Transferable Skills
July 20, 2023 | Issue #87
Big Deal Small Business: Transferable Skills
July 20, 2023 | Issue #87
If you are a new reader / new searcher, I recommend starting with the New Searcher Reader Guide.
One of the common questions I receive from new searchers is how my private equity background has helped me in the Entrepreneurship through Acquisition (EtA) journey.
As I reflect on that, it’s clear that the PE skill set was very helpful in getting a deal done in the first phase of search. The challenge, of course, is that getting a deal done only gets you to the starting line.
Everything you do after the starting line is what really matters in the EtA journey. To be frank, it’s a lot easier to think of skills/habits/patterns I learned in PE that are actively unhelpful at this stage.
Today’s post chronicles a few skills that served me well in a prior life that I find myself actively fighting against as I manage my business. I broke it up into three elements:
Today versus Prioritization
Structure versus Flow
End versus Journey Mindset
Today versus Prioritization
In PE, I rarely kept track of my work tasks or to-do list. Everything that needed to get done was going to get done today, whether that took me until 6pm, 10pm, or 3am.
It’s a bizarre way to live in hindsight, but it does make sense in the deal context where everything felt urgent all the time. Especially if you subscribe to the view that time kills deals (which I do).
That mentality simplified life in many ways — I didn’t have to do a lot of prioritization or make time allocation decisions — everything just got done (said differently, I de-prioritized everything in my life outside of the active deal).
In a small business, there’s literally always something to work on. The number of tasks I could do any given day is pretty much endless. Doing it all today is functionally impossible; even if it were, that would be not sustainable. PE at least had moments of decompression between deals. Small business is an ongoing pursuit, day-in, day-out.
Growing a small business extends your mental timeframe from days/weeks to months/years. As a result, being a shepherd of constant, sustainable, and systematic improvement in the business requires a different mentality than being a PE deal quarterback.
In PE, I could burn junior analysts (or myself) into late hours (just as my seniors would do to me). It didn’t matter if we churned out junior people in 18 months due to burn out, there was always an army of new PE recruits coming in.
Working 80-100 hours per week for three weeks can be the difference between getting a deal done or not.
That type of work style doesn’t generate success in a small business. Building a culture & retaining good people — that is core to building a defensible business over the time scale of decades.
So, now I actually do have to make prioritization and time allocation decisions. Moving a system from pen & paper to digital may feel urgent to a searcher, but once you’re in the business, you have to decide if you really want to burn your team’s time on that transition versus any number of alternative initiatives. In theory, it will save time eventually, but the transition period to that point will be painful for the team.
Those trade-off decisions are suddenly apparent and constant. I could solve most time/resource issues in PE by working longer hours and throwing money at the problem. In SMB, I am actually resource constrained (both in time & money). Learning to prioritize and make resource allocation decisions is brand new for me.
Structure versus Flow
A commonality between PE investors and entrepreneurs is a general willingness to move fast on limited information. We’re paid to identify asymmetric risk/reward while sprinting at 110mph — that feels like working in flow for me.
In a small business, your team didn’t sign up for a job that runs at 110mph. Most don’t want to operate in that free-wheeling way that feels comfortable to me.
The structures of clear expectations, policies, processes — everything I find suffocating in a job setting — is actually helpful & comforting to our team.
Building a SMB team like a PE deal team doesn’t make sense and isn’t feasible. You can hire amazing people into your business, but not meeting them at their desired work style is a recipe for disappointment all around.
I’ve had to learn that freedom & latitude in a job means different things to different people, so needs to be structured differently for different people.
End versus Journey Incentives
PE was highly-oriented to a “means justify the ends” mentality when it came to incentives.
80-100 hour weeks were justifiable for junior staff to close a huge deal (good for your resume & development) and make way more money than you could anywhere else in the world.
10 years of that was justifiable in order to make partner, where you’re arguably set for life from a financial standpoint.
The journey is grueling, but the end is a strong enough incentive to get you through.
You and your team in a small business are making very different choices. (To be clear, I’m not passing judgement on either type of choice — I’m just calling out that a different mentality is usually being adopted in a small business.)
Your team at your small business doesn’t have a multi-million dollar pot of gold at the end of the rainbow.
In PE, that pot is real and motivating to junior staff.
In SMB, your offer to your team is different — you’re offering them an enjoyable place to work, where they feel fulfilled and challenged, without being overworked. You’re offering them wages & benefits & stability to build a life they want to lead both in and outside the workplace. As the business owner, you’re absorbing the ups & downs of a business for them (in exchange for keep the majority of the equity upside).
Those are journey-oriented offers, not end-related offers.
Even if you, as the owner, intend to grow fast and sell the business in 5 years (I’m not, but many search fund acquirers are), that vision likely isn’t motivating to your team, even if you cut them into the equity in some way.
The reality is that in small business (at least at self-funded search deal size), the pot just isn’t big enough where the equity upside for the team is sufficiently motivating to make them focus on the end instead of the journey.
So — moving from PE to small business requires a mindset change in how you think about your team’s motivations and incentives.
If you can’t figure out how to make the journey enjoyable for them, you won’t enjoy it either, or achieve the end you may be chasing.
Conclusion
To be clear, there are PE skills that have proven useful in the SMB operating context, largely around KPI tracking, budgeting, financing decisions, etc. The skills that transferred best are tactical in nature.
By contrast, I’m finding myself actively fighting my instincts on the strategic & people management side of operations, which is far more important on a longer time scale.
It’s worth calling out that dynamic for searchers coming into SMB from that world (and my guess is searchers with large corporate backgrounds would face similar transition issues coming into SMB, though I have no direct experience there).
For thoughts or feedback, just hit reply to this email or post/DM me on Twitter.
Thanks,
Guesswork Investing
P.S. I run a local building maintenance contractor in Seattle, WA that focuses on single family residential & commercial properties. To the extent you know folks in the RE industry in Seattle (both homeowners & property managers), I’d always appreciate intros.
Well said!!