Episode 28: Mark Buffington of BIP Capital on
What Makes a Startup Ready for Investment

Episode Transcript

Shiv: All right, Mark, welcome to the show. How's it going?

Mark: It's going great. Thanks for having me.

Shiv: Yeah, thanks for being on. So why don't we start by introducing yourself and your firm and we'll take it from there.

Mark: Well, I'm Mark Buffington. I'm from Atlanta. I run a firm called BIP Capital and BIP Ventures is our venture product and arm. We've been in business for 17 years. We manage about a billion and a half dollars. And we own some really interesting assets. Our focus is in healthcare, fintech, advanced computing, and media and marketplaces. And so that's the basic elevator pitch.

Shiv: And beyond the industries that you're investing in, is there a stage of company that you try to focus on?

Mark: Yeah, we're a multi-stage fund. And so we'd like to say we can write a $100,000 check for seed stage companies and up to a hundred million dollar check for kind of growth stage companies.

Shiv: And how do you decide what, like in terms of, what types of companies you're investing in? Are there certain governing principles that you look at your firm to sift through that, especially being a multistage fund where there's way more options for you than a firm that might be focused on a specific segment of the market?

Mark: Yeah. So in general, when you're in, or when we're investing in a seed stage company, most of what we're evaluating is the market opportunity. There's just not a lot of business model or functional, you know, team metrics to measure. It's early. They, those, you know, functions, whether it's customer success or really sophisticated marketing or go to market motions have not been built yet. So, you know, so we end up evaluating the quality of the market that we would enter in the opportunity that or problem that we're trying to solve. And then the, you know, what we think qualitatively about the founder and their ability to address that market opportunity through scaling and growing and becoming a sophisticated leader of a business. And a lot of times in that early stage, it's somebody's first time running a business and, you know, even myself, I'm 53 years old now, but when I started my own business, when I was just before 30 and you know, probably thought I knew a lot about growing and scaling a business, but have learned a ton. And so, the first time founders and CEOs, they're in learning mode. And so we try to really assess, how quickly are they gonna learn? And do they have the criteria to be good leaders over the long term? And then on the other end of the spectrum, the kind of growth investments that we're making with much larger checks, really all of that has to be in place. Great market opportunity, the right competitive dynamics. The right, you know, a certain sophistication in the business model, like all the functions, you know, whether it's, you know, finance, marketing, sales, customer success, product technology, all of that has to be fairly sophisticated. And mature, if you're going to write a check like that. And then, you know, then obviously we're always evaluating leadership on various criteria. But mostly for alignment and integrity and kind of energy you know, willingness to really do what it takes to build special category leading companies, but anyway, that's the kind of bookends and. You know that, you know, the criteria for a larger check from seed through what we call the traction phase, the scale phase to the growth phase. The, you know, essentially the bar gets higher and higher to win those checks from us more of that, you know, all of those different areas that I mentioned have to be mature as you move through, you know, different stages of a company's life.

Shiv: Right. And it's really competitive, right? When you look at the amount of dry powder chasing the limited number of deals. So when you look at companies and obviously you're vetting the founders and the businesses themselves and evaluating quality and earnings and all those things. But on your side, when a founder is considering you as a partner, what are some things that really differentiate your firm above the other options that a founder might have?

Mark: Well, we like to think, I think first of all, like you mentioned, like evaluating financials as you know, one of the criteria for, you know, how we evaluate and ultimately the, you know, the criteria that we would look forward to invest. And that's certainly true, but my view of the world is that, you know, there's MBA schools and finance schools or they're graduating, you know, thousands of people a year that can do all that. So those skills are somewhat commoditized. I think, you know, it's when you get into, “Can you actually help create value” as an investor, whether you're a growth equity investor, a private equity investor, or a venture investor, it's can you actually help create value, which means that you ultimately have to solve problems. And, you know, we'd like to, we'd like to say to our, our founder partners or people who are considering taking money from us or investment from us that we're a partner in problem solving and we don't have all the answers. But the way human beings approach problems is really important to us.

It's, you know, look, especially in venture in the earlier stage, you're going to get knocked down a bunch. And, you know, if you're dealing with people, for example, who are really prone to let's say self-attribution bias. In other words, everything that goes right, they take credit for, but everything that goes wrong, they blame everybody else or external circumstances. That's not, I mean, that's not really the right mindset, you know, to solve problems because people never really deal with the truth. And so we spend a lot of time evaluating our partners during diligence on that, like, are they truly going to be, you know, fun and are they going to view problem solving as, you know, and if you think about it's a gift, I mean, we get to wake up every day and solve things and, and take on problems and size it up the right way. And if you have the right attitude, I think it's, you know, that becomes fun. It's not, you know, some burden, everybody's angry at each other because you're working on a tough problem together. And so I, you know, I think that's our, you know, probably our biggest selling point is that we've, you know, we've been there, done that. We've been doing this for 20 years. Our batting average is very high. We're flexible capital. So in other words, our funds aren't so large that I have to write like a $50 million check to a business that, or an opportunity that I believe in.

I think, look, there's some great investors on the west coast, but part of the problem with some of the large mega funds is they, or they have so much capital that they have to write a check of a certain size and they flood businesses with money and it effectively turns them into a binary bet. It's either going to work or it's not. And, you know, so therefore, you know, there's a large number that don't. I mean it, right. And so, but if I'm a founder and I've come up with a great idea and I may not want to turn my dream into a binary bet. I may want to thoughtfully learn and go and solve problems as we go, which is, you know, the other end of the spectrum of that, you know, kind of play bigger model is the lean model. And we'd like to say we can play anywhere in between just based on the circumstances and the market conditions that, you know, that are present when we make an investment in a certain space.

Shiv: Yeah. And one of the concepts that we were talking about before this episode started, was just this concept of permanent capital and how you guys focus on that. So can you expand on that concept and along with the flexibility piece that you just mentioned and how that's beneficial to how companies are built?

Mark: Yeah, no, great question, Shiv. So I think, you know, we, to some extent, I mean, at the end of the day, you know, by law, we're fiduciaries to investors and we have to steward their investment. But, you know, we like to say, you know, we're a fiduciary to the investors we serve, but a steward of founders’ dreams, and we have to balance all that. And so, you know, as the more we've evolved in our thinking on, you know, how we add value to companies when we make an investment, you know, you just end up studying hundreds. I think we've made, at least me personally, I've made over 150 or investments in over 150 companies. And so you just start learning like, what do founders really need?

And, you know, one of the biggest things that comes out of that, whether we survey them or just sit and talk to them is, you know, fundraising is stressful and it's distracting and they have to get out on the road, sell their story again. You know, they have to build those decks. They have to travel. They're away from their teams or not leading. And that's all great. And we're not saying they shouldn't do that, but on the flip side, we want to give them an option to say, look, here we are, we, if you hit certain milestones and there's enough traction and we believe in the story, and we believe in the progress. You don't have to get out on the road, which is why we're a multi-stage fund and flexible capital. And so we can say to founders like, look, you raised $2 million in your series seed or in your series A and, you know, you’ve proven a lot in the business model and de-risked it. You know, we're willing to write up to a 10 to $15 million check now. And you don't have to go out on the road if you're already with us, but you're more than welcome to, we're not going to stop you from doing that. And if you think you can go out and really command a premium or a stretch valuation, you know, we're pulling for you or we're aligned in that regard.

But on the flip side, if you want to stay focused and allow us or give us the privilege of putting more capital to work behind that dream and everything's working well in the partnership, we're happy to, happy to extend our bet and write a bigger check, another check and have more exposure. And, and so that like flexible funding and, you know, you can get all the capital you need here for the most part. I mean, there's certain types of ventures, particularly some of the AI ventures I've been seeing funded lately with like a billion five, you know, we can't handle all of that but we can, you know, we can handle fairly large checks and the checks that most ventures need to remain competitive and to compete.

So that's the positioning Shiv. And we found it. A lot of our founder partners, you know, really value the fact that, you know, we can be quasi permanent. I won't say we're permanent, like we don't ever have to generate an exit, but you know, we can fund for years and years and, you know, we also have evergreen funds, so we don't have this like end of fund life, putting a lot of undue pressure on us to sell things and our, our limited partners, those who invest in us really understand that it takes a long time to build really valuable things. And so we think we offer that value to founders in a way that most funds don't.

Shiv: Yeah, I think that's a really big point, which is that it takes time to build valuable things and I've seen two things really kill companies is just (1) short-term thinking and that leads to decision-making that prioritizes things that you normally wouldn't or you wouldn't if you were trying to build something more sustainable. And then the second is just burning cash on a horizon that is just too long of a timeframe and trying to generate a return in like a 10-year, 5-year, even 3-year payback periods that aren't sustainable, for example.

So talk a little bit about that in terms of how you're helping founders navigate those waters. Because when you, for example, you mentioned the VC firms and how much they're funding out west, like you can get into a situation where it's either you're a unicorn or it's a bust as an investment, right? So how do founders navigate that?

Mark: That's what I mean by binary bet. It's either all or nothing, you know? And so, and I think if you take that style of check, you're on that road. You've got it. You either got to go huge and be big and, or you know, you're probably going to end up washing it all out and the founder gets nothing. And so, you know, we're upfront about that when we speak with, you know, potential partners in the diligence process and, you know, they're vetting us as much as we're vetting them as partners, by the way, I think that's the way it should be. I mean, these are marriages, as you well know. I mean, you're going to, if you take capital from a VC or vice versa, if we give money to a founder, we're going to be working with them for, you know, you know, maybe even a decade or longer. And so you need to really think about like, do I really want to be partnered with this particular person? you know, for that long, and do I really feel like this will be a rewarding experience? Not just from the capital return, but you know, just from like, we really want to get in a room and whiteboard and solve problems together and build and scale together. And so, you know, we were really upfront about that.

Again, one of the only benefits of being a little older now in the venture space is that you've seen a lot of these movies and I think we can talk about what happens more honestly, you know, through time with, you know, the typical startup and so, you know, I think that's part of the discussion. The other part of the discussion is more company specific, meaning that, you know, if you're in a startup that is chasing a big opportunity and there's a clear pain point in the market that, you know, one is trying to solve, you know, for other people you know, that's great, but sometimes there's technological problems that haven't been solved yet. Sometimes there's business model problems that haven't been solved yet. And I think, you know, our experiences, if you overfund a company before those are solved more often than not that business ends up failing. And so on the flip side, if you have all those things solved, like technological innovation is there, business model solution is there, and, you know, there's a kind of a blue ocean, you know, absolutely you should unload and, and go capture as much share and, you know, create first mover advantages and all the economic competitive advantages that lead to long-term value creation.

So I think, you know, that, you know, building a capital and fundraising strategy to meet your business strategy, given its maturity and where it is, is one of the other big conversations we have up front. And should we meet some people that just come in and say, I'm raising $50 million or bust, I don't care. And for us, if $50 million or bust is aligned with they've already got the technology and product worked out, they've already got their go-to-market and pricing models worked out, we're all in for those types of checks. But if they don't have those, we think more often than not, too much capital is going into an immature business and bad things happen, so we tend to avoid those situations.

Shiv: And how are you staying on top of the investments that you make already to make sure that the capital is being allocated effectively and this not good money chasing after bad and their good fundamentals that are being kind of followed through the pond.

Mark: Yeah, it's a great question. I mean, so we, this is another one of those, like when we survey or just speak with our founder partners almost as if they're our customers, like, what do you need? You know, one of the things we find is that, you know, particularly early, most of them don't have financial infrastructure and a, you know, finance team infrastructure to be able to report thoughtfully or not just to us, but to themselves to stay on top of the business. So, we built a proprietary software system that, you know, really gets at in the most efficient way we could think about doing it. And, you know, our portfolio companies, when they take capital from us, agree to kind of close the books no later than 20 days after the previous month. If they don't have a, you know, somebody in place to do that, a CFO or a VP of finance, we provide that.

And again, it's a value add, but you know, that's also, so, you know, you get this report, it has, you know, both financial metrics and KPIs. And then it becomes really the basis for the conversation. You know, if we're, I'll give you a couple of examples. If we're taking a long tail bet where there's not going to be a lot of revenue in the short term, but we're building acquiring rights, for example, like we had a business called Play On Sports that's a, you know, a large live streaming company for, for high school sports, you know, we knew in the beginning, we had to go lock up a bunch of media rights. So the steps to success were not anything that we're going to, it was going to show up in a financial statement, they were going to show up in, you know, the number of media rights contracts we solved. Then we had to go implement the different high schools and state associations. Then the revenue came. And so, you know, if you're, if you're, if you make that bet, and then you're looking at financials and you start getting unnerved because the financials aren't coming, you're measuring the wrong thing, or you're looking at the wrong measurement of success. And I think so creating a system that, you know, where we kind of organize our bet types here we have five different types of bet types and we're measuring the right things to see if we're on track in those bats, you know, I think it's paramount because, you know, even the, the kind of most convicted of VCs lose their nerve and will sometimes if they're not looking at the right stuff to measure success. So a lot of those types of things. And that's, so we're monitoring monthly, but not necessarily financials, but the keys and the, what we call units of measure to success. And I think that helps us stay on track, but also helps us be aligned with the founder on what we're trying to accomplish.

Shiv: Yeah, I think one of the interesting things there is that I think your investment model allows you to take that type of an approach. One of the things that you said there is that sometimes you need to build foundational elements before the revenue-generating activity can actually happen. And we see this all the time inside companies where they try to put the cart before the horse and then an initiative might fail. And then that entire avenue or domain of activities could get ruled out before the fundamentals have actually been put into place. So doing things in the right order is just so important, but you need patient executives and patient investors that truly understand that so that you give it enough time so that value can be created.

Mark: For sure. We have one of our partners here says that in a much more, kind of, layman's way, it's like, you got to put the plumbing and the electric in before you put the drywall in. And, and if you're like delusional about that order, you know, like you're going to end up making bad decisions and understand the bet you're making and the nature of that bet. And so we've, you know, that's taken two decades. I mean, we figured it out about a decade ago, but it took us a while to figure that out. I mean, we're human, subject to emotions, fear and greed. You know, as you didn't see traction, it became very clear, like, are we measuring the right stuff? And so over time we built a system that allows us to measure the progress against a bet to your point. Sometimes the first step is not financials, it's foundation.

Shiv: Right. And so what are the fundamental or foundational things that when you come into companies or you've invested in the businesses that you see are missing or require a lot more work before some of those additional levers or additional growth stages can be unlocked?

Mark: Well, I wish I could tell you that it's universal, but it really is business dependent. So the way we built our software is we can define what those sequential units of measurement are that ultimately lead to a financial scenario.

So the best, I just left a board meeting in a behavioral health play that we have, and they have a screening tool, which then leads to, if you diagnose, if that screening tool diagnoses somebody with, you know, some form of behavioral disorder you still have to have downstream treatment and they do both things. And so, but the first stage is assessment. Well, one of the precursors or pro you know, predictive elements of whether you're going to do a lot of treatment is how many assessments you do. And then of those assessments, you know, how many people are flagged for behavioral disorder. It turns out that, you know, the world is kind of a bell curve in that the more, the more you do, basically it's a fairly predictable number. The more assessments one does, it's fairly predictable number of, you know, kind of people who will come out the other end of that assessment being diagnosed with a mental health disorder. So, you know, so one of the keys to success for us is, get in a position where you can do as many assessments as possible. If you're trying to help cure as many people that are suffering with behavioral health disorders as you can. And, but if you, again, if you measured financials, and you didn't measure how many assessments you're doing and how that's growing, you probably don't really understand all the components of your business that lead to the ultimate financial success. So that's just a simple example of that. So they're all business dependent. And that's part of what we do up front is define all that for every business, or at least what we believe it to be at that time. Sometimes they change and we had the wrong units of measurement for success. We have to pivot, but that makes you much more clear minded when you do pivot.

Shiv: Yeah, I look at something like that as like finding the right customer, right prospect at the right time so that you, your go-to-market is focused on the right individuals at all times. And definitely we see companies missing that. We also just see a basic misunderstanding of how big the TAM is that they're going after the segments that they should be focusing on. We see marketing and sales data that's disjointed. We see a bunch of other things as well. So I'm curious. What are some of those other areas that you've identified as you've invested in companies?

Mark: Well, again, customer specific, I think you touch on something really interesting. Like if we make a seed bet and we go suggest, I mean, Hey, let's segment the market. Let's define, you know, ideal customer profile, ICP, and all that. And you know, if you have a founder that's resisting you in that. There's probably a, there's some, there's a problem there either. They're not willing to really be honest about the steps. Rarely do we encounter like they're just not smart enough to really put it all together. But a lot of times there's something in their way, like maybe they have an idea of the way it should be done better. That's healthy, right? If you debate that. But at some point, if it's somewhat illogical or not working and they're not willing to try other approaches, it probably means they're not a candidate for follow on investment.

But I think if I just were to give you specifics, I mean, like I mentioned Play On Sports earlier. The formula for success there was to sign the media rights in different states, then to go sign up high schools, then to sign up subscribers and the revenue would come and you know, but everyone is different. If we're a B2B SaaS company, let's say it's, you know, or B2B2B maybe, and we do a lot of those businesses, you got to measure the first B that you're going to sell to, and then the second B that you're going to sell to. You know, so in the Play On model, I mentioned it's actually B2B2B2C. So you got to measure every single one of those.

And you know, in FinTech businesses, a lot of times you have to have certain integrations that where the transactions are flowing through for, you know, one to process. So we ended up measuring the number of integrations we have, and then the number of transactions coming through and different types. So then those are segmented and we priced those, but, you know, I wish I could tell you there's like a uniform way, but really, you know, it's not to say we don't have businesses that are similar. B2B is B2B. And, you know, ultimately you're measuring, you know, if you're enterprise SaaS and you're selling, you know, a Slack or something like that, you know, you're measuring how many, how many B's can you go sign up and then probably how many users within those B's. But that, you know, but everyone's different and everyone, you know, requires us to really get you know, granular in the detail on our go-to-market strategy. It also helps us be thoughtful and more targeted in our marketing and how we spend marketing dollars and who we're going after to influence in that channel.

Shiv: Right. Are there inflection points at which, as you're helping a business get more mature or understand what are all those key stages to get them through to a next stage of growth? Are there inflection points that help you identify, okay, this business is now ready for a follow on investment or just another stage of progression where you start to support those founders and businesses more?

Mark: Yeah. I mean, from an investment strategy standpoint, I mean, our goal is to see that progress before any other fund does. And so once we see like delighted customers, a predictable revenue generation model, or at least reasonably predictable in the early stages, you know, we know that if we go sign up this many physician offices, we, you know, and they use the tool at this average level, we get this many assessments, which drives that much assessment revenue, but also that much downstream treatment revenue. You know, things like that. Once we see that all coming together and the metrics work out such that, you know, the revenue stream we get relative to what it costs us to go acquire that channel is, you know, is attractive. We move as fast as we can to get money into the business and because we want to go capture (A) on behalf of the founders and with the founders, we want to go capture the market. But (B) it's also good for our investors. I mean, if we wait till everybody in the world recognizes that this is an emerging awesome business, you know, by definition, the price moves up fast. And, you know, what we generally say to founders is, you know, Hey, let's optimize competitiveness and, you know, lack of dilution for you so we can create more probability that we don't have to put 15, 20, $30 million. Let's say it's a $20 million round to go really capture the market, but you're not going to spend all 20 in the next year. We can say, look, take 10 now and you have a call option on another 10. So you have pure visibility on that. So you don't take as much solution, but you're comfortable that you can go execute the strategy in a way that gives you a real leg up in terms of having the capital to go win the market. And so, again, we try to be flexible funders that are thoughtful and thoughtful with our founder partners, et cetera.

Shiv: I think that's great and I think more investors should consider an approach like that.

One thing I wanted to touch on is something that you shared with me earlier is this idea of just the right, the fat right tails as a way to identify investments and opportunities. Why don't we touch on that? I think it's a good place to transition to that.

Mark: Yeah, well, I think just the light bulb moment was I started my career as a hedge fund manager, trading, statistical arbitrage and hedge funds. And, you know, most of what we were trying to do there was identify, you know, kind of negative black swan events. And, you know, so things like, you know, WorldCom accounting scandal, you know, other things that, you know, the Tyco accounting scandal just you know, bad news happening in some way. And you know, if you, if people were pricing put options or what have you too cheaply, you know, and a company fell apart overnight, you could make a fortune. And, but that's a weird existence.

First of all, I don't like kind of rooting for negative things to happen, but you know, on the other side of that, the more I thought about that, you know, a lot more good happens in the world than bad and it just doesn't get written up in the press and all the time, but I know hundreds of people here in Atlanta that are building really big, awesome companies solving problems. I only know a few that are dealing with tragedy, but so it's just, it just statistically didn't seem like a great way to set up my life is when I was young and thinking about this in my twenties. And so I started thinking about fat right tails as opposed to fat left tails. Turns out they're much bigger. The payoff is unlimited. I mean, if you are focused on negative fat left tails, the worst that can happen to a company is it goes to zero. But in a, you know, on the fat right side, the, you know, the upside is unlimited theoretically. And so, you know, that was just the kind of the theoretical or academic thinking. And so I started to apply that really to ventures and companies. And, you know, that's what, you know, I left the hedge fund space to come focus on, you know, really building things and creating value. And so.

Shiv: How do you think about leveraging that concept in a world where there's just so much competition for a limited supply of deals, right? Because with so much dry powder chasing fewer deals, the price usually goes up. There's, you're paying a lot for the enterprise value. And so like getting even 2X return on a fund from a lot of investors that I've talked to is a great achievement. And so how do you use that to your advantage to get more outsize returns for your investors?

Mark: Well, I think a couple of ways, you know, the, on the fat right tail, we are looking for spaces where, to your point, if they're Uber competitive or everybody else recognizes it and the price is getting bit up, you know, the world is filled with great companies. I mean, you can look all around and a lot of smart people operating great businesses, you know, all over. The world is not filled with great companies that are offered at, you know, a really attractive price for investment return.

Even the way the entire venture capital or growth equity industry has evolved, institutions give them money and they put pressure on them to put money to work very quickly. To me, that defies the odds of real success because there are only so many great companies at attractive prices out there at any given one point in time. We would prefer to make fewer concentrated bets when the odds are really in our favor to drive these great returns, as opposed to a lot of bets that, you know, maybe some small percentage of them will pan out big, but the anybody who looks at the data and really looks at the data, you know, the power law is kind of BS. It's the power law is self-serving kind of prophecy for those who want to allocate a lot of money like that. But if the goal were to optimize returns, there are better ways to do it. I think we've, you know, there's don't take it for me. Take it for people like Charlie Munger or Warren Buffett or, I mean, that's the approach they took is, you know, be more patient and more selective, but when you find what you're looking for, unload and that's the approach we take. And so I think that's one.

And then the second part of that is, you know, it takes time. As you know, I think this is roughly. There's roughly about 300 unicorns in the United States. I haven't checked in the last quarter, but give or take. And the last time I looked at the data, which was maybe a couple of years ago you know, almost all of them, like 80 to 90% of them took 10 years to build that level of value. So it takes time. And what I, the other thing is the way the industry set up, if you're an early stage fund, you're focused on step ups and getting out very quickly, you know, when the next.

The person in the food chain, if you will, the growth equity fund comes to take you out. We don't allow that friction or that kind of, you know, kind of group think to influence our decisions of when we get out. And that goes back to your permanent capital comment. I mean, after we had a few exits, it dawned on me that, you know, an early business we sold that we got an 8X on the folks that bought it from us paid a nice price, but I knew we were selling them a, not a good, but a great business and they ended up doing a six X on that investment. And I thought, and four years later, by the way. And so I thought to myself, wait a minute, if I just held on four years, I would have had a 48X. What am I doing? And so, you know, that's the other thing.

Value creation is not linear. It's curvilinear and it really starts to slope up in the outer years. And so if you have the ability to be patient and not necessarily respond to, you know, just somebody coming to knock on your door and say, Hey, you've kind of warmed up the water. Let us come in and let us dive in with you. You know, you, you have a lot of optionality on when you take your chips off and ultimately it'll drive greater return. So, you know, I think all these lessons are known, but for whatever reason, the way the venture industry in particular has been built and structured and who funds it they've put this kind of institutional imperative on it where you got to return money in a certain amount of time and those frictions drag on returns. So like, I got to tell you, if I brought 2X returns to my clients, they would fire me, our investors. We have to do way better than that to continue raising money, you know, from, from our LPs at least. So.

Shiv: Hahaha. How much do you think financial engineering has compromised or taken away from the actual value creation piece? And I'm saying this in the sense that, the 48X example that you gave, we see a lot of firms just cap and then recap and then four years out sell it. And then the firm that buys it sells it another two years out. And very quickly that management team is so focused on selling and reselling the company that terms of value creation work, far less work is happening. Whereas like you're saying, if you just hold it for a little bit longer and actually focus on the value creation activity, you can actually build a much better entity. So I'm just curious, like in your mind, like do you think too much time is invested on the financial engineering side versus the value creation side?

Mark: Absolutely. You're triggering a lot of thoughts there. I just read a book by Naval Ravikant. I don't know if you read it, it's called The Almanack. And one of the main lessons he says is, you know, focus on partnering with long-term thinking people who are focused on creating long-term value. And that really resonates with me as opposed to people who are focused on status or kind of gimmicks to generate returns, excessive financial engineering, et cetera. You know, we like building highly competitive market leading companies. And that is a certain demeanor and that's a certain kind of DNA and the way people think about that. And we're patient in going to build competitiveness into our companies. And so that's the first thought that you triggered. And I think the other is, as I think about all these private equity firms out there that are using financial engineering to generate returns. I mean, look, there's a reason all the downstream kind of growth equity, private equity have been on the sidelines really for the last two years or year and a half. I think a lot of it's because of inflation drove debt prices to places where they just couldn't play. So think about that from our perspective. We're like, great. That opens up later stage markets for us to deploy capital in at prices that we haven't been able to you know, really see or participate in, in over a decade. And so it's just, you know, it's like right when it's best to be an equity investor because the, the debt markets are tight or there's inflation or rates are higher, their, their business model doesn't work, you know, that seems to be a flaw, you know, kind of a fly in their ointment. It just doesn't, that's not a long-term strategy. It's not, you know, not resilient to different market conditions. And so, you know, again, I think we try to drink the same Kool-Aid that we try to serve to our portfolio companies as we as a fund and a fund management company have to remain competitive through good and bad times and have to be disciplined and committed to our strategy. And I think so, anyway, that's a kind of the high level thoughts that are triggered by that.

Shiv: And something you said there, I'm just curious, you're saying that obviously with the inflation and the rate at which the interest rates have gone up has impacted firms that leveraged up the buyouts and firms that they are the companies that they were acquiring and the amount of debt service has gone up. So we've heard this from a bunch of PE investors as well, but are you saying that on your side, it doesn't affect your model and is there a reason why?

Mark: Yeah, we don't use financial engineering. I mean, that's not to say we haven't put a little debt into our companies when it was efficient and we didn't want the founder to take dilution or too much dilution from around, but I just, I think that, but never is our investment thesis, you know, a big part of the underpinning, the amount and quality of leverage that we put in the pricing of the leverage we put into the business model, it, you know, it has to be driven by a competitive business that's going to be a category leader. And then you can add some, you know, frosting, if you will, with some leverage in the equation, some financial engineering. But if the financial engineering is the reason somebody's doing the deal, I think in the long term, they're going to really, their business model is going to struggle and we see that all over the place. Now it's, you know, certain funds that are over reliant on, you know, leverage and financial engineering to drive returns or really suffering. They can't raise capital now. They can't raise debt. They can't put capital to work. So.

Shiv: And how much of that is because of the focus on organic versus inorganic growth? Because, and just from my interest and also from the audience's side, I'm trying to understand that if you try to grow by M&A, you kind of have to take on more debt as a way to keep your IRRs at a certain range, or at least that's how I understand it. So is it more because you guys are focused more on the organic side of growing these businesses?

Mark: We are very much focused on the organic, but we have plenty of businesses where we have robust M&A strategies and there's any number of currencies or capital to service those, to service the acquisitions through an M&A strategy. One is obviously cash in the form of equity. The other is equity as a currency. So the acquiring firm can use its own equity to buy. You know, that company, and if there's multiple arbitrage there, then, you know, that's great, you can drive IRR in that regard. And then, you know, to your point, you know, another source of cash is debt. And, you know, again, I would never, at least us personally, and at BIP, we would never go do an acquisition if the margin of safety and the returns without debt weren't high enough to meet our thresholds. And then leverage becomes, as I said earlier, like frosting or gravy. But I think all too many firms, if they can't do it by using debt, they don't really have a strong thesis. And a lot of times, I mean, they're coming to us, those firms that I'm talking about, they have an M&A thesis and one of our portfolio companies is a part of that and they're saying, Hey, here's our plan and we say, well, how are you going to finance this? And they say, well, we're going to put you know, six times EBITDA and leverage on it, and they're asking us to roll a bunch of equity into that, you know, we're almost always a no on that. And, you know, in other words, the underpinnings of their thesis are, you know, heavily reliant on financial engineering, as opposed to quality and synergies related to that merger. And so, so we typically pass on that chiv. And I think there's, at least we see plenty of opportunities where unlevered, we could drive mid thirties IRRs with levered, leverage we could drive even higher. And so.

Shiv: Yeah, that's, I think that's great. I think that's something that more PE firms should do. One of the things that I find is that because the firms have found so much success with the financial engineering and taking on debt as a form of growing their assets under management and then flipping those assets, it's almost like organic growth is looked at as like less than or almost ignored. It can be ignored for an extended period of time or the management team kind of keeps it on maintenance mode while focusing on inorganic and that looks good when interest rates and the macroeconomic environment is favorable but now those businesses are kind of behind the eight ball. So I think more firms would do better to really pick great businesses, be more patient with them and put on less debt but then focus on actually driving enterprise value, which is why they bought those businesses in the first place.

Mark: Through organic or better way to say it's through competitiveness in all of those different functions that drive and create value. You know, you got to have a great marketing engine to generate top of the funnel. You got to have a great, you know, sales engine to take kind of, you know, top mid and bottom of the funnel and close them. And you know, I totally agree with you all too many. No, look, let me just say this out front. There are some great private equity firms out there that create tons of value and have value creation teams that are really good, but I see an equal number of what we would call spreadsheet jockeys that come out of some finance school and they can crack all the numbers on debt and leverage, but they can't operate and they don't understand operations and they like to pretend they do, but they've never operated anything. To your point, they're really underwriting on the basis of their spreadsheet assumptions and on the basis of some M&A or some leverage assumption, or financial engineering and I, our view is that's a recipe for disaster. We first and foremost back great founders who then create great teams that run their functional areas with excellence that ultimately drive the types of companies that command premiums, delighted customers, predictable revenue, high key or at least visibility to high free cash flow generation at some point in the future and large competitive motes you ha if you are on the path to building that you're always going to create a premium and then leverage. As I said, is, you know, you can leverage to some degree to, to juice your returns, but if it's reversed, I think that's a recipe for disaster and founders and those people selling their companies. You mentioned like people ended up kind of shifting from, Hey, we built this great business and then all of a sudden they're just trying to generate the next flip and the next flip to the next PE firm that operates like that. I've never met. Founders and teams that are really good operators that are happy in that scenario. And they're not, it's yeah, it becomes all. Yeah. It becomes, yeah, the creative side stuff. It comes all about the money and the best look, the money will be there if you just operate your company and the right way. And, but, you know, once it becomes all about that, you know, chasing the next private equity turn and the next flip. You know, I think more often than not, people are unhappy and bad things happen.

Shiv: They're definitely not. Because the creative side is stifled, right?

Mark: Ya, it becomes, ya the creative side is stifled. It becomes all about the money. Look, the money will be there, if you just operate your company in the right way. But once it becomes all about that chasing that next private equity turn, or the next flip. More often than not, people are unhappy and bad things happen if you just focus on long term things. I love that quote, “Partner with people who are long-term thinkers focused on long-term value creation.” If you just focus on that, there'll be plenty of options to sell your business and, and to monetize, and to take a little financial engineering to drive returns, but the minute it becomes about the wrong things, that process gets broken and ultimately those companies become less competitive over time. And so.

Shiv: 100%. I think that is a great message and I think founders and investors would do well to learn from that and actually apply to their respective businesses. So with that said, Mark, if founders are listening or they want to learn more about your firm, what is the best place to get in touch or learn more about BIP?

Mark: Yeah, we try to be super accessible. We have a submission, very simple submission, essentially intake on our website. So that's www.BIPventures.vc (venture capital). And there's a submission form on our website that people can reach out to us. We will respond. We always respond. And then we try to be highly accessible on any of the social media platforms. And our emails are there, so we'd love direct emails and we will be responsive. So you know, we, we learn a lot from, you know, founder partners and people are pursuing new things and that's, that's part of why we're in this business. So please reach out.

Shiv: That's awesome. And we'll make sure we include all of that and the links in the show notes so that the listeners can have direct access there. And with that said, Mark, thanks a lot for coming on and sharing all your insights. It was a super enlightening conversation. And a message from my own heart. I think a lot of founders and investors would do well to follow your advice. And I think better companies would be created if a lot more companies took that approach. So appreciate you coming on and sharing all of that.

Mark: Well thanks, Shiv. Great to be with you.