20VC Raising $105m in Just 13 Months Over 3 Separate Rounds, The 5 Core Ways VCs Can Add Value & How Founders Can and Should Fully Leverage Their Cap Table with Kurt Rathmann, Founder & CEO @ ScaleFactor

In the inaugural 2020 Founder Friday episode of the 20 Minute VC, host Harry Stebbings interviews Kurt Rathman, the driven CEO and founder of Scale Factor, a startup revolutionizing bookkeeping through automation. Rathman, a born entrepreneur and former KPMG auditor, shares his journey from an 18-year-old grappling with real-time inventory for his high school business to raising over $105 million from top-tier investors, including Bessemer, CO2, and Canaan Partners. Rathman and Stebbings discuss the importance of founder obsession, the art of extracting value from investors, and the challenges of scaling culture and recruiting top talent outside traditional tech hubs. Rathman emphasizes the CEO's role in proactive fundraising and team building, advocating for face-to-face interactions and quick, scrappy problem-solving to maintain a vibrant company culture and effectively manage growth.

• Harry Stebbings announces the first Founder Friday episode of 2020 on the 20 Minute VC podcast.
• Excitement for the upcoming year with guests like Vinod Khosla, Howard Marks, and Patrick Collison.
• Introduction of Kurt Rathmann, founder and CEO of ScaleFactor.

"My word. I'm so excited for our first founder Friday episode of 2020 here on the 20 minutes vc."

This quote expresses Harry Stebbings' enthusiasm for the new year of podcast episodes and sets the stage for introducing the guest.

• Kurt Rathmann has raised over $105 million in funding for ScaleFactor.
• ScaleFactor provides automated bookkeeping solutions, consolidating financial information in one place.
• Kurt's background includes being CFO at KNS Communications and a senior audit professional at KPMG.

"To date, Kurt has raised over $105,000,000 in funding with scale factor from the likes of Byron Dieter at Bessemer, CO2, Canaan Partners, Stripes Group and Firebrand, just to name a few."

This quote highlights the significant funding raised by Kurt Rathmann for his company, ScaleFactor, and names some of the investors involved.

• Thanks to Byron Dieter, Michael Gilroy, Thomas Lafonte, and John Fine for question suggestions.
• Acknowledgment of Silicon Valley Bank's support for visionaries and startups.
• Promotion of Descript for podcast creation and editing.
• Introduction of Spectre (formerly CrunchDecks) for competitive analysis.

"I do also want to say a huge thank you to Byron at Bessemer, Michael Gilroy, Thomas Lafonte, and John Fine for providing some fantastic questions suggestions today."

Harry Stebbings expresses gratitude to individuals who contributed questions for the interview, enhancing the discussion's value.

• Kurt Rathmann identifies as a born and raised entrepreneur.
• His entrepreneurial mindset was evident early on, and he started a landscape lighting company in high school.
• Rathmann's journey included becoming a CPA and working at KPMG, leading to the founding of ScaleFactor.

"I'm a born and raised entrepreneur. It's very early on that I realized that I thought this way, I was interacting on some avenue to create value."

Kurt Rathmann explains his innate entrepreneurial spirit and his early realization of his unique approach to creating value.

• At 18, Rathmann faced a real-time inventory problem in his high school company, leading to his first attempt at a solution.
• His experiences at the University of Texas, KPMG, and a small business in Denver contributed to his obsession with solving the problem that ScaleFactor addresses.

"The problem that we're solving at scale factor really started when I was 18 years old and I had a company in high school."

This quote traces the origins of the problem ScaleFactor aims to solve back to Rathmann's teenage years, highlighting the long-standing nature of his commitment to finding a solution.

• Discussion on whether a founder needs to be mission-driven and have found a market fit to build a large company.
• Rathmann believes that being an expert in the problem area is crucial for success, either through rapid learning or prior experience.

"I ultimately think you have to be an expert, and you can become an expert really fast."

Kurt Rathmann emphasizes the importance of expertise in the founder's journey, suggesting that it can be quickly acquired or built upon from previous experiences.

• Rathmann explains the six-year journey of ScaleFactor before venture capital funding.
• The initial focus was on incubating the idea and understanding the customer before seeking venture dollars.
• Rathmann's strategic approach to raising the Series A, emphasizing the importance of finding the right partner.

"It took three years to do that before we were operating for three years before I ever took any type of venture money."

This quote reveals the careful and considered approach Rathmann took before accepting venture capital, indicating a focus on solidifying the company's foundation first.

• Kurt Rathmann discusses the preemptive nature of their B and C funding rounds.
• The preemptive funding allowed for a strategic expansion of the company's problem-solving timeframe.
• The concept of "drink when you're fed" is mentioned, suggesting the importance of taking opportunities as they arise.
• Kurt emphasizes the need for a longer horizon to tackle the complex problems they face and to see the payoff.
• The decision to raise funds in a condensed 13-month period was influenced by the initial Series A selection and partnership with Michael Gilroy at Canaan.

"Our B and C rounds were preempted. That allowed us to make the decisions possible to expand our time frame and the problem that we were solving."

Kurt explains how preemptive funding rounds enabled the company to plan for a longer-term strategy, which was necessary for the complex problems they were addressing.

• The transition from a lean resource allocation mindset to one of abundance was challenging.
• Kurt discusses the importance of building a muscle for managing growth and resource allocation in a VC-backed startup.
• He introduces the concept of throttling a great team between 80% to 130% to avoid complacency and burnout.
• The company culture shifts between scarcity and abundance to maintain strategic focus and creativity.
• Kurt emphasizes the importance of inorganically forcing prioritization and focus when there is an abundance of resources.

"Between throttling these elements of growing and running a VC backed startup, this is not a normal game."

Kurt describes the unique challenges of managing resources in a startup environment where funding can significantly affect the pace and direction of growth.

• Kurt Rathmann believes the biggest value-add from the cap table is the experience and pattern matching from investors.
• He outlines five ways VCs can add value: writing checks, making introductions to talent and ecosystem partners, providing platforms for recruiting or partnerships, and offering wisdom.
• Kurt stresses the founder's responsibility to actively extract value from VCs, rather than expecting it to be handed over.
• The importance of building relationships and being proactive in seeking out value beyond capital is highlighted.

"The biggest value add is the experience and the pattern matching. From seeing this before, I have a philosophy and a thought, and there's many other folks that have taken a stab at this."

Kurt identifies the experience and insights gained from investors who have seen similar business scenarios as the most significant value beyond the financial investment.

• Investor updates are crucial for providing context to those not involved in daily operations.
• Kurt advises that facetime with investors is key to unlocking value.
• Being open and vulnerable with investors about challenges allows them to provide targeted assistance.
• He suggests that investors can be a valuable resource when founders are specific about their needs and actively engage their investors.

"It's spending time together. And then these things come out and organically start to come out."

Kurt emphasizes the importance of spending time with investors to naturally develop a collaborative relationship that facilitates value extraction.

• Founders may overvalue the brand name of a VC firm or investor.
• It's essential for founders to look beyond the surface level and actively work to add value to their company.
• Kurt believes in keeping investors engaged and accountable, viewing it as a competition for their time and attention.
• The responsibility of managing investor expectations and extracting value lies with the founder.

"It's my job to make sure that the board and that the investors are continually working for the company."

Kurt conveys the proactive approach he takes to ensure investors are actively contributing to the company's success.

• Managing board relations is an ongoing learning journey and involves constant reevaluation.
• Kurt views the boardroom as the founder's domain, where they must take control and build a team.
• He considers himself a professional team builder and applies this to board management.
• The key to effective board management is engagement and being in the driver's seat.

"It's a constant learning journey, and it's a constant reevaluation of where we're at today and where we're heading."

Kurt speaks to the evolving nature of board management and the importance of proactive leadership in that space.

• Culture is a standout aspect of the company, as noted by investors.
• Michael at Canaan highlighted the palpable energy present in the company.
• Kurt and his team have cultivated an environment that leaves people wanting to engage more with the company.

"Energy physically hits you when you walk into the room and the building at Scalefatter, and you end up just wanting more of it."

This quote, although incomplete, suggests that the company's culture and energy are infectious and leave a lasting impression on visitors.

• ScaleFactor is deliberate in creating a positive work environment.
• The ambiance, including scent and music, is carefully curated.
• Interpersonal interactions are emphasized for a supportive culture.
• The physical space and density are managed to maintain the right energy levels.

"I believe that when you walk into the building, we've got to do a number of things to make it a safe place for you to be the most creative and ultimately do the best work of your entire life and your career."

The quote highlights the importance of making the workplace a conducive environment for creativity and productivity, focusing on sensory and interpersonal elements.

• Regular celebrations of individual and team wins are held.
• These celebrations provide insight into others' work and challenges.
• Acknowledging successes helps maintain morale and perspective.
• Leaders use these occasions to encourage and motivate team members.

"But one of the things that we've done since the very beginning of scale factor, maybe a couple of months in, is really celebrate our wins as a team."

This quote explains that celebrating wins has been a foundational practice at ScaleFactor, aimed at fostering team spirit and recognition of achievements.

• The LFF (Let's Face the Facts) conversation is a structured approach to addressing issues.
• Emphasis is placed on data-driven discussions to minimize emotional responses.
• Clear separation between performance data and empathetic leadership is maintained.
• This method aids in objective performance management and supports team member recovery.

"And I try to approach the problem that way instead of bring a lot of emotion to the problem, because that's where things start to go off the rails with performance management and ultimately your ability to dust somebody off versus just leave them on the floor."

The quote conveys the strategy of using factual, data-driven conversations to manage performance effectively while also caring for team members' well-being.

• Maintaining culture during growth is a continuous challenge.
• Core cultural pillars and standards are essential.
• New team members play a significant role in shaping the evolving culture.
• Rapid response to cultural issues is crucial.
• Innovative solutions, like Scale World Live, are used to enhance communication.

"And so as you scale and you do all these things, you have to steer it, but it takes on a life of its own, and it comes back to us."

This quote emphasizes that while company culture naturally evolves, it is important to guide it and react quickly to maintain it during periods of growth.

• The CEO's role is critical in recruiting talent, regardless of location.
• Persistent, long-term recruitment efforts are necessary.
• The company uses creative methods, such as advisory roles, to integrate talent.
• A systematic process exists to facilitate relocation.
• ScaleFactor challenges the notion that top talent is exclusive to traditional tech hubs.

"You can uproot anybody from whatever location if you're willing to put in that work right?"

The quote suggests that with enough effort and the right approach, it is possible to attract and recruit top talent from any location, countering the belief that only tech hubs can secure the best employees.

• Engaging talented individuals requires more than just virtual communication; it necessitates in-person interaction.
• CEOs must be willing to travel to meet potential recruits and investors to establish strong foundations for relationships.
• Face-to-face meetings are crucial for setting the stage for long-term collaborations that can span over a decade.
• Despite technological advancements, personal connections formed through physical presence are irreplaceable in business.

"You got to get on a plane. You got to be willing to get on a plane for almost everything."

This quote emphasizes the importance of personal effort and commitment in the recruitment process, suggesting that CEOs should be proactive in meeting talent and investors in person.

"You got to be face to face with people. You got to look eyeballs to eyeballs, you got to shake their hand."

This quote highlights the significance of physical presence in forming meaningful business relationships, which cannot be replicated by virtual means.

• The investment environment has evolved, with investors becoming more open to funding businesses outside their immediate location.
• Collaborative communication technologies have made it easier for investors to connect with companies remotely.
• Despite these changes, the value of in-person meetings remains high for building trust and long-term partnerships.

"The entire landscape is changing. You're seeing where maybe ten years ago, investors would not want to invest out of their jurisdiction... I think the world's changed."

This quote reflects the shift in investment practices, where geographical barriers are becoming less significant due to advancements in communication technology.

"Would you have me in person? Because if you'd have me in person, I would gladly be there in person."

This quote demonstrates a preference for in-person engagement over virtual meetings, emphasizing the belief that physical presence leads to stronger relationships.

• The importance of strong personal connections in business, both as a strength and a potential time-management weakness.
• The challenges of scaling a business include ensuring effective communication and execution on a day-to-day basis.
• The belief in creating a category in the industry and convincing others of the direction the world is moving toward.
• The vision for the next five years includes leveraging personal impact and scaling the business to significantly influence the small business ecosystem.

"My biggest strength is just connecting with people... The biggest weakness is... I can spend a lot of time creating the connection."

This quote reveals the speaker's self-perceived strength in building relationships but also acknowledges the downside of potentially neglecting other responsibilities due to time spent on these connections.

"It's becoming less and less now, but in 2014, when skill, it was the space that we're pioneering... you've got to figure out a way to turn that and kind of throw that log of disbelief onto the fire and let it keep powering you."

This quote illustrates the initial skepticism faced when pioneering a new industry space and the determination required to convert disbelief into motivation.

• Scale Factor aims to become the default solution for running small businesses and to make a broader impact on the small business ecosystem.
• The first investor in Scale Factor was a close friend who believed in the founder's ability to execute, highlighting the importance of personal trust in early-stage investments.
• The company does not view the market as winner-take-all but rather one that will thrive on strong partnerships among key players.

"We want to become a de facto solution that you run your small business on, and we want to start to feel like we're making an impact on the entire small business ecosystem."

This quote outlines Scale Factor's ambitious goals to be a leading platform for small businesses and to influence the market as a whole.

"The first investor is a close friend of mine... He saw early on that he would invest in this person that would do everything it took to make a return on that investment."

This quote underscores the significance of personal relationships and trust in securing early investment, particularly from individuals who know the entrepreneur well.