Cultivating Win-Win Relationships for Corporate Venture Capital Investments
[00:00:07.210] – Andrew Louder
Hello and welcome to the Dallas Based Innovators Show, brought to you by Louder Co. I’m Andrew Louder. I’m extremely excited about our special guest today. He is Marshall Smith, Managing Director, of First Rate Ventures. First Rate Ventures is the corporate venture capital arm of First Rate Incorporated, the global leader providing data aggregation, performance and reporting solutions to the wealth management industry. And in fact, First Rate Ventures makes minority investments in early-stage startups using innovative technology within WealthTech, InvestTech, RegTech, and MortgageTech industries. Marshall went to school at Dartmouth College where he also played football and our circles have just been colliding a lot recently in a few different areas, including Vistage and having a few friends and colleagues along the way as well. I’m extremely excited to pick his brain on this episode. So, Marshall, welcome to the show.
[00:01:04.980] – Marshall Smith
Hey, thanks for having me. Glad to be here.
[00:01:07.730] – Andrew Louder
Awesome stuff. Well, as a tradition on the show, I love to turn it over to you. Just give us a good one-to-two minute bio. Who is Marshall Smith?
[00:01:17.160] – Marshall Smith
Yeah, thanks for that. Well, I grew up in a rural town west of Fort Worth, Aledo, Texas, and was decent at football and decent at taking tests and somehow weaseled my way into Dartmouth College with that combination of decency and was recruited to play football and showed up and realized I loved Dartmouth College, I loved the experience there. I had a waning interest in the football part of life but stayed on there and graduated in 2007 and studied economics and religion. And that kind of defines my life decision, which was do I go into a ministry-type role like a pastor at church? I was thinking about that as a role and thinking about my economics degree and fintech because I had intern at a fintech company called First Rate who is here in Arlington, Texas. And I sat down with the founder of the company and said, “hey, I’ve got two paths. I’m either going to go down this ministry path or I’m going to go down this business path, help me decide which way to go.” And what’s funny is he told me something that really changed the direction of the course of my life and he really said, “why do you need to choose between the two? Could it be that God would call you to do work in business and to do work in ministry?” And that really kind of changed the way I’ve really thought about just my path and my vocation itself as being less I’m this or I’m that. My identity is I’m this kind of worker, that kind of worker, I’m a father or I’m a community member or I’m a business guy and kind of like form those altogether. So here I am 15 years later, after that, now I’m Managing Director for First Rate Ventures, had just about every other job in the company and ran out of jobs really. So they said, “why don’t we think about investing off our balance sheet in early stage startups and acquiring other founder fatigued fintech businesses that really value the legacy of their business.” And First Rate wants to continue on into the future perpetually. And so we are executing the strategy now, which is pretty interesting. Have a lot of fun with that. Don’t have a background in venture capital, don’t have a background in acquisitions. Have a deep background in WealthTech. And married to Shannon and have four kids and they’re eleven, nine, nine, and six. And the 2 nine-year-olds aren’t twins, so I’m just going to leave that there for you.
[00:04:07.760] – Andrew Louder
Got it. Yeah. You’ve got a lot on your plate there, Marshall. I admire you for all you’re doing, really is incredible. Not just to come out of being a leader over there at First Rate, but then also to lead this new VC arm of it all while juggling a wife and four kids. So very admirable stuff. So many places to begin. First of all, what position were you in football?
[00:04:37.420] – Marshall Smith
So I was the center, and that’s my claim to fame. I like to say that’s the smartest person on the football field. The general thinking is that the offensive linemen are the smartest people on the football field and the center is the smartest. So that’s what I like to say about that. Generally, they’re not the best athletically. They’re usually shorter and smaller and slower. So, I like to highlight the benefits of it.
[00:05:05.430] – Andrew Louder
I’m just curious because looking at you, you’re certainly tall, but I wouldn’t have thought you to be an offensive lineman. How big did you get at your heaviest?
[00:05:15.970] – Marshall Smith
I guess, yeah, in high school I played I’m 6’2”. In high school, I got up to maybe 240. But at the high school I grew up, it wasn’t this spread offense where the offensive lineman basically don’t go anywhere and they just pass block every play. It was more like you run and condition yourself and you’re just going to be in better condition than your opponent, and that’s how you’re going to win. So, we didn’t really bulk up. It was more like we were lean. So, I played maybe 250 in high school, but then I got the Dartmouth, and it was more like kind of a bulk-up culture for the lineman. And I was the smallest, definitely weight-wise. So, I eventually got up to maybe 292-295.
[00:05:53.970] – Andrew Louder
Got it. No, that’s incredible. I can’t imagine what that looks like. You’re going to have to send me a picture of one of these days for you. All right. So, I love the story you shared about kind of, hey, you’re at this fork in the road. Economics or religion? Why not both? You go down this path with First Rate. When you say you ran out of jobs, I mean, you literally did. You’ve scaled the ranks there from the bottom all the way to COO position. What was that like for you from a personal journey of starting where you did, what kind of decision making or determination that you have to then continue growing within First Rate? It’s a very uncommon thing these days, right? Having that kind of time into companies and growing within it. Give us a little bit about what that journey was like for you.
[00:06:54.290] – Marshall Smith
Yeah, so most of the advice I got coming out of Dartmouth was, you want to start at a big company like Fortune 500, and then maybe you go to a small company later. That’s the general advice I got. And of course, First Rate was a small software company in Arlington, Texas. Nobody’s ever heard of them. I had interned for them. I had this mentor who really was helping me think about my future, and so they gave me a full-time offer, so I went for it. And so, I think that would be the story right there. I just walked through the door that was open in front of me and just trusted that that’s what I’m supposed to do. Instead of worrying about what could happen or what other opportunities are out there, just kind of praying and thinking about, well, what’s right in front of me and am I enjoying it? I’m going to keep going. And that’s been a series of new doors that have opened while I’ve been at First Rate. Starting as an entry level analyst. Seeing how the data goes into our Fintech application and seeing how the sausage is made so to speak. It gave me a whole new perspective on the product side of the business, on the marketing side of the business, on sales, on the COO kind of role. Kind of putting all of those things together. And so that’s really helped me. I feel like in my careers, being open to whatever next opportunity was out there, and I’ve just found that I really thrive on new problems, new challenges, and the opportunity to see something work better, to be more efficient, to be able to grow. And probably the most satisfying part of that whole journey is I love handing off my responsibilities to the next person. I think I told my Vistage Group that my goal in each job is to make myself irrelevant within three years. And I’ve never wanted to craft a role around who I was and what my unique strengths were, but I wanted to empower others to lead up in the organization and take over from me after I move to the next thing. And that’s been the most satisfying part of being able to move around.
[00:08:51.090] – Andrew Louder
Yeah. That’s awesome. And in terms of now, kind of forging your path over at First Rate Ventures, what was that decision process like? If you can take us behind the scenes… It’s a really unique way to, I think, an innovative way of branching out into a new venture. Right. Starting a VC firm, in a way, trying to invest in these companies. How did that start? Take us behind the scenes in terms of what sparked that idea.
[00:09:23.160] – Marshall Smith
Yeah, so First Rate started 1991, bootstrapped software company, started in our founder’s garage. Founder and his cofounder, his wife, both started the company together and they bootstrapped it from there. So, we never had a culture of taking outside capital, we never had a culture of raising a lot of debt. We always had a mentality of cash flowing. Our growth organically over time, and that worked for about 29 years. And we grew to 24 and a half million in revenue. We’ve got 150 global employees on three different continents. By many measures, we were very successful. And our founders had this vision that the company was going to grow and reach this next level of growth. And our organic growth rate had come down to be about 5% to 7% a year. And so, to achieve a $40 million revenue target and $100 million revenue target, which was their vision and goal for the company so that we could grow our impact, because First Rate really is a for profit business. But the mission and purpose of the company is to impact our clients, our coworkers and our community, through our values. And in order to do that at a bigger level, growing and having offices in more locations, employing people in our organizations that we can impact the communities where we do business and the clients we do business with is really core to our founders vision for the company.
And so, we actually had an opportunity to acquire a business in 2020. It was a small company, less than a million in revenue. The founder had been running it for 20 years. He had kind of shifted his passion to a new company and a new start up and he needed somebody to take over his legacy business. And so, we acquired that company, brought them in, and we started realizing that we could actually grow our business through deploying capital to acquire other strategic companies or to actually invest in some of these early-stage companies. So, another advisor to the firm, Prab Reddy, and I started talking about what it would look like for First Rate to deploy our capital in a more proactive way. And his background was running a technology-focused venture capital fund, Naya Ventures. And so, kind of with his background in venture capital and my background in the WealthTech space. Knowing our customers. The products they use. The needs they have. The challenges they have. And the whole ecosystem of players that I had network with over the last 15 years here, we came up with a plan to launch a venture capital strategy within First Rate, deploying our own capital and we’re off to a great start. It’s really been interesting to see how this goes because generally larger corporations will launch a corporate venture capital team with a really big set of ammo and we’re going to launch it in our size. We’re $25 million company. We have a commitment from our founders to deploy 15 million and we’re excited about doing that.
[00:12:32.670] – Andrew Louder
That’s great. The way you described it to me when we were talking prior to getting into the recording was it really felt like a similar strategy to what a lot of these larger beer companies have taken in terms of utilizing these start up craft breweries as almost an R&D organization for them and testing the market out. Do you see that kind of alignment here for you guys as well?
[00:13:03.990] – Marshall Smith
Yeah. So, a lot of people do treat their corporate venture capital teams essentially outsourcing R&D to the VC team who will go out and monitor Menlo Park and Mountain View or Cool startups coming up and they’ll put little seed rounds in them. They’ll bet on ten jockeys. Seven will go out of business. Three won’t and the ones. Maybe one or two of those will end up acquiring and that’s kind of the way they do R&D. And First Rate’s thinking about a little bit differently because our goal is to grow the core business at First Rate and achieve the 40 million and 100 million revenue targets for the core business. So our venture capital strategy is less about outsourcing R&D but figuring to some degree… it is a great way to get exposure to people doing new things with new technologies built from the scrap, built from scratch. So it is that, but it’s more than that in that we want to find new companies doing things in WealthTech and RegTech and InvestTech and MortgageTech where First Rate actually already has some assets that they need in their stage in the company.
And usually that starts with capital. They’re looking for capital to help fund them but they’re typically not wanting to build out all of the pieces that it takes to deliver a WealthTech platform. So there’s various components that First Rate has built over time that could be strategic assets to these early stage companies. The second piece is they’re trying to accelerate their product delivery roadmap and accelerate their growth. And so First Rate has some resources and development teams that can help them accelerate their roadmap and their development cycles. And then third, they’re looking for customers who will take an intro from an early stage company. But banks, they’re kind of like the introverts at a cocktail party. They don’t want to talk to new people. And so First Rate is kind of like their old friend who can introduce them to the right players and startups in the space and bring them in a secure way because we offer the secure infrastructure of a mature fintech company that has the mature compliance and data protection infrastructure that startups just don’t have the budgets to facilitate. So we’re offering kind of those benefits to these early stage companies and we see that as a win-win. We see that as a redemptive approach to helping the entrepreneur grow their business. And we think we have a high degree of alignment with them in that we’re very happy with an entrepreneur that doesn’t have to raise additional capital. They can achieve sustainability and organic growth success. We’d be delighted to be a part of a story like that. We’re also delighted to be a part of stories where they raise additional capital and potentially exit in the future. And if that’s what’s best for them, we want to be a part of that journey as well. All the while we think we’re helping each other.
[00:15:58.410] – Andrew Louder
Awesome. I love it. Win-win for everybody. And Marshall, what I’ve known about VCs, I think each one has a different aim. They’re looking at different things in terms of what to invest in. You’ve hit on a few different things, as you’ve been describing First Rate Ventures, but can you give us a bit of a behind the scenes or let us into the mind of Marshall Smith a bit? What are you looking at when you’re analyzing a potential company to invest in?
[00:16:31.590] – Marshall Smith
So we’re looking at a few things. One, we’re looking for a company that’s already demonstrated some traction. So we’re not looking, we’re not the type of VC that’s going to take a pitch, hear a pitch deck and hear about the great exits that the founders have had in the past company and invest in them at that stage.
[00:16:50.640] – Marshall Smith
We want to see that they built their MVP, they built their initial 1.0 version of their product or platform and somebody is paying them for that service. So we believe that having a paying customer is key. The second thing is we’d love to see investors solving some of the trending issues in WealthTech. And some of those issues are related to ESG investing. So we’re really interested in that space. We’re really interested in the blockchain and how blockchain will come through and disrupt various traditional finance trade systems and different parties in the ecosystem. And so we want to be a part of that. And then another area that we’re seeing a lot of success in is companies that are trying to solve problems of really the worker shortage that is occurring now in these spaces where there’s not enough workers to manually process information. One. It’s inefficient and it was inefficient five years ago and efficient ten years ago. But with the combination of the worker shortage and new artificial intelligence technologies that can do natural language processing. That can do machine reading comprehension. That can do natural language generation. We can actually augment the lack of available staff through the use of these platforms and technologies where we see a startup leveraging that sort of an approach to help banks and our existing customer base shift from the manual driven data processing environments that their legacy platforms typically have them behold into and leveraging these new types and ways of augmenting and enhancing and helping them scale.
[00:18:40.650] – Marshall Smith
Those are things that are going to get our attention.
[00:18:44.610] – Andrew Louder
No. Thanks for that insight. And I’m curious, Marshall, just from your shift of leading first rate as COO and now moving into first rate ventures, what’s the day-in-the-life like for you and how has it varied from the previous role?
[00:19:03.570] – Marshall Smith
I certainly have a much smaller team. I have my partner Prab, who we coordinate and partner, looking at these deals. I’ve got one intern and hoping to add another one soon, but I don’t have a big team of people who do all the work. And really it’s turned into I’m listening to five or more new company pitches a week in the early stage space and it’s turned into in our sales, when I oversaw our sales team, it was all about prospecting potential customers. How many doors do you have to knock on, how many reach outs you got to make in order to get one suspect, which is like a new potential qualified lead? Well, now I’m doing the same thing on the opposite side where when I’m looking at acquisition targets, I’ve got to get a database and I’m personally (and with my intern), combing it and qualifying prospects and reaching out to them about the potential acquisition of their company and bringing them into the First Rate family. And so that’s pretty different than managing teams, dealing with corporate policies and procedures and data security issues and client issues and renegotiating multi-year agreements. I mean, those were a lot of the things I would get involved in in the past, and they’re fun and interesting on their own. Right now, I’m essentially looking at a new company doing a new thing maybe two and even three times a day I’m talking to a new founder about what they’re doing. And it’s really fun, it’s really exciting. Every day is different. And then when you get into the deal negotiations, I never knew that there were so many ways to do an early-stage financing round. There’s so many there’s so many details, there’s so many terms that are important and there’s so much negotiation around all that that I’m drinking from a firehose.
[00:20:58.060] – Andrew Louder
Yeah. No two deals are ever the same, right?
[00:21:01.210] – Marshall Smith
Yeah, absolutely. Convertible notes, liquidation preferences, preferred shares, paid-in-kind. I could go on with a list of terms that basically I had no exposure to in scaling a 20-25-30 year old fintech company. That in the early-stage game is what you got to know.
[00:21:25.290] – Andrew Louder
Got it. That’s really insightful. It sounds like a lot of fun. Honestly. It’s like a bit of a breath of fresh air. No day is like the previous. Right. So let’s move into the lightning round, Marshall. So we’ll try to kind of weave our way through these somewhat quickly. We can maybe dive into some of them as we go. But first and foremost, I just would like to hear, what do you wish you had known when you started your career? What would you go back and tell your younger self if you could?
[00:21:58.590] – Marshall Smith
My younger self was really focused on making the right choice in my first career step, and that kind of goes back to my story about whether it’s the ministry or the fintech. Should I go to a Fortune 500 company, I would tell my younger self, just look at the doors that are opening in front of you and take a step, and additional opportunities will come from there.
[00:22:22.050] – Andrew Louder
Awesome. Love it. Who or what has influenced you the most?
[00:22:27.630] – Marshall Smith
I’ve had a series of mentors in my time. My father certainly is one and had a great father growing up. A couple of mentors in my church, in my youth group, and some people during my days at Dartmouth as well. A guy named Ben Quartermatch in particular had a lot of impact on my life, and they taught me a lot about what it would look like to be a man, to be a follower of God, to be a hard worker, to be disciplined, to leverage just the scriptures and prayers and spiritual practices of my life. I feel, as I think back on my development, that those series of mentors in my life, in my faith, and in my career have given me a lot of leg up and success, and I’m really thankful.
[00:23:20.610] – Andrew Louder
Yeah. What an incredible foundation to set you up on right there. That’s wonderful. Is there something you’re learning about right now?
[00:23:29.310] – Marshall Smith
You know, I’m learning a lot about blockchain and crypto right now, and I know that’s probably similar to a lot of people but have gone down the different rabbit holes on DeFi and decentralized finance, and it’s related to the work that I’m doing now and that there are a lot of disruptors in the space, whether it’s a blockchain or crypto or digital currencies. But I really am enjoying thinking about that right now and how that’s going to disrupt the whole fintech ecosystem in space. That’s one thing that I’m definitely learning about a lot. The other is how to make time for four small kids and a wife, your neighborhood, your kids sports teams at church, at work, and finding a way to be disciplined, to have some time to contemplate and think as well. So those are things I’m learning a lot about right now.
[00:24:34.150] – Andrew Louder
It’s a work in progress. Yeah, always. What’s your coffee of choice?
[00:24:40.390] – Marshall Smith
You know, Oak Cliff Coffee Roasters is definitely my go to right now. I like to try other craft coffee shops’ coffee. So if I meet you at Reform Coffee, I’m going to be looking on their shelf to see what they’ve got. And I love to try new things, but I’ll order Oak Cliff Coffee Roasters over and over again. And if I’m running out of that. I’ve got a bag of Costco coffee beans to make sure I’m caffeinated.
[00:25:06.200] – Andrew Louder
Yes. Is it the Kirkland signature medium roast?
[00:25:09.080] – Marshall Smith
You know, I like to buy their other variations that look crafty, they’ll say, like Mayan blend or something. Not just Kirkland basic. And I think that makes me feel slightly more hip.
[00:25:23.650] – Andrew Louder
Oh, totally. Yeah. Good thinking there. How about your adult drink of choice?
[00:25:29.750] – Marshall Smith
So it’s been in Manhattan, and I don’t know, someone introduced to me, I think probably in my first professional business dinner, that I asked them what kind of cocktails they liked, and they said, in Manhattan. And I was probably 22 at the time, and I’ve been drinking Manhattan ever since.
[00:25:47.110] – Andrew Louder
Well, they’re tasty. It’s a good one to have. It’s your favorite. Absolutely. How about just the fact of certain routines maybe you’ve set for yourself that have enabled you to be successful? Any of those you can share with us?
[00:26:02.440] – Marshall Smith
Yeah, I think probably about five or six years into my career, and we had our first child maybe even a second. By then, I started realizing that if I didn’t wake up early enough, there were certain things that were just not going to happen. And so ever since then, on every weekday, I’ve been waking up at five to 5:15, and I have a routine where I sit down and I read the Bible and I pray and I contemplate and meditate on what I’m reading and what I feel like God is showing me. And then I look at the news, I look at my calendar for the day. I kind of mentally prepare myself for what’s coming that day. It’s like I’m doing a practice swing before a real baseball pitch. I’m practicing my day in my mind, like visualization. Visualizing it. And that has been a really helpful practice for me. I try to mix in two runs a week in that little section and get it all done before 6:45, when my little minions are getting out of bed and getting dressed.
[00:27:11.650] – Andrew Louder
I’m a big visualization guy as well. I think it kind of stems from my dad out on the golf course, just trying to tell me, visualize the shot. And I remember that just even as a little kid, I think it was Jack Nicholas that would do that, but it’s kind of stuck with me. So, like, visualizing a meeting even sounds good, but visualizing a call, visualizing this podcast, interview, that sort of thing. It’s always been part of me. Awesome. And last right, lightning round question for you. What do you look forward to the most each weekend?
[00:27:43.630] – Marshall Smith
My dad did this when I was a kid, but basically he made breakfast every Saturday, sunday morning in particular. And I’ve just always been a fan of making breakfast. And I think I just am doing the same thing my dad did. But I love to make grits. I like to make pancakes, eggs, bacon, you name it. So every Saturday and Sunday morning, I’m up getting coffee and I’m making breakfast, and that’s like my Super Bowl of the weekend.
[00:28:08.950] – Andrew Louder
Yeah, bet it’s tasty. Sounds good.
[00:28:12.490] – Marshall Smith
I’ll have to ask my kids about that. Yeah, I’m enjoying it.
[00:28:16.720] – Andrew Louder
That’s good. Well, Marshall, you are officially off the lightning round hot seat. And before we bring the show to a close, how should a business owner that wants you to take a look at their business get a hold of you?
[00:28:31.120] – Marshall Smith
[00:28:44.110] – Andrew Louder
Awesome. Marshall, I’ve had a wonderful time interviewing here today and really learning from you. Thanks for taking us behind the scenes into your brain a little bit and let me pick it learn new things today. So thank you so much for being a guest on our show.
[00:29:00.600] – Marshall Smith
Yeah, it was great. Enjoyed it. Andrew.
[00:29:03.190] – Andrew Louder
Wonderful. And thank you all for listening to the Louder Co, Dallas Based Innovators Podcast. I’m Andrew Louder signing out.