Will Smith (podcast host) (2:56)

Wish they'd known before closing.

Host 1 (possibly a podcast host or moderator) (2:59)

If you're considering buying a business with your partner or just simply curious about how others have made it work, this webinar will give you an honest look at what it really takes to balance love and leverage. It is this Thursday, September 4th at 11am Eastern. Register at the link in today's show notes or on the Acquiring Minds homepage.

Will Smith (podcast host) (3:23)

Acquiringminds Co.

Host 1 (possibly a podcast host or moderator) (3:35)

Welcome to Acquiring Minds a podcast about Buying businesses.

Will Smith (podcast host) (3:39)

My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it.

Host 1 (possibly a podcast host or moderator) (3:48)

You know that one of the most common levers to pull in a target acquisition is technology updating the systems of a business. That may still be running off a spreadsheet or even pen and paper. But tech is complicated with tons of solutions out there. So choosing the right cloud platform, CRM, telephony, compliance and cybersecurity, not to mention implementing all that, is a job in itself. Acquiring Minds Guest Nick Akers knows this firsthand. As a former searcher who now owns Inso Technologies, Nick has seen the tech challenges searchers face when acquiring businesses. His team at INZO regularly works with searchers and their acquisitions, offering a complimentary IT audit of the target company. Nick takes a personal interest in all their searcher clients, drawing from his own experience in the search phase. Enzo dates back to 1989. So this is a company that has managed the tech for hundreds of small businesses over decades. And one last thing, no long term contracts with Inzo, a big differentiator. Check out enzotechnologies.com inzo or email Nick directly at nicknzotechnologies.com and don't forget to tell him you're a searcher.

Will Smith (podcast host) (5:12)

Felipe Corquera welcome to Acquiring Minds.

Felipe Corcuera (guest, co-CEO of Beaker) (5:15)

Thanks Will. Thanks for having me. This is great.

Will Smith (podcast host) (5:19)

Felipe, you bought a process automation business in 2022. The teaser on your deal as you raised for it, didn't even mention the two letters AI. A few months later, ChatGPT is released to the world, presenting a potentially existential threat to the business that you had just acquired. It has been a ride. We're going to hear about that and much more. Let's start with a little background on you, please. Felipe.

Felipe Corcuera (guest, co-CEO of Beaker) (5:51)

Yeah, of course. So quickly, about Me I'm I was born and raised in Mexico City from a sort of bicultural family. So I went to German school my whole life in Mexico. Became an engineer, which I thought was going to be my path, but turns out I ended up working as an investment banker at Goldman Sachs, doing M and A. Turns out lots of engineers end up in investment banking. So I did that for about four, four and a half years, splitting my time between Mexico City and New York City. And while I was there I learned through a coworker's brother about search funds. And I thought it was fascinating, but it was quite sort of distant from me. Being an investment banker. It just sounded like a fun side story or a Fun gig for somebody else to pursue. But then 2016, after those four years at Goldman, I moved to Boston to get my MBA at Sloan. And while I was there just exploring non banking related things, I learned about search funds more deeply and met the co founders of a fund up in Boston called Relay Investments. And so I interned with them in 2017, learned about the search fund model more deeply, loved everything about it. And so when I went back to my second year at Sloan, I had a tough decision to make. Whether go back to Goldman Sachs, you know, take my sponsorship and pursue the easy path or say, you know, this is not sort of what I would like to do full time over the next decade. And so I turned down my return offer and rejoined Relay as a full time switch run investor. So went back full time. 2018 after graduating, went back to Relay as a search for investor. I moved from my 30,000 employee company to a four employee fund. And that created a lot of new dynamics for me. Suddenly I was in charge of evaluating deals and talking to searchers and going through due diligence without much oversight or supervision. And I really loved getting into the nitty gritty of looking at deals and working with these amazing searchers. And over the years and I was at Relay for three and a half years or so, the interest of jumping into the sort of dark, dark side of searching just grew stronger and stronger in me. And then eventually in 2020 I met my now search partner or co CEO Antonio and we chatted for about a year. He was at Stanford at the moment. I was still at Relay. We got to talking and to knowing each other and you know, at some point in the, in the spring of 2021 we felt like we could actually do a great search together. And that was a moment where I decided to transition out of Relay, partner up with Antonio, brought Relay on as one of my investors, along a few others and yeah, move to Texas to pursue search.

Will Smith (podcast host) (9:02)

Great, that was great Felipe, thank you for that. Let's spend a little bit of time on your. The chapter that you're at Relay. Relay was something of a startup, traditional search investment fund. So they would invest in traditional search funds. Correct. And you were employee one or two other than the founders?

Felipe Corcuera (guest, co-CEO of Beaker) (9:25)

Correct, correct. I was probably the second or third employee. I don't know if how much of a startup really would be, I mean size wise it was definitely a startup, but the funders had been investing personally and through the fund for probably 15 years or so. It was startupy in the sense that the scale allowed for little structure in the back end to just to be there in terms of CRMs and financial models. And a lot of those things were startup B, but the track record was already there.

Will Smith (podcast host) (10:02)

Anybody who knows the world of traditional search funds would probably recognize the name Relay. It's one of the handful of funds that invests regularly into this asset class. Is that a fair way to put it?

Felipe Corcuera (guest, co-CEO of Beaker) (10:15)

Yeah, that's correct. Another point about that is the founders both went to Stanford Business School and they sort of built their initial search fund network around the Stanford ecosystem, which is pretty strong in the traditional search fund model. And so they, they were MBA students at Stanford. Then they became searchers, operators. One of them did a second search fund and then they moved on to other things and started investing in as individuals in search funds. So that sort of that, you know, coming from Stanford Business School allowed them to build that, you know, that network that they still leverage today.

Will Smith (podcast host) (11:00)

Yeah, that chronology of searchers, then operators and then I guess one of them, a second time operator, second time searcher and then investors is the common pattern. You know, you, the becoming an investor is sort of the end point after you've earned it. And in some sense you went in reverse. Now, maybe you weren't an investor, you were working for investors, but you were doing the motion of investing. You were diligencing these deals and talking to these searchers and, and doing a lot of the analysis of search investing, lower middle market investing. What, what made you want to go from that position where a lot of people want to end up into being an operator?

Felipe Corcuera (guest, co-CEO of Beaker) (11:47)

A few things. It's a great question and it's a rare path for sure, but a few things. The first one was being an investor is intense in the sense that there is a lot of deals you're looking at, but to some extent you're looking at deals from the sidelines, right? You are coaching the searcher who's playing the game on the field and you're supporting them and coaching them, but you don't actually have your shoes on and you're not running behind the ball in a way. And I had never done that coming from investment banking. For me, doing that playing the game at some point was interesting or exciting and I wanted to try it at least once. I probably have 30 years ahead of me, so I could spend a few years searching and operating just to get a sense of what it is like. And the second reason Will, was because I was already sitting at boards and sometimes as a board member, sometimes as a board observer, but throughout my interactions with searcher CEOs and other board members. I realized that the best investors were the ones who had gone through the search journey themselves, who could speak from experience, who could tell stories about war times when they did this and that and how they solved it and their mistakes and all those things. And I was the Goldman guy, you know, really good at financial modeling, but not really having war stories to tell myself and rather just replicating stories that I heard from others. And I felt like, you know, if I eventually want to go back to investing and be a great investor, I'd rather get some scars myself and you know, and be able to speak from experience. So those were the two main reasons why I switched over to search engine.

Will Smith (podcast host) (13:34)

Great. And do you feel like that thesis or hypothesis that you had about earning some front lines experience is in fact, I mean you're in it today, but is in fact giving you the experience you think that will set you up for a, a career as a yet more successful Investor?

Felipe Corcuera (guest, co-CEO of Beaker) (13:54)

A hundred percent. 100%. I've been, I mean since, since I'm searching, I've also been investing a little bit, I mean micro scale investing in search funds. But I already realized that being able to talk tactically about sourcing engine and tech stack and email campaigns and how to do this and not do that is already hugely valuable to searchers that I talk to. It's just a level of detail that I would otherwise never be able to provide to searchers.

Will Smith (podcast host) (14:25)

Yeah, great. Another thing about your time at Relay is it exposed you, or at least in a very deep way to the lower middle market in the opportunities here and buying businesses here. Prior to that at Goldman, you'd been working on billion dollar transactions. What, what did you find in that contrast?

Felipe Corcuera (guest, co-CEO of Beaker) (14:52)

The biggest shock is you need to be okay with imperfect information. When I was at Goldman, everything was perfectly baked. The buyer or seller had already provided great depth of information, perfectly structured, everything works smoothly. I mean as far as due diligence goes, whereas in the micro cap or small cap space, maybe there is not even a customer cohort analysis or maybe there is no, the balance sheet doesn't balance or things don't tie. And you have to be okay with that because you're buying from a reporting perspective, imperfect businesses. So that was a big shock. And the second one was because as an investor you're putting in small checks and you're only holding 5 to 15% of a cap table. You need to be okay relying on other investors throughout the due diligence phase, meaning sometimes we were looking at a deal with a searcher and they go and said hey, by the way, this other investor did this and that diligence and this is what they found or what they discovered. And we would call that co investor and say hey, what do you think about this deal? And let's spend 20 minutes talking about it. And we had, we didn't have to, but we did sometimes rely on some of the efforts other investors did and vice versa. So I think those were two big ones.

Host 1 (possibly a podcast host or moderator) (16:20)

The team at Aspen HR recently published.

Will Smith (podcast host) (16:22)

A short white paper targeted at searchers.

Host 1 (possibly a podcast host or moderator) (16:25)

Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition.

Will Smith (podcast host) (16:33)

Into CEO and owner of the business you bought. The link to download it is in the show notes.

Host 1 (possibly a podcast host or moderator) (16:39)

Aspen is a professional employer organization or peo run by a searcher for searchers. Search fund veteran Mark Sinatra runs the.

Will Smith (podcast host) (16:49)

Company which provides HR compliance, flawless payroll.

Host 1 (possibly a podcast host or moderator) (16:53)

Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for.

Will Smith (podcast host) (17:00)

A fraction of the cost.

Host 1 (possibly a podcast host or moderator) (17:02)

Go to aspenhr.com or contact Mark directly@markspenhr.com.

Will Smith (podcast host) (17:11)

What about the market itself? The search space and ETA space gets a lot of attention, has gotten a lot of attention because there's perceived to be a lot of opportunity here. The retiring boomers, that, that is probably overstated, but the lack of professionalization, just so many, so much low hanging fruit in this, in this part of the market, the lower or lower, lower middle market that a hungry young person with, you know, a new set of eyes can come in and really move the needle on some of these businesses. I remember you saying something to that effect on our pre call. Can you elaborate?

Felipe Corcuera (guest, co-CEO of Beaker) (17:49)

Yeah, so a few things I think first of all, the way search fronts are structured allow for searchers to read through the noise and identify great business opportunities or investment opportunities, for example. What I mean by that is a searcher will be fully vested in finding one business in two years and because they have that time, they can presumably spend weeks looking at a deal and understanding why EBITDA dropped from year three to year four and really going deep into sort of those company dynamics that are sometimes messy and disorganized. A larger P fund probably doesn't have a lot of time to vet deals as intensely as a searcher does. Right. So that is one part that's interesting. The other one I think comes around valuation. One thing that I noticed was companies of the size of search funds typically have similar multiples because of their size, not their industry. And it's sort of counterintuitive. But when I was at Relay, for example, looking at deals, it felt like all deals had to be in the four to six times EBITDA range for some weird reason. And maybe they're worth less or more, but just because of their sheer size, they were worth similar multiples than other companies of similar size in different industries. I don't know if that's a common theme and speakers you've talked, you've talked to, but at least that was another thing that I, that I realized was interesting.

Will Smith (podcast host) (19:25)

Well, and I, I think, but I think the second, you know, conclusion from that, first of all, to contrast it to larger, much larger businesses or industries and certainly the public markets industries have, there's a wide variety variation in multiples based on industry. So X industry will have really high multiples, Y industry really low multiples based on what the market's perception of the potential of that industry is at any given moment. And so what you're saying is it's very curious that there's no reward or penalty in the lower middle market for the industry. It all comes down to almost, I mean, let's not overstate it. But so much of it just comes down to the EBITDA and the size of the business. And so therefore you can maybe find great opportunities in industries that should be commanding a higher multiple because they're attractive industries but are not.

Felipe Corcuera (guest, co-CEO of Beaker) (20:27)

Yeah, especially in proprietary deals. The moment that a broker comes into the, into the mix, like you said, you know, you know, proportions will be different when you find a small enough business, meaning under 3 million of EBITDA that's proprietarily sourced. There is no broker in the game, you know, and you're just directly interacting with a business owner. There is definitely a bigger chance that you can compare this business with a similarly sized business of another industry. Sometimes will. And this is something that happened to me when I was searching. Sometimes you will have conversations with business owners along the lines of, you know, I would ask them, how much do you think your business is worth? And they would say, well, anywhere between five and 15 times EBITDA. And I was like, okay, the only thing you're telling me is you're actually not a motivated seller. You're not selling your business if you had a clear valuation range in mind, even if it's lower high, but at least I'd know that you're willing to sell. And in most cases, once the range narrows, it will be going down to the lower end. So motivated sellers may just say, I think it's worth six to seven times EBITDA, some will say 14 to 15, but those sort of high range expectations will usually come from B2B services owners comparing their company with what their pal who owns a SaaS business got for his business. Right? Like, hey, my friend runs this software company and he got 15 times EBITDA. Why wouldn't I get 15 for my H Vac maintenance business? Well, it's different, but once you educate them and talk through dynamics of the industry and, and the fundamentals of the business, then they will presumably be willing to receive a lower price.

Will Smith (podcast host) (22:15)

Yeah, yeah, great. Yeah, I had not heard that that valuation specificity of, of a seller is a, a tell as to how serious they are about actually selling. Yeah, it's. And also on the second, that second kind of example that you just gave on SaaS versus H Vac, even down here we should call out SaaS. SAS actually does command different multiples even in the lower middle market. Right?

Felipe Corcuera (guest, co-CEO of Beaker) (22:43)

Yeah, for sure. I'd be careful about paying a lot for SaaS since our friends at ChatGPT came out just because the entire world of agentic AI, and we'll talk about this later on, but the world of agentic AI poses a huge threat to SaaS businesses. And maybe when I was at relay back in 2018, 2019, looking at SaaS businesses, the heavier the code and the more robust the infrastructure and just the bigger the animal the better. And that's not necessarily an exciting thing in SaaS businesses today because heavy code and lots of just like millions of lines of code means it's really hard to update and improve your product. Whereas if you have lean code and just like easier to upgrade technology, then your company might be worth more. So just that concern about SaaS on AI. But yeah, in general it should be more expensive.

Will Smith (podcast host) (23:47)

Well, also code itself, there used to be a perceived premium with every line of code because it costs so much to, to have those lines of code written. Now that we've got vibe coding software development itself is not necessarily perceived as valuable. I mean we are very in a moment of flux there. So let's not let me not overstate it, but, but it sure does seem like, I mean, I see clickbaity but still intriguing headlines about how SaaS is going to be eaten by agentic AI and, and SaaS businesses. I, I do get the sense are, are very concerned and of course software developers are very concerned. It's just a, it's just shocking what has happened to software in the last few years thanks to ChatGPT. And you sir, are, are kind of right in the middle of that. So we're going to hear much more about it. Great. So you decide to do a search yourself to get in the game and you partner with Antonio. Why do a partnered search?

Felipe Corcuera (guest, co-CEO of Beaker) (24:52)

So while I was at Relay and you know, by interviewing and meeting and working with so many searchers, you. You can't avoid doing some soul searching yourself. And I, I realized and. But just by thinking about what makes a great searcher and looking at myself in the mirror, I realized that I, I'm not a jack of all trades. I'm very good at some things and very bad at other things. And that imbalance in skill set across sort of the searcher skill set is, Is dangerous for a solo searcher. So for, for me, it became obvious that my weaknesses as a solo searcher would probably be significant. And I, I'd rather work with someone who's got sort of the opposite skill set that I have and who can really compliment, complement me as a partner. Not only the search, but also in the operation.

Will Smith (podcast host) (25:50)

Makes good logical sense. I don't hear you say anything about, you know, just having another person. The kind of a support element of having a partner, was that less important to you? Like, you could have withstood the, the ups and downs and the emotional roller coaster of search, but it was, it was more really about having this total package to go to market with this how the two of you complement each other coming in.

Felipe Corcuera (guest, co-CEO of Beaker) (26:17)

Yes, the idea was just like very finance, like, let's mitigate this and that. But once we were in the barracks. No, like, you're 100% right. That support system was critical because you get. We got insulted. Called scammers, thieves, everything you can imagine on a daily basis. And it really takes a toll on your mental health. And it's a serious thing. Like, you know, we. I remember for some reason, most of the. Of the calls we had with sellers on Friday afternoons were sour. And they would call everything in the book. And maybe it was just bad luck, but we would almost always go into the weekend with a sour taste of having had a hostile seller conversation. So definitely just, you know, we're in the Woodlands, Texas. It's. There's a lot of woods and open fields and you can take walks in the, in the nature. And we took walks almost, you know, every Friday because we needed to just like, get back in the game. And, and yeah, it's, It's. It's really, it's really hard.

Will Smith (podcast host) (27:23)

Yeah. How interesting. I'd not heard that Friday afternoon calls be, be careful and Felipe, what, what are you good at and what did you perceive yourself to be bad at?

Felipe Corcuera (guest, co-CEO of Beaker) (27:36)

I'm really good at everything that's got to do with finance and, you know, acquisitions and due diligence, negotiating acquisition terms and the yellow eyes. And so everything that goes after, you know, after you prepare the loi, all the way down to acquiring a business. It's just something that I had done at scale at Goldman Sachs for, you know, for four years I had done at Relay. So I felt comfortable with that sort of financial slash diligence side.

Will Smith (podcast host) (28:10)

Yep.

Felipe Corcuera (guest, co-CEO of Beaker) (28:10)

But I'm. But because of my background, I always got work to land on my plate. Right. It's a, it's a bad term. But the paper pusher, they call it work, came in, I did the work, I pushed it onto the next one. Huge, you know, service chain at Goldman Sachs. You just do your thing and you work 24 7, but you're never really hunting for work. Will, meaning as a searcher, if you show up to the office and you don't do anything, nothing's going to happen. No one's going to call you and say, hey, Will, I want to sell my company. Do you happen to be interested? So I'm really bad at, you know, being that proactive lead legion guy, which is sort of, if you will, the top of the funnel. Right. Managing the search engine, the lead generation process, reaching out, showing up to conferences, walking up to people and introducing yourself and that salesy part of the search journey. Oh, I suck. It's really bad. And Antonio was the exact opposite. Really great salesman, really good at sort of lead generation, very strong at just feeding leads into the funnel. But when it comes to, you know, spending six hours in front of a financial model and tweaking here and there, he could never do that. So it was funny how complimentary we were.

Will Smith (podcast host) (29:34)

Yeah, yeah. The way you structured your funnel as a partnered search was a little bit different than probably how a lot of partnered searchers would approach it. And it, and it dovetails with what you were just saying about your, your complementary skill sets. Tell us about that, please.

Felipe Corcuera (guest, co-CEO of Beaker) (29:54)

Yeah, yeah, that's a great question. So a lot of searchers, duo searchers will, like you said, will have, will run parallel funnels. Each one has their own funnel. And then when you find deals, you will just bounce off ideas or check in with the other and say, hey, I found this. What do you think? And then you keep pushing both in parallel. The issue with that strategy is each of the two funnels will only be as good as your weakest skill required to manage the funnel. In our case, Antonio, in my case, it would have been two disastrous funnels because we're very bad at things and very good at things. So instead of doing that, we said, let's play to our strengths. Let's build a macro funnel. Antonio, you take care of the top of the funnel, and the top means from lead generation or deal sourcing all the way down to NDA signed, that was sort of the top of the funnel. Felipe, you take care of the bottom, which is from NDA all the way down to closing the acquisition. Right. And so by doing that, my weaknesses were never exposed, meaning lead generation and deal sourcing and showing up to customers conferences. And Antonio's weaknesses were never exposed because he never, he never even signed an NDA or, you know, drafted an loi. And that was all by design. And it worked really well. It allow us, us to, it allowed us to get a lot of scale, meaning, you know, we were, we were reaching out to 640 new companies per week or so. It was just a massive funnel.

Will Smith (podcast host) (31:27)

Yeah, yeah, yeah, great. Well, when you describe the unifunnel as opposed to two parallel funnels and how you're each tackling the end of the funnel, that makes sense for your skills. It actually, I mean, it sounds perfectly logical and natural that it would be structured that way, but you're right. My sense of how partnered searchers usually do it is like what you said. They try to double the quantity of deals that they look at. Might basically say, you do one funnel, I'll do another, and we'll, you know, and we'll, and we'll double the size of universe that we're going after, as opposed to instead trying to optimize to have the, the most effective funnel possible. But, but a single funnel, maybe it.

Felipe Corcuera (guest, co-CEO of Beaker) (32:10)

Works for some people. It, I'm sure it works. Two funnels isn't necessarily better than one, one is not necessarily better than two, but hence why it's so important to keep track of KPIs. Right. And sometimes people will over index certain tasks in their funnel that are really not yielding much in terms of KPIs. But if you're not measuring, it becomes really hard to just improve and figure out, you know, how to do things better. Because funnels and the sourcing engine are not set. And forget from day one, it took us about four months of AB testing and tweaking things before we got to a point where, where we were like, okay, this is actually decent. We can run the rest of the search with what we have today, what.

Will Smith (podcast host) (32:57)

Are the KPIs, the wrong headed KPIs you've seen in searcher funnels and what.

Felipe Corcuera (guest, co-CEO of Beaker) (33:02)

Are the correct KPIs, I mean, hard to label a KPI as incorrect. I would say response rate is over indexed just because it's the KPI that all investors know, even the non searcher investors, meaning those who never searched. So it's easy to try to coach people based on response rate, but you can get a very high response rate of uninterested sellers. I got a 40% response rate and 99% of those are no thank you. So what's the point? For me, the most important KPI in search in a search funnel is the quality of leads. And the way we calculated that was number of NDAs signed divided by number of intro calls had. Right. So for us that number was around 20%. So for every 10 intro calls that we had, we signed 20ndAs, 2ndAs. Sorry. And that's important because it's telling you how many intro calls you're having are actually interesting leads or qualified leads for you as a searcher. And that's important because when you look at the searching funnel like just the search funnel from top to bottom, the first task that is not scalable with technology is the intro call. That's the one where you'll probably spend 20 to 30 minutes with sellers and you can waste a lot of time talking to people who are not willing to sell. So the better job you do at qualifying leads before you, you talk to them, the better off you'll be. So for us that that indicator was quality of, of leads.

Will Smith (podcast host) (34:46)

Yeah, yeah. During this outreach process, you found a couple deals that you actually gave to other searchers. Talk to us just a little bit about the, the finder's fee you earned on those. Not, not because it's, it's so important. It's obviously not the point of a search, but I do think it gets to an important point that is there's so much when you're doing a kind of traditional search style, proprietary search giant outreach, building a funnel, all of this machinery of a search, it'd be n, it's nice to get a little bit of value out of it other than your own deal. And, and this was a way that you did that and, and maybe other searchers can learn from it and, and try to just, you know, monetize. If they have opportunities that come along that are good but are not good for them, they can first of all not waste that lead and Second of all, you know, pay themselves a little bit for, for back, for all of this, this effort that they've done in building their funnel. So what did it look like in your case?

Felipe Corcuera (guest, co-CEO of Beaker) (35:51)

Yeah, no, it's a, it's a great, it's a great question. So we, we searched actively for 12 months. We got four deals under LOI in those 12 months. One deal we killed, one deal we bought, and two deals we handed off to other searchers. And both deals we, we signed like a lead transfer agreement. Not super binding, but it's just like, hey, let's set the terms of, of this handoff so that we're in alignment. In both cases, it's obviously success based. So there's only a finder's fee paid if the deal gets done. If not, there's nothing. In both cases, the way the finder's fee worked was the buyer group would pay Brooklyn Partners, my search fund, meaning my investors, a cash amount equal to 1% of enterprise value. And then they would pay Antonio and myself 1% of enterprise value in shares of the acquired company. So half of the compensation went to our search fund entity and half went to Antonio and myself personally.

Will Smith (podcast host) (37:03)

And the half that went to the search fund entity was cash.

Felipe Corcuera (guest, co-CEO of Beaker) (37:08)

Yes, correct.

Will Smith (podcast host) (37:10)

And then that, and then the half that went to you guys was shares in, in the acquired business, 1% that you split evenly. So you got a half a point of interest in that in that acquired company of the other search fund.

Felipe Corcuera (guest, co-CEO of Beaker) (37:24)

Yeah, which like you said, you know, the search engine was already there, it's already working. You get the lead. We had at some point, you know, we got three deals under LOI at the same time, but it's not, it's not nothing, you know, it's a, it's a decent compensation for you to just keep your search engine active, like it's already working. Just, you know, answer emails, get on the phone even if you're already under, like doing diligence for another business. Just hop on the phone and talk to them. Maybe they're, they're motivated sellers and even though it's not a deal for you, somebody else is willing to pay a hefty price for that deal. Like when I talk to searchers about it, sometimes people feel adamant about paying a finder's fee. And I go like, listen, imagine you're in month four or five of your search and you get this deal under LOI on your plate. Terms are, are negotiated, sellers are ready to sell, everything's all set up. It's a, it's A good enough deal or a great deal if you pay whatever, let's make numbers up. But if you pay $300,000 between cash and shares, but that's going to save you 15 months of search, you're going to save actually a lot of search capital by just cutting your search time short.

Will Smith (podcast host) (38:39)

Absolutely.

Felipe Corcuera (guest, co-CEO of Beaker) (38:40)

It's a great thing. It's a win win for everyone, honestly for the buyer group paying 2% of enterprise value depending on valuation. But it doesn't even move the multiple of ebitda more than 0.05 times or something. If you're paying 5 times or 5.1 time EBITDA, it's not going to change anything for anyone. So it's a great way to, you know, share deals with others and get a little something in return.

Will Smith (podcast host) (39:09)

Why do you think that other searchers you've talked to have been adamant about not paying a finder's fee? What's the resistance?

Felipe Corcuera (guest, co-CEO of Beaker) (39:17)

It's been more the investors, actually. Investors feel like once you are at advanced stages of acquiring a business or already acquired a business, your focus should not be on selling deals to others. It's not really searchers. It's been more investors. Very few, by the way. It's not like a common theme, but some investors are. But it's a minimal time investment for as an individual, a significant compensation.

Will Smith (podcast host) (39:49)

So your investors, there was a little bit of pushback. Not the buyer group's investors.

Felipe Corcuera (guest, co-CEO of Beaker) (39:54)

The buyer groups investors. Yeah. Oh, but then my investors too, in a way because they're like, so the buyer groups investors go like, well, you know, why should we pay for this? They already bought something. You know, let's should be a friendlier handoff. It's like, well, nothing's, you know, nothing's comes at no cost. But then my investor group, they were not like that. But they could have been like, hey, you know, you're about to close on beaker, you know, maybe focus your time elsewhere. Yeah, didn't happen to me per se, but I heard of other researchers who were in that situation. And it gets really tricky. Well, when you have the same investors in the buyer and the seller group, that's happened before. And the best thing, I mean, if an investor is listening, the best thing an investor can do in that situation is just take a step back and say whatever you guys agree, we're following through. The worst thing you can do is have a, an opinionated investor share thoughts when they're sort of clearly conflicted between the buyer and the seller group.

Will Smith (podcast host) (40:56)

Yeah, absolutely.

Felipe Corcuera (guest, co-CEO of Beaker) (40:58)

Separate topic.

Will Smith (podcast host) (41:00)

Yeah. And to Be clear, a deal is worth paying for. So the deal that you handed off to these two other search funds, search searchers, only when it's under LOI and only when all the terms have been, I mean how, how tied up does the deal need to be for it to be worth a finder's fee to you?

Felipe Corcuera (guest, co-CEO of Beaker) (41:23)

It's actually, I would rephrase the question and, or the answer and I would just say, well, depending on how far along you are, how much you pay for the deal. So in my case, this 1% in cash, 1% of equity. The stage was we had signed the LOI and we were almost done with commercial due diligence. We had probably a 20 slide mini SIM ready to share, but $0 spent on quality of earnings, tech diligence, other legal diligence, nothing like that. But obviously if you've already spent, if you already have QV and you have techdd when applicable and you have a first version of the fba, if you have all of that, then obviously the price, you know, you combine the higher finders fee just because you have to reimburse the selling search fund, all of the expenses and other stuff. Yeah, yeah, it could probably go up, you know, from 2% to 4 or 5%. Who knows?

Will Smith (podcast host) (42:22)

Huh? Okay, yeah, great. Well thank you for sharing that Felipe. That's of course we know finders fees, but that was a great kind of anatomy of how you did it in two cases actually.

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Will Smith (podcast host) (43:21)

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Will Smith (podcast host) (43:33)

Link in the notes. Before we get to hearing about Beaker, the business that you bought a minute on why you chose a traditional search fund versus self funded.

Felipe Corcuera (guest, co-CEO of Beaker) (43:45)

Yeah, so two reasons. First one or three reasons. First one was personally I wasn't ready to do traditional. Between student loans, you know, kids on the way, financially just it just didn't make sense for me to do self funded, nor it made sense for Antonio to go self funded. The second reason was because when I was an investor at Relay, I saw a lot of self funded searchers struggle with business owners to demonstrate seriousness and access to capital. Even though traditional search funds also don't have committed capital. You can at least show a list of names and AUM and stuff like that. So it makes you just a more credible buyer. And the third reason, and probably the biggest one for Antonio and myself, was we want to be an ETA for a very long time. This is not a one time thing. And then we'll move on to other things and you'll never hear from us again. We want to, if not do a second search at some point, become investors, do something in eta. And for us the best way to do that was to start building an ecosystem or a network around us from the very beginning. So by going traditionally funded, we already have really great relationships with a lot of the usual suspects in search that selfishly will become relevant relationships for us in the future, maybe as investors, maybe as co investors, who knows. But we did want to start building that relationship from, from an early stage.

Will Smith (podcast host) (45:21)

And that sort of tight ecosystem exists more in traditional search funds than in self funded search. Because in self funded search, a self funded searcher can engage or not kind of with the community, come on, podcast, whatever, but they also might just buy an sba, a business with an SBA loan and then kind of go off and do that and never hear from them again. There, there, there's kind of a continuity of, of a community on this, on the traditional side and all these very well established investor groups if nothing else.

Felipe Corcuera (guest, co-CEO of Beaker) (45:52)

Yeah, and I would say the other point Will, is there is the emergence of new investors in the space willing to take different terms are a great tool for a self funded searchers who candidly deserve better economics because it took on a higher risk. And so there's a big investor universe out there willing to compensate self funded searchers for that. Traditional investors will be a bit more conflicted because even though they recognize that a self funded searcher is deserving of more of better terms, these investors have 15 Lois on their desks at the same time. So they have enough deals to allocate capital. Why would they allocate capital on a deal if everything else is the same on a deal that has worse economics for them? So it's just complicated.

Will Smith (podcast host) (46:44)

Sure. Well, I'll call out Will Wright, who's not far from you in Austin. He Was on oh good year and a half ago now probably and bought an events business and going right into Covid. Great story. But it was a traditional search and he cited a similar reason that he didn't see his search as. He saw it as, but the first chapter of a career kind of in ETA and in search and really the, the dev. The relationships that he anticipated develop, developing through his traditional search fund process as being as much a part of this experience as the. As the actual search itself or you know, similar. Both having a lot of value to him. So great. Okay, Felipe, minute 44 and we are now turning our attention to the business. You bought Beaker.

Felipe Corcuera (guest, co-CEO of Beaker) (47:37)

It's a bit contrarian situation, but we did a. Over 12 months, we did 155 email campaigns. We were extremely industry focused. We would go down on niches and each sort of niche and across different Rectors was an one email campaign. Right. So 155 email campaigns meant 155 niches, industry niches that we would reach out to. The reality was it was more like 154 industry focused campaigns in one geographically focused campaign around the Woodlands, Texas. And that's the campaign that got us bigger. It was a geographically focused search, which is.

Will Smith (podcast host) (48:21)

Is there something to learn from that?

Felipe Corcuera (guest, co-CEO of Beaker) (48:24)

Yeah, don't leave any sort of stones unturned. I would say like the playbook would say do industry, go industry focused and be geographically agnostic. But you know, less on earth is you can try everything. You never know where you're going to get your deal. For us it was well.

Will Smith (podcast host) (48:44)

And was there some element here where. Because you could go to coffee with him and meet him in person very quickly that that accelerated things.

Felipe Corcuera (guest, co-CEO of Beaker) (48:53)

I think, I think that helps. Also the seller is Latino and so there was a sort of a cultural connection from day one. But the other thing that really worked was we, we got the. We got to Beaker when the seller had already engaged a broker and they were starting the process. But we got it off the market before they could actually start sending out teasers. Because we sat down with the seller and we asked him, you know, how much do you think your business is worth and how much do you want for your business and do you want to roll equity over or not? And basically he said, this is my wish list. And we structured a deal around his wish list to the point where he was like, okay, I'm just going to sign the LOI with these guys. No need to go to market. So we were very flexible on that front with terms and valuation and things.

Will Smith (podcast host) (49:45)

Like that, well, he must have also had realistic expectations.

Felipe Corcuera (guest, co-CEO of Beaker) (49:50)

Yeah, yeah. Again, he was not a 5 to 15 times guy. He was narrowly scoped.

Will Smith (podcast host) (49:55)

Well, I wonder if it helped too that he had engaged a broker already and maybe the broker had, had set his expectations, had done that hard work of, of setting his expectations before you got to him.

Felipe Corcuera (guest, co-CEO of Beaker) (50:06)

No, actually I don't know how much of this I can share, but the broker was encouraging the seller to, to re. To ask for almost twice as much as what we paid for, which was completely unrealistic. So the seller had done his homework separately and seen how much IT services with non recurring and reoccurring revenue business models were worth. And he aligned his own expectations despite the broker saying, you know, we paid, we paid eight and a half million for this, for this deal. The brokers were like, this is worth 20 or 22 million. And the seller was like, no, it's not worth 20 million. So that was great because he was motivated to sell and ready to go.

Will Smith (podcast host) (50:53)

Yeah, great. Well, so tell us about the business. What did Beaker do?

Felipe Corcuera (guest, co-CEO of Beaker) (50:59)

So when we bought Beaker, Beaker was an IT services provider in the robotic process automation space. So what Beaker did was Beaker was and still is to some extent an implementation development and implementation partner for large software companies focused on process automation. So basically in RPA or robotic process automation, you have large public companies like UiPath that are just software companies that sell software licenses where companies can build automations or robots and deploy them to automate certain tasks. Right. The software is not a DIY per se. It's not that easy to operate. So these software companies like UiPath will work with services partners like Beaker who will provide the development services and the implementation and the support to help customers deploy these automations. So basically what? Yeah, go ahead.

Will Smith (podcast host) (52:06)

Well, just to be clear on two things, it's essentially the traditional model of kind of a channel, kind of a channel partnership that you see in a lot of technology software companies or where they have valuable software. But it's complex and needs channel partners who are well versed, fluent in this software to actually design and do the implementation. And, and so you're really partnered with, in your case it was UiPath. There are a couple of other big vendors, but UiPath was the big one. And you make money on the, on the implementation. There's probably servicing and recurring component, you'll tell us, and then some cut of the license fee as well, some kind of the software fee itself. Well, we'll get to the revenue lines, but it's A common pattern in software, right? In kind of, in kind of enterprise level software.

Felipe Corcuera (guest, co-CEO of Beaker) (53:02)

Yeah, correct. You will see the same dynamics with AWS and Microsoft and. Yeah, it's the classic IT services partner relationship. That's correct.

Will Smith (podcast host) (53:12)

Great, great. And just on the word robotic, not to put too fine a point on it, but we don't mean robots, we, we mean, we mean automation software level automations. But robots or robotic process automation is the kind of industry jargon. But we are not talking about walking, humanoid, whatever devices.

Felipe Corcuera (guest, co-CEO of Beaker) (53:35)

Right?

Will Smith (podcast host) (53:35)

Continue please.

Felipe Corcuera (guest, co-CEO of Beaker) (53:36)

Not Boston Dynamics or anything like that. It's like you said, it's just automations or bots that live in like live in computers and interact with systems and, and do tasks that humans would usually do in a computer.

Will Smith (podcast host) (53:50)

Right, Bots. I guess the bots is what we know them as.

Felipe Corcuera (guest, co-CEO of Beaker) (53:54)

Bots. Some people call them bots. Yeah, yeah, exactly. Most people call them bots. And so when we bought this company I would say about 20% of revenue was license resale of UiPath and like you said, you will get a discount for being a diamond or platinum or whatever partner and then you will get some leads through the door to provide the services. Right. And so 20% was licensed resale, about 30% was non recurring bot development and implementation services, meaning the customer. And even though they will request one after the other, it's small sprints of, you know, eight weeks or so and it's non recurring. So a customer will come and say hey, I need an automation to reconcile these two files, whatever and you will build the bot in eight weeks, deploy it, bill for it, and that's it. There's no tail end of services. And then 50% of revenue was more like a staff augmentation model where the customers will come and say I know exactly what I need. I have an internal IT team and an internal automation team. I just need staff to help me push these projects forward. And so we would give them developers on a 36912 month engagement and we wouldn't even know what they were doing. They're just assigned a staff augmentation to the customers and that's sort of what we bought. Obviously the botswill had no brain. This was basic workflows, rules based, you know, if else then why while blah blah blah. And it was like these huge, you know, workflows mapped out that had had some logic in them but they were, they are some of them still very rigorous in their logic and can't really think for themselves or handle edge cases or do things like that. Until ChatGPT came out.

Will Smith (podcast host) (56:00)

And just before we, we hear that, let's, let's understand more about the numbers of the business. First of all, fully 50% of the revenues was in that kind of staffing side. I didn't catch that from the pre call.

Felipe Corcuera (guest, co-CEO of Beaker) (56:11)

Yeah, yeah, it was a heavy human capital sort of business I think like, like a near shoring software development firm services.

Will Smith (podcast host) (56:24)

Yeah, but you, it wasn't your people that you were staffing in onto these projects. You were as a kind of a staffing business, you were kind of making the market. Right. You had this rolodex of, of UiPath developers that you would pair with the client.

Felipe Corcuera (guest, co-CEO of Beaker) (56:39)

No, we actually hired them. So the company has, Beaker has a very strong network with universities with like small, you know, technical universities, 15 to 20 universities or so. And Beaker would hire interns out of college and train them on the use of UiPath and certify them and teach them everything about RPA. And then you know, as employees, as full time employees of the company, Beaker would invest in training them through an internal team called Beaker Academy. And then those employees would get staffed on a project. So these are all Beaker employees. It's not like we would go out to the marketplace and find someone and, and staff them on the project. They're core employees because RPA is, and back then was even more nichy. So it's not like you could find dozens of RPA developers, you know, ready to go for next Monday or so.

Will Smith (podcast host) (57:40)

Great. And what can you share about the numbers about Beaker when you bought it in 2022?

Felipe Corcuera (guest, co-CEO of Beaker) (57:47)

So Bicker was about, had about 1.4 million of EBITDA, about five and a half million of revenue and we paid 1.6 times revenue for the company. Employee count was around 140 people and they had 40 or 50 interns at all times that were basically like college students working for a small stipend while they got training. The 1.6 times revenue was sort of an indication of the seller. That was his expectation. And you know, because, because of the high non recurring revenue part we felt like it was fair. Usually some of some IT services businesses may be trading for closer to two times revenue but given that non recurring piece we brought it down to 1.6 and so that put the enterprise value at $8.5 million of which we had a 1.7 million seller. Note 1.2 ish to unchange million equity rollover and then the rest was investor equity.

Will Smith (podcast host) (59:13)

Thank you for such transparency, Felipe. That's great. Why was this why was the valuation based on revenue given that this is not a SaaS business?

Felipe Corcuera (guest, co-CEO of Beaker) (59:23)

Because a lot of the. So EBITDA is tricky because the more you invest into doing proprietary things, the, the more you hit your ebitda. So valuing. And then I'll talk about our EBITDA today, which is basically unadjusted for investments. Spills are zero where like breaking even. Because the more you invest in building higher margin solutions, the, the, the more you hit your ebitda. So when you, when you value these businesses that are not, you know, whatever hardware maintenance, middle of the road, but more complex IT solutions, the more it makes sense for you to use a revenue multiple. And the thing is I could technically stop investing in R and D and my AI team and things like that and the EBITDA would go up like crazy, but that would hurt the company in two or three years. So it's just tricky to use ebitda. So that's why we went with revenue.

Will Smith (podcast host) (60:25)

And, and to add to that. So it's essentially business that's taking a lot of reinvestment. All of that comes out of ebitda. And so EBITDA doesn't end up being a good, a good barometer of the, of the health of the business, but it's also implied therefore all this reinvestment is occurring not just to maintain inventory. No, it's, it's true reinvestment where growth is expected later. So in other words, it's growthy. It's generally going to be a growthy business or it should be.

Felipe Corcuera (guest, co-CEO of Beaker) (60:59)

Yeah.

Will Smith (podcast host) (60:59)

Okay.

Felipe Corcuera (guest, co-CEO of Beaker) (60:59)

And we can talk about sort of that impact of investing and how it looks today, you know, later on. But yeah, that's, that's basically the gist of it.

Will Smith (podcast host) (61:09)

Great. And what of the size? So I know you just said that EBITDA is not the best barometer, but since that's how we tend to think in search land one and a half million of ebitda or we can even look at revenue.

Felipe Corcuera (guest, co-CEO of Beaker) (61:22)

Five.

Will Smith (podcast host) (61:22)

Five and a half million. That's not, that's not a large revenue number for traditional search and in traditional search reminder to the audience, the, the businesses that are looked for by searchers are often quite a bit larger than on the self funded side. This feels actually in line with something a self funded searcher might have taken down. Although 8 and a half million would have required Parapassu debt. It's 3 and a half million above what the SBA can tolerate. But it's doable anyway. So, so how did you get comfortable with a. At Least on paper, a smaller business.

Felipe Corcuera (guest, co-CEO of Beaker) (61:55)

Yeah. So when Antonio and I were searching, the two things we cared most about was where one, a growing industry and two, a motivated seller. And we, because we felt like if you buy in a growing industry, you can sustain a lot of mistakes and you're not bumping elbows with aggressive competitors. And the motivated seller was important because it's less likely that seller will hide things from you if their motivations to sell are super clear. It just felt like a check. There's nothing weird, doesn't sound fishy, there's nothing crazy. Obviously he didn't know about ChatGPT coming out 12 days before we bought the company, but. And in that context, the industry was growing or is expected to grow high 20s percent per year this decade. And growth was like the company was showing that growth, you know, 25 CAGR. 25% or so, 3 year CAGR. Obviously coming from a small base, so it's easy to grow high. But that was good. The margins sort of adjusted for reinvestments and stuff like that. Just like steady state margins were good, 31%, 32% cultural fit was good with a seller. We really liked him, he liked us. It felt like it was a company and a team that we would and we are happy managing. And then lastly, the logos are and were still very strong. So, you know, this was a small company but working and still working with names like PepsiCo, Heineken, Nestle, you know, Aramark, big names that have just been around with the company for six, seven years and just continue to consume things from the company. So it felt like maybe we're buying something small, but Antonio and I are not necessarily thinking about a four or five year hold. You know, if this, if this is a good business, we're happy to hold it forever. And if you think super long term, whether it's 5 million in revenue or 8 or 9, you know, in the super long term, it's not going to make a huge difference if the fundamentals of the business are good.

Will Smith (podcast host) (64:18)

Yeah, yeah, yeah. I think the combination of that. But the growth piece is also important. So while you're buying a little bit smaller, you're going to grow into a number that would be more in line with what a traditional searcher would go for within a year or two anyway. So you're just kind of buying early in some sense.

Felipe Corcuera (guest, co-CEO of Beaker) (64:38)

Yeah.

Will Smith (podcast host) (64:39)

So 12 days later is when ChatGPT is unleashed on you. It probably felt like a personal attack when the software came out. So. So talk to us about, yeah, talk to us about what that did what, how you felt the whole thing. Please.

Felipe Corcuera (guest, co-CEO of Beaker) (64:59)

So we. Yeah, so if my Numbers are right, ChatGPT was, was launched November 30th of 2022 and we bought on December 12th. I think those are the dates. So we didn't honestly. Well, we didn't make much of it. Like when, when it came out, most people including ourselves thought, you know, what a funny fun tool to ask for restaurant recommendations and, and you know, and chat, you know, save yourself the Google search and just ask things and interact with the computer in a more dynamic way. That looks like fun. And it's probably going to be disrupting omnichannel companies and chatbots and all that stuff. It's probably going to go in that direction. Just gen AI and we never, you know, expected, you know, agentic AI and AI agents to become something and candidly, I mean, agentic AI started taking more shape in 2024. Yeah, so back in the day when we bought the company was more like chat bots and conversations and stuff like that. So yeah, we didn't make much of it. Our biggest, our focus and our initial thesis was that 30% non recurring revenue, those, you know, project based sprints, let's make those more recurring. And so we were actually more focused on shifting the revenue model from project based non recurring into more contractually recurring revenue where we would build bots but then also provide a tail end of support. And so our first year, 2023, the main focus was still on getting that recurring revenue and just adjacently looking at, at AI and OpenAI and trying to understand how it might hit our industry or shape our industry. But we didn't have a super active role in AI in 2023. We did create or launch an internal AI lab and we hired a bunch of AI engineers just to start getting a hold of it. But it was not really a transformational year for us in terms of AI. That really just happened last year in 2024.

Will Smith (podcast host) (67:13)

I keep talking about it as if it was this moment of panic and it really wasn't actually, it unfolded more gradually.

Felipe Corcuera (guest, co-CEO of Beaker) (67:24)

Yeah, yeah. I mean it was a moment of panic in the sense that every board room in the country was talking about AI and asking CEOs of companies of all shapes and sizes to look into AI. And it was panic in the sense that all our customers were like, we need AI right now. And the little we knew about AI was that you need fundamental data to be properly stored for you to start any type of AI journey. And so customers were not really ready to consume AI, but they were demanding AI. So it was a bit panicky in the sense that we were bakers and they wanted us to grill a steak. And so we couldn't really deliver anything because they didn't know what they wanted, we didn't know how to deliver it. And so the panic came from there and then from gradually seeing how AI was just releasing new things every week where it was not like day one, this whole thing is going to explode, we're all dead. It was a bit more gradual like you said.

Will Smith (podcast host) (68:33)

Great, great. So actually the first order of business for you all was, was improving the quality of revenue. Taking that project revenue and trying to stretch it into recurring revenue. And that was, that was irrespective of what was going on with ChatGPT. That was probably item number one in your SIM.

Felipe Corcuera (guest, co-CEO of Beaker) (68:50)

Yeah, correct.

Will Smith (podcast host) (68:52)

And how did that, how did that work, that strategy?

Felipe Corcuera (guest, co-CEO of Beaker) (68:56)

That went really well. We created this new service model called RAS or Robots as a service, very creative. And we put it out in the market offering sort of that the same development and implementation for a lower setup fee and then plugging in one, two or three year services contract with automatic renewals and price increases and the typical more SASE format. And what did happen was will that we got some new customers in through the RAAS model, but we also started experiencing a lot of replacement revenue. And so we were like, why? Because maybe correctly or incorrectly, we were incentivizing our salespeople. We were paying them more for every dollar sold under this RAS model than the non recurring revenue model. And so suddenly we were like, well, we're selling all this RAs and it's going well, but the top line isn't growing. Like what's going on? And two things happen, and this is obviously like textbook, but one was when you're reducing your setup fee and pushing revenue into the future, you're not going to see it in the P and L until it's delivered in one to three years. The second thing is our salespeople were replacing project based revenue with RaaS. So it was just cannibalizing itself. So there was not a big hit or positive impact on the top line, but we could see sort of the projections just growing the top line into the future.

Will Smith (podcast host) (70:41)

And your calculation was that the project, the total value of a project would be less than the total value of a smaller but indefinite monthly charge. In other words, the lifetime value of your customers would go up, else why do it? Yeah, correct. Even though the revenue would become, you'd have to, would be realized a lot later the. That LTV would be really released over months and years as opposed to in the first couple of months.

Felipe Corcuera (guest, co-CEO of Beaker) (71:15)

Yeah, which obviously created a huge cash constraint for us because we were already sort of investing in the team and growing. You don't have a ton of cash to be transforming like investing in your team plus deferring revenue, plus entering AI, plus building an AI lab, plus blah blah, blah, blah blah. And so that obviously created a huge cash crunch. But you know, over time it just started getting better as those monthly payments started coming in.

Will Smith (podcast host) (71:46)

And so you feel like today that the strategy is working. What's the breakdown of revenue today?

Felipe Corcuera (guest, co-CEO of Beaker) (71:55)

So today I'm going to sort of make it up. I mean, not make it up, but just guesstimate. Yeah, the non recurring revenue went from 30ish percent to 7 or 8%. License resale went from 20% to 14, 15%. Staff augmentation is at about 40%. So that's 40, 55, 60 and then 40%. Is that robots as a service plus the new AI agents that we're selling now.

Will Smith (podcast host) (72:38)

So fair to say it is working. That's great.

Felipe Corcuera (guest, co-CEO of Beaker) (72:41)

Yeah, yeah.

Will Smith (podcast host) (72:44)

And are you pushing for a goal of the recurring revenue representing a certain dominant percentage of overall revenue? I mean, are you pushing for 80% or something?

Felipe Corcuera (guest, co-CEO of Beaker) (72:59)

So what we're thinking is, I mean that would be ideal. But the other reality is the staff augmentation side of the business is quote, unquote, very easy to manage and produces immediate cash flow. So yeah, I don't want to stop doing that because it's really great business. So maybe, I mean, at least in my head, and Antonio said we may just start treating them as separate businesses because they are, they look very different. You know, what we bought and what we built is just like night and day. So we might just, you know, not, not legally, but just like financially or for reporting purposes, just split them up so that 80% may not become super relevant if they're sort of in a vacuum. Does that make sense or am I just saying no?

Will Smith (podcast host) (73:49)

Yeah, it would. So, so the, the one, the technology delivery business would be almost all recurring revenue, but it wouldn't be as representative because you've carved out the, the staffing into its own business.

Felipe Corcuera (guest, co-CEO of Beaker) (74:04)

Correct.

Host 1 (possibly a podcast host or moderator) (74:05)

The, the, the staffing business.

Will Smith (podcast host) (74:07)

I've heard that staffing businesses are really challenging, hard businesses and frankly unappealing. That's a very, that's kind of a gross generalization. You're talking about how great yours is. Is that because of the niche you operate in or because of these college relationships that you have that, the, the, that beaker has this incredible pipeline. Why is it such a good business in your case where I've heard staffing businesses are really challenged businesses.

Felipe Corcuera (guest, co-CEO of Beaker) (74:34)

It's a great question. So I would say reason number one is being Nishi sets you apart from competition in a way. Bicker was probably one of the first niche RPA services companies in sort of south of the border in Latam and really build a strong brand and strong reputation as far as RPA services goes. So it's sort of been almost organic to get to a point where customers and one of these top five global CPG brands will just come to us and say, I need two more, I need one more, I need three more. And we're just sending them CVs and they go like, I like this guy and that girl and these two. And there isn't, I mean we do invest a lot in training them and teaching them things and things like that. And that's, that's costly but it's not burdening. It doesn't take a lot of our mind share. We have a strong academy teaching these kids how to do automations and it just feels organic sometimes. One of our board members sometimes says, you should never stop doing things that feel easy. If there's something you're doing that feels like cheating because it's so easy, just do more of that. And staffing sometimes feels like it because we have a solid engine. We have these kids who are hungry for work. Sometimes they worked out double shifts and get paid triple and they just want more and more and the customers want more and more and it's organic, so that feels easy. And the second thing is, we've built a really strong customer service team around the staffing business. And a lot of staffing companies will neglect communication with their customers once they've sold the contract. Whereas my team will reach out to the hiring managers on a monthly basis and be like, hey, what do you, what do you need? How's the team working? Do they need certifications? Do they need training? Do you want to replace someone? You know, do you need more or less like, how are you seeing this and that? And so we become strategic in how we service them from a managerial perspective. Not just like sending bodies to work.

Will Smith (podcast host) (76:47)

Yeah.

Felipe Corcuera (guest, co-CEO of Beaker) (76:48)

And forgetting about sort of the quality.

Will Smith (podcast host) (76:50)

Yeah.

Felipe Corcuera (guest, co-CEO of Beaker) (76:51)

And that means a lot to them.

Will Smith (podcast host) (76:53)

Excellent. And so to be clear, Felipe, a lot of your client base is actually in Latin America. Not just that the owner was Latino, but the clients are too.

Felipe Corcuera (guest, co-CEO of Beaker) (77:03)

We have. So most of our clients are in North America. We have US I would say Mexico and US are the largest ones. It's tricky to set them apart because actually for example my largest customers are US enterprise but both their latam teams and their global teams. So for example, Pepsi is one of my clients. We work with Pepsi in latam, Pepsi India, Pepsi us. They pay me in Mexico because that's where their cost center is for it. But I work with global teams so it's hard to put a geographic pin. But yeah, North America would be the largest one.

Will Smith (podcast host) (77:42)

Yeah. Wow, these really are great logos for you guys to be working with Pepsi. Felipe, let's start wrapping up by just now returning to AI and fit that into how much you've been reinvesting. So today the cash flow out of the business is not going to turn heads. But that's because of this dynamic that we talked about earlier where you're, you're reinvesting a lot to, in the anticipation of great things to come in, in, in the medium term. So talk to us maybe first before we hear about AI, how you, the investments that you've made, how you think about them, how you, the timeline of them, the return on them, how do you think about that?

Felipe Corcuera (guest, co-CEO of Beaker) (78:33)

So yeah, the biggest investments that I've, that Antonio and I have made are I would say two categories. The first one is our, and in no particular order, but the first one is our AI lab which is non billing developers just doing R and D and you know, testing the hundreds of tools that come to market every week and helping plug in some of these AI models into the, the automations or the agents that we sell. Right. It's really hard, you know, because these are not cheap employees as you know, as you can imagine, AI engineers have a huge price tag on them these days and then we have to pay the market rates and we're not getting immediate direct revenue from them per se. Yeah, I mean indirectly we are because they're, they're setting up the, the processes and the, and the structure and the, you know, documentation for us to use them. But, but it's still a big investment. It's a team of six or seven and growing. We usually bring in one, a new AI or ML engineer every every month or every other month. And so that's been a big investment. The second one is that conversion from project based revenue into recurring revenue. What we talked about, pushing revenue into the future in a way that's an investment. Right. Because instead of get all made up numbers but instead of charging $20,000 after six weeks of work for a bot and then doing the next one. And 20k. And 20k. Now we're charging 5k as a setup fee and then a thousand dollars a month over whatever, two, three years. That's an investment in itself, at least from a working capital perspective. So our point of view is we have to keep going. It's painful. Yes. Of course we're careful with our spend and we don't have millions and millions to give away. But we think that if we can keep pushing with this dynamic over the next 12 months, we'll be in a situation where we can actually start investing bigger checks into other things too.

Will Smith (podcast host) (80:56)

That was great. Thank you.

Felipe Corcuera (guest, co-CEO of Beaker) (80:58)

Sorry. Well, one more thought. There is. Yeah, we're not, I mean, I think investing heavily and, and being more cash constraint makes more sense when, when you're thinking long term. Right. Like Antonio and I are not looking to tell a beautiful story today because we're not looking to sell. So I'd rather reinvest everything and have, and have a low free cash flow number to show for because I don't need to show that, you know, we're not, we're not showing things to anyone because we're holding this hopefully for as long as we can. So we'd rather reinvest everything that we have and have a, a tougher story to tell if. Sure, that makes sense.

Will Smith (podcast host) (81:41)

Sure. No, it makes perfect sense. I just, I caught you at a time where, you know, the snapshot numbers don't look so great, but it's all by design because it's, it's you, you're reinvesting for the future. You. I keep hearing you say, or you've shared with us a few times this concept of a long term hold. So can you say more about that?

Felipe Corcuera (guest, co-CEO of Beaker) (82:04)

There's a study by one famous or well known search for investor called Will Thorndike who interviewed a ton of, you know, search fund companies, exited, interviewed the first buyer after the search fund, interviewed the second buyer after a search fund and came to a conclusion based on I think sufficient data that a, the value that's created in years six and seven, and I think these are the right numbers, the value created in years six and seven of holding a company is the same or slightly more than the value that's created in years one through five. What that means is the compounding value of your decisions early on will become fruitful or, you know, will show in years six and seven. That's a sort of like exponential curve and then from there on it's really crazy growth because you're compounding Again, a series of small decisions over the years that start showing in the future. So for Antonio and myself, tying again this long term hold with the way we think about Beaker and how we want to reinvest everything, it wouldn't make sense for us to sell the company this year or next year when we're putting all of our eggs back in the basket to get to that exponential growth. It's just a strategically different point of view than paying dividends, paying down debt and exiting next year.

Will Smith (podcast host) (83:38)

And Felipe, how did your investors think about that? Because traditional search funds have broadly a similar expectation to a private equity hold, five to seven years and that there will be a liquidity event. So how did, how did you explain to your investors that this might be a longer ride?

Felipe Corcuera (guest, co-CEO of Beaker) (83:56)

The crude answer is there is no binding time frame to sell the company. Right. Everyone comes into an investment knowing that this may be a 1 year, 5 year or 10 year or 20 year hold and anyone can sell their units whenever they want. You know, I mean, there's a process obviously and there is drag alongs and tag alongs, but I think it helps to set it, set expectations when the rules of the game are clear that, you know, we don't know what we don't know and we don't know how long we're going to hold this. But the, the, the more fair or the more appropriate response would be that we try to align expectations with our board. If the boards align with what we're trying to build, usually investors will follow. And candidly, none of our investors have asked about an exit. Or when we think about selling, we have voiced our interest in holding this for a longer period, but it hasn't really been a concern for our investors. Maybe in year five or six, some people may start asking, hey, do you foresee an exit? The future. But so far that hasn't been the, the case.

Will Smith (podcast host) (85:09)

Yeah. Great. Well, the point about compounding, Felipe, of course, what, what you described there and Will Thorndike's research, I always kind of took for granted. I thought, I thought that is what the compounding growth curve always looks like. That it becomes interesting, really interesting. In the out years, it takes a little bit, but then, then that exponential effect you gotta wait for. That's why, you know, start investing as early as possible. If we're just talking about personal finance and being in the stock market, you know, time is the lever that can be most powerful. The sooner, the sooner you're invested in something, the sooner you get those great rewards. But you do have to wait for those great rewards if you just are familiar with the compounding curve.

Felipe Corcuera (guest, co-CEO of Beaker) (85:59)

Yeah, no, that's spot on. And then the other thing will is before the exponential curve, there's always the J curve, right. The earlier years, where presumably you're destroying, quote, unquote, destroying value because you're firing bad customers or unprofitable customers and you're reinvesting in technical debt or people debt. And there is a dip in the early years. For some companies, it's a flatter J curve. For others, it's steeper. In our case, it's.