The Financial Coconut: Lending Money & Investing In A Friend’s Business: Are They The Same Thing? [Chills 88 With Jeremy Au]

· Blog,Podcast Episodes,Press

 

Jeremy was featured on Chill with TFC to discuss stories about investing in friends’ and family’s businesses. He also shared some advice for potential investors who are considering putting money into businesses owned by friends or family.

Check out the podcast here and the transcript below.


Jeremy Au: 

And so I respected him and I liked him as a person. And so he was like, "Oh, I was very paiseh, you know, I was very embarrassed to ask you for money. You know, I don't wanna ask from friends. I wanted a family. I wanna ask some strangers." And I was like, "whoa, whoa, lemme get in." And so, I managed to kind of get some allocation, and that came in.

 

Andrew Zhan: 

Oh, so they study your reputation, actually in this case, he didn't help you, right?

 

Jeremy Au: 

He didn't help me.

 

Andrew Zhan: 

Because he didn't help me as a friend. He feels paiseh to ask you, although you are the most obvious person that he should be asking and you are actually interested to invest.

 

Jeremy Au: 

Yeah. Yeah, yeah.

 

Andrew Zhan:

Hello and welcome to Chill With TFC. This is a show where we talk to the quickest and geekiest minds to find out how they think about money and life. My name is Andrew, and today I'm chilling with Jeremy Au. His podcast is called Brave Southeast Asia Tech, and Jeremy is also a VC at Monk Hill Ventures where he scouts and nurtures the businesses that might transform our lives.

Jeremy's also a zero founder and angel investor in over 20 startups across Asia, which is why on today's episode we'll be putting him and his Harvard MBA to the test, to answer this question, "should you invest in your friends and family's businesses"? And don't forget to stay 'til the end for our money insight segment to learn what Jeremy's best and worst investments are.

 

Andrew Zhan: 

Congrats on the book.

 

Jeremy Au: 

Oh, thank you so much. It was a pleasure writing a book, BRAVE10: The Singapore Edition. It's an anthology of inspiring journeys across Southeast Asia and Singapore Tech. So it was nice to be able to donate profits to charity, but also hopefully inspire the next generation of founders.

 

Andrew Zhan: 

Yeah. So stories about founders and you as a VC, you've worked with several founders, you talked to them. So today we're gonna talk about something rather interesting about whether you should invest in your friends and family's businesses. And if on the flip side you're trying to raise funds from your friends and family, like how we should go about doing it.

What's your personal experience with that? When you started your business back then, now you're more VC, if I'm not wrong. Or when you started, have you raised funds from friends and family before? Or went straight to the VC route?

 

Jeremy Au: 

Well, you know, I've been obviously a student, a soldier, national service. I've also been a management consultant. And then after that, I built two companies, which was, one was a social enterprise, and the second was being a VC- backed startup, right? From zero to pre-seed, to seed, to series A, and to eventually sale before finally becoming a VC. And so I think it's been interesting to really have that experience of fundraising twice, one, a social enterprise, one for profit, education tech business.

And both experiences were quite eye-opening because I think it really shows you what you had to be prepared for. And obviously the understandable concerns that people have, right? Because they're entrusting you to do something crazy.

 

Andrew Zhan: 

Money business.

 

Jeremy Au: 

Yeah, exactly. I mean, setting up a business is crazy if you think about it, right? I mean, in today's world, you know, there's so many stable jobs. There's so many steady paychecks. Why set up a business? Right? And I think being able to create business that encapsulates that change to the status quo is difficult. And I think it's understood fully by the market. That's difficult, right? There's a high chance of failing. Give us betting on your paycheck. How much would I pay for your next month paycheck? I know exactly how much it's gonna be, but would your company be around in one year? You know, that's a very tough question all the time.

 

Andrew Zhan: 

What's the difference between raising funds from VCs and raising funds from friends and family?

 

Jeremy Au: 

Yeah. You know, obviously, it's interesting.

 

Andrew Zhan: 

Easier or harder?

 

Jeremy Au: 

Which side, well, I think, first of all, the fundamental question is what kind of business are you building, right? So, are you building a technology startup that has that pathway and mechanism to eventually become a billion dollar company? And when you say a billion dollar company, it means, on average it means that you're generating a hundred million of revenue and having a public, a market, multiple of 10 x. Right? So a hundred mil revenue. per year times 10 was a billion dollar company. And are you planning to do that within 10 years? Right. And if you say yes to all those things, then you should go to venture capital because they're there and looking for people like you who have the ambition and hopefully the capability to be able to do that, uh, within that timeframe.

For everybody else who is building a business. Maybe you're thinking about slow and steady, you're thinking about more of a lifestyle sustainable business, or you're looking for a business that generates cash flow, then the VC route is not really there for you. That being said, both of these comp types of companies will often start out with family and friends first.And I think that was my experience starting out because at the end of the day you are explaining, I think, two different things, right? One is, why the world needs this solution, which is I think the very intellectual piece. And the second part is why I am building this product. The founder market fit.

Why do I care about this thing? And so there's a very interesting dynamic where across your family and friends who's listening to you, they are different processing that, right? Which is, do I believe that the world needs this? And do I believe that you can actually build this? Because at that moment, when you're out raising money from family and friends normally is very small.

It could be $50,000, a hundred thousand dollars, half a million, a million, you know. But that quantum, as you kind of work through family who know you best, to your friends, to your friends or friends, to your friends and friends of friends, often quite a journey for many people. And I think it's a painful journey.

 

Andrew Zhan: 

And you brought up the point about is it a tech startup, like 10 x in 10 years, or is it like a cafe they're opening, I mean, it's a very different story, right? I mean, for the cafe, if they're running a restaurant or something, then yeah. Maybe your friends and family. It's a starting point. As a VC, ever heard of any horror stories from the founders who raised funds from friends and family and things really didn't work out well?

 

Jeremy Au: 

Yeah, often actually. And I think it's very common because the truth is almost every founder for both types of businesses, VC-backable slash with ambition to become a unicorn or even a lifestyle business. I think there's a real dynamic where everyone's a first time founder often, and so they often don't necessarily understand what is the best parameters for what they're trying to build. Now, what I means is that they're not necessarily thoughtful about, say the legal contracts, that it is a legal agreement, even if it's your family or friends. It is actually a fiduciary responsibility of yours because you're saying, I'm gonna do this and therefore, I need Y cash.

And sometimes, it's not necessarily clear from the founder side because they think they're executing about what they promise, but it's not necessarily clear. And then family and friends get frustrated. They get angry, get emotional, which is very fair. Or vice versa. You know, the founder has been clear, but because it's not documented, then that claims by the family and friends be like, you know, I deserve more. And this is even in the best case scenario where the company is successful, right? Because everybody wants a share of it. You know what happens? The truth is most companies fail, right? I mean, heck, if you even look at VC bank companies, 95% companies will fail. The system is designed for 95% of the startups that do not do well. And I think when the money goes to zero, then I think it can be very difficult situation for founders who obviously are going through the loss and grief of losing the business they've been building. But also I think it's a very personal, emotional, and financial pain for whoever chose to invest in that, initial friends and family round.

 

Andrew Zhan: 

So can I say that, whether it's friends and family or VCs, you should treat them all as investors, right? They get all the investor updates. You should sign up all the agreements right from the start. So, how do we structure? As a founder, how should we structure it such that, you know, protect herself from such horror stories.

 

Jeremy Au: 

You know, I think the first is self-awareness about what you're building and if you're clear about whether you're building more of a lifestyle or cashflow business versus a VC-backed business. And I'll talk about the second category more because I think that's an increasingly common path that's viable for Southeast Asians and Singaporeans to do.

 

Andrew Zhan: 

And a lifestyle casual business would mean something like a bookstore.

 

Jeremy Au: 

Yeah, you can say a cafe, or a bookstore, but something that you, even as a cleaning business, you imagine that step-wise, chronological way. I think for that, obviously normally, people are buying a normal share, percentage of the share holdings. There's a relatively fair price that you hopefully set and you don't sell too much of the company, for example. But the truth is, you access the capital as a function of demand and supplier, right? Supply in terms of capital, how well off your network is. And demand, right? Which is in that sense, like how much capital do you need and how good are you at fundraising from your friends and family? So, those quantums you've seen, people have a very robust debate, which is like, is this cafe worth before it begins X million dollars or whatever, right? And it can be very emotional and I think it's a very tough conversation.

 

Andrew Zhan: 

How do you evaluate, I mean, both parties are gonna have different point of view about it, right?

 

Jeremy Au: 

Yeah. And I think that's where, I think the good thing about the VC pathway is that, there's a lot of mechanisms these days that honestly kick the can down the road at one level, but also I think, let more informed people make that representation and valuation later. So, what I mean by that is that if you look at venture capital or VC-backed startups, what the instrument that founders normally use is, they use something called a safe note or comfortable depth. But what it fundamentally says is that, we put the money in and there will be evaluation exercise that'll be done in the next two years, for example. And the price of that will be set down in future. And between now and then, the price that we have right now will be a function of a discount versus that future.

So for example, we don't know whether this magic box that has something like we don't know value is, we don't know it's worth a hundred dollars. It's a million dollars. We don't know. Black box. It's a black box, right? And because it's a VC-backed startup, it has the promise to be a million dollars. Unlike normal lifestyle business, it's either a hundred dollars, $150, so the variance is very low. But because the variance is high, a hundred versus a million dollars, then the instrument basically says, when this box is opened up in two years, I will be able to earn 20% are 30% or 10% more with my cash check in terms of value versus the future. So in two years, my money check today and the money that comes in two years will all be converted at the same time.

 

Andrew Zhan: 

And that's called a SAFE note or comfortable depth. They mean the same thing?

 

Jeremy Au: 

Yeah. It's relatively interchangeable. SAFE is a form of comfortable depth, which is founder-friendly, but not all comfortable depth is a form of SAFE.

 

Andrew Zhan: 

Dinging! SAFE note stands for Simple Agreements for Future Equity. S-A-F-E, Simple Agreement for Future Equity. These notes are documents that access a legally-binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future.

I mean, whatever I know is from Shark Tanks and the Sharks will say, I'll buy a business for 20% this amount. So does it work like that equity model in which I invest X amount of money for X of equity? No?

 

Jeremy Au: 

Yeah. Friends and family would normally, and I normally recommend a SAFE note because I think it's safer for everybody. Because you don't want family to have bought in too cheap. Neither would you want them to have bought in too expensive, right? Because they're buying too cheap, they feel left out and you feel bad about it. If it was too expensive, then you feel you lost control, you lost equity shareholding, they felt unfair.

So I think comfortable depth helps a lot. For Shark Tank, unfortunately, I think that's how most people think friends and family are because it's a show designed for friends and family. So the people who are watching Shark Tank are people who are like, oh, I too can be a Shark. Far . I think there's an unfortunate reality where I think it's done a tremendous job educating people about the fact that people next door, your neighbor, your friend, can set up a business. That's amazing, right? And spotting talent is a great exercise. At the same time, I think I've noticed that sometimes friends and families take away the wrong parameters because these Shark Tank folks are not friends and family and you should not be acting like them.

These are billionaires or millionaires. They're acting frankly as investors, acting more like venture capitalists. And they pretend to have that, you know, some of them have the more that aura, some of them more adversarial. And so I think it is a shame if you as a friend, or family are taking on that same aggressive stance as a shark tank judge or investor.

 

Andrew Zhan: 

Okay? So if you take the flip side of the table, if you are a friend and family, someone is coming up to you. So what should your considerations be? And you mentioned you don't have to be like a shark cause that's literally your friend asking you for help with his or her business. So how has she come in? What's your approach?

 

Jeremy Au: 

Yeah. And I think that's where the awkward reality, and I mentioned this earlier, is that you have to suddenly make an assessment about your drinking buddy, your old army buddy, your sister or brother, right? I mean your uncle. So, yeah, make it as evaluation. You just hang out there for some holiday or Christmas and something. You have to sit back and you say, wait, I need to reevaluate this and say, okay, I like them as a person. I'll trust them my kids, they're good to have a drink with, and you're like, wait a moment. And you have to that make assessment, which is, is this the business that makes sense? And that's one level. And the second one is, do I trust this person to make that business happen?

And those are two very separate questions, right? So first of all, does this business make sense? And that's a tough one because the truth is when a friend or family comes in, you know, they may be doing stuff like, you know, I literally have a friend and he's doing immunotherapy for cancer, right? He's building gene and immunotherapy basically to trick your body's immune system to attack cancer. The science is difficult, the path is hard. Funding is difficult for that kind of startup. But the truth of the matter is that if he makes it happen, it's definitely a billion dollar company because nobody wants to have cancer and everybody's going to face cancer at some point of time.

 

Andrew Zhan: 

Yeah. It's gonna help people.

 

Jeremy Au: :13:13)

And it's gonna help people. But the thing is, you start to say to yourself like, wait, how much do I understand about the science? How much do I understand about the business? How much do I understand about what the market is? And that may not, that may be very non-obvious to be honest. I mean, you look at Facebook. Mark Zuckerberg basically got money from his dad and he was basically saying, here's a social network for university kids. And so, you can sit down yourself and you're like, eh, is that gonna be? You think about it today, it's like, imagine someone comes up to you and say like, you know, I wanna create a video app where people can scroll for fun.

Yeah. And you're like, eh? And then, you know, 10 years later there's TikTok, right? And you're like, wait, there's a lot of video apps, there's YouTube, there's Facebook, there's Google. So I think it's really non-obvious. And so the ability to assess that really helps you there. And I think self-awareness, right? I mean, you know, are you an investor by background? Are you an operator in that field? Do you have experience in that domain? Are there friends you can ask to learn about that space? I think it's a very important one.

And the second, you know, below the iceberg, below the waterline, is really like you trust this person to solve that problem? And sometimes people use it as a proxy. What I mean by that is like, oh, this person is super capable, super smart, super trustworthy, and so I don't understand the business, but I trust him or her as a person, right? I think that's not a bad proxy, I think, but I think it can go badly as well sometimes because they can be earnest and smart and capable but the truth is, they haven't done homework or they got too excited, or that's actually a lot harder than they think it is, right? And so, the proxy may be adequate for you trusting the person, but not adequate for it to be the outcome. And the worst case, and I think the huge issue at the end of the day is, it's very, very hard to cognitively say something like, oh, I really trust this person to take care of my kid, but I don't trust this person to run the business, and to give $20,000, right? Because it's not easy. I mean, it is not even about the person. It's just fundamentally saying like, it's not like saying whether this person can do well in an exam or not. You know, just a binary basis between a hundred and zero. It's literally an exam where in a VC-backed world, 95% is gonna fail.

 

Andrew Zhan: 

Luck plays a part.

 

Jeremy Au: 

Yeah. And luck plays a part too. And so I think it's a very fair piece to be like, hey, I'm not making a decision to spend one hour of time, which is a knob thing, but it's almost like a binary thing, which is like, you either succeed or you fail. And so, I think that's a tricky conversation to have, not just with them. In a way that preserves a relationship over the time, but also a tricky conversation to have internally. Learning how to differentiate the person as a businessman as compared to him or her being a friend. That's tough. And how do you even say, deliver the news, right? It's like, you know, I like you as a friend, but I don't trust you as a businessman. That's awkward.

 

Andrew Zhan:

Good luck with that.

 

Jeremy Au:

I mean, yeah, it's half, I mean, it is honestly easier to root for you. Yeah, exactly. The truth is often the opposite is easier, right? It is easierto be like, oh, I like you as a businessman. I don't like you as a person. That's the most common and you can make money for me, right? And people do that all the time. You know, they go on public markets and they invest in companies. They look at Shark Tank and you're like, oh, this guy makes money even though I don't like the person. And so I think there's an interesting dynamic where I think it can be a very difficult conversation to have.

 

Andrew Zhan:

Mm-hmm. How do you assess? Have you ever said no to a friend?

 

Jeremy Au: 

Yeah, I have. And you know, I think the way to have that conversation, frankly, is I think to share and really keep on the business. So, say like, hey, you know, putting aside our history, et cetera, like here's my questions about the business. And having that fair and open discussion to be like, hey, I want to really hear what you are thinking about it. I want to hear what you need help on, and I wanna know what we should work on together if this was to happen. And I think in that discussion, the process, it should come out is, I think you might have done the entire process, be it one hour, two hours, five hours, ten hours. Both sides already know what the answers are gonna be because of the way that you have been thoughtful about asking questions and you know, you almost want it to be like to the point where you're like, yeah, you know, other person understands why you're not investing rather than just the decision that you're not investing.

 

 

Andrew Zhan:

Oh, okay. That could be useful information for them.

 

Jeremy Au: 

Yeah, yeah, yeah, exactly. Because you know it's useful information for them to maybe improve their pitch at one level or it could be useful information for them to improve or tweak the business model. Or maybe it is useful feedback for them to say, you know what? This is not the right idea. I'm gonna think of a different idea, or do something different. And I think that can be a very helpful conversation both ways.

 

Andrew Zhan: 

Mm-hmm. , I'm sure you get a lot of these because you're a VC yourself. Your friends and family, you're gonna be their top of mind, when they wanna raise some funds.

 

Jeremy Au: 

Always top of mind. And I think it's a privilege, right? Because it means that I think people trust you and people think that you're the capital to do that. And people want you to be part of the team. And so, I think when people ask you, it's very much a gift of, because it's tough to ask for capital, right? I've been in that shoe, right? It's like, oh, I need to ask for money. But actually also gifting them with the opportunity to invest in you, and vice versa. I think that when someone gives you the gift of being vulnerable for capital, but also being brave enough to try to build something new, I think you have to be a good steward in being kind.

So it doesn't mean that you're not unwise, it doesn't mean that you are not being savvy. It's just that you can do all those things about being thoughtful about a business model while also being kind to the person, right? And the truth is, hopefully you also are just as kind to a stranger asking you for capital. But the truth is, the awkward reality is that, you have a preexisting relationship with friends and family that you don't have with a stranger, right? And so, the stranger often will have an easy come, easy go because there's no hard feelings dynamic. But for friends and family, it can feel personal. And so, being kind is really big.

 

Andrew Zhan: 

So after you've done asking the right questions, you've done your due diligence and you decided to invest, how do you, can I use the word negotiate when it comes to your friends and family? Yeah. So how do you like negotiate a deal?

 

Jeremy Au: 

Oh, I mean, there's a good one. And I always remember that I had a good friend in Boston and he was a neighbor of mine, we're both Singaporean founders and I started first in building, et cetera. And I remember for him, he was very much like, at some point he was like, oh, I'm closing the round in financial round. I was like, wait, I want to invest. I was like, what?

 

Andrew Zhan: 

You're already closing?

 

Jeremy Au: 

Yeah. You're closing? I was like, well, he's a friend. Yeah. But I really respected him too. And he'll be someone that I would ask him for advice and he would ask me for advice. And so, I respected him and I liked him as a person. And so he was like, oh, I was very paiseh, you know, I was very embarrassed to ask you for money. Ah, you know, I don't wanna ask from friends. I want a family. I wanna ask some strangers. And I was like, whoa, whoa, let me get in. And so, okay. I managed to kind of get some allocation. He gave me a solid, you know, got some allocation for me. I came in.

 

Andrew Zhan: 

So your reputation, actually in this case, he didn't help you, right?

 

Jeremy Au: 

He didn't help me.

 

Andrew Zhan: 

As a friend, he feels paiseh to ask you, although you are the most obvious person that you should be asking and you are actually interested to invest.

 

Jeremy Au: 

Yeah, yeah, yeah.

 

Andrew Zhan: 

Okay. Okay.

 

Jeremy Au: 

And you know, I was just like, okay, okay, you know, I have to do right. And then, obviously it was a small check, something that I felt was within my budget and my capital, liquidity.

 

Andrew Zhan:

How does it work, it's the last round? And you know, it's a small model.

 

Jeremy Au:

Yeah. Because, you know a certain amount is raising, let's just say a million dollars. It's collected money from all these other people and professionals. And then he's like, oh, okay, you know, , this has some space left for you, right? And I think it was in that case, for example, I followed the terms because the other professional investors are ahead of me with much larger checks. And so they get to decide parameters and the control rights and the financial terms of the around, and I'm just following. So in this case I was like more of a follower. Sometimes it's the opposite. You're like the first check that someone to follow someone else. Yeah. So I do valuations and I think that's very tricky because what you can say maybe is like, and this often happens, is I'm willing to put some capital and I'll follow along with someone else, a more professional investor to set the terms and so so forth.

Or sometimes, the founder already has a point of view and they pretty much set the terms right of the round. And you get evaluated not just as the company and the person, but you get to evaluate whether the deals are attractive, right? Because sometimes the truth is if the founder sets a very attractive deal terms, if it's a lifestyle business and casual business, if it's a business that you're not sure about, maybe the deal terms are attractive enough, you're like, yeah, you know, I'll still go in.

But it's not an easy process and the awkward reality, you know, most investors should be in public equities. Most people should have enough capital for rainy day fund and insurance and, you know, cover your rent or mortgage. And hopefully, when you've done all of that, then you have some sophistication inherent to be able to make that peace. And I think that when you do that investment as well, being thoughtful to be like, hey, really being thoughtful about the quantum really being something in an amount that you can lose. And it's not easy to say. But I think it's a very high chance of failure, right? I said 95% chance if you're a professional VC looking at startups, so your friends and family, you know, you're not a professional, you may not be looking at thousands of startups in the same hierarchy.

You're not a VC, right? So then maybe your odds are worse. Maybe it's only 1% for a VC-backed startup, right? Of course, you know what the reward is supposed to be, is that if it's 5% or 1%, you know, the returns are not just a hundred X, it's like thousand or 10,000 X, but I think that's really the fundamental struggle for a lot of folks.

And so, it's not for everyone. So definitely, kind of normally size your first checks to be quantums that you feel ready to, you know, lose or not have. So one thing to be thoughtful about is when do you expect the investment to be able to bear fruit or mature as an investment? So for example, you know, obviously if you're on stock markets, you can invest in ETF today, and then there's enough liquidity often that if that gains the next day, then you can extract that out, right? And so it's a function of both. Understanding of when the underlying value or asset goes up as a gain, and also the ease of being able to pull that out. So what's interesting is that when you invest in your friends or family business you have to be thoughtful about when you expect these gains to happen and also the ease of being able to get them out. So for example, if you're investing in a friends or family cash flow business, then often what you're doing is that you're investing in them and maybe within a year, even a half a year, they could already be returning profitable cash flow or two years or three years.

And then often you're being paid dividends at some level of cash flow back. So that investment as a result is much easier for you to understand because, like I put in $10,000 and hopefully I'll get share. Maybe I'll get a thousand dollars per year starting from two years out. You know, that's the plan there.

However, for technology startups are very different because when you're putting money in as often as the first or second round of capital, what's happening is that you're actually saying, I'm expecting this company to become a billion dollar company. We didn't extend years. And that's what the goal ambition is. And what that means is that again, there's a 95% chance of failure along that pathway. And on top of that is that the gains that happen at your stage are all people gained. So they, they're valued million dollars, 10 million, a hundred million, a billion dollars, but they may not be generating free cash flow cause those, that cash is being reinvested back in the business.

So you're not gonna receive dividends and you're only gonna receive hopefully a probability adjusted chance of that paper valuation being unlocked and an exit in 10 or 12 or 15 years, right? And so suddenly, you know, you're suddenly thinking to yourself. okay, a level one probability of failure, 90 to 95%.

Two is, there's very rapid gains, but they're all paper. And so there's not gonna be distributed to me in a meanwhile, and therefore there are paper gains until then, and I can't use people gains to, you know, go eat. Yeah, exactly. Eat or go to the bank or get a loan or these, do these things and it's just locked up there forever for, you know, this entire time.

And thirdly, the exit can only happen at a qualified liquidity event, which is often an IPO or trade sale, which happened in 10 or 15 years. And so, you know, even as having that rapid thing, actually maybe a shorter term financial instrument, maybe a better return on investment for you personally than, you know, this fast growth but highly illiquid investment is. So I think it kind of doubles back on our earlier point, which is that when you invest in a France technology startup, you should expect the baseline to be zero. Because in the worst case scenario, it does goes to zero, which is also the base case, 1 90, 90 5%. But in the best case scenario, it's a 10, a hundred, a thousand x multiple, but it's all paper for 10 to 15 years.

Which means that you're like in your thirties and you're gonna see that in your 45. Right. You know, that's forever.

 

Andrew Zhan:

There's this term, which is raising money from the three F's. Yeah. Friends, family, and fools. So the way I interpret it is that, I mean, it's kind of like a joke because you know, you raise money from your friends' family first, and they're the fools because they're the ones who believe in you because they know you personally. Do you think that's true? Do you think there's some truth to this statement, friends, family, and fool?

 

Jeremy Au: 

That's a good question because anyone can be a fool, right? You know, the founder can be a fool. The friend can be a fool, the family can be a fool. But I think what you're trying to describe is a certain sense that it's easy to get capital from friends, families, and fools, right? So what you mean by that is your parents or your siblings or your extended family, they're all gonna put in a check. So family is an easy one to get some quantum right, and friends who know you for some time, it's easy to get that capital. Even a small amount, right? A small amount, right? 1000, 2000, and you all stacks up and the fools are like, you know, people who are like it's crazy for them to invest in you because they don't know you, they don't know the business, and they may not necessarily be sophisticated. So I think that's a very mercenary way. I think sometimes think about that capital because it's really talking about the easiness of getting capital.

Yeah. But I think you take, take a step out, you know, I think at the end of the day, as a founder, you wanna take capital from people who are gonna help you get there. And you want to make them money because by making them money, you're also making money for yourself, right? Because a successful business means that they get a high return.

And so I think the tricky part is you have to talk to family and not take advantage of that relationship and just be sayinh, these are the risks, these are the rewards. This is why I'll do, and this why I'll try to steal it. That dynamic, your friends, I think you also have that same level rigor. And for fools or strangers, you would, should also have the same level of integrity and, frankness about the risks and the rewards.

Right. And I think what that hopefully cause is like, you know, instead of an X axis like firiend, family, and fools, you can also have the Y axis. Mm-hmm. , which is like, are they sophisticated or helpful? Oh, okay. Versus not. And you know, that category of sophisticated, helpful, friends, family and strangers can really be aligned with your vision of the company and also avoid control disputes on the road. Financial disputes on the road, but also accelerate the business in a meaningful way.

 

Andrew Zhan: 

You know, there's this saying about, lending friends money, and I'm not talking about the context of building a business, but more like your friend wants to borrow one to two K from you and, and they tell you, okay, if you want to. Borrow lend money to your friend ticket that never getting it back. So do you think that should be the same mindset that should be applied, you know, when you invest in a friend or family's business?

Yeah, I think so. Oh's failure. Hi. So like, you know, I put a money in. Okay. Don't expect to get it back if it walks out your box out.

 

Jeremy Au: 

I mean, I think difference is that when I normally land a friend for money, sometimes it's like, because you know they have cash flow requirements, right? Like they need a mortgage or they can't meet because they're going through a job transition or they. You know, health bills to deal with, right? And so I think lending people cash is almost predictable.

It's like you kind of know what the salary is at a high level in ballpark, and you know that the cash requirements are also there, right? Uh, and it's relatively predictable. So that conversation, the parameters are more inbound. And so I think that's why you kind of say like, you know, you may not get it back. What's interesting about investment is that there's an element. Greed, right? And fear of missing out. Right? So what I mean by that is there's greed in the sense that you think that this person can make a lot of money, right? And you don't wanna miss out. And it's sometimes you hear that other people are putting money in, so you suddenly have a fear of missing out.

You're like, oh, this person, his uncle invested and this big shark investor. Now I want to get into the fear of missing out as well. So it is an interesting conflict here, a little. That happens internally because you're never gonna have, you know, if you're helping a friend. I think it's a form of charity and adding support, but I think that greed and formal is very unique when investing in a friend and I think can blur some of the rational heuristics that you have. And what I would say is that, If you have the self-awareness, understand that you are an amateur investor, I will lean much more and advise you to really be what we just talked about. You know, assuming you're gonna lose the capital and have that same treasure as you would landing different. Pretty much.

And I think if you're more sophisticated and you have seen lots of different opportunities and you're able to compare them, then I would advise you to be okay with leaning in and doubling down on that.

 

Andrew Zhan: 

Okay. So let's say if some experience investing in friends and families, how does one become a VC? How do you get into the scene? Do you need a huge sum of money?

 

Jeremy Au:

Well, yeah, I mean that's one way to do it, right? If you have millions of dollars, you can be a VC.

 

Andrew Zhan: 

I wanna invest, people look for you.

 

Jeremy Au: 

I mean, you know, that's the way of the world, right? Then the diversity developers look for you, everyone. Insurance agents look for you, old friends, your old school, your old school friends, your private wealth manager comes for you. So I mean, the truth of the matter is that once you have millions of dollars, you can be a VC. You can be a public markets investor or trader, right? So I think there's so many ways to put your money to work once you have that. So yeah, I think that's one way to be a VC.

 

Andrew Zhan: 

I just saw this description for a course. I think it's an online class and in the middle of like several times a week and yeah, it's part of becoming a VC, right? So to assess and all that. I guess that's getting your foot in the door. Right. I'm just wondering, like, let's say, let's say you're sick of the public market, you just wanna become a VC and get into, you know, rooms with pitches and then decide what to invest in. How, how does somebody get into that?

 

Jeremy Au: 

Yeah. There are two major paths. The first major path, of course, is drawing a venture capital firm, right? And so these are companies that are always looking for bright, hungry, talent who is passionate about technology, right? And willing to look at it from a deal perspective. And what that means is that they're always looking for junior talents, associates, analysts, or other teammates in the middle or back office. And those are great opportunities for you to join as a fresh graduate or a career switcher to be able to join and get exposure to that. Right? Of course, the tricky part is that these organizations are selective.

So you have to do the legwork. In terms of having the expertise, uh, having shown that you're hungry for a job, being able to demonstrate that you're able to source clothes and do the correct due diligence and judgment on the deal, which maybe take up the form of investment memos that you write or public thought leadership that you do.

So these are the ways that you kind of like, you are hireable by these things, and once you come in, then the pathway, they'll help you get there, right? Which is, if they identify that you are good, they promote you. If they identify that you're not so good, then they'll ask you to stay longer and learn more, or you end up switching to a different career or different VC fund.

The other path, frankly, is to be a founder, right? And if you're a founder and you're a part of that 5% that does well, that builds a billion dollar company or even a hundred million dollar company, then the truth of the matter, like you said, is it goes back to path. Half zero, which is half millions of dollars having money. And then you can do it yourself. But also I think all the VC funds and all, everybody else is looking for that kind of talent to come in, to switch, because you know you are. You wanna take a break or it is no longer your season to be building and operating, but you want to invest in the next generation of founders who are there, and because you have that hands-on experience yourself as a founder. You are not only better able to understand what it takes a build a business, you'll also be more helpful. To the founder who's building business to therefore increase the odd, the success and also get better judgment because, you know, what are the real lever for success from your perspective in that vertical and in that stage.

So I think that's how you can do it. One is have millions of dollars. Two is join a VC fund by demonstrating that you have the hunger and passion to do that. Or thirdly, is be a founder yourself, and then after you complete a successful exit Yeah. Transition to VC. Yeah.

 

Andrew Zhan: 

Do you think having founded businesses makes you a better VC? Is it good to have,? Is it a must have?

 

Jeremy Au: 

So I'll get a little more advanced here. The short answer is that if you did a quantitative analysis, founder operate experience to investor experience at a macro level, the on average. There's no difference. In other words, it is not an advantage at, in aggregate to be a founder operator at the earlier, late stage across when you average it out.

That being said, if you actually zoom in closer, a founder operator experience is correlated with different strategy, right? So the, you know, this is like the markets, right? A multiple strategies to win in a market, and the returns come out to negative. You know, and if you are active fund manager, on average. But the truth is there are top quarter funds, second quarter funds, and they're both outperforming the market. Yeah, yeah. But on average, everybody's underperforming. You don't lose money. Yeah. Actually outperforming, yeah. Yeah, exactly right. So, so I think what we see is that founding operators tend to be more on the early stage. So they're focusing, for example, on pre-seed C series A, may even series B, and they tend to be associated more active help, so they were looking at scouting talent that is not necessarily the most strongest right now or the hottest, but has the capability and the patience to coach them and help them get to the next level.

So there's a lot of hair in the deal, as they say. So there's a lot of things that doesn't feel right, but with the right help and coaching and expertise, we can kind of get you there. Whereas setting a more classic investor mindset tends to be correlated with latest stage. Series B, series C, series D, series E, and these are growth equity stages where primarily you're analyzing these companies based on their financial models because they already achieved product market fit. They already raised $20 million if the founder already has coaching and is, you know, ready to rock and roll. So, you know, you're not really there to coach they found anymore or figure out where is product market fit. You're really there to give them the jet fuel all to there. And so having more experience with capital markets and liquidity is more helpful for this later stage of capital.

So that is how I think found and operator experience helps you, I think helps you be a better investor, especially in early stage startups. But it's, has an opportunity cost associated with having the investment banking or deal maker expertise that you need for later stage growth rounds. Yeah. Cause it's all different skill sets.

 

Andrew Zhan:

I mean, running a business. You could be a good businessman, but you might not be a good allocator of capital. And being able to identify good businesses to invest in and help the founders. It's all different skill sets.

 

Jeremy Au:

Exactly. Yeah. Yeah.

 

Andrew Zhan: 

Okay. Alright. Thank you Jeremy.

 

Jeremy Au: 

Thank you so much.