Eric is the managing partner and a co-founder of Dolphin Capital. He formerly served as CEO of Winder Farms. Eric was also the founder and CEO of TNT Sound which was sold in 1983, Vice President of MECA Software which went public and was sold to H&R Block in 1994 and Founder and President of Home Financial Network which was sold to Sybase in 2000. Early in his career, he was an investment banker with Smith Barney.Recently, Ken Frei sat down to interview Eric.
Have you been an entrepreneur your whole life? How did you get into the business world?
I don't know if I have been an entrepreneur my whole life, but I started my first company when I was in college. It sort of happened by chance more than me setting out to start a company because I had some grand vision or plan. I didn't write a business plan or anything. I just started selling stuff and making money and doing something I loved. One thing led to another and pretty soon I had a business on my hands and I was able to grow that business and be fairly successful.
So my entrance into starting companies was really by fluke rather than any grand plan or strategy. In fact, when I graduated, someone told me that I should add that I was an entrepreneur on my resume, and I spelled it wrong. I didn’t even know what it was. I guess I have been an entrepreneur, but again it was not by design.
I thought I always wanted to be a CEO of a business but I don’t know if I even knew what that really meant. I figured that I needed to learn how to read financial statements and how to raise money and deal with the financial side of things. I also assumed that I needed to learn how to sell, because I think sales are important for every company, and I needed to understand operations. So, when I graduated I actually became an investment banker. My logic was that I would learn a lot about finances and raising money and that it would be a great experience.
And then I joined a small software technology company. I hated investment banking. I wanted to get out of it and I wanted to move to back to San Francisco. I just wanted to get out of New York City because I was from California and software and technology was a hot thing at the time. If you were young, you could rise quickly in the industry because there weren’t a lot of old people in it. As a young person, I figured it was a great way to go to California and a great way to be able to get on a fast career trajectory.
I joined a small computer software company that made personal finance and tax software. There were about 20 people in the company when I joined. I was head of sales and marketing and I was learning how to sell in real time. I thought it would be a great experience. We ended up growing this company and we took it public in 1993. We ultimately sold it to H&R Block who bought it primarily for our tax software expertise. I guess I was an entrepreneur but not really. I joined this small company and I was one of the key players, but I don’t know if you would call that entrepreneurial or not.
Right place at the right time, I guess, right?
You bet. No doubt about that. And then I did start a company. My partner and I started
a company called Home Financial Network and we were at the very beginning of the internet banking revolution. Again, sort of the right place at the right time. We raised 5 million dollars of venture capital money off of a power point business plan that we wrote. We ended up, over the life of the company, raising about $22.5 million. We were square in the middle of the dot com revolution and we were one of the larger internet banking software providers. We sold to customers like Wells Fargo and helped them build their internet banking sites. 30 of the top 100 banks in the United States were customers of ours. We had several international customers as well. We grew that business and we ended up selling that to Sybase, a public database software company out of California. So that really was my long-winded entrance into being an entrepreneur.
It sounds like you did several technology based things, but your education was more on the business side of things. Is that right?
I was a political science major when I was in school, so I knew nothing about business, marketing, or sales. I had none of the classical training required to be in business.
What are some important skills that entrepreneurs need to have to be successful? If they don’t have classical training, like you didn’t, how can they gain those skills?
You know that’s a question I could talk about for a long time. Years ago, I went to a venture capital conference in San Francisco held by one of the top venture capital firms. There was a Stanford Business School professor who was going to give a speech on “What are the ten traits of a successful entrepreneur?” I was very excited to go to see what this was. Then, the business school professor put up his number one trait and I looked at it and said, “Really?!” Well, that’s not me, but I’m sure that I’m going to have the next nine. And he put up the second one and I said, “Really?!” That’s not me either.
It turns out that I had six of the ten traits that he said were important for a successful entrepreneur to have. And it got me thinking about what really makes a great entrepreneur. If you think about it, there are introverted entrepreneurs and extroverted entrepreneurs. There are the technology and science entrepreneurs who are brilliant, and there are political science major entrepreneurs. There are people who are great at sales, and there are people who are not great at sales. There are people who are all about brand and image, and people who don’t even know what that is. Entrepreneurs literally, in my opinion, take all sizes, shapes, and varieties.
And so for years, I sort of thought about, what does it take? And my conclusion was that it ultimately takes two things: One is your willingness to take that first step and to go for it. It’s just having enough confidence and believing that you can pull it off. Most people are afraid and don’t do it. I think you need to have guts to just go for it. So that’s one.
I think the second trait, and I have talked to a lot of entrepreneurs, is that they refuse to fail. Most successful entrepreneurs have faced bankruptcy or debt or destruction. They have faced incredibly dark, gloomy days, where they had no right to continue to be in business. But somehow, the successful entrepreneur figures out how to make it happen.
In my opinion, those are two very important traits for an entrepreneur to have.
Greg Warnock has some interesting opinions and theories about successful entrepreneurs. He believes that successful entrepreneurs tend to share the information and not hoard it. They tend to put themselves in the middle of an idea generation process. If somebody had an idea, they’re willing to provide suggestions on how to make it better so that more people come to them with their ideas. Then, the more ideas they get, the more knowledgeable they get. The more knowledgeable they get, the more they can share with other people. They become the center of this idea universe and therefore, they have lots of ideas and they have connections to a lot of people. They understand what competitive things are out there. They become knowledge centers.
Greg thinks that entrepreneurs tend to have good networks. They tend to meet people, connect with people, and build networks. Whether it is with technology guys, other scientists, computer science geeks, salesmen, or just good business people, entrepreneurs tend to be good network builders.
Greg believes that entrepreneurs are willing to, what he calls “give a gift". In other words, I will, as an entrepreneur, reach out to somebody or take their phone call or help them in any way I can. Successful entrepreneurs tend to be very giving. And by giving, without asking for anything in return, they build this army of people who want to help them be successful and who want to give back to them.
So, it’s not about taking certain classes or reading balance sheets or having any particular skill. Those things are all valuable, but at the end of the day it’s more of a personality type than a skill set.
How did you transition from starting companies into private equity investing and some of the things you are doing now with Dolphin Capital?
I sold my internet banking company in January of 2000 around when the dot com crash
happened. And in my opinion, in those ensuing 3 to 5 years, there was no premium, or what I call founders premium. There was no benefit to taking the risk of starting a company. If I took the risk to start a company and got to the point where I could raise meaningful venture capital, the valuation that VC firms were giving was so bad, that I would end up with only 10 or 15 percent of the company having taken a lot of risk. I could have gotten a job as a hired gun at a technology company and gotten 10 or 15 percent in options without taking all the risk. So there was no real incentive during those couple of years to start a company.
I kept looking and trying to figure out what to do next. I didn't want to be a CEO anymore. It is a lot of work to be a CEO and to run a company. You make enormous personal and family sacrifices to be an entrepreneur and a CEO if you are really going to be successful. I was at a phase of my life where I wasn't sure that I wanted to do that.
I was then approached by a gentleman who suggested that I start a fund and I said, "No, I don't want to be in that business. That’s the dark side. I don't like venture guys." And then he said, “Well, what if I put up the money?" And I said" well that would be different. If I don’t have to go out and fundraise, that would be different." So, I basically raised a fund from five high-net-worth individuals, and just as an entrepreneur would, sort of figured out how to start that business instead of starting another technology company. And I’ve loved it by the way. It’s been awesome.
Now that you’ve got that going, how do you decide what types of things to invest in? What types of ventures really get you excited?
At Dolphin Capital, we like companies that have a proven product. What we mean by proven is that they are generating revenue and some level of income. We’re not smart enough to be able to predict if some new technology is going to be the next Google. We like a product that has already been built and has customers that are voting with their pocketbooks and saying "Yes, we value this product, and we will pay “X” for it." So, that’s sort of criteria one.
Criteria two is that we need to believe that we can grow it. We are growth people. We’re not really venture in the traditional venture world. I would say we are more growth, private equity. We want to find things that have revenue and profits and that we can use our skills to grow. We believe that we are good at sales and marketing, and we believe we are good at management, and picking management and we believe we are good at finance. We don't believe we are good at inventing products or technologies or markets. We’re not smart enough to do that. So, we want to start with something that's proven and figure out how to make it materially better.
We want to be passionate about the industry that we’re working with. We invest in things that we are excited about and that we think would be really fun. Philosophically we believe that if we're building a widget just to make money, it's harder to be financially successful. We believe that we have to really enjoy it and be users of it. It makes it easier to get up and go to work every day. We have to really care.
We also have to like the people we're working with. Philosophically, we believe that life's too short to work with people we don't enjoy just to make a buck. We really want to care about, like, respect, and admire the people that we're investing in.
We also rarely invest in a company that has the perfect business plan. What I mean by that is that if somebody has got everything perfectly figured out, then they probably don't have any need to come to us. It's okay when people come to us and they aren’t very great at sales and marketing. That's probably almost the best thing for us because then we believe that we can add a lot more value than just money. Or, if they have great sales and marketing and a great product, they might not have very good financial controls, or reporting mechanisms. We're good at that stuff. We're a bunch of numbers geeks, and spreadsheet geeks. We're cool with that kind of stuff. We like businesses where we believe we can add value above and beyond the money.
Has your investment strategy changed at all with the slower economic times that we've had recently? And if so, talk about how that's changed.
The strategy has not changed. It's been much harder to get deals done because what we are willing to pay and what entrepreneurs are hoping to get is farther apart now. The gap widens in these tough economic times. So, it has been much harder to get deals done, but our strategy has not changed.
How do you see the private equity and venture capital landscape changing over the next few years?
I'm more familiar with the private equity side than the venture capital side. On the private equity side, I think there's going to be a lot fewer deals that are done purely with financial maneuvering in order to get a return. I think there's going to be higher value placed on private equity firms who can go in and add value above and beyond just injecting money, strapping on a bunch of debt, doing some financial figuring, and flipping out of the company in 2 years. I think private equity is going to get a lot harder, and therefore there is going to be a lot less of it.
What kinds of things do you think investors will have to do that will make it harder for them?
They're going to have to be more involved. They're going to have to roll up their sleeves. They're going to have to bring greater expertise within the companies as opposed to finding debt, adding a bunch of leverage, adding sub debt and more sub debt, and sucking down management fees. Firms are going to have to add real value as opposed to just buying low and putting on a bunch of debt and stripping out a little bit of costs and flipping it in two years for a nice return.
I think that the fundraising is going to be much harder for venture and private-equity firms over the next few years for a whole variety of reasons. And I think that the trend toward bigger and bigger private equity and venture firms is going to subside. There are going to be a lot more small, niche oriented firms as opposed to big, giant monolithic, huge firms that are wielding billions of dollars. I think people are going to be looking for more local expertise and industry expertise within a private equity firm, instead of trying to be all things to all people.
Why have you chosen to locate and invest here in Utah as opposed to Silicon Valley or Boston or another entrepreneurial hub like that? What do you like about being in Utah?
I am a big, big fan of Utah on this topic. When my partner and I started our first personal financial software company that we sold to H&R Block, we had our technology center in Connecticut. It was very difficult to find state of the art technologists in Connecticut. The state had great sales and marketing people, but not really great technologists. We sold that business to H&R Block and we started our new firm.
We wanted to put our technology center somewhere other than Connecticut. We looked at Boston and we looked in the Raleigh-Durham area in the Raleigh-Durham triangle. We looked in Austin and we were looking in Silicon Valley. We really thought we would put our technology center in Silicon Valley for all of the obvious reasons that somebody would go to Silicon Valley.
One of the guys that we worked with before was originally from Utah and he said, “You know, you should look in Utah.” My reaction was, “Utah?! Why would we ever go to Utah?” And he said, “Well, let me just go and explore”. I honestly thought it was just a way for him to get a free trip to go and see his family. But when he came back, it happened to be a moment in time when Novell had just purchased Word Perfect. And Novell was laying off and getting rid of a lot of the Word Perfect people when the two companies were joined together.
We were able to put together an unbelievable technology team in Orem, literally over the weekend. We found 10 programmers that were unbelievably talented and cost us probably 30-50% less than what we thought we were going to have to pay if we were in Silicon Valley. That was a great benefit. It was probably the single best decision we made in starting and building that company, called Home Financial Network.
We had an unbelievable technology team here. The work ethic here is absolutely fantastic. People don't go out and party all night long and therefore come in late the next day. It's a very loyal employee base. The odds that they are going to have somebody from Silicon Valley come along and offer them 20% more if they move to California are pretty slim. Most people aren't willing to pack up and leave their families and leave Utah for just a little bit more money. The ties here are too strong. I think there is much better loyalty here.
From the investment side of things, Utah is still, in my opinion, undercapitalized from a venture and private equity standpoint. If you really think about it, on the private equity side, there was Huntsman Gay, Sorenson, Peterson, and Dolphin, my firm, is probably the fourth largest private equity firm. And we're tiny. And Huntsman Gay has basically left Utah.
Then, on the venture side, there is vSpring, UV, Mercato, and basically not much else. So, there's just isn't a lot of money chasing the deals here. There's not as much competition for the quality of deals that come out of the state of Utah. For people in Utah trying to raise capital, they constantly have to go to Silicon Valley in order to get money. And I think there's a great hotbed of entrepreneurial ideas and entrepreneurs in this state that are worth investing in.
What advice would you give to entrepreneurs who are seeking investment here in Utah?
My belief is that if you actually have a good idea, a good product, a good company, a good plan, then it is easy to raise money. It's hard to raise money if you don't have a good product, a good idea, a good team, and a good plan. There's money out there that wants to invest. You just have to find the right mix of all the factors that are going to make it successful.
I think that entrepreneurs often fall in love with their own ideas. They don't do enough market research to find out and understand who their competitors are. They don’t know who else is trying to do what they are doing and what all the other forces are that are pressing against whatever their idea is. I think that entrepreneurs are often naïve about what their real competitive advantage is with their products and ideas, versus whatever else is out there. Are their products really that different? Are they really that much better? Are they really earth-shattering? Do they really appeal to a broad group of people? Is there really a big market for whatever their idea is?
Entrepreneurs really need to understand their markets. I think entrepreneurs usually understand their products really well and their customers that they have sold or targeted so far. They understand those very well. But I don't know that they understand the forces beyond that. Who are their competitors? Who's threatening them? What other trends are in their favor or against them? I think having a very real understanding of that would help them raise money because as investors, that's the stuff we're looking at. And that's the kind of stuff we're comparing it to and thinking about when an entrepreneur is sitting there pitching his idea. This guy knows his product pretty well, but who's going to crush him? Who's going to prevent them from being successful? What are the other forces out there?
Are there any good books or blogs that you would recommend to people who want to be more informed on investing or entrepreneurship?
I am not a big reader. I have read some great business books, certainly. I don't know that there are great entrepreneurship books. I personally read general publications a lot, such as Fortune magazine, just to know what's going on, what's happening on the economy, what businesses are doing and trying to do. I read the Economist and I read a lot of industry trade rags. I don't know if there are any books that I would say are great books on setting out a road map for an entrepreneur or how to be successful entrepreneur. I think there's just an unfortunate dearth of good entrepreneurship writing out there because it is hard to quantify. It's hard to put an entrepreneur in a bucket, you know? It’s hard to write something that says, “Here is what an entrepreneur is. Here’s what it takes to be successful.” It's just hard to that. Therefore, there's not much written that's very good in my opinion.
