Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback. Royce, I’m so looking forward to this conversation because it’s so unusual. Our two guests, Daniella Bertolotti and Steve Goulas, are recent MBA graduates thinking about buying a small business to own and run as CEO. That’s not unusual, as we’ve had countless conversations about that topic in the last 15 years. What is unusual is that their alternative to buying a business is starting a business.

Royce Yudkoff:

That’s right, Rick. Most people considering entrepreneurship through acquisition are weighing it against a more typical career path – consulting, banking, private equity, big tech, and the like. These two guests are different. They’ve decided they want a career path in a small organization and they want the control and autonomy that goes with that choice.

Rick Ruback:

Who wouldn’t want control and autonomy?

Royce Yudkoff:

Well, it isn’t free. Most startups fail. You work hard, you put in a ton of time and effort, and you get very little, beyond the experience of the attempt. Me, I find startups way too risky and too prone to going to zero.

Rick Ruback:

Still, what makes the world so much fun is that different people have different attitudes towards many things, including risk. 

Royce Yudkoff:

You know, many people assume that entrepreneurs should have a taste for risk taking, like people who order the spiciest foods in an Indian restaurant. Our experience is that the exact opposite is true: successful entrepreneurs carefully weigh the risks they are assuming, as if they were dosing from an eyedropper. This is particularly true of the people who are drawn to entrepreneurship through acquisition. Listen for that carefulness about considerations of risk when you hear from our two guests. These aren’t people who are casual about failure.

Rick Ruback:

The most common trait in people who choose either form of entrepreneurship is a strong desire for professional independence, the freedom to make choices that matter in their job and the way they live their lives.

Royce Yudkoff:

People who choose entrepreneurship through startup often have strong feelings about the product or service they will create and the people they will work with. People who choose entrepreneurship through acquisition tend to be more fascinated by managing a business: managing people, the customers, the strategy, and so on. They are less focused on the particular product or service, other than it’s something they are capable of managing.

Rick Ruback:

Another repeating characteristic we see is that people who choose entrepreneurship through acquisition often feel that they will be good at managing an established business but they recognize that their strength isn’t coming up with that “big idea” or vision that’s the foundation of many startups.

Royce Yudkoff:

So, both our guests are members of the Harvard Business School Class of 2024. We recorded these conversations with them just weeks before their graduation. Our first guest is Daniella Bertolotti and she will be followed by Steve Goulas. Let’s listen!

Rick Ruback:

We're here with Daniella Bertolotti. Daniella, welcome.

Daniella Bertolotti:

Thank you.

Rick Ruback:

So good to have you here. We want to talk about searching and how you're on the fence. Can we start by just telling us a little bit about the journey that brought you here from pastry chef?

Daniella Bertolotti:

Yes. First, I went to the Polytechnic School of Engineering in Brazil, but I went knowing that I wanted to work in the financial markets. So, I got an internship in Credit Suisse, working in equity research. And I stayed there for a year. After that year, I felt the need to be more in touch with the real economy, the real company's operations. But I needed the stability of a paycheck and I needed the safety net of working in the financial market at the time. So, I went to private equity and I did private equity for almost five years before going to the pastry chef course.

Rick Ruback:

Tell us about the pastry chef thing. What is that, a hobby? Is that a passion?

Royce Yudkoff:

And was that difficult to switch from private equity to being a pastry chef?

Daniella Bertolotti:

It was very difficult.

Rick Ruback:

They both need the dough.

Royce Yudkoff:

Okay, Rick.

Daniella Bertolotti:

That's a good one. No, it was difficult, but it was mainly about the situation that I was in in my life at the time. My husband was coming to the US to do his MBA at the other school across the river. And it was the middle of the pandemic. We talked to a bunch of lawyers at the time and there were very few legal options for me to come with him from Brazil to the US. I loved my work, but the lifestyle of private equity, especially during the pandemic, started to grow more and more unsustainable for me. So after a lot of thought, therapy, pain, and finally relief, I decided to quit and come here with a student visa. So, I applied for this pastry course. Initially, I saw it as a hobby. I was also applying to MBAs, and I thought about just filling my time with something that I really liked to do before going to business school and being able to be here with my husband. But during the course and after, when I graduated, I worked in a cafe in Boston for about three months. And I really fell in love with the hospitality industry. So right now, I see it less as a hobby and more like a career path.

Rick Ruback:

And so you went from private equity to being a pastry chef to the Harvard Business School?

Daniella Bertolotti:

Yes, that is correct.

Rick Ruback:

Wow, that's a special journey.

Daniella Bertolotti:

Yes.

Royce Yudkoff:

Daniella, we wanted to interview you because we understand that you're on the fence about whether to search for a business to own and run in the next few years. And maybe the place to start is if you don't buy a small business, what do you think you would do professionally? What's your alternative to that?

Daniella Bertolotti:

My alternative to that is entrepreneurship in the traditional way, so actually building a company from scratch. I think I made my mind about going in the entrepreneurial journey so my decision really boils down to taking a shortcut with entrepreneurship through acquisition, or doing it the longer way, with building a company from scratch. What's kind of making me lean towards building a company from scratch is because right now I have an industry focus. As I said, I'm really passionate about the hospitality industry and I want to take a shot on working on that industry. And because my husband is here and we made our own plans to be here for the next three to five years, I'm also geographically constrained to Boston. I cannot do a self-funded search. I would need to raise a fund. And I don't think it's a very attractive pitch to investors, being geographically constrained and with the industry focus on B2C food service businesses. 

Royce Yudkoff:

One choice that anyone who pursues entrepreneurship through acquisition will make is whether to do a so-called “self-funded search” or a “funded search”. We’ll talk about these in detail in other episodes but here are a couple of big thoughts: In a self-funded search you aren’t being paid while you look for a company to buy. These searchers generally live frugally during their search. They might live off savings or have a partner who works while they search. There are benefits to this approach that we’ll discuss at another time.

Rick Ruback:

The alternative is a funded search in which a group of investors – almost always people who are reoccurring investors in search funds – will pay you a salary plus expenses while you search in return for the right to invest in the company you find. They usually want to back searchers who are open to a lot of possible targets.

Royce Yudkoff:

Daniella’s concern, and Rick and I think she’s right, is that the combination of a tight geographic requirement, Boston, and a tight restaurant / café industry requirement, will be a no-go for search investors. Let’s return to the conversation to learn more about how Daniella is thinking about things. 

Royce Yudkoff:

Take a moment, before we keep processing down your choice between startup and entrepreneurship through acquisition, and tell us a little bit how you made the choice that's common to many people looking at search, which is working in some big company or someone else's company versus being an entrepreneur. What made you leave private equity and just any option to work in someone else's company?

Daniella Bertolotti:

I think it goes back all the way to my childhood. My father is an entrepreneur back in Brazil. He had a really, really small business in the countryside of São Paulo. And I think he planted this entrepreneur seed in my mind from a very young age. I used to make these artisanal soap bars or paper prints to sell to my family and to friends. And even when I was in college, when I needed to complement my income, I went back to entrepreneurship. So, I used to make and sell these really delicious Brazilian truffles called brigadeiros. And I did that for a very long time during university. So, I think I always had that entrepreneurship seed on the back of my mind. I ended up, as I said, going to the financial markets or private equity, not only because I liked the financial markets, but also because I needed the stability of a paycheck. I wouldn't have to worry about money, because this has been a thing growing up. So, I went to the financial market for this high-paying job but I only stayed a year in equity research, like in a bank.

I wanted to be closer to the real entrepreneurs. That's why I moved to the private equity side of the business. And working in private equity, the firm where I worked, they used to make small to mid-sized market acquisitions. And I worked at the M&A team of a portfolio company that had a roll-up investment thesis. So, they acquired a company to be the platform for growth. And we, the M&A team, we were responsible for searching and acquiring smaller companies to attach to that platform. I really loved that job. But the part that I love more about that job was when I got to travel to the farthest places in Brazil, not glamorous at all, in the middle of nowhere, and walk through the warehouses and talk to the business owners and talk to their employees and see how they were there. And that's what made me feel most in love about the private equity job. And when the pandemic came, that all kind of fell apart because we were still doing acquisitions, but this part was no longer a part of the equation. And on top of that, I think the lifestyle as a whole started wearing on me.

Basically, during the pandemic, I completely lost control of my own personal time. I went probably more than six months without being able to visit my family, who lived in another city, because I wouldn't know how much I would need to work on that weekend. It wasn't a question if I was working that weekend or not, just how much I would be able to stay away from my computer so I could jump in a car and drive three to four hours to visit my parents. So, this lack of control, even little things, like when the decision was made to go back to the office and I wasn't sure if I was comfortable going back to the office, but there was someone making the decision for me, and compensation, and even how long I would keep that job, I wouldn't know. I was relying on someone else to make that decision for me. So, you can tell that I'm a type A person, but this lack of control and this really harder lifestyle really started to put my mind into thinking back to entrepreneurship as a career path.

Rick Ruback:

I understand your fantasy might be here to just start a pastry business, but if you were to buy a business, what's the ideal business? Tell me what that perfect business is.

Daniella Bertolotti:

It would be more of an upscale patisserie or a cafe with a really good location, with good supplier deals, and a regular and loyal customer base, and a favorable lease and all the licenses and operational systems already in place. It would be something like that, like a restaurant, an upscale cafe that's already running, that's already on its feet.

Royce Yudkoff:

Well, this is one of the nice things about entrepreneurship through acquisition as opposed to entrepreneurship through startup, which is all of these things where so many things can go wrong and achieving them, that's all done. You can look at the past and the present and say, "Well, my licenses are in place. We produce a really good product. Customers come in and buy that product for more than it costs us to make," and so on and so forth.

Daniella Bertolotti:

Yes, that will be great. But as I said, I don't think that it's a very attractive pitch to search fund investors. Correct me if I'm wrong, I would love if that was not the case, but I think that if this was not a constraint, I would definitely go that route.

Royce Yudkoff:

Because it is a constraint, because they generally don't favor consumer-facing industries, because they don't want to back a searcher who's searching in such a narrow geographic area as a single city, what direction do you think you'll go in?

Daniella Bertolotti:

Right now, I think I owe myself the chance to give it a shot at the entrepreneurial, the traditional way. So, I'm currently building a business plan and working with two other professors here who have a lot of experience in the restaurant industry to actually build a cafe or a patisserie from scratch. But before I do that, I know that I need to get more operational experience. And I know these things take time because it's not entrepreneurship through acquisition, I'm not buying a place that has everything already in place. It takes time to negotiate leases, to find locations, to find investors, to even finalize the business plan. So, while I'm doing all that, I'm also looking for a job within operations in a restaurant or hospitality company around the city. I think with restaurants, you have to scale and you have to have a concept that is replicable and can scale to places outside the place where it was born. So, I think I have to start with one location in Boston but I don't intend to keeping it that way. I really want to build something that's financially attractive so I would consider this growth component as an important part of the business plan as well. And margins are thin but that's why you need the volume to grow.

Rick Ruback:

Royce, would you invest?

Royce Yudkoff:

Never.

Rick Ruback:

Why wouldn't you invest in a restaurant? We're going to learn something, Daniella.

Royce Yudkoff:

You know, Rick, you and I teach our students some of the qualities of great businesses and we really believe that. We obviously don’t just teach it. It's things like predictably recurring revenues from customers who come back again and again and again and feel a reluctance to switch, and low economic cyclicality, and if possible, simplicity, barriers to competition. As I go down the list, restaurants don't have that. Now I recognize there are restaurateurs who make a huge success out of their restaurants or restaurant chains. But that's not, of course, the way to look at it. If you're just entering the business, you can't look at the tiny percent who do well and the gigantic tail of people who don't. So that's why I wouldn't do it. But there are believers in restaurants. There are investors in restaurants, clearly.

Rick Ruback:

Yeah, there are clearly investors in that space. And I don't know if I would invest in a restaurant. The part that bothers me about restaurants, can I tell you?

Daniella Bertolotti:

Of course, please.

Rick Ruback:

Is I don't understand success.

Daniella Bertolotti:

How so?

Rick Ruback:

Because lots of them are very busy, but don't make any money, which I find -

Royce Yudkoff:

That can't be a success. That seems the opposite of success, failure, I guess.

Rick Ruback:

To finance professors, yes, but to them they get great fulfillment.

Royce Yudkoff:

That's a good point.

Rick Ruback:

And their customers are happy and jovial.

Royce Yudkoff:

Daniella, would you be happy in that circumstance, like if you were really working very hard…

Rick Ruback:

Full café, full café!

Royce Yudkoff:

…and your customers were very happy and the room was always bubbling, but you weren't making any money.

Rick Ruback:

You're selling a $6 croissant and not making any money.

Daniella Bertolotti:

I don't know how I would do that, selling a $6 croissant and not making any money, but I guess there are ways to do that. That's what I'm betting on. I think, Rick, you're not going to like what I'm going to say right now, but I think money is not everything.

Rick Ruback:

I don't believe money is everything! I don’t believe money is everything!

Royce Yudkoff:

But no money is everything.

Daniella Bertolotti:

No money is definitely a no.

Rick Ruback:

So, you want both. You want to pursue your passion of pastry and make money.

Daniella Bertolotti:

Yes.

Rick Ruback:

I love that. I love that. Why not have everything?

Daniella Bertolotti:

I know it's a little bit ambitious but I think, as I said, I owe myself at least the try, right? I've been doing a lot of things to prepare for the next steps that I'm going to take in my life. And up until here, most of my decisions were completely rational or completely based on the, or mostly based on the financial aspect. And I think, especially after the pandemic, I got to do a little bit of a soul searching really, in terms of personal fulfillment. And when I think about that, money is not necessarily the first thing that comes to mind, but it is important to me. That's why I say that I need to make something able to scale and grow.

Rick Ruback:

So if I had that task, if I had that desire, I think I would for certain buy a café.

Daniella Bertolotti:

You would?

Rick Ruback:

Yeah, because all the parts that are really hard are done for me, and I can reinvent the recipes and attract new customers. But I'm doing it incrementally, in a shell or a crust maybe that works really well. So, why not do this?

Daniella Bertolotti:

I would definitely do that but, as I said, it's a very limited pool of cafes for sale in Boston. I don't think that I can bet my career future into that search. That's why I'm leaning towards not going to search full time. But not only in the back of my mind but also in my free time, that's what I do, I look for cafes to buy.

Royce Yudkoff:

To me, listening to this discussion, I sort of feel like this is an ideal path for a self-funded search. And I say that for a couple of reasons. First, these businesses are small enough that an SBA loan fits, and you could get an SBA loan for a good portion of the purchase price. It's just a wonderful program the government has. But the other is that I think investors would be more open to investing if they actually saw a specific business. Like if you say to an investor, "I want to buy a cafe or a pastry shop or a restaurant," I think they're going to be closer to the reactions I had than neutral. But if you showed them a business, and said, "This business has been around for 25 years. It makes between this amount and that amount every year, year in and year out. I have some experience. I have a lot of ideas. It's a good purchase price." I think with the specificity of it, you’d have a better chance of getting investors. What do you think Daniella? Have we persuaded you?

Daniella Bertolotti:

I think it is a viable option. I don't know if it would fit into my personal fulfillment.

Royce Yudkoff:

Certainly, I can understand that. And I think it highlights one of the qualities we see in people who decide to search for an existing business, which is they're not so focused on the product or service. The things they're focused on are being their own boss or making decisions that matter, or managing people, setting the strategy of the company, but they're not really wedded to a particular industry. And I think if you have a specific vision, that may be best solved by a startup.

Rick Ruback:

Yeah, but I think the risk of the startup is so high. I think it's so much easier to buy a cafe and nudge it towards your vision than to start with nothing and try to create your vision. Because I don't think you actually get to create your vision. If you start with a blank piece of paper, you're going to be constrained by real estate, by lease arrangements, by the cost of getting equipment, by who you can get as employees, by what neighborhood it happens to be in. You might have a vision of how that would be perfect, but maybe that location isn't available and locations like that are just too expensive for you. And you end up making compromises along the way. So I think why not just make one big compromise and buy an existing firm, buy an existing cafe, and then nudge it in the way you want? What is the thing that you want to make that's unlikely to be in the cafe that you buy?

Daniella Bertolotti:

I think it's a combination of a specific product that is made or the specific product that is, like the kind of pastry or the kind of desserts, very modern, upscale, that looks great but tastes even better. It's easy to say, “It's hard to make, and it's hard to find”, but it's a lot about the service as a whole. For me at least, when you're doing a full-service restaurant, the space and the service is key to the whole customer experience. At least as a customer, what I see here, not only in Boston, but in the US or in Brazil as a whole, you find some places that have the product and don't have this experience or this service, or the place has the service but the product is not that... for me, it's really a combination of both. The issue for me then is that it’s opportunistic, right? You have to happen to find a cafe that's for sale in those locations. Maybe I'm thinking about it the wrong way but I think it's riskier to count on this opportunity coming up than to actually going and trying to make it happen. That's where my mind went to right now when I was thinking about this very attractive way that you described buying a cafe. Yes, of course, if there were a cafe for sale, I would definitely buy it, but I have to wait to really make this opportunity come up versus like I can constantly focus every day on building something from scratch that I know depends mainly on my effort, my reach to investors, my work to make happen.

Rick Ruback:

It’s an interesting variation on our thoughts about how much angst you have in various career paths. Because here, what you're saying is the startup has less angst for you because you can envision each step of the way. Whereas with the search, you have to wait till you find the café and because you're constraining it to three to five locations…I mean, this isn’t like a narrow geographic area, you got a like a pinpoint of a geographic area, and a well-defined concept. So, I can go ahead and look for real estate that's available there, design my menu, build my model, look for used kitchen equipment. I can do all those things that allow me to do a startup. I know how to walk that path maybe, or at least I can start walking that path. Whereas the search is a little harder because I got three locations and unless a building is open that had been a café, kinda stuck…

Royce Yudkoff:

Look, all that makes sense. And the two great paths in entrepreneurship are entrepreneurship through startup and entrepreneurship through acquisition. Entrepreneurship through startup is much better known but I think the things you're thinking about are really the dividing line between the two, which is the product and the vision of the business is supremely important to you. And you have a lot of specificity around where you want to be, and that is more startup than it is acquisition. It's certainly true that the risks are bigger in a startup but then doing an acquisition to deal with the risks doesn't end you up where you want to be.

Daniella Bertolotti:

Or probably doesn't end up anywhere, which is my main concern, that for this very specific vision or neighborhood or place that I have…

Royce Yudkoff:

Right, you couldn't fulfill that through an acquisition program.

Rick Ruback:

Yeah. I think you need to broaden, even in the startup, I think you need to broaden your geography. I mean, because you’re in places where there are lots of other people competing. You want to be in a place where there’s a little less competition. But I think deep down inside, it would be much easier to buy something than to build something. Look at it this way, it's like if you buy something, you've accomplished the first fifty steps in one big leap. And you have some customers coming in the door.

Royce Yudkoff:

Well, thank you for spending the time with us.

Rick Ruback:

It was really great. It was really fun.

Daniella Bertolotti:

It was great to be here. Thank you so much.

Rick Ruback:

Before we turn to our second guest, we’d like to share a few thoughts on what we heard from Daniella. She’s someone who wants to be an entrepreneur to follow her passion, creating a specific product and experience. That’s a trait we see in startup entrepreneurs more often than in entrepreneurship through acquisition entrepreneurs. Daniella is really only open to acquiring a café or restaurant, and her second constraint – that it needs to be in Boston – gives her too-small a number of acquisition targets. She needs to loosen one or the other if she wants to go down the entrepreneurship through acquisition road.

Royce Yudkoff:

I agree, Rick. We also spoke with Daniella about the investment merits of the restaurant business – and Daniella and we agreed to disagree. You and I see a wonderful opportunity for people to buy high quality small businesses at attractive prices. There are certain, specific qualities we look for in these acquisitions that tend to generate high profits and safety of principal, and we will talk about those a lot in these Think Big, Buy Small episodes. But those qualities aren’t generally found in cafes and restaurants. Ultimately, we agree with where we and Daniella left it: money isn’t everything, although no money is everything.

Rick Ruback:

Our second guest is Steve Goulas. Like Daniella, he is weighing entrepreneurship through either a startup or through acquisition. Let’s hear how he’s thinking about this because, interestingly, his considerations and constraints are different than those we heard from Daniella.

Rick Ruback:

We're delighted to have Steve Goulas with us today. Steve, welcome.

Steve Goulas:

Thank you for having me, guys.

Rick Ruback:

So, tell us about the journey that brings you to this moment in your life. What did your parents do? Where'd you grow up?

Steve Goulas:

Originally from a small town in New Hampshire.

Rick Ruback:

Which one?

Steve Goulas:

Windham. I went to high school there. Our town actually didn't even have a high school until I was a freshman, so I was the first full four years through. But prior to that, lived actually with my grandparents. My parents were saving up for a home, so lived in Lowell, Mass, so about thirty minutes south of Windham. Went to public school. I was fortunate to get into Yale for undergrad and decided to pursue attritional finance background post-school. So, I did two years in investment banking in New York at Morgan Stanley and then wanted to come back to the Boston area, be closer to the family, and also pursue an investing role, so did three years at TA Associates here in Boston and really enjoyed that experience. I felt like it was a great combination of technical skill sets, deal execution, but also this more elusive sourcing component. I was on the healthcare software team, so I got a chance to explore healthcare as an industry, but also a variety of tech companies and how to think about valuations for those types of businesses.

Coming into HBS, I actually was very gung-ho for search, mainly because I really enjoyed the investing role but back in college I had worked on a variety of little startups. I had been very entrepreneurial growing up and I felt I missed a little bit of that in the traditional investing role. And so started to pursue that the first semester, had an opportunity in January / February of 2023 to actually try to solve what was a pain point for me and something I was really passionate about around apartment renting and apartment hunting. The whole New York and Boston and trying to find off-campus housing at HBS was such a pain point, and I came up with this idea called Lease Club, basically a marketplace, a software platform that would connect new renters to apartments through current tenants and be able to basically give people early access to apartments before they actually have to scramble last minute to try to find a place in New York. And ultimately by doing that, avoid brokers, so use technology to disintermediate the broker. And so we raised a pre-seed round, about three hundred grand, to pursue that idea. And so was an opportunity where I said, “It's probably the most risky thing I could do at HBS, and I have the time to do it now, let's give it a shot.” And so when we got the VC money, that was the pivot for me. And so I'll talk a little bit about how that journey has evolved here and how I'm starting to think about, “What is it do I want to do long-term?” And does this startup, am I seeing the data that I need to see to pursue it long-term?

Royce Yudkoff:

So you sort of posed this choice that's on your mind between a startup and buying an established profitable business through a search?

Steve Goulas:

Mm-hmm.

Royce Yudkoff:

Interestingly, not on the menu is joining some large, established company as an employee, as a junior executive there. Tell us a little bit about why that seems to be removed from the menu.

Steve Goulas:

That just really doesn't feel appealing to me at all.

Royce Yudkoff:

But why?

Steve Goulas:

I think for me, it's just like I want to have a little bit more flexibility and control over the decisions that I'm making. And for me, I also don't see the upside in a more traditional corporate role. So I think if I were to go work in a corporate environment, I would struggle in the sense that I would really want to be doing more than maybe I would be doing in that role and potentially being compensated less than what I ideally would like to see after school as well. I considered some roles in the fall. Coming out of school, I'm trying to think, “What do I want to do?” I'm looking at myself and saying, “I would be miserable in that environment” and so I want to take a long-term stance on ultimately what I would like to do after school. And I think that the opportunity with entrepreneurship, whatever form that takes, is one that's really compelling for me.

Royce Yudkoff:

You've moved it now to a choice between, I want to be an entrepreneur, either in my own startup or a startup, or buying an established business that's been around for years and years and demonstrated that it can be profitable.

Steve Goulas:

Yup.

Rick Ruback:

It's nice to be in the situation where ETA is the less risky of the choices.

Royce Yudkoff:

Yeah, because more commonly than not, Rick and I have people come in and say, "Oh, if I go work for this big company, I'm safe. There's no risks." And we spend time questioning that, by the way, but this isn't that discussion.

Rick Ruback:

This is like, “Do I want to skydive or parachute?”

Steve Goulas:

For me, now's the time to do that level of risk and exploration after school because fast forward to 32, 35, like if I want to start having a family, stuff like that, it's hard to make those decisions. And so for me, either way, I'm going to be living with my parents in Lowell, they moved back from Windham, and saving money. So, now's the time to buckle down on the cost side before life creep starts to happen. Now's the time to take that risk and go and do it. And if it doesn't work out, worst case, there will be alternatives. I think I have a good track record prior to HBS that will help me move into something else that uses those skill sets beyond search too.

Royce Yudkoff:

Well, I think that's right. I think if you spend a couple of years going down either of these paths, you become more, not less, employable. I mean, you've just demonstrated that you have all sorts of interesting skills to the right employer. But tell us a little bit about how you're weighing startup versus acquiring an established, proven business. What are some of the big factors on your mind as you process this?

Steve Goulas:

Yeah, there's obviously risk to both types. I'm not the type of person who's going to sit around and brainstorm ideas on a startup. I'm not good at that. What I'm good at is finding a pain point, whether it's someone else's that's communicated to me or my own that I can be creative around and think of a solution. That's why I pursued entrepreneurship. I don't think I would leave school, if it wasn't for our current startup, Lease Club, if that didn't exist, to say, “Hey, you know what? I'm going to go and brainstorm for a year to find a business and test all this stuff.” That's not really my personality. I'm more very tunnel vision, so if I find a problem and I've developed a solution around it, I'll run at it. I'm kind of weighing a decision of, “Hey, you have this really great startup. It's serving a pain point.” So, we did a pilot of the solution at HBS last Spring, and we had 700 students sign up for a wait list, just from HBS, looking for an apartment. That's new incoming students, current first years. And then we had 125 apartments that got shared from outgoing ECs that were off-campus, so non-Harvard-affiliated housing. And we ended up saving renters $150,000 in broker fees, really just like this market efficiency. What we're running into now, and hence why I'm thinking about search again, is that we're trying to scale that beyond just some of these smaller communities and we're finding that it's difficult to do. And if we can't achieve that, leave that startup feeling like we tried every single angle that we could while we were here in school, and then transitioning to search.

I think in terms of your question around buying an established business, I think that's also part of it. So, they've gone through the pains of finding that product-market fit. Lease Club's a great idea, I believe it is, but it works in smaller increments and doesn't scale, and that's a realization that another founder would have made in the past. And so you're coming into a de-risked asset where I think you do have a lot of opportunity to professionalize the business, to build a lot of growth levers as well, and I think be scrappy. I think if you can be scrappy with it, in a similar way you would be with a startup, there's opportunities to optimize for both top line and cost as well. So, that's how I'm processing between the two.

Royce Yudkoff:

I think what Steve said is so interesting because it’s an example of entrepreneurs being very conscious of the risks they take. He’s wondering if the startup that he co-created while in business school has proved itself enough that it has some of the safety characteristics of buying an established profitable business. He is being very reflective about the amount of risk he wants to sign up for. What do you think, Rick?

Rick Ruback:

Well, I think he’s being thoughtful, but I don’t think he’s being realistic. There’s no way that this startup is anywhere close to the risk of an enduringly profitable business that’s been around, that has a proven business model. The startup hasn’t shown that it can scale, it hasn’t shown that it can attract new customers beyond a narrow geography, it hasn’t shown that it’s profitable, it hasn’t shown that it can deliver a product that people value.

Royce Yudkoff:

Well, let’s return to the conversation and learn more from Steve about how he’s thinking about search and entrepreneurship through acquisition. 

Rick Ruback:

If you were to search, tell me about the ideal business you would buy.

Steve Goulas:

So many different parameters around doing a funded search or a traditional search or doing a self-funded. I think obviously it changes depending on the strategy you take, right? So, if you take an SBA loan, I think the max is $5 million, so you're going be buying somewhat a smaller business if you do it on your own. I think ideally for me, I'd like to buy something in the $2 to $4 million EBITDA range. I'd like to look at either a software or a recurring services business in something around perhaps healthcare education, that's tangential or within a GRC model, so governance risk and compliance. And a lot of that's because when I was at TA, I spent most of my time in healthcare tech, and what I found was TA’s investing in companies north of $10 million of EBITDA, now probably even more as they've raised bigger funds. But deploying minimum equity checks means you're buying larger and larger businesses. And so unless you have a platform to acquire some of these smaller software businesses that are doing $2, $3, $4 million of EBITDA, you just sit around and wait for them to grow. And I think I ran into just so many of those that were like, “Wow, this is a really cool niche.”

I'll give you an example: hospital cafeteria management software. Just who would've thought of that? But that company's doing three and a half million of EBITDA, but we don't have an asset that would make sense to acquire it. So there's all of these interesting little niches that I think you can buy one of these software recurring services businesses, grow it, professionalize it, buy it at, I'm not sure exactly, probably seven times, six or seven times, but you can grow it from four to ten or four to twelve, and now I can sell it to my boss for, you know, 17, 18 times EBITDA.

I'm of the opinion that this is a really great path to be an entrepreneur, to de-risk that experience, be your own boss, and go run a company for five to seven years and hopefully if it works out, have a tremendous exit where I have the flexibility to live my life the way I want, as opposed to maybe going a more traditional path and getting stuck in that. So, I think there is an opportunity to build that really strong nest egg early on and then have flexibility in your career to do what you want after. So, I think I'd be okay sacrificing that five-to-seven-year period somewhere that may not be New York or Boston, but knowing that this is a really great opportunity. I am much more attracted to finding the best opportunity and I think that lends itself to a thesis driven approach because you can't be too picky about where you end up.

Rick Ruback:

You're willing to live in Lowell.

Steve Goulas:

Ah, yeah.

Rick Ruback:

The Merrimack Valley’s a beautiful place. 

Steve Goulas:

I'm willing to live in Lowell with my parents in this tiny little room, and they're going to give me a little office too, which will be fun.

Royce Yudkoff:

You know, I feel like you have a very balanced set of thoughts about where you might end up if you search for a business and buy, because Rick and I often hear people saying, "I'm reluctant to search because what if I find a business and it's in some awful place to live?" And, of course, the answer is, “Nothing compels you to buy that business.” It's not like some monster that when you open the information memorandum, it grabs you by the neck and drags you in. You get to say, “Well, this is really great and I'd be willing to make other sacrifices, including living there” or “It's good, but I don't want to live there. I'll look on.”

Steve Goulas:

Yeah, and I think also part of that conversation too is if you do a partnered search and also if you have a significant other and/or families coming with you, for example, you want to have the no-go calls. So, someone might say, “Hey, you know what? I do not want to live in Alaska”, just throwing out the farthest state I can think of from here. But I think ultimately, to your point, Royce, you're not forced to buy a company and I think by doing a thesis-driven approach, you can find the best company wherever it is and then make that decision based off of what you know in the space and what you're spending time around. That being said, it would be great to find a business in a major city, but we'll see how it plays out.

Rick Ruback:

Let's talk about money.

Steve Goulas:

Money.

Rick Ruback:

What I'm inferring is you would do a funded search. Is that right?

Steve Goulas:

I'm not sure.

Rick Ruback:

Because it sounds like you want to buy a bigger company.

Steve Goulas:

Yeah, I think I want to buy a bigger company. For me, I do like the funded search approach. There's been a couple of investors that I've kept in touch with over time that I've actually worked with while I was at TA. So, I do see a lot of value in partnering with an investor in a traditional model, from a support standpoint, from an “I don't know what I don't know” standpoint, “It's the first time I'm doing this.” Maybe it's good to de-risk on that side? And it's risky already to find a business, right? Why not try to bring the best you can under your belt versus maybe doing it by yourself? You're probably going to make mistakes that are potentially avoidable.

So, I think it's a risk-reward question. If I go and do it on my own, I might buy a smaller business, but I potentially could have the same result if I were to go and do a traditional search, but a larger business and you have a smaller portion of the upside. So, just thinking about the economics, I also want to think about creative structures around that too. So, I know if you do a partnered search, the 30% is pretty market standard. If you do an individual search with a traditional model, it's 25%. But I'm curious if there's co-invest opportunities or if you can syndicate a third-party portion of the equity and get a small upside of that for the carry. So, I’m just trying to think about innovative ways and so that's going to be me talking to a lot of other post-HBS searchers and what they've gone through and folks like yourselves, obviously, who are seeing a lot of this happening in real time. So, I think for me it's a question of, do I want to give up the up-side economics for the perceived benefit of de-risking the search process? So, there's just a lot to play out and to think through. To be honest, if I were to do it myself, I would probably go a traditional path because it's my first time. Like, if you had asked me before I leave this room, “Make a decision”, that's probably what I would tell you, because I think that it de-risks and it's the first time you're doing it, and then after you get your feet wet, hopefully after a good exit, you can then go and pursue something on your own.

Rick Ruback:

I'm intrigued that you would say that because you do have a bit of deal experience from TA. What is it that's the first time?

Steve Goulas:

Yeah, it's less so on the deal execution, what's a good investment, what's a good business question, or diligence in the business. I feel pretty comfortable obviously with that. And fortunately at TA, it's a three-year program, so I had an extra whole year to do deals so I've done three to four full platform acquisitions. So, I feel very, very comfortable about executing. My question is post-acquisition.

Royce Yudkoff:

How do I run the thing that I just bought?

Steve Goulas:

How do I run the thing? Like, “Oh, great, my Chief Revenue Officer or Head of Sales just quit because the guy's best friends with the guy who sold the business. How do I go and recruit that?” “Now there's a competitor coming, we're losing some business to this competitor. How do we think about that?” So, there's all these nuanced scenarios that as an operator I haven't really had that experience for, so that just makes me nervous a little bit. And I also think there's opportunities where you got to professionalize these businesses. Some of these traditional investors have seen the playbook and if I can get XYZ amount of growth out of just deploying that playbook that I maybe wouldn't have as much experience with on my own, maybe if I bought the same business, maybe I could grow it faster and larger with the support of a traditional investor.

That being said, and I'm curious your thoughts on this, I don't think I would want 15 traditional investors. I think I would want one anchor investor that owns like 25/30% of the equity or more and then fill the rest out with strategic investors who are going to help me maybe if I do a healthcare-specific search, whatever it might be industry-wise, some kind of investor that would have that experience. So I don't know how you guys think about if you do a traditional, how do you allocate the traditional fund?

Rick Ruback:

So, there's two paths. Some people go for a very fragmented capital structure, as you know, and some people go for a concentrated capital structure. The problem with the strategic piece of your discussion is that you never really know where you're going to end up. So some people reserve some capital, that is some portion of the equity when they buy the business, to allocate to people who might have expertise in that area or board members. But short of that, it's really hard to do the strategic piece because you might say you're going to do healthcare, but you might find something…

Steve Goulas:

Yeah, I see what you're saying.

Rick Ruback:

... somewhere else.

Steve Goulas:

Do it after the acquisition as opposed to...

Rick Ruback:

Yeah, or at the time of the acquisition.

Steve Goulas:

Yup, yup.

Rick Ruback:

Not after, at the time. But as for the single investor versus multiple investor, anchor investor, you know, different searchers have very different experiences and different anchor investors have very different styles, and you've got to make sure you're comfortable with that style. When you have a single anchor investor that owns, say, 50% of the search, or there's two that together own 60 or 70% of the search, they're all individuals, right? And so they might push you in a direction that you may want to go or don't want to go. And if there's two of them that are spiritually aligned, you have a hard choice not just going along.

Royce Yudkoff:

I agree. I would add to that that the traditional way search is operated offers you, as a searcher with a funded search, a real benefit. And the traditional way is that usually the capitalization table is broken up among, say, ten investors, they each have 10% of the capital. And then as you search, you have a year or a year and a half where you're looking at companies and you're talking to these people to get a sense of, “Who do I really fit with? Who's really helpful to me? Who returns my calls immediately and focuses and has good ideas?” Because what's going to happen at the end of that search is you'll form a board and that board will be you and probably two or three investors out of that group of ten, and maybe a strategic or two, if you find them. And so, in a way, that search period is a live audition for you to see, “Who makes a great board member for me?” And so that incents you to do a casting call.

Rick Ruback:

I want to talk about risk, if I can. Oh, two more things, money and risk. We are, after all, finance professors. What do you think you'll make more at, in terms of building your own personal financial wealth? Startup versus search?

Steve Goulas:

You have to look at it, I think, on a risk-return basis. So, the risk of a startup is a lot higher, but the reward's a lot higher, usually, depending on how much you own of the business, right? That's the question that we're going through now is, how big can we scale this startup and is there a path to future scalability? Because you also have to look at the data and say, “OK, does that path seem logical and/or plausible?” And if you don't feel like you can get that, then I do think that search gives you a better opportunity to potentially reach a similar outcome on an outlier event. But in an instance where it doesn't work, you're probably not going to make much in a startup but with search you’re de-risking, odds are if you pay down the debt you do grow 10% a year, 15% a year, you're probably doing relatively OK. So, I do think the span of monetary benefit is larger for, or the range, rather, is larger for a startup than it maybe would be for a search fund. That being said, we always hear about the searchers who partnered together at HBS and bought a company for $4 million and sold it for $250 million or whatever. That's an outlier event, but I think that's how I would think about the monetary component versus the risk of it all.

Rick Ruback:

Yeah. Well, that's helpful. That's really helpful. So, what are we missing? I think you're thinking about this very clearly, so what haven't we talked about?

Steve Goulas:

I'm curious your take on partner versus individual search.

Rick Ruback:

So, I think that two heads are better than one, but two heads require two hats. There are circumstances where having two partners allows you to do things that you can't do otherwise. Think about those situations. What are they? There are situations where the business is very complex to manage and you really do need two people. Other situations are when you have an acquisitive strategy. So one partner can be busy on acquisitions and another partner can be busy running the business. The holding company structure is getting increasingly popular amongst searchers, where people recognize that the better pricing is at the smaller end. So, the plan is instead of buying one $10 million total enterprise company, you'll buy two $5 million total enterprise companies, and one person will run one and one person will the other. All the income and value will run up to a whole co and then they'll split the outcomes. Obviously, they'll advise and consult, but it's a pooling of the resources. So, those are cases where partnering makes a lot of sense, but I think if you end up buying a relatively small company that isn't complex, the two hats thing weighs heavy on my head.

Royce Yudkoff:

Particularly because the company is probably run by someone who is not as well-trained as you are. They know the business expertly, but they're not as well-trained and they're approaching retirement age and not working as hard as you're planning to work. It's funny that they'd have to be replaced by two people for no discernible reason.

Rick Ruback:

But I will say that it is the case that for many people they find the teamwork to be easier than the individual enterprise and they're willing to give up some financial reward.

Royce Yudkoff:

Emotionally easier, right, Rick?

Rick Ruback:

Yeah, emotionally. But it's also the case that if you get distracted by a personal situation, having a partner can somehow fill that in. And I value that and I think other people value that as well. I don't know if that's emotional or whatever, but it's a personal consideration in which people are willing to trade off money because they want to work with the person, they're more productive with the person, or they just want to de-risk the requirements.

Royce Yudkoff:

And all that's very real. There are big emotional ups and downs in entrepreneurship that you don't find when you're part of a large team and someone else's large company.

Rick Ruback:

Right. There’s lots of reasons to do it, but I don’t think they’re financial. I think financially it’s pretty clear, you go it alone and self-fund. Unless you want to buy a giant company where you really need to access the bigger funds to get their equity capital.

Steve Goulas:

Right, makes sense, makes sense. This has been great guys, thanks.

Rick Ruback:

Hey, this has been fun for us and you have such an interesting circumstance because it's this idea of trading off a startup for a search.

Royce Yudkoff:

Not something we usually see.

Rick Ruback:

Not something we usually see, usually we see people agonizing about that consulting job.

Steve Goulas:

Yeah, yeah. Luckily, I don't have a job offer.

Rick Ruback:

Well, that's what happens when you don't look for one.

Steve Goulas:

There you go. There you go. Exactly.

Royce Yudkoff:

Thank you, Steve. It’s been a pleasure.

Steve Goulas:

Thank you, guys.

Rick Ruback:

Thank you so much.

Rick Ruback:

Both of our guests are looking for a high level of control over their professional lives through entrepreneurship. I get that they want to make decisions that matter. They also want rewards that are closely tied to their work. I get that too. I think their approach though is so different. Daniella is very passionate about one industry, the cafe and the pastries, and one location, Boston. And I get that she just doesn’t think that she’ll be able to find a business to buy that is a pastry business in Boston that has the characteristics she wants. So, I get why she wants to do a startup. Royce, why is Steve interested in doing a startup?

Royce Yudkoff:

I think Steve is wondering whether his startup has passed the inflection point and can now be evaluated like an existing, established company – and that’s why he’s interested. I think, barring the fact that he happens to have put some time and effort into getting this going from scratch, he doesn’t strike me as someone who would be looking at startups at all. I think you and I look at that progress he’s made on that startup as great but not remotely as closing the gap between what you get when you buy an established company and what you get when you throw yourself into an early-stage business.

Rick Ruback:

Yeah, I fully agree, and it’s interesting how path dependent all this is, right? If he hadn’t launched that startup in business school, he probably would have just launched a search fund immediately after graduating.

Royce Yudkoff:

You’re exactly right, because Steve actually defines himself as someone who doesn’t have the big idea. He’s all about solving identifiable problems and managing.

Rick Ruback:

Yeah, so it’s this path dependency in our lives that is so interesting and so real. I think he wants to pursue this to some sense of conclusion, and I think that’s a very human thing that we all have.

Royce Yudkoff:

Entrepreneurship through acquisition isn’t for everyone…but it is a path that every would-be entrepreneur should consider.

Rick Ruback:

Royce, our next episode also features two MBA students, Ari and Allan. These two men have very similar backgrounds – both were in the Army, both had distinguished careers, and both think about entrepreneurship through acquisition slightly differently, seeing different strengths and different concerns. And what’s different between this episode that we’ve just heard, where Daniella and Steve are thinking about a startup as an alternative to ETA, Ari and Allan both think about a more traditional career path, be it in consulting or private equity or an operations role in a company, as their alternative to entrepreneurship through acquisition.

Royce, this podcast thing is a lot of fun but it’s different than teaching. In teaching, our teachers are asking us questions all the time and I sort of miss that.

Royce Yudkoff:

Me too! Well, there’s nothing that stops us from asking our listeners to ask us questions. They can do that too.

Rick Ruback:

Yeah, and there’s a simple way to do that. Just send us an e-mail at rickandroyce@hbs.edu and we’ll get back to you.

Royce Yudkoff:

You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Craig McDonald is our audio engineer. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce, all one word, at hbs.edu.

Royce Yudkoff:

We’ll be back next week with another episode of Think Big, Buy Small.