Justin Ishbia - Lessons from Acquiring 586 Companies - [Invest Like the Best, EP.357]

21:50The guy is 45, one's leaning 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 types of money. And I think there's no better way than to create value than to compound it and be a leader in a business growing at a really fast pace. 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.

22:17The idea of a$3 million EBITDA business having a fairly high-powered seven-person board seems ridiculous, unrealistic, but you figured out a way to structure the incentives and the composition of the board, like the nature of each board member and their background that's really seemed to been a key part of this system being the star. Can you just describe that system, the board system and incentive structure in as much detail as you can? 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 power forward and center. What is traditional in private company investing?

22:47Before I found a sure, I invested in small companies about$20 ,000,$50 ,000. What happened normally is that whoever put the most money in was 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 mean, you use sports as an analogy. I think people oftentimes know college basketball.

23:19Who is Tom Izzo? Who is Mike Krzyzewski? And who is their family tree? Every industry has their Tom Izzo and their Mike Krzyzewski who are preeminent basketball coaches. And so we build a board like a basketball team. And we say, I want someone, two people who have run a business in that exact same sector in 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 the customer. I want to voice the supply chain. You usually want a functional discipline expert who has been in that sector, like a CFO, who knows the metrics cold.

23:51And one or two people from the Jason sector. This board of seven individuals, a lot of times our board members who are first time joining us, they laugh. They say there's more people on the board than there's millions of revenue. We buy business doing eight of revenue, nine people on the board. So it's a way of overstacked board but we're stacking boards in a unique way that creates a lot of value. And I want to be clear, and 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 comp. Feed it back. The lead director gets a small stipend to be more involved.

24:19We go through a lead director and we have six regular board owners. Those regular get zero cash comp, but they get options in the company that in our base case, they make$250 ,000. That was breaking out. Very simple, guys. It's very simple that on average, you know, for 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 a 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. They're like, well, I can't afford that board.

24:47I'm like, yes, you can. You give them options that in a 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 and you heard our firm talk about buying a company in XYZ sector, the question that comes out of my mouth versus tell me every board. Literally, and then there's like a slide that lays out the different avenues, the voice of the customer, the voice of the supply chain, the voice of the operator, someone's sure relevance.

25:18And there's really four to eight people deep. And the person who is leading the thesis is their job to pick the best group. And on the unique dynamics, it's about a moat or things from the past that this year will close 12 or 13 platforms. So times seven, we're talking about 90 unique board members. And so we're talking about a third will be repeat customers for us, but I have 60 new people who will join our family next year. I don't know who they're going to be yet. They're all going to be very talented business people. We talked about someone before, it was a phone call. That was someone who's very high-end, very talented person.

25:46There'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 complement that early career energy. And so if you partner with a hungry, smart, first-time CEO, first-time CFO, give them a board.

26:22And naturally, of those seven, by the way, five becomes super value-addive, one or two less. So just to read out of it, I'm very poor. operating who is going to be value-add and who is not. It's just DNA of the people. And after with us one time, I can figure it out. But you get these really talented people on these boards, and they help in a unique way. Every single member helps in a unique outsized way at one point during the life of the investment. Opens the door to a customer. Refers us to a former employee of theirs who was talented. Has a unique way of understanding a software system. Refers us to an add-on.

26:55When we buy a business to an 18-year-old revenue, we want to grow it to 100-year-old revenue. You don't just need a new customer that could bring three men of revenue. You're talking about, at first, a 15%, 20 % pickup in revenue. You buy a business with a billion of revenue, there's no ones that are bringing you a 15 % pickup in customer. It's just not going to occur. But I think what we've learned over time is we've got to create a fun environment for these board members, too. They have choice. They want to do it with a professional time and effort. We put a lot of effort into creating an ecosystem where we have these operating partner summits where we invite individuals, all of our board members from all of our companies, come there twice a year to cross-pollimate and share ideas and bring perspectives.

27:29But it's creating a family and an ecosystem of really talented board members who want to provide advice and give back. Part of it is altruistic. Part of it is financial. Part of it is fun. All those 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 prove 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.

27:59I promise you the process. Our promise is written down. It's clear. And we do the same thing every time. And we make it better sometimes. But the process is the same. And I think that is, I think, what great operating businesses do. Public companies like a Donator, 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 subsectors versus somewhere like software? What is it about that addressable market, those business models? Why pick that instead of something like software that if I took this system and went and did this in software somewhere, it probably worked pretty well.

28:33Why not? We may at some point, but we started 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, went to Vanderbilt for med school. His eight buddies and my eight buddies became one group at Vanderbilt. And we're all still buddies to this day. He's 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 the 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 50, I suppose when he was 30, and have him be my business partner.

29:09And guys like that create tremendous competitive advantage. And so it was always like, we partner with individuals, main street businesses, where the founders have a outsized tactical skill. Well, that's cutting your eye open for a surgery, for a cataract, or whether that is in the industrial sector, someone who's really good at repairing roofs, or whether in the business sector, someone that's great at making sure 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.

29:46Great. 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 skillset? And so in a doctor's example, I don't want the doctor who's a cataract surgeon seeing the follow-up patient, the routine follow-up. There's no complications, very simple. You know what? A nurse practitioner can do that. And they're trained well enough to know there's a problem here. I need to see the doctor on this sort of stuff. And by the way, the same thing, the nurse should only see what the nurse should see.

30:18And the medical assistant, she's a medical assistant to 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 ESI software, software founders usually are pretty savvy business people as well.

30:48They started the business because they wanted to create something enterprise. They started all parts of it. We started in healthcare because usually doctors wanted to do good and help people. It was a byproduct of their job to have to do the administrative part of the business. We said, great, you go be the doctor. We'll be the business part together, best in class, and create a business that will help more people in scale. That's just how we think about it. But there's so many different parts of the world that you can create value in, but you have to be focused. I always tell people when you have a lot of priorities, you have none.

31:15And 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. Vice presidents have one or two.

31:45I want you to pick 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 to let the investment professional pick something they find interesting. I find the best investors are curious. You're curious about something, and you want to peel the onion layers back. And so how we work here at Assure 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't focus on everything. For us, everything starts with what's called a roadmap.

32:14A 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, in order 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 amount of short companies.

32:45Where are the disciples? Where have they gone? Where are they at today? And the pros and cons. Once you do that, it's being between a 40 and a 60-page white paper, effectively, present to a committee. And you can say, hey, I'm Patrick, and I love urgent care, and this is why I think we at Short Capital should greenlight the sector and turn it on. So the whole process goes around 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 press testing it. And so we're organized through our investment committee process.

33:15The team is assigned. I assign team members to Patrick who wants to go forth urgent care. There will be five people on the investment committee. And if they agree to it, they are with you for the whole life of the journey. So from roadmap, through greeting your board, LOI, platform, add-ons, budgets, exit. And their carry in the future is tied to your results. And so they have their own carry for their own deals they lead. They're judged on your outcomes as well. And so they're very incentivized to make sure that the thesis makes sense. They have to also deploy capital. We have to also make sure that they're not just saying no to everything.

33:46It can be a doctor known, but it's a five-person team who effectively votes to greenlight your sector of urgent care in that example. And there's smart people asking smart questions and there's trends we're tracking. 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 other businesses where a small guy wins as well. No one does not do well. He must be multi-continental. That is not good for us. We're not going to invest in the sector.

34:14And so each industry has its own trends. And we try and identify how wins where the puck is going. And like in healthcare, especially, it's the consumerism of healthcare. That thing is something we 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 route rush more the whole roadmap you have 15 people you think could be on the board and you're sharing with them the roadmap hey patrick you're the urgent care expert here's my 20 pages of my deck where am i wrong what makes a bunch of sense you're getting a bunch of industry domain expertise bouncing ideas off people making phone calls through linkedin through different search engines you're outbound and if you traffic in that sector enough you will eventually learn the good guys, the bad guys.

35:03You will learn who everyone respects. I'll tell you one trick of the trade that we use a fair amount and I look at all the time is you could call up the Industry Association, Urgent Care Association of America. You ask them for their agendas for their last five conferences. If someone spoke twice or more in the last five years, pretty darn good proxy. The industry respects them. I want to meet that person. There are little things like that, that the industry itself, there's always industry panels about the lawyers and the bankers, but industries promulgate certain people and you want to get to those industries are.

35:37So for me, everything's about the industry. Industry becomes the core of it. And then that partner, a short capital or vice president or principal, they own it and their jobs to know it. And they oftentimes may invest in that sector, two, three, four platforms over their career or more. My partner, Ryan, who leads urgent care for us, he's done three platforms, urgent care sector. And I was surprised he 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.

36:11I tell oftentimes our executives, our board members, they've forgotten more about the industry than we'll ever know. But for finance guys, our job is to be most educated on domain expertise, impress you to want to join our team because we're prepared. We want to invest. And then for the sellers, I'm telling the seller is when you choose to sell to somebody or partner with somebody, there's two parts of the deal. There's the macro and the micro. The macro is, do you believe in this sector, urgent care? Micro is, do you believe in my company? I want to take one of those two off the table. I don't believe in urgent care.

36:44I have a whole machine behind me. It's my 50-page deck. Here's my board members. We create a board before we even buy the company. So we get the industry, we get greenlit, and we recruit a board. We may not 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 been around the table who know the nuances of the industry. I'm telling the seller, don't worry about the industry no longer because if it's not you, I'm going to invest in urgent care.

37:11We're going to invest here. Now, all we have to do is agree upon why you're best in class and why we should together go build something that's pretty special. And I think that resonates with sellers a fair amount. Yeah. Let's talk about within the given thesis, starting to look at the individual assets, the individual companies, the diligence process, and what you're looking for or looking to avoid. Once you get down to the actual thing that you're going to buy, describe in whatever way you want the things that matter most to you. I'd love to keep walking down this chain and negotiation and operations after the close and everything else.

37:42But 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 role in the sector. We're almost always consolidating. So one of the things I look for almost right away is reputation, amongst your peers in the industry. And there's a really simple test. And I'm hearing people 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 find an ophthalmology company. I'll try and identify in that same town three or four other ophthalmology practices in town and call them up and we'll do a secret shopper or something and ask them, if your mom had to have a cataract surgery and she could not go to your practice, who would you send her to in town?

38:22And I want the company that I'm buying to get on that list multiple times. Now you have to recognize there's always in town a coconut Pepsi. There's somebody that likes each other and somebody doesn't, but people in town know who is pretty good in town. So why it's so important is reputation of that first group is everything because those who are in the know only want to join the winners. The New York Yankees are oftentimes one of the best major league baseball teams. Very different than the AAA team. There's no way the Los Angeles Dodgers want to join a AAA team. The Dodgers would join the Yankees in a roll-up of the baseball industry because they're viewed as best in class.

38:56So I think we have to take it the same way. So reputation. Number two, I want a founder who has a shared vision to grow and has a desire to learn. Back to curiosity. They want to understand and want to grow a business beyond their own means. And they're excited about partnering and they have an open book. Our best founders, clinically, technically, there's a baking sweet goods or a doctor or a plumber. We have a water safety business. it's so important that they're really good at their craft and they're able to identify who are others good at their craft so to me it's reputation and industry technically sound you don't hear me say management team very often do you because it's important what we're going to go build we're going to take what you all have and surround you and compliment you oftentimes the founders are going to pay a role but not the ceo and we're very clear on the front end by the way our biggest company is a veterinary company we started when it was five of revenue one of even three locations.

39:52Today, it's over 400 locations, over 1.3 billion of revenue. That's founder, veterinarian, and 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 why we can help people in rural 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.

40:26Those are the things I really focus on. There's always the minutia of customer concentration and reputation, but reputation is encapsulated so much because this is a role of thesis. It's not like we're buying one business and staying 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 a one-lever roll-up, you've seen one-lever roll. There's snowflakes. Like they're restaurants. They're good restaurants. They're bad restaurants.

40:54Same type of dynamic. Oftentimes, when they get bigger also, the founders have already left the organizations. Now, in the earlier stage where we start, these founders are very hungry, want to grow these businesses, and we like to under-lever. So we don't put pressure on these teams with leverage. We under-lever, sometimes 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 who are disgruntled. And there are some who leave the organization.

41:28So 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 artisan bakers. It can be a bunch of veterinarians. We want to have a technical advisory board. We're able to bring together and create a dynamic of what is the best in class delivery of the services. And so we spend a lot of time on that. And so I recognize that more arrows are shot at bigger companies. No one talks smack about the AAA team. They talk smack about the New York Yankees.

42:03You know why? People start in New York Yankees. So I think it's easier to point fingers at. And do bad things happen? And sure, by normal scale, if you have 400 locations, more likely one doesn't go as well as if you have four. But I think in totality, those businesses are able to pay their employees better, create a better margin profile, and therefore deliver a 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 part of a levered roll-up. I'm like, yeah, but the customers keep picking on them.

42:35Want to know why? Because they believe it to be a better value prop than going to somebody who is not part of that role. And it's because usually they can offer more services, hopefully a higher quality of care. And there's smart people running them with metrics like net promoter score and other things they've been more sophisticated to identify. This is what my customer wants. I'm delivering it in a very efficient way. It'll work hard. 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.

43:02I say, no, I'm in psychology and sales. Look, end of the day, I always tell our team members at Shure, we've done now almost 900 transactions. We've had zero lawsuits. If we ever pull out that document in the future, I have to look at it, we've already lost. We negotiate to do our best, have all those sort of things, button up and sort of stuff. But end of the day, I want people to believe in the growth story. They have to believe that we're building together. You know, lawyers sometimes will try and, I'm a former lawyer, I'm a 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.

43:39I need to make sure if Patrick was on the front page of the Wall Street Journal for doing something uncouth, I need a way to separate. That's important to me because that has risk. I think the most important thing, especially doing a roll-up, and I think most people get it, is what we have to do is create an environment and a structure so that not you, but if someone else down the road or do something, we need a way to unwind that person. If you wear your shareholder hat as opposed to your individual hat, I think most of our partners get it. They go, okay, now if I were to do something wrong, that'd be bad, but you can try yourself.

44:10The 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 sellers negotiating for a larger part of the upside. that's where we end up negotiating. Where it used to be, we do an 80-20 deal. Now it's being 60-40 or 55-45. And that's where a lot of the negotiation comes. But at the end of the day, we prefer it in person. We're not fans of Zoom negotiation. One looks in the eye and says, this is what we're going to do. Yes, I can't write down on paper all the weird things that happen in this world.

44:43But if you trust me, go talk to these 25 references. I'll give you everyone we're partnered 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 on the negotiating side, to me, it's being very thoughtful about who you're partnering with in the big picture. That's, I think, strategically, but I'm going to get one level down more tactically. I think I made sure to see on our last phone call. We have a system at ShortCapt, we call our green, yellow, red system, which basically for every material document in a transaction, a purchase agreement, an operating agreement, a credit agreement, an employment an agreement, a lease.

45:20There's roughly 15 key terms on every document. And we list all those out. And we have a scoring system internally. And I use the simplest term, a non-compete. Everyone knows a non-compete and sell business as 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 home-pired system that everyone in our firm knows on these 15 key points. They know they can agree to on their own and know they need to raise up the flagpole.

45:54Everything 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, I want to give our vice presidents, principals and partners the autonomy to negotiate their own deal. I'd leave the very best people on a super long leash, the appropriate check-ins.

46:23Give them that autonomy, create the rules, expectations and then give them a scoring system to compete with each other. People love competing with each other and the best, the light shined on them and that's what we try and do. It's a fascinating set. I just love all the systems and how they all intermingle. If I was the world's most skeptical Yeah, Cole, but thoughtful LP. And I was looking at all this. I'm sure you probably talked to this person. You probably picture somebody. What do you think they would poke in on and say is the weak point of shore in this whole like system of systems? I think it's that first time CEO, the early career energy.

46:58Are 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 homegrown. And so we created this program six years ago. We call it our CXR program, where we recruit from the best business schools, Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame. We'll hire individuals who come to short capital. They'll be a chief of staff. They'll go to one of our portfolio companies for four or five years. And if they're one of our very best, we'll promise to back them next. And I think we have a unique fund dynamic.

47:30I'd be lying to you if I said I would 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've performed well in the past. And so I think our biggest risk is the high-quality talent want to run small businesses. I think, though, there's a lot of make-ins to it. And so we homegrow our CEOs through this program called CXO program. We homegrow our CFOs. We hire people out of big four accounting firms usually, come to Shore Capital for a 30-month tour of duty. They go through this program, and the best ones can become CFOs.

48:02So conceptually, how I think about it is I offset it by recruiting and homegrowing 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, if you get into a roll-up and somebody that's not going so well, a CEO is wrong, but there's a big pipeline, deals you're buying, it's hard to unwind that and start again. We've done it 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, sometimes someone steps off the board, becomes CEO. I think that's where I would be.

48:35If I was poking holes in my own firm is, can you find enough CEOs and CFOs and leaders? I believe the answer is yes. And we try to home grow them. And also, as we needed to grow our firm, we have a system internally and kind of our all-star tracker. Each company has its own list that are 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 in the 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 Square's eventual moat was all these small things that are built on top of each other.

49:13And then the chain of innovation is itself. The competitive advantage sure really reminds me of this. One thing that we haven't talked about in this theme of innovation stacking is how to decide another fund vertical to go into. You have a real estate fund, for example, Like that's like a surprising thing coming out of healthcare. Maybe tell that story. Why real estate? And what is your philosophy of stacking unfair advantages and how to think about that as you build the firm? I think stacking unfair advantages, quote, everything I think about. How do we have unfair advantages? So I view a market cap.

49:44All 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, a different product, healthcare advantage fund. I tell our LPs and I tell our team members at Shore Capital, I will only add a new product 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 base business. So real estate. So we have a real estate fund. We were acquiring so many veterinary businesses. No, I think several hundred that we kept doing all these sales aspects and it was slowing down the deals.

50:20It was causing problems for us. And so we felt like there's an unfair advantage by, I know the CEOs of my veterinary companies quite well. There's an opportunity where they want to stay in a location for the long term, but the underlying real estate is owned by the veterinarian, and they oftentimes don't want to invest in that. So how do we figure out a dynamic where we know the location is great, the underlying balance sheet of the portfolio company is great, we have an unfair advantage of knowledge and specific knowledge of the location, and then it helps my base business because I can do things to help the base business to potentially lower the rent in exchange for a longer term on the lease.

50:56So the lease becomes more valuable in the market ecosystem. You aggregate 100 of those together as a valuable asset because it's more valuable to the veterinary company by having a lower cost lease or more capital for tenant improvements. So it's a win-win-win scenario. The portfolio company wins because they have more EBITDA or more capital expend. And 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 make sense to us.

51:35So to summarize, I would say we will only extend products that show our capital. Two things are true. We have unfair advantage and help my base business. And I know having a real estate fund helped my base business on the acquisition and also my portfolio companies. There's a current conflict. The conflict is not in the buy, though. The conflict's in the lease. And there's so many REITs out there with public leases. We have them ourselves. We 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.

52:01But the other products that we do in the future, but it has to help my base business. I have to have an unfair advantage. Talk mostly about what you buy and what you do. We haven't talked about selling these businesses. Who do you sell to? What have you learned about the relationships with those sellers? You're selling a product. a product as 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 the actual buyer of over 14 out of 14 sales, I never picked the right buyer. But prior founding, sure, we're telling a private equity firm and partners have as well.

52:33I hear in my mind over and over again, my old boss wanted to buy. I can think what they used to say over and over again. And so how I think about it, it goes back to how we organized. We were able to say industry management company. Back at the very beginning of the conversation on the industry, the roadmap, industry is growing. and I think about an industry growth of a 15-year cycle. 15 years has got to be my whole period, five years, my buyer's whole period, five years, my buyer's buyer. It's kind of a 15-year time period. We've sold to public companies, LabCorp, and HOMA, big public companies.

52:59We've sold to the biggest private equity funds, KKR, TA Associates. We've sold to model private equity funds, and we've done some teamation vehicles as well. At the end of the day, I have high confidence in the following statement. If I buy a business in a growing industry, that is, I'm buying an inefficient part of the market. We make it better. We grow it from single-digit EBITDA to the teens to 30 EBITDA. We will have lots of buyers, both strategic and financial sponsors. So whether it was a platform or an add-on, I think I like that situation. I like to 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.

53:39I want to go create the new middle one and then larger players want to buy it. And so at the end of the day, I also would say larger funds want to buy, which by the way, some of my investors are friends of mine who run quite large funds. I hear when I talk to them, they want to buy a business that's a proven track record of acquisitions, organic growth that beats the industry average by at least 300 basis points, one technology stack system that all businesses are on. Because when you have those three things, you can acquire, you can make them better. I want technology system. They can buy it from you.

54:07It's 30-bitda and go to 100. And so we're basically, we like to say at Shore Capital, we are building platforms, not buying platforms. We like to think of ourselves a lot more like a venture capital firm. And then a venture capital firm's partner with a founder, great founder is an idea, but usually has a relatively small team. And then the venture capital firm works with them hand in hand and helps create a whole entire management team. We buy businesses like an orthodontics business. We'll buy one practice, literally one practice with one gentleman, one lady. and we'll go hire a CEO, a CFO, head of business development.

54:40We will go build a home-powered platform. And on this journey, we'll have some mistakes along the way. We'll have added a lot of awesome people. And when we're at scale, we should be in the middle of the fairway for a fund that wants to deploy between$50 and$300 million for a platform, which is a billion to$3 billion fund. That's where we play in the buying environment. The inventory that we're creating, I think, has strong demand. 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.

55:14What 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 what a copy of the first round capital is a venture capital firm. I got to know a little bit copied what they've done. I think my factory floor is what I call our operations team. We call our portfolio performance group and a group called the Centers of Excellence. I buy businesses, 18 of revenue, three of you. My marketing department, the person who runs it is not somebody who's run a very large business. What we do at Shore Capital is we have a Center of Excellence, a gentleman named Adam Werder.

55:54He runs my marketing Center of Excellence. He has a team underneath him as well. His job is to be the node. And for our 43 portfolio companies, his job is to create a cohort of the head of marketing from all 43 companies. And they all four times a year get together, twice via Zoom, twice in person, and countless email interactions in between. And this is my factory floor where I call it lift and shift. I am getting the newer companies to where they need to go faster. And 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 a customer for orthodontics.

56:33It took us years to build a platform to get to the right system, process, metrics we use. About a year ago, we bought a med spot business. The marketing is very similar. It's B2C as well. And so we lift and shift. Adam's job is to help recruit, take the incumbent marketing leader, work with them, and they're the right person for a 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 spa business or apply it to the veterinary business there's so many different personas we have that things change a little bit but that whole entire journey is i think some of the secret sauce and it's not replicable unless you hire the right people to do it but to think about as we have billion dollar company resources applying to million dollar companies and so the normal name julian larimer is a leader of our division she's a former private Beck Reback CEO, incredibly talented.

57:24She runs the whole entire group. Roughly, I think, 13 functional disciplines. Effectively, a senior management 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. The chief data officer, chief technology officer, head of human resources, head of talent. All of these people help all 43 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 at 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.

57:56Talk to me about career trajectory in 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 shore capital. But associates go to business school and then come back. But a VP, I think we have about 43 or 44 people who are in that bucket. Not one person's ever left. And that's the philosophy behind it. So I think a little bit of it is hard to be 35-year-old and look at the founder who's 46 and say, when do I get my chance? But having the 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.

58:35And same thing industrial. So there's a little bit of a waterfall where the homegrown talent moves to a new vertical. My dad always taught me a couple of things about to retain, treat your people well. But he said two things, Justin, pay the market comp or a little bit above market comp. And most importantly, people don't quit their friends. So my job is to create an environment where they become friends with each other. And so that means holiday parties. It means we have a thing called a party and we sell a business, we have celebrations. It's important for, I think, leaders to know each other's spouses.

59:01And so I think it's really investing in your people because if I'm a seller of a business, the thing I fear most, if I have a friend who sold a business, a private equity firm, I want to drill in really carefully who is the partner on my deal. And who will be with me in this journey? Because this turnover in those ranks, it's really hard and decreases your odds of success. So I think it's core competency to private equity and for my business is to make sure that people stay the same when they're partnering with a founder and a business. And so I guarantee you forever, I will be here the same way.

59:29The 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, hit them 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, nerds, 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 if there's three people or something like that.

59:54Like every little detail is so thoughtful. Three or more want to go to dinner, I'll pay for it. One of our younger guys' name's Tim. I won't say his last name, but Tim, you know who you are? He had like a big bill to 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 i love it always consistent everyone on 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 long term but he follows his roles and he's a culture carrier and i want to create nodes of culture carriers people who want to be here it's a very high bar with vice president though but he makes vice president i'm basically telling you i view i'm saying to you i want you here for career.

1:00:38That'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 major sports franchises. Yeah. So, no, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoenix Suns about a year ago now. February closed, but we signed the contract in December last year. First of all, we're stewards of a community asset.

1:01:07We don't own the team. You know who owns the team? The fans. The X million people who live in Phoenix, that's who owns the team. And there's a lot of analogy between private equity investing and sports and metrics and numbers, but we buy a business. You know what we did when we partnered with Phoenix Suns? Yes, the owner 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 the two things you should stop doing. We did all the time at short capital also.

1:01:34And we got over 300 employees roughly. We got 277 responses. And I read every single response. And I think it's important. This isn't the glamorous part of partnering and running businesses, but the details matter. And you hear themes of the coffee sucks. Okay, that's an easy win. How do I make some easy wins along the way? But the sports business is a complicated business. I view sports and private equity very similar. There's a scoreboard at the end of the game. In private equity, it takes 10 years for the score to flush out. in the NBA. You can see tonight if you won or we lost, but there's a lot of similarities and I love that there's a zero-sum game in sports.

1:02:08There's only one champion. Matt and I talk about it all the time. In 30 years from now, people look back at, hopefully, Matt and I's ownership and stewardship of the Phoenix Suns and the Phoenix Mercury, which we're really excited about the Phoenix Mercury, is that no one's going to say, oh, they improved the EBITDA margin by 400 basic points. No one's going to give it a crap. They're going to want to know were they competitive and they win championships. At the end of the day, we have four pillars and all of us have shortcuts capital. It's goal-oriented. It's values. It's core values. And so at the Phoenix Suns, number one, I want to create a raving fan experience.

1:02:37It'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 at a basketball game. So I want to create a raving fan experience. Number two, take care of your employees. I want a place where there'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 the ass and do right by this community. Number four, win, win championships, win everything they try and do. And so sports investing has become, I think, a bigger trend the last decade or so.

1:03:08Now we're big fans of it. I don't think there's going to 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 made in 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, Matt, going to games.

1:03:38We didn't have the best seats in those days, but our heartbeat was watching our Detroit 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 create 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 ownerships function and work? Anything been really surprising? It's much more of a partnership amongst 30 teams than I thought it was. Between the white lines, it's fierce. Basketball operations, like, no, it's like, no, it's a zero-sum game.

1:04:12But people are quite collaborative. Some of the people you know, they're well-known. When we joined the league, next to one of the guys at lunch. And he said, congratulations, you're brash, you're young. I was the same thing. You'll make a bunch of mistakes, talk to me in five years, but have fun on the journey. So people were very helpful. At the end of the day, we want to create a great product for the fan and NBA is a great opportunity. And the other teams want to help each other. We want to help each other. I want your team to be full and my team to be full. And no one I want to quote unquote lose is I want the other sports or I want other entertainment options to lose to the benefit of the NBA.

1:04:45But I think the camaraderie and the ways to help each other, I think, has been something, not just in the game, not just in the sport, but also outside. If I'm doing something in a different community and I'm in Oakland for something and meet somebody, they're able to open a door to somebody that's been really helpful along the way also. You talked about Mark Leonard before and you're just like a benchmarker. You remind me of Mitch Rails who we're facing in a 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.

1:05:12If 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 people. Sequoia Capital, they've been great to me. The individuals over there, they're different. Sequoia Heritage, 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 time. Creating an environment of bringing the best and brightest together, I think, creates a lot of opportunity for success and unique outcomes.

1:05:52So 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 Doughton. He's the founder of Keystone Capital. He's, in my opinion, amongst the most humble and successful people I'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 Shore Capital. He is an operations leader at heart.

1:06:20He's always thinking about the customer, the customer, the customer. Mark Leonard had been a great friend for me and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined on process. And then there's a professor at Harvard Business School for executive education. They wrote a school there named Boris Groisberg. I've done a ton from him 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 is Donahue. There are people, Donahue leaders, who are on the boards of my businesses.

1:06:51So we've recruited people from Donahue who are retired to be on our boards. And so those are people I think that end of the day, you have to find your own niche of individuals who want to support your vision and want to be around the table and have a good heart that want to help people help me on the way up and help me. And I want to be able to do that to others as well. 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?

1:07:24Most 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, their 10 business days aren't scripted almost by the hour. They need to know where to go. The onboarding experience, I'm very much into experience and process. Making sure when we've made a mistake somewhere else, it's promulgated to the whole entire team. And so we have a thing called what we learned. Every time we close a platform, we do a one or two page on what we learned and we share the whole entire firm. How do you balance with scale, efficiencies, and knowledge sharing.

1:08:01That'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 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.

1:08:32Like, for example, we've made mistakes in the past where we did not renew a lease at a portfolio of a company at an important location, and 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 a thing called lease query. I don't care if the system was called lease query, and all of our leases have all the data points in the system to make sure we never have 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.

1:09:03I say all the time at Short Capital, very rarely is there a problem of first impression. When you have 35 ,000 team members and you have hundreds of locations and you have everyday things you're appearing, the same mistake can happen twice. How do we reduce the risk of that? And that's through knowledge sharing, but doing it in an efficient way. 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.

1:09:33Those early days of short capital, the board members I personally recruited, I was one of four partners and I was lead partner on a lot of those early deals. As the firm gets bigger, my job is to run short capital and give people resources they need and remove obstacles for the system and the whole organization. But you kind of miss the newer boards that created a lot of great people, some really talented people. I just don't know them the same way as those early boards. It's almost like your high school buddies. You know them better than your work buddies. Not that you don't like your work buddies.

1:10:00I like them a whole bunch. It's just that my high school buddies have a little special place in my heart. And so leading a deal, negotiating a deal, working with a founder, recruiting a CEO, I do less that. That's coming to the very end of it. But no, I do miss one of the best questions I think that LP has ever asked me. And if I was an LP, I'd ask people the same question. Do you think you're a better investor or a better manager and why? And I think, at least for me, the right answer for short capital is I have to be a better manager. I love investing. I love buying companies, but to create what we want to create and build and make our system grow, we want our system to grow.

1:10:35It's a manager. You're a leader of people. You're a management system and 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 Shor.

1:11:11Most 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, you know, in 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 ask 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've acted on the last decade for sure. I'm proud of my telephone to some people that work in my organization.

1:11:39whose advice is this. Try and have one friend in each decade of life. So a friend in their 30s, friend in their 20s, friend in 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 need to call upon them for their wisdom, their experiences, and whether it's not losing a loved one, a mom or a dad, oftentimes happens most often in your 50s or so, or 60s. Or if you end up having, you know a child. That oftentimes happens most often in your 20s and 30s. But it's a really great piece of advice that on the personal side helped me a ton, but also on the professional side.

1:12:14Things 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 have shared with me, things along the lines of all my peers aren't working anymore or really hard to try and go get new business and promise someone to be helpful 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 hearing that in 25 years, that could be a possibility aware of that fact pattern, how to prepare myself best for it. And so having a friend in each decade of life is something that I've focused on and it's great value for me and I hope others find it valuable.

1:12:47Justin, 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 build an amazing podcast and following. So thank you for the opportunity to share our story. Thanks for your time today. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

1:13:37Outro Music