How and Why To Invest - with Investor and Entrepreneur Phil Strazzulla

0:00You are listening to and watching Builders where I interview CEOs, authors, authors, authors, authors, and leaders about building businesses, and careers. If you have an interest in investing in private markets, investment philosophy, entrepreneurship, you're going to want to hear this episode. My guest is Phil Strasula. He's a successful investor, entrepreneur, small business owner, and he gives some of the most clear, candid, and actionable advice I have ever heard on these topics.

0:29Hi, Phil. How are you? Good to see you. I'm doing well. Likewise. Glad you're on the pod today. I'll set this up. I love interviewing investors because I feel like it gives really good guidance to business leaders on like how to raise money or maybe exit. And I love interviewing entrepreneurs kind of for the opposite reason. And today I'm lucky enough that you are both. And so I'm going to ask you questions from both kind of both sides of the spectrum. And I want to start with investing. And you have your own own philosophy, I think, on investing. And I'd love to ask, you, I guess, at the highest level, what types of companies for you do you see as a good value for your philosophy?

1:12What types of companies are you investing in today at what stage and why? Sure. And as a bit of context, I started investing when I was 12. I was just always interested in it for whatever reason. My brother and I were both interested in it. He was a year younger than me. This was sort of like right at the beginning of the dot com boom, like Netscape had gone public. but I think it was 1996 or something like that when we first opened a brokerage account and took a lot more money and started putting into stocks and had a lot of fun doing it. We're lucky to ride the wave and then get out at the right time, listen to old Uncle Warren Buffett and get the cash in 2000, stay till after the 9-11 attacks, get back in.

1:55I had an internship at Morgan Stanley in the summer of 2007. And one of my colleagues worked for Frontpoint, Steve Eisenman's hedge fund. Steve Eisenman was played by Steve Carell in the movie, The Big Short. And I listened to his thesis on what was going to happen with the credit crisis. And I was like, wow, this guy's smart. So got to cash again and back in March of 2009. And from a public equity perspective, at that point, I just sort of moved more into passive investing kind of before it was the norm because I went to NYU undergrad finance and all the research was like, nobody beats the market, right?

2:31The market's fairly efficient. And I started getting more and more into private investing. And so the first private investment I ever made was a friend of mine from college, an old roommate. We were like 23 at the time. He found this guy who owned a bunch of real estate in the Bronx and he'd just been audited by the IRS. And it turned out he He owed them like$7 million and he didn't have it. And so he was selling this property. And it was one, twos, and three bedrooms. The one beds were selling for like$120 ,000. And we were able to buy it on an average weight of like$100 ,000 per unit. And I was like, well, the two bedrooms are probably$1.75.

3:13The three bedrooms are probably$200 ,000. We're buying this thing at a huge discount. This shouldn't exist, right? In an efficient market, this should not exist as an investment opportunity. but let's do it. And I invested$3 ,000 and I actually just got my last check from it last year, which is how long does it take many times, right? This is about 16 years, a nice IRR over 16 years, so a nice multiple investment capital. And then I also worked at this venture fund, Vessemer Venture Partners, where we got to invest our own money on a deal-by-deal basis. So when we were doing the Series A of Shopify buy at a$7 million pre, I got to decide, do I want to put my money into it or not?

3:52And again, I'm 24. So I'm investing, you know, hundreds to low thousands of dollars per deal. But when you get, you know, a hundred bagger or 500 bagger with Pinterest or, you know, a Twilio or something like that, it can add up. Totally big time. Yeah. And the nice thing is there's this wonderful part of the tax code 1202 qualified small business stock where you don't have to pay taxes on that money. As long as you don't hit$10 million, which I was nowhere close to on a given gain. So that's sort of how I got into the investing world. And my philosophy is very much the margin of safety sort of philosophy.

4:34So there's this really great book by Seth Klarman, Margin of Safety. You can get the PDF. I think to buy the book online is like four or 5 ,000 bucks because they made a few thousand of them in 1991. They never reprinted them because nobody bought it back then. But now he's one of the foremost investors out there and a billionaire and all that stuff, runs about post the hedge fund. But that's sort of my philosophy is how can you buy a dollar for 50 cents and maybe it grows into$2 over time. Those sorts of opportunities do exist. They don't really exist in the private markets as much. You know, I'm not as good at spotting them, I think, because those markets are efficient enough.

5:15But in the private markets, they certainly do. And some of those are companies like a SaaS company. And some of those are opportunities to buy real estate in weird situations. Basically, the weirder, the better, it seems like. Did you know that Builders is sponsored by business.com? I'd love to tell you about a new free membership from business.com for small business decision makers. It's called business.com plus, and it's designed to address the pain in selecting new products and services. What is the pain you might ask? It's things like knowing which vendor is best for your specific business, negotiating pricing, having access to someone who can answer questions for you.

5:58The new membership, Business.com Plus, handles all of that with a dedicated advisor, pre-negotiated pricing, and solutions tested and reviewed by experts. Check it out at business.com slash plus. That's business.com slash P-L-U-S. Well, if a market is inefficient, I think that maybe not a lot of people know about it. there isn't there isn't information or access or those those sorts of things. What are your habits to kind of like keep your ear to the ground and know that these things even even exist? I think that this is one of those snowballs that starts very, very slowly to compound and grows over time.

6:44And so all the deals that I see that I take a look at are from my network. And they get to me because there's a bunch of people out there that I've shared deals with in the past or that I've looked at things with in the past that kind of know like, hey, Phil does this sort of stuff. And maybe I get an opportunity to look at something and I don't really understand it. And I'm going to bring in Phil because I think, hey, Phil has looked at search funds before or litigation finance or what have you. And then once in a while, there's also brokers who are trying to sell stuff. And a good example of that is there was a well-known B2B SaaS company where an employee left, they had 45 days to exercise their options and pay their taxes, didn't have the capital.

7:35The company had a restrictive policy on their stock, and so it couldn't be traded. So it had to be funded through a forward contract, forward contracts, but$100 ,000 worth of stock. No hedge fund is going to do the work to understand it. And nobody who's writing $100 ,000 check for the most part has sophistication to understand this sort of transaction and the risks inherent in it. And so the broker was like, hey, the one guy in the world is probably Phil. And so I'm going to send it to him. And so it's just sort of a reputational and network thing that grows over time. Yeah, we were talking about off camera before taping about sort of the habits of um effective sales people and just and just successful people in in general and sort of like one of the things that i would i was saying was you know just like doing doing the hard work uh you know hustling nothing sort of comes comes easy i wonder what what your habits are that you think put you in a position i mean i know you said networking but like put you in a position to have a superior take, if you will, than other investors?

8:45Is it more research? Is it curiosity? Is it the fact that you pass these exams to be able to invest? What are some of the things? I think there are a couple of things. So one, I mentioned Seth Carman and his book. I read his book and I emailed him and I said, hey, we should get dinner together because I'm also in Boston. And he said yes, but then his executive assistant was like, why don't we do a call? and we had this awesome call and he would, you know, very generously was like, let's do this every couple of months. And I didn't take him up on it basically due to insecurity and not wanting to take this guy's time.

9:20But one of the interesting things on that call was I asked him a similar question and he was like, you know, there's this fruit fly study and they basically found that like some of the fruit flies like go toward the light and some of the fruit flies don't go towards the light. And he says, that's what I found with this margin of safety value investing. Some people understand it and some people don't. And it has nothing to do with your intellectual capacity, your background or anything. I think to some extent, that's probably true. The other factors that I found that are important are one, take your ego out of it.

9:55I think a lot of people do this investing so that they can go to a cocktail party and talk about, you know, the MIT kids that I'm backing and this thing and that thing. And that's honestly the main utility of it. and for me, I try not to care about that stuff as much. I think you also have to be okay being a contrarian and an outsider and that is very hard because we are not meant to stick out as human beings. Like that's a good way to like get kicked out of the tribe and not have enough food and shelter. And so you have to be okay being weird. Like we had the anime convention in Boston here a few weeks ago and there's like 20 ,000 people walking around as like Goku or Gundam wing or whatever.

10:38And these are like the extreme, you know, kind of like 99th percentile outliers in your high school class. Many of which had, you know, some form of like autism or something like that. And they're, they're like totally cool, like looking like Goku and like putting all this time into their character. And I was sort of like, the funny thing is like, most people look at these people and like, oh my gosh, like that's so strange or bizarre or whatever. And I'm, I'm just like, I totally empathize and like, think it's cool, like what they're doing. And so I think even though I look like a normal person, um, nor, you know, whatever normal is like, I'm really not.

11:17And I don't, I don't care as much, especially at this stage of my life. And so if somebody brings me some deal that, you know, a hundred other people have said like, Hey, this looks terrible or like, what's wrong with this? this doesn't make any sense that this opportunity exists there's got to be something wrong i don't care standing out and being like oh i don't know about that and and to your point leveraging some curiosity to kind of try to figure it out yeah and and you know there's also just pattern recognition too just to go back to the to the to the sales analogy some of the success most successful sales people just reach out to 5 000 people and and so after a while they're they're just like, I know that this works.

11:57Um, I don't know, don't necessarily know why, but I sort of learned, learned that it works. You know, when you were describing sort of coming up in, in, in investing, um, there was a, there was sort of a, uh, uh, a mix of insight and good fortune, you know, getting out at the right time, kind of, um, having access maybe to information that, that tells you that, that an economic recession might, might happen or having that sort of insight. Can you talk through maybe a mistake that you've made along the way that's been like a really, really clear reminder or reinforcement of what your current philosophy is today?

12:36In the heady days of 2021, I made an investment in these two guys from Columbia Business School, not to throw Columbia Business School under the bus as a UBS grad, but I guess They went to an Ivy League business school and they bought this roofing company and they bought it for such a cheap price. It was like 2.6 times EBITDA, super profitable business. And it was sort of like, man, as long as this thing doesn't go to zero, these guys are going to make a fortune. They just need to keep this thing running. And it was kind of a machine where they had amazing Google reviews. They were in Florida where you have to get a new roof if you want insurance every 18 years.

13:21And so there's this perpetual demand. And if you Google anything related to it, they're number one with the five-star Google rating. And they're so good that they can actually get the money up front to fund the project versus most roofers have to wait until the end. So there's this working capital dynamic. So it was really cash-efficient business. And I look back on it, and there's a couple of mistakes that I made, and they're all related to the operators. One is they were not very high integrity. So they learned that the seller of the business had committed tax fraud on a massive scale. And they did not disclose that to investors, that they knew that this person had committed tax fraud.

14:03And so on the books, this was like a two and a half million dollar profit business, but real profit was like$5 million. And the guy was basically like, I take a lot of money from my customers and I go to like a cash checking place. and I just like give them the check. They give me the money minus their 5 % big. And the buyers knew that the guys who I was backing and they didn't disclose that. So there's integrity issue. Two was they were not ready to take over a blue collar business. They were in there. Like literally, I remember there's a photo that they took where they're in the kind of the warehouse.

14:34And one of the guys is wearing Gucci loafers. And I was like, right then and there, I should have just like walked away from this investment because you can't manage a bunch of guys doing roofing in Gucci loafers. Like it's just not going to happen. You've got to roll up your sleeves. And the third part that really was tough was the business actually did really well for a while. And then they had like six or eight weeks of a cash crunch. And these guys folded. And I talked to them. I remember one of the other investors kind of sniffed out that they were in trouble. And I called him up, the CEO.

15:07I was like, what's going on? This guy sounded like he'd been like a POW camp the last six years of his life. Like he was on his last legs. And I was like, dude, like, it's been like six weeks. You know, like, there's lots of ways that you can dig yourself out of this hole by extending your payables and collecting money faster and like, getting a revolver and like all this stuff. And he was just a beaten person. And running a small business, like you got to be resilient. And I just didn't suss that out. And so I didn't necessarily know, what to look for on those dynamics. And it ended up going to zero.

15:45This business that was doing $5 million of free cash flow a year that we've offered 2.6 times EBITDA went to zero in two years. So many things to unpack on that. I want to ask a couple of follow-up questions. One of them is about, this term might be used if you're a poker player. I'm not sure if it's used if you're an investor, but like bankroll management, you've talked about a lot of investments that you've made in the hundreds, in the thousands, more than that. Some you might get a quick return. Some it's taken 16 years to get your last check. How do you think about the map of how much are liquid versus how much are illiquid?

16:27How do you think about the time horizon of investments. Do you have some general rules of thumb on this? Yeah. So my main source of income is my business. And I run a small business that I founded. And I'm always very conservative when it comes to our family's finances. And so I want to have at least a couple years of burn rate in liquid securities. And that could be municipal bonds or ETFs or just cash or gold or maybe a little bit of crypto, things that will be stable. For the most part, I actually don't even have that much exposure to public equities these days because I have so much exposure to private equities.

17:12And so I don't really need that level of risk. And also, So if you live in a state like Massachusetts, unfortunately, the tax rate is super high. And so, you know, munis are a really good way on a tax adjusted yield to invest your money. It's almost as good as public equities without the volatility. So, you know, a couple of years of cash burn and then for the rest of it. I don't think too much about like I want, you know, 30 percent to be income generating. And so we're looking at, you know, real estate that pays a dividend or litigation finance or something like that, or like, you know, long duration versus short.

17:49I'm sort of probably subconsciously doing that math in my head. What I'm really just looking for is opportunities to generate an attractive risk adjusted and liquidity adjusted return over and be okay locking that money up for 10 plus years. You mentioned a couple times in your last answer about starting your own company. And maybe I'll shift gears and start asking about you as an entrepreneur. Maybe you described your investing background. Could you describe your entrepreneurial background? And then what led you to start your own company, which is SSR? What does it do? Sure. So I, for whatever reason, always had a very strong drive to start my own business.

18:33In fact, I remember when I was working for this venture capital fund, I had to like stop reading Paul Graham essays on the commute to work because I was like, I'm just getting too fired up and I have this awesome job and like I need to do well in this job. That's an important part of my journey and I need to be here and learn and grow my network and make some money. And then I went to business school and I taught myself how to program. I kind of committed like, hey, I'm not going to do recruiting like, you know, the 20, 30 hours a week that people go to dinners with McKinsey or whatever. I'm going to focus that on learning how to program and working on different projects.

19:04And I started an HR tech SaaS that was in the employer branding niche with eventually a friend of mine. And we basically bootstrapped the company. We raised like 200 ,000 bucks and we got it to a good, you know, kind of a small profitable business. I was at first our kind of main developer, then I shifted into sales. and it was a hard, hard, hard thing to sell. We were selling in the HR, which is kind of notoriously difficult, a new line item, something that was not really understood that well by our customer base. And we didn't have millions of dollars to educate the market. And so eventually, we got to a decent place just through grinding it out.

19:49But I was like, I need to do something else. And so I started SSR, where our goal is to help HR professionals find about the right software. So we're first and foremost a review platform where we have user reviews, but then editorialized reviews from our team of experts about payroll software, applicant tracking systems, HRASs, and the other hundred sub niches of HR technology that you've probably never heard of or thought about, but they're out there. And around 100 ,000 companies a month will read those reviews to figure out what software to buy. We also have another part of our business where, as opposed to reading our reviews, some Some people don't want to read 25 ,000 words about payroll software.

20:30They would rather take Xanax or whatever other ways you use to get to sleep if you have insomnia. And so you can talk to one of our staff members one-on-one and get bespoke recommendations. So you can tell us about your integrations that matter, how big you are, how fast you're growing. Do you want the best thing? Do you want the cheapest thing? Some combination of all those. and we'll tell you, okay, here are the HRSs, payroll vendors, EORs, ATSs, whatever that you should be looking at. We'll make a warm introduction and then we're sort of a concierge. So you've got questions about pricing, your CFOs in the way, we can help you with all of these problems as you buy the software.

21:12So that's what we do at SSR. You might've been interested in starting a business from a very young age and interested in investment, but you may not have had a passion about HR software since you were 17 years old. So what attracted you to that market? Was there some investment thinking in that? It's underserved, there's a high total addressable market, there aren't enough players doing what I'm doing. What was your thinking of going into it that way? It's funny. I took this aptitude test, I think I was probably in college, and it said you should either be in private equity or be a recruiter. Oh, wow.

21:51That's weird. And so like, at some level, you know, I have a strong interest in career paths and people's life at work, because that's so much of people's lives and culture. And I actually have always had that interest. I kind of got into HR by accident with my first business. And then I was there. And it's like, all right, I have this network, I have this knowledge. And I see this problem. Can I take what's working in the B2C space with some of these, you know, wire cutter, nerd wallet type businesses and apply it to the B2B software space? And of course, there's a lot of differences. And so how do we make money from this?

22:32You know, affiliate doesn't really exist. We need to build direct relationships. We need to build our own technology platform, all these other things. But I sort of, you know, probably on a subconscious level was interested in HR, got into my first business. And then all of a sudden you're sort of in this, you have assets, right? And it's just easier to get started in an industry where you have expertise and network. And that's what I did. Very cool. And I think that in 2025, I'd be fired as a podcaster if I didn't ask you about AI impacting your business. But specifically, I've experienced in the affiliate space.

23:07also, you know, I understand Wirecutter, NerdWallet, these businesses have a high degree of dependence on discovery through Google. And so what's your perspective on that? And how are you hedging? Yeah, it's something I've been thinking about for the last probably two plus years, because even before ChatGPT was announced, you know, we get a lot of traffic from search, which we then monetize, we started seeing Forbes in the search result page. And it was like, oh, okay, like Forbes can write this crappy article about the best HR software and rank number one. And this article is two weeks old. Other large brands are going to figure out the same thing, right?

23:50Don't get me started. We're in hearing aids and other things where Forbes was suddenly the expert overnight. Yeah. Exactly. Yeah. And it took Google three plus years to correct that mistake and penalize those sorts of sites. And people made hundreds of millions of dollars or billions of dollars in aggregate with that strategy. Wherever there's a couple billion dollars lying around, people are going to exploit it. That's a good thing about capitalism. And hopefully it's good for society. In this case, it probably wasn't. But I saw that happening and I was like, all right, Google search is just like, it's building your business on sand.

24:27And so I started thinking about alternative models. And one thing, I actually have a note in my Evernote from 2019 around basically what we call advisor, this advisor business where you're like a true white glove concierge. It's not a lead generator. It's really trying to help people. The North Star is helping companies find and buy the right software. and to me the most interesting uh path forward was and we started building that business and now you know last week it's more than 50 percent of our revenues which is like that's a business where if we do a good job we get referrals we get repeats we get word of mouth and we can also be in other parts of the discovery phase because the monetization rate is high enough where we can do a webinar and we can attract people to that webinar, or I can do content on LinkedIn, or we can build our newsletter.

25:26There's all these other discovery mechanisms that put us in charge of our own destiny. I think that the notion of word of mouth, referrals, advisor, those sorts of things are kind of like brand building exercises or community exercises, if you will. and um and those are the types of things that aren't aren't you know search proof but but you're right when there's a steady free stream of like free users um coming to your site it's hard to want to hedge it's hard to know to know to hedge and it's really it's really interesting that you're doing doing that you know i want to ask about voice of customer and and how you improve your your product in your business because i think that that in a in businesses that were built on commissions or affiliates or affiliate revenue, that can be really challenging.

26:20I think many people in that space are thinking about their business as effectively like an arbitrage, right? Like we're going to buy somebody off of meta and resell them. We have good monetization rates. We can do it five times over, et cetera. And for us, we're really thinking about how do we build a product that is valuable to our end user, which is the HR professional. And if we do a good job with that, everything else takes care of itself. And so we talk to HR professionals on our webinars. We'll run polls like, you know, where are you getting your information from? How many tools a year are you buying?

26:54What are the biggest problems with buying tools? We're always trying to get smarter. And then when we talk to the HR professionals, which, you know, happens 20 times a day through our advisor program, we're not just ripping through a script to qualify them. We're really trying to understand why are you here? or what's bothering you about your current system or lack thereof, and what are the challenges going forward and how can we help you? And as we continue to do that, we build a more and more compelling value proposition to our market, which is the HR professional. Phil, thanks so much for talking with me today.