Justin Ishbia - Lessons from Acquiring 586 Companies [Invest Like the Best, REPLAY]

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1:12 Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Some.

1:48 This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. My guest today is Justin Ishbier. Justin is the founder of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches.

2:16 With seven billion dollars in capital deployed, but an average transaction size of just twelve million. Justin has worked to build a system to drive success for hundreds of businesses through replicable operating procedures and championing young professionals. The firm has created a moat around volume with nearly six hundred acquisitions over the last three years, some of the highest numbers in the world. We discuss identifying growth prospects, constructing a meaningful board, and the business mentality behind Main Street, not Wall Street, as Justin puts it. Please enjoy my conversation with Justin Ishbia.

2:49 Justin, it's such a pleasure to have you joining me today. I remember on our very first call taking more notes about how you were building your firm than about any firm introductory call that I can recall. And I wanna start with a line that you said when we first met, which is that the system is the star. as you think about building your asset management firm, maybe describe why that term or idea is important to you and how it applies to short capital. I followed your show for a number of years and it's been so impressive what you built. So you guys have a best in class audience and showing them how to report.

3:22 create enterprise value as the system no one person creates it at the star and so our view have always been like how to create a system a machine a process that creates differential results outcomes. And I was raised in an environment that you always look for opportunities where others aren't looking. And my view of the world is The last

3:39 inefficient part of the private market ecosystem is the micro cap. And this is where we spend all of our time. This is businesses we define as sub ten million Ubit investment. And I wonder why most people don't play here is I think several reasons. And of course, back to the system of the star dynamic, is that

3:54 In order to play here, takes more resources than normal. Buying a business with four of EBITDA, no audit and a matched team that is Oftentimes no, I'll say running the biggest business that I ran before that day. It's different than buying a business that's doing fifty of e but the professional management team that's been coming in together and have run a business three times the size before and now coming down to run it. And so

4:15 That's the system. To me, everything goes back to the system. Everyone has a role in the organization. Because I thought of sports as well. How do you become best person at your job day in, day out. How do you become the best controller? How do you become the best deal professional? How do you become the best marketing leader? And so the system for us. is documentation. I looked up to organizations or operating companies like Donaher, the DBS system. We're trying to create something very similar in the private equity community. And so

4:42 Everything we do is codified written down. If you walk you're on four walls and you're in our offices. We have the concepts of So the idea someone our firm comes up with they want to invest in the sector, let's pick on the veterinary sector. Everyone knows what that area is, so.

4:54 Okay, idea generation. until the day we sign a letter of intent for that platform. We call that nine things of baseball. There's literally hundreds of steps that go into each inning has each between five and fifteen steps you must go through. A signal letter of intent?

5:07 There's four quarters of closing a deal. Well you have to make mistakes over and over again. Make a mistake, you actually add something to that four quarters say, Hey, make sure you check with international tax council about AB or C. So creates a codified system. We close the platform. Maybe a hundred day plan.

5:22 We have 23 standard operating procedures we put into every business. So we've actually onboard the shore way of how we do things. We own a business. It's the planting phase, the growing phase, the harvesting phase. We exit the business. It's three periods of exit, like hockey, a lot of sports analogies. But what this allows to be done is. Allow scale. We've done over the last few years about six hundred acquisitions, according to pitchbook, more than anyone else in the world.

5:46 Average enterprise value though of transactions, 12 million bucks. Wow. Hundreds of them deployed over seven billion dollars in a three year time period, but across five hundred and eighty six transactions. So why the system matters is early career energy. First time leaders

6:01 running through their own first platforms. Give these people the tools and resources and saying here's the rules. And we believe we're all See one, do one, teach one. Patrick, come work on my team.

6:11 sit next to me, let's go do a first deal and the veteranship looks like this. Next one, see one, that's the C one. Do one, let's do it together. We'll do it hand to hand. I'll tell why I'm doing it. The next one, you're teaching me how you're doing it. In order to own something, you have to be able to teach it somebody else. And so this system is set up in a way to allow early career energy, young professionals. I believe private equity world is a a hustle game and the system has set up a way to have talented people. who want the ball earlier in their career to have the chance to grow and have a big role in a deal.

6:40 And the system allows for that. And so that's why our systems are star. No one person makes the place go, and we have to say. More stars into our system, the brighter the system burns. poking around of this system for the rest of our call is gonna be so fun. And there's so many different areas that You've had this very careful systematic thinking for how to do great deals and run a great business. Before we do all that

7:01 I'd love to rewind back a little bit to the origins of the business. And you like so many of the investors that I've found to be the most interesting started by I think you call it your pre-fund. You were doing these deals without a committed capital vehicle. You were sort of a fundless sponsor going around raising capital for great individual deals. And it was you, you started this. And it's easy to say now you've got this big amazing team, seven billion dollars, hundreds of deals and so on that there's this great system, but it starts with a person And I'm curious. to understand like the formative experiences in those early deals, what you were looking for, why you were attracted to it.

7:35 And then why the system began to emerge. What was it that made you think about the market this way? and want to stay disciplined doing very small deals almost constellation software style. rather than do what most private equity firms do, which is start to get bigger and bigger and bigger in their deal size. So it wasn't just me, my partner Ryan Kelly, my partner Mike Cooper, and John Hannick, the four of us from day one. We were young. I was 31, they were 29, 28, and 27. So we were kids. We were essentially associate levels.

8:02 Where it came from is no originally Ryan and I, Ryan was at Water Street and I was at Valor Happy Partners, and what We would do all time is we would C and DL is like three or four be but done attractive sector and we bring it to our old boss and basically say, Here's a roll up in this opportunity in the sector. And effectively you're heard you know in different ways saying, like, interesting, but you're one of my X number of deal guys, we have to deploy X million dollars per year, whatever may be. Doesn't make sense for us to do that. And basically I heard over and over again was

8:28 No one is Investing is part of the market because when you're good at private equity, what do you do? Raise a bigger fund. When you're not good, you wash out. So who stays small for the long term? The answer is really nobody. And so we decided to get a franchise, a micro cap franchise that would stay small for the long term, but they have a bunch of different products. And so those early former days.

8:47 That is when we had a pre fund like Free funds. are something I think that people Zoom past these days. Want to go raise the first fund one 200 million dollars. Like it is really hard raising 200 million dollars, it's really hard raising 100 million dollars. And so the reason why we did it that way, I wish I could say I was smart, this wasn't plan, but when my mentor said to me years ago, I was like two thousand seven or eight, and said, Justin

9:10 Was a good time to fundraise. It's a bad time to invest. And vice versa. And he said when you start, make sure you start when it's a bad time to fundraise. So I knew it until it was nine. I didn't know oh nine March was the bottom. I didn't know that was exactly, but I knew it was bad. I didn't know how much worse I was gonna get, but I said to myself, Well, you gotta do it when it's bad out there. And so I can't raise the capital. I have no track record. I was an associate of a private equity firm. I was a lawyer first, and an associate of private equity firm. No endowments and investments. That's how I call them.

9:39 And they were like, yeah, come back to the track record. I was like, how do you a track record? We went out and raised money when our first was a prefund was a ten million dollar community capital vehicle, but a couple of important points on that. Instead of raising just four or five million dollars for the first deal. We raise ten minutes of credit capital. And why? Someone give me some really good advice that And go for your first add-on.

9:57 Someone's get divorced, some have changed their mind. And by having a committed pool of capital, you'll spend much of time raising capital for the second add-on. So having a 10 million dollar committed pool is mostly wealth managers. Foundable private equity firms. Head of law firms, traders in Chicago. Into our little network. We didn't have great wealth. We had much of all our small offices of twelve hundred square feet.

10:15 But those very early days. It was about being thematic. And it was about buying a little business where we felt like We were all healthcare originally. where the founders were excellent at something.

10:26 But did not want to do something else, which was usually the business side. So they were a pharmacist, man. They could mix XYZ and everyone in town wanted to work with them because they had the best output. And so in those early form of the days, it was Pick the right theme. Invest in a business where the founder clinically was really sound.

10:44 We have to say a short capital, good medicine is good business. We wanted to find a good health care provider. That had the respect of their peers. Invest in this little business, then bring systems and processes. We call it flash and a dash, a dashboard and a flash every single week. We have to say if you can't measure it, you can't manage it. The very early days we were very process driven, but this pre fund.

11:04 Everyone wants to zoom past it nowadays, but you get seduced by the world of Instagram or Facebook or TikTok, where everyone raises the first two hundred million dollar fund. Guess what? Most people don't start that way. Most people start something very simple. I like to think of Short Campbell's story was Not that dissimilar from some associate or VP in another priority firm right now. It takes time.

11:24 It takes ten years. If you get it right. You do it exactly well, you have good deals. You will make less money. Your first ten years. Then you would stay in the trajectory we were.

11:34 But after you're 10 going forward, it flips in a trillion direction. And so I think people wanna go pretty fast these days, but I always say, slow down, go buy one good business, buy a second good business, make sure those are going well. If you buy two or three good businesses. You will raise a fund one day, but don't think just because you work at XYZ firm, you're gonna spin out and go raise money. And do it now. Do it when the time is crappy out there, recession is here or coming, but now you think about it. I'd be raising it now, I'd be going to invest in businesses. When it's a hard

12:03 Time to Create enterprise value. Sellers are scared. There's relatively Low earnings profile. And multiples are relatively lower.

12:11 looking backwards, don't do in twenty nineteen when multiples are tick tocked and easy to raise capital. but it is really hard to get it right because you're gonna sell it five years later, probably into recession, as opposed to you buy it in twenty twenty four. I'm pretty confident we'd not be selling recession in twenty eight, twenty nine, thirty. So obviously you're hanging your hat on this ability to stay in a small average deal size. So seven million dollars, but a twelve million dollar average deal size is quite something. There's not a lot of examples of firms that have done that. So with that in mind, maybe describe what is the perfect canonical short capital deal. What is the

12:44 business look like what does the multiple look like what does the prospect for growth look like If you had to atomize it. How would you describe it? Everything starts for us the industry. So we're very organized around industry themes and thematics. So pick an industry we'd say has great long term growth potential. is much easier to be playing ball unless she has growing than going the other direction.

13:04 But not only about the perfect type of deal for us, then fifty nine platforms in firm's history. average revenue, about eighteen and a half, nineteen million dollars of revenue. Average EBITDA, three and a half million bucks. Paying about seven and a half times. That's what we've done over levering it two times. So under lever, over equitize. And

13:22 Use about eighty to hundred employees. This is Main Street, not Wall Street. And we're buying business, but it's in a sector we believe that You create value by consolidation and scale.

13:32 And so I was back to the veterinary industry as an example. Value is created. By hiring and partnering with the best veterinarians. We love investing in industries where there's much more demand than there is supply. So what do we do? I become the supplier of choice. By supply that means

13:47 be a place where veterinarians and vet techs want to work. If you have great people want to work with you in demand where it is, then you have a chance to grow definitely quickly. So buying businesses that I think Um in a part of the market that are a price point that is different than what they do at scale. For a lot of reasons, the matching teams have not been developed. They don't have multiple geographies.

14:06 They oftentimes have cost for concentration. But we're okay with that. Is a risk we take. They almost never have audits. On QuickBooks. These are all parts of I would say um Size above the country club round?

14:17 But below where institutional investors want to invest. Constellation software. Mark Leonard's a friend and a mentor. I'm not smart I know to copy. and try to copy that all the software. We've done it in operating businesses, but it's a main street little businesses where where you can aggregate five, ten, fifteen, twenty-five of them or more and get to a spot where There truly is synergies where

14:38 Your cost of goods sold can go down because of scale. You can have data points on pricing to be able to have better intuition and knowledge on pricing dynamics. able also to shift labor around to have their labor utilization. So in a route based business, for example, you have more density than a sudden geography creates value. So I want to have multiple ways to win. I think the last thing I'd say is.

14:57 Unlike larger organizations that buy bigger businesses and competit auction processes for buying on these relatively smaller businesses. If we get the first deal wrong in the thesis, it isn't a death blow. Most times in private equities, probably speaking, if someone commits a hundred dollars to a thesis, they're investing between sixty and eighty dollars of that investment for the platform and reserving twenty to forty for add ons.

15:19 Almost exact inverse. I'm paying hundred dollars to a thesis, I'll deploy five to twenty five for the platform. And what that does is it creates the opportunity to underlever. Make sure the matching team right. And

15:30 If the first one isn't what you thought it was to be, your second or third investment, that sector still can be good. and become the headquarters and the platform later. And so it gives that great opportunity, I think. to increase your margin of safety, increase an opportunity for success. So all that stuff together creates, I think, A really important part of the ecosystem. This part is inefficient and I think by Urban operations, you large

15:53 Martian safety. You learn upside from operations. If I get one or two of our things right, we make three times the money. If I get four or five right, we make five, six, seven times the money. If we get everything right, returns in the teens and twenties multiple times. And so there's Multiple ways to win.

16:09 I like investing where I there's lots of ways to win up reliability one or two factors. One of the things I'm personally really focused on is thinking about the different kinds of opportunity costs for capital today as rates have gone up as the SP has a certain sort of expected return, call it 10% over the long term, that really to deploy capital away from risk-free rate or very cheap index funds, you need to demand like a really high rate of return. And otherwise it's just not worth it. You might as well just stash it somewhere liquid and go home. What have been the rates of return

16:38 in this style of investing historically now that you have so many deals done, lots of deals exited, ten years of experience. Just level set us a little bit on the return profile of a strategy like this, the return on equity. Yeah, it can't be for everybody, it's for our results. So we've done 59 platform investments. We've exited 14 companies. So it's not saying try to go forever, but it's definitely a critical mass. Our average gross cash on cash has been seven times cash on cash, IRR 72%.

17:04 We've never had a deal lower than three times gross cash on cash. Our median is 5.5 times gross cash on cash. So you're talking about the 50s IRR. So you're talking about 70s gross, 50s net. I'm not saying that forever, but that's been historical results. And this ecosystem does produce, I think a really strong risk adjust return profile. But it's hard to do it. The reality is When you're small, you can do it, but then you get bigger and bigger, you raise bigger funds.

17:29 And it's really hard to stay here. That's just the reality of it because Your vice president becomes a principal. When they want to become a partner, you raise bigger funds. And it's harder doing smaller deals, some of our biggest deals. the most easiest to manage because my managing are so darn good. It's harder to get it right. There's more risk involved.

17:46 But I do believe you get it right. No, you do have I think an asymmetric shore profile. One of the things I used to love studying in my quantitative research days was just return on invested capital of public companies. And the norm would be that ROIC mean reverts. If it's really high, it gets competed back down. But there were always some platforms, a lot of them are the biggest companies in the world today, that would have these bizarrely persistent high returns on capital. And when you investigated them, you found classic business motes.

18:11 It seems like the same question applies here. Like what is the system moat? as you would describe it, because seventy percent, fifty percent IRRs, these seem so high as to be like almost unsustainable. I mean, obviously those are absurdly high IRRs and even half that would be good. But how do you think about building unfair advantages into what you do so that you can continue to earn Really spectacular results. I wish I could say I was smart enough on the front end to plan this, but I got a little bit lucky, I think. Our mote is the volume.

18:38 the number of transactions that we do. creates an ecosystem. Creates that deal. Young professional work short capital. gives the opportunity to have so many different executives around the table that reuse people over and over again and try people out relatively small businesses. And so I believe the next 10 years of private equity is all about operational excellence. So we lean really heavy in operations. We have 150 full-time people approximately at short capital, over which half of them are our operations leaders.

19:03 When you're buying a relatively small business from an honest good founder who has nothing but good intent to grow their business. But they often leave laffies on the table. The risk. They want to take there's four of Eba. to go buy a four million dollar machine to automate something. They don't want to do that sort of stuff. And so at this part of the market.

19:20 It's inefficient. And there's an opportunity to, I think, dramatically improve these businesses in the first 18 months. We believe also Eighty percent of our CEOs are first time CEOs. We believe in this thing called early career energy. We believe that it takes a really smart person about

19:37 Eighteen months? To learn Ninety percent of the industry. That last ten percent. Takes five years.

19:43 ten thousand out. We bring more members to comment though. I think the the opportunities is Finding individuals who want to plan a part of the market that doesn't seem as sexy at first, but once you get in there. Return on invested capital.

19:55 If I'm a founder, I'm a CEO, I understand what's going on. Your profile here is much higher than investing in larger businesses. That's just the reality of it is that I lay out the math all the time for Board members of ours who we We're good from our boards and we usually have about seven independent board members every company we buy. And

20:11 don't get paid any cash comp they get options in the company if it goes well they do well and they also get a chance to invest in those businesses But the math of them I say is We've had now nine times that someone's step off the board become a CEO for us. When they see you. If you get it right.

20:26 look at say okay median returns in the private industry pretty good is two times your money I think that's a good fund the most returns and so our math we say is For us. If you can be a CEO. of a large business that has not two or three hundred million dollars equity behind it. It's quite common to have a equity option pool that in a

20:42 Two point Two point five times cash on cash, they can have a$20 million outcome. That is a no fair way, I think, for a lot of CEOs. You can make that as part of the market. by the cash and cash profile game, right? And it is oftentimes Higher probability of success.

20:58 Especially if you can recruit talent. Give me the CEO that can go recruit his her network of two or three awesome people to come to this part of the market. they see the opportunity and return profile could be six, seven, eight, nine times your money because of multiple arbitrage. because operational improvements Because of the opportunity to invest in these little businesses.

21:17 That have many things left on the table. that founders know that should be done. But they don't want to take the risk themselves. Probably so. No, it's Bill of Fairway for us to have Three.

21:27 Founder issue. One is sixty five, one is fifty five, one's forty five. The guy sixty five more risk averse, guys forty five, wants to lean a little bit more. Great. We can partner that dynamic and give them some real upside and give them a chance to differentiate. But this part of the market does create those unique opportunities. We get it right.

21:43 You're talking about seven times your money. And I think there's no better way than to create value than to compound it and be a leader in a business growing at a really fast pace. One of my absolute favorite encapsulations of your systematic mindset is the way you set these boards up. We talked about it in some detail. When we first met. And I love this idea. The idea of a three million dollar EVA business having a fairly high powered seven person board seems ridiculous, unrealistic, but you figured out a way to structure the incentives and the composition of the board, like the nature of each board member and their background. that's really seemed to have been a key part of this system being the star. Can you just describe that system, the board system and incentive structure in as much detail as you can?

22:22 I could say I build a board like a basketball team. I don't want five point guards. I want a point guard, a power forward and center. With traditional private company investing before I found on shore, I invest in small companies about 20,000 bucks, fifty thousand bucks. What happened normally is that whoever put the most money on the board. And usually they have no relevance, no importance.

22:38 The guy puts in a half million box and they're the board. No. That never happens for us at all. And so. We want to go, we finally call the Mount Rush more of that industry. So back to the veteran industry as an example. I want to identify

22:53 Cool. by industry standard reputation is view to be Best in class. I think he's sports as analogy. I think people often have no college basketball. Who is Tom Izzo?

23:03 Who is Mike's just asking? Who is their family tree? Every industry has their Tom Mazell and their Mike Sheshewski who are no preeminent basketball coaches. And so to build a board like a basketball team and we say I want someone Two people. Who have run a business in that exact same sector.

23:18 in at least three times the size what we acquired. So that person has been there and say, I've been through this journey at this exact size and metrics. On the voice of the customer. Wanna voice the supply chain. Usually want a functional discipline expert who's been in that sector, like a CFO who knows the metrics called, and one or two people from the JSON sector.

23:36 This board of seven individuals. A lot of times our board members who are first time joining us, they laugh. They say there's more people on the board and there is millions of revenue. We buy business doing eight of revenue, we get nine people on the board. So it's Oh wait we're stacked board, but we're stacking boards in a unique way. It creates a lot of value. And I'm going to be clear now.

23:53 This is more secret sauce. I don't mind it because this is how I started. We pay them zero. Pay them zero in cash comp. Feel back the lead director gets a small stipend to be more involved. We but the lead director and we have six. regular born owners right could get zero cash comp

24:07 But they get options in the company that in our base case they make two hundred or fifty thousand dollars. That's breaking out. Very simple, guys. It's very simple that. I average them for five years. On average. That's four warming a year. So you're talking fifty thousand a year. twelve thousand five hundred per morning.

24:21 Most people go, Okay. I'm won't join a board for that. That makes reasonable sense to me. And if we do better than average, then you get much more than that. I've talked to people all the time, they're like, Well, I can't afford that board. I'm like, yes, you can. You give them options and the base case look like this. Base case for us is three times. And so that's a very reasonable outcome. And so I think when you go spend the time and effort to go recruit that board.

24:42 That is the most important thing that you do in the thesis. If you were in my Monday morning meeting and you heard a firm talk about buying a company in the XYZ sector, the question that comes out of my mouth versus time board. Literally, and then there's like a slide. That lays out. A different Yeah, the voice of the customer, the voice of the supply chain, the voice of the operator, sure relevance.

25:01 And Usually four to eight people deep. And the person who is leading the thesis is their job to pick the best. group. And The unique dynamics is about a mode of things from the past that this year we'll close 12 or 13 platforms. So times seven. You're talking about 90 unique board members.

25:17 And so we're talking about a third will be repeat customers for us, but I have 16 new people who will join our family next year on who they're gonna be. Yeah, they're all gonna be very talented business people. We talked about someone before is phone call. So it's very high end, very talented person. There's a niche out there of people who are fifty five. The seventy five. Who don't want to work full time anymore. But do not

25:35 More than nothing. They failed to target it. love the found retirement woman or man. And so these board members bring that experience. And so we oftentimes back first time CEOs. Over 80% of our CEOs are first time CEOs. Messed a minute ago.

25:49 It takes eighteen months. To learn ninety percent of the industry. The last 10% takes five years. But guess what? My board has that last 10% from day one to complement that early career energy. And so if you partner with a hungry smart first time CEO, first time CFO, give him a board and naturally.

26:06 Of those seven, by the way. Five becomes super value added, one or two lesser. just the reality of it, I'm very poor predicting who is going to be value add and who is not. It's just DNA of the people and after with us one time, I can figure it out. But yeah, he's really telling the people he's bored to. They help in a unique way.

26:23 Every single member helps in unique outsized way at one point during the life of the investment. Open the door to a customer. Refers us to a Former employee of theirs who was talented. has unique way of

26:34 Understanding uh Software system. For just an add-on. Or buy a business to an eighteen of revenue and want to grow it to hundred revenue. You must be the new customer that could bring three men of revenue.

26:44 We talk about it first. A fifteen twenty percent pickup in revenue. You buy business on a bit of revenue? There's no ones that are bringing you a fifteen percent pickup in customer. It's just not gonna occur, but I think what we've learned over time is

26:55 We gotta create a funnel environment for this. More members too. They have choice. We're going to do the professional time and effort. We put a lot of effort into creating an ecosystem. Where we have these operators summits where you invite individuals, all of our board members from all of our companies can go twice a year to cross-polinate and share ideas and bring perspectives.

27:11 But creating a family and an ecosystem. of really talented board members who want to provide advice and give back. Part of it is altruistic, part of it's financial, part of it's fun. All those things together create a really great board member. And I think increase the odds of success. All of this is about increasing the odds of success. And I think if we do all these things.

27:30 Well, I'm not sure which part will work every single time, but it's a system. And I know the system I'll go. I tell our LPs and investors all the time. and our future seller partners. I say I won't promise you the outcome, I'll promise you the process. Our promise is written down.

27:44 It's clear. And we do the same thing every time and we make it better sometimes, but the process is the same. I think that is I think what great operating businesses do. public company that could donate her. Like a roper, they do great things by system. And I think that's something we're very focused on. Why are you doing this in the industrial

28:01 subsectors versus somewhere like Software. What is it about? That Addressable market, those business models.

28:08 Why pick that instead of something Like software that If I took this system and went and did this in software somewhere, it probably worked pretty well. Why not? We may at some point, but we start in healthcare.

28:20 I always felt like the founders of healthcare businesses. were clinicians by training. So I went to Van Ville for law school. My cousin I'm super close with to Vanille for Med School. His eight buddies and my eight buddies became one group at Vanderbilt, and we're all still buddies to this day. He's just about the smartest individual I know of these doctors.

28:37 Man, they just don't get the business out of it, nor do they care. It's just the reality of it. And so I saw that enough. I said, okay, I could partner with my cousin who would be my age, but him when he's fifty and supposedly was thirty. And Have him be my business partner. And guys like that.

28:53 create tremendous competitive advantage. And so it was always like We partner with individuals, main street businesses. Where The founders have a outsized tactical skill. Well, that's cutting your eye open for a surgery for a cataract.

29:07 Or whether that is No, in the industrial sector, someone that's really good at repairing roofs, or whether in the business service sector, someone that's great at making sure your technology, your outsource IT works really well. To me it's always about I believe that people excel at things they love to do. Most doctors did not go to medical school, for example.

29:24 to hire the front desk person or to evaluate professional development of their peers. Great. You go be a doctor and do what you love to do. Can't wait to use the words. I want everyone working.

29:35 At the top of their license. So by that I mean What can you only do based upon your expertise and your skill set? And so in a doctor's example. I don't want the doctor who's a cataract surgeon.

29:47 seeing the follow-up patient for the routine follow up. There's no complications, very simple. And what English practitioner can do that. And they're trained well enough to know there's a problem here. I need to see the doctor on this sort of stuff. And by the way, the same thing, the nurse. She'll only see what the nurse should see and the medical assistant. Should medical assistant see? That creates sickness'cause employees love

30:05 doing things that are unique or they can do. What frustrates a doctor is interviewing a front desk person. What frustrates a doctor is having to do some of the most simplistic sort of follow up or Putting into the system. So We like to partner with individuals. who love what they do are really darn good at it.

30:22 but want to leave another part of the business alone. They do not want to do it. So Oftentimes like software. Software founders usually are pretty savvy business people as well. They started the business because they wanted to create something enterprise and they're all parts of it.

30:35 We start with health care because usually doctors Wanted to do good and help people. It was a byproduct of their job to have to do the ministry part of the business. We said, Great. You go be the doctor, we'll be the business part together. best in class and create a business that will help more people on the scale.

30:51 That's just how we think about it, but there's so many different parts of the world that you can create value in, but Gotta be focused. I tell people when you have a lot of priorities, you have none. And so very focused. Sounds like thesis generation and evaluation is like the furthest thing upstream at shore and how you think about things. Talk through that part of the business.

31:09 Where did these theses come from? What makes a good one? What makes a bad one? What's the difference between one that almost gets in but doesn't quite really understanding like how something gets through that part of the process would be fascinating. I want, of course, each and that's professional. So partners have between three and seven, principals have between two and four, and vice presidents have one and two. Oh, you pitch your own thesis. Patrick, give me a love, urgent care and I mean I hate it.

31:31 I mean the veterinarian may hate dogs, so I'll let the investment professional pick something they find interesting. I find the best investors are curious. You're curious about something and you wanna Peel the onion layers back. And so how we work here at Short Capital is every investment professional, senior professional, which is a vice president, principal, or partner, has the autonomy to pick. certain number of sectors they want to focus on and they can't focus on everything.

31:54 For us. Everything starts what's called a roadmap. A roadmap is essentially a white paper on industry. Complemented by The industry conferences.

32:03 And also what we call Mount rushmore of the industry. So in every industry, there is a Mount Rushmore of companies and executives. And the industry roadmap will also include The conferences. So your job, Patrick, if you were trying to figure out urgent care industry is

32:16 You have to order the the green with a sector. You have to physically go to one of the industry conferences in person, walk the floor. you have to identify them out rushmore, lay them out who they are. You have to identify hours for companies. Where are the disciples? Where have they gone? Where are they at today?

32:31 And the pros and cons. Once you had that as being between a forty and a sixty page white paper effectively. And you can say, Hey, I'm Patrick and I love urgent care. And so why I think we as short capital should green light the sector and turn it on. So the whole process goes around that. They present for their peers. It's almost like you're standing up in front of fifty people, the committee size changes depending upon the vertical. But you present in

32:51 your peers are pressure testing it. And there's it's part of so we're organized through our investment memo process investment process. The team is assigned. I assigned two members to Patrick who wants to put forth urgent care. be five people on the best committee. And if they agree to it?

33:07 They are with you for the whole life of the journey. So for the roadmap, through your board, LOI, platform, add-ons, budgets, exit, and their carry in the future is tied to your results. So they have their own curve, their own deals they'll lead. They're judge on your outcomes as well. And so They're very incentivized to make sure that The thesis makes sense. They have to also employ capital. They have to also

33:27 Make sure that they're not just saying no to everything. If you doctor no. but it's a five person team who effectively votes to green light your sector of urgent care in that example. And there's smart people asking smart questions and There's trends we're tracking in.

33:41 Why does the small player win here? Why does the little guy win? And Especially in healthcare. Healthcare is inherently a local business. And so that makes a lot of sense there. But this is where a small guy wins as well. No does not do well.

33:53 You must be multi continental. That is not good for us. We're not gonna invest in the sector. And so Each industry has its own trends and we try and identify Hell wins where a bucket's going and like in healthcare especially, it's the consumerism of healthcare. That thing's something we want to believe in.

34:07 It starts with this. thematic approach. We're very theme driven. So in this journey More in a roadmap. You're also recruiting your board members. You found out who the Mount Rushmar is.

34:17 before we even present the route rushmore the whole roadmap, you have 15 people who you think could be on the board and you're sharing with them through map. Hey, Patrick, you're the urgent care expert. Here's my 20 pages of my deck. Where am I wrong? What makes a bunch of sense? You're getting a bunch of industry domain expertise.

34:34 Bounce the ideas off people. Making phone calls through LinkedIn. Two different search engines. You're outbound and If you traffic in that sector enough.

34:43 You will eventually learn the good guys, the bad guys. You will learn who everyone respects. one trick of the trade that we use a fair amount and I at all the time is You could call it the Industry Association, Urgent Care Association of America. You ask them

34:57 for their agendas for their last five conferences. If someone spoke twice or more in the last five years. Pretty darn good proxy. The industry respects them.

35:07 I want to be that person. But little things like that that the industry itself, there's always uh industry panels about the lawyers and the bankers. Right. Industries Protate certain people.

35:18 And you want to get to who those industries are. So for me, everything's industry. industry becomes the core of it. And then that partner as short capital or president, vice president or principal, they own it. And their jobs to know and they oftentimes may invest in that sector two, three, four platforms of their career or more. My partner Ryan leads urgent care for us. He's on three platforms version care checker. Yeah, well, suppose he does more.

35:39 My partner. Chris has done it. Soon three dental deals. So if your job is to know the sector really well. over time may change.

35:46 It may change if you want to invest in it again, but you almost become a strategic choir. after a period of time because you know the industry so well. Until all times are Executives or board members. They've forgotten more about the industry.

35:59 Then we'll ever know. For finance guys, our job is to be Most. Educate on domain expertise, impress you to want to join our team because we're prepared. We want to invest. And then for the sellers, I'm telling the seller is When you choose to sell somebody

36:14 Or partner somebody. There's two parts of the deal. There's the macro and the micro. The macro is do you believe in the sector, urgent care? Micro is you do my company. I wanna take one of those two off the table.

36:25 I'm believing urgent care. I have a whole machine behind me by fifty page deck. Here's my board members. We create a board before we can buy the company. So you get the industry. We get green lit. And we recruit a board.

36:35 We don't have all seven of them, but we'll have easily three or four of them. And they're required to go with us to meet the sellers before we buy the business. So in these early days. Get the main knowledge, you have people been around the table who know the nuances of the industry. I'm telling the seller, Don't worry about the industry any longer, because if it's not you, I'm gonna invest in urgent care.

36:53 We're going to invest here. Now all we have to do is agree upon why you're best in class and why we should together go build something that's pretty special. And I think that resonates with sellers a fair amount. Yeah, let's talk about With in the given thesis, starting to look at the individual assets, the individual companies. the diligence process and what you're looking for or looking to avoid.

37:13 Once you get down to the actual thing that you're gonna buy. Describe. In whatever way you want, the things that matter Most to you. I'd love to keep walking down this chain and negotiation and operations after the close and everything else, but starting with okay, we've got a company that's interesting for some reason. What are those reasons? What are you looking for in diligence?

37:31 Almost always we're doing a roll up the sector. We're almost always consolidating. And so one of the things that I look for almost right away is reputation amongst your peers in the industry. And there's a really simple test. I'm sharing people's my inside baseball because I anyone should do this. I think it's rocket science. Use ophthalmology as an example. We'll try and try an ophthalmology company.

37:49 I'll try and Identifying that same town. three or four little optimal practices in town. and call them up and we'll do a secret shop or something and ask them If your mom had to have a cataract surgery.

38:01 And she could not go to your practice. Who would you send it to? In time. And I want the company that I'm buying to get on that list. Multiple times. Now you have to recognize there's always in town a cult of Pepsi. There's somebody that likes each other and somebody doesn't, but people in town.

38:14 No. who is pretty good in town. So why that's so important is reputation of that first group is everything because those who are in the know only want to join the winners. The New York Yankees are oftentimes one of the best major league baseball teams. Very different to play team. There's no way the Los Angeles Dodgers want to join Triple A team.

38:33 the Dodgers would join the Yankees in a roll up of the baseball industry. Does they're viewed as best in class. So I think the same way reputation. Number two. I want a founder.

38:44 Who has a shared vision to grow. And has a desire to learn. Back to curiosity. They want to understand and want to grow a business. Beyond their own means.

38:53 And they're excited about partnering and they have an open book. Our best founders. Clinically, technically, you know, it's a baking sweet goods or a doctor or A plumber and we have a water safety business. It's so important that they're really good at their craft. and they're able to identify who are others go through graph. So to me it's reputation and industry.

39:12 Technically sound. You don't hear me say Mageteen very often, do you? Because It's important, but we're gonna go build. We're gonna take what y'all have and surround you and compet you.

39:22 Oftentimes the founders Are gonna be a role, but I've seen you. And we're very clear on the front end. By the way, our biggest company is a veterinary company. We started when it was

39:31 Five of revenue, one of e but uh three locations. Today it's over four locations over one point three billion revenue. That's founder, veterinarian, and still CEO. So that's one extreme. That can be one extreme. Other extreme I could say, Patrick, you're a great

39:46 emergency room doctor. If we're gonna partner. You're not gonna be the CEO in our thesis if you're okay with that, but you wanna be the chief medical officer. We would love you to be the person to help recruit other doctors to this team and sells the value of problem why we can help people in rural parts of America better than anybody else. And so to me, It's very much

40:03 Reputation. technical skill set and a willingness to learn and a curiosity and want to grow. Those are the things I really focus on. There's always the minutia of customer concentration and reputation, but reputation is encapsulated so much because this is a role of things. It's not buying one business and staying still. We're growing our business usually over a hundred percent per year, organically and organically.

40:24 I would say on average that levered roll ups have sort of a bad reputation. Why do you think that is? I would say if you've seen one level roll up, you've seen one level roll. There's no flakes. What like the restaurants are good restaurants or bad restaurants?

40:37 Set up dynamic. Oftentimes they get bigger also. The founders have already left the organizations. No, in the early stage where we start, these founders are Very hungry.

40:47 Wanna grow these businesses and we have to under lever. So we don't put pressure on these teams with Leverage. We under leverage no leverage at all. Also, I would say People point fingers at Roll ups.

40:59 In a way because The target's on the back of the winner. It's hard to identify all the small little ones. And yeah. When you have

41:07 four thousand employees, you're gonna have some more disgruntled. They're gonna somewhere who leave the organization. So you hear more of that noise versus a four location versus a four hundred location. I generally believe that Roll ups end up in a better quality of the business. Usually, at least for us, we create usually a technical advisory board. So it can be a bunch of Arson Bakers, it can be a bunch of veterinarians.

41:28 We want to have a technical advisory board. We're able to bring together and create a dynamic of what is the best in class delivery of the services and so we spent a lot of time on that and so I recognize that.

41:39 more arrows are shot at bigger companies. No one talks smack out the Triple A team that talks smack out the New York Yankees. You know why people start a New York Yankees. So I think it's easier to point fingers at and do bad things happen? Sure. By normal scale if you have a four locations more likely the one doesn't go as well. As if you have four.

41:57 But I think In totality. those businesses are able to The other employees better. create a better margin profile and therefore deliver better quality of service to the customer and the day.

42:07 Why do they exist? Because customers keep shooting them. over and over again. People ignore that part of it is like, oh levered business that is a part of a levered roll up like Yeah, but the customers keep picking them up. Wonder why? Because they believe it to be a better value prop than going to somebody who is not part of that role. And because usually they can offer more services, hopefully a higher quality of care, and there's smart people running them with. Metrics like Net Morris score.

42:29 Yeah, other things they've been more sophisticated identifying. This is what my customer wants. I'm delivering it in a very efficient way. L were cost. What have you learned about Negotiation.

42:38 Uh. Lot of deals you've done. So people say to me, Justin, you're in private if you're in finance. I quickly correct them. I say, No, I'm in psychology and sales. Look, end of the day. I always tell our team members at sure.

42:51 We've done now. almost nine hundred transactions you've had zero lawsuits. If we ever pull out that document in the future, have to look at it, we've already lost. I mean, we'd negotiate to do our best to have all those sort of things buttoned up and sort of stuff, but Of the day.

43:05 I want people to believe in the growth story. They have to believe what we're building together. No, lawyers sometimes will try and I'm a former lawyer, I'm recovering lawyer, I understand the lawyer's job. But no, when we're negotiating Most important thing. is negotiating

43:19 Making sure we have catastrophic downside protection. I need to make sure Patrick was on the front page of the Wall Street Journal for doing something uh uncouth. I need a way to separate. That's important to me because that has Risk.

43:30 I think the most important thing, especially do your roll up. Yeah, I think most of what it is. What we have to do is create an environment and a structure so that Not you. But if someone else down the road or do something.

43:42 We need a way to unwind that person. If you wear your shareholder hat as opposed to your individual hat, I think most of our partners get it. They go, Okay, now if I were to do something wrong, that'd be bad, but you can play yourself. The hardest negotiation is that on my part. I know we've never had to dissolve, never had anything worse than three times our money. But I think the negotiation time where it ends up most often for us these days is

44:03 So I was negotiating for a larger part of the upside. That's where we end up pushing. We're used to be we do an eighty twenty deal, now it's being sixty forty or Fifty five, forty five, and that's where a lot of the negotiation comes, but End of the day.

44:16 We prefer in person, we're not fans of Zoom negotiation. Oh, that's from the I say it's already deal. Yes, I can. write down on paper paper all the weird things can happen in this world. But if you trust me, go talk to these 25 references. I'll give you everyone we're gonna partner with.

44:30 Trust. And if we look at those documents, we failed you. And so not saying we haven't unwound partnerships. People have not worked out. That's definitely happened. But On the negotiating sign. To me it's

44:41 Being very thoughtful. about who you're partnering with in the big picture. That's I think strategically, but I'm gonna get one level down more tactically. I think I made sure if she on our last phone call. We have a system at Shortcount, we call our green, yellow, red system. Which basically for every material

44:56 document. in a transactional purchase agreement, an operating agreement, a credit agreement, employment agreement, a lease. There's roughly fifteen key terms. On every Document.

45:08 And we list all those out and we have a scoring system internally. And I'll use the simplest term. not compete. Everyone knows a non compete and sell business as part of the transaction. Five years is market. That's what most time it is. If it's four years, that's pretty, I think pro seller. Anything less than four years is really pro seller. We have a very simple system back to why our teams can grow and people negotiate their own deals is it's a whole entire system that

45:30 Everyone in our firm knows At least fifteen key points. They know they'd agree to on their own and know they need to raise up the flagpole. Everything for me is a function of price and terms. I'm willing to pay you a billion dollars.

45:40 if it's a dollar a day for the next billion years. So whatever it may be. And so On the negotiation part. I like to figure out a way that Strategically. partners feel like they're part of our team for the beginning and they're negotiating.

45:53 not in their employee hat, but in their shareholder hat for a long term. And more tactically Oh you are. Vice Presidents, Principals, and Partners thought I don't need to negotiate their own deal. I'd leave the very best people on a super long leash. the appropriate check ins.

46:06 Give them that autonomy. Create the rules. Expectations and then Give'em a scoring system they can give each other. People love competing with each other.

46:14 And the best of the light shined on them and that's what we try and do. It's a fascinating set. I just love all the systems and how they all intermingle. If I was the m world's most Skeptical but thoughtful. LP and I was looking at all this. I'm sure you've probably talked to this person, you probably picture somebody. What do you think they would poke in on and say is the weak point of

46:34 shore in this whole like system of systems. I think it's that first time CEO, the early career energy, are there enough of them out there who are high enough quality that can scale up to the next level? And so I agree with that. So we internally have I like the home growth.

46:50 And so we create this program now six years ago, call our CXR program, where we recruit from the best business schools. Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame. Well our individuals that come to short capital, they'll be a chief of staff, a good owner portfolio companies for four or five years. And if they're one of our very best, we'll promise to back them next. And I think we have unique fun dynamic. I'd be lying to you if I said I'm gonna put a thirty one year old

47:15 as a CEO of a one point three billion dollar revenue business. But my average business is 18 of revenue I buy. I sure will make a 31 year old first time CEO if they perform well in the past. And so I think our biggest risk is. the high quality talent want to run small businesses. I think though there's a lot of makings to it. And so we home grow our CEOs through this program called our CXR program and we home grow our CFOs. We hire people out of big four accounting firms usually come to short capital for a 30 month tour of duty. they go through this program and the best ones become CFO. So conceptually how I think about it is they offset it. by recruiting and home growing my own CEOs and CFOs. That is the risk of

47:51 Are you gonna trust? For a roll up. A CEO is forty one years old, first time. And one of the biggest challenges we get into a roll up. And some reason it's not going so well, CEO is wrong. But there's a big pipeline district buying.

48:04 It's hard to unwind that and start again. We've done before. That is the biggest risk is that You're doing a roll up, you change leadership, but that's Why have a strong board? So I'm someone steps off the board, becomes CEO.

48:17 I think that's where I would be if I was poking holes in my own firm is can you find enough CEOs and CFOs and leaders I believe the answer is yes and we try to home grow them, but also As you need to grow our firm. We have a system internal uncover all star tracker. Each company has its own

48:32 list our internally of people we've been our best in class and we'll use them again in the future. So how I think about it is Talent wins. With that talent system. I think the system was But the whole is

48:44 enough talent at the velocity that we're building businesses. There's this great book called Innovation Stacking by one of the founders of Square, where the whole idea of Square's eventual moat was all these small things that are built on top of each other. And then the chain of innovation is itself the competitive advantage sure really reminds me of this. One thing that we haven't talked about in this theme of innovation stacking. Is how to decide. another fund vertical to go into. You have a real estate fund, for example, like

49:10 That's like a surprising thing. Coming out of healthcare. Maybe tell that story. Why real estate and what is your philosophy of stacking unfair advantages and how to think about that as you build the firm? I think stacking unfair advantages caught everything I think about. How do we have unfair advantages? So I view market cap.

49:27 all of our funds of healthcare, food and beverage, business services, industrials, that's his own product. But real estate is a different product and next year with product healthcare advantage fund. I tell our LPs and I tell our team members of short capital. I will only add a new product if two things are true. Number one. We have an unfair advantage.

49:43 Mean that. Odds are tilted of success in our favor. Because of the dynamics. It helps the number two is help my base business. So real estate.

49:53 So we have a real estate fund. We were acquiring so many veterinary businesses. No, I think no several hundred. that we can't do all these sell these packs and it was slowing down the deals those causing problems for us. And so We felt like there's an unfair advantage.

50:07 by I know the CEOs of my veterinary companies quite well. There's opportunity. Where They want to stay in a location for long term. But the

50:17 underlying real estate is owned by the veterinarian. And they oftentimes don't want to invest in that. So how do we figure out a dynamic where We know the location is great, underlying balancing the portfolio company is great. We have an unfair advantage of knowledge. And specific knowledge of the location.

50:32 And then it helps my base business because I can do things to help the base business to potentially lower the rent. in exchange for longer term on the release. So the lease becomes more valuable in the market ecosystem. You aggregate hundred of those together because a valuable asset. Because more valuable to the

50:47 Veterinary company. By having a lower cost lease or more capital for tenant improvements. So it's a win win win scenario. The portfolio company wins.

50:58 Because They have more Ibata or more capital expend. The real estate fund wins. Because There's an opportunity to elongate the lease.

51:08 exchange for some things that creates a better value over time. And What cost capital? work in a more efficient way. So all parts of that make sense. So summarizing I would say we will only extend

51:21 Oh, it's a short capital, two things are true. With unfair advantage helps our base business. And I know having a real estate fund help my base business on the acquisition and also the underlying portfolio companies. There's a current conflict. The conflict is not in the by, though, the conflict's in the lease.

51:35 And there's so many reads out there with public leases. We have them ourselves. You take the read that's out there. use the lease from somebody else and just move it over and make the same terms. And so that's how we think about it. But the other products that we do in the future, but I have to help my base business. I have to have an unfair advantage. Talk mostly about

51:51 What you buy and what you do. We haven't talked about selling these businesses. Who do you sell to? What have you learned about the relationships with those sellers? You're selling a product. a product as a business to some financial or strategic buyer. What are the features that they look for in a product? And how do you think about that final part of the chain here? So picking the actual buyer of over fourteen out of fourteen sales, I never picked the right buyer, but Prior Founding Sure, what other private I can firm and partners have as well.

52:15 I hear my mind over and over again my old boss wanted to buy. I can think of what they used to say over and over again. And so how I think about it, it goes back to how we organized people say industry management company. back the very beginning of the conversation on the industry, the roadmap. industry is growing, and I think about industry growth of a fifteen year cycle. Fifteen years gotta be my whole period, five years, my buyer's whole period, five years, my buyer's buyer.

52:36 Kind of a fifteen year time period. We sold to public companies, Webcore and Hulma, big public companies. We sold to the biggest the biggest private equity funds, KKR, TA Associates. We sold to Well private equity funds and we've done some teamation vehicles as well. End of the day, I have high confidence in the following statement. If I buy a business and

52:55 Growing industry. That is I'm buying an inefficient part of the market. We make it better. We grow it from single digit Ebata. to the teams to thirty B but DA. We will have lots of buyers, both strategic.

53:07 And financial sponsors. So whether it's with a platform or an add on. I think I like that situation. I'm like an investment we call barbell industries. Mean there are Usually four or five very large players. And there are thousands of mom and pop, but not much that

53:22 I want to go create the new middle one. And then larger players want to buy it. And so The other day I also would say larger funds want to buy, which by the way, some of my investors are friends of mine who run quite large funds. I hear it. I talked to them.

53:35 I wanna buy a business that's a proven track record of acquisitions. organic growth that beats the industry average by at least three hundred basis points. one technology stack system that all business are on. 'Cause any of those things you can acquire. You can make them better.

53:48 I want technology system. They can buy it from you as 30 Bit doll and go to 100. And so we're basically. With to say short capital. We are building platforms, not buying platforms. We like to think of ourselves a lot more like a venture capital firm. And the venture capital firms.

54:03 partner with a founder. Great fun of an idea. But usually has no relatively small team. And then the venture capital firm works with them hand in hand and helps. Great a whole entire magic team.

54:13 When we buy businesses like an orthodontics business. One practice. Literally one practice with one gentleman, one lady. And we'll go hire a CEO, a CFO, head of business development, we'll go build the whole entire platform. And on this journey we'll have some mistakes along the way, we'll have added a lot of awesome people.

54:28 And when we're a scale. We should be in on uh mill of the fairway for a fund that's wants to deploy between uh fifty and three hundred million dollars for a platform, which is A billion to three billion dollar fund. That's where we buy in The buying environment.

54:43 The inventory that we're creating, I think, has gone a bit. So funny here you describe all these elements that I'm just picturing this big effectively like a money machine. the widgets themselves are companies and platforms and you're perfecting the factory, if you will. What parts of the factory floor Do you think our

55:01 interesting or surprising that we haven't talked about yet. So I think it's our focus on operations, and so. Again, I'm not smart. I don't want to copy the first round capital, it's a venture capital firm. I got to know them a little bit and copy what they've done. I think my factory floor is what I call our operations team, we call our portfolio performance group and a group called the centers of excellence.

55:24 Oh, I buy businesses eating the rep with three Viva doll. My marketing department. The person who runs it is not somebody who's run a very large business. What we do at Short Couple is we have a Headers of Excellence. A gentleman named Adam Warder. He runs my

55:38 Marketing says excellence. He's a team underneath him as well. His job is to be the node. And for our forty three portfolio companies. His job is to create a cohort of the head of marketing from all 43 companies. And they all

55:51 Four times a year get together. Twice by Zoom. Twice in person. Countless email interaction in between. And this is my factory floor where

55:59 I call it lift and shift. I am getting the newer companies To where you need to go faster. And my example of that would be orthodox business.

56:09 It's a B to C sort of marketing engine. No SEO marketing and sort of direct marketing to a customer for orthodontics. Took us years to build a platform to get to the right system, process, metrics to use. About a year ago we bought a med spot business. The marketing is very similar. It's B to C as well.

56:25 And so We lift and shift Adam's job is to help recruit Take the incumbent marketing leader, work with them and throw the right person for long term great. If not. over time work with the CEO to help top grade that individual. But then lift and shift.

56:38 the systems and processes and tech stack from marketing and the orthontacs business and apply it to the Metzpa business or apply it to the veteran business. There's so many different personas we have that things change a little bit, but the whole entire journey. is I think some of the secret sauce and it's not replicable unless you hire other people to do it. But to think around as we have billion dollar Company resources applying to million dollar companies.

57:01 And so an overname Julian Larimer is the leader of our division. She's a former private equity back CEO. Incredibly talented. She runs the whole entire group. Roughly I think thirteen functional disciplines. factively a senior management team from a Fortune five hundred company that work at Short Capital, and their job is to help every portfolio company that discipline get better. A chief data officer, chief technology officer, head of human resources, head of talent. All these people help all four or three companies and elevate all of their games.

57:28 I think you told me that This is a crazy stat if it's true that nobody above an associate level has ever left shore. How have you made that happen? a lot of people, a lot of years, a lot of companies talking about career trajectory in the system there. Two hundred and fifty full time people.

57:43 So if you're a vice president, a principal or partner, not one person has ever left short capital. But associates go to business school and then come back. VP, I think we have about forty three or forty four people who are in that bucket, not one person's ever left and Well some of the philosophy behind it. So I think a little bit of it is Hard to be

58:03 thirty five year old look at the founder who's forty six and say, When do we have my chance? But have the different verticals, healthcare, food and beverage, business services, industrials, my most talented healthcare Went on to become a Principle is my

58:17 business services fund and same thing industrial. So it's a little bit of a waterfall where the Homegrown talent moved to a new vertical. My dad always taught me a couple of things about treating treating your people well, but he said two things, Justin. Pay the market comp or a little bit above market comp. And most importantly.

58:32 People don't quit their friends. So my job is to create an environment where they come friends with each other. And so that means holiday parties. It means we have things called a party, we sell business, we have the celebrations. It's important for I think we just shoot to know each other's spouses. And so

58:45 I think it's really investing in your people because if I'm a seller of a business. The thing I fear most if I've a friend who sold a business to private record firm. I wanna drill in really carefully. Who is the partners I deal?

58:55 And who will be with me this journey? 'cause there's turnover in those rings. It's really hard and increasing your house of success. So I think his core competency to private equity and for my business is to make sure that People stay the same.

59:07 when they're partnering with a founder in a business. And so I guarantee you forever ever will be here the same way. The answer's no. It's not realistic forever, but for 15 years now, no one's ever left. And I think it's because People don't quit their friends and my job is to create an environment with friends develop. I don't know where they feel really good about. I have financial upside, and again, I go back to you a really long leash with appropriate check-ins where goals, nerves, and goals oriented. People build their own goals, set their own goals, and they know when they're performing. Yeah. I love the idea that I think you pay for people's dinner if they want to go out if there's three people or something like that. Like every little detail is so thoughtful.

59:39 Three or more wanna go, then I'll pay for it. One of our younger guys named Tim, I won't say his last name, but Tim, you know who you are. He had like a big build at a club one night. And he's like, There's three of us. And I was like, Tim, I'm paying for it this one time, but clarifying point, if it's a bill over X dollars at a club, it doesn't count anymore. I love it. Oh, I think this is the Everyone in the team loves the kid. He's a great young man and he's he's awesome. But I was like, it's meant for maybe not a club bottle service somewhere and I'm not paying for that for everyone for the long term, but he follows rules and he's a culture carrier and I want to create nodes of culture carriers. People who want to be here. It's a very high bar going to the vice president, though. What it makes me president.

1:00:17 I'm basically telling you, I view I'm saying to you, I want you here for a career. That's what I'm saying to you. It's my job to get an environment where they want to be here. You obviously love sports. You have spent a lot of time thinking about sports, the leagues, teams, you're now an owner. Talk about

1:00:32 why you love this so much. And more importantly, everything you've learned about becoming an owner of major sports franchises. Yeah, so no, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoeni Suns about a year ago now. Um February closed, but we signed the contract in December last year. First of all, we're stewards of community assets. We don't own the team. No who owns the team? Fans. the X million people live in Phoenix. That's the all entertainment.

1:00:56 There's a lot of knowledge between private equity investing and sports and metrics and numbers, but We buy a business, and we did it, we partner with Phoenix Suns. Yeah, it works there. The first day, Matt and I met with every person at a town hall meeting, we all sent a survey out that said. Tell me the two things that we should keep doing here.

1:01:13 So it took the stop doing. The all time is short capital also. And We got of our three hundred employees roughly, we got two hundred and seven some responses. And I read every single response.

1:01:23 And I think it's important. This isn't the glamorous part of no partnering and running businesses, but the details. And you hear themes of the coffee sucks. Okay, that's an easy win. How do I make some easy wins on the way, but The sports business. It's a complicated business. I view sports and private be very similar. There's a scoreboard at the end of the game.

1:01:40 In private equity, it takes 10 years for the score to flush out in the MBA. You can see tonight if we wonder what we lost, but there's a lot of similarities, and I love that there's a zero sum game in sports. There's only one champion. Matt and I talk about all the time. In thirty years from now. You'll look back at no, hopefully Matt and I've ownership and stewardship of the Phoenix Suns and the Phoenix Mercury, which were really excited about Phoenix Mercury. is that no one say, Oh, they improved they give the Mars by four hundred base points. No one's give a crap.

1:02:07 We're gonna wanna know were they competitive and did they win championships? And then we have four pillars and like All of us is short capital, it's goal oriented, it's values, it's core values, and so at the Phoenix Suns. Number one. Wanna create a raving fan experience.

1:02:20 It's gotta be an amazing fan experience. People forget. It's not a sport, it's entertainment. These people have choices to spend their money at a movie theater. at a driving range or at a basketball game. So I'm gonna do a raving fan experience number two. Take care of your voice. On a place where it's a great place to work and people are happy and they want to be there.

1:02:37 Number three. Or a community asset. Get back to this community, be stewards of this community ass, and do right by this community number four. win win championships to win in everything we try and do. And so sports investing has become, I think, a bigger trend the last decade or so. No, we're big fans of it. I don't think there's be more NBA teams in the near future. Maybe one or two, but beyond that, but there'll be

1:02:58 more people throughout America and the day I think It's an intellectual property at its core. As much like the highest and best type of real estate. the corner state may in New York. Phoenix Suns are going nowhere.

1:03:08 Things murky or going nowhere. And so It's a fun opportunity and it's a really opportunity to give back to a community and And hopefully create memories. Matt and I grew up playing sports. My best memories my mom and dad and I, Matt, going to games. We didn't have the best seats in those days, but

1:03:23 our heartbeat was watching our Detroit Pistons win on this and hopefully create an environment like that. That's the fun part about sports. It's the platform for good and for change and get a lot of positivity. And so we're really excited about that. Has anything surprised you so far about how the league, the teams, the ownership. The ownerships function and work.

1:03:42 Anything been Really surprising. It's much more of a partnership amongst thirty teams than I thought it was. Between the way is it's fierce. Basketball operations like no. It's like no

1:03:53 It's some game. But people are quite collaborative. Some of the people you would know that are well known when we joined the league that next to one of the guys at launch and he said, Congratulations, you're brass, you're young. I was the same thing. You'll make a bunch of mistakes talking in five years, but have fun on the journey. So people are very helpful. the other day we want to create a great product for the fan and the MBA is a Great opportunity.

1:04:16 and the other teams want to help each other. You want to help each other one? Your signal to be full or my signal to full. You know who I wanna quote unquote lose is I want the other sports or I want other options to lose to the benefit of the NBA. And but I think the camaraderie and the help each other, I think, has been something not just in the game, not just in the sport, but also outside. If I'm doing something in a different community, and I'm in Oakland for something and meet somebody they

1:04:39 Able to open a door to somebody, that's been really helpful along the way also. You talked about Mark Leonard before and You're just like a benchmarker. You remind me of Mitch Rails, who facing any new challenge, interestingly, also doing this exercise with the commanders right now. If it's about the stadium, he's meeting with 30 stadium owners and stadium operators. If it's about something else, he's benchmarking constantly looking for great ideas. And it seems like you've done that. Who apart from Mark?

1:05:02 stands out as key individual people or firms that you've learned from. Over certain people. It's a clear couple. They've been great to me.

1:05:12 If it was over there. But they're different. square heritage, though more specifically there's a group they have a network and I've learned from them of the power of a network and introducing really talentful gifts to each other. People with

1:05:26 Professional success. I'm very selectable user time. creating an environment of bringing the best and brightest together, I think creates a lot of opportunity for success and unique outcomes. So I think some of the people over there, Kevin Kelly is one that and Keith Johnson too, that stand out a whole bunch. More specifically in the private equity, one individual who I've learned a ton from a mentor of mine, his name is Kent Dunn. He's the founder of Keystone Capital.

1:05:47 He is my opinion. amongst the most humble and successful people ever come across. It's a steady hand on the wheel and do the right thing over and over again. Also a gentleman named Jim Forrest, who was at Windpoint Partners for a number of years. She is now the chairman of Short Capital.

1:06:00 He is an operations leader at heart. He's always thinking about the customer, the customer, the customer. Mark Leonard have been a great friend for me and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined process.

1:06:14 Um And then there's a professor at Harvard Business School for Executive Education. I wrote a school there named Boris Groysbury that I've done from as well on processing. studies Mitch and other people in the DBS community. And I think she's a big one business that I aspire to be most like on consistent process is done her. There are people Donaher leaders who are on the boards of my businesses of the recruit people from Donaher who are retired to be on our boards. And so

1:06:37 different people. I think that End of the day. You have to find your own niche of individuals. H

1:06:44 Wanna support Your vision. And wanna be around the table and have a good heart that want to help. People help me on the way up.

1:06:51 And help me and I want to be able to do that to others as well. My guess is that you're effectively never satisfied with the system. It's obviously evolved a lot. It keeps improving. Where does it feel the most incomplete to you today? How do you most want it to improve over the next five years? Mostly complete, I think you're never complete.

1:07:10 at the short capital level and operations. I get frustrated when I hire a new team member. And their first two weeks. on a job. They're

1:07:19 Ten business days aren't scripted almost by the hour. They need to know where to go. The onboarding experience. I'm very much into experience and process, making sure when we made a mistake somewhere else. It's probably gets the whole entire team. And so do a thing called what we learn every time we close a platform. We do a one or two page draw on what we learned and we share the whole entire firm.

1:07:38 How do you balance A scale. Efficiencies and knowledge sharing. That's the hardest thing I do every single week, trying to balance those things. It's more efficient for very small people to know things. but it's way more valuable for knowledge sharing.

1:07:52 I didn't think of short capital like a Academic teaching hospital. My job is to teach. our principals vice presidents and partners All the mistakes we've made elsewhere. And so I think the biggest challenge is.

1:08:04 You've made mistakes. Not making the same mistake twice. documenting it and making sure that's front and center. I mean it's just around it. So We have a short capital playbook on the operating things. Like, for example, we made mistakes in the past where we did not renew a lease at a portfolio company at an important location and the landlord extracted a pound of flesh out of us after the fact.

1:08:23 What did that for fact is now all of our businesses are required to have a thing called least query, I don't care if the system was called least query, and all of our leases of all the data points in the system to make sure we never have that mistake happen again. So there's prompting. And so. I think The biggest way to improve the organization, I think, is hiring more and more accountable people, getting tighter and tighter on processes, making it incredibly clear. And reducing the likelihood of making the same mistake twice. I say all the time at short capital, very rarely is there a problem of first impression.

1:08:50 When you have thirty five thousand team members and you have hundred locations and you have Every day things are right. The same mistake can't happen twice. How do we reduce the risk of that? And that's through knowledge sharing, but doing it in an efficient way.

1:09:02 Is there anything about how you spend your personal time? that you wish was different. I wish there was More time, I would say, to work with sellers. I've not been a deal insure capital in seven or eight years now. I miss some of that relationship with building with sellers.

1:09:16 Those really is a short capital. The board members I personally recruited, I was one of four partners. And I was the lead partner on one of those early deals. As the firm gets bigger, my job is to run short capital. and give people resources they need and remove obstacles for the system and the whole organization. But you kind of miss the newer boards that created a lot of great people, some really talented people, and just don't know them the same way as early boards. It's almost like your high school buddies.

1:09:40 You know them better than your work buddies. Not that you don't like your work buddies. I like them a whole bunch. It's just that my high school have a little special place in my heart. And so leading a deal, negotiating a deal. working with a founder. Recurring a CEO. I do less that.

1:09:53 That's coming up to the very end of it. But no, I do miss One of the best questions I think that uh LP has ever asked me. And if I was an LP, I'd ask people the same question. Do you think you're a better investor?

1:10:04 Or better manager. And why? I think at least for me. The right answer for short capital is I have to better manager.

1:10:11 I love investing. I love buying companies. But to create what we wanna create and build and make our system grow, we want our system to grow. It's a manager. You're a leader of people. You're a management system and processes and create. Increase the likelihood of success. Of many things at once as opposed to

1:10:27 I can be very effective, we did one deal. But that is not going to create the same value for our investors and for our team members. And so I think it's my job to create an environment of I was seeing one do one teach one. And not let our best people do things. That they've seen done before.

1:10:41 I would very eagerly read a long white paper or HPS case study or book about all these various systems. I'm really thankful for your willingness to share the very specific details of so much of what's behind shore. Most firms are not willing to do that. And I think it's pretty cool that you've done it here today. I am sad and forced to go to my traditional closing question. I could go for you, you know, on this system for hours and hours with you. What is the kindest thing that anyone's ever done for you?

1:11:06 That's a great question. I've heard you've ask it before. You know, I was fortunate to have lots of mentors and different people in my life who made a really big and positive impact on me, but one I think actual piece of advice someone gave me an eye back to on the last decade for sure. And I'm proud of my telephone to some people that work in my organization was advice is this. Try and have one friend in each decade of life. So friend of the thirties, friend of their twenties, friend of their forties, fifties, sixties and seventies. Um

1:11:34 The idea behind it is you truly have a friend in each second of life. When you go to those moments in time, you actually call upon them for their wisdom, their experiences. And whether it's not losing a loved one, a mom or a dad, it happens most often your fifties or so or sixties. Or if you end up having, you know, a child, that often happens most often in your twenties and thirties. But it's a really great piece of advice that On the personal side helped me a ton.

1:11:55 Well professional side. Things you go through, then experiences you have. in your seventies and you're winding down your career. the emotions that you may be going through and friends have shared with me is things along the lines of All my peers aren't working anymore.

1:12:07 Or Really hard to try and go get new business. And promise something be helpful when they're kinda going, Are you gonna be around here in five years? Yeah, so some changes that you know coming for me, at least I'm forty six. I'm hearing that in twenty five years, that could be a possibility, aware of that fact pattern, how to prepare myself best for it. And so

1:12:23 Having a friend that you stuck your wife is something that I focus on. And I create great value for me and I help others find valuable. Dustin built a uh fascinating business. I'm excited to do this again in five or ten years and see how it's all unfolded. Thanks so much for your time. Thank you so much. I hope you want to do it again in the future. You don't like to think we're in inning two of Short Capital. You build an amazing podcast and following. So thank you for the free to share our story. Thanks for your time today.

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