Why Large Corporations Can't Innovate: A Venture Capitalist's Inside View

Rick Holton [00:00:00] This is amazing. It's gonna take over your whole calendar and da da, da da. And I'm like, yeah, there's 10 of these companies out there that have raised 50 million bucks. Like this guy's not gonna beat them. And they're like,

Vance Crowe [00:00:11] Oh,

Rick Holton [00:00:12] I didn't know those were out there. I said, yeah, they're gonna raise 50 million bucks. You're 50 grand is gonna be worth nothing. I'm Ashley McFarland, a nonprofit executive living in Duluth, Minnesota, and you are listening to the Vance Grow Podcast.

Vance Crowe [00:00:28] Welcome back to the podcast. I'm glad you're here. Today we talk to a venture capitalist that runs a firm out of St. Louis, Missouri, focused on of all things FinTech. Rick Holton is a very interesting character that studied engineering in school, went on to work a manual labor job, and eventually got to the top of the world as far as deal making goes. So he is somebody that is helping make decisions on multimillion dollar deals, who to invest in, what technology is out there that he thinks is gonna make the long haul, and how do you get that integrated into the big corporations where money is plentiful? But ideas are not always. We have a really good conversation about the structure and nature of corporations, about how deals are actually put together. And then we conclude with a conversation about people living at the top of the world doing venture capital deals and the people at the bottom of the world that oftentimes have no one around to help them. It was a very interesting look into a man who is deeply knowledgeable about deals, and I hope you'll forgive me because there's a whole bunch about debt and equity and financial flows that I don't know anything at all about. And Rick was very patient with me to teach me. Before we get to that interview, I wanted to bring up a project that we've been working on in the Articulate Ventures network. We have changed this, this group that gets together called The Speaking Gym. And now each month we gather together a cohort of people that decide they wanna work on one type of talk over and over again for four weeks in order to really hone it and make it much better.

Vance Crowe [00:02:06] This month we're talking about how to introduce what you do for a living. And this has been really interesting. We've got cattle ranchers and people running nonprofits and people running a tech company all getting together to say, how do I describe this in a way that other people can understand it? I feel good about saying it, and it prompts the sort of interactions that I'm looking for, whether that's new clients or new vendors or new people to come to me and know exactly what I offer. If this is the type of thing that you'd be interested in doing, we would love to have you in the Articulate Ventures Network. It's a place that is filled with people that have all different backgrounds and the one commonality they have is that they found us through the Vance Crow podcast. We don't advertise the network out in the regular world. We really just wanna select for people that are listening to Ideas deeply, that wanna find other people that are willing to explore ideas and people that want to try and work to make their lives their skillset and their world better. So if you're interested in joining the network, know we'd love to have you visit Network Articulate Ventures for more. Now without further ado, onto my interview with Mr. Rick Holton. Rick Holton, welcome to the podcast.

Rick Holton [00:03:22] Thank you.

Vance Crowe [00:03:23] So, you know, when people think about venture capital, they think about the coast, particularly West Coast, and yet you are housed in St. Louis, what, what in the world, why would you make a venture capitalist firm here?

Rick Holton [00:03:41] I think, well, yeah, I love St. Louis. I grew up here till I was 15 and was gone till I was 25 and came back here for business school. And this is where I wanted to raise a family. So that's why I'm here. The financial crisis created a lot of opportunities. You know, 2009, 2010, the world changed and technology was, was, was really a solution to a lot of of problems. And there's a lot of smart people everywhere, not just on the coast. And you know, I started seeing a lot of angel deals. I joined the, the Arch Angels. You know, I had a meeting every month and people would come pitch deals and you know, you throw little checks at stuff and I kinda liked it. It was fun, entrepreneurial stuff. I'm an entrepreneur, I've started several companies and love working with entrepreneurs. Was a member of EO Entrepreneurs organization. So it was just fun. St. Louis has a lot of money in general, but it's pretty conservative people. People are risk averse here or like the number two or three market for wealth management in the country. Believe it or not. We have incredible wealth management firms here that manage money for people all over the world because of our conservative nature.

Rick Holton [00:05:18] So these great startups were having trouble raising money. Everyone says, well I could lose my money in that. Right? And so a lot of us kind of organized to write bigger checks collectively and and really try to get the startup scene going here in St. Louis that was also going on in other, you know, every other market, you know, there's good, good technology in every market. Big story was, you know, Jim McKelvy was one of my partners, you know, they started Square in St. Louis and couldn't get funding. No one would fund it. I said, how are you gonna beat Visa and MasterCard? No. So, you know, they had to move square to the valley and obviously it's been a big success. So Jim's here as well. And you know, we like looking for local regional deals. The valuations are a lot more reasonable in the Midwest than than the coast. We seldom do coastal deals, although our firm now has got a reputation where we get coastal deals that wanna work with Fin Top. We have offices in New York, Nashville and St. Louis good partners, good track record, you know, so

Vance Crowe [00:06:47] What does a venture capitalist do all day? You're just sitting there waiting for somebody to come to you and ask for money or how does this work?

Rick Holton [00:06:55] That's part of it when you're starting out. It's about deal flow and we still have unbelievable deal flow. We actually get most of our deal flow from portfolio companies 'cause we do a good job. Fundraising goes in cycles, kind of every two and a half to three years. You gotta go raise money, which no one likes doing. Although we've been fortunate, all of our LPs sort of just re-up and double their commitment. 'cause we do well. But the, the most time we spend is on portfolio management. So we spend a lot of time helping our companies, which is why we have a good reputation. You know, we're, we're active board members. We don't write checks and say, send us quarterly reports. We talk to portfolio companies, you know, sometimes daily if they're in the middle of a, of a capital raise or you know, management changes or you know, big contract negotiations, they call on us. 'cause we have a lot of business experience that typically younger entrepreneurs don't have. And I talked to a guy yesterday for an hour. He just signed really an unbelievable contract with a major public company. The problem is, you know, it's shortsighted 'cause you give him 40% of his revenue away. I said, you, you know, that's a blessing and a curse because you know, when you hit breakout you just killed your margin.

Rick Holton [00:08:27] So your multiple's gonna come down. But it also makes the company, I mean, it, it's a, it's a big deal. So, you know, we help, we help with those kind of, you know, contracts, exclusivity, a death, you know, death curse.

Vance Crowe [00:08:45] What do you mean?

Rick Holton [00:08:47] So if I'm doing a, a big distribution deal with a bank, so Mo most of our venture capital stuff is FinTech. If, if I'm doing a deal with a bank, banks obviously want to be the only one that can deploy your technology. So they all ask for an exclusive I. And the problem is, like, we do a lot of stuff with JP Morgan Chase and they love us. We're sort of their outsourced venture arm, if you will. They'll bring deals to us and say, we really like this, but we need a venture firm to manage it. If you put 5 million bucks in, we'll match it and we'll go to market and really push it. So it's, it's a win-win. They are not good at managing little companies that lose money. They also don't want to consolidate the investment on their balance sheet 'cause it's not good for them. So they'll put the money in and they'll go to market and push it out to their, you know, tens of thousands of customers. But we'll do the work as the operators kind of coaching. But we got really cool technologies with them. But, you know, they always, they used to ask for exclusive and we say that's not, that's good for you. It's not good for us and it's not good for the entrepreneur. So it's better for you to have this widely adopted in the market, make a return on your investment, but we'll give you a first mover, you know, we'll give you six months of exclusivity.

Rick Holton [00:10:22] But if somebody, you know, as long as somebody's bootstrapped in a, in a great little company and JP Morgan comes in and says, we'll give you 5 million bucks, but we want exclusivity and they don't terminate that at any point, then basically JP Morgan owns your company. They control it and they don't think, they don't understand that. So it's a, it's a major problem. We, we have to walk away from some deals because of that. Unless we can, we a lot of times know the exclusive partner and go in and say, come on, this isn't fair. We can, we tweak it. So we do a lot of stuff like that.

Vance Crowe [00:11:01] In my experience in working with biotech, one of the big challenges that companies like Monsanto had were you reach a certain size and innovation becomes really difficult because you have so much bureaucracy. You have so many people that are like, Hey, we have rules. You can't do this or this or this. And so the, the way that they overcome, or I think a lot of large companies overcome the innovation trap is the, by sponsoring these things. So it's, it's just a different way of where do you place the innovation? Is that, is that true everywhere? Is this just an obvious observation?

Rick Holton [00:11:35] Yeah, there's there's a lot of bureaucratic reasons and a lot of political reasons. I'm dealing with one right now that's an ag deal and you know, Monsanto now buyer is a partner, but you, you get into a situation where you do a deal with their venture group that's not the same as working with their ops group. And the ops group doesn't care about the venture group and their mission. They're totally separate. So you, you've gotta, if the ops group is buying into the technology, that's where we go. 'cause the money's the easy part, but your money adds no value if you're not actually gonna push it through ops. So you gotta, you gotta fare it through that dynamic and make sure that they're the same. One of the things in FinTech we run into all the time is every big financial services company has a, a big tech infrastructure that they're paying for. So it's in their mind a fixed cost. So we'll go do the dog and pony and guess what happens? The tech group says, well we can just build, this happens at Edward Jones all the time, and I'm friends with top people at Edward Jones. They say, we're, we want to see all your stuff and you could spend three months educating Ed Jones. And as soon as it goes to the tech group, tech group says, you know, we've got a thousand people here, we can just build this.

Rick Holton [00:13:14] And they'll spend two years trying to define what it is they're gonna build. And we've run for two years and now the company's, you know, four or five times as big as it was. And then a lot of times we go back to 'em and they say, all right, we'll sign up. There's a stigma to a startups when you are talking to, you know, the big multi-billion dollar firms is, you know, they used to say, you don't get fired for hiring IBM and now it's sort of Salesforce, you know, or you know, AWS like, I don't wanna invest the, the time and the money in a startup that might go out of business 'cause it's egg on our face and the value we're gonna get from this versus the risk if you guys go out of business. 'cause the stigma of companies that lose money all the time go out of business and it does happen. But, you know, that's where we try to sell the backstop of, you've got very, you know, well capitalized firms behind this company that aren't gonna let it go out of business. So if you come in with us, it'll make it even more successful and then you'll, you know, be in the, be on the curve. But it is hard to get that first big logo.

Vance Crowe [00:14:39] It, it's really funny inside of a corporation when you're working, you know, you think of these large capitalist companies as being just like hard charging. They're going all the time. But once you're inside the walls of the company, there's a form of communism that goes on, right? It's like all of our printing services are done by our printing group. And that printing group now has no competition. You, they're the only game in town. The same thing with your IT infrastructure. And so within a large organization, the, the very problems that people have with communism is it there's no incentive to work harder. It's really risk mitigation as opposed to driving forward the business. And I don't know how you overcome that without radically changing the structure of the modern American corporation.

Rick Holton [00:15:24] It's, it's really hard. And it's, those are the barbells, right? You've got big bureaucratic corporate and then you've got small nimble startup. And it's fascinating when you're running those traps. And at the end of the day, the big bureaucratic corporation mince money. They're doing something right. And you know, they've got a trusted group and we find that our stuff is so small in their big organization when they're dealing with the printing group and the web group and the, you know, HR group. They've got all these groups doing all these things. When you're trying to take one little thing, it's sort of minuscule and it's not worth anyone's time to change, you know, the direction of the, of the aircraft carrier. And, and that's the biggest problem. And we spend a lot of money trying to educate 'em on why it makes their organization better. And most FinTech stuff is efficiency of people. So that's what you're saying is, we're we're not telling you to change the way you're doing stuff, keep doing what you're doing. Let us take this little piece because none of you like doing it. And that's a big FinTech thing. Another thing is, you know, about half the money when you do a FinTech deal, about half the money goes to business development.

Rick Holton [00:17:03] You know, it's hiring salespeople, it's spending money on marketing. It's it's customer acquisition. And about half the money goes to product. I mean, you're in manufacturing, you're buying plants, property and equipment and technology. You're adding lines of code. You gotta keep features and functions constantly, constantly going. So, you know, use of proceeds is usually about half at our stage is usually about half customer acquisition and half product development. If you, our typical rounds at our stage is about 5 million bucks. So two and a half million bucks is going in to sales and marketing. So we're actually launching half of our deals sell to banks. So we're launching a fund right now that is only open, the LP is only open to banks, and they're all banks that are signing an agreement to hear pitches from any companies that the fund invests in. Well, they spend all of their money trying to sell into banks. So it's a hundred banks. So every month there's like a, a demo. So the, the portfolio companies get access to a hundred banks and then, you know, the banks follow up if they're interested in the technology. And we stole the idea from Shark Tank. So Mr. Wonderful came and, and spoke to our YPO group a couple years ago and he gave me the, the real secret sauce on Shark Tank, which is being on Shark Tank is worth, if you're a consumer product, it's worth $4 million a marketing.

Rick Holton [00:18:44] Because I was always, I said, how are you getting the valuations you're getting? I mean, these people are idiots to be selling 30% of their company for 150 grand. And by the way, you're totally distorting the venture capital market because, you know, these aren't market rates. You're paying for these deals. And he says all these, all this stuff's pre-baked, but we look at it as we're giving them 4 million bucks in marketing. I was like, oh, that's brilliant. So they get a stake in these businesses. That's not a lot of cash, but it's the marketing money that they got from being, and it, and there's a long tail on a Shark Tank deal. You go into the Shark Tank ecosystem and they spam text people on your product. And anytime you go to a Shark Tank product, it recommends the other Shark Tank products. So you literally get a tremendous uplift on the cookie dough, on the hair braids, on the, you know, the fancy pizza cutter and all this weird stuff you see on Shark Tank. It's just the new infomercial.

Vance Crowe [00:19:55] Yeah, it's the as seen on tv. That's it. Literally.

Rick Holton [00:19:58] That's it. So we use that model and now we're getting, it hadn't launched yet. It's, it's gonna launch in, in probably Q3, but it's this, it's this fund that's all banks that gets out there in the market and everyone's gonna want to get funded by that because from a sales efficiency standpoint, they get a hundred banks. Day one, they're my owner. So when you're talking to the people, they've already signed up for innovation, they want to hear from you. So we'll get better valuations on those deals. But it's justified because the valuation will spike just from the, the lift of having all the banks is

Vance Crowe [00:20:42] Well, and not to mention the fact that all the sharks would have to be swimming every single time, because otherwise you've paid money into this system and 99 of your competitors are gonna get a swing at this. So if you're not at the table ready to write a check, ready to get in there, that's brilliant. That's brilliant idea.

Rick Holton [00:21:00] So the banks actually asked for it and we came up with a product and it can co-invest with our normal fund. Like it's all been set up so it can go, you can't fund one can't invest in fund two companies, fund three companies can't take money from two. And you can't mix and match funds for SEC rules. But the bank fund is separate LPs so it can invest in fund one companies, fund two companies, fund three companies. But it's bank tech only. 'cause we do other stuff, we do insurance stuff and we do, you know, payment stuff. We do a lot of other stuff besides bank, but it's pretty cool. But you know, it's all about speed to market and growth.

Vance Crowe [00:21:45] So as like a, as a person, as a part of venture capital firm, you get to participate in deals that regular people have been excluded from for a while. Like there were rules set up saying, hey, if you don't have, if you're not a certain type of investor, you don't have a certain amount of money, you don't have a certain amount of income, you're not allowed to invest in those companies. I only remember this from rules I heard maybe 10 years ago, but I also remember people were saying, these are changing. What is the state of play right now as far as regular people being able to invest in companies?

Rick Holton [00:22:18] You can do, you can do a specific type of offering to the masses, but it never really Obama administration paper to, and it was meant to allow everyone to get into venture capital. It's, it's a really dangerous space and you can lose your money easily. 'cause everything, here's an example. So I'm, I'm a tech investor and at, at the archangels meetings,

Vance Crowe [00:22:54] What is Archangels?

Rick Holton [00:22:55] So it's a group in St. Louis, it's, it is like a hundred members and they just all sign up and sign a waiver that says I'm an credit investor, I want to come see pitches, but I'm making investments on my own account. I'm not getting advice from the group, it's a nonprofit. But it was just meant to be a, you know, an audience for entrepreneurs to pitch, you know, to credit accredit investors. And I, when I first started going to these meetings, the deals I loved were the ones I knew nothing about. So guy gets up, he's got a cancer drug and I'm like, I'm in, this is awesome, you know, and then the tech guy gets up and, and gives his pitch and I'm like, this is the worst deal I've ever, ever seen. But guess who in the room was all in raising their hands? The doctors guess who didn't put a diamond to the cancer drug?

Vance Crowe [00:23:56] The doctors.

Rick Holton [00:23:57] So I started talking to these guys when I would love a deal, a life science deal, I'd say, is this a good deal? And they're like, this is technology that's been around for 30 years, it's never been adopted. The FDA doesn't like it. I've actually participated in the trials. Like these guys would've all this knowledge. And I'd be like, oh

Vance Crowe [00:24:14] Wow,

Rick Holton [00:24:15] You just saved me 50 grand, thanks. But then they started asking me about the tech deals, they'd be like, this is amazing. It's gonna take over your whole calendar and da da da da. And I'm like, yeah, there's 10 of these companies out there that have raised 50 million bucks, like, this guy's not gonna beat them. And they're like, oh, I didn't know those were out there. I said, yeah, they're gonna raise 50 million bucks. You're 50 grand is gonna be worth nothing in two years. So that helps.

Vance Crowe [00:24:42] This reminds me of the gelman amnesia effect, which is, it's describing, you know, you open up the newspaper and you read an article about something you know a lot about, like I know a lot about glyphosate and Roundup and those things, and you're like, this author has no idea what they're talking about. What a garbage article. And then you turn the page and you've completely forgotten that they didn't know anything about a subject you knew a lot about. And then you're like, oh, they're telling me about the military now. Oh, I'm gonna believe every word in here.

Rick Holton [00:25:08] You got it? Do you know John Jennings?

Vance Crowe [00:25:11] No.

Rick Holton [00:25:12] Are you from St. Louis?

Vance Crowe [00:25:13] No, I, I moved here about nine years ago.

Rick Holton [00:25:17] God, if you wanna do these with the most interesting guy in the world, he's upstairs, he, he's the president of St. Louis Trust Company and he does the iPod. The interesting fact of the day, he's in my YPO forum and this guy's read more books than any human being on the planet and he gets interested in stuff and he just does a deep dive on whatever the subject is. And he writes a a five minute read. And when he doesn't do it every day, he just does it when he is done something. But he's got, you know, 600 of these things on his website and they're all super fun reads. He did that one that you just mentioned. He, he just studies stuff and writes about it. But he, his day job is, he runs this, this multifamily office, but he'd be a fascinating guy to talk about. Not any specific, or you can talk about any specific things, but just a quest for knowledge. He'd be an amazing podcast guy. Just as an aside, if you, if you want an intro, but yeah, the venture capital space people don't, people think you just put money in and you get, you know, a hundred times your money back, you lose money fairly frequently. My job is to try to not lose money and at my stage, like I got wiped out as an angel on several deals because of dilution and because of the, you know, the series A, B, C sometimes d all has preference and people don't understand there's different types of securities.

Vance Crowe [00:27:04] So explain that when you talk about this. How does somebody get diluted out of making a profit?

Rick Holton [00:27:10] So, I mean, you could do it a number of different ways, but when, when you have a good idea for, you know, blowing this podcast globally and you're gonna get all this amazing talent and you're gonna pay 'em a bunch of money. Like Quibi. Think Quibi, they blew $2 billion in six months. They pitched us in this office, we patch, you know, we, we said you're dead in, dead in the water. Meg Whitman. So we were right. I don't ever like seeing a failure by the way 'cause I just love startups. But you know, if you go into your podcast and you go to your, your parents and your, you know, your fraternity brothers and, and you're all old boss say, I'm gonna blow this thing out. I need a half a million dollars. A lot of times it's getting better now. 'cause NBCA has sort of educated the world on venture capital, but it used to be you go buy a bunch of common stock, common stock has no rights. So then all of a sudden you start spending that money, you start getting success, you start getting talent and Joe Buck's doing one and you know, you're starting to get a bunch of of good names that are, you know, doing your podcasts and then you go out and raise institutional money, you go for your series A. They come in and say, you know, okay, well you're, you're doing pretty well. We think you're worth 10 million bucks and we're gonna give you 2 million bucks, but we're gonna put a preference on it.

Rick Holton [00:28:48] There's a liquidation preference, they're gonna be dividends on that you can have participating preferred, which means when it sells, you get all your money back then it converts to common with everyone else. So you might be selling 10% of the business, but it's not really because the cash comes out and then it's 10% of the business. Then the series B comes in, they adopt the same rights as the series A and they put $10 million into the business, they're getting that 10 back. Then they go to common the a's getting their two back going to common. And all of a sudden a founder where you thought you had, you know, 40% of your business, they took all the cash. And I'm not saying it's not fair 'cause it's, it's, it's downside risk is what they're managing my job's not to lose my investors' money. So I put protections in there. So you know, if you go nuts or go AWOL or go to The Bahamas or whatever, like if we liquidate this thing, I'm gonna get my money back before the common gets anything. But if you were that first seed investor and you bought common, you just got nuked, what if the scrap value of this thing's 10 million bucks says what's happening at Quibi, they're parting that thing out and they're getting tens of millions of dollars. So a billion dollars just went up in flames. But if you have preference in the stack, you're gonna get paid before the next guy down the ladder and the next guy.

Rick Holton [00:30:19] So that early investor you think, you know, I'm gonna make a hundred times my money. And a lot of times it doesn't shake out that way. But the number of investors that don't even understand that, that's why doing the, you know, the the big Obama era Reg D offerings where you don't have to be an accredited investor, it's really dangerous. We don't play in that space. We're institutional. We all, all of our LPs are accredit investors and we don't do deals that are raising money that way. So

Vance Crowe [00:30:57] What was the time that you, you lost it where you, where you got your hat handed to you?

Rick Holton [00:31:04] Great beverage deal in St. Louis founded by a doctor called Nain. It's what you drink when you want to think it had a, a food supplement it called Cognizant. That's actually a byproduct of making beer. And Sapporo was the ingredient provider. The company was really doing well from a beverage metrics perspective. And so what they said is, Hey, we'd like to get involved with this company and ultimately buy it. So it was a good strategic, but the way they funded the business was with debt that didn't buy equity with us. So they put in this, this never ending stream of convertible debt, but they played games, they wanted the,

Vance Crowe [00:32:00] Explain what that means. I don't know what that means.

Rick Holton [00:32:02] Okay, so when you're going to, to raise capital to get Joe Buck, if it's 10,000 bucks a podcast and you say I'm gonna do 50 podcasts to build content. So I get a following and I'm gonna spend $50,000 promoting it on Apple or however you promote podcasts. I'm gonna do a bunch of, you know, placements on, on different, you know, social sites or whatever, right? You, you've got a plan, I'm gonna spend money.

Vance Crowe [00:32:39] I

Rick Holton [00:32:39] Don't wanna value my business right now 'cause I'm kind of early and to go out and value this thing right now with my friends and family. I don't know what it's worth. Is it worth a million dollars? Is it worth $5 million? I know it's gonna be worth a lot. So tell you what we're gonna do. Let's do a convertible debt offering. Put 500 grand in my bank account and I'll wait for the value to be set by somebody like Fin Top. 'cause they know how to value this stuff. They know market comps, they've got PitchBook deal, you know, deal info. And we actually own a owned, a great company called Deal Cloud that has metrics and data and all this stuff. It was for venture private equity guys. So it's a way to raise cash without selling equity today. And then what you do is you gimme a 20% discount on the debt when you go out and raise your a round. So it's very common. That's what convertible debt is. Well they come in and give us a million dollars, then they give us $5 million and we're like, oh this is awesome 'cause we haven't been diluted, right? We're growing with debt. That's amazing. And then they decided instead of growing in a city, we want to grow a whole state. And they picked Florida healthy state and they picked Florida and they did this distribution deal with Walgreens.

Rick Holton [00:34:18] You know, it's a pharmacy. The one problem they didn't think about was you have to distribute yourself. So covering all the Walgreens in the state of Florida, there's a lot of holes between the stores. So they had a handful of people driving around with a noggin truck filling the, the coolers in the Walgreens. But the, the sell-through wasn't that high when you're launching a new product. So they would only go by once a week. Well Monster, they were replenishing twice a day. And guess what the monster guy would do? Who was replenishing, you know, like the beer cave kind of thing the monster guy had on a camera. He would come and push all the noggins into the back of the cooler. The employees of Walgreens are not in charge with stocking the shelves. So Nain was always sold out of Walgreens. They couldn't figure out why they weren't selling anything, but every time they would come in they'd restock the shelves just 'cause everything's going back into the beer cave. And it was the monster guy who was coming by twice a day. Anytime there was a noggin, he'd push it into the back and you wouldn't fix it for 2, 3, 5 days. So it was a total bust. And they ended up spending all this money trying to support the state of Florida.

Rick Holton [00:35:49] We also, because it had the ingredients, it added 90 day expiration. So all of a sudden our product started expiring. So we ended up losing millions in product that we had to call back. 'cause you can't sell expired product. And it, and it totally busted the company. So then this is the problem with debt, it's the highest on the, on the press stack. So guess what they did? We own the company. We're not converting to equity, we're just gonna take the whole thing. And it wiped all the equity out. So we were just out of it. We got zero back and there's an execution play that failed. The product was amazing. It absolutely, I mean everyone was hooked on this 'cause it was like a think of a, and it looked like a Red Bull can, it was the same bottler that did Red Bull, but it was like a healthy Red Bull. So people liked it and you know, but they, they busted the company and that was a bad capital partner.

Vance Crowe [00:36:50] So what's the lesson learned there? How do you, how do you make sure that doesn't happen again? That the, that the monster energy delivery guy doesn't knock you out of the entire game?

Rick Holton [00:37:01] Well it's fascinating. I'm looking at a beverage deal right now, which I don't do a lot of, but this is a YPO buddy. It's an amazing story. But now you've got Amazon people buy direct, so it's changed. You don't have to distribute, you don't need Walgreens. You put it on Amazon and promote it and people do subscription and have it delivered every two weeks. It's unbelievable. So Amazon's changed distribution for a lot of businesses. So that's, it's a different deal. They also do, you know, health food bars and they do powders, you know, workout, drink powders. So it's, it's pretty amazing company. So you're in a,

Vance Crowe [00:37:47] In an unusual position because you have to both be positive and, and like have something that sparks your interest and your curiosity but not allow that to get carried away. And I think most people in the world get themselves to do heavy lifting. The, the detail oriented work. 'cause they're excited about something. How do you balance that so you don't let yourself get carried away?

Rick Holton [00:38:11] So I'm like, I love entrepreneurs, I love entrepreneurial stuff. I hate corporate. So I'm, I lo I'm also a DD and so I love doing 10 different things in a minute. So I switch gears very well. I play to my, my, I play it as a strength. My biggest problem is I think every deal's a good deal. Now when you, the way our firm works is there's seven of us. If I come with a deal then everyone, it's like 12 angry men that movie everyone else has. It's like debate club. They take an opposing view. Even if they love the deal, they try to poke holes in my deal. So I prep with the entrepreneur to go in and pitch my team and my job is to turn every one of them into a yes. And our policy in our firm is one, no we don't do the deal. We've got enough deal flow where we don't, we don't need to do a deal. We've got five deals we're working on right now and they're all better than all the deals that we saw when we started fund one. So we can pick and choose what we do. So our deal is if one says no, we don't do it for whatever reason. I don't like the guy, I don't like how he pitched, I don't like the space.

Rick Holton [00:39:45] I don't think they're techs as good as they think it is. I don't like the service component of the tech delivery. I don't like where they live. I don't, I mean whatever. You know, the most important thing in these deals and, and I love this phrase, a guy named Elliot Stein at Ran Stifel here, you know, Stifel Nicholas, he, he would always say you can have a bad deal with good people, but you cannot have a good deal with bad people. It's always people first. If you've got bad people founding it, running it, whatever, they'll bring in bad people. The deal's gonna fail. One of the things I kind of tease out before I move to the next step is what's the motivation? If you're not mission driven, if you just come in and talk about how much money you're gonna make, you're gonna fail. People that are money motivated entrepreneurs that are money motivated, that's not the right reason to be doing what you're doing. You can tell the passion of somebody when they talk about the problem they're solving, they don't even talk about money. They're so mission driven, they're gonna solve this problem. They're just, they need your money so they can solve the problem. The people that only focus on how much money we're all gonna make, it's a total turnoff. We don't do those deals. We're doing this for financial gain 'cause that's what we're paid to do. But you, the financial gain is a byproduct of solving that mission focused entrepreneur's dream.

Rick Holton [00:41:18] So that's the biggest thing is it's people first. The other thing is you're effectively getting married. You're gonna be with this person on a weekly, monthly basis for five years. If they annoy you in the first meeting, it isn't gonna get better. It's like a first date. Like we don't have a second date because that first impression is is just so important. So it's very important to pick a partner you're gonna be with for five years, sometimes longer. So, but that's how we do it is is you go to investment committee and everyone's gonna tell you why your deal sucks and why it's gonna fail and where you're gonna miss and you gotta turn 'em, we're nice. We're very nice. Our number one core values, respect for the entrepreneur 'cause we've all been there, right? That's why they like working with us because we've been in their seat. But that's how we operate. So I fall in love with every deal that I spend time on and I let my partners tell me I'm crazy and I trust the group think because we all have so much experience and so many different deals. And when somebody says, I did a deal like this seven years ago and let me tell you the five things that you don't see right now. And you're like, oh thanks for dodging a bullet.

Vance Crowe [00:42:41] I would think that the relationship between you and the other angry, angry investors or you know, that, that you were making the joke about would have to be something different than just a group of friends, right? It would have to be more than because you have to have that tension where people are willing to poke and prod the other people. There's got What do you, what do you know about putting together a group of people to have enough different facets of ways of looking at things, but yet still allow them to be a cohesive group?

Rick Holton [00:43:12] It's an, it's an incredible question, but I'll tell you my experience, and this is a common theme. There's always a thread of the connections. So Jim and I had done deals together. He's a FinTech god with Square

Vance Crowe [00:43:33] Jim McKelvy you're talking about.

Rick Holton [00:43:34] Yeah, that's my, that's my connection. We're we're just in St. Louis and did some stuff together and enjoy each other's company. You gotta enjoy working with, with people. Joe Maxwell was my boss when I was in engineering school at Vanderbilt. So I was his fifth employee in a FinTech startup. I had stock in that company. I invested in his next company. It was a competitor to Carta. It sold to Blackstone. When he was working at Blackstone, he bought another company called Eye Level, very successful business. A guy named Rick Kelle was the CEO. Now Rick and Joe are working together at Blackstone and they hated that corporate America feel. So Joe's complaining to me about after six months working in New York, he's from Nashville. It's like, this sucks. So why don't we start a venture capital firm focused on FinTech. He said, it's time. Let's do it. I said, who do you have in mind? I said, well my buddy Jim McKelvy, he's like the square guy. Yeah. He's like, that's awesome. He knows a lot about FinTech. He said, I got a guy, his company I just bought Rick Kelle, he's awesome. I want you to meet him. So we started Fin Top. That's how it began. Most of these, the newer non sort of Sequoia, Kleiner Perkins, 40-year-old firms, most of the new firms are operator led.

Rick Holton [00:45:08] Somebody was successful building a company, had a big exit and they've got three or $400 million. They start a venture capital firm to go look for them 10 years ago. That's what most of the, you know, most of the firms are now. They're not the, the older, very smart, very successful, very big blue chip venture firms. Most of them are smaller operator led funds. And, and they get together with people they're friends with from industry and, and whatever. It's very hard to get into the venture capital business because you have no track record. So

Vance Crowe [00:45:51] One of my favorite questions to ask people that have shown they're they're willing to go against the grain or try things that other people won't try, is what I call the Peter Teel paradox. And this is what is one thing that you think is true that almost no one you know, agrees with? And I'm particularly interested in your view on this about St. Louis because to me like focusing this on a, on a region and saying what is something you believe is true about this? That almost no one agrees with you on sets a new path? Does one come to mind for you?

Rick Holton [00:46:25] Well it's not really a St. Louis thing exactly, but I don't believe that fossil fuels are going away. I have a Tesla, I didn't buy it to be green. I bought it 'cause it's awesome. I think that it's really nice not going to a gas station. I used to drive a threequarter ton suburban that got 10 miles to the gallon and I was at the gas station. Frequently there are limitations to electric vehicles that will over time go away. But I still think that there's a need for fossil fuels. Especially when you get into electricity generation. The math doesn't work on being a hundred percent renewable. You cannot put enough windmills up. You cannot put enough solar up. And I think it's great. And even if

Vance Crowe [00:47:33] You do, you're giving something up. You're giving up valuable arable land. That is probably the most valuable thing we have in the country.

Rick Holton [00:47:39] Well you're also creating the future Superfund sites

Vance Crowe [00:47:44] I's not green.

Rick Holton [00:47:45] The production of a windmill for the generation of electricity and the 15 year life that it has on the blades. There's just, you can't recycle it. It's, it's massive amounts of scrap and it was a massive amount of inputs that went in. So the, the, the carbon footprint of a windmill is not good. And no one's talking about that. 'cause it looks cool and it feels good.

Vance Crowe [00:48:15] Yeah, I I I worked at the World Bank and I remember when they were starting to funnel all of this money into let's do just infinite numbers of windmill projects. And when you go look at it, you find out like, okay, let's just say you get that thing all the way up and not, let's not include the mining costs to get it together, the assembly costs, but taking it down costs something like three times as much as putting it up because it's so difficult to disassemble those things. And now you've gotta bury it somewhere. So I'm totally with you on that one.

Rick Holton [00:48:47] And it's not reusable in any form. And then you talk about something that's very ecologically sound, which is concrete. And I used to put up in the cell phone craze, I was an ironworker, I worked on a rigging crew and we put up cell phone towers. I worked in Denver, we put up those cell phone towers everywhere. And I'm talking thousands, the pad of concrete under a windmill that, that goes up 300 feet. It's like a house foundation. And when you look at these, these windmill farms, you're talking about putting up a thousand windmills. So that's like building a thousand house foundations and no one talks about it. That's lots of concrete, lots of trucking. 'cause they're not right near a ready mix plant. So you're trucking all this concrete out into the desert or into the hills or whatever, and then you're trucking all the, you know, the, the turbine blades, you know, a lot of those things are made overseas. So you're shipping 'em and trucking 'em and, and you talk about the carbon footprint of all the trucks and all that stuff. I mean it's, it's crazy. But then when you talk about Elon's, you know, electric semi, how are you gonna generate all the power? Like when everyone switches to ev, which is happening, you know, when you look at the Rivian, a friend of mine's company put a hundred million dollars into Rivian.

Rick Holton [00:50:22] I thought he was crazy, but that's a cool vehicle. But you know, I still have a suburban to drive out to my farm and dogs and you know, guns and everything going out to the country. Like my little model s doesn't hold stuff and it also doesn't like going off road. So I still have a suburban, so the Rivian might replace my suburban in five years, don't know. But at, at some point if everyone flips over and the gas station becomes a charging station and a convenience store, how do you generate all the electricity to replenish it? That's my question. Can the grid, can my lane where I live, if every house I tell you during COVID we have one coax line coming from charter. And when everyone was home streaming, it didn't matter if I was supposed to get 200 meg service, I was getting two. And it's 'cause every house is coming off the branch. So we've got an infrastructure that delivers, you know, the kilowatts that my house needs and my neighbor's house needs and all that. But if everyone's plugging in cars, that sucks juice. And I got the a hundred amp circuit in there to deliver my charge in four hours. But if, if 50 other cars plug in at the same time, can our infrastructure handle that? And then you go to the next street and the next street then can the transformer and the substation and then the power generation.

Rick Holton [00:51:56] We're coal here, the wind river we're coal powered.

Vance Crowe [00:52:00] Well coal I think is the original cancel culture victim, right? Like that was a group of people that like it is, I have tried, I can get a lot of people from the energy industry onto this podcast. Very easy for me to find people except for coal. If you go out saying, is there somebody that's a spokesperson for coal? It is very, very difficult to find somebody that wants to talk about it because it was made so abundantly clear to a certain group of students, I think at certain age you got, and then those people came up with those ideas and, and to try and say like, Hey wait a second, there are things like the amount of energy you have to generate, you gotta consider. It's just, that was completely canceled.

Rick Holton [00:52:40] Coal's dirty. We won it gone. And it started 15 years ago and it bankrupted all seven coal, coal companies in st. We were the centen, the world's center of coal.

Vance Crowe [00:52:52] Oh, I didn't realize that.

Rick Holton [00:52:53] Oh yeah. And they've all gone bankrupt. This was the center of coal. Like Dallas is oil, we are coal. And it just got n

Vance Crowe [00:53:06] So changing the subject, but I'm, I'm very interested you, you know, have a degree in engineering. You ended up doing actual physical work putting up cell phone towers and now you are running, you know, a a, a fund where you can talk about your buddy that invested a hundred million peop a hundred million dollars into a, into a deal. So there, there you're at a certain echelon of society, I've started watching this YouTube channel called the Soft White Underbelly, which is this photographer that interviews people at the very bottom of society, people like prostitutes and guys that are addicted to crack cocaine and living on the streets. And I look at that juxtaposition and I think that somebody like you probably has an interesting view because you, you were a worker, you know, did stuff with your hands. What do you think needs to be done in order to bridge the massive divide between the, the two worlds that we're talking about here?

Rick Holton [00:54:03] That's a good question and I'll tell you I'm doing my part. So I was at a YPO event, a guy named Danny Luman who was the CEO of Wells Fargo advisors retired. And he did his halftime sort of review of his life and his success to significance was Concordance Academy. And as a venture guy, he talked to our group as potential investors in a metrics driven solution to recidivism. And if you look at the underserved, it perpetuates itself in a big way because of the prison cycle. So if you go to the inner city, you got people without dads and moms, in some cases, a lot of women go to prison too. People don't know that. And I don't know about you, but if you grew up without any parents and no one telling you to go to school, probably wouldn't have gone to school.

Vance Crowe [00:55:13] Oh, if I didn't have my dad, there's no, I would've been completely unruly. There would've been no stopping me. I would've been completely wild.

Rick Holton [00:55:20] I was bad anyway. And I had to. So you look at what's going on, these people typically have an addiction problem. 93% of incarcerated people actually committed to crime while under the influence of drugs or alcohol or both. So there's an addiction problem usually that happens to people because of a lack of purpose. There's a void. They don't know what to do with themselves. They have no direction. They don't have people saying you ought to go get a CDL and be a truck driver. You know, there's a shortage of truck drivers in this country. You can make $130,000 a year. Why somebody's not going into the inner city. And I'm like, this is crazy. You got all these unemployed people and Rankin is a local trade school here. They've tried to reach out to the community and say, here's a six week course and you can make $130,000 a year. They can't get anyone to take it. They have sponsorships so you can take it free and people won't take it. It's like you can drive around and see the country make $130,000 a year. People won't take it. But anyway, so concordance Danny Hook me, I've gotten a bunch of my friends involved because they're attacking, it's a holistic approach to attacking the chemical dependency, the problems that you typically have when you get out.

Rick Holton [00:56:52] People don't realize this, but when you come outta prison, you got all the bill collectors, all the garnishments, all the other, you know, lawsuits against you. A lot of times you come out and then they pick you up 'cause you got an outstanding warrant 'cause you're in prison by the time, I mean it's, it's awful. So these people come out and they got no help. So they all go back. 97% of 'em go back to prison within five years. You're just, you're recycling prisoners. But what people don't understand is it costs us taxpayers $103,000 a year to incarcerate a prisoner. But it's a lot bigger pro, I think it's a trillion dollar problem opportunity. It's a trillion dollar opportunity for investors because if you stop the cycle, we've cut recidivism 50% in the last five years from everyone that's gone through the program. 50%. So if you just do the math on perpetuity, if it's $103,000 a year, then it's a million dollars lifetime at a 10%, you know, discount. So it's a million dollar problem. If we could stop 50%, we're saving $500,000 per life. So the return on the investment, you can see how the numbers can get pretty big. But then they, they commit an average of seven crimes within three years to go back to prison. That's breaking into your house. That's breaking into my car. That's rape, that's, you know, the, you know, going into a convenience store and and robbing the convenience store.

Rick Holton [00:58:27] So the social impact of all those seven crimes has some number that we're working on calculating, get an average number. If you stop the seven crimes, that's better for you and me. Forget about just a hundred, $3,000 a year that we have to spend to incarcerate. Now we get economic benefit out of it. 'cause I don't have to go fix my window that they broke. Now you get into the soft dollars. What happens if the boy has a dad? The dad's not in prison. What if the boy's actually got somebody at home saying, Hey boy, go to school and the guy's got a job. Well how do you solve that? Schnucks, bunch of different corporate sponsors of this program have created job training and placement. So they get outta prison, they get trained on a job and then they go to work. So now they're actually earning an income. So there's a reason not to go to prison 'cause they have a better life outta prison with money. But you're also showing your kid, get a job, go to work, go to school to learn how to get a job.

Vance Crowe [00:59:43] Yeah, St. Louis has a really interesting program. The father support system or support network and like great, their premise, great

Rick Holton [00:59:51] Travel.

Vance Crowe [00:59:53] Fascinating. The, the idea. And like once you become, like I recently became a parent, once you realize like, hey, if you don't know what you're doing and nobody taught you how to be a parent, it would be really hard to do that. And, and particularly if you're coming from having struggled. Like I, when I first saw that place, I thought this is neat. And now as a father, I'm like, that is very important. I I would recommend if you have not watched this soft white underbelly YouTube program, it is maybe the most mesmerizing thing I've seen in the last five years. Because it really was a humbling thing for me to watch. And and it's why I'm prompted to ask you because I realized my life was an Andy Griffith 1950s upbringing and you're talking about people that found their mother dead from an overdose at eight years old and then got put into a foster system. And you think like if I hold them to the same standard that I hold my buddy Travis liebig to, to getting stuff done, it's not fair. And, and so we've gotta figure out things to, to lift people up because not only the money side of it, but just you see the pain on these people. Like you, you hear them talk about I don't want to be addicted to crack. I just can't stop. And if I I I have such a pull, if I was, if I did hard drugs even one time I'd be gone. So I can't judge them in that way.

Rick Holton [01:01:15] Well you just named the two biggest problems. It's chemical dependency and no family. Those are the driving problems behind everything going on with that, with that part of society. Because if you have no parents, you have no direct, no one's gonna care about you like your parents. And if they're not there and or if they're chemically dependent, I mean, come on, you, you don't have a chance. And it perpetuates it. And unfortunately our government has encouraged the behavior.

Vance Crowe [01:01:56] Yeah, I mean I had a, I had a really interesting guy on named Larry Sharp that said for every unit of government you put in, you take away a unit of community. And I think that that's exactly right. Well Rick, I have way overstepped our amount of time that we had allotted I have loved this conversation as Travis told me I would. So thanks for coming on. If people wanted to learn more either about your fund or about Concordia, how would they, how would they go about doing that

Rick Holton [01:02:21] Concordance Academy? I'd love to talk to 'em about, you know, our fund's not open, so if anyone has any, what I would love is, if anyone's got a great FinTech deal, I would love a referral. We don't publicly raise money at the legal, by the way, but concordance, we would love support, and there's a number of ways. Try time, treasure and talent are all needed.

Vance Crowe [01:02:49] Tell me about that. So, if somebody heard this, what's, what's one thing they could do to that's, this is very helpful. It's

Rick Holton [01:02:54] Time, treasure, and talent. They can volunteer. We're opening, we're franchising it, it's nonprofit, but think of a franchise. We're opening it in other cities. So it's not just St. Louis, the model is built here, but we're bringing it to other cities Right now. There's a massive capital campaign that Dave Stewart, founder Worldwide Technologies, is running, raising capital to match other cities that have to raise capital to open up concordance in their towns. If you're in recovery, serving as a sponsor to the people that come out that join our program job placement job, they, they want people that are just business people that can coach. Mock interviews is a big deal. There's a bunch of different ways that people can use their time to support concordance, and if it resonates, give us a call and we can tell you when and how you can help. So it's a, it's a great opportunity to give lives back to people that feel hopeless. You've got, you know, sample size of 30 million people in the, in the sort of flux. So it's a, it's a, it's a really big total addressable market. And if we can cut it down 50%, which we've already got the efficacy, we've only done 500 people, but if we can cut down 5 million people, that's 5 million families that have a chance to not have the broken family cycle perpetuate.

Rick Holton [01:04:37] That's the,

Vance Crowe [01:04:37] And that echoes into eternity. Right. You have no idea how far that will go.

Rick Holton [01:04:41] Big time.

Vance Crowe [01:04:42] Well, Rick, I, I'm, I'm so glad we talked. Thanks for coming on the podcast.