This week on the podcast, Matt sits down with venture capitalist Earnest Sweat. The conversation begins with Earnest discussing his journey from traditional investments to alternative investments and how he became interested in venture capital. Earnest then dives into how he became an investor in FreightWaves and Platform Science by going through his process for deciding where to invest. The conversation concludes with Earnest walking through his involvement with his portfolio companies as well as advice for young entrepreneurs.

Like, what do you want the first conversation to

be is like an amazing trailer, where you understand the story

and plot point, you understand this huge problem, and you

understand why your hero is selected to then go go after and

solve this problem.

Excellence, professionalism, innovation and

collegiality. These are the values the Sam M. Walton College

of Business explores in education, business and the

lives of people we meet every day, I'm Matt Waller, Dean of

the Walton College, and welcome to the Be EPIC Podcast. I have

with me today, Earnest Sweat, who is a venture capitalist. And

he grew up in Little Rock, Arkansas. He then went to

Columbia University, for undergraduate, and then he

received his MBA from Northwestern University. And

since then, he's been involved in the finance industry,

especially venture capital for quite a long time. But you you

started your career more in equity research, is that right?

That's right. Yeah.

And what made you decide to move over to

alternative investments from traditional?

Yeah, so for me, well, it makes a lot more sense

now, after now that I'm here and found what I believe is my

calling, being a venture capitalist. But taking a little

bit further back, you know, growing up in Little Rock, I had

two people investors as parents, like, I feel like they would

have been amazing venture capitalists, because they

invested in people. And it wasn't just something they told

me and my sister to do and with volunteering, they actually

their professions were investing in people. So my dad is a CS

grad, ended up working for the Workforce Development Agency in

the State of Arkansas, becoming a Director of IT. And, you know,

if that's not enough, he was also a full time pastor since I

was 10 years old. And then my mother, just retired a couple

years ago, she's a science teacher for Little Rock public

school, in middle school. And so those two lived out kind of one

of our big ethos, or, you know, values, which is equipping

others, yeah, obviously, education was really important.

But making sure that in careers we have, they can be, you know,

give us a good well being, that we're acquiring knowledge that

can help others reach their self actualization. And so fast

forward. Venture capital for me, is living that out. And so, how

I came from equity research on is like, equity research is a

great foundation for me. I remember, at 22, I was deciding

between sales and trading, or investment banking, and I had a

lot of friends that kind of put a, you know, a line in the sand

and what they do. But for me, you know, being the, just like,

fully on Capricorn, and just like, how do I, you know, become

the best person I can, how do I use my skills and improve my

areas of opportunity, like growth, I always was good at

communication, but I wanted to get even better at it,

especially when from a business sense. But I knew I also needed

to have those financial technical skills of being able

to read a P&L, read a balance sheet and interpret how that

business is doing. And so for equity research, it was the

perfect balance. And so that career was a perfect balance of

understanding that every industry has a science, and that

you have to bring together both these the micro of what is

happening with the company with a macro of going on. And so I

covered REITs, starting in 2007. So, yes, that was a crazy time,

but was there from 2007 to 2011. And the reason why, ultimately,

we can talk about this more, but the reason why I made that shift

was I was making recommendations to hedge funds, fund to funds,

all these different portfolio managers, but I wasn't putting

skin in the game. So it's really just kind of like a theoretical

exercise of saying, hey, if I did invest, I would either short

X, hold y, or buy Z. But that's it, you know, you put not your

opinion and set but you're not putting any skin in the game.

And so that's what really kind of energizes me to make this

switch.

So you're you're into value chain, broadly

speaking, in more traditional industries, like retail,

logistics. What made you interested in that particular

those particular verticals?

Yeah, I think it's the most amazing thing

about venture capital, to me as a profession, is literally no

conversation has to be worthless, you can learn

something from literally any conversation. Because everybody

has a different perspective and expertise. And you never know

you might invest in that area that they're talking about. And

so for me, even how I got into venture capital was how do I

leverage what I've learned in the past and not throw it away?

So many times in our careers, I can speak for myself, I thought,

I gotta create a blueprint. So maybe I need to learn how to,

you know, be an AI expert. And it's like, no, to get into this

industry, I need to know what I'm passionate about, what I

have a background in to create that and build on to the

narrative. And so for me, that was real estate. I cover REITs.

At 22, I was having, you know, being on calls, on quarterly

calls, asking tough questions to Fortune 500 CEOs. And so that

was a basis of like, I know, when a real estate company, and

they get big, what their problems are, and what their

pain points are, now just need to understand technology, and

how what types of technology platforms can solve those

problems. And so that was like the evidence of like me, coming

up with what I call value chain tech. And it's taking the HBS

perspective of value chain is a number of primary and secondary

activities that a company does to increase the end value or

value for the end user. And so I've just only layered that as

like a framework for identifying the most pressing pain points

that all enterprises need help on. And so, for me, the same

problems are happening for supply chain are happening to

retail are happening in manufacturing, essentially

happened to all of GDP. That's not the 19% of high tech. And so

those three issues are quickly one our business systems that we

typically centralized in the 80s, up until 2010s. Those

systems of technology and people aren't equipped to deal with

today's business environment, right? We have both

globalization and deglobalization happening at the

same time. Two, because of those, that complexity of the

business environment, company, business leaders and CEOs are

saying that their stakeholders, most important stakeholders,

their customers, and their employees, are demanding

transparency and speed at an unprecedented pace. And three,

we're in quite possibly the wonkiest labor market of all

time, right? I like to say, from cashier to ML engineer, we don't

have enough people to fill the demand. What that really adds up

to is, whether you're leading the SMB to a Fortune 1 company,

you're expected to do more with less resources over the next 10

years. And so instead of the Silicon Valley, kind of, you

know, ethos of like software is going to eat up the world

actually kind of put it on top of his head software is going to

enhance the world. Because of those three things I mentioned,

there's not going to be the negative connotation of like,

it's going to take away jobs. I said, we don't have enough

people, we need it, so people can be more efficient.

It's amazing how tight the labor market really

is, in so many different ways. And, you know, a record number

of factories being opened right now that are highly automated.

Yeah,

You know, it's gonna take a few years to bring

them online. But

Absolutely.

I've seen some data that is astounding, that the

number of factories being put in place, you have that on the one

hand. And then on the other, you know, you've got generative AI

that is going to solve part of the problem. I, I know, you

know, I constantly hear about how people are able to get a lot

more done responding to emails, making posts,

yeah.

Converting one type of media into another.

Yeah.

Using generative AI. And not only that, but even

helping from a planning perspective. And if you think as

you know, so many of the value chain companies, the companies

involved in traditional value chains, a lot of times their

weakness is planning. So I would imagine over the next few years,

we're going to see a lot of new generative AI applications

within the value chain space.

I think. Yeah, I would agree. I think it's going

to take special entrepreneurs who identify what those key pain

points are. So pain point one, pain point two, because those

are going to get traction when it comes to sales. Again,

because you can't just when companies like Microsoft and

Uber, who have a pretty big war chest of cash when they're

contemplating, hey, do we need 100 software vendors? And so

it's critical now that you're solving a real pain point that

people need today, or need yesterday to be quite honest.

And so although there's a lot going on in generative AI, we're

going to have to have specific, it's really cool stuff now, and

all those things you mentioned. But how do we really productize

it in a way that it's solving specific industries problems.

And so what I look for is like, these archetypes of

entrepreneurs, when they're looking to enhance or accelerate

a foundational industry. And so it's like, typically two and

possibly a third coming up, one I call the innovative insider.

So that's somebody who's worked in this industry for a long

time, has faced a problem, and sees that technology can really

solve it. And they have the ability to mobilize

technologists and product people around them to go along with the

vision. The second archetype is the humble outsider. So having

somebody who's typically maybe they come from Silicon Valley,

maybe they come from, you know, some some tech background. And

they identify, hey, that's I've done research, that's a problem.

But I'm gonna check with customers. And I'm going to

bring on advisers and employees who understand the nuances of

those industries. So I'm not frightening my customer a lot of

times from this, like long term vision, but I'm able to, you

know, bring them along and grow with it. And so I think that's

the second thing. And then the third is, for lack of a good

name yet, I'll take suggestions. But I think essentially a person

I call like a bridge. This is somebody who is highly

technical, but also has maybe a family background in, in an

industry, maybe their family always had like, let's say, for

a construction tech company. A family has had a construction

company for the last four generations. And then they went

to MIT or Caltech and have just now say, hey, I can bring these

two worlds together. So that's the third archetype, but you're

going to need special entrepreneurs, which I think

despite all the uncertainty that's going on, we're going to

start to see that next wave of awesome entrepreneurs going

after really big problems.

I noticed, just diving into a little detail. You

were a Series A investor in FreightWaves.

Yeah.

And I also am impressed with FreightWaves. I

met them about the time you were investing in them a few years, a

couple years ago. But I loved the vision of them becoming the

Bloomberg of logistics. What a brilliant, it's such an easy

vision to get. And if you've ever used a Bloomberg terminal

or read Bloomberg media, you get it. And, you know, they've got

this tool called sonar, which clearly is analogous to a

Bloomberg terminal. And then you've got all the news for for

logistics. How did you, so I'm asking this to kind of try to

understand how did you learn about them, and how did you

decide to invest in them?

Yeah. So I learned about them through,

like, my job is so it's funny, because most people when asking

like, what a venture capitalist does, have some friends is like,

that's not real work, just like have coffees and talk to people

hear people's pitches, and talk to LPs and ask for money, right.

But it's a little bit more nuanced than that. And so having

a prepared mind when I joined Prologis, which is the largest

warehouse owner in the world, yeah. And I joined as a founding

team member of their venture group, this first time they ever

had a venture capital group.

Oh, I didn't know that.

And so yeah, I'd been there for at that point,

probably a year and a half. And so I developed you know, I saw

that we had a thesis around logistics and particularly

seeing that there was so much cost associated with delays due

to not having efficient trucking and not really having data

around it. So we built a thesis around how can we get more data

within trucking which could take out a lot of the delayed costs

that are associated with waiting times. Anytime I was talking to

a seed or pre seed investor who also followed that vertical, the

logistics vertical, I would mention it. And you know

eventually we spoke with Fontinalis, which was an early

investor in them earlier than us. And they mentioned that you

should guys, you guys should meet Craig. And so brought him

in and, you know, loved the team loved, like you mentioned, the

vision was clear. And I would say he was a, if I go back to my

archetypes, he was an innovative insider, you know, comes from a

trucking family, or actually probably even pushing more of

the kind of bridges I mentioned, because having experience, you

know, looking at technology, and then coming from a family that

built one of the biggest trucking companies in the

country. It just merged both worlds. And so given we knew his

expertise, and then another thing we always look for, and I

always look for as an investor is, am I the right investor that

can actually help them get to the next stage, whether that's

sitting on their board, being a board observer, making the right

relationships, and then also looking at the strategic value

that we could possibly add. And so there was just a lot of

synergies between what Prologis, you know, their footprint in the

entire world. And how many trucks go to their, their

warehouses. And what FreightWaves was trying to solve.

And then you also invested in Platform Science.

Yes.

Which is another impressive company.

Yeah, the thesis around there was still like, how

do we streamline trucking? And we made a few other investments

as well, like why systems which helps with automating the

routing systems for commercial delivery, as well as trucking

companies. But ultimately, it's like, how do we streamline this

so we can make this more efficient, we're not wasting

gas, obviously, and, or diesel. We're not hurting the

environment, and we're getting the most out of each truckload.

And platform science actually was also a, you know, thesis was

built around the ELD mandate. So we knew there was a point where

all trucks needed to have some type of electronic system to

track how long truckers were on the road where they are all

those things.

So Earnest, you know, I first started following

venture venture capital in the mid 90s. And, you know, I've

seen a lot of ups and downs in the business, there's times when

it's really hard to raise money for a fund. And there's times

when it's easier. It's never easy, but it's easier at times.

I'd love to hear your thoughts about the current state and what

you see for the next few years.

I understand how things can go. And never to get

too high on the highs. And so, you know, but from our venture

career, pretty much.

That's true. I mean, you you started at BMO

Capital Markets, July of 2007, so you have, you've been through

the tough stuff,

And seeing companies that were around

hundreds of, or 100 years

So that was my entrance into the workforce. I

disappear.

was like, oh, it can go like this. And, you know, took that,

you know, people don't have advice, they usually say, when

facing tough times, they're like, it builds character. So I

just kind of embrace that. Okay, this builds character, you have

to, actually, what I really get it boils down to is you got to

find value for your customer base, despite what's happening

in macro. And so I take the same application to now right when

things were so up and then we realized in 2020, oh, we don't

have to meet founders, they can be anywhere, we can just give

term sheets in over Zoom. That took a run up. We also had

obviously well documented a lot of tourist investors who hadn't

done much early stage or even growth stage doing more of that.

And so prices went up and it seemed like a lot of people

could get money, not to mention, you know, VC firms were raising

a lot of money as well. But now things have changed as we've

seen the continued. People like to go to the denominator issue

for LPS, right like their public stock or their public portfolio

is so far down that is they're not at the levels that they want

of, of allocation versus you know, now venture could

represent when it's only supposed to be 10% of their

entire endowment now it's 25-30%. And so because of that,

we've definitely seen a drawback on on valuations or just a stall

and in, in raising capital, especially towards the end of

22. And it's still been slow, I would say in Q1. But things are

getting funded, I think it's a great time to raise or start a

company and raise at the early stage. So I'm talking about pre

seed seed, and even seed to A, because you have an

understanding of what valuations actually are today, where I'm

seeing a lot of trouble is A to B, especially if you got a

really high valuation in A in from in 2020, or 2021. And you

haven't really grown into that valuation. I think you're just

going to have an influx of more people starting new companies.

But when it really drills down to now of understanding what

your narrative is, why are you starting a company? Why are you

uniquely equipped to solve this problem? Why do you wake up

every morning wanting to solve this problem? And then finding

the right investors.

So would you mind walking me through your due

diligence process? What, how do you go about?

Typically, a process is first meeting with a

company, that first conversation is critical with me, and the

thing I'm getting at, sometimes I don't even want to go want

them to present the deck. But I just want to understand like who

they are, what drives them? What's the origin story of this

company? So that's the first conversation, then I'll request

some, the data room, so their financials, I love looking at

the financials, what they're thinking, understanding, and

I'll dig into this, why I use my equity research background

digging into their assumptions, what assumptions are they

making, I love to look at their product roadmap and any

technical IP just to understand what is maybe defensible, if

they're leaning really on the kind of technical risk. And then

the other thing is, I like to look at the sales, sales deck,

because how you're positioning yourself to your customer base,

is really where I like to lean in. Obviously, coming from a

pretty technical family, dad, a CS grad, sister is a data

scientist. I've picked up a lot of stuff and have a strong

network and stuff. So I know what to ask and who to introduce

them to to get even more technical diligence. But I think

a lot of the lacking in the industry or areas of opportunity

is like understanding, even at the early stage, what is the

business risk? And so where I like to take that in the next

step of diligence, after you know, asking the questions I've

seen from the data room, I like to point out two to three people

within my own network that can feel that persona. Because

there's one thing to get, you know, do customer references,

once you've gone down a path and looking to do it, you know,

writing up a term sheet. But who of those customers who have

agreed to do that aren't going to say amazing things that they

use in the product? Well, actually, sometimes they don't

say the most amazing thing. That's when, when everybody's

entrepreneurs, if you have somebody on your reference list

as a customer, let they need to say that NPS is like 15 like

that, at a bare minimum. But for me, I like to have a win win win

where I have a trusted executive that I've known for a while they

can be a buyer of this technology. And so they get to

understand what's out there, the founder gets to actually have a

chance to get a sale. Even if I don't sign up to you know,

invest in the company or not, they get a shot on goal. And

then I get unfiltered feedback from that executive. And then

lastly, the entrepreneur gets to see hey, this is what you get

from me, starting day zero. I like to help with leads on

customers, because that actually has impact on revenue. So

that's, that's really

So that's part of your big value add.

I love doing that. I love like meeting

people. I love understanding what they've dedicated their

lives for. And I like being a bridge. That that's why I left.

A lot of value.

Yeah.

What what's your approach to the board

involvement in governance with your portfolio companies?

You learn something new every day. I'll

say that being open to that. I think a good board is like a

great basketball team. And maybe the better equivalent is like a

great AAU basketball team. Just understanding different boards

will have different constructions and you need to be

able to flex different roles based on who's there. And

ultimately, it should be about serving the company and that

founder and helping him or her make the best decision for the

company and grow.

How how do you prepare your portfolio companies

for exits?

I think that's a, I probably don't have a great

answer right now. But I think that's something that a lot of

investors and entrepreneurs should be thinking about. Based

on, you know, if you're at a certain clip or a certain stage,

is there a soft landing, or even a good landing, that doesn't

take you to like where you thought you want it to be? Or

you strive to be? Because I think I tell friends this all

the time. Even the most well informed kind of person follows

technology or, or tech adjacent companies. There's so many

companies that are still private, that you think are

public. Stripe. I forget all the time that Stripe is private. And

so there's just a lot of companies that are kind of

waiting on the sidelines until the public markets get better.

And then they'll finally have those exits. And so it's kind of

a waiting game.

You've given some really good advice along the

way, was during this conversation, but any other

advice you would give for young entrepreneurs?

Yeah, I think, you know, especially in this

environment, it's a safe environment and college where

you can just try out new things while you're in school, I would

say definitely exploring, what are you really passionate about.

And a lot of times, you can learn on someone else, like even

interning at a startup, to see if that's the right environment

that you want to either start your own thing. Or if it's like

a little bit later, where you're at, like a Databricks, or you're

at a a more growth company. That's still, you know, high

growth, and still has those elements of like, there's a lot

to learn. But maybe it's not so chaotic. So just being able to

explore the things. I was always told, I'm not sure it's great

advice or not, but like your 20s are about figuring out what you

don't want to do. And if you think you lucked out and figure

out what you liked doing that's even better. And 30s are what

you figured out what you like to do, and then in 40s and 50s

I like that. I see that.

Yeah, yeah.

Well, you know, you you mentioned, like doing an

internship, because so many times it seems like students

wind up going just with big companies for their internships.

But so we created this program called the Venture Intern

Program, which is specifically to help early stage companies

find interns. And, and pick interns and, and to provide them

with a format for providing an internship for a student. And

then making the students aware of these opportunities. So we've

been doing this for maybe, I don't know, four or five years,

I'm not sure the exact time. And sometimes then they stay on

permanently. They say I really do like this, or they say, no, I

think I'd rather work for a large company. But in either

case, they've really learned something about themselves and

what they like and even if they don't want to work in a early

stage company, I think that knowledge of what it's like, is

valuable for the rest of their career.

Yeah.

Well, Earnest, thank you for taking time to do

this. And it's been fun talking to you getting to know you. Look

forward to it.

Absolutely. Thanks for having me.

On behalf of the Sam M. Walton College of

Business, I want to thank everyone for spending time with

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