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You may have heard me reference the idea of maniacs on a mission and how much that idea excites me.
Well, David Cenra is my favorite maniac on one of my favorite missions with his weekly crafting of the Founders podcast.
Through studying the lives of legends, he weaves together insights across history to distill ideas that you can use in your work.
Founders reveals tried and true tactics, battle-tested by the world's icons, and has David's infectious energy to accompany them.
With well over 300 episodes, your heroes are surely in the lineup, and his recent episode on Oprah is particularly great.
Founders is a movement that you don't want to miss.
It's part of the Colossus Network, and you can find your way to David's great podcast in the show notes.
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.
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My guest today is Justin Ishbeah.
Justin is the founder of Shore Capital.
Shore is a private equity firm that invests in micro-cap 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 a 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 Ishbeah.
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 were 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.
I followed your show for a number of years and it's been so impressive what you built.
So you guys have a best-in-class audience and showing them how to be part of it.
To create our price value is the system.
No one person creates a star.
And so our view has always been like, how do we get a system, a machine, a process that creates differentiated results, outcomes?
And I was raised in an environment and 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 microcap.
And this is where we spend all of our time.
This is businesses we define as sub 10 million EBITDA and investment.
And in order why most people don't play here, there's several reasons.
I mean, it goes back to the system as a star dynamic is that in order to play here, it takes more resources than normal.
You're buying a business with four EBITDA, no audit, and imagine a 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 EBITDA, the professional management team that's been coming in together and have run a business three times a side 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 through the organization because I thought 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 looked up to organizations or operating companies like Donna Hurd, 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 in your four walls and your offices, we have the concepts of an idea.
So in our firm comes up with, they want to invest in the sector.
Let's pick on the veterinary sector because everyone knows what that area is.
So, okay, idea generation until the day we sign a letter of intent to that platform.
We call that nine things a baseball.
There's literally hundreds of steps that go into each inning has these between five and 15 steps you must go through.
They sign a letter of intent.
There's four quarters of closing a deal.
We have to make mistakes over and over again.
Make a mistake. You actually add something to that four quarters and say, hey, make sure you check with International Tax Counsel by ABRC.
So, create a codified system.
We close the platform. We have a 100 day plan.
We have 23 standard operating procedures we put into every business.
So we actually onboard to the shore way of how we do things.
We own a business. It's the planting phase, the growing phase, the harvesting phase.
We exit the business. It's three periods of exit like hockey.
A lot 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 a pitch book more than anyone else in the world.
Average enterprise value though of transactions, 12 million bucks.
Wow. 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 and we believe we're of see one, do one, teach one.
Patrick, come work on my team.
Sit next to me. Let's go do a first deal in the veterinarian.
Looks like this. Next one, see one.
That's the see one. 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 the 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 is 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 the deal and the system allows for that.
And so that's why our systems are star.
No one person makes this place go and we have to say more stars into our system, the brighter the system burns.
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 found to be the most interesting started by, I think you call that 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 great system.
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.
So it wasn't just me and my partner, Ryan Kelly, my partner, Mike Cooper and John Hennig, the four of us from day one, we were young.
I was 31, they were 29, 28 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, I was at Valoranpe Partners.
And what we would do all the time is we would see a deal, say three or four of you've done 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're 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, maybe 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 the long term?
The answer is really nobody.
And so we decided to franchise a microcap franchise that would stay small for the long term, but have much different products.
And so those probably former days, that is when we had a pre fund like, pre funds are something I think that people zoom past these days, one of the rays of 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, this was like plan, but my mentor said to me years ago, it was like 2007 or eight and said, Justin was a good time to fund raise.
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 until 2009. I didn't know, oh, nine marks was the bottom.
I didn't know that was exactly, but I knew it was bad.
I didn't know how much more she 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 of a private equity firm.
I was a lawyer first and associate of private equity firm.
No endowments and investors.
That's how I call them. They're like, yeah, come back to the track record.
I was like, how do you track record?
We went out and raise money when our first was a pre fund was a $10 million community capital vehicle, but a couple of important points on that.
Instead of raising just four or $5 million for the first deal, we raised 10 million of community capital.
And why? So it gives them really good advice that they go for your first add-on.
Someone's get divorced, someone's to change their mind.
And by having a community pool of capital, you'll spend much of time raising capital for the second add-on.
So having a $10 million credit pool is mostly wealth managers, founders of a private equity firms, head of law firms, traders in Chicago, the entire little network.
We didn't have great wealth and had much of all our small offices with 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 pharmacists, 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 day, as it was, pick the right theme, invest in a business where the founder clinically was really sound.
We used 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 in this little business, then bring systems and processes.
We called it flash and a dash, a dashboard and flash every single week.
We used to say, if you can't measure it, you can't manage it.
But 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 fund.
Guess what? Most people don't start that way.
Most people start something very simple.
And I like to think of a short capital story was not that dissimilar from some associate of EP and other private firm right now.
It takes time. It takes 10 years.
If you get it right, you do exactly well, you have good deals, and you will make less money your first 10 years than you were the state and the trajectory you were.
But after your 10 going forward, it flips in a trillion 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 it when the time is crappy out there.
Recession is here or coming.
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 tip-talked 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 it in 2024.
I'm pretty confident we'll not be selling recession in 2008, 2009, 30.
So obviously, you're 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.
Just 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?
Everything starts with the industry.
So we're very organized around industry themes and thematic.
So pick an industry we would say has great long-term growth potential.
It's much easier to be playing ball unless you have growing than going the other direction.
But not on the perfect type of deal for us, then 59 platforms in firms history, average revenue, about $18.5 million, $19 million revenue, average EBITDA, $3.5 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 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? I become the supplier of choices.
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 it quickly.
So we're buying businesses that I think are in a part of the market that are at a price point that is different than what they do at scale.
For a lot of reasons. The Imagine 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.
These are 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 is a friend and a mentor.
I'm not smart. I know to copy and credit copy.
They did all the software.
We've done it in operating businesses, but it's a Main Street little business where you can aggregate 5, 10, 15, 25 of them or more and get to a spot where there truly is 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 legalization.
So in a route based business, for example, you have more density than 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 equity, broadly speaking, so I'm committed $100 to a thesis.
They're investing between $16-$80 of that investment for the platform and reserving $20-$40 for add-ons.
We're almost the exact inverse.
I'm committing $100 to a thesis.
I'll deploy $5-$25 for the platform.
And what that does is it creates an opportunity to underlever, make sure the management team are right.
And if the first one isn't what you thought it was going to be, your second or third investment in 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'll learn margin of safety, you'll learn upside from operations.
If I get one or two of our things right, we make three times the money.
If I get four or five right, we make five, six, seven times the 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 where there's lots of ways to win after a lot of one or two factors.
One of the things I'm personally really focused on is thinking about the different kinds of opportunity costs for capital today.
Its rates have gone up as the S&P has a certain sort of expected return called a 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 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, the return on equity.
Yeah, I can't say for everybody else, but for our results, so we've done 59 platform investments.
We've exited 14 companies.
So it's not a safe track record forever, but it's definitely a broken mass.
Our average gross cash on cash has been seven times cash on cash on IRR 72%.
We've never had a deal lower than three 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 you can do that forever, but that's been historical results.
And this ecosystem does produce, I think, a really strong risk-adjusted return profile.
But it's hard to do it, is that 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 become a partner, and you raise bigger funds.
And it's harder doing smaller deals, some more biggest deals are the most easiest to manage because my magicians 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 short profile.
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.
And it seems like the same question applies here.
Like, 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 absolutely 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?
I wish I could say I was smart enough in the front end to plan this, but I got a little lucky, I think our moat is the volume.
The number of transactions that we do creates an ecosystem, creates a deal of young professionals working short 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 in short capital over which half of them are 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 four of EBITDA to go buy a four million dollar 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.
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 five years, 10,000 dollars a month.
We bring more members to compliment them.
I think the opportunity is finding individuals who want to plan 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 way out of it is that I lay out the math all 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 company.
They get options in their company if it goes well, they do well, and they also get a chance to invest in those businesses.
But the math and the MSAs, they've had it now nine times that someone's stuff off the board become a CEO for us.
When they see you, if you get it right, they look at it as a, okay, median returns in the product industry pretty good as 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 not two or $300 million equity behind it, it is quite common to have an equity option pool that in a 2.5 times cash on cash, they can have a $20 million outcome.
That is a mill 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.
Even a CEO that can go and 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 to be six, seven, eight, nine 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 hit the risk themselves.
And probably so. You know, there's mill of fairway for us to have three founders who one is 65, one is 55, one's 45.
The guy's 65, more risk averse, guy's 45, wants to lean a little bit more.
Great. We can partner in that dynamic and give them some real upside and give them a chance to differentiate.
But this part of the market does create those unique opportunities.
You 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 in a really fast pace.
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 even a 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 be 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?
I have to say I build a board like a basketball team.
I don't want five point guards.
I want a point guard, a powered forward and center.
What is traditional and private company investing before I find I'm sure I invested in small companies and I have $20,000, $50,000.
What happened normally is that I would put the most money in the board.
And usually they had no relevance, no importance.
The guy puts in a half million bucks and they said the board, no, that never happens for us at all.
And so we want to go, we finally 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.
I think he's sports analogy.
I think people oftentimes know college basketball.
Who is Tom Izzo? Who is Mike Shisaskine?
Who is their family tree?
Every industry has their Tom Izzo and their Mike Shisaskine who are, you know, preemptive basketball coaches.
And so to 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 least three times the size of what we acquired.
So that person has been there and said, I've been through this journey at this exact size and metrics.
I want to voice to the customer.
I want to voice the supply chain.
Usually want a functional discipline expert who has been in that sector like a CFO who knows the metrics called and one or two people from the Jason sector.
This board of seven individuals, a lot of times our board members were first time joining us.
They laughed. They say there's more people on the board than there is millions of revenue.
We buy business doing it in revenue, nine people, the board.
So it's a way of over stack board, but we're stacking boards in the unique way and create a lot of value.
And we'll be clear that I'm this is our secret sauce.
I don't mind it because this is how I started.
We pay them zero, pay them zero in cash, come feedback.
The lead director gets a small stipend that being more involved.
We have a lead director and we have six regular board members.
Those right, they get zero cash, come, but they get options in the company that in our basic case, they make $250,000.
Now let's break it up. Very simple guys.
It's very simple that an average of over five years, on average, that's four board meetings a year.
So you're talking 50,000 a year, 12,500 per board meeting.
Most people go, okay, I'm going to join the board for that.
And that makes reasonable sense to me.
And if we do better than average, then you get much more than that.
I've talked to people all the time to 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 in the thesis.
If you were in my Monday morning meeting, you heard our firm talk about buying a company in XYZ sector, the question that comes out of my mouth versus company board, literally, and then there's like a slide that lays out the different app, the voice of the customer, the voice of the supply chain, the voice of the operator, as long as shore relevance.
And 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 dynamic, he's about a moat of 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 third, we'll repeat customers for us, but I have 16 new people who will join our family next year.
I know they're going to be yet.
They're all going to be very talented business people.
We talked about someone 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 failed 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.
I mentioned a minute ago, it takes 18 months to learn 90% of the industry.
And the last 10% takes five years.
But guess what? My board has that last 10% from day one to compliment 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 becomes super value add one or two less.
So it's just a reality of it.
I'm very poor at predicting who is going to be value add who is not.
This is DNA of the people.
And after with us one time, I can figure it out, but he's really talented people.
He's bourgeois. They help in a unique way.
Every single member helps a unique outsize way at one point during the life of the investment.
Open 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 versus an add on.
When buying a business doing 18 of revenue, we want to grow it to 100 revenue.
You know, just be the new customer that could bring three months of revenue.
You're talking about it first, a 15, 20% pickup in revenue.
You buy this doing a bit of revenue.
There's no ones that are bringing a 15% pickup in customer.
It's just not going to occur.
But I think what we've learned over time is we kind of create a fun environment for these board members to they have choice going to 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 over companies come to twice a year to cross pollinate and share ideas and bring perspectives.
But it's creating a family and an ecosystem of really talented board members who want to provide advice and give back.
Our business is altruistic, our business is financial, our business is fun.
All the things together create a really great board member.
And I think it increases 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 create an 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 promise you the process.
Our promises break down.
It's clear. And we do the same thing every time and we make it better sometimes.
But the process is the same.
I think that is, I think, what great operating businesses do.
Public companies that can doner like a roper, they do great things by system.
And I think that's something we're very focused on.
Why are you doing this in the industrial sector versus somewhere like software?
What is it about that addressable market, those business models?
Why pick that instead of something like software that, like took this system and went and did this in software somewhere, probably worked pretty well?
Why not? We may at some point, but we start in healthcare.
I always felt like the founders of healthcare businesses were clinicians by training.
So I went to Vanderbilt for law school, my cousin, I'm super close to Vanderbilt for medical school.
His eight buddies and my eight buddies became one group at Vanderbilt and we're all still buddies to this day.
He's just the smartest individual I know of these doctors.
Man, they just don't get the business out of it nor do they care.
It's just a reality of it.
And so I saw that enough.
I said, okay, I can partner with my cousin who would be my age, but him when he's 15, I'm supposed to be 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 an outsized technical skill.
Whether that's cutting your eye open for a surgery for cataract or whether that is, you know, in the industrial sector, someone who's really good at repairing roofs or whether in the business sector, so that's great at making sure your technology, your outsource 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 your skill set.
And so in a doctor's example, I want the doctor who's a cataract surgeon, seeing the follow up patient, the routine follow up, there's no complications, very simple.
And what a nurse practitioner can do that.
And they're trained well enough to know there's a problem here, I need to see the doctor on this sort of stuff.
And by the way, the same thing, the nurse, she'll only see what the nurse should see, and the medical assistant should medical assistant see.
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.
And so oftentimes, like, yes, I software, software founders usually are pretty savvy business people as well.
And they started the business because they wanted to create something enterprise-based, and they should 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 mischief 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 in the scale.
And that's just how we think about it.
But there's so many parts of the world that you can create value in, but can be focused.
And I tell people when you have a lot of priorities, you have none.
And so we're very focused.
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?
I want, of course, each investor professional.
So partners have between three and seven, principals have between two and four, and vice presidents have one or two.
I'll give you your own thesis.
Patrick, you may love urgent care and I may hate it.
I may love veterinary, you may hate dogs.
So I want the investment professional to 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 Short Capital is every investment professional, senior professional, which is a vice president, principal or partner, has the autonomy to pick a certain number of sectors they want to focus on.
And they can focus everything.
For us, everything starts what's called a roadmap.
A roadmap is essentially a white paper on an 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 green light 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 the 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 a committee.
And you can say, Hey, I'm Patrick and I love urgent care.
And so why I think we at Short Capital should green light the sector and turn it on.
So the whole process goes around that 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 precious testing it.
And there's this part of so we're organized, there are an investment in the process.
The team is assigned, I assigned team members to Patrick who wants to pull forward urgent care to be five people on the investment committee.
And if they agree to it, they are with you for the whole way of the journey.
So from roadmap, they're putting 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 their judge on your outcomes as well.
And so they're very incentivized to make sure that the thesis makes sense.
They have to also play capital.
We have to also make sure that they're not just saying no to everything, can be doctor, no.
But it's a five person team who effectively votes to green light your sector of urgent care in that example.
And there's smart people asking smart questions and there's trends we're tracking.
And the question we oftentimes ask is, why does the small player win here?
Why does the little guy win?
And especially in healthcare, 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. He 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 how wins where the pocket's going, like in healthcare especially, it's the consumerism of healthcare that I think so many of us believe in.
But it starts with this thematic approach, we're 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, my page is 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.
The one trick of the trade that we use at Fairmount and Ivy at all times is you could call 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 an industry panels about the lawyers and the bankers, but industries promulgates certain people and you want to get to those industries.
So for me, everything's about the industry.
Industry becomes the core of it.
And then that partner in short cap or president, vice president or principal, they own it and their jobs to do it.
And they oftentimes may invest in that sector to three, four platforms of their career or more.
My partner Ryan leads urgent care for us.
He's done three platforms, urgent care sector, and what's probably does more.
My partner Chris has done three dental deals.
And so if 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 all the times our executives, our board members, they've forgotten more about the industry.
Then we'll ever know. But for finance guys, our job is to be most educated on domain expertise and press you to watch 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 with 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?
Micro is, you believe in my company.
I want to take one of those two off table.
I'm believing in urgent care.
I have a whole machine behind me.
I have a 50 page deck here with my board members.
We create a board before we can buy the company.
So we get the industry, we get greenlit, and we recruit a board.
We 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 get the main knowledge, you have people around the table who know the nuances of the industry.
I'm telling the seller, don't worry about the industry 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 and fair amount.
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, the 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?
Almost always we're doing a roll up the sector.
We're almost always consolidating.
And so one of the things that I like for almost right away is reputation amongst your peers in the industry.
And there's a really simple test.
And I'm sharing people's right inside baseball because anyone should do this.
I don't think it's rocket science.
Use ophthalmology as an example.
We'll try and write an ophthalmology company.
I'll try and identify in that same town, three or four of them are ophthalmology practices in town and call them up and we'll do a secret shop 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've to recognize there's always in town a coconut Pepsi.
There's somebody that likes you and somebody doesn't, but people in town know who is pretty good in town.
So why is 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 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 baseball industry because they're viewed as best in class.
So I think we have to take 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 and 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.
So to me, it's reputation industry.
Technically sound. You don't hear me say match the 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 comment you.
Oftentimes the founders are going to be a role, but not 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 five of revenue, one of three locations.
Today it's over 400 locations over 1.3 billion revenue.
That's founder of veterinarian is still a CEO.
So that's one extreme that can be one extreme.
The other extreme, I could 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 to help recruit other doctors to this team and sell us the value of proper why we can help people and role parts of America better than anybody else.
And so to me, it's 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 piece.
It's not going to buy one business and sting still.
We're growing our business usually over 100% per year organically and organically.
I would say on average that levered roll ups have sort of a bad reputation.
Why do you think that is?
I would say if you've seen one level roll up, you've seen one level roll.
There's no flakes. Like the restaurants are good restaurants or bad restaurants.
The same type of dynamic.
Oftentimes, they get bigger also.
The founders have already left the organizations.
Now, in the earlier stage, when we started, these founders are very hungry, want to grow these businesses and we had to under lever.
So we don't put pressure on these teams with leverage.
We under lever, there's 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 of the scrumptious and they're going to some of you leave the organization so that you hear more of that noise versus a four 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 artists and bakers.
It can be a bunch of veterinarians.
We want to have a technical advisory board.
We have 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 off of triple 18.
They talk smack about 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 four 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.
And today, why do they exist?
Because customers keep shooting them over and over again.
People ignore that part of it.
It's like, oh, levered business that is a part of a levered roll up.
I'm like, yeah, but the customers keep picking on one or why because they believe it to be a better value for a thing going to somebody who is not part of the roll up.
And it's because usually they can offer more services and 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.
Elorix. What have you learned about negotiation?
A lot of deals you've done.
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, at the end of the day, I always tell our team members that sure we've done almost 900 transactions.
We've had zero lawsuits.
If we ever pull out that document in the future, you have to look at it.
We've already lost. We negotiate to do our best to have all the sort of things button up and start stuff.
But at the end of the day, I want people to believe in the growth story.
They have to believe that we're building together.
No lawyer sometimes will try and I'm a former lawyer, recovering lawyer.
I understand the lawyer's job.
But no, when we're negotiating, the most important thing is negotiating, making sure we have catastrophic downside protection.
I had to make sure if Patrick was on the front page of the Wall Street Journal for doing something uncouth, I need 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 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 can try yourself.
The hardest negotiation is that unwind part.
I know we've never had to dissolve, never had anything worse than three times our money, but I think the negotiation time where it ends up most often for us these days is, so is negotiating for a larger part of the upside.
That's where we end up negotiating.
We used to be doing an 8-20 deal now as being 64-50 or 55-45, and that's where a lot of negotiation comes.
But at the end of the day, we prefer in person.
We're not fans of Zoom and negotiation.
I'm going to look some of the audiences, what we're going to do.
Yes, I can't write down on 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 they're a partner with.
Just trust. And if you look at those documents, we failed you.
And so I'm not saying we haven't unwound partnerships.
People have not worked out.
That's definitely happened.
But I'm a negotiating sign.
To me, it's being very thoughtful about who you're partnering with in the big picture.
That's, I think, strategically.
I'm going to get one little down more tactically.
I think I made sure I'd see on our last phone call.
We have a system, a short count, we call it our green-yellow-red system, which basically for every material document in a transaction, a purchase agreement, an operating agreement, a credit agreement, an employment agreement, a lease.
There's roughly 15 key terms on every document.
And we have all those out.
And we have a scoring system internally.
I use the simplest term, a non-compete.
Everyone knows a non-compete-me-sell business is part of the transaction.
Five 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 at least 15 key points.
They know they can agree to on their own and know they need to raise up the flight pool.
And 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 the long term.
And more tactically, only 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 can compete with each other.
People love competing with each other.
And the best, the way it shined on them is that's what we're trying to do.
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, I'm sure you'd probably talk to this person, you'd probably picture somebody.
What do you think they would poke in on and say is the weak point of shore in this whole system of systems?
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 the next level?
And so I agree with that.
So we internally have, I like the home group.
And so we created this program six years ago, we call our CXR program, where we recruit from the best business schools, Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame.
We'll hire individuals that come to short capital.
They'll be a chief of staff.
They're going to want to 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'll be a unique fund dynamic.
I'd be lying to you if I said I'm going to 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 perform 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 CXR program and we home grow our CFOs.
We hire people out of big four accounting firms usually come to short capital for 30 month tour of duty.
They go through this program and the best ones can come CFO.
So conceptually, how I think about it is they 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 is 41 years old first time.
And one of the biggest challenges we get into a roll up and somebody that's not going so well as CEO is wrong, but there's a big pipeline is 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 the strong board, so I sometimes almost steps off the board become 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 need to grow our firm, we have a system internally and kind of our all start tracker.
Each company has its own list of our internally of people who 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 system, I think the system wins.
But the whole is enough talent at the velocity that we're building businesses.
There's this great book called Innovation Stacking by one of the founders of Square where the whole idea of squares, eventual mode 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 health care.
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?
I think stacking unfair advantage is a part of everything I think about.
How do we have unfair advantages?
So I view market cap, all of our funds in healthcare, food and beverage business services, industrials, that's its own product.
But real estate is a different product.
And next year, different product healthcare advantage fund.
I tell our LPs and I tell our team members that short 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 them. Number two is help my business.
So real estate. So we have a real estate fund.
We were acquiring so many veterinary businesses.
Now, I think those several hundred that we keep the only sell these packs and it was slow.
Now the deals 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 veterinary.
And they often have someone invest in that.
So how do we figure out a dynamic where we know the location is great, underlying balance sheet, the portfolio company is great.
We have 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 a longer term on the release.
So the lease becomes more valuable in the market ecosystem.
You aggregate 100 of those together from the valuable asset because 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 spend.
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 our investors win by low cost capital will work in a more efficient way.
So all parts of that makes sense to us.
So summarized, I would say we will only extend products that are short capital.
Two things are true. We have unfair advantage.
It helps my base business.
And I know having a real estate fund helped my base business on acquisition and also online portfolio companies.
There's a current conflict.
The conflict is not in the buy, though.
The conflict is in the lease.
And there's so many REITs out there with public leases.
We have more sales. Just take the REIT that's out there, use the lease from somebody else and just move it over and make 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, I have to have an unfair advantage.
We've talked 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?
So picking an actual buyer over 14, our 14 sales, I never picked the right buyer.
But prior to founding short, what other product I confirm and partners have as well, I hear in my mind over and over again, my old boss wanted to buy.
I can think of what they used to say over and over again.
And so how I think about it goes back to how we organize, be able to say 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. It's got to be my whole period, five years, my buyers, whole period, five years, my buyers, buyer.
It's kind of a 15 year time period.
We sold to public companies, a lab core and home of the public companies.
We sold to the biggest, the biggest private equity funds, KKR, TA associates.
We sold to a lot of private equity funds and we've done some automation vehicles as well.
And the day I have high confidence, 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 a platform or an add-on, I think I like that situation.
We can invest in 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 of them.
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, I want to buy a business that's a proven track record of acquisitions, organic growth that beats the industry, averaged by at least 300 basis points.
One technology stack system that all of this is around.
Because when you have those three things you can acquire, you can make them better.
I want technology system.
They can buy it from you as 30 EBITDA and go to 100.
And so we're basically, we like to say at Short Capital, we are building platforms, not buying platforms.
We like to think of ourselves a lot more like a venture capital firm.
And then the venture capital firms partner with a founder, great founders and idea, but usually has no relatively small team.
And then the venture capital firm works with them hand in hand and helps create a whole entire major team.
When we buy businesses that kind of orthodontics business, people buy one practice, only one practice with one gentleman, one lady.
And we'll go hire a CEO or 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 dollars 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.
So funny here, 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?
So I think it's our focus on operations.
And so, again, I'm not smart.
I know we're going to copy them.
We have the first round capital, it's a venture capital firm.
I get to know 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 the group called the Centers of Excellence.
I buy businesses 18 of them, 3 of them, 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's 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, countless email interaction in between.
And this is my factory floor where I call it lift and shift.
I am getting the newer companies to ready to go faster.
And an example of that would be orthodontics business.
It's a B2C sort of marketing engine.
Now SEO marketing and sort of direct marketing to customer orthodontics.
Took us years to build a platform to get to the right system across this metric we use.
About a year ago, we want 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 throw the right person for the long-term grade.
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-spot business or apply it to the veterinary business.
There's so many different personas we have that things change a little bit.
But the whole entire journey is, I think, some of the secret sauce.
And it's not reputable unless you hire the right people to do it.
But I think that as we have billion-dollar company resources applying to million-dollar companies.
And so a woman named Julian Larimer is the leader of our division.
She's a former private equity backed CEO and incredibly talented.
She runs the whole entire group.
Roughly, I think 13 functional disciplines.
In fact, it's here, Imagine a team from a Fortune 500 company that work at Short Capital.
And their job is to help every portfolio company in that discipline get better.
But she did it officer. She's a technology officer, head of human resources, head of talent.
All of these people help all four or three companies and elevate all of their games.
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's a lot of people, a lot of years, a lot of companies.
Talk to me about career trajectory and the system there.
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.
But associates go to business school and then come back.
But VP, I think we have about 43 or 44 people who are in that bucket.
Not one person's ever left.
And we've got some of the philosophy behind it.
So I think a little bit of it is hard to be 35 year old and look at the founders, 46 and say, when do I get my chance?
But having different verticals, healthcare, food and beverage, business services, industrials, my most talented healthcare vice presidents went on to become principals of my business services fund.
The same thing in 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 treating 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 to 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 a celebration.
It's important for, I think, leaders 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 to 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 and those ranks, it's really hard and decreases your odds of success.
So I think it's core competency to private equity.
And 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 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 where friends develop.
And I'm in a way that I 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.
Yeah. I love the idea that I think you pay for people's dinner if they want to go out of there's three people or something like that, like every little detail is so thoughtful.
The rear more want to go to dinner, I'll pay for it.
One of our younger guys named 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 said, 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.
And I love it. I always drink the system.
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 the longterm, but he follows roles and he's a culture carrier and I want to create nodes of culture, cares people who want to be here.
It's a very high bar from the vice president though, but it 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. 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 maker sports franchises.
Yeah. So, you know, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoenix Sun.
It's about a year ago now.
February closed. 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 live in Phoenix.
That's who owns the team.
And there's a lot of the algae between private equity, investing in sports and metrics and numbers.
But when we buy a business, you know, we did and we partnered with Phoenix Suns.
Yes, it works there. The first day, Matt and I met with every person.
You know, 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 should stop doing.
We did all the time of 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 the easy win.
How do I make some easy wins on the way?
But the sports business is a complicated business.
I view sports in 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 want, are we lost.
But there's lost 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, no, hopefully Matt and I's ownership in stewardship of the Phoenix Suns and Phoenix Markers.
We're really excited about the Phoenix Markers.
Is that no one's they, oh, they improved the ebomars by 400 base points.
No one's even crap. We're going to want to know where they competitive and they win championships.
And the day we have four pillars and like all of us have short capital, it's goal oriented, it's values, it's core values.
And so at the Phoenix Suns, 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.
I 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.
Get back to this community, be stewards of this community asset and do right by this community.
Number four, win, win championships to win and 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 gonna be 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 at the 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 in Maine, New York.
Phoenix Suns are going nowhere.
Phoenix and Mercury are going nowhere.
And so it's a fun opportunity and it's a really opportunity to give back to a community and hopefully create memories.
Matt and I grew up playing sports.
My best memories were my mom and dad and I and Matt going to games.
We didn't have the best seats of those days, but our heartbeat was watching our HRI Pistons win or lose.
And I hopefully create an environment like that.
That's the fun part about sports.
It's a platform for good and for change and get a lot of positivity.
And so we're really excited about that.
Has anything surprised you so far about how the league, the teams, the ownership, the ownership's function and work?
Anything been really surprising?
It's much more of a partnership amongst 30 teams than I thought it was.
It's been the white lines.
It's fierce. Ask-a-ball 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, I sat next to one of the guys at lunch and he said, congratulations, you're brass, you're young.
I was the same thing. You make much mistakes, talk to me in five years, but have fun on the journey.
So people are very helpful.
At the day, we want to create a great project for the fan.
And MBA is a great opportunity and other teams want to help each other.
We want to help each other.
I want your team to be full and my team to be full.
You know, who I want to quote and quote lose is I want the other sports, right?
I want other entertainment options to lose to the benefit of the MBA.
But I think the camaraderie and the voice 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 on the way 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?
I've learned from certain people.
It's a quite a couple. They've been great to me.
They've been over there.
They're different. It's quite a heritage.
No more specifically, there's a group.
They have a network. I've learned from them of the power of a network and introducing really talented people to each other.
People with professional success are very selective how these are timed.
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 can keep Johnson to 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 Dotton.
He's the founder of Keystone Capital.
He's, in my opinion, amongst the most humble and successful people that we've ever come across.
It's a steady hand on the wheel and do the right thing over and over again.
Also a gentleman named Jim Forrest, who was at Winpoint Partners for a number of years.
He is now the chairman of Short 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 to me and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined on process.
And then there's a professor at Harvard Business School, executive education.
They wrote a school there named Boris Kroisberg.
I've done 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 consistency and process, it's Donner.
There are people, Donner leaders who are on the boards of my businesses.
So if you're a career people from Donner who have retired to be on our boards.
And so it was from people, I think that at the 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.
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?
Most incomplete. I think you're never complete at the short capital level of operations.
I get frustrated when I hire a new team member and their first two weeks on the job, 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 probably get to the whole entire team.
And so do the thing called what you 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's more efficient for very small people who don't know things, but it's way more valuable for knowledge sharing.
I didn't think of short capital like an 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.
For example, we made mistakes in the past where we did not renew a lease in a portfolio of a company at an important location in the landlord extracted a pound of flesh out of us after the fact.
What we did after the fact is now all of our businesses are required to have and call the lease query.
I don't care if the system was called the lease query and all of our leases of all of 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 in short capital, very rarely is your 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 we reduce the risk of that and that's through knowledge sharing, but doing it an efficient way.
Is there anything about how you spend your personal time that you wish was different?
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 of building with sellers.
Those early years are short capital.
The board members, I personally recruited.
I was one of four partners and I was the lead partner on one 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.
You 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 the early boards.
It's almost like you're high school buddies.
You know them better than you're 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.
So leading a deal, negotiating a deal, working with a founder, recruiting a CEO, I do less that.
That's come in through the very end of it, but I do miss one of the best questions I think that LP has ever asked me.
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?
I think at least for me, the right answer for short capital is I have to be a better manager.
I love investing. I love buying companies, but to create what we want to create and build our system grow, we want a system to grow.
It's a manager. You're a leader of people, you're an imagined system of processes that 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.
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?
That's a great question.
I've heard you've asked it before.
You know, 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 backed it on the last decade for sure.
And I'm proud of my telepon some people that work my organization.
Those advice is this. Try and have one friend in each decade of life.
So a friend of 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, no whether it's not losing a loved one, a mom or dad, that sometimes happens most often in your 50s or so or 60s.
Or if you end up having, you know, 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 the professional side.
Things you go through and experiences you have in your 70s and you're winding down your career, the emotions that you may be going through and friends that 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 when they're kind of going, are you going to be around
here in five years? And so some changes that you know coming for me at least I'm 46.
I'm here in that 25 years, that could be a possibility.
I'll wear that fact pattern and I'll 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 pretty great value for me and I hope others try to dive in.
Justin, you built a fascinating business.
I'm excited to do this again in five or 10 years and see how it's all unfolded.
Thanks so much for your time.
Thank you so much. I hope you want to do it again in the future.
I'd like to think we're in inning two of short capital.
You built an amazing podcast in the following.
So thank you for the opportunity to share our story.
Thanks for your time today.
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