Evaluating Risk and Reward when Buying Companies, with Mahati Sridhar

Speaker A: Spending a little bit of time focusing and building a relationship, not necessarily focused on the startup, helps me really understand, hey, is this someone I want to go for a walk with and have a conversation with? Is this someone I can share a meal with? Is this someone that I think can, you know, heed feedback, whether it's from me or somebody else? Is this someone we can wrestle through the hard things and celebrate the great things? And. And I think that being able to work through that and piece through that helps me identify who are the founders and the teams that I'm really willing to roll up my sleeves with, be patient with, and invest into.

Speaker B: You're listening to Deal Closers, brought to you by websiteclosers.com, a show, uh, about how to make your business profitable, scalable, and one day even sellable. Hi, I'm Jason Gillikin, and today we're talking to the buyers. So let's say you've got $100,000, and you're thinking, I don't know about the stock market here. I'm not so sure I want to invest my money in this. And you start to think, I wonder if I could invest in some companies. Well, what do you do about that? Well, today we've got a very special guest on with us. She's Mahathi Sridhar. Uh, she is a partner at Revolution's Rise of the Rest Fund. Formerly she was with Bull City Venture Partners. She is somebody that I've known for a little while here in the Triangle community, one of the experts in the Triangle, uh, entrepreneurial and venture capital ecosystem. Mahathi, thank you so much for joining us today.

Speaker A: Wow, Jason, that was a really nice introduction. Definitely, definitely building up what I've done. But, um, excited. Excited to be here. Excited to have this conversation. And, you know, let's get into it.

Speaker B: Okay, let's do it. So let's talk about, um, mindset initially. Let's say again, somebody has $100,000 and they're thinking, maybe I should start to invest in something a little bit different. You've seen so many deals over the years, and you know what mistakes people make when investing in companies. So can you talk about, uh, let's just go say. Let's just say, in general, what are some of the mistakes that you see investors making?

Speaker A: Yeah, totally. So want to come at this from, I think, two different lenses. So both targeting investors as angel investors, but then investors as VCs. Very different. And sort of the rubric that they look at for deals is also super different. Um, and so I Think that at the end of the day there's a couple of things that are the same for both. Um, and one is what is your risk appetite as an investor? Like what are you excited about, what can you realistically take on and you know, what is the role that you can play for that company? And then that second piece is who are the people that you're investing into and how do you trust them? Um, being an early stage investor, whether you're an angel or an institution, at the end of the day you're investing in a team and you're investing, you know, in them to be able to navigate the ebbs and flows, the hurdles, the wins, the hard chips. That is early stage, you know, startups. And most often the idea that you invest in will not necessarily be the idea that crosses the finish line. I have yet to find a business that is the same idea at point of investment to when, when we exit it. Um, and so you're really investing in the people and the people who are able to really build that vision, navigate through really tough waters. And what's your conviction in those people and how you can build a relationship with them?

Speaker B: And so how do you know, like, how do you know if the people that you're investing in, they're the right people to take your money and hopefully make it 10x of what you gave to them?

Speaker A: I don't think there's a perfect answer and I don't think there's a world where you're ever 110% convicted. Like there's always like that point of doubt and I think that that's a little bit of the magic of being in an early stage investor is that there's always like this, this opportunity where things can go awry. And I think what, what helps me, um, and what helps our team to get conviction and founders is spending time with them, building a relationship with them. Oftentimes when we're investing we have hold periods of, you know, five to seven years. That's longer than the average marriage in the United States. And so you're building a relationship with these founders and, and it's going to be lasting. You're going to be checking in with them, catching up with them through lots of professional and personal sort of with life milestones. Um, and you want to be able to have a really great rapport, being able to foster a strong culture between the two of you, seeing a strong culture within their team. And so like, my biggest piece of advice is to spend a good bit of time with your founders. You know, Building that relationship, maybe before, if you have the opportunity to get connected to them before their fundraising, um, spend some time with them through that process. I know sometimes it can go pretty quickly, but, um, try to best prioritize, like, having conversations both about the business, but then not about the business, and then figure out what that good cadence is to keep in touch, post investment, um, to continue to build that relationship so you're not just checking in once a quarter, asking some really hardball questions, and it kind of feels a little bit cold. Um, it's a relationship on both sides of the table.

Speaker B: Have you made mistakes with that and been fooled by somebody that you thought was great? Um, and then if you have, what lessons can you learn from that?

Speaker A: Yeah, totally. At the end of the day, people are sales, right? Like, fundraising is a sales job, and there are some people that are really great at sales. But then at the end of the day, you. You got, uh, sold a goose egg versus sold a unicorn, and you have to, you know, you have to take some of those. I think what has been one of the biggest learnings for me and sort of my career is having conversations outside of the business. Because I think it's much harder to goof someone when you're talking about what you do for fun, how you relax, what you do outside of work, um, where your family is, what your relationship is like with people outside of your company. Because, like, that's a much more, um, like, authentic conversation. And so for me, spending a little bit of time focusing and building a relationship, not necessarily focus on the startup, helps me really understand, hey, is this someone I want to go for a walk with and have a conversation with? Is this someone I can share a meal with? Is this someone that I think can, you know, heed feedback, whether it's from me or somebody else? Is this someone we can wrestle through the hard things and celebrate the great things? And I think that being able to work through that and piece through that helps me identify who are the founders and the teams that I'm really willing to roll up my sleeves with, be patient with, and invest into.

Speaker B: That's awesome. And so, Mahathi, you mentioned team. How do you look at the team in place? Um, or do you typically just have the opportunity to talk to the founder and that's it?

Speaker A: Yeah, good question. Um, I always try to talk to more than just the founder, um, because I think that it's really important. You know, you can have, like, one rock star and then have a bunch of not rock stars, um, and then the band kind of falls apart once the solo's done. Right. And so you want everybody to be, you know, singing together, playing together, communicating really, really well together and having a really strong culture. And I think especially now with, with zoom being a very normalized mode of communicating and getting to know somebody. Especially for distributed or fully remote teams, um, not having the ability to chat with somebody else on is not really a great answer for me. In fact, it's a, it's a red flag if there's a little bit of goaltending around, like meeting the broader team. Um, so I do like to spend a little bit more time with the team to really understand what's driving them. Again, they too need to be bought into building an incredible business, being here for the long haul. Oftentimes early team members are also compensated with the mix of equity as well as, like cash compensation. And so, you know, we'll be sharing a cap table. And so being able to have that, like, collective buy in into the vision, I think is really important.

Speaker B: That's great. And so in talking to the team, what are some of the, some of the issues that the founder is not telling you right up front? Um, what are some of the cultural challenges that you might be able to get from a team member rather than from somebody who's seeking money from you? That type of thing?

Speaker A: That's a good question. Okay, so I think what I'm really trying to suss out when having conversations with team members is what does conflict resolution look like? How does communication happen between the team members? What is sort of the division of responsibilities to make sure there's no redundancies, um, tremendous concentric circles or even just gaping gaps in where the team is today. Um, and an understanding that, oh, this is what maybe co, founder, CEO told me is team breakdown and team responsibility. But then in chatting with the teammate, like, this is what they think their responsibility is and there should be alignment with that, um, and collective buy in. So for me, I'm just trying to see, like, where there is similarities in narrative, where there are differences in narrative, and then opportunities to double click accordingly.

Speaker B: Okay, yeah, um, and let's reframe this a little bit. Let's say somebody listening to this or watching this is looking to completely buy a company. You know, they, they've got a little bit of money and they go to websiteclosers.com and they see, okay, here are some of the businesses that are available in doing the due diligence there. Um, is it different than if they are about to invest in a company?

Speaker A: Do you Feel like, I think so because there's a change of control that's happening and that's like pretty dramatic. I think like as you're thinking about buying out the entire business, it's how do you build a strong relationship with the existing team assuming that you want to keep that team in place, um, as you kind of maintain operations and maintain what the go forward plan is. And so what I encourage folks to do that are in, you know, that specific position is really hone in with the team, get a strong sense of alignment, get a sense of like how you can step into a role, whether it's you know, very passive or very active. It can take a lot of different, you know, tenures in terms of where, where you want to steer and, and how you want to present yourself and really understand like what the team needs. And there's always a gap that you can fill, whether it's you or you hire someone to fill that and sort of like really orient yourself around being a problem solver, moving into that role and filling those gaps so you can be, you know, additive from day one.

Speaker B: That's great advice. Um, what you know, so you've been in some, some deals or seen some deals where the company got acquired, um, or there were just like a huge investment where the founder then took a step back um, after, after that. Um, have you seen situations where it was messier than they thought it would be? And what can our listeners, our viewers do to potentially avoid that?

Speaker A: Yeah, change management is hard. Is one of the hardest things to navigate when you're bringing organization A and B together. When you're completely changing, um, you know, top level management, all of these things can be like pretty unsettling in the situations where I've seen it go the best. Um, having awesome communication at times, maybe over communication for what's happening, um, making sure it's reassuring and clear and transparent, um, is where I think, you know, the most success is found. The situations where things have been a little bit more bumpy have been when there's a little bit of doubt amongst the team for job security, job certainty, vision prioritization of what the new combined entity is focusing on, you know, and being able to have an understanding of what that go forward plan is, it's established well before the transaction is closed and being able to like really articulate what implementation looks like, um, to really, you know, quell. Quell any sort of anxieties that the team would have, um, is where, you know, I, I see a lot of opportunity for, for teams to really Win at that. But at the end of the day it's hard because there's always, there's always some level of redundancies and, and navigating through that, maybe having to like reorg some people or even let go of some people, like, that's, that's always tough.

Speaker B: Yeah, we, um, we've been through an acquisition recently. So, um, my company.

Speaker A: Congrats.

Speaker B: Thank you. So my company, Earfluence, was acquired by Walk West. So now the producer on this show is Walk west, not Earfluence. And you know, we, There have definitely been some challenges and one of them is, so you mentioned over communication. And I feel like I communicated and not over communicated and I needed to over communicate. And one of the things that happened was with me not being the leader of the team, it started to be, uh, a little bit confusing. Um, and my team felt like I didn't have their backs in some things, um, and nothing like nefarious or anything like that, but just like checking, um, legal documents, um, for the transition part. And for me, I felt like, okay, I'm not a lawyer, I shouldn't be answering these questions. But, um, my team wanted more of the mentor that I had been and it wasn't really fair, um, to them. So that's something that I learned. And you nailed it about the over communication part of it.

Speaker A: Yeah, yeah, I think it's definitely critical because again, I think it goes back to my point earlier is relationships is that strong foundational tissue at the end of the day and being able to continue to reinforce that, lean back on that and support that is what's critical.

Speaker B: Um, Mahathi, in your due diligence, do you talk to, do you get a chance to talk to customers also? Um, as well as employees?

Speaker A: Yeah. Great question. So we are typically a non lead investor, so we're usually a part of a syndicate of a round. We're not the ones anchoring the round or writing the largest check. Usually the second or the third largest check is our dynamic. So in some instances, yes, we are able to directly have conversations with some customers. But in some instances we have to rely on the lead investor's diligence or conversations that they've had with the customers, um, for those conversations. But whenever we are able to have those direct interactions with customers, they're tremendously meaningful because at the end of the day, this is someone who's paying money to the company for a, uh, service or a product and they need to be raving fans, but they also need to be able to be critical of what they're getting, and that feedback is priceless.

Speaker B: Okay, all right. So you're typically not the lead investor. And so let's go over the situation where you've got a little bit of extra cash lying around, and you're thinking, maybe I personally want to invest, not through a fund or anything like that. And your old buddy Jason Kaplan, Plane from Bull City, um, says, hey, I've got this great deal that I'm personally investing in. And, you know, do you want to sidecar it? Like, do you want to put in, I don't know, $5,000, $20,000, something like that? And you're like, okay, well, I know Jason. You know, maybe, uh, I want to do this. But let's say he's the lead investor in this. Um, for our listeners, for our viewers, how do you evaluate that? Like, do you. Would you do your due diligence, or do you just kind of trust your source?

Speaker A: Oh, man. Trust Jason Kaplain. Have you met the guy? All jokes aside, he's fantastic. Um, so I. I personally would do my own due diligence, and I always encourage investors to do their own due diligence because in the case that anything goes awry, you can't point fingers at anybody but yourself. And it's always easy to attribute blame here, there, or whatever. And I try to reduce the opportunity to point fingers and just point them back at me, because then I can, you know, have a little bit more of a feedback loop with myself. Um, I think that there's also just a lot more to be had. Everyone gets conviction from different places. Um, and what gets me excited is not necessarily the same thing that would get, you know, Jason investor excited or Bull City excited. And I think that that's important to uncover in doing your own due diligence.

Speaker B: Yeah, that's a great point. Um, how do you think about the market and just challenges in general of. Of our world? Um, I'm guessing you hear a lot about, like, the market could be $7 billion, and if we just get a half percent of that, you're going to be rich. Um, how do you evaluate things like that, where maybe it's a huge potential market, but there's also big players in the space.

Speaker A: Totally, totally. The infamous tam Sam. Som slide. Right?

Speaker B: Wait, wait. Okay, explain those.

Speaker A: Tam Total addressable market, Sam. Like, serviceable, addressable market. And then some is your, like, obtainable market, effectively. So it kind of like they're concentric circles, and they become smaller as you step down. And so exactly to your point, it's we're going to capture, you know, x percent of this and then become a billion dollar valued unicorn. Right. Um, I think that understanding the market and painting those pictures are critical. Right, because that's that big audacious goal. That's like what you know, you're aiming for. This is how big and fast this opportunity is. Um, what I really try to unpack whenever I see those slides or I'm like learning about markets for, for our potential companies is I try to do my own sort of exploration of what that looks like. So if that's a sort of like a top down, like these are how many players, you know, this is how like how we see like their market cap looking and therefore this is what that market sort of represents or kind of like a bottoms up approach. There's this number of CFOs, um, you know, for, at this many startup companies, um, and they are typically have this much as their average salary and we're trying to build an AI tool that replaces the CFO for SMBs. And so therefore companies have this much money to spend and we can get this much improved margin and things like that. So that's kind of another way to think about what that market bulb looks like. I think that they're super, super helpful. Always take a little bit of a grain of salt to it because those are, those are numbers that can be very readily skewed. And so do your own diligence as well to see like if you can get to the same number or get to a reasonably similar number. And then also to your point, see who else is playing in the space and who else is, you know, taking up space and winning allocation in that market and how much is like reasonably like available or how much you can reasonably steal from some of the competitors in the space.

Speaker B: Yeah, such great advice, Mahathi. Uh, let's talk about friends and family for a second. So you know, let's say you've got a cousin, um, and the cousin is, you know, starting a business and needs $25,000 and uh, she knows you're in the space. How do you evaluate that type of thing? And I, I know you've got like a venture capitalist hat on, angel investor hat on, but is there a different hat you wear for friends and family typically?

Speaker A: So when my friends and family are the founders, yeah. So I always go in and caveat asterisks, give a humongous disclaimer with people that I'm close to that are, you know, building businesses, saying I come in here with a tremendously critical lens. So know that the, the way that I'm looking at this deal is like informed by the job that I've had and my career. And I'm not going easy on you because I love you and I know that many other net new investors are going to bring this level of rigor to you. So I'm not going to give you a softball, I'm not going to give you an easy, an easy go at this. And I'm going to really grill you with the hopes that it makes you better prepared moving forward. And like, in the instances where, yeah, I have full conviction, you know, like, I will move forward and, and sort of like invest there. But there are many opportunities where it's just like, hey, like, here's all of my pieces of feedback. Maybe let's circle back in a couple of months or a year and see like, how things have changed and you know, can revisit at that point. Um, but these would be, you know, these are my outstanding questions and this is where, you know, I'm kind of lacking in conviction to date. Um, and for me, maybe spending a little bit more time because friend or family than maybe a, ah, founder that comes in through pipeline to try and see, you know, how can I add maybe a little bit more value to flip the coin for me.

Speaker B: Yeah.

Speaker A: So no shortcuts for me if that's what you're getting to. None of that. Um, I put everyone through the same kind of process.

Speaker B: Right. Yeah. I mean, it's gotta be such a tough, ah, conversation and, and you're equipped to be able to handle that much better than the, the average person. Um, or you can say this is my job, like I know exactly what, what I need to, to ask you here. Um, you know, for, for somebody who's a doctor or lawyer or something like that, um, you know, that doesn't have the background that you do. I imagine it's harder to, to say no and they have to listen to podcasts like this or, you know, go

Speaker A: to being an investor, you get pretty good at saying no. We say no a lot more than we say yes.

Speaker B: So yeah, um, Mahathi, any. Don't use names or anything, but any disaster stories that you can share about, you know, evaluating companies and, you know, or culture changes or anything like that that, uh, you know, that we should be aware of so you can share lessons learned so that we can avoid any of those red flags.

Speaker A: Yeah, yeah, totally. I think one of the biggest lessons that I'll share is, um, and this kind of speaks to what we were talking about earlier talking to team members rather than just talking to founders. Um, there was a company that we invested into and we were really, really excited about this co founding team. We thought they had tremendous synergies and really great founder market fit. So they came from the industry that they were building a solution for and had a lot of potential awesome customers lined up just given what their backgrounds were. And um, they had an outsourced dev team and you know, this fractional head of technology and this and that never spoke to either of those resources when we were first doing diligence, um, because they had put a great logo and a great shop that we knew. So we were like, oh, like that's fine. And this is a fairly like expedited like diligence process. Four months post writing, our initial check that head of tech leaves, um, the fractional dev team kind of falls apart and there's no one that really steps in. The co founders have a major breakup, for lack of a better term. And this company is just kind of like, you know, floating like it's just a million different pieces. And I think, um, for us, other investors on the cap table, like, we were all caught like pretty off guard just given like the level of conviction we had had in what we thought was a rock solid team. And it only takes a really bad conflict and no real process around conflict resolution to, to really shatter that ultimately the team. You know, it took a little bit of time. The remaining co founder was able to rehire around him. The business completely pivoted naturally as it, as it was going to, um, and they got their footing finally. But it definitely like reset and the company is, even to this day probably still, you know, like 12 to 18 months behind the pacing that we had originally anticipated for, for sort of that investment. And, and it's hard, you know, and I think for us the big lesson learned there, um, which is like very topical, is do thorough diligence. Don't rely on other people's diligence, don't hold anything as an assumption or an expectation. Make sure you just like check the boxes. Take the time to check the boxes because hopefully all of the things will be uncovered as you, as you've run through that.

Speaker B: That's awesome. Mahathi, you, uh, asked for questions in advance and I didn't ask any of them. Um, is there anything that um, you wish I had asked that you wanted to answer?

Speaker A: The only, I guess, like piece of advice or additional cautionary tale I'd put to investors is just the timing piece around being an early stage investor. The hold times are pretty long. So if you're looking for a quick buck, this is not the place to, to be spending your time or your resources or our hold times are like you know, three to five to seven years. And so if you're looking for uh, a place to park your, park your cash and park your optimism, like this is a good industry to be in and to spend a little bit more time as well. And I mean you get to support awesome founders and small businesses and I think there's nothing better than that. So awesome.

Speaker B: Mahathi, tell us about Rise of the Rest. Are you looking for investors? Like what, um, what can our listeners and viewers do for you?

Speaker A: Yeah, totally. So maybe a little bit of context on, on Rise of the Rest. So we're a D.C. based fund. We focus on pre seed and seed stage investments. We're a part of Revolution, which is a family of funds that was founded by Steve Case, the founder of American Online, or aol. Um, for Rise of the Rest, in particular, we focus on companies that are headquartered outside of Boston, New York City and Silicon Valley, the rest of the country. Um, and the reason why is because we see big businesses thriving in all of these ecosystems. Steve very proudly built his business not in one of those three places. And the innovation ecosystem is not necessarily where it needs to be, especially in comparison to some of these major hubs. And so we want to invest in the underdog. We see tremendous value being able to build a business anywhere and we want to be a part of that solution. Um, and so the best way to connect with us is through our website to be honest, Revolution.com you can see all of our portfolio companies there. We have an awesome newsletter, um, both if you're looking for a job or you someone else, you know is looking for a job with one of our incredible portfolio companies, you get to follow us. We're often on the road, as you can probably guess from our investment thesis, um, for different opportunities for where to connect with us, where to meet us, where, um, you know, we'll be hanging out, spending some time with our companies and our ecosystem dones. Um, and just like learn a little bit more information about like who we are, why we do what we do, um, and how to best partner with us.

Speaker B: Amazing. Um, and how can people connect with you in particular?

Speaker A: Yeah, so also website's a great call out because it has a cool button where you get my email address as well as like connected to my LinkedIn. Getting into my inbox is probably the best way to get my attention. Um, LinkedIn. I feel like things get lost in the the sauce, so please try to find, find my email. Um, I'm usually in and around Raleigh most weekends. Um, and now that I live here, it's much easier to get a hold of folks, especially locally in the Triangle. Um, but yes, looking forward to connecting with folks. Um, as you sort of think through all things startups.

Speaker B: Amazing. Mahati Sreedhara, thank you so much for joining us on the Deal Closers podcast.

Speaker A: Yeah, thanks for having me Jason. This is great.

Speaker B: And thank you for listening or watching Deal Closers podcast brought to you by websiteclosers.com if you're interested in learning more about what websiteclosers.com does, obviously go to websiteclosers.com this podcast is edited and produced by Walk West. I'm Jason Gilliken and we'll see you again soon on the Deal Closers podcast.

Speaker A: Mhm. Sat.