William Leonard
Atlanta Investor Armond Davis is the Managing Partner at The Paragon Group, a fund hyper-focused on women in ethnically diverse founders. Armond started his career with asset management firms like Goldman Sachs and Truist before transitioning to private equity. While many VCs center their value at around capital or connections, Armond believes a core part of his value add as an investor is helping founders with their mindfulness. And in this conversation, we’ll dive into how he practically does that step by step. Also, tune in to hear Armond shares thoughts on the current macroeconomic environment in the state of fundraising for early-stage founders right now. Equally, we’ll talk about why entry valuations are crucially important for VCs. And we’ll also talk about the sectors that Armond is most bullish on and looks forward to investing in over the next 10 years. Let’s jump right into today’s dialogue. Armond, thank you for joining me today.
Armond Davis
Thank you so much for having me. It’s great to be here and looking forward to a great conversation.
William Leonard
Likewise, it’s great to see you again. I appreciate you judging Startup Runway late last year at the High Museum of Art in Atlanta. That was such a fun experience, wasn’t it?
Armond Davis
It was a fantastic experience, man. First of all, kudos to you guys, for putting together the event and executing it at the level that you did. Second, shout out to all the founders that were there, the ones that presented, and the ones who were there. The level of talent in Atlanta is far underrated. In terms of a national scale, I think that Atlanta can compete with any other city in terms of its level of talent. With the founders, you may not have the sheer volume or number of founders that New York may have. The level of talent is there and I think it’s really an area that’s ripe for investment because I think the fact that it’s an often overlooked area, you can get great returns invested in the Atlanta ecosystem.
William Leonard
Man, you are preaching already. I love it. I mean, I think every investor founder here locally resonates with that message there. Let’s dive into the conversation today. Armond, I definitely want to talk more about your experiences and Paragon Group and how you all invest and really get your thoughts on the macroeconomic environment right now here in early 2023. But let’s start from the top and talk about you, your background, and what led you to build Paragon Investment Fund.
Armond Davis
My pathway is very nontraditional into a venture. I didn’t work at a Silicon Valley firm, I didn’t work at a venture firm, even a venture firm in Atlanta, and doing deals. My pathway was actually a little circuitous. I had an education in finance, MBA in finance from Florida A&M. I came to Atlanta, I worked at Goldman for a short period of time, worked at SunTrust Bank for a while, worked in the equity trading desk, and then moved into equity portfolio management. But I’ve always wanted to be an entrepreneur and I found in around 2005/2006 that I was really looking to do something else. And so I did my first M&A deal. I bought a small construction business in late 2006/2007. I thought I was the smartest guy in the world, fantastic years, just like how I don’t know why I thought I would ever do anything else. This is amazing, running this business and operating this business is amazing. And then 2008 happened, I was no longer the smartest guy in the world. By 2010, I was on the verge of bankruptcy. I literally did not know if my lights were gonna be on. Let’s say if the repo man was going to take my truck away, I was in that position and was really struggling. I had filed and filled out all the paperwork, filled out and prepared all the forms. I was ready to file and got to the bankruptcy attorney’s office and sat in my truck in the parking lot. I just couldn’t get out of the truck. I physically couldn’t move and couldn’t get out of the truck. After about 30-40 minutes of sitting in front of the office and not being able to get out of my truck, I just drove back home and vowed to figure it out. I used my experience from business school and from finance. Negotiated lower rates on loans and made difficult decisions in terms of cutting expenses and powered employees to make decisions in the field that allowed the company to run more efficiently, expanded the service offerings for the firm to be able to capture revenue from multiple different sources, and very proud to say that, although there were many weeks where we did the payroll, and they came up, and I didn’t get anything at the end of that week, that’s part of being the owner and being the leader, right? Even though we had many weeks where that happened, I’m proud to say that we came through it, and I never had to lay anybody off from the business. We went through that and came through that, and really wanted to merge my experience as an operator with my experience on the investment side. The venture was not a natural segue for me into doing that. I’ve worked with founders in pre-seed, and seed stages, really bringing to the table the benefit of actually running businesses. I ran a couple of other businesses as well, in addition to this business between 2006 and today. I bring not just the lens of an investor to the table, but also empathy, right? Understanding how to run a business and the difficult choices that go along with that.
William Leonard
What a fascinating story from being on the brink of bankruptcy, not knowing how you were going to keep your lights on, to now running Paragon fund and taking over a construction company back before the investment and financial sector crashed. And now, as you think about the Paragon Group, Armond, you mentioned early-stage, pre-seed, and seed-stage founders, what specific industries are you targeting? Or are you more general and agnostic?
Armond Davis
I’m industry agnostic. What I mean is, when you’re talking about businesses that are at this stage, these businesses are heavily founder dependent. And so for me, it’s really more of what I’m looking for something, it’s really more of what I’m looking for in the founder, right? There’s talent across a wide array of industries. In fact, you can even make the argument that, because there are so many VC dollars and so much VC focused in tech, that tech is inherently overvalued. I will invest in tech businesses and tech-enabled businesses, but I also will invest in a really talented founder in infrastructure, health and beauty, and other industries that are not considered to be “high tech” or more kind of “low tech”, what they consider them to be, although everything is really tech-enabled at this point.
William Leonard
Exactly. So you have this focus more on the individual, the team, the people.
Armond Davis
100%. You do have to have a viable product, right? I’m not an angel investor. Let me make it clear. I’m not an angel, but you got to have a product, you got to have a service, and you have to have demonstrated that there is a demand for your product or service out there. But from there, it’s really what I’m looking at in terms of your approach to not just business but to life. I invest exclusively in female and ethnically diverse founders. There’s a lot of trauma that comes from being a woman that has grown up here or even grown up somewhere else. It’s trying to grow and build a business. In today’s venture capital ecosystem, there’s a lot of trauma that goes along with being an ethnically diverse founder. A black man who is trying to create a business. I talked with a founder just yesterday, a brilliant, brilliant founder who said that she was in the process of pitching and raising capital for the business. She was told, “Oh, yes, this is a fantastic business. This is a fantastic idea. This is a revolutionary product. I just don’t think that as a woman who is not from the United States that you can execute this and take it to where it needs to go.” And I found an investor who told her that to her face. I’m here to tell her, yes, you can do it. It was your idea. The universe gave you this idea for a reason. It’s your idea, it was given to you for a reason, move on it, and the universe will reward you for continuing to move in your purpose. Really what I’m looking at is the determination, the ability to survive, really to do more with less, the mindset of abundance, as opposed to having a lack mindset.
William Leonard
I think we’re gonna dive into that a bit later in the conversation. You mentioned a lot there and really reflected on your experience of running companies, historically, in the 2010s. And in your investment experience from Goldman and SunTrust, how did you initially think about crafting the thesis for Paragon as a whole?
Armond Davis
That’s a really interesting question. One, my thesis is that female and ethnically diverse founders are two of the most disadvantaged groups by the current system, ergo, really out of necessity. They will lead an innovation that moves society to new systems and that being the case, if you can invest in those founders at an early stage, then you can make above-market returns. I think that the data is starting to really come out and show that women outperform the market in general when you invest in them. Ethnically diverse founders outperform the market when you invest in them. I assembled that thesis of the fact that I’m an ethnically diverse founder. I started the business and I know all of the headwinds that I had to deal with, whether it be access to capital, whether it be wealthy clients who don’t see you as capable or qualified, and you have to prove yourself so much more than your counterparts do. The thesis was born out of my own experience, but also, through my observation. I come from a matriarchal family and the women in my family are all far more intelligent than the men in the family. I have never questioned the ability of women to outperform or lead. It comes a lot from my lived and observed experiences.
William Leonard
Aren’t those the best sort of initial starting points for these, this is something that you’ve experienced, lived, and have helped maybe somebody navigate through before. And now you’re just kind of taking that thesis and putting it on a broader scale to help more and more individuals with capital now.
Armond Davis
Yes and no, right? Yes – you’ve lived it and you’ve experienced it, and so you’re convicted. The no is that because you’ve lived it and experienced it, it becomes sometimes a little more difficult. If I’m talking to someone and saying, well, this is kind of a no-brainer, right? I’ve lived this, it’s in my bones. This is my life experience and this thesis is true. You’re talking to somebody and trying to convince somebody who may not be their lived experience. You try to convince that person to invest based on your lived experience, not their own.
William Leonard
Exactly. Armond, I want to shift the conversation here a bit to talk more about now, today in February of 2023, we’ve seen and I’m sure you’ve seen as well, everybody has seen that the fundraising environment really become constrained over the last 12 to 15 months and the outlook looks pretty bleak. You see layoffs from big tech and big corporations, you’re seeing that the interest rates are rising, capital is no longer free like it once was. I think the side of things is, diligence cycles are much, much longer, and overall VC dollars deployed are down. And so in the midst of all this negativity and in all the headwinds that founders are facing, where do you see some areas for opportunity for the scrappiest, most persistent founders to be looking at right now when it comes to building a company or fundraising?
Armond Davis
That’s a fascinating question. There are so many parts to that question. The first thing that I do want to say is that I get asked every once in a while, usually by someone who doesn’t look like me, are we going to have a recession? And I have to point out at the moment, that there’s even this privilege in the question. Because if you’re a female founder, if you’re an ethnically diverse founder, the recession is here. The recession has been here since like you said, 12 to 15 months. Now, there are still some people who are wondering if the recession is going to hit them, but as I said, there’s a privilege even in being in a position to wonder if you’re going to be affected. Because of this group of founders, particularly ethnically diverse founders, the cash flow didn’t start to come in until post-George Floyd’s murder, let’s say, the summer of 2020. You really started to see significant inflows in this space. Well, by January/February 2022, that had been cut off about 18 months, if you didn’t get in, then in that short window, then you might have missed out on it. What I’m seeing is a continued shift away from diversity in terms of asset allocation on the part of investors, which I think is counterintuitive, frankly, because I actually do believe that now is the time to actually double down on it, not just from a social perspective, because we can always make a social case for investing in underrepresented founders. But if you want to see sustained, long-term investment in underrepresented founders, you have to also make the business case forward. I think that now is a fantastic time to deploy capital to underrepresented founders who are being impacted by significantly larger margins than their majority counterparts. I think, again, that by doing so these founders have the talent, ability, and imagination they will overcome. They’re used to doing more with less anyway. If you actually level that playing field, you give them not just access to sufficient capital, but also give them the benefit of your knowledge or experience. Give them guidance in terms of working on the mindset that things were going on the approach to things, I think you will see significant returns. I’m telling potential LPS that no, this is actually the time to double down on this.
William Leonard
Interesting. I think you’re right 100%. Do you see opportunities for these founders when it comes to fundraising? There is what seems to be a flight away from diverse founders and capital being allocated to their startups now, but in the midst of all that, do you see any opportunities for founders that you can call out who are fundraising right now, diverse or not?
Armond Davis
Well, yes, and for example, infrastructure as I mentioned earlier, but we just had a huge, massive infrastructure bill that’s passed. Businesses that are in that space, construction, engineering, architecture, design, all of those that fall underneath that space, those businesses are poised to be able to grow. The interesting thing is that especially if you look at, for example, there’s an opportunity I mentioned, health and beauty space. To me, this thesis has proven that there is room and space there for products that cater to and are created by and cater to different ethnic groups. And with proper investment and proper distribution, these businesses can really grow and the quality of their product is there.
William Leonard
I agree. 100%. I think I want to segue into that by asking this next question. You’re actively deploying capital right now. You’re meeting with founders every single day, what are some of the core metrics that you are looking for and assessing in the founder meetings that you’re taking right now? Have they changed from a year ago?
Armond Davis
Well, for me, they haven’t, and that is because of my approach to working with founders. Yes, I’m gonna look at your P&L. And yes, I want to see EBIT done, I want to get ARR and I want to see all of those things, all those great and wonderful acronyms are fantastic. But when we’re talking about the early stage, these businesses are usually three years or less. So there’s not a whole ton to be able to pick out there in terms of a pattern. Number two, the fact that we had the downturn start for many of these founders last year, if you want to see three straight years of EBITDA growth, or whatever you want to see, you’re more than likely aren’t going to have that. You may have some that do still have that and great for them, but you’re excluding a lot of really great and talented founders if that’s your deal breaker as an investor. When I’m meeting with a founder when you talk about metrics, what’s the vision? What’s the long-term vision for the business? How do you plan to scale? How do you plan to adapt and pivot, because everybody’s gonna hit that first big wall? It may be in terms of not having necessarily had access to the capital as easily as you used to, but there are also going to be some fundamental challenges to the business. How do you deal with adversity in that sense? Have you dealt with adversity before? If you’ve got a business that’s pre-seed, seed stage, if you’re a first-time founder, more than likely, even if you’re possibly a second-time founder, you’ve never run a business in a recession because the last recession ended a decade ago. It’s just been really great. Ever since then, until last year. You want to understand how people are dealing with things, you want to also understand if people are coachable. Coachability is a massive, massive thing for me, particularly, like I said, I’m dealing with a founder that’s in a pre-seed or seed stage. You’ve got to be open to it, you don’t know it all. I don’t know it all, either. But you’ve got to be open to having this. It can’t just be well, give me the money and let me go. Let me go out of my way. That’s not how I work.
William Leonard
I think it’s important right now. Pitching in this exact moment has been difficult for a lot of founders because I think many companies aren’t focusing on the quantitative value propositions that they present to clients because you look at the market right now, larger companies and enterprise customers are cutting contracts with products that they don’t need. I think as you approach investors from a founder perspective, in your pitch, you should harp on quantitative value propositions. I think the best products are going to drive their customers’ P&L directly. You’re either increasing revenue, or decreasing operating costs for your clients, and I think demonstrating this quantitative value prop will keep your product in full swing for the enterprise that you’re working with now. And then I think it’s also about avoiding incrementally great products. You want products that are 20 times or 100 times better than what your clients are using right now. Especially from a product sustainability and longevity standpoint, companies are cutting what they don’t need right now. I think as a founder, if you can focus on the products that are providing unbounded efficiency for your clients and truly moving the needle for how the company operates or serves their clients, you are going to succeed and raise money in this environment, no matter how bleak the recessionary outlook may be for all companies at the early stage. That’s just my two cents on metrics and things that investors are looking to hear and see within early-stage pitches right now.
Armond Davis
I agree with that. I think that my ideal founder is someone who’s focused on this very product and service-focused founder. Obsessed with best in class, products, or services, and where they need help is more on the business side, more on the scaling, and more on the mindset and helping to develop a growth mindset. But really being committed to offering best-in-class products, best in class service. One of the questions that I asked the founders was, why this business? Why you and why now? Why does the world need this business? Why does corporate America need this? Why do your clients need this business? Why are you the person to bring this business to them as opposed to someone else to bring the business to them? And then, why is now the time you have a business? What are the pain points that you are addressing? And are these pain points significant enough that you can generate long-term revenue growth with this product or service? Once we get past that and those make sense, then now we really focus on you the founder.
William Leonard
I see a lot of pitches missing the why now. I think talking about the momentum in the industry as a whole. So for example, you just gave the infrastructure bill, which is a trillion dollar why now opportunity across dozens of sectors that are going to be impacted. I think examples like that, just talking about the why now, the macroeconomic momentum that is driving the building and product division, I think is a big aspect that a lot of founders overlook in their pitches.
Armond Davis
From an investor perspective, again, this is the best time. You think about some of the businesses that are huge and most known businesses today, many of them came out of recession. Airbnb, I believe, came out of the recession. Facebook was 2008, and right as it was crashing, I want to say. Uber as well came out of the recession. What you have now is one, you’ve got a ton of really talented people getting laid off from their jobs and they’ve got to figure out a way to thrive or figure out a way to survive, and a lot of them are gonna move into entrepreneurship. Those people have experience and talent. They understand from the large, enterprise level what the market needs and what the market is demanding. Now, the other side of that is you have the micro businesses that are, “niche businesses” but now, because you can’t just throw money in the equity markets, in order to find returns, you’ve got to be more resourceful as an investor. Those businesses are poised to really be able to take advantage of the inefficiency in the market if given access to proper capital and proper guidance. It’s my job as the fund manager to find those founders, find those businesses, and deploy capital. The truth is, with valuations coming down, then I can get into a really great business now with a half-a-million dollar check and own a significant piece of the company, versus two or three years ago, a half-a-million dollar check wouldn’t get me a significant piece of the company. I’m able to get in, have a significant piece of the business, and really help the founder to grow and scale.
William Leonard
And to that point, I’ve been speaking to a lot of other investors and just hear the emphasis on entry points are really top of mind for them. Valuation is becoming much more of a deciding point on actually investing. I saw a relationship on Twitter where a founder wanted a $20 million valuation, the investor wanted 17. Because of that $3 million valuation difference, they couldn’t come to a deal. They passed and that small amount probably wouldn’t have been too much of a talking point or the decision point in 2021, maybe early 2022. So now, I think investors are much more sensitive to valuation and ownership targets nowadays.
Armond Davis
If the guy wants a $20 million valuation and he’s got enough investors lined up to come in and complete this raise at $20 million, then more power to them. It just may not fit the guy who is valued at 17. When you start looking at it in percentage terms, that $3 million difference, it seems like it’s insignificant, but if you’re talking about $3 million into the $17 million, well that’s a little under 20%. If you call it 15%, well, that’s a significant difference when you talk about your IRR, when you talk about the capital that you’re returning to investors, if you’re basically overpaying by 15%. But I think another factor is how the investor works with the founder, right? Because if you’re the kind of investor that, you’re going to come in, you’re going to write your check, and then the founder has to go off and execute their plan, and you’re getting that update every quarter, but you really aren’t rolling up your sleeves and getting in the trenches with the founder, then that $3 million difference in valuation really does impact you. For me, I would say it may not impact me as much because I certainly understand if I’m going to work with a founder, I’m rolling up my sleeves, I’m getting in the trenches, I’m on investor calls with a founder helping to secure additional capital, I’m on sales calls with the founder helping to secure new clients. I’m really working heavily and closely with the founder, not just in terms of the formulation of the row strategy, but also the execution of that strategy. I know that if I can come in and if I’m working with the founder, that the boost that they get in terms of the impact that certainly, we’ll take it from and use the example that you gave, will take it from $20 to 50 million. If you take it from $20 to 50 million, then you aren’t so mad that you got in at 20 versus getting in at 17.
William Leonard
Those are all great points there. It really depends on how you work with founders, right? I know, Armond, you have a pretty strong thought process around mentorship and mindfulness. Many VCs pitch themselves as value investors, whether they’re like founder friendly, they make enterprise connections, or whatever it may be, but I’ve heard very few investors tailor their value add around tending to founder mindfulness. Let’s dive into that a bit more as to your strategy at Paragon.
Armond Davis
Well, it’s everything. Because at the stage that I’m investing, your business can’t outperform you. So if you’ve got impostor syndrome and you struggle with it, you’ve got childhood trauma, and you haven’t addressed it, and it holds you back, you get paralyzed. If you’ve got relationship problems, you spend two days a week fighting with your significant other about you working too much, well, that has a direct impact on the success of your company and the success of your business. Frankly, it doesn’t matter how wonderful your product or service is, if you can’t overcome those things, you won’t thrive and you won’t make it. One of the things that I’ve found is that some of the most successful founders, may not necessarily have the best product or the best service, but they have the ability to focus, be really steely-eyed in the face of adversity, be able to push through, be able to block out the world, and focus on what’s in front of them. I really work with founders and try to help them to become the best version of themselves. My thought process is very simple, if I can work with you, I can help you to become the best possible version of yourself then the best possible version of your business will follow. As a part of that and as I’m thinking about the mindset of the founder, I do require that founders mentor. I’m going to invest in you, you’re going to mentor either another founder in your geographic area or in your industry. Because I understand as a person who has been both a mentor and a mentee, I understand that the benefits are actually mutual. It’s not a one-way thing, it’s not that the mentor just pours into the mentee but you also learn from your mentees. It helps you as a founder when you are working with other founders that are coming up and going through things that you’ve been through. It also is indicative of your mindset. We go into that that word again, right? Often you’ll find that we’re raised kind of with a lack of mindset, right? You had a birthday card when you were 10 years old, it had $10 in it, and what did they tell you when they give you, don’t go spend that. Go put that away. Go hide that, go put it on the pillow, put it in the piggy bank, back of the closet. But if you think about it, that’s the complete antithesis of what the most successful investors do. You’re not supposed to be a stopping point for capital. You’re really supposed to be a vessel for capital. Money is a tool just like a hammer. Trying to develop and help underrepresented founders to get out of that lack mindset, and open themselves up to having a mindset of abundance is something that I really, really work on. I talk with founders and they say, man, I’ve got to get an advisor and someone who’s an expert in the industry. There’s an expert at this product and an expert at getting people into boards and going to people. And I say, so who are you working with? Who’s the expert in you? Well, I don’t have time to think about that. I don’t think about myself, it’s just all about the product and it’s all about pushing the business forward. It won’t move forward without you. It has to be you. The main thing is you. Let’s clear the cobwebs. Let’s overcome those hurdles we make. We make licensed therapists available to talk with founders, we make founders available to each other, and portfolio companies available to each other to share their experiences, because founders are all over the country, right? Working and understanding that you aren’t alone in this process is a huge, huge part of this. The number one thing that I get from founders, especially early-stage that are first-time founders is the alarming loneliness of the job. You think about it, a lot of these people are in their 20s, early, mid-20s. When I was in my early mid-20s, I was in Atlanta having a good time. I’m gonna go into the club, every Friday night, I’m doing things that single 20-somethings are doing, right? These people are working. They lose a lot of the connection that they had with their friends from college, everybody’s working these nine-to-five jobs or these nine-to-nine jobs, but it’s still a job. It’s a difference when you’re working. You’re getting a check on the first and the 15th versus when you’re working that same amount of hours, if not more hours, and you don’t know when you’re gonna get another check. It affects and shapes you. Helping founders to understand, hey, you’re not alone in this. I’ve been there, right? Stay focused on why you’re doing this. What’s your why? It can’t be just to make money. You have to be serving a purpose and walking a purpose. If we can help define that, and identify the why here, then that’s what makes you get up and what makes you push through the adversity.
William Leonard
I love it. That is just fantastic insight as to how mindfulness not only impacts the founder but the company and impacts everybody. I love your approach there. Armond, as we wrap this conversation up, what is the best way for a founder who’s listening who wants to pitch you? How can they get in contact with you?
Armond Davis
You can pitch me through the site: https://www.paragoninvestmentfund.com/ There’s a link there for prospective founders. You can go through their signup form and you can fill. I’ll ask you some of those questions. Some of those why you, why now questions, and upload your deck. You can do that. I’m on LinkedIn. People don’t have LinkedIn handles. I’m on LinkedIn. It’s Armond Davis. I’m also on Instagram and Twitter. But please don’t pitch me via Twitter. Send me a tweet. 30 tweets back to back to back with your bits.
William Leonard
I love it. Well, Armond, this was fantastic and insightful dialogue from learning about the origin story of almost being on the brink of bankruptcy to now helping founders in your portfolio, think about mindfulness and product vision and growth in achieving scale. I’m excited that you’re here doing this in Atlanta. I think there’s ample opportunity for founders who are fitting your thesis to be supported by a visionary investor like yourself. I appreciate your time, Armond, and looking forward to seeing you around.
Armond Davis
Man, thank you so much for having me. I enjoyed it. Certainly, this would be the first of many conversations you and I have, and looking forward to seeing the things that you do in the Atlanta startup ecosystem, and the things that you continue to do, as well. I hope that the people that listened, understand the amount of thought and effort that you put into what you do and in your commitment to working with and helping founders to achieve their goals.
William Leonard
Awesome! Armond, thank you.
Armond Davis
Thank you so much.
Lisa Calhoun
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