My guest on this episode is Will Schoeberlein. Will started his career in investment banking and private equity before taking a leap to Southeast Asia to work on startups and software. He finished his time in Asia in Japan where he met his wife and he has since developed a small company acquisition thesis on the Japanese market.
In the episode we discuss his thoughts about investing in private companies, acquiring companies in the U.S. and Japan, aging Japanese business owners and what that means for their economy, IPOing in Japan, and our shared use of Twitter.
Before I dive into the details though, I would like to first thank you for having me on today. I really do appreciate the opportunity. I think my early career, my background started out rather traditionally. Very early on though, I veered off to the left, you could say. I graduated from Georgetown. Immediately after college, headed up to Wall Street, where I spent a total of four, four and a half years or so. First two years were at Perella Weinberg Partners, a boutique M&A and restructuring firm. Generally working with Fortune 500 companies. It was a young firm when I joined. I really liked that aspect about it. It was very entrepreneurial.
But quickly found over those two years again, it was a fantastic experience, but I was looking for something a little bit different than what banking was offering, and really wanted to get to the buy side. Private equity seemed most interesting to me, as I could really get inside of companies. At least, that’s what I thought at the time, and decided to join another very young entrepreneurial firm called Dominus Capital. I was the only associate during my time there. Primarily played in the lower middle market, family-owned companies in the Midwest and the like $5 million EBITDA to say $20 million, $25 million of EBIDTA. Also a great experience. Awesome colleagues.
But found after my two years there that I was also yearning for something more. I wanted to be a little bit more entrepreneurial. I wanted to explore something a little different. I felt a little trapped by the Wall Street bubble, if you will. After my four years in Wall Street, I again was looking at, “Do I go to business school? I probably don’t want to stay here. Do I try a startup? What do I do?” Long story short, decided actually to move over to Asia. Specifically, southeast Asia. I had studied abroad in Australia during college, so I traveled through Asia a bunch when I was younger so I was very aware of the cultures in the region. How it was like. The food, the people, the opportunities, and was just really captivated by the growth, and how different it was.
Again, what I felt were the potential opportunities for someone young, energetic, and eager to explore the world. Explore myself in a lot of different ways. I ended up spending around four or five years over in Asia. You can say it was split up into three parts. The first part was me attempting to build a startup with a bunch of colleagues. I won’t go into all the details, but we tried building an SMB lending startup, that was effectively not a digital bank, but a digital lender. We would take all of these disparate data points. Not just financial and operational, but where is the SMB owner signing in? What type of device? What time of day? Trying to credit score these businesses.
I’m sure many of you have heard of startups out there today doing this very, very successfully. We attempted to do this, I think naively so in a lot of ways, and hit walls left and right, and ultimately failed. But I learned a ton, and met some really great friends in that process. I’d say the second third of my time over in Asia was spent building what is now called Golden Southeast. I shouldn’t necessarily say building. We were, and still are to a degree, an informal group of individuals. Really chasing and attacking a lot of different, unique, esoteric opportunities. We were active and quite successful in land lending in Koh Samui, for example, which is an island off the coast of Thailand. We explored self-storage, which was and arguably still is a nascent industry in southeast Asia.
Obviously, we were digging into various startup concepts, and also deeply explored search funds in southeast Asia. I also looked at search funds quite deeply during my time in private equity as well, so I was very familiar with that model before coming to Asia. The last part of my time in Asia, I would say I spent most of it in the public equity space so looking at stocks, frankly globally, but increasingly particularly in near the end of my time there in Japan. So I was able to spend a ton of time in Japan the last year, year and a half, literally every other week up there, which was a, you know, it’s not was it is a very fascinating country. Amazing people, beautiful culture, interesting economy, and even more interesting business and investing opportunities if you sort of lift up the hood and look underneath
I’ll touch on this a little bit later, but I’ll also note that I was fortunate to have met my now wife while I was over in Japan. So Japan is very close to me personally and professionally these days. Though I have to admit my Japanese is probably still at a first grader, maybe second grader level, slowly improving, but definitely not anywhere near fluent at this point. So after my four or five years in Asia, I felt that I had explored a lot, met a lot of interesting people, but you could argue a very much the Wild West in terms of what I was being exposed to and the skills I was learning. Very valuable but again, I think I was looking for some more structure and decided to come back to the US, and wanted to get actually inside of businesses, specifically small businesses, and more specifically, I targeted private equity backed SAS companies.
So the past several years I’ve been really active within strategy, corporate development, operations roles within again, these smaller SAS businesses growing 30, 40% a year, a hundred or so employees. It’s really shown me, you know, I previously was looking from the outside in on companies looking at balance sheets, looking at strategies, board decks, and now I’m actually sitting inside a business during this time period, understanding, well, what actually needs to happen to make these targets, these financial metrics and all to hit the goals that we’re seeking to drive the value, to hire the right people. It’s been absolutely eye-opening and I think has informed a lot about the model, the concept that we’re looking to launch here in the small business space, which again, I’ll touch on here shortly. But I would say that’s the quick and dirty on my wanting background from DC to New York over to Asia and ultimately back to DC where I sit today.
How have you worked your way up to a greater focus on the private and then not to jump too far in, but the small business side?
So before diving into the specifics around our SMB acquisition concept, I think it makes sense to first talk about how we think about investing more broadly. Generally speaking, the markets today are incredibly competitive and I’m talking more generally around conventional assets, private equity, venture capital, real estate, public equities. Everyone is smart, everyone’s using the same tools, everyone’s thinking generally the same way. It’s a battle for alpha, and it’s critical for you to understand what is your edge, and is it sustainable, and how can you grow it and prove it, expand it.
I think it’s also worth noting that when you’re looking at investments, focusing on the upside is absolutely exciting. And it’s interesting and it’s worth looking at obviously, but it’s not very productive. So where I tend to naturally look is, well, what’s the downside? How do I optimize around the downside and ask the question of of all the assumptions I’m making, which are or which is the most important and what needs to be true for the deal or deals to work? I want to minimize those assumptions to optimally zero that perhaps isn’t realistic, but my goal is to chop down those assumptions to where, in my view, risk is then minimized, the probable range of outcomes is minimized.
Stepping back though again, where do I look in the competitive market landscape to sort of find my edge? Where do I compete? To me, I’ve sort of, as I’ve grown in my career, I naturally start turning to and looking at I’m getting very excited about markets that are overlooked, markets that are ignored, and not frankly even just off the beaten path, but like ideally a completely other curve to where I’m even building an entirely new curve, if you will. It’s not to suggest that these esoteric opportunities are the only type of opportunities I look at or invest in. I don’t. But again, these are the ones that I find most exciting.
So for example, land lending in Koh Samui, an extremely unique niche asset. You need to have local know-how, you need to be on the ground. The returns are 20, 30% IRRs, like high, high return, very low competition, fascinating opportunities where you need to build an entity, build a business in a lot of ways to mechanize the opportunity. So thinking about creative strategies, vehicles, and the like within these overlooked niche markets, that, to me, is just intrinsically fascinating and where I love to just spend my time thinking. But again, I’m not suggesting it’s the only spot where I play. It’s just it jumps out to me and I’m naturally curious about those type of situations.
I do want to make clear however before we dive into the meat of things that we are not in the market today executing upon this thesis. We are actively socializing this concept with a lot of interested parties, potential investors, peers, and the like. But we are still very much in the early phases and I think a large reason for that, quite frankly, is not so much around what exactly we’re proposing or how we’re proposing, we execute. I’m sure around the edges we’ll be tweaking that over time, but it’s more so around where we are proposing to execute this thesis.
I’ll get in more of this later, but I again, want to preface that we are not in the market. I can’t point to specific deals. I can’t to specific successes around exactly what we are proposing. So in a sentence or two, what are we looking to do? I’ll actually pull from my Twitter feed or my Twitter profile. You know, we’re trying to create, in effect, a search fund that from the start raises money like a startup and sets out to buy many low to no growth cashflow streams in the form of small businesses versus as a search fund does, trying to find a single gem with growth potential. Investors will be receiving growing cash attributions over decades versus exiting via buyout or sale in five to seven years. It is not meant to be any type of fund. It is meant to be an acquisition holding company that will endure for years.
So with that quick two-sentence overview out of the way, let’s take a step higher up and talk about the maxims, if you will, that underpin much of this thesis. And there is five, six, or seven of these and I’ll try to run through them relatively quickly. But the first one is that the majority of attractive SMBs are attractive not for their future and presently unrealized growth potential, which is what I think you’ll see a lot of search funds and private equity funds chase after, but rather for their stability and reliable streams of cashflow. So as you’ll see as we talk more about our model, we’re really focused just on assessing the durability of an existing cashflow stream, not so much growth. Frankly, not growth at all.
Second item, the law of large numbers is real and very powerful, and I’ll quote the definition here, but law of large number quite simply is the average of the sample tends to approach the expected value as the size of the sample increases. This plays a very powerful role around returns as our entity scales, our capabilities broaden, our execution improves over time. Third item, predictions and future state assumptions are most often wrong. So the things you put in Excel models and DCFs, you know, while it looks great and it makes the numbers look good, and so Z50 they’re usually wrong. So trying to minimize the range of probable future outcomes in our view is a more compelling way to control risk and increase your conviction in a particular investment.
Fourth one would be that price most drives returns, full stop. I’m not sure there’s much else to add there. It is critical when you’re making investment. If you can buy something at a lower price, ideally with less competition, your likelihood and magnitude of returns is higher. This next one is probably pretty obvious but important SMBs and frankly, all companies are populated by humans who are very complex, emotional beings. Things unique about SMBs though is generally they’re very small, obviously. Anywhere from 10, 20, 50, maybe a hundred employees. Effective you could call it a tribe. And when you’re trying to meddle in a culture within an SMB, in our view, you’re generally playing with some fire both on the upside and downside.
I mean obviously if there’s levers you can pull to improve a culture, the upside could be quite significant. But the downside is also rather scary, and I’m trying to step in and force a different type of culture or mindset on an existing employee base can be quite dangerous. So in our view, the less meddling you can do, the better when you’re acquiring an SMB. Next item would be that integrations are very hard and fraught with risk. Not only that, synergy is usually never materialize. There’s a lot of risk involved with trying to smash two businesses, let alone 50 together. So again, in our view, don’t do it to the extent you don’t have to.
The last item, which I think is most interesting, and I will credit a lot of this researcher data points offsite to Verdad Capital, a very interesting, I think, public equities fund out there. But when you look at private equity’s heydays back in the ’80s and ’90s, the returns were phenomenal. Why? Well, I think you can bucket it … Excuse me. I think you can put it into two buckets. The one bucket, quite simply, there weren’t many private equity firms competing back then. It was a relatively new asset class. So by definition, with fewer competitors for a given asset, you’re going to be able to buy assets at a better price and improve your odds for success.
Second bucket, more specific around how private equity firms operated. You could drill it down to three words. They focused on deals that were small, cheap, and levered. So you’re looking at deals that were saying the low hundreds of millions of dollars, they acquired them for less than six times EBITDA, let’s say. The cheapest 25% of deals back then accounted for 60% of the industry’s profits. They used high relative, low absolute leverage. Again, if you’re buying a business for six times, you can put on three or four times debt and it’s not a ridiculous amount of debt in an absolute sense. They bought simple cash generative businesses. They’re frankly quite boring.
Returns generally came from de-leveraging cost reduction, cost containment, not so much through growth or operational superpowers. So again, when we’re thinking about our model, how can we sort of mimic that? Obviously, not within the space where private equity plays, say there’s again, too many competitors, but can we replicate that and in a smaller segment of the market and ways to allow us to achieve similar returns? So I won’t touch on the market opportunity. I think most people listening to this podcast understand the demographic realities in the US and frankly, a lot of developed markets, and even emerging markets around the world and how that affects SMBs.
I’ll also say that a lot of what we’re talking about here, and what we’ll continue to talk about is high level. I’m not going into the deep weeds here. I’m not getting into every angle of how we’re going to minimize risk here or there. I’m not trying to make this into a three-hour monologue, but I’m happy to have a followup conversation or have discussions offline to get more into the details. I’ll also add that what we’re suggesting, I don’t want to make it again come out to seem like we’re some kind of massively innovative group of individuals. I’m no Elon Musk. There are companies out there who are effectively doing what we are suggesting in many ways and they’re gargantuan, many of them.
To highlight a few, Constellation Software, that I’m sure many people listening to this may be very aware of. Others in the Nordic regions like Indutrade, AddLife, Ad Tech, they all focus on acquiring very small, generally low growth businesses, and looking to slap them together in a decentralized manner. Again, they’ve been around for years and many of them will have multi-billion dollar market cap. So I’m not suggesting. Again, this is some wild, crazy innovative idea where admittedly kindly stealing from many others who have forged the path before us.
What are we looking to do? We aim to buy dozens of SMBs over decades defined as those with 500,000 to 2.5 or maybe $3 million in free cash flow, loosely defined. We’re looking to hold them indefinitely. We don’t intend to at least early on do much with the businesses once acquired. We are buying them because they’re throwing off existing cash flow streams, and we want them to continue as is. We have no interest in really fumbling around trying to improve things, which, quite frankly, as touched on above, isn’t always a simple, straightforward task. We’re looking for businesses that are, again, as touched on not growing or growing very little. We have no interest in investing in growth post-acquisition.
Quite frankly growth is difficult, expensive, and downright disruptive, and a lot of these SMBs are small for a reason, and most of them should remain small. Though I suppose you could say our goal is to make sure they do not get any smaller, at least in the near term post-acquisition. Assessing the ongoing durability and consistency of an SMBs existing free cashflow underpins much of our underwriting thesis, but all-in-all the value is really in the buy here in the sense that we are looking to buy these businesses, I would say between 1.5 to four times free cash flow. So you know, at anywhere from say 20, 25% up to 50% free cash flows yield, day one.
With that in mind, if these businesses, again, these are not necessarily meant to be stellar growth businesses, if these businesses do unfortunately, extinguished in say year seven to 10 theoretically, if we are buying them at two times, three times, three and a half times, we have hopefully, by year seven or 10 recouped all of our investment and hopefully, some profit on top of that during that time period. In a lot of ways we are looking to acquire businesses in runoff, which again, I’ll cite Constellation Software as doing effectively that specifically within the vertical software space.
Now, I know people will point out, well Constellation buys vertical software businesses on purpose and that’s why they can buy them and run off because it’s recurring revenue. So fully understand that and hence, our focus, not necessarily just in the vertical market software space, but on industries that are conducive to a recurring revenue like revenue or cashflow stream where ROI see positive and high quality ROIC is viable. I’m not going to suggest we’re focused on one industry at least early on. We want to keep that top of the funnel very wide to start to, again, less than our competition, perhaps. Realizing, for example, the vertical market space, excuse me, the vertical market software space is quite crowded, but that’s not to say over time as we find a niche or really build an expertise within a certain vertical, we don’t go deeper. It’s just not necessarily a focus for us day one.
I would say lastly here for this general overview is that again, we’re looking to buy these businesses in a very decentralized manner, bringing them on board and not really meddling with them. The idea is maybe we pull some levers around the finance side of things, maybe infuse some tech here or there, but for the most part not doing very much with them. Once we acquire them, we presume that over time, and I will not touch on this deeply at all here, but over time it obviously makes more sense to once you have more resources and capabilities and staff to broaden out our capabilities and driving best practices and improving portfolio operations. But it’s not something we’re necessarily looking at executing right off the bat.
I think it makes sense to maybe touch on a bit more about the exact type of companies we are going after perhaps, and the way we’re looking at it is, let’s say we divide the market up of SMBs between you know, 0% to 100%. The top 5% of that mark we call safe gems. These businesses are generally very high quality. They’re profitable, they have growth potential, but they’re expensive and they’re frankly infrequently sold, probably passed to heirs most often, if they’re not, search funds and P funds and strategics are going to be clamoring over these.
The good, as we are calling them, as I would say the 70% to 95% range, these are cash generative above average quality companies. They’re sustainable, but they’re probably not growing or not growing much at all, and they’re deficient in areas, so say customer concentration, so on and so forth. They’re probably struggling to find acquirers or successors and even if they do, trying to secure acquisition financing or liquidity, if you will, is quite difficult for the aforementioned reasons, the remainder say, 0% to 70% we deem the rest, if you will, and these businesses are poor economics, unattractive industry dynamics, declining growth. They’re usually going to be shut down by the owner once they retire or over the course of an economic cycle.
So we feel the sort of garden that we’re playing in, if you will, there’s arguably far more targets and relatively few competitors, which plays up the how I was thinking about investing more generally, where can we play where very few people are. That’s our goal here and how can we structure an entity that allows us to play in that market safely and scalably. No, I’m not suggesting that just because we’re playing in a different market here, everything’s going to be so much easier. It’s not, and we are very, very aware of that.
But I will say that when we’re looking at our quote margin of safety, we are relying not entirely so but increasingly so on price paid and realizing when you’re paying very low prices for these businesses and that again we’re taking a very large portfolio approach, far larger than a private equity firm. We’re akin to a venture capital fund to where that law of large numbers kicks in and we can sort of diversify that risk across a wider base of assets.
I do want to highlight one pushback that I’ve found we get often. It’s well, why would any owner want to sell their business to you so cheaply? And that’s a fair point I suppose. And we’ve had conversations with business owners where it absolutely has come up, but quite frankly individuals who are very so focused on price and maximizing their exit value is quite frankly, really not the individual you want to buy from. So we sort of test those opportunities aside.
The owners that we have found more interested in what we’re discussing and we think it’s quite common it’s not necessarily a one off is a lot of these business owners they’ve been in these businesses for years, 10, 20, 30, 40 years, they just want to step back. They don’t necessarily want to close it down and the employees that they built relationships with are then out of business … Sorry, out of jobs. Their suppliers, their customers are then put in a difficult situation. They want to hand off the business in a way that allows them to exit gracefully.
You gradually, in a lot of instances, if they can pull some money out, obviously that’s fantastic, but they really want these businesses to endure and go on. And if they can find a home for that business where they feel it’s comfortable and it’s not going to be messed with, frankly a lot, at least initially, that’s an exciting opportunity for them. So we’re finding there are people that bite for this and it’s not necessarily always about the money. These individuals, some of them aren’t necessarily worth 20, $30 million, but they’re also not broke. They have gotten to a point in their small communities wherever they may be that money’s not everything and the relationships and legacy that they’re leaving is important.
So up until now everything we’re discussing is not terribly innovative. I can point to a lot of examples, be it large multinational, billion dollar companies executing like this or a lot of very interesting, successful smaller groups that I’ve been fortunate enough to come across and read about here in the US and elsewhere. I will begin to touch on the two aspects of our approach, which are not off the wall, but they perhaps are a little bit different than what you’ll typically see for some of these SMB acquisition concepts in the market today.
As I’ve done now a few times during our discussion, I will preface this next piece with the idea that we are humble enough to realize that what we are about to suggest with regards to deal financing and how we financed the Holdco entity are a little off the beaten path. But again, we’re humble enough to realize that we need not take this route. We are excited by this route. We think it’s interesting. We think it plays particularly well for the segment of the market we’re going after and also within the broader aims of what we’re trying to do down the line. But there are more traditional, easier ways to go about doing this. We are ultimately not looking to overcomplicate things more than we need to. Simplicity is very important to us, so please keep it in mind as we’re discussing here,
How are we proposing that we finance these dozens of deals we’re looking to do? I would say at least early on, and in a sentence, we’re looking to copy exactly how growth SMBs and emerging markets are often financed by way of a self-liquidating, debt equity hybrid investment instrument. As mentioned earlier in the conversation, I lived in Southeast Asia and spent time attempting to build a online digital lender specifically within the SMB space. So I became quite familiar with a lot of the strategies around lending to SMBs and again, a lot of frankly investment firms and alternative lenders since they’re generally locked out of the financial system, particularly in emerging markets.
The only real difference here is us taking this emerging market strategy instrument and applying it to develop market SMBs where at least the ones that we’re targeting are low growth, slow growth, and cash generative. Whereas often in emerging markets, the target SMBs are not profitable, generally not cash flow to start, and are generally very fast growing. So there’s a higher level of risk. So in our view it’s taken a creative model and putting it in a less risky environment. So you’re probably wondering then like what are these instruments called? We’re calling them demand dividend notes, and we’ve also referred to them as self-liquidating preferred equity.
What these specifically look like and again, I’ll keep things at a high level for the purposes of this discussion, but they are non-dilutive, no voting rights, no put option, they can be collateralized against any existing assets. However, they’re entitled to a set percentage of quarterly distributable or monthly distributable free cashflow until a certain threshold is reached. I would say typically it’s anywhere from say 20% to 80% of that quarterly or monthly free cashflow with an MOIC, multiple on invested capital, of up to say 1.5 to say two times. That’s what we are suggesting, by the way.
In emerging markets it’s a little bit different. They’re not cashflow generating the first year so there’s sometimes a honeymoon period, but for what we’re suggesting 20% to 80% of that monthly, quarterly distributed free cashflow up until again, 1.5 to two times MOIC is achieved. So right off the bat you’re getting payments on this instrument in month one or quarter one and de-risking that investment. Again very, very early on and we can make these distributions, if you will. Largely, again, because we’re buying these businesses at a relatively low multiple. So it’s providing us a lot of cushion here to use.
Again, as touched on with the private equity methods of the 1980’s you know, high relative, low absolute leverage and using a creative way here to lend to a business, frankly, small businesses where you know, it’s not a General Electric where it’s going to pump out consistent cashflow and you can predict it every quarter here. SMB sometimes can be volatile so if you have a lending instrument to where there’s no covenants that can trip it up, you have a lending instrument, frankly, that ebbs and flows with the business performance, that’s a superior form of capital in our view. The investors in these notes are getting compensated for that given this high distribution. And you know, the ultimate MOIC here of 1.5 to two times invested capital. So over the course of five to seven years, these demand dividend note holders should be made whole.
Last little piece I’ll add is again, and this is this instrument, this strategy is practiced in emerging markets and it’s not a cottage industry. There’s several billion dollars of capital being invested into these types of funds and a vehicle. So I think the nuance here is taking it to the developed markets, but I’d also suggest there’s companies in developed markets who are doing something perhaps not exactly the same but somewhat similar. For example, Alaris Royalty up in Canada, it’s tied to revenue, so not free cashflow. So there’s, again, there’s nuances but this model is a used in the market today. So again, we’re not being massively innovative here with what we’re trying to suggest.
I suppose the area where we’re trying to noodle out now with potential investors is, well, how do you make this happen? You know, conceptually it makes sense perhaps, but like how do you structure this? What does it look like from a funding capacity, if you will. The way we’re looking at this, and again, always eager for feedback and thoughts here is that on an individual deal basis there’s clearly risk here when you’re financing a business frankly in general, but particularly using this perhaps “innovative or risky type” of investing instrument.
However, if you were able to raise a pool of capital here that is from the start meant to finance a portfolio of SMB deals in this manner. Similar to say how a P fund or a VC fund pulls capital and calls it as they identify investments, we feel that this deal instrument becomes even more compelling obviously within a diversified portfolio. Now, we’re not suggesting we precisely do this, but you would be, in effect, raising a side private debt fund, you could argue, that’s specifically designed and focused on financing our Holdco’s SMB investing activities.
It’s also worth noting, by the way, that you know at a moderate level of skill here, I don’t think it needs to be 50 SMBs, but five, 10 SMB acquisitions, this Holdco entity that’s acquiring these businesses would likely have the option increased or completely transition off this effective, I mean frankly expensive form of capital and move to more traditional sources of debt that can be directly tied to the Holdco or at least guaranteed by the Holdco in behalf of the portfolio companies.
To close out this piece, we’re envisioning this type of financing usually representing anywhere from 50% to 70% of any given deal with the sellers not representing anywhere from say 10 to 30% equity to the extent you need in a deal, which you know, if you play around this in a model and you acquire these things, these, excuse me, if you acquire these businesses at a relatively inexpensive price, you don’t really need it in a lot of ways. But we are moving forward assuming that there will be some equity in each deal that would represent say anywhere from 10 to 30% as well.
Okay, so with the deal financing piece, theoretically out of the way, well how does this Holdco entity stand up? How does it get started? How does it operate in the early years? I’ll once again preface that this current thinking we don’t rule out the possibility that there is an easier, more optimal route. But again, part of the reason we’re sharing this is to get that feedback, to get that pushback. So how do we finance this Holdco? Well, before we jump into that, let’s actually discuss how a search fund is generally structured to the extent I understand it.
Search fund will go out and they’ll raise say, 150, 200,000 to effectively finance 18 months, 24 months, 12 months of searching. Now some may call this a stretch, but you could argue that the search funder is effectively raising our pre-product, pre-seed venture round in a lot of ways, day one. They’re going to go out and do all this work and “build” the product, and once they find the product, i.e. the SMB, they’re going to raise their seed round to further execute and of course, in reality they’re going to pair with debt and so on and so forth.
But you know, in a lot of ways it’s not too dissimilar from an early stage venture investment. It is, quite frankly though, and also very importantly, nowhere near as risky as a venture investment. Since again, these search funders are going out to buy an existing cashflow stream. So assuming that’s fair and correct and how a search funder raises money and executes there, why can’t we take this same model and more or less copy it just at a larger scale? So instead of with the aim of buying one business and selling it in five to seven years, we’re going to go right in day one, it’s our aim is to buy dozens of these over decades. So right off the bat, the vision is far larger. So theoretically any upfront investment has a longer and much larger potential payoff.
So instead of raising 150,000 or 200,000 let’s, right off the bat, raise 500,000, a million and we can then immediately, not just have me sitting in my apartment trying to handle everything and be a one man show, but let’s go hire a team of three or four experienced, relevant individuals who are committed to building this business over the next X number of years, decades, optimally. Let’s build a robust infrastructure, day one, to really attack this opportunity intelligently and at a higher tempo than I could otherwise do as an individual. You could set up an intern team or frankly just an actual internal team of TA associates summit partner like cold calling where you’re just cranking those out, day one.
You have a really robust marketing apparatus. You can do webinars. Who knows what, again, I’m not getting into all the specifics around what you’d exactly had to deal source. We’ll save that for another conversation. But the idea here is that you’re raising money to treat this as a legitimate, longstanding business just as you would when you’re raising money to build an artificial intelligence startup that’s meant to last and change the world. In a sentence, we are building a business to mechanize an opportunity to make the play actionable.
Now, let’s also realize, and I touched on this briefly above that, after acquiring a modest number of SMB, say five or six, this Holdco entity should be able to sell from, excuse me, sell fund rather early on. So we raised that seed round, let’s say, and get everything set up. Perhaps there’s a series A after, you know, you hit a milestone, another million or whatever the number maybe drops into the groups. You can further build out the team. But at some point in the not too far future, if you’re smart about how you’re operating a business, again, just as a startup needs to be mindful of its cash burn this entity who’s acquiring existing cashflow streams at five or six or seven or whatever the number may be of SMEs, it’s going to be self-funding at some point.
So if you’re an investor looking at this opportunity and putting down several million dollars, day one, to back a team that’s going to buy existing cashflow streams out over the course of say 10, 15, 20 maybe 30, 40 years, you’re looking at they’re making 30, 40, 50, 60 however number of SMB acquisitions, you’re looking at in aggregate 20, 30, 40, $50 million of Holdco aggregate free cashflow for my investment that I’ve put down, they won over the next 15, 20 years. Assuming I stay in the business and I’m not bought out by the management team or some other outside investor, theoretically assuming distributions are coming out as well, I’m getting multiples of my initial investment.
So again, I guess the real risk here, particularly early on is all in the execution. If you really boil it down even more, it’s like can the entrepreneur recruit a team who can collectively work together to execute this thesis to build it out? The market is there, tweaks to the approach are going to happen. So all the deal financing or what type of businesses we’re targeting, all I suggested, that’s always going to be open to somewhat debate. You have to adapt, you have to be flexible when you’re building a business.
But broadly speaking, the market’s there, the opportunity is buying these existing cashflow streams. It really comes down to execution risk and the team that’s able to be brought together to execute in this opportunity. So if I’m a seed investor, which I’m not, and I’m not suggesting a VC at least enough fund capacity, whatever, could ever look at this. But you know, for purposes of this example, on a risk adjusted basis, there’s really no comparison. So the obvious follow on question here is, well, who is this investor that will invest in that? And that’s exactly where a lot of our time is focused today and we’re getting a lot of good feedback, a lot of great traction here. So we’re excited to continue to push down that path.
To tie a bow around this thesis here, at least the specific details around how we execute, how do investors get a return, specifically the whole co-investors. And I think we’re not going to overcomplicate things here. I think it’s pretty straightforward. The way we envisioned it at least today is dividends, special dividends over time. Perhaps not a set schedule, particularly not early on. I want to reinvest a lot of the cashflow, the aggregate cashflow into additional deals. Perhaps over time there’s investor buybacks we would look to tender offers or however you want to call it over time to where people can achieve some liquidity if their timelines aren’t necessarily 15, 20, 30 years.
I will say that there’s one additional liquidity option, which will lead into the last large chunk of our conversation here on this acquisition concept and that would be a potential IPO in Japan. So I’m sure that jumps out to listeners first off as being what the heck? Japan? Well, quite frankly, yes, absolutely Japan. As I mentioned, I had lived in Asia and spent some time up in Japan and haven’t been able to meet a lot of interesting people. I’ve learned a ton about the country, about the opportunity set there. Again, I have a personal connection there, a family there. So you know, and thinking about this opportunity over the years here and as it’s evolved, quite frankly, the idea emanated from me thinking about it first and foremost in Japan, not necessarily the US.
Now that’s not to say we aren’t open to the US. Certainly we are. However, the opportunity set in Japan is immense. There’s an overwhelming supply of SMBs versus arguably buyers, non-existent pull of legitimate acquirers there, at least in our space. The opportunity set is just extremely asymmetrical and far more in our view than in the US, so to the extent we have the option, to the extent we had to choose, I think executing first and foremost in Japan is absolutely our number one choice. Why exactly Japan? At the highest level, and I touched on this in the beginning of our conversation, if you pick up the hood and look underneath in Japan it’s a very different animal than I think a lot of foreign investors and foreign business people realize.
You know, on the surface, yes, it’s slow growth, there’s a demographic issue. The larger themes, they obviously do ring true. However, there’s aspects, there’s pockets of the market where things are changing rapidly. You are seeing that in the venture capital ecosystem, which is absolutely fascinating how it’s growing and evolving. You’re seeing that in how private equity is perceived and growing. I can touch on that a bit as well. You’re looking at how the government, in ways, is really forcing public companies to change how they’re engaging and treating shareholders. Immigration is slowly but surely opening up, and it’s my personal view that over the next 20, 30 years it’s going to open up in a very, very big way.
So it’s just, to my earlier point as well, it’s looking at overlook markets, and in my view, Japan is overlooked in a lot of ways and people just make these blanket assumptions. They don’t really spend the time, they’re not blaming them. There’s a lot of opportunity out in the world. So I can look at so many places, but I find Japan interesting personally, professionally, and digging underneath that hood and seeing what’s there is just fascinating. So at a higher level, that’s sort of my pitch on people taking a closer look at what’s really happening over in Japan, what’s on tap there.
As it relates to SMBs, more specifically, I’ll rattle off again, trying to keep things high level, I’ll rattle off a few statistics here that are pulled from the Japanese Ministry of Economy, Trade, and Industry that I think are really telling about the opportunity set there. So to kick it off here, 50% of SMBs with owners that are over 60 years old are looking but are unable to find a successor. So a huge swath of the market. Now, nearly 70% of SMB owners over the age of 70 are just quite simply not able to find a successor. Now, get this, 2.4 million SMBs greater than 60% of the total will be run by managers age 70 or older by 2025. So you’re talking five years, 60% of all the SMBs are going to be run by managers 70 years or older, of which 70% today can’t find a successor. Roughly half of the SMBs that do go out of business each year do so despite being profitable.
Now, if this phenomenon goes on unchecked, that’s estimated to be around 6.5 million jobs and roughly $205 billion in GDP by again, 2025. The average age of an SMB owner in 1995 was 47, today it is 67. So stop there. I think just quickly hearing those numbers and those statistics, you realize that forget about the opportunity. Japan is facing a crisis and you know, it’s scary and it’s unfortunate, and I’m not trying to sit here and suggest that I’m jumping up and down and giddy for that because it’s not something to be giddy about. It’s a real issue that the country needs to deal with and unfortunately, a lot of ways they really may not be able to in the best way possible.
I’m also not going to suggest that us running over there and buying SMBs, we are going to be the savior. That’s definitely impossible. We’ll be a minnow in a giant ocean if we all agree that the supply demand dynamics in terms of businesses it’s highly skewed towards a significant supply. What are some other features of the Japanese market that make it compelling to pursue our concept over there? I’ll rattle off a few other ones here. Broadly speaking, entrepreneurial-ism in Japan is not prized. In the US, you’d be an entrepreneur. It’s generally very sexy. It’s very interesting. If you fail, it’s okay, get back up and try it again.
Japan, it’s not cultural, it’s not like that. You’re graduating school, you want to work at a very strong brand name sometimes, and this is changing a bit, but lifetime employment has been traditional in Japan. You’re getting married, your wife’s or your husband’s parents want to know where they’re working. Is it reputable? Is it going to provide security? Doing a startup or taking a swing at buying SMBs is just not in the thought process of most Japanese. So even if that opportunity exists, there’s just not a lot of people that are going to see that and then want to jump and act on it.
Private equity is also not very developed relative to say China, Europe, and the US. It is fast growing, mind you, and the reputation is changing rather rapidly as well from barbarians at the gate to something a little bit more friendly among businesses. Again, for them, I would say private equity, it’s really focusing on corporate carve outs these days. It’s just a massive opportunity. You’re seeing KKR even publicly state how excited they are about the Japanese market. So it’s growing there, but it’s not pervasive and it’s absolutely not really even existing in the market segment we’re looking at. Again, that 500,000, around 2.5 million in free cashflow.
There’s no real private equity firm down in large part because private equity firm probably can’t operate at that level. It’s just too much work for every given deal under how a typical fund structure works and the like. SMB owners and thinking about transactions and selling, culturally speaking, and you know, there’s overlap a bit with the US. I’m not going to suggest they’re drastically different, but I would say more so than in the US, Japanese business owners, particularly once they’re 70 years old, they’re wealthy at this point. They’re not looking to maximize their dollar exit, generally speaking.
The ongoing well-being of their employees, their suppliers, their customers is paramount and it’s sometimes anecdotal evidence here is that these SMB owners even tell some of the strategics that acquire them don’t meddle with my company. I want it to go on as is. I want it to remain as independent as possible. They’re not looking for it to be shoved inside of a large organization and subsumed into a bigger entity, generally speaking. Which again plays into our sort of model here that we’re decentralized. We have to say, “I have no interest in touching many of these businesses, particularly right after acquiring them.” Keep on chugging over time. Obviously, we’ll try to iterate on those businesses and improve them, but broadly speaking, that’s not our intention to really mess with things.
I’ll also point out a couple of public stocks in the small business space, not acquiring small businesses in any significant way whatsoever, but advising them within their mergers and acquisitions transactions and the one that’s sort of leader in the space is Nihon M&A Center. It is a $6 billion company that again, effectively, I don’t know the exact percentage, but as the preponderance of their revenue is, is made in deal fees off of advising, retiring business owners, and selling their businesses generally to strategics in most cases.
I’ll touch on Nihon M&A a little bit more here at the end here, but just keep them in mind. I would also point out that probably everyone’s aware of this listening to this podcast, but debt interest rates in Japan are zero. It’s incredibly cheap so the ability to finance acquisitions and the like, if you’re able to grab that capital, it’s free in a lot of ways. Looking at the, again, Japan in general and specifically this idea, but I’ll comment more generally here, if you’re able to bring an entrepreneurial concept and energy to Japan, there’s just a ton of overlooked opportunities that exist there. Again, in part because of risk taking many ways it’s not viewed as positively as it is here in the US. Creative thinking, innovative thought, it’s just not as common.
I would say frankly, in Japan’s history it was, not so much anymore today, but if you can bring these mindsets and you’re not coming over there like a bull in a China shop, you’re coming over there looking for local partners, you’re coming here, very aware of the cultural nuances, but you’re willing to take a risk you’re willing to put some risk capital down. Again, for our model we don’t really view it as terribly risky relative to say again, a tech startup. But if you’re able to take down a pro mindset and put that risk capital at play within an interesting space, the opportunity to the upside is gargantuan in a lot of instances. Particularly again, because there’s very little competition in some of these market segments, SMB acquisitions again, particularly in our space being one of them.
So you know, as a whole taking all of that, I’ve sort of touched on above, we’re just immensely excited about Japan. Again, myself from a personal perspective, my wife and I are eager and open and very excited to move back there, quite frankly. So it checks a lot of boxes professionally and personally as well. Give you a little background on IPOs in Japan very briefly, they’re utilized rather differently than say in the US specifically in Japan and particularly in Japan, IPOs and public companies gain a level of credibility that is very important and developing relationships with customers, suppliers, banking partners, and very importantly of recruiting.
You got to realize recruiting in Japan is a very difficult task. There’s far too many jobs and far too few applicants, broadly speaking. So to the extent you can have any advantage in trying to attract employees, you generally jump at that and being public, as I mentioned earlier, there’s an importance placed on being at a prestigious company, on having a brand name, so on and so forth. So having an IPO and being a public company, it provides you that credibility and allows you to be a little bit stronger of a employer in the hiring marketplace.
Now, the other piece of the puzzle here, if you will, in terms of the IPO market in Japan that’s worth highlighting is Japanese company’s IPO are very, very early, and particularly in the venture space and tech startups, I’m not going to go into the details here, but it’s detrimental in a lot of ways. Because these companies will IPO after four or five, six years of being around and they’re still in their growth phase and they chop off their investment in growth to be profitable and to sort of cut themselves off at the knees. So it’s a whole another topic but it leads into the idea that there’s not much growth capital, there’s not much … The capital stack, if you will, outside of early stage venture and PE, that’s hundreds of millions of dollars looking at corporate carve-outs. There’s nothing in that middle range there for a lot of these businesses.
So that leads to the IPO market being a place for very small companies to raise capital. You’ll see on the Mothers and JASDAQ, which are the stock exchanges specifically designed for venture back, faster growing unique companies, the average IPO proceeds are around $7 million, and I’m going to speak broadly here, but three million of that generally will go to say, the company, three million of that will go to the leading shareholder, and about a million of that goes to the underwriter. So it’s a really inefficient way to frankly even raise capital. But nonetheless, you can IPO at a very young age and very early on in Japan with the one caveat being though that these businesses are often, or excuse me, these stocks are often very illiquid, so it’s not optimal in any sense of the word.
However, let’s step back and think about what we’re looking to propose here. We’re looking to buy cash generative small businesses for two, three times free cash flow. Let’s say we buy five of these and we have four or $5 million in free cashflow. We decided to take it public. You look at these venture backed companies, you look at Nihon M&A Center, by the way, which again, advises SMBs on selling themselves, to $6 billion company. It trades at a, I think, 65 times PE ratio. So let’s play along here and assume that we IPO with $5 million in free cashflow. It’s not hard to imagine us IPOing at a 20, 30% excuse me, 20, 30 times P multiple or multiple free cashflow. So quite frankly, very overvalued.
Nonetheless, we’re in the public markets now, we have a very expensive currency. Now we can do one of two things here. We can issue some equity to buy these small businesses, and that’s very value accretive more than likely these older SMB owners do not want equity. They want cash, but that’s perfectly fine as well. Debt is very cheap, so we can finance these small acquisitions with very cheap debt capital at the Holdco. We can buy these cashflow streams, say it’s $1 million for three times. That million dollars gets dumped under the Holdco public company, and that cash flow stream is again, theoretically, revalued immediately at 20, 30, 40 times.
Multiple arbitrage here could be compelling. It could be interesting. We realize this is not something that’s needed to for this thesis to work. This is not a focus of ours, but at the same time if you play with this fantasy, if you will, it’s not farfetched to look at a multi-billion dollar company here over the next 10, 20 years all things considered. We’re still very early on here. We’re not in the market executing. I think that’s largely because we are trying to explore the Japanese market more deeply before we kick things off here in the US and I’m talking about IPOs and multi-billion dollar opportunities and if that happens, awesome, we’ll obviously love that. But we could have 1/100th of that success and we’d be really happy and really proud of what we can do.
We think focusing on something simple, straightforward, and acquiring basic businesses in Japan and just being very rudimentary and formulaic about how we go about doing it, we can be really successful. It’s going to take us having a local team there, me speaking Japanese, even if I’m fluent and trying to buy businesses from a 70-year-old businessmen, that’s never going to happen. So we’re in conversations with some very interesting and entrepreneur groups and individuals over there to explore setting up in some type of partnership or joining us or some capacity to try to launch this concept and get it up and running in a way that makes sense culturally, realistically. It’s a win, win, win for everyone involved.
So again, we’re really excited about where we’re headed and I’m eager to touch base with other investors, other business people, peers out in the SMB acquisition space who would love to talk about our concept, whether it’s in the US whether it’s in Japan, provide push back, feedback, whatever, on our concept. We’re just really looking to build relationships, socialize our concept, and hopefully get our feet running on this again by mid 2020.
How did your group come together and what are the backgrounds that you all came from and what kind of got you all on this similar path or mindset?
So yeah, let me clarify a little bit about Golden Southeast. So we all met back again in 2013 or so originally. A lot of them helped me out on the startup concept that we tried to launch over there. Again, back in 2013 or so, it started out as an informal group. These guys have private equity backgrounds, corporate development at some of the largest companies in Thailand. A lot of them are also very well connected down in that region. So again, we’re not some formalized group. We don’t have AUM under our belt or anything like that. We pull our own capital, we pull some capital from some local individuals down in Southeast Asia who are very interested in what we like to do and what we look at, and have been very, very supportive of us.
So it’s, again, it’s not some formal entity here that’s operating globally here, but we are a like-minded group that’s very active and eager, building a lot of different things. For instance, right now, a core group of them over in Southeast Asia, and I’m 100% supporting them more on the strategy side and definitely on the capital raising side of things, they’re actively building early stage but still already very successful RPA startup, robotic process automation. It’s really looking to own a Thai market public company, customers at this point looking to expand to Indonesia over the next 12 months or so. So a lot of interesting stuff like that is still going on, but again [crosstalk 00:56:36] I don’t want to suggest here some formal firm or stuff over these loose associations with like-minded individuals. We’ve teamed up, stayed close, and have attempted to formalize our efforts. It’s easier said than done at least from where things have been.
So then the issue with starting off in Japan and not doing the US strategy first before going to Japan, is that mostly a fundraising issue? If I’m understanding it correctly?
So I wouldn’t say that fundraising is the biggest issue for the Japan angle. I’m not saying it’s all so easy. We don’t have money sitting in our back pocket. But I would say that the more pressing and difficult challenge is understanding how we execute there. Again, there’s cultural nuances. There’s a level of education that likely needs to go on, particularly for the model we’re proposing. It’s trying to find frankly, partners to help execute. Even if I were absolutely fluent in Japanese, there’s no way I could go to a regional town in the countryside of Japan or in Tokyo or wherever and have a 70-year-old Japanese businessman sell his company to a “gigin”, a foreigner in Japanese. It’s just not going to happen.
So there absolutely needs to be a local team in place. So we are again, talking to various entrepreneurial groups and individuals in Japan today to explore that angle to see if there’s a way to work together and understand what structure will work, how can we set it up that is a win, win, win for everyone involved. Again, I’m not going to stay where we’re launching tomorrow, but we are in some nice conversations and we are very optimistic about where we’re headed, and we are hopeful that not too far along here, mid 2020 or so things do kick off. So it’s an exciting opportunity here.
But again, to answer your question more directly. Fundraising is, I’m not going to say it’s a nonissue, but we are finding some interested parties both in Japan and here in the US that we’re looking to continue conversations with and see if it makes sense to pull everyone together, work with X, Y, or Z. Who knows? We’ll see. But you know, things are looking up.
I want to ask you very quickly about like Twitter. I think we got connected originally over Twitter. I’m curious how you’ve used it so far and how you’ve been able to connect with investors or like-minded people. Just tell me about your use of Twitter and how it’s been for you.
Yeah, sure. So it’s interesting. I joined Twitter 2009. I don’t know when I was founded, but I think it was pretty early on. I really, didn’t touch it from 2009 until 2018 at some point and I think was dabbling in it then sort of getting back in the swing of posting stuff. I have really no idea what I was posting. It probably deleted them at this point, but random stuff, I think. For some reason I would say late 2018 early 2019 I again, for some reason I can’t remember, just started jumping on and obviously being interested in stocks and investing and private equity and all that good stuff. Just started digging around, following certain people, reading more, connecting with more. Or not connecting with, following more, more people. I just found that frankly, what I was picking up, the tidbits, the documents share, the articles that were being shared was just really high quality.
I had this view of Twitter as a joke, you post random stuff on there or whatever, but this FinTwit community that I’ve now, I’m not sure I can call myself a member yet, but that I definitely dove head first into, the quality for the most part is fantastic. If you’re smart about who you follow and you’re an engaging member of the community, if you will, I found that everyone’s really very nice. There’s tons to learn, tons, tons, tons to learn, and seeing how much people were sharing sort of got me thinking about myself. Like, well you know, I’m probably not as smart as most of these people on here. There’s no better way to learn more and get better connect with people then start.
So I started slowly and putting different thoughts out and over time gain more confidence when I was writing, putting it out there and I’m sure most of it is still ramblings that most people ignore. But at least for myself, it’s been a great way for me to express some of my thoughts to get push back, to get feedback, in the reply section engaging with other very intelligent, successful people, not just on small businesses, learn about stocks and whatever else. It’s just been really great to make, I would call them at least digitally for now, increasingly friends in a lot of way.
I obviously hope to expand some of this to in-person meetings with someone like yourself and a lot of others. But I’ve definitely tried to use it as a way to not only get my own thoughts out there and better build my own reputation among investors and colleagues and peers, if you will, in the investment community. But again, more so to. I was like, get under the hood of a lot of different thesis. Or for example in Japan, it’s following a lot of venture capitalists or private equity guys or whoever it may be over there where I’m able to get inside takes on this or that, you know, reading the Bloomberg or a general Forbes article, whatever it may be.
I’m just not going to get and then be able to follow up with those individuals and begin to build relationships via email or direct messages or phone calls. It’s just been invaluable. So whenever I talk to someone about Twitter, I feel like I’m learning my way around that. Still trying to get better at how I use it, but I recommend anyone out there, whether I’m meeting them or whether they’re listening to this to absolutely get on, stay on, join the community. Everyone has a right and should share what they have. The best way to learn is to get out there and give it a swing. So it’s been great and I’ve loved it so far and I look forward to getting deeper and deeper into the FinTwit universe.
It’s impressive the variety of people on Twitter. To your point earlier about Twitter seeming like a big joke, there’s some really serious people on Twitter putting their research and contributing a ton.
I’m usually, if I’m perusing on there, I will see.. I love exploring the replies. To me, that’s where you get really into the in-depth conversations. You get to really see how insightful people are. You get the all the nuances about a thesis or about a stock or about market or about an opportunity or an article or whatnot. So if I see someone put a really interesting thread or reply or back and forth, that’s generally where I’ll find a lot of interesting people to follow. It’s sometimes digging into some like yourself, if I see it, you’re liking certain people or you’re following certain people, I’ll dig into people that I really admire and like what they are sharing. I’ll look into their followers and peruse, if you will.
So I can spend hours on Twitter. I have to actually limit myself to how much I spend on there. But I would say it’s more fortuitous, serendipitous in terms of who I come across and who I end up following. But I am trying to take a little bit more of a concerted approach to who I’m following in the light because at a tier point having a higher quality feed where you can be a little more concise, sticky, you can engage a little more deeply and just have a higher bar of quality over what’s coming through your feed. It’s perhaps it saves you some time when you’re perusing as I do for probably too much time.
As a professor, if you could teach a class about any subject you wanted, what would you teach them?
So that’s a really great question. I’m going to have to actually suggest two. The first of which would be personal finance. Ever since I was frankly in high school I was wishing for personal finance back then. It’s just so critical I think to younger people and trying to get on their feet after college in particular to know how to budget so they can pay down their student debt or not carrying a credit card balance if at all possible. What’s a mortgage and how does all that stuff work? It seems basic perhaps to some, but to others it’s a foreign language and I think having that knowledge instilled into someone is … I’m not going to argue, you know necessarily that it’s better than reading William Shakespeare. But let’s just say it’s at least equal. I think it’s frankly quite critical. So if I were to teach a class, I think that’d be the number one option I would go back to do.
The second one I would say would be creative thinking. And I know that’s sort of an amorphous blob of a topic there, but it’s just absolutely critical in terms of how I’ve ended up where I’m at today. I know when I was in school I was a heads down, quite frankly, looking back, memorize, get the straight A’s on to the next, on to the next, on to the next. I’m like a machine. I never, when I was younger, really built up that creative muscle. Never really built up the frankly, nerve to sort of step outside the box at least in how I think.
I forced that over time accidentally and purposely in a lot of different ways to where I now it’s, it’s absolutely invaluable. The curiosity I have, the things that I read, the things that I come across and how I’m able to pull that together and come to interesting concepts, most of which are off the wall and are stupid, but some of which do stick and are interesting. So building up that muscle, I think at a younger age. In terms of a class, I don’t know how it would necessarily work out, but writing fiction, short stories, writing poetry, startup ideas and just really getting people to not be afraid of thinking big, saying big, and stepping outside their comfort zones again and how they perceive the world and their role in it.
What’s a belief you had early in your career that you held strongly, that you’ve since relaxed or changed your view on?
That’s a good one, too. I would say the definition of success. I grew up thinking that success quite frankly was trophies, accolades, money, if you will. I was in my early Wall Street career ready to sacrifice what I now consider success for that type of success, for the money, for the accolades, for the title, for the image. I quickly learned that it is not at all worth it. It is quite, at least against my perspective, so I’m not necessarily judging anyone else but for me, it was not fulfilling. I saw the future in some colleagues and it did not look interesting. It did not look bright, which frankly was a bigger reason why I jumped to Asia was to chase, if you will, something that deep down meant a lot. Wanted to explore felt that was my “business school”, if you will.
How do I think about success today? You know, obviously I want to be successful in my career, but I want to do it in a way that is interesting, that is enjoyable with people that are friends, that people are interesting, that people I’m learning from, that people are nice, that are ethical, that are creative, that bring more to the table. It’s having healthy relationships, it’s having a healthy relationship with yourself mentally and physically. Success is just, it’s really all encompassing, if you will. And so for me it’s tough to peg it down to one thing, but it’s a constant motion forward in all aspects of your life and realizing that balance isn’t always possible and sometimes you got to sacrifice that balance.
But over the long run you got to make sure you’re filling up the gas tank if you will, on all sides of yourself. I think if you can go through life knowing that you loved hard, you tried hard, you swung the bat, you may have failed, things maybe you’ll look back without many regrets theoretically. So that’s how I try to live and that’s how I sort of look at success today.
What’s the best business you’ve ever seen?
The best company, well the one that’s jumping out quite frankly, I guess, because we’ve been talking about a concept here is a Teledyne run by Henry Singleton. I don’t have all the facts perfectly now because I haven’t read about him in a while. It was back in my biography phase in my 20s I was going through biography after biography. I could quote half the books, but at a higher level, Henry Singleton at Teledyne had overvalued stock back, I think in the ’70s, if I’m not mistaken, and used that stock to acquire a lot of cash generative smaller businesses and put it under a broader conglomerate umbrella that was very value creative, using such an expensive currency and the stock market to buy again these cash generative businesses at a lower multiple.
Lo and behold, I don’t know, I think, again, I don’t have the exact dates, but the ’80s, ’90s, I’d say everything flipped. The conglomerate fell out of favor, stock price dropped, multiple drops, and instead of continuing as he was doing in empire building, he sort of did the opposite and started eating himself. By that I mean taking that cash from these subsidiaries and acquiring a stock aggressively through Tinder offers and such. Where I think, and again, I could be wrong in the number, but 70, 80% of the stock outstanding over the course of 10 or 15 years, he bought back. So if you look at their stock price, it was, I mean, I believe almost like vertical over those 25 years.
So you know, it’s obviously not a Facebook in terms of growth or anything like that, but particularly as it relates to what we’re looking to do, it’s a huge inspiration, particularly when you touch on the idea of taking this concept public in Japan and realizing there’s a lot of levers you can pull to drive value just as Henry Singleton did so. Lots of good businesses out there, but the one that I think that just stands out from our conversation would be Teledyne.
Thanks for coming on the show, Will. Your Japan thesis is fascinating and I’m excited to follow it over the next few years.
Appreciate it, Alex. Thanks so much. I love what you’re doing and look forward to keeping track to many more podcasts that you put out and other posts that you share moving forward. It’s really great stuff. Thank you again.