Issue #3 - The Eyes of an Investor
by Tim Ludwig, Partner at Majority Search
The Eyes of an Investor
Despite having worked in private equity for the past 15 years, I have no formal training. I went to a good business school (Go Blue!) and took finance classes, but I never worked on Wall Street or learned to navigate Excel without a mouse. In fact, my first investment in a company was as a 34-year old first-time solo fund manager in the depths of the GFC (what was I thinking?! Thank you early investors!). Fortunately, despite some early stumbles, I was able to stick around long enough to learn from a group of very, very smart, humble, and experienced co-investors and CEOs that generously shared their knowledge. That exposure ultimately allowed me to develop enough competence that at some point I finally became comfortable calling myself an investor.
One of my takeaways, once I stopped feeling like every decision I made was going to end in disaster, was that this stuff, while hard, was learnable and that the lens through which investors view a business is beneficial, including for anyone considering employment with a company.
How So?
In my early- and mid-career, before becoming an entrepreneur and investor, each job I took was evaluated against a set of factors that, while important, did not fully capture the things I should have been trying to optimize. Here's what younger-me focused on in my evaluation of job opportunities:
The Role: Does the job interest me and, most importantly, do I believe that there is a steep learning curve? Are there opportunities for advancement (I usually never stuck around long enough for this to matter, ironically)? Does the role involve a lot of travel?
The Location: Does the city have other young professionals and a good social scene? Is the office in a convenient and desirable part of town?
The Pay: Will I be paid a fair rate? I wasn't looking to get rich, but coming from a modest background and having student loans, I needed enough to live and to not constantly feel stressed.
Do you notice some of the things I missed? After I became an investor, I developed the discipline to evaluate: the quality of the management, the industry (growing, declining, fragmented, oligopolistic, etc.), the business model, unit economics, the margin profile of the company, the level of competition, pricing power, external threats, known substitutes, and other factors that have a HUGE impact on the ultimate success of a business, but also on the career paths of employees who join the company.
Lately, I've been using the phrase "opening the aperture" a lot in conversation. That's exactly what happened to me in my evolution as an investor. I'm not looking to become an employee anymore, though many are, and I think a greater awareness of this larger range of considerations would be of value to both the candidates as well as the companies hiring them. In fact, I think there is a real opportunity for companies to educate their candidates about these 'investment considerations' as part of an application process. (That's just one area where I think companies can improve a generally terrible recruiting process, but I'll save my thoughts on that topic for a future newsletter.)
Learn to Think Holistically
Looking back, I'm glad I didn't come up through the traditional investment bank-to-private equity pipeline and that I had the chance to work in industry and manage people before becoming an investor.
The work that I do now - finding, supporting, and backing highly capable mid-career professionals and the small companies that we help them buy - requires and benefits from both skillsets. The larger lesson I've taken from this decade-and-a-half journey is that thinking holistically about problems isn't always easy or obvious, but transformative when applied correctly.
As with most things, the 'how' of learning to develop the skills and awareness to think holistically is the challenge. You can gain the experience and awareness of the relevant factors over time (like I did), or you can be smarter and relentlessly seek out others across disciplines and viewpoints and strive to understand the situation through their eyes. This is arguably the faster path, but requires humility and the courage to reach beyond your comfort zone. In the end, if you're making important decisions, the effort will be worth it.
For More on Becoming a Better Thinker...
Bonus Content: A Quick Overview on Where Small Businesses Are Located in the US and How That Compares to Where Search Funds Buy...
The table below compares, on a regional basis, the differences between the national SBA distribution data with the 2020 Stanford Search Fund Study results. (e.g., ~23% of small companies are located in the West; ~35% of search funds have acquired a company in that region, overweighting relative to the national profile, largely driven by more businesses being bought by search funders in CA and WA than the data would have predicted.)
It is hard to draw conclusions from this data, but perhaps it points to greater opportunity for current and future search fund entrepreneurs to seek acquisitions in places like FL, NY/NJ, and VA?