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Art of Investing

Mitch Rales: The Art of Compounding

Mon Apr 29 2024
Executive SearchContinuous ImprovementLong-Term ThinkingArt MuseumsDanaherHealthcarePhilanthropyLong-Term InvestingVertical Market SoftwareRebuilding Efforts

Description

This episode features discussions on topics ranging from executive search firms to the importance of continuous improvement and long-term thinking in business. It also explores the journey of Danaher, a company that evolved from a tool manufacturer to a key player in life sciences. The episode delves into the influence of the speaker's father and the philanthropic endeavors of the speaker. It concludes with insights on long-term investing, supporting entrepreneurs, and the rebuilding efforts of the Washington Commanders NFL franchise.

Insights

Hunt Club and Glenstone

Hunt Club is a tech-enabled executive search firm that helps with talent identification and recruitment through its network and technology. Glenstone offers a unique experience by integrating art, architecture, and nature on a spacious campus to allow visitors to engage deeply with the artwork in a calm environment.

Danaher's Continuous Improvement Culture

Learnings from past mistakes were incorporated into the architectural design of a place, including addressing acoustics issues in cafes. The roots of benchmarking at Danaher trace back to early experiences with Steve in Japan and learning from Toyota's production system. Adopting principles from quality guru Edward Deming led to the development of Danaher Business Systems, which evolved beyond just manufacturing to impact various aspects of the business. The concept of Kaizen and lean manufacturing is deeply integrated into Danaher's culture and operations, with a focus on continuous improvement through practices like going to GEMBA. Personal reflections highlight the formative influence of the speaker's humble father who grew up in challenging circumstances.

Danaher's Evolution and Long-Term Perspective

Running a business as a CEO of a publicly traded company requires constant commitment and attention to detail. George Sherman was hired as the first real CEO outside of the business, bringing professionalization and processes to the company. The founders emphasize a long-term perspective in their investments and decision-making, focusing on decades rather than quarters or years. Embracing change and pivoting is crucial for long-term success in business, as demonstrated by Danaher's evolution from a tool manufacturer to a key player in life sciences.

Danaher's Journey and Expansion into Healthcare

The founders had a vision of building a $250 million business with 10% operating profit margin. They started by buying a vinyl siding manufacturing company called Master Shield in 1981 for $6 million, borrowing most of the money. They later acquired Mohawk Rubber Company in 1983 and merged it with Master Shield to form Danaher in 1984. Danaher focused on buying industrial manufacturing assets and became a major player in the tools business. Under Larry's leadership, Danaher expanded into healthcare by acquiring Radiometer in 2003, specializing in blood gas analyzing instrumentation.

Danaher's Transition to Healthcare Focus

Quick readout instruments are critical in healthcare for diagnosing conditions efficiently. Secular trend thinking led to a focus on owning less cyclical and more stable businesses. Transition from industrial to healthcare focus involved divesting industrial businesses and acquiring healthcare-specific companies. Under Tom's leadership, strategic acquisitions helped the company become a leader in biologics manufacturing space. Tom demonstrated level five leadership qualities by making difficult decisions and prioritizing the enterprise over himself. Talent acquisition and development play a crucial role in building and stewarding the company towards growth.

Danaher's Integration and Continuous Improvement

Recruiting from the outside is important for fresh thinking and learning agility. Successful acquisitions are led by strategy and need superior integration. Policy deployment is a key concept for integrating new businesses into the existing culture. Utilizing tools like SMED can help increase capacity without significant capital investment. Reducing lead times can create a competitive advantage in the industry. Leadership traits sought after include learning agility, passion, and ability to pivot when needed. Recurring revenues are considered a great secular theme for businesses.

The Speaker's Philanthropic Journey

Recurring revenues are seen as a key characteristic for businesses to master in order to have a good chance of being great, providing steady income and opportunities for growth. The impetus for philanthropy for the speaker originated from a dangerous and transformative experience during a fishing trip to Russia in 1998, leading to a shift towards giving back and focusing on building a museum.

Building Glenstone and Long-Term Investments

The idea of building a museum started to percolate in the speaker's mind in the early 2000s, influenced by their love for the arts and commitment to charitable causes. The speaker has taken the giving pledge, committing 98% of their wealth for the benefit of mankind. The majority of the speaker's net worth is invested in Danaher, a company that has shown remarkable growth over 40 years. The speaker emphasizes staying concentrated in one asset like Danaher rather than diversifying, believing in long-term investments aligned with personal beliefs and convictions. There is a critique on traditional asset allocation methodologies due to short-termism and high fee structures associated with investments like private equity and hedge funds. A new investing model called 'Reimagining the Blue Pin for Long-Term Investing' was developed to focus on finding passionate founders for long-term investments with significant potential returns.

Long-Term Investing and Supporting Entrepreneurs

Investing in passionate and dedicated founders for long-term success is emphasized. Private businesses offer benefits like long-term focus, avoiding short-term pressures of public markets. Staying private allows for higher quality decision-making and focusing on long-term growth. Having an extended time horizon in investing is crucial for success and building great companies. Supporting young entrepreneurs with experience and guidance can lead to profound impact and success.

Building Platforms and Supporting Founders

The speaker discusses the potential for building a better, more durable version of Constellation Software over the next 20 to 30 years by focusing on growthy VMS businesses around platforms. Creating platforms in various industries like aviation, fintech, rail, and agriculture can lead to synergies and organic growth over time. The strategy involves paying a little more for strategic assets that enhance the overall platform's value in the long term. The speaker emphasizes the importance of providing support and guidance to founders in unlearning certain practices and adapting to new strategies for long-term success. There is a focus on helping young entrepreneurs build impactful companies by offering support, ideas, and room for development while maintaining a long-term owner-oriented approach.

Investing in Vertical Market Software and Long-Term Success

Running a business involves finding talented individuals with learning agility and supporting them without micromanaging. Secular trends like vertical market software and healthcare efficiency are attractive for investment over the next 10-20 years. Expanding into near adjacencies and understanding customer workflows can lead to better outcomes for businesses. Investing in companies at early stages (seed, Series A, etc.) and providing continuous support can lead to long-term success.

Long-Term Investing and Secular Trends

Private equity investors often sell investments to meet fee structures or return capital, missing out on potential long-term gains. Long-term holding of investments can lead to significantly higher returns compared to multiple short-term sales. Investors who are comfortable with illiquid investments and have a long-term mindset may see greater success in vertical market software deals. Focus on secular trends becomes crucial for long-term investors looking for impactful and mission-critical investments. Businesses in strong secular areas often have a mission impact component, contributing to their success and appeal to impact investors.

Collaboration and Learning from Experiences

Getting the best thinkers on a topic and spending time digging in leads to extraordinary outcomes and confidence in decision-making. Collaboration among different vertical market software companies can lead to shared learnings and better outcomes across investments. Lessons learned from experiences at other businesses like Danner and Glenstone are being applied to rehabilitating the Washington Commanders NFL franchise. Key focus on talent acquisition, including hiring a great general manager and proven veterans like Bobby Wagner, to drive success and change the team culture. Strategic vision for the Washington Commanders includes rebuilding efforts, drafting well, and focusing on long-term sustainable growth.

Rebuilding the Washington Commanders

The organization is focused on rebuilding like building a house, aiming to be perennial playoff contenders. They have signed many free agents and have a new general manager with a successful track record. The owner engages with players to understand their needs and improve the fan experience. Efforts are being made to increase home game attendance and reduce opposing team fans in the stands. Listening to player feedback led to introducing a new shampoo brand in the locker room, improving player satisfaction.

Creating Unity and Learning from Stadiums

The speaker aims to re-engage lost fans and cultivate new ones by creating a Hall of Fame for young students near the stadium. The speaker emphasizes the importance of stadiums and art museums as places where people from diverse backgrounds gather for a common cause. The new coach promotes unity among team members by mixing offensive and defensive players together, fostering teamwork. The speaker shares experiences of benchmarking at various stadiums to learn best practices and improve their own facilities. Learning agility is highlighted as a crucial trait for leaders, with an emphasis on continuous learning and curiosity.

Summary of Rebuilding Efforts

The speaker discusses the potential for building a better, more durable version of Constellation Software over the next 20 to 30 years by focusing on growthy VMS businesses around platforms. Creating platforms in various industries like aviation, fintech, rail, and agriculture can lead to synergies and organic growth over time. The strategy involves paying a little more for strategic assets that enhance the overall platform's value in the long term. The speaker emphasizes the importance of providing support and guidance to founders in unlearning certain practices and adapting to new strategies for long-term success. There is a focus on helping young entrepreneurs build impactful companies by offering support, ideas, and room for development while maintaining a long-term owner-oriented approach.

Chapters

  1. Hunt Club and Glenstone
  2. Influences on Glenstone
  3. Danaher's Continuous Improvement Culture
  4. The Influence of the Speaker's Father
  5. Danaher's Evolution and Long-Term Perspective
  6. Danaher's Growth and Future Pivots
  7. Danaher's Journey and Expansion into Healthcare
  8. Danaher's Transition to Healthcare Focus
  9. Danaher's Integration and Continuous Improvement
  10. The Speaker's Philanthropic Journey
  11. Building Glenstone and Long-Term Investments
  12. Long-Term Investing and Supporting Entrepreneurs
  13. Building Platforms and Supporting Founders
  14. Investing in Vertical Market Software and Long-Term Success
  15. Long-Term Investing and Secular Trends
  16. Collaboration and Learning from Experiences
  17. Rebuilding the Washington Commanders
  18. Creating Unity and Learning from Stadiums
  19. Summary of Rebuilding Efforts
Summary
Transcript

Hunt Club and Glenstone

00:00 - 07:19

  • Hunt Club is a tech-enabled executive search firm that helps with talent identification and recruitment through its network and technology.
  • Mitch Rails, co-founder of Danner and Glenstone, discusses the importance of continuous improvement, long-term thinking, learning agility, and transformational pivots for organizational success.
  • Glenstone offers a unique experience by integrating art, architecture, and nature on a spacious campus to allow visitors to engage deeply with the artwork in a calm environment.

Influences on Glenstone

06:55 - 14:15

  • Glenstone aims to create a unique and exceptional museum experience through continuous improvement and a long-term vision.
  • The founders, Emily and Mitchell, have been influenced by author Jim Collins in shaping Glenstone's purpose, core values, and vision.
  • Benchmarking played a crucial role in the development of Glenstone, with learnings from 50 museums influencing architectural decisions and overall design.

Danaher's Continuous Improvement Culture

13:52 - 21:11

  • Learnings from past mistakes were incorporated into the architectural design of a place, including addressing acoustics issues in cafes.
  • The roots of benchmarking at Danaher trace back to early experiences with Steve in Japan and learning from Toyota's production system.
  • Adopting principles from quality guru Edward Deming led to the development of Danaher Business Systems, which evolved beyond just manufacturing to impact various aspects of the business.
  • The concept of Kaizen and lean manufacturing is deeply integrated into Danaher's culture and operations, with a focus on continuous improvement through practices like going to GEMBA.
  • Personal reflections highlight the formative influence of the speaker's humble father who grew up in challenging circumstances.

The Influence of the Speaker's Father

20:56 - 28:02

  • The speaker's father had a challenging upbringing, being put into an orphanage at a young age and later leaving with minimal resources to start his own business.
  • The father showed resilience and entrepreneurial spirit, eventually starting a successful wholesale building products distribution business that he sold to the employees in what was one of the first ESOPs in America.
  • The father's influence on the speaker was significant, teaching him street smarts, resilience, and how to navigate challenges in business.
  • The speaker reflects on how his father's time in an orphanage shaped him, highlighting both the positive aspects like hustle and entrepreneurial spirit as well as feelings of abandonment.

Danaher's Evolution and Long-Term Perspective

27:38 - 35:04

  • Running a business as a CEO of a publicly traded company requires constant commitment and attention to detail.
  • George Sherman was hired as the first real CEO outside of the business, bringing professionalization and processes to the company.
  • The founders emphasize a long-term perspective in their investments and decision-making, focusing on decades rather than quarters or years.
  • Embracing change and pivoting is crucial for long-term success in business, as demonstrated by Danaher's evolution from a tool manufacturer to a key player in life sciences.

Danaher's Growth and Future Pivots

34:38 - 42:23

  • The company has gone through different eras with different CEOs, currently on era 4.0 with Reiner.
  • CEOs need to have intellectual learning agility and think long-term to navigate the challenges of the business world.
  • The co-founders Steve and Dan have a strong partnership focused on long-term strategy and business growth.
  • The company's culture of continuous improvement and long-term thinking is crucial for success amidst market pressures.
  • Founders prioritize thinking ahead to future pivots like 5.0 while appreciating the current pivot's fruits.

Danaher's Journey and Expansion into Healthcare

41:58 - 49:10

  • The founders had a vision of building a $250 million business with 10% operating profit margin.
  • They started by buying a vinyl siding manufacturing company called Master Shield in 1981 for $6 million, borrowing most of the money.
  • They later acquired Mohawk Rubber Company in 1983 and merged it with Master Shield to form Danaher in 1984.
  • Danaher focused on buying industrial manufacturing assets and became a major player in the tools business.
  • Under Larry's leadership, Danaher expanded into healthcare by acquiring Radiometer in 2003, specializing in blood gas analyzing instrumentation.

Danaher's Transition to Healthcare Focus

48:53 - 56:58

  • Quick readout instruments are critical in healthcare for diagnosing conditions efficiently.
  • Secular trend thinking led to a focus on owning less cyclical and more stable businesses.
  • Transition from industrial to healthcare focus involved divesting industrial businesses and acquiring healthcare-specific companies.
  • Under Tom's leadership, strategic acquisitions helped the company become a leader in biologics manufacturing space.
  • Tom demonstrated level five leadership qualities by making difficult decisions and prioritizing the enterprise over himself.
  • Talent acquisition and development play a crucial role in building and stewarding the company towards growth.

Danaher's Integration and Continuous Improvement

56:33 - 1:04:27

  • Recruiting from the outside is important for fresh thinking and learning agility.
  • Successful acquisitions are led by strategy and need superior integration.
  • Policy deployment is a key concept for integrating new businesses into the existing culture.
  • Utilizing tools like SMED can help increase capacity without significant capital investment.
  • Reducing lead times can create a competitive advantage in the industry.
  • Leadership traits sought after include learning agility, passion, and ability to pivot when needed.
  • Recurring revenues are considered a great secular theme for businesses.

The Speaker's Philanthropic Journey

1:04:05 - 1:11:31

  • Recurring revenues are seen as a key characteristic for businesses to master in order to have a good chance of being great, providing steady income and opportunities for growth.
  • The impetus for philanthropy for the speaker originated from a dangerous and transformative experience during a fishing trip to Russia in 1998, leading to a shift towards giving back and focusing on building a museum.

Building Glenstone and Long-Term Investments

1:11:15 - 1:19:07

  • The idea of building a museum started to percolate in the speaker's mind in the early 2000s, influenced by their love for the arts and commitment to charitable causes.
  • The speaker has taken the giving pledge, committing 98% of their wealth for the benefit of mankind.
  • The majority of the speaker's net worth is invested in Danaher, a company that has shown remarkable growth over 40 years.
  • The speaker emphasizes staying concentrated in one asset like Danaher rather than diversifying, believing in long-term investments aligned with personal beliefs and convictions.
  • There is a critique on traditional asset allocation methodologies due to short-termism and high fee structures associated with investments like private equity and hedge funds.
  • A new investing model called 'Reimagining the Blue Pin for Long-Term Investing' was developed to focus on finding passionate founders for long-term investments with significant potential returns.

Long-Term Investing and Supporting Entrepreneurs

1:18:46 - 1:26:33

  • Investing in passionate and dedicated founders for long-term success is emphasized.
  • Private businesses offer benefits like long-term focus, avoiding short-term pressures of public markets.
  • Staying private allows for higher quality decision-making and focusing on long-term growth.
  • Having an extended time horizon in investing is crucial for success and building great companies.
  • Supporting young entrepreneurs with experience and guidance can lead to profound impact and success.

Building Platforms and Supporting Founders

1:26:17 - 1:34:19

  • The speaker discusses the potential for building a better, more durable version of Constellation Software over the next 20 to 30 years by focusing on growthy VMS businesses around platforms.
  • Creating platforms in various industries like aviation, fintech, rail, and agriculture can lead to synergies and organic growth over time.
  • The strategy involves paying a little more for strategic assets that enhance the overall platform's value in the long term.
  • The speaker emphasizes the importance of providing support and guidance to founders in unlearning certain practices and adapting to new strategies for long-term success.
  • There is a focus on helping young entrepreneurs build impactful companies by offering support, ideas, and room for development while maintaining a long-term owner-oriented approach.

Investing in Vertical Market Software and Long-Term Success

1:33:50 - 1:41:08

  • Running a business involves finding talented individuals with learning agility and supporting them without micromanaging.
  • Secular trends like vertical market software and healthcare efficiency are attractive for investment over the next 10-20 years.
  • Expanding into near adjacencies and understanding customer workflows can lead to better outcomes for businesses.
  • Investing in companies at early stages (seed, Series A, etc.) and providing continuous support can lead to long-term success.

Long-Term Investing and Secular Trends

1:40:53 - 1:48:01

  • Private equity investors often sell investments to meet fee structures or return capital, missing out on potential long-term gains.
  • Long-term holding of investments can lead to significantly higher returns compared to multiple short-term sales.
  • Investors who are comfortable with illiquid investments and have a long-term mindset may see greater success in vertical market software deals.
  • Focus on secular trends becomes crucial for long-term investors looking for impactful and mission-critical investments.
  • Businesses in strong secular areas often have a mission impact component, contributing to their success and appeal to impact investors.

Collaboration and Learning from Experiences

1:47:39 - 1:54:54

  • Getting the best thinkers on a topic and spending time digging in leads to extraordinary outcomes and confidence in decision-making.
  • Collaboration among different vertical market software companies can lead to shared learnings and better outcomes across investments.
  • Lessons learned from experiences at other businesses like Danner and Glenstone are being applied to rehabilitating the Washington Commanders NFL franchise.
  • Key focus on talent acquisition, including hiring a great general manager and proven veterans like Bobby Wagner, to drive success and change the team culture.
  • Strategic vision for the Washington Commanders includes rebuilding efforts, drafting well, and focusing on long-term sustainable growth.

Rebuilding the Washington Commanders

1:54:38 - 2:01:42

  • The organization is focused on rebuilding like building a house, aiming to be perennial playoff contenders.
  • They have signed many free agents and have a new general manager with a successful track record.
  • The owner engages with players to understand their needs and improve the fan experience.
  • Efforts are being made to increase home game attendance and reduce opposing team fans in the stands.
  • Listening to player feedback led to introducing a new shampoo brand in the locker room, improving player satisfaction.

Creating Unity and Learning from Stadiums

2:01:27 - 2:07:58

  • The speaker aims to re-engage lost fans and cultivate new ones by creating a Hall of Fame for young students near the stadium.
  • The speaker emphasizes the importance of stadiums and art museums as places where people from diverse backgrounds gather for a common cause.
  • The new coach promotes unity among team members by mixing offensive and defensive players together, fostering teamwork.
  • The speaker shares experiences of benchmarking at various stadiums to learn best practices and improve their own facilities.
  • Learning agility is highlighted as a crucial trait for leaders, with an emphasis on continuous learning and curiosity.

Summary of Rebuilding Efforts

2:01:27 - 2:07:58

  • The speaker discusses the potential for building a better, more durable version of Constellation Software over the next 20 to 30 years by focusing on growthy VMS businesses around platforms.
  • Creating platforms in various industries like aviation, fintech, rail, and agriculture can lead to synergies and organic growth over time.
  • The strategy involves paying a little more for strategic assets that enhance the overall platform's value in the long term.
  • The speaker emphasizes the importance of providing support and guidance to founders in unlearning certain practices and adapting to new strategies for long-term success.
  • There is a focus on helping young entrepreneurs build impactful companies by offering support, ideas, and room for development while maintaining a long-term owner-oriented approach.
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