Importance of Alignment in Venture Capital Investing

[00:00:04.030] – Marshall Smith

Hello, and welcome to the Ventures in WealthTech podcast. This is your host, Marshall Smith, Managing Director of First Rate Ventures. So excited that you’ve joined us, this is our first inaugural podcast, talking about wealth tech, venture investments, and all things related to that. I’ve got a guest with me today, Pam Citron. Welcome to the show.

[00:00:25.210] – Pam Cytron

Hello, Marshall.

[00:00:26.410] – Marshall Smith

Tell us a little bit about yourself.

[00:00:28.250] – Pam Cytron

Well, Marshall, I am, first of all, an entrepreneur. I build companies, but a board and strategy advisor is some of the work that I’m doing now. But I have successfully grown companies from start up to operational efficiency. I was focused on driving the revenue of those businesses. Clear vision of tracking technologies, developing innovative strategies to meet industry demands. But I really don’t like the shiny object syndrome. So I’ve been really focused over the last many years when we looked at any kind of company as where that data and where they collide with the impact of data and the use of that data for organizations in the future.

[00:01:08.620] – Marshall Smith

I like that shiny object syndrome. I haven’t heard that one before, but it makes sense if you’re in the venture space. If you haven’t yet, you will be overwhelmed by shiny objects coming through your inbox. How many shiny objects can you see in a day?

[00:01:21.770] – Pam Cytron

Oh, I think you could see hundreds of shiny objects if you look for them. But I think that for our purposes of the work that our industry needs, we need to be able to know the core of these businesses because there’s a legacy part of this, but we have to be able to compensate for that with new things. But I think there’s a real difference between who’s coming in with the shiny objects of what’s behind that technology and what’s show and tell.

[00:01:49.820] – Marshall Smith

Yeah, that’s right. Seeing what meats are on the bone, so to speak. So the reason we invited Pam here to talk today is I want to kick off our first episode talking about something that we’ve been exploring here at First Rate Ventures. Pam and I have been talking about this quite a bit, and it’s the topic of ‘Redemptive Capital’. So we all know in venture capital, it’s the second word ‘capital’. And so Pam has been in the seat of an entrepreneur. We’ve talked a lot about your experience as an entrepreneur, and maybe you could just kick us off talking about Redemptive Capital, what it’s like to actually raise capital, what’s it like to be in the shoes of an entrepreneur, facing off with VCs, with a business plan, with a mission, with a purpose, with a vision? And what was that like? Maybe give us a story about that.

[00:02:39.170] – Pam Cytron

I can give you a story about that, but I also think that I’ve learned lessons along the way about venture capital and my early experience with my first check I ever took, I had a little bit of shiny object syndrome myself from where I was getting the money. So I got really enamored with the name associated with the money versus what the capital was going to do for me. And that didn’t turn out as well as one would expect, but that was a lesson that I learned. So I think that as you meet with venture capital firms, they all look for different qualities, they all look for different things. But I think that sitting from the entrepreneur perspective. Marshall I like to coach entrepreneurs when I meet with them and saying, you know what? Not all money is good money, and it’s not about the valuation, it’s not about how much you keep. It’s about are you going to be aligned with the person that’s putting in, particularly in the seed market? Are you going to be aligned with what it is? Because no matter how much money somebody puts in, if it’s a small check or if it’s a big check, right, there are changes with that first check. The business will pivot, the business will change. And I think that the DNA of where those venture capitals come from become more important than the amount of money, the type of terms and what that means. That first piece of capital is always going to be trumped. So I think that the due diligence on the entrepreneur’s part is as important as the due diligence on the investors part.

[00:04:17.150] – Marshall Smith

Let’s dig into that idea of alignment a bit more. Give me an example of an area of alignment that maybe a lot of entrepreneurs overlook, but it’s really critical when you’re raising capital. Give us some examples maybe of where many entrepreneurs get off track in alignment wise.

[00:04:35.210] – Pam Cytron

As an entrepreneur, I came from a sales background which is somewhat unique. So I built businesses and I came up as a salesperson all the way through sales and marketing. So my go to market strategy was always stronger than some. But many entrepreneurs, more than not, are coming at it from either a product perspective or they’re coming at it with a technology perspective. And so when you think of that alignment, it depends on what you’re as an entrepreneur’s core skills and capabilities are to align them with what you’re going to get. So there are technology requirements, there are go-to-market requirements, channel requirements. First Rate can write the book on how channels grew their early stage business and then how they got into organic growth. So I think you really got to look at what the capabilities that you as the founder have and be very honest with yourself, to align yourself with the firm that’s going to have those traits that you need. And from an early stage perspective, this will probably come off wrong to some of the earlier stage investors, but they drop that first money in, they look for it to trump that they have a smaller time horizon, that they want something to happen, which sometimes isn’t always in line with the go to market strategy of how you get the sales there.

Does that make sense?

[00:06:01.930] – Marshall Smith

Yeah, absolutely. Time horizon from the investors standpoint to the entrepreneur. So one of the common terms that people throw around in the space is smart money versus dumb money. How do you think about that when it comes to alignment?

[00:06:17.510] – Pam Cytron

Well, I think smart or dumb money, honestly, is the smart entrepreneur. The dumb entrepreneur. I don’t think it’s as much about the venture capitalist. Right. We choose to take smart money or we choose to take dumb money, and that’s on us. I’d like to say that all money is not good money, depending on what that means. But smart money is the ability to look at the true attributes. Raising money is really tough, but if you’re at SC, someone’s going to write you a check and you’ll probably get another check and you’ll get your friends and family and you’ll get that support. But at what point is the fundamental honesty going to come in? And if that venture capitalist, what I’ve learned is asking the tough questions and the ones that make you feel uncomfortable, it’s probably better money because I have this expression you have to be uncomfortable to become comfortable. Right. And I think entrepreneurs, that early money is like, well, just give me enough money, then I’m going to do X, Y and Z. And I think that we underestimate what the seed does for us.

[00:07:33.100] – Marshall Smith

Yeah. So another angle this makes me think about is strategic versus non strategic capital. One of the things we’ve run into talking in companies is it’s clear that some entrepreneurs, whether it’s the C Series A, which is generally where first Rate Ventures is looking, they’ve got a plan. They’ve either got the product or they are really focused on the go to market. And oftentimes what I found in more product centric entrepreneurs is they’ve got a plan, they just need to build the tech and they just need $3 to $5 million to complete it. And they’re really just looking for the venture investor to cut a check for that and they’ve got it under control. And then there’s another type of entrepreneur that I’ve encountered that is a bit more on kind of what you’re getting at in the sense that they know what they’re good at and they know there are some areas that they’re not so good. Whether that is they’re not so good at the sales and marketing. They’re not so good at the product engineering. They’re not so good at the AI. Whatever it is, a piece of their roadmap that they don’t have expertise in. And when First Rate as a strategic investor comes and looks at opportunities, we’re not just looking at the valuation, we’re not just looking at the jockey and the teams, but we’re looking for a roadmap that needs a strategic investor to help with an area of which they’re not an expert. So it’s almost in a sense that in order for someone to take smart money, they need to know the area that they’re not upper right quadrant in the consultant matrix and know that potentially a strategic investor could come alongside them. How have you seen strategic alignment come to benefit an entrepreneur?

[00:09:17.910] – Pam Cytron

Well, I’m going to say two things. They’re back to the shiny object syndrome, right? So the types of deals in our fintech space, (and I use fintech in a general sense – if we took it into the specific sense, we’d be talking about wallets and payments). Right. But in the sector that I’ve been a part of and built my previous companies and it’s either making something that’s been legacy better, it’s core. And my experiences would say that if you’re building in the core, whether that’s in a bank, whether that’s in an RIA, whether that’s in a wealth manager, whether you’re improving record check or wealth check, that strategic value that someone offers. I think for an entrepreneur, particularly a first time entrepreneur, becomes far more important than just the money. We’re not out just shooting rockets and trying to go for volume and volume and volume. So that strategic nature of those relationships and that trusted relationship that the strategic money brings, I have learned over time the value of that versus even the fancy name of the startup angel guys, right? There’s great seed investors out there all over the country. But I think that early money coming from somebody that’s strategically aligned has a greater opportunity for success, but also the ability to make better things happen, which makes that next round better in value, better in the amount of money you need, and better for all sorts of purposes. And that strategic alignment is an accelerator for the entrepreneur in my opinion.

[00:11:07.800] – Marshall Smith

Yeah. So kind of in that seed stage, we’ve seen that as well with being a new venture fund. We’re looking at seed stage companies, and often there’s a lot of people interested in investing in seed stage companies, but not necessarily a lot of people interested in leading rounds in those stages. And I think for some of those reasons, may be that they just don’t have the time or the energy to dilute themselves on relatively smaller checks in the seed round. But I think one of the reasons why we’ve been more interested in it is that we’re focused on just the wealth tech space and the reg tech space, it is really core to some of our experience, our channels, our customers. So our customers being banks, wealth management groups within those banks, gives us a unique insight into their problems, their challenges, and their roadmap, their goals, things that they’re trying to do. And one of the things we can bring to the table is not just the capital needed for the entrepreneur to complete their vision, but to become like a guide to them. A guide that’s not the hero. But the person that enables the entrepreneur to lead the company and to be successful providing them advice on how to navigate a space that has a lot of potholes, that has traditionally a large moat for fintechs to get into the banks that is.

[00:12:30.730] – Pam Cytron

And to that point. Right? These large things are called regulations. The vendor adoption people think, I don’t like my bank, even my son, I’m going to build a bank, mom, because I don’t think there’s a bank I don’t like chime, right? Chime is supposed to be a new bank. But that ability to understand that the regulatory aspects, the procurement aspects, the risks that come off are not excuses. They’re real things that these institutions, whether it’s a big bank, a community bank, this is how our industry operates and you can’t watch it all the way. And I think that we think that it’s just easy to overcome that stuff. So that experience that knowledge, even that ability to not get shut down in a contract and help that person strategically with existing relationships of contracts that may exist by the strategic vendor that they can leverage to get through that onboarding process. I was lucky. I got a major bank to take a chance on a very early adopter product I did. But that’s unusual. It’s very unusual for that to happen. So I think that our issues that we deal with are real issues and you have to be able to get that experience to those entrepreneurs before they spend a lot of money trying to say, well, it’s not going to matter because I got new tech, I don’t need to worry about those things.

[00:14:00.440] – Marshall Smith

Yeah, it’s almost like it’s a simplistic straw man emanating from Silicon Valley sort of tech startups that banks use old tech, banks are run by old legacy systems and if they just leverage the latest technology, they would be good. And I think it’s a simplistic way to approach it. And the challenges are more nuanced than that, and many of them are regulatory related. And just the business model that the banks have just makes it more complicated than that. And if you’ve never experienced it, you’ve never run into it, you’ve never grappled with it, you can make it sound a little bit more simple than it really is, and you can burn through a lot of seed capital real quick trying to go to market and get that sales within that sort of environment.

[00:14:46.830] – Pam Cytron

I was watching the Uber story this weekend and how they were trying to reinvent all the regulations for the transportation at the time, city by city by city. It’s a good win, but that would never happen in banking. I don’t care how aggressive or powerful that person becomes, that ability to play by the existing rules, to be able to get your technology adopted to influence the changes to the rules, is what I think that we need to focus on in our industry.

[00:15:22.810] – Marshall Smith

Yeah, absolutely. There’s a herd mentality, I think of it as like a herd of buffalos, and the banks are like a herd of buffaloes and there’s a reason they’re in the herd and running together, because they won’t get picked off. Who picks them off is the regulators. When they get off on their own, and they’re looking weak and they’re looking frail, and they’re looking not as fast as the other buffaloes, they might get picked off. And I think about that with the banks. And so working with them is really a form of helping them see that they’re with their peers all working together to innovate and grow, with the use of new technology. But they’re doing it in a way that they’re all running together. And when they’re all together, just one of them won’t feel vulnerable to regulator’s scrutiny and that sort of a thing. And so that’s been one of the ways that we’ve seen channels work in the bank space, because the channel distributors are often the person who all the other banks use those solutions together. And they’re not necessarily doing one-off things with brand new startup vendors because they see that as risky because they be like getting picked off by potential regulator. Why did you choose this vendor? You’re the only bank that’s ever chosen this vendor. And look what they did. They lost your money or they made a bad calculation, or they did something to put you into trouble versus a group of people evaluating a group of banks, evaluating a new fintech and making a decision together collectively, that’s effectively been the power of some of the channel software distributors in the space. And that’s just one of the ways that First Rate is helping new portfolio companies in the seed and Series A stage find a way through that maze to make themselves appear and actually be less risky of a trial with a bank.

[00:17:07.980] – Pam Cytron

You made me think of something there that I haven’t thought about in a while. But banks, just like some venture capitals, people that we know, they prey a little bit on some of the entrepreneurs to also learn about new technology or about things. And so getting those meetings in some of those places and I mean, oh, I got a meeting at this bank or that bank or this bank. So that ability to balance them, to say, you know what, these guys might be just trying to understand and keep up to date with the market or what they’re hearing. And so I think that’s the other thing. When you’re working with a strategic that they can help that entrepreneur with, that not every meeting means they’re going to buy from you and not every meeting means that you should be going to it. Right. We’re supposed to qualify them too. But that being said, when you do get in front of those right organizations that are looking at being how they partner with the vendors, what vendors are bringing to them, right. You can create a very good relationship in that community aspect that you were referring to.

[00:18:14.200] – Marshall Smith

Marshall yeah, absolutely. So at First Rate, our founders, they started our business 30 years ago with a vision for impacting the clients, the coworkers and in the community of where we do business. And in the last year, we’ve been launching First Rate Ventures, which is corporate venture capital strategy of First Rate, a B2B SAAS Wealthtech platform. We’ve added a fourth C and it’s really the Capital. So what does every venture capital strategy have? Of course they have capital and First Rate is no different. And we’ve tried to weave that aspect of capital into the culture and the ethos of our company that already existed, which was operating our business so that it would benefit the clients of the business, which we’ve been talking a lot about today. How do we get ourselves aligned to the marketplace and to the needs of the industry? And some of the challenges to doing that. Channel partners, distributors, bank regulators, these are all challenges for a portfolio company to serve the client. And one of the ways that we’re trying to be redemptive in how we deploy capital is also be redemptive in how we help and guide entrepreneurs navigate the waters to get to serve those clients.

And it’s also to think about the community of where the business that we’re investing in, the portfolio company does business and where their customers do business. So it’s not just thinking about the stakeholders as being just the clients, but where do those clients do business and where do your employees do business? And when we want to do business here at First Rate, we want the community to feel it. If we stop doing business in that community and then the next is coworkers. We want the coworkers in the businesses that we run and that we invest in to benefit personally from working in those businesses. So by tying those stakeholders together and being a value add, a strategic partner with the portfolio companies, our hope and aim is that they feel that the capital is in alignment with those other three C’s, the clients, the coworkers and the community. And there’s a portfolio company that we’re working with now. In particular, one of the things that really drew us is we felt we were aligned from this standpoint and that one of their cultural values was people first. What is it? Product second or the profits will come.

I believe it’s how it goes.

[00:20:38.680] – Pam Cytron


[00:20:39.140] – Marshall Smith

Mary Kovacinski from Regalytics, who we hope to have on a later episode, can tell us more about that. But that really represented that ethos of that the coworkers were the important stakeholder to the business. And if the coworkers weren’t benefiting from that business operating, their personal lives weren’t positively impacted, and it wasn’t a business worth doing, and it wasn’t a business that First Rate would be interested in investing in. How do you see kind of those aspects coming together in the market today?

[00:21:09.700] – Pam Cytron

Well, I think for everybody that’s listening, I’ve had the great pleasure of being around First Rate for a long time. And I think, Marshall, that those values and those principles that First Rate established 30 years ago, right. On the coworkers, on the community, on the clients, you are pioneering an impact. And so I think what we’re dealing with now is there’s a lot of talk about impact and what we’re making on impact and how we’re measuring that impact. And I think for purposes of the First Rate world and now in the venture capital aspects of what we’re doing with our strategic capital, we don’t know any different here. And so I think that for the entrepreneurs themselves, you’re hearing more about impact and impact investing and making a difference. But I think the real benefit from our perspective and from First Rate’s perspective, is you can write the scorecard on this. And I think that’s a message that really needs to be repeated on your future podcasts, because people are talking about it, people are trying to understand how to do it. But you guys have really written the scorecard for this.

[00:22:28.040] – Marshall Smith

Yeah. That’s cool. Well, thank you for that. And thank you for joining the podcast today. Inagural ‘Ventures and WealthTech’ Podcast. It was a great conversation. Really enjoyed it. Enjoyed hearing the stories about Alignment or Redemptive Capital, how we can benefit entrepreneurs and help guide them to be successful in what they’re doing. You’re going to have to come back and join me again sometime soon.

[00:22:51.650] – Pam Cytron

Anytime, Marshall. Thank you for having me today.

[00:22:54.380] – Marshall Smith

All right, talk to you later.

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