Venture Capital 101: An Interview with Keyhorse Capital's Zeeshan Bhatti

In this episode, we sit down with Zeeshan Bhatti from Keyhorse Capital to demystify the world of venture capital. Whether you’re considering venture capital for the first time or just curious about the process, Zeeshan shares invaluable insights on when and how to engage this funding mechanism, the importance of validating your idea, and what VCs are really looking for in early-stage startups.

Tune in to learn from Zeeshan’s experience and gain practical advice that could be the game-changer in your entrepreneurial journey. If you’re serious about turning your big idea into a thriving business, this episode is a must-listen.

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Transcript

0:47

Hi, Zeeshan. Thanks for being a part of this interview today because we need your expertise in helping budding entrepreneurs learning about venture capital there for the first time. We want to help them learn more about when and how to engage this as an appropriate funding mechanism for launching or scaling their company. But before we dive into all that, can you first tell us a little bit about yourself and what you do and your position at Keyhorse? Absolutely. My name is Zeeshan Bhatti, born in St. Louis, Missouri, grew up in Elizabethtown, Kentucky. I have been in Louisville since 2012 and came here for school and More several careers here over the past almost decade now. It's crazy to say that I have been a Keyhorse for a little over two years now serving as blended head of platform and associate. So running point on a lot of different things. And basically my day to day entails sourcing companies throughout the Commonwealth of Kentucky that fit our investment criteria, evaluating these companies for investment. And then for those companies that we do invest in deploying post investment support services on an as needed basis, I also do a good bit of process creation, implementation, operations, partnership stuff, the whole nine yards. So it's very fulfilling work and I definitely feel quite useful in this role. And that's all I've ever really wanted. What makes it so fulfilling to you? It's being able to support entrepreneurs in a myriad of ways. There's the obvious support, which is the allocation of capital after a company satisfies our diligence requirements. And then it's onboarding the company, the founder. And running through my onboarding process with them and uncovering areas of need that they have, and then playing a role across those needs founders, building solutions and all kinds of industries. Obviously, the founder does the vast majority of the work, but I definitely get to identify some areas that my expertise speak to that they could definitely get help on and then execute. So, and being able to do that with founders across industries is pretty neat. There's a lot of problem solving and immediate value creation for the team or for the founder and their team. it comes in so many ways like tax credits that reduce their tax bills, the small business tax credit, talent sourcing, pitch deck, revisions, pitch practice just education on certain aspects of the business model on basically how to do product development in a way that will lead to something that may be viable in the target market. Fundraising support, and then there's all the other special ways that we assist on an as needed basis. So it's cool stuff. So what you're saying is no two days are alike for you. It seems that way. It's a, it's, it's really, yeah, definitely get to wear a lot of hats in this role, which is pretty neat. Very cool. So diving into the heart of what we're here to talk about today, what is venture capital and how does it differ from other forms of funding like bank loans, angel investment, or friends and family investment rounds? Yeah, so basically, venture capital involves investing in early stage high growth companies in exchange for equity or ownership stakes. So quite different from a bank loan, which is interest bearing and there's a strict repayment period. It's similar to angel investment. Basically an angel investor typically will issue a check for X amount of money in exchange for a certain amount of equity. And they may request certain rights in exchange for their investment. And then friends and family investment rounds. Yeah, those are unique to the particular situation of the company. Typically, those folks will just provide the seed capital with no strings attached or, if the family members are qualified accredited angel investor, then perhaps they will take an equity stake of some kind in the company. But, in a nutshell, venture capital is High risk, high reward investing. We're investing at the earliest stage of the business cycle. And we in particular invest at the pre seed, seed, and series A stages. So pre seed is a typically a company that has just put together some minimum viable product. They may have established some level of product market fit. They have validated their proposed solution in some way. They're often pre revenue and are basically needing capital to Get to the point of revenue generation. And then a seed count stage company is often a company that's generating revenue month over month. That's probably on B two of their product. They are actively working to establish market share in their target markets and perhaps have even done so to a certain extent. And then series a and beyond is basically the growth stage. The company is generating significant revenue. The product is well developed. The team is starting to be built out and now they just need a bunch of fuel to the fire in order to scale to the levels that they think they can reach. What makes it high risk, high reward? I'll do a bit of comparison between a early stage investment and investment into a blue chip company in the stock market. If you look at, NVIDIA which is one of the big tech companies you have their balance sheet, their income statement, their cashflow statement, you know, you have five year historicals on all those financials. The company has just been around for so long and there's so much data to parse through. You're able to look at historical trends. You can compare it with competitors in the industry. There's just a lot more to look at. I won't say it's easier to appraise, but there's just a lot more to include in the analysis. Whereas in the early stage, there's not a whole lot to go off of. At the pre seed stage, you're most often trying to validate the assumptions of the pro forma, which is their five year financial projections. So, to a significant degree are making a bet on the founder and their abilities, the team abilities of the team, their growth strategy. Which can very well be legitimate, but it's obviously absent unsubstantiated until they actually implement it. And then you try your best to make sure that the problem that they say exists exists, so you're just basically doing a lot of research at that early stage to validate whatever the founder is proposing. And you try to determine whether or not they have the expertise requisite for building a solution in the space that they're targeting. And then you cut the check and basically see if they hit the key performance indicators that they said they would hit in a particular time horizon. So there's just not a whole lot to go off of, and that's why it's high risk. And So that's how that goes. Right. And so for a founder who is trying to give themselves the best chance of success, what are some of the things that you are looking for when we don't have that data to look back on? Obviously there's the X factor, there's the team, the strengths, their pitch deck and their actual pitch. But what are some of the things that you're looking for? Yeah, I mean, at the earlier stages at the pre seed stage and the seed stage, definitely not only have a validated product, but have a validated idea. So what does that mean? Okay, let's, you have found some problem in some market and you have an idea on how to fix it. Well, you ideally go out and. Interview three different groups of people who have unique demographic profiles and explain to them your, the problem that you see, ask them if they see the same problem, like, okay, okay, we're all seeing the same thing, propose to them, your very bare bones idea on the solution to it, see if it makes sense to them, maybe talk to them about a proposed feature or a couple of features, gauge interest in those features, And determine if there's demand for a particular thing that you think is valuable in your head. It's one thing to think that you think it's one thing for you to think that something is valuable. And it's a totally other thing to think to know that other people think what you have is valuable. And the only way you can do that is by just getting out in front of people and asking their opinions on what it is that you think is going to make money. So you can do all of that without raising a single dollar. And you can save a lot of money as well by At the earliest, earliest stage validating, whatever you think is going to be a scalable solution. Then you put together the initial mVP, the minimal viable product. So that right there, make sure if you were to do all of that in depth and explain that to us in a pitch, that would show us a high degree of competency. We would think I, at least I would think that this person understands the ABCs of product development, business model, creation, and validation. You know, do quite, it just shows that the founder has done their homework and is. On the right track and then put together using low cost options, which do exist some kind of, and which many of our founders have done some kind of minimum viable product, be it a hardware or software thing, and then go, go and test that out if you can find like a corporate or organizational beta user, that would be amazing. And just try to implement whatever you have in some context and get a lot of data from it and use that data to inform your go to market strategy, your revenue model. The product roadmap. And if you come to us with all of that, along with the pro forma that has very reasonable assumptions and growth numbers. Then we feel good about, about the company, or at least I do. And I love a company that can provide me with customers paid or non paying or non paying that have used whatever they've created and who can give me testimonials on their experience with the product or service that is incredible. Because at the end of the day. You're trying to make money. And if I'm able to talk to users of yours who were at that time of me calling them using whatever it is that you created and tell me that they like certain aspects of it, that. It's compelling. So that's at the earliest stage and that at the C stage, of course, just, you know, the production of traction on an ongoing basis, quarter over quarter growth and the keynote and the key metrics via monthly recurring revenue or even gross revenue. You know, growth. There's a quarter of a quarter growth in your user. Base your turn rate, which is like the number of customers that you lose stays low. You know, customer acquisition causes and exorbitantly high. These are the things that we like to see at the seed stage and this consistent growth and revenue expansion of the customer base expansion of, you know, adoption of customers throughout the geography. So yeah, great. So you meet with entrepreneurs every day for your job at Keyhorse Capital. How do you typically coach first time founders who are considering venture capital but are kind of unsure if it's the right fit for their business? So that's actually a really good question because I was in this situation last week on Friday. So a guy came up to me just randomly, a really nice guy. And he was like, Oh, I overheard you talking to this other founder on the phone. And you just were asking them very interesting questions. I'm trying to build a business. I just want to ask you questions and learn more about your work and what it would take for me to build, like to build a venture backable startup. So I sat with them. And the first question I asked was, You know, what do you want to do in your life? What are your goals as a human, as an individual? Do you want to be really rich? Do you want to, you know, build a business that exists forever and that cash flows year over year and that pays for everything that you would need? You and your, that pays for everything you and your family could ever need. Do you want to build a, you know, super big Fast growing startup and sell it within five years and make a massive cash out and build another business. So I just try to get a feel for the person and their personal vision for life and their goals. So, and then I basically offer my guided, I don't want to say guidance because I'm learning just like everyone else, but my message to them will be based on what they tell me is their life path. So in his case. It seemed he may be on to some kind of scalable thing, but at the moment, it seems like he's building a more service based business. So I was like, maybe venture capital isn't the best route for you at this point in time. Here are the steps you can take to make your business appealing to venture investors because they're going to require, you know, 10 X. On their investment within a, you know, seven to 10 year time horizon. And that's pretty hard to achieve. And then they'll take equity stake in your company. And if it's we don't do this, but if the investor takes a board seat, still take a board seat and they're going to, this is. You know, ties into one of your other questions they're going to be able to significantly impact the direction and growth strategy of your company, the organizational structure of your company. So you just have to be mindful of taking other people's money. It's, you have now a massive responsibility to make good on their investment. So that's a big burden. You want to make sure that you think you can do right by your investors. And you really can only do that if you absolutely crush it in building your business. And you can only do that if you're really passionate and excited for your trajectory of life, which is why that question that you want to ask initially is so important. And I've never heard that approach before, but it makes so much sense because if that's not what you want for your life. Then you're not going to spend each day of your life, you know, feeding into that or dedicating it to that purpose. That's usually better than me. There's so much there that I want to dig into, but I do want to pause to ask one more question for founders who maybe don't know what they want out of life. That is a huge question. They might probably haven't thought about that yet. When you meet with somebody and they maybe hesitate and they say, I don't know what are some follow up questions that you might ask them or prod them with or let them sit with to help clarify what they want. That's a really good question. I don't know if I've directly had a conversation about, I don't know if I've spoken to that in particular with the founder, but what I do try to do is. uncover their passion as best as I can. So I'll ask questions that will help me determine what mean matters most to them what kinds of things stimulate and motivate them. So in the case of this founder or the, you know, all the other founders I've talked to, oftentimes these are people who come up with some solution in their head and they get really, really excited about it. And what, and I think what excites them is the. Prospect of creating something that they think doesn't exist. So these folks are often creative in some way. They are people who want to express themselves creatively. And entrepreneurship is one of the most incredible ways to creatively express yourself. Because essentially what you're doing is just creating something novel that you think is valuable to other people want and who are willing to pay you money for it. So you're a value creator in essence. And you're creating so much value that people are willing to pay you more than what you pay you more than the cost you incurred to create a profit. So, that's a pretty interesting situation. I just try to unpack as best as I can that in the person's mind what they've done in the past, how their past experiences could help them in their current endeavor. And I try to do this next thing. And as a, and in a very delicate way that being create awareness of all of the variables that are, that building a business entails. And I'm, I'm I day after day, learn more and more about. What variables are present in the equation of building a successful business. There's so many, and it's the most, I think, difficult thing. One person can do is building a revenue generating break even business. So I try to help the founder just understand all that it's going to take as much as, as much as I can to. accomplish what they would like to accomplish. It's, it's, it's an incredibly difficult journey. And I just try to be realistic about that, but also empowering and encouraging as well. Like, I don't want to just like kill dreams, right. But I also don't want to like push a founder down a path that they may not be entirely ready to walk down at that point in time. Or if I'm going to do so just like arm them with. A very deep understanding of all that's to come and that is necessary to accomplish what they want to accomplish. I don't know if that answered your question, but it does. There's a lot for, for a founder to think about too. And I think it is really important for them to be cognizant of kind of finding that anchor for them. So I appreciate that so much. Can you describe the process of securing venture capital from that initial pitch to even closing the deal? So what should founders expect at each stage? I can't speak for other venture firms, but there is a lot of overlap in their diligence process with that of ours. So I'll speak from the perspective of the key horse. Thank you very much. So basically company submits the application, process the intake, be evaluated as a team. If we determined that we would like to meet with the founder, we set up a screening call. That's a 30 minute call where we do a deep dive into each aspect of the business model, the roadmap, what they've accomplished thus far we review the findings from that call, along with whatever documentation they've provided at that point as a team, if we decide to move them forward again, then they will enter our pre diligence phase, that's where we do a deep dive. So in that stage, we're requesting what we call a data room, which contains all the documents that we need to be able to determine. Whether or not this company is going to reasonably achieve the level of success that we need to see. So we're going to be, if they have, you know, financial statements, we'll be evaluating those P and L income statement. We will Look at obviously dig into the pro forma, their market opportunity that they ideally have created. So it's great to go and basically appraise the market that you're looking to capture a share of. So you have your, when you're doing that, you'll calculate what's called like the total of available, available market, like the market cap, total market cap of the Of the of the industry that you're building a solution within and you're serviceable available market or serviceable obtainable market. So like a Sam is a subsect of the subsect of this Sam. And we basically want to see those numbers, make sure there's a enough opportunity in the industry that they're operating in. Hopefully they've put a good amount of, put in a good amount of work in creating those values and hopefully the logic makes sense. You know, we evaluate the product, do a deep dive in the product, demo it. Analyze all the features, consult subject matter experts, ask their opinions on the viability of this, ask them whether or not they think that this is going to have traction in the target markets customer discovery interviews. And you know, we will, if they have other investors in the round, we'll talk to those investors, try to get their thoughts on it. You know, ask them why they think this particular opportunity is compelling and Yeah, so we'll just do that for a good while, obviously set up multiple, we'll set up like follow up meetings and calls to dive into all the questions that we have. How are you going to achieve this KPI and, you know, three months where, you know, how are you going to achieve X, Y, and Z by the end of this year, make, try to get as much. Out of them as we can be, what, you know, what's the product roadmap look like? Why are you going to do this? Why are you going to spend your money like this? How are we, so yeah, we just, it's a lot of questioning and analysis. It does sound like a lot, but I can also imagine that it is very affirming for founders too, who successfully make it through the, through this process, because then they can look back and, and. I guess it inspires confidence in themselves to maybe it reaffirms that they are on the right path when they go through all this stuff and they're sharing all this information with you, and then they do achieve funding, I bet that's really affirming for them. Yeah, I think it is too. And that's that's the goal we want to. In the diligence process, help them develop greater clarity around what they're around their business model and what they're trying to do, create awareness around other considerations that may have been in the dark and then provide them with the seat capital that they need to go and run experiments and generate revenue. So how does the involvement of a venture capital firm typically impact the direction and growth strategy of a young company? I mean, it can impact it a lot. So again, I don't have too much to say on this front because you don't. Take board seats. For example, whenever we invest, we take what's called board observer seats where we'll attend the board meeting and you know, contribute wherever we can, but we're not informing the direction of the company at all. But in the case of other venture funds, the involvement is significant from what I've gathered. They will, I mean, they can make hiring, they can influence hiring decisions. They can totally define the overall strategy of. The company, they can set, you know, influence the terms of a fundraising round. So there's a significant influence in class for classical venture capital funds. You know, obviously we're a little different in our, in our mission. So, so what are some things that an entrepreneur or a founder should look for when they're venting a venture capital company? That's a great question. Awesome question. Yeah, you did. You need the money. So that's the number one reason for why founder seeks out in a venture founder and angel investor is to get that check. But I love it whenever a founder, just like last week I was meeting with incredible company like a clean tech company they're in the water sustainability space. And I think the, I think it was the CFO. He was like, You know, not only are we looking for venture funding and, you know, growth capital, we also looking for a strategic partner. So look for funds that have a focus and investing in your kind of company. So if you're a clean tech company, look for a fund that specializes in that industry. Because they're likely going to have a vast network within that space, they'll likely be able to introduce you to other investors that have an interest in that space. They'll likely be able to tee you up, tee up meetings on your behalf with potential customers, provide knowledge that on that particular Market that that's so beneficial to you. They can offer strategic guidance. So if you have the, the wherewithal to do so, you seek out investors that are awesome, that are, that have a track record, track record of operating in your industry, of investing in your industry, and that have expertise in your industry and that were like aligned with your, your mission and passion. There's a lot of funds out there that are. Very mission oriented and better thematic. They invest in a particular theme, so look for those kind and obviously look for investors that are going to be likely to take your deal seriously, who are going to have an appetite for your deal. So don't go out trying to set up a meeting with the series of the investor when you're a seed stage company, like make sure you're vetting these investors prior to any outreach and tailor your outreach to to the individual at that fund.

Zeeshan Bhatti: 27:04

So that's, I think, a good approach to. Engaging investors. Yeah. What are some common misconceptions that early stage entrepreneurs have about venture capital funding? Venture funding is not going to be the panacea to all the problems of your business. That's for sure. So don't think that just because you have money, you know, your, your business is going to succeed and you're going to be able to build the great thing. That's going to make a lot of money. You're going to be able to make the hires that you think are going to push the company forward. It helps, but the venture funding is not going to be the thing that. Makes everything work out. I've seen companies raise hundreds of thousands of dollars and die many times. So don't what all I would say both to myself and anyone else do not view venture capital as the raising of venture capital as the ultimate win as the path to success, it is one of the factors in the path of success and the path to achieving what you want to achieve. And just be very frugal with the money, have a very, very defined capital allocation strategy Because that money is going to run out real fast. And lastly, what is one takeaway that you would want anyone listening to this, watching this to, to know especially if they're an early stage startup? I mean that they're brave and awesome for even attempting to be honest to attempting to build something. It's, I mean, that takes a lot of confidence and a lot of self belief. So yeah, it's like, it's just like, yo, good for you, man, or woman, whoever you are, you know, good for you. Like I always, I never, like, I always want to be supportive, you know, because you're taking a huge bet on yourself. You're leaving a job and you're dumping all your money and time into something that you don't know what works. So just being mindful of that as an investor, whoever else is supporting the founder is super important. Cause I think it makes the person feel Validated and supported and understood. And just that can make someone feel really good and give them the energy that they need to go and get something done. So I applaud all the founders who go and take that leap because it's, it's, it's an incredible endeavor and they don't have to do it, but they do so because they think that they are onto something that could change other people's lives in some way, or that could change an industry for the better in some way. So that's what I have to say to that. Awesome. Thank you zeeshan. Thank you so much for gifting your time and your expertise and your wisdom and encouragement. All the things today. We really appreciate it. Thank you so much. Thank you. You too.