Mike Silagadze, Founder of TopHat ($200M+ Raised) | How to Start your Second Startup

Mike 0:00 ... pretty clear when you've got something that customers are asking, not you're pushing it onto them . That happens in stages, different levels of scale. You think you have it at one stage, and then you reach a certain level of scale and you realize okay , to maintain the growth that we've had , we need to introduce something new and iterate. Pablo 0:22 Welcome to the Product Market Fit Show, brought to you by Mistrial, a seed stage firm based in Canada. I'm Pablo. I'm a founder turned VC. My goal is to help early stage founders like you find product market fit. Intro Pablo 0:37 Welcome to the Product Market Fit Show. Today we have Mike, the founder of Top Hat, a net tech startup based in Toronto that has over 500 employees and has raised over $200 million and now the founder of God's Aid Financial, a quantitative defi fund. Mike, it's a pleasure to have you on the show. Mike 0:55 Great to be here, thanks. Pablo 0:56 Today we're doing something a little bit different. I think often the topics, the episodes here are really aimed at first-time founders in those really early stages. We're still talking about the early stages, but the topic of today's episode is how to start a second startup . It's probably going to be most applicable to all the repeat founders out there that have done something before, whether it was a huge success or not, have obviously learned a ton from the first go at it. Now we're thinking of starting a new one, or have already started a new one, and getting Mike's perspective on what that's been like, what's been easier, what's been harder, and so on. With that said, I mean, Mike, maybe it'd be good to start at the beginning and just go through relatively quickly -- I know it was a long journey, but relatively quickly, like the story of Top Hat, how you started it and just how kind of things went, and we The Journey of TopHat Pablo 1:52 can go from there. Mike 1:52 Yeah, happy to do that. I'll give you my journey and talk a little bit as well how it weaves into the new company, God's Aid Finance that I've started. I started Top Hat , more or less , right out of undergrad , when I graduated university. Having just graduated, being a recent student, the experience of being in university was fresh in my mind. It was natural to focus on education technology. I think a lot of -- well, one of the mistakes, frankly, that entrepreneurs tend to make is they'll start a company in a completely random domain that they don't have a lot of experience, or they don't have firsthand experience with the particular problem that they're solving. Frankly, we did a little bit of that when we first started Top Hat . Fairly quickly, we were able to pivot and focus much more on a domain that I was familiar with, which was education technology. The particular problem that we wanted to solve was the notion of student engagement. In other words , our experience in university was that the higher education experience had not changed all that much over a period of really hundreds of years. At the same time, the students coming into university had changed pretty dramatically. In other words, their expectation and their experience in learning things outside of the traditional educational context had changed pretty substantially. There was this disconnect and students were getting disengaged and not really seeing as much value for their dollar in their higher education experience. Our vision was to create a platform where students could engage to have a more engaging learning experience both with their professors in class as well as with the content they're consuming, so replacing traditional textbooks, for example, with digital interactive learning materials and using tools and technology in class to create a more engaging learning experience. The whole vision around that kind of came together over a period of time, but that was the general theme of it . It was a very long and extensive journey. I ran Top Hat for about 11 years from start to finish until I left to start this new thing and experienced all the same challenges that probably anybody that starts a tech company experiences , from initial fundraising in a very difficult market environment, which was the time of the last crash , the 2008/2009 crash. That was extremely challenging and raising money and not only that but raising money for p roduct i n higher education was particularly tricky because education generally is known to be a very difficult market. During all of that, all throughout that process, I've been dabbling i n and experimenting w ith, p laying a round with crypto and just following that space pretty closely. In 2020, what got me excited and what really changed in the crypto space is it went from a market that was entirely speculative to, w ith the birth of defi, decentralized f inance, to a market where actual software was now getting built a nd real productive assets were being put on c hain rather t han just people gambling and speculating on tokens. That got me really excited and g ave m e a lot of conviction that over time, a significant amount of value t hat's being transacted in t he w orld w as going to r eplatform o nto crypto rails, onto defi. That was the motivation for starting this new venture that I 'm happy to tell you more about. Pablo 6:06 Awesome. So that's a good synopsis. Before moving on, maybe a quick question on a long answer on your first startup. What are some of the main turning points? When you think about that 11 year history, there were struggles and then there were -- up until the right moments, was it kind of a big first round? Was it a big customer that you signed at some point where things kind of shifted from the classic first-time founders struggling to really getting some of that success? Mike 6:36 Yeah, there were many. I'll talk about the first one that comes to mind, and it was one of the very first ones. I think there's a lesson there for entrepreneurs. There's a number of challenges you have to solve as a first-time founder. One is picking a domain, a product that you think makes sense and that solves the user's problem in a way that's compelling. People often iterate on the product and the go-to-market mechanics. Oftentimes or at least in our case, one of the things that we had to pivot was not just -- was not so much the product or even the go-to-market, but it was rather a different customer within the same go-to-market. So it'll be a bit more concrete. Initially when we started our company, we had this product that was aimed at student engagement in higher education. We naturally felt that, I mean, the logical thing to do is to go to universities where the product was aimed and talk to the university administration and try to get them to buy this thing for their school. As we did that, fairly quickly it became clear that although the university sort of ostensibly are there at least partially to educate students, or at least that's what most people looked at it , the incentive structures within universities are set up such that the amount of resources they're willing to expend on actual teaching technology and investing in student engagement, not super high. I mean , it's just that most of their revenue, most of their funding comes not from being really good at those types of things. It comes from research grants. We very quickly realized that trying to sell to the institution, basically at the enterprise level , was going to be a dead end , especially in the beginning. It would -- you're talking 12 to 18 month sales cycles. You're talking very, very budget-constrained. The result is , I mean , 12 to 18 months, your company's dead. You have no -- really isn't -- there isn't a clear path to success there. We had this kind of crazy idea at the time. At the time it was sort of a crazy idea, selling our software product the same way the traditional print textbooks were being sold. In other words, same product but instead of selling it to the institution, we go to individual decision-makers, professors, and get them to adopt a technology in their class in the same way they would adopt a print textbook. Instead of students going out and buying the print textbooks, they would buy subscription to our software. That would be used for some of the content i n c lass engagement. We're one of the first companies to do -- maybe even the first. We were very early i n coming up with that weird model. Over the years, a lot -- other folks saw o ur success, u sed the same business model. It became standardized to where lots of companies now are pursuing the same kind of approach. At the time, it was a pretty radical departure. Frankly, we weren't sure it was going to work. We talked to our investors, our prospective investors, and said hey, look, we're going to do this , and we're met with a lot of skepticism, frankly, because it was like , well , this is weird. You don't sell software that way . It's almost like, imagine you're trying to sell software to a corporation for, I don't know , accounting. Instead of going to the CEO or the accounting department, you go to the individual accountants and say hey, you should use the software. I mean, it's not just about the product market fit. It's also about finding the right customer and the right channel to sell into . I've seen a lot of companies sort of fall down on that aspect of it , especially in education. That's oftentimes the hardest thing to figure out in education technology. Pablo 10:24 I think it makes complete sense. Another way to summarize it is to think through, you've got a product that offers a specific set of values or value prop . Who cares about that, right? In your case, you're ultimately helping students learn better or in a more -- in a less antiquated way, let's say. Who actually in the organization really cares most about that? Mike 10:48 Who has the power to make a decision? Pablo 10:48 Who has the power to actually act on it , right? So it's kind of this -- Mike 10:52 Yeah, exactly. Pablo 10:52 -- this kind of thing, two things crossing together, and that's where the professors come in. There's professors that care about teaching, there's some that don't, but the ones that do really do care about student outcomes.So something that's going to make that better is something that's going to speak to them more than maybe other people in the organization. So that makes a lot of sense. So that's helpful. So maybe moving forward, as you start -- one of the first questions I have is -- a nd because they've seen a l ot -- i t's actually relatively common, I think, for founders to get their s tartup to a certain level and then transition out, right? It's actually the exception of founders that'd like to and are capable of staying a s C EO all the way t o a post IPO and so on. So what was that transition process like? As you decide -- 2020 comes around. You're deciding crypto's interesting enough that you may want to jump into it. Where are you at? Where's Top Hat at at that point? Where are you within it? Then how do you play Transitioning Out of a Startup Pablo 11:43 that? Mike 11:43 Yeah, that's a great question, and you're right. I mean, an 11-year journey is a long journey. I mean, it was -- there's a lot of things that I enjoyed about the education space and a lot of things that are extremely challenging, one of the -- frankly, probably one of the hottest markets to to operate in. Eleven years was a long time. We scaled the business to a pretty high degree , raised a ton of capital and a lot of things came together to start thinking. I think this is natural. Any entrepreneur that you talk to that's been at it for that length of time, almost all of them at some point start thinking all right , maybe it makes sense to transition out and focus on something new and exciting. For us, as I mentioned, there are a couple things that came together. I'll talk about a few of the things that I can talk about, which is , we had an acquisition offer come in that was pretty compelling. That prompted a conversation around other options other than just selling the business to a public acquirer. I think you talked about this. One of our one of our investors stepped up and said, well, why don't we -- rather than selling to an acquirer at at a certain valuation, why don't we actually take a majority share of the business? Then you can have an exit and the business can continue on. I viewed that as a good opportunity because it -- on the one hand, there's sort of a finality to it. We're like, okay , cool. My part of this marathon is done. This relay race is done . In addition, I would get to keep some of my equity and ride the business as it continues to scale and grow. So that felt like a good option. I mean , in comparison to getting acquired where usually there's a lockup and you're required to stay with the acquirer for two or three years , this felt like a better option. At the same time , as I mentioned, I'd been spending some time dabbling in the crypto space , and with the emergence of defi, I got pretty excited about that. I felt like -- I strongly feel this is going to be one of the most significant transformations in, really, the history of mankind. I mean, this is -- if we truly get to the ultimate -- this kind of ultimate end state where you -- where significant or all value chain is transacted on the blockchain, and there truly is a stateless currency that emerges, I think that'll be one of the most important changes in t he history of humanity. I felt like I have to -- I got to work on this. Everything else just didn't seem nearly as exciting or as important. Those combination of things were what ultimately le d t o the transition, a nd it was a long process. I mean, it was -- it took well over a year to get everything set up a nd transition out. Going through th e p rocess of f inding the ne xt C E O an d r e cruiting t h em a n d g e tting t h em i n to t h e b usiness, I m e an, that wa s a p retty lengthy process as well. I'll talk a little bit more about the transition. One of the things I'm -- I don't know that I realistically would've done it any differently, but I didn't really take a break. In fact, I overlapped the two businesses , and I also had a son, my first. Pablo 15:30 Oh, wow . Mike 15:31 My first son. My wife and I had a right as our -- the new start of launch literally two days before he was born. That was kind of a crazy thing to do. I don't know. I, in retrospect, wish I took a couple months off. Pablo 15:48 I'm curious maybe on that, because that's one of my main -- one of my next questions is how did you -- if I think about the beginning of Top Hat, there was probably a lot of the happy accidents sort of thing. You stumbled upon this idea, and you start digging and digging, and you end up with what you ended up. Was this a bit more methodical? You saw the market and then you end -- how did you decide again -- okay, you want to work on crypto, you want to work on defi , but how did you come up with the actual idea? Was that done a little bit more by design this time around? Mike 16:17 So maybe I'll also give a little context about what we're actually doing, and then build on that. I'll give a 30-second summary of the context of crypto. So in the beginning, in 2009, Bitcoin came out and Bitcoin was -- the innovative aspect of the protocol was this consensus mechanism that allowed , in a decentralized way, all the different parties in the world that transact on Bitcoin to come to an agreement on every transaction and solve a number of problems that are associated with a decentralized currency. It was very simple, deliberately so. In that with Bitcoin, all you can do is send your Bitcoin from Point A to Point B, and that's all that's possible. Then around 2016, I would say, the logical extension of cryptocurrency platform emerged called Etherium that created a smart contracts platform, which is rather than just reaching consensus on transactions of sending Bitcoin from Point A t o B , the consensus w ould be reached around the outcome execution of computer programs, which a re called smart contracts. That generalized computing platform, t his decentralized computing platform t hat can control money, ultimately, was a pretty remarkable innovation and opened up the door to creating a very interesting array of sophisticated financial rails like lending and borrowing contracts, d ecentralized exchanges, derivatives, and all the -- o r many of the financial instruments and tools that we use in traditional finance system re-implemented on the blockchain in t his s ort o f decentralized, u ncensorable, p ermissionless way. That was very exciting. It took -- initially what it was used for inevitably was just gambling. I mean, for all intents and purposes and even today , I would say, pick a number, 90 , 95% of the activity that happens in crypto is various forms of gambling , and that is not super interesting to me. I mean, that's -- I think that's inevitable. If you think about even the stock market, what percentage of it is value-driven versus what percentage of it is just gambling? I think it's hard to put a line on that, but especially with the monetary policy that we've had over the last few decades, I would say a significant portion of it was gambling, right? What was happening with meme stocks, GameStop, and MC, and whatever, Bed, Bath & Beyond now, that's not really value-driven. That really is. I mean, it's just gambling. It's just excess liquidity in the market finding a place to go. The exciting thing to me are these financial rails and ultimately connecting those to real-world assets, actually bringing out real assets onto the blockchain and then creating -- bringing about this ultimate end state of a stateless currency or a decentralized currency. The way that we chose to get started building in this space was to start a fund. There's a number of purposes for this for this fund. One is there was just opportunity. There was not a lot of expertise out there on how to allocate and invest in the crypto space in a rational, safe way. There's a tremendous amount of gambling and speculation and lots of funds organized around that. Pablo 20:01 There were hardly any funds that were specifically focused on creating exposure to the activity that's happening in crypto without having to speculate on particular assets. That's basically what our fund does, is we have a market-neutral hedge fund that uses quantitative strategies, focuses on things like arbitrage and market making to generate a yield and return on dollars without taking exposure to the volatility of the crypto assets. We've been doing well. While the market , both tradfi and crypto, are down, depending on what sector, from 20 to 80 or 90 %, we're up I think around 11% over the last year. We've done a lot better than the rest of the market, a lot better than most crypto funds. Obviously crypto funds that took out leverage or were speculative, many of those funds imploded. Mike 20:57 We feel really good about that, but there's a second purpose to this fund, which is to finance the development of tooling and technology that's going to be focused on the crypto space . We've got a couple of things that are in the works for that. The reason that's relevant and interesting is my hope is to build the second startup in a different way and finance it using alternate means , not the traditional venture capital model. Now , there's a lot to like about the venture capital model that many tech companies are used to finance. I mean, it's really amazing actually. There's a huge amount of value creation that happens out of that model. There's also pros and cons. The idea of this hedge fund that generates boring, predictable returns, and then using the income from that to finance technology development that's focused on building these crypto rails, that's the premise of what God's Aid Finance The Pros of Venture Capital Mike 22:05 is about. Pablo 22:05 Got it. I mean, the obvious question, you went through Top Hat with VC financing and it worked out quite well. What were some of the cons that made you decide to go at it a different way this time? Yeah, again, I want to -- before I answer, I do want to stress, I think venture capital is really, really good. I think if you look at the percentage of GDP that's driven by companies that were venture financed, it's some crazy number. I mean, I think it's over 30% or something like that, which is amazing because venture capital is a tiny slice of the financing. I mean, I don't even know if it's 1% . You've got this tiny little slice of the finance sector that's producing these huge, outsized returns. In a very real sense, it's producing a lot of value that's benefiting people. If you look at the top whatever 10 companies in the S&P 500 , a lot of them are venture-funded businesses, so it's really good and it works in a lot of ways. Mike 23:06 It's an amazing way to finance high risk activities. The Cons of Venture Capital Mike 23:10 Okay, with that being said, first of all, venture is not right for many businesses. It makes a lot of sense for things that are intended to grow very quickly and capture market or an opportunity in a tech -- usually technologically enabled way and can scale to a very, very large size. Venture doesn't make sense if you have a business that's going to scale to $10 million . It really -- venture returns are driven by businesses that scale to hundreds of millions or billions of dollars. That's where all of the returns, for all intents and purposes, come from. So for one thing, there's just a category, and that's -- a very small percentage of businesses fall into that category. The 99% of businesses don't. It would be wrong, frankly, incorrect to try and get them -- force them to grow 2% a year and try to scale to $10 billion . You end up breaking a lot of businesses. That's what a lot of founders end up doing is they're LARPing at startups . They come up with an idea, and they try to fit that in -- that company or idea into the mold of venture capital, even when it's not really appropriate given the financing environment that's been, I guess, attractive to do that. That's one aspect of it. The other aspect of it, I would say -- and it's related -- is venture tends to push a short-term thinking. Oftentimes there's a conflict in the business between doing what the right thing for the business would be if you were to run it for the next 20 years versus doing the thing that's going to allow you to hit the next milestone. The next milestone typically is the next fundraise, the next milestone in the traditional startup journey. You see a lot of businesses doubling down in processes or customers or markets or grow to market methods that the right thing to do is just take a step back and say, look, we need to take 12 to 18 months to retool and really rebuild this thing to get to the next stage of growth. At the same time, you think okay , well, but we need to get to the next fundraising in 6 months or 12 months. That conflict and that short-term thinking , it would be good to avoid that. I don't know. I guess that's kind of how I felt . I wanted to do something where I could focus on something where I just think about what is the right thing to do if I'm going to run it for the next 20 years, not what's the right thing to do to hit some arbitrary milestone 6 months from now. So that's one of the reasons that I started thinking, okay , well, is there some other way to finance technology and business creation? This new thing is an experiment in that. Fundraising 1st Startup vs 2nd Pablo 26:11 Makes sense. One of the questions as we started comparing your second startup to your first one, what were some of the easier -- and maybe let's start with that. What were some of the easier things? Talk about fundraising, for example. How did that compare Top Hat fundraising versus God's Aid fundraising? Mike 26:28 That's a great question. So many things are different. One, the market is different. When we were starting, when we were fundraising for Top Hat in the early days, there was no startup ecosystem in Canada and Toronto where we started. Really, there was none. There were no VCs. There were a handful of angel investors. I mean, I say literally a handful there. We raised money from random people, from random consultants and executives and lawyers, just random people that could write a 25 or 50k check i n exchange for 20 o r 3 0% of the business. That was the environment that we were in. So it took us, I think, six months to raise our first 2 or 300k round o f financing. just by the nature of that. I mean, it was a recession. People didn't have a lot of capital to allocate. There weren't investors, so very, very different and very difficult. We didn't have a track record. The second time around was completely different because once you have a success and the fundraising environment is a lot stronger, I mean, you can get a conversation very easily. Generally there's a level of trust that okay, look, this is a person that knows how to execute , knows how to how to build a thing. There's a very high likelihood that there's -- that it's going to be successful. It was much, much easier. I mean, we just approached Boris, who was one of our investors from from Top Hat, talked to him about the idea of what we're building. I mean, it was a very quick and easy process to raise the the capital . It was mostly -- it wasn't even really about the capital. It was mostly about bringing on a number of smart people around the table that we could use to help us along Solving a Need Doesn't Get Easier Mike 28:18 the way . Pablo 28:18 Makes sense. Here's one thing. As you go in a -- because I had this conversation with many founders and. I felt it myself. As you go through startup , especially your first one, you make a lot of mistakes, you learn a lot of lessons, and you have this ongoing thought. You're like, wow , when I do this again, it's going to be so much easier. There's just -- I'm not going to do this; I'm not going to do that. I'm going to -- some of the things, that's true. Fundraising is an obvious one. Not only do you just get much better at doing it, you also just build this track record. All these things are in your advantage and it actually ends up being way easier. What were some of the -- are there any things you think about that were surprisingly not that much easier when you actually got through it and did it the second time around? Mike 28:56 Yeah, absolutely. So it's -- the interesting thing is -- and exactly as you're saying, I thought that as well. Yeah, the interesting thing is that I realized that the mechanics of starting the startup , the really basic stuff that's common to all startups is not at all what creates value. That's not what leads to the success of the business. Even fundraising, that's not what creates value. It's not about -- yes, you need to be able to fundraise to keep the the business going, but that doesn't create value. What creates value is a product and customers and solving a real need. That is just as hard -- well, it's almost as hard the second time around as the first time, because those are the real problems. Yes, we could short-circuit the fundraising process a little bit and a lot better at hiring this time around. A lot of those things are easier. The hardest part is actually coming up with a product that makes sense and continuing to make decisions that lead that product and strategy in the right direction. That's the hard part. That doesn't -- I don't know that it's been easier. I mean, it's -- we've had lots of challenges along the way already , less than a year in, so I don't know if t hat gets gets a ny easier. Pablo 30:12 I think it's a really good point. There's many ways to look at that, but I agree. I think getting -- setting -- getting set up with a lawyer, an accountant, getting funded, setting up your corporation, and then all the things that you just need to do, and you kind of get stuck on the first time around, like, oh , wow , to do this, I need that, whatever it is, getting insurance, all these things. Yeah, your second time, you kind of snap your finger and it's more or less done, not that easy but basically, and yet the core thing that a startup does is it creates true, meaningful value. That part is just really hard. I think when you are a first-time founder, if you have something that's really creating value, you do have to understand it's not that easy to come up with another idea that's going to do that, right? Your going all in and getting the most out of this one is pretty important. I mean, a lot of people do come up with a second one, like in your case, but it's not like, ah , it doesn't matter because I'll do this. Maybe I'll just do a small exit and then I'll come up with something much better. Maybe, maybe not. It's not that simple. Mike 31:15 Yeah. The cliche is it's not about the idea, right? It's about your ability to iterate and develop it into something that is correct, that matches a reality rather than getting stuck on whatever idea you haven't come up with the first time around. Gadze Today Pablo 31:40 Perfect . So maybe starting to wrap up, where is God's Aid at today? You have the main fund. How's that going? We talked a little bit about that, but what about the other products that you're starting to build out? Mike 31:57 Yeah, no , it's -- we've already had a number of, I guess you could sort of call them pivots. We built up a platform or a tech -- platform's the wrong word for it -- a trading system, trading and monitoring system. In the first six to eight months of the system, of the company, realized that we'd built it on the wrong technology foundation. Over the last couple of months, we've rebuilt it from the ground up. The new thing just started trading a week a go. It seems to be going well. I mean, that's an example where you think y ou can --you're not going to nail every decision j ust be cause y ou're doing it for the second time. Product Market Fit Pablo 32:44 The last question, which we always like to end on, and maybe thinking back to the Top Hat days because God's Aid is still relatively early along on this front, but for Top Hat, when did you feel like you had true product market fit? I don't know that we ever felt like, oh yeah, no , we're done. This is it. We just kept having to reinvent the business over and over again at different stages of growth. At any given stage, I guess -- I mean , there's so many things to say about it . The most compressed answer is when you have it, you know. If you're not sure, then you probably don't have it. That'll be my guidance to entrepreneurs. It's pretty clear when you've got something that customers are asking, not you're sort of pushing it onto them . That happens in stages, in different levels of scale. You think you have it at one stage and then you reach a certain level of scale and you realize, okay , to maintain the growth that we've had, we need to introduce something new and iterate and iterate. That was our experience. I don't know that we ever got to a point where, oh, great, yeah, now we're done. It was just a constant process of reinvention. Recap Pablo 34:03 Perfect. Well, thanks a lot, Mike. Maybe just to recap, you started Top Hat, I guess 12, 13 years ago now. You went through an 11-year journey, started out when VC in Canada almost didn't exist in the whole industry, right? Really, it's true, the first funds and rode that out. In the meantime, grew the company to one of the larger startups here in Canada, raised hundreds of millions of dollars, and now you're on your second startup. You've shared some great insights on getting -- making that transition and just what to expect for repeat founders out there that are -- and there's going to be more and more of them here in Canada, which is an amazing thing for the ecosystem. So thanks a lot for that. Appreciate you sharing your story with us. Mike 34:55 Great . Thanks for having me. Pablo 34:56 Thank you so much for listening all the way through. It's been a pleasure having you here. Make sure to subscribe so you don't miss the next episode.