The Exchanges

Q When it comes to taking the ideas, having your partners go and work with the companies, how do you think about being on the ground in the company alongside the executive team that already exists?

A Part of the design upfront is making sure that everybody, both at the company and then our partners, Have a clear eyed view for how that relationship works. The amount of time that an ethos partner spending at the company is bespoken situation specific. If it's helping somebody redesign a pricing strategy, that's a different amount of time than if it's somebody helping a company figure out how are we going to completely change your debt structure from A SOFR plus six, 25 unit tranche deal that we're paying 10 and a half on into a securitized asset backed loan that we're going to pay a fixed 6.8% and save fifty million dollars a year. That's a complicated thing where you have to completely redesign the legal structure of the company and create bankruptcy remote subsidiaries, backup servicer agreements, go meet with the rating agencies. That's almost a full-time effort. That is something that we did for this company, Identity Digital, where we had three of our partners working a lot of their time just trying to execute that one thing, as opposed to another situation where they might just be meeting monthly to talk about how to change the channel strategy a little bit differently, each situation specific. There's an alchemy to the relationship that is unbelievably subtle and important. If you show up as an ethos partner to a company, are you ethos? Are you the company? Are you goi…

AI assessment note: “the relationship that the ethos partner has with their counterpart at the company is a sacrosanct cone of silence”

Q By background, those 16 C-suite partners, what's the spread of what they've done in the past before they joined Ethos?

A It's a magnificent potpourri of industries and experiences. It is Disney, The Gap, Forbes, Google, Verizon, Brinks, you name it, across the spectrum. A lot of the wonderful surprises that That results from them having that variety of backgrounds come in unexpected ways. I'll give you an example. There was a business that we were looking at. One of our partners comes from the world of education. We're looking at this company that provided administrative support services within the healthcare universe. These are people who would help doctors record things. We're looking at this company. We're doing diligence. For every deal that we do, we have two moments in time on the front end and the back end where we have these round tables where every one of the partners is involved in helping us on the front end develop, we call them acceleration vectors, ideas for us to have impact on the company. On the back end, after we've identified all those ideas and diligence them, which ones do we have confidence in? When we're doing this one deal, this was a business in and around healthcare. This partner in education looked at the company and said, they're a school. How is this a school? He said, they recruit people to come in, they train them over a period of time, then they place them in jobs. That's a school. Nobody had thought of the business in that mindset because we were thinking about it…

AI assessment note: “It is Disney, The Gap, Forbes, Google, Verizon, Brinks, you name it”

Q What are the positives and negatives of targeting one deal a year?

A The negative would be, if you get it wrong, having a zero and a fund of five, that math is slightly problematic. The opportunity for us to be incredibly focused and precious with our time is something that Fadi and I have taken away from past experiences to try and dial in the effort of the organization. All we have is time. Thinking about how we source most efficiently, how we diligence most efficiently, We have four companies at the moment. You can imagine the amount of firepower that you can put onto those four companies with 16 executives. This is a purpose built by design strategy on the concentration of ownership that feeds into directly how we spend our time. You can be much more selective in your deal sourcing. What makes it to the, we're going to spend time on this. We probably dig deep on No more than six or seven companies a year. In 20, 24, we didn't do a deal. That's just fine. Another underappreciated characteristic of this kind of model is that we don't have to do three deals a year. We don't need to have 15 companies in a portfolio. If we don't do a deal in a year, that's just fine. The calm and the patience that that brings to the organization is Elevates the decision making, makes us more selective about where we're spending our time, because we don't have to.

AI assessment note: “The negative would be, if you get it wrong, having a zero and a fund”

Q What does that do to the business model of ethos? That's a different construct than the way most private equity firms run, raise a fund, maybe raise a bigger fund.

A By design, being concentrated has worked out well so far. In thinking about how we grow the organization, That's very important to think about because as we continue to increase the size of the organization, you go from fund one to fund two to fund three, is it we're doubling fund sizes and doubling deal sizes? Are we doubling fund sizes and keeping the deals the same, doubling the organization? All of these things create risk in some way, shape, or form if you're changing the model. One of the things that we've designed from the front end is while we are incredibly strict about what runs the gauntlet to become an ethos company on all the characteristics, the one place that we are flexible is in deal size. We've made equity investments of a hundred million dollars. We've made equity investments of five hundred million dollars. Our limited partners are folks that like to co-invest. What that means is I can go from fund one to fund two to fund three and keep doing deals that are within the guardrails of the characteristics that we're looking for at ethos without having to change the organization in the double the number of people or double the size of the deals. Because everything else grows organically. Our team will grow organically. We will promote Associates to senior associates, to vice presidents, to principals, to partners, the investment team will continue to expand at th…

AI assessment note: “keep doing deals that are within the guardrails of the characteristics that we're looking for”

Q In that matrix of the functional roles and the industries, what were the boxes that you filled?

A Every functional box that you would have in a company, sales, finance, go to market, technology, HR, design, et cetera. We wanted to make sure that when we went to look at a company, we had people that were deeply knowledgeable, C-suite executives in every important area that you would want in any business that you are going to own. The sectors of focus for us are the sectors that we spend a lot of time thinking about. They're driven by macro themes. We started the firm thinking about finding businesses that are participating in parts of the economy where there's a huge wind in the sails pushing that forward. Digital infrastructure, risk and resilience, where you don't necessarily have to worry yellow pages. Is this an industry that I'm not sure how long this is going to be around. We want business models that are accelerated by what's happening. Then you go a little deeper. What are the specific business ideas within each of those areas? Within digital infrastructure, you could have cyber securities protecting digital infrastructure. You could have the domain name system, which is your digital identity as it exists. Then you identify specific business models. What are those business models that we're particularly drawn to that we think are most interesting? Those were Financial services, supply chain, digital identity and infrastructure, risk and resilience.

AI assessment note: “Every functional box that you would have in a company, sales, finance, go to market”

Q Why don't you give me a little bit of a hint of growing up and the path that led you to where you are today?

A I wish I had a more exciting story. My background was magnificently Norman Rockwell. It was two parents that loved each other and a sister, a great school and Friends, those kinds of childhoods give you the benefit of stability and security, confidence in yourself, very formative and important and lucky as you grow up. As you move through that though, you don't learn the hard stuff. You don't come out a lot of scars. You don't come out with a lot of lessons learned. You come out confident and strong, feeling good, which that would be wonderful. I did have sort of a cold shower of reality when it was time for me to go to college. Growing up in that environment, I thought everything happened automatically. You go to a great school, you get great grades, you work hard, and everything just happens. I tried to make my parents proud, as we all try and do, applied to every Ivy League school. It was my parents' dream in life for their firstborn son to go to an Ivy League college. When I got rejection letters from every single one of those schools, you can imagine over a Couple of days in the Brooks family. It was a real wake up call for me that things don't just happen automatically. I went to another school, spent my entire experience there doing nothing other than trying to get the best grades that I possibly could. So much so that I would literally go to two of the same class in the…

AI assessment note: “My background was magnificently Norman Rockwell. It was two parents that loved each other”

Q When you bring this group of people together, how do you work as an organization? The conversations you have, the decisions you need to make.

A Back to our operating system, a deal team is created once an idea comes in that is vetted. That deal team creates this analysis that is shared with the organization. We have built from scratch our own AI-powered operating system. We have these 16 partners in different locations that need to look at information asynchronously. Everything that we do at Ethos feeds into our data lake and is run through our knowledge graph in a very Dalio radical transparency kind of way. Every email, Slack, calendar invite, Every note, every file, that is everybody access to information in a real time way to stay up to date and on top of what's happening. When we get together, everybody fully briefed and up to speed and can stay so on a regular basis throughout the whole course of the transaction. Once we own the company, similarly, this continues.

AI assessment note: “We have these 16 partners in different locations that need to look at information asynchronously.”

Q As you put all this together, how do you define what success looks like?

A There are lots of components to success. I could tell you that success is ultimately what's the rate of return we're generating on our investments. How are the portfolio companies doing? Are we hitting our base cases? Are people in the organization happy? Is the turnover low? Are we raising money? There are lots of components to what does success look like? Personally, success is, am I having fun? It is hard work. If all of those things are working together in a way that people are coming to work excited, motivated, and ready to tackle the new day, that is evidence of enough of those things working in tandem that the organization is successful. Having seen lots of examples of that, I know what success doesn't look like, and I know what it does look like.

AI assessment note: “success is ultimately what's the rate of return we're generating on our investments.”

Q What was it about the business that made it the most attractive in that mix?

A The business model itself is literally your digital identity in the world, both the company and the individual. At Ethos, you can't connect with us unless you go to ethoscapital.com or unless Ted is sending Eric an email at my email address. Everything is attached. All of the work that we do, all of our communications, everything happens under this Rubric of the DNS system. It is the identity system across which everything travels on the internet. The business model is the most mission critical part of a company's identity. We don't exist without it. It costs on average for this company's domain names, 30 dollars a year. We spend more on coffee, soda, and pens individually than we do on our digital identities. It is absolutely mission critical. It costs almost nothing, as close to zero as you can get. Customers renew with statistical probability that is the highest I've ever seen based on vintage cohort. The business has EBITDA margins in the sixties, is growing top line double digit, has 98% free cash flow conversion, very much like Verisign, for example, almost a mirror image. Sourcing that took us over a year from the time we originally sort of met the founders, To when we made our first investment. The diligence process is, it's a great business. Now, what are you going to do? What's your impact? What are your acceleration vectors that are going to accelerate this business?…

AI assessment note: “EBITDA margins in the sixties, is growing top line double digit, has 98% free cash”

Q In that moment when he's the person you're working with, as you described, he's a special human being, how do you know the difference between an operator asking those questions and Fadi in particular being the one who's asking those questions?

A I've been with enough managers over time sitting on boards. You can interpret the information, and you hear the information coming back. Understand that everybody has their different style of how they do that. Somebody that was a head of sales asking another head of sales in a different way could be antagonistic. It could be competitive. It could be not received well. Implicit in your question is, Is there a certain kind of operator that would be effective in that seat asking those questions? I think the answer is very much so. That seat is not a seat for every kind of operator to sit in because you have to be open. You have to be non-threatening. You have to be collaborative. You have to give off all of those personal qualities in order for the person that you're talking to To give you back the information and the energy in a way that's going to be really useful.

AI assessment note: “That seat is not a seat for every kind of operator to sit in”

Q Once you took the red pill, sat with him for a couple years, and felt like this was an important thing to do, What was the next step?

A It was easy and unbelievably difficult at the same time. It's difficult because you spend 20 years working with people, and these are your dear friends, and you've been to their weddings, kids' births, and birthday parties. Emotionally and personally very difficult. Intellectually very easy. What I had come to realize that I needed to do with Fadi was create something completely new. Not something that could be retrofit in any way, shape, or form. It was a recognition that Avery was a three Michelin star French restaurant serving 300 people a night. I wanted to build with Fadi a twelve-seat three Michelin star Omikasa restaurant in the basement of the Tokyo subway system. What we were planning on doing was so fundamentally different, it became easy to say, let's go do this.

AI assessment note: “What I had come to realize that I needed to do with Fadi was create”

Q Once you had gotten the people on board, what made it so hard to execute?

A The process of building something completely from scratch was an exciting intellectual exercise. We sat down. Fadi said to me, Fadi's an engineer by training, we're going to Engineer and develop an operating system for every part of what you do in the private equity process. We're going to sit down, and if I showed you our ethos operating system, it would look like a Swiss clock of gears. What do you do in the sourcing process? What happens? Who does it? Who do you talk to? How long does it take? What are the skill sets necessary for it? When you do diligence on a deal, who does it? How long does it take? What skill sets, et cetera. We mapped out and designed all of the different functions. Then we said, okay, what are the skill sets that we need organizationally to do that? We brought the people in with our investment team and our partners who are operators. Then we spent time working with everybody to walk them through the process of what needed to happen when. The investment team, that's pretty clear, but you would be surprised when you're integrating operating executives into the A sourcing process. You really want them involved, or you're integrating operating executives into a diligence process. Somebody who is chief revenue officer might never have done diligence on a company from the mindset of what is this organization look like? What's the SWOT analysis on this partic…

AI assessment note: “The hard part was creating something from scratch that incorporated and melded these two”

Q In your 20 years, alongside Andrew and Royce, what did you see evolve in the business?

A The organization and the investment philosophy grew as we added more people in a healthy way. Thinking about media as technology enabled content enabled us to expand into business services. Establishing a knowledge set and a way of growing your partnership. One of the best parts about building your own is everybody's inculcated in how you think about Risk and return business models and the things that we want to do, as opposed to trying to create an organization from scratch and hiring a whole bunch of folks. That was the strategy. Hire young people right out of investment banking. Spend the next 10 years training them how to be a partner. That creates a great culture. It worked magnificently well for a long time.

AI assessment note: “The organization and the investment philosophy grew as we added more people”

Q What did it mean when someone said don't come to the auction tomorrow?

A That meant that somebody that was connected in a certain way had an idea that they wanted to own that company. They did not want somebody getting in the way of that. What I would do is thoughtfully pack my bags in the morning, go back to Moscow. Discretion is a better part of valor. You have to pick your battles. When it blew up, You viscerally feel like you spent all these years working for something. You have a young child. You're not seeing them or your wife. I knew that that part of the world was going to come back. My value investing DNA had incredible confidence in the magnitude of the opportunity, but I didn't know if it was going to come back in a couple of years or a couple of generations. To my good fortune, I had met Roy Syedkoff, who's one of the founders of Abri, right before I went to business school. Royce had become a real mentor to me over that six, seven year period of time. Timing in life is everything. I was having lunch with him in New York one day. I was having him listen to me go through my thought process of what I was thinking of doing, what I possibly was considering coming back or staying. In the middle of that conversation, he looked at me and said, would you be interested in coming back to Boston and joining me at Abri? That was the lightning bolt. I looked at him and I said, yes. That sounds great. I would like to do that. His response was wonderfu…

AI assessment note: “That meant that somebody that was connected in a certain way had an idea”