Solidea Capital: How to evaluate a potential investment, and the key role market and competition research plays in that process.


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In this episode, I talk with Eric Baum, co-founder and managing director of Solidea Capital, a venture advisory company. Erick explains the difference between venture capital versus venture advisory, and that their value is really in working with early-stage and emerging companies to help them accelerate in growth and momentum.

Some of the companies within the Solidea Capital portfolio include Tennant Tracker, Club Caddy, and Allergy, and they span many different industries. He shares some of the important factors they look at when considering an investment, and how important competition and market research is while in this process. 

Topics in this episode

  • Trajectory management

  • Criteria of a company that is a good fit for Solidea

  • The evolution of the sales strategy within a company

  • Evaluating the market and competition to determine if a start-up is a good investment

  • Pioneer versus me too 

  • The role customer profiles play in the investment process 

  • Industry reporting as a source of market research

  • The importance of a team to be able to pivot and coaching them through that process

Contact Information

Website: https://www.solideacapital.com/

Email: ebaum2611@gmail.com


Transcript

Mike Kelly:          Welcome to The Startup Competitors podcast. Toda, we have Eric Baum, who is one of the partners at Solidea Capital. Eric, welcome.

Eric Baum:           Thank you, Michael. It's great to be here. I'm looking forward to our discussion.

Mike Kelly:          And I said partner at Solidea Capital. Is there a different title, better title?

Eric Baum:           I kind of go by co-founder and managing director. So we kind of have a more sort of flat organization, so we don't use.

Mike Kelly:          Got it. Well, I know your organization really well for a number of reasons. We've collaborated on a couple of projects, but for those who might not be familiar with Solidea how about you give a quick overview of what you and your team do?

Eric Baum:           Sure, that would be great. So Solidea is a venture advisory company, and the reason I say venture advisory versus a venture capital, we kind of straddle both sides of that. So while we do make small investments into portfolio companies, really where we see a lot of value is actually working with early stage and emerging companies and helping them to really accelerate growth and momentum. And so we would be helping companies on some of the key pitfalls or challenges that we've seen over time that startups hit. So that could be things like trajectory management, which from our side is all those activities and determining as a startup how much capital do they need? What does my next three or four years look like from a funding perspective? What is the different value accretive milestones I need to achieve to get to where our company wants to go?

Eric Baum:           For example, in that area sometimes we see that people or some of our founders are really just focused on raising a million dollars and that's going to get us eight month's runway, versus we kind of need to step back. We'd say, "Every fundraise is a journey, and each journey should have a discrete beginning and an end." Really, it's about value-accretive milestones and at the end of the journey it's a discrete ending point and positioned in a natural way to raise the next round. Trajectory management is a process where we look at that. There are other things that we would work on, things like cutback position strategy, go-to-market strategy, governance setup and structure. As our companies are growing, organizational design and development, so who's your next employee and the employee after that?

Eric Baum:           So we kind of work with our portfolio companies from both perspectives, and we do that from mainly an equity for service nature that I've mentioned. The reason we do that, because we do have the ability to put some capital in like I mentioned, and we do have funding sources around us, is it's important to us to sort of align interests. So Solidea Capital is an affiliate company of a group of different business myself and other partners have that can pull on each other. So we're a cost center, and so we know when we take on a company that we're going to put and deliver a ton of resources and time. And so the only way we make an ROI on our effort is for that company to be successful.

Eric Baum:           Our staff would be your classic private equity and venture trained, but we can also call on the resources of a variety of other companies we have, like a strategy operational consulting firm, a specific form of companies and other startups that bring those information to bear. So I'm not sure if that gives the kind of background that you were looking for, Mike. I know it's a little bit complex, but I'll kind of pause there and see if there's any questions.

Mike Kelly:          No, I mean it's hard since I know you guys so well, so I think that's a great background. Who's a good fit? So when you guys evaluate a company that's going to be a good fit for Solidea, that could mean a number of things, right? That could be the type of company, the stage of the company, what they're doing, as well as all the other things that I think probably a more classic investor is looking for. I'm sure you're also looking for those too, because you want to make good bets with your time, so talk to me a little bit about that. What criteria do you guys look for when you're looking at a team or a product?

Eric Baum:           Great, great question. We certainly evolved our thinking over time, as we kind of get the lessons learned and we kind of tweak over where we see the attributes or characteristics are more likely to lead to success or kind of bend that probability curve. So some of the areas that we look for, first is we like to see a product that's in the marketplace today. So what that means is that product may have one customer. It may have one dollar of revenue, but what it allows us to do is go and be able to do some analysis and market research on that product, but also to have the ability to try and test it out or to know that whe new are working with a company, we can actually affect change and look at it.

Eric Baum:           We like to see that the product validates in the marketplace. We like to see that it's earned some revenue, which means that there's someone out there, that sort of value there even if it's small, and so that again we can get to the data. From a team perspective, we do look for experienced teams. We do like serial entrepreneurs, because there's a lot of lessons learned in failures, and then also having gone through the process. But that's not a requirement, but we do look for the team to have started to have been built out so a lot of the key gaps are filled, and that we know that some of the key things that we worry about startups are there.

Eric Baum:           So for example, you need the founder and the visionary and the person that has kind of a strategic road map which also for us we feel is extremely important with different companies to have the internal sales capability. Again, so when they do have the product they have a starting point in understanding how to sell that. It doesn't necessarily have to be a visionary sales leader, but someone that has experience within sales or the ability to be able to move product. The third piece is, we look for is kind of on the funding side. This has evolved over time. What we've kind of noticed is that when we work with companies where, as I mentioned earlier, while we're not a funding source, Solidea's value is really the strategy and expertise we're bringing into really accelerated growth companies. We have for many of our portfolio companies led the charge is raising a lot of capital, because we do have angel investors, super angels, VC relationships around us that we navigate our companies through as they grow and move stages.

Eric Baum:           But what we've found is that when we were reliant on sort of raised capital, the companies struggled a lot more. And so we kind of have an internal metric where we look for our companies to have demonstrated that they can independently raise some amount of capital. It doesn't have to be large. Usually we're looking to see that they've raised at least $100,000. What that kind of shows is that the founding team has a network. They have ability to articulate the story. They can get other folks around them. Generally for us now it's a caution flag if we see a good company and a good product and they haven't been able to kind of bring capital around them.

Eric Baum:           And then we also look for companies and products in spaces that are scalable, that you can kind of move through the sales process. So we always think of it as first you're kind of selling a product one-to-one, so I kind of meet with someone. I try to sell it, and there's certain techniques and tactics that make sense for that. Ultimately, you're trying to shift that to now what I call many-to-one, where I might be able to do a sales messaging or pitch with many potential customers. That might be speaking at a conference or other tactics, and eventually you want to get to many-to-many, where folks are sort of out there, advocates and channel partners for you. So we look for companies that we can see that evolution, that there are areas to be scale channels and channel partners, and the ability that once we get the momentum we could be able to fund that.

Eric Baum:           In a lot of ways, that's more important to us than necessarily the size of the opportunity. We're different from venture capitals in that we're not necessarily looking for the billion dollar, two billion dollar exit. That'd be great, but we think there's a lot of great businesses that can build businesses around 50 million, 100 million dollar businesses. We put more emphasis on the ability to create traction and grow and scale than on that topside. So those are kind of the aspect that we look for.

Mike Kelly:          Love it. Are you open to give a couple examples of companies that are in the portfolio today?

Eric Baum:           One exciting company that I love talking about is Tenant Tracker. So Tenant Tracker is a company that has developed a suite of tools that really help in the kind of supports tenant briefing and placement. So if you think about, I like to always use a retail site, if you think about a mall and as you have storefronts moving out or stores moving out and new tenants going in, there's a series of steps that are complex activities that happen in order to facilitate that. You've got to be able to pick those out. There's potential improvements that need to be made in the space. Some of that's going tenant paid. Some of that's going to be landlord credit. There's a scope of work that needs to be done. There's a move-in.

Eric Baum:           What you typically see happens is that that life cycle becomes fairly long, because there's not a lot of great tools that manage that process, that manage different stakeholders and constructions and contractors, the tenant and the lease. And so what Tenant Tracker has done is be able to kind of manage that process from the very beginning, automate it, create a great repository that connects all the stakeholders. What that ends up doing is shortening the length of time that a vacancy exists, or getting units in there quicker, faster, which ultimately benefits both parties. From a landlord, they're getting rent in there quicker and filling that vacancy. From a tenant, they're out there selling their wares and getting their stores up quicker and generating revenue. So they've been doing some great stuff in terms of really starting to build and scale, and I think the real estate technology speaks to.

Eric Baum:           Another one of our companies is in the golf technology space. It's Golf Club Caddy, and they're out of Michigan. What they're doing is really in the golf industry. You really have, if you look at golf courses, you have 15,000 golf courses in the Midwest. 50% of them are on a technology called Golf Now. Essentially what Golf Now does is it aggregates all these tee times at different courses. It discounts them and brings eyeballs onto them, and provide a very low-tech sort of course management software. What was interesting at the time is that instead of charging fees, because a lot of courses cash flow is an issue especially during slower months, they took tee times. So they would give Golf Now a few tee times in which they could sell. As I mentioned, Golf Now actually ended up aggregating a discount.

Eric Baum:           If you think about a dissonace in the industry, courses were very frustrated. They didn't really understand the vision that Golf Now was going to do. They did a lot of couponing and discounted play, and it ended up costing the courses a lot more money because of this lost tee time, that some courses the fee is $20,000, $30,000 a year. What Club Caddy has done is, it was started by a course owner. While I mentioned 50% on Golf Now, 50% of courses have no technology in place. There wasn't enough interest in Golf Now and they couldn't afford it, so they're doing everything manually, the pen and paper. So what Club Caddy has put together is really kind of a best in breed course management technology. It handles tee times. It handles the ability of equipment, the food service, bringing food out to the golfers, the HR and payroll.

Eric Baum:           They provide it for free, because the business model is they make revenue or we make revenue off of the credit card processing. And so what we say to courses is, we're going to be transparent to you. We roll you onto our credit card processor. You're going to pay the same or below, and then that's how we're going to make our revenue so it becomes a great revenue source for us. Any course is worth $10,000 or $20,000 for us. It's great for the courses. They get top-end technology without really having to do an out-of-pocket payment, and a way to kind of move off of that giving up tee times, and so that one has been growing extremely, extremely fast.

Eric Baum:           Another company we have, kind of switching gears away from technology or SaaS-based, is a company called Allergy. They do something interesting that's dear to me. If you think about a lot of people around the country, there's food allergy is very common. What's also common is a lot of people don't carry EpiPens that should be. My wife has some serious allergies. She rarely carries her EpiPen. It creates a lot of stress for the care circle around them should anything happen. It causes stress on the pharma companies that want to make sure EpiPens are available. It creates stress on the insurance companies, because when you go to the ER and deal with an allergic attack it's much more expensive than if you dealt with it at the time.

Eric Baum:           And so what this company does is they came and they said, "Okay, well, the biggest issue with people carrying an EpiPen is it's inconvenient. It's easy to forget. What's something that everyone has? Everyone carries their cell phone." So Allergy's kind of way of approaching this problem is they're again identifying that the one thing that most folks carry with them and have on them is their cell phone. So they thought, "What a great idea if we could engineer," and it took a lot of time and a lot of iterations in engineering, if you can put an auto-injector into a cell phone case that's all around you, and it would mimic the size of your case. It's very subtle, but that should you have any kind of issue it automatically, the auto-injector comes out. You've got an EpiPen, but then you also have the software integration.

Eric Baum:           It communicates with your care circle. It can provide more information, and then later on, phase two, it can do some interesting things as well. When you think about a lot of elderly people, one of the challenges is there are a lot of pills they take but it's really hard for them to remember when to take them. Obviously compliance in a lot of cases is an issue there, and so again you could use a mobile case or a cell phone case where you could integrate with software and say, "Okay, it's 2:00 pm. These are the two pills I need." You could load all your pills into the case and then it would open up and give you the pills as you needed them and remind you.

Eric Baum:           So I think they're doing some really interesting things to solve the issue of compliance with life-saving technology by tying to convenience and mobile cell phone around us, while also integrating with the software and communicate information to others. Right now it's an exciting time for them. They're in the process of getting ready for FDA submission for regulatory. They've got some great partners. They've worked on several rounds of product and are really getting some great crest out there and I think they've got a chance to really inform that market.

Mike Kelly:          Dude, that's nuts. I know you've mentioned them to me in the past, but I had no idea that that's what they did. That sounds awesome, truly. That's really cool. I guess you kind of went into competition a little bit with Club Caddy and a little bit of the market opportunities that Golf Now left in the market. I would just be interested, and you don't have to pick a specific company. This can be a little bit broader in terms of how you guys look at the market in general, because there's really two aspects to it when I think of your business, right? So one aspect is, how do you guys take into account competition when you're looking at whether or not this is a good investment for you, right? Like, is this worth spending my time on? Is this like we're just competing with an established market and maybe it doesn't make sense?

Mike Kelly:          So I'd love for you to talk a little bit about how you guys look at competition from that deal selection perspective, but then I know from first-hand experience that then once you're in a deal, you're also looking at competition from a go-to-market strategy perspective, and how does this business scale, and who are the different segments of customers? Which all competition clearly comes into play in that analysis as well, so maybe start with, from a Solidea perspective, how do you guys think about it on the first order. And then when you're in working with a founding team, what are you looking at to help give them advice for how they start to dissect that competition?

Eric Baum:           Sure, great questions. So the first thing we do, and if I take it a little bit broader to give you a sense of how we look at it, we believe that most companies or startup companies, they fit into different buckets that give a sense of sort of where they stand from a competitive set, or where also that market fits. So for example, I use the term of pioneer and so that would be like a first group. A pioneer to me would be a company that's solving a problem that people don't yet know they have. That's why in my mind they're kind of pioneers. They're out there, and in many ways Apple and a lot of things that Steve Jobs did early was a pioneer. He was creating product that people didn't really know they had the use for yet.

Eric Baum:           The reason it's important is that in each category that you're in, there's different techniques and tactics of how you respond to competition and how you really build awareness in the company. So for example if you're a pioneer and so you're solving a problem that folks don't know they have yet, then kind of doing SEO and kind of blasting, those sort of initial techniques aren't really going to work. Instead, what a lot of pioneer companies are doing is creating education, right? You're trying to create thought leadership and awareness. It's more important about being on blogs and talking about friends and getting people to it. So in a pioneer scenario, you really don't have a competitive threat yet. You're really focusing on creating a market around it, and then as competitors come in now you're really relying on your first mover advantage, right? You've helped educate and be a thought leader. People have connected to you, and now as you've kind of created that need, a lot of your techniques are going to be there.

Eric Baum:           Another category would be sort of the product already exists, so there's an existing need you're solving but you've added incremental improvement, right? So it's kind of improved, and so again from that standpoint there's a little bit of a different technique, right? You're really stressing what competitive advantage that you just brought to the table, so it might be a new product feature. It might be a cost or some other element that's kind of changed the risk reward that's out there. And then if I simplify it, kind of a last big bucket is a me-too product, right? And I think of me-too, it's really kind of as a startup I'm putting out a very similar product with someone else. A lot of people look at me-too products and say, "Well, those aren't really exciting. We're not interested in that." Well, not really so. Each of those models can work. It's just you have to have the right techniques and tactics.

Eric Baum:           So if you're going to be a me-too company, that's okay but you probably want to be focused in a new geography or be in an area that someone isn't. So for example, people that were doing online delivery of meals all around a big urban center, there were small secondaries that no one was there, that might be a me-too opportunity. Or, you're providing it to a new niche or a new demographic of folks that weren't in that service. So the reason we're kind of rolling this together is when we look at companies, one of the first things we say is, "Okay, where does this company sit?" Depending on where it sits, then we have kind of a viewpoint of competition.

Eric Baum:           So if it's a pioneer, I'm not as worried about where the competition exists today but what I am worried about is kind of usually you have a much longer cycle and length of time it's going to need to get to revenue and other areas. So, what's its funding situation? How strong is the team? Are they prepared for it's going to take longer? Is their marketing and sales skill set aligned to create awareness and education? If it's a me-too, I'm going to be looking at this company and saying, "Okay, I want to understand, what's its?" Its go-to-market strategy is going to be really important to me, because it's not the actual product or something novel. What is it about it? If they can convince me to go to market like, "Look, this is out there and we are taking it to this new geography and this new demographic, and this is where we're going to be uniquely qualified to do that." The product itself is de-risked because know it's interesting in its own fashion. That becomes interesting.

Eric Baum:           If it's something where it's coming with a new competitive advantage, then I'm trying to understand how sustainable that advantage is. So is it something, so for example now I'm going to have due diligence to companies and say, "Okay, what's going to stop existing competitors from being cheaper? If you're competing on cost, is it something proprietary? Is it ID protection? Is it a secret process, or is it something that's easily replicable?" So from a Solidea perspective, going back to your question, we look and see where it is and based on that we see, "Well, how does this company, how is their technique and tactics aligned with what we think is going to be successful there?" A lot of times we'll see disconnects, because a lot of companies aren't necessarily taking the time to say, "Hey, I know I'm a startup but let me think about what bucket I fall in and how that really does affect some of my strategy and tactics."

Eric Baum:           So sometimes we see companies that are in pioneer space and they're talking to us about how we're going to do SEO, and we're going to be meeting with 10 companies and hiring a sales force, and we can tell right away that's really not going to be successful because people are not yet ready to purchase. You haven't created that awareness. Or, we're talking to a me-too company but there's nothing unique in their go-to-market strategy that's interesting.

Mike Kelly:          Totally just curious, there's no right or wrong answer here. Which of those do you see more, between pioneers and me-toos?

Eric Baum:           So I think pioneers are going to be kind of a small minority, right? Because a pioneer really is a hard one. It's that you have enough vision to know that you have a strong compulsion that this product and messaging resonates, and you've been able to get other people around you, but that you're way ahead of the market that you really have to educate. So I think there's very few companies that call that say, "I've got a product that somebody will need that someone doesn't yet know," that can get enough momentum to even get to that beginning point. Most of the time, we don't see too many pioneers that are truly pioneers, right? What happens is either their idea of product is probably not as realistic or sustainable or as mass consumed as they think it is, or there's just no real path to create sort of that education.

Eric Baum:           I think me-toos are probably much more popular, or we see them a lot more, and we see a lot more on the competitive advantage side what I'm calling, they're existing, you've improved it, and really that's probably the biggest bucket. What we're digging in there is to understand how sustainable is that competitive advantage? Again, is that backed by IT? Is it backed by special process, or is this something that?

Mike Kelly:          Awesome, thank you. Sorry for that digression.

Eric Baum:           No, of course. And so when we start to work with companies, so we've kind of then made the assessment, so when we work with companies it kind of follows that time, one of the first things we're sitting down is kind of talking through like, "Hey, we've kind of had this spectrum of stages of companies, and here's where we kind of feel like you fit. What's your thoughts?" And kind of have that dialogue, and we kind of talk about that, that recognizing where we are is really important because it informs us of the different tactics and techniques, and we kind of go through that. So as we're sitting with companies working with them if we say, "Okay, we both agree we're a pioneer," that's going to help us really have a good shared view to competition.

Eric Baum:           Okay, pioneers setting competition is a friend, right? Because ultimately, the new industry that's just burgeoning, the more players that are out there talking about the value or the problem you're solving, the more it benefits everyone in that, right? So it's a new light space. You can create a market that's going to be big enough for the first couple players in it, so you kind of look at competition to say, "Great." You're almost not joining forces, but you're almost trying to see how you complement each other or how you create that thought leadership. You're looking at tactics. Okay, within that I want to position myself if I'm a pioneer to be at least viewed as a thought leader, right? So as I'm getting that dialogue, I want to establish credibility so as this market starts to develop, there is sort of that first mover advantage. But again, recognizing that if you're in the right market all the competition creating a market is really kind of lifting everybody.

Mike Kelly:          How, and this is not a well-formed thought obviously, how critical is I guess the founder or the founding team when you look at that space versus new market, me-toos? Specifically what I'm going for there is basically if you're trying to create the market, I would assume you have to be way more of an influencer in the given space that you're going into, rather than if you're in a me-too, that's much more about reaching down. Nobody needs to know who you are, right? I think it would be great if you were an influencer too, but it's not like you need to be on stage presenting, talking about making this market happen if you're in a me-too, whereas from a pioneer perspective that seems to me like that would be a big question in your mind of like, who on the founding team is going to be that person who's going to be the front person who's driving a lot of that energy? Is that real? Did I just make that up?

Eric Baum:           No, that's exactly right, and that's a great point, and that really helps reinforce, remind me of a couple points that I probably skipped over. I haven't given my spiel on this in a while, so you're absolutely right. When you think about, so what's great about the framework of trying to understand where a startup, what kind of stage they are, and kind of saying not all startups are in the same stage of life, is it does inform all these pieces like we were talking about, marketing, funding. But what you're also hitting is team, and you're absolutely right. So when you're a pioneer, what's really important is that team is folks that are thought leaders. They're folks that were kind of inspirational, like they sit in the room in a conference and talk about where they see the future, and they can bring people along.

Eric Baum:           When you think about a Steve Jobs or Elon Musk, and again I'm going straight to the 1% of them, but that's what they're able to do. They have that vision and they're bringing people along because they have to get people to see two or three steps above. And so they've got to be able to articulate the kind of storytellers, right? It's not as important for the executioners and the operation of folks. It's the folks out there getting people to believe, so absolutely, versus when you look at a me-too one of the things I forgot to mention is, so when we look at a me-too we say, as I said earlier, the me-too is not bad. It's just, these are the things that you need to be successful. So one of those things is, I was kind of mentioning, are you taking an existing product to a completely different marketplace, right? We've seen that all the time where business models get altered.

Eric Baum:           Are you taking it to a different market segment? But the other area is, if you're a me-too, is your team much stronger executors, right? So a lot of times it's not about, you think about an industry and there's a couple competitors. It's not always about who's been there first and what size? Which team executes stronger and better? So again, a great point from the team perspective, if it's a me-too now it's looking about, a team about it's great, we want them to have vision, but does this team have amazing execution? Do I look at this team and say, "These guys are going to execute so much faster, smarter than the next guy?" So you're absolutely right where you are with what impacts sort of that makeup of the team.

Mike Kelly:          Awesome, thanks. Sorry, continue. Didn't mean to derail.

Eric Baum:           Sure, so once we're working individually with the companies, again going through, if we're looking for a ... if we're working with a portfolio company and we think, "Okay, you've kind of made a novel improvement," or you think you're solving a problem in an incrementally better way, we're going to focus a lot on the competitions in terms of, okay, really understanding who's out there today, what our differentiators are, but also how sustainable they are. We're going to look at areas, and so we're going to do a lot more profiling on customers today, and where we think different customer profiles are going to go in the future. So, what do they want today and what might they want in the future? What does the competitive landscape look today, and what is going to be that sort of product mix in the future?

Eric Baum:           We kind of look at the competition and say, "Okay, which are the ones that are uniquely positioned to kind of evolve in the right way? Where do we think we need to be? Where's some of the differentiation?" But what we also focus on is our go-to-market strategy a lot of times for companies is early on it's easy to be distractable. You've got this company and you're like, "Look, I think my product is great and everyone should use it." It could be that you do have 10 or 12 segments. We're very focused on niche segments within niche segments, that you start and you try to find in these areas your stickiest customers. You say, "Okay, here's my competitive matrix. Here's what people are doing." Now we look internally and say, "Where are we the strongest? Where's our differentiation, and what are the smallest subset of customers that would appreciate that? How do we go in and target that deep?"

Eric Baum:           So for example, some of our competitors might have a foot in a bunch of segments but we might want to go that deep in one or two, so we're really focused on where do we particularly show the most value, and hit those customers first and use those folks to kind of grow and expand from there. If we were looking at sort of a me-too company, again on the customer side we'd be kind of aligning from the competitive side as to say, "Okay, where do we think we're the strongest?" So for example, one of our companies, they're not me-too but they've got similar competitors. What we've learned or what we saw is our strength really is an RP process. We felt like we really understood what company. We understand from a consultative side how companies view RP processes. What are enterprise scenarios, implementation? What some of the common challenges are, what some of the mistakes that companies make in RP processes.

Eric Baum:           So for us we knew, "Okay, what we want to do is, every time we're in an RP process we're going head to head in this kind of activity, we're going to have an 80% win rate." So when we're going after a competitive strategy to say, "Okay, here's where we want to compete." And so we focused more of our energy in looking for companies that were already playing our field, getting the right channel partners that brought us in, versus necessarily looking for that one-on-one sale where there's no competition. We felt like in that scenario we stood so much stronger than our competition from a flexibility from our messaging. So from a me-too, we kind of think about that. In the sales cycle, where are we strongest and how do we kind of leverage that about our competition?

Eric Baum:           Across all cases, we're looking at the competitive matrix and we're really trying to understand, where are competitors strong and where do they have gaps? What happens a lot with companies is that you're never ... Early on, you don't always say no to business and companies take businesses that they shouldn't. And so we love to find out where our competitors are playing where they shouldn't be playing, and take advantages of those segments first where we're strong, and using that kind of story to launch pad other sites. So I know that was kind of a long-winded answer on that, so I'll pause and see if I've kind of covered some of that or missed anything.

Mike Kelly:          That's phenomenal. Are you kidding me? You listed, you could talk about this all day. Oh man, that last thing you just said which is when you find a competitors who's maybe in a space that they shouldn't be you look to maybe exploit that. How do you discover that? Where do you go to find that?

Eric Baum:           Great, great question. No silver bullet, and that's one thing I'll say for the audience. One thing I've always seen or just kind of my opinion and perspective in emerging ventures is there's never a silver bullet. Usually change and success is a series of small things that are coordinated. There's not like one magic piece, and same here. I think conferences and educational and trade associations are great ways to kind of get the feed on the street, and kind of here water cooler talk. You kind of put yourself in a position to, "Oh, what are you hearing?" At your more industry events, you sort of get to hear what some of the frustrations are. People like to talk a lot more about things that are going wrong with something than going right, so in the right environment I think you can get it there.

Eric Baum:           Second is really looking at a lot of sort of the industry reporting, so obviously there's reporters generally from every industry. There are travel reporters. There's folks covering real estate, and I feel like if you kind of have your finger on the pulse and you're reading a lot of that, they do a good job of comparing and contrasting and they themselves are out there going to existing customers, customers they lost. So the industry reporting, which sometimes has small followship but if you make sure you're staying current to that. It's talking to, a lot of times when you're getting new customers you're getting customers that are direct competitors. That's a great way to really understand what's behind the change, and so sort of getting from folks that you might be winning, where they see are some of the pain points.

Eric Baum:           The other area is channel partners, and partners a lot of times particularly if you're a SaaS-based technology you might be integrating with a major player in the space. You may need to integrate with SAP or incur expense if you're on the expense management side. I think as you're talking to [inaudible 00:35:28] or talking about them, they're a wealth of knowledge of kind of where they see they're playing, or what are some of the strengths and weaknesses. So I think really kind of having a pervasive look at the different stakeholder groups, and then also trying to kind of build backwards your strategy, right? Again, the way we do strategy with our portfolio companies is to say, "Okay." I know Mike has sat in on a few of these sessions too when we say, "You know, when we think about go-to-market we say, what are the different attributes that are important to us uniquely as the customer?"

Eric Baum:           It might be the length of the sale cycle, the revenue potential of the customer, our access to decision-makers, the reality of that particular customer to refer us to others. So each company we say, "What are those important pieces?" We try to rate them, and then we take different segments and demographics that kind of overlap. And then you kind of create more of an objective system that says, "Okay, you have these 10 segments but based on what the inputs you just put in, these are the initial segment that kind of meets your requirements and so that's where you should focus." And we do the same for our competitors. We kind of look at that and say, "Okay, from what we can see in their client list or what we can see for the information available, where are they playing?" If they're all over the place, well we're going backwards and saying for example, their strategy and their technology, they really are well-suited for Fortune 100 companies A, B, C, but we see they're at startups and mid-size companies, well that's a gap. That doesn't make sense.

Eric Baum:           Or if we're seeing a player that hasn't evolved their technology from a security perspective and they're calling on Fortune 50, 100s, we know that that's a challenge and we can kind of play off of that. So out of all those areas, I'd say industry, resources, cold calling potential customers, and one thing I would say you always have to do in an ethical way, but don't be afraid to call companies and ask them a lot of questions without necessarily like, "Hey, we're looking at different types of technologies. We'd love to get a couple minutes with you, see what your experience is with them." Sometimes you can get good information from folks there from making a few phone calls.

Mike Kelly:          Dude, that's awesome. What are some of the other things when you're sitting down with ... And this doesn't necessarily have to be specific to competition. When you're sitting down with a portfolio company, or even maybe you're evaluating a portfolio company candidate and so you're obviously learning their business and meeting with the team, what are some of the other things you're looking at to maybe assess health of that company and how good of an investment it's going to be?

Eric Baum:           There's a lot of different areas that can give you different tells. Sometimes what ends up happening is as you're having a meeting, you kind of see different tells that you might want to dig a little further in. One for me, and this is a brother one is, and it's one you probably hear a lot. When people talk about the team, and everyone says the team is the most important, but really one thing everyone has to figure out on their own, and for every venture advisory or venture capital investor, is what team means for you. It means different ... What a good team is can be very different for different folks. For us, one of the things that we really look for is flexibility, the ability to pivot. Someone who has ego enough that they want to build a business, but has control of their ego that they're not afraid to make mistakes and pivot and change.

Eric Baum:           The reason I'm mentioning this is that we know almost every company that we take on, that at some point what your initial product is, what you think your initial segment is, where you think you're going to have initial success, 90% of the time it evolves. Products evolve. The market need evolves, and often times there's some big examples. Twitter and almost every big technology company, where they saw and where they ended is very different. What's really exciting about the right team is that they've got a vision, and as you're getting data and as you have a product you start to see, "Oh, it's really interesting. We never thought customers were really like this. This is what resonated, and we're going to pivot there."

Eric Baum:           And so we know that we're going to have hard conversations with our teams to say, "Hey, right now you're a B to C, but you know in thinking about it, we think B to B pivot makes a lot more sense and here's why." Or with our golf company, they originally started as just kind of an [inaudible 00:40:02] food delivery on the course and we saw a brother application. And so for us it's really important that we know that's going to happen, that businesses evolve. All these founders, their eagerness, their vision, can they adapt? Are they going to be folks coming back and saying, "Hey, look what data told us"? Or are they going to be, "No, I know. This is my problem. I'm solving it. It doesn't really matter the feedback." So we do a lot of testing on that. What's their ability to take feedback, to take advice, to take pivots?

Mike Kelly:          How fast do you think you know that, or how quickly do you think you guys assess that? Is that, I mean so is it more scientific where you're actually structuring tests for that, or is it anecdotal where after an hour in a room with somebody, I know whether or not that's going to be an issue?

Eric Baum:           Great question, so it's more anecdotal in the sense that we go through our due diligence process. We have questions and conversation angles that we can take them down. It's almost like an interview, a subtle interview that you're trying to see how they react, and you're giving examples of stories and kind of saying, "What do you think?" You're asking questions to kind of draw that out. It's not scientific. What I will tell you though is that I think you can ... We can root out with kind of 90% accuracy the folks that we know that are stubborn and narrow-minded, and their way is the only way. You can get that out quickly, so we can remove those. Then the rest of them that appear flexible and say the right things, there's still a high percentage of those folks that aren't going to pivot or are going to create an issue.

Eric Baum:           So I'd certainly say it's not a perfect process, but I think you can certainly kind of weed out very quickly folks that get really stubborn. Some of that is just almost playing devil's advocate. We're always challenging our companies, but sometimes we challenge them a little harder in the areas even if we're being overly harsh, just to see their response. Do they get offended? Do they kind of shut down or do they say, "Look, I understand what you're saying. Here's why I have a different viewpoint on that, but if we see data or if our customers start to tell us that, yeah, we're here to solve our customer problems, not our problems." I think it's hard. You can root out some of them quickly, the real hard-nosed ones, but you still face that. Because until people really face that first really tough adversity, you never know how they're going to react.

Mike Kelly:          How do you identify, so go the other extreme which is not the market will know what it wants when I tell them what it wants, but the flip side of that which is not the ego-driven person, but the person who will defer every decision to the last person they talked to? So this is the founder that pivots the company or the product every couple of weeks based on one customer conversation, or one conversation with an industry analyst or something like that. I'm sure you've seen them. How do you identify that person in your process?

Eric Baum:           Yeah, that's a great question too, and very fair, the other side of it. Similar as well in the conversation of really understanding how much, so in some of these conversations, what's the balance of sticking to their beliefs and convictions? There's a difference between having ... We want our founders to have a vision to say, "Here is a problem. Here's why we think it's a problem. Here's the empirical data that we have. Here's some of the initial validation," and that how we solve that problem could change. If someone folds very quickly on, "There's a problem" or the type of problem, that is a little bit indicative of how much of an opportunity is there. I want to see someone say, "Here's a gap that needs to be solved. Yes, we may pivot. We may find other gaps. We may find faster roads," so that's the anecdotal piece.

Eric Baum:           On the more scientific piece when we're kind of with them, what we're really kind of pushing folks on our teams is to get away from the subjective and the anecdotal, right? And that's what I think we all do naturally. That's what startups do. It's very easy to be like, "Well, you know I think my demographic is 27-year-olds, and I had this conversation. This is where I think the success is." We try to remove that by making things very objective like, "Let's not talk about demographics. Let's not talk about customer type. Let's talk about the attributes and the trait that we think that is important to the company." Like I was saying, does the length of sale cycle matter? Does our access to customers matter, yes or no?

Eric Baum:           And kind of define these things across the variety of stakeholders, right? Not just the management team. It's great to get some customer input, and again making it data-driven, if someone says, "Okay, this analyst said X." So my point is, okay, well, how do we know that that ... I always ask our founders, "Does this opinion or thought, is this yours or an individual person's, or is it representative of the masses? And if it's representative of the masses, how do we know?" Because again the biggest ... Well, one challenge a lot of founders make very early stage, kind of idea conception stage is, they're actually solving a problem, but they're solving a problem that they have. And then the first question is, "Is this problem you're solving, are you representative of 20 people? Are you more representative of more of the masses, right? Is this a problem that many people share like you?"

Eric Baum:           And I do the same thing on the reverse. "Okay, so this opinion, how do we know it's there?" Ultimately, I want to see the connection back in the trait. So like okay, this analyst said, "I don't really like where you're going because you're going to have a 12-month sale cycle." Or, "These big corporations, you're going after Fortune 100s, and they're going to take forever to sell, and we know that." Well, I marry that back and say, "Okay, well, how important was the length of sale cycle? Oh, we said it was really important because we don't have a lot of funding, and we don't have more key clients," and so then I can marry that information together. But to your point is, I think it's just as risky when folks are influenced by what the last person said. Really all you can try to do is build that sort of empirical, data-driven objective culture in it, that people have to fight to show why that aspect is important.

Mike Kelly:          Awesome. Give me one more [inaudible 00:46:45]. So when you guys are evaluating a company or working with an existing company trying to assess fit, what's another thing that you might see that could be a red flag that would either be offputting or would cause you to dig deeper?

Eric Baum:           It's very interesting, and this might be unique for us but as I mentioned, most of the work we do is equity for services. Again, we kind of tie it ... One thing I should mention is we believe we're founder-friendly. It's important, where the few folks that are in their camp, investors and different stakeholders often have competing interests and conflicts. As such, we also put our equity at risk. So when we take equity we say, "Hey, we're business owners, too. It's really scary to give a piece of your company if you don't know you're going to get the value. You might think we're great, and so we're going to put it ... It's going to invest over the lifetime of the project, and if either side is not getting the value you can cancel them. We don't want to earn equity for not creating the value. That's not our model."

Eric Baum:           And so the reason I say this is that a tell for us is sort of equity negotiations, or the negotiations. We really kind of figure out, what is sort of the right kind of ROI for us based on value. Interesting enough, when you're talking to companies there's conversations that aren't about, "Well, you know, it should be 3% or 7%." It's more about the value. "Okay, hey, if I can create value, if the pie is bigger, I get it." There's founders that get that. They're not really ... They don't get this ego of, "I'm not going to give X percent or Y percent." They're thinking about, "Well, what are these activities? How do they tie to value? How does it get there?"

Eric Baum:           Then there's founders that you talk to that they could love you. It's like, "I want to be at this percent or that percent," and they don't get the sense that, "Okay." They're not asking the questions, "Well, if I give equity, how do I know that I'm getting value back, and how do I measure that and those kind of pieces?" So for us negotiation, or even that conversation, because negotiation is happening and we know we want to work with them, but sometimes we're just having this kind of structural in the beginning. That's actually a big tell. We're looking for folks that want to drive value, right? That's going to be a tell on everything they do. Are they going to look at partnerships? Are they going to look at potential customers on, "I want to control as much as possible," or, "How do I generate the most value for the equity I have?" So I think people's perspective on that piece is a tell for us.

Eric Baum:           And then the one tell, or I guess it's not a tell but one kind of lesson learned I've seen is, one question I ask a lot of companies is, "Who's your next hire?" Okay, and it's a very interesting one, that I've been kind of telling this story for a couple years. Generally what happens is, I'd say 95% of the time the answer is a technology, a CTO, another developer, something in the technology realm. And while that's extremely important, what I look to hear is oftentimes from my perspective, most companies I sit, that next hire early on I would argue is a salesperson. Because you can have the best product, as you know, and the best thing, but if you don't have the capability to drive sales it's not going to matter.

Eric Baum:           And again, you don't need to have ... I tell people, it doesn't have to be a chief sales officer that's 50 years in. What you really want is something simple. Whatever industry you're in, someone who has experience selling into that industry. Because a lot of times we have technology companies that have people doing sales, that let's say they're selling into restaurants. They've never worked in the restaurant industry. They don't understand how to call on restaurants and how that piece works. So kind of the tell for me a little bit too is kind of their view on the organizational design or how they see building out their team.

Eric Baum:           Because by human nature, we tend to want to surround ourselves or pivot around our strength. So if we're a visionary, big-picture person we kind of want to hire, even if we don't say it, big-picture people. But really, we need that execution person. If we're a technology person, that's what we're comfortable and we've developed a product, we feel really comfortable to continue to add technology folks, right? We don't know a lot of about sales. It's scary. That seems, the next step we just want to keep iterating on the product, so really getting that balance is sometimes a tell to me.

Mike Kelly:          Awesome. I don't think you mentioned this during your intro for Solidea, and if you did I apologize I missed it. But I believe you guys have a bit of a Midwest focus with the companies that you work with. Is that correct?

Eric Baum:           It is, and thanks for bringing that up. I was trying to kind of be brief on sort of the Solidea side of the pitch, but I think I probably neglected a couple key informations there. So yeah, for Solidea we have a kind of a viewpoint, now five or six years ago or more, that innovation was starting to change and evolve, and then a lot of innovation was moving away from the typical coasts like New York, Silicon Valley and the West Coast Silicon Valley, and that we really thought innovation and a lot of early-stage companies were going to come out of the Midwest and the Southeast, and for a variety of reasons.

Eric Baum:           One, just a lot of great access to talent and education. As the cost of setting up a business go down, it's much more cost effective. Also most people, their customer bases, most customers and most companies or even a majority of them are throughout the country, in the Midwest and Southeast. And in addition, we thought there was going to be a lot of smaller cities that were going to try to reinvest themselves through entrepreneurism, so kind of those private public partnerships. So you think about like Detroit, Michigan, where they're trying to revitalize that area by drawing a lot of private startups in. So we've been involved in, we have a lot of focus in Indianapolis and Michigan, in Detroit, Charlotte from fintech.

Eric Baum:           It's on the West Coast, but it's in Los Angeles, which wasn't always seen as sort of a big startup hub. That was San Francisco, but they're starting to get some momentum, too. We like that, because think in these areas, the Midwest and Southeast, these founding teams have to be more boostrapping. They have to be more economic efficient. Like Mike has been living, and a lot of folks probably on the podcast, there's less sophisticated angel networks and it's harder to raise big rounds, and you have to go further along with less capital but in many ways, it creates the right behaviors and the right economic efficiencies to create that. So yeah, we think that's going to be the drivers, and that's what we're seeing, just a lot of great companies coming out of those areas.

Mike Kelly:          Awesome. I wanted you to hit that. I think that's an important part of at least the relationship I know we've been able to build with you. So I just wanted to end on, I think I've collaborated with you guys now on something like four companies. If you'll let me, I'd love to do it on a fifth someday. You guys are amazing. I can't speak highly enough about the work that you and your team do, and I do it often. If anybody would like to get in touch with you, how should they best do that?

Eric Baum:           Great, you know I definitely appreciate it and I do want to put that, especially for folks listening. We've just got the most admiration and respect for Mike for developer town, for the collaborations we've had with portfolio companies. Really one of our favorite folks and organizations to work with, and has been a great source of introduction to companies. That's something I should have mentioned as well is, because we are a cost center, because we put ... Our staff is extremely expensive and we put all the risk in the equity, we have to be highly selective. So most of our portfolio companies really do come from, we really don't look at folks that aren't coming from a trusted source, whether a VC partner that we work with. A lot of our companies come from some of the relationships we have with big VCs that say, "Oh, we really like this company but they're a little too early for us. We think they would really benefit from your help."

Eric Baum:           It becomes a win/win. We know that they've got some tie-ins to those capital sources. We know they're there and they also hear from folks that they respect that make some other changes. So I would say, anyone feel free to reach out to me. You can either reach out directly through Mike and he'll make a connection. Mike, if you want to pass along contact information you can always send me an email. I'll give you my Gmail because it's shorter, Ebaum, E-B-A-U-M 2611@Gmail.com, or go to the Solidea website and reach out. But we're always happy to talk to folks and make ourselves available.

Mike Kelly:          Thank you so much for taking the time. I know we ran way over, but I really appreciate it.

Eric Baum:           Oh, no problem. Really enjoyed it. Great as always speaking with you, and apologizes in advance for, I tend to have long answers but as you can see it's just an exciting space, so always happy to chat about it.

Mike Kelly:          Thanks, Eric.

Eric Baum:           Yeah, thanks, Mike.