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 Yudkoff:

In this episode, we're welcoming Betsy Harbison, a funded searcher who searched and acquired a fascinating vertical software company that targets group travel agencies. We'll learn more about Betsy's journey, and her acquisition, and what it's been like to be a CEO of the company. Betsy, welcome.

Betsy Harbison:

Thank you, Great to be here. Great to see you both.

Rick Ruback:

It’s wonderful to have you.

Royce Yudkoff:

Betsy, why don't we start with you telling us a little bit about where you came from – your background, the family you grew up in, the jobs you had, your education, and take us to the point where you sort of collided with search and started to feel like this might be an opportunity for you.

Betsy Harbison:

Yeah, absolutely. Originally from Kansas City, Missouri, so a really nice, classic Midwestern upbringing. I was an only child, so grew up very independent, I would say, and, you know, now I'm also a solo searcher, so I do think there are some interesting parallels there. Went to Vanderbilt, down in Nashville, which was a great experience. After Vanderbilt, I think what I was really looking for was that right first learning experience coming out of school, and I ended up doing a year of consulting, and I realized very quickly, “Wow, I think I am actually much more well suited to something like investment banking.” So, recruited into an analyst program a year late and joined the technology media telecom team at Bank of America, Merrill Lynch, and did that for two years. Of course, as you can imagine, it's rose-colored glasses with a program like that, a lot of late nights, very limited sleep, but I thought it was a phenomenal learning experience, candidly. And often I think people who go into investment banking start to get on that track. You know, it's the two years of banking, and then it's the two years of private equity, two years of business school. That actually didn't appeal to me at all. I think I just really had this feeling of, “I want to be inside of a business.” I couldn't necessarily even pinpoint why, and then I think actually I followed my gut in a variety of ways throughout my career, post-graduation, and I just had this feeling of, “I have this skill set that I've built. I think it's broadly applicable. I want to go apply it somewhere.” And ended up joining a company called Flywheel Sports, which is a boutique fitness cycling gym. And I was technically on the finance team, but it was about eighty employees. In a company that size, the finance team does sort of become the heartbeat of the organization. There was nothing that we didn't have our hands in, whether it was overall strategy, marketing, headcount, how do you pay instructors and incentivize them to drive people to their classes? Fascinating experience. I loved it. I also was just working with extremely smart people that I learned a lot from. Going into HBS, I had this vision of, “I'll do something similar.” After the first year, took an internship. I built up this vision in my head of, “I'll go join this smaller company. I'll have a real impact. It's going to be this great company. I'll work my tail off and, you know, get equity, and it'll be this great story, of course.” And I think I had a few realizations in that summer in between business school years, and one was just the information asymmetry that exists out there, it's really hard to pick the right business. This was also at a time, lots of VC dollars flowing around, probably dollars that shouldn't have been. And I also took a role doing some of the same things I'd already done at Flywheel, and just this feeling of, “I'm a little stuck. I'm doing a lot of the things that I've already done before.” I'll be totally honest with you, coming back to HBS for that second year, I was like, “Oh my gosh, what have I done? I uprooted my life in New York – I loved my life there. I had this vision. I think I have proven it to be false. You know, what in the world am I going to do?”

Royce Yudkoff:

I'm loving the narrative. I want to hear what happens next.

Rick Ruback:

Yeah, you know, I always say that New York City is the amusement park for young adults, and that's what you were living, right? You gave that up to come to HBS.

Betsy Harbison:

Definitely. You know, you have a life and friends, and there's an energy there that you can't really replicate anywhere. Now, it was the right time to leave Flywheel, just based on where the business was trending but, you know, I did have a feeling of, “Wow, I've made this giant investment, both time and energy and dollars, and I don't have a plan.” So, that sort of leads me into the second year, and I'd heard the term “search fund” before, even before business school, and I'd always just thought those people are crazy. “What do you mean, you just go and you run a business, and you think you can do that?” Didn't really give it a second thought. But immediately took your class, Financial Management of Smaller Firms, and I think it took about two weeks, and completely hooked on the idea. Now, it took me the full year to really think about it and, “Is this really what I want to do?” But I do find with folks that go down this path, they kind of get the bug, and it's really hard to shake the bug. That certainly happened for me because, you know, the first few classes, you see these cases, and you start to think, “Oh wow, I can actually go do this.” And so that's how I first was introduced, and it happened very quickly, and it was one of those epiphanies, I would say, of, “Oh, this is the right thing for me.”

Rick Ruback:

That's great.

Royce Yudkoff:

So, your second year came to a close. It sounds like that's when you decided to organize a search fund for yourself. Tell us about the path you chose in doing that.

Betsy Harbison:

Sure, and I'll talk a little bit about that second year because I do think there are definitely some mental gymnastics before you take the plunge with ETA. And for anyone listening, I wish I hadn't thought about it as much. You know, you worry about geography, and where are you going to live, and maybe you have a partner, and are they tied to a certain place, and what's the type of business you're going to buy? That's kind of the beauty of ETA, you take the plunge, and you'll figure it out. So, in a strange way, I wish I had just not worried about it so much, but of course, during that year, the question becomes, “Okay, is it funded versus self-funded? Different models, both are great, obviously. What's the right fit for me?” And I really viewed it on a couple of spectrums. I think the one thing that you're making trade-offs on is really flexibility. With the funded search, you've got investors, you've got a search, you've got an operating phase, usually CEOs do stay on after they exit for a period of time. So, you're looking at ten years maybe, with this path and a business. And self-funded, you know, maybe you buy a business, you run it for a bit, you put someone in place, maybe you buy the next one. You know, there's just more flexibility on that side of things. And so that's something, I think, to consider. It's something that I'm obviously wildly comfortable with – I can't imagine doing anything else – but I think that's an interesting way to look at things. The second is, look, I'm a solo searcher. I mentioned only child. I hear a lot of searchers, you know, “Do I need a partner? Do I not?” I fundamentally believe, don't go against your nature. Don't use it as a crutch of, “Oh, I don't have the skillset, if I only had a partner.” You can hire a team around you for that. And so that was pretty obvious to me, that I'd be a solo searcher, but because of that, the network and support system just becomes a lot more important. I think there's a higher likelihood for a really great outcome with some really great people around me, and supporting this endeavor as well, and so that’s certainly a factor. And then I think the final is type of business and size. Self-funded just tend to be smaller, funded a little bit bigger – maybe you're actually inheriting a management team, and your day-to-day looks quite different. I think, classic self-funded deal, you're probably doing a lot of things yourself, and not that you're not in a funded search, but I do think your day-to-day can look sort of fundamentally different.

Rick Ruback:

So, this seems to be an argument for a self-funded search – more flexibility, higher rewards, interesting post afterwards, total control. I’m trying to find out where the joy came from, from the investors, because you just described the standard paragraph people give us, in your own words, but those ideas recur as people think about explaining why they went down an unfunded path, but you went down a funded path. Did you just need the money? That's a reason to do it.

Betsy Harbison:

About the actual search phase, let me give an example of unfunded searcher. This is no one specific but just a scenario that I think does play out a lot. “Hey, I'm burning cash. I've got this deal. Okay, do I just kind of wrap it up and finish it? And do I close on this deal because, gosh, the alternative is I have to start from scratch.” Because you don't have that, I guess, mental clarity or the benefit of saying, “Hey, I've got time, I've got funds, I can wait for the right thing.” Because if you buy the wrong business, it is such a time suck, energy suck, you know, you're tied to that business for a while. So, I will say that as a benefit of funded search, it really gives you the space and the flexibility to make the right decision. Because I've seen it on the flip, on the other side of things.

Rick Ruback:

And your funded search was a little bit different from some of them, because you had a majority investor in your first stage.

Betsy Harbison:

Not majority, but a very, very high percentage, sort of outsized percentage, yes.

Rick Ruback:

So, not twenty equal-sized investors. How was that? I mean, some people fear the control that a large investor might bring to the table.

Betsy Harbison:

I hear that and obviously I don't necessarily agree. Sometimes I think in the search fund world people say things and just certain little tidbits get passed around. So, I know when I was raising, I heard, "Hey, you need fifteen to twenty, and no one can have an outside share, and here's why that's important," but I would sort of challenge that narrative. I think, especially as search gets bigger and investors are more diversified, if they are a small percentage of your fund, you're probably a small percentage of their time. And so, really, having a few strong partners in this endeavor was really important to me. And I think you have to get comfortable on, how flexible is this investor, right? Do they have really strict criteria, where you worry if you're going to bring something to the table, and it's just a “no” out of the gate? Or are they really going to see opportunity and really think critically about that? And I obviously was wildly comfortable on that side of things. And it's definitely played out how I thought it would, right? You know, great partners, and spend a lot of time, and all that good stuff.

Rick Ruback:

And you had a bit of a geographic focus to your search.

Betsy Harbison:

Yes. So, I am from Kansas City. My husband's from St. Louis, so we are Missouri folk.

Rick Ruback:

And they're different places, are they? Kansas City and St. Louis?

Betsy Harbison:

Shocking, yes, I know. Most don't know that, but they are. They're on opposite sides of the state. We actually met in New York so, as my mother likes to say, I had to go all the way to New York to meet a nice boy from Missouri. She's not wrong. His family's here, my family's still here. Honestly, we weren't sure where we'd live after HBS and it was a, “I guess we'll go to St. Louis” type of moment. It became, “All right, we're here now. How do we sort of turn this into a strength?” You know, I do think a lot of searchers, they're looking everywhere and maybe they're agnostic, but are they really going to move to Kansas City? I don't know. You know, I'm happy to. I think I'd fare well in any Midwestern city. So, I sort of thought, “All right, maybe these are sort of hunting grounds that aren't that tapped into”, and I think I was just much more upfront and explicit with investors on, “This is where I'm looking.” You know, most buy on the coasts, I would say, and so I do feel like I was looking in territory that wasn't as saturated.

Rick Ruback:

Yeah, I think it's a great idea for searchers to go to a place where people haven't searched before. I think that is such an extraordinary strength. Now, if you don't want to live there, you shouldn't do it, but if you're comfortable living there, it's just a fabulous asset.

Royce Yudkoff:

Betsy, share with us a little bit how you experienced the geographic search. In what ways did that manifest as a positive in sourcing and engaging with owners?

Betsy Harbison:

So, I think the first thing is I just get the sense that most businesses – and this was also four years ago, I don't know what it looks like today – hadn't heard the searcher pitch before. A lot of that messaging certainly stood out during my search of, “Oh, this is an interesting email. What do you mean? You? You're going to take it over? Okay, interesting. I'll have a conversation.” I don't know if that's changed today but was certainly the case back in 2020. And then second, I mean, I really leaned into the Midwest thing. So, I'm a Midwestern gal. I am not from the coast. I am not New York private equity. I'm from here. I want to live here. My best performing sequence was a Midwestern gal looking for a business, really resonated with people. I mean, you've got to do what you got to do. I think I got a lot of responses and phone calls just based on that fact alone. Like, “Hey, this is my brand and I'm going to lean into it very heavily.”

Royce Yudkoff:

One of the interesting things to me about your search, and I know we're going to talk about this shortly, is in the end you acquired a business which is largely virtual, and so it could be anywhere. Rick, you and I have had some discussions about this because I've thought, “Wow, there are a lot of people who want to search but they also want to live in a particular area and that means a geographic search and that can be constructive or it can be limiting.” But there's also these virtual businesses, which means you could live where you want to and buy a business like that. Rick, I know you've sort of said, “It's not clear how well or poorly virtual works in a smaller firm context with a less deep management team.” But Betsy, that was a resolution in a way to where you wanted to live and the business you wanted to buy. Could you share a little bit about that?

Betsy Harbison:

It was. With my search, it certainly evolved over time, as searches do. Hey, I was geography focused, so therefore I was a bit more industry agnostic than maybe some other searchers were but over time I saw a few vertical market software businesses, and that's what I sort of fell in love with. And there are only so many in the nine states surrounding Missouri, as you can imagine. Because of that, I had to start really thinking out of my original territory and what that would mean for me, from a life standpoint also. That's sort of how it changed over time. It went from “All right, industry agnostic, focused around Missouri” to “All right, I really love this profile of business, so let's expand a little bit.” And at the time it was a bit ambiguous. We weren't sure, “Are most going to go back into the office? Is this forever?” No idea. I think it's probably been a mixed bag but ended up being a great solution for me, candidly.

Royce Yudkoff:

Betsy, this is a good moment for you to tell us a little bit about the company you bought. How did you find it? What was the closing process like, and any peculiarities around that? And, most importantly, what does the company do?

Betsy Harbison:

I sort of mentioned that evolution of my search on, I wasn't looking at software, saw a few that I loved, you know, had one heartbreaking moment of something slipping through your fingers. And that's right about the time David and Greg, who are my majority investor, they actually knew of this business from their previous life with smarTours. So, it's called Softrip. It is an end-to-end, mission-critical ERP system in the multi-day tour operator space. So, very specific vertical niche but very sticky, mission-critical software, it really runs their entire business. It was actually built in-house at a very large tour operator called Gate One Travel and, over time, had sort of grown this customer base organically, but it was a strange situation because it's still tied to the parent company who inherently competes with the customers that are using the software. So, just a strange dynamic. And so David and Greg reached out at exactly the right time. Gate One Travel owner’s getting a bit older, who's going to run the business? You know, that's really the mothership. So, David and Greg obviously understood, “Hey, I'm looking at vertical market software” and alarm bells start ringing. “Wait, we know of this business.” And so that's how we were introduced to Softrip. So under LOI in, gosh, March or February of 2021, closed in October of 2021.

Rick Ruback:

So much to talk about with that, Betsy. Let's go back just a little bit in your story. So, you're searching and, for those that don't know, David and Greg are the founders of Footbridge. They had taken our class, graduated from HBS, did a geographic search out of the New York City area, and ended up buying, as you said, a travel business called smarTours, which they owned for I think about five years. Successfully exited and then have become active as investors in the search fund space. So, David and Greg was your sort of lead investor in the search. You didn't pick them because they knew something about the tour business, or this company, or anything else like that. It was just you wanted to work with them.

Betsy Harbison:

Yes.

Rick Ruback:

And people always say one of the reasons they want to do a funded search is because they want help from their investors in sourcing, and most people who search have never sourced before. So, this idea that you're going to get help sourcing, it's such a compelling story, right? But most of the time that help doesn't really happen, but with you it did. In a very explicit way, your lead investors actually help you find the target. And were they involved in the entire process?

Betsy Harbison:

Definitely involved throughout the entire process. But even to speak more to your point, it's pretty funny, I was at a wedding, this might've been six months after we closed, and met a guy who works in private equity, and he's like, “I've been trying to get in touch with that business for years and, you know, just couldn't get in touch with the seller”, and so, again, just personal connections, network…

Rick Ruback:

Yeah, they matter.

Betsy Harbison:

...right place, right time. Yeah.

Rick Ruback:

So, talking about weddings, I believe there was one in your life around this time.

Betsy Harbison:

Yes, I sent over the first draft of the purchase agreement the morning I got married.

Rick Ruback:

Wow.

Royce Yudkoff:

How wonderfully purposeful.

Betsy Harbison:

Yes.

Rick Ruback:

Yeah. I mean, Royce can see that as a really good use of time because what else are you going to do in the day you get married, you really have extra time. Whether you spend the entire morning fretting or...

Royce Yudkoff:

Better to give a final read to a purchase agreement and send it out.

Rick Ruback:

Yeah, because you're going to get married at the end of the day anyway, nobody's going to say…

Royce Yudkoff:

That sale has been closed. Yeah.

Rick Ruback:

...nobody's going to say, “Oh, your makeup isn't perfect, you can't get married.” Nobody says that. That's not a requirement. Or, you know, you still have your sneakers on instead of your high heels, or your wedding dress isn't quite just right. But you don't get the purchase agreement done, you don't get it done, so you might as well get it done.

Royce Yudkoff:

There we are. I love that.

Rick Ruback:

Yeah.

Royce Yudkoff:

There's another way in which your deal was different from most searcher deals, and that was it was a carve out. In other words, this wasn't a separate subsidiary of the company operating across the country with an entirely different organization. It was sort of interwoven with the parent company that was selling it. Rick and I know that can be a challenge. There's a lot of extra thought and work that has to go into not just buying a business but carving it out from a larger business. Tell us a little bit about what that experience was like.

Betsy Harbison:

So, I'll talk a little bit about the diligence process around the carve out, but then I think there's some Year One operating implications there too. Definitely intertwined with the parent company. As I mentioned, they have this software product, they're supporting the parent, they're supporting customers, what's the split of time? Who does what? Very unclear.

Rick Ruback:

Are they in the same building?

Betsy Harbison:

They're in the same building.

Rick Ruback:

No division? No the case of, you know, the guys who are working on the software sit in this side of the building and the guys were working on the other stuff working, none of that?

Betsy Harbison:

So, that division existed. I would say the division between which engineers are focused on the needs of the parent company versus focused on the needs of our customers was a moving target.

Rick Ruback:

Okay.

Betsy Harbison:

No doubt about that.

Royce Yudkoff:

Okay. So, only the most essential employees were sort of mixed between the two companies in a way that was hard to tell.

Betsy Harbison:

Yes, and this was the hardest part of diligence. So also our seller was very firm - “No talking to employees, no talking to customers pre-close” – so we had no access to the team.

Rick Ruback:

Nice.

Betsy Harbison:

But also we had to divvy up the team, in a way that we all deemed fair. And so that was by far the hardest part. I mean, we didn’t have…we had positions, we had no names, we had a couple of performance reviews, we had some data from a ticketing system, to see – which in hindsight, now that I know these folks, was flawed data, right? It didn't tell you anything meaningful. So, we had to get comfortable around this split of employees, and how do we get comfortable that we're left with people that we need to fundamentally run this business on the other side of things?

Rick Ruback:

Wow.

Betsy Harbison:

And that was by far the hardest part. It took a lot of conversations. Candidly, it really boiled down to seller trust, I think, at the end of the day, because you can never be 100% sure. But I think he was very straight up with me, you know, “Hey, yeah, we're going to take a couple of really good people, but at its core you will have the people that you need and the people with all of the knowledge.” That's pretty much what happened.

Rick Ruback:

I've heard this story before and I always imagine Betsy in jeans and a T-shirt, and the seller, who I've never met, in jeans and a T-shirt, and you meet at a baseball field, and it's like the equivalent of picking teams for your pick-up baseball game or your pick-up basketball game. The only thing is, he knows the players, knows their ability and knows the rule of the game, and has been playing it for much of his life. You, on the other hand, know none of the people, don't really know the rules of the game, and you've never played the game before.

Royce Yudkoff:

What could go wrong?

Rick Ruback:

You're going to pick a basketball team and you're going to end up with a bunch of people who are four feet tall, and he's going to end up with a bunch of people who are 6'5, and you're going to say, “Oh, I wish I knew this is a game that tall people did better but I've never played basketball so how would I know?”

Betsy Harbison:

And, just the cherry on top, is software, new to software.

Rick Ruback:

Yeah, you were new to the entire process and, at the same time, you're having to pick or have him pick and you okay, the division of people.

Betsy Harbison:

I remember having my own org chart that I tried to piece together based on LinkedIn and things. “Oh, okay, I think this person is this.” But looking back, it's probably quite wrong.

Rick Ruback:

Boy, that sounds like such a daunting task.

Betsy Harbison:

The fun part came too, as you can imagine, the day we actually split. First of all, no one knew about this, so Monday morning, 9am, transactions happen, sold the business, and then my first conversation with them is, “You're technically fired but don't worry because we're going to rehire you by the end of the day.”

Rick Ruback:

Some of you.

Betsy Harbison:

Some of you. Some of you.

Rick Ruback:

The rest of you aren't fired and you keep your jobs, but we won't tell you who because I don't know who's who.

Royce Yudkoff:

First of all, we know because we’ve followed your story, that this thing, which seems like just an immense risk, as you said, did work out. And I'd like to think that, you know, part of this was that you bought the company at a very attractive price, that reflected this complexity, and now that you've separated the two businesses and it's worked out, what you own is more valuable in part just because of this very chasm that you leaped over.

Betsy Harbison:

I do think that's true. I would say it was an attractive multiple but I, in hindsight, believe it was the right sort of risk-adjusted multiple, given customer risk, employee risk, all kinds of risk tied up in this. And I do think it was the right thing but, yeah, I think it's exactly what you said, Royce.

Rick Ruback:

You know, as I listen to this, I just imagine, “I wouldn't do it, I wouldn't do it.” I would hide under the desk. I would say, “Oh, we just can't close this deal, let's go find something else. Isn't there another business, where the employees actually work for the firm, and I can actually see what they've produced and what they do?”

Betsy Harbison:

To paint a little bit of a rosier picture of it, and again, I won't suggest that I knew this pre-close, but I would say, figured it out shortly after, I think there was an air of excitement around it too. I mean, this is a business that had never been run like a business before, lots of untapped opportunity, that's the flip side of why we loved it. But I think a lot of these people that remain with us today, who've been here since 2004, 2003, 1997, felt like the "business" had hit a wall, and they knew it could be so much more, and they just didn't see a path forward. So, I'm sure everyone was scared, and of course they tell you later how freaked out they were, but I do think there was an air of excitement around it too.

Royce Yudkoff:

I could easily see why a small part of a larger company is forgotten and not focused on. Betsy, this is probably a good moment for you to tell all our listeners what exactly the business does. I mean, it's clear it's a vertical software company, but tell us a little bit about it.

Betsy Harbison:

So, Softrip, it is an ERP system for multi-day tour operators. So, think of a tour operator, someone that packages up flights, hotels, activities, and sells ten nights in Europe for X amount of dollars. As you can imagine, very complex to negotiate contracts, build products, set pricing, make reservations, operate everything post-bookings, you know, confirming with suppliers, all the way down to the last accounting transaction. So we, our system, runs the entire workflow. So, very mission-critical for these multi-day tour operators.

Royce Yudkoff:

Betsy, one difference between the way in which you purchased your business and the way almost every searcher Rick and I have interviewed in our podcast, and frankly different from most searchers, is when you bought this business it was an all-equity purchase, meaning you did not raise any debt. And most of our searchers will buy a business and extensively use debt because that helps them get the equity return that their investors want and that they want. But in your case, zero debt. Can you talk to us a little bit about why that choice made sense?

Betsy Harbison:

Yes. So, I said top issue with the carve out was people. The second is no accounting, no books. You know, of course we had invoices, and I have an FP&A, finance background, so did my best modeling that I could possibly do. But at the end of the day, we didn't know “What is the profitability of this business?” That's a really uncomfortable place to be, especially if you have debt on the business, you don't know what's coming at you on the other side of things. And I did speak with several others who had done carve outs and the resounding theme that I heard from these folks is, debt's going to be a problem on Day One. If you can avoid it, do. Because you're going to have to actually operate this thing. It will actually require investment on the other side and you don't want to be handicapped. So, that was a big driver of that decision. And so, one, no debt, because it's a carve out and you don't know what the profitability really looks like, but it's also comfort around, “I still think that we can make this a really great return because of the potential of software in our industry and a variety of other reasons related to Softrip.”

Royce Yudkoff:

Because of the high growth that the company will make once properly attended to.

Betsy Harbison:

Yes.

Royce Yudkoff:

Well, all of that makes sense, and it's very different from the majority of ETA acquisitions, where the companies are much more mature and debt is critical to getting the kind of equity returns people want.

Rick Ruback:

Royce, just to emphasize this point a little bit, if you were to imagine what the business's customers will look like five years from now, so nine years since you bought the business, I suspect most of those customers in Year Nine will not have been customers in Year One. Is that right?

Betsy Harbison:

That's a very interesting question, and I'll probably answer it in a bit of a different way. The answer to your question is really about which customers will sort of follow us on the rest of this journey. What we walked into walked the line between packaged, off-the-shelf software company and custom development shop and, just due to poor processes, poor practices, candidly, fifteen years of setting expectations with customers, and that is not a great thing for a software business, for a variety of reasons. And so, we've really made a lot of effort in the last three years to change both the perception of us as a partner and also expectations around what are we, and that will only continue moving into the future.

Rick Ruback:

So, what you're saying is that under the sellers' management, there was just too much customization, customization almost dominated the product.

Betsy Harbison:

The word “No” did not exist, and the “No” is the right answer a lot of the time.

Rick Ruback:

So, when a customer would say, “Can I do it this way?” or “Can you change the software to make this happen?”, their answer was always “Yes”.

Betsy Harbison:

Yes.

Rick Ruback:

And so if you had ten customers, you had essentially ten different software packages, ten different maintenance hurdles, ten different development hurdles, because you didn't have one piece of software. You had one sort of common backbone to the software, but you had really ten pieces of software instead of one piece of software.

Betsy Harbison:

Yes, it was one common code base but, again, the word “No” didn't exist, so lots of different things built over a variety of years, and this is what we've really tried to get our customers to understand. Saying you want a thing a certain way and then we deliver on it, that's a dopamine hit, that's a short-term win, that might make you happy for a few weeks, but you're actually giving up a lot in the long run. You're giving up maintainability of the system, and our ability as a team to focus on things that actually move the product forward in a really meaningful way. You know, it's distracting to field one-off requests all the time. It's definitely been a journey to reset customer expectations, and there are still things, candidly, that do make sense, but our bar for any type of customization has gone from here to all the way up here.

Rick Ruback:

Right. So, much harder to get customization.

Royce Yudkoff:

One of the challenges in this change, Betsy, is you can't just take that away from customers. You've got to persuade them that you are working on a product roadmap where they'll be better off if they let the company do the most important things for the customers, not the things each customer wants. Is that the sale you've been selling for the last few years?

Betsy Harbison:

It is and, I'll be honest, it does not happen overnight. I mean, it's definitely been a journey. You know, in search, where they say, “Do no harm for the first, you know, six to nine months”, I did not have that luxury. These relationships with some of these customers were so skewed that had to step in immediately. So, those conversations started very early, but especially a lot of these customers have been with us ten years, fifteen years, so that's a lot of learning to unwind.

Rick Ruback:

So, Royce and I are always recommending people buying businesses that are, in our favorite phrase, enduringly profitable, but the underlying message there is, this is a business model that works and it's really good to grow it, and it's really good to make it more efficient, and it's really good to sell it to more customers. But none of those things are really important. What's really important is you just don't break what's working. And you make some changes along the margins, you make things better, never make things worse, knowing that what you bought, it's very good as it is. Maybe not excellent, maybe not superb, but very good as is. Is that fair, Royce?

Royce Yudkoff:

Very much so.

Rick Ruback:

Yeah. And what you did was buy a business that was really a collection of customers that you want to switch, or change, or nudge – I'm trying to figure out the right word – into a different product. Maybe the same product, but a different incarnation of the same product. Excluding the piece of the carve out, there was also a core transformation in the business in your mind, when you bought the business.

Betsy Harbison:

Yes. And no surprises, you know, knew this coming in. I would say, in a few ways, how abnormal the customer relationships were was a surprise, but that they were abnormal did not surprise me. But yes, in this business, there fundamentally, absolutely had to be a mindset shift, for a variety of reasons. And again, it's because we're more long-term focused here. I mean, what about these long-term customer relationships? Are we actually able to be the right partner for them if we're not changing their mindset as well?

Rick Ruback:

So, that is really intriguing.

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Rick Ruback:

I think the two things that glare here are the carve out and the fact that she's trying to transform the business in a fundamental way, transform the customer experience in a fundamental way. So, she's not taking the existing business and just extending it.

Royce Yudkoff:

Yeah. And I think that's very different from most search, as you touched on, but actually fairly common in the vertical that is vertical software. I mean, I think you see that all the time, taking something from a founder-created job shop to a single product company.

Rick Ruback:

Right, and I think part of that is because those businesses are at a moment of transition. You know, if you think about software, you had the mainframe software, and then you had the server software, and now you have the cloud software. But if you're in that second group and you've got server-based software and you haven't optimized the product for the cloud, and you haven't begun to think about how more users might come in contact with the software, both in terms of who you'd sell it to, but it's mechanics, what it does, that's a natural time for a seller to say, “You know, I don't want to do that transition. It's going to take years and money, and I don't want to do that. I'm happy with where I am now. I'm either going to let the business go down or I'm going to sell it and let somebody else take that journey.”

Royce Yudkoff:

That's right. And I think, tied to that, there's a sort of difference in managerial views. You have a founder who did the incredibly difficult task of going from an idea to having a whole bunch of customers subscribing to the product. And they did what they had to do to accumulate those customers in the early years, which means customizing yourself to their will. And a new manager comes in and just looks at the situation differently and says, “We have these customers. They are happy with the product. They're not inclined to switch, but I'm going to create a product that is one product and that the development will be the best ideas, in some sense, of all the customers. We're going to concentrate on that.” It's a very different way of managing the business as well.

Rick Ruback:

Let’s go back and see what our guest thinks about this issue.

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Rick Ruback:

I must ask, do you feel like you're on a risky path here? I mean, relative to most searchers who are buying this enduringly profitable business, and they walk in their first day and they say, “We will make no changes. Everything's going to be as it is. Don't worry. I bought this business because I love you and I love what you do, and we're not changing anything.” That wasn't your speech.

Betsy Harbison:

No, no, it wasn't my speech. You know, I'm not the first one going down this path. Thankfully, others have gone down it before me, which I appreciate because learning from them, of course. But I will say, I'm honestly a little bit more scared of what would happen with this business if we decided not to change than the path that we're going down here.

Rick Ruback:

Because if you didn't change, what you'd basically have is a project-based software business.

Betsy Harbison:

Correct.

Rick Ruback:

You don't get that scalable revenue that is the magic in a software business.

Betsy Harbison:

You don't. And, you know, eventually we'll exit this business and any investor in the future is going to sniff that out immediately also, right? Is this a software business or is this a services business?

Royce Yudkoff:

And, you know, while Rick is absolutely right in contrasting this with, say, buying an HVAC business, where you want to not change what works, it's also true that Rick and I have seen other founder-owned, smaller, vertical software businesses where they've fallen into the same cycle of wanting business so much that they do whatever the customer asks, and where the entrepreneurs have to do the, the searcher entrepreneurs, have to do the very hard work of eventually emerging with basically a single product that's being sold with features that the customers like more.

Rick Ruback:

Right. Because there comes a moment when you have to tear it down and rebuild it in a sensible way.

Royce Yudkoff:

Exactly.

Rick Ruback:

But your business is like that. You had to basically change everybody's expectations and rebuild the business, rebuild the core product, really. Right?

Betsy Harbison:

Yeah, and what I will say is, now it's been a couple of years, both customers and people in our industry are starting to really understand it. You know, we're starting to get questions of, “Why did you let us do that five years ago? Why did you let us tweak it? It's pretty frustrating, actually, that we have three different brands and like everything's a little different. Why did you let that happen?” The tide is turning.

Rick Ruback:

So, you're in the midst of the journey.

Betsy Harbison:

We are in the midst of the journey.

Rick Ruback:

And has that required some ongoing capital expenditures, some ongoing hires, some reconfiguration?

Betsy Harbison:

That's actually a great question. For our core enterprise product, it's actually been the opposite. We've cut down on customizations, which has therefore, I would say, the exact same decrease in the number of defects and support issues and, you know, every once in a while an emergency pops up. So, we have tightened up that engineering team and it is much more productive, efficient, and optimized than it ever was before. So, it's had the opposite effect.

Rick Ruback:

I bet people are happier too.

Betsy Harbison:

They're so much happier. You know, those first six months, you're a little scared to see what's in your email in the morning because you don't know what happened or did something go down? And that doesn't happen anymore and hasn't for some time. So, I think our team is much happier, and I can even see it. It was an interesting culture, a very serious culture, not a lot of laughter and smiles. That's, you know, completely changed over time because I think we've just gotten a handle on a lot of our things that we need to fix.

Rick Ruback:

So, that's in the core business?

Betsy Harbison:

That's in the core business.

Rick Ruback:

I'm assuming you're distinguishing that from something else?

Betsy Harbison:

Yes, yes. One of the early learnings that we've had, about 30% to 40% of our inbound inquiries are from small, multi-day tour operators that can't find a solution. You know, they're one or two-man show, they're on Excel, everything's disconnected, they can't grow, they also can't hire people because they can't hire people and train them on a system and process that's fundamentally broken. And so, we continued to hear the story, and we were turning away 30% to 40% of our leads. We're too expensive, we're too big, we're not worth it for you, we're not the right fit. And so, we've been building a new offering this year, much different than our core enterprise product, this is a scaled back, very optimized from a UI/UX standpoint, new product, that we are actively working with a beta group right now, which has been very exciting.

Rick Ruback:

Oh, congratulations on that progress. How long do you think you'll own this company?

Betsy Harbison:

I think I always knew from the get-go, just given the carve out nature of this, this would be, this is a longer process than probably a normal search deal. You know, the first year wasn't a lot of the fun stuff. It was setting up core business infrastructure. So, you're already delayed by a year from many of the good stuff. And part of the reason I really liked and was attracted to this business, there are multiple ways to grow it. Hey, you know, in its twenty-seven years in business, Softrip had never spent a dime on sales and marketing. Great, that's an obvious one. There's a really big payments opportunity in this space. Great, another option. And then, as I mentioned, this sort of SMB-focused product that we're building, a third option. And I feel like we're in the midst of all three of those and starting to see some really great early signs of all of that. I mean, candidly, I don't really want to do anything else and can't think about anything else right now, so I would hypothesize a bit of a longer process.

Rick Ruback:

My guess is you're a long time away from getting everything stabilized. You know, we talk to people who purchase businesses, we talk to entrepreneurs, and once they buy the business the stress level goes down pretty quickly in the first couple of years. Are you finding that? I would think with all this activity you've managed to keep that stress level up a little bit. 

Betsy Harbison:

Yeah, I think the most stressed I've been was really in that first year, for all the reasons that we mentioned. Carve out, customer conversations that aren't really fun and they're risky, but there's also no other path forward…

Rick Ruback:

And your first year of marriage.

Betsy Harbison:

And first year of marriage, right. That was definitely the most stressed I think I've been, and also, keep in mind too, it was sort of just me for that first year. Since then, we've built out our executive team, we've got a real team now. So, a lot of other people who can own things, who can move things forward. So, the stress is always there, but nothing like Year One, I suppose.

Royce Yudkoff:

Well, that is as it should be, and I think most searchers would say that about their Year One, that they come in and they're working hard to figure out what's important and what's less important, and because they care so much, everything is important and that's just really hard. Three years later you have a better read on that.

Betsy Harbison:

Yes.

Rick Ruback:

Betsy, Royce and I have a tradition – we have so many traditions – but on our podcast, we have a tradition of ending each episode by asking the guest whether they have any questions for us. And since you are our former student, it doesn't have to be a question, it could just be a criticism, if you want.

Royce Yudkoff:

Yeah, like “Why didn't you teach me this? Because it turned out to be really important.”

Betsy Harbison:

I was class of 2020, and I felt like it was one of the first years where we had a large percentage of female searchers…? And also, gosh, I don't even remember the numbers – you know, some people jump in and out of search after business school, so it's hard to know – but I'd just been curious, I mean, you all have seen so many people sort of think about search, enter the world of search, not enter the world of search. Why do you think it was such a small percentage of female searchers before? And then, how has that changed, and why has it changed, do you think, over time?

Rick Ruback:

Well, Royce and I have been doing this for about fifteen years, and early on there was an article, I think published by The New York Times, I can't even remember, that discussed gender issues at business schools, HBS in particular. And our class had the joy of being singled out as being mostly men, and that the attrition from our fall class to our spring class among women was dramatic. So, we had many fewer, as a percent, women in the spring class, and the spring class, for our listeners, are people who are actually going to search, and we talk about how you do it. So, a pretty large percentage of that spring class, about two thirds, end up not doing the search right away or maybe postponing. The question was, “Well, how come when you look at that, almost all the women drop off?” So, we actually worked with career services. We ran two focus groups of women, and we organized them in an odd way – a way that I thought was odd, but it was I think brilliant – it wasn't my idea. And one was a group of women who were married and another one a group of women who were single. Neither Royce nor I could attend because it was woman's-only session, one of the senior women in career services, and they did this interview, and they did this set of two lunches, and we got kind of a distillation of that. So, we heard two things that were really interesting. One was that for women who were not married, many of them wanted to be married. I think if we interviewed men, we would find the same thing. But the difference was that the women wanted to be in an environment where they would have regular contact with people that they might want to see socially, whereas men just didn't put that as a big deal – “I don't really care what my employees are like, and who I will interact with.” Whereas, for women, who they have lunch with and who they work with were really significant issues because they were imagining building their social lives, and maybe future lives, around the people they met there. And for the women who were married, some of it was questions about how this would work with child-rearing, if they decide to have a family. You know, “I am 30 years old. If I really have to dedicate the first five years to running my company, how's that going to work?” Things were a little more unsettled in just what the right age and risk factors were for women at that point. And for the ones who were married, they also said, “Well, if we're going to have a family and I want to be in charge of child-rearing, then I want to make sure that my husband has the flexibility to go where he needs to go, and I can't do that if I'm tied to a business.” So, that was, those were two interesting reasons. And since then, one of the things Royce and I did was we started working very hard to get female protagonists in our cases, and particularly female protagonists who have been able to live pretty good lives while they were CEOs. And I think what has happened is more and more women have done this and as they've done it, there's been demonstrated success, and they've not only been successful in their businesses, but they've been really successful in their lives. They've had good marriages, children, good families, they feel comfortable with the amount of time they've been able to allocate, they love that they can control their schedule if they need to go to a school play, if they need to go to a doctor's appointment. Whatever it is, they can adapt. I think it has become much more appealing as the pioneers have shown that this can be done. That said, there are still far too few women who are searching and I think it's a fabulous career choice for everybody, men and women and, you know, there's more work to be done. Royce, what would you add?

Royce Yudkoff:

I think that does cover it. I think that this power of seeing women doing it is so persuasive, just as it would be to anyone looking at an opportunity and saying, “Are there people like me who find success here?”

Betsy Harbison:

Similar to, you know, how I viewed search, of, “They're crazy. Oh wait, these are people similar to me and…”

Royce Yudkoff:

Exactly, Betsy. Exactly.

Rick Ruback:

Right, but what we've learned is that to get traction on this, we need to bring women who are similar to them.

Royce Yudkoff:

Right.

Betsy Harbison:

Okay. Well, thanks. Thanks for sharing.

Royce Yudkoff:

Betsy, thank you so much. It's been a delight seeing you and hearing your story again. This is great.

Betsy Harbison:

You too.

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Royce Yudkoff:

It is so different from the model we teach our students, which is, as we say again and again, to buy an enduringly profitable business. And by that we mean you don't need to make big changes. I think Betsy is very smart in the way she did this because while the operational risk is surely higher, as we commented on, she didn't borrow any money, so she took the financial risk way down to zero. And I think that's a sort of off-setting to the higher risk of making operational changes. It surely gives you more time to figure it out as you go along.

Rick Ruback:

Right. We've always talked about the fact that you need to look at the riskiness of your business to figure out how much financial and operating leverage you can endure, that combination between the two. And in this case, I guess software inherently has high operating leverage, right?

Royce Yudkoff:

Yes, for sure.

Rick Ruback:

So, we have high operating leverage inherent to the business. We have a lot of uncertainty in the business because we're developing a new product, we want to transform the customer experience, we want to get them to switch or shift their consumption pattern of our product away from so much customization. So, if I want to do all that, I just can't have debt. But still, so I don't have debt, then I need a really big product market win to make everything work financially.

Royce Yudkoff:

Yes, I think that's true. I would also say that Betsy did a lot of hard work and took a bunch of risk in carving this company out of its parent. And I think once that was done successfully and before she started unifying this into a single product, I think she created a whole bunch of value in the company by having accomplished that.

Rick Ruback:

Yes, I think she made a product into a business.

Royce Yudkoff:

Exactly.

Rick Ruback:

So, it's now a business and I think she's doing wonderful things to the business, but on the spectrum between startup and really dull, enduringly profitable, 99% recurring revenue business, she's closer to the startup than most of the businesses we talk about.

Royce Yudkoff:

Which I think goes to show that there's a whole bunch of choices you can make as a searcher.

Rick Ruback:

Right, you have this visual that I always think about, you know, there's many ways up the mountain. And I think you and I think about the search as being a slow path.

Royce Yudkoff:

It's the trudge up the gradual incline, right, Rick? That's what we're doing.

Rick Ruback:

Right, with lots of switchbacks along the way…

Royce Yudkoff:

Yeah.

Rick Ruback:

…and you're never going up too steeply and each step goes before the other, and this feels like, you know, crampons and ropes.

Royce Yudkoff:

Exactly. Exactly.

Rick Ruback:

You know, I'm going up the steep part of the mountain and if I get there, I could get there so quickly and go so higher and can generate so much wealth.

Royce Yudkoff:

When we get to the top, Rick, we might find she's been waiting there for us, you know?

Rick Ruback:

For a long time.

Royce Yudkoff:

Exactly.

Rick Ruback:

What a great conversation with Betsy. It's wonderful to see the progress she's made and so interesting to see how she runs her business. Next week we'll be talking with Sam Rosati, a very experienced equity investor in self-funded searches. Royce, do you remember last season?

Royce Yudkoff:

I loved last season and I loved best our final episode.

Rick Ruback:

That’s right, and we’re going to do it again. We’re going to take questions from our listeners once again…

Royce Yudkoff:

…and then you and I are going to answer the questions they’re sending in.

Rick Ruback:

We’re going to try anyway. The best way for them to get the questions to us…

Royce Yudkoff:

…rickandroyce, as if it’s one word, at hbs dot edu.

Rick Ruback:

Because we’re really one team.

Royce Yudkoff:

Almost one person.

Rick Ruback:

Hardly of one mind on most things but that’s what makes it fun.

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 dot edu.

Royce Yudkoff:

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