Private Equity| Doug Mellinger

So now from the PE perspective, what are some of the things that I've learned? I said one was this whole issue of— well, I mean, kind of the big thing is as private equity investors, there's venture capitalists who invest in early— there's seed stage and A rounds and B rounds and they raise. And out here in Silicon Valley, they got their formulas, everything's It's $5 million this round, $10 million this round, $100 million, and someday, and it has happened many times, the music stops and things just crash down hard. I saw that multiple times over the years that I was in this. Right now, we still got euphoria going on, so you got all these crazy dreaming valuations that people have and all these unicorn companies, and I hope there's a whole bunch of them in here, and I hope that— I'm not a unicorn. Not only are they in here in paper, but you guys actually get to monetize that value. But the reality is that a lot of people end up building companies that they then end up selling, and private equity or strategic is typically the path. Well, private equity firms who are managing today trillions of dollars are buying tons of companies, and ones that are buying those small and medium-sized companies They're out there to try to make 3, 5, 10 times their money after buying the business. And the question is, why can they buy businesses and make those kind of returns? What are the entrepreneurs not doing that they could be doing to make their companies more valuable at the time that they're selling? And that's something that I've been looking at now over the last couple of years, and I found a couple of patterns that have been emerging over and over again. These businesses that we're investing in are really amazing businesses, but every single one of them has what we call fixable flaws. Now the fixable flaws, what are some of the key ones that people do— don't do? Change the CEO. CEO is definitely one of— well, not just CEO, but it's— I'll put it as the management team in general. A lot of the entrepreneurs reach limits and sometimes it's the limit is they just don't have the energy anymore. A company that we got involved with, he just was making $6, $7, $8 million a year and didn't feel the need to go— have to go out and work that much harder. But the potential of the business is to make 3, 4, 5 times more than that. And so in that case, ultimately having somebody that's got the drive to bring it to the next level is very important. I was going to say the level of access that they have to other businesses that can help them grow is absolutely important. That is definitely one. A lot of people are very myopic in how they operate. They don't get themselves out of their business very often.

It's kind of like what you said earlier with how long would it take me to build an 8-year-long business, but I can do it in 2 years. When you're only buying companies you have networks in those industries, so if you were to buy it, then you could quickly expand it just using your network.

Exactly.

Did you have one?

So let me give you a couple of things that I think all of you should be thinking a lot about. So what we call them is price depressants. So what are the price depressants when we're buying companies? That we know are going to be fairly easily fixable. Also, what is our ultimate goal? Our ultimate goal is that we're going to end up selling the business to a strategic buyer, not somebody that looks like us, because they're going to typically be the highest payers for a business. And what we know that they're looking for is 3 things. They're looking for growth, they're looking for transparency, and they're looking for predictability. And these are things that sometimes the entrepreneurs' businesses are growing, but they're not growing as fast as they potentially could. But for the most part, the entrepreneurs oftentimes have very non-transparent and non-predictable businesses.

Yeah.

They're not institutionalized. So where does all that come from? The first one is, and I was definitely guilty of this, is that when entrepreneurs are growing their businesses, and think about all the companies that you guys are starting or have started, we know everything because we've created most of it. So you know all the little elements of the business, and you oftentimes are managing the businesses versus leading the businesses. The first thing that entrepreneurs need to be doing is thinking about how are they going to become leaders, not managers. The vast majority of entrepreneurs I know, I put into a management-type bucket and not leadership bucket. They're the ones who are doing it. Here's a trick that I want you guys all to think about. I've got lots of friends that do this. These days. When somebody walks into your office, what you need to do is picture a monkey sitting on their shoulder. Literally picture the monkey the moment they're walking towards you, and know that what their goal is, is to take the monkey and throw the monkey onto your back. Every time someone comes into your office, That's what their goal is. They're gonna come in and say, I got a problem. What do you think I should do? Here's the issues that, that we're dealing with. And what most entrepreneurs do as a natural tendency is to grab that monkey and then start running with the monkey. That's management. Leadership is the moment you see the monkey in the air, You want to swat it back to them and get the monkey back on their back. It's, what do you think should happen? What's the right answer? What are you going to do about it? Not what am I going to do about it, what are you going to do about it? The more that you can start getting your team to be the owners of problems, And to be the solution, the better the organization you're going to end up building. Because now you can step back and lead where everything is going and not be the one that everyone starts to rely on to sell it. So what ends up happening in most entrepreneurial organizations is the entrepreneur becomes the key salesperson, and everything relies on that person building the business. They don't build scalable, metrics-driven organizations, and especially around the sales side. Entrepreneurs have feel. I know what salesperson's gonna succeed. I know what is gonna work at a client, but it oftentimes is not repeatable. And so the more that you can actually start from day one measuring everything that goes on. How many sales calls does it take to get a client? What is the characteristic of the sale? And once you get a client, what actually happens with that client? You will find that certain types of business opportunities you just need to turn down, even though they look interesting, because you'll be able to predict that it'll go nowhere. You'll know that if the right person is not in the room during that sales call, you shouldn't even call them again to go back for a second opportunity, even though you feel you have to. Because in the early days, everything to an entrepreneur looks like a good piece of business, but turns out that a lot of business actually holds companies back from growing. The more that you can measure Everything, every piece of what it takes to produce, every piece of what it takes to win, you're going to be a better organization. So that goes to another part that entrepreneurs don't do, which is actually invest in their IT. We find that when we're buying these companies, oftentimes their IT systems around finance, around ERP, around their customer relationship management systems are terrible. They can't tell you exactly what happened yesterday. They can tell you what happened a couple months ago. You want to end up with an organization, as early as possible, you should get audits. You should have the discipline. It's going to cost a little bit more money, but by putting the discipline in place up front, you should have a virtual data room. One of the great things that happens when when people end up buying or investing in companies is everyone starts scrambling to find their articles of incorporation and all the other documents needed to document your business. Think about, as a steward, you're going to sell your company most likely, so make sure you get it along the way. It's a whole lot cheaper and easier to do it. By being transparent and by building a predictable organization, you will ultimately maximize the value that you end up having within your business.