Holding companies and long-term holds have gained a lot of popularity in the SMB world. The best literature on the topic is from AJ Wasserstein.
My notes from his most recent paper: On the Nature of Long-term Holds: How Entrepreneurs Can Operationalize this Approach
A thread
My notes from his most recent paper: On the Nature of Long-term Holds: How Entrepreneurs Can Operationalize this Approach
A thread
Here is a link to the paper: yale.app.box.com/s/i8o06d1lv37e…
Note, the paper includes collaboration from SMB Twitter’s favorite @tsludwig
Note, the paper includes collaboration from SMB Twitter’s favorite @tsludwig
There are three primary reasons a long-term hold is lucrative:
(1) Avoiding taxes and transaction fees when exiting
(2) Avoiding idling cash between entrepreneurial projects
(3) Preventing redeployment risk when moving from one project to the next
(1) Avoiding taxes and transaction fees when exiting
(2) Avoiding idling cash between entrepreneurial projects
(3) Preventing redeployment risk when moving from one project to the next
5 key decisions for a long-term hold
Specific Industry Thesis vs Opportunistic
Single Industry Focus vs Diversified
Traditional CEO Activities vs Capital Allocator
Institutional vs Non-Institutional Capital & Small vs Large Initial Raise
Organic Growth vs Programmatic Acquisition
Specific Industry Thesis vs Opportunistic
Single Industry Focus vs Diversified
Traditional CEO Activities vs Capital Allocator
Institutional vs Non-Institutional Capital & Small vs Large Initial Raise
Organic Growth vs Programmatic Acquisition
Importantly, there have been very successful outcomes with every combination of each of these 5 decisions
My opinion is that these decisions need to fit the entrepreneur. Investor types likely gravitate towards certain options, operators to others. That is great. Fit is crucial
My opinion is that these decisions need to fit the entrepreneur. Investor types likely gravitate towards certain options, operators to others. That is great. Fit is crucial
Specific Industry vs. Opportunistic.
Leverage the knowledge of the entrepreneur. But regardless of the specific industry, certain industry attributes are crucial.
We like to use the Will Thorndike metrics of (1) Growth >2x GDP (2) Very Low Customer Churn and (3) ROTC >20%
Leverage the knowledge of the entrepreneur. But regardless of the specific industry, certain industry attributes are crucial.
We like to use the Will Thorndike metrics of (1) Growth >2x GDP (2) Very Low Customer Churn and (3) ROTC >20%
Single vs Multiple Industries
Do you have a preference for being an inch wide and mile deep or a mile wide and an inch deep?
What are your key skills? Operations (deep domain expertise and people management) or Deal Execution (sourcing, negotiating deals)
Do you have a preference for being an inch wide and mile deep or a mile wide and an inch deep?
What are your key skills? Operations (deep domain expertise and people management) or Deal Execution (sourcing, negotiating deals)
CEO vs Capital Allocator
Likely aligns w/ Single vs Multiple Industries. Over time there is the ability to evolve from CEO activities to capital allocator if desired
Working as the CEO before moving to capital allocation is a great way to build empathy for the life of operartors
Likely aligns w/ Single vs Multiple Industries. Over time there is the ability to evolve from CEO activities to capital allocator if desired
Working as the CEO before moving to capital allocation is a great way to build empathy for the life of operartors
Institutional vs Non-institutional capital
So many considerations here: focus on IRR vs MOIC, defined time horizon vs indefinite, check size, investor involvement, ability to do follow on investments.
Many of the HoldCos I know have gone with non-institutional capital
So many considerations here: focus on IRR vs MOIC, defined time horizon vs indefinite, check size, investor involvement, ability to do follow on investments.
Many of the HoldCos I know have gone with non-institutional capital
Initial Raise
Getting the right investors is far more important than total dollar amount bc “Whatever fundraising approach is chosen, good investment opportunities are rare & it is always possible to raise more equity capital …, so the initial decision is probably reversible” AJ
Getting the right investors is far more important than total dollar amount bc “Whatever fundraising approach is chosen, good investment opportunities are rare & it is always possible to raise more equity capital …, so the initial decision is probably reversible” AJ
Organic Growth vs Acquisitions
Organic: The Ansoff Matrix, a 2x2 matrix with Products (Existing & New) and Markets (Existing & New) is a great framework for assessing organic opportunities
Acquisitions: See AJ’s series on Programmatic Acquisition Strategies for immense detail
Organic: The Ansoff Matrix, a 2x2 matrix with Products (Existing & New) and Markets (Existing & New) is a great framework for assessing organic opportunities
Acquisitions: See AJ’s series on Programmatic Acquisition Strategies for immense detail
Conclusion
While presented as an either or, many of the decisions are on a spectrum
Depending on your decisions, your long-term hold can feel more like an OpCo or a HoldCo
Thanks for making it to the end of a long thread. I would love to hear your thoughts on each key decision
While presented as an either or, many of the decisions are on a spectrum
Depending on your decisions, your long-term hold can feel more like an OpCo or a HoldCo
Thanks for making it to the end of a long thread. I would love to hear your thoughts on each key decision
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