An Advanced Approach To Startup Funding
The Coronavirus pandemic is affecting every industry, every person. When it comes to the Startup world, it is especially effecting innovation funding. In the midst of this pandemic, super accomplished serial entrepreneur, Michael Burtov released his book The Evergreen Startup: The Entrepreneur’s Playbook For Everything From Venture Capital To Equity Crowdfunding. The book is for entrepreneurs, and it shares insider secrets to getting funded by accessing millions of dollars from traditional and non-traditional sources of startup capital.
The Evergreen framework developed by Burtov is the core of the startup funding curriculum taught to entrepreneurs at the MIT Enterprise Forum. He is currently a board member and instructor at the MIT Enterprise Forum Cambridge, where he teaches the Evergreen framework and also helps execute educational programs for aspiring entrepreneurs. I had the opportunity to interview Michael through a zoom of course, and learn more about him, his book, as well as many fascinating topics of the startup world.
Let’s just say it was a SUPER informative interview. Speaking with him felt like I was taking a very interesting and expensive lecture at a top institution. His book is available on Amazon, and if you still need some convincing after the interview, maybe reading the numerous five-star reviews will change your mind.
“The Evergreen Startup has been used in the real world—by hundreds of founders-to raise many millions of dollars.”
“I founded my first company, about 15 years ago. It’s easy for founders who’ve been around for so long to forget what it is like at the early stage, in the beginning, but I get the most excitement out of the beginning of a company. That’s the most fascinating part to me. I like being around companies that I can greatly help when they’re just starting out, it keeps that passion in me. That is really the sweet spot for me. It’s a great revolutionary idea, and what happens now? How do we bring it to market? How do we test it? How do we build it? Things like that, so that’s kind of where I always happen to be.”
“The book is not designed to celebrate innovation, it’s not designed to celebrate investors. It’s really, for the entrepreneur, and I’m one of the entrepreneurs that this book is for. So, I have a very personal section in there about my experience. My failures, my mindset. This is not a vanity book for me. This is not ‘I’m going to write this book and I’m going to look all important and fancy because I have a book out’. This is a book because I think it has value.”
A real problem in the Innovation Space…
Michael is one of the pioneers of equity crowdfunding, which allows you to raise money for your startup from regular people, but that was not always the case…
When I asked Michael why he decided to write The Evergreen Startup he revealed that there are a lot of changes currently happening in the startup world and that one of the biggest challenges is being able to raise money, specifically for minority and women founders.
“It’s very difficult for minorities and women founders to raise funding through traditional methods. A lot fewer startups out there in the world are run by minorities or women. Only about 2% of all venture capital money goes to female-run companies. Less than 1% goes to minority-run companies. Not only are the investors white male, but also the founders happen to be white males.
The demographics of the founding team are the most important part of the equation for a startup. “One of the biggest challenges that startups have, and that good ideas have, is if you happen to be the wrong color, or if you happen to be the wrong gender, your chances of being funded the traditional way, go down a lot.” Said Burtov.
He added that raising money for minority-run companies and women-run companies is one of the biggest problems he has had to work through in his career and help others work through as well. This is what The Evergreen Startup is about, “how to raise funding in a new and smarter way.”
Michael said that this challenge is rooted in the legacy of how innovation was funded in the United States.
“In the 1930s, there was a lot of fraud. So, the U.S. Congress got together and said well we don’t want people to invest in companies, and then have the companies turn around and steal their money. So we need to protect investors.” So to prevent this, the U.S. Congress made a law that said you have to be what’s called an accredited investor in order to invest. “They made a definition for being an accredited investor basically you have to be a millionaire. So, essentially you need to be really rich to invest in startups.”
Michael then explained that the idea was that if you’re really rich, then you know about money which means you are less likely to be fooled by people who want to steal your money. Those laws where you had to be a millionaire to invest in startups existed until 2016. “It’s still the case, it just depends on how you invest “said Burtov.
“There’s a lot of problems with this, not only because only a few people in the United States invest, but the average investor, so the average millionaire in the United States is white, around 62 years old and male. So, the companies that they’ve tended to fund also happen to be represented by younger white males. We had this disparity from 1930s to 2016.
In 2012 Congress got together and started thinking, well this is a real problem. Small businesses are not run by white guys, innovation comes from everybody. Women are innovative, minority founders are innovative. We need to stop this nonsense. So they passed some new laws that allowed for people to raise money from everybody, from millionaires and not millionaires.”
That’s one of the foundational elements of the book. “How do you take advantage of these new laws, which have never existed in the history of this country, that allow you as a founder to a raise from everybody not only through millionaires, because the millionaire system of startup fundraising is very problematic.”
The untold fact about relying on traditional VC and Angel Groups
V: What are some of the problems you that arise when relying on Venture Capital/Angel groups for startup funding?
“Aside from the fact that they tend to be very picky about the demographics of the founders, they also tend to be very selective about the ideas they fund. Some industries are just not fundable, so for example if you have a religious-based startup, you’re not going to get funding from angel or Venture Capital (VC). Even things in the hospitality industry are very hard to fund. Just as an example, if you have a blockchain or artificial intelligence or AI, it’s much easier to get that funded than if you have something in hospitality. There are definitely trends that represent the economy at large.”
There are also other important issues when relying on VCs Michael added, such as their motivation and what they are ready to take from you.
“What they take from your startup might not be something you’re willing to give up”
“What they take from your startup might not be something you’re willing to give up. One of the most challenging things about taking money and relying on money from those sources is that you’re dependent for years. You’re basically committing your startup to selling or going out of business within a few years because that is how these investors get to cash out. So if I was to invest in a company let’s say your company, and I was going to invest $100, there’s only three scenarios that I ever get any money back.
- Scenario One: you go public and I sell your stock on the stock market which almost never happens, it’s really rare almost doesn’t happen at all.
- Scenario two: you sell your company to a larger company, and then hopefully I’ll make some money, which also happens very rarely.
- Scenario three: you go out of business, and I take a tax write off. So, with the tax write off, I get to deduct money off my taxes.
Those are the only three scenarios that I will ever get to see any money from you again. The scenario that you might want as a founder, is to run a company, make a good living and have millions and millions of dollars in profits. But if you do that, I as an investor will not see any money from my investment. There’s just no way for me to get any money out. I own your stock I don’t own any part of your revenue I don’t own anything else. So, they call that company a ‘zombie’ in industry jargon.
A company that’s profitable and self-sustaining, but it’s not exiting, it’s not selling itself to a larger company, is referred to as a zombie. Now, the reason they call it a zombie is because just like a zombie, you’re kind of moving forward and the industry wants to kill you, because if they kill you, they get to take some money out.”
“So that’s one of the challenges of buying stock or bonds or any other those instruments that traditional investors buy. The investor’s motivation can sometimes greatly diverge from the startup’s motivation. Now one of the tools that I talk about in the book helps you align your incentives, your goals, and motivations, with those of the investors, and its a very different approach. I call it the Evergreen approach, because you can always do this, you can stay evergreen. You can always raise money throughout the duration of your company and these alternative methods.”
What are some of the defining characteristics of Evergreen companies?
“The term evergreen is used in different ways in different in the industry. If you were to talk about an evergreen tree, it is a tree that’s always green across all seasons, it always has leaves, it always has foliage it’s always happy and healthy, so it doesn’t depend on seasons. In finance, the way that I use it is always having access to capital. One of the defining characteristics of the Evergreen method, is that you don’t have to rely on something called a round.
In the startup world, a round is you go out and every year or two, and you go to investors, and you raise $3 million or $5 million, or whatever you need. But what happens is you have to set up this whole factory to raise money. You have to train your whole team, you have to create all these materials, you have to develop all these relationships, you have to go through this whole process.
So you open up this factory for a few months, you raise some money, then you close it down for a year or two years or however long it takes, so that’s the concept of rounds. One of the biggest advantages of going Evergreen is that you don’t have those rounds, you’re not limited to raising money in binges by binging and purging. You don’t have to eat enough to last you the whole year. You don’t have to work one day and live on that money for two months.
Now you can always raise money through the sale of stock, which is by the way kind of what public companies do. So it allows you to run your private company, just like a company on the stock market gets to. It’s a way for a small company to raise money in a way that’s similar to how big companies raise money. Which equalizes things and it makes much more efficient. One of the biggest tools that I talk about is something called equity crowdfunding, which allows you to sell stock to regular people, not just millionaires.”
Describe your writing process. Do you have a writing routine?
“A lot of this comes from my lecture notes lecture materials, things that I’ve encountered in the past things that I teach, things that I mentor on. The book originally was much longer. I mean it was over 800 pages but I decided that’s too long of a book. So I made it much shorter, cut out a lot of stuff that was too in the weeds, too detailed. I try to keep the book very conversational, easy for people to understand, I don’t use a lot of jargon or lingo. I made sure that the sections were actually useful. That people found them useful and then the ones that people found less useful I didn’t include.”
How has teaching impacted the way you wrote The Evergreen Startup?
“The few people that have that I gave it to beta read, felt like I was lecturing to them in a class. I think it was just written naturally. I didn’t want too sound educated, I didn’t want too sound academic, I wanted to sound conversational! I wanted to keep it easy, just because I think that’s my natural way of communicating with people.
So, I gave it to a few people and they were like: ‘well this feels like you’re lecturing me in a classroom’, and I’m like oh no this is bad I should redo this. And they were like: ‘no no but it’s good, I learned a lot, I feel like I took like a PhD course in fundraising. Basically the tone is conversational, it’s pretty much exactly like how I would talk in class.
I had people say well you should rephrase it in that way, or you should use this word here because it makes you sound smarter. I’m like yeah but I don’t talk like that. That’s not my thing. I’m not trying to pretend that something I’m not. So it’s a representation of my personality. I even put a section in there, talking about my personal experience, how, what type of founder I am.”
What surprised you the most about the process of creating this book?
“Discipline, actually sitting down and writing is tough. I first started writing this book, before the coronavirus hit. I had a thesis, and I was driven. I wanted to get it down but I actually thought I had a lot more material than I ended up having. I thought I could take lectures from my classes and turn that into a book. And what ended up happening is, as I started going through it I realized a lot of this stuff was redundant, a lot of this stuff wasn’t useful. A lot of the stuff didn’t fit the flow of this narrative of how I wanted trace information.
I had amazingly less material than I thought I had, but I had to cover a lot more topics than I thought I would have to cover. In that combination, it really forces you to sit down. The most grueling part of it for me is probably the editing. The just, you know, editing. Making sure everything’s in the right sequence but also getting rid of the typos, all that. English is not my native language, I’m good at English, but it’s not my first language.”
What is your first language then?
“Russian. I’m Russian. I’m comfortable with English, I’m more comfortable than with English than I am with Russian at this point because I’ve worked here for so long. But still, the grammar sometimes is very tricky. So the editing it was difficult for me. The rereading, the tweaking. I think I spent more time editing the book than I spent writing the book as funny as that is.”
What are some of your proudest accomplishments?
“That question to me. It really depends on who I’m talking to. If you judge a tree by how well it can swim, you’re judging the tree on the wrong criteria. I think traditionally, entrepreneurs because we’re so conditioned, money is kind of like points in a video game for startups, for people. For many people, the more money you have, the more points right? You win the game when you have the most money.
So your question my criteria for proud is very different I think than most people. I think the typical answer would be selling a company, making a billion dollars, maybe employing a bunch of people, or whatever. I’m actually really proud that I help companies. I am hopefully proud of the things I haven’t done yet. The things I’ve accomplished, the things I’ve done, I’m happy. I’ve done good, I fucked up a lot too, there’s no perfect path. But what I’m proud of is what I hope to accomplish.
I think the new world that I think I can help create it, that’s what I’m proud of. A lot of that is decentralizing how financing happens for startups, a lot of that is bringing innovation that just hasn’t happened before. So, I guess I’m most proud of the things that I have yet to do. I know it sounds like a twisted roundabout answer to your question but that’s really how I feel. I am more excited about the future than I am about the past.”
Can you share some words of wisdom for people that are thinking of starting a business?
“Generally, I would either say, just do it or just don’t do it, depending on who you are, and it sounds like they’re completely opposite advice. If you’re starting a startup, a company, something innovative, you are probably not going to make any money at it for a while, if ever, its just the reality of it. So, if you can do it, If you can survive, and if this is something that drives you, do it, don’t think too much.
If you wake up and think, I can be good at this, this is the thing for me, I might suck at all the other stuff I’ve done but I think I can be good at startups, then do it. And if you do it, you do it 100%. But if it’s not for you, then don’t do it, because it’s a lifestyle change. It’s not a diet, you know it’s forever. You don’t just do it and then you move on. It intrinsically changes the type of person you are. And it’s far more difficult and rewarding than anything you’ve ever had.
When I was in the Peace Corps the tagline for the Peace Corps was it’s the toughest job you’ll ever love. Being a startup, the founder, the CEO of an innovative company is the toughest job you’ll ever love. If you’re not into challenges, if you’re not into tough stuff, don’t do it.
Founders also suffer from depression, from financial instability, from falling behind their peers, your friends that have corporate jobs are going to be making more money than you. These are all things you have to consider, startup founders do not get rich. It takes a long time to make any money.
All the stuff that you see on TV and all this stuff that you hear about venture capitalists, you know, take my money and then you can get a billion dollars that’s not true. Those are all lies. The vast majority of startups do no do that. The ones that do, it’s great and there’s definitely a lot of serial entrepreneurs that are successful, but it’s a haul, it’s hard, and you’re either in or you’re out. But you got to make up your mind, it’s a significant investment.”
So now that you wrote your first book do you plan on writing another book in the future?
“I’m actually working on a book for investors. The Evergreen Startup is for startups on how to raise money smartly in traditional and non-traditional ways, and the next book is how to invest in startups in traditional and nontraditional ways. Because now everybody can be an investor. So, you can be an investor. If you’re not a startup, you can potentially help fund a start-up and make some money. The idea behind this book is to help regular people invest, so you don’t have to do stupid things like traditional investors have been doing for the last 80-90 years.”
What is your favorite part of advising and mentoring companies?
“I like creating stuff. I like helping people create stuff. The toughest part of any company is the mindset, and it’s the baggage that a startup founder has. The idea has amazingly little to do with whether the company can be successful in the beginning. It’s about the founder. So, the most rewarding and the most frustrating experiences happen with the founders of the companies.
We all come in, into this world with baggage, with ideas and rules that most of which we make up for ourselves. The most challenging founders to work with are ones that have MBAs or other degrees in business because they come in with very strong ideas about how the world works. And that’s not the case.
There’s a billion successful companies on this planet, and they’re all run differently. There is no formula to run a company successfully and helping people identify what their path is is rewarding, but also very challenging. It’s also an extremely introspective experience because I constantly go through this evaluation of who I am, and how I evolved over the years. It’s therapeutic in a way for me and the founders I work with.
I work with hundreds of founders from many different organizations, and it’s a very unique experience. The founder of the team is the greatest asset and the greatest liability during an early-stage company.”
“The founder of the team is the greatest asset and the greatest liability during an early-stage company”
What’s next for you?
“So there’s a lot. I’m running a company which I’m proud of. I want to help more companies in a more structured way. I mean, bottom line is, every startup needs access to capital. That’s where my sweet spot is. That’s the area where I work. I want to help more companies in a more structured way.
In addition to that, I want to help the ecosystem. We need to train investors about how to invest correctly as much as we need to train startups about how to raise money correctly. There has never been a focus like that before. I think I have a pretty unique perspective on things, which I think works. What I want to do is develop an economy where startups and investors are on a level playing field. Where they’re transparent about their motivations and abilities and using modern technology to facilitate these transactions. So it’s in everybody’s best interest, in the investor’s best interest and the startup’s best interest”
“Once you start taking money, you don’t really stop taking money in that model.”
“Right now, because there are so few investors and they’re so rich compared to the startups that they invest in. As a startup right now if the traditional model of fundraising broke, you’d have no money. You’re dying to get your idea off the ground, and you go off to a millionaire who really couldn’t care less about your personal situation, and so the leverage is all with the investor right now.
That’s a problem and investors don’t realize this a lot of time, but them having all the leverage is problematic. Because they don’t actually evaluate opportunities since it’s such a buyers market. They can just say no if they don’t like something, even if it’s a great idea that they can make tons of money off. So, millionaire investors, the traditional investors don’t make good investment decisions at all, and that’s very clear in the numbers.
Startups are at a huge disadvantage when raising money from them. One of the things that I’m doing is creating a fair way to connect these two things, investors and startups, through the right process.
Basically everybody needs to know what’s going on. What’s in it for them and have access to each other’s information. One of the biggest challenges in the startup world is the risk that a startup has working with a traditional investor is much more than the risk that the investor has working with a startup.
If an investor invests in a startup and the startup fails, the investor is okay. The investor has plenty of cash. If the startup takes money from an investor, and the investor fails, the startup is really screwed a lot of the times because they won’t have access to additional money potentially, the money that they’re waiting for might not come in. If the investor has a board seat, that board seat will go to somebody else and that other person might change the priorities of the company.
Once you start taking money, you don’t really stop taking money in that model. It’s really problematic so the risk that a startup has is much greater in general. All of these kinds of things need to be ironed out, and both investors and founders need to be educated about what it’s like from the other side. Founders don’t really know why investors invest and investors don’t really know why founders need the money. So, developing an ecosystem developing a structure where everybody is on a level playing field I think is a key element of funding innovation going forward.”
Michael is the founder and CEO of multiple successful companies, he is one of the pioneers of equity crowdfunding and has led numerous startups from zero to millions in revenue and millions in funding. He is the inventor of the revolutionary GeoOrbital wheel which was featured on the cover of TIME Magazine and named one of the top inventions of 2019. Michael’s work has been profiled by hundreds of media outlets around the world and has been subject of mini-documentaries including by the Discovery Channel and CNN’s Great Big Story. In 2018, he was named a Gold Edison Award winner for innovation and excellence, in part for leading his company to be the first to raise over $1 Million with Rewards Crowdfunding and over $1Million with Equity Crowdfunding. The list of accomplishments this man has earned really goes on and on…so I won’t list them all.
Michael works with hundreds of startups that are trying to raise money from various sources including funding from venture investors. He condensed years of mentoring, lecturing, and trial-and-error into one easy-to-follow framework for getting funded. His experience working with startups gives him some big advantages when it comes to understanding the mentality of founders and the insides of the startup world. The main reason behind why Michael has worked with over 500 newly established businesses is because he has a sweet spot for working with startups and being around founders that have “crazy innovative ideas.”