MBA Masterclass Models Of Entrepreneurship Through Acquisition

Rachel Waites: Hi, everyone. We're just gonna wait for a few more people to join and then we'll get started in a couple of minutes. Thank you. Hi. I think we'll get started 'cause I don't want to eat into Brian and Mark's time too much. So welcome, everyone. My name is Rachel Waites. I'm the Director of Admissions for the Chicago Booth Executive MBA Program in London, here in the United Kingdom. So on behalf of the executive, full-time, evening and weekends MBA admissions teams, I'm really pleased to welcome you to this Masterclass featuring Professors Mark Agnew and Brian O'Connor. So before I introduce Brian and Mark, there's a couple of housekeeping items. First of all, please use the Q&A box to ask any questions that you might have and you'll see it there on the screen. And also if you need to adjust the size or view of any of the documents, at the top of your Zoom screen you'll, you can click "view options" and then hover over Zoom ratio to adjust if you need to do that. OK, so tonight, we hope that you'll experience two key components of the Chicago Approach to business education. Firstly, where you're gonna see that our data-driven approach teaches you to ask the right questions and think more strategically and analytically. So in true Booth style, we really encourage you to get involved and ask questions. So feel free to type your questions throughout in the Q&A box. And there'll also be some time to ask questions at the end as well. And then secondly, you'll get to experience our collaborative community. So at Booth, you'll join a group of students, alumni, staff and faculty who'll be there for you throughout your MBA and beyond. And that same faculty teach across all of our MBA programs at Booth, including on our campuses in London and Hong Kong. And they truly become part of your network. So it's great that you'll get to experience some of our world-class teaching faculty tonight as well. So tonight you'll hear from, first of all, Mark Agnew, who's an adjunct Associate Professor of Entrepreneurship here at Booth. Mark earned his MBA from Booth in 2006 and spent 12 years in investment roles at Dixon Midland, Glencoe Capital and Deutsche Bank. He then joined Lou Malnati's Pizzeria in 2011 after formerly working there at high school. And he led the company through significant growth for almost a decade. So when Mark was CEO and president, the company employed more than 4,000 people and operated 58 locations throughout the Chicagoland and Phoenix areas. And Lou Malnati's was actually ranked as a top workplace for eight years in a row by the Chicago Tribune. He's joined by one of his former classmates, Brian O'Connor, who's also an adjunct Associate Professor of Entrepreneurship at Booth. So he graduated in 2008 from the full-time MBA. He's the founder and managing partner of NextGen Growth Partners. So that's a lower, middle-market, private equity firm that partners with talented entrepreneur operators to acquire and build great companies in growing industries. And prior to founding NGP, Brian served as co-CEO and Head of Business Development of Innflux, a hospitality-focused IT service company. Innflux was sold to strategic buyer Thing5 in January 2015 after 3 1/2 years of significant growth. And actually Brian became involved with Innflux after acquiring the business through his search fund Fellowship Capital Partners in 2011, which is quite significant based on tonight's topic, I think. And prior to founding FCP, Brian was Vice President with Equity International, a middle-market growth private equity fund as well. So with that, it's my pleasure to hand over to Mark and Brian. Thank you, both.

Brian O’Connor: Rachel, thank you so much for the kind introduction and it's an honor to be here with all of you chatting about a topic that is near and dear to both me and Mark. So this is a really special opportunity for us. In true Booth spirit and in the spirit of our Entrepreneurship Through Acquisition course that we teach at Booth, we like to keep this interactive. And we understand with a group this large, it might be a little bit more challenging to do that but we're going to try as best we can. So as Rachel mentioned, please, as we ask questions of the group, weigh in and share your thoughts. There's two of us here and, there, we'll do our best to monitor the chat function and all the insights that we get from this group. But we do have four very brave souls that have volunteered to stay engaged throughout our session. So I'd like to offer a thanks to Evelyn, Andrew, Matt, and Antonella periodically, yup. Round of applause for being brave and getting involved. Periodically, we'll ask you to unmute yourself and turn on your video so the class can hear from you and we can take a Socratic approach toward the learning that Mark and I, and the environment that we like to promote at Booth. So with that, Mark, do you anything to add before we jump in?

Mark Agnew: Let's jump in.

Brian: Let's jump in. All right. So right out of the gates, we'd like to start our courses is by getting the students engaged and with a cold call -- this one's a little bit manufactured -- but Evelyn, why don't you unmute yourself, turn on your video, and what we'd like to know after preparing the reading on models of entrepreneurial acquisitions is: What does entrepreneurship through acquisition mean to you?

Rachel: Hi, Brian and Mark. I don't think we have Evelyn yet, unfortunately. But I see Matt is there. Maybe you could ask Matt.

Brian: We'll move on to our next brave soul, Matt Repplinger. What does entrepreneurship through acquisition mean to you?

Matt Repplinger: Yeah, thanks Brian and Mark. I mean, after going through the reading, I think that what it kind of means is, it's a way, it's a process for, you know, maybe somebody who doesn't necessarily want to do something like a startup for them to still get access to an operator and a CEO role -- and more importantly, to be that ultimate leader of a company. So this is just a conduit to get there, I think for them a lot of times.

Brian: Yeah, an interesting approach toward entrepreneurship that may, where the entrepreneur may not necessarily have it in their DNA or in their risk tolerance to try to start something from scratch, find your first dollar of revenue, define your market; an opportunity to lead -- I heard leadership in your response -- to lead an organization through its next phase of growth, but perhaps not take on all the risk associated with starting something from scratch.

Mark: There's a lot of classes that focus on startups at Booth, and they're taught by world-class professors. This is another avenue to pursue entrepreneurship and we are big believers and advocates of knowing what your strengths are as professionals. Some people are really good at creating and executing startups. Others, like Brian and I, our strengths are more around leadership, investment theses and execution of the growth plan.

Brian: Antonella, I'd like to invite you into the room as well. What does ETA mean to you?

Rachel: Hey, Brian and Mark. I'm really sorry but Antonella is not here either. So at the moment, we just have Matt.

Brian: OK!

Matt: I'm ready.

Rachel: So I feel sad, Matt's gonna be on the spot a lot.

Brian: We're gonna wear you out, Matt but ... as I shared the beginning, please feel free to literally use chat function. We wanna get the group involved and engaged in what we're talking about. OK. So: really nice response, Matt. A lot of what you said resonated with me. For me, what ETA means to me -- and what it's meant for me over the last decade-plus that I've been involved in this model of investing in business leadership -- is the opportunity to acquire and lead a small business at a relatively young age and generate a compelling economic and professional outcome for you and the investor group that you surround yourself with. That's, that's what gets me excited about ETA. Mark, how about you?

Mark: I agree with that. We often debate as co-professors in this class but I agree with Brian on that. But also, it was an opportunity for me to create a culture to hire and promote employees to impact your community at an early age. And it's an opportunity to really have control of your calendar. You know, that's a different mindset than traditional other approaches that the MBA students go down.

Brian: OK. So great! Why don't we jump into some research and some data? We're all about the data here at Booth. So according to the research on search funds -- and all of you have read and prepared the models of entrepreneurial acquisition piece that we shared in advance, we're gonna operate under that assumption. But one of those models, as you read in the piece is a search fund. And we'll talk a little bit about what that is, but according to the research on this particular path within ETA, the asset class has generated a very impressive internal rate of return of 32.6 percent since the first search fund was formed back in 1984. If you exclude the top three outcomes, these are massive successes and if you exclude those data points from the set, you're still at a 28.5 percent internal rate return. We're going to talk about this data set as a proxy for broader ETA outcomes but know that one of Mark and my priorities in the broader Booth and Polsky Center Community at Booth, is to further advance the research and the data set to include other paths toward entrepreneurship through acquisition so that data set is all encompassing.

Mark: And this industry is rapidly changing and growing. And so we have an opportunity as Booth faculty and as members of the Booth ETA community to really lead the way in terms of research in multiple other avenues of this community.

Brian: OK. So there's an analogy that's used when talking about the key components and drivers of this really attractive level of return. And the analogy that's used is a horse, a jockey and a trainer. And in this analogy, the horse would probably include things like the industry, the company, the deal that you're able to structure for that particular acquisition that you will then lead after the fact. And Mark and I actually teach a framework in our course that embodies the evaluation of industry, company and the deal -- that will obviously, for those of you that decide to matriculate and take our course, we'll get very deep into that framework. But maybe let's use the chat function real quick for those of you that are on and engaged. What do you think you might look for when evaluating the attractiveness of the horse that you might wanna ride as the jockey? So, you know: industry attributes, company attributes, deal attributes -- what's gonna be important to you when pursuing this path? And Mark and I both will do our best to monitor the chat.

Mark: I'm trying to.

Rachel: Can you guys see the chat? This is Rachel. There's a bunch of good answers coming in.

Mark: Oh, Rachel, why don't you --

Rachel: Shall I read you some? Chemistry, cash flow, low cost, high reward.

Mark: Well cashflow, so that's very good 'cause we emphasized free cashflow. And cashflow, as it relates to the structure that you buy into.

Brian: So one of the things -- and the research supports this -- but these companies are typically small but stable cash-flowing businesses, OK? So like, people like to talk about you EBITDA. We like to use EBITDA occasionally as a proxy for free cashflow -- but at Booth, cash is king and we talk about taking EBITDA down to the free cashflow level. So these are typically businesses with really strong EBITDA margins that then lead to high free cashflow conversion. And just to give you a data point median across the search fund model -- remember that one path? -- at time of acquisition is effectively a growth rate of 15 percent and $1.8 million in EBITDA. Again, a proxy for free cashflow at time of acquisition. Great. Rachel, what else did you see on there?

Rachel: There's a lot of people talking about growth, so... yeah --

Mark: Growth is a very --

Rachel: Potential for growth, I guess.

Mark: So we talk about growth as an industry-predominant characteristic. If you're in a growing market, we say rising tides lift all ships. So we focus on really identifying an attractive industry that has a lot of tailwinds of growth behind it.

Brian: And I would say that there is, there are cases in models of investing where you as the investor, or the jockey in this analogy, can bring things to the equation that will improve your growth rate within any company that you acquire. We talk a lot about those in our class, but we're big believers in buying an asset that has a history of profitability and growth in an industry with some growth tailwinds behind it to maximize the likelihood of your success in this endeavor. Very, very good observation. Thank you for those of you that shared it. Rachel, what else?

Rachel: A lot of people are talking about market. So a few people have mentioned Porter's Five Forces but also market trends, total addressable market, market-related stuff.

Brian: Great! I love that before they've even come to Booth, they're talking about total addressable market or TAM. We talk so much in this class about TAM. And what is your opportunity for growth when you acquire this business in the context of your market size? Your playing in a small TAM can be a limiting factor to the ultimate growth that you achieve over your leadership of a particular company. We talk about, we differentiate between TAM, total addressable market; and SAM, which is your serviceable market. And there are certain businesses where TAM might be a more appropriate metric to think about. And SAM, largely footprint businesses where you have a geographic definition around where you operate, that that metric might be more appropriate. Very good. Size of TAM and attractiveness of TAM, that's great.

Mark: And the growth behind the TAM and the growth and the margin profile of the company that you're looking at. Very good. Rachel, anything else?

Rachel: Not many people have mentioned it but a couple of people have mentioned management team.

Brian: Management team. OK, great! So, you know, Mark and I actually leading up to call had a little bit of a debate about this. Remember: In ETA you will become part of the management team post-investment right? And we're gonna talk about that in a second year, the jockey in this horse, jockey, trainer analysis, right? So you might put incumbent management team as part of the horse, or maybe part of the jockey in this analogy. But I think that's really good. You're not the only man or woman that's going to be joining this organization. You need to think about those people that are going to be around you and will, you know, work alongside you under your leadership to take the company to the next level. I love that.

Mark: Yeah, and a lot of opportunities in ETA, the community happens as a replacement of the current founder. So the current founder is looking to retire or transition from their current operating role. And the professional that is buying the business will become the CEO to lead the business going forward.

Brian: OK, really nice job, class. Those are all awesome observations. I think we hit on a majority of them. The third bullet down -- low share of wallet, mission critical, B2B service -- those have become the most appealing targets in this ETA path. These are companies that serve a mission-critical need, representing a low share of annual spend on that client company's P&L. Often, it's a B2B service that's highly sticky, hard to replace and generates what we describe as high-quality revenue, right? Revenue that has the opportunity to stick around for long periods of time. Maybe under a long-term contractual relationship, maybe under a very predictable and repeat method of purchase. Mark and I collaborated with some of our colleagues on a white paper called "On the Nature of Revenue." If you're interested in this notion of quality of revenue, we'd encourage you to find that piece. But we spent a lot of time talking about the quality of the revenue. Low customer concentration; again, you often find in these small businesses that you can be beholden to the whims of your customers in the event they represent an outsized proportion of your overall annual revenue. So avoiding situations where you have a meaningful amount of revenue coming from any one client or any one decision maker. We talked about small, stable cash flows. We talked about profitability and growth. Low entry multiples. So the median across the search fund data set is six times trailing 12 months EBITDA. You know, typically when we talk about these types of investments across all of the various paths we're talking about, you know, somewhere in the order of maybe if you find an interesting opportunity at three times trailing 12 months EBIDA all the way up to maybe six or seven in the event it's more attractive across a couple of these metrics or a higher growth prospect in front of that particular business. Why don't we, Rachel, do you see anything in the chat? And maybe this isn't fair because we haven't posed the question to the group just yet, but anything on the jockey? What does the jockey in this analogy mean to the students that are dialed in here?

Mark: Well, I'm reading chat from Michael. He said, "Jockey quality is our management team, tenure, past assesses, industry affiliations, secondary band strength, board reach, culture and align incentives."

Brian: I like that. I think that's really great, Michael. What about: Remember you, all of you on this call, are the jockey in a certain sense. Right? This is not traditional private equity in the sense that you will take an operating, very likely the CEO position of this business post-investment. What is the ideal profile of that jockey look like? And I'm sort of asking you to describe yourselves here. So it's a little bit of an unfair question but any observations to offer there?

Rachel: Hey Brian and Mark, sorry as well, quickly: We've got four people now that you can call on. I don't know if you can see them there on the right-hand side but there's Matt, Patrick, Chris and Andrew. Just if you'd like to, you're very welcome to do that as well.

Brian: Thank you, thank you so much Rachel. Very good. Well, Chris, let's invite you into the room. What is the jockey -- maybe both, you can feel free to answer either one: the jockey or the trainer, or there's some relationship between the two. Why don't you join in and if you're able to turn on your video or unmute yourself, please join us.

- [Chris] Sure; so in terms of the jockey -- and I think some folks have mentioned this in the Q&A -- a lot of that has to do, I think, with the culture of the company that you're gonna take over, you're gonna run. And so you, as the jockey, are stepping into an organization that is gonna look to you for leadership. And so I think part of that is your confidence going in, and that may be built off of a lot of the factors we already talked about: your confidence in the business itself, but then also your confidence in your ability to run that business, which will be immediately apparent, I think, to the employees -- at least the ones close to your level of management. And so if you come in confident that you think the business is going to be successful -- which, you know, I hope you do if you're taking over the business -- that'll have I think a pretty big effect on how those employees, how those people you're leading will look at you in terms of their new leader, moving into that market or navigating that market that you're already in. And then in terms of the trainer, I kinda see this based on the reading as, in some sense, those investors that may be providing some mentorship to you as you conduct that search and then transition into the business that they've now invested in.

Mark: I love that. Chris, that was a great job describing the jockey and the trainer. When we talk about the jockey, we talk about the attributes that make a successful jockey in this community. And confidence is critical but with a servant mindset: serving your employees, having humility, being curious, not being right, learning the business, and then partnering with your employees to grow the business. That's what we do a really good job at Booth, is really ... identifying attributes and working on our attributes as a Booth community.

Brian: And I saw a good question in there -- and just to clarify, in the event that there was remaining confusion around this -- the jockey, the main context of talking about the jockey here in this study and in our teaching of this topic, is that, the entrepreneur that endeavors to go buy and lead a company. That's the principle jockey that we're talking about. So early career, coachable -- confident, but coachable -- I talk about confident humility and the ability to surround yourself with people that can help your organization, whether they be advisors, employees. And I love Mark's terminology of servant leadership. Those are the folks that you find make the most successful jockeys. And they're business athletes. They can step into situations and figure them out, right? They're nimble, they're quick on their feet, and typically, they're post-MBA: and if I might, they're post-Booth.

Mark: And we, our main model, our main takeaway from our class, is what gets measured gets done. We wanna use our analytic attributes to inform decisions in business and inform the people-decisions business.

Brian: OK Patrick, I want to hear from you because you've been so brave as to volunteer. What are you looking for in a trainer? And then we've got a quick poll and then we're gonna move on in the interest of time. Patrick, what type of trainer or trainers are you gonna wanna surround yourself with in an ETA journey?

Patrick: Great, thanks for having me. First off, to answer your question: What I'm looking for in a trainer is somebody who's a connector. Somebody who, you know, might not -- who's thinking two steps ahead of the jockey. What is the horse gonna need? You know, what's our schedule? I know if I'm the trainer, I don't wanna just be running at Arlington Park. I want a scalable business. I wanna end the fall in Saratoga, you know. So looking at that growth mindset.

Brian: Patrick, nice play on the analogy!

Mark: Yeah, right. For those of you that aren't in Chicago, Arlington is the track here. That's great, Patrick.

Mark: Saratoga Springs, what horse race do they hold?

Patrick: They hold the Alabama Stakes for female horses, as well as the, the really big one, the Travers at the end of the year: what they call, "Where the great horses go to die." 'Cause you win the Derby, but you often lose in Saratoga.

Brian: That's awesome, Patrick! All right, so mentorship. I heard a lot of this in your response, Patrick -- but mentorship, accountability. Remember you're early career, you're a business athlete but you probably haven't, to play on our analogy, you probably haven't been around the track as many times as some of these other trainers have coached horses and jockeys to do so. Relevant investing operating and industry experience. Willingness to invest time in you as an entrepreneur. And then obviously, those of you that understand that the model whereby these are also often your investors; you know, capital and the ability to fund your acquisition at the time that it becomes relevant.

Mark: Booth has world-class faculty in that we'll teach students how to tilt the odds in your favor with the horse, the jockey and trainer. Professor Kaplan; Professor Schrager; Professor Dube, pricing; Professor Altman for operations; Professor McGill for marketing -- they are world-class faculty in these fields that will help you be a successful entrepreneur. Mitch, why don't we launch a poll for the whole class to take: What is the most important component of horse, jockey, trainer in equity value creation: the horse, the jockey or the trainer?

Brian: Wow, this is, this is interesting! We're seeing the results come in. I don't know if the participants can see them as well.

Mark: So let's publish it. It's pretty much split between the horse and jockey. The trainer gets about 20 percent of the students' survey. Our opinion -- and this is really, this class is about opinions rather than being right or wrong. We quote Warren Buffett saying, "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it's the reputation of the business that remains intact." And Professor Steve Kaplan wrote a piece published in 2009 about the jockey or the horse. And he really believed that the data supported the horse more than jockey.

Brian: And for those of you that are interested in reading on it, we would encourage you to investigate. It's called "Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies." Check it out. It's a really great piece. There are a lot, there are a ton of great investment strategies out there. In ETA specifically -- given the components that we just talked about of horse, jockey and trainer -- it is our belief and our recommendation that buying a good business, the fundamentally sound business in a strong, healthy and growing industry, is the key determinant of ultimate success specifically in ETA.

Mark: And we will, we go through the painstaking detail of how to identify these attributes of successful and unsuccessful searches.

Brian: And I'll make this comment. Mark is a much more talented operator than I ever will be. But as a young CEO you make a ton of mistakes, or at least I did.

Mark: So did I.

Brian: And so to have this safety net of a fundamentally sound business that generates streams of recurring and highly predictable revenue in a growing industry with tailwinds -- boy, does that give you a fighting chance to work through some of the mistakes that you're inevitably gonna make as an early-career operator that I most certainly made.

Mark: why don't we launch the next poll, Mitch? What do you think is the worst outcome that you can get in the ETA space is? A no-deal, less than two times return of capital, or more than two times return to capital? I think more than two times return of capital should be zero with this class.

Brian: We'll give the 6 percent or the 5 percent that's coming back with that response. Benefit of the doubt of maybe not knowing what MOIC. MOIC is multiple on invested capital. So clearly, that's not the right response. But I, I like this. And Mitch, are the results published? So 2/3 of you said that returning less than two times multiple uninvested capital is the worst outcome. And that happens, by the way, a third of the time as you can see from this pie chart here. You've got about a third of the time where an ETA practitioner -- again, based on the search fund path alone, the data points in the search fund -- about a third of the time, you conduct a search and you come up empty handed. That, our belief, is not as bad as endeavoring to buy a business that then returns less than two times invested capital as an ultimate outcome. You've spent more time. You've probably invested in a move to the geography where that business is located. And that company -- you know, and again we can drill deeper into this data, about half of those data points in that third returned less than one times investor capital. So there was equity value destruction in half of those cases. And then half of the cases was between one and two times multiple investor capital. But we agree with the class here. That's really the scenario whereby you've not achieved the type of economic outcome or professional outcome probably that you or your investors signed up for. And that would be the bucket to avoid.

Mark: And we will go through detail frameworks to try to prevent our class from falling into that bucket. Some of which you can have control over and some of which you can't have control over.

Brian: OK, great. So I'd like to now transition into the reading that you all prepared and based on the comments that we're getting and the responses, it seems as though this group is very well prepared. But Matt R., I'm gonna invite you into the room. Why don't you weigh in on this question that we've posed here in the context of the case. What are the merits and drawbacks of each of these paths, right? We just talked about the data associated with the search fund asset class but there are a multitude of ways to go about doing this. And there are three that are profiled in this models case that we like to talk about. What are the merits and the drawbacks, and worth considering: our infrastructure, availability of capital, autonomy/control of your destiny, economic considerations. And then, you know this, the trainer -- the advice and mentorship you get from those around you.

Matt: Yeah, was there one you wanted to focus on or we just touching on all three?

Brian: You pick your path, Matt.

Matt: OK, gotcha. Yeah, I mean, we can start with the first one in there was the search fund, traditional search fund with Braun/Robinson. And I'm pulling up just some quick notes I had on there -- but I mean, so some of the benefits there is that when they're going into it, they at least had a team structure. And I know, like, they kinda felt like they could play each other's devil advocates and play off each other. And I thought, at least going into it, that was a good component and it seemed to work out with the two of them. I think in another section, we read about another search funder who partnered up as well, or at least tried to as the, I think it was the Harvard business alum tried to and didn't work out. But that seemed to be a benefit. And then, you know, additionally it seemed like they thought that it was all-consuming, though, however, the traditional search path fund. You know, a lot of reliance on them, they didn't have a private equity firm to sponsor them, provide deal flow and things of that nature; the M&A experience, necessarily. So I thought that that was kind of an area that they lacked in. To be honest, that's kind of what I had for --

Brian: Well Matt, Matt, Matt -- that's great. So you mentioned, you know, the team dynamic in this search fund, right? So you can go about a search fund individually or with a team. And so Braun and Robinson in the case decided to partner up and there's some interesting dynamics that are profiled the case around compatibility, complementary of skillsets, right? Those are important things. But just to juxtapose that response to maybe Callahan -- I'm sorry, Sanabria -- in the case who went a self-funded route, didn't it feel, Matt like, he was maybe a little bit more of a lone wolf and didn't wanna surround himself with others or a team, or get outside perspective?

Matt: Yeah.

Brian: Did you get that sense from --

Matt: I did, yeah. And I kind of got the sense that he probably wouldn't have operated as well if he had a partner. Right? Just who he was. I think that -- and it seemed like he, at the end of, you know his kind of experience, he kind of reflected and he mentioned that he kinda wished that he had a better board of directors and things, or he had gone larger, I think it was he said. So he could have even had more middle management and maybe had a higher, even more strategic role for it.

Mark: Yeah, really great. I appreciate your insights there, Matt. Hey, Andrew: Why don't you weigh in maybe on a couple of these categories that Matt maybe didn't cover as much?

Andrew: Hey, can you hear me?

Brian: We can hear you.

Andrew: Thank you. Thank you for the event. Yeah, so really interesting article I was reading last night. I think for self-funded, I think some of the merits are that since you put up your own capital, you don't have to rely on investors. You don't have to call them every week and update them on their business. Sort of you get to control your own destiny, so to speak, depending on how much ownership you have. The drawbacks probably be more like you don't get the advisor. You don't really have a group of teammates to rely back on in terms of advice. But then for the sponsorship search, you do get that VC or that private equity company that is backing you with deal flows, ideas, and sort of having that brand recognition also helps in terms of when you're managing a business.

Brian: So yeah, really great, Andrew. And I'm looking at a post here from Nicholas Perkins. So pros on the search: Maybe lower risk, right? You can get paid while executing your search, so it doesn't have to necessarily be out of your bank account while you're executing a self-funded search. And the ability to maybe do a larger deal might exist because of your capitalization in a search fund setting or definitely in a sponsored search where there is things like infrastructure and committed capital. Really, really nice insights here.

Mark: I wish we had like three hours with this group. We could really have an engaging conversation with you all.

Brian: This is great.

Andrew: Wouldn't it be hard, though, for people just out of MBA to do a self-funded search since you knew that initial capital or how popular is that choice?

Brian: It's a good question, Andrew. My take on it is you do see it occasionally when someone has maybe a little bit of personal savings or a backer, and that is not necessarily self-funded. But we've had students that have made investments on behalf of their family sort of thing. Or you often see that those self-funded deals tend to be a little bit smaller. So we say your deal size flexibility, which basically means the ability to kinda flex down because your investors don't have the expectation to write meaningful equity checks for the deal.

Mark: And usually, it's usually like three to five years post graduating from business school. At least the students that we taught in our class, they pursue this self-funded route three to five years, post graduating from Booth.

Brian: You know, one thing that was mentioned in one of the chat comments that I'm trying to follow along with here -- but the market determines the deal economics, right? So you might have a control equity position even if you raise outside capital at the time of acquisition. Remember, self-funded means for the search period. For the pursuit of that acquisition. It doesn't necessarily mean that you might not raise money to effectuate the ultimate investment. And so the market, there's flexibility in the terms when you go out to market and raise that capital in a way that the economic package is a little bit more prescriptive in the search fund and in the sponsored search model. I think you guys did really great at this.

Mark: What about William's question? That would be a good question to answer. He comes from a non-traditional background: "What class and skillset are most important to learn at Booth to prepare for ETA?" That's a great question 'cause everyone comes in to Booth -- or not everyone -- some people come into Booth thinking that you need to have a private equity, an investment banking background. ETA really is about attributes and mentorship and humility. So there's a lot of classes within Booth to help you identify and structure transactions like Steve Kaplan, for example, Professor Steve Kaplan. There's a lot of classes in Booth that help you with operating a business like Waverly Deutsch and Ann McGill and Jim Schrager and Jean-Pierre Dube. And there's a lot of classes that help you with your leadership -- Nick Epley for designing a good life. Those all are classes offered in Booth that will help position you to be a successful entrepreneur if you go this route.

Brian: It's a great question. Real quick, just to round out the conversation on these models: In a search fund, you've raised some money to conduct your search from accredited investors that will represent and appear to have committed capital and therefore, when you are trying to convince a business owner to sell you their business, you have the appearance of committed capital -- though they have the right, but not the obligation, to fund the ultimate acquisition. And then finally in the sponsored search -- you all touched on this -- one of the delineations based on what I just said is that there is a committed pool of capital that a business owner would, could get more comfort with that you have the ability to actually fund the investment.

Mark: We're teaching our eighth year at Booth and these -- switch slides -- these are just highlighting some of our successful students within the Booth community. They're all different models of ETA. They're all great people. And we've innovated a lot as Booth ETA Community with the long-term part of the community, as well as a mentorship community. A lot of people aren't, they don't think they have the tool set and the skills and strengths to take on this risk right out of business school. So they get the COO position or the chief of staff position at these businesses. And then they build their skill sets and their confidence level to then take on an operating role as the CEO in this business.

Brian: And Linda is a great, a great example of that. She, you know, wanted to take a chief operating officer role in this apprenticeship model, which I think that Booth is on the cutting edge of continuing to innovate on these paths, right? So Sam, in the long-term holding company model whereby he anticipates owning a small portfolio of businesses over a very long decades, measured in decades-type approach, super cool and super innovative. Charles graduated in 2017 and pursued a self-funded. Rock Irvin in 2009 preferred, went the sponsored route. Monica Weaver, '07 graduate, a search fund. Sam Duprey, a 2016 grad. And then Linda, finally, a 2019 grad. And all these folks came from very different and diverse backgrounds.

Mark: And we have them lecture in our class and provide real-world, real-time experiences as they are pursuing these different ETA models.

Brian: All right: In true ETA form, we're gonna wrap up with three takeaways. Normally, we get our students in the class engaged in curating their own key takeaways from our session. But we'll just leave you with these three for today. Build your ETA community at Booth. It's so important as the jockey that you get the right trainers and advisors and mentors and peers, and your network around you is so important. And that network at Booth has become extremely robust over the years. There are many paths to ETA. Choose or craft your own. Choose the right one for you, and your strengths, while acknowledging the skillset gaps that you need to solve for on whatever path that you choose. And as an ETA jockey, win the race by buying a good business in a good industry at a fair price. So focus on the horse and surround yourself with the right mentors that in our analogy are the trainers. So with that, we've got, I think some time for Q&A. I think we'll invite Rachel back into the room to curate some.

Rachel: Yeah, there's loads of questions, which is good and bad 'cause we've only got 13 minutes. There's a question that's coming up in different forms but I think it's essentially the same question. Somebody's asked, well Hosha has asked, but many people have asked the same thing: "Can you elaborate on why early career is a desirable attribute for a jockey? Wouldn't a CEO with more previous experience be able to draw on their learnings?" Any thoughts on that?

Mark: Yeah, go ahead.

Brian: So in my experience, it's the early career business athlete that can go into one of these small businesses with an acknowledgement that they don't have all of the right answers and want to surround themselves with the right trainers, and marry that with a high degree of executive function and energy and ability to run through brick walls, to get things done -- while acknowledging that they might not have all the right answers in a way that someone that's later in their career might think that they can bring their playbook and it can be applied in each of these very unique, small businesses. And I think that that can be a hindrance to their success.

Mark: And the size of the deal. I think if you've got someone that has 20 years experience, they probably wouldn't play in this sector per se. And the geographic limitations. When you're older, you wanna stay where you develop roots. The successful searches have a geographic -- they can go and operate a business anywhere. So I would say that those are some of the considerations. But ETA is expanding, growing and there's been some successful searches with people in their 40s, 50s and 60s.

Brian: Are you calling us old by having our roots here in Chicago?

Mark: No, I'm saying.

Rachel: OK. Well, I guess a similar question on the other end of the spectrum is from Charles. And he says, "How can we as young entrepreneurs persuade angel investors to inject money into the company, 'cause most investors don't trust young entrepreneurs, claiming their lack of experience to be reason for their refusal."

Mark: That's what we teach.

Brian: I think about investors in this model coming in two principal buckets: those that know you extremely well, and those that know the model extremely well -- and trust that the model has been designed in such a way that you have the right infrastructure, support, mentors, guardrails around you to be successful in this endeavor. So in my experience, the best investor base for a model like this is those folks that believe in you as an entrepreneur, and those folks that have tried-and-true and tested returns in investing in this space.

Mark: And this is a really collaborative community. So if you have the attributes of curiosity, hard work, grit, analytic acumen, they'll surround you with, the jockey, with the mentorship for you to succeed. But it all starts with buying a good business. That is what we try to teach in our class.

Rachel: Great. So another question that's come up by a few people is, "Given the desired horse trait of stable, predictable cash flows, do search funds usually focus on B2B rather than B2C in your experience?

Brian: Short answer is yes.

Mark: Because it all comes down to the quality of revenue. B2C has a harder time to create predictable revenue, which translates into predictable free cashflow. And some B2B, there's some models in B2C that are really attractive. But most, most of the "down the middle of the fairway" ETA deals are B2B.

Brian: That's right. There's exceptions to every rule. I would love to buy Netflix, which is a B2C recurring revenue model at six times, but that's not available. But yes: Historically the highest quality revenue, at least as we define it, usually is in those B2B models.

Rachel: Mmm hmm. And here's one that I don't know if I'm gonna pronounce it properly. I probably won't. Has the prevalence of, is it SPACs or S-P-A-C changed the ETA model? And a couple of people have asked that as well. I don't know what it is, perhaps you could explain.

Brian: Well, a SPAC is a special purpose acquisition company that's publicly traded. They have been quite hot of late. Mark and I have had the number of conversations around the SPAC craze. Has it changed anything for ETA? No. It's a different target profile. It's playing in a much different part of the market than where ETA is. But it is decided, it is for sure a crazy phenomena of like --

Mark: Yeah, and I mean this market, the ETA community and the size deals are really like $10 million of existing revenue to like 25 or tops, 50 of revenue. SPACs target much bigger companies.

Rachel: Mmm hmm. I like this question. I don't know if you're gonna know the answer. It says, "Are there statistics on whether search funds with more experienced founders are more successful than those straight-out-of-business-school search funds?"

Brian: That is a very good question. It gets my wheels turning on a research piece -- so now I'm looking at Mitch -- a research piece that we should think about at Booth. I don't, I don't even have --

Mark: You have a hypothesis? I do.

Brian: I have a hypothesis that if you were to segment the, yeah, and let's just come up with some segmentation right now: zero-to-two years removed, two-to-five years removed, five-plus removed from a top-tier MBA program like Booth -- you'd probably get the best outcomes in the two-to-five.

Mark: I disagree 'cause I think it's all about the business. It's all about the horse. I think the jockey doesn't -- the attributes, if you take a middle-of-fairway search deal, it doesn't matter the experience. It's the attributes of the entrepreneur and the attributes of the business that lead to the outcome. But that would be a good research to --

Brian: This is why I hang it out with you. I think I like your answer better than mine. No, I think that's right: We're both big believers in the horse, and that being the key determinant in the ultimate outcome. And I think it, I would agree.

Mark: So did I, did I persuade you?

Brian: I think you, I think you pretty -- Ahh! Let's, let's do the research!

Mark: Let's do the research!

Brian: Let's figure it out.

Mark: Ah, good!

Brian: My guess is that there, we won't find a statistically significant variance between those buckets. But it's worth exploring.

Mark: And it's, it's a great question. It's unanswered by the data. And what we believe in is the data. As Booth graduates and professors at Booth, we acknowledge our opinions and create hypothesis, but we back it up with research and data.

Brian: You can now, now I'm really thinking about this. Five-plus years and you might have a searcher that's more wed to a particular industry because they have operating experience in that industry, and therefore aren't conducting an unbiased, industry-agnostic search.

Mark: You have to control for a lot of dynamics. So it'll be a bit, that --

Brian: This is a great question. Whoever posed that.

Rachel: We should admit him to the MBA --

Brian: He gets in our class, we could --

Mark: Our goal in ETA at Booth is to create research around those types of questions. So that's a, that's a really, really astute question.

Rachel: Great. So here's a -- I guess this might be our last question but it's quite a good one from John. He says he's currently running a search fund to acquire small fitness facilities. So he said, "Basically, if you could go back in life would you do an MBA again, knowing you'd go into entrepreneurship, given all the things that the MBA might have given you?" Or perhaps what the, whatever trade offs might have been?

Mark: Yeah I'm biased, but the Booth community -- I'll talk on much a data point -- but the Booth community provided me a network of connections that I use every day as a business professional. So not only do they provide frameworks and analytical tools that I use as an operator but they also provide an opportunity to meet amazing people and to learn with them and through them to create just a really amazing opportunity. So I personally would 100 percent do an MBA -- particularly at Booth -- because it's just provided me so many people that I interact with that I wouldn't have had the opportunity had I not pursued an MBA.

Brian: One hundred percent agree with that and I think the only thing I'd add to it is the, is the confidence and comfort knowing that you've got the breadth of learning and experience and network to go about an endeavor as seemingly daunting as buying and leading a small enterprise. So I 100 percent agree with Mark. I would do it all over again, for sure.

Mark: This two-year stint is just the beginning of the Booth impact in your career. So we draw on our Booth connections every day. And it's added a lot of joy to my life.

Rachel: Brilliant. Thank you very much. And we had a couple of questions, I think you already answered it, is that obviously, once people are on the MBA, they're welcome to take your class. But also that it sounds like you have students in your class from all sorts of different backgrounds and industries. We've had quite a few questions from people that say, "Do you have to come from a certain background to succeed in this field?" And I think you already answered it and said no, right?

Brian: No, no. It's about, it's about the attributes -- not the set of experiences.

Rachel: Brilliant. Thank you. Well, I think we've sadly run out of time. I'm sorry that we didn't get to answer all of the questions. I think we had more than 200 at one stage so there was lots. So Brian and Mark, thank you. It's a fascinating area. People are obviously very engaged and very interested in it with all the questions. So thank you very much to both of you. Thanks to everyone for attending and especially, thank you to the people that we picked on to be Guinea pigs on our panel at the very last moment as well.

Brian: Well, it was a lot of fun. Rachel. Thank you for having us and it's Mark and my shared goal to create the best ETA ecosystem in the galaxy. And I think we're on the path to do that. And so we appreciate how prepared and engaged everyone was today.

Mark: And the next time, let's have, like, a three-hour discussion 'cause this was too short.

Rachel: Good idea.

Mark: Thanks for all the engagement and the questions. It was great.

Rachel: Great. Thanks very much to everyone and thank you very much, Brian and Mark. Thanks.

Brian: Thanks everyone.

Rachel: Thank you.