Invest Like the Best with Patrick O'Shaughnessy - Justin Ishbia - Lessons from Acquiring 586 Companies - [Invest Like the Best, EP.357]

Episode Date: December 19, 2023

My guest today is Justin Ishbia. Justin is the Founding Partner of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches. With $7 billion in capital deployed but an average transaction size of just $12 million, Justin has worked to build a system to drive success for hundreds of businesses through replicable operating procedures and championing young professionals.  The firm has created a moat around volume with nearly 600 acquisitions over the last three years, some of the highest numbers in the world. We discuss identifying growth prospects, constructing a meaningful board, and the business mentality behind "main street," not wall street, as Justin puts it. Please enjoy my conversation with Justin Ishbia.  Listen to Founders Podcast For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus, the modern research platform for leading investors. Stretch your research budget with flexible expert calls you can trust. At a fraction of the cost of traditional expert networks, Tegus customers pay only what an expert charges – with zero markups and no confusing call credits – netting an average 70% savings. Don’t want to conduct a full hour call? Tegus offers the ability to schedule 30-minutes, an offer you won’t find anywhere else. And they don’t stop there. With white-glove custom sourcing for every project and robust compliance measures, including a dedicated 50+ analyst team that vets every call transcript, Tegus ensures your privacy and protection. As the industry innovator for qualitative insights, Tegus helps you find the right experts you need at a quality and speed that can’t be matched. For a limited time, as a listener, you can trial Tegus for free by visiting tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.  Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes: (00:03:10) - (first question) - “The system is the star” and how it applies to Shore Capital  (00:07:10) - Shore Capital’s origin story (00:12:48) - What the perfect type of deal looks like for Justin  (00:16:34) - The historical rates of return for their deals  (00:18:12) - Shore Capital’s defensibility and strategic advantages  (00:22:13) - Their board system and incentive structure  (00:28:20) - Why they focus on the industrial subsector  (00:31:21) - Overview of thesis evaluation and generation  (00:37:24) - What they’re looking for during the diligence stage (00:40:45) - The bad reputation of levered rollups     (00:43:57) - What he’s learned about negotiations (00:46:39) - The weak points of Shore Capital’s system (00:48:59) - The Innovation Stack; Thinking about stacking unfair advantages  (00:52:11) - Selling a business and what buyers are looking for   (00:55:08) - Heavy focus on operations and their portfolio performance group  (00:58:00) - Why nobody above an associate level has ever left Shore Capital  (00:60:46) - Lessons learned becoming the owner of a major sports franchise  (01:03:56) - What’s surprising about how the league functions  (01:05:05) - Key people and firms he’s learned the most from  (01:07:17) - Where Shore Capital’s system could improve the most  (01:11:06) - The kindest thing anyone has ever done for Justin

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of positive sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. My guest today is Justin Ishbia. Justin is the founder of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches. With $7 billion in

capital deployed, but an average transaction size of just $12 million, Justin has worked to build a system to drive success for hundreds of businesses through replicable operating procedures and championing young professionals. The firm has created a moat around volume with nearly 600 acquisitions over the last three years, some of the highest numbers in the world. We discuss identifying growth prospects, constructing a meaningful board, and the business mentality behind Main Street, not Wall Street, as Justin puts it. Please enjoy my conversation with Justin Ishbia. Justin, it's such a pleasure to have you joining me today.

I remember on our very first call taking more notes about how you were building your firm than about any firm introductory call that I can recall. And I want to start with a line that you said when we first met, which is that the system is the star as you think about building your asset management firm. Maybe describe why that term or idea is important to you and how it applies. to shore capital. I followed your show for a number of years and it's been so impressed of what you've built. So you guys have a best in class audience and show and I'm on a part to create enterprise value as a system. No one person creates a star. And so our view

have always been like how to create a system, a machine, a process that creates differentiated results outcomes. And I was raised in an environment that you always look for opportunities where others aren't looking. And my view of the world is the last inefficient part of the private market ecosystem is a micro cap. And this is where we spend all more time. This is businesses we define as sub 10 million EBITDA investment. And in order why most people don't play here, is I think several reasons. I mean, it goes back to the system of the star dynamic is that in order to play here, it takes more resources than normal. Buicka, no audit, and a management team that is oftentimes no, I would say, running the biggest

business that I ran before that day is different than buying a business that's doing 50 of EBITDA, the professional management team that's been coming in together and have run a business three times the size before and now coming down to run it. And so back to the system. To me, everything goes back to the system. Everyone has a role for the organization because I've got a lot of sports as well. How do you become best person at your job day and day out? How do you become the best controller?

How do you become the best deal professional? How do you become the best marketing leader? And so the system for us is documentation. I look up to organizations or operating companies like Donnaert, the DBS system. We're trying to create something very similar in the private equity community. And so everything we do is, codified written down. If you walk in your own four walls and you're in our offices, we have the concepts of some idea of our firm comes up, but they want to invest in the sector.

Let's pick on the veterinary sector because everyone knows a veterinary news. So, okay, idea generation until the day we sign a letter of intent to that platform, we call that nine things of baseball. There's literally hundreds of steps that go into each inning has these between five and 15 steps you must go through. When you sign a letter of intent, there's four quarters of closing a deal. We have to make mistakes over and over again. Make a mistake, you actually add something to that four quarters say, hey, make sure you check with international tax counsel by A, B, or C. So create a codified system. We close the platform. We have a hundred day plan. We have

23 standard operating procedures we put into every business. So we've essentially onboard to the shore way of how we do things. We own a business that's the planting phase, the growing phase, the harvesting phase. And we exit of business. It's three periods of exit like hockey. A lot of sports analogies. But what this allows to be done is, it allows scale. We've done over the last few years, about 600 acquisitions, according to pitchbook more than anyone else in the world. Average enterprise value, though, of transactions, $12 million. Wow. Hundreds of them deployed over $7 billion in a three-year time period,

but across 586 transactions. So why the system matters is, early career energy, first-time leaders running through their own first platforms, giving these people the tools and resources, and saying, here's the rules. I believe we're of see one, do one, teach one. Patrick, cut work on my team. Sit next to me. Let's go do a first deal in the veterinary ship looks like this.

Next one, C-1. That's the C-1. Do one. Let's do it together. We'll do it hand-to-hand. I'll tell you why I'm doing it. The next one, you're teaching me how you're doing it. In order to own something, you have to be able to teach you to somebody else.

And so this system is set up in a way to allow early career energy, young professionals. I believe private equity world is a hustle game. And the system is set up a way to have talent of people who want the ball earlier in their career to have the chance to grow and have a big role in a deal. and the system allows for that. And so that's why our systems are star. No one person makes this place go. And we have to say, more stars into our system,

the brighter the system burns. Poking around of this system for the rest of our call is going to be so fun. And there's so many different areas that you've had this very careful, systematic thinking for how to do great deals and run a great business. Before we do all that, I'd love to rewind back a little bit to the origins of the business. And you, like so many of the investors that I've found to be the most interesting, started by, I think you called it your pre-fund. You were doing these deals without a committed capital vehicle.

You were sort of a fundless sponsor going around raising capital for great individual deals. And it was you. You started this. And it's easy to say now you've got this big amazing team, $7 billion, hundreds of deals and so on that there's this great system. But it starts with a person. And I'm curious to understand like the formative experiences in those early deals, what you were looking for, why you were attracted to it. And then why the system began to emerge.

What was it that made you think about the market this way and want to stay disciplined doing very small deals, almost constellation software style, rather than do what most private equity firms do, which is start to get bigger and bigger and bigger and their deal size? So it wasn't just me. My partner, Ryan Kelly, my partner, Mike Cooper, and John Hennig, the four of us from day one, we were young. I was 31, they were 29, 28, and 27. So we were kids.

We were essentially associate levels. Where it came from is, no, originally Ryan and I was at Water Street. I was at Valorkept Partners. And what we would do all time is we would see a deal, like three or four, we'd be a bit down, an attractive sector. We bring it to our old boss and basically say, here's a roll up in this opportunity in the sector. And effectively you're heard in different ways of saying, like, interesting, but you're one of my X number of deal guys, we have to deploy X million dollars per year,

whatever may be doesn't make sense for us to do that. And basically I heard over and over again was no one is investing as part of the market because when you're good at private, actually, what do you do? Raise a bigger fund. When you're not good, you wash out. So who stays small for the long term? The answer is really nobody. And so we decided to put a franchise, a microcap franchise that would stay small for the long term,

but I have a bunch of different products. And so it was probably former days. That is when we had a pre-fund. Like, pre-funds are something I think that people zoom past these days. I want to go raise the first fund won $200 million. Like, it is really hard raising $200 million. It's really hard raising $100 million. And so the reason why we did that way, I wish I could say I was smart if this was like

plan, but my mentor said to me years ago, it was like 2007 or eight and said, Justin, when it's a good time to fundraise, it's a bad time to invest and vice versa. And he said, when you start, make sure you start when it's a bad time to fundraise. So I knew it until 2009. I didn't know 09 March was the bottom. I didn't know that was exactly, but I knew it was bad. I didn't know how much worse it was going to get. But I said to myself, well, you got to do it when it's bad out there. And so I can't raise the capital. I have no track record. I was an associate not a private equity firm. I was a lawyer first and the associated private equity firm. No endowments and invests. That's how I would call them? They're like, yeah, come back to the track record.

I was like, how do you get a track record? We went out and raised money when our first was a pre-fund. It was a $10 million, a community capital vehicle, but a couple important points on that. Instead of raising just $4 or $5 million for the first deal, we raised $10 million of community capital. And why? So again does a really good advice that they go for your first add-on, someone's get divorced, someone's to change their mind. And by having a community pool of capital, we don't spend much of time raising capital for, for the second add-on. So having a 10 million doctorate pool is mostly wealth managers, founders of private equity firms, head of law firms, traders in Chicago. Then to our little network, we didn't have a great wealth, but had much of all our small offices

or 1,200 square feet. But those very early days, it was about being thematic. And it was about buying a little business where we felt like we were all healthcare originally, where the founders were excellent at something, but did not want to do something else, which was usually the business side. So they were a pharmacist. Man, they could mix everything. XYZ and everyone in town wanted to work with them because they had the best output. And so in those early form of the days, it was pick the right theme, invest in a business where the founder clinically was really sound. We used to say a short couple, good medicine is a good business.

We wanted to find a good health care provider that had respect of their peers, invest in this little business, then bring systems and processes. We call it a flash and a dash, a dashboard, and a flash every single week. We used to say if you can't measure, you can't manage it. For the very early days, we were very process driven. But this pre-fund, everyone wants to zoom past it nowadays, but you get seduced by the world of Instagram or Facebook or TikTok where everyone raises the first $200 million fund.

Guess what? Most people don't start that way. Most people start something very simple. I like to think of a short capital story was not that similar from some associate or VP and other private company from right now. It takes time. It takes 10 years. If you get it right, you do it exactly well.

You have good deals. You will make less money. your first 10 years, then you would have stayed in the trajectory you were. But after your 10 going forward, it flips the material in your direction. And so I think people want to go pretty fast these days, but I always say, slow down, go buy one good business, buy a second good business. Make sure those are going well. If you buy two or three good businesses, you will raise a fund one day. But don't think it's because you work at XYZ firm, you're going to spend out and go raise money and do it now. The time is crappy out there. Recession is here or coming, but now you think about it. I'd be

raising it. I'd be going to invest in the businesses when it's a hard time to create enterprise value. Sellers are scared. There's relatively low earnings profile and multiples are relatively lower. Looking backwards, don't do in 2019 when multiples are tip-tocked and easier raise capital, but it is really hard to get it right because you're going to sell it five years later, probably into recession as opposed to you buy it in 2024. I'm pretty confident we'll be not be selling a recession in 28, 2930. So obviously you were hanging your hat on this ability to stay in the small average deal size. So $7 billion, but a $12 million average deal size is quite something, just not a lot of examples of firms that have done that.

So with that in mind, maybe describe what is the perfect canonical short capital deal? What does the business look like? What does the multiple look like? What does the prospect for growth look like? If you had to atomize it, how would you describe it? Everything starts for us to industry. So we're very organized around industry themes and thematic. So pick an industry, we would say, has great long-term growth potential. It's much easier to be playing ball industry as growing than going the other direction. But not talking to the perfect type of deal for us, then 59 platforms in the firm's history, average revenue about 18 and a half, $19 million of revenue, average EBITDA, 3.5 million bucks,

paying about seven and a half times. That's what we've done, levering it two times. So under lever, over-equitized, and usually about 80 to 100 employees. This is Main Street, not Wall Street. and we're buying businesses, but it's in a sector we believe that you create value by consolidation and scale. And so back to the veterinary industry as an example, value is created by hiring and partners the best veterinarians. We love investing in industries where there's much more demand than there is supply. So what do we do?

I become the supplier of choice. By supply, that means be a place where veterinarians and vet techs want to work. If you have great people who want to work with you and demand where it is, then you have a chance to grow it healthy quickly. So we're buying businesses that I think are in a part of the market that have a price point that is different than what they do with scale for a lot of reasons. The matching teams have not been developed. They don't have multiple geographies. They oftentimes have customer concentration. But we're okay with that.

These are risks we take. They almost never have audits on QuickBooks. These are all parts of, I would say, size above the country club round, but below where institutional investors want to invest. Constellation Software market learner is a friend and a mentor. I'm not smart, I know to copy. And credit copy, they did it all in software, but we've done it in operating businesses, but it's a mainstream little businesses,

but where you can aggregate 5, 10, 15, 25 of them or more and get to a spot where there truly is synergies where your cost of good sold can go down because of scale. You can have data points on pricing to be able to have better intuition and knowledge on pricing dynamics. You're able also to shift labor around to have better labor utilization. So in a route-based business, for example, you have more density than a certain geography,

creates value. So I want to have multiple ways to win. I think the last thing I'd say is, unlike larger organizations that buy bigger businesses and competitive auction processes, we're buying them these relatively smaller businesses. If we get the first deal wrong in the thesis, it isn't a death blow. Most times in private equity, broadly speaking, someone commits $100 to a thesis. They're investing between $60 and $80 of that investment for the platform and reserving $20 to $40 for add-ons. We're almost the exact inverse. I'm committing $100 to a thesis. deploy 5 to 25 for the platform. And what that does is it creates an opportunity to under lever, make sure the management team right. And if the first one is what you thought it was to be,

your second or third investment in that sector still can be good and become the headquarters and the platform later. And so it gives that great opportunity, I think, to increase your margin of safety, increase an opportunity for success. So all that stuff together creates, I think, a really important part of the ecosystem. This part is inefficient. And I think by later in operation, Ullarian margin of safety, you layer an upside for operations. If I get one or two of our things right, we make three times of money. If I get four or five right, we make five, six, seven times of money. If we get everything right, returns in the teens and 20 multiple times.

And so there's multiple ways to win. I like investing right. There's lots of ways to win up to rely upon one or two factors. One of the things I'm personally really focused on is thinking about the different kinds of opportunity costs for capital today. As rates have gone up, as the S&P has a certain sort of expected return, call it 10% over the long term, that really to deploy capital away from risk-free rate or very cheap index funds, you need to demand like a really high rate of return. And otherwise it's just

not worth it. You might as well just stash it somewhere liquid and go home. What have been the rates of return in this style of investing historically? Now that you have so many deals done, lots of deals, exited, 10 years of experience, just level set us a little bit on the return profile of a strategy like this, the return on equity. Yeah, I can't be for everybody else for our results. So we've done 50. 59 platform investments. We've exed 14 companies. So it's not a safe track record forever, but it's definitely a growth in mass. Our average gross cash on cash has been seven times cash on cash, an IRA is 72%. We've never had a deal lower than three times gross cash on cash. Our median is

5.5 times gross cash on cash. So you're talking about the 50s IRA. So you're talking about 70s gross, 50s net. I'm not saying you do that forever, but that's been the historical results. And this ecosystem does produce, I think, a really strong risk. a just rate term profile. But it's hard to do it is that the reality is that when you're small, you can do it, but then you get bigger and bigger, you raise bigger funds, and it's really hard to stay here. That's just the reality of it because your vice president becomes a principal, when they want to come a partner, you raise bigger funds. And it's harder doing smaller deals. Some of our biggest deals are the most easiest to manage because my managing are so darn good.

It's harder to get it right. There's more risk involved, but I do believe you get it right. Now you have, I think, an asymmetric shore profile. One of the things I used to love studying in my quantitative research days was just return on invested capital of public companies. And the norm would be that RIC mean reverts. If it's really high, it gets competed back down. But there were always some platforms, a lot of them are the biggest companies in the world today that would have these bizarrely persistent high returns on capital. And when you investigated them, you found classic business moats. It seems like the same question applies here. Like, what is the system moat as you would describe it? Because 70%, 50% IRAs,

These seem so high as to be like almost unsustainable. I mean, obviously, those are surely high IRAs and even half that would be good. But how do you think about building unfair advantages into what you do so that you can continue to earn really spectacular results? I wish I could say I was smart enough in the front end to plan this, but I got a little bit lucky, I think. Our moat is the volume. The number of transactions that we do creates an ecosystem, creates a deal of young professionals, work at short capital. It gives the opportunity to have so many different executives around the table.

they reuse people over and over again and try people at relatively small businesses. And so I believe the next 10 years of private equity is all about operational excellence. So we lean really heavy in operations. We have 150 full-time people approximately short capital over which half of them are our operations leaders. When you're buying a relatively small business from an honest, good founder who has nothing but good intent to grow their business, but they often leave lots of these at a table. The risk they want to take, there's four of EBITDA to go buy a $4 million machine to automate something. They don't want to do that sort of stuff.

And so at this part of the market, it's inefficient. And there's an opportunity to, I think, dramatically improve these businesses in the first 18 months. We believe also 80% of our CEOs are first-time CEOs. We believe in this thing called early career energy. We believe that it takes a really smart person about 18 months to learn 90% of the industry. That last 10% takes five years, $10,000. We bring board members to complement them.

I think the opportunity is finding individuals who want to plan a part of the market that doesn't seem as sexy at first. But once you get in there, return on invested capital. If I'm a founder, I'm a CEO, I understand what's going on, your profile here is much higher than investing in larger businesses. That's just the reality of it is that I lay out the math all the time for board members of ours who we recruit them to our boards. And we usually have about seven independent board members in every company we buy. And they don't get paid in a cash company. They get options in their company. If it goes well, they do well, and they also get a chance to invest.

best of those businesses. But the math of them, I say, is they've had now nine times that someone stuff off the board become a CEO for us. When they see, if you get it right, when they look at it, is like, okay, median returns in the product industry, pretty good is two times your money. I think that's a good fund the most returns. And so our math we say is for us, if you can be a CEO of a large business that has no two or three hundred million dollars equity behind it, it is quite common to have an equity option pool that in a two point, two point five times cash on cash, they can have a 20, nine dollar outcome. That is a middle of fairway, I think, for a lot of CEOs. You can make that as part of the market by the cash on cash profile, getting it right. And it is oftentimes higher probability

of success, especially when you can recruit talent. Give me the CEO that can go recruit his, her network or two or three awesome people to come to this part of the market. They see the opportunity. And return profile could be six, seven, eight, nine times your money because of multiple arbitrage, because of operational improvements, because of the opportunity to invest in these little businesses that have many things left on the table that founders know that should be done, but they don't want to take the risk themselves. appropriately so. You know, it's middle of the fair way for us to have three founders who, one is 65, one is 55,

one is 45, one's 45, one's 45, wants to lean a little bit more. Great. We can partner in that dynamic and give them some real upside and give them a chance to differentiate. But this part of the market does create those unique opportunities. You get it right. You're talking about seven times your money. And I think there's no better way than to create value than to compound it and be a leader in a business growing in a really fast pace. One of my absolute favorite encapsulations of your systematic mindset is the way you set these boards up.

We talked about it in some detail when we first met. And I love this idea. The idea of a $3 million, even a business, having a fairly high-powered seven-person board seems ridiculous, unrealistic. But you figured out a way to structure the incentives and the composition of the board, like the nature of each board member and their background that's really seemed to be. a key part of this system being the star. Can you just describe that system, the board system, and incentive structure in as much detail as you can? I have to say I build a board like a basketball team.

I don't want five point guards. I want a point guard, a power forward and center. What is traditional in private company investing before I found on shore, I invested in small companies, no $20,000, $50,000. What happened normally is that whoever put the most money, it was the board. And usually they had no relevance, no importance.

The guy puts it in a half million bucks and they said the board. No, that never happens for us at all. And so we want to go, we find we call the Mount Rushmore of that industry. So back to the veterinary industry as an example, I want to identify who by industry standard reputation is viewed to be best in class. I use sports as analogy. I think people oftentimes know college basketball. Who is Tomizzo?

Who is Mike Chishefsky and who is their family tree? Every industry has their Tom Isle and their Mike Chishefsky who are no preeminent basketball coaches. And so you build a board like a basketball coach. team and we say I want someone, two people who have run a business in that exact same sector at least three times a size of what we acquired. So that person has been there and say, I've been through this journey at this exact size and metrics. I want to voice to the customer, want a voice of the supply chain, usually want a functional discipline expert who has been in that

sector, like a CFO, who knows metrics called, and one or two people from an adjacent sector. This board of seven individuals, a lot of times our board members were first time joining us, they laugh. They say there's more people on the board than there's millions of revenue. You buy a business doing it, in a revenue, nine people to board. So it's a way of what we're stacked board, but we're stacking boards in a unique way. It creates a lot of value. And we'll be clear. And I'm seeing some more secret sauce.

I don't mind it because this is how I started. We pay them zero. Pay them zero in cashcom. The lead director gets a small stipend to be in more involved. We go to the lead director and we have six regular board owners. They get zero cash comp, but they get options in the company that in our base case, they make $250,000. That's breaking out. Very simple, guys.

It's very simple that on average, you know for five years. On average, that's four board meetings a year. So you're talking 50,000 a year, 12,500 per boardming. Most people go, okay, I'm going to join a board for that. That makes reasonable sense to me. And if we do better than average, then you get much more than that, I've talked to people all the time to like, well, I can't afford that board. I'm like, yes, you can.

You give them options that in a base case look like this. And base case for us is three times. And so that's a very reasonable outcome. And so I think when you go spend the time and effort to go recruit that board, That is the most important thing that you do in the thesis. If you were in my Monday morning meeting and you heard our firm talk about buying a company and XYZ sector, the question that comes out of my mouth versus Tommy Reboard. Literally, and then there's like a slide that lays out the different avenues, the voice of the customer,

the voice of the supply chain, the voice of the operator on some of the shore relevance. And there's really four to eight people deep. And the person who is leading the thesis is their job to pick the best group. And on the unique dynamics, he's about a moat, one of the things from the past, that this year we'll close 12 or 13 platforms. So time seven. You're talking about 90 unique board members. And so we're talking about third will be repeat customers for us,

but I have 60 new people who will join our family next year. I know they're going to be yet. They'll all be very talented business people. We talked about someone before us phone call. That's one that's very high-end, very talented person. There's a niche out there, people who are 55 to 75, who don't want to work full-time anymore, but do not want to nothing. They fail retirement.

Love the foul retirement woman or man. And so these board members, bring that experience. And so we oftentimes back first-time CEOs. Over 80% of our CEOs or first-time CEOs. I mentioned a minute ago, it takes 18 months to learn 90% of the industry. The last 10% takes five years. But guess what?

My board has that last 10% from day one to complement that early career energy. And so if you partner with a 100-degree smart, first-time CEO, first-time CFO, give them a board. And naturally, of those seven, by the way, five becomes super value added, one or two less. So just the reality of it, I'm very poor predicting who is going to be value at and who is not. It's just DNA of the people. And after it was one time, I can figure it out. But you get these really talented people in these boards.

And they help in a unique way. Every single member helps a unique outsized way at one point during the life of the investment. Open the door to a customer. Refers us to a former employee of theirs who was talented, has a unique way of understanding a software system, refers us to an add-on. When buy a business is doing 18 of revenue, we want to grow up to 100 of revenue, you need a new customer that could bring three amount of revenue. You're talking about at first a 15, 20% pickup in revenue.

You buy a business doing a billion of revenue. There's no ones that are bringing you a 50% pickup in customer. It's just not going to occur. But I think what we've learned over time is we've got to create a fun environment for these board members too. They have choice with going to the professional time and effort. We put a lot of effort into creating an ecosystem where we have these operating partner summits, where you invite individuals, all of our board members, from all of our companies,

come to twice a year to cross-pollimate and share ideas and bring perspectives. But it's creating a family and an ecosystem of really talented board members who want to provide advice and give back. Harvard is altruistic, part of it's financial, part of its fund. All those things together create a really great board member. And I think it increased the odds of success. All of this is about increasing the odds of success. And I think if we do all these things, well, I'm not sure which part will work every single

time, but it's a system. And I know the system will prove an outcome. I tell our LPs and investors, all the time. And our future seller partners, I say, I won't promise you the outcome, I'll promise you the process. Our promise is written down. It's clear. And we do the same thing every time. And we make it better sometimes. But the process is the same. I think that is, I think what great operating businesses do. Public companies that can doner like a roper. They do great things by a system. And I think that's something we're very focused on.

Why are you doing this in the industrial subsectors versus somewhere like software? What is it about that addressable market, those business models? Why pick that instead of something like software that by took this system and when did this in software somewhere? It probably worked pretty well. Why not? We may at some point, but we start in healthcare. I always felt like the founders of healthcare businesses were clinicians by training.

So I went to Vanderbilt for law school. My cousin, I'm super close to Van derail for med school. His eight buddies and my eight buddies would give one group at Vanderbilt. and we're all still buddies to this day. He's just the smartest individuals I know with these doctors. Man, they just don't get the business out of it, nor do they care. It's just a reality of it. And so I saw that enough.

I said, okay, if I could partner with my cousin who would be my age, but him when he's 50 and suppose when he was 30, and have him be my business partner. And guys like that create tremendous competitive advantage. And so it was always like we partner with individuals, Main Street businesses, where the founders have a outsized technical skill. Whether that's cutting your eye open for a surgery for a cataract,

or whether that is, you know, in the industrial sector, someone who's really good at repairing roofs, or whether in the business service sector, someone that's great at making sure your technology, your outsource IT works really well. To me, it's always about, I believe that people excel at things they love to do. Most doctors did not go to medical school, for example, to hire the front desk person

or to evaluate professional development of their peers. great. You go be a doctor and do what you love to do and like to use the words, I want everyone are working at the top of their license. So by that I mean, what can you only do based upon your expertise and your skill set? And so in a doctor's example, I want the doctor who's a cataract surgeon seeing the follow-up patient for the routine follow-up. There's no complications. It's very simple. A nurse practitioner can do that. And they're trained well enough to know. There's a problem here. I need to see the doctor on this sort of stuff. And by the way, the same thing. thing, the nurse, she'll only see what the nurse should see.

The medical assistant should be a medical assistant see. And that creates stickness because employees love doing things that are unique where they can do. What frustrates a doctor is interviewing the front desk person. What frustrates a doctor is having to do some of the most simplistic sort of follow-up or coding and putting into the system. And so we like to partner with individuals who love what they do are really darn good at it, but want to leave another part of the business alone.

They do not want to do it. And so oftentimes, like ESI Software, Software founders usually are pretty savvy business people as well. They started the business because they wanted to create something in an enterprise rate. And they just all parts of it. We started in health care because usually doctors wanted to do good and help people. It was a byproduct of their job to have to do the administrative part of the business. We say, great. You go be the doctor.

We'll be the business part together, best in class, and create a business. And that will help more people in the scale. And that's just how we think about it. But there's so many different parts of the world that can create value in. but you have to be focused. I always tell people, when you have a lot of priorities, you have none. And so we're very focused. Sounds like thesis generation and evaluation is like the furthest thing upstream at shore

and how you think about things. Talk me through that part of the business. Where did these thesis come from? What makes a good one? What makes a bad one? What's the difference between one that almost gets in, but doesn't quite really understanding, like, how something gets through that part of the process would be fascinating.

I want, of course, each invests professional. So partners have between three and seven, have been principals had three two and four, and vice presidents have one or two. I'll pick your own thesis. Patrick, you may love urgent care, and I may hate it. I may love veterinary, you may hate dogs. So I want to let the investment professional

pick something they find interesting. I find the best investors are curious. You're curious about something, and you want to peel the onion layers back. And so how we work here at a short capital is every investment professional, senior professional, which is a vice president and principal or partner, has thought how many to pick a certain number of sectors

they want to focus on, and they can't focus everything. For us, everything starts what's called a roadmap. A roadmap is essentially a white paper on an industry complemented by the industry conferences and also what we call the Mount Rushmore of the industry. So in every industry, there is a Mount Rushmore of companies and executives. And the industry roadmap will also include the conferences. So your job, Patrick, if you were trying to figure out urgent care industry is you have to

learn the green light a sector, you have to physically go to one of the industry conferences in person, walk the floor. you have to identify the Mount Rushmore, lay them out who they are. You have to identify the Mount Rushmore companies. Where are the disciples? Where have they gone? Where are they at today? And the pros and cons.

Once you do that, it's being between 40 and a 60-page white paper effectively, present to a committee. And you can say, hey, I'm Patrick, and I love urgent care. And this is why I think we, a short couple should green light the sector and turn it on. So the whole process goes around that. They present for their peers. It's almost like you're standing up in front of 50 people. The committee's size changes depending upon the vertical. But you present, and your peers,

are pressure testing it. And it's part of them. So we're organized through our investment community process. The team is assigned. I assigned team members to Patrick who wants to go forth urgent care. It'll be five people on the invest committee. And if they agree to it, they are with you for the whole life of the journey. So from roadmap, they're greeting your board, LOI, platform, add-ons, budgets, exit.

And their carry in the future is tied to your results. And so they have their own carry for their own deals. They lead. They're judge on your outcomes as well. And so they're very incentivized to make sure that the thesis makes sense. They have to also deploy capital. We have to also make sure that they're not to saying no to everything. It can be a doctor-known, but it's a five-person team who effectively votes to greenlight your sector of urgent care in that example.

And there's smart people asking smart questions. And there's trends we're tracking. The question we oftentimes ask is, why does the small player win here? Why does the little guy win? And especially in healthcare. Healthcare is inherently a local business. And so that makes a lot of sense there. but other businesses where a small guy wins as well.

No, it does not do well. You must be multi-continental. That is not good for us. We're not going to invest in the sector. And so each industry has its own trends, and we try and identify how wins where the puck is going. And like in the healthcare especially, it's the consumerism of health care.

I think something we don't believe in. But it starts with this thematic approach. We're very theme-driven. So in this journey, while you're in that roadmap, you're also recruiting your board members. You found out who the Mount Rushmore is. Before we even present around Rushmore, the whole roadmap,

You have 15 people you think could be on the board. And you're sharing with them the roadmap. Hey, Patrick, you're the urgent care expert. Here's my point of pages of my deck. Where am I wrong? What makes a bunch of sense? You're getting a bunch of industry domain expertise, balancing ideas off people, making phone calls through LinkedIn,

through different search engines. You're outbound. And if you traffic in that sector enough, you will eventually learn the good guys, the bad guys. You will learn who everyone respects. I'll tell you one trick of the trade that we use, a fair amount, I look at all the time is you could call up the Industry Association, urgent care association of America. You ask them for their agendas for their last five conferences.

If someone spoke twice or more in the last five years, pretty darn good proxy that industry respects them. I want to meet that person. There are little things like that, that the industry itself, there's always not industry panels about the lawyers and the bankers, but industries promulgate certain people. And you want to get to those individuals are. So for me, everything's not the industry. Industry becomes the core of it. And then that partner is short cap or vice president or principal, they own it. And their jobs to know it.

And they oftentimes may invest in that sector, two, three, four platforms of their career or more. My partner, Ryan, who leads urgent care for us, he's done three platforms, urgent care sector. And what surprised he does more? My partner, Chris, has done at soon three dental deals. And so if your job is to know the sector really well, over time it may change. It may change if you want to invest in it again. but you almost become a strategic acquire after a period of time because you know the industry so well.

I tell oftentimes our executives, our board members, they've forgotten more about the industry than we'll over know. But for finance guys, our job is to be most educated on domain expertise, impress you to want to join our team because we're prepared. We want to invest. And then for the sellers, I'm telling the seller is when you choose to sell with somebody or partner of somebody, there's two parts of the deal. There's the macro and the micro.

The macro is, do you believe in the sector, urgent care? Micro is, do you believe my company? I want to take one of those two off the table. I'm believe in urgent care. I have a whole machine behind me, my 50-page deck here with my board members. We create a board before we can buy the company. So you get the industry, we get greenlit,

and we recruit a board. We don't have all seven of them, but we'll have easily three or four of them. And they're required to go with us to meet the sellers before we buy the business. And so in these early days, get the main knowledge, you have people who've been around the table,

who know the nuances of the industry. I'm telling the seller, don't worry about the industry and longer because if it's not you, I'm going to invest in urgent care. We're going to invest here. Now, all we have to do is agree upon why you're best in class and why we should together go build something's pretty special. And I think that resonates with sellers and fair amount. Yeah, let's talk about within the given thesis, starting to look at the individual assets,

the individual companies, the diligence process and what you're looking for or looking to avoid. Once you get down to the actual thing that you're going to buy, describe. in whatever way you want, the things that matter most to you. I'd love to keep walking down this chain and negotiation and operations after the clothes and everything else. But starting with, okay, we've got a company that's interesting for some reason. What are those reasons? What are you looking for in diligence?

Almost always we're doing a role in the sector. We're almost always consolidating. So one of the things I look for almost right away is reputation amongst your peers in the industry. And there's a really simple test. And I'm sharing people right inside baseball because anyone should do this. I don't think it's rocket science. Use ophthalmology as an example.

We'll try and buy an ophthalmology company. I'll try and identify in that same town three or four their ophthalmology practice in town and call them up and we'll do a secret shopper or something and ask them, if your mom had to have a cataract surgery and she could not go to your practice, who would you send her to in town? And I want the company that I'm buying to get on that list multiple times. Now you've to recognize there's always in town, a coconut Pepsi. There's somebody that likes each other and somebody doesn't,

but people in town know who is pretty good in town. So why it's so important is reputation of that first group is everything because those who are in the know only want to join the winners. The New York Yankees are oftentimes a few days one of the best major league baseball teams. Very different than the AAA team. There's no way the Los Angeles Dodgers want to join a AAA team. The Dodgers would join the Yankees in a roll-up of the baseball industry because they're viewed as best in class. So I think we take it the same way. So reputation.

Number two, I want a founder who has a shared vision to grow. and has a desire to learn. Back to curiosity. They want to understand and want to grow a business beyond their own means, and they're excited about partnering and they have an open book.

Our best founders, clinically, you know, there's a baking sweet goods or a doctor or a plumber. We have a water safety business. It's so important that they're really good at their craft and they're able to identify who or others good at their craft.

So to me, it's reputation of industry, technically sound, you don't hear me say, imagine you very often, do you because it's important. What we're going to go build, we're going to take what you all have and surround you and comment to you. Oftentimes, the founders are going to pay a role, but not the CEO. And we're very clear on the front end. By the way, our biggest company is a veterinary company. We started when it was five of revenue, one of EBITDA, three locations. Today,

it's over 400 locations, over 1.3, but a revenue, that's founder, veterinarian, and it's still a CEO. So that's one extreme. That can be one extreme. The other extreme, I can say, Patrick, you're a great emergency room doctor. If we're going to partner, you're not going to be the CEO in our thesis. If you're okay with that, but you want to be the chief medical officer, we would love you to be the person who helps recruit other doctors to this team and sells the value of problem of why we can help people in rural parts of America better than anybody else.

And so to me, it's very much reputation, technical skill set, and a willingness to learn and a curiosity and want to grow. Those are the things I really focus on. There's always the minutia of customer concentration and reputation, but reputation is encapsulates so much because this is a role of thesis. It's not even buying one business and staying still. We're growing our business usually over 100% per year, organically and organically. I would say on average that levered roll-ups have sort of a bad reputation.

Why do you think that is? I would say if you've seen one-lever roll-up, you've seen one-lever roll up. There's snowflakes. Like, they're restaurants. They're good restaurants or bad restaurants. The same type of dynamic. Oftentimes, they get bigger also. The founders have already left the organizations.

Now, in the earlier stage, where we start, these founders are very hungry, want to grow these businesses, and we like to under-lever. So we don't put pressure on these teams with leverage. We under-leverage, there's no leverage at all. Also, I would say people point fingers at roll-ups in a way because the target's on the back of the winner. It's hard to identify all the small little ones. And yeah, when you have 4,000 employees, you're going to have some of disgruntled, and

they're going to some who leave the organization. So you hear more of that noise versus. is a four location versus a 400 location, I generally believe that roll-ups end up in a better quality of the business. Usually, at least for us, we create usually a technical advisory board, so it can be a bunch of artists and bakers. It can be a bunch of veterinarians. We want to have a technical advisory board.

We have to bring together and create a dynamic of what is the best in class delivery of the services. And so we spend a lot of time on that. And so I recognize that more arrows are shot at bigger companies. No one talks smack out of the AAA team. They talk smack about the New York Yankees. You know why? They're in New York Yankees.

So I think it's easier to point fingers at, and do bad things happen? Sure. By normal scale, if you have a form of location, it's more likely one doesn't go as well as if you have four. But I think in totality, those businesses are able to pay their employees better, create a better margin profile, and therefore deliver a better quality of service to the customer. And the day, why do they exist? Because customers keep choosing them over and over again. people ignore that part of it. It's like, oh, levered business that is a part of a levered

roll-up. Like, yeah, but the customers keep picking on, I wonder why? Because they believe it to be a better value prop than going to somebody who is not part of that roll-up. And it's because usually they can offer more services, hopefully higher quality of care. And there's smart people running them with metrics like net promoters score and other things they've been more sophisticated to identify. This is what my customer wants. I'm delivering it in a very efficient way. It'll work costs. What have you learned about negotiation? A lot of deals you've done. So people say to me, Justin, you're in private, but you're in finance. I quickly correct them.

I say, no, I'm in psychology and sales. Look, end of the day, I always tell our team members at shore. We've done now almost 900 transactions. We've had zero lawsuits. If we ever pull out that document in the future, we have to look at it. We've already lost. We negotiate to do our best, have all those sort of things buttoned up and start stuff. But at the day, I want people to believe in the growth story.

They have to believe that we're building together. You know, lawyers sometimes will try and I'm a former lawyer, recovering lawyer. I understand the lawyer's job. But no, when we're negotiating, the most important thing is negotiating, making sure we have catastrophic downside protection. I didn't make sure if Patrick was on the front page of the Wall Street Journal for doing something uncouth, I need a way to separate. That's important to me because that has risk.

I think the most important thing, especially doing a roll-up, and I think most people would get it is what we have to do is create an environment in a structure so that not you, but if someone else down the road we need a way to unwind that person. If you wear your shareholder hat, as opposed to your individual hat, I think most of our partners get it. They go, okay, now if I were to do something wrong, that'd be bad, but you can tell yourself.

The hardest negotiation is that unwind part. I know we've never had to dissolve, never had anything worse than three times our money, but I think the negotiation time where it ends up most often for us these days is sellers negotiating for a larger part of the upside. That's where we ended up negotiating. We used to be doing an 80-20 deal now as being 64 or 55-45, and that's where a lot of the negotiation comes. But at the day, we prefer it in person. We're not fans of Zoom in negotiation.

When it looks on the eye and say, this is what we're going to do. Yes, I can't write down on paper all the weird things that happen in this world. But if you trust me, go talk to these 25 references. I'll give you everyone we're partnered with. There's trust. And if you look at those documents, we failed you. And so I'm not saying we have an unwound partnerships. People have not worked out.

That's definitely happened. but on the negotiating side, to me, it's being very thoughtful about who you're partnering with in the big picture. That's, I think, strategically. But I'm going to get one level down more tactically. I think I made sure if you on our last phone call, we have a system at short count. We call our green, yellow, red system, which basically for every material document in a transaction, a purchase agreement, an operating agreement, an operating agreement, a lease, and there's roughly 15 key terms on every, document, and we list all those out. And we have a scoring system internally. I use the simplest term, a non-compete. Everyone knows a non-compete and you sell business as part of the transaction.

Five years is market. That's the most time it is. If it's four years, that's pretty, I think, pro-seller. Anything less than four years is really pro-seller. We have a very simple system. Back to why our teams can grow and people negotiate their own deals is it's a whole entire system that everyone in our firm knows, at these 15 key points. They know they can agree to on their own and know they need to raise up the flagpole. Everything for me is a function of price and terms. I'm willing to pay you a billion dollars if it's a dollar a day for the next billion years. So whatever it may be.

And so on the negotiation part, I like to figure out a way that strategically, partners feel like they're part of our team for the beginning and they're negotiating not in their employee hat, but in their shareholder hat for a long term. And more tactically, I want to give our vice president's principles and partners the autonomy to negotiate their own deal. I'd leave the very best people on a super long leash the appropriate check-ins. give them that autonomy, create the rules,

expectations, and then give them a scoring system they compete with each other. People love competing with each other and the best, the light shined on them and that's what we try and do. It's a fascinating set.

I just love all the systems and how they all intermingle. If I was the world's most skeptical but thoughtful LP, and I was looking at all this, I'm sure you'd probably talk to this person, you'd probably picture somebody. What do you think they would poke in on

and say, is the weak point of Shore in this whole like system of systems? I think it's that first time CEO, the early career energy, are there enough of them out there who are high enough quality that can scale up the next level? And so I agree with that. So we internally have, I like the home grow. And so we created this program now six years ago.

We call our CXR program where we recruit from the best business schools, Stanford, Booth, Kellogg, Harvard, Wharton, Vanderbilt, Notre Dame, will hire individuals that come to short capital. They'll be a chief of staff, a good owner of our portfolio companies for four or five years. And if they're one of our very best, we'll promise to back them next. And I think we have a unique fund dynamic. I'd be lying to you if I said I would put a 31-year-old as a CEO of a $1.3 billion

revenue business. But my average business is 18 of revenue when I buy it. I sure will make a 31-year-old first-time CEO if they performed well in the past. And so I think our biggest risk is the high-quality talent want to run small businesses. I think, though, there's a lot of makings to it. And so we homegrow our CEOs through this program called our CXO program. and we home grow our CFOs. We hire people out of big four accounting firms usually.

Come to short capital for a 30-month tour of duty. They go through this program and the best ones can become CFOs. So conceptually, how I think about it is I offset it by recruiting and homegrown my own CEOs and CFOs. That is the risk of, are you going to trust for a roll-up? A CEO is 41 years old, first time. And one of the biggest challenge is we get into a roll-up, and some reason it's not going so well, a CEO is wrong, but there's a big pipeline, does you're buying. It's hard to unwind that and start again.

We've done before. That is the biggest risk is that when you're doing a roll-up, you change leadership, but that's why the strong board. So I sometimes someone steps off the board become CEO. I think that's where I would be, if I was poking holes in my own firm, is can you find enough CEOs and CFOs and leaders? I believe the answer is yes, and we try to homegrown. And also, as we needed to grow our firm,

we have a system internally and kind of our all-star tracker. Each company has its own list that are internally of people we think are best in class and we'll use them again in the future. So how I think about it is talent wins. But that talent in the system, I think the system wins. But the whole is enough talent at the velocity that we're building businesses. There's this great book called Innovation Stacking by one of the founders of Square, where the whole idea of Square's eventual moat was all these small things that are built

on top of each other. And then the chain of innovation is itself. The competitive advantage sure really reminds me of this. One thing that we haven't talked about in this theme of innovation stack, is how to decide another fund vertical to go into. You have a real estate fund, for example. That's like a surprising thing coming out of healthcare. Maybe tell that story.

Why real estate and what is your philosophy of stacking unfair advantages and how to think about that as you build the firm? I think, stacking unfair advantages, how do we have unfair advantages? So I view of market cap, all of our funds of health care, food and beverage, business, services, and industrials. That's its own product. But real estate is a different product.

And next year, a different product healthcare advantage fund. I tell our LPs and I tell our team members at short capital, I will only add a new product if two things are true. Number one, we have an unfair advantage, meaning that odds are tilted of success in our favor because of the dynamics. It helps. Number two is help my base business. So real estate. So we have a real estate fund. We were acquiring so many veterinary businesses, I think, several hundred that we kept to all these sales effects.

and it was slowing down the deals, it was causing problems for us. And so we felt like there's an unfair advantage by, I know the CEOs of my veterinary company is quite well. There's an opportunity where they want to stay in a location for a long term, but the underlying real estate is owned by the veterinarian, and they oftentimes don't want to invest in that. So how do we figure out a dynamic where we know the location is great, the underlying balancing the portfolio company is great.

We have an unfair advantage of knowledge and specific knowledge of the location, And then it helps my base business because I can do things to help the base business to potentially lower the rent and exchange for a longer term on the release. So the lease becomes more valuable in the market ecosystem. You aggregate 100 of those together from the valuable asset because more valuable to the veterinary company by having a lower cost lease or more capital for tenant improvements. So it's a win-win-win-win scenario. The portfolio company wins because they have more EBITDA or more capital. spend. The real estate fund wins because there's an opportunity to elongate the lease in exchange for some things that creates a better value over time. And our investors win by low-cost capital

will work in a more efficient way. So all parts of that makes sense to us. So summarized, I would say, we will only extend products to short capital. Two things are true. We have unfair advantage of help my base business. And I know having a real estate fund helped my base business on the acquisition and also the underlying portfolio companies. There's a current. conflict. The conflict is not in the buy, though. The conflict's in the lease. And there's so many reeds out there with public leases. We have them ourselves. Just take the read that's out there, use the lease from somebody else, and just move it over and make the same terms. And so that's how we think about it. But the other products that we do in the future, but it has to help my base business.

I have to have an unfair advantage. Talked mostly about what you buy and what you do. We haven't talked about selling these businesses. Who do you sell to? What have you learned about the relationships with those sellers? You're selling a product. The product is a business to some financial or strategic buyer. What are the features that they look for in a product? And how do you think about that final part of the chain here? So picking the actual buyer, I'm over 14, our 14 sales.

I never picked the right buyer. But prior founding, sure, what other private have, I confirm my partners have as well. I hear in my mind over and over again, my old boss wanted to buy. I can think what they say over and over again. And so how I think about it goes back to how we organize, we would say industry management company.

Back to the very beginning of the conversation on the industry, the roadmap, industry is growing. And I think about industry growth of a 15, year cycle. 15 years has got to be my whole period, five years, my buyer's whole period, five years, my buyer's buyer. It's kind of a 15 year time period. We've sold to public companies, a lab core and home up big public companies. We sold to the biggest, the biggest private equity funds, KKR, TA Associates. We've sold to a lot of private equity funds and we've done some teamation vehicles as well. At the day, I have high confidence in the following statement. If I buy a

business in a growing industry, that is, I'm buying an inefficient part of the market. We make it better we grow it from single-digit-e to the teens to 30 of EBITDA, we will have lots of buyers, both strategic and financial sponsors. So whether it's a platform or an add-on, I think I like that situation. It would like to invest, we call barbell industries, meaning there are usually four or five very large players, and there are thousands of mom and pops, but not much of them. I want to go create the new middle one, and then larger players want to buy it. And so in the day, I also would say larger funds want to buy, which by the way, some of my investors are friends of mine who run quite large funds. I hear when I talk to them, they want to buy a business that's a

proven track record of acquisitions, organic growth that beats the industry average by at least 300 basis points, one technology stack system that all businesses are on. Because when you have those three things, you can acquire, you can make them better. I want technology system. They can buy it from you as 30 bit down and go to 100. And so we're basically, we have to say at short capital, we are building platforms, not buying. platforms. We like to think of ourselves a lot more like a venture capital firm. And then a venture capital firm's partner with a founder, great founder as an idea, but usually has a relatively small team. And then the venture capital firm works with them hand in hand and helps create a whole entire

manager team. We buy businesses, like an orthodontics business. We'll buy one practice, really one practice with one gentleman, one lady, and we'll go hire a CEO, a CFO, head of business development. We'll go build a home hire platform. And on this journey, we'll have some mistakes along the way. added a lot of awesome people. And when we're at scale, we should be in the middle of the fairway for a fund that wants to deploy between $50 and $300 million for a platform, which is a billion to $3 billion fund. That's where we play in the buying environment, the inventory that we're creating, I think, has strong demand.

So funny here. You describe all these elements that I'm just picturing this big, effectively like a money machine. The widgets themselves are companies and platforms, and you're perfecting the factory, if you will. What parts of the factory floor do you think are interesting or surprising that we haven't talked about yet? So I think it's our focus on operations. And so again, I'm not smart. I know the first round capital is a venture capital firm. I got to know a little bit and copy what they've done. I think my factory floor is what I call our operations team. We call our portfolio performance

group. And a group called the Centers of Excellence. All I buy businesses, 18 and a revenue three VEB. My marketing department, the person who runs it is not somebody who's run a very large business. What we do at Shore Capital is we have a Centers of Excellence, a gentleman named Adam Werder, he runs my marketing centers of excellence. He's a team underneath him as well. His job is be the node. And for our 43 portfolio companies, his job is to create a cohort of the head of marketing from all 43 companies.

And they all four times a year to get together, twice by a Zoom, twice in person, and countless email interaction in between. And this is my factory floor where I call it lift and shift. I am getting the newer companies to where you need to go faster. And an example of that would be orthodontics business. It's a B2C sort of marketing engine, now SEO marketing and sort of direct marketing to a customer for orthodontics. It took us years to build a platform to get to the right system,

cross the metrics we use. About a year ago, we want a medspot business. The marketing is very similar. to see as well. And so we lift and shift that Adam's job is to help recruit, take the incumbent marketing and leader, work with them and they're the right person for a long-term grade. If not, over time, work with the CEO to help top grade that individual, but then lift and shift, the systems and processes and tech stack from the marketing and the orthodontics business and apply it to the medsop business or apply it to the veterinary business. There's so many different personas we have that

things change a little bit, but the whole entire journey is, I think, some of the secret sauce. and it's not reputable unless you hire the right people to do it. I think it around as we have billion-dollar company resources and applying to a million-dollar companies. And so the owner named Julian Larimer is a leader of our division. She's a former private equity-backed CEO, incredibly talented. She runs the whole entire group, roughly 13 functional disciplines. Effectly, a senior management team from a Fortune 500 company that work at Short Capital, and their job is to help every portfolio company in that discipline get better.

Chief Data Officer, Chief Technology Officer, Head of Human Research, head of talent. All of these people help all four or three companies and elevate all of their games. I think you told me that this is a crazy stat if it's true, that nobody above an associate level has ever left Shore. How have you made that happen? There's a lot of people, a lot of years, a lot of companies. Talk about career trajectory in the system there. So we have 150 full-time people. So if you're a vice president, a principal, or partner, not one person has ever left short capital. But associates go to business school and then come back. A VP, I think we have about 43 or 44 people who are in that bucket, not one person's ever left.

And what's the philosophy behind it? So I think a little bit of it is hard to be 35-year-old and looking at the founder who's 46 and say, when to make my chance. But having the different verticals, health care, food and beverage, business services, industrials, my most talented healthcare vice presidents went on to become principal as my business services fund. And the same thing industrial. So there's a little bit of a waterfall where the homegrown talent.

move to a new vertical. My dad always taught me a couple of things about treat your people well, but he said two things. Justin, pay the market comp or a little bit above market comp. And most importantly, people don't quit their friends. So my job is creating an environment where they come friends with each other. And so that means holiday parties. It means we have a thing called a party and we sell business. You have celebrations. It's important for, I think, leadership to know each other's spouses. And so I think it's really investing in your people because if I'm a seller of a business, the thing I fear most. If I have a friend who sold a business

a private equity firm, I want to drill in really carefully who is the partner on my deal and who will be with me of this journey. Because this turnover in those ranks, it's really hard and decreases your odds of success. So I think it's core competency to private equity in my business is to make sure that people stay the same

when they're partnering with a founder and a business. And so I guarantee you forever, ever be here the same way? The answer is no. It's not realistic forever. But for 15 years now, no one's ever left. And I think it's because people don't quit their friends in my job. is to create an environment with friends develop, pay them in a way they feel really good about,

and have financial upside. And again, I go back to you a really long leash with appropriate check-ins. Where goals, nerds, and those-oriented, people know their own goals, set their own goals, and they know when they're performing. Yeah, I love the idea that I think you pay for people's dinner if they want to go out if there's three people or something like that. Like every little detail is so thoughtful.

Three or more, I want to go to dinner, I'll pay for it. One of our younger guys names, Tim, I won't say his last name, but Tim, you know who you are? He had like a big build of a club one night. And he said, there was three of us. And I was like, Tim, I'm paying for it this one time, but clarifying point, if it's a bill over X dollars in a club, it doesn't count anymore.

I love it. I always freak the system. Everyone in the team loves the kid. He's a great young man, and he's awesome. But I was like, it's meant for not a club bottle service somewhere. And I'm not paying for that for everyone for long term. But he follows his roles. And he's a culture carrier.

And I want to create nodes of culture carriers, people who want to be here. It's a very high bargain with vice president, though. But he makes vice president, I'm basically telling you, I view I'm saying, saying to you, I want you here for a career. That's what I'm saying to you. It's my job to get an environment. They want to be here. You obviously love sports. You have spent a lot of time thinking about sports, the leagues, teams. You're now an owner. Talk about why you love this so much. And more importantly, everything you've learned about becoming an owner of major sports franchises. Yeah. So, no, my brother and I are best friends. And we were fortunate enough

to become the controlling owners of the Phoenix Suns about a year ago now. February it closed, we signed the contract in December last year. first of all, we're stewards of a community asset. We don't own the team. You know who owns the team? The fans, the X million people who live in Phoenix. That's who owns the team. And there's a lot of analogy between private equity, investing in sports and metrics and numbers.

But we buy a business. We did when we partner with Phoenix Suns, yes, anyone who works there. The first day, Matt and I met with every person. We had a town hall meeting. We all sent a survey out that said, tell me the two things that we should keep doing here. Tell me two things you stop doing. We did an all-time, a short capital also. And we got over 300 employees.

roughly we got 270 some responses. And I read every single response. And I think it's important. This isn't the glamorous part of, you know, partnering and running businesses, but the details matter. And you hear themes of the coffee sucks. Okay, that's an easy win. How do I make some easy wins along the way? But the sports business is a complicated business. I view sports in private equity very similar. There's a scoreboard at the end of the game. In private equity, it takes 10 years for the score to flush out. In the NBA, you can see tonight if you wonder, we lost. But there's a lot of similarities. And I love that there's zero-sum game in sports. There's only one champion.

Matt and I talk about it all the time. In 30 years from now, people look back at, hopefully Matt and I's ownership and stewardship of the Phoenix Suns and the Phoenix Mercury, which we're really excited about the Phoenix Mercury, is that no one say,

oh, they improve the Uphithe margin by 400 base points. No one's either crap. They're going to want to know, were they competitive, and they win championships. And the day, we have four pillars. And like all our business is short capital. It's goal-oriented,

its values, its core values. And so at the Phoenix Suns, it's number one, I want to create a raving fan experience. It's got to be an amazing fan experience. People forget it's not a sport, it's entertainment. These people have choices to spend their money at a movie theater at a driving range or to basketball game. So I want to create a raving fan experience. Number two, take care of your voice.

I want a place where there's a great place to work and people are happy and they want to be there. Number three, we're a community asset. Get back to this community, be stewards of this community asset and do right by this community. Number four, win, win championships. Do win in everything they try and do. And so sports invest. It's become, I think, a bigger trend the last decade or so. Now, we're big fans of it.

I don't think there's going to be more NBA teams in the near future, maybe one or two, but beyond that, but there'll be more more people throughout America. And the end of the day, I think it's an intellectual property at its core that is much like the highest and best type of real estate, the corner state in Maine in New York. Phoenix Suns are going nowhere. Phoenix Mercury are going nowhere. And so it's a fun opportunity and it's a really opportunity to give back to a community and hopefully create memories.

Matt and I grew up playing sports. My best memories were my mom and dad and I, Matt, going to games. We didn't have the best seats of those days, but our heartbeat was watching our Detroit Pistons, winterless, and hopefully create an environment like that. That's the fun part about sports. It's the platform for good and for change and get a lot of positivity. And so we're really excited about that. Has anything surprised you so far about how the league, the teams, the ownership, the

ownership function and work? Anything been really surprising? It's much more of a partnership amongst 30 teams and I thought it was. Between the white lines, it's fierce. Basketball operations, like, no. It's like, no, it's a zero-sum game. But people are quite collaborative.

Some of the people you know, they're well-known. When we joined the league, like I said, next to one of guys at lunch, and he said, congratulations, you're brash, you're young. I was the same thing. You'll make much of mistakes, talk me in five years, but have fun all the journey. So people are very helpful.

At the day, we wanted to create a great fraud for the fan. and the NBA is a great opportunity, and the other teams want to help each other. You want to help each other. I want your team to be full and my team to full. I know who I want to, quote, unquote, lose is I want the other sports or I want other entertainment options to lose

to the benefit of the NBA. But I think the camaraderie and the voice to help each other, I think, has been something, not just in the game, not just in sport, but outside. If I'm doing something in a different community, I'm in Oakland for something and meet somebody, able to open a door to somebody, that's been really helpful along the way also.

You talked about Mark Leonard before, and you're just like a benchmarker. You remind me of Mitch Rails, who we're facing any new challenge. Interestingly, also doing this exercise with the commanders right now. If it's about the stadium, he's meeting with 30 stadium owners

and stadium operators. If it's about something else, he's benchmarking constantly looking for great ideas. And it seems like you've done that. Who, apart from Mark, stands out as key individual people or firms that you've learned from? I've learned from people.

Sequoia Capo. They've been great to me. They've been over there. they're different. Square Heritage, more specifically, there's a group. They have a network. I've learned from them of the power of a network and introducing really talented people to each other. People with professional success are very selective values of time. Creating an environment of bringing the best and varieties together, I think creates a lot of opportunity for success and unique outcomes. So I think some of the people over there, Kevin Kelly is one that can keep Johnson, too, that stand out a whole bunch.

More specifically in the private equity, one individual who I've learned a time, Hunt from, a mentor in mind. His name is Kent Doughton. He's the founder of Keystone Capital. He's, in my opinion, amongst the most humble and successful people who ever come across. It's a steady hand in the wheel and doing the right thing over and over again. Also, a gentleman named Jim Forrest, who was at Windpoint Partners for a number of years.

He is now the Chairman of Shore Capital. He is an operations leader at heart. He's always thinking about the customer, the customer, the customer. Mark Leonard had been a great friend for me, and I've learned a ton from how he thinks about growing businesses and how he thinks about having a very disciplined on process. And then there's a professor at Harvard Business School, went for executive education. They wrote to school there named Boris Croyceport. I've done a ton from as well on process. And he studies Mitch and other people in the

DBS community. And I think if he's a pick one business that I aspire to be most like on consistency in process is Donna Her. There are people, Donner, leaders who are on the boards of my businesses. So we recruit people from Donna He who are retired to be on our boards. And so those are from people, I think that at the end of the day, you have to find your own niche of individuals who want to support your vision and want to be around the table and have a good heart that want to help people help me in the way up and help me. And I want to be able to do that to others as well. My guess is that you're effectively never satisfied with the system. It's obviously evolved a lot. It keeps improving. Where does it feel the most incomplete to you today?

How do you most want it to improve over the next five years? Most incomplete, I think. You're never complete at the short capital level of operations. I get frustrated when I hire a new team member and their first two weeks on the job, their 10 business days aren't scripted almost by the hour. They need to know where to go. The onboarding experience, I'm very much into experience and process. Making sure when we made a mistake somewhere else, it's probably getting through the whole entire team. And so you have a thing called what we learned. Every time we close a platform, we do a one or two page on what we learned and we share the whole entire firm. How do you do a thing called? How do it? do you balance with scale efficiencies and knowledge sharing? That's the hardest thing I do every

single week, trying to balance those things. It's more efficient for very small people who have to know things, but it's way more valuable for knowledge sharing. I think of short capital, like an academic teaching hospital. My job is to teach our principals, vice presidents, and partners, all the mistakes we've made elsewhere. And so I think the biggest challenge is we've made mistakes, not making the same mistake twice, documenting it, and making sure that it's front and center, having a system around it. So we have a short capital playbook on the operating things.

Like, for example, we made the mistakes in the past where we did not renew a lease at a portfolio of a company at an important location, and the landlord extracted a pound of flush out of us after the fact. What we did after the fact is, now all of our businesses are required to have a thing called lease query. I don't care if the system was called lease query

and all of our leases of all the day of points in the system to make sure we never had that mistake happen again. So there's prompting. And so I think the biggest way to improve the organization, I think it's hiring more and more talented people, getting tighter and tighter and processes, making incredibly clear and reducing the likelihood of making the same mistake twice. I say all the time at short capital, very rarely is there a problem with first impression. When you have 35,000 team members and you have 100 locations and you have everyday things are appearing, the same mistake can't happen twice. How we reduce the risk of that, and that's through knowledge sharing, but doing it an efficient way. Is there anything about how you spend your personal time that you wish was different?

I wish there was more time, I would say, to work with sellers. I'd not let a deal in short capital in seven or eight years now. I miss some of that relationship with building with sellers. Those early days are short capital, the board members I personally recruited. I was one of four partners, and I was the lead partner on those early deals. As the firm gets bigger, my job is to run short capital and give people resources they need and remove obstacles for the system and the whole order. organization, but you kind of miss the newer boards that created a lot of great people,

some really talented people, I just don't know them the same way as those early boards. It's almost like your high school buddies. You know them better than your work buddies. Not that you don't like your work buddies. I like them a whole bunch. It's just that my high school buddies have a little special place in my heart. And so leading a deal, negotiating a deal, working with a founder, recruiting a CEO, I do less that.

That's coming to the very end of it. But, no, I do miss one of the best questions, I think, that LP has ever asked me. And if I was an LP, I'd ask people to say in question, do you think you're a better investor or a better manager and why? And I think, at least for me, the right answer for short capital is I have to be a better manager. I love investing. I love buying companies. But to create what we want to create and build and our system grow, we want our system to grow. It's a manager.

You're a leader of people. Your management system and processes that increase the likelihood of success of many things at once, as opposed to having very effectively leading one deal. but that is not going to create the same value for our investors and for our team members. And so I think it's my job to create an environment of kind of see one, do one, teach one, and let our best people do things that they've seen done before. I would very eagerly read a long white paper or HBS case study or book about all these various systems. I'm really thankful for your willingness to share the very specific details of so much of what's behind shore. Most firms are not willing to do that.

And I think it's pretty cool that you've done it here today. I am sad and forced to go to my traditional closing question. I can go for you on this system for hours and hours with you. What is the kindest thing that anyone's ever done for you? That's a great question. I've heard you've asked it before. I was fortunate to have lots of mentors and different people in my life who made a really big and positive impact on me.

But one, I think, actual piece of advice someone gave me and I backed it on the last decade for sure. And I'm proud of my telephone, some people that work in my organization. Because the advice is this. try and have one friend in each decade of life. So a friend of the 30s, a friend of their 20s, friend of their 40s, 50s, 60s, and 70s. And the idea behind it is you truly have a friend in each decade of life. When you go to those moments in time, you're actually to call upon them for their wisdom, their experiences, whether it's not losing a loved one, a mom or dad, that oftentimes happens most often in your 50s or so or 60s.

Or if you end up having a child, that oftentimes happens most often in your 20s and 30s. But it's a really great piece of advice that on the personal side helped me a ton, but also the professional side. Things you go through and experiences you have in your 70s and you're winding down your career, the emotions that you may be going through and friends have shared with me things along the lines of all my peers aren't working anymore or really hard to try and go get new business and promise someone to be helpful when they're kind of going, are you going to be around here in five years? And so some changes that you know coming for me, at least I'm 46. I'm hearing that in 25 years, that could be a possibility, aware of that fact pattern,

how I prepare myself best for it. And so having a friend in each decade of life is something that I've focused on. And it's pretty great value for me. And I hope others find valuable. Justin, you built a fascinating business. I'm excited to do this again in five or ten years and see how it's all unfolded. Thanks so much for your time. Thank you so much.

I hope you want to do it again in the future. I'd like to think we're an inning two of Shore Capital. You build an amazing podcast and following. So thank you for opportunity to share our story. Thanks for your time today. If you enjoyed this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.