WHAT INVESTORS LOOK FOR WHEN INVESTING (With Dan Caffee)

Hey guys, welcome back to Investment Fund Secrets. I'm Bridger Pennington. Today we have our special guest with us, Dan Caffey. Uh, Dan, welcome on. How you doing today?

Doing great. Just kind of self-quarantining here.

Yeah, we're both, uh, on a video call, so excuse the audio. I'm in my sweatpants over here. I got a nice top on but still in my sweats below. So, um, but Dan has— you have an incredible career. You're gonna tell us a little bit about your story in just a minute, but has sold multiple companies. Most recent sale, Teen, you sold to WeWork for over $100 million. Limited partner in multiple funds. Just an impressive tracker. And I'm excited to hear all about this. And now doing a lot of stuff. You and your partner have kind of a combined family office that you're investing into smaller startups. We want to hear what you look at for investments. If other people come pitch you to join their funds as an LP, what do you look at? Anyways, we're gonna have a fun episode right now. So First off, tell us a little bit about your story, how you got started, and then why did you make the transition to more investor type of space? Why don't you just ride off in the sunset on a, you know, on a sailboat and be gone?

Yeah, well, I'm glad to be here. So I'll tell you a little bit about my story. I started my first company when I was in college with a guy there in Provo, and it was in his basement. And it was— I just thought it would be a fun challenge, and it turned out that it really was a fun challenge. The company grew, it was great. And so, you know, I was an international diplomacy major, so not business at all, but I just took to it. It was something I really liked. My business partner, who— well, we've been partners for over 20 years. We met at BYU. You guys stayed together through the whole time?

You haven't— you're still together? Wow.

Yep. Yep. So we, we started our first company together, I think in 2001. And we met in 1996 in the dorms in college our freshman year. So yeah, so it's been great. So we started our first company.

And what were you guys doing? What was your first company?

The very first company that we did together was a marketing and recruiting company for transportation truck drivers. So over-the-road truck drivers. There was a huge shortage of drivers and we decided to apply technology to the process. And we were one of the first companies to do that, to do online recruiting and technology and marketing for that industry. And then we've evolved. That particular company has kind of been the source of our other companies. So we've evolved it several times. We sold off a large chunk of it. We sold off pieces here and there. And then we spun out another company, which we'll talk about, Team. several years ago. But, but yeah, that company grew into a large company called Neutron Interactive, which was on the Inc. 500 several times. So it was fun. So I was a CEO for probably 15 or 16 years before I kind of stepped away from operations. And, and then my partner took over at our other company for a few years, and then we ended up selling that one. So now we're focusing on investment.

Now you're doing this now. Okay, I love it. So yeah, a lot of people listening, that, that last part, focusing on investing, is kind of where We're interested, right? You've done well in your career. We could probably have multiple episodes on just entrepreneurship and how to start a tech company. But now as a limited partner in a shared family office, you probably get, I'm assuming, a lot of people with their hand open asking for money.

To you, what is a good deal versus a bad deal?

And walk us through that.

So we do a couple different things. My partner, Sean Ritchie, and I, we have a lot of deal flow from startups, early stage, mid-stage, etc. And we also are LPs in several other venture funds and other types of funds. And so we get together and we look at what the opportunity is and whether it seems— there's a couple criteria. One is, does it seem like a good deal? Is it something that we actually believe in? Do we believe in the people, whether it's a company or a fund? Do we believe in the people running it? Do we believe in the industries they're focusing on? Do they have a track record? But also, to be honest, is it something that we care about? Is it something that we're passionate about?

Mm-hmm.

We have a background in operating, so because of that, we like to feel like there's something else we can contribute more than just money. You can raise money from anybody. So is there anything else that we're able to contribute to the fund or to the company? Are we going to be able to actually add real value? That's a big criteria for us.

I love it. So when you look at that, right, you have a new company come to you. What kind of— I mean, you've worked with VCs in the past, right? And I've heard it from other managers and other people that have raised money. Some people hate their VC company, some people love their VC companies. I'm guessing now you would love to— you want to be in the latter, right, where people love you as a partner. What do you do that you've learned from previously raising money and now being on the other end of as a VC funder on some of these startups, or just an LP in these funds? As a partner, what have you learned and what do you try to implement with these companies that you're partnering with?

So all of our first companies up until Team were all bootstrapped and backed by ourselves.

Oh, were they?

Yes. Yeah, so we learned a lot of lessons in doing that about how to operate lean. And I'm not gonna say that was necessarily by choice. I mean, there really wasn't a lot of funding available for startups in Utah up until pretty recently. So, you know, we learned some lessons on how to operate in a really lean way. But we'd also heard horror stories sometimes from other CEOs who'd raised money and their venture investors were just a nightmare to deal with. And so there was some hesitation there. We didn't have that problem. My partner is— he's very good at raising money. That's one of his specialties. And he was able to put together a group of investors that was phenomenal. And honestly, they were more value-add investors. They weren't just money. And again, that was mostly just luck. A lot of times, the investors we got were the only ones who were interested, right? So we just— you do 20 pitches and you get one response that's a yes, and that's the one you go with, and they just happen to be fantastic. So, um, shout out to all of those VCs that we had in that company. They were all just fantastic and very helpful. So that was kind of a model for us of how do we be that type of investor, investor who can actually contribute, um, and care enough to put some time and effort in put some of your heart into this, into this, into a company.

So, so now that's— then that's— I'm guessing that's how you want to be with, with your people now, be able to put time and effort into their companies.

Absolutely.

And something we talked about beforehand is you emphasize a lot on the value, and I've heard you speak before as well, the value of a team and the value of building good people around you. How have you been able to do that? You've done this with multiple companies, multiple businesses now. How have you effectively hired good people or brought on good partners? You said your partner's really good at raising money. How have you effectively done that and try to teach and coach other people?

Well, I would say a couple things. So it's a learning process and we haven't always, haven't always been great at it. I've made some very bad decisions and hires as well. So not to toot my own horn, but I've made some really good ones too. And there are a few things I like to talk about in this area. So one is the very best people can work wherever they want, right?

Hmm.

They don't have a shortage of job offers. Even in a tight economy, they can work wherever they want. So the question you have to ask yourself as a CEO, and frankly, even as an investor, is why would they want to work for you, right? Why would they want to work with you? Because Who are you? What are you offering? If you don't have a good answer to that question, you're probably in trouble. So really, you want to get the very best people. So one of the ways we do that is during an interview process, you know, you can be interviewing for the lowest level position in a company where almost anyone could do the job requirements. So what you want to be asking yourself is not whether they can do this job effectively, but what else could they do, especially at the early stage of a startup. What else are they going to be able to do? Is this someone who's going to be able to run the company one day? Are they going to be able to co-found the next company with me? Right? I mean, is this someone who has more potential than just, you know, what we're interviewing for?

Yeah.

Absolutely. There was, there was a story I like to tell from, from one of our early hires at Neutron, and we were hiring for pretty much the lowest level position, answering phones and doing a few other things. We interviewed a bunch of people and one girl, she was, I think, literally 19, and she was phenomenal. She was just— something about her, we knew she was better than the other candidates. She was the only one we called back for the position, and I think we were advertising for, you know, $10 an hour or something, and we called her back and said, we want to offer you this, and she said, well, you know, I need whatever. $15 an hour. We were like, what? But she was the best one and we knew it, right? The question was, is she gonna be able to do more than just answer phones? Is she gonna, you know, is this someone who has real potential? Anybody could have done the basic job. And fast forward to today, like 15 years later or something, and she's the president of the company. So—

Wow.

Oh my gosh.

Geez.

Yes. Making those early decisions makes a big difference. Another one was an early developer that we hired at Neutron. And it was another one of those where we just interviewed a few people and there was one guy named Zach Holmqvist and he was just brilliant. He's a brilliant guy. I don't think he was the best coder. His resume had really nothing of interest on it. Just from talking to him, he was someone who we had the sense was going to be a huge player. And we hired him instantly. And he was, I mean, immediately he started to sort of transform the culture of the company. You know what they say about having A players if you want to attract more A players.

Yeah.

So this guy was an A player and he started bringing in more talent into the company. He just transformed kind of the way we were operating. And really you could look at that as a turning point for that company of when it really started growing was this one hire. wasn't a senior executive, he was a junior developer, but a killer guy. And he ended up coming up with the whole idea and was the co-founder of Tym when we spun it out. He's the one who came up with the whole thing and built the prototype. So, you know, putting that extra time and effort into the hiring process and really trying to get the very best, it can really pay off.

Wow, geez, those are, those are incredible stories. Wow, that's, that's— I, I personally haven't heard a lot of stories like that in the past. That says— I think it says a lot about you as a, as a manager to recognize talent and let them grow in their space. Did you actively help those 2 individuals grow and promote and, and have the opportunities to, to grow your business?

Yeah, that's, that's a great question. So The answer to that is yes. Um, you know, Google used to do something they called 20% time, and what they would do is they would give their developers 20% of their time to, to work on a project that they were really passionate about, that might have been outside of their normal, you know, job requirements, but it was something that they really felt passionate about. So we were inspired by that, and we, we encouraged our developers to, you know, in addition to their main stuff, work on that. Zach, in particular, thought it was more like 60% time and eventually started spending tons of time on it. And that, you know, as a manager, that could have been really frustrating where you said, look, you're not working on anything you're supposed to be working on. What are you doing? For me, you know, I just thought this guy's brilliant and all right, this, you know, this is great stuff you're working on. And so, you know, that particular one, he got another job offer and came and said, you know, I think I have to take this offer, it's a lot more. And I said, no, you can't, you gotta stay here. We'll start a whole company just around you and then the stuff you're building, and you'll be a co-founder and a partner. And he was like, yeah, okay.

That's awesome.

And that became Thym. So, so yeah, it was actively encouraging that. You know, there's something about— there's a sense that as a company gets bigger, they'll tell you to go hire outside talent and more experienced people, and there's something to that. But there is really also something to growing your own leadership teams.

Yeah.

You know, people who, they don't just feel like they're really a part of the company, they really are a part of the fabric of the company. They really understand that. You know, you see that with companies like GE. Jack Welch, he started in the mailroom at GE. And I think that's kind of an inspiration.

Geez, I love that. So, and following on this same topic of, you talked about in both those interviews, you felt like they were different, like they had this superpower about them. Can you talk to us about with hiring or partners or your leadership team or even companies you invest in today, Or founders of companies that you're looking at to invest in. What is— can you put that— it might be a hard question, but put that into words. What is that sixth sense, that superpower that you have obviously been able to see in other people and probably see in people now? What is that, if you can put that into words?

So I think there's a few things to look at. One of them is, it's not just is this person exceptional or are they brilliant, it's are they also an exceptional fit for the team that we're trying to build? Are they going to be a great contributor to what you're trying to build? So if what I wanted was a highly disciplined, organized team that was just nailing what they were supposed to be doing all the time, then Zach would have been a terrible choice for that position. But that's not what I was looking for then. What I was really looking for was someone with with that skill set and sort of that vision. I gotta be honest though, someone like him in a different organization could have just been a giant, enormous pain. And they would have— not only would they not have liked him, they would have hated him. It would have been difficult. So it wasn't just that he was great, but also that it was a great fit. And we were asking questions beyond just code checking, let me see your code and what's your resume. It was more how do you think about things? What are you passionate about? And getting into those kind of interviews, especially at the early stage when you only have 5 or 6 people, those early hires, they make or break a company. And so those are the ones where, look, it's a pretty small company, you got plenty of time and effort, put as much as you can into the hiring process. So that's part of it. So when you're asking, you know, what are your ambitions and what do you want to do? And they say, well, you know, I'm their ambitions are super limited and they're not, they're not very ambitious. That's not a good fit for a startup organization, at least not for my organizations.

Yeah.

You want someone who's passionate and you can sense that passion sometimes, right? And if you can get passionate about something like developing software or, you know, recruiting truck drivers or whatever it is, that's, that's someone who really Who really gets it.

I love it. That's awesome. Um, that's good. Very good insight. And I, you have decades of experience doing this. I love hearing that. Okay. I want to shift focus a little bit to what you're doing now with your current, um, partners. And I want to hear from, from your, you know, top floor, what are you guys thinking about the coronavirus COVID-19 right now with your current investment strategy? Um, any thoughts on there from, from you guys looking forward? And things that, you know, maybe young fund managers or people in the fund space can, can lean from?

So today, right, in the second half of March, yeah, uh, of 2020, um, I don't think we're at the bottom of the market. I think there's a lot of turmoil. I think the country was not as prepared as they should have been for this considering the amount of time we had leading up to it. And so because of that, the effects in the economy are enormous. We don't have enough masks, we don't have enough testing. And so the only real solution is shutting down the economy and closing stores, closing businesses, doing all those things. And, and until we can get that under control, it's going to have a pretty intense effect. From an investor point of view, You know, we have kept a lot of our holdings in cash because we were anticipating a major, major downturn, and it's here.

Yeah.

So from an investor point of view, there's some upside to that. It's really tough seeing some small businesses and local businesses suffering because they're bearing the brunt of it right now, but there will be a sort of a trickle-up effect of You can't lay off all of the waitstaff at every restaurant in these cities and not have a major effect on real estate market, on the landlords, the rent that's not going to be able to be paid. So I think there's some major systemic problems, which from an investment point of view, we look at pretty positively, I guess, going forward, which is it creates opportunities. So, You know, one of the problems that we were seeing, especially in the venture market, was it was overheated. The valuations were getting into crazy town.

And you sold to WeWork, right? You saw firsthand, right?

So firsthand what that looks like. And we sold for cash. Luckily, most of the companies didn't, and it ended up being a huge problem for them. And the threat wasn't, you know, I think when I saw what was happening at WeWork, I thought it would have a much bigger effect on the venture market and on valuations when people started seeing, you know, it's time to look at some of the fundamentals here. And it didn't really have a major effect.

Hmm.

And I think partly that made me very nervous. And they said, you know, it's just a WeWork issue. It's not really. There were some major— you know, you'd have investors fighting and fighting and fighting to get in, to be able to put their money into a company. And that's a reversal of roles. Normally, As an entrepreneur, you're fighting to get money. And I started having conversations with VC friends who were saying, yeah, we're fighting to get into this deal. And I thought, that's a little bit worrisome. So I think now with this correction, it provides some real opportunities for investors. For a while, what I was seeing— this is, again, take it with a grain of salt— some companies that are pretty terrible were able to get funding. They were able to get to that next round.

Yeah.

I mean, companies with really— I mean, it's tough to value a startup anyway, but these were some pretty bad ones getting significant funding. And so if you're a value investor like I am, you're looking for something at an early stage, or you're looking for something that has a lot of potential that's not already blown out of the water as far as valuations, it was tough. What we'll see now is that better and better companies will struggle to get to that next round. And that is where—

Creates huge opportunities for you. Yeah.

Yep. Yeah. So, and so if even bad companies can get funding, then you gotta fight to even get into those. What'll happen now is liquidity starts to pull way back and there's a lot of hesitation. I've had a few calls this week with entrepreneurs who are, you know, they had deals in the pipeline that are now frozen. Their bankers pulled out, their backers pulled out, the liquidity pulled out. It's a tough time. But, you know, we've made— we've had a lot of success in some of the worst recessions. They do present opportunities. So, you know, as long as you can keep your head on straight and keep your eyes open.

Those opportunities are present, like currently on March 20th, right? 2020? Or is it still on the downside and you're Going to wait for the uptick a little bit, or where do you see it?

We're waiting. Yeah, still. I don't think we're there yet. And I think if you look at this, as far as— I've been monitoring this since December, partly because I'm just very tuned into it. It's something I'm— it's been of personal interest to me, so I've been monitoring it really closely. But within the country, within the US, it really It's only been what you'd call a crisis that people have been talking about for a couple of weeks.

Yeah.

And so it hasn't had a real chance to trickle through yet. It hasn't really set in for people. What you're seeing is a lot of, you know, out of the main capital markets, money coming out, going to cash just so that they can wait it out. But they don't know what to do with it yet. I think people were waiting for some kind of a rally that they're expecting to happen now, and it's not the right time.

Yeah.

So I think, I think it needs to settle a little bit more, um, especially for some of the effects that I'm looking at, which is people adjusting to a different world for valuations.

Yeah, I love it. Uh, so Dan, thank you so much for your time today, by the way. I've got one last question for you.

Hit me.

Um, so people, let's say me, right, or guys like me that are running a young fund that are looking to get in contact with a family office, to come pitch a family office, what advice would you give specifically to family offices or like you guys combined family offices? What advice would you give to someone before they walk in the boardroom, before they come pitch you?

A couple things. One, you know, it's the biggest challenge there partly is going to be getting into that boardroom in the first place. So, you know, you send unsolicited emails to a venture fund or any family office or private equity, the likelihood of even getting a response that's not automated is pretty slim. So one of the best ways is to find, you know, make a connection with someone who's already connected with them.

Hmm.

It's not super fair and it's not the most equitable way of operating, but that's kinda how they do operate because there's so many people coming in, so many different deals that are coming for you. You have to have some kind of triage. So you wanna say, look, this is coming to me as a recommendation from someone who we've already invested in or someone that I already do trust and do know. And then we're much more likely to even take that meeting in the first place. So that's a tip on how to even get in. And then you wanna see just, you know, a certain sense of— it's tough as an entrepreneur. You have a certain sense of not hubris, but you have to have a lot of self-confidence balanced with a little bit of humility. So you know that you're coming in asking for money. Be prepared with some answers to some tough questions, and that's gonna be even more important in this current economic situation. The questions will get tougher and tougher, so expect that. That's awesome.

I love it. Yeah, those tough questions. I've had other people actually walk me through a lot of questions like that. What happens if you die? What happens if, you know, there's a million things you've never even thought of. And yeah, I love that answer. And then the connection to get into— get in the door, like you said, it's not fair, but it's the way that it is. I love that answer. Well, Dan, thank you so much for coming on today. Geez, I love that we could call together and Skype in. A lot of valuable content. Thank you so much. If there's any way that people can reach out to you or connect to you or follow you online, what's a good source for that?

LinkedIn is really great, actually. I use it a lot. So it's just Dan Caffee on LinkedIn, C-A-F-F-E-E. Reach out, connect with me, and if you have If you have a great company you want to pitch, send it over. I'd love to hear it. There it is.

Awesome, Dan. Thank you so much, and you have a great day.