April 2021 -- Why a HoldCo?, Q&A with Semil Shah
Insights, Noteworthy Bits, and Q&A with Semil Shah, General Partner of Haystack
Holding Company Structure and What it Means for Business Owners
We had two primary objectives when starting Eads Bridge Holdings: 1) to help close the digital divide between Tech and Traditional Industries, and 2) maintain a singular focus on building long-term value measured in decades. In our first blog, we addressed #1 and in this piece, we address how our permanent capital holding company structure is important for achieving #2.
A typical private equity fund operates with a 10 year fund life. That means the fund needs to acquire 10-15 portfolio companies in the first 3-5 years and then sell them in years 5 through 10. Before the ink is dry on the stock purchase agreement, they have developed a plan to church up your business and sell it to a new buyer as fast as possible. For middle market businesses (<$50m EBITDA), that means selling to a strategic acquirer or oftentimes to another private equity fund who will run the same playbook to sell the company again. You can expect that the company you spent your life building will be hard to recognize within 5 years of selling the business. If selling for the highest price is your main consideration, that may be just fine, but a lot of great entrepreneurs we meet want to ensure a different path for preserving the legacy of what they’ve built.
At Eads Bridge Holdings we are structured as a company not a fund. This means there is no predetermined start and end date. Our time horizon is death or obsolescence, whichever comes first. This lets us have an entirely different perspective for how we develop our thesis, underwrite investments, create value, and even approach relationships. Rather than an 18 month plan priming the business to be sold, we can implement a strategy that matches our time horizon.
In particular our strategy is focused on tech enabling companies with a toolkit that creates operating leverage and growth opportunities. An effective “technology strategy” is not the story you pitch the next buyer. It’s an ongoing, critical self-examination of the breaking points that stifle growth and identifying modern technology tools to improve workflows, surface critical data, and ultimately better service customers. Our role at EBH is to help guide and implement the technology strategy that powers a team to reach its full potential.
Alignment with Stakeholders
“Where are the customers’ yachts?” is an all too frequent refrain in the world of finance and investing. Eventually most people come to learn the mantra “show me the incentive, I’ll show you the outcome”. In a traditional private equity fund model, firms are incentivized and often encouraged by their limited partners to grow the size of their fund. Who can turn down the guaranteed management fee income stream or the potential for massive carry dollars? The only way to build equity value at the PE firm level is to create an annuity stream from management fees that encourages you to raise more funds, bigger funds, and add new strategies to increase the size of the income pool.
As fund sizes continue to grow, the firm is forced to abandon the strategy that made them successful in order to find places to put bigger $$$ to work. As this repeats itself across the industry you find more people chasing fewer opportunities, hardly a recipe for investment success and returns tend to suffer as a result.
Operating as a company and not a fund, EBH aligns our success with the success of our investors. Maintaining strong alignment with investors is something we believe is critical for building a firm that can stand the test of time. Our only incentive is to buy and build great companies. Over time, our holding company model creates its own flywheel that allows us to reinvest and acquire new businesses without requiring outside capital to do so. This keeps our focus on compounding cash flow for our investors while also saving them the transaction costs, fees, and taxes associated with PE portfolio swapping that is so prevalent today.
For business owners, this means our objective is not just to preserve the legacy of what you have built, but to enhance it. Furthermore, we can create a path for you and your team to ensure alignment with the future success of the business and Eads Bridge Holdings. While it doesn’t happen overnight, our goal is to create a vehicle for long-term wealth accumulation for our investors, our employees, and our teams.
There is a permanence associated with nearly everything we do, and we have built the model, team, and investor syndicate to align with that vision. We are uniquely suited for businesses that share our goals and for entrepreneurs who care about ensuring the future success of their business long after they are even running the company.
“Forced to operate with less contact between customers and workers, companies plowed money into technology, automation and videoconferencing software. Consumers have had to embrace digital services such as electronic commerce and telemedicine, and many find they like it.”
“We’re going to see continued investment in productivity-enhancing technology because the pandemic really made it so clear that we need to have this digital backbone.”
Health Care’s Retail Revolution via Middle Market Growth
“Today, the patient experience is shaping the way care is delivered, and it’s prompting health care providers to rethink their offerings and how they measure business performance.”
“Consumerization isn’t about replacing clinicians, Wolf stresses. “It’s about augmenting them, so they can focus on the most value-added part of their role, which is providing care and helping people get better or stay healthy.”
Q&A with Semil Shah, Founder and General Partner of Haystack and Venture Partner at Lightspeed Venture Partners
[Editor’s Note: Each month we will be featuring an industry thought leader to share their business and technology insights. We are delighted to have our friend Semil Shah kick off our inaugural newsletter. Semil has built an extraordinary track record investing in a number of consequential companies including Instacart, Doordash, Hashicorp, Figma and many many more.]
The pandemic exposed the digital divide between the haves and have nots. How can technology help create a more resilient economy? What steps can business owners be taking to better leverage technology tools?
First, I think we need to make broadband ubiquitous. I don't understand why that isn't already the case. The giant technology companies should be donating computers and internet connections to kids to get online and learn. For me, it all starts with education and technology plays a critical role in education in normal times and even more so during a pandemic. There should be a free repository like Khan Academy broadcast on television during the pandemic. Sadly, so much depends on local government, and most of these local governments are under stress.
As a business owner, I would absolutely put someone in charge of creating and implementing a digital transformation plan. And, I'd make sure those people were smart, technical, and to be frank, young -- digitally native. That may mean acquiring a company and paying them a lot of money. It's worth it. Second, I'd think about how I could use cash and/or stock to acquire other lines of business and integrate them, ideally with a technological component. Finally, third, I'd try to figure out a way to accumulate and leverage unique data in the business to help glean insights for new products and services in the future.
How can the tech community build effective bridges to traditional, non-tech industries to better serve what is such a significant part of our economy?
As a venture capitalist, I'm always looking for industries that can be disrupted by better technology to create a breakthrough product or leverage the distribution advantages of software. Yet, I also recognize the opportunity for software to be an enabling force for good within traditional industries. For instance, our investment in nTopology provides advanced design engineering capabilities for manufacturing in aerospace, medical, and automotive applications. This creates new capabilities their customers otherwise wouldn't have for designing breakthrough products.
That being said, I think it starts with empathy. Taking the time to understand the pain points of users, the challenges they face within their businesses, and focusing on building solutions rather than buzzwords. Most of our effort in venture investing is identifying entrepreneurs who understand the needs of their customers at a visceral level, ideally having been in their shoes.
With great challenge comes great opportunity. What opportunities do you see on the horizon in Tech to improve the growth and performance of SMBs?
There are so many software tools that truly empower SMBs. For instance, what Shopify and Square provide retailers is incredible, and they are the poster-children for this broader trend. One of the things that excites me most is how today businesses can communicate directly with their audience through their digital presence. You see this in the new direct-to-audience creator-focused tools, networks, and even financing mechanisms. Traditional barriers are being broken down such that businesses don't have to navigate gatekeepers but instead can communicate with their audience directly.
Over the course of your career, what is something you got wrong about technology?
I thought the economy moves in cycles, and that technology does the same -- but lately, it feels that even if the economy moves in cycles, the network effects, lock-in properties, and economics of software technologies are perhaps the greatest force, at times defying gravity. Understanding these dynamics and the advantages of software properties and business models is critical for every business to understand.
What resource or book should every CEO be reading when it comes to technology?
I wish I had a clever suggestion here. I'm a huge fan of Albert Wenger's blog (Parter at Union Square Ventures) as he provides readers a wide ranging exploration of technology and its impact on society and institutions. Keith Rabois' (Partner at Founders Fund) list of must-read books for entrepreneurial executives is also fantastic.
What are you reading / watching these days?
Reading? Haha! As for watching, I'm late to the party, but I was enthralled with The Mandalorian. During the pandemic, I introduced my kids to the entire Star Wars trilogy, and then the first three episodes, and then the final three episodes. We also watched Season 1 & 2 of The Mandalorian. My kids immediately connected with Mando and Baby Yoda. The music, scenery, editing, art work -- everything about it is incredible to me. I would go so far as to say the person who hatched the idea for Baby Yoda should at least be considered for a Nobel.