Joe DeLuca, NewSpring Capital | Reassess and Adapt: A Conversation on Pivoting Business Models and Organizational Structures

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But at the end of the day, let's say six months later, nine months later, you kind of move on and down the road you go. And after a few years, I said to myself, You know, somebody else is getting rich here, and there must be a different world. And so I was actually talking with one of my clients. He said, You know, you ought to think about private equity investing, and I said, that's an interesting idea.

I didn't know a lot about the world of private equity. This is way back, this is long before it was hip to be in private equity. And so I started sniffing around the local private equity community where I was working up in Boston. And I really fell in love with the concept, so I pulled the rip cord.

I left consulting and hooked up with a really, really small firm that was probably in the middle of their first fund. Actually, it was founded by a guy who had spun out of Berkshire Partners. And so we had a little office in the suburbs and I went there and started working with them. And I didn't know anything about private equity investing, and it was a little bit embarrassing to say because we weren't trained in doing deals.

We were trained in sort of problem solving for large companies. But over the years, I picked it up and moved around a couple of private equity investment firms in between. And so here I am, 25 plus years later. In between, I spent, I think, seven or eight years doing maybe even more than that, 10 years doing independent sponsor deals too. And it's funny how this industry has evolved because it used to be called fundless sponsor.

That's not PC anymore. Now you're an independent sponsor.

So I'm dusting off, you know, 20 year old memories or 20 plus year memories. And there was that whole idea. It's like, what happens after? And this idea of how do you build value and participate in that value? Beyond? Kind of a deck that you leave for someone else to do? And it was always this kind of consternation that I was like, you know, I'd really like to be part of doing that thing.

And I grew up in a family business, so I grew up wearing steel toe boots and hard helmets.

Erector sets For those who don't know, is this, you know, almost like this really cool scaffolding robotic type device that existed a long time ago?

And I think about, you know, what they're reading, or what they've read and what their interests are, and I've always been like that. So if you came over and you look, you'd see a lot of interesting, very diverse subjects. We go from religion to stories about the sea and the ocean, to, you know, trashy novels.

And so and so, a little bit northern, a little rowdier, a little more budget friendly for, you know.

And certainly, for me, it was a, you know, it was kind of a coming of age experience. So one of the things that I really like about the private equity industry and the people that are drawn to it is this sense that, you know, there's this idea of, like, we're going to overcome this, too, shall pass, we're going to find ways. And as I think about my career when I was in PE and certainly also at Blue Wave, was every time I. The way things happened in life and in business, et cetera. They never really happened for reasons I thought it'd be not one model happened, you know?

Like, there was never the serendipitous like March, the model in the SIM set. And so I think people have this ability in the industry to kind of get to a roadblock and find a way to overcome, and it's certainly a challenging industry. What's one of the things that, as you reflect back on, you know your life and business career? That was maybe a hard thing that you had to work through and overcome?

We had a portfolio company up in New York City area and we had invested in it probably 18 months prior to when Covid hit. And at that point in time, it had gone through two CEOS, a CFO, a COO, a failed IT implementation, all in 18 months. I mean, the company was just reeling and then Covid hit and it was, and a chairman?

And so it was without a chairman and without a CEO, and I had to go up there and run this business. So, and it's in Queens, right? Which is in the bullseye of Covid, yeah.

Right, and so here I am sort of. And nobody in the world has figured it out. Like, what are the implications of Covid? You know, where is this going? I said goodbye to my family.

I kind of moved, you know, went up and found it was easy to find rooms in that area of the city at that time. And started, you know, introduced myself to this company. We had 110 employees and they had to be in the building every day. Because it's an institutional pharmacy, we were an essential business, right? We're doing meds for, you know, transplant patients and people with AIDS and HIV, or HIV and CF, and really bad serious diseases.

And they need their meds, and so we had to be in business.

Well, we had a fleet of drivers, for example, and we had to pivot the whole business because the fleet of drivers. No driver was going into a building anymore. They would, you know, drive up, but they couldn't get into the buildings. So how do you deliver meds to people in buildings around the city? So we had to figure all that out.

And it was very challenging while at the same time just trying to keep people safe, keep people, you know, feeling like they can come into work and be protected. And it's New York City, so it's very, very tight confines, real estate, you know, New York's real estate.

So it was very challenging, I think, you know, we thought we had the thing under control and stabilized, and then we sort of came into this new. About nine months later, I was still there running the business and the vaccine came out, and now we had to pivot our business again. Which is, we were one of the first people. I'll never forget this.

You know, one day the armed guards show up and the truck rolls up. I got 10,000 doses of the vaccine to put in my refrigerator and I was like, holy crap, like we weren't one of the first people in the world to get this stuff. And it's going in here.

And so we pivoted our business to basically being, you know, institutional pharmacy, delivering these other meds to. How do we go out in the community and vaccinate people, how do we do that, and how do we get paid to do that? And basically, the state and governor's office and other authorities have said, you know, just go do it.

We will figure out how to pay people and the paperwork involved in that. So it was for a whole host of reasons. It was interesting intellectually, but it was very challenging physically and mentally. And our team. We sort of put our heads down and just we just went day by day and plowed through it. There was nothing else we could do.

And it's going to be this thing that I think a lot of people can look proudly on, the challenges that we all face. But finding a way through and wasn't perfect, no, but we all found a way through. But those first few weeks were daunting, so when you were kind of called into action, you had to get into Queens. And probably even just finding a hotel, even though there's lots of rooms. It's like, Where do you go? What was it, what was that first week?

Like, how did you approach it? how did you kind of, like, get the lay of the land?

I introduced myself and I tried to just do half of the building at one time and the other half of the building at the other time. And say, Look, you know, can we just sit together for 15 minutes and talk? We're in this together, like, what's going on, what's going on in your world? And you hear the stories of the team.

It's like, I'm making a name up. But Mary Mary commutes an hour, she has to take a bus to a train, and it's sort of like her normal commute. How is that going to work, you know, in this world? So just trying to. So I tried to understand what the people that were working at our business, just what was going on, so that I could. We could relate to each other and then I could ask of them, Hey, okay, we really need to do X.

Like, and then there was some empathy, you know, and some relationship building in the first week. That I just felt was really critical because it was all happening real time. And instead of just coming in and saying, you know, here's the list of 17 priorities, and we're going to work on these from a business perspective. The world wasn't like that for us, it was more like human that first week, as opposed to anything.

In retrospect, people said, Oh, we figured it out. But then I remember, exactly, you know, the things that you were going through. And so I started looking at. How do you even come up with frameworks, how to act, and what you're describing is exactly kind of like the first step in this framework? I saw there's this really fascinating guy named Colonel John Boyd, who came up through World War II and then the Korean War. And then became a really big part of kind of the military doctrine.

But you think about it, they're always working with imperfect information and trying to figure out how to make decisions. And he came up with this construct called Ooda loops. We're at Ooda loops O o d A. And so what it stands for is observation, orientation, decision and action. And the thing that he was saying, the first thing you always have to do is exactly what you did.

It's like, let's observe what's going on, let's listen, let's figure out the lay of the land. And then you can analyze and orient, then you can decide, and then you can act, and then you rapidly iterate. So it sounds like you were operating kind of right out of the playbook there.

It was unbelievable, like they completely changed their business model and the things that they were able to do, these people running the businesses. It was fantastic and a lot of it was sort of it wasn't by the book, right? For anybody, it was neat.

Kind of like what we were just talking about.

Let's have a finance person, a marketing person, an HR person, an IT person. You sort of get the idea. And let's have them on tap, call on them and add value where and when needed. So we started to do that, and, you know, for a couple of years, you know, it worked in some instances, and for a lot of reasons, it didn't work.

And so then we did a reboot a few years ago, and one of the things that I got involved in when we were doing the reboot. I went out and did a little consulting study and I interviewed 40 people, 20 operating partners, 15 people from private equity firms around the country, other people in the value chain. Just to talk about the role of operating partners, the role of value creation and private equity. And I sort of synthesized and came up with recommendations for how we should do reboot, you know, version two at Newspring. So anyway, what we've moved on to is really because we have five different investment strategies.

At Newspring, instead of having a value creation or operating partner group, that serves all. We go strategy by strategy. So I happen to be in the mezzanine strategy dedicated to that strategy now. Whereas before, I was sort of trying to do, you know, a lot of the other strategies. And just for a lot of reasons, it doesn't work. So basically, we suit up with strategy jerseys now and now. We were adding to the team, the roles that we play and where we get involved. We still use these third party people frequently because there's so much ground to cover. Unless you're a mega mega fund and you're able to afford to have a person in HR, a person in marketing, a person in, you know, that focuses from an operating partner perspective, just on that discipline. You still have to come at it with, we come at it with a generalist approach, and we chop her in these very specific resources as needed.

So that's a model that works for us now. I can see as we grow, where we may move to a model where we actually bring one or two of the. The more typical disciplines in-house, like finance and HR or talent, typically are the ones that are the first to come in house. Because they're just across every portfolio company. All day long, you know that you will have, you know, financial issues that you need people to work on, and HR issues that you need, you know, people to work on. So that's the model that we use right now. But, like I said, I've talked with lots of other private equity firms and there's very different ways that people go about doing it.

They're really interesting and unique. I remember with Francisco Partners out on the West Coast, those guys, they built their own consulting firm, you know, basically after they sort of evolved their model for value creation. It's interesting.

And one of the things that you kind of mentioned reminds me of this book, the lean startup, which is this great. It's one of the best, certainly the best book I ever read. To start Blue Wave, because it saved me from making a thousand mistakes. And they were the one that came up with this concept of MVP. You know, the minimum viable platform product, however you want to describe it, and it sounds like that's exactly what you did. It's like, let's go have the audacity to talk to your stakeholders and they'll tell you what they want. And so how you went out and talked to 40 different people before you even built.

It is, I think, incredibly insightful and intuitive in terms of how to build something that your customers want. And then their whole concept, once again, is this idea of you iterate, you know, you're going to just get it going, talk to people and form it. And almost like Ooda Loop as well, and then they'll tell you where to take it. So the way that you're iterating here seems very familiar and makes a ton of sense to me. And a lot of what we're seeing. And and certainly with the third parties, I intimately appreciate that, because that was something. As a lower middle market private equity investor, we needed lots of them.

And unfortunately, most of the time I spent googling and calling friends, saying, Do you know someone who does this? And I was like, Oh, these market network concepts will solve this. But I mean, your point. Even with the large funds, we work with many, if not most of the large private equity firms and their OPS groups as well. And they still have to outsource tons of things because you just can't forecast where your needs are, and I almost think of private equity. It's almost like a craps table, kind of germinating to where we are.

You can only cover so much of the board. Everything else. You're kind of, like, you know, moving and grooving and trying to, you know, kind of fill in chips with. So that makes a ton of sense. So we're obviously in this time that's very fluid.

And I think every time is fluid. But this one, particularly as you think about, you know, this recessionary, transitory economy, whatever you want to describe it. You have. You have geopolitical issues, you have, you know, global kind of changes. As you think about the time now, and at face value, it can be kind of scary to people. Where do you find opportunities? What are you thematically sharing with your portfolio companies and saying? Here are places you can secure safety but also find success and opportunity?

So it's helping those companies take a look at how are they, how are they set up from an organization structure perspective. Are we are we? Are our processes properly aligned with the tasks that we're trying to accomplish? Are we sort of aligned organizationally to best serve the customers?

And and once you start going down the rabbit hole of organization, you, invariably, at least my experiences, start to make decisions and improvements. In the way you do things, the processes. And so, you know, you're adding value in a whole bunch of different ways that you didn't even think about. But you came in to the with the approach of I'm going to look at the organization, how we're organized, and then the second part of organization. I think where there's, there's always, you know, huge amounts of value that can be added is with the people, right? And so again, these are small companies that we're investing in. And they really, you know, in most cases, haven't had the luxury or been been pushed to step back. And say, you know, let's talk about talent and talent management across the organization in a in a systematic way. How are we going to develop people?

How are we going to recruit people and retain them, and what are the criteria? You know to to, you know, you know, move people on if they're not sort of doing, you know, making the making, the cut.

And so just thinking about that in an organized way with the the leaders of the businesses, I think, you know, it's. It's a huge way, it's a huge lever to add value in the companies. Because then all of a sudden, I think, like, you know, wow, I never, really. We never really could afford or had an HR person before. And a week later, like this is like the best thing. I can't imagine how we got on with that, you know, without this person, for example.

And and it just goes on and on and on when you're, when you're in there and doing these, you know, doing this from an organization perspective, as it relates to people. So I think organization is is always a good go to to, really a theme that across the portfolio company, you can't go wrong.

So it gives us kind of, like, a normalized perspective of what's happening.

2017 or 2018?

It was like 17 18 of the projects this last quarter, it was upwards of 40. And so there's been this metamorphosis and people were always important through all of PE. But right now, I think, you know, in some ways, Covid has catalyzed this whole idea of, like, Wow, you know, there's by by getting the right people, keeping your teams intact, keeping them engaged. You know, we've seen this metamorphosis occur, and so what you're sharing makes a ton of sense.

And once again, you all are intuitively doing all these things and we see the industry kind of taking shape. And now the biggest single use case we see in private equity is people. It's every quarter and it gets bigger and bigger and bigger. And so that's something that I think people don't necessarily understand or appreciate about the industry is, even if the industry is totally return generated. The only way they're going to do it is by bringing in great people and making them successful.

It really is.

So this is like going back to Chadwick and Rutherford, okay? LISA MEITNER Like the real like pillars of nuclear physics, it's really interesting and cool, and then the next 450 pages are like the making of the atomic bomb.

Okay, and the Manhattan project, and it's just it's an awesome book. I mean, it gives me goosebumps when I, you know, when I pick it up. And I can just jump into it in any place. And be just totally overwhelmed by the task that they had to accomplish, it's incredible.

What were some of the takeaways? So, so, okay, so here's one, which is, you've got this guy. General Leslie Grows, who from the government and the military is sort of in charge of Manhattan Project. And then you have the polar opposite in Robert Oppenheimer, running the scientific, you know, and the technical aspect of the project. These guys pulled it off and they were completely opposites, I mean, they were like the stereotypes.

You've got a cigar chewing, you know, belligerent sort of general, okay? and you've got, you know, a really, you know. Oppenheimer probably weighed 120 pounds 130. You know, brilliant physicist, just, you know, a man of the world, and, you know, by a lot of regards, probably a communist. Okay? And they worked together over the course of a couple of years to put this thing together and make it happen.

Like, how does that ever happen? But it does so. One of the things that always is inspiring to me from that, and then the parallel to businesses. No matter what the task is, there is a way to do it, there's got to, there is a way. I mean, people, how do we build, like, how do we make this work?

Like, how did we get these people to work together? There's a way to do it if you really, really, really, really want to drive on it and spend the time. And these guys, they spent the time, they worked on it and they got it done. So that I think that, that that's a lesson for me, at least, you know, I can use everywhere, and it's inspiring. At least for a short period of time, though, because they weren't going to be working together for five years. But if you put them in a room for two years, they can get this stuff done.

The same with all the other people that were involved in that project, the tens of thousands of people that were involved. For a short period of time, they came together and got it done. I mean, they can't fix the potholes in the road, you know, around my house in two years, but they can build an atomic bomb, right, you know? And whatever, 18 months, it's unbelievable.

I'm going to order that book right after this conversation.

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