Building a Mini Berkshire Hathaway

0:00when you look at the risk return of going and buying a company and being on your own and being on the ownership side of the table it's it's truly life-changing not only for you but potentially for your your children your grandchildren so the risk-reward trade-off is is heavily in the reward favor [Music] sieva xavier so excited to have you guys on for this episode it's one that um both greg and i have been wanting to record for for a while i mean obviously we're all friends and we know you guys but you know from afar getting to see the rise of of what you've been doing and

0:36building over the last year plus as we've known each other um but even more you know publicly as you guys have started to share more about it and kind of build in public quote unquote around that journey and and uh you know and around really this like opportunity that i think a lot of people have to kind of opt out of like traditional employment and you know potentially uh go and build and acquire and uh uh boring businesses and kind of the rise of like boring business twitter as it were um so super excited to kind of just like dive into the details and and dig into things but thought it would

1:10be helpful for everyone um you know and honestly myself included to just like set the stage a little bit uh on your guys backgrounds and uh really like where you came from and how you uh how you kind of wound up with the insight to start building enduring ventures and we can dig into the details on what it is and the whole story and what you guys are working on but would love to kind of set the stage because you're both independently quite amazing and um would love to start there so xavier maybe we can start with you um and uh we'd love to just kind of hear more about you and

1:42like you know you were born and now you're here what happened in between well i'm a little older so that gets that's a long and boring story so i'll give you the the short version is i was always an entrepreneur i think i was i was mowing lawns when i was 11 at least a mini golf course when i was 14. um so i was into boring businesses early pause pause you leased a mini golf course when

2:06you were 14. yeah i was i was frustrated that you couldn't get a job like a proper job until you were 16 or some with some would take you when you were 15. and i really wanted to earn money and i was i was willing to work you know whatever was required and so i found out about this opportunity where the small town i grew up the the mini golf course uh they weren't even gonna run it because they just paid some kid to sit there all summer and then i lost money and so um i worked out a deal with the guy who was head of the parks department

2:39uh and the deal was basically i get 90 and he gets 10 but he doesn't have any fixed cost i have to fix up the mini golf course and then i have to run it and whatever i make i make um so that was my introduction into low marginal cost uh business because it turns out the key to a mini golf course is just making it look busy even if people aren't paying um and then other people want to go play on the mini golf course and pay for it so that's amazing sorry i cut you off i had to ask that's all the that's also the key to the nightclub

3:09business i think as well [Music] the creating the is creating the buzz creating the buzz so we sold um a few family passes comically cheap it was 20 for the whole summer and there was some families who would then just send their kids down to like play mini golf for four hours a day so they could get some work done um and then that that created enough commotion there that other people would walk up and and play um we also illegally sold uh uh cold drinks and uh uh chips i don't think we're supposed to do that but there's no other convenience store in town so we

3:46seized on the the window love it it's like the your version of the lemonade stand uh in a much more complicated manner i love that um it's just been like top of mind for me the reason i paused you is because you know i have this newborn um you know little boy and my wife and i have been talking a lot about how i didn't feel like i was raised in a uh household where entrepreneurship was you know really a focus my dad was an academic um and my mom actually did have a business although i never we never really it was a consulting business and so i kind of

4:19always thought of it more as like services not really super scalable you know tech enabled type business more like renting out your time and um you know i just felt like growing up it was never top of mind for me to go and do entrepreneurial things and now that i'm exposed to this world and i meet guys like you like greg and i spend time with these you know people who as kids we're just off doing business stuff and like randomly cobbling together businesses and trying different things and like going door-to-door and selling stuff and um all of that i just think about it a lot now with my wife of like

4:51i want to prioritize that same set of principles and skills in my son as he gets older and like be able to kind of foster that same creative entrepreneurial spirit in him that i feel like so many of my really smart friends built from a young age yeah you know and it's funny like my parents were not entrepreneurs at all my brothers were not entrepreneurs and so i think about this with my own kids too and i think you know i got to start with the motivation so they got to actually have something they want because like my middle brother would just keep any money earned in a pringles

5:23jar never spend any money on anything and so it was very hard for him to get motivated enough to go earn money where for me i was really into um i was into early computers and i was into games and that was like a bottomless pit of money that you could sync into like mid 90s computers and so that was what was motivating me to go out and earn my own money because i wasn't gonna get that on my own so i always think it starts with the motivation and then once you have the motivations like okay well here's i'm not gonna just give you the money

5:54but here's a path where you could earn it i think that's that's probably the best way to approach that yeah so um i started uh i also started an early proto college social network in college which would have been like year 2000 um so that was um it was another that was my first entrepreneurial adventure where like it went bigger than like just a small-born business it was like the whole campus was using this site and that was kind of cool um i was a little early with that idea but um i i was going to go to silicon valley and try to start a company around

6:26it uh in 2001 when that when the crash happened so that was what got me um was it literally like a facebook or like social network type experience yeah we had a e-dog book feature so we had a feature on it called the e-dog book uh we had uh peer-to-peer teacher reviews were actually the biggest thing on our platform we hadn't gotten the social dynamic quite right uh i would say we hadn't thought of like likes i think likes were sort of the early genius of facebook's uh viral growth the other thing we were categorically wrong about is we thought that hyperlocal was the right approach so our

7:03idea was like i was nd today where i went to school notre dame and then we did a yale today and we did a pen today and the other ones just didn't take off in the same way that the nd that one did because i so intimately understood that campus and was able to kind of make a perfect product for it but a lot of the features on the site ended up being like large standalone websites uh someone else did in their own right like i never made any money off that but like rage my teachers is like a big platform that um we were doing kind of way back in those

7:36in that proto that swamp uh internet swamp of 99 um and so that uh i guess it was really necessity in some ways it set me off selling textbooks on the internet it was like in a way back to um doing a boring business in a in a realm i understood which was college um and i'll make a really long story short but i founded a company called better world books that's a social impact company so the idea is it um raises money for literacy um and for libraries um by taking the on-run books of the world and selling them on the internet so lots of

8:12people donate books to their alma mater for example maybe you bring your whole book collection to stanford when you move and um students also often don't need the books at the end of class and don't have the patience to stand in line with seldom and so better world books ended up being built first around college book drives and then around sort of every unwanted book uh to take those books physically take possession of them sell them in a warehouse um put them into where i'll sell them on the internet uh primarily through amazon ebay originally now uh primarily through its own website um and uh that was that was sort of a

8:4920-year journey of i think the company has sold in aggregate well over a billion dollars worth of books on the internet since since i founded it yeah whoa that's crazy was it like kind of chegg before chegg yeah we actually helped get chegg off the ground um we had a jv with chegg uh for a little while uh we should have we should have gotten some equity in it but um it was uh chegg was focused on textbook rental and we were really focused on um taking books essentially being outsourced online sales um and sometimes organizing the book drives as well so we would almost never pay for a book

9:29like new york public library is a good example they would send us semi semi truckloads full of books that the good people of new york had donated to them and we would market that on the internet and sell those books and then we'd revenue share with them um and with the literacy program that they picked um and that was probably new york public library alone was probably a two and a half million dollar your account uh where they would ship us books we would sell well um it's kind of a cool like there's a greg you and i have talked about this in general it's like there's a cool

10:01business framework around that same type of you know just like general generalized idea and model which is like you know take something that uh is not their core business model and that they are bad at or have no idea how to do and sort of just like abstract all the complexity away from them of that process and like you take on all the headaches and the challenges of it but you're quite good at it for whatever reason you figured out how to streamline that process and so like for new york public library they have no idea how to sell things online it's just not their core competency they have no clue how to

10:30deal with it they would rather pay someone and be happy to pay the margin of that person to just get rid of it and get it off their hands um i saw a business recently that was trying to do that with like lost and found for big arenas and you know big locations which i thought was kind of neat it's like those places don't want to have to deal with you know logging and categorizing lost and found and you know this company was basically coming in and saying like we'll do that we'll abstract all the complexity away and make it a much better experience for your customers you should be happy

11:00because it'll you know create a much better more seamless experience um i think it's kind of just like an interesting general framework um and then you ended up in um in the solar space right like in energy yeah so i i worked on better world books for about eight years i went to business school for a year and then i was chairman of federal books after that but i started this um distributed solar company in africa um also a social impact business so the idea was to make solar accessible to the mass market in africa um which it really wasn't uh at the time um and that was sort of 2011. so the

11:38idea was if people could pay um in small increments like a prepaid mobile for the power that a small solar power system produces then that would be cheaper and better than their alternative which is paying for kerosene for lighting for example or there's actually a non-trivial industry in africa paying other people to charge your cell phone so going the going rate is about 25 cents a charge to uh have the guy at the shop charge your cell phone crazy crazy crazy all right so we've got xavier's background um and there's a lot to unpack there too see eva i want to give you the uh i want

12:16to give you the time of day before we dive into all the uh all the fun and games on enduring yeah sure and i'm and i'm happy to tell you a little bit about my career i think in some ways uh entrepreneurial like xavier's he's uh he's a little bit older and wiser than i am um and all of us i guess your your original question was uh from birth until now and you know it's it's probably worth noting that my story or kind of the decisions that i make in this world i think are largely impacted by the immigrant story in america um i don't know if i've told you the saw

12:54but um my mother immigrated to the u.s from the soviet union in the early 90s there was a jewish refugee program going on at the time and she came over with me i was a baby at the time she didn't speak the language she had heard that america was this better place and that she could create a better future for her kids and it was just just this incredible jump that she made and i think you know when i reflect on like what drives me what what gets me up in the morning what keeps me going it's really to um do honor by the the kind of risks

13:33that she took and the effort that she put in in those early days and i think i think about that a lot um xavier and i ended up talking about that quite a bit as well so i moseyed kind of through through life living in california i had always wanted to be a doctor i'm in college i took pre-med i interned and kind of shadowed some doctors at the time and then i think you know became a accidental entrepreneur or business person um i wanted to start an education company i felt like there weren't enough resources at my public college to support students so i built a tutoring company and then a

14:11note sharing company and kind of a few startups later i guess fast forward to most recently i had a built a healthcare network so totally different industries i pivoted out of education i went into healthcare and built this network of clinical research sites where we powered clinical trials for large pharmaceutical companies so our customers were companies like pfizer and novartis and novoderm and we built this network and we used technology in order to connect patients who needed access to trials as well as those pharmaceutical companies who wanted to accelerate how fast they were getting patients into those trials because it's so expensive to to run the trial or to just keep one

15:00running um so that was pretty successful and ended up selling that business right before xavier and i started enduring ventures got it got it okay so you guys came from both entrepreneurial but very different backgrounds um presumably you met uh along the way and and had become friends what was the what was the insight that led to the creation of enduring ventures and then can you just give us the like quick uh point on like what is enduring ventures what are you actually creating and then i wanna i wanna actually get into the like nitty-gritty of this model because i think you know the general characterization that i

15:38would have for it which i think you know we've talked about on twitter in the past is like you're building a baby berkshire hathaway warren buffett and charlie munger's brainchild um and there's something amazing about you know two guys setting out to kind of go and do that and sharing in public that journey and how you're doing it and like really the mechanics um and getting into the weeds of how you're going about that process so i want to get into the nitty gritty of it because i think there's probably a lot of people out there listening that um you know they may want to pursue something similar in the

16:06future so can you just talk a little bit about that founding insight and then let's dive into it and and one thing i just want to highlight um [Music] so before we get into that because i think it's an that's a really good like i also want to dive into that but sieva and xavier were living in san francisco at the time at least i met you guys in 2016 in san francisco i didn't know that sean yeah sean poury was hosting these masterminds before sean poury had my first million as a place to like get his ideas out there sean pory basically you know every few

16:41weeks would invite different entrepreneurs into this room in san francisco at his office and we would basically order pizza hang out and just talk about ideas i show up uh you know i was going to these things often and the people that were showing up were like the nikita beers of the world social founder um the josh buckley's of the world who at the time had a you know video game um alex ii who's the founder of com.com like mostly just mobile apps with social features or social apps with mobile features like that's basically where it was at and i show up and these two guys are in the

17:28room one guy xavier is like working on this thing in africa about solar energy way more ambitious and so i was like what and sievo was i don't remember exactly i think you were working on your education thing at the time it might have been your yeah your i think it might have been no chairing at the time and which was also like completely like uh different than what people working on it so there's something that you two have which i find interesting and i'm curious your perspective on it which is you don't exactly go toward the trend is like you just kind of come up with

18:13ideas that connect with you and you just like are curious and you follow it is that right i mean i think that's within hand grenade range i think we're also both very cheap i think that's something to know about us and so in some ways we've been much more comfortable in the world you know i had this experience of building a bootstrap company with better world books and then having the complete opposite with the solar company or had to raise absolute boatloads of capital so you know over 200 million dollars raised just on my watch for that business and um the whole raising boat loads of capital

18:49that was like 70 of my job was like you know not just the like oh making the pitch like that's the easy part but really holding together a high-powered board that had maybe different opinions on which we think should go on um you know on sort of navigating funding rounds that don't always happen at the time when the market wants them to happen and so they can be tough to close so i think for me personally getting back to the fundamentals of business was was really interesting i think that's something sieve and i kind of share is like both a sort of broader view about like

19:24social impact beyond just like let's make something that grows as fast as possible and we can sell for as much as possible and then also like the real art and fundamentals of business as an as a practice i guess rather than like what is what is the hypey thing right now that you could dive into that if you're lucky someone will buy your company and i know see but what do you think about that well i i was going to say um you know i spent five years just fanboying xavier from afar i thought he was like the coolest guy the coolest entrepreneur he was building this social impact

20:00business in africa lighting millions of people's homes um you know raising capital for flying back and forth between europe africa and california and obviously very positively affecting people's lives but simultaneously building this incredible recurring revenue kind of commodity business that people really needed so you know that was something that i really looked up to him for and it was greg was really in that room in that mastermind that sean used to host where xavier and i became really good friends um and it was it wasn't until many years later that we came up with the idea for enduring but that certainly was the genesis of it

20:42and sam do you remember what the actual like when we came up with the idea i feel like it evolved so organically like i don't remember what specific conversation it was it was like oh let's let's do this thing yeah i don't i don't recall the exact day i think it really started with you know you you hired a ceo at your previous business and for years you guys had worked together you know you were ready to move on to your next thing and we first decided that we wanted to do something together and then it evolved into this conversation around well the next thing we do

21:15let's reverse engineer what is the last business we would ever want to work on right like what is something that we would want to work on for the next 20 30 or 40 years which is really different from our startup experience both i know you and i talked about this where you start something you know in your head you're like i'm gonna sprint after this for five to ten years and then i'm gonna sell it or i'll hire a ceo and leave and the idea for enduring was really how can we think long term about something and then that's when i think we really pointed our kind of uh our

21:47laser towards uh towards warren buffett and what he had done uh with berkshire hathaway and i think we were always fanboys of his of his yeah but that's i think like anyone anyone that had had that experience uh you know of like being interested in investing and you know reading the berkshire hathaway annual letters uh you know probably had that like same uh feeling of like fanboying around it right like you know the general story around berkshire and and warren buffett just for anyone that doesn't know it that you should go read it if you're at all interested in investing but basically they bought you know he bought

22:23a dying textile mill berkshire hathaway and it was cash flowing um pretty significantly i think like on the order of several million dollars a year um and at the time he was like reinvesting you know the money into the dying textile industry quickly realized that that wasn't the smartest way to reinvest the dollars for the best long-term compounding return and so started reinvesting the dollars from that um from that business into higher profit you know and more kind of like macro growth industries which you know has now grown into a massive you know hundreds of billions of dollar conglomerate or non-conglomerate holding company of insurance and you know big

23:03other like heavy industrial businesses and bnsf and you know the railroad company a whole lot of other things but basically started this engine of taking cash flows and reinvesting them into um you know long-term compounders the reason i say that a lot of people fanboy over is i think a lot of people read it fanboy over the idea sounds really sweet oh so cool you know quote warren buffett all the time on twitter uh everybody be greedy when everyone's fearful like it's the it's all in vogue to quote it very few people actually go and do anything about it and go and build around this general concept and

23:37idea uh you guys did so can we just like dive into it a little bit um from the get-go did you envision the structure that it was going to take um you know and kind of the way that that created certain advantages from a tax perspective and from an ability to reinvest that really uh attractive um you know kind of compound growth rates like what was the general vision for it from the get-go yeah i can i can start diving into that so you know the the kind of search fund and private equity road is really well trodden so if you if you know if you heard of search

24:13funds that's essentially where an mba goes and raises a bit of money to go try to acquire a business and then run it and essentially the way they're compensated for doing this looks a lot like private equity which is fundamentally a sort of more or less a carried interest model i get if i sell it for more than i paid for it then i get some some of the gain in my pocket yeah this is where i get this is worth pausing on sorry sorry this is worth pausing on because it's actually a really interesting model that has proliferated a ton recently this search fund model it's like it's become

24:48you know you know this you guys know this i spent the first seven years of my career in private equity and um several of our employees left went to business school and then raised search funds and it became like you know it used to be that people would go to stanford business school or harvard business school and then go take a job at mckinsey or at a private equity fund and it became the new like in vogue thing to go do after business school because all of a sudden you're armed with this network of really wealthy people or people that think you're really impressive that you can convince to give

25:18you what is effectively a blank check like they commit to uh investing in whatever business you find you don't have a business and you say like okay let's let me go raise a 10 million dollar search fund and you now have committed 10 million dollars it's not in your bank account but people have committed that they're going to fund it when you find the business now you go and you know go through phone books or like the digital version of phone books and find a bunch of businesses you know maybe you find like a local or regional hvac business uh that is not optimized for whatever reason you

25:51strike up a deal with the you know the owner of the business that you're going to acquire it you call all the people who have given you the commitment to give you the funding for the deal you buy the business and then as xavier alluded to you kind of you know normally it's in the form of like what's called promote but you effectively have you know kind of upside equity that you didn't have to buy into in this in this business going forward so if you eventually sell it you now kind of got paid both a salary while you were running it and then also on top of that

26:19you know a big chunk of proceeds if you expand the equity value of the business but it's a pretty interesting thing um for young people to potentially do if you are coming out of business school or you do have a network of people that might be willing to fund you to do something it's a pretty cool opportunity and like a way to take a big swing without having a whole ton of downside risk since it's not your upfront capital yeah i know i really think it is and in some ways we sort of started as a search fund on steroids in the sense that we were saying we're not just going to go

26:49buy one business we're going to go buy a portfolio of businesses but the structure was very different so we didn't like the promote structure because it fundamentally incentivizes selling and selling as quickly as you can and i've just been on both sides of that transaction so both selling a business and buying some businesses while i've been running businesses and i know how much work it takes to actually prepare a business for sale if you're going to do it right and you really run a business differently and there's no two ways about it you run it differently if you're going to long term hold it than if you're going to sell for

27:24maximum proceeds um and so that uh that sort of didn't appeal to us and also on the on the buffett side you had to look at why did buffett not start a hedge fund or he actually disbanded an investment partnership and and bought berkshire and it's it's so that he could have a stock in one company and then the cash flow could flow up to that company and he could keep allocating it and so having an internal capital market means i don't need all the friction of going to a pool of investors and pitching them an idea and saying here's how much you get and here's how much i get and or if

28:02i need debt going to a bank and saying okay well to borrow some money so i have cash flow from business a and cash and business b needs some investment capital you can just make that decision and go and the the increase in efficiency is enormous right so even if you don't have the tax advantages which you do it's it's the ideal structure for long-term compounding you have you have the flexibility of decision making and operation and and the portfolio effect that if one of your businesses is suffering that doesn't mean the whole thing's going to crumble it just means that that business may run at zero profit for a while while

28:37the other ones um you know the other ones keep cranking um like what are the high points of the actual structure of it so if you wanted to set up something that has um these features of of the vehicle like the berkshire hathaway the baby berkshire that you guys are building it enduring what are the the kind of the key features that uh that it would have so the most key feature is that it has a parent holding company that's a c corporation and ideally that c corporation has very few to no employees rc corporation has no employees it's um how we actually even save and i just get

29:15a salary from enduring consulting group llc which is a subsidiary so you really try to wall off the the battleship at the top and the only thing the battleship at the top does is have capital go in and capital go out so if we need capital to buy businesses then shareholders buy shares and capital goes into the holding company if we uh want to buy a business or invest in one of the ones we already own the capital goes out in the holding company and then the subsidiaries are a combination of c corps and llcs we have a whole menagerie there's probably 16 of them or so that are

29:49underneath us right now and the way that sort of breaks down is if we think a company will eventually raise external capital or um or spin out into the public markets on its own uh if we think it has that potential then we'll set it up as a c-corp because that's much more friendly structure to take external capital if it's just a small cash flowing business that we're just going to reinvest the cash flow then it's uh llc is a much simpler and lower cost structure to do that in got it okay so a couple questions um for either one of you guys so c-corp at the top

30:27um what's the reason for not wanting any people associated with that like what why is that is that a qsbs thing because i know like i want to get into qsps and understand that for people as well um it's just risk mitigation right anytime you have an employee there is some small chance they could yeah i could i could slip on an ice patch on my way to work and have a beef with cave and sue the company right or there's a um there's just small risks that you want to minimize so for example we don't have any debt that is guaranteed by the parent company

31:03that's very important because then if business a for some reason has a catastrophic failure it doesn't take down the rest of the ship so you're sort of limited in your exposure in each business in in terms of the money you invested and that's that's a real buffet ism is don't lose money i think that's that's one aspect of his model that is really underestimated is yeah is is his view of the downside risk he's actually okay with relatively low rates of return as long as there's some uh possibility of growth of the business he bought um yeah so he's not thought that that was i always thought that that was like

31:39a really interesting um just like experiencing sort of two ends of the spectrum of investing personally like you know going from private equity and honestly like i was at a value-oriented private equity shop so going from that to doing early stage venture stuff it was a really interesting change because in in you know in value-oriented private equity it was like the whole thing you're basically like you're underwriting credit almost where you can't lose money and if you manage to just not lose money on deals like if your bad deals are a 0.7 moic like you get back some of your money you like claw your way to a you

32:16know shitty .05 outcome or something but you don't just get you know washed it's pretty hard to have a bad fund if you do that over and over again if you're like you know buying reasonable businesses because ultimately you have a few that do 5x or 7. like something goes really well and it clicks and it goes your way and if you can just avoid those like complete washout deals the fun turns out pretty well and that's like more the buffett model versus venture where it's like yeah i'm gonna get washed out on nine out of ten and if the one is a thousand x who cares and i feel totally

32:48fine about the whole fund yeah i think i think buffett talks a lot about the hardest part about his job is sitting on his hands and doing nothing and the reason most people fail is because humans are naturally impatient we want to be doing something we can't sit still in a room so a good opportunity might come at us and we know it's not the best one but we jump at it right and that's when things can fall apart for your fund so a big part of our job and something that xavier and i talk a lot about is there's thousands or millions of great opportunities out there especially in

33:23this segment of the market where we participate in which is really the smbs and if a deal isn't a perfect fit if it doesn't seem like an obvious growth opportunity or worst case scenario as you said we get our money back then we just pass you know we're happy to spend a few months doing our diligence understanding in business and if it doesn't check the boxes even despite all that effort and maybe costs we're happy to just wait you know we have our little capital engine going so no matter what we have cash flow that we can pull on at a later date what are some

33:59buffet-isms that are sacred to you all like you know you maybe it's like uh a few of them that you're just like wow this is how we're running enduring and what are some buffetisms that you're like wow he is totally wrong on that and that's a great question um that is a great question all right i'll shoot um so i'm gonna i'm gonna i'm terrible at quoting things so but he has he has this notion of management by abdication that you um you basically that as long as you have the right ceo and they're compensated properly based on the company's success the best thing you can

34:41do is probably leave them alone and so i mean buffett took this to incredible extremes where he would not even ask for financial reports from companies for sometimes you know years at a time if he trusted the ceo let alone like a monthly board call or quarterly board call he'd just find the right guy and you know sort of let them loose they wouldn't standardize anything there's literally still 40 people in the berkshire head office and most of them do the tax return and it's amazing and so you know they run it like a small business i mean it's like you know warren and charlie and like the

35:18two ted's and like a few other guys like deciding okay we'll put 400 million into snowflake okay we'll buy this 20 billion dollar company you know they'll make these monumental decisions with an awfully small team um and so i think that it's amazing like despite having had that really clear message from him we almost immediately went oh it'd be nice to have a recruiter on our team let's hire a recruiter and then sure enough what happens she was a perfectly good recruiter but then the ceos start losing agency and they're like oh well it's a during ventures job to recruit my talent so i'm not going to

35:55worry about that i'm just going to interview whoever they bring me and the second people start losing agency they don't have full responsibility for the outcome of their business which is actually the the most fulfilling work as a ceo and like also the thing that makes the model scalable and so i think it's also why buffett can be in industries he doesn't understand at all because uh you know he doesn't know how to make airplane parts but he knows what a good airplane parts making company looks like and he knows what a ceo does when they're running it competently um and so sometimes people will try to say

36:28oh well warren buffett owns this company and they have a sexual harassment suit or something like that you know berkshire hathaway has a bad culture and like berkshire hathaway doesn't have a culture it's an owner of these companies and it doesn't try to impose its culture on on the individual organizations that's really driven by the by the ceos um so i think that's that's something really sacred and then i'll say one thing i think we could do better if we do it right which is uh federating capital allocation and so uh buffett has a view that basically it's his job deck allocate capital and nobody else's

37:06and i think there's a world where you can train your management teams to also be buyers of businesses in their sector and to smartly allocate capital and it for and and step into it so at first they propose allocations of capital and we evaluate those and push back and then eventually as we get five or ten years on i would love to be able to just give certain chunks of capital to managers and say okay your job is to grow with this to make one or two acquisitions within your sector or invested in your in your current operation whichever whichever way you think you can grow the

37:39best i mean one of the things that they have to that like i personally just feel they need more pushback on because i like i'm similar to you guys right like i've always worshipped a lot of these quotes and i have a ton that i love but like their stance on crypto and web 3 and bitcoin um and i say day because i'm i'm grouping charlie munger into this um i just think is i just think it's kind of silly like charlie munger has the quote of you know you never allow yourself to have an opinion on something when you don't know the other side's argument better than they do and i just

38:14like you can say that that's great there's no way they have dug into this i don't think or understand it as well um as the like true you know patrons of that industry and yet they are extremely vocal about their distaste for it and that's like i i get it but i feel like you're talking out of both sides of your mouth um when you when you do something like that like it it seems like what would be logically consistent with their perspective on on uh you know having an opinion and earning an opinion would be just not saying anything about bitcoin and crypto and just saying like look we

38:45don't get it we don't agree with it we're not investing in it but like you know calling it rat poison squared over and over and over again and saying that it's like you know for criminals and degenerates and like it's just maybe it's part of their shtick and it's kind of the whole like they're folksy and that's their thing and you know they're eating coca-cola you know they're like talking about bitcoin and crypto being the worst thing for human society while like drinking coca-cola and you know eating candy on stage um i just like that whole thing it would be the one area for me where i would just

39:16kind of say like i get it if it's part of their shtick but i just don't agree with it yeah they're definitely creatures of their era every great company has a great narrative and the berkshire narrative is so strong around productive assets buying wonderful businesses uh never bet against america like they've got like these sayings that are so iconic and i'm a crypto guy so obviously when i hear like icons like charlie and buffett saying like bitcoin is rap poison squared like a tear slowly goes down my face but at the same time if you ask them about gold non-productive asset they're not buying gold they did buy a gold mine though

40:08well that's a product which is a productive yeah yeah that's so i'm not surprised that they latched on to it it's also i mean like if you look at other things if you if you're a believer in crypto and web3 and you believe that you know it is like a new paradigm for the internet or the new age of the internet um you know warren and charlie have missed uh real tech trends right like the the time when they bought apple how long they passed on amazon for like they have not been historically very good at you know predicting mega trends within tech um and so maybe it's just you know circle

40:47of confidence right like to go back to one of their things maybe it's just out of their wheelhouse and they can you know have their narrative and their shtick and the you know focusiness which everyone loves and it's very endearing um and it's just not worth paying attention to like they're gonna keep kind of saying their thing about it one of the ones i absolutely love which i think relates sieva to one thing you were saying earlier is like warren buffett's quote about like when you find yourself at the bottom of a hole the first thing you need to do is just stop digging um i think about that

41:17so often for my own life and myself because uh to your point earlier like when i find myself in a bad situation whether it's investing or just like personally you know whatever you screw something up you're in a bad spot my first uh instinct is always to create motion i'm like all right i'm going to do this do this do this take this action jump this way do this thing um and oftentimes you realize that like all of that movement you're creating is actually just digging yourself deeper into whatever you're in and that the real action that you need to take is inaction it's literally just stepping

41:50back and doing absolutely nothing for whatever period of time um and i think you alluded to it of like sometimes the best investment decision is to just do nothing to just say no um and i think that that is like the mark for me of a really sophisticated investor is the ability to literally just do nothing and you tweeted it i think recently so you have a um something to the effect of like you know the best investments are made at the end of bear markets um not at the beginning of them and so like being really patient you know we're in this time now where it's like oh asset

42:22prices are down do i just start buying things um how do i kind of go about this and sometimes the answer is literally just do nothing just wait like see how it plays out i'm thinking about it now with my venture fund it feels like a great time to have dry powder but i have no idea how much asset prices are going to reset and so part of me is like i kind of just want to pause for three months and just see like in three months what is the average seed valuation gonna be my guess is it's lower than what it is today um and so doing nothing actually right

42:52now would really benefit me in terms of the vintage of the fund and how it's gonna turn out um so i i mean that that really resonates with me more broadly yeah and i think xavier and i you know relative to maybe a year ago we're still investing we're still looking at opportunities but um we're happy to be patient for another three to six months to see where kind of the world lands where everything resets and then pick up the pieces and jump back in with both feet so what uh what businesses do you guys buy and like how do you think like what's your framework for

43:28for buying businesses we're we're really looking for um what we call boring cash flow businesses um and i don't think you know they're not boring to everyone they're really boring because nobody's writing about them in the news they're not on the front page of tech crunch you usually won't hear about them in the wall street journal we really want to buy the businesses that power america is how i think about it you know really those small mom-and-pop shops of blue oftentimes blue-collar industries that um you know that generate good revenue incredible cash flow have been going for 20 30 years um and now you know maybe they don't their

44:13employees don't want to take over or they don't have a son or daughter that wants to take over the business and enduring ventures is just a perfect buyer for that type of company examples might be you know we love plumbing service businesses hvac service companies we own a series of businesses that provide broadband to people's homes and offices so all of these companies that are largely recession resistant have been around for a really long time that we can buy a very reasonable multiple multiple of cash flow that is which is sometimes different than sas which we can talk about but that's really our sweet spot and it's follow

44:55that playbook and do that over and over again over a long period of time xavier do you have anything to add there yeah the only other thing i would add color on that is we um we really like to see some growth angle to the business so we'd probably rather buy the number three plumber in a metro rather than the number one um especially if we think that the number one is is vulnerable in some way and so when you're buying businesses you you protect your downside by buying it a little multiple but you really deliver returns for your investors by by getting the business on the growth track

45:29especially if it wasn't before and that usually usually comes with bringing in new energetic management with with good ideas and then how are you actually buying them so like you know two of the principles that jump out to me here um as far as the advantages of your model it's like the actual financing structure of how you're financing the deals um you know to generate returns and then um the whole qsbs thing which i want to just like understand a little bit better so how are you financing the deals like are you doing sba loans are you doing seller financing you know kind of what's that like actual

46:03structure of how you're doing these deals that people can take away to you know to maybe execute in the future for themselves yeah so there's we we've done everything in kitchen sink so everything from all equity to seller finance to sba uh to uh you know sort of we've gotten close on some mezzanine financing we haven't actually done one with a mezzanine lender but there are folks out there who will lend say five to ten million dollars you know they lend to search funds for example which are sort of classic um you know uh users of that capital i would say if you think about the universe of

46:40businesses you can buy if it's under say 500 000 in profits you ought to figure out a way to buy it personally as a listener with an sba loan that's like a real sweet spot because you can probably buy that business for one to two million dollars and it'll set you for life if you just run it properly and grow it a bit um and how does that work so like if someone wanted to do that if i found a half a million dollar a year profit you know local landscaping business that i wanted to acquire um how would i actually go about getting an sba loan

47:12for that and what would you know typical kind of terms like what would i be signing up for with that sba loan and like how much cash would have to come out of pocket just like give me a quick you know napkin math on it so napkin math is let's say you pay three times cash flow which is very achievable some sectors you'll have to pay more some sectors you can even pay less but let's just call it three times um so you're paying 1.5 million for it you are taking an sba loan for 80 to 90 percent of that purchase price so you're coming out of pocket maybe 150 to

47:46300 000 if you don't have that 150 to 300 000 um you can get an investor to come in and provide most of the capital if you're if you sort of have no money at all and no assets at all sometimes the bank will be cautious just because you're you're a very weak uh guarantor there's no sign you can put in any more money if things go sideways um but those deals can still get done um and then the sba loan is a 10-year loan so your payments on that would be awfully reasonable let's say 15 dollars a month just just spitballing and so maybe a third of that cash flow goes to

48:25service the debt um and even without growing the business another third goes to pay your living expenses and then you have a third you can sort of reinvest in in the business um now if you can grow that from 500k to a million in cash flow that millionaire cash flow is probably worth four or five times and so you've created two or three million dollars of equity value right there in addition to having obviously really strong monthly cash flow for your personal use yeah this is like the entire model of like the opt out from the traditional track that i find so interesting and like great greg and i

49:01have differences of opinion on like the headaches of potentially running one of these as an individual um which i think are very real and people need to consider because you actually need to go run this business if you're gonna do that form of like a one person you know sba go buy a landscaping business but it's a pretty neat idea like you know i had a friend who was working at deloitte and i don't know he's probably making 150 a year as like a director at deloitte and doing quite well but it was like really stressful wasn't getting to spend time with his family and he

49:29literally went and did this he bought a bought a local landscaping business and got an sba loan and now he's probably making like a million a year he has employees he's like you know probably works like 20 hours a week at this point it was a grind for a while as he got it off the ground for sure but it was kind of a cool way that he just like within a year opted out from the entire track that he was on like the partner track at this consultancy and did it the other thing which you mentioned that i think is so cool that people don't fully appreciate

49:58with like an sba loan or with business loans when you acquire a business it's like people equate it to like getting a mortgage when you buy a house the challenge with that uh with equating it to that is like when you buy a mortgage with a house you take sorry when you buy a house with a mortgage you're you're taking a loan against your income and so like your income is what's kind of providing the collateral that they're um that they're basing the loan on um when you buy a business with an sba loan you're kind of buying the business with itself because you're buying you're getting the loan against

50:31the cash flows of the actual company it has nothing to do with you there might be a personal guarantee on the back end in that case but you're able to now service the debt with the cash flows from the business and so like it's a it's a unique hack of american capitalism that you're able to buy businesses with loans against the cash flows of those businesses um it's just like a very neat thing and then you know combine that with seller financing which you can often get in these deals um and you can often do them with very very little cash up front um which generates

51:01just an absurd return on your equity that's that's exactly right i mean you you should really underwrite 100 equity returns when you when you do one of these um and that should be a very that should be a base case that's like growing the business 10 a year um so it's really it's really really juicy um there's some really good sba lenders out there some of them are on twitter uh we have one uh we use again and again happy to send a referral if anyone dn wants to dm me uh for that um but uh yeah it's it's a really special i mean it's an only in america thing i i

51:37don't know the equivalent anywhere else in the world okay so that's that one um and then qsbs you got to hit us with soon to get uh here on this because um i i just have so many people like asking me the question i don't know all the details of it so like just hit me with uh the the kind of high points on like what is qsbs and why does it matter and why is it such an unbelievable hack for um you know for business owners so if you set up as a c corp and you buy original shares so you you invest some money that could be just you register

52:11the business online and you put in 50 to get your shares and then you hold those shares for five years and you sell them and there's a few other caveats consult your cpa or tax advisor on this but um essentially you can sell up to 10 million dollars of that stock uh tax-free you may pay state capital gains but you won't pay federal capital gains on it um you can even go further you can have your kids buy some of the stock your wife buy some of the stock and they each person um gets a 10 million dollar exclusion so it's kind of amazing um and this is up to the first 50 million

52:49dollars in assets on the balance sheet of the company so all of our original investors along with me and sieva had that treatment in the company um and uh you you do as well as an investor i think about the first eight million of that we raised uh qualified as qsps so when you do sell if you hold for five years um that should be a very clean transaction 25 years is my plan at least beautiful for what it's worth um i mean this is like again you know america being the home of um you know of entrepreneurship and and kind of incentivizing capitalism um it's

53:27an amazing you know people push back against this kind of stuff because they're like oh you should be paying your taxes the flip side of that is this incentivizes a whole lot of people to go and build and to go and create jobs and um you know and build businesses because you are going to get these advantages from doing it versus you know working in a in a salary job so i um i think it's amazing and it's like a very cool way that um you know that builders and that people that are kind of compounding long term and doing things for the long term to your point the five plus year thing

53:56so you're not doing you can't do this with like quick flip you know flip something you know in a year and hope to get the same tax advantage um it just incentivizes uh entrepreneurial long-term thinking which i just find to be a really awesome thing no it's a really smart policy and it's it has suffered some assaults by some small-minded people so it's important we we keep fighting for it it almost got taken out in the in the buildback better bill which was uh but it but it survived huh um so i know we're running up close to the end of time and we're gonna have to

54:29do like a follow-up episode on all of this um because there's just there's too much to cover in one session what like maybe from each of you um it would just be great to like get some just general um either general closing thoughts on you know how listeners can kind of take away some of the insights from what you guys are doing to um you know to go and do this like things you wish you knew um as it were uh or uh give us like one just like fascinating business or story that you've seen recently that is um you know kind of capturing your attention sort of

55:04like uh sieva's scaffolding story that he shared recently that that that drummed up a lot of interest on twitter i love that business too i still think about it like on a weekly basis um so i'll give the advice because i get hit up a lot on twitter dms where people are saying hey i want to buy a business like what should i do and i think the number one thing is honestly having a really honest conversation with yourself and your spouse about like your readiness on a scale of one to ten to do it because it absolutely can be a grind to run a business and it's it's probably

55:39an intensity that if you've only worked in an office you haven't fully experienced because and i've seen i have seen people um you know where businesses haven't gone well really suffer and really grind for years and years and that's not you know that's not what you want to see um but at the same time it's when you look at the risk return of going and buying a company and being in your own and being on the ownership side of the table it's it's truly life-changing not only for you but potentially for your your children your grandchildren so the risk reward trade-off is heavily in reward favor

56:14but if you don't know how if you never manage people especially if you have never managed blue collar people if you've never managed p l um it could make sense to go work in a small business and help them build it and make sure that that feels like what you want to do before you actually go go try to buy one i see some folks who are like 23 saying i'm gonna go go and buy a landscaping company and it's like man that could go horribly awry because you never manage people so you know that was that was the the gift that i think sieve and i both had

56:46is that we had we had done every job that you could do in business before we went and started buying them and so even though we might not know something specific about plumbing we we do know if a business is working or not by looking at the financial statements and it's it's financial health as well as culturally and and the team perspective and apply some heuristics to that um so i think that that's that's the advice i would leave to people but that doesn't scare you like you're you both are have experience in tech building tech businesses then all of a sudden you buy this uh plumbing business and you're in the

57:24plumbing business um but you can't fix your own toilet you know like does that not scare you or are you that confident that you're gonna hire the right people to manage it and you'll be able to troubleshoot it yeah it's it's a little article of faith i mean uh better world books was more of a logistics company than it was a tech business so with 300 people working in three warehouses around the globe and shipping an enormous amount of books here here and there um so i think like in just in terms of sort of managing a blue-collar workforce i probably got a little more exposure than most folks in

57:59the tech world um but the point is really well taken and it does it's a little scarier uh for sure to buy a business you don't fully understand and i think that's something we've really gone into is saying we need to really understand how this business makes money and where we would find the kind of people who know how to run this business we don't need to be able to run it but we need to be able to understand it if something goes wrong and you know business like scaffolding you actually can understand a bit more simply than maybe some you know some industrial chemicals business where you

58:34know it's really it's really sort of obscure and you don't know exactly what could go wrong um and i think we've seen that in our acquisitions that the best businesses we've bought have been at least somewhat in our circle of competence and in a weird way local plumbing and hvac is as much about internet marketing as it is about um yeah there is kind of like generalized knowledge versus specific knowledge in these businesses too and like you guys have um incredible generalized knowledge and have probably been able to find you know patterns across all of these that apply and then it's like how do you retain the people that have the

59:09specialized knowledge that you really can't afford to lose to greg's point like the people that if you know if they're gone and you you lose their insights or their um you know their kind of like uh institutional knowledge um as a good way to say it you're gonna be in a lot of trouble and then making sure you incentivize those people for the long run absolutely um steve do you have a do you have a business uh want to share one of our businesses we've seen um yeah i'm happy to and i think you know adding to some of the comments you were saying earlier i also get dm quite

59:42a bit on twitter from people that want to start holdco's and or holding companies and the main focus is identify your ongoing cash flow source and that may mean buying a business right using sba debt to buy something small that then generates cash flow for you so you can buy more businesses or in the world of the internet you know that may mean starting your own business be a content creator you know create a course or whatever it is that allows you to build some ongoing cash flow engine your own little version of the berkshire textile mail because once you have that you have unlimited unlimited opportunities to go

1:00:26out and buy more businesses and that's really been our focus at least in the early days of enduring um and then as far as like businesses that we love you know i'm a i'm a die harder for the blue collar businesses the high cash flow generating companies recently i actually posted a twitter thread about a scaffolding business that we looked at in the midwest we ended up passing on it but i can share some of the fun dynamics of that one scaffolding is is an incredibly cool concept because if you think about it you're buying a bunch of equipment right all the different scaffolding pieces that you're renting out to general

1:01:05contractors but once you buy that equipment which which can be really expensive so that's a real barrier to entry which is tough for new people but great for people that already have the equipment um but once you have that equipment let's say you have 10 million dollars of scaffolding product you can reuse that scaffolding equipment year after year for all of your contractors and you really don't have to replace it too often you know of course there's some maintenance cost there's going to be some amount of costs where you're buying the latest and greatest equipment but your core business is this beautiful recurring revenue engine and the one we

1:01:43looked at in in the midwest was doing about four million of ebitda we could have bought it at what wasn't xavier maybe four times he did that yeah i think four times four times even uh yeah um and you know what you get paid you just get up you get you have to get paid to put up the scaffolding you get paid a day rate well it's up so any construction delays just go in your favor and then you get paid to take down the scaffolding it's amazing yeah and i mean just to like the craziness of buying companies at four times ebitda like in a world where

1:02:17everybody was talking about you know 100x uh uh adjusted you know or like you know arr in um in the venture world six months ago or something like buying a business for four times cash flow you know ebitda as a proxy for cash flow um is insane like if you just do the math on you know i bought it for four times that uh you know and so it's going to generate um you know and it generates its ebitda with no growth uh in an unlevered world where i didn't use any debt i bought it with all cash i'm still generating a 25 return on that and now i

1:02:51lever that uh you know with some debt and you're generating you know you generate like 100 plus return if you if you leverage effectively potentially in year one with no growth it's like it's completely insane um when you uh when you think about the math of buying businesses at that price i always thought by the way um seva that like the best business in the world is those um uh the like dumpsters that get dropped at like construction sites and just sit there um yeah like at even in like office parks and at um like apartment buildings there's just like a dumpster that sits outside and they come and pick it up

1:03:28every now and then but it just sits there and it has to be rented at like a pretty attractive rate you never have to maintain those things because they're just like old dumpsters there's no like specialized equipment no one's standing on them like scaffolding um that has to be an unbelievable business yeah i mean we love anything where you can buy it once and just rent it over and over again i think there's a franchise that's taken off uh like maybe one of the fastest growing franchises right now they're called like junk crushers i'm totally butching it butchering it but basically they put that junk bin in front of your house you

1:04:02put a bunch of stuff in it and the only difference is that they have a machine that comes and compresses it in order to create more space for you so it's much cheaper than the previous rendition where like maybe your chairs alone filled up the jump um and they're doing incredibly well they're going super fast and we certainly have our eye on them oh that's cool that's a cool business you know i think the ultimate god of the cash flow businesses is the smart card at the airport every you notice that thing where you pay six dollars to get an airport cart yeah i mean what whoever invented that

1:04:34to me is the all-time genius of cash flow businesses yeah that yeah that's probably right actually i'm actually curious now now that you mentioned that i want to dig into this now after like if anyone knows that's listening any of the mechanics of those businesses um i would love to learn more about that one because like i mean it used to be that there were people it was like someone would come and you'd have to pay them and they'd kind of like hawk you down and you know you'd have to tip them or whatever it was for helping you like when i was a kid and that still

1:05:00exists in india actually um and then it became the coin operated uh you know dolly carts and now it's credit card like i think you could pay with a credit card and get one of those um i haven't used one in years but i wonder what the actual economics are of those things yeah they must have a revenue share with the airport or something but it's it's it like solves the airport problem because it makes it easier for people to load and unload it uh you know you pay six bucks when you get it and you don't really care where the person leaves it because either someone else will take it

1:05:29for free i think you return it you get like a quarter or something so there's like some incentive for people just go walk around and return them and then every once in a while someone walks around the airport at the end of the night and then picks everything up and there's no alternative like you just you have to do it otherwise you're not getting your bags you know if you have three screaming kids and you got all your big bags for your long vacation to hawaii like you're just paying the six bucks you're paying the uh yeah the pre you know like there's no uh there's no

1:05:58pricing discipline around that all right well guys this was awesome um absolute blast and i feel like i um i have like a hundred things that i learned and now a hundred more things that i need to spend more time learning um because you've opened my eyes to a bunch of cool new stuff so thank you both so much for uh for joining where can people find you i know you guys are both sharing a lot on twitter um i believe it's at xavier helgeson um and we'll put in the show notes the spelling of of your guys names because neither one of you has a

1:06:28particularly easy last name and at sieva kaczynski um both highly recommend following because um sharing some of the most interesting tactical insights that i've seen on twitter and and what i think of is like real earned insights um from things that you're doing actively on here so um super super thankful for for both of you coming on yeah my biggest takeaway is thinking about the plumbing business as an internet marketing business like if you start thinking about all these services businesses as really just like internet like 95 percent internet marketing 5 like sort of old-school utility then that really changes your mindset on these things and then you can just go one by one and

1:07:11look at all these different cash cow industries and see how you can play a role so thanks for that and uh that's a great takeaway greg because i think you you guys all know nick huber um the uh sweaty startup on twitter but he had a thing a while back that was like um the best way to find business opportunities is to go to all of the like local businesses um in the niche that you're trying to operate in and look for the ones that still have a fax number listed on their website or like don't have a website or the website's not optimized for mobile and you'll

1:07:43immediately identify opportunities because you'll be if you're thinking about you know opportunities to improve it and you know create more tech enablement um clearly anyone that still has a fax number on their on their page or or at their business is is not ready for uh for what the future looks like that's the truth i always like that honestly you can even scribe you can even sell leads you can start out internet marketing just sell leads to local plumbing companies and once you have the engine cranking then you can eventually go buy one it's a really interesting strategy that i've seen before and often that's the best way to start

1:08:18because you actually learn you know you learn the players that way you learn the economics that way so yeah folks listening like get in the leads business and it's a fantastic business and a great way to learn we should do an episode on that greg we should do an episode on the leads business there's a i think there's a lot to dig into there that'd be super interesting yeah i've got some people there awesome all right guys well thank you so much super appreciate it um look forward to everyone that's listening following you guys and and learning more from you guys in the future so thank you

1:08:48both thanks guys all right thanks guys [Music]