Growth Equity Explained: When to Raise Money for Your Business

**[00:00:00]** Hello everyone, my name is Armando Perez-Carreno and welcome to the Web Talk Show. Today with us is Melanie Nabar, she's principal at Volition Capital. Welcome Melanie. Thank you, glad to be on. Oh, I'm glad you you were able to join us. It's a very exciting conversation when we get into growth equity and investments and I know a lot of our listeners might be interested in this and not have any background about it and how it all works behind the scenes. So, I'd like you to give us a deep dive into how all this exciting world works. But before we do, could you give us a brief intro into how you got into growth equity and and this particular Yeah, absolutely. Um, I definitely didn't wake up when I was, you know, 10 years old and say, "Oh, I'm going to be a growth equity investor." Um, but I I went to college at a school called Babson College that was very entrepreneurial and because of that I ended up working at a few different software startups in the Boston area and kind of fell in love with the world of technology through that. I studied finance in college and so as I was thinking about, you know, my first gig, I wanted to do something hard and hardest thing I could think of uh that I had the qualifications for at least was investment banking and so I did a three years in investment banking focused on technology still. I wanted to keep that that passion um and ended up working actually on the other side of a transaction with a growth equity firm where instead of selling the whole company, we were helping uh company to raise a series B, a minority raise and uh that was my first exposure to growth equity and I "You know, wow, how cool it is to be along with the full journey and be along for the ride with multiple companies instead of just one startup." Uh, but also not just at the end. You get to be really a part of that journey. And so, I moved **[00:02:00]** over and I've been now in the growth equity world for about 7 years. And how did you get into Volition Capital specifically? Yeah, it's a great question. So, I was at a firm initially called Summit Partners. Summit and TA were two of the first growth equity firms, the first firms out there to say, "Hey, we should we should do minority investing instead of buying the whole company." And back the founders and management teams in place. Um, now those firms, like many, have grown larger and larger and larger. And so, they write very large checks, uh, like $500 million checks into a business. Uh, and at Summit, they had a small fund. They had a billion-dollar fund that was focused on earlier-stage businesses, typically Series B. That's where I sat. I love that stage because you have product-market fit. And I think an investor can finally be not just helpful with a few introductions, but helpful in helping you avoid some patterns of mistakes that people make all the time the first time they're running a business, because you're in that scaling phase. And so, I really like that segment. We were writing, you know, 25 to $100 million checks. And, uh, they ended up deciding to to stop with that fund because, uh, there was a period of time where it became very hard to fundraise. And so, you wanted to just focus on your flagship funds. Very logical decision. Um, and you know, with that, I wanted to stay where I was. I wanted to stay focused on this sector. And I think the writing was starting to be on the wall. Uh, haven't hadn't happened yet, but I started to poke around at firms in Boston. Volition's a top 25 growth equity firm, top decile returns. It's always fun to be somewhere that's winning, right? Uh, and I think, um, it's a growing firm where the funds that they're raising are getting larger and it creates a lot of opportunity. They've also been around now for **[00:04:00]** 15 years, so we've built out some great support internally operationally for companies and I think you want to be somewhere that's winning and also somewhere that has a great product. Like at the end of the day, we are a product that you can bring to investors as investors and ultimately feel good that you're at a good place to to win great relationships with great I like that. I've had a few conversations and a few of them on the show even about capital races and VC and investments and there's been this thread that we've discussed about when some companies get acquired, everything changes. I was just having this conversation yesterday with The the company just drastically changes. The support style changes, the environment, the culture, right? In many cases, not all of them, of course. And so when you mentioned earlier about these minority minority races where the people stay in place, that that jumped out to me. I I want to learn a little bit more about that and and help our listeners learn about these different variations of a capital raise, right? It's not necessarily go directly to a VC. There are options and and and this one sounds very interesting. Yeah, absolutely. So there's a few like core stages of capital and when or why you might take them varies, but you know, there's there's seed capital where you're investing in an idea, you're kind of investing in the founder themselves and the market opportunity they're going after, but they may not have a product built, or they may only have one or two customers, and that style of of venture capital is very high risk, high reward, because you're getting in early, but most of your companies are going to **[00:06:00]** And you're playing the power law game, where you're betting that one or two of them is going to make up for all the losses, cuz, you know, you're going to get in early and they're going to be a billion-dollar company. then uh there is growth equity, which kind of sits in between that venture seed and a buyout opportunity. uh you're not selling the whole company, you're still going after your vision, but you're taking some capital and putting it on the balance sheet to go after could be go-to-market hiring, it could be a new product you want to build, it could be an acquisition. You just want a little bit more in your arsenal, because you're saying, "Hey, man, we've done a lot with a little. What could we do if we actually had some Um and then the other side is kind of that private equity, where people are typically thinking about, you know, buyout, selling the whole company. And in those cases, you're usually buying, using some debt to fund the acquisition, and so that helps you create leverage. And with that, you're also usually providing quite a bit of secondary capital for existing investors and founders. And so, with that, folks are like cashing out. And that's why you see so much change, because one a an owner of a business is going to have a say, so that private equity firm has a say. They may bring some of their own folks in. They may have a playbook that they run. Um and then the existing founders, they may have an agreement where they're going to stay on for a year or two, and then and then they're kind of free to because they've sold most of their equity, and so, you know, where there's no incentives beyond that to really stick around. And so, that's why you see so much change in the culture when when you're acquired. Um our theory is let's find companies where it's working really well and and add some fuel to the fire. Um and sometimes we'll do some secondary where it just makes sense to de-risk your own personal balance sheet as a **[00:08:00]** A lot of our founders are first-time founders. Uh sometimes they've had exits and they don't need secondary, but sometimes they're trying to send their kids to school and they're stressing over their mortgage and meanwhile they have this asset that's worth maybe a hundred million dollars if they sold it They don't want to sell sell it today. They think there's this could be a billion-dollar company. And so we'll provide sometimes some we call chips off the table essentially where you you sell off some shares and you still maintain control of the business, but you could just make your life a little bit easier in the That's super interesting because in many people, especially if you're not in the entrepreneurial space or you're not a founder, you've you've never been in that space. You can't fathom that somebody owns a hundred million-dollar company and they're stressing with the mortgage. They don't they don't understand that, right? But it's very common because you might not be just taking the money out of it. There's there's people you're paying, there's there's infrastructure, there's a lot of different costs. why does this still happen? Uh I think it's a it's a good question to ask so that people get some clarity into what happens behind the scenes in that might lead someone to be in that position and even sometimes be at risk. A company could be doing very well and if it just jumps that little hump, it'll explode or it might die, right? So, why why do you think these scenarios occur? Give you give give a little clarity on that for Yeah, it's a good question and I think if you're an entrepreneur building a business, um of course part of your motivation is that clearly you see a problem and you just are itching to solve it. Like you're like, I just need to fix this, whatever's going on in the world. Um, but the other piece is it's a probably one of the only ways that you can build like tremendous generational wealth, candidly, without starting from it, right? **[00:10:00]** And because for the most part most careers you're not going to get a payout that is tens or hundreds of millions of dollars. Um but with any reward comes that risk, right? You don't know if that business is going to work and you could spend three years trying to build a business that's worth absolutely nothing and during that time period, if you don't have any revenue and you don't have any investors, that means you don't have any income, right? And so there's usually a period of time where, you know, you're you're maybe working for nothing. And even if you raise capital if you're a smart as an entrepreneur, it makes more sense to invest in your company cuz that's what could get much larger than to just take that as a big salary. And so a lot of times we'll invest in companies and the founders are they're taking smaller salaries. They might not even they're not making six figures because they say, "Hey, every dollar that's going in my bank is $1 I'm not using to build that product that could double the company or hire that sales rep that could double the company." And so they're they're thinking about long-term um rewards, right? It's like that marshmallow project people talk about but on steroids. Um And the thing is anything can happen at any time that where the market could shift and you might have a business that in 2021 markets were high, people were throwing out crazy valuations. Maybe you at that point you got an offer to sell for 150 million. And then markets plummeted in 2022 and suddenly at current multiples your business is worth half that. And then, a gets acquired by a big platform player and is selling that into all of their their customers, and so your competitive position shifts, and your company's worth even less cuz you're not growing as fast. And so, there's a reason to de-risk yourself because you can you can know that, all right, I'll still be okay, you know, I still have enough that I can support my family, and it's not stressful while dealing with these **[00:12:00]** things, and um it's not a up and to the right journey the whole way, even for the best companies. It's going to be a bumpy ride, and I think part of the reason people sometimes take secondary as a part of a growth equity raise is so that they can logically and not emotionally because if you're feeling like your life's worth is at risk, like that is scary for any We're all humans, and that's scary. And so, that can help you think and take a step back and say, all right, yes, I'm not going to sell my business today, but I don't need to, and I'm good personally. And so, now let's solve this problem, let's tackle it logically, and and let's get back to a place where we're growing and when worth a great amount from an equity That's That's a great answer. I while there are some entrepreneurs that are thinking about the generational wealth aspect of and and put more more of the money into the business, there might be a bigger percentage of those who don't necessarily put everything back in the company, and so that also adds to why many or the the the statistics where you see that many businesses fail because sometimes a lot of money is taken out of the business and and it just it could have grown, but it didn't have enough to survive those pauses in the economy or other factors, because there just wasn't enough fuel left. Believe it or not, you could also have a company that looks so successful from the outside. You've raised 500 million for this company and something could go wrong and you could get absolutely nothing as a founder, because **[00:14:00]** every dollar of capital you take, it's usually in what's called like preferred equity and so that means that before anybody who owns common, which would be all the founders, gets any capital, the preferred equity holders get paid out first. And so you may look to all your friends and colleagues like you're so successful, cuz you've raised all these big rounds, but if you're not thoughtful about making sure that capital is put to work to make the company just so much larger that it's worthwhile, you could end up in a position where your common equity is actually not really worth anything, despite building a business that's worth Say you raise 500 million and your business ends up worth 400 million, you're not getting anything. And that is that is something I think especially when folks are in the seed and they're being offered these big checks and they're thinking about that headline in on their LinkedIn that we raised this massive round, it can it can get attractive, right? But you want to make sure you're not thinking like raising capital is absolutely not the goal, right? It's building a really great business where you're you're building value for yourself and for your employees, too, because they all have stock options and hopefully you're not It's not just your life you might be changing if you're building a really great business. That's a great point. If you think about just the race as your goal, it's like if you're thinking about raising 500 million, for example, you should be thinking, and you might have the factor, but you should be thinking, "Okay, I'm getting that 500 That means I it has to be worth a billion or two." I don't know. There's a number, right? So, you shouldn't be thinking that 500 million as your goal. It's like No, no, no. You got that so that you can make it worth so much more. Is that correct? Absolutely. Yeah, that needs to be the math you're doing is you're diluting yourself, um, **[00:16:00]** and you want to make sure that as you dilute yourself and take cash in the form of putting it on the balance sheet, where you're not taking any chips off the table, um, you just want to make sure that you're going to be able to use that cash to make yourself two, three times larger. Uh, so it's worth that dilution, right? You're giving away a piece of the pizza so that the pizza can be so much larger. Um, so you want to make sure that that calculus works. And it's not perfect. You can't predict everything, but at least if you have some inputs you're going off of and you're being thoughtful and methodical, then it increases your likelihood of of success. Where do you see the money going most of the time in the cases that it's Mhm. It's a great question. There's no one way to build a successful whole business, and so we see it going multiple directions. we've had successes where the founders are actually taking the entire check as chips off the table, personally. Um, where the company is so profitable that they don't It's okay. They don't really need to to, uh, you know, raise capital and put it on the balance sheet. Um, we've seen it be successful where folks have a really great product, great product market fit, and they're focused on scaling their go-to-market motion with that capital because they have a few sales reps, some marketing funnel, and it's working. Uh and so it's worth investing there in the near term. But we've seen folks be successful by investing in in product, maybe they're building out a new product. I think the key is on all of those places making sure it's measured because if you're not measuring, you can't control. Like if you're not measuring something, you're not you're playing with complete fire in terms of like is it going to work? Is it not going to work? I don't know. You're increasing your chances of success if you measure it. And so whether you're measuring you put more capital in, you hired more engineers, uh you maybe you hired an AI expert, whatever it is that **[00:18:00]** you're doing from the product perspective, you want to make sure you have clear goals so that folks know how to measure themselves and measuring yourself against those goals and being thoughtful about that. If it's sales and marketing, making sure every dollar in is producing more than a dollar out. Um and and making sure you're measuring that and not just flooding the market with marketing dollars that are not getting any ROI. You still want to be measuring and I think that's the key difference between folks who raise capital and use it very well and the folks who don't is one measurement and then two being Let's test. Let's Let's hire five sales reps. Let's not hire 50. Let's hire five, see if it's the right profile, see if our go-to-market works, and then let's double down. Um and the folks that are the most successful with raising capital and having it create the impact you want are those that do those two things. Oh. That makes sense. When speaking of go-to-market, is it common to invest in go-to-market like outbound and sales reps and things like that more I expect, in the B2B space than than in in B2C, that maybe that's more like sales and marketing. What what's the What's the split there? And and what should people think about when maybe they they get some capital for whatever reason, and they don't know where they should focus. How How does one sort of determine, based on the type of business, I guess, what what path to take? Yeah, I think there are different go-to-market motions, of course, in a B2C versus a B2B. You're not going to have an individual sales rep calling a consumer to sell a $20 product. It's just that it doesn't mathematically make sense, so you're not going to do that. Um it doesn't mean you might not pour some fuel on the fire in go-to-market, but your go-to-market funnel may look a lot **[00:20:00]** more like paid ads that then flip into adoption, and then following up to make sure you're getting repeat sales, uh versus sales and marketing. I think, ultimately, the way you want to think about it is like, what is the most impactful lever lever or levers that we can go after to make a big difference? Maybe the most impactful thing you can do as a B2C business is somehow figure out how to get, instead of a customer buying once, get them to buy a second And how do you do that? And and is that a customer success strategy? Is that a product strategy? Is that a adding a SKU? Whatever it is, maybe that's the most impactful thing. And so, that's where you're you're putting your resources to start. And then, maybe once that's working, well, wow, if we were to pour some fuel on paid ads, now that we know how to get customers to buy multiple times, suddenly it's totally worth the that cost of customer acquisition, because they're going to buy twice. And that that unit economics, those work, so we should do that. And so, what you might do to start is probably go after your biggest lever, but most likely you're targeting a few at the same time. That makes sense. when we talk about go-to-market, again, depending on where you are in business or if you're just you've been always working at a company, maybe you have no reference to what you hear go-to-market with. What are these people talking about, right? So, can we explain a little bit about, let's say, the B2B How those deals work. I think there's there's a disconnect when you've never been in it of like there's actually people calling other people, they're making meetings, right? They're they're having those interactions because these are larger contracts and they require more touches and things like that, right? So, can you just give us a a brief or maybe an example of how **[00:22:00]** deal making typically works is when thinking go-to-market versus B2C. Yeah, absolutely. And I'll give an example, but I'll caveat even within B2B we could spend the next hour talking about different go-to-market motions within it depending on how big the contracts are and the industry, etc. But um a classic example when we get involved is a company where they're likely going to conferences and they're going to conferences, they're paying to have a booth and with that they have sales reps those conferences who are trying to make connections with buyers in in the industry that they're selling into in the target buyer persona. Uh they get to meet with a bunch of people at the conference and they come home with what would be called sales qualified leads. Um they went out, they met them, they said these people were interested in having a conversation, so they're qualified as interested, we know they're the right buyer persona, they're in the right industry. And then after the conference, they might be sending follow-up emails, they could be cold calling to try to have a conversation and do a demo on the product. And then from there, they're trying to get this person to be their champion internally to make sure they're talking to the right stakeholders, convince them to buy, and hopefully sign a contract. And if it's a recurring revenue business, that could be an annual contract that hopefully they're paying each year. If that's the case, you might then pass that customer Great, you do the demo, they love it, they're your champion, you land it, it closes. Go to market doesn't stop there. The goal is to have that person in that company stay with you. And so you might then pass that relationship off to customer success managers who will build relationships, make sure if people know how to use the platform, check in, make sure they're getting value. Um and then ultimately the goal for them is to get them to renew again, maybe even buy more of a new product they launch, and so the cycle kind of goes on. And so that's that's a very straightforward example of, you know, one **[00:24:00]** one marketing channel, i.e. events, that is then building through the funnel, but you could also have channel partners that are trying to sell your product on your behalf, taking a cut. You could have uh paid search, you could have, you know, paid ads where you're targeting certain personas of people and they're coming in as as marketing leads and you're qualifying them with a bunch of data that you're pulling in to see like is this the right persona, industry, size of a company, whatever your ideal customer is, and then passing it to sales to then call. Um and so there's a bunch of different funnels. I will I'll stop there with those examples, but uh Those are great examples because you touched on on a few important aspects of that whole life cycle, which are yes, there's the sales motions, but then also the customer success side. I remember a couple of months ago, I went to speak at a conference, and you know, you're you're chatting with someone on the way to the airport back from the event, and then they they were in the same event. It was a striking event. And he was from one of these air conditioning units companies uh for for that are used in trucks and and that sort of thing. And it was very interesting. He was explaining what he actually did, and he was more in the customer success side. Because these are 6-year contracts, right? And so somebody had to have gone through all the motions that you talked about, and you have to keep them happy because you want to make sure that after 6 years, they're going to give you another 6-year contract and not go with your Yeah, it's critical. You don't want to spend all this time, money, and energy landing a customer and say it costs you $10,000 to land them when you think about the amount of time the sales rep and their salary spent, and the commission they got, whatever the costs are to provide that product, uh the cost **[00:26:00]** to attend the event. That all cost $10,000 and you land a $10,000 contract, and then the next year they go away. Well, you didn't really do anything. to zero. Uh and so it's it's very important. It's a big piece of go-to-market, for sure. And another thing that you touched on that is very important is that LTV, right? The lifetime value of customers both in B2B and B2C. Especially if you're a new founder or new entrepreneur, many times you don't think of that. You just think I have this great product, this idea. I'm solving something. But not until later you you learn, oh so this is what the stores are doing. This is what the brands are doing, getting people to extend their lifetime value in different ways, like you were saying, with different SKUs, etc., or or or upsells or or recurring, right? That's a that's a very important thing. But sometimes we don't think about it. It's It's not something that comes to mind as a first founder, for example. So, is that part of what a company like Volition helps with when they're not just putting capital in, but also handing them expertise on this is what others that are successful have been Yes. Yeah, absolutely spot-on. Many times when we're coming in, uh I mean, the reality is when you start a business, you're wearing all the hats at first. Everybody at the company is kind of wearing multiple hats. And then, the larger you get, the more you need specialization. And there's value in having different leaders that are owning segments that have done it before, seen it before, or maybe they were part of the early startup team and they're growing into this role. And where we can be helpful is giving founders the basis of like, this is usually what a company in your scale range is looks like. we don't yet need a CRO. That's too big of a hire. It's too expensive. And you know, we don't **[00:28:00]** have the plumbing in place even to support that yet. So, you know, hey, I I think right now you really need like a VP of sales because you have your best sales rep spending time managing the other sales. And we think if you actually had someone leading it who's done it before, that would unlock that person to make more sales, who's the best sales rep. And it would give more mentorship to the other sales reps, so you can kind of scale that org. and so, I think a piece of it is is helping folks understand what has been done before. That being said, there isn't a playbook that is required for folks to follow. I think it is really important to make sure to value that that founder is Usually, by the time we're involved, it's got They've gotten to like 10 million in revenue or ARR. They know their business inside and out and we want to make sure we're not coming in and and trying to bully our way into saying this is what you have to However, we also want to make sure that that founder has a voice that's that's seen it before and can at least flag like, "Hey, sometimes this is like a high-risk decision because of XYZ. Um maybe you promote that top sales rep to the head of sales. Well, who's going to book all that revenue that the sales rep was booking cuz now they're managing. And are they going to be a good manager? And maybe that's the right move. Hey, every head of sales or VP of sales at one point was a sales But let's just talk about it and I if you decide this is the right move, we'll support you, but at least you're getting those flags along the way um because you're moving so quickly. And and so it can help just give some advice. And then we also have specialized folks along with the board members that you can tap where we have an advisory board of folks who've kind of been there and done that. Um President of HubSpot, JD Sherman would be an example. Maybe you just want to chat with somebody uh who's been in the seat and has done it before Uh we can make **[00:30:00]** those just connections. We have operating partners who can get a little more in the weeds, who can we're not deciding how your go-to-market's going to run, but let's spend two days with all your leaders talking about what works, what doesn't work. Let's build some plans for what your goals are and he can kind of help moderate that. Um or maybe you've decided you do need to hire. You need a VP of marketing. We have a recruiting team in-house. They're not focused on like paid on placement like most recruiting firms. They are part of Mission. Their our success is their Uh and so that creates alignment and we can actually help find those folks that you're looking for. And so I think it's all about skipping some mistakes and hopefully streamlining some of the learning so you can get there faster both because you have some guidance but also because you have capital to go after it, too. Yeah, and also I expect you have experience as you place capital in different industry different types of companies now, you know, oh, I have a consumer packaged line that we know this has worked tremendously well and so now that we're dealing with you, maybe you can make these slight adjustments that will separate your product from the rest so that they can't catch up while you do more R&D or whatever. Absolutely. There can be value and learnings from different industries, different business models. we also do a great job, I think, connecting our executive teams. Being a founder is a lonely job. Like you are at the top. Maybe you have a co-founder that can help a little, but at the end of the day, most likely like maybe you know some other founders, but it's still you at your company at the top making these big decisions and it can be lonely. And so we always have an executive summit where we spend two days all of our portfolio executives come in, meet each other. We talk about whatever the biggest issue is that seems to be happening in our **[00:32:00]** portfolio companies. Obviously, this past year we talked about AI, shocker. Um, but I think that can be useful as well because ultimately you're still making the call, but it can be helpful to get different perspectives, um, whether they're your board member, an operating partner, or just another CEO who is literally in the same cohort. They've decided to work with the same firm. They were exactly in your stage or are at some point cuz we invest in the same stage every time and so um, that can be useful in and of itself, I think. Yeah, that's that's super helpful. And and and we've also discussed this in the show previously this feeling of giving back that is a common thread across successful founders I've seen and and talked with many that once you've sort of made it and made the mistakes and had the success then especially if you're giving yourself the time you're not just really in the whole time you start giving back and you talk with other founders that are at a different stage that you can share your learnings and help them like you were saying avoid some of those mistakes. So this type of let's call it networking at a certain level is super helpful and helps with that loneliness factor of of being a founder um because again I don't think people I can be a founder of a small business and it can get lonely because you're the one doing everything right but then as the business it could even get lonelier because now the difference between you and once you go down the hierarchy in the organization is so much **[00:34:00]** now you're talking hundreds thousands of employees it some people even don't want to talk to you for or or there's no transparent communication because there's that fear of I don't I don't want to say the wrong thing because it's my boss or whatever and so who do you interact with that you can be candid with Yeah. Absolutely and I think that's that can be really helpful because there's a little bit of a circle of trust I think amongst founders where you You chat about problems that maybe you can't even talk to your executive team because maybe your problem is like I don't know if this executive leader is the right leader and if I tell another executive leader it could get back to them and if I tell another executive leader they could get concerned about like the shake-up and they could tell their subordinates which could create a bunch of anxiety in my organization and so there are repercussions to chatting about these things and I think that is also where a board member can be really helpful is like having somebody to bounce these things off who is like at the end of the day entirely incentive aligned to your business achieving its largest outcome possible and can give you that that person who's you know outside the org but knows enough about your business to be helpful cuz otherwise you just have to start from the top and explain everything and it takes forever to get to the true question so I think that that's useful as well. I'm glad you touched on that. The board is another concept that I think many people are disconnected from. You hear the bad side of the boards with the movies and and the shows, right? But and people are like why do they have a board it just doesn't make sense if you don't what the purpose of the board is. So with these examples I think you're making it easier to understand for people like it's there's people who **[00:36:00]** either have specific expertise, right? Or that have been there or have the connections or can take an outside look but at the same time know enough about the company to give you advice so that the company can grow. So they're not there to stop you like they portray many times but they're they're there ideally to help with the growth. Is that Yeah, no that's spot on and Uh, board's responsibility ultimately is to optimizing the outcomes of the business. And so, if you think about as an employee, somebody who has maybe stock options or phantom stock, whatever that might be, like the board is responsible for optimizing the outcomes of those for you. And so, that may mean, making tough calls for the ultimate benefit of everybody at the business. And I think that's where a board is helpful in terms of not telling you what to do for the tough calls as a founder, cuz I think it's important, like we are minority investors and we aren't we aren't trying to run the business, but making sure there aren't blind spots when those decisions are made. And um, making sure that ultimately you're representing the best outcome for everybody. And that's that's really the responsibility of a board. Like fiduciary responsibility is that. Um, and then the reason you have a board in addition to that is so that when you're running a business, it's so easy to get caught up in the day-to-day. Until you're not taking a step back and saying, "All right, well, we set these goals at the beginning of the year. How close were we? Why didn't we hit them? Let's talk about every functional area, how it's doing, the KPIs, the people in it." You're not taking a step back, right? You're just trying to get your day-to-day done. And so, the board meeting is in a way a forcing function for everybody take a step back, every leader present their functional area, and let's talk about **[00:38:00]** what's working, what's not working, ideas that other folks might have, and making sure that we're focused for the next quarter on the most impactful item to drive value in the business. And if you don't do that and you don't have a board and you're just a solo founder, you can you can try to create that on your own by setting up like quarterly reviews or whatever it might be. Um, but it's just a very good forcing function for those conversations and that step It may seem like, oh, you have to put together all these slides, but ultimately it's really about that strategic step back on the business. No, I think you're right. It's a Of course, you don't want to overwhelm with meetings and have a bunch of them that are not necessary, but sometimes like in this scenario, I think it makes perfect sense to do that as that forcing function because as a founder, that happens. You you get so caught on caught up with day-to-day activities and especially if something comes up, you get distracted and you might have had the best idea that will push your business forward today and you write it all down and you're ready to go and it would have actually worked, but then 3 days later some fire happened in the business and you have to fix it and then you get back to work and then you forget about that. And it's there somewhere in your notes, but you just just forget about the initiative because there's so much to think about. And by having something like this that sort of forces you to get into it, someone can ask, what happened with this thing? And then you get back into it and it again might have been what actually helped the business grow. No, it's such a great point. And you also as a founder, you're focused on a probably 20, 30 different tasks every day and they're varying **[00:40:00]** degrees of impact on the business and you might you're just trying to accomplish them all. So, they might end up with the same but the board meeting makes you refocus and make sure you're putting the right weight on the right items. Like for maybe if you're a one product company, the best thing you could do to drive value in the business, maybe it's actually not getting your growth rate from 40% to 50%. Maybe it's actually getting a second product to be adopted because that creates defensibility and proves that your customers can be upsold and so you can have a more efficient sales engine going forward. And as a result, somebody's going to be willing to pay 10 times ARR instead of 7 times ARR. Instead of getting from 40% to 50% growth, which could be I don't know, let's say you're 50 instead of 40. If you're applying a 10 times multiple instead of a 7 times multiple, like you could actually be driving more value. And so the board's responsibility is also to make sure that it's a little bit of keeping an eye on the capital markets, keeping an eye on like the buyer markets to make sure we're also going after the strategic initiatives that could have impacts like multiple expansion or contraction where as a founder, you're mostly focused on growing profitably, the metrics, etc. But these can be huge swing factors in the outcome of everybody, right? example of focusing on growth versus maybe a second product or or increasing LTV is so important because sometimes you just the growth is easy to see. You're like, "Oh yeah, I'll focus on this to get more people in." And you might have an increase, like you were saying, but the cost of doing that increase is a lot of times way higher cuz always the first attraction is **[00:42:00]** is the the the most While maybe you you would have increased the total by 2% or 3% or 5% by doing that at but it's going to cost you this much versus people that you already have and then the new skew or thinking about the upsells etc. might cost you this much but it would give you a 10 times or 20 times increase because you already have all those people so it's an immediate thing that you can just switch on, right? And it affects everyone else that comes in so you automatically increase this one plus the new people that are coming in, right? So at the end if you have a stable then uh many times it's not increase the acquisition but but the other part like you were saying and and we don't think of those things and so this is this is great that you mentioned it because we see those mistakes happen all the And And even your example here like it's still focused on like the P&L like what's your revenue, what's your cost but there's another attribute that comes with the value of a company and it's the multiple people are willing to pay for it. And there's multiple variables on like what can impact that and so it's that's where I'm saying like the part of the board's responsibility is to keep an eye on like what people are valuing from a a market's perspective like what are private equity firms paying, why are they paying those things, what are strategics paying, why are they paying that and trying to make sure we're optimizing the multiple you can sell for while while also making sure you have obviously want to be as big as possible but you could get two times as big and be at the same value if your multiple's cut in half and so you want to make sure you're optimizing for both and I think it's just logical as a founder you're not going to be focused on things like that and so that's where a board can provide some guidance and and push on things that **[00:44:00]** maybe wouldn't have felt like a priority when you're focused on your P&L and those outcomes. That's a great point. It's like when you are thinking about doing something to your house because you want to sell it. And you might be thinking, well, I'll I'll spend all this money to change the countertops or I'll change the windows or like there's a few different things that you could do. But some of them will affect the actual And some will not at all and you just spent the money, right? And so it's where you should focus not only for the immediate thing but like you're saying what actually is important in the eyes of the investors such that you'll get a better valuation because it could be that they don't care as much about the acquisition but they they care more about the stickiness factor or the LTV or whatever other thing that you might not be thinking about as a Yeah, that is a wonderful example. I might have to steal that from you. It is just like deciding what you're going to do to your house. Deciding what you're going to do to your business to make it more valuable even if it's like going to be the same size, the same growth rate, the same profitability. Um and in your example, the same cost. It could cost you the same amount to do all those things. Which one are you going to choose? Yeah, and I think people relate to that. It's like, oh, yeah, yeah, that that's it makes sense. But again, we get we get so so caught up in either the the the running of things or or the flashiness factor of something that looks good on paper like you were saying the valuation or the the capital raise looks good but it's not it's not the whole picture. Yeah, and the information to learn about that is not publicly available for the most part. Um like these are private transactions for the most part. It's not disclosed what they're trading at. Um you know, we know **[00:46:00]** because we're selling companies like maybe we get to a point where a company's the founders are ready to sell and we're selling and we're seeing what people are bidding when they're going to market from an investment bank who might represent them. And and try to sell that asset and then we also have relationships with investment bankers who are keeping us up to date on the private market. And we know what we're willing to pay for, too. So, like that that piece of it like it's it's not super publicly available unless you're tapping into a resource like your investors or maybe an investment bank relationship or something like Well, that's an excellent thing to consider. We've talked about sometimes companies on the smaller side, especially if you have served for a community, doing capital raises with like Rex EF and things like that and crowdfunding and which is fantastic, right? But but there's there's levels and there's also Like you were saying, right? So, yes, you could get a capital raise, but sometimes depending on the position that you are and what you want the final outcome to be, it makes sense to do it through a firm like Volition or similar entities because you don't only get the capital part, but you also get access to that sort of hidden industry knowledge of what things should be worth. Are they actually giving you the right offers? Are you being taken advantage of, etc. Yeah. No, absolutely. It's a good point. And you know, there are reasons people choose to go like the crowdfunding route even choose debt or something over Um, I think as you're thinking about bringing on if you are a partner for a capital raise, that's you know, a single partner or a group of a group of institutional investors, like you want them at this point there's plenty of firms out there that can provide a heck of a lot more than just capital. And so, um **[00:48:00]** I think it makes sense to bring a partner that's going to help. Now, there's also folks out there who would prefer to take capital from an institutional partner just one cuz then you only have to manage one relationship versus crowdfunding cap tables are very messy and it gets very annoying. Uh candidly on some of the decision-making and legal things in the background. Um but they may actually want a partner who's not going to take a board seat and not going to provide any strategic guidance and those exist as well. Um that's just a preference. Uh it's not it's not where we think we provide the most value and drive the best outcomes. Um but that's out there, What is the level of a company at which it makes sense for a founder to reach out to to something like Volition? Yeah. So, we'll invest in companies uh typically once they reach like 4 million in revenue or ARR. That's kind of our minimum. Um but we invest in companies anywhere from that four to 35, 40 million in ARR. And so, it's kind of once you've reached that product market fit where you have dozens and dozens of customers, you have proven they're getting our they're getting ROI from your product and now it's really about doubling down on certain things you know that are working and then starting to scale other pieces of the org that maybe you haven't even really started focusing on. Uh and that's where that's where we're the most helpful. at that stage, let's say you're doing 5 million ARR. Is it always worth considering getting getting capital, getting assistance to grow the business or are there scenarios where perhaps it's fine to just stay as they are, if you will. Yeah, I think it depends on what is a win for you as a founder, which is a very personal thing. If you want to build this business and pass it **[00:50:00]** on to your kids, then you probably don't want to take a institutional partner because we get our capital from folks like college endowment funds, uh teacher pension funds that are trying to drive outsized returns for their pool of capital, and they need their capital back eventually. So, you eventually do need to sell the business um or go public or something like that. And so, if you're saying, "Hey, I have this business. I I run it for profits. It's growing at an okay clip, and I'm just going to keep running it and pass it down to my kids." Don't take any institutional cuz it's not what you want. Um I'd also say like if you don't know what you want to do with the capital, if you are saying, "Hey, um I don't think if we hired three more sales reps we could actually grow faster we're in an industry that's very hard to crack into. We're landing big contracts that are very slow, and we need to land a few of these big like lighthouse customers before we're able to get our foot in the door of a bunch more. And so, hiring more sales reps isn't going to help us. And we can't yet sell another product cuz we're just focused on this first product, and we don't know what we would do with this capital." Well, don't take the dilution. Wait till you're larger. And then if it makes sense to raise capital, raise capital. um it's definitely a personal decision, and uh no two businesses are alike in their capital journey. Uh some folks don't raise any capital till they get to 20 million in ARR, and then they do a 50 million-dollar round. Some folks raise some venture and never raise again and exit uh from there and all of the things that fall in between that. And what is an example of a company's situation where it's like perfect to get into this? I I if you're seeing good strong growth and you're seeing that your unit economics, so your lifetime value versus how much it costs to acquire customers, like if that's getting almost like too high, so it's like above 7x or something like that, uh **[00:52:00]** and you're saying like, "Oh man, um we're cash constrained right now. So I can't hire that these other three sales reps because they're not going to produce right away. They're going to be costs at first, right? They have to ramp up, etc." And so we don't actually have enough cash to support them for a few months until for them to wait until they start selling. Um but man, I know if we could hire them now, we could get to 15 million at the end of the year instead of 10. Like I can see it, the math works, like we have the leads. That kind of situation is very logical to think about raising capital or you know, our customers are so happy and they've been clamoring for this second product, but we just don't have enough cash to hire the engineers that we need to build it in the next year. So it's going to take us 2 years and then maybe our competitors are going to come in and they've already built it and our competitive position's going to change. So that's another example where it might make sense to stay ahead of your competitors and to also start booking that new product revenue faster. Um so it's really all about like can you see a place where you could put capital and you could get to where you might get to anyways, but you get there faster. Or you can increase the likelihood that you do get there because you're ahead of your competitors and you're able to stay ahead of them via this capital to move Wow, those are excellent examples. Thank you, Melanie. um I I think you've given us a lot of clarity as to what happens in this phase and uh I we probably will see many listeners starting to think about, especially if they're founders, "Oh, okay, so I might be close to this point or I thought this is something I needed but but it might make no no no sense now but maybe in a year when we're at this other stage, right? So, thank you so much for sharing all your expertise today with us and um your examples have been incredible. **[00:54:00]** If anyone wants to learn more about Volition Capital and and perhaps get get get in touch and learn more about what they can do or their next steps should be, where should they go? Yeah, so um feel free to reach out to me on LinkedIn or you could send me an email. My email is on the Volition Capital website. So, either way, uh would love to get in touch if you know, if it sounds like there could be a fit and you're thinking about capital or just want to chat, uh feel free to reach Excellent. And I'll put that in the show notes as well. And for the listeners, if you haven't liked and subscribed to the show, please do so so that you can be aware whenever we release excellent episodes like this one with Melanie. Thank you so much, Melanie, for joining us today on the show. It's been great. uh everyone, we will see you in the next