Justin Ishbia: The Three Traits Required to Succeed in Private Equity | E1119

1. 0:00 – 0:55

   Intro

   1. JIJustin Ishbia0:00

      ... I view private equity in the following way. We're a huge flashlight. You walk into a room that may be dark. I'm shining the light everywhere, in the corners, in the crevices. What I found is those who are really good at their job, well, they're super excited. And those who are maybe less than good at their job curl up and kind of hide from that light. And so when we eventually exit our investment, the light's on in the room. Everyone can see everything, transparency in data.

   2. HSHarry Stebbings0:21

      What's the most common piece of investment advice you hear that you think is BS?

   3. JIJustin Ishbia0:25

      I can't tell you how often I hear... (dramatic music)

   4. HSHarry Stebbings0:29

      Justin, I am so excited for this. I heard so many great things from Peter at SCS, had a great chat to Neal Major about you the other day. So thank you so much for joining me today.

   5. JIJustin Ishbia0:38

      I could not be more excited to be here. Thanks for the opportunity to share a little more about Shore Capital and those are my fam- favorite people out there and, um, some of the most successful investors. And so, um, have an opportunity to share the Shore Capital story and what we're building in the future. I'm always loved telling about... talk about it.

   6. HSHarry Stebbings0:53

      They are all great people. I have to

2. 0:55 – 6:00

   Childhood & Family Influence

   1. HSHarry Stebbings0:55

      agree with you there. Uh, listen, I stalk the shit out of you for the last few days. I listened to everything that you've done. And I believe that we're all shaped by our childhoods. And I want to start there. I, I saw that your father found UWM when you were eight. You saw him grow the business through your teenage years. And I just thought that must have been quite transformational to your early mindset. What are one or two-

   2. JIJustin Ishbia1:15

      Well, yes and no.

   3. HSHarry Stebbings1:15

      ... of the biggest... Well, that's interesting. Go ahead.

   4. JIJustin Ishbia1:17

      Yeah. So yes and no. So let me tell you about my, my father a little bit 'cause it plays into, I think, how I was brought up and I think how I think about investing and kind of big picture. So my grandfather came over on the boat from, um, Turkey in... when he was eight. And my grandfather wa- settled in New York, and then when he was in his middle col- early 20s, moved to Detroit. And so I'm born and raised in Detroit. My parents are from Detroit. My dad, um, father owned two small diners on the edge of Wayne State University's campus, like literally like a diner for college kids at burgers for lunch or whatever maybe. Um, unfortunately, my father's father, my grandfather, I never met, passed away when I was 16 years old. I think my dad's framework of business and mindset was really framed by watching his dad work his tail off but also pass away too young. And I think it's something that drove him and also, I think, framed how he wanted to be a father, also on the business side of it. And so my dad, if you, if you asked me when I was 18 years old, "Tell me what your dad does?" The mortgage industry would be the last thing probably I say. He was a lawyer first and foremost. He's an entrepreneur. He started a restaurant chain. He started a potato chip company. He started an alarm company and a mortgage company, which ended up being obviously a me included sides business. But when I was in high school, there was probably 30 employees in that mortgage company. So I was eight years old when he founded the mortgage company and he founded it because one of his best friends was a mortgage broker and needed a partner. And they were officially partners and then his best friend ended up having a, a family issue and moved away and he was left with the business, so it was relatively small. And so... But my dad's framework for that business was... I think it was very simple. He never had an office in that building. He's always worked at his law firm. He advances himself as a lawyer. You know, he never spent a lot of time in that business, but it was more about, I think, hiring the right people and treating them right. And it was also, I think... It wasn't like he never took venture capital money. It was just his own money, built brick by brick and, um, I think he really thought about in a way of, "I'm going to do something for the long term." He was not trying to build a huge company. He was trying to basically service some customers and make a little money. And I think if you talk to him still to this day, the first 20 years of that business, he would call it his side hustle. Like he's a lawyer and it was a way to feed business to his law firm. At least that's how I really think about it, but, you know, I've learned a ton from him, but those early days of that mortgage company, it was more of a, I would say, a ancillary part of his work life than it was, I would say, his, his main business. And then i- in 2009, that changed a whole bunch and I can... Happy to dive into that part of it, but that was... I was already, you know, 32 at that point in time, uh, when it, when it changed in a material way. But it was a relatively small business that, you know, in 2009... I used to use... I use an analogy. Have you seen the movie Forrest Gump and-

   5. HSHarry Stebbings3:49

      Yeah, I love that.

   6. JIJustin Ishbia3:50

      ... that part of the movie where, um, (laughs) I forgot the guy's name, the, the ca- the captain? They go out into the ocean during the hurricane and, you know, they come back and all the ships were destroyed and they're the one ship that's still available and they, they would... That was my dad in the subprime market. And if we asked him why in 2005, 2010, they never did a subprime loan and he said, "I didn't understand it." That was it. "I don't understand why we're loaning somebody X dollars with no income statements, no information on them." He goes, "I don't understand it." So his business was relatively small in that moment in time but when the whole world crashed, because every subprime loan got destroyed, he was the last one left 'cause he had no buybacks. And so in 2009, the business kind of blew up. Before that, there was, you know, 30, 40 employees. I think before 2009, it was maybe the, you know, 10th or 20th largest mortgage player in the state of Michigan. And after 2009, it went to a national player because so many players dropped out. I think that was foresight in judgment and also, I think it's a lesson in business. Don't do things you don't understand if everyone's doing it. It doesn't make a difference. You do what you understand and if you understand it well, I think you can execute on it. And so my dad never understood subprime mortgages, never did it. He only did FHA government-backed loans and when the world turned, he was kind of the last one standing. So the business kind of took off then. My brother was running it and so... But, um, watching my dad be an entrepreneur, I would say, between the restaurant... I remember being, you know, 12 years old, you know, on Saturday night entertainment, my dad would take us to his little restaurant. And before we would, um, go in for like, you know, a, a Saturday night, 9:30, like, you know, chocolate sundae or something, we would sit in the parking lot and watch through the window to see if the front desk person was still getting cash. It was a cash business back then. And so he's taught me like, you own a business, you trust but verify, and he was watching people through the window from about, you know, 40 yards away and saying, "Are we doing what they're saying we're gonna do? Are they, are they pocketing cash?" So if someone paid for their coffee for $2, they put one in their pocket and one in the register. And so I was watching that at age 12 going, "Oh, okay. That's how you think about managing a business. You trust, but you verify." And the verify stuff is a really important part of it.

   7. HSHarry Stebbings5:51

      (laughs) So I write notes on my hand. It helps me remember.

   8. JIJustin Ishbia5:54

      (laughs) Yeah.

   9. HSHarry Stebbings5:54

      When you get to my age, Justin, my memory is not what it used to be and the reason this show is a success is 'cause you just totally

3. 6:00 – 9:20

   Balancing Work & Personal Life

   1. HSHarry Stebbings6:00

      go off schedule. You said about, you know, grandfather dying maybe too early. Ironically, I, given my youth, I think about this a lot and I respectfully look at you, someone who's achieved immense success, respectfully has-... all the money that one needs. How do you think about that and, bluntly, the concept of dying too early and missing what, what could be time with family, what could be time with your wife? How do you reflect on that?

   2. JIJustin Ishbia6:27

      Yeah, yeah. I think it's everything has a balance. Like the last thing I want to do is die too early. That's for the first thing. And so like, to me, you have to invest in your health and you have to invest in like a balance. Which is kind of incongruous what people tell you in, like, the world of what we do. Like, work non, non, all hours of the day, like hustle through everything. I think without your health, you have nothing. You know, like you have to balance. So like to me, it's like I have a primary care doctor. I do my physical, reg- regular physicals twice a year, kind of proactive steps on testing. You know, you're trying to do all the right things, but there's, there's luck and there's genics, right? And there's, and there's some things you can do like I can't tell you if I go out on the street today if I'd bust. So you have to live your life to the fullest. Um, but to me, you know, you know, my grandfather died of a heart attack at 56, so I'm very aware of heart issues. And so like I'm proactive on heart stuff. My dad is as well, and my brothers as well. And so, you know, you have that lineage and try and be mindful. But one way I think about is my job is to be here for my kids until they're, you know, 30, 40, 50, 60 years old and beyond. And so, um, how do you balance that with building an organization? That's what I think you have to do. I can't be... And by the way, there's time for everything. I didn't get married till I was 40, you know, largely because it took a long time for a girl to like me. But, you know, the, for... But those first 25 years or so of my life, I was heads down. I was working my tail off and then the time for balance and time for, for hustle. But I think that the mindset of you only work isn't right and I think the mindset you only play isn't right either. I think you have to know when to turn on and off and it ebbs and flows and I personally like to mix a little bit of both. Unfortunately, a lot of people I work with who are long-term friends, people I trust, who work in organizations, you have a mixed business and pleasure, which I think is an important part of at least for our firm's success.

   3. HSHarry Stebbings8:05

      How old were you when you had your first child, Justin?

   4. JIJustin Ishbia8:08

      41. 41. So I got married when I was just turned 40. My wife's eight years younger than me. So, uh, I had the chance to like ... There was ... So I started Shore Capital when I was 31. And I do believe one of our competitive advantages was, you know, early on, my partners were like 28, 27, and 29, and one of them was married and other three of us were not married. And we were routinely in the office till 7, 8, 9, 10 o'clock at night. It was normal course. It was the behavior of the organization. And I think as we've grown and matured to 150 people, and I think things change. But I think, look, it's important for me to be there for my kids, coaching their games, drop going to school, ... conferences. At 34, I wasn't doing that because I didn't have kids. So there is an advantage of, um, you know, I'm sure there's probably disadvantages as well. You know, when I'm now, I'm coaching their four-year-old baseball league, I'm the older dad. Most of their dads are 35 and I'm 45, right? So there's a, there's trade-offs, of course. Um, but I know, I view that everything will have some balance and trade-off and if there's a right way to do it, someone would write a book and everyone would follow it. There's no right way, you gotta figure out what's right for you and, and for your family.

   5. HSHarry Stebbings9:10

      And you did buy the baseball league that they play in, so at least that helps. That's- (laughs)

   6. JIJustin Ishbia9:14

      It does help. It does help. It does help.

   7. HSHarry Stebbings9:17

      Um, uh, uh, we're gonna get to parenting later

4. 9:20 – 11:32

   Managing Investor Psychology

   1. HSHarry Stebbings9:20

      'cause I do wanna discuss it. But you also mentioned, you know, um, your father in the mortgage business really being like Forrest Gump and The Captain. I can't remember his sodding name, but being the one left behind. And there's a little bit there that's persistence and just being the one that's bluntly persistent.

   2. JIJustin Ishbia9:33

      Yep.

   3. HSHarry Stebbings9:34

      But a little bit of luck there too. You've said before, P is a hustle game. How do you think about the balance between skill and hard work and luck in your journey and success?

   4. JIJustin Ishbia9:46

      So I, I call my dad a lot. My dad so- so told me, "The harder you work, the luckier you get." And so like how do you parse out hard work and luck? And so in a vacuum, any moment we appear lucky, but I would argue it may be the pro- product of hard work or vice versa. Let me give you an example. The very first platform we did in 2009, my partner Mike Cooper sourced our CEO, his name was Chris York. Chris York is a, I would say, a luminary in the home infusion industry, a very small niche of the world. But he made a phone call to Chris York, Chris York answered the phone call and... So, I'm gonna say that was lucky. He got ahold of Chris York, who was an industry luminary, who was leaving his job, and that happened to be that week, he caught him at the right moment. Yeah, may- that, that, and that phone call was luck. However, Mike, I know, made hundreds of phone calls in that industry to learn who that person was, but to make, meet other people and did 10,000 steps before then. And so when that moment came in time, he's prepared, he knew the industry, that guy was interested. And that phone call was lucky, but I would say that was a byproduct of hard work. Many, many steps and the outcome of one moment was lucky, but the whole entire process was hard work. And so I really believe that more often than not, you do the process right, you follow all the way, you won't always end up with the luck or the opportunity at the end, but I'm confident about this, if you don't do it right, the odds of that success are dramatically lower. I'm a big person on playing the odds. How do I increase the odds of success? And you think about process and following through, the process is the hard work. And then that's how I really think about it. So Mike did an amazing job sourcing Chris, Chris became our first CEO. Our first deal went from, you know, we... It was a $6 million deal, sold for $50 million plus. Three years later, allows you to raise your first fund. You know, that sort of stuff is luck and hard work and it's hard to separate in certain moments. Um, but I think that the best investors

5. 11:32 – 15:30

   Role of Skill, Hard Work & Luck in Success

   1. JIJustin Ishbia11:32

      have a little bit of both.

   2. HSHarry Stebbings11:32

      I, I totally agree with you that the best investors have both. You mentioned that being the first deal there, um, and it being a very successful first deal. And bluntly, you had a blistering start of success. My question to you, and this really continued, to be honest, um, but it often doesn't. Um, my question to you is h- and you're all thinking, "Why on earth are we getting so off schedule?" But I'm too interested. How do you think about managing investor psychology? If it's amazingly successful, it can be dangerous. And if it's in the dumps, it can be dangerous. What have been your biggest lessons on how to manage investor psychology through the ups and downs?

   3. JIJustin Ishbia12:05

      Yeah, so like, first of all, I view our role at Shore Capital, like we're investors, but I think we're also kind of company builders. We are operators and so I think we kind of help make some of our own success.... but there's gonna be good and bad luck. But I think you try and stack the deck in your favor and have many things that can go right, that, you know, if all of them go right, you hit a home run. If a few of them go right, you do pretty well. And if they all go wrong, you know, you miss out. And that, to me, starts with the industry, you know? I think a lot of people who know thing about investing, you know, I think Warren Buffett is one of my favorite investors and I trust a lot of things he says, and the quote he always says is, always rings in my mind, the quote goes something like this, about, something like this. It says, "When a great management team meets a bad industry, the industry maintains reputation." That always sticks with me. You know, you have to understand the industry. If you go into the, you know, publishing business right now, I don't care if you're Jack Welch in his prime, you'll probably not end up having much of success. So you have to pick out the right, to pick your spot. I think that is less luck and that is industry expertise, focus, discipline, and process. From there, a lot of things follow. But I think you're only as good as your last investment, and you're only as good as what you did yesterday. And so to me, it's all about process and, you know, investor psychology. You know what? There's gonna be good days and bad days. Literally, you know, if you come home from work and everything went well, you aren't trying hard enough or a range of goals aren't confirmed, and I tell our guys if all the things set out to do... We, we were green, yellow, red firm. Green, you got it, yellow, part of the way, red, dead. And, and if all your goals are green, you didn't try hard enough. You didn't stretch yourself far enough. And so it, in my view, um, I want my investors, my partners, executives to make mistakes, but no mistakes that kill you. And so you have to have a balance. And so unlike the things that haven't gone as well, well we always write an investor meeting memo and we have a whole process around it. Tell our guys, we've yet to have an outcome below three times our money. So that's not occurred yet, but that day's gonna come. And that day comes, I told my guys, "I'm judging that team that put together on one fact in that moment. Did we identify the risk before we started?" And we may have thought it was only a small risk, but I'm gonna be really bummed if we made an investment and it didn't go well and we didn't see the risk even coming. If we saw the risk, we thought the reward was better, and we misjudged the percentage in the weighting? Okay. That's a, that's a misjudgment by our team and we missed that. But I'll be pretty upset with myself and the team if we were blindsided by a risk that c- we could never have solved. And so to me that's a lot about, you know, so how do you manage psychology of that? Hey, you know what? We made a mistake. We saw the risk, we missed it, we didn't get it all the way right, but we didn't die from it. I think that's where we've been so far as an organization. But a day will come and there's some little lessons in there on like I think things we won't do anymore, you know, on, on the, on the, you know, not-so-good investing. I'd say our worst deal in the firm's history, um, looking back on it, I was seduced by price. If I would ever do a deal again, I will never do it just because of price. There's, I knew we were getting a sweetheart deal, an opportunity and a deal paying probably, I don't know, half to two thirds what the market would yield. You know what? There's a reason why. And I, I thought that we were smarter than the next guy. We got a deal for a really good price. But I think people all the time sometimes, look, I wanna pay... One thing you can never change about a deal is the price you pay for it. But sometimes just the price in itself, the other factors aren't there, I'm very, very re- resent, resent to invest in that dynamic.

   4. HSHarry Stebbings15:25

      (laughs) My hand is gonna look ridiculous by the end of this interview. Um, I have

6. 15:30 – 18:25

   Managing Competition & Capital Supply

   1. HSHarry Stebbings15:30

      so many things to ask. You said that like, "Hey, we've never had a deal that's, you know, less than 3X." What an amazing track. In venture one would say, "Are we taking enough risk?" We should have more lo- losses bluntly, or we should have that as part of the portfolio. Is that mindset the same for you in, in your business?

   2. JIJustin Ishbia15:49

      We're buyouts, right? So we're micro-cap. This is for those who don't know our firm very well. We focus on investing with businesses one million to 10 million of EBITDA at investment. We make somewhere between six and 10 platform investments in a fund. If one goes bad, that's not good at all, right? So to me, we can't have zeros, unlike venture where you could end up be fortunate and invest in a Facebook and that can be, you know, a thousand to one, whatever it'd be. In the private equity industry and micro-cap sector, a really, really good outcome is, you know, four or five times your money. You can't afford a zero. That makes your, means your, your average becomes two and a half or so or, or whatever it may, may be. So to me it's not acceptable to have a zero. And, you know, we try and mitigate all those things, and unlike in venture where you're not in control, in our industry, only do control investing, right? And so, you know, my buyouts, if it isn't going well, it's on us to make changes. And that is whether it's management, whether it's doing another acquisition. Um, one of the thing- things that's been a little bit of not a secret to our success but I think it's increased our margin for error is that when like many private equity firms, we allocate a certain amount to a thesis. Let's just say we're gonna allocate $40 million to these just to invest in the urgent care industry. More often than not, before we make the investment, um, we have a board in place. So I'll have my board in place before I even buy the company. And so they're helping me think through the challenges of buying a business before you invest. That part isn't that unique, I don't believe. Um, the next step I think is unique is that most other private equity firms, in my experiences, they commit $40 million to a thesis. They'll deploy $25 to $30 million or $35 million for the platform and reserve five to $10 million for the add-on. We're the inverse. Our platforms are really more, we'll put 10 to 40 or 50% of our capital into the platform and reserve the rest for add-ons. And why that's so important to reduce your loss ratio is I can get the first investment wrong, I put 20... It can't be so wrong that it kills you, but if I try and back Harry and Harry's the wrong urgent care operator and we've deployed 22% of our capital for that thesis with Harry, as long as Harry isn't fraudulent and isn't horrible, I can do a second investment in that exact same sector in another town, and I can go partner with Peter. And I can say, "Peter, now you're the platform. Peter, you're, no, Harry, you're the add-on," and my margin fares, I have two or three shots on goal. If I miss all three of them, I'm gonna have a bad outcome. But we've yet to have that occur. And so the opportunity to almost reset by having...... dollars go in later that is equal to the first investment. I think it's created a really competitive advantage, and that's a function of the size of the market we play in.

   3. HSHarry Stebbings18:23

      How efficient is the allocation

7. 18:25 – 23:36

   Importance of Scale & Efficiency

   1. HSHarry Stebbings18:25

      of add-ons? So like in, in venture, we obviously have reserves. I don't believe in reserves at an early stage because I feel like your early winners are not often sustainable value generators and they're just traction winners. How efficiently can you allocate those add-ons and is it really telling who the winners are early?

   2. JIJustin Ishbia18:45

      So it's not super efficient at the investment. It gets super efficient at 1.4. At 1.4, I know if I... So I'm, so let's say we have a, we have a $500 million fund. I'm gonna put, you know, 12 portfolio companies in there, roughly $40 million each. I can get to, when I make three investments all at the same time, in the same quarter or whatever it may be, I'll get 40 to each of them. I can get probably, you know, 18 months in and go, this is a thesis we need to double down on. I'm gonna change my allocation from 40 to 80. And the one that we thought was pretty good, maybe 42, we're just doing 25. And so we can readjust our allocation while we have some more knowledge of the industry. You know, when... I've never bought a business where I knew everything right now. It's just, you make mistakes, and so once you get in the game with the people... The industry's most important part for me always. When we get the right people with the right industry with a system and a process we believe that we've executed as a firm for a long time, usually it goes pretty well.

   3. HSHarry Stebbings19:37

      It's funny, you, you s- spoke about your kind of centrality around industry there. I can't remember if it's Buffett or Charlie Munger, but one of them said the secret to success in business is weak competition, and it's something that I think too often. I, you might be able to tell me who it is, but alas, my memory is not as good as it should be.

   4. JIJustin Ishbia19:52

      I don't know which one it was yet.

   5. HSHarry Stebbings19:53

      Uh, but I think of that often. How do you think about competition when analyzing industries?

   6. JIJustin Ishbia19:58

      Yeah, I mean, so we like to think about where can the small player win? And that's how we think about it. Like, and we like to invest in industries where being inherently local is a true competitive advantage. And so e- people want to feel like you're a cottage or boutique or a small feel where you have a relationship with the customer. We usually like to invest in those sectors. Where short capital is not really good is if you have to be multi-continental. We're not good at that. You know, so there's some like drug pharma companies that require testing to be done in India and in Western Europe and the US and South America. Not for us. That's not something that w- we think we have expertise in, nor should we with our capital size and allocation. But where we have some kind of advantages is where something is on the smaller side, where it'd be the local player wins. And we also like when we can get to places before larger funds can get there. So an example, probably a decade ago, um, I heard over and over again from a lot of larger funds, they love the veterinary industry, but every time a platform that was of scale came to market, it was, back then it was 12 times EBITDA, it was so expensive. That to me was like music to my ears. Okay, let's go one step back in the food chain. Our competitive advantage is we can go between niche where very few are playing, buy it with three of EBITDA and grow the business. And so the thing about competitors is you have to look at the local competition, the regional, national, and there are some industries that are really val- and, and especially in healthcare where I'd say about three quarters of our investing has been, it's a state by state game. Medicaid in Texas may be very different to Medicaid in Utah. You have to know the nuances and so what may be a really good physical therapy company opportunity in Utah is not so good in Texas and vice versa. So there's like state nuances and also even local overlay with like local credits and sort of incentives. So I think you have to really get in the weeds and, and know your local competition but, in healthcare, I always say it's inherently a local business and we want to become the dominant player locally and we'll, we'll get in multiple markets and we'll land and expand and... But when we get into certain markets, it's about who's in town and our... We're not the smartest guys in the room but like you ask about competition so like this is my homework and others, and this is like a secret sauce, but like, but copy it. I think I wish others would do something that's the right way to invest in. So if we're gonna invest in ophthalmology platform, when we bought our first ophthalmology business, which is Atlanta, we bought it when it was roughly 10 of revenue, roughly, you know, million and a half, $2 million in EBITDA. The homework on that was as follows. Calling between five and 10 other ophthalmologists in Atlanta and asking the following question. "If your mother was gonna have a cataract surgery and she could not come to you, who in town would she go to? Who'd you send her to?" And we ask that question all the time, almost every business we acquire. And you have to recognize there's sometimes people in town that like, don't like each other. So it's a balance of like recognizing the Yankees and the Red Sox hate each other so they never say, "Oh, that guy's good." But you want to hear that the group you're buying and partnering with is on the list from the majority of the group. And if everyone's saying, you know, "Dr. Harry is really good, you should go there," you ask, "Who are the four or five guys you, girls you refer your mom to?" That to me is about competition and the industry respect. And if you're gonna invest behind a business, especially in a roll up, you want the industry's respect and there's no higher form of respect than allowing your mother or your child to go to that person for the services they're being offered. And so we talk about industry expertise and competition. To me, it's all about local reputation and be able to identify a low winner in that town. Every industry, every town has the good guys and bad guys. I can't tell you I know them from afar, but I think over a period of time with process, we can zero in on a town of knowing who is the, you know, the kind of the Coke and Pepsi and partner with the right ones.

   7. HSHarry Stebbings23:35

      Over the last few years

8. 23:36 – 29:10

   Knowing When to Exit an Industry

   1. HSHarry Stebbings23:36

      though, it seems that that and, uh, healthcare practices, w- whether it's laser eye surgery, which we were chatting about earlier, but have been like the darling of a lot of PE specialists. How do you think about when something becomes obvious, the price increases and the capital supply increases, and when's the time to depart a previously attractive space because of an increase in capital supply?

   2. JIJustin Ishbia23:58

      So I think two things occur. In an industry, things go from, in my opinion, novos, which is when you open or greenfield a new location, to acquisition. And there's opportunity for both and so the industry may start out at, like the urgent care industry. We bought certain in that sector 12 years ago. All we would do was de novos because there's only 8,000 in the US. Today there's something like 12,000. It was about green space. It was going to locations where no one's been.... and after the industry matured a little bit, lots of relatively smaller ones out there you, you wanna, you wanna acquire. And so I think there's a, um, there's like a path that an industry goes through and it goes from de novo to acquisition and to industry optimization. And for us, we love investing in spaces where scale creates value by synergies, lowering of cost, and increase, increased price. And so three areas we love a lot we call healthcare lite, which is veterinary, med spa, and orthodontics, because there's no third party reimbursements, no Medicare, there's no Medicaid, there's no, you know, Blue Cross Blue Shield. You can raise price there if you're the best person in town. Like, this isn't like rocket science, but, um, if you have a waitlist to get in to see the provider and you have a high MPS score, you probably can raise the price. You won't price gouge or be obnoxious, but with data of having hundreds of locations, you can say, you know, "A spay in Knoxville, Tennessee costs $400 and in Nashville it costs $500." People line out the door of Knoxville, Tennessee for 440. It's not gonna change the behavior if your MPS score is high and you have a high waitlist. So for me, yes, when do you get out? It's when you feel like that the acquisition prices are unreasonable, you do not believe raising prices, um, in a outside the normal course makes sense, and you no longer can increase the margin of the business through scale or reducing the cost to your vendors. The most valuable businesses where you can consistently increase your pre-corporate margins by lowering the cost. And so like in orthodontics, the bigger you get, the lower you can buy Invisalign from, the cl- lower the cost. And so the bigger you get, the more valuable assets. So if Harry wants to sell his practice to us, if you call it paying a dollar a unit for the hardware or paying 80 cents, day one, you're a more valuable part of our family. And if we're also buying from McKesson or Schein your gloves and your, you know, your, your all sorts of other utensils, whatever it may be, your tools, they cost a dollar, cost 70 cents with us. I love investing in sectors where w- we can make acquisitions where day one who we acquire is more valuable. We call that at Shore Capital, we call it light switch EBITDA. It means by contract, I have something that when you become part of our family, you make more money just because you're with us, period. Not 'cause we operationally changed it, which we'll try and do, not 'cause we made something better, but just by the very fact you're part of our family, the cost from the vendor goes down, which increases your margin. And that's something I spend a lot of time thinking about. An industry where there's more opportunity there, there's more of that. And the last part of that is also ancillaries. So you can be investing in a sector where a TPA sector, where you're holding, you know, millions of dollars or hundreds of millions of dollars as a custodian, when you're a relatively small player, you get almost no fees from, you know, a Wells Fargo or a large bank. The bigger you get, you can start having some fees and credits and things become more valuable, develop an ancillary revenue stream. When you can develop an ancillary revenue stream that the small guy doesn't have that you have because of scale, I'm not a seller in those industries. I'm a buyer. And so I'm always thinking of ways where scale can give me an opportunity to be successful. And when you acquire, we are a buy and build firm, gives you an opportunity to, by adding more to the team, it increases the value of the whole entire platform. Just know, what they say in venture community is network effect. I think it's a different way of saying it, but there is, by being part of a platform, you become more valuable. And I think that's what I focus on. I mean, when we sell, I don't think that makes sense any longer or sometimes your management team has kind of run its course. And that's one of the things I think is hardest to part and sell, but it's the right call. So let's say Harry and me partner together and we're gonna do a veterinary roll up in, you take a chance on us and you're a first time CEO. About 75% or 80% of our CEOs are first time CEOs. And I say, "Harry, I'm gonna back you and we're gonna start over at 2 EBITDA and if we get to 15 or 20 of EBITDA in four or five years, it's a home run. Then what we've su- succeeded." Let's say we're at 19 EBITDA. And I still see runaway ahead of us. But I see Harry, you kind of tapped out. I think it's the wrong call for an organization and for our firm and for our investments to say, "Harry, I'm letting you go and bringing in, you know, Peter tomorrow to be the new CEO." In that fact, better we're a seller 'cause we've accomplished our goals. We said what we were going to do. Even though I think there's runaway ahead of the opportunity, it's the wrong thing to do to the person and to the organization to let Harry go if we've accomplished our goals and there's just a natural J-curve. It's time for a new round of investment. It's time for a top grading of the team, but I'm not gonna let go of the guys who got me there if they've done the job they're supposed to do. Supposed to go at 20 and you're at seven and you, you're, you're at your limits, then it's different. Then I would say it's time to change. But we've accomplished our goals, we said this at the very beginning, I'm not gonna kind of take your knees off. Yeah.

   3. HSHarry Stebbings29:08

      Y- you said when you were You

9. 29:10 – 33:08

   Benefits of Scale & Economies of Scale

   1. HSHarry Stebbings29:10

      say it a lot and then I'm like, keep on trying to remember the different segments so that I can-

   2. JIJustin Ishbia29:15

      I'm sorry.

   3. HSHarry Stebbings29:16

      No, no, it's fantastic. But I just want to go back. You said there about kind of, and you gave the Invisalign buying solution where, you know, you buy at scale and then it obviously cost of units comes down and then you, yeah, have, you know, increased or better pricing because of that. Can you talk to me about a time when you made an investment or an acquisition and you had a belief that turned out to be wrong on scale in some way? What was that belief and why was it not what you thought it was?

   4. JIJustin Ishbia29:41

      We've made investment in another sector where we believed that scale mattered. This is, this is another part of the dental industry actually. We believed scale mattered, but the state by state regulation was so overbearing that the complexity of the new state was so challenging that it outweighed the value of scale. It was almost like you're running two separate businesses across state lines. And so the cost of goods sold and the vendor costs, that part was right, but the payment structure and the rules in that state were so different. So this is the wrong example, but a nurse practitioner works in Illinois but does not work in Indiana and, but ind- but in Wisconsin, the nurse practitioner works, but is only able to do A, B, and C. So these are three states with the exact same industry. They get paid different.... you have different rules, different training requirements. It's like you're running three businesses. So the efficiencies are sucked up with the administrative burden to run three businesses, um, the right way. And so I think that's where I would say I made a mistake. So now we're, we're so much more focused now. In the early days on making sure that if we're trying to scale, and efficiencies is a big part of it, it's ensuring that as you grow to multiple geographies and states that the rules don't change in a meaningful way.

   5. HSHarry Stebbings30:58

      To attain scale and the economies of scale, the benefits of scale, do you have to be high volume?

   6. JIJustin Ishbia31:05

      I mean, you can buy a bigger business and

   7. NANarrator31:06

      (smacks lips)

   8. JIJustin Ishbia31:07

      So, I mean, when we're selling, I think less so. Um, I think though the multiple arbitrage and the arbitrage for us is that we are oftentimes partnering and we're, we're three quarters H on healthcare. The, the, the bigger value is partnering with amazing people who are really good at one thing, fixing your eye from a cataract or whatever it may be. But they focus less on the business side of the house and they let a lot of the low hanging fruit go because they're doing quite well as it is. And so we focus on this concept of light switch EBITDA where contractually we're better and where there's relatively low hanging fruit where we know we have executed before and we can bring new things to the table. So for example, if an ophthalmologist has a line out the door, you know, what are things we can do to help an ophthalmologist? Well, we can hopefully bring nurse practitioners or PAs in to help fully do the things that are, um, more administrative or not what a doctor should be doing. So we use the terminology at SureCap all the time, top of your license. We believe people love working at the top of their license doing things only they can do. Cataract surgeon is the only one who can cut your eye, but the follow-up visit for a standard procedure, a nurse practitioner trained the right way with the appropriate process can ask all the right questions and flag if there's a problem. But, you know, 80% of people who come back, there's no problem. So now I've taken away the follow-up visits from the doctor unless the nurse practitioner says there's a problem and he can go do more of the things that he or she loves to do. People love doing things that are the most complex of their ability. And so we want to put people in those positions. We believe people excel at things they love to do and they love doing things that are complex that only they can do. And so that's when we think about a whole bunch, how do I put you in that position and... So then I want that nurse to do things only that she or he can do. I want that medical assistant to do things only that they can do or for that desk person to do things that only they can do. So everyone is pushing up, doing things at the top of their license. I think that's where a company thrives, where people are doing things that are always unique to them and always professionally challenging and rewarding.

   9. HSHarry Stebbings33:07

      How welcoming

10. 33:08 – 36:31

    Imparting Advice & Wisdom to Operators

    1. HSHarry Stebbings33:08

       do you find these operators of your advice, wisdom, imparting? Often people are quite ingrained in the way that they do something. Are they that welcoming always of, hey, we're gonna improve how you run your business. We're gonna in- you know, increase productivity with X, Y, and Z? How do they respond?

    2. JIJustin Ishbia33:25

       So we want partner with them if they are, if they are open to the things we want to do. We try to be... One of the benefits of us starting with a board of industry experts, we're able to start on the front end of knowing what good looks like in that industry. We're able to say, you know, this is what the industry metrics are. It's, in the urgent care industry, it's three visits per hour. In the, you know, orthodontics sector, it's X visits per day. So you're able to know what industry norms are and if the person we're partnering with is not as industry norms, we share that before we start. And the answer isn't work harder, it's why is your outcomes different than industry norms? And maybe something structural we don't understand, maybe it's a, a regulation that we don't understand, but we want those who want to do things in a certain way. I always tell people how we think of SureCapital is if you can't measure it, you can't manage it. And we, people say private equity can be, you know, tough and like, you know, fire people or that sort of stuff. No, that's not how we think about it. I view private equity in the following way. We're a huge flashlight. You walk into a room that may be dark. I'm shining the light everywhere, in the corners and the crevices, and what I found is those who are really good at their job are like, "Shine it here. Like, look at me. No one's recognizing me, what I've been doing for the last year. I'm performing at a really high level," and they're super excited. And those who are maybe less than good at their job curl up and kind hide from that light. And we try and shine a light everywhere. And so when we eventually exit our investment, the light's on in the room and everyone can see everything, transparency in data, comparing to your peers and having industry norms. I never want anyone to do anything that is not safe. We always say good medicine is good business, but to us, we want to have people work with the potential and that can be top of your license, it can be having the right tools and the right metrics. Sometimes people just don't know. You just know if you got trained, you know, 19 years ago and all you've done was a certain way, you may not even know there's a new procedure that's available that, you know, with investment of a new tool in your office could create a differentiated value. And so I'm a big believer of shine the light. You can't measure, you can't manage. And the only time the measuring part of it is, it's not at first you have to go change, it's more of just tracking it. Just by the very tracking of number of something per week or per month or per whatever it may be, people start comparing themselves to their peers. And my experience is the best ones are competitive. They go, "Oh, I want... Wait, Harry, no, no manufacturer, no eight widgets last week or yest- yesterday and our line benefited six? Why, why they want to invest in us?" And competitive people usually want to, you know, beat the guy next to them. And I, those are the people that just thrive in our system, who are excited about growth and want to learn. And by the way, we learn a ton from them too. Those things we've learned in X industry, we go, "Wow, they're doing something pretty amazing. We should port that over here." We call that lift and shift where something is done really successfully somewhere and we think it can apply somewhere else. And that's one of the most valuable parts of our platform is recognizing analogs in other industries and porting it somewhere else that can become...... help the other industry or business get there faster. And that's in part of the platform by creating-

    3. HSHarry Stebbings36:29

       You mentioned that you like

11. 36:31 – 38:52

    Preference for First-Time CEOs

    1. HSHarry Stebbings36:31

       first-time CEOs. W- we differ in this respect. Um, (laughs) my, my, my thinking is, bluntly, there are so many mistakes that you make the first time that with the benefit of hindsight, you would never make again. It could be hiring, it could be pricing, it could be new market entry, whatever that is. So I always favor second-time founders. Why do you like (laughs) first-time CEOs? Are you not concerned that they make many mistakes that can be avoided? Why do you, why do you think like this?

    2. JIJustin Ishbia36:58

       So a couple of things. So it's probably, so when I started Short Capital, I was in your camp. So our first three or four platforms, I went out and found CEOs that were more experienced as (techno music plays) ... at Christie (techno music plays) before, was very established CEO. I felt like we had to get the experience-established person. My biggest, I'd say, paradigm shift in investing is give me that young, hungry energy that wants to run through walls, has yet to make it yet. They're gonna make mistakes, but remember, as, if in a construct, in a system, they're not alone. Now, the one thing if it's sometimes the venture community, um, you're more a minority investor, you touch base them four times a year, it's a little more hands off. I try to build a system where we have a board, seven individuals around the table who are helping that CEO, bringing a CFO. We have a lead director on the platform, bringing in a whole team around them. And that young and hungry first-time CEO, to them, they have to make it work. It is their professional career on the line and they also know if they succeed in our system, they become incredibly valuable round two. And so if you went from a four (techno music plays) people with us to 28 and accidentally made eight times your money, now you have the big boys calling. Blackstone wants to back you to go do something all over again. So we're hopefully h- helping mint future really valuable CEOs for other ecosystems who will want to come to us for that part of it. But also our first-time CEOs, they aren't 28-year-old individuals very first time on sometimes. A lot of times, they are running a large division of a large company that's doing $400 million of revenue, but they've never had the CEO role. They've been present of Division A, and now they're going to come down market to a $75 million, $50 million revenue business and be CEO, which now you have to change. I mean, my view, a CEO has three jobs; set the strategy and vision for the firm, recruit and retain the best talent, hold the talent accountable. So

12. 38:52 – 40:31

    Recruiting & Retaining Talent

    1. JIJustin Ishbia38:52

       bucket two and bucket three are the division the president's doing. You know, if you're Harry's the division president of a billion-dollar company, he's running a $200 million P&L, you are probably recruiting and retaining the right way. You are probably holding your talent accountable in your division if you're successful in that division. What you probably have had to do is set the vision. And by the way, I have a board who will help you set that vision and we will line up the vision it's going to look like and what success looks like and we're buying relatively smaller businesses. And so when it's four EBITDA or nine EBITDA, at that stage, me going to get that multi-billion dollar company CEO first time, w- well, three or four times back to come back to a $4 million EBITDA business, I don't want to. Well, what's wrong? Why is he used to running a business doing 100 EBITDA, want to come back to four? With one caveat. Then I think 11 or 12 times where we've had people on our board who's run that large multi-billion dollar business, was a board member at company A, gets to know us pretty well for year, two years, three years, the company grows and scales, and that person then has resigned, retired, or changed where they are professionally, the other job, and we start doing a CEO search and that person goes, "I'm interested. I'd like to step on this board." There's a, just happened with us applied two months ago, individual who was number three guy at a business that's probably 300 or 400 EBITDA, he's becoming a first time CEO for us of business doing 4 million EBITDA. And so he would never have done that but for him knowing the management team and the board and the structure, he goes, "I'm stepping in for the last three years 'cause I know what, I know what I got," kind of, as opposed to you coming in from the outside, you have no experience. So that board member to CEO role for us has happened a whole bunch as well.

    2. HSHarry Stebbings40:29

       What are the biggest mistakes

13. 40:31 – 41:38

    Mistakes First-Time CEOs Make

    1. HSHarry Stebbings40:31

       that those first-time CEOs face most commonly? What do they most come to you, the board, with and go, "I'm struggling. I'm str-" What does that look like?

    2. JIJustin Ishbia40:39

       I think they, they try and do too much themselves. I think it's, they think they have to be the CEO and they think they have to kind of do everything. I think they're hesitant to dele- delegate too much. The best ones right away know, "My first job is to go hire the best star people around me," and they're very aware of their own strengths and their weaknesses. They, they'll, I usually ask the CEOs in interview, one of my common interview questions is, "You got to pick one. Are you a sales-focused CEO or an ops-focused CEO? Which one?" And so they say both, but I'm like, "Well, you got to pick one." The best CEOs, they can be either one, but they got to know which one they are, and they got to then say, "I'm going to over-index resources on what I'm not." And so I think our best CEOs do that. And the ones that aren't, aren't as strong, they probably have lower self-awareness of what they're, they will surround people, well, their strengths. But our best CEOs are able to say, "I'm one of those two," or, "I lean more this direction and I have someone in my network I used to work with who I have high confidence in who is my, the yin to my yang, and I'm gonna go get her or him to join my team." And I think our

14. 41:38 – 44:08

    Consistently Top-Grading Talent

    1. JIJustin Ishbia41:38

       best CEOs, they're consistently top grade talent. I have a whole process around how we get better talent in the organization and the best ones are always itching to top grade and add more to the team as we grow. We have a whole process within Short Capital, we call it our nine box analysis. Have you heard of a nine box before or no?

    2. HSHarry Stebbings41:57

       No.

    3. JIJustin Ishbia41:58

       So we do this nine box analysis, we do it twice a year. But the Y axis is we call potential and the X axis is performance. And it's low, medium, high, right? So the top right box, the ninth box in the upper right corner is high performance, high potential. We sit down with every CEO and we evaluate all of their reports. We call the CEO the word, letter N, like Nancy. N is your CEO, the board is N+1.... the CEO's reports or their N minus one, so like a CFO is a N minus one. N minus two is a controller who's, like, reports to the CFO, who reports to the CEO. And so we sit down and we map out the whole entire C-suite, the N and the N minus ones, with the CEO. Usually the partner at the firm will do it on his own, and then we share the whole with our firm, and then the CEO will do it per, on his or her own. Then they meet. And they say, "Okay. Where's my marketing person? Where's my finance person? Where's my sales person? Where's my compliance person on this grid?" And we look at where we are in our investment. If we're 100 million in revenue right now and the goal is 300 million in revenue in four years, but my CFO is at his potential... He's performing high, but he's at his potential, we want to triple the size of the business. What should we do about it? Those are the questions I think that our best CEOs are asking. They go, "Hmm. Well, if he's at his potential or at her potential, I need to probably top grade here." And you have to know, always try and think about the kind of culture and the ecosystem of what you're doing with, but I think the best CEOs are always trying to get value. And so a big sports fan, like in sports, quarterback has the most valuable position in football. The left tackle is probably the next most valuable position in, in football, American football, that is, to be clear. And the punter is probably less valuable. But my best CEOs are always kind of, I would say, gyrating to find the most valuable punter for the dollar. And they're always hustling to figure out how to top grade talent just a little bit everywhere, and in, in an appropriate way. And I think those who really get the most talent around them and that nine box gets to its most upper right portion, that's when we see things take off in our businesses.

    4. HSHarry Stebbings43:57

       Justin, are you a sales or you're an ops focus CEO?

    5. JIJustin Ishbia44:00

       Sales.

    6. HSHarry Stebbings44:01

       Sales.

    7. JIJustin Ishbia44:01

       Um, uh, I like to be able to hopefully share what we're trying to do and get people to buy into

15. 44:08 – 44:32

    Sales vs. Ops Focus as a CEO

    1. JIJustin Ishbia44:08

       it. I think my job is to sell the vision and sell the best people to come work with us. Um, I have a COO at Shore Capital who's a long time, uh, best friends, he's a star and he's amazing at ops. I think my job is to make sure we do all of it well. But if I had to pick, um, I'm sales. Um, the ops part of it, you need both in a business to do well. You need to overindex on the part that you are not an outsider.

    2. HSHarry Stebbings44:30

       You said that one of the core

16. 44:32 – 47:24

    Curiosity & Mental Firepower

    1. HSHarry Stebbings44:32

       roles of a CEO also is building the best team around you. I love something you said before, which is it takes a smart person 18 months to learn 90% of a field. It takes them a further five years to learn the final 10%. Why do some people not learn the 90% in the first 18 months?

    2. JIJustin Ishbia44:49

       So I think that's, there's your question a couple ways. First of all, we find the most important attribute is curiosity. People are just naturally curious. Harry, I'm guessing, knowing you just a little bit, you read everything you can find. You listen to podcasts. You are, you talk to somebody and they ask a question, you pull a string. You're just naturally curious. I find that to be a really important attribute when I'm doing off-sheet references. Curiosity meter is high on my list to figure that out. Those who are curious and, and have certain level of firepower intellectually, they, they, they always get there. But people succeed in our organizations if three things are true. Number one, they have the mental firepower at the job. If they don't, shame on me for hiring them. Number two, they have the work ethic to do the job. If they don't have the work ethic, shame on them for not having the hustle. And bucket three, we train them properly. If we don't train them properly, shame on me. But if you have mental firepower, you have the work ethic, and we train you properly, I am confident you will win in our system. And I personally believe that the best organizations create an amazing system. We can put a relatively average person into the system and have extraordinary results. An example I like to use is if you're an American football fan, the New England Patriots, you know, over the last 20 years, probably one of the most successful, um, football organizations. They had a system that was so successful that they would basically bring in relatively average players and they'd be out-performers in that industry, in that team. And they'll leave and they go somewhere else, they'd underperform again. I think you create enterprise value, you create success by building that system where you can plug and play relatively average people into the system. And then you have a better outc- better outcomes. You also can plug in superstars, like Randy Moss, for example, went into that system and even excelled even further. But then a lot of average running backs, for example, went into that system, performed there, and they got paid and they went somewhere else and then didn't perform. And so I view my job at Shore Capital as building a system where you can bring in talented people. I want to get as best as I possibly can. But if I want people to be able to do better here in the system than they can anywhere else, then for our portfolio companies... I had a board meeting yesterday. I was sharing with management, like, "Your job is not to go find five of you. I can't afford five of you founder or CEO's because that level of talent, I can't find over and over again. I can find you to build something where you can bring in relatively competent, talented people that will thrive in your environment that you've created. And they will be more successful because of what you've created." And that to me is one of the great business pillars.

    3. HSHarry Stebbings47:17

       We're literally going up the arm here. You can see this, it's turning into a sleeve. Uh, smarts or work

17. 47:24 – 48:33

    Financial Incentivization & Retention

    1. HSHarry Stebbings47:24

       ethic training, where have you most often dropped the ball?

    2. JIJustin Ishbia47:28

       I would say the work ethic. I've never interviewed somebody and they said, "Yeah, I don't work so hard." Like, that, that is, there's, there's... It's hard to get a proxy for that. And unless you have an off-sheet reference from multiple people you know personally, it's really hard to get a read on that. Because, you know, if someone calls you for an off-sheet reference, you don't know them at all, and you like the person. I think Harry's a good guy and Harry's did a pretty good job. Let's say Harry's a B for me, a B or B+ player on my team and you left the right way and it's like, call me four years later and say, "Tell me about Harry." I'm not gonna say that Harry stinks. I think Harry's pretty good. He did a good job. And I think, I, I like Harry. And how's his work ethic? Like, you know, compared to what, you know, compared to who? And so it's really hard to get that answer. You only know, I think, once they're part of your team for a period of time, or if someone on your team has worked with that person directly for at least three or four years. So that's a harder one to get. I try my best to get to it, but I think if you ask where I err the most, that's probably where I err the most, that no one thinks they don't work hard. That's just the reality of it. And so you have to be able to, I would say, know that bias and try and figure out, uh, different mechanisms till it gets underlying truths.

    3. HSHarry Stebbings48:32

       This is gonna be a

18. 48:33 – 51:43

    Work Ethic & Self-Awareness

    1. HSHarry Stebbings48:33

       little bit divisive.I don't think young people want to work that hard anymore. I think they wanna optimize for, and sorry, maybe we're gonna disagree here.

    2. JIJustin Ishbia48:41

       No.

    3. HSHarry Stebbings48:41

       I think they wanna optimize for balance. I agree with what you said earlier, which is there's a time for balance, but dude, I work 18 hours a day. I kill myself to succeed (gasps) and that's why I've been successful, (laughs) not because of smarts. But I don't find many want to go that 10% further. Do you agree and do you worry about that?

    4. JIJustin Ishbia49:02

       I, I think it's hard to generalize but I would say that the people who work hardest don't talk about it and you don't see it for 10 years. Like, it's like, almost like a butterfly. That category goes in that, that, that coupe or whatever it is, and you can't see what they're doing for a long, long time. Their head is down, they're hustling, they're doing what they do and you know what? Eventually that beautiful butterfly comes out and people can see it. And, uh, I think it's really hard to judge. I just tell people, "In your 20s you're an apprentice. Go work for somebody who is a star and you basically a sponge and learn as much as you can." It's really hard to compare who works hard because, you know what? I would say maybe young people today, I think there's an argument they may work less or want more work/life balance, but they're oftentimes a lot more efficient and have better technology tools than somebody who's in their, you know, last third of their career. So, you know, somebody who's really talented and works his tail off, is a salesperson with great relationships, but struggles to operate in the CRM and document what they do, I don't know, who's working harder? Who's working smarter? There's, there's a balance to those things. Like obviously you want someone to work harder and smarter. I don't want someone to burn out. You know? To me it's about, it comes from within, the drive of within, and I think a lot of times people have a chip on their shoulder, they have something they wanna prove or just be competitive with something. You know? My brother and I are best friends. I wanna beat his butt always. I wanna be better than him at everything I possibly do and I think he does the same thing and having somebody... I really believe that the best and most talented organizations and people have a rival they really respect. I think the Red Sox are better because they hate the Yankees. I think Duke is hate, hates basketball against North Carolina. I think Coke hates Pepsi and they are better because the other one exists. And so as far as hard work, I think, you know, I try to create environments in my organization where people have a peer that they can bring themselves with. I think those people who are best are gonna fight it out and I want category killers. I want someone who is so much better than everybody else that it's abundantly obvious, and those do exist. You can get those, you promote 'em early, you reward them, you shower 'em with praise, you give 'em, you give 'em what they want, and it's not fair to everybody else, but I'm a firm believer that the top 0.1% are worth much more than the next 10%. Give me one 0.001% individual over 10 people in the top 10%, and finding that one leader, mover, shaker, and to worship them. Now, I always want as much as I can, but I think also using sports as analogy, there's just some players who are just so much better than everybody else, it doesn't matter. You can get, you can get the, the next four best players on the field, that one will lift up the rest if they have average or reasonable people around them as well. So, I'm a big believer of finding the guy or the gal that is a needle mover and make sure you give 'em what they want and give them the upside.

    5. HSHarry Stebbings51:41

       And when you find them,

19. 51:43 – 55:31

    Creating a Culture of Success

    1. HSHarry Stebbings51:43

       the most important thing is that you retain them. And from my stalking, you've said before about your father's two lessons on retention, uh, and one of them is people don't leave their friends and pay market comp. I just wanna break those down. When you think about paying market comp, ensuring they see upside, incentivizing them r- the right way, what are your biggest lessons on, bluntly, financial incentivization that aligns with their career trajectory and keeping the best talent?

    2. JIJustin Ishbia52:10

       So, I love giving more upside for performance, but I also, my dad taught me this and I do this all the time. I think it's important to have surprises to the positive consistently, and I'll give you an example. So, at Shore Capital, whenever we exit a business that has a return that's been greater than three times your money, the shelf worth and all of them, but we call it a Shore win. Like Shore is one, a Shore win. And I'm a believer that when we win, the whole firm wins. And so from the most junior person in the organization to the most senior person, everyone gets paid a bonus outside of their current compensation package. So, let's say we sell a business tomorrow for like five times our money. The front desk person gets a bonus of X dollars. The, the analyst Y. All the way up the chain, everyone wins as a firm and I think that creates camaraderie and culture 'cause everyone's pulling for each other to win and you celebrate those wins. When we have an exit more than three times our money, we have a miniature Stanley Cup we take out on the town, we celebrate. We have a horn that goes off that celebrates the win. Celebrates the wins. You catch people doing things right, reward them in the moment. I think that creates a culture of people who want to excel. We have a thing every Monday morning we have our meeting, we have a hall of fame. And so if someone in the organization sees someone else does what's really awesome, a process, a report, a judgment call that was awesome, they get nominated for the hall of fame. The public recognizes them. I think it's no one factor, Harry. It's a system and it's many. They all pile, they're all pennies. They all add up. You can't just say do one. It's a culture of success and rewarding success financially. I think people like to be rewarded public sort of praise. People want to feel good around the people they care about. I think all those things together, plus market comp, plus friends, but it's a system I believe that matters.

    3. HSHarry Stebbings53:59

       Listen, you've been managing firms for much longer than me. I, I, I think little and often is my biggest lesson. And what do I mean by that? It's like break apart like title and then salary or finances and then increase one of them little and often so they continuously have hits, and this is like once every six months. Continuously have hits of progression, financial or career, and it retains them and makes them feel worthy in a way that I find difficult to do otherwise.

    4. JIJustin Ishbia54:25

       The best people want recognition, whether that is compensation, title, or something. There's lots of ways to do it, and I think people also want responsibility.And I think that's an important part of it. I think that, I think the best people want the ball early. And I think whether there's compensate, I, I bet you there are a lot of really talented people out there that would trade off, you know, $20,000 increase in compensation, the right to be the lead on the deal and be the ultimate decision maker on certain parts of the transaction, 'cause they would feel that experience is incredibly valuable. And by the way, I want that. I want the guys and gals early into their career to have that ball. That's why I started Shore Capital, I was 31. I craved the ball in my hands to make the judgment calls, and I think the best want that. Now, that's why I have a bunch of systems and processes in place to hopefully have guard rails to allow them to make the judgment calls. It's their judgment call on negotiating certain parts of the transaction within a framework, and I think that is really rewarding on top of compensation, on top of other things, and professional upside. They feel like they have a chance to be a leader and a chance to make it, ultimate to make it.

    5. HSHarry Stebbings55:29

       Justin, the best

20. 55:31 – 1:07:15

    Managing Egos & Motivation

    1. HSHarry Stebbings55:31

       often do have egos. How do you think about willingness to accept them, and if so, ego management in teams?

    2. JIJustin Ishbia55:38

       Yeah, so like I read a book about Phil Jackson and, um, he wrote a part of it, something to the following effect. Um, if any of you folks don't know, Phil Jackson was a famous basketball coach for, for the Bulls and for Lakers. This is when he was managing the Lakers. He had, um, Shaquille O'Neal on his team and Kobe Bryant on his team. They were probably two of the probably top 10 players of all time, roughly, maybe top 20 players, whoever they were. They were two great players. And he said there's a point in the game where both of them said, he's like, they both wanted the ball, they both wanted the, the ego stroke. They both wanted to be told they were the best. And he said he would ask them at timeout, basically step away for timeout, grab Kobe by his jersey, "Kobe, get over here. You're the best goddamn player on this planet. Go out there and you make sure you get this bucket next." And then l- a second later, he'd turn around to Shaquille O'Neal, grab him by the jersey and say, "Shaquille, get over here real quick. You're the best goddamn big man I've ever seen in my life. Go make sure you get the ball and score." I mean, so they're both accurate (laughs) and true, but he had a little bit of nuance and both needed that. You have to understand what that person needs and what's motivates them. Some people get motivated by silent pressure, simple things like just take an article and post it in their office that says, you know, the best deal done last year in your industry was done by another firm. Just stick it on the wall, put a, a little pin in it, and tape it on someone's, tape it on someone's computer. They walk in, they're like, "That's bullshit. My deal was better than that." And they, they went by that. Other people need to be consistently talked to and praised. Other pe- I think a manager's job is to meet the great executives where they are and where they want to be met and give them what they need to motivate them. And you always have to be honest, be truthful. But I think there is ways to manage to be able to say similar things to the best people and my job is to get the best out of each of them. That's by creating a system, give them resources, but also giving them the confidence that you are really good at what you do, go get it done, and prove that you should have more responsibility and more upside. And I think those who do that in my organizations get promoted quicker and, and have the opportunity to have more success earlier in their career.

    3. HSHarry Stebbings57:42

       That's very funny. There's a, a football manager in the UK called Arsene Wenger who was the manager of Arsenal for many years. And before every game he would go up to four or five people and say, just alone, "Justin, you are my best player. This is your game to win." Two minutes later, "Peter, this is your game to win. You're my best player." And only 10 years later did they realize that he said it to five of them. (laughs)

    4. JIJustin Ishbia58:05

       Yeah, I mean, I, I wanna make sure I'm always honest so I can say, "You're the best right wing," or, "You're the best defender," or, "You're the best player I've seen play in the last four years." But yes, I think a manager's job is to get the best out of his people, right? And there's lots of ways for them by also being truthful. We get the best out of his people. You have to know what drives them and what incentivizes them.

    5. HSHarry Stebbings58:25

       Justin, have you ever felt like you failed as a manager? I'm young and I make mistakes. I often-

    6. JIJustin Ishbia58:30

       Yeah.

    7. HSHarry Stebbings58:30

       ... feel like it.

    8. JIJustin Ishbia58:30

       I've failed a bunch of times. Um, one that sticks out the most to me is, um, when we raised our first fund, it was a small fund, $100 million fund. I was so excited. We had a, my view is some name brand LPs that I was really excited about, and the very last week, they left me at the altar. We were still a month from closing the fund, but I was frustrated that the people I felt were coming in didn't come in. So okay, close that chapter. That was the framework for it. Our next fund we raised, I don't know, I think $250 million, whatever it was. And I told myself, "I'm not gonna be in that situation again where someone I wanted involved would leave me at the altar and we could be short of what we needed." So I went out and I made sure that we had a bunch of interest and I had, again, way more than we needed. And I think the biggest mistake was I didn't communicate well to those LPs and all of them went and did their work and all of them came in. I didn't have room for all of them and the outcome was some frustrated LPs who had minimums they had to invest. I couldn't give it to all of them. It was a really big learning lesson for me on expectation setting and I think I failed some of those LPs, this is about probably 10 years ago now, by letting them go do their work, write their invest committee memo, go do their thing, and then not have them come into the fund at the size they wanted, and that's about expectation setting. And since then, of course, I've changed my approach and I'm trying to be very clear on the front end, "If you go do this work, you will have this opportunity if you get there, and if you don't, you won't," and I won't tell, I won't double that up. I'll let people know exactly where, where they're gonna be and, and why. And so, you know, it was a big learning lesson for me on expectation setting that applies across the whole entire organization.

    9. HSHarry Stebbings1:00:00

       There's an alternative perspective, which is the people who move fastest and have most conviction probably did get the allocations and those that didn't probably didn't, but you have a more humble approach maybe than I do to that. (laughs) Um...

    10. JIJustin Ishbia1:00:12

        Well, well, it's also important to me to have the right partners. It just someone, someone moves fast, who has conviction, I wanna make sure that they see the world the same way as we do. We're, you know, we're very much focused on highest return on invested capital, you know? So we're very much focused on partners who apply even more of a patient approach and collaborative approach. So there are other LPs who have different focuses, maybe IR focused or more MOIC focused. That's just really how, how we think about it, and so I think it's alignment and also I want LPs who I would say, um...... have a cause we believe in also. All things equal, I want something that we can hopefully support something that can do a lot of good. We have a, a reliance share of our investors, our endowments, and it feels really good knowing that if we do our job well that there's a u- person who's getting a scholarship to university or a building that's gonna be built to hopefully make the world a better place if we do things right. Or, there's not-for-profits that are gonna be, you know, be able to do things they wouldn't do otherwise. So I think it's, it's multifactorial analysis. Um, we do those sort of things.

    11. HSHarry Stebbings1:01:08

        Final one on the people, and then I, I just wanna move to family quickly, which is, you know, you said people don't leave their friends. Um, in, in venture we have, you know, Doug Leone at S- Sequoia, who famously says, "Sequoia is a team. It is not a family." Um, really imbuing that performance above everything else. It kind of flew in the face of that when I heard that-

    12. JIJustin Ishbia1:01:28

        Yeah.

    13. HSHarry Stebbings1:01:28

        ... people don't leave their friends. How do you think about people don't leave their friends?

    14. JIJustin Ishbia1:01:32

        I mean, I wanna create the environment where people want to be around each other. Um, you know, I think, you know, we're all fortunate enough in our life right now to pick where you work and have choices and the best people to have those options. And so, I b- believe by working in an environment where you have deep relationships and friendships with people, I think it creates a better long-term success strategy. By the way, I'm not trading off one penny on, um, or one inch on quality or ex- execution. So if they don't perform, then they don't have the opportunity. I have a really, really high bar of who gets to a certain level of the organizations, vice presidents and principals and partners. If you're there, I think about this way, if I'm giving you a role as a vice president, I'm giving you a role for your career unless you mess something up. That's how I really think about it. And I think, I mean, absent bad behavior, which is a whole different conversation, the, the creating an environment for friends and, um, a place I wanna be around each other, that is really, I think a emphasis on the f- I would say the younger half of our organization, where I think I want to create the option where they wanna be around each other. They work in the bullpen late at night, they become friends with each other, and then when they go off on their own to go to business school or they go to work in a company, they have context and relationships. I think there's a more enjoyable workforce and I think it creates more stickiness to those we want to be here. I think those deep, I love it when, you know, one of our guys gets married and there's like 17 people from Shore Capital at the wedding. I, I take a lot of pride in that. You know, when, when I got married, you know, I invited every person, Shore Capital, so now 10 years, uh, eight years ago, I guess now, um, seven years ago, I guess. Uh, I prefer that environment. And by the way, I know Doug really well and Doug is not the best investor I've ever met. One of the top handful for sure. And I think that his approach is very, is very spot on. You have to keep your standards. Um, I don't care about standards at all for friends, but creating an environment for the organization where people are friends with each other, little things, the little things that matter. You know, an example, I stole this from somebody else and I'll share it here and I think, I wish, I hope others steal it. One thing we do at Shore Capital I think is really impactful and I think creates friendships and creates a lot of loyalty to the organization. It's super simple but I think super valuable. Um, we have a database that shows every employee at Shore Capital their spouse's birthday and their children's birthdays. On every spouse's birthday, there's flowers that come from Shore Capital to the spouse. For every child's birthday, there's a little cookie bouquet that goes to that child's for their birthday. Makes me nothing more happy when I get a random text on a Tuesday morning when it's no, you know, it's a child of my partner saying, "Thanks for the cookies yesterday. It was a great birthday." Like, those are the little things I think that add up over time and it's, uh, hard to implement that. That is a relatively easy thing to implement, but has, I think an outsize impact and creates bonds across the organization. I think that's one of the things I really focus on.

    15. HSHarry Stebbings1:04:15

        God, you are good. I thought I was good at-

    16. JIJustin Ishbia1:04:18

        (laughs)

    17. HSHarry Stebbings1:04:18

        I thought I was good at the little things. Uh, no, you, you, you-

    18. JIJustin Ishbia1:04:21

        I copied that from my friend, my name Doug. He was, he, he gave me that-

    19. HSHarry Stebbings1:04:24

        Do you know what ... like seven years ago, I just copied it. Do you know what I do which is the most impactful also, is like when someone has a child, it is one of the most impactful moments in their life, and so special. I will send a little baby grow with a 20VC logo, a Shore Capital logo, and I'll say, "My daddy does PE," and then I'll put on-

    20. JIJustin Ishbia1:04:42

        That's cool.

    21. HSHarry Stebbings1:04:42

        ... the back, "But my mommy is the boss."

    22. JIJustin Ishbia1:04:44

        Uh-huh.

    23. HSHarry Stebbings1:04:44

        Honestly, you will, you will have the love of that person and family for five years, 10 years. They never forget that little thing. It cost me $22 per one.

    24. JIJustin Ishbia1:04:55

        And in fact, it's the thought, 'cause there's effort, and you think about it and people care about those things as opposed to a random blanket you, you buy off of x.com or whatever it's gonna be. Like, you know, those things matter. And, and also a really important part of our culture is also, I think people don't w- we, no e- people don't care much you don't unless you care. And for me, I care about, by the way, my leaders' spouses a whole bunch. We invest a lot of effort into making sure they feel part of the family, they're involved, 'cause look, everyone has a bad day. No matter who you are, what you do, you have a bad day and you come home from work, he or she comes home and they're frustrated and they complain to their spouse. That just happens everywhere. One of my goals of relationship building over a long time is for that spouse to say to the person that works at Shore Capital, "Yeah, but they're really good guys." Like, that right there diffuses many things that people's mind may go down a rabbit hole and we don't want them to go there. And so, if they believe we're really good people and they believe in doing right by the organization, right by the person, it's always, uh, my mindset of make it right. We had a mistake last year on benefits or something and someone had a problem. My answer to our team was, "Make it right. I don't care what it costs. Make it right." And if you do that over and over again, it adds up and it matters.

Episode duration: 1:29:19