Jason Van Gaal (00:00):

And then we were growing really, really fast. So then we were growing 400% year over year. Our customer just grew too quickly. Blew out the top of our projections. It was like so much demand. So- 

Pablo Srugo (00:10):

This is from a single customer early on?

Jason Van Gaal (00:12):

Mostly driven from a single customer. I was 28, 29 when I was doing the third one. So I was just all in. Right? if I miss, then I'll just go work for somebody else, then go down a normal path. For me, it's like backbreaking customer demand. Like you have so much demand. The problem for the company is not customers. It's trying to operate the company so that it isn't all apart because there's so much demand for your product.

Previous Guests (00:39):

That's product market fit, product market fit, product market fit. I call that the product market fit question, product market fit, product market fit, product market fit, product market fit. I mean, the name of the show is product market fit.

Pablo Srugo (00:51):

So I have really bad news for you. The show actually now caused money. So I'm gonna need you to wire $10,000 to my account if you wanna keep listening. I'm kidding. I just need a review now. You thought you had to pay because it looked so bad, right? All you have to do is take your phone out, hit a couple buttons, hit five stars, and you're done. Thank you.

 Jason. Welcome to the show, man. 

Jason Van Gaal (01:11):

Thank you very much for having me. I really enjoy what you have been doing. Some great content you've been putting out for everyone in the ecosystem. 

Pablo Srugo (01:19):

Well, it's great to have you on, man. You've had, I mean, multiple companies, four companies now three in the data center space. One was in AI and one of them when it exited in 2019 was the third largest exit in Canada that year. So quite a successful company. And then you turn that into kind of your family office. And so now you're on the investment side, done 20 plus angel investment. So I think what we'll do today is definitely let's go through some of those stories and we'll spend obviously most of the time on that really successful one and what you learned there, especially about product market fit, because you had pretty crazy pull in that journey. And then, we'll shift over to the angel side and I think as an early stage founder, getting that perspective from somebody who's been a successful founder and now is on the other side and how they're thinking about investing and some of the things you learn. 'cause Obviously you learn a lot as a founder, but then because you go to the other side, you learn different things and just putting that all together. So let's start there. Maybe like a brief intro. We'll go through some of those early companies, how you got into kind of building centers in the first place,

Jason Van Gaal (02:19):

I guess a little bit of background, I'm an engineer. I guess I consider myself to be a technical founder. And I would say since a pretty young age I kind of had a different view on how things worked. And you know, the one and only job that I had, I kept telling my company how to do what they were doing and that didn't really go so well. So I went off and kind of started my own thing out of that. And yeah,built three companies in the data center space. Leveraging my engineering background and kind of taking a different spin on kind of a traditional industry just to make it a little bit better. You know, lots of- death by a thousand cuts type things, just kind of tuning and making everything 1% better, 2% better.

Pablo Srugo (03:01):

Walk me through that, that world, like data centers, for me it's like, it's AWS, it's Azure, it's done. But  I do kind of faintly remember early as GymTrack 10 years ago there were these small, I remember a company called hosted biz that would do some data center stuff. Like what year are you getting into the, how do you even get into data centers? Like what year is it and what's kind of going on like in that space at that time? 

Jason Van Gaal (03:21):

I started that way back in 2008, 2009 when I graduated. So back then, AWS was kind of just getting going. A lot of people were building their own data centers in house. There was really this like significant capital spend that companies had to outlay early stage companies in order to operate their IT environments. They buy and own and operate their own servers, which obviously are very different today, but back then, you know, that's kind of how it was done. And you know, 2008/2009 through to the last company data center started in 2016, the industry really evolved and moved away from companies buying and owning their own infrastructure to really renting it. And it went from renting some kind of data center space and not needing to build the data center component to renting the full kind of the full system and buying units of compute on an hourly, monthly basis, which is the AWS and you know the Googles and Microsofts that we have today. So that was kinda the evolution and yeah, the three companies that I built kind of followed that evolution and adapted-

Pablo Srugo (04:27):

I don’t know if there's a simple way to answer this, but like, how do you end up having three different data center companies instead of just one that you kind of grow over time? 

Jason Van Gaal (04:35):

Yeah, so the first company I built was like an engineering professional services data center company. And I had customers that kept coming to me saying like, Hey, can you please justify me building my own data center? And I would run the models and I'd look at them and I'd be like, I could make assumptions and make this work, but really this doesn't work for you as an IT company. You don't know if you're gonna be around for 20 years and you're making it a 20 year investment in a data center to justify its payback. So I, I kind of saw the writing on the wall for that. And then I had an opportunity to kind of get into designing and operating a data center colocation facility in Ottawa. And so that company kind of evolved into the next company. So I kind of had this eureka moment or understanding of, okay, the market's shifting so I better, I better adapt or die. And so I adapted. And then again, at the second company, it was kind of that, that same thing. We were getting customers, but we kind of saw that the customers were getting bigger and bigger or they were going to AWS and we weren't really well positioned in Ottawa because of the high cost of power and the tiny market. 

Pablo Srugo (05:38):

But you did own- like in the first company it was more consulting. The second company you actually, you, you owned and, and ran like a data center?

Jason Van Gaal (05:43):

Yeah, that's exactly it. So I used the consulting engineering kind of skillset that I developed at the first company to build a low cost data center and operate it. So we were able to build a data center for less money, and it was, that allowed us to launch the data center and be competitive and in the market, get our kind of foot in the door. Yeah. And then, and then we kind of kept, we saw the market shift and we saw more and more customers needing more space, and the smaller customers were all just going AWS. And so that company wasn't really well positioned to handle those large customers. We were losing those deals to, you know, people in Toronto, people in Montreal, Ottawa is a secondary market, you know, I kind of just saw that market not really being able to compete on an international scale with all the consolidation that was happening.

Jason Van Gaal (06:27):

So we were able to exit that to Rogers in 2014ish. And I kind of said, okay. by that point, I had this laser focused vision and I was like, okay, if I'm gonna do one more company, it's gonna be XYZ, like, these exact things that were gonna happen and am gonna strip out all of the waste that was kind of happening at the second company and got really, really super focused in on this third company, which was root data center in Montreal. I said, I'm only gonna do it if I have three shareholders on my cap table. I don't wanna deal with 50 shareholders.

Pablo Srugo (06:58):

How do you even think about a data center company, like let's say, root specifically, your company? Like is it a tech company or is it more like a 3PL, like a warehouse almost, or just, you know, it's compute, not, you know, physical goods sort of thing? 

Jason Van Gaal (07:10):

So, that's a really good question. My audience may have a different answer, but I like to call it tech enabled real estate. So, you know, it's a very traditional space data centers. It doesn't move fast in the way that, you know, software moves. You know, there's a new coding language to learn every year, like it's first principles, you know, fluid mechanics and, and you know, it's all those things. So that doesn't really shift too quickly. So that part is more real estate. Right? So you're building a building, you're using kind of this like established design principles and-

Pablo Srugo (07:43):

You were building these buildings from scratch?

Jason Van Gaal (07:46):

Yeah, so I designed, my background was designing, engineering, project managing the construction of these buildings. We would do brownfield retrofits. Some people would build the shell. We would generally go in and take over an industrial building and convert it into a Datacenter space . and there's a variety of reasons that we did that. 

Pablo Srugo (08:07):

What's the cost? especially when you started, like what, what would it be more or less, like you probably don't remember, but like, what would be more or less the cost of that first building?

Jason Van Gaal (08:14):

Oh I mean, I definitely remember <laugh> <laugh> 

Pablo Srugo (08:17):

because it's so painful. It's one of those,

Jason Van Gaal (08:18):

Yeah, so like one of my obsessions, and I think founders have all these different kind of weird quirks about them. And I would say one of the things that is kind of quirky about me, or is weird about me is like, I have this obsession about efficiency. And when I see something that's not being done as efficiently as it possibly could be, it really bothers me. And so with the data center business, I was like, this could be more efficient, this could be more efficient, this could be more efficient. And so, like with the brownfield retrofit, I was just like, okay, I could build a new building, but that would take me like 18 months or I could go and like, you know, take over an industrial building and convert it. It's basically gonna be the same thing, but I can do it in six months and I can do it for, you know, X percent less. And so our cost to build was 3-3.5 million dollars per megawatt. And in Canada at the time, we were seeing our competitors build at like $10 million per megawatt in Canada, in the US they were more competitive. They're more like, you know, five, six -

Pablo Srugo (09:10):

for simplicity. Like when you measure per megawatt, you're measuring like- is that like per compute? per energy? Like per what? 

Jason Van Gaal (09:16):

So yeah, there's two kinds of core metrics that our customers would buy. They would buy square footage space, which is your cabinet space, and then they would buy megawatt, which is the amount of compute they could basically put in there. So like AI using a lot of power compared to what, kind of old compute or not old, but like traditional servers would use. The power was the more expensive component. So the cost of space was 10% and the cost of the power on the capital side was like 90% the power and the cooling and all the stuff that went to support that. So yeah, so that's why that dollar per megawatt number is really important in the industry is because that's where most of the capital expenditure goes into. And so everyone gets very excited about where their dollar per megawatt cost of construction.

Pablo Srugo (10:02):

And then for clarity, like that first building, how many megawatts would it be? Like how much money did you actually need to just get off the ground?

Jason Van Gaal (10:08):

For root we went out and raised 3.5 million that came from three investors, one of them being myself. So we all kind of threw in equal amounts.

Pablo Srugo (10:16):

That was from money. You would've gone from the past exit?

Jason Van Gaal (10:19):

Exactly. From the prior exit. I rolled that over. I put in some sweat equity so just like converted by, you know, hourly or annual salary into my contribution basically. So that's how we kind of-

Pablo Srugo (10:31):

I’m curious by the way, just, and I don't go on a tangent, but how all in did you go? Like, did you take like half or more of your money and run to stick for business or did you-?

Jason Van Gaal (10:38):

Yeah, All in, I mean. I'm almost always like 99%, you know, in my business it's super stressful, but like, you know, when I'm on the toilet and it's the only way i know to do it, and maybe other people know how to do it in a better way, but like how I did it was like I'm on the toilet. I'm thinking about my business which, you know, is not necessarily great for relationships, but it worked out well for my companies. 

Pablo Srugo (11:01):

That's right, that's right.. So you went all in, you basically, whatever winnings you had, you put 'em back, you put it back to work.

Jason Van Gaal (11:04):

Yeah. You know, looking back it was kind of insanity. As someone that's gone through it now it's like, man, I can't even think about doing that. But like, when you're young and you know, I was 28, 29 when I was, doing the third one, so I was just like, you know, all in, right? if I miss, then I'll just go work for somebody else. Then you go down a normal path.

Pablo Srugo (11:23):

It's not as silly as it might, as it might seem. I think given who you are, you know who you are, you know how in you're gonna be, you know, the business super well, you've de-risked it and in frankly worst case scenario, you can start again. You know what I mean? Like, it's not as crazy as it might seem.

Jason Van Gaal (11:36):

Yeah. That's it. So yeah, we're kind all in and so we raised 3 million, three shareholders equal ownership. And that was kind of like, I wanted everyone to have an equal say, not to have shareholder infighting, like shareholder infighting can, can kill and destroy companies. And you know, we had some of that, our second company. So I really just wanted equality across the cap table, you know, one, one class of share. And then we went out and raised. We started growing really fast, signed some, signed some big deals and we went out and raised 20 million from private equity. 

Pablo Srugo (12:09):

This is before or do you sign deals and then raise and then build? or do you sign, build, like what’s the order? 

Jason Van Gaal (12:13):

Yeah, so that was, that was fun though, it was a chicken and egg thing, right? And so, we had to figure out how to do both at the same time. So we kind of raised money in parallel with signing a large customer contract and that basically the equity went to finance that, but, anyway, it was both of them had to believe it was gonna happen. And then you manage that and then it, it does happen. And then everyone's, okay. So we raised 20 million from a private equity group in the US called Abry. I think they  have 6 billion under asset management. They were kind of like the leader in the data source spacing, financing at that stage. 

Pablo Srugo (12:44):

And is it pure equity or is there a debt piece to these? 

Jason Van Gaal (12:47):

Yeah, so it was a debt mezzanine. So they gave us, they gave us it was 20 I think, and then they got a certain percentage of the company and then we had to repay that. It was a great deal for them. Like they got the debt component and they got equity in the company and it was great for us 'cause we had to give up less of the company than we otherwise would have. Like we put in 30 and then we three and then we raised 20. 

Pablo Srugo (13:07):

Well, this is a part that's not like tech, right? In the sense that these are a bit more predictable. You build it out, you've got the customers for it, so you can do, you can lend against it versus just take like an all-equity risk.

Jason Van Gaal (13:18):

That's it. They look at it as, and they're like, okay, there's an asset that's backstopping this. You know, there were some intricacies in their customer contract that, you know, was a large contract and if we screwed up then there may not be an asset for it to lean back on. So it was, it was a little bit more complicated than a traditional real estate deal, but there was parallels in terms of how to finance it. And then we were growing really, really fast. So then we were, we were growing 400% year over year. Our customer just, just grew too quickly, blew out, blew out the top of our projections. It was like so much demand. 

Pablo Srugo (13:51):

So this is from a single customer early on?

Jason Van Gaal (13:53):

Mostly driven from a single customer. We had other customers that were kind of coming up behind it. But yeah, we just blew out all of our kind of top model forecast projections. And so yeah, just managing this 400% year over year growth for about three consecutive years. And then we had to grow and raise more money. So we went and raised a hundred million. That was a more traditional debt deal. Like they gave us, we could do full debt or we could do a little bit of a warrant kicker and and and reduce our interest rate and you know, de-risk it. And so being, you know, great conservative Canadians that we are we're like, you know, we'll take the low risk deal and, and give it a little bit of equity on that.

Pablo Srugo (14:33):

And that was what? Was that to add more customers at that point? Or was it just to fulfill that one customer's demand? 

Jason Van Gaal (14:38):

Yeah, that was to add more customers. at that point, with that second deal, we expanded one of our sites. We built another site. So by that time we had three sites that were kind of being simultaneously constructed in Montreal. And there were like milestones in there. So like the hundred million didn't come out all in one shot. It was kind of like X revenue. We release the next tranche X revenue, we'll release the next tranche, which was great for us. 'cause If we didn't, if we weren't generating that revenue, we didn't need more money anyways. So yeah. So there was kind of just tied to those milestones, to two milestones and-

Pablo Srugo (15:10):

And what you're talking about- you get over a hundred million in revenue, what kind of revenue numbers high level did you get to?

Jason Van Gaal (15:16):

We never really publicly disclosed that, but we would've got, when we sold, we would've got a tech revenue multiple kind of comparable to someone like Nvidia..

Pablo Srugo (15:29):

Hmm round numbers are talking like eight-  tens of millions of revenue and hundreds of millions in terms of exit value sort of thing. And then going back to, 'cause the original question, so there, that's the real estate kind of component. What was, what's the tech component of it? 

Jason Van Gaal (15:43):

Yeah, so the tech component was, okay, there's different ways, different technologies that you can use to service these customer power requirements and then assembling those different components in a way that allows you to build your infrastructure really quickly and allows you to build it for less money. Why that mattered in our space. Like imagine you're building a house, right? And you can build a house, your neighbor's building his house for $500,000, but you can build your exact same house, like a three bedroom, same finishes, but it costs you $250,000 and it's right beside each other. You can go sell that house for $550,000 and make $300,000 in profit and the neighbor can go sell his house for 550 and make $50,000 in profit, right? So, so because we're able to build for less and basically sell our product for the same, or actually we found out we could even at same time sell it for more because we could deliver our product to market faster and some people would pay

Pablo Srugo (16:38):

Premium, right? Just to get that. Yeah, it's the same now that's happening, but on the AI side, right? there's a premium to just getting access to chips.

Jason Van Gaal (16:46):

Yeah, exactly. It's the exact same thing as going on in NVIDIA. People pay more money to get the chips today versus in six months from now opportunity, there's an opportunity cost for customers in that space. And there was one for customers in our space as well. 

Pablo Srugo (16:57):

I'll pick up on something else you said earlier because now I've seen this multiple times. We just had the founder of Bridge, I dunno if you saw, they got acquired for like a billion dollars by Stripe recently. And when they launched, this is like a totally different industry, it's stable coins, right? When they launched, like almost all of their growth was just this one customer. And so you, you mentioned that and I thought of that and there's other examples that come to mind. There's some in our own portfolio, especially the ones that are kinda transaction, volume driven, right? It's not classic B2B SaaS and it's just kind of crazy again, like shifting maybe to the investor side, how much more common that is. 'cause The normal adage is, you don't wanna depend on a single customer, which I guess all else equal, you don't, except sometimes you do and it's freaking great <laugh>, you know, and that customer explodes and like, and that's the reason you win so big. I don't know, I dunno if you've seen that as you know, like you've looked, you've invested now in 20 companies, I'm sure you've looked at hundreds, if you've seen that as well or is that just more like just happened to you? But, it's rare.

Jason Van Gaal (17:51):

Yeah, I mean, it happens and I see it's you can get customer concentration risk and you can get supplier risk. Like if you have a marketplace and all of your revenue comes from, you know, two people that you're referring to and one of those guys disappears, that's also challenging, right? So yeah, definitely. I mean, you know, customer diversification is nice in an ideal world. But you know, as an early stage founder, you take what you can get and you worry about that. You become aware that that problem exists and then you just figure out, how do we mitigate risk against it? You know, I think we bought contingency insurance or we would buy certain types of insurance policies to protect us against specific things, you know, related to customers, stuff like that.

Jason Van Gaal (18:37):

So you kind of look at that risk, but ultimately if someone's gonna, you know, give you a deal, you generally say yes to it. I mean, there's times crypto was blowing up in 2021 and we said no to a lot of that business because we didn't wanna be concentrated in that industry and it ended up being the right thing for us at the time because some of our other competitors said yes to it and got themselves into trouble. But yeah, you just kind of generally want to, manage risk as best you can,

Pablo Srugo (19:03):

You know, and I think the other thing is, at least that speaks to me at the end of the day, like you're looking for product market fit. And, yeah, in an ideal world, there's a hundred of things you worry about and hopefully looks like this. Like, like as long as you get real product market fit, like that's the most important thing, however you get it.

Jason Van Gaal (19:18):

Yeah, that's it for sure. And there's advantages to, you know, customer concentration as well. Like you, you can create synergies. sometimes an acquirer will pay a premium to have revenue from one specific customer 'cause they want that individual as a customer and it blends well into their portfolio. Maybe they have the other four customers in the market and they are missing that one customer. And so they want to kind of merge them together and then an acquirer can take that risk off the table and so they actually will pay a premium for that. So yeah, it's all about how you fit into the market and how to maximize value for your shareholders.

Pablo Srugo (19:50):

So let's talk now about the investing side of things. You were telling me that you kind of have over time developed, let's say a framework for how you think about evaluating angel stage investment. So I'm thinking, let's go through that. And you know, I think like most, most people that listen to the show, like they're not investors, they're early stage founders, but I think most of them want to raise money or have raised money. And so it's more about the perspective of like, them thinking about how an angel investor might think about them, right? So anyways, that's just a frame of mind that we're going through this, but yeah, maybe we can just kind of go through them one by one and just riff on each one.

Jason Van Gaal (20:26):

Yeah, absolutely. So I would say one thing I'll kind of preface is: we're a family office and so family offices can take risk in ways that VC can take risk because it's generally a single individual or if it's a third or second generation family office, maybe there's a couple people making a decision instead of an investment committee. So, you know, we can make decisions quickly, we can take on risks like VCs can take on risks, but we don't have to allocate capital into early stage companies as an obligation. We can, you know, if we think valuations are great in that space, we can buy into that space. If we think the grain in the treasury bull market will just sit in cash and buy US government debt. 

Pablo Srugo (21:10):

Well I think, you know, even just as one of the things that, to me, thinking about founders is like there are hot times and there are cool times and it's exacerbated by the fact that most VCs can't just pull out of the market. Like the reality is, we deal in a relative world, like if our firm says prices are really high today, sure we could sit and do a little bit less, but we can't just exit the market for two years until things come back to normal. It's just not our business model. And so that's power to the founder, which is like, if you find yourself in 2021, like yeah, you definitely should go out and raise 'cause it's an opportunity and people will still fund it, even if they all agree prices are wild, you know, you still, it's still gonna happen. And that's not the same as other markets. 

Jason Van Gaal (21:54):

Yeah. VCs can't say We're gonna take a 2% management fee and put your money in cash and earn 0%. And I feel you're, you're gonna lose 2% with us. 

Pablo Srugo (22:03):

Tough model <laugh>.

Jason Van Gaal (22:04):

We can be a little bit pickier in terms of, you know, velocity. We need to move when we see, like in 2021 we didn't do anything, or I think maybe we did one, one deal 'cause it was just too hot and it was just, you know, I was like, VCs have fun. And I told 'em my founding team, I was like, this is the best market. If I was you guys, I would go raise, raise, raise. Because like, you know, even if your company's stronger in a year, you may not get the same valuation as you can get today. There's just so many people, this is a founder, this is a seller's market today. It's not a buyer's market. And yeah, just go raise, raise capital. So we stepped back during that period, but 2020, 2019-2020. we're more balanced today, I would say balanced. I mean, today is probably even a little bit more difficult than 2019 and 2020, maybe more comparable to like 2010, 2011, which is yeah. creates a healthy ecosystem but it's hard for companies as a founder when you're going through it For sure.

Pablo Srugo (22:52):

So, yeah. So what, I mean, what are some of the things that you've learned over, over your time as an investor you're applying today?

Jason Van Gaal (22:58):

So we kind of have like five things. I mean there's, there's standard stuff that kind of, everyone looks at the competitive landscape, you know, do they like the founding team as individuals? Kind of the basic stuff that everyone will look through the 20 deals that we've done over five years, we've had time to kind of look back and see what works and what doesn't.

Pablo Srugo (23:17):

Normally your check size is what? 

Jason Van Gaal (23:18):

Yeah, we were doing like a 100k

Pablo Srugo (23:20):

Hundred k at like pre-seed seed.

Jason Van Gaal (23:21):

Yeah, pre-seed seed. And then we save space for follow-up . And we know that we're likely gonna double up or triple up as the company evolves if we're happy with the progress. So you know that our target allocations probably 300K to a company that we like by the end of the process, what we do is kinda look at these pass-fail criteria in addition to the standard stuff people look at. And so one thing I really didn't appreciate as a founder, but I came to really appreciate as an investor, is the why now slide. And Sequoia I think it was Sequoia. I was like, oh, this is magic. They came up with the why now slide. The industry was like, wow. Oh my god, it's amazing. And as a founder, I was like, I don't understand why that slide is so important.

Jason Van Gaal (23:59):

And it's why I tell founders, I mean, this slide allows investors to be mentally lazy, right? Because you know, investors look at a lot of deals. Your company is very special to you, but to an investor, you're one of a hundred deals they've looked at that week. So investors are just seeing a lot of volume and they need ways to be mentally lazy and look at things quickly and be interested or not interested. So the why now slide for us became very important because it allowed us to be kind of mentally lazy and it allowed us to say, okay, we assume that every idea that we're gonna see has been thought of by someone else before. Your idea is not unique and special. As a founder, I thought my idea was unique and special, but I'm sure 10 other people have the exact same idea as me.

Jason Van Gaal (24:38):

Yeah. So we look at this why now slide and it basically enables us to kind of think of the idea that we're being presented as like, okay, there's a true genesis, there's a true reason why this idea came to exist very recently as a result of something shifting in the world. And so that says, okay, five years ago no one would've come up with this idea because, you know, the Apple iPhone didn't exist, right? Like or crypto didn't exist, right? So before crypto this idea wouldn't have worked or before the iPhone this idea wouldn't have worked. So that's why we went through the why now 'cause it says, okay, this idea is relatively fresh because something has changed in the world around us that makes this idea makes sense today. 

Pablo Srugo (25:13):

Do you depend on the founder to identify this for you or do you just try and, 'cause sometimes as a founder, you stumble upon something, you start building, you get traction, like things are moving. You haven't necessarily taken the time, to appreciate or sit to reflect like, Hey, why is this happening now? And so is that to you the job of a founder or the job of you, the VC or investor At that point?

Jason Van Gaal (25:32):

If we get pitched and we like the other parts of the business and they don't have a why now slide, I'll talk with the founder and be like, Hey, like tell me why today. So I'm not gonna be like, Hey, you didn't do a why now slide. Like, but you know, they may even think of it as like, why is this so important? And I may see the why now, but I want them to tell me the why now. So I'll generally try to work with them to kind of come up with that slide or polish that slide.

Pablo Srugo (25:53):

But I think, I mean the, the key point here I think is timing is obviously critical. Like I think for the way we look at it is, team for us is number one for the simple reason that you can actually like, identify if it's a great team or not. More than timing, I find it a little bit harder, but at the end of the day, if you look back at least retrospectively, like timing is the big driver of, you know, why things work or d like, you know, take Uber, take whatever you wanna take.

Jason Van Gaal (26:15):

Absolutely. The why now slide very much plays into that, that timing element and helps kind of make that a little more tangible for us at least. Anyway, the second component we kind of look at is, is the TAM, which I also didn't really pay too much attention to as a founder and in Canada we kind of have this issue. I find we're kind of a bit of a big 10, at least when I was in companies, big 10 was kind of a bad thing, right? You go pitch Canadian VCs and you know, you want $10 million and they're like, why not $2 million? And it's like, well my idea is this big <laugh>, I was never encouraged to really go after Big Tam and I didn't pitch in the US too much early on. But for us, big TAM is important.

Jason Van Gaal (26:52):

And that's kind of common, well in DC space, a lot of people, but we also wanna see as part of a big tam's less common is, is a path they kinda hover near break even or even generate free cash flow in the early stages too. So I'm not expecting if we're a pre-seed seed year one that you're gonna execute on that as a strategy, but like there's a way, you know, you're going off the big tam and there's a branch that you can kind of move off of year two or three if you're not hitting that right away, that you can kind of hover around break even and all this stuff on paper. We know changes over time and things evolve, but it's just like seeing the framework, seeing how the founder thinks about that that there's alignment for us with them on, on kind of those two things. 

Pablo Srugo (27:30):

Why is that so important? Like why is the free cash flow versus like the blitz scale model? 

Jason Van Gaal (27:34):

Yeah, so free cash flow, if you can be in your break even, you can kind of control the dilution, right? And so people will give you better terms. Well one, when you're just like growing off the charts and things are amazing that everyone's gonna be all over you to give you money. But that doesn't happen for a lot of companies. And so, you know, the other lever you can pull is kind of hovering your free, your cash flow, make a little money, and then you just can wait for the right time to go out and raise and, and you can get good terms that way. So the time we raise money is when you don't need money or when you're just, you know, I guess growing like crazy and people just start throwing it at you <laugh>. So it helps, it helps manage that risk.

Jason Van Gaal (28:09):

And then the big TAM is really, it speaks to the, the right tail for us is kind of like IRR and returns for a portfolio in the space are very, very sensitive to the right tail. So if you have one company in your portfolio that does a 100x I mean you're instantly a top decile VC, right? So you wanna leave space for that kind of right tail. 10x is great, 100x is, is 10 times better. So we like to see the big TAMs like, okay, this is how big it could get. And then probably it's gonna be somewhere, you know, between the Sam and the Tam,

Pablo Srugo (28:46):

We have tens of thousands of people who have followed the show. Are you one of those people? You wanna be a part of the group? You wanna be a part of those tens of thousands of followers? So hit the follow button. How, how sophisticated do you get on like Tam, Sam, whatever analysis? Like I honestly, I find early on, like I think for me at least the way I'm curious how you do it. Like for me it's like, it's almost like a check the box sort of thing. Like, I wanna do back of the envelope math and kind of say like, okay, yeah, could this do a hundred million in revenue? Yeah, I can. Okay, cool. I'm good. You know what I mean? Something like that.

Jason Van Gaal (29:14):

Yeah, it's an art more than it is the science and it's kind of like, you know, is there a realm where this kind of makes sense? You can do a top down, bottom up and there's different ways to look at it because

Pablo Srugo (29:23):

Like some people get over like, oh my God, this could be 10 billion a year versus this could only be a billion. I'm like, yeah, but it's nothing right now, you know what I mean? Like,  let's just get somewhere first,  you don't wanna be selling, you know, trombone oil or whatever that expression is where it's like, you know, the market is a million a year max if you hit everybody. But beyond that, like once you can get to over a hundred million, you're gonna have to stack different products. You're gonna have to expand to different verticals and all these other different things to expand your time if you actually get there in the first place.

Jason Van Gaal (29:48):

And I would say I almost prefer less math on it. More like less conditional positive outcomes. So you know, one if then statement versus many layered if then statements. So I want one good thing to happen for the TAM to play out versus five good things to have to happen for the tam to kind of play out. 

Pablo Srugo (30:06):

I hate those ones where it's like, look,  sure our business model is this, but like if we get that, then we enable this business model. If we do that, then we can do this. And then it's a big thing. It's like, that's a lot of ifs. That's tough <laugh>.

Jason Van Gaal (30:16):

Yeah. And so yeah, I've certainly been guilty myself, of too many if then statements. 

Pablo Srugo (30:22):

And the free cash flow by the way, I'll just double down now 'cause I, and I actually think like founders have gotten, I think like the blitz scale thing was super hyped up and the reality is it can work. Like in some cases you have to do it, you're an Uber, maybe an Airbnb, not really, but certainly like a PayPal. Like you gotta do those blitzscaling motions. It almost got conflated where it was like, if you wanna be in unicorn, you gotta blitz scale and maybe in some environment, 'cause there was so much money you kind of had to. But I, you know, I don't know. And I think in any case, as a founder being able, like mining that bottom line, you know, mining your burn and therefore getting close to break even or you know, whatever they call default alive, whatever you wanna call it. Like, it's so important. It just gives you so many more choices if you're like, whether it's power on fundraising, whether it's waiting for that right inflection moment or whether it's like, hey, this business is never gonna be nearly as big as I thought it was, but I'm still gonna make a few million off of it instead of just like burn it. 

Jason Van Gaal (31:13):

Yeah, absolutely. And I think a lot of people forgot the lesson. I mean, blitzscaling is a great book. And my biggest takeaway from that book is you wanna spend as little time as possible blitzscaling. And I think a lot of people have gone away from that kind of core fundamental point of that, of that book. There are times we need to blitz scale winner takes all, but like we were applying, people were applying that, in 90% of cases when really it should be applied in like 2 or 3% of cases. 

Pablo Srugo (31:34):

That's right. Okay. Point three

Jason Van Gaal (31:36):

Point three is: Hungry, hungry founders. So I would say we have not had great success in investing founders with large successful exits and reinvesting myself would be case in point, in company number four. But I have buddies that I've invested in that did super well and you know, and I was like, anything that you touch is gonna be fantastic. And I would say, you know, with all of them consistent myself included is kinda a lack of hunger. There's too many distractions. I couldn't think about my business as the only thing when I'm on the toilet. And so, you know, that was a challenge that we've kind of seen in the 20 companies that we put money into. all of those companies kind of really struggled. So we actually, contrary to a lot of people, would prefer that they not have had a large successful exit, like enough money to, you know, buy a house is okay, like your house is not a distraction. Your house is like financial stability. So someone that's had a, a moderate level successful exit that's a good thing. But like a huge, you know, they put a hundred million dollars in their pocket and went to go start another $2 million company and raise $2 million then that we struggle with. And we generally prefer founders under the age of 30 to 35. I'm not sure if we get in trouble for

Pablo Srugo (32:45):

<Laugh>. I don't know who can put you in trouble, man. You got like, you're doing your own thing, you know, so <laugh>, it doesn't really matter <laugh>,

Jason Van Gaal (32:50):

But there's a reason for that. I mean as we get older, we tend to make decisions more on an experiential basis. Like I think of how my brain works today versus when I was younger, everything was possible. When I was younger, I had no experience to tell me it wasn't possible. But today I'm like, oh, this could be cool. But then I’m like, well I did this, this and this thing before and experience tells me this is not possible. And, you know, some of that, that jading that we have as we get older I think, dampens our creative abilities. And, it works great. Like, I mean if I'm looking at the founding team or series B team, I wanna experience CFO. I don't want financial innovation in like a SaaS company. So that's all I'm looking for. So if cfo, that role is great to have that experience, but like the tech guys, the disruptors, like I would love for them to be young and hungry. 'cause You know, they want, they wanna break things. You look at all the big companies, the fangs that exist today, those are all started by young hungry guys or girls.

Pablo Srugo (33:46):

I mean, that's interesting. So there's this book that's really changed my perspective a lot on, like venture investing. It's called Super Founders. 'cause They did the analysis in a way that I thought was pretty compelling. They looked at, I dunno, if you've seen it before, but they looked at 20,000 seed stage companies and then just looked at the top 1% that actually became unicorns with 200 unicorns. And they just did like, basically so many different factors, what did they study? What school did they go to? How many years did they work, experience, whatever, whatever whether they're technical versus business founders and just looked at control versus success. And two things. One is there wasn't, I don't remember exactly, they drew the line for a super founder, you have to sell your company for 10 million or more, or grow a company to 10 million in revenue or more, which wouldn't put them in your hundred-.

Pablo Srugo (34:27):

Like, you sell a company for 20 million, you're a super founder, you might have made, let's say two or $3 million, so you're still hungry. So I don't know beyond that, but what you say makes sense to me. But the second one was interesting because I had that same mindset that you just said about the kind of younger founders, and I'm biased too, 'cause I'm younger, so I think there's a natural affinity there. Plus you have the first plus if you look at the big ones like the, you know, the top five, like the FANGs  he talked about, yeah, they were all, they were mainly younger founders, but the data actually showed that like 50 year olds, like 60 year olds, they start way fewer companies. But actually the odds of success are no different than 30 year olds.

Pablo Srugo (35:04):

So I wonder if it depends on the industry. I mean, if you wanna start the next like agentic AI company in some new vertical, you probably wanna be younger because there's not much experience there. Certainly in Web3, like you probably wanna be younger, social, anything like the next TikTok or whatever's not gonna be from- But if you want to just - you’re in like health, let's say, and you see an opportunity you could probably create a multi-billion dollar company by, you know, but their experience might actually be helpful. I mean, I don't know if you agree with that, but that's what the data seemed to suggest. At least that's my interpretation of it. 

Jason Van Gaal (35:37):

I hundred percent agree. Like if I'm gonna invest in an HVAC company, my expectations are, they generate me 10 to 20% free cash flow yield and they grow 10% year over year to infinity. A 40, 45-year-old, 50-year-old is great. Like,that's a great industry for that

Pablo Srugo (35:51):

but beyond that, even within tech and even potential for unicorns, ir’s just less. existing market versus new market, I guess is my thinking. 

Jason Van Gaal (35:59):

Definitely. I mean, when innovation, new innovation is required, I kind of lean on this kind of under 30, 35 more and it tends to be, and we're talking about VC today, so it tends to be that a lot of those 10x, a 100 x ideas are in industries where there's new- It is not always,, it skews that way, I guess. But I don't know if I've read the Superfund books. I'm gonna have to check that out. I'd love to see some data on it.

Pablo Srugo (36:22):

Yeah, check it out. Check it out. Because even on that, the existing and new market was almost 50-50. Like not, it's weird. There's a lot of stuff that, but you know, the state is imperfect. So like, I don't think it's the end all be all. I I would consider it like one probably the best study I've seen, but like at the end of the day it is one study. But there were a lot of things like that that I found counterintuitive, like counter to what my gut would've said. But anyways, there's a million ways to play this game. Okay, cool. So what's the, what's point four.

Jason Van Gaal (36:49):

The fourth one I like is long-term corporate sustainability. So, there's some businesses that are built where there's like a really small window of like success to exit. So you've got like, you know, if you don't exit in three years to one of the top 20 companies in the space,, you're building this company to be acquired. So I struggle with those because if you miss that window, it's like a very fast, it's gonna be a very fast year, almost likely.

Pablo Srugo (37:14):

Was that not the case with root, would you say root fell into that or no?

Jason Van Gaal (37:18):

Well, I would say part of the reason I wanted to sell root was because I was becoming very concerned about that item, right? and the way that the industry was starting to operate itself. So yeah,that's kind of why I pushed to kind of move forward with the process. 

Pablo Srugo (37:33):

At the outset, you're trying to de-risk for that if you can see it like at the time of investment.

Jason Van Gaal (37:38):

Yeah, exactly. Exactly. So just kind of de-risk and you know, there's lots of companies that can be financially viable long term and it ties into like kind of that near break even FCF backup plan.

Pablo Srugo (37:49):

Well, there's a lot, like, we saw- the most recent example of that for me was prompt engineering companies, right? It's like, oh, prompt engineering, you're gonna need to do that. And I'm like, well, like the whole point of all these LLMs is to understand natural language so that you better believe that they're all trying to make prompt engineering effectively useless because they're just gonna understand what you want when you say it. So like, there's a time and window, like right now, it's really needed. You go solve it, you become the leader and like your market's just gonna shrink, shrink, shrink over time until it's no longer a problem. Like, and there's always those, you know, same around like bandwidth or like different things around compute that kind of like exist now as a problem and are for sure not going to exist, you know, five years from now. And yeah, it's, it's kind of adding a new element of risk. 'cause Not only you gotta get it right, you gotta get it right. Like you gotta hit at that point or it's over.

Jason Van Gaal (38:37):

Exactly. So yeah, so that's kind of the fourth one. and then the fifth one, we categorize two companies- Well we like two categories of company. I want a marketing type company or I want a tech company. And so a marketing type company, I would say is, you know, a coffee company or like a whiskey company. Something that exists today where really and, and there's lots of varieties of, I'm just using those two as an example. And so something exists today and it's really a marketing problem, is how do we acquire customers with less money than our competitors to grow faster, to basically reinvest it through cash flow to grow faster. So how do we solve that? And for those companies, I wanna see a marketing founder lead the company because that is the most critical problem for that company to solve.

Jason Van Gaal (39:21):

And then there's tech companies which, like, there's a lot of technology risks, but if you can build this thing, it's basically gonna sell itself. So a chimp can sell your product, like, if it works, customers will be calling you nonstop. You don't need a good sales and marketing team. It's just like it will sell itself. So, I kind of wanna see companies in those and for that company, I want a tech founder running that company. Like I don't want a marketing CEO slowing down tech decision making. The tech guy or girl needs to be the leader. So we wanna see kind of those two categories of companies and we generally like to see two or three founders in place. Just generally single founders can work, but it's just very rare that a single founder that's strong technically is also strong on the marketing side.

Jason Van Gaal (40:03):

It's just the way that our brains kind of work. Like I can struggle through marketing, I can struggle through sales. I'm okay with it. I've done it, but it's not my superpower. I'll be a six on 10, like seven if I really, really try where someone else, you know, just naturally does it. Where engineering can go on all day for that type of thing. Right? So yeah, so we generally like to see a team of two or three and then I prefer two, three is okay more than that. It just becomes like this consensus decision making that tends to slow down the business and people are just really, there's just wasted space on the cap table. Generally, like the problem, it shouldn't, if there's four people needed to solve a problem, the problem is generally probably too complicated.

Pablo Srugo (40:43):

And I think, I mean for the solo founder piece, like I think to make it work 'cause it can work, but you do need to have almost founder types, like really early on, I would say whatever your weakness areas are, you wanna get some generalists that can run around in those circles. 'cause It's really hard to find, like, you know, in this zero to one stage, I find you're not really ready yet for many heads of mm-hmm <affirmative>. Mm-Hmm <affirmative> because those departments are almost too small. But you do need somebody to run them. So you kind of need somebody who's a generalist come in, let's say you're technical, do sales, like get it kind of going, then do marketing, get it kind of going, do support, get it kind of going. And then, you know, and then maybe once you get to like a million or two in revenue, then you start, you know, filling in heads of, but finding somebody like that who can compliment you. Maybe they came later so they don't get, you know, half the company or 20% they get 5% or 7%. They're not technically a co-founder, but are actually incentivized and are thinking like you as an owner. But, but yeah, I think you need something like that unless you're very experienced and then, you know, maybe, it's a little bit easier. You start with more money or something like that. But otherwise yeah, there's always gaps you need to fill.

Jason Van Gaal (41:46):

Yeah, there's always gaps that are gonna need to be filled and you just have to wait till they're the right time <laugh> to fill those gaps and you gotta fill them in as best you can while you're waiting to do that. And I guess I find a technical founder is generally good with numbers, so they can generally fill in the finance gap early on. Like building a spreadsheet is generally less difficult than programming an ai like programming and Python is generally - you can write a Python code to automate generation of financials if you wanted to. Right? So, someone that's good at marketing, you know, they can generally do sales pretty well 'cause they're generally an extroverted person. They can generally manage that HR 'cause they're generally good with people. I find those two types of brain. That's right. Those categories tend to work well together. 

Pablo Srugo (42:27):

Listen, Let's stop it there. And I'll ask the two questions we kind of always end on the first one is, and, and I'll ask it a bit of a different way. Like, but because of your experience with Root and now investing in 20 companies, like what is your latest kind of definition of product market fit? Like what is product market fit to you? 

Jason Van Gaal (42:43):

Yeah, that's a great question. So for me, and so I was researching this the other day with one of my companies 'cause my definition was different than theirs <laugh> and I, I thought theirs was okay too, but for me it's like backbreaking customer demand. Like you have so much demand. The problem for the company is not customers. It's like trying to operate the company so that it isn't all apart because there's so much demand for your product. So that's like, I mean, if you look at how Facebook grew or like, some of those companies like  that was their issue once the engine started going. And that’s what I felt we experienced at root. And it's hard. I mean, you, you could be successful as a company without hitting that. So like, don't get me wrong.

Jason Van Gaal (43:25):

Like you can make it through series E, series B or C and eventually get to that point. But for us, that's kind of- and there’s leading indicators on that that we like to see and look at. 

Pablo Srugo (43:33) 

What are some of those?

Jason Van Gaal (43:34)

 I think there's six standard ones that you can measure. One I would say that is interesting is we look at very early indicators is conversation to conversion ratio. So like that's something that generally is not typically measured but especially useful in a B2B business where there's a sales process, an actual personal sales process and you have five conversations and four of them become customers and you've only had 10 conversations and you have eight customers. I'm very excited

Pablo Srugo (44:04):

Lately. It is great you say that, like lately I, in the really early stages, that's the number one PMF early indicator for me is demo to close, whatever you wanna call it, close because of exactly that. Like that's the, like you just think fundamentally like do people really want your shit? Like you're saying something to them and they're buying the thing at more than 50%. I would say that's a pretty strong indicator that you're selling something people want, can you deliver on it? Like, can you get a lot of customers into your funnel? Like all these other things need to ultimately be true. NPS, you know, whatever. Then you have like later on the Sean Ellis test, like retention. You got all these things, but you kind of need customers and data to get that. Whereas sales to -, you know demo to close, you can get, you know, month one, you can start to understand what that looks like.

Jason Van Gaal (44:52):

Yeah, exactly.

Pablo Srugo (44:53):

Absolutely. then the last question is what's one of the top pieces of advice that you would give early stage founders, just given everything you've seen and everything you've learned?

Jason Van Gaal (45:04):

Especially for founders looking to go down the VC track. I think there is this general desire, and I know it's part of this to kind of go out and raise money as soon as you feel you possibly can. A lot of the time will result in a lot of extra cycles being spent and months of raising and actually turning some investors off that would otherwise be interested when you're actually ready to raise money. So there's this kind of like, sometimes you have to go slow, go fast. And so it's like you have six months of runway left and you wanna start raising today. And that's what I would've done in the past. It's like, I got six months, I better start today. I think now Jason would kind of say is like, okay, you got six months left. What can you get done in the next four months that makes your company stronger?

Jason Van Gaal (45:47):

That gives you the highest probability of success to close in six months and focus 150% of your energy on getting those, you know, five things done so that your metrics look better. So whatever it is, they look better and then you start raising two months before you run outta money. And I think it just gives you a better chance of success. Like you can, sure, you can build your list while that's happening, but you don't talk to anybody. Or maybe you do some really ugly pitches early on to people that are like on your C list that you don't actually wanna take money from, but you wanna start practicing with. Yeah. So that's probably one of the biggest lessons I've kind of learned over the years. I

Pablo Srugo (46:22):

Love that. I think it's super counterintuitive and much more likely to be correct because the reality is all you're doing is if you don't have the story, you're probably just burning conversations. You're burning doors that aren't gonna give you second or third chances. and not spending as much time on changing the story, right? versus When you spend those four months building the business, changing the story, putting up numbers, it just makes everything so much easier when you go out of fundraise.

Jason Van Gaal (46:47):

If you have a bad first date, think about how many times you get to have a second date and it's a lot of work to get that second date. You might as well just have a good first date. 

Pablo Srugo (46:54):

Well, and especially look with investors like, I'll say this, I mean, if someone pings me with a founder I haven't met, usually, especially if it comes from a good referral, like I'll take a look, but once I've taken a look, then I don't necessarily need to follow up on it. Like, okay, it's done. I've already passed, I've already made a decision. And I think it goes for most people. So like, it's usually way easier to get the first meeting than any subsequent meeting after that. Cool. Well Jason, it's been great having you on the show,

Jason Van Gaal (47:20):

Man. Thank you so much for having me. keep doing the great work and sharing wisdom with the community.

Pablo Srugo (47:26):

Thank You.

Jason Van Gaal (47:26):

Awesome. Thanks Pablo. Have a good one.

Pablo Srugo (47:29):

Listen, when you go to a restaurant, you eat a nice, you know, meal. Maybe a fancy one, maybe not. Do you leave a tip? I assume you probably leave a tip. You probably leave a tip 100% of the time. Well guess what a review is just like a tip and I know you haven't been leaving one. So just like the waiter that doesn't get a tip after hours of great service, I'm getting a little frustrated. So take your phone out and leave a review. It helps the show move up rankings, it helps us get better guests. It doesn't just help me, it helps weigh more founders. Thank you.