Building a Baby Berkshire: How Enduring Ventures Bought 20 Companies

Happy to have on the stage here this afternoon, Xavier and Eva. We've got seven or eight hours of discussion topics to get through in 30 minutes, so we're going to jump right in. Quick bio background, if you guys want to take 30 seconds and introduce yourselves, and then let's chat about what you have going on and what you've built.

Xavier: Quick background on me, technology entrepreneur for about 20 years before I got into the world of buying businesses. I founded an online bookstore called Better World Books in 2002. It's a large used bookseller, still going strong on the internet. Also a solar company working primarily in East Africa though across the developing world called Zola Electric. I bootstrapped my first company, Better World, and grew it to about 70 million in revenue. That was really my education in running a profitable business. Then Zola raised an enormous amount of money from venture capital. I had the experience on both sides of that world and found I like being cash flow positive a lot better than cash flow negative. That's what finds me here today.

Eva: In some ways similar to Xavier. I always thought I wanted to be a doctor first, but that mostly came from my immigrant parents telling me I wanted to be a doctor. Then I took an entrepreneurship class in college and thought, this is cool, I can start a business, I can hire people. I started a little education business and that business is still around today. It's a small note sharing tutoring business for college students. It's been like 12 years. Then I started a clinical trial business for pharmaceutical companies. We ran phase two and phase three trials. That was my first run at a true non-tech cash flow business. I was making money the first month that we started it, and I sold that business, then went to business school and learned about buying businesses. I'd come from the world of tech and starting stuff and had never once thought about buying a business. All of a sudden I was surrounded by private equity guys and investment bankers who made their whole career on it. I called Xavier and said, did you know we could buy businesses? That's how we got to where we are today.

I know a lot of searchers here are first-time buyers. What did that path look like to you guys to partnering up before your first acquisition?

Xavier: From the beginning, we had an idea of doing a platform, not just buying a business. If we were just teaming up to buy, name your service business, a garage door company together, it may have been a little too small for our joint ambitions. Whereas building a platform together said, hey, we can actually buy multiple companies, we can start companies, we can raise capital on this joint platform. That gave us plenty of room to run together. I do a lot better building with a partner than building on my own, left to my own self-destructive devices. I will take too much risk or be too optimistic, or have other biases psychologically. Having a partner to check some of those impulses is incredibly valuable for me.

Eva: For me it's just an opportunity to work with Xavier. You heard his background, it's incredible. He's built some really cool companies. When I met him 10 years ago, I was like, I want to be like this guy when I grow up. I was a little baby entrepreneur tinkering around with my student startup. Many years later we developed a friendship. When the opportunity came up and he asked, do you want to work together, I said yes. I sold my clinical trial business, which was going to make me a lot more money in the short term, to come and do this thing with Xavier for two reasons. One, because he's awesome. Two, because for me, this felt like a better long-term vision and goal. When he came to me with this idea of doing a holding company, it was, let's pick a business that would be the last business we would ever run. Let's not start something that we would want to sell sometime soon. Let's think of a format that would give us all the flexibility we need but also give us the opportunity to compound and create as much value as possible. This holding company was really it.

I would be careful going into business or buying a business with someone you've known for like six months or even 12 months, because there's a lot of ups and downs. Our relationship and knowledge of each other has really helped us through that.

Things seem to be going very well for you two as partners. Talk about the other side. What's been difficult as partnered searchers? Are there times you're not seeing eye to eye?

Eva: Every once in a while I'm like, why does this guy not see this? This is going to be amazing. He's got all these problems with it. I sometimes will be a big grump about one too. He'll come saying this one is amazing, and I'll say I don't see it, there's this big problem with it.

Xavier: In the search process, it's easy to fall in love with the person selling you the business. If you get to meet them and you say, wow, this is a really cool entrepreneur, this is a really special person. What I find is the exact same personality type that has built the famous companies in Silicon Valley is the exact same personality type that has built the best local plumbing company in Duluth, Minnesota. Everybody's going here, I'm going there. They're very self-reliant, very resourceful, very entrepreneurial. It's one of the great pleasures of this work, meeting those people and hearing their stories. When you see that, you can get caught up in the possibilities and the excitement. It's really nice to have someone to bring it to soberly and say, here's a business that does this much revenue in this market with this profitability, is this the kind of thing we want to go after?

We talked to a lot of experts about how do you set up a 50/50 partnership. The best structure is actually just, if you both don't agree, you just don't do it. As long as both people can keep their own mind and not be pushed into doing something they're not really excited about. We have to check, are we both thrilled to move forward on this business or this investment.

Let's talk about building Enduring Ventures. Walk us through the first acquisition.

Xavier: The original pitch deck has been pretty consistent. We're going to try to build a baby Berkshire. We're going to leverage a small amount of equity to buy a few cash flowing businesses. We're going to reinvest that capital. It didn't even contemplate beyond the first 2 million raised into the business. With this, we can buy about 15 million worth of business, which should be three to four million of cash flow. That will be the baseline that we will essentially start compounding from. Then like any plan, the first shot of battle comes and you throw the plan out. The first shot of battle was both COVID hitting and the opportunity to buy an unprofitable technology business rather than a boring cash flowing business that we had been intending to buy.

It was a great example of a very proprietary deal. The founder of UpCounsel, I had actually hired him as a software developer in 2004, brought him out from South Dakota, and he had dreadlocks down to his waist. So I knew this guy very well. It was a really unique situation that I don't think anybody else could have pulled off.

Eva: We set out to buy a classic cash flow business, and one week into our journey UpCounsel announced a shutdown. UpCounsel is a legal marketplace. If you need to hire a lawyer, you can go on there and post, I need so and so done, I need these types of documents. Lawyers will bid on it, and you can hire someone at a big discount to a big firm. We'd used it quite a bit at our different firms. Mason was actually an advisor at my first company, so we knew him through the Silicon Valley network. We all got the same email as customers, basically a shutdown notice. Thank you for being an UpCounsel customer for eight years. Unfortunately, we're going out of business. I sent it to Xavier, he sent it to me. We had the same idea. We're in buying mode. Here's this business that has been around for eight years that has incredible technology. We know the CTO, we know that he's built something really special. He's really good at SEO. There's millions of visitors coming to this website every month for free based on the SEO value they've created. We didn't know if we could create a lot of value from it, but we knew for sure that it shouldn't die. If we could get a good enough price at the right deal, worst case scenario, we could throw up a bunch of ads and monetize those.

KJ here, who's sitting in the front row, runs the Arising Ventures arm of Enduring Ventures, which is the technology businesses. KJ and her team pulled off this amazing feat. They took this business that was a marketplace business and converted it into a full SaaS platform. Now we're charging lawyers 10 to 15,000 dollars a year to use the platform. As you can imagine, the value of that business went up immediately. It's profitable today. KJ went out and raised about 4 million dollars from the customers because they had all of these long-time loyal customers. We sent out emails, did some campaigns, they invested, and then we used some of that capital to go out and buy another growing business. Now UpCounsel is two growing SaaS businesses.

Xavier: Our original equity check was 200,000 dollars with no personal guarantees or other hooks. There was also a seller note for 1.8 million secured by the assets of UpCounsel. There was this large company, which I won't name here, which owed UpCounsel about 300,000 dollars. It was not SMB Law Group for the record. We looked at our 200,000 and said, okay, if we can just collect this bill, we can get it back. Eva changed his LinkedIn to be CFO of UpCounsel. He found as many people working at this large company's email addresses as possible. He would email the person in charge who's supposed to pay us and say, hey, is your company having trouble? Why are you not paying our bills? CCing everyone in the company. Sure enough, we did indeed get a wire. We were able to take our equity back out of the business at that point.

Was that strategy identified before closing?

Xavier: We knew there were a bunch of receivables that had not been pursued aggressively. In our downside thinking, there was so much legal page views that you could put Google AdWords on it and it would generate some significant amount of money. The downside was, if we can't turn this thing around, we're not going to sink millions of dollars more into it. We did get a negative surprise, which was the combination of COVID and them announcing a shutdown roughly cut the transaction volume in half. We did have to dig our way out a bit. But KJ really is responsible for the 100x of equity value that happened with that particular company in the portfolio, and then actually converting that increase in equity value into cash in the bank account, and then using that cash to buy another business.

Eva: That became a whole practice. We've bought three other failed venture-backed startups that had raised in the past over 200 million dollars. I think we've paid grand total about 2 million for all those businesses in equity.

Xavier: We have a very valuable domain that we own. That was our underwriting on one of the deals. We figured we could sell the domain for as much as the company.

Had you raised money before inking the UpCounsel deal?

Xavier: We had started collecting some investor checks from the people who believed in us the most. We gave them the pitch and a few people said, call me when you have a deal. Some were just like, whatever you guys are doing, this looks good and I'd like my money to be in now. We had authorized up to 2 million in shares. We had like 600,000 in the bank when we closed on that. Some of that was our money too, but most of it was investor money. It's probably 10 times easier to raise for a specific deal than it is to raise just for a platform-driven thesis. If we had had to circle up the wagons and raise the money to close it, it would not have been hard to do. We closed it very quickly because the business had announced a shutdown. We went from LOI to close in two weeks, and that was in the middle of COVID.

Eva: I agree, it's much easier to raise money if you have a deal. Tactically, for those of you that haven't bought a business yet and are thinking of fundraising, I would go around and socialize with as many people, including people here, and just say, this is my plan, this is what I'm doing with as much certainty as you can. Then when you find that deal, you can bring it to them. Even if it's a little bit off topic, these people already know you. They're thinking, oh wow, they said they were going to do this thing, they have now found a business. Even if it's not exactly what you told them, I trust them enough to buy into this. That's usually how these deals happen. We had a unique advantage because we'd been building companies for 10 to 20 years, so we had friends that had seen us do it and trusted us. I wouldn't recommend the blind pool capital raise to most people. It's much harder.

How does that develop into continuing the original thesis of finding cash flowing businesses?

Eva: We set out to buy a boring cash flow business and we learned about the broadband space, the fixed wireless broadband space. I grew up in San Francisco. To get internet there, we get cable or fiber. It turns out that most semi-rural, suburban, and rural communities don't. They don't get cable or fiber, usually because it just costs too much money to run a wire across different farms. A technology popped up maybe 20 years ago that allows you to beam internet to people's homes and businesses. You connect it on a tower and you can beam internet to people's homes. Forever it was a hobbyist business, but sometime in the last five to 10 years it really professionalized. The technology got really good and competitive with cable and fiber speeds. That's when we found out about this business. We saw a business in Nevada that was for sale. I had always assumed internet was a monopoly, that the only way you could provide internet was if you were a big Comcast or AT&T type company. Here was this little mom and pop with 2,000 customers, all subscription revenue, very sticky, high EBITDA margin, with very few employees. I sent it to Xavier, and that's when we got interested in this industry.

Those were the first businesses we bought. We ended up buying two Nevada-based internet service providers. One in Reno-Sparks, Nevada, which is a fast-growing area, and one east of there about two hours. We bought those together using Xavier's SBA capacity. It was a really interesting SBA deal because we bought two businesses at the same time and got the bank comfortable with it. Because they were in the same industry, physically adjacent about two hours apart, we were able to put the two businesses together and it was a much stronger underwrite than either business would be on its own, without even reducing staff. It went from 2 million in recurring revenue to 4 million in recurring revenue with 1.8 to 2 million in EBITDA. This is a higher CapEx business. You've got to spend money on the towers, but it's a higher cash flow profile. Our transaction there was 300,000 in equity, a full standby note of another 300,000, and SBA and some other little seller notes for the balance. That ended up being a really good transaction that did add about a million dollars of cash flow on top of the SBA payments.

Does broadband become its own roll-up within your holdco?

Xavier: One thing we've evolved on is that we were more excited about the roll-up strategy when we first started. What we found is it's a great private equity strategy and a little less attractive as a holdco because you're constantly putting more capital in. It's a way to put lots of capital to work, not necessarily a way to generate lots of cash flow in the short run. Our bias as a holdco is to minimize risk and have everything be cash flow accretive rather than cash consuming. That said, something like broadband is nice because when you have cash flow, you can put it there. You can get a reliable return. The business works well. Boston Omaha, one of their main businesses is broadband, and they really like it because they can predictably invest more capital. They're more of a capital deployment model. They're really good at raising public equity and then deploying it. They want really predictable businesses.

Two or three years ago we were looking more at what sectors can we do a roll-up in. We're looking now at what businesses stand on their own, and what can we get really good at running more profitably than the market standard. Then we can potentially find opportunities to buy a business in the same space. We do that best with technology so far. KJ's team runs your average software or marketplace business five times more profitably, I would honestly say, than the average management team would. That's a source of arbitrage.

What does Enduring Ventures look like today?

Eva: Today we own a portfolio of about 20 acquisitions. Three of those companies we started internally because our background is in startups, and sometimes a great idea comes along with a great operator that we want to support. Other than that, it's 17 small business acquisitions that we've done. The portfolio of the group of companies did about 100 million of revenue last year. As far as how fast we're going, we don't set any plans. We don't set any growth figures at the Enduring level. We're just swimming around, waiting for the right opportunity, the great business to come in, and if there is one, we'll pursue it. If there's two of them, we'll pursue them as well. We're also perfectly happy to not do a deal for six to 12 months if it's not the right opportunity.

Xavier: A lot of the focus last year was strengthening our balance sheet. We'd created some visibility and traction. One of the cool things about a holding company model is when someone invests, they're not only investing in your future stuff, they're investing in everything you've already done to this point. It's a really aligned model. A lot of people in the business buying world get advice that essentially says you should be like a baby private equity firm and set yourself up roughly as a private equity firm would get their economics. That makes sense if your goal is to sell in three to five years. If your goal is not to do that, then you actually start to be in some ways at opposition with your investors. The longer you are holding the business, the more fees you're collecting from them. There's some time horizon differences.

Our model from the beginning has been one C corp that people buy shares in. Everybody owns the same class of stock. Investors own the same kind of stock that Eva and I own. There are no fees, there is no carry. The model is extremely aligned. We added over 120 new investors last year directly and another 500 through AngelList syndicates. We want this to be broad based. We don't want it to be just the two of us running a partnership. It's something where we can help our shareholders build wealth and hopefully even build a community around them. We just had an event for our shareholders this week. So far that has worked out pretty well. I'm always very surprised how many of our shareholders will make the trip and hang out with us for a couple days.

Eva: I think 60 or 70 percent of our shareholders, including the people that showed up to our event this week, came from Twitter. I started posting probably a year and a half to two years ago. Much of our business is now powered by this amazing ability to share content and connect with people online. I would have never believed it, but here we are.

Enduring Ventures is a long-term buy and hold model, but you use a QSBS structure, which traditionally isn't a long-term buy and hold strategy. Walk through how you thought about building your holdco.

Xavier: You can actually go to a model like this at any time. If you have an LLC interest, you can contribute that to a C corp and then get into a holdco. We did start from absolute zero. We registered with the state of Delaware, Enduring Ventures Inc. I bought my QSBS stock for 40 dollars when it was just a pure shell. The goal was to make that the store of value. There's a bunch of rules around it, some which are really random. You can't run a hotel if you're a QSBS business. It's not trivial to stay compliant with it, so you really do have to pay attention. The upside of QSBS is huge: 10 million dollars of no capital gains on your C corp stock.

Now the question is how do you get liquidity if you're not going to sell anything. That's where cash flow comes in and where having an investor base comes in. If I have new investors who want to buy in, right now they're buying stock from the company treasury in exchange for cash. In the next cycle, they can buy shares from anyone who wants to sell their shares. That could include shareholders in this room. They could all sell their shares. I could sell some of my shares, and new investors can come in and buy that. Part of that is setting up the plumbing where there is some liquidity. We mark a price every two years. We have a liquidity window. We mark a price for the stock every two years based on our best estimate of value. That becomes the market clearing price and people can buy and sell at that price.

We also have a requirement of the company to repurchase its own stock if its balance sheet is strong enough and it has the cash to do so. It has to allocate up to 40 percent of cash flow to buying back its own stock. That's an insurance policy for our investors that even if we can't recruit any new shareholders, there is still a buyer, which is the company itself. Look at how Berkshire Hathaway returned capital to its shareholders. Share buybacks are the only way that it has done so, and it's worked out pretty well.

Q&A:

Q: With the companies you have right now, what's your thought process behind aggregating within those, or continuing to expand and buying more unique companies?

Eva: When we started the company, we thought we were going to have centralized services and support. It felt obvious, we've built companies, we've done marketing, sales funnels, and a local plumbing company might not have the same level of experience and may need recruiting support. What we learned pretty quickly is that we can't provide any services at all to our companies in the way that we do it. I've seen other holding companies centralize services and support, but for us, we're a disparate group of companies run by incredible CEOs and leaders, and everything lives and dies by the hand of those CEOs. The most we can do is be good thought partners, sounding boards, board members, supportive as much as we can. It is actually counterproductive for us to insert a recruiter or marketer into their business because there's agency risk. The minute we start contributing our services to these businesses, the question comes up, who's really running it, us or them? We tried it for a few months and it became apparent that wasn't going to work.

We'll recommend some services and ideas. We have two platforms. The broadband business is now four businesses under one. That one shares its own services within it. Our plumbing and HVAC platform is four or five businesses now and shares its own CEO and services. But we don't do anything amongst the different businesses.

Q: Who runs your companies? Do you want to buy companies where the CEO stays on, or are they looking to make an exit?

Xavier: Yes to both. As usual, the answer is, it depends. What we've generally found is that in most cases, the CEO has gotten the business as far as they can personally get it. I found that with my own companies. I got to a certain point where every good idea I had had been baked into the business. If anything, I knew too much to be useful for the next phase. I didn't know what it looked like to go to the next phase because I'd just been the person who got it to this point.

KJ is talking to a CEO right now that she may double down on. She'll say, hey, this incredible industry expert, if we buy your business, we're going to teach you the things we know that you may not know. She's been really committed to building some of her leaders up. Eva and I don't have the bandwidth for more than one or two of those at a time. We're usually looking for people who already know what to do and just want to be left to do it. Occasionally if we do a startup or something else where we can put in more elbow grease, we can help someone who has the raw material but has never sat in the seat before.

Q: I'm 25, acquired one niche manufacturing business a year and a half ago. To get from here to where you are, what experiences would you seek out?

Eva: You're already ahead of both of us. I was 28 and Xavier's a little bit older. We talk about how much research and thinking and planning we did before we got into it, and the minute we bought a business, we realized that we had known nothing at all. Three days after the acquisition, we had aged 20 years. We just had our event. We had a 24-year-old there who started a business, just bought his competitor. These things start happening. You're in the game, you're meeting other businesses, you have suppliers. Just keep your ear out, talk to them. The best entrepreneurs that do what we do are so curious. They're asking everyone around them, what's the best business, who'd you talk to today, what's the status of their business, are they thinking of retiring? Then your supplier will say, well, this guy is having trouble, but it's a really good business, but he wants to move to Florida. The light bulb pops up and you say, make an introduction, maybe there's a deal to be done. Stay curious. Have as many conversations as possible. Because you're in it, you're going to get way better deals than anybody here that would come out from the outside. You have that information arbitrage already.

Xavier: We've done a lot of architectural legal and financial work on how do you do a holding company. There's a really easy template for how do you do an independent search or a private equity fund. You pull the docs off the shelf. There really isn't one for a holding company, at least we were not able to find it. We've done all that. There may be a way to platformize some or all of that, or support people in building something that looks like what we've built. If that piques anybody's interest, send me a note.

There's a fundamentally different mindset. To me, you can only run one business at a time. I've been fractional CEO of a few of our companies for some period of time and generally did a terrible job because I was not the full-time dedicated CEO. Everybody knew I was only there for a temporary period of time, so they didn't even listen to me that much. I wasn't an industry expert in these areas. You usually need to be to really do well as a leader of most businesses. Your first step is to decide that you're going to do more than one business. Nothing wrong with just owning one business and having it be great. But if you have an ambition that's greater than that, then you should think about it. It's a different practice to hire a CEO and support them than it is to be one. It's a different thing to be a really good board director to a CEO and to build a board of other great operators who are neither the CEO nor the owner. Building a board and getting yourself out from being the primary board member to maybe not even being on the board, that's one of my aspirations for some of our companies, especially the ones where I don't add any specialized knowledge or skills. There is a better director for that company than me, and I shouldn't be taking up that valuable space.

Q: How are you developing yourselves in this phase as board members and business buyers?

Xavier: I'll give you an overview of how our team looks. We have a controller who does all the accounting for parent co, runs the payroll, pays any bills, helps with financial diligence on any new acquisitions. He sometimes is a fractional CFO for some of our companies to the extent that they need that support, and he really loves that fluidity, jumping in and out of different businesses. We have Andy Dalton, our operations and legal guy. He went to law school, so he has a legal background, and he handles everything from the transaction documents. He'll often work with external counsel, but he's the glue that holds it all together, all financial diligence. We have an analyst, Nasr, who builds the financial model, fills out the painful form with the broker who pitches us, and says, hey, this business is cool, I think this will work. Those are the three roles. If you can have those, even on a fractional basis, this team plays both sides of the field. They both manage what we're doing already as well as any new deal. That's our diligence team. They're very hands-on, very tactical. They do all the work themselves. They're not trying to offload it to anyone.

What we try to do is free up as much open empty space for Eva and me. Eva does a great job of freeing me up even more to go down rabbit holes, to pursue new things, to get smart about businesses or industries that we may not be smart about already. Eventually we find something we're excited about enough that we dive in and add it to the group. There's a fair amount of work to be done. There's always things that we jump into on a day-to-day basis. We have a company we bought out of bankruptcy that we just raised the seed round for. That's actually on a more traditional venture path because that's the right path for that business. I was active in that seed round raise. There's a great diversity of activities, but try to keep as much open space as possible.

Q: We've heard dramatically different viewpoints on debt and leverage. How does Enduring Ventures approach debt and leverage in your acquisitions?

Xavier: We approach debt like one approaches a tiger in a cage, carefully and with a lot of fear. And the tiger has a laser on its forehead. Debt is actually a great way to get in the game and punch above your weight. The fact that you can do an SBA loan and own a business cash flowing seven figures without having seven figures already to spend on it, or near eight figures, is incredibly remarkable. It's a risk I would encourage someone to take once and then deleverage as fast as humanly possible. We used some leverage in our early acquisitions, but I would not prefer to do that again, sign my name on that personal guarantee for that amount of money. It's a tool like any tool. It creates a lot of pressure on a company to have large, regular debt payments. It can really constrain management decisions and stress everybody out. It's probably still a good practice to have really strong profit expectations even if you don't have a debt payment to make. But it sure helps everybody sleep a lot better at night when things are deleveraged. The majority of our businesses at this point are either owned outright or only with a seller note that's non-recourse.

Eva: We don't take any debt on the parent company. We're not willing to do anything to go faster that could risk the longevity of the business. That's a big trade-off. If you're using SBA, it's a great one-time Hail Mary pass. Build your wealth and then run away from that debt for the rest of your life. Small businesses are chaos. We own 20 businesses. We've seen every type of issue that you could probably see, and there will be many more. I'm often grateful that most of our businesses don't have debt because it would be much more chaotic.

Thanks guys for being here. Appreciate the insight, and thanks everyone for the Q&A.