How to Get Investors Onboard: What Founders Need to Know Part 2 with Stew Campbell

On June 4th, I'm excited to be speaking at the Corporate Dealmakers Forum in New York City hosted by imn, an informa Business. I'll be joining execs from ge, Pfizer Johnson Controls and more to tackle the big topics AI powered diligence, faster execution, portfolio strategy, antitrust moves, and what's actually getting deals done in 2025. I'll be sharing real world insights from the buyer led M and A frontlines and not just ideas, but strategies you can actually use. Register now using the link in the episode description. That's informaconnect.com imn-corporate dealmakers. Come join me in New York and let's keep moving dealmaking forward. Today's episode is sponsored by Deal Room, the M and A platform for teams running buyer led M and A. If you've ever spent a Friday chasing five people to complete diligence tasks or watched integration timelines slip while everyone blames someone else, this is for you. Deal Room helps you stop herding cats and start aligning your team. You get project management built into the Deal Room with features like real time tagging, stakeholder alerts, task dependencies and custom reporting. That means everyone knows what they're responsible for, when it's due and what's holding things up. On top of that Deal Room customers hit their integration timelines 90% of the time. When integration stays on track, cash flows unlock faster, CFO is happier. Learn more@dealroom.net or click the link in the description. Now let's get back to the episode. I'm Kisam Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello and welcome to the M and A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school double LED approach? It's dead. Buyer led. M and A is all about strategy, alignment and efficiency, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We uncover what truly works in M and A by learning directly from the best. I'm your host Kisan Patel, Founder and CEO at Deal Room and Chief Scientist at M and A Science. We're back. Second part of our interview with Stu Campbell, partner at tcg, a leading growth equity firm focused on investments in consumer brands, media, sports and culture. TCG specializes in helping consumer facing companies Scale offering not just capital but also deep expertise in strategic growth, operational scaling and founder led businesses. Today we're going to talk about how growth equity differs from other investment models. We'll talk about the various investment models. We'll talk about the relationship with the board, working with investors and how do you get the best terms when it comes to negotiating with investors. If you missed part one, I recommend giving that a listen first. Otherwise let's pick it up right where we left off. Now I'm starting to get it. Starting to build the list of here's firms I really admire. Starting to categorize it too. Stu of here's like the TA Associates which is huge firm. Like it's going to be a while before we get a check and especially trying to do minority recap. We got to go. Yeah get up there. So I'm realizing that here's some aspiration good friends to have but then what's the next tier down firm you're at previously like Norwest, maybe they're getting closer to the check size. There's a little bit of that where you got to size it. Where's the sweet spot and then being upfront do they have appetite for minority recap Now I want to get more like vetting and competition part of it because I thought that was interesting when you mentioned can you get it down to 10 and make it competitive? Teach me how to do that.

The easy first answer about that for sale sign is just to hire a banker and sell it. And I love working with bankers. Plenty of great relationships for a controlled transaction in which you want to sell 80, 90%. That can be a great forcing mechanism because it forces that competition because now you've engaged banker X and they're going to be running a process on your behalf if that's not your prerogative and there's such meaningful role or a minority deal. And I'd argue that in that case a banker can be helpful but you can also probably try to tackle it yourself. To me there's a walk then run stage of diligence but also a vetting on both sides which is is if you have a certain idea of a transaction in mind, you can share a certain amount of information. It's 4, 5, 6 bullet points worth of stuff and it's probably what may or be in your quarterly reviews and send that and then send it with an expectation of here's what I'm willing to send, here's the time I'm willing to spend with you. Here's what I'd like to see that comes out of it. And it could be an ioi, an indication of interest of just you've vetted it with your ic, you're interested, there's more work to be done. But based on the six things that we've seen and our work in the category, this is how we'd see value. And you could ask for term sheets, non binding, a couple pages long and use those to force a couple groups off each other.

You basically run your own.

You can run your own process. What sits behind that first few things you can either pre prepare as if you were running your own banked process. A data room ready or you could just prime your team and tell them this may be coming. What you should be ready for is that the groups that see that first round of information or that think that there's something really to go do are not going to play by the rules you set out. April 15th, the ides of April. I'd love to see a first term sheet. The right group that you've been dating for a while that really knows you and finally has an opportunity and knows and have seen you perform over time will see that opportunity and will make it awkward for you because they're going to come full throated ready to try to transact, throw some hard elbows against the other firms in a not so competitive way and try to really go lock up a deal with you. Now if that's what you're ready for and you've done enough of that pre work, you're then in a position to say, I know Stu really well. I've had three great years for him. He's been waiting for this. He finally got some information. He now knows I'm ready to think about something. He's ready to rock.

This goes back to that right partner. We're going to run twice as far, twice as fast. I know that from some of these conversations. I know like we talked about, we threw some a couple names out there. Your firm's got a lot of great strong reputation. So then all of a sudden you are going to start favoring that relationship because you've established that there is aspiration, but there's almost confidence that you'll be able to achieve it.

Absolutely. We at TCG meet founders all the time irregardless of when they want to transact. You want to meet great founders of great businesses and then start to help them build. And sometimes the feedback coming out of a first, second or even third meetings. I don't think there's a deal here anytime soon. But if there is, we got to be on it. In getting to know those founders and supporting them, that's the relationship that gives you that opportunity. We love it. We embrace it. We find more connectivity and benefit among our network and among founders. And if a transaction happens, that's great. It's just a beautiful part of the process.

Even though I like you, I still want to give some competition. There's still, like, let's see. So I can compare your term sheet to something else. What are red flags I should look out for? Because sometimes I get this. You go dating, all things look good. Then boom, you find out some crazy surprise about this person.

Absolutely. When you're starting to narrow that list, make some calls. I'd encourage founders to call portfolio companies, ring up their CEO and say, hey, clearly, because you're part of growth equity firms, portfolio company A, they got to you. What's it been like? They're calling me. We're starting to get towards more advanced discussions. Give it to me. How has it been with them? What's been the most trying time? And then beyond the portfolio companies that are put out there on the site, they'll figure out which ones have not gone well and either directly asked the partner for which portfolio companies they've worked on. And then do your own research. If you're in ypo, go start to circulate a few names and see what you can go generate. But doing reverse diligence on the firms is of the utmost importance.

Backdoor references, Absolutely. Okay, that makes sense. That's the best way to really get a sense of. And that's what I learned. Back to the culture of the firms. I've seen them. I've seen PE firms. Certain PE firms have the reputation they do. They're full of assholes. And then there's some. I'm actually learning there's some really good P firms out there, which I'm now hopeful for.

And there's nuances to the questions you can ask both on reputation and what it's like to work with, you can ask for. In that pursuit of the deal that I mentioned and sharing some of that information and letting a couple of groups run hard. One of the bigger risk factors you'll have as a founder is, okay, I locked arms. They're getting ready to put a ring on it. What's the chance that they walk away from the deal now? Some things are out of a firm's control, and we do all of our diligence. There are findings within the quality of earnings and background checks, and there's things that happen that are very good reasons. To your question about sussing out certain firms and potential behavior issues, you can ask for what is the loi? The signed LOI to close rate, which means you came to an agreement of terms. It's been negotiated, there's value, there's expectations on a whole number of terms. And you sign this relatively lengthy document that gave a firm exclusivity means you're not allowed to talk to anybody else. They're going to give it a full throated effort. What's that close rate? Seeing that close rate, then pressure testing that with references, you may find that some firms are super eager to lock it up and then drag you long retrade on terms and really demonstrate some of that behavior that you should probably be most concerned with.

Teach me how to negotiate a term sheet. What do you call it? You call it term sheet or loi? Growth capital language. What are we doing?

Initial term sheet is the ioi, which is an indication of interest.

And your ioi, you'll reference the term sheet.

An IOI is just an outline of terms. It's a talking document. And then there's a move to a letter of intent, which often has a timeline, an ask for exclusivity, a willingness for the firm to spend money and.

Resources and a price.

And a price.

Your ioi, you put a price or.

A range on there price and range, depending on the situation. Okay, depending on the situation.

It's kind of a pretty rough.

And it's a talking document. We expect you to roll between 60 and 80%. If it's a minority deal. We would endeavor to put this amount of primary capital on the balance sheet and this amount of liquidity at this value. It's a discussion document. It's really meant to be written in pencils that we can say hey look, we've had a first set of conversations. We're very interested. Here's how we're thinking about approaching a transaction. Let's have a conversation.

So this competitive process, I want to solicit the term sheets. That way I can wind it down.

With my only caution to you is a very interested firm will try to blow right through that process and get to the loi.

Okay, teach me how to negotiate these terms.

Figure out what's most important to you. And look, I've made plenty of mistakes in these discussions, this work with founders, but in the end figuring out the two three things that are most important to the other side of the table and the two three things that are most important to you. And solving for that four to six set of points is probably how a very good term sheet comes together.

Okay, I'll tell you what I think. You tell me where I'm wrong.

Sure.

One would be the exit timeline. Okay, I get it. I got capital in. This is now formalizing your institutionalizing the business. You got to deliver a return to your investors. And I want to understand that if I not ready for that exit, is there options to do something and continue? That's one. The second is control. Do we create the board? Do we have dual class of shares? Do I get control of the preferred over common? That's the second. And then the third is, I would call it the gotchas. I'm thinking of the preferred X returns and things like that. Where the gotcha like he didn't think 3x preferred return was a. He didn't think anything about that till later on. You're like, damn, now I'm screwed. Yeah. So those are my top three. Would those be your top three?

Absolutely. The gotchas for sure. The first two, we pull apart minority versus control deals. You sell me 80% of your business. You are giving control.

Yep.

Now, I and tcg, we approach that board and that investment as if we were minority investors. Giving control doesn't mean giving operational control. I want to be invited into your kitchen. It's your kitchen. And I want to be told you focus on that part. You're chopping that, you're searing off that. But I have control of this whole set of the kitchen. And figuring that out in diligence lets us lean into something like M and A lets us lean into something like capital financing or whatever the strategic objective is where we TCG think we can help and then we stay out of the way. So much else. Now that's operational control, which even if we have 80% should be 90% of your headaches. Which means I really want to make a change at this vp. I really want to go tackle this. I really want to go lean into this strategy. Those operational decisions, until you really come to that strategic discussion, are all really yours. So that's one part. Now, the control minded, when you sold us 80% and in four years we get a bonafide offer from a strategic or another PE firm that's compelling. We as control owners have to act on behalf of all shareholders and our own LPs and we have to do what's best for the company. Now, the dirty little secret is that it's unlikely without your support as an ongoing CEO, that we're Going to go consummate a transaction. It's very difficult to take a management team, let alone a founder kicking and screaming into a sale process. So control means we have the right to make the decision. Doesn't mean we can actually execute on said decision as a minority shareholder. Those protective provisions, they really only have teeth in a very few percentage of chances. You talked about controlling the exit timing. If you and I worked on a deal together and I had a six year redemption period. So at the end of six years, probably five and a half years, the legalese would be that I'm able to get a fair market value set of work done on my investment. The 30 million I invest is now worth 100 million according to some firm. You have the responsibility legally to now go transact and go deliver me 100 million of value. You could go raise debt, you could find another private equity firm, you could sell the business. There's that threat. But in reality it's very rarely used because either the company's not doing well and my 30 or 100 doesn't really matter, or it's doing swimmingly and we're actively working on what's the best outcome for all of us and we're going to work together on it. As big of a consideration as control is or minority protective provisions for a founder who has built his or her own business on their own bootstraps the transaction itself and how an investor comes in buying 80% or buying 30%, and that whole dating process should make those controls much lesser of a concern. So in summary, there are valid concerns now with the right partner and the right process, when you go to sign and you get that requisite level of liquidity and growth capital delivered, I'd want you to ask those same questions again and see if you have a different feel of it. That's the first two. The third is really just a business point. The gotchas and having really good advice and being a very transparent investor. When there are those structural items to help bridge valuation, it's a really important exercise. For instance, you think your business is worth A hundred million dollars, it's worth 60 million dollars. We have a valuation gap, but God help me, I want to invest in your business and you really want to partner with me. We just, we're staring microphone to microphone, unable to get to that valuation. There's structural ways to make that happen. There are protective provisions that can help. On the downside, where I see your plan to be pretty risky and I want to be protected. So there's unequal economics on the way up to a transaction, there's also an ability to transact much closer to my 60 million value, but give equity kickers and a bunch of bonuses on the way out because you think it's worth 100 on the way in understanding and diagramming and being very clear both with the partner and the principal that you're investing with. And then from a legalese perspective, it ends up becoming a really good mechanism to bridge valuation. When I have done it and when I have seen it in use, hasn't mattered because the companies were on such great trajectories. They blew right through said structure, ended up not being an issue. It's of concern and should be looked at, but hopefully mitigated.

That's a lot.

That was a lot.

That's some really good points in how to think through that. What would you do? You had some interesting scenarios of do you look at the accelerators or do you. That's where the preferred returns come in to de risk, the high risk.

The first bit is that when we're out networking with founders and we're getting to know what they want to go build, there's a professional plan and a business plan that they're going to chasing and a category. TCG meets these unbelievable founders across areas of passion and are just building unbelievable things. The challenge for you as the founder is to go figure out where those personal and professional minds are going to cross. And what I mean by that is there's an element of liquidity. Back to that poker chip example, in which whether you're solving for a new residence, something for the kids from a trust perspective, but there's some element of diversification, wellbeing that you're going to start thinking about. Some people have a number. If I had X, I would stop really thinking about what I'm doing on the family side and really just able to focus on the business. And that's what we're trying to unlock as growth equity investors is to end the de risking, increase risk a smart fashion, but help you make better decisions because you already have all those black poker chips in your back pocket and you're doing great personally. Now let's go take healthy risks for the business and actually go seize that opportunity. Figuring out that number and figuring out what you're trying to solve for it sounds like you've done some of that thinking can be a really powerful way to start. Sometimes I'll sit with founders and say, what are you solving for? And they'll sometimes give me a raw number, sometimes they'll Say I'm only going to engage in a minority transaction. Whatever that liquidity ends up being, I'm confident that will be enough what I'm looking for and start there and then you can work backwards.

This kind of is going to lead to this question around wealth preservation. Some of these people out there. Michael Dell blows my mind. If anybody knows Michael Dell and get him on the podcast. I got a huge reward for you. Just the whole take private and if you look at his equity share before to post all the public it's I think the biggest M and a move done in history that nobody really looked at that perspective. They had all the news flash about all this, the car icon, all that engagement, the whole spinoff VMware. But the wealth creation was blown everything out the water. I'm always curious on the preservation side of this because then you hear the other stories which is not good. The founder that has a huge exit, big number. But then they had this tiny little check that came out of it because they were just so diluted and just the way that economics were putting these terms together. How do you sort of protect yourself or build in that way? The ones that don't, I'm just. That's the curious thing I really want to learn and I know you've seen it from your side. How do you build that as part of your plan that you can grow your business? Because even when I look at doing acquisitions capital intensive you bring an equity partner in, you're going to get diluted pretty quickly. What is that path? What is that magic to do it and still preserve wealth?

First comment is that so many of the founders have been just so generous with philanthropic efforts with their own employees that seeing a number and thinking that only goes to that founder. And you have to think about that risk. They're often in that position because they're so generous and they've built so much culture and are embedded within that employee base and the community. I was with one founder and walking around and there was a community hall at the very top of the list that built this very nice building and set of facilities. There were a bunch of smaller donors listed at the bottom, but the top it just said Anonymous. And I looked at them and. And he just smiled and that gave me so much comfort that he had invested so much in that town that when more liquidity was coming it was just going to be more of that. Now he deserves to appreciate what he built and sees things that he wanted to do in terms of if he wanted a new toy or a new home. But I also had that notion that he'd already invested that much into the town via this anonymous mark, and he was just going to do more of that. And then I watched it as he gave a very good amount of his liquidity via deal bonuses to his employees. Fathers and sons and grandfathers were either retiring, they were going off to college, they were paying off homes on the back of his presumed liquidity. So you can pattern match within a founder and getting to know them of what that's going to look like. At the same token, this is not a very small slice of a big exit selling down a little bit in an ipo. This is a meaningful event because so much of the equity has been built into the company that this is the one big event. It's a mini IPO just for a founder or a set of founders in that dating process, understanding where they came from, what is most important, where they intend on spending money. Where would you want to go live? Where do you want to retire? Those things come up over the drinks and the dinners and the time that you spend with somebody so that when you see the raw number in the funds flow and you know exactly what they're getting, you have great comfort that they're going to be using it the right way. And you have belief that they will take care of their family, they will spend it the right way, and that they have enough equity left in the business and that the value that they've built so far is going to be the value that they try to ascribe and build with you. And that's a great journey to take on.

Well, let's talk through that so we can build our roadmap together. For me, maybe about 15 million. I pay the taxes, that'll take care of me. I can get some property taken care of and no kids, family, all this stuff is. They're all set. That's sort of a near term. Within the next couple of years, longer term. Private jet and taking care of the team both already create an option pool. Even though we don't have outside investors, we built an option pool for 20%. Every employee has some options to it and the management team is highly incentivized around that as well. I want to see them achieve their dreams as well and get a jet too. The dream is to have a podcast on the jet.

There you go. I recently, I think it was last year, the year before I received a little paperweight from united for achieving 2 million miles. So I still aspire to the same end goal that you have. But Far too much time on planes. The solve which is I want to take care of my kids, pay off a house, get the place in the Poconos or wherever you'd want to go. Those are all completely reasonable against the equity value that you've built. And having those conversations and hear you talk about that, I'm perfectly fine being that mechanism because in that multi year process in which we've gotten to know each other, I know that's what you're building towards. I know how well you've taken care of employees. I know from where you're going to be taking this wealth and delivering it to. I had a founder who despite all of this success was in a rental house and said I want to solve to put my kids into a really nice house and not have to worry about them schooling or inheritance and just be done. And then we're going to go build something magnificent. And that's the greatest pleasure of this job is that you can be that mechanism to let them really go recognize the value from which they've bled and sweat into a company and then go chase something big together.

Okay, near term, I get it, that's not too hard. But the jet, I need to really preserve value to make sure the jet.

Happens and taking on a minority partner and then going building something great and taking it from the 20 of ARR to 50. I'm not a jet guy, but it sounds like that's the right level of scale.

This podcast can be in the jet, but hopefully maybe you'll invite me back.

On that jet with that podcast.

We'll be something new. Yeah, we'd have the studio in the air. Okay, challenge me on the timing. I don't know if it's more of an ego of just created this arbitrary milestone that we got to get to 25 million ARR before we do a minority recap and then hopefully strong growth trajectory. And I can go make an argument for getting 10x revenue valuation. Let's create a package for 75 million that puts it around that 30% mark. Challenge me.

So back to this personal professional lines which I'm crossing on video. In terms of crossing there's a presumed path and at that level of ARR I can find the right level of liquidity to make things work.

And I would add, I think I can work with this next tier of investors that are like more of the.

Real estate investors in starting to meet and work with those investors hearing from their experiences on the path from 10 to 25 or in my world within consumer investing in the Path from D to C, getting into wholesale, meaningfully opening your own retail units. There are big jumps in scale and organizational theory that happen for these companies to help them make it through these levels. The path from 10 to 25 is not as simple as just blocking and tackling. It'll come with organizational stress, it'll come with likely up leveling certain levels and certain members of the team starting to understand what's going to come in that path and how quickly it's likely going to come can influence where that line sits for you. In terms of the professional side. The other bit that we haven't talked about is what happens when there are just fundamental macro things that come and throw off your very notion of what the timing should be. You're a consumer brand or worse yet, a consumer services company that deals with stuff in real life and you were thinking about doing something in 2019. You said, no, I really want to go push for two more years. My in person business model is really going to hit it in 2021 and that's what I'm going to sell and really make money. And I really like these investors, but I'm going to hold on for two more years. You're holding on for six more years. It's ironic, it was year five of COVID that just happened, but there are a number of founders that we worked with that were really holding on for that 2021, 2022 timeframe and they're still holding on. If you find the right investors, challenge yourself to say, if something fundamentally shifted in the rest of 2025, wouldn't it be good if I had this investor along with me? And maybe that affects those two lines and that intersection point a little bit.

So you got a little bit of how they evaluate now close to then as well.

It doesn't mean the conversation's over. It just means that maybe there's a valuation gap, maybe they want to see more proof points. They've gotten to know you, you've invested some time and gotten to know them. But the right investor that sees and hears and understands what you want to do will lean into your company or asset at the right point. And hopefully that's three months before a pandemic, not after.

Yeah. So let me complicate this a little more. I have Firm believe at 44% year over year growth last year, and despite management restructuring and all these things that disrupted the business, have strong confidence in the coming years. Of course something surprised could happen. We operate right at break even. We push for the growth. We got Strong cash reserves. I don't technically need the money. That's where I got this. Let me just wait till we're like 20, 25 million. I know it gets harder. People are going to message me after 10 million. It gets harder. Economics change. I get it. But why not? That's the fun part. Figure that out. But now I want to go do.

An acquisition and an acquisition could be the catalyst. Back to that poker chip example. If you're going to either scrape together friends and family money, you're going to take on debt, you're going to go have that founder roll equity and dilute you down and then you're going to have to go handle the acquisition itself, which is not always straightforward. Both in the diligence and then the post deal integration. Those are all challenging things. If you think that 10 to 25 could involve an acquisition, maybe that's the catalyst. And maybe you use the firms that have been reaching out to say hey, M and A could be a very big stepping stone for us. We're ready for it. You four firms seem to have spent the most time in category. Let's just have a conversation about what you would see and have them bring you ideas because they're out talking to many other companies just like yours. They would love nothing more than to bring some acquisition ideas in perspective and maybe something you haven't thought of. They are the very firm that would then help you with that work and if they can unlock liquidity, maybe that becomes your catalyst.

I find this deal, I lock it up. Maybe do the deal based on the post combined company valuation.

Yeah. Devil's in the details, but yeah, that's the approach is to go do something that you couldn't or wouldn't necessarily want to do solo.

How do you weigh out all these? You know, we talked about the firms, the growth capital, the private equity VCs, but we didn't mention there's family offices, good old independent sponsors out there. No offense to any independent sponsors, but high net worth individuals. I could go ask you for a check personally, Stu. There's that you got strategics that are doing stuff right off the balance sheet and then you got these evergreen funds and the evergreen. Sounds interesting. So we don't have to get pushed for an exit timeline here.

Absolutely. So there's one of the idioms is how you add capital and we want to bring the resources of our firm. So I can honestly say within tcg, the operating partners that we have. I was just with one at lunch. Our talent partner in Margot, the Rolodex of folks, the authentic Rolodex that we have. Because I'm the black sheep that actually wasn't a full time operator. We're all operators now turned investors. So the Rolodex and the perspectives that we have can fundamentally help you. Which is different than an evergreen fund, a family office that's just deploying. Those are sources of capital and they can be very effective for you if that's what you're solving for. Usually a founder, when they're ready and willing to take on growth equity, they want the resources as much or almost more than the capital because they probably have dividends, they're probably taking home a healthy salary. Liquidity is nice, but it's this moving target to your point, it's the resources that can really butress growth and help you augment that opportunity. When you can tap into a network of like minded executives and portfolio companies and shared experiences that this is what we do and this is where we invest so much of our time and our investors money to go create goodness that becomes such a helpful function for you as a founder.

It goes back to the network piece, how that company's going to approach value add, getting that real good sense. This is a partner that's going to allow you to run twice as fast, twice as far.

Yeah, it absolutely is.

That kind of overseeds everything before you get into details of capital source structure and stuff like that.

Absolutely. Because the very definition of us being invited into a business is that we're not just capital. And if we were just capital, you could find a different source for it. You could find bank financing.

I agree.

And that's a perfectly good way to do it until you want the resources and the network and the learned experiences, both good and bad that we've had as investors to go support you.

You're right. That's what it comes down to is a big picture. Seeing how that's going to amplify everything, the relationships forth and then we'll keep it a little competitive. That sort of terms is more of like the 10, 20% difference.

And really on a minority deal, if you're selling the business, there's the for sale sign and it's an auction. By definition it's an auction. A minority deal, you're selling 30% of the company. Whether you value your company at X or 105% of X, $100 million or $105 million. The right partner is way more important than the relative value. Not to say you should always take the lower bid, just the relative delta and Economics, in the end shouldn't really matter against the ability of that partner to add value and truly be your partner in crime. That's of way more importance.

I have not been good at getting the most value out of advisors. When I think about getting an investor in the company, I want to make sure that doesn't happen. Can you teach me how to get the most value out of it? Because I feel like, oh, we had good conversations, we go like this, but then things sort of drift. What have you seen the founders that are the best of getting the most out of you and solving the business challenges? And I talked to other founders that feel like they're micromanaged by the board. How do I get the best out of the relationship with a good investor?

Absolutely. I mentioned the notion of board conversations and then one off conversations. I love nothing more than when a founder says, oh, just catching you up. I've had these three conversations with such and such advisor or you'd introduce me to this person. I've already had four or five conversations, one just to get you back up to speed. That's terrific. That means that there was a critical path and a well connected set of relationships that led to those conversations. That's one part just making sure that any advisor has that one on one relationship with you and absolutely has the right and the need for you to call them or them to call you as they're thinking about things independent of the board. The other part is setting expectations and leaning on your investor to set those expectations very clearly with the advisor. So often investment firms, growth equity and private equity find category or industry luminaries, put them on the site, tell them that they're operating advisors, introduce them to you early in the process, say you should really call Jack or Jackie and that may be the one and only call. Finding an advisor that has either specific economics in your company equity typically or has an operating executive role in which they are dedicated to a certain number of companies within the portfolio insurer is just that much more focus to you as a founder, I kind of beg for forgiveness. Call them as much as you want and have that advisor push back on the firm and say hey, you gave me X amount of equity in the company. I have this arrangement with you as an operating partner within your firm against these sort of time expectations. But we are really leaning into this company and this founder is calling me and I'm loving the help but we're pushing meaningful hours in a month more than I expected. I'd rather that conversation that you're finding great value from that advisor and I have to go up his or her equity or figure out a different way of compensation. Because you're finding such great lean on them. Make it my issue that you're spending 10 hours or 15 hours or 20 hours a month with this advisor and you're hitting it off and solving real problems. It's leverage for me and it's a better person for that role. I can go figure out the economics on the back end.

Invest the time to get. He's lemon with you get the most out of it.

Absolutely. And then on the inverse, you're calling an advisor, calling an operating executive, and it's not working. It's not in my vested interest to have somebody on my firm's behalf that's not delivering value to you or the company. Let it be known that's no different than another executive that's not working out. We'll figure out a different path for that person.

Change the board soon.

Totally. Absolutely.

What does break down the relationship where we get pissed off at each other?

It's rarely happened. I've been quite fortunate. There are sometimes challenges with selling control, especially when the presumed path is for a CEO transition to happen. That can come from a couple of different ways. Sometimes a founder will say, if I'm selling 70 or 80%, I'm ceding control. I have less economics and equity in the business. Yes, as CEO transition, I want to not only recognize my success, but empower the next generation of leader. Bringing on a CEO to take over a founder led business is tough. I found more success with COOs. I remember meeting with a founder and I could barely see the person because there were so many stacks of papers which each represented a direct report. My comment was we need a COO in here to just help divvy the responsibilities and help you see above the clouds, not be in the clouds. That COO can then much more easily turn into a CEO over time. That's one friction point, but that's really not on the founder. It's more on the stage of investment because we're investing in these founder owned bootstrap companies that have just. I mentioned that glacial process. They've been through hell and back to build this amazing company. And yes, they sold control. But there may be a little bit of a cognitive dissonance with the fact that now someone else is going to run it. That process and the emotions that go with it are totally authentic and totally understandable. But that to me is the only real consistent friction point is trying to help a next generation leadership we don't come in with a presumption of bringing in a CEO because we're backing founder owned companies.

But, but they don't see it that way. I've seen that that was actually a big thing that came up when I brought RCO in. A lot of concerns about the founder letting go of operational responsibility and you.

Don'T come in with a presumption. And even if the founder expects it to be coming, it can be emotional. They're having to let go of their baby. Within a 5, 7 year timeframe of this new first investors investment horizon and 3 years in their trusted number twos are all reporting now to a new CEO. They are now still at the board table, but perhaps interacting with the board in a different way, not leading those meetings. There's a lot of emotions that go with it and those are understandable because these are not private equity owned businesses in which the CEO is the fifth CEO that's been running this 35 year old platform and they're just coming in with his or her own network of executives. This is a founder that was founder CEO that's now just founder. That happens. I have plenty of CEOs that are still the founders and that's great. They're ones that have transitioned because they wanted to and that's great. It's a natural part of the stage in which we invest that those emotions are perfectly fine and frankly healthy for the relationship.

You see a big difference between bootstrapped and venture backed.

100%.

What's that like?

100%. Bootstrap companies by definition have watched competition come and go and have clawed and scratched their way to that level of success. They've been through their own scaling issues over time. The culture and the sort of ferocity of which the founders have built that business. You're stepping into just a prideful organization and it should be. It's achieved that level of scale and profitability through that glacial process. I meant venture backed companies are seizing an opportunity which by definition is massive. It's evolving very quickly and it's highly competitive with other very well funded competitors. It's a race, it's a flag planting in the wild west. There's an attitude of move very quickly and break things and go seize opportunity and that the winner based on time will seize so much of the rewards. Not always the case. Facebook was the 56th social network or some remark to that degree. But so oftentimes it's the opportunity is in front of us and we have to go spend against it and use capital as one of the tools to go get it. A bootstrap business uses the fundamental value prop and the winning over time and the people that sit behind it to then go deliver that success.

Yeah, that's like a well put point in terms of the difference. I never even thought about it that way, but that pretty much says it all. I wanted to just put all this stuff together and highlight one of the investments and one of the ones that I noted that you have been a part of two times, I guess at Norwest and at a current firm is Vuori. I say Vuori as I'm sitting across from you wearing a Vuori shirt and I'm wearing Vuori pants. I believe I'm wearing some Vuori socks too. But I love to hear the story about what that journey was like. It kind of opens up too since I know you're more focused on consumer brands, which I'm not. So I'd love to hear a little bit about what makes it unique, investing in those consumer brands because I feel like a lot of them everywhere. How do you sort of put the dynamics together of creating the winners or identifying them?

It's a fascinating story. Super privileged to be able to back Joe and his team twice and it's a fun story to tell. Joe is an N of 1. He is an absolute just mensch of a founder. He's a really good person that happens to have built a massive and very successful brand. It's been a pleasure of backing up twice. Met Joe at outdoor retailer which is a conference and we met in his booth and it was a 15 by 10 foot booth or so. And at that point he had half dozen retail units. A burgeoning men's brand. It was born out of Encinitas. It was an Encinitas brand and I fell in love with him. I could not stop thinking about what that brand could become.

What was the brand called?

It was called Viori at the time.

Oh, it's called Vuy.

Okay. It was early on and it was doing quite well. He was building it profitably, it was growing. It embraced the Southern California lifestyle which was how at that time can you help put people in Unbelievable product that works at the beach, the cafe and the gym all on the same day. Because it's that Encinitas lifestyle. To my point earlier about backing founders and in the investment thesis, it being founders and team, founders and team and then everything else, our belief was utmost in Joe and what he could deliver along with his team. He had such a belief that product wins within apparel and that his focus was not only people, but product, his investment and belief in product. We knew that the transition from men's focused to adding women's was going to be very much on the back of really high quality product. We didn't know what that winning silhouette or category would be, but that he absolutely had a right to win women's. We did some work thinking what happens when women's takes off? What happens when a California, Southern California brand expands meaningfully out of California? We'd had the benefit of investing in Kendra Scott, which expanded from Texas on out. We had a little bit of that concentric circle exercise. And if they achieved both genders and if they achieved outside of California, we saw nothing. But Runway was doing great, was doubling, was a very fast growing brand and doing so profitably. And he's a CPA by training, has an even more healthy respect for P and L because he can build them himself. And then Covid happened, and they seized on Covid in such a way that between product content, they had a whole online fitness community. And then a delayed retail expansion, which they really seized on opportunity. Because so many others were so nervous about retail that when we came out, we were growing, obviously, very quickly. It came out as an absolute American brand, and it continues to grow unbelievably. Well, utmost respect for him and what he's built. They have nothing but opportunity in front of them. It's just a really good company.

Give me the boardroom view. How did you interact with them? And I'm always curious with these kind of products, because I feel like kind of bootstrap, something like that. It'd be just so hard to figure out. How do you scale nationally? I liked how you had that point thesis of can you go from being local to the regional brand? And that sort of builds you the Runway to go everywhere.

Yeah, absolutely. So we joined as a minority partner, and at tcg, we took a minority stake as well.

Do what I want to do.

Absolutely. It was a competitive round and it should have. And as a minority partner, it doubles down on that kitchen example of where you're doing something. We're joining you, and we really just want to focus on a certain few areas. Product. We're not going to be helpful with product. I look much better dressed now by wearing said product, but I don't have a firm view of silhouettes or how things should look. And so stay out of the way of that. Making sure you have the right resources for retail to make sure it's a thoughtful expansion with really good returns. So that Flywheel can run well. At the time of our investment way back when he had no cfo, he was his own cfo. We leaned into some really helpful support to say build that layer of infrastructure to make 2021 and 2022 that much easier. Having a CFO as Covid hit was perfect for it. He was able to focus on such different and bigger problems because dez who is still the CFO was absolutely terrific. Was a perfect right hand person for him. Figuring out where you can help and where to stay out of the way is often one of the more important attributes, especially with a brand or any platform that is growing that quickly. It's a do no harm type of a DNA.

It goes back to supporting him with more of those introductions and absolutely.

And just and being supportive on the edges and making sure that nothing inhibits his growth because the company was doing just so well.

Curious about that too because the brand came out really well and it's a highly competitive holding in general. Is there some fundamentals for founders operating in those kind of competitive environments that you sort of noted?

To my point, Joe is focused on product and rightly so. And the brand has run on product led growth because people talk about it, people just are effusive with how good it is, how nice it feels, how effective it is, how long lasting it is, how good it looks. All the attributes of a really good apparel brand. More broadly speaking, when you dive into a consumer brand, you can get trapped with easy to talk about, but relatively shallow in my point of view metrics in the same way that people talk software rule of 40 that tells a story but not the whole story. LTV to CAC is just one of the very measures of a company's success. How you define LTV and what you put into cac, which is a numerator, denominator and a ratio kind of wild impacts as to what the health of your business actually is. Especially when you start adding retail wholesale dynamics where there's other channels to go get your product and go find the brand. It makes all those numbers really messy. Seeing the forest and seeing the trees when you're valuing something in terms of repeat rate, unaided brand awareness, aided brand awareness, return rates within different categories of apparel and accessories and then reviews all point to how much a brand is beloved and how naturally it will spread. At tcg, we love brands and experiences and consumer platforms that when you sit around a dining room table for a Sunday dinner, you can't stop talking about that product or service. So there's plenty of great consumer investments that no one really talks about, they just move and they work fine. But when you sit and you are a surfer and you're talking about surfline or you have really improved your health because you track everything with your Oura ring and you pass around said ring, you have gotten into gardening and now you're talking about epic gardening and how much it's educated you. Those brands cause a natural NPS where you just want to talk about things and you really want to share the number of people that talk about Vuori independent of influencers or performance marketing or anything else that just sit around and just say like that's a really good looking pair of whatever. That's the best form of marketing because it's authentic, it leads to a quick conversion, it's free, it's a really good way to build a brand.

I like that you put the whole spectrum together of looking at some clear metrics like the CAC is really important. But then you get to more the soft of like how much these customers really love the product. It's interesting I put that together for your diligence. What about the market outlook? Do all this research. Do you see that when you kind of hear Joe's story about building something for each cafe gym, how do you sort of put that against oh, what's our market outlook for that as a category? Or do you not you just look at what you just described?

Absolutely. Reflecting back on that. We're at the five year mark of COVID Think about what we've been through. Just five years. If you were trying to make an investment in the fall of 19, depending on when you were in the fall, you couldn't have predicted Covid and the boom and the bust, especially within consumer that happened from that in terms of pulling forward demand and cheap money. And then the sloth that came off of that. We emerged from that. We're now in a tariff environment which is causing all sorts of supply chain disruptions for brands. And now we're heading into a point of more economic uncertainty. That's a lot within five years when you take an investment perspective. Of course the short term needs to be acknowledged to make sure your company gets off to the right foot. But for a growth equity investor, you're likely investing for 10 to 15 years. And what I mean by that is you're investing for the likely five years that you hold something. But as you sell something to another sponsor or to a strategic, they're going to be looking forward not only their five years, but likely the next five years, but there's an end cap because it's a fad where there'll naturally be a drawdown. There is an end cap in terms of the number of retail doors, number of retail units that you can go find. If there's an endpoint to any of those within the next 10 to 15 years, someone will find it and it will compress multiple and compress value. And so it's not that you can ignore what's coming in the next year or two, but you have to find enduring products and brands and founders that will navigate whatever happens and succeed.

So you don't have this big calculation of TAM and this and that.

You want to make sure that the market's big enough, big enough and that the tailwinds are there so that you're not completely sailing into the wind for the first three, four or five years. You want to be on the right side of history. Another idiom acknowledging where health and wellness trends are going, where general apparel trends are going, those are all obvious areas of focus. But no one could have predicted that post Covid I would sit here in New York without a sports coat. But now it's perfectly fine. At least I think it's perfectly fine because we've brought down the level of what Viori calls commuter wear, but is just perfectly good fitting looking stuff. But it's a new norm. And no one could have predicted that.

Absolutely. I got the knitted sweater blazer on. That's awesome to just hear that as an example, one that familiar with. Absolutely. I'm lucky though. I got in early. One of the startups I was mentoring out of Chicago and they were building a startup of helping you pair with brands based on what social causes, things you believed in being green, recycling, whatever. And they paired me with Vuori. Yeah, it was really early. I'm so happy because the stuff has gone up in price.

Absolutely, absolutely. And hopefully it lasted. So you got it gotten early and it maintained.

Yeah, I got tons of stuff. I just started drawing it. I'm like, this is just great, great. It's just like easy. It kind of fits in and it's great how they've matured it too with stuff that you can wear to the office. I gotta ask, what's the craziest thing you've seen in M and a?

Oh, after 15 years you've seen a lot.

Yeah.

Maybe I split this. The transactions themselves and then the founders with that sort of a seller that you're going to choose. So on the founder side, I have been part of prayer circles at lunch. Unexpected. I'm a big guy. I've been physically intimidated at a company event. That was something. I chased a founder to a rooftop of a Vegas party at a conference in order to get time at 2 in the morning actually led to an investment opportunity. So you end up in some interesting situations. Not every meeting with a founder is in an office face to face. You're out and experiencing quite a bit. On the transaction side, I've been cc'd on emails that I shouldn't have been and peeked under the hood and been asked to delete said emails relatively quickly. That's happened. You see some bad behavior in that regard. The most formative and I consider crazy experience is I was working at Spectrum with just terrific now MD Ben Spiro on the Ancestry transaction. It was my first real transaction. Sorry, Ben. I didn't really know what I was doing and I was working nights and weekends trying to figure it all out. And I remember sitting, unfortunately with my feet up, I was so tired on his desk. And there was a capital group that had committed to the financing to help us with the acquisition. And on a Wednesday, Thursday they were in for 40 million. At Friday, I remember talking to them again with my feet up and they're in for like 20 or 30 million. And by Monday the group had been disbanded and they were gone and the GFC had swallowed them up. And I was witnessing my little segment of history. But a really well known financing group had gone out of business and taken our 40 million to zero of a commitment within three days. It's those sort of like formative periods where I knew that he, as a very strong partner was going to have to go navigate through this GFC and we were seeing it in real time. I was just an associate. I was just helping and working. And I didn't realize until Covid that was going to be my time to go navigate some really tough challenges that kind of kept getting thrown at us. That one just sticks out because it was one of my first memories from M and A and it was. I didn't appreciate the gravity of it at the time, but it was meaningful. It really was.

That's crazy. Yeah.

Yeah.

Stu. This has been an awesome conversation. I had a lot of fun. I got my money's worth. I feel so much more.

I appreciate you having me working with.

All these investors that reach out. It's been extremely helpful. Those of you still listening, you got this far, I appreciate you. I would love to hear what you think about this interview. It's not a pure typical M and a focus, we sort of hit more of an investment perspective. Reach out to me LinkedIn Share your thoughts, Give me some topic ideas and criticism. I'll take it. I'll learn to get better. Till next time. Here's to the deal. Foreign thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcast. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisank I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.