In this next iteration of the capital allocator series, Matt sits down with Don Huffner, Vice President at RZC Investments, which is a Bentonville, Arkansas, based multi-strategy investment firm focused on deploying capital into operating businesses at all stages from series A to buyout. It is owned by Steuart and Tom Walton. They start the discussion with a quick overview of RZC Investments including their focus when it comes to investing, although they are industry agnostic they do invest heavily in the outdoor industry and technology including investments in Eddyline Kayaks, Allied Cycle Works and AcreTrader. In general, their investments focus on strengthening and diversifying the economic fabric of Northwest Arkansas. They continue the discussion by diving into the decision making drivers when it comes to investing at various stages within a company's journey, especially the importance of getting to know founders and the people who are running a company that they are considering investment in. They also discuss total addressable market for a company and how RZC evaluates that metric for a company. They finish their discussion with an overview of Don's career journey and how he came to Northwest Arkansas and RZC.

When there are companies that are right here at home growing their talent, we are looking for the best businesses that we can support. And I think that we've got a phenomenal amount of community resources here that we can leverage to accelerate the growth of businesses that are based in Northwest Arkansas.

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. For next few episodes, I will share my conversations with capital allocators in the seed, venture and private equity space. They will discuss how their capital allocation works, and provide tips to entrepreneurs on how to stand out. I have with me today. Don Huffner, Vice President at RZC Investments. Thank you so much, Don, for joining me. I really appreciate it.

Yeah, thank you, Matt. I'm happy to be here and excited to speak with you today.

You know, Don, some of the companies you all have invested in, like Eddyline kayaks, Allied Cycleworks AcreTrader, and others. These are some companies that I interviewed the CEOs of for our entrepreneurship series. So this will be particularly interesting. I wanted to start out with if you wouldn't mind tell me a little bit about RZC and the background and that sort of thing.

So RZC, we're based here not far from Fayetteville. We are up in Bentonville. And we are a direct investment vehicle for Steuart and Tom Walton. And we are doing executing a broad capital mandate that ranges from venture capital typically series A and beyond, up through growth, equity, and later stage buyouts. So we have a tremendous amount of flexibility as to the stage at which we're investing, as well as a fair amount of flexibility in the industries in which we invest. So we are technically industry agnostic. But we do spend a lot of time in the outdoor industry, you met with Scott from Eddyline, and Drew from Allied which is phenomenal, as well as technology, so within b2b SaaS, and you met some of our other tech enabled investments such as AcreTrader, but technically industry agnostic. And so a broad capital mandate with the ability to write checks from a million dollars up to 10s of millions of dollars or hundreds of millions of dollars. So we've got a unique vehicle for direct capital deployment. But I'd say the unifying theme across a broad array of investments is that we work with all of our portfolio companies to in some way, shape, or form, add weight to the scale, if you will, or helped strengthen and diversify the economic fabric of Northwest Arkansas. So regardless of the stage or size of the investment, we're frequently working with our management teams, to play a part in the growth story of this region.

That is really interesting. When you think about the growth story of this region, it's quite remarkable. I mean, I've lived here 28 years, and I've seen it, it's been remarkable in terms of, you know, everything from restaurants, I mean when we first moved here, there really weren't any good restaurants in the whole region. And now there's so many it's quite remarkable, but even things like you know, the bike trails not only the mountain biking, of course we're known as being the best mountain biking place in the country but but we also have great paved trails. So I can kind of you know, and of course I own an Able which is a type of Allied Cycleworks bike that is for gravel, and Allied is here in Northwest Arkansas. I've been to their plant, and of course Eddyline Kayaks kayaking is another big thing. And Northwest Arkansas, for those of you listening if you've not been here, I particularly like the Buffalo River. It's beautiful. I think it's one of the it can match any river in the country in terms of beauty. So I see that that, that's really interesting. Those are companies that can make a difference here. You know, we've got Rapha, which is one of the top apparel cycling is the top apparel cycling line. But at the same time we're trying to advance our high tech focus And so I understand then why you would invest in AcreTrader that that makes sense to me, such an innovative idea. But going forward, so I can see how you all are using investments in this that support the strategy for the reason. And in some some ways this is really brilliant, because it uses market forces to drive success. And I don't know if that's intentional, or I suppose it is.

Absolutely right. You know, we were speaking about this with there was a group in town last week from Tulsa, and I was posed a question, what's the future of innovation look like in Northwest Arkansas? And to me, the answer is, innovation will follow authenticity, right. And so if you look at what is authentic to this community today, we're trying to capitalize off of this phenomenal base of authenticity and work with companies to create the innovations of tomorrow that come from it. And that's a great reason why we spend a lot of time in the outdoor industry, right? The authenticity of the access to an abundance of natural resources, here are our waterways, our trail systems, et cetera, has led to real business benefits that are tangible, right? You mentioned Allied, we just released our first ever mountain bike maybe two months ago that was designed and built for riding the trails of Northwest Arkansas, and having the credibility of Allied being based here to launch a product like that really gives us a level of authenticity in the market that we might not have otherwise had. And similarly, we talked about Rapha right. Rapha is a UK based company, but we launched, I guess it's probably a year and a half ago, a mountain biking line of apparel. And we did that out of our Bentonville offices, and the opportunity to move from a road centric product into expanding into an entirely new line of riders and customers, we were only able to do that because of those market forces that you mentioned. And so it's it's certainly intentional. And it's one that we're very thoughtful about or try to be.

You mentioned, your strategy is very broad and flexible. But let's suppose you have two firms that have a similar kind of market focus and product, some more capital requirements. When you look at the drivers of your investments in each of these areas, venture capital, growth, equity and buyouts, what are the big drivers of decision making at each stage of these investments, even when the companies are comparable?

So I'll start with venture capital. And certainly things are situation dependent. So I'll speak a little bit broadly. But typically, when we're looking at a venture investment, we are primarily considering the team and people, the market in which they're operating and the product that they've brought to market right? Now, people are a recurring theme, right? It's the most one of the most important aspects of making any investment is knowing and trusting the folks that you work with, but it's particularly critical at the earliest stages of a business's lifecycle when investors and even the founders and management teams themselves are probably aren't certain what the future of the business looks like. And so we are looking for smart, tenacious, passionate and malleable founders who we think we can work with for for a decade plus and who are able to build robust teams of, you know, equally impressive folks around them. Secondly, we're looking for as large of addressable markets as possible, right, you can build the greatest business in a tiny market, and ultimately never achieve a venture like returns because a market that's large enough does not exist to support the business. And then thirdly, we are doing a bunch of work on our end to investigate the competitive dynamics, competitive positioning of the business and the product to understand if it's truly disruptive enough to earn outsized share in a hopefully large market. As for growth equity, the situation changes a little bit, right? Generally there is proven traction in the business and in its product, there's a full team in place. And often, the company's proven to some degree that it can be profitable, right, which is generally never the case on the venture side of the equation, with a few exceptions, and the company has proven its ability to be profitable, and is making a strategic decision to forego profitability to continue to gain outsized market share. So in those instances, what we're looking for, is, again, a great team. But we're really trying to dive in and understand the unit economics of how a company transacts. So I will use just for the simplest example, some some widget, right? A company may be unprofitable. But if they sell widgets on an individual basis, every time they sell one singular product, are they making money? If the answer to that is yes, and we can prove that out through a lot of work, you can justify the case that investing in the business further to gain market share is is a worthwhile investment. And on the buyout side, where, you know, an industry or business is typically quite mature, we're looking for defensive moats, right. And those can come in a variety of forms. That can be through high barriers to entry in an industry, it can be through best in class processes, best in class management teams, the defensibility of brand is very real in the consumer space. And so we're looking for businesses that are profitable, and can demonstrate that they have the ability to defend those profits for years to come. And also, we're looking for levers to pull to drive additional value within the business, to grow in new ways that the company hasn't in the past, or to look at the cost structure of a company to find levers to create further efficiency in the business and drive profitability. So it's very different based on the stage at which you're investing, which is part of what makes my job fun, right, we get to do all three.

Yeah, that's unusual. Usually you have you're in one or one of those three, but not all three. Going back to the earlier stage companies, this idea of looking for founders who are flexible, and tenacious, that's so important, because invariably, there's a lot of pivoting that has to go on early. So trying to identify their willingness to pivot can be fairly challenging, until you actually observe it. So I suppose you can assess it based on previous pivots. Or you might be able to assess it based on conversations, and really, maybe even the understanding of the need to pivot. I think some people get into early stage businesses, and they haven't been around early stage businesses, and they don't realize how frequently you wind up having to pivot.

I think that's true. Absolutely. We've seen business models change substantially from where an idea started. And I think one of one of the most interesting ways to just kind of test that we love to if we're gonna do an early stage deal. We love to get to know founders at the start of their journey, right and follow them over a year or two until they get to the point where they might be raising that series A fundraising, right. And hopefully over those two years, we have gotten the chance to watch them pivot potentially right or, or persevere and execute, right? I think pivots are common, but also sometimes it's important to see the tenacity required to persevere through an idea and not pivot too soon, right. And so you can see both. And our strong preference is to really get to know folks well, leading up to our investments, so that we can underwrite, underwrite the folks that we're that we're going to get into business with, and furthermore, see the teams that they grow and build over time.

Well, speaking of that, you know, as you know, when companies start scaling, they need people, they need capital, they need the processes, they need technology. And the people are the hardest part of that equation. And so of course, capital's critical to be able to, to do that. So Don, you mentioned that one of the things you look at is the total addressable market. Many times people I'm glad you didn't use the acronym I so often hear people say TAM, and this and that and the acronyms confused people who aren't familiar with these things, but the total addressable market, meaning just the total potential market of this business this, but how do you go about assessing that with a company?

It's a good question and can be hard to answer, right? Because I think we all I say we as investors love to love to throw around terms and at times, make things sound very scientific that that aren't necessarily scientific, right? There's, there's combinations of art and science. And when we're looking at a new market, we're certainly leveraging extensive third party research, right to pull data that we can aggregate from a variety of sources to triangulate around what a number for total addressable market is. But I think where our work really focuses on is actually spending time with customers in that space, or potential customers to validate if all these third party numbers make sense, right. And you can have, theoretically this very sizable market, that if you get in and speak to customers, and understand that the problem isn't really all that important to them, you can start to poke holes in that total addressable market pretty quickly. And so I'd say, we're starting from kind of a top down approach of leveraging as much third party research as we can, oftentimes we will hire groups, consulting firms, research houses, etc. to help us kind of frame the market initially, and then we're rolling up our sleeves to work with customers to understand if, if those numbers really hold true.

Don, how do you work with the companies you invest in? To be a part of the Northwest Arkansas story?

Yeah, it's, it's interesting and looks looks different for a lot of companies, right? So we have investments in companies headquartered all over the United States or even internationally, with with Rapha being based in London. Eddyline, who I know you spoke with is based out of Washington. And then we work with companies that are headquartered right here, like Drew from Allied, who you've also spoken with, or Carter from Acretrader who I believe, you know, well. So it's situationally dependent. But I'd think when we look outside of Northwest Arkansas for business partnerships, we are primarily looking for growth oriented businesses that have a credible reason to grow into this region. For Eddyline, and Scott, for example, they needed a distribution facility in the middle of the United States. And that's what started their conversations with us. And then alternatively, when there are companies that are right here and home growing their talent, we are looking for the best businesses that we can support. And I think that we've got a phenomenal amount of community resources here that we can leverage to accelerate the growth of businesses that are based in Northwest Arkansas. But most critically, we're looking for for companies that want to hire and grow here. And I think that's very important to us.

One other question I have for you, in closing is, would you mind? You know, a lot of students might be listening and wondering, how did Don get to this place? How did what was your path?

I did not grow up in Arkansas. I am originally from Georgia. But I took off, did my undergraduate in the United Kingdom at the University of St. Andrews. And at the time, I wasn't I wasn't sure what I wanted to do. I just knew that I wanted to learn as much as I could. And I think I've always been focused on driving as much impact as I possibly could on the organizations and people that I work with. And so at the time, I thought you know natural options would be either strategy and management consulting or investment banking. And I started off in strategy consulting, I moved back to the United States. I worked for Accenture for a short period of time. And then as I was working in consulting, I think I came to the conclusion whether whether rightfully or wrongfully that if I was really going to focus on that impact the best way to get that exposure at a younger age shy of entrepreneurship is through participating in the ownership groups of businesses and that that came through chasing a career in direct investing. At that point in time, I thought that in order to break into private equity, I would need a harder technical financial skill set. And so I left I left consulting and went to work in investment banking, spent a couple of years with Barclays Capital, focused on and consumer retail investment banking as well as financial sponsors coverage. So working with large private equity firms on their acquisitions, I spent a handful of years doing that. And then I got the chance to transition to the direct investing side. And at that point in time, wanted to get out of the big company, right, I worked at Accenture that had half a million employees or more, and Barclays that probably had 100,000 or so. And I wanted to go to a smaller investment shop. And I joined a group out of Denver, Colorado, that was investing family capital. So it was our LPs, or our investor base was about 15, ultra high net worth families. And we were deploying capital in the US as well as in emerging markets. So we had an office in Denver and Cape Town, South Africa. I spent a couple of years at that fund jumping back and forth between Denver and Cape Town. And really came to understand the power of family capital in private markets, particularly in that families have a unique ability to invest with a long term or even permanent horizon, which really changes the way that investors can think about value creation in a business and partner with management teams. And I really saw that advantage helping us win deals and helping us create better outcomes at our portfolio companies. And so when I was ready to leave Denver, I got a I got a phone call asking if I'd ever consider moving to Northwest Arkansas. And at the time, I'd never been to Arkansas in my life. And I came out here and and spent a week and understood that something very special was going on here and signed up to join Matt Tarver, who I know you've met and it's been it's been for four and a half years since I've been here. And I'd say we are still very deeply focused on that long term value creation that I mentioned. You know, at RZC, we, we invest forever, there are some investments that we will never sell. And that truly enables us to think about value in a way that I don't think any other private equity fund can't.

Well, Don, thank you so much for spending time with me and for your train your experience. Congratulations on your career and the tremendous success you're seeing I wish you the best.

Thank you very much for having me. It was great to get the chance to speak with you.