Private Equity's Tech Transformation: David Freed on Adopting Technology for Growth

[00:00:00] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of best, but never final. Hi, I'm Lloyd Metz joined by Doug McCormick and Sean Mooney. Together, we'll navigate the corridors of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

Let's go.

[00:00:37] Sean Mooney: All right, today we have a special episode and not just special because we get to speak with Doug and Lloyd again, but special because we have another guest joining us today. And before We get to the mystery guest joining us. Why don't we just dispense with niceties, Doug and Lloyd, how are you doing today?

[00:00:56] Doug McCormick: Friday of labor day, ready to knock this out and then get on to some other stuff.

[00:01:00] Sean Mooney: All right. And Lloyd, how about you? What's on for your weekend?

[00:01:04] Lloyd Metz: Bunch of family stuff. Work never ends. We actually have some deals under LOI that we're trying to close the next month. So yeah, it's going to be work and family.

[00:01:14] Sean Mooney: Love it.

[00:01:15] Lloyd Metz: That sounds good.

[00:01:17] Sean Mooney: So. I think there's a lot of good things. As you notice, we've recorded this during Labor Day, so a lot of good things to go. We're at the precipice of The great race that begins the Tuesday after Labor Day when everyone starts running really fast to year end. And with that in mind, and with the idea of not only our private equity firms running fast, but also portfolio companies, operating companies, everything.

We thought it would be a really good idea to bring in someone who's had a little bit of experience from almost every vantage you can think of. So having been involved with operating companies themselves. As an operating executive within a portfolio company and also now an investor and a co founder of a firm himself.

So I'm really pleased to introduce to our audience, David Freed. David, thanks for joining us.

[00:02:06] David Freed: Thanks for having me guys.

[00:02:07] Sean Mooney: The last thing I didn't mention was that David also has a close and lengthy relationship with the one and only Doug McCormick. So Doug, I will pass the baton to you to make further introductions.

[00:02:20] Doug McCormick: Yeah. Well, first of all, just really excited to have David on the show here today. And I think he's a really interesting profile for us to explore in a couple of different fronts. First of all, he's had a very much diverse experience in a relatively short period of time. So by quick bio, Dave is a undergrad Duke biomedical engineering.

Yet another indicator that you can do something dramatically different from your undergrad experience did a brief consulting gig and this is my worst night is but if you got bored and then move to eight rivers which was a venture capital opportunity from there was where I first met Dave when he played a management role in one of our portfolio companies called smart connect where he was trying to introduce some new technologies.

And we had such a good experience with Dave in that when we exited that business, we brought him on at HCI as an executive partner. And he was really focused on an economical portfolio of things related to information technology, data analytics. But over time, we saw that mandate evolve into things like automation, artificial intelligence, sustainability.

So pretty dynamic role all around like technology and innovation. This is kind of how I would describe it. From there, Dave actually decided he wanted to get back into the operating game and migrated from the executive partner role to a chief information officer role at one of our portfolio companies, where he had a big impact there.

And then most recently Dave's gone out to do his own thing, where he's a user of capital, looking at specific deals that align with his skill sets. I'll let him talk about that. So anyways, Dave brings a really interesting set of experiences. And then I think it's. Also worth noting, he overlays that with a diverse set of experiences with us, both as an operator, as an executive partner, and now as a user of capital.

And so I think he's got an interesting perspective, both in terms of breadth of experience, but how to think about the private equity ecosystem and where you create value, how you use capital to do that. So Dave, welcome. Excited to have you.

[00:04:28] David Freed: Thank you. Yeah, no, appreciate the overview. I might correct a couple of things there that you said, and if that's all right.

Doug, so, yeah, please. Fair people have different memories, I suppose. But, so, Eight Rivers, we weren't exactly a venture firm. We didn't have external capital. There were two guys that founded it. There were MIT grads back in the 70s. One guy, Bill, had gone off and was a early partner at Goldman and Morgan and AIG and partner at Sidley.

His counterpart, Miles, was a PhD chemist. I had worked at SAIC, which is a big government contractor nobody's heard of for 20 something years. And they like to say they built actual and financial weapons of mass destruction and then started 8 Rivers to try and build things in the world. We really were more of a technology development company than a venture firm.

We did make venture bets and things where it made sense, especially early on. We eventually realized that's really hard to drive the ship from the back of the boat. As a venture firm, you're not really in control. So we ended up really becoming more of a developer of technologies ourselves, and then spinning those out as independent companies and commercializing those kind of an incubator accelerator before that was really a term and really focused on deep tech before that was really a term, we really focused the business on clean energy and industrial decarbonization again, kind of before those were in vogue, like they are today, I joined that group.

And. Got to know them in 09, I was an intern right after I graduated in 10, went off to BCG for 6 months and then realized that if I was ever going to make more of an entrepreneurial bet, I'd be doing so when I was 22 rather than I was 35, it would probably make more sense, but fast forward to now, I'm still making that bet I suppose.

Yeah, 8 Rivers, we had a lot of fun, happy to keep going on that one if that makes sense or wherever you want to take the conversation.

[00:06:19] Doug McCormick: I think it's interesting that as you think about the different stages of business you've been involved with, kind of take me to your first experience with private equity, and I'm going to say that smart connect where you're at an operating business, and you're seeing the private equity business from that perspective of a user of capital trying to execute a growth plan.

What were the things that were positive and what were some of the negatives of that experience?

[00:06:44] David Freed: Yeah, I might back up to the eight rivers days when we. Tried to raise a lot of venture and private equity dollars into these big energy technologies, and we're totally unsuccessful at doing so. We ended up only raising strategic capital.

We raised, when I was there, almost a half a billion dollars in the company. And when I got to HCI and Smart Connect, I really saw an opportunity to solve some of the problems that we were having in clean energy of being able to adequately organize people and keep them safe in an industrial environment.

We hired a big EPC firm when I was at NetPower to build our demonstration facility and an engineering procurement construction firm. And the efficiency doubt in the field was almost non existent. That's not what people talk about in construction. And so what I saw with SmartConnect was really taking this opportunity to leverage this really interesting industrial services business that we're experts in.

Things like safety and project controls and project controls in this world means schedule and budget. And digitize that. And when I first got involved, I would say it was not as far as long as it was advertised to be when I met the team. I don't think that was anybody's fault. It was just a lack of understanding of how much it was going to take to get to the commercial end of the world.

So we kind of thought, Hey, we've got some interesting customer use cases here. From a learnings perspective, we were trying to do a lot. We were trying to design hardware. We were trying to build up a network. We were trying to design software and then push that through an organization that historically had sold man hours.

And we're trying to shift that organization to sell technology as a solution and as a service. And that was a really big initiative to try and get the organization oriented towards thinking like a technology company. And I think my biggest learnings are really about how to build what we at the time called a coalition of the willing.

How do you ensure that folks are actually Involved in the process and don't see technology as a threat, but see a technology as an offering to be able to enhance what they do and to be able to enhance what their customers can do and really change the dynamic of the business. And initially I came in and I was like, just go, go, go.

We just got to get things done. Let's put schedules together. Let's execute, let's run an agile organization. It was like very traditional, just kind of tech, go, go, go. And I kind of realized I was leaving people behind and I wasn't bringing people along for the journey. And that was slowing the progress in the long run.

And so I think that people first portion of technology is not something that I had to do at eight rivers because we had really built it from scratch. I was one of the first employees. Every person we brought in was grown into the vision from the beginning. It was part of the culture, what we were doing.

This was very different. It was a big organization that we were trying to bring technology to and within. And a very different goals from kind of the core business in terms of what success look like. So I think that learning was really important for me.

[00:09:45] Doug McCormick: Yeah, David, there's this classic saying, if you want to go fast, go alone.

If you want to go far, go together. My experience with innovation and technology is generally. It's less a technology problem in many cases and more a change management. How do you get the organization to embrace whatever you're doing across all facets? And maybe you can just talk about that a little bit more.

[00:10:09] David Freed: I think that's right. I think you have to do both You can't just have people excited about the technology And willing to do it. You also have to have good technologists, right? You have to have people that actually know what they're doing, have built software and hardware before. There's a book that I recently read that I'll reference.

It's a great book. If you guys haven't read it, it's called how to get big things done by this professor called, and I'm going to butcher his last name, but Fjord Borg. You did, you did butcher it. Yeah. Yes, I did. What he did, he cataloged 16, 000 big projects, mega projects, a hundred million dollar plus, And he found in IT was one of the worst culprits of getting things done on time on budget with original scope being met.

Of the 16, 000 project, only 0. 5 percent met original schedule budget and expectations. In IT projects, 73 percent of them go over by over 100%. 18 percent of projects go over by almost 500%. So if you think about it projects, right, there's just this huge outside risk of things going wrong. And I think you're very right, Doug.

And that, and his conclusion in the book was one, you got to hire experts, people that actually know what they're doing in this world, like overscope and over engineered to begin with, and then do it in a real modular fashion that brings people along as you go. So I think you're very right that getting people involved early on, what the scope really is.

Getting early wins. A lot of that, I think I learned there at SmartConnect and then continued on across the portfolio MSI.

[00:11:41] Doug McCormick: I want to acknowledge one other aspect of that experience, which, and you kind of alluded to it, but I want to make it explicit. So this is a traditional growth equity buyout situation that Dave was put into.

And this was a venture bet with inside a broader organization. And I think that that can be really interesting in some cases, as you think about trying to create value in the portfolio. And at the same time, I think it comes with some unique challenges as you think about how do you fund a startup in a business that has traditional financial metrics that you're trying to be held accountable to.

I think it can be a really interesting value creation opportunity, but you got to be explicit about that tension between are we trying to grow the business? Are we trying to introduce new technologies? Are we trying to benchmark ourselves relative to some kind of consistent growth in. earnings and cash flow, or are we willing to bet on a set of strategic capabilities that a buyer will pay for?

And how does that all play into timeline for exit timeline for monetization? You live that real time. Any comments there that are worth highlighting?

[00:12:50] David Freed: I got really bought into that thesis, right? Because it was all right, uh, kind of run of the mill, good size, industrial services, business trades for X on EBITDA, right?

And then Maybe if you tech enable it, you start talking about trading on revenue and you build this recurring revenue base that is really high margin that can grow really organically, really nicely, as long as you have got good retention with your customers. And we got some really big wins. We got some very big EMP companies, exploration, production, oil companies.

Biggest ones out there to sign up for early projects, as Doug said, like there was always a tension between are we going to invest in hiring more service folks, or are we going to invest in hiring developers? And are we going to invest in buying more hardware that we have to get out in front and building this inventory in order to sell?

Or are we going to go and invest CEO always was kind of balancing this and then COVID hit, right? One of our big customers saw it first in Asia and they just started cutting across the board. They cut innovation, they cut new technologies, rollouts, and then kind of the core business was really challenged in the beginning of COVID like a lot of businesses were.

And so at that point, it was kind of like, well, are we going to invest in technology knowing that when we probably come out of coven, there can be a lot of value here or not. Right. And that decision was a really tough 1 for everybody to kind of sit around and talk about. And it ultimately decided that, hey.

When HCI exited the business, the actual smart connect spun out, and it wasn't a portion that kind of the new buyer wanted to continue to run. The guy that was running it was really passionate about it and really wanted to continue with it. I ultimately decided I didn't want to do that anymore. It was kind of interesting that the next buyer kind of didn't want to make that technology bet.

They wanted to kind of continue on with business as usual.

[00:14:45] Doug McCormick: As people think about the business of private equity, I think one of the things that this highlights is multiple ways to create value, right? So you can grow the business, you can grow the earnings. You can also transform the business and you can reposition the value prop.

You can create strategic exit value. And I would say. That latter one can be more value enhancing, but it's also harder to get conviction along the way because you don't get a lot of interim feedback, right? You believe you're building a strategic asset and you're really only going to know kind of when you get to the other side.

So I think that's something that the same way the company can struggle with those competing demands, investment committees can struggle with that trade off as well.

[00:15:29] David Freed: It also, there are different private equity in this world, right? Like I've started to work with a private equity firm that owns a lot more software businesses, right?

And the way they look at value creation and value metrics is very different than when I worked with HCI. HCI is a more traditional industrial focus. And so I wouldn't necessarily paint it with as broad a brush in terms of the metrics that people look at.

This rule of 40 question in software is kind of an interesting one of, Hey, what is growth plus EBITDA? And that's ultimately how you think about value. That's not at all what we really talked about in the industrial side of the equation.

[00:16:15] Sean Mooney: This episode is brought to you today by HCI Equity Partners, a lower middle market private equity firm focused on partnering with family and founder owned manufacturing service and distribution companies.

ICV Partners. An innovative private equity firm supporting management teams of leading companies at the lower end of the middle market and BluWave, the Business Builders Network connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point and on time due diligence and value creation needs.

Now back to the

[00:16:54] Lloyd Metz: episode. Hey David, can you say more about that? What other differences have you noticed between. A more software technology oriented mindset and lens versus a more traditional industrial one, given that industrial services, industrial technology, there's a lot of overlap in the Venn diagram these days.

Right. I would just love to hear how you compare and contrast.

[00:17:18] David Freed: I think it's a great question. It's a sliding scale. I think you're really right. Because most tech companies now have a significant amount of services revenue. And I think if you're a services organization without the technology offering, I think you're behind.

So it is totally a sliding scale. The guys on the more software end of the equation, they talk about the rule of 40, which is for people that don't know, you take your EBITDA margin plus your growth, if it's over 40, it's quote unquote a good business. In the software world, because the idea is if you're growing fast enough, it's such a high gross margin business and software that you eventually will be able to get to really attractive, even a multiples.

If you're not growing as fast, you need to have already shown the potential for that gross margin turn into even a margin. And so I think that they're very willing to pay up big multiples for businesses that are not profitable today. Right? But yet show those. Threshold ARR numbers that are kind of interesting show the gross margin potential.

That's interesting. The net customer retention. That's interesting. The ability to deliver new products to those customers and get increased wallet share. I think as we think about acquisitions, it's less about entering new verticals. So far, it's more about how to expand the wallet of the customers you already have and simplify their world and software world.

I saw this a lot as a CIO. I hated integrations, right? It's a necessary evil, but you really want to have as few software tools as possible. Now, that's always easy to say. It's really hard to do. Like, if you just only buy everything from your provider, your users are probably going to hate you. And so you need to have some kind of best of breed in a couple different areas and then tie them together.

But if a software private equity firm is C is a vertical and says, Hey, I'm going to go buy this. And I'm going to go add on a couple of pieces around it and build the integrations as part of the product roadmap. There's a ton of value that can be created there because the ability for cross sell is really fast.

On the services side, HCI is probably my best example there. Cause I was just more day to day there. And then some of the other businesses, a lot of the acquisitions we were doing was going and getting either new geographies or new customers or new skill sets, maybe there was a little bit of growing the pie with some of our big CPG customers at MSI or, Hey, I'm in.

Pick your big CPG brand, and I want to figure out how to go from one department to another by having a different component. But they were very different buyers. It was still a sales process. I think in the software world, it's typically a single buyer in your CEO office. And so you have the ability to kind of leverage that cross sell, I think a lot faster.

[00:19:56] Sean Mooney: And David, it's kind of interesting, as you're talking about is like the difference between maybe tech and software private equity and kind of traditional economy private equity and that. They're both in kind of the good to great business, like we're going to transform, we're going to take it to the next level.

You're also looking for, you can see kind of some of the tech roots or the VC roots in the software firms, like we're willing to pay up for growth, but you're really talking about like 40 percent targets, not 400%.

[00:20:23] David Freed: That's right.

[00:20:25] Sean Mooney: These guys know, I metaphorically. That's what happens when you grow up in Texas.

And so for me, it's like. Everyone in the investment business, your aviators, VC, it's like multi stage rocketry trying to get to orbit, right? And then like, at any one of those times, you can either make progress or you kind of plunge into the ocean if something goes wrong. And that's part of the model, but you're creating value, whereas in kind of the PE world, it sounds like you're still gaining altitude.

You might be even like a fighter jet, but you're at like a 45 degree angle and you got to do things differently to get it to another level of elevation. What you're describing here is like maybe different from even the earlier VC days, like we got to be growing 400%.

[00:21:09] David Freed: I would still separate software VCs versus PE software people.

VC to a 5 to 10x, right? Because they're in the power law game. The PE software guys are still underwriting to a true three X, right. And they're kind of in the game of. We're not going to lose money on any deal, right? We're still believe that we're in the not losing money game and they're not going to lever up heavily, but you're right.

They have this VC roots, this ability to create value and do things differently because In the HCI case, you're a 5 million, even a business versus a 50, very different team, very different systems, very different capabilities in a software world, if you're a 20 ARR, 20 million of ARR versus a hundred million of ARR, fundamentally different in terms of the business.

And you have to act out.

[00:21:56] Sean Mooney: So VC is kind of ideation and try to change the world or change a segment. Either by quote unquote, disrupting or just creating new or something, but it's much grander, but a much lower percentage of the business. probability of success, but when it is successful, it's 10 times successful.

Whereas I think what you're describing and really all of PE, you're in the good to great transformational kind of game versus kind of like create something new.

[00:22:24] Lloyd Metz: Hey, Sean, just keep an eye on your comments on this episode. I think the VC crowd may be coming for you. They may take issue with some of your comments, but I don't want to get in front of that.

[00:22:37] Sean Mooney: I think at the end of the day, Both P. E. and V. C., they kind of make similar returns. One's just more of a rollercoaster ride, and you gotta be right two out of ten times, whereas Doug and Lloyd, you've gotta be right nine out of ten times. The other thing I think of the difference between P. E. and V. C. is like, the book and the movie Moneyball, P.

E. 's like get on base, do hit singles and doubles and make it home. V. C. 's like swing and home runs. They're putting up kind of similar runs. It's just more of a, at least as my personally think about myself, I don't have the intestinal fortitude

[00:23:10] Lloyd Metz: coming for you, Sean, just more of like the literally team

[00:23:15] Sean Mooney: from Florida, like let's bond and get on base.

[00:23:19] Lloyd Metz: Hey David, just real quick, and I know we want to move on, but something you said earlier really got my attention trying to create an agile organization, an agile culture. How did that work out? Do you feel like you accomplished that cultural transformation? And I would love to hear how you might grade yourself on that and what you might do differently next time.

[00:23:42] David Freed: The investors thought it was enough. So that's what matters. I think within our little smart connect team. We could kind of dictate that. And that was, I think immediately, Hey, this is just how we're going to operate as a team. We're going to have daily standups because we were working with development teams in Russia at the time in Ukraine, back when they could work together.

We were working with hardware teams that were in multiple states across the U S. And we need to get everybody on the same page because we were building an IOT platform and an IOT. You kind of have to have the full stack, right? You have to have from hardware all the way through the application layer, and all of that has to work seamlessly in order for you to deliver an experience to the customer.

That's really interesting and magical. And so we needed everybody on the same page. And since I was writing the checks, I could make that happen. The whole thesis was, all right, we're going to build this really interesting tech tool, and then we're going to roll it through the rest of the organization, use their sales channels to get it out, use their service channels to help service it.

That's where I think we fell down is we didn't bring some of those people along with us early on to say, Hey, this is the level of technology we are at today, rather than we were selling the grand vision rather than selling the actual of today. So when we got in front of customers, There was sometimes a disconnect there as to what we could actually deliver today versus what the vision for what this thing could become and getting people kind of more engaged with.

We are not there yet, but we will get there in slow iterative steps rather than these grand releases that people kind of think about with software. We were probably weren't as successful. I think at the MSI level. That 1, I think I learned my lesson a lot better and that I didn't try and do this, like.

Little team inside this overall organization that we're going to leverage when I got in. It was like, no, no, no, we're going to go out in the organization at the beginning. We're going to get quick wins with the ops leadership, with supply chain leadership, with quality leadership, with finance. As part of our team, and yeah, they're not going to be as agile as our team, but they're still going to be thinking about, hey, we're going to put wins on the board.

Thank you. Bunsen singles so that when we do try and do the bigger stuff, they're already at the table. They know how we work. They know we can deliver and that was a win. And I think that if I didn't have the smart connect lessons, I probably wouldn't have been as successful at the MSI level.

[00:26:11] Doug McCormick: Yeah, Dave, let's just kind of compare and contrast your experience with smart connect versus MSI.

So MSI to me, just to kind of frame it out, smart connect, kind of a high single digit EBITDA business MSI. When you went there, how big was it? When you left, how big was it? And talk about like the differences in resources you had and the clarity of mandate in terms of what you were there to do.

[00:26:34] David Freed: I showed up really at the end of 2019 with MSI.

It was at the HCI annual conference in DC. HCI had made their first investment in late 2018 with this little business in Ohio that was below single digits of EBITDA and they'd combined it with a business in Indiana that was also kind of mid single digits. And then they decided kind of in October of 19 that they were going to do a big corporate carve out from DHL that was taking kind of the top line from 80 ish million.

We were doing a carve out from DHL that was almost going to quadruple the business overnight. And it was like, I remember sitting around the bar in DC and the CEO and president and an operating partner on Doug's team. And saying, Hey, we have to close by January. And there's a TSA transition services agreement.

That's going to have to be done by October 28 months, nine months, 10 months later, and it's from DHL. So it's like all the big company stuff, Oracle, yada, yada. The original two businesses had not been integrated yet, right? So they were still operating as two independent entities. There was the thought that they had been integrated from a systems perspective.

They were still operating on independent systems. Culturally, they weren't quite integrated yet. There's still a lot of work to do. By the time I left kind of fast forward, and we can go through this journey because it was super fun. And I learned a ton and had a really good time doing it. By the time I left in four months ago or so in April of 24, we were doing We had roughly, I don't know, half a billion in revenue now and really significant increases in EBITDA margins from where we got in and along the way, we acquired two other businesses, one corporate carve out one additional.

So in total, we had kind of brought together five companies. We had organically grown just as much as we had inorganically grown because there was a thing called COVID in the middle of that. Oh, by the way, remember, so I met the business in October, November of 19, closed that business January 1, 2020 COVID hit really in March.

And so we were doing this big corporate carve out while COVID was happening and food couldn't stay on the shelves. And we were, by the way, producing food. And so we had this enormous demand. And we couldn't hire people, right. As you guys all probably remember very well. So it was just like trial by fire.

And if you want to build a corporate culture and a team strength, like throw them in that crucible. And I think we came out of that as a executive leadership team. And I'm a side, which I was lucky enough to really participate in a lot and ended up joining really, it's just like really tight knit group that had kind of been through the fire and seeing the growth and accepted the growth and thrive through it.

Yeah. And it was just really fun to be able to then just start winning after COVID kind of went away and the people challenges went away, supply chain challenges started to fall and we just could keep putting wins on the board.

[00:29:34] Doug McCormick: That's a great description. I think there are a couple of interesting kind of threads to pull in that conversation.

I think the first is it's a great example of the optionality that happens in these consolidation strategies where. We had no idea that we were going to have an opportunity to buy this sizable asset out of DHL in what candidly was a really compelling value. But there was also tremendous complexity to it.

And so I think the opportunity for a private equity firm to be creative and to be able to move quickly allowed us to differentiate. And so literally, I think we signed that thing maybe 60 days out from year end. They wanted to close by year end, probably for tax purposes. And so like we closed on December 31st and we had a literal, and you can talk about it, like 24 seven war room set up with a very precise kind of integration plan around 180 days.

And we had assembled a bunch of internal resources and external resources to kind of augment and complement that process in a way that allowed us to be fully disengaged from the parent under the agreed upon timeline. So, I think it's just a really good example of one of the ways that private equity creates value is being able to deal with complexity, timelines that many others can't.

And if you can do those things effectively, we took risk to do that because we had to execute. But you can also create a lot of value or get paid for that skillset.

[00:31:01] David Freed: It was a challenged asset and culturally it was, people knew that it wasn't doing well and so we had bought some really robust capabilities, but it just had not been effectively managed and we had a team.

And the MSI and express team, which are the two original organizations that really knew contract manufacturing and packaging to their core, right. And that's what they had kind of grown up doing. And you had DHL who was a logistics business that was trying to participate in contract packaging and manufacturing.

And now they are a super successful contract packager. Like I don't want to take anything away from that inside of their three PLs. It's an enormous business. This was a little bit different. This is more co man than co packing. We don't have to go into the nuances there, but. Again, just thinking about the people and bringing this team together.

And then we had to stand up a new ERP system from scratch. We had to stand up all new IT infrastructure. We had to stand up the whole team, all the hiring and firing and Do all of that within a COVID environment where you couldn't bring contractors on site or they wouldn't travel because of corporate policies, it ended up working out, but it was a rough couple of years before we really got the systems working at a level that we all kind of wanted and expected them to.

And when I first met Doug and Dan, I had built this big power plant, done all the control systems, like was really excited about IOT and machine learning and cloud, and this was back in 2018, and then I got to these portcodes and it was. ERP upgrades and IT infrastructure standups, right? I was often like, why am I not able to do this bigger things?

And I was just kind of felt so much empathy now for other CIOs who are in this world where they're dealing with AS400s, these legacy mainframes and trying to migrate those and do these big IT projects when they want to do the more interesting value creating stuff. Sometimes you can't do that until you do the blocking and tackling stuff.

And I really live that. With this DHL carve out was we just had to get the business to be able to do the basic processes before we can ever talk about more interesting things here.

[00:33:09] Sean Mooney: If we kind of double tap on that and you talk about the technology from your vantage as a CIO private equity portfolio company rapidly growing organically and through add ons.

What role do you think ultimately did technology play in enabling the value creation, the transformation, and ultimately the return on investment that was achieved?

[00:33:34] David Freed: I think we couldn't have done it without the people and the customers, right? I think technology enabled it in a lot of ways. Doug liked to say when I was at MSI, like technology to him is like football.

You have to play both offense and defense, right? And you really have to start with defense. I think defense is the stuff that. Is not as fun, but it's super critical to these businesses being successful, right? Like cyber protection is number one. If you're not keeping your people and your data safe and your customers data safe, like you can be at risk and losing significant value in the business.

We saw it at some of our competitors at MSI, where people came to us because they have big cyber leaks or data leaks. And people said that we can't trust them with our critical information anymore, right? This is billing materials for. The big CPGs are pretty important for them to have differentiation.

If you can't protect that data, you're in trouble, right? And if your finance can't close the books on time, if operations don't know if it's a good day or a bad day and can't get the data out, right, that stuff is not that sexy, but man, it matters. And I think that getting those quick wins, like I talked about before, so you can build that coalition of the willing.

You have to drive with that people first mentality and technology. I think these. Words like digital transformation or AI, whatever, whatever, whatever. Like these people don't really care about that stuff. What they care about is like competing, getting their jobs done. Well, they don't obsess over tech trends.

Like maybe you or I do Sean, right? Like they really care about how do I deliver better products, better services to my customers. And if technology can't help me do that, then get out the way. I'm going to go back to the way I've always done things. And I think difference in smart connectors, MSI. Like I saw when I was at MSI, there were a few people who, when I brought technology to a plant, like, man, this guy's been here, there's a guy down in Texas, he's literally was 15 at the plant.

When he started, his dad used to run it. He's now in his sixties, right? So he's been there for 50 something years. And people are like, watch out for this guy. We're not sure if he's going to really be supportive of the stuff you're talking about. And so the first thing I did was like, went into his office.

I'm like, Hey man, tell me where your problems are. Right. Let me hear from you first about all the issues you wish you could do differently, all the things you wish you could do differently, what's working, what's not right. And as starting with those questions about how can technology solve his problems rather than assuming the problems that we were there.

And by the end, he was my biggest proponent. Like, he was a guy that, like, was training other people. He's like, if you're not using this, you're not on my team. He was like, Come call me weekly, if not daily, hit me up on teams and say, Hey David, can you fix this dashboard? I've been looking at this and it's like, man, he's the only guy in the company using that dashboard.

Like, that's awesome. And shame on me if I didn't use that experience. Cause the guy had been in the plant for 60 years, him and his dad, they'd literally seen everything that had gone through that place. And I think he gave me the credibility and the kind of right to win other projects, right? And so like God and getting processes done, creating scoreboards, that was day one.

And then it was like, Oh, the CEO is going to start bonusing on this. Okay. Maybe we should start paying attention to it. Right. Oh, this guy got promoted. This girl got promoted because. They were doing the right things here, man, maybe we should start paying attention to it. And I think then you start to build that momentum behind these technology tools, and then the magic starts to happen, right?

You start seeing like, Oh, people are actually paying attention to labor costs at a really granular level. They're really paying attention to material scrap at a really granular level. Like OEE is no longer this conceptual concept. It's like tied to their bonus and tied to like specific outputs that they can control.

And we talked about like a KPR waterfall, right? Like at the very top, you have a couple metrics, but then for that person to do their job, the next Layers down, they all need to do their jobs. And so we need to have metrics that were specifically targeted to each part of the organization, not having your production supervisor caring about revenue.

Like, they can't control any of that or margin, right? What they can control is like, are my people on the line on time? Do I have the right number of people relative to my standards? Am I hitting outputs or not? And if not, why that ability to like day and day in our CEO at MSI used to call it the blocking and tackling, right?

Like let's just focus on blocking and tackling technology should help us figure out where we're not doing the right stuff, but ultimately it's about enabling our people to just be better at their jobs. We created a ton of value with technology. A lot of it was to support growth. We always used to say like, our tech wasn't about cutting jobs is about enabling growth.

And we grew a lot. And because of that, we didn't have to hire the extra 10 extra AP people or 10 extra AR people or hire the 50 more document specialists that were literally typing in one system to type in another system to type in another system jobs that nobody likes doing. Right. But we were able to automate a lot of that data entry work so people could go up a level and start using their brains rather than just like typing stuff into computers all

[00:38:37] Doug McCormick: my perception of how you think about value creation at MSI.

Probably four buckets up front ERP system, the integration we kind of talked about. And then the other three buckets in my mind are more of the offensive things, which were the analytics, the automation, and then what I'm going to kind of call sustainability broadly. Can you talk a little bit about how you thought about those three offensive moves?

[00:39:02] David Freed: Yeah. So Analytics. I think that's where we were able to get some of our early wins, right? Of building a daily dashboard that went out automatically to 50 people at the top of the company that had seven KPIs on it that were tied to the budget. Right. We refined it over time, but it was still something that people talk about every day in their morning meetings is what does it say on the daily dashboard?

Right. And then it was like, okay, I'm going to start getting bonus on this stuff. That's where it's like, all right, now I want to dig in. I want to understand, well, why am I not able to get materials to the line? What does my material process look like? Right. Why am I unable to be able to collect from my customers?

Right. Why do I have quality holds in this area? Right. Like you start to ask the question and we coupled that analytics with training. We had a big training push in LMS, but also really like day to day. Starting to bring in some of these lean concepts and tying that to our analytics so that as you're thinking about first pass yield or Six Sigma or Kanban walks or any of these kind of lean techniques, you had the analytics at your fingertips to be able to support some of those techniques and put them into practice.

I think two is once we had those wins and we could start to document the process as part of that, like literally on big Vizio boards. We could then start to see like, well, we're sending data from this application to this application. Someone's literally typing this in every day. Like, why don't we just do an API call?

And people are like, okay, try it out. I don't know what an API call is, but you tell me it's going to work, David. So like, I'll believe you because you give me this dashboard that works really well. And so then we could just start automating parts of the process along the way. And once we had automated, well, people are like, oh, can you actually build me a tool, not only to like enter data, but also to feed data back to me?

And that's where we started building applications. We did some interesting AI applications there, and we were able to build apps and doc scheduling and. AR automation, AP automation, bankruptcy reconciliation, expense reconciliation, like lots of finance tasks that were taking a lot of time, but ultimately we're slowing things like collections or cash conversion or putting us on vendor holds because we were running up too fast and nobody was noticing.

Like some of the automation in the back office, we were able to now get, because we really understood the processes and had the right to win there. And then third, you talked about sustainability in this. Really comes from a place of personal passion because when I got to MSI, I'm like, man, we're in the food packaging business.

Like there's a lot of packaging. The food industry creates a lot of GHG emissions. Like what are we doing at MSI to change the equation here? Because our customers and really The way I was able to get support, if you look at our biggest customers, they're all making big commitments to the street on net zero, on scope one and two reductions or emissions reductions to zero or close to zero.

And so I was like, well, it's got to be a matter of time because we, MSI, we're part of their scope three emissions, which for people don't understand, scope one is their direct energy use in your business, scope two is all the stuff that is kind of indirect energy use, like your electricity and your natural gas, scope three is like all your supply chains.

And so we're in the supply chain of all of the big CPGs. They're going to come to us eventually and like ask us what we're doing. And so, again, I was in that world. I was able to get some quick wins. So like step one was do energy audits at all of our facilities. Okay. Four of our biggest facilities don't have LEDs.

Hey, I can get paybacks for Doug in under two years by just for changing the light bulbs. And Hey, it's brighter, like safer. And it gets paid back in two years. That's a private equity investment that people like, right. Okay. And by the way, there's some old motors that we could replace that maintenance wanted to do.

Anyways, we can get credits for, we can get paid back by the utility for some of those things. We can be in demand response activities that pays us tens of thousands of dollars a year. And I was able to achieve multimillion dollar savings across these energy efficiency projects, right? Because we have 2, 000, 000, 2, 500, 000 square foot under the roof, and this wasn't like putting solar on the roof.

Buying in a big wind turbine project. This is just like again kind of blocking and tackling easy stuff But once I did that then it was like, all right, let's go after the harder stuff, right? Let's start changing With the packaging that we use let's go talk to our biggest suppliers about what they're doing in plant based packaging or compostable or recyclable Let's start doing a big recycling program that we called trash to treasure that I started but ultimately Our supply chain leader took over and ran with because it made much more sense for him to do it He got a lot of excitement about it and recycling We were able to recycle Tens of thousands of tons over the time I was there and things like metal and cardboard and plastics and feed those directly into the recycling plant.

So we knew they were actually going where they were supposed to be able to switch over our customers from virgin plastics and virgin cardboard. To recycle, right? And they could put on their brands, Hey, we're using post consumer recycle, which they all want. Customers show that they want it. They're willing to pay more for it.

And we were actually saying, you don't have to pay more. Again, I kind of go back to this ability to start with quick wins, show quick value, then you give yourself the license to do the harder things. And I think that offensive mentality it's there for the taking. Where I see people fail is when they're like, I'm going to come in with this grand vision and change your organization.

Right. Well, people are like, well, I don't need to change my organization. We're doing pretty well. Right. We're private equity backed by these great firms. Like you don't need to change my life. Right. What you want to do is just be undercover about it and make big changes through small steps.

[00:44:30] Doug McCormick: Either props to you or the good training you got at HCI.

But what I like about your approach is it's servant leadership, right? Where you're viewing yourself as a resource to help your team be successful. And all of the technology initiatives that we talked about are grounded in business principles of like, what is it doing for the value prop? What is it doing for the quality of the business model?

What is it doing for us to be competitive in the marketplace to ultimately make money? And so it's very tangibly tied to business rationale. And I think when you lose sight of those two things, that's when it projects can get really challenging.

[00:45:04] David Freed: Yeah. A lot of credit to you guys and to the MSI team for giving me the opportunity to be able to go and do this.

I'd never been a CIO before. Right. And so you took risk on me to let me go and experiment with probably your second largest portfolio company. And luckily to be very successful because I was surrounded by really smart people. So that made me successful. So super proud of what we did there and where it's going.

[00:45:28] Sean Mooney: I got some really nice insightful takeaways from what you shared. And one is that. really any company, whether you're in the tech business itself, or you're in a traditional economy of business, technology is and should be used as an enabler of your strategy, right? And you've got to build a foundation, and then you can do other things with it in an accelerated way.

And so I'm curious, as we kind of progress through The conversation here, you've had these great experiences spanning kind of almost every walk in business, and now you're on your latest chapter, so you're a co founder, managing partner of CP Energy Holdings, which is a PE firm focused on the carbon reduction economy, which no doubt you can see that connection from what you did at MSI in terms of sustainability and how it's all interconnected, and you can have what I call broccoli with cheese on it.

It can be good for you and tastes good too, right? And so now as an investor in these companies, these SMBs that are kind of coming along, how do you take everything you've learned through these steps and how do you now think about looking at companies and looking as being a business builder across a portfolio?

How do you think about using technology strategically to create value? And kind of the order of those priorities.

[00:46:50] David Freed: Great question. And I think we're just, uh, go back to my eight rivers days. So we had built these energy technology companies and it just so happened. One of them last year went public company called net power at a billion five.

And then eight rivers did a large secondary with SK global, big Korean company. And kind of that gave us the outcome, right? We had been building these things for 15 years. And finally, someone was able to get liquidity when we were starting. It was like people like this thing is going to take 15 years.

I'm like, no way we can be faster, but they were very right. And it's still got a ways to go, right? Like net power is a phenomenal company, but they're still in the early innings, I think of what they're doing. And Danny rice and the team there, I think are doing amazing things. I think at CP, we really formed it because one of my partners, Walker, had really built a development platform in the energy space.

So that's where you go and stand up projects, get financing. We had done collectively the technology bet where we were kind of building the technology from scratch, trying to get it commercialized. What we said was, Hey, those are long term bets. They're very binary in nature. Let's take this private equity mindset of.

The singles and doubles and really invest in what we're calling the picks and shovels, the energy transition. I think we believe that, and I've said this multiple times, the energy transition is the biggest opportunity of my lifetime. I think it's bigger than AI. I think it's bigger than the digital revolution.

I think the energy transition is enormous. It's happening. It will take time and it'll take longer than people think. It is already massive and it's becoming bigger. And I think we took big swings 15 years ago. Because the world needed technology to be able to kind of achieve the outcomes that people want.

And I think those outcomes are kind of irrespective of who's in charge. Because you could either bet on American independence and reliability and resilience, or you can bet on climate change. Right? Both are important. For the energy transition, and both are necessary for the energy transition. And I think what we saw was, hey, the technologies are here.

It's really the service providers, the manufacturers, the engineering firms, they're not there yet, right? And there's expertise in adjacent markets that are needed. And this is how we built NetPower, was taking expertise from the industrial gas market, the chemical market, the oil and gas market, the power market, and bringing those together to be able to build our facility and build our company.

And That's what we're trying to do with CP energy. Jeff Bezos has a quote where he talks about mercenaries versus missionaries. I'm totally a missionary in this world, right? Like in HCI and food and Bev, I was a mercenary. I was able to like create a lot of value, but my passion is very much in sustainability and building sustainable infrastructure for my kids, right.

And for their kids. And I think the way that we've been doing things does have to change. But it's going to take time and we have to bring the entire economy along with us. We can't overnight flip the switch. And I think we think that in this big transition, there's just enormous opportunities to invest our own capital, but also partner with bigger institutions than ourselves to really make a sizable impact on the world.

[00:49:58] Sean Mooney: And so when you look at these companies, right, and I really like your perspective here, it's kind of like the private equity approach to venture capital, right? Let's get the little wins and just chunk it up into little pieces. You'll get there eventually. You can see kind of how that mindset has progressed through your story here.

So you go to a company that maybe is good, but you think they have an opportunity to great. What's your mindset when you look at their tech stack and you say, okay, here's what you have. Here's what you need. Here's how we're gonna supercharge it. Like, what's your approach to looking at those businesses?

And by design, like, what should every business builder think at their, look at their own business and go, Oh, I should probably think the same way.

[00:50:36] David Freed: I think my biggest learning we've kind of hit on a couple of times here was you got to start with the people and where they're at and the problems that they're trying to solve.

You may want to help transition them into the clean economy. They may not believe in climate change. They might not think climate change is important to talk about. That's okay. That's not something that we need to argue about, right? What we're trying to figure out is how to grow the business together, right?

And which markets are going to be there now, right? How are we going to generate EBITDA now? So like, we still have to do the small stuff right. Blocking and tackling delivering to customers today, while also thinking about how we're going to transition the business over time. And I think it's important.

This is one of the things that I think we're in some ways uniquely able to do as having been entrepreneurs, having sold a business now, having been also in the private equity seat, I can talk to both of those experience with current owners. And say, Hey, listen, I've been in your shoes. I've had to raise capital.

I've had to make payroll. Like I know what that's like to have to live with that stress. Doug's talked about this in the past. This is where private equity can actually be great, right? Because you can take some cash off the table. You can go risk on because you now have squirreled away some of your cash.

And with the cash that you're rolling into the new entity, you can go risk on, right? You can make bets and ERP systems and hiring and growing into new markets that you couldn't do before. And I think that's where private equity tends to work really well is where you're Enabling entrepreneurs who've built these beautiful businesses to now make bets that they otherwise couldn't make, but do it in a sustainable way.

And I don't mean sustainable from a climate perspective. I mean, it's sustainable from a business perspective. And I think from a technology perspective, it's one of the levers, but it's not the only lever, right? I think what Doug said was really right. Like technology has to be in service of accomplishing the business goal.

And so start with the strategy of like, what do you want to do? Do we want to grow top line? Do we want to cut costs? Like, do we want to expand internationally? Do we want to expand via acquisition? All right. How does our tech enable that strategy to happen? Don't start with like, Oh, I need an ERP system.

Well, what do you need an ERP system to do? Like go hire any ERP system. There's a thousand modules in them. Which module are you going to start with? Right. And then based on that module, there's 20 consultants that can do it for you, but some are too far get it on your industry. Some are focused on growth.

There's like lots of business questions you have to ask yourselves before you start talking about technology questions. And those business questions are, yeah, what is it the boardroom we're focused on? What are we hiring into? Where are we growing? What customer segments are most important to us? So yeah, that's how we think about it.

[00:53:00] Sean Mooney: Yeah. I think what you and Doug both pointed out is something that's incredibly important for any business builder. I think a lot of people confuse technology as a strategy. And it's really a tactic, particularly in this kind of emergent AI age that we're in, it's much like the internet was in 1996 or 97.

Like, Oh, those are our strategy. It's like, no, it's a tactic. Plug it in where you need it to accomplish your goals.

[00:53:23] Lloyd Metz: Yeah. It's a means to an end.

[00:53:25] Sean Mooney: And I love it. And it's addressable for every company. And it just so happens. I think the world's going to start moving a little faster. So

[00:53:31] David Freed: like a lot of cliches, people process tech, right?

Tech is last for a reason. You got to start with your team. Is your team going to get you where you need to go? Your process is set up to be where you want to go and then bring the technology to the equation. Like if you're starting with, Hey, I need AI sprinkle on AI, right? Like it won't work. It's not going to stick around, right?

If AI is part of what you do every day and it totally changes how your processes work and how your people think, like it'll stick around and it'll be value.

[00:53:59] Sean Mooney: A hundred percent. I think that's, you know, I'm going to go a thousand percent on that one. It's, we kind of bring this conversation. To a fruition or a conclusion here, maybe let's talk about, we all love victories, but you know what weighs the heaviest is losses.

Psychology 101. And you've talked about some of these in different places of our conversation, but David, how would you say, like, all right, you're going to use technology as your enabler, it's a tactic, it's part of your strategy, what are some of the risks that you've learned that people need to be aware of, kind of bring everything we've talked about together into a summary of like But watch out for this.

[00:54:37] David Freed: Yeah, I think cyber has to be top of the list. Like, if you haven't been hacked, you either don't know or you will, right? And so like, we had cyber events throughout the HCI portfolio. We had cyber events at MSI. My customers and vendors all had cyber events. Like, it is very prevalent. And it's only getting worse because AI is an enabler of the strategy by hackers to get in your data and ransomware your data for a lot of money.

And so I think you have to, one, hire people that know what they're doing when it comes to cyber to FA everything, right? Don't trust that people aren't going to click on things because everybody will. They will download data they're not supposed to. They'll download stuff online. They think they're helping, right?

It's like, Oh, I need this random piece of software to modify my PLC program. I'm going to go online to a torrent site and download something on my work computer literally happened, right? That's what you deal with because you're giving people these powerful tools and they're going to create risk for the organization.

And so you have to figure out how to segment your data appropriately, how to ensure that you have the right backups, ensure that you're training people on social engineering, because you can have all the best it tools in the world. Like every person. The safest computer is the one in a drawer, locked away, does not connect to anything, right?

And nobody's going to have that, right? People are going to bring their own laptops, their own phones, regardless of what you do. We don't live in 1984 Big Brother land. People don't want to operate like that. They can't, right? You shouldn't want them to as your IT leader. And so how do you balance this risk of like, cyber security, but also ability to get stuff done.

And if you go one way too far in the other, you've got problems. So walking that line is. I think something that takes a lot of really good people around the table, making trade offs of we're willing to live with this risk or not. And what is the true risk? And then as you evolve, you just have to get better, right?

Like what you do at a 3 million EBITDA business from a cyber perspective is totally different when you get to 50, right? Think about processes, think about team, think about the tools you buy. Like you, you can't afford the stuff at 50 and the stuff that the fortune 100 has, you can't afford either. But so you still have to do stuff really well.

So I think that's on the defense side. I think the other thing, like the cost of not doing anything, if you will, I think is also really high in this world. I believe every company should be in some form of e comm. They should be using tech to reduce your cost. You should be using tech to find new customers and market effectively.

Right. Cause if you're not doing it, somebody else is, and then they have pricing power over you and they're going to take share. And I think that if you're just hoping that AI. affect somebody else's business, like you got a problem, maybe not today, but you're in decline. And I think in order to take advantage of the growth that happens in these markets, like you should be out at least experimenting with these technologies or have someone on your team that is so you can figure out where to apply them.

[00:57:37] Sean Mooney: I love that perspective. One cyber. That might be a thousand percent actually, because like the life hack we learned for the SMBs out there is every business in this world should have cyber security insurance. And you know how you get pretty good cyber security is the cyber insurance people tell you, we're not going to give you cyber insurance unless you do all this stuff.

And you're like, Oh, so that's like a life hack for anyone that's like building their companies, like get the insurance and they'll tell you the very least what you need. But the other point that I think is a really good way of kind of crystallizing this conversation is. One of the biggest risks of technology is not running towards it because you're getting way behind while others are getting faster if you are not looking to see how does this automate things, how does it speed it up, how does it inform what you're doing, how does it accelerate practices, processes, procedure, get more out of your existing people so they can use their brains versus their fingers to type in data, that kind of stuff.

I think that's a great point to end on where it's just like the biggest risk of technology is you're not running towards it and using it.

[00:58:39] Doug McCormick: Hey Dave, I thought this would be a really interesting conversation as I started out given your breadth of experiences, but also the different roles you played at HCI at a portfolio company level and then as an executive partner.

So really appreciate you making the time. I thought it was a great conversation and thanks for the insights.

[00:58:55] David Freed: Yeah. Thanks for having me guys.

[00:58:56] Lloyd Metz: Yeah. Great conversation, David. Good content. Took lots of notes. Thanks.

[00:59:01] Sean Mooney: Likewise, David. I was doing the same. So thanks for joining us. Hope everyone has a great weekend.

[00:59:08] Doug McCormick (2): A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing services and distribution companies. Learn more at hciequity. com. ICV Partners, an innovative, Lower middle market, private equity firm, supporting management teams of leading companies at the lower end of the middle market.

Learn more about ICV at icvpartners. com. And finally, BluWave, the business builders network, connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point and on time due diligence and value creation needs. Learn more about BluWave at BluWave.

com. For further information on HCI, ICV, and BluWave, and relevant topics discussed during the episode, please see the episode notes or links.

[01:00:09] Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.