DEEPA TALWAR – FROM SILICON VALLEY TO SEARCHING ON MAIN STREET – EP. 58
My guest on this episode is [redacted]. Deepa is currently searching for a company from her home in Fort Collins, CO. Her background includes working with prominent Silicon Valley tech companies like Uber, Thumbtack, and Stripe, and she decided she wanted to become an entrepreneur, but not in the typical Silicon Valley way. During our conversation, we talk about how her tech experience gives her a new perspective when looking at companies, red flags she’s seen looking at deals, how she seeks the truth from owners and brokers, helpful advice she’s received along the way, and her own advice learned through experience.
Think Like an Owner Sponsors
Live Oak Bank – Live Oak Bank is a seasoned SBA lender focused on search funds, independent sponsors, private equity firms, and individuals looking to acquire small companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.
Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [redacted]
Oberle Risk Strategies – Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.
If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [redacted] in sponsoring? Send me an email at [redacted] Transcript:
Thanks Deepa for coming on the podcast. It’s fun to chat with another searcher. We’ve had searchers on before, but they’ve been either traditional or focused on a specific industry in a different area. So I’m excited to hear your experience so far, especially coming from a tech background. It would be great to start with your tech background and work your way to your search today.
Yeah. Thanks for having me. I should mention that I listened to your podcast while I was thinking about searching, so it was one of the things that got me over the hump. So my background is, I’m born and raised in Chicago. My parents are immigrants, so they came over to the US in the ’80s, and they actually did a career switch mid-40s. So they started my mom’s a physician practice just like yours, which I now realize is basically building and running a business when you have kids who are much older. So I have a lot of respect for that. There, a big thing to my sister and I was always be in a position where you can be your own boss and where you can be in a position where money is not an issue for you, where you don’t have to worry about it.
And so those are two things that have stuck with me for awhile. I went to Northwestern, I was a math and econ major there, and then moved to San Francisco right after that. My first job was at Visa. And Visa is pretty interesting. They had just gone public a year before, in 2009, and so their plan was to bring in young people into the company and revive the place and rotate us around. I wish I had realized how fascinating Visa is as a business when I was there, but I did not appreciate it. And it was pretty corporate. This was 2010 and I had wanted to make the jump to tech. So I left Visa in 2012 and joined Uber.
I was the 70th employee at Uber. We were just in 10 cities or so. It was only valued at the time at $300 million. We were in something like 10 cities. So still very expensive. I think an average ride at the time was something like $40 to go 20 minutes away. And so my role was a team called Process, and so our job was basically to figure out how to figure out what was working on the operation side, whether that was with how to launch a city or how to run the driver operations or the community operations to just stop recreating the wheel every time we launched a city.
I think the biggest thing I took from that experience at Uber was just the pace. I have never since then worked at a company that grew as quickly as we did. We 10Xed our business regularly. And I think generally, just the taste of how people work, there was just this constant hustle, this constant need for growth at all costs, but it taught me a lot about what you can do when you’re motivated that way. From there, I went to Thumbtack, which is a marketplace for home services, and I was the 40th employee there. My first job there was to improve our operations in the Philippines.
We had 200 folks out there, all remote, all on different islands, all doing various sorts of back office roles. So the job was basically to figure out how to put some structure towards that team and keep us really tightly coordinated with the US. And then we grew that team to 1,000 people over a year, which was a wild experience. And I think in retrospect, it was a really interesting case study in remote work and how it can work really well when you build a really great culture. So I did that for a while and then moved to our SEO team. Thumbtack is arguably one of the best in the world at SEO, so it was a great place to learn of how to tweak the algorithm and keep the machine running.
In 2016, I wanted to run a company. My sister had gotten married a year earlier, it was an Indian wedding and we needed Indian wedding clothes, but my family doesn’t go to India often, and so we had to do all of our shopping in Chicago. And that experience was a nightmare, just the pricing, the margins, just the antiquated buying experience of trying on clothes that don’t have sizes and then coming back and having the sizes be wrong and having to come back again. And this was around the time that everything was moving to direct to consumer. So my idea was simple, it was just, can I find suppliers or manufacturers in India that I can partner with, get their inventory online, and then come back to the US and sell it from here?
And it ended up taking eight months. I changed my business model three times while I was out there. I started with building clothes myself, which was not a great idea for someone without that background. Then I pivoted to renting, kind of like a Rent the Runway model. And then the last model that I landed on was reselling, and that was by far the easiest option and it made the most sense. So I did that, got that all set up. At the end of my time in India, India actually demonetized the currency, and so they pulled 80% of the cash in circulation overnight.
And so that took a pretty big hit to my business in just the operations that I had built, that were already pretty shaky. It definitely made me restructure quite a few things. So I’ve got that set up, came back to the US, and then automated everything from here and it became a passive business for me. And then I moved back to Chicago. And for the last three years, I’ve spent building sales teams for SaaS companies. So my first role was a small IOT SaaS company with a series A funding in Chicago. And it was just 20 guys, I was the 21st person, only woman to join.
The role was interesting because they gave me carte blanche to figure out how I wanted to build a sales team from scratch, from very much a first principle basis. So we did quite a few things there, which ended up doubling revenue, and it was just a great experience, honestly, of figuring it out on my own. And then the last two years, I’ve spent at Intercom and Stripe, which are pretty big in the SaaS space. And so it’s been a fun journey building inbound and outbound sales teams for them. We moved to Colorado during the pandemic when the pandemic hit. So we came out to Colorado thinking it would be temporary, and obviously permanent now, and we live here permanently now.
That’s wonderful. I’m curious on your Indian clothing startup, are you still running it today and it’s mostly passive? I’m curious with each evolution in the business, what do you think you took away from each of those steps?
I wish it was still running today, it was a great business. Etsy’s policy is that you have to be the designer, you can’t be a reseller, and Etsy was my main platform. It was just phenomenal. The amount of traffic that Etsy drove to my business without having to lift a finger was just like a perfect flywheel. And so eventually, after a year, I got ticked off, which was tough. And the other thing that was tough was that my supplier had gone out of business by the end of that because of the demonetization the year prior. And so I just never have picked up the ball from there, but I probably will in the next few months.
In terms of what I’ve learned from the business model iteration. I think generally, it’s just tough to start a company. And I think that experience just gave me a lot of empathy with why it’s so hard to start a company, and honestly, why it makes a lot more sense to buy someone’s business than start it yourself. It just gave me a lot of insight into why that process is really tough, and it’s lonely, and you’re constantly hitting your head on the wall and re-strategizing and thinking about things. I think for me, the first model, now that I have some foresight, I think the first model of building clothes was a crazy model to begin with.
I now know that was crazy, but at the time, it seemed like the only path. And so I think for me, what I took from that was like constantly pressure-tested business model and constantly test, is this the best way? Is this the easiest way? Is this the least expensive way? And make sure that works before proceeding further.
So with your experience at Uber when it was growing so fast and some of these other tech companies you’ve been a part of including your own startup, how did all of these experiences in companies that were growing really quickly and were in that startup phase, how did it influence your thinking towards buying something that already exists and isn’t in that startup phase?
So my experience on the tech side, it’s all what we call go to market. So it’s basically, how do you take a product and bring it to market as quickly as you possibly can? So how can you hyperscale sales and marketing and operations? And so I actually think those are the things that small businesses are actually generally pretty bad at, is sales, marketing, and operations. The link to me is pretty clear, but I don’t think most people see it. And so that’s the hope I have, is to find a business that’s underperforming in one of those categories and bring those skills over.
I think the other thing is, in tech, you’re constantly thinking of like, what is the most efficient way to get from point A to point B? What is the easiest path of building a sales program? What’s the fastest way of processingize our operations? We did it at a very different scale, obviously, but I think taking that mindset of, what’s the most efficient lever I can constantly pull, is something that I hope should work on SMB side.
Yeah. When you’ve looked at some of these companies for sale during your search, what core processes or systems are they usually missing that you had at some of your other tech companies that you think apply most closely to what they do?
I haven’t seen sales done well at all, and so I think that’s a big one, is just having a sales process that makes sense. The only sales program I’ve seen at all has been at a roofing company, which makes sense because at the end of it, a roofing company is basically a sales machine that doesn’t really do the services in-house. That company was doing a[redacted]commission split. So you would get, of the sale that you made as a commission salesperson for the roofing company, you would take 10% off the top to give back to the house for overhead, and then you would split the profits[redacted]with the business. And these were for inbound leads.
So the commission sales person wasn’t actually bringing in the lead, the lead was coming in themselves, and then they were splitting the profits 50-50, which meant that there were folks at the business that were making $400,000 a year selling something that was coming inbound.That’s the only program I’ve seen, but that just seemed incredibly rich. And it seemed like a recipe for creating a culture that was really entitled, which is what they had. But other than that, I haven’t seen any sales program or process or system at all in any companies.
What I’ve seen the most is a business that’s B2B that just doesn’t have capacity, and so they’re just refusing to pick up the phone and take on new business. And then I’ve also seen the business that operates completely word of mouth, and they’ve been doing that for 30 years or so and it is just enough to make ends meet.
Each of those strategies, the entitled sales culture, the not willing to pick up the phone, and then word of mouth, each are different challenges. Is there one of those specific types of challenges that you get most excited about where you feel like, I can do the most good in this situation, and that motivates them strongest?
I think the sales piece is really interesting. I think if you can win at sales by having the right sales program, having the right sales folks in C, having the right commission structure, the right incentives, I think then you can win. Think another version of that is that you have the right relationships. So you have insurance folks, you’ve got real estate folks who’re constantly working with you, and you’ve got the right incentives with them to send you business and vice versa. I think that can work really well. So those are the things I’m gravitated towards.
What the opposite of that looks like is where you’re constantly fighting for consumer spend and you’re spending a ton of money on AdWords and it’s basically just a race to the bottom to figure out who can outspend each other and who can get better at spending money and optimizing it. And that is something that I don’t want to do. So those are two examples there. The other one that gets me excited is the operations piece. So thinking through, if you need a third crew, you obviously don’t want to bring on a third crew unless you’ve got enough business.
So I think thinking about that balance of supply and demand and how do you build up sales enough to a point where you can justify having a third crew? What can you do with a third crew before there’s enough work to fill in gaps? I think that is a really fun one to solve as well.
So you’ve seen building the sales and operations together, you see it as building a sales first and then back filling with capacity and operations then?
Potentially, yeah. I think with all of these businesses, you’ve got to be open right to how this thing plays out. And so if it’s a chicken and the egg and it’s harder to find folks, then I think he probably would start there and get them in C, but I think pretty quickly you’d need to figure out what to do with them once you’ve got them in C. I’ve seen things, like I just looked at a flooring company and the idea was, let’s train new guys on residential, which they don’t normally do, but it’s a really easy way to learn and that business was easy to find.
So I think that’s something that could work just to keep guys busy, get them in the field, get them learning things without the pressure of going to a big commercial job right of the way. But I think you’ve got to be open in terms of what it looks like in whether you solve for sales or whether you solve for adding a crew first.
As you’ve gone through lots of these deals through your search, is there a type of company, organization, or culture that you don’t think you’re capable of fixing, that even if you’re a brought in and you have these resources and ideas, there’s really not much you can do there with what already exists? What kinds of companies fit that description for you?
It can’t fix, I think culture is a tough one. And I think that’s been talked about on your podcast quite a bit is, if there’s a tough culture and it’s not one of high integrity where there isn’t a ton of just pride, I guess, in working there, I think that’s a really hard one to fix. And I think if you think that you’ll come in as a new buyer as an outsider and fix that overnight, I think that is a big ask. I think that would be hard to fix. Beyond that, ones that are hard, I guess, there’s the tiny businesses, the one-man plumber who’s basically selling his business, and you would have to backfill both him and continue the business forward. I think that would be a tough one to run as well.
Absolutely. So can you walk us through your search? How long have you been searching? What’s the experience been like? How are you sourcing companies? Just walk us through your search periods so far.
It’s been five months, I would say there’s been two phases of that search. So phase one, I would call like, I’ll look at anything. And so that was a process of lots of BizBuySell businesses, talking tons of brokers. I looked at everything during that period. And I think that was actually a really good thing for me to start off with because it taught me what was out there. Colorado, I think is it’s a different market than other metros. We’ve got a lot of industrial, we have a lot of construction. We have service-based businesses, but they’re not, I don’t think as plentiful as they are in other markets.
So I think learning what was in my local market was really important to me, and I think that getting those reps in going through BizBuySell, filling up tons of NDAs, working with lots of brokers that were all across the spectrum in terms of quality, looking at businesses that were all across the spectrum, I think was a good process for me. Most of those businesses were under 500 KSTE. And the first business I looked at, actually the first business ever that I looked at seriously was a solar business. And it turned out to be a really lucky deal for me because it had all the right ingredients of great sellers. The sellers were actually my age, and the reason he was selling was that he got a pretty bad experience with COVID and it really hit him hard and wrecked him.
And so it forced him to take the scope of what he wanted his life to be, and thinking about work and how it played in there. And so he was ready to sell, but he was a young guy. I think we got along really well from just an age perspective. And then beyond that, he had management in place. It was a solid business. It was riding these great industry tailwinds in Boulder, of all places. And so a great broker. So it was like this great first deal for me to work on. And they ended up narrowing it down from, I think there were 10 offers, they narrowed it down to two of us.
I didn’t end up getting it, they went with the 50-year-old general contractor who had a Rolodex, but it was a great experience for me to get the full experience in figuring out how to write an LOI, learn how to get a deal team together quickly, figure out the SBA process. So I’m really grateful for that one as my first deal. But beyond that, yeah, I looked at a ton of businesses, there were some weird ones in there, there was a sign installation business, there was a roofing business. So, really great experience of just getting things and seeing a ton of things.
A lot of these businesses were just bad fits. They were way too small, very much in the buying a job market. There was a good amount of turnarounds in there as well. And as an operator, my thinking was, I can fix these companies. I can buy them for a great price and I can fix them. I like chaos, I’m used to it, I’m used to a mess. I was going to fix a lot of it anyway, so why not buy it for the right price and then improve it over time. And I think the reality is that, it’s tough to think about it from an investment perspective when you’re buying that much risk. There’s got to be a nice balance of downside protection when you’re buying something.
There’s also the question, I think, at that scale of, “Why don’t I just build this myself?” Or, “What am I actually buying?” Especially when it’s a one-man operation. So that experience taught me a lot about how to think about risk and downside first before you start making a nice story about the upside and how I can fix things. But yeah, I would say the beginning was definitely a high volume. I looked at 50 or so businesses in that period. That was my first three months. I did three LOI, one IOI, so tons of volume there. And then I would say in mid January, so these last two months, I’ve shifted to a strategy of knowing more about what I’m looking for and being pretty patient and moving when it’s the right time.
So I started working with a few bankers, which has been a really nice contrast, I think, to the broker world. I have started looking at some bigger deals as well. And then now more open to what I’m looking for, but also flexing on the size if I need to.
Is there a particular deal that you feel like you learned the most from? You’ve listed a couple here, but I’m curious if there’s one experience in particular that maybe kick started that shift for you or adjusted something else in your search?
Yeah, I would say the roofing deal right at the end of that first three months, I think was a pretty big learning experience for me. The business was very, very local, really honestly built, 10 or 15 years or so in the making. The owner was just a great guy who wasn’t from the industry but stumbled into it through insurance, built this team. He was the one who had the very expensive sales team. So it had this great culture, very family oriented, very known in the community, very obvious with where it was located and how it was integrated into the community. So it had all these great benefits to it. I think the catch was that it’s roofing, and roofing in Colorado is a great thing, but it also can be a horrible thing when you’ve had no storms, which we haven’t had for the last two years.
So it is by nature, a very cyclical business. It’s very seasonal. You have to be able to flex up and down with capacity if you need to. You have to be able to weather two years of no storms and have business that you can do in the interim when there isn’t a big hail storm coming in. So for me, I got really excited about the business. The seller and I got along incredibly well. He was an open book. I met his number two, she was a woman, which I have not seen at all in any of these businesses, and we got along really well. So I got attached to the business just from the business itself. And I think what I didn’t take into account was thinking about first was the valuation. This was the business where the seller just had a number in mind and it wasn’t really rooted in multiples or EBITDA.
And I wish I had pressure tested that more. And instead, I just thought he’s not financially motivated, his (inaudible) thing that makes me think he is financially motivated. He wants this business to go to the right owner, and I feel like we’ve aligned on that. He actually said before we did the LOI that I was the right buyer for the business. And so I just put together that this isn’t a financial sale, this is one about legacy and transferring the business over to the right hands. That was wrong, but I wish I had pressure tested that valuation earlier on.
And then the second thing was that this business was pretty big. It was a $5 million SBA loan in the deal structure, which is the most that you can take on from an SBA perspective. And I think for me, that experience was a really good one in understanding that I don’t want to be anywhere close to that amount of SBA loan towards my first loan guarantee. Just that amount was pretty terrifying to think about. And then the second thing was that the business was lumpy. The monthly income was not actually consistent because it’s roofing, and so it actually couldn’t meet all of the debt service payments, which is a position you don’t want to be in.
So for me, I think these are probably obvious mistakes that I made, but it took me way too long to figure these out. I think on the plus side, I learned them with my time, which is plentiful right now, and I’m glad that I got to learn these kinds of free lessons, but that was definitely the end of that three-month period, and it was the forcing function for me to figure out how to think about things better, how to negotiate better, what to look for in the future.
As you were thinking about starting this search during your research and listening to the podcast, is there some advice that you received that you feel like has been really helpful in thinking through your search?
Part of what I started off doing when we moved to Colorado was thinking about, along the same time that I thought about buying a business, I also was thinking about real estate as well and getting into that. And so the advice I got actually early on was about real estate, and it was looking at a multifamily deal with someone. And we went through the downsides first. And I think for me, that was a really interesting experience of watching someone from an investment, general partner perspective, look at a deal and ask questions about the downside first before asking anything about the upside.
I had never looked at a deal that way, I only looked at it from the potential first, and then I would think about the risks secondarily. And I think for me, that was a massive mindset shift of when you’re investing, you’re trying to figure out how to minimize the downside. And for me, that was a really great experience of trying to figure out what to ask first before you even considered the other case.
So with that mindset shift, what questions do you ask now to these prospective owners or brokers?
I think the big one for me is trying to think about like, what is the worst case thing that can happen here? And to me, the worst case with these businesses isn’t so much defaulting on the loan, but it’s being in a position where you’re constantly scrambling to meet your debt service. And I think that that just puts a big mental toll on your life, on your mentality and your whole operation with the business. So that’s the thing that I am the most scared of with any of these businesses, is being in the position where I have no liquidity, I have bought myself a business that I’m now spending all of my energy trying to just break even on. So that’s the thing that I’m scared of.
And so the thing, to your question of what I ask sellers is, I dig for monthly P&L first and foremost, trying to figure out what this looks like on a monthly basis, and then I stress test that against worst case scenarios on the top line. What is the debt service look like in various scenarios? And do these numbers match up? And is the ROI at the end of the day after debt service worth the amount of effort that’s going to go into this one? So monthly P&L is definitely something I press for, but beyond that, there isn’t anything much that I think I get from the sellers on the risk side. I think they’re pretty cagey with what the challenges are of the business.
And I think the best thing you can do is ask veiled questions that get to what you want, but don’t ask directly. For example, a direct question would be, “What’s the most challenging part about running your business?” And I don’t find that I ever get a straight answer on that one, but when you start digging into, “When was the last time that someone was let go? Why? When was the last time you hired? How hard was that? How long did it take?” I think those are the questions that tell you a lot more about how the business runs versus asking it directly.
Do you have any more of those questions? I’m curious. It’s an interesting train of thought.
I like to ask about how they would the business. I think it’s really interesting to ask that and get their perspective of how they describe the business. I find that a lot of the small business owners don’t actually have a good pitch, which makes sense, they don’t pitch their business, but I think it tells you a lot about the sophistication of the seller and how they approach this whole sale. If they’re more of a conversational seller to you, or if they are more buttoned up, I think it tells you a lot about how the deal is going to work. I like to ask if you had limitless time and energy, what would you do to two extra business at this point? And I like to take their answers and then pressure test them further. So take the first answer they said and say, “Okay, let’s unpack that one. How would you do it?”
And often, I don’t get the right answers, the things that I’m looking for, but I think what it tells you is it gives you a lot of insight into how they think and how they operate as a leader. Sometimes you’ll get a good answer that you can run with and start to put a case around in your head, but most of the time what I use it for is to get a sense of how they think and how they’ve run the business for the last few years.
You’ve mentioned pressure testing and stress testing these businesses, what handful of scenarios do you usually try to stress test a business for?
Debt service, again, is the big one that I’m stress testing for, so I’ll definitely run through scenarios of what’s the worst case that can happen on top line and bottom line. I like to recreate the P&L myself. So I’ll take what they gave me and then manually enter everything back in, and then highlight things that I don’t understand. So I saw that the rent went up in year three, why was that? I saw that payroll went up, why was that? And I like to understand what the breakdown is of payroll specifically and what goes into that and what can cause it to go up and down. I found a few businesses now where the payroll has ballooned in the last year that they’re selling, often what’s happening is that they’ve put in a lot of investments, but it’s something that you’re not going to have to continue investing in and carry forward as a line item.
So I like to understand what’s in that one and who’s in that bucket, how long have they been there, what’s their tenure, what’s their salary, are they full time or part time, how does that process work? Those are the big ones, is honestly just the financials and just getting that in the right place before I move further,
What’s been your experiences with brokers then? How has your communication with them evolved? And then what few examples or experiences have you had that have shaped the way you interact and communicate with brokers?
I appreciate brokers, I think that they do a ton of work with just getting the buyer in the right mindset of what is the right valuation? What’s the timeline? What should I expect from this process? So I’m glad that they’re there. I’ve worked on some that are off market, and there’s definitely a missing medal, which is the valuation and the right thinking about how the deal will work. I would say the first broker I worked with was still my favorite broker I’ve ever worked with, and he was just an amazing person, sort of coaching both sides. So that was my first deal ever, I had no idea what I was doing and he held my hand the entire time, which I very, very appreciative of, very transparent, was very much trying get the best deal for both sides done.
And we’ve actually kept in touch. He’s someone that I bounce deals off of now and get advice from, which has been really nice to have someone on the inside. But beyond that, I have learned that for a broker in a lot of ways, I am not the ideal buyer because I’ve never done this before, I don’t have a track record. You can look at me and wonder, can she close? I’ve never actually closed a deal before, so it’s actually a fair question. I’m younger than most people, I don’t look like the profile of the right buyer. And so I understand where the skepticism comes from. And so now, I think the way I think about it is from their shoes of what do they want to see to know that there is certainty here of me closing?
I like to make sure that I’m really buttoned up on the seller calls, and I think I handle those generally very well and make sure I get the right answers, but I think the other things is just having a really polished LOI and standing your ground in terms of what’s important to you, and what’s your something that you’re willing to walk away from, I think that just helps the broker do their job better.
When you say, make sure you’re buttoned up for seller calls, what does that look like? What kind of preparation do you do ahead of time?
I’ve got a template of the same questions I like to ask the sellers, and then I’ll unpack things depending on how chatty they are, if there’s something that’s more unique about their business, but it starts pretty broad. I like to have them start with, just tell me about why you started this business and how would you explain it to someone if you had to at a bar? So start there and then go into what they do all day, and who’s on the team, and who are their customers, and how do people find them? Who are the competitors? Why do people choose them? So it’s pretty standard, I would say in terms of the questions, but I think the gems that are in there are the little things that get passed between questions or when you start to unpack something they say, I think that’s where you find a lot of the great inputs there.
For me, what I really want to understand is the business model. And throughout my search, I’ve been opportunistic and open to any industry. And I’ve kept that this whole time and I will probably keep that going forward. And I think the hard part about that is you have to learn tons of business models overnight and figure out, how does this medical device company make money? And then how does this at the same level, this technical service-based business make money? And you’re constantly flexing between these different business models. So I really like to understand on that first call, I should know completely how they make money, how repeatable is it?
How do people find them? Where is investment needed? What’s the growth potential of this going forward? Those are the things that I really like to leave the call with just full confidence and the understanding it.
When you think of the lifestyle of being a searcher and having this be your full-time role, what did you not expect or not anticipate in making that shift from working in a job to now being a searcher looking for a company?
I didn’t expect this process would take this long. I have heard about people taking two or three years to find a business, and my first thought was, why would it take this long? There’s tons of businesses for sale, this is a great time to be a buyer, this should be straightforward, there’s tons of places to look, and so, as long as you’re looking in the right places or you’ve built the right relationships, you should be fine. I think that is very wrong. And I think there’s a lot of reasons why this process takes as long as it does, but I think that was a big realization for me is that buckle up, has some patients as this process will take quite some time. So that was one.
Otherwise, I would say, I have never appreciated being on the investor side, I’ve always been an operator and I’ve always heard about the board meetings and the VCs who are involved, but I’ve never actually been in their shoes. And I think switching from an operator to an investor is actually a pretty big mindset shifts. I thought investors get to be these fat cats who gets to get the benefits of the business but not actually do any of the work. And I think the reality is when you’re investing your own money, it is a very different ball game, and you’ve got a lot more questions, you have a lot more downside to protect, you have upside to think about as well, you’ve got a lot to learn very quickly and this steal cycles are quick.
So once you find a good deal, you don’t have tons of time to noodle on it and ask a ton of questions, you actually have to move pretty quickly to be competitive. And so I have a lot more empathy now for the investor mindset, I’ve really appreciated this whole education for me of learning to become an investor and switching that mindset, but it’s very much a different one.
Any investor today or business, or maybe venture capital fund that you feel like you’ve learned the most on the investor side from besides of course, just your own experience in that chair?
Yeah. I think that’s part of what makes this hard is that there isn’t a good blueprint for how to be a micro, private equity investor. I think everyone’s experience is so different and where you’re starting from is so different, where you came from is so different, what you’re investing in, what’s your lifestyle, and it’s hard to generalize a lot of that and find someone who I can model my business or my idea after. I found inspiration from a lot of folks, a lot of the folks I’ve met on Twitter have been just a great base for showing you different ways of how this gets done. But I wouldn’t say there’s like one model of who to emulate just because everyone is coming from such a different starting point.
You mentioned real estate before, does real estate still factor into your search to some degree?
The reason that we were excited about real estate, my husband I is from the tax perspective, we are your typical millennial couple that up until the pandemic owned nothing. We had a tiny apartment, all of our stuff could fit in a car. We were that kind of couple and all of our investments were in the market, which meant that we were pretty exposed if there was any shakeup on that side. So part of what our goal was this year with moving out to Colorado and me switching jobs, was to think about how to diversify our assets, and real estate was obviously, one we wanted to get more into.
I’ve learned a ton about thinking about real estate, and how to enter the market, and where to enter the market. I think this is probably the hardest time to enter the market because of where capital is and where the market has gone. But it’s given me a good framework of how to think about it and how to think about taxes. I think a really interesting combination is a small business that has real estate tied to it, and how to think about that grouping structure, when can you use the benefits of depreciating one against the income of the other? I think that would be a really interesting one, but for now, we are on the sidelines on the real estate side until something good comes up.
So when a deal says that it has real estate as a part of selling the business, or is an option inside of the business, is that something that you look at as well? Or you said real estate is more on the sidelines, is that something you pushed to the side at the moment?
I think both are interesting. The deal I just looked at recently that I walked away from last night was actually one where they had real estate involved in the deal as well. And I think what I learned from that was, I had full enough information about the business and I was confident doing an LOI and evaluation and a price that I felt comfortable with on the business side, but I knew nothing about the real estate. And I think that’s the tough part about a business with real estate involved is that there isn’t usually an appraisal, you generally don’t know much about the real estate, there isn’t a report about the condition of the roof or any of the utilities, you don’t know what the taxes are.
And so that was a deal that was actually uncomfortable for me to even put a price on the real estate, because I had such little information about the real estate. And then on top of it, the real estate was old, it was a 1960s light industrial building. And that was one where I just wanted more time, and I think from an LOI perspective, the broker didn’t like that I didn’t put a price on it. He wanted to know going into it that we’re going to accept the offer, you definitely want the real estate and you’re definitely going to pay this much for it. So I think that’s the downside is I still don’t know how to approach it from the LOI stage and how to tackle that number, but I think it can be a really good asset and you can get a great deal if it’s packaged in the right way.
Yeah. I saw you talk about dropping that deal last night. Can you talk through some of the other reasons that that deal fell through?
Sure. Yeah. I would say the business is solid, I love the seller, the issues I ran into were on the LOI side. And so I had sent her an LOI and the broker sent it back with tons of edits. And this is my first time having a broker fan respond to an LOI, so maybe this is me being open and new to this new process, but it was tons of edits to it. And one of the edits that we couldn’t get past was exclusivity. So I had written it to be, I think, what a standard exclusivity clause is, which is during this 30 to 60 day period, there won’t be any solicitation, there won’t be any entertaining of any other conversations. You obviously won’t accept any offers during my period.
And they had redlined that and changed it to, we won’t accept anything during this period, which means we’ll still have the listing open, we’ll still talk to people, we’ll still entertain conversations, but we won’t make an offer to anyone. And my pushback to that was, “What prevents me from having done a ton of work on diligence and quality of earnings and whatnot, getting to the end of that, and then having my purchase agreement not get signed?” And their answer to that was, “What’s preventing us from you walking away at the end of diligence as well saying you don’t want the business?” And that’s a tough one because how do you answer that?
And my answer was, I didn’t have a great answer, but it was just that it felt like this was a situation where there needed to be mutual trust on both sides, that we were both in it for the right reasons and that we both wanted the deal to get done. And it felt like on their side, there was this feeling of me walking away and needing to protect themselves when I would prefer them to have had more trust, I think in me.
So is there anything on the business side or is it purely just with the broker being there in that process, even if the business is good, there’s going be a lot of challenges that you probably just are better walking away from?
I got the sense that on the LOI side, the broker was the one running the show of telling the seller what to accept on the LOI side and what to edit. And that made me uncomfortable because at the end of the day, I’m buying a business from the owner, and I liked the owner, I liked the business, I liked how much integrity he had and what he had built and how simple this business was. What I didn’t like I guess was having to then also think about, I’m not just negotiating with the seller, I’m clearly negotiating with the broker, and the broker was the one who’s pushing for exclusivity. One of the things he said when we were having that conversation was, “This is not how our firm does things. We don’t do what you’re asking us to do on the exclusivity side, we only work this way.”
And that’s a hard one to hear because at the end of the day, I’m not negotiating with you, I’m negotiating with the seller. And what I would have liked to hear is, “I hear you and I will take this feedback back to the seller.” But instead I heard, “This is not going to happen and this isn’t how we work.” And so I think that was the tough part was just these tiny little moments of realizing that I wasn’t just going to be working with the seller, but also the broker and playing that out to how would this work during diligence and how would this work through the end of that, will this constantly be three-way conversation, or would it eventually switch to two? How much confidence do I have that that would happen?
That’s what made me nervous is these tiny little moments of realizing that it was a bigger party than I anticipated.
Yeah. That’s a pretty wild story. What other things within some of these deals that you’ve come across have you found to be really odd or just unexpected that you maybe didn’t think would be involved in the conversation like the brokers saying, “If we’re not going to do an exclusivity period.” That from what I’ve seen and listened to people talk about, the exclusivity period is a pretty default setting in any of these deals. And so to hear a broker question that is odd, I’m curious what other odd things that you’ve come across that you’ve found that you’re best just walking away from?
Definitely, not having a good explanation for the seller’s number. I remember on that roofing deal, I had asked the broker point blank, like, “Where is this number coming from? What’s it rooted in?” And the broker didn’t have an answer either, he just said, “This is the owner’s number.” And when I asked, “Right, but why? What’s behind it?” It was a unique number, it was ending in[redacted]So I was asking, why is it that much money? And what’s behind that number? And he didn’t have a great answer either. And I think that’s a warning sign because part of the broker’s job is to make sure that the number makes sense and it’s rooted in something and it fits the market patterns.
And I think that was a pretty big warning sign for me to realize that the broker actually had no idea where the number was coming from either. So that’s one. I think when businesses struggle to come up with the right financials is a tough one too, and their books aren’t clean or they don’t have readily available monthly P&L’s. With the roofing business, I remember asking, “Can you show me a breakdown of where leads come from just so I can understand what things are working? Is it mostly referrals? Is it mostly the sales team, or is it mostly this marketing program we’re spinning up? Which one of those three is working?”
They couldn’t really answer that one either. And you were spending quite a bit on marketing, and quite a bit on referrals, and quite a bit on sales. And so if you’re spending a ton of money, but you don’t really know what’s working, I think that’s unexpected problem to be in as a buyer who’s buying a business from a retiring owner, but it makes it a hard business to understand when you’re trying to figure out growth projections.
Yeah, absolutely. That’s definitely a challenging one. Going back to your investor mindset of look at the risks and then look at the growth opportunities. If you look at the growth opportunities, when you hear something, what things when you hear them from an owner or a broker make you excited and make you really want to pursue a deal?
I generally don’t hear them from either of those parties, but what excites me on the growth side is the levers, when there are multiple plays that you can run to grow the business. So with the roofing one, there was a geographic expansion, of course, that’s the game in roofing is to figure out how to spread your services as far as you can across the country. So there was that play involved. There was an expansion of services, so not just selling roofing, but building this sales team that could sell any adjacent home service that related to the exterior of the home. That was interesting. Just generally, when there’s different options you can pull, because you never know what’s going to happen, and which one will…
Geographic expansion is tough and sometimes you have to build offices in each of these locations and maybe that’s too expensive or honestly, just not something I want to do at the time. Do I have a plan B, and a C, and a D to pull from, to make sure that this thing can grow and there are different ways to get there?
Absolutely. Moving into some closing questions. What classes would you teach in college if you could teach about any subject you wanted?
I would do something around finding career paths for you. I think the crazy thing to me is that you go to college or don’t, but you have this lack of education about what your paths are from a career perspective. And I think for a lot of people, your job is this thing that determines so much of your life. And I think it’s a failure, I guess, on the system that we force people into these paths and they don’t really know what they’re getting into, and they commit tons of debt and tons of years of schooling without realizing that that’s the right path for them.
So I think something along the lines of just knowing your options, firstly, but then secondly, knowing how to navigate the process, what do you need to say during the interview screens to get pass each one? How do you find the right path for you? How do you create an opportunity when there isn’t a formal job description? How do you handle that process? I think that is something that I learned through trial and error and through being really fortunate to be able to switch jobs many, many times, but it’s something that if I didn’t have to work and I didn’t have to make money, it’s the thing that I would spend my time on, honestly.
That’s a great answer. What industries do you think that kind of class would be most helpful for where there’s not necessarily that many paths defined by a school that you think that career path would really benefit from?
I think you can definitely think about the trade school piece, that’s pretty close to this whole search community is the shortage of labor on the trade side and how to think about putting the right folks in those roles, and then continuing those roles. We don’t have enough electricians or plumbers or HVAC guys, and so how do you keep that path going forward? There’s also, as we know very well, there’s a ton of money in the trades. And so I think that’s a really interesting place to start is how do you think about education on that side? But I think on the more white collar side, I have a lot of friends who became doctors or lawyers, and in reality, that position was just a really bad fit for them on a personality basis and a lifestyle basis.
And I think what is crazy to me is that you spend so much time and you invest so much of your life into becoming one of those roles and you don’t realize the implications of as a lawyer, your time is money and you’re constantly billing for time, but you’re also accountable to your clients at any time, and is that a lifestyle that you want? And is that where you see your life going? And do you want to be in that kind of position? And I think those are the things that don’t get talked about enough and I wish they did.
Yeah, I completely agree, especially in the lawyer front. I have a close friend who got into law school and quickly realized it was not something he wanted to do. So some path education class would be really interesting, I think very helpful. What belief did you use to hold strongly that you’ve changed your mind on?
I was pretty early on the FIRE movement, the Financial Independence Retire Early. I read about it, it must be like 10 years now ago, and so I got this idea of, if we keep our big three low, which is your housing, and your food, and your, what’s the other one? Car, maybe, if you keep those three low, then you can keep a lot of your income and you can save it all, and that is the key to wealth generation. My husband I were doing that for a while actually up until the pandemic, and when the pandemic hit forced us to rethink a lot of things about what do we actually want to work on and where do we want to live? And so we’ve had a really nice 180, I guess, lifestyle of moving out here and me switching jobs.
And now I would say where we both think about wealth now is about how to decouple time for money and how to think about making money while you sleep and moving from the labor side to the capital side. I’m still trying to crack that nut and try to figure out what of that make sense for us and how is it going to work here in this space? But I think it’s a pretty big mind shift to think about saving 70% of your income every month to then thinking about what’s a different game we can play that does this on its own.
So that shift from trying to save as much per month to now looking for ways to grow wealth, does that involve just switching what you do with those 70% savings in addition to some other things? What is involved in that mindset switch for you?
Yeah. I guess the obvious thing is I no longer am on the labor side since I left my job. So now the goal for me is how to figure out how to get on the cap table side. And the same things actually played out for my husband as well, he’s gotten the chance to earn more equity as well. So for both of us, it’s making that slow shift over, but yeah, we’re still saving, which is really nice, it’s nice to be able to. And so we’re doing a hybrid solution, but I think we’re definitely more on the mindset of how to decouple our time for money at this point.
I like it. That’s good to hear. What’s the best business you’ve ever seen?
I would go back to Visa. I think it’s a phenomenal business. And again, I wish I had appreciated it while I was there, but Visa, when we were there, we had this phrase that Visa is a bridge and toll. And so we basically built these bridges for the card networks to operate on and we would charge a toll, literally every time you swipe the card in any country in the world. And it’s obviously a phenomenal business from that perspective when you own the rails that everything sits on. And so Visa is obviously now one of the largest companies in the world, and I think what’s also interesting about them is how capital efficient they are. They’ve got, I think it’s like a million dollars per employee is what they bring in revenue.
And so it’s just this business that doesn’t really need a ton of people, it’s just got solid enough technology, they can keep everything running constantly.
You say you wish you had spent more time at Visa, what do you wish you had spent time doing while you were there? If you were given another year or two at Visa, what would you be working on?
I have an interesting experience because I started my career at Visa and then I ended it 10 years later at Stripe. And I think that comparison of being at a card network that was old school and built a lot of the rails to then being at a company that is trying to innovate on top of those rails was a fascinating counterexample. I think fintech if you followed it, has been growing at a pretty enormous clip over the last few years. And I think this is a phenomenal time to be in fintech, but what I’d wish I had learned from Visa was just the fundamentals. So how does the merchant situation work? How does acquire work? How does the issuer work? How do these pieces all interplay? Who’s making money? Why? How do you create systems that take cut out of different parts of this?
What parts of their system is broken? What are the APIs is going to solve? And what won’t they solve? What is legacy and will always be legacy? Who are the players involved? Those are the kinds of questions I wish I had asked then and appreciated because it was a quick learn when you were at Stripe. But I think what I learned at Stripe and even after leaving Stripe honestly, is that the fintech ecosystem is very understood. I don’t think most people understand who’s involved in a credit card transaction, who’s making money, why all these fintech companies are now sprouting up all of a sudden, what’s enabled that. And so I think in retrospect, I wish I had learned a lot more about all of that from the Visa perspective before moving forward.
Why do you think we’ve seen so much more interest in fintech companies?
Because of the infrastructure. Now we’ve got APIs to build off of, and now you can build things like… Stripe has actually enabled a lot of businesses to build fintech into their company. So you have someone like Shopify who makes a good portion of their revenue from Shopify payments, which would not be possible unless they could build on the infrastructure without the API that was sitting on top of that. So having this API system opened up a lot of companies to then be able to build on top of it, which is a huge unlock in the whole system.
Is there one fintech startup today or one company besides Stripe or Visa that you’re most excited to see?
I think now that I’ve gone through… We’ve done all the adulting things, I guess, since we’ve moved out here and we just went through the process of getting a mortgage, and I’m obviously working with SBA lenders constantly on these deals. And I think what I now know and have appreciation for or understanding of is how bias the system is on the financial side and who gets access to loan products and why. And the reality is that I am constantly selling myself to a lender and explaining why I’m fit for this loan and why I’m good for it. And I think it goes back to the education system and the job matching system. There is a ton of bias in financial access and who gets access to what.
I don’t have any names firsthand, but I think the companies, there are a ton of them that are building more open access and more openness, I guess, towards who gets a loan and on what terms, I think is a fascinating piece of the ecosystem, just given how broken and biased it is.
Thank you, Deepa, so much for sharing your time on the podcast. It’s been great to hear about your time in fintech and then obviously your research so far. I’m excited for you to acquire a company and get to have you on the show again to talk about that. So thank you for sharing your time today.
Of course, thanks for having me.