Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy.com. It is, of course, home of the ambitious upstart. It’s the place where I interview entrepreneurs about how they built their businesses for an audience of real entrepreneurs who want a company dissected so they could understand it because they’re building their own companies and they want to learn from real entrepreneurs.
By the way, you guys don’t see my desk. I know most of you are listening to the podcast so you don’t see jack. But I will tell you that right there on my desk is this stack of mail that I still have to get through. Evan, do you see this?
Evan: Yeah. I’ve seen a few of those before. I’m sorry about that.
Andrew: Right. We still get a stack of mail. Some of this is from my accountant. Some of it is from friends, all that stuff is still coming in. That’s why I was so excited when a while back, I’d see these cars drive through San Francisco. They’d have this little mailbox flag on them. They were so striking you couldn’t help but almost get into an accident just to look at them.
When I went back to Google what this company did, I discovered that Outbox, the company behind those cars actually wanted to scan your mail, come grab your mail, scan it and let you look at it on your computer–or in my case, let my assistant look at it and prune it a little bit and then let me look at what was important. I thought that the company was just the future. That’s the way things ought to be. And then it wasn’t.
In fact, I went to that website right now. It redirected to a whole new business. The business is called Able. It’s a lending company that offers super low interest rate loans because it rewards borrowers that have friends and family that support them and it’s this whole business that the founders of Outbox switched into.
Today I’ve got the founder here with me. His name is Evan Baehr. I’m looking forward to finding out what happened with Outbox, how he transitioned to Able. I think most people would have just given up at life at that point because he was right, we all wanted it. But he didn’t. He ended up coming up with this great new business.
He’s also the author of a book called “Get Backed: Craft Your Story, Build the Perfect Pitch Deck and Launch the Venture of Your Dreams.” It is a book on raising money by a guy who’s done it and written with the experiences of other people who have done it. So, “Get Backed” is a really worthwhile book for you to get if you’re listening to me.
And this interview is sponsored by two companies. You probably know them by now. It’s HostGator–if you need a hosting company, later on I’ll tell you why you’ve got to check out HostGator. And it’s sponsored by Toptal–if you need a great developer, later on I’ll tell you about Toptal.
First I’ve got to welcome Evan. Evan, good to have you on here.
Evan: Hey, man. Thanks for having me.
Andrew: Did you wince a little bit when I talked about Outbox or was that my imagination?
Evan: No. It was definitely a wince. It is a common experience I get. I’m based in Austin, Texas but am in New York and San Francisco a lot. And we will often be introduced to someone at a party or meet someone. Outbox will come up and they’ll say, “Oh, you’re the Outbox guy. That service was awesome. We so needed that.” And on the one hand that’s flattering because we built something that was cool. At the same time, it’s a little salt in the wounds of this thing that people really wanted, but we just couldn’t make work as a business.
Andrew: Is it a little bit like having an ex-girlfriend, Heather, and every time you walk in the room, people say, “Where’s Heather? We really liked Heather.”
Evan: Yeah. I’ve not thought about it that way before, but I think that’s fair.
Andrew: You raised money for Outbox. How much?
Evan: Outbox total round was $7.75 million over two rounds, a seed and an A.
Andrew: Where did you get your experience raising money?
Evan: Yeah. So, I’m kind of an accidental entrepreneur. Growing up in a small town in Florida, the only person I knew in business was the local car dealer. I sort of said to myself, “I don’t want to be a car dealer. So, I don’t want to go into business.” So, it took me a while to learn about what running a business meant. But I did have a sales piece to me. I sold Accel Communications door to door, so, selling long distance phone service door to door.
Andrew: I’m sorry to interrupt, but how old were you when you were knocking door to door?
Evan: I was knocking, I think at about 11.
Andrew: 11? What was your sales pitch for selling long distance phone service?
Evan: Hey, we were the lowest rates, man–lowest rates. I think we were–oh gosh, it’s been a long time–our competitors were MCI. And I think we were $0.10 a minute domestic long distance. It was actually Accel was built on kind of a multi-level marketing channel for sales.
So, actually I think at the time, we were actually the low cost provider of phone service, which was a total commodity. But really, it wasn’t really about phone service. It was like, “Hey, I’m Evan. I live around the corner and I’m working on this thing. I thought maybe I could save you some money on your phone service. Would you consider signing up?” So, it was a pretty personal plea.
Andrew: “I live around the corner” helps.
Evan: Yeah, which was kind of true, at least for the people who were around the corner, less true for those who weren’t.
Andrew: Did you start dreaming at that age–sorry, go ahead.
Evan: I was just going to say one funny story of this is I’m very interested now in multi-level marketing and how they recruit people, but I very clearly remember my first sort of moment of kind of a “Glengarry Glen Ross” moment where I went to the recruiting pitch where they were recruiting salesmen for Accel and it was at a Shoney’s, which I don’t know if you’ve been to a Shoney’s before, but it’s like a bad diner in Florida.
So, they rented out the Shoney’s and the guy who was the speaker who was in the million dollar club of Accel pulls up in yellow Corvette and parks right in front of the door and like parks his car and gets out. And I was just like, “That guy is amazing.” He’s talking about how much money he makes and a big necktie and a big watch and the worst of the worst. But I was totally taken in.
So, that was my kind of intro to sales, but still learned a lot from that. Having to carry a quota, having to cold call or cold knock on a door is, I really think, a rite of passage for learning how to sell stuff. CEOs may be directly involved in the formal sales function, but I think everything I do is sales.
I sell to potential employees to get them to join the company. I sell to investors to get their money. I sell to customers to sell to BD. You’re selling all day long. It’s a skill set that sadly I think is not really understood. It’s not really appreciated. Oftentimes people have a low view of people in sales. But it’s been foundational to everything I do.
Andrew: You were starting to say what else you did after that. What was the other business or other sales job that you had?
Evan: Oh, the other one was Cutco Knives.
Andrew: Oh, great.
Evan: So, my parents still have–all my relatives and some neighbors–it’s kind of the white handles were a big thing in the day. You’d upsell them on the slicing machine or the carrot peeler or all kinds of things.
Andrew: What’s one thing you learned from selling Cutco Knives?
Evan: Huh… That one, it was not the low-cost solution. They needed to touch the product. So, we’d have the product with us. We’d be in their kitchen. Sometimes through social selling, which was pretty cool–so, you invite a few neighbors, there’s the party. If people are old enough, you’d have wine. You were able to actually get the product in front of them. And honestly, they’re really good knives and they lasted a long time. Put the knife in their hand, give them a nice cutting board with something easy to cut like a cucumber and they’re like, “I can do this thing.”
Andrew: Anyone who’s listening to us should go check out the Hal Elrod interview that I did. He is one of the top if not the top Cutco knife salesman. I learned so much about sales from him. All right.
Evan: Man, I did not hear his podcast as a kid. I should have. I would have done better. I did okay. But I clearly didn’t do as well as that guy.
Andrew: And he had a process that was just so good. So, that’s where you got your experience. But what about raising money? You raised money without traction. You raised money without a past business that you started. You did have experience as an advisor to Peter Thiel. What kind of advice did you give Peter Thiel back in 2008?
Evan: Yeah. So, that was actually launching a company. It was the data company that we launched as sort of an internal venture of Founders Fund of the venture capital firm. That was this interesting experience where we had venture capital available and just ran the company based on this budget that we were given. It was sort of a way to try to run a company but not actually have to go raise capital for it. So, that was not really a representative sample but a great way to learn a lot of entrepreneurial skills.
I learned a ton with getting to work with Peter. I have been involved in–it was a friend of mine who actually looked at me one time. I was talking about what I was going to do with my life. I planned for years to be a lawyer. I was actually in law school. I went to a joint program, graduate program at Yale and was chatting with a friend of mine saying, “Hey, I just spent the summer at a law firm. I’m not really sure that I want to be a lawyer. I do like the idea of changing the world, but having to do it as a lawyer is really, I just think it would suck the life out of me.”
He says, “You’re an entrepreneur.” I was like, “What do you mean?” And he started thinking through, listening out loud all these different things that I had done. So, I ran for city council as a student at Princeton. I had launched and run three newspapers. I had launched and built a nonprofit that raised $1 million.
I had done these different things that in my mind weren’t business. But he rightly was like, “That’s what business is.” So, it for me kind of took this outside person to make this case to me, which was really powerful. So, that gave me some confidence, pushed me over the edge a little bit. The very first money that I raised I learned a really important lesson from it.
So, this was for a nonprofit. I had met a lot of interesting donors that cared about the causes that we were working on. This one very wealthy donor person said, “Let’s get a few people together over lunch to talk about this nonprofit that you’re building,” which is kind of a side project. I said, “That would be excellent.”
So, we get together for lunch. Lunch goes an hour and there are three or four really interesting people. They had a lot of great feedback on what we were trying to build. At the end of it, the investor guy says, “Well, did you get everything you wanted out of this lunch?” I said, “This was awesome. Thanks so much for the feedback. I really appreciate it.” He says, “How about $250,000?” And so, I like accidentally got a first check of $250,000 by not asking.
I think the two things that came out of that for me, lessons that I won’t forget–number one is if you want money, ask for advice. If you advice, ask for money. So, playing that out, this was a case where I had asked this really interesting, smart person, “Can you please advise me on this business?” That set up that meeting for the right relationship between the two of us.
Andrew: We’re talking about now Outbox.
Evan: This is still the nonprofit. This is the nonprofit.
Andrew: Okay.
Evan: But it applies to all sorts of other projects that I’ve raised money for.
Andrew: Can you take me to Outbox. Do you remember the first money you raised for Outbox?
Evan: Yeah. So, first money for Outbox was an angel investor based in Dallas, Texas. It was a casual conversation with him where I thought of him as a trusted advisor and I said, “Hey, we’re thinking about building this company. We wanted to get your thoughts.” So, it was a case where we asked for advice.
Andrew: How did you even get in front of this angel investor to get to ask for advice like that?
Evan: Yeah. So, I love meeting people. I have a really crazy CRM that has tens of thousands of people in it that I’ve met and notes on them and where I met them and what they’re interested in. And I go to events all the time. I got my first PDA in sixth grade and put all the mailing addresses of my classmates in it. So, I’m like weird, what I do.
Andrew: I see. So, you’re just that connected to people that it was easier for you to meet an investor than someone else who’s not organized and hasn’t kept track of all the people they met.
Evan: Yeah. At the point where you’re trying to raise money, your first money in, it’s really hard to get first money in from someone you don’t already know. For a pre-revenue company, first money in, it is really an investment on trust and character and you. That’s really hard to do in any kind of investor deck.
So, this is said about running for office. If you can’t write a list of 100 names of people that could write you at least $1,000 or more, you should not run for office. There’s maybe something to be said about trying to raise seed capital for something if you can’t list 20 people that can write a $10,000 check for you.
So, a lot of people will say things to me like, “Well, Evan, if I had your network than it would be easy for me to raise money.” Well, number one, it is not easy for me to raise money. In this last round, we closed 3 people out of about 54 pitches. So, my close rate is like 6%.
Andrew: Even for the guy who wrote the book on closing money.
Evan: Yeah. It is hard. Your close rate is low. It really is low. So, I do find a lot of people, they get frustrated in their financing rounds because they’re like, “Gosh, I pitched 30 people and only one is interested.” The reality is those aren’t bad numbers. We’ve got one company we profiled in the book that had 249 investor meetings for one round.
So, it can be really brutal. So, they say, “Hey, look, Evan, I can do it easily if I had your network.” Number one, it’s not easy for me to do it either. Number two, I think the answer is kind of start today in building a more thoughtful network of people.
Andrew: What is it mean to build a thoughtful network? What does it mean?
Evan: Yeah. I see people going about this in kind of a lame way, like a salesy way. I’ll see this a lot with like realtors or insurance brokers where it’s like they get your business card, they add you to some drip email list and you get this Christmas card on like a box of wine and you’re like, “Who did this even come from?” I think what communicates there is that they really don’t care about you and their goal in staying in touch with you is a transaction that could come about from that relationship.
I love Adam Grant’s book “Give and Take,” which has a lot of really cool ways that you can give to other people. So, I’ll come out of meetings–I had, I don’t know, seven meetings today. Every single meeting I go into it, I take a lot of meetings that are related to Able and if we can fund the company or we’re trying to close them as an investor, that’s clearly an objective, but I try to come out of every meeting with at least two very practical things that I can do for that person.
Andrew: What does that mean? Give me an example of one practical thing that came out of one of the meetings today.
Evan: Yeah. Okay. So, today one meeting this morning was with a guy who has two young kids. He said in passing that one of them was, I think, seven years old and pretty feisty and has a lot to say and his parents are trying to work through how do we do a good job raising this child? There’s a book, one of my favorite books is called “How to Talk So Kids Will Listen and Listen So Kids Will Talk.”
Andrew: That works with adults too–great book.
Evan: It’s amazing. It’s not a kid’s book. It’s a communication book, literally.
Andrew: Right.
Evan: It’s so good.
Andrew: Yes.
Evan: I hope your listeners buy it. But I guess this is on the record. True confession–I screen shotted and PDF’d the first chapter from Kindle. So, I had this little PDF of the first chapter. So, whenever I hear someone talking about the challenges of raising the kid, I mention the book and I write it down in my notepad and later, I send them that chapter and I say, “I really think this will be helpful for you guys.”
And I think what that shows is like relationships with people in the context of the workplace are not only about business. So, like real life things enter the scene there. In that context, it was about the person’s child.
Number two, I think it shows that you pay attention. You hear what they say and you can pick up on little side comments about–you might hear someone say that they’re on the weight list at boarding schools or something and they just kind of said it in passing.
Andrew: What do you do with that?
Evan: Do you know someone in a boarding school? And follow up with them. The last piece, I think it shows that you do what you say what you’re going to do and you’re really going to follow up. In this weird way, do I close investors by sending them books about children? Probably not, but like in an interesting way, yes. I was there in that relationship and showed up.
I think we like to say if you’re trying to raise capital, first you should raise friendships. Those little investments in the friendship outside of the context of business made is such that I was having lunch with this guy who I had become friends with five years before, we had a great email exchange, I’m telling him about the business. He’s like, “What do you need? $250,000? Of course, let’s do it.” The money wasn’t an issue because we had the foundation for it.
Andrew: Okay. This is unexpected for me but because this is something you’re so good at it and to the specifics of how you used your specific CRM and understand what you do with it that other people don’t. But first, let me tell people about where they can hire an incredible developer.
Here’s a problem a lot of people have–great ideas, maybe even a lot of customer demand, but they don’t have developer resources to actually build them out, even people who have big teams don’t often have developers who have the time to build out new projects. So, here’s what a lot of smart entrepreneurs do, a lot of smart businesses do. They go to Toptal.com. Evan, do you know about them?
Evan: I have not used them personally, but I’ve heard amazing things.
Andrew: Right. They’re just now starting to get a lot of talk around here. Are you in San Francisco? No, you’re in Austin. So, you probably have heard about them too. You have, actually, as you said.
Here’s what they are for anyone who hasn’t heard about them like Evan. They are a network of developers pre-screened, pre-tested, pre-vetted, really put through the ringer by other programmers, other people who know what to look for. So, when you go to Toptal, one of the first things they do with you is get on a call with you to really understand what you’re looking for. There’s no form that’s going to understand exactly what you have in mind for your product. But a human being could.
They’ll understand the languages you program in. They understand the product you’re working on. They’ll understand what team you have, who’s already working, how many hours you need this person for–a few hours a week, part-time a week, full-time, long-term commitment, short-term, whatever it is.
Then they’ll go to their network, they’ll find the right person. They’ll say, “Hey, guys, here’s what we’ve got. Who here is a good person for this?” They’ll find the right person. They’ll match you up. If it’s someone you want to work with, you can get started with them right away. People have hired full teams from Toptal. They’ve hired individuals for part-time work for Toptal and everything in between.
So, if you need a great developer, go to Toptal.com/Mixergy. When you go to that special URL, they’re going to give you 80 free developer hours when you pay for 80 in addition to a guarantee that you’re going to love them. If you’re not, within two weeks, you let them know and they will give you your–actually, they won’t give you your money back, they won’t even charge you but they will pay the developer. Go to the site for details. It’s Toptal.com/Mixergy. I’m grateful to them for sponsoring.
I noticed you grabbed a notepad, Evan, as I was talking. Is this so you can make some notes on Contactually and how you use them? What was the notepad for?
Evan: Yeah. Thank you for asking. So, I like paper. I have an iPad Pro with the pencil. But I also have for live event stuff, I like a Rhodia. This is a nice one because it’s actually reversible. So, it sort of angles like this. It’s grid paper and it’s a cool color. And then my designer introduced me to this a few years ago. It’s a Sharpie pen, really fine point.
Andrew: Such a good pen.
Evan: I love it.
Andrew: I’ve got the exact same pen here. Great writing instrument.
Evan: We’re like brothers from another mother. This is so good. I love it.
Andrew: So, what were you doing? Sorry.
Evan: Yeah. So, I was just kind of thinking about when I think about CRM, what do I do and how do I use it that’s kind of different? Should we run through a few things right now?
Andrew: Yeah.
Evan: Okay. So, first of all, the tool that I use, I personally use Contactually, which is a consumer-oriented CRM and they have a few interesting features that help me organize my database of people. So, let me just walk through a few, a use case of like I meet someone and I need to get them in there and then I want to do something around that person.
Okay, here’s a practical example. I met a guy today. He’s a Navy SEAL and he’s starting a gym. I have a long chat with him. So, I come out of that meeting. I had emailed him already. So, I already had his email in the CRM because it collects it automatically. I went and I added some notes on our meeting, what we talked about.
I had several follow-ups of a book I was going to send him and then three introductions I was going to make and I logged those in the CRM and then I added a number of tags to him. So, I added tags–entrepreneur, Austin, veteran, Navy SEAL and gym. I think that may have been it.
So, that gives me a little profile of who that person is. I then tried to find bios on people. So, I’ll google the person or if I go to an event that has a PDF distributed of all the attendees, I’ll grab all the bios from that. That makes it really easy for me to introduce that person to other people in the future.
So, my follow-up items were I needed to make these several introduction for him. I could do that. So, I was introducing him to someone else. So, I created an email, put both in the to field, intro: first name: first name, and then had both people’s bios in the email with like a little prompt of why they should connect. So, I get to kind of brag about both of them and kind of set the context for who they are and soon they’re sort of off and to the races. So, they get intake. I do my quick intros right then.
An interesting thing about Contactually is the tagging system they use, they have this thing called buckets. So, for example, a project I’m newly involved in is a veteran entrepreneur project, which is how do we help more vets start more companies. So, I put him in that bucket. On that bucket, I say, “I’d like to be in touch with these people about every 60 days.”
So, what it shows me is all these people in the bucket of veteran entrepreneurship, their color is green, yellow or red. The red people are people that it has seen that I have not emailed them in the last 60 days. So, some people have given this talk to my company before. They’re like, “Gosh, it’s so programmed. It’s so calculating.” I said this, “Tell me about a cousin that you have…” Let’s do this right now. Can you name a cousin that you have?
Andrew: A cousin that I’ve got? Danny.
Evan: Danny. Okay. This example doesn’t always work, but we’ll try it. If you’re like a good cousin, how often would you want to touch base with Danny?
Andrew: If I was a really good cousin it would be once a week.
Evan: Once a week. Okay. The reality is when’s the last time that you talked to him or how often do you think you are in touch with him.
Andrew: It’s been a few years.
Evan: Yeah, okay. Good. This example worked. So, here’s my point. A system like this is not about calculations. A system like this actually helps you be a person of integrity to live out how you say you want to live. So, for example, other buckets I have–I have a bucket for people in my neighborhood because I think it’s important for me to be invested locally in my neighborhood. I have a bucket for my college roommates. I don’t live in the same city as them and they’re on every six months.
So, I look at it and it’s like, “Dang, I have not talked to Adam in six months.” I’m not sending him a canned email. I genuinely care about him. But I think for a lot of people like us that run in a bunch of circles, it’s really easy for people that are important to you to be out of sight and out of mind. A system like this helps you do it a little bit more effectively.
Andrew: I’ve always wanted to do that with my interviewees. I get to know people, sometimes have really deep bonding conversation over one hour and never get to see them again. So, I thought, I should just put them into some system–and I like Contactually too–that tells you when you should come back and say hi. But I don’t have anything to say to them. What are you and I going to talk about in six months? Do just say, “Hey, I got a Sharpie again?” How do you come up with stuff to say?
Evan: Yeah. There are marketing-y ways to come up with stuff to say. Like, you have a cool microphone right there. So, I can flag an article six months from now on some new microphone and send you this thing like, “Hey, I thought of you…” That to me just feels like lame. I would stay on your mind about something, but like it’s not that exciting.
Andrew: Heidi Roizen, the investor told me–sorry, there’s a lag. That’s why it sounds like we’re talking over each other. Heidi Roizen, the investor, told me she doesn’t want people to her pen pals and at some point, if all you’re doing is pinging me just to say hi, you’re trying to have a pen pal that you’re saving for a special occasion that you might need to tap them for something big. So, that would be that.
Evan: So, more authentic ways, I think, in a lot of these buckets, for example, I will use the buckets to send invitations, maybe. So, I help put together a lot of events in New York and San Francisco or retreats of leaders. So, I have been collecting veterans for a few years now into this bucket. It’s, I don’t know, 60 of 75 people. One idea that we’re working on is spinning up this retreat with some generals and founders and investors that would be about giving some momentum to this project of how do we help more veterans start companies.
Andrew: I see.
Evan: So, that’s a case where someone is in this bucket. I may not have talked to them in 18 months. I email them and say, “Hey, I remember we chatted about this. It might not be of interest to you anymore, but we’re doing this thing. Is it interesting to you?” I think for me it helps with that kind of like one-to-many communication, where I get to present that audience with an opportunity. So, I interview people, I’m writing content, I’m putting together events and I’m regularly trying to think, “Who would appreciate this opportunity?” Having people organized by tags or buckets helps me find those people.
Andrew: All right. That makes sense. How about one other tip from Contactually and the way you keep track of people and then we’ll move on with the story if something comes to mind.
Evan: Yeah. So, I found myself regularly sending a pretty similar email to a lot of people that would have like templates. So, for example, in going through this book process of writing a book and having a publisher, it made me a magnet to not maybe 20 or 30 people wrote me saying, “I’m working on a book. I would love any advice you have. Can we find time to chat?”
What I did was I wrote two or three of those emails and then I completed an email template, which had my six best eBooks as well as like my best thoughts on, “Here’s advice for writing a book.” So, one option is you can publish that as a blog post and then like a friend writes you and you’re like, “Check out my blog post.” To me that feels really shyster and lame. Instead, I can send them this email with a personal note on it and it’s a lot of good content that I created. So, I have a ton of templates in Contactually.
I have one–I meet a lot of entrepreneurs who have just moved to Austin and they’re trying to get to know Austin. So, it’s my like “Welcome to Austin” template. It’s like, “Joe, so excited you’re moving to town. I collected some of my favorite resources–best restaurants, day care, how to raise money, it’s all in this email. Let me know how I can help.”
Andrew: I see.
Evan: So, I have a policy. I can nearly certainly, but I might get called out on this, I basically respond to every single email I receive, which is probably, I don’t know, many thousands a week. I can respond to all of them by having templates ready to go that help me say better, more thoughtful things to more people.
Andrew: Okay. That makes sense. Now I want to write you about that email that send people about writing a book. I’ll come back to it later after the interview. Let’s go back to your story. So, you had this idea. People have mail. They shouldn’t be bothered with it. Let’s digitize it. You start raising money. Can you tell me the first big money that you raised, the one that maybe surprised you and taught you how to raise money?
Evan: Yeah. So, the target for that seed round was to raise $1.5 million. We had a number of targets to invest that we thought would write $100,000 or $200,000 checks. So, our plan was actually to raise $1.5 million from about 10 people, ranging from $50,000 to $200,000 checks, which is not uncommon for that kind of round, but the idea was to not have a single lead who has most of the round.
Andrew: I see.
Evan: So, we actually had soft-circled, which means us getting kind of oral commitments from people that they’re going to be in the deal, $1.4 million. So, we were nearly done. And we finally met Mike Maples, who we had heard great things about and just missed each other a few times. So, we have this meeting with Mike, we explain what we’re doing and have a great meeting and he says, “Guys, I want the whole round.”
And so, we really only had $100k left. Now, we had not legally committed to the other people. We were like, Mike, we like you, but we have $100k left. What do we do?” He says, “Well, you’re going to need more money than you think.” So, we took the $1.4 million, crammed it down to $750,000 and then took $1.5 million from Mike to do a total of $2.25 million for that first one.
So, I think that moment with Mike was the first real kind of big $1.5 million check that we weren’t planning on, I had not been plotting toward and it just kind of happened.
Andrew: He invested in Twitter, Digg, Gowalla, TaskRabbit.
Evan: Lyft.
Andrew: Lyft, BranchOut. What do you think it was that drew him to you?
Evan: Mike likes a lot of stuff and he’s a really smart guy. I think an interesting thing about Mike is he likes problems he can understand and there was something about the simplicity and the very practical nature of the problem we were trying to solve that was interesting to him. It also fits like two broader investment hypotheses he has. One was about, at the time, screens and clouds. So, how we store data in the cloud and access it on multiple screens.
The other one is this theme around non-ownership that people want to have separation from physical assets. The last thing, I don’t know, we were from Austin. He was from Austin. We had some commonalities. We just sort of hit it off personally. He’s been an amazing investor and partner for us.
Andrew: I’m curious about this thing. You discovered a real pain point that I have that other people have, but I know that people are listening to use saying, “I don’t really get much mail anymore and when I do, I toss it in the garbage.” How did you know that other people experience this frequently enough that they’d be willing to pay for it?
Evan: Yeah. So a lot of millennials in San Francisco, the way they solve their snail mail problem is that they just never get it. They just don’t physically go to the box and pick it up. So, for those people, it’s not really a problem until they get a threatening letter from the post office which is like, “Check your mail,” or they get a parking fine that started at $300 and is now $1,000 or something.
So, for a lot of young people, it’s actually not a problem. I would say once you get a little bit older, late 20s into 30s, those are like real adults that get things like tax documents in the mail and mail is largely junk but the important things that do come in the mail are very important and usually needing to be accessed and stored digitally, like your tax records.
Andrew: Did you have a process for knowing this? Did you talk to customers? Did you look at some kind of research or was this an overall understanding?
Evan: Yeah. So, I had worked at Facebook before and was going to go back to working at Facebook after business school at Harvard. At Harvard, I met a guy there who’s one of my best friends now, and we started kicking around ideas at the end of business school. I had committed to go back to Facebook and we had this weird gap of three months over that summer when I couldn’t return until the end of the summer. So, it’s like, “All right, let’s just go work on something interesting.”
And it was a crazy way that we got the postal mail, but we knew we wanted to work on that problem. So, we set out to interview 100 families and did this weird home study where we gave people digital cameras and said, “Photograph your experience with mail and make a collage.” We did interviews. We did paper prototypes where we had a scanner that plugged into the back of Will’s car and we would scan their mail in their driveway and show it to them on an iPad.
So, Ideo would never hire me, but I love everything that Ideo does, and really took the design thinking playbook for how can we best to come to understand this problem. One thing I’ll flag about it is like there’s this concept of the job to be done and one funny thing we came across was it was a friend of ours who was an early user of a prototype we had of this service in Austin and the proposition was, “Never go to your mailbox again. All the mail that was going to come to your house will come to you on your phone.”
So, we hear back from him like a month into the service trying to get his feedback on how it’s going. He’s like, “It’s been really bad for my marriage.” We’re like, “What do you mean?” He’s like, “So, at my house, the mailbox is actually a half-mile away,” in what’s called a cluster box in the front of a neighborhood.
What he would do is when he got home from work, he would walk with his wife down the neighborhood and then get the mail and come back. It was their routine every day to have time together away from their kids. So, for him, checking your mail, the job to be done was time with wife. And our product like massively violated that experience or that job to be done. It failed to deliver that job to be done.
So, anyway, I think design thinking as a concept is an extraordinary way to pursue customer discovery and we got a lot of great feedback through that. I think as you layer on to that, actually adding in requiring people to pay as you move beyond you initial beta set of users to people that don’t know you who are not biased and giving you positive feedback. You kind of get in the real world and you start getting beat up a little bit more.
Andrew: Is there a book about Ideo’s process that you especially like? Have you read any that stand out?
Evan: There is. It’s called the Stanford D-School Bootleg… I have the PDF. I’ll send it to you. It’s like 100 pages. I think it’s actually on the web. So, Stanford has a 100-page PDF guide that’s like poor man’s version of design thinking.
Andrew: There it is. If you just Google “Stanford PDF Ideo” it comes up, “The Bootcamp Bootleg” PDF of D-School.
Evan: That’s it.
Andrew: I’ve heard them speak so many times and got so much out of hearing Ideo’s process, but I just haven’t found a good book with their full process in it. All right. That’s a good recommendation. Why don’t we just close out that part of your business by just giving a quick summary of what happened that kept you from being able to continue?
Evan: Yeah. So, two parts to go quickly through–we had to find a way to get people’s mail, which is trapped in all sorts of law and regulation. We found a way to do it working with the former general counsel of the Postal Service and the regional post office, starting in Austin. So, we had this partnership. It let us get our customers’ mail. The service was working really well. We were scaling the service. As we were growing, we get a call from headquarters in DC. It’s the Postmaster General’s comms team and it says, “You’ve got to come up to DC.”
So, we go up for this meeting. We thought it was our meeting to ink the best business development deal of all time. We pitch them saying, “Hey, we’re young startup guys trying to make postal mail into the 21st century for some of your users and we want to share with you data and learnings,” and we get a bunch of answers from their leadership team. I’ll flag two. One of them was the head of digital innovation, this guy who’s like 70-something years old, looks at us and says, “The problem is no one is going to want what you guys have built because digital is a fad.”
Andrew: Is a what, a fad?
Evan: Is a fad. What?
Andrew: Are you exaggerating that or he literally said, “It’s a fad.”
Evan: Verbatim quotation, “Digital is a fad.” So, that was crazy. Then we get around to the Postmaster General. He was a smart guy. It’s a new one now, actually. The guy at the time looks at us and says, “The problem is that the people that you are serving,” so, our customers. He says, “Those people are not my customer. My customer is the 400 volume mailers that send junk mail. My product to them is the guaranteed delivery of junk mail onto the kitchen tables of Americans.”
So, that was like a mind-blowing moment to see our business flash in front of our eyes. That was the midpoint of the business where we came back to the drawing board. Our core operational partnership had just been blown up. We built this other insane way to run around the post office, which resulted in these cars and trucks and mailbox flag things. It was nuts. So, that was the midpoint of it.
The finale of the business was after we raised the next financing round for Outbox, which was a $5 million series A, we used that money, built out operations in San Francisco, launched in a much larger way and that was the first time that we got validated data to speak to the two sides of the core economic equation of any business, which is customer acquisition cost and lifetime value of the customer.
For us, the acquisition cost was about double what we had planned it to be. The takeaway was a lot of people say, “Oh, that’s a really cool idea,” but when you ask them to put in their credit card and let you read all their mail, not as many say yes. And then the lifetime value on the customer side, the challenge was we had to have certain density of our users to have the costs come down on a per-user basis. We were fielding requests from all over the Bay Area. So, density was low, which meant cost was really high.
So, essentially, we had double the cost of acquisition, half the lifetime value and the only way out of that is, we thought, to raise like $50 million and just keep spending and we reached a tough decision which was like we don’t think it’s responsible to continue to operate this business with this business model.
Andrew: That is a gutsy decision. When you’ve had people look you in the eye, shake your hand, say, “I love this,” where Joshua Baer, I’m looking at your AngelList profile, says, “Please kill paper mail.” So, people are counting on you to do it. That’s the guts that an entrepreneur needs to have.
Let me take a quick break here and then come back and I want to ask you about how you switched direction, got a new idea, started building it up, got users and customers before you launched and how when I look at your AngelList profile, the other thing I see is guys like Dharmesh Shah are investing, Dave Morin is an investor. I see Blumberg Capital. I see all these other investors. You’re the guy who wrote the book on raising money, so I want to ask you about how you raised that money, how you came up with the new business idea and how you got customers for it.
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You now had an idea that was great that people loved. You had to figure out a new thing. Where did the new idea come from, the one for Able?
Evan: So, we had a really strange beginning to Able, which was $4 million in cash, a team of 18 incredible people–engineers, designers, marketing–and a tabula rasa, a blank slate from our investors to go build something, in Mike Maples’ words, “awesome.” So, if you can ever find a way to replicate that, I highly recommend starting a company that way.
Andrew: What chapter of your book, what chapter of “Get Backed” shows me how to get my investors to not want their money back and says, “Just go build something awesome?”
Evan: We have not cracked the code on how to repeat that one. I think that might be a once in a lifetime kind of thing.
Andrew: What do you think it was?
Evan: It does speak to Mike Maples’ sense here, where he is the ultimate entrepreneur’s investor. He looked at us and he said, “You guys have this cash. You have built an amazing team.” I really liked his perspective. He said, “The default position, the default reality for a business, for a startup, is that you’re dead. The only time you’re alive is when you’re growing.”
So, even though previously we had a business model that we were running after, we were still dead. Now, we were just dead also but had $5 million. So, when Mike said it that way, we were like, “Bingo. All right. We’re in.” So, we went through this crazy process. It was 12 weeks. We didn’t plan for it to be 12 weeks. We didn’t know how long it was going to take. But it was a process informed a lot by Ideo.
We began with a number of exercises of basically an exhaustive inventory of–in Peter Thiel sense, one of the definitions of startup is, “The largest group that can keep a secret,” and that the activities of a startup are designed to generate novel findings that confirm or deny hypotheses. So, if that was an asset that we had from Outbox, we really needed to be a good steward of that asset.
So, we spent the first full week documenting something like 400 lessons of everything we learned out of Outbox about sales and marketing, about acquisition, about everything. So, that was one full room of just post-it notes from that. The second full room was a set of what we call mega trends, basically observations we had about things that are true in the world that we’re interested in. You kind of do this almost like madlibs-style game where you put a few of those trends together and you say, “What business could we create that would seize that trend?”
So, the added piece to it, which I don’t know how we could replicate was that because we are in Austin, and I really believe that we would not have created this business if we were not in Austin, because we were in Austin, we were in an environment where we surrounded by small business entrepreneurs, not tech entrepreneurs, but every restaurant or coffee shop or apparel store–every retail experience you have in Austin nearly certainly you’re encountering the owner.
So, this was the first time where we were really around this set of customers, of people that had very clear needs. So, some things that came together for us were this idea that business owners had a real problem in accessing capital. I had studied under one of the economists that worked a lot on the concept of collaborative consumption, so basically how to people work together to generate value as a network.
The last piece was we saw that customers were looking for more intimate ways to interact with companies and brands they really cared about. So, there were a few different megatrends that we were interested in. The very clear–this was not a sepia-filter app that threw auto-posts to your Yelp page. This was very clearly, “We need to find a way to get low cost to capital to these awesome entrepreneurs because they deserve it and they’re going to make money.”
So, it was not a fancy, sophisticated demand. It was just a very plain, straightforward demand. So, what we set out to do was we believe–so, in the last 40 years, there have only been four years when more small businesses have been destroyed than created and it’s the last four years. That’s terrifying to us for a lot of reasons. Our goal as a company is to find ways to profitably deliver capital to these small business owners.
I had worked at a hedge fund before. Will, my cofounder, had been on the House Financial Services Committee. He knew banking policy. So, we knew enough to be dangerous, but–and I’ll end with this–we hear from equity investors when raised money for Able, which has core to our model, the idea that when you are raising capital as a business owner, some of the people that you know, your friends and family and customers, will want to stay up for you and materially contribute to your financial success.
That’s a hypothesis that we have. When we fund, say, a $500,000 loan, we may require that you raise $50,000 or $100,000 towards that loan from people that you know. When we took that product to the market, so many people who had left JP Morgan or Capital One or big institutions said things like, “Well, that will never work because people don’t like raising money from friends and family,” or, “Friends and family don’t want debt. They want equity.”
There are all these notes that they had because they’re been stepped in this industry for a really long time. So, we like to joke, “God protects fools and widows and we aren’t widows.” So, there’s something about us not being from the industry that even gave us the condition for the possibility of running after something that everyone else thought was crazy.
Andrew: You said Peter Thiel taught you that entrepreneurs that a startup is an organization that creates hypotheses and tests them–how did you test it before you launched Able?
Evan: Yeah. So, we spent time doing scrappy ethnography. The first phase was probably 100 small business owners in Austin. We had done some kind of high-level data research about supply and demand of small business credit. But for us, the human component to it was much more interesting.
So, one thing we learned was you look at the global data and you see that the interest rates on the merchant cash advance product looks really high. You’re like, “Why would any rational entrepreneur ever take a 50% interest rate loan?” Well, you dive into it. So, we’re with a woman who owns a hair salon in Austin, learning about how she finances her business. She’s like, “Oh, I’ve got this revolving line of credit from this company. It seemed like a good deal. It was really easy to do.”
We’re like, “What are the terms?” She’s like, “I felt like it was single digits, but it feels like a good deal.” We’re like, “Let’s look at that.” So, we get out the marketing. She had received cold calls, direct mail, email and then all the documents of the loan itself. Most of the documentation said, “Rates start at 4%.” And we then did the math on the actual loan that she received and it was 1,300%.
Andrew: Okay.
Evan: So, that’s something that we would not have seen in the data. That was something where the marketing is actually very deceptive to small business owners who, even though they are smart, they don’t build compound interest models to learn how insanely high the actual interest rates are.
So, we began with ethnography. Through that, we also leaner through those 100+ businesses we met, every single one of them had friends and family in their business. So, there was a giant shadow economy of usually not paper transaction among friends and family in supporting businesses.
So, this concept of having your friends and family support your business is not new. Before the modern FICO credit measure, it was the only way that people could access capital. So, in that sense, we’re a forward-looking technology company, but we’re really just restoring what was the classic lending practice that existed for millennia.
Andrew: I have a note here in my research here that says that before your public launch, you had already done 40 loans to businesses ranging from $5,000 to $150,000. What was that process like?
Evan: Man, we built and shipped a number of really bad loans. So, we were trying all kinds of deals. So, we knew we liked this collaborative credit model, but we weren’t sure what actual loan type we were going to fund. So, we’ve tried a peer to peer pawn loan model where people would send us photos of like personal assets.
There was one I remember that had, it looked like a bloodstained carpet with a picture of an iPad on top of it. We don’t have them anymore, but we did several peer to peer pawn loans on expensive watches that sat in our safe at our office. We shipped a bunch of crazy stuff. They were all really bad–not all.
Each time we shipped it, we had a hunch that it wasn’t our final product, but we wanted to ship it for the purpose of learning. So, every time we shipped a product, we had a goal in mind of what we were going to learn through shipping it. So, it was sort of how do you know when your product is working?
Able Loan, as a small business, low-interest term loan to small business entrepreneurs, I guess was our fifth product and there was pretty marked difference in response around the kinds of people we’d get to work with, the availability of other types of capital. They felt like a constituency that had a real need that we really wanted to serve.
Andrew: I see. When people were sending you watches, peer to peer loans, for peer to peer loans, how did that work? You would hold on to their watch, someone else would lend money to them and then you’d give back the watch when they returned the money to their friend?
Evan: Yeah. That was roughly it. In your voice, I can tell that you think it’s crazy. It was crazy. So, yeah, it was wild.
Andrew: I don’t know that it’s that crazy. I think the way you have it now, it’s a much bigger loan and you have better customers and less to ship around.
Evan: Right.
Andrew: But I’m curious about this whole process of just testing out different ideas. How did you come up with this idea of peer to peer loans? I see how you tested it and you said, “It’s not for us?” But where did this idea come from?
Evan: Yeah. I think the problem set initially was through these mega trends that we were interested in and the personal experience of knowing small business owners that couldn’t access capital. That put the question out for us of how Are we going to get these people capital.
Andrew: I see.
Evan: So, we knew what the research for the business question was. The model was interesting. A fairly straightforward way to say it is something like that–when you look at how thoroughly Airbnb disrupted the housing and leisure industry and Uber did in auto, rideshare, then we believe that if Lending Club had been as effective at leveraging the power of the network, then Lending Club would be a trillion dollar company, not like a $5 billion company.
Andrew: Okay.
Evan: So, Lending Club, they say they’re a club and they say they’re peer to peer. Lending Club has about 93% of its money comes from hedge funds.
Andrew: Really?
Evan: Yeah. It’s not peer to peer at all. It’s a marketing ploy. Now, they set out to make it peer to peer, but it didn’t work. So, off the record, although this is recorded, I’ll just say someone who used to be involved in SoFi says it’s a little ironic because it’s no longer So or Fi. It’s not social or finance. So, these companies that started out with some social component to finance really abandoned the social component pretty early.
So, we still believe in the power of networks. There’s a book called “The Wealth of Networks” by Yochai Benkler. He’s an economist at Harvard who did sort of the definitive treatise on how networks work to produce outcomes. We are basically trying to take the theory of that book and then productize it in the form of a loan. We think this is a multi-trillion dollar market. There’s $500 billion currently a year in new originations to small business credit.
So, it’s just this massive, massive market that we thought it was worth trying to apply this mechanism that has worked in other industries to this particular question of financing of companies.
Andrew: All right. I’ve got two more questions. One of them has got to go back to this, the pawn business. It’s just so clever. I’m curious about beyond seeing the photos that people sent you and having to ship back and forth, what’s one thing that told you, “This is just clearly not a good model for us?” Anything analytical that told you it wasn’t right?
Evan: I think the weird–so, you can imagine people that are in the pawn loan business, it’s pretty shady. The people who run the businesses are pretty shady and then the people who are needing to get a pawn loan are often in really tough circumstances. So, it just seemed like mostly just through colorful experiences, it just seemed like this was not a clientele that we really wanted to build a long-term relationship with.
There was one case where my cofounder, Will, went to go–it was a deal that was in Austin–he went to meet this woman who was pawning a piece of jewelry. She brought with her a Texas ranger and the guy who currently had the pawn loan out on the watch. So, it was like a pawn re-fi and they brought law enforcement. Anyway, it was just like, “What are we doing?” My mother in law joked because she thought what we were doing was super shady, she was like, “I don’t think you’d look good in stripes,” kind of thinking we’d go to jail for what we were doing. What we were doing was not illegal, but it was crazy.
Andrew: I get that. All right. So, at this point, how much in loans have you guys done?
Evan: You mean like today?
Andrew: Yeah, how much lending?
Evan: So, we’re approaching $10 million in loans. So, our target for this year is to hit $100 million in originations. We really started lending in serious in this product about six months ago. So, we’ve had three $1 million months.
For us, we lined up access to capital, which was a real challenge to get the right kind of lending capital that we could use to turn around and fund loans. So, that was its own fascinating and complex process, but learned a ton through that and got great reception from people in the credit hedge fund industry and family and office industry that really likes the product that we’ve built.
The challenge for us is how do we find great borrowers that need access to low interest loans? The sad reality is that some of our competitors in the online space are much larger than we are. They have huge marketing budgets. They are carpet bombing small businesses with rates that are basically unrepresentative of what they actually charge.
So, we have found some really successful distribution partners. So, we’ve worked now a lot with banks. So, we’ll work with a bank loan officer, a bank CEO. They know that our rates are the lowest on the market. So, they would much rather send their customers to us than send them to some online loan shark, which are the many of the other companies.
Andrew: If they don’t qualify for a loan from the bank?
Evan: Right. Loan committees reject eight out of ten applicants.
Andrew: I see.
Evan: Probably four of those applicants, they would not have rejected ten years ago. So, banks want to make these loans, but literally the regulators in many cases will not let them. So, the bank thinks it’s a good loan. They think they can make money on a loan. They cannot make the loan. So, they send it to us. We get to make the loan and the bank gets to keep the customer.
Andrew: I see. All right. For anyone who wants to check out the website, it’s AbleLending.com. The book that Evan wrote is called “Get Backed.” It’s about how to raise money. One of the things I like about it are specific examples, including people’s pitch decks that they’ve used. They’ve given you permission to include in the book.
If you want to hire a developer, go check out Toptal.com/Mixergy. If you hate your hosting company or frankly just want to host a new site, go to HostGator.com/Mixergy. If you like this interview, please tell your friends to subscribe to it in whatever podcast app they have on their phones. In fact, do it for them. Introduce them to podcasting and say, “Here, check out Mixergy. It’s a really good podcast.” I appreciate it if you do that.
Thank you so much for doing this interview. Thanks, Evan.
Evan: Thanks for having me.
Andrew: You bet. Thank you all for being a part of it, especially you, Charlie Hoehn, for making this happen. Bye, everyone.
