Episode 28 | Part Two: 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.

Welcome back to my talk with Jan Arp and Elizabeth Lott, the managing partners at the Holt Exchange, an AI fintech accelerator that's helping partners navigate success through their investors and associated network of financial institutions. Elizabeth, in part 1, we talked about the horse and the jockey. Early-stage investors have been arguing about this for years. Do you bet on the entrepreneur, the jockey, or the business idea, the horse? And for many of us, we're looking for businesses that can scale and become meaningful. What factors do you consider when it comes to the potential scale of a company?

I think so much does play in terms of The individual. And I think, you know, you highlighted very well the jockey or the horse. I think as a horseman or horsewoman myself, you know, that ability— I've gotten on a lot of stubborn horses or difficult horses. There's not a lot of great synchronicity, but, you know, I might've got them over the jump. You know, the beauty is when you get the right horse and the right rider together, you know, that's where you hit Olympic gold. But both of those can be trained for.

Absolutely.

I don't think they're innate abilities. I've also, you know, I'm going to give you a plug here, Greg, because I do love what you've done with the Boss Startup Science. I know that one of our portfolio companies as we were going through due diligence and looking from an investment side, just even kind of going through the methodology in terms of looking at how you present yourself.

Yeah.

I think that ability to go into scale-up mode It's like boot camp training, right? Like that ability to constantly be on your game. And I think to the point of moving from being visionary, being an operator, and trying to do both at the same time, I still think where I look across all of the portfolio companies and you can just never do enough of this, right? Which is that ability to be asking questions. My favorite is if you want money, you ask for advice, right? You're basically going to get a lot of it. So, that element of there's not— I think there's a big gap. The biggest gap where I see so much isn't team, isn't market fit, isn't technology. It's in product management. Product management is the mini CEO of the company. And that ability to really hunker down on that expertise in product management. And you can hit the job boards and see between Google, Microsoft, Recruiting for top talent in product management is really, really difficult. And it's hard for earlier-stage companies to get that talent. And so therefore, where do you get help in that product management side? Because so much of what's happening around market fit and really listening to where potential customers are coming from. Henry Ford, right? If I listen to my customers, I would have given them faster horses, right? But you have to find that. that in-between of how you push innovation without total disruption because it's really hard to get adoption when you have total disruption. So, you have to constantly be sensitive to that. And I do think there's a methodology and you have to kind of continuously reevaluate from that product management side on fine-tuning my fit on a continuous basis. And I think to Jan's point, even talking about Owl, and I think really great founders have that ability to find great product management fit and build the organization and how they grow around that.

So, let me get into that just a little bit with you because I am passionately in agreement with you. I think that, you know, I did this long study of why entrepreneurs fail and it was like this big 5-year thing. It was hundreds of thousands of pieces of data and the product thing came up Every time, right? So I'm in violent agreement with you on that one. And when you look at product and you're out there and you're having these conversations with people and you think about why they're failing due to product, right? So because you're so passionate about this, I'm going to aim the question directly at that. Why do you think entrepreneurs fail at the product stage? Like, what are the variable reasons that cause that to happen?

Well, I think Jan highlighted that really well, right? In the sense, you've got to be a bit stubborn because if you're trying to disrupt a market, there's going to be resistance to that, which is, oh, this doesn't work. I don't like the way that— I don't see it. So, you have to really push that vision through. But adoption is the most important element. And so, you have to kind of mold through that. But I love our portfolio companies and we talk to a lot of early-stage, but I'd be like, Have you had a thousand conversations? And in most cases, the answer is no, right? And so, how you actually slice out, you know, carve out time. So you've got time that you need to be talking to investors, but you really need time to do you know that that that product fit into potential customers on a regular, you know, substantial basis. And there's just not enough of that. And and how you take that feedback. And at the end of the day, we did a really great exercise with one of the corporations I was. with where we went through and had listened to all of these features and functionality that people wanted, which also can kill an earlier-stage company. You get involved and all of a sudden, feature scope comes out and you're delivering to one client and you're just bottlenecked. That ability to really price out what functionality is worth. Would you pay an extra $1,000? Is this $200,000?

Right?

Like to quantify their need in relationship to your ability to monetize it. And really good product management does that exceptionally well to be able to say, here's what's core. Here's what's core that we need to focus on to succeed. Here's what's periphery that might open up a broader segment of the market, but really finding that core deliverable.

Yeah, maybe just building off some of Elizabeth's point then and getting there is kind of that feedback loop, right? We all know the high level, the build, measure, learn sort of mentality. But How well are you taking that feedback and listening? What is really being said? And what information do you process and which one do you cancel out? And we've seen it ourselves in the way that we grade. So to give some context, right? Before we invest in a company, we might see hundreds of advisors might actually meet our startup, right? We've done it, found a way to do this in a systematic structured process. It's value-add for everybody. They get to all meet each other and hear pitches and the startups get to meet all these advisors. So it's great. But we're collecting all that data in the backdrop there, and there's times when it's very clear that there's tons of momentum around the startup, right? And momentum is a real thing in the early stages, and everyone's kind of talking, right? It's going to be their top 3, and you can see it in the way that the comments come through and how well people understood what it is and how they can get behind it and support it. There are times when the advisors might rate the companies not so great, but when we actually dive deeper into the data, they're not understanding the opportunity. The problem that's being solved is a little more Perhaps it's not positioned well or perhaps it's just a different field that is not as clear for everyone. So you need to really weight the decisions or the information that you're taking, the wisdom of the expert crowd. You shouldn't be listening to everyone. You should be really pinpointing those that say kind of the ones that truly know and have a better understanding of what's occurring. That line is very hard to do, right? To be able to cancel out the right noise, take the right information and to adjust yourselves based on that. Especially as a founder, you have so many things going on and you're trying to continue to build and consider what to do next. So I think that's a key component. In fact, that's where we spend a lot of time. We try to be that third-party voice of reason as we dissect the data with them and say, listen, this is a recurring theme here. We tend to agree with this. We were in that meeting. And sometimes they're not even giving you the main reason because they don't want to. They don't want to deal deal with the fight that they're going to have to get into. So they might be kind of trying to let you down easy with some other reasons versus the real reasons of what's being said. And that's sort of where we try to play a role to support them and help them navigate it. And the best founders can take that feedback properly and be able to adjust and move forward versus getting defensive over it and not adjusting accordingly.

And, Jan, how do you find out about the founders' skill sets from a tactical level? And how do you grade those, like financials, key metrics, Metrics, indicators, any KPIs, valuation drivers? How do you grade those and how do you find out whether or not they have those attributes?

Yeah.

From a founder perspective, again, we try to look at those buckets areas, right? And in doing so, we put some key advisors who both have those buckets and that vertical market assessment, right? And what we're able to do is Take, you know, we'll start with the deck and we'll sort of build those questions from there and put them, that sort of information in front of key expertise who can then add and further comment on it. And one of the biggest things that I can see is watching how the founder is able to hold themselves in those meetings with these experts in each of these markets, right? Whether it's like dealing with the way that they handle the product or the market. And so we're able to kind of get an assessment. Leveraging the wisdom of the expert crowd to be able to kind of move them through there. Now, so that's kind of more on the founder side and the character of the individual that goes through there. There's other high-level data points we can pull from online whether or not, you know, they have a strong network or how much experience that they have in the space, right? And like how much they've been referred to in the space, etc. You know, you do have a digital footprint that can support—

Yeah.

But I would not be making my decision on that alone. I think that model doesn't quite work. You need the kind of human loop to still analyze and process these large volumes of information. Of course, we're attempting to try to solve for that where you hit a button and everything is decided for us and we make the investment. But I think we're quite a ways away from that still. You mentioned other points about whether the financing, the metrics and whatnot, that's just kind of getting into the due diligence at that point, right? Okay, if they have revenues, let's look at their bank side of things and statements and how that lines up with their financial statements and how they think. But more importantly is how they think about their projections and their growth drivers. And again, so I come back to the founder of how they see where they can actually— where the market can be, where they can go with the market.

And Elizabeth, the question for you that I have is a little bit trying to pivot here to some market information. There's been this incredible growth in space. AI, medical sustainability robots, and of course SaaS is always moving. And I know that you're focused on fintech at Holt Exchange, but can you tell me what is crowded and where there is room? And are there any new emerging markets or subsectors that people should be focusing on as an investor or an entrepreneur?

I'm a big Ted Lasso fan.

And me too.

There's a Chilean, I think, soccer player that says soccer is life. Well, you know, my slogan is Fintech is life. I don't look at fintech really as a segment anymore, but as opposed to one of the largest infrastructure plays that is happening in the world today. When I see Biden fast-tracking digital cryptocurrency regulation, when I look at what's happening in the metaverse moving forward in terms of really our digital interactions, You know, we're digitally interacting today. I've lived my life for almost a year and a half now in Zoom. I've reached Star Trek level of transponding. And where we've built a deep knowledge in fintech right now is what I call enabling infrastructure. If I look at blockchain, if I look at digital currencies, the monetization of our lives in digital is really at a neophyte stage as to how people are going to be making money. I mean, look at Netflix, just took a major, major hit. Yet, you know, they have significant eyeballs, but, you know, improper monetization as opposed to, you know, they lock themselves down to a single subscription model as opposed to looking at how people are interacting with that content and the ability to upsell and downsell with the real value of an entertainment experience that they're providing or a shopping experience. 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 how you bill, how you charge, how that experience moves forward. And so, I look at revolutionary technologies like blockchain that are going to enable you to do those things. And so, I really feel that we're investing in probably the biggest platform change that's going to happen over the next 5 years.

Jen, I have a question for you that just popped in my mind here with regards to the failure of these entrepreneurs, the data shows that the majority of the failure actually happens in the first year post an accelerator. Why do you think this is happening and what would you say to entrepreneurs to avoid this landmine?

I mean, it's a great question. I would say— think that it might be attributable to the fact that there is an abundance of accelerators, incubators now, and their range— I mean, everyone's an accelerator. In fact, we actually stopped calling ourselves that a while ago. We got tired. I mean, we are a fund. We just believe in a structured systematic approach to venture investing is the future. So naturally, if you have all these ways of pulling and everyone's pulling in all these various companies, it's also just the next stage, right? Like the failure rate from getting from seed to Series A, right, you're gonna see about 90% fail, right? So we're just getting to that big one and then continue on the path there. So is that just a natural evolution there? Is that part also, you know, needed? And is this— are these accelerators playing sometimes a part in accelerating the failures so that they can come back into the ecosystem and refocus on their areas? Or are some of them not adding the value that they could be doing in many cases, right? Versus, you know, kind of picking some really great companies and providing more substant— like the network that they require to kind of move the needle forward, right? There's still a gap. It also has to do with just when people like to invest. The stage, I mean, seed stage is a very different type of investor, although some would act like a— that's what I was kind of saying at the beginning of the podcast. It's like the— There's so many seed investors who act like a Series A. investor, right, who expects Series A sort of metrics. And so it's more challenging.

Oh, 100%.

Yeah. So it's hard for startups to even kind of get the funding that they require to survive, to be able to even execute on some of the stuff that they want to do in this particular case. And so there are still sometimes the funding issues. But I mean, yeah, I think naturally there's just— while they come out of an— it's not— I don't think the accelerators are also causing the issue. I have seen it can. There can be a lot of distractions and we've actually— we get pushback sometimes saying, hey, well, we don't want to go through this program or your diligence process is long. And I'm going, shaking my head going, I don't understand. I'm going to introduce you to 100+ people. I'm going to match you with people that I think are going to be your customers or your investors. Where else do you get this sort of handholding? And they're kind of getting pushed or jaded. They don't want more workshops.

A vetting point too, right? You're sitting there going, man, if you're not even willing to go through this, how do I know you can start up a company and go through that? It seems like that would play into—

Agreed. In many ways it is. However, what I've also known, as long as I can get on the call with the founder and then have that conversation, the best founder, that's the feedback loop. It's going, wait a minute, let me resituate my beliefs. And I understand that what you're offering me is actually very advantageous. I didn't think of it that way. You're right. It's not a long due diligence. Process. You're literally— you're just— you're actually working for me in the interim and I'm getting this free ride, this free value. And at the end of it, hey, they're going to even give us some capital for, you know, and then they're going to further be invested with us, which means we're going to be more incentivized to do more of this, more working together in the future. So, but again, I think the issue is because there's been so many incubators, accelerators with so much just like, you know, types of the same material. Like when the first— it reminds me of The Lean Startup when it came out and I bought into it too. Go speak to 100 people. Fill in the business model canvas, all that kind of stuff. I think that they try to oversimplify how hard it is to actually build a startup. And it was great. I believe in structures and frameworks, so don't get me wrong. But I think many just got kind of tired that of all the— there's too many, too much noise out there, not necessarily the great value add to support the companies and what they really need.

Yeah, I agree with you. I think I see, you know, we've studied this so thoroughly and I had to do it for the book as well. And I was just blown away by, you know, how many folks there are out there calling themselves an accelerator, but they really don't have the chops behind, you know, what it would require to really accelerate a business, you know. And I agree with you. I think it's, I think it's, you know, going to be interesting to see what sorts out over time, you know, those that are real like you guys who are actually providing the things that are necessary for these entrepreneurs to get a springboard, and then those that are not doing that, basically. You guys are unusual too. I mean, I've talked to Elizabeth and even in this conversation, knowing what I've done in the space to research all of these accelerators, 1,272 accelerators, and then learning the way you guys do it versus the way a lot of the other folks do it, the advice that I would give to entrepreneurs is you need to pay attention to what they're offering. Along those lines, I want to ask Elizabeth a question. You know, your bread and butter is investing into these fintech companies. And in this conversation, I keep hearing about this like war on talent, right? And the shortage of tech talent. What's your view from where you sit on how that affects which companies you actually invest in?

Well, I think a core portion of what we look at from the investment side is going to be the the OpEx to be high-performing. There's no doubt that if you're located in some key cities in North America, you're paying $150K to $200K for top development talent. So, the ability to look, which is we certainly collaborate with our companies to look to, say, establish development organizations out of Canada. Very, very favorable environment. in terms of credit and partnership and access to funding grants in order to be able to develop. So, that's certainly back to your— I get the first question, why Canada, why Quebec? I think the ability to look at collaborative development, really, really great founders are looking to say, how am I going to build out over the 5 years. And there are a lot of really great emerging models. And also, I've been with many organizations, even myself in my early-stage companies, that ability to outsource certain portions of your development. That's no easy feat. But when it's done well, it's very, very cost-effective. And it also, I think your initial point, even talking about the founding team, right? How you go through different stages in your development cycle. Well, I think you can go through different stages in your requirements for your technology team. You've got to find that right balance. But yes, there is a global shortage of talent. And as well as, you know, I think a lot of people really enjoy the early stage. I mean, look, I think Google said they were asking people to come back to work and 30% of the company's resumes hit So I think that there's some really unique opportunities to be working in early-stage, fast-accelerating companies today. Very exciting spot to be.

The last question for you, Elizabeth, and then one more for you, Jan, and I'll let you get back to your busy day. What I've noticed is ever since this war started, Russia and Ukraine and a lot of Eastern Europe, All of these engineers are now done. And so what's happened in the Valley and in California where I am is the prices of engineers have gone through the roof because, you know, all of those engineers disappear. Now they're turning inward. China's off the, off the radar now. So you have the United States and a few other countries, India and some other places where you're trying to find engineers. And it seems like this is going to get a lot worse. As this war progresses, you know, where people are out there just trying to find engineers. Are you guys experiencing that in Canada or do you have protection from that?

Well, I think, you know, what a great opportunity for governments to be fast-tracking immigration, right? Like the talent, you know, coming out of Ukraine is incredible. And, you know, some of our portfolio companies certainly had remote teams in the Ukraine. I think that, you know, looking— talent exists everywhere. And I think that countries such as Canada and US need to be accelerating immigration and certainly making it faster. I mean, we've hired some great resources from around the world, but it is a bit slower, right, in terms to get people moved in and set up and their citizenship. So I think that collaboratively speaking, in order for us to continue to move ahead from an economy side, we need to be taking that much more into consideration, which is, you know, how do we relocate talent? And then the second component is, I think, as we move into these really virtual worlds and digital worlds and working remote, you know, the tools are definitely increasing for much better collaboration. So I think that you really can have your development team all over the world. And as long as everybody can align to a time zone and we're actually kind of playing in the metaverse with our office right now. And I like it because I log in the morning and I get to see everybody's little icons in there. And I feel more like a team. I can have a water cooler conversation. So, I think technology is definitely going to help us overcome some of those challenges on getting more talent accessible to us.

So, last question is for Jan. There's an old business phrase, it's not what you know, it's who you know. You guys have brought this up a whole bunch of times in terms of your advisor base, and it seems like a huge value add. And these advisors are— some of them, I'm assuming, are future customers or people that are going to give them information on how this fits in the product-market fit category and so on and so forth. When it comes to investing generally, how important is it Or should it be to an entrepreneur to be referred to you by one of these trusted colleagues versus just coming in through a blank application?

Oh, it substantially moves the process much, much more quickly. I mean, we're happy you can— for the entrepreneurs listening, you go on our website and you can filter through and see the list of names that are on the website. But, you know, and then, you know, how are you going to process that? First and foremost, identify which are the key ones to go after. And then how do you open with what sort of area? Everyone's super busy right now, like no one has tons of time. So how do you be able to really prioritize those and be able to get through and have the right conversations? I mean, from our side, that's where we spend a lot of our time when we're working with the different founders is really first and foremost pinpointing who's to go after and then ensuring that both parties Are interested to engage and have the time for it. I mean, life is all about timing and certain— like how you might find your— think of it like you're finding your next love of your life, right? You could have missed the opportunity because timing was off. You were too busy, you couldn't show up. So we try to spend time in understanding where everyone is and are they capable and where they can add value because everyone wants to be valuable and value-add in those processes to be able to facilitate those connections. So we spent a lot of time trying to just profile our advisors, understanding the areas, the verticals that they're in, their strength of where they give good information and how they like to engage, right? Everyone likes to engage in different ways. Some people enjoy being able to participate in the interview process. So they're kind of at the top of the funnel and they're really seeing what's out there. Others just want to wait until the end of the program, right? When they're all Properly pitched and groomed, and then they can make their decision thereafter on the top one, and that's how they want to play. So it's— everyone likes to engage in different manners, and how do you streamline that process? And again, listen to what's being said in that process, right? Like, if you've never met them before, how you can lead with a key conversation, a key point, so that way, A, you can— you're kind of on your second or your third date, so to speak, versus, you know, having to start from scratch and building off of that. When we get an intro from any of our advisors, we take that very seriously from how we consider for making that investment from our side. We do the same thing. We will look double and triple at that. Plus, we get all this background and context of a trusted source to understand so that we can ask even better questions. It's all about, at the end of the day, what is the investor doing? They're just accelerating your business. But you can also accelerate it through the acceleration of those contacts. So yeah, we spend a lot of time looking at that. I think it's It's super important and it certainly adds a lot of value.

I just want to say in closing that I have evaluated 1,277 accelerators, specifically went through. I had a team of 3 people going out and looking at them. And although some accelerator, microfund, corporate, whatever they decide to call themselves, they all are in the business of assisting startups to get from one place to another. And I want to say that the Holt Exchange is exceptional in that way. So the fact that you guys only take 1%, there's a reason for that. And that's because you get a lot of attention and that's why you get a lot of applications because you guys actually do add value. And I just wanted to state that because when I did the investigation and I looked into them, there was a lot of them out there that were charging a lot of money, taking huge percentages or both. And in the end of the day, when you ask the entrepreneurs in forums and chat groups and whatever, what value they got out of it, it was not that much. But that's not the case with yours. You know, your folks are like, you know, if you can get in, it's like getting into Harvard. You're almost guaranteed success. So kudos to you guys for what you put together and thank you for joining the podcast.

Well, Greg, coming from you, that's a pretty big compliment. So much appreciated. Love the work that you're doing. Would love to find a way that we can collaborate even more. So appreciate the time today.

Yeah, echoing that. Thanks so much. Super kind words. And I think it speaks to just how easy we kind of get along and see the big vision of the ecosystem collectively. So would love to find ways that we can also sync up and make better support those entrepreneurs. Together.

That was Jen Arp and Elizabeth Lott, the managing partners at the Holt Exchange. And that wraps up this episode of the Boss Podcast. If you enjoy the show, make sure you take a second to subscribe so you automatically get notifications of new shows when they drop. And also, if you have a minute, I'd love it if you left us a review so more folks like you can find out about the show. I'll see you next time, my friends. Namaste.

Learn more about the BOSS Business Operating Support System at bossstartupscience.com, or you can reach Gregory Shepard at gregoryshepard.com.

This has been a production of Forbes Books.