Fall 2018 Update
The Last Puzzle Pieces, A Bittersweet Victory, And The Orbit
Someone recently asked me, “When did you decide to get into private equity?” My answer was, “I never did and never intend to.” Needless to say, he was confused.
We purchase equity positions in private companies, but to call us private equity is like calling an ostrich a bird. While technically true, it doesn’t paint an accurate picture. It’s not a knock on traditional PE, but we tend to do things differently, sometimes out of ignorance and almost always because of how we got our start.
The Bittersweet Victory
Adventur.es is not the result of some grand plan. I wanted to do impactful work with people I admired and hopefully make a living in the process.
We got our start as entrepreneurs and operators. Unless you’ve lived through it, it’s hard to imagine the stress of losing a big client, struggling to make payroll, getting hit with an out-of-the-blue lawsuit, or having a top employee go off the rails. It’s also impossible to know the rush that accompanies landing a big customer, successfully launching a new product line, or creatively solving what seemed like an impossible problem. We can empathize with owners, because we were them and are them.
As of last week, one of the beautiful things we helped start and build, but no longer own is Influence & Co. It’s a bittersweet victory for everyone involved. Kelsey Raymond, co-founder and president, approached us earlier this year about buying us out and after lots of discussion, it made sense. Because of how the organization originated, it was an outlier in our portfolio. Plus, Kelsey wanted more risk/reward and we wanted more focus. Everyone wins. The bittersweet part is that, professionally, we all grew up together and care for each other. It’s the end of an era. We’ll now be enthusiastically rooting for that team from a distance.
Last Three Puzzle Pieces
The first, and hopefully annual, adventur.es decathlon recently took place. It was a heated afternoon-long competition of escape room breakouts, scavenger hunts, doughnut making, and wine tasting. Yes, we can even make seemingly innocuous and indulgent activities competitive. It was also a celebration—we’ve finally set the team and had everyone in one location.
Kelie Morgan, Don Broekelmann, and Tim Hanson have all recently come on board. Kelie and Don joined the operations side of adventur.es, while Tim is our new CFO. How each of them came aboard are stories worth telling.
I’ve known Kelie for many years through my wife, who got to know her teaching fitness classes at a local gym. Kelie had risen up through the ranks and helped manage operations for their three locations. Small business is unlike anything else. It’s volatile, messy, and often counterintuitive. The only way to learn the space is to do it. Kelie’s exposure to sales, marketing, logistics, and budgeting will serve us well. After about two years of on-and-off discussions, she agreed to join us. And that’s how we prefer to hire—personal relationships built slowly over time.
Although he technically never left, Don is our first official boomerang employee. Don joined adventur.es in 2011 to help build out our digital design and development capabilities. Previously, he led software development efforts at a large company. Before that he was a two-time entrepreneur, a financial advisor, and a golf pro. When Influence & Co. took off in 2013, he moved over to lead their account service and software teams. Like Kelie, he’s been in the trenches as an operator and will bring that experience to bear on our companies. Plus, he improves our adventur.es golf team.
As I previously wrote about here and here, we’ve been on the lookout for a CFO for a couple years. As we’ve grown, raised the fund, and invested in two more companies, our casual interest turned to focused effort and eventually into screaming pain. Thankfully, because of Morgan Housel, we’ve found our painkiller. There’s nothing better than friends referring friends.
Tim’s career is delightfully weird. He was the White House deputy director of writers for a time during the George W. Bush Presidency, then joined The Motley Fool and has done, well, seemingly everything. He spent years analyzing small companies, became director of research and portfolio manager, launched funds, and led product development. He’s a deeply fluent investor and operator with SMB leadership experience, which is an obviously rare combination. We greatly look forward to welcoming Tim and his family to the great state of Missouri when they make the move later this year.
Big Opportunity, Big Team
With the latest additions, we’ve grown the firm from five full-time employees to fourteen in four years. While that may sound small by traditional metrics, especially since our typical portfolio company is 50+ employees, it’s the largest team in our segment of the market by a country mile. But why?
The norm in the lower-middle market is a “deal guy” with a board of advisors and a little of his own capital who wraps himself in the name of a firm, usually after a local river or street, or both. But when you strip it down, he’s the only one thinking in the shower about how to make stuff happen. On the upside, decision-making is streamlined and he can make a very good living if he can get a deal done. The challenge is focus. When you’re finding deals, you’re not doing site visits, getting to know leadership teams, combing through insurance contracts, reviewing purchase agreements, or sourcing financing. And especially post-close, something has to give, requiring a different structure to scale beyond one investment.
Leveling up usually means creating a small team around the pivot point, the partner, and raising a pool of committed capital. This usually includes an experienced second-in-command, with a handful of less experienced helpers. The team’s whole purpose is to scale the partner’s judgement, allowing him/her to focus on the highest-and-best use of time and attention. By the nature of the traditional 2-20 fee model, it makes the math of buying small companies challenging and naturally leads to scale through adding more partners and doing larger-and-larger deals. And, of course, you must churn the portfolio every three to five years.
Our thesis at adventur.es requires scrapping both these models. We want the enduring ability to do small deals, or bigger deals, opportunistically. We want to optimize the transaction experience for sellers and the operating experience for leadership teams. We want to buy with no intention of ever selling. We want to build an organization, without pivot points, that could continue to thrive far beyond any one person, especially me. We want the beautiful selection bias that comes from inbound opportunities opting in after understanding who we are and what we value.
The net result is adventur.es looks and operates nothing like a traditional private equity firm:
The marketing team has specialities in online lead generation, data analysis, and design. We’re able to surround the seller and the seller’s helpers with information, allowing them to evaluate our potential fit. And we can get the word out as employment opportunities arise.
The deal team works with sellers and intermediaries to understand the business, meet and eat with them, and negotiate the deal.
Due diligence and legal is conducted in-house, allowing for a process customized to the seller with improved communications and faster turnarounds. And because we do the work ourselves, that knowledge is retained post-close for the benefit of the operating company.
A talent pipeline is managed both for adventur.es and for our portfolio companies, connecting people with opportunities.
We oversee governance in the portfolio, auditing on a monthly basis and assisting with accounting, finance, legal, cash flow management, taxation, HR, and benefits. We maintain relationships with accounting firms, law firms, benefits specialists, insurance companies, and banks across the country.
We help when we can be helpful. We’re always involved in board-level strategy and often take on special projects within the portfolio, at the portfolio company’s discretion. These range from legal assistance usually tied to real estate, financing, or employment, to sales team incentive structures, to cost of capital reduction, to advertising plans.
Although we have no intent to sell, inquisitive buyers often contact us and the deal team takes back over to understand the offer.
Over the past five years, we’ve added specialty expertise and depth in an effort to improve the quality of operations, as well as capacity. It’s hard to be good at legal without a lawyer on staff. If there’s only one person overseeing due diligence and an average due diligence timeline is four months and you can’t perfectly time out the intervals, it’s next to impossible to do more than two deals per year.
As we’ve learned through the years, buying one company is brutally difficult. Buying and overseeing multiple companies is exponentially harder. And we’re just now realizing how much more difficult it is to build an organization that acquires and oversees at scale. It’s like a six-sided teeter-totter. Marketing, deal-making, diligence/documentation, portfolio management, capital, and talent must all be leveled up simultaneously. If any side lags, the whole organization is bottlenecked, and, if any side sprints too far ahead, there’s tremendous waste. Having done two deals in the first six months and feeling stretched thin, we now have the capacity to do 4 to 6 deals per year sustainably and perhaps flex up to 8 deals per year if there was a deluge of opportunity.
If our average deal adds 50 employees and $30 million in revenue, combined with organic growth in the portfolio, the math gets nutty, fast. That’s both scary and exciting. We never aimed to get big, or do so quickly. Just like in the beginning, we don’t have a grand plan and continue to put one foot in front of the other, taking the resources at our disposal and trying to make probabilistically good decisions. The design of adventur.es team and the resulting scale seem like the most prudent and logical next step. And if things don’t turn out the way we think they will, which usually happens, we’ll figure it out.
With the increased deal capacity, we’ve turned our attention to portfolio-level hiring and are launching a new initiative called “The Orbit” aimed at connecting operators with opportunities. Our goal is to create a community of talented people who are excited to eventually step into the fray, roll up your sleeves, and humbly learn a ton. Think of it like a team bench, but instead of a dugout covered in sunflower seeds, it’s a virtual community of those interested in small company operations. Once in “orbit,” you’ll get to know the adventur.es team on a personal level, be asked for feedback, and have a standing invitation to stop by our office in Columbia, MO, or Columbia, SC, whenever you’re in the area. While you’re not yet on the field, we want to treat you like a team member.
As we get to know each other, our hope is that when the time comes to fill a position, it’s a no-brainer who gets called off the bench, or out of orbit. This could be for anything from system-level technology, marketing, or operations consulting, to a role in the C-suite, an accounting position, or an entry-level sales opportunity. We want the orbit to include both experienced professionals and those just getting their start, and everyone in between.
If you share our values, are interested in small business, and want to be shown opportunities, then go to The Orbit section of the adventur.es website and sign up. You’ll hear from someone on our team shortly to start the conversation.