Setting up a Private Equity Firm

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Colin: [00:00:00] Hello and welcome back. This is Colin Keeley here,

Brent: [00:00:03] and I'm Brian Sanders.

Colin: [00:00:04] and we are two guys buying and building wonderful internet companies.

Brent: [00:00:08] Yes. Wonderful.

Colin: [00:00:12] That's a Warren buffet word. That's who I'm

Brent: [00:00:14] Oh, good.

Colin: [00:00:14] I thought it was a pleasant term.

Brent: [00:00:16] That's good. I like that. So this week, or I should say the last couple of weeks ,  we've had some interest in ,  people getting involved from a capital perspective and saying, how do we. Let me know when you have another deal. Let me know when you have another business that you guys want to tackle, or I'd love to get involved and kick off a interesting conversation with Paul and myself, really Collin taking the lead on ways to make it work because of the people we've spoken to.

Immediately. And we both worked at a venture capital fund and, immediately my mind goes, Oh ,  maybe there's interest to, and everyone's starting a fund, everyone has these ,  has their own funds and is raising money. And in those structures make sense, but what we're doing, isn't venture capital we're buying the business.

And so Colin, you've done some research around this. I think that would probably be the best thing to talk about this because just what your research was, what you've looked into what's out there. What are the different ways of. Working with money, we can only fund so many of these things and ,  our resources are fairly limited to that extent.

So it's like, how do you look at this ,  with, taking money from third parties?

Colin: [00:01:17] Yeah. So coming from the venture world, like we're well versed in that and compare it. The venture world is just so well established and people do saves a simple agreements for future equity or pretty standardized venture rounds. And I understand that. And portfolio construction really well, private equity is the wild West relative to venture.

There's just so many different ways you could structure things. Venture has always been like a cottage industry relative to private equity. It's like a small corner, so know stumbling into this private equity world. It's probably most similar to search funds. So search funds came out of Stanford.

Maybe 30 years ago. So MBAs basically raised a pool of capital and go out and buy a business. And it's normally like a box making business in Idaho. It's not as commonly these tech companies. So just looking at how we would structure this. I think you could go deal by deal ,  which is awesome called like fundless sponsor or syndicate.

So real estate, private equity, which is more comparable to then venture is you could syndicate deals out where you buy companies. And basically you commit on a letter of intent and then you go out to your email newsletter of high net worth individuals and raise the capital after you commit to a deal.

So that's an option ,  or you raise a proper fund. So you raise it big, poor capital, and you go out and deploy it, which ,  the bar is much higher to actually do that. Often you need, some history to point to and make people ,  like convinced that they should be comfortable giving you their money.

And so in venture, like there, people are raising these rolling funds and all this different stuff. It seems easier to raise these tiny venture capital funds than it is to raise a tiny private equity fund, at least from what I could tell in the market. So we're looking more at going the syndication route.


Brent: [00:03:05] Yeah.  And by the way, I just have to say this it's like we're thinking of this stuff is more to thought experiments in the future. Obviously the main focus is executing on blink sale, making that a success. And then I feel like everything will be so much easier to fall into place, to be able to point to some track record and point to Hey, there's a playbook that exists.

We know how to run it, and we have the resources to run it, but the idea of having additional resources, and let's just call it additional cash to be able to run that playbook is super interesting and compelling. However, yeah, we're not taking our eyes off the prize right now, but that being said.

I think there's, it's worthy of exploration.

Colin: [00:03:50] Yeah, I think the natural end of delegation is just being a investor, and just buying companies from the right CEO in place and letting them make all the smaller decisions. And so search funds build up all this. Like infrastructure for sourcing and deal structure and everything. It always seemed like a waste to me where you do all this stuff, you buy one company and then you sunset it all.

So this is more, and it's a little bit of hubris to be like, I am the best person to run this company. So I'd much rather pair a CEO who would actually be better equipped to run the company. And I think we could find them and we have some experience doing that kind of thing. And the studio model,

Brent: [00:04:32] Yeah, that truly was a difficult challenge. So you, with the studio model, you would come up with an idea and you'd pair them with a person. And it was all about having a really strong Rolodex and combining, all the different communities together to find the right person to run a specific type of business, because it's not only the person, but it's are they in the right point in their life?

Are they. You know his experience, and then we've even talked about, there's like different sort of grades to, to these operators of like in different comp setups, based on those grades. It's okay, this person has a track record. You're pretty confident that they're going to be able to turn something around and keep it running.

And they even may even have their own playbook. That. It's all very much more art than science in my mind because it's dealing with people. But  I do think that's something that the question is are we the right people for that? And are we in a. Particular position.

I do think with these tech companies, it's like SAS companies, SAS businesses in particular, there is something to be said for it ,  our experience. And then again, we've got to show that track record via blink sale and say, Hey, we started here and ended here. I think that's going to be the credit.

Even though we do have people that are saying, Hey, let me know when you have. Another deal I'd love to participate. It's they're interested until you in my mind until you get into the, okay, give me the check. We've come up with a structure. We're happy with it where we'd like to do this.

Then it gets a little bit interesting. Cause right. There's always this ,  everybody wants to be a part of it as long as it's winning. And then once they realize Oh, I have to add this money over or there's a capital call or a commitment to be made, then it gets serious. And it's okay, we'll wait like.

What else, what else have you done in this space and how do I know you're going to be able to deliver returns?

Colin: [00:06:15] Yes. I've talked to a few, my search from friends that have actually bought businesses this way and they get their cap table already before they find a business in roughly a third of folks bail. Once you actually find a business. And don't come through with the money. And then you ask either your existing two thirds of folks to increase, their commitment to fill in the gap, or you have to go find some other folks to fill in the gap.

Just one note on this, finding these operators. So with studio you're with studios that have studios, you're taking a company from zero to one. And so that burden on that CEO is just extraordinarily high and you have to find someone that. Can tell the stories so well that they could convince future investors to invest like employees to join this company.

That is basically non-existent. And so you're like bringing something into life and then with a holding company or private equity, you're basically hiring someone to not. They just have to scale something that already works. And there's a pretty like well-established playbook on how you would scale like these smaller SAS companies.

So I, I just feel like the burden is so much lower it's the goal would be like, just find someone from a company that's similar. That's two to three times the size and be like, Hey, I love what you did over there. I'll come over here. You want to be the CEO and, we'll incentivize you very well to do a good job to do that.

Brent: [00:07:35] Yeah. 100%.  That was the key. Indicator was, can they sell as in, can they sell people on joining the team? Can they sell, can they raise money? That was. Not all that matter, but that was most of what mattered in the studio model when we were working on it. It was  it, which was scary because then you knew that these people had operational, they had plenty of other deficiencies, but it is really hard when there isn't a track record there.

And the most important thing that they can do is get smarter people to join. And so if they were good at that, then that's perfect for that stage. I would not want to go back there and especially harder to find those people. It was difficult because to a certain extent, we only really had success with people that had done it before.

Have had done it before on their own, done it before with less funding or whatever it is pretty difficult.

Colin: [00:08:26] Yeah, it's really hard. And it shows every rich guy that has like a nice exit wants to do it again, but not actually be the operator. So he starts a startup studio and then there's there's always a more interesting golden goose. He has some five ideas, one gets more appealing. The other five get neglected.

So I think that the companies that do it really well, the teams are dedicated to what they're doing and they live or die based on that. And so you can't really spread people across as much cause they just don't care about, any idea that lags at all. I would say generally, but that's a different discussion is like, how do you properly structure a startup studio?

Brent: [00:09:03] You don't, that's how you do it. Going back to this space, this is one of the things that I like about it though, is like, as we're working on blink sale, it's like there's income coming in. There's product market fit. You have customers. It's it's so much easier. It's like at the earliest stages, which I've spent so much of my career, it's been fun.

Because it's like, when you do start getting the customers and it does start to click, it feels so good. But so many of them. Struggle to even get that point and then sustain that point and grow that point. So it's it's nice having a little bit of a wind in your sails, so to speak.

Colin: [00:09:38] Yeah. And so thinking through what this looks like ,  so getting the basics in place is the most important step that I've been working on this week of collecting investor interest ,  deciding on a focus, a landing page for the sellers. Just so everyone knows what you're actually focused on purchasing, having a debt partner in place and then finalizing a structure.

So all this is in the mind, like with the mind of when a good deal comes across, like we're ready to hit it out the park and move quickly.

Brent: [00:10:08] So when you say a debt partner, you mean a bank?

Colin: [00:10:11] Yeah. Yeah. So there are banks, I've got a few referrals of ones that specialize in like search funds or these kind of tight deals.

Brent: [00:10:18] And where are they? Like, how does that typically work? So you have a business and they already basically understand what your finances are. So if you do need to raise debt, they already know the deal and you already have kind of terms figured out or do they want to look at what are those terms?

Even I'm just going to, I know we talked about this before, but now that I think about it, it's like, it's gotta be a pretty special. Banking. What are they getting out of it and why they would want to get involved with these businesses. But as I'm even asking that question, obviously there's capital involved.

So there's a reason for them. But I'm curious ,  are these special banks or is it like chase? Like they, they just have a branch that's interested in this type of lending.

Colin: [00:10:55] no, yeah, it's not chase. It's much more specialized. There's a lot of boutique banks that do this kind of thing, and they do it for the search funds traditionally. And some of these deals are like 50, 50, so 50% debt, 50% equity. And this is sometimes like a seller note in there. So maybe you can knock your equity down below 50% as well. Then, so the debt goes to the business. So like we're not personally taking on the debt for these kinds of structures. That would be more like an SBA seven, a loan where you're personally guaranteeing a debt. At least that's my understanding right now. Looking into it more. But yeah, they would, they do this for all kinds of search funds and they would just love this, like SAS, super stable, recurring revenue, like niche B2B is like the most stable you could be. So I think they do the most comfortable lending money on this type of business. Okay.

Brent: [00:11:41] Yeah, it's great. Again  the resources that are opened up, in opposed to  venture where it's okay, you fill up the tank and you have to, then as soon as you fundraise, you're already thinking about the next fundraise. It's just a much different focus of the founder.

Yeah. One thing that I'm thinking about is like the folks that have approached me or I've had a conversation around capital they've expressed interest, not so much in a fund. So I guess this fits pretty well. They want to look at deal by deal and they want to, they seem like they want, I don't know that they want a job, but they want to have some level of.

It's not a board seat per se, but it's nebulous. Like I haven't really heard a consistent, drum beat around it, but in these types of deals, is there a common, like LP position where, they have some power or is it really just, you're just an LP and that's it, or is there something more kinda like a board seat when you're leading around?

Colin: [00:12:35] By definition and LP does not have power, a limited partner. So the general partner GP makes the decisions. But yeah, I think it's common to have these people like circling around these companies that have made large investments. And if they want to jump in and be helpful, I think that is pretty common, but they're not the ones making the decisions.

Brent: [00:12:59] They're not directors. They're either not board members.

Colin: [00:13:01] They could always lean on you, we're not happy with what you're doing and there's a lot of soft power for sure.

Brent: [00:13:07] Yes. That's a good way of putting it. Yeah, that's interesting. I think it's ,  that it is a chicken and the egg type thing, or cart before the horse type thing where it's like you, if we see a deal pop up, like the reason I feel like we had success with closing plink sale was just, we were ready to move and we, there was no pause or decision around on our end.

We just knew, Hey. This is this makes sense. This is what we definitely, we know we can turn it around and we know we can make improvements and the capital wasn't like, Oh, I've got to call on so it's you do have to have the fund raise with the pieces in place and committed to before you can do any sort of deal.

Colin: [00:13:44] Yeah, for sure. And doing this one small idea with blink sale, like we hit most of the points. So we have one deal on our belt. We know how it all works. We know how to diligence and how to negotiate everything.  So we're like ahead of the game, a lot of people are doing this for the first time on their first deal.

So I feel good about it. And so the last couple of things are figuring out a name which is not easy. And then ,  sourcing deals. So like getting that infrastructure in place next.

Brent: [00:14:15] If you're going to start a fund, though, it has to be some name with rock in it, or are you allowed to choose names without rocking it?

Colin: [00:14:23] So our position is going to be like four founders by founders. So I almost lean towards a silly name, like shrug capital is like a consumer venture capital fund. That's doing really well, something along that where it's like borderline silly and playful.

Brent: [00:14:39] So FUBU the, basically the FUBU of  funds for us by us.

Colin: [00:14:44] Oh, yeah. I didn't even think of that.

Brent: [00:14:48] Yeah. I was thinking, some color in a rocks, like red rock, gray rock, that those are probably all taken though.

Colin: [00:14:55] Everything's taken. So it's our naming a startup and like capital there's every variation of capital editor ever or equity, or it's not easy. But if you venture into these silly names, not a lot of people are naming their things  rainbow capital or something like that.

Brent: [00:15:09] Yeah. They're not trying to attract the interesting money.

Colin: [00:15:13] Yeah, that's our opportunity. We're not ,  we're not the suits. We're not coming from investment banking. I do have an MBA, but  I don't look like it.

Brent: [00:15:21] We don't hold it against you. Exactly. Yeah, I think it's, I think it's, the name is really important to indicate, and I think this is an asset I'm hoping that we can continue to carry on as we're going to be easy to work with. We're going to be good stewards of the business and if you've built something.

And you're looking for an exit. It's it's not somebody who's gonna, come in. And I don't even know what, like the general conception of private equity is other than, they're going to be assholes or something like that. So maybe we should just call it a no asshole capital, but

Colin: [00:15:51] I did write that

Brent: [00:15:52] Yeah.

Colin: [00:15:54] as no assholes is one of my  pillars on this web site I'm working on.

Brent: [00:16:00] Okay. Excellent. Yeah. So some something along those lines, but I think people will get it and ,  yeah, we'll see. It all makes sense to dive into ,  I'm glad you're looking into it. I'm glad you're doing this research and a little bit more ,  Yeah, obviously more depth than I am, but ,  because I think by the time we decided Oh, this is going well and dot.

Now you need to raise money. You're like six months away from, and I'm guessing that's what it takes to actually fundraise and move this stuff forward. Even with people that want to give you money, like the, all the fundraising processes I've been around, they take longer than you think.

Colin: [00:16:35] Yeah, it'll be interesting. I don't think it'll take that long. The thing I was missing is you don't really need that much equity rates the, with dads and with a seller side note. So the companies you get by with not a lot of equity is ,  pretty impressive. I get that is the beauty of private equity, oh, one of the things I didn't talk about is like experimenting with not just, pure private equity, buy something, sell it in three years, I would love to be like a longterm steward of these businesses. So people have, nice. Structures for like permanent equity or like holdcos where the money's tied up for a couple years.

And then you offer people exits, like you could buy them out or pay them out with dividends. I think that the beauty with these businesses is they just cashflow so well, if you buy them for such low multiples, it makes sense to hold them for the term. I do think that's more appealing to sellers. Like you are protecting their legacy indefinitely and are going to grow it.

And yeah, you can do that as well.

Brent: [00:17:33] It's what I mean. That's the way you look at these. That's the way I look at all of these. No monthly subscription or as a software or, businesses where you're basically on the hook for paying as you go or something along those lines. It's not, yeah, it can be looked at it exactly like that as an annuity, which is, what's better.

It's like life insurance policies now you're in the same category as some mutual. So anyways, it's, I think that is a very compelling model and I think it also fits. I think our philosophy, which is farmers over miners, this idea of we're not coming into essentially, rape the land and strip it and turn it into, whatever else.

But it's more we're looking to plant new seeds and grow it.

Colin: [00:18:17] yeah, I feel good about it. I think you'll develop best practices like across the holdup, the hold co and there's no reason why you shouldn't be able to grow up better than a single bootstrapper did, which I think is the most appealing person to buy from is like some bootstrapper that really cared about the business, cared about the culture, and then you just are taking it to the next level with your best practices and processes in place.

Brent: [00:18:39] Yeah, I dig it. Cool. Yeah. So we'll see where this ends up going. I think again, eyes on the prize trying to make blink till success story. That's number one, but. Having this sort of any waiting the weightings, I shouldn't say waiting in the wings, but something like that word, we're not, this isn't the main focus, but he can't think about it. And then not at least see if you can generate a little bit of interest. So I didn't think it, I do think it makes sense to, to spend some time on now to get it up conceived in Not necessarily up and running, raise money yet, but get things ready.

So if you do see an opportunity like next week or next month, you can capitalize on that.

Colin: [00:19:17] Exactly. Getting ready to capitalize. So that's it on my end. Anything else you want to talk about? Okay.

Brent: [00:19:27] No, this has been super interesting. This is, this definitely deserves its own conversation. I think  if you're out there listening, definitely let us know if you, you did and, hit us up on Twitter. I feel like this is a good conversation continue. Cause you see a lot of people, especially in the Twitter world, the  I don't even know what to call the people with funds and rolling funds and all the ,  Yeah, there's a category of Twitter that somebody probably has a list for, but I do think it's worthwhile of  continuing the conversation and seeing what other people are doing.

I don't know. There's gotta be other people in our kind of similar scale, similar skill sets that are in, either beyond this stage, maybe they have feedback or behind us and find this useful. So either way, let us know.

Colin: [00:20:07] For sure. Yeah. Any feedback is much appreciated. We've received some feedback that this micro piece stuff is super interesting. So I think we'll focus on this more and more, but yeah. Hit us up on Twitter. I think we're both on it all the time. So take care, everyone.

Brent: [00:20:22] Bye. Bye.

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