Aug. 30, 2020

When do you make a pivot and how to use your first round of funding? By Andrew Ermogenous

When do you make a pivot and how to use your first round of funding? By Andrew Ermogenous

Andrew Ermogenous, Co-Founder at Real Factors acquired by 7ParkData explains what major mistakes they have done with the company and what were the major achievements. We also talk about the importance of planning the first funding round and some alternative sources of fundraising that Andrew recommends.

Andrew's LinkedIn: https://www.linkedin.com/in/aermogenous/

7ParkData: https://www.7parkdata.com/

You can contact Andrew at his website, ermognius.com


Transcript

Today, 
as a guest speaker with Andrew Co, 

founder at real factors that was acquired by seven part data and to do, 

we'll talk about this acquisition, 

how real factors raise money and also how they made it after the first release that was not as successful as the one that came after. 

So, Andrew less kickoff by you're giving us some background on yourself and on real factors. 

Don't think so much for having me really grateful to be part of the podcast high level. On me. I am the. 

I guess entrepreneur I've spent all my career in enterprise tech, 

primarily in kind of data analytics focused companies started my career at Oracle kind of big corporate cookie cutter training, 

learn the ropes of enterprise sales, 

and and dealing with customers and working enterprise accounts shifted gears to something completely opposite, 

which was a seed stage predictive, 

analytic startup in the Bay area. 

I moved from Boston rose Oracle to San Francisco, which is a great career decision there. 

I kinda did everything from events to sales to customer success, working with product, et cetera, but really learn kind of the ins and outs of startups I would say. 

And, 

you know, 

I, 

I went to another startup where I was focusing on on field sales, 

and the first day on that second job, 

that next job, 

one of my former colleagues call me about working on a Bloomberg terminal for commercial real estate and, 

you know,
my parents are in commercial real estate. 

I, they were kind of immigrant entrepreneurs themselves so it was kind of like checking a lot of boxes for me, in terms of taking a chancellor of a wife for kids or a mortgage until I get all my stuff. And. 
I decided to make the jump, so in April, April twenty is twenty seventeen left San Francisco, and 
moved back to New York, which is where I'm from originally start real factors. 
Nice. So, let's go just a little bit deeper into real factor. What does it do? We're yeah, yeah, yeah, absolutely. 

So so, 

as I mentioned, 

the initial idea was to build a Bloomberg terminal for commercial real estate, 

it, 

which was essentially a software platform that can integrate a variety of different data resources that real estate investors used. 

Because the process was pretty complicated. You know, if you're investing in a big office building or a mall or or something of that sort, there's all sorts of different data points. 

You need comfortable sales lease rates, market data, et cetera and typically all this data sources come from a variety of different platforms. 

And so our goal is really to optimize that entire kind of data aggregation analysis process with a bunch of workflow tools on top of it, 

what the business actually evolved into is a alternative data platform for investors, which means we use unique and novel data sets like,
consumer spending payroll job postings,
social media, 

etc to give large institutional investors a data edge of some sort. 

So, let's talk about your very first round the race and the only round if I remember that correctly if you raise only friends and family round and didn't go further in the fundraising process. Here's why is that? 

Yeah, so we, we kinda did everything backwards.
I would say,
which I think is probably a a common theme among first time founders,
but you see all the all this news about tech crunch and venture beat and whatnot about, you know,
Monster seed rounds of late.
And so my, my two Co founders are, like, we're, you know, we're a great team. 

We've worked Silicon Valley, let's go talk to VCs and, you know, in retrospect toe is really like the wrong idea and so, you know, fifteen or twenty, and and they were pretty uniform and they're and they're kind of feedback, which was. 
You know, this sounds interesting. Go build the product and get some customers before we even start 
talking. You should probably go raise some friends and family. So that that's what we did. So,
we reached out to and uncles,
parents, 

friends, 

and pulled together about two hundred and fifty K, 

two hundred and sixty K to to build that first version of the platform the from there. 

And you asked why why didn't we raise more? You know, I could get into kind of the deeper details, but, you know, we invested some of that money. 

We actually had an opportunity to join accelerator, which we turned down because we had another acquisition, had an acquisition offer. 

That acquisition offer ended up not working out, which is not helpful for us,
obviously,
in some ways, 

but about ten months, 

after that, 

we had a second acquisition offer and so the in, 

between that time, 

period, 

we started to get some traction we had signed down our initial customers were generating some revenue and we kinda want to not repeat the mistake that we had made previously, 

which is kind of prematurely going back to VC investors. And so we're really focused on, you know. 

Essentially saying on our first, ten, twenty customers, when that second acquisition offer came along, we had all invested some of our personal capital. 

My one Co,
founder was having a baby,
you know,
we,
we were all kinda hungry for some stability and so we decided to move forward with the acquisition 
offer, 
which was in the fall of twenty, 

nineteen and that is probably the best decision. 

We made just given the macro client climate and unrest that's going on with the global pandemic. 

So right so so good timing I would say, but also very much, like, the time Congrats on the acquisition by the way, and congrats on the timing. I think that sounded like a good timing. That's true. 

But let's talk about a little bit time traveling here.
If you could go back in time into the very beginning of this, you know,
when you were just starting real factors, 

what would be the thing that you would change it can be either in the fundraising process or maybe instead of trying to pursuit that first acquisition offer you would go to the to that accelerator or what would be that would make. 

I think they're all kind of interrelated. Right? I, I alluded to the fact that we did everything backwards where we really should've spent our time early on is is with it is not is with the product. 

But what I mean, by that is, like. 

Validating the fact that the product is, 

in fact what our customers wanted and so early on, 

we did a lot of like, 

concept testing calls where we reached out to, 

you know, 

senior executives across all our potential customers and kind of floated the idea to. 

Then they were all pretty receptive. 

They're like yeah, that sounds great but we didn't ask those those second and third order questions or second third line questions that would have gotten to the heart of what they really wanted. 

And so, where that hurt us is we invested a lot of that friends and family that money that we had raised into a version of a product that was, you know, for lack of a better term, more of a vitamin than a painkiller. 

And so, I think what, we would have done differently we should have, you know, I, I'd say one, everyone no time spent with potential customers has ever wasted. 

I think that's like a rule that no founder would disagree with. 

So I think we would spend more time with them, but, but in that time, in that time, we should have been kind of more targeted with the questions we're asking. We kinda got confirmation bias in the way that we were interviewing news were like, this is a great idea right? 
Versus how would you pay would you pay what are they gonna say? No. Versus what would you pay money for this? 

And if so, how much and, you know, can we sign an ally that you would be our first customer for an extremely discounted rate? 

If we went out and build this, and I think if we asked the simple kind of three or four questions, we wouldn't quickly realize where the opportunity was for us. 

And, you know, in our specific case, we were trying to solve a pain point that, in the mind of customers wasn't really a pain point. And we didn't really think about what they actually care about, which is making more money. 

And so, you know, all institutional commercial, real estate investors really care about the returns and how can we drive more returns for them by giving them a data edge and that's essentially what the business evolved into. 

We just came to that conclusion twelve months too late. And so, yeah, and so as it relates to your question, I'd say, I I think, like, we would have been more thoughtful. We wouldn't have spoken to as early as we did. 

Would have been more thoughtful and how we spent the friends and family money. We absolutely would have joined the accelerator because that would have given us credibility and structure that we needed, which in turn would have set us up for. 

A successful Pre seed C state seed whatever round. Do you wanna call it? I'd say about, like, fourteen to sixteen months after we had started, right? Yeah. 

And I think the customer interview that's so important and many people just don't understand how it's done. They just want to have it, like a friends chat. No, that's not how it works. You should have like, a real great prepared set of questions that you will ask. 

You shouldn't sound like you're,
and trying to figure out what what the person's hiding, 

but it has to be really well structured and read a couple articles before reaching out to customers and actually talking to them to avoid the mistakes that you Andrew made. 

But, yeah, that's great. Work twelve months, but still, he figured it out. And let's talk about that. When was the point when you were like, okay, we're doing something wrong now it's time for us to try to do something else. When was that? 

You know,
I don't think there was actually a moment it's very easy to recognize the pivot and hindsight, but it was very much a,
in retrospect analysis they recognized that we didn't pivot,
but I'll give you kind of what I believe was the inflection point. 

So, we went to risk friends and family money. We hired outsource engineering team to build the first version of our platform took about six months over the course of those six months. 
We had reached back out to the initial concept testers that we had spoken to early days and said, hey, you know, the products a few months are being ready. Would you be interested in being like a an alpha or beta user? 

And so that naturally, that filtered down to a smaller portion of potential customers. 

And so, you know, in some of the, in some of the conversations, all the conversations, we obviously pitched a broad vision of not just software. 

But, like, creating data products for investors and being kind of the, the single place to access any data you want as a real estate investor. 

And so we went back to a large pension fund who was really interesting working with us and we talked we. 

Pitch the pilot and so they're like, yeah, you know, the software is interesting. Like, you had also mentioned, like, in the past using some like, unique data, like Yelp data and review data to evaluate markets. 

Like, we'd like to include that in the pilot basically, and we essentially pitch them on the software and then we added in some of the R, and D work. 

We were doing with unique data sets is kinda, like, add on to get them across the goal line. And it was, it was the chief pilot, it was six thousand dollars, but it was our first customer, and we're really excited about it and so would actually ended up happening. 

So that was summer of twenty eighteen.
So,
what actually ended up happening was they weren't interested in all actual product, and they,
you know,
focused all of their interest on the kind of,
you know,
add on throw in type piece of the pilot that we had discussed. 

And so just as a function of them being our first customer us, wanting to keep them happy. We did more and more of that work. And then they're like, oh, have you guys thought about, like, using cell phone data, or have we thought about using job postings? 

And so we'll just, like, get sample data sets and start doing analysis and exploration for them. And so, you know, fast forward, six months and. 

They logged into the original platform once, and all they wanted was, like, new unique data that can help them make an investment decision. And so. 

We continue development on our existing product,
but the other the our data products kind of organically become,
it started becoming where people focused most of their time and so, 
you know,
it was January of of twenty nineteen, 

when we signed on the first customer to an annual subscription which was entirely based on our data products and nothing to do with our initial software product. 

And then I was like, well, you know, our, our initial software product, which is called data terminal. I was like, well, data terminal like, it's not really ready. Why don't? I just pitch the data products and see how it happens. 

And in the six month, period, we're able sign on a customers pretty quickly and so to, you know, decent size contracts and decent size organizations. 

We signed on two of the top, ten largest. 

Real estate investors in the world, we signed on to the top five, largest, real estate brokers in the world so we're pretty successful and pretty big brand names and, you know, eventually it was just like, this is our product. 

We coincidentally ran out of money and we're like, well, we can't really fund our engineering team anymore. So, this is just kinda organically gonna become more. We focus our time. Nice. That's a good timing. 

You know, but what happened after after you get those first eight customers, the first big customers will happen, then what do you after you realize, you didn't have much money to develop anything else what were the next steps that happened? 

Yeah. So, and that's where the the acquisition comes into play, but, you know, once you send them customers, it's a whole other ball game. 

And what I mean, by that is, you sign on customers great now, you actually have to service them and early customers are kind of always going to stretch the limits of what your your product can do. 

And so then kind of a new challenge emerged, which is we were stretched then for resources to, to service a customers that. 

We couldn't they all wanted different things. It was hard to prioritize. 

We needed the incremental capital to purchase more data sets that we're gonna build products off of and, 

you know,
we had hard data costs and so around that time,
which is summer twenty,
nineteen we one of our,
our data scientists had gotten connected to someone who would gotten connected to someone else, which was seven part data and we are just kind of introduces like,
you guys should meet and pretty quickly after, 
like,
the second call. 

It became clear that the first call happened, and she was like, yeah, we should continue the conversation and I didn't really know what we're continuing the conversation on but we're like yeah, sure. 

And it eventually became pretty clear that they were interested in acquiring us and, you know, it was good because seven part kinda did what we do for different verticals. 

So, there was some really good kind of to use the, the corporate buzzword synergies between us and seven work. 

Nice and, yeah, that the more and more I hear stories about the acquisitions, the more I hear similar isn't how they happen and they happen just in that way, you know, let's talk and then second call. Let's talk again and the farmer's like yep, sure. Let's talk. 

I have no idea what we're talking about, but yeah, let's it. Synergies and so yeah, nice, nice work but now, looking back at that story, that acquisition specifically, would you rather change something in there? 

Maybe you would rather go out try to go out to these again. Try to raise money with those eight customers or would there be anything you would change in your fundraising process after after you got the first traction? 

Yeah, I, I think it's funny when you have money, it's easy to spend when you have a little money, it's you're so much more careful. 

And so I think we, we didn't do a good job of planning. 

Once we raise the money what we were gonna do with it, in the sense that we didn't think about, okay, how are we gonna use this money? How are we gonna make it last? 

We were to kind of focused and fixated on how we're gonna get a product out as soon as possible, which I think is not the right approach. And I think the reason startups are hard in my opinion is because they take time. 

And when you're not making money time is not on your side. Right? And so I think people. Rush to get money or to raise money and they,
you know,
they and when I say people us included, 

we're,
we're rushing to raise money, 

rushing to get a product out rushing to sign customers on and we didn't it took time for us to realize what we really needed to do and so my point in saying all, 

this is we should've built a better plan in the initial friends and family around as to how we were gonna use the money. 
We should've spread across twelve months. We should have paid ourselves a little bit, which we didn't 
we paid weeks or so we play that paid our engineers. We should've kind of created, like a, a kill switch. 
Like, if this isn't working after X date, let's let's shift. I mean, like, they're all sorts of different things we should've thought of and planned for with the money that we didn't do. 

I think that would've set us up for, like, having more runway. And I don't mean runway in, like, the literal kind of cash burn since. 

I mean, in the sense that, like, we wouldn't be rushing to get to some future state and we would have been able to like, slow down and objective. We look at where we were going and what we're doing and say, hey, this isn't working. 

We should shift to this and so, you know, if, if we want if we re, wrong rewind the clock, I'd say we would've spent the friends of failing on the slower. 

We probably would have came to the realization that our first product wasn't working quicker, would have shifted gears to the other product, who would have been more thoughtful. And how we invested that money in the second product. 

And then, I think we would have been a good position to raise a seed round there after so, you know, eighteen months after starting twenty months after starting something. 

Right? And, yeah, that's those are really great points and hopefully the losers, the founders for listen to this right now we'll take that advice and actually use it to their true advantage. But you've successful exits. So it's a happy story. 

Let's not focus on that mistake as an exit founder. Do you do mentorship or do do angel investments in other starts now? 

Yeah, I'm not a millionaire, so they're not their minuscule amounts, but I invest through Republic and in a few different startups, you know, a mentorship. 

I have a pretty good network of different founders that I stay in touch with from, from time to time and anything from,
you know,
do you want a therapy session or do you do you want, 

you know,
to talk about how to bring on your first customer fundraising,
I love and enjoy that stuff and obviously,
I emphasize with the,
the process they're going through,
and the,
the challenges that are faced the ups downs and kind of everything in between. 

So, yeah, I mean, I, when I get excited on Republic, I definitely put a little money in and in terms of connecting with founders always up to connect with founders. 
And if you want to put my email, and you're showing out some up for that sounds like the plan. And, by the way I interviewed the CEO of Republic, like a few months ago. So we'll definitely include the link to that episode. 

In the description of this episode, if you haven't heard it yet, so definitely check it out. It was fun. 

And by the way, I'll definitely include andrew's email and the notes of this as well. I forgot to say that. But let's talk about what's happening now and what's your advice to early stage founders right now? 

You know, trying to open up their companies that their home, maybe they lost their job recently, was your advice to those people how should they approach this? 

I think deals are still getting done in in, from what I see. Seed rounds and fundraising. 

It seems like, you know, obviously people kind of didn't do anything in March and April, just trying to figure out kind of their new mental model for the world. And what a post covet world looks like. It seems like. 

There's a significant amount of of deals being done. 

So I don't think fund raising has has dried up per se if anything capitals is more accessible than ever with some of the recent kind of changes and who an accredited investor is with 

the,
the rolling fun concept. 

I think there's a lot of angels and potential opportunities out there for capital but I, I'd say my advice kind of remains the same, which is spent time with customers. 

I think the, the more you hone in on. 

You're who your potential customer is the more time you spend with them, the more feedback on their product, the better position you're in to sign on customers and in turn raised venture money. 

I'd say, obviously, there's kind of a chicken and egg challenge with, with fundraising. You can always have more customers and more revenue and so that is an out. 

Sometimes,
it's,
it's well,
you know,
get some more customers and Paul's back or, you know, 

we'd like to see revenues of X but,
you know,
I think customer acquisition never hurt anyone as long as they're good customers right?
You don't want so non scale, non scalable, non, standard pain customers that are are paying enough, 
right? Yeah. And that's that's good advice. You know again, again, customer acquisition, that's that's great. 

There are multiple stores here in fundraising redo as well about customer acquisitions. How people have done it really, really weird ways so, it definitely take a look at search customer acquisition. 

I think one of the episodes is called just leave that we're moving onto last question of days episode, which is a call to action. What's the one thing? Andrew, you want to lose her to do as soon as the episode is over. 

Yeah, yeah, so I'm gonna give you two things. So one is something that I think I should have mentioned earlier when you said what we have changed. 

It's something I wanted to mention and the second is what I think founders should do right now. 

So the first is, we missed out on an opportunity and fundraising to make our potential investors people who also could have been customers. 

And so what I mean by that is, I,
you know,
find who the, 

you know, 

a hundred, 

innovative expert tech focused folks are, 

and whatever industry your domain, 

you're building a startup for and have them get involved in your startup in one way or another. 

I'd say the easiest way is having to be part of your customer advisory board and create a customer advisory board, the second is ask them to invest a thousand dollars. 

And so, if you, if you get a hundred folks to invest a thousand dollars, that are domain experts, they're, they're, they have a vested interest and your success will introduce you to folks, they'll provide feedback. They get to say their investors. 

So, there's a lot of benefits to a small check from the right types of folks, the second piece of advice and, you know, I think I mentioned it four times over the course of the podcast. 

Go talk to customers, there's nothing will ever. 

No, customer discussion will ever not be worth your while because every potential customer can can teach you one thing that you didn't know about your business. 

So so my kind of call to action is go find, you know, twenty potential customers that you haven't spoken to with. 

And scheduled meeting with them, and and whatever way you can, 
whether it's you sending them a book, you send them a handwritten letter, you Tweet at them,
or send them a DM, 

you know,
whatever it is find a way to get twenty meetings with twenty potential customers. 

Right Yep. Perfect advice on both. Actually I'm personally pretty much big believer in those small checks, but keep in mind that once you move on from that phase to VC phase, when a V. C. 

is gonna take a look at your cap table and see hundreds investors, investing thousand dollars. They're gonna be like, okay, what is that? And wherever it takes you to get to the next day, you do it. 

I really don't like seeing founders, you know, staying in one. 

Step and never making that step, because they're afraid that in the future this specific step is going to be irreversible mistake that's gonna ruin their company. 

I don't think I've ever seen that happen so just don't worry make a mistake take the step just keep moving. So, thanks a lot, Andrew, that was a really fun podcast. A lot of great advice here and yes. Keep talking to the customer. 

My call to action is usually go to description of the episodes and take a look at the links that will leave their one of the links is going to be two andrew's LinkedIn or his emails. 

So that, you know, if you want some additional advice from him, definitely reach out and have a good day.