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Invest Like the Best with Patrick O'Shaughnessy
Justin Ishbia - Lessons from Acquiring 586 Companies [Invest Like the Best, REPLAY]
01:13:51
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- [00:00]
Patrick O'Shaughnessy
The best operators have a relentless focus on leverage, finding ways to multiply their impact rather than just working harder. But here's what I see happening in finance teams everywhere. Brilliant people getting buried in expense management. Busy work. If you think about it, you become a finance leader because you love strategic work. Modeling scenarios, optimizing capital allocation, finding the insights that actually move the business forward. But instead you're chasing receipts and categorizing transactions. It's the opposite of leverage. This is exactly why I'm so bullish on what the team at Ramp has built. Karim and Eric understood that every minute spent on manual expense management is a minute stolen from high leverage work. So they automated all of it. Automatic categorization, receipt matching, spending controls that actually work. I love the network effect that this creates. When finance teams at companies like Shopify and Stripe automate the mundane stuff, they free up cycles to think bigger, to ask bigger questions, spot patterns others miss, and make the kind of strategic bets that separate great companies from good ones. The math is simple. Get your time back, focus on what matters. Check out ramp.com invest and see what happens when you eliminate the busy work. As an investor, gaining an edge means having the right tools and one platform leading the way is AlphaSense. Trusted by 75% of the world's top hedge funds, AlphaSense is the market intelligence platform that gives institutional investors access to over 500 million premium sources, from company filings and broker research to news trade journals and more. And with its recent acquisition of Tigus, it also includes the world's largest library of expert interview transcripts. Over 200,000 calls covering more than 24,000 public and private companies all in one platform so investment teams can move faster, go deeper and make high conviction decisions with confidence. Now AlphaSense is transforming the research process with the launch of its Deep Research tool, part of the next generation of.
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Justin Ishbia
Its AI powered platform.
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Patrick O'Shaughnessy
Unlike other deep research tools, AlphaSense's version is purpose built for investment research. It runs multi step iterative analysis using AlphaSense's proprietary content, including those 200,000 expert transcripts and in minutes services. Insights that would take multiple interviews and days of digging to uncover. It's like adding 10 analysts to your team, helping you accelerate analysis, deepen understanding and make sharper decisions. See it in action@alpha-sense.com invest in asset management Growth often depends on customization. It's the nature of the beast in our industry and I know having experienced the problem firsthand as an active manager, it's a competitive differentiator to tailor products and services to clients preferences and we want to say yes. When we say yes, it means delivering a tailored portfolio, a tailored report, or a tailored expectation for service. Saying yes leads to growth and it also creates customization and a trade off. The more you grow, the more complexity you absorb. The more you say yes, the harder it is to scale efficiently and consistently. That's where Ridgeline comes in. Ridgeline automates customization. It gives asset managers the ability to deliver personalized experiences at scale without adding headcount, manual work or operational risk. Having been an early design partner myself, I saw firsthand the power of taking an entirely clean sheet of paper to building the system we've all been waiting for. It's how leading firms stop choosing between growth and efficiency and start saying yes to both. I believe the best firms will be built on Ridgeline as their operating system. I also believe they will be a leading case study in the combined power of systems of record and AI. If you haven't spent time with them yet, I urge you to see what Ridgeline might unlock for your business. Hello and welcome everyone. I'm Patrick o' Shaughnessy and this is Invest like the Best. This show is an open ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest like the Best is part of the Colossus family of podcasts and you can access all our podcasts including edited transcripts, show notes and other resources to keep learning@joincolosis.com Patrick O' Shaughnessy is the.
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Justin Ishbia
CEO of Positive Sum.
- [03:53]
Justin Ishbia (continued or elaboration)
All opinions expressed by Patrick and podcast.
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Justin Ishbia
Guests are solely their own opinions and do not reflect the opinion of Positive Sum.
- [04:01]
Justin Ishbia (continued or elaboration)
This podcast is for informational purposes only and should not be relied upon as.
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Justin Ishbia
A basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit Psum vc.
- [04:19]
Patrick O'Shaughnessy
My guest today is Justin Ishbia. Justin is the founder of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches. With $7 billion in capital deployed but an average transaction size of just 12 million, Justin has worked to build a system to drive success for hundreds of businesses through replicable operating procedures and championing young professionals. The firm has created the moat around volume with nearly 600 acquisitions over the last three years, some of the highest numbers in the world. We discuss identifying growth prospects, constructing a meaningful board, and the business mentality behind Main street, not Wall street, as Justin puts it. Please enjoy my conversation with Justin Ishbia.
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Justin Ishbia
Justin, it's Such a pleasure to have you joining me today. I remember on our very first call taking more notes about how you are building your firm than about any firm introductory call that I can recall. And I want to start with a line that you said when we first met which is that the system is the star. As you think about building your asset management firm, maybe describe why that term or idea is important to you and how it applies to Shore Capital.
- [05:27]
Justin Ishbia (continued or elaboration)
I followed your show for a number of years and it's been so impressive what you've built. So you guys have a best in class audience and and showing on every part of it. To create enterprise value as a system, no one person creates a star. And so our view have always been like how do we create a system, a machine, a process that creates differentiated results outcomes. And I was raised in an environment said you always look for opportunities where others aren't looking. And my view of the world is the last inefficient part of the private market ecosystem is the micro cap. And this is where we spend all of our time. This is businesses we define as sub 10 million EBITDA at investment in order. Why most people don't play here is I think several reasons and it goes back to the system of the star dynamic is that in order to play here takes more resources than normal. Buying a business with 4 of EBITDA, no audit and imagine team that is oftentimes no I would say running the biggest business that I ran before that day. It's different than buying a business that's doing 50 of EBITDA. The professional management team that's been coming in together and have run a business three times the size before and now coming down to run it. And so back to the system. To me everything goes back to the system. Everyone has a role from the organization goes back a lot of sports as well. How do you become best person at your job day in, day out? How do you become the best controller? How do you become the best deal professional? How do you become the best marketing leader? And so the system for us is documentation. I look up to organizations or operating companies like Donahue, the DBS system. We're trying to create something very similar in the private equity community. And so everything we do is codified, written down. If you walk, you're in our four walls and you're in our offices. We have the concepts of from the idea of someone in our firm comes up with they want to invest in a sector. Let's pick on the veterinary sector because everyone knows what veterinarian Is so okay idea generation until the day we sign a letter of intent to that platform. We call that nine innings of baseball. There's literally hundreds of steps that go into each inning has these between 5 and 15 steps you must go through when you sign a letter of intent. There's four quarters of closing a deal. We have make mistakes over and over again. You make mistake, you actually add something to that four quarter say hey make sure you check with international tax counsel by a, B or C. So creates a codified system. We close the platform 100 day plan. We have 23 standard operating procedures we put into every business. So we onboard to the shore way of how we do things. We own a business. That's the planting phase, the growing phase, the harvesting phase. And we exit a business. It's three periods of exit like hockey of sports analogies. But what this allows to be done is it allows scale. We've done over the last few years about 600 acquisitions according to Pitchbook. More than anyone else in the world. Average enterprise value though of transactions 12 million bucks.
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Justin Ishbia
Wow.
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Justin Ishbia (continued or elaboration)
Hundreds of them. Deployed over $7 billion in a three year time period. But across 586 transactions. So why the system matters is early career energy. First time leaders running through their own first platforms. Give these people the tools and resources and saying here's the rules. I'm a big believer of see one do one teach one. Patrick, come work on my team. Sit next to me. Let's go do a first deal. And the veterinary ship looks like this next one. See one that's the C1 do one. Let's do it together. We'll do it hand to hand. I'll tell you why I'm doing it. The next one you're teaching me how you're doing it. In order to own something you have to be able to teach it to somebody else. And so this system is set up in a way to allow early career energy young professionals. I believe private equity world is a hustle game. And the system has set up a way to have talented people who want the ball earlier in their career to have the chance to grow and have a big role in a deal. And the system allows for that. And so that's why our system is our star. No one person makes this place go and we have to say more stars into our system, the brighter the system burns.
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Justin Ishbia
Poking around of this system for the rest of our call is going to be so fun. And there's so many different areas that you've had this very careful systematic thinking for how to do great deals and run a great business. Before we do all that, I'd love to rewind back a little bit to the origins of the business. And you, like so many of the investors that I've found to be the most interesting, started by, I think you called it your pre fund. You were doing these deals without a committed capital vehicle. You were sort of a fundless sponsor going around raising capital for great individual deals. And it was you, you started this. And it's easy to say now, you've got this big amazing team, $7 billion, hundreds of deals and so on that there's this. But it starts with a person. And I'm curious to understand, like the formative experiences in those early deals, what you were looking for, why you were attracted to it and then why the system began to emerge. What was it that made you think about the market this way and want to stay disciplined, doing very small deals, almost Constellation Software style, rather than do what most private equity firms do, which is start to get bigger and bigger and bigger in their deal size.
- [10:04]
Justin Ishbia (continued or elaboration)
So it wasn't just me, my partner Ryan Kelly, my partner Mike Cooper and John Hennigan. The four of us, from day one, we were young, I was 31, they were 29, 20 and 27. So we were kids. We were essentially associate levels. Where it came from is no, originally Ryan and I, Ryan was at Water street and I was at Valor Equity Partners. And what we would do all the time is we would see a deal, it's like three or four EBITDA on an attractive sector and we bring it to our old boss and basically say, here's a roll up in this opportunity in the sector. And effectively you heard in different ways of saying, like, interesting, but you're one of my X number of deal guys. We have to deploy X million dollars per year. Whatever it may be, it doesn't make sense for us to do that. And basically I heard over and over again was no one is investing as part of the market because when you're good at private equity, what do you do? Raise a bigger fund. When you're not good, you wash out. So who stays small for a long term? The answer is really nobody. And so we decided to create a franchise, a micro cap franchise that would stay small for the long term. But I have a bunch of products. And so those early formative days, that is when we had a pre fund, like pre funds are something I think that people zoom past these days, want to go raise the first fund one, $200 million. Like it is really hard raising $200 million. It's really hard raising $100 million. And so the reason why we did it that way, I wish I could say I was smart enough, this was a plan. But my mentor said to me years ago it's like 2007 or 8 and said, Justin, when it's a good time to fundraise, it's a bad time to invest and vice versa. And he said, when you start, make sure you start when it's a bad time to fundraise. So I knew it in 2009. I didn't know 09 March was the bottom. I didn't know that was exactly, but I knew it was bad. I didn't know how much worse it was going to get. But I said to myself, well, you got to do it when it's bad out there. And so I can't raise the capital. I have no track record. I was an associate, not a private equity firm. I was a lawyer first and associate, a private equity firm. No endowments in investment plus I would call them, they were like, yeah, come back to the track record. I was like, how do you get a track record? We went out and raised money. When our first was a pre fund, it was a $10 million committed capital vehicle. But a couple important points on that. Instead of raising just 4 or 5 million dollars for the first deal, we raised 10 million committed capital. And why? Someone gave me some really good advice that you go for your first add on, someone's get divorced, someone's gonna change their mind. And by having a committed pool of capital, you don't spend much of time raising capital for the second add on. So having a 10 million dollar credit pool is mostly wealth managers, founders of private equity firms, head of law firms, traders. In Chicago. We went to our little network. We didn't have great wealth. I didn't have much at all. Our small offices or 1200 square feet. But those very early days it was about being thematic and it was about buying a little business where we felt like we were all healthcare originally where the founders were excellent at something but did not want to do something else, which was usually the business side. So they were a pharmacist man, they could mix xyz and everyone in town wanted to work with them because they had the best output. And so in those early form of the days, it was pick the right theme, invest in a business where the founder clinically was really sound. We like to say a short capital. Good medicine is good business. We wanted to find a good healthcare provider that had the respect of their peers. Invest this little business, then bring systems and processes. We call it a flash and a dash, a dashboard and a flash every single week. We used to say if you can't measure, you can't manage it. The very early days we were very process driven. But this pre fund, everyone wants to zoom past it nowadays. But you get seduced by the world of Instagram or Facebook or TikTok where everyone raises the first 200 million dollar fund. Guess what? Most people don't start that way. Most people start something very simple. I like to think of shortcut. Full story was not that dissimilar from some associate or vp. Another priority firm right now it takes time. It takes 10 years. If you get it right, you do it exactly well. You have good deals, you will make less money your first 10 years. Then you would have stayed on the trajectory you were. But after you're 10 going forward, it flips material in your direction. And so I think people want to go pretty fast these days. But I would say slow down, go buy one good business, buy a second good business. Make sure those are going well. If you buy two or three good businesses, you will raise a fund one day. But don't think it's because you work at XYZ firm. You're going to spin out and go raise money and do it now. Do the time is crappy out there. Recession is here or coming to now you think about it, I'd be raising it now. I'd be going to invest in businesses. When it's a hard time to create enterprise value, sellers are scared. There's relatively low earnings profile and multiples are relatively lower. Looking backwards don't do in 2019 when multiples are tick tocked and easier to raise capital. But it is really hard to get it right because you're going to sell it five years later probably into recession as opposed to you buy in 2024. I'm pretty confident we'd not be selling a recession in 28, 29, 30.
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Justin Ishbia
So obviously you were hanging your hat on this ability to stay in the small average deal size. So $7 billion but a $12 million average deal size is quite something. There's not a lot of examples of firms that have done that. So with that in mind, maybe describe what is the perfect canonical short capital deal. What does the business look like? What does the multiple look like? What does the prospect for growth look like? If you had to atomize it, how would you describe it?
- [15:05]
Justin Ishbia (continued or elaboration)
Everything starts with the industry. So we're very organized around industry Themes and thematics. So pick an industry we'd say has great long term growth potential. It is much easier to be playing ball industry is growing than going the other direction. But not talking about the perfect type of deal for us then. 59 platforms in firm's history. Average revenue about 18 and a half. $19 million of revenue. Average EBITDA three and a half million bucks. Paying about seven and a half times. That's what we've done over levering it two times. So under lever over equitize and usually about 80 to 100 employees. This is Main street, not Wall street and we're buying business but it's in a sector we believe that you create value by consolidation and scale. And so I was back to the veterinary industry as an example. Value is created by hiring and partnering with the best veterinarians. We love investing in industries where there's much more demand than there is supply. So what do we do? Try and become the supplier of choice. It's by supply. That means be a place where veterinarians and vet techs want to work. If you have great people want to work with you and demand where it is, then you have a chance to grow really quickly. So we're buying businesses that I think are in a part of the market that have a price point that is different than what they do with scale. For a lot of reasons the magic teams have not been developed. They don't have multiple geographies. They oftentimes have customer concentration. But we're okay with that. These are risks we take. They almost never have audits on QuickBooks. These are all parts of, I would say size above the country club round, but below where institutional investors want to invest. Constellation Software. Mark Leonard's a friend and a mentor. I'm not smart. I know to copy and try to copy. They did all in software. We've done it in operating businesses. But it's a main street little businesses. But where you can aggregate 5, 10, 15, 25 of them or more and get to a spot where they're truly as synergies. Where your cost of goods sold can go down because of scale. You can have data points on pricing to be able to have better intuition and knowledge on pricing dynamics. You're able also to shift labor around to have better utilization. So in a route based business, for example, you have more density within a certain geography creates value. So I want to have multiple ways to win. I think the last thing I'd say is unlike larger organizations that buy bigger businesses and competitive auction processes, we're buying them these relatively smaller businesses. If we get the first deal wrong in the thesis, it isn't a death blow. Most times in private equities, broadly Speaking, someone commits $100 to a thesis, they're investing between 60 and $80 of that investment for the platform and reserving 20 to 40 for add ons, we're almost exact inverse. I'm committing $100 to the thesis. I'll deploy 5 to 25 for the platform. And what that does is it creates an opportunity to under lever make sure the management team right. And if the first one isn't what you thought it was going to be, your second or third investment, that sector still can be good and become the headquarters in the platform later. And so it gives that great opportunity, I think to increase your margin of safety, increase an opportunity for success. So all that stuff together creates I think a really important part of the ecosystem. This part is inefficient. And I think by layering operations, you layer in margin of safety, you learn upside for operations. If I get one or two of our things right, we make three times our money. If I get four or five right, we make five, six, seven times our money. If we get everything right. Returns in the teens and 20s multiple times. And so there's multiple ways to win. I like investing right. There's lots of ways to win. I'll rely upon one or two factors.
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Justin Ishbia
One of the things I'm personally really focused on is thinking about the different kinds of opportunity costs for capital today as rates have gone up as the S and P has a certain sort of expected return, call it 10% over the long term, that really to deploy capital away from risk free rate or very cheap index funds, you need to demand like a really high rate of return and, and otherwise it's just not worth it. You might as well just stash it somewhere liquid and go home. What have been the rates of return in this style of investing historically now that you have so many deals done, lots of deals exited, 10 years of experience, just level set us a little bit on the return profile of a strategy like this. Return on equity.
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Justin Ishbia (continued or elaboration)
Yeah, I can't speak for everybody else for our results. So we've done 59 platform investments, we've exit 14 companies. So it's not the same track record forever, but it's definitely a critical mass. Our average gross cash on cash has been 7 times cash on cash and IRR 72% percent. We've never had a deal lower than 3 times gross cash on cash. Our median is 5.5 times gross cash on cash. So you're talking about the 50s IRR. So you're talking about 70s gross, 50s net. I'm not saying do that forever, but that's been historical results. And this ecosystem does produce, I think a really strong risk adjust return profile. But it's hard to do it. The reality is when you're small you can do it. But then you get bigger and bigger, you raise bigger funds and it's really hard to stay here. That's just the reality of it. Because your vice president becomes a principal when they want to come a partner, you raise bigger funds and it's harder doing smaller deals. Some of our biggest deals are the most easiest to manage because my magic team are so darn good. It's harder to get it right, there's more risk involved. But I do believe you get it right. Now you have I think an asymmetric shore profile.
- [20:03]
Justin Ishbia
One of the things I used to love studying in my quantitative research days was just return on invested capital of public companies. And the norm would be that ROIC mean reverts. If it's really high, it gets competed back down. But there were always some platforms. A lot of them are the biggest companies in the world today that would have these bizarrely persistent high returns on capital. And when you investigated them, you found classic business moats. It seems like the same question applies here. What is the system moat as you would describe it? Because 70%, 50% IRRs, these seem so high as to be almost unsustainable. I mean obviously those are absurdly high IRRs and even half that would be good. But how do you think about building unfair advantages into what you do so that you can continue to earn really spectacular results?
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Justin Ishbia (continued or elaboration)
I wish I could say I was smart enough on the front end to plan this, but I got a little bit lucky. I think our moat is the volume, the number of transactions that we do. Creates an ecosystem, creates a deal. Young professionals work at shore capital. It gives the opportunity to have so many different executives around the table that reuse people over and over again and try people at relatively small businesses. And so I believe the next 10 years of private equity is all about operational excellence. So we lean really heavy in operations. We have 150 full time people, approximately short capital, over which half of them are our operations leaders. When you're buying a relatively small business from an honest good founder who has nothing but good intent to grow their business, but they often leave a lot of these on the table, the risk they want to take, there's 4 of EBITDA to go buy a $4 million machine to automate something. They don't want to do that sort of stuff. And so at this part of the market it's inefficient and there's an opportunity to I think dramatically improve these businesses in the first 18 months. We believe also 80% of our CEOs are first time CEOs. But we believe in this thing called early career energy. We believe that it takes a really smart person about 18 months to learn 90% of the industry that last 10% takes 5 years, $10,000. We bring board members to compliment them. I think the opportunities is finding individuals who want to play in a part of the market that doesn't seem as sexy at first, but once you get in there, return on invested capital. If I'm a founder, I'm a CEO. I understand what's going on. Your profile here is much higher than investing in larger businesses. That's just the reality of it is that I lay out the math all the time for board members of ours who we recruit them to our boards and we usually have about seven independent board members in every company we buy. And they don't get paid in a cash comp. They get options in the company. If it goes well, they do well and they also get a chance to invest in those businesses. But the math of them I say is we've had now nine times that someone step off the board become a CEO for us. When they see if you get it right, we look at it and say okay, median returns in the product industry pretty good is two times your money. I think that's a good fund the most returns. And so our math we say is for us, if you can be a CEO of a large business that has two or $300 million equity behind it, it is quite common to have an equity option pool that in a 2.2.5 times cash on cash. They can have a $20 million outcome that is a middle of fairway. I think for a lot of CEOs you can make that as part of the market by the cash on cash profile, getting it right. And it is oftentimes higher probability of success. Especially when you can recruit talent. Give me the CEO that can go recruit his her network of two or three awesome people to come to this part of the market. They see the opportunity and return profile could be 6, 7, 8, 9 times your money because of multiple arbitrage because operational improvements, because of the opportunity to invest in these little businesses that have many things left on the table that founders know that should be done, but they don't want to take the risk themselves appropriately. So no, it's middle of fairway for us to have three founders who want to 65, one is 55, one is 45. The guy 65, more risk averse, guy's 45, wants leaning a little bit more. Great. We can partner in that dynamic and give them some real upside to give them a chance to differentiate. But this part of the market does create those unique opportunities to get it right. You're talking about seven times your money. And I think there's no better way than to create value, than to compound it and be a leader in a business growing at a really fast pace.
- [24:04]
Justin Ishbia
One of my absolute favorite encapsulations of your systematic mindset is the way you set these boards up. We talked about it in some detail when we first met and I love this idea. The idea of a $3 million EBITDA business having a fairly high powered seven person board seems ridiculous, unrealistic. But you figured out a way to structure the incentives and the composition of the board. Like the nature of each board member and their background. That's really seemed to been a key part of this system being the star. Can you just describe that system, the board system and incentive structure in as much detail as you can.
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Justin Ishbia (continued or elaboration)
I just say I build a board like a basketball team. I don't want five point guards. I want a point guard, a power forward and center. What is traditional and private company investing? Before I found on shore, I invested in small companies, about 20,000 bucks, 50,000 bucks. What happened normally is that the most money was the board. And usually they had no relevance, no importance. The guy puts in the half million bucks and they the board. No, that never happens for us at all. And so we want to go, we find we call the Mount Rushmore of that industry. So back to the veterinary industry as an example. I want to identify who by industry standards, reputation is viewed to be best in class and use sports as analogy. I think people often have no college basketball. Who is Tom Izzo, who is Mike Shashevsky and who is their family tree? Every industry has their Tom Mizell and their Mike Shashevsky who are know, preeminent basketball coaches. And so we build a board like a basketball team and we say I want someone, two people who have run a business in that exact same sector at at least three times the size what we acquired. So that person has been there and say, I've been through this journey at this exact size and metrics I want to voice the customer. I want to voice the supply chain. Usually want a functional discipline expert who's been in that sector like a CFO who knows the metrics cold and one or two people from adjacent sector. This board of seven individuals. A lot of times our board members who are first time joining us, they laugh, they say there's more people on the board than there is millions of revenue. We buy business doing either revenue. We nine people the board. So it's the way we're stacked board, but we're stacking boards in a unique way that creates a lot of value. And we'll be clear sauce. I don't mind it because this is how I started. We pay them zero, pay them zero in cash comp. See that back. The lead director gets a small stipend to be more involved. See the lead director. And we have six regular board owners get zero cash comp. But they get options in the company that in our base case that make $250,000. Now let's break it out. Very simple, guys. It's very simple that on average for five years, on average, that's four board meetings a year. You're talking 50,000 a year, 12,500 per board meeting. Most people go, okay, I'm going to join a board for that. That makes reasonable sense to me. And if we do better than average and you get much more than that. I've talked to people all the time, they're like, well, I can afford that board. I'm like, yes you can. You give them options that in the base case look like this. And base case for us is three times. And so that's a very reasonable outcome. And so I think when you go spend the time and effort to go recruit that board, that is the most important thing that you do. The thesis. If you are in my Monday morning meeting and you heard our firm talk about buying a company in XYZ sector, the question that comes out of my mouth versus tell me your board literally. And then there's like a slide that lays out the different avenues. The voice of the customer, the voice supply chain, the voice of the operator. So it's shore relevance. And there's usually four to eight people deep. And the person who is leading the thesis is their job to pick the best group. And on the unique dynamics he's about a moat or things from the past that this year we'll close 12 or 13 platforms. So times seven, you're talking about 90 unique board members. And so we're talking about a third will Be repeat customers for us. But I have 60 new people who will join our family next year. I know they're going yet they're all going to be very talented business people. We talked about some before this phone call about someone who's very high end, very talented person. There's a niche out there. People who are 55 to 75 who don't want to work full time anymore but do not want to do nothing. They fail retirement. Love the fail retirement woman or man. And so these board members bring that experience. And so we oftentimes back first time CEOs. Over 80% of our CEOs are first time CEOs. Mentioned a minute ago, it takes 18 months to learn 90% of the industry. The last 10% takes five years. But guess what? My board has that last 10% from day one to complement that early career energy. And so if you partner with a hungry, smart first time CEO, first time cfo, give them a board. And naturally of those seven by the way, five become super value added, one or two less. So it's just a reality of it. I'm very poor at predicting who is going to be value and who is not. It's just DNA of the people. And after with us one time I can figure it out. But you get these really talented people in these boards and they help in a unique way. Every single member helps in a unique outsized way at one point during the life of the investment opens the door to a customer, refers us to a former employee of theirs who was talented, has a unique way of understanding a software system, refers us to an add on. When buying a business doing 18 of revenue and want to grow it to 100 revenue. You just need a new customer that could bring three men of revenue. You're talking about first a 15, 20% pickup in revenue. You buy a business doing a bit of revenue, there's no ones that are bringing you a 50% pickup in customer. It's just not going to occur. But I think what we've learned over time is we got to create a fun environment for these four members too. They have choice going to do the professional time and effort. We put a lot of effort into creating an ecosystem where we have these operating partner summits where you invite individuals. All of our board members from all of our companies come here twice a year to cross pollinate and share ideas and bring perspectives. But it's creating a family and an ecosystem system of really talented board members who want to provide advice and give back. Part of it is altruistic, part of it's financial part of it's fun. All those things together create a really great board member and I think increase the odds of success. All of this is about increasing the odds of success. And I think if we do all these things well, I'm not sure which part will work every single time, but it's a system and I know the system will prove the outcome. I tell our lps and investors all the time and our future seller partners, I say I won't promise you the outcome, I'll promise you the process. Our promise is written down, it's clear. And we do the same thing every time and we make it better sometimes, but the process is the same. And I think that is, I think what great operating businesses do. Public companies, like a Donner, like a Roper, they do great things by a system. And I think that's something we're very focused on.
- [30:11]
Justin Ishbia
Why are you doing this in the industrial subsectors versus somewhere like software? What is it about that addressable market, those business models? Why pick that instead of something like software? That if I took this system and went and did this in software somewhere, it probably worked pretty well. Why not?
- [30:30]
Justin Ishbia (continued or elaboration)
We may at some point, but we started healthcare. I always felt like the founders of health care businesses were clinicians by training. So I went to Vanderbilt for law school. My cousin, I'm super close to Vanderbilt for med school, his eight buddies and my eight buddies came one group at Vanderbilt and we're all still buddies to this day. He's just the smartest individual I know. But these doctors, man, they just don't get the business out of it nor do they care, just the reality of it. And so I saw that enough. I said okay, I could partner with my cousin who would be is my age, but him when he's 50 and supposed when he was 30 and have him be my business partner. And guys like that create tremendous competitive advantage. And so it was always like we partner with individuals. Main street businesses where the founders have a outsized technical skill, but that's cutting your eye open for a surgery, for a cataract or whether that is in the industrial sector, someone who's really good at repairing roofs or whether in the business service sector someone that's great at making sure your technology your outsourced. It works really well. To me it's always about I believe that people excel at things they love to do. Most doctors did not go to medical school, for example, to hire the front desk person or to evaluate professional development of their peers. Great, you go be a Doctor and do what you love to do and like to use the words I want everyone working at the top of their license. So by that I mean what can you only do based upon your expertise and the other skill set. And so in a doctor's example, I want the doctor who's a cataract surgeon seeing the follow up patient for the routine follow up. There's no complications. Very simple. You know what A nurse practitioner can do that and they're trained well enough to know there's a problem here. You need to see the doctor on this sort of stuff. And by the way the same thing. The nurse should only see what the nurse should see and the medical assistant should medical assistancy. And that creates stickiness because employees love doing things that are unique only they can do. What frustrates a doctor is interviewing the front desk person. What frustrates a doctor is having to do some of the most simplistic sort of follow up or coding putting into the system. And so we like to partner with individuals who love what they do, are really darn good at it, but want to leave another part of the business alone. They do not want to do it. So oftentimes like yes I software. Software founders usually are pretty savvy business people as well. They started the business because they wanted to create something enterprise all parts of it. We started in healthcare because usually doctors wanted to do good and help people. It was a byproduct of their job to have to do the administrative part of the business. We said great, you go be the doctor. We'll be the business part together best in class and create a business that will help more people and scale. That's just how we think about it. But there's so many different parts of the world that you can create value in but can't be focused. I always tell people when you have a lot of priorities, you have none. And so we very focused.
- [33:13]
Justin Ishbia
Sounds like thesis generation and evaluation is like the furthest thing upstream at shore and how you think about things. Talk me through that part of the business. Where did these theses come from? What makes a good one, what makes a bad one? What's the difference between one that almost gets in but doesn't quite really understanding like how something gets through that part of the process would be fascinating.
- [33:34]
Justin Ishbia (continued or elaboration)
I want of course each invest professional. So partners have between three and seven, principals have between two and four and vice presidents have one to two only pick your own thesis. Patrick. You may love urgent care and I may hate it. I may love veterinarian. You May hate dogs. So I want the investment professional pick something they find interesting. I find the best investors are curious. You're curious about something and you want to peel the onion layers back. And so how we work here at Shore Capital is every investment professional, senior professional, which is a vice president, principal or partner, has autonomy to pick a certain number of sectors they want to focus on and they can't focus on everything. For us, everything starts what's called a roadmap. A roadmap is essentially a white paper on industry complemented by the industry conferences and also what we call the Mount Rushmore of the industry. So in every industry there is a Mount Rushmore of companies and executives. And the industry roadmap will also include the conferences. So your job, Patrick, if you were trying to figure out urgent care industries, you have to learn to greenlight a sector. You have to physically go to one of the industry conferences in person, walk the floor. You have to identify the Mount Rushmore, lay them out, who they are, you have to identify the Mount Rushmore companies, where are their disciples, where have they gone, where are they at today? And the pros and cons, once you do that as being between a 40 and a 60 page white paper, effectively present to committee and you can say, hey, I'm Patrick and I love urgent care. And this is why I think we at Short Capital should greenlight the sector and turn it on so the whole process goes around. Have they present for their peers. It's almost like you're standing up in front of 50 people. The committee's size changes depending upon the vertical, but you present and your peers are pressure testing it and there's, it's part of. So we're organized through our Invest community memo process. The team gets assigned, I assign team members to Patrick who wants to put forth urgent care, be five people on the invest committee and if they agree to it, they are with you for the whole life of the journey. So from roadmap through creating your board LOI platform, add ons, budgets exit and their carry in the future is tied to your results. And so they have their own carry for their own deals. They lead, they're judged on your outcomes as well. And so they're very incentivized to make sure that the thesis makes sense. They have to also employ capital. They have to also make sure that they're not just saying no to everything can be Dr. No. But it's a five person team who effectively votes to greenlight your sector of urgent care in that example. And there's smart People asking smart questions and there's trends we're tracking. Question we oftentimes ask is why does the small player win here? Why does the little guy win? And especially in health care. Healthcare is inherently a local business and so that makes a lot of sense there. But a lot of businesses where a small guy wins as well. No, it does not do well. You must be multi continental. That is not good for us. We're not going to invest in the sector. And so each industry has its own trends and we try and identify tailwinds where pockets going. And like in health care especially, it's the consumerism of health care. That thing something believe in. But it starts with this thematic approach or very theme driven. So in this journey, while you're in that roadmap, you're also recruiting your board members. You found out who the Mount Rushmore is before we even present the Mount Rushmore. The whole roadmap, you have 15 people you think could be on the board and you're sharing with them the roadmap. Hey Patrick, you're the urgent care expert. Here's my 20 pages of my deck. Where am I wrong? What makes a bunch of sense? You're getting a bunch of industry domain expertise. Bouncing ideas off people, making phone calls through LinkedIn, through different search engines. You're outbound. And if you traffic in that sector enough, you will eventually learn the good guys, the bad guys. You will learn who everyone respects. Tell you one trick of the trade that we use a fair amount and I look at all time is you call up the industry association, Urgent Care association of America. You ask them for their agendas for their last five conferences. If someone spoke twice or more in the last five years, pretty darn good proxy. The industry respects them. I want to meet that person. There are little things like that that the industry itself, there's always industry panels about the lawyers and the bankers. But industries promulgate certain people and you want to get to those individuals are so for me everything's about the industry. Industry becomes the core of it. And then that partner insure capital or president, vice president or principal, they own it and their job is to do it. And they oftentimes may invest in that sector 2, 3, 4 platforms of their career or more. My partner Ryan, who leads urgent care for us, he's on three platforms urgent care sector and what surprised me does more, my partner Chris has done soon three dental deals. And so your job is to know the sector really well. Over time it may change, it may change. If you want to invest in it again. But you almost become a strategic acquirer after a period of time because you know the industry so well. I tell oftentimes our executives, our board members, they've forgotten more about the industry than we'll ever know. But for finance guys, our job is to be most educated on domain expertise. Impress you to want to join our team because we're prepared, we want to invest. And then for the sellers I'm telling the seller is when you choose to sell to somebody or partner somebody, there's two parts of the deal. There's the macro and the micro. The macro is do you believe in the sector urgent care microwave is to leave my company. I want to take one of those two off the table. I'm believing urgent care. I have a whole machine behind me, my 50 page deck. Here's my board members. We create a board before we buy the company. So you get the industry, we get greenlit and we recruit a board. We may don't have all seven of them, but we'll have easily three or four of them and they're required to go with us to meet the sellers before we buy the business. And so in these early days you have the main knowledge. You have people been around the table who know the nuances of the industry. I'm telling the seller, don't worry about the industry any longer because if it's not you, I'm going to invest in urgent care. We're going to invest here. Now all we have to do is agree upon why you're best in class and why we should together go build something that's pretty special. And I think that resonates with sellers a fair amount.
- [39:15]
Justin Ishbia
Yeah. Let's talk about within the given thesis. Starting to look at the individual assets, the individual companies, the diligence process and what you're looking for or looking to avoid once you get down to the actual thing that you're going to buy. Describe in whatever way you want the things that matter most to you. I'd love to keep walking down this chain and negotiation and operations after the close and everything else. But starting with okay, we've got a company that's interesting for some reason. What are those reasons? What are you looking for in diligence?
- [39:44]
Justin Ishbia (continued or elaboration)
Almost always we're doing a roll up the sector. We're almost always consolidating. And so one of the things that I look for almost right away is reputation amongst your peers in the industry. And there's a really simple test and I'm steering people's my inside baseball because anyone should do this. I don't think it's rocket science. Use ophthalmology as an example. We'll try and provide an ophthalmology company. I'll try and identify in that same town three or four ophthalmology practices in town and call them up and we'll do a secret shopper or something and ask them if your mom had to have a cataract surgery and she could not go to your practice, who would you send her to in town? And I want the company that I'm buying to get that list multiple times. Now you have to recognize there's always in town a coconut Pepsi. There's somebody that likes children, somebody doesn't. But people in town know who is pretty good in town. So why it's so important is reputation of that first group is everything. Because those who are in the know only want to join the winners. The New York Yankees are oftentimes viewed as one of the best major league baseball teams. Very different the AAA team. There's no way the Los Angeles Dodgers want to join a AAA team. The Dodgers would join the Yankees in a roll up of the baseball industry because they're viewed as best in class. So I think we have to take it the same way. So reputation number two. I want a founder who has a shared vision to grow and has a desire to learn. Back to curiosity. They want to understand and want to grow a business beyond their own means and they're excited about partnering and they have an open book. Our best founders clinically, technically, you know there's a baking sweet goods or a doctor or a plumber. We have a water safety business. It's so important that they're really good at their craft and they're able to identify who are others good at their graph. So to me it's reputation and industry technically sound. You don't hear me say management team very often, do you? Because it's important what we're going to go build. We're going to take what you all have and surround you and compliment you. Oftentimes the founders are going to be a role but not the CEO. And we're very clear on the front end. By the way, our biggest company is a veterinary company. We started when it was 5 of revenue, 1 of EBITDA 3 locations. Today it's over 400 locations, over 1.3 billion of revenue. That's founder, veterinarian is still a CEO. So that's one extreme. That can be one extreme. The other extreme I can say Patrick, you're a great emergency room Doctor, if we're going to partner, you're not going to be the CEO in our thesis, if you're okay with that. But you want to be the chief medical officer. We would love you to be the person who helps recruit other doctors to this team and sells the value prop of why we can help people in rural parts of America better than anybody else. And so to me is very much reputation, technical skill set and a willingness to learn and a curiosity and want to grow. Those are the things I really focus on. There's always the minutiae of customer concentration and reputation. But reputation is encapsulated so much because this is a role thesis. I'm buying one business and staying still. We're growing our business usually over 100% per year organically and organically.
- [42:37]
Justin Ishbia
I would say on average that levered roll ups have sort of a bad reputation. Why do you think that is?
- [42:43]
Justin Ishbia (continued or elaboration)
I would say if you see a one lever roll up, you see one lever roll, there's snowflakes. Look like the restaurants are good restaurants or bad restaurants. Same type of dynamic. Oftentimes they get bigger. Also the founders have already left the organizations. You know, in the earlier stage where we start. These founders are very hungry, want to grow these businesses and we like to under lever so we don't put pressure on these teams with leverage. We under leveragement, no leverage at all. Also I would say people point fingers at roll ups in a way because the target's on the back of the winner. It's hard to identify all the small little ones. And yeah, when you have 4,000 employees, you're going to have some are disgruntled and there are going to some who leave the organization. So you hear more of that noise versus a 4 location versus a 400 location. I generally believe that roll ups end up in a better quality of the business usually at least for us. We create usually a technical advisory board so it can be a bunch of artisan bakers, it can be a bunch of veterinarians. We want to have a technical advisory board. We're able to bring together and create a dynamic of what is the best in class delivery of the services. And so we spent a lot of time on that. And so I recognize that more arrows are shot at bigger companies. No one talks smack up the AAA team. They talk smack off the New York Yankees. You know why people start in New York Yankees. So I think it's easier to point fingers at. And do bad things happen? Sure. By normal scale, if you have a 400 locations, more likely one doesn't go as well as if you have four. But I think in totality, those businesses are able to pay their employees better, create a better margin profile, and therefore deliver better quality of service to the customer. End of the day, why do they exist? Because customers keep choosing them over and over again. People ignore that part of it. It's like, oh, lever business that is a part of a levered roll up. I'm like, yeah, but the customers keep picking up, want to know why? Because they believe it to be a better value prop than going to somebody who is not part of that roll. Because usually they can offer more services, hopefully a higher quality of care. And there's smart people running them with metrics like net promoter score and other things they've been more sophisticated to identify. This is what my customer wants. I'm delivering it in a very efficient way at lower cost.
- [44:48]
Justin Ishbia
What have you learned about negotiation? A lot of deals you've done.
- [44:54]
Justin Ishbia (continued or elaboration)
So people say to me, justin, you're in private, you're in finance. I quickly correct them. I say, no, I'm in psychology and sales. Look, end of the day, I always tell our team members at shore, we've done now almost 900 transactions. We've had zero lawsuits. If we ever pull out that document in the future, have to look at it, we've already lost. We negotiate to do our best, to have all the sort of things buttoned up and sort of stuff. But end of the day, I want people to believe in the growth story. They have to believe what we're building together. No. Lawyers sometimes will try. And I'm a former lawyer, recovering lawyer. I understand the lawyer's job, but no, when we're negotiating, most important thing is negotiating, making sure we have catastrophic downside protection. I need to make sure if Patrick was on the front page of the Wall Street Journal for doing something uncouth, I need a way to separate. That's important to me because that has risk. I think the most important thing, especially doing a roll up, and I think most people get it, is what we have to do is create an environment and a structure so that not you. But if someone else down the road or do something, we need a way to unwind that person. If you wear your shareholder hat as opposed to your individual hat, I think most of our partners get it. They go, okay, now if I were to do something wrong, that'd be bad, but you control yourself. The hardest negotiation is that unwind part. I know we've never had to dissolve, never anything worse than three times our money. But I think the negotiation time where it ends up most often for us these days is sellers negotiating for a larger part of the upside. That's where we end up pushing where it used to be. We do an A20 deal now as being 60, 40 or 55. 45. And that's where a lot of negotiation comes. But end of the day we prefer in person. We're not fans of zoom negotiation. I want to look some of the eye and say this, what do I do? Yes, I can write down a paper all the weird things that happen in this world. But if you trust me, go talk to these 25 references. I'll give you everyone here partner with just trust. And if you look at those documents, we failed you. And so not saying we have an unwound partnerships, people have not worked out, that's definitely happened. But on the negotiating side, to me it's being very thoughtful about who you're partnering with in the big picture. That's I think strategically. But I'm gonna get one level down more tactically. I think I made sure to on our last phone call. We have a system at shortcut we call our green yellow red system which basically for every material document in a transaction, a purchase agreement, an operating agreement, a credit agreement, employment agreement, a lease, There is roughly 15 key terms on every document. And we list all those out and we have a scoring system internally. And I use the simplest term a non compete. Everyone knows a non compete, you sell business as part of the transaction. 5 years is market. That's the most time it is. If it's four years, that's pretty. I think pro seller. Anything less than four years is really pro seller. We have a very simple system. Back to why our teams can grow and people negotiate their own deals is it's a whole entire system that everyone in our firm knows on these 15 key points. They know they can agree to on their own and know they need to raise up the flagpole. Everything for me is a function of price and terms. I'm willing to pay you a billion dollars if it's a dollar a day for the next billion years. So whatever it may be, and so on the negotiation part, I like to figure out a way that strategically partners feel like they're part of our team for the beginning and they're negotiating not in their employee hat, but in their shareholder hat for a long term. And more tactically, I want to give our vice presidents, principals and partners the autonomy to negotiate their own deal. I believe the very best people want a super long leash. The Appropriate check ins, give them that autonomy, create the rules, expectations and then give them a scoring system. They compete with each other. People love competing with each other. And the best the light shined on them and that's what we try and do.
- [48:31]
Justin Ishbia
It's a fascinating set. I just love all the systems and how they all intermingle. If I was the world's most skeptical but thoughtful LP and I was looking at all this and I'm sure you probably talked to this person, you probably picture somebody, what do you think they would poke in on and say is the weak point of Shore in this whole like system of systems?
- [48:50]
Justin Ishbia (continued or elaboration)
I think it's that first time CEO, the early career energy, are there enough of them out there who are high enough quality that can scale up to the next level. And so I agree with that. So we internally have I like the homegrown. And so we created this program now six years ago we call our CXO program where we recruit from the best business schools. Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame will hire individuals that come to Shore Capital, will be a chief of staff, go to our portfolio companies for four or five years and if they're one of our very best, we'll promise to back them next. And I think we have a unique fun dynamic. I'd be lying to you if I said I'm Gonna put a 31 year old as a CEO of a $1.3 billion revenue business. But my average business is 18 of revenue when I buy it. I sure will make a 31 year old first time CEO if they performed well in the past. And so I think our biggest risk is the high quality talent, want to run small businesses. I think though there's a lot of makings to it. And so we home grow our CEOs through this program called our CXR program. We homegrown our CFO. So we hire people out of big four. Accounting firms usually come to Shore Capital for a 30 month tour of duty. They go through this program and the best ones become cfo. So conceptually how I think about it is I offset it by recruiting and home growing my own CEOs and CFOs. That is the risk of are you going to trust for a roll up a CEO who's 41 years old first time. And one of the biggest challenges if you get into a roll up and somebody's not going so well a CEO is wrong. But there's a big pipeline of deals you're buying. It's hard to unwind that and start again. We've done before that is the biggest risk is that when you're doing a roll up you change leadership. But that's why we have a strong board. So it's not someone steps off the board become a CEO. I think that's where I would be if I was poking holes in my own firm is can you find enough CEOs and CFOs and leaders? I believe the answer is yes. And we try to home grow them. And also as we needed to grow our firm, we have a system internally and kind of we're all star tracker. Each company has its own lists are internally of people we think are best in class and we'll use them again in the future. So how I think about it is talent wins, but that talent in the system I think the system wins. But the whole is enough talent at the velocity that we're building businesses.
- [51:01]
Justin Ishbia
There's this great book called Innovation Stacking by one of the founders of Square where the whole idea of Square's eventual moat was all these small things that are built on top of each other. And then the chain of innovation is itself the competitive advantage. Sure. Really reminds me of this. One thing that we haven't talked about in this theme of innovation stacking is how to decide another fund vertical to go into. You have a real estate fund for example like that's like a surprising thing coming out of healthcare. Maybe tell that story. Why real estate and what is your philosophy of stacking unfair advantages and how to think about that as you build the firm.
- [51:34]
Justin Ishbia (continued or elaboration)
I think stacking unfair advantages core to everything I think about how do we have unfair advantages. So I view a market cap all of our funds with healthcare, food and beverage business services, industrials. That's its own product. But real estate's a different product and next year different product. Healthcare Advantage fund. I tell our LPS and I tell our team members at Shore Capital. I will only add a new product if two things are true. Number one, we have an unfair advantage meaning that odds are tilted of success in our favor because of the dynamics it helps. Number two is health. My base business. So real estate. So we have a real estate fund. We were acquiring so many veterinary businesses. No, I think no. Several hundred that we kept in all these salespex and it was slowing down the deals. It was causing problems for us. And so we felt like there's an unfair advantage by. I know the CEOs of my veterinary companies quite well. There's an opportunity where they want to stay in a location for the long term. But the Underlying real estate is owned by the veterinarian and they oftentimes don't want to invest in that. So how do we figure out a dynamic where we know the location is great. Underlying balance sheet of the portfolio company is great. We have an unfair advantage of knowledge and specific knowledge of the location. And then it helps my base business because I can do things to help the base business to potentially lower the rent in exchange for longer term on the release. So the lease becomes more valuable in the market ecosystem. You aggregate 100 of those together. Valuable asset becomes more valuable to the veterinary company by having a lower cost lease or more capital for tenant improvements. So it's a win, win, win scenario. The portfolio company wins because they have more EBITDA or more capital expend. The real estate fund wins because there's an opportunity to elongate the lease and exchange for some things that creates a better value over time. And and our investors win by low cost capital will work in a more efficient way. So all parts of that make sense to us. So summarize. I would say we will only extend products that short capital. Two things are true. We have unfair advantage helps our base business. And I know having a real estate fund helped my base business on the acquisition and also underlying portfolio companies. There's a current conflict. The conflict is not in the buy though. The conflict's in the lease. And there's so many REITs out there with public leases. And we have Marcel's. Just take the REIT that's out there, use the lease from somebody else and just move it over and makes the same terms. And so that's how we think about it. But the other products that we do in the future. But it has to help my base business and I have to have an unfair advantage.
- [54:02]
Justin Ishbia
Talk mostly about what you buy and what you do. We haven't talked about selling these businesses. Who do you sell to? What have you learned about the relationships with those sellers? You're selling a product. A product is a business to some financial or strategic buyer. What are the features that they look for in a product and how do you think about that final part of the chain here?
- [54:21]
Justin Ishbia (continued or elaboration)
So picking the actual buyer over 14 out of 14 sales. I never picked the right buyer. But prior founding short where to the private equ firm and partners have as well. I hear my mind over and over again. My old boss wanted to buy. I can think what they used to say over and over again. And so how I think about it goes back to how we organize. We was an industry management company Back to the very beginning of the conversation on the industry. The roadmap industry is growing and I think about industry growth of a 15 year cycle. 15 years, got to be my whole period. 5 years, my buyer's whole period. 5 years, my Buyer's buyer. It's kind of a 15 year time period. We've sold to public companies, LabCorp and Homa, big public companies. We sold to the biggest, the biggest private equity funds, KKR TA Associates. We sold to model private equity funds and we've done some TMT vehicles as well. End of the day, I have high confidence in the following statement. If I buy a business in a growing industry, that is I'm buying an inefficient part of the market. We make it better, we grow it from single digit EBITDA to the teens to 30 of EBITDA. We will have lots of buyers, both strategic and financial sponsors. So whether it's with a platform or an add on, I think I like that situation. I'd like to invest what we call barbell industries, meaning there are usually four or five very large players and there are thousands of mom and pops, but not much. I want to go create the new middle one and then larger players want to buy it. And so in the day I also would say larger funds want to buy, which by the way, some of my investors are friends of mine who run quite large funds. I hear when I talk to them they want to buy a business that's a proven track record of acquisitions, organic growth that beats the industry average by at least 300 basis points. One technology stack system that all businesses are on because we have those three things you can acquire, you can make them better on one technology system. They can buy it from you. It's 30 but dot and go to 100. And so we're basically, we like to say at Shore Capital we are building platforms, not buying platforms. We like to think of ourselves a lot more like a venture capital firm in that the venture capital firms partner with a founder, great founder, has an idea, but usually has a relatively small team. And then the venture capital firm works with them hand in hand and helps create a whole entire management team. We buy businesses like an orthodontics business. We'll buy one practice, literally one practice with one gentleman, one lady. And we'll go hire a CEO, a cfo, head of business development. We'll go build a whole entire platform and on this journey we'll have some mistakes along the way. We'll have added a lot of awesome people. And when we're at scale, we should be in the middle of the fairway for a fund that wants to deploy between 50 and $300 million for a platform which is a billion to $3 billion fund. That's where we play in the buying environment. The inventory that we're creating I think has strong demand.
- [57:00]
Justin Ishbia
So funny hearing you describe all these elements that I'm just picturing this big effectively, like a money machine. The widgets themselves are companies and platforms and you're perfecting the factory, if you will. What parts of the factory floor do you think are interesting or surprising that we haven't talked about yet?
- [57:18]
Justin Ishbia (continued or elaboration)
So I think it's our focus on operations. And so again, I'm not smart. I know what a copy of the first round capital. It's a venture capital firm. I got to know them a little bit and copy what they've done. I think my factory floor is what I call our operations team. We call our portfolio performance group and a group called the Centers of Excellence. I buy businesses, 18 of Rapid, three people. My marketing department. The person who runs it is not somebody who's run a very large business. What we do at Short Capital is we have a Centers of Excellence gentleman named Adam Werder. He runs my marketing Centers of Excellence. He has a team underneath him as well. His job is to be the node and for our 43 portfolio companies. His job is to create a cohort of the head of marketing from all 43 companies. And they all four times a year, get together twice by zoom, twice in person, and countless email interactions in between. And this is my factory floor where I call it lift and shift. I am getting the newer companies to where they need to go faster. And example of that would be orthodontics business. It's a B2C sort of marketing engine now. SEO marketing and sort of direct marketing to a customer. For orthodontics took us years to build a platform to get to the right system process metrics we use. About a year ago, we bought a med spot business. The marketing is very similar. It's B2C as well. And so we lift and shift. Adam's job is to help recruit, take the incumbent marketing leader, work with them and they're the right person. For long term, great. If not over time, work with the CEO to help top grade that individual. But then lift and shift the systems and processes and tech stack from marketing and the orthodontics business and apply it to the med spa business or apply it to the veterinary business. There's so many different Personas we have that Things change a little bit. But that whole entire journey is I think some of the secret sauce and it's not replicable unless you hire the right people to do it. I just think there as we have billion dollar company resources applying to million dollar companies. And so the woman named Julian Larimer is the leader of our division. She's a former private equity backed CEO, incredibly talented. She runs the whole entire group roughly I think 13 functional disciplines, effectively a senior management team from a Fortune 500 company that work at Shore Capital and their job is to help every portfolio company in that discipline get better. The chief data officer, chief technology officer, head of human resources, head of talent. All these people help all four, three companies and elevate all their gaps.
- [59:41]
Justin Ishbia
I think you told me that this is a crazy stat. If it's true that nobody above an associate level has ever left Shore, how have you made that happen there? A lot of people, a lot of years, a lot of companies talk to me about career trajectory in the system there.
- [59:54]
Justin Ishbia (continued or elaboration)
So we have 150 full time people. So if you're a vice president, a principal or partner, not one person has ever left short capital, an associates, go to business school and then come back a VP. I think we have about 43 or 44 people who are in that bucket. Not one person's ever left and lots of the philosophy behind it. So I think a little bit of it is hard to be 35 year old, look at the founder who's 46 and say when do we have my chance? But having different verticals, healthcare, food and beverage business services, industrials. My most talented healthcare vice presidents went on to become principals. My business services fund and same thing industrial. So there's a little bit of a waterfall where the homegrown talent moves to a new vertical. My dad always taught me a couple of things about retain treat your people well. But he said two things, Justin. Pay the market comp or a little bit above market comp. And most importantly, people don't quit their friends. So my job is create an environment where they come friends with each other. And so that means holiday parties. It means we have a thing called a party. We sell business, we have celebrations. It's important for I think leadership to know each other's spouses. And so I think it's really investing your people. Because if I'm a seller of a business, the thing I fear most, if I have a friend who sold a business, a private equity firm, I want to drill in really carefully who is the partner on my deal and who will Be with me this journey because this turnover in those ranks is really hard and decreases your odds of success. So I think it's core competency to private equity and for my business is to make sure that people stay the same when they're partnering with a founder in a business. And so I guarantee you forever, ever will be here the same way. The answer is no, it's not realistic forever. But for 15 years now, no one's ever left. And I think it's because people don't quit their friends. And my job is to create an environment with friends, develop, pay them in a way they feel really good about and have financial upside. And again I go back to a really long leash with appropriate check ins where goals, nerves and goals oriented people know their own goals, set their own goals and they know when they're performing.
- [61:45]
Justin Ishbia
Yeah, I love the idea that I think you pay for people's dinner if they want to go out. If there's three people or something like that, like every little detail is so thoughtful.
- [61:52]
Justin Ishbia (continued or elaboration)
Three or more want to go dinner, I'll pay for it. One of our younger guys, name's Tim, I won't say his last name but Tim, you know who you are. He had like a big build a club one night and he's like there's three of us. And I was like, tim, I'm paying for it this one time. But clarifying point, if it's a bill over X dollars at a club, it doesn't count anymore. I love it.
- [62:09]
Justin Ishbia
Always drink. The system.
- [62:10]
Justin Ishbia (continued or elaboration)
Everyone in the team loves the kid. He's a great young man and he's awesome. But I was like it's meant for not a club bottle service somewhere and I'm not paying for that for everyone for a long term. But he followed his roles and he's a culture carrier and I want to create nodes of culture carers, people who want to be here. It's a very high bar to the vice president though when he makes vice president I'm basically telling you I view him saying to you I want you here for a career. That's what I'm saying to you. It's my job to get an environment. They want to be here.
- [62:37]
Justin Ishbia
You obviously love sports. You have spent a lot of time thinking about sports, the leagues, teams. You're now an owner. Talk about why you love this so much and more importantly, everything you've learned about becoming an owner of major sports franchises.
- [62:51]
Justin Ishbia (continued or elaboration)
Yeah, so no, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoenix Suns about a year ago now, February it closed, but we signed the contract in December last year. First of all, we're stewards of a community asset. We don't own the team. You know who owns the team? The fans, the X million people who live in Phoenix. That's who owns the team. And there's a lot of theology between private equity investing and sports and metrics and numbers. But we buy a business. Know what we did and we partnered with Phoenix Suns. Yes. Anyone who works there. The first day Matt and I met with every person, we had a town hall meeting. We all sent a survey out that said, tell me the two things that we should keep doing here. Tell me two things you stop doing. Build all time. A short capital also. And we got over 300 employees roughly. We got 270 some responses and I read every single response and I think it's important. This isn't the glamorous part of, you know, partnering and running businesses, but the details matter and you hear themes of the coffee sucks. Okay, that's easy win. How do I make some easy wins along the way? But the sports business is a complicated business. I view sports and private equity very similar. There's a scoreboard at the end of the game. In private Equity it takes 10 years for the score to flush out. In the NBA, you can see tonight, if you wonder, we lost. But there's a lot of similarities and I love that there's a zero sum game in sports. There's only one champion. Matt and I talk about it all the time. In 30 years from now, people look back at hopefully Matt and I's ownership and stewardship of the Phoenix Suns and the Phoenix Mercury, which we're really excited about. The Phoenix Mercury is that no one say, oh, they improved the ebitda margin by 400 basis points. No one's giving a crap. They're going to want to know where they're competitive and they win championships. End of the day we have four pillars and like all our business, short capital, it's goal oriented, it's values, its core values. And so at the Phoenix Suns it's number one, we want to create a raving fan experience. It's got to be an amazing fan experience. People forget it's not a sport, it's entertainment. These people have choices to spend their money at a movie theater, at a driving range or a basketball game. So I want to create a raving fan experience. Number two, take care of your employees. Want a place where it's a great place to work and people are happy and they want to be there. Number three, we're a community asset. Give back to this community, be stewards of this community asset and do right by this community. Number four, win. Win championships. To win in everything they try and do. And so sports investing has become, I think, a bigger trend the last decade or so. Now we're big fans of it. I don't think there's any more NBA teams in the near future. Maybe one or two, but beyond that. But there'll be more and more people throughout America. And end of the day, I think it's an intellectual property at its core that is much like the highest and best type of real estate. The Corner State made in New York. Phoenix Suns are going nowhere. Phoenix Mercury are going nowhere. And so it's a fun opportunity and it's a really opportunity to give back to a community and. And hopefully create memories. Matt and I grew up playing sports. My best memories were my mom and dad and I, Matt going to games. We didn't have the best seats in those days, but our heartbeat was watching our Detroit Pistons win or loose and hopefully create an environment like that. That's the fun part about sports. It's a platform for good and for change and create a lot of positivity. And so we're really excited about that.
- [65:47]
Justin Ishbia
Has anything surprised you so far about how the league, the teams, the ownership, the ownerships function and work, anything been really surprising?
- [65:57]
Justin Ishbia (continued or elaboration)
It's much more of a partnership amongst 30 teams than I thought it was between the white lies. It's fierce basketball operations. Like, no, it's like, no, it's a zero sum game. But people are quite collaborative. Some of the people you know, they're well known. When we joined the league, let's say next to one of the guys that lunch and he said, congratulations, you're brash, you're young. I was the same thing. You'll make much mistakes. Talk to me in five years, but have fun on the journey. So people are very helpful. At the end of the day, we want to create a great product for the fan. And the NBA is a great opportunity. And the other teams want to help each other. We want to help each other. I want your team to be full and my team to full. You know who I want to quote, unquote, lose is? I want the other sports or I want other entertainment options to lose to the benefit of the NBA. But I think the camaraderie and the willingness to help each other, I think has been something not just in the game, not just in sport, but Also outside, if I'm doing something in a different community, you know, I'm in Oakland for something, I meet somebody, they able to open a door to somebody that's been really helpful along the way.
- [66:54]
Justin Ishbia
Also, you talked about Mark Leonard before, and you're just like a benchmarker. You remind me of Mitch Rails, who facing any new challenge, interestingly, also doing this exercise with the commanders right now. If it's about the stadium, he's meeting with 30 stadium owners and stadium operators. If it's about something else, he's benchmarking constantly looking for great ideas. And it seems like you've done that. Who, apart from Mark, stands out as key individual people or firms that you've learned from?
- [67:21]
Justin Ishbia (continued or elaboration)
I've learned from so many from people. Sequoia Capital, they've been great to me. Individuals over there, they're different. Sequoia Heritage, more specifically, there's a group, they have a network. And I've learned from them of the power of a network introducing really talented people to each other. People with professional success are very selective how they use their time. Creating an environment of bringing the best and brightest together, I think creates a lot of opportunity for success and unique outcomes. So I think some of the people over there, Kevin Kelly is one that. Keith Johnson too, that stand out a whole bunch more specifically in the private equity. One individual who I've learned a ton from a mentor of mine, his name is Kent Daughton. He's the founder of Keystone Capital. He's, in my opinion, amongst the most humble and successful people ever come across. It's a steady hand on the wheel and doing the right thing over and over again. Also a gentleman named Jim Forrest who was at Windpoint Partners for a number of years. He is now the chairman of Shore Capital. He is an operations leader at heart. He's always thinking about the customer, the customer, the customer. Mark Leonard had been a great friend for me, and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined process. And then there's a professor at Harvard Business School for Executive Education. I wrote a school there named Boris Groisberg. I learned a ton from as well, on process. And he studies Mitch and other people in the DBS community. And I think if you said, pick one business that I aspire to be most like on a consistency in process, it's Donher. There are people, Donahue leaders who are on the boards of my businesses. I've recruited people from Donahue who have retired to be on our boards. And so those are people. I think that end of the day you have to find your own niche of individuals who want to support your vision and want to be around the table and have a good heart, that want to help people, help me on the way up and help me. And I want to be able to do that to others as well.
- [69:07]
Justin Ishbia
My guess is that you're effectively never satisfied with the system. It's obviously evolved a lot. It keeps improving. Where does it feel the most incomplete to you today? How do you most want it to improve over the next five years?
- [69:20]
Justin Ishbia (continued or elaboration)
Most incomplete. I think you're never complete at the short capital level and operations. I get frustrated when I hire a new team member and their first two weeks on the job. Their 10 business days aren't scripted almost by the hour. They need to know where to go. The onboarding experience. I'm very much into experience and process, making sure when we've made a mistake somewhere else is promulgated to the whole entire team. And so a thing called what we learned. Every time we close a platform, we do a one or two page on what we learned and we share the whole entire firm. How do you balance with scale, efficiencies and knowledge sharing? That's the hardest thing I do every single week trying to balance those things. It is more efficient for very small people. I'm going to know things, but it's way more valuable for knowledge sharing. I didn't think of short capital like a academic teaching hospital. My job is to teach our principals, vice presidents and partners all the mistakes we've made elsewhere. And so I think the biggest challenge is we've made mistakes not making the same mistake twice, documenting it and making sure that it's front and center, having a system around it. So we have a short capital playbook on the operating things. Like for example, we made mistakes in the past where we did not renew a lease at a portfolio company at an important location and the landlord extracted a pound of flush out of us after the fact. What we did after the fact is now all of our businesses are required to have a thing called lease query. I don't care if the system was called lease query and all of our leases of all the data points in the system to make sure we never had that mistake happen again. So there's prompting. And so I think the biggest way to improve the organization, I think it's hiring more and more talented people, getting tighter and tighter on processes, making it incredibly clear and reducing the likelihood of making the same mistake twice. I say all the time At Short Capital, very rarely is there a problem of first impression. When you have 35,000 team members and you have hundreds of locations and you have everyday things are occurring, the same mistake can happen twice. How do we reduce the risk of that? And that's through knowledge sharing, but doing it in an efficient way.
- [71:14]
Justin Ishbia
Is there anything about how you spend your personal time that you wish was different?
- [71:20]
Justin Ishbia (continued or elaboration)
I wish there was more time, I would say, to work with Sellers. I've not let a deal in Short Capital in seven or eight years now. I miss some of that relationship with building with Sellers. Those early days of Shore Capital. The board members I personally recruited, I was one of four partners and I was the lead partner on a lot of those early deals. As the firm gets bigger, my job is to run Short Capital and give people resources they need and remove obstacles for the system and the whole organization. But you kind of miss the newer boards that created a lot of great people, some really talented people. I just don't know them the same way as those early boards. It's almost like your high school buddies. You know them better than your work buddies. Not that you don't like your work buddies. I like them a whole bunch. It's just that my high school buddies have a little special place in my heart. And so leading a deal, negotiating a deal, working with a founder, recruiting a CEO, I do less that that's coming to the very end of it. But no, I do miss one of the best questions I think that LP has ever asked me. And if I was an lp, I'd ask people the same question. Do you think you're a better investor or a better manager? And why? And I think at least for me, the right answer for Short Capital is I have to better manager. I love investing, I love buying companies. But to create what we want to create and build. I mean our system grow, we want our system to grow. It's a manager. You're a leader of people. You're imagined system and processes and create increase the likelihood of success of many things at once as opposed to having a very effective leading one deal. But that is not going to create the same value for our investors and for our team members. And so I think it's my job to create an environment of kind of see one, do one, teach one and let our best people do things that they've seen done before.
- [72:54]
Justin Ishbia
I would very eagerly read a long white paper or HBS case study or book about all these various systems. I'm really thankful for your willingness to share the very specific details of so much of what's behind shore. Most firms are not willing to do that, and I think it's pretty cool that you've done it here today. I am sad and forced to go to my traditional closing question. I could go for you on this system for hours and hours with you. What is the kindest thing that anyone's ever done for you?
- [73:20]
Justin Ishbia (continued or elaboration)
That's a great question. I've heard you ask it before. I was fortunate to have lots of mentors and different people in my life who made a really big and positive impact on me. But one I think actual piece of advice someone gave me and I've acted on the last decade for sure. And I'm proud of my televon. Some people that work my organization whose advice is this, try and have one friend in each decade of life. So a friend in the 30s, friend of their 20s, friend of their 40s, 50s, 60s, and 70s. And the idea behind it is you truly have a friend in each decade of life. When you go to those moments in time, you actually call upon them for their wisdom, their experiences. Now, whether it's not losing a loved one, a mom or a dad oftentimes happens most often your 50s or so, or 60s, or if you end up having a child, that often happens most often in your 20s and 30s. But it's a really great piece of advice that on the personal side helped me a ton, but also on the professional side, things you go through, the experiences you have in your 70s and you're winding down your career, the emotions that you may be going through. And friends have shared with me things along the lines of all my peers aren't working anymore or really hard to try and go get new business and promise someone to be helpful. And they're kind of going, are you gonna be around here in five years? And so some changes that you know coming for me at least. I'm 46. I'm hearing that in 25 years that could be a possibility. Aware of that fact pattern, how to prepare myself best for it. And so having a friend in each decade of life is something that I've focused on and it's created great value for me and I hope others find it valuable.
- [74:43]
Justin Ishbia
Dustin, you built a fascinating business. I'm excited to do this again in five or ten years and see how it's all unfolded. Thanks so much for your time.
- [74:50]
Justin Ishbia (continued or elaboration)
Thank you so much. I hope you want to do it again in the future. I like to think we're an inning two of shore capital. You build an amazing podcast and following so thank you for the opportunity to share our story. Thanks for your time today.
- [75:00]
Patrick O'Shaughnessy
If you enjoyed this episode, check out joincolasis.com there you'll find every episode of this podcast, complete with transcripts, show notes and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations and more, as well as share the best content we find on the Internet every week.
- [75:19]
Justin Ishbia
Sam.