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Episode 229: Exploring the Mind of A Venture Capitalist with Earnest Sweat

May 31, 2023  |  By Matt Waller

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This week on the podcast, Matt sits down with venture capitalist Earnest Sweat. The conversation begins with Earnest discussing his journey from traditional investments to alternative investments and how he became interested in venture capital. Earnest then dives into how he became an investor in FreightWaves and Platform Science by going through his process for deciding where to invest. The conversation concludes with Earnest walking through his involvement with his portfolio companies as well as advice for young entrepreneurs.

Episode Transcript

Earnest Sweat  0:00  
Like, what do you want the first conversation to be is like an amazing trailer, where you understand the story and plot point, you understand this huge problem, and you understand why your hero is selected to then go go after and solve this problem.

Matt Waller  0:20  
Excellence, professionalism, innovation and collegiality. These are the values the Sam M. Walton College of Business explores in education, business and the lives of people we meet every day, I'm Matt Waller, Dean of the Walton College, and welcome to the Be EPIC Podcast. I have with me today, Earnest Sweat, who is a venture capitalist. And he grew up in Little Rock, Arkansas. He then went to Columbia University, for undergraduate, and then he received his MBA from Northwestern University. And since then, he's been involved in the finance industry, especially venture capital for quite a long time. But you you started your career more in equity research, is that right? 

Earnest Sweat  1:10  
That's right. Yeah. 

Matt Waller  1:11  
And what made you decide to move over to alternative investments from traditional?

Earnest Sweat  1:20  
Yeah, so for me, well, it makes a lot more sense now, after now that I'm here and found what I believe is my calling, being a venture capitalist. But taking a little bit further back, you know, growing up in Little Rock, I had two people investors as parents, like, I feel like they would have been amazing venture capitalists, because they invested in people. And it wasn't just something they told me and my sister to do and with volunteering, they actually their professions were investing in people. So my dad is a CS grad, ended up working for the Workforce Development Agency in the State of Arkansas, becoming a Director of IT. And, you know, if that's not enough, he was also a full time pastor since I was 10 years old. And then my mother, just retired a couple years ago, she's a science teacher for Little Rock public school, in middle school. And so those two lived out kind of one of our big ethos, or, you know, values, which is equipping others, yeah, obviously, education was really important. But making sure that in careers we have, they can be, you know, give us a good well being, that we're acquiring knowledge that can help others reach their self actualization. And so fast forward. Venture capital for me, is living that out. And so, how I came from equity research on is like, equity research is a great foundation for me. I remember, at 22, I was deciding between sales and trading, or investment banking, and I had a lot of friends that kind of put a, you know, a line in the sand and what they do. But for me, you know, being the, just like, fully on Capricorn, and just like, how do I, you know, become the best person I can, how do I use my skills and improve my areas of opportunity, like growth, I always was good at communication, but I wanted to get even better at it, especially when from a business sense. But I knew I also needed to have those financial technical skills of being able to read a P&L, read a balance sheet and interpret how that business is doing. And so for equity research, it was the perfect balance. And so that career was a perfect balance of understanding that every industry has a science, and that you have to bring together both these the micro of what is happening with the company with a macro of going on. And so I covered REITs, starting in 2007. So, yes, that was a crazy time, but was there from 2007 to 2011. And the reason why, ultimately, we can talk about this more, but the reason why I made that shift was I was making recommendations to hedge funds, fund to funds, all these different portfolio managers, but I wasn't putting skin in the game. So it's really just kind of like a theoretical exercise of saying, hey, if I did invest, I would either short X, hold y, or buy Z. But that's it, you know, you put not your opinion and set but you're not putting any skin in the game. And so that's what really kind of energizes me to make this switch.

Matt Waller  4:42  
So you're you're into value chain, broadly speaking, in more traditional industries, like retail, logistics. What made you interested in that particular those particular verticals?

Earnest Sweat  4:58  
Yeah, I think it's the most amazing thing about venture capital, to me as a profession, is literally no conversation has to be worthless, you can learn something from literally any conversation. Because everybody has a different perspective and expertise. And you never know you might invest in that area that they're talking about. And so for me, even how I got into venture capital was how do I leverage what I've learned in the past and not throw it away? So many times in our careers, I can speak for myself, I thought, I gotta create a blueprint. So maybe I need to learn how to, you know, be an AI expert. And it's like, no, to get into this industry, I need to know what I'm passionate about, what I have a background in to create that and build on to the narrative. And so for me, that was real estate. I cover REITs. At 22, I was having, you know, being on calls, on quarterly calls, asking tough questions to Fortune 500 CEOs. And so that was a basis of like, I know, when a real estate company, and they get big, what their problems are, and what their pain points are, now just need to understand technology, and how what types of technology platforms can solve those problems. And so that was like the evidence of like me, coming up with what I call value chain tech. And it's taking the HBS perspective of value chain is a number of primary and secondary activities that a company does to increase the end value or value for the end user. And so I've just only layered that as like a framework for identifying the most pressing pain points that all enterprises need help on. And so, for me, the same problems are happening for supply chain are happening to retail are happening in manufacturing, essentially happened to all of GDP. That's not the 19% of high tech. And so those three issues are quickly one our business systems that we typically centralized in the 80s, up until 2010s. Those systems of technology and people aren't equipped to deal with today's business environment, right? We have both globalization and deglobalization happening at the same time. Two, because of those, that complexity of the business environment, company, business leaders and CEOs are saying that their stakeholders, most important stakeholders, their customers, and their employees, are demanding transparency and speed at an unprecedented pace. And three, we're in quite possibly the wonkiest labor market of all time, right? I like to say, from cashier to ML engineer, we don't have enough people to fill the demand. What that really adds up to is, whether you're leading the SMB to a Fortune 1 company, you're expected to do more with less resources over the next 10 years. And so instead of the Silicon Valley, kind of, you know, ethos of like software is going to eat up the world actually kind of put it on top of his head software is going to enhance the world. Because of those three things I mentioned, there's not going to be the negative connotation of like, it's going to take away jobs. I said, we don't have enough people, we need it, so people can be more efficient.

Matt Waller  8:31  
It's amazing how tight the labor market really is, in so many different ways. And, you know, a record number of factories being opened right now that are highly automated. 

Earnest Sweat  8:46  

Matt Waller  8:46  
You know, it's gonna take a few years to bring them online. But

Earnest Sweat  8:48  

Matt Waller  8:49  
I've seen some data that is astounding, that the number of factories being put in place, you have that on the one hand. And then on the other, you know, you've got generative AI that is going to solve part of the problem. I, I know, you know, I constantly hear about how people are able to get a lot more done responding to emails, making posts, 

Earnest Sweat  9:18  

Matt Waller  9:19  
Converting one type of media into another. 

Earnest Sweat  9:24  

Matt Waller  9:25  
Using generative AI. And not only that, but even helping from a planning perspective. And if you think as you know, so many of the value chain companies, the companies involved in traditional value chains, a lot of times their weakness is planning. So I would imagine over the next few years, we're going to see a lot of new generative AI applications within the value chain space.

Earnest Sweat  9:56  
I think. Yeah, I would agree. I think it's going to take special entrepreneurs who identify what those key pain points are. So pain point one, pain point two, because those are going to get traction when it comes to sales. Again, because you can't just when companies like Microsoft and Uber, who have a pretty big war chest of cash when they're contemplating, hey, do we need 100 software vendors? And so it's critical now that you're solving a real pain point that people need today, or need yesterday to be quite honest. And so although there's a lot going on in generative AI, we're going to have to have specific, it's really cool stuff now, and all those things you mentioned. But how do we really productize it in a way that it's solving specific industries problems. And so what I look for is like, these archetypes of entrepreneurs, when they're looking to enhance or accelerate a foundational industry. And so it's like, typically two and possibly a third coming up, one I call the innovative insider. So that's somebody who's worked in this industry for a long time, has faced a problem, and sees that technology can really solve it. And they have the ability to mobilize technologists and product people around them to go along with the vision. The second archetype is the humble outsider. So having somebody who's typically maybe they come from Silicon Valley, maybe they come from, you know, some some tech background. And they identify, hey, that's I've done research, that's a problem. But I'm gonna check with customers. And I'm going to bring on advisers and employees who understand the nuances of those industries. So I'm not frightening my customer a lot of times from this, like long term vision, but I'm able to, you know, bring them along and grow with it. And so I think that's the second thing. And then the third is, for lack of a good name yet, I'll take suggestions. But I think essentially a person I call like a bridge. This is somebody who is highly technical, but also has maybe a family background in, in an industry, maybe their family always had like, let's say, for a construction tech company. A family has had a construction company for the last four generations. And then they went to MIT or Caltech and have just now say, hey, I can bring these two worlds together. So that's the third archetype, but you're going to need special entrepreneurs, which I think despite all the uncertainty that's going on, we're going to start to see that next wave of awesome entrepreneurs going after really big problems.

Matt Waller  12:53  
I noticed, just diving into a little detail. You were a Series A investor in FreightWaves. 

Earnest Sweat  13:00  

Matt Waller  13:01  
And I also am impressed with FreightWaves. I met them about the time you were investing in them a few years, a couple years ago. But I loved the vision of them becoming the Bloomberg of logistics. What a brilliant, it's such an easy vision to get. And if you've ever used a Bloomberg terminal or read Bloomberg media, you get it. And, you know, they've got this tool called sonar, which clearly is analogous to a Bloomberg terminal. And then you've got all the news for for logistics. How did you, so I'm asking this to kind of try to understand how did you learn about them, and how did you decide to invest in them?

Earnest Sweat  13:52  
Yeah. So I learned about them through, like, my job is so it's funny, because most people when asking like, what a venture capitalist does, have some friends is like, that's not real work, just like have coffees and talk to people hear people's pitches, and talk to LPs and ask for money, right. But it's a little bit more nuanced than that. And so having a prepared mind when I joined Prologis, which is the largest warehouse owner in the world, yeah. And I joined as a founding team member of their venture group, this first time they ever had a venture capital group. 

Matt Waller  14:29  
Oh, I didn't know that. 

Earnest Sweat  14:30  
And so yeah, I'd been there for at that point, probably a year and a half. And so I developed you know, I saw that we had a thesis around logistics and particularly seeing that there was so much cost associated with delays due to not having efficient trucking and not really having data around it. So we built a thesis around how can we get more data within trucking which could take out a lot of the delayed costs that are associated with waiting times. Anytime I was talking to a seed or pre seed investor who also followed that vertical, the logistics vertical, I would mention it. And you know eventually we spoke with Fontinalis, which was an early investor in them earlier than us. And they mentioned that you should guys, you guys should meet Craig. And so brought him in and, you know, loved the team loved, like you mentioned, the vision was clear. And I would say he was a, if I go back to my archetypes, he was an innovative insider, you know, comes from a trucking family, or actually probably even pushing more of the kind of bridges I mentioned, because having experience, you know, looking at technology, and then coming from a family that built one of the biggest trucking companies in the country. It just merged both worlds. And so given we knew his expertise, and then another thing we always look for, and I always look for as an investor is, am I the right investor that can actually help them get to the next stage, whether that's sitting on their board, being a board observer, making the right relationships, and then also looking at the strategic value that we could possibly add. And so there was just a lot of synergies between what Prologis, you know, their footprint in the entire world. And how many trucks go to their, their warehouses. And what FreightWaves was trying to solve.

Matt Waller  16:33  
And then you also invested in Platform Science.

Earnest Sweat  16:39  

Matt Waller  16:39  
Which is another impressive company.

Earnest Sweat  16:43  
Yeah, the thesis around there was still like, how do we streamline trucking? And we made a few other investments as well, like why systems which helps with automating the routing systems for commercial delivery, as well as trucking companies. But ultimately, it's like, how do we streamline this so we can make this more efficient, we're not wasting gas, obviously, and, or diesel. We're not hurting the environment, and we're getting the most out of each truckload. And platform science actually was also a, you know, thesis was built around the ELD mandate. So we knew there was a point where all trucks needed to have some type of electronic system to track how long truckers were on the road where they are all those things.

Matt Waller  17:32  
So Earnest, you know, I first started following venture venture capital in the mid 90s. And, you know, I've seen a lot of ups and downs in the business, there's times when it's really hard to raise money for a fund. And there's times when it's easier. It's never easy, but it's easier at times. I'd love to hear your thoughts about the current state and what you see for the next few years.

Earnest Sweat  17:59  
I understand how things can go. And never to get too high on the highs. And so, you know, but from our venture career, pretty much.

Matt Waller  18:08  
That's true. I mean, you you started at BMO Capital Markets, July of 2007, so you have, you've been through the tough stuff,

Earnest Sweat  18:19  
And seeing companies that were around hundreds of, or 100 years 

Matt Waller  18:25  

Earnest Sweat  18:25  
So that was my entrance into the workforce. I was like, oh, it can go like this. And, you know, took that, you know, people don't have advice, they usually say, when facing tough times, they're like, it builds character. So I just kind of embrace that. Okay, this builds character, you have to, actually, what I really get it boils down to is you got to find value for your customer base, despite what's happening in macro. And so I take the same application to now right when things were so up and then we realized in 2020, oh, we don't have to meet founders, they can be anywhere, we can just give term sheets in over Zoom. That took a run up. We also had obviously well documented a lot of tourist investors who hadn't done much early stage or even growth stage doing more of that. And so prices went up and it seemed like a lot of people could get money, not to mention, you know, VC firms were raising a lot of money as well. But now things have changed as we've seen the continued. People like to go to the denominator issue for LPS, right like their public stock or their public portfolio is so far down that is they're not at the levels that they want of, of allocation versus you know, now venture could represent when it's only supposed to be 10% of their entire endowment now it's 25-30%. And so because of that, we've definitely seen a drawback on on valuations or just a stall and in, in raising capital, especially towards the end of 22. And it's still been slow, I would say in Q1. But things are getting funded, I think it's a great time to raise or start a company and raise at the early stage. So I'm talking about pre seed seed, and even seed to A, because you have an understanding of what valuations actually are today, where I'm seeing a lot of trouble is A to B, especially if you got a really high valuation in A in from in 2020, or 2021. And you haven't really grown into that valuation. I think you're just going to have an influx of more people starting new companies. But when it really drills down to now of understanding what your narrative is, why are you starting a company? Why are you uniquely equipped to solve this problem? Why do you wake up every morning wanting to solve this problem? And then finding the right investors.

Matt Waller  21:06  
So would you mind walking me through your due diligence process? What, how do you go about?

Earnest Sweat  21:13  
Typically, a process is first meeting with a company, that first conversation is critical with me, and the thing I'm getting at, sometimes I don't even want to go want them to present the deck. But I just want to understand like who they are, what drives them? What's the origin story of this company? So that's the first conversation, then I'll request some, the data room, so their financials, I love looking at the financials, what they're thinking, understanding, and I'll dig into this, why I use my equity research background digging into their assumptions, what assumptions are they making, I love to look at their product roadmap and any technical IP just to understand what is maybe defensible, if they're leaning really on the kind of technical risk. And then the other thing is, I like to look at the sales, sales deck, because how you're positioning yourself to your customer base, is really where I like to lean in. Obviously, coming from a pretty technical family, dad, a CS grad, sister is a data scientist. I've picked up a lot of stuff and have a strong network and stuff. So I know what to ask and who to introduce them to to get even more technical diligence. But I think a lot of the lacking in the industry or areas of opportunity is like understanding, even at the early stage, what is the business risk? And so where I like to take that in the next step of diligence, after you know, asking the questions I've seen from the data room, I like to point out two to three people within my own network that can feel that persona. Because there's one thing to get, you know, do customer references, once you've gone down a path and looking to do it, you know, writing up a term sheet. But who of those customers who have agreed to do that aren't going to say amazing things that they use in the product? Well, actually, sometimes they don't say the most amazing thing. That's when, when everybody's entrepreneurs, if you have somebody on your reference list as a customer, let they need to say that NPS is like 15 like that, at a bare minimum. But for me, I like to have a win win win where I have a trusted executive that I've known for a while they can be a buyer of this technology. And so they get to understand what's out there, the founder gets to actually have a chance to get a sale. Even if I don't sign up to you know, invest in the company or not, they get a shot on goal. And then I get unfiltered feedback from that executive. And then lastly, the entrepreneur gets to see hey, this is what you get from me, starting day zero. I like to help with leads on customers, because that actually has impact on revenue. So that's, that's really

Matt Waller  24:10  
So that's part of your big value add.

Earnest Sweat  24:12  
I love doing that. I love like meeting people. I love understanding what they've dedicated their lives for. And I like being a bridge. That that's why I left.

Matt Waller  24:27  
A lot of value. 

Earnest Sweat  24:28  

Matt Waller  24:28  
What what's your approach to the board involvement in governance with your portfolio companies?

Earnest Sweat  24:36  
You learn something new every day. I'll say that being open to that. I think a good board is like a great basketball team. And maybe the better equivalent is like a great AAU basketball team. Just understanding different boards will have different constructions and you need to be able to flex different roles based on who's there. And ultimately, it should be about serving the company and that founder and helping him or her make the best decision for the company and grow.

Matt Waller  25:17  
How how do you prepare your portfolio companies for exits?

Earnest Sweat  25:22  
I think that's a, I probably don't have a great answer right now. But I think that's something that a lot of investors and entrepreneurs should be thinking about. Based on, you know, if you're at a certain clip or a certain stage, is there a soft landing, or even a good landing, that doesn't take you to like where you thought you want it to be? Or you strive to be? Because I think I tell friends this all the time. Even the most well informed kind of person follows technology or, or tech adjacent companies. There's so many companies that are still private, that you think are public. Stripe. I forget all the time that Stripe is private. And so there's just a lot of companies that are kind of waiting on the sidelines until the public markets get better. And then they'll finally have those exits. And so it's kind of a waiting game.

Matt Waller  26:22  
You've given some really good advice along the way, was during this conversation, but any other advice you would give for young entrepreneurs?

Earnest Sweat  26:31  
Yeah, I think, you know, especially in this environment, it's a safe environment and college where you can just try out new things while you're in school, I would say definitely exploring, what are you really passionate about. And a lot of times, you can learn on someone else, like even interning at a startup, to see if that's the right environment that you want to either start your own thing. Or if it's like a little bit later, where you're at, like a Databricks, or you're at a a more growth company. That's still, you know, high growth, and still has those elements of like, there's a lot to learn. But maybe it's not so chaotic. So just being able to explore the things. I was always told, I'm not sure it's great advice or not, but like your 20s are about figuring out what you don't want to do. And if you think you lucked out and figure out what you liked doing that's even better. And 30s are what you figured out what you like to do, and then in 40s and 50s 

Matt Waller  27:36  
I like that. I see that.

Earnest Sweat  27:38  
Yeah, yeah.

Matt Waller  27:39  
Well, you know, you you mentioned, like doing an internship, because so many times it seems like students wind up going just with big companies for their internships. But so we created this program called the Venture Intern Program, which is specifically to help early stage companies find interns. And, and pick interns and, and to provide them with a format for providing an internship for a student. And then making the students aware of these opportunities. So we've been doing this for maybe, I don't know, four or five years, I'm not sure the exact time. And sometimes then they stay on permanently. They say I really do like this, or they say, no, I think I'd rather work for a large company. But in either case, they've really learned something about themselves and what they like and even if they don't want to work in a early stage company, I think that knowledge of what it's like, is valuable for the rest of their career.

Earnest Sweat  28:44  

Matt Waller  28:46  
Well, Earnest, thank you for taking time to do this. And it's been fun talking to you getting to know you. Look forward to it.

Earnest Sweat  28:53  
Absolutely. Thanks for having me.

Matt Waller  28:56  
On behalf of the Sam M. Walton College of Business, I want to thank everyone for spending time with us for another engaging conversation. You can subscribe by going to your favorite podcast service and searching Be EPIC. B E E P I C

Matt WallerMatthew A. Waller is dean emeritus of the Sam M. Walton College of Business and professor of supply chain management. His work as a professor, researcher, and consultant is synergistic, blending academic research with practical insights from industry experience. This continuous cycle of learning and application makes his work more effective, relevant, and impactful.His goals include contributing to academia through high-quality research and publications, cultivating the next generation of professionals through excellent teaching, and creating value for the organizations he consults by optimizing their strategy and investments.

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Walton College of Business

Since its founding at the University of Arkansas in 1926, the Sam M. Walton College of Business has grown to become the state's premier college of business – as well as a nationally competitive business school. Learn more...

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We're sitting down with innovators and business mavericks to discuss strategy, leadership and entrepreneurship. The Be EPIC Podcast is hosted by Matthew Waller, dean of the Sam M. Walton College of Business at the University of Arkansas. Learn more...

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