Uncovering Capital Allocation Strategies

22:35Filled bars, things like Twix or Snickers. The way I was seeing it was like, okay, maybe you've got a full day of work. You hop in your car. You're on your way home. You go to the service station to put some gas in. And while you're doing it, like, I'm kind of hungry. Maybe I'll run in there. 15 years ago, you run to the candy counter and you grab a Snickers bar. You don't even think about it. But now in today's world, people are maybe still going inside for that snacking opportunity, but now they're turning over the package to read the ingredient panel. And so instead of a Snickers bar, maybe they're buying a Kind bar or a Clift bar or a Lara bar or something like that that had at least a perceived healthier alternative to the Snickers bar.

23:14So we ended up looking at that particular sector and Kind came up as an opportunity where we could engage in a conversation about potentially acquiring them. At the same time, I remember Peter Rahal, who was the CEO at the time of RX Bar, also came up for sale. I started looking at both of them because I thought we were so far behind in this agenda. We needed multiple acquisitions to really begin to shape this, what I call, portfolio of the future. So I remember talking to one of the Mars family, and they're like, you have Kine Bar, you have RX Bar. Which one do you want to do? I think we should do both of them.

23:46Well, you have to pick one. Obviously, we picked Kine. It was a much bigger business, much more developed business. Kellogg ended up acquiring RX for about$400 million. I can't give you the exact numbers of the kind deal, but let's just say it was a multi-billion dollar deal. Kind of bought in stages. We basically bought a minority share of the first tranche. And then three years later, the agreement was to buy the remainder of the business. And Daniel Lubitsky is an incredible founder. He's a kind of a serial entrepreneur. Kind wasn't his first venture, but that was the one that really became successful for him.

24:19We wanted him to stay on. at least as a partner in the business together, at least for the first few years, for sure. And then I think he's still relatively involved with Mars. But that was a great acquisition because it had filled a need. It began to expand the portfolio in a direction that needed to go. I think my only regret was we felt like we needed to do a lot more deals like that during my tenure there. And they've done some deals in the, call it snacking arena, but not as big as kind, probably nothing that I would consider to be transformational. If we look at the large of an enterprise Mars is, and this kind was a large transaction.

24:52Playing on the future, we're purely looking strategic that this is a place we want to be in the future versus a discipline around IRR. Yeah, it was both. There's kind of layers. First is, is kind fit a strategic need? It does based on what I just told you in terms of, hey, we're losing snacking occasions to other types of products. We can either let those go to other competitive offerings or we can build one or buy one ourselves. Decided to buy that one. That's one. The next layer is, okay, now, Is it going to deliver solid IRR? At the time, I really don't know what Mars hurdle rates are now, but at that time, without being super specific, it was in the low teens.

25:30Had to deliver at least a threshold of that for a clear sort of the second layer. And then, of course, the third layer is how you're going to create value. What are you going to do? A big company like Mars, we bought a lot of nuts. We had Snickers, we had peanut M &Ms, Kind Mars, basically nuts and fruits and things like that. we thought we could put our procurement scale and leverage to bring value to buying better. So that's one thing you think about. The other thing is, okay, Kine at the time was pretty much a North American business. I had a center of gravity in the US, a little bit of Canadian business, tiny bit of business, I think in the UK.

26:03We did business at the time in almost 200 countries. So think about the opportunity to expand that globally. And we thought it was a good brand. That's the other thing you think about another layer is can that brand travel? if it's successful in the U.S. or maybe I'm making an acquisition in U.K., can the U.K. brand travel to the U.S.? Can the U.S. brand travel to the U.K.? And beyond. You think about all those different layers, but no, certainly if it has a strategic fit, great, you cross that threshold. But if it doesn't deliver the IRR, the project's killed. It doesn't go any further. There's a lot of discipline around that, at least in the Mars environment.

26:34I just feel like it's hard when you talk about some of those things and here's all these synergies that you're betting on. How predictable can you actually be on those things? And I'm in the tech world and you're buying this piece of technology hoping it's going to increase revenue because you're going to cross sell it to all your customer base you're very hypothetical about determining what that projected irr is going to be or if you even think about it as irr that's what i was curious about but i guess there is a discipline around it there's a model that they're really looking oh for sure even when you're getting ready to do a deal like that you're still making a lot of assumptions that are going to have to deliver to create that irr quite frankly you want to do a deal, you're going to create the most optimistic case you can for the board to get behind it.

27:12So oftentimes, maybe we went out a little too far out on a limb, let's say, to say, hey, we could expand to X amount of countries in the first three years. We could deliver 10 margin points through procurement. We could expand distribution through our sales force. That would increase X amount of top line. And those are all quote unquote best case scenarios. And if they don't deliver, then yeah, you destroy the economics of the IRA that you promised. And And I think that happens a lot in the big strategic world. CEOs find something they want, a new shiny toy. They create a really optimistic case.

27:45They do the deal. And then three years later, the board's going, hey, none of this stuff is actually delivered, at least in the timetable you told me. So I think CEOs are getting more cautious these days, having stubbed their toes and maybe not having transformational value creation that they promised the boards based on capital allocation of the company's money. What was integration like with this company? I imagine it being different. Mars was actually quite thoughtful about it. Now, you got to remember, Mars is a private company. So they can have a lot more patience. They can do a lot of things that maybe you couldn't or wouldn't do in a public world because you're under such a microscope every 13 weeks with analysts and everybody else.

28:21But Mars had the luxury of saying, hey, look, we're a private company. We really don't have to answer anybody. So we're going to do this our way. And I thought they were very thoughtful. Whenever they'd make an acquisition, I mentioned that I ran the Royal Canaan business, and that was an acquisition in 2003. literally for almost 10 years, the Mars family said, leave these guys alone. We bought this business because it filled a very unique niche. It's delivering something scientifically in terms of nutrition for cats and dogs that our other large pet product portfolio isn't delivering. So let's not go in there and Marsify this thing and think we know the business better than they do.

28:54So they were really thoughtful about it. And they just wanted those teams and those businesses to continue on uninterrupted and bring in this incremental value that the business didn't have. Now, after a period of time, some of that wears off a little bit and they go, okay, we need to be more efficient. We need to maybe combine systems. When you make acquisitions like that, at Royal Canin, we were using like Microsoft Dynamics. Well, the rest of Mars was using SAP. Inefficiency there. There were probably different benefit schemes. There were different maybe sales tactics, different marketing philosophies.

29:25We needed to bring all that in and leverage the scale of Mars Inc. to really create the value. But again, they were patient. They didn't do it day one. Sometimes they didn't even do it until year 10. But it was important that people recognize that you bought this company because we don't know everything. And maybe we don't know how to do this better than everybody else. So let's learn from them. Let's bring them into our ecosystem and see what kind of synergies we can create by not necessarily showing them how much we know, but learning from them and maybe just siphoning off some of the things that they know better than we do.

29:58Preserve the secret sauce versus capture synergies as fast as possible. Yeah, great soundbite. Strike the right balance. I agree. Wrigley, I talked about me going up there to merge the Mars Wrigley business together. Again, that was an acquisition of 08. I didn't move up there until 2017. So very patient acquisition. And why was that the case? For the first time, there was a pretty, well, maybe not the first time, but at least at this scale, a significant amount of debt taken on to buy Wrigley. And there was still some debt remaining on the books with Berkshire Hathaway and Warren Buffett. So in order to truly merge those businesses and capture the synergies, we needed to buy him out.

30:35We bought him out in the fall of 2016, which enabled the business to bring those together more carefully. Wrigley was a fascinating, again, family company. Bill Wrigley Jr. was running the business, I think, when they bought it. What was cool about that business was like, think about back to what we were talking about, strategic fit. Mars didn't really have a very significant presence in China, and Wrigley did. When Mars bought the Wrigley business, all of a sudden you had a north of a billion dollar profitable business in China that wasn't controlled by the Chinese government, which is a unicorn, if you will.

31:08You've heard of them, you've just never seen them. That was cool. And even when we were merging the Mars and Wrigley businesses together, one of the things I was looking at was like, wow, this is interesting because in China, Wrigley had over a million points of sale. So like a million retail accounts where they're selling gum. And our chocolate business had something like, I want to say like 250 ,000. So if you can merge those businesses together, theoretically, you say, well, I should at least be able to double my chocolate business because I've got access to the Wrigley distribution system.

31:38Now, that's a little bit of a flawed argument because China, depending on what part of the country you're talking about, can be very hot. And maybe in certain retail accounts, chocolate isn't going to sit on the shelf, shelf stable, it's going to melt. So again, you can't say, okay, Wrigley's in a million accounts, so we need to have chocolate business in a million accounts. Theoretically, you could maybe double it, maybe triple of it. And so that was part of some of the things we thought about when we were bringing the businesses together. Interesting. It's interesting they waited so long and it seemed like the debt was the bottleneck.

32:07There was the debt and there was, again, just this kind of patient approach, like let's not go in there too quickly and change the, using your words, secret sauce. Maybe absorb some of that secret sauce. At the time when they decided to bring those companies fully together, gum was starting to stall out a little bit. People weren't chewing gum as much. I haven't thought about it when I went over to work there. I'm like, wow, I used to chew a lot of gum and I don't anymore. I'm not really sure why. That's some of the things I was working on too. It's like, well, maybe we can put something in gum.

32:33It'll make people want to chew it, whether that would be caffeine. We had a caffeinated gum at one point. It was called Lurt. Maybe you could put vitamins in there. What else could you do? That was maybe a motivation to say, well, gum use occasions, volume, maybe even profitability starting to stall out a little bit. How do we maybe use the leverage and the scale of Mars Inc. to stimulate that and bring those businesses together? So it was an interesting time. And I like working on challenging projects. And that certainly was one. When I look back at my career, another opportunity to learn, another opportunity to do, and maybe another opportunity to create value along the way and then sharing that value.

33:10And you supposedly retired. Yeah. Yeah, 2019, I was traveling all over the world. I was going to Russia a few times a year, China, Dubai, UK, Switzerland, looking for high-end chocolate companies, looking for maybe snacking opportunities. And I just felt like the family didn't want to move as fast as I did. And maybe in some respects, there were some places where I was pushing too hard. It just made sense. When we were bringing those businesses together, we're looking for something like, I want to save just shy of half a billion dollars in cost synergies. And I'm like, hey, I'm a high-paid guy.

33:41Maybe we can work something out. And so it just made sense for, I've been doing this for more than three decades. I've been traveling all over the world and I have an agenda that I believe in and I can't get other people to at least move at the same pace I want to move at. Then maybe it's time we part ways. So I did. Keysan, when you leave a business or you make a change, you call the people that you've been doing business with and say, hey, I'm leaving and call so-and-so if you want to continue a dialogue in this particular area. And one of the people I called up was John Sebastiani. who is the founder and managing partner at Snowma Brands.

34:15And he says, wow, what are you going to do? I don't know. Like yoga, ski, ride my bike. I'm not planning on working very hard. Why? And he's like, well, do you want to be an operating partner in our next fund? I'm like, maybe. I'm not really even sure what that is because everybody's definition is a little bit different. And he's like, look, my philosophy is that if we build a team of people that bring in experience and expertise and a track record of success that helps build credibility for the fund, but also brings insights into making deals and doing effective due diligence, then we're going to create a lot of value for our LPs and there's going to be a big pie to share.

34:51We want to just surround ourselves with people like that. And so he invited me in to be an operating partner at Sonoma Brands at that time, which was fun too. Now we have three funds and like most growth capital or private equities or venture capitalists, everybody wants is looking for their next fund. At some point we'll have a fourth fund. And that's been a great relationship. John's a fascinating dude. He bootstrapped himself and created Crave Jerky and ended up having a quarter billion dollar exit to Hershey. And basically that was the catalyst for him to start his fund because a lot of guys that start funds, it's always OPM.

35:22It's other people's money. And in John's case, that's also the case, but he has got his own money in it too. So he believes in what he's doing. He's putting his money where his mouth is. And I like that about him. He's a successful entrepreneur. He knows what it takes to start a business and to create real value. That's of a lot of value to our portfolio companies. There's a check and there's a check plus what else can we bring? I've had three decades of experience and a track record of success and everything from beer to pet food to snacks and treats. John has done jerky and wine. And we've got people on the team that are just smart young people with either banking or VC experience.

35:58And it's just a good group of folks. And we've got some really great portfolio companies. We hope someday to create a lot of value by having successful exits on all of those and deliver superior returns to LPs. That's why it's interesting. Now you're involved with a bunch of smaller companies. Yeah. You're sitting on boards with a bunch of companies. Can you break down the operating partner role? Give me, what does it involve? What's the day-to-day look like? Basically, the way it works is we've got 20 plus portfolio companies across the three funds now. I'm not involved in all of those, but there's a few of them that I am very involved in.

36:30And I help either lead due diligence or participate in a meaningful way in the due diligence of us making an investment. I'd say the three companies I was most involved in were Milk Bar. We made a significant investment in Milk Bar, which is a New York-based bakery, confection, cookies, cakes, ice cream, things like that. Sugar products. Sugar products, highly indulgent. And we led that Series A back in, I want to say that was 19. We got two board seats. John took one, I took the other. There was another business that we looked at and ended up making a significant investment called MixLab, which is basically a B2C animal pharma business.

37:08So if you've got a pet and it requires medication and your vet says, hey, I'm making this up, you've got a diabetic cat, needs to be on insulin, we can provide that insulin via mail to your door when you need it and making sure that it never runs out. It's a good deal for the vet at times because there's some incentives for the vets as well. But just think about doctors in a lot of cases, they're really good at practicing medicine. They're not great at business. So businesses that can come in and help them with that. MixLab is one of those. Would you consider like a telepharma for pets? Kind of, but not necessarily tele.

37:40There certainly is a customer service call bank, but it's more internet-based and it's a technology. I wouldn't call it a tech company. It's definitely more of a pharma company, but it's tech-enabled. But it's done really well and it's a good founder and a good team around it. It's just starting to grow. As an operating partner, I led the deal, due diligence on that. We took that to the investment committee. They asked me a lot of her questions. We did the numbers and asked me if I believed in it. And I said, I did. And so we made the investment. And then the third one was another business, again, pet related, because I had a lot of experience in pet and a successful track record there.

38:12We did a deal with Bobby Flay, made by Nacho, which is a premium cat food offering, which is cool. When you think about a world-class chef creating meals for your cat, number one, and then he had this love affair with this Maine Coon cat. Maine Coons are beautiful cats are huge. They're like dog-like. They're so big. His cat's name was Nacho. And you're too young to remember this key sign, but there was a campaign years ago where there was a cat named Morris. The cat was your advertising vehicle and advertising icon, but the voice of the brand was through this cat called Morris. And so it's very similar with Nacho.

38:46Nacho is Bobby's cat, and a lot of the brand voice was coming through Nacho. So I just thought it was cool. I always thought most people think about pet food and they think about dogs, but cats are highly underserved in terms of premium offerings. Nestle has a huge stranglehold on the market with canned wet food. In this world, particularly in private equity or VC, you look for disruptible markets. That's a disruptible market. So you sit on the boards, you work with all these companies, you help due diligence in initial investments, you're providing some operational guidance advice to help them scale, keep growing.

39:18What do you get out of it? Financially, I have a piece of the fund. I have carry in the fund. If we create value through exits, then I share that value creation. So your carry is not specific to the individual company. It's to the broader - Across the whole fund. Yeah. The whole fund. Across the whole fund. You know, I mean, if you think about it though, too, it's like when people go to kick the tires of investing in a fund, the first thing you look at are the people. Okay, you got Johnny, successful entrepreneur. They've got some of the other team that have successful track records, maybe in BC or PE.

39:48They have me, successful consumer, packaged goods executive. It adds credibility, Kisan. And I think that's what you want to do is build credibility, build a strong team that has expertise, that your LPs believe will allow you to create value, maybe above and beyond what other firms can do because of the people you have in it. So that's a lot of it. For me too, like beyond just the money, I've worked with these really big companies and now I'm working with a lot of small companies through a growth capital business. I've really enjoyed working with entrepreneurs. They're full of passion. They have just a belief in themselves or in their idea, product, service that they're offering.

40:23There's very little time for bullshit. There's no bureaucracy. There's no politics. They actually don't have time for that crap. I got really tired of that in Anheuser-Busch and Anheuser-Busch InBev and Mars. Look, it's not a criticism on those companies per se. It's a function of bigness. It comes with bigness. I want to get into that. Yeah. I'm saving up for the jet. That's why I ask these questions, okay? Not to like probe into your specific business. So tell me whatever you're comfortable with. What's the typical carry like for that role? It varies sort of in the one to 3 % range in terms of your percentage of the fund or second fund that when I joined was a hundred million plus the third funds in that same range.

41:01We hope the fourth fund will probably be 250 million, but it's a percentage of the overall carry. Yeah. Ah, okay. Yeah. Not just in the companies I do due diligence on or the ones I sit on the board of. They'll create like a structure for like a 20%, whatever carry, right? Variants. But then then they create a percentage of that. Okay. And then is there a salary with it or? Nope. No, but I mean, honestly, like if I'm doing a deal, I may work a few hours every single day. if we're not doing a deal that I'm not very involved in, I may not talk to people for weeks. I go to board meetings if I'm on a board.

41:32I'm available to the CEOs or the management team if they want to ask me questions. There's sometimes we have specific update calls that we're part of. There's not a separate comp for the board participation? There is. When I take a board seat, there's either sometimes both cash and additional equity and sometimes just equity. Depends on the situation. Got it. And they're more mature companies so they'll probably have a very instructive on that. Okay. The big company versus small company M &A, you were getting into. Can we revisit that? Because I'm really curious about this because I do a lot of podcast interviews.

42:01We do both. We cover this one with huge companies, billion-dollar transactions, smaller ones. Sound like you're more in favor of the smaller entities. I'm more in favor of the smaller entities because of the people that are part of it and the processes. I touched on it, but again, like big companies layered with process, with stakeholder management, they're just slow and lumbering. My philosophy is that opportunities in business are like windows. They open at a specified period of time. And if you're nimble and you're fast and you're decisive, you can move through that window before it closes.

42:39But big companies sometimes are just so slow and they're checking every box and they're very risk averse. They don't want to make a mistake. And I get it. There's a lot more at stake and a lot more to lose when you're a huge company. So they want to make sure that they do what they feel is right to protect the entity. But at the same time, If you're so protective and you're so risk averse and you're so slow, you're going to lose the deals and you're going to get a bad reputation. In the PE, VC, entrepreneurial community, that's just not a company that I want to do business with because they don't move fast enough.

43:09There's too much bureaucracy. They're going to be looking under the hood every other day. People don't want to mess with those kind of folks, but people do want to deal with folks that are decisive, that are nimble, that are quick, are willing to assume some risk. I find smaller companies to have those ingredients and the bigger companies to be the things that I'm less interested in spending my time on these days. Fundamentally, larger companies are more inefficient. And you think about M &A, it almost goes the same. It's just the way they operate because they operate more efficient at this scale.

43:38And when you do M &A, you tend to be more inefficient in terms of how you really drive to capture value. I think the smaller entities are so driven by it. There's a lot more at stake. The stakeholders are really hands-on and they know what's involved and what the outcomes are. that tends to be more efficient. Yeah, I'd agree with that. Efficient in the sense of the way you're describing it, making a deal, creating a term sheet, doing those types of things quickly. I think big companies are actually very efficient in their manufacturing environments. They're combining a lot of back office stuff.

44:08They're trying to streamline systems. So they're actually quite efficient in those areas. They're just not very efficient in the M &A and the deal making and coming to the table with a legitimate term sheet quickly. that can get people excited and want to move forward. That's a good argument there. Not clear, cut, and dry. In terms of venture capital versus recapitalization, if you can compare and contrast venture capital investments with recapitalization strategy from an operating partner. Yeah, sure. I mean, say VC is willing to assume a lot more risk, either at pre-revenue or very early stages where you're barely off the ground.

44:49There's just a belief that that particular investment is going to have a massive return. In a venture mindset, these percentages aren't going to hold true for every firm. But let's say you're invested in 10 portfolio companies. Five of those may go to zero. Two may return capital and maybe get one or two moonshots. That's going to return the whole fund. So you've got that mentality as a venture capitalist. When you're talking about a recap, oftentimes that could be a business that we may look at or were involved in that needs capital. Maybe there's some existing shareholders that are saying, I'm tapped out.

45:25I don't have any more capital to deploy here or I've lost my enthusiasm for this particular business. And you can get some folks to maybe bring in some secondary and take out those investors. The things they both have in common is capital's fuel. There's a need for capital if you're in an early stage business or even a late stage business that says this capital can help me grow. It can help me build infrastructure to help me hire the right people. It can help me create physical availability. If I have a product like we have consumer product goods or health and beauty aids and make those more available and more in front of consumers, all that requires money.

46:01And then there has to be a belief that investment is going to generate a return in a timeframe in which your feel is reasonable. That's an interesting topic too. Keysign is like this notion of what is a reasonable timeframe. most people in the early stage investment world were probably saying hey three to five years and now i think it's more like five to seven maybe five to eight your holding periods as an lp and a fund are going to be longer but also as a venture capitalist a growth capital company or private equity where you have to have enough patience to ensure that you're not what i used to call sometimes like digging the sapling up every other day to make sure the roots are growing and essentially killing the tree you have to allow that business that idea to have enough time to actually germinate let it actually begin to establish some roots then eventually grow for me like vc and recapping are different in the sense that vc is coming in very early stage recaps probably coming in later in the game yeah so it sounds like it's more of the the risk arena is where the venture capital falls in do you think there's a difference in ir expectations I know you mentioned the big bets and the thing, but if you look at your overall pitch to the LP, here's my fund returns.

47:12Yeah. If people are putting money into private equities or venture funds, they're going to want a much stronger return than they can get in the S &P. Typically, people are going to be wanting to probably capture 3x their money within five years. If you think about the rule of 72, like your money's going to double every 72 months, a VC or private equity growth capital is going to drastically accelerate that if they do it well. But you're going to have to assume a lot more risk for that because some of these companies may or may not make it. Founder's perspective. I'm going to open up because I'm probing for some self-serving advice here.

47:46Let's say your company, they're kind of like in between. 10 million run rate, 50 employees. Could be venture capital, but then a lot of P firms are reaching out to you. In terms of the capital allocation structure, just to make sure I got it right. If it's a venture capital, they tend to allocate capital, cash, into the organization as equity, but it's strictly cash that they're putting in for a percentage of the company. Whereas a recap, it sounds like there's two components to it. There's cash to purchase shares from the current ownership, and then also a cash infusion to support a growth plan.

48:25Yeah, I think that's a perfect description. From that business owner's perspective, is it the variable of, hey, I want to take cash out. How much cash do I want to take off? Is that sort of like a variable to be determined and influenced on the owner side? Or is that coming more from the fund of, we think a company is this much. We'd like to cash you out for this much. There's a specific company in our portfolio right now. We're going through that with the founder wants to take some chips off the table because left a big corporate job. started a business drawing a meager salary because he wants to put as much money as he can back into the business.

48:58But it's like, hey, man, I got family now and I got expenses. I need some cash. So oftentimes it'll be the entrepreneur coming our way to say, I need to realize some value, knowing full well that they're probably giving up some value down the road if they were just let those shares ride. We have those situations from time to time and we want to be thoughtful and good partners about working with them when they have a need or they have a want. And we don't get hurt by that, let's say. And there's just a way to make that work for everybody when there's new money coming in through investments. Same.

49:31Well, some of that can be put in the business. Some of that could be to allow the founder to take some chips off the table. Thing I've seen too, Keysan is founders start to get weary after a certain point. After a certain amount of time, it's like, hey man, I'm working my butt off. I'm really not making that much money because everything I'm doing is going back into the business. I need to generate something that's going to just stimulate whether it's the income part of that or sometimes it's just like money is when I always, I've got a 30-year-old son and I always talk to him about like, money isn't going to buy you happiness.

50:04Money's not going to solve all your problems, but money does make things easier. Think about straining relationships between husbands and wives or partners in businesses. It's like oftentimes money is at the root to some of those issues and disagreements. And so when the money can maybe make things a little bit easier for people, that's a founder in a particular situation, then we want to be thoughtful partners around that. Do you have a view on a minority versus majority recap? Like, is there different fundamentals that happen? So if I do a majority, now you're under the funds control. Yeah. This is, we're going to dictate the strategy and everything versus minority is we believe in you and we're supporting your vision.

50:41Like, yeah, majority recap is going to shift the balance of power to the people that own the shares. So you got to be really smart about that as an entrepreneur. My advice to entrepreneurs is always don't borrow more money than you need because you'll just spend it. And then all of a sudden you're going to be beholden to people that own that paper. Borrow what you need. It's okay to give up a significant amount of equity. If you think the pie you're going to create is significantly bigger than what you have right now, that's what you're betting on. So there's nothing wrong with that, but be really smart about that.

51:10be thoughtful about it be frugal about it the money that you borrow has to be i always think about it as a sources and uses here's my source of money and this is what i need here's how i'm going to use it this is what it's going to deliver if all that comes to fruition the way you've thought about it then you've hit it out of the park problem becomes you borrow a lot of money and then all of a sudden doesn't deliver and then you got to go borrow more money and you're just giving up more and more of your share of ownership. And at times, smart PEs, smart VCs, they're going to put preferences on these things.

51:43And if let's say the company ends up getting sold for a certain number and that PE's got a two or three X pref, they're going to get their money first and everybody else will get whatever's left over. And sometimes there's nothing. Unfortunately, I've seen founders really get screwed in deals by borrowing too much money and over leveraging and in the money that they have borrowed, they've burned through and haven't delivered the results. That's when he really creates problems, creates animosity. It creates a lot of issues that you want to avoid. As a founder, you're a piece of the capital allocation puzzle.

52:16I'm doing all these interviews, talking to investors. I'm seeing their lens. At the end of the day, it boils down to IRR. But even for the founder, if you're taking that capital, you're part of that. You have that accountability. You need to be thinking the same way of, how are you going to deliver IRR, make sure you're using that money wisely. You shouldn't take more than you know how to really allocate. Right. Otherwise, you're going to diffuse that, then you're not going to. And then that ex-preference is going to come back and bite you pretty hard. Yeah. The key element there is like having that full level of confidence.

52:43You're going to put that capital to work and really deliver that value increase on it. Absolutely. The biggest problem oftentimes with some of these deals that don't turn out to deliver at or above expectations is execution. People don't execute. asked for money, said you're going to do this with it. It was going to generate X, Y, and Z, and it didn't happen. All of a sudden, now you need more money. It's like, can you execute better? Because if you can execute better, maybe you won't have to go do another series, C or D or E. You have what you need. You're creating your own oxygen and you're delivering on your promises.

53:17It's one of the things I used to always tell my teams when I was running businesses was like, do everything in your power to deliver your plan. Because a plan is a promise and you should always be in the habit of keeping your promises. When that happens, you build confidence, you build momentum, and you maybe reduce the need for additional capital and to give up ownership. Because that ties right into the capitalization. It should fit right into a plan that you can execute and deliver on, have that full commitment and confidence on. 100%. This market's been really funny the last few years, if you haven't noticed.

53:46Yeah. I haven't noticed that. You haven't noticed, right? Valuations. Interest rate's a big factor of that. All the different sectors have been affected in different ways. How do you look at that? How do you look at just the effects of valuations, interest rate, impacting investment decisions? It's been a really interesting last couple of years. Maybe we're easing our way out of it, but right now we're still in the throes of it. When I say it, it means that if you're a business, an entrepreneur, whether you're an early stage, a startup, or one that's been going for a while that needs capital, it's a very difficult time to raise capital.

54:21Why is that? You hit on one of them. Interest rates are high, number one. Number two, while there's capital available, it's being fairly tightly held in terms of saying, okay, I'm going to be really just cautious about how I allocate that capital and be in the business of picking winners, number one. But number two, also knowing that if somebody needs money, that I'm going to use the fact that the leverage is on my side of the table now. So if you need the money and I believe in your business, I'm willing to deploy that capital, then you're going to have to give up more ownership than maybe you needed to give up three or four years ago.

54:58The balance of power is probably always to some degree in the hands of the people who had the capital, but even more so now because access to capital is difficult. Whether you're going to try and get a loan and take on debt, if you do that, then you have a lot of debt to service because the interest rates are high. and if you're going to go the other route, which is a growth capital company or a PE or a VC, then they're going to ask for more ownership and you got to be okay with that if you truly believe that capital infusion is going to deliver what you think it's going to deliver. My crystal ball is no better than yours, but based on what we're hearing and what we're seeing, that you'll see some relaxation of the Fed and maybe see some rate cuts down the road.

55:37That'll flow through to people that need to borrow money. Two, I think it'll create some enthusiasm for the overall financial markets. which will maybe loosen the purse strings on the folks that have been very stingy about allocating their capital. People have learned some lessons over the last few years. They made some mistakes, and I think they're learning from those things. On both sides, by the way, on the sides of the investors who are making investments and also the entrepreneurs that are taking those investments. The question on the investments, if you were a fund investing in a sector that was 8A, trading at 10X multiplier, and now it's 5, what are you doing?

56:09What's the plan to make up for it? Yeah, it's basically back to what I said earlier, like execute, put your nose to the grindstone, be very frugal about how you spend your money. Definitely try and be efficient on the SG &A side of the equation, create the value that you think you can create. Do you think it would deter a fund to do, there's still an active fund to do less platform plays and more add-on plays just to push for growth on those to try to make up for that? Say more about that. How would you make that distinction between platform and add-on? You're just doing a whole new investment into a brand new business line, sector in general, and saying, hey, we're going to invest in this new sector at 5X and sort of get the new start right.

56:51Versus we've already got these seeds in there. Let's really focus on the add-ons, so we can make sure that we can push the growth and really have a negative on this investment. A different flavor of ice cream for everybody too. Yeah, it is. Okay, the world according to Keith here, so let me preface that. But when you have a fund, you say I'm gonna make an investment in a business, you better be reserving capital to make investments in follow on rounds. If you don't do that, A, you either didn't believe in the business strongly enough to make that first investment, or B, you're just gonna dilute yourself, and that's gonna be a problem if you're not reserving enough capital to do that.

57:28But then you're always needing to make sure that you have some dry powder when some great ideas, some great founder comes along you've got the ability to step in and do that deal. So it's always a balancing act. It's never a perfect formula, but I think you want to make sure that, let's pick a round number. If you've got a$100 million fund, you've allocated$50 million of that, you should at least be thinking $30 to$50 million of that for follow-on rounds and not just looking for the new shiny toy to just increase the port coast. Because along with that, additional investments and new platforms becomes more board seats, more personalities to manage, more, more, more versus a more focused portfolio where you say, hey, I went on the series A, I went on the series B, I went on the series C, I'm in on D, I'm all in on this thing because I believe in it.

58:17I want to make sure that if I was whatever, 20 % of the business when I wrote my first check, that I maintain that same percentage as time goes on if I still believe in the business. It's a strategic thing. Not every fund does it well, but I think it's a discipline that most good funds should be building and adhering to. I got the big money question for you. Timing on all this stuff. And I think of timing for an exit, timing for a recap. I feel like this is such a critical thing where I've seen entrepreneurs wait too long and all of a sudden growth has slowed down. Valuation is really because of that.

58:54Or you've done it too early. I've seen them where they've got the exit at like a$20 million,$50 million exit and then watch his business blow up to a billion dollars. How do you think through timing on that to get it right from everything you've seen? This is like the two-headed llama, the push-me-pull-you. When you want to make sure that business you invest in has enough time to reach terminal velocity and unlock value. Oftentimes, though, funds want to make sure they have enough exits so they can raise the next fund, in which case they don't always allow enough time for that business to unlock the value that it has the potential to unlock.

59:31That's definitely an issue. But then you're right. Sometimes you wait too long. And I've been involved in some of those too where we probably waited a little bit too long or maybe had a more inflated price tag than we thought the business was worth and didn't take the burden to hand, if you will. And a couple, three years later, you're going, boy, I always should have taken that. Timing is crucial. And I think right now in particular, as I indicated a little bit earlier, I think the holding period is a little bit longer. the time to actually allow businesses to develop. It's taking a little bit longer.

1:00:01Maybe that's a function of not having enough money to actually accelerate growth or business development, if you will. Some people just get lucky. John's example is great. John Sebastianian had some one at Crave. He wasn't really ready to sell the business. Somebody put a very tempting offer on the table and took it. And in his case, timing was perfect. Other cases, you've seen it go the other way. I talked to some of these founders. Again, the 2021 magic year, They raised extremely high valuations. Got your preferred X on those valuations. And now look, I mean, that's a tough spot I wouldn't want to be in.

1:00:34Even though at the time, big champagne bottles were being popped and people were partying hard because they got$200 plus million raised. That's one thing. Let me go back to the self-serving side here. So if you're at a business that has strong organic growth, and I feel like there's a timing factor of there of, I almost feel like it's probably your own confidence of how long are you going to sustain strong organic growth to time it at that right point? Because you don't want to do it too early. You don't want to do it too late when your growth declines. To do a recap and introduce F &A as a strategy for accelerating the next stage of growth.

1:01:08And you're looking at the market around too, whereas current market valuations are low. we should push this out a couple of years or so and really wait till things turn around and the markets favor, but then pretty confident we're going to have strong growth strides for the next three years. How do you sort of look at that? Is it a year by year evaluation? It's a difficult question because you've seen a lot of down rounds right now. People raise money on big valuations to your point, 2021, and now we're sitting here in 2024. Dynamics are completely different and they still need money and they're like willing to issue equity at a much lower valuation.

1:01:43It creates problems for the entrepreneur. It also creates a problem for the existing investors. I'm making this up, but if I invested in a$100 million valuation and now we're doing a new round of$50 million valuation, like that's not good for me. So this is a little esoteric, but I'll say it anyway. The boards that I'm on today and even boards I've been on in the past, what I've always advised people to do is, yes, you want a successful exit at some point. You're trying to create as much value as you possibly can. But if you're so focused on that and not focused on just creating a great business, you're going to run out of problems.

1:02:13I guarantee you. Just think about what it's going to take to build a great business. And then suitors will come, investors will come, eventual strategics that may want to acquire you will come along when you're not even thinking about it. Sometimes that gets lost. I was running a company last year for a bit and people kept wanting to say, well, shouldn't we be thinking about what our exit strategy is? I was like, I want to talk about that with you guys. I want you to think about what it's going to take to build a better business. Your job every single day is to drive positive change and create more value.

1:02:45That's it. Anything else is going to be distraction. And I think that's what happens to people. And look, we're guilty of it sometimes as growth capital companies and investors. We're pushing people into those directions because we want that for our shareholders, for LPs. But it's a fine line of really allowing the business to stay focused on what really matters versus just focusing on, well, how much can I sell this business for one day? And how do I dress the baby for that sale? Tough to keep everyone happy. Your customers, your team and shareholders staying true to the mission or they focused on IR.

1:03:17Yeah. You think about it, you put all the noise aside and everybody's just focused on building the best possible business they can build. Then value will come. It will come. I couldn't agree more. To wrap things up, what are some like golden nuggets of wisdom, whether the M &A side or investment side that you might have to share? I've learned a lot over the last, call it, seven, eight years or so, having done it for Mars Wrigley, now being more involved on the fund side of the equation. Some of the things that I've learned are, I guess, are as follows. One is that a check isn't always a check.

1:03:49If you're an entrepreneur, you have to think about what can come along with that, number one. Number two, what's the culture and the ways of working of the people you will be now beholden to because they own a piece of your business? So that's something I've learned a lot about. It stands to reason in general business or investing, but it's under-promised and over-deliver. I see a lot of over-promising. I see a lot of things even through some of our deal flow. when I look at people promising$100 million run rates in three years and positive EBITDA in the same time period. And I look at that kind of stuff and I go, that's overpromising.

1:04:27So trying to find the right balance of enthusiasm with realism, but also the ability to execute on that. I've made some personal investments outside of the funds that when I looked at those types of equations. Still had my spidey sense tell me it wasn't going to actually come to fruition. I still put the money in. I've had some misses on those things. That's a big piece of it. Just under promising and over delivering and execution is a big piece of that. I think for people that want a career in M &A or whether you're on the fund side or you're on the corporate development side, it's like you need a fair amount of financial acumen for sure.

1:05:04So there's the numbers part of it, the IRR. There's the, how do I read a P &L and really look for some of the gremlins that may be hiding underneath the surface to make sure that I ask the right questions before we do the deal. That's a piece of it. But I think just real world experience in a sector that you may be interested in, whether that be tech or the area that I'm in, more of like consumer products, or it could be in services. Just I think people that can bring that kind of street level experience to the deal side the equation could be quite valuable so one part's about having an mba or knowing the numbers another part about really understanding the dynamics of the segments categories you're working in i like it what's the craziest thing you've seen in mna probably part of it was the ab deal i lived through man like when you think about somebody coming to the table at 53 billion dollars and in 2008 when we were in like financial apocalypse that was crazy i've personally seen some things that i've been involved in where I've seen 30 times revenue multiples being bought with no EBITDA and no line of sight to cash flow positivity.

1:06:07Yet people wanted those businesses so badly and felt that they were so unique they had to go buy them. I'm fascinated with some of these documentaries on WeWork and Uber. I had a good friend of mine for a while who was president of Uber. But when you watch those things like just the craziness that went on the adam newman's convincing softbank to put in billions of dollars it's like that's kind of stuff just blows my mind man but it's also part of what keeps us interested in this business like finding those truly unique gems that are just going to have this massive exit that's going to be somewhat unheard of but yet it's going to just deliver a lot of value and that create a reputation for a firm create a reputation for an entrepreneur There's some things around that stuff that's just fascinating.

1:06:51But living through the AB deal the way I did, seeing how it got done, seeing some of the consternation in the family and the board and the time we were in in 2008, and it actually working just blew me away. And I was both proud to be part of that and certainly reaped the financial rewards of being part of that. But it shook the world that I knew. It turned out in a fashion that I never would have expected. That was history right there. That's got to be one of the largest M &A transactions in history. Pretty big. A lot of interesting story behind it from the book I read. Keith, thank you so much for the time today.

1:07:26I enjoyed this conversation. Thanks for hosting. You've helped me become a better M &A scientist. My pleasure. Thanks for having me. Those of you still with us, I'm curious about what you think about this interview. I had a lot of fun and found it really amusing and educational. Hit me up on LinkedIn. Let me know what you think. Until next time, here's to the deal.

1:07:54Thank 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.

1:08:39Again, that's mascience.com. Here's to the deal.