How BodeTree Launched A New Venture Investment Fund And Learned Three Important Lessons
One of the things I love most about entrepreneurship is that it allows for continual learning. Every new experiment, product, or strategy serves to make you smarter, more mature, and ultimately wiser.
As BodeTree has grown and expanded over the years, we’ve had the opportunity to learn new skills and lessons. Last year, we found ourselves learning about running a successful sales company, having acquired a franchise development firm by the name of VelocityFD.
This year presented an entirely new opportunity when my BodeTree co-founder and I launched a new investment initiative called BT Ventures.
The concept behind BT Ventures is simple. We provide capital, structure, and support for businesses that are looking to franchise. BT Ventures allows founders to participate in the upside of becoming a franchisor without taking on any additional risk.
Our process is relatively straightforward: We start out by identifying concepts that lend themselves to franchising, with predictable, recurring revenue, strong margins, and a defensible market position. Then we analyze the current business and determine whether or not the unit economics could be attractive for a potential franchisee.
If a concept passes our review, we’ll work with the founder to create a new franchisor entity, capitalize that business, and then run the sales and operations functions until the concept is ready to stand on its own.
The founder keeps his or her original businesses, as well as a good portion of the new entity. Ultimately, this enables the founder to participate in the upside of the concept without risking any time or capital of their own.
It sounds simple, but we soon discovered that there are very real emotional and human elements that quickly complicate matters. Looking back, we realized that there are three key lessons learned in those early months.
Lesson 1: You have to stick to your investment thesis
When you enter the world of venture investment, you can quickly fall victim to “shiny object syndrome,” where every concept that comes across your desk looks interesting and exciting. The temptation to look at everything and anything can be strong, but that can quickly get you into trouble.
Whether you’re investing in new businesses, securities, or real estate you have to stick to an investment thesis. Without this focus, you’ll never be able to develop a coherent investment portfolio.
For BT Ventures, our investment thesis is straightforward. We look for businesses with the following profile.
- Recurring, predictable revenue
- Low capital intensity
- Business model is straightforward, aligned and effective
- Product/service that is essential, unique and chosen
- Market that is large, growing and rational
- Semi-absentee/absentee owner (not buying a job)
- $150K - $350K upfront investment (sweet spot for good franchise candidates)
- Break-even in 1st year; payback in 2-3 years (quality business)
Of course, I tend to want to throw all of this out the window when I find a concept that excites me.
For example, I’m a sucker for food concepts. They tend to be exciting, tangible, and relatively “sexy” businesses, and I’m always tempted to look at them despite being outside of our thesis.
Fortunately, my partner Matt Ankrum always pulls me back to earth when I depart on a flight of fancy. As a professional investor for over 20 years, Matt understands the concept of discipline and does his best to instill it in me.
Those few times where I’ve disregarded his advice and dove into concepts that sit outside of our investment thesis have not gone well. I’ve put in a lot of time and effort trying to fit a square peg in a round hole. They can be frustrating, but ultimately these experiences have taught me a valuable lesson about picking a lane and staying in it.
Lesson II: Don’t swing at every pitch
Recently we found a concept that I fell in love with. It was interesting, centered around unique and emerging medical services we could take mainstream; and it fit our investment thesis perfectly.
The concept had the potential to explode on the national scene, but its unit economics hinged on our ability to control certain fixed costs associated with critical vendors. We invested a significant amount of time in the concept and got very close to opening a prototype store.
Unfortunately, one of those critical vendors ended up proving to be less than flexible, and without their product, the opportunity suddenly became far less attractive.
At this point, I was so intellectually and emotionally invested in the idea that I was tempted to keep at it, trying to find a way to compromise on the unit economics to make the deal happen.
Once again, however, Matt reminded me that we don’t have to swing at every pitch. Without our vendor acting as a partner, the concept wouldn’t be able to create a sustainable return on investment. There was, of course, some wiggle room, but the chasm between our position and the vendors was too vast to overcome.
We had to pass on the investment, which was painful. Still, Matt’s insight proved to be invaluable. Sometimes the best investments are the ones you don’t make.
Lesson III: Only work with people you trust, respect, and admire
The third and perhaps most important lesson I learned was also one of the most simple. It doesn’t matter how attractive a potential investment may appear; it won’t work out unless you trust, respect, and admire the operational team.
Personal chemistry is a huge part of any investment relationship, and its importance cannot be overlooked.
One concept we looked at early on checked all the boxes. It was in a high-growth industry, had a track record of profitability, and even had pent-up demand from potential franchisees. The only problem was that the founder was, for lack of a better term, a jerk.
Throughout our due diligence, we found that he was rude, aggressive, and disrespectful to his employees, clients, and partners. His reputation was known far and wide in the industry, and everyone we spoke to had the same feedback. It was a great business, except for its founder.
In the end, we chose to pass. We’ve learned the hard way over the years that life is too short to work with people who you don’t trust, respect, or admire.
It was a difficult decision to make at the time, but looking back, I know it was the right thing to do.
The lessons I’ve learned while starting our venture investment business haven’t always been easy, but they are valuable. You have to commit to playing the long-game, sticking to an investment thesis, passing on deals even when you love them, and having the wisdom to work only with quality people.