In this next iteration of the capital allocator series, Matt sits down with Don Huffner, Vice President at RZC Investments, which is a Bentonville, Arkansas, based multi-strategy investment firm focused on deploying capital into operating businesses at all stages from series A to buyout. It is owned by Steuart and Tom Walton. They start the discussion with a quick overview of RZC Investments including their focus when it comes to investing, although they are industry agnostic they do invest heavily in the outdoor industry and technology including investments in Eddyline Kayaks, Allied Cycle Works and AcreTrader. In general, their investments focus on strengthening and diversifying the economic fabric of Northwest Arkansas. They continue the discussion by diving into the decision making drivers when it comes to investing at various stages within a company's journey, especially the importance of getting to know founders and the people who are running a company that they are considering investment in. They also discuss total addressable market for a company and how RZC evaluates that metric for a company. They finish their discussion with an overview of Don's career journey and how he came to Northwest Arkansas and RZC.
Episode Transcript
Don Huffner 0:00
When there are companies that are right here at home growing their talent, we are
looking for the best businesses that we can support. And I think that we've got a
phenomenal amount of community resources here that we can leverage to accelerate the
growth of businesses that are based in Northwest Arkansas.
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. For next few episodes, I will share my conversations with
capital allocators in the seed, venture and private equity space. They will discuss
how their capital allocation works, and provide tips to entrepreneurs on how to stand
out. I have with me today. Don Huffner, Vice President at RZC Investments. Thank you
so much, Don, for joining me. I really appreciate it.
Don Huffner 1:04
Yeah, thank you, Matt. I'm happy to be here and excited to speak with you today.
Matt Waller 1:09
You know, Don, some of the companies you all have invested in, like Eddyline kayaks,
Allied Cycleworks AcreTrader, and others. These are some companies that I interviewed
the CEOs of for our entrepreneurship series. So this will be particularly interesting.
I wanted to start out with if you wouldn't mind tell me a little bit about RZC and
the background and that sort of thing.
Don Huffner 1:37
So RZC, we're based here not far from Fayetteville. We are up in Bentonville. And
we are a direct investment vehicle for Steuart and Tom Walton. And we are doing executing
a broad capital mandate that ranges from venture capital typically series A and beyond,
up through growth, equity, and later stage buyouts. So we have a tremendous amount
of flexibility as to the stage at which we're investing, as well as a fair amount
of flexibility in the industries in which we invest. So we are technically industry
agnostic. But we do spend a lot of time in the outdoor industry, you met with Scott
from Eddyline, and Drew from Allied which is phenomenal, as well as technology, so
within b2b SaaS, and you met some of our other tech enabled investments such as AcreTrader,
but technically industry agnostic. And so a broad capital mandate with the ability
to write checks from a million dollars up to 10s of millions of dollars or hundreds
of millions of dollars. So we've got a unique vehicle for direct capital deployment.
But I'd say the unifying theme across a broad array of investments is that we work
with all of our portfolio companies to in some way, shape, or form, add weight to
the scale, if you will, or helped strengthen and diversify the economic fabric of
Northwest Arkansas. So regardless of the stage or size of the investment, we're frequently
working with our management teams, to play a part in the growth story of this region.
Matt Waller 3:20
That is really interesting. When you think about the growth story of this region,
it's quite remarkable. I mean, I've lived here 28 years, and I've seen it, it's been
remarkable in terms of, you know, everything from restaurants, I mean when we first
moved here, there really weren't any good restaurants in the whole region. And now
there's so many it's quite remarkable, but even things like you know, the bike trails
not only the mountain biking, of course we're known as being the best mountain biking
place in the country but but we also have great paved trails. So I can kind of you
know, and of course I own an Able which is a type of Allied Cycleworks bike that is
for gravel, and Allied is here in Northwest Arkansas. I've been to their plant, and
of course Eddyline Kayaks kayaking is another big thing. And Northwest Arkansas, for
those of you listening if you've not been here, I particularly like the Buffalo River.
It's beautiful. I think it's one of the it can match any river in the country in terms
of beauty. So I see that that, that's really interesting. Those are companies that
can make a difference here. You know, we've got Rapha, which is one of the top apparel
cycling is the top apparel cycling line. But at the same time we're trying to advance
our high tech focus And so I understand then why you would invest in AcreTrader that
that makes sense to me, such an innovative idea. But going forward, so I can see how
you all are using investments in this that support the strategy for the reason. And
in some some ways this is really brilliant, because it uses market forces to drive
success. And I don't know if that's intentional, or I suppose it is.
Don Huffner 5:33
Absolutely right. You know, we were speaking about this with there was a group in
town last week from Tulsa, and I was posed a question, what's the future of innovation
look like in Northwest Arkansas? And to me, the answer is, innovation will follow
authenticity, right. And so if you look at what is authentic to this community today,
we're trying to capitalize off of this phenomenal base of authenticity and work with
companies to create the innovations of tomorrow that come from it. And that's a great
reason why we spend a lot of time in the outdoor industry, right? The authenticity
of the access to an abundance of natural resources, here are our waterways, our trail
systems, et cetera, has led to real business benefits that are tangible, right? You
mentioned Allied, we just released our first ever mountain bike maybe two months ago
that was designed and built for riding the trails of Northwest Arkansas, and having
the credibility of Allied being based here to launch a product like that really gives
us a level of authenticity in the market that we might not have otherwise had. And
similarly, we talked about Rapha right. Rapha is a UK based company, but we launched,
I guess it's probably a year and a half ago, a mountain biking line of apparel. And
we did that out of our Bentonville offices, and the opportunity to move from a road
centric product into expanding into an entirely new line of riders and customers,
we were only able to do that because of those market forces that you mentioned. And
so it's it's certainly intentional. And it's one that we're very thoughtful about
or try to be.
Matt Waller 7:35
You mentioned, your strategy is very broad and flexible. But let's suppose you have
two firms that have a similar kind of market focus and product, some more capital
requirements. When you look at the drivers of your investments in each of these areas,
venture capital, growth, equity and buyouts, what are the big drivers of decision
making at each stage of these investments, even when the companies are comparable?
Don Huffner 8:12
So I'll start with venture capital. And certainly things are situation dependent.
So I'll speak a little bit broadly. But typically, when we're looking at a venture
investment, we are primarily considering the team and people, the market in which
they're operating and the product that they've brought to market right? Now, people
are a recurring theme, right? It's the most one of the most important aspects of making
any investment is knowing and trusting the folks that you work with, but it's particularly
critical at the earliest stages of a business's lifecycle when investors and even
the founders and management teams themselves are probably aren't certain what the
future of the business looks like. And so we are looking for smart, tenacious, passionate
and malleable founders who we think we can work with for for a decade plus and who
are able to build robust teams of, you know, equally impressive folks around them.
Secondly, we're looking for as large of addressable markets as possible, right, you
can build the greatest business in a tiny market, and ultimately never achieve a venture
like returns because a market that's large enough does not exist to support the business.
And then thirdly, we are doing a bunch of work on our end to investigate the competitive
dynamics, competitive positioning of the business and the product to understand if
it's truly disruptive enough to earn outsized share in a hopefully large market. As
for growth equity, the situation changes a little bit, right? Generally there is proven
traction in the business and in its product, there's a full team in place. And often,
the company's proven to some degree that it can be profitable, right, which is generally
never the case on the venture side of the equation, with a few exceptions, and the
company has proven its ability to be profitable, and is making a strategic decision
to forego profitability to continue to gain outsized market share. So in those instances,
what we're looking for, is, again, a great team. But we're really trying to dive in
and understand the unit economics of how a company transacts. So I will use just for
the simplest example, some some widget, right? A company may be unprofitable. But
if they sell widgets on an individual basis, every time they sell one singular product,
are they making money? If the answer to that is yes, and we can prove that out through
a lot of work, you can justify the case that investing in the business further to
gain market share is is a worthwhile investment. And on the buyout side, where, you
know, an industry or business is typically quite mature, we're looking for defensive
moats, right. And those can come in a variety of forms. That can be through high barriers
to entry in an industry, it can be through best in class processes, best in class
management teams, the defensibility of brand is very real in the consumer space. And
so we're looking for businesses that are profitable, and can demonstrate that they
have the ability to defend those profits for years to come. And also, we're looking
for levers to pull to drive additional value within the business, to grow in new ways
that the company hasn't in the past, or to look at the cost structure of a company
to find levers to create further efficiency in the business and drive profitability.
So it's very different based on the stage at which you're investing, which is part
of what makes my job fun, right, we get to do all three.
Matt Waller 12:07
Yeah, that's unusual. Usually you have you're in one or one of those three, but not
all three. Going back to the earlier stage companies, this idea of looking for founders
who are flexible, and tenacious, that's so important, because invariably, there's
a lot of pivoting that has to go on early. So trying to identify their willingness
to pivot can be fairly challenging, until you actually observe it. So I suppose you
can assess it based on previous pivots. Or you might be able to assess it based on
conversations, and really, maybe even the understanding of the need to pivot. I think
some people get into early stage businesses, and they haven't been around early stage
businesses, and they don't realize how frequently you wind up having to pivot.
Don Huffner 13:03
I think that's true. Absolutely. We've seen business models change substantially from
where an idea started. And I think one of one of the most interesting ways to just
kind of test that we love to if we're gonna do an early stage deal. We love to get
to know founders at the start of their journey, right and follow them over a year
or two until they get to the point where they might be raising that series A fundraising,
right. And hopefully over those two years, we have gotten the chance to watch them
pivot potentially right or, or persevere and execute, right? I think pivots are common,
but also sometimes it's important to see the tenacity required to persevere through
an idea and not pivot too soon, right. And so you can see both. And our strong preference
is to really get to know folks well, leading up to our investments, so that we can
underwrite, underwrite the folks that we're that we're going to get into business
with, and furthermore, see the teams that they grow and build over time.
Matt Waller 13:06
Well, speaking of that, you know, as you know, when companies start scaling, they
need people, they need capital, they need the processes, they need technology. And
the people are the hardest part of that equation. And so of course, capital's critical
to be able to, to do that. So Don, you mentioned that one of the things you look at
is the total addressable market. Many times people I'm glad you didn't use the acronym
I so often hear people say TAM, and this and that and the acronyms confused people
who aren't familiar with these things, but the total addressable market, meaning just
the total potential market of this business this, but how do you go about assessing
that with a company?
Don Huffner 14:15
It's a good question and can be hard to answer, right? Because I think we all I say
we as investors love to love to throw around terms and at times, make things sound
very scientific that that aren't necessarily scientific, right? There's, there's combinations
of art and science. And when we're looking at a new market, we're certainly leveraging
extensive third party research, right to pull data that we can aggregate from a variety
of sources to triangulate around what a number for total addressable market is. But
I think where our work really focuses on is actually spending time with customers
in that space, or potential customers to validate if all these third party numbers
make sense, right. And you can have, theoretically this very sizable market, that
if you get in and speak to customers, and understand that the problem isn't really
all that important to them, you can start to poke holes in that total addressable
market pretty quickly. And so I'd say, we're starting from kind of a top down approach
of leveraging as much third party research as we can, oftentimes we will hire groups,
consulting firms, research houses, etc. to help us kind of frame the market initially,
and then we're rolling up our sleeves to work with customers to understand if, if
those numbers really hold true.
Matt Waller 16:45
Don, how do you work with the companies you invest in? To be a part of the Northwest
Arkansas story?
Don Huffner 16:55
Yeah, it's, it's interesting and looks looks different for a lot of companies, right?
So we have investments in companies headquartered all over the United States or even
internationally, with with Rapha being based in London. Eddyline, who I know you spoke
with is based out of Washington. And then we work with companies that are headquartered
right here, like Drew from Allied, who you've also spoken with, or Carter from Acretrader
who I believe, you know, well. So it's situationally dependent. But I'd think when
we look outside of Northwest Arkansas for business partnerships, we are primarily
looking for growth oriented businesses that have a credible reason to grow into this
region. For Eddyline, and Scott, for example, they needed a distribution facility
in the middle of the United States. And that's what started their conversations with
us. And then alternatively, when there are companies that are right here and home
growing their talent, we are looking for the best businesses that we can support.
And I think that we've got a phenomenal amount of community resources here that we
can leverage to accelerate the growth of businesses that are based in Northwest Arkansas.
But most critically, we're looking for for companies that want to hire and grow here.
And I think that's very important to us.
Matt Waller 18:18
One other question I have for you, in closing is, would you mind? You know, a lot
of students might be listening and wondering, how did Don get to this place? How did
what was your path?
Don Huffner 18:32
I did not grow up in Arkansas. I am originally from Georgia. But I took off, did my
undergraduate in the United Kingdom at the University of St. Andrews. And at the time,
I wasn't I wasn't sure what I wanted to do. I just knew that I wanted to learn as
much as I could. And I think I've always been focused on driving as much impact as
I possibly could on the organizations and people that I work with. And so at the time,
I thought you know natural options would be either strategy and management consulting
or investment banking. And I started off in strategy consulting, I moved back to the
United States. I worked for Accenture for a short period of time. And then as I was
working in consulting, I think I came to the conclusion whether whether rightfully
or wrongfully that if I was really going to focus on that impact the best way to get
that exposure at a younger age shy of entrepreneurship is through participating in
the ownership groups of businesses and that that came through chasing a career in
direct investing. At that point in time, I thought that in order to break into private
equity, I would need a harder technical financial skill set. And so I left I left
consulting and went to work in investment banking, spent a couple of years with Barclays
Capital, focused on and consumer retail investment banking as well as financial sponsors
coverage. So working with large private equity firms on their acquisitions, I spent
a handful of years doing that. And then I got the chance to transition to the direct
investing side. And at that point in time, wanted to get out of the big company, right,
I worked at Accenture that had half a million employees or more, and Barclays that
probably had 100,000 or so. And I wanted to go to a smaller investment shop. And I
joined a group out of Denver, Colorado, that was investing family capital. So it was
our LPs, or our investor base was about 15, ultra high net worth families. And we
were deploying capital in the US as well as in emerging markets. So we had an office
in Denver and Cape Town, South Africa. I spent a couple of years at that fund jumping
back and forth between Denver and Cape Town. And really came to understand the power
of family capital in private markets, particularly in that families have a unique
ability to invest with a long term or even permanent horizon, which really changes
the way that investors can think about value creation in a business and partner with
management teams. And I really saw that advantage helping us win deals and helping
us create better outcomes at our portfolio companies. And so when I was ready to leave
Denver, I got a I got a phone call asking if I'd ever consider moving to Northwest
Arkansas. And at the time, I'd never been to Arkansas in my life. And I came out here
and and spent a week and understood that something very special was going on here
and signed up to join Matt Tarver, who I know you've met and it's been it's been for
four and a half years since I've been here. And I'd say we are still very deeply focused
on that long term value creation that I mentioned. You know, at RZC, we, we invest
forever, there are some investments that we will never sell. And that truly enables
us to think about value in a way that I don't think any other private equity fund
can't.
Matt Waller 22:14
Well, Don, thank you so much for spending time with me and for your train your experience.
Congratulations on your career and the tremendous success you're seeing I wish you
the best.
Don Huffner 22:29
Thank you very much for having me. It was great to get the chance to speak with you.
Matt Waller 22:34
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
Matthew 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.
