Episode 14 | Part One: Undiscovered Country

Gregory Shepard, an entrepreneur who's built and sold 12 businesses, a recipient of 4 private equity awards, TEDx speaker, and Forbes author. This is The Boss Podcast with Gregory Shepard.

The best investment opportunities don't always emanate from Silicon Valley. Today, I'm joined by Patrick McKenna, the founder, Patrick has invested in 47 companies. 31 of them were outside the Silicon Valley. He's focused on investing in remote-first companies. I guess that turned out all right. Patrick, welcome to the BOSS Podcast.

Great to be with you.

Patrick, I mentioned at the top that you've invested in dozens of companies, many of them outside of the Valley. What was the inspiration behind that?

Investing in entrepreneurs outside of Silicon Valley is one, as an investor, you're always looking for something new. You're looking for new ideas. New people, new problems to solve. And also, as somebody who's, you know, not— you know, I have a little bit of a non-traditional background. I grew up in a small town in Northern California, and I actually know that there's talented people all over this great country of ours. And through my entrepreneurial adventures as a company, starting new companies and investing in companies, I've met amazing talented people all over the place. And what I found is they tend to be undercapitalized, undernetworked. And so as an investor, I was looking for that kind of alpha. And so I very specifically about 8 years ago started looking for teams that kind of met the kind of Silicon Valley heuristics of knowing something, you know, unique that other people don't know early in a cycle, have some insight into the problem, and have confidence that that team can succeed. So I kind of went out and looked in places like Baltimore and Pittsburgh and And Austin and Salt Lake and different places. And there's amazing entrepreneurs.

Yeah, there's a bunch of them, right? These little underserved markets with great talent and low valuations, right?

Well, that's right. So there's 2 sides of it, right? So you're getting these really terrific entrepreneurs, you're getting low valuations, and they can actually go further on less capital, which is also a really exciting part of the, of the mix here, is right? So in Silicon Valley, you know, $1 million or $2 million, you you can barely qualify to get an office lease when we used to do offices. But in Bend or in Pittsburgh or in Baltimore, $1 or $2 million, you can actually get pretty far along in your product, which actually de-risks the investment as you go into a Series A and stuff like that. So there's a lot of really good business reasons to do it. And then just this other side of it is that not everybody can move to Silicon Valley, right? So if your filter is the person actually moved to Silicon Valley, you're gonna be limiting your opportunities. And for me, I'm like, well, I have the ability to go and kind of see the patterns in people and ideas in other places. And that kind of was what I thought from an investor is just bringing my alpha.

Before we go into your entrepreneurial background, I wanted to ask you about this article last month in Forbes. You wrote about the pandemic and how it's broken the monopoly of cities like New York and San Francisco. And I wanted to give you the opportunity to talk about a little bit more about how these high-paying jobs and how much a factor like this is going to affect the cost of living in the cities they move into and why you think this whole thing is happening. 'Cause there's definitely a movement and even a term for it with these Zoom towns. So can you shed some light on that?

First of all, COVID didn't create this trend, it just accelerated it, right? So it basically took 10 years of trend and compressed it into really one moment when everybody went home. And over the last year, I think we've just kind of experienced what was going to happen inevitably. And why was it happening? Well, it was happening because the Silicon Valleys, the New Yorks, these places were becoming very expensive, and companies that were already located there were opening offices outside of the Valley, right? They, you know, Austin, where I'm based, you already had Facebook, Google, Apple. These big companies were already accessing talent here in Austin. And if you look at what's going on in Utah, I mean, there's like maybe 8 or 9 unicorns kind of coming out of Provo. And so there were really tremendous companies being built in Utah. That stuff was already happening. And then COVID happened and it completely shifted the entire playing field. Now, if you're a VC, it used to be, well, I wanna drive to board meeting. Well, you weren't driving to board meetings even for your companies that were locally based. The other thing was that diligence was really an in-person thing. You'd wanna sit around the table, kind of walk through, go to the office. Well, no diligence was being done in person. So those 2 big barriers on both where the talent is and how investors were diligencing and looking at investments completely changed. So now once you've changed those 2 patterns, now traditional investors were like, well, if you're going to be in Madison, Wisconsin, it's just the same as if you're in San Francisco. That really opened up the funnel, and I think that's really changed, um, the opportunities for startup companies that either were going to move to San Francisco and decided not to, or never were going to move but didn't have access to that capital.

Yeah. And I mean, what you said adds a lot of value, right? So if you think about it, you go to these places— as an investor myself, you go to Silicon Valley, you know a deal coming out of the Valley is going to be valued at 4 or 5 times the same deal out of one of these underserved markets. At the same time, you see even Facebook and Twitter and all these guys saying, oh, work from anywhere. And you see this lot of people leaving places like, you know, the 280 corridor from Silicon Valley to San Francisco and starting to move into these smaller towns. So you have this talent that wasn't there going back home. And I think that this springboards the opportunities in these underserved markets. And I really, really admire what you're doing because I also agree 100% that the opportunities are now all over the place, not necessarily so central.

You used to actually have to move to San Francisco, right? To work for Google, Facebook, get the access. And you no longer have to do that, right? So that big shift, that's what's broken down the monopoly of the big cities. Like there was this San Francisco and New York pretty much said, hey, we'll do, you know, we can treat you however you want as a company, as a tech worker, as a knowledge worker, anything like that. And they didn't really treat their tech workers very well. They just assumed they were gonna come. With the breaking of the monopoly, and this is what gets exciting, is cities now are in the game of attracting the tech ecosystem, the innovators, the entrepreneurs, the tech workers. So if you work at Twitter, Twitter said 100% work at home. Now the Bend, Oregons, the Salt Lakes, the Denvers, the Austins— now these cities are making a pitch for people, not the companies, for the people to move there, which then gets related to the remote work and the whole thesis, right? So Now, if your talented workforce no longer are completely focused just in a couple places, your talented workforce are in all these different cities. The entrepreneurs who are spinning up businesses in Indianapolis or Pittsburgh or Nashville, they actually have access to more talent, whether they work remotely or that talent is moving to a Nashville or an Indianapolis. Does that make sense? Right. So Indianapolis is a really cool example because Salesforce has got about 5,000 people there. And if you look at Indianapolis, people don't think of it as a tech center, but there's a ton of marketing technology companies and SaaS companies that are spinning up because of the Salesforce connection. Now people can work for those startup companies that are in Indianapolis, whether they move to Indy or they're remote, because they actually have this knowledge, this core of experience that they built because Salesforce had a big operation there. You kind of see that in Pittsburgh with robotics and AI and self-driving cars. You see that up in Bozeman around LiDAR technologies. Also Oracle has a big operation that's based in Bozeman. So you're seeing different companies spin up around there, which then kind of leads to this remote workforce. It's like, well, now the talent is everywhere. And if you can build a business that can access the talent that's moving around, you can get the best people at a lower price, which is good for your, um, for, you know, managing your, your cash and investable dollars. And here's the kicker, is that you have higher retention, which is a huge value when you're actually building a business.

I didn't even think about that. You're absolutely right, 100%. And you've got this innovative strategy that is integrating all of these different elements to your outlook. It's really impressive. You know, I've paid a lot of attention to this, but I haven't thought about the retention. That's a big deal.

It's a really big deal. You know, it's so funny, is like, take like Zendesk. You're familiar with Zendesk? It's a software company. Absolutely.

Yeah.

So they're based in San Francisco, but they have a huge operation in Madison. Wisconsin. And if you talk to them, they used to actually bring everybody to San Francisco, engineers like that work. But you know, the, the average term that somebody worked at a tech company is about 12 months, an engineer about 12 months. So they would hire everybody, they'd come to work for Zendesk as an example, and Zendesk was already public, you know, it's kind of growing a certain, certain amount. And then other companies would poach them, all the good people would get poached. So it was actually you know, you were basically recruiting to San Francisco for other companies, startups or otherwise, to poach your people. In their case, they were able to spin up these kind of more regional hubs, and people had— they paid less, they had a higher quality of life for a lower pay, and frankly, they had higher retention because there was frankly less competition. So these strategies have actually been around a while, and the thing about COVID which you brought in, was it has just expanded these opportunities to more companies in more cities. And this is what gets me excited is because more problems are out there in the world. And if more talent can be in more places focused on more problems, and the capital is also able to follow the opportunity of those entrepreneurs and those problems, there's another wave of innovation that's coming that this is where we should be getting excited.

Yeah, it's interesting. 2020 was sort of Zoom's coming out party, right? And, and they were sort of standing back and became the dominant video conferencing platform Zoom is going to be an ancient tech a year from now is something that you said. And I was really interested in the background of where you get that from. I think it's a bold statement, but I agree with you. And I think that you're, you know, as you know, when I read into you, I'm like, this guy knows what he's doing. So I think for the audience, it'd be really interesting for people to hear about this approach you have with Zoom.

So it's so, yeah, I was like, exactly, the Stone Age, like Zoom is gonna be like the Flintstones. Right? You know, yeah. And, and so, you know, my current company is called Facet Wealth. As a quick background, we started physically in Baltimore, but it's always been a remote-first business. We are— we're doing financial planning for the mass affluent market. So you take like a certified financial planner who would otherwise work at Goldman or Morgan Stanley or Merrill Lynch working with high net worth, you take that exact same credential, that same person, you apply technology, increase the productivity of that really high-quality person, and then you apply them, you take them as the service and offer it to the 33 million US households who have between $100,000 and $1 million of assets. That's our business.

Wow.

When we started this, so it's really about productivity. This is my main focus. Like, as an entrepreneur and an investor, I am looking for how software lowers the costs of delivering a service or a product. Like, to me, that's like your— that's your weapon. And this is why the remote work has been so pivotal to both to my entrepreneurism and also my investing. It's like, how are you taking some expensive service or some expensive input of labor and adding technology to increase the productivity and lower the cost or eliminate the cost? And my first company was called LiveOps, and we started this in 2002-2003 timeframe, and this was work-at-home customer service. It was very novel at the time. That people would work from home and do customer service. Well, we grew that from me and 4 guys in a, you know, an office on Palo Alto on University Avenue to 20,000 work-at-home customer service reps and 700 employees in Palo Alto. The idea was technology accessing people working from home with broadband internet and a computer that was not visual at all, that was just using audio. And we increased the productivity of our US workers to the point where we were able to compete with offshore. That's kind of the kernel of my understanding of how the world was going, which kind of leads me to the Zoom thing, right? So go forward to 2016 when I started Facet Wealth with my co-founder. We were looking at these in-person services, like your financial advisor, you meet them in person, and like, it's expensive. It's expensive, the amount of people that you can meet and see. We said, well, How do we lower the cost of delivering this person? Well, work at home, distributed. What if the person doesn't have to live in D.C. to service people in D.C. or New York to serve New York? And but how do you capture that in-person experience? And Zoom was the best thing at the time. You know, this is 5 years ago. And so we built Zoom into our product from the very beginning. And people said, oh, everyone needs to shake the hand of the person who's going to manage their money. That's 5 years ago. Like, today nobody wants to shake anybody's hand, right?

Yeah, right.

And so, and so with this business of increasing productivity, distributing our cost structure out into the marketplace where certified financial planner living in Florida or Georgia or Texas, same credentials, same background experience, they get paid less than living in New York, but that lower cost manifests itself in a lower cost of service, right? And so we then offer dedicated human financial advisors to people with much lower asset bases, and we do this on a subscription basis. So instead of having a percent of assets or commissions or anything, it's just a subscription. So we think of Facet as like the Netflix for financial services. And that's, that's where I'm seeing the interpersonal relationship. Like, what can you do on Zoom today is pretty limited. That interpersonal relationship, as you start expanding more and more people, developing deeper and deeper relationships through this video interface, we're going to add stuff to it that we can't even imagine today. We can't even imagine. You know, the one last thing I'll say on this that, that gets me, that is going to— I think this is going to prove my point— is before a year ago, very few engineers used Zoom to do their job. They just didn't, you know, they just weren't using video to do their job.

Nobody would turn on the camera.

Nobody turned on Yeah. But today the most innovative people in our tech community are using Zoom every day and they're frustrated, right? So they're looking at this going, this has gotta be better. There's gotta be a better way. Oh, it could be faster, smoother. I can feel more. And this is where I think that the, you know, the designers, the UX people, the core engineers, they're living the problem every day and they're gonna be building way better stuff. And there's a huge market for it. So I would say go long on the next version of Zoom.

I mean, there's stuff coming out all the time. I look at— I probably see 5 of them a month, you know, people that are developing things to compete with Zoom that, you know, they're the, the, uh, aka, you know, Zoom killers. So we'll see what happens. And I'm behind you 100%. I, I found it interesting because, you know, you used to do 140,000 miles to do business, and now you're at home all the time and you're spending you know, that, that budget allocation that you had for travel just goes away. Because it's not just the travel time, it's not just the meeting time and the hotel time and transportation, it's the recovery too. So you do a lot of miles and you're burned out and you can't even function for a couple days until you get back from a tour. So it's— I'm, I'm with you 100%. I love it personally. Do you think it's permanent?

I think there's going to be a hybrid that's permanent. So, so I think that the— we're thinking about this already with, with Facet. So We gave up our office lease last June, and we did two things. One is we kind of took the the amount that we were spending on office, and we allocated a budget to our home workers to say, you know, build a really nice home studio, get a good camera, you know, get a great chair, however you want to do that. So we kind of took that budget and allocated it to people at home, which I think is a really smart thing to do. And companies that are remote first are going to be thinking about how do you make that. Distributed, that remote environment more effective and pleasant and comfortable rather than buying snacks in the office, right? So that, that's going there. But there's also something that's really powerful in human face-to-face interaction. And, you know, conferences didn't go away as people were, you know, getting more and more remote. So our strategy and my thinking about this is that you're going to get like short amounts of intense time where people do things together, like bringing teams together for a week to do a hackathon or do a product sprint or to do something where they not only get something done, but they also develop those relationships as interpersonal. So then when you're remote, you're actually— you remember, oh, you know, Jennifer and John and Jim, we did this thing together and we built something, and then it makes the rest of your relationship that much smoother. So my expectation is there's going to be a kind of A hybrid of short amount of intense time where teams spend together, but the vast majority of the time is still going to be remote.

All right, Patrick, let's hit pause right there. But coming up in part 2 of my talk with Patrick McKenna, the founder of One America Works, Patrick will tell us more about the companies he's founded, plus he has some important advice for startup entrepreneurs.

Here's my 4 questions as an investor when I'm thinking about investing in entrepreneurs. And this is the questions I think you should think about when you're starting a business or you're talking to an investor. And this is specific to outside of Silicon Valley, actually. So it's why this, why now, why you, and why here?

Learn more about the BOSS Business Operating Support System at bossstartupsience.com, or you can reach Gregory Shepard at gregoryshepard.com. This has been a production of Forbes Books.