Deal Origination Business is the BEST Way to Get 4 Acquisitions FAST!

 Summary

In this conversation, Gabe Galvez shares his entrepreneurial journey, starting from his early experiences in deal-making to founding CapTarget and Verde Holdings. He discusses the challenges of deal flow in M&A, CapTarget's innovative approach to sourcing leads, and the importance of tailored services for clients. Gabe also reflects on the evolving landscape of deal sourcing and the strategies he employs to ensure cash flow and returns in his investments. In this conversation, Jon Stoddard discusses his approach to investment, emphasizing the importance of trust and relationships in deal flow. He shares insights on his investment philosophy, focusing on finding opportunities and navigating market changes, particularly in the landscaping industry. Stoddard also delves into the dynamics of partnerships and governance, highlighting the significance of alignment in values and goals. He reflects on his entrepreneurial journey, acknowledging the lessons learned over time, and emphasizes the need for community and collaboration in the business landscape.

Takeaways

Gabe's entrepreneurial journey began in a pawn shop, emphasizing early deal-making experiences.
CapTarget addresses the critical challenge of deal flow in M&A.
The firm operates as a buy-side mechanism, providing leads without representing clients.
Their economic model focuses on retainer fees rather than success fees to avoid conflicts of interest.
Gabe emphasizes the importance of tailored services based on client needs.
The current market is seeing a shift towards more diverse payment structures for deal sourcing.
Verde Holdings was founded to pursue investments without the need for LPs.
The focus is on achieving predictable cash flow and returns on investments.
Gabe's approach is to filter leads effectively to provide quality over quantity.
The conversation highlights the changing dynamics in the M&A landscape. We have a trusted network that provides us with deal flow.
Our investment philosophy focuses on finding ways to make deals work.
Navigating market changes requires adaptability and foresight.
Partnership dynamics are crucial for successful governance.
Understanding people and their motivations is key to business success.
Effective meetings are essential for productive outcomes.
Encouraging mistakes fosters a culture of learning and growth.
Community and collaboration are vital in the entrepreneurial space.
Embracing change is necessary for long-term success.
The journey of entrepreneurship is both challenging and rewarding.

 

 Watch the Interview:

Transcript

Jon Stoddard (00:03.042)
Here we go. Thanks. Welcome to the top &A entrepreneurs today. My guest is Gabe Galvez out of San Diego runs a company called Cap Target and a couple other companies Verde Holdings. So we're just going to start talking to Gabe about how he got started in all this acquisition. Welcome, Gabe. Thanks, John. Thanks for having me. I love talking about this stuff. Excited to talk about it with you. So let's, let's.

Go back and where you got started with this. Was it at the digital marketing lab or before that, or just kind of tell me that story?

I think if you really, you want to ask where it got started. I mean, I think fundamentally both my entrepreneurial track and my more conventional private capital markets track intersect at kind of a deal-making intersection as being the common denominator, like so many of your listeners and all of us. So when somebody asks me how it started, I tend to go back to, where did the deal-making start?

And for me, that actually was my first job, which was working in a pawn shop when I was 15 in high school. And you want to talk about deal-making. I mean, you wait around at a counter for somebody to come up and negotiate with you. And that happens a hundred times a day, right? Somebody comes in and they go, hey, I got a guitar. need to pay my phone bill, whatever. And you go through this process. So deal-making for me started at the very moment my

you know, ability to earn income started as a, as a team. But the more formal pieces of this puzzle really are part of kind of a funny, whirlwind accidental path that got me here. Basically, I was part of a startup early in my career that was acquired fairly quickly, sort of a hyper growth company that got acquired. And that was sort of my first foray into

Jon Stoddard (02:08.491)
both managing hyper growth or mismanaging, whatever, living through, we won't call it managing. was just along for the ride. Hyper growth, living through an integration, the ups and downs of that. And after that transaction had occurred, I ended up working for a really entrepreneurial family office in a CFO capacity. And we got to buy and start and build companies with a pretty, pretty broad mandate.

And that led me ultimately to leaving and becoming an investment banker, which ultimately led me to meeting one of my primary business partners, which led me into a more conventional entrepreneurial journey of fixing problems that our industry had. And that first problem fix attempt was us founding CapTarget now 12 years ago or so. And that led to...

spinning off merger labs and starting a few other companies and ultimately becoming primarily focused on my own professional investing endeavors through Verde. So I've bought them, I've built them, I've sold them, I've invested in them, and I've been the intermediary along the way. So I've really sat on all sides of the whatever octagonal or triangular table that we sit at in this deal.

Yeah. So I am part of a number of groups, mastermind groups and acquire businesses. think if I mentioned the name Roland Fraser, he's out of San Diego. He's got this epic group. There's Carl Allen and all kinds of other groups. The number one challenge for all the students is getting deal flow. That is the challenge. So how does CapTarget do that?

What do they do? mean, what, what, know, on any specific one, say, Hey, I want to take your order and I need a wholesale company out of Georgia. And you go look for what? Yeah. Yeah. I mean, that's number one. I want to acknowledge that that, is the big problem, right? We, kind of joke to some extent, but it's serious that, you know, you can't play the game without the ball, right? I don't care if you can dunk you're faster. You got better moves on the court.

Jon Stoddard (04:32.428)
If you don't have a ball, you're just a guy running around looking like an idiot. And a lot of us have been in that position at some point where we have the chops to do a deal. We have the access to the capital or we're properly capitalized. But really, so what? We need the ball. And so CapTarget is sort of the provider and arbiter of the ball. In a lot of ways, we're like a buy side firm, except our economics are very different.

Conventional buy-side firm, as most of your listeners will know, there's some upside in the deal. Maybe there's a retainer, maybe there's not. Typically, they're only working for a few firms because of some potential conflicts. We take a lot of what they do, a lot of the functional work that a buy-side firm does and package it in a different economic model that scales better. So we bring the horse to water. You call CapTarget, you say, hey, we're looking for

HVAC service companies in Arizona with EBITDAs of X, Y, and Z, go get them. And instead of doing the outreach and doing the curation of the opportunity like a buy-side firm would do in that they represent themselves first, right? A buy-side firm reaches out as XYZ partners, we're looking for companies to buy, we have a client. Instead of doing that, we reach out as the actual buyer.

and say, hey, I work for ABC industries. We're looking to buy companies like yours. Here's our value proposition. Here's our perspective on valuation. If you're interested, let's engage. And so we really work at the very top of the funnel where we do the research, the outreach, the initial qualification, and then we leave the lead with the buyer. And in doing so, we don't have to ask for deal fees. We don't participate in any transaction in any kind.

We don't advocate for a deal. don't represent anybody expressly in the market. We're just here to help you find the ball. And then if you can score with that ball, good for you. But it's sort of above our pay grade. We're really just that top of the funnel mechanism to make sure you have the at bats you need to do the work that you want to do. And because we don't represent a single customer as a third party, but rather represent ourselves as the customer.

Jon Stoddard (06:56.683)
we can do this at a much broader scale than a normal buy-side firm because the inherent conflict that comes with representing a number of firms with the same mandate goes away. Because at the end of the day, we're representing XYZ industries. And if you want to sell to them, it's based on their value proposition, not based on our slick moves as a buy-side firm to get you to want to sell. And because of that, we can work with hundreds of firms at the same time on

different or at times similar mandates without any conflict because you own each lead that comes to you because each possible seller or each possible target has responded to your specific value proposition, not to a cattle call to sell. So let me get this. Are you selling the lead to, you know, private equity firms are big, let's say 10 out there. They're looking for HVAC companies, 10 to $25 million. And are they buying the lead or, or?

Who's, who's the short answer is no, but there's, some detail in there rather than selling leads specifically, meaning, Hey, there's an opportunity who wants to buy it. We're curating those leads on a retainer basis, what we call a fee for service basis per account. So John calls me, he goes on buying HVAC companies. say, cool, John, I'm going to go basically effectively be on your team.

I'm to have a John email address. I'm going to be reaching out telling John's story. And if anybody responds to John's request, that's a lead for John. So we're not warehousing leads. We're not doing any matchmaking like some of the two-sided marketplaces that are out there, which is not a criticism of them. It's just a different model. And whether you buy that company or not kind of doesn't have anything to do with me. I'm here to just facilitate that getting John's message to the appropriate audience.

helping validate the interest of that audience, giving you the lead and off you go. Hopefully if you close a deal, you send me a bottle of wine, but that's not part of the economic model. You just pay us to execute a protocol to build a lead generation funnel. And you're the beneficiary of anything and everything that comes from that funnel. Yeah. Now, do they give you the acquisition profile to go after exactly?

Jon Stoddard (09:22.441)
Yes. And the more specific, the better. we can, but we don't want to get into that arena of expert network or sort of mandate analysis. We really like to just be on the catching end. You come to us, you say, this is our mandate. This is what we're looking for. If as an example, it was really broad, which does happen, especially with big funds, right? They say tech enabled business services companies in America. Well,

That's every business in America right now. One could argue. And that's either going to be a really expensive endeavor just because of the amount of volume of data, email finding and communication. So in instances like that where we have a really broad mandate, we want to help them tighten that into something that's a little more digestible. As a service provider, CapTarget is definitely not a more is better company. It's a better is better company.

I'd rather get you 10 good leads a month that really resonate and really have some opportunity and traction to move forward than to just blow up your inbox with every old opportunity that's out there. Because most private equity firms, even some of the larger ones that play in the middle market, aren't really equipped to handle that volume of deal flow anyway. So we want to just give you what you're looking for and really play the filter.

role in making sure all nonsense doesn't end up on your desk that requires MD level labor hours to sort through, right? We want to protect you from the bad stuff, give you access to the good stuff, make sure you own it expressly because this is sort of part of a bespoke effort for you. And you get to make the decision on what happens beyond that. Yeah. What kind of lead is that? Is that somebody you actually talked to and said, yeah, I represent this client. They're interested in purchasing HVAC companies between this.

And then there, just hand them off and say, okay, now who, who makes the appointment to, to, to get those two people together? Well, so two questions in there. I'll start with the first one. So we're not actually, and this is semantics, but we're not actually representing the client, meaning I'm not calling from cap target and saying, or emailing or whatever, and saying, I worked for this great firm and they're looking at buying HVAC companies as an example. Instead I say.

Jon Stoddard (11:48.203)
I'm on John's team. I work for John Corp and I'm in this corporate development capacity or I'm in this business development capacity. And we're buying HVAC companies that have this criteria and looks like you're possibly fitting in there. Do you meet the criteria? Are you interested in having a conversation? And once they self-qualify, once they kind of raise their hand and say, yeah, no, I have a million dollars in EBITDA and yeah, I'd love to sell. And yeah, we have competent management. At that point.

John takes the lead in this example. you ask them any questions like why are they selling? It could be one of the seven, eight or 10 things like divorce or moving or tired or stagnant, something like that. It depends on our client's appetite for our involvement. We have clients that run the gamut, particularly with large firms with big built out, know, corp dev or biz dev teams.

They're really just looking for pure lead flow. Those guys don't really want us to get in the weeds too much with their leads. And they'll just say, look, if somebody says, heck yes, I want to sell. Cool. Ship it to them. Smaller groups or more resource sensitive groups. It's more common for them to ask us, Hey, do a little digging, build a profile on them, ask the questions and help us sift through these a little more.

but we really want to leave it to the discretion of the customer to see how involved they want us. And we can kind of go wherever they want us to go there. We don't really have a preference, but I think in this current cycle that we're in of the buy side universe, most groups are giving preference to simply seeing a few more deals than having us do a little more in-depth screening. There've been other times

in this or this kind of last cycle we lived through where our clients preferred us to do more of that digging. But for some reason right now, folks just really want to see a lead, make sure it meets some basic criteria, and then ship it to them and they go run the show. Now, looking on your website, I mean, you don't really charge very much for that. It's like a thousand or two thousand dollars a month on that deal. Totally. I mean, we we make no qualms about we're really in a somewhat of a volume game.

Jon Stoddard (14:11.691)
Right? I mean, we want to work with as many real buyers in the market at any time as possible. We also, when we were developing the model, and I don't know if this is good or bad, but one of our primary goals was to have the ROI, have the value proposition be so, so absurdly obvious that you kind of had to work with us. Right? So when we talk to a customer, we say,

You could hire a corp dev team. I don't know what that's going to cost you. It's not going to be cheap. You could hire a buy-side firm. You're to pay them a retainer and you're going to give them some points. And some buy-side firms charge some, you know, mean, we got groups that are paying five points right now. And if you're doing a $20 million deal, well, you know, heck that's, that's some real scratch, you know? So we want to go to those customers and say, look, your alternate solutions costs hundreds of thousands of dollars per year or per transaction. Ours costs a couple thousand a month.

And I think that resonates with a lot of folks, particularly now that we see this advent of independent sponsors, of scratch PE, way down market stuff that's going on. Those guys really value keeping transaction costs low because they're not charging back those fees to LPs or they don't have a conventional management fee. I mean, I know you've covered it in other podcasts, but there's so many different models now on how to

get paid and doing a deal that a big portion of this market by headcount, they're really interested in like, Whoa, so I can run a full process every year for 30 grand. And if we close a big deal, I don't owe you anything. And if we don't close the deal, I can just fire you. Cool. So we're trying to make it as low risk and easy as possible. Yeah. Where did you guys make the decision to say, not take any points on that because of

the nurturing you did to find a business. I in this industry, like, hey, man, I was responsible. I spent time on this deal flow and, you know, if you want it, it's three, 10 points, whatever. It was a conflict of interest scale problem, right? So if we, if we started taking points and deals, all of a sudden there becomes this new incentive for us.

Jon Stoddard (16:30.923)
And, and mean, let's look at buy side firms. Again, it's not a criticism of any other model. It's just the reality. If I'm a buy side firm and I'm getting points, I get a lead. The first thing I do is say who pays me the most. And the second question I ask is who has the highest certainty of close, right? That's who's going to get the lead because I want to get paid. And in doing that right away, you're going to give preference to your top tier firms. And you're going to overtly penalize your.

your folks that are new or small or budget sensitive. And that's okay. Again, there's some great buy-side firms that make a shit ton of money out there. Awesome. It's great. But for us to do this for hundreds of clients at a time instead of five or a dozen, we need to really be able to argue clearly that we have no ulterior motive. We have no incentive that's misaligned with our customers.

So by removing the success fee component from the deal, I can really say, I care about every one of our clients the same. They all pay us basically the same. And our job is to execute a protocol, not to get them close, right? Our job is to do the work we know how to do at scale, hit certain performance metrics, certainly provide a certain amount of value, but everything else is above our pay grade. So, and you know, as somebody from the space, I've built the model.

You can, you can build the model and say, what if we had 10 clients that we got points from and we closed two deals a year for each one of them, what would we make? And then the counter to that model is what if we had whatever, pick a number, a hundred clients that paid us a retainer on an annualized basis. And whether or not we closed anything, we got paid to do the work. And as we look to build and sell this company someday, you know, at some point.

we saw that the enterprise value was going to be in recurring revenue, annualized contracts, not in the lumpiness of points. And certainly there's plenty of really attractive upside in that lumpy point world. But candidly, I make that money elsewhere too. I get lumpy points from all kinds of stuff. We're buying companies outside of CapTor. get my other company. We're starting companies. We're a really entrepreneurial crew. So in some ways as a founder, I have the best of both worlds. have a

Jon Stoddard (18:52.425)
a nice stable company that gets nice midterm retainers from great customers. And then through other avenues, I can do my own deals. I can participate in other deals in different ways. And maybe there's some points to have there, but CapTarget as a branded entity doesn't want to get involved in any of that question of allegiance. We want to just run the protocol, do the work. And if you close the deal, it's because you have a great firm and you know what you're doing. And if you don't close the deal,

It's not our fault. It's, you know, let's look at your process. Let's look at your pricing, et cetera. So long answer to your short question. It's about achieving scale and keeping conflicts of interest and loyalty to a bare minimum. Yeah. How did you, I mean, try to make that decision where you, you know, sometimes it's easy to see that I like, I need to do volume on this because it makes sense. It doesn't, we're not, there's no conflict of interest versus I'll take five clients.

you know, and I make the same amount of money. What was it? What was the characteristic that said I need, it's better to go volume than it's, than just a five, you know, a few clients. You know, I'd like to say it was part of a clear vision we had to build enterprise value and grow and ultimately exit this company. But honestly, that's not the real answer. The real answer is before we started cap target, both my partner Paul Sedowitz and I,

were licensed investment bankers doing classic work here in Southern California. And honestly, just as a guy working out there in the market, the volatility of getting paid on a deal and then having a drought and then having a good year, it was just hard on me. Maybe I'm not cut out for it and that's why I haven't been an investment banker for 12 plus years, whatever.

so it was totally just selfish. I just said to myself, I don't want to chase deals anymore. I want to just do good work. I want to manage a team that does good work. And maybe we can get, make up some of that scratch on the backend with a company that's worth more than the cashflow that would come from these deals. But full honest answer, it was just too difficult for me to live through what some of our banker clients and plenty of your listeners love that volatility of the fight. just, that's not my deal. And it was hard on me.

Jon Stoddard (21:18.571)
And I wanted some more predictable way to build a team and make a living and generate some value. It makes sense. Because it's just pragmatic. How did you decide on the types of clients that you go after? And I'll give you an example. We're put out a proposal to a hundred million dollar IT firm. And you can say, I need to find, they have a goal, send a billion dollar company in five years. Right. So that's.

purchasing indirect and direct competitors that add right on to their top line and bottom line. But there's so many other parts like agency adjacent type acquisitions you could do like media groups, manufacturing for margin, IP, how they get their leads, media infrastructure. Do you get orders for that too or is it just indirect direct?

No, I mean, it gets fairly nuanced, you know, and we all know we're kind of in a bit of a buying frenzy right now, inspired by many things, COVID, some other big economic shifts. So right now we're a little more trending towards look at everything, buy everything that makes sense. And that'll probably change, but ultimately, and not to like assert responsibility or not answer the question, but ultimately,

We're here to do whatever our clients want us to do. And if they want us to get very niche or get real tertiary with the strategy, we absolutely can. I don't want to position CapTarget as just order takers, but in some sense, we have a process that works. It's been proven, you know, thousands of times over, and we're kind of just here to execute it and to help reality check you along the way if it doesn't make sense or if it can be improved. That said,

You you tell us to jump. typically say how high and hopefully we can keep jumping down the road together. Yeah. You know, speaking of the buying frenzy, you notice that the Lehman standard changed to the double Lehman standard now because of inflation. Yeah. I mean, some of it's not even Lehman versus double Lehman anymore. Now there's just, there's a number of groups that are doing just kind of classic fixed fee or excuse me, fixed fixed fee and or fixed percentage.

Jon Stoddard (23:45.293)
without any small print. It's just, five points, period. No cap, no bottom, no expense recoup, basic stuff. There's even been an advent of some really alternative groups that are doing, you know, kind of wacky, fun stuff. You know, there's a couple of groups that'll lease you a car or pay, send you on a vacation or it's gotten, that's not a bad thing. I find it kind of amusing. It's kind of novel, but

the rules are definitely changing and the expectations are definitely changing as a whole marketplace, I think, starts to acknowledge coming back to what we were talking about earlier, that there's no game without the ball and the ball has some cost. Whether that's paying capital target or retainer, paying a double Lehman, I think everybody now understands that you gotta pay for the ball and how people choose to pay for that ball is now a really diverse conversation and I think it's kind of cool.

and I think overall, this is anecdotal. don't, don't have any real data to point to, but we see a lot of activity and we get a lot of the background info. I'm willing to wager that the overall incentive or cost for sourcing a deal on a variable comp basis is increasing. Whether it's single Lehman to double Lehman or some future triple Lehman that we'd never thought would exist or whatever. I don't know.

but it's gotta be getting more expensive or rather the costs are, or the incentives are more aggressive to attract that next deal than say 20 years ago when it was just the Lehman. That was the standard, Lehman still existed. I find some humor in the fact that we use this Lehman scale when Lehman Brothers hasn't been around. It's like the bankrupt. mean, they took them down like, why are we still doing that? Exactly. And I know that had not, mean, they had.

Big, problems than what their Lehman scale was. It didn't have anything to do with anything. But I think it's funny that we all use this bankrupt company that really set this benchmark for how to not do things at a really key time. And that's our anchor point for how we all get paid or don't in Cap Target's case. I think it's funny as hell. So the future, is it all double Lehman? Is it something else? I don't know, but it's gonna be more.

Jon Stoddard (26:10.145)
Totally. It's going to be something other than a standard fee. That's a three, two, one step down with some hurdles. Yeah. So you're able, you've got a lot of skill to create, put the balls in front of people. And when did you decide to make the decision to do this for yourself with Verde Holdings? Tell me about like, you, were you by yourself or with your partner or?

And how those conversations go. You know, another accidental thing I'd like to say there was this great convergence of opportunity and talent and capital, and it made a lot of sense. Probably wouldn't be super accurate before covid. I was partners in a growth equity fund that we we were raising capital and doing that classic early stage conventional committed fund work.

And COVID happened. And I kind of made a commitment to just sort of stay home for a while. mean, early COVID, you I think a lot of us did. And I wasn't super jazzed on getting on a plane and going pitching folks, going to meet placement agents. And it just, I wasn't there in June of 2020 or whatever. I was just going to stay home and work for my laptop. And so my primary partner in that growth equity fund really was

and more power to them really focused on moving the needle then and now. And so we kind of got to this place where I just said, you know what, I got some other priorities now. I'm just going to stay home, go do your thing. It's all good. I'll find something else to do. And almost concurrently with that conversation, a friendly neighbor of mine almost literally knocked on my door and said, Hey, you're the only person I know within blocks of here. I can't hang out with anybody because of COVID. I'm in real estate.

I want to get into private equity. I think you know something about private equity. Can we hang out in your backyard and just talk about private equity? And I mean, as we all can remember, I was just like alone in a room. So I'm like, hell yeah, dude, you want to talk about the work I'm not allowed to do right now because of COVID? Let's talk. And we sat in my backyard and chatted and chatted. And pretty quickly, we got to this place where we said,

Jon Stoddard (28:35.045)
We both have enough capital to be dangerous as principal investors. We both had a great ops entrepreneurial track record, and we're both looking to really deliberately pivot. I was attempting to make that pivot with our growth equity fund, but again, COVID disruption. And we got to a place pretty quickly where we said, well, let's develop a thesis almost as a fun thought exercise in John, my partner in Faraday's

garage. Let's develop a thesis and let's see how much capital would take to hit the return numbers we want to justify doing this as a real thing. Well, so I have to like, what was the original thesis because I talked to a lot of people and they will there. The original thesis definitely looks at even with war above it is original thesis. Totally completely different than it is. Well, ours was for lack of a better term, pretty ghetto. It still is pretty ghetto.

because one of my non-negotiables coming into that partnership was I don't ever want to raise money and I don't want any LPs. No offense to any LPs listening. am an LP. This is not me slandering LPs, but just as an individual, thought I've done enough. I've got enough in the coffers. I've got enough of a track record where I shouldn't have to raise money. And I'm not trying to play a game that requires raising a billion dollars. So we can deal with.

tens of millions of dollars and be okay value. So is that why you guys kind of started off from let's say, five, 10 million somewhere around there? Okay. Yeah, something like that. I mean, it's already we've already tripled the value of our balance sheet, which is crazy. But so we kind of just said, number one, no LPs, I don't want to work for anybody. Number two, I wanted autonomy when it came to committee, I really didn't want there to be a committee. And I told my partner basically, like, look, we're gonna do this, I know how to do this.

And I'm going to need our bylaws and our structure to honor this idea that I'm going to make investments on our behalf and we're going to feel good about it. So that was sort of the selfish part of the thesis was just I want what I want. The second part of the thesis, equally as selfish from both of us, was really just a number. We really just said, whether it's doing one off real estate deals, being an LP in a big conventional fund,

Jon Stoddard (31:03.635)
We know what IRR numbers we can hit without having to do a lot of work. So this needs to be marginally better than that from a return standpoint and from a cash flow dynamic standpoint. So what was the IRR? What did you put right now? 20%. 20%. Okay. Annualized. And which so far so good. And we wanted to be able to cash flow at a level that

both sustained the inner workings of our little team and also created some, a reason for us to do the work on the day-to-day, right? I didn't want to be- Yeah, let me ask you about that. they, so if you bought a company, they had to throw off enough cashflow to support, you know, whatever other investments or, because if you invest in real estate, sometimes you're not going to see, you know, the cashflow that you really wanted. Yeah.

Well, yes and no. So it depends on what type of deals you're doing. Right. So we look at all of our deal, know, pipeline through this lens of how quickly do we start seeing cashflow? How quickly do we start getting de-risk? And so for example, we just did, gosh, in, probably in September, we did a real estate deal in, in Tulsa, Oklahoma, like we were chatting about earlier. And, I already got a check, you know, it's been like 60 days and started cashflow.

We should be totally de-risked in 18 months and be cash flowing for the next 30 years on this thing. And you can't do that with every deal. And certainly you can't do that in San Diego where we are every time. But we really try to put these rails on this thing where we say it's got to cash flow in year one. We count investment year as terminal year zero. So we don't need to make money in year one, but by year two, or year one for us, calendar year two.

We need to be cashflow. We don't need to be hitting a- Let me jump in here real quick about the, was this in Oklahoma? So was this a off market, on market deal, or did you find it through CapTarget or your skills from that? And the reason I brought this up was I had this great conversation with a guy who already built a $250 million company with acquisitions. And I said, well, how are you? And then he lets people go because he doesn't keep the people. And they go, well, how are you finding that? He goes, well, I-

Jon Stoddard (33:27.351)
started an HR company before that and built that up. So it's really easy for me to find people to insert in those roles. Yeah, I mean, with obviously CapTarget doesn't deal with early stage real estate. It deals with classic middle market private equity. So we don't get a tremendous amount of help. Really, we get no help from CapTarget right now here and now. But that real estate deal is an example. The short answer is it came from our network. You it came from a

co-founder of a company we were close with here who exited, moved back to his home market to manage his family office and started doing some really attractive deals out there. Time to time he needs to raise capital. We're kind of one of maybe five investors that participate. And we have a real, you know, people to people trusted track record. We've worked with him for a decade. And so when he sends us a pitch, we make a one day decision.

We look at it and go, does it meet the financial criteria? Yes. We don't really need to diligence the management team because we've worked with them and the markets because we have other investments there. And so we say, So much like your HR example, not as specific, but we have a network that really is deal flow focused that gives us some good access that I don't think everybody has access to. I'm really, we're lucky.

I'm proud of the fact that we have that capability. And I think it's a differentiator. think if we were two retired plastic surgeons or whatever who wanted to deploy, you know, $20 million in cash and turn it into a hundred in five years, I think we'd have a hard time. But, we're not, so we don't have a hard time. I got more deals than I could ever know what to do with. And we really, again, try to look at them through the lens of does it meet our IRR targets? Does it cashflow? What's the risk profile?

So that all said the original question, those first two levels of our thesis are pretty basic or I mean, they're very self-interested basic concepts. Beyond that, we of course get into a more classic portfolio management perspective, 10 % series A or later, 30 % non principally managed out of market real estate, 60 % control private equity, dot, dot.

Jon Stoddard (35:52.417)
very boring sort of four slice equals the whole portfolio blended deal that shakes out to what it should shake Let me ask you, maybe it's a matter of semantics here. Is it an investment or is it an acquisition? Because you can say, hey, I made an acquisition and you could be a non-controlling interest. For I guess, probably is semantics and we just.

use whatever terminology we default to. But for example, the platform that we acquired in the summer is a commercial landscape maintenance company. Some new construction as well in there. You know, that was a classic control acquisition. I think we own 82 % of NUCO or something like that. Where did you find ELE? Also network. was, you know,

This is a little in the weeds, but you asked and you can always cut this and I will take no offense, but. No, I way to bring that up is, you know, there's like, I, if you deploy cold email out, and the return on investment or just the conversion ratio to get one guy talking and having a conversation versus a guy in your church and you say, Hey man, I'm getting old. want to sell. The dynamics are completely different. So I'm.

I understand what you're saying. Yeah. mean, the dynamics on the cold outreach as an example, which cap target is known for, it's what we do. You you hope 20, maybe 22 % of your audience even reads your email or answers your phone call. And of those you hope that maybe a 10 % turn into a lead, right? So what is your net net contribution lead margin? I don't know. It's 0.2 times 0.1. You know, it's, it's a fraction of a percent, right?

And you have to do it at scale, which is why we have a good team and really great technology and a lot of the hacks that we figured out along the way, because you have to scale that effort. And when it comes to your buddy at church, or in this case, we found this company through a, call them a due diligence firm, a management consulting firm that did HR specific due diligence, who had already been retained.

Jon Stoddard (38:15.009)
to help do some value improvement at the people level of this target company. So he was, the firm was already working with this target of ours and they sort of made the introduction without being an intermediary, just, guys, we're working with this firm. Someday they might be a nice acquisition target. And we took a good look at it and.

Talk about network and inside kind of dealings in the best way possible. There, there were some synergies. We liked the target. We looked at it. We got an LOI that everybody liked and the only thing we didn't have. that process. say, Hey, let's put an NDA place. Take a look at your quality earnings and, you know, give us like three or four days and I'll make you an offer. We will. think behind that question is sort of the.

philosophical who are you as an investor or as a fund question, I put everybody into these two really basic categories. The groups that try to determine why they shouldn't do a deal and the groups that try to determine why they or how they could do a deal. And we are in that second bucket, meaning we try to look at every deal through the lens of what would it take for this to make sense?

Right. Let's assume every deal is doable, which of course we know is not true, but it's a great way for us to build a culture around how do we engineer transaction structure and value to make every deal we see turn into a possible positive outcome. Right. We're working with small volume and stuff so we can have this wacky approach. We were looking at 500 deals a year. We couldn't do that. We're looking at 50 a year. So.

We are in the, do we get this done bucket? And that said, we moved pretty quickly. We had probably an intro call with the seller founder and maybe two weeks later had a binding LOI on his desk, which probably took a couple of weeks to sign. And we were in QOE on the second day post LOI signing. And we didn't close as fast as we wanted to. There were some, at the time,

Jon Stoddard (40:39.467)
more specific COVID related availability of professionals and some travel stuff that was still a challenge. But we closed probably 40 days after and started what became a 90 day integration piece right after that. So the deal came from within the network, but you want to talk about serendipity. So this HR diligence company that made the introduction with no participation in the transaction, we ended up of course retaining them to do the

management team analysis and the fit analysis with our company moving forward, et cetera. And the CEO of that diligence firm is now the CEO of our rollout. So he does. this a landscaping firm? I mean, 50 person company. It's been around for 40 years. You know, it's just sort of your classic million ish, she bedock. I mean, you know, nothing crazy, but a good, good little company that had a good brand and

some real legacy stuff going on, second generation, family owned, know, community roots, that kind of stuff. And we got to a point with the, in our CEO search, which was in part being conducted by this diligence firm, where their CEO called me and said, you know, hire who you want to hire, but I kind of want to be the guy here.

I don't need to work at this firm day to day. There's some legacy transfer stuff and I've wanted to become an operating partner for a group and we get along really well. And how about I become your CEO? And we said, okay, pretty much verbatim on the phone. I was like, okay, this guy would be the best guy. I just didn't think he was available to us. And you know, this is a, again, way in the weeds, but so often these days, I think it's

It's less common than it used to be in a job interview where you used to get asked, Hey, John, can you do this job? And you would say, yes, sir, I can do the job. And then it was a matter of, we pay you enough and do we like you? And I think the dynamics of hiring have changed so much that you don't get that binary outcome anymore. It's a lot of, well, I want to need to learn your processes and talk to me about your culture. And I'm not invalidating that, but when we talk to our now platform CEO, Michael.

Jon Stoddard (43:03.565)
I said, okay, you want to be the guy? Cool. But can you do this work? You're not of the space. You're running another company. Can you do this? And, you know, he said, hell yeah. Like no hesitation. He's like, yep, I'll take this company wherever you want me to take it. And those are the guys we like to work with. And I'm really excited that that inside track led to not only my steel flow, but a chief executive operating partner that is really exceeding our expectations.

How did you, mean, real estate in Oklahoma, landscaping in California, completely different metrics, KPIs, how did you guys say, okay, this is what makes the bell ring, let's focus on this and we know we can do it?

There's probably two answers. Number one, if it doesn't work, the answer is we're just idiots, right? Who knows? I'm okay with the idiot outcome. I've had an idiot outcome or two in my life. So just be validating that I don't know what's going on. But the other is a simple decision-making metric that we use to make investment decisions, but also to avoid FOMO.

and some of the funny behavioral stuff that comes along with deploying your own capital. So I invest in stuff I know about, hopefully things that I either am expert in or can become expert in. And to a landscaping maintenance point, I'm not an expert in that, but I am an expert in business service company growth, right? How do we grow B2B service companies? I know how to do that.

It's not rocket lancer, it's not a SaaS company. Totally, there's no development. It's basic, it's trucks, it's guys, it's relationships, it's processes. It's all right. So number one, am I an expert or can I become an expert before we close this deal? And number two, do I care about it? And I don't even mean that from like a deep emotional place. We're not, know, investors focused on

Jon Stoddard (45:16.045)
you know, not impact investors, for example, there's some great impact investors in San Diego, not impact investors. So I don't say care in the sense of, we believe that this will change the world? I mean, in a really basic personal level, do I give a shit about what these guys are doing? Like, do I care? Do I want to hear about this every other Friday on a board call for the next three months during integration? And that said,

I care about a high cap rate multi-unit value add real estate. love that stuff. care about early stage, you know, our early stage local community, cause I've started a bunch of companies here. Do I care about landscaping particularly? No, but I care about growing old profitable, but fairly stagnant companies and turning them into something great. I'm going to ask a question. Your governor.

put a restriction on gas powered mowers. How's that affect your business? I mean, look, it'll be a big cap exit. Most companies in that space, ours included, are already moving to noiseless, battery powered, eco-friendly consumables. Certainly, we have an obligation to continue to improve and minimize our environmental impact, both, again, with chemicals.

We have a conversation about bee protection at this point, noise elimination, fume elimination. The business will be very different. know, landscaping as just a funny aside, there are a lot of landscaping companies that are just about to be for sale or have been for sale. Not that they're all worth buying. And a lot of it is because in the 70s, there were a bunch of innovations to gas powered push behinds, right? Pricing dropped. I mean,

I was not a child of the seventies. I was a child of the early eighties, but I remember pushing for my dad, analog spinning blade mower, right? In the seventies, if you were professional, you could get your hands on some gas powered stuff. So all these kids, entrepreneurial kids started landscaping companies in the late seventies. All those kids are now 65 years old and looking to go do something else with their time. So we are.

Jon Stoddard (47:33.303)
probably at the very end of that last innovation life cycle. And we're gonna have to double down from a CapEx standpoint, from a overall brand positioning standpoint to become a new version of what landscaping is. And I think most groups in the space are, trending that way and we're trending that way too. It won't happen overnight, but give us the 10 years and we'll all be looking a little bit different for sure. So now this is a platform company. Are you looking to do...

like a private equity roll-up in other places, or are you just trying to purchase other landscaping to roll under this one, or are both? Primarily, we're just looking to buy revenue and inorganically grow EBITDA fairly quickly. We'd like to do a build and sell with this platform. However, because we don't have LPs,

because we don't really have a fiduciary responsibility to anybody but us and any bank that's participating with debt. If the company grows and we'd like it to be $4 million EBITDA company in the next 24 months and we're tracking that direction. If it grows, cool. Maybe of that 4 million, we'll have three in cashflow and I'll get to keep half of it. And not to sound gauche, but hey, that's another million bucks in the pocket, whatever, every year. I can live on that forever.

all these other companies, right? What an incredible blessing. But if the strategy works, you know, okay, we're buying at one and a half to three X and we can sell at five or six and there'll be some favorable economics there. But the beauty of our model is we don't have to do anything. And if the market doesn't make sense to sell in, we won't sell. If it does and we don't make the returns we need,

We live to die another day. That's okay. And that autonomy and that flexibility. Yeah. I mean, that's, that's what we wanted. We, we wanted to be able to make the best decisions for us in the context of some really basic rules that we look at all this activity through and just find a way to make it work. and that's kind of what we're doing. It's again, it's kind of ghetto. pretty basic. We make no claims to be sophisticated guys, but it works. Yeah.

Jon Stoddard (49:52.845)
It sounds like you guys share the same value, you and John share the same values as far as what you want to do, where you want to go. mean, was there any conflicts like you say, Hey, but create the construct to be able to solve those conflicts? that kind yeah. We, we, mean, I've lived like any entrepreneurial folks. I've lived through a lot of governance gridlock, right? A lot of.

some pretty, you know, I don't want to say traumatic, but challenging, you know, your best buddy business partner all of a sudden doesn't want to sell the company. And now you have to assert them out of the captain. You know, I mean, all that wacky stuff. I've lived through some of that. I've learned a lot. You know, I used to not have any gray hair. Now I'm just, what's going on anymore. I still feel good. I'm just looking old, but that informed a lot of this partnership.

the Verde partnership with myself and John, and we probably spent what some would consider an inordinate amount of time before anything happened on our operating agreement and on our perspective on governance. And there's some nuance to it as far as how and what can get done if who doesn't want to do this or that or the other. But we kind of came down to this mutual agreement that basically is based on this idea of look if

If you don't want to work with me, I don't want to work with you. And let's just build a structure around what happens if that's the case and how do we make it as light of a lift as possible? So that said, mean, we probably spent a month powwowing on what our, mandate would be. And are we buying landscape companies versus day porter service companies, whatever, but we probably spent four months on.

How do we not kill each other? And much like a prenup, I would imagine, I'm not married, but I've heard all those stories. I think it was good to lay all the chips on the table and say, what if you don't wanna sell, but the offer's too good? What if you stop showing up to work? What if you have a financial hardship and you can't contribute par to what I contribute on the next deal? What happens then?

Jon Stoddard (52:17.427)
And we need black events or yeah. Yeah. mean, we always have to think about those, those black swan things that we don't even what if, you know, and, I think we did a pretty good job. My only expectation is I did a better job than the last time I had to have that conversation with other partners some years ago. but I feel really confident about it. And, as business partners, I think to your point,

Although we're certainly very different people with different interests and different circumstances and different areas of expertise. I think we have a core value alignment that's pretty tight. And I think we have a pretty literal goal alignment around, hey, I need this much money and this much amount of time, or this doesn't make sense to spend all my waking hours doing. And our numbers are pretty similar. And what we care about is pretty similar.

And thus far it's allowed us to be pretty seamless. You know, we're, we're working on this add-on right now that is more challenging than the platform, just because you have just no two deals are the same and we're managing through it well. And we're both quick decision makers. And the reason I wanted to have this autonomy was to be able to look at a deal and in a day say yes or no, you know, and I want partners that I can put a one pager in front of and say,

assume everything here is correct. Assume we'll suss it out in diligence. Do you want to do it or not? Read it at the end of your reading, say yes or no. And this team we have now, both my primary business partner, John Hamby and some of our equity participants and some of the lesser folks that are involved. We all have that commitment to saying yes or no really, really quickly. And that's what I'm all about. I don't know if I'm saying the right thing. I just want to let's, we have a,

methodology here, lean into the methodology, trust it, get in and out. Yeah. I think if you did a Charles Munger and say, you know, inversion thinking and go, you know, what do we need to do to not get the results we want? You just said, practically, this is what we're, this is what we want to do. This is what we want to do. Yeah. Totally. I I had read or I heard some podcasts the other day.

Jon Stoddard (54:39.947)
And I'm not like an Elon Musk fanboy. I'm not gonna really follow what's going on there. Just, I got other things to do in my life. But somebody who is an ex manager or something at Tesla had said something to the effect of Musk looks at every decision through the lens of does it accelerate or inhibit our trajectory to get people living on Mars, right? Which I mean, who knows? If anybody pulls it off, it's probably him. He's got the resources and he's wacky enough to do it.

I don't know anything about that, but I just, I've really valued that strict perspective on every decision we make has to be filtered through this funnel. Ours is again, much more basic, but we do have some little framework and it allows us to make decisions really quickly and look at a deal and say, Nope, nothing there. Don't have to talk about it ever again. No regrets, no FOMO turn the page. Or conversely, very quickly say, if the structure was right, we could do this. Let's try to do it.

and let's swing for just about every ball that gets thrown at us and we'll hit something at some point. Yeah. Where are you at now? How many acquisitions or investments have you made? Well, this year, 2021 was our first year of deploying capital. We've made four or we'll likely have made five. We're in process on one now investments by the end of the year. And that's probably about our tick. You know, if we can buy or do two add-ons a year,

hopefully more, but two add-ons a year, a couple big real estate deals, find a diamond in the rough series A that could 10X and is attractive. That's cool. We don't need to do the a hundred deals a year to hit the metrics we're trying to hit. And we want to keep the team small and involved. again, we want to...

have some level of expertise and add some value to the investments we're making and certainly care at some level about the type of work that's being done. And that allows us to get fairly selective. And thankfully, before we started this initiative, we were both all pretty diverse. I have significant equity, if not control, in three other operating companies that are healthy.

Jon Stoddard (57:03.085)
some minority interest in a handful of other companies that are doing well. I have my own real estate holdings that aren't vast, but I own apartments here and there and a couple houses. And you got your Airbnb hustle and your long-term rental. mean, I'm an entrepreneurial guy. I got some stuff going on, not to brag, but I got a couple little avenues of cashflow.

we don't need the thing to do anything other than hit our targets because we have a, we have a decent little base. And I, a lot of this for me really comes down to that adage of like, and I'm bastardizing the saying, but I'd rather have a hundred percent of something then maybe not, maybe not a, excuse me, 50 % of something then a hundred percent of nothing or 2 % of something and not bashing anybody who's on a two and 20.

They're doing good work and there's some incredible people in the space doing conventional private equity work, not a hater. I just, I don't need another job. And for me, this is less about capital deployment, which is the classic private equity model, right? You got to spend money to get your management fee. This is about capital preservation, right? This is how do I die with a couple hundred million dollars to give to my family and to give to...

charity and the community and institutions. And I'm willing to take a little more entrepreneurial angle on it and take a little more risk, but also pace our investments and just do what we need to do to get there. And there will be times where that means we don't write a check for a year. It probably is coming at some point. Yeah, I've had that answer if you're raising money from venture capital. So, our capital's deployed.

Yeah, I don't I mean, again, that's fine. I just I don't care about that. I don't have any obligation to spend the money that's sitting in my bank accounts. So if it doesn't make sense for us, it doesn't make sense for us. And, you know, I'm kind of like a pain in the ass rogue entrepreneurial guy at heart. And I didn't want to be told what to do. And I wanted to be able to be as dangerous I could with my own resources. And that's kind of the dream, right?

Jon Stoddard (59:21.389)
Let me ask you about that because you've gone through this like entrepreneurs journey, the hero's journey. And so what do you feel is different about who you were and who you are now, how you change, wiser, smarter, or just a different perspective? mean, you know, listening to watching, for instance, like Elon Musk texts and what he focuses on goes, holy crap.

There's a reason he does that. Totally. You know, I mean, my entrepreneurial journey started so young, you know, right out of school with a startup that I, you know, played at, was like the first hire non-founder, but equity holder, which we built and sold. And that was an awesome ride, but I had no idea what was going on, man. No idea. I mean, I was just holding on by, you know, this tale of the tiger kind of situation.

And the work was being done around me and I was hopefully helping along the way, but I didn't know what was going on. And, you know, iterating through managing other people's portfolios as an operating partner, and then working as a banker and management consultant, and ultimately starting, you know, our own companies and now acquiring other companies. I think the one thing that I didn't value nearly enough was the people conversation.

I'm kind of a quantitative guy by nature. like to, you know, my background is in accounting. like to build the spreadsheets. It's pretty basic. I can audit a journal with the best of them, but it took probably too long for me to really understand that none of this matters if not just we have the best talent, but we have, you know, value-based alignment. And I'm not talking about core company value bullshit like that. I mean, we need that. That's fine.

The company has to have some meaning, has to have some structure. But I'm talking about like a cap target as an example, we have this thing called the cap target archetype. And basically it's us as managers making a commitment that every single person that works here has to have these, meet these criteria as a personality, as motivators, as value.

Jon Stoddard (01:01:43.755)
So rather than telling them what's important and then helping them adhere to that, we instead have built the box and at point of hire, we say, if you don't fit in this box, that's okay. You're just not going to be best fit here. And now as we go through top grading processes and hiring, evaluating, the only thing we evaluate on with the exception of some business development type roles are, you fit in the box? Do you have those four traits? And if you don't,

Regardless of tenure, regardless of position, regardless of Gabe likes you, but Paul doesn't like you, but Jim thinks you're awesome. John thinks you're wacky. It doesn't matter. Do they 100 % adhere to the archetype we believe creates a successful outcome? And if they do, you work here forever. And if you don't, again, not a punitive measure, but you're just going to be better off somewhere else, right? Doesn't mean you're not a great employee, a great contributor to a team. It just means our team needs something a little bit different.

and it took me way too long to figure that out, but also tactically, and this is probably a dumb answer, but again, the possible outcome to my whole story is that guy was a total idiot and had no idea what was going on. again, we'll, we'll acknowledge that could be an outcome, but like, honestly, John, don't think I ran an effective meeting until this year. Like it took me to be like 40 to run a good meeting where something got done.

And it wasn't just me talking to people and people nodding and then. yourself talk and I go, I'm so smart. so smart. Totally. It's like, I don't know if that's just cause I'm an asshole or an egomaniac or, just didn't know how to do some of that work. really again, just tactically, like all of a sudden, I think I know how to set expectations better. I think I know how to empower teams a little better than simply dictating work to be done by smart people. And some of that comes, think with,

time and experience. And where else did you glean that knowledge from? Like, you know, a lot of mentorship. I mean, I have a lot of great people in my network that I've worked with over the years. I've also mentored a lot of people, primarily students through a couple of our entrepreneur programs in town, namely, San Diego State's Laban School of Entrepreneurship. And some of it came from that, but a lot of it, you know, I'm kind of a

Jon Stoddard (01:04:08.855)
hard-headed trial and error guy. I think I've just tried a lot of stuff that didn't work and I'm really willing to try again. At all our companies, we tell people, we encourage you to make mistakes. We will never penalize you for making a mistake as long as you don't make the same mistake twice, right? And that's all I'm trying to do is just not make the same mistake two times in a row. And I'm probably totally guilty of still making those mistakes, entrepreneurship, as you know, I mean,

At its core, I view it as a very intimate, pretty painful exploration of self. It's tough stuff. And I'm just good enough to get by. I'm not making any crazy claims, but just getting the good enough to get by, have a little wealth, have a little autonomy, have a little flexibility is a deeply painful process. Yeah.

Which I love, not a complaint, but it's tough. Yeah, and a lot of us have been through it. I'm 60, so I know what that means. Gabe, look, 107, over an hour went by. I really, really greatly appreciate your time on this. Likewise. I love the talk shop. I think this is awesome. What you're doing is great. we need more of this community focused.

open kimono conversation in this space because this space was so closed door for so long that I love that we're blowing it up. Such a mystery. they only, you know, so like these five people could do it. No. Yeah, no, we can all do it. And I think the more the merrier, there's plenty of space for all of us to try to apply our trade out here. And in a lot of ways, I think this is the highest and best application of some of these.

you know, whether it's stuff we learned at school, whether it's old school American dream stuff, which I don't know if applies too much anymore, but I still believe in a lot of it. It's a great application of all that stuff we got. And I think we should all embrace each other as we go through this, you know, learning painful introspective trial and error. How do we play the big game? And I'm excited to engage with anybody who's trying to do that. Gabe, thank you so much for your time today.

Jon Stoddard (01:06:32.695)
Thanks, John. I appreciate it. Cheers, man.