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Special Interview with Rick Gordon of Mach37
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New Venture Finance: Startup Funding for Entrepreneurs
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Course 3 of 4 in the Specialization Entrepreneurship: Launching an Innovative Business
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Sources of Capital for the Early Stage Company
This session examines the options that entrepreneurs face in where to raise their financial capital from in the early stages of their venture. From friends and family, to angel investors and venture capitalists, the pros and cons of each source of capital are explored.
Meet the Instructors
Michael R. PrattLecturer of Technology Entrepreneurship
Maryland Technology Enterprise Institute (Mtech)
[MUSIC]
Good morning.
Welcome back, and today we're very fortunate to have Rick Gordon with us.
He is the managing director of MACH37, which is a, a cyber security
accelerator located in Virginia in the Center for Innovative Technology.
Rick, thanks for being with us.
>> Happy to be here.
>> Thanks. So we've talked about accelerator's in,
in the course and I thought it would be good to have someone who
actually runs an accelerator tell you a little bit about it.
So, Rick, can you kind of give us a little bit of background about you at first and
then, how you got into this and what, what it's all about.
>> Sure. So I, I got,
first got involved with MACH37 actually before it even existed.
Their the center for innovative technology had recognized in this region that there
was a lot of intellectual capital around the burgeoning cyber-security market.
But what we hadn't seen was a corresponding,
I think growth in the number of disruptive at
security product companies that were being created and going to market.
And so part of this effort to analyze that included
a focus group that I was a part of and, and, where this idea emerged that.
We could create an accelerator that would
fill some of those gaps that may exist in, in the ecosystem in this region that
may have been limiting the ability of these you know, budding entrepreneurs.
From taking that entrepreneurial leap and,
and you know, building disruptive product companies.
So that was so I was involved in that process the center for
innovative technology was fortunate enough to, to get funding.
And in 2013, July 2013 we got it launched and and
I was privileged to be ask to be a part of it.
>> Right. And your background is in, is in finance.
>> So, so I interesting question.
So I've a variety so maybe a patchwork quilt of a resume.
And it, which actually almost fit perfectly with the,
the job description for this this position.
So I started my career at, in the military in the Navy.
I, when I, I finished my obligation, I went to business school and
I was fortunate enough to go to Wall Street where I was doing technology.
Financing for companies that were a little later stage than what we're dealing with.
But you know, we were, we, it was the IPO tech boom.
>> Right. >> A really great place to learn.
I found that I was more in alignment with,
I think, the entrepreneurs that was taking public as opposed to the bankers.
So I took my bonus one year and
decided to go do my first start up, which ended up being.
A cyber security business.
We launched that in 2000, I guess 2009.
And I've been in and about this cyber security industry really since that time.
Either you know, consulting to cyber security companies, running them,
raising more for them.
For them, you know, a variety of different capacities.
>> Right, right, very interesting.
So, MACH37, tell me about what you guys do and
what benefits you provide the entrepreneur, that type of thing.
>> So, the purpose of the accelerator is to
launch disruptive cyber security product companies in the strategic relevance.
Of this area is this you know, more than any other place on the earth.
There are individuals that are running around with deep domain expertise,
particularly as it pertains to the threat.
>> Right.
>> We have whether it's work that's going on inside the intelligence community.
Inside DOD or, or
a federal civilian sector whether it's you know the intelligence that's been gathered
in the commercial sector by companies like Mandiant that are based in this region.
>> Mm-hm. >> We have that expertise more than
any other place on the earth and, and
we're harnessing this that by bringing those other.
That are critical to successful startups.
That would include taking tech, what are mostly technical entrepreneurs and
imbuing them with a vision for an early-stage business.
We have a curriculum that we teach these entrepreneurs what your company needs to
look like in six weeks, in six months, and ultimately through exit.
We have built an extremely robust mentor network that
includes seasoned executives that may be on the buyer side so I would say your
Fortune 100 are former Fortune 100 >> Mm-hm.
>> We have successful entrepreneurs that have been in this industry and.
You know, sold for
multi-hundred million dollar exits, that are advising our companies.
And we have, industry analysts that are really shaping that market and, and,
you know, defining what the market is that work with our,
our entrepreneurs, you know, on a, a daily or a weekly basis.
And so we've, all of that expertise is available to the entrepreneur customers.
Also, you know, access to, and
importantly, access to customers that are willing to say-
>> Mm hm. >> I have a problem you're trying to
solve, I like your approach and I'll, I'll partner with you,
with you through your alpha and beta.
Ages of, of software development.
All those are extremely critical pieces, and then finally, you know, access to that
early-stage capital, which is, if you've ever done a startup, and I know you have.
>> Oh, I have, yeah. >> It's hard.
It, you know. >> Yeah.
>> Especially for, you know,
where we've [CROSSTALK]-
>> Thank you, by the way.
>> [LAUGH] >> because I've said 100 times on
these video lectures, raising capital is hard.
>> And it, and, you know, it's it gets easier at your second and
third time around.
Good for, for where we specialize or mostly first time entrepreneurs.
There's some exceptions to that but, it's hard.
You don't have the credibility of,
of bringing a return on investment to the investor community and
getting those those first seed round investors in, takes a lot of work.
You have to borrow a ton of credibility from other people to
believe in what your doing and we really do facilitate that.
>> Right. So how, I mean, do you,
you make an investment within these companies?
>> We do. >> And, and, and
fund them with some cash, I understand.
>> We do.
>> and, and then.
So the purpose of that is to hopefully generate value that you can
continue to do this thing into the future so that maybe you can supplement some of
the funding coming out of the Commonwealth, maybe.
Perhaps, I don't know.
>> That's so abso, actually I'm committed to that.
>> Okay.
>> I absolutely want this this operation to be self sustaining.
Currently we were funded, seeded by the Commonwealth.
>> Right. >> The expectation by the Commonwealth is
that I'll find private sector sources for that.
We are in the midst of, of that campaign now with I'll just say I've,
I've been humbled by the level of interesting.
>> Right. >> That,
that we've gotten by the commercial sector that wants to
align let's say large multinational brands-
>> Yes. >> With security innovation and,
you know, it's a good to, you'd be doing that.
>> Oh, yes. >> [LAUGH]
>> Security's
a good market.
>> Right. >> For sure.
>> So and we're doing that, you did mention that we do make an investment.
>> Yeah. >> Our economics are,
are pretty standard, we make a $50,000 investment.
>> Okay. >> We take 8% for that investment.
We work diligently, or some would say exhaustively.
>> Mm-hm.
>> With our entrepreneurs for, through a 14-week program, really imbuing them.
And with that, vision for, a business that venture funders or seed funders
are going to, feel comfortable about >> Right.
>> It'll be familiar to them, and and
then as we help them raise, additional funding we'll also if, when they raise,
their first hundred thousand dollars from a, a, season investor.
>> Right. >> Will match another $100,000
investment >> Ok, okay.
>> In that company.
The, the $50,000 is interesting and the economics have been interesting.
I think, we, the, there's an implicit valuation when you
take eight percent on a $50,000 investment.
>> Right, I'm hoping that my students are out there calculating
>> Yeah, it's, the math is easy, right?
>> Post-money valuation. Based upon our, our-
>> Yeah, pre and push, right?
>> [LAUGH] Right.
>> that, so post money evaluation, $625,000.
>> Right. Yeah.
>> The all of the companies that we invest in are worth more than that.
>> Mm hm. >> They know it and
we know it and we don't argue about it.
>> Right.
>> We we also-
>> It's the cost of them getting into the [INAUDIBLE].
>> That's right, and so
we also we also know that the value of the program is, is worth more than that.
And so really, part of our DNA, and
I think where we have probably surprised ourselves or sort of outdone our
own expectations is in the expectation that we are going to create more value.
For those companies, then we're claiming in that 8%.
>> Mm-hm.
>> And all I'd say is all you have to do is check Twitter for
the companies that have gone through the program and
without a doubt everyone feels like they got a good deal.
>> Yeah. Well, accelerators are, I mean,
the data out there suggests that companies that go
through accelerators do much better than companies who don't.
So. >> I've, I've seen some of that data, too.
>> Yeah.
>> So I'm no expert on accelerators, I'm an expert on ours.
>> Right.
>> And our company's are doing very well.
>> Right. >> Yeah.
>> So how do I get into you,
to MACH37, if I'm an entrepreneur who has a cyber security solution?
What do I have to do to, to be accepted into the program?
>> So there's an application process.
We generally batch our acceptances.
We run two sessions a year, one in the Spring, one in the Fall.
You really can apply any time, and, and if you apply early, we'll actually, you know,
start cultivating the relationship with you early, but the program itself is,
is that we run in the Spring and the Fall is, is pretty.
Demanded and we, you know, expect our participants to be there, you know,
for most, if not all of it and so, there, you know,
that's generally what we are sort of driven by, that, that schedule, where we
will, you know, focus on the cohort that we have, if we are that 14 week period.
And then when, once they graduated with a demo day,
then we'll really start focusing on bringing in the next batch.
>> Right. And there's a pretty competitive, I mean,
there, are there a lot more applications than actually get into the cohort?
>> Absolutely.
>> Yeah. >> It's, it's-
>> So. >> It's and it's gotten more competitive.
We get applications from all over the world.
>> Okay.
>> The I will tell you, we've made 17 investments so far.
>> Okay. >> Of those,
seven have not been from this region, so we did recognize that there's a lot of
intellectual capital here that that could birth disruptive companies.
But that intellectual capital exists in other places as well.
And just, just in the U.S. we've invested in companies from Austin from Montana,
from Palo Alto Florida, all over.
And then we've we're also getting applications from.
We've actually invested in a company from Berlin.
We've gotten applications from Turkey, from Morocco.
From the UK, from Australia, and I don't see that trend subsiding at all.
We, we generally built a global reputation for being the place to go for
particularly individuals in the security researcher community.
>> Right. That's very interesting I,
I, I wrongly assumed that you are focused on Virginia,
Commonwealth of Virginia-based companies.
But you'll would, you'll accept applications from most any-
>> Absolutely.
>> Any place?
>> The-
>> Right.
>> This is what we're driven by.
We're driven by you know, building sustainable companies that will
give the accelerator a return on investment.
>> Right.
>> And sometimes that you know, that,
what that does mean is you make the best investments you can find, right?
>> I can guarantee you that that when the first investors on
Sand Hill Road were deciding you know, you know, how do we, or whether or
not we should fund Oracle or whether or not we should fund Google.
>> Mm-hm.
>> They probably didn't think about economic development.
They thought about building sustainable enterprises and that ecosystem emerged.
>> Right. >> Out of that all that said,
all of our companies have the commitment to be building something significant in
Virginia within two years.
So that would mean, even if their domiciled in a,
in another location, they're committed to being back here and
building either in some cases their development here,
because of the, the richness of you know, like social capital here.
In other, other cases, government or you know,
sales organizations that are focused on the mid-Atlantic region.
>> Right. Well, that's interesting, because you,
you may be interested to know that this, this course is being.
Looked at or signed up by twen, over 20,000 people so far.
>> That's terrific.
>> In 175 different countries around the world.
So I'm sure that people listening in will find it interesting.
>> If, if any of you are cybersecurity entrepreneurs, I hope you give us a call.
>> Yeah.
So, let me ask you a final question.
>> Sure. >> I, I don't want to take up all your,
I know you're a busy man.
well, actually, let's make it two final.
>> Sure. >> Things.
One is are, do you know of or
have relationships with accelerators that are outside of the country?
That, you know,
some of these entrepreneurs who live across the world may want to
determine are there, are there MACH37s located in Europe.
In Asia, or do, do you have relationships like that?
>> Informal.
We don't have any formal relationship.
I think, so, we're new.
>> Right. >> And I think there's a whole lot,
a whole lot of foundation building that, that we focused on.
And so we haven't really we've thought about potentially broadening.
Clean our footprint, we haven't engaged in that yet, but there are, so, you know,
of course there are accelerators all over the world.
There are some that have come in to, and we are really happy to help them.
I help them, you know, we, I, I, again, I can't tell them how all accelerators work,
but I can tell them that what we are doing is working very well.
>> Right. >> And, and
we share that, that approach with them.
You know, and that includes, you know,
eastern Europe, there are, we have informal relationships with,
security focused accelerators, you know, in the, in the Middle East.
>> Mm-hm. >> For example, Israel in particular.
>> Israel's a big security >> Yeah.
>> Technology group, yeah.
>> It's a, and, you know, and, wh,
if we're not aware of what's going on in Israel were really not not doing our job.
>> Right.
Yeah.
Okay, thanks, that's good.
And so if, if you're looking for an accelerator where you live and work,
I'm sure you can find, with the, with the appropriate research you can find, you
know, sister accelerators that can help you, you know, kind of grow your business.
So here's the final question.
>> Sure. >> This is not meant to be,
put you on the spot.
>> Okay. >> Because I'm not that type of
an interviewer, but I mean, I know you're fairly new.
But do you have any data yet on how successful the people are becoming and
getting funding, let's say, that come out of your program.
Are they getting funding?
Are you seeing that, you know, that they're really, that they're getting a lot
of interest from, like their institutional investors, that, that, that type of thing?
Or is it too early to tell yet?
>> so- >> Or any success story you want to
talk about, in particular, not to name names.
>> [LAUGH] So we do have success stories, so I would say that they
are getting funding and for a couple of, a couple of just real key reasons.
One, the program works and the partners don't quit.
We have a 14 league program that our relationship with
our companies doesn't end.
Then it ends when they exit, and I get a return investment.
>> Right. >> And we do look at that,
look at it that way and we may be, perhaps, we only take six or
seven companies per session, so it allows us to,
perhaps, act more like a, a a venture capitalist, you know,
in supporting the companies through exit than, you know, if we were to win 40.
>> Right.
>> So and they are having success some of them you know,
obviously are more successful than others.
Maybe too great success stories.
One one company that just grad graduated from the program is already over.
Were subscribed.
And which was, you know, was, a few weeks ago.
>> Great. >> Already over-subscribed in
its seed round.
Is already talking to institutional VCs about perhaps doing an A round
much earlier.
In this one's, it's an exceptional, exceptional company.
>> Mm-hm.
>> You know, similarly the we have one in
from the second cohort that did a $750,000 seed round.
With, really within, within a few weeks.
And so we, we get those.
>> Right. >> It's not all of them and
the ones that don't have that level of success then.
I'll, I'll give you another example.
The one that we've
that we've raised money almost a million dollars in seed funding for.
Already is you know, it's been, it's been hard work just hard work with, you know.
>> Mm-hm. >> From the company and, and
the partners really finding those seed investors that are,
that are willing to take the risk early.
>> Right.
So there you have it.
You heard me talk about accelerators now you've actually met a person who
runs one and got first hand.
The knowledge of how it works.
So, Rick thanks very much for joining us.
>> Thank you for, We appreciate your insight.
>> Thank you for have, having me.
>> Thanks.
[MUSIC]
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