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Venture Capital vs. Bootstrapping: Brianna McDonald of Keiretsu Forum On How To Determine If Fundraising Or Bootstrapping Is The Right Choice For Your Startup

Understand your capital-raising plan long term. Most companies are not going to exit in three to five years. The fundamental question to ask is, ‘how much will I need to get me through exit’ while understanding this number is going to change. You must work backwards from the exit-strategy, to work forward properly: if bringing in outside capital from investors you must understand how you will return that capital before you even start your fundraising processOnce you put the time and energy into this exercise you will have a proper framework to execute on.

Founders are often faced with the nagging question of whether Fundraising or Bootstrapping is the best choice for them. What is better, having access to capital or maintaining full control over your vision and profits? What is preferred, to have the seasoned oversight of an experienced investor, or to plow forward with a disruptive and pioneering ‘can do’ attitude? Of course, every situation is different, but what standards can be used to help a founder decide? As a part of this series called “Venture Capital vs. Bootstrapping: How to Determine If Fundraising or Bootstrapping Is the Right Choice for Your Startup,” I had the pleasure of interviewing Brianna McDonald, president of Keiretsu Forum Northwest. Keiretsu Forum Northwest is a part of Keiretsu Forum, a global investment community of accredited private equity angel investors, venture capitalists and corporate/institutional investors. Keiretsu Forum members invest in high-quality, diverse investment opportunities. To date it has invested over $900 million in 2000+ companies. The community strengthens through its involvement in social and charitable activities.

Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?

In2000 I was selling real estate for executive relocation for Microsoft, working specifically with its acquisition hires. In 2005, my fiancé Nathan McDonald had the opportunity to start up the Pacific Northwest chapter of Keiretsu Forum, part of what is now the world’s largest Angel investing group. Nathan invited me to see what went on in the investor meetings but at first, I balked. I wasn’t an investor. I was 26 at the time and intimidated. At the same time, I found it fascinating. It was exciting hearing about innovative companies, the entrepreneurs behind them, the pitch, and the potential market impact. I immediately caught the bug, but still had feelings of imposter syndrome. This went on for about a year before I finally raised my hand at a meeting and asked my first investor question. In 2018 I became president of the Keiretsu Forum Northwest Chapter. What a fascinating journey it has been.

Can you share a story with us about the most humorous mistake you made when you were first starting? What lesson or takeaway did you learn from that?

Like many beginners, I was so excited about my first angel investment of $25,000. I thought then that it would end up as my retirement plan! But the novice I was, I was passive and didn’t engage with the company or ask questions. In fact, I didn’t even read the quarterly reports. Luckily the company is still operating and going strong, and yes, I got my money out about three years ago. It took 12 years, but I made a 2X return. My retirement plan is still a work in progress.

The major takeaway from that endeavor is, in investing, communication is everything. You need to ask questions. You need to have a clear line to the CEO. Back then I made the mistake of trusting the CEO 100%, I never challenged anything I was hearing. As it was, we missed the exit window.

Early-stage investing is not something you do passively unless you’re putting money into a fund. As a private investor, you need to be active and engaged with your investments. Communicating early and often is paramount to understand not just the growth metrics, but also the macro and micro challenges facing the company. This is my #1 advice for how you drive ROI on your investments.

You are a successful business leader. Which three character traits do you think were most instrumental to your success? Can you please share a story or example for each?

  1. Speak the truth. I don’t tell people what they want to hear, and I try to be 100% authentic in everything I show up to do. I think that my authenticity and my ability to be open and honest and show vulnerability are critical. That also means ask for help when you need it.
  2. Compassion. I am a servant leader who endeavors to treat everybody on my team as an equal; and empower them to execute and get done what they need to get done. People appreciate knowing where they stand. As a manager the greatest gift you can give is when people feel that you value their contributions, and you respect the time and energy they put into their work.
  3. Commitment. Commitment is a powerful word, if I make a commitment, there is nothing else that is more important than honoring that. We make a commitment to our members and to our portfolio companies to support them in the best way possible. That attitude drives and permeates everything we do within Keiretsu Forum. I think that “commitment to commitment” should be a hallmark of every organization.

Are you able to identify a “tipping point” in your career when you started to see success? Did you start doing anything different? Are there takeaways or lessons that others can learn from that?

Being named president of Keiretsu Northwest and transitioning from “member” and “wife of the Chairman’’ was a huge tipping point. There are so many lessons and takeaways that I’ve gained from the experience. Out of the gate I looked to improve processes that could make the organization more efficient. Getting full support from the member community was a huge confidence-builder.

As I also found out, if you’re not doing the job, it’s hard to know what goes into the job. There were assumptions I made, where I thought it would be easy to iterate, fix, and do things differently. This was not necessarily the case once I got behind the scenes and started working on improving systems. Just because you have the title, don’t assume you have all the answers. Often you don’t realize how complicated it is to execute, and what the commitment will be. Understanding that gap has been transformative. I listen much more now and ask more questions. For me, curiosity and kindness are the best pathway to getting a broader depth of understanding.

None of us are able to achieve success without some help along the way. Is there a particular person or mentor to whom you are grateful who helped get you to where you are? Can you share a story about that?

Joe O’Neill, managing director, Sikich investment banking, has mentored me over the past 15 years. He is an original Keiretsu Forum charter member who I sat next to quite often during meetings and who was exceedingly kind to me. When I finally got up the courage to ask that first question, I was so nervous, my palms were sweating, and I was shaky. When I finally asked it, Joe leaned over sitting next to me and told me it was a good question. The validation in that moment is hard to put into words. I feel incredibly lucky to know him and his wife and family.

You have been blessed with great success in a career path that many have attempted, but eventually gave up on. Do you have any words of advice for others who may want to embark on this career path but are afraid of the prospect of failure?

My outlook is there is no such thing as failure, only opportunities to gain experience and grow. The greatest lessons are when you fall flat on your face and pick yourself up again. If life were good all the time, and we never had anything bad happen to us, would we learn anything? This really holds true for investing; in this profession you need tough skin, and you need to be risk averse.

Ok, thank you for that. Let’s now jump to the main part of our discussion. Can you share a story with us about your most successful Angel or VC investment? Or an investment that you are most proud of? What was its lesson?

My first investment that I outlined above is still my most proud investment. This is the point where I broke my self-imposed glass ceiling. That was the catalyst. From there, the biggest lesson I learned is that I had a rightful seat at the table; and that my investing intuition, and knowledge about how and what to invest in, was just as viable as anybody else in the Keiretsu Forum group. I’ve never looked back.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

Again, the lesson is things are harder than what they seem from the outside. I found that out the hard way with my attempt to start a consumer-focused business. We were going to design an online, direct-to-consumer yoga clothing line that yoga instructors would wear and endorse. Instructors and the studios would share in the profits, which we thought altruistic. There were no barriers to entry. But it was a highly competitive marketplace and the businesses ended up failing and I lost about $50,000. It wasn’t a bad business idea, but I underestimated the commitment, and having gotten pregnant with my third child, bad timing also was a downfall.

Yoga is more of a lifestyle than it is about making money, so the aim was not to build a billion-dollar company on the backs of yoga instructors. Instead, it was to partner with them in the sales and profits. We got the clothing designed, imported fabric, had manufacturing in place, built out the financial projections, and initiated fundraising.

But what about the $2 million valuation we gave ourselves, and how we thought it was so amazing to have this idea and think it was worth $2 million? Unfortunately, the valuation was just too high, for what we had it was stupid. In the end, any of the big retail brands could have switched to a direct-to-consumer model at the drop of a dime. The amount of capital required to build a brand was greater than I thought. The “channel conflict” between the yoga instructors and studio owners was another valuable lesson learned.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

There are bad deals out there; and so many people who raise money, who shouldn’t raise money. The biggest lesson is that Investing is not emotional. They call it angel investing for a reason. Early-stage companies fail. When you fold a hand at poker you learn to just move on. In angel investing you will need to fold 80–90% of your hands. It’s a business transaction. So, I don’t have any regrets. Besides, it would be impossible for me to invest in every one of the 80–90 deals that come my way.

Super. Here is the main question of this interview. Let’s imagine that a young founder comes to you and asks your advice about whether Venture Capital or Bootstrapping is best for them? What would you advise them? Can you kindly share “5 things a founder should look at to determine if fundraising or bootstrapping is the right choice”? If you can, please share a story or example for each.

  1. I love a good, bootstrapped company, and hate the new Shark Tank mentality of ‘I’m going to build this business, so I need to raise this much money.” This question should be, ‘what is better, raising capital, fundraising, or bootstrapping the company?’ There are myriad ways to sell off your company and get capital. One hundred percent of the time I will encourage the entrepreneur to bootstrap the company for as long as possible. It is up to that entrepreneur to hold onto the business, simply because they built it.
    Vita Inclinata, which develops and produces helicopter and crane load stabilization and precision hardware, is a great example. The founders bootstrapped for eight years until they got to working prototype, and from that point, cultivated the business plan and went out and did a raise. This approach shows me, when the time comes to finally fundraise, you know the value of a dollar, you know how to stretch it, and you’re completely bought into this business based on the time and capital you’ve personally invested. Even better, that gives me the confidence you can execute and maximize the money I invest into your company.
  2. Number two, bring on advisors to support growth. Business advisors are there to support the CEO and the founders of the company. These are not “attorneys” or “CPAs” specifically, but individuals you can tap for knowledge and advice who have been there, done that. These are people who can function as a point of reference and bounce ideas off as you work through the most difficult challenges. Most people don’t understand what it’s like to be an entrepreneur, having those people that you can trust and talk to and pick their brain, who are outside the company, is critical.
  3. Understand your capital-raising plan long term. Most companies are not going to exit in three to five years. The fundamental question to ask is, ‘how much will I need to get me through exit’ while understanding this number is going to change. You must work backwards from the exit-strategy, to work forward properly: if bringing in outside capital from investors you must understand how you will return that capital before you even start your fundraising processOnce you put the time and energy into this exercise you will have a proper framework to execute on.
  4. This is going to be a long-term relationship, do the proper research ahead of time so you can bring in the smart money. The ‘spray and pray’ approach to fundraising you see right now on LinkedIn is just not working for me. Take the time to understand your local investors and angels so you can determine who you really want on your cap table. Don’t just boldly reach out to a bunch of investors because you desperately need money. Instead, be strategic about the investors you bring in: can you leverage their network, will they provide access to private resources and support you, right alongside you? Oftentimes on LinkedIn I respond to people who are actively seeking funding but have no idea who or what I represent. If you are looking for dollars, please visit my website and look at my process.
  5. Read your term sheets and understand how they affect building out your capitalization table long term. A broken cap table with too many safes and convertible notes will hurt your opportunity to exit the company. Just because a safe note or a convertible note is a cost-effective way to raise money doesn’t mean it’s the best way to raise money. Leverage your general counsel and have good general counsel to ensure your deals are fair and balanced, and investors aren’t negatively implicated. These are long term relationships; most investors prefer equity which gives them greater stake in the deal. There are exceptions, but outside of Silicon Valley, most private investors don’t like safe notes.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

Empowering more than three percent of the U.S. population to fund innovation. Sadly, of that three percent, only one percent writes checks greater than $10,000. So, part of this movement would be encouraging more people who have built businesses, who are entrepreneurial, to give back and support innovation. Innovation helps make the world a better place, an endeavor that is a grander ideal, compared to a Paul Allen, Bill Gates, or even a Warren Buffett, where the model is to start charitable foundations and the like.

We are very blessed that a lot of amazing founders and social impact organizations read this column. Is there a person in the world with whom you’d like to have a private breakfast or lunch, and why? He or she might just see this. :-)

Dave Matthews from the Dave Matthews Band has built an amazing business and organization from top to bottom. Even though he’s not a businessperson or one who “likes to do business.” He is the perfect example of a servant leader; you will find that the people who are with him have stayed with him since the beginning. He has seamlessly merged venues, merchandising, et al into one brand with appealing core values. I find him truly inspiring, and what he’s done makes me think how a similar, down-to-earth approach may be applicable to different businesses.

 

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