Search Funds - State of the Market Panel Discussion
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Copyright 2009, The Board of Trustees of the Leland Stanford Junior University and the Stanford Graduate School of Business


PETER KELLY: So, this is -- again, Bob Oster, Brandon Cope,
and
Charles Phillips, and I will say we're really lucky because
they
really have a different perspective on investing than each
other
does and they both are involved with really good
organizations.
Charles with one, he's creating himself through his search
fund,
Brandon with Peterson Ventures which is really an excellent
investor and Bob really through a network of investors has
created a search fund for a long time. Bob, I noticed humbly
on
his -- modestly on his bio left out that he was CFO of a
division
of iTel and Syntax, and Oracle for when they went public.
So we have some good brain power in this room.
If I could -- let's try to over this way.
Sorry, Jefferson.
>>
[Laughing]
PETER KELLY: Is that okay?
Can you see over me okay?
I'll just sit over here.
So, would you guys comment on especially the first hundred
days
and what you've seen people do well?
You can feel free to comment on other parts but I do wanna
get on
to other questions that are specific to you but on the first
hundred days and then anything else that jumps out at you
from
the discussion.
Bob, would you start?
PANELIST: Yeah.
I just wrote down three notes.
It's not exactly first hundred days but I just thought the
deal
was put together on a false premise and if I had been an
adviser
of the search funder I'd say find out.
You should establish enough credibility with the seller that
he's
happy to introduce you to employees and customers and is not
giving you the standoff malarkey about I'm just not sure how
you're gonna bowl and how everybody's gonna react.
Once you're in there the two they thinks I've observed,
having a
good answer to the question, "How do I know what I think I
know
about the business?"
We talked about following the cash and all those things and
the
most effective thing I've seen is people get involved in the
business.
They spend some time with the salespeople, they've gone on
the
shop floor -- hopefully it's not a manufacturing dealer --
they've looked at how the software -- whatever it is.
The biggest mistake new entrepreneurs make in my experience
in
that first hundred days is they're confronted a problem and
they
immediately try to figure out how to solve it.
That's a waste of time.
What they should think about who do I know that's dealt with
this
one before?
And the chances are really good if you built your investor
base
with people who bring more to the table than money and you'
ve got
a board that's -- there's somebody who you can identify and
say I
bet -- and call 'em.
And that's a huge time saver.
PANELIST: So, what I'd say first of all there's not a right
answer so I'll give you my opinion but I thought the
opinions
shared were really solid.
And I think my one point that I'll make is tied to Bobs
which is,
you know, in the MBA student what you love to do is
overanalyze
everything.
So the first thing you wanna do is go in and build some
complex
model, right, to figure out how to run this business and I
would
say actually take a step back.
And I don't know if you prioritize this, if it was in the
order
but you mentioned calm the people, get to know the people.
I would say make it a people thing first, you know, really
get to
know the people.
Let down some of the analytical prowess you have and just
treat
it as getting to know individuals, getting out on the shop
floor,
getting the know the people.
I think that's the biggest flaw I've seen is just
overanalyzing
everything and taking too much of an analytical approach.
You gotta have it but remember you're dealing with people
and
typically they're not people like you.
These are people that may have barely graduated high school.
So different.
PETER KELLY: Thank you.
PANELIST: I've never bought a business.
I've run them before.
And what I can say that I would -- I'm class of '99 so I'm
sitin'
where most of y'all were sitin' some years ago.
But what I can say, you have to let your employees do their
jobs
and I will tell you that as an MBA your tendency is going to
believe that you can do better than they do it.
And it's important to remember that your primary job there
probably through most of the time that you're at that
company if
not the entire time is not to do anyone's job for them but
to
make them -- put them in a situation where they can most
effectively do their job which means you basically are a
servant
of your employees.
So you have to remember that because most times -- I mean,
you're
gonna find yourself in a situation where there are guys that
can
shut your whole company down if you don't get a long with
them.
And how do you deal with that?
You don't run in there, confront them, and say, "Well, you
know,
I've done all the analytics.
I know the smart thing to do."
You may have to swallow your tongue, you may have to swallow
your
entire pride and just work with that guy 'til he gets right
and
eventually comes to respect you but still your job is to
serve
the business.
So you have to do whatever it takes to keep things going at
the
risk of proving that you're the smartest guy in the room
which
you won't be anymore.
PETER KELLY: Thank you okay.
We have a set of questions that I'd like to run through and
then
give time for the students to ask some questions, too.
And actually what I may do is go through some of these then
I'll
put it up more broadly to make sure we cover student
questions.
So are traditional search fund investors still investing?
PANELIST: Yes.
>>
[Laughing]
PANELIST: I would say yes.
What I've seen is that there's been a proliferation is
search
funds and so I think a lot of the investors are, you know,
and a
lot of the funds somewhat tapped out.
But that said, if a great search funder comes along I think
people are still investing and looking for great
opportunities.
PANELIST: We raised our money last November so I'd have to
say
they are.
>>
[Laughing]
PANELIST: There's more money now than there was then so
yeah.
Absolutely.
PANELIST: Brandon's point's a good one, though.
There are a couple of dozen, or I don't know how many,
there's a
number of people who have been doing this for a long time
and are
still doing it but the volume of potential search funders
relative to that pool means you gotta -- those of you who
wanna
do this have got to find other people to bring into the
fold.
I couldn't -- I'm seeing people at the rate of one,
sometimes two
a week and I mean there's just no way in the world I could
do all
those deals.
I wanna be helpful any way I can so we're all investing but
we
need more investors relative to the search funders.
PETER KELLY: What do you look for in a search fund when
you're --
PANELIST: God.
>>
[Laughing]
PANELIST: I'm sorry to be smart aleck.
I don't know that I have a good answer to that, personally.
You're all bright, goal-oriented, articulate, have good
resumes,
and now there are more experienced people so for the
potential
investor, identifying the right ones you wanna do with, you
know,
have a lot to do with the person connection but also your
ability
to clearly differentiate yourself.
And I don't have a specific guideline how to do that but you
need
to put some energy into it because -- compared to when I
started
out, you know, when I'd see one or two a year and they were
all
sent to me by Irve it was a lot easier than when you're
saying
thirty a year and they're all very qualified.
And so the advice I give 'em is start thinking about what --
how
it is -- why you're gonna win and how you can convey that to
somebody.
PANELIST: I'm gonna agree with that and then add something
to
it.
I think differentiation so just in the last two weeks I've
probably looked at close to ten search funders and what's
different about you?
That's always my first question now is tell me what's
different?
'Cause your resumes look exactly the same so what's
different?
Have you operated a company?
Do you have some sourcing advantage?
Did you beat Lance Armstrong in the Tour de France in
something
that's really interesting that really sets you apart from
others.
I think about that.
The second thing that we look for is really -- and I'm
oversimplifying here.
What we see are two different types of people, generally:
Analysts and managers.
Okay?
And I think typically based on the backgrounds that most of
you
have you tend to be extremely good analysts and you've
proven
that but there's less proof about a great manager and a
great
leader.
So if there's so way that you can demonstrate that you have
the
ability to lead, to manage; right?
When I talked to Joel Peterson about Jim and Kevin who I
didn't
realize this until I talked to Jim today, they didn't have a
consulting banking backgrounds.
He could see -- what he mentions is that leadership about
that he
saw in them; right?
That ability to manage.
So think about how do you demonstrate that ability?
I think the other thing that we look for is and Bob said, "
God".
I mean, the full skill-set, right, which is can you source?
Can you do a transaction?
Can you lead?
Can you get to an exit?
Whatever that means. So I would look at yourselves and say
look,
if I don't have these skill-sets then maybe it makes sense
to
have a partner who will bring that.
So we look for all the skills whether it's in an individual
or a
partnership.
But I think you need to have the full package because others
do.
PANELIST: And your references are really critical 'cause I
always check 'em and I always ask who do you know that could
tell
me something about these people so we keep -- I keep pushing
and -- references are really valuable resource for an
investor to
get the answers to the questions that Brandon was raising.
I mean, if I talk to a former employer and I say, are you
gonna
invest with them and they say yes and I say why?
And they explain to me, because whatever it is.
He or she can do the stuff you need done and here are some
examples, that's really valuable.
And so you feed to be mindful of who it is you're gonna use
as
references, and what they're gonna say about you, and how
they
can validate whatever your position is.
PETER KELLY: Do you have any opinion, Charles, of what
people
are looking for in the search funders or the --
PANELIST: Yeah.
I think that in this environment you're gonna also have to
prove
to people that you're not just doing this 'cause there isn't
anything else available.
I mean, I hate to be that way but for me I quit my job last
March -- well, March of what is this now?
PANELIST: '09.
PANELIST: I quit in March of '08 and pretty much I didn't do
anything from March of '08 to November of '08 except raise
money.
And I pretty much let everybody know most of the guys in the
room
have spoken to me who aren't you and I said, "Hey, I'm gonna
get
this done one way or the other.
If I gotta go to Timbuktu to raise the money I'm gonna get
it
done but I will spend in two years trying raise the money to
get
there."
You ask yourself if you have that kind of commitment to this
and
if you don't it may be a sign that this is not what you
wanna do.
The process is hard beyond that.
Running a business is really tough.
So, you know, one of the problems that I faced is when I
came out
there was this whole metric of guys running around saying I
raised my money in three months.
That wasn't me.
On the other hand what I was able to say was I walked away
from a
job that paid me $300,000 a year to come do this for 80
grand and
try to find a business to buy.
That was my differentiator.
Do any of you guys have differentiators like that and you
don't
have to have them now but you can build them.
So if you really wanna do this, I mean, are you prepared to
take
two years to go get another job that will sure up what you
don't
have and then come back and do this?
If you have that kinda story you gonna essentially get it
done
but if it's something that you look up a year from now and
say,
"God, what did I do with my time?" You might not wanna do it
anyway, especially in this environment.
PETER KELLY: What do you think makes a successful search
fund
acquisition?
In the deals you've done that have turned out well or you've
seen
them turned out well what do you think makes a successful
deal?
PANELIST: That's a tough question to answer.
PETER KELLY: That's why I knew you could handle it.
>>
[Laughing]
PANELIST: Because search funds in their respects are -- one
of
the things that search funds have in common with the venture
business is, not always but most of the time companies can
be
wildly successful for reasons that have nothing to do with
why
you invested in the first place.
I can give you lots of examples.
Two of them are right here in the room.
So the successful ones just have a lot in my case -- I don't
know
what it is, luck or good judgment, just picking the right
entrepreneur who had the passion and dedication to operate
on the
premise that there's no problem that can't be solved and I'm
gonna make this thing successful.
And I say that 'cause we're picking from a pool of really
bright,
capable people.
I don't think I could point to specific kind of businesses.
I've been in situations that have failed where the due
diligence
was spectacular but something got missed.
It's all sort of all about you.
PANELIST: Yeah.
That's a tough one.
I agree, you know, the people -- I mean, sitting next to him
I
would invest in him right now.
I could sense the tenacity.
I'm giving this up.
No matter what, I'm gonna make this happen.
I think there's a huge bet on the person.
If you think about it from our perspective at least in the
initial phase we're only underwriting an individual so we
have to
believe that this person, no matter what comes, a market
that
completely blows up, other changes that they'll face that
this
person can get it done and figure it out.
That means buying one business and turning it into something
else
or whatever the circumstance.
So the individual is a huge component for us.
But then, you know, the deal itself we look at it the same
way
you do.
So we look at the market.
If it's a growing market we're a lot more excited than if
it's
flat or in decline even if you think it's a great business.
We're gonna look at the product in a competitive advantage
and
the thinking of us as customers.
So there's nothing new here that I'm gonna tell you is sort
of
the "secret sauce".
It's the things that you look at when you pitch yourself and
say,
here, this is what we're gonna do, this is what we're gonna
go
after the best businesses that we've seen are the great, you
know, great entrepreneurs and typically where industry is
growing
and dynamics where the company or what you'd want around
recruiting revenue and so forth.
So --
PANELIST: I would add -- let me weigh in here, too.
I think there are better companies, there are better search
processes.
So I think people who buy in really good industries as we
talked
about earlier in the class are much more likely to be
successful.
They buy companies that don't have big problems right away.
We had a big problem right away which I'll talk a little
more
about later.
We got through it but that's, you know, that's a little
atypical.
If you people have time to figure out the business, figure
out
the company in a good industry and find new ways to grow.
Sometimes the industry you're in is different than the
industry
you thought you'd be in and that can be good or bad but I
think
that's the case.
And I look for searchers to be successful.
I have not invested in a lot but I look for searchers who
are
really driven, who are motivated, who -- I mean, who have
the
qualities that Charles articulated well, who have good
interpersonal skills they can sell -- I think they can sell
to
customers, I think they can sell to hourly employees, I
think
they can sell to investors, I think they can sell to
bankers, and
they're all very different but who -- a lot of that is
listening
skill but who have just these really good interpersonal
qualities
can and then have enough of the other things to be
successful.
Those are the they thinks that seem to stand out to me a
little
bit to the folks who -- and it's not a science but those are
they
cans that I guess I say I look for.
PANELIST: Is Bill Egan gonna speak to the group?
PETER KELLY: Yep.
PANELIST: Well, he's got a saying I love which is, "There
hard
ways to make money and there are easy ways to make money.
I really wanna do easy ways to make money."
And the way to define easy ways to make money if you think
about
companies you're gonna buy I use the term "the business has
to be
tractable."
And that means that you the -- there's no job in that
company you
couldn't do if you had to.
And that means when you're going in the door, you know, the
dependence on the people in the company is difference than
it is
if you buy, for example, a technology company and there's a
VP of
manufacturing who knows something about whatever it is, the
process of putting together the hula hoop and bauble but
there's
no way you can ever learn that's really -- that's a recipe
for
disaster.
So to the extent that you avoid that problem and you avoid -
-
A manufacturing company, that's a hard way to make money
versus
being a PEO so those are the things that can get you in
trouble.
But it is betting on the people.
It's different from venture in that regard.
Every venture guy has a different approach but, you know, in
venture, you're creating a market, you're playing a game of
typically technical leapfrog.
You can get ahead first ahead of everybody else by the time
somebody comes in to jump you, you're ahead of them.
You're relatively, you know, there's -- you're a little
harsher
on the management notion in the words that you can always
find a
manager to sell that problem.
In this deal you're betting -- the bet from the industry is
on
you and that's where I start.
And that's what you're selling.
PETER KELLY: When investors do see an opportunity, what do
they
wanna see in terms of the opportunity to -- when they find a
company from search funders?
Do they wanna see your idea, or a full deal book, or do they
wanna see the Letterman tent and the correspondence?
How do you want it structured when you're an investor
looking at
a group?
PANELIST: I think it depends on the investor.
So we're -- because we're pretty active we actually like the
see
a lot of it.
I think other investors may not wanna see as much
information.
So from our perspective if you talk to some of the search
funders
that we've invested in recently we say, look, we have an
open
door policy.
Give us a call if you've got an idea or you're looking into
a
particular industry give us a call.
If you're getting ready to put together an LOI and you want
us to
look at it give us a call.
So I think we actually like to see more than less but other
investors may differ.
PETER KELLY: Do you have any opinion of that, Charles?
PANELIST: Bob's standing order is don't send me an LOI
unless
somebody else has looked at it and I think that's a good
one.
PANELIST: Well, but I like to be involved in the process
early.
I mean, my pitch for years: My heart, my mind follows my
mind.
So, you know, if I'm an investor you're gonna get me as long
as
I'm in-house and I like to help shape, you know, where
somebody
is going.
If it -- so if you come to me with an idea I'll tell you
whether
I think it's a good idea or a bad idea and if I think it's a
bad
idea I'll usually say, "Don't take it from me.
Talk to some of your other investors."
But that's a good way to avoid wasting a whole lot of time.
And I also like to talk about all the psychological aspects
of
the business.
What are the characteristics of the seller?
I mean, the fundamentals of the business we can get into.
So I think to be involved with that process.
The flip side is, you know, I have to go back and look at
specific cases but it's frustrating for me if somebody all
of a
sudden springs something on me, you know, that's got a
complete
package and I'm sort of having to get everything -- up to
speed
on everything all at once.
That's me and I don't know -- I mean, most of the people I'
ve
invested with tend to be like that.
They wanna be a part of the process because we -- you get to
be
old and gray you think you bring something to the table.
It may not be true but you oughta pander to that just a
little by
exploiting it.
>>
[Laughing]
PANELIST: But if I can say one quick thing, if you're out
there
trying to find deals right now we find a lot of stuff and
the
seller or their representative fending on the situation,
tries to
rush us.
So they will say, you know, this is the deal of the century,
you
got three days to get X, Y, and Z in place, plus you gotta
get on
a plane with the owners in New York tomorrow.
And your tendency is to say, "Yeah, yeah.
We gotta do that."
And it's good to have someone like Bob or someone that, you
know,
make sure that you have two or three advisers that you can
call
when you get a little nervous.
Just try to slow yourself down 'cause you will forget to do
that.
And so, for us, somebody told me, "you need to be in Atlanta
by
Wednesday."
And I'm, like, for what?
I just pumped into you guys.
It's nice talking to you.
We've loosely got deal terms.
I know you want five and a half times but I haven't really
spent
a lot of time talking to Bob about its logistics.
We spent a little bit of time so it's not like this is the
first
time he's hearing about it but we haven't talked it through.
And so if I'm a smart guy I'm just gonna get down there.
But I don't know what they want and I haven't talked to my
investors about they want.
So if it's not financeable, if it's a situation where I may
be
walking into something that I done really understand I
probably
don't need to touch it.
But the big deal for me is, I mean, this is an old Richard
Pryor
joke.
You listen to old people 'cause they get to be old by being
no
fool.
>>
[Laughing]
PANELIST: And I try to talk to my investor.
>>
[Laughing]
PANELIST: That's great.
PETER KELLY: I wanna open it up for questions here.
Victor?
>> Yeah.
I'd like to hear a little bit about let's assume you -- how
many
quotes you invested upon and how you -- do you get through
the
first hundred days?
What are some of the stories you've seen where one company
was
headed in a certain direction maybe as a problem company or
whatever and became a totally different company.
If you could have one or two illustrations maybe that you've
seen
in your careers.
PANELIST: Well, I mean, Asurion and Pacific Pulmonary are
great
examples.
Asurion are looking for tow truck companies and --
>> (Mumbling).
PANELIST: Well, roadside assistance.
Well, yeah.
It was a tow truck.
PANELIST: You used to ride around in a tow truck.
>>
[Laughing]
PANELIST: And so they bought that company and in fact a lot
of
vaccinations and in fact when they wanted to go into hand
set
insurance most of the directors and I thought it was a dumb
idea
'cause we couldn't understand why anybody would wanna insure
the
fall because they were so darn cheap.
And so -- but what they understood was that the real core
idea in
roadside assistance, the profitability was a function of
utilization which they never did learn how to manage but
fortunately they found something else to do.
But they had an insight and they took it in that direction.
In the case of Pacific Pulmonary it started out as a durable
medical equipment company and, you know, specialized
wheelchairs
were kind of an interesting market and an interesting
business.
We had all kind of problems but they had this other little
thing
they were doing, oxygen and meds.
The rest is history.
In my experience, Carol Moriarty and -- Carol and I is the
only
ones that started out as an assisted living business -- it
was a
venture, actually, it was a venture -- and it wound up as an
assisted living business.
What's usually going on is an inside by the entrepreneur or
his
team about some -- something that's happening in the
business and
they're thinking strategically not tactically and I could
give
you some examples in the venture business but that -- that
seems
to be the common denominator where you have this dramatic
change
and the big difference between being in a venture deal and a
search fund is my own personal experience is that the
directors
of search fund companies are for more amenable to
redirection by
the entrepreneur than they are in venture deals.
'Cause venture deals are heavily typical -- heavy bets on a
market and creating a market and you're always hesitant to
make a
strategic change until a company is really well off the
ground.
But the neat thing about what you wanna do is typically if
you do
it right you'll have a company that has revenue, and
profits, and
cash flow which are pretty slim.
>> Quick questions.
To the investors two related questions.
I guess first what percent of people do you fund to search
do you
end up funding through the acquisition?
And I guess a corollary bit out of it when you make a bet on
a
person for the search component do you think of it as making
a
bet on a person or do you think of it as paying the person a
nominal fee to really get an option -- essentially a first,
like
a proprietary kind of deals saying okay, 15 or 20 grand and
in
turn you get a look at a couple proprietary deals over the
next
couple years?
PANELIST: Oh, I'm betting on the person.
I'm not looking for a company option on a blind pool.
I don't know.
I don't think I've got a percentage.
I mean, I've been fairly free with my advice.
There have been deals where I haven't -- actually, in terms
of
multiple one of the nicest deals I ever had was I didn't do
the
follow on 'cause I thought it was a lousy business and I was
wrong.
So, you really there's no -- I don't have any portfolio --
personally don't have any portfolio approach.
It really has to do with how much I know about the business
and
the -- how much I'm a part of the process.
And I've helped people in a couple of cases buy businesses
because I just didn't wanna be in them for reasons that had
nothing to do with the economics of the business.
I just didn't like the businesses.
But they were capable entrepreneurs and they're doing fine
now.
So each deal is different in that regard.
PANELIST: I think it'll be interesting to see if this
changes.
Again, there are so many search funding right now.
Let's say you've got an investor with 25, 30 search funds.
It'd be interesting to see if that percentage goes down.
I think our intention is actually to find every deal at the
acquisition but you should know that I this I the investors
if we
don't like the deal we're not gonna fund.
So I don't know what the -- our percentage has been probably
80
to 90 percent honestly up until this opponent.
That may change on the future.
Just depends on the deal.
You question about the option, I mean, I think we definitely
look
at an option, gives us a look at a lot of deals and we get
to
watch an entrepreneur.
We just try and buy the best option so it's still the --
still
finding the right person for that.
PETER KELLY: Quai Ten?
>> I'm interested to learn your take on the search fund in
Europe
and would you invest in a search fund in Europe if what
would you
be looking for?
If not, why?
PANELIST: So we like international search funds.
There aren't a lot.
I think there are two things from our perspective.
I think we build more of a portfolio.
I think there is some diversification benefit so I think
that's a
piece of it.
But secondly there just aren't a lot of people doing it
internationally.
So we recently invested in a group out here that's doing a
search
fund in Mexico.
I just talked to a guy that's raising a fund in Germany, I
think
there's a guy in Australia.
So from our perspective there's some international or
country
risk and some other risks but we're actually favorable
because we
think that there are fewer -- there's opportunity but there'
s
fewer search funders out there doing it.
So the right guy, the right story, we'd be pretty excited
about
it.
PANELIST: I wouldn't 'cause I don't wanna deal with the
country
risk.
Maybe if it were Australia I'd do it.
>>
[Laughing]
PANELIST: Or New Zealand.
>>
[Laughing]
PANELIST: No.
I'd rather have -- if a company wants to, you know, after
your
business is growing and they wanna move abroad through that
vehicle that's a different story.
Part of it is I have nothing to contribute really to, you
know,
the search fund in Mexico or Germany.
I mean, there are so much about, you know, the culture in
which
that's gonna be done, the nature of the legal system then I'
m not
particularly useful.
PANELIST: The one thing I'd add there is so the fund we just
invested in, part of the reason why the Mexico opportunity
was so
attractive was because of the investors that they had
gathered in
Mexico.
Because we don't know a lot about Mexico we felt that they
would
bring that knowledge but they also had never done a search
fund
so we felt that we brought a search fund expertise and could
really add value there.
So again it's gotta be the right dynamics.
And I mean the investor group in a foreign country makes a
big
difference for us.
PETER KELLY: Jason?
>> (Unable to hear audio) -- deals in the last two weeks.
Is that representative of how many search funds are out
there
right now?
Would it be better later in the year?
PANELIST: I'm trying to look at how many I've looked at this
year.
I'd say this year it's been probably 40.
PANELIST: It's beyond description.
PANELIST: Yeah.
It's a lot.
PANELIST: It's just astonishing.
>> Is it 200 plus or something?
PANELIST: No, it's not 200.
PANELIST: I don't remember the number is.
I can tell you this.
Some of the old guard, I mean, each of us kind of approach
this
thing differently but I know some investors thought they
might,
you know, a few year ago tended to look at it as a portfolio
and
would do -- knowing how hard it is to pick winners would try
to
do 'em all but you just can't.
And Charles referred to this but part of the dilemma is, for
an
investor, is trying to figure out those who are passionate
about
buying and running a company versus those who figure this is
just
an alternative to getting a job.
And I have no particular calibration of all the people I've
talked to but, you know, as I say, when I -- the first time
I got
involved in this a long time ago, you know, I would look at
one
or two candidates a year, they were always newly minted MBAs
and
they were all Stanford students.
And from then to now there's a huge sprinkling of very
experienced people from schools all over the country, lots
of
teams, lots of individuals, lots of ex-service, ex-military
people and so it's just a -- I don't think -- I mean,
Brandon's
had that experience, Rich Kelly was one of your speakers,
right?
PETER KELLY: Yeah.
PANELIST: I know Rich has had that experience, Lou Davies
and
Cambry has had that experience.
PETER KELLY: Charles, do you have any opinion on -- do you
have
any sense of how many search funds are out there now?
PANELIST: Umm, I know I get a lot of calls, which is funny.
>>
[Laughing]
PANELIST: It's a good thing that they call but when I was
calling last year I was, like, one of the few people that
called
few people.
Like, I went through and called and got the Center for
Entrepreneurial Studies list and called every single person
on
that list which was literally how to spoke to you and I know
it's
how I first spoke to you.
I don't know how -- I didn't know about the legend.
I just knew about you guys were former search funders.
And I mean it's it shall the list is daunting but it's still
possible to stand out so I like to give a slightly different
perspective.
You can stand out by it's a war of attrition.
There are a lot of people who are looking into it who won't
really be looking into it six months from now.
And if you can stick with it you're fine.
The other thing you have going for you and I hate to say
this
because I'm not trying to tell you how to game it but you
gotta
be off cycle here soon.
So if you try to raise your money now and you don't wanna be
out
raising your money -- everybody raises their money during
the
same period.
What helped me tremendously I didn't know it and it was real
difficult but I was trying to close in November.
Everyone else closes way before that and everybody was like,
we
don't have any money for you.
I'm like, well, I still need the money.
>>
[Laughing]
PANELIST: That's kind of where --
>>
[Laughing]
PANELIST: That's kind of where you need to be.
So, I mean, you know, what you're experiencing right now is
kinda
cyclicality like anything else.
The questions you're asking are good -- there are a ton of
people
trying to do this.
And there are other problem is it's a virus that's spread.
So there are people from Chicago trying to do it, and I
bumped
into someone from Emery Business School that was trying to
do it.
That's not a good sign for you.
>>
[Laughing]
PANELIST: But if you stick with it, I mean, those people may
not
have the -- they don't have the same institutional knowledge
as
you do to get it done.
PETER KELLY: I was gonna say that none of those people has
taken
this class.
PANELIST: Right.
>>
[Laughing]
PETER KELLY: So, if there's any value here you're a little
ahead.
PANELIST: Sorry about that.
PANELIST: I was gonna ask the question around timing of
rate.
So, by the way, there are people from all over, all
different
schools.
I've only had one guy that was a complete embarrassment that
I,
like, was pretty embarrassed for him.
But other than that these are pretty talented people that
it's
much more, you know, heterogeneous but on timing the one
thing I
would warn you about is the summer.
Sound like that's when you've started so, again, if you're
tenacious you're gonna get it done anyway but most investors
in
the summer are gone and so I think there were a lot of
frustrated
search funders trying to raise money this summer because
everyone
was gone.
I mean, literally was gone.
Like, you know, off in another country doing something.
So I actually think the beginning of the year is a decent
time.
It gives you plenty of time to raise it, you're not dealing
with
the vacation schedule.
So just something to think about.
Again, at the end of the day if you're gonna raise it the
timing
really doesn't matter.
I mean, you're either gonna raise it or you're not.
But I do think there's a time when investors are around and
you
will be able to get their ear.
PETER KELLY: Let me throw out a question and then keep
asking
questions.
How come more women haven't done search funds?
And is there any reason really is there any reason women
wouldn't
really be successful doing a search fund?
>>
[Laughing]
>> Watch out!
>>
[Laughing]
PANELIST: We should ask the women in the room.
PANELIST: Yeah, I have a clue.
I talked to a number of women who are -- one the other day
who
just graduated, she had a venture deal she's working on.
Other than probably standard democratic answers I have no
idea.
PANELIST: So, I just spoke to one 2 weeks ago who's raising
a
fund.
She has a partner, it's a male partner.
They're not married.
He's married, you know, to another woman but -- so I have
not
seen that before.
So I've only had a phone conversation but they're actually
gonna
come out and meet us face-to-face.
I don't know why.
I mean, again, I'd probably ask the ladies in the class if
they've got thoughts but I think there might be -- I'll be
interested to see if in the next several years you see a few
more.
PANELIST: I think there will be.
I mean, the search fund study from 2007 lists I think only
one
which is probably Karen Moriarty.
So who's still at it and doing well.
I can't think of any reason of why there wouldn't be a lot
more.
So ...
PETER KELLY: Austin?
>> Charlie, how do you finance your -- I mean, you come out
of
business school, how do you finance your search fund for
four or
five months?
So it fair to recoup that money from the amount raised?
Does that count as part of your process or are you looking
at
just, like, starting once you've raised the money so that's
expenses --
PANELIST: The only thing recoupable is legal fees,
theoretically.
And that's the close.
Everything else, I mean, that's just getting in the game.
You're right.
It's a tough situation.
I mean, I don't know if it's tougher just coming out of
school or
trying to explain to your wife why you're not making any
money.
Everyone has to make that decision differently.
But what I will say is that, you know, it's a great
clarifier.
I mean, helps you understand if you really wanna do it.
And one thing that you can do is go out and figure out how
to
finance your search by -- I did a self-funded search before
this
and I will say that four months that I'm talking about,
that's
significantly better than a self-funded search. I mean, I
looked
for business for a year based on money that I just happened
to
have behind me.
So it's a little tough and I would tell you I don't think --
you
can't recoup -- you can't recoup that money.
PANELIST: And it's hard.
That's hard to do it.
I do think a search is not a full -- I mean, raising money
for a
search does not take all your time for the most part so you
can
do other things that make money during that part of it.
I think sort of searching while you have another job is much
more
difficult.
PETER KELLY: Rob?
>> So -- and then obviously have to a pretty good return on
aggregate but a lot of the skepticism, guys like Jim,
basically
skew it.
>>
[Laughing]
>> Essentially I was wondering from your personal
perspectives
what kind of returns would you see?
How many you sideways down and kind of just from your own
personal experience.
PANELIST: Well, search fund investors have conclusively
proven
that they know how to kill companies as well as anybody so,
you
know.
>>
[Laughing]
PANELIST: We've had our shares of -- and I blame the
investors
because I think it's a team effort.
I mean, in a company fails everybody who's involved is part
of
the process.
I -- going back to my good friend Billy, it's kinda like if
I
start out with this much money and end up with this much and
there's a lot more of it I might be a really happy camper.
So I haven't looked at the rates of return and how many have
been
successes versus failures.
The number of times where you actually get a company and it
fails
those are -- I mean, it's happened but those are pretty
limited.
The more common experience is a searcher just can't get a
deal
done.
I don't know what the data is for all of them but my sense
is if
somebody can raise a group, buy a company, and run it the
returns
are gonna be positive.
Some are gonna be great, some not so great.
But, you know, my own experience has got a little be the of
everything in it.
PANELIST: I would just say I think if the returns weren't
there,
you know, Bob and I wouldn't be sitting here.
You wouldn't have the investor networks.
I mean, obviously we think there's still an opportunity.
We did just have a failure about a year ago, an acquired
company.
I think you learn from failures.
>>
[Laughing]
PANELIST: No one wants failure but I think there will be
failures and I think you learn a lot not only as an investor
but
I think as an individual.
So my greatest lessons has come through failure.
So, you know, you take it and you learn from it.
But I think overall I think there's still significant
opportunity
that keeps us excited about doing search funds.
PETER KELLY: Pat?
>> What would you recommend for those of us who might not be
available to start a search fund right after school, might
wanna
go out and gain some of the skills that Charles mentioned.
Is there anything aside from going out and being real honest
with
yourself what's going to happen don't and going out don't
what
else would you recommend it would take three years to do
that do
venture work staying in contact with the community?
How else -- what else would you recommend?
PANELIST: I feel you'll get different thoughts here.
PANELIST:
[Laughing] I would recommend that you go out and get
another job for a while.
And don't forget this.
While you're doing it make sure you're talking to people in
the
community.
I have an extremely different approach to my life than I did
when
I first graduated business school.
And I know that sound kinda hokey but it's true.
And when I first graduated, like, I was a straight up I'm
trying
to work at a venture back company guy, I want pre-IPO stock
and
all this yip yap yay and then over time I merged over time
to I
wanna fine an exciting job and then over time I merged to I
wanna
run something.
But I had not burned any bridges and I still knew people who
could connect me to folks who could try to help me figure
this
out and I still tried to have conversations about.
So I just think that the trick is not to close any doors and
if
you think this is something you might wanna do, once again
then
you have the opportunity to talk to people for two years
about it
and if some point you can come back and say, this is what I'
ve
done, when you work at your job it helps you 'cause you're
focused and you can let your boss know, hey, I'm not gonna
be two
years from now -- you don't wanna say that right away -- I
might
not be here two years from now be you start building a track
record within your company that would make you have more
credibility later.
And you can have a focused approach to your job knowing that
you
may not be there and wanna do this I guess is the best rout
to
describe.
PANELIST: One thing I'd say when I was graduating from
business
school -- obviously I'm not an entrepreneur or an investor
but I
went to the top, you know, entrepreneurship professor at the
school and I said, hey, I'm thinking about starting my own
thing.
I figured he'd say, "Yeah.
This is what you should do."
And I said, you know, "I've got this, and I've got McKinsey
as an
option, and a couple other things."
And he said "Do McKinsey."
I was just completely taken back that he would tell me like
him
which is saying hey, you should think about other options.
So for me what I would say is what are you missing in the
skill-set in if you did banking or you do private equity if
you
do that again then come to me in two years and say hey, I
really
wanna do a search fund it's not really believable.
If you said, look, I did private equity before and I
realized
that I wanna be a operator so I took a job even if it's a
big
company in more of an operating role or I went to a smaller
company and took an operating role.
That story starts to be pretty convincing.
So I would say if this is something you think you wanna do
long
material look at the skill-set you have and then figure out
where
the gap is so that when you do come to search fund investors
or
other investors you got a pretty compelling story.
>> A question for Charles.
How do you merge professional development?
How do you kind of track it, and show it you're developing
the
skills that you need to be very successful in the search and
also
in the (poor audio).
PANELIST: I mean, I kinda stumbled on it.
I mean, I didn't have this.
I mean, you guys actually have a template for it.
What he's telling you is you probably need three skill-sets.
You need to sort of be a banker/BE person, you probably need
some
operational experience, and you probably need to be -- it
helps
to be sort of a strategist/consultant.
It's -- I worked at BCG, I worked at Siebel, and did a bunch
of
start ups and I worked at a private equity advisory shop but
I
did not real -- I looked at myself and I tried to do a
search and
I could not get it done and I knew what the hole was.
And the hole was I did not understand how private equity
money
worked enough to get people interested in my deal.
So then I had to shut down the company I was running, move
from
Seattle to California again with my wife in tow, sit with
her
while she took the bar, and try to use every network I had
to get
into private equity which at 33 years old is no mean feat.
Did that and then figured out this is what I wanted to do.
So I didn't have anybody tell me what they're telling you.
You can look at your resume -- and I'm not being funny --
look at
your resume and figure out which one of those thing you're
missing and if you really wanna try and get this done
successfully you might wanna think about augmenting where
you're
missing.
I didn't have a whole list of view but I just knew there
were a
bunch of things I didn't know how to do.
>> What about the skills now that you realized you still
don't
have and are holding you back from doing whatever you need
to
right now to get search fund or -- kind of leave out, like,
I
wish I knew how to do this better, I don't really know, why
I
can't get a seller, or I really don't know anything about
this
industry but it's squeezing my investors.
When you come across those skills what do you do?
PANELIST: I talk to my investors as much as they will allow
me.
I think Bob is tired of hearing from me basically.
But the way I get there is there's three or four investors
that
will allow me to call them a lot and I call them as much as
they
will humanly allow to say, okay, this is where I am, I'm
stuck,
how do I figure this out?
I can't solve it.
I mean, I ran a construction company.
I can't operate heavy machinery, I can't do plumbing, I can'
t do
electricity stuff.
So I had to learn to go to people and say, "I don't know how
to
do this.
Either you do it for me or help me -- teach me how to do it
without electrocuting myself."
>>
[Laughing]
PANELIST: It's not quite that analytical.
We just think about Peter mentioned earlier, you know, you
need
interpersonal -- you need to be able to communicate with
people
and have some sense of communications is as much as emotion
--
communications is all about emotions.
It's not only how you're delivering it but how people are
receiving it and how they feel in your presence.
You need to know something about how to run a company.
And there are some other -- I mean, I'm involved in a
company
Stanford Business School grad.
He must have had -- he knew he wanted to do it all along but
he
just didn't feel right doing it when he got out of school.
So he went to work in a manufacturing company, did some shop
floor stuff, he did some sales, a guy that eventually got to
the
point where he's managing and he's running an internet
advertising company which obviously has nothing to do with
his
background but he got all the basics there.
In other cases, you know, you might have a lot of
weaknesses;
right?
A lot of things you don't know.
But if you wanna do this, I mean, the point is, well, do it
then
find people -- surround yourself with people who can fill in
the
holes.
If it's not a partner doing the search, get investors who
flush
things out.
So there's this sort of a delicate balance between, I mean,
you
could send the rest of your life trying to become the
perfect
entrepreneur which will never happen.
At some point you just gotta say, I'm gonna do this.
And for each of you that point in your life is -- only you
can
figure that out.
I don't know -- map out a strategy per se.
PANELIST: I would add to that I think sort of my perspective
which is that you'll get a lot of strategic perspective and
skills here.
And you'll get, you know, some transaction experience here,
but
you've probably seen some of that in other places.
So the stuff that's most valuable is hiring and firing
people and
having a PNL that you have to figure out how to move the
numbers
and having sales experience, either sales or management
experience.
I think, you know, Bob told me 15 years ago or something
people
either believe products are sold or bought and I believe
products
are sold.
And I thought about it at the time and said, I don't know, I
to
believe that but I didn't really know how to do it that well
when
I started the search fund but if you could figure out how to
sell
well and how to manage a sales process, and what a really
good
sales process works like in the kind of business that you're
gonna go into -- that can be direct sales, it could be
customer
acquisition on the internet, it could be all of the above --
that's really, really valuable.
When people ask me, look, I need some experience, most of
the
teem I'm telling them, hire/fire, PNL, sales management
experience.
And learn it where they do it well.
It may be a small company, maybe a big company.
Doesn't really matter just that they do it.
Do they have good practice there?
Do they demonstrate that they're good at it and do they have
a
good reputation for it?
PANELIST: -- about the discussion about whether they're
gonna
fire the poor salesman because as a real-life example guy's
got a
company and that problem was the salesman just been coasting
but
the guy was 55 years old with two or three kids in college.
Well, that really colors, you know -- and the entrepreneur's
30.
That really colors how you're gonna deal with that.
Now, he eventually dealt with it.
We had more than a few conversations but there's an awful
lot of
information about the hiring and firing process and holding
people accountable to your level of expectations in the
means by
which you get there that, you know.
If you've done it before, then it's a lot easier than if all
of a
sudden this is your first time.
Hiring is a piece of cake.
I mean, firing, that takes some skill.
Well, hiring's not a piece of cake.
From an emotional standpoint the drain on you, firing is --
and
knowing if you're gonna run a company that your job is not
to
convert B players into A players 'cause you can't -- you
don't
have the time, or the energy, or the skill.
Your job is to pick A players and get rid of all of the
others.
That isn't easy.
Peter -- when Peter first dealt with that problem he had
hair.
Look at him now.
>>
[Laughing]
PANELIST: You know, I would just add to this sales piece, I
mean, this is something we really look for.
I bet when he said "sales" half of you were, like, oh, man,
that's soft.
It's not analytical enough, it's not meaty enough or you
started
to fall asleep.
I think that sales is not taught that well in general in
business
school and yet in these types of businesses I think it's the
key.
I mean, there are a lot of skills that you need but it's the
one
that's often missing with folks like yourself.
So, you know, specifically a job that gives you some sales
experience -- 'cause you have to sell yourself to raise the
money.
You have to sell yourself to a seller.
You have to sell yourself to your employees.
You gotta sell the product or service.
I mean, you gotta sell the business or --
PANELIST: The issue I think I've heard from people on that I
just realized the lately is that that's not a traditional
business path from here and so if you go do -- if you go do
something else and then decide not to do a search fund oh
well
but if you go do that then what do you do after that?
There's not -- you sort of -- I mean, I think sales and
marketing
are the primary path for CEO jobs in a lot of businesses so
I
think you can go do that can it is a good path.
It's just not something you hear your peers saying "Oh, I'm
gonna
go take the sales management job where I'm managing a sales
team
of five people selling, you know, backyard sheds to
construction
yards."
I mean, you just don't hear that.
But I think it is either -- if you think about building a
career
as opposed to being where you wanna be in three or five
years
it's really a great skill-set to have for a long period of
time.
>> This is for Charles, specifically.
But I get asked all the time things like how do I find a
partner
and how do you come to terms on that?
And your partner is not a classmate of yours.
PANELIST: He's not.
>> And so if you could kind of share how you found each
other and
how you create to do this.
PANELIST: So he worked with me at Siebel so and we knew each
other we worked together about a year and we bumped into
each
other and I was in the middle of doing this.
It was a little bit of an unusual situation 'cause I was
probably --
PANELIST: You were down the path.
PANELIST: Damn right.
PANELIST: And, by the way, I want you to meet my partner.
PANELIST: Yeah, yeah, yeah.
>>
[Laughing]
PANELIST: And I've gotta go with my wife to Turkey as part
of
this deal.
I'll be back.
What happened was I met him and I didn't really -- I wanted
to do
it by my -- I was prepared to do it by myself.
I wanted someone that I could really sort of trust because
I've
been in businesses before and one of the key things we
talked
about this earlier is when you're first working somewhere
whether
you start something new, or you're in a project, or what-
have
you, you need somebody that you can talk to at, like,
3:00 o'clock in the morning.
You just need somebody.
Some people can get by without it.
I can't.
I gotta have somebody that I can say, "Man, I don't know
what
we're gonna do about this guy."
Or, you know, how do we deal with these issues?
And it helps to have someone that you can have this
conversation
with can if Chris we talked at it and he approached me and
he
actually we went through a bit of an issue to start with
because
we weren't sure we were gonna be able to get to the fund we
needed.
And that was really helpful to see how both of us reacted on
that.
You know, was he gonna stick there, was he gonna bail?
It was late in the game, you know.
How did our wives deal with it together?
And so for me if you look at it from a strictly analytical
standpoint and then I'll go back to how I really felt about
it --
strictly analytical, you got two guys, two people -- I hate
to
say "guys".
I don't mean it that way but you got two people who can --
if I'm
looking at one deal and he's looking at another deal we don'
t
drop deals.
That helps a lot for me in terms of trying to get it done.
'Cause a part of the process that I was least sure about I
feel
really good about my ability to run a company, not so sure
about
my ability to source and buy a company.
That was what I was concerned about.
He has a little bit better skill-set there but I thought the
two
of us together would work well on that.
And then the second piece was what I referenced earlier.
I looked at him and said, "Is this the kinda guy I can go
through
this with?"
And we have very different skill-sets.
I mean, there's a investor who will remain nameless who made
us
take a series of personality tests and we do have very
different
skill-sets and what's interesting about our situation --
>>
[Laughing]
PANELIST: -- is that we sorta complement each other but
there
are situations where we can go left or right like we get on
each
other's nerves a lot but we do have complementary skill-sets
so
there are ways in which he's very, very much a fly-by-night
cowboy type guy although he doesn't appear to be at all and
it
drives me nuts.
And there are clearly ways in which I'm a maverick and can't
be
governed at all and it drives him nuts.
But I think we have a tendency to coalesce.
Now, I'm saying all this way in advance of us actually being
successful.
I mean, the only thing we've ever done is raise money.
So it'll be interesting to see if we can actually get a deal
done.
PETER KELLY: Last question and then last if you guys would
wrap
up with any advice you have for search funders.
Ryan.
Wait.
I'm sorry.
Were there any back here?
I had my back turned.
Okay.
Ryan.
Thanks.
>> Can you tell us a little more about these companies that
have
failed?
Assuming you've taken their trends are there any particular
common threads why these companies failed?
They failed because they just picked bad business, failed
because
they didn't have the right skills and didn't look to see
about it
when they came to approach you as an investor?
Can you tell us a little bit more about those?
PANELIST: So, the one that, you know, recently happened with
us
I'd say it was just a bad business.
So I tell you in general what we've seen is you pick the
wrong
business in the wrong industry probably number one.
It's not necessarily man into it.
Number two I would say we've had, you know, entrepreneurs
get in
there and again maybe it's not a complete failure but it
certainly doesn't generate the turns that one would expect
or
hope for.
So I think you have some management issues.
We've had a companionship or partnership where it, you know,
all
of a sudden they weren't friends anymore and they had to
have
counseling, ask, you know, so I think that happens as well.
But in general at least in my experience it's been bad
business
in a bad industry.
PETER KELLY: Last comment, Charles.
Just any last advice for entrepreneurs.
PANELIST: I mean, anybody who's serious about this, I mean,
trying to do a search fund should e-mail me.
And I'll it will you what I can -- and that's the other
piece.
Like, you really are entering a bit of a community here and
I had
no idea of this when I was graduating.
It is a very powerful community.
It's one of the better communities that you can find in all
the
GSB ecosystem.
But it's a community so you're thinking I'm trying to get a
deal
done and my partner went to war ton.
I love him to death but I have to remind him sometimes I'm
responsible for these people for the next 50 years.
>>
[Laughing]
PANELIST: And, you know, I wanna stay responsible for them.
So, you know, if you got any questions e-mail me and I will
help
everyone that I can help try to figure out how to get it
done if
you wanna get it done.
PETER KELLY: Thank you all very much.
>>
[clapping]
PETER KELLY: Gonna be a little bit more comfortable than me
pacing around.
Let me tell my search story a little bit.
I feel like it's -- since it was a long time ago people
probably
know it but I've been reminded that they -- that you don't.
You don't.
Most of you don't, anyway.
And so let me tell you a little bit and when I was here I
learned
about this in formation new ventures and I was just
compelled to
do it.
It was just the top of my heap.
And I started to do it with a partner who was a classmate in
business school.
I looked around, said, this is the guy I wanna to it with.
A lot of other people.
I thought he could help me raise the money the most.
That's what I thought he -- that's what really attracted me
to
him but I liked him, I respected him, he operated a little
bit.
And we wrote a document, we went to see Irve actually and
got
some advice and were going down the path and then he -- we
sat
down one day and he said, "I really don't want a partner.
I wanna be 'the guy'.
If you wanna be the number two guy, you know, maybe that's
okay
but otherwise I wanna do this by myself."
And I didn't wanna be the number two guy. I wanted to be an
equal partner so I was disappointed.
It went apart.
He pursued it for a while and then put it on hold and then
ended
up doing something else entrepreneurial but not search fund.
And then so I got out of school this is 1989 and it was a
little
bit of a hard time to find a job.
And I didn't find -- I wanted a marketing job in technology.
I didn't wanna go back to the big company, Microsoft that I
had
worked for for a summer 'cause it was just too big.
They had 3,000 people.
That was just massive.
>>
[Laughing]
PETER KELLY: And so I worked for a couple venture capital
firms
that I'd done that before business school so I had a chance
to do
that just to make money on the side wile I was trying to
figure
out what technology firm would take me into marketing and I
could
learn some of their practices.
And then I had talked to David Dodson along the way when I
was
first doing it and in December of 1989 I remember calling
him on
the phone and just thinking, "I'll just call Dodson and talk
to
him a little bit."
And he just reminded me that this was a doable thing and if
I
wanted this I could do this.
And it just -- it just the switch flipped and I just said I'
m
gonna do this.
And I went through my paper.
Wasn't a Rolodex but whatever it was, address book, and I
looked
at everybody I thought who I could do the with and I found a
guy
who I had worked with before.
I didn't find him I just said that -- I'll do it with this
guy.
And there were two guys I thought that about and I called
them
both up and I sent them both the material and one of 'em
sorta
said, yeah, yeah, I kinda would like to do it.
He was at Harvard Business School at the time and I had
known him
from undergrad but then he said, "Nah, it's just too much."
And the other guy just owned it.
So we started to do it and we searched, we raised the money
in
about three months, we looked for three years.
It was 38 months before we closed the deal.
We almost closed to other deals.
Bob will remember this.
The first one was a construction equipment -- well, the very
first one was an off-set printing company in Boulder,
Colorado.
The next one was at a construction equipment renting company
in
Denver which was a really good company, actually.
It did really well the guy just wouldn't pull the trigger at
the
end.
And the third one was a school bus company that the guy, one
of
the owners, was not trustworthy.
And so we were getting -- we'd raised more money for that
last
one and we had it, we went back to people and said do you
want it
back or do you want to let us keep searching?
And we kept searching and we skinnied down and we were
making
about thirty thousand dollars a year, no health insurance,
having
a great time but pretty nervous.
And watching friends who went back to Microsoft -- everybody
in
my class who worked there in the summer went back except me
and,
you know, they were worth suddenly 5 million bucks out of
the
gate and there were oh people who were working at other
technology companies that were doing well or gone onto
consulting
and were working at McKinsey doing really interesting
things.
But we just kept chugging along.
We found this company about two and a half years into the
search
and we closed it about eight months later.
And we along the way got to know some of the investors
really,
really well and were able to build a board that was really
strong, that had great complementarity and wisdom, and knew
when
to shut up and when to ask for things, and when to push us
on
things.
We had our first board meeting in Bakersfield it was a 104
degrees they flew down a little bumpy plane, and they pretty
much
said, let's never meet in Bakersfield again.
>>
[Laughing]
PETER KELLY: And we didn't.
I liked the -- we liked the business.
We bought a home medical equipment company.
It was in Bakersfield California, it had about 13 locations.
We liked it because it was down and dirty, and can there
with
respect a lot of people in it, and it had a lot of
locations.
We figured they could have more locations and the
competition
wasn't really tough but their demographics were really
driving it
and their -- it was making money, and we just thought it was
--
we thought it was actually running fairly well.
We got into it and -- what else did we like about it?
I guess we just thought there was a rising tide overall.
We got into it and found out that some dignitaries
overstated the
accounts receivable had gone way downhill, it wasn't as
profitable as we had thought, we had a big fight with the
seller
four months after we closed.
We violated every bank covenant after that first audit and
Wells
Fargo Bank put us in their work out group which is a guy
named
Leonard Kam in San Francisco who, you know, used to come
down and
you'd sit down at the table and sit across from me and we'd
talk
for a little bit about how the business was doing and within
five
minutes he'd say
[Banging on table] "Your investors need to put
in more money."
And he would just start do that for like an hour.
>>
[Laughing]
PETER KELLY: And I would just talk to my partner was running
the
sales and I was trying to figure stuff out and so I just
talked
the him and after about three times of doing that, umm, he
kinda
switched ed over to our side and he kinda said, "You know
what?
You're actually the best company in my portfolio.
You're making money.
You may make it out of this so I guess you're not gonna put
any
more money, are you?"
I said, "No, they're not gonna do that."
And so we worked our way out of it then we picked the
respiratory
piece that was 15 percent of our revenues and we focused on
that
and we did that because I hired somebody who was really a
great
leader who knew how to grow and focus on that business and
knew a
lot about it.
We grew that a bunch and as we grew that we shut down other
things and we made more money and we were growing it 50
percent,
60 percent, 70 percent for a while.
And it was a lot of fun.
It had been really scary and really a lot of pressure for a
while.
I'd wake up in the middle of the night and I couldn't sleep,
and
didn't know when I was gonna get through things and was
working
seven days a week in Bakersfield, California.
We figured out how to kinda build on something that was
strong
and we grew a bunch.
The job changed.
It got more interesting.
My partner left which was difficult but positive for both of
us
in the long run.
And we moved the company to Marin County and that was 12
years
ago or something like that.
Been with the company for 15 years.
Along the way we started thinking about liquidity and we --
I
took a little bit of money off the table.
I don't know, maybe ten years into it or so.
Enough to sorta feel like, okay.
The world's not gonna fall apart if the company fell apart.
And then we tried to sell the business about three years
ago,
four years ago, and it didn't work.
We had a banker.
We thought it was gonna work.
Something happened in the industry that just kinda threw ice
water on all the potential investors.
Great process that I always thought would -- I mean, the
company
at that point was I don't know ten times bigger, 15 times
bigger
in terms of profit than we had been before so we were worth
a lot
more but no one would buy it.
This thing happened and no one would buy it.
It was sort of a crazy time.
And we were actually on vacation and I'm on the phone trying
to
just sort of boom.
Well, it happened we met another company sick months later,
nine
months later, I mean we've heard of them and we introduced
ourselves to them and they ended up buying the company.
It's a company called Teijin.
It's a big Japanese company.
It's a 10 billion, hundred-year-old Japanese company,
materials,
health care.
And so last year we got liquidity which is a great event.
I was thinking back I think probably the most exciting time
in
my -- in this whole thing was when he closed the deal.
I remember being in Bakersfield and closing the deal August
5th
of 1993 and we just -- it was probably the biggest high.
And maybe the biggest low was probably having to go to the
work
out group with the bank.
I was trying to think what that would be.
We had to do a layoff.
I had to fire a guy whose wife was critical to the business
and
they were both really nice and hadn't done anything wrong.
He just wasn't very good at his job.
And that layoff may have been the lowest point but maybe
going
into the back work out group and having to meet with those
guys
all the time and know that, you know, they could take the
keys we
were sort of saying, well, if you want it, you can take the
keys
to it.
But the highs have add up to be much higher than the lows
and
think not just for financial reasons but because of
something
that my colleague, David Dodson, talked about.
In the relationships that we bill along the way inside the
company.
It's really different working in an operating company.
It's really a lot of fun.
It just very much more alive everyone than something that's
very
stimulating and interesting like venture capital which was
what I
did before.
There's just something about those relationships that are
really
fulfilling and with the investors along the way.
Some I got to know really well.
One I think I never met in the whole time.
I'd never met before he invested, he never, you know, he
bought
out halfway through maybe because we never met but he, you
know,
it was fine.
Someone else bought his shares and did really well on them.
But half the investors probably I became very good friend
with.
We had government investigations, we had an audit where we
got a
letter one day we were probably 25 million in revenues,
maybe
more than that.
Maybe 40.
And it say that you owe us seven million dollars.
Pay in 30 days or we're gonna stop paying you and attach
your
ass.
So what do you do with that?
Well, we went through a long process and I actually didn't
freak
out when we got that letter.
I was worried but at the end of the day after doing good job
with
it we ended up paying about $3,200.
And yeah.
>>
[Laughing]
PETER KELLY: That's how it sort of ... there a lot of lows
but
the highs have been fantastic.
I would like to say don't forget your partner in this.
I do have a few pieces of ending advice to you but I would
like
to ask my wife, April, who's over here to just for you guys
who
have partners -- at home not business partners just to
comment on
what was it like early in the search.
Not, you know, gotta be in Boston or Bakersfield.
What was it like along the way and what feels it like for
people?
And for their partners, too?
APRIL: Okay.
I guess I would say it was during the search which you
definitely
have to have an adventurous mindset.
'Cause I was living in Colorado and having a great life over
there.
Peter was in San Francisco 17 years ago this was, right?
Wow.
And I would call him.
It would be "I'm looking at Christmas trees in Oregon."
And I'd be Oregon.
Yeah.
>>
[Laughing]
APRIL: I like Oregon.
And then it was three weeks later.
No, no, no.
That didn't work out.
It's Los Angeles school buses.
L.A.
Okay.
L.A.
Well, you can imagine we went from tree farms to frozen pie
crusts and I don't even know where that was, to in these
deals
your mind you think, okay, that's where I'm gonna be.
I'll start looking for rentals right away and then we ended
up in
Bakersfield.
And actually for the record it was Oildale.
PETER KELLY:
[Laughing]
APRIL: It wasn't Bakersfield.
It was Oildale.
>>
[Laughing]
APRIL: So it was hard -- did you get that on the camera?
>>
[Laughing]
APRIL: It was hard to get excited about living in
Bakersfield and but it was exciting what you were saying,
that
getting the deal done but then you forgot there was the
whole, I
don't know, chapter, too, of running the business and how
hard
Peter worked and the hours that he put into it.
I really had no idea how much time he had to put into it.
So we didn't -- I fortunately had another job that I
traveled
with so we worked it out but they were long, long weeks.
[Laughing]
APRIL: And --
PETER KELLY: How about the later stages?
How far those been?
APRIL: Well, one thing.
>>
[Laughing]
[Clapping]
PETER KELLY: Moving right along ...
APRIL: You know, it's interesting cause you mentioned a few
things, Bob, that what stood out for me that was really
hard,
like the sleepless nights in Bakersfield were all over
firing
people.
And that is what stood out for me is being the hardest thing
if
you asked me for Peter in this couple years.
It wasn't the running of the business and the day-to-day
operations.
It was firing people.
And whenever you did do it, it was just a huge burden off
his
holders and I remember always hear, like, in hindsight you
should
have fired him even earlier.
You know, that first question that came up about doing it
sooner
or later that was interesting.
But in having fantastic board.
We had a board that he could call anyone on the board before
advice on issues and they were very engaged and they all
worked
well together.
That stood out for me.
PETER KELLY: Any last words of advice for partners that for
folks here who are thinking about could take back to their
partners on how to survive it or do it well?
APRIL: Don't have babies during the search fund.
>>
[Laughing]
APRIL: Not really.
It's just a huge, tremendous commitment and it's -- you have
to
really just keep an open mind it's gonna be, like, a great
adventure.
PANELIST: I would volunteer that the partner's gotta be
tuned in
just like you are.
We had at least one situation where she wasn't and they
tried to
make it work and, you know, it just was a nightmare because
it is
not a nice, easy climb up this way.
So you have to both be on the same page.
PETER KELLY: Let me wrap up with some last comments since
we're
running out of time and I wanna respect your time.
I do wanna survey at the end that we're gonna distribute on
the
classes and the guests here if you could either fill it out
and
take a few minutes today or -- as a matter of fact if you
could
start passing it out Lisa or turn it into the CES in the
next
couple days that'd be great.
Before choosing entrepreneurship through acquisition I would
say -- give you a couple pieces of advice.
First of all be clear about your objectives.
What are you doing this for?
Are you doing it to make money?
Are you doing it because you want to -- because you think
you'll
enjoy the journey or because you wanna run a company?
If your goal is to do deals or to get richly do private
equity.
Don't do this.
Those may come from it but this is not about doing a deal.
It's about running a company primarily.
And I think it's a good way to get there but I think you
won't be
satisfied if what you really enjoy is the transaction which
there
is absolutely nothing wrong with.
That is a fantastic way to go and I have some good friends
and
people I respect immensely who do that.
If you wanna run a company, develop relationships with
investors
along the way as soon as you start going.
Think carefully about now or later.
I think it's right either one is right for different people.
I did it right out of business school but if you notice I
was
really a year out I didn't have significant additional
experience
but it's harder to leave your life behind if you do it later
but
it's absolutely doable.
Just keep in mind -- I think Charles had great advice.
Stay in touch with people.
Don't forget why you're doing this.
Keep building your skill-set.
Build experience with people in companies who have good
practices
and are key value drivers.
That's what I said.
Hire or file PNL or sales, executing it, acquisitions,
marketing,
and applied IT are things I think of adds the big value
drivers
generically.
It's different by different company and industry.
Create a track record for yourself now and as you go through
the
process.
So that's if you're just-tying of doing it.
I think it's really a terrific path for some people in the
middle
I've gotten to know you in this class today I think it would
be
good for some of you but not for all of you.
Just general comments going forward.
Think in terms of a long career either this way or in
another
way.
I think it's very easy to try and get to the pinnacle really
quickly like in two, or three, or five years.
You're gonna have a long career no matter how you do it.
Think in terms of that.
Build your reputation, create a track record, build your
leadership skills.
You've gotten great ones here but there's more to get in the
real
world and you know where those are if you know yourself.
Take the time to really build a good career.
You are part of community that's not just search funds that
Charles referred to but the whole business goal and you
wanna be
accountable to that community and part of it -- a
contributing
part of it for a long time and that takes some work.
Go to work in companies where they do things well and
sacrifice
other things to be willing to do that either to learn search
fund
skills or just in your career.
Seize opportunities but build your abilities along the way
to be
able to seize opportunities.
They will pop up and you'll wanna jump on them.
Be prepared to do that but it doesn't hurt to just build
your
skills as you go.
From positions of strength I'd say take risks, stretch
yourself,
do things that make you uncomfortable, be willing to take
risks.
Failure in the short term can lead to great success down the
road
and you shouldn't be worried about it too much.
You're in a really great position even for those of you in
debt I
had a lot of debt coming outta here.
I figured out a way to make it all work and I wouldn't be
where I
was today if I didn't take some risk.
Ask for help.
People who are very successful are terrible at asking for
help.
Ask for help from your classmates, there are amazing people
in
your class.
You kinda know that but you won't really realize it until
later.
Ask for help from advisers, from friends, and that will take
you
a long way.
It'll help you solve a lot of problems.
If what you're really after in the long run is happiness it
doesn't come from material success.
It doesn't hurt it but it really doesn't come from that.
It comes from, in my view, this is just my opinion -- backed
up
from some research I will say but from strong marriages,
from
good relationships with peers and friends, and from new
endeavors
that fit you and fit things that get you excited and give
you
great satisfaction.
And lastly I'll just say do it with integrity.
You can get better with integrity over time.
I think that someone I respect a great deal was asked if his
integrity got better as he had more money.
And he had to admit that in fact it did and that over time
he got
better and better at integrity.
Being and acting with who he was but also making good
decisions
long term that maybe hurt in the long term but were the
right
they thinks.
You can do that and you will get much further with that.
I wanna say thank you again for committing to this class.
Thank you for going on the journey with me.
It's been a lot of fun.
In very small ways I feel like I've gotten to know everybody
in
this room better and I appreciate that and I could say that
this
will always be the first class that I ever taught.
Thank you for being in it with me.
>>
[Clapping]