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
Yeah,
Matt Waller 8:46
You know, it's gonna take a few years to bring them online. But
Earnest Sweat 8:48
Absolutely.
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
yeah.
Matt Waller 9:19
Converting one type of media into another.
Earnest Sweat 9:24
Yeah.
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
Yeah.
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
Yes.
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
disappear.
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
Yeah.
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
Yeah.
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
