Podcast Host (5:42)

Just scale.

John Pennington (5:43)

Yes, yes. I was the anti money laundering officer for eight of our Cayman island feeder funds. That was a job, man. I did compliance, SEC compliance and all SEC issues for all of our employees in the 33 states. You know, I had many, many more jobs than that. Right, but.

Podcast Host (6:03)

And we wonder why you were tied.

John Pennington (6:05)

Yeah, yeah, exactly, exactly. Yeah, yeah. We went public and I was like, you know what, I'm good. And so my partners took off and they've done even incredible job. I'm still a large shareholder, but they've done incredible job going forward and they've even raised more money, got bigger and bigger and they run the company way better than I did, you know, and we ran it together. I had pieces, but like I said, you had to find talent in specific areas to go large. And what we used was ownership in the general partner are. We believed. And I believed from the first I was looking for people who didn't want to be employees. I was looking for the mindset. They wanted to be a entrepreneur, they wanted equity. And some people had never had equity. They had huge jobs over here, never equity. And I wanted, I wanted someone that wanted. And in 2008, 2009, people were willing to take a chance and I was able to gobble. I shouldn't say gobble. I was able to acquire partners that would have never been my partner. If it wasn't 2008, 2009, if it.

Podcast Host (7:03)

Was like 2004 when everything was booming, everybody's.

John Pennington (7:06)

They would have never been my partner. Yeah, there was a. Nah, Johnson. No, I don't want to be a part. No, no, no, no. But 0909 right there we got some. And then they came in and they were equity owners and the company just went.

Podcast Host (7:19)

So two things out of that then. Firstly, you got the strategy correct. And secondly you got the talent, let's go strategy. What was the difference in strategy of this one versus the previous ones, how did they almost, I guess, teach you? Because I define scalability as the next sale costs less and is easier, you know, so it got easier as you got bigger in this one. The strategy was on point.

John Pennington (7:45)

Yeah.

Podcast Host (7:46)

What did the first 13 teach you that led you to that thinking?

John Pennington (7:49)

So I just answer that in a kind of a, just a holistic. Right. People say if you can go back in time when you're changing thing. No, because I, the three, the three companies I lost money on, if I wouldn't have lost money on those companies, I would not know I would have lost on this company. Right. So I learned these things way back when lose. So I would not go back and tell myself, don't do this, don't do that. Because those learning losers. You wake up on some Monday mornings and you're like, how can I make payroll by Friday? You know, and you're like scrambling and you're learning how to, how to, how to solve, solve problems. And I use that skill set when I, when I started that first fund in 2004, you know, so it's just, I don't know if I go into details there in time. We have, but it's just a, it's a process through life where people want to go back and change their past. But that means you'd be different today. Yeah. Right. So, yeah.

Podcast Host (8:45)

So the people thing did. Is that something you had to learn over time or were you always find the best people type guy?

John Pennington (8:51)

No, it wasn't always. I. Earlier businesses, I was just wanting to hire employees. I wanted to hire good employees. But this is what happened. I'll give you the strategy here. So I'm 40 years old when I start my first fund. Okay. And I played my life game out. And I always said to myself, I want, I want. Once in my life, I want to go huge, I want to go for the stars. Right. And if you go for the stars and fail, well, you know, so usually what I do, you know, it takes a year or two to see if a business will work. And then if it fails, you've lost a lot of money. And then you take another year to find another business. So now you're four years into a smaller business, but a really, really big business. It's going to take you five to six years to see if it really works or not. And if it fails, you've lost six years and a lot of money and you're going to have. So if I'm 40, I was like, well, John if you wait till you're 50 and you go, and you go big, you'll be 56 and you'll be, that's square one. You don't have enough time to recover and retire. So, John, if you don't go try to go big at 40, you're never going to do it because you're a conservative dude, you know, you're not going to risk your family. That's just the way you think. You look in the mirror and you think this, right? And when I was 17, I looked into the mirror and I don't know why I said this, but I said, john, you're not afraid of being poor, John, you're not afraid of being old, John, you're just afraid of being old and poor at the same time.

Podcast Host (10:20)

How did your 17 year old. I don't know.

John Pennington (10:23)

I don't know. I don't know how I did that, but I was, I was, you know, you're 17, you're thinking, what am I going to do in life? How am I going to make money, right? And I just kept narrowing it down to what is it really? What's really in there, right? And I, I was afraid, right? I was seriously afraid of not being able to figure out in life which, whatever. So that, that mirror, I, I said it to myself for years and that drove me through the companies I failed at. And the ones that did okay, and the ones, it was just, John, John. And so by the time 2015 rolled around, we're managing 8 billion. And I knew at that point, I'm never going to be poor again, right? Yeah, yeah, yeah. So I'm conservative. I'm conservative, right? So when we were managing 100 million, I went, how much? We managed 100 million. And then someone says, we're managing 500 million. I went, what? And then when someone said, we're managing the first billion, I was like, no, no, it can't be a billion. So I got my calculator out and I'm like, how, how, how much is a billion seconds? Yeah, yeah, it's 31.7 years, right? I said, wait, a billion seconds is there? And we, we're managing a billion. And then like a year and a half later, we were like, 3 billion. I was like, what? And then we, when he's six or. I was like, okay, I'm never going to be poor again in my life if I, if I choose to be right. And Warren Buffett always says this, you'll have to get rich in, in the United States. Once you see people get Rich and they're broke. Rich and broke. They're idiots, right? I think they risk too much. You get rich once, and you kind of have to change the game, right? It's like if you're ahead in a game by a lot of points, you play differently, right?

Podcast Host (11:58)

They all protect.

John Pennington (11:59)

Yes, yes. And I'm like, you know what? I'm going to protect it.

Podcast Host (12:02)

You know the crazy thing. And you know, coming from Vegas, people don't take their money off the table in business either. They. They keep running that thing.

John Pennington (12:09)

And I wonder why they do that. I.

Podcast Host (12:12)

You know what? I think that's very few people, John. They learn how to sell their business. Very few people. I literally say to every business owner, you will have an exit in your business. You get to choose pine box, shut it down, or actual sell. Now, if you want to sell it for value, it's going to take us two to three years of planning to sell that thing for value. And most like, you look at the baby boomers right now, holy heck, you got like, across the US right now, we got just under 40% of businesses are owned by baby boomers who got 5 to at most 10 before they got to be out. There's a massive transfer of wealth coming. And I don't think. Think that. That they understand it. But I, I sit with most people and I ask them, you know, like, a simple dumb question is, have you trained your managers? And they look at me like, no. And then a super dumb question is, well, what's your business worth and what do you want to sell it for?

John Pennington (13:05)

Right?

Podcast Host (13:05)

And they look me and I go, I'm going to pass it on to my kids. No, you're not. Your kids don't want your business. So it's interesting that, you know, in your business, you almost, from day one, built the sell strategy into the business. Talk more about that. Building the sales strategy in.

John Pennington (13:25)

Yeah, so it's. It's. It's. It's the mentality of sub. I've seen. I have friends that have this. They run their own businesses and they go to work and they want to handle everything. And I was the opposite. I wanted people to. I wanted to be able to leave my business. And that's a true business. If I have to go in and I have to run everything every day, if it doesn't run, it's not a bad business, really. It's a. It's. It's. It's a. It's. It's a job.

Podcast Host (13:50)

And you learn for an age.

John Pennington (13:51)

That's right. You work for yourself. You work yourself, but it's a job. So if you can, if you can leave your business for weeks at a time and it runs, maybe doesn't run exactly as right, but it still runs, you have a real business. And that's the underlying goal of a entrepreneur is I want to create a real business where I'm not running it every day. I'm the present CEO. I'm visualizing where this business is going to be in two or three years and I'm creating contacts or relationships with customers or wholesalers that is going to expand or acquisitions that's going to expand this business. Right. So that's the kind of the vision that I had when I said I want to go big at 40. Yeah.

Podcast Host (14:33)

Your buddies that are the bottleneck of their own business. You know, it's, it's great to be the rock star on your way to a million dollar a year business. Yes, you should be, but you, you can't be the rock star at 100 million.

John Pennington (14:46)

And this is why I think your company, your product is because a lot of entrepreneurs get to a certain size and they can't figure out how to make that transition from. I'm intricate in the business, but that's not really my role anymore. It was when you started it.

Podcast Host (15:08)

Yeah. How do you build the managers and the management team to get the 10 million then how do you build the leadership team to get 100 million and beyond? And I think that goes back to your point of hiring great people. At some point you got to professionalize management of the organization or professionalize lead leadership of the organization to get it.

John Pennington (15:25)

And, and we used equity rather than a high salary and bonuses. We used equity to find that type of person. I just explained to attract the talent.

Podcast Host (15:35)

That's right.

John Pennington (15:36)

That's right. Because our, my goal was look in the beginning my, my first me and my first partner, I was like dude, I want to run a huge, huge company. And I would look at him in laugh and we, I'd say, you know, you and I aren't smart enough to run a big company. We gotta find really big, better talent, smarter guys than us. And, and we did, we did. We found part that were smarter, way smarter than us and, and just took, took it to heights that I never could have imagined.

Podcast Host (16:01)

Yeah, yeah. I think that's the thing. But let's go flip it over a second scale requires capital.

John Pennington (16:07)

Yes.

Podcast Host (16:07)

You want to scale exponentially grow a business, you require capital. One of your key skills has been raising capital. Tell me more about how that works. Why it works and why were you damn good at it?

John Pennington (16:18)

Yeah, I'm a good capital raiser. I'm not a great capital raiser. And so I had to find, again, people who were great capital raisers. And what I found over the years was there are three really different personalities in raising capital. We found that there's a personality that can raise capital from high net worth individuals. There's a middle personality that can raise capital from family offices and banks and stuff like that. And there's a third personality that can raise capital from institutions. And so usually up the scale, your first couple years, it's high net worth, High net worth, high net worth. Then you try to go to the family offices, and it takes you a few years to get into institutions, because institutions, they don't even come out to see you unless they can write you a $30 million check. And they won't even fly out to see you. And they don't want to be 30% of your fund. They want to be like less than 15% of your fund, but they want to write you. They want you at least a $30 million check. And they do question. They ask you questions, do due diligence, that you have no idea how inclusive it is. So it takes you years of being like one of my partners, early partners. We had an audit. We had. All of our funds were always audited. But in our town, we had. There was an auditing firm. They were 50, man ish. They were local, they were good. I'd used them for two decades. And when we started our third fund in 2008, he goes, we can't use them anymore. Why? And he said, we need the big accounting firms. I said, why? And he goes, because when an institution three years from now flies from Boston to come see us, they're going to want to know who your auditors are. And you need to have the big four. And when you tell them one of the big four names, Deloitte and Touche, right, they're gonna go, okay, go the check box, check the box. If you tell them ab work. Yeah. If they do say ABC Company, it's all. I said, they're gonna go, what? You know, so he. And I said, but they're triple expense. He goes, exactly. John. We have to become a company worthy of an institution before the institution comes. We can't wait to them come out and say, oh, we'll change. No, no, that doesn't work that way. They're coming up. You. You already have to be. So we had to become things that we didn't want to be yet. We had to become a registered investment advisor. We had to become, we, we had to use the big four, right. We had to have SOC 2 type 1 audits before we were asked to do them. Right. So our vision was always, we're going bigger and better. And so. And once you get to that level, for instance, let's see, my first fund was 2004. We got our first institution in 2010. Six years to attract that institution to actually write us a check. But after you got that first one. Yeah, it was like, you get, it was like a snowball. It is, it's a long term plan. People want to go after institutions now. Listen, I've seen people, their first fund get an institution. I don't know how they did it. Probably relationships maybe, but it takes years and years of prepping your team, training your team, getting your team to act and talk like an institutional worthy investment.

Podcast Host (19:22)

That's an interesting thing because I don't think most people understand how much you have to grow into your goals and businesses have to do that the same way humans do. So how did, did that strategy just be something natural to you or did you have to learn that? Where did that come up for you?

John Pennington (19:37)

No, and that was one of my partners. He, he was, we hired, we hired him as an employee, as an operation officer. We said, you know, used to work at big, the big financial firms. Can you make us more institutionalized? Okay. And within a year he was a partner. Right? Because we couldn't, we couldn't let him go. We, we had to have him. And he convinced us we have to spend the money now, triple the audit cost to become. And that got us into that mode of spending the money now we have to, we have to keep our salaries low, spend the money now, invest in our company. Because this is, could be huge and I want to be huge. Right?

Podcast Host (20:17)

Let's go back to the raising capital and average business owner where, where can they start learning the raise capital thing? Where does the. Because they're going to have to do it. And they're probably not getting debt money, you know, probably not getting debt.

John Pennington (20:33)

If they can get debt money, you go get it because it's cheap. It's cheapest, right? It's cheapest. Investor money is more expensive. But there's no payment every month, right? Debt money you get, it's cheap, but you have a payment you got to make, right? So we, you know, most of our funds were, hey, we're going to get investor money, we're going to Pool 99 investors into one pool called a limited partnership. And we would file under a 506B 3C1. And that allows you 100 investor, 99 investors of accredited investors, 35 non accredited investors. Then above that, there's a 500A 3C7, and 3C7 allows you 2,000 investors. But they have to be qualified purchasers, all of them. A qualified purchaser, a quality purchaser, is someone who has a $5 million net worth. A qualified client is someone has $2.1 million net worth and an accredited investor has a million dollar net worth. Or now if you're in a lawyer, if you're a, if you have financial licenses, you can be a credit investor. And there's a couple of exceptions there. In a 506B3C1 you can have investors 35 can be non accredited. This is a fund structure. A lot of people, they're not large enough to become funds because funds are kind of expensive to get into the game. If you're going to raise and do big things. A lot of people are, you know, they want to raise $3 million, $6 million. They're not really big enough yet to be a fund. So they're kind of a limited liability company. But I would say when you write your limited liability company documents, you need to write them kind of like a fund where the passive investors don't vote every year to take the president out, right? So you have to kind of mirror fund documents. Because most funds out of New York and Boston are called 2 and 20s. They're 2% management fee, 20% of the profits. And I gotta tell you, when I learned in 1999, I was like, wait a minute. Real estate agents make 3%, okay? Stockbrokers make 1 1/2 percent. A mortgage broker makes 1%. A general partner makes 20% of the profits. I want to be one of those guys, right? I was like, you know, over, there's always a minimum. You have to make a minimum, like a prep for your, for investors. But over the minimum, if you hit the minimum, you get 20%. I was like, I'm in. That's, that's what I want to do.

Podcast Host (22:55)

I want to stretch out listeners thinking just for a second, because you're right. Most people go the private placement memorandum, they only want to raise a small amount to run this one business. What if we stretch their thing and say, well, what would you have to do to need a fund? How many companies would you have to be buying? Because I don't think people realize that it's Cheaper to buy a company than start one. It's cheaper to buy a company than buy customers. Even, like, marketing is more expensive than buying a company. And the time to do it and buying a company is equity deployment, not expense deployment. And so when we look at that and it's like, what would you have to do to go, okay, how many do I need to buy in order for it to be worth doing a fund? I mean, I know when me and Doug came to you guys and started learning this stuff, we're like, holy, we need to start our own fund and go and buy a bunch of, you.

John Pennington (23:49)

Know, okay, so my first fund, the fund documents, the legal documents cost me about 35, $30,000. Okay. So. And we were lending on real estate. Okay. So my third fund costs the same documents cost a quarter million dollars. Okay. Now, so, so you asking, well, how big would you have to be to have a quarter? So the, the third fund, we were raising money from Australia, from Hong Kong, from France. And so what you're doing is in one document, you're combining the IRS of Australia and New Zealand and the US and France and Hong Kong all in one document. And you're combining the SEC regulations and the SEC of Australia. That's an expensive document if you want to raise money for a real estate fund overseas at US Real estate fund. But the first fund, we weren't raising money internationally. We were raising money in five states and we were doing loans in five states. So it really comes down to, I think, the upfront costs. How big, big would the, would the capital raise have to be to justify a quarter million dollar piece of paper with a bunch of papers with ink on it? Right?

Podcast Host (25:00)

Yeah.

John Pennington (25:01)

And so that's kind of how you have to, you know, think, think, think about it. But my first fund with, with $30,000 of the upfront cost and then putting it into place, I personally, my partner, we had to go like 14 months without a paycheck. Yeah. Now we had two other guys, two friends of ours that wanted to become. They couldn't do it. They had lived their lives where, you know, they had car payments and house payments and second mortgages and stuff. But they were great guys. They just couldn't go 14 months, 15 months without a paycheck. And then the two of me and another guy could. So we did. And then after about that year, year and a half, we brought in two more partners. And those, those, those guys were the big boys in the real estate industry. And we were already cash flowing by that time. Right. And so I guess in the roundabout way, that's kind of what I'm saying. It's kind of like, how big is your room right now? Why could I go 14 months without a paycheck? The reason is I looked in the mirror when I was young and said, I don't want to be old and poor at the same time. So all my businesses, I was like, I have to. When I. When the years are good, I can't go buy a new car. I have to put that in the war chest because I might get a bad year. And that's why I said, when we finally hit in 2015, the 8 billion, I was like, I don't need a war chest anymore. I'm good. We're making so much money, I'm never going to. But all my 14 businesses, every time it was going good, the years, I just lived the same life. And a lot of people, and I think you coach this way, a lot of people, when they start making a lot of money, they start spending a lot of money. There's three different levels of wealth. Rich people, they view money, you give them money, you know what they think, how can this money make me more money? Now the middle class person, they get more money and they go, okay, this money can help me get a bigger house with a bigger payment. This money can help me. This salary can help me get a bigger car with a nicer car. That's how they think. And poor people think, this money can help me eat today so I can eat. That's one mentality. Middle mentality is, this money can get me more in debt, but I get to live a better life. And rich people are like, I just want this money to figure out how to make more money. That's the three different. So if you're in the middle and you're thinking, how can this money make me more money? That's how I thought I got this extra money. I'm making good money. Oh, I got to put this away. I got to save this. I got to invest this. I can't go buy another car. My boys tell me it's a great story too. My son, they'll tell us on stage. My sons are on stage a lot and they do presentations and they'll say, yeah, my dad, he was driving a car with 200,000 miles on a dent in the door, right? And he has my. One of his business partners agreed to be a mentor to one of my sons. So he goes up there, you know, to this guy's house, and he goes, I go through these private gates I drive through this beautiful rolling hills. I come to this cul de sac. There's a house, a white house. I knock on the door, I think there's gonna be a butler. Go away. You know, he walks, he goes, there's beautiful white couches. There's an indoor basketball court. There's an outdoor pool. There's a view off the deck of the whole valley. It's gorgeous, right? He's got sports cars in the. In the garage. And he says, he says, I want you to be my son's my son. He says, I want you to be my mentor. And he goes, let me tell you a secret. You know, rich families send their kids to Ivy League schools, then to Wall street, and they come home and run their family fund, right? The family office. And he goes, I know, that's why I'm here. I want you to teach me how to do funds. He goes, your dad knows more about funds than I do. We're partners, but he knows more about funds than I do. And he goes, but you're vastly more successful than my dad. I want you to teach me any. He goes, let me tell you a secret. Me and your dad make the exact same amount of money. And my son, he goes, I looked at the ceiling, I looked down and I said, I gotta go. And he drove home. I remember I was sitting in the living room watching football. It was a Saturday afternoon. And I heard the door slam. Bam. Dad, what is going on? And the next two months, I mean, I mean, so my wife got a new Range Rover. Yeah. I bought a Tesla. I bought my test, my dad a Tesla for his birthday. My dad, My kids got new cars. My father in law, mother got a new car. I spent like a half a million dollars the next month. Two months in cars, right? So the bag was out of the bag. I wish I could have stayed under the radar for about five more. Five more years. But he goes, my dad was. We're living a normal home. And he was 200,000 miles on a dent in the door. And my partner had sports cars and all this stuff, and it was. But anyway, that was years ago. So.

Podcast Host (29:33)

Yeah, you know, it's really interesting is, you know, I remember, first time I filled my own bucket and, you know, I had all the things that were on my bucket list sort of thing, and the dream chart. And then it was like, maybe it's a bigger bucket. You know, instead of one nice car, let's get multiple. And maybe it's not just one nice house, it's two nice houses. And that Sort of stuff. And eventually, and I think that was a part of me being first time rich to, you know, that I don't know, wanting to look rich more than be rich type thing.

John Pennington (30:06)

That's human nature, right?

Podcast Host (30:07)

For me, I don't deny myself that stuff because I'd worked my tail off to do it. Nowadays though, I see doing these podcasts is more important and giving back and teaching others to me is more important than doing that stuff. But you know, it, I think we all have to get there. So let me just finish this up with one very simple question that's not that simple. All right. Person sitting on a million bucks a year now, or a million dollar a year business, what's the two or three mindset shifts they've got to make to go for the hundred million to go for the exponential and the scale?

John Pennington (30:53)

So, yeah, so, you know, let's just say, let's just take a dentist, okay? They make really good money. They work three days a week after they got their business up. They're all four days and they work three days. I've seen this over and over, right? And they make a real, they have a really good life. So you're going to talk this person out of that really good life so they can have a generational wealth, okay? They have plenty of money for them and their family. And so that's a, you know, a kind of a decision the person needs to kind of make because they're going to have to risk, you know, they're going to have to risk a lot to go big. So would that dentist decide, you know, what I'm going to do? I'm going to drill teeth three days a week and two and a half days a week that I used to not work. I'm going to try to build a fund or investors and go buy more dental offices. And in 16 years from now, I'm going to have 45 dental offices, all working in these five states. And then I'm going to retire because I wanted to go big and I think it's a personal thing. These people have worked hard. They have a great life. Who's going to talk about the great life? There are some people though, and I was when I was 40. Just once in my life I want to go for it all. I want to go large. I don't want to start a business and make it work. I want to go for and see if I can, what, what can I do in this life? And so I don't know how you would talk. I think it's Just a mental desire in someone that just wants to try to go big once in their life. And that dentist has the ability, he has the time and the money to do it. If he learns how to raise capital, investors and how to duplicate himself, which you can do 16 years from now, you could have 45 dental locations and you could be generationally wealthy. Not just wealthy. Right. So I. That's kind of the roundabout. So I don't know how to answer that, except for I got to find the right person who really believes and wants to try it once. Now they might fail at it. This is the problem. This is the problem. And the great thing, you get to fail at stuff. Right. Can you imagine you lived in a life where nothing, you couldn't fail anything. It'd be boring. Right. And. But, you know, say it'd be safe but boring. But. So I, I don't know how to, yes, properly answer your question, but that's.

Podcast Host (33:12)

The old saying of if you knew you were going to succeed.

John Pennington (33:16)

Yeah.

Podcast Host (33:16)

What would you start? And I think that, you know, very bluntly, most dreams die on the never started list rather than on the actually failed list. So. John Pennington, thank you. $100 million. Let's go. Thanks for joining me on the $100 million podcast. If you've got value from today's episode, make sure you've subscribed and check. Share this with all of your friends. Never miss a strategy that could change your business and your life. And remember, the fastest way to scale is to learn from those who've done it. That's what this show is all about. See you on the next episode.