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Smart Money Startups – Why is it Important?

Interview with J.D. Davids from the Fronis Group

In this interview with J.D. Davids from the Fronis Group, we discuss his concept of Smart Money Startups.

J.D. has been the CFO of eight different startups; three went IPO, and three concluded in successful M&A exits. J.D. has raised over $1 billion in financing and M&A transactions, on both the buy and sell side, in his career. J.D. is a former United States Marine, and has a passion for helping veteran entrepreneurs. J.D. is also a competitive sailor.

JD Davids Fronis QuestFusion

Fronis Group’s charter is to accelerate fundraising for startups using “Smart Money Startups” strategies. They provide online workshops, in-person workshops, speaking events, and seminars. They help entrepreneurs identify the right investors, and guide them through the process of raising money, and getting the money into their deals as soon as possible. Smart Money Startups focuses on getting the right investors at the right time. While you’re raising money for your start up, you could look into using these UK van experts.

Smart Money Startups

In the interview, J.D. describes how many entrepreneurs take a “shotgun” approach to raising money, in many cases focused in a geographical area where they live. Smart money investors have verified domain expertise in the vertical markets that the startup serves, and they can catapult the business into greater success. Smart Money Startups have a better target list, and aggressively work that list.

The market for raising capital for startups is significant. According to the The Global Entrepreneurship Center there are about 50 million startups every year, and many of these startups will require outside equity financing to grow their businesses. However, according to a Harvard Business School Study, about 75% of venture-backed startups fail. According to the National Venture Capital Association 2014 Yearbook, the U.S. venture capital industry has about 900 firms and about $200 billion under management. There are about 6000 venture capital professionals managing this money. Also, according to the Halo Report, there are about 265,000 active angel investors in the United States alone. Smart Money Startups techniques can improve the odds of raising capital, doing it more efficiently, and with investors that can be helpful to your business.

In the interview, we discuss how the venture industry is evolving, and how this is impacting both entrepreneurs and investors. Generally venture capital funds are either going out of business or becoming mega billion dollar funds. This is opening new market opportunities for Angel investors, micro VCs, and family offices. In the last few years, we’ve seen the emergence of the likes of 500 Startups, First Round Capital, and Angel List, as examples.

Patrick Henry Entropic

Patrick: Hi, this is Patrick Henry, the CEO of QuestFusion, with the Real Deal…What Matters. I’m here today with J.D. Davids. J.D. has recently started a consulting company after many years of being a startup CFO, board member and board advisor.

I’m really excited to introduce J.D. to our audience because we do a lot of things that are very complementary with each other. I see a significant opportunity to collaborate together with mutual clients.

Thanks, and welcome to the Real Deal…What Matters.

J.D.: Thanks for having me, Patrick.

Patrick: You bet. Tell us a little bit about your background, yourself and what you’re doing now.

J.D: I love working with entrepreneurs. I’m a serial entrepreneur myself. I’ve had the privilege of serving on the management team of eight different startup companies. Three of those companies completed successful IPOs. Three were acquired. The other two were learning opportunities.

I’ve been fortunate enough to have completed over $1 billion in financial transactions. That includes raising money from angel investors, venture capital firms, strategic corporate investors and doing mergers and acquisitions, both on the buy side and on the sell side.

Patrick: Were you ever a founder of one of these companies?

J.D.: I was. Deal Management Systems was a software company that I founded. It was an online deal room in 1998 before they had online deal rooms.

Patrick: Cool, that’s awesome.

J.D.: I’d also like to make a shout out to the veteran entrepreneurs out there. I was fortunate enough to serve four years in the United States Marine Corps. Veteran entrepreneurs is a big movement now. I always like to give a special shout out to those guys.

Patrick: That’s awesome. Tell us a little bit about Fronis Group. That’s your new company. Tell us about what you do, your focus and where you’re taking it.

J.D.: Fronis Group accelerates fundraising for startups, in a nutshell. We do this in a number of ways. We provide online workshops and in person workshops. We have speaking opportunities and some services that we provide as well.

The primary thing that we really focus on is helping them identify the right investors and getting them into the deal as quickly as possible.

Patrick: Interesting. You mentioned in your marketing materials “smart money fundraising.” I did a blog piece a while ago about myths and realities of venture capital raises and dumb money versus smart money.

Walk me through what you mean by “smart money fundraising” and how you identify smart money to bring into your deal.

J.D.: Smart Money is the title of the book that I’m publishing right now. It’s all about getting the right investors in your deal at the right time of the company’s development.

What we see with entrepreneurs is that a lot of them tend to use the shotgun approach to fundraising. I’m sure that you see this all the time, too. It’s a colossal waste of time for both the entrepreneur and the angel investor.

What we focus on is not necessarily finding people that are geographically desirable for your business. After 23 years and billions of dollars in deals, what I find is the ones that are successful are the ones that bring investors that have vertical domain expertise to the table.

Those people can add a lot more. They can literally catapult your business from here to here in a very short period of time. You can go get investors that don’t have domain expertise. In my experience, and I’m sure in yours as well, in many cases that actually slows the entrepreneur down.

Patrick: I definitely have had that experience. One of the key things that I focus on with the entrepreneurs and startup CEOs that I start with is first off waiting as long as you possibly can before bringing in purely financial investors into your deal.

That might be with strategics, strategic partners, crowd funding or finding some source of revenue where you don’t have to give away equity. That includes small business loans, you can read more about business/ personal loans here.

It definitely changes the dynamic once you bring other people on board. It can be in a positive way if you do get the smart money on board. I agree with you on that.

How large is the market for services like Fronis Group?

J.D.: The Global Entrepreneurship Center estimates that there are about 50 million new businesses created every year worldwide. A fairly large chunk of them, at some point in their development, are going to need to raise some sort of outside financing in order to help scale their growth.

It’s a pretty big market. We also know that venture capital as an asset class has close to $200 million in assets under management. There are 6,000 venture capital professionals that manage that money. There are 265,000 active angel investors in the United States alone according to the Halo Report. To answer your question, in a nutshell, it’s a big market.

Patrick: That $200 million seems low for venture capital.

J.D.: I’m sorry. It’s $200 billion.

Patrick: $200 billion makes more sense. That’s a big number.

J.D.: Yes, $200 billion in assets under management.

Patrick: Do you know any statistics about the 50 million new startups every year? How many of those are more cash flow life style businesses versus the companies that were like the companies that we either started or worked for? The ones that ultimately had an exit strategy through mergers and acquisitions or taking the company public.

J.D.: I don’t know what the breakout is. The 50 million new businesses a year is just a statistic that I got from the Global Entrepreneurship Center.

Patrick: Okay, great. Let’s talk a little bit about the competitive nature of this business. I’m doing similar things in a little bit different niche than what you’re focused on. It seems like there’s a new internet based executive coach every day.

What do you see as your competitive advantage? What differentiates J.D. Davids and the Fronis Group from all these other folks that are out there? It is a very noisy, crowded space.

In my belief, there are a lot of charlatans out there that really don’t have very much to offer, but seem to have a good ability to brand.

J.D.: Absolutely. At Fronis Group, we don’t actually provide executive coaching services. We provide a lot of workshops and educational opportunities. We have working sessions where we show entrepreneurs how to do the work themselves.

As you know, particularly for early stage entrepreneurs, raising money is something that the founders of the company really have to do a lot of. We provide what I call Sherpa services.

For example, if you’re going to go climb Mount Everest, you’re going to read all the best books out there. You’re going to buy all the best equipment. When you get to the base of the mountain and get ready to climb, the first thing you do is hire a Sherpa.

Why do you do that? Because that guy goes up and down that mountain every single week. He knows how to read the wind direction and weather changes. He will say, “Put your ladder over here and not over here because three people died last week on that crevasse over there.”

We provide some free training and paid workshops. Maybe I’ll take on four or five different clients. My focus is really to reach a much wider audience to show them how to do it themselves. Our real focus is putting together a target list.

If you want to raise money for your startup and get those vertical experts that can bring introductions and the industry expertise to catapult you to that next level, it’s just like anything else. It’s sales 101. Build the list. Work the list. We show them how to do that.

Patrick: Awesome. Do you need to raise capital to grow your business? There is another way to put this. Is this more of a cash flow lifestyle business? Maybe it could be a great lifestyle business.

Is it something that you eventually see raising money and building this into something bigger that you sell to a bigger training organization?

J.D.: I’m writing some checks right now for audio and video productions. I’m writing some checks for people that are helping publish the book.

The example that I always like to point to is TechCrunch. Everyone is familiar with TechCrunch. Michael Arrington started that back in the day. It was a two-person blog.

He was an attorney at Wilson Sonsini. He was an entrepreneur himself. He basically quit his job at Wilson Sonsini to start a two-person blog.

He pretty much ran around Silicon Valley and interviewed people that he knew. Now TechCrunch has 35 million monthly visitors to the website. They put on big conferences in New York City, San Francisco, London and Beijing, China. That’s a pretty good cash flowing business.

He sold the company to AOL for a reported number of around $40 million. That’s a pretty nice lifestyle. Now Michael Arrington was named as one of the 100 most influential people in the world by Time magazine.

Now he’s got his own venture fund called CrunchFund. He’s a limited partner in Andreessen Horowitz and Benchmark. For a guy that started with a two-person blog, that’s pretty good.

Patrick: That’s outstanding. We all aspire towards that. Tell me something about yourself that people don’t know.

J.D.: That’s a good one. I think the one thing that a lot of people don’t know about me is that my favorite passion is actually racing sailboats. I’m primarily on 30 or 40 foot boats. Right now, we’ve got a crew of around eight people to race the boat effectively.

First, I just love being on the water. Secondly, racing sailboats is very intellectually and physically challenging. It’s a team sport. You’re constantly looking at how many different things you can tweak in order to make the boat go faster.

My preference is to do what you call one design races. That means that the boat and the equipment are essentially identical. It’s all about crew and tactics.

You’re constantly watching the wind shifts, wind speeds, how fast you’re going through the water and tacking angles. You’re watching your competitors. If they make a mistake, you’ve got to react and consolidate those gains pretty quickly.

Honestly, I think sailboat racing is a lot like doing startup. There are always little things that are shifting. You have to react. You’re relying on your team members to do it right.

When you’re tacking that big spinnaker sail from one side to the other, eight people all have to be doing the right thing. You’re constantly in communication. There are a lot of similarities. Plus, I just love being on the water because it’s just good for my soul.

Patrick: That’s awesome. Is there anything that I neglected to ask you about? Whether it’s about the Fronis Group or your view on what’s going on in tech and the startup world?

J.D.: I think there’s a couple of things. First of all, I think that early stage investing is evolving. It used to be that a venture fund was $100 million. They would do seed deals and startup deals.

Now, most of the funds are $1 billion or more. The winners are consolidating larger pools of capital. That means in the early stage there’s sort of this vacuum. Now that vacuum is creating more opportunities.

Now you have micro VC funds, 500 Startups, first round capital and all those folks. There are always individual angels and angel groups that are doing deals.

One of my favorite things to point to now is AngelList. I think Naval Ravikant has done something very interesting, particularly with the advent of the JOBS Act. You can actually talk about early stage deals in public if you do the right filing.

I think that opens it up. We used to say, “We’re going to raise half a million dollars so we’re going to go to the local country club and soft circle a deal.” It’s unusual for you to successfully attract smart money in those types of deals.

I’m not knocking that at all. There are some very brilliant, successful and wealthy people that do a great job. However, there’s no substitute for having someone with cash in your deal that has already sold or taken a company public in your vertical market. You can’t replace that. That’s the first thing. It’s about how early stage investing is evolving.

The second thing is that I just love working with entrepreneurs. I think they’re some of the most brilliant problem solvers in the world. You and I are both serial entrepreneurs. Once you have that illness, it’s a disease that you can’t get out of. It’s like the Hotel California. You can check out, but you can never leave.

Patrick: Absolutely.

J.D.: I think that it’s a lot of fun. Particularly, I think there are a lot of technical founders or people who are really primarily focused on the product rather than the customers. I think guys like you and I can come alongside them to be that Sherpa, if you will. We can walk with them up that mountain and help them.

We can tee up the ball, but they’ve got to hit it for 18 holes. I think that’s a lot of fun. That’s why I think there are a lot of opportunities for folks like you and I to help technical founders through a process that they may not have been through before.

Patrick: I agree. There are so many elements of building and running a business. It includes all of the things in terms of dealing with boards of directors and fundraising while you’re still trying to run the company.

It’s a challenging job. That’s part of the fun of it, too. A lot of technical founders want to continue to be the CEO. Having someone to help guide them through the process at a minimum can make them more efficient.

It may even be the difference between the deal working and the deal not working. I think there’s definitely an opportunity there for both of us.

J.D.: Absolutely. I think that’s a really good point. You and I know that fundraising is a full time job. You raise 18 months of cash. In two months you have to start the next round.

You’re always selling the company. I think a lot of technical founders grossly underestimate the amount of time that that’s going to take on their calendar.

Patrick: Also the time that it takes away from running the business at probably the most crucial time in the genesis and evolution of a company. If you’re pre-product and pre-revenue, then the key thing that you really need to be focused on is getting that product working, in the customers’ hands and that first revenue. If you’re spending all of your time raising money, then it’s a difficult trade off.

J.D.: It is.

Patrick: Anything that can make them more efficient is definitely beneficial for entrepreneurs.

J.D.: That’s what we’re doing with the SmartMoney Startups Workshop. It’s free. Our primary goal is to help accelerate that process so that they can be more efficient.

It’s your point, right? Entrepreneurs and founders have to balance their time between building the product, interacting with customers and raising money.

To your point, it’s anything that we can do to help them accelerate and not work harder but work smarter when it comes to fundraising. That’s what the SmartMoney Workshop is really designed to do. It’s to help them be more effective and more efficient.

You and I have both been doing this for many years. After doing a billion dollars’ worth of deals, it’s a process that you can actually repeat. It’s difficult, but at the same time there’s a formula that you do over and over again.

Like I said before, the whole thing is to build a list, and work the list. The SmartMoney Workshop shows people how to build their list in an intelligent way. Then they don’t waste a bunch of time pitching people that don’t really understand their business. They’re probably just going to kick the tires for six months and never write a check anyway.

Patrick: So how do people get a hold of you or sign up for your workshops?

J.D.: You can register for the free webinar, which we have about twice a month at You can also look me up on Twitter, which is @jdavids. You can email me any time at [email protected].

Patrick: It’s been a real pleasure having you on here today. I’m definitely going to tune in to the SmartMoney Workshop. I’m super curious now where you’re leading these folks. It’s been a real pleasure. Thanks for taking the time to do this.

J.D.: I appreciate you having me, Patrick. I really do.

Patrick: You bet. This is Patrick Henry, CEO of QuestFusion with the Real Deal…What Matters.

I hope you enjoy this interview and it’s insights. Please feel free to leave comments and questions below!

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.