The Person, Not the Paper

Hello, and welcome back to The Meaning of Money. I'm excited to have with me Mark Sullivan from Lineage Capital. We're going to have a really fun conversation and a deep dive on a couple of different things here. Welcome, Mark. Thanks. Thanks for having me here. Mark, one of the things that people often talk about is financial capital in the investment business. But long ago, ironically, it was Michael Milton who got me focused on the importance of human capital. And one of the things that really strikes me about your model is just how much you focus on owners. Share with the viewership a little bit about your model and how you pick the people that you're investing into, because I think you have a very different model, and the degree to which you really take a bet on the person. We do. Our firm solely focuses on partnering with owner-managers. So 100% of our investments, we're partnering with typically the founder. Sometimes the business is transitioned to another owner, an individual or family or something. And where we're really different, the real focus for us, is owners who believe in their business, want some liquidity, want to stay involved, and really care about their business. Our model, I think, is fairly uniquely tailored to those folks, because we allow them to get significant liquidity while letting them keep control of the board of directors. So even if we own 60% or 70% of the business, they get to keep board control, which is typically very comforting for them. A lot of people are concerned about bringing on a partner: What does that mean? What can they do? I've lost control of my business. And as you said, we really need to understand our partners before we invest with them, because we don't have rights that people typically have after we invest in the business. So understanding their motivations, what's important to them in and outside the business, is foundational to what we're doing in our model.

Will founders keep going after a big payday?

Let's talk about that for a second. I was talking with another founder of a venture capital firm, and he made the statement that the only thing that's guaranteed in a startup is that you will run into challenges. And I think that's a fair statement. Any time you're building a business, you're going to run into them. Very rare is the fairy-tale business builder for whom it's all rainbows. One of the other things he mentioned that was interesting was that before getting an exit, there's this deep hunger of, I have to make the business work, for a variety of reasons. But sometimes after an exit, there are new questions that can become nagging when you run into problems, like, why am I doing this still? Why am I messing with this? I've got a bunch of money in the bank. Why am I still putting up with this? Whereas before the money, you're like, I have to make it work. To the extent that you're giving significant liquidity to the founders that you're betting on, and given that you have a lot riding with them and need to see them continue through, how do you assess that risk? So it's actually been quite fascinating in that regard, because we're always thinking, okay, these folks are going to get a transformational new net worth, liquidity net worth, out of the business, and are they really going to want to keep going? For one, they're kind of self-selecting with our model, because we're requiring them to keep typically a 30% or 40% ownership. So they must believe in the business and think that they can have an impact. But what's really fascinating is that, for the most part, many of them say they're working harder than they did beforehand. And I think that is because of the partnership. They don't want to let their partner down, which has been really fascinating. We've not had anybody, even when a business goes sideways from time to time, we've not had anybody just sort of throw in the towel and say, I'm out of here, good luck. So either we're good at picking partners or partners are good at picking us, but it's worked out pretty well.

When a founder's strengths hold the business back

That doesn't mean we agree on everything every step of the way. Typically these founders have built their business, and what's made them successful, some of those things can also prevent them from getting to the next level. And that's where the rub can come. Often it's, well, why do I need a CFO? I've never had a CFO before. And if we collectively get the right CFO, they're like, why didn't I always have a CFO? What was I thinking? But if we make the wrong decision initially, it's, I told you we didn't need a CFO, this is just a waste of money. So a lot of it has to do with the moves we make together and how they work out. And then there are always people in the business who have extreme loyalty to other people in the business. Sometimes it's great that they have that loyalty, but the person they have a loyalty to may not be able to take it to the next level, and that's where you can also see some friction at times. But for the most part, the vast majority of our investments have been rewarding for them and for us, even with other challenges along the way. We've had businesses that stumble out of the blocks and then we get momentum, and vice versa. We're investing in businesses that have typically been around for 10, 20, 30 years. These are not venture businesses; they're kind of mom-and-pop, mainstream-America businesses.

How mainstream businesses are actually using AI

I can't help but ask, because I know it's on everybody's mind: How are you seeing those businesses interact with AI today? I'm sure it's different for every company, but any thoughts on whether AI is living up to its hype, or it's overhyped, and where it's useful and where it's not? So it's funny. We had a board meeting with one of our businesses two days ago, and three months ago they were literally nowhere. We were like, you guys should start to look into this more, where it can be useful, how you can leverage it. And at the board presentation, every functional area, and we didn't know this was coming, every functional area was like, well, here's how we're using AI to improve the analysis, improve the data, improve processes. There's a part of the business, this is a children's publishing business, where the market does not want content created by AI. So we're very careful about that, because these are for grade-school kids. But generally speaking, they've really embraced it there. They kind of went from zero to 60 relative to some of the other businesses. The other businesses have gone more methodically at it. I would say just about every business, as it relates to the finance function and the analysis, and also automating some routine things like bank reconciliations, it may have made them more productive. I don't think it's revolutionized any of our businesses, and I don't know that it will, but it's definitely improving productivity and decision-making through better, faster analysis. I love hearing that. There's a lot of money and energy going into it, and the last thing you want is to hear that people are spinning their wheels and not actually generating results. So that's very positive feedback to hear. And like you said, it's just a tool; it's not going to get in every area, every business. And I think at the base level, you have a monthly subscription for 20, 25 bucks or whatever it is. The payback on that is quite good. If we were trying to do something broader and much more elaborate with much higher expense, we're not there yet. But for that, I think the return is quite good for improving productivity and analysis. And we're seeing it at our firm as well.

Using AI inside the firm, and not getting lazy

Oh, cool. How are you using AI in the context of your business? Yeah, so people are using it to enhance investment review. We get a memorandum in from the investment bank or something, and there's still a requirement to read it, but I think it can help with the analysis and the timing and the speed. Some of our teams have automated reporting from our portfolio companies; there's a monthly update, and it puts it in the format and does some base analysis, which has been quite helpful. So again, I think these are improvements to productivity and analytical capability and decision-making that are, I wouldn't call it a step change, but it's certainly helpful. Meaningful, but it's not going to put you out of a job. Yeah. And the key thing is for people not to get lazy and try to use it in place of doing the work. For someone new, we required a cover letter, to see if people really were interested in the job and how they thought about it. And I would say a very high percentage of the cover letters were written with AI without thought, and we just didn't go to the next step, even if the resume was really good. So I think you've really got to put the work in. It's irritating when you see that, and we all see it. When you're working with it, you can just totally tell from reading it. The difference between a truly personally written letter versus a generic output is just very different.

Where money helps more than people expect, and where it doesn't

So speaking of return on investment, I want to ask you about this. You've had a chance to work with owners; maybe you were the source of a big liquidity event for them, maybe they had one prior, or maybe together you went through one and you stayed in touch. A lot of people, especially before their first big exit, have a sense of wanting to achieve a certain level of wealth and imagining what that will do for them. And have no doubt, money is fabulously helpful for the things that money does. But it also sometimes happens that once you get that newfound wealth, some things get solved, maybe even better than you thought, and other new problems or challenges can arise. From what you've seen, and I'm sure it's different for everybody, and you've met some pretty interesting characters along the way, what are some areas of life where you've seen money help people maybe more than they were expecting? And what are some interesting problems on the other side that didn't go away no matter how much money you had, or became new problems that you didn't have before? Yeah, it's kind of interesting. I always ask the people we're partnering with, what are they going to do with the money? Have you been waiting to buy the beach house, or whatever they think? And it may be the nature of the businesses or the people, but very few of them, and we do stay in touch with them, have done something where their lifestyle or their life changes dramatically. I do remember one of the guys; he was living in a 1,200-square-foot house, and they bought a new house, and then he's like, I wish I had the 1,200-square-foot house again. We bought a 4,500-square-foot house and there's too much upkeep and all this kind of stuff. But generally, and maybe they're also private, I haven't encountered like, oh. A couple of people started foundations, things like that, which I think they're very excited about. And one person has gotten really involved in his state in school funding, and dedicated his time to helping them think through how they can improve the funding and actually manage the cash at school levels better than they do, because they don't even think about it. So there hasn't been a lot of transformational change that's visible with the people. You hear some stories about things they're glad to be able to do, like the charity, or they did buy a second home. But I think that's kind of it. Maybe we're dealing with the boring crowd that isn't doing too many wild things.

Purpose, philanthropy, and the freedom to give back

Well, you alluded to purpose, and I've always felt that true wealth is lived at the intersection of health, wealth, and purpose. When you're in the heat of building a business, and particularly pre-exit, you often don't have time to be super involved in the community or philanthropy in the way that maybe you might want. And one of the great joys, although discovered maybe after the fact, of having more financial freedom is the time to explore and take action on some things where you want to make a difference. And I have yet to hear anybody say anything other than, wow, that effort and giving back in that way, in something close to their heart, was one of the best things I've ever done. To a T. The return people get on truly just doing it to make a difference, not trying to get a contract from it, or a connection from it, or a visible board seat that'll help them network, but just truly trying to make that difference, whether it's a combination of sweat equity or giving money, if it's a cause somebody feels strongly about, the returns are off the charts. But what's interesting is that until somebody does that, it's hard for them to really get how impactful that is on them. Yeah, I mean, it is, for them. For a lot of people, charity and giving back is often just a, hey, we're hosting this black tie, we've got a table, can you write a check for two thousand bucks? And I'm going to have fun for an evening. That last 15 minutes, that's not a deep, meaningful memory that you're creating, in the way that you'll often experience when you're really rolling up your sleeves and making a difference. And so there's something very real there. And to your point, wealth gives you the freedom to be able to do that, whereas it's really hard for most people to carve out the time and the money before that, because you're just so stretched in every direction. Yeah, and I think that is one consistent theme with the vast majority of the people we partnered with: time and some capital to do those kinds of things, time being an important one. And just the financial freedom, even if they had money before, this is an exponentially larger chunk. So there's just a sigh of, okay, all's okay, and I can go do these things. Yeah. And I think that security, which happens for different people with different amounts, and often I find that having a defined financial plan can also be an important part of that. Because without that, people may have a lot of money in the bank, but they're writing such big checks all the time that they still fear whether they're going to be okay, even if the normal person would be like, oh my God, if I had that amount of money, that'd be a dream.

A financial plan, and knowing what enough is

Well, it is. Given the business you're in, it is fascinating, the number of people, and most of them have created some good personal wealth, but this is just kind of a note when they get the big liquidity event. Most of them, until they have this big liquidity event, don't have a very sophisticated investment advisor or approach. And so this is the time they take the opportunity to say, okay, this is different, I need to go make sure I have a good view of what I should be doing here. Yeah, and it's surprising, you'd be surprised how many people, even after that, don't have it. Because while they're going through it, the fear is, I don't want to create a plan that assumes the egg hatches. I don't want to jinx it. So it's very interesting watching that process and being part of it, helping people, like, no, look, you really need to have a plan, so you know, and that'll help you on your exit. Like, hey, you thought you needed to get 30, you really only need 20. So while you're arguing around 25, fine, argue a little bit, but realize you're winning. And it's an interesting perspective: no matter how much you have, there's always a temptation to want more. And so having some non-financial grounding in what's enough, I think, also helps you feel and appreciate the true wealth that you actually have, if that makes sense. Yeah. It is interesting, you just jogged my memory on something: the number of business owners we encounter who have a target number they want to get to that's not necessarily even related to the value of the business. They have a target. And sometimes they're like, I'm not going below the target, even if the value of the business doesn't get them to the target. So we don't really know how to deal with that when we're trying to help them think through the situation. I've seen deals fall apart over that very thing. And often it's because that person doesn't understand that what they need is well below this mental number. Their fear is, I'm not going to have enough, and they've somehow set a number in their head, and that may or may not relate to reality for them. But it's there, so you've got to deal with it.

Why respect beats control

So, look, I think it's really interesting. You have a very unique model, Mark. And for all that our industry focuses on the financial-capital side, I think it's human capital that really drives the world. Obviously we need financial capital, and you combine it together to do even greater things. But I commend the courage you have, and I say courage because I think most venture-capital investors would be scared out of their minds doing what you do. Most people can't wrap their heads around it. And at the same time, I know that a lot of owners will walk away and say, I'm never going to deal with another venture company again, because they didn't like the feeling of being micromanaged or controlled, or the kind of outcomes that felt that way to them. And maybe that even led to them feeling more disconnected, because they weren't actually in control anymore. Whereas in your model, they are. They've got a lot of equity and they're formally in control. They have to drive. And I think it's a really beautiful and very rare model, because it gives that entrepreneur the space to continue to be the builder and the leader. Even in scenarios where they step aside, because maybe, to your point, they're getting in their own way, and the answer is, let's get a professional executive in here, it's their choosing. That's right. And their light bulb finally turning on to that, and doing that in collaboration with you, as opposed to just waking up to an email one day informing them. Yeah, right. We're extremely collaborative. And you talked about human capital, the people we hire in our firm; we like them to be very smart, but they need to be very focused and respect the party on the other side. That's been really important to us. Even if we think we could help improve a business, we have extraordinary respect for what the founders have created. Yeah. And the temptation for a lot of people is, well, if we just control them with this clause and this part of this agreement, and this ownership, these rights and these procedures, if we control them, we'll be protected. But I've seen too many situations where that didn't work out that way. And even though it may be scarier for people to follow in your footsteps and take the approach that you do, I think it's more realistic. You want somebody to have a good working relationship with you because they want to, not because they're forced to. And the goodwill that comes out of that, I feel, is just immeasurably bigger than whatever you can squeeze out of somebody by force. So good on you, but I recognize it takes courage, and such a unique model. You're the first guy I've talked to that really embraces it in the way that you do. So keep up the good work, and great having you on the show today. Thank you for making time, and I look forward to staying in touch. Yeah, thanks for inviting me. I really appreciate it.