Episode 7 - Dr. Newton Campos, Managing Partner of Newton Equity Partners

Investments I made are amazing. Last time I calculated was like 50% a year. But that's not my main goal and that's not the main goal of any good entrepreneur that I know. Hard to come across entrepreneur that ultimately just want to make money. The money is a consequence.

So the big question is this. How are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk? Welcome to Surge funded the Entrepreneurship Through Acquisition podcast. I'm here today with Dr. Newton Campos, who is a successful startup entrepreneur and is now the country Director of IE University in Brazil. He's also a professor of entrepreneurship at Fundasau Gatulio Vargas in Sao Paulo and a visiting professor at IE Business School in Spain. He is also the founder and Managing Partner of Newton Equity Partners, through which he invests in SMEs via search funds worldwide. Professionally, Dr. Campos life is driven by reshaping capital capitalism through entrepreneurship and technology, preparing leaders to thrive relentlessly in their quest to solve local and global business, environmental and social challenges. So I was really interested in talking to you because I was drawn to search fund entrepreneurship not only due to the financial returns of having a higher expected value due to lower risk compared with other forms of entrepreneurship, but also because as an MBA grad, I had become somewhat disillusioned with a lot of the other options out there. And the opportunity to grow businesses that are participating in the main street economy and creating value in their communities was particularly exciting for me. That being said, compared with other options out there where there's more of a stated focus on creating social or environmental impact, whether it's clean energy or ESG or impact investing and so on, I hadn't seen so much talk about this when it comes to search funds. So I'd like to start out just by understanding a bit better how you see entrepreneurship reshaping capitalism, and particularly what value you believe that search fund entrepreneurship can offer to the world.

Hi Nick. Hi everyone. First of all, I'm very pleased to be here with you to discuss and share these topics. Yes, I love studying capitalism as a kind of hobby. For me, I think it's a fascinating system and unfortunately it's a bit unsustainable by nature. Although of course I criticize capitalism, I'm not saying that I'm against it. I do think we can reshape it and we can improve it. And actually now is the time to do that. This century is the century where we have to do that. We have to start doing that in our generation. And the next, at least couple of generations have to fix this problem with this current system. It's an amazing system. I'm a fan of capitalism, despite my criticism. And I just think all of us, we can somehow have a role in improving it. And in my case, I just realized that I could use private equity, venture capital, entrepreneurship, and ultimately search funds and entrepreneurship through acquisition to do this. So that's how I exercise this part of my responsibility, basically.

Amazing. So I was wondering, when it comes.

To search funds, what role you see.

These family businesses or small businesses in the countries you're talking about playing in that reshaping of capitalism?

Well, remember that in most economies in the world that adopt capitalism, you have a large number of small businesses operating. Depending on the country, you might have 70, 80% of the economy run by small and medium sized enterprises. So the SMEs, they have a very, very, very important role in our economies. And the way I see is that we have now a chance to update at least part of these SMEs through entrepreneurship through acquisition. And then search funds can be a really, really nice tool to take young people, you know, willing to change to improve the world. And instead of creating things from scratch where they think it's also nice, you know, some of these people don't feel so comfortable in creating things from scratch, from zero. And for those people, I think entrepreneurship acquisition is an amazing solution to find small and business enterprises that are out there in the market, the ones that have of course, the potential to thrive and basically together with partners, investors, to make a great job in bringing those small and medium companies to the 21st century. Sure.

So when you're investing in searchers or in acquisitions that the searchers have found, what do you look for in terms of determining whether this is a searcher or a business that really can create impact? And maybe you can give a few examples of what that impact could look like.

Yeah, this great question, you know, a lot of people ask me, how do you select your searchers?

Right.

Because of course, each one of us who invest in search fund, we have our own thesis and that passed by selecting the right people.

Right.

One of the things that I love about search funds is precisely the role of the searcher or the entrepreneur is a very, very important role that differentiate search fund a lot from private equity, from normal private equity, where of course, you do have people as an important ingredient. But in here is absolutely key. And that's why usually I position search funds like somehow in between private equity and venture capital, because you have private equity aspect of the company that you acquire and the venture capital aspect of the entrepreneur invest.

Right?

And in this case, of course, each one of us believe in something. In my case, I believe that the searchers that are entrepreneurs so that have these really deep call for building something, for setting up something in a new way, for developing a new product, for exploring a new market, for finding out new suppliers, developing new suppliers and so on and so forth, which are the roles of a know a typical classic entrepreneur. I love to work with entrepreneurs. So in search funds I try and my team, we try to do the best to locate within all the people that want to become searcher in a certain year, those that are more entrepreneurs. And not only that, I think we added an aspect in our case that is okay, entrepreneurs are not enough today for this century, because last century they were enough, but this century they're not enough. Because if you create something, build up something that is amazing, but it's destroying the planet, it's destroying the air, is destroying the rivers, you're not amazing anymore. You know, a hundred years ago you were amazing despite of that, but today, no, it's like, come on, you're destroying the water I drink, you're destroying the air I breathe. So you're not a nice entrepreneur. So in our case, of course, we look for to locate entrepreneurs that are also very, very responsible and are aware of their role in this new century of not contaminating things. And that's just for saying of the aspect of the environment. If you go all over ESG and all the aspects of ESG in emerging economies, for example, we have a huge problem with bribery and corruption. And so this is also a big problem that we have to solve this century. And I believe that entrepreneurs can also do a great job in building up companies that don't have to be corrupted, you know. And so to provide you with a few examples that I've seen or I invested myself, for example, a couple of searchers that everyone who invested in them and work with them are very happy here. From Brazil, they acquired a very small company that rent laptops and smartphones initially mostly B2C. And one of the opportunities for growth that they first saw in the very beginning when they acquired was, well, maybe if we do B2B, we could grow faster, right? Actually, the owner who sold the company to them already mentioned that. And this was the typical pivoting that we do in many startups and many projects that in this case worked very well, as well. But we're not satisfied of just growing the company. You know, this was, even for them was not enough. We wanted to grow the company responsibly. And so just to make a long story short, this company today is not only the largest in the country, but by far the most responsible company in the segment. So, you know, we extend the life of all the equipments for much longer than they used to be by the industry. So instead of having, let's say a shelf life of 8 years for a laptop, we managed to have an 11 year shelf life to rent a laptop. So diminishing our impact in course in environment. But not only that, we also recycle a lot, you know, all the equipments in a very, very systematic way which are making us to receive recognition and award in this area. And not only that, all the other players in the market, they're wow, now we have to be like that because otherwise these guys are the leaders and they are now showing how to do this. And one way of doing that is precisely to extending the life of equipment and properly having them back home to recycle them properly. And now we are even offering the recycling service to other companies. And so this is what I think is fascinating about this whole thing is being able to take companies that are existing, that they exist, they've been doing a job for many years, 20, 30 years, and we have new mindset, new approaches. We can make this company not only very big and impactful as a business, but also in terms of impact for society. Yeah, sorry if I spoke too much, but I said enact the example to the, the rational.

No, no, feel free to talk as much as you want. I think that's the point of this podcast.

I didn't mention previously, but not only have you lived all over the world, you're investing in search funds in many different markets.

Yeah, yeah, it's to Africa, Japan. Yeah, even myself sometimes. I just had a meeting with Japan now before talking to you and it's great. This searcher is coming across many different businesses in Japan and one of them is to help recent born babies and their mothers. And it's an amazing business. It can be improved a lot because the 30 year old business that has been done more or less the same thing for 30 years and we were precisely exploring what can we do with that business. Right, for the 21st century. You've done a great job for 20th century, but what can we do now? And we were exploring, for example, the possibility the company is specialized in recent moms and babies and we were thinking, can we adapt some of the products and services to the elderly? Because they also need diapers, they also need care, they also need, you know, and this is big trend all over the world, right? We all going to be old soon and we will need this care. And so we were exploring this possibility. And imagine if we take a company that lived by serving babies and now can also serve elderlies. It would be amazing from the point of view of impact to society.

Absolutely. Yeah. I think a lot of the value that actually touches people's lives comes from these sort of businesses rather than from all the excitement, exciting startups that you hear about more in the media or just because they. The ones that maybe have more outsized returns that get the attention.

Yeah, yeah.

They're not the ones that are actually impacting people's lives on a day to day basis. And beyond that tangible impact, there's certainly often a large financial reward as well for the work that these businesses do.

Exactly, yeah, yeah.

And so maybe related to that, I just started your book the Myth of the Idea. And from what I can gather so far, your thesis is that innovation doesn't come from ideas. It comes from people who are working.

Within an industry and understand the market that they're in. And then with the resources they have, they innovate either out of necessity or just when they see something that could be solved in a different way. I was wondering how that applies to search fund entrepreneurship.

Oh, I love it.

When you invest in entrepreneurs, are you looking for people who have industry expertise or market expertise? Or is that something that can be picked up along the way?

Yeah, it could, it could, but not, not, not necessarily. Because you know, this whole concept, this whole book, what I tried to do was to mix a concept that I'm really passionate about, which is called effectuation. For those of you passionate about entrepreneurship, you should definitely check it out. And basically I tried to just make effectuation. Talk to Lean Startup. Basically, that's what I tried to do. This and by saying that, what I was trying to say is that 90% of successful businesses, they don't come out of a great idea. Some of them, yes. But these are marginal, most amazing businesses that you come across all over the world. They came through the life of a person and these opportunity crossed the life of the person. So if you could summarize, effectuation in a short way is like the end. Successful entrepreneurs are great, are doing the best they can with the limited resources they have.

Right.

And in here, what I saw in search funds that also made me become passionate about is that in startups, usually the level of resources you have access to are so limited, so limited that of course 95% of the times you fail. And even in the few cases where you get financed and you have capital for some reason or the other, and you have access to some financing even with the money, the money is not enough to buy all the resources you need to make that happen. And so there is a big misconception on the power of money to actually make something work.

Right.

If it was just by money, Google would have succeeded and not Instagram or Facebook.

Right?

Because Google had billions and billions and billions of dollars behind and it still didn't work, you know, so it's not just about the money. And when I come across search funds, what I like is that when you acquire a company, you're not just acquiring a company, you actually acquiring the right of using those resources of that company you acquire. And those resources include a lot of stakeholders. It does not include only the employees or the collaborators, include also the suppliers, the friends, the partners, the customers, the regulators and so on and so forth. So it's a much better platform for you as an entrepreneur to start seeing what can you do with the birds you have in hand, in this case the company you just acquired, then just with a startup with five people and no resources at all. And even if you have money, this money run really fast and in one or two years you're out of money. And usually to build up a company you usually need 7, 8, 9, 10 years. And you know, if capital don't follow you or you don't break even fast, you won't make it. And so that's why I more and more, I become every day more a fan of search fund. And that's how I correlate that with my book and effectuation.

Yeah, that makes a lot of sense. I guess. You said most startups takes at least seven years before they're even profitable a lot of times. So yeah, yeah, why not take over a business that's already making money and.

You can innovate while even in search funds? Even in search funds. What I see is that in the beginning you don't have so much room for innovation because you paying the debt of the acquisition, you're learning about the business, you are discovering the possibilities. And so you don't have yet room to innovate in the first two, three years. One, two or three years I would say. But then, you know, after you are already familiarized with the business, with the people, with the Customers and so on and so forth. Then if you are an entrepreneur, you won't be satisfied. You say, okay, now I understand this whole thing. Now I know everyone, now I know the industry, the segment and so on. And how can I use my background, my history, my network is and this environment that I acquire to innovate?

Right.

That's why I'm not so concerned with the past background of the search. Of course, some degree, yes. If he, he or she worked for consulting or for bank or for private equity, et cetera, something comes. If he or she is an engineer or a lawyer, there's something coming out of there. But this will only have use usually after two or three years after acquisition. Because during this first two years it's mostly a technical job of being a manager and it's a highly, highly dependent on hard work, basically. Sure.

That's really interesting. You provided an example of this already talking about the search one in Japan that you're working with. But I was wondering in terms of innovation in the companies that you invest and how hands on are you in terms of providing support or using your research as a professor to help the.

Surgeons or entrepreneurs you're working with.

Yeah, you know, of course you might imagine my time is really limited. So I keep thinking about that on how to scale whatever I do at the moment. I don't have this problem because I've done 15 investments around the world so far and I talk to about, I don't know, 100 to 150 searchers per year, more or less. And I can handle today, if Search Fund goes mainstream, which might happen in the next years, then I will for sure have a problem in the sense that I will have to talk to, I don't know, instead of just a hundred, five hundred searchers per year and maybe support 60 or 70 searchers and then time becomes constrained. So it's not only a matter of assembling a team around me, which I'm doing and I think helps, but also making the processes around the search fund world much more automatized and scalable. So I'll give you an example. I just last year spent the whole week in a studio recording a course on Udemy on fundamentals of Search Fund. So it's a three hour course, but that's typically kind of conversation that a searcher would have with me on a chat like this.

Right.

But that's now a course that I spent some time, you know, and, and it's there, it's a three hour course where after that, you know, all the Basics of search. And now I was contacted by another platform saying, oh, would you be willing to do a more advanced version of that? Said, yeah, sure. So today we have plenty of tools to be able to supply the demand and I think I'm ready for that. But you know, for the counseling and board meetings and so on, I don't know, I think that's more human thing and that will have to be done by a team of people that believe in the same dream. This team, I'm assembly right now.

Totally. It's really exciting to see the search fund ecosystem developing the way that it is with these, as you mentioned, tools that could automate aspects of the search or the investment process. And then the courses like the ones that you're making, you've seen a lot.

Of these in when it comes to lifestyle businesses or startups.

But now that we have this in search fund, it just shows how healthy the ecosystem is. And also want to say that it is really cool that you're building a team that is aligned with you in terms of your dreams and values. I think it's really.

Oh, you too, you too with this, these amazing podcasts.

Yeah, thank you. Yeah. So yeah, hopefully the more we can do to spread search funds as an alternative career path and I really think that if it can be something that is also viewed as a way to create social and environmental impact, that will just be amazing. And I think it will create a lot of impact because it's something that's much more tangible. I think that something I'd like to focus on more, which you started going into, was that you are working a lot of these emerging economies. I was wondering if you could talk a bit more about your international experience, how that informed you and then also how you see search is developing in these countries. Because it is still, I mean, it's new everywhere, but especially in the emerging world. It's a pretty new concept.

Let me see. One thing that, you know, really caught my attention when I did my MBA some 20 plus years ago was that I would say, I don't know, 90% of the cases were from the U.S. i studied in Europe. But you know, the cases were typical, you know, HBS cases and from US companies today is not the same. I know I teach those MBAs and I try not to use so many American only cases. But you know, that influenced me a lot during my PhD because then in my PhD I said, you know what, I will study entrepreneurship for emerging economies. Because it's so different. It's so different that, you know, half of those cases don't apply that I had in my MBA back then. And so what I decided to do was precisely to study entrepreneurship in emerging economies. Been teaching there that subject and researching for more than 10 years now. And one of the things that really still catch my attention is the number of opportunities in emerging economies. It's that they are huge. If you compare the level of development of most industries in emerging economies compared to developed economies, there is a huge gap. And of course there are reasons for that and there's a lot of obstacles. That's why you don't have all the products and services that it would like to have. But also there are a lot of opportunities. And so depending on how you enter in a market and which market, and with, you know, along with home you enter, you might have a really, really great impact in that specific geography. So I try to combine those two things and say, okay, don't invest only in developed economies, as you said, it just invested in Japan, but try to do in my portfolio half, half, half in strong currencies and half in emerging economy currencies. But what I see out of this practice so far is that larger opportunities are in emerging economies usually. I mean, you do have opportunities in developed, of course, but usually the growth you expect from a company you acquire in Europe or in North America is usually on average smaller than the growth you would expect in an emerging economy. And that's, I think the beauty of it, you know, is you to locate a nice market, a nice searcher, and then of course locate a nice company to acquire with nice co investors and then the magic happens.

Sure. And in terms of the searchers that you invest in in the emerging markets, I'm assuming they would be people who are already from those countries or living there or what do you look for in the searchers that you'd be.

Yeah, most of them is a good question because you see searchers, for example, from emerging economies looking for companies in developed economies. I see a good number of those. But you rarely see a searcher from a developed economy searching companies in a developing economy.

Right.

So that happens because of course as developing economies, the institutional framework is less developed, it's hard to navigate. And so it's easier a person who is in a more messy environment to perform in a more organized environment than one that is used to perform in an organized environment to move to a disorganized environment. So what we investors usually we tend to do is to invest in nationals of that country. That's the most standard way of doing so. You're going to invest in Egypt Usually. I just invested a couple of months ago in a searcher from Egypt and he's Egyptian and he grew up in Egypt, but he also had some international experience and now he's right now searching for a company to acquire in Egypt and the same in all the other countries invest. Usually the nationals are from those countries. Of course, I would understand. For example, now there is a searcher. I didn't invest in him, but a searcher from Portugal trying to locate a company in the uk. And he's an amazing searcher. I think he will succeed. And you see those patterns also taking place. And I could eventually support some of those searchers as well. It's just that today my practice is very limited to my own very limited resources. So I'm very picky. Usually out of, I don't know, 15 searchers that I talk, I invest in only one so far today.

And you are raising your own fund to be able to invest more?

Yeah, this was, you know, last year I took a week off to the jungle here in Brazil. I like to do that sometimes. And I spent a week, I wrote my book this way, by the way, in this very same place. It's a, you know, a hut in the, the top of a mountain, very isolated area, very nice place to be. And I, last year I did that again just to think about search funds would be my role and what I'm doing with all that. And the fund, I wouldn't say came in that week, but it became really strong in that week in the sense that if my dream is to support entrepreneurs to have a big impact on capitalism, to create a more sustainable capitalism, then I have to accelerate my impact to help them to make more impact. And so if I was going to grow organically with my own limited resources, I calculated that in five or 10 years time I would have impacted, let's say 50,000 people. And I didn't like the number. I said no, 50,000 in among 10 billion is not enough. So I said if I want to accelerate that and impact, I don't know, 500 million people or 300 million people or a hundred million people or one billion people, I need capital and there are plenty. As I've been researching and working with private equity and venture capital for so many years, I know there are plenty of capital that has been misused in the world, plenty. So why not collecting some of these capital to do this practice? And that's how I just decided, okay, I will fundraise and I'm doing that Right now. And then I'll find some LPs, some investors that will, that will perform this, let's say, task with me, along with me. I already have a number of them committed, but I didn't finish. I still, I don't know when I'm going to finish. I'm not in a hurry. I want the best investors that dream, the same dream I'm having to that last point.

In terms of the investors, is there any criteria you look for in terms of their expectations for an exit or their ES goals?

You mean investors? Investors. Search for investors.

Yeah, the ones who will invest in your fund.

Ah, okay, okay, okay. Yeah. Well, these, yes, these investors, the ones I'm looking for, all of them basically, usually they are family offices and they generate their resources through entrepreneurship. So this is the characteristic that I, I'm looking for. I want families or resources. The fund is not big, so I don't think it's going to be so hard to raise. Of course, first time fund is always hard, always hard. But in this case, I see the project very rounded and I'm looking for families that have the origin of the resources come from entrepreneurship. There are many of them and that they want to believe and they want to invest in the new generation of entrepreneurs. I think that's the best connection I can make is entrepreneurial money. Investing in entrepreneurs and acquiring small family businesses or small businesses from families that are also entrepreneurs. So it's like feeding the system by itself.

Totally. I think those would just be better.

People to work with.

They would understand that.

Yeah, exactly. Exactly. Yeah. And they see the power of real economy businesses. The investors that are more opportunistic investors, they're just looking usually for return. And that's their main focus by far. And I'm not saying I'm not looking for return now. Returns I'm having so far, investments I made are amazing. Last time I calculated was like 50% a year. So I'm very happy with my own investments and I do think that I can pass some of that return to a fund, but that's not my main goal and that's not the main goal of any good entrepreneur that I know. Hard to come across, entrepreneur that ultimately just want to make money. Definitely the money is a consequence.

Yeah. When we were talking, you spoke about life as a millionaire and not as a millionaire. Maybe you expand on that a lot if you don't.

Yeah, no, it was, you know, the audience cannot see me, but I, I'm almost 50 years old, but I don't know why. Maybe Genetics, I keep myself relatively fresh and so most people say I don't look like I'm close to 50. And so I'm saying that because, yeah, I never lived so many things in my life, so many things already. Of course, 50, you live many things that sometimes I feel like I gain an extra life from the video games, you know, it's like, oh, you got an extra life. Because I've lived in so many places and I've done so many things like, wow, I got an extra life like computer game. And so once in my life I was a millionaire. So what I told you that day is that I thought that being a millionaire would be incredible. Back then I was not, let's say myself a millionaire, but I was working with my dad, I was in my early 20s and we managed to develop a product that was amazing and became the reference in the market was the software. And so we saw this software everywhere, everywhere. It became the standard of the industry. And so I was his accountant. And so we have just a small business, regular as usual. And suddenly this business started to make money and money and money and money. And it was the bank account. Every day I would look and there was more money in it. And so it's like, wow, this is really crazy. And so for I would say some five years, let's say more or less, we lived like millionaires, right? Our family. And what I found out was that it was not as good as I imagined. I thought the difference would be so much bigger than I thought that I became a bit disappointed. Of course, traveling business always and eating the best restaurants is always good. And having the access to the best hospitals, this is always great, but it was now much more than that. It's not so much more than that. And so I was a bit disappointed, like, wow, it's like this to be a millionaire or the son of a millionaire. I thought it would be more exciting, you know, of course you can do different things, I'll travel to different places, but you know, after couple of years it's enough, right? And so we ended up having big problems with this company and eventually this business went bankrupt some years after. And so we stopped being millionaire after some years and we just came back to be normal, regular, medium class people. But what I think that taught me a lot, you know, that whatever I was searching for was not the money, it was much more related to building things, to solving things, to love. Love is amazing. And when I say love, the wide meaning of it. No, love not only your life, but love your work, love Your friends love your city. It's really powerful. And so if you build yourself career or life or find jobs that allows you to love, that's what actually is great.

Right.

And so at this search fund's history, what embarked precisely because I think that not only, of course we can make money, I am making money, I cannot complain. But on top of that, we can do things that we love. Right, Totally.

Yeah. I mean, at the end of the day, money is one thing to focus on, but you're a human and life lives through human emotions.

Yeah. And time flies and I'll be dead in 30 years. If I'm lucky. If I'm lucky, I'll be that in 30 years. So it's like now I'm starting to consider, to count my age in the opposite. So it's like now I'm 30 and next year I'll be 29, you know, and then 28 and then 27, then 20, because these are the last, I don't know, 30 years that are ahead of me. And it's funny to think this way.

Well, you never know. Maybe with psychology it could be another 50 years, 100 years, but I don't know.

I don't know. I don't know if I want to leave the hundred years.

Sure, sure.

Yeah.

Now there's something about, I think fine either.

Yeah, yeah. And it's fine, you know, but anyway, it's funny how to connect all of this in this case specifically with search funds, right?

Yeah, I guess it does. Give me one more question.

You did mention that impacting 50,000 out of 10 billion didn't seem enough for you. I was wondering, let's say 30 years from now, you've accomplished everything you wanted to accomplish and made the impact you wanted to make. What would that look like?

How are you? Yeah, yeah. Well, if I could dream high here with you, it would be maybe, I don't know, in 15 years from now, maybe 20, to have a really, really great, amazing platform to support family businesses and entrepreneurs, to update their businesses together at a global scale. And then after so many years of witnessing capitalism being improved in practice and pushing capitalism to perform better every day along with those people, maybe what I would love to do, perhaps, is to take some years off just to write or to think and to read about then what comes after capitalism for the next, I don't know, hundred years from now or something like that. And then I think would be satisfied to, after I'm able to dedicate the last 10 years of my life writing or recording something related to that thinking how humans will have to coordinate better in the next hundred years to live in harmony with nature. I think that would be cool.

Amazing. Yeah. Fascinating discussion, really. It was an absolute pleasure. Thank you so much.

No, no, you're welcome. You're welcome. It was a pleasure. Sorry if I was too theoretical or too academic, but it's part of my practice.