Terrific discussion with Steve LeFavour as we discussed his journey into private equity, how companies are turned around and sold, and some of the common items that hold a company back. We dive into the company-side of private equity and eventual capital raise while also taking a look at how people can get involved in it as a career. We closed out the discussion talking about the 4x4x48 challenge with David Goggins.
Shout out to episode sponsor R.D. Adair PLLC (https://adair.law).
#78: What you’ve wanted to know about private equity with Steve LeFavour
February 4, 2021 • 1:01:19
Aaron Spatz, Host, America’s Entrepreneur
Steve LeFavour, CEO, TPG Astute
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We’re going to jump right into it this morning. I appreciate you being here. I’m welcoming Steve LeFavour to the show. He comes to us from a variety of backgrounds. So he got his start as a Navy Nuclear Officer and then he’s jumped out is doing a wide variety of different things, but most recently, as CEO of TPG Astute and managing director of Castle Placement. Steve, I just want to welcome you to the show, man. Thank you so much for being here.
Thank you. And Aaron, thank you for your service. So you’re in the Marine Corps, right?
Yeah, I sure was. Did four years. I grew up in a Navy family and so I joke with people, sure, I got out after four years, I feel like I retired after 28 years because it really was like a lifelong journey. That was literally all I knew. So.
Yeah. Well, so glad that you’re here, man. Thank you. Thank you for your service and thank you for being here. So take us a little bit through your journey. So post-military, you got your start as a director in a different firm. So just, one, in fact, I almost messed up. We got to back up. So where are you originally from and how did you get to DFW, I think, is the best question.
Well, like everybody who’s a transplant to Texas, couldn’t get here fast enough, right?
So, no. Our family has probably been five generations now within 20 miles of I-35, somewhere between Dallas and Wichita. So, farming, ranching, et cetera, small town, Americana life. And it’s just, you know, where else are you going to live besides what you know to be home? So I must profess to not being a big city guy and living in a suburb of Dallas is about as close to a city as I ever wanted to get. So I make that compromise with my wife.
It’s a little bit of a give and take, right?
It is. So we moved here in 2010 after living in Wisconsin for 17 years.
Yeah. I still carry my – I know I’m going to get killed now. I still carry my Packers allegiance.
I was hoping for the ultimate fantasy of mine, which would be to have Kansas City and Green Bay playing a Super Bowl together again, but that’s not going to happen.
That was so quick little sidebar, but that was not a bad game. You know, Rogers is making it happen, but I mean, there’s only so much you can do. And I don’t remember. I think there was a couple of picks, a couple of things that happened during the game. And then it’s Brady, man. Brady, he’s been a force. It’ll be crazy to see him on Sunday.
Yeah, exactly. You can’t make mistakes and expect to recover from them when you have Tom Brady on the other side of it, right? Even if you have and Aaron Rodgers, you’re is still not going to make up for those mistakes.
That’s true. That’s true. So despite the heartbreak of being a Green Bay fan, my sincere condolences. Take us through a little bit of your journey here now in DFW metroplex. You’re in investment banking. This is a whole another world that I’m not familiar with very well and I would love to learn more about. So take me a little bit on a tour of how you got into it, first of all, and then what are some of the things that you’re working on?
Oh, sure. So investment banking is a very large industry as you’d expect. And most people somehow get a start. And so my start into this was I was working for a private equity companies first. And so private equity company will go in, buy another company. And if there’s something wrong with that portfolio company, then you’ve got to fix it. And by doing that, you add value. So there’s a group of folks out there like myself that will go in and fix the operation side of whatever company that you acquire. And so over the years, we became really proficient at that and can help those private equity companies add value to what they’re doing and then sell it to higher multiple later on. Because most private equity companies hold their portfolio companies now for like five years, there’s some now that we’re working with that hold for ten but it gives you plenty of time to fix things and make them better. And as an example, the last portfolio that I was contracted to fix, we took them from minus 75% EBITDA to plus 25% EBITDA in about five months.
Holy cow. Wow.
Yeah. So it’s all hands on deck 12, 18 hours a day until you get that company turned around. And there’s portions of the investment banking business that just focus on the financial side or turnarounds. They’ll provide the capital to make the initial purchase and the capital to buy new plant equipment or whatever it is that you’re going to use that money for exploring new markets. And then there’s the operating side of that. And I’ve always just focused in on the operating side of that. And after doing a couple of dozen turnarounds like that, you become really proficient at laser focusing in on what we call a performance driver.
So there are probably five or six things inside any given company that really matters the most as far as how it’s going to perform. The faster you identify those things and get them fixed, the faster your company is going to make you money. May not be perfect to where you want it to be, but at least you’re out there. You’ve turned it around from underperforming, losing money to making money and performing and competing in a market in a really short period of time. And that’s where that initial rush of value creation happens.
So finding those five or six things that are the key things to your performance, getting them fixed as quickly as possible. So I have a rule of thumb and nobody believes me until you actually go in and execute to this, but any given company, no matter how bad you are, I think you’re six to eight projects away from being excellent.
Wow. Well, you’ve cracked open a can of worms in there and there was a lot of questions that I have for you and I want to circle back to some of these before we get too far down the road. And I’ve probably forgotten half my questions already. No, it’s a fascinating topic. And so the way that you described it is really neat. So you’re going in and you’re adding value because you’re identifying some issues within the company, but you recognize it as a strategic component to it. And then you’re holding onto it for five, maybe ten years to sell it. And so question one is, are you holding onto it and are you selling it to another private equity firm? Who is typically the target buyer? And then as soon as you get done answering that then I wanted to jump into what are a couple of those factors, those five or six things that you kind of regularly run into? Just maybe pick the top couple of items that you kind of regularly see.
Oh, sure. So the answer to your first question. Who do you sell it to? You’re selling it to other private equity companies in the lower mid-market, mid-market. So they’re in that maybe $10 million of revenue range to $50 million revenue range. There’s a lot of companies like that. And larger private equity companies and funds will come in and buy up a collection of those companies, or individually, depending upon how big they are. And so it’s not uncommon to groom a portfolio company with the intent of selling it to a loan buyer already in the future.
I see. And maybe that future buyer is wanting to see a certain revenue target that you’re hitting.
Or certain earnings, percentages or whatever. So you’re kind of doing that and it’s almost like you’re kind of handing it off and they might take it and hand it off at a higher level as well. It just depends, I guess, on where in the market you are.
Right, right. Exactly. And so then the answer to your second question. Are there commonalities? Yes. And the first one being, the leadership team. So thinking of the analogy of the guys in the row boat and you’re trying to get everybody rowing the same direction at the same time, right? Well, yeah, it seems like a very simplistic analogy, but it’s fundamentally true. You have to have that. So if your leadership team hasn’t created a strategy and then figured out how to weave that strategy into the DNA of the company, meaning getting everybody moving in the same direction at the same time, then you’re going to fail. Because I guarantee you, your competition has figured that out and they’re eating you for lunch. All right.
So that’s the job. One, make sure you have a good leadership team, make sure that the strategy is sound and in place, and it’s being executed to by everybody. And then from there, it really goes off to where’s your pain at? So do a lot of work with discrete manufacturing company. So companies that make big things like surface mining equipment, pressure vessels heat exchangers, oil and gas, and probably the number one reason for failure that we see there is because they don’t estimate correctly. So your estimate becomes your prediction of your top line revenue for that particular project.
If your estimate is off, then you’re going to either make money because you guessed right or you’re going to lose money because you guessed wrong. So the accuracy of your predictions, which is accuracy of your estimate, is paramount to your top line revenue, which then, you know, if your operations underneath that are sound and you can execute to that project and make money off of it. But if your top line revenue prediction is wrong right off the bat, then you’re going to lose.
And so, you know, going in and looking at how you make that prediction is incredibly important. And a lot of this smaller, you know, in the, let’s say, $10 million revenue range, it’s the owner who’s actually making that estimate. And those guys do quite well at it because they’ve grown up in that environment. Whereas to a bigger company where the estimating is handed off to a professional estimating team, well, where did those guys come from? What’s their background? How much do they know? And you really run into a lot of discontinuities there in people’s knowledge about, you know, they may have an estimating team that sits in an office remote from the plant that’s doing the work. Huge mistake, right?
One of the first things we always do is the estimating team is now moving to the plant and you’re going to spend six hours a day on the shop floor with your tablet, actually performing time and motion studies to show how long it does take to do things. And you’re going to continue to refine your estimating tool over and over and over again until it’s perfect. And then you’ll see revenue get predicted better. And of course, right along with that, even the numbers will start to change because you’re more accurate than how things are done.
Right. Wow. That’s really cool. That’s a great, great visual, great representation of a real life application of how solving this problem works. And so you come in, and again, I know I’m probably asking incredibly obvious questions here. But is this something that is executed by typically you have a team of people that are coming in and helping with this company or is it like there’s one person who’s kind of calling the shots in terms of helping make these changes?
Yeah, great question. So typically, I don’t like doing it in a team of bigger than three. Because you need to move fast and so the more layers of decision-making you have, the slower things are going to go. And so you don’t want that, but you do want to have enough breadth of knowledge to where other people’s perspectives help you to understand what the lay of the land is. So I always like going in with an operations person and a finance person as a team as a minimum. And you don’t have to have a senior finance person, but at least somebody that understands P&L and can do job costing and stuff like that for you while you’re looking at some particular aspect of the processes within the business. Yeah. So at least two or three, probably no more than four, otherwise you’re starting to slow yourself down.
Wow. Okay. No, that’s great insight. And so, you know, kind of backing up and going a little bit more macro now. So if you’re a company that’s been in operation for a number of years, at what point do some of these companies decide that they want to – maybe they had an exit plan, maybe they don’t have an exit plan. And I think one of the things that’s probably coming up right now is we’ve got a generation of people that are – I mean, never before, are we going to have such a mass exit from the workforce here in the coming years with the Baby Boomer generation as they’re retiring. So what have you seen, I guess, is the better question. What have you seen from your end in terms of companies or ownership teams getting ready to sell? And then what are some ways that companies can help themselves by making them a more attractive purchase?
Sure. So the macro trend that you’re talking about of course is the Baby Boom generation, which should really have three waves to it. 1961, the top of the third way, right? And we’re bigger and populous than any of the other generations after us. So that the next closest one, Gen X, close to a non-Baby Boom. So what you have then of course is you got a lot of executives that have been in business for a long time, right? And so you have more executive-ready directors and vice presidents than you have CEO positions.
So folks like myself and other people that were on the corporate ladder, if you will, it was like, well, if I’m never going to reach the top, why don’t I just go make my own ladder? So they’ve bought their own businesses. They created their own businesses and they’ve been doing it for a while. So now, who am I going to sell to? So that’s problem number one. I got to find a buyer, right? Well, Gen X, generation after us is smaller than we are. So now I got a real problem that they may have a lot of capable executives also, but there’s more going to be coming up in the future. And you can start to see this trend developing now. You’re going to have far more businesses that are available for sale than you have capable operators operating them, right?
Which is both good and bad. It’s good and bad. You’re going to see, I think, an upsurge in entrepreneurism even more so than what you see today, right? And so that’s the good thing. The bad thing is a lot of those companies are going to just simply dissolve and be absorbed by the market as a whole. So if you want to avoid that, which answers your second part of the question there, the first thing you got to do is get your finances in order. So make sure your financial statements are audited and pristine.
A lot of times we’re going to a company, we’re looking to buy them and we’ll see an obvious financial here. I don’t profess to be the world’s greatest CPA or anything like that, but I can read a financial statement. So I figure if I find an error on your financials, especially a material error, then that deal is done. I’m walking away because I don’t have time to go and correct your books and to really figure out what reality is and then go into your operations and figure out what reality is there.
So if you want to get yourself solid, and it goes for any investment banking deal, finances, finances, financials. Know your financials dead cold, make sure that they’re accurate, get them audited. Don’t walk in front of a professional investor with obvious mistakes in your financials.
Oh, wow. Well, I mean, that’s sound advice. And so if this is something you’re considering in your business, then you need to be proactive. You may need to hire an extra accounting assistant just to go in.
That’s true. Absolutely.
Get everything cleaned up. And then when you think you’re done, then go and hire and an auditing firm to come back through and basically double check your work, right?
Yes, absolutely. Then the second part of that is if you want to sell your business for the most amount of money you could get for it, then you need to have what’s called quality of earnings. So we see a lot of companies where they’re doing poorly, then all of a sudden, the last year before they go to sell, they’re doing great. Oh, okay. Well, we’re going to factor that into the sales price. The price that we’re going to offer to buy you for, that’s going to be factored into there. Because we all know that that’s financial cookery. We’re not going to stand for it.
So that’s going to be used to have a long-term plan. You know, I’m 60 now, I want to retire at 65, and okay, fine, great. Bring somebody on that can absolutely groom your operations side to run consistently year after year after year. So even if you don’t show a million dollars in earnings, at least you have $750,000 in earnings for the last five years. That’s far more attractive story than you were losing money, until all of a sudden, magically, you got better one year than the year before you decided to go sell.
Right. That’s right. Kind of funny how that happens.
Consistent earnings goes a long way.
Kind of funny how that happens. All of a sudden, man, it turned around so quick. Yeah. All of our margins just went just straight up.
Yeah. Imagine that. Well, hey, as soon as we get back from the break, what I’d love to do is we’re kind of in story time now because I feel like it’s a great setup. But I love to hear what’s one of the most interesting – and this could be good or bad, right? So it’s going to be like, you picked up a company and sold it for something massive or you come in and it’s like an absolute disaster but you’re able to turn it around. Just cherry pick one of your favorite, all-time favorites, from your career in terms of something that you’ve worked on. And we’ll explore that together here in just a second.
So our show is incredibly honored to be sponsored by just some amazing partners. And so I just want to quickly shout out R.D. Adair Law. So wherever you are in your business, whether it’s the formation or maybe you’re doing transactions, there’s a lot of things that you’d need to consider, right? And then on the other end of that, unfortunately, disputes and litigations sometimes become a part of business, right? So you need a solid business attorney. You need a solid team of folks that can help you. And so I’d encourage you to give Ryan and his team a call with R.D. Adair. They’re fantastic people. And they’ll be able to sit down with you, understand exactly what is you’re going through, what you’re up against, and how they may be able to help. So I’d encourage you to reach out to them. Fantastic people. I would recommend them all day.
So Steve, I just want to jump right back into it. So what’s one of the most exciting or interesting triumphs or disasters, something that you’ve seen over your career?
Well, I think there’s a classic in my mind. It’s always like the first girl you kissed, right? You always remember that one. So the one that sticks out in my mind is my first turnaround which I did with the turnaround specialist from a former Newell Rubbermaid executive. And their business model is acquire, fix, and keep. So they were given 18 months to do turnarounds of these consumer brand companies that Newell acquired. And so they became quite proficient at doing turnarounds. And so we were hired to go in and turn around a seat manufacturing company. So this company made all the seats and saddlebags for Harley-Davidson. And if you’re sitting on a John Deere lawnmower, they made those, you know, a Club Car golf carts, they make those.
It was just wonderful to work with somebody that was that focused in on fixing things and had the profound experience in it. I think the thing, to me, that was memorable about that was is there was no such thing in his mind as a chain of command. You were all like the same players on the same team. And so I remember this one day, we were touring through a warehouse and this guy was so good at numbers that he walked through this warehouse and wrote down a number on a piece of paper. And he goes, “Show me the financials for the balance sheet for what the valuation of this inventory.” “So here you go, boss.” “Oh, this is wrong.” It’s like, “What do you mean?” He goes, “The balance sheet is wrong. They’re cooking the books.” I was like, “How do you know this?” “Because this number I wrote down on this piece of paper doesn’t match what they said. So there’s another warehouse somewhere in town that they’re hiding from us.”
How did you figure that out? So, sure enough, we got into the car that we had rented and followed the truck drivers around and found that other warehouse and this extra $5 million for the inventory that somehow didn’t get put on the books. And so he just looked at me and said, “Now what are you going to do about this?” “Well, we got to get the accounting straighten out.” “No, no, that’s the obvious answer. What are you going to do about this?” “I don’t know. I don’t get what you mean.” “No, go fire somebody right now.” I was like, what? So it’s like, “I started working for you two weeks ago. I kind of figured I was pretty low on the pecking order of things.” “No, this is my company. This is your company.” He said, “Go find out the person that lied to us and go fire them.” So here I was, you know, probably at the equivalent of a managerial level on the corporate ladder firing the old CEO of that company.
Holy cow. What was that like?
You know, sometimes you feel like, well, that’s really mean-spirited, but then, you know, hey, it’s not, because that’s what the other 500 people in that company needed in order for them to keep their jobs. And to me, the motivating thing that gets you up in the morning when you do this and you go, I faced another 16-hour day or 12-hour day today, is the amount of jobs that you’re saving or creating because you’re taking this poor farming company and turning it into a well-performing company.
That’s the real motivation. That’s gone a long way and I carry that motivation forward in other areas of life. And it’s like, well, everybody’s got friends and everybody’s friends, you know, if they’re running up against the corporate ladder and realize they’re never going to reach the top, they get frustrated. So I also do a lot of mentoring to those people and help them escape corporate life, if you will. But I look at it as creating value for themselves and their family by starting their own companies. And so we do a lot of that. I find them a great deal of enjoyment in that, which has then led me to kind of long-winded path to get to Castle Placement.
You know, I had a friend of mine who said, “Steve, I went to work as a president of this company and we’re putting in this big real estate infrastructure transportation project around Milwaukee County,” which is where I used to live when I lived in Wisconsin. And he goes, “Can you help me out?” And I said, “Well, what do you want me to do? I could be your project manager. I know how to build the infrastructure that you’re working on, the machinery that you’re going to – I know all the technical aspects of that.” He goes, “No. Even before that, we need funding.”
I was like, “Oh, okay, well, how much are we talking about here?” “You know, 1.5 billion.” I was like, “Well, I don’t know that many rich people. Sorry, can’t help you.” So I said, “But the least I can do for you because you’re a friend of mine is I’ll cold call investment banks until I find one that’s interested in your deal and then the bank and you can talk and I get to step away.” Because at that point, I would have been in private equity long enough to know how to avoid getting in trouble with the law. And so you can’t have an intermediary between a bank and a company like that. So best you can do is just make the introduction and walk away. “So all right. I’ll call up investment banks for you and we’ll see what happens.”
Like Sam Smith the other day, he said, “Smiling and dialing.” Smiling and dialing into all the brand name investment banks that you would instantly recognize and couldn’t even get past the secretary. And so personality trait of mine is don’t make me mad because I’ll just dig in like a tick on a hound dog, right? And it made me mad that I couldn’t even talk to anybody because I knew I had at least something interesting to say. I got this big deal. It makes sense to me because I used to live there. I know it’d be a great value to that community to have this deal going. And so it just made me mad that I couldn’t get ahold of a real person into decision-making chain of command here to help me out.
And so after like 50 or 60 smiling and dialing phone calls, you know, I finally said, “Okay, fine. I’m going to move away from the name brands investment banks to maybe…” you know, here naïve I was, like, “I’ll just find the next tier now. Maybe find somebody that’s hungry and wants to do a deal.” So I got really lucky on the first phone call on that cycle, that new cycle then of smiling and dialing. I got ahold of Castle Placement and it was instantaneous. I was on a phone with Richard, the managing partner. He’s like, “Oh, this is awesome.” Here I was, you know, gotten heard no like 50, 60 times in a row, and finally, I’m on a phone, the very first phone call, with them. And they’re like, “Oh, yeah. We can do that. We do deals that size.”
It was completely different experience than what I had just gone through and I’m sitting here going, you know, I volunteered to help a friend and I’m thinking, I’m going to be on the phone with Gordon Gekko. He’s going to get a laugh at me, right? No, Richard was exactly the opposite of that. And everybody I spoke with at Castle was warm and open and professional and like, you know, here’s exactly how this is going to go. Here’s exactly when you, the referring source, you’re going to have to bow out because that’s what the law requires. So they’re completely transparent about that.
I said, “These people are not only open and warm and transparent, but they have integrity as well. And they’re not Gordon Gekko.” So, hey, this is the place for me. So if I ever have any more deals, I’m going to send them their way. And one thing led to another and they were actually looking for bankers to open offices, more offices around the country. And so just on a whim, I said, “Hey, I know this really smart guy. You’ll like him. He’s nice.” Richard came back and said, “Yeah. Go get your license. We sponsor you. Go get your Series 7, Series 63 license.” And away we go. So, you know, that’s two years, two and a half years ago. And I haven’t regretted a day and love everything that happens there.
Wow. Okay. So between that, help me understand. So the Castle Placement is a private equity firm, right?
No, they’re an investment bank Itself.
Investment bank itself. Okay.
And then TPG Astute. So I’m just trying to understand the difference between these two.
So Castle Placement is an investment bank. So they are more on the sell side and the buy side. So they work with companies that have equity that they want to sell in order to raise capital and Castle Placement will then find investors that, you know, I need to put my money somewhere and this is a good investment package. So I’ll go and invest in the company that Castle Placement is cliented with. Versus a private equity side like TPG Astute where we’re working with private equity companies who directly own. So they’re not seeking additional capital. They’ve already gotten the capital and now they’re buying a company to create value that way.
Now on the flip side, on the back end of that, I should say, is when that private equity company is done growing their portfolio company, they may come to an investment bank and say, “Hey, I want to shop this thing around. Do you have anybody out there in your investor database that would want to buy us?” And so yeah, we at Castle Placement, we can do that as well. So it’s a big industry. And if you think of all the possible iterations of how deals get done, there’s a well-worn path for all of those possible iterations.
I got you. Yeah. So again, I’m kind of back briefing you here for my benefit and for those listening and watching. So the private equity side of things is going to focus more on the operations, the going and purchasing something, doing something with the capital that they have versus an investment bank, which is providing the fuel for that to happen. So they are working closely with private equity firms to help fund a deal or something that’s going on. And they’re representing a collection of different investors that may want to participate in that. And then they cut the private equity firm a check and that private equity firm takes that check and then runs operations with that or whatever that use case is. Is that right?
Yeah, absolutely. So, you know, I went to the Castle Placement website and look at the 84 deals that they have out in to put things in perspective. So 20% of their classic oil and gas to where you have an oil and gas operator that wants more capital to expand. And so they go through an investment bank like Castle Placement to find those investors. And then another 20% or so is real estate. So classic “We have a real estate project. I have 10% of the money I need as a sponsor, I need the other 90%. And we’re going to go out.” And Castle Placement will find the other 90% of that money for you and most of those are structured as an LLP (Limited Liability Partnership). So the tax advantages go to the limited partner and the sponsor or the operator actually operates and build the buildings or whatever it is that you’re using the money for, right?
I’ll give you the more classic. You know, I’ve got a business, I have this great idea. I’m at the $10 million revenue range. I want to grow to $100 million dollars and here’s path forward. Castle Placement go find us somebody to make that investment and we’re willing to give away a portion of our company in order to bring on that new capital in order for us to grow. And so that’s probably the other 60% of what’s out there all across multiple industries, very industry agnostic. All of those 84 deals, I think, probably, like I said, 40% of them are repeats, you know, oil and gas, real estate, et cetera, but all the rest are ones that teases. They have an industry agnostic viewpoint. That’s really based on the folks like me, you know, what is your expertise as a managing director and what type of deals can you bring in? So I tend to focus on manufacturing and industrials because that’s where my knowledge base is at and where my contact base is at. But that doesn’t mean if I run across a real estate deal with John Hazelton, you had on onto podcast the other day, you know, I met him at the dog park.
If John ever had a real estate deal, he wanted to become, you know, needed funding for, they could come to myself or anybody else at Castle and we could fund that deal for him.
Nice. Okay. Well, cool. No, that’s good. And I was on the website looking at it like, yeah, it’s a mixture of real estate. I saw some energy on there. I saw a bunch of different things, but there’s quite a bit of different things going on. So let’s flip the table around now. So if you are wanting to get into this industry, so you are either a younger professional or maybe you’ve had a successful career so far, but you really would love to understand and work in the private equity side of things. Just for starters. What are some of the more common paths or how difficult or not is it for someone to want to get a start working in private equity?
Oh, man, that’s a really hard question to answer because I took a non-traditional path into it.
I see. Okay.
To say what is the typical entry foothold into investment banking, it would be an intern. Go to college, focus on finance, do internships during the summer. And Castle does sponsor a lot of interns and it’s fun working with them. They’re energetic and smart and they want to learn and grow. So start there and you can go work for an investment bank or a private equity firm as an analyst. And then you grow from there to vice president, whatever the next ladder is, into the partnership or like myself, into a managing director, whatever the corporate ladder for that particular bank that you’re talking about looks like.
But then on private equity toward the work I did as a private equity operator, I got into that because – I had not intended to, but when you go and work for a company, you may inevitably find yourself working for a portfolio company of a private equity firm, right? And then from there, I think the most common path deeper into private equity is you find somebody that do well and then work with that same private equity operator over and over and over again. And that was my case where I latched on to the CEO of that very first company that I worked for and followed him around as he moved from one particular portfolio company to the next. And then you gain a reputation within the private equity community and that’s when other private equity funds started to say, “Hey, we like the work you did over there in Wisconsin. Can you do that for us down here in Texas?” “Yeah, roger that. We can do that.” For me, the path was latch on to that mentor and follow that person, do a good job of course, because that person has to want you on their team.
Right. Yeah, for sure.
Right. And then follow that person around.
I got you.
So, you know, if you’re fortunate enough to work for a big private equity fund that may have 50 companies in their portfolio, even if those companies are very well-run, inevitably, you’re going to find that two or three of them need help. And so there’s always the opportunity to go work at some company somewhere because the law of averages says that not everybody’s perfect all the time.
Right. Nice. Really kind of a very random question. I’m just looking at some of the notes that you and I kind of traded before coming on air. So you made a note in here and I just wanted to – I was just curious what you meant by this. You said democratization in retail investing is spilling over into private investing. What does that mean?
Oh, yeah. So technology’s affecting everything. As you know, I mean, it’s been going on now. 40 years is rapid change. And so you have the ability on the retail side to perform instant trading. You can go on Fidelity or Etrade or Robinhood.
You’re talking about GameStop, are you?
But, you know, technology allowed that to happen to where you can execute trades if you wanted to. You want to try it out for account, you can go execute trades in real time. And so that’s same mentality then of how do I get involved more in the private side? Because remember, the investment banking world is really divided in two basic camps. The first camp is retail, which everybody’s familiar with. Everybody has a 401(k) and a stock broker. That’s the retail side, where you’re buying and selling amongst average investors. And then there’s the private side. The Castle Placement and the private equity firms I worked for focus on the private side. So, you know, the larger transactions to institutional investors and that’s been their bread and butter for a long, long time.
But now with the technology being the way it is, it’s inevitable that that demand for openness, speed and transparency are going to spill over onto the private side. So no longer is the private side is kind of like, you know, old boys, scotch drinking, cigar smoking, golden Rolodex type of thing. Those days are gone. And the demand is for people that would not traditionally have been in private equity or private investment banking transactions, the laws are opening up and it’s becoming more accessible to them and their expectation is you’re going to execute at a much higher level of transparency and speed because they’re coming from the real retail side where you can execute an order real quick.
So Castle has done a really good job of bringing in that technology to – and remember our prior conversation that that’s what I really liked about them. They were very open, very transparent. And so you can go on their platform and see how many LinkedIn campaigns are tied to your deal, how many investors that they have actually contacted, who they’ve called, what those people’s responses were, how long does it take to trade legal agreements back and forth, and all the speed and transparency that you would want are there. Versus the bad old days, I think, you know, the cigar smoking, scotch drinking, golden Rolodex days of the 70s or 80s. You would never see that, never know about it. And you paid your money, if you will, and you don’t even know what you got for your money. So if I ever had to do a raise again, I would never do it with a company that outside of Castle now. Because, to me, they set the golden standard model of openness and transparency.
Wow. Well, then, on then of capital raising, how much involvement do you have on a new startup, right? You got to start up that’s wanting to raise capital, how much work do you do with those companies?
That’s actually changing. So Castle has historically just worked with institutional investors and institutional investors typically don’t work with startups. That’s more of the friends and family and angel investor stage. However, again, you know, you move with the times and move with the technology that’s available to you. So the Security Exchange Commission has opened up their rules on two of the exemptions from registration, which makes it easier for younger companies to raise money. So the first one is the crowdfunding. So right now the limit is $1,070,000. And so in March, that’s moving up to $5 million. And so now it’s kind of like, well, now, for us, as an investment bank, you’re now at a threshold value where it makes sense for us to engage in the startup companies.
So that’s positive trend number one, and positive trend number two is the inner workings of the Bay Area, that combination of startup companies and venture capital people and business accelerators, it’s not unique to them. It’s something that can be replicated elsewhere. If you take the time to study and see how it works, you can now model it and use that model to replicate Silicon Valley elsewhere. And so you see that, right? That’s as a huge trend going on right now is a lot of universities are doing technology transfer and accelerator offices. The federal government is doing it. And so you’re shifting the locus of power away from the west coast to being far more spread out throughout the United States. The University of Arkansas has a large technology transfer and business accelerator program coming out of the university, right? Austin does. Even University of North Texas has a technology transfer office. And so all that, to us, as investment bankers, represents deal source, right?
If you think of blue ocean strategy, how do you get to more deals? Well, you’d go find people in their infancy. That’s why Pepsi bought Frito-Lay because they can sell potato chips to youngsters and soda pop, youngsters all the same time. You can market for their life, right? So if you’re out there working with the startup companies, they’ll represent a new avenue of deal sources for you, which becomes eventually a revenue stream. And so now you need, really, both. We want to capture that customer for life. You have to have the ability to help them get started up through a regulation CF, raise a crowd funding raise or regulation, a raise which is bigger than that, and say, “Okay, great. Now we got you up and running and let some time go by and you grow, and now you’ll need a new round of money to keep growing. And that’s where we can take you over to perhaps the institutional side of investment banking, the people with the larger pools of money. And we can place that, you know, do that capital raise for you.”
And so to me, it’s a life cycle type of models to where now if you’re really focused on the up and coming companies and maybe you can’t do a raise from that. And that’s always the risk you take is that they just don’t have enough money to pay the fees to do a raise. Okay, fine. You know, I offered to mentor them and help them. I’m a phone call away because eventually they’re going to remember that. You helped them find the right account or you helped them with the business problem or you offered them some advice on who knows what, how to approach a market. They’re going to remember that. And when they are big enough or have enough cash or whatever to work with you as an investment banker, then they’re going to remember you and they’re going to come back to you.
And so, you know, that’s kind of building a market from the ground up and that’s what our approach – my approach personally has always been that line. Castle’s now, I think, taking that approach as well with their marketing plans.
It’s good to see. It’s very exciting to work with young startup companies because there’s always that kind of daring do, if you will, of you don’t know whether they’re going to make it or not, but they have these really great ideas and captures your interest and working with those folks can get pretty exciting at times.
Do you see more of that coming to DFW? Do you think DFW is becoming more of a hub or is there a lot more work still to be done here to kind of foster, kind of recreate what you’re talking about with Silicon Valley?
Yeah, it’s both. So it’s fledgling, I think. And I know there’s probably folks out in the startup community that would take the challenges to that, and I appreciate that. So, but first off, Texas and Austin, Austin specifically are really kind of – I think there’s more venture capital deals done in Austin last year than there was in Silicon Valley.
Yeah. You know, I could be wrong about that, but if it’s not more then it’s very, very close.
Very close. Yeah, very.
We’re at least having a conversation.
Yeah, exactly. And so if you’re not paying attention, you would never notice that because not everybody works, you know, how many people do you know that actually work in venture capital and around startups. See, this is not like it’s on national news or anything to show, but it’s true. So then how do we replicate that here in Dallas? That’s really what one of the things I’m working on is trying to grow my own connections and networks of obviously investment banking deal sources, but also people that want to help mentor younger startup companies. Because one, it’s the right thing to do. If you care about your community, then that’s what you’re going to do. You’re going to help out in whatever way you think you can help out.
And then for somewhat selfishly, for me, as an investment banker, then that provides me a source of deals for five, six, seven years down the road. Where were those deals coming from? But well, through all the connections that you know in the startup community and those guys have grown up. Okay, fine. So it’s an investment in the future both for me and for everybody else as well. So I’m definitely looking for help. Anybody that wants to help mentor young startup companies and bring them up into the marketplace, you know, just a phone call or an email away. We’ll get you going, we’ll help you out as best I can.
Oh, that’s fantastic. Right before we go, you’d made a note in some of our correspondence pre-show but tell me just real quickly and then we’ll wrap up. You said something about endurance sports. So you have an interest in that?
Oh, yeah. So the backstory to this is when I was in in the military, I was on submarines, right? And the grind there was 80 to 100 hours a week. I come off submarine duty and go on to shore duty and go, wow, this is a 40-hour week job. I feel guilty. I’m not working 80 hours and I feel really guilty. And so I always carry that level of discipline with me. And until the point where your memories of submarine duty fade and you begin to question, like, well, did I have that sense of discipline in myself? So was it an internal or was that sense of discipline external? And so you start clicking through all of the instances in your life where you have prolonged periods of high discipline in your life, you know, getting up at 4:00 AM, blah, blah, blah. Okay. Well, a lot of those were also externally driven as well. I need to feed my family so I must keep this job. Therefore I will work 12, 16 hours a day. Okay, fine.
So eventually, it comes a point where you question, is it me or is it the environment? And so this challenge that I’m going to go on in March, March 5th through the 7th, it’s a nationwide event. COVID, obviously, it’s going to be virtual. So everybody’s kind of like on a gentleman’s agreement to do it on your own. But you run four miles every four hours in a repeating fashion for 48 hours in a row. And this was a challenge by David Goggins who’s a former SEAL. I’m sure you know who David is.
I do, yeah.
So I’ve attempted this several times in the past and was crushed by it. So I must admit. And then finally I succeeded this past year in making it all the way.
And now want to do it again. Only this time, harder. Last time we did it, I did it on cement, just around through the neighborhood. This time we’re going to do it probably Erwin Park on dirt trail.
And you know, it’s a lot harder. My running time slow down by about 30% going from concrete to dirt and then I’ll probably do a camping at Erwin. So none of the luxuries of the home to help you recover. So it’s going to be a lot harder than it was last year. But I need to get it. I really feel like Captain Ahab chasing the whale. I got to kill this thing because I really need to know. Is that ability to turn on self-discipline like a light switch something that is inherent to me or is it an external environment driven?
And if it’s not inherent to me, then you need to start exercising that ability to grow it to where it is inherent in you. Because it’s an extraordinary skill, I think, very necessary for a success in life and anything you do, whether as a dad or an investment banker or whatever it is that you’re doing. Your ability to muster up all your self-discipline and push yourself further than what you thought is what’s going to get you to grow. And you know, I don’t know about you, I’m sure you probably feel the same way, but there’s got to be some forward motion all the time. Otherwise you kind of feel like what’s the point? Staying in the same spot is not the point.
A hundred percent. No, I couldn’t agree with you more. I did. And in fact, very closely related to that has been I kind of go on these triathlon journeys every so often. I need something in my life to kind of help force me to stay focused and work towards a goal, right? And so it goes back to that driving forward. And so yeah, it’s great. I mean, great time, man. That’s a great topic. And it’s like kind of getting philosophical there. It’s getting real deep because it’s like, you know, is the source of my motivation coming from within or is it a forced hand, is it forced in some way?
And so my opinion on that, honestly, and I know you didn’t ask for it, but my opinion on that has been that it’s selective, right? I think there are absolutely moments in time where external forces, for sure, helped give you a little bit of a nudge in the right direction. Because you needed to go do X, Y, and Z. And then I think there are other times when you have the capability, the capacity within you, you just may sometimes decide to not exercise it as often. And so then there’s other times where you do exercise. What I hear you saying, I think is really, really powerful is, it’s a great thing to continue to kind of check yourself and continue to kind of re recheck and retest yourself in that way and to put something in front of you and go do something that is going to make you a little bit uncomfortable and we could go off on a whole David Goggins’ theory there because he talks about that quite a bit. I’ve seen some of his stuff. But no, I mean, it’s very fascinating. So man, I will be cheering you on for the 4x4x48 Challenge. That’s really cool.
But no, Steve, I just want to thank you, man. It’s been a blast. I really appreciate having you here. How can people get in touch with you? How can they learn more about you? What’s the best way to get in touch?
So by email at firstname.lastname@example.org.
I’m just going to throw this guy up here. Tell me if that’s right.
Yeah. That’s it right there.
Cool. All right. So reach out to Steve.
Absolutely. On any topic. Banking, turning around companies, Goggins Challenge.
You start to personally have to go on to Yahoo, you know, business, work, separate, but definitely open to helping people out in actually whatever way I can. Because like I mentioned before, it builds the community that you live in and we’re here to pass along a better life for our kids than what we have for us. That’s what we should be doing. That’s one of those duties that we take on.
Yeah, for sure. Well, Steve, I just want to thank you again. Thank you so much for being here. This is a sincere blast.
Thanks. It’s great to be on. Appreciate having me on and I’m joining your guests. I’m surprised, you know, coincidentally know several of them.
Oh, yeah. And it’s always interesting to hear their perspective.
For sure. Thanks, Steve. Thanks for listening to America’s Entrepreneur. If you enjoyed the show, please leave a review or comment on your preferred social media platform. Share it out with friends, family, coworkers, others in your network. And of course you can write me directly at email@example.com. That’s firstname.lastname@example.org. Until next time.