Independent Sponsors

Independently Sponsored: Ouroboros Group

February SPOTLIGHT

Richard Tannenbaum

Managing Partner, Ouroboros Group

FIRM OVERVIEW

Ouroboros Group is a private investment firm specializing in middle market corporate acquisitions and operations, offering flexible investment structures to provide minority capital for growth, or buyout capital for change of control.

Firm Profile
Founded in 2017
HQ in Boston, MA
Early and later-stage companies considered
Areas of Focus
Consumer
Healthcare
Manufacturing
Select Distribution
Investment Criteria
Revenue: $10-300 million
EBITDA: $5 million+
Strong Management Team

Turtles, Tactics & Therapy

A Perspective on Organic Growth in PE-Backed Companies

TONY HILL

Richard, it’s great to have you on Independently Sponsored today. Thanks for speaking with us. I’ve been looking forward to this discussion for weeks. You see, so far, all of our interviews have focused on deals before they close. This is the first time we’ll be discussing how we add value post-close, and I can’t think of a better topic to start with than organic growth. Before we dive in, though, quick question: it’s almost a running gag that all PE firm names sound the same. What does Ouroboros mean and why did you pick it?

RICHARD TANNENBAUM

The Ouroboros Group derives its name from the ancient symbol of the Ouroboros, a serpent eating its own tail, which represents the cyclicality of beginning and end. The Ouroboros is often interpreted as a symbol for eternal cyclic renewal or a cycle of life. From an investment standpoint, we believe the symbol conforms to our view of natural evolution, change, and growth of a business throughout an investment lifecycle.

TH

Nice. Before you know it, we’ll have Ouroboros Capital, Ouroboros Capital Partners, Ouroboros Investment Group, Ouroboros Venture, right?!

Ok, let’s get to the topic at hand: organic growth. At Trivest, organic growth is one of the six core pillars of our value creation program. This program has been developed over the course of 40 years and we refer to it as the Path to 3x. For us, organic growth is all about driving revenue and margin expansion. How does Ouroboros Group define organic growth and, if you had to force-rank them, what would you say are its strong suits in that department?

RT

It seems that we are both using the same dictionary for organic growth, which to us is everything except growth that comes from purchasing another business. The focus for us is examining the resources that a business currently has, its competitive advantage and finding out a way to leverage that strength. As cliché as it can sound, it starts from defining a mission statement. Any business can cut margin, but there is a risk to that strategy. I have often found that if you only focus on margin or revenue growth, at the sake of all else, often you will miss what the business is to its current customers. Once the mission statement is defined, you can run the revenue and margin growth opportunities across the mission to make sure it aligns with the business’s North Star. Usually, that is easier for us as we invest in companies who want to be the best in a category, not those that are trying to produce the least expensive products. That way, as a board and a company, we are thinking teleologically toward the shared mission and that everyone in the organization knows what drives the company’s decisions.

In practice, I think we do a lot of work on the front end, before consummating a transaction, to understand the mission-centric growth strategy. Usually, this includes inorganic growth as well, but what usually comes to the top of the page is product or strategy development. My background is mostly R&D and technology commercialization, so I’m oftentimes the point person at Ouroboros in finding the edge of a particular investment. I am often focused on whether there is a competitive advantage that the company is not currently exploiting, and if so, what is the lift required to execute. Most times, that means I am thinking about new products or new lines of business that can repurpose a product for another market.

TH

Well, clichés are clichés for a reason: they’re usually right! Let’s unpack the product development piece a little more. For instance, at what point do you begin thinking about developing a new product, during diligence, presumably? Who’s leading the charge (Ouroboros or management)? What value-add is Ouroboros bringing to the product development process? And, can you provide a concrete example of a successful (or unsuccessful) new product launch?

RT

We tend to focus on talking about the growth strategy from the first call. Our founder, Samantha Ory, always has us ask, “what can we do to add value for the Company?” That way, by the time we get further into the opportunity we already know, and have validated with the CEO or management, with real granularity, what are the growth potentials in the business they are running. This is important because of any anticipated capital expenditures that might modify the models we are making to forecast the investment returns and to start pulling in the right operating partners from our bench. Usually, we can just help put the right people together and develop the overall focus and strategy from our understanding of the market trends. We have an algorithm we developed that distills industry trends, and as entrepreneurs we tend to simply have a heuristic vision for what will work, as well as the pattern recognition from seeing so many potential investment opportunities.

For example, we invested growth capital in a business that was focused on building a veterinary focused CRM. The business struggled with user adoption past its initial base but had a great core idea and software. We decided that we needed to jump into a more commoditized market of pet products that could drive additional user adoption without building our own supply chain. So we brought in our of our operating partners, who had lots of percurrent experience, to help us source the product’s components while I advised the CEO on how to secure some intellectual property around the new product. The product was so successful that the company ended-up creating a line of products around pet feeding, play, and bathing. This brought more eyeballs to the site and created a synergistic effect with the CRM’s adoption.

TH

Great example, thanks. With the exception, I guess, of firms that follow an operating partner model, I would have assumed that most PE firms and independent sponsors let management take the reins on new product development. Do you ever butt heads with, or encounter resistance from, management with regard to product roadmaps?

RT

We are great listeners. We do not expect to be better than an expert in the field. Usually, we do pseudo-business therapy sessions. I get in a comfortable room and have the CFO recline and say, “now how does your P&L make you feel?” Sounds ridiculous, I know, but it works and you learn so much! The less talking I do the better. I already know what I know, so if I am talking too much, I lose on the opportunity to hear what is really going on. I also take copious notes, because what I think matters at the first meeting is almost never what is truly important. The more nonsensical the comment, usually the more important it really is. On butting heads, growth strategies are a little bit like Ouija boards. Everyone’s hands have to be on the wheel and add something to the discussion—the wisdom of the crowd will often be effective in coming up with the strategy.

TH

Haha. I’m losing it over the image of a CFO, resting in a recliner, confiding in you his nigh terrors about his P&L. Let’s move on to organic growth via new markets. Are you referring to new end users, new geographies, new use cases? Enlighten us.

RT

New markets are both new geographies and new end users. We do a fair number of software-based deals, as I have management software development projects and the General Partner of the firm is a coder. We often are thinking about how we can provide existing data to new user groups, like prices on specialty chemicals from a distributor to a hedge fund. It comes from thinking about a business’s core competency and finding another way to expand the scope that does not challenge the core business model. Like with an emergency care veterinary clinic, ever expanding the scope of services was a chance for more revenue, because dog owners might have come for emergency care for their pets, but may then become comfortable with the facility for more routine care or even pet psychology, believe it or not.

When the growth plan is geographic, it is also about doing more of what works, but adjusting to different languages, price point, and cultural differences that may be part of what makes your product tenable in another geography. Usually, this can be done with running a pilot, which I had gotten used to growing up in science, where everything you do is a pilot project. Because, if we knew what we were doing, they wouldn’t call it research. So, usually no one has done what you are about to do. And lots of projects fail because they underestimate the complexity, as Dick Cheney puts it, of “unknown, unknowns.” That is why we lean on our operating partners and look at opportunities to joint venture to rely on our partners’ market segment experience.

TH

Pet psychology? CFO psychiatry? I’m noticing a trend here… OK, so, as it relates to deal execution, how does Ouroboros’ focus and specialization in organic growth differentiate it from its peers when negotiating an LOI with a business owner or economics with a capital provider?

RT

Ouroboros focuses on bringing in more entrepreneurial-minded folks, who see things differently than your more traditional sponsors. Our founder, Samantha Ory, talks about the Turtle experiment, done in the 1980s by a legendary commodities trader named Richard Dennis. Dennis believed anyone could be taught to trade, while his partner William Eckhardt, thought it required a special gift. So, Dennis set up the experiment to settle the debate and gave the traders his own money to run the experiment. The trainee traders were called turtles, since Dennis thought they could be grown like turtle farms he had visited in Singapore. Hence, the Turtle experiment moniker. Anyhow, Dennis found that the trainees could not only learn trading, but that they were better than the experts and/or traders who had a gift. While most of the team at Ouroboros has the traditional investment banking or private investing experience, lots of the team’s background is from industry or entrepreneurial paths. That gives us a different way of looking at the world to start, but we do a lot of training and development of the staff. We do work to homogenize the staff as our modeling test is quite a doozy. This gives us an edge over groups that just have a surface level understanding of an industry.

Additionally, we can think more deeply and, in so doing, offer more value to a target as well as to a co-investor. There is a lot of diligence that goes into sourcing a potential investment and we shoulder the work of another group, a banker, when we do direct deals, plus what we have to do to be a good fiduciary to our investors. I think that creates a lot of value and we have been doing a lot to streamline our internal and external processes to select the right co-investor for the deals we do—if we cannot or would prefer not to fund the deal entirely internally. The ability to say, “we are putting our money where our mouth is,” helps us negotiate with founders and management.

TH

I don’t know if you caught last month’s interview with Anthony Valencia and Emanuel Pleitez of East Los Capital titled Without Research, You’re Just Another Dealmaker with an Opinion, but their secret sauce is to identify, professionalize and supercharge businesses via rapid technological enablement. You and your team have deep backgrounds in tech, so I was surprised that technology transformation hasn’t come up very much today.

RT

A magician never reveals all his secrets, I guess. No truly, I was not trying to turn this into an anthology, or maybe I just want you to buy me dinner first. I heard Joe’s is nice.

TH

Ha! Deal! Joe’s is a Miami institution. What would you say are the biggest organic growth-related pitfalls you want to avoid out there, and can you cite an example—yours or someone else’s—of how things went awry?

RT

Organic growth mishaps are about not understanding a target market or a market segment. The best example actually comes from my family’s business and the acquirer’s post-close growth strategy (or lack thereof, really). They did not at all understand what market segment my father’s chiropractic practice was in and tried to create a wellness practice from a personal injury practice. That absolutely did not work, as lots of the patients were focused on their injury settlements and getting treatment for their injury was often a nice side effect of the settlement money they would receive. Needless to say, the business did not succeed because their growth strategy was nonsensical. They were trying to make a fish climb a tree.

TH

A fish climbing a tree… your imagery has been on-point today. Great example, and sorry to hear about your father’s practice. Well, Richard, it’s time for my favorite part of the interview: when you share with our readers a humorous or odd or incredible story from your days as a dealmaker. We all have them. What’s the best you got?

RICHARD TANNENBAUM

I once tried to do a deal in Bulgaria. It was actually a licensing deal for a telemedicine platform. I thought it seemed like a great platform and I had seen a demonstration of it virtually. But, back when people used to do deals in person, we negotiated a term sheet on the phone. However, it occurred to me that maybe I could add more territory. I was actually in the airport lounge as the flight was getting called to board when I sent the term sheet with the updated territory for the license.

Fast-forward to Bulgaria. When we arrived at the hotel to be picked up by the telemedicine platform’s two owners, only one showed up. After making excuses for why the other couldn’t make it, he took us to a restaurant specializing in horse meat (which actually tastes alright!) After lunch, while we were heading back to the hotel, the other partner called and words were exchanged in Bulgarian, which I don’t speak. It seemed the partner was otherwise indisposed and could not meet until the next morning at 6:00am for breakfast. Though still jet-lagged from international flight, we did not want to seem rude—and perhaps he truly was this busy—so we agreed.

The next morning at 6:00am, we finally met the second partner, only for him to tell us that that we were not far enough along in the deal, that we were being pushy, and that he was second-guessing whether to offer us the license after all. After five months of negotiation and a 12-hour flight, I was flummoxed. The truth is, though, that the terms probably were too aggressive and, to this day, I wish I had waited a few weeks longer before hoofing it to Bulgaria. Great food, though. If you ever go, ask them for the horse meat special. Nowadays, when something is not at all what was expected, I tell someone it was all just “horse meat.”

TONY HILL

Haha. I’m picturing a t-shirt which reads, “I flew twelve hours to Bulgaria, and all I got was a horse burger!”

Richard, once again, thanks for carving out some time to speak with us today. We appreciate the insights and look forward to seeing them play out on the deal stage from afar, if not as your partner, which of course we would love. Stay safe—looking forward to grabbing a bite at Joe’s!

“Independently Sponsored”

Trivest has a long and successful track record of working and closing deals with independent sponsors. Each month, we interview a leading or up-and-coming independent sponsor about a relevant topic of their choice. To mix things up, at the end of each interview, we ask our guest to recount a particularly memorable (and hopefully humorous) deal-making experience. Our goal is to deepen the knowledge and strenghten connections within the independent sponsor community.
Interested in taking part? Have a potential transaction to discuss?
EMAIL TONY HILL

About Trivest

Headquartered in Coral Gables, Florida and founded in 1981, Trivest is the oldest private investment firm in the Southeastern U.S.  For nearly 40 years, Trivest has invested exclusively in lower middle market businesses, completing over 350 transactions that total more than $7 billion in value.

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