#83 Jeff Totten on Built from Scratch

0:00 Hello everyone and welcome to Investing by the Books, a podcast by Redeye. I'm your host Eddie Parniyan and today we're delighted to have Jeff Totem on the show. Jeff is the founder and CEO of Evergreen Services Group, a holding company for technology services businesses. The firm is based in San Francisco and has done over 160 acquisitions in its first 9 years, currently generating about 1.5 billion dollars in revenue. For this episode, Jeff has selected the book Built from Scratch, How a couple of regular guys grew The Home Depot from nothing to 30 billion dollars.

0:34 I really like this book, which is written by the founders of Home Depot, and I think it proves how far common sense can take you, but also the many challenges along [music] the way to success. Built from Scratch was published in 1999 and we're thrilled to discuss it on the show today. Here comes our conversation with Jeff Totem. >> [music] >> Hi Jeff and welcome to Investing by the Books podcast. Hi Eddie, good to see you.

1:02 It's great to have you on. We recently met in Stockholm at Redeye's Acquire Conference. Where are we reaching you today? I'm in Minnesota, so a little bit colder than a home base, which is San Francisco. All right, good. And to begin, I'm curious about your upbringing and how this has shaped you as a person. Yeah, so I I grew up in the Bay Area, you know, close by where the company is is based today in San Francisco.

1:31 And my dad was an entrepreneur. He had a construction company. And I always looked up to him. He was kind of my role model growing up and I wanted to be a business leader, an entrepreneur like he was. And so in in high school, I started a uh a photography company. I was interested in photography and and decided to turn that into a business. I would go and take pictures at at, you know, high school events. Could be a sporting event or Eagle Scout event and I would sell digital downloads to the parents. Uh which is a very easy audience to sell sell to. I'd sell, you know, uh mostly to to my friends' parents. Uh but that that's how I got into business. And and from there, I you know, I took an interest in, "Hey, how do you build a a business up?" And so I I went to the bookstore and grabbed every book off the shelf that uh talked about business and there happened to be some books on investing that were right next to books on on running a business. And so that's that's when I came across, you know, Warren Buffett and in the book Snowball about about Buffett. And that's when it really clicked for me this idea of building companies through through acquisitions. And so I really been interested in it since I would say high school uh when when I first discovered Buffett and the power of of acquiring companies and and operating companies and being being an entrepreneur.

2:53 And how much investing have you done like on the on the private side of investing in in public companies for your for your own sake since since those days? I I've I've been investing since I was in high school and it was a fascinating time. You know, this was during the Great Financial Crisis. So it was a a fascinating time to start investing. Obviously, it's a good time to start investing when >> [snorts] >> when stocks are are pretty low. You can you can feel pretty good about how you're doing when uh you know, stocks are at at a a low during my lifetime. Um but through through that, it was also an interesting time to read about, you know, what makes businesses durable and able to survive a recession, but also you know, some of the things that people get wrong running businesses that can cause them to go out of business. So I I've been investing in public companies since since high school. And then on on the private side, I got into private equity directly out of undergrad and and invested both through the private equity firm. And then I also uh personally invested in several uh search funds during that period of time.

3:50 So I got good exposure both personally and professionally to private investments directly out of undergrad. And 9 years ago in 2017, you founded Evergreen Services Group, where you still the CEO. Can you tell a bit about them? We'll get into to the business and and how this has formed, but can you say a bit more about how this came about? My my co-founder Ramsey and myself, we were both working at a private equity firm called Alpine Investors, and really a pretty innovative private equity firm and one that's had a lot of success with buy and builds and with backing early talent into companies.

4:29 And we loved the whole model of acquiring middle market businesses and helping them grow. So we we enjoyed that part of the work within private equity. But we also really admired Berkshire Hathaway, and we went to the meeting in 2017 and just saw what Berkshire built over 50 plus years and were really impressed by that. And one of the things that stood out is just the power of the holding company structure. The idea that the company doesn't have a lifetime somewhere how to a private equity fund has a lifetime to it.

4:59 And we thought, "Hey, that's the right structure to build in for us." Like we wanted to do something over many decades. We wanted our work to be cumulative, not you know more project based. And so we proposed the idea to Alpine going back from the the Berkshire annual meeting, "Hey, what if we built something similar to Berkshire backed by Alpine?" And that was our big you know audacious idea. And and Alpine supported us, you know, they they backed early talent, and they supported us in getting this off the ground with their their backing. It took you know a few weeks after we got back from the meeting to have the initial commitment from Alpine, and the one piece of advice they gave us is, you know, we know you want to build Berkshire Hathaway long term, but start by focusing on a single industry. And so we decided to focus it on the managed IT industry to start, and that's that built our foundation as a company.

5:48 Amazing. And how old are you now, and what stage of life do you feel like you're in, and how is that for you now? Um I'm mid-30s. Uh you know, my wife and I are are starting our family. Uh actually all the partners at Evergreen are have recently start- recently started their families. And um it's a I I find find it to be very fun uh point to be building and to be a leader in a company. We've been doing it for 8 9 years, so I think we've made some mistakes and learned from those mistakes. We've got some experience.

6:21 But at the same time, uh you know, we're very early in our in what we're building. Like we we feel like this is just getting started. And so we feel like we can look build upon upon that over the next, you know, several decades as a as a company. So in some in some ways it feels like, you know, Evergreen we've scaled to a billion and a half dollars of revenue. It feels like it could be a mature company.

6:41 A lot of ways it feels like we're we're just really at the beginning of of building the business right now. And today we will speak about the book that is also starting something from the beginning. It's called Built from Scratch. Uh can you briefly tell us what what is this book about? Yeah, it's about the the founding of Home Depot and really the first 20 years of the business uh being built. And it's it's written by the founders, uh so that's one of my favorite parts about the the book is that it's a a first-hand story. Um you know, Bernie Marcus and Arthur Blank telling the story of building the business uh truly from scratch.

7:16 Uh and it's it's a more entrepreneurial story than you would expect. Uh Home Depot today is a big business, but really they started by trying to raise a few million dollars and uh built the business uh from the ground up. And it ended up being a very entrepreneurial business is the way that they they built. I think that really comes through in the book as you read through some of the stories in the book. And I think what's surprising about it, you know, if you think about Home Depot, they think of a a brand.

7:41 You find a more consistency across all the stores, but it's actually a highly decentralized business, at least in how it was built by the founders, which is comparable to how we're building Evergreen. So, I found it to be a very enjoyable book, a very, you know, impressive entrepreneurial story. When did you first come across the book and why did you select it for for this episode? Yeah, well, you made you made it kind of hard to select a good book because you've you've profiled so many good books that I love.

8:09 If my favorite book is The Outsiders by Will Thorndike, but you got you had Will on for that, so I I had to go even on the list, but this is one of my favorite books. I actually um read it fairly recently, actually after my son was born. I remember reading it while he was napping in our our nursery. So, it was an interesting time to be reading it because Evergreen was established at that point. It wasn't a new business in its formative years. Um I think I think I was thinking a lot about how to scale our learnings in the business, scale our culture.

8:41 During that period of time, and so it came at a good time from that standpoint, thinking about how do we kind of take the culture that's working for us at Evergreen and really scale it up, and how do I need to evolve as a a leader. And I think the fact that it's 20 years into the journey is when the book was written is really relevant cuz I was in year six, seven when I I read it.

9:03 And in Built to Scratch, we learn that one of the role models for Home Depot was Walmart. So, in your way of building Evergreen, which companies do you look up to for for inspiration? Well, the super audacious one is Berkshire Hathaway and naturally that was the inspiration. But a little a little closer to where we are, but still far ahead of us are you know, on the acquisition side, we look a lot at you know, Constellation Software.

9:32 We look at the great Swedish serial acquirers that we are profiled at the the Red Eye conference. Those like businesses that inspire us from a capital discipline standpoint, from an acquisition strategy standpoint. And then on the on more of the how to create value in our company you part of our strategy is how do we acquire businesses, hold them forever, be a great home for them. Another part of our strategy is how do we create as much value as possible in the businesses that we own.

10:01 And there we really look at look up to TransDigm as an example company that's that through their three P's playbook of driving value creation. Uh so that's another role model that we we have in a company that we pay close attention to. And if you look at Berkshire, they can basically invest in in anything. And you mentioned you have focused to begin with at least in in one sector or area. Uh why was that and can you speak a bit more about the type of companies that you want to own?

10:30 Yeah, I think when you think about where we play in the market, um we we play far down market. And so if we had to get up to speed every time we bought a company, uh it'd be very hard to operate at the pace that we operate. We've acquired over 160 businesses uh over the past 8 to 9 years. And I think it would just create too much risk for us as a as a company to be getting up to speed on a new business every time. And after we acquire the businesses, we're trying to create value in those businesses. So there's value to having cumulative learnings from you know each acquisition should make us better at acquiring businesses in our space.

11:03 Should also make us better at operating businesses in our space. And so that was a core principle from the get-go and really important and valuable advice that Alpine gave us to focus. So really the way we've built the business over time is we've established three verticals. MSPs are the big vertical that we started with kind of fully outsourced IT for small businesses. Then we got into implementing ERP software, which is basically accounting software for middle market companies.

11:30 And then the last industry is government IT services. So on they're all under this broader kind of technology services umbrella and there's, you know, there's knowledge we have from MSPs that made us better at buying ERP partners. There's knowledge from ERP partners that made us better at buying government IT and we will expand our our mandate over time. I don't ever see us buying kind of a hodgepodge of businesses. When we go into a vertical, we want to make multiple acquisitions and we want to become experts in that that vertical.

12:01 And if we go into lessons from the book, the founders, before starting Home Depot, they got fired from their their previous jobs and that's quite quite early in the book. Uh That was of course very tough for them, but turned out eventually to be a blessing considering what they built. Uh I'm wondering if there have been any such pivotal moments for you during the journey with Evergreen. Well, I the founding was pivotal was was pivotal. I'm not not because we got fired. I mean Alpine backed us and and supported our vision from the get-go, but that leap of faith that Alpine took on us was a big deal. Um it put us into business when we were in our mid-20s at the time. Uh so that that was a really pivotal moment.

12:45 More from an adversity standpoint, I'd say a pivotal moment was in our first year. We bought a company that had an existing M&A strategy that was quite a bit different from how we were doing acquisitions. We were doing acquisitions on a decentralized basis. So each business we acquired kept its own brand. It had its own CEO. And this business had a successful track record of buying businesses and fully integrating them into their platform. And so our thought was, "Hey, let's keep that going."

13:10 In fact, with our scale, why don't we accelerate how much M&A that they're doing? And that turned out to be a bad strategy for us. Uh it turns out when you're doing that level of integration and you're changing up the management team, you you can't move as fast as we were trying to move. And there were some cracks in the foundation of what we were what we acquired, particularly when you put that much stress, that many acquisitions on top of it.

13:35 And that was in our our first year of starting the company, and so it was it was, you know, a pretty risky moment for the business, but we we paused acquisitions at that company. You know, we got you know, we got that business to a stable point, and we pressed ahead in building the business. And it was, you know, what we had to look at is we're trying to build this business over multiple decades. We had a very big vision for the company.

13:57 And we Ramsey, in my view, was just there's only way that we could move forward was aiming towards that vision, continuing to buy quality businesses outside of this company, getting the performance stabilized, and really driving organic growth at our other companies. And it was kind of a critical moment where we just had to lock in in that first year. And so we we have an unusual story in that we did more M&A in that first year than we did in the second year as we tried to get things back on track.

14:22 And then [snorts] from there it's been a really, you know, fast growth experience. But we, you know, it was a it was a tough moment for us making, you know, very early on where we weren't sure how that was going to turn out for the business. It's really clear from the book that when you're young, you're very vulnerable. And you mentioned the the the funding and being backed by Alpine was really important for you. And and in the book they they had a lot of struggles with that as well, how to find capital. Can you can you share some stories from from the book how they did actually raise capital to fund the business in the early days of Home Depot.

15:00 It was a long time ago, but it was it was a pretty small even I think by time standards it was not a very big capital raise. I think a couple a few million dollars that they were trying to raise. And they had a very there's a very important person who wrote a separate book, Ken Langone, who's their investment banker, and really like almost served as a third founder of the business alongside them. And he helped arrange financing for them and and multiple times they got pretty far along with investors and you know, the founders, Bernie and Arthur, decided to pull out because there wasn't values alignment. In one one case it was it was Ross Perot and they he said, "My people don't drive Cadillacs." And they happened to have like a used car The founders of Home Depot happened to have a used Cadillac that they drove for work and and that was a signal that after the the investment was going to happen he was going to have more that investor was going to have more say over how they run the business and they wanted a partner that trusted them. Uh so they they worked through multiple iterations to that until they finally found an investor base that, you know, was more aligned with what they were trying to build and ended up I think it was going out to much smaller investors a more diversified group of investors uh to back them.

16:10 I think I think the big learning from that that that moment for Home Depot was really making sure everyone you partner with, you know, from a financing standpoint, investor standpoint, and key people in the business has to be values aligned and has to believe in you and there has to be trust kind of across the board. I thought it was actually quite impressive, you know, at at moments where they it seemed like they were on the brink of you know, be able to raise fundraise raise the capital that they needed, they pulled out because they did they saw some little sign that they weren't values aligned with their investors and I think that's hard to do when when you're starting a brand new company and you you're very close to the finish line. Uh so I think big credit to them and in in our business it's something we really focus on. Are we are we aligned with the people that we're partnered with in the business, the leaders of the companies, our financing partners, our investors, the business owners that we acquire companies from. You just need to have that alignment across the board cuz life's too short to build people that aren't aren't aligned with you.

17:10 And speaking about that alignment, it's it's as you say, it's not only about fun funding, it's about many other things as well. And and in the book we we read that the the founders of Depot they really say like culture you can't just delegate culture. It's something that they must personally carry and transmit and this has to be on from from the get-go. So, how do you think about culture and and philosophy at Evergreen and aligning that with everyone?

17:37 We're we're definitely structured a lot differently than Home Depot. We're not a single national branch, right? Uh so we we do one of our core values at Evergreen is empowerment and therefore we let our companies have their own cultures. Now, those cultures generally only work if there's, you know, some sort of alignment with Evergreen's values. At the end of the day we're not going to buy businesses from uh founders or or companies that don't have a high-level alignment with with Evergreen from a cultural value standpoint. We don't We buy the company we don't change the values. We let the team locally set their own values.

18:13 Uh and so it we're a little bit different in how we're we're structured from that regard, but when I think about the Evergreen culture, it's about, you know, we're decentralized and so we're very focused on empowering our leaders to run their businesses as if they're running an independent venture that they started and and that's really important. We think that's how you get outsized results in these small businesses. Uh next we we are very focused on persistence and that that really started with Ramsey and me starting the business and going out and finding our first acquisition opportunities.

18:41 We found that the only way to be successful when we were in our mid-20s and trying to build the business was to just keep after it when whenever business owners rejected us or deal didn't work out the way we wanted to or that early challenged acquisition that we had, we just had to keep going and keep pressing ahead until we got the results that we're looking for and that mentality kind of is pervasive across our group of companies whether you're a CEO running an operating company, whether you're on our M&A team trying to make an acquisition, or whether you're a front-line technician serving the customer, we keep going until we get the results that we're looking for.

19:16 And the last part of our culture, which is probably a bit more unique, is just our long-term orientation. And our core value associated with that, we call it rolling snowballs. And what we mean by that, and snowball is a a book that I I really love about Warren Buffett, but that We mean by rolling snowballs is you have to do some hard work to to roll a snowball off of a a steep hill. First, you have to climb to the top of the hill. And you have to compact a snowball to make sure you got a good foundation. And then you roll that snowball down the hill, and you got to let it go all the way to the bottom. It gets bigger and bigger as it goes down to the bottom of the hill as it picks up more and more snow.

19:52 And that's really what we try and do in our business. We're trying to make bets in our business. We We We make investments that require a lot of work from a foundational standpoint to get up and running. It might be not It might not be the type of investments you would make if you were a traditional private equity company with a 5-year hold period. For us, we're willing to make these upfront investments, you know, compact the snowball, and roll it down the very uh long hill. And And the other thing is to not interrupt compounding. You don't want to stop the snowball halfway down the hill uh when it's not nearly the full size that it could get to.

20:23 To make that a little more tangible, you know, an example we announced actually uh as we're recording this today that we're launching a brand new company to be an AI native uh business that will be will within our Pine Service Group is group company, which is our ERP business. In that world, there's a lot of people coming that are thinking about how do I have a AI native ERP uh solution. And they're going to think through which partner they want to choose to implement that ERP solution.

20:49 So, instead of just trying to slightly modify one of our existing businesses, we launched an entirely new company to provide that service. Now, that might not That investment might not pan out over a traditional private equity hold period. But I think over the next 10, 15, 20 years, we'll build something really special in that business. And that's a that's a a small example of kind of in our culture how we roll snowballs uh you know, ideally every quarter.

21:14 And when it comes to decentralization, this is of course a keyword for many of the Swedish serial entrepreneurs and and many others. Um in Home Depot as you mentioned, they were having this system in in the business quite naturally. They wanted the autonomy from uh for the store managers to to take the best decisions. Um but I I I find it funny that they didn't have the door to the headquarters in of Home Depot. They didn't say headquarters. They said store support center. So they really just wanted to be there for for the stores and they spent so much time the founders they spent so much time in the stores. I think it was 60% of their time or something they mentioned.

21:52 Um but of course they have to delegate some things uh but is there something in Evergreen that you could never delegate to someone? Well, fir- first off the store support center was one of my favorite parts of the book. The fact that they named their corporate headquarters the store support I I sent that around to the company after I read the book cuz I just I love that. Um just it truly made the the store top of the hierarchy as opposed to making corporate the top of the hierarchy and so many companies put corporate at the top of the hierarchy for all the wrong reasons.

22:28 So I just love that aspect of the book and and also um in reading this book is what I didn't realize I picked it up reading about Home Depot with a national brand it would be such a decentralized company. That would I'm I've been a fan of decentralization for a long time. I was surprised to learn about decentralization in a book about a national brand company like Home Depot. So it's pretty pretty unique. But to your to your question in terms of what we won't delegate at the holding company level we do centralize capital allocation. Um and that that's less about um not trusting uh uh uh you know our operating companies or the the verticals to allocate capital. It's more about just uh focus that we really want our our operating companies and our verticals to be very focused on organic growth.

23:19 And we think that often times if you delegate M&A out too far into the organization, M&A is exciting and it it tends to be where people want to spend their time. Often people take their eye off the ball on the really important work of serving the customer, of driving organic growth. And so we've centralized M&A in part because we want to have a strong competency on a central basis, in part because Ramsey and I just personally love doing M&A and we want we want to drive that kind of work.

23:47 But one of the things we figured out after we launched the company was the power of of keeping all of the operating companies and verticals highly focused on organic growth. And so we hold that very dear. Uh we share most of the other responsibilities uh or fully delegate other responsibilities to the operating company. So day-to-day operations, you know, the majority of day-to-day strategy, all all that's at the operating companies. Any you know, shared functions like finance and accounting or talent acquisition for the CEOs, we have some resources at the holding company to help out with that um but still most of it happens at the verticals or at the operating companies.

24:25 So really, you know, I think probably the best way to uh explain it is you know, we have over 6,000 employees at the operating companies. We only have 50 at the holding company. And those 50 are pretty focused on M&A and a few kind of reporting and key talent roles. Uh but it's it's a pretty limited uh we we really try to limit the subset of things that we focus on at the holding company and make sure we're we're very good at those things and then we delegate the rest to the operating companies.

24:52 And you mentioned that organic growth is important for you. Uh what other type of metrics do you have, or how do you evaluate whether an operator in in your in your group is performing as you want it to? Yeah, or organic growth is is central, so and we we focus both on top line growth, are we seeing particularly recurring revenue growth in our businesses. We focus on margins and is that top line growth dropping to the bottom line?

25:19 Those are very important. Uh, and then we also focus on this just underlying health of the business, so retention is very critical metric there, net revenue retention, customer retention, gross revenue retention are things that we focus on. I think that's an area where a lot of private equity backed businesses in our space have struggled because they have centralized a lot of functions, gotten further removed from the customer and we hold those metrics very dear and and we believe that decentralization supports those metrics.

25:47 We also pay close attention to employee NPS and customer NPS and again these are metrics that maybe they don't move the needle on bottom line growth this year, but when you're trying to build a multi-decade, hopefully a multi-century company, you have to make sure that employees are happy and and the you think of the Home Depot story that employees being happy was central to delivering a great service over the the long haul, so we pay a lot of attention uh, there and right now, you know, a lot of our we're paying a lot of focus on innovation and AI is transformative to our business and we're thinking about are we being bold enough in terms of making bets within our companies that will transform the model in terms of our value proposition, our level of efficiency at our companies and also the revenue that we're generating from AI at our businesses.

26:38 You mentioned customer NPS as one of the metrics there and in the chapter about customers in in the book, it's very clear that Home Depot, they will do whatever it takes to please their customers. Uh, they one example was that they even gave money back for tires that someone bought and came back with to a store and they are not selling tires and they never had so. They never sold tires but they just wanted to make this customer happy and come back.

27:03 What do you think about this? Should you really serve every customer everything they want? Such a great story and one of like one of a few in there where they really they uh they took on short-term expenses or or you know let they let revenue surpass it uh they could have captured if they were solely focused on the bottom line but instead they focused on serving the customer. And that was incredibly powerful for them. And we we encourage the same with our operating companies. Now we wouldn't tell our operating companies how to serve their customers. They they know how to serve their customers best and they're they're the ones that are on the front lines talking to their customers every day but absolutely we we would encourage our companies to do whatever it takes to take care of our customers. I mean we're we're in a business that's uh a highly recurring revenue business with very long customer relationships and so it is economically foolish to do something in the short-term that might make you an extra dollar that in any way you know threatens the trust that customer has with our business and so we very much would encourage the the same and we would celebrate you know uh similar stories as as Home Depot. We I hope we can rack up more stories like the ones that Home Depot has over the years. It's true it's truly an inspiration the examples that they have of of serving the customer.

28:20 Uh and as we talked about the founder spent a lot of time in the stores. They were both helping out with stuff in the stores and they were also disguising as customers just walking into stores and seeing if someone would help them if how they would be treated. Uh and that is not really decentralized in a way. How do you go about it? Do you also go out in the operating businesses or how do you actually check what the what's What's out there?

28:47 Yeah, we're we're structured a little bit differently. I do think you need to be in touch with what's going on on the ground and and so uh from my vantage point, I I personally spend a lot of time on acquisitions. And so I love to go visit business owners and go see how they operate their business, go learn from new acquisition opportunities. And when I'm on the road, if there's an opportunity to go visit one of our operating companies that's close by, I love to go visit one of our operating companies.

29:10 But we're very decentralized. We're very much empowering our operating companies and our vertical CEOs. So we also have a high degree of trust in what's going on on the ground and and letting the leaders locally lead their business. Uh and and we look at our vertical CEOs, they're they're more focused on the organic growth side of things. They're on the road much more often, specifically focused on the Well, I'm on the road focused on M&A, they're on the road focused on our operating companies.

29:33 And so they're they're regularly getting in front of our businesses, engaging with them, learning from them, checking in on sharing best practices that they're learning from other companies. And so there's a there's definitely a high degree of engagement and being in touch with with what it's like to operate one of these uh managed IT service providers, one of these ERP partners. At the same time, we don't operate the same way as as Home Depot and Home Depot, while it was very decentralized, there was a little bit more central work and a little more standardization in how they were operating than how uh we operate. So because of that, we're a little bit more hands-off and we let our operators lead their businesses with a little bit more autonomy than I think Home Depot does.

30:15 And when it comes to acquisitions, were there any lessons for you on what to do or what not to do from from Home Depot? Well, I think the just the level how in touch the founders were with how the stores operate was pretty powerful and and how much they were looking for uh opportunities to celebrate um a success in the stores. I think often times when we come from this background of of doing due diligence on on businesses, it's natural to kind of look at, "Hey, what's wrong here? Like, what's the thing that's going to get us in trouble if we buy this business?" Which is very important. It's a very important part of the job.

30:50 But, there's also an opportunity, particularly when you're acquiring a lot of businesses in the same industry, to also identify something they're doing right. It's an upside with that business, maybe something we could teach other businesses. And I I feel like The Home Depot understood a good job of going into a store and noticing someone doing something right. And that's something I've tried to bring into how we approach M&A is like, let's catch a an acquisition opportunity, let's catch an existing company doing something right, and go profile that. We call them bright spots internally, uh opportunities to kind of learn from one company and spread it across other companies. And And Home Depot is is an inspiration on that front.

31:29 And have those criteria that you're looking for in in acquisitions changed since you started? They've definitely evolved it definitely in the nuance. At the high level, though, we've we've always been focused on a strong value proposition to the customer, highly recurring revenue, healthy organic growth, strong retention, and you know, low customer concentration. You're never going to find something that's a green across the board, you know, we do have a stoplight, red, yellow, green on each of those metrics, and you're you're rarely going to find something green across the board. We have a sense of in in across our data set, we have our gigantic data data set of 160 companies, we have a very good sense of where the boundaries are on each of those metrics, where we start to get in trouble, or where we start to see really exceptional results in in companies.

32:20 So, that that's been that's been pretty true from the early days. I'd say, we've really evolved in the details of what we're looking for. You know, we've seen that businesses, as an example, that operate with more of a public cloud offering, particularly in the United States, tend to perform better than businesses with more of a private cloud offering. We've seen examples of where founders are really instrumental to all aspects of the business versus other examples where there's kind of a robust sales team at a at a company it reduces the kind of founder centrality particularly for new business development. There's kind of these nuances uh below the surface that have been helpful for us identifying, you know, which companies are going to do exceptionally well, which companies are higher risk.

33:00 From day one we've been very focused on on this kind of high-level criteria. I think the hard part is not setting the criteria of what makes a great company. I think it's going out and finding those companies, convincing them to join Evergreen. And then staying disciplined when something comes in and it you know, it's always exciting to do an acquisition. But if it doesn't meet our criteria, you got to stay disciplined and pass. You got to have you have to have an opportunity set that's broad enough where you don't sweat it too much you have to pass on a lot of opportunities.

33:29 Yeah, and when it came to Home Depot they they did both acquisitions of other companies and then in a way when they opened up new stores in a new geography for example in the US that was it's kind of like an acquisition in its own way. Definitely. It's a huge capital allocation decision, right? Because you you're signing a big lease and you're you're putting in you know, a ton of inventory into one of those stores. So it's it's a big capital allocation decision and you are our business we don't have as much on the internal we're we're in much more capital light businesses than Home Depot. So we don't have as much kind of internal capital allocation.

34:05 We're actually starting to see that right now specifically with with AI where we can fund projects internally that could be an existing company where we want to drive an automation. It could be an existing company where we want to generate a new revenue stream. Or the example I shared earlier where we're just launching a wholly new company. Uh so this is actually you're catching me at a moment in time where we're actually doing the most internal capital allocation that we've ever done.

34:28 Historically almost all of our capital allocation has been more on the acquisition side of things. And uh when it when Home Depot got started, they actually found the concept that the founder had they had thought about it and how they wanted the stores to look like. But then they actually went out and and saw a store that was everything they had dreamed of and it already happened to be there and they wanted to acquire this. But then and this was like a creative genius as we can see throughout the book. This person comes back every now and then with like this creative ideas and how they should do things differently than than others, which usually worked out well. But when they looked closer at the business, he wasn't looking at the paying his suppliers or anything. He was just caring about the growth.

35:13 Of course you wouldn't go into such an acquisition. You do very thorough due diligence, I'm sure. But if you find someone who has this creative mindset and can just generate business in another way, would you be interested in acquiring such a talent, but maybe not necessarily the business or or how do you go think about that? I think I think the analogy for us is that we we do back entrepreneurs in their businesses, you know, leaders to run our our companies. And you know, I think run one of our companies, you do need to have that you do need to have that kind of pulse on on how to run a business, how to manage a a P&L.

35:52 But we we have leaders who come from different profiles. Some of them are more growth oriented and driving the sales side of things. Some of them are more operationally oriented. You know, either other profile can work as long as you make sure to surround yourself with people that can can make up your weaknesses. And I think that might have been the issue in the example from Home Depot that the the store that they modeled Home Depot after. I'm not sure that he the entrepreneur surrounded himself with folks that could kind of complement his weaknesses or or maybe they could tell him no when he needed to be told told no.

36:25 But we we do back entrepreneurs to run our our companies. And we find that talent is usually the catalyst to drive growth in our our companies. So, whenever we buy a business, we try and find someplace to install talent. You know, that that could be that the founder of the business is retiring. And we back a go-forward CEO. So, we manage like we manage through a succession plan. Another case is that the founder might want to continue on with the business or the management team might might want to continue on.

36:55 And then we might look for placing a chief revenue officer or an operating leader. We almost always found that find that founder-owned businesses tend to have a a gap on the talent front. And we bring in a capability where people are excited about the broader opportunity with the Evergreen, broader backing. They might not be willing to join a small business and take some of the risk entailed in joining a small business, but they are willing to join a company backed by Evergreen.

37:18 And so, they join us and they join one of our companies. And we often find that that's a catalyst for growth and catalyst for operational improvements. And we try and find someone that that complements the team that's currently there. So, if the team is really operationally dialed, we might hire someone more growth-oriented. If they're very growth-oriented, we might hire someone more operationally oriented. And it's a really critical juncture for the the business. And one of the And that that's the the ultimate driver of us then executing our our value creation playbook where we're trying to drive accelerated organic growth on top line, extended margin, and better service delivery to the customers. It always starts with the person. But But short answer is, I don't think we have any businesses run by a creative genius that where the financials are falling apart, but we're >> [laughter] >> we're excited about how the business is going. I I think if we found a creative genius like that, we would probably pair them with a with a great operator and and make sure that we have that balance in in each of our businesses. That's the benefit benefit of all your experiences and being a being a larger group, of course, you can take care of that talent.

38:19 Um, we talked about the number of different capital allocation decisions now. Focusing on the organic growth or buying companies or doing internal capital allocation decisions. Something that is often debated with for example the Swedish serial acquirers is that they do have dividends and they distribute that back. How was Home Depot thinking in terms of returning capital or reinvesting? My my recollection of the book and it covers the first 20 years is they were pretty focused on on reinvesting and growing business throughout. They were a public company. I'm not sure if they ended up paying any dividends during that that period, but I do my recollection is they were very focused on redeploying capital and and that's you know that's how I would think about things too in that growth period that first 20 years. It's the time to build the business and you know there's always opportunity to buy back shares or even do dividends over over time, but when you have opportunities to redeploy capital at exceptional rates of return which I think Home Depot had during that period and and long thereafter you want to keep going and keep keep building and keep reinvesting and and that's what the founders were were doing during during the period of the book.

39:33 So it seems like you have many opportunities to invest and and is nowhere near any situation in terms of of growth or or acquisitions. We're yeah, we're incredibly early and have a lot of opportunity to redeploy capital right now and you know M&A is the the natural place to redeploy capital for us. We're seeing solid returns when we acquire businesses and then grow them organically and so we're trying to find every opportunity we can to do that and I think just the way our our mindset works we that's our our first preference. The only other preference we'd have is to repurchase shares in the the business which is is hard to do in a private structure, but Uh, we do love our business and would love to buy more of our own business uh first and foremost, but the primary opportunity we have ahead of us is to redeploy capital and back positions.

40:26 And it doing dividends at this point would not make much sense cuz we would have to um source other capital to to complete acquisitions. And you're currently 9 years in uh of Evergreen. In In Home Depot's case, they they went 13 years before they went public in 1981 and that was mainly to fund growth as I understood it from the book. Uh what are your thoughts on this uh staying private versus listing? Of course, as you mentioned, the benefit is that you could buy back your shares more easily if you're public.

40:56 That would That would be a great benefit, for sure. Um But um >> But it comes with some other There are some other consequences of being listed that might not be positive, of course. Sure. Sure. I mean, we're we're first and foremost focused on building the business and you know, we we built the business with the concept of being able to hold businesses forever and so that's our priority term in terms of any sort of structure. Um as long as we can accomplish that in the private markets, we love operating in the private markets.

41:24 Uh the public markets are another way to accomplish that and have permanent capital. You know, at our scale, we like to be you know, ready for either environment uh and and we're comfortable with either environment for us in the long term, but our focus right now is just continuing to build and we try and and put the vast majority of our attention and time towards compounding the the business and we think if we do a good job compounding, or acquiring businesses at a healthy clip with good returns, if we're growing organically, we'll have a lot of options from a capital standpoint. Uh but for us, both options are on the table and we'll be ready for either option, but we haven't selected a route yet.

42:01 My understanding is that it's uh easier to be uh or have a higher leverage when you're a private company compared to when you're a public company. How do you think about leverage and and that aspect of it? Certainly, yeah. In the the private markets, a lot more comfortable with leverage and we we've we've used leverage and financing from our partners to to finance our acquisitions, and that's that's worked well, and we have a highly recurring revenue base, highly cash generative business, very clean earnings, and that enables us to support um our our debt and finance financing and generate really strong uh equity returns. So, we've we've used financing in the the private markets, and we'll we'll continue to do so. Uh obviously, the public markets have different viewpoints on on financing, and you know, our our goal is just to drive as much organic growth as possible and uh maintain strong cash flow conversion, and if we do that, you know, over time, the business deleverages, and and you know, that'll set us up well, whether we're in the private or the public markets.

43:03 Do you have any more specific leverage ratios that you think are within the range that where you want to be now and and looking ahead? I think like anything we do, it's all about continuous improvement. We're we're just focused on how do we delever the business with each passing quarter and and year, and and that's what we're doing uh currently. We're we're growing the business top line organically. We're grow we're expanding the margins of the business, and then we're increasing the cash conversion of the business. Those all kind of compound to improve the leverage profile of the business over time. And and right now, we're in a very comfortable place as a private company. Uh you know, and as a as a public company, you would need to be uh less leveraged, but uh you know, we've operated this way for the past 8 years and are in a deleveraging stance right now.

43:53 And if we look ahead, uh Built from Scratch, the book that we've I've been talking about, it was published in 1999, covering the first 20 years of Home Depot. A lot has happened in the world since then. Have you followed anything about how Home Depot has developed? Certainly not as closely as Constellation and TransDigm and Berkshire, but yeah, I I did follow cuz it's an interesting example of you know, there's a lot of companies that start out decentralized and then after a founder transition, they they centralize more and that's what happened at Home Depot during its second chapter after the founders transitioned out. Bob Nardelli from GE joined the company to run it uh for kind of you after the founders and he took a much more centralized approach to the business.

44:40 He's a lot more focused on cost cutting at the store level and my understanding is that led to not as good of experience for for the store associates that were so as you read about so critical to the first uh 20 years at at Home Depot. And that didn't go very well for the business in terms of, you know, growth or stock price performance. Lowe's during that period performed very well. Uh Home Depot did not perform well under uh under Nardelli. Um After after he was succeeded by a series of internal successors that did perform better and kind of my understanding is returned more to the roots of Home Depot and prioritizing the store associate. Um it's not a company I track. I I I love the book. I love reading about the first 20 years uh and I understand the principles have come back to a large degree um posted Nardelli era, but uh not a company that I track super closely.

45:36 And in your case, you are still in your mid-30s, but uh you you mentioned earlier in the conversation that you wanted to build a multi-decade, even multi-century company here. How are you thinking about the long-term identity for Evergreen and what happens after you? Yeah, well already I'd say Evergreen's much bigger than than I am, so that that I would start there and and we've already built a a culture that's much stronger than anyone person than than just Ramsey and myself.

46:07 Uh it's actually really cool to go to the office every day and see people sharing the Evergreen story with business owners. We have a mission that is inspiring us to to be the best home for businesses and their leaders and that's much bigger than any one person at Evergreen and I love hearing other other people sharing that story, but more importantly delivering on it. We actually track how we do with business owners after we uh buy their company, check in to say, "Hey, did we live up live up to our mission to be the best home for businesses and their leaders? What contributed to that? What what detracted from that?" And I I I I think we are living up to that uh today and and we're living up to that, you know, across a fair you know, a large list of leaders across the group of of companies.

46:49 Uh I think the only way as we think about succession, think about it on multiple levels throughout the company. So, it starts with the operating companies and the operating companies you want to have talent depth at each operating company. So, every time we buy a company, we're placing a leader into that business. That could be the CEO or it could be someone else on the senior leadership team. And after we make that first hire, we continue to look for opportunities every year for where else can we build a more robust team, you know, might have bought the business at $5 million of revenue and it gets to $10 million of revenue.

47:19 Might need additional, you know, leadership capacity to drive its next kind of growth phase. That that's true at the vertical level. So, we have the three verticals across our group of companies. We want to make sure we have depth of talent at at that level. It's true at the holding company. We have a very strong M&A team. We have a very strong leadership team around me. And And you know, I I I think there's the two things I would think about in terms of like how do we make sure Evergreen last decades, hopefully a century plus after current leadership team.

47:52 The two things that we're focused on is just keeping the mission alive, you know, making sure the mission matters to everyone throughout the organization and that we uphold it day in and day out. And then packing the organization with talent. You know, we don't want it to be dependent on one person. We want to have talent at every level of the organization. We think if we keep the mission top of mind, if we pack the organization with talent, you know, the business models might change over time, the market environment will change over time. We think that 100 years from now being the best home for businesses and their leaders will matter as a mission. It'll matter as an offering to business owners who are looking to sell their company.

48:29 And so, if we do our job right of kind of getting the right leaders in place to uphold that mission, we think the business can last long beyond us and you know, that therefore, even though we're in our mid-30s, we do spend a lot of time thinking about succession planning and thinking about how we make this business last long after we're gone. It will be exciting to follow and hopefully we can have a conversation in say 10 years and and see see where you have gone since since this episode was out.

48:55 That'd be fun. Come come me in. But as this is a book podcast, we'd like to wrap up with a few questions on reading and writing. So, uh I'm curious what other books have been influential. You mentioned Snowball and a few others, but maybe there are more examples besides Built from Scratch. Yeah. I mean, I I first off, I love I I personally love reading stories about actual businesses. Uh I don't I don't love like the generalizable kind of business book that's like business takeaways that are kind of watered down for anyone to learn something from. I like reading stories about actual companies uh cuz there's usually twists and turns and there's ups and downs and uh that's why I love Built from Scratch.

49:31 That's why I love Snowball about Berkshire Hathaway. I love The Outsiders by William Thorndike. I mentioned that at the the top of the conversation. Then one other one is Made in America by Sam Walton and I I don't know if I have a a fascination with these retail concepts that are very tangible. But I think Sam Walton is such a fascinating leader and and the that he just flew all over the the country to visit the stores and the fact they'd be on hit family vacations and go visit a competitor's store and take such detailed notes.

50:00 He just seemed like a a total learning machine and was so far out of his time in many ways and built a very uh enduring company as a result. Uh and then there's other companies that are kind of similar format to The Outsiders that I like. The Recently, The Compounders came out. I really enjoyed that book. Uh 100-Baggers, uh Money Masters, which was the one of the inspirations for um uh The Outsiders. So, I could keep going. I I I love I love reading about, you know, business stories and particularly you know, the ones that have some ups and downs along the way.

50:34 Are there any other disciplines that you're reading books from or non-business books that have have inspired you? Uh my team would laugh at that question cuz cuz I'm I'm kind of one-track mind with my my reading. I read uh I probably read, you know, one book that's not a business book per per year. Um so, I'm not very I'm not a renaissance person as it relates to reading. >> [laughter] >> I'm very I'm very focused on reading uh reading business books. So, gosh, um I I would say right now I'm spending a lot of time on all the LLMs trying to learn. Uh and so, in terms of my learning outside of business books, I I'm just kind of pulling on strings of curiosity about how AI works, you know, how you you think about past disruptive technologies, how have they come into the the world?

51:25 Um I'm reading the book on Palantir right now, which is a business book, but I you know, it's interesting in this this time period. Um So, I I wish I was a more dynamic person, had more you know, varied interests to talk to you about, but I I'm I'm pretty uh one-track mind when it comes to to books. It's also good to be focused when it when it comes to writing. Is that something that you would like to do or have an ambition to do?

51:50 I I love writing. I I write an annual letter to our shareholders. And I've written a few things that we posted online. I I wrote something about um why we why we believe in decentralization at Evergreen, how it helps us grow faster, attract the best talent, why business owners like the model. I I wrote a letter to Buffett after he stepped down. I haven't gotten a response. It was It was cathartic to write it. It was a very cool moment to be at the meeting when he announced he was stepping down and I posted that online. So, I do enjoy writing. It's my favorite way to organize my my thoughts and and to communicate with our team.

52:29 Great. Jeff Tonkin, thank you so much for coming on Invest by the Books podcast to talk about Built from Scratch and your exciting journey with Evergreen. If our listeners want to get in touch with you or or follow you, or how can they do that? You check out our website evergreen.sg.com. And then I'm pretty active on LinkedIn, so that's a good way to follow me or to message me directly. Wonderful. And I hope to see you in in Stockholm or or Omaha or somewhere else soon. Yeah, I look forward to it.

52:59 Thanks, Eddie. Thank you so much, Jeff. Thank you for listening to Invest by the Books, a podcast by Redeye. Follow us on Twitter at IB_Redeye and email us at ib.podcast@redeye.se. To improve, we'd love to hear your feedback, so please rate and review us. Notice that the content in this podcast is not and shall not be construed as investment advice. This information is meant to be informative and for general purposes only. For full disclaimer, visit redeye.se. I'm your host, Eddie Palmgren. And until next time, I sincerely wish you the best of luck on your journey through life and investing.