Tailwinds Edition #2

August 3, 2019


The name “Tailwinds” was recommended to me by Nick Haschka and what he meant by it was someone looking to build something special, like a business or permanent capital, should position themselves where there is a tailwind at their back taking the form of changes in the economy, culture, cities, demographics, or some other factor. It also relates to private company investing in two other ways, the first being that buying an existing company, rather than starting your own, gives you momentum and a head start, a proverbial tailwind. Second, the concept of positioning yourself in front of a tailwind relates to a Charlie Munger quote about fishing where the fish are, rather than a crowded shore or dock. Private company investing is a space with opportunity that most investors and institutions cannot touch, and that leaves the door open for smaller investors to build portfolios.

I hope you like the newsletter, please feel free to reach out to me with your thoughts, feedback, or ideas, I’d love to chat!


Capital Notes

2018 Independent Sponsor Report

“Deal sourcing strategies have also changed for our respondents through the years. When many independent sponsors were just starting out, broker referrals and auctions were the dominant sources of deal flow. Once independent sponsors developed a track record with a few deals under their belt, inbounds and proprietary deal sourcing became more popular.”

Justin Vogt passed this report along to me and it’s one of the few reports I’ve seen that really dives into the numbers of micro PE. (obviously Stanford has an excellent report on search funds, but that is more specific than this one was) This report has data on capital sources, reasons for becoming independent sponsor, whether they want to raise committed capital or not (spoiler: mostly no), deal sourcing, and even ways sponsors have streamlined their process.

Big Time Small Business: DHM Landscaping

“We had to take this relatively sizable investment on the back burner because the other strategy was to create automation throughout the workforce. And when folks aren’t showing up to work and you’re facing high levels of turnover, which I definitely knew about, but didn’t anticipate it would be as disruptive to the day to day. So talk about ‘tyranny of the urgent’ or ‘urgency over importance.’”

I’ve grown to really enjoy Palmer Higgins’s podcast Big Time Small Business podcast and this episode about DHM Landscaping is a phenomenal look into a business that is fairly popular in the micro PE space for it’s unique economics, contracted revenue, and low customer expectations.

LEV: Scaling Up

“The issue she sees related to ineffective communication internally and externally along with a sense of micromanaging by the leadership. I thought she summed up the situation well by saying they are in the midst of going from a small staff of generalists to a larger staff of specialists. Here’s my lightly edited reply.”

I included this article by Little Engine Ventures (LEV) partly because the article and advice that’s offered, but mostly because this firm is fascinating to me for a few reasons. First, they are regionally concentrated and focus on acquiring companies within a 180 mile radius of Lafayette, Indiana. Second, even given that constraint, they have managed to acquire a dozen companies in 3 years. Third, they are incredibly focused on building a community around their portfolio companies and investors. If you’re interested in building a firm of your own, give this one a few minutes of your time.

Other Notes

Maverick Book

“We found that in an office without secretaries it paid to reflect before adding to the paperwork. We still make extra copies if there is a chance someone will feel left out. (By the way, when we distribute a memo, we always list everyone getting it in alphabetical order, to avoid silly guessing games about prestige.) But generally, the fewer copies the better. And we think three times before filing anything. Read it, understand it, act on it, and throw it away, that’s our motto now. 

This is not as easy as it sounds. I remember when a new manager brought me a beautifully bound report that powerfully and effectively argued against the feasibility of building a new high-pressure com- pressor for a petrochemical plant. I was impressed with his analysis and, after flipping through the pages and reading his recommendation, looked up to tell him so, while casually throwing the report in the wastepaper basket under my desk. “You’re right, it’s not worth doing,” I said, watching the blood drain from his face until it was more or less the shade of our fanciest bond stationery. He had worked for fifteen years for a multinational corporation and wasn’t used to seeing the product of several long days tossed out after a few minutes of consideration.” - pg 145

This book has so many interesting operating elements. First, it’s a book about a Brazilian manufacturing company called Semco run by a father who decides to pass the business off to his son. His son has historically disagreed with the way the business had been run and, now that he has the chance to make changes, he changes nearly everything about it. Some examples of his operational changes: eliminating secretaries, reducing paper usage, decentralizing the company into departments and teams, making all salary information available and allowing workers to give themselves raises, sharing 23% of profits with employees, among others. If you want to see the wildest way to run a company that worked, this is the book for you.

Clearing Fog Advice

“Another aspect of a chaotic world is the opacity around the links between what outcomes could have occurred and what actually occurred. To elaborate, I followed xyz path making decisions that ultimately led me to where I am today. While I like to think the decisions I made increased my chances of success it is impossible to know. Said differently, what if 100 me’s made all of the same decisions and only 1 achieved what I have achieved. It follows that I got lucky and my process isn’t replicable. Of course, we can never know, but in thinking that way it makes you question your own success and others: did this person get lucky (1/100) or was his process sound and success was highly likely.”

I’m adding this article for many of the same reasons I added LEV’s article: the advice is great to read, but the true value is exploring the site. I really like the way Clearing Fog is written in a very conversational way that communicates the point very efficiently and easily. I’m looking forward to reading more articles by them.

If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff!

Photo courtesy of Brenda Stonehouse