Episode 28 | Part One: Investment and Growth

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. Joining me today are Jan Arp and Elizabeth Lott. Jan and Elizabeth are managing partners at The Holt Exchange, a global seed stage venture capital fund investing in fintech business application companies across the globe. Holt is powering innovative tech products, world-class companies, and entrepreneurs, and helping shape the future of their businesses. Jan, welcome to the podcast.

Wonderful to be here, and thanks for the invitation.

Oh, you're more than welcome. It's an honor. And Elizabeth, thanks for joining me today.

Greg, always a pleasure to have a conversation with you.

That's very nice. I feel very honored about that. Elizabeth, I wanted to start out with your location. So Holt Exchange is based in Montreal, and I've spoken to several entrepreneurs based in Quebec. For folks not familiar with your city, how and why has it become the Silicon Valley of Canada?

Well, I think there's a 2-part answer to that, Greg. And I think first of all, a little bit of history. So our anchor investor in our fund is the Holden Family Office. Now Holden is Holt and Dunn combined, and the history of the Holt family in Quebec has been significant. Sir Herbert Holt was really Canada's Rockefeller. He was 35-year chair of Royal Bank of Canada, which is the 3rd largest financial institution in North America. He was the founder of Hydro-Québec, which was nationalized in the '50s. Today, that returns $2 billion in profit to Quebec citizens. Opened the Ritz-Carlton here. Basically directed over— directed, managed, acquired, invested in over 300 businesses. So, as part of foundational of our anchor investor was really building, being the next generation of builders around fintech based out of Quebec. But we are a global fund. But the important part about being in Quebec is Quebec is unrivaled in its appeal in terms of investment. Over $2.7 billion in venture capital invested in Montreal just between 2018 and 2020. Focusing on fintech, we have over 3,000 companies in finance in Quebec alone. We have an impressive IT sector, a huge pool of skilled workers. Today we have 27— 7,000 workers just in AI-related skills, 14,000 university students in AI-related programs. And we're the number one location in Canada for university research funding as well as world-renowned experts in AI, Yoshua Bengio, Joel Pino, I can go on. You know, large organizations such as Google, Meta, IBM, Microsoft have all opened up innovation research centers here in order to take advantage of this. And really, it's one of the most cost-advantaged places from tax credits. Now, our aim really in terms of investing in companies worldwide, yes, it's certainly the ability to bring technology into Canada and use Canada as a conduit into North America, but it's not our only aim. Our aim is to really look at top technology around the world.

I mean, it sounds like not only is Quebec an anchor, but Holt Exchange itself is an anchor in the area.

Absolutely, yes.

Jan, talk to me about founding the Holt Exchange and how you and Elizabeth partnered up.

Yeah, it was a great opportunity. The 5th generation family, I'd say led by Brendan Holt Dunn, was interested in giving back to the early-stage fintech community and a family whose legacy is financial services and understands that, sought out myself who was also eager to push the Quebec Canadian ecosystem forward. So that's kind of how it originally started and how can we level up and better seek a global pool of candidates to better fit into the ecosystem there. What we recognized is that the early-stage funding side for startups, there's a big gap, right? Most investors at that stage still look for profitability metrics, almost like Series A style companies in terms of the way that they look at them. Before you get there, you need to go through the seed stage. You need to have exploratory capital to be able to build the stuff, to be able to eventually get there, get your first customers, to make yourself more suitable for those future rounds. And so what we sought to do is, okay, well, how do we find those early companies, find those individuals, a team? And some of the biggest challenges then is, of course, trying to assess market timing.

Yeah.

So we said, well, why don't we build ourselves a big pool of experts and advisors that could support us in this journey? Elizabeth was actually one of the first, very first ones I had spoken to, and we had great conversations about how the vision of what we could build could better support, you know, the early-stage startups that go through this journey. And as we did that, we built a big pool of these advisors who have a range of expertise from The big buckets that we like to look at is product, market, financing, and team, but also in different vertical markets in finance. I mean, as a generalist, if you're in finance, and as we did that, as we then we built on the other side a way to really scout all the top companies that could fit into that network and started building sort of these matchmaking algorithms to better understand which ones would be best suited to partner with them and getting that initial network lift. Which essentially actually proves for market timing, right? Whether they can get customers, whether they can get investors, and whether they can get other experts to support them. And so with that journey, Elizabeth was a key advisor through all of this, where eventually, probably the longest sales cycle to become an investor, I'd somehow convinced to say, hey, why don't you put some capital in and join us and get more vested in that? And she said, hey, well, if I'm doing that, I want to be at the got the seat at the table with you, driving the ship together, and joined as a fellow managing partner. And here we are entering year 5 with a portfolio of over 35 companies, entering into pulling some more and supporting some really great breakout companies and having a lot of fun in this journey.

Let me ask you a question that's a little off here, off the normal path, but I'm really curious about this. When I look at the early stage, so pre-A round, early stage VC, private equity, angel investing space in whole, that part of the lifecycle. I see companies that are what I like to refer to as value creation. These are the companies that are pre-revenue, and then value capture, the companies that are post-revenue. And what I'm noticing is that, you know, if you look at the acquisition space, the companies that are out there acquiring companies are basically outsourcing their innovation, right? I mean, they're starting accelerators and they're investing into companies out of accelerators, And pretty much their whole innovation has been outsourced. So the value creation part of that's been outsourced. The value capture part of it, it seems like they are out there trying to acquire the companies as they head into that. And I'm just curious, in your space in fintech and in Canada and all around the world that you guys are invested in, are you seeing something similar to that? And I'd like to get an answer from both Elizabeth and Jan, if that's possible.

I would agree that I liked how you sort of framed the dialogue there. I mean, another way to look at this on the innovation cycle, if we're referring to kind of financial institutions and their increasing appetite to work and partner with startups, has certainly substantially increased. Generally, one of the best models— I mean, we've studied a lot kind of the open innovation models, and there's various ways of doing that. One of the best ways that tends to work is on the funding side. So, these turn into like the CVC, corporate venture capital arms. A lot of the times, they prefer to sort of play at the Series A or later stage when they're making and cutting their checks and investments. So, it's harder for them to kind of play at the seed. So, that to your point is the value capture side of things. And as a bank, it's just how the business model is set up. Like, they're trying to de-risk things and, you know, is a 10x or 100x return as appetizing as de-risking or minimizing the downside?

Yeah.

You know, these are very costly endeavors to onboard a startup and work with them. It's not just the cost of the pilot, it's the, you know, you have to have the implementation in mind. And these are hundreds of thousands, if not million-dollar projects when they're kind of all said and through. So, generally speaking, they tend to prefer at the later stage. But that's not always the case, and I think there's a lot of great innovation that gets overlooked and missed in those types of opportunities. You know, when you're working with some really— the value creation side of things, you're getting insights into the full universe of what's possible. And so this can feed your own product roadmaps. It can also support the way that you're training your individuals, your organization, and motivation, because many of them are excited to— your employees and staff— to work with these early-stage startups and have that sort of startup mentality. And culture within your organization. And let's face it, talent is incredibly challenging to come by at this time. So, and we're starting to actually see acquisition of companies so early, and it's a bit different of just the organizations, these companies super early at the seed stage, purely just from a talent play. So that's the other model there. I think though, regardless, as a— if I'm a big financial institution, I mean, obviously diversity and diversity in your innovation approach needs to be considered. And so, on that note, I would strongly suggest— I do think the corporate venture arm and the funding and financing arm is proven to be one of the best, but you should be looking at omnichannel approaches and doing direct investments in yourself, looking to invest in other funds, and making sure you're covering various stages so that you're not seeing the surprises and you're tracking the trends because things are happening so quickly. Like now, Every year there's a new theme, right, that you need to be up to speed on to be able to make sure that you're getting in front of it and to protect yourself. And so, you know, I think you make a good point to say that value capture is where they spend a lot of time, and I think value creation is overlooked, and we play a part in solving for that.

Those are some great points that Jen raised, and I really come at it from an operator side, having been in the operating side of a fintech moving to significant revenue size. I think in the innovation side and lots of great innovation labs and we certainly partner with corporates in order to look at that. There's an element of, and this really comes from my corporate life, whereas there has to be a change of the business model internally to take advantage of innovation. I think a great example just even one of the last corporates I was at, we had tremendous amount of great research internally and basically entrepreneurial-level projects But we couldn't get them to market because basically, you needed to be at about $5 to $7 million in revenue to be able to be dropped into the distribution channel. And banks face a lot of the same issues, right? Like they can't just offer an early-stage product, get feedback. They're dealing with very sophisticated channels and distribution models. And so, this is a really kind of two perspectives. And where I see it—

It's like a chicken and egg kind of deal, right?

It is a chicken and egg.

Yeah.

I could think of Autodesk at the time, right? We'd end up going and buying a competitor who was more advanced from a revenue side versus the team that had been working internally on this for 3 years. But because it fit into the channel model. So, there is that different perspective. And where I've also seen out of the corporate innovation elements is that ability to look to say timeline, right? So certainly, from an earlier-stage company, and I'm going to say even from Series A to Series B, is perspective. What 3 months of time in an early-stage company means is equivalent to about 3 years in bank years, right? Like that comparison between dog years and human years. And so, how you find that in-between stage in order to be able to nurture innovation in the organization, take advantage of it. Initial conversations I had with large financial institutions as an operator was, We love your product. We want to invest but we want an exclusivity. And I was like, well, geez, exclusivity is where you go to die, right? And so, there's a lot of maturity that I've seen happen over the last 3 years of working with early innovation companies where they see the need for acceleration versus exclusivity so that they can help accelerate that company. So, they'll invest and maybe not use it internally but invest it to get it to a market size that now it makes sense in order to do the internal changes and processes to be able to take that product to market themselves. So, lots of moving parts. And I think we play a big part in that, especially with all of the advisors from financial institutions who participate really in, you know, overall in our selection process, our innovation process, who are getting a much broader window on opportunities of how to change things internally in their organizations.

So, Jan, you're currently invested into over 30 early-stage Canadian and international fintechs. So, I have a 2-part question on this. The first question is, why fintech? And the second question is, we've all been seeing this feeding frenzy that has happened over the last 12 months lead to a tremendous number of overvaluation companies, right? We were seeing 2 unicorns a day for a while, and then now the decacorn is the new unicorn. And a lot of these companies are starting to experience some serious overvaluation from investors, have been going out there quoting huge valuations, getting big rounds in, and that sort of stuff. And so I'm wondering if you think, first of all, why fintech? And do you feel like this overvaluation trend that we're seeing that happened post-COVID, the buildup and everything that led to it, do you feel like that's going to affect fintech as well?

Great question. Sure, maybe I'll just start with the first one, why fintech? I mean, me personally, I mean, maybe I'm just justifying my own existence as that's all I've studied since I was in school way back when. But more seriously, I think there's no greater way to have an impact on this world right now. It does make me think of the times when my early days and we used to do these pitch competitions and there's streams in the healthcare sector and then the one in finance. Healthcare sector would always win, right? In the sense because it just sounds better. You're saving lives, right? You're having a profound impact from whereas fintech you're saving people money, right? Profits. It doesn't come across as sexy. However, you know, if you just look at the flow of capital and where most of it resides, you know, ten percent arguably in any economy, it makes up directly ten percent of the economy and indirectly substantially more. It's the lifeblood of How everything sort of functions here, so you can have a substantial impact by being able to move the flow of that capital. So keeps me very motivated to maintain and continue there. And there's just a lot of money in fintech, meaning if you can shift pockets and pools of capital into it, you can obviously get to work and make things happen. You know, we joke that in startups, you always want to show— it's about showing your market size in Bs, right? Well, in fintech, it's about Ts, right? Trillions of dollars of opportunity in some cases, and it's just that large when we're getting into some of the areas. Now, to the point though, are some of these Ts overvalued, right, in terms of market size? And, you know, is this going to continue? There certainly is a market correction that is occurring, and that is, you know, having a large impact on the industry right now. We're seeing it with our own portfolio companies trickle down to the early stage. There is a bit of a tightening of capital right now as people have a bit of a wait-and-see approach. You have situations where, you know, I'm speaking more on the early side, but I think it does reflect it, when they're going to invest, well, their portfolio is down, so meaning their startup portfolio, if they're heavy investors, is a substantial larger portion, so they feel like they have too much invested in the space, even though it might be still performing well. And or on the other side, they just don't know what's happening and they just kind of want to wait and see and we'll have that rebound. So they just don't have the same level of capital to be able to invest in it. So there is certainly a wait and we've actually seen this before too, right? We've seen it when COVID first hit. So there was that pause in time. So we'll see how long this will last, but certainly there is increasing pricing pressures for startups to kind of double-check themselves and see where they are in terms of their valuations. And we've seen it with their own portfolio companies. Now, that said, great companies are still going to be able to break through the noise and invest. And so they're going to be able to raise capital, and they're even going to be able to raise at solid valuation rounds right now. That will continue. And we're actually seeing certain areas a little bit more aggressive that still remain, the price of business to get into the metaverse or Web3 or however you want to call it, it's still commanding substantially high valuations right now. So certainly, there is a correction, which I think has been needed, but ultimately, there's still a lot to build. Once you get into the nuts and bolts of all the problems, and there's still a lot of true great business models that are being built right now, it's still a very exciting time. So while I do think there's a bit of correction for some, It doesn't mean— I don't think this is by all means the end. I think we're going to just have a shift over the next couple years and there's going to be a surge. And as an investor, it's a great time to invest if you're investing right now.

Yeah, I agree. I think that it's just a normalization. There's always that big buildup and then a normalization. And then during the normalization, there's another buildup and it just keeps flowing that way. I'm wondering, Elizabeth, When I look at the overvaluation situation right now, and the podcast has both investors and entrepreneurs listening, and for the entrepreneurs that are out there, how do they understand if they're getting overvalued and how do they project that as a leading indicator to prevent it from happening, even though they may be getting pushed from the investor side to take more capital on and take more capital on? How do you look at that from an entrepreneur side and make sure you don't fall into that category?

I think that's a great conundrum that's happening today.

Right.

I think the element, you know, everybody always says take as much capital as you can, you know, build yourself long runway. But it does have an impact in the longer term. And I think there's an element of building solid valuations, solid valuations, you know, clearly substantiated by recurring revenue versus forecasted versus market opportunity. I think the element of the ability to price yourself out, the primary thing, I still say to investors, money is great, but strategic investment is what's really more important. So, that ability as to what's going to open up new markets for you, what is going to provide you the right support, and take that into consideration. I think also, we're in a unique position because we scout globally. And I think part of— we had talked about discussing how we actually do that.

Yeah.

And I think to the comment Jen made, because we have the opportunity, sure, there is unique technology. But in general, there's a lot of the same things happening, just being implemented differently. And what makes that difference is team performance, runway, and ability to implement. So, we've seen certainly very high valuations coming out of North America. And we'll go looking at comparable technology in other regions of the world. And so, you know, part of that discussion really looks at, you know, how we've amalgamated all of our data together to say, okay, you know, roughly same technology, you know, roughly same stage of market, very, very different. You know, I mean, we have investments in New Zealand and Switzerland and UK and Portugal where we've looked and said, yeah, you know, I mean, there's definitely an advantage to investing internationally and having that as a strong comparative base. And I highly recommend that founders really should take that into consideration and look on a global basis, you know, in order to get a better feel of where their valuation should be and not have it run away on them.

So I've heard also that you have about 3,000 applications for funding over 75 countries, right? And you guys invest in the top 1% of those applications globally. I wonder if you could walk through the process that you go through to choose that 1%?

Sure, and I think I'm going to take a step back on how we got to looking for that 1%. I think, you know, Jan and I certainly looking at what we were doing with Holt Exchange, how we could be different. We looked at the impact of technology and especially in the hedge fund market, right? You know, algorithmic applications in order to be able to significantly decrease the amount of research work in order to build out signals. And we said, you know, Really, the venture market has not been revolutionized or disrupted yet by data. And here we are investing in all of these great enabling data companies that how can we actually look and build it in order to have an impact on VC? And so, part of that was looking, you know, significant amount of effort spent, you know, probably most VCs spent 80% of their time scouting for the right deal. And so, how could we simplify that? And we looked and said, huge, huge pools of data. And I'm going to go back to my very first statement about why we're located in Quebec. There's a 28% cost advantage in software development over other large metropolitan areas in Canada and the US. So, we actually have a whole arm of our company that is a software development organization that is building out the algorithmic basis on how to scout the top companies in the world. Part of that is building out where we look at significant key indicators on a global basis. We look for year-over-year changes. We can track a company 3 years and the signals might not be right. And when those signals are great, then we're like, okay, time to get an application in. Or we might be nurturing an application for 3 years. And I kind of shy away from the word application because we're not a We're not a traditional accelerator. We're a fund that invests early and then strategically de-risks that investment in order to prepare for the opening of their larger seed round. Different than where I considered community-based acceleration programs where you have a lot of external funding coming in. This is us, the LPs, paying for this. And what it allows us is this competitive edge to get in early. We also have a whole series of investment partnerships all across the world who work with us on de-risking these companies. So, it creates great deal flow for them. And the other one is why we say an application. You know, every investor is going to say, geez, you know, I get over 1,000 decks a month, right? How do I— you know, every deck's a little bit different. By actually having a very standardized process, we get to compare apples to apples really, really well. And we get to look for indicators in those apples and how well the orchards are doing, In terms of where we're picking our apples, and then with the data play of our 500 plus advisors, every element that they do is codified. So we you know we do specific matching in terms of skill set. We are the Match.com of fintech and early stage companies on bringing the right level of advice at the right time, and it's a really good mutually beneficial relationship. You know the advisors get to see a lot of great early stage. technology. They get to contribute to the growth of an organization. And, you know, most recently, a number of our advisors have also become LPs in our fund. So, there's even that further push to see this overall success in our model.

I wonder, Jan, you guys get a lot of investors looking at deals and there's a lot of hearsay about, you know, the horse and the jockey. The horse being the business, the jockey being the entrepreneur. And I'm wondering your thoughts on one side, one camp is sort of like, oh, it's all about the jockey, and the other side, it's about the horse. Either way, it seems subjective. So I'm wondering what side you fall on and why and how you look at the other side for those entrepreneurs that are out there listening.

Great question. But I would bet probably majority, the simple answer is, especially for the stage we play, would say that it's all about the team. However, the longer answer in my mind is that everything's a scale and a moving scale, and then how do you weight that scale for different whole bunch of criteria? Like, just even think of like a personality test, right? And how you get to properly assess from that sort of vantage point. I think it's a good comparison, and we look at that when we're building our models. And what it does, it helps us to actually really think through, well, what does make a good founding team, right? And how much weight should you put into that? Because you can't take any really indicator on its own. And just like anything, when you take that indicator, it's a sample of time. So how is that through time, right? Because things are bound to change, especially when you're looking at kind of team dynamics. There could be reasons why the team is not performing at its best at any given moment, yet could be performing later on better later on. And so, like, you know, how do you identify how a good team can prioritize well, right? I mean, that's key to a good founder, the ability to understand exactly what to do and when in certain circumstances when they haven't been doing the right thing, do a big thing called a pivot, right?

Yeah.

Do they have things where they can take feedback or continuous learning? Versus being stubborn. Yet the challenge, of course, is a founder needs to be somewhat stubborn, stubborn in the right way, right? So how can you identify between what is the right and wrong way here, or have what we call kind of that founder-market fit, right? Which can go beyond that. It's part experience, it's part network, and sometimes you can see a lot, you can pull a lot of data to already help you with the decision to better ask better questions, to better validate these points, or do they just have that sort of unrelenting passion for where they are right now? So that's kind of part of it, right? But in some cases, you can have a great founder, a great team, and they're just in the wrong market. Will they be able to pivot hard enough to be able to find their way, or do they really need to ask that tough question and shut down? I know I've personally been in that situation where we were working on something quite early stage and having that conversation of, After X amount of time going, you know, all we invested, and you feel like it's your baby and you're trying to make it work and say, no, this is no longer working. We like this. We just got to, you know, we got to come back with a completely new area. And that's not easy to do. And so some cases founders could just be in the wrong market. And so that ties back to your other point, whereas now an earlier stage, there isn't usually tons built either. You just hope they have the right market and the right tailwinds.

Yeah.

And you're betting on the team, and you're hoping that what you're betting them on is to create optionality to eventually kind of really pinpoint their product-market fit. And what we do find sometimes is how early we come in, the next-stage investors are really pushing them to just say, what's the one thing you can do well? And I get that, your North Star metric to be able to do that, but sometimes you're just so early, you kind of need to have a bit of more exploration in that capital to uncover where it is in a profitable fashion. I'll give you one example. One of our breakout companies, Owl, in this story, had a suite of products. They had a— just with your name alone, they can get up to 70 data points, and they're able to pull it. They don't store the data, which is great for financial institutions, don't have to worry about hacks. And they eventually— they first started pitching as a supercharged sales bot, but the unit economics weren't as fantastic. The sales teams weren't as eager to pay for it. They said, well, how about augmented due diligence? Because you can use the same thing as you're going through and reviewing, you know, who should be— to making sure that from obviously KYC and AML sort of product, very enticing, especially nowadays more so than ever. But they actually eventually settled on fraud and insurance fraud at that. And if they didn't have the time to explore, if they really overfocused in any given particular area, they would have missed the area where they can charge hundreds of dollars per search versus dollars a search. And that's a 100x multiple. And now, and it's been such a need and the sales cycles are short and they're doing fantastic. So, you know, just sort of to say, how do you find the right founding team? How do you do it? Be able to support them in identifying their markets, but making sure they're not too far off. But yeah, it's definitely for me a combination and leaning towards team, but ensuring they're in the So the entrepreneur, the jockey in this scenario, is ever-changing, right?

I mean, it's a different person that you need when you're in the vision stage and you're trying to get through ideation and find that product-market fit. You need this creative, outside-of-the-box thinker, but then later on, you need an operator who can actually sit down and prioritize, to your point earlier, and focus on what needs to be done. And then you need somebody that can manage a team and manage investors and Moving down that. So when you guys are working with these companies, Jan, do you help them develop and evolve into the different types of personas they need to have as the company moves down the lifecycle?

Well, we certainly help them surround them with the right cast of people, right? So we have now over 500+ advisors. And so what we've understood is life for an early-stage startup is frame of either they have a product problem, a financing problem, a market problem, or a team problem. And we try to then prioritize, build frameworks or processes around that, and then introduce them to the right people to support them and push them through to the next stage. And that sort of thing, from my perspective, just sort of repeats. Of course, you can drill down further in those 4 big buckets, but it sort of repeats at the different stages, but the network that you need sort of There's different, obviously, funders and investors. It's a food chain, so you need to find the right people that are around it. So we certainly help them with getting them and filling the gaps and the right tools. It's important that as we work with them, we do ask them questions about the culture that they're building and where they want to be and what role they do want to play. At some point, you can't force someone into the role that they don't want to be in either. And you still— I mean, you mentioned you can't shift from a vision to an operator later.

Yeah.

You still need the vision. You can't cut and go purely into the operations. Otherwise, the longevity of the company is just not going to succeed, right? It's kind of like the— in my mind, the finite mindset versus the infinite mindset. And so, it's just about identifying. It's for sure when you're early stage, you have to do a bit of everything. But as you advance your roles, there certainly gets more specific and it shifts more into obviously delegation, that's for sure, and identifying where you want to, but then building the cast around you. In the beginning, you're kind of doing it all. You're first having to get the company its first million in terms of revenues and then you're raising money and it's doing the fundraising from that standpoint and then making sure it's all operating. But through time, you are shifting. So, we certainly do try to support them in identifying where they want to play and then find them the right people to coach them and train them there and then build their teams accordingly through that advisor network.

Awesome. Thanks for sharing that. Okay. I hate to do this. But we have to stop right here. But coming up in my conversation with Jan Arp and Elizabeth Lott, the managing partners at the Holt Exchange, Elizabeth tells me why she loves fintech.

I think all across the board, everybody is going to be looking at implementing technologies that allow you to meter by the second in terms of, you know, how you bill, how you charge, how that experience moves forward. And so I look at, you know, revolutionary technologies like blockchain that are going to enable you to do those things. And so I really feel that, you know, we're investing in probably the biggest platform change that's going to happen over the next 5 years.

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.