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Sarah Foley of SWAT Equity Partners: 5 Things I Need To See Before Making A VC Investment

   

Proven financial performance and momentum. We really care about the numbers! Given our partners’ extensive experience investing in early to mature business, we take a bottom-up approach to evaluating past financial performance as well as projections. This means, for example, studying growth by channel, cohort, location, or account; unit level economics by product or service type; marketing budgets by channel of communication; organizational plans for building the team; and always examining working capital investments required to support growth. Lastly, we strongly encourage founders to pursue profitable growth — meaning identify the minimum revenue level the business must reach to be breakeven so that the company is not dependent on raising outside capital to support itself.

Aspart of my series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing Sarah Foley. She is a Partner at SWAT Equity Partners, an early-stage venture capital firm focused on investing in emerging consumer brands across various product, service, and commerce sectors. She oversees the firm’s current portfolio and is responsible for the day-to-day sourcing, diligence, structuring, and monitoring of fund investments. Sarah has over 20 years of experience as a private equity professional, operator, and investor in angel to leveraged buyout-stage companies across a variety of industries. Prior to SWAT Equity Partners, Sarah was the CFO of a New York City-based food company. Throughout her career, Sarah has held numerous corporate executive, investment, and board of director positions and assisted companies through growth to turnaround stages of development.

Thank you so much for doing this with us! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?

Icome from a family of serial entrepreneurs. Observing both of my parents’ work ethic and ambition to build successful businesses has had a major impact on my career choices, and taught me how to take calculated risks and bet on myself.

After graduating with math and economics degrees from Northwestern University, I followed my desire to pursue a career in finance and moved to New York City. I was fortunate to receive a couple of job offers from investment banks and ultimately chose Morgan Stanley, where I spent several years building a foundation of financial evaluation skills in the mergers and acquisitions department. Then I took a calculated risk and joined a new boutique investment bank called Greenhill & Co. While there, I worked with trailblazers in the corporate finance industry and learned how to evaluate investment opportunities the firm was making into companies. That investment “bug” propelled me to ultimately find positions at two private equity firms where I learned how to source, diligence, structure, and manage a portfolio of investments. I thoroughly enjoy understanding business models and best practices for successfully building companies.

As my career progressed, I had the opportunity to make angel and venture capital stage investments of my own in start-up businesses, and loved the collaborative approach required for this early part of the “capital stack.” I also complemented my investment experience with a stint as CFO at an early-stage food company, which was both incredibly challenging and rewarding. This experience, in particular, helped me empathize with the many facets of management required by early stage entrepreneurs.

When a few years ago my partners Richard Kirshenbaum and Mark Hauser offered me a role at SWAT Equity Partners, a venture capital firm they founded to support early stage consumer products, services and technology companies, I jumped on the opportunity. SWAT Equity applies a unique approach that blends creative, operating and financial expertise that all three of us accumulated throughout our careers. It’s rewarding to see that it continues to resonate with entrepreneurs, particularly at nascent phases of development when branding and communication with consumers and a strong operating and financial foundation are critical.

Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

While I love reading, in this unusual time I have embraced long walks throughout my beloved New York City, which allows me to rediscover the nooks and crannies of the best city in the world (in my humble opinion) with a bit less bustle interfering. During my walks, I have enjoyed listening to two podcasts. The first is Pivot by Kara Swisher and Scott Galloway. The business and technology topics they cover with deep knowledge and authority keep me up to speed in areas I do not study on a daily basis. And their banter is wonderfully entertaining! The second podcast is SmartLess hosted by Jason Bateman, Sean Hayes and Will Arnett. I listen purely for entertainment value and to give my mind a break, but you will often catch me laughing out loud at their antics interviewing other celebrities and high-profile guests.

Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?

This quote by Warren Buffett has always resonated with me: “It takes 20 years to build a reputation, and five minutes to ruin it.” The importance of SWAT Equity’s reputation is critical to everything we do. Our reputation is at the center of interactions with founders — from initial meeting through closing of an investment and working together thereafter. The best compliment we can receive regarding our reputation is the referral of a new founder from a founder in our network because they respect each of us and enjoy working with SWAT Equity.

How do you define “Leadership”? Can you explain what you mean or give an example?

Successfully inspiring and motivating others to adopt a vision and then play a role in bringing that vision to fruition is my definition of great leadership. I also believe great leaders are exceptional communicators. Oftentimes in the VC world, I refer to leadership as “maverick-ness,” because founders at this early stage are pioneers who buck current trends and offer solutions to pain points others are also experiencing. This is a quality we seek at SWAT Equity in the founders and C-suite of the companies in which we invest. The start-up road is windy and bumpy — successfully navigating the path requires a leader who continually course corrects in order to remain focused on that overall vision.

How have you used your success to bring goodness to the world?

I really enjoy mentoring younger women and participate in two organizations created to support women building their careers or businesses. Luminary, founded by Cate Luzio, is a collaborative hub for women to develop, network and connect. As an original member, I am inspired by the growing community Luminary has built in two short years, and I enjoy providing knowledge and resources to its growing membership. I have also mentored young women in the beginning of their careers through Declare, a leadership accelerator that helps companies develop underrepresented talent.

Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?

The venture capital community must change the profile of the General Partner, or the investment team, to include more women and other minorities so that those “funders” identify with, and therefore attract more diverse founders. Investors need to rethink how they recruit, how they train, and how they retain this extraordinary pool of talent that is so often overlooked. I cannot tell you how many female founders have told me that I am one of very few women they have met to discuss a solution to a pain point that many other women experience. The venture capital investor community is still dominated by white males.

On a broader level, we also need to continue encouraging the limited partner community that supports venture capital firms to keep pushing their diversity goals to include more colleagues with diverse backgrounds in their own investment decision-making process, as well as continue supporting diverse emerging managers who generally have fewer limited partner relationships.

There are some great organizations working hard to make an impact on furthering VC opportunities, including AllRaise and Women-in-VC. I am proud that SWAT Equity Partners is doing its part with diversity represented in 40 percent of the investment team and 80 percent of the portfolio’s founders or senior leadership.

Can you share a story with us about your most successful Angel or VC investment? What was its lesson?

Our most successful investments have a couple things in common. First, we put substantial effort into the due diligence process that encompasses the various branding, operating and finance areas of expertise on our team. We work hard to identify how a company’s product or service offering is truly differentiated from others. And we pay close attention to the company’s financials because early discipline around sales, margins and areas of investment will enable a company to reach profitability sooner and reduce its dependency on future capital raises. Secondly, strong leadership is critical. We enjoy discussing the achievements and challenges founders are managing in a fast growth environment and how SWAT Equity may help throughout the process. Staying disciplined around our due diligence and team assessment activities is the lesson we repeat to ourselves every day.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

Conversely, there are a couple of reasons we often see negatively impact a company’s growth trajectory and its ability to raise more capital. One reason is chasing sales opportunities without thoroughly understanding the profitability of the channel or account. For example, being asked by a large mass retailer to launch in most of their doors carries significant margin and inventory risk that could adversely impact the whole company. Another reason is acting too slowly to invest in roles on the team required to support high growth. While there is a careful balance to managing a company’s organizational chart growth, at the early stages in which we invest we believe the founder must invest in people to unlock opportunity.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

I met the founders of an incredible shoe brand with a disruptive manufacturing angle and a clear sustainable edge in their supply chain which had just launched. While the nascent business model definitely resonated with me, I turned down investing at the time because the company was too early in its development, and we were in the process of raising our first SWAT Equity fund. Needless to say, the business went on to great success. I do not regret turning them down as they did not fit our scope given our minimum revenue threshold. But I would like in the future to have some flexibility to make smaller investments (commensurate with the smaller round size) to invest in these opportunities.

Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

SWAT Equity invests in high-growth consumer brands that are disrupting their categories. We employ a blended approach to our sourcing and due diligence processes by leaning on the vast and diverse experience our partners bring to evaluating opportunities. Our team uses the following criteria to filter our pipeline of companies across several broad categories within our investment scope:

  1. Authentic brand with broad appeal and competitive differentiation

We spend a great deal of time on this topic which involves getting behind what we perceive makes the brand authentic. That process is a combination of art and science, and we lean heavily our branding agency affiliate to assist in the assessment. Validating the whitespace and studying how the company is positioning itself is critical.

2. Passionate founder and dedicated team of go-getters

As I mentioned previously, we seek “maverick-ness” here. We want to invest in founders who will pioneer new solutions and innovations to solve pain points. That passion must also come through in their ability to lead their team to execute on the vision coming to fruition.

3. Strong customer engagement and sentiment

Building a dedicated tribe of followers is critical in successfully scaling a consumer brand. We measure this success in a few different ways so that it is less about “likes” on social media and much more about reviews, marketing activations, referrals, and other items. Ultimately, the relationship between a brand and its customer is a two-way street, and we want to evaluate the traffic in both directions.

4. Clear and proven market fit

There are few barriers to entry when launching a new consumer product or service, thus a market can quickly feel crowded with “me-too” competitors. Thus, we spend time really digging into a company’s traction to understand its raison d’etre, or the reason for its product or service offering to exist. How is it different and do we believe those differences are strong enough to support substantial further growth.

5. Proven financial performance and momentum

We really care about the numbers! Given our partners’ extensive experience investing in early to mature business, we take a bottom-up approach to evaluating past financial performance as well as projections. This means, for example, studying growth by channel, cohort, location, or account; unit level economics by product or service type; marketing budgets by channel of communication; organizational plans for building the team; and always examining working capital investments required to support growth. Lastly, we strongly encourage founders to pursue profitable growth — meaning identify the minimum revenue level the business must reach to be breakeven so that the company is not dependent on raising outside capital to support itself.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

Access to more affordable higher education. I believe the U.S. is at an inflection point where the incumbent product offering of a four-year degree on a physical campus is under serious scrutiny. The cost has become exorbitant and the value proposition is no longer clear. A recent McKinsey article references a study stating that only 60 percent of students who start college actually earn a degree within six years. The numbers are worse when broken down by race. The COVID-19 pandemic has demonstrated that remote learning is viable. As a country, we must offer an affordable and accessible solution to prospective students seeking to build better lives for themselves and others. Imagine how many new founders are out there with incredible solutions to offer and job opportunities to scale a company!

We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. :-)

Jacinda Ardern, Prime Minister of New Zealand. I am so impressed with the way she has governed and navigated her country through three major crises (COVID-19, Christchurch terror attack, and White Island volcano eruption) during her tenure. She was the one of the youngest females in the world elected to such a leadership position and just won her second term. Moreover, her Labour Party won the majority of parliamentary seats, which makes it the first party to govern alone under their current system since it was introduced. She is authentic, approachable, and non-divisive, and she embodies my definition of “maverick-ness”!

This was really meaningful! Thank you so much for your time.

 

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