RYAN LECHNER & NICO GIMENEZ - SEARCHING WITH A PARTNER - EP. 31

My conversation with ^[redacted]‌ & ^[redacted]‌ of Bonsai Group on:

- Running a traditional search fund with a partner
- How they've divided their role in the search
- How their owner outreach has evolved
- A niche surfing monopoly

Enjoy!


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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 Live Oak directly to start a conversation at liveoakbank.com/contactus.

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] - Barrel is a digital marketing agency that helps companies create revenue-generating websites, emails, and marketing campaigns. Clients include L’Oreal, ScottsMiracle-Gro, Barry’s, and SmartyPants Vitamins. Barrel has extensive experience working with venture capital and private equity firms to help audit, optimize, and grow their portfolio brands. To learn more about Barrel, visit barrelny.com/alex or email [redacted] and mention Think Like an Owner podcast.

Interested in sponsoring? Send me an email at [redacted] Transcript:


Thanks for joining, you guys. I'm excited to have searchers who were partners. I've had some individual searchers, but I'm interested to hear more about the partner dynamic. To begin, do you guys want to go over your backgrounds? Ryan, perhaps we'll start with you.

Ryan: It's worth knowing Nico and I grew up together. We grew up a couple houses down knowing each other since we were about five years old, and we both went to university together as well. Not only are we a partnered search, but we have a 25-year brotherhood here that we're building on, which has been pretty awesome. My background, did finance at UVA, out of school worked at Bain & Company on the West Coast, so mainly worked in their technology practice. Ended up joining Netflix, so moving down to LA at the time. This was really at a point where Netflix was moving from a second run content company to an original run content company, and got to help build out our content library and our strategy for originals, which was a lot of fun in a really dynamic time. Then I ended up moving back to the East Coast working at a growth stage technology company in New York. At that point, I knew I really wanted to do something entrepreneurial, so after a year of wandering through the desert and figuring out where I was going to plant my feet, I just got increasingly excited about a search fund. Nico will tell you his story, but he was marching down the same path and decided to go at it together this year.

Nico: On my end, also went to UVA as Ryan mentioned. We were both in their undergraduate business school there. Then from there I headed up to New York, started in the traditional finance career trajectory where I did investment banking at JP Morgan doing M&A in their health care group. Then worked at a upper middle market, private equity fund. When I joined, it was they had just closed their fit fund. It was a $2 billion fund mainly investing in industrial manufactured products, some B2B services, but very traditional kind of private equity experience, but wanted to really start something from scratch. Just always loved the concept of being an entrepreneur and building something from zero, and so left to start a niche software business doing a lot of, actually, analytics and workout management, and team management for the endurance fitness space, predominantly swimming, because I was a swimmer. Swam in college and had a strong network in swimming, so built that software business with two other friends of mine and that business is actually still operating today.

It got to a point where it was generating some really nice passive income. It's a very, very sticky, low-churn SAS product, but it also wasn't where our careers were going to end and die, so decided to move on to other experiences and from there went back on the investing side. This time, rather than doing late stage private equity, doing very early stage tech investing, so joined a venture fund out in LA and did series A, series B investing in early stage growth companies. One of the investments we made is in a company called Bird, which is now a multi-billion dollar micromobility company. If anyone knows about these electric scooters, they kind of kicked off the scooter wars. We invested in that company and shortly after investing decided to go back on the operating side and be an operator at Bird, and there kind of helped lead their global expansion strategy in operations, and so spent most of my time in Mexico, actually, building out their operations and team in Mexico.

Then during that time, just serendipitously, an opportunity came up to potentially buy out owners of a legacy health benefits business. This is before I even knew what a search fund was, but it was an opportunity that a friend of mine made me aware of, and I started digging into the business and realizing how much low-hanging fruit their was in this otherwise very, very stable business, and very quickly started dedicating all my time to pursuing that deal and ended up leaving Bird to focus on that full-time. That deal ended up falling apart at the eleventh hour, but that was through that process I started learning about this concept of search funds. That's when Ryan started also learning more about search funds. We had just been in contact, obviously, over the years around it and decided to ultimately team up and launch an official one together.

Beyond the lifelong friendship you guys both have, was there something appealing about pairing up together for a search?

Nico: Definitely. I think there's a lot that's appealing both just from a quantitative and qualitative perspective. I think there are studies, and if you probably go the Stanford search on Primer, I think there's some data that shows that partner searches tend to have a higher probability of success in finding a business as well tend to have higher returns. I think just from an economics perspective, it makes sense, but that wasn't necessarily the reason, I think, that we decided to do it. There's also something incredibly fun about doing it, not only with a friend, but doing it with someone else and not living in your own echo chamber, and getting to bounce ideas off each other, and going through the ups and downs together, and developing a very, very strong relationship. Obviously, Ryan and I already had one, but for any other partnered searches, you just get incredibly close as you go through all the ups and downs. I just think it's also more fun.

Ryan: I think we bring a lot of similar characteristics and skillsets. We both had careers in technology, similar education in undergraduate business school. We've also had pretty different routes out of school, Nico with a lot of finance skills that I don't really have, and myself being able to bring something to the table on tech product, that sort of stuff to. It really allows us to look at a company with four eyes, but pretty different worldviews and, I think, get to better decisions that way, and be able to get a lot more done.

With a tech focus, is that something you're going to focus on in your acquisition, you're going to look for tech companies, or is there some other industry you're looking for that you might tangentially apply your tech focus?

Ryan: Yeah. I think for a lot of businesses, specifically businesses that are owner operated for the past 30 or 40 years, there's probably opportunities to use technology. It could even be, frankly, digital marketing is a new channel that might not be fully realized. For us to be able to come in there and sort of bring our learnings from the tech sector to just about any company, I think it's going to be a pretty big benefit to us. I think it just gives you a fresh perspective on systems level thinking and problem solving that complements a lot of our finance, and consulting and undergraduate business school experience too.

Neither of you have an MBA. Did you have any issues with putting a search together without one?

Ryan: Yeah.

Nico: No. I thought you said, "Yeah."

Ryan: I was going to say, "Yeah, not really," but go for it, Nico.

Nico: No. We did close the fund. I think we closed it in a reasonable amount of time, so no issues. It's come up. It came up in a lot of interviews, but it was never ... I don't think it was ever a show stopper, at least as far as we're concerned.

Ryan: It's true that most search funds are raised by MBAs, probably for a pretty good reason. I think for Nico and I, having undergraduate business school experience, pretty traditional backgrounds of banking, consulting, private equity. Then some real operating also helped to be a differentiator or make us a bit unique when we were going out to fundraise, so ended up turning out just fine for us.

In your process of fundraising, how did you evaluate the investors that you chose, and if any of them had questions about not having an MBA? You obviously have operating experience to offset that, so how did that conversation go, or those conversations?

Ryan: I think it was really just playing back some of the points we just mentioned. I don't think it was a material bottleneck in too many of our conversations. In terms of choosing investors, I think the really cool thing about a search fund is getting just a ton of smart, accomplished and almost entirely kind, fun people around the table to help be part of your journey, and really was just trying to build a really diverse portfolio of people with different both experiences and then sort of skills to bring to the table. Yeah, I think getting different sector experience as well was something that was on our mind, but we feel really happy with the group that we got together.

Nico, how about you? Did you have any insights from your conversations with investors?

Nico: As it relates specifically to the MBA, I will say that I don't think I've been asked more times about my decision or lack of decision of getting an MBA than I did during those two or three months of fundraising. It's funny, because if you got asked the question so many times where for the first time I probably reflected and being like, "Why didn't I get my MBA?" It's not something that I put much weight, or thought or energy towards up until really the fundraising period. I think this is true for Ryan as well, so maybe I'll speak for both of us here, but I think for us there was never a point where we just quote, unquote, "decided to pass on" on getting an MBA. I don't think there was a point where we just really deliberated, do we or do we not, do we or do we not? I'm sure it's cross our mind here and there, but at least for me, I think this is true for Ryan too, each career decision that we took and each opportunity that came up along the way happened so organically. We were so excited about it that the idea of pausing and not taking that opportunity to then step back and go back to school just didn't seem ... It wasn't something that came into play.

I think MBAs are incredibly valuable and if you need it to get to where you want to go, but if you're kind of heading in the direction you want to go anyways, and you're excited about each new challenge that's being presented, then it's not necessary. I think all of our investors, obviously, understood that. They understood why each phase in our career, why each opportunity that we took, why that made sense, and how the experiences and skillsets that we accumulated with those opportunities is transferrable to what we're going to be doing as operators and managers of a company that we acquire. I think they understood that the real life experience that we got is highly relevant and therefore wasn't a ding against us. Maybe there were some investors that did end up passing because we didn't have our MBAs, and we were just not aware of it, but everyone seemed to understand that it wasn't a requirement.

Gotcha. Then going into your search as partners, how are you dividing up your roles amongst each other? Then what are your plans post-close, or is that something that's going to be more case by case according to the deal that you find?

Ryan: The way that we're sort of running it is that each person, essentially, is their own sales rep. You have an industry that you really like, and you're focused on. Then we're each building our deal flow in those industries and trying to find the right opportunities. It's really sort of a divide and conquer approach. Once we find a deal, I think, somebody's head is down driving the deal, and the other person is more cognizant on keeping the pipeline really going at that point. That's sort of pre-close. Nico, do you want to talk about post-close?

Nico: Yeah, although I think it will be somewhat case by case. I think it's always going to depend on what the needs of the business are. A lot of people ask us about, "Okay, well, who's going to be CEO?" At first, we were like, "Well, that'll be case by case depending on, like I said, if the business requires a CEO that has this skillset, this profile, this whatever it is." If Ryan fits better into that, then it makes more sense for him to be CEO. If I fit better into that, then maybe it makes more sense for me to be CEO. Both of us have the exact same economics, and so I think both of us are very easily able to put ego aside and say, "Let's just do whatever is going to be best to optimize the equity value that's created because that's how we end up winning, ultimately." Titles don't really matter as long as it's going to maximize how many dollars we end up taking to the bank afterwards. That's what's most important.

We've heard a lot of search partners taking the co-CEO route, which at first Ryan and I were like, "That's a lazy answer." That's just because you're scared to make a decision. Actually, I shouldn't talk too much trash about that because our biggest backers took a co-CEO role. If they're listening, I don't mean to say that you're lazy and scared of making hard decisions. We are saying, okay, we don't know if that's necessary the right path. We have heard from a few folks that the co-CEO role actually is beneficial, and there's actually a lot of merit to it, so I think we're open to that as well.

Ryan: There, it's just you avoid deflecting a lot of responsibility onto one person. If one person is CEO, and the other person does have the decision making authority on, let's say, sales or product, there's a risk that people try to politic their way to the CEO, which just creates more of a friction and bottleneck in many ways. Just to have it as dual authority and people view it as such, I think has worked really well in the past in search deals. We do want to lay out where we're functionally responsible for each part of the business though.

When you've seen other searchers take co-CEO roles in the companies they acquire, how do they usually distribute those roles in the company? I can't help but think of that Office episode with Jim and Michael where they're both co-managers of the office. Curious how you guys have seen that role distributed.

Ryan: I think one way is inside and outside. Someone is focused on sort of core operations, finance, that sort of stuff, outside being more sales and marketing. I think that's a pretty clean divide. There's other ways to do it as well, and you can cherry pick who has the relevant skillsets in the organization, but I think it ends up being pretty case by case. Each business is some sort of unique construct that needs to be handled just the right way. Then also, who else do we have in the organization around the table to help us run the business? It certainly won't be the two of us, so also want to design around that too.

If you had a situation where only one of you became CEO, would the other person then look for another deal to add another company to Bonsai?

Ryan: I don't think we'd do sort of a second search. I think there could be a case where Nico has a lot of M&A experience, for example, so a lot of his time might be corp-dev focused whether or not we are sort of co-CEOs. We both plan to be all in on a company, for sure. It might just be two different titles. Again, I don't think the titles are really the most important thing. It's really, how do we end up getting this business where we want to go with it?

How's your experience been so far reaching out to owners?

Nico: It's very emotionally taxing because you need to approach every single day with this positive mentality of, today's the day and stay optimistic. The reality is chances are today is not the day. We send out hundreds, if not, sometimes over a thousand emails a week. You really do get a mixed bag of responses, but I will say 90 plus percent of the responses are no. Then the responses that are yes, hey, I'm open to discussing and maybe do a little bit of prequalification, okay, well, are you at least this size? Yeah, we are. You get on the phone with them and most of those calls end up not leading to something that's relevant to spend time on. Then when you do end up finally like you have a fish on the hook that this is worth fighting for and worth spending time on, the probability is that it actually ends up progressing far into the funnel, let alone closing a deal is still very small. You have to approach every day with a bright-eyed, bushy-tailed mentality as if it's your first day because if you start getting a little lazy or jaded, then you may miss the one. You may miss that needle in the haystack and diamond in the rough. It's just that battle.

Ryan: I love speaking to people who have built really cool businesses in a niche that never even heard of, to think too that you can help solve a real problem for this person, which is my net worth is in this business. How do I get some liquidity without having to sell to someone that I might not want to sell to, and really put sort of the successor plan in place? That's pretty awesome. When you come across those people, it's a really joyous experience to chat to someone who's ready to make this big plunge, and you can be the right person for them to take that next step, but yeah, the funnel is so steep. A lot of people just have other goals. They want to keep growing their business and really raise some capital to put it into the company, but stay sort of full-time in the CEO role. There's other people out there who will do that, so finding the two-way fit, it makes sense why the search can take some time. It is a really steep funnel.

How much learning have you had from your first 10 phone calls or so to where you're now at your 50th or 100th phone call? How much smoother and more comfortable do you feel with answering a lot of those frequent questions that an owner has for you?

Ryan: You just have to be ready to have the hard conversations upfront without it being a complete deterrent and show stopper. You don't want to close the door too early, but just to let someone know how you think about valuation, sort of that you and your partner who are new to their industry are coming in to be CEO or CEOs. Those are conversations that maybe to a fault sometimes, but you want to put out there and let people know at the very least what your guard rails are. You definitely get more confident and polished, and having those talking points in the first conversations. I also think you're doing both sides. Just, these people are incredibly busy running pretty good businesses, so you're doing ... It tends to be appreciated, I find, when you're just very upfront on what it would take for this to make sense, and seeing if it's a fit or not.

Nico: I think I've gotten a lot better since we first started. Also, you start to identify these different seller or business owner profiles, and you start getting more sophisticated in terms of how you tailor your messaging based on what you're picking up on the other side of the line. It's just, I feel like I can navigate my way through a conversation and say the right things, or at least I think they're the right things, on owner by owner case by case basis. It's just anything. You get better at it over time. I'm sure there's still so much room to continue improving, but I feel like now I get on a call with someone, and I feel very comfortable. I'm no longer getting on the calls and being like, "Man, I hope this ..." It's just a lot less nerve-wracking.

Ryan: Advice I got really early on that just, I think, saved me a lot of heart pain was just, be humble. Let people know just how little you actually know about their business or their industry because that ends up diffusing the conversation a bit, and makes someone willing to show up, and open up and tell you about their company. I've heard of other searchers who come in wanting to prove that they're an expert, and maybe at some point you are, but people will sniff it out of you if they've spent 30 years in the industry, and you've been three months even, or even three years. They'll just say, "Nah, you're faking it." Just being humble, willing to listen. It's great characteristics of a leader of just about any organization, so starting with that, at least I find it works much better when you can put your humility on the table.

Nico: It's a trust-building exercise. You have some random name coming through your inbox. You don't know who they are. There's very little that they know about you. Luckily, we're not the first ones to do this, so there's precedent of people successfully having a succession plan through a search fund, and so we're not fighting that battle. I think if we were pioneers here, then it would be really hard to get a deal done. At least, there's understanding that this model exists, and so that helps establish credibility and trust with the model. Then it's just a matter of establishing credibility and trust with you as an individual, and so yeah. To Ryan's point, if you try to fake a little too much and they sniff that, then all of a sudden any tint of distrust is going to completely sour their perception of you and make it very unlikely that you're going to be their successor.

Ryan: There's also, I find, just in search you need to throttle your energy levels. Not to sound too West Coast on the East Coast half of our search, but you need to just make sure that you have enough energy to have the same call 10 times a day sometimes. It's way easier to do that if you're not trying to posture. I think the sell by not selling, I think is advice that I very much believe. I think so far it's getting me through the day and just getting me to better conversations.

Yeah, and Nico you mentioned a few different owner profiles. Have you figured out the different buckets of personalities that you tend to run into and how you converse with those folks?

Nico: To a certain extent, there's so many different types. Ultimately, you have folks that it's very clear that they just care about highest price, and that starts to become evident when they start getting most of the conversation is directed on, well, what multiple would you apply to my business? I think my business is worth this much. If that's where they're heading, you can navigate around that conversation, but usually, that's one profile of seller where typically that's, at least for us, a little bit of a turn off. There's the other profile of someone who will never mention price. All they talk about is their employees and how their employees are like family to them, and how they really care about making sure that everyone is still going to have a job in a year, in two years. That's a totally different profile and those, obviously, tend to work better with the search fund model.

Talking about trust, trust goes both ways. There's times where I get off the phone where everything sounds good, but you just get this vibe that they're being dishonest in some way, shape or form. For us, as buyers, that's scary because we don't want to be in a situation where we're buying a business, and then six months into it we're like, "Wow, there's this, this and this that we weren't told about or whatever it might be." It's always comforting to talk to a business owner where when they send you the numbers, it's exactly what they said over the phone. When they communicate this or send you this data poll, it's very much aligned with what they communicated. Just having things check out and match up is ... There's some business owners that are very much in that camp and others that don't have that profile.

You have your talkers. I'm guilty of this too. I think Ryan and I are both sometimes guilty of this, but you have your business owners where they'll keep you on the phone for 90 minutes if they could. It's really tough to have the heart to just shut them up, but you have those. Then you have those that like to get right to the point. They just go, "These are my numbers. This is the thing, this is the situation. If you're willing to pay this price, then we can continue the conversation. If not, have a nice day." It's a mixed bag and all is fair.

Ryan: The heartbreaking one for me is you have an owner who's ... They've got a great company. They're certainly thinking about succession, but you just know it's a decade out still or even five years out still. I love to nurture those relationships. I'd love to connect them with the right searcher when we're operating a company, but sometimes if the timing is just not right, you can't twist someone's arm into selling you your business. You certainly shouldn't try. I want someone who's ready to do it and is on board. Now if they need a little bit of time to get comfortable and get over the finish line, I totally get it. We're early enough that we have the ability to be pretty patient and still get a deal done, but man, when you know you want the business, and somebody's still got a few years of building the thing before they're really going to start a conversation, that's a heartbreaker.

Nico: Intent to sell is one of the first things we try to suss out.

How do you suss that out?

Ryan: I find it the toughest part of the process.

Nico: No doubt.

Ryan: If someone has a real life event like retirement, they're ready to retire, the spouse is asking them to retire, that tends to be a really good signal. Not always so, but it could be a good one. Also, just to understand sort of what's someone doing after they sell their business, their hopes and dreams. If there's a clear plan, like a use of time and money, that's great. Even with some younger business owners, if they just love getting from zero to one, and they can't wait to get back to the drawing board, and the idea of growing a company from $20 to $100 million is just not interesting. The numbers are interesting, but the getting up every day to run sort of a adult style company is just not what they want to do. If they have that plan and that passion, and you can really hear it that they want to get back to the drawing board with some cash in the bank and go from zero to one again on a new idea, that's totally fine as well. It's clarity. They need some sort of clarity of what comes next or else they risk just shopping for valuations or whatever.

Do you have a few stories and examples of calls where you felt like you learned the most about talking with owners?

Nico: If there's an industry that we're excited to learn more about, just thinking in one case I was starting to dig pretty deep into fire protection and safety services. There was a business owner that I got on the phone with where very quickly just realized that the company was far too small, and it wasn't going to be something that we would pursue seriously. He was willing to talk, and we developed some good rapport early on in the call, and so I just used that call to just soak in as much industry knowledge and expertise as I could about fire protection and safety services, everything from the different types of certifications the service providers may or may not, and why, and who the different players are, and kind of the different parts of the value chain, everything from the manufacturing of the safety products to the distribution, to the servicing, to the installation, to the servicing and replacing, and just where there were opportunities in those categories. That might not be a conversation you're willing to have with a business owner where you're really trying to court them to try to buy their business because they very quickly may realize that there's some shortcomings in your knowledge about their industry, and therefore maybe you won't be the right buyer for them.

Whenever there's on the phone with someone that knows that they're a potential target and just try to squeeze as much knowledge while also though ... This is always the part that try to return the favor as well. Getting off the call, if it was just the person giving you a ton of value, and they didn't feel like they got any value out of that call, then they might be like, "Okay, well, that was a waste of 30 minutes or 45 minutes." If you try to offer up what you're seeing in market regardless of whether it's specific to their industry, just this is what I'm seeing with business owners. This is what they're thinking about. They have taxes on their mind, whatever it might be, or even if it's just some charm and good humor, and you make them laugh, even something simple like that where they just feel like they left the call being like, "Okay, that was a fun call." That's usually how I try to approach it.

Ryan: I think sometimes you speak to an owner too who just ... Some people have a better strategy or better focus. When you come across that, it's really cool speaking to an owner and letting them brag about it, of course, as many people would want to. We've spoken to owners who just sort of said, "Hey, listen, if I just focus on this one customer segment, yeah, it's a much smaller portion of the market, 10% of the market, but way more profitable. I'm just going to try to get as much market share in that one segment as possible." Those businesses can do great. You find people who choose a bit of a different business model. In a lot of more sort of boots on the ground facility services businesses, a lot of people do sort of big projects that have high dollar value, but low margin.

Coming across an owner who does a lot of very small projects and can scale that a lot better once they hit a certain volume, just those little insights that people have where you are leaning forward by the end of the call being like, "Man, this is a really good strategy." It's not often the case that they're the only person in the market who has figured it out, but when you're looking at 1,000 businesses, there might be 10 who are doing the thing that can really lead to a much better business. That's when you really want to lean in and say, "Okay, let's chase this one."

Certainly. Is there a few calls where it didn't go well and you also had some lessons there too?

Ryan: This comes back to energy levels, but if you just stack up too many calls, you can end up ... To do this well, you need to have very good, deep listening skills and a high, strong attention span. I want to really understand what this business does, how they make money, why they're different than their competitors, what makes this business owner tick, why they build it, what they're planning on doing next. Do they have a reasonable price expectation? That's a lot of questions, but a lot of the calls should be deep listening and picking up on the little nuances on their answers that can give us some indication on whether or not it's a good fit. I think if you're catching up on 50 emails in the inbox and half listening, or you just don't have an appropriate understanding of what their company does, you can get into a pretty bad conversation very quickly.

Nico: I, unfortunately, don't have any horror stories or bad call. I wish I had more. I wish I had something where I was like, "There was this one time I was on a call with a business owner and they were just like, 'Fuck you! You suck! I'm never talking to you again,'" or whatever it might. We've gotten some of that language in email responses, but generally when you get on the phone with someone, not to say it's boring. We geek out on this stuff all day. We love picking these people's brains, but man, if you were a third party listener, you'd be like, "This is the most boring thing ever." No cool stories, at least so far. I hope some come up.

Ryan: I have a folder in my Gmail called, "Rejects." It's about 30 different just very mean emails that people sent me in response. I'm looking forward to maybe on Nico and my's 10th anniversary as business partners bringing out a binder of that because it's really humorous. You just have to take it in good stride. I think the one place Nico where I'd say it certainly is a good laugh is when you get on the phone with a business owner, and they're just categorically way too big for you to buy and be like, "Yeah, I don't think I could really buy a $500 million business." What's funny, I don't know why this is the case. It might be a bit of self-selection, but they tend to be the nicest people when we've had those scenarios. They're like, "Tell me more about what you're doing. It's really cool. I wish I did that when I was your age," and not afraid to impart advice. I think for the most part, again, they're choosing to get on the phone probably knowing that you're a bit of a time waster, but I have found that. While you're a little bit embarrassed when you get off the call, it ends up being probably a pretty good conversation still.

In that sense, when you have a bad phone call that doesn't go well or you get a bad email, how do you make sure that you get your mind right for the next call or the next interaction, and you don't dwell on that for too long?

Ryan: I just tend to call Nico and laugh it off a little bit. I think that's the best strategy.

Nico: This is, I think, a benefit of just having been operators in the past. As an operator and manager, you develop a pretty thick skin to things. Things always go wrong, or people are always complaining. You just develop a thick skin to it. You never take anything too seriously or too personally. If you did, man, I would be in a dark place.

Ryan: I'd rather just have someone punch me in the face really hard three times a day than just someone flicking me in the back of the head all the time. Just let it out. Tell me why I'm wasting your time. If I'm not, great. We can get to work here.

Yeah, there's something about being able to separate yourself personally from these situations that even though it's like if you get an owner on the phone, and the deal works, it's a hugely life-changing relationship, but also knowing that it's also probably not going to work out, so having some separation between your personal emotions and excitement in what is a pretty major decision. From the outside looking in, it seems like it's something that would be really difficult.

Ryan: I think along those lines, I think Nico and I believe that we can give someone a pretty life-changing outcome, a retirement plus a great succession plan for their business, plus a number of other benefits, legacy. Just, when you have conviction in that mission, in that value proposition, again, you're not really selling at that point. We just, hey, if it's not the right thing for you, we're certainly going to find someone for whom that is the right thing. Without being arrogant, I think just knowing that model is going to work for someone, and we're going to find the right two-way fit, I think we've already found a number of people where that would be the case. You can stay motivated on that because I think the reward is really good for us, and it's really good for the business owner as well.

What's one thing you're trying to learn more about today that you've devoted a lot of focus and energy to?

Ryan: Well, I don't know if it answers your question directly, but I think the thing I wish I knew when we starting a search fund is just the game changes each step of the process completely. It's almost like a Rubik's Cube where you take one step forward and everything kind of switches. Going from fundraising to launching a search fund, revving up the engine to full blast, and then once you're actually pursuing a deal, it just feels like almost a completely different use of time. Then you end up taking a step backwards if a deal falls apart, so agility is something that I don't hear people talk enough about in the search community. Certainly, it's a topic, but it really is important to stay agile, being ready to just change what you do every day 20 times over in a single day. I don't know. Does that touch on your question at all?

Yeah, that's a great one. Absolutely.

Nico: To that point, there's just so much that's outside of our control, even the fact that we launched this search fund in the heat of the pandemic. We closed in April, launched in May. That was very much in the thick of things as it relates to the current climate that we're all living through. Those are things where, again, like I was mentioning earlier, in terms of just having a thick skin, these constant changes and the need to be agile and to adapt to things that are completely outside of your control is things that you do learn as an operator and just things that you get comfortable with. We're dealing with issues now during our search whether it's we get flagged for spam and our emails are ending up in the spam box, or we have a global pandemic going on, and everyone's numbers are out of whack. Whatever it might be, there's constantly things that are getting thrown our way. It's just important to stay cool, calm and composed, and not be reactionary. That's the biggest thing. I think we're fortunate that we both have had that mentality kind of coming into this, but it's one of those things where if you don't have it, you need to learn to get that type of mentality quickly. Otherwise, you'll drive yourself insane.

Ryan: The day that we finished our fundraising road trip is the day that I drove back from Boston, and Nico was on a flight back to LA. That night I'm sitting on my couch with my wife just watching TV. We look at our phone and the NBA is canceled, and then Tom Hanks gets coronavirus, which pretty much is when coronavirus became really scary to a lot of people though it should've been well before that in the US. It's just luck of the draw. We were like, "Wow, okay. We're starting at a really interesting time for this." We were a little bit patient in officially launching our fund, but I think we were almost a bit lucky because we just simply didn't know any better on what a search should or could be like. We were so excited to get going that there was no deterrent at all. I think we were running full blast from day one, so can't control the timing. I think as Nico was saying, just to make sure that every day you're just ... Obstacles will be thrown your way. You'll get past them even if it is a global pandemic, economic collapse, a really daunting, formidable time to start a search, but got to keep on keeping on and take it one day at a time.

Nico: At first, we were scared that we weren't going to be able to have any in person meetings and obviously, it's hard to build that trust that we were talking about earlier and rapport without meeting someone face to face. Over the last month, Ryan and I have had a fair share of in person meetings. They vary in levels of strangeness in terms of I had one meeting where it was what felt like a 20- or 30-foot long conference table and the owner was on one end, and I was all the way on the other end, and we were wearing masks. Now, completely understand. The owner was 74 years old and wanted to be extra cautious. I was actually surprised he was even open to meeting in person in the first place. It was one of those things where normally the meeting is focused around building rapport, and there it was focused around understanding what they were saying because it was so muffled and so far. You have things like that that are little unique.

Recently, we've gotten better about how to do these in person meetings in a very non-threatening way to some of these older business owners, and people have been open to meeting in person. None of these problems that we're dealing with are going to ... They all pale in comparison to the problems that we'll be facing as operators. I'm just convinced of that. We felt that first hand. These are small issues, so nothing that's a show stopper.

My first closing question is, what class would you teach in college if it could be about anything you wanted? You want to start, Ryan?

Ryan: It's maybe a bit of a nerdy answer. I'm not sure I'm the best person to do, but I feel like data analysis for business school students, like data analytics, and then just statistical thinking. You can do so much more using advanced analytics than you could just using a spreadsheet and get better answers faster. I think it's a great skillset. Then just having a statistical framework to approach the world, thinking about things like sample size. Do you actually have enough evidence to make a decision at this point? There's just a lot of, I think, learnings that you could apply to every single business problem that you're going to face.

Nico: That's a class I should take and wouldn't take.

Ryan: That's why you've got me.

Nico: Just because Ryan is teaching it, actually. No, just kidding. I'm actually very glad that Ryan is as analytically minded and data driven as he is. I consider myself a analytically minded person, but I definitely don't have the innate capacity that Ryan does to think through these scenarios through a mathematical and statistical lens. If you do a partner search, find a partner that has that mind, without a doubt. I think for me, the class that I would love to teach is ... I would love to take this class or teach a class all around different cognitive biases and mapping out every cognitive bias out there, everything from confirmation bias, to loss aversion, to the IKEA effect, to social biases. I think it's really important to be mindful of some of the shortcomings of our mental models and heuristics that we view the world and make decisions on, and to the extent that we can be aware of those not only makes us more empathetic individuals, but also it makes us better decision makers. I think it's really important to understand those mental biases and limitations.

What's the IKEA effect that you mentioned?

Nico: That is where you assign a disproportionate amount of value to something that you helped build regardless of its true worth. That's actually really relevant for understanding that bias to a certain extent is it's obvious when you think about it, but it's also relevant to what we do because these business owners often times have built this from the ground up without taking any capital funding, and really building it organically. It's only natural for them to assign a value to it that may be disproportionate to what it's actually worth. That's something that from a valuation perspective, we battle with. Again, that's a bias that isn't just true in whether you're building IKEA furniture or a multi-million dollar business. It's just these biases are prevalent in so many different forms, and I think it's important to be mindful of them.

What's a belief you used to hold strongly that you've changed your mind on?

Ryan: It's funny. I think coming out of school and out of management consulting I felt to really have a positive social impact, would want to plant myself at a pretty socially minded organization. I think what I have grown to appreciate is that you can have a really big impact running a local business of any sort of flavor, creating jobs, helping your community develop and advance, having a much smaller, but much more direct impact on the world around you. If we lived in a world full of people doing that, and I think in many ways we do, we'll be in great shape. Going local is something that I just don't think I appreciated enough in the past.

Nico: Something I used to believe that I changed my mind on, probably the existence of Santa Claus. It is the first thing that came to mind when you asked the question, and it's part a half joking response. I very much remember the moment when I found out and realized that Santa Claus wasn't true, and that was one of those moments where it turned me into a lifelong skeptic, not necessarily in a negative way, but by all means I very much question many things. It also made me realize that, wow, something that you can believe so deeply, it can just not be true. That is something that now Ryan and I always talk about how we have very strong opinions, but they're loosely held and that's something that I just feel like I've carried on with me since that very earth-shattering moment.

Ryan: It's funny, actually, that you mentioned that. At Netflix, we had this concept called idol smashing, which is take the most sacred belief that everyone just assumes to be how we do things at Netflix. If you could just prove that it's not a good decision, you'll get promoted two levels. It very much ties to that. We all fail to do that in a business context frequently. This is just how it's done, so I think that's a great example.

20 years from now, what do you think you'll look back on and see as your Santa Claus of today?

Nico: It's a scary thought because I'm making real life decisions based on what I know to be true. If 20 years from now I look back and realize that one of those things wasn't true, then I made a ton of decisions predicated on this completely false assumption. That's a scary thought, so I hope the answer is nothing. There's no doubt that all the beliefs I hold today are unequivocally true, so I'm sure there's something. Let's see. This will be a lot easier said than done when I have all the money in the world, but it's not all about the money. There's studies that show that's true, but the reality is my driving force is money and accruing wealth. I put a lot of weight and time into that.

Maybe 20 years from now I'll be like, "I shouldn't have sacrificed so much time with friends and family, and instead have put more time into those things." I almost know that's true today, but I also know that 20 years from now I'm going to be in a position where easier said than done because now I have all the money in the world, and I get to spend all the time that I want with friends and family because I get to fly them out to whatever island I'm hanging out on. Hopefully, that's my Santa Claus of 20 years from now.

There's a friend of mine who was talking to somebody who was saying, "I want to have $30 million by the time I'm 40. I don't care what it's going to take, relationships, family, friends, work hours, life balance. I don't care what it takes, I'm going to get there." It just seemed kind of hollow. There's no inherent goal there. You could buy more stuff, sure, but your life won't be that much different, I would think.

Ryan: I think a mistake that a lot of people in our generation make, and myself very much included is that your work defines your importance. I would elect that as a Santa Claus. Ultimately, what you accomplish is not at all reflective of how other people that care about you are going to think about you. It's the way you treat people, all the stuff that Nico alluded to. That would be my Santa Claus.

I like it. What's the best business you've ever seen?

Ryan: This might be cheating on my behalf since I worked there, but Netflix never ceases to amaze me just in terms of being able to reinvent itself from a DVD company to a streaming company, a streaming company to an original content house, and then really a US Hollywood dominant service to a multi-national best content around the world. It's so impressive, and it speaks to culture, willingness to listen to the data and just relentless focus. If you can do all those things right, you're just pulling ahead from the pack. I'm so long on the company compared to competitors. I think that's a big part of it.

I think the other thing is just actually and on the first last question you asked me around data analytics, being able to understand what people want by really studying it with teams of data scientists and analysts is such a differentiator. Most of Hollywood is four to six genres that they program against. Netflix has hundreds. They're able to just look so deeply into what are the different trends in content patterns that people want and make really smart decisions around how to create as much joy as possible with their subscriber base. There's not a lot of other companies doing that, and it shows in just everything in their financial performance.

Nico: I think, for me, and I don't know too much about the inner workings of this company, but Surfline. They do surf cams and daily surf reports for surfers. Their tagline is, "Know before you go," so you know all about the conditions before you actually get on that wetsuit and run out, or drive out, whatever it might be to go surfing. The reason I think that business is interesting is because they do have a subscription model. It's whatever, $100 bucks a year. I don't know a single surfer that isn't subscribed to Surfline. As far as I can tell, their costs aren't too crazy. They just have, from what I can tell, a complete monopoly on this niche that is big enough to just be one of the most interesting businesses I've seen.

It's still a very, very big market, but it's small enough and also non-consequential enough where no one cares to cry monopoly and cry foul on their monopoly in this market. There's no trust busters coming in and being like, "The surfing market needs more competition." Not that they're completely ripping people off by any means. I think they operate in a very ethical way, but they do have a complete monopoly on a, I would imagine, multi-hundred million dollar niche. I think that's a great business. It was founded in the 80s, and it's been very, very tightly held. As far as I know, never raised outside capital and just prints money.

Nice. What do you get with $100 a year? Is there a free version as well?

Nico: The free version, you get one or two days in advance of forecasts whereas the premium version you get two weeks in advance. You can see swells that are building up and coming through well in advance. You also get ad-free surf cam vids. You can rather than needing to wait 15, 20 seconds to see another 10-second clip of the waves in whatever local search spot you're going to, you just get uninterrupted surf video. Then there's a couple of little things here and there, but those are the big ones. If you surf more than couple times, it's worth the subscription. Like I said, I don't know a single person who doesn't have it.

Do they own the cameras that are on the beach?

Nico: I think so. This is another cool think about the company, is that they've totally tech-enabled their services over the years. It used to be a scenario where it was 50 cents a call. You would call in, and they would give you the surf report. That was back in the 80s, and the 90s and early 2000s. They charge 50 cents a call. Now they've installed these HD cameras as famous surf breaks. I don't know how much those cameras cost. I can't imaging they cost too, too much. Then once they're installed, it's kind of infinitely scalable from there. I imagine the pay back is great on them. It's like I said. It's not like the more people they have, the more cameras they're necessarily installing.

Are you going to reach out to them to try to buy them?

Nico: Yeah, there's no chance. They are a massive business. They're in Huntington Beach though. Like I said, I think they're low key. The original founder, unfortunately, passed away six or seven years ago. Whoever owns that business, I think they're the low key richest people in Huntington Beach, if not all of So. Cal. I don't see them selling. They'd be too expensive for us anyways.

We'll have to get them on the podcast. That'd be pretty sweet. Thanks for joining me, you guys. This was awesome. I loved talking to you guys about being partners in search and your experience getting on the phone with people, and hearing about interesting businesses. Thank you very much for your time, this was awesome.

Ryan: Yeah, thank you for having us.

Nico: Yeah, thanks, Alex. Appreciate it.



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