‘The ETA Model Works’: Booth Alum, Professor Talk ‘Grand Slam’ Investment and Their Path to Success
University of Chicago Booth School of Business alum, Shamus Hines, MBA ‘15, and Steve Morrissette, a visiting professor of business administration at Booth, first met in 2013 when Hines was a student in Morrissette’s M&A Strategy course.
At the time, Hines was a sales executive with Morningstar and had a strong drive to own and operate his own business. Morrissette was a serial entrepreneur that had invested in many new ventures and started several of his own, two of which he took public.
The two quickly found a common interest and in 2015 jointly published “An Investor’s Guide to Search Funds” in the Journal of Private Equity. Morrissette also accompanied Hines on his searcher journey, which led the duo on road trips across the Midwest to explore various opportunities, including a medical supply business and a mechanical piping contractor.
The search concluded in 2016 when Hines, backed by a group of investors, including Morrissette and Dennis Chookaszian, adjunct professor of strategic management, Chicago Booth, acquired Applied Data Corporation (ADC).
ADC, which provides software that helps clients keep fresh food operations profitable by reducing waste and increasing sales today is used by more than 120 retailers and over 20,000 customer sites in nine countries on three continents. In late 2020, ADC took another major step under Hines’ leadership, completing an investment/recapitalization from a private equity firm that will fund ADC’s next phase of growth.
In the following interview, Hines and Morrissette provide some insight into this success story of ETA at Booth – a true “home run” for the Booth ETA community – and an example of the beneficial connections between Booth students and professors.
The following excerpt (edited for clarity) is from a recent podcast discussion between Hines, Morrissette, and Brian O’Connor, an adjunct associate professor of entrepreneurship at Chicago Booth.
>> Listen to the podcast in full, here.
Brian O’Connor: Shamus, let’s go back to the beginning. So you are sitting in Professor Morrissette’s class and you already new you wanted to leave a great job to go buy a business to grow? Also, why did you decide to involve Steve in your search?
Shamus Hines: Yes, I had gone to Booth to seek out opportunities for entrepreneurship. I was open to just about all options, including continuing my career at Morningstar by leading a new initiative for them or even doing a startup. However, after learning about the different avenues of entrepreneurship, I was really drawn to running and operating a business that was already in existence, but small enough that we could make a noticeable impact by investing our time and money into it.
I felt like taking something from zero to one was much more difficult than taking something from 1 to something larger. Doing a startup likely required a deep level of subject matter expertise, a higher risk appetite, and funds to see your vision through all of that. Without extreme conviction in building something from nothing, the chances of success were low. So why not build on the success of others?
The fire inside of me definitely got stoked in Steve’s class – especially hearing one of the guest speakers describe how, when he was a student at Booth he decided to leave a great job and buy a tiny seven person company and then spent the next 10 years growing it 100x – I was mesmerized by his process to buy and build.
Regarding Professor Morrissette, I just connected with Steve very quickly, he was easy to approach, he was ready to engage with students. He was an investor, an entrepreneur, an operator, and the content in his M&A class was spot-on for starting my search process to find a business to buy. I loved the way he thought through acquisitions and we seemed to have a lot of shared experience, or at least a shared mindset of kind of how we would think about business. So it was a really cool alignment.
The fact that he was willing to help, and willing and excited to be part of it, was a huge advantage for me and something was very attractive. I was so nervous about the idea of taking on something I had not done before at this magnitude, and to be able to bounce ideas off of someone who has been-there-done-that at a very granular level was invaluable. It helped me build a ton of confidence and prove that I was seeing things the right way. He helped me to start to trust my own judgment.
O’Connor: Steve, from your side, what compelled you to back Shamus early in his pursuit of an acquisition through a search fund vehicle?
Steve Morrissette: After about 10 years of angel investing in new venture “moon shot” deals, I was pivoting to more direct/control investments in established companies that still had growth opportunity left – just as I met Shamus and learned about ETA. In Shamus, I saw several valuable characteristics immediately. Obviously, he is a smart person, good drive, good sales skills. Even though I’m a finance guy in my DNA, I know that nothing happens till somebody sells something. So I knew that whatever business we would buy, we would need to [help] grow it.
Shamus has the skillset to understand sales and customer development processes. So I consider that a very valuable skill. We talked a great deal about the difference between finding investors, buying a company, and then actually operating and growing a company. When I talk to potential searchers, many of them seem more attracted to the search, get a little too focused on the capital raising and company finding process. Value is created in the operating phase. And my smell of Shamus was he knew how to be an operator and was committed to being an operator. He wasn’t trying to be a consultant or an investment banker – he was committed to operating the company.
O’Connor: Steve, sounds like you were a bit of a mentor to Shamus but you were also an investor that had to make a financial decision. Why did you agree to invest in ADC with Shamus?
Morrissette: It was a good solid fundamental business. It was not sexy, not esoteric… providing software and services to the delicatessen part of a grocery store is not exactly the next Google. But there was a clear pain point that this service and software solved. And then there was a lot of opportunity to solve that pain point for more customers in our primary target market.
Additionally, we saw levers we could pull to bring this service to additional target markets. In my experience, searchers like Shamus find unsexy fundamental businesses that still have great growth opportunity – and they can create a lot of value. And, again, a business where Shamus’ sales skills would be valuable.
O’Connor: Sounds like ADC is a fundamental, mission-critical business and that there were some levers that you could pull to grow it. Shamus, how did that play out as you were leading the business?
Hines: We won this phase exactly because of the fundamental nature of the business and the growth opportunities. First on the growth side, we discovered that most clients and potential clients would prefer a software-as-service model rather than an installed, hosted model. We pulled that lever – it took over a year to convert to SaaS, but it allowed us to grow our recurring revenues by over 300%.
When COVID hit we certainly saw the beauty of being a mission critical service in a fundamental business. Suddenly, fundamental items like groceries had increased importance in everyone’s daily life. When I was raising money for the deal it was during the peak of the last bull market and everyone warned me to buy business that had opportunity, but that could survive the next downturn. Mission critical businesses like ADC fare well during downturns and shocks like COVID.
O’Connor: I can’t help but wonder how a relatively green CEO handled the COVID turbulence – even as very experienced CEOs were shaking in their boots. How did you handle it?
Hines: I think the board and I did a great job of pulling together at the very beginning of COVID and made some quick decisions about taking the workforce 100% remote. We also had to shift gears on the way that we interacted with our clients – shifting from in-person meetings to all Zoom calls.
At the onset, as we and our clients were learning how to work remotely, it caused some clients to delay projects, which caused our pipeline to suffer. We had to learn to be more patient because our customers were going through a stressful, momentous transition. It sounds contradictory, but had to be both fast and patient.
O’Connor: Shamus, again, congratulations on taking ADC to the next level and attracting a PE fund to sponsor ADC’s next phase of growth. Why was that the right time for you and for the business to bring on a financial partner? And, what does life look for you on the other side of this transaction?
Hines: There is strong demand for our service and we can’t move fast enough to fill all the demand. So we thought it was important to bring on a partner that could help us move faster. We have some significant M&A opportunities to expand our business – a partner can help us there too. I am continuing on as CEO – they want us to grow the business organically and through M&A. I am excited about this next phase of our growth.
O’Connor: Steve, from your perspective, how was this event perceived by the investor group? After only two and a half years with great growth opportunity in front of ADC, is it too early?
Morrissette: To be clear, this investment was a home run for Shamus’ investors – really a grand slam. The investor group are all sophisticated investors and know that you cannot control the timing. When people say, “today’s not perfect, let’s wait two years,” you wait and sometimes find out there’s no deal out there in two years. Secondly, Shamus commented, I am a huge believer in having the right partners funding the company at the right stage of its development. The investor group that Shamus put together was right for this phase. Just like the founder was the best owner for the former phase.
For the next phase of this company’s future, Shamus has found a great financial partner. So could you get more value six months from now? I don’t think so. And by the way, investors have the opportunity to roll some of their equity if they want to participate in the next phase of the company’s growth.
O’Connor: I completely agree that you need to evolve the capital structure, and investor base, alongside the evolution of the business. To wrap up, what are the biggest lessons learned from this round trip?
Morrissette: Two quick points: number one is, these companies, while they were founded by great founders and are nice companies, there is always a lot more company building to do and mess to fix. Searchers need to know they’re not buying a perfectly shiny, polished apple. They are going to need to do some work to get that company ready for its next level of growth. They’ll need all those operator’s skills, it’s a little bit messy, and Shamus went through a fair amount of that mess early on.
The second is the ETA model works. As always, the idea of this is to increase your odds of success: fundamental/mission critical businesses, good recurring cash flows, growth levers you can get your hands on, get the right people on the bus, etc.
Hines: I saw a quote from an entrepreneurial investor, Jason Lemkin, which nails it: “keep moving, don’t quit, hire great people, don’t run out of money.” I’d especially emphasize to keep yourself moving and stay focused. And, as Steve said, the model works.
Lastly, attract great advisors that help you make great decisions and help build up belief in yourself. I’m so glad to have started the search journey at Booth, taking advantage of all that I learned there, and with the help of great advisors I met there. It has been a great ride so far!