Wednesday, May 22, 2024
Wednesday, May 22, 2024

Interview: Saumil Jariwala, Founder of Feta Fund

Saumil's mission, as defined on his website, is to assist 1,000 future CEOs in acquiring small businesses, with over 50 already accomplished and 950 to go.

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Saumil’s mission, as defined on his website, is to assist 1,000 future CEOs in acquiring small businesses, with over 50 already accomplished and 950 to go. Drawing from nearly a decade of experience in search fund investing, private equity investing, and due diligence consulting, he aims to empower searchers to “get tough deals done.” This interview explores the genesis of Feta Fund and its ambitious objective, offering insights into Saumil’s hands-on approach as an investor.

What motivated you to set the ambitious goal of assisting entrepreneurs in acquiring “1,000” businesses through Feta Fund? Additionally, what timeline do you envision for achieving this monumental portfolio milestone?

The secret to working with 1,000+ small business entrepreneurs is easy: do it slowly over a long period of time. My timeline for helping 1,000 entrepreneurs is measured in decades (3+), not years. Working with small business entrepreneurs gives me a ton of personal satisfaction and meaning -and I’m excited to spend the rest of my career dedicated to those wild, crazy folks that make the decision to take underappreciated, underloved, scrappy, “diamond-in-the-rough” small businesses and inject time, enthusiasm, resources, and (least important of all) capital into them.

What set Feta Fund apart from other players in the field, particularly regarding your hands-on approach?

The search fund ecosystem has evolved by leaps and bounds since I first entered the space in 2016. One searcher pain point that remains unaddressed is the need for significant and tactical support during the sourcing and diligence phases of the journey. These days, it’s not terribly difficult to find equity to fund a great deal or to find someone excited enough about your company to take a board seat. Finding someone to read a 100-page purchase agreement, review your cold email copy each and every month, or help you solve email deliverability issues for your cold emails is much harder. I launched Feta because I wanted to play a role in helping fix this problem for search fund entrepreneurs. We are a specialist fund (read: not a “one stop shop”)–I spend 90% of my time helping searchers with the search stage of the journey.

What strategies does you employ to address the needs of all searchers seeking assistance, and how does it explore and tackle their primary challenges?

Here are some of the hard parts:

– Public companies need to file financial statements. But it’s difficult to find a small company with quality financial reporting. 90% of them use cash basis financials, which no lender will lend on. Some of them still use physical dot matrix printouts instead of QuickBooks. Converting their financials into something professional and useful takes money (can be $50K!) and time.

– Winning the trust of the owner is difficult. They are likely to worry that a potential buyer will take advantage of them while the diligence is going on.

– You can’t learn much if the owner doesn’t share the real data. Taking it on faith isn’t diligence.

– Few search funds have enough time and money to conduct diligence that is as in depth as they want it to be.

– It can be really difficult to understand a market you don’t know well in just a few months.

– It’s hard to know from a few hours of meetings whether the team is capable and has committed.

– It’s even harder to know whether the seller has integrity.

– Legal and regulatory issues can be a deal-killer, and they’re hard to learn about without a trained eye. Paying for the right help is expensive (read: $500K+ across all your lawyer, accountant, and consultants).

– If a business is easy to find and understand, it will be bid up to the point where it’s overvalued.

– Valuation is hard. If it were easy, the seller wouldn’t need someone else to buy their business.

– Just getting to the finish line is tiring and can create unstable emotions for the investor and the entrepreneur.

All of these challenges are addressed the same way: working with experienced partners that are generous with their time, pattern recognition, and experiences. And along the way, while you struggle through these issues, they offer a listening ear and empathy with no judgment. I’m grateful to say that there are many investors in our community that act this way—we strive to do the same thing at Feta.

Could you share some of your investment criteria, such as geographical preferences, company size, targeted sectors, and portfolio distribution? Additionally, what are your preferences regarding solo and duo funds, for example, and what are your expectations as an investor?

Investment criteria: Great search fund companies have 1) a real, recurring revenue business with high switching costs, 2) a clear and sustainable competitive advantage, 3) attractive industry or vertical dynamics, 4) proven product-market fit with a large addressable market, 5) a value creation roadmap with known levers, 6) a scalable business model and infrastructure, 7) a strong, resilient and healthy culture with high caliber talent, and 8) consistent profitability. Finding all of these at the same time is nearly impossible, so I spend a lot of time working with the searchers I back trying to figure out which of these 8 are essential and which we can live without, for each and every deal.

Geographical preference: The USA and Canada. International search funds are neat, but I’m not afraid to admit that my experience with 60+ searchers since 2016 is almost entirely from supporting businesses based in the USA and Canada. I try to be careful about acknowledging what I do know and what I don’t know—and there’s a lot I don’t know about buying and running a company abroad.

Company size: “Sweet spot” is $10-25M Enterprise Value, but I’ll do both smaller and bigger, depending on the searcher and the company.

Preference for solo vs. duo: None: both are great. I’m all about trying to find and partner with highly talented people. Highly talented people might search alone or search with a partner.

Expectations as an investor: Searching is emotionally painful, intellectually difficult, regularly uncomfortable, and usually unpleasant. By working together closely, we can make it a little bit better… and maybe even have some fun along the way (maybe!)

Could you provide us with some insights gleaned from your years of experience, including common mistakes made by searchers during the deal-seeking process?

Some things searchers sometimes do wrong:

– They don’t define their investment thesis clearly enough.

– They rely too much on easy-to-find brokers or listing websites to find deals.

– They don’t understand the industry enough before trying to find the right company.

– They don’t build a link of trust with the sellers (or customers or investors).

– They don’t do enough due diligence.

– They don’t have a 100-day plan to make things more successful after the ink is dry.

– They’re not disciplined enough in their searches (read: consistency matters).

– They’re not persistent or patient enough.

But it’s easy to focus on the mistakes: the miracle is that some searchers do all of this right, despite all the things that can go sideways.

What are the key success factors post-acquisition, the significance of the board of directors, and what are the optimal growth strategies?

Generally, these are key success factors I see post-acquisition:

–  Robust and recurring revenue model. The company enjoys steady, predictable cash flows from long-term customers or contracts. Second best outcome is that there aren’t long-term contracts, but there’s subscription revenue (read: revenue not tied to usage or projects) with a strong history of high revenue retention (read: >90% Gross Revenue Retention). Third best outcome is revenue where there’s a waiting list, which indicates a supply-demand imbalance in the market (i.e., not enough supply to accommodate demand). [Note: In that situation, we spend a lot of diligence pre-close on making sure this supply-demand imbalance is persistent and not fleeting.]

– Strong and sustainable competitive differentiation. The business has carved out a unique and defensible niche in its market. This could stem from its brand, customer relationships, intellectual property, specialized capabilities, or other hard-to-replicate advantages.

– Attractive industry dynamics. The industry has solid long-term growth prospects, high barriers to entry, and fragmented competition that avoids head-to-head battles with large players. It isn’t overly susceptible to technological disruption or macroeconomic swings.

– Proven product-market fit. We know what we sell and what we don’t sell, and we know what matters to our customers and what doesn’t matter. Plus, we have a strong “why” for all of those questions.

– Clear value creation roadmap. There are identifiable and achievable pathways to grow revenue and expand margins. Common initiatives include geographic expansion, customer share-of-wallet expansion, sales and marketing investments (read: installing a CRM for the first time!), price increases, and add-on acquisitions.

– Scalable business model and infrastructure. The company can grow significantly without major structural limitations or diminishing returns. It has strong underlying systems, processes, and back-office functions that support seamless expansion and operational efficiency at higher volumes.

– High-caliber talent and culture. The business has a skilled, energized and cohesive team, spanning senior leadership to the front lines. There is a performance-oriented culture of accountability, continuous improvement, and bias for action. New ownership can augment the existing foundation.

– Clean from a legal, regulatory, and compliance perspective. Self-explanatory: no fraud.

– Consistently and predictably profitable. The company is consistently profitable and cash flow positive with industry-leading margins. It has a strong balance sheet, good working capital management and ability to service appropriate levels of debt. There is dry powder to fund attractive investments.

– Effective and engaged governance. A great, experienced board with plenty of relevant experience and the willingness to make intros and open doors.

Could you share any emerging trends or opportunities you’ve identified in the investment landscape, including potential new markets?

Some reasons I see emerging markets as a neat place to launch a search:

– Less developed ecosystem: Few people have heard of a search fund, so when one is formed in an emerging economy, it can be the first of its kind. (Two wildly talented Stanford GSB graduates I know just launched India’s second search fund… somehow there was only ever one before them, even though India is the most populous country in the world!)

– Valuation arbitrage: Companies in some countries trade at a significant discount to similar American firms. It’s not unusual to find a strong company with growth potential trading at 2-4x EBITDA in a market where similar companies might trade for 5-7x in the US.

– Cross-border synergies: One approach is to find a company in a place where you can add value, then work to export it to a place where you have connections or expertise. (Doing this is harder than it sounds.)

– Macro tailwinds: Fast-growing countries like India are well-positioned to thrive over the next ten years. Remember, a rising tide lifts all boats.

– Local knowledge: It’s difficult to parachute into a new country and gain immediate trust and connection. For a native search fund team, there are benefits in being local at every step. These benefits give you a big advantage over American firms (and searchers) without this knowledge.

– Talent: Often, there’s a scarcity of local talent that understands both the global best practices and the local conditions.

– Best practices: The search fund model brings with it a series of techniques that are relatively easy to bring to companies that haven’t yet been acquired in other countries. You can “copy-paste” one company’s business model in one context to another company in a different context.

– Platform potential: In many of the economies where an international search fund could start, there are many similar companies that would benefit from running in a regional cluster.

Note that these benefits are offset by several important risks – some of these off the top of my head are foreign exchange risk, rule of law, home country transfer issues and regional cultural differences.

https://www.fetafund.com/resources 

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