*Note: Scale VC is now Redbud VC
On August 4, 2021, the Scale team and 1 Million Cups KC dove into the nucleus behind Scale’s mission and investment thesis. Scale is based in the Midwest & is largely investing in founders between the coasts at the earliest stages. The firm was founded by the founders of EquipmentShare (Willy & Jabbok Schlacks) and Jai Malik of Countdown Capital. Other advisors include Wade Foster (founder & CEO of Zapier).To recap the discussion, below are the key points:
Scale is democratizing capital, education, and network effects between the coasts.
An extra layer of struggle is a proponent to extreme outlier success with founders.
A weak founding team is a leading reason for startup failure, but a strong founding team is a leading reason for extreme outlier success (paired with struggle).
Scale is building a long-term startup ecosystem in Columbia, leveraging EquipmentShare as a pillar company.
Scale invests in all industries whether it is hard tech or software.
The Scale program is 12-weeks with virtual or in-person options.
Our base investment model is $40k for 5% with negotiation based on current capital commitments and the stage of the business.
Scale has a team of successful operators available for support, insights, and hands-on building for Scale founders.
Verbatim transcript below:
Brett Calhoun: Hi everyone. My name is Brett Calhoun. I’m here to talk to you about scale, the new accelerator, and incubator in the heart of Missouri. And to start us off, I want to walk you through a few data points that are not surprising, and that is 5% of our seed funding is allocated to the Midwest, and less than half a percent is allocated to Missouri.
This goes into my first point, that there is an access to capital problem in the Midwest, but not in the sense that there is no capital here. There are 70,000 millionaires in Missouri. In a sense that capital is not allocated or directed towards early-stage pre-market investments. This goes to my next point, that the root of our problem is not that there is a lack of capital.
It is a lack of communication, education, and network effects. And so in conjunction, these problems together caused a lot of founders to bootstrap, to their seed round, which yes is capital efficient and yes, lowers dilution. But at the end of the day, this causes a loss of the copious amount of network opportunities that they miss out on.
For example, getting that first LOI or building up that investor pipeline for that first seed check, ultimately hinders growth. Now, despite everything I just said, there has been extreme outlier success. And four of those come in Columbia, Missouri, home of scale.
And two of those companies have come in the last decade and both out of Columbia startup weekend, which we are bringing back. And those two companies are Zapier, which is founded and led by Wade Foster, who is a Mizzou graduate. Who has built a $5 billion business with less than 2 million in VC dollars.
And the other is EquipmentShare who has stayed in Columbia, Missouri and scaled from one employee to over 2,500 in the last six years. Now at the forefront of all of these businesses, our founders built their businesses based on first principles with an extra layer of struggle that has strengthened them along the way.
Now, these founders were not Harvard or Stanford grads or ex-McKinsey, Google, or Apple, but true entrepreneurs who knew how to roll up their sleeves and build a billion-dollar business. And everything I just talked about has kind of led to what we just started at scale and our new investment model of founder first incubation. Our investment thesis is that the greatest driver of venture returns is the selection of founders strengthened by struggle.
In other words, the key to true outlier success in our opinion is the founding team. And so what differentiates Scale, an incubator with the characteristics of an accelerator fund? The reason we call ourselves an incubator, even though on paper, it looks more like an accelerator fund is that we are incubating founders first.
So necessarily we don’t care about the company idea. We’re more worried about the founder because those things change and what this comes from is really our founding team. So we were founded by unicorn founders, Willie and Jabbok who through their experience of going through YC saw hundreds of companies with all the capital network effects, all the resources they could possibly need and 90% still haven’t exited, and 99% till haven’t reached unicorn status.
Well, there are many reasons why, whether it’s bad timing, or couldn’t actually find product-market fit, but we believe the overarching reason is a weak founding team. And so at the end of the day, we believe that a strong founding team would pivot and ultimately build a successful business. Now you’re probably wondering, well, there’s a ton of incubators.
A lot of accelerator funds. The market is so saturated. Well, we believe we’re unique and reviving what an actual accelerator was meant for. We’re also not founded by investors. We have a more unique approach where we’re founded by operators who have built billion-dollar businesses and have insights to give to founders.
So they don’t make the same mistakes that they made, even though they had successful businesses. And so over the years, our four unicorn founders have accumulated all these resources, knowledge, and capital that they want to invest and reinvest in founders between the coast.
And so a little bit about our investment parameters are we, are founder-first focused? Especially with founders between the coasts we’re investing pre-pre-seed to pre-seed we’re industry agnostic, but we’re focused on low capex software-based companies. And we’re investing through a standard YC safe note with a minimum of $40k checks for 5% of the company.
Now, what do we offer? Outside of capital, the real value that we offer is the intangible value. It’s the mentorship of multiple unicorn founders that we have on our board. It’s the team that we provide. So we like to say that we’re your co-founder for the next 13 weeks. We’re going to be boots on the ground, helping you build your business, whether that is needing help with customer interviews or building out a financial model, we’re going to offer interns to our portfolio of companies.
We’re going to offer discounted legal services. You know, the typical resource toolkit that an accelerator fund offers. And, and, you know, one of the overarching things too, is that the network that we offer from coast to coast, as well as in the Midwest to get you your first LOI or get you that first investor in your Seed round.
Now to kind of dive in a little more, I talked about how we’re unique. And so we’re also taking a unique approach on our boot camp and the curriculum that we provide and our curriculum is really based upon the learnings and failures of our investors and founding team. And so we’re not just going to help founders with their pitch or how they tell their story to investors.
We’re going to get down with starting at the founding team, going to customer development, product development, scaling your business. And we’re also going to take a unique twist on this, where we’re not just focused on company growth, but also personal growth and how that mirrors company growth because that’s something that a lot of investors miss out on.
And the last point I want to make is just, you know, I think that we’re doing something that is truly revolutionary with four unicorn founders who have come together as pillar companies to change the startup ecosystem in Missouri for generations to come. Thank you.
Larissa Uredi: Awesome. So I’m gonna step in here real quick folks. I know this is going to be, I know we’re all a little out of practice, but I would love to have questions from the audience as they’re coming in. I will get things started. So talk to us. Can you give us some specifics? I know you said that you had like one applicant maybe that you were, that just, that just got approved.
Can you talk a little bit about, who you’re really pursuing or what the profile of a good scale incubator, the candidate looks like?
Brett Calhoun: Definitely, definitely. So.
So, as I said, we are focused on the founding team and that. So our vetting process and our application are going to be eight questions that dig into the person and their characteristics, how they operate, how they’re continuously feeding their curiosity. Are you a hustler? Do you have an entrepreneurial mentality?
Do you display the characteristics of a unicorn founder? Um, I mean, we do have a strategic fit in some industries because we are backed by EquipmentShare. So anything in construction tech, property tech real estate tech is definitely a strategic fit. Plus we have Veterans United on board as well. But, you know, we’re, we’re really looking for a strong founding team and we’ll invest as early as a founder with just an idea that hasn’t been incorporated yet.
We’ll help you incorporate. But we’ll also invest to companies who have raised a pre-seed round, which we will invest at the current terms that they’ve raised. Yeah.
Larissa Uredi: And that was actually going to be part of my next question is, can you talk a little bit, I know within the VC space and especially in investing something that, you know, startups deal with a lot is like that, uh, they ended up losing most of the value that their company would have simply by hopping in bed with investors a little too early, maybe.
How do you guys see yourselves addressing that issue or that question from your founders?
Brett Calhoun: Definitely. I mean, we are providing 40 K for 5% up front, which is. A lower valuation, but we’re also investing extremely early, earlier than most accelerator funds and investors. But it also, we’re providing more value than just capital.
We have free office space. We have a team of unicorn founders. We have a whole list of guest speakers from all parts of the country who have been extremely successful and built billion-dollar businesses. We’re going to be, hands-on helping them build, and this is a long-term relationship. This isn’t just, Hey, let’s invest in you and send you off to our investors.
I mean, we’re not going to hold your hand for a couple of years. You know, we’re going to be in a 12-week boot camp, working 12 hours a day with you, and then thereafter we’ll help you as much as we can.
Larissa Uredi: So something that I think has been an interesting conversation, um, here with, especially just with digital sandbox and some different areas is looking at the amount of funding that they, that you give upfront and understanding the most strategic way to apply those dollars.
So how did you guys arrive at the 40,000 at 5%? It sounds like that’s kind of just like across the board and, and also like, what do you envision your founders being able to really do with that or hope that they would do with that?
Brett Calhoun: We came up with was that’s about how much it is to build out a good MVP for a software-related company. And so the goal would be you come in with an idea and we help you build out your MVP, and then I’ll ultimately help you find we’ll help you find product-market fit. But usually, that doesn’t even happen until the series they round.
And then send you off to our investors at the end of the book. To have, you know, be more polished and have a more sophisticated Pitchdeck in terms of, you know, $40k we also have the opportunity for follow-on funding. So one of our founders is Jay Malik and he has his own fund countdown capital.
And then the shellacs himself has also been leading pre-seed and seed rounds of various startups. And so there is more opportunity from where the capital came from. You know, as long as our companies perform and, you know, We’re working on investing in the right people. And so we think that those people are going to, we’re going to perform well and they were selected based upon the person and not the idea.
Samuel Gahm: So yeah. Um, we had a question on, on zoom. But, uh, they said disregard because you thought they thought you answered it, but maybe you just wanna speak on more of it. Don’t you think 5% of 40,000 investment is a little extreme.
Are there concerns about this being problematic down the road for founders during the, during institutional capital?
Brett Calhoun: No. I mean, w w we do not see this being an issue down the road. Um, you’re talking about getting four unicorn Sanders on your cap table. Um, from the get-go and we’re, we’re investing at a point where you might not even have, um, anything, but an idea, a napkin idea. And so. This is truly, this is more risky than, than what you’re getting, you know, coming in at say, YC where you getting 120 K for 7% and you’ve already got an MVP.
This is, this is a little bit different than that. And if you’re at that point, we’ll, we’ll negotiate and we’ll invest at the terms that you already have capital commitments at. Um, and you, you know, I mean, And in my opinion, the 40 K is, is just like, that’s not 120 K like YC, but we’re also going to be more hands-on than YC is.
We’re going to be more hands-on than other accelerator funds. We have operators at your disposal to help you build your business over the 13 week period. Um, so we, we think that it is warranted to that the 5% is.
Larissa Uredi: So then I want to follow up. Um, so founders come in, they know the terms are agreed.
Everything is good. They get to the end of that 12 weeks. They have what you’re calling an MVP, which I think could look really differently. And I would love to hear kind of your take on like what you would expect out of some of those. Um, because I think that that’s a broad term, right. Defined. I mean, if you’re an ag tech versus if you’re in construction manufacturer, like if it’s gonna look really different.
Right. Um, but so just kind of speaking to that, but then I think also, um, thinking about like, what does that roll off kind of handoff, right? So they come out of this bootcamp and then ideally you guys are passing them off gently. Right. You know, sort of into the world.
So can you talk a little bit about kind of that, that post-boot camp experience for that.
Brett Calhoun: So a little, a little bit more background on our cohort is that this is a two-year time period. And we’re going to have four cohorts over the two years. And let’s say about 16 to 30 companies total. And so there’ll be three months on three months off, three months in the cohort and then three months recruiting the next cohort.
Right. Right now, you know, we’re very much so in the startup phase, just building everything out, when it comes to recruiting the next cohort, we’re gonna have more time to continue helping our companies. So yes, it will be a handoff and yes, we don’t want to hold their hand through it. I mean, it’s, this kind of goes back to our, our saying with, you know, the founders are strengthened by struggle.
This, this is a similar to Sequoia capital’s thesis of we’ll invest in you. And then we’re not going to talk to you for a year or two, because we want you to struggle in those who come out of. Or even more successful at the end of the day. So we’re not going to hold their hand would come out of it, but we are going to have a demo day and we’re gonna do everything we can to get them ready for that.
I mean, we’re going to be up late with these founders, working hard to get them ready for the demo day. Ultimately to get, you know, those first C checks in the door and in terms of the MVP, I mean, that’s. That’s really why we’re staying focused on software based companies, because that 40 K does help you get to the finish line for that MVP.
And this that does look different. I mean, you could have an AI ML company that 40, K’s not even gonna come close to touching your MVP because it could take six months, 12 months, 18 months to train your AI but that’s, I mean, that’s a little bit about, you know, I guess kind of what the handoff looks.
Cool. No, I mean, I think that’s a good point. And I think that I think your model is really interesting because you are investing. I mean, you’re essentially saying smart people, given smart people are given a little bit of financial fuel will go and do great things. Right and, and I think that that’s a, an interesting take and that’s something that, I think.
She’s really work, but I don’t think anyone really comes out and says it. Right. Cause there’s a lot of good ideas that don’t get funded and I think it has to do with the team. Right. So definitely. But, no, I appreciate that. And, and I, and I think it’s a good distinction to be able to make, you know, with folks.
Larissa Uredi: Cause yeah, I mean, if you’re dealing with machine learning and AI, like $40k doesn’t even, I mean, you can’t hire an intern for 45,
Brett Calhoun: right. I mean, you know, it’s, we’re digging into the person, you know, what are they driven by? Are they mission driven? Are they money driven or. Ego-driven and I mean, those are red flags for us because we’re looking for someone who has this long-term vision of building a billion dollar business.
It’s not just someone who’s coming in and saying, I want to, I want to exit in five years for a hundred million dollars. We’re like, no, you want to exit and seven years for a hundred billion dollars. So that’s who we’re looking for.
Larissa Uredi: So what do you guys think? Let me ask this real quick and then we’ll go back to zoom, for your conversion rate right?
For your own, uh, application, um, interviewing like how many, how many people do you think you’re going to have to talk to before you really can land on enough of those, uh, unicorns in training?
Brett Calhoun: Yeah. I mean, it’s, I mean, you know, I w I would love to see hundreds of applicants, but we’re also in a different phase for the first cohort, because, you know, we’re trying to get all the legal documents in place. Doing any soliciting that’s against the sec. And you know what I mean? So I’m really like, you know, doing a lot of outbounds myself.
I’ve probably reached out to 400 different people and I’ve probably talked to about 25% of them and then probably 75% of them have applied. And out of those people, you know, talking to them, you kind of get a feel for, you know, different, different personalities. And so like through the process, You know, we have this application that we want to see authenticity.
You want to see uniqueness. We don’t want to just see answers that someone’s trying to give us that we want to see and then we’ll send out a DISC personality assessment to see where you fit in a team. And if there is a co-founding team, it’s like, how do you guys work together? You know, we’re really focused on like, how do you, how are you as a team?
Like, how did you guys meet each other or the new economy? So the process is application this personality assessment, and then we’ll have an interview with our team, which is really like Willy going in and digging into the person, which she has a unique ability to just really understand people and so I think that’s one advantage on our end is just having Willie slacks as the brains behind the.
Let me grab this one on zoom and then I’ll, I’ll, I’ll get you to you here.
First off. I just want to acknowledge that, not counting the 1 million cups, connection on zoom. We, we do have 10 people on connection on zoom, and I believe we have 13, in the, in the room here. So that’s, it’s wonderful to have this, this nice balance, but, we have a question on zoom, in regards to the $40k.
If this number was arrived. If this number was arrived at, based on what you think an NVP for a tech product can be built, do you, do you have relationships with founder-friendly development shops? Non-technical founders will plow through the $40k with not much to show for it. I assume you will. You’ll be heavily involved in how that $40k is spent.
I mean it, we’re not going to tell them how to spend their $40k we’re picking founders who we believe are going to make the right choices and know how to spend that $40k. So we’re not, you know, we’re not going in and wasting your money and holding someone’s hand and telling them how to spend their money.
We will connect them to our resources and yes, we have a lot of, dev shops in our network and other technical founders that we can introduce them to or technical hires. But we also don’t have. I mean, I know a lot of people think it’s good to have a co-founder, but we don’t expect you to have a co-founder we’re investing in, in people because we believe they have what it takes to build a billion-dollar business.
Not, we believe they have what it takes to build a billion-dollar business with someone else that they have to bring on after the program.
Samuel Gahm: So Brett, so once you select the cohorts or is this based out of Columbia or you’re going to have the 12 weeks in Columbia?
Brett Calhoun: So we are based in Columbia and we have an office downtown.
I don’t know if anybody in here is familiar with downtown Columbia, but we’re in the old hoot design building, which is right by fretboard coffee. It’s in that catacombs area with all the art galleries and bakeries. That is an option, but we also know that we live in a remote world and we don’t want geographical barriers to get in the way with us and great founders.
And so we’ll make this as remote as possible, would love to like bring, bring our cohorts and that aren’t in Columbia, Missouri for at least a week and also for, for a demo day but no, we’ll, we’ll make accommodations for, for people who aren’t in Columbia. Great. We have another question from, zoom.
Samuel Gahm: Are you strictly looking. Are you strictly looking for software-based startups or would you consider other companies?
Brett Calhoun: We would, we will consider other companies. I mean, we’re obviously more software focused. We’re not going to have, you know, five biotech companies in our cohort, but maybe we could have one.
And especially with more hardware companies and deep tech related. Just a little background on one of our founders, Jay Malik, his fund is focused on investing in deep tech companies that are more hardware focused, not software. So there is following opportunities from his fund. And so like if we were to bring in, someone in like the AI aerospace, or transportation, IOT tech space, I mean, there, there is another strategic fit there with, with, with Jay Malik’s fund.
Paul Riat: So. Hi, Paul riot for the state. Good to see, right. How much dry powder do you have? And my second question is, uh, let’s say you make 20 investments. How many of them need to actually succeed for your model to work?
Brett Calhoun: For sure. So we are, we have, enough to invest in 30 companies and. In terms of our projections for the model, if we invested in, if all the companies failed, but one and one reached unicorn status are our fund with 13 X.
And so that’s what we’re looking for.
Larissa Uredi: I know it’s been like, I know we’ve, we’ve drilled you kind of hard on the $40k, but, uh, um, no, I mean, I think what you guys are doing is really, is really interesting. And you said something earlier, um, just kind of, as it relates to, I think that relationship building right, and being more hands-on um, so out of the investor, And the partners that you guys have, um, do they have any particular vision about how engaged or disengaged they’re going to be?
Like, what is, what is their sort of daily schedule look like?
Cause I know, um, I know within the Kansas city ecosystem and just other ecosystems, it really is about being in the room with, with the right folks. Um, and then I have a follow-up question about, uh, keeping tech, keeping your talent in the Midwest.
Brett Calhoun: yeah, so. Myself and Jai Malik will be the most. Hands-on, we’ll be the ones who are, are pretty much full-time with these founders, doing anything we can to help anything that they want to sign us to. Willy slacks. We’ll also have time set each week with each portfolio company. And so they will have an opportunity to, to talk with our founding team.
And, a lot of our guest speakers are gonna be like Wade foster brand, but Koski, Willie and Jabbok Schlacks. I’m not going to tell anybody else because you know, we’re not, um, making everything public and our curriculum right now is we’re still building.
Larissa Uredi: They don’t want to every LinkedIn request that’s going to cover.
Well, um, so then talk a little bit about, um, so you talked about how the, the funding, um, for those who aren’t familiar rises, the rest is also a really interesting, I think, case study for bringing funding to the Midwest. Um, it was started by, um, a couple of apple guys and all this stuff. Right. But one of the things that I think, even in their instance that they found is that tactile and get started here.
And they take advantage of our great resources and our low cost of living and our beautiful spaces. And then they bounce. Right. Um, it actually does happen again, like two days ago with a, uh, Casey based company.
Do you guys have any sort of longevity planning for actually keeping those dollars within this Midwest ecosystem?
Brett Calhoun: So we’re investing between the coast and I mean. We’re accepting all US-based applicants and investing between the coast with definitely a focus on the Midwest. And we would love to keep as much dollars here as possible, but that really depends on people in Missouri and our opportunity to reach those people in Missouri, because.
A lot of our applicants are not inside the state. So a lot of people I’ve been talking to are not in Missouri and it’s. So we’re trying to find a better way to, to channel what we’re doing to those people, because we definitely want to bring in as many people close to home as we can.
In terms of keeping people here. I, you know, I, I think if they come to Columbia, Missouri, and they see what’s being built, for example, we have EquipmentShare and Veterans United right there who have close to 10,000 employees themselves. I think there is already as pillar companies. They have the potential to build up an ecosystem there and incentivize people that with not just money, but bringing talent to Columbia because of who is there.
I think a big problem with like, trying to keep companies in Missouri is you give them an investment, but like, that’s not really enough to keep them in the state. They need more incentives than just money. They need to feel like they’re welcomed they’re at home. Like they’re surrounded by other like-minded individuals.
And so. Taking the, if you, if you read the book called startup cities and taking a sense of like a pillar company, as well as a university, like university of Missouri and everybody collaborating together to build up that ecosystem, that’s how you keep people there.
Larissa Uredi: Awesome. No, thank you. I think it’s important to speak to Sam got one for us.
Samuel Gahm: Yeah. Another question from zoom. Are you going to continue raising for, uh, Yeah. If I can read, if you’re are you going to consider, are you going to continue to raise for your fund? If we are dealing with napkin ideas, then there won’t be a unicorn exit likely for five to seven years, based on the amount of dry powder you have, it sounds like you will have enough for two years.
What’s the plan for the next three to five years to continue your mission? Or are you, or are you expecting some early exits to help fund this after two years?
Brett Calhoun: No. Early exits. We expect this to be, you know, five to 10 years exit timeline, and yes, we’re investing over two years with this being hopefully a success story.
we will go to a bigger fund from there and two years from now for following opportunities and other investments in the Midwest. Also I just want to know too, like we had talked about capital and Midwest, and so like, we have our own capital that we’re investing in the Midwest, but we also have networks of investors from coast to coast and we want to attract that capital here.
And so it’s not just our capital, but people in our networks capital, we want to bring here.
Larissa Uredi: Cool. All right. Any other questions from the audience or from zoom? You guys all like five seconds to decide? No, maybe. Okay. Uh, so I’m going to go ahead and ask the official final question, which is what can 1 million cups Kansas city do for you?
Brett Calhoun: The best thing that you can. I think there’s really, there’s really two things. And one is. Introduce us to great founders and just more, more, more people in the Midwest because you know, our, a lot of our network comes from coast to coast. And so we’re trying to build up more of a network here in the Midwest.
And then the second thing is, is really. Collaborating with us on how to connect two, two corridors, the Kansas city St. Louis and Columbia in between. I think you have to have a whole community of people to do that. And, nothing against other people. You have some people who are proactive and want to go out of their way to do things.
And then you have some people who will fall along. And so just have to find the right proactive people to get together and put something that other people will be passionate about and rally around. And so we can really connect this ecosystem.
Larissa Uredi: And so what is the most, um, sustainable way to, uh, connect you or Scale to folks short of just, you know, blowing up your cell phone?
Brett Calhoun: I mean, you can direct them to our application or, I mean, obviously I’m, I’m up to get on the phone for anybody any day of the week. So, I mean, I have an intro email that I can send to you that I sent to everybody I talked to that has potential founders to intro me into but I mean the easiest way is definitely the application.
That’s. Depending on the person, it could take less time to fill out or could take more time to fill out, because they are kind of deep questions about you as a person. There’s only one question about the idea and it’s uploading a 60-second video of your or 60-second video of your idea. Had a lot of good feedback on the questions.
It’s, you know, people have been saying, oh, I love this, this, this made me actually like, think about myself, the things that I haven’t thought about in a while. So I mean, it’s, it’s, it’s meant to be a low barrier and it’s like, meant to be questions that you kind of just like know about yourself. So, you know, either email me or.
Long way to answer that question.
Larissa Uredi: It sounds like folks can find email@example.com. Correct? Yes. Awesome. Fantastic. Well, Brett, thank you very much for not just making the drive and coming up here. Um, I appreciate everyone’s faces in this. Room today. Um, I will, uh, I will put a shameless plug out for just letting your, your friends and colleagues know that we are going to be returning to in-person and that this will last just as long as we can have it last.
Thank you so much, folks. So everyone go get your free co-work on drink some coffee and enjoy the rest of your morning, sir. Appreciate you.
Brett Calhoun: Thank you a lot, Larissa. This is a lot of fun and it made me remember what life was like before zoom and COVID,
Larissa Uredi: we’re also much taller and like very 3d. It’s awesome.
Redbud VC is an early-stage venture capital fund and studio investing monetary and social capital in early-stage tech founders.