Summary of the Little Engine Ventures Annual General Meeting 2022

On Thursday, July 21, 2022 many of our 37 partners gathered in downtown Lafayette, Indiana for a report on the previous twelve months and our updates on the go-forward plans. We began with a video, as we have done for many years past. In this year’s video we showcased a single manager, sitting down in an interview and sharing his personal journey and that of a key employee… expressing and emphasizing the rate of their climb.

We are grateful for the people who have helped us. My wife of 21 years, my business partner, Mikel Berger, a coworker for 16 years, and our advisory committee members, two of which have not missed a meeting since launch. Thank you.

I announced one committee member’s desire to retire before year end. I considered putting out a ballot for a vote but am too much of a control freak. Instead, I’ve personally nominated someone and asked the current committee to interview them. If accepted, partners will receive notice. Partners are also welcome to talk to current and past committee members with questions. I asked them to raise their hands. Thank you.

Our purpose at Little Engine Ventures is to help people in our community climb. This includes teammates, partners, customers and beyond. We are focused in a dense geographic area, and within that area, we are focused on best-in-niche service companies. We pull resources into our area from outside and reinvest heavily in our area, developing and perpetuating increasing deal flow and quality of life improvements.

After I reviewed our purpose and value statements, I covered our 10, 3, and 1-year targets, key performance indicators (KPIs) and near term objectives (Os in OKRs). We discussed the importance of reviewing key results (KRs in the OKRs) and the KPI’s weekly. Our deal flow has increased and our estimates of near term results (next several weeks to next 3 years) are strong. No guarantees, but reasoning was outlined as to how we roll up our measures into empirically-based assumptions.

We then opened up for questions.

Questions ranged broadly, from “Why not focus on one company?” to “Do you incentivize your managers to refer sellers to you?” People were particularly poignant this year, and I loved it. We barely used 1/3 of the slides I had prepared in case questions slowed down. Afterward, many General Managers thanked me for handling and being so direct in my responses. Partners also asked about our views on inflation and marketable securities. Without naming names we walked through how we go about evaluating companies, private and public, and how we view organic growth and roll-up enterprises that use bolt-on acquisitions. After the meeting, some partners asked for definitions of these terms.

Roll-up enterprises attempt to consolidate a niche into a single company, and thereby become the leading, regional or even national company –which is often more valuable once assembled than it was while apart. A bolt-on acquisition is a purchase that is merged into and added to a central operating company. The acquired company integrates the processes of the central business unit.

At launch we set out to grow our starter companies quickly. We wanted to use “professional management” and double or triple their size very quickly using “enabling technology” to expand unit count and margins using organic and inorganic initiatives. We do not believe this rapid growth effort worked in a risk-wise fashion. While it worked in some cases, the consistency was below our tolerances. We believe the overall failure of this approach was a result of our diversified model and the mismatch of ownership percentages, dedication, rate of change and past experiences of our original cohort of managers. Adjusting to experience set, we did several bolt-on acquisitions to better utilize our “professional management.” This wasn’t great either. Culture clash made integration painful and expensive as differentiating habits were not broken efficiently or retained and extended meaningfully for customers.

Thus, an overarching point of clarification from the meeting was the strategic shift from “starter companies” — that we wanted to grow rapidly– to already, best-in-niche service companies that produce cash, and likely grow more slowly. There are a number of reasons why the rapid growth of acquired companies has not worked flawlessly for us, but foremost among them is the disconnect between our desire to own companies forever, and our desire to work locally, in a way that relationships form multiplex bonds, that produce future referrals. We must also systematically throttle growth to the rate of change of our well-trained people. We now have a systematic way of measuring and adjusting rate of change at an individual and corporate level that informs what is realistic.

We took a break and changed assigned seats.

Upon return, I picked up a question that was left hanging… “Why haven’t you bought anything recently?” The answer was multifaceted, but the punchline is we have bought things. We bought back several minority partners. We bought in lots of marketable securities (larger slugs than several control companies.) And we have bought back all our debts. And, while we remain active toward buying another control company, we would like for it to be larger and reside within our geographic and experiential strike zone.

Partners also asked about side pockets. I tried an ELI5 method (explain it like I am 5 years old) with a set of granola bars found on a table in the room and the explanation did not land perfectly. I apologized afterward as it came across confrontational. I did not mean it so. It would have been better to explain it like a shared checking account and an apartment we are building together. We put in our cash (not side pocketed) and began to purchase material to build the apartment. The apartment is side pocketed. It is no longer in the form of cash. The cash is not side pocketed. It is in the form of cash. Ownership shares of the cash are easily tracked as new partners come in, or existing partners want to withdrawal cash. The ownership interest in the apartment is more difficult when different people come in, or request withdrawal at different times. As the apartment gets further along its value changes. Those who come in early and stay throughout participate in all of the changes in value. Those who come in late do not participate in the earlier fluctuations in value. We use annual appraisals to allow the joining and departure of ownership of the apartment. The cash portion can come in/out with greater velocity. The ownership shares of the apartment are limited to certain windows of time.

A partner asked about long-term vision. “Will you ever sell the whole thing?” My response was that when evaluating my life, I figured I had one more startup left in me. I setup Little Engine Ventures to endure for the remainder of my life. After 5+ years now, we are established. It took us longer to get to where we are now than I thought, but I also wonder if the ultimate size might become much larger than I originally dreamt. Lord willing, I live beyond 84 years of age, and we still have 42+ years together. I set out to be a next-best alternative to my partners’ primary business. We have done that successfully for our longest term partners. I intend to do my best for everyone involved. It will take time. I hope to spend the rest of my life delivering progress toward that vision.

We adjourned for lunch at the restaurant downstairs.

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