Episode 137 - Redeeming the Entrepreneur-Investor Relationship with Jessica Kim
No one likes to be a part of a dysfunctional relationship. Yet, entrepreneurs and investors can often be on completely different pages with completely different goals and expectations.
Today’s conversation between Henry Kaestner and Jessica Kim gives both sides of the story. Jessica shares how setting unrealistic expectations hurts the entrepreneur’s ability to follow through and the investor’s ability to determine success. And Henry talks about the fundraising side of his entrepreneurial journey and what he now sees from an investor perspective.
Both sides are worth listening. Both sides have a lot to learn. Both sides can do a lot better. So, regardless of whether you’re an entrepreneur or an investor, today’s episode is for you.
Episode Transcript
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Jessica Kim: How do we not fall into these trends are dynamics that are real, but how do we fight against that and say, OK, let's treat this as we're building something together?
I'm looking for a partner when you're looking for a spouse, right. You don't posture. And then all eyes on eyes like you're looking like, what are we going to build together?
Are we aligned on these things? And to get rid of the posturing, because if there is a match there, then that is actually what it's going to look like. And that's your greatest chance of actually making it succeed.
Henry Kaestner: Jessica was awesome having you on the podcast a couple of weeks ago, and one of the things that's really special about you and your story is that you have these unique perspectives of having been an entrepreneur, having advised entrepreneurs, being on the receiving end of fundraising, being able to help entrepreneurs get funding. And one of the topics that we kind of explored a little bit together on the podcast was just this sense of the status of fundraising, the good and the bad and the challenges. And, you know, we talk a lot about different industries and products that need to be redeemed, but we haven't really talked a lot about what we might do to redeem the fundraising process. You've got some really unique experiences and some perspectives, and let's refine it a little bit together. Let's start off just with this. Is fundraising broken? Is there things that are challenging about it? Does it need to be redeemed?
Jessica Kim: Yeah, I mean, I don't think fundraising is broken, but I think the way we approach it, we're not being very transparent and real about how some of the tensions that exist and rightly so, can make that relationship something based off of distrust or playing games versus transparency and finding a true partner in this venture that you're trying to create to impact a world. You know, I think it should be aligned right, because entrepreneurs root themselves in especially Christian entrepreneurs. We're rooting ourselves in love and purpose. And how do we build a sustainable venture to enable people to flourish? And then investors are there seeking for those opportunities and partnering with entrepreneurs, you know, to do this good work while getting a good return. Right. So it seems like that's great. But then the reality is some of these past can cause tension. And, you know, for example, if we really dig into fundraising process, a big part of it is specifically figuring out the projections. Are we aligned on projections of big opportunity? How are you going to do it? And entrepreneurs want to be realistic in the goals and projections and operational path, because from the entrepreneur perspective, this is the one venture that is going to impact our personal lives. We don't have a portfolio of many options. This is the one thing that we're going all in on. But I remember presenting projections in one of these pitches for this, my latest venture, I Unicare, and the feedback was, that's just not big enough.
That's not aggressive enough. And I was talking like 30 million, 40 million in four years and it still wasn't big enough. OK, first four years of being existant, like it wasn't big enough. And so, you know, there's this tension that if you don't present a big enough opportunity, that is that up into the right, you might not even get that meeting because they want from the investor perspective. The reality is, especially for the v.C model, it tends to be I need one or two out of these 10 to really hit it big. So I'm driven to see let's get them all to try to be that home run because I just need one or two of them, you know, to work at the risk of eight of them failing. And that for me is OK for my model. But there's a conflict, though, right? And so I think that's like a tension that I just feel is not something to get upset about because it's the way those models work. But I think as Christ centered investors and entrepreneurs, how do we reconcile that where we can look at the bigger impact of what we're creating and also the relationship and see the other person as a human versus my one chance to get a home run or you're just my vehicle for money. Right. And I think that's the conversation we should have that we often don't even talk about those tensions.
Henry Kaestner: That was very, very good. Said it also up and state maybe on the investor side. And then also the entrepreneur said, what are some different practices in different postures that may be unhealthy and kind of give us an overview of that. So on the investor side is a pressure to the entrepreneur and saying you're not thinking big enough. And so it's just kind of coming into like why you're doing what you're doing. And if you're not big, then you just you don't matter it. Or that there is this kind of pressure of, OK, now I've given you the money, now you've got to grow so I can get one hundred percent markup on my investment. Mark-To-Market in one year and then you need to show me where you going to be able to raise twice the valuation twelve months from now so I can get that show. That's my partner. So we can raise next one. Or the most important thing is just to expand. It's just unhealthy things you see from that side. Because what we're doing, this is a construct and say here's the reality, these are messed up. Investors have a wrong mindset, but so do entrepreneurs on the other side. They're trying to create this kind of false thing of scarcity and their fear of missing out. And I want to give you this first look. And then once the investment happens, then maybe there's not as much transparency because the entrepreneur continues to try to sell the investor on the things are going well because they want to have an insider led round because the optics of how that works. So why don't you talk from your perspective about things that are messed up from both sides of the equation, then that allows us to go ahead and. Talk about let's have an alternate vision for the way this works. Yes, entrepreneurs, investors having these open and transparent conversations where the entrepreneur can be vulnerable with the investor because, you know, there can be times that are really, really hard. If you set this whole relationship up at the beginning with his unhealthiness, where you have this dysfunction dysfunctional in the entrepreneur and the investor, and you're able to find the one place where the dysfunctions can align. So you can transact. Yeah, you still have a relationship based on dysfunction. So three months into it sums going wrong in the entrepreneurs. I can be honest with the investor and the investor is not going to be honest with the entrepreneur. And meanwhile, the investor has already discounted back the growth rate 50 percent. Right. But he doesn't share that with you. They want to keep the fire like you showed me something they know full well they can hit that. And this unhealthiness, there's no partnership, is it only to be redeemed? So to riff on that, yeah.
Jessica Kim: I mean, that's exactly I think ultimately we have to strip everything away from what the world has created in each of those industries. Right. That it's so natural for us to fall into. And I'll talk about those. But to then see it as a true partnership, because after the fundraising process is over, you are partners in it. We have different roles and different perspectives, but you are now on the same team. So like, can we let go of all this posturing and these dynamics?
So on the investor side, I mean and I've had so many conversations with investors where the fear of missing out the FAMO is actually a real dynamic. Right? Everyone talks to each other and they want to get in on that, whatever however they define as the hot deal. Right. And then if you're not in that, you're not even worth my time to meet, even if I do think what you're creating is a good thing. Right. It's like I'm just driven because there's this pressure. I've got to go. I'll get into Haiti. I don't want to miss out. And that gives me a checkmark of my credibility as a firm or an investor to find the hot deals. And can we just let go of that? But I know it's a real dynamic. Right. And on the entrepreneur side, it's like we just want to get a chance to get funded and we want to show, wow, we do think big. I am going to be that unicorn. I'm going to crush Red Bulls over my head and say, yes, I'm the one to do it. And so we present ourselves that way. But in reality, especially people who have done this before, like you just said, Henry, like investors are discounting what they see and entrepreneurs are also discounting like what is realistic for me to achieve because I have to align all the operations to achieve that. And you've been our turn out to see of that unique perspective on both sides. Like, we need to actually follow through on that. And the problem with these up to the right, just to get to the meeting and just posture just to get the funding is when that's all over. I think there's another tension of, OK, I funded you for that. You've missed your numbers, you missed your numbers. And then the next round of funding is at risk. But you're spending, you know, and running your operations to hit those numbers. And then that's where I think actually a lot of the statistics of nine out of ten fail. A lot of them is because they can't get the next round of funding. So that is broken. I think the fundraising process aligned with actually how we operate is broken. And I think we're missing out on a lot of amazing opportunities to build incredible redemptive ventures because of this posturing in the beginning that we should just all let go of. And so I think that's our call. That's our call is how do we not fall into these trends are dynamics that are real, but how do we fight against that and say, OK, let's treat this as we're building something together?
I'm looking for a partner. When you're looking for a spouse, right. You don't posture and then eyes on your like you're looking like, what are we going to build together?
Are we aligned on these things? And to get rid of the posturing because if there is a match there, then that is actually what it's going to look like. And that's your greatest chance of actually making it succeed.
Henry Kaestner: OK, so you're an entrepreneur and you understand that there's something inherently flawed in many interactions that entrepreneurs have with venture capitalists, and it feels to you almost like a necessary evil. I need the capital. I know this is going crazy, but I want to be able to achieve my dreams. And so I want to make some concessions. I'm going to grow a little bit faster than I otherwise would have thought. I'm going to get out there and do more fundraising because I understand that they need this internal markup. And just you end up making these concessions and you end up losing in the process, adding more and more pressure on yourself and your team. And then you end up finding yourself in the system that's kind of designed to fail because it's designed to make you want to raise more money so you can go even faster. And it just that's why the wheels are falling off. So talk a little bit about then what the solution for all this is. So as you're an entrepreneur and just like, oh, my goodness, I don't want that to happen to me.
Yeah, I can't have that. But does that mean now that I'm not going to play the game and so or can I play the game the right way? How do I find somebody who wants to play the game the right way with me.
Jessica Kim: So that's exactly it. I think it's finding that match. It's finding that partner. And when you approach it that way, as opposed to looking at it as just I want that money right. And I'll do anything just to get that. Yes. To get that money. It's about one first being very true to yourself as an entrepreneur of saying, like what? What do I see this path as? And what for me personally, for my team, for the venture. And then there are a lot of different funding sources, as we know. Right. We often talk about these, but there's a lot of different other funding sources and we're just accelerating prioritizing revenue. But I think it's also being honest with, OK, if I take money from this source, then I also have to respect their model and what they are investing me in. So if I take this money, which I have very I know what I'm signing up for in terms of I cannot run a lifestyle business for 30, 40 years and expect that to be a good relationship because that doesn't meet that structure of that investment fund. Right. You know, so you have to align kind of how funding is so strategic and operational. And we often slap it on later after we've looked at our sales strategy, our marketing strategy, our hiring strategy. But it's just as built into the fabric of how you're going to operate and what your goals are. And so I think it's like one really understanding what you're looking for by being honest how you're going to run and operate. And then it's, you know, for me, as I pitch, I'm not looking just for the yes, I'm looking for my partner.
So I'm with my strong conviction, sharing how I see this operating, what we are going to be like in thirty five years and where, you know, what does that look like. Right. And then if they push back, that that's not big enough. And so the way I honestly have done it, it's like here's the upside. I mean if nothing goes wrong and this totally takes off, that's all of our hope because for us then we impact more lives. Right. So it's rooted in our mission. If it goes up into the right, this is the potential. And that would be incredible. But let me tell you what the realistic thing is, because one telehealth is in flux right now, too. You know, you talk about these trends are the realities of these challenges that we're going to face and say, so we're going to knock it down to do this. And then worst case scenario is kind of, you know, if we do these things right. But, you know, the policy changes in this way or someone so get elected in this change then will look like that. So I think that's a very realistic and transparent way to say, like, OK, here you go with the big vision. This is realistic, but let's talk about this scenario. And then a lot of times people will say, you know, I don't think this opportunities for me and now I'm not afraid to say thank you so much. Like, let's keep in touch, you know, obviously connected for a reason. But if this is your opportunity, then this is not going to be a good relationship to operate together if we're not sharing our vision and how this is going to look like in three to five years.
Henry Kaestner: OK, so this has been very good for the secular, pragmatic approach, for just thinking about choosing the right partner. Also a good conversation to be able to introduce the concept of how do you think about whether I should be raising money to begin with? And what I'm getting out here is praying and fasting the spiritual discernment process that actually happens before you decide to go down the right route. Too many entrepreneurs just assume I've got a company I want to grow it. So I guess I get to raise capital. And I think that Jessica is appropriately talk to us about what happens when you decide. But I think that we need to talk about that ahead of time.
How do we know, of course, that's wrapped up in a balanced story, balanced story that we went for 40 venturers. Is the problem there was that we didn't have the right type of spiritual discernment process. We thought we needed to raise money and we would pray before we go to Redpoint or Sequoia or Battery and ask for a twenty million dollar term sheet. But we never really fast and prayed about the process. Should we be raising money? We just assumed we needed to reality. We didn't need to we never raise venture capital. Yes, we grew we grew the company a little bit slower, but it ended up being the greatest thing ever. And we miss a very important step. So maybe we talk about that in here about how you go through that discernment process to even get to this point that we're talking about.
Jessica Kim: I mean, I think that's actually quite fascinating that that was your journey as an entrepreneur and now you're on the investor side. And so I'm curious to hear also I mean, you've been on both sides.
I haven't been on the investor side. Right.
And so how do you now, knowing what that entrepreneur journey looks like, how do you assess kind of what you see? And like how do you deal with the dynamics that are real dynamics of an investor? Right. Because you need to see a return like that is a huge part of your job. Right. Is to kind of invest some money and get that back, plus some. And so how do you assess kind of how an entrepreneur pitches or what's big enough or just anything? It's like I'm curious to see if I were ever on the other side, how I would either be too critical because I kind of know reality of things or I also see vision. I can believe in it, but I don't how you reconcile that.
Henry Kaestner: So that's a that's a great question. Well, as an entrepreneur, you should never raise money from venture capital. If you're a venture capitalist, everybody should raise money. Now, I'm just kidding. Of course, you know, from my perspective, what I try to do is I try to share my story. You're here. You're looking to raise money. I want you to know my story. My story is that I was also in your spot 20 years ago and I was convinced I needed to raise money. As it turns out, I didn't need to. And so to be clear, we get really excited about coming alongside entrepreneurs and helping them to achieve all that God has laid out in advance for them to do. It's what we do. It's our mission. And we think that there's a very, very valuable role that capital can play. We also think there's a very valuable role in having people on board with you to get what makes you tick and can help you with things like distribution channels and intellectual property and supply chain management and all those different things that we do. And we get excited about that. And to be clear, that's important. But what I want to be able to do with you is to be able to help you to understand whether you do need to raise money. And then also this concept of optimal growth rate. Right.
There is a place where there's the right type of customer acquisition costs, where you come up with a product and people are starting to like it. And that initial wave of early adopters is giving you validation. And so your customer acquisition cost is very low. Those tend to be your most passionate customers. And then your customer acquisition costs remains low because those early adopters become your advocates and they refer more people in. OK, now here's the challenge. With more capital, you could grow faster, but you can't outgrow this pace of natural customer acquisition or the customer acquisition cost is lower. At some point in time, you start to force growth. You can buy customers. Those customers, though, those incremental customers are more and more expensive.
And so the question is, is the capital of that I'm going to bring in going to help you along that optimal growth rate. We're able to go ahead and bring on board all the customers that are able to really value what we're doing and then to serve them well, or are we going to artificially accelerate our growth, bringing on board customers? We have to buy their costs more money to bring in. And then they're also more likely to leave us because we had to buy them. They don't have the same loyalty. They didn't seek us out. They don't value the product as much. And then they end up leaving. And that's where the wheels start to fall off. Because we have left that concept of optimal growth rate. We're no longer using venture capital to serve the customers who really see our need. We really are solving a problem with them and to serve them well. We should have been here. And Capital can help you to do that very, very well. But if instead we use capital and we just just start to crank up the growth rate a little bit more, because if we can just get another 20 points of growth, then we're going to be able to go back to the market in 12 months or 18 months. The venture capital is going to be able to get their mark up. And now now we're cheating the system a little bit. And that's what we have to watch for. So I as a partner, need to be able to work with the entrepreneur and help them to endeavor to understand, are we raising money for this? This is our natural growth rate or are we artificially contriving something hundred percent?
Jessica Kim: I mean, that what you just shared is exactly what often does not happen in these meetings. And that starts the partnership, even in the conversation of should I raise money? Do you see funding? You know, you're partnering with them and even thinking through that. But what typically happens in these meetings is like, pitch to me, let me see. And I'm assessing you and judging you and seeing if you're going to be one of my chances for a homerun. I'm obviously simplifying it in a more of a crass way, but I'm just saying, like, that's. Basically kind of the dynamic and breaking down kind of you mean just like easing even that first tension and saying, why do you want to raise money? Do you want to. Is it a good thing for your business? Let's dig in. And through that, you ask about the dynamics and LTV in the cash and all that stuff. And like you work together to even see should we even try to work together? Do you need this? Do we need this kind of partnership that would change? That is a solution like how you answer. I don't even know if you realized because that's probably how you operate, but it's like that doesn't often happen. So for like, you know, either an entrepreneur or an investor, like, I think it takes both. Right. And I think that's the conversation. It's not about saying, oh, entrepreneurs, you should do this. And so often you're right. I read these articles. I like top five things. Entrepreneurs should do better for investors. And I'm like, my goodness, it is a two way street because that tension and dynamic, if only one person enters it that way, it doesn't mean the other point is going to receive it that way. And so if we can enter with that posture together, that is what's going to make it redemptive. I think that's beautiful and that's where we need to do the work.
Henry Kaestner: Yes, yes. And then hopefully that type of dialog at the outset of a relationship allows for post relationship, that type of open communication, because that's a real challenge. The challenge is, from an investor perspective, is that an entrepreneur and it's not really being honest with me, they're always continuing to sell me. The things are going well so that I'll continue to fund them. And if you can start off with that type of honesty and transparency and vulnerability, even if we are praying before our fundraising meetings and praying again about whether we should be fundraising at all and ask God, God help me to find a funding partner that will understand and validate the different challenges I have. Give me the confidence about what you've laid out in advance for me to do and help me to be able to share what we're doing with confidence, to be clear, but also help me to be able to share honestly with the investor what I don't yet know. Yeah, because you pointed it out and then with that type of match made, then that's going to be a sign that you've got the right type of partnership going forward. So the three months after the investment, when things go wrong and things always do, yes, we already have that type of repartee.
Jessica Kim: Yes. And that becomes a functional partnership. And that's when you can build something redemptive.