2021

Shareholders of Enduring Ventures,

As they say in the newspaper business, “don’t bury the lede.”

Your shares have gone up in value by 400% in the last 24 months.

We raised our first and only round of equity financing in early 2020 to launch this grand experiment in long-term compounding. We expected with reasonable luck to make 2-3 small business acquisitions with that money and spend the first 3-5 years grinding it out to get the flywheel turning.

‍

The global pandemic had other plans for us. It hooked our flywheel to a rocket and lit the fuse. We suddenly had access to unusually good financing terms, unusually good opportunities, and unusually few distractions. Like any first time rocket launch, it has been anything but dull.

How did we get here?

Luck, opportunity, pandemic-induced binge work, and adhering to a few fundamentals:

• Strict price discipline on acquisitions  
• Proprietary deal sourcing
• Creative deal structuring to build win/wins with sellers
• Recruiting and partnering with exceptional CEOs
• Modest use of leverage

Read on for the story of our growing family of businesses, as well as a few painful learnings along the way.

Building a Baby Berkshire

Before diving into our family of companies and their progress, it is worth reflecting on how and why we do things so differently. Nearly everyone in the “company buying business” raises a fund (structured as a partnership) modeled after private equity. They are typically compensated based on the Internal Rate of Return calculated as the growth in investor capital divided by the time period from time of acquisition to time of sale. 

As Charlie Munger says, “show me the incentive and I will show you the outcome.” It is not surprising that private equity firms maximize leverage and aim to “flip” their acquisitions in the shortest possible time. They are playing with other people’s money and other people’s businesses. Your risk, as a limited partner or seller of business, is their reward.

If private equity’s business model was completely aligned with its investors, then perhaps this is a fair trade. The reality, however, is that their business model has strayed further and further from this. Many large private equity firms make over half their revenue from management fees rather than performance-based fees. Heads they win, tails they win more. Their goal has become to raise as many large funds as possible, regardless of their ability to deploy this capital to achieve exceptional returns. 

There is another, less obvious, challenge of the private equity model. 

In private equity, the cash flows from a cash-generating business with low growth potential cannot be redeployed into a capital-hungry business with high growth potential. In essence, each “deal” needs to stand on its own until sold.

We can’t imagine something we love more than building businesses and something we loathe more than being required to sell our babies. 

The advantage of a holding company model is that it creates an internal capital market. In the hands of a skilled team, this allows a kind of discretion and long-term thinking that is impossible to achieve on a “deal by deal” basis. We think of our internal capital market as not only financial capital, but also human capital. We share best practices frequently between companies and help place our Operating Partners into whichever roles have the highest possible leverage.

We believe that our arbitrage opportunity is the largest in acquisitions that are too small, too operationally complex, or too long-term minded to be good bets for private equity. This, unfortunately, does not scale well if all capital must be allocated by our founders. Recognizing this, we are not simply acquiring standalone businesses. 

Instead, we’ve launched vertically focused holding companies with our parent company as the majority shareholder. Typically the management team will be a shareholder alongside us in the business. This way, each CEO can allocate capital with precision, leveraging his/her team’s strengths, industry knowledge and vision. We have only taken third party partners into one, but we may partner with others in the future (operational or capital partners). 

We have launched three subsidiary holding companies to date in software/SaaS, broadband, and home/commercial services. We will likely launch 1-2 more in the next year. We believe this parallel scaling model will allow us to allocate more capital, in more capable hands, with less risk than if it was all done from the top down.

Here’s a high-level overview of our growing family of businesses. In many of these businesses, we are not the only shareholder. We have substantial shareholding of our subsidiaries by our executives. In some cases, we also allow sellers to “roll over” part of their proceeds into shares in our platform company. 

Long Term Thinking

In San Francisco, not far from the crowds of tourists at Fisherman’s Wharf, there is a strange bar with an unusual clock. At the Interval Bar, you can order a cocktail while you admire a prototype of a mechanical 10,000 year clock. If Enduring Ventures had an avatar, it would be this clock. We believe that a long-term horizon is the most sustainable competitive advantage in a short-term world. 

When a manager is hired by a private equity firm, nobody is under any illusions about their goals or their timeline. The faster they grow the company and the quicker they can sell it, the bigger everyone’s payday is. This necessarily breeds a very mercenary mindset throughout the company. They are building the company to be resold from day one. Any long-term strategies or investments that won’t increase earnings by the time the business is sold will be relegated to a “growth opportunities” slide in the company deck.

We don’t want mercenaries at Enduring Ventures, we only want missionaries. We want people to do what they love, work with people they admire and respect, make the world a little better each day, and build wealth for themselves and their teams while doing it. We are in the business of long-term abundance. 

The best way to attract missionaries is to align their incentives. Our leaders are typically given maximum decision-making latitude and minimum short-term pressure. They typically propose their own compensation structures and sign up for longer-than-usual vesting schedules on their ownership. We encourage them to chart their own paths for the companies they run. 

Every leader has their own style, so we don’t try to impose our values on our companies. We do, however, evaluate our leaders on a few deeply core values to us:

• Thrift – Do they spend their shareholders’ money as though it were their own?
• Kindness – Are they genuinely kind and thoughtful in their interactions?
• Hustle – Do they have the ambition and drive to do that little extra every day? 
• Long Term Thinking – Are they making every decision with the long-term interests of all stakeholders in mind?
• Total Responsibility - Do they take complete and total responsibility for the success of the company they are entrusted with? 
• Innate Integrity - Do they keep their word and make decisions in their shareholders’ best interests when it would be easier or more personally lucrative not to? 

In a similar vein, we have a certain kind of company we love. We are agnostic about geography, deal size (generally $20-$100 Million), but particular about a few things:

• Net Positive – Our companies need to fundamentally make people’s lives better, more fun, and create more value than they extract. We would not want, for example, to sell sugary cereal or frack for natural gas, no matter how attractive the margins.
• Substance over Style – We like companies that provide great products and services and have done so for a long time. They typically rely on positive word of mouth and have very low marketing budgets.
• Mini Moats – High margins come from doing something special that is hard to replicate and unattractive to compete against. We like to identify and build local champions and leaders in niches. If a business doesn’t already have a mini moat, we have Dolphin Pools standing ready to build them one. Speaking of which… 

Dolphin Pools

We expect that for quite some time our shareholder letters will start off with a love letter to Jeff Manno and the team at Dolphin Pools. Jeff is the consummate hands-on leader. He drives to customers’ homes to make things right and pores over every line in the budget. Having spent his career in the pool industry, there is little doubt that Jeff’s tenure as Dolphin’s President will be his masterpiece. We hope to never let him retire.

When we bought Dolphin, the sellers of the business were eager to head to the golf course, so they made an unusual proposal: if we hired Jeff as President, they would contribute part of their proceeds from their earnout as a bonus to get him to take the job. There’s little doubt now that as valuable as the business’s sterling reputation and hardworking team were, the most valuable thing we acquired was the introduction to Jeff.

Dolphin has been the bedrock of Enduring Ventures from the day the acquisition closed, contributing reliable cash flow and growth with minimal need for capital investment.

The pandemic has been especially good for the business of pool building and California’s high taxes and housing prices have been especially good at chasing Californians to Arizona. Without Jeff’s leadership, however, the business would have buckled under the pressure from its growth. Many competitors simply stopped taking orders this year, as they were no longer able to fulfill them. With creativity, hard work, and a rigid eye on costs, Jeff kept building.

Sometimes you are good and sometimes you get lucky. In this case, we are not ashamed to say that we got lucky. Had we not acquired Dolphin, we would not have this cash flowing engine in our toolset, and we would not have had the opportunity to work with Jeff.  As it stands, we now have the prototype of what we would like to do a whole lot more of: Find a world-class industry leader and pair them with a cash-generating business with a legacy of excellence.

Dolphin has had no shortage of organic growth opportunities, so it is not yet a “platform” company. We would, however, love to find a pool service company in the Phoenix metro area that is looking for its forever home. If beautiful custom pools are the razor, then lifetime hassle-free pool service is the blades.

Enduring Technologies

No one in the Enduring family has demonstrated our values of thrift and hustle better than the team behind Enduring Technologies: KJ, Paul and Danny. The Enduring Technologies team initially came together as the executive team tasked with rebuilding UpCounsel after its near shutdown. The business had no employees, declining web traffic, and a business model that had not yet proven itself.

Under our team's supervision, the business now running profitable service is now focused on driving new clients to independent attorneys with specialized and/or growing practices, allowing attorneys to stop worrying about billing and marketing and spend their time practicing law. The attorneys pay a subscription fee, allowing fees to buyers of legal services to be substantially reduced.

While driving this turnaround, the team decided that they liked working so much together that they were going to build a platform company focused on software and digital platforms. With a team this formidable in place, it would be foolish to not give them more to work with. The opportunity appeared in the form of the most creative deal we have done.

A while back, a brilliant young programmer named Tim quit JP Morgan and took over his dad’s business – the very epitome of a “boring” business. It audits the accounts payable records of large retailers, often finding millions of dollars in claims that can be recovered with a careful eye. With a programmer’s hatred for repetitive tasks, he built a complex and highly optimized algorithmic software system that automatically detects over 325 different billing anomalies.

Tim had no experience building the sales and marketing engine necessary to find more customers. He was also starting a family and was ready for his next thing. He wanted to sell to reduce his risk, have more time for his family, and work on creative new projects. As luck would have it, we had recently done a deep dive into a business with high customer concentration and written a detailed blog post about how to structure M&A transactions to share risk between buyer and seller in these situations.

Our basic underwriting was based on a conviction that we could expand our relationship with the large customer and add at least one more in our first 2-3 years of ownership. Although it is still early, we are pleased to report that revenue has grown in the first year of our ownership. Danny Page, Enduring Technologies’ COO, has taken over as general manager of the business, and is in the process of building out a dedicated team to support its growth.

KJ and the team are getting their flywheel turning, even in a competitive M&A market where quality digital businesses often sell at premiums.

This team has also been remote-first from day one, showing by example how a truly global team can deliver better results at a lower cost than a team sitting in a San Francisco or Miami office ever could. Their team includes Russians, Filipinos, Ukrainians, Nigerians, and at least one Californian living in Barcelona, the makings of a veritable United Nations of Capitalism. 

We continue to look for Vertical Market Software companies. If you have one of these for sale, please give us a call:

• Ideally over $10 Million in revenue, we will look out $5 Million and up
• We don’t mind turnaround situations.
• Can have a supporting team, or no team at all.
• Revenue can be growing or flat.

Rango Broadband

If you close your eyes for a moment, I’ll describe a business with 100% monthly recurring revenue, customers on autopay, 2% annual churn, and 50% profit margins. Are you blushing? Doesn't it sound like I'm describing a sexy software company?

Nope, this is a rural broadband provider. And the best part is, you can buy it for a reasonable price (unlike a sexy software company).

The more we learned about the $100 Billion broadband market, the more we believed that it was undergoing a transformational shift.

Shockingly, as of 2019, 8% of the US population, or 32 million people (that’s more than the population of Texas) were still using dial-up internet service. Many others rely on out-of-date DSL or cable modem networks that don’t support modern applications like Zoom, video streaming, and gaming. These networks are prohibitively expensive to upgrade, and many incumbents have preferred to minimize capital expenditures and collect the rents, believing that their customers have no choice. 

We saw, however, that an insurgency was emerging. Point-to-point wireless technology was rapidly evolving, providing ever-faster speeds and lower latency over ad hoc networks that could be built wherever incumbent solutions were failing. Unlike mobile phone networks, these broadband networks operated in the public wireless spectrum, eliminating the need for costly national spectrum licenses. All of a sudden, local entrepreneurs could compete with national giants in the broadband business. 

Many small, local Internet Service Providers popped up. They won customers by being responsive, nimble, and customer-focused.

A vision began to form: a customer-obsessed network of local broadband providers, providing fiber-like speeds without needing to lay wires. We struck fast, closing three acquisitions in the middle of 2020, adding nearly $7 Million in recurring revenue to our portfolio of companies. 

Here, we made our first foot fault. We didn’t manage the transition well enough from the previous network engineers to our new team. The customers on one of our networks suffered, experiencing outages for some customers of up to four days (!!!) that could have been avoided and which caused us all to lose more than a little sleep. When your business delivers a 24/7 service people rely on, it is critical that you have multiple people on your team with the technical mastery necessary to keep that service up and running. Going forward in any business we are involved in, we will always make sure that we have technical experts involved in the due diligence process and on the payroll on day one. 

We made our initial acquisitions in this space without yet having a CEO identified. That CEO became obvious when Xavier reconnected with his old friend Maarten, then the CEO of the largest telecom in Haiti (a $300 Million revenue business). Over the course of many conversations, an even bigger vision emerged. Maarten’s skills managing a highly distributed wireless network in a developing country were a perfect match for the challenges of deploying and scaling the USA’s first broadband-only wireless network.  

Like Berkshire’s railroads, Rango reliably transforms capital (both for CapEx and Acquisition) into ever-growing lifetime streams of cash flow by providing an essential, utility-like service. The business also benefits from substantial government enthusiasm for the expansion of high-speed broadband nationwide. The US government recently allocated $62 Billion in public funding toward universal broadband access. We expect the 2020’s to be a critical decade for broadband infrastructure in the USA, and for Rango to emerge as the leading next-gen broadband company.

Snowball Industries 

In recent years, the private equity world has become infatuated with HVAC and plumbing home services, and it is not hard to understand why. It is a fragmented industry that is recession resistant, has low CapEx requirements, and has opportunities to build recurring revenues streams. Many smaller companies in the sector have not adopted best practices in marketing, sales, and new products. This has driven multiples for well-run, profitable companies in the sector to truly eye-watering levels. 

With this level of competition, it may seem crazy to launch a holding company in the space. What we have found, however, is that just like in other vertical markets, private equity is often a poor match for the goals of the owners. Because the business is extremely people-intensive, the owners of these businesses are usually very concerned about what will happen to the company after they sell. The idea of their business being flipped every 2-4 years does not sit well with them. There are still many businesses in this space that are too small, require too much operational work, or are values-misaligned with private equity. This is where we play best. 

We have made four acquisitions this year, and Snowball is cash flow positive and on pace to generate over $20 Million in revenue in 2022. The team is led by one of our Snowball co-founders, Amir Haboosheh. Anyone who has spent time with Amir knows he is one of the most genuine, hardworking, and high-integrity leaders out there. Amir’s genius with people has helped us befriend and learn from the best. 

This brings us to another important learning. We had a smart, entrepreneurial, values-oriented founding team at Snowball from day one. But we didn’t have the depth of industry knowledge to be able to plot a clear course for our companies. We were also a bit too heavy-handed centrally, which increased costs and disempowered local leadership. 

This mistake is especially disappointing since we are already believers in the decentralized Berkshire/Capital Cities philosophy. The temptation to “standardize best practices” from afar briefly clouded our judgment. Sometimes the only way to learn to check if the soup is too hot is to burn your tongue. Had we prioritized seeking out industry expertise earlier and let our local teams do what they felt was best, we would have avoided some expensive early mistakes. 

Our second-foot fault was unnecessarily slowing down the Snowball of Enduring Ventures. When we founded Snowball, we distributed shares to Enduring Ventures shareholders, including ourselves as founders. We had some logical tax reasons for doing this, but this was shortsighted. 

We essentially divested a major store of value, making shareholders of Snowball and shareholders of Enduring Ventures “compete” for our attention and resources. To rectify this, we have reinvested 90% of our personally owned Snowball shares back into Enduring Ventures. Early Enduring Ventures investors are free to keep their personally owned Snowball shares, and will benefit from their ownership in both. 

In addition to Software, HVAC, Plumbing and Broadband companies. We are regularly on the lookout to acquire companies with the following characteristics:

• Companies with a durable moat driven by their brand, or unique offering;
• Cash flow focused; Annual pre-tax earnings of $3mm or more.
• Cash generating enterprises with a long track record (we prefer 10+ years);
  

If you know of any of these businesses for sale, please give us a call. You can even make a pretty penny by referring these to us if we buy (see our scout program).

Startup Stuff

As former startup founders, we love seeing an idea go from zero to one. As we have many friends and collaborators in the startup world, it is not surprising that we are regularly invited to invest in projects at their earliest stage. 

Startups can take a lot of time and a lot of money, and we have neither in abundance at this stage. As a result, we have settled on a simple litmus test: if we would forgo our salary personally for a year in order to make the investment, we believe in the CEO, and it does not create substantial risk for Enduring Ventures if it fails, then we will do it. We have invested a total of approximately $1 Million in equity in this part of the portfolio.

The first company we incubated has a fascinating business model, and creates a meaningful impact for our customers from day one. If successful, Ecosafi will transform how many people in the world cook and become a meaningful producer of carbon offsets (by displacing charcoal and propane as cooking fuels) as a happy byproduct of its business model. Even at a small scale the model is proving itself. We feel fortunate to be partnering with Chris Sacca and the team LowerCarbon Capital, who have led the first rounds of outside capital into the business. 

We expect the company to complete a fundraise in the next 3-6 months that will begin a phase of rapid expansion. As the founder and former CEO of one of Africa’s largest distributed energy companies, there is probably no better person on the planet to chair the company’s board than Xavier. This is also a convenient excuse for his safari addiction, having been on more than 30 in his life.

The second company we incubated has a no less remarkable future ahead of it. Following a career at Facebook and as an Operating Partner with Enduring Ventures, Dimitry Gershenson began working on a business model to radically accelerate the flow of capital into climate tech. Seeing that there was no equivalent of Clearbanc in the climate sector, he launched Enduring Planet along with co-founder Erin Davis in 2021 to bring non-dilutive funding to climate founders. Wasting no time, they rapidly raised $1.5 Million and brought in a world-class outside director in Olympia De Castro. This one is still early but watch this space in the next year for more news.   

We have also made five minority investments. These are typically proprietary opportunities where founders invite us to invest in the earliest stages of their companies. We will generally keep our participation in these private.

The Next Stages

One of the hardest things about long-term holding companies is waiting patiently for the fat pitch and being sure you are ready to swing when it comes. Unexpectedly, our success in generating our own fat pitches (by creating platform holding companies) has exceeded the speed at which we can generate our own capital internally to swing.

We are left with an enviable, but still frustrating decision:

1. Accept substantial dilution of our ownership of our favorite businesses.
2. Sell more shares at the holding company level to fund these businesses.

While we have considered simply not selling additional shares, we have become more comfortable with bringing in new shareholders. These shareholders must be carefully selected given that we are long term hold investors (which is rare), and we only want to work with people that we like. We honestly don’t know what the demand will be, but we expect that as more people hear about what we’re doing, they may want to own a share in a diversified portfolio of cash-flowing businesses.

Our performance in future years is unlikely to live up to our progress in the first couple years. Given our long term investment strategy, we may underperform a hot market, but in flat or bear market, our strategy should shine when compared to the public equity markets. As we grow our platforms, we may experience price increases for our acquisition targets, and missteps will surely occur, but there’s a reason we both have 99% of our net worth in this business and are quite happy to keep it that way. 

As folks buy shares, we also need a way they can get liquidity. We have settled on the “SpaceX” model for the time being. SpaceX has grown to a $100+ Billion valuation without ever publicly listing its shares. Instead, SpaceX opens up regular “liquidity windows” where accredited investors can buy in and shareholders sell out as they wish. 

We will offer a “liquidity window” on a yearly basis starting in early 2022 where new investors can buy shares and existing investors can sell them. To ensure liquidity, our articles state that we will allocate 60% of free cash flow after 2025 towards buying back our own shares. We will do our best to set a fair price that is neutral to buyers and sellers today but will always be a screaming bargain for the buyers in the long run.

We thank you for your faith in us and your belief in our vision. We look forward to writing many more of these letters over the years.  

Happy Compounding,
Sieva & Xavier