Growth Equity vs. PE vs. VC: What Founders Need to Know with Stew Campbell

Kison: [00:00:00] I am Kison Patel, and you are listening to M&A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M&A deals.

Kison: Hello and welcome to the M&A Science podcast. [00:00:30] This podcast is part of a mission to rethink how M&A is done. The old school double led approach, it's dead buyer led M&A, is all about strategy, alignment, and efficiency. Putting value creation at the center of every deal. Let's be real. It's not just about closing the deal, it's about making it successful.

Kison: We uncover what truly works in M&A by learning directly from the best. I'm your host, Kison Patel, founder and CEO at deal room and Chief Scientist at M&A Science. We're back second part of our [00:01:00] interview with Stu Campbell. Partner at TCGA. Leading growth equity firm focused on investments in consumer brands, media, sports, and culture.

Kison: TCG specializes in helping consumer facing companies scale, offering not just capital, but also deep expertise in strategic growth, operational scaling, and founder led businesses. Today we're gonna talk about how growth equity differs from other investment models. We'll talk about the various investment models, we'll talk [00:01:30] about the relationship with the board, working with investors, and how do you get the best terms when it comes to negotiating with investors?

Kison: If you missed part one, I recommend giving that a listen first. Otherwise, let's pick it up right where we left off. Now I'm starting to get it, build a list of, I.

Kison: Here's like the TA Associates, which is a huge firm. Like that's gonna be a while before we get a check and especially Minority [00:02:00] Recap. We gotta go. Yeah. Get up there. So I'm realizing that here's some aspiration, good friends to have, but then what's the next tier down from where you were previously? Like Nor West?

Kison: Maybe they're getting closer to the check size. Yeah, there's a little bit of that where you gotta size it. Where the sweet spot. And then being upfront, do they have an appetite for minority recap? Now I want to get more like the vetting and competition part of it, because I thought that was interesting when you mentioned, and can you get it down to 10 and make it competitive?

Kison: Teach me how to do that.

Stew Campbell: The easy first answer about that for sale sign is just to hire a [00:02:30] banker and sell it. And I love working with bankers. Plenty of great relationships for a control transaction in which you want to sell 80, 90%. That can be a great force in mechanism because it forces that competition because now you've engaged Banker X and they're gonna be running a process on your behalf.

Stew Campbell: If that's not your prerogative and there's such a meaningful role or a minority deal, and I'd argue that in that case a banker could be helpful, but you can also probably try to tackle it yourself. To me, there's a walk then run stage of [00:03:00] diligence, but also a vetting on both sides, which is if you have a certain idea of a transaction in mind.

Stew Campbell: You can share a certain amount of information. It's 4, 5, 6 bullet points worth of stuff, and it's probably what may or may be in your, in your quarterly reviews and send that and then send it with an expectation of, here's what I'm willing to send, here's the time I'm willing to spend with you. Here's what I'd like to see that comes out of it.

Stew Campbell: And it could be IOI, indication of interest or just, you've vetted it with your ic, you're [00:03:30] interested, there's more work to be done. But based on the six things that we've seen and our work in the category, this is how we'd see value. And you could ask for term sheets, non-binding, a couple pages long, and use those to force a couple groups off each other.

Kison: So you basically run your own. You can run your own process.

Stew Campbell: Process. What sits behind that? First few things. You can either pre-prepare as if you are running your own bank process, have data, a data room ready, or you could just prime your team and tell 'em like, this may be coming. What you should be ready [00:04:00] for is that the groups that see that first round of information or that think that there's something really to go do, are not gonna play by the rules you set out April 15th, right?

Stew Campbell: The odds of April. I'd love to see a first term sheet. The right group that you've been dating for a while that really knows you and finally has an opportunity and knows and has seen you perform over time, will see that opportunity and will make it awkward for you. 'cause they're gonna come full throated, ready to try to transact.

Stew Campbell: Throw some hard elbows against the other firms in a [00:04:30] not so competitive way and try to really go lock up a deal with you. Now, if that's what you're ready for and you've done enough of that pre-work, you're then in a position to say, I know Stu really well. I've had three great years for him. He's been waiting for this.

Stew Campbell: He finally got some information. He now knows I'm ready to think about something. He's ready to rock.

Kison: This goes back to that right partner. We're gonna run twice as far, twice as fast, and know that from some of these conversations. I know like we talked about through threw some, a couple names out there, your firm's got a lot of great strong reputation, [00:05:00] so then all of a sudden you are gonna start favoring that, that relationship because you've established that there's aspiration, but there's almost confidence that you'll be able to achieve it.

Stew Campbell: Absolutely. We at TCG meet founders all the time. You're, regardless of when they wanna transit, you wanna meet great founders of great businesses and then start to help them build. And sometimes the feedback coming out of a first secondary and third meetings. I don't think there's a deal here anytime soon, but if there is, we gotta be on it.

Stew Campbell: In getting to know those founders and [00:05:30] supporting them, that's the relationship that gives you that opportunity. We love it, we embrace it. We find more connectivity and benefit among our network and among founders. And if a transaction happens, that's great. It's just a beautiful part of the process.

Kison: Even though I like you, I still wanna give some competition.

Kison: It's still like, let's absolutely see, so I can compare your term sheet to something else. What are red flags I should look out for? Because sometimes I get this, you go dating how things look good. Then boom, you find out some crazy surprise about this person. [00:06:00] Absolutely.

Stew Campbell: When you're starting to narrow that list, make some calls.

Stew Campbell: I'd encourage founders to call portfolio companies, ring up their CEO and say, Hey, clearly, because you're part of Growth equity firms portfolio, company A, they got to you. What's it been like? They're calling me. We are starting to get towards more advanced discussions. Give it to me, how has it been with them?

Stew Campbell: What's been the most trying time? And then beyond the portfolio companies that are put out there on the site, you'll figure out which ones have not gone well and either [00:06:30] directly asked the partner for which portfolio companies they've worked on, and then do your own research. If you're in YPO, go start to circulate a few names and see what you can generate.

Stew Campbell: But doing reverse diligence on the firms is of the utmost importance.

Kison: Backdoor references. Absolutely. Okay. That makes sense. That's the best way to really get a sense if. Okay. That's where I learned about the culture. The firms, I've seen 'em, I've seen PE firms. Certain PE firms have the reputation. They do.

Kison: I'm full of assholes. And then there's some, I'm actually learning. There's some really good PE firms out there, which I'm now [00:07:00] hopeful for.

Stew Campbell: And there's nuances to the questions you can ask both on reputation, what it's like to work with. You can ask for. In that pursuit of the deal that I mentioned and sharing some of that information, letting a couple of groups run hard.

Stew Campbell: One of the bigger risk factors you'll have as a founder is, okay, I locked arms. They're getting ready to put a ring on it. What's the chance that they walk away from the deal? Now some things are out of a firm's control and we do all of our diligence, their findings within the quality of earnings and background checks, and there's things that happen that are [00:07:30] for very good reasons.

Stew Campbell: To your question about sussing out. Certain firms and potential behavior issues, you can ask for what is the LOI, the signed LOI to close rate, which means you came to an agreement of terms, it's been negotiated, there's value, there's expectations on a whole number of terms, and you signed this relatively lengthy document that gave a firm exclusivity.

Stew Campbell: It means you're not allowed to talk to anybody else. They're gonna give it a full throated effort. What's that close rate? Seeing that close rate, then pressure testing that with [00:08:00] references. You may find that some firms are super eager to lock it up. And then drag you along Re-trade on terms and really demonstrate some of that behavior that you should probably be most concerned with.

Kison: You should be on negotiated term sheet. What do you call it? You call it a term sheet or LOI Growth, capital language. What are we doing? Initial term sheet is the IOI, which is an indication

Stew Campbell: of interest.

Kison: Uh, so your IOI, you, you'll reference

Stew Campbell: the term sheet. An IOI is just an outline of terms. It's a talking document, and then there's a move to a letter of intent, which often has.

Stew Campbell: A timeline and [00:08:30] ask for exclusivity. A willingness for the firm to spend money and resources. And a price. And a price.

Kison: Your, IOI You put a price or a range on there?

Stew Campbell: Price and range, depending on the situation. Yeah. Okay. Depending on the situation. You got

Kison: kind of a pretty rough thing, and it's

Stew Campbell: a, it's a talking document.

Stew Campbell: We expect you to roll between. 60 and 80%. If it's a minority deal, we would endeavor to put this amount of primary capital on the balance sheet and this amount of liquidity at this value. It's a discussion document. It's really meant to be written in pencils that we can say, [00:09:00] Hey, look, we've had a first set of conversations.

Stew Campbell: We're very interested. Here's how we're thinking about approaching a transaction. Let's have a conversation.

Kison: So this competitor process, I wanna solicit these term sheets. That way I can wind it

Stew Campbell: down with the discussion. Yeah. And my, my only caution to you is a very interested firm will try to blow right through that process and get to the LOI.

Stew Campbell: Okay. Teach me how to negotiate these terms. Figure out what's most important to you. And look, I've made plenty of mistakes in these discussions, this work with founders. But in the end, figuring out. [00:09:30] The two, three things that are most important to the other side of the table. And the two, three things that are most important to you and solving for that four to six set of points is probably how very good a term she comes with.

Kison: Okay. I'll tell you what I think you tell me when I'm wrong. Sure. One would be the exit timeline. Okay. I get it. I got capital in, this is now. Formalize your institutionalizing the business. You gotta deliver a return to your investors. And I wanna understand that if I not ready for that exit, is there options to do something and continue?[00:10:00]

Kison: That's one. The second is control. Do we create the board? Do we have dual classes, shares? Do I get a control of the preferred overcome? That's the second. And then the third is, I would call it the gotchas. I'm thinking of the preferred X returns and things like that where. The gotcha. Like he didn't think three X preferred returns was a, he didn't think anything about that until later on.

Kison: You're like, damn, now I'm screwed.

Stew Campbell: Yeah.

Kison: So those are my top three. Would those be your top three?

Stew Campbell: Absolutely. The gotchas for sure. The first two we pull apart minority versus [00:10:30] control deals. You sell me 80% of your business, you are giving control. Yep. Now I and TCG, we approach that board and that investment as if we were minority investors.

Stew Campbell: Giving control doesn't mean giving operational control. I want to be invited into your kitchen. It's your kitchen, and I wanna be told you focus on that part. You're chopping that, you're searing off that, but I have control of this whole set of the kitchen and figuring that out in diligence lets us lean into something like M&A, lets us lean into [00:11:00] something like capital financing or whatever the strategic objective is, where we TCG think we can help.

Stew Campbell: And then we stay out of the way for so much else. Now that's operational control, which even if we have 80%, should be 90% of your headaches, which means. I really wanna make a change at this vp. I really want to tackle this. I really want to go lean into this strategy. Those operational decisions, until you really come to that strategic discussion, are all really yours.

Stew Campbell: So that's one part. Now, the control minded, when you sell us [00:11:30] 80% and in four years, we get a bonafide offer from a strategic or another PE firm that's compelling. We as control owners have to act on behalf of all shareholders and our own LPs. We have to do what's best for us. The dirty little secret is that it's unlikely without your support as an ongoing CEO that we're gonna go to consummate a transaction.

Stew Campbell: It's very difficult to take a management team, let alone a founder kicking and screaming into a sale process. So control means we have the right to make the decision, doesn't mean we can actually execute on set decision. [00:12:00] As a minority shareholder, those protective provisions, they really only have teeth in a very few percentage of chances.

Stew Campbell: You talked about controlling the exit timing. If you and I worked on a deal together and I had a six year redemption period, so at the end of six years, probably five and a half years, the legalese would be that I'm able to get a fair market value set of work done on my investment. The 30 million I invest is now worth a hundred million according to some firm.

Stew Campbell: You have the responsibility legally to now go transact and go deliver me [00:12:30] a hundred million of value. You could go raise debt, you could find another private equity firm, you could sell the business. There's that threat. But in reality, it's very rarely used because either the company's not doing well and my third year or a hundred doesn't really matter, or it's doing swimmingly and we're actively working on what's the best outcome for all of us, and we're gonna work together on it as big of a consideration as control is, or minority protector provisions for a founder who has built his or her own business.

Stew Campbell: On their own bootstraps. The transaction itself and how an investor comes [00:13:00] in, buying 80% or buying 30% in that whole dating process should make those controls much lesser of a concern. So in summary, there are valid concerns now with the right partner and the right process when you go to sign and you get that requisite level of liquidity and growth capital delivered.

Stew Campbell: I'd want you to ask those same questions again. See if you have a different feel of it. That's the first two. The third is really just a business point, the gotchas, and having really good advice and being a very transparent [00:13:30] investor. When there are those structural items to help bridge valuation, it's a really important exercise.

Stew Campbell: For instance, you think your business is worth a hundred million dollars. It's worth $60 million. We have a valuation gap, but God help me. I wanna invest in your business and you really wanna partner with me. We just we're staring. Microphone to microphone, unable to get to that valuation. There's structure, ways to make that happen.

Stew Campbell: There are protective provisions that can help on the downside where I see your plan to be pretty risky and I wanna be protected, so there's unequal [00:14:00] economics on the way up to a transaction. There's also there. An ability to transact much closer to my 60 million value, but give equity kickers and a bunch of bonuses on the way out because you think it's worth a hundred on the way in understanding and diagramming and being very clear both with the partner and the principal that you're investing with.

Stew Campbell: And then from a legalese perspective. It ends up becoming a really good mechanism to bridge valuation. When I have done it and when I have seen it in use, it hasn't mattered because the companies were on such great trajectories. They blew right through [00:14:30] said structure ended up not being an issue. It's of concern and should be looked at, but hopefully mitigated.

Kison: It's a lot. That's, that was a lot. That's some really good points in how to think through that. What would you do? You got some interesting scenarios of, do you look at the accelerators or do you, that's where the preferred returns come into sort of de-risk. The high risk, the first bit is that

Stew Campbell: when we're out networking with founders and we're getting to know what they want to build, there's a professional.

Stew Campbell: Plan and a business plan that they're going to chase in a category. TCG meets these unbelievable [00:15:00] founders across areas of passion and are just building unbelievable things. The challenge for you as the founder is to go figure out where those personal and professional lines are gonna cross. And what I mean by that is there's an element of liquidity back to that poker chip example in which you're solving for.

Stew Campbell: New residence, something for the kids from a trusting perspective, but there's some element of diversification and wellbeing that you're gonna start thinking about. Some people have a number. If I had X, I would stop really thinking about what [00:15:30] I'm doing on the family side and really just be able to focus on the business.

Stew Campbell: And that's what we're trying to unlock as growth equity investors is to. De-risking increases risk in a smart fashion, but helps you make better decisions because you already have all those black poker chips in your back pocket and you're doing great personally. Now let's go take healthy risks for the business and actually go seize that opportunity.

Stew Campbell: Figuring out that number and figuring out what you're trying to solve for. Sounds like you've done some of that. Thinking can be a really powerful way to start. Sometimes I'll sit with founders and say, what are you solving for? And they'll [00:16:00] sometimes give me a raw number. Uh, sometimes they'll say, I'm only gonna engage in a minority transaction.

Stew Campbell: Whatever that liquidity ends up being, I'm confident that will be enough, what I'm looking for. And start there and then you can work backwards.

Kison: This kind of is gonna lead to this question around wealth preservation.

Stew Campbell: Some of

Kison: These people out there, Michael Dell, blows my mind. If anybody knows Michael Dell and get him on the podcast, I got a huge reward for you.

Kison: Just the whole take private. Mm-hmm. If you look at his equity share before to post all the legendary public, it's, [00:16:30] I think the biggest M&A move done in history that nobody really looked at that perspective, had all the news flash about all this, the car icon, all that engagement, the whole spin on VMware, but the wealth creation.

Kison: Was blown everything out the water. I'm always curious on the preservation side of this because then you hear the other stories, which is they're not good. The founder had a huge exit, a big number, but then they had this tiny little check that came out of it 'cause they were just so diluted and just the way the economics were.

Kison: Putting these terms together, like how do you sort of [00:17:00] protect yourself or build in that way? The ones that did it. I'm just, that's a curious thing. Like I really wanna learn, and I know you've seen it from your side. How do you build that as part of your plan that you can grow your business? 'cause even when I look at doing acquisitions, I.

Kison: Capital intensive. You bring an equity partner in and you're gonna get deleted pretty quickly. What is that path? What is that magic to do it and still preserve wealth?

Stew Campbell: First comment is that so many of the founders have been just so generous with philanthropic efforts with their own employees, that seeing a [00:17:30] number and thinking that only goes to that founder, and you have to think about that risk.

Stew Campbell: They're, they're often in that position because they're so generous and they've built so much culture and are embedded within that employee base and the community. I was with one founder and walking around and there was a community hall at the very top of the list that built this very nice building and, and set of facilities.

Stew Campbell: Now, there were a bunch of smaller donors listed at the bottom, but the top, it just said anonymous. And I looked at him and he just smiled. And that gave me so much comfort that he had invested so much [00:18:00] in that town that when more liquidity was coming, it was just gonna be more of that. Now he deserves to appreciate what he built.

Stew Campbell: And sees things that he wanted to do in terms of if he wanted a new toy or a new home. But I also had that notion that he had already invested that much into the town via this anonymous mark, and he was just gonna do more of that. And then I watched it as he gave a very good amount of his liquidity via deal bonuses to his employees.

Stew Campbell: Fathers and sons and grandfathers were either retiring, they were going off to college, they [00:18:30] were paying off homes. On the back of his presumed liquidity so you can pattern match within a founder and get to know them of what that's gonna look like. At the same token, this is not a very small slice of a big exit.

Stew Campbell: Selling down a little bit in an IPO, this is a meaningful event because so much of the equity has been built into the company that this is the one big event. It's a mini IPO, just for a founder or a set of founders in that dating process, understanding where they came from. What is most important? Where do they intend on [00:19:00] spending money?

Stew Campbell: Where would you wanna go live? Where do you wanna retire? Those things come up over the drinks and the dinners and the time that you spend with somebody so that when you see the raw number and the funds flow and you know exactly what they're getting, you have great comfort that they're gonna be using it the right way.

Stew Campbell: And you have belief that they will take care of their family, they will spend the right way, and that they have enough equity left in the business that the value that they've built so far. Is gonna be the value that they try to ascribe and build with you. And that's a great journey to take on.

Kison: Let's talk through that so we can build a [00:19:30] roadmap together.

Kison: For me, maybe about 15 million's gonna pay the taxes, that'll take care of me. I can get some property taken care of, and no kids, family. All this stuff is, they're all set. That's sort of a near term within the next couple years. Longer term private jet and taking care of the team both. We already create an option pool even though we don't have outside investors.

Kison: We built an option pool for 20%. Every employee has some options to it, and the management team is highly incentivized around that as well. I wanna see them achieve their dreams as well and get a jet too. The dream is to have a [00:20:00] podcast on the jet.

Stew Campbell: There you go. Recently, I think it was last year before I received a little paperweight from United for achieving 2 million miles.

Stew Campbell: So I still aspire to the same end goal that you have, but far too much time on planes. The Solve, which is I want to take care of my kids, pay off a house, get a place in the Poconos or wherever you'd want to go. Those are all completely reasonable against the equity value that you've built and having those conversations and hear you talk about that, I'm perfectly fine being that mechanism because in that multi-year process in which we've gotten to know each other, I [00:20:30] know that's what you're building towards.

Stew Campbell: I know how well you've taken care of employees. I know from where you're gonna be taking this wealth and delivering it to. I had a founder who, despite all of the success. I was in a rental house and said, I wanna solve to put my kids into a really nice house and not have to worry about their schooling or inheritance and just be done, and then we're gonna go build something magnificent.

Stew Campbell: And that's the greatest pleasure of this job is that you can be that mechanism to let them really go recognize the value from which they've bled and sweat into a company, and then go chase something [00:21:00] big together.

Kison: Okay? Near term, I get it. That's not too hard, but the jet, I need to really preserve value to make sure the

Stew Campbell: jet happens and takes on a minority partner and then goes building something great and taking it from the 20 of a RR to 50.

Stew Campbell: I'm not a jet guy, but it sounds like that's the right level of scale. This

Kison: podcast can be in the jet.

Stew Campbell: Well, hopefully, uh, maybe it'll invite me back on that jet with that podcast. We'll be, we'll be something to do.

Kison: Yeah. We'll have the studio there. Okay. Challenge me on the timing. I dunno if it's more of an ego or just created this arbitrary milestone that we gotta get to 25 [00:21:30] million a RR before we do a minority recap.

Kison: Mm-hmm. And then hopefully a strong growth trajectory. And I can go make an argument for getting 10 x revenue valuation. Let's create a package for $ 75 million that puts it around that 30% mark. Challenge me.

Stew Campbell: So back to these personal professional lines, which I'm crossing on video in terms of crossing, there's a presumed path and at that level of a RRI can find the right level of liquidity to make things work.

Kison: And I would add, I think I can work with this next tier of investors that are like you, more the goal investors.

Stew Campbell: And I think in starting to [00:22:00] meet and work with those investors, hearing from their experiences on the path from 10 to 25 or. In my world, within consumer investing in the path from D to C, getting into wholesale, meaningfully opening their own retail units, there are big jumps in scale and organizational theory that happen for these companies to help them make it through these levels.

Stew Campbell: The path from 10 to 25 is not. As simple as just blocking and tackling. It'll come with organizational stress. It'll come with likely upleveling, certain levels and certain members of the [00:22:30] team starting to understand what's gonna come in that path and how quickly it's likely gonna come can influence where that line sits for you.

Stew Campbell: In terms of the professional side, the other bit that we haven't talked about is what happens when there are just fundamental macro things that come and throw off your very notion of what the timing should be. You're a consumer brand, or worse yet a consumer services company that deals with stuff in real life and you are thinking about doing something in 2019, said, no, I really want to go push for [00:23:00] two more years.

Stew Campbell: My in-person business model is really gonna hit it in 2021 and that's what I'm gonna sell and really make money. And I really like these investors, but I'm gonna hold on for two more years. You're holding on for six more years. It's ironic when we're in the year five of Covid that just happened, but there are a number of founders that we worked with that were really holding on for that 20 21, 20 22 timeframe, and they're still holding on.

Stew Campbell: If you find the right investors, challenge yourself to say if something fundamentally shifted in the rest of 2025. [00:23:30] Wouldn't it be good if I had this investor along with me? And maybe that affects your, those two lines in that intersection point a little bit.

Kison: Hmm. So you

Stew Campbell: got a

Kison: little bit of how they would value it now close to then as well, and that it

Stew Campbell: doesn't mean the conversation's over, it just means that maybe there's a valuation gap.

Stew Campbell: Maybe they wanna see more proof points. They've gotten to know you, you've invested some time, they've gotten to know them. But the right investor that sees and hears and understands what you wanna do will lean into your company or asset at the right point. And hopefully that's three months before a pandemic, not after.

Stew Campbell: Yeah. So

Kison: let me complicate this a [00:24:00] little more. I have firmly done 44% year over year growth last year, and despite management restructuring and all these things that disrupted the business. I have strong confidence in the coming years. Of course, something surprising could happen. We operate right at break even.

Kison: We push for growth. We got strong cash reserves. I don't technically need the money. That's where I got this. Lemme just wait till we're like 20, 25 million. I know it gets harder. People are gonna message me after 10 million. It gets harder. Economics change. I get it, but why not? That's the fun part.

Kison: Mm-hmm. Figure that out.

Stew Campbell: Now I want to go [00:24:30] do an acquisition. And an acquisition could be the catalyst. Back to that poker chip example. If you're going to either scrape together friends and family money, you're going to take on debt. You're going to have that founder roll equity and dilute you down, and then you're gonna have to go handle the acquisition itself, which is not always straightforward, both in the diligence and then the post deal integration.

Stew Campbell: Those are all challenging things. If you think that 10 to 25 could involve an acquisition, maybe that's the catalyst and maybe you use the firms that have been reaching out to [00:25:00] say, Hey, M&A could be a very big stepping stone for us. We're ready for it. You four firms seem to have spent the most time in the category.

Stew Campbell: Let's just have a conversation about what you would see and have them bring you ideas. 'cause they're out talking to many other companies just like yours. They would love nothing more than to bring some acquisition ideas and perspective and maybe something you haven't thought of. They're the very firm that would then help you with that work.

Stew Campbell: And if they can unlock liquidity, maybe that becomes your catalyst.

Kison: Yeah, I find this deal, I locked it up, maybe do the deal based on the post combined company valuation.

Stew Campbell: [00:25:30] Yeah. Devil's in the details, but yeah, that's the approach is to go do something that you couldn't or wouldn't necessarily wanna do solo.

Kison: How do you weigh out all these, you know, and we talked about the firms, the growth capital, the private equity VCs, but we didn't mention there's family offices. Independent sponsors out there. Mm-hmm. No fancy independent sponsors, but high net worth individuals, you know? Yeah. I could go ask you for a check personally, stu.

Kison: There's that, you got strategics that are doing stuff right off the balance sheet and then you got, uh, these evergreen funds and evergreen sounds [00:26:00] interesting where it's, oh, we don't have to get pushed for an exit timeline here.

Stew Campbell: Absolutely. So one of the idioms is how you add capital and we want to bring the resources of our firm.

Stew Campbell: So I can honestly say within TCG, the operating partners that we have. I was just with one at lunch. I. Our talent partner in Margot, the Rolodex of folks, the authentic Rolodex that we have, because I'm the black sheep that actually wasn't a full-time operator. We're all operators now turned investors. So the [00:26:30] Rolodex and the perspectives that we have can fundamentally help you.

Stew Campbell: Yeah, which is different from an evergreen fund, a family office that just deploying capital. Those are sources of capital and they can be very effective for you if that's what you're solving for. Usually a founder when they're ready and willing to take on growth equity. They want the resources as much or almost more than the capital because they probably have dividends.

Stew Campbell: They're probably taking home a healthy salary. Liquidity is nice, but it's this moving target. To your point, it's the resources that can really Beatrice growth [00:27:00] and help you. Augment that opportunity when you can tap into a network of like-minded executives and portfolio companies and share experiences that this is what we do and this is where we invest so much of our time and our investors' money to go create goodness.

Stew Campbell: That becomes such a helpful function for you as a founder.

Kison: It goes back to the network piece, how that company's gonna approach value add, getting that real good sense. This is a partner that's gonna allow you to run twice as fast, twice as far. Yeah, it absolutely is. That kind of [00:27:30] oversees everything before you get into details of capital source structure and

Stew Campbell: stuff like that.

Stew Campbell: Absolutely. Because the very definition of us being invited into a business is that we're not just capital. And if we were just capital, you could find a different source for it. You could find. Bank financing.

Kison: I agree.

Stew Campbell: And that's a perfectly good way to do it until you want the resources and the network and the learned experiences, both good and bad, that we've had as investors to go support you.

Kison: You're right. That's what it comes down to is the [00:28:00] big picture. Seeing how that's gonna amplify everything, the relationships forth, and then. We'll keep it a little competitive, but that sort of term is more like the 10, 20% difference.

Stew Campbell: And really on a minority deal, if you're selling the business, there's the for sale sign, and it's an auction by definition, it's an auction, a minority deal.

Stew Campbell: You're selling 30% of the company, whether you value your company at X or 105% of x, a hundred million or 105 million. The bright partner is way more important than the [00:28:30] relative value. Not to say you should always take the lower bid, just the relative delta and economics in the end. Shouldn't really matter against the ability of that partner to add value and truly be your partner in crime.

Stew Campbell: That's of way more importance.

Kison: I have not been good at getting the most value out of advisors. When I think about getting an investor in the company, I want to make sure that doesn't happen. Can you teach me how to get the most value out of it? Because I feel like, oh, we had good conversations. We get along with this, but then things sort of [00:29:00] drift.

Kison: What have you seen the founders that are like the best of getting the most out of you and solving the business challenges? And I talked to other founders that feel like they're micromanaged by the board. How do I sort of get the best outta the relationship with a good investor?

Stew Campbell: Absolutely. I mentioned the notion of board conversations and then one-off conversations.

Stew Campbell: Mm-hmm. I love nothing more than when a founder says, oh, I. Just catching you up. I've had these three conversations with such an advisor, or you'd introduced me to this person. I've already had four or five conversations. One, just to get you back up to speed. [00:29:30] That's terrific. That means that there was a critical path and a well connected set of relationships that led to those conversations.

Stew Campbell: That's one part, just making sure that any advisor has that one-on-one relationship with you and absolutely has the right and the need for you to call them or them to call you as they're thinking about things independent of the. Setting expectations and leaning on your investor to set those expectations very clearly with the advisor.

Stew Campbell: So often investment firms, growth, equity, and private equity find [00:30:00] category or industry luminaries, put 'em on the site. Tell 'em that they're operating advisors. Introduce 'em to you early in the process to say You should really call Jack or Jackie, and that may be the one and only call. Finding an advisor that has either specific economics in your company.

Stew Campbell: Equity typically. Or has an operating executive role in which they're dedicated to a certain number of companies within the portfolio ensures just that much more focus to you as a founder. I'd kind of beg for forgiveness. Call them as much as you want and have that advisor [00:30:30] push back on the firm and say, Hey, you gave me X amount of equity in the company.

Stew Campbell: I have this arrangement with you as an operating partner within your firm, against these sort of time expectations. But we are really leaning into this company and this founder is calling me and I'm loving the help. We're pushing meaningful hours in a month more than I expected. I'd rather that conversation where you're finding great value from that advisor and I have to go up his or her equity or figure out a different way of compensation.

Stew Campbell: 'cause you're finding such great [00:31:00] lean on him, right? Make it my issue that you're spending 10 hours or 15 hours or 20 hours a month with this advisor and you're hitting it off and solving real problems. It's leverage for me and it's a better person for that role. I can go figure out the economics on the backend.

Stew Campbell: Invest the time to

Kison: get

Stew Campbell: these lemon with

Kison: you,

Stew Campbell: get the most outta. Absolutely. And then on the inverse, you're calling an advisor or calling an operating executive and it's not working. It's not in my vested interest to have somebody on my firm's behalf that's not [00:31:30] delivering value to you or the company.

Stew Campbell: Let it be known. It's no different than another executive that's not working out. We'll figure out a different path for that person,

Kison: you know, change the board seat. Totally. Absolutely. What does break down the relationship where we get pissed off at each other?

Stew Campbell: It's rarely happened. I've been quite fortunate.

Stew Campbell: There are sometimes challenges with selling control, especially when the presumed path is for a CEO transition to happen. That can come from a couple different ways. Sometimes a founder will say, if I'm selling 70 or 80%. I'm seeding control. [00:32:00] I have less economics and equity in the business. Yes, A CEO transition.

Stew Campbell: I wanna not only recognize my success, but empower the next generation of leaders. Bringing on a CEO to take over a founder led business is tough. I found more success with COOs. I remember meeting with a founder and I could barely see the person 'cause there's so many stacks of papers, which each represented a direct report.

Stew Campbell: My comment was. We need a COO in here to just help divvy the responsibilities and help see above the clouds not be in the clouds that COO [00:32:30] can then much more easily turn into a CEO over time. That's one friction point, but that's really not on the founder. It's more on the stage of investment because we're investing in these founder owned, bootstrap companies that have just, I mentioned that glacial process.

Stew Campbell: They've been through hell and back to build this amazing company. Yes, they sold control, but there may be a little bit of a cognitive dissonance with the fact that now someone else is gonna run it. That process and the emotions that go with it are totally [00:33:00] authentic and totally understandable. But that to me is the only real consistent friction point, is trying to help a next generation relationship.

Stew Campbell: We don't come in with a presumption. Of bringing in a CEO because yeah, we're backing founder owned companies,

Kison: but, but they don't see it that way. I've seen that, that was actually a big thing that came up when I brought our CO in a lot of concerns about the founder letting go of operational responsibility,

Stew Campbell: and you don't come in with a presumption, and even if the founder expects it to be coming, it can be emotional.

Stew Campbell: [00:33:30] They're having to let go of their baby within a five, seven year timeframe of this new first investor's investment horizon. Three years in their trusted number. Twos are all reporting now to a new CEO. They are now still at the board table, but perhaps interacting with the board in a different way, not leading those meetings.

Stew Campbell: There's a lot of emotions that go with it, and those are understandable because these are not private equity owned businesses in which the CEO is the fifth CEO that's been running this 30 5-year-old platform, [00:34:00] and they're just coming in with his or her own network of executives. This is a founder. I was founder, CEO, that's now just founder.

Stew Campbell: That happens. I have plenty of CEOs that are still the founders and that's great. They're ones that have transitioned because they wanted to, and that's great. It's a natural part of the stage in which we invest that those emotions are perfectly fine and frankly healthy for the relationship.

Kison: You see a big difference between bootstrap and venture backed?

Stew Campbell: A hundred

Kison: percent.

Stew Campbell: What's that like a hundred percent. Bootstrap companies, by definition, [00:34:30] have watched competition come and go and have clawed and scratched their way to that level of success. They've been through their own scaling issues. Over time, the culture and the sort of ferocity of which the founders have built that business, you're stepping into just a prideful organization and it should be, it's achieved that level of scale and profitability.

Stew Campbell: Through that glacial process, I meant venture backed companies are seizing an opportunity, which by definition is [00:35:00] massive. It's evolving very quickly and it's highly competitive with other very well funded competitors. It's a race, it's the flag planting in the wild west. There's an attitude of moving very quickly and breaking things and going to seize opportunity.

Stew Campbell: That the winner based on time will seize so much of the rewards. Not always the case. Facebook was the 56th social network or some remark to that degree, but so oftentimes it's the opportunities in front of us and we have to go spend against it and [00:35:30] use capital as one of the tools to go get it. A bootstrap business uses the fundamental value prop and the winning over time, and the people that sit behind it to then go deliver that success.

Kison: That's like a well put point in terms of the difference. I never even thought about it that way. Yeah, but that pretty much says it all. I wanted to just put all this stuff together and highlight one of the investments and one of the ones that I noted that you have been a part of two times, I guess at Norwest and at a current firm is [00:36:00] Vori.

Kison: I say Vori. I'm sitting across from you wearing a Vori shirt and I'm wearing Vori pants. I believe I'm wearing some Vori socks too, but I'd love to hear the story about what that journey was like. It kind of opens up too, since I know you're more focused on consumer brands, which I'm not. So I'd love to hear a little bit about what makes it unique, investing in those consumer brands.

Kison: 'cause I feel like. A lot of 'em everywhere. How do you sort of put the dynamics together of creating the winners or identifying

Stew Campbell: them? It's a fascinating story. Super privileged to be able to back Joe and his team twice, and it's [00:36:30] a fun story to tell. Joe is an N of one. He is an absolute mensch of a founder.

Stew Campbell: He's a really good person that happens to have built a massive and very successful brand. It's been a pleasure backing up twice. Met Joe. Outdoor Retailer, which is a conference, and we met in his booth, knows him, 15 by 10 foot booth or so. And at that point he had half a dozen retail units, a burgeoning men's brand.

Stew Campbell: [00:37:00] It was born out of Encinitas. It was an Encinitas brand, and I fell in love with him. I could not. Stop thinking about what that brand could become. What was the brand called? It was called VR at the time. Oh, it was called VR. It was. It was early on and it was doing quite well. It was building it profitably.

Stew Campbell: It was growing. It embraced the Southern California lifestyle. Yeah. Which was how at that time, can you help put people in unbelievable products that work at the beach, the cafe, in the gym, all on the same day because it's that Encinitas lifestyle. Yep. So my [00:37:30] point earlier about backing founders and in the investment thesis, it being founders and team founders and team and then everything else.

Stew Campbell: Our belief was utmost in Joe and what he could deliver along with his team. He had such a belief that product wins within apparel and that his focus was not only people but product, his investment and belief in product. We knew that the transition. From men's focus to adding women's was gonna be very much on the back of really high quality product.[00:38:00]

Stew Campbell: We didn't know what that winning silhouette or category would be, but that he absolutely had a right to win women's. We did some work thinking, I. What happens when women take off? What happens when a California Southern California brand expands meaningfully outta California? We'd had the benefit of investing in Kendra Scott, which expanded from Texas on out.

Stew Campbell: We had a little bit of that concentric circle exercise, and if they achieved both genders and if they achieved outside of California, we saw nothing but runway. Was doing great, doubling, was a very fast growing brand and doing [00:38:30] so profitably. And he's a CPA by training, has an even more healthy respect for a p and l because he can build them himself.

Stew Campbell: And then Covid happened and they seized on Covid in such a way that between product content, they had a whole online fitness community and then they delayed retail expansion of which they really seasonal opportunity. 'cause so many others were so nervous about retail. When we came out, we were obviously growing very quickly.

Stew Campbell: It came out as a, as an absolute American brand, and it continues to grow [00:39:00] unbelievably well, utmost respect for him and what he's built. They have nothing but opportunity in front of them. It's just a really good company.

Kison: Gimme like the boardroom view. How did you interact with them? And I'm always curious about these kinds of products because I feel like trying bootstrap or something like that, it'd be just so hard to figure out how do you scale nationally.

Kison: I. I liked how you had that point thesis of can you go from being local to the regional brand and that sort of builds you the runway to go everywhere.

Stew Campbell: Yeah, absolutely. So we joined as a minority partner and at TCG we took a minority stake as well. And so, you [00:39:30] know what I wanna do? It took, yeah, absolutely.

Stew Campbell: It was a competitive round and it should have been. And as a minority partner, it doubles down on that kitchen example of where you're doing something, we're joining you and we really just wanna focus on a certain few areas. Product, we're not gonna be helpful with the product. I look much better dressed now by wearing said product, but I don't have a firm view of silhouettes or how things should look, and so stay outta the way of that.

Stew Campbell: Making sure you have the right resources for retail to make sure it's a thoughtful expansion with really good [00:40:00] returns so that flywheel can run well. At the time of our investment, way back when he had no CFO, he was his own CFO. We leaned into some really helpful support to say, build that layer of infrastructure to make 2021 and 2022 that much easier.

Stew Campbell: Having a CFO as Covid hit was perfect for it. He was able to focus on such different and bigger problems. Because Dez, who is still the CFO, was absolutely terrific, was a perfect right hand person for him. Figuring out where you can help and where to stay out of the way [00:40:30] is often one of the more important attributes, especially with a brand or any platform that is growing that quickly.

Stew Campbell: It's a do no harm type of A-A-D-N-A. It goes back to supporting him with more of those introductions and Absolutely. And just, and being supportive on the edges and making sure that nothing inhibits his growth because the company was doing just so well

Kison: Curious about that too. 'cause the brand came out really well and it's a highly competitive I.

Kison: Holding in general, are there some fundamentals for founders operating those kinds of [00:41:00] competitive environments that you sort of noted?

Stew Campbell: To my point, Joe is focused on product and rightly so, and the brand has run on product-led growth because people talk about it. People just are effusive with how good it is, how nice it feels, how effective it is, how long lasting it is, how good it looks, all the attributes of a really good apparel brand.

Stew Campbell: More broadly speaking, when you dive into a consumer brand. You can get trapped with, easy to talk about, but relatively shallow in [00:41:30] my point of view metrics in the same way that people talk software rule of 40, that tells a story, but not the whole story. LTV to CAC is just one of the very measures of a company's success.

Stew Campbell: How you define LTV and what you put into cac, which is a, it's a number denominator and a ratio, kind of wild impacts as to what the health of your business actually is, especially when you start adding retail wholesale dynamics where there's other channels to go get your product and go find the brand.

Stew Campbell: It makes all those numbers really messy. [00:42:00] Seeing the forest and seeing the trees when you're valuing something in terms of repeat rate. Unaided brand awareness, aided brand awareness, return rates within different categories of apparel and accessories, and then reviews. All point to how much a brand is beloved and how naturally it will spread.

Stew Campbell: At TCG, we love brands and experiences and consumer platforms. When you sit around a dining room table for a Sunday dinner, you can't stop talking about that product or service. So there's plenty of great consumer [00:42:30] investments that no one really talks about. They just move and they work fine. But when you sit and you are a surfer and you're talking about a surf line or a.

Stew Campbell: You have really improved your health because you track everything with your aura ring and you pass around, said ring. You have gotten into gardening and now you're talking about epic gardening and how much it's educated you. Those brands cause a natural NPS where you just wanna talk about things and you really wanna share the number of people that talk about vori, independent of influencers or performance marketing or anything else that just sit [00:43:00] around and just say like, that's a really good looking pair of whatever.

Stew Campbell: That's the best form of marketing because it's authentic. It leads to a quick conversion. Free. It's a really good way to build a brand.

Kison: I, I like that you put the whole spectrum together by looking at some clear metrics. The CAC is really important, but then you get to more the soft of like how much these customers really love that product.

Kison: It's interesting how you put that together for your diligence. I. What about the market outlook? With all this research, do you see that when you kind of hear Joe's story about building [00:43:30] something for each cafe gym, how do you sort of put that against, oh, what's our market outlook for that as a category?

Kison: Or do you not? You just look at what you just described. Absolute. It's

Stew Campbell: reflecting back on that we're at the five year market of covid. Think about what we've been through just five years. If you were trying to make an investment in the fall of 19. Depending on when you were in the fall, you couldn't have predicted covid and the boom and the bust, especially within consumers that happened from that in terms of pulling forward demand and cheap money.

Stew Campbell: And then the sloth that came off of that, [00:44:00] we emerged from that. We're now in a tariff environment, which is causing all sorts of supply chain disruptions for brands. And now we're heading into a point of more economic uncertainty. That's a lot. Within five years. When you take an investment perspective, of course the short term needs to be acknowledged to make sure your company gets off to the right foot.

Stew Campbell: But for a growth equity investor, you're likely investing for 10 to 15 years. And what I mean by that is you're investing for the likely five years that you hold something, but as you sell something to another sponsor or to a [00:44:30] strategic, they're gonna be looking forward not only their five years, but likely the next five years, but there's an end cap because.

Stew Campbell: It's a fad where there'll naturally be a drawdown. There's an end cap in terms of the number of retail doors, the number of retail units that you can go find. If there's an end point to any of those within the next 10 to 15 years, someone will find it and it will compress multiple and compressed values.

Stew Campbell: And so it's not that you can ignore what's coming in the next year or two, but you have to find enduring products and brands and founders. That will navigate whatever [00:45:00] happens. Hmm. And succeed. Hmm. So you don't have this big calculation of TAM and this and that. We wanna make sure that the market's big enough, big enough.

Stew Campbell: I obviously big enough and that, and that the tailwinds are there so that you're not completely sailing into the wind for the first three, four, or five years. You wanna be on the right side of history. Another idiom, acknowledging where health and wellness trends are going, where the general apparel trends are going.

Stew Campbell: Those are all. Obvious areas of focus, but no one could have predicted that post covid, I would sit here in New York without a sports coat. Yep. But now [00:45:30] it's perfectly fine. At least I think it's perfectly fine because we've brought down the level of what URI calls commuter wear, but it is just perfectly good fitting looking stuff.

Stew Campbell: But it's a new norm and no one could have predicted that. Absolutely. I got the Ninda

Kison: sweater. There you go. Blazer on. That's awesome to just hear that as an example. One that we're familiar with is Absolutely, I'm lucky though. I got in early. One of the startups I was mentoring out of was Chicago and they were building a startup of helping you pair with [00:46:00] brands based on what social causes, things you believed in, being green, recycling, whatever.

Kison: And they paired me with Vori. Yeah, it was really early. I'm so happy because the stuff has gone up on Friday a lot. Absolutely,

Stew Campbell: absolutely. And hopefully it lasted. So you got it early into Maintained.

Kison: Yeah, I got tons of stuff. I just started drawing 'em like this is just great. It's just easy. It kind of fits in and it's great how they've matured it too, with stuff that you can wear to the office.

Kison: Yeah. I gotta ask, what's the craziest thing you've seen in M&A? Oh. For

Stew Campbell: 15 years, you've seen a lot.

Kison: Yeah.

Stew Campbell: Maybe I split [00:46:30] this, you know, the transactions themselves and then the founders and with that sort of a seller that you're gonna share. So now on the founder's side, I have been part of prayer circles at lunch, unexpectedly.

Stew Campbell: I'm a big guy. I've been physically intimidated at a company event. That was something I chased a founder to a rooftop of a Vegas party at a conference in order to get time at two in the morning actually led to an investment opportunity. So. You end up in some interesting situations. Not every meeting with a founder [00:47:00] is in an office face-to-face.

Stew Campbell: It's you're out in and experiencing, experiencing quite a bit on the transaction side. I've been CC'd on emails that I shouldn't have been and peeked under the hood and. Been asked to delete, said emails relatively quickly, that's happened. You see some bad behavior in that regard. The most formative and I consider crazy experience is when I was working at Spectrum with just terrific now, MD Ben Spiro on the ancestry transaction.

Stew Campbell: It was my first real transaction. Sorry Ben. I didn't really know what I was doing and I was working nights and weekends trying to figure it all [00:47:30] out. And I remember sitting. Unfortunately with my feet up, I was so tired on his desk and there was a capital group that had committed to the financing to help us with the acquisition.

Stew Campbell: And on a Wednesday, Thursday, they were in for 40 million. On Friday, I remember talking to 'em again with my feet up and they were in for like 20 or 30 million, and by Monday the group had been disbanded. And they were gone and the GFC had swallowed them up and I was witnessing my little segment of history, but a really well known financing group had gone [00:48:00] outta business and taken our 40 million to zero of a commitment within three days.

Stew Campbell: It's those sort of like formative periods where I knew that. He was a very strong partner, and was gonna have to navigate through this GFC and we were seeing it in real time. I was just an associate. I was just helping and working and I didn't realize until Covid that was gonna be my time to go navigate some really tough challenges that kind of kept getting thrown at us.

Stew Campbell: I. That one just sticks out. 'cause it was one of my first memories from M&A and it was, I didn't appreciate the gravity of it at the [00:48:30] time, but it was meaningful. It

Kison: really was. That's crazy. Yeah. Yeah. Stu, this has been an awesome conversation. I had a lot of fun. I got my money's worth. I feel so much. I appreciate you having me working with all these investors that reach out.

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