By Tom Ballard, Chief Alliance Officer, PYA
Those who attended last Thursday night’s “Innov865 Investor Series” forum should have walked away from the discussion with some sage advice and useful insights courtesy of two seasoned veterans from the region.
Bill Malkes, Co-Founder and former Chief Executive Officer (CEO) of GRIDSMART Technologies, Inc., and Grady Vanderhoofven, CEO of Three Roots Capital and Managing Partner of Meritus Capital, were the panelists, and yours truly asked the questions in the final event of the 2019 edition of Knoxville’s “Innov865 Week.”
At the beginning of the year, GRIDSMART, which markets a video detection system that optimizes the flow of people and traffic through intersections. was acquired by Cubic Corporation in a deal announced at $87 million. Meritus Capital was the lead investor in GRIDSMART, soon after it was founded, so Malkes and Vanderhoofven have a long-standing relationship.
For GRIDSMART’s Co-Founder, the company continued a partnership with Vig Sherrill, a well-known local entrepreneur who is now focused on General Graphene, his seventh start-up. In Malkes’ case, GRIDSMART was only his fourth new venture, but it was an idea that he said “was really born out of practicality. Vig and I were sitting at a stop light, and there wasn’t a car in sight. We said this is stupid.”
Although neither one had ever been in the traffic management business, they drew-up a plan, but set it aside when they realized the processing power at the time would cost about $250,000 per device. Fast forward another six years, and Malkes and Sherrill were looking for another project.
“I rewrote the business plan in December of 2006, we had seed funding in the spring of 2007, and we closed our Series A in the fall of 2007,” Malkes explained.
While both acknowledged the challenges of raising capital locally, Vanderhoofven added an important insight for those seeking outside capital. “One of the big challenges (locally) is basically it’s a constant educational process . . . trying to educate investors, trying to educate entrepreneurs about how risk capital works,” he said.
Malkes made a key point from the perspective of a start-up seeking investment capital and the vetting process it should perform, using an analogy that many would understand.
“It’s a marriage in a sense,” he observed. “You’re gonna be doing business, you’re gonna be accountable, you’re gonna be talking, you’re going to be trying to get a return. I take it very, very personally. It is very personal.”
Malkes emphasized the importance of recognizing that “somebody has entrusted me with something that they worked hard to get. So, it has to be somebody you want to be in a relationship with. Grady and I had known each other for years before we actually did the investment.”
He characterized the relationship with Vanderhoofven and the role he played as “my buffer for everything we did at GRIDSMART. He was a local resource. He was a mentor, and it wouldn’t work without that if you didn’t have that kind of relationship. So, more than the terms (of the deal) within reason (and) more than the location, it’s about the personal relationship.”
We asked both about the frequently heard adage that investors are more likely to select a B technology with an A team than the reverse. If that is true, what advice would they offer to young entrepreneurs in terms of convincing a prospective investor that they are A team material?
“It’s wanting to deal with the cold hard truth and then be able to present realistic expectations,” Malkes said. Noting that in one deal, he would have been forced to move to Austin, Malkes said he declined those dollars. “It is about being true to what you want and not chasing the fad of the day. And I think that makes an impression on the right kind of investor.”
Vanderhoofven summed-up his thoughts with three words: accountability, teachability, and transparency.
“A young entrepreneur absolutely has to be teachable,” he said. “If for any reason they seem unteachable, they become instantaneously unattractive. They have to be absolutely accountable. I mean like integrity, honesty. transparency. If at any time you are interacting with a young entrepreneur as a potential investee and you perceive something is dishonest or less than fully transparent, it’s very unattractive.”
Drawing on Malkes ’point about an investment decision is much like a marriage commitment, Vanderhoofven said that “everything that leads up to closing the investment is the dating part of the relationship. It’s like dating. You’re going on dates, you’re getting to know each other because once you make the investment, it is like a marriage. You are stuck with that portfolio company until there’s an exit, and you have to be incredibly selective and thoughtful and deliberate about who am I going to enter into this relationship with”
Needham & Company, an investment bank and asset management firm based in New York City, sponsored the refreshments and libations at the forum. Scott Glaid, Managing Director of Investment Banking for the firm, attended the event, and we had an opportunity to chat with him.
“We were introduced to GRIDSMART in 2017,” he said. “We knew the company was an absolute jewel.” After a vetting process, GRIDSMART selected Needham & Company to help with its acquisition.
Last Thursday was Glaid’s sixth visit to Knoxville in a little more than 12 months, and he described the region and its technology assets as “a great area. We can find uncovered gems in communities like Knoxville.”
The company focuses on technology and healthcare and typically gets involved at the Series C or D levels.