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April 24, 2023

Deal Maker Jerome Fogel Reveals How To Raise Capital To Grow Your Business Or Start Your Own Fund To Grow Your Wealth (#223)

Deal Maker Jerome Fogel Reveals How To Raise Capital To Grow Your Business Or Start Your Own Fund To Grow Your Wealth (#223)
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“God has gifted you and one of the adventures in life is to figure out what those gifts are.” - Jerome Fogel

Jerome Fogel is the co-founder of Fogel & Potamianos LLP. He is known as a dealmaker and innovator in the legal community. He represents successful entrepreneurs, corporations, and sports and entertainment stars. He also serves as the go-to offsite general counsel for a number of small and lower middle market companies.

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Jerome Fogel - Partner - Corporate Practice Group, Sports & Entertainment Group - Fogel & Potamianos LLP | LinkedIn

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Your liquidity event is the most important financial transaction of your life. You have one chance to get it right, and you better make it count. 

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Enjoy the interview!


[00:00:00] Jeffrey Feldberg: Welcome to the Deep Wealth Podcast where you learn how to extract your business and personal Deep Wealth.

I'm your host Jeffrey Feldberg.

This podcast is brought to you by Deep Wealth and the 90-day Deep Wealth Experience.

When it comes to your business deep wealth, your exit or liquidity event is the most important financial decision of your life.

But unfortunately, up to 90% of liquidity events fail. Think about all that time and your hard earned money wasted.

Of the quote unquote "successful" liquidity events, most business owners leave 50% to over 100% of the deal value in the buyer's pocket and don't even know it.

I should know. I said "no" to a seven-figure offer. And "yes" to mastering the art and the science of a liquidity event. Two years later, I said "yes" to a different buyer with a nine figure deal.

Are you thinking about an exit or liquidity event?

Don't become a statistic and make the fatal mistake of believing the skills that built your business are the same ones to sell it.

After all, how can you master something you've never done before?

Let the 90-day Deep Wealth Experience and the 9-step roadmap of preparation help you capture the best deal instead of any deal.

At the end of this episode, take a moment and hear from business owners like you, who went through the Deep Wealth Experience.

Jerome Fogel is the co-founder of Fogel and Potamianos LLP. He is known as a deal maker and innovator in the legal community and represents successful entrepreneurs, corporations, and sports and entertainment stars. He also serves as the go-to offsite general counsel for a number of small and lower-middle market companies.

Welcome to the Deep Wealth podcast, and while do I have a guest for you, so for all your listeners out there that you want to know about deal flow or you're thinking about raising capital so you can take your business to the next level.

Or maybe you've even been fortunate enough to have your deal and it's now the post Exit life and you wanna get into deal flow yourself. How do you do that? How do you raise your own fund? How can you have some fun doing that? I'm gonna stop right there. We're gonna talk all about that and more, but Jerome, welcome to the Deep Wealth Podcast and as always a true pleasure to have you with us.

And I'm curious, Jerome, there's always a story behind the story. So, what's your story? What got you to where you are today?

[00:02:36] Jerome Fogel: This is a great question, Jeffrey. Glad to be here with you. I'll tell two quick stories. The first is my dad spent many years at Hughes Aircraft, IBM, jet Propulsion Lab, and in the eighties when he was at IBM, they called it, at that time womb to tomb meaning IBM was family. Once you go there, you basically die there in a good sense.

In a sense, they take care of you, your family. It's a lifelong process. Well, he was part of there was a move from Westlake Village to Boulder and a manager was trying to basically ascend and so my dad had to the company he thought he was basically gonna end his career at, ended up leaving him at the lurch.

And one thing he told me very young was, Rome, you never work for somebody else. You always have to go into business for yourself. a very young age, but I also always was very entrepreneurial. I remember getting pulled into my principal's class for renting video games to other fifth graders.

And I remember, you know, everybody was selling when I was in middle school, people were selling blow Pops and everybody's finding blow pop, they said well, I found another supplier and I found these job breakers that were small size and softball size. Nobody else could find them. And then we were selling them for premium.

So, you know, from a very early age, I was always thinking an entrepreneurial, I went to a hos business school, an undergraduate, and I ended up getting an excitement and thinking about becoming a corporate attorney. And I went to NYU for law school and what I found was initially working at a big firm and I had a cup of coffee at a big firm, like I call it, it felt like corporate plumbing to me in the sense of I really wasn't getting involved in deal flow and being creative and doing things.

So, I ended up working at G Capital. I was in business development there in real estate finance and my career eventually led me back to the law.

And I'll fast forward about five years ago after I'd had a long career business development, I had been a nonprofit leadership. I had used my law degree very frequently. I had a couple of different people come to me with legal problems.

[00:04:41] Jeffrey Feldberg: Okay.

[00:04:42] Jerome Fogel: And as I started to advise them, these companies and these people started to grow. One was a Hall of Fame baseball player who the US, Pedro Martinez. And his company's 45 Enterprises. Another company was a small company in Texas that appeared on Shark Tank called Sleeping Baby and they just recently had an Exit in December of last year.

So, starting with those two clients, we built up this transactional law firm. And what I found myself doing was not only corporate work, but getting increasingly involved in mergers and acquisitions and then, with clients that have already had their exits getting increasingly involved with helping them start their very first venture funds and working through that process.

Everything from the formation to the investment process, to due diligence. And then on the athlete's side, we've built that out too. And that's a separate side of the business. so, being an entrepreneur at heart, I have found myself in a place where I advise entrepreneurs on their most important transactions, and I absolutely love what I get to do.

It's never the same day, and it's a fun life that I feel very blessed to live it.

[00:05:54] Jeffrey Feldberg: Wow. Jerome, quite a story and you got a terrific start from some very sage advice from your dad, and you follow through with that. Why don't we start on the pre-exit side of things, because so many businesses, once they've locked in that formula, okay, we know how to make this grow, but we're missing the capital that can accelerate that growth and make it grow faster.

And you can certainly help with that. Let me ask you this, because usually where glasses always half full and that's how we see the world, but on the flip side, where are most companies getting it wrong or they're just not seeing it when it comes to raising capital? What would be some of the top mistakes that you're seeing?

[00:06:32] Jerome Fogel: Yeah, that's a great question. I think first it's understanding what your company is really selling and who the buyer is. What I mean by that is are you building users? Are you building a cash flow?

Are you trying to build a platform company that will be bought by a private equity firm? Are you building a company that's an add-on acquisition?

And what I mean by that to your listeners, is this a company that's gonna be bolted on to another platform company? Is this a company that's gonna produce cash or is this a company that's gonna be used just selling users like Facebook, brought Instagram so, I think it's really first understanding what it is that you're selling.

Then the second thing is when you bring in capital, you really need to strategically capitalize the company and not laden the company with too much debt or outflow. What I mean by that is if you take on too much debt, the debt service could put the company out of business. If you put on, if you take on preferred shares and have these rich dividend payments. You could put your company out of business so, the whole point, in the beginning, is you have to capitalize your company with enough cash to get you to the next level. The second mistake companies make is they just have these rosy projections and assume, oh, we're gonna have revenue at this hockey stick projection within a year. What they don't realize is that when they do bring in capital, they may get the fancy office and furniture and that stuff gets sold in a bankruptcy so what you wanna do is, you wanna raise up enough cash to where you can get yourself to the next level to where you can be cash flow positive and you want to wisely spend your cash and also prepare even y combinators saying now 18 months of capital, I would say 9 to 12 months of runway. So, you want to make sure you're spending the capital the right way. And the third is you wanna make sure you work with investors, not just for the money, but for the expertise they bring but the strategic value you bring. One board member said it to me very eloquently in the very beginning you wanna attract the guppies when you're raising. That means your angels, your family, friends. The next stage is you wanna attract the fish, and that's maybe you get some institutional a venture capital. Maybe you get a small piece of a very high net-worth individual, and then that attracts the whales.

These are the people who only will write a $10 million check so, so I think the mistake some companies make, Jeffrey, is they just try to, I'm gonna go for the whale first, but they don't go through the process. You gotta go through the process. The guppies attract the fish. The fish attract the whales.

[00:09:09] Jeffrey Feldberg: Makes a lot of sense. And I have a couple of questions. You gave so much there. Let's unpack that. You know, Jerome, I call it amateur night. And amateur night is the danger with it is, okay, I'm raising capital, I'm taking your advice, Jerome, I'm not gonna go for the whale. I'm gonna go for friends and family and you know, my brothers, girlfriends, aunt becomes an investor. I'm just making this up, becomes an investor in the company. Next thing I know, you know, and I'm taking all these small checks, 5,000, 10,000, 15,000, 7,500, whatever it is. Next thing I know, okay, what's going on with my money? Can we have lunch? And hey, I haven't heard from you, you know, since last week.

Let's meet again for three hours and you can run through where the company's been in the past seven days because they're not professional investors and they just don't act like that. And it can really be a time sink and a waste of time and takes your eye off the ball so while not going after the whales on the first round.

It makes a lot of sense. What's the balance? Where can you look that you're avoiding amateur night on the one hand by getting the right investors for the first time out?

[00:10:14] Jerome Fogel: That's our great point. You definitely don't want the investor that's gonna call you every week, so number one. We work with only accredited investors. We don't suggest general solicitations. So, a credited investor for your audience would be. Someone with a $1 million net worth, liquid net worth, or $300,000 a year income for spouse and themselves, or 200,000, and that's the last two years.

 That right there, the Aunt Edna probably is not gonna fit. Okay. So, that'll solve 80% of your problems. The other way you do it is minimum check sized, 25,000, something like that. Then you eliminate the five, ten z's. Yeah. That's just not gonna get you anywhere. So, you eliminate those and I think by the time you do those, you're gonna set yourself up with some more professional, then you have also, you have disclosures that this is significantly speculative, huge potential for risk of loss. But the really smart people at Jeffrey, I've seen people who get on the cap table really early because they know. Hey, a year down the line those same shares are probably gonna sell for 5-10 times so, that's why they're getting in early. And you can get some really smart money in there early as well. Not just like unsophisticated investors, but you can get some smart people that maybe they're not institutional investors that people are known by, but they do have high liquid net worth and they look at you know, angel investing as part of their strategy.

[00:11:38] Jeffrey Feldberg: That does help. And actually, we're gonna get there in the second part. Let me ask you this because you're speaking to a guy and I'm gonna put myself under the microscope and put myself out there. You know, when I was running my e-learning company, Embanet, it was bootstrapped. We were a cockroach startup, and one of the reasons that I didn't want to go the route of private equity or back in the day venture capital was control. My concern, my fear, what kept me up at night was I'm gonna lose control of the company. I'm gonna lose the ability to grow it the way that I wanna grow it. Now, look, didn't do so bad with our nine-figure exits. We'll take that. Thank you very much. And bootstrapping is terrific, but there's a time and place for everything.

So, for those other business owners that are out there, they're saying, yeah, Jeffrey, I can really relate to that. If I bring in outside capital, I'm gonna lose control. I'm gonna give up some ownership. How can you do that smart Jerome were you're attracting the right kind of an investor, but you're minimizing the amount of equity or control that you're giving up?

[00:12:34] Jerome Fogel: That's a great point. And number one, I would say bootstrapping obviously is the number one choice. You have a hundred percent control and equity. And I have clients that have done that and so, to the extent that you can, yes, do it. There's some industries that are more capital intensive or you're trying to accelerate the timeline.

You have a limited opportunity. So, I understand that really when it comes to investing, it's really not clear how you can proceed so, what you have to do is realize that if you do get involved with a venture capital firm, you may get on their terms, and you may have their preferred investment vehicle.

They may want what's called a board seat, or they may want a observatory seat where their observer board who doesn't vote so it's really depending on your leverage that you have. So, you do not want to give up, obviously, control or voting control, but if you were to give up, 5 or 10% of the company to the right venture capital firm that could actually be very additive to you because of their relationships.

Because of the visibility. And that can help you if it's a strategic type of venture capital firm. I think what you do is as an owner, you strategically keep you know, the majority of the voting and the percentages in your favor the way it's drafted up. Maybe you have some other advisors, but let's say you still have 80 or 83% of the company. If event VC firm has 10%, you still have control of the board. You still have control. The issue comes as the company gets really big, if you get down below 50% and there's more board seats, then there can be some political maneuvering and things take place. Cuz the more money's involved, the more the knives come out in terms of, and I mean that not physically, I just mean

[00:14:21] Jeffrey Feldberg: Of course.

[00:14:22] Jerome Fogel: figuratively.

[00:14:23] Jeffrey Feldberg: Sure. Hopefully you're dealing with the right kind of investors that it is figuratively.

[00:14:26] Jerome Fogel: Yes.

[00:14:27] Jeffrey Feldberg: And so, let me ask you this. We've been talking about what not to do. Let's talk about the companies, the business owners, the founders, Jerome, that you've worked with that have come to you and you've walked away from that initial meeting saying, you know what? They really got it right. They are prepared. They've impressed me. I really want to go out to market and help 'em. What's gone on with people that have approached you, that you've walked away, so impressed? What have they done? What's their secret sauce when it comes to raising capital?

[00:14:54] Jerome Fogel: You know, nobody does it perfect, but I think number one is they have a track record with investors. And I'll share this story cuz you know, there's a guy named Mike Maples. He is president of True Mark Corporation, a billion-dollar real estate fund.

But one of the ways he started, believe it or not, he was a youth pastor and in Northern California, he got involved in real estate investing. This was in the eighties and there was a huge crash. But he went to each of his investors, Jeffrey, and he told them, listen, I'm gonna pay you back. It's gonna take me a while.

I think it took him almost 10 years to pay them all back every dime. But what happened is those investors became his most loyal supporters cuz they knew in his worst situation how he behaved. And now True Mark Capital is a billion-dollar real estate fund and development company based out of California with projects all over the US.

I say that because it's really about investor relations, so, I have clients who are on their third or fourth venture, and investors believe in them. They've seen what they can do. They've seen the exits and so they're ready to come with them for their next project. And so I think it's developing that trust with your investors and them seeing you in your worst and best of times, so I think number one, I've seen clients who are able to raise money in weeks because of the trust they've built with their investors. I think that's number one is the trust you've built. I think the second thing is these entrepreneurs, they know what their lane is.

They know is their specialty. Are they the marketer, are they the inventor? Are they the operator? Are they the executive leader? Which stage of the business or do they do best in? Is it just in the early? First two to three, four-year stage. Is it in the management stage leading up to a sale? Cause there's different types of leaders.

I've got one client right now pioneering CEO who started out for the first year or two. But now we have another CEO in who the board brought in who is gonna really professionalize the company and get it ready for sale and get ready for a big, you know, they're looking at eyeing a billion dollar plus Exit so.

It's a really different type of leader. It's knowing as a leader, which part of the business is your strength and which phase of the business are you best in. And sometimes the leader can be the ceiling of the company if they're not careful. And very often that's the case. so I think that's the second thing I would say.

The third thing is they let the professionals help them so bringing in people, the people like yourself with the expertise. Bringing people like me on the legal side they lean on their advisors, their accountants, their lawyers to give them advice. Not that they just blindly accept it, but they're really listening and taking advice from people who've done a number of these transactions.

 But they also bring in their own ideas too. I have clients who bring in their own thoughts and ideas and that's always great, but they do listen to their advisors.

[00:17:49] Jeffrey Feldberg: And Jerome, let me ask you this because you brought up a great point. It was one of my questions for you. Sometimes as business owners, we are our own worst enemies because we believe we can do everything ourselves and we probably can.

But we don't really think things through or how long it's gonna take. And I know there's some listeners that are saying, okay, Jerome, you seem like a terrific guy.

You have a great story, but hey, I'm a deal guy myself. That's I, that's what I do all day long. I can raise capital. It can't be that difficult. Why would a business owner with that kind of thinking be better off saying, hey, you know what, Jerome? Go at it. Here's what we wanna raise, capitalized. Tell us what you think.

Yes, we'll have some fees and payments go your way to do that. But why are they better off doing that as opposed to trying to go it on their own and figure it out?

[00:18:36] Jerome Fogel: I think number one, there's securities law issues that they've gotta be aware of. We can help them structure. The term sheet so that investors can soft circle their interest, meaning investors can kind of commit to their interest, and then we can button up the paperwork. So really, there's two kinds.

There's some clients they're really successful at raising interest and so what we do is we'll come in and we'll create the term sheet. They can use that term sheet in negotiations. Then we'll nail down the agreement. And then especially will help nail down any side letters because that's really important.

 I love clients that are out there raising capital cuz they have relationships, we don't, that's one. The second type is on a bigger type, more formal raise where you wanna work for an investment bank. If you're gonna be raising more than a hundred million, then you're gonna get an investment bank involved.

And that's a whole different scenario where they're really the best people. That have the institutional relationships to raise that capital. I think on the end where the entrepreneur's going out and finding capital, that's great. It's your relationships. And then the attorneys are gonna really nail down the details of the deal because the entrepreneur's gonna Ms.

Key details that are gonna make a difference that they, for example, we working on a deal where an investor want an open-ended to invest in a deal. And we basically said no, we gotta put a cap on this data, drop a data, or else it could extend into the future indefinitely.

And then lo and behold, the investor put in the money, right at the date that we had set. Whereas, the entrepreneur may not see that issue. We see that. And so we will help them, advise them on that.

[00:20:09] Jeffrey Feldberg: And Jerome speaking of that, because when you're out there and really in many ways, you're courting people to invest in your company, and really if your company is viewed as the next it the next big thing. You're gonna have a lineup out your door. May you be so fortunate of people who wanna write the check and invest in your company, and they're saying everything that you want to hear because they want to get a piece of the action and all those good things.

So, given your background with what you're doing and how you're structuring the deals, what would be some deal points and at Deep Wealth, in our 90-day system, the default experience, the deal points are things that you want to have that if they're not there, you're walking away. And the no-fly zones, that if any of these things show up in a letter of intent or the deal itself, hey, no deal at all, not possible, not gonna do it.

What would be some typical areas that so many people would just overlook or they don't think of until after the fact and it's too late where someone like yourself, you're a professional, you're doing this day in, day out, you'll have it in there from day one.

[00:21:07] Jerome Fogel: We're talking about the raising capital, the sell process.

[00:21:10] Jeffrey Feldberg: In the raising capital part. Yes.

[00:21:11] Jerome Fogel: I think what I've seen is there's investors that come in and they wanna dictate the capital structure of the company. And unless you are a lead investor, meaning you're the premier investor putting in the most money in that round, There's really no business and so I've seen deals where clients have gotten themselves in these convoluted capital structures.

What I mean by that is all convertible notes that don't. Really link together and make a lot of sense. Or this investor wants this particular preferred structure. They want particular liquidation preferences. They want voting preferences. They want all these rights. And you know what?

Number one, maybe we won't even get this to you. Number two, if you're not the lead investor, there's really no reason because you want to save, you want save You wanna save that for, hey, you've got this big whale that comes in and you maybe want to consider so, if you've already changed your whole capital structure for this one investor.

And now the true big whale comes in. Your kind of hands are a little bit tied. I would say number one, it's do not restructure your company for anybody other than a lead investor if you even do. I see that's number one. I would say number two is you have investors that wanna be involved in the deal, and a lot of times they're gonna wanna sometimes get options into future rounds.

So, for example, hey, if I invest in this round, I want to buy in the next round. And what happens is that dilutes other people. Let's say somebody so I'm gonna invest $500,000, $5 a share. But I want to be able to have an option to invest in that in the next round. What if your next round sells for $20 a share?

Now you've diluted yourself, so I don't think clients need to give away those deals so easy. They can really reserve some of their capital for the future. So, I'd say, yeah, the main thing would be, one, do not restructure your company if you even do anyone other than a big lead investor.

And number two, don't give away these freebies like options and different things unless it's really warranted. Cuz you're just really now diluting the firepower the gunpowder you have, dry powder you have for future potential investors.

[00:23:27] Jeffrey Feldberg: And Jerome, where that really hits home. And for our listeners, I hope you picked up on this. Once again, when you have a professional Advisor who does this day in, day out, you're gonna get asked questions, you're gonna get requests that maybe you're not so, sure of. Maybe you think it's the way to go.

It really isn't. Someone like Jerome would just knock that right off the table, hey, not happening. If you wanna see that go somewhere else. This is how we're gonna do it. This is not industry norm or industry standard, and you put them into place. And so Jerome, let's now switch hats here. For those listeners that have been fortunate enough to have a liquidity event, they now wanna do their own venture capital fund.

What does that look like? How do you help?

[00:24:03] Jerome Fogel: That's a great question. So, this is what it typically looks like. You have somebody who's had their liquidity event, and what they realize is now they've got people coming to them to invest in different deals. And as they've done this, either number one, they've already had success and they have a good instinct at picking winners.

Also, being an operator, having sold a company, they know what rocks to unturn and what to look for in companies. So, they have an eye for deals already, and what they realize is if they do buy into, let's say, a deal with a fund, what they're paying and I, this is industry standard, they're gonna pay 2% fee of whatever they invest.

Let's say they put in $500,000. You're basically gonna put in $10,000 fee. Then you're gonna pay 20% carry, which is of whatever the profit is. So, let's say the company has a 20 x sale so you put in 500,000 and you end up with $10 million so for that 9.5 million.

The venture fund would take 20% of that as a fee. I think it's something in the order of $1.9 million. Now again you were able to invest in a deal you couldn't. What we do is we help the clients set up their own venture funds, so we do all of the paperwork. We set up the entity structure, the management entity, the general partner entity.

And what we do is we help them create their own fund. And these are exempt funds through the SCC. You're only dealing with typically accredited investors or in some cases qualified purchasers if it's a hedge fund. Qualified purchaser meaning 5 million or more in net worth. But the accredited investor is the 1 million or more in net.

We help them create their fund. And now what they do is when they see deal flow, Jeffrey, what they can do is they can now invest in the deals they already were going to. But number one, they'll get more favorable terms. They'll often get side letters, they'll get warrants and other treatments that would be beneficial to them.

And then when they have people come and invest, they'll then get the 2% of that money that comes in and they'll get 20% of the gain of the other investors that come in and so, for them, they're already gonna be investing in deals, but for them, it's just more fun. They can bring more people into the fold.

People maybe already listened to them or asking them what to do about deals and they can start to build this investor network. They start to get more influence and gain more deal flow. They get access to better and better deals. And we just had a client who did this, they've had, last year they started, they've done five deals in the last year, I think.

And they've been almost oversubscribed in every deal. And they're really, It's not easy, but we're advising them. From the formation through the investor process to helping them do diligence on deals, doing the post-closing compliance so it's really from start to finish, it's advising these high net worth individuals to help them become venture capitalists of their own.

[00:26:58] Jeffrey Feldberg: Sounds exciting, , I suspect it's not gonna be for everyone. So, lots of advantages. We can talk about that. Becoming your own venture capital, so you're taking your hard-earned money from your liquidity event, your newfound wealth, whatever the case may be, wherever it's coming from.

Why would you perhaps not be the best person to do it? What would that look like, or what should you know, before doing something like that?

[00:27:19] Jerome Fogel: Sure. And just to be clear, we're not investing you're, let's say you had a $25 million Exit. I'm not suggesting $20 million, but I'm sure if you're already gonna invest, $250 to $500,000 a year. Then I'm just, what I'm saying is you're having a fund where instead of getting 20 extra returns, you might get a hundred extra returns cuz you have all these involved. But to your point, I would say number one, if you don't enjoy investing in companies already if you don't enjoy being an angel investor, you probably will not enjoy doing venture capital so number one. I think you have to really enjoy the angel investor world. Not just doing venture capital cause you think it sounds right, but you truly enjoy investing in companies and helping them and watching them grow.

I think two is you don't wanna necessarily just be a passive investor. You wanna be somebody who's gonna help get involved. You wanna help them be successful so, you have to like, enjoy working with other entrepreneurs, that's number two. Number three would be, I think, a special case like if the person who's doing this is, let's say a celebrity or sports figure, and maybe they don't want the risk may be of starting a venture fund and something going wrong. What we also can do is set up what's called a special limited partner, or maybe, you can just invest in these deals and you can lend your name, but you don't get charged to carry, and it's all disclosed so, maybe, hey, maybe you shouldn't be the venture capitalist, but maybe your name because it's a huge brand. Maybe you're, you could just be associated with, hey, I'm investing in these deals. But you get these sweetheart favorable treatments where you don't pay fees as a special limited partner. So, hey, maybe you're not a venture capitalist, but maybe a special limited partner might be a better fit for you.

 That's some of the other things. So, to recap, one would be you have to like angel investing. You have to like work with entrepreneurs. And three is you have to be okay with your brand being part of this venture capital ecosystem. And if not, maybe the special limited partner is something you could do.

[00:29:21] Jeffrey Feldberg: Got it. Okay. And so, someone who's listening who says, okay, you know Jerome, check check. I checked all the boxes. That is me. Let's do it. Why would someone do that? What would be the advantages that you're getting as opposed to just writing a check or checks, depending on, what you're doing, where you're going, and being part of someone else's network?

So, you, it's now your own venture capital fund. What are the advantages that, that you're getting? Where are some of the savings?

[00:29:47] Jerome Fogel: Sure. Number one, when you're investing with a fund, you're only making money on the money you put in. Let's say you put a half a million dollars into a fund, and let's say you know there's a 10 x Exit you just made, four and a half million minus the carry so you made what, 3.6 million, let's say.

But let's say instead of putting in half a million, you put in, let's say $5,000,000 and 4 a half million of that was other investors. Now if there's a 10 x event look what happens, multiply it out. That gain for the other four and a half million, that becomes a $45 million investment.

You get 20% of the difference there, so, you think about that. You get another eight, 9 million in the deal. You've essentially, Quin toppled your leverage. And it keeps going from there. So, number one, when you make a bet your downside is lower and your upside is higher when you're investing as a venture capitalist.

Number two, you get access to better deal flow so you get access to better opportunities because you investing in yourself versus investing with your fund, people. You're probably gonna have more pitches than you want to, deal with so you need somebody to actually vet those for you, but you're gonna have access to better deal flow.

 I think the third thing is the venture fund can be set up in a way with a 2% management fee, where it doesn't, it may not pay for all the expenses if your fund small, but as your fund gets bigger, it can cover all of the expenses. Essentially you have a separate business that's going.

That's I think another advantage of working with your own fund versus investing another fund. But it's not for everybody. It's not for everybody.

[00:31:27] Jeffrey Feldberg: And Jerome in terms of setting up a fund, if I'm one of those people that, yes, this is what I wanna do and I get it, and I prepare for the risk, but I'm also prepared for the upside as well. Where do you fit into that picture Jerome? How are you helping with someone setting up a fund?

[00:31:42] Jerome Fogel: The first thing that we'll do is we'll wanna understand what these individuals if it's an individual, individuals, what kind of deals do they wanna invest in? So, we wanna understand, what market are they going after. What types of deals, what stages of investment? And then we start to think about, okay, what is the likelihood of them?

Getting investors, let's say into their first deal so then we have it sit down with them and talk about, okay, how much do you think you could raise? And then what we do is we help them put together a term sheet.

And we essentially have them go to their investors and say, oh hey, based on what I'm showing you in this term sheet, is this something you'd wanna invest in?

We also, in their pitch book, we can put disclosures, so it is all exempt from the SCC in terms of securities regulation. And then once the investors, what's called soft circle the investments. Then we can start to build all of the entities. Cuz what we don't want to do, Jeffrey is build a rocket ship and no one's gonna fly in it.

 We don't want them to come to us we put together all their entities, deal structure, and then nobody comes. We do the term sheet first. We have their pitch deck with the disclosures. They go to the investors. Once they've soft-circled they've set their committee. Then we'll go out and we'll create all of the legal structure for them.

We'll help them create the operational processes, the investor process, and we'll walk them through A to Z of how the fund's gonna structure. We walk 'em through their first deal. We do all of this for them. And then if they're really interested once a year, we'll help them put on a portfolio event of all their portfolio companies and we'll do top best practices and learnings and we'll have people from our firm there and other outside speakers come in and speak to their portfolio companies, which is a beautiful way to cap the year for them.

[00:33:27] Jeffrey Feldberg: Wow, so, you really cover it from start to finish just to make sure they're doing everything right, not everything wrong. I know it's gonna be different from one entity to the next entity. Generally speaking back of the envelope, how have these funds been doing, generally speaking, in terms of if they're on the profitable side, what's that looking like percentage wise, and what are you seeing more or less?

[00:33:50] Jerome Fogel: Yeah. I think returns in the venture capital world you're looking at IRR of around 10 to 15%. I think that's kind of industry standard. I think as far as the hedge fund world. We've seen them things over an annual return of 20%. At the same time, you have the recent FTX debacle and Sequoia just wrote off a $230 million investment.

They literally wrote it off and said, hey, we're taking this as a loss so, at the same time it's a very risky market. What you want are investors who are investing capital that they're not living on, obviously. As long as you have that going you can, in the long run, you look at five to 10 years, you're gonna have that kind of high IRR return for these type of investments.

[00:34:35] Jeffrey Feldberg: So, just like you have buyer beware. In this case, investors beware. And let me ask you this because it really applies if you're raising capital. Or if you are setting up your own venture capital fund, private equity fund, and you're now looking to invest in other companies. Jerome, from what you've seen in both situations, in your opinion, how important is the narrative?

For that individual when speaking to other people, either to why to invest in the company, so in other words they're receiving the check or why someone should accept their check so, that they can become a partial owner in the company. What does the narrative fit into all that?

[00:35:13] Jerome Fogel: Are you're talking about the narrative of the company or the individual or both?

[00:35:16] Jeffrey Feldberg: It would either be the narrative of the business looking to raise capital or the narrative of the company that's looking to write the check to buy into a company.

[00:35:25] Jerome Fogel: Okay. You also mentioned private equity. I wanna briefly say something, we talk about venture capital, we're talking about companies that are investing well with private equity. We have clients interested in this too. They're basically creating a whole ecosystem or a platform of companies around a specific topic.

And they're buying those companies, they're packaging them, and then hopefully looking to sell six to eight years later for a high multiple so which is a different type of a business you're more hands on with the P side. But to your point about narrative, absolutely. These people engage with stories.

And the story has to make sense. And you know this, especially when you're selling companies, buyer has to connect with the story. I think in the same way, there has to be a thread, a through line in the venture firm in the company trying to sell and the investing. People connect with stories, they emotionally connect with the things they're doing.

So, I think it's really important for there to be a cohesive story that people can understand, that they can relate to, and especially when it comes to things like ESG. Can't just be something an add-on. It's gotta be integrated into the fabric of what the fund is about or what the company is about. I think people can sniff that out if it's just green washing or superficial.

[00:36:47] Jeffrey Feldberg: So, narratives, storytelling is really important from what I'm hearing, and it yes, tell a good story, but have the data, have the facts behind that, just to back it up and make you an attractive option regardless of whether you're looking to receive money or to give money. Have that narrative locked in and in place.

[00:37:06] Jerome Fogel: Yes, absolutely.

[00:37:08] Jeffrey Feldberg: Well That's terrific. And Jerome, I'm just wondering as we begin to wrap up the episode, whether I'm looking to work with you to raise capital or you're helping me set up my own venture fund, were there any questions that I should have asked or that I didn't ask, or anything that you'd like to share with the listeners that they should know?

[00:37:25] Jerome Fogel: One question is people ask me where do they see the mergers and acquisition market going and I think that it relates to capital raising cause you're raising capital because eventually you do wanna have an Exit so, I think that's one question I think that people often ask me.

[00:37:39] Jeffrey Feldberg: And your insights on that?

[00:37:40] Jerome Fogel: Here's the insight on it. Looking at 2023, I think there's gonna be active activity deal flow, but because of the cost of financing, it's going to go to buyer's institutions that have cash that are going to come and they're going to get these deals. There are gonna be more deals that are gonna be 50%, let's say cash upfront, 50% earn-out or 60 40, whereas in, times past it was 90 10 or 80, 20, 75, 25, I think you're just gonna see less cash front, more earnouts, more rollover. But you're also gonna see the buyers with cash on hand that are gonna scoop up and get some deals I think in 2023. So, I think if you're a seller, you're looking at buyers that have cash versus financing for the horses to bet on next year.

[00:38:31] Jeffrey Feldberg: And Jerome, would it be fair to say, and you can correct me if I'm off base with this, that the change in the market condition has really taken out the players who just didn't have the longstanding roots, and what you have left are the serious players. They've been in this day, in, day out, year after year.

They're the ones that have withheld the test of time. They're the quality players. They've been there before. They'll be here now. They'll be hereafter. Would that be a fair statement? What do you think?

[00:38:57] Jerome Fogel: I agree. I was involved in a deal where a real estate fund was trying to get involved and starting to do their own kind of private equity deal, and they just fell out because they didn't really understand the target company. It didn't make sense to them, and I doubt if that fund will still be around next year or the year after. Just like you said, they don't have the staying power, the experience. I think it's Dave Ramsey says any Turkey can fly in a tornado. I'm not suggesting that people are turkeys, but what I'm suggesting is, you're looking for the eagles, right?

That can fly in the storms, that's who you're gonna bet on.

[00:39:28] Jeffrey Feldberg: Absolutely, because you know what? The partner and the hour partner in every sense of the word. That has a direct impact on your business. You wanna be with a real deal and not someone who's just showing up because capital at the time was easy or inexpensive or all other things. You really want the real deal who has the experience.

And we didn't really talk about this, but you did allude to this. When you pick the right partner, if I'm raising capital as an example, having someone who can not only write the check, but they have their own industry connections, they have their own experience.

They can help guide the company to get to the next level and beyond. That's really where someone would wanna be. Would I be on base with that?

[00:40:05] Jerome Fogel: Absolutely. Your investors are some of the biggest champions. Not only from a financial standpoint, they want your success, but from a personal standpoint, they get to know the founders. You know, if you're a founder, you have these investor days, or you'll have people out and they're invested in your success and they're some of the best people to help you bring in other deals and partners.

And if you have a problem, you have now a whole army of investors who are gonna give you, they're really sharp business people. They're gonna give you some good feedback and ideas and I think you should leverage them.

[00:40:36] Jeffrey Feldberg: Sage advice. Speaking of sage advice it's a terrific segue into our wrap up and so, Jerome, let's do a fun thought experiment. We'll use the F word fun, and I want you to think about the movie Back to the Future. And in the movie, you have that magical DeLorean car that will take you to any point in time.

So, Jerome here's where the fun begins. You look outside your window. It's tomorrow morning. You look outside your window, and not only is the DeLorean car there but the door's open and is waiting for you to hop on in so, you hop into the DeLorean and you can now go to any point in your life, maybe Jerome, as a young child, a teenager, whatever point in time it would be.

What are you telling your younger self in terms of life wisdom, life lessons, or, hey Jerome, do this, but don't do that? What would that sound like?

[00:41:26] Jerome Fogel: Wow, I've never heard that question first of all. So, I think the first thing I would say is that people are the most valuable thing in this world.

And I would say second is that God has gifted you and one of the adventures in life is to figure out what those gifts are. The third thing is it would just be living with passion and making a difference in this world.

[00:41:50] Jeffrey Feldberg: Terrific advice. Each one of those on its own. You know what has stood the test of time and would be enough, but you gave us above and beyond you went the extra mile. Thank you for sharing that. Jerome, we're gonna put this in the show notes. It'll be really easy. It'll be points and click for the listeners.

If someone wants to learn more about what you're doing or even connect with you online, where's the best place for this?

[00:42:11] Jerome Fogel: Sure you can go to our firm's website, You can also find me on LinkedIn. You can find me on Instagram less on Twitter, but I'm on there and if you want to email me directly, it's jfogel[at]fpgeneralcounsel[dot]com and I'd love to chat.

[00:42:34] Jeffrey Feldberg: Terrific. And we'll have all that in the show notes. It's gonna be any easier. Jerome, as we wrap up this episode, heartfelt, thank you for your wisdom and your insights. And as always, please continue to say healthy and safe.

[00:42:46] Jerome Fogel: You as well, Jeffrey. Thank you so, much for having me. It's been quite a treat and blessing.

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[00:45:20] Jeffrey Feldberg: Are you leaving millions on the table?

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