Episode 46: Omair Sarwar of Gearbox Capital on
Matching Values with Founder-Led Companies

Episode Transcript

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

Omair: Hey, you're doing really well, Shiv. Thank you for having me.

Shiv: Yeah, excited to have you on. Obviously we've known each other for quite some time, but for the audience's sake, why don't you introduce yourself, your background and what you're up to now.

Omair: Sure, for sure. So, you know, Omair Sarwar, I've been fortunate to have been investing in founder-led bootstrap technology companies for over 15 years. Prior to launching my own entrepreneurial journey and kicking off Gearbox, I was the co-head of the software and information practice at SFW Capital, which was a pretty specialized technology firm and had a variety of private equity roles prior to that. But really the common thread through all of this was this passion for and developing partnerships with founders and bootstrap companies.

Shiv: And what led you to start your own thing? Because obviously SFW is a reputed PE firm and things were going well there. So what led to the change on your side?

Omair: Yeah, great question. Tongue in cheek, I'll put it like, some part midlife crisis and some part, you know, entrepreneurial itch. But essentially, you know, I've been at that firm for for 10 plus years and helped to build and develop their software practice. And you kind of there's an element of private equity where, you know, kind of success begets success, of course, but you end up with a certain type of private equity firm ends up doing larger and larger deals, right? And you start to kind of gravitate and that's, you know, classic to the industry where that's how you collect larger assets under management. And what I found was that I was, you know, forced, forced is maybe the wrong word, but kind of oriented, I was being nudged towards doing larger and larger transactions. And what ends up happening or I found was, you end up, dealing with a lot more, it becomes a lot more transactional, right? The management teams are professional in some ways, they're almost mercenary, right? Not that there's anything wrong with that. And the sellers become other private equity firms. And so there's, you know, it's just a very different dynamic. And what, as I reflected, you know, I was turning 40 and as I reflected where I want to spend the next decade of my life, I realized that some of the most fulfilling aspects of private equity and investing for me was actually, working with founders, people are just deeply passionate about their products and customers and their culture even, right? And that's been a much more fulfilling experience for me. And so as I realized that's what I want to do and by nature, you kind of, you know, that requires working with and partnering with smaller companies, it just became less of a fit relative to the strategy that SFW was trying to pursue in between that and kind of some other strategic things that I wanted to focus on at Gearbox, similar to kind of building our great, you know, offshore arm back in Pakistan. I mean, there was just a lot of nuances to it, but I would say that was the fundamental thread that said, hey, let's try and start something that kind of feels connected to my values.

Shiv: Yeah, and I want to jump into Gearbox as well and hear more about that. But just before we do just to round out what you brought up here in that answer is you mentioned this need to invest in larger companies or deal sizes. Is that just a function of PE funds growing, raising more capital, needing to return the fund? Like just help us understand those dynamics and what goes into that into that reality.

Omair: Yeah, and I think it's somewhat connected to the kind of strategy or philosophy a private equity firm may have, right? There are obviously some great firms that are very comfortable in having, you know, larger and larger portfolios, right? Now that requires more and more partners and then kind of you're starting to, you know, build a pretty large scale team. The other model for growth is kind of what SFW was following, which is, you know, continue to have a very concentrated portfolio, right? Small group of partners, but the only way to scale that model, right, is to do larger and larger deals, if you want to continue to kind of grow assets under management, grow fund size, et cetera. Look, I mean, personal capacity of a private equity partner starts to tap out at like four to six investments, right? And so the only way to grow is to do, instead of where we started, we were writing $25 million equity checks. And by the end, when I left, we were writing $60 million equity checks, right? And so it's just, there's nothing - you can be successful doing either strategy. I think it's just kind of the path that you want to go down. And again, it's kind of connected to personal interests and kind of what kind of philosophy and strategy you want to pursue.

Shiv: And so switching over to what you're doing now at Gearbox, how is that different or how are you approaching this venture and opportunity differently?

Omair: Yeah, for sure. I mean, I think it's, there are a couple of different elements. I mean, I can walk through our core philosophy, but let me maybe first talk about the differences, right? The differences, one was I wanted to refocus on what other people may think of as the lower end of the market. You know, I just, I think of it as these are founder led bootstrap companies that have some very interesting elements. They're product forward, and they're genuinely looking for partners, right? And I'll get into some of those aspects. So that's a slight difference from, you know, being in a lot of investment banker led auction processes where you're under the gun and like, you know, everyone's kind of, it's like speed dating, right? So I think that was one difference that was fundamental. And then the other thing, element that I wanted to do was like, I'm an immigrant. I was born and raised in Pakistan. And, you know, again, it's interesting, you know, you start to hit middle age and you want to start building some connectivity back to your country of origin and your birth. And I thought there was this great opportunity to both allow me to contribute back to my country of birth, but also act as a really interesting value creation driver for these companies, which is to build a back office arm, an operations arm in Pakistan to support these portfolio companies around, you know, finance, you know, R&D, marketing, et cetera, because oftentimes what I found with these with these founder-led companies is they either don't have the scale or they don't have the skill set to really take advantage of offshoring effectively. And offshoring gets a bad name because of that, but Gearbox acting as an aggregator and a center of excellence has been really powerful, actually. So those are kind of, I would say, the two core strategic differences that I wanted to apply in terms of setting up the product.

Shiv: Talk about that second one a little bit more, just operationally, how are you bringing offshoring to these companies?

Omair: Yeah, for sure. I mean, so let's say you're a small founder-like company. I'll give you to make it real, Office Timeline, for example, which is a wonderful business that we have the fortune of partnering with in Feb of ‘23. Cash basis accounting, right? Super technical. Not that there's anything wrong with that, but a typical CFO search takes anywhere from three to six months, right? And they're incredibly expensive. But we have, as part of our team, a former Ernst & Young audit partner who is able to come in day one at a fraction of the cost that understands the Gearbox operating model from a finance perspective and we're off and run. And that's one example. Another example is building dedicated R&D teams. Look, you're also an immigrant. I don't have to kind of communicate some of the economic advantages to it. But even in addition to economic advantages, right? And Office Timeline has now a big team in Pakistan. It's, you can access in our country the top 1% of talent, right? And they will be grateful for this job and their retention is incredibly higher, and they're incredibly capable and at a fraction of the cost, for example. But it's not even cost, it's just velocity and scale. You can just scale so much faster if you have a trusted partner with dedicated feet on the ground to be able to commit to that.

Shiv: Right. And I guess the difference is that most companies don't have access to like a local counterpart that can help them build that. As an example, our last business, Wild Apricot, we had an entire developer team in Zelenograd, which is a suburb in the outskirts of Moscow. And it was a huge advantage because we were able to get premier developer talent and technical talent which here would have been multi six figures, but there was a fraction of the cost, but we were able to have a much larger engineering organization as a result of that. But in order to do that, we actually had boots on the ground and folks that knew the Russian market very well. And I guess most companies don't have that.

Omair: That's exactly right. And you'll see this thread, I think, throughout our conversation. But like, so much of it is about trust, right? And it can be hit or miss for a lot of companies, right, that are trying offshoring for the first time. It could be you may get lucky and you may get a truly trusted individual, or you may be unlucky and you get somebody who's double billing you without telling you in the back, right? And so, and that's just the economic element to it. But then there's a quality element to it, right? Whereas, I think in our example, similar to what you're saying, we can maintain quality of talent and retain them because as Gearbox, we're not interested in necessarily generating a profit on those resources, right? We're trying to make sure that our portfolio companies are successful. So there's also that dynamic of a vendor, an independent company that's like its own profit generating entity versus just somebody truly that is in service to, you know, greater, efficient, and objective.

Shiv: Let's talk about the founder element of it because you also mentioned that you were passionate about working with these smaller businesses that are founder led. So is that where you're spending most of your time, which is vetting founders and meeting with them?

Omair: Yeah, 100%. It's more, it's a personal passion project as well as I generally think it's, it makes a lot of commercial sense, right? And typically what you would see any Gearbox investment translated into is, you know, these are relationships that we're trying to cultivate over a 12 to 24 month period, right? And part of it was, look, it's, to be able to accomplish these partnerships and these investments outside of being under the gun, driven by an investment banker, et cetera. I find it fascinating that the real life equivalent to an intermediary driven auction process is like speed date, right? And did you, I don't know. I don't know the math on this. I don't know the statistics, but would you feel comfortable finding your life partner through a speed dating process? And so I've always found it fascinating that for founders, typically this is one of the most important milestone of their life's work. And so would you rather get to know people over time, not only just when the suitors are on their best behavior, right? And is that in your interest? And so that I think just makes so much sense, particularly as the world just gets faster, more transactional. To me, I've just always gravitated to this philosophical element. And that's from the founder perspective. And then from our perspective, how a founder approaches kind of this milestone of their career, of their life's work, it tells you a lot about their values, right? And their incentives and do they care about their product and their customers and their culture because, you know, they should be bringing the same level of thoughtfulness to a transaction like this as they would to, you know, products and customers and, and their culture and their, and their employees. And so I think of it as a win-win, right? I mean, because it's, it allows us to test for values, right? And, I'm fortunate, kind of like you Shiv, I'm fortunate that I'm in a point in my career where I get to choose the people I work with. And these are lessons that have been learned over time with, you know, battle scars to show for it. But, you know, I'd like to think that I've done something entrepreneurial to support that, you know, finding people that kind of share common values.

Shiv: What are some values that are important to you or that you're looking to partner with?

Omair: Yeah, for sure. I mean, we're pretty transparent about those there. You know, a lot of people throw these values out. But if you go to our website, right, and what you see there, actually, I put a lot of thought into those. And so it's everything from having, you know, strong product focus, right. And, you know, having a mindset that's oriented around responsible growth, as we call it. Right. There's an element that we call folks that have an action bias. Right. And when I kind of love this phrase of like cowboys are better than professors. Right. And that's just kind of a value that we have. And then finally, like culture. Right. There's that great saying that, you know, culture eats strategy for breakfast. Right. I mean, you have a lot of fuel, a lot of private equity. Most of the folks that end up entering this industry tend to be very analytical, they're trying to be very strategic, but it's like culture eats strategy for breakfast, right? And so, or for lunch or whatever analogy you want. And so those are some of the values that kind of are important to us. Those are what we live by. And so, and the beauty of it is it takes time to figure out if somebody exhibits those values, right? It's kind of, again, it's like an analog to a marriage or a life partnership. You know, you always hear from everyone saying, hey, values are really important. It's important to have consistent values with your life partner. Well, this is a partnership that's like, it's maybe not to the same extent, but it's very similar because these are 10 plus year relationships. And so wouldn't you want people that share your values? And how do you get to that point? It takes time. It takes effort and it takes collaboration, usually.

Shiv: Yeah, I really like a lot of what you said there, especially the cowboy comment for me. I love working with founders and actually I use cowboys a lot as an analogy is one of the reasons why I like being a founder. And I love talking with entrepreneurs and founders is that I find that they are incredibly good at building their own ecosystem and their own, their own, their own thing that is not reliant on others to generate value for themselves and their communities or families or people who work for them. And I think you kind of have to have like a cowboy mindset in order to do that. And that involves like taking on a ton of risk and being comfortable with that and being comfortable with uncertainty and being able to operate with a ton of uncertainty.

Omair: And make and be decisive and make decisions. I mean, I again, I have so much respect for Tim Stumbles, who's the founder and CEO of Office Timeline. That dude is a cowboy, you know, but in a thoughtful, mature way, I don't, you know, I don't want to make this sound like cowboy is just, you know, you're kind of firing blindly. That's not the intent, but it is a, you know, it's, that's why I always use like cowboys greater than professors, right? It's not kind of go around willy-nilly shooting stuff, it's that don't overanalyze, try to avoid analysis paralysis and just do have an action bias. Because I think for a lot of, particularly for a lot of our product-led growth companies, and you know this, right? Experimentation is such a core part of these kind of companies. And so you almost have to have that cowboy mentality to be able to iterate really fast.

Shiv: Yeah. And while, while maybe things are not working or you're risking your capital, like a lot of founders also like delay taking out dividends, they reinvest into their companies when it would be much easier just to take the money out and buy, you know, five sports cars, but like, you know, but, but they kind of reinvest because they believe in something and they kind of grow the business and it impacts all the people around them. So I totally identify with that.

So talk a little bit more about, as you meet these founders, how are you trying to separate out the winners or the real entrepreneurs from folks that maybe are still finding their way or figuring it out and not yet ready for an investment?

Omair: Yeah, I would say I want to be careful not to say that somebody is a real entrepreneur or not, right? I mean, there's like everything else in life. There's just a flavor of, you know, there's nothing wrong with any brand of entrepreneurship, right? I mean, not, yeah.

Shiv: Yeah, sorry, just to fix that, I would say more like someone that you as Gearbox are in a good place to back as an investor.

Omair: Yep. Yeah. And for us, again, it starts with those values, right? It starts with those values. And the way we kind of align around those is typically through a very collaborative process. It's kind of the way I communicate this to founders is like, look, when you hire somebody, right, the guys, when you're hiring an executive, you typically put them through a case study, you put them through working sessions, right? Why do you not do the same thing with investors? Cause I love doing that with founders. And so, you know, what we will do typically is engage with people and we're happy to make that investment around like a lot of working sessions collaborate, you know, a lot of collaboration around, you know, building a growth strategy for the business, applying some of the tactics and playbooks that we have built over the years. And there's, again, it's a win-win because we get to observe the execution of those initiatives and how founders are taking some of our advice and manifesting that in the business. And at the same time, they get to see if we're blowing smoke up their ass or actually we know what we're talking about, right? And so typically the way it manifests is through what I call our Pulleys and Gears Framework, which is kind of our value creation strategy, which we work, you know, most of these companies through. And, you know, to put that into perspective with an example. So an Office Timeline, for example, right? We met Tim and Eddie, it's just wonderful people and such a passion for their product. And we met them, you know, 18 or so months before we actually decided to partner up. And over that time, for example, we worked with Tim and Eddie to essentially define the pulleys and then the gears, right? 

And so an example of a pulley would be, you know, the three to four core vectors that are going to drive long-term growth. And so in Office Timeline's case, a big pillar for us or a pulley was product expansion, really more enterprise-centric. Product expansion was very PLG business, very kind of organic viral growth, but there was such an opportunity to deepen their capability into the enterprise. That's a pulley, right? 

A gear would be like the tactics and the playbooks that we can kind of execute in the near to medium term. And so the gear would be, hey, if the pulley is product expansion, the gear is let's develop functionality for the enterprise, or let's eliminate friction from the onboarding process. Or let's expand ecosystems and integrations, right? Those to me are gears, but it's kind of developing that capability and planning that strategy with them. And then what we observed to Tim and Eddie's credit, they executed on some of those things. And the ecosystem strategy was incredibly successful. We just launched our enterprise sku, right? A few months back, that is seeing great adoption. We engaged with them on some pricing and packaging opportunities. And so it was, you know, it works both ways. And so we saw their willingness to take some of our suggestions and implement really fast and really well. And they kind of saw our capabilities in action. So I think that's kind of the thesis and the approach.

Shiv: Using that example and this framework, how do you vet ideas, and I'm getting more into the tactics here, but how do you qualify ideas that might be too far removed from a company's core market or area of expertise or where they actually win deals versus like things that are maybe more of an adjacency where there is actually opportunity, right? Like a lot of companies, for example, wanna go up market or down market, but usually it's much harder than they initially think and it requires a much bigger investment in product and sales processes and service capacity and everything else that goes along with that. So just talk a little bit about how do you vet that through the framework?

Omair: 100%. That's a fascinating question. And prioritization is one of the most important and one of the most challenging things to do, right, for any business, particularly the kind of businesses that we work with. It's almost like they have too many opportunities, right? They could go in like too many different ways. And so it's a fascinating exercise. I would say philosophically, right? And this is where the pulleys and gears kind of come into play, whereas, I'm a strong believer in kind of the experimentation mindset. And so in any given investment, we are looking for like five to seven discrete ways to win. Right. And so, because I know like life always gets in the way, there's no straight road to Rome. And so the idea is to have clear, clearly identified initiatives and projects, right, that are kind of in the seven to 10 range, knowing that, hey, you know, a decent one of the, you know, decent set are going to flop. But even if you hit three or four, like you, you know, the business is going to do really well and the market is going to tell you, your customers are going to tell you, your adoption rates are going to tell you, your activation rates are going to tell you which one of those kind of exist. Now that's kind of the philosophical approach, right. Then in terms of actual prioritization, again, we are kind of very product first folks. What does that mean? Essentially what's one step after or before, depending on how you're looking at it is customers. Right. So oftentimes your customers will be telling you kind of what they want in the near term. Right. And we have a lot of frameworks and playbooks around figuring that out in Office Timelines case, this is a product like growth business. They have 20,000 customers, right? They have over 100,000 users. A lot of them are kind of your typical viral kind of single users. But then there was these massive enterprises that were saying, hey, here's what we need to standardize this across our entire business. And so that was kind of what I would say near adjacent, kind of clear voice of the customer driven approach. That was something. Hey, we have a 80% probability of success if we can develop this functionality. I would put that in pretty high in the priority and because we know from a probability perspective, high success rate. On the other extreme was things like ecosystems, right? Where the business is pretty well, has pretty good market share in certain ecosystems. And then there was this potential for a bet, right. Which I call truly where maybe the probability of success is, you know, 20 to 30%. But if it hits, it's going to hit big. Right. And so what we try to do is have a mix of high probability of success, decent impact, and then always have a couple of what I would say are kind of really interesting options that, you know, low probability of success, but if they hit, they really hit. And I've found in business, like you want to have kind of a mix of both. And so our, it's kind of a, almost a barbell approach, I would say in terms of identifying prioritizing initiatives around, around that. The core things that are always going to be consistent, helping build out management teams, right? Because a lot of these businesses, again, they haven't kind of fully, you know, they typically don't have full compliment of leadership, systems, processes, and then the offshore arm. Those are kind of consistent, right? Because we know every single time that kind of adds a lot of value. And then whether it's around initiatives around product, around go to market, or partnerships, M&A, that is more tailored to the specific.

Shiv: How much of this work that you just described are you doing pre-buying the company while you're vetting the founder versus post?

Omair: Typically, in almost every case, we will have run through with the founder, kind of our pulleys and gears. It's not going to be necessarily finalized, right? But we want to be able to get to like 60 to 70% of the way there because alignment is really important, right? Because the last thing you want to do is, hey, we kind of shook hands. And then the day after, you know, the investor is going in this direction and the founder wants to go in that direction. So to me, that's a critical step is getting alignment on division alignment on the strategy. And it's a collaborative exercise, right? Such that, cause that is what, you know, LPs don't realize this, but that's what really shrinks what's called the J curve, right? Post close is, cause a lot of people, this again, as a consequence of a lot of these action processes, we're just figuring, you know, you close. And then you start figuring this stuff out, which it's just, yeah, it takes time and it's, it could cause friction. So I would say that aspect, you know, obviously we do our diligence in advance too, but to me the milestone, if you will, is that piece.

Shiv: In working with these founders, are you incentivizing them given you're coming in at an earlier stage and in a lot of cases, are you incentivizing the founders to stay and build a business with you or are you hoping that they transition out and bringing in a professional CEO?

Omair: No, 100%. Look, we'll take the founders' guidance on this in terms of, I would say, operational involvement. But we like people, again, it goes back to values that just care deep. You can care deeply as a board member, right? You can care deeply as a CEO, even a CPO or CTO, right? But it's just more about those values. I would say over time, from an incentive perspective, what I will tell founders is any kind of transaction with us, founders will, from an economic, purely economic incentive perspective, will make way more on the second term, right, than they have at the date of the transaction. And so there is, you know, I certainly believe, right? I eat my own cooking, right? And I'm a big personal investor and every platform I do is just that the next outcome, given kind of what we've talked about in terms of the resources that we put to bear, the strategic alignment is just a much bigger outcome than the initial one.

Shiv: Yeah. And also like the founder is such a critical piece of the secret sauce in a lot of ways. They have this founder-market fit. They understand customers in a very deep way. So, especially as you're trying to go through some of those strategic things that you mentioned in the pulleys and gears, like they have unique insight that losing that institutional memory kind of makes everything significantly harder.

Omair: 100% and this goes back to why it's so interesting to get that thinking and alignment on paper in advance. Because it's a, that then allows you to go is like, hey, there's the imprimatur of, there's the stamp of approval of the founder on this. So you can then go to the rest of the team and say, hey, this was a joint exercise. This is not just coming out of thin air. And so that's the other value of getting to that alignment.

Shiv: Right, right. That's awesome. Okay. And just, I think that's a good place to end the episode, but if founders are listening, Omair and want to learn more about Gearbox and what you're up to, how can they get in touch?

Omair: Yeah, the best path would be first, I would say, again, go look at our values, right? On our website. That's www .GearboxCap .com. Or they can reach me on LinkedIn or email me as necessary. But we're open for business. I'm fortunate that since launch in September of ‘22, we've made two great platform investments. We've deployed over 100 million capital and we're looking for the next one. And even if it's just advice, even if you're not interested in a sale, happy to.

Shiv: That's awesome. Yeah. And I appreciate you coming on and just sharing the story and just this different approach. I think founders especially are often looking for partners that want to get deeply involved with their business and understand what the vision of what they're trying to build. So I think it's great that you're building Gearbox and a lot of founders will likely resonate with that. So appreciate you coming on and sharing all the details around it.

Omair: Awesome, man. Thank you so much for having me. This is fun. I love talking about this. Thank you for entertaining my diatribes.

Shiv: Thanks, Omair. Yeah, anytime. Thanks, Omair.

Omair: Thanks, bye.