Jeff Kearl Transcript

Clint Betts

So you've done a lot of incredible things like Skullcandy, Stance. I want to talk about all those things and now you are obviously a prolific investor, but you started your career as far as I understand it—and you can correct me if I'm wrong here—at vSpring, which was like the only venture capital firm in the state of Utah. And it kind of blew up. I don't know if that is the correct description—again, correct me if I'm wrong there. It had some of the greatest investors and minds in Utah involved and they've all, it seems, to have gone on to do great things, but for whatever reason they couldn't do it together which was really fascinating. But vSpring … somebody needs to write a book on vSpring and what happened there, how it came together, how it, for lack of a better term, fell apart. What did you learn during your time at vSpring?

Jeff Kearl

Yeah, look, I want to be careful to respect some confidences because I think some of the things that happened are private. I don't think the individuals want everyone to know. But look, I think Paul Alstrom, Greg Warnock were the initial energy for it. And I think they viewed an opportunity relative to Utah Ventures and Epic used to be called Wasatch. And I think those two funds that served the Utah market and I think had been pretty good funding partners to local entrepreneurs. Maybe they weren't perfect, but I think they tried their best to fund the Utah opportunity. And I think those firms were started with the idea that, hey, Utah can be the next Silicon Valley. We have Evans, and Sutherland was perfect, Novell. This is going to turn into something where there's some anchor tenants and they'll likely breed other startups.

And I think a lot of that thinking was accurate, but for whatever reason, I think Greg and Paul sensed that there was more opportunity than those two competing firms were taking advantage of. So they got together with Dinesh Patel who was the father of biotech. He had a company called TheraTech that he sold to Watson Labs for $300 million. And that doesn't sound like a lot today, but back then, that was an enormous outcome for Utah. And he'd been up on the university research campus and knew that whole ecosystem. And then Scott Petty had come from Jamba Juice and had been a consultant at Bain and had the HBS pedigree, checked those boxes. And then last but not least, you had Ed Ekstrom, who'd worked at a couple of Utah startups and ended up as kind of a senior executive at Intel and was responsible for getting Intel to open their first Utah office and put some energy into the state via Intel's big footprint, which they had at the time and still do.

So I think it was an interesting group of five people. I think they needed each other to get the first fund raised. It was a $125 million fund. And without all of their collective networks, I'm not sure they could've cobbled the money together. And so I think there was a need, but once they all got in a room, they had all been successful to various levels and they all had strong opinions about how they had become successful and they weren't all the same. So I think it was hard meshing the values. I won't use names, but there was one partner who really valued a thorough investment process, wanted to call references, build returns, models, write thoughtful investment memos about the risks of a business and more importantly, the upside. And he felt like, "Hey, don't ask for my vote if you don't do really thorough work, because I feel a genuine fiduciary duty to our LPs, and if you don't do the work, you can't get my vote."

And some of the other partners, I think, wanted to go quicker and shoot from the hip. "I have known this entrepreneur, I know this space, therefore we should do it." That created a lot of friction when businesses were evaluated and assessed and deliberated around how much work had really happened. And I think to your point, one thing that I'm proud of is at least the staff, the investment staff—there's a guy named JD Gardner. He joined first, I joined about two months after him. And then along the way we had Jeron Paul and Clarke Miyazaki, which were fantastic additions. We had Eldar and he's a really intelligent guy and then Gavin Christensen from Kickstart and that was our investment team supporting the partners. And so if you follow the careers of all those folks—

Clint Betts

They've all gone on to do amazing things. Every one of those from the investment.

Jeff Kearl

I'm pretty sure you could make a case that the net worth today of the five or six or seven associates that worked in that shop far exceeds the net worth of the five partners that were operating at the time. So I don't know, maybe that's an indictment on the succession plan. I'm not sure, but systematically every single one of those talented people left and went on to start funds and companies that were successful and made interesting investments that worked out and I think is a really good group of people. And we enjoyed each other. I loved working with JD Gardner, I thought he was the smartest guy. Gavin was really smart even back then. And they just, part of being a good investor is your natural disposition, the bedside manner you have with an entrepreneur, how curious and supportive you are versus how critical and prosecutorial you could be.

And I think all of those folks had such great bedside manner with entrepreneurs, that it was inevitable that they would become trusted by CEOs and founders and become good investors. So long story short, look, I think without exposing all the gory details, let's just say one partner couldn't really afford his lifestyle. And I actually know what they were all worth because I had to file the SBA application that listed all their assets, and I’m going to keep all that private. I don't think that does anyone any good, but eventually I think that led to some of the partners getting pushed out, obviously a management fee divided by three is more than a management fee divided by five. So there were some internal dynamics that when people disagreed, it led to, "Hey, let's vote people off the island," which was really harmful.

I would say the greatest risk of any venture fund is that the partners one day don't get along and you as an investor have committed to a ten-year fund. And so just like a marriage can fall on rocky times, so can a partnership. And if you're that investor with a long-term large commitment, that's probably the most troubling thing that can happen. And that's really what happened there. I think the partners fell out of love with each other, became rocky and strained. Then it's hard to make good investments, have clear thinking, you're managing politics instead of the risks of the companies you're investing in. Once partners started to leave, two of the partners were pushed out forcefully, I think you could argue, unfairly. And then eventually one of these partners who was left was not living within his means and that all became exposed.

A bunch of the loans that he had around town became widely known public knowledge, including by some of the LPs that ultimately led to a key man provision being called some funds. If you go down to three people, if you started with five and you go to three, that could trigger the key man in this case, I think it was two people who triggered the key man provision. One of the LPs took control and they insisted that they either hire a new partner or merge with another firm—at the time Ron Heinz and Brandon were managing the Ray Noorda assets down at Canopy.

And there were some common LPs and ultimately that group got merged together. And I think they really looked at Ron Heinz as like "Ron, come in and fix this thing," this broken partnership. And so I think for a while, Dinesh and Scott continued with Ron and Brandon, eventually I think Dinesh kind of retired. He'd been doing it for a very long time. And I think Scott is the only remaining member of that original vSpring team still there in the same office, in the same building doing it after all these years. And I joined in the year 2000. So that was 21 years ago. So he's been doing it for an awful long time now.

Clint Betts

Scott's great too. I love Scott. It's amazing that he's the one who lasted out in that. Although everyone's gone, everyone in this story has gone on to do incredible things, which I find so fascinating from the investment team, from the original five founders, all of them have done incredible things since vSpring. What did you learn personally in that experience that helped you as you left and went on to do other things?

Jeff Kearl

Yeah. I think one learning that I just take away as an entrepreneur is when you're raising money, you face a tremendous amount of rejection, more funds typically say no than yes. And I think I could see good investment opportunities getting passed up on because the internal dynamics were so broken. And I also saw what I considered really poor investment opportunities that the certain partners would chase after for whatever reason, “Oh my Bishop's the CEO,” or wherever the opportunity came from. And they would feel highly passionate about chasing these below average companies because of a personal relationship. And I think that really exposed, like I like to tell entrepreneurs, don't take it personally because you never know when a partnership is dysfunctional. You never know when a partner is going through a divorce. You never know when one partner has already done so many deals out of a fund that there are partners looking at them like, "Dude, your pace is crazy, you have to slow this down. You're going to spend all the capital."

Or if a partner really pounds their fist on the table to get a deal over the finish line that really doesn't stack up very well. Doesn't have a lot of support inside the firm that uses a lot of political capital. So then the next deal comes along. And even if it is great, sometimes it's hard for them to get it done. And as an entrepreneur, you just don't see any of that internal stuff happening in the fund. You just get a rejection. And so you take it personally and you think, “My business isn't good. Maybe my presentation wasn't good." You start to reflect back internally when the reality is, the no could simply be for all these other reasons that you can't see. And so, as I went to fundraise for my companies, I really went in with the view of I'm going to try and size up if this partnership feels healthy. If the dynamic between the partners feels healthy in the same way when an entrepreneur comes to present to our whole firm, she's usually the last check box before we cut a check.

I think the entrepreneur is typically focused on the presentation, "Are my slides, right?" I don't care about any of that. Everyone in the room already knows a lot about the business. They've theoretically seen the deck, read the investment memo, and thought critically about the opportunity. I'm looking to see how much talking does the CEO do relative to the rest of the team members? When one person on the team starts talking to the other team members, kind of lean in, or do they fold their arms and move back, right? I'm trying to understand the team dynamic of the opportunity, more so than get information. And I think those little subtle clues around just the way people interact with each other reveal a lot about both the venture capital partnership, as well as an entrepreneurial team. And obviously a high trust group that likes each other is going to be so much more effective than the opposite.

And what I will say about these vSprings sadly, is for whatever reason, the culture became toxic. The partners didn't have each other's backs. And you could just see the damage that that caused, it unwound what I think was a good opportunity, I believe had that team stayed together with the opportunity that Utah has presented over the last 20 years, it could have been one of the best returning venture funds of all time. The raw material was the like-

Clint Betts

It could be like Sequoia, right? It could have been something incredible like that. Like, like what Sequoia built or Kleiner Perkins were named the venture fund in Silicon Valley that's done really well. I mean, the opportunity was crazy and the timing seemed to be perfect. And if you just look at what's happened from then to now in the state of Utah, my goodness, had they just kept that thing together, who knows what would have happened? That's why it's a fascinating story.

Jeff Kearl

I left the firm in 2004, June of 2004. And so many of the businesses that we looked at investing in or did invest in are still around today. As I drive around Utah, there was a day when vSpring could have put $4 million into Omniture at an $8 million free money. And I'll never forget the partner that pounded his fist on the table and said, "That entrepreneur is too pigheaded." It's like that pigheadedness is what drove one of the greatest outcomes. I think if you pull site catalyst out of Adobe, that's probably, I would need to do some math, but I'm guessing it's not less than a $10 billion business could easily be a $20, $30, $40 billion stand-alone business. Had it stayed independent all these years.

It's a substantial anchor tenant to Utah, and those were the kinds of opportunities we saw one after another, at incredibly low prices by today's standards. If you had taken all those investment opportunities, that fund would have been off-the-charts successful. But I think the sad part was the original vision was: let's fund the best entrepreneurs in Utah, let's be differentiated, let's add value in a different kind of way than the incumbent funds were doing. And what ended up happening is 10 years later, some of those great companies we didn't get to invest in, or we chose not to invest in.

And then it cuts the opposite way because you're like, wait, how did you miss Omniture? How did you miss Qualtrics? You were around, those businesses existed, and they were in your state and investment charter. We're going to do the best high growth tech companies in Utah, and you missed them. So then your LPs are like, "Well, what are we paying you for if you're not getting the best opportunities in your geography?" We might as well just give my money to Axle and Sequoia because ultimately they'll find the best Utah companies when they get big enough, as they did with Qualtrics and others. So all of a sudden, from an LP perspective, you talk yourself out of being a regional fund investor pretty quick, if the regional fund isn't the seed investor in a lot of the best opportunities.

Clint Betts

Yeah. Imagine passing up on like maybe the greatest entrepreneur to come out of Utah the past 20 years, and Josh given what he did with Omniture, what he's done with Domo. I mean, there's not too many people who have taken two companies public and had them valued at what they're valued. There's not very many people who can do what he's done and that's crazy.

Jeff Kearl

It's amazing that pigheadedness what that can do for you, you know?

Clint Betts

That's actually quite great.

Jeff Kearl

Incredible value creation, incredible. But I mean, it's funny, we recently took over, we made an announcement that we were taking over the crypto assets from Many of those investments happened under Patrick Byrne. And I think their shareholder base was somewhat split between people very happy about those assets on their balance sheet. And other shareholders probably concerned about them on their balance sheet. They just said, "Let's put them in a fund. We'll shift them over to Pelion, have those guys manage these assets out, figure out which ones deserve follow on financings, which ones don't, et cetera." And I pulled out the investment memo that I wrote in 2001, six months before they went public and the original Patrick Byrne analysis and why Overstock could be an interesting business. They were just entering a partnership with Safeway, which never produced.

And these are the kinds of opportunities we looked at in 2001, we were going to put $5 million in that business and owns 13% of it. It's like, you look at what that, there's so many of these Utah companies that we've, I mean, Overstock’s the kind of business that I think most people in Utah have almost forgotten about. It's a big, big successful company right here in Utah. And those were all the opportunities available if you were an angel or a venture capital investor in the early 2000s. So many of these businesses that went on to be really interesting started in that timeframe.

Clint Betts

So where did you go after you left vSpring, what did you do next?

Jeff Kearl

Yeah, I had a good friend of mine from college. His name is Morgan Lynch and he had this idea to do a marketplace. It has a really interesting history. So for purposes of Silicon Slopes, I'll tell the whole story, which most people don't know. There was a little company called Gravity Media and they were sort of a regular agency doing websites and creative assets for startups here in Utah. But what was interesting about them as they were one of the first work-from-home companies, many of their designers worked from home and they had built their own little software tool to collaborate on projects where they could do revisions and pass creative back and forth. And at the time my partner Morgan, he was the director of marketing for another high profile, late '90s company in Utah County. In fact, I think it was one of the biggest, it was called InsurQuote and they had raised over a hundred million dollars.

Murray Meeker was like, "This is the next thing." It was like property and casualty insurance online. And it ultimately merged with another life insurance company, I think out of Colorado when sort of the dotcom bubble burst in the early 2000s. But when Murray Meeker executed this merger of the two businesses, it was a very high-profile thing for Utah. His job was to create the new corporate identity. So he goes to a local firm. In fact, he went to several of the local firms, I think Studio and Gravity Media said, "We need a new logo and corporate identity for this combined software company." And he writes a check for $30,000 to execute this. And he walks into these fancy conference rooms and gets these presentations.

And they're just not very good. They're on blackboards of course they're fancy. And he'll be like, "What about this? What about that? Could we combine this one with that one?" They would send it to some graphic designer in the backroom. And finally Morgan is such like a make stuff happen, execution oriented guy. He's like, "Let me just go back and sit with your designer." So we somehow like makes our way back. It's the designer's desk and pointing things on the screen, "Show me that, what about this color?" Anyways, eventually arrives at a graphic and just realizes that the amount of money the back and forth was so inefficient and most entrepreneurs, one common denominator is they despise inefficiency. When a process is slow, bureaucratic or broken, it's just fuel that I've got to fix that. So of course he looks at their system of how they're passing graphics around. And he's like, "I wonder if we could do that."

And that leads to this conversation of, could we build a marketplace? At the time eBay was this new up and coming business. And it was really taking America by storm, both small businesses. And it was sort of like what Shopify is today was like eBay back then. It was a platform people were developing on it. So we thought, could we do a marketplace for graphic designers where a company that needs design could come in and fill out a short creative brief. And then we could farm this out to remote graphic designers and use a software platform to pass back and forth the file types and the revisions. And so we started recruiting designers from Craigslist and we started buying keywords on Google Ad-words, which was a relatively new platform. And you could buy most keywords for like 10 cents. It was a different day in time. You could buy words like “logo design” for under a dollar.

So we quickly had an extraordinary, we were charging $400 to get a logo. Most businesses were coming in and saying, "Wow, that would have cost me $2,000 at the local design firm." And we were pulling levers in the background where we were building the code to eventually automate the whole system. And the business of course, it took off, we had a good customer acquisition engine and Morgan would come in every month or so. And we would write the business plan and think through the milestones. And finally he's like, "Hey, are you ever going to quit? Or we need to do this full-time? I feel like I'm trying to make this business go and be awesome you'd join." And and so I was arrogant enough that I went to the partnership at vSpring, and I was like, I can't work this hard if you're not going to give me more of the Kerry economics.

And I think the partners there already had five partners that all wanted to make more money. And I feel like that would just the wrong ask to the wrong group at the wrong time. I think they were very courteous at the time, but they probably laughed me out of the room. Like, "Can you believe this arrogant kid’s asking for 10% of our partnership?" And so once they said, no, I knew like if I was going to keep working this hard, I got to go do it for myself. So I joined Morgan full-time and I think the next month we did like $10,000 of revenue and we were so thrilled, like it's working. So we just started scaling the platform and figuring out how to get more customers from more channels and making the platform more automated. The business was called Logoworks.

And we get about a year into it. We have really great growth and we're like, "We should try and raise some money." And I think I was a little bit jaded with the dysfunction that I knew existed inside of the vSpring, even though I really adored some of the individual partners. And I'm not really sure why I think I thought if I went to the Bay Area to get Bay Area money would be this validation on our opportunity. That would be different in a way than Utah money. I would think about that differently today, but back then-

Clint Betts

Oh, back then for sure. Yeah.

Jeff Kearl

So we set up these fundraising appointments. We didn't really know many people, but luckily Mike Levinthal, he had just moved to Utah and he'd reached out and said, "Hey, I'm a venture investor. I want to do some angel investments." He'd introduced us to his wife, who has a background in consumer companies. She worked at Apple, and other consumer companies back in the day. And Kathy Schlein introduced us to all of the Silicon Valley VCs. It was a really generous group of introductions she made, she even flew with us to Sandhill Road and she walks us into John Doerr. Obviously her brother, Ted Schlein worked at Kleiner Forever. She walks us into Bob Cagle at Benchmark it Jim Schwartz at Axle, like one by one we're meeting with the top guys at the top funds. And I think our first or second meeting was Benchmark and we get about five slides into a 15 slide deck. And on the left-hand side of every one of our master slides, we would show four logos that had been produced in the marketplace. And there were always different.

So it wasn't like a master slide. It was just like a different background for every slide. So we have, let's call it five slides in and Bob seen 20 logos and one of the logos was for a dry cleaners and he just stops. And he's like, "I'm thinking about how many dry cleaners are out there, let alone how many small businesses, I can't believe how many logos you guys have already produced. This is crazy." He's like, "I'm in, let's do this." And we started negotiating deal with Benchmark. They bought 20% of the equity for $4.5 or $5 million bucks. And we were off to the races, the growth just accelerated even more. But it was this great experience because we've got the early on, this was 2004 or five, got to get pitched by all the great venture funds on why we should take their money and build relationships early.

And a lot of those relationships have continued even today. A good example of that will be one of the introductions that Bob Cagle had made was Jeff Jordan, because Jeff was the president of eBay. Bob was on the board of eBay. And so he was kind of like, "Let's learn what we can from eBay and put that into the Logoworks marketplace." And then all those years later, I ended up on a board with Jeff and all those years later I ended up calling Jeff about the Neighbor opportunity, which he then invested in. And then it was very natural when you called me and said, "Hey, who could moderate this session?" I'm like, "Well, Jeff Jordan and Andreessen would be great." But that was a long-term relationship that really was a product of those initial introductions that Michael Leventhal and Kathy Schlein had made for us. These two 20-something startup guys that didn't know much.

We didn't have any of those relationships. We didn't know who to talk to. And without them, our business would have never developed. And then the conclusion of it, I'm skipping a lot, but we grew very rapidly. Business was headquartered in Lindon at the Canopy building. And I ended up getting an outbound call from HP and they're like, "We want to acquire you because we can see how much ink you're spilling." Every one of these design projects we'd expanded into all other designs at this point. And most people would print them on Indigo printers, which was an Israeli, digital printing company that HP had bought to compete with traditional offset presses. So we were early to this digital printing revolution and they had also bought Snapfish, a photo sharing site in the early 2000s for the same idea that people are going to print their photos. This is going to spill lots of ink and HP ink is so profitable. Anytime they can buy a business that spills ink, that's a good fit for them.

But we didn't really think much of the call because we weren't selling the company. And then randomly I'm at the Montgomery Investment Conference in Santa Monica. And this guy comes up and asks me for directions to the registration booth. And his badge is Chris Robell, VP Corp Dev HP. And he glances at my badge and he's like, "Wait, Jeff, didn't my team talk with you? How come we never did a deal?" And I was like, "You didn't bring your checkbook. It was just a call." And he's like, "Well, I have my checkbook now, do you have an hour?" And so we sit down in the hotel lobby an hour later, we sold the business all cash to HP three years after I had left the vSpring. I left vSpring, my last day was June of 2004. We probably raised money in '05. We sold the business in April of '07.

Clint Betts

That's amazing.

Jeff Kearl

So the whole thing beginning to end was less than three years. And look, I think like most entrepreneurs we always think about, what if we had not sold? What would the outcome have been? Inevitably it would have been different. HP moved the business, San Francisco merged it into their internet group and everything about it changed upside down, some things for the better, a lot of things for worse. But look, having an early outcome makes a big difference personally, because you stopped playing defense. You're not worrying about your minivan car payment anymore. You are just thinking creatively about the next thing you get to build. And so I think just having that financial pressure taken away so that we could then focus on, hey, what was next was a really great blessing to happen at a pretty young age.

Clint Betts

Oh, it's unbelievable. What was next? What happened next?

Jeff Kearl

Yeah. Well at a parallel process we had an entrepreneur, this will maybe get into the next part of the story. We had an entrepreneur when I was at vSpring, he came in and he was wearing shorts and flip flops. He didn't look like all the other entrepreneurs that used to wear Banana Republic outfits in to pitch us, comes into the conference room, super irreverent and was like, "Look, I want to build headphones for snowboarders." And I think quite quickly, I was like, "Look, our firm, we do internet software, life sciences. We'll never invest in that. But as a snowboarder, I get what you're saying. I think it's a cool vision and you should do it." And I can totally see shops like Salty Peaks or Milo selling this like local Salt Lake City core shops. And so that led to him talking me out of my credit card to pay for a trade show excursion to the consumer electronics show.

He goes down with the samples, calls me after the show. This is Rick Alden, by the way, from Skullcandy the founder. And he says, "Hey, good news and bad news, the good news is we sold $900,000 worth of headphones. The bad news is we don't have any money to pay for the production." So I started getting on the phone and we build out some fundraising materials. And luckily I go to Greg Warnock, one of the partners of vSpring and I'm like, "Look, I know that this is not in our investment charter, but I think this entrepreneur deserves some money. I'm going to invest. I'm going to write an angel check. And I don't have a lot of money. And I think it would be interesting for you.” He's also a snowboarder, and so he wrote $250,000 check.

Around this time we got connected with Jeremy Andrus who had gone to BYU at the same time I did. And so I started interviewing Jeremy, Jeremy agrees to not only join that a discounted rate. We didn't have enough money to even pay him what he deserved or what he had been making in his career. He not only took the job, I think he was initially his title was president and COO if I remember right, but he invested alongside of him joining the company. And I can tell you, this was not very far along. This was a risk taking move on the part of everyone who got involved. It was hard to see that this could be something, it was a non-obvious play. And I think Rick was a gifted visionary and product person, great product sensibility. Jeremy of course, is just an execution freak, he knows how to get things done, very even keeled personality and just always makes the right decision.

And so you put those two together and you have this really powerful combo. I became the chairman and the three of us operated that business for quite some time. I don't know, another decade. And the growth numbers were like 1, 9, 35, 75, 125, 175, 225, 300. That's not exactly what the numbers were, but more or less. And in 2011 we were able to take that business public on the NASDAQ which for a consumer products company in Utah, I think was a pretty extraordinary moment. There hadn't been very many consumer companies that had grown that quickly or become that substantial. And then two years later, the business received an unsolicited offer from a private equity firm, which was substantially more than the company was trading for. So we did a mini process and ended up selling the business, taking it private which I wish it would have stayed public.

And I was told last year by one of the employees, they had their best year ever in the company history. So I think the business has a real well, it's kind of quiet. I don't hear a lot about it. I know the CEO there used to be our CFO. He's an unbelievable leader, terrific person. So I think they have great leadership and it's kind of cool to see this brand continuing to execute as well as it is after all these years. But it was a really great experience and that probably took the next seven years of my life, even though it was part-time that was a substantial part of it and a really fun ride instead of going to boring Gartner Conferences to talk about magic quadrants and whatnot. It was like sponsoring the surf industry and the snowboard industry and the trade shows felt more like parties than business events. And this is an extraordinarily great time to reflect upon great business, great people and just a terrific success story.

Clint Betts

And then you had competitors, people don't realize Skullcandy came up before Beats by Dre.

Jeff Kearl

Yeah, that's a great story there.

Clint Betts

Oh yeah. Tell me about that. What is the intersection between Skullcandy and Beats by Dre?

Jeff Kearl

I'll tell you how it all started. We were over at a factory of ours in China that was going to produce the initial Beats by Dre product, which at the time was a joint venture with a company called Monster Cable. And it was sort of Jimmy Lovine had partnered with this electronics company to build the headphones. And they gave us, they gave me a pair of the headphones and I brought it back on the plane from China and I brought it to our product team. And our product team was very dismissive. It's a great lesson. They were like “$300? No one's going to pay $300.” They looked at the NPD data, which is this, firm that you can buy all of the retail data from if you're a consumer company. And it basically showed that only about 5,000 units a month were sold over $300.

So the team just believed that at that price point no one would show up to buy the product, even though the product looked differentiated and it was pretty cool. And I think it's a great example of underestimating your competitor, just because they're small. You think just because they're so small, they can't have a differentiated idea, but in reality they often do. And in this case they did. So the company starts growing quite quickly because it very much became a status symbol, almost like wearing a Rolex watch. People wanted to have this cranial billboard of, "I've made it. I can afford $300 headphones, look how powerful I am." And we saw that. We saw it show up in the numbers quarter over quarter. We could see them selling more and more in the MPD data. We could see their distribution expanding. So that led to lots of conversations with Jimmy Lovine and culminating in a conversation where while we were much bigger, we still both viewed our competitors as Sony and Bose and Sennheiser the incumbents, not each other.

We orchestrated a deal to put the two companies together. We were going to merge them on like a 50/50 basis. And this is always really difficult merging two private companies, because how do you assign value to growth versus revenue, versus, profit margins, versus whatever other intangibles exist in these businesses? It's so hard to get them to come together. So we gut check the idea to Skullcandy board meeting. We try and socialize the idea with the board. We know the idea that we're going to take 50% when we were already much bigger. So the smaller company is going to own half the equity. We knew that was not going to go over very well because we thought the board would say, "Well, we're bigger. We should get a majority of the deal." My argument was this company is growing faster and they're growing faster in the high-end dollar segment, which with the consumer brand, it's very hard to go up in product positioning, quite easy to come down. A good way to think about this would be like Canon dominates the digital SLR camera business.

You look on the sidelines of a Utah Jazz game, most of the camera people are using big fancy Canon lenses and bodies. And so when they went into the point and shoot business, years ago, they had a natural license to come down because they were the experts at the high-end. Very hard if you were kind of a low grade consumer products company to then come up. And so it shows the power of premium brand positioning, which Beats by Dre had, easy for them to come down because they already own the top much higher, like a premium Skullcandy product back then was like $99. And so the fact that they were selling it $300, it was a noticeable price difference. And long story short, we bring this to our board. We had some private equity folks.

Again, I won't name names. I don't think that's helpful, but they threw up all over it and basically killed the deal. And we had another board observer. He wasn't a board member, his name's Brian O'Malley and he went on at the time—he was at Battery Ventures and they were an investor in the company—and he went on to work at Axle. And now he's a partner at Forerunner with Kirsten Green, great consumer investor. Really fantastic. And he called me after the meeting. And he's like, "That was the greatest board meeting destruction opportunity I have ever witnessed in my career. Watching these private equity guys use their veto right on this merger and block it." He just couldn't believe it because for him, it was just such an obvious decision to merge the companies. And so we just couldn't get it through our board, that led to a falling out between Rick and this firm because he couldn't get their support.

So we cut a deal with them that we would take the company public. We were big enough to do that. We didn't really want to do it, but we would take the company public. They would agree to get off the board on the IPO date, which they did. And so that was the only reason Skullcandy became public, was to solve these broken board dynamics that had happened with our investor and converting them to come in and getting rid of all of their rights, seemed like the easiest way to create a peace accord. So we did that. But it's a sad story because you think about what could have been of course, Beats ultimately sells for $3 billion not long after that, so the overall value creation destruction, just based on the decisions of the board great case study.

Clint Betts

Yeah. It's fascinating. And then Jeremy goes on Jeremy Andrus, was the CEO when that went public, right?

Jeff Kearl

Yeah. So about 60 days before our IPO, some things came up with Rick and he stepped aside and Jeremy took over as the CEO, it was either recruit a new CEO or shelved the plans to go public or take someone internally to do it. And no one knew the business better than Jeremy. In fact, he probably architected nearly every business process in that company. He worked long hours and was an incredible value creator for that business. So he becomes the CEO about 60 days before the IPO. He does the roadshow. Back then, you flew into different cities. I think I flew up to San Francisco and met the team for their pitch there. I wanted to see it in person. And Jeremy did a great job and stayed on for the next couple of years as a public company.

Clint Betts

Yeah. And then he goes on to build a Traeger Grills, which is this incredible, he figured out he must've learned some lessons in Skullcandy and we've talked to him about on this show and others before where going high end, starting there, building a brand that matters, building a brand that people care about and turning it into Traeger. And you did the exact same thing with Stance. At what point did you start thinking about Stance and that as a category socks, this is a category?

Jeff Kearl

Yeah. I think we would always ask ourselves at Skullcandy, why customers were buying our product? What is motivating this consumer to pick us off the peg hook, take money out of their wallet, and buy us? And part of the thinking here, I'm sure it's not perfectly developed, but at the time of the initial investment in Skullcandy, Rick had gone down to the CES show, comes up with all these orders and he's like, "I need money for production." So I'm like, "Send me the POS." So he sends me the POS and I start calling them. And one of the POS I called was this business called Sam Goody Musicland. And they were this retailer, they had over 1,000 stores. They were in every mall in America. They primarily sold compact discs and cassette tapes, which explains why they no longer exist.

But they had this section in the store where they sold consumer electronics, headphones, Sony Walkman, this kind of thing. And they had placed an order for like $100,000 of Skullcandy. And I couldn't believe it. Why would they buy it from the sub start company? So I called the buyer. He mentioned he had been the headphone buyer there for like 15 or 20 years. And he proceeded to tell me that the reason he was bringing it in is that Sony, Bose and Sennheiser and Panasonic were all black and silver. They were in the same cardboard box. Their positioning was all the same. The positioning was, "We sound better than the next guy." And then he said, "I looked at the Skullcandy product and it's in top colors, clear packaging. It doesn't say anything about sound quality. It's all about this contrarian irreverent lifestyle. And it just felt so differentiated from all the other products I was looking at. So I wanted to give it a chance. So I kicked out Panasonic to make room for Skullcandy," was the gist of the conversation.

And that became such an impactful conversation for my entire consumer life. Because every time I would walk into a Walmart or a Target, and I would just stand in front of the sunblock aisle or name the aisle, school supplies, it's luggage, jewelry. It doesn't really matter. I would stand there and I would try and size everyone up, colors, positioning, pricing. How are all these guys trying to attract consumers and what differentiates one from another?

And inevitably, nearly every mature category starts to look homogenized, in other words you walk up to sunblock, they're all fluorescent bottles. They're all trying to grab your eye. And then you look a little closer and Neutrogena’s got the doctor approved message and Banana Boat’s kind of got this fun vibe going. And Hawaiian Tropic still has the girl in the bikini, and you start to see all the different positioning elements. And then you ask yourself the question: “If I were to launch a sunblock product against all of these, how would I differentiate? How would it be different? How do I make the packaging different? How do I make the value proposition different? Can I completely change the matrix so that I don't even fit in the two by two matrix that McKinsey has drawn for this group?”

And if you have that genuine differentiation, you probably have a chance at success. So that led to this let's look at other categories that are homogenized. Could we build a differentiated product? And more importantly, I think the question is, yes you probably can do that if you're creative enough. If we did do that and we won, would it be valuable? I don't know, maybe reinventing school supplies is a dumb category because kids are moving more and more digital. They don't have paper and pencils like they used to, it's a seasonal business, most of the sales probably happen in the month of August. And then they're crappy for the rest of the year, probably dead in June and July when school's out. And you look at the whole category, paper products, not sustainable, low gross margin structure.

I don't know how big the business is or how easily it could be globalized. And you're like, "Yeah, even if we did reinvent school supplies, and I'm not sure it's a valuable enough piece of territory that we want to own it anyway." So that adds that second dimension of even if you could do it, would it be valuable? Would barbecue grills be a valuable place if you could reinvent it and dominate it? Would socks be a valuable place if you could reinvent it and dominate it? How big are these markets? What are the profit pools? And that's the second part of the homework. But with that in mind, Rick and I would travel around and size up every product. We're like, "Oh, we should do golf." What I think Travis Matthew became, we conceived of that whole business in the mid 2000s.

Could we do something that was more irreverent and fashionable and young? Our version would've probably been more aggressive than theirs, but at the time golf felt so sterile and old. Could you reinvent the whole thing? So we just looked at so many product categories and to short circuit the whole thing, we were over in China visiting some phone factories. We were at the JW Marriott in Shenzhen. We're eating the breakfast buffet there. And Rick is like, "It’s socks, it's socks." And he starts preaching sucks for the entire breakfast that was in May of 2009. We incorporated the company in December of '09, sold our first pair of socks in August of '10. So it was really that conversation. We looked at luggage and jewelry and perfume, lots of these high margin categories. And we're asking ourselves how easy or hard would it be to sell them online?

DTC was this new thing, we were already thinking about that. And socks just seemed fun and easy. And we also noted that every inch of the human body had already been branded in apparel, except socks. Most sock companies were so dumb. They put their logo high up on the sock because the embroidery machine wouldn't go any lower. So you couldn't get it on the ankle anyway, if you wanted. We thought that was dumb. And so we of course redesigned our embroidery tooling to accommodate a logo lower down on the sock. But that whole line of thinking led to this new product category. Let's go after socks. We would go to our favorite skateboard and snowboard shops, and they literally had brand headphones, branded glasses, branded sunscreen, branded head to toe apparel—shoes, skateboard shoes. They just didn't have branded socks. It was like the one thing that channel didn't have.

And so that was the channel we knew from Skullcandy. It was where Skullcandy was born. One of the market mechanics we always talk about is “demand is created at the specialty level, but it's fulfilled at the mass level.” In other words, you could just buy an end cap at target, but if no one knows who you are or what you sell or how you're different, it won't work anyway. People like to think, "Oh, they have so much traffic, it'll just turn into a big deal.” It rarely does. You have to build a grassroots groundswell of energy. And that is much easier at the specialty level because the local skateboard shop, they actually know every product in their store and they can talk to it credibly even the fashion door, like Fred Segal in Los Angeles. If they bring in a new brand, everyone on the floor knows about the brand, who the designer is, where it came from.

And when a customer asks, they can have this really interesting conversation and you tend to lose that when you're in a big box environment. So I think it just helps build a brand when you start at that specialty level, assuming you're going to have wholesale business and not just be DTC. But it does illustrate the problem, the challenge of DTC. You still have to tell that story and build that grassroots energy, even if it's only online. And I think some of the local businesses say, no, I don't want to use names, but some of our local consumer brands that started DTC, I think have learned the hard way that it's actually very hard to tell a brand story online, really hard to do.

Clint Betts

And you started at a premium price point. I remember thinking like, man, like $15 socks, or like when it was monthly, this is fascinating. Who's going to pay $15? Turns out everyone's going to buy $15 socks that are interesting looking and have some story behind them. And then the deal with the NBA. I mean, my goodness Stance being the official sock of the NBA and not even being a category. And then like Nike figuring out that that's a category and they have to start getting into that game itself. How did that come about? How did the NBA thing come about?

Jeff Kearl

Well, we had a little bit of an advantage because Skullcandy made licensed headphones for all the NBA teams. So we knew a little bit about that business. In other words, we knew how many LA Lakers headphones would sell relative to maybe a smaller market. We knew some of those things and Clark Miyazaki who worked with me at vSpring joined me at Logoworks, then joined me at Skullcandy. Then joined me at Stance. We've worked together almost our entire career. He's really strategic about thinking what kinds of business development channels would increase awareness for a brand and how much does it cost to access that? And we really thought the marketing value of an NBA agreement was almost more important than the sales because you have all these fans coming in to get exposed to you, your logos in NBA 2K, every home gamer is seeing it.

And so he had initially done this project where he looked at all the different athletes. We could sponsor looked at the value of the leagues, looked at the value of people like Will Smith or Rihanna. What would that give you if they were behind your brand? And you can use surrogates like their social media presence, or how many jerseys they sell or what markets they're in. And pretty quickly we realized the NBA could be a one of, if not the best partner we could hope to have. I think the NBA is also special because it's sports, but it's also culture. People like Allen Iverson, completely reinvented a culture inside of the game of basketball that spread. So I think not that the other leagues are not also very powerful for a brand, but they don't have the cultural element that the NBA has.

It kind of wraps up so many elements of popular culture in it. And I think that can benefit a brand if done the right way. So we ended up having lots of conversations with the NBA, all the details, some of which are probably still confidential, but they had an existing deal with Adidas, but Adidas had never done anything with the socks. So they had continued to use the NBA Jumpman logo sock, which was just a very plain cotton sock. So it wasn't hard to engineer a much better product that had better padding, better, or ventilation, fit better, all of that. So we did that. We brought at the NBA, but they were kind of like, "I don't know what Adidas response would be if we put an actual different brand on there." The only brand on the court at the time was Spalding with the ball.

They had never done or branded deals. There were no sponsor logos on jerseys. So it was a big deal to be like, “We're going to put a branded logo on every NBA player's ankle. Are we okay with that?” So luckily we had an early angel investor, a guy named Mike Levine from CAA he's the president of CAA Sports largest sports agency in the world. He was one of our early angels. He called the commissioner, gave us some air cover, helped get the whole deal lubricated. We ended up in an All-Star Game, I think it was in Houston. And I remember Clark brought a check for $1 million as the minimum royalty guarantee. And in the meeting, slid it across to the NBA licensing team and was like, "Here's a down payment on how many socks we're going to sell." And they were kinda like, I don't think they were thinking that the category could be that big.

And we of course were. And I think that was such an over the top signal to them that a combination of us working behind the scenes, working with the team, they ultimately said, "Yeah, we’ll do a two year deal, because there's two years left on this Adidas deal." At that point, we're going to put the whole Jersey up bid, Nike ultimately paid a billion dollars and took the whole thing head to toe. But for those two years, we were able to put Stance socks on every NBA player. And from a brand awareness perspective, if you think every game, every replayed game and just the closer we are to the athletes. Inside the All-Star Game, Clark is in the locker room at halftime or before the game. And he's done these custom boxes with the All-Star Game socks. And he's like handing them out to every player and explaining why they're better.

And you can imagine all the NBA players putting your product on. It was kind of a fantasy moment. What an incredible part of the story. We still do the NBA licensed product, but Nike now has the on-court sock deal, which was sad. We just couldn't compete with them on a price basis. But it was a fantastic breakthrough for the brand at the time. And I think it was also our first performance product. And I think there's always a question when you start getting into running or biking. Now the true athletes look at this as a piece of equipment, not as a fashion item. So the substance of the way the sock is built and what it's built out of really matters in those use cases. And we didn't have any credibility on the performance side, but all of a sudden, LeBron James is wearing the sock.

That's all the validation you need, which is another great story I'll tell you quickly. We get a call from the NBA two days before the season is going to start. And they're like, "Guys, we have a problem. Lebron has tried the socks and practice and he won't wear them. He's been wearing the same sock since he was in middle school. And they're manufactured by this little sock company up in Minneapolis.” It's an all-cotton sock. So we immediately somehow get a couple pairs of these things. We at a spool of cotton, we load up the knitting machines and we make NBA cavalier socks, just straight copying this other company that he's used to wearing.

There's so much trial and error to try and get this sock done that the machine keeps malfunctioning, and we keep ruining the socks. And I think we have enough material for like 20 pairs. And we're down to like two pairs when we finally pull off a sock, we're doing all this in the office at San Clemente. By the time we get the final sock copied and we're happy with it, it's one day before the game. So we put a woman from our office on an airplane. She flies—the first game is in Chicago—she flies to the locker room. They meet LeBron before the game, because we couldn't FedEx the socks in time. We had to just hand deliver them. And he's kind of like scrutinizing them. He's actually on the massage table, our head of products trained to explain to him why this is a superior product and he's kind of dismissive. And he wears these socks and the message comes back from the NBA that actually he was happy with them. And so I don't know if we made socks for his whole season, but LeBron wore a different sock than every other player.

Clint Betts


Jeff Kearl

Yeah. It's like if you're a normal NBA player and you're like, I don't like the sock, they probably don't listen to you. But if you're-

Clint Betts

The winger LeBron James.

Jeff Kearl

... or Chris Paul, or you have all that weight in the league and you're like, "I'm not wearing this part of the uniform." The league is concerned. They're like, "We have to solve this problem." So it was just this fortuitous, somehow it all came together and we satisfied him, but I was really nervous for about 48 hours that this was going to escalate into a big, big problem.

Clint Betts

Wow. Well let me I have to respect your time and we're probably a little bit over as it is. But I want to talk about you getting back into venture capital and you've been investing this whole time throughout your whole career, but you've kind of come full circle. You're the managing director at Pelion Ventures now. What gets you excited these days? I mean, you don't need to work anymore. Why do venture capital? What gets you excited about all this?

Jeff Kearl

Look, I think it's kind of, I hate the analogy, but it's kind of a player turned coach analogy a little bit in the sense that I don't know that I would have the tolerance to start a company from dead scratch and get it off the launchpad again, it takes such an enormous sacrifice and work and hard to do. They don't all work out and I'm getting older. And I think the ability to be able to work with young great entrepreneurs and maybe share the lessons that I learned. One of the things we skipped in this interview, which I was happy we skipped is before vSpring, I had another Utah startup called Freeport. We actually raised money from Wasatch, now Epic, and some Utah County angels. And in 2000, when the dotcom crash, we sold the business off in pieces and laid off 100 employees.

It was a super painful failure for me, my first venture. And of course I learned more lessons shutting that company down and coping with the failure. I felt like it went from paper multimillionaire to failure in a matter of months as the stock market melted down. And that taught more lessons than nearly any other successful venture. In fact, a lot of the lessons learned there went into Logoworks and later Skullcandy, those kinds of things. But I think being able to share all that information with a younger entrepreneur, and being their confidant, I've always been that I was that with Rick. We talked every night at 10:00 because we wanted to, it never felt like work. My partner Morgan and I talked around the clock at Logoworks because we wanted to and so being the, I don't know, CEO whisper or founder whisper, I don't know if that's what you call it, has been really rewarding for me. I really like being this person in the background and just trying to create value through the coaching experience.

And so I didn't know there was that. And then the other story was that I actually interviewed at Novell Ventures in the late '90s, when I just graduated from BYU, they had a 300 million venture fund and I thought I would get a job there. They seemed like they liked me, but an offer never came. Of course the person I interviewed with was Blake. He was running the Bench Fund at the time. He hadn't come to. So when Blake called, I don't know, I guess it's been about three years ago now and said, "Hey, would you ever be open minded to coming back to investing full time?" That was intriguing just because it felt like this chapter that had never closed, Blake and I could work together, and we'd co-invested together over the years.

And so I think it just felt natural. And then when I looked at my personal angel investments, I think I had about 15 in Southern California, 15 in Utah, 15 in the Bay Area. And I looked at Pelion's deal flow and it was kind of like a third, a third, a third in the same triangle. So it felt like I could invest in the same geographies. I had talked to a couple of other venture funds that really wanted a specialist like come be our consumer investor or come be our SAS investor. And I didn't want that constraint. I like the idea of being able to invest in anything and everything. And being a generalist, which I think you can only really do these days. If you're a geographically focused fund, it's tough to be a generalist in Silicon Valley because how it do you differentiate?

Which is why most firms have highly focused practices in each of the key investment areas. So I think all those things combined wait on the decision and then last but not least the most important part was just from how do I see the world developing? I had read the University of Utah census that they were predicting the state to double in the next 19 years. And I had seen the number of companies spinning out of Domo, Qualtrics, Vivint, Pluralsight, all of these great Utah companies that had been founded. And I could see people leaving and starting the next generation of companies. And I was just so long on Utah. I'm so long on Utah, Clint. I really believe this is the next big, big place. And the reason why I believe this is I put half of my 401(k) at the depths of the pandemic while the market was still crashing and people were uncertain, what was going to happen? We were under lockdown.

The first move I made was I shifted my 401(k) more than half of it in Zions Bank. It's like my retirement, I'm going long Zions. I'm like Zions at $18 a share. Are you kidding me? I'm backing the truck up. And my thought is the population's going to double in the next 19 years, each one of these tech companies goes public and produces hundreds of millionaires. We still have MX and Lucid and Weed and Podium. There's a whole other wave of mature great companies that haven't exited and are going to create a bunch of wealth. And I just thought, who's going to do the mortgages? Who's going to do the car loans? Who's going to finance these small businesses? It’s going to be Zions? I can't think of-

Clint Betts

Yeah, that's brilliant.

Jeff Kearl

... regional bank. So literally I'm voting with my feet by being a venture investor in Utah. And I voted with my own dollars by backing the largest bank inUtah, just because I believe our region is going to continue to perform so much better than most other regions. I mean, there's no reason we should be bigger or different than Denver. And the number of companies at scale that we have versus what they have? You can't even compare the two, not to pick on Denver or others. But they're not in the same league.

Clint Betts

No, even Austin. Right Austin. I mean they have like established companies that are moving there. That are putting corporate headquarters. But you put the homegrown companies versus Utah, it's not comparable. It doesn't get the national attention because it's not Austin. Which has its own appeal and all that type of stuff outside of it. But yeah, Utah blows these ecosystems away that get a lot of... like Miami, for example, which is getting a lot of a publicity right now. You talk blowing Miami away right? Now, will that continue? Who knows? But Miami's getting the pub because it's freaking Miami.

Jeff Kearl

Like I got 20 venture friends that have moved to Miami during the pandemic. Some have now gone back to New York or other places, but I have a really close friend and I was asking him and he's at a fund and I'm like, "Hey, tell me about the deal flow." And he's like, "Honestly, I'm seeing way more deals in Nashville and Atlanta than I am in Miami." So everyone went to Miami and think it will develop into something, there's no question. They have such a supportive mayor and too many good investors have moved there, but nine women can't have a baby in a month. These things are a natural process. It takes time to get big anchor tenant companies. Qualtrics was 20 years in the making. Yeah, it's worth 35 or 40 billion now, that did not happen overnight. It was a long time of sacrifice in the making to get there.

And so the odds that Miami's is going to have like a $40 billion company tomorrow are low, because these companies take time to grow and develop, like what happened in Utah was there was a bunch of entrepreneurs like Ryan who spent the last 20 years building real value into these businesses that are only now everyone can see them. And we have a whole other group, like I mentioned right behind them. And another group behind that. So the velocity of companies getting to scale in Utah, I don't think there's another ecosystem, save for maybe New York or LA, which obviously have popular advantages and capital advantages that we don't. But outside of those markets, I don't think there's another secondary market that can hold a candle to what Utah is. It's really a testament to the culture, all of the entrepreneurs that came before and just unified—Silicon Slope's a big part of this. Like Josh's first map back in whatever '06.

Clint Betts

Oh, I sell the calendars and saying this is a real thing. I mean, I think Josh gets credit. Don't get me wrong, but him selling Omniture for what he sold it for proving, you can get a Silicon Valley exit without living in Silicon Valley in 2009. What Omniture has done to the Adobe business since then, and then doing it again with Domo. It's just unbelievable. What that guy and he coined the term Silicon Slopes, put all energy and money behind it. Man, the guy deserves a statue. But the Adobe building is good enough. That's a good enough statue.

Jeff Kearl

He probably has a statue. So he's good. But I think the interesting point is a year ago, someone put a flag down in Miami and was like, "Silicon Miami, we're coming for you. We're Miami." And my point, this just, yeah, we did the same thing. The guy was Josh and it was the year 2005 or ‘06. So we're like, we've had 15 years of building Silicon Slopes and they're literally starting from scratch. So it's just going to take time for these other markets to get their stride. I'm not saying the Midwest can't be an interesting place. I'm not saying Miami won't be a great market. It will, but there's a natural course to turning into a whole ecosystem and it takes time and we planted the flag and started building 15, 16 years ago here, you could argue vSpring before that.

And you could argue Wasatch Venture Fund and Utah Ventures before that. And like a lot of people have been at this, the Wayne Brown Institute, all iterations of the life science associations and the tech associations that existed for all these years, the MountainWest Capital group. It's the combination of all those things. Most of which are 20 plus years old, they're finally resulting in all the obvious outcomes you see now that everyone could point to. But this has been decades in the building. I'm sure if you were talking to the early word perfect folks, they'd be saying some of these same things. If you went to the S-Net team and said, "Tell us about the Utah ecosystem 25 years ago," you'd have a bunch of interesting content. And so the idea that Miami is the new place and it started one year ago, seems kind of silly when you look at how much work is really taken to get Utah to where it's at today.

Clint Betts

Yeah. I totally agree. Jeff, we need to have you back on you and I could talk forever. I want to talk to you about marketing and how to build the brand, all that type of stuff, which we didn't even get to but I appreciate you, man. Thanks for everything you're doing.

Jeff Kearl

Appreciate you Clint, thanks for building up this Silicon ecosystem. We appreciate it. And thanks for having me.

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