Episode #26 - Founder-Led Scale in a PE-Backed World w/ Chuck Canton

Speaker A: The Lab takes the ethereal to the practical. Our, uh, podcast acts like a business school case study for private equity professionals, CEOs, operating partners, and chief transformational officers. We all know transformation is the key to differentiated alpha. Uh, here's how you actually do it. Our audience tunes in to learn from those in the field getting their fingernails dirty and driving meaningful growth through, through better operations, technology and data. We learned from going to business school, teaching at business schools, and applying these lessons in the real world that case studies actually help the insight stick better. Come join us.

Speaker B: All right, well, welcome to the, uh, latest and greatest episode of the Lab. Couldn't be more excited to have Chuck Cannon here with us today. We spend a lot of time speaking with, talking to private equity professionals. And what do they want? They want great companies, they want great founder operators. And so we've got one here today. So maybe we'll start. Either you're a founder operator, either you're an entrepreneur or you're not, Chuck. And so, you know, I've known each other for a long time. I wasn't around when you started your pressure washing and deck staining business, but that was a business that you started back in college to, uh, you know, help make ends meet, so to speak. We've all been there and done that, but I'd love to just kick it off and have you give your quick background of what you've seen, what you've done and we'll get to, uh, Source Pass where you're, you're the founder and operator, CEO of that business, a large msp. But let's go back and just, you know, give us a quick overview of you and your background before we dig into, you know, all the great things you've done so far.

Speaker C: Happy to do that. And, and Scott, Nick, thanks for having me on the podcast today. I've been, been excited for this, to share a bit of our journey at Source Pass and hopefully it helps some of the other aspiring or current entrepreneurs out there. So, yeah, I'll talk about my background and maybe tie in a bit in the Source Pass. There's entrepreneur, there's operator. I definitely personally tend to always be more on the entrepreneur side. Always been passionate about startups and driving, uh, you know, innovative business concepts. It's funny, Scott, you remember my deck staining days doing contracting work. Not allowed to remember that tidbit about my background. But yeah, my first exposure to the entrepreneur life was in college. I was in a position where I needed to have money to support college and spending and lifestyle and all of that. And it was actually a brother in law of mine, Ryan German, owns a restaurant called Cafe Gelato in Wilmington, or sorry, Newark, Delaware on the versus Delaware's campus. And he's the ultimate entrepreneur. He opened a restaurant when he was 19 years old. It's been now running over 25 years. It's one of the only fine dining restaurants on the University Network's campus. And he was, when he's opened the restaurant, he was too young to drink, but he had to get a liquor license to support the restaurant. So that's the type of entrepreneur he was. And he took me under his wing after my freshman year of college where I needed to find a way to have money for school. And he basically taught me the contracting license. So pressure washing, deck standing was what we chose. Not very capital intensive, but something that you can mobilize college kids to do. And so, and we start off that summer personally, just pressure washing, you know, cleaning decks, staining them. You make anywhere from 500 bucks, thousand bucks a deck. And then by my senior year I ended up having 15 people on payroll, insurance, certifications, all of that. And that was my first exposure to the entrepreneur life and starting a business. And that was my plan to do that actually. But in my senior year of college I actually got poached by my uncle who was also entrepreneurial starting a uh, unified uh, communications cloud communications company called iCore Networks. And he kind of wanted someone who had the entrepreneurial mindset but was willing to do the work that no one in the business wanted to do, from like you know, cleaning the bathrooms to doing collection calls, the past two clients to knocking on doors to get, to get revenue. And that ended up being a really successful venture. It went from, you know, kind of a garage room startup at zero in revenue to over 70 million. And I sold a public trade company called Bondage Trade on NASDAQ for successful exit and seeing that ventures where I just kind of got hooked into the, the, the entrepreneur life.

Speaker B: What happened to the standing deck business? Is that still, still around or.

Speaker C: You know, it was the Maloney twins, two of my employees on my team who went to high school with me. They were three grades younger than me. They kind of took it over. People are always like, did you sell it? And unfortunately without having me operate it, there was no salvage value. So they got all my equipment and they ran it. And I think they may have passed it on to three other people now. And there's probably some Georgetown prep graduate in Maryland still running that business at this point. But you know at the end day, it doesn't matter what the business is. It got me exposed to marketing, got me exposed to sales, got me exposed to payroll, got me exposed to being organized with how you approach things and leading people. And that experience still drives what is the company I'm at. Now that we started Source Paths, it's a very similar playbook, just a different scale. So it's all services.

Speaker B: Well, let's dig into it because obviously you, you know, it's similar but different from, you know, that path, the path there for my core to vantage, you know, et cetera. So what was your aha moment where you said, hey, I want to sort of do this again and I'm going to, you know, maybe stub my toe a few times less or I've learned the following lessons that's going to allow me to, you know, go raise some capital and you know, get Source Pass up and running.

Speaker C: So the concept of Source Pass manifested when we were at that company Vonage business that we sold I Core Networks to and myself and the other co founders, Bruce Sims, who I've known since I was uh, 7 years old by the way, who worked for my father on an IT services initiative. He worked for my uncle at that startup I Core Networks and now he works with me and then Rollie Points, who manage client success at Vonage. The three of us came with the concept there in that Vonage was again a public trade company focused on telecom and they were struggling doing residential telecom. Think of cell phones, think of Skype at that time. Think of, you know, voiceover IP in the residence world kind of made their business a bit obsolete, but it was highly cash generative. So they took all this cash and invested into transforming the business to business in the middle market, uh, for telecommunications. And our company was the third of eight that they acquired and we ended up being the operating platform. And so that got us our PhD in M& A and true go to market at scale because we had the entrepreneur DNA. We had to learn the scale DNA because we combine them. It can be very deadly for executing. And when we were at Vonage, it went from a $300 million market cap early transformation company to eventually selling to Ericsson mobile for 6.2 billion. Those are big numbers. None of us got rich, but we helped build a lot of wealth for others and watch people get rich. But we had the learning experience when we were there. At Vonage, we'd have clients who were deploying their telecommunications solutions. They'd want help with other things, network, cloud, security. But As a board at a public trade company, the charter was very much stay focused on voice. It's our niche. So we had to turn down a lot. And that's where we kind of came with the concept. You know, we could add more value if uh, we could do all areas of digital transformation for our clients. Let's help them with the cloud strategy, the security strategy, voice strategy. And now today the newest thing that runs the buzzword is their AI strategy. And so that's where we decided services will stand the test of time. If we can help small to mid sized businesses have access to a breadth of, uh, technology, we can truly help them focus on their core business. So let's build that. So that's where we kind of came up with our investment thesis and that's where we decided this is what we wanted to do long term once we got through the Vonage venture and as soon as we had the Runway to, to pay to go to work, which is what, you know, a lot of entrepreneurs do. And the thesis was again, broad access to technology. No longer is it just Fortune 1000 need all these different capabilities. Even a 50 employee accounting firm needs them. And so there's no one focusing on it because everyone is so focused on the large organization. The next one was we worked with a lot of managed service providers, which is the category Source Pass falls under. And there's some great engineers and operators there. What it lacks is a true client experience mind and an innovative mind that the delivery is kind of archaic. It's still dispatching people on site, taking phone calls, doing emails. That's where he said, you know what, let's modernize it. People are used to uh, Amazon getting things immediately, they're used to Uber things like that that are on demand. Let's digitize the experience through a platform we now call Quest, where they can engage through modern technology. Text, chat, video, they can self serve, they can check their inventory. Let's make it easier to engage with us. And that was kind of what we decided over five years ago would be something to differentiate the space. And that's where we came from. Concept resource fest.

Speaker A: Yeah, I'm curious in that entrepreneurial mindset, I think sometimes when I talk to folks, it's easy to put the cart before the force a little bit. Right. So when you, you jump into this Source Pass roll up strategy, did you know when you were launching this this was going to be a platform play? Did you think this is going to be a single MSP and we're going to grow slowly, organically or did you know, going into it with the team that you had built, the experience that you had that you're going to roll this out and it was going to be a big player in the space.

Speaker C: We did not know we'd get to the scale we were at today. And we, I wish I could say it was intentional. We didn't realize how much capital markets was focused on the space, how much dry powder is being put into it because of the fragmentation in the market. We just saw an opportunity to elevate client experience. And as entrepreneurs and operators, that's where we, that's where we focus what happened when we were starting it, and I can talk a bit about how we source capital and went to market and mobilize everything. We found that there was a heavy amount of interest across capital markets to get exposure to the space and that just kind of accelerated it. We're sourcing capital came easier than expected. And our uh, M and A background, we realized, could accelerate building that platform to have a differentiated offering. And luckily we had kind of a PhD in M, M and A from Vonage. That was the biggest return we got out of that was learning M and A at scale. So it just kind of came together fortuitously. But uh, I wish I could say it was intentional. We had a little bit of luck, which every entrepreneur needs on their, on their side at times.

Speaker A: Yeah, I mean, you called it out. I mean the capital markets definitely are very heavily invested in the MSP space resource. We play in the agent space. So there's been a ton of money dumped into the TSD space, into individual agents with rollups, et cetera. You kind of touched on PE a little bit here. So can you walk us through how and what you were looking for when you were taking on a partner and, and kind of what potholes maybe to, to avoid for others?

Speaker C: Yeah, so it'll kind of lead into it because it goes to first. The first thing we had to do is make sure we had the team around us, the founding partners that were all passionate about the thesis of what we were doing, which is we're going to disrupt the IT services space, elevate it and do a lot of work that bigger companies scale don't want to do. And whether it's investors or partners or founders, the first thing you have to make sure is that there's a high level of passion to do it. Because when you start a business, you pay to go to work. Like we, we did this for two and a half years before we got a single paycheck. Out of um, Source Pass as a business and I'm certainly grateful for Bruce and Rollie to go on that journey with me. But you have to love and be so passionate what you're doing that you know, you would almost do it for free if you have to right now. There's always a liquidity goal in mind. There's gang shareholder. That's the first thing for anyone that mobilizes around you. So that's the first thing for thesis and team. And then when we thought about capital markets, who we wanted to partner with, we were very intentional to find folks that one were equally passionate about that mission and that vision. Two for early stages realized that their capital was their most value at that juncture and were willing to be hands off and let us run to make sure there's no bureaucracy in what we, what we were doing. We could just move and execute quickly as operators representing, you know, future clients and things like that. And so the way we broke it down was there was kind of three categories. There was the equity category, giving up ownership early, the debt category, taking on some debt that you know would be non dilutive but give us some latitude and autonomy to run. And then there's the third category which is time and resources. Those are partners and infrastructure that's willing to give you access to free services, willing to give up time, sweat equity. Those are like the three categories we think of approaching it. And in all three categories they have to love your mission because if they do, you have to think about genuine buying on the mission and then to not what these partners are going to be like in capital markets when things are going well. Because if numbers are good on a spreadsheet, even those ruthless like challenging equity partner in the world is still going to be happy if the IRR is there early on. It's what they're going to be like when there's challenges in the entrepreneurial journey and how they support you. Because if a challenge comes up and all it is is conflict, well then that's a uh, recipe for disaster because you're not going to navigate. So we always thought about when we're thinking and I encourage everyone from the thing about this is what are they going to be like if things don't go perfect to plan? Because innately the entrepreneur journey is, you know, it's not about how you handle the success, it's how you handle the challenges and navigating through them. You know, if it was easy, everyone would be an entrepreneur. And so for equity, you know, we looked at on the Onset, you know we wanted to get at least 60 million in capital to go buy a platform company. We grew through product driven M and A. So to build out this differentiated platform that had end to end cyber infrastructure, digital transformation and productivity suite. That's like how we categorize a portfolio. And we acquired to build out that portfolio and so know we wanted to get 60 million to find a platform and then bolt on to that. We first look at equity. We got growth equity, private equity offers, that's one category. Vc, early stage investors and then friends and family. Mobilizing your network of people you know who are going to be passionate about it because they're supporting the entrepreneurs. And in the equity category we chose friends and family and boutique VCs and the reason was is we didn't think we had the scale yet to go to a growth equity or private equity shop. We thought that my varnish we're trying to build a special culture around and we wanted to wait to go to private equity. We had more scale and then you know that sourced about 20 million in capital there. And then we looked at debt facilities and debt can be if you're not disciplined, a blessing or a curse because innately in debt there's a discipline that it caused you to have, you have to always have a M. ROI mindset to be able to service it. But the benefit of debt is that you preserve autonomy and you can preserve value for shareholders because it's non dilutive. You're not giving up a lot of equity as a part of it. And we looked at institutional debt, some banks that had a thesis and MSP space. Then we looked at some private debt providers and what we landed on was our largest investor. Metropolitan Capital Partners is all public information who's you know put over 100 million into the space via Source Pass and has been a great partner to us and is a big part of our success when it comes down to is. Paul Isiak, Richard Lynn shared the entrepreneur mindset. They were different from how they viewed things. They thought about the mission first before they thought about how it manifests direct even and things like that. Because you focus on the mission, good client outcomes, treating our employees well, truly integrating business you acquire. Then the economics fall in place after that. And they also believed in you know, their founder driven capital letting us run and they've been great partner, they've been awesome during the time to celebrate our wins, when we've had challenges, they've been supportive and made sure we could think our way through it. And that's probably one of the best decisions I made in the company. And then the last thing was time and resources. You know, there's a lot of people when you're starting a business that want to help entrepreneurs. So we had advisors who for nominal amounts of equity would give their insight. We learned from their life lessons. We had banking partners that would do things for free, technology partners, things like that, but all manifesting that they believed what we were building. And so that's kind of how we mobilized to get, get where we are today is um, you know, $100 million plus MSP.

Speaker B: Well, it's interesting that you know, when you say that Chuck, you know, taking on debt can you said it's a blessing of a curse. Like you know, Warren Buffett a weapon of mass destruction. Right? They can be. But you found a way to have the company pay down that debt so you didn't have to give up equity. It's a great move for you and the shareholders when it works. So how do you think about. You had mentioned finding the right partner. We spent a lot of time when we're working with entrepreneurs and we've worked on a bunch of different projects to work with executives, to develop a thesis, bring it to private equity. Knowing the private equity firm, um, is hard. How do you know whether it's a sponsor? What Metropolitan? I agree they're a bunch of great people and they've done great by you and great by a bunch of other people. But how do you get to know these funds in your mind in an efficient way to make a good decision? Because you know, once you're working with them, you're stuck with them. You know, how many times have you heard the unfortunate stories of saying, hey I would you talk to executives with a PE firm and say gosh, they, they weren't that helpful. They, they, they sort of did this or did that and you know, maybe that's a self filling prophecy because maybe the business was or wasn't doing well. But how would you recommend if someone's thinking about starting a business, bringing on um, private capital, how do you tease out whether they're gonna be the right partner for you?

Speaker C: So the first thing I would say, and I again learning from my own mistakes, I did not do this early on, is I definitely think there's value in bringing on an advisor, an investment banker that knows your space and has history of um, doing deals with these partners. Especially when we get to a certain scale like where we are now. We won't do another fundraise at this juncture without Having like professional representation because the advisors can kind of advocate for you but guide you on what's happened from previous deals and connect you with former clients to share experience. So the first thing is you got to. The advisors are going to check the basics for you. Like do they have the concentration cap to support the amount of capital need to grow? Do they. So are you in the check size range? Do they have the lifetime on the fund that you want to do liquidity in three to five years? Do they have that duration with their LPs your business and what your, you know that your buy box criteria does that match up with theirs and that what you're building is part of their like 10 Commandments for, for making investments. So there's like the basic stuff that just navigates. Can you get through the investment committee without wasting time? Because there's a fundamental disconnect. You shouldn't be talking to that private equity or growth equity shop. So that's the first thing. The next thing is in my opinion, don't chase a investor who hasn't spent time in your space because you're going to spend more time educating and explaining, less time doing. Uh, so if it's a new thesis, they haven't bid on companies in the past. So uh, they're asking very basic questions. Focus on someone else. You want smart, intelligent capital, understand your space. If you're trying to chase dumb money and get a new investor this space, it never works because they're just never going to get grasp of challenges. So asset category experience or formal thesis from top of the firm M is like paramount to success. And then the next thing is for an entrepreneur is are they truly founder driven? What is their track record? What is the average tenure of CEOs in their portcos? The founders make it through. Do they come in and want to just bring in their own team or do they want to come in and develop the talent to execute some thesis and do they think development before they think exit strategy is very key? Because there's some PE firms that they're very transparent. It's part of their DNA. They come in and it's like you know, X, Y and Z hit these numbers or you know we're going to bring in a new team. We have all these op execs and we can do this just as well as you. There's a time and a place for that. If you're late in your journey or maybe you don't want to continue this. But if you're a team that's got skin in the game, heavy equity exposure. And you're passionate about this journey. You want an equity partner who thinks, how do we develop and foster this raw talent and passion? And that can be, in many ways it could be. We have an executive coach framework. We have an operating exec group that guides you, doesn't try to like, you know, peek over his shoulder and keep an eye on things. And then we also have commercial things where we help add some value to vetting out, go to market strategy, finding more M and A targets or client targets. Those are ones that have infrastructure. Like, we want to make this team work. And we invest in the team, not the asset or the client base specifically. And it's really important to do your back channeling reference checks, talk to CEOs that they traded with in the past, ask for references, and again, go back to what was a value that they had and then tell me about times of adversity. How did you navigate that successfully? Uh, and to me, for an entrepreneur, that that's key, critical, because otherwise it's just going to slow your journey down. If you're defending your stance on things as opposed to executing.

Speaker B: Yeah, it's a balance, right? Because it's been plus or minus five years, you know, since Resource Pass. And the leverage you have now is much different than the leverage you had, you know, five years ago. Right. So you can ask those questions and you can get that sometimes you, you say, and I imagine, you know, the beginning of it is, uh, you get lucky, you have good people and you'd be thoughtful about it. But this is what also wasn't your first business to grow. So you've learned each times. Which leads me to the next question is around. You know, we hear this all the time. When you start a business, it takes three times as long and four times as much money to get to where you wanted to get to. So, you know, what are your thoughts on what do you, you know, what would you go back and tell yourself other than what you've just highlighted? You know, what do you wish you knew then? Do you know now? Because a lot of, in the, in the case study method here, there's going to be a lot of people that are running businesses that say, you know, I want to get to where you are.

Speaker C: Right.

Speaker B: But I'm somewhere on the journey between, you know, years, you know, zero and year five. So what are a couple things you'd go back and say other than it's going to take longer, it's going to be more expensive, it's, you know, it'll be harder. It's darkest before dawn so you know, keep fighting through it. What are your thoughts there?

Speaker C: So a few things when I look back on our journey and I think about myself rolling Bruce and the founding team is one thing to look back on is I wish I was more selective with how I allocated my, my time. And it actually had an epiphany on this. I was listening island up to a podcast. It was an interview with one of it was a former, a girlfriend of Elon Musk, which I know is a random connection. But they asked about one of his characteristics that she uh, thought was defining as a part of his success and she said he was rigid with the meeting she chose to take or not take. He had no problem pushing people off if they didn't have a very very relevant reason to meet with him for what he was trying to accomplish. He's very, very selective with his time. And I think that port that's important for an entrepreneur because there's only so many hours in the day. Time truly is money. The faster you get things mobilized, the faster you can get to liquidity and paying yourself things like that. But when you're starting a business, there's a whole enterprise that wants to make money off of startups. There's literally business startups that make money off of startups. And so you can take advantage a lot. And so what I would say is be selective of who you spend your time with to make sure that there's a very, very intentional, specific reason to meet, rational reason to meet and that they have a thesis that's similar to yours and then translating that to private equity and growth equity, that's a methodology that again we're going to take as we look at our future capital market strategy. And so, you know, we're hoping to exit the year, you know, let's say over 125 million in run rate revenue. Uh, to us that puts us in our opinion, the top 3% of the 50,000 MSPs out there. And so now we've earned the right to be selective of what type of high value capital we bring. And that's why we intentionally built this was to go with infrastructure and intention to go to a private equity partner and be able to select the right one. And so going back to that, we're only going to spend time with ones who know the space well. We'll know just as well as we do. I don't care if they know it better. I'd love to learn from them because they've done trades in the past or, uh, they've diligenced. A lot of companies like ours, that's someone you can learn from. And the discipline they give you helps you build more value. So the thesis has to be there. The next thing is, we want someone who partners, doesn't control. And that doesn't mean, like board governance. That just means stylistically they're very clear. Like, you run this business, you drive it, we partner, give you infrastructure to do it right and make sure you, you minimize the amount of mistakes. You learn from them quickly and make them once. But a partner mindset, not a control mindset, especially in a services space, you really need that because people innately don't like to be controlled. When you do that adds a lot of bureaucracy and slows things down. And then economics, right? You got to make sure that there's firms that have reputations. These ones are more aggressive, these ones are less aggressive, but they give you, like, you got to make sure your economic goals, you know, with how they've been in the past, that they can get to the quantum you're getting to. And if you know from your advisor that they've always come up short, well, don't put them in the process because you're just wasting your time. And so for us, Source Pass will never be like some large auction process. Seventy p's looking the deck. For us, it's very concentrated. We know the qualified investors and we spend intimate time with them to make sure culturally, operationally, and economically there's alignment. And by doing that, you'll build a better result because it minimizes execution risk. But what our hope is, when we do that in the future, you minimize distraction for the asset because it's going to streamline things and hoping get that result faster. The biggest risk of raising capital or recap is the distraction to the team. Uh, you can try to go through a process and they will ask every question, they will drag it out, they will retrade at the nth hour, and you don't get a deal done, that hurts your ability to then get something done in the future because all you've done is distract and rotate value in the asset. And so that's something that I, I think is very important to be disciplined who you're talking to and insulate your team from that process as well. As a CEO, my job is protect the team from letting capital markets distract them. And that's something that I take to heart.

Speaker B: Yeah, I think that's a great way to sort of, you know, and to thank you for, you know, Juggling on with us because that there can be distraction. So many times that happens, and, you know, that hurts you for the long run. So, um, I'm sure, you know, we've all. The problem with getting older is you. You run out of mentors, you know, and all of a sudden you start mentoring people, and you're like, when did that happen? But is this is a great opportunity, Chuck, for you to sort of let other people learn from the successes you had? And, you know, it's not always been up and to the right, to your point. Right. But it's generally been that way. But there's always dips and knowing that it happens. So we're excited to watch you, and it's been a great journey that you've been on and appreciate you joining the podcast and let Nick and I bend your ear about what success looks like. And we're super excited. Uh, see what this next chapter brings for you, your investors and your colleagues

Speaker C: appreciate having me on the podcast. And, Scott, when I talk about that time and resources, partnerships, I, uh, think of you and the Land Corp team. You know, you knew what managed services were your passion, what we were doing, and you've been a resource along the way. Whether it was introductions, capital partners, sourcing talent. The CFO we just placed, we're super excited about him. He's. He's doing a great job. He's kicking ass. The team loves them, and, uh, you know, that's what you want to surround yourselves with. So, uh, we appreciate the partnership and, uh, looking forward being on the show. And maybe after we get the recap of the future, we can. We can come back and talk about. Did. Did I listen to my own words?

Speaker B: Yeah, well, we can decide, you know, which island you ended up buying. Success in Will. You know, the problem with buying an island is you have to name it. So maybe we'll have some ideas for you, too. Uh, we're looking forward to your success.

Speaker C: Let's, uh, hope. Let's see where things go. And we still got a lot of work to do. We're having fun. And Nick and Scott, thanks for the time. Appreciate having,

Speaker B: um,