The Pomp Podcast - #1127 Nick Santhanam On How Industrial Technology Can Create a Better America

Episode Date: November 23, 2022

Nick Santhanam is the CEO of Fernweh Group and author of the book "The Titanium Economy". In this conversation, we discuss the industrial sector, where the opportunities lie today, and why industry is needed more than ever in a world of advancing technologies. ======================= OKX is the world's most powerful crypto exchange and is now the second largest in terms of volumes. It offers a comprehensive trading platform with over 730 spot trading pairs, 280 derivatives markets, and 1000 options markets. It processes 400,000 requests per second with 30 gigabyte per second data throughput and 99.95% uptime. For pro and institutional traders, they’ve just launched the OKX Liquid Marketplace, an on-demand liquidity network with multiple brokers where you can instantly trade spot, derivatives, and multi-leg structures at the price you want while bypassing the order book. They offer up to a 50% discount now. Go to OKX.com and try it now. ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp ======================= With a Messari Pro subscription, you gain access to exclusive industry-leading long-form daily research reports, daily crypto news & insights in your inbox, advanced asset screeners, curated sets of charts and metrics and so much more. Try Messari Pro today! Get up to 25% off their Messari Pro membership by visiting www.messari.io/pro and entering promo code "POMP" at checkout. ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= The number one name in NFT domains and the world’s most powerful wallet are teaming up to bring something new to the crypto and Web3 world: <Your Name.Blockchain> Either sign up for a free blockchain.wallet or visit Unstoppabledomains.com to buy your domain today. ================== This episode is brought to you by Eight Sleep. The Eight Sleep Pod is a tech layer that fits onto your mattress like a fitted sheet. The Pod dynamically cools and heats each side of the bed, to maintain the optimal sleeping temperature for what your body needs. With the Pod, you can start sleeping as cool as 55°F or as hot as 110°F. The result: Clinical data shows that Eight Sleep users experience up to 34% more deep sleep. Go to eightsleep.com/pomp  for exclusive holiday savings and ring in the most wonderful time of night. Eight Sleep currently ships within the USA, Canada, the UK, select countries in the EU, and Australia. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Nick Santherman is the CEO of Fernway Group. In this conversation, we talk about his book, The Titanium Economy, how industrial technology can create a better, faster, and stronger America. I really enjoyed this conversation with Nick. We go through every single detail I could think of around the industrial sector, including talent, hiring and firing, building businesses, cashflow generation, geopolitical conflict, and much, much more. I really hope that you all enjoy this conversation with Nick. I learned a lot and I think you will as well. Once you get done

listening, jump on Twitter, let me know what you liked and what you didn't like and what we could do better. This episode is brought to you by OKEx. They're the world's most powerful crypto exchange and now the second largest in terms of volume. It offers a comprehensive trading platform with over 730 spot trading pairs, 280 derivative markets, and 1,000 option markets. It processes 400,000 requests per second with 30 gigabytes per second of data throughput and 99.95% uptime.

For pro and institutional traders, they've just launched the OKX Liquid Marketplace, which is an on-demand liquidity network with multiple brokers where you can instantly trade spot, derivatives, and multi-leg structures at the price you want while bypassing the order book. They offer up to a 50% discount now, So go to OKEx.com to try it today. OKEx.com. Go try it today.

Go learn more at lmaxdigital.com slash POMP. Again, that's lmaxdigital.com slash POMP. This episode is brought to you by Masari. Your days of spending hours scouring the internet for quality crypto insights are over. Masari is your one-stop shop for all your crypto data and research needs. With Masari Pro, you gain access to exclusive industry-leading long-form daily research reports, daily crypto news, advanced asset screeners, and curated sets of charts and protocol metrics. You can try Masari Pro today, and listeners of this podcast will get 25% off the Masari Pro membership by visiting www.masari.io backslash pro and entering promo code POMP.

Again, that's masari.io backslash pro and use promo code POMP. Navigate the market with confidence with Masari Pro. All right, let's get in this episode with Nick. I hope you guys enjoy this one. Anthony Pompliano runs POMP Investments. All views of him and the guests on his podcast are solely their opinions. and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp

or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I've got Nick here with me. The entire American industrial industry

seems to have gone through highs, lows, everything in between. I read the news and it makes it feel like American industrial revolution is over. We will never see the industrial industry come back. It's all being outsourced. It's over. You wrote a book called The Titanium Economy, which basically argues the exact opposite. What are people missing in the mainstream conversation around the industrial industry? Anthony, you started off with the right message. People always look at the industrial sector and think it's a thing of the past. They look at it and very sadly say, wow,

this was a great sector. It was stolen. It was lost. It was given away. The truth cannot be farther away from this. We are in the first innings. Why? Let's just start with what the industrial sector is. If you look around, anything and everything you touch, you see, you do on a daily day starts because it was made by the industrial sector, innovated by the industrial sector. Let's just start with two examples. You wake up in the morning, you grab your cup of coffee, you walk out, doesn't matter what city you are in, you walk on the deck. The deck is made of composite materials, which are amazing innovation in material processing. For example, a company called Trex, which we talk about in our book, does it. You wouldn't think about it. You would

think it's common lumber, but actually the deck is made by recycled plastic bottles, protecting the environment and protecting you when you're standing on it. You run to the airport, you have to go somewhere, and like always, you're going to be late, and you're going to go to Starbucks to grab a cup of coffee and a muffin. You want the muffin heated up. The muffin is heated up in an oven made by a company called Wellbuilt, which heats up the muffin in 15 seconds, nicely warm, regularly heated, because of innovation in how you heat up your food. And last, you're boarding your plane, let's hope you're in Phoenix or Minneapolis, too hot, too cold. What keeps the plane hot or cold is because of what's called ground support equipment made by companies like

Dabico, which keeps the plane hot or cold when it's on the ground without having to turn on the engine and burning valuable jet fuel. Again, an amazing innovation. So I can continue on, Anthony, and that is like the first 10 minutes of your day on a typical day. Roll this out, everything is done by the industrial sector. And all of those are driving innovation almost on a daily basis without which we would be stuck. So I'm very excited to talk to you because I feel like people who are entrepreneurs and investors will find you specifically and your partners interesting in terms of the model that you take. So the industrial sector is this huge thing that touches everything. People think it's a thing of the past. You all are very excited. You and two

other folks who wrote the book ended up originally working at McKinsey, you left high paying jobs to go and do this. And what you all are doing is a combination of being an entrepreneur and an operator, with also being an investor. And so help me understand, like, why are you leaving your job? Like, what are you guys going to do? And why not just be investors? Or why not just be operators? Why take kind of this hybrid model? Anthony, two parts to that question. One is, if you look at the industrial sector, and we talk about it in the book, there's not one or two. There were 35 companies we profiled. Several of them have done better than S&P 500 in stock performance. So put it very bluntly as an investor, would you want to invest in the next Facebook, Amazon?

Absolutely. But you're taking a gamble because you don't know what's the next Facebook or the next Amazon. Versus in the industrial sector, pretty much the odds of picking the winner is very high. Every company does well, they create a lot of shareholder value, and you can do it. But what is more interesting is when you take the same companies and you infuse the capabilities to transform them, what we call the segment of one leaders, having a great product which solves a customer problem, having the customer intimacy, having the ability to deliver a product within the time it needs, within the right quality, you have amazing performance. A company called Heiko, which is based right here, which is probably five blocks from this office, has outperformed

pretty much every FANG stock over the last 30 years in stock exchange performance. And that is because Larry Mendelson, who's the CEO and the chairman, is a very active, engaged investor. He's not just invested the money, but he has actually invested and transformed the company. And our model is the same thing. Let's be an engaged investor operator. Three keywords, engaged. We're very engaged in the company with the management to make sure we're getting the right products to the right customers at the right time. We are investors. We put our money because we obviously want a good return on our capital. And we are operators. We actually operate the company. We put in the right management team. We put in our talent. And all of that combined creates a huge

alpha. And when there's an opportunity like that, our whole premise is we can talk about it in a book in McKinsey, which we did, but let's eat our own cooking and let's actually go do this on our own. And that's what we're doing at the Furnby Group. So there's a specific example that you've told me where a company was struggling. It's a publicly traded company. I believe it was about a hundred million dollar market cap or so. It then became worth tens of billions of dollars in a fairly short period of time. Let's use that company specifically. What is the company? What did they do? And let's kind of walk through the model as to what you all did to help folks understand how this model can actually have a very profound impact on businesses.

So let's pick any company for that matter. Usually, these companies have revenue. They have good margins or decent margins, but they struggle because they really don't know what good looks like. The question is, in this particular company, the one you talked about, it was a $400 million company, publicly traded, so we'll sort of keep the name off, but people can make a wild guess, and was struggling and losing money. When we were able to engage with that company, what we did is we said, look, let's start with the basics. Let's make cash. Cash pays the bill. It's not EPS, it's not EBITDA, it's cash. Two, we said, we really need to have the best product out there. So this is not about cutting costs and firing people. We need to have the right

cost structure, but let's actually have a product which the customer wants. Let's drive the innovation engine. And third, let's get the right people in the right seats, whether it's the CEO, whether it's the CFO, whether it is the head of supply chain, and let's give them the right incentives. And what we found very interesting is everybody wakes up in the morning and says, I want to do a good job. I don't think anybody wakes up and says, I want to do a crappy job. But a lot of people don't know what good looks like. And so the step one was what we call creating the transparency of where you are versus where you should be. So it was very clear in this particular company, they were at 18% gross margin, and they thought being at 20% gross margin was good. And

we said, no, 40% is a good number, which was beyond their thinking, beyond their thought process. We said, look, you have a great product. You have a great brand. You should be at 40%. Similarly, we said, once we got that, we got that communication out across the entire workforce. It's not just what was in the board or the C-suite. We got the whole company at that time to realize, we are really good. We just have to be as good as we claim to be. Let's go deliver, not only in developing products, not only in delivery, not only in customer service, let's do that. And then the last one was, in a lot of areas, there was big gaps. And we said, let's take the actions. For example, in pricing. Pricing was a great example. They thought they were doing a

great job. They added a lot of value to their customers, but was not extracting it in pricing. And their argument is, well, our customers are not good except the high price. We said, well, if you create value, they are. So we were able to go optimize pricing. Same thing with cost optimization. Their products had a 25-year warranty when in reality, the industry had only a 15-year warranty.

And we said, great, have a 25-year warranty, but if the customers demand for it, they're going to pay for it. Let's right-size the products. The list goes on. It was not one thing. It was 1,000 small things. But when you add it up, it had a huge impact on the performance. And everybody wants to be a part of a winning team. Once the flywheel started going, people said, well, this is not good enough. They went from losing 24 cents a share to break even to 10 cents. And they said, why should we be 10 cents a share? We should be 18 cents a share. Once they were 18 cents a share, they were like, we should be 35 cents a share. And the sky became the limit.

But fast forward the movie later, this is a company which has gone from less than $100 million market cap to north of $30 billion over a period of five years. And what is the importance of the team? Because I think that there's this saying, when good team meets bad market, market wins. When bad team meets good market, market wins. You've mentioned the team a couple of times. What is the importance of having the right people in the right seats as you described? It begins and ends with the team. Money is a commodity.

If I have a dollar and you have a dollar, it's the same thing. What's the team which does with it? At Fernway, we say we only bet on the teams. Every time we look at a company to invest in, if we have a good team, either already in place or a team we know, we will lean forward.

How do you evaluate them? So a good team, is this their past performance, conversations with them? Walk me through the process of evaluating the team. So the way I would put it, and this is something we use even in Fernway, we use a very simple model called O&O GID. O&O GID. It stands for Outcomes and Ownership and Get It Done.

Okay. It comes down to very simple things. Do you really have an outcomes orientation? Put it differently, you have to hit a certain revenue and margin target. That's the outcome. A lot of management will say, oh, I tried really hard. I talked to three guys. you know the ukraine crisis happened and the cryptocurrency collapsed what do you want me to do

well that's amazing input is not the outcomes you're not an owner in that you're having a more an employee and an input mindset so that makes the biggest distinction anthony which is is it and the second one is gid is get it done it really doesn't matter i mean obviously do it right do it legally, but get it done. Think about it how many times when somebody calls you and says, well, I really tried my level best. I was supposed to do this, this, this, this.

You really don't have a lot of patience. At the end, you say, did you get it done? The answer is no. Then, well, you really wasted my time. Did you get it done? And then you want to bask in the glory? Fantastic, I'll listen to you. For us, it really comes down to that very simple thing,

which is, do you have O&O and GID? Which really then comes up to is, what's your clocks? what we call, what's your clock speed? How quickly do you get it done? Because even let's say you're not good at what you do, if you move fast, you get multiple chances to back. If you fail, you fail fast and you fail free

and you learn from that. And if you look at this, and when we were at McKinsey, we looked at management teams across a lot of companies. And when we are now at Fernway, we use this as our benchmark, which is if the management team has that mindset of O&O, GID, they always win. They always find a way.

Even when they hit a road bump, they find a detour. Versus if they think, hey, I did all I can. What do you want me to do? I mean, then you have an employee in hand. You have to manage them. You have to check the box. You give them a checklist. They say, I checked the list.

And you're, well, that doesn't get me to what I want. If you're an investor, you want to make money. If you're a customer, you want the product delivered to you. If you're a supplier, you want to be paid. I mean, I always tell my employers, if I come to you and say, well, John, I'm not going to pay you this year's salary. And they're like, what do you mean? Well, I really tried hard. I talked to Anthony 17 times, but he didn't fund my company.

You're like, I don't care. I need my salary. Would you give me credit for trying? The answer is no. And that model works everywhere. And people need to get that head around that it's O and O GID. So how do you evaluate potential CEOs to bring in to these companies? Because it's interesting, right?

You underwrite a team, and some of the teams you say, hey, we're going to come in, we're going to help optimize whatever, we're going to back you, and we're off to the races. We already have a team. Other times, you actually may bring in a new CEO or a new management team. What is that process like to find the right person? Because it's probably the most important decision that you're going to make once you decide to do a deal. Absolutely. So far, we are lucky. In every deal we have done, we have brought the CEO, the CFO, who we have known for the last 20 years.

So you look at the company Avail Infrastructure, which we just closed, which we spun out from AZZ, the CEO, the CFO, the head of HR, we have known for north of 10 years. The CEO is an amazing CEO, a guy by the name of Bill Johnson. He used to be the CEO of Dover, after that a chart at Wellbuilt. So we knew him over three companies, and I personally know him very well. And he's a guy, I have 100% confidence, not even 99% confidence, he knows how to deliver. So when I have him at the seat, I don't even need to think twice.

On the flip side, you asked this great question. We were looking at a company. We didn't have the right management team. We found a person who we thought we liked. But as we dug in and went more into diligence, what we found is we really didn't know whether they had that values to drive that. And we could have taken that risk,

but we said no. So to answer your question, so far we have been lucky. We just have a track record of having known them for 10, 20 years. And in some cases, we really go more to see whether they have the O&O GID. But my worry is, the next five years,

that's going to be our biggest gating factor. We have to find the right guys, guys and gals, and we have to put them in. And that is our biggest differentiating factor. How do you decide where the big opportunities are in industrial? So, okay, we understand how to pick the teams. Now, when you pick the right market sector,

do you kind of have like prepared mind approach where like you guys have done a bunch of work and you go looking for a company you're kind of on the hunt do you wait for people to pitch you

and you go learn about a sector like how does that process work three comments industrial is a very broad term if you look about it it's a very heterogeneous sector one side is you have the Amazon rainforest

and one side you have the Antarctica scope so what we have done is we have taken the industrial sector and broken it up into 90 micro verticals. Some of them we know really well, some of them we don't know at all. So rule number one, we start with the sectors we know. If we don't know, that itself is not a red

flag, at least a yellow flag. So we say, is that something we worthwhile to go in where we have not done our homework? So first flag is, is it a sector we know? Second is what we call the structural factors. Most of us, not all of us, most of us are first generation immigrants. And so we say rule number one through rule number 99 is capital preservation. We don't want to, I mean, we're allowed to get a 10x return, 20x return, pick a number, but we want to make sure there's a high probability we'll get our capital back. And so we, when we look at the sector, when we look at the company, we say how comfortable we are that we're going to get our capital back, the investment we made. Some of them is we buy companies with very high networking capital, very high asset base,

so we feel good. But related to that, we also say we are more than comfortable betting on ourselves. We are not comfortable betting on things we don't control. E.g., we don't go into a sector where there's a big government subsidy because it might stay, it might leave. We don't know about that. We don't go into sectors where there's a high threat of substitution because of global warming, climate change. And we're like, it could happen, could not happen. That's not a bet we can take. So we apply critical parameters to say we are more than happy to double down on risk we will take. We will not take risk we don't control. And the third thing is, as they say, the proof is in the numbers. We look at that and say, okay, what are the variables we control? As we talked about

before, revenues, cost, margin. And we say, do we feel comfortable over a period of time we can double our EBITDA? And if the answer is yes, absolutely. And then we would be more than happy to get a multiple expansion. We'll be more than happy to drive more inorganic growth. But capital preservation combined by doubling our EBITDA, which you can do the math, leads to a very healthy MOM IRR. We would do it. If not, we are more than happy to walk away. And last thing related to question is we don't typically participate in auctions. Every deal we do is a proprietary deal or a lot of deals we do is proprietary deals. And the reason is, one, we know the industrial sector,

so people know us, they call us. And it's always fun when you do it with your friends. So we do it with people we know, we like, we trust. It allows us to have a high level of trust so we are not gaming the system. We go in with a win-win partnership model. I mean, you look at every deal we have done, I can tell you with a high level of confidence,

the counterparty will say, hey, this was a good deal for me as well. So that allows us to really play the game we are good at rather than go play a game we have never played before. As you are evaluating things like margins and different aspects of pricing, you mentioned earlier warranty, stuff like that. Is there a crude knowledge over time?

And so, you know, going into a business, okay, we know that we can increase prices, we can do this, and there's like an actual playbook. Or is each company so unique in that you have to start from the basics, ground up, and build a plan as to what you're going to do with that business? Because you could see both, where sometimes it's unique, sometimes it's just like, hey, we've got our operating manual,

let's go in, we know what to do, and we do it. How do you all approach it? I would say it's probably 80-20 of your mix. What I mean by that is, in a lot of these sectors, we have served companies before, we know these companies. I've been in the sector for more than 30 years, so there's a big pattern recognition. You can go into a company and say,

well, this is a company, we should be at 20% EBITDA, it's at eight. Maybe I'm wrong, but at least I can get it to 15. So there's a huge pattern of recognition. Related to that, even if I don't know personally, there are five people I know very well, I can call up and say, Anthony, I'm looking at this company,

I think it should be a 15% EBITDA. Do you think I'm smoking pot? No, I've been a CEO, I was a supply chain guy, so I can do that. So that allows us to have the first 80% comfort level and in a few times you've gone in this is not a sector we know then we do first order problem solving we say well i don't know let's really think if this company's at five percent ebitda can we get it to a 15 ebitda and we go and literally uncover every rock uh we as i

say we are confident but we're not cocky um and i tell this to my team every time we will make a mistake i just don't know when and i hope it's not on this deal but remember we are going to make a mistake and so that allows us to go and say is this something we can really get that number and a couple of times we walked away because we couldn't get that comfort level when you look at this sector uh i think most people say oh industrial like that's so boring and sleepy compared to uh bitcoin or uh high growth tech or you know name your uh ai ml uh you know favorite startup whatever and then you think of like russia invades ukraine and all of a sudden everyone becomes a commodities expert everyone becomes an industrial expert right

um we pull out of afghanistan and people i literally see them on twitter talking about like this china or the taliban control that mine right and like you start to realize like hey wait a second like there are real world consequences and there's a lot of geopolitical natures to it and everything. Is it boring and sleepy? And we're all just maybe, or are we all not paying attention? And like, maybe this is way crazier. And if we started to pay attention to it, we would think it's just as cool as some of this other stuff. I think one sentence summarizes it all. One of my friends said it and I stole it from him. We're all in the basement while the party's in the penthouse. We would love to get from the basement to the first floor. Would we ever get to the

penthouse? I hope so. But the culture of the sector drives that behavior. If you look at these companies, they're not in Silicon Valley, they're not in Miami, they're not in New York, they're in Fulton, Missouri, they're in Pittsburgh, Kansas, they're in Chattanooga, Tennessee. And what you find are amazing men and women doing the work, but they're not the folks who are going to go and browbeat and say, this is amazing, what we do is great. So, this is a sector which typically does not do a great job in marketing itself. They just do their job and get about it. And so, for a long time, exactly as you said, what was more sexy was AI, autonomous driving, Bitcoin, I mean, you name it, NFT. Well, I think COVID and then the geopolitical

tensions, whether that was US-China or now Ukraine-Russia, people said, oh, wait a minute. If, for example, Russia turns off gas, Ukraine people are going to freeze. And if Russia turns off gas, more than 40%, I think was the number quoted, of manufacturing is going to shut down. And people said, wow, I can't be cold. Well, I need to control my destiny. I mean, back to my point, I need to build a basement before I build the penthouse. I think that awareness is coming. But to your original question, will we be sexy? Probably not. Do we need to be sexy?

I don't know. I would say, I mean, I've been in the sector for more than 30 years. I'm more than happy being in the basement. It's a very vibrant community. We create a lot of value to the communities we play in. In a lot of the companies we have served, we have looked at, there's not one or two. Multiple people who have stayed in that company for 20, 30 years, 40 years, and have retired as a millionaire with their 401k.

And that's an amazing satisfaction when you can say, look, this company, pick a number, 20% of the people are going to retire as a millionaire. I mean, it's just the true American dream. And I think as a sector, we enable that. And I'm hoping we'll get the recognition. I mean, that's one of the reasons why we wrote the book.

But even if we don't, I think it's totally fine because it's such a vibrant part of who we are and defines who we are as a country, as a sector, as a society. And I think that will continue. Russia, Ukraine has had a big impact on the overall industry or not really? Globally, yes.

US, no. The reason is, if you think about it, natural gas is the best. And this has nothing to do with global warming. It's a fact. Today, if you want to heat up anything, space heating, gas is your best driver. not electric not obviously hopefully not wood gas and if you live in cold countries which is

a lot of northern europe you need gas uh fact of life unless you are willing to go back to prehistoric times or ice age and so if i stop that the fundamental premise is what do you do so you need it for the consumer uh if you're in poland you're in germany you're in france you're in estonia just pick any countries there you need gas so if i turn that off it i don't want to say it cushions your survival but it really does cushion your survival or at least a comfortable living second pretty much any hardcore manufacturing making steel which you and i touch everywhere i mean whether it is a ev car or you use a pc for bitcoin mining it's you needs steel for that needs heat and heat comes from gas the gas being the primary medium so I

think that has fundamentally cushioned people saying what you took for granted think of it this way Anthony if I say all of a sudden you're not going to get half the water you consume every day you're like I've never thought about that because wherever I go I'm going to get a bottle of water and I've never thought what is it it's going to be a scarce commodity it's maybe not to that extreme but it's one of that and the second is I think it's tied to the geopolitical angle which is for a long time, people believed and I believe too in globalization, which is I'm going to do what I'm going to be good at, you do what you're good at. And now people said, well, probably that's not going to work as seamlessly as I thought it to be. And so I need to control

my own destiny. And you're starting to see that in the US, when COVID hit, this has nothing to do with geopolitical borders crossed, borders closed. When borders closed, you couldn't get the stuff you needed, you needed to have it within your own four walls. And so a lot of that is now creating that awareness saying the industrial sector is a core part of enabling everything you do and you better not outsource that and as you start to look at the industrial sector itself in the u.s right so you have all this kind of geopolitical stuff that's playing out but inside the united states you said it hasn't really affected that much uh there's some very big players uh one that comes to mind is like the coke industries right uh and what's always fascinating

is i'm not an expert on this i don't know how much you know about them specifically but uh it appears that in the industrial sector you build these huge conglomerates and what i've never really understood is how much of that is uh a product of there being uh various benefits to combining a bunch of industrial companies together so you get efficiencies at scale and and can share some back office stuff or whatever versus no they just got a lot of money and like there's a lot of opportunity and so uh people just end up being capitalist uh and they happen to be in industrials and like the conglomerate model isn't necessarily as effective.

How do you think through maybe like the business structure and why have we seen so many large, mostly private or many private companies that have kind of this conglomerate thing with their hands in a lot of different aspects of the industry? This episode is brought to you by Arculus. If your cryptocurrencies are stored on an exchange,

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is on your wishlist, look no further than the new Pod 3. You can go to 8sleep.com slash Pomp for exclusive holiday savings and ring in the most wonderful time of the year. 8sleep currently ships with the US, Canada, the UK, and select countries in the EU and Australia. Go check them out, 8sleep.com slash Pomp today. If you look at the industrial sector in general, they're extremely fragmented. So there are roughly 4,800 companies just in the US alone on the industrial sector. Half of them are privately held and 80% of them are mid-cap, which is very good in the sense live and let live. To your question, I don't know the Koch brothers that well, so it'll be hard for me to comment. But I would say that is a point which defines the industrial sector, which is if

you do well, you're going to generate a lot of cash. And if you generate a lot of cash, you can buy more companies. So there is nothing which prevents you from doing it. You look at Koch, they have their hands in a lot of stuff just because they have their hands in a lot of stuff but you look at the flip side

and you look at for example I picked up Wellbuilt as a great example it was a billion and a half dollar company making amazing ovens in an 80 billion dollar sector

so you can whatever the math is 78 million or whatever 78.5 billion is controlled by a bunch of other companies which is not those guys

and that Wellbuilt was one of the leaders so I do think the industrial sector has always been more fragmented than typically like tech for example

if you have to do a search you're going to go to Google and if you're in a mood you might do Bing but after that you don't have any other guy I don't think that's the case in industrials

I think you'll find this is a sector of live and let live there are a lot of companies they do very well they're very well at what they do they're very well

they don't do well the stuff they don't do but I think that allows that model of hey I'm going to stick to my knitting and sort of not be all over has, I don't know, say worked well,

but has created a very vibrant sector. And the cash generation is fascinating because most people in the tech industry are like, cash? Profit? What are you guys talking about? We grow, we invest, we lose money, we light venture capital on fire. And to their credit, there are some massive, very valuable companies that have been built there. But the industrial sector does not take the same approach.

what are the things that people do with the cash? Are there companies that just generate a bunch of cash and sit on it or dividend it? Or is it pretty well understood that there's like no reinvestment strategy? Like talk to me a little bit about this cash generation. You hit the nail on the head. I live in Silicon Valley

and one of my friends once told me, I'm really unhappy today. This was three years of his company. And I said, why? He said, I made a profit. And I was shocked. I said, why? He said, my VC investors are really mad at me

that I was not growing fast enough. And I shouldn't be generating a cash. I should be investing for the future. and he talked about why he's not able to hire the right folks and so on. And I looked at him for like 30 seconds and I thought that's fascinating a mindset because if you're a company,

I would expect you to make a profit. And if you feel sad that you made a profit, I mean, there's a lot of ifs and buts and caveats, but that's a fascinating point. A tech sector is trained to believe for a long, long time, you should not make profits. The industrial sector,

I think it is just a genesis of how they started. Most of them are family, start family owned. a founder comes up with a brilliant idea nobody believes him or her he says screw it i'm gonna go prove you wrong he mortgages his truck he mortgages his you know wife jewelry he does it and he sort of says look if it's his money there's no outer money and he grows the business and that dna sticks in that company and it rolls out in the sector i can't tell you anthony how many companies have talked to private owned companies and you ask them like what's your relationship with wall street or what's your relationship with financial institutions and

they'll give me this blank look and the reason i'll always be surprised after a long digging they didn't need to have it they have no intention of going public and they're very well funded they generate the cash they pay themselves well you can call it dividend recapitalization they continue to do it i mean if you go that model and i'm not saying that model is right i'm not saying that model is wrong, but if you believe in that model, I don't need the bankers. I don't need Wall Street. And to your question then, what do people do with the cash? Nine out of 10 times they invest in growing the business. That's how they grow the business. The old adage, you make cash, you invest. You pay your employees very well. You pay yourself very well. And sometimes

when you need it, you do a dividend recapitalization. But for the most part, it's a virtuous self-feeding cycle is that the best way to grow a business short answer is no um what you learn in business school is opm other people's money is a good way to grow um so maybe that is my business training uh which i say hey look uh do it but i think the broader question anthony is whether you take external capital or not it's your decision that's just a risk conservative how conservative you are and what risk you take but i do believe and i tell this a lot of these companies i know them very well i've known them for generations i tell them you have to get external talent whether you get external capital or not that's fine talk to every wall street banker i mean you

might never take your company ipo that's okay that's a decision you want to control it but talk to him or her because you will learn a lot if you're insular you're not going to grow and so i would sort of say whether you take external capital or not your call completely up to you i mean, my dad is not a billionaire, so I will take other people's money and I'll use it to grow and I'll make them a lot of money. I'll make myself a lot of money. But if you're well off and you say, I don't need the capital, I don't want to give up control, I don't need you to tell me what to do. Okay, that's an operating model question. But I do believe you really have to bring external talent in. Not because you have to bring it, just when you bring diverse talent in, you learn a lot,

you cushion your thinking. And at Fernway, one of the things we do is we obviously invest, But in a lot of companies, a company says, I don't need your capital, but can you help me professionalize it? I mean, the code word is, look, we have been too insular. And one of the things I really enjoy personally doing it is when we go into the companies, they do a lot of things great, but then a lot of things they don't do. It's not a question of they don't do great, they just don't do. And opening up that aperture, we find is fascinating on how much value creation is there. And so I guess really talking to the external people, one, they have knowledge, they have experience. Is it also that there's like weird family dynamics at play when people are operating

these family businesses, especially in the industrial industry? Absolutely. I think family is weird. We can just stop with that sentence. I mean, we all have grown up with great families, big families. Families in general are weird. You would expect a family to be a Brady Bunch family, I don't know about you, I can tell you from my family, it has never been that way. You have the normal infighting between siblings and cousins and as generations go on. You mean it's hard for humans to communicate with each other when there's emotion involved? Yeah. And when egos are involved. I remember in my third grade, you never came to my birthday party. You're like 50 years old. Can you let go of the third birthday? But obviously it matters.

um and then when you furthermore put money into it it gets worse uh and then furthermore when you start putting control into it it gets worse so i would argue uh more companies struggle with it than companies which have got it right there are some companies which have got it right and they do a great job of managing their intergenerational wealth their intergenerational control uh i know a few of them they've done great uh as they say sleeve to sleeve uh generation to generation but a lot of companies have done very well they've done very well past the fourth generation um when we looked at some data we found is first generation does a great job second generation remembers the first generation so they continue doing a great job they know what matters third

generation starts to drop off the fourth generation is a do or die i mean very if you're able to get past the fourth generation you're in great shape so to answer your question is it hard absolutely It's hard everywhere. Industrials, does it make harder? Probably yes, because their talent infusion or the capability infusion from external is on the lower side. But I would argue it's really no different

than any normal family. And as you're watching these companies get built, they're getting passed from generation to generation, they're kind of working here, how does technology start to play in? Because this is like a fascinating thing. So manufacturing, which is somewhat similar in the industrial space right now we're talking about reshoring and automation and robotics and

again some of this like sexy cool stuff right uh for what most people would consider like a kind of a sleepy industry is that happening also on the industrial front are we talking about robotics and computer vision and ai and can we do certain things with this technology that maybe previously wasn't possible and will transform these businesses it's a huge unlock some companies do it some companies don't and that is why we don't call them industrial companies we call them industrial tech because there's a huge value in combining industrial and technology and companies which have done it have done it very well anthony and the short answer to your question which you said absolutely automation why should it not apply vision uh vision ai absolutely it should so um

is everybody doing it no but the guys who have done it have done have captured huge value So there's a couple of parts in the book that I want to talk about. And one of them I thought was fascinating is Heiko, a company, looks for well-managed entrepreneurial companies playing in high margin niche markets that may be difficult to enter, such as companies that already carry needed certifications. Now, when I think of these types of businesses, moats, Warren Buffett, right, like all these things that I think people are kind of like, ah, it's the old school, immediately jumped to mind.

How can you tell if a company actually has a real moat? Not like we think we kind of sort of have a moat or our brand is our moat, right? But like, how do you actually measure what is a moat and how companies can hold onto the moat as they continue to face increased competition? I think how you measure moat, back to the comment about O&O, it's all about outcomes.

I measure it in margins. If you say you're an amazing company with an amazing moat and you make 3% gross margin, Anthony, you don't have a moat. let's be clear if you're a company with a 50% gross margin people vote with their wallets

people are willing to give you a higher price because you create higher value for them so a moat for me shows up in the performance of a company

operational performance and financial performance how do you hold on to it it's what Warren Buffett once said you wake up every morning saying you're going to treat the customer

as if you never knew him you don't take it for granted companies which hold on to their moats I tell them don't take anything for granted because easy come easy go even if you have an amazing brand you have a great product

you have a great relationship you screw up once you'll get an order delayed you don't respond to the customer they are going to try to they might not try but they might start thinking of moving away from you so at least in our portfolio companies

we say very simple don't give the customer an opportunity to think about moving away from you whether it is in product performance operational performance how you treat them And look, we all screw up. But when you screw up, how well do you react to it?

And simple. I mean, it seems very simple. I'll give you a great example in Dabico, this company we acquired. It's an amazing company with a great brand, great mode. But we messed up. We missed an order for a customer. And the customer was pretty pissed off.

And we screwed the pooch. We could have come up with excuses. and there were some legitimate excuses. Supply chain was messed up. What we did is we picked up the phone and we said, we messed up. And we don't have any excuse. We can give you excuses,

but we promised you the product seven days ago and seven days later, you don't have a product. So we messed up, point number one. But what we are going to do is we're going to get you ahead of the line. We're going to get you in the next 14 days and this order is on us. We took a big loss, but it's okay

because we screwed up. And as I told my company, we need to pay for it. It's not like, oh, we screwed up, sorry. Sorry is cheap and free, but it doesn't mean anything. We never thought about it, Anthony. Six months later, we got a call from a different customer saying, hey, we're looking to bring you guys in. By the way, so-and-so recommended you.

And genuinely, we didn't know who that was. And then we realized, people realize everybody screws up. It's how well you react to it. A lot of people say, well, it's not my fault. But when you say, no, look, we messed up and we really mean to, you're going to fix it. And when we fix it, we're going to fix it, right? You keep your customer and they keep coming back to you.

There's another part in the book about Tesla. I did not expect to see Tesla in this book, but I want to read you a little excerpt. This is a little bit long, but just bear with me. It says, the dynamism of hubs like the Golden Strip has been brought even to the long beleaguered U.S. automotive industry, thanks in part to Elon Musk. He has made the business sexy again by reinventing the automobile among America's most mature and iconic consumer products.

Tesla is doing what no one else in the world thought possible in the process by producing innovative electric cars, not in a faraway, low-cost country, but in a technologically sophisticated factory in high-cost California. The brand is redefining what it means to be an industrial company now that is very true i think from my perspective of we look at it it kind of feels like a tech company but they're making cars are there other examples that people may not be as familiar with where maybe it's not a consumer facing product like a tesla car but you're like look this is a perfect example that lives at the intersection of the industrial industry and this technology industry. And this is a good way to see how this is going to kind of evolve moving forward.

It's interesting you ask this, because when we were writing the book, we had a big debate. Is Tesla a tech company or an auto company? Interesting. And I said, what do you see in front of you? I mean, you're a consumer. What do you see? You see a car. It does a lot of cool stuff, but it is a car. You can buy a GM, you can buy a Ford, or you can buy a Tesla. It's a car. if it walks like a duck and quacks like a duck it's a duck and the best part is i mean you know there's a lot of news about elon musk in the news so there's nothing about that but he said look i'm going to take something as mundane as auto apply technology and change the game now the question you had to ask yourself is can you change it in other parts of industry we talk about this a lot

in the book, but take electrical infrastructure. It's a great example, which I talk about it. I don't know about you, growing up, I never thought about electrical infrastructure. You turn on the light, the lights came on. Magic. Magic, right? And if I come to you, and I don't know about you, if I said, my dad works for a utility company, you'll be like, boring, let's move on to something else. But just fast forward now. In the next decade, how you make energy is going to change. You might or might not make it in a coal-fired plant, but hydroelectric yeah i know how that is solar wind yeah i heard about it in the last five ten years but now people are talking about making it in hydrogen so you're moving from electrons to

molecules so before you ship electrons now you're going to ship molecule that is changing second is before it used to be made miles away from a plant you probably never saw a utility plant and then you came through these big lines now they're starting to put it right next to your house it can be solar sun it can be a hydrogen plant right in your backyard and then how you use electricity so again before you went and plugged it in and you turned on your tv now you're plugging your car in people are now talking about uh planes i don't know if you know uh people are now talking about electric taxis so you're in a tier two tier three city why do you need to take a puddle hopper if i can have an electric taxi come to your house and pick you up and take you to

Miami airport. And from there, you take your normal flight. So things which we took for granted, electricity has been around for quite some time. Flying has been around for the last 100 years. Think about it. Can that change how you fly? Absolutely. I mean, you will say, Nick, I've flown all my life and I get into a plane. But ask yourself the question, what happens if flying changes the same way driving has changed? And I think it will. Think about how you get electricity instead of having to go into your house and plug your socket

if you can get and call your utility company and say oh my god a storm hit us and lights went out if you can get electricity different it changes what we do and I think for example

the electric I'm going to call it energy not even electric the energy infrastructure because everything you and I do needs energy and the aviation infrastructure because I think people like to drive

but people like to fly are two other things which are going to change unfortunately I'm not Elon Musk I don't know what that company is going to be but if you ask me to place a bet I'm going to say you're going to see that it's um it's an interesting way to think about you have no access once you get access that's kind of a step function change then you almost get like efficient access that's another step function change and then eventually there may be like even a third step or something that that kind of leads along um the last part of the

book uh that I thought it'd be interesting to get your comment on uh is actually close to the beginning of the book and you say, the titanium economy is the secret weapon, not only for workers and their families, but also for improving socioeconomic conditions writ large. I don't think a lot of people, when they think of industrials, think about the humans who work at the companies or the potential economic impact outside of just somebody sells this, it goes into a product that I then use in my home. Talk a little bit about that aspect of it, There are people who work at the companies, and there's usually these local communities, it sounds like, who are built around these businesses that employ a large percentage of the local population. What is kind of the direction of that?

Is that going to expand more and we're going to see more of this? Or are we going to see consolidation in major metropolitans? Or how do you think about it? Anthony, there are three statistics I want to start with, and then I'll answer your question. One is an industrial job or a manufacturing job on an average pays $63,000 a year in the U.S. compared to a services which is $30,000. Two, in 460 counties in this country, so roughly 20-25% counties in this country, manufacturing slash industrial jobs make more than 20% of all jobs. Wow. And third, people talk about 85% of all job creations

happening in 25 urban areas, New York, San Fran, Miami. What people don't talk about is there's an equal number of jobs being created by the industrial sector in Tier 2, Tier 3 cities, which you and I have never heard of, meaning think of it as a diffused model. Why do I say that? Because with this, if you think about it, there are two big customers, or sorry, two big suppliers for this industry.

Suppliers of capital, which we have talked about, and suppliers of talent, labor. And for a long time, people said, I'm a smart kid, I went to Harvard, MIT, Caltech, I'm going to go to the Bay Area, work for the Googles and the Facebooks of the world, or I'm going to go to Wall Street and work for investment banks,

or come to crypto and work with you. They don't wake up and say, well, I'm going to go to a city you and I haven't heard about. but for first time people are saying hey this is a industry which is going to put great jobs which is going to allow me to put foot on the table have a great family have a great life and when I look at a lot of these industrial companies people have joined as I mentioned before and they are I don't want to call them high school dropouts they finished high school

but instead of going to a four-year college they go to a two-year college or they go to a trade school and join the company and grow up the ranks to become a CEO or CFO great position And they say, I can do that. I don't have to be the elusive, that one kid in my town who went to Harvard and did it and everybody else was like, well, you didn't win the lottery ticket. But this, everybody wins the lottery ticket.

And the lottery ticket pays off well. And if you think about our society, I mean, the question is, do you want to be the one guy who wins the lottery ticket? Or do you want everybody to win the lottery ticket and have a great future? And this sector allows you to do it. It really does feel like an American story, right?

the American dream story of, uh, there's something about blue collar type, uh, um, economies of companies, uh, that I think Americans have nostalgia for a little bit. But one of the things you're pulling out here is like, this is not a story of 50 years ago. This is a story of today in America and people in the tech sector and the finance sector may not realize how important it is, but it's still, uh, very prevalent today. When you look towards the future, are there one are two trends that you think are imperative for people to understand around kind of the titanium economy and how this is going to evolve where you say, look, you know, if you're a young person, you're looking to get a job, these are pieces to pay attention to. If you're an investor looking

at the industry, these are trends to pay attention to. What are the one or two things that you're like, you know, if you don't really know that much about this sector, this is going to be an important story over the next decade or so? I think it comes down to two things. One is the good thing, the silver lining, the dark cloud coming out of COVID, the geopolitical risk is people said, even in a virtual world, I need physical goods. And so the physical goods are enabled by the industrial sector. So the awareness is happening. I think what has not happened yet is people don't realize that this is happening right around you. So you look at industrial sector, you look at manufacturing companies, they're in every county. You don't have to go, like,

if you're looking for a banking job you have to go to new york if you're looking for a tech job you have to go to the bay area in this one if you're looking for an industrial job nine or ten times it's somewhere around the corner so trend one is it's around you just have to look and the second one is we all are what i call expectation theories i mean it's not what i will have today what i'm going to have in the future and how well we do i do think where we started off with the book and i'll end with this which is we're on the first innings and the next eight innings is going to be determined on what we do as a country, what we do as a society, what we do as a sector. I think what we do as a country, it doesn't matter which side of the political aisle you are. I think

there are a lot of good policies coming on investing in us. There's a lot of money coming back. And as I tell, this is not a sector which needs a handout. Just level the playing field. Just don't block me. As a lot of my fellow CEOs will say, I don't need your help, but just don't block me. If you don't block me, I'll do great. And I think you're seeing that. But I do think the rest, we control our own destiny. So to your question, the best part is, we have the winning lottery ticket, we write the number. Whether we want to do it or not is up to us. And I think we will. This is why I'm so bullish about the sector. I'm so bullish about the companies we are working with. But we control our own destiny. You mentioned regulation, the political sphere.

Is there one or two things that they could do to actually help? So get out of the way is usually a pretty good strategy. But is there deregulation, something that could be passed? Like, is there anything that you all have identified where you're like, man, if this happened from that point of the economy, this would really be a boom? I really think there's only one big thing where the broader society, I'm not even calling the government, can help, which is we are going to be limited with how much great talent we get into the sector. When I started off, people, people, people. I bet on people. I think getting that message out, which is if you're an 18-year-old kid, you can have a great future. And we as a society are going to support you. We're going

to celebrate you. And then have the investments. For example, I was in D.C. a couple of days ago meeting with one of the local congressmen where we have our plans. And he said, what can I do to help you? And I said, very simple. Just help us in finding the right number of people and training them. And we'll do the training, but we just need the message out. And I think we get the right workforce, the sky's the limit. I love talking to you because you pretty much know exactly where my thought process goes. Training is interesting. And I've thought about it. I have a friend who maybe six or seven years ago, he's one of my smarter friends that I've ever met. He said to me, I just bought a company.

And I said, wow, that's impressive. Congratulations. What kind of company? And here I was thinking it was a software tool or a widget or maybe consumer packaged goods. And he goes, I bought an electrician business. And I said, that sounds insane. What do you know about electricians? and he said you know he'd done some work or whatever and he said uh i bought it and i can't remember if it was the first one was in uh southern california or in canada but he but he had bought one he started buying more and more and more and finally i just said to him i said hey i thought you bought one business because it just was a good business or something like you obviously have a strategy what is the strategy and he said well i think that electricians are not going to get automated away and what i noticed is that less and less young people are going to trade schools where they would pick up this skill set.

And so I understand supply and demand. Demand does not appear to change. It may actually be increasing. Supply is not keeping pace. And so therefore, prices will go up, margins will go up, like all these benefits to a business. And I remember saying,

damn, you really are one of my smartest friends that I know. That makes a lot of sense. Is that also true, that same idea of less and less people are getting trained to work in some of these jobs in the rest of kind of like the broader industrial sector or are there efforts being done to try to get people up to speed

and really prepare them for working in some of these jobs? Yes and yes, meaning there's absolutely shortage. I mean, if you ask me what keeps me up, it's like, do we have enough skilled talent? I mean, I always tell this, I start my war with the best people and I end my war with the best people. When I look at Fernway, we carved out for McKinsey,

we have the best people. I know we're going to win because we have the best team. I look at our portfolio companies. I know we're going to win because we have the best people. But then I'll say, do we have enough best people? And the short answer is there's only a finite pool. And so that keeps me up every night. I mean, no ifs, no buts.

Are there efforts to train? Absolutely. But you and I both know there's a curve. I mean, if you put somebody into school, it takes them 12 years to come out of high school and it takes them 20 years to come out of college. And so you're going to have this catch up for a long time. And what makes it worse is the changing demographics.

You go back to the 50s and the 60s, a family had four kids. So you can do the math. I mean, four people went to school and they did it. Now people are getting married later. They have fewer kids. So you can do the math quickly. The law of numbers is against us as a society. So to answer your question, I'm not a guy who chases demographics.

I look at the data. the demographics is against us. Fewer people and fewer people are having fewer people so you can do the math and I think what we found is by 2080,

thank God I'll be dead by then, you're going to have a lot less skilled talent in the labor pool than you have today. So you have two choices. One is either find a model plan B

but to your point, like your smart friend said, it's very unlikely to automate an electrician job because, I don't know about you but when my switch gear doesn't work,

I don't want to call a robot, I want to call a human being who can come and fix it. Or two is you just find a plan B on how do you make them more efficient and get the pool. And there's a lot of people, thank God, in this country

where you can figure a way out to re-pivot them towards what matters. When you think of your career, you've been doing this for 30 years or so, and you look back, what do you want people to remember? I would say it goes back to what my friend said.

I'm totally okay being the guy in the basement when the party is happening in the penthouse because I truly believe what we're doing matters. We are truly creating value. We are enabling a lot of great things to happen. And I'm totally happy being the guy in the basement. As I said, maybe one day I'd like to go to the first floor, but no need to go to the penthouse.

Being in the basement and creating value is phenomenal. I love it. for those who have not yet read it The Titanium Economy How Industrial Technology Can Create a Better, Faster, Stronger America it's a fantastic book I was very impressed

sometimes people send me stuff and I'm like huh, I wonder if this is going to be good and you know, I'll kind of do a sniff test read the first chapter and I was like oh shit, I might read this in one day this is fantastic so I highly suggest for those who are interested you should go check out this book

you can get it on Amazon and stuff like that where can we send people to find you if they want to learn more about what you all are doing, either on the investment side or you personally? You can find us on the web, funway.com, or you can email me, nick.santhanum at funway.com. Awesome. Well, Nick, listen, thank you so much

for taking the time to do this. It's a very interesting thesis. And what I love about it is that this isn't like some pontification. This is not coming from academia. Like somebody should go do this. You all have real skin in the game and you're spending your time, your money, your energy,

and really your reputations to go and execute on this. And you have a track record of doing it successfully. So I'm just very impressed and I've really enjoyed our conversation. Hopefully we'll do it again in the future. Thank you. Thank you for having me and really appreciate it. Thanks so much for listening to today's episode.

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