Are you pitching them a very long horizon or are you saying that you can return their capital at an ongoing rate?

We can be a little more patient. So taking 3X on the investment seems like a high cost of capital, but when these emerging growth companies have no other option, we need to try to unlock that capital by making it attractive to these LPs. But where we do have some leeway is not taking cash out of that growing business really quickly because we have to. The complexity of the operating companies, the families that own those operating companies, owning their pro-rata stake in the growth company portfolio, because they own that pro-rata on leverage we can stretch those payments out which allow the companies, the underlying growth companies, to recycle a fair amount back into their business for growth. So the idea is from years 4 to 13 if we can recoup greater than a 2X return at a portfolio level from revenue share, that's a healthy return. Oh by the way, if you've, in that time period, built sustainable businesses that can recycle the free cash flow that you helped them generate, they can recycle that back into future growth, and these are good, healthy, sustainable businesses, our LPs still own an underlying equity option in those businesses. Some of the biggest exits that we have from the Pittsburgh region are not high tech growth companies.

There was a dog food company in Meadville that did co-packing or white label for Rachel Ray, sold to Smuckers for $1.9 billion. That took decades and generations to get there, but a lot of our LPs have a perpetual mindset because they're family offices. Owning that underlying equity option in a really healthy business that has the ability to grow, particularly if they're operating in a relatively nascent market, potentially attractive to them.

When you think about these cash flowing businesses, is there a type of business that you like or dislike? What sorts of businesses are you going after and is there a requirement on the characteristics of the owner specifically as well? Yeah, a lot of it comes down to mentality. Getting to know and understand how they think of that asset. Are they thinking of it as a financial asset? Well, it's probably a little less attractive to me. Are they thinking about it as a means of storing wealth through time to hand on to future generations? Well, if that's the case, they probably have a feeling around running lower debt levels than their financial advisors are telling them they could. And they know, well that's how we've been able to withstand cyclicality. That's how we've been able to withstand recessions and the like. So a lot of it comes down to mindset but the characteristics are then manifested in how they run their business and how they manage their balance sheet and really what their optimizing that business for. So what is potentially really attractive to me from a mindset standpoint also is we do have entrepreneurs coming out of these universities that are operating in these extremely nascent markets of AI and robotics, and it's really interesting cool stuff.

And in the traditional model of investing in them what we're asking them to do is to guess what the market's going to need eight years from now and go make that. What's potentially way more interesting is if we have an LP base that owns an entire asset, owns an operating business, that is in a cyclical business, they have to plan around that cyclicality and actually many of them have a mindset where they know some of their competitors, especially the ones that are backed by private equity, are not planning for that cyclicality or seasonality potentially as they should. So what happens is is there's downturns and there's opportunities for consolidation and they can be the beneficiary of that because they've maintained a really healthy core. So if you can take that mindset where you're always looking for growth as this older, more boring cash flowing business, you're always looking for growth, but you're really only going to swing for the fences maybe one year out of 10. And even then you're not really swinging for the fences.

But you're willing to wait for that fat pitch. If you can take that mindset, someone that has to operate a business in a very cyclical industry, and transfer some knowledge that they've learned over decades or generations to a roboticist who is trying to commercialize something, they might have some sort of a product that they can sell to someone at a profit, but it might be a small market. Might be a small but addressable market. That's not attractive to traditional venture. But if we can fund them in a fashion that allows them to build a smaller, but sustainable component to their business to generate revenue and to generate free cash flow that can be reinvested back into research and development, how nice would that be? If you were actually generating enough free cash flow that every time you wanted to do more R&D you didn't have to go beg an investor for it. And further dilute yourself. So that's the idea is that if we can bring that mentality of operating a large business in a cyclical industry and take that patient capital approach to these roboticists and to these people that are commercializing these really interesting things, there's a potential that there are a few companies where that might be a more attractive option for them.

And if they can sustain on the nascent market as it becomes less nascent, they will be very well positioned to swing for the fences. And at that point in time my bet is that when they start asking people in Pittsburgh for money to capitalize on that growth opportunity, they're not going to come back saying these people are too risk averse. Because these people will already be engaged with them they'll already see them working, they'll know that they understand their business and can operate a profitable business, and now when there's a growth opportunity that's massive, they'll see how much money and how much support you can get from a city like Pittsburgh.

So with your two funds you have venture type investments in one fund, i.e. creating new businesses, and then you have ones that have existed for quite a while and are more at the cash flowing level. How do you think about the two types of investments? Usually when I come across a micro PE or permanent capital type firm, they're usually just doing the cash flowing and not venture. How do you think about combining the two?

Well we'd like to take smaller businesses and get them to a place where we could potentially recap them in the future. So we want to optimize them for free cash flow generation. So again, it's transferability of learned lessons for building sustainable cash flows. Who better to educate and invest in in a fashion that allows these growth companies to optimize than the people that have already done it even if it was their great-grandfather or great-grandmother that funded the business? They understand how nice it is to own a goose that lays golden eggs. That's the way that I think about it. So some of these companies may be venture-able that we're investing in, and they are opting for personal reasons not to go the venture route. Others just might not be venture-able, but they can still fit into our mold because as a result of the complexity of the structure we can invest in a fairly diverse basket of growth companies. And again, to Brent's point about money not being a commodity, money is attached to people and when you're giving somebody money on specific terms that directs their behavior, we like the Indie VC style terms because we believe that it will influence people to optimize for building sustainable revenues, building real good core businesses.

And that's what's so important is we're taking things that people are doing in the permanent capital space or in the junior equity space, we're taking what Indie VC is doing, and we're doing it under one umbrella, in one region, for the idea of creating more sustainable, large businesses here in this region.

To view the rest of the transcript, visit my site here: https://www.thinklikeowners.com/podcast[redacted]andy-ellis-localize-capital-tlao-ep-8