How To Build A Business To IPO, With Cole Shephard

High-growth, ventured-backed (and PE-backed) companies are increasingly choosing to stay private, but there’s no question that “going public” can provide certain benefits to founders and investors.

Cole Shephard, partner at Legacy Group, joins WealthChannel’s Andy Hagans to discuss the strategies and tactics needed to scale a company towards an IPO.

Episode Highlights

  • Background on Legacy Group, and its portfolio companies.
  • The three main phases in the lifecycle of a company that’s scaling towards an IPO or major liquidity event.
  • Why many founders have trouble adjusting to the second phase in the lifecycle of a high growth company.
  • The specific strategies needed during the middle phase of scaling a company towards an IPO (and why success in this phase mainly depends on finding the right people, and making sure they’re “in the right seats.”)
  • How the process of scaling a company towards a liquidity event is similar whether the goal is to sell to private equity, or to go public.

Today’s Guest: Cole Shephard, Legacy Group

About The Alternative Investment Podcast

Hosted by WealthChannel co-founder Andy Hagans, The The Alternative Investment Podcast is the #1 alts podcast reaching RIAs, family offices, and High Net Worth investors.

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Show Transcript

Andy: Welcome to the Alternative Investment Podcast. I’m your host Andy Hagans and today we’re talking about a really exciting topic, something that honestly is on my bucket list. We’re talking about taking a company to IPO. Because there’s actually a process to that, there’s actually a framework to that. It’s not just like I have a good business and I get lucky and I’m able to IPO. There’s a very intentional framework. And the companies that do it, you’re going to notice some patterns that do it.

So, I’m very excited that joining me is Cole Shephard, partner at Legacy Group. Cole, welcome to the show.

Cole: Thank you, Andy. Nice to be here.

Andy: Yeah, and this is continuing our series on venture capital. We’re doing a little miniseries on venture capital on the show. And, you know, I know Legacy Group, strictly speaking, isn’t venture capital. You’re more on the private equity side. But I think we’re going to be talking about a lot of strategies and tactics and ideas that are…frankly, are relevant and applicable to both venture capital, private equity, really any company that’s trying to scale. But before we get into all of those, you know, ideas, strategies, and tactics, Cole, could you tell us a little bit more about Legacy Group and your portfolio companies?

Cole: Sure, sure. So, Legacy Group is an asset manager really operating with U.S. capital down here in Latin America. We focus on Colombia, largely. While I wouldn’t say we’re venture capital, I wouldn’t say we’re purely private equity, as well. We work with early and mid-stage companies. And we basically are a mixture of investors and company builders. And that’s what we do. We do heavy concentrated bets in a small number of portfolio companies.

So, where I’m recording from today is actually one of our portfolio companies. They’re one of the best in digital arts and entertainment here in Medellin, Colombia. So, I’m recording from one of their studios. And our largest portfolio company is a company I founded in 2017 called Green Coffee Company. We started with about, you know, $5.7 million in investment, since have placed about $50 million of equity into the company. And we’ve become the largest consolidated producer of coffee in the country, when the national product is coffee in Colombia.

Andy: So, I’ve seen your presentation a couple times for the coffee company. Is the goal there to IPO?

Cole: That’s right. So, what we’ll do for that one is we’ll dual track it. So, we’ll prepare the company for a private sale or for… That’s a big private equity buyout from our, basically, smaller retail investors. Or we’ll go for an IPO. Really, the structure of doing that is exactly the same. Basically, you’re taking a small emerging company, making it a mid-scale company, and then getting to the reporting and the sophistication of what U.S. public companies need to report at. So, no matter if you were selling it in a private market or you’re selling equity in a public market, really you want to be the company at a level of sophistication that can do any. And basically, you’re an omnivore to capital at that point.

Andy: Yeah, and I love what you kind of said, that the process is the same. So, this reminds me. I’ve sold four different businesses to private equity. And it’s funny, it’s like the same freaking fire drill every time. And it’s not… To be honest, it’s a different…I think it’s the same concept, but it’s a different scale and a different level. Like every time… There’s like… There’s probably 25, 50 things like this, you’re like, “Oh, it turns out we never sold our…we never signed our operating agreement. It turns out we need to sign our operating agreement before we can sell all of our assets to this private equity company.”

Cole: That’s right.

Andy: There’s just, like… You got to cross the T’s, you got to dot the I’s. Those are kind of like the little things. I don’t think that’s really what we’re talking about. What we’re talking about more is enterprise value. Because some businesses, a lot of small businesses, are really just, like, glorified jobs for the founder.

Cole: Yes.

Andy: You know, it’s like a founder has found themselves a way to have essentially 5 or 10 assistants, but they’re really driving all the value. And it’s not really systematized, it’s not really…there’s not really enterprise value that will necessarily survive once someone else acquires the business. So, the trick is to not just have a glorified job, but to build enterprise value and systems and, you know, repeatable, scalable things to where another buyer can come and say, “Oh, that’s a value. We want to take that asset, we want to purchase it and grow it even more.” Now, you’ve built a business, that’s no longer just a glorified job for one person, right?

Cole: Agreed completely. Agreed completely. I think that’s the way you need to think about taking a company public, is make a company that’s going to last and be valuable to somebody else. Same concept as anything in the world. How much is the equity worth in a company? How much someone is willing to pay for it. And I think you’re seeing nowadays, I mean, you really need to create profitable companies to IPO. You’re seeing dips in public markets. I mean, you really need to prepare companies. And I think you’ll see less and less companies with one product that looks really sexy at the time, losing money, being able to raise a tremendous amount of capital on public markets. Because you’re just not seeing that risk appetite.

Andy: Yeah. And it’s another interesting thing that you kind of pointed out that, depending on the timing, the public markets may not even be that appealing. And so you may not want…you know, you may not want your liquidity event to be going public. And going back to my own experiences, I haven’t scaled anything anywhere near to the point of an IPO. But I will say, in that process of building a company to exit, you kind of learn, “Okay, we need systems, we need repeatable processes.” And then you sell it. Just that process of preparing the company to sell, there are some really stressful and annoying parts of it that are never fun. But the overall process actually just creates value in and of itself. Because it forces you to take on that external perspective and be like, “It’s not just about top-line revenue or whatever, it’s actually about how stable is this.” You know, “If I get hit by a bus tomorrow, is this organization going to”…

So, it actually, like…it kind of forces you to do some really good organizational things regardless, even if you never end up IPO’ing or even if you never sell to private equity. It’s like, “I’ve strengthened my organization merely by following this process.”

Cole: That’s right. I think what you’re going to see is there’s a reason why public…U.S. public companies operate in the manner they do. And it’s what stakeholders demand of them, whether it’s, you know, regulators or investors or counterparties, such as clients, customers, suppliers. They operate in the manner they do because it’s best operating practice in the world.

You’re going to see companies that want to sell to private equity. It doesn’t matter if you go public, say, on a public market or private market. Public equities want to see the exact same thing. Private equity firms want to see companies that have the optionality that can go public if they want to, but they choose to stay private. It can be a valuation issue, it can be a regulation issue, it can be “we want to stay under the radar” kind of issue. But there’s a number of reasons why companies don’t go public. But I agree with you completely, Andy, that developing a company shouldn’t be restrictive around, “Okay, I need to do this because I’m going public.”

I think a lot of the roadmap that you do and the milestones you hit you need to do when you grow a company from what I always call, like, an early-stage start-up, kind of a test of thesis. And then when you go into an IPO-level company, I call it, like…it’s a big-boy operation. Right? That’s your enterprise value kind of operation. And then at that point, you have more…

To me, public markets are just another tool in the tool belt of saying, “Is this a useful tool at the time? Does the market line up for me or should I use a different tool to get my end goal?” And if capital is one goal, maybe a private market is sufficient for you and you don’t actually need to dip into public markets. If there’s another goal in mind, maybe you want to dip into public markets. It really depends on where the company is at and what do the stakeholders really want to do.

Andy: Yeah. And that’s interesting. It’s kind of like “be careful what you wish for.” Back to my experiences. You know, after exiting several companies, I realized, “Well, shoot, if you build a company enough that someone in private equity wants to buy it, and then as part of that process you sort of solidify it and make it into a more stable organization,” I’ve realized years later, like, “why the heck did I want…why was I in a rush to sell that?” Right? So, like, now my current goal is to do it again and build a company like that again, but then to not sell it. Like if this is a nice, stable, growing company, why the heck am I selling it?

Cole: Definitely. That’s a great concept. And I’m sorry to cut you off, Andy, but I think that’s a really important topic that not enough people really talk about. Is they always think about liquidity events and really term horizons, especially for private capital. You don’t talk about it as much with public capital. Public capital, usually it’s not, “I’m going to hold this for three and a half years, then I have to sell because that’s my capital churn that I have to keep up.” Right? But with private capital, you see that all the time.

I think you’ll see numerous studies, and obviously your whole business is around alts and around private capital, is that a lot of guys, they want to exit as soon as you have an IPO event. That doesn’t mean all the value is gone in a company. You know, I think in…a lot of people think in that simplistic term you’re either in a private market or you’re in a public market, and then there’s no really dipping in between. You’re seeing more of, what I would say, the successful asset managers and fund managers dipping into both. Right?

So, there’s guys that say, “Look, my goal is to find arbitrage. And I will take a company, whether it’s seed, if I think it’s special, or it’s a series C where they’re a midterm growth company, or I’ll even participate at a pre-IPO or IPO stage, but I think the company can get to the next level.” And so what I really like about that is people are going back to, like, what is the basis of capitalism and say, “I want to invest in companies that are doing something special.

And I think if I have the value, the valuation that makes sense for the value that they’re providing and the value to me, I have a longer-term time horizon and I’m not set by term limits.” Which I think I haven’t seen it much in my career before the last, like…maybe like the last five years, where you see hedge fund managers start dipping into private, and then you see some of the private equity guys start holding positions past IPO. Now, they might be trading it between different, like, portfolio funds, but they’re still the ultimate manager of that fund. And they might be trading underneath, but they take long-term positions on companies they think are special. And I think that’s a great…it’s a great theme and I think those guys are doing the right thing.

Andy: Yeah. So, the public markets, private markets, I mean, these are tools, right? These are tools of capitalism.

Cole: That’s right.

Andy: It’s not, like…it’s not the end all be all. But I do have to say though, Cole, that, you know, for me, professionally, bucket list, I got three things. Number one, I want to be in the print issue of Barron’s, you know.

Cole: Yeah. Yes. Yes.

Andy: To me, that’s… I love Wall Street Journal. But to me, Barron’s is, like…that’s my ultimate. Not the website, the print edition. Okay?

Cole: Print edition.

Andy: Yeah. Number two, I want to ring the bell, open the New York Stock Exchange, you know, trading day.

Cole: Oh, yeah.

Andy: Yeah. That one might be the…that might be the easiest of all these.

Cole: Yes.

Andy: Yeah. Have you done it?

Cole: I have never done it. We’ve worked with clients…in my old life when I worked at PwC, we worked on a lot of…you know, when I was a dorky accountant, you know, in the audit days, you know, we worked on a lot of S1s, you take clients public. You know, accounting…you don’t get any credit for being the accounting advisor on a public issue. You know, my partner, he’s a securities attorney. He probably gets to sit in the front row. The attorneys are, you know, higher. It’s like the investment bankers, the attorneys, and the accountants are in the way back.

So, I’ve never personally rung the bell, but I have worked with companies that have. You know, and I think ringing the bell, honestly, with the small cap exchanges, now that both NYSE and the NASDAQ have, you know, we’re seeing… You know, I see some competitors, even in the coffee space that you’d say usually you need a really balance-sheet-heavy business, I mean, we see guys going public with $10 million in net assets, $5 million in net assets, you know, $10, $20 million of revenue. Not to say that it’s the right thing to do and the correct capital-raising strategy. But actually, to get on those exchanges isn’t as difficult as many people think, actually. A lot of it’s a check-the-box exercise. And if you can do…if you can meet all the points, you can be a public company.

Andy: Fair enough. Well, I was… So, I was going to say, number three, I want to be part of a team that takes a company public. Right?

Cole: There you go.

Andy: I don’t know that I’d want to be the leading person in all that, you know, because it’s probably…it might be more…

Cole: Yeah.

Andy: Okay. So, let’s talk. You sent me some notes, which I really appreciated, just kind of big picture.

Cole: Sure.

Andy: Because every company is going to be a little different. Right? And for some companies, the threshold to go public for one type of company might be, what, a $2 or $3 billion valuation?

Cole: Sure.

Andy: But you already…you mentioned the other end of the spectrum. So, it’s not always going to be this one-size-fits-all template, but you mentioned three sort of broad phases. Could you just introduce us to those phases briefly?

Cole: Sure. And those are…they’re probably my own terminology, but it’s how I think about companies and kind of the different stages that they go through prior to getting to, like, a fully developed IPO-level company. First would be, like, a seed level. That would be the cliché of the funding term “seed,” but really approve a thesis. Right? And so… And I’ll introduce each one of these kind of as we go.

So, every company that starts out, you’re going to start out with pure risk capital. Right? Even if you’re a balance-sheet-backed business, like, it’s going to be pure risk capital. You have a thesis, the founder and probably a management team. Hopefully, smart guys have a thesis that they want to test out. And usually, you test it with a relatively small amount of money. You know, you’d see tech guys come in with $250,000, $500,000-dollar equity stacks, and then you’ll see balance-sheet-heavy businesses come in with whatever the management team feels comfortable. There are some seeds that might start with $50 million, there are some guys that might start with $10 million. Like when we did ours for Coffee, we did it with $5.7 million. And what you really need to do at that stage is develop the thesis, make sure it…your product works in the market, and make sure the market responds to the business.

And probably most importantly out of that is the…someone could logically, as an outsider, see growth. Right? And say, “Look, I see what you guys are doing. Even if you’re not fully profitable, you’re growing revenues. And I can see, while if you push more capital into the business, the market needs that. You have something that’s unique.”

Andy: So, if I could summarize that in just a couple of words.

Cole: Sure.

Andy: Product-market fit.

Cole: Yes.

Andy: Not perfect, but some.

Cole: Yes.

Andy: And then traction. Because then, I agree, it doesn’t mean you need to be making bank, that you need to be, you know, 20% profit margin. It might be negative profit margin.

Cole: That’s right.

Andy: But I think at that phase, a lot of private equity guys, we like to see offense. Right?

Cole: Definitely.

Andy: Because we’re like, “Well, you can always trim costs later. Can the revenue grow? Can it grow at a pretty quick, you know, pace?

Cole: That’s right. I think you’re exactly right. I mean, that’s what most guys are measuring at that point, is revenue. They want to see revenue growth. And they want to… And I think more… Versus 10 years ago, people want to see that your opex isn’t burning like crazy. Right? They don’t want to see, “Oh, yeah, you took it from a million to $10 million in revenue in a year, but you took your opex from $1 million to $50 million.” Right? That model isn’t…I don’t think it’s going to work for too much longer, people aren’t going to fund losses with equity forever. And I think that’s why you’re seeing less money go into some of these VC deals these days, because they’re not willing to fund losses with equity.

But you’re exactly right. That overview is that product mix…or product fit, market accepts it. And then basically, at the end of that, you say, “Look, I can logically tell, and show with historical results, what I’ve done in the market and why the business makes sense.” And then you can get to the next level. Now, certain companies, they don’t have to actually raise capital to get to that level. I mean, there are certain companies that raise enough capital to organically grow to the next level. It depends what your timeline is.

So, to give an example down in Latin America. You know, the VC markets, the private equity markets, aren’t nearly as efficient in Latin America as they are in the United States. So, you would never be able to get to that developed stage if you weren’t profitable. So, there’s, like, almost zero companies that get past that initial stage in Latin America that aren’t profitable at the end of kind of reaching the KPI and say, “Look, I’ve got a developed thesis, I’ve proven it to the market.” Usually… I mean, in my mind, that usually takes two to five years, somewhat depending on the market that you’re in and whatnot. So, but the nature of it is you can prove to an outside party that you get to the next stage.

Andy: But you might be, at that stage… Let’s say you’re at $2 million revenue or $5 million revenue or whatever.

Cole: Sure.

Andy: You might be what I was talking about, which is you have one founder, or two, who are essentially the whole thing. Like they have a team. But, like, if they get hit by a bus, it’s like, “Well, we can all go home, it’s over.”

Cole: It’s over. I mean, that was one of the main things when I wrote the notes to you, Andy. Is, like, a lot of things at that stage, like at that early stage… You always talk about risk capital when you’re an investor, but that business has massive human capital risk. It’s…at the beginning stage of any company, you got one to five people maximum that if they’re all on a plane and it goes down, it’s over. Right?

Andy: Well, it’s funny. It’s funny, Cole. Yeah, just hitting home here. I’m remembering an experience when a partner and I were gearing up to sell a business to private equity and they were like, “Have you ever considered you and your partner getting key man’s insurance?” And I was like, “What is that? That literally sounds like a joke.” I was, like, laughing. I was like, “That’s not a thing.” And they were like, “No, it’s definitely a thing.” And we’re like, “What are you talking about? We have this awesome business, it’s growing,” yadda yadda. And they’re like, “Yeah, it’s really cool, but you don’t understand. There’s arguably not a lot of enterprise value. In the sense that once you step away, there’s a ton of risk.”

Cole: 100%.

Andy: So, I think that that’s what they were getting at. But we did not end up buying the key man’s insurance.

Cole: Yeah.

Andy: Do people actually buy that?

Cole: People do. I’ve seen it from some… Like institutional investors might require it on some funding grounds. It’s almost like you’re getting a mortgage from a bank and they require you to have insurance on a house. Same concept. You know, there are…I know there are institutional investors that require that, for sure.

Andy: I just can’t see it paying out. I mean, maybe.

Cole: It’s a difficult one. I mean, especially on early-stage companies, you’re buying basically life insurance on a couple founders. And it also matters to me, is how much money are you deploying. Right? If you’re doing $250,000, $500,000-dollar equity, like, placements, you don’t have a lot of capital to work with. And you start blowing it on life insurance for a couple of founders. You say, “Look, I’m pretty sure that $10,000 bucks, or whatever you’re spending on life insurance proceeds, could be used probably for something a little better to make sure that business gets to the next level.”

Andy: Exactly. And at that investment phase, I mean, isn’t it kind of like, yeah, it is risky, the risk comes with the territory? Because…

Cole: 100%.

Andy: And looking back, those investors that we were working with, they did very, very, very well. Like they did take a risk, you know, but they did great.

Cole: Definitely.

Andy: So…and, like, I’m guessing, like, with your all portfolio companies, even now at, like, the current valuation, the folks who got in on that first $5.7 million seed round, they took a lot of risk, but they’re probably…

Cole: They’re way up.

Andy: Yeah, exactly.

Cole: Yeah. That’s the whole thing. The risk-reward is always way higher to come in at a seed. But, you know, as an individual, let’s say ordinary retail investors, they don’t like to see things go to zero. You know? So, but that’s the risk when you invest at a seed round. You know, for us, you know, I would say if we wouldn’t have the coffee company doing balance-sheet focus… Which is, you know, we have a heavy collateral background. Even if something was to go wrong, you know, everything is backed by fixed assets, infrastructure.

Andy: And, Cole, that’s such a difference. With venture capital, I feel like, “We’re going to build a new crypto ecosystem for this.” It’s like if that doesn’t work, there’s nothing there.

Cole: Yeah. It’s over.

Andy: You know? Whereas if we repo your business, like, there’s a ton of machinery. There’s tons and tons of… You know, there’s a lot of there.

Cole: Totally.

Andy: And we’re not going to repo your business, you know, I’m just saying.

Cole: Well, thank you. Thank you for not repo’ing the business. But you’re exactly right, Andy. I mean, a lot… I always split businesses. I know it’s a really simplistic way to do it, but I say it’s a balance sheet business or it’s a P&L business. Everything you’re talking about are P&L businesses. Right? Heavy on your whole, like, capex space is people. Right? It’s usually people. You know, if you’re building a venture-capital-backed crypto planet investor…investment vehicle, you know, you’re right. If the thesis doesn’t work, you’re down to zero. Right? Well, some of these, they might have liabilities, you know, for some of these guys getting sued and whatnot, going around banking regulation. But theoretically, if you’re an LP investor, you’re just a regular stock investor, your risk limited up goes to zero. But, you know, if you’re doing… You know, but you still have…

One of the things I think about VC investing is everyone always focuses on VC as always being seed in those P&L businesses. Right? Tech focused businesses, whether it’s apps or a new algorithmic program that can do, let’s say, trading on the New York Stock Exchange in a better way, whatever it is. Those are very high risk. And if you were to think about it like a VC, you say, “Look, I need one of these to pay off. I need two of them to maybe get my money back. And all the rest of them go to zero.”

Andy: Power law. Right?

Cole: Power law. Exactly the power law. And, you know, there are other businesses out there that are either collateral-backed more close to what I would say is a pure balance-sheet business that once you build out the balance sheet, you’re there forever. Right? There’s always going to be value there.

Andy: Yeah. If I’m investing in those kind of businesses, so mentioning VC, it’s like I have one grand slam, two singles, and 37 strikeouts, or something.

Cole: That’s right.

Andy: Whereas for a capital-intensive business, a balance-sheet business, it might be if I get five hits, one strikeout, one single, one double, one triple, one home run, something, distribution, like that?

Cole: That’s right.

Andy: Okay.

Cole: That’s right. That’s the way I would look at it. I mean, I think the balance sheet businesses, honestly, get a bad rap. You know, I love the balance sheet businesses. You know, they’re more difficult to replicate. If you said, “Is there a competitive mode around it?,” there is. You need capital to play. Especially in places like Latin America or any emerging market, whether you’re doing Africa deals or Southeast Asia deals. You know, a lot of those markets, capital is scarce. So, if you can come in with a scarce resource, whether it’s capital or human capital, and come in and basically build a competitive mode of a balance-sheet business and you’re not just wasting money and splashing it, you’re actually building, you know, valuable assets, it’s an interesting proposition. Where especially in early-stage balance-sheet businesses, they don’t…banks aren’t taking a lot of the risk on funding them.

So, if you come in with equity, you come into that mix of equity, or maybe you can even do some private debt, I think there’s a massive room to play there. And everyone always focuses on the P&L businesses because they want to see the ability to get 10,000 X returns, and they like that one home run. Whereas, I’d say, look, if you’re hitting singles and doubles, and you say, “Look, I want to invest in a balance-sheet business at a seed round and I’m willing to hold it,” let’s say, “10 years,” and you’re comfortable saying, “Look, I can make 5, 10 times my money on that. I might not make 10,000 times my money.” But if you say, “Look, I can make 5 to 10, and I’m collateralized the entire time with massive downside risk protection,” I think a lot of the high-net-worth guys, they like that kind of thought process and that kind of, you know, strategy.

Andy: I know I do. I know I do. Well, then, okay. We talked about the seed round, and it’s kind of…it’s a little different for that asset backed business versus the P&L business. What’s the next… I mean, I kind of see where this is going, there’s going to be a muddy middle. There’s going to be this…

Cole: That’s right.

Andy: The next phase is the phase that most people don’t understand. Like a guy like me, I’m like, “Oh, this is the phase I’ve never gotten to.”

Cole: Yes.

Andy: Like even my successful businesses, they kind of exited kind of at the end of this seed round type size, or whatever. So, what’s the next phase?

Cole: I think the next phase is really… You have a core thesis at the end of your seed round. Right? Where you’re developing a company, you say, “Look, I can prove it.” You’re either regurgitating capital that you’re growing organically or you’re bringing in outside capital, and you’re building upon that existing thesis. Right? So, you’re basically saying, “I’m going to do my thesis of whatever I’ve already proven, and I’m going to do it at a bigger scale. Now, maybe you’re building out a couple, like, ancillary revenue streams on there, but you have a core business at that time. It theoretically works and you’re throwing in capital to make sure it works on a larger scale.

Andy: Now, is this the phase where we fire the founder and we bring in the more professional management?

Cole: That is an excellent point, and that can happen. And I say that’s…this is the stage where you have to… Honestly, I like to do this with all the companies, and I do it with Legacy, and me and my partner do it all the time. You know, we’ll say, “Are the people that we have the right guys for what we’re doing at the time we’re doing it?” And let me give you an example, a real-life example.

So, for instance, when we started the seed round of the coffee company, I would step into a lot of executive roles at the time. I might be the CEO for a day, I might be the CFO, I might be the head trader of coffee. Right? You’re on a lot of operational calls. But when we got to the stage where the thesis was ultimately proven, we had control of the company, people could see what we’re trying to do, and we can start raising what I would say is more big-boy money. You know, we had to look at it and say, “Are we the right guys, really, to be running this company?” And the answer is no.

Andy: You fired yourself.

Cole: Fired myself. Right? You got to fire… Like, and I think that’s really important. You can say, like, “What are you actually good at and where do you actually add value?” I think you see a lot of founders, or like the original five people or whatever it is, they think, “Oh, I was here first. So, I’m going to ride it all the way to the top.” When in reality, if their goal is, “I want to make the most powerful enterprise we can do,” or a lot of them just say, “I want to make as much money as possible,” you know, them not being there actually can make them more money, or it can make the business stronger.

Andy: The organization is just going to change. Because in a 5-person organization, or maybe even up to 10 people or whatever, if you’re a founder and you’re like, “I want to do X, I want to do Y,” you might even just be operating on gut instinct of what needs done next.

Cole: That’s right.

Andy: And so you’re like, “I just know we need to invest into Google AdWords. Let’s go do it right now.”

Cole: That’s right.

Andy: I’m like literally on the computer right now, logging into Google.

Cole: That’s right.

Andy: You can’t survive that kind of thinking with 10, 15, 20, 50 people in your organization.

Cole: I think you’re right.

Andy: You need an HR department. Right? Like, you need policies. And I just think it’s…some of its personality. Like the type of person that thrives in the Wild West, creative, you know, that atmosphere, a lot of times they’re going to be miserable in that mid-sized organization.

Cole: I’ve definitely seen that. I mean, you have guys… And I agree with you. A lot of those at the early stage, especially when you’re in markets that are inefficient, frustrating, what…not efficient places to do business in, you have guys that are good founders that can put out fires. And they’re putting out fires every minute of every day. Right? That’s really their job. If you had to say, “What do you do in an average day?,” that guy will tell you, “I put out fires and I just try to make sure the train doesn’t go off the tracks,” in reality. That’s… And they’re just trying to get, like, day by day to the next… It’s like living paycheck to paycheck, but you get paid on a minute-by-minute basis. And it’s possible if you don’t get paid the next minute, it’s all over. Right? Because the risk is high when you’re in a seed-level company.

You know, that same person, when you start talking…when you get to the next level that we’re saying, that growth level, when you start…really start growing on that thesis, you know, you have to think strategically. You need to make decisions that aren’t one day out. You need to say, “I need to be thinking for”… Like short-term would be a year, mid-term might be two to three, and then long-term. And say, “Am I meeting… I have to start thinking about my stakeholders on a 4 or 5, 10-year basis, and what are we trying to do, what is the train that we’re trying…or the train tracks we’re trying to build and where are we going.” And if you can’t do that at the second stage of a company, or what I consider the second stage of a company, you can’t lead the company. Right? You can’t do it. It’s just not possible.

Andy: I love the vehicle analogy. I pretty much use like two or three analogies over and over. Baseball, I’m a baseball guy. So, I love baseball. But I love the train analogy because I’m thinking the start-up, the seed company, that’s like a Ferrari F430 or something. Like if I’m heading into a corner, I need to make a sharp turn, like, boom, I slam on the brakes, I make that sharp turn. But you’re talking about laying train tracks. And, like, you know, a train can’t just turn on a dime. Right? A train, you have to be planning way, way, way ahead to pilot the train, or to conduct the train, whatever the word is.

So, is this phase, I guess… It sounds to me, we talked briefly about, you know, new revenue streams, scaling revenue streams. But most of what we’ve discussed here is more like human organizational team…you know, team and talent type stuff.

Cole: I think so. I mean, Andy, when I think about building a company, I actually think the human capital is way more important than the physical capital. You’ll see companies just, sorry to say, ****** away so much money on dumb stuff because they don’t have the right guys in the right seats. Right?

So, I think every stage, and I would encourage, like, companies to do it every month probably, and say, “Do we have the right people in the right seats, and are we driving in the right direction?,” for your car analogy. You’ll find that at different stage of a company growth, not only can certain people not perform at the level that you want them to be, they don’t like being there.

I mean, I think if you go back to your founder analogy, if you really sat down with some of these founders and they get to the stage where it’s really growing, they just got a $50 million-dollar check or whatever to build out the thesis completely. A lot of those guys like the scrap, they like the fight, they like starting from zero.

Andy: My partner Rich, he calls it the scrounge.

Cole: The scrounge, exactly. It’s like a rugby pitch, you know.

Andy: Exactly. Yeah. No, they want to be in the trenches. And honestly, when you get conditioned to that seed fate… You know, you were talking about the $10 K for key man’s insurance. If you’re in a start-up, it’s, like, absurd. It’s like, “Are you serious?”

Cole: Oh, absolutely.

Andy: I could put $10 K into AdWords. I could do a million things with $10,000 that are better than buying some… But you can’t think that way with an organization that’s doing $15 million in top line, or even $10 million. You need to start understanding, like, talent is going to be expensive. Sometimes, by the way, the worst decision is to try and, like, hire, you know, cheaper talent. It’s like, actually, you want to pay up for the good talent.

Cole: I agree completely.

Andy: As a founder, though, it’s, like, crazy. It’s like, “No, you don’t understand. We scrimp, we save, we stretch every dollar.” It’s just like it’s hard to unwire yourself from that start-up mentality.

Cole: I agree with you. I agree. And, like, especially at the second phase. You need to get comfortable spending money. And understand when something doesn’t work, you cut it. Right? And you can’t… You obviously have to be better. You have to be good with money. But you can’t do the scrimp in the saving of the seed-round-level guy. If you’re worried about a $10,000-dollar spend and you just raised $50 million bucks that you need to deploy within, let’s say, 18 months. And you’re going down crazy into every line item and say, “Why did we spend $37 on this Google Ad word? I would have done it in a different way.” You got to step back and say, “What is the macro goal we’re trying to achieve here?” Right?

And then I agree with you completely on the human capital side. To me, the most important people that…or the most important thing you can do is get the smartest people around you that can build the business. Right? And any founder, one guy that thinks you can build a business, especially, like, a balance-sheet business that isn’t based on, like, one algorithm or something like that, the smart…the people are going to build the business, not one person.

And I think we overestimate the importance of one person on the majority of businesses. In reality, you’ll have a group of high-level people that grow and build a company. And without those people, the company would never get to where it was. It was it wasn’t one guy, ever.

Andy: So, okay, we need one more analogy. We’re going to do the horse racing. You’re the founder. If you get that company to whatever traction, $5, $7, whatever, million bucks in revenue, you’re a stallion. Right? You’re a stallion.

Cole: Yeah.

Andy: You’re a high-performance racehorse. But this next phase, you really need like 10 stallions.

Cole: Yes.

Andy: Right? Like you need a stallion CFO, not the type of person who’s going to be intimidated by a founder or who the founder needs to micromanage and say, “Oh, no, you did this wrong. I would do it better.”

Cole: Definitely.

Andy: They need to all basically be better than you.

Cole: Yeah.

Andy: You know?

Cole: I think you’re exactly right, Andy. I mean, you’re right. At the seed-level stage, the guys who do the best oftentimes are massive micromanagers, massive. Right? They want to be in control, touch every point of contact, either with the client, with the investor, with the supplier, with whoever. Right? But if you try to run a business that’s scaling like crazy in this second level, you’ll just miss things. You’ll care about certain things, and then everything else will get completely overlooked. And all those other things that you don’t think are important probably are important to some counterparty out there. Right?

So, when you rely on purely the judgment of someone who’s micromanaging and they take…everything they do is going to be great for the things they focus on. But for the things outside of that, they’re going to get neglected. And so that’s when the delegation becomes important. And exactly what you’re saying, Andy. Everything that’s a core process of the business that needs to get built out that you didn’t have when you’re a seed round, especially things like HR, you need a superstar of HR to run that department. If you need a new sales department, you need someone running sales when potentially the founder was the guy running sales before. But you can’t interact with 100 clients if you’re meant to be building a growing company, it’s just not possible.

Andy: So, okay. What I want to understand, and let’s get to the third phase. But I know that the numbers are different and it kind of all depends. But I’m going to put you on the spot. I mean, I’m going to ask you to answer it if you can.

Cole: Sure.

Andy: Like, what are the ranges? So, like, that seed round, is that generally, like, up to $5 million in revenue?

Cole: Sure.

Andy: And then what is this next…what is the middle round? When does that round kind of mature?

Cole: Sure. I think you can do generalities with it. I think at a maturity of a company, you’re going to get through that… If the company survives, most of them don’t… Right? Through the seed round. You’re going to hit two to five years of company maturity. I think that’s really what you’re going to get. And obviously, everything is going to be based on how much money do you inject in a company, if it’s a balance-sheet business, because you’re going to leverage those assets on revenue side.

And the other is how big is the market you can hit with a P&L business. But most of these that get to the next stage, I mean, I think you’re going to be between a range of $2 million bucks and, you know, $20 million bucks, probably, to hit that second stage. Unless you’re coming in with just, you know, massive down payments, and the guys have done it before, and it’s a rinse and repeat business that they know the business already, it’s theoretically a start-up, but it’s a proven model that the management team has been doing forever. I think that’s where you’re going to hit.

You know, then you get to that second stage and you’re building out the scale of your thesis. Right? So, I… And I think at that point, you know, then you have another two to five years of company life, is what I would say. And that’s when you’ve pretty much proven that not only does your revenue model work on a micro basis, whether it’s in a city or a state or whatever, but maybe it’s a nationwide expansion on that one core business. Right? That’s the key, on the one core business. Maybe it’s, like, a regional model, whatever it is.

So, then, depending on the life cycle of the company or kind of, like, how long, the tenure, have you been doing it, you know, I think you’ll be at that $10 million-dollar to $100 million-dollar range at that point, depending what markets you’re in. Right? I mean, if you’re in Cambodia, you know, it’s going to be a lot harder to get to a $100 million-dollar revenue multiple, or a revenue amount, than if you’re in, you know, Silicon Valley. You know, you can… It depends what the product is, depends what your client base is.

Andy: And sorry, and sorry. That’s… Is that revenue or valuation?

Cole: I’m talking about just revenue, top-line revenue. Top-line revenue. You know, valuation is…especially in early-stage companies, I really put the majority of the value that people assign is blue sky. Everything going forward. You know, your historical… And we talk about with the banks all the time, you know, banks really underwrite your company based on historical performance. But if you do that for early-stage company investing, you’re never going to have an accurate…

Andy: Zero. You’d never make a single investment, right?

Cole: Yeah, you’d never make a single investment and you really have no idea what they’re doing in the future. Like everything when you’re investing in early-stage companies is, “Well, what can they do in the future? How do I know they can do it? And what’s my risk buffer?” So, usually that’s by a valuation adjustment of saying, you know, “What happens if it doesn’t go right?” Right? “Am I overpaying? Am I underpaying? Is the management team right?”

But everything is always about the future because the company is not established. Right? It’s not a company that’s fully developed. It’s not Coca-Cola that grows in line with GDP growth. You know, if you’re at that level, you can’t grow faster than global GDP because you’re everywhere. Right? But if you’re a new soft drink that just started and you’re doing $200,000 a year in revenue, you could grow at a 1,000% a year for a while before you even hit a dent in Coca-Cola’s revenue. Right? And so they might not even notice you for 10 years.

So, more or less, that’s the revenue that I would say between those two.

Andy: And your portfolio companies, I feel like at least the coffee company, is it in the thick of this stage, is it maybe towards the end of the stage?

Cole: I think we’re really in the thick of the second stage as a company. I think we’ve proven thesis when we first… I’d say over the first… It took us about, I would say, three or four years to get through that kind of seed level. You know, we’re deploying the amount of capital that makes us a national player now. We’re the largest in the country now, as a consolidated coffee producer.

Andy: And your coffee is… By the way, your coffee is really good. I got to give a plug for the coffee.

Cole: Thank you.

Andy: Because your partner Josh, he sent me some coffee. And I’m kind of a coffee snob, so it is good coffee. And they…you know, they kind of…in the presentation, they go into, you know, all the production stuff they do and it’s really cool. And we actually have some of those presentations on our site at AltsDB. So, I’ll make sure to link to those in the show notes. I just had to stop you there because I’m a coffee guy. I had to point out the product needs to be good, folks. It’s good coffee. But go on, go on.

Cole: Thank you, sir. Thank you, Andy. Thank you for the plug. But I would say, you know, once you… And our core thesis really is growing around, you now, how do you do coffee growing in a better way. Right? How do you do it in a sustainable way, how do you do it in a scalable manner, how do you run it as a true international corporate. Right?

And so now we’re in the stage that we’re growing outside of our…what I would say is, like, our core nexus. We’re buying farmland in other regions, we’re scaling our trading operations. And really, that’s just an expansion of our core thesis. But we’re starting to get into what I would say is the most important aspect of, like, a third stage. Right? So, we’re kind of blended between the kind of models of what I would say is a third-stage company, is when you find alternative revenue streams. Right?

And I think that is one of the most important things to take. Once you get your core thesis, a lot of times you have a macro scale, something that you have… I guess from an investment terminology, it would be arbitrage. Right? You have influence because of your scale, or because of the position you have in the market, that allows you to penetrate another revenue vertical or another product or something.

Like for us, it’s taking coffee cherry, because coffee comes on a cherry, and we’re going to distill that coffee cherry fruit and put it…make pure ethanol. Right? And we call that a byproduct in agriculture. The only reason we’re able to do that with any kind of monetary value or to do it at scale is because we already have so much, like, production scale from harvesting coffee itself and selling it as a traditional product, which is roasted coffee, which Andy loves. But, I mean, that’s kind of where you got to get to at somewhere in the second stage and say, “How do I build out new products, use my position in the market to really supercharge growth?”

Because, typically, whenever you have…it doesn’t matter what product or original thesis you’re trying to prove, it’ll always have some kind of limitation. Whether it’s a market limitation, a scale limitation of your management, it’ll be something. But there always will be some kind of low-hanging fruit to say, “I know our team is capable of a little bit more without a material amount of new investment. I don’t have to replace the CEO, I don’t have to replace the CFO. But we can get into this other corollary business.” And that’s what we start developing. Right?

Andy: And as an investor or as an owner of a…like if it’s in that middle market, what I would say is if you don’t have any of that stuff, those extra revenue streams, that growth plan, I could consider that business to be like an annuity. Like, okay, great. You know, whatever. It has a 10% profit margin and it grows 3% a year, or whatever. And sure, I’ll pay 7 X for that, or whatever. I’ll pay 5 X or 10 X earnings, or, you know, whatever the multiple is.

Cole: Yes.

Andy: But then if I’m in your position, I’m like, “I just built this kick-butt company. I’m not selling this thing for 7 X. Are you crazy?”

Cole: Yes.

Andy: But if you can prove, “Well, actually, we have these three other growth revenue streams teed up. We have a plan, we have a team in place. Maybe we need a little capital, but we’re also generating income that we can reinvest. And so that’s how we’ve gone to this higher level where we can actually 10 X it from here.” And that’s where the private markets, or the public markets, say, “Okay, we’re willing to give you liquidity and we’re willing to pay a pretty high multiple off your current earnings to buy the business.” Right?

Cole: Definitely.

Andy: And that’s kind of the goal. The goal is not to sell your business for 5 X earnings. Like, “Well, shoot, I’ll just earn it forever…I’ll just own it forever if that’s all you’re going to pay,” right?

Cole: I think you’re right. And I think if you only stuck to one core business, as much as you love to…or anyone loves to just see a business grow and grow and grow over again, there will always be that limitation. And I think if you don’t show…if management doesn’t show flexibility in the ability to think critically about, “Where do I sit in the market? What value do I really have? What more value can I generate? Am I doing the right thing with investors’ capital?,” they won’t get more capital. Right?

So, if I personally was to see a business that wants to do the exact same thing, rinse and repeat year over year for 20 years, no way. I don’t think there’s any business that I would look at and say, “I just want you to do the exact same thing year over year, and not change and critically think about where you are at least once a year on an annual summary, you know, and just rinse and repeat.” I don’t think… It’ll be… I’ll put it this way, it will be incredibly challenging for that group to get access to a material amount of capital to keep doing that. You’d have to just keep regurgitating, I think, earnings into it, and it would just become like a walking zombie company.

Andy: Well, it might be…you’d almost be like a utility company or something. It’d be like…

Cole: Oh, of course.

Andy: It’s just so… Which it’s not that it has no value, it’s just, again…

Cole: Limited.

Andy: Yeah. Why do I want to exit something at a really low multiple? You wouldn’t, right?

Cole: Absolutely. Absolutely.

Andy: So, Cole, you’ve done a really good job of kind of showing us these three phases. And I wanted…I had a couple other questions for you. But before we leave this last phase, I wanted to get your opinion. We talked numbers, the first phase, that second phase. And you made the point that different companies are going public for different reasons at different levels. But what… If we’re talking about kind of a normal, typical…I hate to use the word, typical IPO, at what scale, at what valuation does it make sense? Right?

Cole: Sure.

Andy: Because being a public company, there’s trade-offs. Right? There’s pros and there’s cons to being publicly traded. And there’s also…there’s expenses associated with it, right?

Cole: That’s right.

Andy: Internal to the company. So, when do you really hit scale in terms of revenue or valuation to where you should even be considering it or looking at it as an option?

Cole: Sure. I think, you know, for us, whenever we talk about going public, I really would be hesitant, as a bar, under like $100 million of revenue. I’d be very hesitant. Now, you’ll see what I would call, like, financial engineering companies to where you’ll see guys go public with $5 million, $10 million of revenue. And a lot of these guys, they know public markets. They might be actually…some of these companies will be run by ex-investment bankers. And they’re looking for, like, pumps. Like, “Just pump up revenue a bit, pump up valuations, and then we’ll try to make a bunch of money on some kind of liquidity event.” Sometimes they’re going concerned companies, but I wouldn’t say they’re going concerned companies. Right? They’re not building companies for the next 50 years. They’re building them for the next five years, maximum.

So, you don’t see… I don’t think you see a lot of companies that are coming in for what I would say is the right corporate reasons at under about $100 million of revenue. You know, we have certain advisors around us that say, you know, “Don’t go public before you hit a billion in revenue.” Right? There are a lot of reporting requirements for public companies, you are under more scrutiny. You know, you basically have access…

You could privately due-diligence the company with the amount of information at any point in time. Right? You have to continuously report to the SEC and the public. And a lot of companies don’t want to do that. They don’t want to… I mean, theoretically, your business model is completely up for grabs, as well. I mean, it’s completely transparent. If someone wanted to know exactly what your strategy is, exactly where you’re going, it’s a public company. You have to tell your shareholders that, and then it’s public knowledge. Right? So, theoretically, your competitor knows more or less what you’re trying to do. Theoretically, if they’re a good competitor, they would have known either way, but you do have to do that.

And I think, you know, more than just the revenue amount of what’s important and what the valuation on that revenue is, it becomes, you know, “Is your goal just a primary issuance of capital?” Right? Is it, “Look, I’m going public because I need to raise $500 million”? You know, that kind of liquidity is easily available a lot of times with one counterparty, whether you’re talking to sovereign funds or larger private equity funds. A lot of times you can raise that from one counterparty, depending on what the nature of your business is. Right?

So, when you… But when you get up into the multiple billions of dollars, you know, the amount of counterparties that can do that transaction starts going down. Right? So, suddenly, if you say, “Look, I need a one-ticket…or $12 billion,” suddenly you’re looking at a few sovereign funds, a couple big private equity funds.

Andy: Well, yeah, no, I get that. My question is at the kind of middle level of that. Let’s say you’re looking for $500 million. Is there… Do you take a penalty if you try and get that money, you know, privately? Like is there a premium attached to your revenue and earnings in the public markets? Historically, I feel like there has been, but anymore, I’m not so sure. Is that still the case?

Cole: It’s difficult. When I was doing M&A in Hong Kong… And our business…my background was really buying banks, insurance companies, you know, asset managers, you know, gold mines in Xinjiang province in China. You know, we would try to get as much data as we could on private market transactions. The number one thing a private equity manager or a private market wants to do is not get you the details on a valuation multiple that they paid in a private market transaction. So, it’s nearly impossible to get the information.

But what we saw when we were doing transactions in Asia is a lot of times for companies, when you’re going through diligence with buying a bank, insurance company, any basic enterprise value transactions, you’ll take public market multiples as a benchmark, and then private money will come in and potentially overbid that. Right? And they’ll keep you private because they either don’t want to give up the business model, they want everything to be confidential, they don’t want to deal with the regulation. There’s a number of reasons, depending on which public market. Obviously, the United States isn’t the only public market in the world. You have Hong Kong, London, Germany, you know, a bunch of islands in the Caribbean, tons of public markets. But there’s a number of reasons why you don’t want to do it.

So… But I guess to more appropriately address your question is there’s definitely instances where private markets will pay you a higher valuation to stay private than what they will in public markets. And we’ve seen that. I remember we had a study at Pricewaterhouse about family office purchases. And family offices were paying premiums on public market valuations because, one, they don’t want to be a public market, like, entrant of information.

So, obviously, when you’re a public company, top five shareholders get reported and you have to, like, drill down into almost, like, a UBO, ultimate beneficiary owner. A lot of private money does not want to be on those lists. They do not want to be on the 50 richest people in Forbes. Right? That is not their goal. They want to stay under the radar. So, if they think a company is very valuable and they don’t want to take LP positions, they want 100%, they pay premiums on public market transactions.

Now, obviously, public equity…or private equity, they’re not dumb guys. They’re not there to overpay for transactions. I’m sure there’s a lot of transactions that close below a public market approach. But what I’m saying is, you know, to reach back to where we started, dual tracking a company is for that exact purpose.

So, you can play off each other. Right? So, that, ultimately, the same counterparty… If you’re talking to a managing director at Goldman, he’s saying, “I’ll underwrite this transaction, I’ll buy the entire block at this price.” You can also have the exact same conversation with someone that’s at TPG who’s running a private equity book and he’ll say, “Look, I’ll buy the whole company for this.” And you could do those at the exact same time you’re talking to a corporate. And they say, “Look, I’m the head of M&A for X, Y, and Z corporate. We’re an internal M&A firm. This is how we do internal transactions at XYZ corporate. And this is the kind of valuations we look at.” Right?

So, you can do all three of those at the exact same time. But the stage you need to be as a company to be able to engage in that conversation is exactly the same. It’s exactly the same.

Andy: It reminds me… You know, this reminds me a little bit of, like… I read a book about the private art market, you know, investment-grade art, and like Sotheby’s and Christie’s and these auction houses.

Cole: Sure.

Andy: And how they will kind of work clients and be like, “Hey, we have…you know, we have a Monet, it’s a haystack. It’s… We think it might bring $60, $75 million at auction. You can buy it privately for $55, but we’re happy to let it go to auction if you want, you know, if you want to miss out.”

Cole: Yes.

Andy: And, you know, public market versus the private deal. And it’s funny, that kind of human psychology. I don’t care if you’re the most sophisticated I-banker in the world, sovereign wealth fund, private equity. That human psychology of there’s a deal kind of behind the scenes being privately shopped and there’s information asymmetry. You know?

Cole: Oh, yeah.

Andy: And it’s like I think that can work to the seller’s favor.

Cole: Absolutely. I can’t tell you the amount of times… Because when you’re…especially when you’re young and you’re working in the business, kind of growing up, and you think, “Everything is based on valuation models, everyone does everything based on the same kind of weighted average cost of capital. So, everyone must come up with the same valuation.” That is not at all true. It’s the exact…it’s like the exact opposite of that when you come with enterprise value of companies. One person will say, “Look, it’s worth $600 million.” Another person will say it’s worth $250 million. Another person will say it’s worth a billion. Right? And it will be vastly different. Then depending on the scale of the business, the valuation ranges will be huge.

I remember in…again, in Hong Kong, we used to put out valuation reports for huge banks, lending portfolios, loan blocks, all kinds of stuff. And, I mean, you’ll be in the valuations of $300, $400, $500 billion dollars on loan books, and then your value in the whole company, blah, blah, blah. And you’ll be looking at ranges and you just pick a range in between, like, a median of two ranges, but your range of a valuation might be $400…you’re worth between $400 and $600 million dollars. So, we’re going to save over $500 million dollars. I’m going to tell you what. To the guys who own that bank, a $100 million-dollar swing means a lot. Right? But that’s a…that, to me, is a giant swing.

And that’s what you do with the biggest companies in the world. And when I learned that, I’d say, “Oh, I guess all these companies are 100% negotiable.” And when I come to Colombia and see how companies do here, it’s exactly that market. Everything is 100% negotiable and it all depends on who you’re talking to what the value is.

Andy: Yeah. And, Cole, totally. It really…that really hits home. I’m thinking there are so many things like this. And I won’t get political, I promise. But it’s something that’s really art, it’s something that’s art, and we pretend that it’s science.

Cole: That’s right.

Andy: And so I know, as a private equity buyer, definitely I’ll look at the numbers.

Cole: Yes.

Andy: And usually what’s in the back of my mind is enterprise value, growth rate. And I’m kind of more…I’m more painting the picture internally of how big can this get and what does the organization look like three or five years from now. And I’m basing a valuation on a combination of that versus also the current situation and the current cash flow. But anyway, I kind of…I usually come up with my valuation in my stomach.

Cole: Yes.

Andy: I don’t know what to call that besides art and experience, or whatever you want to call it. And then sometimes it’s like, “Okay, I guess I need to make a pro forma or something to justify.” But I just…I know myself. You know, I’ll be honest with you. Like, we’re not in a transaction right now, but it’s just like a lot of it is just my gut feel, “This is what this is worth to me.” And then I understand, you know, the nerds need to come in with their pocket protectors…

Cole: Totally.

Andy: Pro forma.

Cole: I agree with you. And just being one of the nerds in the past… And I guess I’m not that cool right now, I’m probably still one of the nerds. You know, I’ve seen that transaction. I have literally seen transactions where private companies are buying a public bank. I remember this transaction in Hong Kong. And a private company was buying a public bank. The transaction price was already agreed before and they hired all the legal accounting, I-banking diligence to rubber-stamp it. Right? It’s just a rubber stamp. Everything was already hand-shaken, agreed. And this is over a billion-dollar transaction. Right?

And so everything is just there kind of to support the opinion of the chairman of the private company saying, “I’m buying this no matter what. And you need to give me a bunch of high-level professional firms to make it look like I’m making the smart idea, like this is a smart transaction.” And that was the purpose of the whole, like, diligence round you’re doing.

And it’s a real transaction. I mean, these are billion-dollar transactions. And, you know, they do have that art-versus-science approach that you’re saying, that happens every day. It happens… These kinds of transactions happen every day. “I want this bank.” “Why?” “Because I want it. I want this asset.” “Why?” “Because we need it because it adds to the portfolio.” “Well, how do you…how much is that worth?” “I don’t know, but I think it’s going to be worth a lot. Let’s put a billion dollars on it.”

And that might be the mandate of how you place a $10 billion-dollar private equity portfolio. And then you’ll get all…you’ll get the nerds, I agree, to put together all the numbers that make you look smart. But a lot of times it will be one or two guys saying, “Look, I know this is going to work in the future, I’m positive, I know the macro scheme. I don’t know how much it’s worth, but I know it’s worth more than our cost of capital. So, we’re going to put it in.”

Andy: And by the way, that’s okay. I’m not even denigrating…I’m not denigrating myself or anyone who operates that way. Because sometimes you have an experienced, smart investor, they have something in their gut.

Cole: Sure.

Andy: And they’re right. And I’m looking back. Like the best private equity investment I’ve ever made on paper, I wildly overpaid. You know? And, like, I think there was probably nobody else in the world that would have made the investment that I made. But I was like, “I know these…this team, I know these three people, I like this, you know, recurring revenue model.” And so I’m like, “I’m just going to overpay because I just have a feeling.” And that’s, like, literally…that’s literally the best investment I’ve ever made, let alone private equity investment.

And I think even at the billion-dollar level, take someone like Steve Jobs, you know, when he was running Apple. Like, “Do I want to follow his gut or do I want to follow what the research team learned in their focus group?” I’m like, “No, I’ll take his gut.” Right?

Cole: That’s right. That’s right. I agree with you 100%. And a lot of it, honestly… And we didn’t talk about a lot. A lot of it’s investing in people. And it’s a word…or a phrase that’s a cliché, I know, and it gets thrown around a lot. But the longer you get to spend with the people that run the companies and understand their thought process, understand their strategy behind what they’re doing, if they come up with a really reasonable strategy, and if it works or doesn’t work, it almost doesn’t matter to me if I understand why they came up with it and it’s a logical process and say, “All right, we tested this out, didn’t work. So, I had to it migrate and do something else with the same kind of resources,” whatever. I think that is probably almost more important than what the numbers say. You know, understanding the thought process behind and say, “Look, if this guy is going to come into trouble, is he going to be able to get out of it?” Or is it, you know, a one-trick pony and say, “If this doesn’t work, it’s over”? Right?

And so I think your Steve Jobs example is a great example. As some people that run companies, they’re…the truth is they are exceptional. Right? And it doesn’t matter what happens, they’re still going to be exceptional. Maybe the business model is not exceptional, but they are. And they can figure out problems better than other people can.

And so if you can find those people, a lot of times, I know it sounds like horse betting, but you’re betting on that horse. Maybe the valuation doesn’t make sense. But if you say, “This guy can really do something special,” you bet on the horse.

Andy: Absolutely. Cole, I love this conversation we’ve had. Honestly, you know, you sent me this framework ahead of time. And, you know, so I kind of understood there were three phases and everything, but it kind of took a surprising turn. Because, you know, and you even pointed out, like, you know, I wouldn’t call you a nerd, but you’re like, “I’m an accounting nerd,” or whatever.

Cole: Yes.

Andy: But this is all about people. It’s all about people and ideas, and talented people building organizations. So, it’s, like, amazing. I feel like… How do you take a company public? How do you IPO a company? Like, to sum up what you taught me today, the answer is people.

Cole: That’s right. Special people. I think that’s what brings you to the next level, is, “How do you get”… Like, this is the way I think about building a company, is, “How do I make enough money, or raise enough money, to get the best people around me that I know the company”… It’s like buying an insurance contract. I know this company is going to work no matter what. I can’t tell you whether we’re going to go to the moon or we’re going to go to the top of this mountain. But if we only get to the top of this mountain, it’s still going to be pretty great. Right?

But the people are what’s going to get you to the next level more than…way more than what the capital is, way, way more. Buying the best people you can get. And I say “buying,” but really it’s sometimes, when you’re at the seed stage, and I’ve been there, you’re begging, pleading. Because you can’t pay people, you don’t have any money. Right? You don’t have any money. So, you’re pleaded to be like, “Let me present my idea. We’re going to do all these things.” And then the next level, you can actually start to pay people. And then the next level, you probably start to feel like you’re overpaying people, but you got to keep the best people around. And they’re going to be what brings you to the next level. I agree with you 100%.

Andy: I love that, Cole. So, I know we’re short on time.

Cole: Sure.

Andy: But I’m going to make sure to link to… Everything we discussed today I’ll link in our show notes, which are always available at That being said, Cole, where can our audience of advisors and high-net-worth investors go to learn more about Legacy Group and your offerings?

Cole: Sure. So, you can see our website at, or you can follow us on LinkedIn. Just look for “Legacy Group” and we should be the first one on there.

Andy: Thanks so much, Cole, for recording this today. This was an awesome conversation, I really appreciate you.

Cole: Thank you, Andy. That was fun.

Scott Hawksworth
Scott Hawksworth

Scott is the Chief Marketing Officer of Wealth Channel. He has worked in B2B and digital marketing for over 15 years.