Transcript | podcast (Wisdom Board as guest)
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Hall T. Martin:
This is the Investor Connect Podcast Program. I'm Hall T. Martin. I'm the host of this show in which we interview angel investors, venture capital, family offices, private equity, and many other investors for early stage and growth companies. I hope you enjoy this episode.
Hall T. Martin:
Hello, this is Hall Martin with Investor Connect. Today we're here with Adam Smith, founder and CEO of Big Sky Partners. Big Sky collaborates with companies and their brands to develop, grow and maximize their potential through expert advice and extensive networks.
Hall T. Martin:
Big Sky helps clients to build brands and businesses that are respected, unique, global, profitable and leave a legacy in today's crowded marketplace. Big Sky assists clients through brand positioning, executive and board resources, product distribution opportunities, corporate development, strategic partnerships and capital and M&A affairs.
Hall T. Martin:
Selective in its collaboration, Big Sky takes a meritocratic approach to client relationships, utilizing traditional client advisor engagements, as well as revenue sharing and equity upside arrangements. Adam, thank you for joining us.
Adam Smith:
Thank you. It's a pleasure to connect to you today. I've enjoyed your podcast series and it's great to be a guest with you.
Hall T. Martin:
Great. And so what was your background before you got involved with early stage companies?
Adam Smith:
Well, began in early stage around 2010, actually, when technology was a little less advanced and we were in a digital marketplace. I was an investor, and so the last 10 years we've been growing that business as both an investment business and an advisory business. So nice to have both sides of the coin that we're involved in.
Adam Smith:
But now we began what was a optimistic investing business into more of a governance and founder advisory company. Our focus is mostly strategic planning and corporate governance support and putting deals together for the founders at Big Sky Partners. And that also leverages some other businesses that we own as well that are within the broader private equity and venture capital community.
Adam Smith:
I was in private equity before for about 15 years doing middle market buyouts and recaps and some billion-dollar funds, and then before that I started on Wall Street.
Hall T. Martin:
Great. So what excites you right now?
Adam Smith:
Particularly, I'm interested in the evolution of sustainability and impact investing in the early to mid stage venture companies. We have a very strong expertise in consumer products. So the ancillary areas that are exciting take into account a product or service which is sustainable. Can be at the core, it can be something that's upcycling, recycling.
Adam Smith:
Something that's unique in terms of impact, whether it has specific ESR protocol or whether it's just creating a fantastic product that's good for the world. We don't take a huge amount of risk in the seed level like others do, but as the companies get a bit more scaled, more sophisticated, more capital, then we can really make a difference, I would say, more than Series A, Series B.
Adam Smith:
So that can be wellness, exercise, fitness, mental wellness, sustainable product upcycling, even R Design collecting. And also some non-profits that are also in [inaudible 00:03:15] a for-profit model. Those areas that I mentioned.
Hall T. Martin:
What's your advice for people investing in start-ups? What do you tell them to do before they write that first check?
Adam Smith:
Well, you've heard this story probably thousands of times. I think there are different opinions, but the general themes relate to doing diligence and evaluating both the horse and the jockey to understand who you're backing as the founder of founders.
Adam Smith:
I personally like companies that have more than one founder, but if there needs to be additional resources, then it is nice to see the early stage companies have several founders, or board of directors, or advisory boards, or some sort of adults in the room that support the hectic and stressful lifestyle that a founder needs to go through for several years.
Adam Smith:
Also, the size of the market, and is it scalable? Is there enough room left? What is the markets or capture that the company is seeking to acquire within a reasonable period of time; three to five years? I also like to understand how many rounds, how much capital, how realistic are the founders?
Adam Smith:
How much capital and how much time are they looking to build a company, and how that relates to the business model? So it's important to have, for investors particularly anywhere from angel up to institutional venture capitalists, to understand is the business model going to be sustainable in terms of cashflow and when is that going to occur?
Adam Smith:
And therefore, I like to see that the founders are realistic about their timing, their needs for additional capital. I think also understanding your competition, looking at a SWOT analysis, supporters analysis is a minimum, but really going deeper into these direct competitors and understanding metrics on those companies.
Adam Smith:
Not just their names, not just to exist. They have a relevant product that really it's nice to have more data around those competitors from a size standpoint, the metrics of those companies, because ultimately you're going to be either creating a market; share market, creating a new demand, or you're going to be taking shares from those competitors.
Hall T. Martin:
So for the start-ups, what do you tell them to do before they go out to raise funding?
Adam Smith:
Have some funding before you raise funding?
Hall T. Martin:
Good point.
Adam Smith:
I think, you flip it around and of course, the founders need to have tons of passion. That passion should be directed with a sense of realism and also with patience, which can also be augmented if there is money in the bank. I say somewhat jokingly, but I've seen way too many compelling or passionate founders that really should be supported, should have the time, the resources to support them.
Adam Smith:
But whether it's extra resources like ours, or lawyers, or trademarks, registering patents, hiring people, creating a spec, NVP, even a beta site or some form of wire frames, I don't often see start-ups that don't take at least $25,000 to get to the finish line for actual funding. And even better than that would be that the founder would already have some capital, their own friends and family around before they hit the road.
Adam Smith:
I think also having a nice presentation across all mediums helps. So, not just a teaser, not just a deck, not just a website/page or some Instagram handle, but really trying to have everything lined up and consistent around the brand name. The social media, intellectual property, not to mention trademarks that should be either prepared and fully diligenced, if not started already, if not completed prior to hitting institutional capital. Of course, I've come back ...
Adam Smith:
I come from more institutional investing, so if you're coming in as an angel, sometimes you can take more risk and you're willing to be a bit more lenient on where the company stands. I think and a final comment would be, there is such a explosion of entrepreneurial-ism and creativity, innovation, technological advancement, empowerment tools that the more that this may pose e-commerce digital revolution continues, the pace will speed up.
Adam Smith:
And if there's entry, will be changing. So having just an idea to run with and get investors capital is increasingly tricky and insufficient, I think.
Hall T. Martin:
Great. That's good advice. So, let's talk about the state of investing. How do you see the industry evolving and where's it going?
Adam Smith:
Well, fortunately, it's here to stay. America and the world needs risk capital, other than emergency loans from the government or family capital or institutional capital. It's essential that the venture capital ecosystem is vibrant and supported, both from policy and tax, but also philosophically capitalized. So I don't see that changing.
Adam Smith:
But I do see that technology and digital tools will start to explode, I think, and both cannibalize and also compliment the traditional venture capital source of funds into a bit more of a digital landscape. So the development of marketplaces, way back to looking at Kiva, looking at FundersClub, through to AxialMarket, Sharenet, iCapital, of course AngelList, then there's syndication model.
Adam Smith:
There's tens and tens of online incubators, accelerators, marketplaces. I personally find some of these larger platforms to be very inspiring, very important, including Kickstarter, Indiegogo, AxialMarket, GoFundMe. These are really powerful tools, as well as AngelList.
Adam Smith:
So I think the digital access and platforms will become more and more vital, which raises the question of how they use their artificial intelligence and what type of diligence is incumbent upon the investor versus the platform itself.
Hall T. Martin:
And so what's the biggest change you think we'll see in the next five years?
Adam Smith:
Well, let's say, non-traditional venture capital funding now in terms of using online platforms, particularly since the Jobs Act has been created and both improved, as well as the SEC accredited investor definition has also improved less recently again. So those create more agency risk; more risk for the broader investor community.
Adam Smith:
But I think it's also a democratic model and people need to take responsibility for their own actions. I can't rely upon the government's safety net to provide both the risk protection, but also the empowerment at the same time. Those don't necessarily coexist well together. So, I think the online platforms will take 20%, maybe 30% of total angel and early stage venture capital funding.
Adam Smith:
Let's say if you cap it at Series A, I could see that being 20, 30% of total funding in just a couple of years. Analogy could be, for example, if you look at the IPO market, which is completely down the road from the venture capital investment, which is pretty much the end ... The ultimate goal really is to monetize the venture capital investment into an exit, not to specifically an IPO would be ...
Adam Smith:
The analogy could be relevant to looking at the SPAC market right now. So, SPAC market had its fits and starts. It's been around a while, but there was a strong period 10 years ago when the markets were soft after the first credit recession, the great recession. And then it kind of went quiet as the markets became more normalized. Now the markets are not normal and SPACs have been embraced in many ways.
Adam Smith:
I read a stat showing that the IPOs have been over 50% SPACs from 60, 70% SPACs this year. It's incredible.
Hall T. Martin:
Wow.
Adam Smith:
You could look at that reality, which is a very risky IPO of a concept funded as a co-option essentially. Look at that model as what venture capital can do align with investors that are willing to take much more risk than a SPAC. they could be willing to go more self-empowered, more investing in a curated model.
Adam Smith:
I think the AngelList syndication is really the first mover and has shown that people are willing to follow some intelligent hard and make decisions on their own without having to lock up into funds. So that does create a concern for venture capital funds, I think.
Hall T. Martin:
Good point. So what's your investment thesis? What do you look for in a start-up?
Adam Smith:
Some of the things we talked about before. I look for significant passion combined with realism. Trying to find founders that are determined, focused clients or partners, or colleagues, or collaborations. It depends on the role, but we want to make sure we understand them. We can empathize with them, get along with them, support them for months at a time or years.
Adam Smith:
And also that they have a mind towards creating appropriate governance and leadership to expand leadership team in terms of different people, different gender, different diversity, different skills. Creating a board of directors, and then of course running that board of directors well. We focus on the governance through a different company, as you know, called Wisdom Board.
Adam Smith:
Wisdomboard.co is a governance digital leadership community really focused on excellence for those boards that can include venture capital and sound early stage family office investments. So there is a growing chasm of governance skills and knowledge and willingness, resources. So we are increasingly focused on early stage family office and super entrepreneur holdings, which add Wisdom Board to make sure that they can get consulting services.
Adam Smith:
They can get connections with experts. They can get content and learn. They can network to make their governance resources as strong as possible. And in turn, not only protecting themselves, but also empowering their role as a fiduciary and making the company stronger.
Hall T. Martin:
Well, is there a particular start-up you can call out that fits that thesis?
Adam Smith:
We see about 500 a year, so I won't pick one right now. But I would say I can give you an example of one that we invested in that I would do again, for example, in a good for you, unique branded space in this case in accessories, although I'd say now we're more focused on wellness and the consumable products for your health and your beauty, food, beverage, mental wellness content.
Adam Smith:
But accessories and fashion and clothing, they can have a cause, they can be a B Corp, they can be sustainable, and they can also make people happy, of course, through our traditional world of shopping. So Koyo, K-O-Y-O.co is a five-year-old affordable luxury footwear brand here in New York. We were the seed partners initially in a Series A, 1.3 million.
Adam Smith:
It was just a concept with a couple of skews made out of Italy and using a drop ship model directly to the consumer. So essentially a virtual prop ship DDC [inaudible 00:15:03] shoes, both for men and women. And they have proceeded to build a strong cause in their brand. They have raised four rounds, over eight, $9 million and assume they're pushing over 25, 50 million valuation.
Adam Smith:
And they really care about their people, their product, their returns. They're starting to move a bit into the Tom's shoes model of sustainability and supporting social causes but also a bit of the, let's say the first dibs or the Rebag model of vintage as well, which you see at other brands, how to go. And you have, of course, I think North Face, Skurka.
Adam Smith:
It's a very interesting development to see brands take the effort to incorporate social good into their product, which does not necessarily create more business, but it creates a stronger brand and connection with the customer.
Hall T. Martin:
So you see a lot of start-ups out there. What do you think their main challenge is in launching their company these days?
Adam Smith:
Unfortunately, capital is number one. It seems 60, 70% of start-ups fail because of capital followed closely by the scalability and actionability of the actual product and service itself. I think that there will continue to be a meaningful imbalance between the quantity of start-ups and the quantity of capital. So there will continue to be a Darwinian landscape for many years to come.
Adam Smith:
But that's the way life is and it results in the stronger ones surviving. That doesn't mean it's necessarily the best businesses, but I think those remain the challenges. Also, like I said, having strong governance, having adults in the room, having opinions around the table, having a diversity of thought is important and those are also challenges, another challenge.
Adam Smith:
I think a third challenge is just the prototypical need to run fast and hard and to get things done quickly, both because of scarcity of capital, but also the ego and energy and drive of everybody at the table and the concern that there is a constant ecosystem of competitive activities going on.
Adam Smith:
So that speed is of course motivating and realistic, but it's also concern for founders that feel like they have to make decisions too quickly, and I think that can be risky.
Hall T. Martin:
Now on the other side of the table, what do you see investors struggling with these days?
Adam Smith:
Same thing. Too much deal flow. Too little time, too many deals, too many ideas. A lot of ideas aren't worthy. They are selfishly created. They don't have a core purpose. They're not going to work. And that's just reality because there isn't a way for many people that ... especially those that are less experienced or just maniacal about their concept, it's very difficult for a lot of startups to get outside input to change the course of their direction.
Adam Smith:
They won't know ... Or willing to change the course of direction until it is necessary, which is typically when they hit a pivot, or they run out of money, or they have founder [inaudible 00:18:20] concerns. So I think the same ... That challenge exists and will continue to be the primary challenge in venture capital.
Hall T. Martin:
Great. We see a lot of deal flow out there with 500 a year. What sectors or applications do you think are good immediate opportunities for investors to pursue today?
Adam Smith:
Yeah, I know you see probably thousands of angel and seed situations that need mentorship. You connecting me to access a platform. I'm glad to see there are people like you creating empowerment and the democratization of access without a tricky or overly complex investment banking model that does empower a lot more founders and there should be more of that as well.
Adam Smith:
I like the Series A and Series B level myself, and also the secondary opportunities at that stage.
Hall T. Martin:
For the last few minutes that we have here, what else should we cover that we haven't?
Adam Smith:
I think this has been a great talk. I would encourage founders to balance their desires and passions with seeking continuous diversified advice from others in their circle and outside their circle to push yourself past your comfort zone. Not just in the company itself, but also in the input and resources around you.
Adam Smith:
That can include core development advisors like us. It can be augmenting your lawyers. It can mean creating an advisory board. It can also mean having a co-founder or two or three that you weren't anticipating. It can also mean a joint venture if you want to accelerate your timing to create a BBB partnership. All those things are opportunities for founders.
Hall T. Martin:
Great. Well, how best for listeners to get back in touch with you?
Adam Smith:
Thank you. LinkedIn is the best. I'm at R. Adam Smith in LinkedIn. We own four different companies, but all of them are listed there and all of our websites have emails and phone numbers as well. Like most venture capital funds, you can actually find my email.
Hall T. Martin:
Great. We'll put those in the show notes. I want to thank you for joining us today and hope to have you back for a follow-up soon.
Adam Smith:
Thank you. Nice to talk to you today.
Hall T. Martin:
You as well. Investor Connect helps investors interested in start-up funding. In this podcast series, experienced investors share their experience and advice. You can learn more at investorconnect.org.
Speaker 3:
Hall T. Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinions of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.