you’ve obviously been in the space of venture capital for years now. Have you seen it evolve over time, and is it trending in a direction of just needing more traction, more validation? Like, where have things gone?

David: Yeah, there is a nuance here, right? A lot of what Josh and I are talking about or have talked about so far is around raising institutional capital, right? So, bringing professional investors onto your cap table, typically onto your board, typically with a lot of control provisions baked into their investment. And so, I’ll answer your question about that piece first, but I’ll also bring up a little bit of the friends and family and angel rounds. So, to answer the question about just generally what’s happening in the market, I think that the venture market, just like any other market, is very cyclical, right? But I do think in venture, the cyclicality, the swings up and the swings down, tend to be pretty wide, right? In a bull venture market, for sure, valuations swing way up, money, you can feel it viscerally, that money is looser. And then when the money is tight, which I would argue that we’re currently in one of those cycles, the money is very tight, right? And there’s a whole bunch of reasons for why that cyclicality swings in a more extreme way than I think in other private markets, and certainly versus the public markets as well, but we can talk about that at our happy hour conversation, the panel that we have in June. Yeah, this is a great preload for that. But let me answer, Dave, sorry, just I wanted to answer the other question about angels and friends and family, which I just want to say, I think that’s a great channel for raising capital. And I’ll also say, like, this part is definitely anecdotal, but just through my own experience and anecdotally, you know, in 2021 and even early ’22, you saw a lot of people just dabbling and investing in startups as individuals, and really, I don’t see that happening much at all right now. And I think that’s just because there’s a bunch of reasons. One is just the venture market is cyclical, and the individual will follow that cycle. I think two though is that we’re in an era of high interest rates, right? The stock market, the public markets are doing great, and the opportunity cost of putting your money to work into a startup, especially in a market where we know that venture capital funds are funding at a much lower rate—I don’t know the exact stats—but, you know, the opportunity cost of putting your money to work as an individual into a startup, it’s just much greater now than it was even a couple of years ago.

Josh: Yeah, zero interest rates really created that huge glut in funding, and lots of folks were like, “I’m getting 0% in my savings account. I should just start angel investing and chasing every AI deal because it’s so hot.” That created a huge bubble that stopped with the interest rates coming up. And I think now, just like Dave said, there’s fundraising cycles where it’s really founder-friendly, where it’s like, “Oh my God, I walk into a room, and everyone’s got their checkbook out because they’re hunting for the next thing.” Because, to Dave’s point, they have another great place to put their money right now. Or it’s, “Man, this is really hard. Only the companies that have really incredible strong traction are getting money easily, and for everyone else, it’s a battle and a long game.” And it’s the same thing for VCs too. Like, raising money these days for VC firms is hard. And so, that’s another reason that they’re going to hold their pocketbooks a little bit closer because they’ve got to make really strong bets to meet the returns for their investors. And especially after this last fundraising cycle in like 2021, when valuations were sky-high, there’s a lot of VCs, I think, nail-biting on are all these unicorns that we minted actually unicorns. And so, there’s a lot of I think wait and see of what is our portfolio going to look like in the next couple of years before we start even deploying more capital.

Dave: Yeah, Josh actually texted me a new word yesterday, “the unic corpse,” which is dead unicorn, the unicorn that didn’t make it. That’s a good one. That’s got viral potential.

Dave: Let’s talk about Philadelphia. You guys have both been in the ecosystem for a while, you live here. I’ve been running a community organization for over a year now, and people make jokes, they talk that like Philadelphia companies don’t really get funded. What is that true?

Josh: I’m going to jump in. No, it’s not true. That’s absolutely right. You don’t think that venture capital firms that have a mandate to put money to work are looking all across the entire country for great deals or what they perceive as great deals, of course they are. So, the fact that you’re in Philadelphia has zero bearing on your ability to raise capital. Now, is it a lack of or perhaps like have there been fewer? I guess the question is, are we punching below our weight in terms of raising venture capital? You know, I don’t have the stats in front of me. I would—I got a feel and just frankly experience, yeah, we probably are punching below our weight. But that’s not because our companies and our individuals are based in Philadelphia. There’s lots, I think that a challenge is that like in Philly, a lot of these great funded companies stay under the radar, but we’ve got like DBT Labs, which is a unicorn. We’ve got Guru, we’ve got Cross Beam, we’ve got Common Paper. These are YC-backed companies that have strong valuations, and John’s invested, like, they’re here. But I think they’re doing what they should be doing, which is like building great businesses and keeping their heads down and going and do that. And I think the more of those that happen, then we start creating some virtuous cycles where we’re starting to hear more about, “Oh, some people left this company that was really great and started another company.” And then I think like the life sciences aspect of VC work, like on this Tech side, like building software as a life sciences hub, Philly is also, you know, really strong. And so, I think that sometimes overshadows a lot of the tech that is happening in the city. And then you have like companies that get their starts here and then migrate away, Venmo and Warby Parker and these other ones that get sucked into the New York ecosystem. So, they’re here and they’ll start here, but you’re just, if when you’re comparing it to like San Francisco or New York, we’re just not quite there yet. But I think to David’s point, it’s here, and I think we’re punching below our weight class. But I think with communities like what we’re in right now and like PT, these are the things that we’ve got to start doing to start raising the profile and showing founders, “Hey, there’s great engineers here to work with. There’s strong talent pools here. There’s great executives to recruit onto your team who have experience.” And I think all those things will continue to help dispel the myth that like companies don’t get funded in Philly because they do.

Dave: I’m glad that you bring up communities and Philly Tech entrepreneurs, and as someone who’s been running this for a year, and I’ve also seen so many other communities, and you know, it’s great that there’s some activity and people are doing happy hours and stuff like that, but I don’t think that is probably going to in of itself raise the waters here significantly, just people have drinks with each other. What are the other things that need to happen from the communities, incubators, whatever development programs exist in Philly? What can we all be doing to help more Philadelphia companies succeed?

David: I think that’s a great question. I do think, you know, more mentorship and education opportunities, people, frankly, like Josh, who have gone down this path, right? To the extent that a new entrepreneur’s right path is to raise venture capital and build a large business, there are guys like Josh who have knowledge, I guess I have that knowledge too, right? Like, we do need to do more to get out there and help people out, just having done it many times, we can say one little thing, right? One bit of pattern matching can really help change the trajectory of a company. And I do think actually that getting folks together in the community is very helpful because those are the conversations that, like I said, you can make that help change that trajectory. You can also become an angel investor, right, or an advisor. And an advisor, right? I do think that, like, we have to start building more of that virtuous cycle and opportunities for that virtuous cycle to actually start. And look, I’m not saying that that doesn’t happen now. It certainly does happen in pockets. We need to do more.

Josh: Yeah, well said, Dave. The number one thing that I think needs to happen is there needs to be some Uber-level company that, like, exits from Philly, right? And that will create huge virtuous cycles. So, short of that, right, like, how do we get there? How do we create the environment for something like the potential of that to occur? And I think, Dave, to your point also, I think it’s the same, right? The fundamentals are the fundamentals. And it’s what Dave got to, like, don’t chase a thing just because you saw it on the cover of Forbes. Like, it’s the tried saying, right? “Fall in love with the problem, not the solution.” Like AI, the internet, the worldwide web, whatever you want to call it, they’re all solutions to problems, right? So, find a problem that you know better than anyone else, you’ve lived it, you’ve researched it, and you feel like you can generate and create customer value there and go prove that out. Start getting traction. And you know, every VC has their thesis, but they’re looking for scalable companies that can grow really fast and have certain margin profiles and all that stuff. So, if you’re building a software company that is focused on a problem that might be totally unsexy, I think there are VCs who like the unsexy. Like, there’s—I personally love all of these middleware companies that no one’s ever heard of that are like required to make AI to do the fine-tuning, to do all the thing. There’s so many great companies where the CEOs are incredible, they’re minting money, but they’re never going to be on the cover of a magazine. So, people don’t think that there’s all these other great successful companies out there. So, I would say the words of Public Enemy, don’t believe the hype, and go build what you know and get the traction. And if you are truly delivering customer value and customers are saying yes, and you’re getting customers and getting them to pay you, and you can, as Dave said, you can tell a great story around why you’re doing what you’re doing, how it’s going to grow quickly, why it’s going to be worth a lot, why you need the money, that’s a great story to go tell. And AI could be a piece of it. It could be a lot of it. It could be, hey, it’s going to be down the road. But as long as customers are paying, you’re onto something. So, that’s my exclamation point in the stuff that Dave said very articulately.

Dave: Yeah, I’m to end on the Public Enemy quote. I can’t think of a better way to wrap things up. I appreciate you guys coming on the show, sharing your wisdom. Look forward to continuing the conversation with you in a couple of weeks, months or so. For people that want to get in touch with you and learn more, Josh, where should they go?

Josh: Yeah, I’m in the FL group. Hit me up on LinkedIn. You can just search me and add there. I’ve done a lot of working with other folks like in the community. Just pitch me and give you my feedback, and have been trying to do my part in what we were talking about before, connecting. So, I’m always happy to chat with folks who are building things, and even better if you’re seeing traction.

Dave: Yeah, you can find our website Palm (PM) Venture Studios, plural, dot com. I was hoping for p6s. It actually is really 16 letters in between, but we went with the fully the long form name. And then if you want to email me, I’m at davidl@…

Dave: Awesome. Thanks so much, guys.

Josh: No, thank you, Dave.

Dave: Thanks for hosting and the great community that you’ve really been a keystone and pillar to draw people around.

Josh: Dude, seconded. You are doing some really great work, and keep it up, because, as you said, the Philadelphia ecosystem needs you and people like you.