Justin Ishbia - Lessons from Acquiring 586 Companies - [Invest Like the Best, EP.357]

My guest today is Justin Ishbia. Justin is the Founding Partner of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches. With $7 billion in capital deployed but an average transaction size of just $12 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 600 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. Listen to Founders Podcast For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus, the modern research platform for leading investors. Stretch your research budget with flexible expert calls you can trust. At a fraction of the cost of traditional expert networks, Tegus customers pay only what an expert charges – with zero markups and no confusing call credits – netting an average 70% savings. Don’t want to conduct a full hour call? Tegus offers the ability to schedule 30-minutes, an offer you won’t find anywhere else. And they don’t stop there. With white-glove custom sourcing for every project and robust compliance measures, including a dedicated 50+ analyst team that vets every call transcript, Tegus ensures your privacy and protection. As the industry innovator for qualitative insights, Tegus helps you find the right experts you need at a quality and speed that can’t be matched. For a limited time, as a listener, you can trial Tegus for free by visiting tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes: (00:03:10) - (first question) - “The system is the star” and how it applies to Shore Capital (00:07:10) - Shore Capital’s origin story (00:12:48) - What the perfect type of deal looks like for Justin (00:16:34) - The historical rates of return for their deals (00:18:12) - Shore Capital’s defensibility and strategic advantages (00:22:13) - Their board system and incentive structure (00:28:20) - Why they focus on the industrial subsector (00:31:21) - Overview of thesis evaluation and generation (00:37:24) - What they’re looking for during the diligence stage (00:40:45) - The bad reputation of levered rollups (00:43:57) - What he’s learned about negotiations (00:46:39) - The weak points of Shore Capital’s system (00:48:59) - The Innovation Stack; Thinking about stacking unfair advantages (00:52:11) - Selling a business and what buyers are looking for (00:55:08) - Heavy focus on operations and their portfolio performance group (00:58:00) - Why nobody above an associate level has ever left Shore Capital (00:60:46) - Lessons learned becoming the owner of a major sports franchise (01:03:56) - What’s surprising about how the league functions (01:05:05) - Key people and firms he’s learned the most from (01:07:17) - Where Shore Capital’s system could improve the most (01:11:06) - The kindest thing anyone has ever done for Justin

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:35Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal 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 joincolossus.com.

• 1:00Speaker 01

  Patrick O'Neal 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 Sum. 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.

• 1:29Patrick O'Shaughnessy?

  My guest today is Justin Ishbia. Justin is the founder of Shore Capital. Shore is a private equity firm that invests in micro-cap businesses within industry niches. With $7 billion in capital deployed, but an average transaction size of just 12 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 600 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.

• 2:12Patrick O'Shaughnessy?

  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 want to 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.

• 2:37Speaker 02

  I followed your show for a number of years and it's been so impressive what you've built. So you guys have a best in class audience and showing them on every part. To create our price values, the system, no one personally creates a star. And so our view have always been like, how to create a system, a machine, a process that creates differentiated results outcomes. And I was raised in an environment that said you always look for opportunities where others aren't looking. And my view of the world is the last 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 10 million EBITDA investment. And why most people don't play here is I think several reasons. When it goes back to the system of the star dynamic is that in order to play here takes more resources than normal. Buying

• 3:20Speaker 02

  a business with four of EBITDA, no audit, and a management team that is oftentimes, no, I would say, running the biggest business that I ran before that day, is different than buying a business that's doing 50 of EBITDA, the professional management team that's been coming in together and have run a business three times aside before and now coming down to run it. And so back to the system. To me, everything goes back to the system. Everyone has a role through 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 look up to organizations or operating companies like Doherty, the DBS system. We're trying to create something very similar in the private

• 4:03Speaker 02

  equity community. And so everything we do is codified, written down. If you walk in here on four walls in your own offices, we have a concept of when the idea of someone in our firm comes up where they want to invest in the sector, let's pick on the veterinary sector because everyone knows the veterinary news. So, okay, idea generation until the day we sign a letter of intent to that platform, we call that nine things of baseball. There's literally hundreds of steps that go into each inning has these between five and 15 steps you must go through. They send a letter of intent, there's four quarters of closing a deal. We make mistakes over and over again, make mistake, you actually add something to that four quarters, say, hey, make sure you check with International Tax Council by A B R C. So create a codified system. We close the platform, we 100 day plan. We have 23 standard operating procedures we put into every business.

• 4:48Speaker 02

  So we essentially onboard to the shore way of how we do things. When we own a business, it's the planting phase, the growing phase, the harvesting phase. When we exit a 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 600 acquisitions. According to PitchBook, more than anyone else in the world. Average enterprise value, though, of transactions, 12 million bucks.

• 5:12Patrick O'Shaughnessy?

  Wow.

• 5:13Speaker 02

  Hundreds of them, deployed over $7 billion in a three-year time period, but across 586 transactions. So why the system matters is early career energy, first time leaders, running through their own first platforms. Give these people the tools and resources and saying, here's the rules. And we believe we're of see one, do one, teach one. Patrick, come work on my team, sit next to me, let's go do a first deal and the veterinary ship looks like this. Next one, see one, best to see one, do one, let's do it together. We'll do it hand to hand, I'll tell you 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 to 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 hustle game.

• 5:55Speaker 02

  And the system is 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. And the system allows for that. And so that's why our system is our star. No one person makes this place go and we have to say more stars into our system, the brighter the system burns.

• 6:12Patrick O'Shaughnessy?

  Poking around of this system for the rest of our call is going to 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, 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 called it your. Prefund, 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

• 6:54Patrick O'Shaughnessy?

  in those early deals, what you were looking for, why you were attracted to it. 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.

• 7:14Speaker 02

  So it wasn't just me, my partner Ryan Kelly, my partner Mike Cooper and John Henning, the four of us from day one. We were young, I was thirty one, they were twenty nine, twenty eight and twenty seven. So we were kids, we were essentially associate levels. Where it came from is no, originally Ryan and I, Ryan was at Water Street and I was at Valor Equity Partners. And what we would do all the time is we would see a deal, say three or four, we've been done, attractive sector. We bring it to our old boss and basically say, here's a roll up in this opportunity in this sector. And effectively you heard, you know, in different ways of saying like, interesting, but you're one of my X number of deal guys. We have to deploy X million dollars per year, whatever it may be, doesn't make sense for us to do that. And basically I heard over and over again was no one is investing as 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.

• 7:58Speaker 02

  So who stays small for a long term? The answer is really nobody. And so we decided to do a franchise, a micro cap franchise that would stay small for the long term. But have a bunch of different products. And so it was probably four or five days. That is when we had a pre-fund, like pre-funds are something I think that people zoom past these days. Why go raise the first fund, one, two hundred million dollars? Like it is really hard raising two hundred million dollars. It's really hard raising a hundred million dollars. And so the reason why we did it that way, I wish I could say I was smart up, this was a plan. But my mentor said to me years ago, it was like two thousand and seven or eight and said, Justin, was it 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.

• 8:42Speaker 02

  So I knew it in two thousand 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 it was going to 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 out of private equity firm. I was a lawyer first, no associate private equity firm. No endowments and investments. That's how I called them. They were like, yeah, come back with a track record. I was like, how do you have a track record? We went out and raised money when our first was a pre-fund. It was a ten million dollar committed capital vehicle, but a couple of important points on that. Instead of raising just four or five million dollars for the first deal, we raised ten million committed capital. And why? Someone gave me some really good advice that you go for your first add-on, someone's get divorced, someone's changed their mind. And by having a committed pool of capital, you don't spend much of your time raising capital for the second add-on.

• 9:26Speaker 02

  So having a ten million dollar credit pool is mostly wealth managers, founders of their private equity firms, head of law firms, traders in Chicago. Then to our little network, we didn't have a great wealth, but then much of all our small offices were twelve hundred square feet. 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, but did not want to do something else, which was usually the business side. So they were pharmacist. Man, they could mix X, Y, Z, 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.

• 10:07Speaker 02

  We had to say a short capital, good medicine is good business. We wanted to find a good healthcare provider that had the respect of their peers. Invest in this little business, then bring systems and processes. We called it flash and a dash, a dashboard and a flash every single week. We used to say, if you can't measure, you can't manage it. But the very early days, we were very process driven. But this pre-fund, everyone wants to zoom past it nowadays, but you get seduced by the world of Instagram or Facebook or TikTok. Where everyone raises their first two hundred million dollar fund. Guess what? Most people don't start that way. Most people start something very simple. And I like to think of short capital story was not that dissimilar from some associate or VP in another private equity firm right now. It takes time. It takes ten years. If you get it right, you do it exactly well. You have good deals.

• 10:52Speaker 02

  You will make less money your first 10 years than you would have stayed in the trajectory you were. But after your 10 going forward, it flips in a chilling direction. And so I think people want to go pretty fast these days. But I would 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 going to spin out and go raise money and do it now. Do it. The time is crappy out there. Recession is here or coming. But now you think about it, I've been raising it now, I've been going to invest in businesses when it's a hard time to create enterprise value, sellers are scared, there's relatively low earnings profile, and multiples are relatively lower. Looking backwards, don't do it in 2019 when

• 11:36Speaker 02

  multiples are tick tock and easier to raise capital, but it is really hard to get it right because you're going to sell it five years later, probably into recession as opposed to you buy it in 2024. I'm pretty confident we'll not be selling recession in 28, 29, 30.

• 11:49Patrick O'Shaughnessy?

  So obviously, you're hanging your hat on this ability to stay in the small average deal size. So $7 billion, but a $12 million average deal size is quite something. Just 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 does the 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?

• 12:15Speaker 02

  Everything starts with the industry. So we're very organized around industry themes and thematic. So pick an industry we'd say has great long-term growth potential. It's much easier to be playing ball in a shit that's growing than going the other direction. But not only the perfect type of deal for us, then 59 platforms in firms history, average revenue about 18 and a half, 19 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, levering it two times. So under lever, over equitize, and usually about 80 to 100 employees. This is Main Street, not Wall Street, and we're buying businesses, but it's in a sector we believe that you create value by consolidation and scale. And so I was back to the veterinary

• 12:57Speaker 02

  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? Try and become the supplier of choices. By supply, that means be a place where veterinarians and vet techs want to work. If you have great people want to work with you and demand where it is, then you have a chance to grow relatively quickly. So we're buying businesses that I think are In a part of the market that have a price point that is different than what they do with scale. For a lot of reasons, the management teams have not been developed. They don't have multiple geographies. They oftentimes have cluster concentration, but we're okay with that. These are risks we take. They almost never have audits. These on QuickBooks. These are all parts of, I would say, um, size above the country club round.

• 13:40Speaker 02

  But below where institutional investors want to invest. Constellation Software, Mark Leonard is a friend and a mentor. I'm not smart, I know to copy and try to copy. They did all the software, but we've done it in operating businesses, but it's a main street little businesses where, where you can aggregate five, 10, 15, 25 of them or more. And get to a spot where there truly is synergies where 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. You're able also to shift labor around to have better utilization. So in a route based business, for example, you have more density than a certain geography creates value. So I want to have multiple ways to win. I think the last thing I'd say is unlike larger organizations that buy bigger businesses and competitive auction processes.

• 14:25Speaker 02

  We're buying them these relatively smaller businesses. If we get the first deal wrong in a thesis, it isn't a death blow. Most times in private equity, broadly speaking, someone commits a hundred dollars to a thesis. They're investing between 60 and 80 dollars of that investment for the platform and reserving 20 to 40 for add-ons. We're almost the exact inverse. I'm committing a hundred dollars to a thesis, I'll deploy five to 25 for the platform. And what that does is increase the opportunity to under lever, make sure the management team right. And if the first one isn't what you thought it was going to be, your second or third investment in that sector still can be good. And become the headquarters in the platform later. And so it gives that great opportunity, I think, to increase your margin of safety, increase an opportunity for success.

• 15:07Speaker 02

  So all that stuff together creates, I think, a really important part of the ecosystem. This part is inefficient. And I think by layering operations, you layer in margin of safety, you layer in 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. I like investing around. There's lots of ways to win after a while, one or two factors.

• 15:35Patrick O'Shaughnessy?

  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 S and P 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 in this style of investing historically? Now that you have so many deals done, lots of deals exited, 10 years of experience, just level set us a little bit on the return profile of a strategy like this, the return on equity.

• 16:12Speaker 02

  Yeah, I can't be for everybody else, but for our results. So we've done 59 platform investments. We've exited 14 companies. So it's not, let's say, a track record forever, but it's definitely a trickle mass. Our average gross cash on cash has been seven times cash on cash, IRR 72%. 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 you do that forever, but that's been the historical results. And this ecosystem does produce, I think, a really strong risk-adjusted return profile. But it's hard to do it. It's that the reality is when you're small, you can do it, but then you get bigger and bigger, you raise bigger funds, and it's really hard to stay here. That's just the reality of it because

• 16:56Speaker 02

  your vice president becomes the principal. When they want to come a partner, you raise bigger funds. And it's harder doing smaller deals. Some of our biggest deals are the most easiest to manage because my management are so darn good. It's harder to get it right. There's more risk involved. But I do believe if you get it right, now you have, I think, an asymmetric short profile.

• 17:13Patrick O'Shaughnessy?

  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 moats. It seems like the same question applies here, like, what is the system mote? As you would describe it, because 70%, 50% IRRs, these seem so high as to be like almost unsustainable. I mean, obviously, those are certainly 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?

• 17:55Speaker 02

  I wish I could say I was smart enough in the front end to plan this, but I got a little bit lucky, I think. Our moat is the volume. The number of transactions that we do creates an ecosystem, creates a deal. Young professionals work at short capital. It gives the opportunity to have so many different executives around the table. They reuse people over and over again and try people at 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. 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 a lot of these on the table. The risk they want to take, there's four of EBITDA to go buy a $4 million machine to automate something.

• 18:40Speaker 02

  They don't want to do that sort of stuff. And so at this part of the market, it's inefficient. And there's an opportunity to, I think, dramatically improve these businesses in the first 18 months. We believe also 80% of our CEOs are first time CEOs. But we believe in this thing called early career energy. We believe that it takes a really smart person about 18 months to learn 90% of the industry. That last 10% takes five years, $10,000. We bring board members to complement them. I think the opportunity is finding individuals who want to play in a part of the market that doesn't seem as sexy at first. But once you get in there, return on invested capital. 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.

• 19:24Speaker 02

  That's just the reality of it is that I lay out the math all the time for board members of ours who we recruit them to our boards and we usually have about seven independent board members in every company we buy. And they don't get paid in cash. They get options in their 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 they've had now nine times that someone's off the board become a CEO for us. When they see you, if you get it right, they look at it as a, 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 now two or $300 million equity behind it. It is quite common to have an equity option pool that in a 2.2, 2.5 times cash on cash, they can have a $20 million outcome.

• 20:09Speaker 02

  That is a middle affair, I think, for a lot of CEOs. You can make that as part of the market by the cash on cash profile, getting it right. And it is oftentimes higher probability of success, especially when you can recruit talent. Give me a 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 of operational improvements, because of the opportunity to invest in these little businesses 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, appropriately so. Know this middle affair way for us to have three founders who one is 65, one is 55, one's 45.

• 20:53Speaker 02

  The guy is 65, more risk a risk, guy's 45, wants to lean in a little bit more, great. But we can partner in 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. You get it right, 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.

• 21:14Patrick O'Shaughnessy?

  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 $3 million EBITDA 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 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?

• 21:45Speaker 02

  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. What is traditional in private company investing? Before I found out, sure, I invested in small companies, about 20,000 bucks, 50,000 bucks. What happened normally is that whoever put the most money was the board, and usually they had no relevance, no importance. The guy puts in a half million bucks and they send the board. No, that never happens for us at all. And so, we want to go, we find, we call the Mount Rushmore of that industry. So, back to the veterinary industry as an example. I want to identify who, by industry standard reputation, is viewed to be best in class. I use sports as analogy. I think people oftentimes know college basketball. Who is Tom Izzo? Who is Mike Shesky? And who is their family tree? Every industry

• 22:29Speaker 02

  has their Tom Izzo and their Mike Shesky, who are, you know, preeminent basketball coaches. And so, we build a board like a basketball team, and we'd say, I want someone, two people who have run a business in that exact same sector, at at least three times the size what we acquired. So, that person has been there and said, I've been through this journey at this exact size and metrics. I want a voice of the customer. I want a voice of the supply chain. Usually, I want a functional discipline expert who's been in that sector, like a CFO, who knows the metrics cold, and one or two people from the adjacent sector. This board of seven individuals, a lot of times our board members were first time joining us, they laugh, they say, there's more people on the board than there is millions of revenue. We buy business doing eight of revenue, nine people to board. So, it's a way we're stacking board, but we're stacking these boards in a unique way.

• 23:14Speaker 02

  It creates a lot of value and it will be clear, this is my secret sauce. I don't mind it because this is how I started. We pay them zero, pay them zero in cash comp, feed it back. The lead director gets a small stipend to be involved. We go to the lead director and we have six regular board members, those regular get zero cash comp, but they get options in the company that in our base case to make $250,000. That was breaking up very simple guys. It's very simple that on average, you know, for five years, on average, that's four warnings a year. If you're talking 50,000 a year, 12,500 per warning. Most people go, okay, I'm going to join the 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, but like, well, I can't afford that board. I'm like, yes, you can. You give them options that in the base case look like this and base case for us is three times.

• 23:59Speaker 02

  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, that is the most important thing that you do in the thesis. If you were in my Monday morning meeting and you heard our firm talk about buying a company in XYZ sector, the question that comes out of my mouth versus tell me your board, literally, and then there's like a slide that lays out the different avenues, the voice of the customer, the voice of the supply chain, the voice of the operator. It's one of the shore of relevance. And there's 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 that happens is about a moat or things from the past that this year will close 12 or 13 platforms. So times seven, you're talking about 90 unique board members.

• 24:40Speaker 02

  And so we're talking about a third will be repeat customers for us, but I have 60 new people who will join our family next year. I don't know who they're going to be yet. They're all going to be very talented business people. We talked about someone before, it's phone call, about someone who's very high end, very talented person. There's a niche out there, people who are 55 to 75, who don't want to work full time anymore, but do not want to do nothing. They fail retirement, love the failure retirement, women or men. 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. I mentioned a minute ago, it takes 18 months to learn 90% of the industry. And the last 10% takes five years, but guess what? My board has that last 10% from day one to complement that early career energy.

• 25:22Speaker 02

  And so if you partner with a hungry, smart, first time CEO, first time CFO, give them a board and naturally of those seven, by the way. Five becomes super value add, one or two less. It's just to be out of it. I'm very poor predicting who is going to be value add, who is not. This is DNA of the people and after with us one time, I can figure it out. But he's really talented people he's born and they help in a unique way. Every single member helps in a unique outside way at one point during the life of the investment. Opens the door to a customer, refers us to a former employee of theirs who was talented. Has a unique way of understanding a software system versus an add on. When buying a business to an 18 of revenue, we want to grow it to 100 revenue. You're just a new customer that could bring three months of revenue.

• 26:07Speaker 02

  You're talking about at first a 15, 20% pickup in revenue. You buy a business at a billion of revenue, there's no ones that bring you a 50% pickup in customer. It's just not going to occur, but I think what we've learned over time is we kind of create a fun environment for these board members too. They have choice, go into the professional time and effort. We put a lot of effort into creating an ecosystem. Where we have these operating partner summits where you invite individuals, all of our board members from all of our companies come to twice a year. To cross pollinate and share ideas and bring perspectives. But it's creating a family and ecosystem of really talented board members who want to provide advice and give back. Our business altruistic, our business financial, our business fund, all those things together create a really great board member. And I think they increase the odds of success. All of this is about increasing the odds of success.

• 26:51Speaker 02

  And I think if we do all these things, well, I'm not sure which part will work every single time, but it's a system. And I know the system will create an outcome. 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, 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 companies like a Roper, they do great things by a system. And I think that's something we're very focused on.

• 27:21Patrick O'Shaughnessy?

  Why are you doing this in the industrial subsectors versus somewhere like software? What is it about that addressable market, those business models? 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?

• 27:40Speaker 02

  We may at some point, but we started in healthcare. I always felt like the founders of healthcare businesses were clinicians by training. So I went to Vanderbilt for law school. My cousin, I'm super close to Vanderbilt 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 the smartest individual I know with these doctors. 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 his my age, but him when he's 50 and suppose when he was 30. And have him be my business partner and guys like that create tremendous competitive advantage.

• 28:18Speaker 02

  And so it was always like we partner with individuals, main street businesses where the founders have a outsized tactical skill. Whether that's cutting your eye open for a surgery for a cataract or whether that is now in the industrial sector, someone who's really good at repairing roofs. Or whether in the business sector, someone that's great at making sure your technology, your outsourced 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, 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. And like to use the words, I want everyone working at the top of their license.

• 29:00Speaker 02

  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 seeing the follow up patient, the routine follow up. There's no complications, very simple. You know what? A nurse practitioner can do that and they're trained well enough to know there's a problem here and need to see the doctor on this sort of stuff. And by the way, the same thing, the nurse should only see what the nurse should see and the medical assistant, she should medical assistant see. And that creates stickiness because employees love doing things that are uniquely what they can do. What frustrates a doctor is interviewing the front desk person. What frustrates a doctor is having to do some of the most simplistic sort of follow up or coding, putting into the system.

• 29:39Speaker 02

  And so we like to partner with individuals who love what they do, are really darn good at it, but want to leave another part of the business alone. They do not want to do it. So. Oftentimes, like yes, I software, software founders usually are pretty savvy business people as well. They started the business because they wanted to create something enterprise and it's all parts of it. We started in healthcare because usually doctors wanted to do good and help people. It was a byproduct of their job to have to do the administrative 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 and scale. That's just how we think about it, but there's so many different parts of the world that can create value in, but can't be focused. I sell people, when you have a lot of priorities, you have none. And so very focused.

• 30:23Patrick O'Shaughnessy?

  Sounds like thesis generation and evaluation is like the furthest thing upstream at shore and how you think about things. Talk me through that part of the business. 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.

• 30:44Speaker 02

  I want, of course, each investor professional, so partners have between three and seven, principals have between two and four, vice presidents have one or two. I'll pick your own thesis. Patrick, you may love urgent care and I may hate it. I may love veterinary, you may hate dogs. So I want the investment professional to pick something they find interesting. I find the best investors are curious. You're curious about something and you want to peel the onion layers back. And so how we work here at Shore Capital is every investment professional, senior professional, which is a vice president, a principal or partner, has autonomy to pick a certain number of sectors they want to focus on. And they can't focus on everything. For us, everything starts, what's called a roadmap. A roadmap is essentially a white paper on an industry, complemented by the industry conferences. And also what we call the Mount Rushmore of the industry.

• 31:29Speaker 02

  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 industries, you have to learn to greenlight a sector. You have to physically go to one of the industry conferences in person, walk the floor. You have to identify the Mount Rushmore, lay them out who they are. You have to identify the Mount Rushmore companies. Where are the disciples? Where have they gone? Where are they at today? And the pros and cons. Once you do that, as being between a forty and sixty page white paper effectively present to a committee and you can say, hey, I'm Patrick and I love urgent care. And so why I think we at 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's size changes depending

• 32:12Speaker 02

  upon the vertical, but you present and your peers are pressure testing it. And there's this part of, so we're organized through our investment memo process, investment team process. The team is assigned. I assign team members to Patrick who wants to go forth urgent care. It'll be five people on the investment committee. And if they agree to it, they are with you for the whole life of the journey. So from roadmap, through getting your board, LOI, platform, add-ons, budgets, exit. And their carry in the future is tied to your results. And so they have their own carry for their own deals. They 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 deploy capital. We have to also make sure that they're not just saying no to everything. It could be doctor, no. But it's a five person team who

• 32:54Speaker 02

  effectively votes to green light your sector of urgent care in that example. And they're smart people asking smart questions and there's trends we're tracking. And question we oftentimes ask is, 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 a lot of this is where a small guy wins as well. No, it does not do well. You must be multi continental. That is not good for us. We're not going to invest in the sector. And so each industry has its own trends and we try and identify how wins where pockets going. Like in healthcare especially, it's the consumerism of healthcare. That thing's something we believe in. But it starts with this thematic approach. We're very theme driven. So in this journey, while you're in that roadmap, you're also recruiting your

• 33:37Speaker 02

  board members. You found out who the Mount Rushmore is. Before we even present the Mount Rushmore, the whole roadmap, you have fifteen people you think could be on the board. And you're sharing with them the roadmap. Hey, Patrick, you're the urgent care expert. Here's my twenty pages of my deck. Where am I wrong? What makes much sense? You're getting a bunch of industry domain expertise, bouncing ideas off people, making phone calls through LinkedIn, through different search engines. You're outbound and If you traffic in that sector enough, you will eventually learn the good guys, the bad guys. You will learn who everyone respects. Tell you one trick of the trade that we use a fair amount, I get all the time is you could call up the industry association, Urgent Care Association of America.

• 34:19Speaker 02

  You ask them 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. I want to meet that person. There are little things like that, that the industry itself, there's always industry panels about the lawyers and the bankers. But industries promulgate certain people and you want to get to those industries are. So for me, everything's about the industry. Industry becomes the core of it. And then that partner, a short capital or president, a vice president or principal, they own it and there are jobs to do. And they oftentimes may invest in that sector, two, three, four platforms of their career or more. My partner, Ryan, who leads urgent care for us, he's done three platforms of urgent care sector. And what's surprising does more.

• 35:02Speaker 02

  My partner, Chris, has done soon three dental deals. And so if your job is to know the sector really well, over time it may change. It may change if you want to invest in it again, but you almost become a strategic acquirer after a period of time. Because you know the industry so well. I tell oftentimes our executives, our board members, they've forgotten more about the industry than we'll ever know. But for finance guys, our job is to be most educated 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 to somebody or partner somebody, there's two parts of the deal. There's the macro and the micro. The macro is do you believe in this sector, urgent care? Micro is do you believe in my company?

• 35:46Speaker 02

  I want to take one of those two off the table. I believe in urgent care. I have a whole machine behind me, my 50 page deck, here's my board members. We create a board before we buy the company. So we get the industry, we get greenlit and we recruit a board. And 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. And 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 longer because if it's not you, I'm going to invest in urgent care. 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.

• 36:25Patrick O'Shaughnessy?

  Yeah, let's talk about within 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. Once you get down to the actual thing that you're going to buy, describe in whatever way you want, the things that matter most to you. I 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?

• 36:53Speaker 02

  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. And I'm seeing people right inside baseball because anyone should do this. I don't think it's rocket science. Use ophthalmology as an example. We'll try and find an ophthalmology company. I'll try and identify in that same town, three or four ophthalmologist practices in town and call them up and we'll do a secret shopper or something and ask them, if your mom had to have a cataract surgery and she could not go to your practice, who would you send her to in town? 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 coconut Pepsi. There's somebody

• 37:34Speaker 02

  that likes each other and somebody doesn't. But people in town know who is pretty good in town. So why is 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 often times who does one of the best major league baseball teams. Very different than AAA team. There's no way the Los Angeles Dodgers want to join a AAA team. The Dodgers would join the Yankees in a roll up of baseball industry.

• 38:00Speaker 02

  Does their view that has best in class. So I think we take the same way as reputation. Number two, I want a founder 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. And they're excited about partnering and they have an open book. Our best founders clinically, technically, you know, there'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 able to identify who are others good at their craft. So to me, it's reputation, the industry, technically sound. You don't hear me say management very often, do you? Because it's important what we're going to go build. We're going to take what you all have and surround you and compliment you.

• 38:45Speaker 02

  Oftentimes the founders are going to be a role, but not CEO. And we're very clear on the front end. By the way, our biggest company is a veterinary company. We started when it was five of revenue, one of EBITDA, three locations. Today it's over four locations, over 1.3 billion of revenue. That's founder veterinarian is still a CEO. So that's one extreme. That can be one extreme. The other extreme, I could say, Patrick, you're a great emergency room doctor. If we're going to partner, you're not going to be the CEO in our thesis. If you're okay with that, but you want to be the chief medical officer, we would love you to be the person who helps recruit other doctors to this team and sells the value of property why we can help people in rural parts of America better than anybody else. And so to me, it's very much reputation, technical skillset and a willingness to learn

• 39:30Speaker 02

  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 encapsulates so much because this is a role thesis, not you're buying one business and staying still. We're growing our business usually over 100% per year, organically and organically.

• 39:47Patrick O'Shaughnessy?

  I would say on average that levered rollups have sort of a bad reputation. Why do you think that is?

• 39:53Speaker 02

  I would say if you've seen one lever roll up, you've seen one lever roll. There's no flakes. What like the restaurants are good restaurants or bad restaurants. Same type of dynamic. Oftentimes they get bigger also. The founders have already left the organizations. Now, in the earlier stage where we start, these founders are very hungry. Want to grow these businesses and we need to under lever. So we don't put pressure on these teams with leverage. We under leverage and there's no leverage at all. Also, I would say people point fingers at roll ups 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 4,000 employees, you're going to have some who are disgruntled. And there are going to be some who leave the organization. So you hear more of that noise versus a four location versus a 400 location.

• 40:39Speaker 02

  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 artists and bakers. It can be a bunch of veterinarians. We want to have a technical advisory board. We're able to bring it together and create a dynamic of what is the best in class delivery of the services. And so we spend a lot of time on that. And so I recognize that more arrows are shot at bigger companies. No one talks smack about the triple A team. They talk smack about the New York Yankees. You know why? Start in 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 one doesn't go as well as if you have four.

• 41:20Speaker 02

  But I think in totality, those businesses are able to pay their employees better, create a better margin profile and therefore deliver better quality of service to the customer. And today, why do they exist? Because customers keep shooting them over and over again. People ignore that part of it is like, oh, lever business that is a part of a levered roll up. Like, yeah, but the customers keep picking on them. I want to know why? Because they believe it to be a better value prop than going to somebody who is not part of that roll up. And it's because usually they can offer more services, hopefully a higher quality of care. And there's smart people running them with metrics like net promoter score. You know, those things they've been more sophisticated, identify this is what my customer wants. I'm delivering it in a very efficient way. It'll work fast.

• 41:59Patrick O'Shaughnessy?

  What have you learned about negotiation? A lot of deals you've done.

• 42:04Speaker 02

  So people say to me, Justin, you're in private, 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 Shore, we've done now almost nine hundred transactions. We've had zero lawsuits. If we ever pull out that document in the future, I have to look at it. We've already lost. We negotiate to do our best to have all those sort of things buttoned up and sort of stuff, but at the end of the day, I want people to believe in the growth story. They have to believe that we're building together. No lawyers, sometimes we'll try and, I'm a former lawyer, recovering lawyer, I understand the lawyer's job. But no, when we're negotiating, the most important thing is negotiating, making sure we have catastrophic downside protection.

• 42:45Speaker 02

  I had to make sure if Patrick was on the front page of the Wall Street Journal for doing something uncouth, I need a way to separate. That's important to me because that has risk. I think the most important thing, especially doing a roll up, and I think most people get 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 will do something, 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 tell yourself. The hardest negotiation is that unwind 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 sellers negotiating for

• 43:28Speaker 02

  a larger part of the upside. That's where we end up negotiating. Where it used to be, we do an eight, twenty deal, now it's being sixty, forty or fifty-five, forty-five, and that's where a lot of the negotiation comes. But at the end of the day, we prefer in person. We're not fans of Zoom negotiation. I'm going to look someone in the eye and say, this is what we're going to do. Yes, I can't write down on paper, paper, all the weird things that happen in this world. But if you trust me, go talk to these twenty-five references. I'll give you everyone they're partnered with. Just trust. And if you 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 side, to me, it's being very thoughtful about who you're partnering with in the big picture. That's, I think, strategically. But I'm going to get one little down more tactically. I think I made sure I said on our last phone call,

• 44:13Speaker 02

  we have a system at Shore Cap, we call our green, yellow, red system, which basically for every material document in a transaction, a purchase agreement, an operating agreement, a credit agreement, employment agreement, a lease. There's roughly 15 key terms on every document and we list all those out and we have a scoring system internally and I use the simplest term, a non-compete. Everyone knows a non-compete, you sell business as part of the transaction. Five years is market. That's the 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 everyone in our firm knows on these 15 key points,

• 44:56Speaker 02

  they know they can agree to on their own and know they need to raise at the flagpole. And everything for me is a function of price and terms. I'm willing to pay you a billion dollars 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 not in their employee hat, but in their shareholder hat for the long term. And more tactically, I'll give our vice presidents, principals and partners the autonomy to negotiate their own deal. I have the very best people on a super long leash, the appropriate check-ins. Give them that autonomy, create the rules, expectations, and then give them a scoring system that can compete with each other. People love competing with each other and the best, the light shined on them and that's what we're trying to do.

• 45:41Patrick O'Shaughnessy?

  It's a fascinating set. I just love all the systems and how they all intermingle. If I was the 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 shore in this whole like system of systems?

• 46:00Speaker 02

  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 grow. And so we created this program now six years ago, we call our CXR program, where we recruit from the best business schools. Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame. We'll hire individuals to come to Short Capital. They'll be a chief of staff, a good owner of 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 a unique fund dynamic. I'd be lying to you if I said I would put a 31 year old as a CEO of a 1.3 billion dollar revenue business. But my average business is 18 of revenue when I buy it.

• 46:44Speaker 02

  I sure will make a 31 year old first time CEO if they performed 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, call it 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 CFOs. So conceptually, how I think about it is I offset it by recruiting and home growing my own CEOs and CFOs. That is the risk of, are you going to trust for a roll up? A CEO is 41 years old, first time. And one of the biggest challenges, if you get into a roll up and somebody's not going so well, a CEO is wrong. But there's a big pipeline that you're buying.

• 47:27Speaker 02

  It's hard to unwind that and start again. We've done before. That is the biggest risk is that when you're doing a roll up, you change leadership. But that's why the strong board, that's why sometimes someone steps off the board, becomes CEO. 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. And also as we needed to grow our firm, we have a system internally and kind of our all star tracker. Each company has its own list that are internally of people we think are best in class and we'll use them again in the future. So how I think about it is talent wins. But that talent is system. I think the system wins, but the whole is enough talent at the velocity that we're building businesses.

• 48:11Patrick O'Shaughnessy?

  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 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?

• 48:44Speaker 02

  I think stacking unfair advantages is part of everything I think about. How do we have unfair advantages? So I view a market cap, all of our funds with healthcare, food and beverage, business services, industrials, that's its own product. But real estate is a different product. Next year, a different product, healthcare advantage fund. I tell our LPs, I tell our team members at short capital, I will only add a new product if two things are true. Number one, we have an unfair advantage, meaning that odds are tilted of success in our favor because of the dynamics. It helps. And then number two is help my base business. So real estate. So we have a real estate fund. We were acquiring so many veterinary businesses. No, I think, no, several hundred that we kept on always selling leasebacks and it was slowing down the deals. It was causing problems for us.

• 49:27Speaker 02

  And so we felt like there's an unfair advantage by, I know the CEOs of my veterinary companies quite well. There's an opportunity where they want to stay in a location for a long term, but the 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 balance sheet of the portfolio company is great, we have an unfair advantage of knowledge and specific knowledge of the location, 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 a longer term on the lease. So the lease becomes more valuable in the market ecosystem. You aggregate a hundred of those together, it becomes a valuable asset,

• 50:08Speaker 02

  becomes more valuable to the veterinary company by having a lower cost lease or more capital for tenant improvements. So it's a win-win-win scenario.

• 50:19Speaker 02

  A portfolio company wins because they have more EBITDA or more capital spend. The real estate fund wins because there's an opportunity to elongate the lease in exchange for some things that creates a better value over time. And our investors win by low cost capital will work in a more efficient way. So all parts of that makes sense to us. So summarize, I would say we will only extend products that short capital. Two things are true. We have unfair advantage, help my base business. And I know having a real estate fund help my base business on the acquisition and also underlying portfolio companies. There's a current conflict. The conflict is not in the buy, though. The conflict is in the lease. And there's so many REITs out there with public leases. We have them ourselves. You take the REIT that's out there, use the lease from somebody else and just move it over

• 51:04Speaker 02

  and makes the same terms. And so that's how we think about it. But the other products that we do in the future, but it has to help my base business. I have to have unfair advantage.

• 51:12Patrick O'Shaughnessy?

  Talk mostly about 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. The product is 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?

• 51:31Speaker 02

  So picking the actual buyer, over 14, our 14 sales, I never pick the right buyer. But prior founding short, what other private equity firm my partners have as well. I hear in my mind over and over again, my old boss wanted to buy. I can think what they used to say over and over again. And so how I think about it goes back to how we organize. We will say industry management company. Back to the very beginning of the conversation on the industry, the roadmap. Industry is growing and I think about industry growth of a 15 year cycle. 15 years has got to be my whole period, five years, my buyer's whole period, five years, my buyer's buyer. It's kind of a 15 year time period. We sold to public companies, LabCorp, Homa, big public companies. We sold to the biggest, the biggest private equity funds, KKR, TA Associates. We sold to a lot of private equity funds and we've done some continuation vehicles as well. At the day, I have high confidence in the following statement.

• 52:16Speaker 02

  If I buy a business in a growing industry. That is, I'm buying an inefficient part of the market. We make it better. We grow it from single-digit EBITDA to the teens to thirty EBITDA. We will have lots of buyers, both strategic and financial sponsors. So whether it was a platform or an add-on, I think I like that situation. It makes an investment we call barbell industries, meaning there are usually four or five very large players. And there are thousands of mom and pops, but not much of them. I want to go create the new middle one and then larger players want to buy it. And so at the end of the 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 when I talk to them, they want to buy a business that's a proven track record of acquisitions,

• 53:01Speaker 02

  organic growth that beats the industry average by at least three hundred basis points, one technology stack system that all of this is on. Because any of those three things you can acquire, you can make them better. I want a technology system. They can buy it from me with thirty EBITDA and go to a hundred. And so we're basically, we like to say at Shore Capital, we are building platforms, not buying platforms. We like to think of ourselves a lot more like a venture capital firm. And then the venture capital firms partner with a founder, great founder's an idea, but usually has a relatively small team. And then the venture capital firm works with them hand in hand and helps create a whole entire management team. We buy businesses, like an orthodontics business, we'll buy one practice, literally one practice with one gentleman, one lady,

• 53:42Speaker 02

  and we'll go hire a CEO, a CFO, head of biz development. We will go build a whole entire platform. And on this journey, we'll have some mistakes along the way. We'll have added a lot of awesome people. And when we're at scale, we should be in the mill of the fairway for a fund that wants to deploy between fifty and three hundred million dollars for its platform, which is a billion to three billion dollar fund. That's where we play in the buying environment. The inventory that we're creating, I think, has strong demand.

• 54:10Patrick O'Shaughnessy?

  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 are interesting or surprising that we haven't talked about yet?

• 54:28Speaker 02

  So I think it's our focus on operations. And so again, I'm not smart. I know what a copy of the first round capital is a venture capital firm. I got to know a little bit and copy what they have done. I think my factory floor is what I call our operations team. We call our portfolio performance group. And the group called the centers of excellence. All I buy businesses, 18 and revenue, three EBITDA. My marketing department, the person who runs it is not somebody who's run a very large business. What we do at Shore Capital is we have a center of excellence, a gentleman named Adam Werder. He runs my marketing centers of excellence. He's a team underneath him as well. His job is be the node. And for our 43 portfolio companies, his job is to create a cohort of the head of marketing from all 43 companies.

• 55:12Speaker 02

  And they all, four times a year get together, twice via Zoom, twice in person, and countless email interaction in between. And this is my factory floor where I call it lift and shift. I am getting the newer companies to ready to go faster. And my example of that would be orthodontics business. It's a B to C sort of marketing engine. Now, 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 we use. About a year ago, we bought a med spa business. The marketing is very similar. It's B to C as well. And so we lift and shift. Adam's job is to help recruit, take the incumbent marketing leader, work with them, and they're the right person for a long-term grade.

• 55:56Speaker 02

  If not, over time, work with the CEO to help top grade that individual. But then lift and shift the systems and processes and tech stack from marketing in the orthodontics business and apply it to the med spa business or apply it to the veterinary 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 the right people to do it, like the thinkers we have. Billion dollar company resources applying to million dollar companies. And so a woman named Julian Larimer is a leader of our division. She's a former private equity backed CEO, incredibly talented. She runs the whole entire group, roughly 13 functional disciplines. Effectively a senior management team from a Fortune 500 company that work at Shore Capital.

• 56:38Speaker 02

  And their job is to help every portfolio company in that discipline get better. The chief data officer, chief technology officer, head of human resources, head of talent. All these people help all four or three companies elevate all their guests.

• 56:51Patrick O'Shaughnessy?

  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? There's a lot of people, a lot of years, a lot of companies. Talk to me about career trajectory in the system there.

• 57:04Speaker 02

  So we have 150 full time people. So if you're a vice president, a principal or partner, not one person has ever left Shore Capital. And associates go to business school and then come back. But VP, I think we have about 43 or 44 people who are in that bucket. Not one person's ever left and lots of the philosophy behind it. So I think a little bit of it is hard to be 35 year old, look at the founder who's 46 and say, when do I get my chance? But having the different verticals, healthcare, food and beverage, business services, industrials. My most talented healthcare vice presidents went on to become principals of my business services fund. And same thing industrials, there's a little bit of a waterfall where the homegrown talent moves to a new vertical. My dad always taught me a couple of things about retain, treat your people well.

• 57:49Speaker 02

  But he said two things, Justin, pay the market comp or a little bit above market comp. And most importantly, people don't quit their friends. So my job is create an environment where they become friends with each other. And so that means holiday parties. It means we have a thing called a party and we sell business, we have celebrations. It's important for I think leadership to know each other's spouses. And so 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 have a. Friend who sold a business, a private equity firm. I want to drill in really carefully. Who is the partner on my deal? And who will be with me this journey? Because this turnover in those ranks is really hard and decreases your odds of success. So I think it's core competency to private equity in my business is to make sure that people stay the same when they're partnering with a founder in a business. And so I guarantee you forever, everyone will be here the same way.

• 58:35Speaker 02

  The answer is 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 where friends develop, pay them in a way they feel really good about, and have financial upside. And again, I go back to a really long leash with appropriate check-ins. We're goals, nerves, and goals oriented. People know their own goals, set their own goals, and they know when they're performing.

• 58:55Patrick O'Shaughnessy?

  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.

• 59:02Speaker 02

  Three or more want to go to dinner, I'll pay for it. One of our younger guys, his name's Tim, I won't say his last name, but Tim, you know who you are? He had like a big bill at a club one night. And he's like, there's three of us. And I was like, Tim?

• 59:13Speaker 02

  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.

• 59:18Patrick O'Shaughnessy?

  I love it. Always trick the system.

• 59:21Speaker 02

  Everyone in the team loves the kid. He's a great young man and he's awesome. But I was like, it's meant for not a club, bottle service somewhere. And I'm not paying for that for everyone for the long term. But he follows roles 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 bargain as vice president, though. But he makes vice president. 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 create an environment that want to be here.

• 59:47Patrick O'Shaughnessy?

  You obviously love sports. You have spent a lot of time thinking about sports, the leagues, teams. You're now an owner. Talk about why you love this so much. And more importantly, everything you've learned about becoming an owner of major sports franchises.

• 1:00:01Speaker 02

  Yeah, so no, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoenix Suns about a year ago now. February it closed, but we signed the contract in December last year. First of all, we're stewards of a community asset. We don't own the team. You know who owns the team? The fans, the X million people who live in Phoenix. That's who owns the team. And there's a lot of analogy between private equity, investing, and sports, and metrics, and numbers. But we buy a business, no, we didn't. We partnered with the Phoenix Suns. Yes, the owner works there. The first day, Matt and I met with every person. We had a town hall meeting. We all sent a survey out that said, tell me the two things that we should keep doing here. Tell me the two things you should stop doing. We did all time a short capital also. And we got of our 300 employees roughly, we got 270 some responses. And I read every single response. And I think it's

• 1:00:46Speaker 02

  important. This isn't the glamorous part of, you know, partnering and running businesses, but the details matter. And you hear themes of the coffee sucks. Okay, that's easy win. How do I make some easy wins on the way? But the sports business is a complicated business. I view sports and private equity very similar. There's a scoreboard at the end of the game. And private equity takes 10 years for the score to flush out. In the NBA, you can see tonight if you want, or we lost. But there's lots 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 30 years from now, people look back at, no, hopefully Matt and I's ownership and stewardship of the Phoenix Suns and the Phoenix Mercury, which we're really excited about the Phoenix Mercury, is that no one say, oh, they improved the even the margin by 400 basis points. No one's give a crap. They're gonna want to know whether they're

• 1:01:31Speaker 02

  competitive and they win championships. At the day, we have four pillars and like all our business of short capital, it's goal oriented, it's values, it's core values. And so at the Phoenix Suns, it's number one, want to create a raving fan experience. It's got to 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 the basketball game. So I want to get a raving fan experience. Number two, take care of your employees. I want a place where it's a great place to work and people are happy and they want to be there. Number three, we're a community asset. Get back to this community, be stewards of this community asset and do right by this community. Number four, win, win championships, to win in everything they try and do. And so, sports investing has become, I think, a bigger trend the last decade or so. Now, we're big fans of it. I don't think

• 1:02:16Speaker 02

  there's gonna be more NBA teams in the near future, maybe one or two, but beyond that. But there'll be more and more people throughout America. And at the day, I think it's an intellectual property at its core, that is much like the highest and best type of real estate, the corner state in Maine, New York. Phoenix Suns are going nowhere. Phoenix Mercury are 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 were my mom and dad and I met going to games. We didn't have the best seats in those days, but our heartbeat was Washington, already tried Pistons win or lose. And I hopefully create an environment like that. That's the fun part about sports. It's a platform for good and for change and create a lot of positivity. And so, we're really excited about that.

• 1:02:57Patrick O'Shaughnessy?

  Has anything surprised you so far about how the league, the teams, the ownership, the ownerships function and work? Anything been really surprising?

• 1:03:07Speaker 02

  It's much more of a partnership amongst 30 teams than I thought it was. Between the white lines, it's fierce. Basketball operations, like no, it's like no, it's a zero sum game. But people are quite collaborative. Some of the people you know, they're well known. When we joined the league, I sat next to one of the guys at lunch and he said, "Congratulations, you're brash, you're young." I was the same thing. "You'll make much mistakes, talk to me in five years, but have fun on the journey." So people are very helpful. At the end of the day, we want to create a great product for the fan. And NBA is a great opportunity. And the other teams want to help each other. They want to help each other. I want your stadium to be full and my stadium to be full. I know who I want to quote, quote, "lose" is I want the other sports or I want other entertainment options to lose to the benefit of the NBA.

• 1:03:51Speaker 02

  But I think the camaraderie and the willingness to help each other, I think, has been something, not just in the game, not just in sport, but also outside. If I'm doing something in a different community and I'm in Oakland for something and meet somebody, they able to open a door to somebody, that's been really helpful along the way also.

• 1:04:05Patrick O'Shaughnessy?

  You talked about Mark Leonard before and you're just like a benchmarker. You remind me of Mitch Rails, who were facing a 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, stands out as key individual people or firms that you've learned from?

• 1:04:31Speaker 02

  I've learned from certain people. Sequoia Capital, they've been great to me. They've been over there, but they're different. Sequoia Heritage, 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 talented people to each other. People with professional success are very selective how they use their 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's Kent Dutton. He's the founder of Keystone Capital. He's, in my opinion, amongst the most humble and successful people I've ever come across.

• 1:05:14Speaker 02

  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. He is now the chairman of Shore Capital. He is an operations leader at heart. He's always thinking about the customer, the customer, the customer. Mark Leonard has been a great friend to me and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined on process. And then there's a professor at Harvard Business School, executive education, I wrote a school there, named Boris Groysberg, I've learned a ton from as well, on process and he studies Mitch and other people in the DBS community. And I think if you said pick one business that I aspire to be most like on consistency and process is Donner. There are people, Donner leaders, who are on the boards of my businesses. So I've recruited people from Donner who are retired to be on our boards.

• 1:05:59Speaker 02

  And so those are some people, I think that, end of the day, you have to find your own niche of individuals who want to support your vision and want to be around the table and have a good heart that want to help. People help me on the way up and help me and I want to be able to do that to others as well.

• 1:06:17Patrick O'Shaughnessy?

  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?

• 1:06:30Speaker 02

  Most incomplete, I think you're never complete at the shore capital level of operations. I get frustrated when I hire a new team member and their first two weeks on the job, they're 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've made a mistake somewhere else, it's promulgates to the whole entire team. And so do a thing called what we learned. Every time we close a platform, we do a one or two page on what we learned and we share the whole entire firm. How do you balance with 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 a very small people to know things, but it's way more valuable for knowledge sharing.

• 1:07:15Speaker 02

  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 we've made mistakes, not making the same mistake twice, documenting it and making sure that's front and center, having a system 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 in a portfolio of a company at an important location and the landlord extracted a pound of flesh out of us after the fact. What we did after the fact is now all of our businesses are required to have what's called a lease query. I don't care if the system was called a lease query and all of our leases have all the data points in the system to make sure we never have that mistake happen again. So there's prompting.

• 1:07:57Speaker 02

  And so I think the biggest way to improve the organization, I think it's hiring more and more talented 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 with first impression. When you have 35,000 team members and you have hundreds of locations and you have every day things are occurring, 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.

• 1:08:25Patrick O'Shaughnessy?

  Is there anything about how you spend your personal time that you wish was different?

• 1:08:30Speaker 02

  I wish there was more time, I would say, to work with sellers. I've not let a deal in short capital in seven or eight years now. I miss some of that relationship of building with sellers. Those early days of short capital, the board members I personally recruited, I was one of four partners and I was the lead partner on a lot 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 the early boards. It's almost like your high school buddies. 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 buddies have a little special place in my heart. And so leading a deal, negotiating a deal, working as a founder, recruiting a CEO, I do

• 1:09:15Speaker 02

  less of that. I have to come into the very end of it. But no, I do miss one of the best questions, I think, that 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 or a better manager? And why? And I think, at least for me, the right answer for short capital is I have to be a better manager. I love investing. I love buying companies, but to create what we want to create and build, having our system grow, we want our system to grow. It's a manager. You're a leader of people. You're imagining system and processes and create, increase the likelihood of success of many things at once, as opposed to having very effectively leading one deal. But that is not going to create the same value for our investors and for our team members.

• 1:09:55Speaker 02

  And so I think it's my job to create an environment of kind of see one, do one, teach one, and let our best people do things that they've seen done before.

• 1:10:04Patrick O'Shaughnessy?

  I would very eagerly read a long white paper or HBS 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?

• 1:10:29Speaker 02

  Hmm, that's a great question. I've heard you ask it before. You know, I was fortunate to have lots of mentors and people in my life who made a really big and positive impact on me. But one, I think, actionable piece of advice someone gave me, and I've acted on in the last decade for sure, and I'm proud of my telepathy on some people that work in my organization, was the advice is this. Try and have one friend in each decade of life. So a friend in their 30s, friend in their 20s, friend in their 40s, 50s, 60s and 70s. And the idea behind it is you truly have a friend in each decade of life. When you go to those moments in time, you actually call upon them for their wisdom, their experiences, whether it's not losing a loved one, a mom or a dad. That often times happens most often in your 50s or so, or 60s. Or if you end up having, you know, a child that often times happens most often in your 20s

• 1:11:14Speaker 02

  and 30s. But it's a really great piece of advice that on the personal side helped me a ton, but also on the professional side. Things you go through and experiences you have in your 70s and you're winding down your career, the emotions you may be going through and friends have shared with me of things along the lines of all my peers aren't working anymore, or really hard to try and go get new business and promise somebody to be helpful and they're kind of going, are you going to be around here in five years? And so some changes that you know coming, for me at least, I'm 46. If I'm hearing that in 25 years, that could be a possibility. Aware of that fact pattern and how to prepare myself best for it. And so having a friend in each decade of life is something that I've focused on and it's pretty great value for me and I hope others find it valuable.

• 1:11:53Patrick O'Shaughnessy?

  Justin, you built a fascinating business. I'm excited to do this again in five or 10 years and see how it's all unfolded. Thanks so much for your time.

• 1:12:00Speaker 02

  Thank you so much. I hope you want to do it again in the future. I like to think we're an inning two of Shore Capital. You build an amazing podcast and following. So thank you for the opportunity to share our story. Thanks for your time today.

• 1:12:10Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations and more, as well as share the best content we find on the internet every week.