Angel Capital vs. Bootstrapping: Howard Lubert of Keiretsu Forum Mid-Atlantic & South East On How To Determine If Fundraising Or Bootstrapping Is The Right Choice For Your Startup

In reality, except for a few early seed-stage deals, it’s not about choosing between Funding or Bootstrapping. It’s about taking advantage of both. Most successful companies will need lots of capital to succeed, and the key is to bootstrap early on to get the company to a critical inflection point so that investors can not only see and share the vision, but they will also place a value on the determination and tenacity of the founders and their team.

Founders are often faced with the nagging question of whether Fundraising or Bootstrapping is the best choice for them. What is better, having access to capital or maintaining full control over your vision and profits? What is preferred, to have the seasoned oversight of an experienced investor, or to plow forward with a disruptive and pioneering ‘can do’ attitude? Of course, every situation is different, but what standards can be used to help a founder decide? As a part of this series called “Venture Capital vs. Bootstrapping: How To Determine If Fundraising Or Bootstrapping Is The Right Choice For Your Startup”, I had the pleasure of interviewing Howard Lubert.

Howard Lubert is Area President of Keiretsu Forum Mid-Atlantic and South-East, private angel investment groups. Howard has over three-decades of experience in private equity and angel investing, leading Keiretsu Forum to a record level of investment in 2020. Howard is a preeminent architect in valuations and term sheets.

Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?

I’m an x-IBM Systems Engineer and Marketing Rep who left IBM in 1979 to start working with and selling the Apple II microcomputer and then the IBM PC. Ten years later, I was asked by Safeguard Scientifics to visit with a Provo Utah company they were looking at for investment. I suggested that they go all in on this company, Novell. The recommendation led to additional due diligence on other tech companies which led to me joining Safeguard full time, that is until the dot. bomb market crash of 2000. I left Safeguard to offer my services to a broad range of funds and, in 2010 discovered Keiretsu Forum while at an investment conference in San Diego. The rest, as they say, is history.

Can you share a story with us about the most humorous mistake you made when you were first starting? What lesson or takeaway did you learn from that?

The Safeguard investment in Novell was one of the most successful private equity deals in the history of the marketplace, turning $20m into $7.7b. I spent 2 days in Provo plus travel time and days working with the Safeguard team and never thought to ask for a piece of the deal!

Which three-character traits do you think were most instrumental to your success? Can you please share a story or example for each?

Being a psychologist by education with a focus on testing and learning combined with a very hands-on technical background provides me with the ability to analyze both the “secret sauce” as well as the founders of a potential investment company and quickly get to a strategic decision.

I am a huge believer in swarm intelligence and mindshare and work closely with SMEs (Subject Matter Experts) who bring the additional expertise to get to the go — no-go decisions promptly. I have no idea how to assess the value of the technology in the dozens of Life Science deals we have invested in over the years and would likely have no portfolio companies in this silo if it were not for the experts who joined in the due diligence and validated the investment opportunity just as I was/am able to do in the technology silo. The culture encourages members to share as well and in-turn the group knowledge and success is elevated.

I look for and try to structure a win-win in every deal we do. Pushing a founder and his/her team into a deal that is not balanced will, over time, greatly diminish their motivation, significantly reducing the likelihood of a successful liquidity event for all of us. The psychologist in me has allowed me to focus on creating deals in the form of an attractive Term Sheet that is designed to get investors excited about writing checks!

Are you able to identify a “tipping point” in your career when you started to see success? Did you start doing anything different? Are there takeaways or lessons that others can learn from that?

I had the privilege of working at Safeguard Scientifics in 1999 and lived through the dot. bomb implosion in 2000. After realizing that Safeguard was, for all intent, stuck in space, I spun SafeHatch, a technical due diligence consulting business out of Safeguard. I was able to remain on Safeguard’s campus for 18 years, thanks to Pete Musser, Safeguard’s founder. Nothing leaves a stronger impact on an investor than to watch five trillion dollars of wealth disappear in free fall despite the hard work and investment decisions of the experts of the day.

Lesson 1 — No matter how great an idea or technology the market and the attitude of the time will dictate an overwhelming amount of success. You could have discovered the cure for cancer in June of 2020 and likely would not have been able to attract investors to get you through FDA approval.

Lesson 2 — There are a relatively small number of focused creators and investors that will figure out a way to get it done. Looking at the current Covid-19 situation today some savvy investors did not miss a beat including Keiretsu Forum. We turned what could have been a disastrous year into our single most successful and largest investment year ever by seamlessly moving into online meetings and taking advantage of all the extra time our members had while sheltering in place.

None of us are able to achieve success without some help along the way. Is there a particular person or mentor to whom you are grateful who helped get you to where you are? Can you share a story about that?

I have been blessed with exposure to great people who helped me develop into a successful investor and angel group leader. My brother is one of the most successful VCs in the Mid-Atlantic area and manages billions of investments in a diversified group of successful funds. As I mentioned earlier Pete Musser was a mentor and guide and always took time to gently steer the ship back into line when needed.

You have been blessed with great success in a career path that many have attempted, but eventually gave up on. Do you have any words of advice for others who may want to embark on this career path but are afraid of the prospect of failure?

I live by two mantras…

1. “I’d rather be lucky than good” and I’ve been very lucky these past 35 years.

2. “It’s better to seek forgiveness than seek permission” and most people who know me know that I am a bull in the china shop. Couple this with a lot of good luck and you start to hit more doubles, triples, and home runs than the next guy. My reputation in the space as a due diligence and term sheet expert have helped pave the way to a wonderful career in the private equity space.

Ok, thank you for that. Let’s now jump to the main part of our discussion. Can you share a story with us about your most successful Angel or VC investment? Or an investment that you are most proud of? What was its lesson?

In my second year with Keiretsu Forum Mid-Atlantic, we had an opportunity to invest in an early-stage pharma company that had licensed a platform technology from Johns Hopkins and went to work on developing allergy vaccines. Three years after our investment, a Japanese pharma company wrote a check for $300 million to take ownership of the allergy side developments. Thanks to a $100 million distribution to investors, we all got back a 4.4X return and still held our stock. Last year a new investor in the company offered us $6.50 a share in a move to acquire more of the company. Some of us sold off our equity positions, this time at a 4.2X ROI. So, all told, in one of my first angel investments after founding Keiretsu Forum Mid-Atlantic, I ended up with an 8.6X return.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

I got very carried away with a start-up tech company that had figured out how to make the internet go faster, especially for clients who did not have access to Comcast or Fios or other broadband solutions. Think internet via satellite or dial-up connections or your internet connection on a commercial airliner. I got so caught up in the technology, I forgot to make absolutely sure that if they built it the customers would come — they did not, and we took a big hit. The minute you get emotional about your investment you are in serious trouble.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

My brother offered me a piece of his substantial investment in Facebook stock that was offered on the secondary, pre-IPO market. I told him that I just could not see how Facebook would ever make money! Duh! I guess when you get to a certain age you just can’t appreciate all the new stuff the younger generations are going to jump all over.

Super. Here is the main question of this interview. Let’s imagine that a young founder comes to you and asks your advice about whether Venture Capital or Bootstrapping is best for them? What would you advise them?

In reality, except for a few early seed-stage deals, it’s not about choosing between Funding or Bootstrapping. It’s about taking advantage of both. Most successful companies will need lots of capital to succeed, and the key is to bootstrap early on to get the company to a critical inflection point so that investors can not only see and share the vision, but they will also place a value on the determination and tenacity of the founders and their team.

Can you kindly share “5 things a founder should look at to determine if fundraising or bootstrapping is the right choice”? If you can, please share a story or example for each.

Be clear on the following factors to come to your decision on whether Bootstrapping or Equity Funding is the right choice:

When you get ready to seek funding, be clear on the following:

• Know your potential investors! Do not try to raise money for a cupcake bakery from a group of Life Sciences investors.
• Are you raising enough to get to the next major inflection point or better yet, to profitability? Be prepared to justify the raise and where it will take us.
• Structure the deal so you only have to raise the money once but can offer milestones that would trigger the investment dollars in tranches. Investors will almost always happily write lots of smaller checks vs. one big one if it means seeing the progress as it happens.
• Be clear on what you need besides the money — how can you tap into our network of investors who are also successful businessmen and subject matter experts.
• No matter how many times you have built a successful company you will never know more about how to best structure the investment deal to attract the money than professional investors (like me). Take advantage of their expertise to get the best possible deal done.
• Draw the appropriate line in the sand with your investors — acknowledging that they know more about deal structure offsets to the fact that you and your team know more about what you are trying to accomplish than we will ever be able to do. Don’t let unqualified investors try to sway or pivot the company’s direction but by all means listen to the SMEs.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

In reflecting on my 35 years in private equity I have discovered that I have not done enough to help very early wanna-be entrepreneurs get started and my role in Keiretsu does not help since we do not invest in the very early space. I am in the process of extending the idea of working with a small number of universities to develop an active accelerator model and fund for those very early deals that, one day, may come to Keiretsu for their A Round!

We are very blessed that a lot of amazing founders and social impact organizations read this column. Is there a person in the world with whom you’d like to have a private breakfast or lunch, and why? He or she might just see this. :-)

I met Steve Case for like a minute at a DEMO conference in San Diego when he was just getting Startup America going. I would love to sit down with him to see how we might work together to turn the university accelerator idea I mentioned above into a grass roots movement.

How can our readers further follow your work online?

You can follow my work on LinkedIn (https://www.linkedin.com/in/hlubert/ ) , as well as on Medium.com (https://hlubert-64883.medium.com/ ).

The work of Keiretsu Forum can be found at https://www.keiretsuforum-midatlantic.com/ and on LinkedIn at https://www.linkedin.com/company/keiretsu-forum-mid-atlantic

Thank you so much for this. This was very inspirational, and we wish you only continued success and good health!