How Tobias Kaulfuss Is Transforming Business Succession Through Microcap Investing

Speaker A: Hey, I'd like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you'd like to apply to be a guest in the show, just head on over to missionmatters.com and click on Be our guest to apply. All right, so today I have Tobias Colfus on the line, and this episode is part of our Super Return Berlin series, where we bring you the best of those that attended and participated in Super Return that took place in Berlin. And, uh, Tobias is. He's the CEO and general partner of Castella Nova. Tobias, welcome to the show.

Speaker B: Thank you for having me.

Speaker A: All right, so we got a lot to talk about today. So we're going to talk about microcat Buy and build investing. So, super interesting topic. But before we get into that and your strategy at Costella Nova Super Return Berlin, talk to me like, have you been going to Super Return for a while? Or, like, give me some of the backstory about the event and your attendance.

Speaker B: Well, I actually love the event, so I've been involved in different industries over. Over my lifetime, and I have to say that Super Return in Berlin was the one event where I have to say that's bringing the whole industry together cannot get better than that. So, uh, it's rare that an event based in Germany brings over us Americans flying in. So therefore, that's. That tells a story and all the topics covered there. I had a blast, actually. Yeah.

Speaker A: Oh, that's amazing. Have you been in the past. This is your first. You. You've been. You said you've been going for a while. I'm curious what keeps you coming back? Like, a lot of different conferences and things that, for those that haven't attended, because my goal is I want some more people to fly over, because it's amazing. What keeps you coming back, though?

Speaker B: So what is, uh, what is really, really, um, good about the event is that you have just about every opinion in the room. So you have everyone truly involved in the industry and doing business within private equity. You have them at Super Return in Berlin. And that is such a rare mixture of. Of opinions of people you can talk with, of seniorities, uh, getting together. This is really brilliant. It also brings the two different sides to the table. The investors as well as the people investing, private equity firms. So they're all there and, uh, also mixing with family offices, and, uh, that's a. That's this crazy blend of inputs you're getting within just one week.

Speaker A: Amazing. So before we get into Castellanova, I mean, tell me a little bit about yourself. How did you get into finance? Like go back a little bit for me?

Speaker B: Well, yeah, sure, I mean finance was not really a coincidence so I always wanted to be involved in finance. However, having been through all the major German banks and also with a stint with Merrill lynch in Canada, I actually decided not to pursue banking anymore but, but remained in the finance field and did some logistics and came to E commerce, did some, some strategy consulting. And eventually what brought me back really was my own path into entrepreneurship. And that started back in 2018 when I decided to end my, my corporate ladder career. That also brought me up to the CEO level of a listed company in Germany. Nonetheless said, well the next company just has to be mine. I need to own the next company to make it my own gig. And that then brought me also into the investor sphere. You talk to investors a lot more doing investor relations also for that public listed company beforehand. And that has a lot to do with finance. And that's, that's really where I dwell on where I can add value. And what I did then was look into the business, uh, m. Succession field. So I was a, an entrepreneur. Uh, that's always really nice. You're just adding value to a corporate base there. But that entrepreneur experience taught me well. I can build a company. However the company is, is small and therefore my own ideas, they bring everyone to rotate around me. So having an organization already existing and working on that organization is way more to my liking and also to the managerial capabilities. And that actually then brought me to buying a business. And so when I looked into the market in Germany, I was actually flabbergasted. So we have 600,000 companies in Germany.

Speaker A: Mhm.

Speaker B: Looking for a successor and we have roughly the same number, a little higher even not finding one.

Speaker A: Wow.

Speaker B: And that's crazy. That's purely crazy. And when you look at.

Speaker A: I can't leave that on the table to bias. Why? How? Like, come on.

Speaker B: Like, why does that happen exactly? How huh does that happen and why are we not talking a lot more about that? So that's exactly the point. And that is, I mean your podcast is law Mission matters. That's my mission now. So I looked into that market. I found that entrepreneurs looking for a successor, they're pretty alone when they look into to. That's that moment in time when they're passing their company on and passing the pattern on. And that's.

Speaker A: And some of those reasons. And some of those reasons could be what? Like the kids don't want to take over. Maybe they didn't have kids like all the like, like some of the reasons are just pretty natural. It doesn't mean it's a bad business. I just always like to bring that out. Am I accurate on that? It means it could be a really great yes, but they don't have somebody that, or maybe they're not skilled, whoever they wanted to be their successor and they don't a lot of different things. But am I off on that? I want to make sure I'm not.

Speaker B: Oh, you're completely accurate. I mean the statistics is the following. So statistics in Germany is that 50% can only find a successor in their family. The other 50 even cannot. Zero.

Speaker A: 50. Right. 50%.

Speaker B: 55. Zero.

Speaker A: Wow, that's so low. Go ahead.

Speaker B: Yeah, yeah, that's so low. Exactly. And that's just the people looking into the family. So that doesn't mean that it's really working out.

Speaker A: Right.

Speaker B: And the other 50 just cannot. So we have hundreds of thousands of companies not even being able to look for a successor. And then it is about size. You look at the German economy, we are dwelling on Mittelstan. So it's SMEs, that's the SME companies in, in Germany. They make up, uh, what the German economy really is. So when we talk about German companies, we talk about companies below 10 million euros or $10 million roughly in revenue per year. So that is the bulk of it. So that means 90% of companies are below that threshold. And that is also the threshold where it makes sense for a financial investor to look into a company interest. If you are below that threshold, they won't even bother. So it might be a little add on for one of their platforms, but it can't be a platform by itself. And that was exactly the business chance I saw when I started back in 2018 and I've been doing this since. So we have developed something that is one of the foremost micro cap investing platforms in Germany. That's an over.

Speaker A: How are you? So, uh, it's amazing. It's an amazing story. And I'm curious on how you like, what advantage when you're building this platform have you and your team developed that allows you to maybe create some value where other people can't?

Speaker B: And that's the, the question of how big is your machinery, how big is the gun with which you're shooting? And we are on an entrepreneurial, we have started as entrepreneurs on the entrepreneur level. We haven't left when it comes to the M and A machinery. So it's really down to earth. Uh, we are trying to make the, the M and A process as lean and sleek as possible. We try to explain all the different steps and also be cost effective. And this efficient process that we've built there is really the advantage that makes it possible for us to acquire small companies between 1 to 5 million euros or dollars in revenue.

Speaker A: How do you get your deal flow? Like how do you get your deal flow? How do you come across the right companies and fit and maybe even go a little bit into the, of what you're looking for in a deal?

Speaker B: Well, for sure, I mean we have started off with IT services companies back in 2018 and in 2019 we founded our platform for that business. And the platform didn't have any companies in there. So this is always our approach. So we have the holding company and then we buy a number of smaller or micro business, better to say. And those 1 to 5 million euro businesses that we are buying, we are forming a new champion out of that. And when we're talking about the first platform and how we go into deal sourcing first there's always four different sources that we are then adding. It's platforms existing in Germany that we're advertising. Of course we, we do direct calls, we do direct mailings. Then we have MA consultants that we are targeting. And so there's also specialized M and A consultants for very small businesses. Nonetheless, their quality really differs. So we really have to know who to ask and with whom to advertise. And there's always one or two MA advisors really knowing the market by heart. And then lastly the fourth channel kicks in and that is you will become known within six months because there's only, only very few, at least I know only of us professional buyers for micro caps in that sector and really being able to acquire businesses.

Speaker A: Wow.

Speaker B: So that's, that's the major difference.

Speaker A: Am I, am I correct in saying that as you acquire and as the uh, I think, I don't know if you use the word niche, but as you build in one particular niche and you have and you add more companies that tranche or portfolio or like that, that part of the business. Am I correct in thinking that there's probably some efficiencies there that the company's gained through overlap of whether different resources and even just learning and technologies. It seems like once you have a bucket of these, like there has to be some things that are, you know, you're probably not changing everything immediately, but it seems like certain efficiencies that weren't learned in one business maybe were working really well in another. Am I off on that or Is any cross learning?

Speaker B: Oh well, of course, I mean you're creating a lot of cross learnings. You're, you're creating cross sell opportunities. I mean it's buy and build. And the major difference I always make is you have to integrate, you have to build something. You have to take those two words, uh, very um, verbatimly. So therefore the build is crucial and without a build you only do buy and collect.

Speaker A: Mhm. Man, Tobias, that sounds like a lot of work. But it sounds amazing. Like getting all these. It's gotta be fun. It's gotta be fun. But every new business you acquire new management teams, new this, new that. But what I also like though, and this is the part like just let me take it right brain for a second. Left brain, I get it, it's very logical and it's, it's amazing. But right brain, I think the other amazing part is that some of these businesses that might be mismanaged or you know, an, an owner of one of these businesses, I'm um, picturing somebody that started off with an idea and work, you know, 30x amount, 40 years maybe, who knows, Years building a certain type of business and now their legacy, right? Like they don't want, they don't want that to die because they, they don't have the right person to take it over or just to be, or to end or uh, you know, they care about their employees, they care about all these other things and they hope to see it go on past their retirement. Like so to me, you know, the right side of the brain, I'm like, it feels good to me too, Tobias, what you're doing.

Speaker B: Well that's, that's completely true. And this is also what's what attracted me to that market. So it of course brings all the left brain sides for finance and M and A guy together. However, it adds the right brain side. It adds the human aspect.

Speaker A: Yeah.

Speaker B: And there's this human aspect everywhere in such small businesses. But what is really something that feels invigorating is talking with the owner and, but also getting to know the owner, getting to know the organization, dealing with concrete people. Sometimes challenges and sometimes knowledge bears personal names.

Speaker A: Yeah.

Speaker B: And that's just the, the characteristic of such a small business. And for me this is the layer which makes it a lot more fun.

Speaker A: Have any of these, I mean like in any business or any investment, everything can't be all, all good. Has anything ever gone wrong or like a deal go like and you'd expect that or there had to be some learnings there. Yeah.

Speaker B: Of course, of course. Along the way, I mean we've done this over the past eight years more than 30 times. Wow. Um, that's a lot of learnings in there.

Speaker A: It's a lot of time to do something. Go ahead.

Speaker B: So maybe sharing one of such incidents with you. So after acquiring a company, I uh, got a call and from a lady in the accounting department just raising, raising an issue to me and saying well, something might not, might be a little bit off here and I uh, need you to know that. So she was a concrete whistleblower and we took that very seriously. We looked into it, investigated the case and uh, we always do a DD beforehand. But what I'm always seeing is that when you have some, some criminals straight in you, that's ah, that's like water. It always finds a way. And therefore that was well hidden and within the structures. So we investigated, we found, yes, she's right. And thanked her and protected her and got rid of, of the people really then doing, doing stuff that they shouldn't have done. So that actually raised a very critical point to me. The, the numbers of the business were very profitable. They were, they were accurate. But any profit is meaningless without integrity.

Speaker A: Mhm.

Speaker B: So integrity is the foremost value we have in our group.

Speaker A: Yeah. Tobias, this has been great having you on and learning more about your business, what you're doing over at Castellanova. Uh, that being said, if somebody's listening or watching this and they want to connect and learn more, how do they do that? How do they connect with you and your team?

Speaker B: Well, obviously, uh, our website is a great source, Nova.com and then we also have our LinkedIn presence with Castellanova. We're also in the podcast sector as well with success and succession. Unfortunately that is a German podcast, so therefore you have to read the subtitles. But we are trying to get the message out that business succession is an issue that we are on a mission to solve. Business succession in Germany. And when I say the 600,000 companies that finding a successor in Germany, it's twice that number in Japan.

Speaker A: Wow. Gee.

Speaker B: So we've, we've won our horizon last year and founded a Japanese subsidiary.

Speaker A: Amazing. I love where this is going and I'm excited to bring this story to my audience for every listening. Just so you know, we're definitely going to put some links in the show notes so you can connect with Tobias and his team. And speaking of the audience, if this is your first time with Mission Matters and you haven't done it yet, you hit that subscribe or follow button. This is a daily show. You heard me correct each and every day. We're bringing you new content, new ideas, and hopefully new inspiration to help you along the way in your journey as well. So hit that subscribe or follow. And Tobias, it's been an absolute pleasure. Thanks again for coming on the show.

Speaker B: Thanks for having me. A pleasure.