Mark Ribeiro is managing partner at Juna Equity Partners in NYC, a growth equity firm that grew out of part of GE Capital. Since one of my portfolio companies was acquired by a growth equity firm, I thought it would be fun to learn more about this type acquirer.
Highlights:
Sal Daher Introduces Mark Ribeiro
Angel Investing Vs. Private Equity
What Juna Equity Partners is Looking For
"... They basically provide autistic learning centers for kids that have been identified at an early age with autism. It's a company that when we bought it, it was still considered a somewhat niche space ... There was a change in the macro environment..."
"... what private equity does is it allows companies to become more efficient, and it makes American companies, absolute world beaters..."
Private Equity Investments Gone Wrong
Advice to the Audience
"... This is what angels do. Angels look at founder flesh. They evaluate founder flesh. The other thing is, is this a technology that has the potential to revolutionize an existing business somewhere? ..."
Why Staying a Private Company is Better than Going Public
ANGEL INVEST BOSTON IS SPONSORED BY:
Transcript of “Private Equity 101”
Guest: Mark Ribeiro
Sal Daher: I'm really proud to say that the Angel Invest Boston Podcast is sponsored by Purdue University Entrepreneurship and Peter Fasse, patent attorney at Fish & Richardson. Purdue is exceptional in its support of its faculty, its top five engineering school in helping them get their technology from the lab out to the market, out to industry, out to the clinic.
Peter Fasse is also a great support to entrepreneurs. He is a patent attorney, specializing in microfluidics and has been tremendously helpful to some of the startups which I'm involved, including a startup that came out of Purdue, Savran technologies. I'm proud to have these two sponsors for my podcast.
Sal Daher Introduces Mark Ribeiro
Welcome to Angel Invest Boston, conversations with Boston's most interesting angels and founders. I am Sal Daher, an angel investor who is very interested in finding out how do better build technology companies from the ground up. Now, today, our guest is Mark Ribeiro who is from the world of private equity. Welcome, Mark.
Mark Ribeiro: Thank you. Happy to be here.
Sal Daher: This is tremendous. The disclosure, Mark's my cousin.
Mark Ribeiro: I had to have an in somehow, we might as well start there.
Sal Daher: No, but the thing is-
Mark Ribeiro: It's family connection.
Sal Daher: -yes, family connection. Yes, it's family connection. Mark, I'm very proud of my cousin. He's also my godson, family connection because he's-
Mark Ribeiro: Hallelujah.
Sal Daher: -yes, he's managing partner at Juna Equity Partners in New York City. He's a big-time private equity investor from New York City. Mark happened to be up in Boston, so we thought we'd get together at PodSpot, Raul's studio. Now, it happens that a lot of people in my angel investing circle have just had a very nice exit from one of the companies we're invested in to a private equity firm is buying up these types of companies.
I thought it might be interesting to have someone in who is very conversant with the world of private equity, but at the same time, also knows about startups. Because Mark was also early on involved with Healthjump. Martin Aboitiz my brother-in-law. He was the founder of that and Mark.
Mark Ribeiro: Another family connection. [chuckles]
Sal Daher: Family connection, yes. Paella, yes. Anyway, Mark, why don't you explain to the listeners, compare and contrast Angel investing, venture capital, and then that subsection--? Venture capital is a type of private equity, generally known as private equity is something that's later-stage, lower risk, cashflow driven, very low loss. Anyway, compare and contrast the three genres.
Angel Investing Vs. Private Equity
Mark Ribeiro: When I think about the different stages of a company growing, this is something that really sets the US ahead of pretty much any other country in the world. People get concerned about, are China going to beat us or India or whatever? I always go back to the sophistication of our capital markets and our capital investors is just unparamounted compared to what you see in other countries.
There's lots of places that have tried to replicate it, and there are many places that are getting closer, but it's something that's really unique to the United States and something special. If you're an early-stage investor or an early company, you start off on that friends and family round. That's really where you're passing the hat to people that really know you.
You're going to them and saying, "Look, you know I'm a smart person, you know I've got the right background to do this. You know I've got the right motivation. Take a leap of faith with me because I got nothing else."
People do. Those early rounds are typically done by people that know the founders best or maybe have had a previous experience with them.
Sal Daher: Or the next step, after the friends and family round, the angels because the angels are making a judgment based on founders because there really is not any product, there's a dream, there's a pitch deck.
Mark Ribeiro: As an angel person, you're slightly more sophisticated. You see a lot of flow of companies and people and management teams, and you say, "Hey, this team has got something special." Friends and family are not sophisticated.
Sal Daher: No.
Mark Ribeiro: They're really just more there to help you.
Sal Daher: They believe in you. The angels actually want to make money. Then you have venture capital, which is looking for companies that have very fast growth. They want to throw a big chunk of money at that company and then benefit from that growth. Venture capitalists expect that there could be losses in their portfolio, but they're investing much later on to the point where there is already some kind of proof that the business--
Mark Ribeiro: They have their proof of concept.
Sal Daher: Yes. There're a couple of verticals that have been developed. They're trying to throw fuel on an existing fire, so the whole thing blows up. Throw gasoline on a fire so it blows up and they try to get very, very fast growth. Private equity is a different type of company, a different type of growth. Please describe the companies that private equity goes?
Mark Ribeiro: As that company progresses from the exactly what you talked about. The angel and then the VC. The VC typically invests in companies and they keep them on a leash. They're not betting full plan on a company. In the very beginning, they're basically saying, "Hey, look, I like this. I'm going to put whatever, $5 million in the 20 different companies." Then let's say two years later, each company starts coming back to them and they can see which ones are performing better than others.
Then they only fund the ones that are performing well. They let the ones that are not performing just die in the vine. As companies start progressing to private equity, private equity has two different sides of it. There's the growth side, and then there's the LBO side.
Sal Daher: Leverage buyout.
Mark Ribeiro: Leverage buyout. My experience is much more on the leverage buyout side.
Sal Daher: Leverage buyout, these are steady businesses, usually pretty low margin businesses. The revenue is very predictable. Basically, you leverage the entity that's called leverage buyout. Then you buy out the existing owners and you provide equity incentive to some management team. Presumably, the management team that's running the place, the thing in place to stay-in-place equity kickers, please. That's your business.
Mark Ribeiro: That's by large accurate, but companies that we invest in have EBITDA margins of 20%, 30%, 40%. What these companies do have is they have sustainability.
Sal Daher: For people who are not accountants, EBITDA is a measure of profitability that's fairly stable. That's earnings before interest, taxes, amortization, and things like that. It gives you an idea of the real cash --
Mark Ribeiro: Cash profit of the company before debt, essentially, and depreciation. That's a whole another area. These companies, their gross profits can be 50%, 60%. Every industry has got its own benchmark profitability metrics and what you're doing is you're going in, you're saying, "This is a great business." First thing you do is you do an analysis on the industry, where is this industry going? Is it getting much larger? Is it getting much smaller? What's the competitive landscape?
All the competitors really are fairly established already. You can diligence that pretty effectively. You're looking for industry macro trends and is that going to change in the long term, so a private equity investor typically thinks of the world in 10 years. We are in it for, on average, let's say five years. Then we need to find someone else to buy it who's in it for another five years.
Sal Daher: You acquire the company, you primp it up, you make it more efficient. You get rid of the relatives on the board and all that.
Mark Ribeiro: Typically, these things don't necessarily always go through venture capital. It could be a family-owned company. There are plenty of wonderful family-owned companies that families have owned for generation and a half. Then the family says, "You know what? My father passed away or my mother passed away. They were running, this really was for them. We want something different."
Sal Daher: You take them out.
Mark Ribeiro: We can either take them out completely or we can partner with them and say, "Hey, we're going to put some money with you. We'll help you professionalize the business. We'll put in different accounting systems and ERPs and Salesforce software, and just try to streamline the business." Find where you can cut cost, and professionalize it, meaning that we can understand the market better, help you target your customers better, and really partner up with those folks.
That can be done either with founders that want to stay in the business, or a founder may just be like, "I'm out." We just cash them out completely. You find a new executive team to replace them with. Our companies by and large are pretty stable. They're going to have I would say our smallest company in our portfolio might have $15 million in revenue. That's in the healthcare space. Typically a company that size, it should be growing fairly quickly.
Sal Daher: You're in the LBO space, and then there's growth equity. The acquisition that we talked about, this is a company that a bunch of us at Walnut invested in called Mavrck. It got acquired by a growth equity firm. What growth equity is doing, this is a business that has a platform for influencers and it has grown very fast. It's a section of marketing technology market that is growing very fast, and this company is a leader. Basically, the CEO thought it was an opportunity to get a growth equity firm behind them that could bring in very significant capital and that would then allow that firm to grow very fast.
Mark Ribeiro: Just like when you're finding that right VC partner, you're looking for more than money. You're looking for someone that can not just give you capital, but give you insight out of how to better run your firm or open doors to help you get into new spaces that you couldn't get into on your own. Typically, you have a plan. Let's say you're going to raise growth equity.
It's coming into a firm that's larger and more sophisticated than the venture capital firm, and these typically are tech-focused companies that are growing quickly. They can be fairly large, but they may not necessarily be profitable yet because they're just plowing every dime they have back into the business. They're losing cash, but that's okay.
Sal Daher: It's a gain market.
Mark Ribeiro: Market share is a race that we try not to encourage companies to chase after.
Sal Daher: Not necessarily market share, but they're building product, which eventually, it's going to build revenue.
Mark Ribeiro: Let's make up numbers. Let's say you're without any new money coming in. You have $30 million in sales, and you're growing nicely. With a $10 million investment, you'd have access to a bunch of other players in the market that don't see you large enough. It might give you-- Maybe, you have government contracts, and they want to see that you have cash in the bank, sustainability. There are plenty of markets that you could sell into where they want you to have real critical mass before they trust you.
We see that in places like healthcare and anything that works with a government, semi-conductors. Anyways, folks just want to see the ability to sustain yourself and to deal with their growth because they don't want to change. Because then, you become an important product to them. You don't want to just, "Hey, we ran out of cash this six months from now." Then they have to do it all over again.
Sal Daher: Mark, would you be able to talk about specific companies that would exemplify the kind of companies that Juna Equity Partners is looking for?
What Juna Equity Partners is Looking For
Mark Ribeiro: We are a very unique nut. Our origins are out of General Electric, and General Electric had this massive private equity portfolio within GE Capital. When they were divesting themselves of GE Capital, they also sold off that portfolio. We managed that legacy portfolio, but that portfolio is unique in the sense that it's a non-control investment in LBO-type of companies.
What does that mean? It might mean that we take a minority position in a company, or it could mean that we work with a control sponsor, and we take a piece of equity in another part of the equity stack.
Sal Daher: You're not taking over the company and running it, you're taking minority shares in companies that you think are going to be well run by the controlling group?
Mark Ribeiro: We do an extra layer of diligence around the control sponsor. We have an operating partner that supports our portfolio.
I sit on seven or eight boards, and our goal really is to support the companies and support the sponsors to make an educated decision and be a valued partner. I don't really want to be there and have-- My controls are equity controls and not lender controls, and that goes down a whole another road that I don't want to bump into today.
Sal Daher: That's a very different world because my life in the LBO world was from the debt side. Because the Bank of Boston was very big in the LBO area, I intersected with that. Anyway, can you give me some concrete details on a company?
Mark Ribeiro: What do we look for in companies? We're ultimately industry-agnostic, which means that we're open to investing in any industry. I've got to be able to diligence the industry and understand it, diligence the competitive landscape. If you were a company that's 1 of 100 other companies in a landscape, it's going to be very hard to know where you're going to be in 10 years.
Like I said, we have that 10-year time horizon. Our company is typically probably our lowest profitability measure of EBITDA. That lowest number is probably $7 million, and we invest in companies that have all the way to-- we just sold the company that had $50, $60 million in EBITDA. We have quite a range of size.
Sal Daher: These companies sell out what kind of multiples EBITDA?
Mark Ribeiro: All over the place.
Sal Daher: All over the place.
"... They basically provide autistic learning centers for kids that have been identified at an early age with autism. It's a company that when we bought it, it was still considered a somewhat niche space ... There was a change in the macro environment..."
Mark Ribeiro: The multiples are truly reflective of the underlying industry, the marketplace margins. If you're in a very steady Eddy low growth, but still growing industry, but that means that I can still put a bunch of debt on you and you can slowly pay down that debt. I can try to find efficiencies that make you more efficient and increase your margins.
Sal Daher: That's the LBO angle of a leveraged buyout. Is there a particular company whose business you can describe that you have the whole lifecycle of the company? You bought them on this theory, they do this and then you guys cleaned it up this way and that way, and then you sprinted off?
Mark Ribeiro: I think I'll shy away from giving specific names, but I can certainly talk stories. [laughs]
Sal Daher: We'll do story. Maybe the business the company's in?
Mark Ribeiro: We have a company that's in the healthcare space, and it's on the autism space. They basically provide autistic learning centers for kids that have been identified at an early age with autism. It's a company that when we bought it, it was still considered a somewhat niche space. People were starting to realize what it was. There was a change in the macro environment.
The macro-environment changed because on the federal level, they started mandating that insurance companies provide support for programs like this. That was done at the federal level. Then each state goes through and thinks about, "Hey, how are we going to digest this? What are we going to do with it?" Every state does this a little bit differently. We found a company that was in a state that was pretty progressive the way they thought through it.
Insurance providers were more on the forefront of supporting autistic families. Also, importantly, there was a fair amount of talent pool that had been trained in helping autistic kids. Every state's got different requirements and regulations. As an example, New York State had a fairly significant problem a couple of years ago, where they just one day changed the rule. Didn't even tell students in the programs that they changed the rules and the requirements.
What happened was, you had a bunch of people that were about to graduate, and they all got stuck having to go do another 18 months' worth of work. What happened? It means that you've got a-
Sal Daher: You've got a shortage of labor.
Mark Ribeiro: -complete shortage of labor that's fairly specialized.
Sal Daher: A little bit what's happening in the airline industry right now. They changed requirements for pilots, and all of a sudden, "Oh, geez, we got a shortage of pilots."
Mark Ribeiro: The shortage of pilots that's a different issue. I actually think that's--
Sal Daher: Oh, but the number of hours.
Mark Ribeiro: There are smart airlines that rotated pilots through during COVID, and that way, they kept their licenses. Other airlines just didn't do that. They just said, "Okay, you've worked, continue working."
Sal Daher: There was a regulatory change in the middle. They increased the flight times that people have to have to fly. Anyway, your theory when you guys bought this autism care company, was that you would be able to expand it to different states?
Mark Ribeiro: What turned out was, so you have these macro winds behind you saying, "This space is growing and there's a shortage of these types of facilities." You look at the providers, and there's just not enough of them. We invested in this company, and it's grown phenomenally. It's growing in part, because of the dynamics that I talked about. Also, in part, because the team has been incredibly well managed.
They've been able to attract really the best talent. They've worked hard to create an advisory board, a very sophisticated, well-known academics that had best practices that reverberate with its own employees and attracts better employees. You think about it like a hospital or health system. Usually, the better hospitals attract better--
Sal Daher: They attract the better-- Yes, it's kind of a self-fulfilling prophecy. [crosstalk]
Mark Ribeiro: Exactly. It's a space that just no one was in. Every time we built a facility-- and these things are small. Imagine a kindergarten, you're talking about $200,000 or $300,000 in each location, just to build it out. It's not a complicated space. Each time you basically put one of these facilities in place, you could fill it up in eight, nine months with students. That also becomes a self-fulfilling prophecy because primary doctors know you, they refer you in and so you have this-
Sal Daher: You build a flywheel.
Mark Ribeiro: -critical mass that brings everything together. Not only could we grow this thing just adding new locations. It's grown so rapidly that we're talking about adding 40% new locations every year and filling it. The home run in all this is that you buy this, I'm going to make up the numbers here, but you buy this at a multiple of say, 10 times EBITDA. The whole industry is getting re-looked at and re-evaluated and the multiple grows to 15 or 17 times. That way, you're getting growth just on the underlying company itself, and you're getting multiple expenses.
Sal Daher: The EBITDA grows, but also the multiple for the sale?
Mark Ribeiro: Yes.
Sal Daher: What might have been at the beginning something that sold 10 times, maybe that might sell for 15. Then you might have a company that's 70%, 90%, bigger,
Mark Ribeiro: It's hard to tell what, when, and how these things work. A lot of times people were investing before COVID in the event space and then you had COVID hit, and these companies had debt, and they had to find a way to finance it or renegotiate with the lenders.
Then I think the jury's still out if future buyers will now say, "You bought this at 10 times, but I now see the space was vulnerable to something like this. I'm only going to pay you seven times." You can get industries where multiples come down. We see this in the auto space. We've had companies in the auto sector that focused more on internal combustion engines and just out of sheer panic in the market, people don't really know and understand how long the internal combustion engine is going to be around for. Most expectations are, it's 17 years or something.
The point is, is that because people are looking 10 years down the road, they know that they can buy this company, hold on to it for five years, and it'll do just great, but they're a little worried about the next five years. When you go to sell an asset like that, it's just electric year, and that's when multiples come down. Instead of an asset being worth eight times, you're now managing it just for cash flow, and those companies might sell for five times.
"... what private equity does is it allows companies to become more efficient, and it makes American companies, absolute world beaters..."
Sal Daher: Very interesting. Let's get a little bit macro again. At the beginning, you mentioned that the United States is very advanced in the private equity space, very, very deep markets for private equity. This is one of the advantages that the US has that really sets it apart from other countries. Most of the markets where private equity is done, it just comes up to the knees of the US in this.
The US has gone very deeply into private equity. It's a trend that's been going on, started with the leveraged buyouts small, Michael Milken, back in the '80s with the junk bond market. He created the junk bond market.
Mark Ribeiro: I took an education company, in his public called K12.
Sal Daher: Michael Milken, he's just a very, very impressive guy. It's something which is very misunderstood. The term private equity, people think, "These are mean guys. They don't do anything, they just go in and they--" I feel when Mitt Romney was running for president, they pulled out some guy who claimed that he caused the death of his wife because he got rid of the health insurance, health coverage or something.
The point is that what private equity does is it allows companies to become more efficient, and it makes American companies, absolute world beaters. Because of Michael Milken's effort with the junk bonds, and then this whole private equity industry that came after that, this is a very competitive environment. American companies are lean and mean and very strong at competing in the global markets, and this is thanks to private equity, which gets a terrible rap.
You can have bad operators who make mistakes like a classic thing, the people who bought Toys R Us, and then they went bankrupt. There are a lot of talking heads who yammer about that.
Mark Ribeiro: I think there's probably two reasons why it gets a bad rap, one is the Gordon Gekko, Wall Street, greed is good, and that old mantra of--
Sal Daher: Oh, Gordon Gekko was not a private equity guy, by the way. He was an insider trader, basically. [laughs]
Mark Ribeiro: I'm just saying it's a bad rap. I'm not saying it's fine.
Sal Daher: A stock market manipulator in public markets, not a private market.
Mark Ribeiro: We do that where we do take privates. We've been part of a take private. We have a combinator portfolio like that. His focus is really, greed is good. I'm going to come in and fire everyone and get rid of the unions and just try to cut costs that way. We've never bought a company and I can't say that I've ever worked with a sponsor that I can think of that's looked at a company that's coming in and said, "Look, I can cut 1,000 people here and the company's still going to do well and I'm going to get all that extra profit."
When you say efficiency, it's not really about firing people. It's about professionalizing the institution.
Sal Daher: You mentioned the ERP, putting in a management system that helps people work better, do more with the resources they have at present.
Mark Ribeiro: Just think about family-run businesses. Family-run businesses have their own challenges where the smaller the company-- This actually goes to all companies, not just family-run companies. The smaller company is, the more it's exposed to the individual personalities of the team involved. If you're an early stage-- If you're just coming out and you're three or four people, obviously the strengths of that company are based upon the strengths of those three or four people.
When you grow it to 20 people, you can't hide-
Sal Daher: You can't scale uncle Vito who's just brilliant at doing whatever the company does. You can't multiply him. You need--
Mark Ribeiro: It's deeper than that. It's around the personalities of the individual. If you have an individual that's introverted and doesn't like to really discuss and chat and debate or they withdraw on a process like that, their area of the company reflects that. When you get to a larger company, you can define a spot for that person much more easily than you can if you're a 20-person company.
The point is that private equity companies are trying to get companies that are past that scale hurdle. There are always dependencies on executive senior management for some of those things. Look, sometimes we do have to change management teams. It's not something we've ever relished or liked to do, but it happens.
Sal Daher: Mark, at this point, let's talk a little bit about your experience in the startup world and what you see there. Maybe you could contrast a little bit what happens in the private equity world. Your experience with startups is basically with HealthJump which has been on this podcast. Martin Aboitiz is the founder. HealthJump is a company that is making data in electronic health records available across electronic health records systems, EHR systems. Mark was very helpful in getting that up and running. Thoughts on that?
Mark Ribeiro: When I think about the biggest differences when you're a small company and you're growing, your business model's not been confirmed yet. You're trying to grow into a certain space, but you might be going left, and then all of a sudden you can't go left anywhere. You start hitting resistance and then you have to learn to pivot. You have to go left right and then far right, I guess the best early-stage guys are the ones that have a vision and they know they can get it done, but they have to be flexible enough to pivot where they need to and have to.
Your business model can be constantly adjusting until it finds that happy medium point. Private equity companies, "My business model's set--"
Sal Daher: You sure hope they don't have to pivot. [chuckles]
Mark Ribeiro: There's no more-- There's micro adjustments on how we deal with things. We have a craft beer company in our portfolio and they're great. I love drinking the beer. It's Bold Rock's. I'm going to do a little commercial for them. It's Victory Beer, Bold Rock Cider, and Southern Tier. That plan's not really going to change. There's tweaking. There's making sure you get with the right distributors. Making sure you're working with vendors.
You're trying to cut the cost of your keg cost or your wheat cost or sourcing of supplies, but it's not like you're going straight and you have to make a hard right turn to keep the business going. When I think about working with that early-stage company and you're just trying to find a way for success and a path to get through it, for us, it was all about aligning incentives of the people around us. We juxtapose that with a much more advanced-stage company that's in private equity. It is very different.
Sal Daher: In your experience, have you had a private equity investment that went wrong? I know that's not supposed to happen.
Private Equity Investments Gone Wrong
Mark Ribeiro: Yes. Will I announce publicly here, no. This is all public and highly unfortunate, but we invested alongside-- There's no need to put the other names of people in this with us, but there are quite a few large-scale equity investors who invested with us into a company called Outcome Health. Outcome Health for some time was the largest. If you went into a hospital or doctor's office, chances are they had a TV screen in there.
Sal Daher: Oh, I remember those things. Oh, yes.
Mark Ribeiro: They would either give you informational commercial types of things. Or if you went to the doctor's office, there was a big screen there where a doctor could use to show you, "Hey, you have a knee problem," and he could blow up the screen and angle the knee so that you can actually see, "Okay, here's where I'm going to do the surgery and connect this and take apart that and whatever." This was all driven by advertising dollars.
Unfortunately, the management team committed fraud, and they provided faulty information to both the investors and to the ad providers. The truth is that there was no reason for them to do that. They were trying to take their memories that already looked pretty good, and no one could compete with and just make them a little bit better. Yes, no reason for that.
Sal Daher: Unbelievably stupid.
Mark Ribeiro: Then I think some of the other problems they had is they're just scaling so quickly, that they're having trouble keeping up with their own internal data points that I think they could have gotten through, but the downright fraud is just really tough with the Justice Department got involved. It's been not pretty for that management team. They since have merged with another company called PatientPoint, but because of multiple restructurings, our equity stake is worth significantly less than what was before. Can I protect against fraud?
That's just really hard. When someone is doing something like that, and you go into a data room that's got information in it, that they've manipulated, just really hard to know that. My entire career, I've just lived by the fact that integrity is everything. There are plenty of times where especially early-stage companies, maybe they're having cash problems, and they start to get squeamish, they bend the rules a little bit.
I think it's Warren Buffett has that famous quote that says, "You don't know who's got the swim trunks on until the tide goes out." That's very true. You don't really know how people behave until they're under duress.
Sal Daher: There's a difference between people behaving sub-optimally, in fighting, that kind of stuff, you're not getting along, and outright fraud. In a portfolio of something in the order of 70 startup companies that have invested in it, I have one case of fraud. This guy went through Tech Stars, the guys of Tech Stars, he was one of the best pitches they've had. A guy could present like nobody's business, but he's just a liar.
Eventually, his lies caught up with him. I suspect if you've gone to his high school and talk to people, "Oh, he's just so full of it." People would have told you.
Mark Ribeiro: Adam Newman, "I don't know who's backing that guy again."
Sal Daher: Yes. I went through the Lending Officer Training Program at Citicorp. There was a guy in the training program, who was very bright, very clever, and one of the other guys, the trainees in the program invited him home for Thanksgiving. This guest gets royally drunk at a Thanksgiving dinner and punches out a window with his fist because he was so drunk.
The family is just appalled. Then sues the host family for damages. People say, "You were invited to Thanksgiving dinner, you disgracefully got drunk, and you punched a window out and you cut your hand and then you sue them?" "Oh, nothing personal, the insurance company will pick that up." Everybody was appalled because Citibank, characters, everything, and all this stuff.
There's a case study about the Cabot Corporation, and how they bailed Citibank out in a situation when they didn't have to, just because of the Cabot family. The Cabot's name was on it, they bailed them out. They made a big emphasis on this. This guy was just a bad seed. Tell you, Mark, a decade later, I read the guy is set up for securities fraud. I mean the same guy.
It's like he was fated. He was in a career. He's just like a bad seed, sociopath. He thought he was smarter than the average bear, the rules didn't apply to him.
Mark Ribeiro: Certainly, I've met many people in my career who are always trying to finagle the system or cut corners--
Sal Daher: That's different.
Mark Ribeiro: There's a fine line between the creativity needed to work and say the emerging markets and then someone who's just outright just either fraudulent or litigious or it's someone else's fault and there is that line there and most people I think, know when not to cross it, but it does happen.
Sal Daher: Anyway. Very good. I wanted to get some thoughts from you as we begin thinking about wrapping up the interview. Do you have any thoughts for angel investors or for founders, things that you've experienced in your career that you think could be valuable for them?
Advice to the Audience
Mark Ribeiro: I think what I think about some of the greatest companies that have really come into existence now and you think about some of those founders, they are quite passionate around what they're doing. They don't take no for an answer, but no one to pivot. They are willing to take risks and with that, there's an age issues too. If you're 25, 26, 27 years old, this is the time to take some risk. Once you start having a family and kids, you're less prone to risk unless you've already hit a few balls out of the court.
Sal Daher: A caveat here. It doesn't apply to life science founders. A 25-year-old life science founder is just beginning her PhD.
[laughter]
It is more like 32 or 33 when actually--
Mark Ribeiro: The funding of those companies tends to be pretty substantial in the early stages. Your funding is going to be five, $10 million.
Sal Daher: No, no, no. That's the whole thing. There's a whole class of these early-stage life science companies that with $5 or $6 million, you can get them to the point where they can validate the technology enough so that a strategic player will get very excited and take it from there. This is an explosion.
Mark Ribeiro: That's a much larger number than some of the tech companies that their proof of concept cost $500,000,
Sal Daher: $500,000. You know something, Mark? The company who's $500,000 proof of concept, the Airbnb of this or the Uber of that or whatever, those companies 15 years ago, because I've been in the space since the early '90s actually. In those days, that same proof of concept might have cost millions of dollars.
Mark Ribeiro: Oh, sure. I mean the scale technology data, all those costs have just made it much easier.
Sal Daher: Come down tremendously. The same thing is happening a decade later in the life sciences. Because you have shared lab spaces, you have, for example, in the microfluidic space, there's a lot of developments where if you have an interestin--, it's a little bit like microchips in electronics. The microfluidic space industry has developed a lot.
You can develop a microfluidic chip for not a whole lot of money. 15 years ago, they used to be a very exotic thing. There're a lot of very, very smart university professors who the cutting edge in their field, and if they have the drive to take that technology to the clinic or industry, they can do it. There are projects that don't take $50 million.
Mark Ribeiro: It's interesting that you go in that down that road, because to me it's always about competitive landscape and trying to understand your own competitive strengths and weaknesses and who else is out there. It just means that before you could fund a life science and it's, hey, I'm going to put $5 million into it, and I can look around the world to see who else got five to $10 million, and it's the list of four companies.
If all of a sudden it costs $500,000 to a million to get to the same place, then it means that, you could be $1, $2 million into something and you think you're number one, and then someone's been developing something in a garage and--
Sal Daher: There are generations of technologies that come along, but because a lot of these are patented, you have ways of knowing what's happening because the patents, public, you can go and you can analyze the patent.
Mark Ribeiro: I'm very wary around investing around patent companies because what are you going to do, sue? Do you have the resources or millions of dollars to sue?
Sal Daher: If you have--
Mark Ribeiro: It doesn't--
Sal Daher: If you have a strong patent you can sue. I mean there--
Mark Ribeiro: You can sue, but your ability to follow through with the lawsuit is tens and twenties of millions. I know if you will live on this, unfortunately, and if you're actually going to go through a patent defense, it costs $10, $20 million.
Sal Daher: Your patent defense gets very expensive.
Mark Ribeiro: Yes, you can say you have a patent on something, and you think you're doing right, and then all of a sudden you're--
Sal Daher: The thing is that if you're a strategic player, and someone has a technology that is really valuable for you, you're not going to get involved, and borrowed in a patent dispute with somebody. You're going to buy them out.
Mark Ribeiro: Apple's famous for just not even paying attention to touching those things and then they deal with it later.
Sal Daher: It's different. Patents in software, and so forth are basically, useless. Patents in the life sciences can be very strong. Peter Fasse--
Mark Ribeiro: My only question here is that the industries have changed enough --
Sal Daher: You, and I know Peter Fasse, right? He's been on this podcast, and a lot of what Fish & Richardson does is patent enforcement. It is expensive, but you can enforce patents, and life science patents if it's, if you have a patent on a particular composition.
Mark Ribeiro: That construct of the industry's changed, right? Your competitive landscape changed, and the number of new entrances being able to get into it has changed.
Sal Daher: The thing is, Mark, it's not the--
Mark Ribeiro: Barriers to entry have changed.
Sal Daher: The barriers of entry are scientific. It's developing, for example, if you are Savran, a company I'm on the board of, they have a technology for capturing extremely rare cells, and the process is patented. The patent office was very surprised at the design that they have, because it was just like, "Wow, I can't believe this hasn't been patented before," but around that original design, there's a lot of other stuff that they've created that has to do with the process to make it work.
In order for you to make that thing work, you have to have all these pieces, and what it can do for a company. Let's say, you're a company that has noninvasive prenatal testing, okay? What you're doing is you're looking for fragments of DNA circulating in the blood. The problem with that is that it's really, really difficult for you to get a full picture of what's happening because you are basically, capped out, under coverage. Basically, there are some conditions that you can be fairly certain of, but others are not.
Others have a lot of false negatives and false positives. There is an article on the wall in the New York Times about this. How a lot of these companies talk up their ability to predict this, or that problem, but in fact, it's not at all reliable. If you come along, and you're actually, able to capture an individual cell and say, here it is, there's a fetal cell, and that, you can have a situation, where a lot of people will get very strong interest in a company like that.
Mark Ribeiro: You're talking about companies that are more advanced stage, because once you have a patent on more concept or specific science, that's one thing. Once you start building in other vertical patents around the process, the company's usually been around for some time, and you have more barriers to entry. My only point is that the barriers to entry in some of the early-stage stuff are just falling to your point, where the costs are less.
"... This is what angels do. Angels look at founder flesh. They evaluate founder flesh. The other thing is, is this a technology that has the potential to revolutionize an existing business somewhere? ..."
Sal Daher: The costs are less, but those companies are not getting funded. The tidal is funding. There are lots, and lots of technologies, most of which don't get funding, and so my interest is in finding those technologies, I have a screen that I think should work. Those are, number one, is a really motivated founder, who understands that this is not just science, this is actually building a business, and so forth. By the way, it's going to be founder-led. You're not going to be able to hire a CEO to lead the company.
Mark Ribeiro: Management is always key in early-stage, mid-stage, private equity, and public companies.
Sal Daher: No, no. This is what angels do. Angels look at founder flesh. They evaluate founder flesh. The other thing is, is this a technology that has the potential to revolutionize an existing business somewhere? That a strategic player will say, "Oh, I have a $500 million a year business, margins of being pressured down competitors, and say, I have this path that technology that could allow me to increase the profitability, and maybe even gain market share, because it does what I'm doing much better."
Those are the type of technologies that I'm shooting for. That's why I like platforms. I don't want to be involved in one-shot therapy things, does it work, or does it not work?
Mark Ribeiro: Yes, you're rolling dice.
Sal Daher: You're rolling a dice, and it's just too. This is what I see as an interesting opportunity in the life sciences, really. This is why I've decided to focus on this area. Now, at the same time, we are in the middle of a complete meltdown in the public markets for early-stage life science companies. I don't know how familiar you are with that but since the beginning of 2021, that market, the index, XBI index, or something, went way up.
Then in the beginning of '22, the index was crashing down. There's something like a quarter of the companies in the index are trading below the cash value, the cash they have in the company. I think the area is ripe for companies being acquired by strategic players. I think it's also right for some clever fun investors buying out the ones that have the greatest potential, and weeding out the ones that have no chance.
Because the public markets are not really good at evaluating these companies. They can't understand what's going on. The flow of information is so overwhelming. There's stuff coming from clinical studies all the time, and so forth. Sometimes these things work out. I've been an investor in a company called Karuna Therapeutics, that's repurposing some drugs to treat schizophrenia, and they just had very promising phase three results. It's a public company.
The market responded very favorably for that. It had a 70-something percent jump in price in one day. Companies that are outside of that, outside that charm circle are dying on the public markets.
Mark Ribeiro: I spent some of my pup years in equity research, mostly Merrill Lynch and Morgan Stanley. I'm no expert on life science, but it is easy to see why companies can be trading below cash. One is if they're just burning cash, and you're expecting them not to be able to raise new money, for one reason or another. Their product is just not going to get there, and so the market is not going to respond.
Sal Daher: It's not even a product. It's a discovery. It's a clinical trial.
Mark Ribeiro: Even more to the point, when there's a shortage of liquidity and cash, it means that companies that were able to raise capital fairly easily, the good ones are having trouble now, and the not-so-good ones are almost-- It's just become a much more challenging market for them. Unless you really have that next thing that's coming out soon, it's time to buckle down and make sure the cash you have lasts for like a year or two years.
There are other dynamics in the public markets that take place. A big part of it is just making sure you have research coverage. If you don't have an analyst from an investment bank that people know about, that's writing research reports saying, "This is good or bad."
Sal Daher: You have no depth. You have a few institutional investors who might buy your stock, but there's nobody else.
Mark Ribeiro: The other thing is that there's typically a low float. Basically, when you think about, if a company has 100 shares, maybe only 20 of those 100 are actually traded in the public market. You might have a few large institutions that could be very happy with the company, and they're staying there. Then you have, to your point, maybe the public markets don't quite understand it. Maybe the research isn't there.
You have people just start selling it. It doesn't take that many people to sell for the stock price to get depressed. The public markets can have all kinds of weird dynamics, particularly in smaller companies that are just, they're known challenges.
Why Staying a Private Company is Better than Going Public
Sal Daher: I'm really skeptical now of whether early-stage life science companies should-- They should think long and hard before going to public markets.
Mark Ribeiro: I have for quite some time. I spent, as part of those pup years at Morgan Stanley, as a data analyst, and there was a big push to have all these companies go public. The whole industry has changed, the cost of change. Frankly, the longer you stay private, the better, unless there's a real reason to be public. Those real reasons typically are maybe you're highly acquisitive, and you want to do a lot of acquisitions. Maybe that's one reason. Maybe there is a reason why you need to provide liquidities to your shareholder base. By and large, if you can avoid being public--
Sal Daher: Your life is so much simpler.
Mark Ribeiro: Your life is better.
Sal Daher: Yes. I agree. I agree entirely. For my biotechs, I'm looking strictly for biotech companies that are going to either sell to a strategic player or make a strategic deal with a strategic player and have a collaboration with them. I am almost purposely avoiding ones that are thinking about going public because that is a very, very tough--
Mark Ribeiro: A way to weave private equity back into this, whenever we're making investments in a new company, we really don't expect an IPO. Most of our sales, and it depends upon the strength of the private equity market but most of our sales at this point are probably going to other private equity funds and some industries are more ripe for strategic investors. It could be for some time strategic investors were more capable of offering more money for a company. There's magic world called synergies. Let's take our beer company. If someone buys that, let's say Anheuser-Busch buys it for example. They have a whole bunch of synergies around management team. They can manage it without the current management team. There's a whole substantial amount of costs which they can cut.
Sal Daher: Those are businesses that perform well at scale.
Mark Ribeiro: They have the ability to grow things. I guess my point is that for a long time strategics could out pay sponsors because sponsors didn't necessarily have synergies. The capital markets there's been so much liquidity both on the debt side and the equity side that sponsors started to change and sponsors were paying at least as much as strategics and they move much faster than strategics.
A strategic could take several months to look review close a transaction. Sponsors are just much faster. They're used to diligence and they know how to diligence. They know how to get in front of who they want to be in front of. They know how to look at an industry. They know how to bring in outside consultants and talk about the subjects they want to talk about. They're just nimble and fast.
They know the lenders for firms and they just have a plan to just diligence move quickly and thoroughly that gets them where they want to be. Not all strategics have that capability. That's actually a pretty big difference between the two. I do wonder now the debt markets in these past few months has been very challenging and so it's made things more difficult for sponsors for private equity investors. These guys are having to lower what they can pay for things that might change. It's not just fully around interest rates, there are other, kind of just, dynamics that banks have when they need to lend money. I think in this market you could see strategic starting to overpay for some investments.
Sal Daher: Interesting. Mark, I hate to cut you off but you mentioned beer. We have a reservation that we have to go.
Mark Ribeiro: That's good but I wanted to bring this one other thing up that gave private equity a bad word. First that was the Gordon Gekko thing. Second it's about financial engineering. For a long time and through the last downturn we saw examples of financial engineering where firms put too much debt on companies. That meant you could have a great operating company, a great management team that's executing the way they should be doing. They're doing all the things the private equity guys are telling them to do.
Sal Daher: They're just overburdened with debt.
Mark Ribeiro: They have too much debt and they're overburdened and they just start stumbling on that. That's tricky for any company. That's definitely changed to a certain degree but you still see it from time to time. As a private equity investor, we do work hard at not trying to overlay companies and have that problem because it can catch up to you.
Sal Daher: Mark, I'm very happy that you made time to have this chat before we sit down for dinner. This is tremendous. This is Mark Ribeiro, managing partner at Juna Equity Partners in New York City. Thanks for coming to our PodSpot studio.
Mark Ribeiro: Glad I could be here and learn a little bit about life science. It's all about knowing what you don't know. I don't know anything about life science so we have nothing in life science in our portfolio.
Sal Daher: Very little. Anyway, Mark thanks a lot. This is Angel Invest Boston. I'm Sal Daher. Thanks for listening.
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I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.