The 5 ‘T’s to a Successful Start-up with Sam Bernards
Hi everybody, welcome to another episode of Angel Investing Podcast. I’ve got an awesome guest for you today but first let me ask you this: did you check out last week’s episode? I was talking to my law school pal, Gil Bradshaw, who is a securities attorney. Gil was giving us a run down on the new SEC rules related to equity crowd funding for non-accredited investors. That is a topic that you simply have to know something about.
Today I’m talking to Sam Bernards. Sam is a partner at Peak Ventures, a VC firm in Utah. Peak Ventures is different from many other VC firms because all the partners in the firm are actually battle-tested entrepreneurs and Sam is going to share with us his entrepreneur experience prior to becoming an angel investor. I have met Sam via a great organization called Wayne Brown Institute which provides pitch mentoring programs for start-up founders. Sam and I were and are mentors in this program. At the end of each mentoring cycle, there is an event called the deal forum where start-ups do their pitches and a panel of investors provide their critique. During one of these panels I heard Sam use his 5 ‘T’s approach to evaluate start-ups and their pitches. The 5 ‘T’s is a simple but robust system and today Sam is going to share the system with all of us. I hope I got you super curious now and here is Sam. Hi Sam, how are you?
Doing all right, thank you Tatyana.
It’s so great to have you on the show today. Thank you so much for joining us.
Sam, I already know a little bit about your story since we’ve talked before but I don’t think I’ve ever asked you how you became an angel investor/venture capitalist and I’m sure our listeners would love to hear your story too. How did you end up in this industry?
My story starts out as an entrepreneur. My parents had a series of entrepreneurial businesses themselves so I guess blood runs deep in the family. They started off doing small format retail which actually carried through in my own career. After I ended up starting with a mid-size pharmaceutical company running their IT operations, growing with the business, I was persuaded to leave with the offer of joining up with a new start-up company. It was called Automatic Web. We were solving the problem that people didn’t have access to the inventory, to the dealership inventory. The cars that were available within their state. My job was as the technical co-founder of this start-up to develop the technology to reach remotely into the databases of the dealers of an entire state, extract the data and normalize it, then post it online on an easily searchable website.
We generated UtahCars.com and ArizonaCars.com and a host of other websites that were all state automotive inventory driven and that business was going well initially until the big dot com bubble burst. If you remember that time, everything was shaky. Things had seemed to be going so well and then everything just crumbled. The founder ended up removing himself from the organization, taking all of the cash to pay us fellow peers with him and we were left high and dry. I ended up starting up another start-up with some folks. That one failed. A third one, it failed. A fourth one, it failed. During that time I was also asked to do some technical consulting on the side that took me to Italy.
When I returned back from that, some of my previous co-founders had been hired by the Larry H. Miller Group in Salt Lake City, Utah. The financial division and they said we’d love to take this company to the next level however, there is no way we can do it with the current state of the technology. We know just the guy to do it, he happens to be in Italy right now on a consulting gig. When I returned to the states, they had created a position for me. We took that company, transformed them from the ancient age to the modern age. We brought them into the dot net platform, this was back when Microsoft’s dot net was the leading edge of technology, very painful. We did that, we transferred their 20,000 active car loans over to the new platform, got it stable and that’s when it became boring.
I looked into starting another start-up at that time but there was a problem. The co-founders that I had attempted these failed start-ups with, they all had MBAs, they all knew how to do the business side, as the technical co-founder I felt at a disadvantage with these folks. I didn’t understand the business side. It was time for me to instead of starting up a new start up fresh to go and get some education. I pursued an MBA at Brigham Young University. My goal was to win a business plan competition with one of my start up-ideas. Use the money to launch the business and get new MBA colleagues with whom I could go forward and conquer the world, so to speak. That’s exactly what happened to a certain degree. We ended up winning, a peer of mine winning the BYU business plan competition. We created a business called Marketplace Africa. We secured the sourcing rights, the exclusive sourcing rights from Overstock.com for the entire continent of Africa to sell the wares of impoverished artisans beginning in Ghana. We had 3,000 of them lined up to the more affluent market here in the United States through Overstock.com’s website called Worldstock.com.
That business started up and I realized an MBA was kind of a once-in-a-lifetime opportunity so I handed the reins over to my partner and pursued the second year of my MBA. In so doing was recruited by Walmart where I was responsible for co-authoring the growth strategy for Walmart US. It was an $80m growth strategy and when the board of directors approved it, I was then given the leadership of the execution of that strategy. For the next several years, I was responsible for creating an internal start-up within Walmart pitching to the executives for the need for this was able to raise $200m of capital. I started a team from just myself to around 300 people and we launched a new concept called Walmart Express. I grew it from zero in revenue to around $10m in monthly revenue and when the CEO of Walmart said, ‘uncle, this is no longer considered to be an innovation for the company, we are going to assimilate it into the mainstream’ that’s when everything got boring. My whole team was moved out of strategy and business development into operations which in Walmart speak means just turn the wheel on a daily basis and execute the stores.
I suffered that for about 2 months but I’m a creative strategic leader. I need that kind of start-up experience, that challenge. I ended up leaving Walmart. As I was looking for what to do, various options came to light. One of those was to join a private equity firm in Salt Lake City to help one of their portfolio companies start up. I joined that, it was a company called Micore. It was a resurrection of the business that Franklin Covey became known as. It was the original founding team of the Franklin side before they merged with Covey to become Franklin Covey and my job was to bring back the technology of the modern age with the foundation principles that made Franklin so successful. We ended up doing that and got the first dollars in the bank. Right at that time an interesting thing happened which was Sid Krommenhoek, who at that time was an executive with Chegg, called me up and said, “Sam, you know how to do strategy. You know how to scale companies. I would love to scale my business more than what I’m doing. I operate the international division of Chegg and I think there’s more but I struggle to know how to do it. Could you hunker down with me for a Friday and help me change my growth plan to something bigger?”
I was delighted to do that, so we hunkered down for a Friday. We changed his multi-million dollar growth plan into a multi-billion growth strategy. Little did I know he presented it to the executive team that very afternoon. They ratified it, adopted it, and said, “How did you do this?” He said, “Well, there’s this guy named Sam.” They asked him if I could execute. He said that that’s what I did at Walmart. They flew me down to bring me on the team and right at that moment when Sid and I were figuring out how to go forward to grow this one company, Jeff Burningham, the managing director of Peak Capital Partners, called Sid up and said, “Sid, I just raised a $23m venture capital fund, I’d love for you to be my partner.” Sid said, “I can’t. I just now created the most exciting growth strategy of my career.” Jeff pressed him as Jeff does well and it ultimately came out that Sid said, “I would love to operate this plan with Sam Bernards”, and Jeff said, “I know Sam Bernards, let meet all three and consider bringing you both on board.”
We did that. It looked good and then Sid and I had this heart to heart moment where we decided we could grow and scale one company which would be Chegg or we could do 100 companies and that would be Peak Ventures so here we are today. During the course of that, we have reviewed around 3,700 deal opportunities. This is in the past 18 months. We’ve made our first 30 or so investments. Our portfolio is founded under the thesis that fellow entrepreneurs make the very best backers. We think of that thesis playing out about half of the investments have already had paper write-ups based on an external party’s evaluation of the company from a down stream funding event and the growth of their valuations right now is on average around 400% so we think these companies are growing well under this thesis that fellow entrepreneurs make a lot of difference. That’s my story, I hope that didn’t take too long.
No, Sam, thank you so much for sharing. It’s a fascinating story. I have a follow up question for you related to your MBA. I also went there twice so great school. Sometimes I feel at a bit of a disadvantage that I have a technical background. My undergraduate is in computer science and then I also have a law degree. On the financial side I do feel kind of lost. I’m trying to learn a lot just by talking to people or reading online and for our readers who are thinking about getting into angel investing and maybe don’t have that financial background, what is your advice? Is MBA really necessary or some type of self-study can be sufficient?
I pursued the option of doing a self study MBA or even just self-study to fill the knowledge gap and what became increasingly clear the more people I spoke with about their paths, there was a fair mixture of folks who had gone with all of those paths, was that the financial education or the book knowledge of an MBA was not what you got actually got. That was not where the value of a business degree came from. The real value is in the people. The more I have been with Peak Ventures in particular as an investor in early stage companies, the more I realize that you don’t invest in companies, you invest in people. If you want that book knowledge, it will come if you place yourself in the situations in which that financial knowledge is required, necessary in daily operations and it’s also much less important than knowing the people that can execute well. Knowing the people who understand the financial side well and surrounding yourself with people who are better than you at these things.
You learn through experience of what is really important in the moment. That reinforces the key knowledge. For anybody who is considering an MBA, if I were to go back and do it again, the biggest question I would ask myself is ‘where am I going to get the best network for the price of admission into business school?’ I think BYU is a good option. There are plenty of other options. We happen to have backed a person that recently graduated from Harvard Business School, Tim Chavez is his name. He has a company called Zip Books. His feedback as he came into our offices after we invested in him and as he was building up his team was along the same lines. It’s the people from the business school that meant everything about that experience more than anything else.
Definitely. I think there is a saying that your network is your net worth. I think that becomes very true especially getting into the angel investing side. I personally can see how it comes to life. When I was a programmer at Novell, it didn’t necessarily matter as much. As a lawyer, and now as an angel investor I completely agree that the network plays such a huge huge role. For those readers out there and for myself, I don’t see an actual MBA in my future but like you said, surrounding yourself with the right types of people. Surrounding yourself with people that have that specialized knowledge and learning from them. People who are better than you in those areas. I think that’s a huge key for those of us who can’t go back to school and get an MBA.
Sam, I want to talk a little bit more about Peak Ventures. You mentioned that there are 3 partners, you and Sid and Jeff. Tell us a little bit more, it’s a VC fund in Utah. Do you specialize in any types of companies? In a particular stage of companies? Just tell us more about Peak Ventures please.
Great. Let me begin with a point of clarity. We have another member on the team critical to our success. His name is John Mayfield. The 4 of us together make the entire team. We had another member, Dan Appell who’s recently left us to pursue his own entrepreneurial endeavor. We definitely wish him the best of luck. It’s been great to have him on the founding side.
Peak Ventures is the type of start-up investment firm that has as its core a belief in people. It’s a firm that we wished all of us existed when we had our start-ups and were looking for funding. What that means to us is that there is an intense appreciation for the entrepreneur. That the entrepreneur is the person that we invest in. We don’t necessarily invest in the business, we invest in the person. We know that businesses will change. Business models pivot. As businesses explore the realities that are previously unknown to some extent that there will be massive change. It is critically important therefore to know that the founding team can adapt to that change, can race in their journey to get that product market fit. Thus what we have done to answer your question about how we invest and where we invest, we love early stage companies. That’s where our team talents really lie. We can also scale those companies. Some of us have experience in large entities. What we look for in all the complicated things that we could look for, we’ve tried to simplify it down.
What we did initially when the team was first organized, was we gathered together a group of bright-eyed interns from all sorts of universities locally and we said to them: ‘There are over a thousand Best in Class VC firms around the nation and to some extent around the world. Let’s go get to know them. Let’s get to understand who are they. What are the questions that they ask? How do they do their due diligence? How do they make their initial assessment of the companies?’ We then coupled that with some pretty amazing traction that the capital partners at Peak had created. Jeff Burningham, Jamie Dunn, Jeff Danley had invested in over a dozen early stage companies previous to Peak Ventures even being created. It was their work that actually laid a remarkable foundation for Peak Ventures. They created and grew from zero to north of $1.4bn in real estate transactions. They owned and currently own and operate just over 14,000 apartments, all multi-family dwelling units all across the United States. With the cash flow of that they started investing in early stage companies. Several of those actually went full cycle yielding an 18x return on what we now call the angel fund, the precursor to Peak Ventures and the way that they did that was coupled with their approach, the questions, the thoughtfulness about ‘how do we get to know the entrepreneurs?’ especially. What sort of questions do we think are important?
We took that body of information, coupled it with what myself and the interns found about these Best in Class VC firms around the nation and we distilled everything down to just 5 things. These are the 5 things that we consider to be the most important topics of conversations when we assess a company. We gave them a simple alliteration. They all begin with the letter T, so we call them the 5 Ts. In order of importance they are: the Team, the Terms of the deal, the Traction that the company’s made, the Ten Times potential for growth with our investment, and our Technology. When we assess any company regardless of stage, we simply look at it through the lens of these 5 Ts. At the end of our conversation with the founders of the company that’s seeking for funding, we’re able to give a very simple red, yellow, green assessment of each one of these 5 Ts that is coupled with the knowledge that if they’re mainly green, then we go forward with the diligence and the discussion about backing them as an investor.
If they lack any one of these greens, if it’s red or a yellow, we’re able to give them very clear criteria of how we see the gap and some recommendations what they do to flush out that gap.
Sam, I’ve been dying to talk about the 5 Ts with you and we both have been mentors for Wayne Brown Institute in Utah and Idaho and that’s where I heard about the 5 Ts for the first time when as a pitch mentor you were using them to evaluate the companies. Sam, if it’s okay with you, let’s just go through each of them and talk a little about each and for our readers I think it’s important because we can use and rely on these 5 Ts and you guys can adopt them as well when you meet start-up founders and when you evaluate them. Maybe it’s not as formal a process as Sam and Peak Ventures does but it is certainly a great framework. Sam, why don’t we start with team and what do you look for under that section.
Fantastic. The people. This is 80% of the decision is on just this one T, the team. It’s the team that means everything. There’s a couple of indicators that to us flag a good team to invest in. The first one is the person themselves is inspiring to us and they can communicate well. It’s the soft skills. This is a person that we would love to be friends with. They’re passionate and knowledgeable about the topic. They are intimately passionate about solving the problem that their company is engaged in solving. Beyond this soft side of is this the right person, there are other indicators we look for to make the team go green.
One of these is the team is in place. Regardless of funding, it’s remarkable Tatyana, how many teams have come across my desk with fully-fledged teams even in a state where they don’t have the capital to pay them themselves but they have burned their boats on the beach of this company and they’re all in and that makes such a critical difference than a team that is pieced together with some gaps and everyone’s waiting around for the funding to come in and then they’ll jump on board in a full time capacity. That half way in half way out, it’s just not inspiring.
If people can get all the way in at the very beginning, face the boot strap mentality that’s the consequence of doing that and make it through that little hell of a time period, if they can do that, there’s almost nothing that they can’t do. They can achieve anything if they can make it through that little period. That sort of team comes together, they rally together, they share the vision. They’re full time dedicated even without money, they’re testing their fundamental hypotheses, that is awesome and its sends such a powerful signal.
Another thing that we look for besides the full time dedication of a complete team is the cap table. We invest in people not companies so the cap table has to be set up to account for the dilution that happens in subsequent raises such that the person we invest in can maintain ownership and control throughout the dilution, so that there won’t be unnecessary risk in let’s say an investor controlled cap table when bad things happen. Bad things are going to happen and if you just know that the company’s going to encounter rough spells and that the person and the people you are investing in have the capacity to get through those rough times, that makes all the difference. You have structured the capitalization of the business accordingly. Those are the big things we look for on the team. There’s some other questions that we typically ask such as ‘who’s on the boar?’ ‘Who are the advisors?’ ‘Who are your strategic partners?’ ‘What is the team’s burn?’ ‘How much runway do you have?’ etc. Those are considerations that occur after these big team issues are discussed.
But wait…there’s more!
This post has been adapted from the Angel Investing with Tatyana Gray podcast. Listen to this recent episode for more great information from Sam Bernards!
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When Tatyana learned that out of almost 9 million accredited investors in the United states only 300,000 (about 3%) were active angel investors, she made it her mission to attract, educate, and inspire the next wave of angel investors in this country.
As a new angel investor herself, Tatyana loves to learn the craft of investing in startups from experienced angel investors. It was only natural to share this process with a broader audience via her Angel Investing podcast.
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