120. Unlocking Startup Growth: Fundraising Strategies and Resilience Tips with Paulo Andrez
If you’ve ever felt like building a startup is a chaotic blur of conflicting advice, impossible priorities, and limited resources—you’re not alone. In a recent Feel the Boot interview, Paulo Andrez, angel investor and author of "Zero Risk Startup," joined me to unpack how founders can create clarity, reduce risk, and massively increase their odds of success.
Paulo has invested in more than 100 companies and worked with over 1,000 early-stage founders. So when he talks about what works—and what kills companies—it’s worth paying attention.
Here are the key takeaways that stood out to me, and why I think every early-stage founder should hear this message.
Step Zero: Validate Before You Build
We opened our conversation by talking about a pattern Paulo sees constantly: founders rushing into product development without validating their core assumptions.
He calls it skipping Step Zero. And it’s a killer.
"Many founders believe that building the product is the first milestone. But the real milestone is proving someone will pay for it," Paulo said.
“The product is not the starting line. The customer is.”
At Founder Quest, I’m constantly telling founders to sell it before you build it. Paulo agrees—and he even takes it a step further. He described how he encourages founders to validate not just demand, but pricing, using tools like fake landing pages, ads, and manual customer outreach.
His rule of thumb?
"If you're not hearing 'no' from people outside your circle, you're not really testing."
Risk is the Enemy—Here's How to Fight It
According to Paulo, the biggest reason startups fail is not running out of money or building a bad product.
It’s avoidable risk.
He shared the story of a founder who raised a significant pre-seed round before validating anything—only to burn through it without traction. That’s not bad luck, Paulo said. That’s failure to manage risk.
His approach focuses on building what he calls a Zero Risk Startup, by:
Validating customer need before building
Avoiding team and founder splits with clear agreements early
Setting up equity and governance to avoid founder lockouts
Choosing the right investor structure for long-term alignment
“Most startup failure is preventable—but only if you identify the risks early.”
We went deep on some of the frameworks he uses with founders. One powerful idea? Treat your startup like an investment portfolio. You wouldn’t invest in a stock without doing due diligence—why would you build a company that way?
Don’t Just Raise Capital—Choose the Right Investors
Fundraising was a major theme in our conversation (no surprise there). Paulo emphasized that many founders approach raising money as an achievement in itself. But it’s not. It’s a strategic tool.
He told a great story about a founder who took the first check they were offered, only to realize later that the investor had no relevant experience or network in their industry—and wasn’t aligned with their vision.
"Capital is not neutral," Paulo said.
“The wrong investor can cost you more than no investor at all.”
He encourages founders to ask hard questions during due diligence, especially:
What happens if things go sideways?
How involved will you be?
Do you have follow-on capital available?
Can I talk to founders you’ve worked with?
The point? Treat investor selection as seriously as hiring a co-founder.
The Founder Journey is Personal
We wrapped our conversation by talking about the emotional rollercoaster of building a startup. Paulo shared his own experience founding a company that scaled across 16 countries—and the toll it took on his mental health.
He’s a big believer in founder communities, mentorship, and building emotional resilience.
That really resonated with me. It’s something I hear constantly in the Crossroads community. Founders feel alone. They’re carrying the weight of the company, the team, and their own ambitions.
“Startup success isn’t just about strategy. It’s about staying in the game long enough to win”
Final Thoughts
There was so much wisdom packed into this interview. If you’re an early-stage founder, I encourage you to watch the full episode. Paulo’s mix of practicality and vision makes him one of the most thoughtful investors I’ve met.
You can follow Paulo on LinkedIn at https:// www.linkedin.com/in/pauloandrez or on his website https://www.pauloandrez.com
And if you’re looking for a place to connect with other founders going through the same journey, I’d love for you to join our free Crossroads community inside Founder Quest. It’s where we talk about topics like this—and where you’ll find support, accountability, and answers when you need them.
Until next time, ciao!
-Lance
Paulo’s bio
Paulo Andrez is an angel investor, serial entrepreneur and #1 bestselling author of Zero Risk Startup, published by Forbes Books.
As an angel investor, he received the award “Best European Angel Investment” in 2012 as one of his investments (United Resins) reached 24.5 million euros in revenues within the first year of operations. One of his investments (Sword Health) became unicorn in 2022. In 2000, he played a pivotal role as one of the key shareholders in Novabase's IPO on Euronext.
Some of Paulo's notable investments include: United Resins (PT), Thinkable (USA), Climber (PT), Sword Health (USA), Novabase (PT), Maven (USA), Bugbox (EE), Toys R US (PT & ES), New Atlantis (ES), Spintop Ventures (SE), Nascente Capital (PT), Growth Partners Capital (PT), E-Vittles (UK), CoachVox (US) and RideTandem(UK).
Paulo was appointed President Emeritus EBAN, European Business Angel Network, after serving as President until 2014. Paulo is a founder of Entrepreneurship Agency DNA Cascais, which supported more than 500 startups.
Since 2012, Paulo has been working with a number of European governments in the field of Early Stage Investment policies and Business Angels Co-Investment Funds design. He chaired the European Commission Expert Group for support of Slovak and Romanian governments in designing and implementing entrepreneurship and innovation policies.
He has a background as serial entrepreneur and is frequently invited as speaker worldwide, guest lecturer and expert in innovation, entrepreneurship and early stage investment. Since 2012, Paulo has been holding a series of workshops on the topic of new ventures risk mitigation: Zero Risk Startup.
Transcript
Lance Cottrell (00:00)
Hey there. Today I'm talking with Paulo Andres. He's an angel investor and serial entrepreneur. He's also the bestselling author of Zero Risk Startup and President Emeritus of IBAN, the European Angel Foundation. So in this episode, Paulo is going to be sharing his insights on how you can mitigate risk while building a successful business. Paulo, welcome to Feel the Boot.
Paulo Andrez (00:25)
Thank you very much, Lance, for this invitation and I'm looking forward.
Lance Cottrell (00:30)
Absolutely. So we've had a bit of a conversation in advance. And one of the things we talked about was this conflict between investors and founders. Founders are always accusing investors of being risk averse and not wanting to take a chance on a startup, while investors are usually accusing the same founders of not doing the things they need to do to mitigate risk and try to make a safer investment vehicle for that investor. So can you speak to how that gets resolved?
Paulo Andrez (01:01)
Yeah, you are totally right. So many entrepreneurs, they blame the investors and blame the banks and the system for not providing money for them. And on the other side, the investors say that they are not good projects. So the reality is that the entrepreneurs need to understand why investors invest and why investors reject deals. One of the surveys that was done in Europe, for instance,
IBAN was done through more than 600 professional angel investors and was asked the investors what were the main reasons why they rejected the deals that they rejected in the past five years. And the main reason is not that there is enough, not enough potential. It's because there is a lot of risk in the project. So this means that entrepreneurs potentially they have
good ideas, have good projects, but the perception of the risk to the investors is very high. So investors do not want to invest in such a high-risk project. And so the entrepreneurs are left with basically two options. One is to blame the investors, the ecosystem, etc. Or to try to mitigate the risks and mitigating the risks
they will have less risk to the investor and the investor will increase the likelihood to invest. On the same survey, it was asked one of the questions if the project risks were reduced, if the willingness of investors would increase or not to invest in the project. And 96 % said yes. So there is no doubt that if an entrepreneur wants to fundraise,
the best way to do it is to mitigate risks.
Lance Cottrell (02:58)
And do you have a sense of what sorts of risks are the ones that are the most concerning to investors? Which things kind of scare them off?
Paulo Andrez (03:08)
Look, there are two types of risks. One is the project risk. And basically then we go to the market risk, the entrepreneur team risk, the financial risk, the legal risk and operational risk. So this is on inside the project risk. Basically, if the startup will be able to execute what is promising and will be a success. But on the other side, there is also the investment risk.
and independently of the project risk. And on the investment risk, there are a lot of things that entrepreneurs can do in order to help investors to mitigate the risk. And in many countries, there are tax breaks for investors. For instance, here in UK, if you invest in a startup, a legible startup, you can deduct up to 50 % of your investment in your income tax bill. So basically, your risk, independently if the company is successful or not.
In other jurisdictions, are countries where you can deduct up to 100 % of your investment in early stage companies. So what entrepreneurs can do before approaching an investor is to try to understand if there is any instrument where the investor will be reducing their risk in terms of the investment risk, because this does not depend
on the entrepreneur, but entrepreneur may be aware of these kind of instruments. And then the entrepreneur needs to focus on mitigating the project risk and by mitigating the project risk on those five categories of risk, the market risk, the entrepreneur, the financial, the legal and the operational risk. One important concept lens that you are aware of course, is that one thing is the
information that the entrepreneur has about the project and their know-how. And very unlikely the entrepreneur will meet as investors that know the same kind of knowledge as the entrepreneur on that specific project. So there is one thing, it's the real risk versus the perceived risk. And I talk about this in the book. And it's very important to understand
from the perspective of the entrepreneurs that the decision of the investors and also banks, etc. in terms of investing in a company is not based on the real risk, but based on perceived risk. an entrepreneur, the first thing that an entrepreneur needs to address is to try to equalize the perceived risk from the investor side to the real risk because
this will reduce dramatically the risks. for instance, one example is entrepreneurs say this market is going to grow 30 % in the next five years. And this is something that the investors will perceive. maybe he made up this number where he's based. But if the entrepreneur says, according to this study of Deloitte or another entity from 2025,
they project that the growth of this market will be of 20 per cent per year. So the perceived risk is equalizing the real risk. And this is very, important. I see a lot of entrepreneurs trying to impress the investors by talking about very technical stuff. But the investors don't understand what they are talking about. And so they perceive a lot of risk and they say no to the project. So this is
This concept of perceived versus real risk is very important for entrepreneurs trying to fundraise.
Lance Cottrell (07:03)
I love that. That's a really good insight that, in general, with these sorts of situations, perception is reality in terms of being able to get that investment and trying to understand what that perception is. I think founders can go a long ways before they start pitching in earnest, talking to some investors, talking to advisors to understand how people feel about the risk that they have so that they can understand where they need to get ahead of that.
when they're pitching, when they're talking to investors.
Paulo Andrez (07:35)
It's very, important to understand what is their perception of risk. of course, entrepreneurs need to try to understand when they pitch to some investors. Maybe they can ask in the end of the pitch in their opinion, what are the areas that would require a little bit more work and they see more risk and which areas of the project they really like.
And maybe some investors will say, hey, I was not very happy with this part. And this allows the entrepreneurs to try to mitigate the risk and prepare for the next pitch. And in the next pitch, they will be better and they will improve pitch by pitch until they excel.
Lance Cottrell (08:22)
Yeah, it's always a narrative process. And I like your discussion of the investment risk as well. I'm extremely jealous of angel investors in Europe and in the UK with some of those huge tax breaks. I really wish I was able to take advantage of some of those. But when we're talking about risk and sort of fear and concern, I think that also applies to founders, that a lot of founders are risk averse and afraid to jump off the cliff and start that business. And I know you talk about that a little bit in your book.
Maybe you could elaborate on what are the reasons that founders have that fear and resistance and what can they do to overcome it?
Paulo Andrez (08:59)
So in US, 60 % of people that work for someone else would like to quit and start their own business. But 92 % of them do nothing to start their own business and their own startup. So this is clearly the fear of failure is the main obstacle for people that would like to become entrepreneurs to be entrepreneurs.
There are two ways to deal with this. One is to the government to tell people, if you need to believe in yourself, you need to jump the cliff. But apparently this does not help a lot because the most of the people that have ideas and would like to become entrepreneurs, they don't start. Another way is to mitigate the risk and tell the people, okay, let's try to mitigate this risk and see what would you lose if you try to start the company because
failing fast and cheap. It's not a problem. So imagine I talk with people and they say, I have this business. I have this idea, but I work in this company and I say, why don't you quit? And they say, you know, I need the funding. And I say, okay, look, if I get you an order of $1 million for your product, would you quit? And they say, if you get $1 million for my order, I will quit immediately.
So you don't need investors, you need clients. So while you are working, can you try to find these clients? Can you talk with these clients? And then we go on that direction. And basically there are two types of risks that founders face. One is tangible risks like money, assets, guarantees that they need to give. But there is another type of risk, which is intangible risk.
which is reputation risk conflicts. And that is sometimes more important than the financial risk. People that are very successful, they say, look, I created my career. I'm very successful. Why would I put that in risk now by starting a startup? And maybe I failed. And then in the book, I give several tips to these kind of people that are afraid
publicly fail in terms of the project. So I give a lot of tips for them to follow so that they can avoid. And when in the book I talk about one concept, which is the acceptable level of risk. each entrepreneur should have one acceptable level of tangible and intangible risk. And they should calculate it before because otherwise they don't know what
when if they should start so imagine that one entrepreneur says okay my my tangible maximum risk is $10,000 let's suppose I'm okay to lose $10,000 okay so what we need to do is to to to work in the in the project in order that the maximum loss that the entrepreneur will have is $10,000 and and then it is possible then if we achieve and we say okay
Now we are at $5,000, so it's below your acceptable level of risk. And now let's work on the intangible risk. Are you afraid of failure? Are you afraid of this or whatever? And then if this is acceptable, they... So I say, okay, there are no more obstacles for you to jump because these are on your acceptable level of risks. The problem is...
A lot of governments tell the entrepreneurs or the people that have ideas, if you have a good idea, the money will come. And so people don't even think that they need to put something from them and they need to take some risks. So basically in Europe we call grantpreneurs. I know in US also there are these kind of people, but in Europe there are a lot of grantpreneurs that they don't do anything until they receive a grant from the government. And this prevents them to move on.
Other people will not start the business if they don't receive money from investors. And this is a loss of time because only 3 % of entrepreneurs that are trying to fundraise in Europe and in US receive funding from investors. 3%. So what happens to the 97 %? It's really a waste of energy, time, talent, etc.
Lance Cottrell (13:43)
Yeah, I think it's interesting. People really underestimate the amount they can accomplish with part time effort and pretty minimal money to really do the experiments to understand what's going to work, identify those risks and either understand what they are and work around them or mitigate them or prove that they're not actually an issue. But often they don't want to do that work. They want to just jump right in and
That requires big capital and is exactly what no one wants to back.
Paulo Andrez (14:17)
Yeah, for instance, I received and I'm sure you also are aware of entrepreneurs trying to do a prototype and they come and ask $30,000 to build a prototype and I get crazy with this request because I think it's just a waste of time and so I asked them, okay, tell me why do you need these $30,000? ⁓ I need 7,500 for a battery because without a battery I cannot build a prototype and they say who...
are the producers of batteries. So I picked the phone, I called the manufacturers of these batteries or the sales and say, hey, by the way, we have here an entrepreneur that has a fantastic product and is selecting the supplier, the preferred supplier of the batteries for their product. Do you have any spare battery that he could test for one month? And the answer usually is yes. Come, we give you this battery for one month and then you return.
And so I told the entrepreneur, go there and pick the battery. ⁓ no, but I need a machine to cut this. He said, which industries have this machine? And then he says, and I call one of these companies and say, hey, I know that you have this kind of machine. We have here an entrepreneur. Would you be kindly enough to help to cut this to the entrepreneur on a weekend or after hours? And he will make a big thank you in a...
in a LinkedIn post for your company. And the people usually say, yeah, send him on Saturday at 6 p.m. and I will do this and stuff. And they sell the entrepreneur, you go there. But and then the entrepreneur, no, no, but we need raw material because to test we will need the raw material. Then who is the raw material suppliers? Call them and ask if they have some raw materials so that you can. And then in the end, then they say, I need one thousand dollars for marketing. Look, if you don't have one thousand dollars.
go and work in McDonald's for one month or two months and then you get the money, then you try this, how about that? But entrepreneurs just think that they have a great idea, many entrepreneurs, and they just wait for the money. And this is the problem I see in the market and we need to unlock this potential because many of them have great ideas but they don't know how to unlock without receiving money, without being on their comfort zone. And the governments don't help a lot about this problem.
A lot of universities have these labs and there are fab labs there in Europe for instance and you can test and you can do prototypes in these labs without any problem.
Lance Cottrell (16:55)
Yeah, exactly. People sort of have this preconception about how they have to go about this. And I think the media also leans heavily into this talking about these big early funding rounds. But yeah, it's amazing how scrappy you can get. And people are usually very happy to help entrepreneurs. People like entrepreneurship. They like to sort of be able to see something succeed. And so, yeah, I love your suggestion of just going out and asking and talking to people because it's way more successful than I think most people.
realize. So if someone was looking to try to start up something, let's take an example just to have some concrete suggestions. Let's say someone's trying to set up a music festival of some sort and they need to raise a million dollars to fund that. How would you suggest that they approach that?
Paulo Andrez (17:46)
Look, music festival, there are a lot of ways to do it. But for instance, one is to find the location, talk with the municipality and say with the mayor and say, look, we can bring 100,000 people here. You have an area that we can use for free because this will put the place in the map. And I'm sure they can get this space for free.
Then in terms of all the restaurants inside, all the vendors that will sell stuff, then they can say, hey, we are open that you can open your sell stuff in the festival. But for this, you need to pay us this amount of money and you need to bring everything for the restaurant. So there is no need for the organizer of the festival to invest in.
equipment for restaurants, so the restaurants themselves will bring everything and they will manage the activities and they will pay a fee for this. Then they can also approach people, the entities that can buy, sponsors that can buy the tickets in advance and guarantee that these entities will buy a certain number of tickets which will guarantee some revenues for them. And once they have this then
they can start paying the musicians. And another way is, of course, is to do revenue share with the musicians, hey, if you, we will share 10 % or 20 % of the revenues. And many of them may accept this. So this is the best way to do. But of course, other people may think, okay, I want to be on the comfort zone and I will try.
to fundraise for one million or two million dollars from investors and then maybe it's a problem that they will not fundraise and by doing this bootstrapping it will be much better for them. They don't need to share any profits with anyone. It will be 100 % for them.
Lance Cottrell (19:58)
Right. And the investors are going to want them to have done that level of validation and testing and pre-selling in any case. So you might as well just do it in a more bootstrappy way so you can hold on to that control.
Paulo Andrez (20:11)
That is absolutely correct. And many of these investors may fear that just investing in one local festival is too much risk. So probably the investors would like that this festival would happen in several locations around the planet. I mean, for instance, I'm a friend of the CEO of Rock in Rio, which is a world class festival.
and they have Rock in Rio in Rio and they have in Lisbon as well. So it's kind of there is potential to go other markets. So the more potential that you show, the more likelihood as well that the investors will want to invest.
Lance Cottrell (20:55)
Yeah, to have that payback, you need to have the much bigger result. I want to circle back to something you talked about earlier. You were talking about grants a little bit and sort of that you think that they're problematic, particularly with the way the Europeans handle those grants. was wondering, could you expand on that? Because I often recommend that founders go out and look for grants to allow them to reduce the amount of investment capital that they need to bring.
Paulo Andrez (21:22)
I do the same. tell the entrepreneurs that where I invest, look, if you find opportunities in terms of grants, go for them, but don't lose time. Hire an expert to file for these grants, because what is the problem? The problem is that the value of the company and the success of the company will not be based on grants, but will be based on market clients. Because if they have clients,
then the investors will want to jump in and there is no problem of funding. But what I see a lot of entrepreneurs is that they spend a lot of time in grants and sometimes grants can take one year or two years before the money comes in and before getting the knowledge if it has been approved or not, the grant. and this is one of the problems. So I tell entrepreneurs, don't focus on grants.
build your company without thinking about grants, but if you see an opportunity and you're not going to lose a lot of time, then go for grants. What I see some problems is what is a grant, because sometimes the grants require some achievement of goals like sales, export, and then if you are not able to receive, to get those KPIs, then you may need to return the money and then you are personal liable.
I know many entrepreneurs that went bankrupt, personal bankruptcy, because of grants. I remember one entrepreneur that got a grant and he spent all the money building an industrial kitchen in a place that he was renting. And when he asked for the license to open the industrial kitchen, he was informed by the municipality that the space that he was renting was not able
to allow for industrial kitchen and that the previous owner changed the space. and the entrepreneur needed to put the space as it was originally. So he spent all the money there and he filed for bankruptcy. So this is one of the problems of grants. They are technically very good, but if there are some strings attached, then it becomes a problem for the entrepreneurs.
Lance Cottrell (23:47)
Interesting. This sounds like a sort of a different kind of grant than I usually think about as well, where when I'm looking at grants, it's usually for kind of deep tech or med tech kind of solutions. They're doing, they're research grants where the output is going to be some research outcome developing the technology that they're going to use, as opposed to it sounds like in this case, these are more grants for operational.
purposes and capital requirements. And so how do you think about those two kinds of grants?
Paulo Andrez (24:20)
There are these two types of grants, but even on the research grant. First, when you apply for a research grant, these will be evaluated by experts. And for instance, in Europe, the European Innovation Council, only 6 % of the applications get funded, 6%. So first, you're going to put a lot of effort, you're spending time, money, and only 6%. Then probably you need to wait six months or nine months before you have them.
But even on those research grants, sometimes they have strings attached. And if you said, for instance, that you have 30 % of the money committed from investors, and then you don't get the money from investors, but you received the grant, then you didn't fulfill, then you need to return the grant. Or if you say that your grant that you want to achieve certain levels of...
performance and then you do not achieve them, then it becomes a problem. Or if you promise that you have a team and then the team moves because someone left and then you are left without the team. And then it's going to be evaluated if it was good or not. I know for instance on the research grants where there was the COVID, people had money from the research and they needed to test but because of COVID they were not able to test so...
they were not able to fulfill the grant criteria and they needed to return the money, for instance. So of course you need to see always if there are strings attached or not, but what my recommendation is focus on clients, don't focus on grants. If there are some grants, hire someone expert to take care of that. And if it comes, comes. If it doesn't come, it doesn't come.
Lance Cottrell (26:10)
Yeah, you can never be betting the company on getting a grant over which you have no real control.
Paulo Andrez (26:17)
A lot of entrepreneurs that I call the grantpreneurs, the traction is not sales to clients, but grant number one, grant number two, grant number three. And they are always adapting the company to where the grant. So if there is money for putting solar panels, now they are going to put the company with solar panels. Then if there is money to do export to Asia, so they will find a way to do...
something for Asia. So, and it's the grants that dictate the future of the company and it should not be, it should not be the market. They should be serving someone and not just the grants.
Lance Cottrell (26:59)
Interesting. Yeah, right. It takes you off point for the kind of business that you need to build at the end of the day, which always has to be customer focused. So there's an interesting a lot of discussion about entrepreneurship in Europe right now. And I'm hearing a lot of people making arguments that it's in a lot of trouble and there's a lot of issues with creating companies and getting them funded. And certainly, compared to the size of the economy, you see much more
outcomes in the dekakorn kind of space coming out of the US than Europe. And I know you've spent some time working with governments over there talking about entrepreneurship and angel investment. And maybe you could share a little bit about your insight into that and how you see that needing to go.
Paulo Andrez (27:43)
Look, the perspective of the government usually is very short term. So they try to get some benefits in short term and make announcements. it's not frequently that you see politicians willing to do long term programs. the politicians usually prefer to give grants.
because they say that they can give grants and I don't think that giving grants is the best way. think that for instance creating a co-investment fund with angel investors and what I advise a lot of governments is look, instead of you giving grants to companies, let's say you have 200 million dollars to give grants to companies. How about you say that you create a co-investment fund with angel investors so that if the angel investors
will invest $1 million, you will invest another $1 million. So you will put $400 million in the economy, not $200 million. With advantage that if these companies require some support, the angel investors are there to support the company. While if you just give grants, you are alone with the companies and you are not going to succeed. And money is not the big problem of the companies. Connections,
networking clients are the biggest problems for the companies and this is something that the government usually cannot provide but the private market the angel investors the vcs can provide so i am a fan of a government to create coin investment funds with angel investors and with vcs and i think this is the best model and forget these grants
Lance Cottrell (29:34)
I really like that approach because you're also leveraging the self-interest of the angels and investors who are going to be doing really profound deep due diligence into the potential of the market, the potential of the company, their strengths, their validation with a level of perspective and experience that you're unlikely to get with a person in the government who's trying to evaluate this grant proposal.
Paulo Andrez (29:59)
correct, so the government gives the grant and then doesn't help the entrepreneurs to find clients, to get the products tested and they hope that the money will do everything, it will be enough and that is not true. So I think a model where there is a co-investment and attracts angel investors and VCs, this is the best model. Look for instance Israel. Israel
They started with Sukhoi and basically is a co-investment fund. what the government of Israel said in the beginning when they started this startup nation situation was, hey, come to invest in Israeli companies and we will invest with you. And if the company is successful, you can buy us out and you just buy some interest to us. So this is fantastic for an angel investor or for a VC where
they can invest in a company, but if it's very successful, then they can buy out the government side and pay some peanuts for the government. So the money, the principal, and plus some interest. And the upside is for the angel investors. This is the best model to create a community of angel investors in any place. This is the best policy that can be done. Much better than tax breaks.
Lance Cottrell (31:22)
Yeah, I like that. That's huge leverage as well, knowing that if things go well, you're effectively doubling your result at the end of the day.
Paulo Andrez (31:30)
and you
reduce the amount that you need. So for instance, an entrepreneur needs $400,000 and you know that you have this program, so you just need to put $200,000. So you also reduce your risk instead of putting $400,000.
Lance Cottrell (31:45)
I like that. That's a really clever approach. Yeah, it's funny how many things get pushed through the tax system and it always feels like a somewhat backwards approach to trying to address things. It could be addressed directly, but I think it's just a pattern.
Paulo Andrez (31:58)
The problem
of the tax breaks, it depends how it is well designed. I helped several governments to design tax breaks for angel investors, but the main problem is in countries where there is not a tradition of investing from angel investors, there is not a big community or VCs. The problem of launching a tax break policy to anyone that is investing in a startup,
is that the valuations will rise dramatically because anyone that is working in a supermarket will invest in a startup and the valuation is dictated by the entrepreneur. And so the professional angel investors and the VCs will be not investing in this market because the valuations get very, very high. The problem is, of course, in the future, there is no...
There is no angel community and there is no VC community. once the tax break stops, then the market collapses. So I suggest governments to launch tax breaks for everyone, only in countries where there is a community of angel investors and a strong community of VCs, because entrepreneurs understand that they benefit from mentoring and networking.
from these kind of investors and not just about the money.
Lance Cottrell (33:25)
Interesting. I wonder if that's the same effect because I've looked at, say, crowdfunding sites and other retail investment platforms, and it strikes me that the same kind of valuation inflation takes place where the valuation is now not negotiated with someone with experience. It's set by the founder. They tend to set it high. And so the numbers often seem to spiral out of control in those spaces. I mean, that's one of the reasons I very rarely invest on those platforms.
Paulo Andrez (33:52)
Correct, you are 100 % correct. So in crowdfunding platforms, you reach very high levels of valuation. The question is, is it good for the entrepreneur? In some cases, I think it's good for the entrepreneur because they get exposure. They have a lot of backers that will want to support. And I encourage a lot of entrepreneurs to go to crowdfunding. However, there are basically four types of crowdfunding, you know, so.
There is one crowdfunding that I love a lot, is revenue based crowdfunding. And that is very interesting for entrepreneurs as well. But there are equity crowdfunding and some platforms only go to, they create this platform for anyone to invest, but they require a lead investor to be there.
and to a professional lead investor to support an entrepreneur. And in that case, I think it's great. And some angel networks, when they have a deal and they, let's say, two thirds of the deal, then they put this project in these crowdfunding platforms to get the other one third. So that is great. in those cases, the valuations are not so much insane.
Lance Cottrell (35:17)
Yeah. And I think it's also can be a very powerful, I think you referred to it a little bit as a marketing approach where all of those investors, even if they're only putting in $100, it might not be material to the company from an investment perspective, but those are now all committed fans of the company. They feel like they've got a part of the business and they're going to be actively promoting it to everyone they know. I know a number of founders who run small crowdfunding equity rounds just for that advantage.
Paulo Andrez (35:46)
As I mentioned, the reward-based crowdfunding is one of the best initiatives that exists and I have invested in two companies that I suggested to go to the reward-based crowdfunding because one of the problems as angel investors is to understand if there is a market for that company or not. So nothing better that says, hey, run a reward-based crowdfunding and give a reward for...
the people so buy the product or service and then you see if the people are willing to buy your product or service. In one case one of the companies that I told them to go for the reward based crowdfunding they got $300,000 from a lot of backers buying their product and I understood well there is a market because people are paying for the product. So for me as an angel investor
is less risky to invest in that company than in another company that has done no sales. So what I agreed with that entrepreneur is, okay, you are going to run this campaign and if you reach these levels of sales, I commit to invest in your company under these terms. And so the entrepreneur did the campaign and was very, very successful. I tried this with six other similar companies that did.
the reward based crowdfunding and they failed so I didn't invest in them because there was no market for them.
Lance Cottrell (37:21)
Yeah, that is a really nice way of testing that market. And then you've got pre-sales, right? You've got some revenue. It's a win-win-win all the way around for the startup. You absolutely know that you've got something with demand. So in your book, you have a methodology that you recommend. I think MeFlow, and I thought it would be great for you to share a little bit about that.
Paulo Andrez (37:34)
Correct.
Yeah, so basically what I recommend for entrepreneurs and of course for angel investors to support entrepreneurs is to go and identify the main risks under each of these categories. So the market risks, so what is there, is there a real request from the market for this product? Did you talk with potential clients? How is the competition going to react?
Then we have the entrepreneur team risk because a lot of times the entrepreneurs do not have all the skills. Sometimes I'm an IT engineer as my background. Sometimes we see three IT engineers creating a company and that's no problem, but they need also someone to sell and they need someone to do administrative work and financial work. So they need to find someone to help them to go like this.
And then we have the financial risk. Is the company dependent on one client? Is the company dependent on a bank loan or a grant? Then we have the legal risk. Is this legal business? Do we have the license to operate? If we need the license, what are the prerequisites of the license to operate? And then the last one is operational. Is it the first time that entrepreneurs are doing this? Did they tested this before? Did they work on this industry before?
So this is the five risks. And on each of the risks, they need to identify what are the the risks that are more impactful and the likelihood to happen are very high. And usually is that the market doesn't buy the product. That's one of the key ones. And then they need to try to mitigate those. So, and once they identify each of these key risks,
in each of the categories, then they need to do one of the four things. One is to mitigate the risk, reduce the risk. So for instance, is there clients for this? And say, look, we have already 10 clients who are willing to buy this product and we have here the orders. So it's not enough to make it super successful, but at least we show that there is a marketing meant for this. So this is a reduction. Another one is to transfer the risk to someone else.
For instance, imagine someone willing to try to build a product and they want to manufacture the product. So just creating a factory and creating... it creates a lot of new uncertainty. So what they can do is, in the beginning, say, we will outsource the production to this reliable factory that has done tons of other products and they have done the samples and they are okay. So we are transferring the risk.
to someone. Then, of course, they can also buy an insurance company to transfer the risk. Another thing that they can do is to accept the risk as well, so that they say, okay, this is an acceptable risk and we are taking it with us. And this must be iterated.
until they reach the acceptable level of risk. And if they achieve the acceptable level of risk, the tangible and intangible, then they are ready to go. They don't need to continue, but they can continue to further mitigate the risk. There is no point to mitigate 100 % of the risks because some are very unlikely to happen and the impact is low.
they need to focus on the ones that are very impactful and high probability of happening.
Lance Cottrell (41:40)
Yeah, I really like this methodology. It resonates with my background in cybersecurity and looking at how do you analyze security risks. And it's exactly the same sort of approach, understanding which are the most likely ones, which are the highest impact, what kind of mitigations are available, and in some cases, just accepting that that is something that can happen. I remember the...
Paulo Andrez (42:02)
And then,
then have a plan B. If this happens, have a plan B and understand. For instance, one way to mitigate a risk, a financial risk, imagine that you need to buy equipment for $1 million. And, and then you are asking investors $1 million for the investment. Yeah. But imagine that you agree with the manufacturer of the equipment that in case your company fails.
in terms of not getting clients, whatever, they, the supplier, you can sell to the supplier the machine back in one year time for half of the price. So instead of one million dollars risk, you have a five hundred thousand dollar risk because you have this option to sell the machine back to the supplier. So this is the kind of approach that entrepreneurs can do.
to mitigate the risk. instance, imagine that an entrepreneur and approaching an investor, maybe this is good example, say, hey, I need $500,000 and I'm going to open the first operations in this city. Then I'm going to open the second one, third one for five. On each of them, I need 100,000. So give me 500,000. What is the risk of the investor? 500,000. But...
If the entrepreneur tells the investor the following, look, I want to open these five operations. We are going to start in this, in this city. When I have 2000 clients, so I'm breakeven, then I will, and I will ask you a hundred thousand upfront. Then when I reach this level of activity, then I will ask a second hundred thousand so that I can open a second operation. And then when I reach this other operation, breakeven, then I will ask.
The other hundred thousand so what is the risk of the investors is hundred thousand is not five hundred because if the first one Goes well, even if the second one fails, then you have the first one profitable But if so the hundred thousand but then you come to the investors and say hey by the way I agreed with the manufacturer of this equipment of the hundred thousand and if the company fails then They will buy back for fifty thousand and this money goes to you
So the risk for the investor is not 500, it's not 100, it's 50,000. And then potentially you can also say, hey, by the way, you can have access to these tax breaks that you can deduct 50,000 or 20,000. So in some cases, the risk is zero. And that is where the entrepreneurs need to think. They need to think not about their needs, but how the investor will take the decision.
and how you can mitigate the risk for investor. And then if you are able to show this and to mitigate the likelihood for the investors to invest increases dramatically.
Lance Cottrell (45:08)
Yeah, the simplest, most strict path is often not the right one for the startup to be taking. They should always be thinking about those kinds of negotiations and risk reductions and approaches. And I always like that phased approach where you're going after one city at a time, because for the founder, not only is that a lower risk proposition and requiring less capital upfront, but the second, third, fourth and fifth cities are also probably going to, those investments are going to come in at a substantially higher valuation because the entire process is
de-risked because you know that you've proven out the exact model before.
Paulo Andrez (45:43)
Correct. And in some cases, if you get the first operation done, so you don't need to dilute yourself so much. So, and then you probably, you don't need investor. Maybe after second operation, maybe you can get the manufacturer of the equipment to give you credit. Maybe you can get loans from the bank. So why are you giving so much equity to investors? And when I'm helping entrepreneurs to do risk, their projects,
Then many times they come and say, but Paulo, so this is so little risk. So why should I have investor? And I said, yes, you should not have an investor. That's what I'm saying. You should not. And then he says, yeah, I don't need an investor. I can do it by myself. And I say, yes, do it by yourself. Why are you looking for an investor?
Lance Cottrell (46:32)
Yeah, you really only want to raise capital if you absolutely need it for strategic reasons because it is the most expensive money you can bring in, right? You know, if things go well, you're getting $100,000 from this person and you're giving them 10 million back or something like that. It's going to be crazy.
So I wanted a little bit of a pivot here at the end because I know a lot of founders get advice to spend a lot of time and effort on PR, doing interviews, going on TV, radio, podcasts, and sort putting their face out there because it's usually cost effective. And I know you have a lot of experience doing that sort of thing yourself. And I wanted to know if you had any guidance about how people should approach that or tips and tricks that they should use.
Paulo Andrez (47:13)
Look, if the type of clients that the companies are approaching are clients that the company can benefit from having a lot of PR exposure, then maybe it is good to have some PR exposure. But in many cases, the PR exposure will not help the entrepreneur. So they focus a lot giving interviews, but they don't focus on the core activity of the company, which is finding and serving clients.
And that is where they missed the point. So I think that I'm not saying that they should not apply for contests, competitions, do PR, but it should be much well balanced in terms of getting clients and getting orders. I've seen a lot of companies that won business plan competitions and then they file for bankruptcy because they were focused so much on the ego of the entrepreneur many times.
showing on televisions, on shows, winning competitions and not on clients. I always prefer entrepreneurs that focus on clients and if they win some competitions that's fine but focus on clients should be their primary focus.
Lance Cottrell (48:29)
Yeah, that's a great point about ego that a lot of people like that ego stroke of being on this thing, being seen to be an expert. And there are some businesses where that thought leadership can be a meaningful way of getting access to customers. But in many cases, it is purely a self-gratification activity.
Paulo Andrez (48:48)
Yeah, they promised that they will conquer this world and in the next one and then one or two years after people will come and investors will come and say, hey, you said two years ago that you'll be in five countries in this year, but you are just in one country. So you failed. If this entrepreneur would not be talking so much in the beginning, not promising so much, then you would not be facing these investors and showing that
he was not performing as he promised. So I think entrepreneurs need to be careful on what they say, what they promise, and the message when they are on the PRs should be clear to what they want to achieve.
Lance Cottrell (49:33)
Yeah, I think that's a great closing spot. The internet definitely has a long memory and people will be able to find the things you claimed and promises you made a couple of years ago. So how is the best way for people who want to reach out, talk with you, find you online?
Paulo Andrez (49:49)
Yeah,
so they can go to my website www.pauloandres.com or they can find me in LinkedIn.
Lance Cottrell (49:58)
Fantastic. I'll make sure I put those links down in the show notes and follow. Thank you so much for coming on Feel the Boot. This has been fantastic.
Paulo Andrez (50:05)
Thank you, Lance, and I hope that a lot of entrepreneurs will benefit from our talk here. Thank you.
