The Meeting Before the Meeting

What’s new, reader?! How are you doing?? Now, this time, after almost 6 months of trying to tell the story about capital raising, I’ll wrap up that part in this column.

Let’s recap: we were by the end of August, beginning of September 2009, we had 7 potential investors, or “FFFs,” interested in putting money in Resuelve. There were still upcoming meetings with two prospects: Jorge Alonso, “Georgy,” and Javier Arrechea. According to our financial model, we needed 2 million dollars to launch, and we wanted a Pre Money valuation of 1.3 million USD (3.3 million, Post Money).

We must remember that, at the time, the Venture Capital industry, in Mexico, was practically nonexistent. Hence, the contemporary sophistication in processes for raising capital didn’t exist. A clear example is that we never formally made what is now known as a “Term Sheet.”

To be honest, I sometimes feel embarrassed about telling these stories because it seems we never paid attention during our time at Stanford, hahaha.

Term Sheets are a summary of all the important agreements between the investors and the entrepreneurs, to later draft the legal documents, and formalize the investment (the lamest part of raising capital). Some of the most important, or common ones, are:

• The company’s valuation and the equity capital structure table. Here’s where you detail how much capital the investors are providing, and the structure of shares after contributions.
• Structure of the Board of Directors. What will be the structure of the company’s board?
• Drag-Along, Tag Along, and Pre-emption Rights. These are the mechanisms that facilitate the participation of investors in disinvesting, or in a subsequent equity round. No one wants to be stuck for life with a minority holding.
• Rules of necessary votes for important decisions. Here, for instance, you establish how many shareholders’ votes are needed to: raise more equity capital, sell company assets, get in debt, fire the founding team (yes, they can do this), among other things.
• Equity awards for founders and employees. A possible key to unstock things related to valuation, and motivate the company’s management team. Since the valuation depends on many premises, equity awards give you flexibility. “If you reach the promised goals, I’ll give you more shares. If you don’t, investors keep them.”
• Compensations for operator partners. This tends to be a taboo, mainly because operator partners don’t like talking about their compensation, and here’s where they can establish how can it increase in the medium-term. As I previously mentioned, investors shouldn’t be subsidized, but we mustn’t abuse. The entrepreneur must earn enough to live a comfortable, yet frugal, life. Comfortable enough as to not worry about rent or food, but frugal without having extravagant trips or luxuries. A golden rule: not a single day of vacation during the first 12 months!

The Term Sheet comes in handy when looking for more than one investor. Typically, there is what is known as Lead Investor, with whom you negotiate all the investment terms and conditions.

Once you agree on the terms, you go with other investors and show them the Term Sheet to see if they get on board with what is already negotiated. It may come to pass that they, not being the Lead Investor, ask for modifications or request adding some things, but if your Lead Investor has a good reputation, changes tend to be minimal. Here’s were the FOMO works wonders!

Zorro and I had a class at Stanford DEDICATED to this topic. Did we put this to work during our equity capital raise, you ask? In short: No!

This reminds me of a 2012 tweet by Wayne Rooney. A classic match was happening between Barca, and Real Madrid, during La Copa del Rey’s first round, and, during the second half, Pepe made a stupid foul against Messi, and he got expelled. Cut to Rooney tweeting: “Pepe, such an idiot.” Most likely, when you finish reading this, you’ll think: “Zorro, and Javi, what a pair of idiots!”

After meeting Chacho, and M, we met Georgy, who would become our Board President, and with whom we closely worked during the following years.

As I described in the previous column, Georgy had been the chief Prince at JP Morgan, Mexico, and had also climbed very high in the bank’s global structure. This successful road left Georgy with 2 particular strengths:

A discipline, and diligence, I’ve rarely seen in people. He’s always ready, having a great follow up, and super formal. During the first years, he helped us a lot with institutionalizing our corporate government, and would even join us anytime we had to talk with some bank or authority.

When we launched Resuelve, most people in important positions in Mexico, were old school. Therefore, if we lacked gray hairs, suit, and tie, we would basically be dismissed as assholes. That’s why we would carry Georgy around, so that, at least, they paid some attention. We were trying to convey something along the lines of: “Yes, dude, we have adult supervision.”

Georgy’s second skill, obtained after many years of leading surrounded by local policies in JP Morgan, was that of selling an idea, or initiative, to a group of people. Here’s where we learned the concept “The Meeting Before The Meeting.” This basically entails how to present, and to lobby, your initiative with different actors, before an important meeting; the Board of Directors in this case.

You never want to be in a meeting where a relevant decision will be taken, without, at least, having previously presented the idea, individually, to everyone involved. These individual meetings are useful to address any doubts and see if some unexpected ones arise.

During our first presentation of Resuelve tu Deuda, Georgy asked a lot of questions, and when we were done, he told us he’d give us an answer in a couple of days because he needed to think about it.

Finally, we met with the last of our potential investors, Javier Arrechea. By then, we had become aces at selling our idea, and we’ve felt confident enough based on the response we’d got from the other potential investors. I think that was our best presentation because, after introducing the project to Javier, and telling him who else was interested in participating, he basically said: “You had me at hello.” (FOMO)

The icing on the cake was when Georgy called us a couple of days after, to confirm his participation. When he hung up, Zorro and I looked at each other and said: “We nailed it, dude!”

If you’re thinking that it got to our heads, you’re right. However, that’s why life is beautiful, and every time you think you’re the shit, it salps you a little, and gives you a reality check pill.

Zorro and I thought it’d be a great idea to have a meeting with all of the investors so that they would meet each other, and they could bring a cheque with their investment (remember, this is 2009, hahaha), without a Term Sheet signed by each one of them.

The meeting day came, and we were able to gather The Columbus (Alan, Luis, and Pablo), Pizpurri, Georgy, Gabriel Garcia de Vinueza (on behalf of Javier Arrechea), M, Chacho via phone (he lived in New York, but, most likely, he was in Deer Valley), Fernando Nieto, and Lorenzo Gonzalez.

They introduced themselves, some already knew each other, and it seemed like everything would go smoothly. We started with our super presentation, and here’s where everything went to hell.

Being as successful as they were, some started to talk trying to prove who was the shit (if you read the previous columns you’ll know whom). Some doubts, and questions that we thought we had solved started to come up during these iterations.

How will you capture savings, if this is not an activity regulated by the National Banking and Securities Commission (CNBV, in Spanish)? How will you attract customers? How will you convince people to save, if no one does it in Mexico? And the one which created uncertainty: What will happen if banks refuse to negotiate with you, and want to crush you?”

Our meeting had gone to hell, and we turned into mere spectators. Suddenly, it seemed as if the uncertainty about the project started to permeate, and Lorenzo said: “Why not, instead of investing 2 million USD, we invest 2 million pesos for a pilot test? Even better, we need to get 4 billboards on the expressway, and it’ll work for sure.” The famous Fail Fast and Fail Cheap.

At that moment, everyone agreed: “Yeah… that’s a great idea!”, while Zorro and I were internally screaming: NOOOOOOOOOOOOO!

We had no choice but to fake smiles; like when, during sweet sixteen parties, when the girl is invited to dance by an undesirable, but she has to be polite and take his hand.

Our life had been reduced from a 5-year project to for 4 months.

Nowadays, Zorro and I are firm believers of Fail Fast and Fail Cheap. It’s an easy, and cheap, way to validate certain business hypothesis. Clearly, at the time, we didn’t think this way. Much less our wives, haha! Yet again, we had to explain to them that the game had changed.

After the infamous meeting, we kept chasing many of the investors wanting to know if they would still invest in the pilot test. Most of them stated they had already made a commitment, and they would participate under this new structure (how wouldn’t they, if they had considerably reduced the initial amount). With others, however, trying to find out if they were still interested was pure hell.

Suddenly, they stopped replying to calls and emails. We even had to stalk one, outside of his office, to get an answer on whether he’d still participate because we just couldn’t reach him. Few times we’ve been under such uncertainty,

In the end, all of them got involved in the pilot test, except for Lorenzo Gonzalez (even though he suggested it), and Fernando Nieto. Now, looking back, we can say it was their loss, haha.

After this infernal meeting, every time we want to push an important decision with a group of people, we always have The Meeting Before The Meeting, and we highly recommend it to any entrepreneur dealing with a Board of Directors.

As you can see, raising capital is not a simple task, and there’s always something new. Even now after 9 years of work, employing more than one thousand people, and expanding to 3 countries; we still learn about the challenges related to the inner workings of a company. By now, you know what it took for Zorro and me to raise our project, but if you want to know about other bumps we found in our way, then don’t forget to read me next month.

See you! If you have any comments, questions, complains, or suggestions, nag me on Twitter. Find me as @Javivelop.

P.S. Never in your freaking difficult and bitchy life surrender!