Alex de Pfyffer & Ross Porter – Investing Strategies in Data

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(3:03) – What’s the background for Heritage and how did you each get to this point?

(5:56) – What ideas were you considering for a startup?

(7:57) – Have there been any guiding principals or common threads through the acquisitions you’ve done thus far?

(11:49) – What does the data center business model look like?

(13:53) – Is there some overlap with your ISP or Fiber investments?

(15:00) – Is there some first mover advantage to bring Fiber Optic Cable to a certain area?

(16:33) – Who is your typical competitor?

(18:38) – Once you own an ISP, what are the ROI metrics for expanding that footprint?

(20:27) – Where do you see other opportunities in data for investments?

(26:10) – What have you learned from managing companies of different sizes?

(34:09) – What changes the most when you go from $10m to $50m of EBITDA?

(37:29) – What are some structure questions in your mind as you look to future acquisitions?

(43:35) – What’s a strongly held belief you’ve each changed your mind on?

(49:41) – What’s the best business you’ve ever seen?

Alex Bridgeman: Well, it’s good to see you guys. Thanks Alex and Ross for joining the podcast. I’m excited to talk about Heritage Holdings and all these businesses in between. For folks that aren’t familiar, what’s the kind of background of Heritage and maybe each of you individually? How’d you kind of get to this point?

Alex de Pfyffer: Sure. I’ll start here, Alex. It’s a pleasure to be on. Thanks for having us. And I’ll correct you slightly. Our name is Heritage Holding. And it’s a good way of telling our story. We started as a self funded search fund. And at the time, we wanted to be called Heritage Holdings. We had sort of came up with the name, Ross designed a logo, we went to see one of our advisors, Jim Sharp. And Jim told us, “Guys why do you want to be called Heritage Holdings? You guys are out there to buy one company, you guys ought to be Heritage Holding singular.” And that’s how the name came about. And so to this day, there’s a little bit of confusion as to whether we’re Heritage Holding or Heritage Holdings. But we started as a self funded search. Ross and I met at business school. We were in the same section. We both come from pretty different backgrounds, pretty different professional skill sets. And we got along, recognized our differences and felt that between the two of us, we could make one good CEO. And so, in the summer between our two MBA years, we decided that we would go out and search for a company that we could run. And that’s the inception of Heritage Holding.

Ross Porter: This is Ross here. I’ll give a little introduction of myself and maybe expand on that. First of all, thanks for having us on here. I really appreciate you taking the time and having us tell the story here. So yeah, we graduated in 2015. That’s really when we kicked it off. And prior to that, my background was in engineering. So I studied mechanical engineering in undergrad. I did some grad school as well. I worked in Silicon Valley for tech startups, one solar manufacturer, one self driving car company. So that was probably four years or so of pretty hardcore engineering work. And then I moved out to the East Coast. I followed my wife out to medical school. So moved out there, kind of got out of the engineering world. And I was pretty fortunate to expose myself a little bit to entrepreneurship. So I started a business. I was selling hearing aids basically out of my apartment in Philadelphia with a co founder that I went to undergrad with. And we built an online hearing aid business over three or four years. And it was a great experience, kind of got me exposed to running small businesses, owning a small business. And I was in business school thereafter. I was really focused on staying within entrepreneurship. So, I met up with Alex. We really liked each other personally but also saw the difference in our backgrounds and thinking process. And we’re thinking about starting a startup and going on that path to entrepreneurship. And then luckily, halfway through the first year, we got exposed to search funds and entrepreneurship through acquisition, it really resonated with what we wanted to do with our lives.

Alex Bridgeman: What startup ideas were you considering?

Ross Porter: I don’t even think we got that far. I think we were just in that fun ideation phase when didn’t really matter at the beginning. I don’t even think we had any ideas really. We were just kind of thinking about the idea of starting something. I was still running my hearing aid company throughout business school. I sold the company right at graduation pretty much to start Heritage Holding, not for crazy money or anything like that. It was okay. But it gave me great experience in running a business.

Alex de Pfyffer: My background was totally different. I grew up in Switzerland. I came to the US for college. I studied international affairs, politics and economics, thinking that I would work for the government or be a diplomat or something like that. And I decided to work in finance after doing a couple of internships. And I ended up working in investment banking. But I always had an entrepreneurial spirit. I always sort of wanted to launch something, which is sort of what led me to do my MBA. And it was clear to me that I did not have the next Facebook as an idea. And that’s what was appealing to me about the entrepreneurship through acquisition concept is you don’t have to have that crazy idea, you can just focus on the thousands of companies that are successful, owned by folks who want to retire soon, want to pass to retirement, and you can take what’s already existing and hopefully bring it to the next level. And so, the risk reward there was highly appealing to me. And so we decided to set up Heritage Holding around helping all the baby boomers who are the biggest sort of demographic in terms of business owners in the US and facilitating a path to retirement because what you’re seeing is that most of them don’t have a daughter or son to take over. And we provide that path to exit.

Alex Bridgeman: Have there been any guiding principles or industries for the companies that you’ve been acquiring? Like, is there any common thread through each of the acquisitions you’ve done so far?

Alex de Pfyffer: Yeah, there certainly has. I think we like to focus on the companies that are now described as essential businesses. I think COVID was an interesting catalyst for the government to actually begin to describe those companies that are essential. But I think before COVID, we were already thinking along the lines of what are companies that provides such an important service to the community, service to the economy, service to other businesses, service so important that it stays up and stays running in a downturn, in a crisis. That is sort of the big picture framework that we approach for all the companies that we look at for all the industries that we look at. I think another big one that is recurring across Heritage Holding partner companies is data consumption. So, growth and data consumption is 40 to 50% a year depending on who you ask. We’ve really liked investing along that track, whether that’s by owning data centers, by owning a company that decommissions servers and laptops by wiping data and recycling parts, or a company that builds transport networks, so building fiber optics, maintaining data centers and network facilities for the flow of that data. That’s a trend that we really believe in and we’ve invested around.

Ross Porter: Alex doesn’t talk about this as if it was like an intentional thing. I will say it’s a messy process. We spent the first year once we graduated just thinking we’d go roll up medical, especially medical clinics out there. And I remember going to investors the first time we found that first opportunity that we ended up acquiring that did the maintenance and install in data centers and network facilities, and investors were just confused, just saying I thought you guys were doing medical stuff. And all of a sudden, we have this weird data center maintenance roll up play. And I think that’s how it is. I think we’ve always put in the framework that we want to remain opportunistic, like down to the structure of how we’ve done everything together. Like we’ve always wanted to make sure we have control over everything, want to make sure that we’re not getting locked into anything that would not allow us to go chase some interesting opportunity that comes up. I think that’s really helped us. Like, that first deal, we had no idea about data consumption or data centers or any of that. But we get into it, we realize it’s really fantastic during diligence. And then we have a footprint in it. And once you have a footprint, you get a lot of deal flow, a lot of opportunities pop up. And that’s really what led us into finding, hey, here’s the datacenter opportunity. And that’s equally attractive just in a different way. We got introduced from the founder of the first business that we acquired to another business that did a lot of fiber installation and maintenance. And that really got us attracted to what if we go out and own fiber networks and internet service providers. So, I will say, looking in hindsight, that it looks like this very concrete path of, hey, let’s go do these very logical roll ups. But at the time, it definitely felt like we were opportunistically chasing new opportunities all the time. And I’m sure it’s some combination of both.

Alex Bridgeman: Yeah, that makes sense. There’s a- I’m fascinated by all things data. And I haven’t come across anyone who has invested in data through like the physical aspects of data, like you talked about the internet service providers and data centers, like the physical server centers. What’s the data center business model look like? Are these data centers that license their servers to other companies like Facebook or Snowflake or what have you? How does that business model workin a nutshell?

Alex de Pfyffer: Yeah, so we’ve decided to focus on data centers in smaller markets. So our thesis was, if you have leases in well connected buildings, typically carrier hotels, a building in which there are multiple fiber networks interconnecting into it, that becomes a very sort of strategically located place for folks to have their servers. So, our investment thesis was around acquiring colocation providers in carrier hotels or strategically located real estate in tier two and tier three markets in the US. The interesting thing there is, first of all, it’s very- because once you have that location with all the fiber going into it from all the different carriers, it’s very hard or expensive to build a similar location across the street. We found that companies that have their servers colocated on our premises are unlikely to change quickly. I think when you have servers that house important data where your technicians can access pretty easily, there’s some stickiness there. And I think potentially the most beautiful part of the data center business model is the contribution margin is very high. So once you’re paying for your space, you’re paying for your redundant power, redundant cooling, your electricity, and you’ve got your racks in place, most of the next dollar goes to your bottom line. And that was a big part of what was attractive to us in pursuing the business model.

Alex Bridgeman: Is there some overlap between- like you mentioned some specific strategies around the locations you pick. Is there something similar along the lines for some of your ISP or other like fiber investments?

Alex de Pfyffer: So that’s a different thesis altogether. Our fiber thesis is focused around connecting underserved communities. So what we found is that all the cities now have fiber and have multiple options. But what’s also happening is that a lot of smaller towns that have, let’s say, between a thousand and twenty thousand people are still relying on fixed wireless internet technology to get their broadband. And so we are focused on identifying these communities, acquiring the dominant ISPs in these communities, and building fiber to the premise, to the home, to the business in those communities and becoming the first mover, the first in terms of providing high speed fiber internet in those underserved communities.

Alex Bridgeman: So, is there some advantage you gain? I imagine- you talked about a first mover advantage. So if you are the first to bring fiber optic cable to a certain city or county, neighborhood, what have you, is that a pretty defensible moat from somebody else coming in and trying to rebuild the same set of cable?

Ross Porter: Yeah, yeah, definitely. With the switching costs for somebody who’s already using our fiber, to switch into somebody new wouldn’t really be there. So a town of that size or municipality or whatever you want to call it is not going to be able to support two fiber providers in there. So to be that second person to spend millions of dollars to go build out fiber into some region like that, like there’s just not going to be enough subscribers that come on board for that to make it worthwhile. If you’re the first one, then everyone’s jumping on board. So the difference from going from hardly being able to stream Netflix to being able to get top tier internet service, that’s a big difference for a community. And a lot of people sign up for that. That next wave, if you had a second provider, maybe prices come down a little bit or quality might be slightly better, but it’s not enough to really make people switch on to it and to warrant that kind of investment for somebody new. Big cities, they can support whatever, four or five different providers, Verizon, Comcast, some of these new fiber entrants that are coming in, and that’s fine. They can get 20, 30% penetration and still make it work. But in the communities that we’re going into, it’s really one provider that really can support it.

Alex Bridgeman: Who’s your typical competitor for those companies, for other buyers trying to acquire those same businesses?

Ross Porter: There’s a few large players out there. So big internet service providers that do make acquisitions, they try to build up their network through acquisition. We occasionally see that. I think we have the advantage that we’re willing to start a little bit smaller and scrappier and messier and step in and help clean up systems and processes and documentation of where the network is and contracts to actually have legal contracts for customers and subscribers. So we don’t typically see it at the scale that we’re going after. And then after that, there’s not much. Like it’s a pretty small community. Most of the deals that we go after are ones that we’re reaching out to directly and explaining our background in data centers and our current holdings in fiber, which is really attractive for folks.

Alex de Pfyffer: There are many consolidators of assets of the size that we’re looking at. I think the interesting thing about what we’re building there is the larger players are very focused on much larger towns in terms of population. We’re coming in at a much smaller size. And our value proposition is that we can provide high speed internet, low latency compared to an imperfect fixed wireless solution. And that means that our adoption rates, once we actually bring fiber to those towns, is extremely high. What keeps other providers out of those towns is that in terms of when they run their models around where to go in, they’d rather go into a greenfield opportunity or build neighborhoods and towns where they are already. And so, being that first mover does sort of create a barrier to entry in that the ROI gets lower for potential competitors.

Alex Bridgeman: Once you own an ISP, what are the ROI metrics for expanding that footprint? So if you were going to go and if there’s a neighboring county that also doesn’t have fiber or could use fiber, how do you kind of evaluate whether it’s a good idea to go build fiber and expand and literally lay cable through that county?

Alex de Pfyffer: Yeah, I mean, it’s a great question. There are many variables that go into that equation. I think one of the biggest pieces is the construction costs. So how much will it cost to actually put the fiber underground or on telephone poles and connect those homes? How many of those homes and businesses do we think will take our internet service is another one. And I think lastly is, by building fiber into this new neighborhood or subdivision, are we taking away customers from ourselves? Is there cannibalization of our existing fixed wireless customers, which will happen naturally, but that is something to be taken into account as well. And what we found is those pure fiber internet service providers are trading at a pretty high multiple, high teens. And we would rather build fiber at sort of a low single digit million dollars of EBITDA in terms of construction multiple rather than acquire a lot of these pure play fiber players. So, our ROI is calculate how much it costs to connect these homes and these businesses, let’s prioritize the projects that have the highest ROI, the lowest build multiple in terms of EBITDA, and let’s just go quickly.

Alex Bridgeman: So a lot of- so the data investments we’ve talked about so far are physical data centers, ISPs, and various fiber business models. Where do you see other opportunities in data for investment strategies? Are you seeing any more on the software side? Or are there still so many hardware opportunities that are keeping you occupied?

Ross Porter: We love the hardware side. Software for us gets a little tricky because valuation expectations are a little different than what we typically look for. We’re looking more towards these great kind of service models or kind of hardware models that are trading at crazy software valuations. So one other company that we own, they manage the end of life of IT assets. So they partner up with a lot of data center operators, just regular big companies as well, big enterprises. And they handle all the end of life IT assets. So laptops, desktops, servers, drives that come out of it. And so, when a big fortune 500 company has, let’s say, 40,000 laptops, they’re refreshing those every three to four years, they have a three year old laptop that’s still probably worth a few hundred bucks, and they don’t really know what to do with it. They want to make sure the data security is on par, that we’re going to wipe all the data on it, we’re not going to have any breach of data. They want to make sure that there’s environmental precautions taken her, so things aren’t going to end up in landfills. They want to make sure that the logistics are taken care of. So if they have assets across the world, that the process can look the same anywhere that they give us an asset, and then there’s some value recovery back to them. So it’s a fantastic business. We partner with a big fortune 500 customer. They end up getting money back from us. They’ll give us a bunch of assets they’ve already depreciated fully, and we’ll give them a check back and process those assets. And they get peace of mind on data, wiping out everything. They don’t have to worry about the logistical headache. But it’s a great model. We’re getting a lot of value out of these three, four year old IT assets. And that’s something we saw early on. Our first acquisition, we were doing a lot of deinstallation of data centers. And we were wondering, hey, where do these assets end up, saw a few businesses that were handing those downstream and then started really looking into that industry. And luckily, we found a great player in New Hampshire that was doing it really well.

Alex de Pfyffer: And I think that it’s interesting because when you think about growth in data consumption, that’s- I’ve talked about this as being a big driver of our filtering of industries that we’re looking into. But the next layer of that is sort of what Ross talked about, when you have all that data, what happens next? IT, data security is on the desk of every CIO in corporate America. You’ve got to make sure that not only when your servers are live and your laptops are live and up and running that the data is protected, but on the way out you can’t have the servers and laptops ending up on eBay without getting wiped. You’ve got to make sure that everything is getting erased and that you don’t  carry that liability with you. So that’s one of the next layers that we’re exploring as Heritage is what other companies enable optimization of data security, network security, IT security. And for that reason, we’re very focused on the managed services space. It’s an area we’ve been looking into for a couple of years. We are looking at managed service providers, managed security services providers, as a new angle, new vertical for Heritage Holding because we think that’s the next layer of that trend of growth in data consumption. Another one is still related to the company that Ross is talking about. Not only do you have to manage your IT data security carefully, you also want to make sure that when you’re getting rid of your IT assets, that you’re minimizing your environmental impact. And that, over the last few years, is become increasingly top of mind to a lot of the CIOs, CTOs, IT folks in large organizations. Part of that is because the SEC is talking about requiring companies to disclose their climate risk. And part of that is evaluating the supply chain forward and reverse and figuring out what your environmental impact is. And so, we’re looking at companies that are helping those fortune 500, fortune 1000 firms not only evaluate what their environmental impact is but also help them reduce that environmental impact because they’ll have to disclose it publicly sooner or later.

Ross Porter: Yeah, I think the stats on that are pretty bad in the US. I think in Europe, it’s somewhere around 50 or 60% of electronics are responsibly recycled or reused. In the US, I think it’ssomething like the mid teens, like everything else ends up in landfills at the end of the day, which is obviously pretty sad. I think Europe’s gotten ahead of it with some good regulations. I think the US isn’t too far behind. But that’s really what we’re trying to push. There’s these big secular tailwinds of hey, these need to be corrected at some point. And we want to have some asset that’s playing in that space. So that company that does the IT hardware, we love it. It has all the trends of data security, all the trends of better environmental responsibility. And we want to continue to grow that and expand as much as we can.

Alex Bridgeman: Shifting gears a little bit, one thing you’ve mentioned a few times is kind of the scale of different companies. And one thing I’d love to hear about more is what have you learned from managing companies at different size ranges? So as a company you own grows, how does management of it shift and maybe goals or your style? How does it shift over time as a company grows larger?

Ross Porter: I think the biggest risk that we deal with is just the size of the company. I think that the biggest risk in these small businesses is that they are small, and because they’re small, they tend to have a lot of concentration, whether it’s customer concentration or key person risk, like one person has all the sales accounts, one person has the full processing. So we have this belief that just gaining scale, even if there’s not really that much synergy or benefit, just gaining scale in general just provides so many opportunities. We’ve dealt with everything. We’ve ever dealt with, we bought a business that was a few hundred thousand in EBITDA. And we’ve bought businesses that are up to 5 million in EBITDA.  And there’s just a huge difference. Like if you have that scale like that, the ability to operate those businesses just becomes a lot easier. Like there’s more complexity and more decisions you have to make, but I think they’re just more solutions. When we started with the data center, the first data center we bought had half a million of EBITDA. And just like the thought of, hey, let’s go hire a salesperson and go burn 20% of our EBITDA on some guy’s salary, like that’s a tough decision to make. Like there’s not that much cashflow. There’s debt. There’s all these other issues in the business. Just because it’s small, you can’t really make those types of decisions that easily. And so, our big philosophy is once we get these opportunities, even if they’re small, how quickly can we get them to a reasonable scale. And I think our thresholds in general are upfront we can start with things that are pretty small, but we want to see that path to getting past $2 or 3 million in cash flow. And that really allows us to make decisions that we generally think are pretty obvious in the business, like investing a little bit in growth and sales, investing maybe in like a software platform to have better operations and better control over the data in the business. And those are a lot harder to make when it’s a really small company. And similarly, as we get that scale, I think just more opportunities come up of here are new services that we can sell, here’s new ways that we can diversify the business. So across our platform, we’ve now made 17 acquisitions, I think. Is that right, Alex? Yeah, something like that. So a lot of what we’d like to do is bring in- it’s across six platforms. So we like to do these follow on acquisitions. And part of its some strategic element. We want to open up some new geography or we really like the sales team on the acquisition that we’re going to bring in. But a lot of it’s just let’s gain scale so that we can have a platform around that, we can have more cash flow to hire on better people and really grow through that. So, I’d say there’s definitely a difference between a half a million dollar EBITDA platform, the 5 million, our first platform that we grew, we got up to about 12 million in EBITDA, and we sold that business last year. And 12 was definitely a different threshold than it was at 3. There’s a lot more opportunities for making acquisitions, more capacity to raise debt and equity at pretty friendly terms. There’s just more kind of momentum in the business to make key hires, to make bigger investments, to grow the business. I think Alex and I talk about this a lot, like what’s our overall focus. I think initially, Heritage, we had this idea of, hey, let’s get these messy businesses, let’s personally spend a lot of time in the businesses to help them grow, help them become more efficient, and get them to a point when they’re let’s say 5 to 10 million in EBITDA and a great platform for a private equity buyer to take to that next lifecycle of the business. I think more and more we’re looking at what if we just continue to grow it. I think we’ve seen now after selling a few of these businesses to those private equity buyers, that maybe demystified a little bit of what they do. I think most are phenomenal and they have great processes, and they do really great things with the businesses. But I think it’s nothing that Alex and I can’t figure out ourselves and start running ourselves. And I think that’s going to be our next step in Heritage Holding is trying to grow businesses even beyond that, holding on to them longer, do more follow on acquisitions, and try to grow platforms at a substantial scale.

Alex de Pfyffer: It’s a challenge, in my mind. And it’s a challenge between how do we keep the agility, the sort of scrappiness that we’ve had and that are really part of our DNA and what we do while scaling and sort of adding process in organizations that are $15, 20, 25 million of EBITDA. And so, while I do believe that there is- there’s no secret sauce to running and building a business that’s $20 or 30 or 40 million of EBITDA. It’s a lot of the similar things that we do. You’re upgrading the ERP system from QuickBooks to Sage to Oracle, whatever. It’s sort of a similar technological upgrade. You’re hiring key management that have seen the evolution of a company from a smaller size to a larger size. You’re figuring out new avenues to grow from a sales perspective, like new channels, new industries, new customer targets really, and you’re continuing to do M&A. So, the post merger integration process, which, in my opinion, is one of the most challenging pieces of it all, that’s also a big portion of the value drivers that a private equity firm will use to get a business from 15 million of EBITDA to 50. And so, my constant sort of paradox, so to say, is how do we institutionalize, quote unquote, while staying true to what has made us so successful? Today it is our agility or scrappiness. And so, I think that’s a real tension that I think is a healthy tension that Ross and I have and that we think about a lot. For example, when we think about hiring for executives, the new VP of Ops, a COO, a CEO, the way we’ve done it typically is we’ve done it internally. We’ve sort of done a network search. We’ve cold called, cold outreach to folks. We’ve looked on LinkedIn. We’ve played a volume game. We’ve talked to a lot of people. A much more effective way to do it that I’ve seen some of our private equity partners do is just pay a substantial retainer to a strong search firm and have them do the work. And you’ll get someone in the right seat quicker, and yes, it will cost you a bit more of upfront money, but hopefully the end result will be the same, if not better. But I think, going back to Ross’s point, I think seeing how private equity firms are working. So by the way, Ross and I do not have any PE experience at all. We’ve approached Heritage Holding as an entrepreneur and a salesperson trying to build a private equity firm so that we have a pretty unique lens when it comes to doing private equity. But now that we’ve seen private equity firms, which are very successful and capable, do what they do for the last year and three months, it feels like we’ve gained more confidence to think that we can actually handle that next layer of growth from $10 to $15 million in EBITDA.

Alex Bridgeman: Between 10 and 50, is there anything in particular that you’ve noticed that changes the most in terms of how the management team is set up or the kind of look and feel of the company? You mentioned wanting to keep the kind of scrappiness of the companies you have so far. Like of the 50 million EBITDA companies you’ve looked at so far, what appears to be the most different compared to the companies you have today?

Alex de Pfyffer: I would say it’s a lot more people. I think it’s just having bigger teams, bigger finance teams, bigger sales teams, bigger ops teams, bigger post merger integration teams. I think that is the obvious difference I see between a company at scale versus a company at sort of the size we play at. And I think we typically handle a lot of the roles I mentioned in house in Heritage. We try and lead business development, technological upgrades, post merger integration. When I see the sort of skill of the teams that are solving the problems in the larger company, I find that impressive, effective. I’d like to think that we’ll get there one day, and I like to think that when we’re there, we’ll still have- do more with less attitude. So our teams won’t be quite as big because we’ll try to stay true to our agility, the agile mentality that we have, but the team size is bigger.

Ross Porter: I think that’s right. I think what we see generally in most service businesses like this is one person can kind of manage something that’s 20, maybe 30 million in revenue. I think beyond that, if they’re not willing to kind of invest in a deep management team that can oversee new lines or new verticals and new geographies, they really get capped out of that, and that’s most of the business owners that we partner up with is they’re kind of bumping up into that. And they really need support to kind of help get to that next layer of growth. So going from like 20, 30 million revenue to like 100 or 150 that we saw in the growth of first platform, that was a lot of our role. Let’s bring in some management people who are really strong; they can open up their own basically book of business and manage it themselves, empower that first founder, who stayed with us, he is still on there today with us six years later. It really allowed him to kind of focus on managing that core management team. And he had a strong management team when we stepped in, but it’s something that we really focused on is getting him a deeper management team. And then, that same business is now 400, 500 million after many acquisitions more. This is with the new ownership of last year. And it’s really impressive. And I think part of it is they bought our company alongside another company, and that other company’s leader became the CEO of the entire platform. And I think what Alex said is really important, that people matter a lot. Like that one person, that CEO just has a really good finger on the pulse of basically all the employees, can communicate with an electrician in the field just as well as he can communicate with these big private equity guys in the boardroom. And he’s really strong at that kind of interpersonal skills of understanding it all.

Alex Bridgeman: You mentioned early on in our conversation that so far you have taken a more independent sponsor type approach to some of the structures you’ve had with these companies. Going forward, what are some structure questions you’re weighing in your minds in terms of what you want or need in these next couple acquisitions in the future?

Ross Porter: Yeah, something Alex and I talk through a lot, I think we’ve had two guiding principles for us overall. One, we want to have fun with what we’re doing. Like, that’s something we sat down early on in business school and said, hey, this has to be fun in order for this to work. And it hasn’t been fun, for sure, sometimes. There’s definitely some low moments in this whole process of broken up deals or losing out on contracts or employees that are quitting or whatever it is. But on its whole, it’s extremely fun. Like you’re meeting really interesting people, really fantastic businesses. You get to make really critical decisions in pressure situations. And it’s really rewarding when you win a big contract or things really work out or you’re able to combine businesses in a good way. So that’s one thing we’re always focused on is the fun. The second thing we’ve always focused on is having some sort of control. Early on, we talked to some investors that had different models, where the board had governance or investors, LPs had control over when to buy a company, when to sell a company. And we said we want the entrepreneurial way of doing this. Like, the companies are pretty messy, and we’re going to be in there day to day, and I think we’ll try to learn best what company needs and what the right things for the businesses are. So we’ve always kind of weighed that balance of having our own control over things, like really being true entrepreneurs, building Heritage, building the portfolio companies we have. I’m not saying we don’t listen to investors. We have boards for everything. We always get external advice from external board members. But at the end of the day, we really want to make sure that we can remain opportunistic when these opportunities come by. It’s worked out really well. We’ve had these opportunities that maybe other people have been limited to go and go acquire. Like the first business we bought had 80% customer concentration, like that’s crazy. A lot of structured funds or other investment structures would probably have rules in place to say no to a deal like that. Maybe that’s a good thing. Maybe we shouldn’t have bought a business like that, but it worked out really well and kind of fit our model of even though it’s really risky and messy, like we’re going to step in there. And that’s going to be our sole focus for a year or two, getting that diversity in the business. And so we’ve always tried to remain that structure of, let’s have a structure, we’re going to have fun, like we’re going to dictate our own shots, we’re going to do what we want and have that autonomy to make our own decisions. So we’ve gone back and forth. We see the benefits of having a more structured private equity fund, raising $100, 200 million and deploying it. It’d probably have to be in slightly larger companies, which will get more competitive, probably have to be doing more deals, which would mean we get less involved in each platform, which I think we would think would make returns come down a little bit from what we’ve had. But that’s something that we’re discussing all the time right now. In the short run, I think we really like the model that we have right now. We have a great group of investors who really trust us. They really like this asset class. They like the idea of let’s go buy these great small, messy companies that can be built into wonderful platforms over time. And so, we really appreciate what they bring to the table. And then, we really think that this is a good model for us to continue to do what we’re doing.

Alex de Pfyffer: Yeah, the traditional private equity game is a completely different game. I think you’re spread much more thinly across many more companies, and you’re less in touch with the direct impact of the decision you’re making. I think, going back to what Ross said around why we started Heritage Holding, in large part we wanted- in order for us to enjoy what we do, it needs to be fun. I think I get a lot of satisfaction in seeing when our good decisions resolve to a big customer win, a new market opening up from scratch, a successful acquisition that integrates well from a cultural perspective. These are things that bring a lot of personal satisfaction for us that I worry about losing as we scale and if we become a sort of larger scale private equity, more traditional private equity entity. Perhaps even more importantly, the favorite part of my job, and I tell this to folks that I interact with when we’re exploring acquiring companies or we’re working with sellers of companies that we acquired, is working alongside those CEOs, founders, who have these unique skills and management philosophies that we get to learn from every day. And that is something that we won’t get to do if we are in a position where we’re overseeing 40, 50 companies. We’d be very far removed from the introduction meeting with a business owner where we get to learn about what makes them special as a business model, as an entrepreneur, as a CEO. And that part I really enjoy. So, going back to your initial question, Alex, I think there’s some real tensions around returns, personal fulfillment, being close to what decisions are made, the fact that we are- we consider ourselves operators before investors, and becoming a fully fledged private equity fund deploying a lot of money in a short amount of time, I feel like we’d lose a lot of what has made us successful today.

Alex Bridgeman: Yeah, there’s definitely going to be trade offs in any of those structure decisions on either end. I want to close with our two typical closing questions. First one being what’s a strongly held belief that you’ve each changed your mind on? Maybe, Ross, do you want to start?

Ross Porter: Yeah, this one, over the course of the last seven years at Heritage Holding, just came to mind here. When we first bought our first company, I talked a little bit to advisors and other people and really kind of what should you be as a CEO? Like, should you come into this persona of what you think a CEO should be? Should you be friends with employees, or should you be somewhat reserved and kind of casual with folks? And I remember my aunt I was talking to, one of my aunts who was a good leader, had never been in business before, but she was saying, “Oh, Ross, you can’t be like yourself.” Like, I’m kind of- I don’t know a good way to describe myself, but I don’t take things too seriously, I’ll say that much. She said, “Ross, you really got to change. Like you can’t go in there day one thinking you’d be somebody’s friend and just do a bunch of jokes and pranks on people.” And probably the first six months, I was fairly reserved, kind of wanted to make sure that I was the boss and try to garner some respect that way. And I pretty quickly changed my mind on that. I think at the end of the day, it’s hard not to be yourself and not to be how you are as like an authentic leader. I think over that first year, it really changed. And I think one good example of that is like the first company we bought was at its core an electrical, union electrical shop in Boston here and a lot of kind of construction folks. Meanwhile, I drive my beat up 2011 Toyota Prius and get around Boston on my electric skateboard. And I remember meeting one of the senior managers of the construction division. The first couple meetings with him, we went out to dinner. We were at our office in Boston outside and decided let’s take our two skateboards over and meet him at the steakhouse in Boston. It was good. It was like a great way to like build trust and camaraderie with folks, just kind of being yourself and being really genuine around people. I think we’ve learned that pretty quickly, it’s hard to kind of keep up with any persona or like fabrication you make around who you are and what leadership you’re trying to be here. And that guy still would make fun of me for my electric skateboard and my Prius, but he has a lot of respect for who we are and what we did with the business, and I thought that was a really important transition that we had.

Alex de Pfyffer: Yeah, he quite literally fell off his chair when he saw us rolling in with skateboards. I had fallen off my skateboard on my way to dinner as well. So I had like a scab arm. But till this day, he still wants to have an annual dinner with us, because we were sort of memorable. And we became- He let his guard down after that, when he saw us rolling in on skateboards. So, that was a fun time.

Alex Bridgeman: Yeah, that’s a great one. Alex, what’s your changed belief?

Alex de Pfyffer: My changed belief is around transparency of numbers and metrics. I think we work with a lot of smaller founder owned businesses who have typically kept a lot of the numbers close to their chest. We’ve been in companies where the controller wasn’t even allowed to get full financial access to data of the company, couldn’t own the whole QuickBooks file. So, we have folks that believe in keeping a lot of the financial data pretty guarded. And one of our investors told us early on, he actually runs his own technology business, and his advice was, “Hey, guys, I’m probably not going to speak to you until you sell and you give me my money back. But if I have one piece of advice, it’s give folks visibility into your numbers and visibility into how well the company is doing. Because that will create some sort of motivation and a competitive spirit around meeting monthly, quarterly, annual goals.” And off the cuff I dismissed that thinking that’s not how it’s done. You can’t give people too much information. You can’t tell them how well the company is doing because they’re going to want a raise or they’re going to feel like they can work less. And that was completely wrong. I think the best decisions, some of the best managerial decisions we’ve made were giving transparency to operational folks, salespeople, folks who are technicians visibility on how the company is doing, how the region is doing, how the specific business line is doing, and being public around where we want to go. We’ve had people who were not even financially remunerated by the outcome just be thrilled at the result of beating targets. And so, to answer your question, Alex, what’s changed is I believed the pros of keeping financial data and numbers guarded. Now I see the full benefit in revealing those and getting team members to set their view on what quarterly and annual goals are.

Ross Porter: That is a good one, Alex. I like that one. I think it is definitely one of our advantages too. Like I get it, if you’re a business owner, and you pocket a $2 million last year, you probably don’t want to tell your managers that are making salaries what you are taking home. But I think it is one of our core advantages. Like people understand that we have lenders and debt and investors. And even though the company might be making a lot of money, it’s not like it’s going into our pockets or anyone’s pockets there. So it’s definitely an advantage we have over just owner operated businesses. I think we have a lot more flexibility to release that information and have employees get on board with it.

Alex Bridgeman: Yeah, that makes a lot of sense. I like that one. Ross, what’s the best business you’ve ever seen?

Ross Porter: We saw a great business. So in our first platform, we maintain a lot of networking facilities. So this is where telcos and MSOs with cable operators charter Comcast, Verizon, AT&T, we maintain a lot facilities like that. And each city will have what’s called a carrier hotel. So this is where long haul fiber, so fiber that comes from, let’s say, New York to Boston, or long distances, will come and enter into the city. And there’s a building here in Boston where basically everybody who’s related to telco, even like Harvard University and anyone who wants could get kind of direct access to high speed fiber from long distances, all have a little suite in it. And so this business, one Summer Street here in Boston, but it’s the main carrier hotel for all of Boston, which is incredible. And they can lease out basically a small- it is like 1000 square feet for a few million dollars a year to these telecom companies, just because they need access to that fiber so they can go sell to their customers. And we would maintain these facilities. We’d physically see like here’s the fiber connection that goes and powers all of Fidelity in downtown Boston here. It is such a cool business. There is basically one entrepreneurial guy, I don’t know the full story, but 40 years ago or so really saw that fiber was the future. And there would be such a moat there that they’d be the only building that would have long haul fiber, that if you could control that asset, you’d be able to make a lot of money on it. And obviously, it worked out really well for him.

Alex Bridgeman: Yeah, that’s a good bet. Is it how I imagine where there’s cables coming out of the ground that are gigantic, the size of like wine barrels in terms of thickness? Or is it deceptively small, perhaps?

Ross Porter: I haven’t seen the whole thing. As you can imagine, there’s pretty tight security in that building. So I’m allowed to get into only the parts where I can walk in a few hallways and get into the buildings we manage. It’s been built out a lot. Like just to get access onto the roof to put a new generator to support one of the suites is a six month long process to convince everybody that that’s the right decision, just because space is limited in the physical constraints of the building. So everything costs a lot of money to get things done, and it takes a lot of time and effort to get to do it.

Alex Bridgeman: That makes sense. Alex, what’s your best business?

Alex de Pfyffer: Roscoe stole my thunder. I should have talked before Ross. But I have a similar business in mind, not quite the same. And by the way, those carrier hotels, like the one at Summer Street, all the kinds of buildings that I was sort of telling you about earlier, where as a colocation service provider, we would have a long term lease and then rent sort of rack space in those suites, but it’s much smaller markets in Boston. And I really love the business model of being a well located colocation service provider. I think mine is somewhat related. It’s around MDU fiber. So, MDUs are multi dwelling units. Essentially, they’re residential buildings that contain multiple units, so an apartment building, a condo, townhomes, mobile home parks. And I like the idea of being the only fiber provider to those MDUs. And I like the idea because especially when those MDUs are located in areas that aren’t that accessible, like up a hill or at a ski resort or on an island in a beach town, because once you build that fiber to that MDU, there’s so much staying power. You’re unlikely to have competitors build to that exact dwelling. And instead of managing a hundred customers, you’re actually just dealing with the building or the HOA. And so you’ve got sort of one throat to choke, as the saying goes, but you’re really dealing with one counterparty, which makes things administratively a lot easier. So a company that does fiber installation deployment and runs internet to these MDUs is a business model that I’m a big fan of.

Alex Bridgeman: I love it. Those are both fascinating. I love hearing about these different data businesses. So I’ll have to ask you for more later on. But thank you both so much for sharing a little bit of your time and coming on the podcast and talking about it. This has been a lot of fun.

Alex de Pfyffer: Thanks for having us. It was fun to talk about it, and we’ll talk soon and excited to hear when it comes live.

Alex Bridgeman: Thank you for listening. I hope you enjoyed the conversation today. If you enjoyed today’s episode, please consider leaving us a review and telling a friend to help more folks find Think like an Owner. I also want to thank our show’s sponsors Live Oak Bank, Hood & Strong, Ravix Group, Oberle Risk Strategies, and Oakbourne Advisors for their support. For full episode transcripts and more information, please visit our website at alexbridgeman.com/podcast.