Exploring Evergreen's Long-Term Investment Strategy, People, & Global Expansion w/ Jeff Totten

[00:00:02] Dave Sobel here at IT Nation Connect. I'm joined by Jeff Totten, the founder and CEO of Evergreen. Thanks for joining me, Jeff.

[00:00:09] It's good to be here.

[00:00:09] So I'm really curious. One of the things that intrigues me about talking to people that are investing in this space is a little bit of the way their thesis works.

[00:00:16] In your case, I've talked to Ramsey before on the channel, and he walked me through a little bit of the way you guys were at the Berkshire Hathaway meetings,

[00:00:23] and you're thinking about this space. Tell me a little bit about the concept of holding onto assets to do the entire length,

[00:00:29] because that's a unique approach to investing, particularly unique for this space.

[00:00:33] Tell me a little bit about the genesis of that and what inspires it.

[00:00:36] Sure. So Berkshire Hathaway is a big part of the inspiration. And really what Berkshire Hathaway does is they acquire businesses

[00:00:41] with the thought of building them and holding onto them for the long haul.

[00:00:45] We think it's a more fun way to operate, and we also think it generates better returns in the long haul

[00:00:49] because you're not just focused on what's the next year's profit or preparing the business to sell it to the next buyer.

[00:00:55] You're focused on long-term business building, investing in the team, investing in the customers,

[00:01:00] which we think you get rewarded for in the long haul. It's also inspired by my father actually had a family business,

[00:01:07] and he sold his business to a larger public company that was really focused in the short term,

[00:01:11] and it kind of ruined the business over the long haul. For us, we really protect and invest in the businesses.

[00:01:17] And one of the things we want to be able to say to a founder is if you bump into one of your employees or a customer

[00:01:22] in the grocery store after you sell to us, they're going to be proud of the partner that you chose

[00:01:27] and the fact that the business is being maintained and built for the long haul not to be sold to the next acquirer.

[00:01:32] Now the interesting thing about a long-term approach like this is how much you have to invest in people.

[00:01:37] And you actually have, in a way, a two-level people problem is the way I would describe it.

[00:01:41] The first is you've got to manage your own team has to have a team of people that are invested in a long time

[00:01:47] in order to have the consistency. Then additionally, you have to invest in unique organizations

[00:01:53] and the leadership teams in each of those. Talk to me a little bit about the way that you approach people management

[00:01:59] to deliver some consistency of culture.

[00:02:02] Yeah, absolutely. So we, first off, we invest a lot of talent in the businesses.

[00:02:06] So we've placed 100 leaders into the businesses that we've partnered with over the past seven years.

[00:02:11] And really that starts with our Chief People Officer.

[00:02:13] So we have a Chief People Officer focused on finding the best talent in the world,

[00:02:17] but also maintaining the talent in our businesses. And that comes down to being a great place to work.

[00:02:22] That comes down to identifying the best talent in the market and sharing this kind of story

[00:02:26] around how Abergreen's different. Because we're a long-term investor in businesses,

[00:02:31] people can come here and spend a whole career here and advance over time.

[00:02:34] And from a cultural standpoint, we try and preserve the local culture.

[00:02:39] So there's a reason why all the employees joined the companies that we're partnering with

[00:02:42] when they initially joined that company. We want to maintain that culture and only make it better over time.

[00:02:48] And I think the ways we make it better are really around injecting additional talent into the businesses.

[00:02:53] So if you are lacking in a sales role, as an example, a lot of MSPs really struggle to make that higher.

[00:02:58] We've made that higher dozens of times so we can go help you find a sales leader to come join your business.

[00:03:04] But that new talent that we bring in is going to add to the culture over time.

[00:03:08] They're going to integrate into what's already there, but they're going to add to the culture as well.

[00:03:12] And that's worked out really well at our businesses.

[00:03:15] For that to be successful, for you to be able to do that, you have to keep your team together over time.

[00:03:21] Because these are trusted advisors that are working with each of those.

[00:03:24] How are you building Evergreen in a way to keep people in your own organization?

[00:03:30] I'm currently proud of you. Over seven years, we've maintained a lot of the same people that were at the business seven years ago

[00:03:35] are still with the company and have taken on bigger and bigger roles.

[00:03:38] I think about Elliot Hyman, who actually was running one of our first businesses, Wolf Consulting,

[00:03:43] which is part of the Evolve peer groups. He went from being the director of business development to the CEO of that company

[00:03:49] to now running, then running a region and now running all of our MSPs globally.

[00:03:55] It's an incredible track record to go on individually and it's an exciting career path to then show the next person

[00:04:00] that's joining the company. We also have that on our Emergence and Acquisitions team.

[00:04:04] The same folks that joined us in 2019 are celebrating their five-year anniversaries at the company.

[00:04:10] Ultimately, we try and treat each person individually as a really important member of the team, design career tracks for them,

[00:04:17] listen to what they care about, and try and create opportunities over time.

[00:04:20] We're really in the business of providing opportunity.

[00:04:22] We provide an early opportunity to become a CEO of a company, an early opportunity to be an M&A leader for us,

[00:04:28] an early opportunity to be a sales leader and MSP.

[00:04:31] Those opportunities draw in really talented people and it causes them to want to stay for the long haul.

[00:04:37] I think it would be interesting to understand then, based on all of this, what your decision-making framework is.

[00:04:43] How do you, as a business leader, you've got to make a bunch of strategic decisions on a regular basis,

[00:04:48] you've got to help design people's careers, you've got to make decisions.

[00:04:50] What's your framework for decisions?

[00:04:52] Yeah, so we started just being focused.

[00:04:55] I think as a leader you can make any number of decisions on a given day.

[00:05:00] You have to decide which decisions do you want on your desk, which ones do you coach your team on bringing to you.

[00:05:05] First off, we try and focus.

[00:05:07] Our view is that the holding company team at Evergreen, we really focus on acquisitions

[00:05:11] and we focus on putting the right talent into businesses.

[00:05:14] That's where I put a lot of my attention, is maintaining the culture of Evergreen,

[00:05:17] making sure we're making good acquisitions and making sure we're putting good talent in the business.

[00:05:21] I think one way to make a decision is just narrow the scope of which decisions you make as a leader.

[00:05:26] From there, there's a lot of first principles thinking around decisions.

[00:05:30] One thing I like that I actually take from Warren Buffett and Berkshire Hathaway is,

[00:05:35] how do you feel if that decision was published on the front page of the newspaper for your friends and family to read?

[00:05:40] There's decisions you can make in the short term that might benefit the profit in the short term,

[00:05:45] but you wouldn't be proud to have it on the front page of the newspaper.

[00:05:48] I always want to make a decision that I'd be confident about if the world knew what decision we decided to make in that circumstance,

[00:05:54] they would think it was made from a first principles standpoint that it was the right thing for the company

[00:05:58] and the right thing for our customers and employees.

[00:06:00] We always start there as well.

[00:06:02] Then just being thoughtful about which decisions can be made fast versus slow.

[00:06:06] As each decision comes in, we think about, hey, where is decision velocity helpful?

[00:06:10] This is a decision that we can make a mistake, we can get it wrong, and it's okay.

[00:06:15] It won't hurt the company for long and long.

[00:06:17] Let's make those decisions quickly and empower others to make those decisions.

[00:06:21] What are decisions that are one-way doors that we have to get it right,

[00:06:24] and we need to be really thoughtful and slow down the process and involve all the key constituents?

[00:06:29] The thinking fast and slow is an element of our decision-making as well.

[00:06:33] Okay.

[00:06:33] I would also think that the other thing I wanted to get a little sense of is how are you measuring success?

[00:06:38] Because when you're, it feels like there's a balance of long-term retention, which is cost you have to invest in,

[00:06:45] but at the same time you're trying to generate profits for the organization and you could forever spend on growth for maintaining.

[00:06:53] How do you think about the balance of what you're trying to do because you want some level of consistency too and predictability?

[00:06:59] Talk to me about how you're thinking about that balance.

[00:07:02] Yeah, I mean we think about growth as a big area of focus.

[00:07:05] So are we growing the top line of the business or are we growing the bottom line of the business?

[00:07:08] We want to do that in a way that's sustainable for the long haul.

[00:07:10] When you think about our, we're going to be in this business for a very long time, we want to do it in a way that's sustainable.

[00:07:15] And so we pay a lot of attention to customer MPS and to employee MPS.

[00:07:19] So we're tracking the sentiment of customers, we're tracking the sentiment of employees.

[00:07:24] And ultimately if we have happy customers, happy employees, that will drive the success for the shareholders in the long haul.

[00:07:30] But growth is a big focus area for us and we really focus on organic growth.

[00:07:35] Are we adding new customers? Are we providing additional service to our existing customers?

[00:07:38] Are we doing that in a profitable way?

[00:07:41] And so we pay a lot of attention to not only are we growing but how do we disaggregate that and look at the underlying drivers.

[00:07:47] And at any given year, there's some drivers that are going well that we're going to keep optimizing and there's others that we're working on.

[00:07:54] And right now what we're really working on is adding net new customers.

[00:07:57] That's a big focus area and sort of making a lot of investment in the sales talent in our businesses right now.

[00:08:02] This may seem like a simple question but I think it's worth asking.

[00:08:05] How are you defining customer?

[00:08:08] Yeah, we have two customers today.

[00:08:10] The first for us is a business owner who wants to partner with Evergreen and sell their business.

[00:08:15] And so we put a lot of emphasis on what's the experience for them.

[00:08:18] We have a perfect score on our net promoter score with business owners who have sold to Evergreen,

[00:08:24] which means that they would all reference us when another business owner is looking to sell their business,

[00:08:28] that they would all recommend a friend to us.

[00:08:30] And then the other customer is our ultimate MSP customers.

[00:08:33] And so we want to be an owner of these businesses that promotes the end customer.

[00:08:37] That's a small business, a good law firm, a healthcare institution that's looking for a fully outsourced IT support.

[00:08:43] We want to make sure that we're the best partner of these businesses and they can be good partners to their customers.

[00:08:48] Gotcha. Now I want to go to an area that I'm intrigued by because I find that we can learn an awful lot by comparing markets, right?

[00:08:55] And understanding the different dynamics.

[00:08:56] And you've recently actually done your first international expansion.

[00:09:00] You purchased the final step, Rajapagadala, an old friend of mine.

[00:09:03] And that was your first expansion. You've now done more internationally.

[00:09:07] Tell me what you've learned as you've moved into other markets besides the U.S.

[00:09:12] What have you learned from that experience?

[00:09:14] It's been a great experience, first of all.

[00:09:16] We've really enjoyed going into other markets.

[00:09:17] We're now in Australia, New Zealand, and North America.

[00:09:20] We're in the U.S. and Canada.

[00:09:21] And now we're in the United Kingdom as well.

[00:09:24] We've really enjoyed getting into those markets.

[00:09:26] What we found is that the MSPs are very similar in a lot of ways out there.

[00:09:29] There's a similar value proposition to the end customer to fully manage their IT needs.

[00:09:34] But they're in different points of their maturity journey.

[00:09:38] I'd say from a cloud standpoint, the international businesses are a little bit behind where the U.S. businesses are.

[00:09:44] But from a regulatory framework standpoint, data governance, they're actually ahead of where we are in the United States.

[00:09:50] So it's been interesting to learn about where the customers are on their maturity journey.

[00:09:54] And then it's been interesting to learn about local business dynamics.

[00:09:56] I'd say in Australia and New Zealand, things move very quickly from a process of getting owners comfortable with partnering with Evergreen.

[00:10:04] And in the U.K., folks want to go through more steps to get to know Evergreen and get comfortable with us as a partner before making a decision to partner with us.

[00:10:15] Is there a lesson you implemented from those that you've sort of taken back and made a change based on that?

[00:10:19] Yeah, I mean, partnerships are just being a little more patient in the U.K., but another part of it is just investing in local team in the U.K. actually.

[00:10:26] So getting folks on the ground in that market, building trust on a local basis to be able to then strike the right partnerships in that market.

[00:10:33] Gotcha. So the question I've been asking a lot of the leaders that I've been talking to recently, so we're talking towards the end of 2024.

[00:10:40] What's on your radar for 2025 as a thing that you're keeping an eye on as a key indicator or trend as you think about next year?

[00:10:49] Yeah, when I look at our partner companies, really two focus areas.

[00:10:52] One is new logo acquisitions, acquiring new customers and are we making the investments in the sales organization in order to be able to drive new customer acquisition?

[00:11:02] We talked about that a little bit. So we're injecting a lot of talent into businesses on that front.

[00:11:07] Another is AI and RPA and thinking through how do we become more efficient in how we deliver services, but also deliver a higher quality service to the end customer because there's consistency in how it's being delivered.

[00:11:19] So one of the reasons it's exciting to be at IT Nation is to hear about some of the vendors out here who are thinking about how do you bring more RPA and AI into these businesses.

[00:11:28] And I think it's one of the most exciting things that's going to happen in this market, both as it relates to MSPs and how they're going to manage their internal operations.

[00:11:35] But also, I think MSPs have the opportunity to be on the front lines and helping customers bring AI into their own businesses.

[00:11:41] And so as we think about the next five to 10 years, I think that'll be a key part of the value proposition.

[00:11:45] And I think that 2024 and 2025 are kind of the foundation for being able to provide those services to our customers.

[00:11:51] Gotcha. Now, I want to give something actionable to our MSPs and listeners as sort of a last question.

[00:11:56] I'm going to throw this out there. I don't think you would be surprised to know that private equity has a mixed message within this community, right?

[00:12:04] And in some cases deservedly so. But we can be thoughtful to say that is a too wide a brush to put all private equity into the same bucket.

[00:12:13] As somebody who specializes in this, what do you think MSPs should ask of investors to get insights into the differences?

[00:12:21] Right. I think they should just get into the weeds on what is day one going to be like after they sell their business?

[00:12:27] Are they going to maintain their brand? Are their employees going to be on the same HR system? Are they going to get migrated?

[00:12:34] Just really, do they show up, do the employees show up the day after the acquisition closes and feel like they're a branch office of a much larger organization?

[00:12:41] Or do they feel like they're still running their businesses they have historically with just an added growth partner?

[00:12:46] I think a lot of private equity is focused on converting these MSPs into branch offices.

[00:12:51] And I think that doesn't serve the customer very well. It doesn't serve the employees very well.

[00:12:54] Our focus is all about how do we maintain what's made a company work in the past, what's made it successful in the past, and help that company thrive post acquisition.

[00:13:04] And from our standpoint, we keep the brands of the companies that we partner with.

[00:13:07] We continue to have the employees show up day to day, the same employees, the same management team.

[00:13:13] And we are the growth partner. We're helping inject talent to drive growth in that business.

[00:13:18] I think private equity is a very broad breaststroke. And I think we've kind of formed our firm around being the anti-version of a private equity firm.

[00:13:26] And I'd encourage anyone to talk to the sellers that have partnered with us in the past to see, you know, that's what Evergreen says they do.

[00:13:33] And I get to talk to the sellers to see how we live up to it.

[00:13:36] But what you've just outlined there is what we would call the thesis, right? Your investment thesis.

[00:13:40] And for listeners, that's the element that you want to focus on is understanding the different theses.

[00:13:44] Jeff, this has been great. Thanks for joining me today.

[00:13:46] Yeah, thanks for having me. Appreciate it.

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