CPG Due Diligence: The Operator Framework Behind a $800M Exit | Keith Levy Part 1

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Let's jump in. Today I'm back with Keith Levy. If you caught our first conversation, you know Keith's arc.

24 years at Anheuser-Busch where he ran a billion-dollar marketing budget as a CMO, then president of Royal Cannon USA, where he doubled revenue and tripled earnings, and then running global business development at Mars Wrigley, where he led the KIND acquisition.

Today, Keith's an operating partner at Sonoma Brands, a growth equity firm backing disruptive consumer brands. He's been in the seat for about 6 years now, sitting across 20+ portfolio companies. He stepped out of the boardroom to run one of them as president for over a year. Last time we went broad. Our interview. This time we're going deep on how Keith actually operates, how he evaluates deals, what he sees in diligence that finance guys miss, what separates the investments that work from the ones that don't, and what happens when an operating partner has to become the operator.

Keith, welcome back to M&A Science. Hey, good to be back.

Since we're up here in the mountains close to Breckenridge, when we're tilting a little Breckenridge bourbon—

there you go—

a little Breckenridge bourbon to, uh, podcast number 2. Thanks for inviting me back.

Podcast number 2, probably the highest altitude podcast I've done. We're like 9,000 feet up in Dillon, Colorado. Indeed. Can we tell listeners the podcast prep for today for this interview?

Yeah, podcast prep was an early start on the mountain at about 8:30. 8:30 start. Probably about, I don't know, I'm going to take a guess, maybe 18,000 vertical feet, skied hard in the snow, and then came back and prepared a couple of fabulous cheese, spinach, and truffle omelets. Truffles courtesy of Kison Patel's trip to Italy. So that was kind of how we got to where we are now, and here we are. You forgot the hot tub. I did forget the hot tub. The hot tub is always a highlight, but I do it every day. It's more special for you. You're right. We had a nice hot tub with some tunes in the background and some content prep for this. That was the prep.

And then I spent about 10 minutes with AI to actually prep this outline. I can make sure we have a good conversation.

Indeed. Looking forward to it.

I always start with the simplest question. Can we just kick off with a brief on your background? I try to narrate a little bit, but I love to hear from you to build on what we're going to focus on in today's role.

So you said some of it, but I essentially spent 40 years of my career in consumer packaged goods. I began my career in in the wine business with Gallo Wine Company. I moved out to California after graduating college at Kent State University and decided I wanted warm weather, new surroundings, and a new challenge. I learned a lot for a couple years and found my way to Anheuser-Busch, which was a place I stayed for 24 years. Did a lot of different things there up to including being the head of sales and then the chief marketing officer, and then also working through a pretty significant combination when we sold the company to InBev in 2008 for a $52 billion all-debt deal. Stayed around for about 3 years to help bring those businesses together, which is pretty heavy lifting if you've never tried to bring together two $50 billion companies, but was great experience. It was probably my first real hands-on understanding and daily implementation of integration, big integration. Like most things, when you sell a business and you help build it for 20-plus years, it feels like a different place when you have new sheriffs. And the new people who were running it, I exercised my change of control provisions within the 3-year window and left. I stayed from 2008 through 2011 and found my way to Mars Incorporated. Mars gave me a chance to run one of their pet food companies called Royal Canin in North America. I was responsible for the US business. It was a phenomenal run. It was the first time actually running a company. Had 3 factories, had over 1,000 associates we grew to by the time I was done with it. As Kison Patel said, we're very successful of dramatically increasing the top line, but also increasing the bottom line, which is kind of an important combination these days. We'll talk more about that in terms of how we think about it in small companies that we invest in through Sonoma Brands and how we think about exit. But did that for about 5.5 years, and it was one of those magic carpet rides where everything we did worked. I built a great team. I took some risks. I got in arguments with the Mars executives about what I wanted to do, what they didn't want to do. And at the end of the day, they deferred to me as the operator of the business. And 99% of the time it was a good call. And again, I've really just had a great experience doing that. And like most things in my life when it's going perfect, I have to create chaos in it somehow. So I moved to Chicago when Mars asked me to help them merge the Wrigley business and the Mars chocolate business. Wrigley was an acquisition in 2008, same year we sold Anheuser-Busch, by the way, and had not integrated it for a whole host of reasons. But one of the biggest ones was we still owed $3 billion to Warren Buffett, who was holding the remainder of the debt. And if we didn't pay him off, then he would de facto own part of the chocolate company. So we needed to Clear him out. And then that gave us the wherewithal and the operating room to bring the businesses together. My role outside of being on the executive team to do those things, because I've been involved in big integrations, was to create what I would call a platform for the portfolio of the future. So Mars has amazing brands. When you think about Mars Wrigley, Snickers, M&M's, Skittles, Twix, Wrigley Spearmint Gum, Orbit Extra, but they're all off trend on a whole host of factors. They're loaded in calories, they're loaded in fat, they're loaded in ingredients you can't pronounce. And when I came in, it was really to about, okay, what could we do to really build the portfolio of the future through M&A, through incubation, and through early-stage growth investment with companies that may need our help and we can help them create terminal velocity. And along the way, maybe we could participate in that investment together. And did that for a few years. And as Kison Patel said, I led the multi-billion dollar acquisition of Kind, which was kind of one of those things. It was the exact reason I was put in place. People used to eat a lot of Snickers bars as an occasional snack. And today they're turning over the product they're eating and looking at the ingredient panel and looking for healthier options. So you think about a Snickers bar that has peanuts and nougat and chocolate. You think about a Kind bar that might have peanuts and chocolate, but maybe honey and dates as a binder and a healthier offering, still maybe 140, 150 calories, but at a lower glycemic index with ingredients you could pronounce and ingredients you could see through a clear cellophane wrapper. So it was a phenomenal acquisition for the business. It was my first really big deal that I led and did on my own. And there was a lot of, lessons learned and a big step forward in trying to, again, future-proof that portfolio of Mars Incorporated brands to bring in more consumers that we could offer products that were more on trend with what they're looking for. Now, I punched out of big corporate America back in 2019, and for the last 7 years I've been quote unquote semi-retired, but working as an operating partner with Sonoma Brands Capital, which is a, again, as Kison Patel mentioned, a consumer products-focused growth capital firm. I've got about 25 active portfolio companies. We'll talk about some of those and some recent exits that we're very proud of. I have taken a couple of board seats on some of those portfolio companies over the years. As Kison Patel said, I've stepped in to run one of those portfolio companies when I felt like it needed some help and maybe some experience that would be beneficial to the business. I lead due diligence on deals that are in my wheelhouse: pet food, beverage, alcoholic beverage, snacks and treats. If there's a business that we're looking at, we looked at one last week. I flew out with our partners and kicked the tires and looked under the hood at a potential investment we may be making in the future. I've done some expert witness work. I mean, I've got 40 years of experience that I think I can leverage to help create value. And along the way, maybe sharing some of that. And it's just fun for me. And it's only so much skiing, golf, yoga, and cycling and boating I can do. So got to keep the mind alive and keep contributing in a way I think is meaningful.

I'm still stuck on the CMO, Anheuser-Busch. Yeah. I'm curious what your favorite Budweiser commercial was.

Everybody always asks me that. Do they? I could never pinpoint it, man, because here's the reason. I shot 125 commercials a year. A year. Wow. So you had an advertising production budget was somewhere around $50 million. You had an agency budget was in the $20 million range. You had monthly— what, sorry, monthly? No, annually. You had a media budget that was probably about half a billion dollars. And then the other $400 million we spent building brands, doing sales promotion, sports sponsorship. You name it. Having those kinds of resources and those brands was a ton of fun. I mean, it's sort of one of those things that most people dream of having a job like that with that much horsepower, that much swag when you have a checkbook that big and brands that have global notoriety and 99% awareness. It was a ton of fun. I consider myself a marketing guy at heart, so I take that with me in everything I'm even doing today. So even on looking at investments we're making in portfolio companies around the way out, What's the strategic implication of some of the decisions we make around those? And I think marketing oftentimes gets a bad rap for just being creative and right-brained, and great marketing has a lot to do with combining perfect blend of art and science and doing it in a way that's actually going to eventually sell product. So back to your original question, favorite commercial was probably any commercial that had a Clydesdale in it.

They were just the most— Clydesdale. Okay.

They were just the most fun to do. They were the biggest productions. Most expensive shoots, and they had great music that sat behind them. Sometimes we had celebrities and they made people feel good about Budweiser, the brand, and Americana that I think the brand stood for. And we did a lot of them over the years, particularly for Super Bowl spots. And one that I wasn't involved in, that it's still one of the most prolific spots ever shot, was a spot called Clydesdale Respect. It was only produced for one particular showing in the Super Bowl after 9/11. And it was really to show our respect for everything that happened to our country. And then the heroes are around trying to save people and risking their own lives to do it. And Budweiser being the center of that. And it's always a very dicey thing, Kison, because whenever you wrap yourself in the flag or try and look opportunistic, it's a fine line. But I thought August 4th had just the best possible insight in this. He's like, look, we're going to run it one time. That's it. One time out of respect for what happened. "And we're going to do it on the Super Bowl." And that's what we did. But he was also smart enough to know that at that time, back in 2002, internet was just developing. And even though he ran it once on television, it lives forever on the internet. That was the genius behind only running it one to be less opportunistic, but also knowing that it would have a life of its own on the internet. It's still being viewed today. That was probably one of my favorite spots. As I said, shut down the Brooklyn Bridge to do that spot, by the way. Wow. Now, how many companies can do that?

Okay. That's interesting. First thing we disagree on in the podcast. Mine was the frogs. Oh, you like the frogs?

Yeah.

Because I just vividly remember as a kid, and then you guys fired the frogs but kept the Clydesdale because they—

Do you want to hear a funny story about the frogs? Yeah, sure. You got time for this? Sure. Okay. So I always think it's fun to utilize agency creative juice to bring out just interesting ideas that you wouldn't normally bring out on your own. The way we used to do business with agencies is we had a big agency, DDB. Chicago was our biggest on Bud and Bud Light, by the way. We would hire smaller agencies to keep the big guys on their toes. If they didn't come with new or disruptive creative or something that was really interesting for the brand that was strategic, we would say, "Well, I got a little agency over here that's brought me a great idea," and we would use those from time to time just to keep them on their toes. So we had this agency called Cannibal in St. Louis, a guy named Dave Swain and his partner. They were actually out in the swamp in New Orleans and they're just enjoying the evening and they're listening to the sounds in the middle of the bayou and they're like frogs are "Bood, wop, brrr." And Dave looks at Purnell, he's going, "Dude, that sounds like Budweiser." They brought that idea in based on that hallucinogenic experience in the bayou in New Orleans, outside of New Orleans. That's how that spot was born. So it became the frogs and then Louie the lizard and the war between Louie the lizard and the frogs. It had a ton of great entertainment value. That's what you look for in spots is how do you entertain people and get them to notice your brand in a fun way?

[Speaker:TREY_LOCKERBIE] When I was a kid, it was the thing I remembered.

So not my spot, wasn't a CMO at the time, but big props for the people that came before me and doing it and the insights for the creative agencies to bring that out in a bold and creative way.

I'll just touch real quick. The big part of it was you tailed out with the $52 billion integration. You're a part of the InBev acquisition. You haven't listened to our first conversation. We talked a lot about that. You know, one thing I might've missed was how you came back in to do the Wrigley integration. Yeah. So that's pretty interesting, but I don't know if there's any quick takes on just being involved with these large-scale integrations. Was the InBev one mainly focused on the marketing function? Did you go beyond that? And then lessons learned that you brought over from the next one you participated in, in terms of large-scale integration?

Yeah, it was one of the reasons why they asked me to come do that, because they knew I had been through a big integration and they know how difficult that can be, both in trying to find synergy as well as unlock value that may have been trapped in two organizations. When you bring them together in one, you get the kind of one plus one equals three, When I went up there, there were some logical things you would do. For example, the chocolate business had a president of every chocolate business, and we had a chocolate business in China and we had a Wrigley business in China. And we had a president for the Wrigley business. We had a president for the chocolate business. You don't need two presidents anymore. Bring them together. You got to get rid of one, choose the best one, try and integrate the sales force to the extent you can. One of the cool insights about that particular example, China, was that Wrigley was, as I said, an acquisition back in '08. And one of the reasons that Mars acquired Wrigley was because, A, they had great brands and they had fruity confections, they had gum, which is also part of the aisle that chocolate is in, but again, a different part. Second part about gum is extremely profitable. Had like 75% gross margins. Wow. Crazy gross margins. And in China, Wrigley had a billion-dollar top-line business that was actually profitable, which is very unusual for an American company to be that big and that successful in China because doing business in China is difficult. You're dealing with Chinese government, a whole lot of other host of complications. So anyway, when we were looking at, they're like, "Okay, this is cool. We'll choose one president. We'll consolidate the sales forces. Let's look at how many points of distribution Wrigley has." China's a massive country, right? There's tons of places where people can buy goods. And at the time, Wrigley was doing business in over a million points of distribution. So retail accounts that they were calling on and selling gum to and Skittles and other fruity confections, Lifesavers, et cetera. [Speaker:TREY_LOCKERBIE] Across China? [Speaker:JOSH_MACKIE] Across China. Geez. A million. And chocolate had something like, I want to say, my memory probably doesn't serve me right, but I'm going to take a stab at this, something like 300,000 points of distribution. So logically you're thinking, okay, if I'm combining this president, I'm combining the sales forces and they're all going to go sell this one product line, then theoretically we can take the 300,000 points of distribution for chocolate and triple that because we'll just get in all the Wrigley accounts. One flaw in that argument is that China in a lot of provinces is a very hot country. Chocolate melts. So you could only get it in so many retail accounts that had refrigeration or that had controlled environmental conditions that the chocolate wouldn't degrade to the point where people didn't want to eat it any longer. So that was one insight, but still maybe we could double it by the synergy there. Wrigley had phenomenal— and chocolate business had phenomenal R&D capabilities. They created heat-stable chocolate to be able to have more integrity throughout hotter climates up to a certain point. And so we learned a lot in that. So that was some part of the thinking that I brought to the table about how can we do these things? The other part of that was, as again, as a classically trained marketer, you have to look from the consumer backward. What are their eating habits? What are their eating habits in China that are different than the US? What are their eating habits in the UK that are different than the US? And how do you both take advantage of that, but also recognize the differences? We would look to say, how can we expand products that might have flavor differences in certain countries that might make sense? Strategically, how do you think about that? Secondly, very big global study around what are consumers' snacking preferences? What are they eating today that they weren't eating yesterday? Or what are they looking for that maybe isn't in the marketplace today? We would look at this global sort of snacking preference map to say that people used to eat chocolate bars while they're watching a movie with their kids at home, but now they're choosing cheese, or now they're choosing ice cream, or now they're choosing XYZ, whatever it might be. So a better understanding of that could help us both, A, develop the portfolio again to meet the needs of today's consumers, or buy companies that maybe were doing it better than we could.

That's like actually a great take on operator mindset. Mm-hmm. From there, Kinbar acquisition, listen to the first conversation if you haven't, we covered that. But this current role at Sonoma Brands was fairly new last time we talked. Mm-hmm. Now you've been in it for a while. Before we jump into your current role as an operating partner of Sonoma Brands, can you give me a little bit of a perspective on just the firm and how they operate and how it's evolved?

When I was in the global business development role at Mars, I met a lot of people and I was meeting with entrepreneurs, I was meeting with VCs, I was meeting with private equities. I was meeting with a lot of different people that I thought we could find brands and products that we could bring into the Mars Wrigley stable. And we— so I took a lot of meetings with people and there are certain people that you just meet and you gravitate towards because they have, you know, just a way of doing business that maybe is more connective tissue with the way you look at the world. John Sebastiani was a really interesting character. He had some things in his portfolio that I was looking at buying for Mars to bolt on. I was having a lot of difficulty with Mars Incorporated at the time, thinking that any acquisition we did had to be a multi-billion dollar acquisition because they're a big company. They probably got a $70 billion top line. I'm estimating that now because I've been gone for a few years, but that'd be my guess. So if you were looking at a $25 million top-line company or a $50 million top-line company, or even a $100 million top-line company, is that going to make a meaningful difference to Mars Incorporated? And I thought, look, there's only so many multi-billion-dollar acquisitions à la Kind or others that are out there. So you might have to make smaller acquisitions and build a portfolio, kind of a roll-up strategy of a bunch of small brands that would equal a large portfolio, and then we could take our scale of manufacturing, of purchasing synergy, exporting it around the world to enter new markets and really build up the businesses that we bought. That's how I thought about it. I met John Sebastiani as part of that process. When I left, you do what you normally do. You call people and go, "Hey, I'm leaving." They go, "What are you going to do?" My answer would be like, "I don't know. I'm going to ski. I'm going to golf. I'm going to do yoga." I'm going to ride my bike. Why? John said, "Well, would you be interested in being an operating partner in our next fund?" And I said, "Maybe. I don't really know what that is because everybody's definition's a little bit different in regards to that." His answer was really good. He's like, "Look, here's the thing. We have a lot of smart people around us and we think we're making some good investments and we think we can help create value, but the stronger we make the team around us, the more value we create and the more value we can create, the bigger the pie we get to all share in." "I think you have some skills and some experience that could be value-added to Sonoma Brands team. We think if we do this right, then it's going to be good for everybody." The thing is, Kison, when you retire and you say, "I'm pulling the ejection handle on the big corporate jobs," for me anyway, life's about finding balance in terms of my own personal opinion is mind, body, spirit. If you can't keep your mind occupied and you can't leverage, again, at the time, 35, 36 years of experience I had, or then you're probably not keeping your mind alive to the point that you need to. So my way of keeping my mind alive was utilizing my experience, working with entrepreneurs, working with the fund, working with businesses to help them maximize their value creation for everybody involved. I found a lot of energy in that, man. From a guy that spent many, many years in big machines, it sounds crazy for me to say this, but if I were to do it over, I'd probably go into smaller businesses because it's just fun. Yeah, it's risky, Yeah, maybe from one day to the next, you don't know whether you can keep the lights on or not from a cash flow standpoint, but everything you spend your time on matters, man. There's no bureaucracy. There's no bullshit meetings. It matters. I love that about working with entrepreneurs and growth capital businesses because they recognize that. They don't know how to do it any other way. So it's pretty cool.

Like you're skiing, like a wild ride where every move matters. That's right.

I've always loved speed. Going fast is always my thing. All right.

I'm going to give you one more softball question, then I'll start asking you some tough questions. Enough teasing here. So when we're in the hot tub, one of the things you mentioned was the firm really evolved from the early beginnings to very much of a venture focus. Yeah. And now it's more of operating like a growth equity firm. Can we just talk a little bit about that just to get some context in terms of how the firm sort of invests as a pattern? Because you're on what, fourth fund in right now?

Yeah, we're getting ready to raise fund 4. John Sebastiani is the managing partner and founder of the firm. He was a phenomenal entrepreneur. Crave Jerky had a more than a quarter billion dollar exit. So he knows how to do it. When you're working with entrepreneurs, it's important to them. There's the check and then there's what sits behind the check. When John first started out, it was much more about a venture capital mindset, smaller checks, bigger upside, but along with bigger risk. And as we've gotten bigger and each fund obviously has gotten larger and the check sizes along with each fund have gotten larger, you look to limit your risk a little bit. In a venture capital model, maybe you're going to make 20 bets and 15 are going to zero, 2 are going to return capital and you got 2 moonshots and that returns the whole fund. If it works, all 20 go to zero, you got a problem. And that can happen in the venture world. In a growth capital world or a private equity world, the numbers are a little bit different. Let's use the same number, 20 bets, maybe 8 go to zero and maybe 6 or 7 return capital and the remainder are your moonshots. And so you've got an ability to minimize your risk with a larger check, maybe come in at a later stage, Series A, Series B, you're no longer doing seed, you're no longer doing pre- revenue, maybe even Series C with a quick exit in the horizon. And with a larger check, you also have the ability to maybe take the whole round or get a larger percentage of the business. And again, I think businesses evolve to say that, here's where I started, but based on the lessons I've learned, here's where I am today and here's where I'm going.

Would you do growth equity over buyout?

Yeah, I would. Because I think buyouts sometimes come with an inherent belief that there's value that's yet to be uncovered. In plain and simple terms, it's a lot more turnarounds or a lot of things where you feel like this is a depressed value and I can come in and create value. Whereas when you're just adding fuel to a flame that's burning hot already, that's an easier equation.

I just got to ask real quick. So the deals that didn't work out, was it the model or the company?

When you go into a deal, you're not investing in that deal unless you think this is a moonshot. You just believe that from everything about the product, Maybe the margin structure, certainly the founder. Because as you're making investments, your number one sort of important criteria on that list of things that are important to you is the founder. You're betting on them. And if that one doesn't pass the sniff test, you don't even go to the product. You don't go to the margin structure. You don't go to the P&L. You don't go to anything.

[Speaker:KISON_PATEL] Start with the product.

[Speaker:JOSH_MALCOLM] No. It doesn't matter because a bad founder can just tank everything no matter how good the idea. So Yeah, that would be my answer relative to that.

So it is a company. It's either the model, they didn't pick the right company, or the company.

Yeah. So ones that did go bad, I would say was we probably bet on the wrong founder. We had maybe a vision of what we thought this founder was. And when we got in there and started working closely together, we found out that it was something different. So that's one. And then secondly, also look, when you're doing early stage growth investment and seed round and pre-revenue, there's no visibility in financials. There's only pro formas. Over time, we've gotten smarter to say that, look, companies have gotten bought on insane multiples of revenue over the years with no EBITDA or no meaningful free cash flow or not even operating breakeven on just their cash flow. And I think those are mistakes and we've learned from those. Now we're betting on companies that have recurring revenue, that have real EBITDA, real cash flow, or a very short path to achieving those. I think that's the difference from venture. When you're going in, hey, you're just making a bet. You love the founder, you love the product, you think it's going to be a moonshot. There's no revenue, there's no profit, there's nothing. To there's revenue, there's profit, there's growth, there's certainty in team, and that's a safer bet. Is the upside limited? Sure. But that's okay.

I was trying to set up the philosophical tone for this interview. It's basically both, a little more in the model in some ways. Your models have really evolved in the way you evaluate companies. Yeah. Let's walk through this. A deal comes across Sonoma's desk.

Walk me through your role.

What are you doing in evaluation and diligence that someone from finance wouldn't?

Yeah. So first of all, if a role comes to me from Sonoma, there's a specific reason why it comes my way. One is that I have experience in that sector. Is it beverage? Is it alcoholic beverage? Snack and treat? Is it pet food? Is it pet ecosystem? And if it doesn't fit those categories, it goes to somebody else. There's not much I can offer. So that's first and foremost. Then once it comes my way, let's say, let's make this up. Let's say it's a pet food company because I ran a very successful pet food company and had experience doing that. I would look at, again, founder. What does he or she have that we feel is something special? Secondly, is the product-market fit? So do they have a product that's addressing a need in the marketplace or want in the marketplace that others aren't addressing properly? Thirdly is, what does a route to market look like and how does the strategic choices around that make sense based on the life stage of the product they're in? Because most of the things we're doing in consumer products is You have to have a brand around it. It's great to have a great product that people like and fits something that they're looking for, but do they have a brand that speaks to them, that engages them, that makes them want to lean in? And then lastly is, are they making it? Are they paying somebody else to make the product? Are they making it themselves? Are they in the basement of their house? How does all that work? And once I look at all those things and I think great founder, great product, need in the marketplace, have a handle on how they're going to make it, whether that's themselves or through somebody else, And then how does it get to market? Those are the beginning factors. And then it goes into, okay, what are your gross margins? That's great. You got a great product that people want, but you got a 10% gross margin. I'm not interested in that. Again, are you profitable today? And if you're not, why aren't you? Because you're making investments that will pay off year 1, year 2. But what is that path to profitability and how soon will that arrive? Because look, in a growth capital business or private equity business or venture capital business, You're making investments in companies to help maximize value and create a great exit for everybody. You always have an eye on the prize, which is like, what are we going to sell this for down the road? That's going to make everybody happy. But there's a lot of things that happen in between the time that concept originates, the time you actually exit, and everything that goes on in between. That's kind of how I think about it.

So you have first, as you look into the founder, then product-market fit, then go-to-market, How the sausage is made and then tying that all to the financials. Is that our framework here? 5 steps on how operating partners do diligence? Yeah. And you know, we call it Keith Levy framework.

Sure. And a deal can fall apart in any one of those. Okay.

I want to touch on this again from your lens. You got the operator background, founder. Mm-hmm. You used to get sussed out. I remember this. I learned early when I hired engineers, like a good engineer will hire a good engineer. Kison cannot hire a good engineer, period. For you to start thinking about the founder perspective? What does that look like? What are the clear good wins and red flags?

[Speaker:TIM_FERRISS] Yeah, really great question actually, because leadership is a term that gets thrown around a lot. People spend a lot of money reading books and going to courses and stuff, but it really is all about leadership when you think about how somebody's going to successfully build a team, build a product, have the energy it takes to get doors slammed in their face and all those types of things. The founder thing as an operator, and again, I've led as many as 1,500 people in businesses, and it's about understanding how to create a vision that they can buy into, how to give them the resources they need to get their job done, how to hold them accountable for what it is that you're asking them to do, and how to reward them when they achieve what it is that they're supposed to get done. And for me, I look at founders Do they have that capability? Can they create a great team? Do they have a vision? Can they communicate it well? Does everybody pull on the same end of the rope because that founder is right there with them in the trenches, the sleeves rolled up, getting it done? Those are some of the key ingredients I look for because they were what made me successful as an operator. I love leading people. I had a lot of things that I wasn't good at, and those things I just hired people that are better than me. And if you have a founder that you see has that capability where they go, humility. Kison Patel said, like, you just have to look in the mirror and go, look, I'm really good at this, but I'm really not good at this. Honest recognition of that. And when you say I'm not good at this, but it's an important—

That's a key thing you look for when you start talking to them. You're looking for them not to have this, like, godlike mentality that, you know, they rule the world, but more of that humbleness and vulnerability of this is where I'm doing really good, here's not. And even breaking down the business in terms of strengths and weaknesses.

I'd say yes and no.

Or is it more intrinsic? No, yes, no.

Like, I don't tend to want to just hire my own image. I'm okay with hiring diversity. I like diversity of thought. People think completely different. I've had complete assholes that worked for me, but they were really good at what they did and they were really good at the stuff that I wasn't good at. And that was cool because I just knew they'd get the job done. I could still be okay with them on a leadership team. At the end of the day, utopia is sure, like-minded individuals that see the world the same way, that are humble, that are smart, that have energy, that like to take apart the Rubik's Cube and they just get it done. Reality is that you have to be tolerant that people are different and they look at the world differently. And as long as they've got the right skills to complement the ones that you don't have, that's going to be your jigsaw puzzle for success.

You're not helping me make this into tactical framework, just so you know. And what you're saying doesn't mean it comes down to a gut feel either. So between tactical framework and gut feel, like, where's your sort of, this is a good founder versus not?

Oh man, I wish you could answer that question with a crisp answer, but it's very founder to founder. That is a gut feel. Sure, it's gut feel, but there's demonstrated levels of success around.

There is. That's clear. Let's acknowledge that. Your historical pattern can help you predict a future versus— Yeah. I mean, who's the people they surround themselves with?

What are they like when the bullets are flying and you're in a foxhole together with them? Those are things that are hard to assess in a diligence process, and you have to take some leaps to think about this person could be like this or handle this situation like that. We're getting better at it because we looked at hundreds or thousands of deals over the years very quickly when somebody doesn't do those things. But the hard part is like when you think that they do, they really have those key ingredients that you think they have.

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We can agree there's a span of time to build a relationship to get there. Where you're like, "This guy is good." Versus you just meet somebody, just like first date with somebody. You're not like head over heels and trust them and willing to bet on a 5, 10-year investment on them. [Speaker:TREY_LOCKERBIE] Yeah.

Some of that happens in the diligence process for sure, because you're spending a lot of time with people, not just numbers and data rooms. And that's as important part of the equation as the rest of it. Not minimizing the importance of the data, because that's super important. And then make sure that you have transparency and financials and potential landmines that are down the road. Here's a good example. We have a founder that goes, "Hey, look, I've got a ton of business with Costco, but that's at risk today. But here's how I'm going to replace that." I love that candor. When you have a founder that goes, "I've got Costco. I'm going to get Kroger. I'm going to get Walmart. I'm going to get this." Now all of a sudden my Spidey sense is going off and going, "They don't know about this one." That's sort of how I think about evaluating founders and leadership potential and candor and what's really going on underneath the surface. Because look, a good founder's not going to give you everything. They're going to hold some cards and they should. I respect that. But to the extent that we've got a good relationship, we've got good visibility, we've got candor, and I don't need to read your mind, you don't need to read mine, we're probably going to wind up in a good place.

[Speaker:KISON_PATEL] How do we think through product-market fit? We're talking through it and I'm the guy in the PE office, Working on the numbers. Here's my founder fit based on his financial track record. He's obviously a good founder. Hey, counter to what you said, product-market fit, obviously they got some financial traction. They have some product-market fit.

Product-market fit to me is about, again, it's classically trained marketer mindset, like work backwards. What do consumers want? What's the marketplace have? What does it not have? Where is the latent or emerging demand that you think that your product's going to address? And when you look at those things and you find products that actually do that, Whether it's a better-for-you snack or a— because we do a lot of work in nutraceuticals as well as cosmetics, a brand that's probably going to have more efficacy to solve a particular problem than another. Those are product-market fits. There's a market looking for this. It doesn't have a complete answer for it, but this particular product does. When I see that, it's, "Oh, ding, ding. That's something we want to be looking hard at maybe being part of because somebody's figured out something that somebody else hasn't." I'll give you a couple examples in our portfolio. Touchland, great one. When I first saw it, by the way, I had nothing to do with this due diligence process because it wasn't in my wheelhouse. I don't know cosmetics. I don't know nutraceuticals. Those things I don't know. So this was a very cool sort of packaging concept around hand sanitizer for tweens. Places where they would buy this would be places like Sephora or Ulta or whatever. And there was always at the point of purchase, But what they did was they made this kind of like cool colors, cool packaging, cool fragrances. They made hand sanitizer something different. So there's a need for hand sanitizer, particularly post-COVID. Everybody's crazy germ conscious now, whatever. So if you could create something that was cool in terms of packaging, had a scent that you liked, had a little bit of a brand kind of cachet around it, that's a cool thing that nobody else was really doing. Purell isn't doing that. And No one's doing them. We made an investment in that business. We were in it 2 years. I could be wrong, but it was a short period of time. And it was a female founder, amazing founder, had great insights, sold for $800 million last summer. $800 million. We were in it like 2 years. I won't tell you the X, but it was well beyond our 5X. Cool. Those types of things have a product-market fit. There's a need for it, but it's done in a unique way with a cool founder that has insights behind it. It's bringing fragrance and color. And packaging and style and brand.

[Speaker:TREY_LOCKERBIE] The market's pulling you basically. [Speaker:JOSH_MCMULLEN] Yeah.

We've had a couple of really good ones. I know we're probably going to talk about this, but I'm seeing the market turning in favor of companies getting the deadbolt off the checkbook and getting in the mix and buying companies again. That wasn't happening for the last 3 or 4 years. We had a pretty good drought going on. We'd sell a company here, we'd do a SPAC, or we'd do some things to monetize a little bit for LPs. Now we're getting big exits and we have probably 3 more on the horizon over the next 12 months. That's amazing. And then so everything on top of that's gravy.

What were the key things that you look for in product-market fit?

If you were to bullet point them. Product-market fit to me again is about understanding a need in the marketplace. It's either unmet or there's latent demand for. A lot of founders come to us with stuff. I've got the best product, the best idea. And what it is, is a product looking for a market instead of Going backwards and saying, here's the need in the marketplace.

Would you come up bottoms up and saying, here's this profile of a customer. This is why there's this demand from them. This is how we're serving it. Is that what— versus here's this product everybody wants?

No, exactly what you described. I'm looking for something. It's not there, or it's not there exactly the way I want it. If somebody could satisfy that in a way that speaks to me, I'm on it. So we look for those products. I'm always going to look from consumer backwards and say, if I come up with something that you want and no one else is satisfying in a way that we can, I got something here. That's product-market fit. Okay. Not directly in the financials, let's talk go-to-market.

When you think through go-to-market, how are you looking at that?

We've got a lot of products in our portfolio that are better for you or have a niche that's not completely widespread. People have to be smart about how they go to market. In other words, if you were a cat food company, let's say, and you said, I've got a really high-end cat food. I could go to Walmart or I could go to PetSmart and Petco and Pet Specialty and try and build it out that way first. And once I got the momentum there, then I go, okay, maybe I'm going to Kroger next, or maybe I'm going to Publix, or maybe I am going to Walmart next. I don't know. You have to have a strategic understanding of your roadmap and a methodical patient approach to how you're going to do this in a way that won't have massive spikes in production or demand. I prefer a curve that looks like this versus one that looks like this and like this. And so I don't know if that was on camera, but yeah.

So steady progress versus hyper-progress to crash back up again. Yeah.

Or just to kind of steady build. And a steady build to me is a thoughtful approach to where am I going first? Where am I going second? Where am I going third? And how do I just penetrate all the ACV I want to penetrate?

My take as a founder who's talked to well over 60 growth equity funds, and the number one thing is always the TAM.

TAM means the TAM.

So when I correlate, as soon as that comes up, and for me it directly ties to the go-to-market because you're almost like building your case on why you're going to hit this TAM in that go-to-market. And I'm curious because again, you have the finance folks in the office crunching. How do you sort of look at your lens of here's what I see in the go-to-market. Versus it's always the TAM and when's this thing going to taper off?

That's actually a very good point, Kison Patel. I think TAM is important. You want to know that the size of the addressable market out there is big. But to me, that's a very early sniff test. Is this a big market or not? Yes or no? Okay. And then the more important things are to me, okay, once you know that you're swimming in a big pond, how do you get your fair share of that? Whatever that is. Is that your Is your product unique? Is that because your distribution is more thoughtful? Is that because your people are better? Do you have stronger R&D? Do you have an innovation pipeline that's going to penetrate? Those are all things that I think about. But yeah, the size of the market, that's a quick conversation, right? Big market or not, honestly.

So the founder has to build that case to investment committee basically, or the business case they're building to fund the deal. And it's like, hey, here's— and they have to validate it to some degree, but you're almost giving a little bit more of the how of why that's actually going to happen. It sounds like there's a bit of a perspective of, yeah, I really do agree with the TAM because I really do feel after all these conversations, investors don't have any idea what TAM is. It is very made up. It's very just— because to me, there's present-day TAM, and then you were talking, you're 5 years out. TAM could totally change based on— obviously you talked about consumer behavior here. So there's a little bit of the bottoms-up approach versus top-down. Here's I look at macro down in terms of this is what I think TAM is versus here's an operator lens of what I think TAM is. And I think there are two different perspectives that Somehow need to converge to sign a check.

[Speaker:TIM FERRISS] Yeah, fair enough. For me, it's just, okay, big market or not, yes or no. But then there's, okay, let's use a more practical example. Let's say, I don't know, what is the chocolate market worldwide? Is it $100 billion, something like that? But if I'm in a small niche of that, what is that total addressable market within that large, larger TAM? That's a point of debate for sure in conversations. We have everything from Yerba Madre, which is started out as Guayaquil, which is a packaged yerba mate tea, to an animal pharma business, to a topical nutraceutical product. What are the TAMs for those things? And again, they're going to be large, but then— I think it's agreed.

You're not betting on the accuracy of TAM and trying to build your model downwards to hit those numbers. There's sort of a validation of TAM. And then you're still building off of bottoms up with how the business operates.

Yeah. Like big market. I get to swim in that pond. Why do I have a chance to be successful in there? And how much of that market can I actually capture? And what's believable about that?

And then there's obviously the strategy and what you're betting on in terms of overall thesis. 100%. Okay. So that's go-to-market. You mentioned earlier how to make it was the pillar number 4 in Keith Levy's framework and how to diligence CPG companies. Why is that important to know how you make it?

Actually, that's becoming a very relevant conversation today because here's the thing. So we mentioned that I stepped in to run one of our portfolio companies. And one of the things I discovered is we made very little of our product. And when you're a small business and you're in a co-man environment, a lot of stuff can go wrong. What can go wrong? Maybe some bigger player that they make product for, i.e., Walmart, decides that they want to step on the gas and all of a sudden they need more production time. They go to me and they go, "Hey, I know we committed to producing X amount for you, but we can't because Walmart needs this line." That's a problem. Or maybe you're in a 3PL and they say, "We've dedicated this much space to you," and somebody else, bigger player comes in, they need more space and they're paying more, so you got to go find another 3PL. So you're kind of at the mercy of other people. So 3PL is one of these shared kitchen environments? Well, 3PL could be a warehousing situation.

Like just like leasing.

Could be like in my case, I was storing ice cream at -10 degrees below zero in a 3PL. It's not like those exist everywhere. So you have to find those.

So you can quickly have a supply chain issue depending on third parties. Yeah.

If you're outsourcing all this. Now, if you're a founder and you say, "Look, I'm raising money. I know I've got a great brand and I want to hire people and I want to do X, Y, Z, but I'm going to take my first dollar and I'm going to invest in my supply chain because I can avoid all those problems. Somebody kicking me off the line, somebody telling me I want to raise my pick, pack, and ship rate, somebody telling me that I can't meet your payment terms. I want net 14 days now, which puts a lot of pressure on a small business in terms of cash flow. So if you were a founder, you said, I'm going to invest my first dollar in my own manufacturing environment. Why? Because I can control how much I make, control quality and food safety. I can control my payment terms. I'm kind of looking at companies now in my due diligence process that I'm asked to participate in. What do they own? Because it used to be like, just be asset light, create a product, create a brand, don't have any of this money in the ground. It's much more attractive to strategic acquirers, whoever.

I was convinced that's the beauty of America. You just build something, get the marketing right, and you'll get rich.

I don't know. I think it's changing. And for me, I'm looking at people that are smart and have engineers, are putting their first dollar in the ground, and they're creating manufacturing environment. Here's the other thing. So when I was in a Mars environment, and I was— so I did a lot of M&A, but I also did incubation. And I'd go to one of my plant managers and I'd go, "Hey man, I need some line time. I'm screwing around with—" "Hey, I got a chickpea and chocolate product and it could be cool, but I don't know. I need some time to experiment." It's like, "Fuck you. You're going to screw up all my metrics. I'm compensated on efficiency. If you come in and disrupt that, I know I'm doing you a solid and a favor, but it's not going to be very good for me. Where's the win-win in that?" So again, from a strategic standpoint, it's like if I'm an acquirer, like a Mondelez comes in and goes, "I want to buy that whatever snack business," and they got their own manufacturing environment, I don't have to disrupt my own. That's cool because I got that. And then as it gets bigger and whatever, okay, I'll figure out how to repatriate it and I'll put it in a line and whatever. But big companies, man, those manufacturing environments run at a massive speed and efficiency and your managers are compensated on not screwing that up. Oh yeah. That's just stuff I've learned over years of doing this stuff on both sides, making it in a big company environment and trying to think small and doing something inside the walls of a big company. It's more difficult than meets the eye.

You look at how they make it. And I think this is when it goes to a fifth pillar of like how this all ties back to your financials or the company's financials. Yeah. Because then this sort of gives you the story about, okay, here's what gross margins are operating at, understanding like what their whole supply chain is, benefits of their control factors that impact the business scalability and other threats to the business. You tend to get a full picture between the founder, the product market fit, the go-to-market, and how they make the product.

Yeah, I don't think you got it. It's good sequence there. Okay.

One question was the operating partner role. Mm-hmm. Is it like sometimes like you're making a real impactful outcome to the business or just theater? And obviously like different portfolio to portfolio, the operating partner.

So put yourself in the shoes of a guy like John Sebastiani who's started a growth capital business, trying to create a team and surround himself with the right people.

I get that's the intent. And I thought, I love that story. This guy's an operator. Goes into private equity, he's not purely, I'm just trying to make money. He's like, I'm trying to make an impact. I learned things. I want to impact other growth companies, provide the capital expertise. That model I like. I'm just wondering, because I talk to other ends where I talk to the founders and it's like, hey, I know you worked with so-and-so investors. That's what I learned. I could go get references. Yeah. And I'm like, how are they actually sure who to work with? Because everybody pitches a story of, hey, we invest capital because we have a creative way to produce value. Coinciding investing with you and accelerate your value creation, which is great. This is great. And obviously different ways of them digging in, actually how they do that, how their sausage is made. And there's definitely ones I've talked to where we didn't get any kind of support and help at the end of the day. They offer it, but we don't really use it. And boom, versus big difference, huge. I'm sure you've like seen that where in the portfolios you worked with, big impact, no impact.

People hire operating partners or invite them into their funds for different reasons. So like one you just mentioned, like Some people that bring in like, wow, they know a lot of people that have a lot of money in the family office circle or wherever. They can be a great source to raise the next fund. That's not the value I bring. They got that. They've got bankers. They've got people that worked in private equity. They have people that worked on funds in university and they have entrepreneurs. What they don't have is somebody sat in my seat and said, I'm going to buy a company. I've had the Mars hat on. I'm going to go buy your company. What am I looking for? What am I not looking for? What pisses me off? What gets me excited? So I bring that mindset. Okay, I know you think you can sell this to McCormick, but here's what McCormick is going to ask you, and here's why they're not going to like what this portfolio company is bringing, but here's what they're really going to like. So how do you shine a light on that? So that's one value. The second value is I've run companies, I've run divisions, I've had big jobs with big budgets, to deploy investments, to build brands. So when my name and my resume is on their website and people start to check out Sonoma Brands, it's like, "Oh, they've got some hitters around them. They don't only have bankers and entrepreneurs. They actually have somebody lived in the world of big corporate America or wore an M&A hat and acquired companies." That's really valuable and it adds credibility to the firm. So some of it's optics, Kison Patel. I'm not going to lie. My face, My reputation, my experience, and my resume, that adds a level of credibility. But then when it comes down to the brass tacks of, hey, is this business that we're going to invest in going to be attractive to strategic acquirer or not? I can answer some of those questions, or at least I can help with some of the visibility around whether it will or won't be attractive. I like this.

Ties to some of the coaching you're giving me on the ski lift about having some like prized people on the board because it creates strong optics, credibility, trust. Okay. So we'll check that off. That's like purely, there's a mark on goodwill value there to put. And then I love the fact of the perspective that you brought in as the strategic acquirer and bringing that to this company. Now you're on the other end of, hey, let me help you understand. But how do you want an ideal situation is going to be acquired by a strategic acquirer. Most people listen to this podcast know that, but then you're bringing that in early, maybe even helping them think through how to network and get on the radar of those strategic acquirers.

Again, if we're going to make an investment in a pet business, every single one of the guys on the team has very little pet experience. I ran a very successful company for 5.5 years, created a ton of value, worked with veterinarians, worked with retailers, worked with suppliers, was on the board of pet food associations. I can quickly come in and go, "I know you're looking at this pet food company, but it's a piece of shit," or, "I know you're looking at this pet food company and I like it and here's why I like it." "And here's what no one else is thinking about or doing." Those are things that I think are important to growth capital businesses or private equity business or VCs or whatever. Who do I have on my team that could help me with insights that aren't apparent to me or they're just not obvious? And the good founders get that. John gets that. Other people I'm sure that are successful like John get that. They also recognize that, "Okay, I'm going to have to share in the wealth creation that we're going to do in order to create that wealth, we're going to have to have the right people around the table pulling on the same end of the rope and bringing in points of view that maybe are not the way we look at the world in a typical fashion.

Deep operating experience. That wraps up part 1 of our podcast with Keith Levy. Hope you enjoyed it. Hope you learned a lot. I know I did. Look for part 2 coming soon.

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