Listen to the episode:
Laurie Barkman speaks with Bobby Zappala and Andy Ellis, Managing Partners of Localize Capital. This episode highlights an innovative financing approach for family owned businesses that supports long-term growth and the independence of emerging entrepreneurs. It’s a strategy that may resonate with legacy businesses, technology creators, and anyone who believes it is possible for companies to grow without financial returns being dependent on a liquidity event.
Show Notes:
- Andy Ellis LinkedIn
- Bobby Zappala LinkedIn
- Localize Capital Management website
- Edelweiss Holdings Company
- Carlota Perez innovation wave theory
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Episode Transcript:
Laurie Barkman:
Welcome to Succession Stories, insights for next generation entrepreneurs. I’m Laurie Barkman. I’ve spent my career bringing an entrepreneurial approach to mature companies struggling with change as an outside executive of a third generation, 120 year old company, I was part of a long-term succession plan. Now I work with entrepreneurs, privately held companies, and family businesses to develop innovations that create enterprise value and transition plans to achieve their long-term goals. On this podcast, listen in as I talk with entrepreneurs who are driving innovation and culture change. I speak with owners who successfully transitioned their company and others who experienced disappointment along the way. Guests also include experts in multi-generational businesses and entrepreneurship. If you are a next generation entrepreneur looking for inspiration to grow and thrive, or an owner who can’t figure out the best way to transition their closely held company, this podcast is for you.
Laurie Barkman (00:58):
I love speaking with guests who are really passionate about what they’re doing to move family businesses and entrepreneurs forward. Bobby Zappala and Andy Ellis definitely fit that bill. They are the Managing Partners of Localize Capital Management an investment group with a unique model. Their fund invests in family owned businesses and emerging companies through two blended investment strategies for income and high yield. Localize provides options for entrepreneurs who take a long-term view to growth and creating value. I hope you enjoy listening to this episode spotlighting an innovative approach to deploying patient capital in privately held companies.
Laurie Barkman (01:38):
Bobby Zappala and Andy Ellis, thanks so much for joining me today on Succession Stories. I’m really glad to speak with both of you. This is a show that explores innovation, transition planning, next generation entrepreneurship, and privately held companies. And I’m really excited about our conversation because I think that your firm, called Localize Capital Management, is centered in a lot of those different aspects in a pretty unique way. You’re providing partial liquidity options. I know we’ll talk about what that means, but you’re providing these options for family business owners so that you can also create a mechanism to invest in emerging businesses in our region, which is in Western Pennsylvania. That sounds really complicated, but I’m excited to dive in and I know that you’ll be able to unpack it for us. We’ll get to Andy in a minute. Bobby, you and I have known each other for about three years, I figured out on LinkedIn, and we met when you were running a startup incubator and co-working space called Ascender – and I know you’ll tell us probably a little bit about that. But I wanted to start with you. If you could tell us about the mission of Localize and what it’s about, and we’ll dig in as we go.
Bobby Zappala (02:55):
Sounds like a plan, Laurie. Well, it’s great to see you and thank you for hosting us. And yes, I think we’re between three and four years of history at this point. I’ve appreciated the friendship and the business relationships. So Localize, like many new ventures, is designed to solve some problems and the problems that we had identified that we’d like to address through Localize or the need for investors to find ways to put their money to work and invest their money in ways that they can really understand how it’s working for them. And also to put patient capital into companies that are looking to grow over longer arcs of time, that aren’t necessarily structuring themselves toward an exit, but are actually looking to grow strategically when opportunities arise, as opposed to growth at all costs. And also looking to help those established businesses, those large private companies in the region, find ways to diversify their investment opportunities by participating in the regional ecosystem. And also in some cases, yes, finding partial liquidity, which may be a term of art, but certainly to the audience that you’re serving here, those business owners, they understand that concept pretty readily. Andy had to explain many of these things to me being that he is the finance guy as he will certainly get into, but that’s the general purpose. So we’re looking to attach patient capital to businesses that are looking to grow patiently over longer arcs of time.
Laurie Barkman (04:30):
And you have a really interesting background because you were a corporate attorney for years. And I know you’ve said you’ve morphed into an entrepreneur, but it sounds like you’ve been an entrepreneur in a lot of ways, even when you were an attorney, I think you’re always looking for ways to do things differently and that really had served you well. And now you’re an investor. I’d love to hear a little bit more about your journey and how did you find Andy and Localize. Was there some entrepreneurial matchmaker out there that brought you guys together?
Bobby Zappala (05:00):
Well, I think that one of the areas that I have excelled in over the last eight years or so since I stopped practicing law, and even at the time I was practicing here in Pittsburgh, I always made it a point to try to build as many connections as possible because you just never know where they’re going to lead. And as somebody who is from Pittsburgh and really believes in the region and its ability to grow and distinguish itself as a unique place to build successful businesses and organizations, you tend to have fortuitous run-ins. And I think you have to seize them when they feel right. So I didn’t find Andy, Andy actually found me through a mutual friend. Someone who Andy had known since high school, I believe, and someone who I had met through his wife, who knows my wife, so it’s weird circles like that.
Bobby Zappala (05:55):
But because of my work at Ascender, this connection was aware of my interest in entrepreneurial endeavors and specifically was aware of my interest in supporting businesses that may not traditionally fit the kind of stereotypical venture model. And so Andy as he’ll get into himself, when he moved back here from California, he did so under the auspices of developing this Localize model further that he had already started to concoct and to find partners who were really philosophically aligned with what he wanted to do. So he started trying to track people down. And when this mutual friend of ours said, you should meet this guy, Bobby Zappala, Andy, of course, very strategically decided to show up at some event. Or I happened to be in run after me at first, I was scared. And then I was very happy.
Laurie Barkman (06:50):
So when someone tracks you down at a networking event, it could go one of two ways.
Bobby Zappala (06:55):
It can definitely go you know, in many times the former way, which is not the great one, but yes. So it was good. I was glad that he had tracked me down.
Laurie Barkman (07:04):
That speaks to the power of the network. And that’s certainly something that you’ve worked really hard to build when you’ve worked here in a variety of ways. You grew up here, right, Bobby? You’ve grown up in Pittsburgh?
Bobby Zappala (07:15):
Yes. I’m from the South Hills, I grew up in Mount Lebanon.
Laurie Barkman (07:18):
So supporting businesses that don’t stereotypically fit the venture model. That’s what you said. And so I want to hone in on that. Andy let’s turn to you now. One of the things you told me when we spoke before this interview is that you love family businesses. And that really stood out to me. And I got to know your background a little bit. You spent nine years with federated investors, which if our listeners don’t know Federated, is one of the country’s largest investment managers with more than $350 billion with a B in client assets. And they may not know also that federated is a family owned company, family owned and led, which is pretty remarkable. And you had shared with me that you always wanted to be an entrepreneur. So I’d love for you to tell us what inspired your idea for Localize?
Andy Ellis (08:11):
I have a bit of an indie streak and I should say, thanks for having us on I’m looking forward to the conversation. I have a bit of an indie streak in me. I really loved the idea of entrepreneurship when I was in school and wrote a lot of business plans, took a lot of entrepreneurship classes and was pretty hell bent on being an entrepreneur when I got out of school. And when I got out of school, I had a few friends tell me, well, my mom’s an angel investor. My dad’s an angel investor. You should pick one or two ideas and go talk to them. They invest in companies and I’m like, wow, this sounds great. Someone’s going to give me money to start a company. Very quickly I learned, wait a second. Okay, I get this. So they’re buying in a company that doesn’t quite exist yet.
Andy Ellis (08:58):
And therefore they’re buying stock at the cheapest price that it hopefully will ever be. And in order to get their money back, they’re going to force me to sell the company at some point in time. Well, the whole notion of starting a company to sell it seemed very foreign to me. And while many people wear the badge of a serial entrepreneur with a sense of pride, it wasn’t something that I necessarily wanted to set out to do by design. So, being from Pittsburgh, having gone to Central Catholic was trying to decide what I should do with my life and thought that getting some sales experience would be a worthwhile endeavor and learning something about finance as Bobby harasses me for saying the word properly, it was probably a good idea as well. So Federated is a great Pittsburgh company, my mom worked there way back in the day, I think when she was pregnant with my older brother.
Andy Ellis (09:56):
And so moved back, was looking for opportunities and Federated had a great sales program. They could bring you in, and train you, you get licensed. And so that was attractive. So, that’s what I did. I thought to myself, let’s go learn something. Let’s make some money so we don’t have to go beg people for permission to start a company. Ten years later, I was still learning, nine years later, I was still learning about the world of finance and why people do the things they do with their money, how the capital markets work, how they change through time. And it dawned on me as we were living in coastal California, Southern California, thinking about a lot of the issues that early stage companies have or family businesses have and started to dig into private equity thinking, wow, this is so much more long-term focused than trading stocks very quickly.
Andy Ellis (10:59):
Maybe this is something that I should think about and pursue. And as I started to peel back the layers of the onion there, I started to realize that Henry Hillman, a Pittsburgh connection here, he seed funded Kleiner Perkins’ first venture fund. I think it was 50% of Kleiner Perkins’ first venture fund came from Henry Hillman, and 33% of KKRs first LBO fund came from Pittsburgh from Henry Hillman. And when I started to peel back the layers of the onion, started to see how private equity venture capital and elbows have changed through time, really started to get interested in the idea of patient capital. And that’s how I started to formulate the ideas for Localize.
Laurie Barkman (11:42):
I think the term patient capital is interesting because is there a term called impatient capital? And that’s what I’ve found working in the venture space at startups, and Bobby, I’m sure you saw this too, it is pretty impatient. You know, people who are looking for a quicker turn on their assets and their investments than the long game. And I’ve also worked in privately held companies that definitely have a view to a long game. So that’s where I think I’m so intrigued by what you guys are doing, trying to – going back to Bobby, the way you explained Localize in the beginning – there’s really sort of two facets to your firm and your investment strategy. So I think that that’s something important to kind of hone in on. Andy, if you could just give a little more color to, was there anything about the ecosystem of family businesses that struck you? I think when we talked, you mentioned there were these regional exchanges in the past.
Andy Ellis (12:40):
Yeah. I think for many reasons you’re going to see more regionalization and localization from a macro standpoint. Globalization has gone so far and surely many things will remain globalized, but you look at the hollowing of middle America and you look at what so many of us lived through here in Pittsburgh. We saw the de-industrialization and I think few recognized the financialization of the real economy. We took these real family businesses and have started to turn them into financial assets. So I’m not a super curmudgeony guy. I don’t think I am anyway. Yet I find myself standing in line at Idlewild after I moved back here with my family, thinking to myself, okay, these people own T. Rowe Price and Vanguard, these ETFs for income for retirement. They’re here in this beautiful park. It’s one of the oldest parks in the country. It’s a beautiful asset to the region and they’re shelling out money for slushies and soft pretzels.
Andy Ellis (13:45):
And they own these financial assets for income. Meanwhile, they’re standing in a big, beautiful asset that is owned by a private equity firm in Spain. And it’s kind of mind boggling when you think about that, all of these previously family owned assets. They were operated with patient capital for survivorship over a long arc of time. And in order to survive, they operate with relatively low debt and they focus on generating free cash flow. These are the exact things that most people want and need in retirement, right? So we have all of these beautiful assets to the region that employ people locally, et cetera, et cetera, yet, over the arc of time where we saw places like Pittsburgh get hollowed out, we continue to send our excess capital to other areas of the world to be invested. And then we wondered why people’s grandchildren are being raised in other states. So made me think a lot about those types of things.
Laurie Barkman (14:49):
And that is an interesting reflection now with the pandemic of COVID-19, there’s a lot of discussion about local manufacturing, local supply chain, getting products the last mile. And I think you’re right. It sort of all fits together in that overall dynamic of focusing on the local environment and the region and supporting these family businesses, small businesses, what have you, these privately held companies that are the mainstay of the everyday entrepreneur and America on Main Street, right?
Andy Ellis (15:24):
Yeah. I mean, it’s funny because you look at it. People generally don’t tend to think about things at like a system level, but when you think about all the choices we’ve slowly made through time, it’s no wonder we’ve gotten to the place that we’ve gotten. That being said, what is so attractive about places like Pittsburgh is we have so many staunchly independent holdouts that refuse to financialize their family businesses for the sake of feeling better about themselves short term. But the whole notion of EBITDA was created to find a sense of how much leverage can you use to purchase new companies. It’s a relatively new financial term that is ubiquitously used in the industry and just commonly asked, you know, well, what EBITDA are you looking at for these businesses that you would like to invest in and et cetera, et cetera, and real business owners and operators have an entirely different mindset. And while they may know what their EBITDA it is, they’re not trying to optimize necessarily for that. That might not be the game that they’re playing.
Laurie Barkman (16:35):
Yeah, you’re right. There’s different perspectives there. Bobby, what do you think about that?
Bobby Zappala (16:39):
Well, an analogy that Andy and I use pretty often that we read in a book that we shared a couple months ago, is this idea of how do you kind of perceive growth as a business? If you think about two different people, one’s riding a bike and the other is jogging. The person riding the bike is going to go faster than the jogger in all likelihood, riding the bike. However, when the person riding the bikes stops, they’re going to fall over. You can’t balance yourself unless you’re one of those cool, like hipster, fixed gear people setting up inside. If you’re a jogger, however, you can stop, get your breath, take your time. And then start going again whenever you’re ready. You’re not going to hurt yourself. You’re not going to fall down. None of that’s going to happen, right? We like to think that there are many more companies out there that abide by the principles of the jogger than of the bicyclist.
Bobby Zappala (17:39):
We are experiencing at a massive scale, now the bicycle problem — the grow, grow, grow, grow, grow, go, go, go, go, go. Well, what happens when all of that grinds to a halt, everything falls over. Cause we’re just growing for the sake of growing. Now that’s not some kind of nefarious situation necessarily. It’s the way these systems have been designed. And when you’re talking about investment models that currently dominate like private equity and LBO and venture, again, I’m not saying that people have ill intentions and Andy isn’t either, but the reality is the math has to work. And in order for the math to work, to return to your LPs in those scenarios, you have to push things quickly toward an exit. You have to show quarterly growth. You have to do all of these things to fight the IRR clock that’s significantly negative from day one. So this is the most exciting thing I think about Localize is, yes, there is some sophistication to the model.
Bobby Zappala (18:38):
And I don’t mean that in a way where like Andy and I are so brilliant. It’s just, there’s some complexities to it, but the complexities are necessary to make the math work such that you can invest in the joggers instead of being forced to invest in the bicyclists who are going to have to forecast growth, even if they’re plowing money in just to show you some metrics that are going to eventually catch up to them in two or three years when they fall over. So that’s exciting. And given the climate that we’re in, it is becoming now, you’re feeling that messaging kind of come out a little bit more in. Certainly we’re not sitting here like super giddy that everybody’s in this situation. This is not fun. It is in a much more dramatic manner than what would have likely happened in it in a typical quote unquote recession environment that was just driven by the markets themselves without any kind of superseding major event like this.
Bobby Zappala (19:42):
It’s just made it very stark, and it’s just happening very quickly. And every day you can pick up the Journal, or the Times, or the Economist, or pick your whatever, and you’re going to find somebody writing about how we need anti-fragile systems and how we need to get away from scenarios where there’s a supplier on the other side of the globe where somebody sneezed and now your stock has dropped 25% over here and you have no idea how that happened. So, I think that it’s just that the timing for these types of models is there and we’ve developed one. And that’s another thing is I think where people are recognizing that there’s a problem. There aren’t necessarily a ton of solutions out there. If you start to try to package venture or private equity with some flowery language that says, Oh no, we’re now looking much more conservatively. Well, I mean, show me your term sheets. If your term sheets are still written the same way. I think it’s nice that you want to talk about it differently, but again, ultimately the math is going to force you to push that company toward growth and acquisition or sequential fundraising.
Laurie Barkman (20:52):
And Andy, I know that you recently wrote a blog article that ties into what Bobby is saying. I think Bobby’s points are well made, it’s sort of topical as well as it was sort of a systemic problem, even before the COVID-19 pandemic shut down our economy in a lot of ways. And it was sort of maybe building up to that as Bobby said. What are your thoughts about that? This article you wrote was called, “The world isn’t ending, it’s just changing and are you paying attention?” So what was the purpose behind that article? Was it a rallying cry and kind of supportive investing and locally owned and independent businesses? What was the message you had about that?
Andy Ellis (21:31):
Yeah, that’s absolutely it. I think that there are a lot of people that are waking up to the idea that growth at all costs, maybe the cost is not actually worth it. I actually wrote a shorter version of that hopefully will be published in one of the local papers soon. And the title was a little different. I condensed the message a little bit as well. And it said, “Growth over stability is dead. Long live patient growth.” And again, I think the system that we have here, we have these staunch and independent holdouts that already think in this patient fashion. And Bobby alluded to this as well. You can’t have the same structure for funds, the same structure for deal terms, and put the same investors into the fund and just say that you’re doing things differently.
Andy Ellis (22:30):
It does not actually work that way. If you have a 10 year life fund and you bring money in from traditional LPs, their standards are already set, they’re already anchored. It’s why we’re trying to do things differently. We have actually structured the fund differently. It’s much, much longer term than a traditional ten-year fund. The terms of the individual deals are different, but that’s kind of like us proving out that we do want to do things differently. The real key here is partnering with very like-minded people and those like-minded people are the owners of these multigenerational family businesses. And we have here in Pittsburgh, everything that we need to restart, jumpstart, however you want to say it, our regional economy, and it should be done on terms that actually fit our culture and how business is done. We’re constantly looking to other systems for validation and for money. There is a plenty of capital. We have plenty of resources here, and if we can deploy them in a fashion, that is true to Pittsburgh, we can hopefully draw more people back into this region to conduct business in this way.
Laurie Barkman (24:00):
Is this a unique model, Andy, have you and Bobby created something completely new or were there other approaches out there that are similar? What makes this unique?
Bobby Zappala (24:09):
I’ll start and let Andy layer in. It is unique in that it is a combination of two fund models, which to some extent exist on their own, but it is the pairing of the fund models that make it function in a manner that allows for true, patient long-term thinking with an IRR clock that allows for the investors to hold for longer arcs of time, without growing concerned about when they see their money come back to them. So, the funds are called, one is an income fund and the other is a high yield fund. The income fund is similar to a fixed income investment. So there are around the world, a handful of sophisticated money managers who have almost fallen backwards into this premise of the positions that they’re holding for their clients are in again, generational, longstanding businesses that have geographic modes, that have industrial modes, that are able to withstand cyclicality.
Bobby Zappala (25:20):
And they’ve done it for a hundred some plus years. They don’t let a lot of people into their company because they don’t want people changing the way that they run their business, which is with longterm legacy thinking and sustainability. Because of the philosophy of these money managers and investors, they have been able to get access to some of those assets. So they’re providing their client base with a very steady, consistent return. It’s not something dramatic, but it is consistent single digit yields year over year over year, because these are strong companies. And the investors are happy because unlike putting your money in a mutual fund where you’re saying, okay, I mean, I guess I’m seeing a little bit of a percentage return year, but I really have no idea how this is happening. And when it goes bad, I’m extra frustrated by the fact that I don’t know why this is happening, right.
Bobby Zappala (26:18):
Instead I’m able to watch these businesses, this collection of businesses do their thing, create product, evaluate their balance sheets, make smart acquisitions in terms of, facilities or otherwise when there is a real business opportunity, as opposed to just because I have to show growth. So there are models like that, right. So we’re incorporating that type of model. On the other side, the high yield fund is most similar to a fund called Indie VC. Indie VC is a revenue based return model that invests in companies that are poised for growth, but companies that may not look like the type of “hockey stick growth” that you want to see from a venture bubble environment. We like the terms of that model, the reason why we felt it was important to pair these two models together, is because in the Indie VC model, the LP base are still a collection of individuals who are looking for a return.
Bobby Zappala (27:22):
And the math in that model is still, if it’s a $50 million fund, it’s negative $50 million, right. And you got to make that ground up on companies that you’re looking for, a revenue based return over an arc of time. That’s a hard slog. So ultimately that fund is still looking for some of that portfolio to potentially return in some way that is accelerated in order to make up for that deficit. By attaching the income fund piece to the high yield fund, what we’re doing is we’re actually eliminating that negative IRR clock. This how steep that negative IRR clock happens to be. We’re bringing in a large, privately held businesses to hold positions in that fund. Those large companies, those privately held companies, aren’t looking for instant gratification or looking for a return overnight. They’re looking for diversification and opportunities to participate in regional growth.
Bobby Zappala (28:20):
So they want to hold for a long period of time. They like seeing companies that look, they want to look like them when they grow up, frankly. And it also positions us to be able to invest in companies that have sophistication enough from a business and operational perspective where they’re not looking to me and Andy and our other investors, advisors, and partners to say, Hey, help us. Hey, you’re going to give us some money. And you’re also going to make us so much better. No, we’re not. They already know what they’re doing. What they have is a nice core asset and some outsized opportunities for investment without capital that they can access to help them attack some of these other opportunities in a strategic manner. They know what they’re doing. We’re not looking to time to try to tell them what to do, right.
Bobby Zappala (29:11):
So this is again, Andy likes to use some quotes way more than I do. And one of his is like, “I would never…” What’s the one about joining the club, Andy, that I can’t get, right? The Groucho Marx quote.
Andy Ellis (29:26):
“I would never join a club that would have me as a member.”
Bobby Zappala (29:33):
Yeah. So, that’s what we’re looking to do. We want to be in clubs where nobody really wants us as a member, but they do want us because of our alignment in patient investment in that thesis. Now there are pieces that I’ve glossed over within the context of how the fund actually flows. And another important aspect of the Indie VC model where ours is differentiated is check size. In the Indie VC model because of the way that fund is structured, you’re really making smaller investments.
Bobby Zappala (29:59):
You’re kind of limited in the size of checks that you can write to a company. In our model, it can be seven figures, potentially even eight figures, if it’s the right business that’s looking for that type of articulated investment. We can do that. There’s no limitation on check size and we’re not looking to have a diversified portfolio for the sake of hedging risk. We’re just looking to make good investments in companies that can put that capital to work in smart ways to grow patiently over time. So there’s a lot of fundamental differences there that make it pretty exciting.
Laurie Barkman (30:38):
Andy, is there anything you want to add about that, about what makes your firm unique?
Andy Ellis (30:42):
Stellar job, partner. I thought it was good. Bobby alluded to on the income side, one person that I really admire and look up to. He runs a holding company that runs money for family offices, and he runs it out of the Swiss Alps, but I believe it’s domiciled in Bermuda. And again, he takes an owner’s mentality. There’s a really great interview. You can find with him on YouTube, it’s called Edelweiss Holding Company. The guy’s name is Anthony Deden. He shares this similar passion for stories of people who own, I can’t remember if it was a fig or date farm, where he was taking a tour of the fig or date farm. There were some newly planted trees, and he asked the young man who now was running the family business, how long till these bear fruit? And the guy said something like 15 or 20 years.
Andy Ellis (31:55):
Wow. Think about that. You know, in modern day finance there’s almost no way to value something that far out. You need to get a return much quicker, much sooner. And the guy laughed and he said, well, no, it starts to bear fruit in that 15 to 20 years but it’s not actually salable. It’s not a good date or a good fig for another 10 years. And so he’s looking back at all of the trees that he just saw and he’s like, well, you’re a young man. You didn’t plant all these trees. He said, no. My father planted these trees, my great grandfather planted these trees. My great, great grandfather planted these trees.
Bobby Zappala (32:40):
And that’s a mentality that is alive and well here in Pittsburgh, where these people inherit a big stone wall. The mission is to not let the stone wall get knocked over. And maybe you add one or two stones in your lifetime.
Laurie Barkman (32:58):
That’s an interesting story. It’s a good visual about the trees and the generations that came before you. That’s one of the things I’m enjoying about doing this podcast is talking to some really amazing companies. I’ve talked to fourth generation, sixth generation, and you really get an appreciation. One of my guests, Shelley Taylor said, it’s about the legacy as much as it is about the family investment. Then certainly we see that. So I think it’s interesting that you have this income fund and a high yield fund. And the high yield fund is really about investing in these next generation entrepreneurs in our region that are innovating and they’re more agile and nimble. And a lot of them are in the tech space. I know that you have conversations that you don’t need to provide any specifics, there’s things underway for you, but just in general, what might some of those innovative emerging companies be in Pittsburgh? And how are they looking at your model? What’s been their reaction so far?
Bobby Zappala (33:57):
This is maybe an area where, I mean, sometimes you just kind of are a little bit lucky and the timing of things. Pittsburgh as a technology marketplace is differentiating itself through robotics, artificial intelligence areas like that. Specifically looking at robotics, the more you talk to entrepreneurs in that space, the more you hear, and feel this kind of sense of aversion to some traditional investment models. And there’s a couple of reasons for that. One is investing in that type of technology. Those hardware technologies can be very capital intensive. And so to go down a traditional venture route is going to mean giving up a whole heck of a lot pretty early on just to get it started, if you go that route, because of the cost. The other part of it is from the perspective of these entrepreneurs, is we don’t even know what markets we can address with these technologies yet.
Bobby Zappala (34:59):
This is evolving fast, but also the applications could take a lot of time to kind of unearth with a lot of this IP that we’ve developed. And so why would we give up all of this value that we can even quite, we couldn’t even price yet if we wanted to. And even worse, what if we get put on this shot clock of investing, and then it just so happens that five years down the road, it hasn’t quite happened yet, but our investors want out because that’s the timing of the investment. And then it happens to be that year six is the year that it becomes a thing. Guess what, too bad for you. You didn’t get to strike at the right time. You had to strike at some artificially created time and it undersold the value of the business.
Bobby Zappala (35:52):
And then, the last part, which is a little bit less of a financial piece, but probably more important in my opinion is just, these are people who really like their toys. Like they are very passionate about the intellectual property they’re creating, the robots they’re creating and otherwise. They don’t want to sell it. Not meaning they don’t want to commercialize and actually sell product. They don’t want to sell the business. They don’t want to sell that core asset of the team and the IP that they’ve created. They’re looking to spin out technologies that can really help. And so they have these kinds of skunkworks and these labs where they can build this stuff and do these kinds of things. So it’s interesting because it is kind of a juxtaposition of – from the outside looking in, it’s super high tech and look at these robots, look at the crazy things they’re doing.
Bobby Zappala (36:45):
Wow. Let’s give them half a billion dollars, let them run wild. And really on the inside, they’re like, no, no, no, no, no. It takes a long time to develop these technologies. You have to be smart about how you’re putting your money to work. You have to be smart about how you’re entering markets. And we want this to become the next industrial era almost. They want to build these empires with these businesses not look for a quick flip and a way out. There are a number of reasons why the way that we’re talking about investing works for them. Many of these companies have leveraged opportunities like government contracts as a way to build a solid underpinning of revenue and maintain ownership while continuing to build a base of IP.
Bobby Zappala (37:42):
So they’ve already kind of chosen a path in that way. If you just look at the way that they’ve accessed capital already and put together contracts and built products. It’s pretty self-evident that’s the way they want to do it.
Andy Ellis (37:57):
There’s some irony in that too. You talk to people who run legacy businesses. I think this is a big topic on the show is they might not either receive recognition for being innovative or might not think of themselves as innovative. Well, in addition to that, you talk to some of them and say, well, are you active in the entrepreneurial community? They look at a lot of the activity going on and say, well, what in the hell would I have to add to that sideshow? It sometimes can seem like a lot of people playing entrepreneur, playing a part.
Andy Ellis (38:36):
I think it’s wrong. The problem is that the entrepreneurs that are out there hustling, building businesses efficiently, optimizing for a longer arc of time and really trying to solve real world problems, they’re not the ones in the newspaper typically. They’re not the ones receiving the funding rounds and parading themselves around there. They’re the ones talking to customers and trying to figure out problems. And it brings me to another kind of macro economic thing. There’s a woman named Carlotta Perez that studies and writes about technological innovation and how that happens in waves. And what’s so intriguing about Carlota Perez and her theory on waves of innovation is a while back she started to talk about possibly a major shift in trend. How you finance and how you attack brand new innovations is entirely different than how you take those technological advancements and deploy them into productive capacity.
Andy Ellis (40:03):
So she calls it the Deployment Era or the Deployment Age. So what you’ve seen ever since Henry Hillman funded that first Kleiner Perkins fund, you’ve seen risk capital being thrown at innovators to create technological advancement. What we have failed to see is how all of these amazing things people have created are going to actually be deployed into productive capacity into the real economy. And there is a distinct possibility that Carlota Perez’s theory, wave theory, is playing out right before our eyes. And so the reason these legacy businesses thought they didn’t have anything to add is because again, the financial instruments were being invested in technological advancement at all costs and creating things from whole cloth that nobody ever thought was possible. If in fact, we’re entering a Deployment Age where it’s more important for us to find how to deploy the technology into productive capacity, the people that truly understand that, and understand how to finance that, they live in our backyard and they operate legacy businesses. So building that bridge between that legacy mindset and that deployment mindset, and actually focusing on productive capacity, they hold the key to the next wave. And we’re perfectly positioned for it.
Laurie Barkman (41:52):
There’s so many great examples of that. Now I think because of the pandemic and how you look at the supply chain, you look at grocery store chains. We have a very large family owned grocery chain here in Western Pennsylvania, and many other grocery chains across the country are probably in the same situation where they’re looking for solutions to minimize risk of their customers, minimize risk for their employees. And at the same time, keep a sustainable operation. And so they’re looking to some of these more innovative companies who may not have had a time of day, previously at these larger firms to get 15 minutes or a half hour to do a pitch. And now it’s like, wow, let’s collaborate. Let’s understand what’s out there. How can we deploy quickly? And so that’s just one example, but I hear what you’re saying.
Andy Ellis (42:39):
Yeah. And it’s funny because it’s like you hear all these, all this stuff was new to me when I moved back and started looking into the entrepreneurial ecosystem, but it’s like a DNVB “digitally native vertical brand” that goes DTC “direct to consumer”. And it’s like, well, what about our neighborhood brands? They were the OG direct to consumers, Schneider Dairy, Turner’s milkman, delivered straight to your door. It is kind of funny in some sense where we can actually deploy in a different fashion if you’re not trying to do it at global scale at the push of a button. We have opportunity to serve local markets in really innovative ways. That’s kind of fun and exciting to think about is that the direct to consumer has already been done. It was the local dairy farm making your weekly delivery.
Laurie Barkman (43:44):
Yeah. It is. It’s almost like back to the basics. Well, I’ve had you guys on for a long time. I want to move to the last question. I really appreciate you both being on the show today. And as we said in the beginning, I think this is a really interesting and important type of platform that legacy businesses can explore as well as how you’re addressing emerging entrepreneurs and how they can seek investment from sustainable companies. So the last question ties in. I like to ask all my guests if you have a favorite saying, or mantra regarding entrepreneurship and Andy, we’ll start with you, what’s yours?
Andy Ellis (44:22):
Something that I find myself repeating pretty frequently. It applies to business and life.
“In life and in business, you get what plan for. What are you planning for?”
And I recently read Clayton Christensen’s How Will You Measure Your Life? It’s funny, working every day with Bobby. Bobby has a strategy for how he loads the dishwasher, how he organizes his clothes, things of this nature.
Bobby Zappala (44:49):
Easy Andy, this isn’t supposed to be a personal question about me.
Andy Ellis (44:53):
We all have strategies for all these different things we do, right. But so few people take a step back and actually have a strategy and a plan for what they’re trying to accomplish in life and why. And so that’s why that’s probably my favorite mantra in business and in life, you get what you plan for.
Laurie Barkman (45:16)
I like it. Thank you. Bobby, yours?
Bobby Zappala (45:19):
I don’t know if mine is quite so crisp and succinct.
My mantra and philosophy about entrepreneurship is that it’s about the people more than anything else.
And that was the philosophy that we took even in founding Ascender and the way that we attempted to identify aspirational entrepreneurs and help them build up from the ground up. The process that we followed at that organization to vet entrepreneurs and their ideas, we focused almost exclusively on the people and hardly on the idea at all, because what we really wanted to understand was what is driving that person or that team of people to pursue that business? Why did they care? If it was about some opportunity for a quick financial game, likely not going to be that successful. If they really cared about a problem and we’re really looking to solve it, then you knew they were likely going to find a way, and that’s the kind of passion and mission driven philosophy I think matters a lot.
Bobby Zappala (46:36):
Sometimes everybody wants to see a diligence checklist and this, that, and the other thing. I get that, there’s important information there. A lot of that information is probably for a good product or service going to shed a lot of light on the philosophy of the people running the business and the mission and how they actually are approaching it just as much as fundamentally, whether or not it’s a good or bad business based on what’s in that spreadsheet or on those pieces of paper. So that’s the thing that I think matters to me more than anything else is what are these people want to do with this business? And you see that in closely held family businesses all the time.
Bobby Zappala (47:26):
We’ve mentioned it throughout this conversation– planning, legacy, successorship, community stakeholders. These are elements that drive the owners of these assets almost as, but probably more so, than just the product that they’re selling, right. It’s almost a means to an end. I think what’s just so critical is that oftentimes we look at these businesses from the outside in, and we just think of the product. And we think of the revenue when we think of those pieces, and we forget that it’s a collection of human beings making decisions, and why are they making those decisions matters a lot.
Laurie Barkman (48:06):
So the 140 character limit on Twitter would probably pare that down to maybe the importance of having a mission driven philosophy as an entrepreneur and focusing on things they really care about so that they’re looking at it with that perspective for the future. Andy, Bobby, thank you both so much for sharing your perspectives today, telling us about Localize Capital. In the show links. I will include the link to Localize.Capital as well as some of the other things that you mentioned, including Edelweiss Holding Company in the show notes. I thought those were interesting. So thanks again you guys. It was a lot of fun.
Andy Ellis (48:42):
Thanks for having us on, it was a lot of fun. Thanks for making us sound smart.
Bobby Zappala (48:47):
Yeah, we really appreciate you having us, Laurie. This has been a lot of fun, and I hope you and everybody who is listening to this stays safe and healthy.
Laurie Barkman:
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