Ryan Addis Discusses Lessons Learned on Investor Communications - Searchfunder Interview

Ryan Addis founded Oak Stream Partners, a private equity search fund, and is now Chairman and CEO of SCJ Insurance Services. As an entrepreneur, Ryan has co-founded several companies, the largest having over 100 associates and $1.2 billion in annual mortgage application volume before joining the searchfund community. Ryan provides good advice from his lessons learned, especially concerning investor communication, that should prove invaluable. As you’ll see from the interview below, Ryan takes a long term view of the searchfund process and his relationship with investors and his fellow searcher community. Some language has been edited for the sake of clarity.

Do you find other search CEOs to be helpful or are they too up to their eyeballs trying to get a handle around their own businesses?

Generally, I find the searcher community to be very helpful and interested in paying it forward. There’s different ways you can slice it. About a third of your operators do not participate. They may be overconfident; they’re looking for opportunity and the low hanging fruit has been exploited. There’s that crowd. Then, some CEOs are insecure by nature or maybe just a bit more aggressively competitive. They aren’t going to do that buy-in and aren’t big on pay it forward. Beyond those, other CEOs are helpful. Every searcher got the help of an operator and has benefited from a successful searcher before them. I have 4 operators in completely different industries and we are in regular cahoots. I use another searcher’s company for some of our services. When you have investors that sit on multiple companies and now one of those companies is your vendor and you have that very unique relationship with that vendor, you can really take things to another level. I’m a big proponent and I know at least 4 others are.

So you have your own informal group of 5 searcher CEOs?

Yep, exactly.

Your child is about two. Isn’t running a company and raising a 2-year old like having two 2-year olds?

Yes. My wife became pregnant when I was searching. When I took this job, my daughter was six months old. I moved on 3 hours’ notice. Two weeks later, my family moved up. I showed up at my old home in a town car. Got out. My wife hasn’t seen me. There’s 8 movers. Boxes are everywhere. She’s holding the baby. She had this look of death look in her eyes, like “What did you do?!” (chuckles).

Why did you pursue search over your other options?

I started a company that had grown to a decent size. Then, I did a successive string of smaller start-ups. Plus, I’ve worked at a Fortune 500 and all of this exposure made me realize that I really enjoyed middle market space. Rather than organically growing a company through the whole start-up cycle again, which is its own unique animal, I wanted to get in a position to run a middle market company which actually would have resources (the missing thing in start-ups) and where I could have decision control and create strategy (which really isn’t an option for a large company).

At first, based on my background, I wanted to do a type of mini-Berkshire Hathaway. That was the model that I was trying to create which I think philosophically has a lot in common with the searchfund model. In my research, I came across the searchfund model online. I had an interesting conversation with an attorney from whom I was trying to barter some office space. The attorney was not from the searchfund world. She had a lot of questions about my model and how it would work. To make a long story short, she said, “That sounds stupid”. I started thinking that if there is a successful searchfund model with a blazed path, then all I really need to do is prove that I can fit that mold as opposed to selling a whole new structure, etc. and educating an audience unfamiliar with it. The searchfund model made a lot more sense to pursue because I would have support not only from investment dollars but others who had a similar philosophy. Part of that philosophy is identifying talent and enabling them to perform. That was pretty much it.

I could fill it out with one more analogy.

The ideal work environment for me is like Star Trek, where I have multiple subject matter experts around me that go deep into areas that are not my bailiwick. Being able to coordinate all those people and the company’s resources around a unique mission is the most rewarding career experience I can think of.

Middle market and lower middle market companies are the area where you really get that kind of exposure. As a start-up, you don’t have the resources for a full management team – or resources in general. Leading a Fortune 500 is a much lower probability at our age. Thus, I found the searchfund model to be most suitable for me.

Some searchers will speak with any investor that will talk them. Did you have a systematic way to pick who you wanted as investors?

Yes. I also had a system. However, in retrospect, I probably would have used a little bit more of it. I created a matrix, but I should have had more columns on that matrix. The matrix had their interest level, capabilities, connections, industry experience. What I should have had was columns about communication on there, such as communication styles, frequency, points of communication (e.g., are they okay fishing through ideas or do they want to be brought in just at the point of a deal). I also would have had tried to get a better understanding of who their key influencers are. You can get potential concentration of decisions around one person. For instance, three of your investors will rely on one person who has industry experience. Even though they are a minority investor, they might have undue influence on decisions.

For me, there are a few people who have that – an almost grandfatherly sense of caring about me. Those investors were of particular interest to me. I know that they are going to invest their time in me because of heart and passion. That level of personal investment goes beyond some of the other expertise.

How would you go about finding this type of soft information about investors to fill out a matrix like that?

You design a few questions around it. I would take any meeting with an investor. I wouldn’t be restrictive in that sense. I’d only be restrictive in managing the travel logistics to try to conserve resources, for instance, by doing an East Coast swing. I would design a few questions around the soft information. For example, “Can you give me an example of a searchfund that was floundering and you were able to revive it, leading to a successful outcome?” Also, I probably would have asked more questions to unearth potentially confrontational decision points. As an example, I would want to know if the investor was interested in me as an operator as opposed to can I just to get a deal done. I was told candidly by one potential investor that one of their key criteria is “Are you going to get a deal done?”, which is fine, but there was no reference at all about being an operator which aligns with my interests more. The search period is a year or two years, while being an operator can be a ten plus year relationship with the investor. So, I think there should be more emphasis on the operational piece.

There are two schools of thought on the number of investors. Some searchers want to have 15 or 20 investors so that they perceive themselves as holding the keys to the castle because their investors are more minority players. The other school of thought is to have 1 primary investor or perhaps a small cohort of 4 to 5 investors. What is your perspective?

If you had twenty investors, it doesn’t mean that a 5-person board couldn’t fire you. If you have 10 investors, one consideration is that 50% might actually invest in the deal. It doesn’t mean that you can’t get the investment from outside parties later. Indeed, some investors enjoy skipping the search round and prefer to fill out a subsequent round so that they aren’t funding expenses.

From a pure capital availability standpoint, I think it’s smarter to nurture an investment group around that potential future. In other words, you need people who will be supportive in the search round who can help you identify issues, avoid pitfalls, encourage you, etc. Since they have first right of refusal, my preference would be to have people who will genuinely mentor you and are available to you rather than focus on the number of investors. You’ll also need a couple names to drop as well. If you can drop 1 or 2 names to a prospective seller, it gives you instant credibility in the transaction.

In terms of funding the deal down the road, it’s a separate pool and a separate process. If, maybe, you’re going for a slightly larger deal, you may want to nurture some of those additional investors proactively to fill any acquisition funding gaps. When you are raising the initial search round, it’s a good idea to also identify whether some potential investors are likely to be a follow-on market for you at acquisition time. By the time your deal is done you may have 20 investors even if you started with 5 on the search round.

If a deal is 50% subscribed, say, is it up to the searcher to pull in the rest of the capital? Or, do those investors have the good connections to pull in the rest of the capital for the acquisition?

I’ve heard it both ways. Some investors will make an introduction to a friend. Other instances, searchers pull in 1 or 2 family relationships to fill out the round.

What do you now wish you could have told your younger self at the time when first started your search?

Most of it goes back to communication – being really methodical about communicating with the investors. As an example, I had a tough time reaching one investor on the phone. I just assumed they didn’t want too frequent communication. As it turned out, that person had good influence on some of my other investors. I learned that another searcher spoke with the investor weekly, where I struggled getting them on the phone monthly. The real secret was that the other searcher had a standing call time. I think weekly in general is too frequent for me, but the point is really understanding what the investor expects. For instance, another investor force ranked their searchers based on their quintile. He used that ranking as one element in his decision process on whether to support them on the deal. I found out by asking, “How do you rate me? Where do you see areas of improvement?” I really wanted to dig in and hold up a mirror to myself so that I could learn from these investors. He then told me where I ranked, what quintile, and how I compared to others.

If I had proactively worked on that communication piece ahead of time, it would have helped a lot. I got some great advice: “Don’t call for a vote unless you know how it’s going to come out.” So, you have to do all the one-on-ones about a deal before moving forward to have a very strong sense of where people stand. You also want an understanding of the needs and sensitivities of some of the investors. You may have another searcher who says “Here is how I do my report and here’s how I file taxes.” Then, you do the same thing only to discover one of your investors has a problem with it. Investor communication is the biggest thing.

Could you see understanding your investors’ expectations as a drawback? One searcher who is about 16 months into his search says that he’s starting to skew deals towards his investors’ preferences rather than deals that he believes are good deals. Do you have a perspective?

Most of my deals were on the large side. Some deals did not necessarily fall into what the investors would necessarily have preferred. There is a spectrum, which has only increased lately. Some investors are inclined toward the original model and want you to stick to that knitting. The challenge with that approach is that only certain industries will fit into that knitting at any particular time. Then, there are others who are looking for the next thing. They realize that it’s a dynamic environment and yesterday’s investment isn’t going to work today. Buffet went from cigar butts to looking at intellectual property.

I reached the point where I had to dig in and get an understanding of my investors and what I wanted to do. My takeaway -- which was partly built on advice from other searchers – was to follow your passion. What are doing it for if you buy a small company that fits everything that your investors want and you don’t like it? Now, you’re probability of success is that much lower. If you don’t like what you are doing for the next four years, then you probably won’t do that well at it. You probably took a pay cut to do this whole thing. For what?

Conversely, though, my friend bought a total turnaround company for $3 or $4 million. A total turnaround. Very much outside of the traditional model. He was passionate about it. He has had a hell of a run it. He’s been very successful. So, I would skew towards “follow the passion.” Be realistic, be pragmatic, and give a lot of consideration to your investors’ advice. If you can’t find your passion, you need to find something that dovetails better.

Was the turnaround situation a traditionally funded search?

Yes, it was.

So, investors won’t tell you that they will fund a turnaround but they do in fact fund them?

Well, I know of that one. Circle Graphics was a $100M transaction; that was a second or third time searcher. It’s across the board. If you look at some of the industries, it’s all over the place. I’ve had the question from some investors, “Do you want to manage a balance sheet or do you want to grow something?” By managing a balance sheet, you can buy a small company with some assets. You’ll service the debt, pay off the debt, and earn your equity position -- without a lot of growth. That’s fine. But, that’s not something I was passionate about. For me, a business and resources is like a canvas and I want to paint a picture. It’s a creative expression for me. I enjoy it. One thing most searchers can benefit from the most is learning about what makes them tick and what gets them excited.

Thank you. You’ve been very generous with your insights and perspective.

I’m glad to help.

Summary of Insights

We spent a lot of time thinking about Ryan’s statement that he considers being an entrepreneur like being a painter, where the business and resources are a canvas for his creative expression. At Searchfunder, our expression is in building this thriving online community that makes the searchfund process more efficient for all. As you review the insights below, it might be a good time to ask, “What will be my creative expression?”

• • Create a support network of searcher CEOs from other industries to take you to the next level.
• • Understand your ideal work environment and leadership style.
• • Assess the soft skills of potential investors, and track their communication expectations.
• • Consider cultivating two potential pools of investors -- for the search round and then the acquisition.
• • Get feedback from your investors, such as on your communications, your progress, and your ranking with them.
• • Follow your passion. What makes you excited? Otherwise, why are you doing this?