A Decade of ETA Insider: The Things They Don't Put in the Syllabus

Speaker A: Foreign. Hello and welcome to the ETA Insider Podcast, where we explore the dynamic world of acquiring businesses and creating value as an operator and leader. This podcast is brought to you by the Polsky center for Entrepreneurship and Innovation at the University of Chicago Booth School of Business. As a hub for venture creation and business growth, the Polsky center provides invaluable resources, mentorship and support to advance innovative ideas and technologies from the University of Chicago ecosystem to the world. I'm Brian o', Connor, Adjunct professor of Entrepreneurship at Chicago Booth, and joining me today, I have the pleasure of speaking with my good friend Alex Schneider. Alex is an adjunct lecturer at the Kellogg School of Management, teaching the entrepreneurship through acquisition curriculum. He's also the co founder and managing partner of Clover Capital and Grosse Pointe Search Partners, a very interesting investment vehicle that I'm sure we're going to spend some time on during our conversation today. Alex, thanks so much for being on the show.

Speaker B: Great to be here, Brian.

Speaker A: Great to be back here. We should say for our listeners that follow the podcast. Alex was one of the first guests on the show when we first started doing it. Alex, if I recall, we were actually doing audio and video back then, but based on some listener feedback, we've moved to audio only because they say I've got a better face for radio.

Speaker B: Yeah, no, that was, uh, the early days of the podcast. It was my first podcast I think I've ever been on and it was, it was quite a to do. I had to get like dressed up and hair and makeup. Now I can, you know, sit in my home office with, you know, who knows what I'm wearing. Just, I'll leave it, I'll leave it to everybody's imagination.

Speaker A: We won't get into that on the podcast. Alex, why don't you bring our listeners up to speed? It's been a while since you've been on the show. Maybe start with a little bit of your background and how you found yourself in the world of teaching at Kellogg and investing in all sorts of facets of entrepreneurship through acquisition. Just give us a little flash on your background and what you, what led you to where you are today.

Speaker B: Sure, yeah. I was kind of an accidental search fund kind of teacher and experience. So when I was a undergrad, uh, at Northwestern, I actually played soccer and I was on campus early and I met a couple guys who had a small business that was doing shipping and storage over the summer. Now that I have a college age kids, I just moved out my daughter from college and I was chatting with the owner of the shipping and storage business there and was reliving some of my glory days. I ran into that business, the guys were graduating. They said do you want to buy it from us? I said I had no money. Uh, they said well why don't you give us a portion of what you make next year. Little did I know. I just learned about an earn out with a couple other guys. Bought that shipping and storage business at Northwestern and we grew it over the next couple years. We ended up buying other businesses along the way, including a yellow page directory. Some of your listeners might not know what yellow pages are.

Speaker A: My hope is that many do.

Speaker B: But it was a good sales experience kind of back then anyway. You know, I had these little entrepreneurial experiences as an undergrad at Northwestern. Ended up selling little businesses to other students. Did investment banking, private equity, a very, you know, more traditional finance path. After that, did get my MBA at Kellogg also. And interestingly, had I known about search funds back then, I probably would have pursued that path. I did enjoy the buy side. I did like buying businesses and then the value creation piece of it versus the transactional side, but wasn't familiar with the path. We again didn't teach that at uh, Kellogg at the time. So went back to the private equity firm that uh, I was at before school, had a great experience there and ultimately had the opportunity to buy a business that was too small for that private equity firm. PE firms that are successful have this high class problem of moving up market and I was still sourcing smaller deals and came across a business in a uh, industry I knew pretty well. I hooked up with a partner, uh, who I had overlapped with at JP Morgan who already had sort of a shingle set up and away we went. It was more of an independent sponsor deal. We didn't run the business. I think I was more of a active chairman. When you have a portfolio of one and you've, you know, kind of put all of your money, all of your resources into one business, you know, you tend to be pretty active in it

Speaker A: and yeah, you tend to pay attention.

Speaker B: Yeah, exactly. And thankfully that was a great, it was a great experience. I mean we owned that business for 10 years, ultimately recapped it with another private equity firm. I think we've had a couple of liquidity events along the way and actually Kellogg classmate of mine is now the CEO of that business. I was able to recruit him in that sort of got me off of my own. And then uh, from there investing in other, I would say broadly entrepreneurial things. So ventures, other independent sponsors and Search funds. And, uh, started to explore sort of these other models. Finally learned about search funds. And then sort of concurrently, there were some students at Kellogg that did an independent study on why don't we have a search fund class at Kellogg? I think I'd been talking with you about the class that you and Mark were starting at Booth. I guest lectured in entrepreneurial acquisition at Columbia, and sort of, you know, Kellogg was like, hey, why don't you start this in Evanston? And So that was 12 years ago now. And we've been teaching entrepreneurship, uh, through acquisition now robustly through that period. Had a chance to start what's called the Zell Fellows Program, which is a experiential program, you know, focused on a handful of students who really want to pursue eta. And launched the second class this spring with my work wife at, uh, Kellogg, Matt Littell, who you know as well. That class has been a lot of fun to put together, a lot of work. We can chat a little bit about that. Even though the independent sponsor stuff has evolved into a bunch of search investing. We also actually have a venture fund called Clover Vitality that I run and then started Grosse Pointe, which is more investing in kind of search fund opportunities and tangent, I would say. So we're definitely a lot of hats, but it's fun and it sort of keeps me on my toes.

Speaker A: Well, I think you'll find that, I mean, for our listeners, it's not uncommon for someone like Alex that's had success in this model to then go on and sit on boards, maybe raise capital, maybe do a second or third or fourth tour of duty, maybe go and. And lecture at their alma mater, either as a guest or as a permanent fixture within that ecosystem. It's really cool to hear about Alex's story and how other people, their journey has evolved as they get into eta. And I'll just say, as a, you know, Alex, as a close friend of mine, the ecosystem has benefited tremendously from your decision. I remember those early days when we were talking about standing up the effort at Kellogg. And the ecosystem has benefited tremendously from your and Matt's involvement and development of the Zell Fellows Program. And it's really special what you have been able to create there. So on behalf of our listeners, I want to thank you for all of that.

Speaker B: I think I just interject a little bit. I mean, you know, everybody talks about how collaborative the search community is in general. Right? Like, you know, it's unlike. I mean, look, I've been in private equity, I've been in. I mean venture capital also, it is not that way. It is not as collaborative and sort of helpful. And I think it sort of mirrors the industry the way, you know, the academic sort of, you know, institutions have, have been cooperative as well. I mean, I think, you know, what we do with, you know, with, with AJ at uh, Yale and guys at Harvard and Andereg at, uh, Tuck, and we're seeding other, uh, programs around the country and the world for that matter. Uh, and that's super cool. I think being part of that broader community has been a lot of fun.

Speaker A: I would absolutely agree with that. Hey, Alex, the first topic that I want to go a layer deeper on, and I'm going to call back something that you shared in your background. You mentioned that when you were graduating from Kellogg, you know, this topic of search funds and certainly eta, that wasn't even a phrase back then. You would have been inclined to pursue that path had it been more well known. But it also struck me in your background that you accumulated some skills and probably some network and some know how and that benefited and sourced a deal from your time as an investment banker turned, you know, early career private equity professional. My question is maybe think back to that time and I would sort of ask as, uh, you think about our listeners that might be inclined to pursue this path, like, what does it take to get into this path, like to raise a search fund or become sponsored in their search effort, if they're looking to raise capital in whatever vehicle, like, what are the table stakes? What does it take? And maybe even call back to your early career experience. And what you said about had this been a more traveled path, you might have chosen to pursue it sooner.

Speaker B: Yeah, that's interesting. It's an interesting question. It's funny because when I started teaching, and I'm sure you felt this as well, we had the opportunity to introduce the idea of search to a lot of our students. And I used to love that. You know, they would come on campus and they'd be curious about a lot of different paths and they'd, some of them would hear about search and they would be like, oh my God, that exists. That's what I want to do. And, you know, we got the benefit of introducing people to that idea. I think today it's interesting because people are hearing, they're. They're listening to your podcast and other podcasts and reading books and talking to people, and they're coming with a little bit more of a sense for what this is, and they're coming, you know, with a specific plan in my experience, I probably wasn't open enough to listening and talking to people. It was there, the market was there. There are people who went to Kellogg and uh, found the pathway. Matt Littell being one of them.

Speaker A: Dustin was early to it. Yeah, yeah, exactly.

Speaker B: Like it was a little bit more discreet. You had to find, you had to be actually looking for, for it. And uh, you know, today it's there and look, I struggle with that a little bit. And this is a whole, you know, potential topic of conversation which is like I admire the cohort like you for example, who found it even though it wasn't there and sort of created self, created the table stakes themselves. So you talked to a lot of people, you read as many books as possible. You, you know, did all that work. You know, today we're making it easier. Is it too easy? I don't, I hope not. But we are widening the top of the funnel and uh, you know, my hope is that we're introducing the opportunity. People who would be really good and interested at it, you know, need a little bit of confidence, they need a little bit of uh, awareness of it. But this is still very self driven. And that's, I mean the most important thing that I think as an educator, you know, we try and instill in our students is that like you have to be looking for this and wanting to drive it. I think at an academic institution we can, you know, shortcut some of the process. But this is really a, uh, this is really an entrepreneurial path.

Speaker A: And so to the students out there, and I'll share an observation that, that I've had over the years, it may not be for the student or the graduate or frankly somebody that chose not to pursue an MBA that is evaluating this path vis a vis interviewing for the investment banking job at Goldman and the management consulting role at McKinsey. And oh, by the way, I'm also kind of thinking about a corporate strategy position at a Fortune 500 company and you know, maybe I'll do a startup. But uh, this ETA thing sounds kind of interesting and so I'm going to throw that in the. It's really, if you're sort of going through that thought process, it's. You may want to question whether or not it's for you, it's very different path.

Speaker B: Yeah, I think it's a very discreet path. It has some similarities in the, how you weigh risk and return. I think, you know, we're trying to create ways for people who may find this pathway like just not at the right point in their lives. An MBA program's a great catalyst for exploring it for a number of reasons. And again, it sort of, from my standpoint there, you know, there weren't those opportunities at Kellogg previously, there are today. But this is a great path for those not coming out of obviously an MBA program, either choosing not to do an MBA or after a number of years of experience. And getting back to your original question, I think for me I wasn't open to it. My MBA experience was very focused on, I did the one year program at Kellogg and I was going back to the private equity firm. So wasn't, I think open to the idea of it. Uh, but you know, I think the world sort of aligned and the timing for me sort of worked a few years later when I had a little bit more credibility and conviction. Right. And that's a theme that I talk a lot about with people who are searching, particularly when they're making the decision to go down the path, but then also when they found a business and uh, they need to raise money and to uh, engage a seller and also, you know, get uh, investors behind them. Like that combination of credibility and conviction. It's such an important balance that really is the essence of, you know, how you get a deal done, I think.

Speaker A: Yeah, credibility and conviction. So I love that. You know, I think that was a nice conversation around the sort of, the table stakes, around what it, what it takes to sort of get into this, into this path. Let's talk. It's no secret, Alex, that acquisition rates, if you follow the Stanford research acquisition rates have come down. If you read anything, you sort of understand that there's more competition than there has been in the past for these small and mid sized businesses from a variety of different places, whether it be the private equity backed strategic consolidator, the independent sponsor universe, private equity firms directly, more and more people sort of becoming interested in entrepreneurship through acquisition, more seller awareness of their exit alternatives, et cetera, et cetera, et cetera. Let's talk about what it takes for people that have decided to pursue this path. What does it actually take to find and buy a company in this universe that we live in now that is decidedly more competitive than it was when you started teaching ETA at Kellogg.

Speaker B: Yeah, I mean, I think it's becoming, you know, a more efficient marketplace and you know, there are way more searchers than there were before and competition from lower middle market private equity firms, other independent sponsors. So I think with any efficient market the challenges change. First of all, so what used to be more of a challenge in raising Search fund capital or raising debt, financing or convincing a business owner that you could buy their business without having money, like that was, that was more of the challenge before. I think the model is way more accepted in the marketplace, so that's less of a challenge. And you're just in a more efficient market where that convincing a, uh, business owner that you are the son or daughter that they've never had and that they should go with you as opposed to all of these other alternatives, that's where more of the challenge, you know, I think lies today. So really it's just a shift in, where the inefficiency is in the market and that's just something to accept. Deals are still getting done. There's still really, really good transactions that are happening out there. Are there more people? Can it be frustrating for searchers? Yes, of course. And so I think, I think you gotta adapt. And I think a couple of the things that we've seen that have been helpful, you know, from that context include, you know, a little bit more industry expertise and focus than, than probably what, you know, 10 years ago. You could be a little bit more agnostic. I think that that theme of right to win is a little bit more important today. So, you know, if you've got a background that's really tangent into a couple different areas, really being thoughtful about what's your vector into those areas. And uh, you know, we talk about table stakes. I mean, I think, you know, leveraging technology is not a differentiator. That's table stakes. So complementing, you know, your use of technology in a search with some of the blocking and tackling, I mean, you know, the trade show circuit, like developing river guides, like that old school networking, you got to do both and you got to build a broker deal platform as well. And I think you got to do all of those things today to just increase your likelihood of success. And that's all we're talking about. I mean, I think it's sort of, this is a very bespoke thing to find, you know, a business to buy in a limited time frame. And so like doing everything that you can to increase your likelihood of success, which includes being able to walk away from things that, you know, early that, you know, aren't going to get there. And that's a really difficult thing, um, to do because emotion and passion, like, you just, you know, it just, you just get tied up in it.

Speaker A: That, that certainly resonates with me, Alex. And on this podcast we often talk about the role of investors and advisors and how if used in the right way, they can help you stay objective and unbiased in your evaluation of these opportunities because it is highly emotional. And even then when those folks around you, those very smart folks that have a lot of pattern recognition, even then it's sort of easy to say, I want those people around me and I'm going to listen to them. But boy, when you've been working on something for a long time and uh, you bring it to a group of people that you really respect and trust and think highly of their opinion, and it's different than yours because you've gone ahead and fallen in love with that opportunity, that's a tough situation. And so remaining objective and committed to this strategy of surrounding yourself with smart, trusted, well respected people that can give you some unbiased feedback on opportunities is easier said than done, but critical. I don't know what your reaction to that would be.

Speaker B: Yeah, no, I mean, I think honestly it's sort of, maybe even to segue. I mean, sort of the investment vehicle that we've kind of put together is kind of designed to be investing in the person and not the deal. And uh, I think it's a little bit based on some feedback that we've heard from searchers that, you know, there's been a lot of money that's come into the space and uh, you know, a lot of those, you know, legacy investors that have really done well, they've gotten larger and uh, you know, that, that expertise has, has. It's hard to get sort of the, the, you know, the managing partner from that firm on your, on your board. It's hard to find that mentorship, you know, the attention sometimes. And so, you know, I think we're seeing that and we're hearing from the marketplace, from our, you know, searchers that they're, they're really looking for people who can give them that guidance, kind of tell them that their baby's ugly, you know, like really challenge them early in a process to be objective and to avoid you know, some of the confirmation bias that just plagues the whole, the whole experience. And so I think that's like, really important is to really try and give objective and, you know, thoughtful, critical feedback, especially early in a evaluation process.

Speaker A: Yeah, yeah. Alex, I want to, uh, be mindful of your time. Maybe a final topic or two, if we can sneak them in and be brief on them. And to be brief on this topic that I'm about to bring up would, would not be doing it justice. But let's keep it high level. Where have you seen Some of the recent and meaningful advancements in technology, AI and everything around it creep into this world of entrepreneurship through acquisition.

Speaker B: That's a whole different podcast in a lot of ways. So I mean I'll take it from a couple different points. One is, one is actually teaching. I mean I think we're being able to kind of develop material and create simulations now that I think replicate the experience that we're trying to give students at BATS with. So one of the projects that we're working on is sort of a number of chatbots that replicate owners and sort of challenge students to mine information, to ask the right questions, to have the right tone, to sort of play around with being more direct or being a little bit more subtle. So there's opportunities there that we're sort of exploring I think on the fund administration, the search, fund administration and sort of the search side of it. I mean I feel like every week I meet someone else who's using tools in a novel way to sort of source opportunities to create um, authentic campaigns that you know, they're tracking metrics and they're playing around with different ways to you know, sort of engage with you know, business owners in an email campaign. And that, that works in certain markets and doesn't work in other markets. So it's not sort of one size fits all. And then probably the most exciting is actually in the operational side of it. And that's not just search. I mean that's small companies like basically creating their own ERP systems, um, you know, with Claude that would have cost hundreds of thousands of dollars to sort of, you know, develop integrated accounting and management tools are being done by our CEOs you know, today with a little bit of, you know, a subscription and a little bit of extra time. So you know, the use cases of that are you know, from simple things like one of our companies basically took their you know, some SOPs that were bullets and you know, kind of uploaded it into uh, some, some software and sort of created AI based videos on like you know, company training. And the engagement is like tenfold on uh, you know, just how to do simple tasks where people weren't reading it but they'll engage with a short video that it takes two seconds to, to use during, you know, use use AI to sort of implement so all the way to way more sophisticated purchasing and commodity management for example. So I think the next few years is going to be really interesting with again developing the use cases of uh, AI in managing a small business. And that's a pretty compelling opportunity I think. For this cohort of, uh, people looking to search and buy a business is the ability to integrate these tools into businesses that wouldn't normally be exploring those options.

Speaker A: It's an exciting time. I mean, and on that point, whatever small or incremental doesn't necessarily need to be transformational. Changes that can be made today are very likely going to set that small business up for success in the future as things change so rapidly and are probably a step or two or three ahead of where the peer companies in that market are operating today. So I feel, I talk to a lot of operators. It's so overwhelmed by all of the possibilities and how rapidly everything is changing. And my reaction to, um, them is, listen, walk before you run, because my guess is that most of your competition is sitting on the couch and not yet walking. The other thing that you mentioned about the search, Alex, it's cool. Is you're finding some of these innovations in search specifically are freeing up, uh, searchers to do the things that only they can do and where their real value proposition lies. And so when we talk about, you know, campaigns and list building and industry research and some of these things that you can leverage AI for, boy, how cool is it that that frees up, uh, time for them to go to a trade show and meet as many business owners and have thoughtful conversations and build real relationships and break bread with people. As far as I'm aware, you know, robots are not yet doing that. So where we can use these technologies to do the things that only we can do that represent unique value proposition differentiators, or for us as buyers or operators of small companies, that's really the framework that I'm sharing with people 100%.

Speaker B: Uh, if it's something that, like, you find yourself sitting, you know, in front of your computer, sort of doing a repeatable task that has sort of like rules associated with it, there's probably a way, you know, for AI to help you. And then, you know the example of, yes, I mean, freeing up your time to go to a trade show. And guess what? Like, AI is going to help you make them a, uh, better use of your time at that trade show. Like, there's a prompt which is like, I'm going to this trade show. And these are, this is my investment thesis. And here is the list of companies that are going to be there. And like, map out a schedule for me and reach out to, uh, these business owners and see if I can get a meeting. And the prompt of this, the prompt of that email is going to be, hi, I'm I'm going to be at this trade show. Are you going to be there? And if not, can I follow up with you afterwards? Like, again, incremental stuff to just increase the possibility of a connection, which increases the possibility of, uh, you know, finding a business to buy.

Speaker A: Yeah, yeah. Alex, we're about up on time. Unfortunately, I think we've now planted a few seeds for future podcasts can go deep on a whole bunch of different topics. So, you know, you thought that the second time on the show might be the last, but I. Unfortunately, I think we might have just signed you up for another few tours on the. On the. On the podcast. So I really thank you and appreciate you taking the time to do this. I know how busy you are, and I want to just say on behalf of the Polsky center for Entrepreneurship at Chicago Booth and our listeners worldwide, thank you so much for taking the time to share your insights and learnings from your ETA journey. We sincerely appreciate it.

Speaker B: This is a great resource, I think, for people, you know, interested in, you know, search and eta. And I love being on the podcast, love listening to, uh, the other guests and, you know, always feel like, you know, this is a go to for some of my students or people that I've met to, you know, again, learn, learn more about the process and then they, you know, then we can have a more robust conversation after they, you know, get as many of these data points as possible. So thanks for having me on.

Speaker A: We appreciate it. Alex, thank you so much and thank you for all you do for the ETA community.

Speaker B: Cheers.

Speaker A: We hope you found this episode both enlightening and inspiring. Inspiring. Please don't forget to subscribe, rate and review the podcast to stay updated on new episodes, upcoming events and more.