NEW PODCAST! HOW TO CROWDFUND A MICRO PE DEAL

Colin and Brent discuss crowdfunding a micro PE deal from users and the public.

Pre-order Colin's Micro-PE Course at IndiePE.com.


https://www.vernehq.com/post/how-to-crowdfund-a-micro-pe-deal

Brent Sanders: [00:00:07] Indeed. We are buying, building and operating right now, a wonderful internet companies. And this week we're going to just dive right into some interesting stuff that actually you sent over yesterday, right? This is , Deal or it's through a site similar to Republic, which is called we funder.

And it was a deal called UpCounsel. And this is a company that has a legal services marketplace cutting the fat out of the old law firm model. So sounds like a great idea. And so you sent this over first of all, how did you find it?

Colin Keeley: [00:00:35] So Xavier Helgesen posted about it. And he was like, I believe reg CF regulation, CF crowdfunding, or revolutionized fundraising from micro private equity. And so they bought this company. So a little background on this company. It raised $26 million in venture capital. It basically died like it. I think it completely went out.

He bought it for maybe a million bucks. I'm not sure the exact amount and that was 15 months ago. And now they are raising money publicly , with regulation CF at a $26 million cap on a safe note.

Brent Sanders: [00:01:13] So let me understand this. It was a venture back company raised a bunch of money cratered. He did this , we talked about on a previous episode, this sort of like venture orphans bought it for a million bucks. So revitalize this business for, basically pennies on the dollar. And then the, I'm trying to think of an analogy the ship took off, but the trajectory is not quite as high as it was intending to be.

How would you characterize the graph I'm trying to paint.

Colin Keeley: [00:01:40] Yeah, I didn't read in super detailed. What it sounds like it's basically like a managed marketplace so much, like Paro is Paro connects you with bookkeepers and CFOs and on a part-time basis, they connect you with lawyers and they cut out the middleman and do it that way. It sounds like the company before he acquired, it was just burning a bunch of money is unprofitable kind of a class.

Venture orphan story. And he took it over as they were planning on just shutting it down from my understanding and kind of reorganized. It hired a pretty solid CEO with a YC background, Stanford BA Oxford MBA. And it seems like it is improving, but they're trying to raise some money and go for it, which is like something that I've been thinking about is we acquire these businesses, blink sale, the one we're working on now.

And you acquire them. You try to run it off Caslow, but sometimes the opportunity could be a lot bigger than what you were thinking initially. And maybe you just need more money. So if we were like, blink sales is pretty interesting, you could run it on low power mode for us. Or he could really, raise some capital, go after B2B payments.

And we have a unique viewpoint that we really believe has potential. Like, how do you raise money for that? Do you want to go the traditional VC route? Do you want to go with angels? And so he decided to do this regulation CF, which it sounds like in the last year, the rules have changed.

It started back with Obama in 2012 and in 2016, and now there's something going on. I don't know why it changed. Recently, but now you could raise not just from wealthy accredited individuals, which is only like the wealthiest 2% of Americans. You could raise from anyone and you could raise as little as a hundred bucks and up to 5 million bucks.

And that's what he's doing. He's opening up this private equity investment to the world and he has it public now.

Brent Sanders: [00:03:25] And I've seen , so this is we funder I've seen Republic is the one. I think we've had some portfolio companies, actually your one portfolio company. Add on to the round using this. This is a couple of years ago and they, I think they raised close to a million dollars in addition to their other rounds from honestly, a lot of their existing users, people that love their product that put, 500 to a thousand dollars in some people put in 10,000, and so for this deal, it looks like on the side, I can put in $250 and there's a ticking sort of date in which, here's until we can, you can raise, I guess this one has the launch on the 20th. So you, 10 days away from right now is, you can put in 250 bucks and go along to the ride.

But , one of the weird things is like understanding, how this works. So the, this is open to the general public. Anybody can do it. And it's a safe note, which. A type of agreement. I think that it's generally, we've heard about it a ton in venture, but can you explain like basics of a safe note?

Colin Keeley: [00:04:22] Yeah, it's basically an agreement for future equity. So it's not a convertible note. It's not alone and there's no like obligation of accrued interest or a maturity date, or there's no guarantee you get paid back. It's basically the best way to get future equity and like kind of punt everything down the road.

And so it's not a priced around, it has a cap, which effectively if they raise it. Okay. Amounts greater than the cap in the future. That's basically like the price of that you're investing at often with a 20% discount. So the danger here. Is it all only works if there's a future , like either liquidity event or future price fundraising round.

And so the danger is that there's not right. They raise a million dollars and there's never any other future event and then nothing ever convert. And so people don't talk about this very often because normally it's in the venture space or like startups. This is like their first round of funding.

They're guaranteed. That need more , it doesn't really matter. This edge case where it doesn't convert doesn't matter. Top towel, which is like another managed marketplace for developers, raise $1.5 billion in 2012 for about 15% of the company from Andreessen Horowitz and some other folks , the safe note.

And then it ended up that they never raised another round. So they reached a, roughly a billion dollar valuation. Never raised any more money. So the investors never got any equity because nothing ever converted. The other employees never got any equity and the founder owns a hundred percent and this is all completely legal.

This is what the legal docs say happens. So people have nicely, asked him for their money back and he gave some people their money back and then he fired like other employees are asking and they have no recourse here.

Brent Sanders: [00:06:07] Yeah. This is it's if you're going for a certain model and then you decide not to conform to them, I don't like the. Not fundraise again. And Hey, this is just profitable and you don't need anything else. I guess that's fair. It seems like a shitty thing to do. It's like everyone was sold an idea that you were going to conform to a certain model.

And I think it's a really weird place to play for this UpCounsel. Where they, to me, this looks like a micro PE deal. It's just what we're been , working around. Obviously. They're buying a business that is a venture orphan that's right in our strike zone.

It's like they've , then are trying to do some form of turnaround. They're definitely taking, take a bigger swing by, and I think what is the Val valuation cap is around 24 million. And so you essentially won't get anything until the company is sold or, some liquidity event.

So

Colin Keeley: [00:06:59] Or raises an additional round of funding in which case the equity, the safe would convert to equity.

Brent Sanders: [00:07:05] Yeah.

it's just funny. It's so mixing these two things seems a little weird. The one thing I appreciate about this specific deal that was making me laugh is , that, they have losses, right? It's not like they bought the business for 1.5 million and it's, taking off and it's a great story.

They've actually, on the site, there's a great little icon that has , a little like man in the fetal position with money on fire. And it's the net loss figure and they have 147,000 of net loss for the, I think the prior year is this[redacted]So they've raised 1.9 million. They have 1.4 in revenue.

They have $84,000 of cash on hand , and have a negative 10% net margin. So it's a negative 7% return on assets, which I was at first, when I looked at this, I'm like, you can't be serious to expect people to put money in, but now that you hear the full story, it's okay, this was a venture business.

They're trying to get this back on the rails, now that they've made an initial investment and it looks like it could do that. If you believe in this vision, you think it's , it has the right players in place. The CEO, as you were saying is a really strong , background and Hey , could they turn this around?

It seems like it's likely, it's not in a great place now, but it's, it reminds me of I had , techno, like my first job out of college was doing technology and options trading. And it was, they let us, I think he might have told some of these stories before, but like they let us do a little bit of trading.

They gave you like a thousand bucks and showed you how to trade options. I remember sitting with somebody and I placed a bet essentially on something. And it immediately tanks immediately goes down and oh , should I buy more? And he's let me ask you if you're betting on a horse and they roll out the gate and break their leg.

Are you going to double down on your bet? And so it's cemented this idea that when things immediately start. Underperforming. It's they're going to continue to underperform, but and more money may not help, but that's not always true for business. It's a, oversimplification, but it reminds me of that exact case.

Colin Keeley: [00:08:58] Yeah. It's investing in startups which are inherently super risky. This one has real like revenue, so it's not maybe as risky, but I think it's great that non-accredited folks and roll the dice. You could play the lottery. This is probably better ads than playing a lottery. It's a good learning experience whether you make money or not.

So I think it's great. I think it's pretty interesting as like a way to finance micro PDLs. You could just take this to all your customers. Like we have, I don't know, thousands of people use blink sale and you could go out to them and be like, Hey, we'd love to, invest a bunch of money and improve the product and dramatically improve your life.

Would you like to own a little piece of that? And you couldn't do that until it sounds okay.

Brent Sanders: [00:09:35] Yeah. Yeah. It's wild. If you see there's perks when you invest, it's just like a , a lot of the other crowd funding sites, you get a t-shirt or something, and this is interesting. Their audience , they have specific perks for attorneys or clients, right? If you're on one side of the marketplace or the other, if you're an attorney they're going to help you build your sort of authority, they're going to post your blog posts or write articles for you and direct connect you and help you with sales.

It's not a terrible way to, if you have users on your platform that love it right. And are also attorneys they're making good money, they're not, working for pennies. And if they're believers. That's what you have. This is a great vehicle to do it, right? It's Hey, we're building something that you believe in.

We just need more revenue or sorry, cash to build that revenue and stay around. Maybe it makes sense. The thing that I can not get out of my head here is the , top tail model where it's like, Hey, this is not a venture deal. It's more of a micro PE deal where, if someone's just going to hold it forever and they're going to enjoy the returns and , There may not be no liquidity event.

So I think that's the one thing that these safe notes, at least as I go to this site and kind of look at it and if I wasn't, didn't know what I knew. I would assume that I would get my money back at some point, or if the business does really well, I would get some upside, but it's yeah, you do, but you may not.

And everything can go. And you still get zero, right?

Colin Keeley: [00:10:54] Yeah, that is really the hiccup here is. A lot of people that don't know the kind of nitty gritty details are going to get screwed. And that's the whole danger of opening up private investing to the public that isn't accredited and maybe doesn't have the money to lose. I do wonder why they went with the safe, I wonder, clearly.

Legally cheaper, but I wonder if they could have done like a more priced around where maybe they take some management fees and then there's some share profits. So if they ended up never selling, at least these like little people, get some share of the profits going forward and maybe get a nice, monthly yearly check or whatever.

Brent Sanders: [00:11:30] Yeah. Do we know what they've raised so far? Does the site show it should be public

not seeing it. It shows a lead investor, but it doesn't say how much they've put in. Oh, he put in 25,000. So they've raised some money, right? It's not nothing.

Colin Keeley: [00:11:45] Yeah, I think it shows publicly it's not actually public yet. Now I'm thinking that we may have to delay releasing this podcast because it's not actually open to the public for 10 more days.

Brent Sanders: [00:11:56] Either way, it looks like I can put 20, can I put 250 and let's see, let me,

Colin Keeley: [00:12:02] So Xavier sent me this, so I sent it to you.

Brent Sanders: [00:12:06] ah, yeah. Yeah. And they take an $8 fee on my $250. Ooh. I get an early bird bonus. The first million we'll invest in a safe with a 24 minute.

Colin Keeley: [00:12:15] Okay.

Brent Sanders: [00:12:15] If you are in on the first million, you get the cap for the safe note is 24 million. And if after it's 28 million. So, it's like a early bird bonus.

Yeah. This feels weird.

Colin Keeley: [00:12:26] This is what Gumroad did. A cell did this with Gumroad and he raised like $5 million at one valuation. And I think he bumped it up and they may be raised another 5 million. I don't know. I feel like some of his secondary, like he actually took money off the table with that, but it was a aggressively high evaluation.

But again, these people that are investing in this, they have no idea what, like a proper valuation is for these tech companies.

Brent Sanders: [00:12:48] right. Yeah.

It's hard to know. Cool. This was really interesting to see. I'm wondering if we're going to see more of a mix of this and these micro PE deals mixed together. And I wonder if there's a better. Way to do this, it's where you can open it up to everybody.

And then rather than using a safe note, maybe have a different mechanism that, guaranteed some sort of dividend, if certain conditions are met, if you were to invest in, for example, blink sale and you put in a thousand dollars and then a year from now, we hit certain targets. You start getting dividends and returns on that.

Would that be interesting to open up to the public? I'm not proposing it. just seems like it'd be really complicated, if this is going on for venture, why not for other investment models?

Colin Keeley: [00:13:32] You heard it here. First folks.

Brent Sanders: [00:13:36] Yeah. Maybe we need to , we need to run with that idea was just build like a micro PE crowdfunding. But , I saw the folks.

at micro acquire rates.

Colin Keeley: [00:13:44] Yes. I think this is probably Andrew's plan. At least as he's spoken about it in the past of making this whole thing easier and a big chunk of making this easier, it'd be like letting you raise money for deals on a deal by deal basis. And Navarro was one of the investors. So I'm sure they have the angel list for Michael P in mind.

Brent Sanders: [00:14:02] Yeah, Yeah, that's great. Big fan of microbes.

Colin Keeley: [00:14:06] Yeah, it's about time. There's been all these crappy marketplaces for so long and it's like finally, a professional marketplace that comes on the scene and it's going to dramatically improve with this funding round. I've been very impressed with what Andrew has done with no money so far.

Brent Sanders: [00:14:22] Yeah. That's such a good sign. And it's not like he raised $20 million. I think it was a million million, a quarter or something.

Colin Keeley: [00:14:29] A 2.8. Yeah. Which is pretty low. Cause he's , he's on a quick path to a million dollars. ARR, I think he's six, 700 right now.

Brent Sanders: [00:14:37] Yeah. Huh? It seems like he's staying true to the brand, right? This is a, this is not a , angel list per se, which, I don't know anything about the funding rounds of Angeles, but I do know, usually on a venture path like that, you could have gone in a multiples higher. But staying true to the brand, staying true to the type of people that are using it.

I think it's , seemed like a very modest way to go and probably doesn't dilute himself too much.

Colin Keeley: [00:15:02] Yeah, I wonder what the terms are. He definitely could have raised a lot more money than this. Maybe just wanting to get those people involved. Cause it's awesome to have Nepal involved. But yeah, this is great news, especially for my , little course business micro B will get bigger and bigger.

Yeah.

Brent Sanders: [00:15:17] How is the course going?

Colin Keeley: [00:15:18] I really well. So I said, I'm going to open it up on, I think Wednesday. Good chunk of it recorded. I probably have three more in a, you have two or three that you're going to send over. I think that will be a good like V1 and then get a bunch of feedback, open it up to folks, but the response has been awesome.

Like I'm super happy with the pre-order. It's been really fun to do. I'm definitely learning a ton about , the course business and running something on podia and like slowly bumping into all the limitations and also seeing , how much work we would have to do on avocado to make that like a credible creator economy , e-commerce experience.

Cause there is a lot there, a lot of features.

Brent Sanders: [00:15:56] Yeah, And meanwhile, people keep signing up for avocado. I'm like, what's what or why is that happening? And yet there are no, there isn't a. Equal uptick in sales. I think people are using it to what the latest thing that I've seen is we've had people signing up in hosting, like their beats, like producers are using it , which has been interesting to see.

And I didn't think about that, but that's the latest sort of unattended , what do they call it? Management by advocation, the business is still running, but no, one's really watching it, but ,

Colin Keeley: [00:16:25] normally there's a CEO in management by advocation. This is a, the CEO's have advocated.

Brent Sanders: [00:16:32] This is a, yeah. This is a kin to, yeah, it's a raft floating down a river and we're watching it go and see what happens.

But , as depressing as that is it's, it is something that, yeah, I think we're going to have to make a decision on soon and that's how this whole podcast started.

Colin Keeley: [00:16:48] yeah, that's episode number one is talking about it. I still think it's interesting. So if you had a hundred thousand dollars today to spend an avocado, what would you do with it?

Brent Sanders: [00:16:57] Obviously we have, there's more than a hundred thousand dollars of features to build that's my one reason to, I would, yeah, I probably picked a niche build. Spend $40,000 on tech to build the features and try to pick one or two things are really important. Do those things really well. And then just , Spend the money on marketing, or even just finding somebody to go down one specific niche and just get the MRR to a point where, you know, w whether it's producers and you're the next sort of, or the ideal solution for small-time producers to get to sell their beats, or , what else?

We went down, romance novelists , went down. Education, obviously that was still is very much the main piece, but going down fitness, one very specific niche. But yeah, I would split that maybe 40% to tech and 60% to, marketing content and sales and see how it does and really try to, I think there's, there, isn't something we've never found above or anything that is stop people from checking out.

But I think that there's something with the way. That the checkout works or in the model that we did that, like just doesn't appeal because , we saw with the subscription model, we saw just sign up just naturally happen and occur. And people got that. They understood how that would work in the first model we had.

So for people that are listening, the very first model was you sign up for a subscription through your mobile device and you get access to all the courses fairly straight forward. We started to transition to. And which is the current state is you find somebody site, you check out online and then you get access on the app or you can listen on. Yeah. And we transacted in a bunch of different ways as well, but yeah, I would niche down, spend less than half of it on tech and the rest on, becoming the authority in that one space, whether it's through content or paid or, all the various parts of acquisition. And I'd say a hundred thousand dollars would be gone in six months, pretty quickly, three

Colin Keeley: [00:18:58] Yeah. I generally agree with that. I think my experience with podia, like they've spent millions of dollars in years and years to build the features they built. And it is still lacking. Like they got a good, they got enough there that like I'm transacting and everything, but it's not. It's not like Shopify, so Shopify e-commerce experience super optimized or anything.

And so I think our only choice, unless we want to raise a big venture capital round is like to niche down and be like the best scary stories app.

Brent Sanders: [00:19:30] Yeah.

Colin Keeley: [00:19:31] That's a little saturated, but something like that, where you hide it. Basically just content producers, and you turn out content. And then when you're marketing it's to a very knit segments and you could probably, convert at a pretty high rates for an IUD, iPhone app.

And we just have to, at some point, pick a segment, pick a content producer and probably slowly wrap it up. But I don't think it actually costs a hundred thousand. Like you could probably break even pretty quickly sell annual subscriptions , there's ways around it. But yeah, at some point we should refocus on it and, give it a go.

Brent Sanders: [00:20:01] Yeah , cool. I think that's all I got on my end

Colin Keeley: [00:20:04] Yeah, same.

Brent Sanders: [00:20:05] a cover. Anything else?

Colin Keeley: [00:20:07] No, this is good. Get your order in for my course. I would have been IndiePE.com. I'm gonna raise the price. I think maybe next week, maybe the week after, once I have enough content there, I saw this other woman has a very similar course for sale for $5,000. And it's do you want to optimize for bringing people in the door or do you wanna optimize for like revenue?

I'm leaning more towards bringing as many people in the door as possible, and like building a community on a backend then like purely on revenue.

Brent Sanders: [00:20:38] Yeah, I would agree with that. The more people doing this , I feel like the better, I know that it sounds, we've talked about this before, like we're creating competitors, but I feel like there's just so many, there's so many opportunities out there that it's just, yeah. It's not the problem, but yeah.

Also the next thing I think is start building that community up.

Colin Keeley: [00:20:57] Yes, I will add that to podia. I do know how to do that. That's another add on, but , yeah, that's it for me, take care of everyone.

Brent Sanders: [00:21:04] Yeah, thanks for listening.



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