Justin Ishbia - Lessons from Acquiring 586 Companies

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What you might not know is that they've recently launched something game-changing, AI-powered channel checks. Channel checks give you a real-time expert-driven perspective on public companies, weeks before they show in earnings or consensus revisions. AlphaSense uses an AI interviewer to run thousands of expert calls with real human experts every month, asking consistent questions across experts so the signals are clean, comparable, and useful. You get live updates as interviews come in, full transcript access, and coverage across every major sector. Instantly compare insights across experts and analyze quarter over quarter trends in sentiment and key performance indicators. For investors trying to stay ahead of the fast-moving markets, it's already table stakes. Hello and welcome, everyone. I'm Patrick O'Shaunasey, and this is "Invests Like the Best." This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincallossus.com. Patrick O'Shaunasey is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. - My guest today is Justin Ishbia. Justin is the founder of Shore Capital. Shore is a private equity firm that invests in micro-cap businesses within industry niches. With $7 billion in capital deployed, but an average transaction size of just 12 million, Justin has worked to build a system to drive success for hundreds of businesses through replicable operating procedures and championing young professionals. The firm has created a moat around volume with nearly 600 acquisitions over the last three years, some of the highest numbers in the world. We discuss identifying growth prospects, constructing a meaningful board and the business mentality behind Main Street, not Wall Street, as Justin puts it. Please enjoy my conversation with Justin Ishbia. - Justin, it's such a pleasure to have you joining me today. I remember on our very first call, taking more notes about how you are building your firm than about any firm introductory call that I can recall. And I want to start with a line that you said when we first met, which is that the system is the star as you think about building your asset management firm. Maybe describe why that term or idea is important to you and how it applies to Shore Capital. - I follow your show for a number of years and it's been so impressive what you've built. So you guys have a best in class audience and it's shown on a report to create our price value as the system, no one personally creates a star. And so our view has always been like, how do we get a system, a machine, a process that creates different shared results outcomes. And I was raised in an environment that you always look for opportunities where others aren't looking. And my view of the world is the last inefficient part of the private market ecosystem is the microcap. And this is where we spend all of our time. This is businesses, we define as sub 10 million EBITDA and investment. And why most people don't play here is I think several reasons. I mean, the good back to the system is a star dynamic is that in order to play here, it takes more resources than normal. The buying a business with four EBITDA, no audit and a management team that is oftentimes no, I would say running the biggest business that I ran before that day, it's different than buying a business that's doing 50 EBITDA, the professional management team that's been coming together and having a business three times aside before and not coming down to run it. And so back to the system. To me, everything goes back to the system. Everyone has a role for the organization. Because I love the sports as well. How do you become best person at your job day and day? How do you become the best controller? How do you become the best deal professional? How do you become the best marketing leader? And so the system for us is documentation. I look up to organizations are operating companies like Daughter, the DBS system. We're trying to create something very similar in the private equity community. And so everything we do is codified or written down. If you walk in your own four walls in your own offices, we have the concepts of an idea. So in our firm comes up with the one invest in the sector. Let's pick on the veterinary sector. Everyone knows what veterinary is. So, okay, I'd give you a generation. Until the day we sign a letter of intent to that platform, we call that nine things of baseball. There's literally hundreds of steps that go into each inning. Has these between five and 15 steps you must go through. They sign a letter of intent. There's four quarters of closing a deal. We make mistakes over and over again. Make mistake. You actually add something to that four quarters. And hey, make sure you check with International Tax Council by ABRC. So, create a codified system. We close the platform. We have a hundred a plan. We have 23 standard operating procedures. We put into every business. So, we basically on board the short way of how we do things. We own a business as the fencing phase, the growing phase, the harvesting phase. And we access a business. It's three periods of exit like hockey. A lot of sports analogies. But what this allows to be done is it allows scale. We've done over the last few years, about 600 acquisitions. According to a pitch book more than anyone else in the world. Average enterprise value though, of transactions, 12 million bucks. Wow, hundreds of them. Deployed over $7 billion in a three year time period, but across 586 transactions. So, why the system matters is early career energy, first time leaders running through their own first platforms. Give these people the tools and resources. And saying here's the rules. And we believe we're of C1, D1, Teach1. Patrick, come work on my team. Sit next to me. Let's go do a first deal in the veterinary shift. Looks like this. Next one, C1, that's the C1. Do one. Let's do it together. And I'll tell you why I'm doing it. The next one, you're teaching me how you're doing it. In order to own something, you have to be able to teach you somebody else. And so, the system is set up in a way to allow early career energy, young professionals. I believe, probably, the world is a hustle game. And the system is set up a way to have talent to people who want the ball, or they're in their career to have the chance to grow and have a big role in the deal. And the system allows for that. And so, that's why our systems are star. No one person makes this place go. And we have to say more stars into our system, the brand new system burns. - Poking around of this system for the rest of our call is gonna be so fun. And there's so many different areas that you've had this very careful systematic thinking for how to do great deals and run a great business. Before we do all that, I'd love to rewind back a little bit to the origins of the business. And you, like so many of the investors that I've found to be the most interesting, started by, I think you call it your pre-fund. You were doing these deals without a committed capital vehicle. You were sort of a fundless sponsor going around raising capital for great individual deals. And it was you, you started this. And it's easy to say, now you've got this big amazing team, $7 billion, hundreds of deals, and so on that there's this great system. But it starts with a person. And I'm curious to understand like the formative experiences in those early deals, what you were looking for, why you were attracted to it. And then why the system began to emerge. What was it that made you think about the market this way and want to stay disciplined doing very small deals in almost constellation software style, rather than do what most private equity firms do, which is start to get bigger and bigger and bigger in their deal size. - So it wasn't just me, am I part of Ryan Kelly? My partner Mike Cooper and Johnny Hany. The four of us from day one, we were young. I was 31, they were 29, 28 and 27. So we were kids. We were essentially associate levels. Lauren came from us, no, originally Ryan Knight, Ryan was at Water Street and I was at Valoraki Partners. And what we would do all the time is we would see a deal, say three or four of you, but done and try to sector. We bring it to our old boss and basically say, here's a roll up in this opportunity in the sector. And effectively heard in different ways, saying like interesting, but you're one of my ex-dominated deal guys, we have to deploy ex-million dollars per year, whatever maybe doesn't make sense for us to do that. And basically I heard over and over again was no one is investing as part of the market because when you're good at private equity, what do you do? Raise a bigger fund. When you're not good, you wash out. So who stays small for a long term? The answer is really nobody. And so we decided to do the franchise. The micro cap franchise that would stay small for the long term. We had a bunch of products. And so it was really 400 days. That is when we had a pre-fund. Like, pre-funds are something I think that people zoom past these days. One of the raised the first fund won $200 million. It's like, it is really hard raising $200 million. It's really hard raising $100 million. And so the reason why we did that way, I wish I could say I was smart up. This was like plan, but my mentor said to me years ago, I was like, to 7 or 7 or 8 and said, Justin, was a good time to fund raise. It's a bad time to invest and vice versa. And he said, when you start, make sure you start when it's a bad time to fund raise. So I knew it until 2009. I didn't know, 2009 March was the bottom. I didn't know that was exactly, but I knew it was bad. I didn't know how much worse it was going to get. But I said to myself, well, you got to do it when it's bad out there. And so I can't raise the cap, I have no track record. I was an associate in other private equity firm. I was a lawyer first, an associate in private equity firm. No endowments in the invested. That's how I call them. They don't like get. back to the track record. I was like, "How do you track record?" We went out and raised money when our first was a pre-fund. It was a $10 million committed capital vehicle, but a couple important points on that. Instead of raising just four or five million dollars for the first deal, we raised 10 million committed capital. And why? So we gave them really good advice that we'd go for your first add-on, someone's hit the worst, someone's gonna change their mind, and by having a committed pull of capital, you'll spend much of time raising capital for the second add-on. So having a 10 million dollar credit pool is mostly wealth managers, founders of private equity firms, head of law firms, traders in Chicago, and into our little network. We didn't have a great wealth, but in much of all our small offices, with 1200 square feet. But those very early days, it was about being thematic. And it was about buying a little business where we felt like we were all healthcare originally, where the founders were excellent at something, but did not want to something else, which was usually the business side. So they were a pharmacist. Man, they could mix XYZ and everyone in town wanted to work with them because they had the best output. And so in those early form of the day, as it was, pick the right theme, invest in a business where the founder, clinically, was really sound. We got to say a short capital, good medicine, it's good business. We wanted to find a good healthcare provider that has a respect of their peers, invest in this little business, then bring systems and processes. We called it flash and a dash, a dashboard and a flash every single week. We had to say if you can't measure, you can't manage it. But the very early days, we were very processed driven, but this pre-fund, everyone wants to zoom past it nowadays. But you get seduced by the world of Instagram or Facebook or TikTok, where everyone raises the first $200 million fund. Guess what? Most people don't start that way. Most people start something very simple. Now, like to think of a short capital story was not that dissimilar from some associate or VP and other private different right now. It takes time. It takes 10 years. If you get right, you do exactly well. You have good deals. You will make less money. Your first 10 years than you would stay in the directory you were by after your 10 going forward. It flips in a trillion directions. So, I think people want to go pretty fast these days by honestly, slow down, go buy one good business, buy a second good business. Make sure those are going well. If you buy two or three good businesses, you will raise a fund one day. But don't think it's because you work at XYZ firm, you're going to spend out and go raise money and do it now. Doing the time is crappy out there. Recession is here or coming. But now you think about it. I've been raising it now. You go into investing businesses when it's a hard time to create enterprise value. Sellers are scared. There's relatively low earnings profile and multiples of wealthy lower. Looking backwards, don't do in 2019 when multiples are tiptocked and easier raised capital. But it is really hard to get it right because you need to sell it five years later. You'll be in to recession as opposed to you buy it in 2024. I'm pretty confident. It'll not be signed recession 28 29 30. So obviously, you're hanging your hat on this ability to stay in the small average deal size. So $7 billion, but a $12 million average deal size is quite something. Just not a lot of examples of firms that have done that. So with that in mind, maybe describe what is the perfect canonical short capital deal? What does the business look like? What does the multiple look like? What does the prospect for growth look like? If you had to atomize it, how would you describe it? Everything starts with the industry. So we're very organized around industry themes and thematic. So pick an industry we would say has great long term growth potential is much easier to be playing ball and she has growing than going in the other direction. But not all the perfect type of deal for us. Then 59 platforms in firms history, average revenue about 18 and a half 19 million dollars of revenue, average EBITDA 3 and a half million bucks, paying about seven and a half times. What we've done over, leveraging it two times. So under lever over equitize and usually about 80 to 100 employees. This is Main Street, not Wall Street. And we're buying businesses. But it's in a sector we believe that you create value by consolidation and scale. And so I was back to the veterinary industry as an example. Value is created by hiring and partnering with the best veterinarians. We love investing in industries where there's much more demand than there is supply. So what do we do? I become the supplier of choices. By supply, that means you're a place where veterinarians and that text want to work. If you have great people want to work with you and the man where it is, then you have to grow it up quickly. So we're buying businesses that I think are in a part of the market. That price point that is different than what they do with scale. For a lot of reasons, the magic teams have not been developed. They don't have multiple geographies. They oftentimes have cost for concentration. But we're okay with that. These are risks we take. They almost never have audits. They are huge on QuickBooks. These are all parts of, I would say, size above the country club round, but below where it's two social investors want to invest. Constellation software, Mark Leonard's a friend in a mentor. I'm not smart. I know to copy. And pay a copy. They did all in software. We've done it in operating businesses. But it's a mainstream little business. But where you can aggregate 5, 10, 15, 25 of them or more and get to a spot where there truly is synergies where you're cost a good soul can go down because of scale. You can have data points on pricing to build to have better intuition and knowledge on pricing dynamics. You're able also to shift labor around to have their labor utilization. So in a route based business, for example, you have more density than a certain geography creates value. So I want to have multiple ways to win. I think the last thing I'd say is unlike larger organizations that buy bigger businesses and competitive auction processes, we're buying them these relatively smaller businesses. If we get the first deal wrong in the thesis, it isn't a death blow. Most times in private equity, it's probably speaking so I'm going to miss $100 to a thesis. They're invested between $16, $18 of that investment for the platform and reserving 20 to 40 for add-ons. We're almost exact inverse. I'm coming $100 to a thesis. I'll deploy 5 to 25 for the platform. And what that does is it creates an opportunity to underlever, make sure the management team write. And if the first one isn't what you thought it was to be your second or third investment that sector still can be good and become the headquarters and the platform later. And so it gives that great opportunity, I think, to increase your margin of safety, increase an opportunity for success. So all that stuff together creates, I think, a really important part of the Eclis system. This part is inefficient. And I think by layering operations, you layer in margin of safety, you layer up side for operations. If I get one or two of our things right, we make three times the money. If I get four or five right, we make five, six, seven times the money. If we get everything right, returns in the teens and 20s, multiple times. And so there's multiple ways to win. I like investing right. There's lots of ways to win after a lot of one or two factors. One of the things I'm personally really focused on is thinking about the different kinds of opportunity costs for capital today. Its rates have gone up as the S&P has a certain sort of expected return, call it 10% over the long term, that really to deploy capital away from risk-free rate or very cheap index funds, you need to demand like a really high rate of return. And otherwise, it's just not worth it. Might as well just stash it somewhere liquid and go home. What have been the rates of return in this style of investing? Historically, now that you have so many deals done, lots of deals, exited 10 years of experience, just level set us a little bit on the return profile of a strategy like this, return on equity. Yeah, I can't wait for everybody else to be for our results. So we've done 59 platform investments. We've exited 14 companies. So it's not the same track I grow forever, but it's definitely a growthal mass. Our average growth cash on cash has been seven times cash on cash on IRR 72%. We've never had a deal lower than three times gross cash on cash. Our median is 5.5 times gross cash on cash. So you're talking about the 50s IRR. So you're talking about 70s, gross, 50s net, I'm not saying that forever, but that's been the stroke results. And this ecosystem does produce, I think, a really strong risk of just return profile. But it's hard to do it. The reality is when you're small, you can do it, but then you get bigger and bigger, you raise bigger funds. And it's really hard to stay here. That's the reality because your vice president becomes a principal when they want to come a partner, you raise bigger funds. And it's harder doing smaller deals. Some of our biggest deals are the most easiest to manage because my magic team are so darn good. It's harder to get it right. There's more risk involved. I do believe you get it right. Now I do have, I think, an asymmetric chore profile. One of the things I used to love studying in my quantitative research days was just return on invested capital of public companies. And the norm would be that R.I.C. mean reverse. If it's really high, it gets competed back down. But there were always some platforms, a lot of them are the biggest companies in the world today that would have these bizarrely persistent high returns on capital. And when you investigated them, you found classic business notes. And it seems like the same question applies here. Like, what is the system note as you would describe it? Because 70% 50% IRRs, these seem so high as to be almost unsustainable. I mean, obviously those are certainly high IRRs and even half that would be good. But how do you think about building unfair advantages into what you do so that you can continue to earn really spectacular results? I wish I could say I was smart enough in the front end to plan this. By Galibot Lucky, I think our note is the volume. The number of transactions that we do creates an ecosystem, creates a deal, young professional worker short capital, it gives the opportunity to have so many different executives around the table that reuse people over and over again and try people at relatively small businesses. And so I believe the next 10 years of private equity is all about operational excellence. So we lean really heavy in operations. We have 150 full-time people approximately a short capital over which half of them are operations leaders. When you're buying a relatively small business from an honest good founder who has nothing but good intent to grow their business, but they often leave a lot of these at table. The risk they want to take, there's four of EBITDA to go buy a four-line dollar machine to automate something. They don't want to do that sort of stuff. And so at this part of the market, it's inefficient and there's an opportunity to I think dramatically improve these businesses in the first 18 months. We believe also 80% of our CEOs are first time CEOs. But we believe in the thing called early career energy. We believe that it takes a a really smart person, about 18 months to learn 90% of the of the industry that last 10% takes five years, 10,000 out of all. We bring more members to compliment them. I think the opportunities is finding individuals who want to plan a part of the market. It doesn't seem as sexy at first. But once you get in there, return on a message, Capo. If I'm a founder, I'm a CEO, I understand what's going on. Your profile here is much higher than investing in larger businesses. That's just a red out of it is that, I lay out the math all the time for more members of ours who we recruit them to our boards. We usually have about seven independent board members every company buy. They don't get paid to cash. They get options that are company, if it goes well, they do well. They'll get a chance to invest in those businesses. But the math, I think, they've had nine times that someone said, "All of the board can be CEO for us." When they see you, if you get it right, they look at it as, "Okay, meeting returns in the product industry pretty good is two times your money." I think that's a good fund the most returns. Our math, we say, is for us, if you can be a CEO of a large business that has two or 300 million dollars equity behind it, it is quite common to have an equity option pool that are not 2.5 times cash on cash. They can have a $20 million outcome. That is a mill fare way, I think, for a lot of CEOs. You can make that as part of the market by the cash on cash profile gain, right? It is oftentimes higher probability of success, especially when you recruit talent. Give me the CEO that can go and recruit his, her network, two or three awesome people to come to this part of the market. They see the opportunity and return profile to be $67, $8, $9 times your money because of multiple arbitrage, because of operational improvements, because of the opportunity to invest in these little businesses that have many things left on the table that founders know that should be done, but they don't want to hit the risk themselves. The probably so. The most important thing is that you know as a mill fare way for us to have three founders, one is 65, one is 55, one is 45. The guy is 65, more risk of risk, 45, one is lean a little bit more. Great. We can partner in that dynamic and give them some real upside to give a chance to differentiate. But this part of the market does create those unique opportunities. You get it right. You are talking about seven times your money and I think there is no better way than to create value than to compound it and be a leader in a business growing in a real fast pace. The most important thing is that the way you set these boards up, we talked about it in some detail when we first met. I love this idea. The idea of a $3 million even a business having a fairly high powered seven person board seems ridiculous, unrealistic, but you figured out a way to structure the incentives and the composition of the board, like the nature of each board member and their background that's really seemed to been a key part of this system being the star. Can you just describe that system, the board system and incentive structure in as much detail as you can? You can go to the board like a basketball team. I don't want five point guards. I want a point guard, a powered forward and center. What is traditional and private company investing before I find a short and invested in small companies about $20,000, $50,000, what will happen normally is that over the most money it was the board. And you do the head no relevance, no importance. The guy puts in the half of my inbox and they say the board. No. That never happens for us at all. So we want to go, we find we call the Mount Rushmore of that industry. So back to the veterinary industry as an example. I want to identify who by industry standard reputation is viewed to be best in class. And he's sports is analogy. I think people have a lot of time in college basketball. Who is Tom Ezo? Who is Mike Shesewski and who is their family tree? Every industry has their Tom Ezo and their Mike Shesewski who are in a family basketball coaches. And so the board like a basketball team and we say I want someone, two people, who have run a business in that exact same sector, it at least three times the size of what we acquired. So that person has been there and said I've been through this journey of this exact size and metrics. On a voice to the customer, on a voice to the supply chain. Usually on a functional discipline expert who has been in that sector like a CFO who knows metrics called. And one or two people from the Jason sector. This board of seven individuals, a lot of times our board members were first time joining us. They laughed. They say there's more people on the board than there's millions of revenue. We buy business doing an interview, we buy nine people the board. So it's a way of overstacking board, but we're stacking boards in a unique way. And that creates a lot of value and I want to be clear that I'm doing some more secrets off. So I don't mind it because this is how I started. We pay them zero. Pay them zero and cash comp. Feed it back. The lead director gets a small stipend that be more involved. We look through the lead director and we have six regular board members. Those record get zero cash comp. But they get options in the company that in our base case make $250,000. I was breaking up very simple guys. It's very simple that an average over five years on average. That's four more means a year. She's talking 50,000 a year, 12,500 per more me. Most people go, okay, I'm on a board for that. That makes reasonable sense to me. And if we do better than average and you get much more than that, I've talked to people all the time to like, well, I can afford that board. I'm like, yes, you can. You give them options and the base case look like this. And base case for us is three times. And so that's a very reasonable outcome. So I think when you go spend the time and effort to go recruit that board, that is the most important thing that you do in the thesis. If you are in my Monday morning meeting and you heard from him talk about buying a company and an ex-weisy sector, the question that comes out of my mouth versus a temporary board. Literally, and then there's like a slide that lays out the different added the voice, the customer, the voice supply chain, the voice of the operator. I want to show our relevance. And usually four to eight people deep. And the person who has laid the thesis is their job to pick the best group. And on the unique that I have, he's about a moat, well, the things from the past this year will close 12 or 13 platforms. So time seven, we got 90 unique board members. So we're talking about third will be repeat customers for us, but I have a 16 new people who will join our family next year. I know they're going to be yet. They're all going to be very talented business people. We talked about some before us phone call about what is very high end, very talented person. There's a niche out there. People who are 55 to 75 who don't want to work full time anymore, but do not want to nothing. They fell retirement love the family time woman or man. And so these board members bring that experience. And so we oftentimes back first time CEOs over 80% of our CEOs were first time CEOs. And it's the minute to go. It takes 18 months to learn 90% of the industry. And the last 10% takes five years. But guess what? My board has that last 10% from day one to compliment that early period energy. And so if you partner with a hundred smart first time CEO, first time CFO, give them a board and naturally of those seven by the way, five become super value add one or two less. Just to be out of it. I'm very poor, printing who is going to be value and who is not. This is DNA of the people and after with us one time I can figure it out. But he's really tell the people his board. And they help in a unique way. Every single member helps a unique outside way at one point during the life of the investment. Open the door to a customer refers us to a former employee of theirs who was talented. Has a unique way of understanding software system. First, just an add on what by a business to an 18th of revenue. We want to grow it to 100 revenue. You know, speed a new customer that could bring three minute revenue. You're talking about it first a 15th 20% pick up in revenue. You buy a business in a bit of revenue. There's no ones that bring you a 15% pick up and customer. It's just not going to occur. But I think we've learned over time is we kind of create a fun environment for these board members too. They have choice going to the professional time and effort. We put a lot of effort into creating an ecosystem where we have these operating partner summits where you invite individuals all of our board members from all of our companies. It's kind of twice a year across Palmite and share ideas and make perspectives. But it's creating a family and ecosystem of really talented board members who want to provide advice and give back. Our own is altruistic, our own financial, our own fund. All the things together created a really great board member. And I think we increase the odds of success. All of this is about increasing the odds of success. And I think if we do all these things, well, I'm not sure which part will work every single time. But it's a system and I know the system will go out. I tell our LPs and investors all the time. And our future seller partners. I say I won't promise you the outcome. I promise you the process. Our promise is down. It's clear. And we do the same thing every time. And we make it better sometimes. But the process is the same. I think that is, I think what great operating businesses do. A public company, the good daughter, like a roper. They do great things by a system. And I think that's something we're focused on. Why are you doing this in the industrial subsectors versus somewhere like software? What is it about that addressable market, those business models? Why pick that instead of something like software that by took this system and went into this and software somewhere. Probably worked pretty well. Why not? We may at some point, but we started a health care. I always felt like the founders of healthcare businesses were clinicians by training. So I went to Vanderbilt for law school. My cousin, I'm super close to Vanderbilt from Ed's school. His eight buddies and my eight buddies, we gave one group at Vanderbilt. And we're all still buddies to this day. He's just one of the smartest individuals I know of these doctors. Man, they just don't get the business out of it. Nor they care. She's a reality of it. And so I saw that enough. I said, okay, I can partner with my cousin who would be his my age, but him, he's 15, and supposed to be his 30. And have him be my business partner and guys like that create a tremendous competitive advantage. And so it was always like we partner with individuals, mainstream businesses, where the founders have a outsized technical skill. Well, that's cutting your eye open for a surgery for cataract or whether that is no industrial sector. So it was really good at repairing roofs or whether in the business or sector. So that's great at making sure technology, your outsource IT works really well. To me, it's always about, I believe that people excel at things they love to do. Most doctors did not go to medical school, for example, to hire the front desk person or to evaluate professional development of their peers. Great. You go be a doctor and do you love to do? And like to use the words, I want everyone working at the top of their license. So by that I mean what can you You only do based upon your expertise in the inner skill set. And so in a doctor's example, I don't want the doctor who's a cataract surgeon seeing the follow-up patient, the routine follow-up, there's no complications, very simple. And what a nurse practitioner can do that. And they're trained to well enough to know there's a problem here. I need to see the doctor on the sore stuff. And by the way, the same thing, the nurse, she'll only see what the nurse is seeing, the medical assistant should medical assistant to see. And that creates sickness because employees love doing things that are unique where they can do. The first reason the doctor is interviewing the front desk person. But first reason the doctor is having to do some of the most simplistic sort of follow-up or coding, putting into the system. And so we like to partner with individuals who love what they do, are really darn good at it, but want to leave another part of the business alone. They do not want to do it. And so oftentimes, like yes, I software, software founders usually are pretty savvy business people as well. And they started the business because they wanted to create something enterprise-based. And they just do all parts of it. We start on healthcare because usually doctors wanted to do good and help people. It was a byproduct of their job to have to do the mischievous part of the business. We say great, you go be the doctor, we'll be the business part together, best in class, and create a business that will help more people in the scale. And that's just how we think about it. But there's so many of the reparsal world that can create value in it, but can be focused. Now we sell people when you have a lot of priorities you have done, and so we pay very focused. Sounds like thesis generation and evaluation is like the furthest thing upstream at sure and how you think about things. Talk me through that part of the business. Where did these these come from? What makes a good one? What makes a bad one? What's the difference between one that almost gets in, but doesn't quite really understanding like how something gets through that part of the process would be fascinating. I want of course each of us professionals. So partners have between three and seven, principles have been two and four, vice presidents have one or two. Only a picture on thesis. Patrick, you may love Virgin Karen. I may hate it. I may love veterinary. You may hate dogs. Only the investment professional picks something they find interesting. I find the best investment. I'm curious. You're curious about something and you want to peel the onion layers back. And so how we work here at Shore Capital is every investment professional, see a professional who's a vice president principal or partner has not done me to pick a certain number of sectors they want to focus on. And they can't force everything. For us, everything starts with a roadmap. A roadmap is essentially a white paper on the industry, complemented by the industry conferences. And also we call the Mount Rushmore of the industry. So in every industry, there is a Mount Rushmore of companies and executives. And the industry roadmap will also include the conferences. So your job Patrick, if you were trying to figure out urgent care industries, you have to lower the green light of sector. You have to physically go to one of the industry conferences in person, walk the floor. You have to identify the Mount Rushmore, lay them out who they are. You have to identify the Mount Rushmore companies, where are the disciples, where have they gone, where they are today, and the pros and cons. Because you had been to 40 to 60 page white paper effectively, present a committee. And you can say, hey, I'm Patrick and I love urgent care. And so why I think we a short couple should green light the sector and turn it on. So whole process goes around that. They present further peers. It's almost like you're standing up in front of 50 people. If you make size changes depending upon the vertical, but you present in your peers are press testing it. And there's this part of so we're organized through our investment in the process. The team is assigned, I assign team members to Patrick and I go forward with urgent care. Be five people on the investment committee. And if they agree to it, they are with you for the whole life of the journey. So from roadmap, through green your board, L-O-I, platform, add-ons, budgets, exit. And they're carrying the future as tied to your results. And so they have their own care for their own deals they lead. They're judged on your outcomes as well. And so they're very incentivized to make sure that the thesis makes sense. They have to also deploy capital. They have to also make sure that they're not to say no to everything. Keep your doctor known. But it's a five person team who effectively votes to green light your sector of urgent care in that example. And there's smart people asking smart questions and there's transfer tracking. Question oftentimes asked is, why does the small player win here? Why does the little guy win, especially in health care, health care is inherently a local business? And so that makes a lot of sense there. But our business is where a small guy wins as well. No, it does not do well. He must be multi-continental. That is not good for us. We're not an investment sector. And so each industry has its own trends. And we try to identify how wins are pockets going and like in health care, especially the consumerism of health care. That thing, something I wouldn't believe in. But it starts with this thematic approach. We're very theme driven. So in this journey, when you're in that roadmap, you're also recruiting your board members. You found out who the Mount Rushmore is. Before we even presented out Rushmore, the whole roadmap, you have 15 people you think could be on the board. When you're sharing with them the roadmap, hey, Patrick, you're the urgent care expert. Here's my page of my deck. Where am I wrong? What makes a bunch of sense? You're getting a bunch of industry domain expertise, bounce ideas off people, making phone calls through LinkedIn, through different search engines. You're outbound. If you traffic in that sector enough, you will eventually learn the good guys, the bad guys. You will learn who everyone respects. Tell you one trick of the trade that we use in a fair amount and I look at all the time is you could call up the industry association, the urgent care association of America. You ask them for their agendas, for their last five conferences. If someone spoke twice or more in the last five years, pretty darn good proxy, the industry respects them. I want to meet that person. There are little things like that that the industry itself, there's always industry panels about the lawyers and the bankers, but industries promulgates certain people and you want to get to those individuals. So for me, everything's about the industry. Industry becomes the core of it and then that partner in a short cap or a vice president or principal, they own it and their job is to know and they often may invest in that sector to three, four platforms of their career or more. My partner Ryan leads urgent care for us. He's done three platforms, urgent care sector and one specialty does more. My partner Chris has done it. Soon three dental deals. So your job is to know the sector really well. For a time, it may change. It may change if you want to invest in it again, but it almost becomes a strategic choir after a period of time because you know the industry so well. I tell all times our executives, our board members, they've forgotten more about the industry than we'll ever know. For finance guys, our job is to be most educated on domain expertise and press you to want to try our team because we're prepared. We want to invest. I'm telling a seller is when you choose to sell somebody or partner somebody, there's two parts of the deal. There's the macro and the micro. The macro is do you believe in the sector, urgent care? Micro is usually my company. I want to take one of those two off table. I believe in urgent care. I have a whole machine behind me, 50 page deck here at my board members. We create a board before and by the company. So you get the industry, we get Greenland and we recruit a board. We don't have all several of them will have easily three or four of them and they're required to go with us to meet the sellers before we buy the business. So in these early days, you get the main knowledge, you have people around the table who know the new options of the industry. I'm telling the seller, don't worry about the industry a longer because if it's not you, I'm going to invest in urgent care. We're going to invest here. Now all we have to do is agree upon why you're investing in class and why we should together go build something pretty special. I think that resonates with sellers in firm work. Yeah, let's talk about within the given thesis, starting to look at the individual assets, the individual companies, the diligence process and what you're looking for or looking to avoid. Once you get down to the actual thing that you're going to buy, describe in whatever you want the things that matter most to you. I'd love to keep walking down this chain and negotiation and operations after the close and everything else. But starting with, okay, we've got a company that's interesting for some reason. What are those reasons? What are you looking for in diligence? We're almost always doing a role at the sector. We're almost always consolidating. One of the things that I look for almost right away is reputation amongst your peers in industry. There's a really simple test. I'm sharing people right inside the baseball club that anyone should do something that's rocket science. Use ophthalmology as an example. We'll try and find an ophthalmology company. I'll try and identify in that same town, three or four of the ophthalmologists are practiced in town and call them up and we'll do a secret shopper or something and ask them if your mom had to have a cataract surgery and she could not go to your practice. Who would you center to in town? I want the company that I'm buying to get that list multiple times. Now, you recognize there's always in town a coconut path. See, there's somebody that likes to learn somebody doesn't, but people in town know who is pretty good in town. Why it's so important is reputation of that first group is everything because those who are in the know only want to join the winners. The New York Yankees are all the time few days when the best major league baseball teams. I'm very different to play team. There's no way the Los Angeles Dodgers want to join a triple A team. The Dodgers would join the Yankees in a roll up of baseball industry because they're viewed as best in class. So I think we have to take the same way. So reputation. Number two, I want a founder who has a shared vision to grow and has a desire to learn. Back to curiosity. They want to understand and want to grow a business beyond their own means and they're excited about partnering and they have an open book. Our best founders, clinically, technically, there's a baking sweet goods or a doctor or a plumber and we have a water safety business. It's so important that they're really good at their craft and they able to identify who or others good at their craft. So to me, it's reputation of industry, technically sound. You don't hear me say imagine team are often do you? Because it's important what we're going to go build. We're going to take what you all have and surround you and come into you. Often times the founders are going to be a role but not CEO and we're very clear of the front end. By the way, our biggest company is a veterinary company. We started when it was five of revenue, one of the three locations. Today, it's over four other locations, over 1.3 blade of revenue that's found. veterinarian and still a CEO. So that's one extreme. That can be one extreme. Another extreme I could say Patrick you're a great murder-serium doctor and we're going to partner you're not going to be a CEO in our thesis. If you're okay with that but you want to be the chief medical officer we would love you to be the person who helps recruit other doctors this team and sells a value proper why we can help people enroll parts of America better than anybody else. And so to me it's very much reputation, technical skill set and a willingness to learn and a curiosity and want to grow. Those are the things I really focus on. There's always the minutiae of customer concentration and reputation but reputation is encapsulates so much because this is a role of thesis. Not even buying one business in Stingstone. We're growing our business usually over 100% per year organically and organically. I would say on average that leopard roll-ups have sort of a bad reputation. Why do you think that is? I would say if you see a one-leather roll-up you see one-leather roll. There's no flakes. Like the restaurants are good restaurants are bad restaurants. The standard dynamic oftentimes they get bigger also. The founders have already left the organizations. Now in the earlier stage when we start these founders are very hungry. One of the growth businesses and we get to under lever so we don't put pressure on these teams with leverage. We under leverism has no leverage at all. Also I would say people point fingers at roll-ups in a way because the targets on the back of the winner. It's hard to identify all the small little ones. When you have 4,000 employees you're going to have some of different. Some of them leave the organization so you hear more of that noise versus a four location versus a four hundred location. I generally believe that roll-ups end up in a better quality of the business. Usually at least for us we create usually a technical advisory board so it can be a bunch of arts and bakers. It could be a bunch of veterinarians. We want to have a technical advisory board. We have to bring together and create a dynamic of what is the best in class, delivery of the services. We spend a lot of time on that. I recognize that more arrows are shot at bigger companies. No one talks smack out the triple-18. They talk smack out the New York Yankees. You know why people start in the New York Yankees. I think it's easier to point fingers at and do bad things happen. By normal scale if you have a four-in-a-location more likely one does it go as well as if you have four. But I think in totality those businesses are able to pay their employees better. A better margin profile. Therefore deliver a better quality of service to the customer and the day. Why do they exist? Because customers keep shooting them over and people ignore that part of it. They're like, "Oh, lever business that is a part of a levered roll-up." Yeah, but the customer keeps picking on one know why. Because they believe it to be a better vet, rob thing going to somebody who is not part of that roll-up. And it's because usually they can offer more services. Hopefully a higher quality of care. There's smart people running them with metrics like net-primorescorer. You know, other things they've amorphous kid identify this is my customer wants. I'm delivering it in a very efficient way. It'll work us. What have you learned about negotiation? A lot of deals are done. So people say to me, "Just in your private area of finance, I quickly correct them." I say, "No, I'm in psychology and sales." Look, end of the day, I always tell our team members it's sure. We've done almost 900 transactions. If had zero losses. If we ever pull out that document in the future, I have to look at it. We've already lost. We negotiate to do our best to have all the sort of things button up and start stuff. But end of the day, I want people to believe in the growth story. They have to believe that we're building together. No lawyers sometimes will try. I'm a former lawyer. I'm a recovering lawyer. I understand the lawyer's job. But no, we're negotiating. The most important thing is negotiating. Make sure we have catastrophic downside protection. I had to make sure Patrick was on the front page of the Wall Street Journal for doing something uncouth. I didn't always separate. That's important to me because that has risk. I think the most important thing, especially to be able to roll up. I think most of what we get it is what we have to do is create an environment in a structure so that not you, but someone else down the road or do something, we need a way to unwind that person. If you wear your shareholder hat as opposed to your individual hat, I think most of our partners get it. They go, "Okay, now if I were to do something wrong, that'd be bad." But you can tell yourself, the hardest negotiation is that unwind part. I know we've never had to dissolve, never had to be worse than three times our money. But I think the negotiation time where it ends up most often for us these days is, so is negotiating for a larger part of the upside. That's where we end up negotiating. We're used to be doing a 20-deal now as being 64-der, 55-45, and that's where a lot of negotiation comes. But any day, we prefer in-person. We're not fans of Zoom in negotiation. I want to look at some of the agencies. What we're going to do? Yes, I can't write down a paper all the weird things that happen as world. But if you trust me, go talk to these 25 references. I'll give you everyone they're partner with. Trust. And I think those documents we failed you. And so, not saying we haven't unwound partnerships with people have not worked out, that's definitely happened. But on the negotiating side, to me, it's being very thoughtful about who you're partnering with in the big picture. That's, I think, strategically. But I'm going to get one little down more tactically. I think I made sure to see on our last phone call. We have a system at Shorecount with all our green yellow red system, which basically for every material document in a transaction of purchase agreement, an operating agreement, an credit agreement, an employment agreement, at least, there's roughly 15 key terms on every document. And we let's all those out. And we let scoring system internally. And I use the simplest term, a non-compete. Everyone knows and not compete in sell business as part of the transaction. Five years is market. That's what most time it is. This four years, that's pretty, I think, pro seller. Anything less than four years is really pro seller. We have very simple system. Back to why our teams can grow. And people in the gosh of the row and deals is a home pirate system that everyone on our firm knows how these 15 key points, they know they agree to on their own and know they need to raise up the flight pole. And everything for me is a function of price in terms. I'm willing to pay you a billion dollars if it's a dollar a day for the next billion years. So, if we're going to be able to ever be in so on the negotiation part, I like to figure out a way that strategically partners feel like they're part of our team for the beginning and they're negotiating not in their employee hat, but in their shareholder hat for a long term. And more tactically, only of our vice presidents, principals and partners thought, "Ponomi, to negotiate their own deal." I believe the very best people want to super long leash the appropriate seconds. Give them that autonomy, create the rules, excretations, and then give them a scoring system, they compete with each other. People love competing with each other. And the best delish shine on them, and that's what we're trying to do. It's a fascinating set. I just love all the systems and how they all intermingle. If I was the world's most skeptical but thoughtful LP, and I was looking at all this, I'm sure you've probably talked to this person, you probably picture somebody, what do you think they would poke in on and say is the weak point of sure in this whole system of systems? I think it's that first time CEO, the early career energy, are there enough of them out there? He were high enough quality that can scale up the next level. So I agree with that. So we internally have, I like the home grow. And so we created this program six years ago, call our CXR program, where we recruit from the best business schools, Stanford, both Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame, well, our individuals have come to short capital, albeit chief of staff, the good old one, portfolio companies for four or five years. And if they're one of our very best, we'll promise to back them next. And I think the unique, fun dynamic, I'd be lying to you if I said I'm about a 31 year old as a CEO of a 1.3 billion dollar out of the business. But my average business is 18 of revenue I buy it. I sure will make a 31 year old first time CEO if they perform well in the past. And so the biggest risk is the high quality talent want to run small businesses. I think though there's a lot of making to it. And so we home grow our CEOs through this program, call our CXR program, we home grow our CFOs. We hire people a lot of big four accounting firms usually come to short capital for a 30 month tour of duty. They go through this program and the best ones who come CFOs. So conceptually how I think about is they offset it by recruiting and home growing my own CEOs and CFOs. That is the risk of, are you going to trust for a roll up? A CEO is 41 years old first time. And one of the biggest challenges we get into a roll up and somebody's that's not going so well, CEO is wrong. But there's a big pipeline just you're buying. It's hard to unwind that and start again. We've done before. That is the biggest risk is that we're doing our roll up. We change leadership. But that's why the strong board, especially when someone steps off the board becomes CEO. I think that's where I would be if I was poking holes in my own firm is can you find enough CEOs and CFOs and leaders? I believe the answer is yes. And we try to home grow them and also. As we needed to grow our firm, we have a system internally in cover all start tracker. Each company has its own list that are internally the people we've been our best in class and we'll use them again in the future. So how I think about is talent wins. But that talent is system. I think the system was. But the whole is enough talent at the velocity that we're building businesses. There's this great book called innovation stacking by one of the founders of square where the whole idea of squares eventual moat was all these small things that are built on top of each other. And then the chain of innovation is itself the competitive advantage. Sure, really reminds me of this one thing that we haven't talked about in this theme of innovation stacking is how to decide another fund vertical to go into. You have a real estate fund, for example, like that's like a surprising thing coming out of healthcare. Maybe tell that story. Why real estate and what is your philosophy of stacking unfair advantages and how to think about that as you build the firm? I think stacking unfair advantages, court everything I think about how do we have an unfair advantage? So I do a market cap. All of our funds in healthcare for the beverage business services and dustreels. That's its own product. But real estate is different product and the next show is from product healthcare advantage fund. I tell our LPs and tell our team members a short cap rule. I will only add a new product if two things are true. Number one, we have an unfair advantage, meaning that odds are tilted of success in our favor because of the dynamics. It helps the number two is help my based business. So real estate. So we have a real estate fund. We were acquiring so many veterinary businesses. No, I think no, several hundred that we kept the always sell these backs and it was slow in other deals. Those cause and problems for us. And so we felt like there's an unfair advantage by I know the CEOs of my veterinary companies quite well. There's an opportunity where they want to stay in a location for a long term, but the underlying real estate is owned by the veterinary and they often have the one invested in that. So how do we figure out a dynamic where we know the location is great, the underlying balance sheet of portfolio company is great. We have an unfair advantage of knowledge and specific knowledge of the location. And then it helps my based business because I can do things to help the base business so potentially lower the rent and exchange for longer term on the release. So the lease becomes more valuable in the market ecosystem. You can aggregate 100 of those together from the valuable asset because more valuable to the veterinary company by having a lower cost lease or more capital for tenant improvements. So it's a win-win win scenario. The portfolio company wins because they have more EBITDA or more capital expense. The real estate fund wins because there's an opportunity to elongate the lease and exchange for some things that creates a better value over time. And our investors win by low cost capital will work in a more efficient way. So all parts of that makes sense. So summarized I would say we will only extend products that short capital to things are true. We have unfair advantage, it helps my base business. And I know having real estate fund helped my base business on the acquisition and also the underlying portfolio companies. There's a care and conflict. The conflict is not in the buy though. The conflict's in the lease. And there's so many reads out there with public leases. We have ourselves. Just take the read that's out there. Use the lease from somebody else and just move it over and make the same terms. And so that's how we think about it. But the other products that we do in the future but they have to help my base business. I have to have an unfair advantage. - Talk mostly about what you buy and what you do. We haven't talked about selling these businesses. Who do you sell to? What have you learned about the relationships with those sellers? You're selling a product. The product is a business to some financial or strategic buyer. What are the features that they look for in a product and how do you think about that final part of the chain here? - So picking an actual buyer over 14 or 14 sales, I never make the right buyer. But prior founding shore, we're probably the type of firm that partners have as well. I hear in my mind, over and over again, my old boss wanted to buy. I can think what they used to say over and over again. And so how I think about it is, it goes back to how we organized. We would say industry management company back to the very beginning of the conversation on the industry, the roadmap industry is growing. And I think about the industry growth of a 15 year cycle. 15 years ago, it'd be my whole period, five years, my buyer's full period, five years, my buyer's buyer. It's kind of a 15 year time period. We sold two public companies, a lab core and home company. We sold to the biggest private equity funds, KKR, TA associates. We sold two private equity funds and we've done some teamation vehicles as well. And the day I have high confidence, the following statement, if I buy a business in a growing industry that is I'm buying an inefficient part of the market, we make it better, we grow it from single digit EBITDA to the teens to 30 EBITDA. We will have lots of buyers, both strategic and financial sponsors. So whether it's with a platform or an add-on, I think I like that situation. I like to invest in what we call bar bill industries. Meaning there are usually four or five very large players. And there are thousands of mom and pops, but not much of them. I want to go create the new middle one and then larger players want to buy it. And so in the day, I also would say, larger funds want to buy, which by the way, some of my investors are friends of mine who run quite large funds. I hear, I talk to them, I want to buy a business as a proven track record of acquisitions. Organic growth that beats the industry average by at least 300 basis points, one technology stack system that all businesses are on. Because when you have those three things, you can acquire, you can make them better. I want technology system. They can buy it from you as 30 EBITDA and go to 100. And so we're basically, we have to say a short capital. We are building platforms, not buying platforms. We like to think of ourselves like a venture capital firm in that venture capital firms, partner with a founder, great founder's an idea, but usually has no a relatively small team. And then the venture capital firm works with them. Hand in hand helps create a whole entire management team. When we buy businesses that kind of work with the dot index business, we'll buy one practice. We'll do one practice with one gentleman, one lady, and we'll go hire a CEO, a CFO, head of business development. We will go build a whole entire platform. And on this journey, we'll have some mistakes along the way. We'll add an a lot of awesome people. And when we're at scale, we should be in the mill of the fairway for a fund that wants to employ between $50 and $300 million for a platform, which is a billion to $3 billion fund. That's where we play in the buying environment, the inventory that we're creating, I think, has strong demand. So funny here, you describe all these elements that I'm just picturing this big, effectively, like a money machine. The widgets themselves are companies and platforms. And you're perfecting the factory, if you will. What parts of the factory floor do you think are interesting or surprising that we haven't talked about yet? So I think it's our focus on operations. And so, again, I'm not smart. I know we're going to copy. I know the first round capital, the venture capital firm. I get to know a little bit in the copy of what they have done. I think my factory floor is what I call our operations team. We call our portfolio performance group. And a group called the Centers of Excellence. Why buy businesses? 18 and a half with three people. But my marketing department, the person who runs it is not somebody who's run a very large business. What we do at Short Capital is we have a Centers of Excellence. Joe, my name Adam Werder. He runs my marketing Centers of Excellence. He's a team underneath him as well. His job is to be the node. And for our 43 portfolio companies, his job is to create a cohort of the head of marketing from all 43 companies. And they all four times you get together. Twice by Zoom, twice in person, countless email interaction in between. And this is my factory floor where I call it lift and shift. I am getting the newer companies to ready to go faster. And I example, that would be orthodontics business. It's a B2C sort of marketing engine, no SEO marketing, and sort of direct marketing to customer orthodontics. It took us years to build a platform to get to the right system process metrics for you. About a year ago, we bought a MedSpot business. The marketing is very similar. It's B2C as well. And so we lift and shift. The Adam's job is to help recruit, take the marketing layer, work with them, and throw the right person for long-term grade. If not, overtime work with the CEO to help top grade that individual. But then lift and shift, the systems and processes, the tech stack from marketing and orthodontics business and apply it to the MedSpot business, or apply it to the MedSpot business. There's so many different personas we have that things change a little bit. But the whole paired journey is, I think, some of the secret sauce is not replicable unless you hire the right people to do it. But to think about as we have $1 billion company resources applying to $9.00 companies. And so the moment I'm Julian Lerimer, as a leader of our division, she's a former private, we back CEO and probably talented. She runs the whole entire group. Roughly, I think 13 functional disciplines, effectively a senior management team from a Fortune 500 company that work at ShoreCapo. And their job is to help every portfolio company that discipline get better. When she did it off-served, she's technology officer, head of human resources, head of talent. All of these people help all four three companies and elevate all of their games. - I think you told me that this is a crazy status. It's true that nobody above an associate level has ever left Shore. How have you made that happen? There's a lot of people, a lot of years, a lot of companies, talking about career trajectory in the system there. - So you have 150 full-time people. So if you're a vice president, a principal or partner, not one person is ever left ShoreCapo. If an associate's go to business school and then come back to a VP, I think we have about 43 or 44 people who are in that bucket, not one person's ever left. And lots of the philosophy behind it. So I think a little bit of it is hard to be 35-year-old, look at the founder, is 46 and say, "When did I get my chance?" By having different verticals, healthcare, food and beverage business services and dust drills, my most talented healthcare vice presidents went down to become, principles of my business services fund. The same thing in the dust drills. There's a little bit of a waterfall where the homegrown talent moved to a new vertical. My dad always taught me a couple of things about to retain clear people well, but he said two things, Justin, pay the market comp or a little bit above market comp. And most importantly, people don't quit their friends. So my job is to create an environment where they come friends with each other. And so that means holiday parties. It means we have things called a party and we sell business, we have them celebrations. It's important for I think leaders to know each other's spouses. And so I think it's really investing in your people because Vama's a seller of a business. The thing I fear most, if I have a friend who sold a business to private-acquit firm, I want to drill in really carefully who is the partner on my deal and who will be with me this journey. 'Cause this turnover in those ranks it's really hard and decreases your odds of success. So I think it's core competency to private equity and for my business is to make sure that people stay in the same way they're partnering with the founder and in the business. And so I guarantee you forever ever be here the same way. The answer's no, this is not realistic forever. But for 15 years now, no one's ever left. And I think it's because people don't quit their friends and my job is to create an environment where friends develop. Pay them in a way that they feel really good about and have financial upside. And again, go back to your really long leash to the appropriate seconds where goals, nerves and goals are oriented. People know their own goals, set their own goals and they know when they're performing. - Yeah, I love the idea that I think you pay for people's dinner if they want to go out of fish three people or something like that. Like every little detail is a double. career. more. I want to go to the general pay for it. One of our younger guys names Tim. I will say his last name, but Tim, you know, you are, he like a big build a club one night. And he said, there's three of us. And I was like, Tim, I'm paying for this one time, but clarifying point, if it's a bill over $x at a club, it doesn't count anymore. I love it. I always drink this is the everyone team loves the kid. He's a great young man. And he's awesome. But I was like, it's meant for not a club, I'll service somewhere. And I'm not paying for that for everyone for a long term, but he follows roles and he's a culture carry. And I want to create nodes of culture cares. People who want to be here. It's a very high bar. I can't the vice president though. But it makes my president. I'm basically telling you, I view I'm saying to you, I want you here for a career. That's what I'm saying to you. It's my job to get an environment that I want to be here. You obviously love sports. You have spent a lot of time thinking about sports, the leagues, teams, you're now an owner talk about why you love this so much. And more importantly, everything you've learned about becoming an owner of major sports franchises. Yeah. So no, my brother and I are best friends and we were fortunate enough to become the controlling owners of the Phoenix Suns about a year ago now. February it closed, we signed a contract in December last year. First of all, we're stewards of a community asset. We don't own the team. No, it owns a team. Fans, the explain people live in Phoenix. That's the owns a team. And there's a lot of knowledge. Private equity investing and sports and metrics and numbers. But we buy a business. We did and we partner with Phoenix Suns. Yes, it even works there. The first day, Matt and I met with every person in the head of the town hall meeting. We all sent a survey out that said, tell me the two things that we should keep doing here. Tell me the two things you stopped doing. We did all the time, a short couple also. And we got over 300 employees roughly. We got 207 some responses. And I read every single response. And I think it's important. This isn't the glamorous part of no partnering and running businesses. But the details matter. And you hear themes of the coffee sucks. Okay, that's easy win. How do I make some easy wins on the way? But the sports business is a complicated business. I view sports in private. You're very similar. And there's a scoreboard at the end of the game. And private equity takes 10 years for the score to flush out in the NBA. You can see tonight. If you want, are we lost? But there's lots of similarities. And I love that there's a zero some game in sports. There's only one champion. Matt and I talk about all the time in 30 years from now. People look back at it and hopefully Matt and I's ownership and stewardship of the Phoenix sons and the Phoenix market. We're really excited about the Phoenix market. Is that no one's they, oh, they improved the margin by 400 base points. And no one's either crap. They're going to want to know where they competitive and they win championships. And the day we have four pillars. And like all of us, a short couple, it's goal oriented. It's values. It's core values. And so at the Phoenix sons, number one, when I created a raving fan experience, it's got to be an amazing fan experience. People forget it's not a sport entertainment. These people have choices to spend their money at a movie theater at a driving range or a basketball game. So I'm going to do a raving fan experience. Number two, take care of your employees. On a place where there's a great place to work and people are happy and they want to be there. Number three, work community asset. Get back to this community. Be stewards of this community asset and do right by this community. Number four, win, win championships to win and everything they try and do. And so sports investing has become, I think, a bigger trend to last decade or so. Now we're big fans of it. I don't think there's going to be more NBA teams in the near future. Maybe one or two, but beyond that, but there'll be more people throughout America. And the day, I think it's an intellectual property at his core that has much like the highest and best type of real state, the corner state in New York. Phoenix sons are going nowhere. Phoenix, Mercky are going nowhere. And so it's a fun opportunity. And it's a really opportunity to give back to a community and hopefully create memories. Matt and I grew up playing sports. My best memories were my mom and dad and I met going to games. We didn't have the best seats of those days, but our heartbeat was washing already try pistons win or lose. And I hopefully create an environment like that. That's the fun part about sports. It's a platform for good and for change and get a lot of positivity. And so we're really excited about that. Has anything surprised you so far about how the league, the teams, the ownership, the ownership's function and work anything been really surprising? It's much more of a partnership. It's 30 teams. I thought it was between the white lines. It's fierce basketball operations like no, it's like no, it's a zero sum game. But people are quite collaborative. Some of the people you know, they're well known when we joined the league, the next one guys at lunch and he said, congratulations, you're brass, you're young. I was the same thing. You'll make much mistakes talking five years, but have fun on the journey. So people are very helpful. And the day we weren't creating great fraud for a fan. And NBA is a great opportunity. And other teams might help each other. They want to help each other. I want you are sitting to be full. I'm nice to be full. And no, I want to go and go lose as I want the other sports or I want other entertainment options to lose to the benefit of the NBA. But I think the camaraderie and the voice help each other, I think, has been something not just in the game, not just in sport, but also outside. I'm doing something in a different community. And Oakland for something, I need somebody they able to open a door of somebody that's been really helpful. And we also, you talked about Mark Leonard before and you're just like a benchmarker. You remind me of Mitch Reils who were facing in a new challenge. Interestingly, also doing this exercise with the commanders right now. If it's about the stadium, he's meeting with 30 stadium owners and stadium operators. If it's about something else, he's benchmarking constantly looking for great ideas. And it seems like you've done that. Who apart from Mark stands out as key individual people or firms that you've learned from? I've learned from certain people. Sequoia, Capel, they've been great to me. They've been over there. They're different. Sequoia heritage, no more specifically. There is a group. They have a network. And I've learned from them of the power of a network and introducing really talented people to each other. People with professional success are very slight at all. These are time. Creating an environment or bringing the best and brightest together. I think creates a lot of opportunity for success and unique outcomes. So I think some of the people over there are Kevin Kelly. It's one that keeps Johnson to that stand out a whole bunch more specifically in the private community. One individual who I've learned a ton from a mentor of mine, his name is Kent Dotton. He's a founder of Keystone Capel. He's my opinion amongst the most humble and successful people that ever come across. It's a steady hand or we'll do the right thing over and over again. Also, a gentleman named Jim Forrest, who was at Winpoint Partners for number of years. He is now chairman of Short Capel. He is an operations leader at heart. He's always think that the customer, the customer, the customer. Mark Leonard has been a great friend for me and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined on process. And then there's a professor at Harvard Business School, for executive education. They're at a school there named Boris Forrest for another ton from as well on process. And he studies, mentioned other people in the DBS community. And I think he said, pick one business that I aspire to be most like on consistency and process is Donner. There are people, Donner leaders who are in the boards of my business. So if you're a crew of people from Donner, who are retired to be on our boards. And so, those are people I think that end of the day, you have to find your own niche of individuals who want to support your vision and want to be around the table and have a good heart that want to help people help me in the way up and help me and I want to be able to do that to others as well. My guess is that you're effectively never satisfied with the system. It's obviously evolved a lot. It keeps improving. Where does it feel the most incomplete to you today? How do you most want it to improve over the next five years? Most incomplete, I think you're never complete at the short capital level of operations. I get frustrated when I hire a new team member and their first two weeks on the job, their 10 business days aren't scripted almost by the hour. They need to know where to go. The onboarding experience. I'm very much into experience and process, making sure when we've made a mistake somewhere else, it's the pomadee's and the whole entire team. And so, you have a thing called what you learned every time you close a platform, we do a one or two page on what we learned and we should have the whole entire firm. How do you balance with scale, efficiencies and knowledge sharing? That's the hardest thing I do every single week, trying to balance those things is more efficient for very small people. I don't know things, but it's way more valuable for knowledge sharing. I didn't think of short capital like an academic teaching hospital. My job is to teach our principles, vice presidents and partners all the mistakes we've made elsewhere. And so, the biggest challenge is, it made mistakes not making the same mistake twice, documenting it and making sure that it's front and center, having a system around it. So, be a less short capital playbook on operating things like, for example, we made the mistakes in the past where we did not renew a lease at a portfolio of a company and on an important location in the land lord extracts the pound of flush out of its after the fact. What we did after the fact is now all of our businesses are required to have what we call the be squery on the system is called the be squery and all of our leases of all of the points in the system to make sure we never have that mistake happen again. So, there's prompting. And so, I think the biggest way to improve the organization, I think it's hiring more and more talented people, getting tighter and tighter on process, making it incredibly clear and reducing the likelihood of making the same mistake twice. I say all time, a short capital, we're very rarely as a problem of first impression. When you have 35,000 team members and you have hundreds of locations and you have everyday things you're appearing, the same mistake can happen twice. How we reduce those, go that and that's through knowledge sharing, but doing it an efficient way. Is there anything about how you spend your personal time that you wish was different? I wish there was more time, I would say, to work with sellers. I've not let a deal on short capital in seven or eight years now. I miss some of that relationship with building with sellers. Those are really as a short capital. The board members, I personally recruited. I was one of four partners and I was lead partner on a lot of those early deals. As the firm gets bigger, my job is to run short capital and give people resources they need and remove obstacles for the system and the whole organization. But you miss the newer boards that created a lot of great people. Some really tell the people, I just don't know them the same way as literally boards. It's almost like, you guys, cool. You know them better than your work buddies. Not that you don't like your work buddies. I like them a whole bunch. It's just that my school buddies have a little special space in my heart. So leading a deal, negotiating a deal, working with a founder, recruiting a CEO, I do less that. That's come into the very end of it. But no, I do miss one of the best questions I think that LP has ever asked me. And if I was an LP, I'd ask people saying question, do you think you're a better investor or better manager? And why? And I think at least for me, the right answer for short capital is I have to be a manager. I love investing. I love buying companies, but to create what we want to create and build anything our system grow. We want to just want to grow. It's a manager. You're a leader of people. You're a imagined system of processes that create increases the likelihood of success of many things at once as opposed to having a very effectively really one deal, but that is not the great same value for our investors and party members. And so I think it's my job to create an environment of kind of see one, do one teach one. And that our best people do the things that they've seen done before. I would very eagerly read a long white paper or HBS case study or book about all these various systems. I'm really thankful for your willingness to share the very specific details of so much of what's behind sure. Most firms are not willing to do that. And I think it's pretty cool that you've done it here today. I am sad and forced to go to my traditional closing question. I could go for you, you know, in this system for hours and hours with you. What is the kindest thing that anyone's ever done for you? That's a great question. I've heard you've asked it before. No, I was fortunate to have lots of mentors and different people in my life who made a really big and positive impact on me. But one, I think actual piece of advice on gave me and I backed it on the last decade for sure. I'm proud of my telepon some people that work my organization goes advice is this. I try and have one friend in each decade of life. So a friend of the 30s, friend of the 20s, friend of the 40s, 50s, 60s and 70s. And the idea behind it is you truly have a friend in each decade of life. When you go to those moments in time and you actually call upon them for their wisdom, their experiences, whether it's not losing a loved one, a mom or dad, sometimes happens most often your 50s or so or 60s. Or if you end up having no child, that all things happens most often in your 20s and 30s. But it's a really big piece of advice that on the personal side help me a ton, also on the professional side. Things you go through that experience you have in your 70s and you're winding down your career, the emotions you may be going through in front of share with me, the things along the lines of, all my peers are working anymore or really hard to try and go get new business and promise someone to be helpful when they're kind of going, are you going to be around here in five years? So some changes that you know coming really some 46 from here in that 25 years that could be a possibility, aware of that fact pattern, how to prepare myself best for it. And so having a friend in each decade of life is something that I focus on. And it's a pretty great value for me and I hope others find a title. Justin, you built a fascinating business. I'm excited to do this again in five or 10 years and see how it's all unfolded. Thanks so much for your time. Thank you so much. I hope you want to do it again in the future. You've built an amazing podcast in following so thank you for watching the Sheriff's Story. Thanks for your time today. If you enjoyed this episode, check out JoinColossus.com. There you'll find every episode of this podcast complete with transcripts, show notes and resources to keep learning. You can also sign up for our newsletter Colossus Weekly, where we condense episodes to the big ideas, quotations and more, as well as share the best content we find on the internet every week. [Music]