Mikel Berger, Little Engine Ventures
I’m just going to give you the floor for a few minutes if you want, but just generally, what are you seeing with portfolio companies? What are you hearing from them, and then perhaps what are you recommending they do?
Yeah, so what we’re hearing from our Little Engine Ventures portfolio companies is that business for the most part is trying to operate as normal as possible. The particular businesses that we’ve been in, and we could get into some specific examples if you want, Alex, on what’s happening in a few different places. There’s some interesting things. I think they are coming up with some clever work arounds and things like that, but for the most part our customers are still working or we’re in industries where stuff is needed. We’re not heavy into restaurants. Our breweries tap room is the closest thing, but in Indiana the bars and restaurants have been shut down but are allowed to do carry-out, and we’ve been doing carry out. Some of them are promoting delivery.
We have really good partners in our distributor and the grocery stores and liquor stores and stuff like that, so we’re not promoting delivery. We’re saying go pick up a six-pack of Fountain Square when you’re out getting toilet paper or whatever else, so we want to make sure we promote those relationships and those things. There’s more individual stories like that, but overall it’s, for the most part, business as normal. We say we’re going to be the best social distancing version of whatever business we’re in. There’s certainly going to be stuff coming and that, but it hasn’t hit us as massively as this hit some other people as immediately. I think that’s some luck towards our direction, and hopefully it’s some good planning and having a good solid business and good relationships with customers and things like that as well, so it’s some mix.
Are there a few individual stories from companies you’ve heard that are being perhaps a little more interesting or creative with how they adapt?
Yeah, I thought our glass shop, auto glass repair. People are still breaking windows. We’ll see, if people aren’t driving as much how that lowers, but people still got to get around for groceries and work and stuff. We’re not totally shut down here in Indiana, but we’ve staggered. We have a guy that comes in and sets up all the glass for the days jobs already. He leaves, and the techs now don’t simultaneously arrive and chat and then go out. They are staggered. One guy comes in and gets going. The next guy comes in after that, so all our routes are just staggered so they can alternate their start times and stuff.
Obviously the techs have to interact with customers at their home or business, but that includes quite a variety of places, and there’s plenty of distance and things like that. That’s what’s happening. That’s as interesting, I guess, as auto glass can get, but I thought that was a good solution. All of our customer service reps and the manager are working from home. Not because they don’t want to be on the front lines, but that way it keeps it safe for everybody else. We shut down the lobby, so if you want to bring your car to us, which we’d rather go to you, but if you’d rather come to us, you just have to drop it off and we’ll get it the next day.
Our tool and die shop, I’ve joked, the guys in the tool and die shop had been practicing social distancing as a life pattern for 20, 30, 40 years, and so you kind of can’t tell a difference there. They like to go in, work on their machines. They like to keep things neat and tidy and do a good job. The tool and die shop, our customers are manufacturers, so thankfully we have a very diverse customer base, but as especially some of our larger customers here …
Subaru, the Subaru plant, announced they’re going to be shut down next week for one week. No case there or anything like that. I think it’s as much trying to manage their inventory levels for anticipated demand is as anything else, and so there’ll be shut down, but I think they’re going to be doing some maintenance things, so that might actually mean a little bit more work for us. Obviously, if their equipment isn’t running, their tooling won’t be breaking or wearing down as much as fast, but again, the effects will be later, but we’ve been getting new jobs coming in this week and things like that.
Is there a business that you’ve seen do better than you perhaps expected it would?
In two ways. The brewery. Man, things seems so long ago. They aren’t actually that long ago. This last weekend, yes, we actually had an up weekend at the tap room, because people came in. That kind of freaked us out, so we had conversations Sunday morning, and by Sunday afternoon, Sunday evening, we went to carry-out only, and then Wednesday afternoon the governor of Indiana actually mandated that bars and restaurants go to carry-out only. We wanted to lead well in that. Remove the allure of having a place to go out to, but still be able to serve our customers and serve the local community there in the Fountain Square area of Indy.
That was good, and then the customers have responded, so carry-out has been good. I think our manager, Luke, there has communicated really well to social media and other things of what our hours are and what we recommend. We did it for the safety of the people that shouldn’t have been in our establishment, but then I think people recognize that leadership, Luke’s leadership there, and doing that, and that’s at least part of why they’re supporting our business in that time.
Are any of your companies strapped for cash, or having to use lines of credit or borrow in other ways?
Again, at this point, nothing beyond the normal, so no. We have done the acquisitions and been very light users of debt in those ways. Yeah, no. We’re pretty well set for that. That’s the part I think we, Daryl, the rest of the team, that’s the planning part of it. Some things are luck, they’re outside of our control, but I think that’s the being ready for positive opportunities, but what we hope to be able to spend some of that cash on. We’re ready to move forward if things slow down for a little bit here.
At the brewery, we promised our servers that normally work for below minimum wage but with tips, and we promise them an above minimum wage base and stuff like that. That will hurt our profitability, probably, but we’ll be all right. Again, everything else is … we have businesses that are pretty solid in the fundamentals, and we can be ready to weather a storm or even grow in some aspects once things settle out here and we figure out where everything’s at.
What sorts of things are you lining up in preparation for perhaps deeper negative effects or like you said, some opportunities that come along?
Right now I don’t know that we’re lining up anything super specific. I think we’re spending extra time to make sure we know where everything’s at. All the I’s are dotted and the T’s are crossed, so it’s a good test of those systems of communication. How’s accounts receivable? How well do we know our customers are doing? What’s the likelihood of them being able to pay on time? We’re trying to be proactive and say, “Are you going to need some time?” We sent a note to several vendors and said, “Hey, we plan to honor our commitments. We plan to pay our bills on time. If you are offering discounts or other opportunities to others, we’d take advantage of those things, but if you know of others that need opportunities, we’d be glad to talk with them either at the individual company level or even at the Little Engine Ventures level thing.”
We’re just trying to be aware, line things up. Again, I think good communication is what we’re trying to tell everybody.
You’re not instructing companies to delay rent payments or anything like that?
Nope, not at this point. We want to be good partners to the folks that were in business with. We know they’re in a tough spot. We’re okay. We look at, like we always do though, we look at expenses. What are the expenses we really need, and what are we likely to need going forward? We’re adjusting some of those things.
At the tool and die shop, we haven’t had issues with getting material, metals and stuff in, though that’s potentially a concern, but we’re not stockpiling anything either. We have a few different options. I think right now is what levers do you have? I’m thankful that we have quite a few levers in each of the businesses, and so we’re just testing a little bit like, “Hey, does that lever still work, and how far could that lever go? How far would we be comfortable pushing it?” But no, we haven’t made any massive directives.
Would you be able to talk about a few of the levers you’re testing or thinking about using?
Yeah, scenario planning. In most of our businesses, salaries, staffing is the biggest expense in a lot of them. It’s looking at, well like I talked about, the brewery production staff, front of the house staff. What are the staffing levels that we need? Always have some people coming and going. We had already decided in one business where a staff member was going to leave. I think next Friday was supposed to be his last day. It’s still going to be his last day as far as I know, but we’d already said we weren’t going to back fill that position right away. We were thinking about restructuring his role, and so we had said let’s go a couple of months and see where we really feel the pain. That’s another staffing lever we use.
We’re small businesses, so we have vendors that are almost like staff and contracts with them, so the good things. Why we do a lot of that is because we can variabilize needs as they go up and down. We’re trying to communicate with them and say, “Hey, if this happens we might have less. In some cases we might need you a little bit more, or we might just need to shift the load.”
Right now, for this base core stuff that we’re in, construction is still happening, dumpsters are still needed. Farmers are going to plant corn. We’re coming up on planting season. They can safely plant corn. They are plenty socially distanced when they’re doing that. People are still going to eat, animals are still going to need food, so they’re still going plant a lot of corn. We got to get that seed corn out and get it in the ground.
That was something I was thinking about, hearing other companies suspending rent payments or payments to other vendors. This could be naive of me perhaps, but you risk damaging the relationship with that vendor or landlord in the future. It sounds like you’ve at least prepared your company so you don’t have to do that. Is that relationship a bigger part of your thinking, or is it more that you’ve just prepared your companies that you don’t have to do that?
It’s the former, but because it’s the former, we do it because of the ladder. Because we know those relationships for the long haul is why we prepare to be able to be in those relationships for the long haul. We rent most of our facilities. We own one building. Besides salaries, rent is usually a significant piece of the expenses, and is one that is more difficult to variabilize for different workloads, so that’s something we bake into the model. We’re going to have this. It’s a fixed cost. Somebody said they think of rent as another form of debt, because you’ve got an obligation to make a payment.
At what point does this crisis get worse to the point where you have to take more drastic measures?
I think that’s a hard thing to quantify. Would sales have to drop off 50%? It’s different if sales drop off 50% or 90% for two weeks because everything shuts down, but then it bounces back up. There’ll be a cost to restarting the machine. Then that’s different than on the other end of the spectrum would be … If we go two years with just this level of uncertainty, and so people are doing stuff, but they’re a little more nervous about it. The sales cycle is a little bit longer, so costs are a little bit higher and so revenues get delayed just a little bit. We’re living in that for two years.
Both of those could be very severe, but in totally different ways. It’s a hard question to answer where I don’t think we … We’re saying we’re taking it week by week, month by month, and the longterm plans are still the same. We think we have fundamentally good businesses that work in all sorts of economic periods. Doesn’t do a whole lot of good to have super detailed nine-month plans at anytime, but especially right now when stuff can change, so you make the best decisions and you lead. Take the next best step. Think big, act small. We use that phrase around. Dream big what could be, but then just do the next best thing that moves you towards that goal.
You had the video conference with the various business owners around your area a few days ago. You post it on Twitter and it was fun to join that for a little bit. What are you hearing from others in your area?
Yeah, I’m glad that you could be on that call. It was fun. The Matchbox folks helped set that up. I don’t know, we probably had 20, 25 people over the course of an hour or so that hopped on at least for a portion. Everybody from a lady that runs a pottery studio. She sells pottery, but she also does a lot of classes, especially for kids. She was debating, “Well, my studio … I don’t do large classes and kids are home from school, and if a mom wanted to bring her family over, I’d disinfect it. But then do I look like I’m putting people at risk if I try to do those things?”
Again, that was … man, that was five days ago and it seems like it was two years ago. What options do I have? How do I get creative about this? An event venue manager was on the call, and he’s just been wiped out. There’s nothing on his calendar now for the next six weeks and he’s got a big space that he’s got rent to pay on and stuff like that. He’s one that’s more immediately hit. Trying to think of creative ideas to utilize the space or his skill sets or his equipment, his gear and stuff. Yeah, a lot of folks that are hit a lot more immediately and harder. It ranges.
I was in at Matchbox just for a little bit today and there’s just a couple of folks in there working that need the space, and one of the members was telling me his brother owns a number of restaurants and he had to lay off 1,400 people yesterday. I just can’t imagine that. Worst day of his life. I’m very thankful to be in the position that I’m in and don’t take it for granted. A lot of folks are having it a lot worse here in Lafayette and around, but at the same time there’s a lot of good things happening too. Other things are continuing on, everything is not shutting down. It just depends on … you have to look at all parts of the world around you and globally to try to keep everything in perspective I think, then you can lead well through that if you have that information and that perspective.
Have you been hearing from any of your LPs?
We had a call with our three member advisory committee. They’re all part of our limited partners, but it was the normally scheduled one. Obviously, it contained a bit of COVID discussion, besides a few other business items that we had to take, but we had discussion with those three. Actually, Daryl and I were talking. We love our limited partners. They’re almost all business owners themselves, and no we haven’t. I take that as a sign of trust. I take that as a sign of, they know we’re busy and working hard. We’ve heard a few things here and there, but more of like, “Hey, check this out. I thought it might be helpful if you want to pass this along to your team,” and that’s great.
They’re just trying to be helpful, but not be a burden. We’ve had a couple that have contributed cash and made additions, so they think Little Engine is ready to do well in this, and I’m excited for that as well, that the vote of confidence. Again, there’s no guarantees for anybody, but I think we’re good position in this, and it’s good to have their back and that they have our back.
How are you communicating with your LPs through this, and have you been notifying your LPs leading up to this that there could be some issues or just preparing them for this?
Daryl’s quarterly letter is set to go out here in another, whatever, week or two, two-ish weeks, and we decided just to keep to that cadence. Again, business has been fairly normal or within the realm of normal, and so anything that we would report would be that things are normal and that we’re preparing for all sorts of scenarios, but we don’t have anything to report or anything yet, because nothing’s happened.
We decided it was best to, since we didn’t have a ton of them reaching out to us other than for a few helpful resources, that we would keep to our normal cadence. We’re calm, they’re calm, we think we have good communication channels and cadences anyway, so let’s lean into the structures that we already have. We don’t have to rapidly try to build a scaffolding, which is partly why we put some of those structures in place. Honestly, when we had fewer LPs, and we’re still a small fund, but it’s just now starting to feel like all that structure that we put in place is not overkill, but again, that’s, I think, trying to be forward-looking and stuff like that.
I haven’t even seen a draft of Daryl’s quarterly report letter yet, but I’m sure it’ll be a good one. It’ll be memorable, I’m sure.
How has your deal flow changed? Are there deals that are coming up because of the crisis, or is it business as normal in that area too?
We have not been inundated with, “Oh man, we’re going to go bankrupt. Save us, Little Engine Ventures.” It hasn’t happened yet. I think the businesses that we would be interested in and we would be able to help probably aren’t having that situation yet, but that could happen. I’m open to talk with any business owner if I can be helpful. I don’t know, an acquisition at this time, I’m certainly open to it, but no one should be making a rash decision in this time. I’ve talked with a few business owners that were not really having explicit deal discussions. That’s just the status of things normally.
I would say some stuff has slowed down, inbound deal flow, maybe a little bit. We talked to quite a few business owners in the course in the course of a week, but normal to maybe a little slower, but the slowness isn’t outside of the normal ebb and flow of that either too. All the conversations are tinged with a little bit just like we did. The first five minutes is, “How you doing? How’s your family? Kids home from school?” It’s all that kind of stuff, but then you get down to business and, “All right, cool.”
In fact, I like it now that we’re into the default is a video conference, so it’s not that, “Ooh, do I ask him if we should meet? I don’t know. In person? What are they doing?? Pretty much everybody’s like, “The default is we’re going to video conference.” It’s just, “Are you doing Zoom or Google Hangouts?” Like that. We’re not wasting time on the other stuff.
I remember in our first podcast, you said you limit an LPs investment to $1 million at most. Do you think that limiting factor has made it easier on your LPs, knowing that their entire net worth isn’t wrapped up in LED?
That’s a good question. I think that does have an impact. Saying that, we have a minimum of 250, and again, I think it’s not so much the absolute dollar amount, it’s the percentage of net worth and just also the temperament of how you think about money. For some of our LPs that came in at the minimum, they’ve got a higher percentage of their net worth in Little Engine than some of the folks that came in at higher amounts, and so we definitely take that very seriously. This is longterm, generational wealth that they’re trying to create and are trying to provide for their families, but it is also a longterm, and we said over the course of the time that we want to do this, there will be times, again the specifics, this is a very unique situation, but there are these kinds of things and we’re going to come through it.
I think we’ve been trying to be very upfront with folks about that. I think that’s partially why we have it, but I think that a lot comes down to temperament. Small business owners that have, like a lot of our LPs have 30, 40 years of small business ownership experience, they’ve seen more than I have. I rely on that. We’re banking on that. That’s where all the dollars aren’t created equal.
For the LPs that contribute extra capital during this time, is there any place for that capital to go until you make an acquisition, either within your portfolio companies or would you consider investing in public companies? Is there something you could do with it today if you had extra or as LPs add?
Yeah. Since the very beginning we’ve always held some marketable securities. Yeah, we have investments into public companies, and frankly there’s some stuff on sale right now that I think is still pretty good.
We’re a little bit different. We always call committed capital right away, not on a deal, on basis. It’s part of how we do a deal quickly, is we have the cash ready to go. We have baked into our model that we know we’re going to sit on some cash. Some of that goes into investing in public companies as they’re just sound good … We’re here about buying good businesses. What we talk about and is the majority of our capital, is acquiring controlling interest in private companies, but we like good businesses; public, private, wherever they are, and we like being owners. We think most people don’t think this way. I think people listening to this podcast probably do, but if you own shares in a company, you are an owner of that business. That’s how we think about it.
Then we can, just to make some return on those dollars, because the public markets, as I look at it, just provide a smaller working unit to buy into those businesses than doing a controlling acquisition. Part of it’s just managing the liquidity at the fund level so we can own the best businesses available. That’s a little more how the sausage is made, or the internal workings of managing liquidity in the fund. I don’t need deal flow help on the public companies. I mainly blabber on about small businesses, but it’s most of my background, my experiences. I lead Daryl to do the public stuff, enjoy it, but I’m about good businesses wherever they are, whatever size. Right now, we’re in a position to do most with the smallest ones. We’ve always said Little Engine isn’t supposed to stay little, it’s supposed to be a 40 year joke.
Well, hopefully it’ll become a joke a little bit sooner than 40 years, but is there anything that you’re able to take away from this that helps influence your plans in the future for when you acquire a company that there’s a few extra steps you now want to do with new companies that come in to help them prepare for next significant revenue disruption like we’ve seen?
Again, it’s probably not anything totally new yet that I’ve learned, but probably this has helped reinforcing some lessons or some things that I would say. “Yeah, I knew that, but oh wow. Yeah.” Customer concentration has always been a thing that we look at, and by what even vectors, they are concentrated. I think I mentioned our tool and die shop has pretty low customer concentration. It’s one of the better businesses we’ve bought in that regard, but they’re all fairly geographically concentrated. Different types of manufacturers, different sizes of manufacturers, but they’re all basically fairly close to Lafayette, Indiana.
If government or city County officials issue stop, then not only are we stopped, but almost all of our customers are stopped, so there’s that concentration. But overall I’ll take that risk, because we have other businesses with a lot worst customer concentration issues. It’s reminding of some things. Where are we susceptible? Every business has them. It’s just if you know them, and then again, you know what levers you have to work around them.
Is there anything that you would do with your companies to prepare them for things like this, that people looked at you funny, or that was a little bit overkill and now you feel vindicated?
About three months ago we made some pretty significant staffing changes with management and some of the businesses, and it was hard. Good people that changed roles or even exited out of the Little Engine system, but in some cases, they did a good job for the time that they were in, but then the job was done and we can’t keep you around if we’re not providing value in the business.
We helped them transition … Others may think differently. I think we did it with warning and with as much help as we could provide, so those were hard discussions that we had, but this week I’ve been really glad that we had those discussions several months ago and not this week. That, “Hey, we’ve got too much overhead here,” things like that. Cleaning those things up on a small scale. Thing we didn’t do, we talked back in December at our roll off dumpster that we needed to sell one to two trucks, and it just was always a low item on the priority list to get those. They got to get fixed up a little bit before we list them, and we just didn’t get around to it, and so you know what? We’re going to list them.
I don’t know yet if we won’t get much for them, or if there’ll be nobody interested, but I’d rather have the cash right now. I wish we had sold them in January or February. All things being equal, we probably would’ve gotten a better price then, so if we’d just stayed on top of that thing. It’s a small item, but it’s all the little things that add up.
To conclude, is there anything that you’re looking out for or paying really close attention to that might change what you do with your companies?
Let’s look for opportunities here. I’ve been telling folks from back the ’08, ’09 timeframe, my software firm at that time had done a lot of work in manufacturing, automatic data collection capture software and things like that, and that almost all dried up in those businesses. That’s actually when Daryl and I … we met in ’07, I think, and then started working. He started contracting to me, and I don’t remember exactly, but it was around ’08, ’09.
Because commodity prices were the one thing that were up then, farmers were getting more for a bushel corn than they had ever before. They had cash, they were ag retailers and agribusiness people that were ready to take that and use that. Ag. equipment sales went up, but Ag. software and it’s things like that that coincided with the move to software as a service and the lower cost computing. Those two trend lines hitting meant that my software firm grew when everybody else … Now we’re still small, we’re even smaller, but we were even smaller then.
You got to be aware of the macros, but when you’re as little as that, you can move into little pockets of opportunity. I don’t know. I’ve been thinking about the circumstances are totally different for why we’re in this downturn as it was in ’08, ’09. The results won’t be the same, but I think it’s the same type of thing is be proactive, be on the look, see who needs help. If you’re solving people’s real problems, they tend to pay those bills. You find out pretty quickly if you weren’t solving a real problem for them, so just look for real problems that you can solve in your businesses, and look at what your raw skill sets are.
Just before we got on this called, Daryl and I have this text message thread going where, I don’t know, he’s always got some idea, and he’s ready for LTD, our tool and die shop, to start making ventilators or whatever. And I’m like, “Ah, maybe. I don’t know. That’s what we can do.” We’ll see.
Thanks, Mikel, for the time. I hope you guys weather everything pretty well and things go smoothly for you here now.
Thank you, man. Thanks for having me on. Hopefully what’s going on in my world is somewhat helpful to some of your listeners. I know I’ve gotten to connect to several of them. You’ve got a cool group of folks that listen to the podcast and all small business owners are, even though we’re doing our own thing, we’re in it together. The only ones that can understand the exact situation. I’m glad to got to get on and chat. Thanks for the community that you’re building here.