Strategic Management: Four Routes to Entrepreneurship
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Copyright 2009, The Board of Trustees of the Leland Stanford Junior University and the Stanford Graduate School of Business

MAIN SPEAKER: We're very fortunate to have these people here
too and I hope you
think carefully about the questions that you ask them just
to ask the best questions
that you can.
I'm gonna ask them each to please introduce themselves a
little bit, just make some
brief comments about their situation and then we've got some
questions prepared and
we'll go through and give each one a chance to lead the --
answer the question but
then also give everyone a chance to answer it and then we'll
leave 25 minutes or so
for questions from you all here in the class and then the
last ten or 15 minutes for
closing statements from each of the panelists.
So, without for the adieu, please introduce yourselves.
PANELIST: Great.
I'm David Kennedy, class of '98 here at the GSB.
When I left here and I went to management consultant --
which I'd done a little bit
of prior to business school and I had some operating
experience, albeit quite light,
before business school.
After three years I did a search fund with a partner of
mine, and a gentleman called
Mike Smerklo, he's not here.
We bought a company called ServiceSource.
It went pretty well.
We ran it together and Mike is still the CEO and Chairman
there now.
Umm, we ran it jointly for about four years and about three
years ago give or take I
stepped back from that in a kinda minority recap deal.
Took a bunch of my chips off the table, took some time off,
and then founded a
private equity firm so I've kinda been on both sides of the
equation here.
I've been the search funder and I've also, you know, sort of
started the side of the
private equity guys who have dabbled a little bit with
sponsored search idea without
prosecuting with great vigor.
And that's where I am right now.
A firm called Sorin Capital which I founded with another GSP
grad of 1998.
MAIN SPEAKER: Sean.
PANELIST: Sean Callihan.
I also was '98 of Kellogg.
Umm, I was an operating consultant for about three years
before Kellogg then went
back, did a dual degree program and was engineering
management and business similar I
think Stanford has one as well.
Came out, did management consulting for a year but quickly
decided it was time to go
into the operating company.
Went into a venture back start-up.
It was a client start-up.
Actually, it was with Hal Lee who was a professor at
Stanford.
I was probably as serious as B at the time maybe not as
serious as A but got a good
experience there in a growing company.
Then stepped out went to Oracle and spent about four years
there.
I guess actually about three years.
It just seemed like four.
>>
[Laughing]
PANELIST: And then I left and went into business management.
Which was another venture back company but it was probably,
like, series C at least
by the time I joined so it was more of a mid sized company
and growing.
I had a role of I was running our sort of sales and then
became the GM of
international operations.
Umm, when the then CEO, who's a very, very persuasive
gentleman, convinced me it
wasn't in that bad of shape.
And so he was definitely good at convincing me because when
I got there it was.
Umm, but it was a great experience.
Lived in London for a couple years, got the international
operations in better order
of the company overall.
We had a good turn around, made us appealing, sold the
business in February 2007.
Umm, I had an employment agreement there until about August
of 2007 so it gave me
some time of kinda think about what was next and that's
where I started thinking
about what we're talking about today.
And so when I got back to the states, sort of teed up, you
know, the normal rounds of
discussions and sorta looked at taking another GM role.
Ultimately I ended up going with Alpine Investors, as, you
know, an executor and
residencers.
You guys call it sponsored searching.
So we acquired YLighting.
I was there for about seven months before it was acquired.
We acquired it on September 5th, 2008, sorta high-end,
modern retail.
If you guys are in the mood for lights or furnishings.
About a week before Lee had been imploded.
So I think some of the things we should talk about is, uh,
when that investment
thesis doesn't turn out to reality, up, what do -- you know,
the type of experience
you wanna have in hand to sort of help you guide through
that.
Been there for a year, love it, and happy to be here.
MAIN SPEAKER: Great.
Thank you.
PANELIST: My name --
MAIN SPEAKER: I should note that everybody has seen your
resumes, so if they've
read -- if they've prepared for class today, which I'm
confident 100 percent of the
people have, well, I'm serious about that then -- so you can
be confident of that.
PANELIST: I'm very trusting so I'll be pithy.
Umm, I, like David, I'm have Dublin, Ireland, originally.
Like David followed him to Russia at some point in time and
then, of course, followed
him over here.
And then I met him.
And of course Ireland being a small country, you know, we
know similar people.
I did a search fund coming straight out of school, looked at
doing some other
entrepreneurial stuff, did speak to some folks about the
sponsored search and
ultimately decided to go the search fund rout with a
partner.
And we've been operating the business for close on five
years and one of the
interesting things, like many search funds our buyout has
sort of morphed into a
start-up.
So, here we are eight years out of the of business school
and we're running a
start-up, and running very hard, and fast, and we've got an
exciting, growing
company.
PANELIST: Okay.
I'm Michael Sanabria so I'm class of '93 so I started about
ten years after I
graduated with a search fund.
So, for me, I always knew I wanted to do something
entrepreneurial and so the choices
I've made both in terms of choosing Stanford then after
Stanford the kind of
operational decisions I made going to Apple as a product
manager and, uh, so on and
so forth, going to increasingly smaller companies were all
targeted to address some
of the things that you guys brought up, which is get that
operational experience I
thought would help be successful.
So, I waited about ten years until I joined a company, uh,
in Novato and then decided
it was time to go out and do a search and at that time I
chose to do a self-funded
search model and, uh, been with the company now about seven
years will be this year.
MAIN SPEAKER: Great.
So, I'm gonna start off with some questions.
Umm, you know, just in following the discussion today in
class the first question
I'll ask is -- and, Mike, I'll ask you to answer it first
but if the rest of you
would then please that'd be very helpful.
What do you see as the biggest benefits to the acquisition
path to entrepreneurship
and what do you see as the biggest risks?
PANELIST: Umm, so, for me the question is -- it depends.
For me personally when I started this search I had a pretty
good idea -- well, not
pretty good idea.
I knew the industry I wanted to go into.
I knew basically the idea that I wanted to pursue, and so
for me the benefit of going
into acquisition was I wasn't trying to, uh, create some new
way of creating RAM.
It wasn't a high-technology solution.
It was very blocking and tackling.
I was going into a very mature industry where I felt I could
bring some strategic
channel partnerships and a customer centric focus to sales
marketing and I didn't
need to -- I felt like by acquiring a going concern that had
folks with industry
experience, ongoing operations, I could bring my ideas and
get them more quickly than
going out and starting from scratch.
So, for me the benefit was being able to look for the type
of company that, umm, had
what I needed but was missing what it -- what I felt I could
bring and then add value
through that.
Umm, the downside in my particular model going self-funded
was, umm, I -- you know,
you find yourself a little lacking perspective and expertise
in terms of not so much
the operational side but probably the deal side.
And, uh, when you're going self-funded there's a lot of
resources I called upon, a
lot of classmates had done similar things so that was a good
thing for me.
But there's a very limited amount of time that they're
willing or able to spend and,
uh, so that was probably something that hurt me.
And then the two big things a the downside were in terms of
acquisition was the
baggage can become pretty overwhelming, as some of you
mentioned that when you get
inside I spent a lot of time early on overcoming some
cultural issues that were
pretty tough to identify in the search and acquisition phase
but I spent a will the
of time with those once I actually bought the company.
And then the last thing where in sort of acquisition is
discovering those rotten
Easter eggs.
Things that just were hidden below the surface, umm, that
hit you, uh, and, you know,
so you have all these great plans, what you're gonna do
within the first hundred
days, and then you come in and fine things that, umm, were
completely unexpected that
all of a sudden divert your energy and attention.
MAIN SPEAKER: Karen, how about you?
What are the biggest benefits and risks of the acquisition
path?
GUEST: I don't know if they're the biggest ones but some,
you know, that come to
mind as we're sitting, it's a -- it's definitely an entree
into entrepreneur.
You know, I'd had ideas before and just the timing didn't
work out.
I was in, umm, the UK in '93, having come back from the
states for the first time and
was trying to sell everyone on coffee in a paper cup,
telling them it was gonna be
huge, and I couldn't convince a soul.
And, umm, and I knew nobody in business and I knew nothing
about business, umm, and I
had the long hair and a guitar and it just wasn't going my
way.
>>
[Laughing]
PANELIST: And I figured I gotta learn something about
business.
Well, you know, several years later the coffee thing sort of
panned out a little bit
and I didn't have that next idea.
I had some that I thought were okay and I wanted to build a
great business and this
was how I was going to do it.
Umm, it was -- so, it's an -- it's a rout.
Umm, one thing -- one benefit of the acquisition path that's
not been mentioned here
today I think is if you get into a company of the right
scale and the right size and
that is decent, frequently, actually, bizarrely, umm, a lot
of the skills that you
gain in this room can be of more benefit than in a smaller
company.
I think it was Jason you were commenting on smaller -- you
might feel more control
over the thing.
But if you get into a larger company I frequently think you
might have some decent
management under you who can look out for the day-to-day
tactical and you may be of
some benefit in thinking through strategic issues which
people in this room are more
keyed up for.
I saw in Michael's write-up that he suffered like I did from
not having decent
management under him so you're dragged into the tactical.
So I think actually acquisition path if you get into the
right sort of vehicle it can
really gear you up.
Umm, it's a great model if you get a good company.
But that's a big if.
Biggest risks umm, been mentioned several times.
You're inheriting someone else's problems, and someone else'
s team, and culture,
which aren't necessarily positive things.
If Dave Dodson I remember impressing this upon us, umm, if
you get into a bad
industry or an industry where the tide just isn't going the
right way, that's --
that's just not fun.
You can push against the tide for a while but if the
industry's not going the right
direction it's tough.
And then finally the biggest risk, umm, I think ultimately
is time.
You can spend a lot of time just not moving quickly enough.
I think it was Jeff who talked about figure out if you're
gonna fail or not.
Umm, you know, if you're in a bad industry or you're in a
bad company, or if you're
gonna fail, I'd like to do it a lot faster.
You know, one of my mantras in the company is, let's move
faster.
Let's fail faster.
You know, talk to the salespeople, get no's faster, umm,
speed up that sort of what's
gonna take place.
MAIN SPEAKER: Okay.
Thank you.
PANELIST: So, a little bit of -- again, I'm gonna start with
Michael's "it depends".
You know, I think that's the great thing about this class is
it's not right or wrong
but we're gonna tee it up for it.
The, umm, why I acquired personally versus founded is I took
a lot of the
entrepreneur classes when I was in school, did new product
competitions, really loved
the idea of starting my own company but I never had a killer
idea.
I think if I had a killer idea that I really had passion
about maybe I would have
taken that rout.
But I didn't.
But what I did have passion about was creating an
organization that could be lasting,
that could really, really grow.
So I love the idea of setting a vision, getting a team
aligned to set that vision,
and really growing that business which is gonna make you,
you know, successful I
think in business but it also just -- I have passion about
doing that which I think
you brought up.
So very much that can happen in any of these three models.
For me that was one of the criteria 'cause I don't wanna
spend seven years of my life
on something I don't have a passion about.
I think life's definitely too short for that.
But, I don't know, again, why do the -- through acquisition
versus start-up.
I do enjoy the base and having, umm, as it turns out there
wasn't a whole lot of
vision when I, you know, got into the company.
Even though it was a 3,000 EBIT business, good size
business, uh, didn't mean it had
a good vision.
Meant it did some things right. It didn't mean it had a
management team as it turns
out.
They didn't.
But there's a lot of things you can work with.
And so you get to work those tools if you feel good about
the management skills.
So that's been great.
I mean, and just the idea of you get to go through the
process of trying to find a
company by, a learned a lot there even though I had done
that a few times but for a
company not really, you know, which I was gonna end up
running.
Learned a lot of things through that process which I'll take
with me through the rest
of my career.
Then, you know, obviously you get a chance to run a company
which, umm, which, I
don't know, Jeff said at this point in your career that's an
interesting opportunity
and you have to decide sorta when you're ready.
I know the CEO of Business Engine which was the, you know,
the job I took before
this, umm, he was my age.
We actually graduated from Kellogg together.
He was ready to be a CEO after four years, umm, out of
business school.
I wasn't at the time.
By I tell you when I walked out of being the GM I felt
ready.
Like, I felt like, umm, Victor, you mentioned.
It's like, you got a team of people whose lives, you know,
you play a big role in.
You gotta do the right things in the company which sometimes
they're hard to
decisions.
Then the day that I wanted to feel like I was ready to lead
that before I was gonna
take that on.
So I think that it's a wonderful opportunity and it just
felt as natural next career
step for me given I didn't have a killer product idea.
The risks, we've talked about this before but I think you
could spend two years
looking let's say towards the tail end of that you close the
deal, four, five years
running it, umm, and let's say it's a zero.
It's a donut.
I mean, great personal life experiences but, I don't know,
if you're seven years out
of business school and that's your post, umm, post, you
know, graduation track
there's some considers there I think or valid ones to really
think about.
I think for me at least I felt that it's gonna be, uh, it's
gonna be a natural career
path for me so I'm sort of mitigating that risk not just
financially but career-wise.
Umm, I'll leave it.
MAIN SPEAKER: Great.
Thank you.
David the biggest benefits, and, umm, the acquisition path
to entrepreneurship and
the biggest risks.
PANELIST: So, I think the reason that I did it and -- which
for me was the biggest
benefit of the lot was just the ability to control my own
destiny.
I felt, you know, I'd worked for big companies, I'd worked
for consulting firms and
through them for other big companies, and I felt like, you
know, I kinda wanted to
instead of being the person on the sidelines who's coaching
people taking the shots I
wanna be the guy with the ball in my hands with the last 60
seconds of the game and
be able to make things happen and I felt confident in my
ability to really drive
performance and I thought that I should gain the benefits of
that both a psychic, and
the financial and, you know, I wanted to earn the marginal
product of my labor if you
wanna put it into economic terms.
But the reality is I felt like I could control they thinks
and that I had learnt
enough, and I was ready, and I really wanted that control
and that autonomy.
So that was the reason that I did it.
And for me this is -- uh, I think the benefits versus wash
and for me I didn't have a
great start-up idea.
Maybe I might have done a start-up at the time had I had a
great idea but for me it
was versus being a GM of a division for a large company
maybe working with a private
equity firm with their portfolio companies.
Those were things that were possibles for me that I explored
as I kinda decided to
tape the leap to do a search.
I think in retrospect the risk -- because I'm always -- I'm
often in an unusual
situation when I sit in these panels because I did the
search fund, it went very
well, and I think it's a dumb idea and I wouldn't do it
again.
>>
[Laughing]
PANELIST: And so let's get that out on the table straight
away.
The reason -- and I -- the reason that I feel that way is
because I this I the risks
to your point, Peter, are large and I think particularly
they're non-diversifiable
risks.
You know, the fact that the bulk of search funds don't work.
They either don't buy a company or if they do they lose
money for their investors or,
you know, even in fact I think the worst of all scenarios is
you buy something and
you chug along for five, six, seven, eight years and you
make no money for anybody
and your career's in tatters.
You haven't made any cash at all, you haven't been paid
terribly well, and you look
at your peer group that's out there from the search side of
things and they're
flying.
You know, they're CEOs of things now, or GMs of things now,
what have you, and it's
got at least as I can tell having been fortunate enough to
be in kind the top kinda
decile quartile of search fund returns it's got nothing to
do with us. I don't think
we're particularly stupid but I don't think we're
particularly smart, either.
When I look at my peers who did search funds and I think,
most folks who come to
Stanford have always been the top decile of anything they've
ever done or top percent
tile and they hear that, you know, top decile does the best
in search funds, sign me
up.
I'm gonna be top decile.
And reality is that these small businesses have massive
risks that's really hard to
tell before you buy.
They have usually significant customer concentration, uh,
particularly because you're
typically buying small, fast-growth businesses which you
tend to do with somebody's
got proof of concept, they've got a couple big customers,
you hope you're gonna take
it from a couple to 20 or from ten to a hundred or whatever
it ends up being and hey,
the customer changes their mind, the customer merges, it
gets bought out, it goes
bankrupt.
There's a is the of things that are just endemic to small
business that are just
risky and to me in retrospect that risk is kinda two-fold.
I mean, the first one is there's just a financial economic
set of risks that go
along, you know, kinda with this process.
And the second one, though, which is sort of a harder one to
articulate is what's the
risk that you're not actually ready to be a CEO and what's
the risk to your career of
the fact that you've now jumped into that position which as
people sort of jokingly
refer to you makes you constitutionally unemployable to do
anything other than be a
CEO and you never learned how to be a CEO properly?
You never learnt how to bring in revenue, you never learnt
what it's like to make a
quarter and to lose a quarter, you never learnt what it's
like to build a team well
or to build a team badly, to fire people, you never learned
those things properly
because you never had a mentor, you never went to a well-run
company, you dropped
into a two million-dollar EBIT Dow business and you
struggled there for a while and
it's still a two-three million-dollar EBIT Dow business and
you never -- you know,
you never apprenticed to the skill set of being a great
manager.
And so to me those are kinda the core risks that are
associated with doing a search.
MAIN SPEAKER: Thank you.
The class is not over yet.
>>
[Laughing]
MAIN SPEAKER: But I think this -- the experience of this
panel highlights really a
lot of the things that we talked at today and the things
that we're gonna explore the
next two weeks.
So, to keep going, umm, why -- let's see.
Why did you -- why did it make sense for you to try to
approach at the point in your
career where it did?
You kind of answered that already each of you but I'll go
and actually shift and
Karen if you'll go next and I'll try to keep in this order
of shifting the first
question to the next.
So, why did it make sense at that particular time in your
career?
PANELIST: Sure.
Umm, so, probably coming off of that Starbucks experience I
went out trying to get
some business skills and I specifically went -- long story
but I ended up in Russia
knocking on doors of western institutions looking for
business experience and didn't
care how I got it.
Ultimately there came a point when, up, I'm in New York, I'm
in consulting, it's in
the dot com times when everybody's knocking on your door
saying, "Hey, come on, work
for us."
And there's lots of money to be made and I got the
promotion, passed the MBA hurdle,
and it turns out I was really good at this consulting gig
and life could be easy
doing this.
Umm, and it wasn't what I wanted to do.
I wanted to go build companies and I think, umm, Sean sort
of described it pretty
well.
It's -- this personal fulfillment, umm, that's what I
wanted.
Umm, and, you know, part of it had come through that
Starbucks thing.
Part of it -- I grew up in Dublin when it was huge
unemployment.
I think 18 percent was the typical.
Umm, where I grew up, lots of unemployed fathers -- and I
say fathers because
typically the mothers weren't working until the father got
unemployed and they'd go
looking for a cleaning job or something -- and I knew from
the factories where my
parents worked that good managers could make a huge
difference and I saw the standard
of management that was out there in the average company.
I was, like, I can make a difference.
So there was 2-fold motivation.
And so but I'm 27 and I'm in New York and I'm thinking, I
don't need this huge money.
I wanna build something.
I'll either start something now or this place Stanford'll
have me.
They seem to spit out entrepreneurs.
I'll go out there and see what they drop me off with.
Well, this place had me.
That was nice.
I came out here.
And I got two years of discussing pros and cons gearing
towards a lot of bright
people.
That was wonderful.
Built a great network.
But ultimately I was ready and I was chomping at the bit and
I did believe there's a
lot that I just didn't know.
I sort of knew I didn't know.
I wish I could surround myself with more smarter folks but,
umm, it's in the case
study.
I mean, the first three things Christian and I had to learn
were selling, leading,
and managing, and we're not done with that.
I mean, the speed of, I met Joel Peterson out in the parking
lot, the speed of
learning has only accelerated, umm, since leaving school and
continues to do so.
And in terms of, umm -- there's -- we've had some -- look, I
mean, we've had some bad
luck perhaps that maybe we weren't kicked out of the came
early on and kind of did
something else.
We persisted onwards.
We've had the good luck that we've found something else and,
umm, and we're running
on that hard.
Umm, but it was just -- I felt that readiness. That's it.
I just felt it and I wanted it and there were risks there
and those risks are pretty
subjective because I think David's right that looking at
your peer-set, the green
eyed monster can really chew you up when I compare myself
to, you know, the couple of
classmates that are driving the Lamborghinis from the choice
of cars in the big
parking lot at their house.
Umm, and there are some of those guys.
Umm, but that's not what I wanted to do.
I wanna build something.
Umm, so that's why.
MAIN SPEAKER: Thank you, Sean.
Is there -- you talked a little bit about how you got in
your career to that point.
Is there, umm, anything else why you picked that point
versus another point in your
career to do it?
GUEST: So, I really I just felt ready in my gut that it was
time that I could lead a
company successfully versus being a GM which is great
training but it is different
when you don't have that CEO to sorta go to and sometimes to
tell you, you can't do
things when you were right.
'Cause now you still have the board.
By the way, the board can be positive even in a sponsored
search.
Hopefully we'll have time to talk about it.
Just I was ready and so I didn't feel like frankly it was as
big of a risk as it
would have felt to me before.
And we can talk about why.
We'll talk a little bit about that later but David had
pointed a lot of the points
out.
It wasn't a strategy experience.
There's a lot -- I can assure everybody in this room are
very, very smart and
probably very strategic thinkers.
It was having a number.
Having to hit that thing every quarter or not hit it, figure
out how to conjure up
the revenues, to hit that right, build a team.
It was that kinda stuff that really I felt comfortable in my
own skin at this point
managing people and that's what gave me the confidence.
It wasn't that I could outthink the next person.
MAIN SPEAKER: David, you said you sorta felt ready, too.
You were just prepared, too.
Would you add anything to that?
PANELIST: Yeah.
Well, I think in retrospect I wasn't and I thought I was.
You know, and so, umm, the way that I think about timing is,
umm, I think that this
is an inherently kinda risky thing and so if you're gonna do
it that's fine.
You're gonna take on risk. It's like everything else you do
and you take on risk.
You then work out how do you minimize the chances that
things will go badly and also
if things do go badly you kinda hope for the best and plan
for the worst that's what
CEOs do all the time.
And sorta given that I would do it -- if I were doing it
again and wanted to do it I
would do what Sean did it.
I'd do it having being a GM somewhere.
I'd do it having had all of that experience because I think
you're father better
off -- we screwed up a bunch in the first couple years
because learning how to do the
job and in retrospect that didn't kill us.
It certainly probably left some money on the table but it
didn't kill us.
But I'd be far better off having done it having had some
sort of general management
experience.
And then secondly I think if it all goes pear-shaped --
which can happen -- umm, you
need an exit strategy.
And I think to the extent that you have built a brand and
you've built a set of
skills and a network through having a strong, operating
career prior to doing it
you're in far better shape than you are when you do it, you
know, sorta straight out
of business school.
I did it business school plus McKinsey which is -- it's a
little bit better than
straight out of business school uh be I think not a lot.
Umm, and so you know at some point when that fails if you
try to buy something and
you finally buy it and to Sean's point if you're seven years
in at some point you're
no longer kinda somebody who worked at Goldman Sachs and TA
Associates and, as you
know, Stanford MBA.
You're now just some guy who, you know, kinda ran a company
kinda badly for half a
decade and, you know, spent seven years of their career
making no money for anybody.
And I think you want something to fall back on and
preferably that's a very
successful GM experience prior to doing it.
MAIN SPEAKER: Is your comment about three years at McKinsey
not being much different
a comment on the nature of the work?
PANELIST: It is.
Look, I had a great time at McKinsey.
I think it's a fantastic firm.
It's a lasting experience.
I'm totally with Sean.
What makes a difference with being ready to do this stuff
it's being able to bring in
a enough and it's having to manage a team of folks, and it's
having to hire, and it's
having to fire, and it's the things that general managers do
all the time and you
don't learn at business school and you don't learn at
consulting.
And I think that set of skills is just invaluable and it's
hard to do any way than
through apprenticeship I think.
MAIN SPEAKER: Michael?
PANELIST: Uh, so it's clear we're all in violent agreement
about the operational
experience and managing people and all that stuff.
So, all folks on stead is what was key for me in ten years
is I had a much better
perspective and idea of what I wanted and so in part why I
chose self-funded versus
the more traditional or sponsored model.
I had a pretty clear idea of the end game.
And for me the end game wasn't to buy a company, flip it,
and retire in five years.
I'd gone through -- I'd graduated in '93, a little something
called the Netscape
browser was launched around that time, and I lived through
that entire boom and bust,
and to echo what David said, I saw a lot of really smart
people make nothing out of
it and I saw a lot of really not so smart people, umm, pick
the right company at the
right time and make a lot of money.
And it kinda wasn't -- there wasn't any rhyme or reason
around how hard you worked,
umm, there was a lot of timing.
There was a lot of luck.
And so I had a pretty clear idea that now my end game, my
time, I knew what I wanted
and it was I wanted to go out, buy a company, build a
company, and I expected and
fully expected that was something I was gonna be with for
15, 20 years.
My goal was to generate income.
My goal was to get it big enough and step back and play a
strategic role day-to-day
but still stay engaged.
Because after ten years I realized that was still important
to me.
I can't conceive of a world where I just retire and do
nothing.
I wanna stay engaged.
I wanna be, you know, still stimulated by something
important and meaningful that
I've built.
So, for me what was key was I had a very clear idea of what
I wanted and what I
expected to get out of it and that's what made it the right
time for me.
MAIN SPEAKER: Thank you.
The next question I'd like to put to you four is -- and,
umm, Sean I'll start with
you -- is how did you attract investors to your search fund?
In your case your I guess was Alpine so it was different but
they didn't just
magically appear.
How did you attract them and then I'll ask the others.
PANELIST: Uh, so coming out of Northwestern and even after
that I wasn't, umm, I
guess aware of the entrepreneurship through acquisition, the
search fund.
So I just knew what I was trying to do and so when I knew we
had that six months
after we sold the company I just started reaching out to
people I knew back in the
states.
I was -- I knew I wanted to be at a growing company, like,
mid-sized.
I didn't want it to be venture capital.
I'd worked at two venture backed companies and that wasn't
for me.
So, anyways, I just started whittling down the private
equity firms that I thought
sort of were investing in middle-market companies and sorta
the criteria -- the type
of company I wanted to work with.
That's how I went about it.
I also worked for GM rules.
I got a hedge of my bets because I was bringing home a wife,
and kid, and a dog.
You know, I had to start looking.
Really that was what I did and tried to be thorough about it
and talked to people.
You guys call it "informational interviews."
You learn a lot along the way and just kinda naturally came
to a point where the
Alpine folks were investing in types of businesses I was
looking for or thought I was
looking for 'cause I wasn't picking an internet retailer
going in.
Umm, and I trusted 'em.
And, yeah, we talked a lot about the board control issues
and those are very real and
I think those are very real in any of these scenarios.
So I just felt a really good trust for them which made it a
really easy decision for
me and they were, you know, crazy enough to bring me on
board.
MAIN SPEAKER: Thank you.
David, how did you and Mike attract investors?
In three weeks?
PANELIST: Yeah.
You know, it was three weeks 'cause we been a bunch of time
kinda pre-marketing
before we went out to sell.
So that number I was a little uncomfortable with it going
out there.
Reality is I've been thinking about and talking about doing
a search for two years,
three years.
And so I already knew a whole bunch of folks, umm, including
a couple folks you're
gonna have in the class here on Thursday who are just super
people who helped me out
through that process with Will and Bill.
Umm, I think that's a little bit tied to me with the
question of what are you looking
for with your investors?
I'm gonna kind of answer both, if that's okay.
Umm, I liked the set of things we had up there but
particularly the fact that dollars
is first is pretty important.
And it should be first, second, third, fourth, fifth, and
then, you know, somewhere
around sixth you can start talking about other things.
What we ended up doing was we sort of decided -- first of
all, we built a list of I
think literally 200 people that we thought would plausibly
be search fund investors
for us then we worked through who had really deep pockets
and for us that meant that
they would be prepared to put of the order of a million
bucks in cash into one single
deal because we wanted to have the ability to put fifteen
million dollars in equity
ask we only wanted to have 15 investors.
And then we kinda rank ordered them in based on kinda two
criteria one of which was
how well do you know the search fund and how comfortable
will they be investing in
this model and the other one was how well do they know us?
And folks that were both, so, who knew us well and who
understood this model, we
prioritized first and we quickly got five of those people
and we all had deep pocks.
Umm, and again some of this was I'd been talking to some of
these folks forever.
I'd worked at a company which was a search fund company,
very successful one, and the
two founders were both sort of prepared to sponsor me
through my search effectively
to make introductions for me.
Mike, similarly through his career had had, you know, had
done some fantastic things
for a couple of very wealthy, highly respected deal people.
They wanted to back him.
And so suddenly within a couple days or prelaunched if you
will we had five of the 15
taken with folks who were real name investors who had real
money, knew was really
well, and so it meant a lot when we go to other people and
say it's X and they know
who X is and they know that X knows us really well.
Umm, and that just made it that much easier with you get
both of those cross sections
of know you, know the search, and they're really well
respected people as well with
sorta deep pockets.
And from then on it quickly ran through.
For each of those folks who sorta said yes we sorta said,
hey, can you suggest
another set of folks that you think would be truly great
investors?
And so we went down it like that.
And the other thing we did is we were very careful about
trying to make sure that we
had no concentration of power in our search fund.
And there's a theme that came through the class that I'm
sure we'll talk about in a
second which is control and autonomy on one hand and the
flip side of which, which is
support and involvement from an investor on the other.
Mike and I were decidedly on one end of the extreme that
said we wanna be able to
control our destiny entirely.
And that means we want a completely fragmented set of people
investing in us, we
don't want anybody who's gonna actually, uh, own more than
one unit and we don't want
anybody who's gonna be able to drive the decision of whether
or not we buy the
company.
If we like the company we wanna be able to force it through,
umm, and so the private
equity funds for example that might plausibly invested in us
-- and there were a
few -- we talked to when we were basically already sold.
That way we had relationships such that when we fund the
company we had a gap we
could go back to those private equity funds and raise the
slug of 4 million, or five,
or six, or seven, or whatever was required to finish off the
acquisition and we'd
formed relationships with 'em that were solid from that
perspective.
We didn't have to, you know, told them we only needed three
units sold and tell them
to get lost.
We told 'em, hey, we've already got one unit left might you
be interested?
Oh, terribly sorry.
Somebody else just took it.
Umm, and that was kinda the order in which we sorta thought
about it.
So we were very thought about the order in which we hit up
those sets of folks.
MAIN SPEAKER: Thank you.
PANELIST: -- I was doing a very specific industry search and
so for me I was looking
for investors who brought one -- I'm a manufacturer so I was
looking for distributors
who could bring me sales so went out talking to people that
could actually invest in
me and then turn around, have their companies funnel sales
to my company.
Second thing I was looking for was prior relationships.
I had spent a lot of time dealing with venture back company
boards and saw that what
they don't provide -- I have to smile when I hear some of
the things you guys are
looking for from investors 'cause the reality is, is they
don't have a lot of time
for you.
They want the numbers.
That's what they care about.
They really can't spend or don't choose to spend that much
time understanding your
business so you're not gonna get a lot of insight out of '
em.
So I wasn't looking for people necessarily who were gonna
provide operational
experience or things of that nature.
But I wanted people that I had a relationship with me so
that they went into the deal
with a -- with a basis and foundation of trust and then I
felt I could grow from
there.
So the one thing that you mentioned that I wish I'd done
differently is probably a
third really important thin would have been people had
deeper pockets because I those
people who, umm, you know, kinda put the element of what
they would invest in any one
opportunity and then when I came back to them later with
acquisition opportunities
and I needed more power, they really weren't there for me.
Uh, it was kinda like, uh, let's see what we can do.
Let's go to a bank.
Let's try other avenues.
And that hurt because they were in the best position -- they
weren't unhappy with my
performance.
They weren't unhappy or it wasn't that they didn't
necessarily believe in the inside.
It's sorta that they had already given as much as they were
willing to give and I
should have looked at that follow on investment as a more
important component of who
I chose.
PANELIST: Umm, so, on the question of how we attracted our
investors when we went
out looking for money it was about a year after David went
out and we went out and
June 2002 and since I knew of three search funds who went
out summer of '01 we went
out summer of '02, clearly 9/11 had happened and the Dows
went into a free-fall.
So, when we started raising money in the middle of June '02
the Dow was at 9-7 and by
the time we closed our fund it was at 9-6.
So it meant that everyone who ought to have liquid assets to
invest in us we really
had to sort of twist their arms and twist a lot of other
stuff with some pretty
brutal implements.
It was a classic sales process.
And someone said, here, what do you take away from the, umm,
the two-year process or
that whole process of looking for money?
I think it was Victor.
No?
Okay.
What do you take away from the process of looking for money
and then going and
looking for a deal?
It's not the sales.
It's not the ones I wanted.
I wanted to go in and run a business but we got really good
at running a sales
process.
First of all, you gotta come up with the value propositions.
There's a lota people out there looking for none in this
brutal time so you gotta
come up with how you're different and when you're going in
front of a lot of people
your pitch really starts to hum.
Umm, in terms of the process I think that's what we were
really good at.
We didn't know people.
We just didn't.
We got a spreadsheet and we wrote down 70 names when we
started and I think we
actually wrote a White paper and I think the CES, has this a
lot of search funders
who are looking for money today are passing this around.
But we wrote down 70 names nine months later we had a
thousand 70 names on it and we
sat down face to face with over 200 people and from that 200
people we ended up
getting I think in the search fund something like 25 people
which isn't an ideal
number at all.
It's way too high but, you know, back to David's point.
It's the dollars.
And we were actually looking for experienced dollars.
We were looking for folks who'd run businesses and who could
be value at.
And by the time we did our deal, because it was such a bad
time for raising money we
had 44 people in the deal and all of those additional people
had come from people
we'd hit up along the way.
But in terms of the sales process it was that calling people
saying, hey, tell them
that we're doing, tell them that we're trying to achieve,
and when they try to shut
you off the phone you give them a reason that they ought to
be talking with you on
the phone and ultimately what you're looking for is two
names.
'Cause if you can get two names from everybody you're still
alive.
Umm, so, I certainly know that -- I didn't know Sean at the
time and I didn't know
Lisa at the time but Jim -- we hounded poor Jim.
We hounded poor Peter.
We definitely hounded poor David.
We hounded everybody for names.
And that's how we did it was classic just pure grind at
sales process.
MAIN SPEAKER: Thank you.
So, you were all successful in buying a company.
Umm, and David I think this is yours -- yours to start with.
Umm, how is the experience of actually operating it
different than what you expected?
PANELIST: Umm, well, I think in a -- you know, in a few
different ways.
As I said, I think one of the things I -- one of the things
I discovered quickly was
that I wasn't as good as I thought I was and that there were
a set of skills that I
was learning for the first time.
And as a result we messed up.
We messed up with some of our hiring, umm, with some of our
critical hires, uh, we
messed up in managing I think our sales process some, umm,
we messed up with some of
our key accounts in terms of account management, and so I
think, you know, one of the
first things I learnt was the fact that there was a set of
skills that we were
missing.
And so that was kinda different.
Umm, I think secondly we had -- and this is sorta similar to
the last conversation
but we had pulled together what I still think of as being a
phenomenal board of
directors for a typical search fund business.
We had four smart, experienced, committed folks sitting on
the board who had great
alignment with us and were relationship type of people and
yet the board experience
was a curiously unsatisfying one for us because kinda to --
what sort of amounts to I
think everybody on the panel -- a set of folks who have I
think careers and jobs, and
they were doing, you know, important things and who were
managing partners at firms,
or who are professors at the GSB or whatever it is just had
limited time.
And so you'd come into board meetings, we found, and very
quickly it turned into,
"How did you do in the last 90 days"?
And we said, "We did great."
And they'd say, "Great.
Congratulations.
Now do it again."
Umm, and.
>>
[Laughing]
PANELIST: And that was kinda what our board meetings started
to turn into relatively
quickly.
And again that's not to knock our board because they were a
set of fantastic folks
but what were they gonna do?
They're busy working the other 90 days in the quarter.
And one of the things that we did do was we took on a
venture firm after about 18
months who didn't actually invest in the company.
They just bought shares from some of the existing folks and
we did it deliberately to
kinda raise the game.
Not the quality of the board members because I don't think
the quantity moved. I
think it just stayed extremely high.
But we now had somebody whose actual job it was that we knew
well and that as a
result went on sales calls and got to know members of our
executive team a lot better
and became somebody that you could talk to on a daily basis
without feeling like you
were being a pain in the backside by calling them.
Umm, and so, you know, I think those are kinda the two
pieces.
One, that we weren't as good as we thought we were and that
we were kinda ready to
screw up; and then, secondly, well, therefore you need
assistance.
We didn't really a hundred percent get it from our board and
that's not to knock
them.
It's just, you know, the difference between having a
professional set of investors
who have real skin in the game of what you're doing as
opposed to, umm, folks who
were doing it as a hobby.
MAIN SPEAKER: Can you give us one war story of early on of
something that didn't --
you said hiring, sales, key accounts.
PANELIST: So, yeah.
So, I mean, I think the best one of the lot was we invested
just a huge amount of
time in getting a VP of sales and for us this was a company-
making hire as far as we
were concerned and we hired an individual who just had a
glowing resume and who
had -- ended up being president of a multimillion dollar
public company, and had
driven sales at a couple of technology companies,
extraordinarily successful, well,
multiples larger than our company was at that point and we
had to fire him within two
weeks of hiring him for a variety of reasons I went go into.
And having agreed with our board that this was a key hire,
and having negotiated an
unbelievable compensation and option package for this
person, tough to go back in 14
days later and say, "I'm terribly sorry.
We screwed up.
We gotta fire this guy."
It was a pretty big one.
MAIN SPEAKER: Thank you.
Thank you for sharing that.
PANELIST: So, for me it was a -- the biggest deviation was I
came from high-tech.
I came from an industry where my peers, the people that I
worked for, the people that
worked for me, umm, you know, had a minimum of a, uh, an
undergraduate degree, many
of them had advanced degrees, and so all that operational
experience and supervisory
experience and all those things, that was great but then
when for me I bought a
manufacturing organization where people are hourly, uh, blue
collar, it became a very
different management experience.
And so fortunately I had the experience to kinda deal with
it but you're just dealing
with a whole different set of issues.
Different way to motivate people.
It's very different to motivate people in my industry and
than it was in high-tech
where everybody had equity, and shares, and options, and did
all the right things for
the right reasons.
For those were some of the things that really deviated a lot
was going from one
environment to the other thinking I had transferable skills
which I think for the
most part worked out but just a different set of issues --
operational issues -- when
I chose to move so far between industries.
MAIN SPEAKER: How has your experience deviated from what you
expected?
PANELIST: From when I expected?
Umm, someone mentioned here they really wanted to manage
people.
Umm, I can't remember who that was.
Umm, the bizarre thing is I meet so many business owners who
are like, crap, I hate
managing people.
This is hell.
Get rid of these people.
It's bizarre.
I never understood why search funders -- the guys who worked
in private equity firms
would write down in their books one of their key ratios in
sort of ascertaining the
quality of a business is the revenues per employee.
I'm like, who cares if it's 70,000 versus 700,000?
Umm, the reality is it's a lot easier to run a business with
when it's 700,000 per
employee than 70,000.
Umm, managing people's really hard, umm, and, just that's
probably the biggest thing
by far.
I just way underestimated.
And, uh, what else?
Umm, lack of -- I've written down here we are just under
leveraged and I think this
goes to David's experience thing of, today I'd know going
into a business crap, I
don't care what this is doing to the cash flow.
We gotta get in a more leveraged management team here today.
We need to make differences immediately.
I'd know going into a deal that I need to raise an extra
half a million from the
investors so that in order to do these things rather than
and keep the investment the
minimum possible.
Umm, in terms of the under leverage there's that lack of
tactical management, umm, or
other executives, umm, the difference in workforce. You
know, you start to employ,
you know, college grads from nice colleges and it starts to
really make a difference
in sort of your daily experience, my daily experience.
Another thing on lack of experience, you know, David
mentioned getting rid of a VP of
sales after two weeks.
It took us nine months.
That's our lack of experience.
Umm, you know, we should have just taken the guy out back,
shot him very quickly.
>>
[Laughing]
PANELIST: Umm, by the way, one sort of business group I'm
in, the chair was asked
recently, "Do you think Huron really does have a stick that
he takes to people?"
And the answer is, no.
The torture implements, the stick, the shooting, it's all a
figure of speech.
The final thing on difference of expectations is the lack of
board umph.
It's just I think David had a far superior board to us.
I mean, we have great guys on the board but there's a degree
to which when I describe
some of the things we're going through I knew that I wanted
more operational depth on
our board than the money guys that they wanted on the board.
Guess what?
When I described to them what we were facing on the sales
team or with other
operational issues or the lack of management issues, this
isn't what the finance guys
were good at.
They just didn't know how to deal with this.
And that's very frustrating.
That wasted time.
MAIN SPEAKER: Okay.
Thanks, Sean.
And then I'm gonna open it up to questions in the classroom.
GUEST: Umm, I mentioned the one we bought it on September
5th about a week before
basically the high end retail market really cratered and
turns out we were in high
end retail.
So, again, one of the things that deviated was the, uh, the
market.
And so what that did is we had this great transition plan
where I was gone that --
'cause the basically the three owners and executive team
were stepping out of the
business, I was stepping in.
And so we were gonna have this nice, casual sort of hundred-
day plan as I learned the
business.
Well, that was a luxury we no longer had.
So that was a big difference.
And in honestly looking back these guys said what I would
say is that I wish I would
have moved faster to make some changes I kinda knew in my
gut were the right things
to do.
And, you know, I let 'em linger on 'cause for some reason
you don't wanna, you know,
you don't wanna go and shoot the person who's been there
forever that could have an
impact on the culture.
But you know what?
You knew it was the right thing the do and you look like I
just lost two to three
months where I could have been making forward progress.
So those are definitely things I would do going forward.
That really is the biggest one.
I think, you know, on the upside is that as it turns out we
got a real brand and when
you do diligence it's really, really hard to figure that
out.
You can figure out the balance sheet.
You probably find some surprises but really is that real
brand there?
So even though the market's down, our market share's up a
lot.
So again I think it's just you gotta adapt and that's one
nice thing is that if
you've made mistakes before, that's experience umm, that you
feel a bit more comfort
and adaptive when things aren't going as you expected.
MAIN SPEAKER: Great.
Thank you for fielding those questions.
Let's open it up to questions from the classroom.
Dennis?
(Question being asked in the background).
MAIN SPEAKER: So, the questions is -- I'm gonna repeat the
question for the video.
You've heard of people who have done search funds outside of
the states.
Is that for anyone in particular?
STUDENT: Yes.
Two the two mates.
PANELIST: I can come up with them.
They're in my computer somewhere but they're -- before we
went out there'd already
been a couple of guys who were relatively successful in the
UK and since then we've
heard from multiple folks who wanted to do it in South
America and Mexico.
So I can get you names.
STUDENT: All right.
STUDENT: So, to anyone who wants to answer this question, is
what do you find this
process that really surprises you about yourself?
So you look back and say wow, that was me doing that?
So, something really positive?
PANELIST: I think for me, umm, you know, I thought I worked
hard and I thought I had
been under stress, you know, working for VC backed companies
and all that.
And, you know, it went much deeper than I ever anticipated
and so, you know, there
are a lot of sleepless nights the first couple of years and
because I really had no
choice, you know, I couldn't just walk away.
You stuck with it.
And, uh, you know, I made it through and I haven't had a
sleepless night in a long
time.
It's not necessarily that things are easier but there is
this, uh, tremendous hill
you have to get over and once you get over it, you kinda
find out, you know, it's
such a cliche but those things that don't kill you make you
stronger.
They do.
You find out, hopefully you find out that you've got a much
deeper capacity to
overcome things that you ever imagined.
PANELIST: I think I know where you're going.
I don't know if this answers your question directly but I
will tell you that the most
rewarding part of the whole thing was my partnership with
Mike who's still running
the company and who's just -- I didn't know well before we
started doing the search
together.
We worked together for about three months before we started
telling people we were
gonna start to raise a fund, to try to get to know each
other better.
And, you know, I think it's like anything else in life.
For me, I think is you do things as a team the highs are
just that much higher and
the lows are easier to manage and that was an incredibly
rewarding component of it.
PANELIST: I got two things.
Just -- how little I know, or how little I knew.
Last year I turned 37 and I was talking to Joel Peterson
about this in the parking
lot as well.
Basically -- and I described -- agreed with other business
owners on this.
There comes a point, it's like, I gotta speed up how much I
learn.
I read more business books now than I ever learned.
More on leadership than I've ever read.
In addition, the other thing beyond improving on those
skills is one big skill I need
to learn for running business was I ended up taking
meditation classes because I just
couldn't sleep.
I mean, just the crap that's waking me at three and four in
the morning.
Like, that freakin' VP of sales.
That's where I get language, like, "I'm gonna take you out
back and shoot you."
>>
[Laughing]
PANELIST: Like, at four Mountain morning.
PANELIST: That is very zen-like.
PANELIST: It's working.
PANELIST: But it's to Michael's point.
It was the -- it's the level of intensity was quite
something.
It's like, you know what?
Are you gonna make the debt payment?
Are you gonna make the quarter?
It's like, whoa.
I did learn a lot.
PANELIST: Just one quick one 'cause this is a great question
I think.
We're trying to change the culture and how people work at
the company and so every
once in a while you'll see that person you know's really
leveraged if they just
decide to jump on board they make a comment where, like, all
those things you've been
trying to work on in different ways, 'cause you can't just
say it directly, it's
coming out of them and they're being self-directive in a way
you'd like it to be.
And that's good.
So when I do -- by the way, I have a piece of paper next to
my bed 'cause I wake up
so much.
I just write it down and it at least seems to let me go back
to sleep.
PANELIST: I did the same thing.
(No audio)
PANELIST: Great idea.
I mean, I did that somewhat where I failed on the execution
standpoint we've hit a
lot is I did it in a very under capitalized way which forced
me to not move forward
and execute on some of the strategic ideas I had.
I mean, it specifically was I was gonna go in and do things
differently 'cause I had
a lot of experience in that industry and I saw people who I
thought were failing.
Umm, so I still think it's valid.
It's gonna take me longer to get there and I would -- do it
differently would have
followed Jim's advice and bought a bigger company.
'Cause as I told me, Michael, it's just as easy to buy a big
company as a small
company and so if I had approached it differently in terms
of being better
capitalized, gone in with a better management team, in other
words a better base, I
believe I could have gotten there sooner execute on sort of
building a better mouse
trap if you will.
MAIN SPEAKER: Dave, you're gonna, say, fund people who work
--
PANELIST: I think that you gotta be care with that idea.
I mean, I think these are little businesses.
I mean, really to Michael's point, and events get in the
way, you know, events
whether it's, you know, customers quitting, or even signing
up a new customer, or
employees quitting or what have you and I think the idea of
aye got a great strategy
and now I'm just looking for a company to execute against.
Look, if it's a phenomenally powerful strategy then I guess
it can work but I just
think it can be dangerous.
You know, you gotta treat each invest it as -- it's gotta
wash its face on its own
and it's gonna grow on its own and that's hard to do.
Umm, so, you know, that's not to say, you know, look, if you
think that there's a
business where there's a set of interesting consolidation to
be done or kind of a new
set of products to be rolled out that it can be the be neat
and it can't work.
I just feel like you need to know the industry
extraordinarily well.
I think it's very easy from the outside to think that things
are easy to do
strategically and to think that people in the industry just
aren't very smart and
they haven't thought of it before.
And one of the things that continues to astonish me is how
incredibly bright people
are who founded businesses and built them from nothing into
businesses that are
making money.
And just thinking that you've probably got a smarter idea
than them a lot of the time
you don't.
There's a reason why they haven't done some of the stuff
that's out there.
So I'd just be careful, that's all.
MAIN SPEAKER: Thanks.
How about you, Victor?
(No audio)
PANELIST: Umm, you know, so to these guys points what I did
is when my two investors
is I forced myself -- having been on executive staffs of
companies that were venture
backed I tried to force myself to do that sort of reporting.
So even though I spent a lot of emphasis on gaining control
I could sort of, you
know, tell as much or little I suppose as I wanted, I use my
investors to force
myself to report to them on monthly, quarterly, annual
basis.
And so as much as I really wasn't expecting to get a lot of
wonderful insight out of
them I did use them as a gauge to say, okay, her are the
results.
Here's my strategy, here's what I'm gonna do.
And it was sort of third party validation if you will.
So ultimately that's how I approached it.
I tried to force myself to do the reporting and analysis
that is really, super
difficult to do when you're battling with the day-to-day
stuff to just sit down and
run a balance sheet and a PNL and analyze it and come up
with bullet points of why
you're doing something right or wrong is amazingly difficult
to find the time.
(No audio)
PANELIST: Sorry.
I was looking to buy a good company with excellent growth
potential.
So I wasn't looking to buy a, you know, a rock bottom
company at a rock bottom price
because I really do think growth is the engine that's gonna
drive your performance in
these types of deals.
I was flexible in what that could mean but that was it.
And I wanted to buy one that was of a certain size just for
me personally.
Plus, I think, your, umm, the options you have to do
different things are better when
you're a 3 million EBIT company versus an million EBIT T A.
PANELIST: We wanted to buy a great company at a fair price.
That's exactly a lot of growth prospects and something that
we felt was -- we were
perfectly prepared to pay up, pay a fair price for a great
business, much more
important than buying -- we wanted one that was already
going like this.
We just wanted to keep it going like that.
That's what we were looking for.
PANELIST: I remember why -- so, there's all the criteria in
the books that folks
talk about.
The number one thing we were looking for growth and we were
looking for multiple ways
to win.
We had a business that was spitting off cash and it was this
little growth piece.
I think that, yeah, I think in general these companies are
bought cheaply or at low
multiples but frequently I think a lot of search venders
would agree, buy a good
company.
There was a bit of talk about it not being a sufficient
market the size of these
buyouts.
I think it's shocking when you actually get out on the field
that all these
companies -- or private equity firms that were out says we
look at companies that are
5 million plus in cash flow that are down at looking at
stuff with one and a half
million in cash flow.
It's hardly scary at what the competition is against you.
And Alpine, who is across the street from us here, so, umm,
those guys are -- they
got people who are making calls all day long and they're
calling the same folks we're
calling.
It's very, very efficient.
So, fining a good company is really what you're looking for.
And growth is probably the number one criterion that we were
looking at.
And the one criterion I think we screwed up on was
scalability.
The original business that we went into.
It just couldn't -- with the right resources couldn't just
go like that.
Umm, just the business we're building has that.
PANELIST: One quick comment just on the conversation that
was had around, you know,
do you make your returns by buying cheap or do you make your
returns, you know, by
buying the heck out of 'em?
One of the things about the search fund is, it's set up that
you buy cheap.
Basically, you're investors -- you have to convince a whole
bunch of people that this
is a good deal, not just one, a whole set of people and, you
know, it's your first
time buying something, and blah blah blah, it's a whole
bunch of risk etc., etc.
People aren't prepared to pay up and pay, you know, pay ten
times you put down
multiples for a first time CEO who's doing a change control
deal where the founding
CEO is exiting.
And that's -- to me at least that's inherently why a lot of
search fund deals do look
somewhat cheap from a multiple perspective but I'll tell
yeah what.
I don't think that's what drives the returns.
You'll get a 30 percent pop or something like that from
buying something at four and
a half five times that maybe should go for six or seven
these days.
That's great.
You made 35 percent.
You wanna make 35 percent IRR over six years?
You gotta keep that going for a long time.
But anyway so I think search deals are just inherently cheap
because otherwise your
equity providers aren't gonna be there for you.
MAIN SPEAKER: Questions.
Jason?
STUDENT: Umm, so, I guess -- (no audio)
PANELIST: It is honestly just going back to the sleepless
nights thing.
You know, doing it alone, uh, I guess the on the personal
level, umm, if your spouse
isn't on board don't do it.
I mean, just it's not gonna happen.
Umm...
>>
[Laughing]
PANELIST: You know, I had -- I bought a company, umm,
conceived our first child, my
wife started graduate school at UCSF, and, uh, we moved all
within 12 months and,
umm, if it wasn't for my wife and her -- her parents just
never would have happened.
If I didn't that kinda support at home and the fact that I
had an individual that
came from an entrepreneurial family and grew up parents that
had a deli that was
opened 364 days a year and didn't go on vacation, whether
because they couldn't leave
the deli, so she would go on vacations with aunts and
uncles.
I mean, she got it.
She really did.
And I'm so really in retrospect it's not really because I
chose her for those
qualities.
>>
[Laughing]
PANELIST: I'd like to say I was that prescient, but,
honestly interview your spouse.
I mean, figure out if --
>>
[Laughing]
PANELIST: -- if you're in a family environment that can do
this.
I honestly we never would have made it through without her
personal makeup and the
support of her family helping with, uh, the two kids that
we've -- I now have a
five-year-old and a two-year-old and I've owned the company
seven years.
So do the math.
It's been impossibility without them.
As far -- it would have been nice to have a partner.
It would have been nice to be able to leave for a week and
go on vacation.
I didn't take my first week off until year five.
And, uh, you know, all my vacations were you have three-day
weekends and so it would
have been really nice to have a partner that I felt like I
could just, here are the
keys.
I'll be back in a week.
Don't call me.
PANELIST: Yeah.
I think on the partner side of things there are also
advantages.
I mean, to me the -- as I said earlier on I guess the key
piece here is making sure
if you are gonna take the risk you gotta make sure that you'
re minimizing it; right?
So what are your, you know, a lot of times what ends up
happening is that you buy a
business that frankly just doesn't end up being as good as
you hoped it was prior to
purchasing.
And so one of the things you can do that can insure prior to
the acquisition that
you've done everything that you can to make sure you've been
honest and had as much
diligence as you can.
And having a partner is a way to do that.
It's not the only way to do that but structurally, for us,
having a situation where
each of us ran our own deals and the other person played the
devil's advocate role
and pushed pretty hard and said, I think this business sucks
because ... and every
Friday afternoon one of the two of us would be on the hot
seat explaining what we've
been doing and what the deals were that we were working on.
The person just sat there just chucking rocks at the other
guy basically saying
here's why it sucks. Umm, that was a huge source of value
for us, for both of us.
I mean, it got me -- my partner was just much better at
approaching companies and
getting stuff up and running and having a bunch of irons in
the fire and I was great
at analyzing each iron that I had perfectly and that was a
total waste of time 'cause
the vast majority of the time nothing happens; right?
You're really in the business to say "no" when you do a
search fund.
You gotta get through the no deals as fast as you can rather
than the businesses
saying yes.
And having a person there who's efficient at helping you run
through the no's and
doing it quicker and more honestly was huge for us.
There are other ways to do it but that was a big deal.
I think on running the business it's great to have a partner
and, you know, for an
emotional and psychic perspective it's great to have a
partner. You know, the
reality is if it's only gonna work out pretty well you have
less equity.
We have less equity in some of these deals, too.
One sort of �ber comment in this thing I guess is sort of if
you're doing absolutely
everything you can to make sure the transaction is a
success.
That's the really important thing.
Your share thereof whether it's 10 percent, 15, 20, 30, it's
just nowhere near gonna
matter anywhere near as much that it's a success and not a
failure, or that it's a
home run and not a double.
Those are the things that make all the difference in the
world.
And so my partner took half the economics that I took
obviously and that reduced
significantly theoretically what was available for us in the
deal and I'm the
luckiest guy in the world that I did because he added way,
way more from that,
whether it's through the deal process or subsequently in
running the company than
that ever cost me in my half in the economics in that
question.
MAIN SPEAKER: I'm gonna just ask you guys to make closing
comments here and if
there's any time before 6:15 we'll, umm, take some last
questions but if you would
just focus them, uh, any closing comments you want, really,
anything that you wanna
talk about that we haven't touched on, you know, advice for
people in the class and,
uh, and anything that you would, uh, if you did it over
again if you would do it
differently.
That would be great.
Why don't we just go right to left.
PANELIST: I mean, one key thing that I don't expect your
investors to act
rationally.
Umm, I -- one of the key components to this business I was
counting on was one of my
investors was supposed to bring me a snippet amount of
revenue and I thought, you
know, well, maybe I didn't really think about it too
clearly.
It's like, well, he's an investor.
Of course that money'll -- that revenue'll just come.
The sales will just come.
And, uh, in those first five years where I took the company
from two million to
3.8 million had nothing to do with him and had those dollars
come I should have taken
that company from two to six or 7 million.
So, I guess the one thing is -- is, you know, anything that
you expect, any key
assumption, anything you want is, uh, have some teeth.
Get it in writing.
Have some contractual obligation that people are gonna
follow through and never, when
it comes to investors assume, well, they've got money in the
company.
They're gonna make the same rational decision that you
think's rational.
I'm not saying he's acting irrational.
There's a rational method behind that.
I've never figured it out but it's not -- it didn't turn out
the way I thought and
that's a key thing that I would do differently.
PANELIST: Umm, if you go this rout, focus on getting a great
business.
David said this several times in this meeting in some format
and in other forums.
Umm, just focus on getting that great business.
It makes everything so much easier.
Then live within your means.
You know, whether it's entrepreneurship through acquisition
or some other form of
entrepreneurship, everything goes haywire if you don't get
good about your personal
financing planning and your needs.
And if you're thinking, I'd like to do this in five years,
well, plan for that
because guess what?
In five years your cash flow is probably gonna really suck.
Umm, so plan.
And if that's really what you wanna do in five years, build
-- financial plan around
and make it happen.
And lastly on the support item, I -- there's David and I had
partners but then
there's the partners at home.
And I don't think there's a statistic in here but what you
start to discover when you
call search funders around the country is it's mostly guys
and it's mostly married
guys because this reality of, you know, the company that
you're acquiring could be
taking you to Knoxville, Tennessee which could be great if
you're from Knoxville,
Tennessee and you wanna go home to your family but for an
Irish and English guy my
partner wanted to take me to the middle of Louisiana and I
really had to sit down on
what that meant.
>>
[Laughing]
PANELIST: Umm, but you gotta build those support mechanisms
around you.
You just do.
It's a big undertaking and you gotta make sure that the
people who are there are
gonna look after you emotionally throughout this process.
PANELIST: So, umm, I -- he took my bullet because my last
name's Callihan.
We always talk about "Team Callihan".
That's my wife and I.
Umm, she's made a lot of sacrifices, you know, so that we
could get the experiences
we wanted.
But I absolutely agree.
There's definitely -- we could have gone anywhere and she's
from Sydney, Australia,
so Knoxville, Tennessee wasn't this appealing to her.
But we agreed up front on what she would and would not do.
The, umm -- yeah.
And I just say, think about it as part of your career not a
one and done and I'm off
to sit on the beach after this.
That'll probably make you think about planning it better and
as David said I think --
I'm just focused on its success.
I'm not focused on getting rich off this deal.
If I make good money, that's obviously a great thing but I
want these guys to wanna
put me in a bigger company the next round.
PANELIST: So, Sean just took one of mine for sure which is
you gotta take and think
ant this as part of a 40-year career, not kinda what do you
wanna do now as soon as
you graduate from business school.
I just think that's very important in thinking about the set
of skills you wanna pick
up over the time period of your career as opposed to simply,
you know, what do I
wanna do next month?
Umm, I think the key thing is you gotta recognize if this is
a path you're gonna go
down the odds are it's not gonna work.
Three times out of four it doesn't and the other three folks
are just as smart as the
one where it does.
I guarantee you.
I've seen all four of those folks and they're not all that
impressive.
If you recognize that most of the time it's not gonna work,
umm, if you recognize
that most of the time it's not gonna work then you just
start to say, Okay, so what
does that mean to me in the first thing is that you realize
that in failure there are
different kinds of failure here.
The first -- in rank order the things you wanna do are: The
a great deal, do no deal
whatsoever, do a bad deal.
Right in that order.
And you wanna do everything you can to avoid being in the "
do a bad deal" bucket and
recognize that frankly, again, most search funders don't
success in doing that.
It doesn't work out terribly well.
But you're gonna do everything you can to do that.
So that's all around and your search process, people you get
money from, how you
think about, you know, which one of these three transactions
you will go through in
terms of the structure.
For me there's no doubt you would do the funded search if
you can.
You have an involved, committed, experienced set of people
who will help you with
diligence, they will help you find deals, they will help you
negotiate deals, they
will help you find the little Easter eggs that are hidden
there inside of the
financials or the legal problems.
Umm, you do everything you can to minimize the chance -- do
you think about a
partner?
Do you think about maybe you're able to do it yourself and/
or you're able to run the
company yourself?
From a timing perspective you ask yourself: Am I ready
today?
Am I really ready to put my career on the line as a CEO of a
business or are there
things I should learn in the interim in umm, and I
think you give up control, umm, you give up
economics, umm, you do everything you can to make
sure that the field you're involved in, the deal you
do is a successful one or that you don't do a deal
at all.
Those are the things I think -- the final thing I think is -
- and you're all doing it
just by virtue of being here today -- but I think you should
try and learn from the
smart people and the accumulative mistakes of smart people.
And God knows -- I mean, the CES with Linda just does a
phenomenal job on capturing
as much of the wisdom and the network of folks that are out
there.
The folks that you can get folks like David and Peter
teaching this class is just --
it's one of the things that makes GSPN an amazing place to
be at.
The accumulative of David and Peter in this process is just
-- is extraordinary.
You guys would be lucky to get time with them if you're
trying to start a search fund
they're actually here teaching a class.
Umm, the fact that Jim Elis is here would have you -- there
are so many smart folks
that have made most of the mistakes that are necessary in
this and so be wise and
learn from those people rather than be smart and learn from
your own mistakes, if you
will.
MAIN SPEAKER: Great.
Thank you all four very much.
>>
[Clapping)]