My guest on this episode is Sieva Kozinsky, co-founder of Enduring Ventures, a holding company founded in 2019 with 17 acquisitions to date. Sieva and I met at a dinner following the Berkshire Hathaway meeting in Omaha, his first time attending the meeting. A theme from our first conversations in Omaha that continues through this episode is long-term thinking being a huge advantage, and that compounding happens everywhere. Reputation, lessons, and learning – well beyond capital alone.
We talk about Sieva’s background as a founder and how it impacts his role at Enduring Ventures, how he discovered he is a better buyer than a builder, great companies and founders he’s studied and taken lessons from, and much more. Enjoy!
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(00:03:53) Belief Documents
(00:08:39) Long-termism trends
(00:11:22) Takeaways from the Berkshire Event
(00:20:02) Helping employees & executives think and behave like an owner
(00:25:44) Being a Buyer vs. Builder
(00:32:36) Culture Index
(00:35:24) The importance of having experience as a founder/operator to succeed at Enduring
(00:44:18) Pareto Prinicples
(00:53:45) Habits, tactics, and learnings from biographies on great founders and companies
(01:08:14) What strongly held belief have you changed your mind on?
(01:09:34) What’s the best business you’ve ever seen?
Alex Bridgeman: Your notes are pretty thorough. Is this like a note doc you’ve put together over the years of just like interesting ideas you’ve collected or beliefs of yours?
Sieva Kozinsky: Yeah, I have like two running docs. One are just beliefs that I have. And as I compile them, I add them here, so I can look back on them and cement them into my brain. And then we have a separate doc that is everything that we’ve learned at Enduring specifically, which is 15 pages and constantly growing of mistakes we’ve made, things we’ve done correctly, so we can look back on them and make sure that we don’t make those mistakes again.
Alex Bridgeman: That’s awesome. That’s a good idea. I have this- I think I told you about the chief of staff role I have now at this media business, and we just bought a data business in December. A few friends have recommended doing something similar. I have just like a daily notebook that I use. It’s actually a NetJets notebook I bought at the last Berkshire meeting that I use every day. But I haven’t had any sort of long term lessons and beliefs document before. Did you start doing this recently? Or is it something you’ve been doing for quite a while?
Sieva Kozinsky: I started it maybe a year and a half ago. And I’ll forget to add to it for like three months at a time. And then I’ll go there, and I’ll add a few more bullet points, look back, make some changes on the stuff that I believed six months ago, and go from there.
Alex Bridgeman: What’s been the newest addition to the doc?
Sieva Kozinsky: Good question.
Alex Bridgeman: I also love the TransDigm episodes. Those were really good.
Sieva Kozinsky: Yeah, they’re so good. Let me see. Let me see what I sent you. There’re some things that I learned and I kind of doubled down on over time. I mentioned I’ll go back and I’ll delete some things. There’s also some things that I’ll just expand on and I will have had a belief, but my belief is cemented, and I kind of go deeper, and it grows, I kind of pull on the string. One of them is this concept of structures, the most important thing for your company, and it really drives your strategy, which then drives how successful you can be, I think. So, we picked a C Corp, for example, like when we started Enduring Ventures, we started it as a C Corp, which is pretty unique. There aren’t many private holding companies that start as a C Corporation. Usually people do a fund, maybe an evergreen fund structure, or simple LLC structure. But we opted to say, hey, this is something we’re going to do for the long term. We want to be doing this for 20 plus years. What’s the best structure for that? And at the time, we decided that it was a C Corp because what a C Corp does is it allows you to reinvest the profits that your companies make over and over again without taking taxation at the individual level. So, you’re getting corporate level taxation, which is usually half of what it is for the individual. So over time, that really adds up if you can continue investing and reinvesting and reinvesting that capital. Now, most companies are fund or an LLC, and a fund and LLC is a great way to get wealthy fast. It’s a great way to distribute a lot of cash flow from your profitable companies, buy yourself that nice house, maybe a nice car, send your kids to private school. But as you’re doing that, you are taking money out of your company, and you’re using it for your personal life, and you’re getting used to a better existence, kind of a more expensive lifestyle. So, your current lifestyle is always going to be a drag on your ability to compound wealth over the long term, over 10 and 20 years. The C Corp is like the ultimate marshmallow test. So, it’s a delayed gratification structure. It disincentivizes you to distribute cash flow to individuals or to pay yourself a large salary because you get taxed at the corporate level, you get taxed at the individual level. So, you’re really incentivized to keep your cash inside the company and use it to reinvest over and over again. And that allows you to, hopefully 10, 20 years from now, have something that’s a really big company that’s worth a lot of money as opposed to maybe an expensive lifestyle that you lived along the way.
Alex Bridgeman: Yeah, I like your thought around long termism being an advantage. Do you think that’s becoming more- do you think long termism is becoming more or less common amongst competitors for great businesses, so other investors or holding companies? I was just looking at Blackstone having put together more of a permanent capital fund or having more and more focus on stuff like that. Do you feel like more and more folks are thinking long term? Or do you think it’s actually going away?
Sieva Kozinsky: I think Brent Beshore is inspiring all of these like massive, old school private equity companies to take the same exact model that he did. I think I saw the Blackstone one and the KKR one, they’re all like 30 year funds. And Brent’s for the last 10 years has been a 30 year fund. So I think he carved that path. And a lot of people are following him now. At least, I’d like to hope to think that those giants are taking inspiration from him. So, I have seen more long term funds. I don’t really have a good gauge on whether it’s more or less than there were in the past. I think some people have seen the benefits of having a long term company, a long term vehicle. But the whole world is still focused on the short term. Like 95% of the world is classic funds, classic private equity funds, institutions are still way more comfortable investing in a classic private equity fund than they are a long term vehicle. And that’s just because they want to feel like there’s some kind of time horizon for their money. It’s because it’s a model that they’ve been used to for the last 30 years. And they’re not ready to kind of pivot and shift and say, okay, we’re in this for the long term. I mean, if you look at, obviously, the best indicator of this is the stock market, the New York Stock Exchange and the NASDAQ. They both have most companies are doing quarterly filings and quarterly forecasts. And that is the greatest form of short termism. Because no business operates on a three month cycle. You can’t look into the eyes of any CEO and have them honestly tell you that they know what’s going to happen over the next three months. So I hope the world is going to more of a long term mindset. I think everything would be better. That’s actually a pedestal that I- I stand on a hill that I’m willing to die on. If people thought in decades, as opposed to quarters or years, the whole world would be a better place. Because if the incentives were structured around the long term, as opposed to the short term, people would behave better because incentives drive everything. And I think we can hopefully all agree on that.
Alex Bridgeman: Yeah, certainly. And the kind of poster child for a lot of this long termism is where we got to meet at the Berkshire event. Any notable takeaways from the event or what Warren and Charlie talked about or folks you met there? Anything stand out to you?
Sieva Kozinsky: Yeah, that event was amazing. That was my first time at the Berkshire event. I wish I had gone in previous years. This year, I made a last minute decision on a Tuesday to go on Friday. I’d been traveling quite a bit for work. But I told myself, hey, this might- Of course, those two are idols of mine. I’ve read everything that they’ve ever written. And they’re kind of getting up there in age. So, I had to go see them. It was really cool. It was like the energy of Coachella, but for a bunch of business nerds in suits. It was so fun. We woke up at 6:30, got in line, waited to get in. There were thousands of people already in line, drinking coffee, chatting it up. People were feeling good. The energy was high. And then when they opened the doors, once you go through security, this was funny, once you go through security, and you turn the corner, you see people like jogging to their seats or like running to their seats, and it’s really just like a Taylor Swift concert, like people trying to get to the front of the stage as quickly as they can, so they can see their hero. I thought it was so cool. Biggest takeaway, take care of your body and your mind. Those two, Warren is now 92 and Charlie is 99. Charlie’s in a wheelchair, but he’s just sharp as a tack still. So, I think anyone that I’ve talked to after that event and asked them the same question, they’ve all come away with the same answer. I cannot believe how sharp and on it those two 90 year olds are. And that was really, really cool. Other than that, let’s see. I think I just appreciate how they have said the same thing over and over again for 40 years. And they’ve never deviated. And I don’t know if they send each other speaking notes for the first 10 of these to say, hey, this is what we’re talking about, and then eventually it gets cemented. Or if there’s just like 15 things that they care about that’s on their mind, and in any situation, their response is the same. So, obviously, we had the big banking crisis in the last few months. SVB, a top 20 bank, went belly up. First Republic, an institution here in California, went belly up. And they got asked the question about what they think was- what they thought about the banking sector. And their response was just a different- Their response was really just a different frame of the same thing that they always say, which is incentives drive behavior. The CEOs are driven to make their banks grow, to grow their balance sheets, to grow their profits in the short term. So, they’re going to make short term decisions with long term capital, which is risky. So that’s the first issue. The second issue within incentives is there’s no liability or claw backs for those executives. You can walk away a billionaire of a seat, you can walk away a billionaire as a CEO of a bank, retire, and the next year, your bank can go belly up because of all the bad decisions you made over 10 years. But you as an individual don’t experience that at all. And if there was some alignment of downside incentives, you would have better behavior when you’re running the bank, of course. And the last thing is just interest rate and money printing, they talk about this a lot. They talk about the Fed. They talk about the Treasury. And we had 10 years of super low artificial interest rates in a hot economy with quantitative easing, and the act of increasing the money supply by so much in a given year leads to poor behavior. Every human, even at the end of a bull market, is acting irrationally, is buying speculative crypto, is buying NFTs, is etc., etc., any form of risk on assets. And they just referenced that. They’re like look, when interest rates are low, this is what happens. And when interest rates are high, people behave well. And this is just a downstream effect of that single action by the Fed. The incentive alignments, actually, is my most recent learning. You asked me earlier what my most recent learning was, and there’s a lot of learnings that I get studying Warren Buffett, Charlie, other holding companies, etc., because I’m a huge biography nerd. And I’ve heard this lesson over and over again. But unless you learn or unless I learn a lesson firsthand, it’s never cemented in the same way. I guess like if I read about a lesson in a book, it’s never really cemented for me in the same way than if I learn it firsthand. I think I heard this quote yesterday, I’m going to butcher it, but it was something like lessons forged in blood are lessons you remember forever. So like lessons you learn on the battlefield are the lessons that you truly ingrain in yourself as opposed to maybe the lessons that you learn in like a military strategy book. So, one lesson that Charlie Munger has talked about forever is incentives, incentives, incentives. I think if you were to just say pick one learning from Charlie Munger, what do you think? Is that the one? Does he have any others?
Alex Bridgeman: No, I think you could sum up a lot of his thoughts and things he’s taught and talked about before as optimizing incentives or focusing on incentives and let those drive behavior and outcomes. Yeah, I think you’re totally right.
Sieva Kozinsky: And that’s really the main learning that I’ve had from him. And it’s changed how I think about- I mean, I’ve started a few different businesses. I sold a business. We’ve bought companies now. We’ve bought 17 businesses today. And it was only in the last year that I started truly thinking of the incentives of our executives, which is a little bit embarrassing to say, but basically, like the last 15 years of my business building career, I’ve been just kind of on automatic. Yeah, like when we hire someone, we give them a salary, we give them some kind of bonus based on performance that I decide, and then we give them some stock. And that vests over time. And I’ve just been- I come from the tech world, so that’s just kind of what I learned growing up in San Francisco and building tech companies. But I never really thought about what type of behavior that drives, what are those incentives aligned with. And of course, in tech, when you’re building a tech company, if you give someone equity that vests over five years in a business that’s not worth anything at the time, if you’re just getting started, what you’re really saying is between now and five years from now, you’re going to need to create incredible value, and you’re going to need to do it really quickly. At a normal business, you couldn’t do that. A normal business will grow incrementally, you’ll create solid value, but not such where the equity will be life changing. But in a tech company, you need that equity to be life changing. And I think it’s both good because we see kind of world changing businesses, maybe like Airbnb or SpaceX or something like that, get born. And people really go after it. And they want to create a ton of value in a short period of time. But you also see bad behavior. You see all of these different specks that happen, where people want to just grow at all costs and exit publicly so that they can have a huge windfall themselves. Now, how that applies to our business today. Until recently, I was in the mindset of we should give our executives cash, bonus, and stock, cash, bonus, and stock. And that’s always been my mindset. Because I do want people to behave like owners. I do want our key leaders, they’re super senior people. They’re very sophisticated. They know their industries really well. And your podcast is called Think Like an Owner, and that’s one of our values at Enduring Ventures. We want people to think and behave like an owner. Because ultimately, they are. But what I’ve learned, and if I had studied Warren’s history a little bit better, I would have learned the same thing. But what I learned is basically you can’t give upside equity if there’s no downside alignment. You can’t have people benefit in the upside glory if there isn’t downside alignment. And what that means usually is skin in the game. Unless an executive has committed personal capital that is meaningful to them in their lives, they will never behave exactly like an owner. Because if you think about it, what an owner is, let’s say you’re starting a plumbing company. You start a plumbing company, you’ve got to buy three trucks. When you go to buy the three trucks, the bank is going to ask you for a personal guarantee. When you go to lease your office space, your industrial space, the landlord is going to ask you for a personal guarantee. You’re going to basically sign on a lease for five years and say, yeah, I’m good for this. This business will be around for five years. But you have no idea. You’re buying your first three trucks. Maybe you’re starting your first business. You have zero customers. And now you’re on the hook for this lease that’s tens, maybe hundreds of thousands of dollars. And that’s the same thing for people that are buying like an SBA backed business; to buy a business with SBA, you need to have a personal guarantee. So that is an owner. That is somebody who is sacrificing their time, their energy, and is betting on themselves saying that this business is going to be successful. Because in year two, when things inevitably get really frickin’ hard, and customers aren’t calling you, and maybe it’s winter time, maybe it’s wintertime, and everyone’s pipes are bursting, and you don’t have enough kind of people to supply them or your guys are calling in sick or quitting on you, and you’re out there at two in the morning fixing your customers’ pipes because it’s the only thing you can do to pay your rent, that is owner behavior. Because if they didn’t have that personal guarantee on the trucks, and they didn’t have that personal guarantee on the space, look, maybe they would push through just because they have a great attitude and they really care. Or maybe they would think, you know what, fuck this. It’s Christmas Eve. I have a family. I’m done with this self-employment thing. I’m going to go get a job because I have a plumber’s license, a Master Plumber’s license, and somebody else is going to pay me to work from nine to five, Monday through Friday. And I don’t need to work evenings, I don’t need to work evenings. And you know what, I’m tired of dealing with these customers. And they could totally do that. If they had no trucks, no space, they could just walk away. So all that to say, when you’re hiring executives, when we’re hiring executives, we want to create a ton of upside if they grow the business, but we also want to find a way to align downside and think through how do we make it so that when things get really tough, and you need to fight through, you’re going to stick with it and push through. Because if you have smart people that are committed to sticking it out and pushing through and growing the business, it always works out. You can figure it out. This isn’t rocket science. It’s business. There’s pretty basic things you can do. You just have to tough it out when things get hard. So now, our new position, our latest position that Xavier and I have shaken hands on, it’s so it’s so serious, we’ve written it in blood, is that our executives will only get upside equity if they have skin in the game.
Alex Bridgeman: So, skin in the game, you mean they need to personally invest to purchase a certain amount of equity and other equity vests? Or how does that mechanically work?
Sieva Kozinsky: Yeah, it really depends on the business and the business stage. The earlier the business is in its life, the more equity you get, considered sweat equity. But we still want people to make a capital commitment that’s important to them, buy shares. If a business is a bit later stage, we expect a higher capital commitment relative to what you’re going to earn on the back end because the business is already up and running, it’s profitable, it’s successful, it has a brand. So, you’re really going to make most of your equity if you can grow it from point B to point C, which means increasing profits meaningfully.
Alex Bridgeman: You mentioned in your notes as well that coming from the venture world, you don’t see yourself as a builder, you’ve spent a lot of time trying to be a builder and decided that being a buyer was actually a better fit. I’d love to dive into that a little bit more and hear how that affects how you run Enduring but perhaps what your experience at StudySoup like influenced for you that belief, that thinking?
Sieva Kozinsky: Yeah, that’s a good question because I spent the first 12 years of my life being an entrepreneur and building businesses from scratch. If you dial it back to when I was younger, I always thought I wanted to be a doctor or a veterinarian or something like that. I’m a son of immigrant Russian Jews, and that’s what they told me I was going to be, so that’s what I thought I wanted to be. And in college, I took pre med classes and I was on that path. And then I took one entrepreneurship class. And it was like I got bit by a bug, and it took over my whole life. I turned into this like startup zombie. I was just so excited about building companies. I thought it was the coolest idea. You could start something from scratch. You could hire the people you want to work with, and you could grow it, you can kind of grow this thing that started with an idea. And it is a really, really cool concept. And I was just in that cycle for about a decade. I started an education business. I started a healthcare business, which was doing clinical trials for pharmaceutical companies, phase two and phase three trials. And that was actually the first business, the first couple of businesses I did were tech or tech kind of adjacent. My clinical trial business was my first foray in true cashflow companies. It’s a service business first. So you’re running a trial, you’re recruiting a patient, you’re taking them through the trial, and then the company’s paying you a lot of money to do that. So, from day one, your business is, maybe day 60, let’s say, however long it takes them to pay you, but your business is very profitable. And that was my first taste of true profits. Because before I had raised a little bit of venture capital, and it was kind of grow at all costs, and hopefully, sometime in the future, we would have profits. But here, it was profitable from day one, and it kind of parted the clouds for me. All of a sudden, I was like, wow, I really like this business. It’s maybe a little bit slower growth, and I don’t have a few million dollars that I can spend to just grow, grow, grow. But every month, I’m making 5k, and then 10k, and then 20k, directly into my bank account that I can use that I don’t need to reinvest. And it feels great. And I really, really liked that. But what I’ve also learned about myself is that I don’t like the product market fit stage of building a business. So I was in San Francisco; I was living in San Francisco all these years. And everybody there is startups, startups, startups, startups. And that’s all I knew. So, I thought to be a business owner, you have to start a startup. So, I went through a few different cycles of starting businesses. And some were kind of successful, some were not successful at all. But many years later, I learned that, and I knew this about myself, I just didn’t know you could skip this part, I hate the product market fit stage of starting a business, which means that when you start a business, you’re looking, sometimes in some industries like tech, you’re looking for a product to fit to the needs of your customers. And to do that, you’re meeting with customers, you’re getting their feedback, you’re building the product, and then you’re testing and iterating, testing and iterating until you find something that works. That’s in the world of product building or tech. And the reason you have to do that is because you’re trying to innovate. You’re trying to create something new that doesn’t exist yet. So, you’re creating a product for a market that doesn’t know what they want. And that can take months. It can take many years. And for my personality, that was the dark days. I didn’t like that. I would just kind of grind my teeth and push through it until the business started working. And then it started generating profits. And I love that. I love when there was already a fit, and I could just focus all of my attention on hiring super smart people to grow the business and kind of turning the dials and figuring out what’s the best way to grow it. So, learnings that I had, I don’t know if I could have avoided those 10 years of being a builder, of being a starter of companies, because I learned kind of the two most important things, which is, one, I love cashflow businesses, as opposed to tech where profits are coming in the future. And two, I hate the product market fit stage. And if I can avoid it, I would like to avoid it. But I didn’t know I could avoid it until I went to business school. So, I spent all those years starting companies. I never planned on going to business school. My peers, my startup peers were like, my startup founder peers were like, why are you going to school? Like, it doesn’t make any sense. You’ve learned way more than business school can ever teach you, and they were mostly true about that. But when I got to business school, there were a lot of pros. And one of them was that I was surrounded by private equity and investment bankers for the first time. And all they do is buy and sell businesses all day. And I’m this entrepreneur, and I thought I was hot shit because I’d started a couple of companies. But now I’m surrounded by people that have made way more money and been way more successful buying something that works and then selling it. And that opened up my eyes to this world of business buying. And I realized that, okay, I can get into my two- I can solve the two things that are important to me. One, I can have cashflow quickly by buying a business. And two, I can skip the product discovery phase, and I can go directly to something that has product market fit, where I can just focus on hiring and working with great people and solving the issues that a business that’s already working has.
Alex Bridgeman: Have you done any of those characteristic or personality, not personality assessments, but like kind of the predictive index or culture index? Have you done any of those on yourself to figure out some of the roots for why certain situations or certain companies fit you versus others?
Sieva Kozinsky: We did the culture index recently as a group. I don’t remember all of my criteria. But one area that came back and kind of informed some of the conversation that we’re having right now. So yeah, so one area that came back and informed the conversation that we’re having right now was, I don’t remember what they called it, but it was basically like the ability to dream and innovate. And I think to be a great founder and CEO, you need to be fairly high, and I’m talking about in tech specifically, I think you need to be fairly high on that metric. So, Xavier, for example, is quite high on that metric. And for me, that metric is quite low. And so, what the culture index indicated through that indicator and another one was that I’m someone who’s more of a linear thinker and more of an operator. And buying a business that works, that is functioning, that is generating good cash flow, that has been around for a long time is a perfect fit for my personality. And I think the other, I might butcher this just because I’m working from memory, but the other thing I think we learned is that for the culture index, it’s basically like five or six horizontal lines, and there are markers to the left or to the right, basically along a spectrum for each of those lines. And if those lines are grouped tightly together, you are in a role and doing a job that you’re suited for well. And if they’re spread out, it means you are stretching beyond your capabilities. And you may be able to do it; that may be perfectly fine. But you are stretching beyond the place where you like to operate, where you will operate most efficiently and effectively. And for me, those lines were grouped fairly tightly together. And I think that was nice to see. Because I do feel like I was born to do what we’re doing today. I love the long term holding company that we work on. And I love the businesses that we work on. So it was interesting to see that come through in an index as well.
Alex Bridgeman: How different do you think your effectiveness with Enduring Ventures would be had you not had prior experience as a founder?
Sieva Kozinsky: I’ll tell you my belief. So, I think it’s incredibly important to have been an operator at the scale and business types that we work with. 70% of the time, my job is to look at interesting businesses, research interesting industries, learn from other great people, and find great businesses to buy. That’s 70% of my job. But 30% of my job, which is incredibly important and perhaps makes up half the value, is working closely with our businesses, rolling up our sleeves, and operating. And I just can’t imagine running a small business or even being a meaningful investor in a small business and not having operating experience. Because small businesses are chaos. They’re just slightly contained chaos. Actually, any size business is chaos. It’s just when you have a big business, you have a lot of people to manage that chaos. When you have a small business, you have a limited number of people to manage the chaos. So, our ability to operate has really helped us, like we have definitely stepped in as CEOs or COOs or CFOs of our businesses, usually not by title but by function, certainly, and have been, I think, very supportive and important to the success of our company. So, I really just can’t imagine coming from a world where you’ve never operated a business because there’s a million different things Xavier and I have learned in the last 10 to 20 years, which I think make us better investors today. And the first and most important one is identifying and recruiting great talent. And the only way to do that is if you’ve had many turns at the wheel. There’s really no other way to shortcut that process. Basically, to be an incredible identifier of talent and recruiter, you should have recruited dozens of people to work for you and then seeing how they perform over time. Because your intuition or my intuition 15 years ago was far weaker than my intuition is today. And that intuition was built on cycles and cycles and cycles of seeing people work with us. So, I think that’s the most important thing is the ability to quickly identify and recruit the best people for the job and place the right people in the role that they should be in. But look, there’s plenty of coaches in the NBA that never played professionally. And I think there’s plenty of investors out there that weren’t operators by background. But for me, I found that incredibly helpful.
Alex Bridgeman: What do you feel like the founding experiences that you had taught you about identifying great companies? Like what things do you pay attention to because of having run companies before that maybe are tied directly to that experience?
Sieva Kozinsky: Along the way, as you’re building companies, as you’re investing, it’s less about what is the right type of company to buy. And it’s more a million different reasons you learn why a company is not a great company. And that’s really what I learned along the way. My first business was an education business. And it basically provided note taking and tutoring solutions for college students. So college students were paying us to help with studying. And it was an okay business. But college students are a horrible customer base for study solutions. Maybe if you’re hosting like a Coachella or some kind of concert, they’re a perfectly fine customer, they’re willing to spend hundreds of dollars. But when your goal is to help them get a slightly better grade or understand a topic a little bit better, they are not excited to dig into their pocket and pay you a couple hundred dollars a year. And when you’re running a business that’s only extracting a couple hundred dollars a year for value and you have to fight tooth and nail to get that couple hundred dollars, that’s a bad business. You have no pricing power. There’s really no upside value in it. Now, of course, there are great businesses that have been built serving college students. But that is a learning that I’ve had. So, now, if we’re looking at a business that serves a specific type of audience, I want to know do they have a disposable income, like can they spend money on the service that we’re providing, one. Two, is their perception of this product a nice to have or need to have. Because if it’s a nice to have, when you raise your prices, they may stop buying your product. But if it’s a need to have, like a plumbing company and you’re a homeowner, and your pipes are leaking in your bathroom, when we show up with our plumbing service, you’re definitely going to pay for it. It’s not a nice to have. You need to protect your investment. Running water in your home is a huge problem. So, you’re going to pay for- you’re basically going to pay whatever cost that plumber is going to charge you to fix it. So yeah, there’s been a million little learnings along the way of what to do, what not to do, what type of people to work with, what types of people to hire, and it all kinds of nets out to what we do today. Today, we look for businesses that have been around for a long time, because for us, that’s an indicator that they’re likely to be around for a longer time. That’s called the Lindy effect. We don’t want a business that has just been around for four or five years because we don’t know, it hasn’t really stood the test of time, we don’t know if it’ll be around for four or five years. And when we look at a business, we want to buy it and hold it hopefully forever. We look for businesses that generate good cash flow, and we specifically look for businesses that have good cash conversion cycles. So, the clinical trial business that I mentioned to you, we would do work and then submit to the pharmaceutical companies, and they could take 60 days, they could take 90 days to pay us. So that is considered a poor cash conversion cycle. Basically, I had to pay the salaries of all of my employees and all of the costs for the studies for 60 or 90 days before I was making any money. Whereas some businesses that we have, you pay either before the work is done or the day the work is performed. So, for example, like our pool construction business, one of the reasons we love it is because you have to pay before every stage of the construction. So, the construction of your pool is broken into five stages. Before we dig a hole, you’re going to put down a deposit. After we dig a hole, you’re going to pay for the next stage. So, we’re always in a positive cash conversion cycle. So, we’re basically holding your cash and using it to pay our employees and our subcontractors. Yeah, I think those are probably a couple of good ones. Maybe one last one is we care about- We want to have businesses that generate more cash flow than they consume as they grow. So, a business can spit off cash and still grow. And that learning really comes from VC backed businesses. So, my first business, we tried to grow in excess of the cash flow that we created. So that’s why we raised money. We wanted to grow, grow, grow. And I didn’t enjoy that. I didn’t think that was fun. So eventually, we actually shifted our business model. We shifted from a VC backed business to a profitable business to focusing on profit and growing out of profit. So now, when we buy businesses, we’re less interested. We’re more interested in buying a business that can double in size and still create free cash flow for us, as opposed to a business where we’re going to have to outlay millions of dollars in order for it to double in size and then recuperate our investment on that over the coming years on that growth.
Alex Bridgeman: Speaking of the investing of that cash flow in other businesses, one thing you’ve mentioned, too, is that within a lot of these holding companies that you’ve studied, there’s a Pareto Principle in effect where most of the returns are growth or performance by a holding company is driven by kind of a handful of businesses within those. I think that’s probably true broadly of lots of things like even within a company, there’s probably only a few products that are driving most of growth. So, it’s not specific necessarily to holding companies. But do you think that that concept is at odds at all with a holding company structure where you’re trying to buy multiple businesses, with perhaps an alternative being trying to find the best possible business and focusing entirely on that business? Do you think that’s in conflict or not so much?
Sieva Kozinsky: It really depends on the person. I have people in my network, friends of mine, that they only want to focus on one business. They want to pick one product, and they just want to focus on that exclusively, and they just want to go after it until it succeeds. I love the holding company model because you don’t need any given company to be an outstanding success. If you just buy a great business at a good price, and we buy businesses at three to five times yearly cash flow. So, if you pay four times cash flow for business, and you don’t break anything, it doesn’t need to double. Every single year, that business is going to produce 25% cash on cash returns for you, which is more than double what the S&P 500 will do for you. So, it’s a bit of an obvious investment, even if you’re not creating some kind of outstanding success. But when we are buying businesses that we don’t think will grow and double and triple, the focus is really to create cash flow streams. Actually, the focus with all of our purchases is to create cash flow streams. So, every business we buy is like a new stream of cash flow into our river of cash flow that goes into our lake of cash. So, every time we buy a new business that generates good cash flow, it opens up a new spring, and then we buy another business, and it opens up a new spring. And it increases the velocity with which our river starts flowing and our cash flow starts growing. And then of course, we can use that pool of cash flow to go and buy new businesses. And if you do that enough, sometimes you as a buyer have a unique insight and you know this business is going to be huge, and it’s just undervalued today. But my guess is that hindsight is 20/20, and 90% of the great investments that you see today, 90% of those investments that make up the majority of a holding company, that are just outstanding successes, I think those are all smart accidents. So, if you make a lot of smart investments, every once in a while, an accident is going to happen. And you’re just going to have an outsized return on one of those investments. And you see it everywhere. Like Berkshire, the world’s greatest holding company, I think something like 25% of their market cap today is Apple Computer. And Warren Buffett and Charlie Munger did not make that investment originally. They had no- like, if you wind the clock back 10 years, I think they made the investment maybe eight years ago or so, or maybe 10 years now, if you wind the clock back and you ask them the six months after they bought Apple, in your portfolio today, what is the greatest company and what will make up the largest some of your holding company 10 years from now, and these guys have been investing for 50 years, these are the best of the best, the smartest in the world, genuinely, I don’t think either of them would have mentioned Apple. I don’t think either of them would have mentioned Apple in the top five even. Now, of course, I’m guessing. This is all speculation; this could be totally wrong. But any company that you look at, I think, any great company you look at falls into that. Let’s take a look at another holding company. So, I studied Loews Corporation recently. Lowe’s Corporation was started by Larry Tisch and his brother. And they first started as a hospitality business. So, they bought a hotel and they bought another hotel. Today, they own a portfolio of really nice, beautiful hotels. Then they bought a chain of theaters. So, what happened was there was a big Supreme Court ruling called Paramount versus the United States. Paramount is the, of course, movie production studio. And what used to happen is movie production studios used to have their own movie theaters, so they could have vertical integration. They can make the movies and they could show the movies. And if you wanted to see their movies, you had to pay whatever price that they were offering in their theaters. And they didn’t have to show their movies in anybody else’s theaters. And somebody, a group of folks contested that at some point. And the Supreme Court voted that this is kind of anti-competitive behavior. So, they forced those production companies to sell their theaters. And as part of that, Larry Tisch bought Loews theaters, which we all know today; it’s a brand that people are familiar with. Eventually, just a year later, they take that business public. It’s a very successful outcome. Instead of reinvesting in those theaters, they realize that they’re just sitting on really expensive real estate in like New York and Chicago, and they just decide to start selling the real estate. So, they take this business that they got at a pretty low price, they take it public, and then all they do is they sell off the real estate. And they divest that company entirely from the Loews Corporation. But then, this is where things get really interesting, then there’s a business called CNA, a very large insurance company that has 4 billion of revenue. And CNA hits hard times. They’re doing $4 billion of revenue, but they’re losing like $80 million a year. And basically, they go into a fire sale. Larry Tisch and his family offer $100 million for this business that’s producing $4 billion. And they buy it. They buy this totally distressed insurance company. And the company owns a bunch of different things. It owns a large insurance business and a large reinsurance business. But it also owns like nursing homes and I don’t remember, like massage parlors or something like that. I don’t remember the whole series of things that are owned, but basically, they come in, they take over, they hire an incredible leader from one of the other large insurance companies to come in and run the insurance business. And then the brothers take turns basically divesting and spinning off all of these other little parts of CNA that are no longer useful. CNA today, so Loews Corporation still exists. It’s a really big company. It has hundreds of businesses under it. CNA Corporation makes up something like 60% of their EBITDA. So, Loews Corporation, I’m going to quote some numbers, they might be directionally correct. So, Loews Corporation, $4 billion in EBITDA last year. CNA, I think, made up like two and a half of that. And in every company that I study is effectively some version of that, like even Apple Computer where you would say, hey, that’s a product business. They build products. They’re a technology company. Well, they have hundreds of products, if you consider all their software businesses, their MacOS, their different laptops, their iPhones, their headphones, etc. Their iPhones make up 56% of that business. So, this is a company, this is like a trillion dollar company with hundreds of products, very successful products, and they have one product that makes up over 50% of their business. So, all of that is to say, all of that, like I guess the takeaway for me really is like the goal is to just be on the field, generating good cash flow from good investments. And if you do it long enough, your learning engine gets better. You apply that learning engine to make slightly smarter investments. And if you’re at it for long enough, you’re going to get lucky, and you’re going to have a business or two that are going to make up 60% of your holding company value. And people are going to turn and say, look at that person. He’s a genius. And he made all these incredible investing decisions. But every investor knows that’s not true. Every investor knows that the reality is you’ve got to be slightly smarter than the rest, and then you’ve got to be really lucky, and you’ve got to be around long enough for that luck to take hold.
Alex Bridgeman: You mentioned being a biography geek. From these companies you’ve studied like Apple or TransDigm, CAN, what are some like habits or tactics you’ve taken away from some of those executives who’ve led those companies and tried to apply for your own work?
Sieva Kozinsky: I think each story has its own learnings. That’s why I consume hundreds of biographies. Like I listen to biographies on Audible. I’m now listening to the Founders podcast, which is great. I’m reading biographies. Like all day, every day, all I do is like study history and read biographies. And then every once in a while, I’ll read a fiction book. That’s how I diversify my inputs. So each book has its own takeaways for me. And the other really interesting thing, and I’ll comment on some of those, but the other interesting thing is I can read a book a year from now and then today the same book, and I can learn and take away something totally different. So, 10 years ago, when I was running my little education business, we were growing, growing, growing really fast. We were like doubling year over year and then tripling one year. And then at some point, we hit a plateau. And we started growing like 15%, 20% a year, which isn’t bad. But in that year, I was stressed out, I was like I need to grow faster. We’re never going to be a venture backed business. I was in this mindset of growth at all costs. And I read Snowball, which is an incredible biography about Warren Buffett and his story. And as I was reading that book, one thing that stood out to me was that Warren was running three or four different companies early in his career. And because he was running three or four companies, he could take money out of a company that was growing slowly and creating a lot of cash flow and inject it into investments that were growing faster. So, you could have two different businesses, one growing at 10% and one growing at 50%, and you could take all of the cash flow out of that 10% business, and you could inject it into the 50% growth business. And that hit me like a ton of bricks because here I am sitting on a business that’s generating good profit. It’s growing slowly. But I only have that one business and that one product where I can invest my money into. And I felt so silly because I know that there are better businesses out there. But I’m the CEO of this company. And all I can do is just take the money out and re-inject it and grow slowly. And I felt very envious of the world that Warren had built for himself and this ability to take from somewhere that’s low generating and inject into future investments. So that was a learning that I had eight years ago. And today, now that we own a series of businesses, I can apply that learning to the T. So for example, back to our pool construction business, it generates a lot of healthy cash flow. But it’s a low growth business. It’s in a limited market. And hopefully forever, people in Phoenix are going to be swimming in pools. It’s super hot there, so I think they will be. So, I think that’s a very dependable durable business over the long term that’ll generate cash flow. But it doesn’t make a lot of sense for us to take all of that cash flow and constantly reinvest it in that company. So instead, we can take money from that business and reinvest it into other opportunities. So that’s a learning that I had many years ago that I took away. And it just hit me right at the right time when I was feeling the pain myself as the CEO. Another thing that I’ve learned from Warren is the importance of acting with integrity and empathy and building your reputation. Because over your career, if you act with integrity when nobody is watching, it compounds, and it ultimately ends up creating value for you that you could have never expected. So, the relationships you build along the way compound. The reputation that you create grows. And if you ever need to call on that reputation in a time of uncertainty or time of need, you have it. It’s like a swimming pool that you filled drop by drop over decades of acting well with integrity. And you see this quite a bit. Like, for us, I’ve been building companies for like 15 years now. And there are incredible people that I work with today that worked with me 15 years ago. My first head of operations at my first education business is the COO of our technology division. He’s so great. He’s incredible. He runs those businesses perfectly. And if I had behaved in a way that was not aboveboard, if I had treated him in a way that was not correct, then he wouldn’t be working with me today. And I would be out there scrambling, looking for another incredible person. And that’s just one example, but it permeates every part of our life. Like, we have so many of our shareholders that we’ve known for decades. Xavier has built a couple of large businesses. I’ve built a couple of businesses. These are people that have followed us, that know us, and many that blindly invested in us when we didn’t have a business, we just had an idea. We just went to them with a deck and said, hey, we’re a couple of, I think, smart guys, and there’s businesses to buy out there, and we’re going to buy those businesses, but just give us some of your money please and trust that we’re going to do that. You can’t do that without reputation. And there’s just so many instances of this. Let’s think of a couple other books that I like, a couple other biographies, because I spent a lot of time on good old Warren today. I really love the- Man, I love so many biographies, it’s hard to call them out. But I love the biography of John D. Rockefeller, Titan. He was like the original conglomerate. He entered the oil industry in the early 1900s, or I guess, late 1800s. And it was just the Wild West. It was total chaos, small kind of like businesses started by wildcatters all across the country. There was no systems. There was no processes. And what he did effectively is he went around and he did a nationwide roll up of these small players, these small, unsophisticated players. And he brought structure and consistency to this industry. Everything from digging it up from the ground, filtering and processing it, and then how he transported and then sold it. And he ultimately created hundreds of products. So I think when I look at his story, I think of, okay, that was 100 years ago, he was kind of the original holding company builder. But there are businesses today that are out there that are similar. They’re individual kind of mom and pop players. They’ve built a bunch of small businesses. And there’s an angle to going out and buying these businesses and creating stability and structure in an industry. So yeah, so other favorite biographies of mine are, of course, Elon Musk biography, Steve Jobs biography. One of my favorites is a book called The Gambler, which is- Have you read this book?
Alex Bridgeman: No, I haven’t.
Sieva Kozinsky: It’s about Kirk Kerkorian. He’s also a business buyer and seller and grower, I guess that’s maybe the easiest way to call it. But he’s a Greek immigrant who came to the US, and over the span of a career, he bought and sold the MGM brand like four times, might be three times, but he bought it over and over again. And it’s this interesting takeaway for me where, basically, you only need to do one good thing in life to be very, very successful. He did a lot of things that led up to his wealth and his ability to kind of even have enough capital to buy MGM in the first place. But ultimately, if you look at his track record, I think he created like 60 or 70% of his wealth just through MGM. He bought the business when it was struggling. And then he sold it and its catalog. And then somebody botched it, and it was going bankrupt. And then he bought the business again and righted the ship. And then he sold it again. And there’s just something beautiful in this because I think when people look at success and when they look at successful people, it feels so far away. It feels like, man, I have to go to the right school. And I have to be super smart in reading, in being an accountant. Like I have to understand P&L and balance sheet. I have to be good at reading. Like, I have to have read hundreds of biographies. I have to know everything. And I need to own like dozens of companies that are successful. I need to be able to like raise a bunch of money. But the reality is that’s all not true. You can actually just do one thing really well. You can buy one business and it can change your family’s financial future forever. And I didn’t realize that when I was starting off because I always thought like, okay, you’ve got to get lucky, you’ve got to own all these businesses, you’ve got to make all the right decisions. But what I’ve learned doing what we do now is if you just buy one, you can go from zero, just having very little to nothing, to a lifetime of wealth and success by just making one good purchase decision. Whether it’s a real estate property or a business that you buy, it just takes one. And that was one of my early takeaways from The Gambler and one of the ones that I like to share.
Alex Bridgeman: I love that one. And that ties back to an earlier comment you made around lessons forged in blood are remembered forever. Have you learned anything about or what have you learned from reading and studying companies, biographies, founders and trying to apply those lessons to your own life in a way that sticks?
Sieva Kozinsky: I think the most important thing is reading and rereading. And even now I’ve started writing out the lessons that I learned, when we started this conversation, I list some of my personal learnings from our journey. I also have a notepad where I write down lessons that I’ve learned from other people’s journeys. And it’s really just the act of pure repetition of hammering it into my head through reading it or listening to it and then writing it now, which really etches it into my brain. So, I started a newsletter maybe a few months, maybe like six months ago. And I’m not naturally a person that just loves to write or spend my time creating content. But I found the act of taking a concept and projecting it out loud to others and putting it in written form to help me cement that concept in my head. And, of course, Warren Buffett has a great quote about this, which is, if you are learning a new concept, the act of teaching an orangutan that concept will leave the primate confused, but will have you better understand and remember the learnings that you’re trying to take on, something like that. So basically, when you’re studying something new, the act of like teaching it to somebody else is going to ingrain that in your head. And I know for years, he was an associate professor at a local college. And I think part of it was this desire to take everything that he’s learning, the thousands of pages a week that he’s processing, and go out and actually tell someone and synthesize it in a way that is useful to them, but also helps you remember it. So that’s been an incredible act for me. I’ve been posting more on Twitter. I’ve been writing this newsletter. And I highly recommend it to people, to people that even don’t consider themselves writers or content creators. Like even if you have two readers and one of them is your mother, it doesn’t matter, just the act of taking all those lessons in, which is synthesizing knowledge that you’re absorbing, taking in, and putting it out allows you to retain it and hopefully use it when the time comes. Like this Loews example. So for example, this learning about the Pareto principle, I studied this Loews Corporation a few months ago. And then I said to myself, this is super interesting, I’m going to write something about it in my newsletter, and I don’t normally do company profiles. I’ve studied hundreds of different holding companies. And today when you asked me about a holding company, that’s the first one that comes to mind because I actually spent a little bit of time to write and synthesize about it. So, I guess that advice is working here even as we record.
Alex Bridgeman: What strongly held belief have you changed your mind on it?
Sieva Kozinsky: We covered some of this earlier, but it’s this idea that fast growth will solve all your problems. So, I come from the tech world where that is a well-known and strongly held belief. And you believe that momentum solves everything, so culture problems, systems problems, and everything. And sometimes that’s true. But my observation is that if you have a great business with a great product and great people, you can grow slowly and in a measured way over a long period of time, and you’re going to create way more value and way more durable value, which is what I really care about, than fast growth. So, speed of growth is actually something I discount now if we’re looking at a business that we’re looking to buy, and it’s growing at like 50 or 70% per year. To me, that’s a cause for concern. Because I’m wondering, is that growth sustainable? Is it growing? Is it attracting customers that are not actually durable or going to stick around? And so on. So that’s the main thing that I think about when you ask that question.
Alex Bridgeman: Last one, what’s the best business you’ve come across or studied or seen?
Sieva Kozinsky: Costco. Costco. Absolutely, Costco. And the second part of that answer is businesses that look like Costco. So, Costco has this incredible flywheel, which is they’ve taught us that they’re going to offer us the lowest prices that you can find anywhere with the best quality products that they can find. And they’re never going to upcharge on the margin. They have their buyers out there negotiating as hard as they can to get you the best quality, the best quality product at the lowest price. So if they get a super inexpensive pair of jeans that they need to sell, they’re not going to mark it up 25% because either way, you’re going to get a good deal, they’re still going to mark it, I think their markups like 7 or 8% or something like that, they’re always going to mark it up 8%. And it’s that trust that they’ve built with you. So basically, it’s created a flywheel, which is they lower their prices, which brings in more customers, then more customers show up, which allows them to apply more pressure to their manufacturers to give them even lower prices because of the volume that they’re buying at. And then they can lower their prices again, and then more customers come. So you have this beautiful flywheel where more customers equals lower prices, which equals more customers. And there’s a few examples of those types of businesses out there, but few as beautiful as Costco Corporation. One of the other businesses that I’ve been looking at that I’ve been really fascinated with for years, we don’t own anything here, but I would like to own something like this one day, which is a business buying group or business buying organization. Are you familiar with these?
Alex Bridgeman: No, I’m not.
Sieva Kozinsky: So, say you’re a doctor’s office, like a dentist or something like that, and you need to order those hand tools for your office. What you can do is you can order them directly, and then you’ll just pay the normal kind of markup price, retail markup price. Or you can join a business buying group. So, it can be a group of a thousand dentists that get together, and they all need the same exact parts, they all need the same exact tools. And now they have formed a group where they’re buying as that group, and therefore, they’re pushing down prices. So, they can get lower prices as a group, which then brings in more dentists because it’s more attractive to be part of that group, which then allows them to pressure the manufacturers more and get even cheaper prices. So, any business that has like a beautiful flywheel like that is something that has my eye.
Alex Bridgeman: Seiva, thank you for coming on the podcast. This was super fun to get to chat with you more. I’m glad we got to meet at Berkshire and glad I got to show you a little around the town and give you some recommendations for your first time coming. So hope to get to see you next year and at future conferences and gatherings too.
Sieva Kozinsky: Yeah, likewise, Alex. And thanks for hosting today. This was fun.
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