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Video: Build A Team That Attracts Investors

Entrepreneur Editor in Chief Jason Feifer chats with Katie Schoen, VP at Baird Capital to discuss scaling businesses and seeking out investors.

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Jason Feifer: If you an entrepreneur and you're thinking about scaling, then you're going to be asking yourself this question over and over again, I know, and that is, of course, what are investors looking for, what drives an investor to say yes, what drives them to say no. There's a lot of answers to that question, of course. There's frankly the idea, the market. But here's something that we don't talk enough about, and it's what we're going to be digging into today, which is, the team - that you need to build a team that people can invest it for.

My name is Jason Feifer, I'm the editor in chief of Entrepreneur magazine. I am joined by Katie Schoen, VP with Baird Capital. Baird Capital makes direct investments into private companies. And when Katie and I were talking while we were preparing for this conversation, she told me something that I just knew we needed to dig into, and that was at one of the reasons that Baird will walk away from an investment opportunity because the company's team and culture isn't right. That may make some people's blood run cold. So we need to talk about exactly what it is that people like Katie are looking at and how to build that team that people can invest it. So, Katie we're going to dig into all of that take, but before we do, first of all welcome and can you give us a little more background into what you do with a kind of opportunities that you are looking at?

Katie Schoen: Yes, thank you Jason for having me really excited to talk about this topic. So Baird Capital is the direct investing armed within Baird that invests in private companies. And we have two distinct strategies Venture Capital Strategy, as well as a Global Private Equity Strategy. So we will invest in companies with between $2 million in revenue, really start up early venture, to $150 million in revenue. And across that we look to partner with entrepreneurs; we don't just provide capital, but really our expertise as well. We have a team of 35 investment professionals. We've invested in 330 companies over the last 20 years. Managing over about a billion or four billion, excuse me, dollars. And so, I have a lot of expertise of really partnering with founders in through. That is a 330 some companies that we've invested in, we have found that there's a lot of tie into the success of the investment out of correlation with the team. How the team is built and importantly, the culture. It's something that now we have included within our processes. So, excited to talk about that. How we look at it. I have the opportunity within my role. I sit between our Global Private Equity team and as well as our Venture Team, as well as internal strategy for Baird and Baird capital, and that's really important as well for us and how we're modeling.

Jason Feifer: You have obviously a wealth of experience in this area. You are seeing companies that are having that are perfectly suited for their capital investment and also ones that are not. And we want to understand what that distinction is. You talk about the team, you talked about the structure of the team. So before we talk about what people can do right, I'd love to understand if you could take us into the conversations that happened with you and your colleagues where you're looking at a company you're saying, "this company is super interesting, a great opportunity," but we are very concerned about this team structure and about this culture that we're seeing. What, when those kinds of conversations come up, are you guys seeing?

Katie Schoen: It's really interesting, Jason, and kind of taking you through the diligence journey, I'll make the analogy that we often times do, is with an investment and really being active managers to sitting on the boards, partnering with founders, a lot of what we want to do is it's almost marriage, right? I'm making an analogy to dating. So you can when we're looking at a deal, when we see an investment opportunity come through our desk. And I will tell you, our team sees about 2,000 investment opportunities a year. We make, between the two teams, maybe ten on the high end. We see a lot of investment opportunities, see a lot of teams, see a lot of deals. The financial side of it, that's the one that I would on paper is almost like a dating profile, right? You can see is this a match or not? Is this the right sub-sectors where we have expertise in? What is the size? What is the structure that the the entrepreneur or management team is looking for? So there's an easy, you know, an easy way to sift through and either swipe right or left at the beginning.

Then we get into the diligent side of it. And that's really where you're finding out more about a potential company, as well as the company, the founders are interviewing us. So they are looking for it, you know, what are you bringing to the table. Not only what the check size is, right, in the valuation for the company. But how are you going to be as a partner for me as well? And that's really, I would say, is the getting-to-know-you part of the investment process. And that is where, I would say, you know, it's not so much look on paper, red flag, green flag, this management team is great. This was less though, right? You can do a culture; it's over time. And so our diligence processes takes quite a bit of time. I would say, measured in months, not days. It's an opportunity for us to get to meet the entrepreneurs. Get to meet the management team's, to get to meet the founders. And understand if we're aligned: Are you acting the way that you said you were going to act? Is the company set up the right way? And just taking you through high-level, regardless if it's a venture investments or on the private-equity side of the business, we do team diligence. But we will bring in third parties to talk to you, your senior leaders: are people saying the same thing? How are you acting? Understanding and motivations behind the different leaders, the executive. Interviewing and having those conversations with more junior people within the team. Your customers or those that you're working with as well. And honestly, it sometimes what we see is really demonstrating, you know, being able to see the culture, having a hard conversation with an entrepreneur or maybe if something comes up and diligence. But what we're looking for is, is there alignment? Can we have an open and honest discussion? And so I would say, somethings within the diligence process can be your growth rates, your end market. That's more easily definable. The team, the culture, the process, that's where we want to experience it. We want to get insight and understand and really see if it's going to be a long-term partnership that we can make a work.

A funny anecdote is that I think you will appreciate. We even do premarital counseling. So the partner getting the deal as well as the founder. We'll go through get their personality profile. What makes them tick? How do they like to be communicated with and could this be a match? Because if you have a founder and a and a senior investment partner, the capital is important but trust is incredibly important. So how can we act? How am I going to want to be communicated with? How can we partner on this together to have a good outcome for both parties. And are we align with what that good outcome for both parties looks like. I know that was a lot. I hope that was helpful.

But thinking through additionally, some of those red flags. When you have this dis-alignment on what the goals are, on what the strategy is. When you hear from maybe some lower-level within the organization about questions that are coming forward. If you're having a hard conversation and people aren't being truthful with you or you're uncovering that there was misalignment of truth throughout the time. So I think those are just some examples that will come out during diligence process. That makes us goes, "mmmmm." It could have good growth rates in market, but maybe this isn't the deal for us.

Jason Feifer: I love the way with your answer though rooted, obviously in business fundamentals, is also so human. The things that you're talking about are really about how people communicate, how they connect. And the idea of going through some kind of premarital counseling is perfect because it really goes to show that this is not just a matter of when people see a term like what we've titled this conversation, build a team that attracts investors. I bet a lot of people think, "oh, that's just about hiring people with the right experience or putting them in the right rolls," but what you're really pushing people to think about is, "No, no it's a lot more than that." It's making sure that they're all aligned; that they all work together. They're all communicating properly and they're all really able to serve that large mission and are going to be cohesive so that they can grow this company.

I know that something that you guys talked about internally which I'd love to hear a little bit about, you have no assholes rule at Baird, which I think everybody in the world should have a no assholes rule! Unfortunately, it doesn't seem like we're all able to achieve that, but I'm glad that you guys have it. Can you talk to me a little bit about what you mean when you're talking about that internally and what rises to the level of, "there's an assholes were walking away"?

Katie Schoen: Great question, and something I really like to talk about it. So it goes back to culture. Your underlying culture and you can say easily, like, you know, "that's that's an asshole over there." I hope. I'm able to say that without Twitter blocking me. But, what we see and how we define it is really someone who has a tendency to put them above the interest of our clients or the firm. I can tell you it is helpful from Baird as we are employee owned. So about three-fourths of our employees are two-thirds, excuse me, of our employees own shares within the company. It is pretty widely dispersed throughout the firm. And because of that, what we see is it's really an ownership. So we're making sure that we're aligned on what's best for our investors, and not simply what's best for me as an individual. Because when you're perpetually saying, what's best for me as an individual, instead of the firm or the clients, importantly, that is what's going to be a headwind or a shocker. But it goes deeper than that, too, because you can be not an asshole, but how is the culture? And really within Baird Capital, we have focused very strongly within our culture and we want to demonstrate the type of company we want to be investors in.

So we have the three cultural pillars that we look at which are: to be accountable, think creatively and engage openly. And when you have a culture where you're calling each other out on it, this is your expectations, it can make it very easy to recognize those characteristics or negative characteristics in people that you're doing business with, whether it be in potential management teams, in founders that you're interacting with on a daily basis, or investors or just with a business in general. So that's been very important to us to really demonstrate what we want to do. Have these habits and engage on a team level, and then be able to help implement it and recognize and also take best practices from some of the founders that we invest in. That's really important for us as well.

Jason Feifer: We spend a lot of time talking about warning signs and about the kind of due diligence that you and your team for doing at Baird. I'd love to to take it a little further now because when you're talking about, well, you're seeing that teams are not necessarily aligned, or you're finding that maybe somebody is putting themselves in front of the business. If somebody's watching this right now and they're a leader and they're thinking, I wonder what would happen if the due diligence team at Baird sat down with my team? What would they find exactly? What should a leader be doing or thinking about right now to make sure that they're actually creating the kind of alignment that can actually enable strong growth at their company?

Katie Schoen: What we see across-the-board is a lot of times the success of the company it can really be built on what we see from an entrepreneur. It has been your blood, sweat, tears, and your culture, your attitude that you've been bringing forward. And how you've implemented that throughout the organization. One of the things going back to culture, it's really trying to institutionalize it. So, not to say, "we have Bob over there and he's kind of a grump and he doesn't work well with others, but Bob's our best engineer. So we're just going to let him sit in the corner and disagree with what we're saying and not participate in team building." That you work for a while, but it's going to have an influence and it's going to have an impact. Thinking about institutionalizing that culture, but creating an opportunity where you could step away. You can have that next level of leadership and management and know that that's going to continue. Because that's also, it's a business risk, when diligencing. If the success of a company, we back great founders, we love great founders that are passionate, but you also don't want to have an investment make or break because someone decides to step away or something happens, that we weren't anticipating personally. So, thinking about that next level of investments you're making within culture. And one of the other things is we think about that five-year revenue plan, right, five year growth. Where we're going to be? What capital is going to need to be consumed? How would the senior leadership need to change? If you're going from $4 million in revenues from $7 to $70 million in revenue, over a five-year period, what do you want to have and who are the best people? Because what you need to take it from 0 to 5, might not be the same as from 5 to 70. So thinking about your plan there and making sure that not only the positions, but the skill sets and how do you develop those? How do you institutionalize a culture? And how even what we're seeing right now, and it may be a jumping ahead, but the market has shifted significantly over the last 12 months, and even the last 6 months, when it comes to fundraising, when it comes to capital, when it comes to the economic environment that we're all experiencing right now. It's gone from growth at all costs to capital efficiency. Thinking about is there the opportunity to play offense with people instead of defense. If you're needing to go through some reorganization with your internal team, how could you do it into a way that aligns with where you want to be in five years? Even if it's taking a step back right now with some repositioning. And also, bringing in, if there's the opportunity, bringing in some expertise or consultants to help and support that because it is something that we paying attention to as we're looking at looking at making an investment within a firm.

Jason Feifer: I'm enjoying watching the comments here. Annemarie, in particular, loved the premarital discussion. Let me ask you, Katie, well we were in uncertain economic times, lots of questions about what's going to come next. A question I hear all the time people asking, what advice does anyone have, no matter who I am talking to, for entrepreneurs about how to manage or prepare whatever comes next? Are we going into a recession? Whatever the case is, how can we start to think about how to prepare for that? Now, there's a lot of case studies out, and Entrepreneur has published plenty of them, about what not to do it, right? You can look right now in, for example, how the airlines are struggling to get back to full capacity in part because there were so many layoffs in the earlier part of the pandemic that they weren't quite able to scale up when the demand was met. So we know that we don't always want to make rash decisions but instead you want to make smart decisions about what we need to be doing going forward in uncertain times. Can you share some advice for entrepreneurs who are looking for some guidance or or some ways to think about how to prepare for uncertainty?

Katie Schoen: That's a great question, it's something that we work with our companies on, on a regular basis is really trying to help support from a business operations perspective. The first thing that we looked at, and as I said from a global private equity standpoint, is leverage and debt. How much leverage, how much debt do we have on the business? Is there the opportunity to pay it that down? Is there the opportunity to have capital flexibility? Maybe it is taking out a credit line that you may have even with higher interest rates. But, understanding capital flexibility because getting into capital constraints can make or break a business. And it also allows you the ability to be more flexible in times dislocation. Also, we have what are your time periods and how much capital do you have on the balance sheet? It could be a reprioritization. Instead of just focusing on revenue growth being able to focus on cost control or not growing your cost larger than your revenues. Additionally understanding what the economic situation is going to do from a currency perspective that impacts Baird and Baird Capital. And so just trying to lay that all out, understanding of potential headwinds for growth, understanding then the capital consumption requirements. If things turn around shortly, where would we be sitting at? And if we have to buckle down the hatches for a little bit longer period of time, if revenues, you know, how reliant are your revenues on certain economic factors? And then planning out worst case decision. I would always support having a plan in any of these directions and so maybe in two months from now you look at, you know, okay, it's not the worst case decision but we can make this incredible higher who's out in the market right now and be able to justify it with how we're looking from our revenues. Maybe at the other side, then it is, we need to tighten our spending a little bit more. We're not adding the new salesperson that we had been looking to. I think it's things like that is really understanding but also capital. And at the same time, that's part of it as we talked about, and I would be remiss not to offer, that's where institutional investors if you have the right partner can really help you navigate it. Because we've had experience in different areas. We have a network that can help and be able to support. And so that's that's one of the benefits that were able to bring outside of just as a capital.

Jason Feifer: Katie Schoen, VP with Baird Capital. This has been such a informative and insightful conversation and I really appreciate you being able to take folks into the kind of high-level conversations that you're having a Baird Capital. I see a lot of comments here, Ivan: "I think she hit the nail on the head with the with culture and and capital efficiency." You've given people a lot to think about it. I really appreciate it. I know that this is a part of the conversation we're having right now, is it part of Baird's Women Marketing Initiative. You can learn more about achieving your career aspirations at one of Fortune's Best Workplaces for Women at rwbaird.com/womenatbaird. Katie, thank you for inspiring people to think bigger about what success really looks like that. It really does come down to not just, you know, not just great business fundamentals, but also great people and great culture and frankly, no assholes.

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