Ep.257: Alex (@aebridgeman) is joined by Steuart Botchford (@Botchford) and Sam Hyde.
In this episode, I sit down with Sam Hyde and Steuart Botchford to dive into their journey of acquiring and growing Northstar Fertility, a leading surrogacy and egg donation agency. Sam and Steuart share their insights from building and managing the business, including how they identified value levers early on and prioritized investments in sales and marketing to drive growth. They also discuss their innovative pricing model, which offers clients greater certainty and simplifies the surrogacy journey.
We explore the challenges of balancing long-term and short-term initiatives and the lessons learned from experimentation. Sam and Steuart candidly share stories of successes and missteps, including how they refined their strategies by embedding themselves in the sales process, adapting to client needs, and fostering a culture of transparency and growth within their team.
Whether you’re navigating the complexities of business growth, considering acquisition opportunities, or looking for leadership insights, this episode provides a thoughtful and engaging discussion on creating value through experimentation, client focus, and dynamic organizational culture.
Listen weekly and follow the show on Apple Podcasts, Spotify, Google Podcasts, Stitcher, Breaker, and TuneIn.
Learn more about Alex and Think Like an Owner at https://tlaopodcast.com/
Hood & Strong LLP – One of the nation’s premier full-service public accounting firms, Hood & Strong LLP provides buy- and sell-side quality of earnings, due diligence, assurance and tax services to search funds, private equity firms, and business owners and investors. The H&S Advisory team helps expedite a smooth, cost-effective transaction process that maximizes value and minimizes tax impacts for both buyers and sellers. To learn more about how Hood & Strong can support your M&A objectives, please contact Transaction Advisory Group Partner Jerry Zhou at [email protected].
Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.
If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].
(00:00:00) – Intro
(00:04:34) – Steve and Stu’s acquisitions
(00:11:31) – Spending time in Sales and Marketing
(00:15:48) – Experimenting with new concepts
(00:27:08) – Working with the board to make decisions
(00:31:07) – Dealing with failed experiments
(00:37:30) – Implementing systems
(00:40:57) – Designing incentives
(00:46:11) – Employee rating scales
(00:49:47) – Team management principles
(00:53:50) – Balancing short and long-term payoffs
Alex Bridgeman: …and Lindsay from Pacific Lake. So, the two of them, for every episode, the three of us talk about the episodes. They listen to it before and then they kind of give a summary of what they thought was the most interesting as an introduction to the conversation. So, you as a listener would hear that conversation. It’s like two minutes, and then we jump into the episode and conversation. So, we’ll have an intro from their perspective about the both of you. And I think that’s helpful too, because they know you pretty well. So, they’ll be able to kind of explain some more of the nuances as well. But yeah, so that’ll be really fun. But Sam and Stu, thanks for coming on the podcast. Excited to chat all things value levers and people, businesses, and everything in between. Would you just give a quick background of the businesses you acquired and kind of the way the businesses have evolved and your focus? And then we’ll jump into all kinds of value levers and how you prioritize them and all that. But a quick intro would be pretty helpful, I think, as a place to start.
Sam Hyde: Sure, I can jump in there. So, Stu and I bought in 2017 a business called Circle Surrogacy and Egg Donation. Along with it, there was a small insurance agency that primarily, I guess it’s technically an MGA, that underwrote insurance policies for surrogacy agencies on behalf of the surrogates that they had and the egg donors that they had going through their program, a fairly small business at the time. Circle Surrogacy was the largest and still is the largest surrogacy and egg donation agency in the world. So we bought that in 2017. In 2019, we added on a business called Reproductive Possibilities, which was a more budget-friendly surrogacy agency located in New Jersey. It was kind of a Toyota to our Lexus, so to speak. Circles is kind of a premium agency that does things a very specific way. Reproductive Possibilities gave clients more options, but was a little bit lower cost. We then added on, Stu, keep me honest on this, in 2021, we bought a small egg donation agency called West Coast Egg Donation, which is on the West Coast and does primarily egg donation. That was an effort to expand our pool of egg donors that we had available for the clients coming through our program. In 2023, we did two additional deals. We bought a company called Growing Generations, which is a surrogacy agency based in LA that is, if you think of Circle as the Lexus, Growing Generations is the Rolls-Royce, very high touch bespoke journeys for individuals. And then we also bought a company called, excuse me, we also bought a company called Donor Concierge, which provides a concierge matching service for intended parents to other small agencies to help them navigate through the process, both from a surrogacy perspective and an egg donation perspective. And then we also, in 2023, started a frozen egg bank. So, we had in-house ingredients. We had money on the balance sheet, parents who needed access to biology. And we had egg donors that we recruited to do cycles. And so we put those three together and started a frozen egg bank that’s called Everie. And that now all sits under our umbrella company that’s called Northstar Fertility.
Alex Bridgeman: And so, jumping into different levers you identified, maybe early on, what seemed like an opportunity that either panned out or didn’t pan out? From the first couple months, couple quarters, how did the two kind of shake out? What seemed interesting at the time that became really interesting and huge or didn’t go that way?
Steuart Botchford: Yeah, I think as we came in and evaluated the business, we really saw, we thought there were going to be two opportunities that existed in business. One was going to be focusing on and improving the sales and marketing aspects of the business and that function, and the other was improving the product and service that we were providing to clients. I think pretty early on, we realized that we already had the best service at Circle and sort of, quote-unquote, product available and that spending a lot of time there was just not going to yield a lot of results in terms of the actual growth of the business. And of course, there are always things that you could do better and make small changes to, but the business did not need fundamental changes in the way that we served our clients. And so, Sam and I frankly deprioritized that as an area. We got a couple of really great people in the business, found a couple of really great people in the business that could focus on that and spend a lot of time with a little bit of support from us. And then we poured all of our effort and energy into sales and marketing, which became the most important part of the business and really was the driving factor behind what we did, and the success that we had was just getting out there and having more conversations with more potential clients in a way that was better tailored to what they needed to hear and what they cared about. And that was the primary value creation driver in our business over the four years that we owned it in the search fund model and since then as well.
Sam Hyde: Yeah, one of the attacks that we took early on was we felt like we had, as Stu said, above the hurdle rate, far above the hurdle rate from a service delivery perspective. On the sales side of things, we felt like we really needed to get out there and understand what our customers wanted and why they were choosing us. The previous owner of our business had a firm belief that people were choosing our company based on the price that we were charging, that we were a value provider. We fundamentally just felt like that was the wrong ethos. They were certainly choosing us. Price plays a role, but we thought that price played a pretty small role. And I think our seller felt like price played a pretty big role. And so one of the things we went out and did very early on was getting to be very active within the sales process for our business. So, coming in and starting to take client meetings right off the bat and participating with our salespeople in that sales process. I think that’s an area where a lot of searchers in particular don’t put enough emphasis on in early days is they should be out there with the salespeople making the pitches, not just getting the feedback from the salespeople on how the pitches went. And we walked a lot of miles on that front, both with our channel partners and referral partners in the form of IVF clinics, but then also with our actual intended parents that are coming through our sales process, so we could get a more nuanced sense of why are they actually choosing us. And it turned out price was a very- price was on the list of criteria, of course, that they were using to evaluate us. But it was not the first, second or third one, where I think if you’d ask our seller, he would absolutely say it was one of the first two or three criteria. And so, we were able to take that information to reorient the way in which we delivered our program from a pricing perspective and a structure perspective that was really difficult for other agencies and other competitors to replicate in the marketplace.
Alex Bridgeman: I love getting on the sales calls with customers as a way to understand the business and customers faster. I think that’s pretty smart. It’s like there’s like almost second level levers within, like if you think of sales and marketing as one big lever, within that, there’s a hundred ways you could spend your time as a CEO. Getting on calls with customers feels like probably one of the, I would think one of the best ones. What other levers within sales and marketing did you start pulling and spending time on?
Sam Hyde: Yeah, marketing was another one. I mean, we quickly realized that in our field, the competition that we were dealing with from other agencies, that is, so other agencies that were trying to recruit intended parents and recruit surrogates, we quickly realized that we were probably the best in our field of marketing. The previous owner had done a really good job identifying a marketing resource that came in and implemented a pretty sophisticated plan in terms of how to market to intended parents and market to surrogates and donors. But we realized that while we were clearly the best in our field, the business had grown to a size that we were nowhere near the best for a business of our size. And so there was a gap to the amount of information that we needed to make good decisions on the marketing front versus what we were actually able to get out of the business. And so this has really been an effort. Stu, I think you would agree with me, this has really been an effort for like the last seven years of like we feel like we should be able to get more data out of the marketing function to make better decisions on how we market to surrogates and donors and intended parents. And I think only in really the last 18 months have we been able to fully get up that curve. We’ve kind of been clawing our way up that mountain for the last seven years. But that’s been a lever that we’ve tried to continue to push the ball forward on, both from a search engine marketing, SEO, on-page formatting and conversion rates, et cetera, et cetera, et cetera. On the ground, kind of hand-to-hand combat type of marketing with referral partners. And we still have a long way to go, but that value creation lever combined with our pricing structure and our sales process over the course of the business has been really, really- over the course of our ownership of the business has been really successful. I think there’s still a lot of work left to do, but yeah.
Steuart Botchford: It’s funny, you come on a podcast or sit on a panel or something like that, and it’s very easy to tell these stories in a very linear fashion because you know how it worked out in the end, and you want to be pithy and crisp. But the reality is that this was a very up and down process for us of experimentation. Very early on, we made some changes to the website that we thought were going to make things better and allow us to rank higher in SEO that just absolutely lit our organic traffic on fire for like six months or eight months. It was a complete disaster. Yeah, it really took us about a year to recover. And that was probably in, what, month four or five of running the business, maybe even earlier than that. So, I just want to say, whatever we’re saying with humility, that we’re not telling you all of the ways that we screwed things up along the way, or we’ll try to, but certainly there are a lot more screw-ups. Yeah. Certainly, there are a lot more screw-ups than we’re going to talk about here.
Sam Hyde: I think, just to add on, and I think, you didn’t quite go in this direction, Stu, but I think it’s important to note is we did try to adopt a testing mindset pretty early on in our tenure, which was we felt like we could move top line up, but we could take some of the profitability that would create and put that back into testing different initiatives within the business. So opening new offices, hiring staff that were going to target specific geographies in a new way, and trying different SEO vendors or whatever it was, with the mindset that we could then call those investments over time and pick the ones that worked. And I think we did a pretty fair job, not universally great by any stretch of the imagination, but we did a pretty fair job of understanding which one of those investments was paying off and which ones we needed to cut loose at the appropriate time. Certainly, COVID three years into our whole period helped force our hand on making sure we were culling the investments that were working. But I think that was something early on that paid dividends as we got out of COVID and started to continue to grow.
Alex Bridgeman: Can you talk about some of the experiments? Because those are almost, those are levers in themselves in some way. How much time or resources did you try to spend or allocate towards experimenting and trying new things? Is there a limit you put on yourself so you’re not betting the farm on any one particular experiment? How did you think through allocating that time and those resources?
Steuart Botchford: Yeah, so we knew that we had this sort of like core set of things that was going to kind of deliver market-level growth in the business that was going to drive us forward. And all of the experimenting that we did sort of sat around that. So an example, we’ve actually done this twice now, an example of something that we tried was hiring a PR firm and spending money on that. And I think we allocated, I don’t remember if it was $50,000 or $100,000 towards it. Yeah, about $100,000 over the course of a year the first time. And we kind of sat back and watched and saw what happened, didn’t really see a lot of results from it, and eventually said, you know what, this just isn’t working, like we’ve got to cut it off. And then eventually down the road, we hired a new chief marketing officer, and she came in and said, we should try hiring a PR firm. And we hired another PR firm. And this time we allocated $300,000 towards it or something like that and got the exact same result. And the thing that we learned from that was that it wasn’t just bad execution. It just isn’t a field where PR is likely to have a huge impact. So, sometimes we have to learn those lessons more than once. But there were a lot of things like that, where we would allocate a non-trivial but also manageable to lose amount of money towards something, see if it worked. And if it did, we’d pour more gas on the fire. And if it didn’t, then we’d pare it way back or kill it relatively quickly.
Sam Hyde: The PR one was especially interesting because I think it flew in the face of what our conviction was when we first bought the business, because if you think about the business that we’re operating, we’re helping people create families together, we’re pairing up surrogates and egg donors with intended parents. There’s these beautiful relationships that form, and then they have a child. These are like hallmark moments that we’re creating every day. And we thought, this is picture perfect for PR. And we can go out and get all this on-air media where people will kind of orient around these stories, and we’ll get views and we’ll get clicks and it’ll drive a lot of traffic for us. And what we found was just like, despite our best efforts, news organizations were actually just not interested in picking up these stories, despite what I thought was pretty beautiful stuff. And that was kind of a hard one to stomach, I think, because it flew in the face of what we thought, I think, at the time was a pretty high conviction decision. And I think Stu hinted at this in our pre-talk, which is that we really view these businesses as a probabilistic enterprise where you have to develop your conviction over time, figure out what you think the probability of success is, and then you’re going to place your bets and size them accordingly. And this is one where we thought we had high conviction it would work, the size of the bet was moderate, and we felt like this is a total no-brainer. And it totally fell flat on its face. And we’ve had a couple of those instances. We’ve had some ones where we had really high conviction it would work, and it did work. And I’m happy to talk about those too, but it’s always trying to go place your chips out on the table and see which ones are going to hit for sure.
Alex Bridgeman: Was there any consistency or consistent themes you picked up on between bets that worked or bets that didn’t? Like all the bets that didn’t work, there was some specific thing or some consistent pattern you saw in why they didn’t work, or was it just completely random, like you just really didn’t know until a couple months later when everything shakes out?
Sam Hyde: Yeah, that’s an interesting question. I’d have to think about it a little bit. I think the bets that didn’t work out, I mean, I think the other key bet that we made that really didn’t work out is we hired a resource to target the China geography specifically. There’s a lot of intended parents that come from China to the US to get access to this care that isn’t widely available in China. And similar to the PR thing, I think we misunderstood. In the PR world, you’re taking these stories out to news agencies, which in essence, is your client at that point. We misunderstood what our clients, the news agencies, really wanted from what we were giving them. And if I think about our experience hiring someone to target in China, our fundamental failure there too was also that we misunderstood what the Chinese clients wanted for their experience coming to the US to do a surrogacy journey. And so, it really was a highlight again of we really need to make sure that when we’re making these decisions, we understand who the client is and exactly what they want. And if I think of a decision that really worked well, one of the things that we had high conviction on was that our clients, our intended parent clients, really had preferences to work with an agency that was nominally located near them. You think about big purchases you’ve made in your life or big expenditures you’ve made in your life. You buy a house, you use a local real estate agent. You buy a car, you usually go to a local car dealer. And certainly, going through a surrogacy journey is not buying a house or buying a car. That’s very different. But expenditure levels are very high in this case. And so, parents, I think, default to natural heuristics that they use to make other large investments in their life. And they want to work with someone that’s close to them, even though working with a surrogacy agency that’s down the road from you actually has no bearing on your success versus working with one that’s across the country. And we understood the clients wanted that. And so we were able to go out and stand up these offices, and I’m using kind of air quotes around my phrase of offices, because they really are small venues. They’re not staffed full-time. But we use them as a vector to meet in-tenant parents and hold cocktail hours there and hold conferences there. And it establishes credibility for us as an agency with those parents, even though all of their service is going to be delivered remotely anyways. And we’ve had a lot of success with that in San Francisco, in Washington, DC, in New York, in London, in LA, to a certain extent, where we’ve been able to go stand up these small offices and have success. And I think in that case, we did understand what the client wanted, and we were able to kind of intuit how this particular investment would change their behavior in a way that was beneficial for us. And that’s been a wild success for us.
Steuart Botchford: And another one that came out of really getting to know the clients early on was a shift from what we would call a variable price journey where the intended parents are taking on all the risk of travel costs and other parts of the journey, insurance, medical care, that can go wrong, and actually moving that onto the business into a more fixed price model. And that was something that I think really Sam came up with as part of the conversations that he was having with intended parents was the sales process of this variable cost journey is very complicated. Because you have all of these costs, your surrogate’s traveling to the IVF clinic, she’s going into hospital, she’s having the IVF, she’s getting paid some amount of money, which varies based on a whole bunch of different things. And you have to sit down and have a conversation with these potential clients and explain this two-page cost sheet with 40 numbers on it, many of which have huge ranges, and tell them that this journey could cost $140,000 or it could cost $300,000, and you’re not going to know until the end how much it costs. By the way, you can get $150,000 into the journey and still not have made any progress towards having a baby if a surrogate has a miscarriage or something like that happens. And what we realized was that we can take that risk on, we have a scale that we could take that risk on, and by the way, most of our competitors couldn’t take that risk on, it made the sales process much easier to go through because now you’re saying, look, we’re going to get you to the end, you’re going to have a baby at the end of this, and it’s going to cost you $150 or 160 or 170,000. And yes, you might get to the end and realize that you paid $10,000 or $15,000 too much. But at that point, you’re going to have a baby in your hands, and you’re just not going to care. And weirdly, there was also knock-on impacts to the operations of the business, too, because the single most contentious issue our teams had to talk about with our clients was money. Like, you can imagine, surrogate travels from her home in Tulsa, Oklahoma, to New York for the IVF procedure. You’re booking that at the last minute. The parents call afterwards and say, wow, this flight was $2,000, but it’s because you knew on the 25th that you had to book this flight and the team didn’t book it until the 26th. And then you’re having this conversation and you’re offering to pay for part of the flight, whatever, the parents are mad. And we just took all of that off the table with this change to the way that we charged our clients. But we never would have understood that or realized that had we not embedded ourselves into that sales process very early on.
Sam Hyde: Yeah, I talked about it earlier, price was not on the top three levers. It turned out that like security, certainty of outcome, and service delivery was actually the top three levers. And the fixed cost program really just nails all three of those to a really high degree. And so it really changed our sales process. I mean, our conversion rates went up by 25% probably over the course of a year or two as we rolled it out. And it’s been- it’s very hard for competitors to replicate as well, as Stu mentioned. So it’s been a real success for us. So I think that type of insight is something- I sit on another, I sit on a search fund board where we bought this business that was providing a very low cost service to consumers, but they were providing it in the same manner, where it was like six different line items. It was kind of a range every month. And I said, why don’t we just bundle all these together, make it a little bit higher, and parents are going to appreciate the simplicity, be willing to pay for it. And we’ve done some other things as well. The searcher has done just a phenomenal job on the business. But we’ve been able to kind of take some of those similar learnings of just we should kind of demystify these things, kind of bundle things together from a pricing perspective. I think that works in a lot of different avenues that when operators are originally standing up the business, they might not intuit that. They’re building the business as it goes. And they never go back and say, okay, if I clean sheeted this pricing strategy, what would I actually price it at? And if you do that, you can unlock a lot of value, I think, in a lot of cases.
Alex Bridgeman: Yeah, in any of these experiments, you’re working with a lot of incomplete information. And some of these, like the sales and marketing, like it’s a great example of going from incomplete to much more complete over a period of time. Did you develop a framework for working with incomplete information on any of these levers where who knows where it’s going to go, if it’s going to work or not? Obviously, experiments is like the most extreme end of that where you truly don’t know. But in a lot of these other levers, you might know some things, but not the full picture. How did you go about together making decisions or maybe working with your board too on a lot of these decisions where you don’t know everything?
Sam Hyde: Yeah, it’s tough. I mean, it’s really tough to make these decisions in real time because, Alex, as you said, you’re dealing with just highly incomplete information to go about it. We had an advisor at one point that was like let’s calculate the ROI of all the available opportunities we could go for. And then once we have those, let’s talk as a group and decide which ones we should do. And we’re like, well, if we had the ROI, we wouldn’t need to talk as a group to decide which opportunities we should do. We would just do the highest ROI opportunities. And so, you’re really trying to kind of gather as much information as you can with avoiding paralysis and being willing to spread your bets out across a number of bets so that you’re not too concentrated. And so we didn’t necessarily have a specific framework that we followed, but Stu and I, I think through the years, have done a really good job of being willing to bat ideas back and forth and being willing to play the foil for the other person’s optimism. And you’re taking that kind of different tact of, well, what if this isn’t true or what if this is true? And then also being willing to say like, hey, we’re going to be wrong a good number of times. I kind of have the belief in life that, it’s maybe not a perfect corollary to baseball, but like you don’t have to bat a thousand to be in the Hall of Fame in baseball. In fact, you really only probably have to bat a little bit over 300 to be in the Hall of Fame. And business, it is probably not that low in business, but you don’t have to bat a thousand in business to have a great outcome. I mean, we talked about some of the investments we made. We bought Reproductive Possibilities in 2019. We’re in the process of changing the operations and winding down that business over time. And that was a bet that we made that just went wrong. We made a bet with incomplete information. The market changed on us over time, and we weren’t able to adapt that business to perform. And we have to be able to look back and say, okay, what did we learn from it? But like, let’s not beat ourselves up about it too much. And so no specific framework, really more just a lot of trial and error and being willing to take your lumps and move on and throw the interception and get back on the field and try to be a gunslinger again.
Steuart Botchford: Yeah, I think one of the things that we’ve done is, as weird as this is, we sort of scale in tests over time. So you almost have like the pilot to the experiment that you do to get a little information. Recently in marketing, we were looking at segmenting some of our marketing spend and cutting out different income brackets out of that spend to try to make it more efficient. And we knew that was going to drive down the absolute number of leads that we got, but we didn’t know how it’s actually going to change the quality of those leads. So, we did it in a couple of states and sat for a few months and saw what happened and then learned a little bit and adapted and tried some new things. So, I think it is a continuous process, and you sort of dip your toe in the water on one thing and that informs not just the experiment that you’re doing there, but it gives you a better sense of how other experiments are going to react as well. So, I encourage people to have a bias towards action in these things rather than a bias towards analysis. And particularly on, Jeff Bezos uses this term, two-way doors versus one-way doors. Like, if it’s easy to undo, you should move quickly and just try it and see what happens. The really hard decisions are the ones that, once you go through them, like buying another business, there’s no going back. Like, that requires a much higher level of certainty, a much higher level of analysis to build conviction. You’re still not going to get it right all the time. But for these two-way doors, I don’t think you have to have a lot of conviction to try it out and then calculate the ROI based on what you learned from that.
Alex Bridgeman: How do you communicate these ideas with your folks in your team who are executing these experiments? Because for you, like you have all these different experiments going on at the same time, and it looks kind of like a portfolio of experiments for you. But you might assign one experiment to one person, and if that experiment goes wrong, now that person, they don’t necessarily pay attention to everything else that’s being tried. And so, to them, it feels like their entire project just failed. And that can’t feel good. That can’t be a very motivating experience for them, even though for you, it’s like, it’s okay that it failed and didn’t go well, but they’re probably not going to feel that way. So how do you kind of get everyone to see it the same way and not feel like they let you down and their advancement in the company just got cut at the knees there?
Steuart Botchford: I think that’s where burying or pushing down that probabilistic thinking in the organization is really important because people, particularly our sort of like upper and middle management, understand that we think of the world that way now. And we can have a conversation where we say, we’re going to try this. It’s probably 60, 40, maybe 65, 35 that this is going to work. And if it fails, it’s okay. But like, give it your best shot and let’s go do it. And I think we’ve normalized failure and normalized that way of thinking that we’re not going to get everything right. And that helps a lot. It helps people feel safe going and doing it and also coming back and saying, hey, this just isn’t working. We tried it, the team worked really hard at it, and it’s not going to work, and we need to stop it. Because that’s the other thing, that’s the other risk with a lot of this stuff is if you make people feel like if they fail, it’s going to hurt their career, then they’re going to hide the answer from you, they’re going to work on things that aren’t working, they’re never going to want to quit, they’re going to defend their projects to the death because they don’t want to admit that they’re not working. And that’s just a recipe for a bureaucratic nightmare in the business where you have a bunch of things going on and everyone’s fighting with each other. So, I think normalizing failure and admitting when things aren’t working is an important part of that, and talking about things in a probabilistic way.
Sam Hyde: Yeah, I think we’ve probably done a pretty good job on an individual by individual basis of giving them our ethos on how to make decisions and how to test things. I think over the years, Stu, I think you’d probably agree, we’ve had trial and error about how to do it as a group, because the outcome is, if you’re testing a lot of things or moving the ball forward across a lot of functions, the teams feel like there’s so much change going on, the business is changing so fast, and that gives people a lot of anxiety. And so, I think we’ve done, certainly with fits and starts, we’ve learned a lot individually as leaders about how to talk to the teams about change over time. And what we’ve oriented around through the years is that we’ve tried to have this mantra of growth is good. Like a company that is growing is healthy. It allows us to serve more clients, which if you believe we’re the best at this, we have a mandate to go out and try to serve as many clients as we can and help them start their families. Obviously, we have a great karmic benefit to orient around. But then also, the unsaid piece or the piece that isn’t said enough, I think, is a growing business provides opportunities for employees too in a way that flat businesses and shrinking businesses certainly do not. And so the only way our employees can grow in their career is if we’re changing and growing at the same time as well. And so, yes, with growth comes change and with change comes problems that we have to solve. But I always say, I can guarantee you the problems that you’re solving when we’re growing are way more interesting than the problems we have to solve if we’re shrinking or if we’re flat. And so if we have the mindset that we’re going to have to solve problems in our career, and we’re going to have to adapt to change in our career, we should try to do it in a way that we’re helping the business grow and we’re doing it at a growing company. Even though it gives you anxiety, you have to deal with failure more often, but overall, it’s a healthy way for us to allow people to grow in our careers. And we have a frank conversation with people and say, hey, if that’s not right for you, that’s totally fine. Like, I meet with every employee that starts at Circle within the first week that they start, I still do it today. And one of the things I tell them is, this sounds weird, but I’m just telling you, it’s okay if you don’t like Circle and you want to go to a new job at some point, that’s okay. This is not the right place for everybody all the time, but if you want to stay here forever, we’d love to have you. And I think it’s important to note that to people that that type of mindset and that type of approach to growing a business doesn’t necessarily work for every single employee.
Steuart Botchford: Yeah, working in a business that Sam and I run requires a decently high level of comfort with ambiguity. And over time, we’ve just filtered out the people that aren’t comfortable with ambiguity and the people who are more comfortable with ambiguity have stuck around and have thrived. And that’s just, there are other organizations and other managers that are going to create a lot more certainty than we do. And there’s value to that. Like the way we run things is not universally correct in all situations, but for us and the way that we think and the way that we operate, that is a really important attribute that we think about when we try to hire people.
Sam Hyde: Yeah, we don’t run the business that way because we’re such incredible managers. I think we run that business this way because it’s the way that we think we can create value for ourselves, understanding that we have flaws as managers. And we’ve been fortunate enough to have employees, both that were part of the business when we acquired and that we’ve been able to hire that understand and appreciate that and can deliver to the best of their abilities under an environment that we’ve created that may not be kind of HBS management school best practices in terms of managing a business, for sure.
Steuart Botchford: We could never implement and successfully manage a very detailed EOS-style system. It’s just not who we are. It would fall flat. It would feel inauthentic. And we just have to be honest with ourselves about that. We have some strengths and some weaknesses, and we try to maximize and create structures that maximize our strengths and minimize the impacts of our weakness, and then bring people around that thrive in that environment.
Alex Bridgeman: And so that, like not using EOS or anything like that, can you talk more about that? Is it just the ambiguity with the business as a whole that makes those structures harder to implement or less practical? How did you think about those structures, like ways or systems of running a business versus what the business probably needs?
Sam Hyde: Yeah, I think that Stu and I, and this is a fault, I think, and maybe a strength in some ways, but like we have kind of a natural distaste for any sort of real bureaucracy that is out there. And certainly, when businesses get to a certain size, the bureaucracy is a benefit to the business. And then I think at some point, the bureaucracy becomes a negative to the business. And coming from a consulting background where we consulted largely for large organizations where in a lot of cases that bureaucracy was a drawback for the business, I think both of us, just pre-search, developed a distaste for this unneeded bureaucracy. And I’m not steeped in exactly how EOS works, but my sense is that Stu and I would find a meeting-driven culture that has kind of a real rigid framework of how things are reported and detailed out to be bureaucracy that we would feel constrained in to a degree. And so, I’m open to being wrong about that. I’d love to try to run a business with EOS implemented on it. I think Stu’s right that like, I don’t think, particularly me, I think Stu might be more adept to it, particularly me I think would not thrive in that environment. But we’ve just tried to create this culture instead that we want to give our managers autonomy. We want them to go out and make decisions on their own, be comfortable, to Stu’s point, be comfortable with failure. And then we want to support them and buttress them with strategic thinking and problem solving and backstopping their ability to fail in these experiments and then supporting them throughout and then obviously championing them when they when they succeed at it. And so we run a more needing light, structure light program organizationally wide, although we’re deep diving with each of the teams on a regular basis to help them problem solve issues within their specific team. Which again, it works really well for some things and probably doesn’t work as well as it needs to for other things. But to date, it’s been effective for us as a management tool.
Steuart Botchford: Like everything else in life, everything has trade-offs. And I think if you talk to our staff, they would say, I wish I had a better sense of what exactly was going on and how what I was doing fit in with the rest of the organization. But I love the autonomy that I get to focus on what I do and I get help when I need it. And I’m not constrained by that spending time in meetings all day long and doing things like that. And so, it’s a trade-off. And it has downsides in it and it has upsides. But it seems to have worked for us. Like, frankly, it may not work as the business gets bigger, bigger and bigger. And I’m actually in the process of transitioning out of the role of CEO of Northstar right now. And we’re bringing someone else in who has more experience running bigger businesses. And I’m kind of curious to see how it all plays out. I think it’ll be a experience for me to watch that and see it play out, because I think he will bring some more structure and we’ll see how the team adapts to that and how the business works. And it’ll be a little bit of a natural experiment in some ways.
Alex Bridgeman: How does this all influence, when thinking about managing people in your team, how does this influence incentive design within this kind of levers and experiment conversation? Obviously, if a lever or experiment or decision works really well, it makes sense for incentives to work towards that goal, but these things may not work or may not go very well or pan out anywhere. How does that influence how you think about designing incentives for team members?
Sam Hyde: Yeah, it’s an interesting question. So incentives are something we spent a lot of time on through the years. When we bought the business, nobody in the business had any sort of incentive plan. Everyone just had a salary. And so we’ve had to bring people along with both the actual structure of an incentive and how do you layer that into a business that doesn’t have that, which is not easy, and then also bring them along from a mindset perspective on why having a bonus program is good and how we implement it and whatnot. And what we’ve tried to orient through the years on is we want to give people an overarching list of initiatives that they’re working on at any given time. And this is something we started very early on. We showed that metaphor of, if you put the rocks in the glass and the sand in the glass and the water in the glass in a certain order, you can fit in more material than if you put it in in the wrong order. I’m sure you know what I’m talking about. And so we oriented around what are your big rocks. Put the big rocks in first. And that’s been really effective for us through the years. Our staff still to this day talks about what are our big rocks on a quarterly basis, what are our big rocks on an annual basis. And those are really project-based, initiative-based activities around I want to go make this element of service delivery better. There’s not necessarily a KPI attached to that. And so we bonus based on achievement of those big rocks that we validate with the teams. And then we also have a set of KPIs that each team is working against, whether it’s a sales target or a matching target or an NPS score in some cases. And then we bonus against those as well on a quarterly basis. And so, we’ve been able, I think, effectively to orient the teams around these team specific goals. During the last few years, we’ve also brought in more organizational level goals, of course, what’s easiest to orient around is a profitability metric, where we also, for various senior executives, have an element of their compensation based on that. But overall, we’ve tried to create team by team big rocks and KPIs that the people can go after. And our mindset on incentives is, we want to set up incentives that are challenging but achievable. And so, ideally over time, you’re earning an average of 70% of your bonus or 75% of your bonus over the course of multiple periods of bonus. And so sometimes you’ll get 100 and sometimes you’ll get 50 or less. But over the long term, we want to get about 75%. So we track that carefully. If people are consistently getting 100, we go back to them and say, hey, your bonuses and your incentives are not structured appropriately. We need to restructure these so they’re a little bit more challenging. And conversely, if someone’s never hitting, we talk about is this a skills gap thing or is this are we setting too high a target? And how do we adjust to make sure that we get people into a range in which they feel good about having a bonus rather than it being a penalty of some sort.
Steuart Botchford: But again, you have to normalize not getting 100%. That’s the whole point. It’s like we tell people on day one, you should expect to get 75% of this, because look, like again, all of these decisions, all of these things are probably at best 75, 25 and some of them are just going to fail because it was the wrong decision, and that’s okay as long as you have set expectations appropriately.
Sam Hyde: We had to do that on performance reviews too actually. So we when we bought the business, there were no performance reviews in place, and we had to bring in- Stu spent a lot of time putting together a really thoughtful performance review structure for people, which is kind of a standard one to five rating, but it was really buttressed incredibly well with some nuanced thinking around what each rating meant. And we went to the teams and we said, hey, three is a good rating. No one will be getting a five, or if people get a five, it’ll be very rare. The three is a normal rating. And a lot of people pushed back against that. And we had employees that were like, I am a five. Like I asked my daughter and my daughter told me I am a five. Like there was a conversation we had with people. They were like, you might be a five as a mom, and that’s a different rating scale than we’re working with here at the business. Like at this business, a three is good. If you get a three, you know you are doing a good job and you should feel great about that. And that took a long time. And it’s still to this day, we laugh about it, and we occasionally get new employees that do their self evaluation and give themselves all fives. And that is a tough conversation around, hey, fives are for distinctly exceptional people on distinctly exceptional skills. There might be five fives across the whole company and there’s a hundred employees and each employee gets ten, is rated on ten different metrics twice a year. And so, we’ve had to log a lot of miles on that front as well.
Alex Bridgeman: Can you talk about that a little bit more? Like you said you had to really specifically define one through five, what each one means. Three being a good rating is definitely less intuitive than most I’ve seen. Can you talk about what does each number really mean and some of the nuance behind it?
Sam Hyde: Yes, Stu should get into that. I guess what I would say is we wanted to avoid a situation in which everybody got fives on everything and then a four became really bad. Like a four was like you’re getting fired. It’s like if we’re only going to rate people on fives and fours, why are we having a five-point scale in the beginning? We should just have a one or a zero scale. You’re either one or a zero, and if you’re a zero, you’re getting fired. And so we really wanted to allow, to put in place a scale that had the ability for us to have a nuanced conversation about things where a three is good, a four is you’re well above average, and a five is distinct, and with the idea being that we want to find people that are fours and fives in specific skills and put them in positions where they can do more of those skills that they’re fours and fives in and deprioritize things that maybe they are twos in or something like that. So kind of get everybody above the hurdle rate on the three and then find ways to let people kind of work on whatever their sparkle is. And so, Stu, you can talk about, I think, you spent- it’s such a good rating system that we’ve got that has moved you through.
Steuart Botchford: Yeah, I mean, the whole idea of the rating system is to facilitate a conversation. Like you can set the raises and bonuses and whatever on whatever scale you want, but you want to facilitate a conversation. And the conversation should be that, hey, you’re a great employee. You are at threshold at eight of the ten skills. And then there are two things that you’re truly, like one thing that you’re pretty special at and one thing that you’re truly special at. But is this role actually maximizing your specialness? You’re in a role where you’re talking to people all day long, and your truly special thing is data analytics, then we’ve got you on the wrong role. We need to go find a role that allows you to do more data analytics and less sitting on the phone talking to people all day long. And we get information about people from that too. Like we can look at a team and say, gosh, like this team has a bunch of people on it that are great employees, but they don’t really- like we’re not really maximizing their skills with this role or this matter. We can find people that we then pull up through the organization because we see those ratings over time. And one of the things I think that we’re really proud of that we’ve done is a number of people in our organization today were frontline employees when we bought the business are now managing 50 plus people in the company making deep into a six figure salary when they were making $60,000 when we started because we identified opportunities for them to do what they do really well and do more of it, and they’ve really just thrived. And you don’t get that information if you have this sort of classic, like Sam says, like five-point structure where like a five is good, a four is failure, and a three means you’re getting fired type thing. It just doesn’t give you rich information to have conversations with managers and with people who you’re coaching and all of that. And fundamentally, those reviews are just, they just exist to facilitate a conversation. And so, again, we kind of normal- it took a while, like it was a slog to do, but we normalized that, and now people get it, and everyone’s fine, and they’re just like, oh, okay, cool, like my average score was a 3.2, and that’s good. That means I’m doing a really good job. I’ve got some things well above threshold, and everything else is at threshold. But it was, like I said, it was a slog.
Alex Bridgeman: What other people management and team management principles did you develop over time? Like talking about how to manage your team well or things to avoid, what were some other concepts, principles you implemented?
Sam Hyde: I think we’ve been really good about pushing decision making down into the organization. I think Stu did a good job of kind of explaining what that ethos was to our management team, which is we want to push decisions down to its natural lowest level within the organization. What that means is, for everyday type of decisions, we want, if the person that reports to me can make the decision the same way that I make the decision, somewhere in the neighborhood of 80 or 90% of the time, then we want them to be making that decision rather than me making that decision. Understanding, of course, that they’re not always going to make the exact same decision I did, but that on a day-to-day basis, the stakes are not that high. And so, you take that with all the decisions that you have to make on a daily basis in the organization, you start to say, okay, if the person that reports to me can make that decision with 80 % efficacy, then they should be making that decision. And the 20% of the time when they get it wrong, we’ll have a conversation about why I would have done things differently. Over time, they’ll be able to kind of close that gap and make that same decision that I would have made 90% of the time or 95% of the time. And then for that person, you do it for the people that report to them and that person the people that report to them. And so, you’re equipping the people below you and the people below them to take on these low to medium stake decisions on a regular basis. And what it allows you to do as a manager or the people that report to you in the executive team, it allows them to spend more time thinking about the actual important but not urgent problems that are facing the business and spending time problem solving on those versus making these routine day-to-day decisions that their team should be making. I think we’ve done a good job through the years of, again, it comes back to normalizing failure. That we have to be comfortable with the fact that they’re not always going to make the same decision as us. We can’t go blow up at people if they do. We have to go have a nuanced conversation about why we might have made a different decision or just be okay with it. But that’s been really effective, I think, of freeing up time within our executive team to focus on sales or to focus on strategic initiatives. They’re focused on these big rocks that we talk about, but they’re not just consumed on a day-to-day basis with the minutiae of the business where you try to kind of have a choke hold on every decision that gets made. I think that’s been an effective people management tool for us through the years.
Steuart Botchford: Yeah, it has this interesting side effect of, as a CEO, eventually, if you do it right, the only decisions you get are the like 50-50, 55-45 terrible decisions where there’s no good answer. Yeah, the stakes are high. Like people are on different sides of the decisions. So no matter what you pick, you’re going to disappoint people. And some people are going to think you’re an idiot for making the decision that you made. And that feels tough sometimes. But I think it’s a sign of a really healthy organization that all of these easy decisions are getting made by someone else. And Sam and I are only making the truly, truly hard decisions in the organization. I think that means you’re doing something right. It doesn’t always feel good to only see those decisions because sometimes I’d love to have some easy 90, 10 decisions that I can just knock down and feel good about, being like, ah, nailed it today, I made 10 decisions right or whatever, but if you’re doing that, you might be feeling good, but you’re not building an organization that’s sort of robust and running well.
Alex Bridgeman: And one other concept I’ve been thinking about too in terms of value leverage is some will have quicker payoffs than others. Some will take years before you get real feedback on if it’s going well or not. And some levers you can pull and it’s fairly quick, within a quarter, you kind of see some of the results. Do you have a balance between the two that you’re not only focusing on just the short-term levers or long-term, there’s a mixture of both? How do you kind of think through payoffs that have different timelines?
Steuart Botchford: Yeah, it’s probably even worse than that in reality in that there’s like many of these value drivers are correlated with other value drivers, and you don’t get the value from them until you do other things as well. I send all the time to people the first chapter of James Clear’s Atomic Habits book where he talks a lot about this, this exact issue, where there’s the sort of low-hanging fruit, you do it and you see it immediately impact, and then there’s these long-term things where you know you’re making progress to them, you have high conviction that they’re going to work, but then there’s this whole messy middle where you do one thing, you have pretty high conviction that it’s going to work, it doesn’t necessarily work, but that’s because you’re missing some other piece of the puzzle that you have to stick together. And we spent a lot of time in that middle, feeling frustrated that things weren’t working that we knew should be working. And sometime in 2021, it all kind of came together and the business really took off for us at that point. So differentiating between those things and figuring out which ones are failures and which ones are just not working because you don’t have all of the other pieces working together is a really hard part about, is a really hard part about running a business. But we do try to have long-term things and short-term things that we’re working on. Launching this egg bank that we did, Everie, is a great example of that. Like that was two years in the making before it got to a point where it was really in a decent spot. And we had the high conviction on it, and we had to keep trucking on it going forward. And I think those long-term decisions you have to have really high conviction on because they’re not going to come to fruition quickly. And so, you can only have a few of them. Like the organization can only solve a few of them. You can only sort of support the effort and burning up goodwill with people as you grow these things. And so we’ve probably, most of them have actually been launching new business lines or new businesses that we’ve worked on over time. And those are hard. And you’ve got to have high conviction and you’ve got to only do a few of them and hope they turn out to be right. Whereas the short-term stuff, like you can try lots of it and cut them off if it doesn’t work. But I think in many cases, the interesting stuff is actually the stuff in the middle of those two where you have to kind of figure out, is this not working because it’s wrong or is it not working because I don’t have all of the right ingredients in place around it to make it work. And that’s the judgment call in most cases.
Alex Bridgeman: And you’ve now, of course, run this business for quite a while, but have also been involved in boards and other companies or investors in other businesses. Is there kind of a- are there levers you’ve been able to kind of put in like an overrated, underrated where certain levers are usually thought of as creating more value than they do in reality and maybe the opposite too? Are there any that come to mind that fall in either bucket?
Steuart Botchford: That’s an interesting thought. Yeah, I mean, I think this is not universally true, but I think in most cases, like changes to the way you provide a product or service are probably overrated in the change bucket, and changes to sales and marketing are underrated, even though people still rate them high, like you can almost not do enough investing in sales and marketing to do that. And so, I find that it’s really easy to come in and say, our product is bad and we gotta fix this or that or rebuild the software or whatever else. And sometimes that’s true. Like it’s not, this is not universally true, but I think the staff, if you just go ask your staff what they need to fix, they don’t usually focus on sales and marketing. They focus on the product and the processes behind the scenes and the CRM and all of these things. That’s what they interact with every day and what they think about and they hear complaints from the clients and things like that. And so you have to take a bigger view on that and not just listen to necessarily what they’re saying. I think the other thing that’s underrated as a value creation lever is just culture and working on that. You can almost never spend enough time working on and building the culture in your organization. So, for us, those were the things that worked for us was basically culture and sales and marketing. We have a little bit of a natural experiment. One of the businesses that we bought later on down the road was about the size of the business that we bought in 2017. So these two businesses were about the same size when we bought them. We invested heavily in sales and marketing on our side. They invested heavily in IT and process on their side, and four years later, our business was three times the size of theirs. And so, again, it’s not always going to work out like that, but at least in our world, those investments in sales and marketing were way more accretive than the investments in process and IT infrastructure and things like that.
Alex Bridgeman: Sam, any that come to mind for you?
Sam Hyde: I wish I had some that I could tell as eloquently as Steuart did, but no, I think that, I think I feel very similar.
Alex Bridgeman: Wonderful. Well, thank you both for coming on the podcast. This has been really, really fun. I am excited to- I’m enjoying this process as a searcher, too, thinking more about it as I actually meet lots of different owners and think, like envision myself running this company, these conversations like this become a lot more top of mind of like, okay, well, now you’re in the business, what are you going to do with it? How are you going to grow it? So, I appreciate you sharing some of the wisdom you both have accumulated over the last couple of years. So, thank you for your time.
Sam Hyde: Yeah, absolutely. This was fantastic to participate in. And we’ve certainly messed up a lot of things, but fortunate to have made a couple of good decisions and always happy to talk about those. So thanks for having us on.
Steuart Botchford: Yeah, thanks so much for having us, Alex. This was great.
Join small company investors, search funds, private equity firms, business owners, and entrepreneurs in reading the Think Like An Owner Newsletter.
Northstar Fertility – https://www.nsfertility.com/
Steuart on LinkedIn – https://www.linkedin.com/in/botchford/
Pacific Lake Partners – https://www.pacificlake.com/
Trilogy Search Partners – https://trilogy-search.com/