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Sculpting Success in the Microcap Space | Ryan Kelley

Ryan Kelley is a Founding Partner of Shore Capital and is responsible for all activities of the firm including sourcing, evaluating and enabling the growth of Shore investments. In this episode, Ryan shares insight on the “why” behind Shore Capital and the meaningful relationships that make Shore such a great partner for founders.

Ryan is a Director of Behavioral Innovations, BrightView, Navia Benefit Solutions, Transformations Care Network and CG Life, and was a past Director of the Florida Autism Center. He serves as Chairman of Community Care Partners, Point C, and Tandem. Ryan also served as past Director of Sirona Infusion, ClearPath Diagnostics, Michigan Rehabilitation Specialists, Fast Pace Urgent Care, the Stepping Stones Group, and Navia Benefit Solutions.



Michael Burcham: Welcome to Microcap Moments, a podcast from Shore Capital Partners that highlights the stories of founders, investors, and leaders who have taken on the challenge of transforming ideas and small companies into high growth organizations. The journey of building and scaling a business takes one down many unexpected pathways.

It's a journey where we learn from our mistakes fall down often, but have the entrepreneurial grit to pick ourselves up and persevere. Within this series, we will share these stories of success and failure of the challenges and the rewards faced by those who dare to dream big. And through their lessons learned, we hope to inspire others who are on a similar journey of becoming, growing, and leading.

In this episode, I am talking to Ryan Kelley, one of the original four founding partners at Shore Capital. Our discussion covers some of the unique ways Shore Capital supports the founders with whom we partner both personally and professionally. Ryan also shares his unique perspective on Shore's approach to investing in the microcap space.

I thoroughly enjoyed this interview and I think you will as well.

So Ryan, to get us started, tell us a little bit about yourself and how you got to Shore Capital.

Ryan Kelley: Thanks Michael for hosting me. Excited to be here. Just quick backgrounds from the Midwest, so from Michigan. Parents were teachers, didn't grow up around business, but went to Michigan State and fell in love with business. Majored in accounting.

First job out of college, was in investment banking. Focused on the healthcare industry in New York, and found myself to a great firm in Chicago in 2006, working in private equity. From 2006 to 2009, got to meet Justin Ishbia, the managing partner of Shore. Justin and I were friends socially, and then begin working together on different ideas professionally and give Justin all the credit for the vision and the idea of Shore.

He pulled me in, in early 2009 to help with the business plan, the website, finding the first office space. So Shore was really born on June 1st, 2009, and I'm just humbled to be part of day one with Justin, Mike and John, turning the lights on and getting this thing off the ground.

Business Builders

Michael Burcham: In this first segment of our interview, Ryan defines Shore Capital as business builders. Listen, as he defines this business building perspective to investing.

Ryan, Shore Capital focuses on microcap investing. Can you share with our listeners how you define microcap and what that means as an investor?

Ryan Kelley: I would say there's like many things, there's different flavors of private equity, and I think in the microcap space, the biggest difference versus other types of private equity is that at this end of the market, we're really business builders.

There's not really an element of financial engineering. For us, it's all about finding a great business, in a great sector and recruiting talented management to complement the founder. So for us, it's all about growth and it's about building businesses.

Michael Burcham: Can you give me some examples of what you mean by business builder and the kinds of things you bring to help a young company grow?

Ryan Kelley: You know, often a founder is an owner operator, so the a hundred percent owner, or maybe they're 50/50 owner with a partner, and they're also running the business day to day. And that puts a founder in a position where they're often facing a trade off between current income and growth. Because to spend money for growth takes money out of your pocket today.

And so that's often a situation that founders find themselves in. I think the biggest thing we do is we change that paradigm. So we allow for current investments, where often the earnings can go down in year one or year two of our partnership. We call it the J curve. So make investments, right? The cost always comes before the growth and the revenue.

So pull that expense forward, which we call an investment, to invest in sales and marketing, or to invest in technology, or to invest in HR. Things that you need to scale your business. So pull that expense forward and it allows the business to scale and it doesn't come at the expense of current income.

So when we partner with the founder, the founder's often getting several years of earnings off the table at a more efficient tax rate. Instead allows us to now really reinvest in earnings for transformative growth. A few other examples might include developing a strategic plan. So often founders are innately aware of their customers and their employees and they're doing the best they can in their world and the opportunity to have a board of directors.

So it's something that's big for Shore. We recruit a board of directors of industry experts and complimentary experts. We bring strategic planning resources to bear. We often encourage mergers and acquisitions, so in some spaces it can be more of a consolidation strategy where you're buying very, a lot of very similar like businesses to create scale more rapidly.

And other companies of ours we're buying adjacent products. We're buying adjacent technology offerings. And so all of these acquisitions allow the business to scale and to de-risk the business. You get more clients, you get more employees, get more market share, and so often we don't see founder owned businesses executing an M&A strategy.

But that's something that we think we really bring to these owner founder businesses. We bring the the M&A muscle and sort of help them do acquisitions, teach them to do acquisitions.

Michael Burcham: Ryan, in addition to all those things, you also tend to bring a professional management team to a company that may not have had or could afford a team like that. Isn't that right?

Ryan Kelley: Oh, yeah. We see that all the time, Michael. Not uncommon for us to find a, a wife or a sister or brother-in-law who's the bookkeeper of the business, and of course not trained in accounting, but just doing bookkeeping in QuickBooks. I even think in an earlier investment we had a, a box of receipts given to us for accounting records.

A lot of what Shore does is professionalize the back of the house. So the accounting, the HR technology functions, and it's something the founders are often happy to give up. Founders typically passionate about their product, their service, their clients or people, and they're more than happy to get out of HR, accounting, technology, and other areas.

So one of the big things is we often ask the founders what do they really enjoy doing and what don't they want to be involved with? And we try to take things off their plate that they don't want to be involved with.

Industry, Management, Company

Michael Burcham: In this next segment of our discussion, I asked Ryan to talk about how we are typically partnering with founders who do not think their business is for sale.


He also shares a key part of our investment formula in a model he refers to as industry, then management, and then company.

We often buy businesses that are not for sale. What does that mean and what does that process look like?

Ryan Kelley: Yeah, I think when people think of private equity, we, we always get asked, how do you find your companies?

Do you look at listings online? Do you talk to bankers and brokers? And I often tell people that we're trying to buy a company that's not for sale. And so that seems counterintuitive. But the point is, if someone is listing a business for sale and they wanna sell a hundred percent of that company and walk away from it, it's probably not the best business for Shore.

So there's asymmetrical information where the owner operator today knows a lot more about the business than we ever could on the outside. And if they're listing it and trying to walk away from it, it's probably not something that we want to be part of. So instead, what we try to do at Shore is find a business that we know something about the industry and we know as much as we can about the company from the outside, and we try to position ourselves as the best possible partner for that company and that founder.

We want to actually become a business partner to that owner founder. And so a typical Shore structure will have the owner, founder retain anywhere from 25 to 40% in the business and Shore would take the balance of the equity position and our approach is to really grow the business over a five year period and then have that 25% position of the founders be worth more than the 75% that they might have sold to us initially.

Michael Burcham: There is a process to how this actually works, I believe. Let's talk about that process a little bit.

Ryan Kelley: That's a great question. So at Shore we always say industry, management, company. And we're very thematic in our approach. So we create roadmaps and we do a lot of industry research going to conferences. And so if you think about industry, management, company, in that order it's pick an industry that you have conviction around that specific industry, the growth and the opportunity for consolidation, and then go find managers.

So it could be former CEOs of bigger companies, it could be founders that have already sold their business many years ago. So find executives that have experience in that particular industry. And the third part is finding the company. And so I think what's interesting is that industry, management, company, the third part of our process is meeting with the companies.

So by the time I meet with a company in a certain niche, I might have already met with 10 or 15 similar companies, and I might come across as more educated or well versed on the competitive landscape, the trends, the pricing structure of that particular industry. And so we often tell founders that they've forgotten more about their business than we'll ever know, but for a third party partner or a financial partner coming in, we've done a lot of homework and we're pretty in tune to the market and what the opportunity is for that company.

Transformative Partnerships

Michael Burcham: I would imagine that forming a partnership with Shore can be pretty transformative for many founders. Are there any stories you can share that illuminate this for us?

Ryan Kelley: That's a good question. I think founders and also the CEOs that we often recruit in, so a couple stories come to mind.

One is the Stepping Stones Group. We merged two companies in 2014 to form the platform. One of the businesses was called Cumberland Therapy Services. It was a carve out of a corporate parent. The other business was, My Therapy Company was an entrepreneur, founder led company. So we merged the businesses in May of 2014.

It was roughly $18 million enterprise value partnership. Where the founder retained a big part of the business. We executed a five-year growth strategy, and really in year three, started to hit our five year plan and exited the business to a New York private equity firm in December of 2017 for 132 million.

And the main founder of My Therapy, who is a large equity holder made I think five to six times his rollover investment. The business went on and continued an M&A strategy, continued to grow organically and sold for over a billion dollars in 2021 to Leonard Green Partners. What I'm most proud of there is there was roughly six employees at Cumberland.

So in May of 2014, 6 employees who were, we thought really talented, but maybe underutilized by the corporate parent. They're all still at the company today and they had equity granted to them that became, had value monetized in the 2017 transaction as well as the 2021 transaction. And so what's really neat is to have a really dedicated set of employees that got equity, saw the business scale, got rewarded for it.


We hired a CEO in this business called Anthony Rintala, and he's still there today working in a business that traded for over a billion dollars. And so for me, it's the fun of building companies and bringing things together, but also seeing our founders and our CEOs and our staff reap the benefits of equity and growth.

Michael Burcham: And you also had a very positive story and outcome with Navia. I'd love to hear more about that one as well.

Ryan Kelley: Yeah, so Navia is a great story. In 2017, we made an investment in a company called Navia Benefit Solutions in Seattle. And prior to our investment, the business was owned 50/50 between Hillary and her brother Matt. There was sort of a divergence of interest between Hillary and Matt.

Hillary wanted to keep going and be the CEO and grow the business. Her brother Matt, had other interests outside of the business, including teenage daughters and interests in other things. And the way Hillary tells the story, it became a friction point around Thanksgiving and Christmas because they thought the two options were sell a hundred percent of the business or keep status quo.

And so they kind of assumed they'd have to sell the strategic buyer and basically sell out and lose control of their company. We met with both Hillary and Matt in early 2017 and explained that we could customize a partnership where Hillary could retain roughly 45% of the business, and Matt could retain a piece, and Shore would come in for roughly 50% ownership.

And so we'd allow Matt to get some liquidity and to move on and do other things. We'd allow Hillary to remain in that CEO seat and continue growing the business. And so that was just one where our flexibility and ability to structure a partnership met the needs of both owners. And so it was roughly a 30 million enterprise value partnership in 2017.

We grew the business through acquisition and organic growth. It sold for roughly $230 million in 2021. So similar to Stepping Stones we had a five year plan, and by year three, year three and a half, we'd roughly hit our five year plan, and it was time for another PE firm to take the business. And last thing I'd mentioned on Navia would be similar to Stepping Stones.

One of the most exciting parts for me is seeing there were roughly eight employees that were reported at Hillary had been there for roughly 10 years, but they didn't have equity in the company. So when we partnered in 2017, we granted equity to the roughly eight direct reports of Hillary, and I vividly remember kind of these boring legal documents called Unit Award Agreements.

And then fast forward to the $230 million sale to a bigger private equity firm, we had this group of kind of eight direct reports get anywhere from a $600,000 to $900,000 of value, which for many people is probably six to 10 times annual salary. And so I remember in particular, there was one employee who came up to me at the closing celebration and she was nearly in tears telling the story about, had been renting a house, a long commute to the office.

All she wanted was a house that she could own. And so with the payday, she was able to buy a house much closer to the office. Her son, you know, nice backyards, her son could play in the backyard. And I could just see the genuine excitement and thrill for how that changed her life.

Building Relationships

Michael Burcham: In the following segment, Ryan and I talk about the importance of building relationships and why this is so important to our team at Shore Capital. I really enjoyed the stories he shared in our discussion.

So Ryan, building relationships with business founders and owners is critically important for success. Can you give us a few examples of how you have worked to build these relationships?

Ryan Kelley: I think that's so core to all private equity, but in particular in the microcap space.

Cause you have to remember, we're partnering with owner, founders, we're the first private equity person that they may have met, and sometimes we're explaining what private equity is to an owner, founder. One of my favorite stories about relationship building is down in Tennessee with a business called Fast-Paced Urgent Care.

Founder Stan Bevis and his wife Juanette, along with Reams Powers and his wife Carrie.

But I'd spent the most time with Stan getting to know him in the early days, and Stan is in many ways the opposite of me. So I'm living in a big city in Chicago at the time, live in a high-rise building, work in financial services. Stan lives in a town of probably less than 10,000 people, two hours southwest of Nashville, multiple hunting properties and pickup trucks.

And it was natural for me to kind of connect with Stan as a human and on his terms and his place. And so Stan invited me to his daughter's high school basketball game. And so one of the early parts of me and Stan hanging out was, In a middle school gym in rural Tennessee with Stan and his wife after the game trying to figure out where I'm gonna sleep that night, Stan decides to take me to his hunting cabin.

So he is got a hunting property near his main house, and after a long day in the dark, we arrive at Stan's hunting cabin with I think no running water and maybe one or two lights that we could turn on. And, uh, Stan flips the switch and there is, I think close to 20 animal heads on the walls. So taxidermy, I just immediately felt uncomfortable and told Stan, I'm not sure this is gonna work out.

And uh, Stan's sensing that I was very uncomfortable, offered to take me back to his house and kicked his 12 year old son out to the couch for the night. And, uh, I ended up sleeping in Stan's 12 year old son's bed for the night in the middle of nowhere in Tennessee. So it's stuff like that.

People think in private equity, you're excel spreadsheets and financials and numbers, and it's just financial engineering and I think it's really middle school basketball games and people's hunting property, driving around with them. You get to know people at a different level and I think Stan and I just bonded over these experiences and he got to know me and vice versa, and so there's lots of those stories, but that's one of my favorite.

I cringe when I hear the word transaction or deal. To me, it's not just a deal, it's a business partnership.

Michael Burcham: Ryan, talk to us about why any founder or owner would want to partner with Shore Capital or any other PE firm in the microcap space.

Ryan Kelley: I think the decision to sell, if you will, or partner, is one of the hardest decisions.

So we own a lot of companies at Shore and we're often making that decision of when to sell. And I often, the best way I can talk about it or frame it is to say, when you've reached an inflection point in your business or the market is at an inflection point, something's changing rapidly. That is a great time to consider a financial partner like Shore.

And so I think we've talked earlier in the podcast about some of these things, but you're getting a business partner if you picked the right PE firm. You're not just getting capital. I think if you want capital, you can go to the bank or you can go other places and get money. I think with Shore or another PE firm, you're getting yes capital, but you're also getting a business partner that has seen growth in other companies.

So those analogies from other companies that are brought to your business are very helpful. With Shore and the board of directors. So I think that's kind of one. Another would be just de-risking your personal financial life. I often talk to founders about when you started the company it was worth zero.

It was just an idea, and then the value of the company probably went negative cuz you put capital into it, and your time. And you get it to a point where maybe the company's worth $10 million or maybe the company's worth $20 million. But that is just evaluation on paper. That money is not in your checking account or your brokerage account.

Partnership with Shore allows you to monetize that value. And so in just using a $10 million example, you could take seven or $8 million off the table and put it in a trust or in a checking account or investment account, but keep two to 3 million of equity in the business and hope to grow that into, could be four or five times or larger with Shore.

So it's really about de-risking your personal financial position. So as a founder, a hundred percent of your net worth or nearly a hundred percent of your net worth is tied up in your private illiquid company and Shore allows you to do what you want to do and de-risk that personal situation. So the last thing I would say is partnering with PE allows you to move more quickly and take calculated growth risks that you may not take on your own.

So I think you'll take different risks with Shore as your partner than you would on your own. So you might have grown at, if you're an urgent care business, open two centers a year on your own. But with Shore, you might open 12 centers a year. If you're a business with sales professionals, you might hire one new sales professional a year because there's some burn with that and a break even. With Shore, you might hire five salespeople a year.

The last thing it's is just you're allowing your business to flourish and to get more resources in that format.

Lifelong Learner

Michael Burcham: In this next segment, Ryan talks about the importance of lifelong learning. And how curiosity drives opportunity in the microcap investment space. He also describes Shore's process of WWL, short for What We Learned to help our entire team learn from our shared experiences.

Ryan, I've heard you say that to be really successful in private equity, you have to be a learning machine, particularly in the microcap space. What do you mean by becoming a learning machine?

Ryan Kelley: That's funny, Michael, I'm not sure if I've framed or or can be quoted for learning machine, but I think I always do harp on, on curiosity and learning.

So when our junior staff will ask, hey, what's one piece of advice or what do you recommend? I always kind of go to curiosity and learning because when you're younger, you think you're gonna go to college and you're gonna learn a certain skillset or go get your MBA and then you're set. You think you're gonna get a job and learn a certain skillset and then bam, you can make more money or be successful.

Maybe there's some truth in that, but I think as we all kind of progress in our careers, you learn that it's all about just continous learning and curiosity. And I think some of the best investors, operators, leaders, are just innately curious. So they're saying, why is the competition doing this? Why is our pricing structure this way?

Why haven't we done this? Why is this vendor trying to do this certain thing? And so I think you have to look at everything that comes in your cross hairs and just try to understand it at a very nuanced level. And so I think the point is the curiosity can kind of get you educated and make you attractive as a partner to a founder.

And then once you're in an investment and in a business partnership, that curiosity will help you grow the current company. It helps you find other investment opportunities. Just to summarize, I think there's no static state of I figured it out or I know everything. I think you have to just realize that you're always learning.

Things are always changing. I think the, just the innate curiosity is what will separate average PE professionals from excellent PE professionals.

Michael Burcham: So, Ryan, one of the things Shore does to really embrace this learning mentality is this twice a year review of what we learned. Would you tell our audience a little bit about that process and how it helps all of our team members really learn from our experiences?

Ryan Kelley: Just for our listeners, we have a, a process at Shore called What We Learn, so WWL. And after every investment, the team documents in writing and a PowerPoint, what they learned about all different aspects of the partnership. After every sale of a company, there's a, what we learned, and then every year that gets updated twice a year, as Michael mentioned.

And so during our summer offsite and our winner offsite as a firm, each partner gets up and presents their collective what we learned, so if Ryan has five companies, there's five different what we learns, pre-investment, post-investment, post sale. And the point of it is one to document our learnings. And another big point, as Michael referenced, is sort of our junior team, right?

So the junior team can absorb this information. And so we like to say, make new mistakes. We don't want to make the same mistake twice. We're trying to make new mistakes and learn as we go.

The Human Element

Michael Burcham: In our final segment, Ryan speaks to the human element of private equity, and why really embracing and supporting founders is a core part of our philosophy at Shore Capital.

Part of Shore's philosophy is the human element of private equity. Ryan, can you speak to what we mean by having the human element as a core part of our philosophy?

Ryan Kelley: Yep. I think the most subtle part of private equity and probably the last thing that our professionals kind of learn as they advance and grow in their careers. So I think when you're earlier in your career and just looking at how things get executed, you know, businesses, analysis, data, facts, goals, follow up, get the right people in the room, that's how business gets done.

And I think all that is important and has to be repetitive across every company. So analysis, data, facts, details, get the right people in the room, make decisions. I think just the point of the human element is just doing that alone is not enough. And there's a quote I like and it's, people don't care what you know until they know that you care.

And the point is, you could know everything. You could have all the answers. You could have figured it out, but the people won't follow you unless they know you're human. And so I think as leaders, we all have to humanize ourselves. And so we have to, I try to tell stories about, yeah, my kids. Growing up, mistakes I made.

I think being humble, admitting that you're not perfect, being relatable, then people buy in and they're willing to sort of follow, they're willing to listen and embrace, to go along with the business aspects of things. And so I think it's pretty nuanced here because there's sort of the execution and how things get done, but then it's, you have to be a good person.

You have to be likable. One new test that we have when we interview people is "Would I want my daughter to work for this person?" And so we ask this across Shore or my son, right? It's sort of, we're gonna hire you as a CEO or a CFO or hire you even at Shore, it's what I want my son or daughter to work for you.

That is sort of the ultimate test of do we think you are a good person or a good human.

Michael Burcham: In addition to this human element and the authenticity you just described of people, there's an element of empathy that fits into our work as well at Shore, particularly in understanding the founder. Can you speak to that just a bit?

Ryan Kelley: I think this is a big part of being successful in partnering with companies. So at the most basic level, I think it's trust. And so a founder has a business, they're probably talking to Shore and a few other people, and they're trying to say, do I want to give my life's work up to this person, to Ryan or you know, to Shore?

And so I think a big part of it's just the ability to put yourself in their shoes. And also communicate that you know how they're feeling. Often founders probably worry that Shore is gonna fire the founder, or the founders worried that Shore is gonna fire certain employees or change the culture of the business, or that Shore is going to disrupt the clients.

So I say that to founders and say, acknowledge kind of those feelings and those thoughts. And then often I'll say, at Shore, we're worried that the founder's gonna cash a big check. The founder's gonna become disengaged in the business, Shore is worried the founder's gonna have employees that turn over. Shore is worried that clients are gonna leave.

And so I always sit there and say, we have the same concerns. So we want the founder there and engaged and we want the staff there. We want the clients there. So when you really unpack it, the founder's fears and concerns are exactly what ours are. And so when you, I think the point on empathy is really understanding what drives a founder.

And so it's building trust, putting yourself in their shoes, acknowledging you know how they feel or you think you know how they feel. I think that allows us to be successful in this part of the market.

Michael Burcham: This podcast was produced by Shore Capital Partners with story and narration by Michael Burcham. Recording and editing by Andrew Malone. Editing by Reel Audiobooks. Sound design, mixing and mastering by Mark Galup of Reel Audiobooks.

Special thanks to Ryan Kelley for this interview.

This podcast is the Property of Shore Capital Partners LLC. None of the content herein is investment advice, an offer of investment advisory services, nor a recommendation or offer relating to any security. See the terms of use page on the Shore Capital website for other important information.

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