My guest on this episode is Searchfunder member‌. David started the second ever search fund after being a Stanford case writer, purchasing Smith Alarm Systems in###-###-#### Over his career, David has been the CEO or executive chairman of five companies, has and continues to invest in search funds today through his firm Futaleufu Partners, and he is a professor at Stanford Graduate School of Business, teaching classes about search and the management of small companies.

My conversation with David starts with his time as a case writer before launching his search fund. We talk about peaks and valleys in his search career, including some very hard conversations. We dive deep into the topic of transitioning from a contributor to a leader of a small firm and important leadership skills.

We also talk about how the search fund world has evolved over time and where it might continue to change in the future. Finally, we talk about the relationships searchers have with their investors and how to foster better ones. I’ve been really excited to have David on the podcast for quite a while, and I hope you enjoy our wide-ranging conversation.

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If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at Or reach out to August directly at Transcript:

Alex Bridgeman: Thanks, David, for coming on the podcast. I’ve been really excited to have you. There’s been a number of folks who have encouraged me to try to have you on the show, so I’m excited to finally get to chat with you a little bit more. I would love to just begin with the extensive background that you’ve had as a CEO, investor, professor. I would love to hear kind of your version of that journey up until today.

David Dodson: Sure. So, my journey kind of started with this seminal event that happened to me when I was in business school. Before business school, I’d worked at McKinsey for a couple of years, and then I was at business school. And in my second year of a two-year program, I got to know this guy, Irv Grousbeck. And he was a professor. He was very early in his career as a professor, but he had started a company called Continental Cablevision with a partner years ago. And I ended up doing a little bit of independent study work with him. And I just realized that this is the guy that I needed to work for. And so, this was all before internet and email and so forth. And so, I called or sent letters to all the places that I had job offers or I was trying to get a job from and took my name out of the hat. So, I burned the boats. And then, so that I wouldn’t lose my nerve, I went to his office, and I said, “I want to work for you. And I don’t care what you pay me, and I don’t care what I do. I’ll wash your car. I just want to work for you.” That’s literally what I said, Alex. And he paused and he said, “Well, I was talking to the deans at Stanford and we’re thinking about hiring our first case writer,” because by the way, all our cases were written by Harvard Case Services. He said, “Would you like to be Stanford’s first case writer?” I said yes. I mean, I was going to wash his car for free, so this was a dream come true for me. So, I ended up staying a year after I graduated from business school and was a case writer at Stanford. And the first case I wrote was on the first search fund that had ever been raised. Two guys, Kirk Readinger and Jamie Turner, who happened to be students of Irv Grousbeck’s when he taught at Harvard, he taught at Harvard for two years before he came to Stanford. And as I’m writing this case, the whole time, I’m thinking this is what I want to do, this is what I want to do. So, for a second time, I went into his office, kind of trembling. And by the way, Irv is not an intimidating person. I was just intimidated by him. So, this is about me, not about him. And so, kind of trembling, I said, “I’d really like to do this, and I was wondering if you thought it was a good idea and whether you would be interested in investing.” And I’m sure that I was stuttering and all of that. And he said yes and yes. So that’s how I ended up raising a search fund. A guy named Jim Southern had sort of raised- it wasn’t really a search fund, but it was kind of the foundation for the concept of search funds. These other two guys raised it. And that launched my career. And I always wanted- I always knew I wanted to lead an organization and build something. But I didn’t have an idea. I didn’t have any money. I mean, I grew up in rural Colorado. I was surrounded by horses and cows and no money. So, I needed to find some people that would back me and help me on my journey to go buy a company. And I remember going out and talking to people who had money, and I wasn’t used to that and I wasn’t around that. And it was just miraculous for me that you could go to somebody with your dream, and they might say, “Yeah, I’ll back you.” And then they would write you- back then, it was a check and they would literally write- and I was raising $120,000. So now a search fund raises more like $420,000. So, I raised from 12 people $10,000. And I still have photocopies of these checks because I just couldn’t imagine that somebody could write a check for $10,000. So, that was how I got started.

Alex Bridgeman: Were there any interesting memories or like something that sticks out to you the most when you think of getting all those $10,000 checks that was really like the shocking moment to you or really you felt like the turning point perhaps?

David Dodson: Well, I have a funny story, if you’ve got a minute for a funny story. There were two guys who were case subjects in Irv Grousbeck’s class, a guy named Bill Egan, who had a venture capital firm, and then a guy named Rob Johnson, who was the entrepreneur that he had backed. And I got to know both of them a little bit. And one quarter, Rob Johnson came to class and afterwards, the three of us were going for lunch. And he said, “Well, what are you going to do with your life afterwards?” And I explained this idea of a concept to Rob Johnson, and he had been an entrepreneur not too much longer before that. And he said, “Well, I’d really be interested in taking a look at that when you come time to raise money.” So, I did, and he invested. So about four months later, Bill Egan was coming, by coincidence, to the same class, but Rob Johnson wasn’t there, and we were also going to lunch, and he asked me the same question. Of course, now I’m on a roll. And I give him my little spiel about search funds, and he pauses, and he actually stopped as we were walking and looks at me and he says, “That’s the most ridiculous thing I ever heard. Why would anybody invest in such a thing?” So of course, he’s not going to invest, which was really a disappointment. And then, months later, when I was closing and I was calling Rob Johnson, or actually he called me, and I needed a signature for something, he was going to- needed to fax a signature, whatever. And as he’s describing to me, I hear this voice in the background. It goes, “Who’s that?” And he says, “It’s this guy, Dave Dodson.” He goes, “Who?” He goes, “Dave Dodson.” He goes, “Give me the phone.” It was Bill Egan. Bill Egan grabs the phone. He goes, “I’m in.” So, my lesson is that a key part of fundraising is people have a fear of missing out and people do want to be in deals that other people are in. So that was- and Bill Egan is now a dear friend of mine, and he’s probably invested in a hundred search funds since then.

Alex Bridgeman: That’s fantastic. And were you the first one then?

David Dodson: First one what?

Alex Bridgeman: The first search fund that he invested in?

David Dodson: Oh yeah. No, because he thought the whole thing was insane, but I was the second search fund. Now remember this guy Jim Southern sort of had the basic concept of getting some people to kind of back you to buy a company, but it was Kirk Readinger and Jamie Turner that formed a fund. So, it was probably two years later before a second search fund was raised. I mean, there wasn’t even one a year that was raised back then.

Alex Bridgeman: So, I imagine there’s probably not a whole lot of standard practices or guidelines from other searchers you can follow. So, once you had the 120,000 raise, what did you start to do to go look for companies?

David Dodson: Well, first of all, I’ll tell you something that’s really interesting, that so Kirk Readinger and Jamie Turner probably raised their search fund probably almost 40 years ago to the day. The structure is unchanged since then; they just nailed it from the start. So kind of the structure and the concept is unchanged. In terms of going out and finding sellers, things have matured a lot, but back then, I mean, you were typing out letters and licking stamps and putting them on envelopes. And you were getting on the phone and cold calling. I mean, it was very different. There wasn’t the opportunity to reach people like you can now and also reach people in mass. But what’s been interesting, Alex, is that the most successful search fund entrepreneurs, when they’re looking for a company, tend to do best when they go back to some of the old school methods, not necessarily of a letter in an envelope, although some people have been quite successful with that, but not doing kind of the spray and pray mass mailings, but the custom individual mailings where maybe you’ll research the company and do four or five a day instead of 50 a day, seem to be far more effective. So, I think there’s still some lessons from us dinosaurs that are being used today.

Alex Bridgeman: Yeah, I’m sure there’s a whole bunch of calls, too, where you called and they yelled at you and hung up immediately and said never call again or something like that.

David Dodson: You do get some of that.

Alex Bridgeman: What are some of the most kind of stressful calls that you had or maybe the ones that kind of stung at you the most?

David Dodson: Well, in fairness, this is 35 plus years ago. So, I wish I could recall a specific phone call or incident; I can’t. But I can tell you something that’s more general, which is that I loved meeting owner operators, people who had started their company 10, 20, 30, 40 years ago, they built it brick by brick. They knew everybody’s name. They knew everybody’s spouse. They were at people’s weddings and christenings and funerals, and the pride that they would have in their companies. And I loved meeting them. And surprisingly enough, yes, there’s a few people who might hang up on you, but most people liked the idea of getting a chance to talk to somebody about their business and maybe brag a little bit, honestly, about what they’ve done and what they’ve accomplished, show off their company. And most people who are successful as an owner operator and have built a company are good people. Of course, there’s knuckle heads out there and there’s creeps out there that you wouldn’t want to associate yourself with. But generally speaking, to be a leader and build a decent sized company, you’ve got to be a good person. You’ve got to be a good soul. Otherwise, you can’t get good people to work for you and you can’t get customers to want to buy your product or service.

Alex Bridgeman: Tell us a little bit about the company that you acquired and ran as CEO then. What was that part of your life like?

David Dodson: Yeah, so the company was- the name of the company was Smith Alarm Systems, and it was a third generation company, and it was owned by George Smith and his brother Jim Smith and three aunts. But George and Jim Smith owned most of the company. They owned 81% of the company. So, it was really the two of them that I had to buy the company from. And then somehow, I had to get the three aunts to sign the agreement. And I remember that George and Jim said, “Lots of people have tried to buy this company, but you can’t buy it unless you get all five of us to agree,” just the way that it was structured. And when that happened and when I did buy the company, they said, “Do you know that there is not a single piece of paper on the planet that has all five of our signatures on it?” So, it was the only thing they ever agreed on in their entire life. I think I got a little bit lucky because the aunts were at a place in their life where they did need to sell their business. But I was blessed that one of my investors was an attorney in Dallas, and he was a tax attorney, which you wouldn’t necessarily think that a tax attorney would be a good deal guy, but he was a really, really skillful deal person. And he understood how you did business back then in Dallas. And he would accompany me in meetings, and I’d get in the car and he’d tell me all the things I did wrong and all the things that I did right. And he was- his name was- he’s passed away now, but his name’s Herb Kendrick, and Herb was an enormous mentor to me, which brings me to another part of why I was able to buy this company is that I was surrounded by really great people like Herb and Bill Egan who I’d mentioned and Irv Grousbeck. And one story in particular, I was working in San Francisco, so I’d flown to Dallas in the morning. I was going to come back that night. I didn’t have any change of clothes with me. Just a day trip. And I met with the Smiths, and the day did not go well at all. And as far as I could tell, the deal was dead, dead, dead. So, I’m taking the cab back to Dallas, Fort Worth airport. And I call Irv Grousbeck on the phone, and I explain the situation to him. And I said so the deal’s dead. And I was so worn out, Alex, at this point, I kind of almost wanted to be left off the hook. I just sort of wanted to go home and put the blankets over my head and maybe have two or three beers and fall asleep and call it, and that was it. And I remember he said, “I don’t think that deal’s dead. And I think you should go back. You do whatever you want, but I think you should go back.” So, I mean, he is a smart guy and I’d never done anything like this before. So, I told the cab driver to turn around, flip a U. Fortunately, I had a classmate that he and his wife, they were both classmates of mine from business school, and Rich and Tucker Entoven, and I stayed on their couch for three nights in a row. I decided to – I don’t know if this made a difference or not – but I decided to wear the same clothes every single day because I wanted to show how determined and dedicated I was to buy their company. So I’d show up with the same clothes every day, day after day. And after three days, I left with a signed piece of paper and a letter of intent. So, it just shows that one of the important tenants of the search fund model is you’re combining a kind of I call it a high trajectory but inexperienced CEO with a good company and good mentorship. And when you put that combination together, it’s got an extraordinarily high success rate.

Alex Bridgeman: I love the using the same clothes over and over. It shows that you’re almost at your wits end with your abilities. That’s fantastic.

David Dodson: Yeah, of course, I might have been able to get the deal closed in two days if I hadn’t looked like such a kook when I was walking in there with the same clothes every day, but that was my strategy back then.

Alex Bridgeman: Well, it clearly worked. I know one concept or even just time period that you thought a ton about is that first 18 months as a CEO in a new company. How did you approach the first 18 months in your business versus how you might teach someone new today to do that same 18-month period?

David Dodson: Yes. So that really brings on kind of the point of something that’s changed a lot over those 35 years. So, when I bought this company, and this was true with Jim Southern, Kirk Readinger, Jamie Turner, and the dozen people after that, is that I was calling my investors all the time, and all the time meaning somewhere between once and twice or once and three times a week, with all sorts of questions. And after the search fund world or community started to get bigger and more populated and investors started to become busier and so forth because most of my – not most – all of my investors only had one search fund investment because I was the only person who had done it, was doing it at the time, everybody got kind of busy, and it became a little bit more do it yourself. And it was damaging to the search fund world because we forgot that you just can’t take somebody, no matter how bright and talented and ambitious they are, from whatever they did before business school say to business school, which doesn’t really train you on a lot of the day to day stuff you need to do to run a company, and then just expect that they’re going to show up the next day and figure out how to run a company. You have to learn it. And it’s a little bit like if I said, oh, I want to be a great piano player, so I’m just going to sit down at the keys and magically, all of a sudden, music’s going to come out of the keys when my fingers touch the keys. It doesn’t work that way. You have to learn all the basic skills, you put them together and you’ll make some music, but somebody’s got to teach you what a sharp and a flat is and how to hold your fingers over the keyboard and what the pedals do. And so, in the early days, those were those phone calls. Then there was this period of time kind of in the middle where people were sort of left on their own. And I think it had- fortunately, everything worked out, but I think it made it harder for people to get started and get ramped up. What’s happened now, and now meaning in the last say 15 years, is really a wonderful development, which is that investors- there’s far more investors than there are entrepreneurs. And so, investors have to prove to entrepreneurs that they’re going to add value. Money’s easy to come by in the search fund world, which what the smart search fund entrepreneurs are looking for is mentorship and guidance. And so, when they raise money, they don’t ask the question about can you write me a check for $40,000? They say, what are you going to do to help me learn how to become a CEO? So, in our case, so I have an investment fund. It’s called Futaleufu Partners, which is hard to spell and hard to pronounce, but it’s named after a river in Chile, so that’s where the name Futaleufu came from. We actually offer with everybody an 18-month training program. And once a month, I pair two other CEOs together, so it’s a cohort of three. And once a month, we get together on Zoom and we talk about a particular sub skill that adds to one of what I’ve identified as the five main skills of leadership. So, let me give you an example. So, one of the five skills of being a good leader is the ability to create a team, build a team. Well, probably everybody knows that, but how do you do that? Well, you do that because you pull together different sub skills – learn how to hire, learn how to do an exit interview, learn how to do a 360 review, learn how to give someone a performance review, learn how to let someone go. So, all of those sub skills are the same thing, I’ll go back to my piano example, same thing about learning the difference between a sharp and a flat or what the pedals mean. If you knit all the sub skills together, then you have it. So, on these Zoom calls that we have, we’ll talk about how to do an exit interview, and I’ll send something out in advance that’s in writing just to make it efficient, so they have something to read in advance. And then we talk about the reading and any roadblocks that they’ve seen to implementing, let’s say, 360 reviews within their company. And my goal is to get somebody to the 18-month mark, excuse me, to get them to the three year mark in 18 months. So, to get them down that curve steep so it’s not on the job training. That’s just one example.

Alex Bridgeman: So, what are the other four skills of leadership that you tend to focus on?

David Dodson: So, Alex, the five skills that have kind of come about as I’ve been both a professor at the Stanford Business School, and that kind of forces you to pop your head up a little bit and think more broadly about business and what kind of drives performance, and then of course, my own experience as a CEO and a leader of multiple organizations, and then just watching people as they progress through their own career. And I came about these five and I’m just convinced to my core that if you learn these five, and they’re all learnable, that you’ll be successful as a leader. So, the first one is a commitment to building a team, which we just talked about. The next one is being a fanatical custodian of time. All leaders recognize that their number one resource is their time and they don’t waste it and they don’t let other people waste their time. The next one is a willingness to seek and take advice. And Alex, you and I were just talking about it not too long ago, how I was surrounded by mentors and I was able to seek and take advice from those people, and it made a huge difference in my career. Fourth is setting and adhering to priorities, and the last one is an obsession with quality. And sometimes people think about that obsession with quality as if it’s sort of- it seems like not an obvious one, but you name me an enduring organization that doesn’t either offer a high-quality service or provide a high-quality product. You can’t get away with it otherwise. People can match you on price. They can find resources with the click of the internet, but if you’re not providing quality, you won’t survive. Furthermore, quality, some people have pushed back and said, well, I think being able to sell, and I say, listen, I fundamentally disagree because if you have a crappy product, the best salesperson in the world can’t sell that over a long period of time. And by the way, if you have an awesome product, you can have a mediocre salesperson and it’s going to fly off the shelf. So those are the five, all of which can be broken down into sub skills and can be learned by anybody.

Alex Bridgeman: I think that’s a big point too, that the five can be learned. They’re not- there’s no sense that any one person- like this person was born to be a leader. This person was not. There’s not this distinction between the two; it’s very fungible and learnable to do these things. Is that a challenging concept to communicate with folks who maybe have perhaps viewed other entrepreneurs as born to be great, so to speak, and they don’t feel like they can get to that point or-?

David Dodson: Well, the born to be great thing, I just absolutely disagree with that. And you line up 15 or 1500 leaders that you admire and you’re going to find introverts and extroverts, and you’re going to find people that are great public speakers and people that stutter at the microphone, and you’re going to find tall people and short people, all across the board. But one thing you’ll find is they all share these five characteristics and they all have had to learn it. Whether they learned it in 18 months or they learned it in 18 years, they’ve all come about to learning it. So, for example, I would just challenge your listeners. So, just go, and well, you won’t have to because I’m going to give you the answer, but had you gone and Googled “prioritization” and then you looked for sort of quotes on prioritization, you would be overwhelmed with quotes from people like Steve Jobs and Warren Buffet and Mary Barra of General Motors and Winston Churchill. I mean, they all were fanatical about prioritization. Steve Jobs in particular was quite interesting. I’ll tell you two very quick stories. One was when he left or after he got fired and then he came back, I’m not going to have the exact number right, but Apple had something like 15 products, and he cut it down to two or three. And he has this quote, he said, “If we can’t make one good computer, how can we make 15?” And he was absolutely obsessed with priority. And then you look back on Apple’s history and you say, oh, that’s kind of interesting because they came out with the iPod and then they perfected the iPod. And then they came out with whatever it is, the Apple Watch and they perfected the Apple Watch, or they came out with a laptop and they perfected that. And so, basically, Apple had this history of coming out with maybe one product a year, making it perfect, and then they would come out with another product. While I’m on the subject, Eric Schmidt, who was one of the founders of Google, he went by to see Steve Jobs in Steve Jobs’ very last days, and it was evident to both of them that it was the last time they would ever see each other again. And this is in the book on Steve Jobs. And I was struck by the fact that, of all the things Steve Jobs could have talked to Eric Schmidt about in their last meeting together because he knew he was going to be dead soon, he talked about prioritization. Imagine that. Isn’t that amazing?

Alex Bridgeman: Yeah. Talk about getting your priorities straight when your clock is ticking down very quickly. What are some examples of prioritization that are effective in that early 18 month or even maybe the 3-month period? Because I imagine it changes over time. Like the stuff that’s important and you prioritize in the first six months is probably very different then what you prioritize in year three or four. So, within that early timeframe, what’s effective to prioritize?

David Dodson: Well, it is one of the sub skills, and when I talk about prioritization, the first thing I talk about is sort of how you go about the job of deciding what you should or shouldn’t work on. And I’ve kind of broken it down into a series of questions and steps that you go through. So first you talk to your employees, and there’s about five questions that I suggest people ask of all their employees. And then you talk to your customers or your clients, and then you talk to your suppliers, and then you’ve learned about information for your competitors. So, the first thing is, the first priority, if you will, should be information gathering because your instincts are really not good. Instincts are only good if they’re built on a foundation of experience and pattern recognition, but you don’t have that when you walk in the door. So that’s the first thing. The second thing about prioritization is you have to understand these two concepts. The first concept is that the leader can think of great ideas faster than the organization can implement them. You can ideate your way when you’re driving home and think about, oh, we should do this, and oh, we should do that. And then you come back and okay, well it only took you 20 minutes or an hour or a week to come up with the idea, but your organization needs to hire people. They may need to get equipment. They may need to get suppliers. I mean, implementation takes time. But amateur leaders and people early in their career think that the organization can implement as fast as they can ideate, and they can’t. The second thing that you have to accept is that prioritization is not about eliminating all the things you shouldn’t do. It’s eliminating all of the great, wonderful, fantastic ideas that you can’t get to. And less experienced CEOs and less experienced leaders can’t let go of the fact that most of their great ideas will never see the light of day if they want their very, very, very, very best ideas to be implemented.

Alex Bridgeman: Yeah, that must be a really big challenge and another kind of embedded challenge within that but throughout all your different skills is having to switch from being a contributor to another organization to now being a leader of your own organization, where you talk about that instinct and gut and that pattern recognition is built on being a contributor, which is now perhaps not relevant at all to being a leader. How do you recommend folks make that transition when they’re used to having a boss and having deliverables and a whole organization that they’re a part of to now leading that organization?

David Dodson: I remember a long time ago, I was meeting with a guy, Kevin Landry, and Kevin Landry, he was the person who effectively built up the huge private equity fund TA Associates. So, Kevin didn’t found it, but he was there early on, and he’s the one who created the modern day TA Associates. And he told me that the hardest step that a person makes in their career is not going from an individual contributor to being a manager. He said it’s when you go from being a manager to managing managers. And here’s why, Alex: If you’re an individual contributor, you’re basically measured based on output. And you can just hit the more button, you can work on the weekends, you can stay a little later, and it’s mostly on how many charts you can do or how many cold calls you can make and so forth. When you become a manager, you can actually still hit the more button. So, if the person that works for you, if you don’t like their report before the sales presentation, you can just stay up at night and fix it. Or you can work on the weekend and cover for somebody. So, you can actually get away with not being a good manager when you just have three or direct reports. But when you go up one more level and you’re managing managers, you’ve got two things that make it impossible. One is you can’t really reach over your direct reports who are managers and fix things that their subordinates did because then you’re kind of destroying the fabric of the organization chart. But the other is just from a practical standpoint, you just got too many people. So, you can do three people’s work if you work your tail off, but you can’t do 13 people’s work. The beauty of that, which is what Kevin Landry explained to me, and I saw it over and over again, is once you learn how to manage managers, it’s completely scalable. So it’s why my classmate and friend Tom Staggs, who was the CEO of Disney, why he could run an organization with, I don’t know how many, but it was maybe a hundred thousand employees, why he could do that in exactly the same number of days in the week and hours in the day as someone who’s running an organization with a hundred employees, because they’re both exercising the skill of managing managers, and within that, the five skills of good leadership.

Alex Bridgeman: That’s a huge point to make too, that that is a model that scales versus the simply hitting more button which doesn’t scale. What are some common struggles that folks have when they move to the manager of manager’s role? You mentioned reaching over and doing someone’s work for them that maybe needs to get fixed, but what are some other common pitfalls that you see folks run into?

David Dodson: So, one would certainly be the kind of Napoleonic version of if you want something done right, you have to do it yourself. And okay, so maybe you can do it a little better than someone else, but would you rather be having ten times the output at 94% or one tenth the output at 100%? You just can’t build an organization that way. So, you have to kind of let loose of your own standard of perfectionism and say my job is not to be perfect in one small little thing. If you want to do that, go be an artist, or go be a public speaker, but don’t be a leader. That has nothing to do with leadership. So, you have to let go of that. And you also have to realize that the work has to be done by other people. You’re now a coach. You’re not throwing the pass. You’re not making the blocks. You’re not running the patterns. Someone else is doing it. And so, your job is other people become really, really good at what they do, not try to be a doer yourself. And once you kind of sort of break out of that mindset and then you hire really good people and you’ve got them motivated and you’ve allowed them to- you’ve told them what the priorities are and you’re sticking to your priorities, you’re not changing priorities every month, and then you see the results, it becomes very addictive because now what’s making you all excited and what’s having the endorphins fly in inside of you is you’re watching your organization work as opposed to just, wow, look at my PowerPoint presentation, I got the shade of blue, I nailed the shade of blue.

Alex Bridgeman: Absolutely. That shade of blue is very important. Within your company, at what point did that click for you where you are like, holy cow, I now have a team that’s improving and growing my own organization for me? Like when was that moment? Do you remember that?

David Dodson: Well, I was really lucky that I think- that allowed me to get there faster than I think I otherwise would’ve. So, the company that I bought had had three basic divisions, and one of those divisions was just too complicated for me to get my arms around. And it wasn’t a huge part of the business. It was about 20% of the business. So, I even went to George Smith and offered to sell that piece of it back to him because for the reasons I just described, but we weren’t able to get something worked out, and that was fine. And while I was busy messing around with the other two divisions, which that represented about 80% of the company sales, all of a sudden, I started noticing that because that division, the third one, was really well run and had a good manager, that it was doing really, really well. And then I started to realize the power of if you are clear with your priorities and you have created a good team and etc., etc., that these organizations can run on their own with you serving in the role of leader. So, I ended up then- so I got there by accident, Alex, but then the other two, then I started to work back from and pull further and further back. And my job became less about, here, I’m going to design the commission plan for this particular division to I’d like you to design a commission plan, here are some design principles around it. How can I help you succeed? And then done properly, that person would come back with something that exceeded anything that I could have done on my own. And then you don’t go backwards. It’s a mindset and it’s a skill and it’s a frame of mind that you don’t retreat from.

Alex Bridgeman: We’ve talked a lot about challenges just within making that transition, but I assume over your career, there’s been a lot of peaks and valleys just on the natural course of being an entrepreneur and investor. Can you talk a little bit about perhaps some of the valleys where things were challenging? And there’s an entrepreneur who called them near death experiences in their business. I’d love to hear perhaps a few of yours that you learned the most from.

David Dodson: Yeah, probably the most painful near-death experience, and I had more than one, this was the fourth or fifth company that I was running, and this one we effectively started from scratch. And when I say we, it was myself and two people. So, this was a time when I brought on two partners to start this company, and we were buying up a bunch of companies along the way and putting them together and we were doing it with quite a bit of success. And then we moved out and expanded from the New England area into Long Island. And we bought really, really fast and the businesses were a little bit different than the other ones. And we got out over our skis, and we owed more money than we really were going to have the cash flow to pay. And we had bought these companies from small, independent mom and pops, and most of them had sold their company to us for cash but also a note that we would pay them over time. So, this wasn’t as if I might not be able to pay back money to Citibank or Goldman Sachs. This was not being able to pay money back to a 75-year-old couple who had depended upon that for their retirement. It was frightening to me, frightening for me, that I would have any role in that at all. And I had to go back seller by seller in their kitchen. Sometimes they would be in tears explaining that I needed more time. I never asked for forgiveness on the amount that I owed. And I never said that I couldn’t pay them. I just said that I needed a few more years. And it was scary for them, and I more or less lived out of my car as I went back to probably about 35 different people that I bought companies from. In the end, we paid everybody back every penny that we owed them, and it had a happy ending. But there were times when I thought the company was going to go into bankruptcy and I was going to have ruined the retirement of 25 people.

Alex Bridgeman: Any of those conversations over the kitchen table sting the most or are most memorable to you?

David Dodson: I think one that was really, really difficult, it was a couple of different sellers, and I was in a room because they all wanted to meet with me together, and one couple, and they were probably in their seventies or whatever, and I watched her start to tear up. And then at some point, she said, “I don’t think we’re going to be able to have a wedding for my granddaughter.” And there was something about her there personally, watching her tear up and realizing the true impact that I was going to have on them. And I didn’t know whether I was going to pay them back or not. I knew I was going to do everything I could and for as long as it took to pay them back, but I didn’t know whether I was going to or not. And that was one among a couple just really devastating conversations that I had. I was really lucky though that I had two great partners who were- we were both signed up- All three of us were signed up to make sure that we did everything we could to get everybody paid back, and the company ended up being successful, but it was probably three years of really, really difficult times.

Alex Bridgeman: Yeah, no kidding. What are some of the core lessons you took away from that experience? What advice did you get from that experience that you now are able to pass on to other searchers?

David Dodson: Well, I think what kind of tipped us over the edge was we did a fairly large acquisition that some of our investors were really kind of pushing us to do. And I allowed myself to be influenced by them. And this is not to put any responsibility on them, but I was supposed to be the leader and the CEO, and instead, I allowed myself to be too heavily influenced by them, not recognizing that they didn’t have all the information because I was running the company day to day, and they weren’t. And my two partners didn’t want to do this acquisition and they were right, and I was wrong. And that was a point in my life when I was doing too much talking and not enough listening. And I wanted to just convince them why they were wrong instead of really understand what their position was. And looking back on it, if I had run those meetings with my two partners with curiosity and no desire to be right but, instead, a yearning to get to the right answer, I don’t think we would’ve bought that company. And then I would’ve been able to go to those investors and make the case and explain why. So, there’s that, Alex, but it’s also kind of led me down this road of trying to understand increasingly why people make bad decisions. I mean, nobody wakes up in the morning and drives to work and says, okay, today’s Thursday, so Thursday is the day I make my bad decisions. Everybody wants to make good decisions, and yet we make bad decisions, and we make bad decisions that oftentimes we look back on and say I should have known better. And I think for probably the two of us, most of our bad decisions, we can look back and say the evidence to support what we should have done was there and available. We just ignored it, or we didn’t weigh it well or weight it properly. And our mind likes to play tricks on us, and so all, this kind of whole family of cognitive biases I think is one of the hidden villains in leading an organization. And so, that’s been a fascination of mine since then.

Alex Bridgeman: Are there any exercises or practices you try to do to put your mind at a pause moment before a decision, which you might make the wrong decision, and think, and just relax and let yourself think about evidence maybe more rationally? Is there anything you do to help streamline that process a little bit or make it a little bit more efficient, effective?

David Dodson: Absolutely. So, let’s take a cognitive bias that most of us have heard of or are familiar with, which is a confirmation bias. And people incorrectly think that confirmation biases, that we just look at stuff that is consistent with what we want to be true, but confirmation bias, first of all, your IQ, your awareness of confirmation bias, none of that impacts – this is statistics – none of that through studies changes your susceptibility to confirmation bias. The only thing you can do is you can build these guardrails around it. And so being aware of it, knowing that you can’t just sort of muscle your way through it is the first step. Then you build these guardrails. So, I’ll give you a pretty straightforward example. And one that I think probably most of your listeners can relate to. Let’s say that you and I, we want to go hire somebody. So we do the recruiting and we interview eight people and we get it down to three and then we interview more and we get it down to one. So, okay, I’m going to go hire this person, but I want to check their references. Well, you’re cooked. You’ve started with eight people. You’re down to one person. There is no way you’re going to do those reference checks with objectivity. All you’re hoping is that you don’t hear anything bad. So don’t even try to do that. So here are the guardrails: Do your reference checks when you have three people. So now your reference checks are helping you get from three down to one. You’re going to be critical in those reference checks. It’s going to be a completely different mindset because you’re trying to get from three to one, as opposed to praying, praying, praying that you don’t have to start over in the process. So that’s an example of a structural guardrail that you have to put in place, which makes that cognitive bias go away, in this case, confirmation bias.

Alex Bridgeman: I like that. That’s a good idea. That’s a good guardrail to set up. You’ve alluded to a few examples throughout our conversation so far, but I’d love to hear some of the ways you’ve seen the search fund world change from the second search fund that you launched to the 200th or whatever number we are at today with searchers. What’s changed over this timeframe?

David Dodson: And I’m sure it’s way beyond 200, because I think in 2020, there were 88. So, there’s probably well over a hundred people who are search fund entrepreneurs now per year. Well, we talked about one thing, which is that the investor community- for an investor to be successful in the search fund world, they have got to add value. So that’s one thing that’s new. The second thing, which is probably less relevant to entrepreneurs but sort of interesting, is that because there’s institutional investors that have limited partners, people that don’t have millions and millions dollars can invest in the search fund world by investing through another entity. So, it’s kind of cool that the search fund world from the investor side has democratized and it’s been opened up to a lot more people. So, I think that’s pretty cool. Another is that through trial and error, pattern recognition, other things that we’ve talked about today, that the best practices of what makes for a good company are getting increasingly established. And so, where you had asked me a half hour ago or whatever about when I was first going out to buy a company, there were no rules, there were no guides. There was no handbook. Now there’s kind of a handbook, which great because you don’t need to, if you’re a search fund entrepreneur, you don’t need to relearn how to approach sellers. That kind of stuff you should just copy. You should be exercising your skills and using your skills in other ways that are more sophisticated. For example, how do you manage that seller relationship? That’s different than what’s a good email out to a seller. And so, these kinds of best practices are getting more and more embedded into the system. The other is that, it’s a little bit more industry oriented, is that forever software was kind of off limits. But remember that 35 years ago software, it was different. It was harder to write. It was more complicated. It was less known. And I would say that, I mean, in our case at Futaleufu Partners, probably a third or more of our companies that we invest in or so software related, because they have a lot of those characteristics that make for a good search fund company – recurring revenue, high margins, sticky customer relationships. So that would be another one of the, I would say, one of the big changes or innovations that’s taken place. And of course, early on every search fund entrepreneur graduated from Stanford and was a case writer for Irv Grousbeck. So, I would say, something like the first half dozen, and now there’s search fund entrepreneurs all over the world from all sorts of different schools, all sorts of different walks of life. There’s increasingly greater diversity. We have way more women. We have way more people of color. And it’s a great way for anybody, regardless of background, to become a leader and become an entrepreneur. And I think that’s something that the whole search fund community is quite proud of.

Alex Bridgeman: Yeah, certainly. Do you have a sense for where the search fund world is going to continue going or what things might change in the near future? Do you think there are, on top of that, do you think there are too many searchers? Is there a point where you reach- you’re kind of saturating the seller market with too many searchers? Do you think that’s also possible?

David Dodson: Well, I think it’s possible- not possible. It happens that a certain seller might get multiple inquiries from a search fund entrepreneur, but that person’s probably not a seller. Otherwise, they probably would’ve been entered into some kind of a conversation or negotiation with one of those early people. But I remember that- I think it probably would’ve been maybe 1992 or something, was the first year that two people were searching at the same time. Two, all of America. And I remember there was this kind of buzz about, well, how’s this supposed to work? Two people searching at the same time? And of course, now it’s a hundred. So, this question about are there too many people searching has been going on for 25 plus years. But here’s the thing, there are about 105,000 business owners that need to sell their business every year. So whether there’s 100 people or 75 or 150 people searching, the denominator is enormous compared to the numerator. And I’ve been saying for years, it’s as if you are kind of walking down the beach and you picked up a tablespoon of sand and dropped it on the beach, or you picked up a pitcher of sand and dropped it on the beach. It doesn’t matter. It’s still nothing compared to how much sand is on the beach.

Alex Bridgeman: Yeah, that’s a great analogy. I like that one. And talking about the evolution of search funds, one thing you’ve mentioned a few times is the strong connection you had with your investors who were powerful mentors for you through your entire process. And as a search fund world has gotten larger, some investors have maybe had more time constraints than they would’ve had earlier. Is it still possible for a searcher to have that same type of relationship with an investor base that you had? And what are some tips or advice that you might give someone to help build those types of relationships?

David Dodson: Yeah, that’s interesting. So, at Futaleufu, we have certain things that we look for, characteristics, when we’re making an investment with a search fund entrepreneur. And one of them that is hard measure but is specific is that we ask ourselves, is this someone that we could see in our personal circle long after they’ve sold their company? Is someone we can see ourselves being just friends with? And so, we actually make that a criteria when we make an investment. And when search fund entrepreneurs have asked me what they should look for, or students at Stanford, what they should look for in an investor, I tell them that. I say, I think you should look for someone who will be in your orbit or you can envision in your circle long after you’ve sold the company. Of all of my original investors, every one of them that’s still alive I’m still in contact with, across the board. And by the way, that’s in reverse too of now that I’ve been an investor with Futaleufu Partners, many, many former CEOs I’m friends with now. And so, I think if the search fund entrepreneur has that in the back of their mind, and if they’re raising money from 15 people, it doesn’t have to be all 15, but with a bunch of them they could see that, and that’s something that they would want. And then they make the effort because, generally speaking, these relationships are driven by the generation below, the CEO. They’re usually not generated by the older generation. And if they just make that- carve out a little bit of their time to not making money, but making friends, those are the things that are lasting. And I want to say one thing that’s really important. I teach a class on search funds with two people, Jim Ellis and Gerald Risk, and inevitably every time we teach the class, something gets around to a student will say you guys seem to be such good friends. And then the case guest that we’ve had in, or they’ll say everybody seems to know each other well and are such friends. And usually, Gerald will make the point that the money is good if you’re in a successful investment or you’re a successful CEO, but it really is the pile of memories that you build up with the people that you associate with that, as you get older, is the thing that you value the most. So, I know I’ve kind gone on and on probably longer than you wanted, Alex, on that question, but it’s just because it’s so important to happiness.

Alex Bridgeman: I want to move into some closing questions so we can get you out on time. What college class would you teach if it could be about any subject you wanted, and it couldn’t be search funds?

David Dodson: I kind of hinted at this earlier when I was talking about the cognitive biases. I really am fascinated with how our mind works and how it tricks us into doing things that we shouldn’t do or that are not in our best interest. So, I’d probably, if I could teach any class I wanted, I would probably team up with some person from the psychology department and teach a course on applied cognitive biases. How’s that for obscurity? You probably didn’t expect that one.

Alex Bridgeman: I like it though. How would you structure the class?

David Dodson: Oh, my gosh, it would be so much fun because the things that your mind does that tricks you are fascinating. There’s a book called Irrationally Rational, and it talks about how we think about pricing and anchoring with different decisions. And we do so many dumb, stupid things because our mind is programmed probably to help us run away from a saber tooth tiger instead of doing the kinds of things that we do now, that I think it would be a wonderfully fun class. And you would have games that you would play and people would go, oh my gosh, I can’t believe I did that and say, okay, well, let’s talk about why you did that. And you explain why you did it. And maybe it was a game that involved colors or numbers or whatever. And then you say, now, how might this apply in your day-to-day life? And then you would apply it in your day-to-day life. And so, they’d experience it through an experiment. The concept would be explained to them, and then we talk about how it applies in your day-to-day life, and then are there solutions around it? Are there, as I was saying earlier, are there some guardrails to protect you going forward with it? I think it’d be a great class.

Alex Bridgeman: Yeah, it certainly sounds like it. What’s a strongly held belief you’ve changed your mind on?

David Dodson: Well, I got a degree in economics at Stanford and I was really completely sold and bought into the Milton Friedman, Adam Smith, invisible hand that the marketplace sorts everything out and that you should just let the market operate. And if you let the market operate, everything will be fine. And even though I’d been exposed to some notions of externalities, of things that happen outside of the marketplace, those were kind of one-off obscure things. And so, I had a very, very strong belief that everybody, government and so forth, should be as hands off as possible. And then I’ve observed over time how the political system has worked and how the free market has not led to good decisions and good people being elected to office. And even when good people are elected to office, the making decisions that are on behalf of the country. And then I have watched a situation where the environmental issues within the world are not getting solved within the free market system. And then the way that the distribution of wealth, I mean the distribution of wealth in the world today or in the United States, I mean, is worse than it was right before the Great Depression when things fell apart. And so, I just finally came to realize that the free market left on its own does not function as it should and that there is a role for the public and there is a role for government in assisting the free market and working with the free market. But that took a while for me to get over because I was deeply embedded in that belief.

Alex Bridgeman: Yeah, that’s a big one to get over. What’s the best business you’ve ever seen?

David Dodson: Well, I think early in my career, it was probably cable TV because I loved the idea that you would pay a small amount of money per month on a subscription basis for something that you got a huge amount of value, there wasn’t an alternative, and the switching costs were very high. And those characteristics of- those characteristics still exist with businesses today. I mean, one of them is the subscription apps that you get on the phone that it’s 99 cents a month or something like that. So, it’s a trivial amount of money. It’s almost more work to unsubscribe than it is to keep paying the 99 cents or the 2 dollars. And because of the power of software and the margins of software, you get a huge amount of value from it. So, those kind of subscription businesses that are high value, low dollar amount, high switching costs are fantastic, I think.

Alex Bridgeman: Any particular business stand out to you in that regard where it has those kind of software margins and sticky costs or sticky customers?

David Dodson: Well, I just lost my phone last week and left it in an Uber. I’m sure that happens all the time. And so, I go I need a new phone and I looked and I realized that I had handset insurance with this company Asurion. And so, I went online and click, click, click, and I had been paying what, I don’t know what I’ve been paying, two bucks a month or something like that. I mean, that’s kind of the point. I don’t really know. And the next morning, there it was outside my door, brand new phone, and I plugged it in and typed in some things, and boom, I had a new iPhone. And I thought, okay, that’s a pretty good thing. I mean, talk about a lot of value for very little amount of money on a subscription basis.

Alex Bridgeman: Yeah, that’s been a case study for a lot of folks to study in the search world and it’s definitely a hugely successful example of a deal.

David Dodson: Yeah, just lose your phone and then you’ll know why.

Alex Bridgeman: Yeah, certainly. You didn’t have your- you don’t have one of those cases that has your wallet attached to your phone too? Like you didn’t lose your wallet as well on top of the phone, did you? That’s good. That’s good. That makes me nervous when I see folks with the card slot on the back of their phone case. Because if you lose your phone, now you’ve also lost your payment methods to do anything else and you can’t- now Apple Pay is gone and your credit cards are gone all at the same time.

David Dodson: You know what? My wife has one of those things stuck on the back of her phone with all her credit cards. So, I’m going to tell her about this podcast tonight.

Alex Bridgeman: Excellent. Well, I hope she at least doesn’t lose a phone. That would not be good.

David Dodson: Hey, it’s only a matter of time that we all lose our phone; that and taxes and death are all true.

Alex Bridgeman: Yep, certainly. Absolutely. Thank you so much, Dave, for coming on the podcast. I’ve really enjoyed having you and getting to chat and hear all about the lessons you’ve learned starting from the second search fund and investing in all these other things you’ve been a part of. So, thank you for sharing a little bit of your time. This has been really fun.

David Dodson: No, not at all. And from time to time, I forgot I was on a podcast. I thought we were just chatting. So, it was wonderful. I enjoyed it.

Alex Bridgeman: That’s flattering. Thank you.