Ep. 70 – Gregory Shepard Interview Part 2

MAY 15, 2022

Dr. James Richardson

Welcome to episode 70. The second part of my interview with Greg Shephard.

Dr. James Richardson

Thank you, Gregory for coming on the show.

Gregory Shepard:

Oh, you’re welcome. Thank you so much for having me. I really appreciate it.

Dr. James Richardson

So I wonder if we could switch briefly to my topic I crave to unpack with some kind of story, but can you give me a persona and archetype of the bad institutional investor? What are the signs and behaviors and language that should cause you to politely run?

Gregory Shepard:

Yeah, I can tell you that the way that they work is that there are the investors that represent the real investors’ money, right? They’re seen as investors, but they’re just wrapping the money that’s actually being put in by the people that have the money. And those guys, the more senior ones, will run out deal hunters. And deal hunters are going out there to talk to you and listen to your story and all that kind of stuff. They choose the ones that are good, that they think are good and then they turn them over to the next person who decides on whether or not they’re good or not.

Gregory Shepard:

Well, those people that they have running around the streets, those are people usually right out of school, looking at pitch decks, doing some stuff. They don’t know what they’re doing. If they did, they wouldn’t be deal hunters. They would be guys sitting behind deal hunter looking at the finalized deals. Right? So the first thing I do is if somebody is out there just hunting for deals, that’s my first red flag. I’m not actually talking to the person making decisions, somebody that is making the decision has sent out somebody to bird dog deal.

Dr. James Richardson

Is age the primary criteria you use?

Gregory Shepard:

No, usually I go to their LinkedIn. I’m like, “Oh, they graduated a year ago.” Right? So this person’s bird dogging for somebody else, but that somebody else is too important for me to talk to. And right there, I’m like, “Okay.”

Dr. James Richardson

Next.

Gregory Shepard:

Yeah, there’s a problem. I can’t even talk to the person. So that’s one thing. The other thing is I’ll look at the number of deals they invested in over a period of time. And how many transactions closed. A cycle time should be three to five years, from the time that you have a product three to five years and you should be able to sell your business. So you take a five year cycle time. How many businesses did they invest in? And then how many businesses sold? And then you can see their failure rate. You can see how many of them plundered. And usually it’s nine out of 10.

Dr. James Richardson

I would translate that to seven to 10 for CBG listeners. But yes, I totally understand. It’s a little slower for us.

Gregory Shepard:

Yeah. Than tech. Yeah. But you can see the numbers. You can see, oh man, these guys did 50 companies and one person exited five years later or seven years later. And you’re thinking what happened to the rest of them? That’s another thing I look at. And then –

Dr. James Richardson

They’re in law school, Greg. They went to law school.

Gregory Shepard:

Yeah. They went, now they’re working for the VCs.

Dr. James Richardson

Right. Yes. Oh no. Or my favorite they’re a lecturer at a business school. Oh, I probably shouldn’t have said that.

Gregory Shepard:

There’s a lot of those. There’s a lot of teachers, lecturers, people that they mentor, advisors, consultants and stuff like that, that are either one hit wonders or have never done it before. Or haven’t been a practitioner. Consultants sometimes are better because at least they’ve been down in the trenches with the entrepreneur, talking about these things. A lot of the –

Dr. James Richardson

Yeah, not to throw myself under the bus, but the consultant’s only as good as the depth of their pattern analytic learning. And that takes time.

Gregory Shepard:

Yeah. And what they’ve done, in a conversation, you can quickly figure out, how much in the ground experience. When you’re starting a business, you don’t need high level people. You need people that have been down in the trenches because the first two, three years of starting your business is a freaking hand to hand combat.

Dr. James Richardson

That’s a much better metaphor than the one I use, which is janitorial work.

Gregory Shepard:

It’s very different when you’re in the ground and you’re down there and you’re taking the beating. And a lot of times you’re doing 50 things at the same time as an entrepreneur, you don’t have a team that can do a bunch of things and all this stuff, it’s all just scrappy. Just really scrappy, takes a lot of grind, a lot of grit to get through it. And then you got this investor, who’s sitting there sitting in a big office with a window view on the corner, looking down at Alcatraz in San Francisco with his air conditioner and his $250,000 base pay plus bonuses and car and all this stuff. Starting right there, how are you going to have a conversation?

Dr. James Richardson

Who booked me in economy classes? Sorry.

Gregory Shepard:

Yeah, exactly, right? How are you going to have a conversation with somebody when you’re coming from this perspective and they’re coming from that perspective? I can tell you a story. I did a startup one time for this guy who was a trust fund baby from a very well known company. He was a billionaire trust fund baby. And I did a round of funding and I was building this company. This was in the eighties, and I’m building this company and the guy took the money out of the bank account and went and bought a Lamborghini, because his dad was giving him money and the payroll bounced. And I’m calling the CFO, I’m like, “What happened to the payroll?” And he goes, “Oh, so and so took it out of the account.” And I’m like, “How did he just take it out of account?”

Gregory Shepard:

He’s like, “Well, he just took it out of the account. He’s a signer on the account.” And so I called that guy and I’m like, “Hey man, you took the money out of the account, so people can’t do their payroll.” And he says to them, “Well tell them to go to the ATM.” That’s what he tells me. I’m like, “Dude, they don’t have money in their account, so they can’t go to the ATM and just take money out.” And that is the delta between some wealthy people and an entrepreneur. They don’t even understand that there are people who don’t even have enough. They don’t have a savings account to just tap into.

Dr. James Richardson

Well, it’s funny. Would you say that’s a red flag or is that just a reality you have to deal with, with institutional investors that they’re all like that? Or are there enough of those folks who actually understand that they’re a privileged asshole?

Gregory Shepard:

Sometimes they never know how privileged they are, but sometimes they know how unprivileged you are.

Dr. James Richardson

Well, that’s actually great. That would be huge if they could even acknowledge that.

Gregory Shepard:

Yeah, but that’s not even that common. Sometimes, I’ve been in that seat where you’re an entrepreneur and you’re like, “Hey, I’d like to get paid a little more because I’m barely getting by.” And they go, “Yeah, that’s not going to happen. If you want to get paid more, you need to do more sales.” And I’m like, “Can you put more money into the bucket that we have for sales?” “No, you have to do these things first.” It’s easy for them to say that and-

Dr. James Richardson

Look at financial.

Gregory Shepard:

Oh, that’s the chain of events. But from your perspective, you’re like, “Hey, I got to make my house payment. My wife’s pissed off. My kid has to get braces.” And they can’t understand that you have to live or you are distracted and distraction is not healthy for them in their investment.

Dr. James Richardson

So while we’re on this topic, I’m just going to go for it because I’m a social scientist, so I get to talk about shit like social class and you have to listen, even if you disagree. You’re welcome to disagree, but you have to fucking listen because this is my expertise from academia. What I’ve noticed is related to what you’re talking about, which is in my industry, they’re these huge trade shows. They’re now half their size due to COVID, but in CPG there’s been a massive acceleration of what I would call post-grad educated, upper middle class founders. So basically people who look, act and have the net worth of me, James Richardson. We’re not super rich. We’re not the 1%. We’re not the children of the 1%. There’s thousands of these folks starting companies. I think it’s great that people are starting companies, but the level of naivete in which those people, and let’s be honest, if you’re upper middle class, you’re already privileged, right?

Dr. James Richardson

Including me. You got a post grad degree. You could have gone on and done something pretty straightforward. If you chose to become an entrepreneur, it’s because you have some basic appetite for risk within your social world. That’s unusual, but you’re still a peasant compared to the people we’re talking about at these institutional firms, including the general partners and the amount of wealth they personally control. What I’ve noticed is these guys literally don’t understand what it’s like for upper middle class person to take out a home equity loan, beg for friends and family money to go run with one of these businesses in the first three years.

Gregory Shepard:

They don’t. They’ve never –

Dr. James Richardson

They don’t have a fucking clue at all we could lose the house.

Gregory Shepard:

Yeah. They don’t understand the gravity of the decisions that you make as an entrepreneur. But, neither does an entrepreneur.

Dr. James Richardson

No they don’t. But I have more sympathy for them. I have no sympathy for the investor who has, I just can’t take the time to respect that gap because I think a lot of his relationships would start off better if there would be like some church-like ritual, where we acknowledged this power asymmetry. It was almost more functional, Greg, in the medieval period because the king was dressed a certain way. His peasants were honestly rather clearly peasants without talking to them. It was all very carefully demarcated. He wasn’t confused that he was not the king, but in America we have this problem where the super rich, they actually want to talk to you like they’re the same as you over drinks. And I have witnessed this at conferences and that makes me want to barf.

Gregory Shepard:

Pretty runaway everywhere.

Dr. James Richardson

But, it’s also an American problem too because we just deny the existence of class.

Gregory Shepard:

It’s an American problem because when I tell people, I grew up poor.

Dr. James Richardson

They don’t believe you.

Gregory Shepard:

I don’t mean internationally poor. I mean American poor.

Dr. James Richardson

Yeah.

Gregory Shepard:

That route is completely different for them. I can tell you, I had a conversation with a very well-known investor, somebody that everybody knows his name. I can’t use it because of the story. But what he told me was he said, “Listen, I think that entrepreneurs and people just need to pull their selves up by the bootstraps.” And I’m like, “How are they supposed to do that if they don’t have any bootstraps?” Then he says, “Well, let me tell you story. When I was young, I lived in a neighborhood and I used to pick apples off the fruit trees off my mom’s property. And then I would go sell them in front.” This guy’s worth billions. My first thought is, well, did you steal the apples from your parents?

Gregory Shepard:

Because if you’re a regular person and you did that, you’d go to jail for stealing and selling somebody else’s stuff. Second, you’re in a neighborhood where everybody is rich and they have so much disposable cash and they see their neighbor’s kid out there. That’s not pulling yourself up by your bootstraps.

Dr. James Richardson

No.

Gregory Shepard:

And that’s this particular guy who is in venture capital in the startup world, very well known. That’s his perspective. That was what he said. And then there’s other personas, like people that don’t understand just the value of a safety net. If you fail, you’re homeless and that happened and I was homeless one time. You have to pull yourself up. You don’t have a safety net. It’s not like you fail and then you go call your mom and say, “Hey, I need some money because what I did failed.”

Gregory Shepard:

And then your mom just fires over some money and then you recover. And then these wealthy people scenarios, these startups that they invest in, or even the ones that do startups, it’s games for them. It’s not life or death. There is no safety net for a lot of other entrepreneurs. I have mad respect for the people that did it the way I did it, which is you go into entrepreneurship not because you’re rich or even because you want to be rich. I went in because I had no other option because I couldn’t get a job. I couldn’t figure out the whole application process. And I had to create my own future. I didn’t have a choice. And I think that is a true entrepreneur. Somebody that is like, “I need to create my future by setting somebody else’s future up.” And that’s the opportunity.

Dr. James Richardson

Yeah. And I think that’s very well said. A lot of entrepreneurs, including me, that resonates with their story as to why they’re on their own, doing their own thing. The neuro typical super rich are just milking a social class world. It doesn’t take a lot of effort to recycle that privilege as a social scientist, I can-

Gregory Shepard:

Yeah.

Dr. James Richardson

Take it from me.

Gregory Shepard:

I couldn’t even get into college. There’s no way I could get, I couldn’t even get into the military. When you’re at that level, but you know that you can make things happen, you’re smart, you’re just not smart in the way that they analyze intelligence. Then you create your future. Some people go in to be rich and some people just go in because that is the natural route because there is no other route. And then you found that you can create. That’s why I started startup science because I found out that 4% of people have the ability to get out from check to check living. 98% of them do it through a windfall and 75% of that group, the windfall is a startup, but then 90% fail trying. So I decided to dedicate the rest of my life to helping the ones that try, succeed.

Gregory Shepard:

This podcast and all the information, part of that is obviously the investors. Most entrepreneurs start businesses because they’re trying to get rich, not because they are rich. Usually what you see with the data is that they have a big exit and they either invest or they become investors or they go away completely. Most of them just go live a good life. Sometimes they’ll do it another startup, but the safety net is there, so it’s a different deal.

Gregory Shepard:

What I’m trying to do is help those people that are marginalized and that includes people that are neuro divergent, like us, people of color, women, just everybody that has been marginalized, people without money, for whatever reason, all those people, give them a chance to rise themselves up, like creating a curriculum and a path that helps them get through the mine field, get through the gauntlet without stepping on the mines. One of those is the investors, like this conversation.

Dr. James Richardson

It’s tough. Well, thanks so much for your time, Greg. I want to let you go. Thanks for your help educating my listeners.

Gregory Shepard:

Oh, you’re welcome. Thanks for having me. I really appreciate it. And I hope for everybody listening that this was helpful for you. So I appreciate everybody’s time. I consider it an honor. So thank you very much, James.

Overlooking consumer interaction is a unique problem for experienced, sales-only teams with an admittedly perfectly timed product design. But, it’s just a big version of what might happen to most founders when they hit $20M or so and see the same problem in their topline numbers.