These Two Tech Entrepreneurs Turned SMB Acquirers Are Disrupting the Private Equity Model with Permanent Capital

From growth-obsessed startupland to the boring backwaters of SMB M&A, meet Sieva Kozinsky and Xavier Helgesen, co-CEOs of Enduring Ventures.

In December 2019, Sieva Kozinsky and Xavier Helgesen walked away from their highly successful venture-funded Silicon Valley careers and startup way of life to found Enduring Ventures. Conceived in the image of Berkshire Hathaway, Enduring Ventures is their long-term permanent capital holding company, through which they aim to “buy exceptional businesses and hold them forever.” 

To help them originate attractive SMB and lower middle market acquisition opportunities, Enduring Ventures became an Axial member in January 2020, two months after founding their holding company.

In this informal Q&A, we cover:

• Their personal stories and how they decided to start Enduring Ventures
• Why they pretty much always replace the CEO post-acquisition
• Why they are OK with businesses selling 100% vs having to roll
• Why they think private equity’s incentive model is bad for the SMB economy
• What they look for in the businesses they how to acquire and hold forever
• Why they love plumbing companies
• Some favorite books and resources of theirs

Enjoy this Q&A with Sieva and Xavier.

Video

Audio 

Introductions 00:00 – 3:55

• Xavier has spent 20 years starting and growing technology businesses (including Better World Books & Zola)
• Sieva took an entrepreneurship class in college that really got him interested in starting his own business(es) and from there, he found a technical co-founder and started multiple businesses where he’d typically get a company off the ground, raise capital, and then either sell the business or put in a management team and leave

Life before Enduring Ventures: Xavier and Sieva’s past business ventures 5:30

• Xavier founded Better World Books in 2002 — when he was 23 — with two friends from college after realizing that there were books that the bookstore wouldn’t buy back that were still worth money
• This was right before Amazon Marketplace started, so timing was right; sold their first books on Half.com and then moved onto Amazon Marketplace once that opened
• At that point, he didn’t know what he didn’t know, which made things all the more difficult
• The business didn’t raise capital, mainly because they didn’t know where they should even look for capital for that type of business
• They partnered with school book fairs and then later with libraries to sell their books, all the while, making charitable donations with proceeds
• Sold off last shares a few years ago so unsure of current revenue, but it was up in the $60-70M revenue range before that
• Xavier got his MBA at Oxford after 8 years at Better World Books; and there was a scholarship program there focused on social entrepreneurship
• Better World Books had raised $20M for literacy, and Xavier wanted to be able to have a double or triple bottom line in his next business venture
• Zola started because the developing world leapfrogged landlines and went directly to the mobile phone, so they would likely do the same with energy.
• It was the right time to start a distributed energy company, so Zola was started to bring solar to the mass market, leveraging mobile networks to allow people to pay in small amounts for solar energy
• Xavier had two co-founders at Zola
• Zola was venture funded because they needed a lot of capital, so that was at least half of Xavier’s job the entire time he was with the company
• There are some interesting and well-known investors at Zola like Tesla, GE Energy, etc.
• Xavier knows both hardware and software
• Sieva ran an education marketplace for about 6 years; a lot of students aren’t getting the help they need on campus (especially at larger state schools or city colleges), so since there weren’t enough professors and TAs to help, the business was built on students helping students
• They built an online marketplace where students could create profiles and post/sell their notes (and also learn how to market themselves); they eventually turned to video and live tutoring, etc. 
• Raised a seed round of capital and grew the business nationwide across 30 different states; after raising the initial seed rounds they knew it wasn’t going to be a huge, unicorn opportunity, so they wanted to create a sustainable subscription-style business.
• Sieva co-founded the business and was CEO for about 5 years before he stepped back and started a venture fund as well as a clinical research business (non-tech company)

Xavier and Sieva: the joining of forces 17:55

• Xavier and Sieva met at a ski/snowboard weekend through Summit Series (Xavier was running Zola and Sieva was still at the education business, pre-venture fund)
• Sieva loved that Xavier was building businesses in the social impact space
• Their visions crossed with the belief that it is extremely helpful to have a business behind a charitable cause so there is a “finance machine” to sustain it

The birth of Enduring Ventures (and how Warren Buffett fits in) 20:30

• Enduring Ventures was founded about 2 years ago; the business’ first acquisition was about 15 months ago
• It started when Xavier asked Sieva the question: What is the kind of opportunity that would make you want to build a business for 20+ years?
• They started thinking about a long-term holding company and were inspired by Warren Buffet and Charlie Munger’s work in Berkshire Hathaway
• They really felt strongly about that thesis: How do we identify great businesses that live in our day-to-day lives that will not be disrupted by AI/technology and then how do we use the profit from those businesses to either reinvest or find new businesses to invest in?
• Sieva is a self-proclaimed “business nerd” and loves to do research on businesses and work with people and help them level up in their careers; this model brings both of those things together and allows Sieva and Xavier to look at a lot of different types of businesses and bring a social impact mindset to them
• Some people called Enduring Ventures a search fund when they first started, but Xavier told those people that they were actually looking to do the opposite of a search fund: they want to ultimately take themselves out of the business and have someone else run it entirely.
• Warren Buffet really had the mindset that if he was running a business, he couldn’t do anything else, so instead, he wanted to understand the business, and trust someone else to do the legwork.

Placing (the right) CEO in a newly-acquired business 29:50

• You almost always need to find a new CEO when you’re buying a small business; sometimes that CEO is within the existing walls, but a lot of times they’re not
• In order to grow the business, you need to be able to have someone at the helm who is willing to change things, to modernize, etc.
• The best profile has been people who highly value their independence: they could get paid way more money to work somewhere else, but they want the autonomy
• It’s the idea of spoiling people with autonomy
• A lot of the stories about Warren Buffett are about how he absolutely adores the management or CEOs of the companies he buys, so is the idea of replacing management different than what he did?
• Later on in Berkshire Hathaway, once it had become a huge, established entity, it was much easier to acquire a company like AmEx and then praise the great leadership; however, earlier on in the business when they were buying much smaller businesses, there was usually a change in management.
• NetJets is a good example of replacement man]gement more recently.
• Xavier and Sieva just want to be obsessed with the CEOs that they put into position; not only do they want to love them, but they want them to be highly revered by everyone who works for them and with them
• Once they find the right person, it’s their job to make sure those great people never leave
• Some of the better fits are people who have run a company before; if you’ve grown a business successfully before, you have so many learnings that you can bring to the table that it would take others a lot longer to figure out
• When you’re running a business that’s sub-$20M in revenue, the owners are wearing a huge number of hats and are often a lot more technical 
• Ultimately, a lot of the time, they don’t actually want to be the CEO of the business when it comes down to it — they want to be more technical — but it just happened that way
• If the owner wants to stick around, they’re often moved to a more technical/consultative role (and this is on the table before a transaction happens)
• An owner who is transitioning out needs to be ready to be a consultant and an investor 
• A founder is so used to their financial earnings being tied to their work, but Xavier and Sieva want to change that for them and make them comfortable that they have a team in place to run the day to day and they can still benefit; rollover equity is always offered

Pitching an unconventional acquisition vehicle to sellers 39:55

• A long-term holding company is a model that could easily be a bit fuzzy and unclear to a seller; if Enduring Ventures is up against other sellers, how is it characterized to help get businesses comfortable and over the line?
• There are two main touchpoints that help tell the Enduring Ventures story
• One is the firm’s website, which does a deeper dive into what a long-term holding company is; this oftentimes helps peak curiosity since it’s different from the typical private equity buyer that is often across the table
• The second is that both Xavier and Sieva are both entrepreneurs themselves, and there is a special connection between entrepreneurs; there is empathy and understanding without having to even say anything
• The first conversation that Xavier and Sieva are having with owners is oftentimes not about revenue or EBITDA or financials, it’s about the personal journey and the brand
• If they’re sitting at the table to begin with, it’s because the numbers are good enough, and then it really comes down to the story.
• Because there is no set holding period or LPs to get a check to, it’s easier for Enduring Ventures to treat their employees and customers well because it’s not about the immediate profit that sometimes is needed with a shorter holding period
• The firm really almost presents an “anti-private-equity” thesis; if you treat the employees and the customers well, even if it’s at the sake of the short-term profit, the financials will work themselves out in the long term
• If a business is going through multiple PE transactions, you may be able to recognize it after the first one, but you likely won’t recognize it as the same company after multiples transactions; sometimes this is okay, but other times that’s not what an owner wants
• Some owners just want the highest dollar amount, but those oftentimes aren’t the ones who align with Enduring Ventures
• And while the above scenario is sometimes the case, but there certainly are plenty of scenarios when PE comes in an drives down the EBITDA to make engineering improvements or operational improvements, or when corporations come in and do the opposite for the sake of short-term gain

The “humane” way to implement change 49:10

• The tension of any acquisition model is change
• The best way to go about change is not to guarantee lifetime employment — because that’s not realistic — rather it’s to tell employees: we’re going to invest in your and teach you the new ways, and if it doesn’t work for you, you let us know and we’ll help you find a new opportunity 
• When you look at a small business, it usually is not very tech-enabled. So when you’re looking to create more current, tech-driven businesses, where do you make the investments? Are there tons of new hires coming in?
• Unless Enduring Ventures owns a business in a specific software sector, they don’t make any decision on software systems without running a process with the management; it’s important to clearly draw out what is in the board’s authority versus the CEO’s authority
• When there is someone there to ask the hard questions and get the ball rolling, more often than not, employees are grateful to have new software to help them with efficiency
• A lot of Enduring Venture’s leverage comes from its operating-partner model; they have a huge network of entrepreneurs, and these are people who live and breathe the Enduring Ventures ethos and they’re also the people who know how to apply technology and grow companies
• These operating partners will oftentimes step in as an interim c-suite exec for a few months, or sometimes they step in alongside a CEO, which is called an “integrator” 
• Operating partners are usually in charge of implementing new technological changes

A look into Enduring Ventures’ portfolio 58:43

• Currently run a platform business called Snowball Industries Inc. that runs HVAC and plumbing companies
• Plumbing is not a “sexy” trade, but plumbers make a very good living and it’s a very necessary profession; plumbing isn’t going to get disrupted by a new technology
• As the tech industry grows and tech professions become more and more prevalent, there are an increasing number of people who cannot do plumbing/HVAC fixes themselves are are willing to pay a premium to have someone else do it
• Partnered with another group for Snowball and it’s a 50/50 venture with another holding company
• The sector is also super interesting right now because there is a big number of baby boomers that are looking to retire and there is a huge transfer of wealth up for grabs
• There’s very little difference in operating performance across different cities/states/regions in this sector
• Being an early adopter of some of the new marketing channels that are available for these services in today’s market (Angie’s List, Google & Yelp reviews, etc.) is something that Xavier and Sieva can help bring to the table
• Acquisitions within Snowball are nationwide (the team is virtual, but they’ll go on-site anywhere in the country to get businesses up and running)

Influential materials for business owners 1:11:22

• Traction: Get a Grip on your Business by Gino Wickman (good framework to build the core framework for any business)
• Extreme Ownership: How U.S. Navy SEALs Lead and Win by Jocko Willink and Leif Babin (focuses on taking complete accountability for every single thing that goes on in your business, whether you touched something directly or not)
• The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike (about running an organization that takes care of your shareholders)
• Cable Cowboy by Mark Robichaux (the early days of John Malone and the rise of the cable television industry)

You can reach Xavier and Sieva on Twitter or using the enduring.ventures contact form.