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:

Rick Ruback and I are here with Kent Weaver as our guest. Kent is one of the most experienced and highly regarded investors in search. We are just delighted to have you with us, Kent. We're going to ask you all sorts of questions. Welcome aboard.

Rick Ruback:

Yeah, it's really nice to have you. Thank you, Kent.

Kent Weaver:

Super excited to be here.

Rick Ruback:

So, Kent, I think Royce and I have known you, it's at least a dozen years, right? I remember early on in our ETA journey, Royce and I were getting comfortable with the basics of funded search and then we started talking about unfunded search and I remember a meeting where we had a whole bunch of investors in the room, as they were getting ready to participate in a class exercise, and I was talking about the virtues of an unfunded search and you were the only one smiling in the entire room, so you were the only friendly face there. Even Royce was scowling at me a little bit.

Kent Weaver:

I remember that conversation.

Rick Ruback:

When did you make your first search investment?

Kent Weaver:

My first search investment was in 2006. It was my second year into running my own self-funded search. And I had searched at the same time as Ben Godsey, who has built a fantastic traditional search fund company over all these years. He had an equity gap in his deal. I had no liquidity and almost no money to my name, but he was a powerhouse. I loved searching with him and I put my first $50,000 into his search fund, 2006. Then didn't have liquidity for a couple of years and made my next one around 2009. And there's been well over one hundred searches, self-funded and traditional, and I'm in about sixty operating companies.

Rick Ruback:

That's terrific. That’s terrific. And you run a small fund that invests in search.

Kent Weaver:

I wouldn't call it a fund. I mean, it's mostly been my own capital all these years and then, you know, there are times I'll invite a couple of special investors or people I think are just super energizing and we'll co-invest together.

Rick Ruback:

And for full disclosure, Royce and I are part of that team, and we very much appreciate being included and being called special.

Kent Weaver:

Absolutely.

Royce Yudkoff:

So, Kent, let's spend a moment, if you would, walking us through your professional background, your journey, where you grew up, your education, jobs, and then your engagement in search.

Kent Weaver:

I grew up in a small town in southern California. Super loving parents, great household. My parents really elevated my younger brother and I's lives from what they had, but it was pretty humble beginnings. You know, I worked early. If I wanted first car, that was money I had to earn. I played sports growing up, but no one was paying anything for my talents, administratively or intellectually, so I installed carpet, starting in eighth grade and did that through college. I was in the consulting world for three years out of undergrad. Learned a ton. I was around people that offered a lot of mentorship and I'm forever grateful. After about three years of that, I wanted to build and run something. I didn't know what a search fund was. I just knew I wanted to build muscle to be an operator. So, I did this search with the firm's blessing. Like, the CEO training programs were, you know, General Electric or Pepsi and there were other names, and I fully immersed into that. I ended up getting hired by Pepsi. My first rotation was in the Pizza Hut unit and they gave me an analyst job. Like, the first four months I was like the annoying younger brother just pounding the table, like, “I thought I got to run something.” And so it was good professional development, learning how to be patient. But I did become like a regional CFO for the Arizona Pizza Hut unit, which in the whole scheme of importance at Pepsi is like a grain of sand on a beach. But I thought it was everything, and it was my first real professional operational role and I loved it. Long story short, I ended up getting an MBA and one of my old consulting bunk mates, named Rick Gustafson, had turned me on to the search fund world. I came back to search a couple of years later and had a lot of conviction to just do a self-funded search and solve for being a leader early and building wealth and having, you know, control over my professional and personal life. And after a two-year search, bought a healthcare business in Sacramento and ran it for close to ten years. And we raised four kids and loved it. And about ten years into that, I stepped back and we elevated a team to build the next chapter, and I thought I'd take a break, be a little bit more present at home, and maybe go do it again. But investments started to come in and some of those early CEOs were just totally energizing and rock stars and it was so much fun that three investments turned into seven or eight and then I was like a drunken sailor and I couldn't stop. And it was pretty good on my home life too. In a way it became like one of the early holdco companies. Back then, I owned my healthcare company, but I started to invest a lot into traditional and then later into self-funded and traditional.

Rick Ruback:

When did you do your self-funded search?

Kent Weaver:

2002.

Rick Ruback:

2002. So, you were early in the game.

Kent Weaver:

It was pretty early.

Rick Ruback:

And an early self-funder. Why did you decide to go unfunded?

Kent Weaver:

We had a little bit of a nest egg. I wanted to fund my own path. I did want to own more equity. I wanted control over where we lived. And so it just seemed like the best path for my wife and I, and I didn't mind working in a smaller business. I liked the grind. I liked immersing into the companies that are little, that don't have infrastructure and need to build out teams. I didn't mind any of that work. And I thought there was a bit of a labor arbitrage by doing it, and it just seemed right at the time, and it really worked out for us.

Rick Ruback:

What was its size, approximately?

Kent Weaver:

The business I bought was $2.7 million of revenue, had a great clinical team. The back office was a total mess. It was maybe break-even, but it should have had profits of $500,000 to $600,000. And I worked really diligently with a consultant to see through what the earnings could look like and what the work would look like, and I had a hell of a purchase price and we just went for it.

Rick Ruback:

That's great, not so different than some of the smaller self-funded searches that are happening these days.

Kent Weaver:

Not at all, a lot of similarities.

Rick Ruback:

So, that's why you're so sympathetic to it, because you did it.

Kent Weaver:

Yeah, I can understand the grind. The scars are still there.

Royce Yudkoff:

Well, it's special to be an investor in search and have done a search and bought a company and run it as CEO. That brings a lot of value to searchers, for sure.

Kent Weaver:

I think some of the early search CEOs, I think there was a depth of connection that I know was very energizing for me. It kind of converted me into doing this. Entrepreneurs never BS each other, so it was candid, transparent, trusting conversations. We could all be vulnerable. And, you know, something about that was a really good foundation to build deep relationships, and I think we all really relish that.

Rick Ruback:

That's fabulous.

Royce Yudkoff:

When a prospective searcher comes in to you, what are the qualities you're screening them for, Kent? And then when they bring a business to you, what are some of the qualities you're screening that business for? I just think there are a lot of people who would like to look at themselves through your eyes.

Kent Weaver:

It's such a great question. I love betting on young, passionate super talents that have endless energy. Even though they're typically young, there's a lot of accomplishments to-date. Where did they go to undergrad? What did they do in their first or second job? Were they around smart people? How challenging was it? Where did they get their MBA? But it could have been PE, consulting, Teach For America, working for a microfinance company in Africa, like there's fascinating stories. But underneath that you can see these character attributes that I just love – the grit, humbleness, focused, curious, like hungry but with edge, but authentic and likeable, tenacious, like you see these patterns and it gets very exciting. It's the kind of people you want to bet on. I would add to that, demonstrated interest is pretty interesting to me. What are the classes they took in their MBA program, if they got an MBA? What are the activities they've done to learn about this model to see if it's a good fit? How many informational interviews have they done? Like, how'd they kind of mosaically build conviction to go do this? I think that's fascinating. I'm probably a little heightened by early childhood entrepreneurial experiences. If somebody did a paper route, I think there's a correlation to maybe that and this being a good fit. And then, just to crystallize it, I'll give you a couple of examples. Take Jim Vesterman. You know, over ten years ago, he's raising money for his search. Princeton undergrad, decorated Marine, gets his MBA at Wharton and then, if you talk to him at that time in his career, super humble, super focused. You could tell he was super talented, very passionate about this. How do you say “no” to that? Or Paul Thompson, HBS, had your guys' class, loved it, comes out to visit me in Sacramento, which he didn't have to do. 110 degree day, his rental car, the air didn't work so he is dripping with sweat. He walks into my company, doesn't need a break, and proceeds to talk about building a company for about three hours. I couldn't get him to stop, but it was intoxicating, like the grit. And, you know, he was a rugby player and a CPA and he had sold encyclopedias door-to-door before Harvard Business School. Or Alex Stavros, son of missionaries, grows up in an impoverished part of Peru. Immigrates to the US, has a pretty intense operating job, goes to Stanford Business School, is willing to come out on a Saturday morning and talks about sense of mission and wanting to build a mental health company. You could throw any kind of problem out to Alex, he'll stay up all night. His intellectual curiosity is just so intense. It's like, how do you say “no” to people like that? That's what it's all about. Those are the people that are going to build great companies.

Royce Yudkoff:

That's a pretty impressive and clear way to describe how you spot someone when they walk in your office, right? It seems pretty vivid to me.

Rick Ruback:

So, Kent, one of the conversations that Royce and I have that we repeat a lot, often in private, is that every time we make an investment, we of course love the CEO and love the business and think it has great potential. And then with the passage of time, some do really well and some do less well, and we pause sometimes and say, "Could we have predicted that? Did we miss something? And could we tell something about those businesses or those people that marked them, either the ones that were super successful or the ones that were less successful?" I'm wondering what your take on that is.

Kent Weaver:

Well, I would say if you're talking about maybe the deals that didn't work and you're reflecting why…

Rick Ruback:

Yeah.

Kent Weaver:

…what are some commonalities? I'll put them into two buckets. I think there's some indicators of things when it probably doesn't go right. And I'll put one bucket, I'm going to call MBA hard skills. So, I'd say one, due diligence is a little soft. How we diagnose the health of the industry, you could use a Porter model, whatever, but the industry, it's more commodity-like, it's slower growth, there's more competition so that diagnosis doesn't prove to be right, and that one's a crippler. I think sometimes the operations are too complex. Sometimes it takes some pattern recognition, people around you to say, "You just don't look like you're meant to run that business. That's not a good fit." Those kind of people aren't always around. Sometimes the margins – again, MBA hard skills – the margins, they're not realized. There's lower cash flow, more CapEx, worse working capital needs than what we thought. And then the soft skills, the leadership skills, which is sometimes so hard to know up front. There's trouble between the searcher and the previous owner, the team, maybe their board, they're not able to retain talent or hire, and they just don't execute. Some things you just can't know until after. Some people end up being just happy in a room running spreadsheets all day instead of like out in the business talking to customers, and that can end up being a kiss of death.

Rick Ruback:

Yeah. And particularly on the soft skills, it's really hard to tell how well they're going to lead because there's never been an example, and even in the military, where people have great leadership skills, they didn't actually recruit the people. People might've liked to work with them and serve with them, but there's no real way of telling that and we can't really learn anything about leadership style in the commercial space.

Kent Weaver:

It's not a class that usually is taught at a business school. So, Bill Egan, who was a special mentor to me in this ETA world, used to say, "You can't predict..." And Bill's usually right about everything but on that one, I'm not going to agree wholeheartedly. I'll say like we probably know seven out of ten times after doing this this long, but that's still at best a 70% hit rate. We just don't know.

Rick Ruback:

Yeah.

Royce Yudkoff:

Yeah, well, there's surely a lot to that. I know Rick and I will look back at, say, pairs of investments, one that did really well and one that disappointed, and the challenges the CEOs faced in each of those at the start seemed roughly of the same magnitude and yet one sort of made it work and the other struggled. And, you know, there have got to be a lot of soft skills in that difference.

Kent Weaver:

Royce triggered a thought. This is what makes this so fun, and if it were easy, everybody would do it. I made this comment the other day, like after doing this this long, I think I know who's got the top five or six investing records and I think if you were to look at their portfolios and maybe compare it to the Stanford study as an index, I think you'd see more consolidations and probably more healthcare. And I think I also probably know five or ten investors that are beneath the index and I think you'd see probably more consolidations and healthcare investing.

Rick Ruback:

Oh, that's really funny. Same industry, same strategy.

Kent Weaver:

A lot of collaborating, you know, a lot of copycatting, whatever.

Royce Yudkoff:

Yeah.

Kent Weaver:

Like, what teases apart the gold from the landmines? We all have our twenty criteria, but there's probably a vital three, four, or five and one of them is the CEO and the board around them and those are the gold versus the landmines. You just don't know. We're all trying to figure it out but...

Rick Ruback:

So, I have this concept that I've been toying with recently. I wonder if you could react to it. And what I think is that one marker, I think – unfortunately, I can't tell this before closing – is executive control. How quickly does the new CEO take control of the business? How quickly do they gain respect of their employees? How quickly do they start doing sensible things? I mean, I'll contrast it with a person who's leading the business in all the right ways with a person who's just crippled by uncertainty, is just unsure of the right thing to do, maybe relies a little too heavily on their board. What do you think of that concept?

Kent Weaver:

I love the concept. I think part of the magic's in how you get there because, while I love the concept, if it doesn't start with humble learning and you go a little bit too fast to being directive and wanting to be emperor and in control, you can force a lot of errors and you can run off a team. So, I think so much of it's going to be in the execution.

Rick Ruback:

Yeah. My inclination is that I want every CEO to be able to get their hands dirty in the business.

Kent Weaver:

Hell, yes.

Rick Ruback:

And you're right, though. If you come in and you start telling the person who's been operating that machine for the last thirty years, "Let me tell you how to do this better", your first day, it is not going to work out very well.

Kent Weaver:

I think that part of a mark of a great entrepreneurial CEO is they put what's best for the company above all else. That is a forcing function for humbleness and just keeping things aligned. Really hard to do though.

Royce Yudkoff:

Kent, we've been talking a bunch about sorting out the great candidates for CEO from the ones that are less great. Take us, if you would, to the other side of this, which is you've backed someone in a search, they come back with a company. How do you start to filter that company? And I realize there's lots of iterative work as you and the searcher go forward and they push through due diligence. But tell us a bit about your screen that starts to tell you, “Is this a good opportunity or less good opportunity?”

Kent Weaver:

There's a couple parts to that. So, the couple of variables that are just so essential, for me anyway, are the health of the industry – and I hope it's expanding. I don't have to have huge TAM, I don't need hyper growth, but I like evidence that there's rational thinking in the industry, it's healthy. I also like quality of revenue. I'm going to sound so cliche but I'm a real stickler on just, “Do we understand how we differentiate and extract economics out of a customer? Is there stickiness? Is the revenue recurring in nature?” I like the revenue quality part. “Do we have pricing power?” One of the hardest things to find in business. “Do we have really good unit economics?” Because I think it speaks volumes about the market, the industry, how good this company is, how well it's run. So, you have all those things floating around and then when an entrepreneur, like a search funder's presenting, I like to see like deep understanding about all those facets – the org chart, the company, are they relentlessly curious? Is there a tone of partnership? They should be coming to us like partners and helping to make a high conviction, strong decision and de-risk making a mistake versus selling. And then is there a good fit? There's an entrepreneur named Charbel. He did traditional search. He had worked at McKinsey, he went to Wharton, and was excited about a residential brain trauma company in Florida. Great margins, great market, but he was encouraged to go spend a couple nights there. And seeing people that are having head trauma issues walk around in the middle of the night and sometimes get super angry, it wasn't that he didn't have the stomach for things that were hard. It just wasn't a good fit. Fit does matter. I could have never bought an engineering services company. That would not have been a good fit. So, those are all the things that are swirling around my head as I think about that.

Royce Yudkoff:

I love that last point you made about fit because people who look at search for the first time often wonder how young entrepreneurs can go into an industry in which they have no experience. And I think you put your finger on it. They're also looking at what that job is and whether that job is a fit with their skills and interests, personality. And if it's distant, they say “no.”

Rick Ruback:

And it's really nice to see an increased focus on that, I think. You know, in the book we use one of my lines, which is, “If you're allergic to fur, don't buy a pet shop.” But that's really a trivial way of capturing this whole idea. And I think it's intriguing because it is rare for a new CEO that's young and energetic, that's often replacing an older, less energetic CEO, to want to do the job in the same way. They don't. There's a sense in which the potential CEO has to kind of sit down and imagine what their life is going to be like. And Royce and I once had a former student and searcher who was an observant Jew, and he was really interested at one point in this snowplow company and then he realized that it could snow on Shabbos and he is not going to work on Saturday no matter how much snow comes, so that's not the right fit for him. And I thought that was...

Royce Yudkoff:

Practical.

Rick Ruback:

…just the right decision. That might be an extreme example, but it's an example, right?

Kent Weaver:

Yeah.

Royce Yudkoff:

Kent, speaking of decisions searchers make early on, you know, one of the things Rick and I see all the time, as our students are getting their head around, “Do I search and how do I search?”, is this decision of whether they should do a partnered search or whether they should just search on their own. And obviously there's no one right answer, because we see our very successful students go down either of those two paths. But I'm sure you've seen a lot of solo searches and partnered searches. What observations would you have for people who are thinking about which one is right for them?

Kent Weaver:

What a great question. It's hard to have a perfect answer. I'll share my story. I do think it's illustrative for people to hear. I recognize partnered searches tend to do better. I mean, I've seen stats. It's pretty black and white, and I would acknowledge that. I also just thought, for me personally, like I probably had a slight preference to do it with a partner. I just wanted a fun, enriching journey, and I didn't have to have that. It'd have to be somebody really special and, in my case, I had worked that first job, I was bunk mate with Rick Gustafson, and we worked on projects together. He went to the GSB and I thought he was a super talent. We had fun together. It wasn't necessarily about complementary skill sets. I just had deep, deep respect, and the idea of working together was just very energizing. I don't think you should be seeking a friend or anything. I'm not trying to paint that picture, but I just thought, “Wow, we could do a lot of stuff together and it'd be fun.” When that didn't work out, you know, that was my standard and I didn't have another relationship like that. And I was so excited about doing this, like, if it wasn't going to be that, I was really comfortable doing it on my own. I would offer that up to anybody, like, you should want to do this for you. If you happen to get lucky and meet somebody along the way that maybe enhances the journey, I think that's great. But if you need that to do it, I would really do a little soul-searching about that.

Rick Ruback:

Well said.

----------

Rick Ruback:

Royce, I was really interested in Kent's discussion on partnered versus solo because at one point he seemed to say, “I really preferred partnered searches”, but, as you know, he did a solo search and he seemed really happy about the solo search and it certainly turned out well. So, what do you think?

Royce Yudkoff:

You and I have observed that, overwhelmingly, investors say that partnered searchers do better than single searchers, and there's some data to show that. But, of course, you and I always reflect to each other and to our students that it's the searchers who are paying the full cost of that partnership in a 50-50 split. It's not the investors. The investors get the benefit. And so reasonable people might look at this different. Two things about partnered searches – one is, it seems kind of obvious that if you felt you could add skills at the top level to your own, that you would buy a company and at that moment you would assess the missing skills in running that company and you would recruit, quote, a partner, unquote, at that moment. Not only would you get someone whose skills were precise to the need in running that company, but you probably wouldn't have to give them 50% of everything you were getting. And so, just as sort of a base case to think about it, that would be a better way to bring aboard a so-called partner, unless you felt like the search was so trying, probably emotionally, that you would just do better with a thought partner, a morale partner, someone to get you through that. That would be a reason to get someone earlier. But that's kind of my reaction to the notion of partnering. I don't know that we've ever talked about this precise point. I'd love to hear your reaction to it.

Rick Ruback:

I think it's also situation dependent. I think if you really do, as Kent was talking about, if you really do have somebody who you have a great working relationship with that you think you can make more progress with, that somehow makes you a better searcher, then yeah, go ahead and do it. But I also think, as you say, it is the case that the cost is borne by the searcher because, you know, yes, two heads are better than one. That's true. That benefits the investors. But the searchers are knitting those hats because they're dividing their carry. And interestingly, in the funded search community, what they don't say is, “If there are two searchers, we'll double the carry.”

Royce Yudkoff:

Right.

Rick Ruback:

They don't say that. If it was really worthwhile, why wouldn't they double it? In an unfunded search, the way most investors price those is by looking at a rate of return, and that rate of return calculation, there are lots of numbers in that calculation but none of them are the number of searchers. I just think you're right, you’re 100% right, that the cost of the partnership is borne by the searcher. Now, there's certainly circumstances where two people working together can accomplish much more than one person working alone, and maybe even more than two people working alone, because there's some synergy or some gain there. And so it could be very beneficial, particularly in the early stages of acquiring a company. So, I like the model where people partner, they both throw themselves into the first business and then after that business gets its legs underneath it, they then move on to another business. And perhaps one stays as CEO in the first business, the second searcher becomes CEO of the second business, but there's a sense in what you're sharing executive function across a couple businesses. And that's an interesting partnering model, different than two people working in the same firm.

Royce Yudkoff:

I think maybe a good, simple rule for this is if you're intending to be a searcher, you don't have any idea about a specific partner and are starting to find yourself running around looking for a partner, probably you should put a pause on that. It should be someone you know well and value their skills as additive to your own, or it should be done later in the process, but just playing the mating game seems like a recipe for cutting your returns in half.

Rick Ruback:

The other thing I think is interesting is that in a partnered search, you need to buy a bigger company. You need to buy a company that has enough complexity so both of you can be gainfully employed.

Royce Yudkoff:

And enough economic value that both of you can get paid enough to make this worthwhile.

Rick Ruback:

That's right. And so it's hard to imagine you could buy a business with $600,000 in EBITDA and make it work. Because after you pay your annual debt service, you probably have enough money for one salary, not two.

Royce Yudkoff:

Right. This is a big decision searchers need to make because you're going to be looking for different types of businesses. And there's a lot of attraction to small firms. There are other things that attract people to big firms, but it really is a choice that is partially framed by whether you're feeding two mouths or one.

Rick Ruback:

Royce, let’s get back to the conversation.

----------

Royce Yudkoff:

Kent, just on this track we're on right now of some of the big decisions searchers make right at the start of their decision to search, one of them is a decision you made, which is do they go down the path of a self-funded search or do they go down the path of a funded search? And maybe you could describe how you think a searcher ought to think about that decision.

Kent Weaver:

Personal choice. I think at its core, ETA entrepreneurs are solving for wealth creation, wanting to be a leader early, like challenge seeking, professional control, but life control and balance. That's why we're doing this. Where it gets really personal are, what's your desire to own more equity or not? But recognizing that if you want to do something, if it's self-funded and there's more equity, you might have to personally guarantee a loan. You will very likely start in a business that's smaller. Your first two or three years, the motion and the things you do are probably going to look different. Does that fit you? Are you energized by that? Like, I actually like that kind of work, but not everybody does. Smaller companies have no infrastructure. You're probably going to make every hire for the first two years. You're probably going to let some people go. You know, in addition to that, there might be a desire for a bit more flexibility in what you buy or where you're going to live. That might tilt you towards self-funded. But for people that do traditional, I think they look at it differently, like, “I'm getting all kinds of mentorship and de-risking. And, you know, it's a learning model and I think that lends itself nicely to me.” That's just something to have a decision on.

Royce Yudkoff:

And flipping it around to you as an investor, do you do both funded and self-funded investing?

Kent Weaver:

I did a self-funded search, then my first fifty investments were traditional. And I've loved it, I've loved the people in it. I've loved that whole collaboration. It's been wonderful. I try to stay objective. I get most excited by the entrepreneur in front of me. And so I'll pressure test hard, like just “What's your fit?”, but whichever side they end up on, if it's authentic and it's filled with passion, I can rally behind it. So, in the last, I'd say, six years, I've done more alternative type of models, more self-funded than at any time before, and still am really excited about the traditional searches I'm into.

Rick Ruback:

Do you think the traditional searches have a different skill set for the CEO? I've always thought that they do, that the self-funded searches, because they're buying smaller businesses and, as you described, they're going to be working not just on the business, but in the business for at least the first several years. And my sense is the funded searches, they tend to be really laser focused on the task of professionalization. They're not so much getting their fingernails dirty, but they're wearing their fingers out evaluating IT and that kind of thing.

Kent Weaver:

I don't know. Like, at the end of the day, if there were a Venn diagram, we see so many of these super talents filled with passion, pick one or the other. Then you get to know some of these people five, ten years after they bought their business. And there's a healthy amount of them that would've done pretty darn good at either one. I'm not sure I could have distinguished. And I think the self-funded, I think that entrepreneur tends to want to be more immersed, happier with a smaller business and some of those other things we talked about. And there's probably a couple out of ten that do traditional search that probably want to buy something bigger to start. You know, the idea of trolling around a smaller business that doesn't have infrastructure is less appealing. And they're probably trying to buy a bigger thing and scale to a decent sized outcome in a shorter amount of time. A lot of those hold periods on traditional, they've condensed over the years. Most traditional search funds, I think, are four to five years.

Rick Ruback:

I would think most unfunded investments are more like a decade.

Kent Weaver:

I think that's right. That would mirror the experience I had.

Rick Ruback:

Yeah, it's just different. Interesting. I hadn't thought about the difference in whole periods but now that you say that, it is, I think, absolutely right. And I wonder, it could be the velocity of wealth creation can be higher in a funded search. It could also be, I guess, that because they have more flexibility in the unfunded search, they might find a company that's just a better fit for them personally, and they don't want to move on to the next thing because they love the thing they have.

Royce Yudkoff:

Yeah. Often there's a geographic overlay to a self-funded search, where someone's bought a company in Indianapolis because that's where they want to live. Kent, as you know, in recent years we've seen the emergence of some hot sectors, in terms of searcher activity, which is a little different from how the world used to look maybe more than a half decade ago, so like med spas or HVAC are examples of sectors which have attracted a bunch of sector interests. So, Rick and I, we have this question for you, which is should searchers be attracted to these because there's agreement that they are good opportunities, or should they be put off because there's too much competition? What's your take on pursuing the hot sectors?

Kent Weaver:

I’m always careful to generalize, but I'll make a couple comments that are generalizations. I would always be wary of a cheery consensus. It's really important to build independent conviction. I think that's gold. Even a lot of today's searchers, there's a lot of herd mentality. I’m all for collaboration but there's some part of a search that I think ought to have an edge, be independent. Don't fall into what you hear a lot about or what other people have had success in. You think of somebody like Colin Hathaway to plumbing roll-ups – cliche, right? But he's been in that industry fifteen years. He knows what he's doing. He’s an advantaged buyer in that industry that has earned trust. He's got a legit right to win.

Royce Yudkoff:

Yeah.

Rick Ruback:

Don't you think, though, that one of the things about roll-ups that seem to be key on that strategy is that you're going to get multiple expansion? Multiple expansion seems key to that model. You're going to buy your platform at five and then you're going to do tuck-ins at three and you're going to sell the whole mishegas for, I don't know, ten, twelve. I think, to be successful, it really requires that you get that multiple expansion, and that's been fabulously true over the last decade but who knows about the next decade.

Kent Weaver:

Well, I get skeptical, maybe like all of us, about just any consolidation working. So, when somebody's starting to talk that speak, I'll encourage them to get under the hood on what some of these consolidations have looked like and kind of document it, codify it. And I think what you'll see is really good consolidations that got the multiple expansion, they had unusually high success rates. When they bought something, eight or nine out of ten times, it was positively value creating. That's really hard to do. You should know that, entrepreneur, that's really hard to do.

Rick Ruback:

And they often did real things, right? They changed operations, they improved revenue generation, they improved revenue quality.

Kent Weaver:

Then improveability of the businesses at a very high percentage success rate. Most of what they bought doubled revenue or EBITDA in four to five years. Now, how'd they do it? You know, pricing power, relentless focus on productivity, profitable growth. How’d they built the Holdco office, like what was enhancing to the Opco CEOs? Did they get really good at pricing? Did they build human capital flywheels? Did they learn how to be leaders in value creation machines as CEOs? Did they build brand and become like an acquirer of choice in that industry? Like, there's playbook there. Go learn it. Go look how hard it was. Talk to the CEOs that implemented that. And then all of these were really equity efficient. To your earlier point, not only is there magic in the multiples, but you have to become a surgeon at how to use debt and alternative forms of financing. You over-equitize these, you don't get the return at the end. So, you got to earn your multiple expansion.

Rick Ruback:

That is a really important point that you just made. It's not multiple expansion by just combining it. It's multiple expansion by improving the operations, by doing something special. And then you get the multiple expansion, not as a gift, but because you earned it.

Kent Weaver:

We know it, you can't deny it, it does happen. People stitch things together, slap them together. I wouldn't want to bank my career on that. I'd rather make it more intentional and causal. And if you get a little bit of luck, great, but that's the playbook.

Rick Ruback:

Right. People win the lottery, but that doesn't mean lottery tickets are good investments.

Kent Weaver:

That’s right.

Rick Ruback:

Kent, one of the things Royce and I really like to do, although with you it's frightening, is we always ask our guest if they have any questions for us. Now's your chance. I mean, you could I suppose ask Royce why he puts up with me, but...

Royce Yudkoff:

We'd need an hour. Just kidding.

Kent Weaver:

What are some of the trends and changes you’re seeing in the ETA world?

Royce Yudkoff:

I would love to jump on that. And Rick, you, I'm sure, would have some thoughts too. We've been watching this for a while. To me, a trend that has caught my attention and Rick's is that in self-funded search, there is now the emergence of recurring investors, like we've had for years and years in traditional funded search. So, one of the great benefits to entrepreneurs in funded search is that you could meet someone like Kent Weaver, and if Kent Weaver is impressed with you and maybe later with your deal, Kent will help you form a syndicate of recurring investors that have worked well together in the past. And that's a huge benefit to traditional funded searchers. Whereas in the self-funded world, it's always been the case that you had to create your own unique set of investors. You had to know some people who had the money to put into a deal, you had to explain what search was. And frankly, it was frightening and challenging to many self-funded searchers. And now you're starting to see investors who form syndicates and again and again are funding self-funded searches, often smaller deals with SBA loans. And it sort of mirrors what funded search was half a decade ago, and thus lowering the barriers to searchers getting into that side of the world.

Kent Weaver:

I am seeing that.

Rick Ruback:

I think what's happened is that HBS students used to say, "Wow, I go to McKinsey, I go to BCG, I go to Bain. I know what my consulting career looks like. I go to private equity. I sort of know what that looks like. I look at search and that's so different.” But now that there's hundreds of people who've done it successfully, I think people are looking at it and saying, "Oh, that's not so unusual. That's not so weird. I could do that if they could. Maybe that fits me.” It’s sort of interesting. And I think increasingly, higher percentages of our students are going unfunded, in part because they feel like the funded search community pushes them into stuff that maybe doesn't fit them very well. We have this phrase we talk about in class. You know, one of the reasons to do this is you want to build the world you want to live in. And if you want to live in a world where you're sponsoring the town baseball team and you know all your employees and the like, it is driving you to a certain size company. And that's different maybe than some of the larger transactions we've seen coming out of the funded world recently. I don’t know, just a thought.

Kent Weaver:

Yeah, it's pretty fascinating.

Royce Yudkoff:

Kent, thank you very much for joining Rick and me in this podcast. We appreciate it.

Rick Ruback:

This was so much fun. I feel like I learned so much. It was really great.

Kent Weaver:

Humbled, thank you both for the kind words.

----------

Royce Yudkoff:

Kent's comments on how he selects searchers to back is very interesting to me because a lot of the skills he's looking for are things that would come out as you interviewed someone for an important job. I'm not sure exactly what I was expecting him to do in these interviews when he deals with someone who has a relatively short career background but as he lays out what he's looking for, it kind of made sense to me. How did you react to it, Rick?

Rick Ruback:

I thought so too. I think the job interview is a good analogy. Like a job interview, it’s kind of a two-sided interview. He's asking questions of them to try to understand how it would be if he were to invest and work with them and, I think, both parties are trying to see if there's a fit there. Interestingly, in search, you know, an investor may choose not to back, even though it's a great fit and they would enjoy working with the searcher, because perhaps the industry thesis doesn't match or the geographical thesis doesn't match. It could be all kinds of reasons why an investor chooses not to work with a searcher that have nothing to do with the criteria that Kent was so cleverly digging into, but the ones he digs into are just right. You would never want to back a searcher that you just didn't like or you didn't think had the qualities that made sense.

Royce Yudkoff:

That's right. And then, of course, the way the relationship unfolds is the searcher will spend the next twelve to twenty-four months searching and in close contact with their investors. And so that's a period where everyone gets to learn a lot more about each other before any big financial commitment is made to the company. It's a sort of early stage job interview for this, where much more information gets to be collected before the really big decision occurs.

Rick Ruback:

But you point out often that it is really hard to see how somebody's going to function as CEO of the business, because you're not sitting on the other side of the table with that human. But when you're receiving the pitch from the searcher that you potentially might back, you can also think about how sellers will react to that pitch and say to yourself, “Self, if I were a seller, would I want to sell to this person?” And so, you know, one of the problems here is you get so little first-hand knowledge of how people do at the essential skill that you're hiring them to do.

Royce Yudkoff:

There are some skills that are decently measurable, like how will this person appear to a potential seller? There are other skills that are much more elusive at this stage. You often talk about how a key skill in searchers who succeed after they buy a business is their willingness and ability to seize executive control of the company. That is super hard to measure until they're in charge of a company.

Rick Ruback:

You bet. But this lets you know how well they're going to sell, how well they're going to present themselves. Are they organized? Are they thoughtful? Do they project confidence? Those are the things, I think, that are important in the human interaction between potential buyer and seller. And if you can't do that in your discussion with investors, it seems very unlikely you're going to be able to do it successfully.

Royce Yudkoff:

Said like that, it's a really intelligent thing that Kent is doing here because the commitment that he and other investors are making is to put up a bit of money to back the searcher in the search. And so the test is really about how well they do with the search. You now get another decision later, when they're presented with a company and know the searcher better, and they'll have a different set of tests then.

Rick Ruback:

That's right. Royce, I was intrigued by Kent's division between hard and soft skills, where the hard skills were the things that you can imagine teaching in a classroom. You know, how to model, how to negotiate a debt covenant, how to price your product, how to organize your inventory, what software system to use. And then the second kind of skill he talks about are these soft skills. And the soft skills are, well, soft. That doesn't mean they're easy. They're just harder to measure. Their leadership skills, their ability to empathize, ability to connect, ability to communicate.

Royce Yudkoff:

And it really means reading the room and knowing what the right thing is to say, and that is just so difficult to train people to do.

Rick Ruback:

What Kent said that I thought was intriguing is that you can think about eventual success based on these two sets of skills. And I reflected a little bit on that. I don't know if soft skills are unlearnable. I think everything's learnable, maybe not foreign languages for me, but for other people most things are learnable. But what I find really intriguing is that when people say they don't think they're ready to search, what skills are they looking to improve? They're looking to improve the hard skills. And the hard skills are things you learn on the job or know ahead of time. And the hard skills in a small business, they're not actually that hard. It is almost never a source of failure. And yet that's what people worry about. And they don't say, “I need to learn to be a nicer person. I need to communicate better. Why don't people like me? I have to figure out how to become likable on demand.”

Royce Yudkoff:

That's a really good point. And I guess it leads to, if someone feels in some ways they're not ready, maybe the place to go is take a job working for a CEO at a smaller firm, throw yourself in that environment.

Rick Ruback:

I think in the end it comes down to confidence. I think the people who think they're not ready are not looking for the hard skills. They say they are, but I don't think they really are. I think they're simply trying to get comfortable with the idea that they could do it.

Royce Yudkoff:

Yeah. The truth is if you're a first-time CEO, you're never going to be fully prepared for that job. There's no one on earth who has held each functional role in a company before becoming a CEO. So, everyone makes a leap, and you just have to get comfortable with it.

Rick Ruback:

Absolutely.

Royce Yudkoff:

Rick, that was such a fascinating conversation we had with Kent Weaver. He really has seen so much in search and has so much wisdom to share. Next week, you and I are going to be grouping together, speaking to an early career searcher who's gone into the healthcare industry, and a former student of ours, Adriana Garcia-Ceja.

Rick Ruback:

I'm looking forward to that. And Royce, I think now’s a good time to ask our listeners to send us in some questions. Our last episode of the season is going to be us answering the questions that we hear from our listeners.

Royce Yudkoff:

That’s wonderful.

Rick Ruback:

Listeners, please send your questions. Our email is rickandroyce at hbs dot edu.

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.