Silicon Valley’s Bubble- What Happens When It Bursts? | Montgomery Kersten

 

About Montgomery (Monty) Kersten

Montgomery Kersten serves development-stage companies as an independent board member, investor and advisor. Mr. Kersten was the co-founder & CEO of VitalSigns Software (later acquired), and serves as the independent board member of Silicon Valley private companies. He has worked for 35 years as an executive in sales, marketing, business development, legal affairs and M&A at large high technology companies as well as at start-ups. Mr. Kersten has served for over a decade as a board member of the Law Foundation of Silicon Valley, which oversees five charities.

Today, Mr. Kersten acts as a board member for high technology companies and has led the initial and follow-on financings for many ventures. Mr. Kersten serves as a mentor and advisor to founders and CEO’s in order to accelerate their success and assist in overcoming the many challenges ventures face, from founding, throughout the company life cycle to an acquisition or IPO. His expertise focuses on organizing, financing and developing young companies, advising founders on strategies and tactics for successfully collaborating with all parties, building business models that succeed, creating effective sales and marketing and channel strategies, advising on strategic plans, operational issues, and the crisis of the day, while guiding founders in forging strategic relationships, building strong intellectual property protection, safeguarding founders and fiduciary board members, rapidly building value, and accomplishing successful mergers & acquisitions or IPO’s. As the independent board member, advising founders and their team, and working with investors and the board, Mr. Kersten provides independent operational advice to propel the company to success, while providing founders with “air cover” as they interact with their board, investors and customers.

 

Interview Transcript:

Alan
Welcome back. I’m here today with Monty Kersten. And Monty is an independent board member of young startups and angel investing money. Welcome to the show.

Monty
Delighted to be here, Alan.

Alan
So money, how did you get to where you are in your position in life?

Monty
Well, I was raised in Iowa as a very conservative Midwestern family with a father who didn’t believe in borrowing money and leave hard work made everything came out here to Silicon Valley, with dreams about having some great achievement come through. And by hard work and a lot of luck, I was able to find a successful software company, and then become independent and able to help ventures and founders with the support of me on their boards as their independent board member, apart from the venture capitalists who share those board positions. And I also invest as an angel in select young startups.

Alan
And you have a legal background also?

Monty
Yes, we try and keep that a secret. And I haven’t practiced for 20 years, however you practice every day, and you never lose that part of your brain, it’s very helpful to have a legal background in this contentious world as you build value for shareholders.

Alan
So I imagine a that that does prove as a board member very valuable to the perspective of helping companies as a scale and have growth and go through their legal contract negotiations?

Monty
Especially if you can use the law as a tool for the business goals. Many times the law becomes its own purpose. And it’s much better to turn it to the benefit of the business goals of the young company.

Alan
So today, I want to jump over to the angel invest angel investing industry. So what changes have you seen in this industry since you first started?

Monty
Wow, well, of course, I’ve been in the Valley for 35 years. Angels in those days were thought to be an angel that came along and saved the business or sponsored it before the venture capital firms came in. And angels were individuals like Arthur Rock, a very famous name here in Silicon Valley, people that backed apple before it was public. And then it transformed from individuals into almost baby venture capital firms that did Angel stage vesting investing that is at the beginning, before the venture capitalists came on the scene. So it has changed a lot into more individuals are morphing into firms that are Angel stage.

Alan
Now you’re relatively, you’re working with relatively young companies as they’re beginning to scale. And, and I think a lot of these companies have reputations of burning through cash relatively quickly. Is that a good sign? Or how do you how do you help companies as the scale growth to balance between their spending and getting up to profitable breakeven point?

Monty
That’s a critical question. I come from the old fashioned view of capital efficiency, high productivity, building, huge shareholder value is small injections of financing. I respect the worlds of the Amazons and the Ubers, that have these massive amount of funds raised and are really not profitable, but high growth and massive market footprint. I don’t know how to do that. I liked the old fashioned way of modest capital, hard work, great productivity, profitability, save, conserve and build cash after you have to burn it for a short period of time. And I’m reminded of World War One when the British were criticized for not having enough casualties in the Battle of some, which showed they weren’t trying hard enough. And that’s the wrong approach in the startup world be capital efficient?

Alan
See, great analogy. Yeah, not enough casualties, I guess, is one thing we want to avoid?

Monty
And yes, and you can run out of money way faster than you think.

Alan
So are we are we currently in a startup bubble right now.

Monty
Everybody has their own view, I strongly feel we are in a startup bubble. We’ve had a record again, a record amount of venture capital dumped into companies that aren’t profitable, that aren’t having exits, we have almost no IPOs we have many fewer acquisitions than is said. And a whole lot of unicorns with no way out for investors. I think there’s a big bubble gonna pop here. And I think Silicon Valley traffic patterns are gonna get easier for our commutes in the next year.

Alan
This is interesting as you as we’re looking into the industry, and we hear about in November, the revaluation for the unicorns coming out. And, you know, when we look at companies today, how does all this affect the fact that there are no exits?

Monty
It’s very, very serious problem. Because the venture capitalists promised their investors returns that are liquid cash they have to return cash or public stock to their limited partners as a wait pay them back and reward them with returns on their capital. And if they have no acquisitions of their own investments, and they have no IPOs, they don’t have any value yet beyond just the paper stock certificate that they can give back to their limited partners. So there is a imperative to break the logjam and IPOs. And to have acquisitions happen more frequently. And it’s a puzzle.

Alan
I’m visiting here today with Monty Kerston. He is an independent board member of several startups and also an angel investor. money I need to take a quick break, and we’ll be right back after these messages

Alan
Welcome back and visiting here today with Monty Kerston. He is an independent board member of several startups, as well as an angel investor Mati. In the first segment we’re talking about stated the industry today. The past few years, there’s been a flood of money coming out into the markets, new startups happening. And what do you think’s going to happen?

Monty
I think we’re going to see a revisiting of the.com Bust. Not so much in dot coms today. But in young startups that have raised too little and spent too quickly and have too thin a business model and didn’t have a plan to win customers and turn profitable in time, I think you’re going to see a lot of wash outs, intentionally let go by the venture capitalists so that they can concentrate on their stronger horses they have running in the race.

Alan
When these companies are starting the rollout and they get a flood of startups. The smart ventures will strive to get companies to break even as quick as possible in the most efficient manner, manner. And beyond that, but as a independent board member and looking at over governance, are there certain tools and trends that you try to to help companies navigate through?

Monty
Yes, of course, I always try and focus the founder and the management team on profitability as soon as it’s realistic to achieve and cash management in the meantime. So you want to always have enough money in the bank when you raise around for 18 months or 24 months of operations. And you must have the religion of a business plan that projects what products you’re going to offer in what timeframes. What the sale cycles with customers with those would be that is how long is the delay? Once you start with a customer to win an order? How many orders can you win over time realistically with the resources you’re devoting to penetrating the market and it’s a race against time where of course you are going to run at a loss in the early days. But you want to reach that breakeven point as easily and as early as you can in a way that is realistically possible in the competitive market they exist in today.

Alan
When you’re looking at new startups there’s all sorts of different types of ways startups me structure from LLC s. C corporations, S corporations and as a board member, are you concerned about tax efficiency as much as return on investment?

Monty
Great question I always strongly encourage C corpse Delaware C corpse forget about LLCs forget about s corpse. If you’re stuck with that as your heritage. I usually encourage the founder to reincorporate in Delaware as a classic C Corp. Because that is what all investors are most comfortable with. If they’re in an S corp investors are going to have all kinds of tax effects that they weren’t anticipating they just want to buy a C Corp stock have long term capital gains and great returns by Delaware. Delaware is the most friendly corporate jurisdiction to put a corporate company in as a startup you can do a California Corp. But if you want to look really long term class a high quality investment to investors, you want to be a Delaware C Corp, no question about it.

Alan
So if we go back to looking at the unicorns, we heard news in November last year about revaluations of unicorns and first of all, let’s start what is a unicorn?

Monty
A unicorn is just a slang term that the venture capitalists put on a company that had a theoretical last time around priced at around out the door market cap of a billion dollars based on how many shares are out Standing including stock options, it has nothing to do with the real value of that company, it’s a moment in time.

Alan
Do you feel that the time of the unicorns is over?

Monty
There will always be companies that are worth a billion dollars and are private. So I don’t think the time of unicorns is over. However, I think there’s a whole lot of froth in the unicorns today. And is what is not understood is when fidelity puts 400 million in to Uber on its last round and is valued at $62 billion. And those are not accurate numbers, but they’re good example. Fidelity is saying and I get all that money back before anybody gets any money. So what you’re seeing in some of these late stage financings that pushed the valuations up to a billion dollars are illusory, because if they pull that huge amount of money out and take it back, the company could lose all of its remaining capital and truly go bankrupt for all the other investors.

Alan
Monty I need to take a quick break visiting here today with Monty Kerston. He’s an independent board member of several startup companies, and an angel investor here in Silicon Valley we’ll be right back after these messages.

Alan
Welcome back and visiting here today with Monty Kerston, and he’s an independent board members, several startup companies here in Silicon Valley, as well as an angel investor and and we were talking about in in the prior segments about the state of the industry as a whole. When a company is receiving a finite amount of resources in cash, as a as a board member, how do you direct and steer them to put those resources to best use.

Monty
I always ask them to focus on building value, which means building products offerings or services offerings, getting to market in time winning referenceable customers, building customer delight, not just customer satisfaction, getting your core customer footprint established, and then extending from there. So that you can become a master of your own destiny rather than look about losing money for years and having to get round after round.

Alan
Sounds enterpreneurs are driven by their passion or their ideas. But as a as a seasoned investor, you take a totally different approach in terms of trying to get value into the investments, I want to spend a few minutes. So walking through the different stages of investing such as the angel this series a walk us through at what point of time should a company be looking for different series investment? And what are what is a Series A, B and C round.

Monty
These are often misunderstood. And I’m glad to go into it with a little bit of detail. I think the first thing to recognize is if you’re going to build a venture that is not going to be bootstrapped. But you’re going to need to go out and recruit investors for it. And then you need to think about how much capital over time you’re going to need. And you want to think about how big do you want to build the business? And how do you want to reward investors on the long stick long term stage, you want to start then with progressive funding, you don’t raise all the money the venture needs at the beginning, you raise about 18 months to 24 months worth of time in the camp in the sense of cash raise to be spent over the next time as you build a product, build the team when the customers and turn into having revenue be higher than burn and expense. So if you’re going to fund it progressively, the first round to consider is just going to individuals who are angels, who will are often insensitive to the very tough deals that VC drive at that early stage. And the angel might have a little more romance about the company and being involved with it. And a little bit less of a sharp pencil in pricing the round that allows also the founder and his team to have some supporters as initial stockholders who are individuals, angels who believe in the people. And then after that angel round of maybe a million dollars or so is raised and you build furiously the value with that million dollars. You go back out to the venture capital community or the institutional investor community for the classic series, a priced round of preferred stock issued for maybe two to $10 million, depending on what you might want to do with that. If you’re a software company, you can be very efficient with that capital. And then after you’ve spent a bulk of that you want to go back out after you build a whole lot more value and team customers product offerings, intellectual property, and consider a B round, which is supposed to be every time you go back out, you should try and have a 3x. Uplift. So if the angel value is at 5 million pre money, you’d like to have the preferred a be at $15 million pre money valuation.

Alan
When you’re looking at the value a company takes on, are they essentially committing their company have to get to a certain value and make the return for the investors?

Monty
Absolutely, you must whether it’s truthful or not, you must always have a model, where your company is going to return to investors, a minimum of 10 acts as a rule of thumb on the amount they put in, in order to justify the risk. And angels when I work on an angel deal, I am often looking at a 20x or 30x, or higher return on a 5 million pre money valuation, I want to see 20 times that on the back end. If it can’t grow big enough, then it’s really not something I want to risk my funds on. And I’ll let somebody else chase it as a mom and pap venture.

Alan
When you’re really looking at these deals, and I’m sure you get a lot of them that get presented before you. How do you decide which one you get involved with?

Monty
That’s a very good question. And I can tell you that those decisions are made very differently by angels. I’m 61. I’ve been doing this a long time. I’m intuitive. I’m not very good at analytics. Excel is not my great strength, I certainly do understand all those metrics. So first, I look at the market, you often hear people as what they invest in. First, there has to be an explosive market trend unstoppable, a massive wave you can get on and surf for years. Market kills a lot of deals that sound great otherwise, but there’s no market. So after you establish that, then you want to look at the team and the leader, the founder or the CEO. And you want to believe that they will do everything it takes and devote all of their energy wisely and listen to others. As they forge ahead. In an A, they just have to do a kind of a feeling, then you want to think about the idea. And the idea better have some breakthrough potential. And it has to be good enough to have be critical mass size, if it’s a baby little imitation of events for different kinds of invitations for nonprofits, for example, on the internet that gives money back to nonprofits. That’s just to baby and investment. There’s no critical mass just as an example. So those are the most important things, then, of course, they have to have a business plan that makes that capital efficiency I was talking about earlier, pay off what for what return on investment to shareholders building huge value for the shareholders willing to take the risk and the team members working so hard to achieve it.

Alan
You know, money you’re 61 years old, as stated earlier, and a lot of these new entrepreneurs, the millennials, they don’t think like the old guard. How do you work with the millennials today?

Monty
Well, sometimes you can’t work with them, resigned more than once from a board where I just didn’t feel I was being listened to. But the way I work with them is just get them to understand that what they read about on the internet is not always true. All the fairy stories they have about how ventures pop overnight, like Instagram existed a year 12 employees, Zuckerberg bought him for a billion dollars, it really did happen. And it was a brilliant move by Zuckerberg and Facebook, it’s proven already in their results. Don’t count on that. Instead, think about that old value of hard work, high productivity, capital efficiency, never say die. And make sure everybody works really hard. You cannot do a startup on a nine to five attitude with no weekends. I’ve never seen one succeed.

Alan
They have a viral video on the Instagram about how the owners were saying we were asking for 2 billion but we ended up settling for one.

Monty
Yes, please don’t regard those as normal concurrences for your results.

Alan
So what advice would you have for a startup?

Monty
Gather around you. People who have done it before. Put them on the advisory board that are full time employees listen to the experience and wisdom. Many times your early investors will be advisory board members or board members who can help you who will guide you and who will be supportive of you when things go wrong. So gather around you wise people who’ve done it before and do compensate them on the upside of the company and at the same time be the founder who drives the company He forward with a vision and a concrete achievable plan. Never let down the bar in hiring only hire world class people who are willing to work as hard as you. And don’t ever think you can do it without six days a week, five in the morning till seven o’clock at night, or however you want to swing that time zone.

Alan
There’s a few more areas that I wanted to delve into. Sure. Okay, the first theory is the essential aspect for investors to look for, let’s say a year down the road.

Monty
So a startup is a race against time. And after a round of investment comes in, those investors are expecting in one year, you two have created a great deal of value using their harnessing the resources they provided. And they don’t want you to spend them all they want you to be able to go back out and seek additional funding in the market after you’ve built that value. So usually, they will want to see the concrete and progress on the plan of the company, which includes hiring the killer killer team members that you need to execute, while hurrying to market with the right kind of product offering that’s going to appeal to the market, while winning customers, your initial handful of customers who will end up loving you and be able to say that as a reference to others.

Alan
What advice would you have for new entrepreneurs seeking investment capital?

Monty
New entrepreneurs seeking investment capital? Number one, don’t believe everything you read on the internet today, there are many illusions that you cannot afford to believe in wishful thinking is the most dangerous thing a startup can engage in. Instead, I would urge you to prepare, winning funding from investors is much harder than you think it is. You need to look professional, you need to be polished, you need to have carefully reviewed your pitch, you need to understand that you need about a one and a half page executive summary. You want to get introductions at the partnership level to investors, not associates if you can bypass that time wasting area. And then you want to have a crisp one hour pitch that is going to cover all the aspects that that investors care about. You only have a first impression time to get them to not reject you. Don’t forget venture capitalists often invest only six times a year, but they see three companies a day. And they never tell you about that math, or you wouldn’t even show up for the appointment. So don’t believe you can beat those odds without having a killer pitch, passion in the room, and as much critical match and value already established as possible.

Alan
When you’re at the initial stages of launching a company, how critical is your board at that point? And at what point? Do you begin to organize and build out your board?

Monty
That is also an excellent question. And you will find differing approaches there. The reason that I am often requested to become an independent board member because I was a successful CEO. And because I serve as an independent board member, not as a representative of a venture capital firm is because the founder wants that operations advice that comes independently for the good of the business and the good of the shareholders. The venture capital firms represent first and foremost their investment as board members. Of course, they want to build the value of the company. But they approach it fundamentally differently. Then, the CEO and founder and the independent board members do they share many common interests. So as you build your board, you will find that the dirty secret of Silicon Valley is two out of three founders are replaced by their board of directors over the lifecycle of the company. And this is happens very often when the founders are no longer able to scale the business in the mind of the venture capitalist. And yet the founder feels he’s capable of it. So a founder at the beginning is benefited by architecting a long term plan for the board membership, that is not just going to be one founder, maybe one CTO and three venture capitalists that will outnumber in the boardroom the vote every day. Rather, the founders should be thinking about how can you have a more harmonized and and an even handed board with some experts on it that don’t just represent the venture capital investors.

Alan
Monty if somebody wants to contact you to solicit your help to come in, introduce their company, how would they go about that?

Monty
I’m on LinkedIn or you can send me an email at montgomery.kersten@gmail.com

Alan
Monty has been a pleasure having you on today’s show.

 

 

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This transcript was generated by software and may not accurately reflect exactly what was said.

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