Joe stump on How an Entrepreneur Learns the Startup Investing Game

In Chapter 12 of 14 in his 2012 interview, Internet entrepreneur Joe Stump answers "How Have Your Entrepreneurial Pursuits Taught You to Be a Better Investor?"  After raising money for three companies, advising a venture capital firm and investing his own money in three companies, Stump shares what he has learned about startup investing.  He describes the portfolio theory approach VC firms take and how as an entrepreneur he has learned to compete as a portfolio firm.  He learns the mechanics of angel, seed, series A and series B investing and how to negotiate contract terms.  Joe Stump is a serial entrepreneur based in Portland, OR. He is CEO and co-founder of, a product management software company.  Previously he founded SimpleGeo, which was sold to Urban Airship in October 2011.  He advises several startups - including and ngmoco:) - as well as VC firm Freestyle Capital.  He earned a BBA in Computer Information Systems (CIS) from Eastern Michigan University. 


Erik Michielsen: How have your entrepreneurial pursuits taught you to be a better investor?

Joe Stump: So, I've been involved in a number of ways with venture capital, raising money. I've raised money now for two companies myself and I've helped a third company raise money as well. I'm a fund adviser for Freestyle Capital and I've invested my own money into three companies now. And the things that I have learned are that there are billions of dollars that are being deployed in what at times appears to be a very chaotic manner.

VCs work off of portfolio theory. They invest in a hundred companies and they expect 95 of them to fail for the most part. And what that lesson taught me as an entrepreneur is if you're one of those 95, guess what, you are competing with 95 other people for probably 20 percent of their time because they're spending the other 80 percent of their time on the five winners. So, that’s a harsh reality to learn but it's good to know and I think that there are times when getting the attention of your VC and your investors can actually be a bad thing. I mean, not that they're bad people or whatever, but it's nice to sometimes work without having the pressure.

So, I know founders that will withhold good information for just a little while longer so that they can have a little bit more breathing room and then they're like, “Ta-Da! We're one of the five!” and then the VCs are like, herd over. And they’re like …  and they bear hug them, you know, and they’re like oh god. It's like when your mom gives you a hug, you're like, “Mom, stop.” You know.

So, that’s been interesting to learn about. The way that... What's been really fascinating to me is like someone like me that dress like me, looks like me, says the F word as much as I do, can walk into a guy’s office who manages billions of dollars and then I’ll show him -- well, with my last company, I didn’t even have a PowerPoint presentation. I didn’t even have a presentation. I had a financial model in Google Docs, a product document, and a prototype and they were just like, “Oh yeah. Let me pull out the check book, and just write you a giant check with lots of commas in it” and you're like, “Really?” It seems -- Growing up in a blue color family in the Midwest, it seems like you're cheating somehow, like you're stealing money or whatever. So, that’s been really interesting.

A lot of people on the outside view it as like oh this – that the firms don’t really talk with each other and that they're always competing and they do compete for deals. But it's not really like that at all. They talk a lot to each other, they will actually -- I won’t say fully collude but I mean there are a lot of times that the VCs are back channeling with each other a lot more than entrepreneurs really realize. And then you just learn the basic mechanics like I know now that Angel investors, depending on the Angel investor, they want between a half a point and one and a half percent. They want enough that we’ll take their $20,000 to $100,000 investment and turn it into a million dollars, right? If you're the first point and a half in, that can happen if it’s one of those five companies.

I now know that seed stage, they generally want between 12.5% and 17% of the company. I know that the series A wants 20 percent, series B, things start going back down because hopefully by then you're making money and what not then looking at more anywhere between 10% and 20% and the C is definitely kind of in the 10% range. So the basic mechanics of understanding how that game is played has been invaluable to me.

I've been able to negotiate better terms for myself, I have been able to…I advise a number of companies, I've been able to return sheets over and tell them, “Hey! Maybe we shouldn’t do that. Maybe we should do this,” and getting clear insight into how the VCs interact with each other and who likes who and who doesn’t like who and how they work together has made me a much stronger -- I won’t say opponent, but like when I go into the ring with those guys, like I know who’s going to say what to who and how that’s going to all work out. And knowing the players in the game makes you a better player.

I almost feel like one of the best defensive basketball players of all time: Dennis Rodman. That man watched hundreds of thousands of hours of video and it was all so that he could know his players, his opponents inside and out. And being an adviser, being a fund adviser, investing my money, et cetera, that’s my way in to understanding the game and my opponents and who I'm going to be going up against as far as the next -- who goes on down the line and getting insight into their mentality.

I read an interview once about Dennis Rodman and they were talking about how much of a fanatic he was about watching tapes and he got so good at it that he could literally say by the time the guy flicked his wrist – so you’re talking about the ball is maybe one-third of the way to the rim. He will be like, “That’s going to bounce off the back of the rim off the left side. That’s going to bounce off the front of the rim straight down the lane.” That’s how good he was. Doing that has taken me from being a blue-collar kid that grew up in a cornfield to somebody who can negotiate contracts with some of the best MBAs that our country has and it's really fun.