M&A Roll-Up Playbook: The IRR Framework That Replaced Budgets at Zayo | Dan Caruso (Part 2)

21:15So most bankers and lawyers say, no, don't do that because there'll be problems. But when the person was bringing it up, my advice was, you know what? You're going to go public, but you should do that. If I had over again, that's what I would have done. I would have ignored the bankers and ignored the lawyers. Because if activist investors see that it's a mostly held company, there's majority shares, the activists will go move on to something else. They're going to find companies they could pick on, not companies that they go to. They could just say, well, I'm sorry you feel that way. there's five of us who control the voting in the company and we're going to do what we're going to do anyways, the activists will just move on and go somewhere else.

21:52Yeah, it's great to sit up there and ring the bell. In fact, I got to sort of enjoy that again just two weeks ago because one of the first investments I made after I left Zale and one that I served as intern's CEO as a transition period was called Cold Quantum Time. It's called Inflection Now. They just went public a week and a half ago and I got to watch them. They invited me to go out there with them, but I didn't make the trip, but got to watch them go through that experience. And it brought up great memories of how special that moment is. When you're ringing the bell and you're celebrating afterwards, it's just a special life moment for everyone involved.

22:23So think through control and power dynamics when you go public. There's more homework, it sounds like. You got to do earning calls and are in the public face at that point in time. You got to deal with the whole investor relations. But the fluctuations of the market, how do you view that market sentiment that is either on your side or again, your counterparty. I'm curious, how do you think through that as a public company operator? The way I thought through it, I don't know if this worked or didn't work at the end of the day, is stuck to the principles of the value creation. It's like, if we're truly creating value, like measurable value, the stock price will find its way to your value.

22:58At times, it will think you're worth more than that. At times, it will think you're worth less than that. Don't get caught up in what the market thinks at any given point in time, but be transparent in how you're thinking about value creation and why. and over time you'll end up with investors who want to invest because of how you're creating value and they understand it and those are investors you're going to want to have for the long term. That was at least my theory and practice was more complicated than that and maybe I'm not the best public company CEO from that perspective because I was maybe a little bit naive just thinking I had kind of a Warren Buffett type approach is just be plain and tell people what it is.

23:35Don't tell them stories and don't fall into the traps and that's easier said than done, perhaps. It wasn't like a PR game for you to keep a positive perception of the company. No, because I saw people get in that trap that they were always of the frame of mind. How do you view your stock price? The public markets don't fully appreciate our company. It says all the time. It means absolutely nothing. For me, it was like, I'm not going to go down the road. My job's not to make the stock price as high as possible. That's just not my job. You do that. That means someone's going to buy your stock at an overinflated price.

24:05Once they buy your stock, they're your partners. You help sell them something for more than it was worth. Yeah, maybe the person sold feels good about that, but they're not your partner anymore. Now your partner's person who bought it at too high a price. Did you really do well for them? So for me, it was like, I don't know what the exact price that's right for the company, but I don't want to be on the side of hyping it to be higher than it should be. I want to be as transparent as possible so that buyers and sellers are tending to make a good decision. The buyer is buying at fair value and the seller is selling at fair value.

24:34And then we increase the value over time, not based on storytelling, but based on fundamentals. What surprised you the most about transitioning and being a CEO of a publicly traded company? I think I could have structured the management equity. So for those who were there before the IPO, I could have done some things so that there had been a longer transition period before it would have been easy for people to leave and that it would be more staggered. But I mistakenly set it up so that it would be optimal time for a lot of people to leave. all happened one year after the IPO. And that was an unforced error on my part because I could have done things differently to foresee that, well, if you do that, what are people going to do?

25:12They're going to leave so that they could see you from the cell once they leave. And then they got a lot of liquidity. We're going to take some time off while I'm still like slugging away. And then they're going to start doing stuff again, like reapplying the playbook. That should have been very predictable to me. I need to be there for a period of time longer. I should have made it harder for people to leave. While I didn't have that option of leaving, it was harder to onboard new people and maintain the momentum. So that one I should have seen. Another one I didn't see, and I don't know how predictable it should have been, but by revealing what we did, I thought we already revealed it for the IPO, but by revealing the financial success that we had in a way that outsiders could really, teams of people and say, how did they do that?

25:51That our playbook would all of a sudden be understood by others who then could throw a bunch more money at trying to do what we were doing. And retention lessons, competition. Were there any skills that you thought you developed as a CEO, as a public company CEO, as opposed to private? Yeah, I certainly understand how public markets work from the perspective of a CEO. I mean, I understand how they work from the perspective of an investor and a University of Chicago graduate. But from the lens of being a CEO of a public company and dealing with, in particular, activist investors, because I always thought activist investors were a good thing, that they would hold companies accountable and that would help unleash value.

26:26I was of that frame of mind that's a whole bad management team is more accountable and they'll help investors out. What I didn't realize is that it's really a racket because they can operate in ways that if I, as CEO, operated, I would be in jail. By their behavior, they basically create volatility and they create inside information because they know that they're creating the volatility in ways that isn't transparent to the public markets. when they create the volatility, if they know it's coming from them, then they know how to trade in it. So if they behave in ways that will lower the stock price, they can buy and then they could almost counter what created volatility and the stock goes back up to where it should be and they could rinse and repeat that and they could cause tension in the management team.

27:10They could cause overreactions in the management team, which create trading opportunities. The activists weren't really unleashing value. They were creating volatility that they could trade into. What I also learned was that they could do that in cahoots with private equity investors or public investors by walking this fine line between signaling to each other in ways that was not illegal, per se, because they just could read each other's body language. which is kind of a, maybe I use the word racket, like I know if this activist does this, here's how I should interpret it. So I'll do that. And if I use these words, they'll know what I really want them to do and they'll do that.

27:48And they know how to scratch each other's back and benefit and learn that only when you're in the inside and seeing it happen. Wow. Okay. The activist piece. Any other skills? The network actually I'm curious about. So I feel like your network changes as a public company CEO. I'm very convinced they sort of network with other public company CEOs. I think it's more the drain on time. As a public company CEO, you could fall in the trap of spending way too much time doing the things that analysts want you to do and the market wants you to do. And that's a distraction from running the business. If I was doing it over again, the other thing I would do is pay a lot less attention to what a public company CEO is supposed to do.

28:26I'm going to go to Wall Street after I do the earnings call. I'm going to meet with investors and I'm going to go to JP Morgan's conference and Goldman's conference. Listen, I'm going to run the business. I'm going to tell you once a quarter how we're doing, but I'm not going to distract myself or my CFO or any of us in trying to appease the market. If we deliver results, we'll get rewarded from it. But we need to focus on running the business, not getting distracted. Any other advice for a first-time public company CEO? Think hard before you really want to do it because there is a big tax that comes with being a public company.

29:00Not the funnest job in the world, is it? No, but at the same time, it's like the big leagues. There's big rewards with being public company CEO from a pride standpoint and from a career standpoint. And there are public companies to be run. And it can be quite lucrative if that's what you care about. Some of the bigger companies are public companies. There's just pros and cons. It got harder after you got public. You invited a lot more competition. You're on the full radar. More funds started investing in the space. Other roll-ups emerged. When do you know it's time to sell? Well, I go on that in the book.

29:31So Warren Buffett gives some good advice to that. But when there's a lot of buyers, you should be a seller. So you got to go with the market. So I saw what was happening. I saw all the infrastructure money flowing into our space, all the capital formation, all the eagerness to buy zail like assets. It's like, okay, take advantage of that. Find those who want to be buyers and sell. Don't feel like you can't sell the company. It doesn't need to be a public company. You don't need to be CEO. In fact, I was ready to move on anyways. if it's a frothy market, if it's a time where buyers are eager to buy, that's the time you should be eager to sell.

30:07So I had to be the seller as opposed to be the buyer and take advantage of that opportunity. That was the best interest of our shareholders. And frankly, it was the best interest of me too, because it's time for me to move on. Did you sense like returns were compressing? Were there any kind of indicators? Yeah, no, absolutely. Because the value creation math that we would always do. As I was saying earlier, we were doing that math in the past and we could just see even before it happened that the value was stepping up and it was pretty straightforward math. And then we could see when we were public that it wasn't that our stock price was wrong.

30:41It was that our value creation engine had slowed down. And if your value creation slows down, you shouldn't expect your stock to keep going up. So yeah, we weren't creating value at a pace that we were. And others thought they could come in and do a better job as long as they were paying us for the privilege of having the opportunity we should sell. You don't have time to hunt through generic resources or wait for the next conference. The M &A Science Intelligence Hub gives you battle-tested playbooks from over 400 dealmakers instantly tailored to your role and deal stage. Whether in diligence, integration, or anywhere in between, get the framework that fits right now.

31:21Ditch the boring panels, Get answers that fit your deal. Learn more at mascience.com. Again, that's mascience.com. Did it come to a formal decision? Like, hey, we should sell the company that we run a process or what would that look like? I was ginning up interest. You could signal that as well. So I knew how to signal that we were open and there was interest brewing. And I can't remember if we ran a formal process out of the gate or not, but we definitely were signaling that with all the large infrastructure funds out there and they're paying higher multiples than we were trading for, that we would be open to selling.

32:01That's when you had the activists come in? Yeah. Activists were in the equation as well. That isn't what triggered us to sell, but it certainly... You had a car icon was part of it? The car icon was a different story that I was part of. I tell it in the book. And that was a situation where there were opportunities to learn by being part of something. It was, we would say at the time, like, I don't know if I want them to sell us or not, but it's fun to like be part of this because it was definitely an opportunity to interject ourselves. And he was behaving in a very hostile way toward other shareholders of what was called XO communications because he was trying to get outright control and he was a master.

32:39So he was playing all kinds of games to wrestle control, but we were playing some games as well as, as I tell in the book. And again, that's all backed by, because it was a public company, you can reference SEC filings, which I did when I was selling the book. And I was like, wow, I forgot that this is how this played out. But that was before we sold. That was before. But there were surprises on that story. When you looked at it, it's like, wow, that's crazy. How'd the sale process go? Was it competitive? Yeah, it got really crazy because we had a certain price in mind. And a group of investors that I was friendly with at the time came together and they met our price.

33:16And they needed to do diligence. And frankly, they brought on several members of our former ZAO team as advisors. That was a new period in industry that's continued to stay where the really big infrastructure and private equity funds will make it very lucrative for people who used to be operators to be advisors to them. They get paid a whole bunch of money and don't have to do that much work. They were really trying to almost corner the market as it played out. What I mean by that is they brought a consortium together that was most of everyone who was in a position to buy an asset of the size of Zayo in the space because we were one of the biggest take private in the history of take private at the time.

33:52There's been some bigger ones since then. I think we were number two ever when it finally happened. And there wasn't capital formation at that stage that there was soon thereafter. So the private equity firms had to join together to do it. There wasn't one or two who could do it easily on their own. And so we had the kind of whole lineup. We had Blackstone leading it and Carlyle, I think, was part of it. And you look at it, it was multiple major, major investors, including my lead series B and my lead series C. Investors were part of that group, people I was really close to. So all was going fine and dandy until some of the bad actors there were starting to work with the activists.

34:30They saw an opportunity to get it for less than$35 a share. That was the price we agreed on. And then they were coming back and saying, well, all this stuff and diligence, we're not going to get there. We could tell they were starting to signal that they were going to come back and retrade the deal the deeper we got. But while they were going through that, they also tried to lock up all the sources of debt to do a deal this size. So basically, they were setting it up so that there was zero chance there could be an alternative bid. There wasn't any strategics involved. So they were corning the market.

34:57They were locking up all the debt sources, making them sign agreements that they couldn't support any other bid. almost all the sources of equity, leaving us with no other choice. So they would even oversubscribe it intentionally. Yes, and deliberately. And knowing that there wasn't anywhere else to go, seemingly. And that would have been fine if they would have paid$35 a share because we wanted to sell it. But it wasn't fine if then they started to get greedy and started to then try to lower the price and make it sound like it was our fault because this was different than that was different. And okay, but$35 is the price.

35:29So then they would use activist pressure to try to make it so that we couldn't just say no to the deal. It would be very hard for us just to back down and say, we're not selling it because you lowered the price. It was dragging on and stuff, but I had to work really hard to get an alternative deal. So I played a really big role in lining up two companies that typically wouldn't work with each other. One would only do deals by themselves, but they couldn't afford this. It was too big for them by themselves. We don't ever work with partners. The other one didn't usually work with partners either, and they weren't even big enough to partner with the other one.

36:00But I somehow got them to the point where they were willing to work together. And then they offered an alternative bid. Then it became kind of a really crazy process. So I tell the story in the book from the perspective of Aesop's got a fable where some guys walking down and the sun and the wind make a bet. Wind says, I think I could get that guy to take his coat off. Sun says, I get the guy to take his coat off. So they make a bet and the wind goes first. So the wind creates all this torrent wind and howling wind. And all the guy does is clutch his coat tighter because he doesn't want the wind to blow off his coat.

36:35Well, the sun then comes in and just makes it really hot. And the guy takes off his coat because it's hot and he wants to take his coat off. So the sun won the bet. So I described the one who was being very hostile as being the wind trying to force me to do something I didn't want to do, force us aboard. And then the other bidders were the sun. They wanted to work with us and stick to the price. and Sun, which was the second consortium, ended up prevailing in the field. Crazy story I tell in detail in the book. Yeah, it's a really good one. It was a group of P firms that ended up coming together in like the second largest in the world right now.

37:06Yes, EQT, the second largest in the world, which ironically, this was too large for them to do at the time. And now they could do it by themselves in a heartbeat. My favorite part of the book was actually the appendixes. You had two, you had the owner's manual and this view on IRR, owner's manual. So is that more of like a reflection of here's the key ways of operating a business or was it? I developed that at the beginning of Zale. So Warren Buffett publishes an owner's manual as part of Berkshire Hathaway. And what does it mean, owner's manual? Tim is like, well, if you bought a lawnmower, you get an owner's manual to tell you how to work the lawnmower.

37:39If you buy Berkshire Hathaway stock, don't you think I should give you an owner's manual? Now you're an owner of my stock. Here's how this works. So he writes this owner's manual and he updates it every few years saying, here's how I'm going to run the business. and I want you to know that so that if you want to own my stock, you know what you're getting into. You don't like it, don't own my stock, but this is what I'm going to do. And he articulates it. So I had the inspiration that I should have an owner's manual that I could share with investors. I could share with my employees. I could share with people who gave us debts and this is how we're going to run the business.

38:11And it's a way of holding ourselves accountable too. And it talked about nine or so principles of what you should expect if you're a partner of ours. Here's how we're going to go about making decisions and why and how we're going to think about the business. But that's what I took. I took one of the old versions of that, cleaned it up a little bit, and put it in an appendix. A little more than company values that you see everybody have. You get a little bit more in-depth about how we're going to operate this business and what to expect if you're going to participate in this company. And it was important because remember, we were coming off the telecom meltdown where the trust between management teams and investors was destroyed.

38:46People went to jail. They went to jail for doing things that were fraudulent and trying to deceive their investors. And I wanted investors to get over that period and be able to trust the management team that we're not going to do things that were done in the past to create illusions of value. We're going to be committed to true value creation. And here's how we're going to go about doing that. So it was maybe overkill from the lens of the future, but from the time, it meant a ton to our investors and then a ton to our management team. Now I can put the management team and say, okay, this is how we're going to operate.

39:18This leads to equity value creation model that you came up with. I want to break it down tactically so I can apply it to my business. You had this view that at the end of the day, investors, there's only one metric to measure their performance. And it's our fabled IRR. And you had this view that, why is it at the end of the exit that you calculate IRR? Why isn't this a continuous metric that we all know what we're working towards? When did that come up? It actually came out of a little bit of stress. And what I mean by that is every management team will say, our number one objective is to create value for our shareholder.

39:51And think of this as more developed companies, maybe not pure startups, but private or public, we are committed to value creation for our shareholder. They all say that. Am I right? Yes. Okay, well, how do you measure that? Then I look at you like, what do you mean? It's the stock price. Yeah, but if the stock price is down, you say that the markets are wrong. And if it's up, you say that's because you're a great management team and how much value. But then when it's down again, you say, it's not our fault. It's the market doesn't know what we're doing. So the stock price isn't, that's not measuring value creation.

40:18As Warren Buffen often says, that's a voting booth. It's not a measuring tool. It's not a scale. You need a true scale of how to measure value creation. Your stock price isn't that. If you're private, you don't even have a stock price. So you're saying you're creating value. Do you measure values? Like, yeah, we have a budget every year that we negotiate with our board. And it's got revenue targets, got EBITDA targets, got capital targets. Okay, so you got like targets. It's that measurement of value creation. If you achieve your plan, how much value did you create? And they look at you like, I don't know what you're talking about.

40:45No one, I mean, it sounds crazy, but no one measures value creation. It's the craziest thing until you think about it. Yeah, no one measures it, except, you know, who does measure it? Private equity firms, right? They do it every quarter. Every quarter, they measure value creation. In fact, it's even regulated that they have to do it now. So what do they do? They have a very simple process. I've got 10 companies in my portfolio. I know how much I invest in each of those companies. That's how much I put in. I invested$10 million in this one and$5 million in that one. And every quarter, I go through a process to say, what do I think my investment is worth?

41:18When I'm doing it in a truly honest way, it's because I want to know approximately what the answer is. So I look at one of the companies and I look at what's the best metric used to estimate the value of that company. And for some businesses, like our business, EBITDA multiple is the first measure. If I take my EBITDA and multiply by 12, that's a good approximation for the value of the business. If my EBITDA is 100 billion, and for that business, 12 is approximately multiple, I know the business is worth about 1.2 billion. So that's at a point in time. I could look backwards in time and say, okay, a year ago when I did the same math, it was worth a billion.

41:55I could also look forward and say, if the management team hits their budget, I don't know if they will or won't, but that budget they put in me, if I run the same math, it'll be worth$1.4 billion a year from now. Okay, so the business went from$1 billion to$1.2 billion to$1.4 billion in terms of what it's worth. So does that mean you created value? Well, not necessarily because that just tells you what the business is worth at three different points in time. It's an important number, but it doesn't tell you if you created value because if I got from there to there because I earned a bunch of cash in the meantime, yeah, it's worth$1.4 billion, but you invested$500 million more because you bought a company.

42:29That's why you're worth more. I didn't create value. I lost value because I put in 500 million more and it's only worth 200 million. I went backwards. So the same simple math they do for each of their companies and for their portfolio, you could take that exact same math and apply it to the operation of business. The only big innovation, the big light bulb is I just need to take their methodology that they use when they're valuing the portfolio and apply it to the lens of you're running the business. You could look at that backwards in time and see how much value creation took place historically, but you could also look at it forward in time.

43:01If I make my plan for the next three or four quarters, so I know how my EBITDA is going to change and how much cash I'm going to burn in the process, I can show whether value created. And then if I can normalize that for debt, then I can see how much equity value I created because part of it might go to the debt holders or equity holders. And you could do that over time and it will correlate really well with the values. It's the exact same way you calculate IRR. Exactly. You're just doing it as an exercise We all do it when we're looking at a business. I'm going to do a five-year plan for either starting a business or requiring a business or a five-year strategic model.

43:37It's the exact same math, but you're using it as a real-time metric. Do your metrics change? We use the tech as an example. Right now, it's kind of shifted in a different direction. But if you had this model change instead of the 12x, depending on the market, would you adjust that? So now we've probably got to start using 10x because things are different. You have to be honest in your assessment of what approximately the Brighton EBITDA multiple is. And you got to realize that that's not stagnant over time, nor is it externally driven over time. It has more to do with the growth rate in your value creation.

44:12It's a little bit circular. If you do your value creation math and you're creating value at 40 % a year, which we were, well, that tells you if you had conviction, you should be willing to buy that asset a lot more money than 12 times. you should be willing to buy for 20 times because you're going to catch up to that 12th time within a year or two. It's going to be a signal that you're probably using an EBITDA multiple that is lower than what a rational buyer would be willing to pay you for the business. But the same is true the other way. If you can't demonstrate value creation at a 12x multiple, no one's going to give you a 12x multiple for the business because it's not trading value.

44:47When a buyer really looks at it, if they're savvy enough to understand what they're buying, they'd be like, eh, it's not really worth 12 times. So you got to pay attention to your growth rates, not just of revenue, but your growth rate, really of value creation itself. But usually those are tight ranges. And if you're carrying your equity value at one period to the next period, you're using the same multiple. It doesn't matter if you're exactly right on the multiple, whether it was 10X, 12X, 14X, it's really the change of it that you care. And what's the change of it, that's called IRR. It's changing at 20 % from one period to another, and that period is one year, that's 20 % IRR.

45:23It's changing at 20 % over two years, that's about 10 % IRR. So the IRR is the percent of change in value creation, and equity value created is the absolute change. I went from a billion to 1.2 billion, and that was a 20 % increase. But it's the exact same math that every private equity firm uses. Now, it's harder to do that in, And you can't do that with the quantum business right now because quantum businesses, that's more about projecting into the future what you think quantum might be worth. That's much more subjective. But for businesses that are anywhere close to trading based on the financial performance, you can do it.

45:58And it doesn't have to give it down multiple. It's like, what's the norm for correlating kind of value to a metric? The precision of that multiple matters not much. You've got to be in the right ballpark. It's really keeping a constant period to period and seeing if with a constant multiple, are you creating value and if so, at what pace. Once you do that, it becomes a math exercise and you use it to judge, is this an appropriate budget going forward? Because it takes all the silliness out of budgets. It's funny because we never had budgets at Dale, which is really crazy. There was never like a negotiated budget with the board and then measurement against how you did against budget.

46:36that was never part of our vernacular because we didn't really care how we performed against budget. What we cared about is when the math played out is the value creation equation saying that we're worth a lot more. It was years before our investors even figured out that, you know what, we're not even having a conversation about budget. And they didn't even care because what they knew we were is we were having a conversation about financial performance. But it was never really against budget. It was more in an absolute context. Then after I sold Zale about two years afterwards, it was really funny.

47:03I get along and really good friends with the CEO. oh, they lost all these principles when I left. He tried to explain to me like a year and a half after he took over the company, did you realize that sale never really had budgets? And I'm looking at him like, you're asking me about her sale random for 14 years if I realized that sale didn't have budget. And I'm like, yeah, that's true. We never had budgets. Yeah, of course I knew that. It was because he just kept him distracted with the IR. They wanted to know if their investment was worth a lot more now than it was before. He gave them a clean formula.

47:33In fact, it made it calculated and this is... And what was nice, they even started to laugh. There was a couple of them laughing in a respectful way because they're like, every other portfolio company, we got to do all this math ourselves about what the company is now worth compared to before. You just give us that math. And all we got to do is look at it and see if we agree. And then we just repeat it. So you're even doing the work for us in terms of how we value our investment in Zayo. I'm going to try it. I got a business I run now that's right at 9.9 million ARR, bootstrapped the business.

47:59So I could probably figure it out. I know I got about 1.6 million that was put in over time. You got some debt, paid off the debt. But then we'll probably do a recap at some point. Yeah. It becomes very motivating. Once people understand it and buy into it, all decision-making is not... Because with budgets, people want to negotiate budgets. I'm the CEO and I want my revenue target to be lower so I could suppress the revenue and get my bonus. Is that what you want? The lower revenue target? Is that your motivation? I mean, but if you're saying them by, like, I'll give you a bigger bonus if you beat your revenue target, they're going to want to negotiate for as low revenue target as possible.

48:34It's human nature. It removes all that kind of gainsmanship out of the system. Would you incentivize on having that equity value creation? Yeah, that's all we incentivize on. Other than sales teams. All the bonuses are based on that. And then is it tiered that, hey, we have this much, we have this? Yeah. That math said we created a lot of value. Bonuses payout, wonderful. And now everyone had a lot of equity too, so it would be correlated equity. But yeah, all the financial rewards, including to get promoted. And then we end up with a bunch of people knew how to run businesses, which in our industry, that wasn't the norm because in our industry, it was like, you knew how to do operations.

49:08You knew how to sell. You knew how to be a CFO. You knew how to be an engineer, but no one knew how to run a business because no one ran a business. But that's why so many former Zale people run companies right now in our business because they all learned how to really be business people. And they took that. And now they all, like I said, I was just came back from that trade show, which I don't go to those anymore. And I had a bunch of people come up to me. If they're on the East Coast, they would liken it to the Belichick tree. You must have so much pride. Look at this Belichick tree. If it was on the West Coast, it was the Shannon tree or whatever.

49:37People in the industry now appreciate how much true management talent has come out of the system. And they're running companies and they're creating enormous value for lots of teams, largely former ZO teams and for investors. Before we wrap up, I want to talk about what you're up to now. But let's go through the exit because you got paid a lot, but you've also minted a lot of millionaires in that process, which is an extremely successful exit what do you do with the money? I keep asking a lot of entrepreneurs this question because I'm trying to play it through because I eventually have an exit and whatnot and I'm like what do you actually do with the money?

50:09I don't tell we'll talk a little bit about taking money to make more money but like what do you actually do with the money? What you should do is you should be wanting to have a positive impact with your wealth. What you shouldn't do is just hoard it because if you hoard it it just sits in some bank account somewhere doing nothing but if you put it to work in different ways in ways that reward and give opportunity to others and help improve whatever community you care most about, then you're doing something good with your money. And we now have what is a single-family office. It probably doesn't look like one externally facing.

50:42We have a very clear mission. It's to be the most catalytic tech investor in Colorado with an aim toward helping Colorado be the top ecosystem for tech investing between the West Coast and the Northeast. So we have a clarity of mission, And it applies not just to how we invest our capital, but it also implies to how we navigate our foundation. I was able to fund a pretty sizable foundation, and we use that to help create culture and environment that is both good for the community and also helps bolster entrepreneurial environments. So it's consistent with our overall purpose. So Endeavor Global is the top organization, nonprofit for scale-up tech entrepreneurs globally, operational in 45 countries or more.

51:27We launched Endeavor Colorado as part of that, and Endeavor Colorado is one of the top performing offices. So that's all about helping those who are in their scale journey already get to be really effective. But it's also to be role models for those people on what do you do once you have success? How do you give back to the community? We're very active with Sundance Film Festival, which is moving to Boulder. We have launched Boulder Roots Music Fest, which we see as a complement to Sundance, opposite time of the year, using music as a theme, but build an entrepreneurial ecosystem around that. Support Colorado Startup Week, Boulder Startup Week.

52:01So we lean into a lot of community activities, but then we invest. We're very active investors in Colorado tech companies. And when we invest, make no mistake about it, we're investing as capitalists. We're investing to earn outsized returns. These are two different things. This is like Caruso Ventures, this sort of investment vehicle. And then what's the not-for-profit? It's called Caruso Foundation. So Caruso Foundation, separate, two different things. Yes and no, because it's all part of the same mission. So we're all serving the same mission of being the most catalytic. And by catalytic, that's an importantly chosen word.

52:34It doesn't mean we want to be the biggest. It doesn't mean we want to be the best. It doesn't mean we want to be glorified as anything. It means we want to help the ecosystem. We want to help other investors. who want to help the entrepreneurial ecosystem in general. And certainly we want to help our own portfolio companies. We want to really be catalytic for the community of Colorado, Boulder in particular, but Colorado. And what is really important, I mean, you've got a thriving tech ecosystem. That's good for everyone. If you don't, you're in deep trouble, especially with what AI is going to do to everything.

53:06You're in a geography that does not have a thriving tech ecosystem. I don't know what you're going to do to have good schools, to have good healthcare system, to have people be able to live comfortably, particularly with the disruption that's going to take place with AI. So we believe a thriving tech ecosystem is not for the entrepreneurs. It's for everyone else. It's for the community. Very cool. I like that you're really proactive on making an impact. I read a lot of billionaire biographies, all the names you've heard of, and you see this common pattern. It's around 70. They got you worth billions and billions.

53:41And then it's, oh, I better do some philanthropy. and you're just cutting big checks to different endowments and whatnot, but you're taking reign and actually seeing things through of personal dollars to impact that you're making. Looking backwards in time, people thought doing good was giving money to philanthropy, and certainly there's an aspect of that. But what's contributing to positive forces in the world is not philanthropy, or if philanthropy is, but that's not the main it, it's tech. Make no mistake about it. There are less people in the world today by far who are living under the poverty line that people are living longer, they're living healthier, they're living in more comfortable situations on every corner of the globe, not because of philanthropy, but because of technology.

54:22That's kind of something that we still have to make sense of because most people think that the gap between those who have money and those who don't is getting wider. And Buckley seatbelts is going to get much wider in the future because of technology. But it's that same technology, that same wealth gap that is the fuel to making everyone's life better. In general, people are more healthy across the globe. They're more educated across the globe. There's more equal rights across the globe, less poverty across the globe, than at any time in human history by a lot. And that's fueled by technology, evolution, not anything else.

54:58Badding big on tech. What kind of deals do you guys do? And you mentioned quantum. I talked to one of your associates. We talked a little bit about space. As of the money in two categories, you're going to highlight some investments you're super proud of. We got a really cool portfolio and it's performing really well. I was so surprised you were. In my head, I was thinking of this, reading the book. I'm like, that must be like just funding a bunch of roll-ups right now. No, you absolutely are not. No. I don't think you're funding any roll-ups. We're 100 % focused now on Colorado. If you look at our portfolios, you'll see things outside of Colorado.

55:26Colorado has actually been known as a pretty big space hub. Yeah, it is. It's a big hub for digital infrastructures, thanks in part to our legacy of Level 3 and ZAO, but others as well. But a huge hub for data centers. Lumen and ZAO are still headquartered here. So digital infrastructure is a huge ecosystem. Space tech, this is one of the biggest aerospace and space tech markets, period. And quantum, it's gigantic, and we're very active there. There's a content creation and creative tech scene that's beginning to gain more momentum out here. There's energy innovation ecosystem out here. There's outdoor lifestyle, even natural food.

56:01This is a historically important market there. Agriculture technology, regen is big out here. So Colorado is a big playground for lots of different sectors. Most markets outside of Northeast and Bay Area are known for one or two things. We're leaders in a lot of areas, and we get a lot of the best deals come our way. So we have six quantum investments. One's already exited. One went public two weeks ago at a huge valuation, and that's been one of our bigger investments. And we have the other quantum companies in our portfolio doing really well. In fact, we're hosting, we, Caruso Ventures, are hosting a film premiere this coming Monday.

56:38So it would have already happened by the time you dropped this podcast called Our Quantum Future that was filmed all over the world, but we're premiering it right here in Boulder because of Boulder's and Colorado's prominent role in quantum. We're really excited about what we're doing. We got some really cool AI investments that are here local that are going to unveil themselves in the next year or two that are really compelling. So yeah, we've got a lot of cool stuff going on. Yeah, some space deals too. Space Seals, yeah. We're the largest and lead investor of agile space industry, which makes in-space thrusters and in-space tanks.

57:12That's doing really well. We're an investor in this company called Boom Supersonic, which his mission is to build... I don't know this company. What's crazy about this company, and we're sizable investors in it, is they first failed in their quest to build supersonic engines. And all of it ran out of money, all of it ran out of support, all of it had to close their doors, in part because Rolls-Royce was going to build their engine. And Rolls-Royce not only pulled out, but they pulled out really publicly that left the company reeling. So the entrepreneur is a gritty, gritty entrepreneur, which is so important.

57:46So he said, we're going to go build our own engine. Have the first supersonic plane. Who does that? They go build the whole engine, run out of money, run out of support. It's not quite done. And led by some really prominent Silicon Valley investors with names like Sam Altman, so prominent group there. They led a recap of the company that we participate in. And they discovered that engine, that turbine that they're building for the supersonic plane is ideal for AI data centers, better than state-of-the-art by a lot. And the state-of-the-art turbines are in really short supply. You can't get them for like five years.

58:22So now they're selling these engines into that market for contract values of like lots and lots of money. And it's going to be a huge success story. They're still going to build the jets. That's going to fund the build out of the supersonic commercial jets. But they're going to fund most of that through commercial deals, not through the need to raise more money. It's like one of the, I think it will be successful. It's got to still get there. but it'll be one of the most interesting pivots since SpaceX decided to do Starlink. When they launch a commercial, I'm going to hit you up for some discounting tickets, just so you know.

58:51Absolutely. We're going to have to wait five years for that first plane ride. Okay, I'm patient. I can show you the engine in operation next year, I think. Okay, so you got investments. You're investing a lot back in the community, philanthropy. I want to know, like, what do you do for fun? Like, the money, did you buy a yacht? Did you buy a jet? What do you actually do with the money? What is the fun you did with the money? crazily i've been golfing a long time my three best golf rounds have been in the last two months it's almost makes absolutely no sense not because i'm taking a bunch of lessons but i just started to click at least for three rounds my creative side has come out so the book i wrote a song which is crazy and it was more accidental that got produced i do the podcast the bear roars b-a-r the bear roars my nickname the bear and it's a really cool podcast it's got a lot of traction and you should definitely check it out.

59:39Diverse. I went through it. I actually listened to get some context to one of them. But yeah, you just don't follow one theme. It's very oriented around the community. Yeah, the primary theme is the cool people doing really cool things in Colorado. And a lot of it is like tech entrepreneurs or tech investors, but there's also some more cultural icons. But then there's also a theme around the bandwidth industry and people telling stories related to bandwidth books. So joint lived experiences where they're telling how it played out from their perspective. It's kind of got the two-pronged approach, which put a lot of iconic people on there.

1:00:09But we also have a really nice house on the beach in Cabo at a really exclusive club that's a very social club. We spend about two and a half months there. I'm busy all the time, but I'm doing stuff I want to be doing for the most part. Sun Golf Book Podcast. Song and Boulder Roots Music Fest, which is going to be a gift that we're able to give to Boulder and Colorado, and hopefully much broader than that, that we think can grow into being an iconic annual, not just music event, but South by Southwest structure around it that is really designed to appeal to investors, particularly tech investors, tech entrepreneurs, as well as the broader cultural arts community in and around Boulder, Colorado, and beyond.

1:00:50I'll bug you for a ticket for that. We'll get it for the LA Science crowd. Yeah, it's going to be a blowout event this August, the weekend before Labor Day weekend. Mark your calendars. Come to Boulder. Okay, it's right around my birthday. There you go. I'll be part of a... Boulder Roots Music Fest. Look it up. I got to ask, what's the craziest thing you've seen in M &A? Oh, the craziest thing I've seen in M &A. Let's see. Ooh, good deals that we've done. Probably the craziest one was the ICG one we did because that thing was certainly the above net story is the craziest story and definitely worth looking at that.

1:01:23But the ICG where this is a company that had 30 million of remaining cash, no access to debt, by their own admission was earning 8 million a month. Okay, so do the math. What's 30 divided by 8? It's a short period of time. And that was when we started talking. So they got no access to money, $30 million, earning$8 million a month, do the math. We were able to buy the company. We only gave them$8.7 million to buy the company. Most of that didn't go to their burn rate. It went to pay the lawyers, the bankers, whoever else was involved. So almost none of that money went in the company. We never had to put a dollar in that company.

1:01:58And we got to cash flow positive. And they're still like, okay, that makes no sense. They didn't even own it. you didn't even buy the company until you were deep into that like remaining burn days but we just while we were buying the company we also restructured a bunch of stuff and by the time we owned it the burn rate was down almost nothing and we brought in some cash from things that we teed up to sell you know before we actually owned the company and we never had to put another dollar and then a year and a half later we sold it for 250 million in aggregate it's like freaking crazy it's still like you're looking like how do we do that again but it just happened we would have meetings with the investors and we had to call the meetings.

1:02:36What have you done for me lately? The reason we did it is we were making all this value creation for investors. They knew it, but every meeting wasn't like, wow, you guys did a great job last week and this last month. Never had time for that. They're like, okay, that's great, but that's what was already done. What are you going to do next? What are you going to do for us now? So every time it was like, no one ever saw this coming and everyone just wanted more and more and more. And the craziest thing is I think we left a lot of money on the tables because we should have sold some of it and kept some of it, used that to launch what became Zale because some of those assets would have been really valuable as part of Zale, but oh well.

1:03:09Yeah, this has been great. I appreciate you taking the time. Appreciate you reaching out. That's the full Zale life cycle. A thesis formed during a hip surgery recovery, 45 acquisitions, an IPO, and a sale that ranked among the largest take privates in history. The thing that Dan kept coming back to is this. Most leadership teams say they're creating value, but they can't actually measure it. The model he built wasn't complicated. It was just honest. And that honesty is what Kebzeo aligned and focused for over a decade. If you want to apply the same thinking to your business, the M &A Science Hub has an equity value creation scorecard.

1:03:47It's built around exactly what Dan described. Link in the show notes. Dan's book is bandwidth. It's the longer version of everything you heard across both episodes. Operator level detail. No theory. Worth your time. Thanks for listening. here's to the deal

1:04:10thank you for taking the time to explore the world of M &A with our podcast we love hearing feedback tag us on a LinkedIn post add a review on Apple Podcasts we'd love to hear from you if you need help standing up an M &A function or optimizing one that you already have We're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

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1:05:15Views and opinions expressed on M &A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.