Today, David Strauss, Co-Founder of PetWell Partners, sheds light on PetWell Partners’ fundraising strategy, how they spotted value-unlocking opportunities, and hiring the right people for the job.
David also shares some of his key learnings from his time in the space and what he would do differently, details around PetWell Partners’ decision to be acquired by NVA, and his latest project Roo.
Welcome to Consolidate That!
Ivan, great to see you and David, we’re excited to have you. Ivan, why don’t you introduce our guest today?
Hi, I’m Ivan Zak, happy to introduce a friend of mine, David Strauss. David comes with a business degree from University of Michigan, and then he worked at Guggenheim for about nine years before he became a co-founder of PetWell Partners. Which is the group that successfully exited in December of last year and they started that at 2013. They ended up in 51 hospital in eight states and David, welcome to the show, thank you for finding the time.
Guys, great to be here.
David, I’m going to hop in. I’m going to say, I’m pretty happy to have David. Most of the time Ivan just brings DVMs and MBAs on so I’m happy to have a person that we don’t have 45 extra degrees that Ivan just to participate. Thank you for being a somewhat normal person like I am.
The success there Ryan, is to do very little certificates that look good on your LinkedIn so just do it. That’s what I do, I do a bunch of little ones.
I’m a notary, does that matter?
There you go, yeah. David, thank you for joining us. We kind of talked about several topics and obviously, PetWell has great success that’s been a big project, you guys ended at 51 hospital, which is a sizeable consolidation.
What I want to talk about is about the early and many late challenges as well and how do you find and how do you allocate resources towards operations versus acquisitions and also, how your investors are looking at that problem, sort of by framed it into a consolidated challenge, not having enough money to operations until buying enough practices. If you’re okay, we’ll kick off with that.
Yeah, absolutely. It’s definitely a little bit of a chicken or egg problem. Our journey was unique. When we started, we bought our first hospital in June of 2013. It took us about a year of putting together the business plan, raising a first round of seed funding and sourcing that first acquisition.
We raised three million dollars to get started from a group of 30 individuals. Back then, I think we were probably like the eighth or ninth kind of consolidator to enter into the industry. And so, it’s funny, I remember, a friend of mine who is at a large PE firm who would eventually make an acquisition in the space and had a successful exit. He told me, he’s like, “You know, as soon as you get to 10 million of EBITDA give me a call and we’d love to buy your company.” Now, I feel like, if you have a – just like a heartbeat, you can raise institutional money from these groups to go out and buy hospitals and build a business.
It was a much different atmosphere back then, you know, our first challenge was just getting over the skepticism of corporate, you know, doctors didn’t even want to talk to you so we had to do a lot of work to kind of build credibility.
But Ivan kind of going to the heart of your question, our focus was always on building something that was sustainable for the long run and so we were probably over indexed to investing in operations in front of the growth just so that way, when we made promises to hospital and nurse and veterinarians, we felt like we would be able to deliver on those 100% of the time. Again, you know, credibility was so important even in those early days.
We’ve seen a lot of our peers kind of go about it on a much different way of just building out a massive BD organization, scale up really fast, get to 50 hospitals maybe in like a year or two years and then start to build the operations around it.
To us, that strategy just always seemed riskier; it’s not necessarily a bad strategy but you got to be really good at your site selection, make sure that you kind of like maintain a lot of momentum and positive financial performance and you could probably accomplish that a lot easier with like much more substantial financial backing to kind of get you to that point of critical mass.
We would kind of raise money every year, spend it, go back and at the end of the day, we’d probably done five or six different financing to kind of get to where we were. It wasn’t a private equity backed model result, kind of individuals and family investors, which worked well for us but it definitely kind of I’d say, influenced kind of our growth path compared to maybe some of the other kind of institutionally backed groups that are out there.
The other thing that I’d say just to kind of follow on is we really knew, like my co-founder David Murvin and I, we really knew what our strengths and our weaknesses were so in like early days, we started kind of thinking about who do we add to the team? Well, we had never operated a veterinary hospital before we bought one.
Kind of, first hire is get a really great operations person that knows how to walk into a hospital and expect what to see and knows what’s good and knows what’s bad. Shortly after, we kind of augmented with people on the accounting side, people in HR, IT was a big one too, we understand technology from a big perspective but if a server goes down, we weren’t the guys to fix it.
We wanted to think about what were some of the areas where we could really help our hospitals from day one and kind of build a team to deliver those services.
Do you think that – you were saying, the chicken and the egg, right? Building the credibility piece without having credibility, do you think that the team that you built was a major component of that or was it the fact that you got one hospital and then you did what you said and then use that as a referral or a reference source? Which do you think was more important?
I mean, both are kind of critical, you know. The team obviously is a kind of very representative of the organization as a whole. If you have some weak players on your team, that’s going to shine through and that’s going to hurt your kind of reputation and credibility. And as the organization evolves, obviously, you’re going to have to continue to upgrade that team too and that’s just a constant challenge no matter what business you’re in.
Yeah, absolutely. Digging a little further into it because there’s always interesting sort of balance between the EBITDA, the total revenue, and the corporate overhead. What would you say was the original, sort of the first year or two or the first two rounds, what was the corporate overhead percentage in general if that’s okay to talk about that?
Yeah, absolutely. You know, it’s funny, we never had bank financing. So, a lot of the companies out there, they’re very focused on consolidating EBITDA and understanding what their leverage ratio is because they have to comply with financial covenants. The way we financed our business was with equity from investors and then in some cases seller notes.
That’s where we got our debt financing, so because we never had to manage to quarterly financial covenants, we felt like we’d over equitized the business. That gave us much more flexibility to kind of run heavier on corporate overhead, knowing that once we got to scale, we could solve for that.
Generally speaking, kind of our industry, kind of for mature companies will be four to 5% of sales will be corporate overhead. But that was a target for us, kind of like an end state, many years, we could have been much higher than that, even 10 to 15% of sales, knowing that we’re investing for the future. We would kind of grow into that corporate overhead.
If we had bank financing with quarterly covenants, that’s something that we probably wouldn’t have been able to do, which I think probably you might have heard us in the long run in terms of being able to kind of deliver on our strategy.
Again, our path was I think unique compared to most but you know, we really just wanted to kind of like over-invest in the operations to the business and be able to kind of generate – the other thing that I’ll add too is by doing that, we feel like we’re able to buy hospitals and really kind of enhance same store sales growth and EBITDA margin expansion and generate a lot of investor returns that way too.
Was there anything in the way that you were trying to buy hospitals that that financial modeling inhibited you?
It certainly made it hard to compete on the much larger, higher-margin hospitals, our cost capital is higher typically so just – especially as the market heated up in the last few years, we had to really pick and choose our spots, where we’d want to stretch on evaluation. But we weren’t afraid to also buy hospitals where we’d have to roll up our sleeves to maybe improve performance and to us, that was exciting, you know? It wasn’t just like a multiple arbitrage game but how do we unlock value through operations too?
A lot of those hospitals that gold opportunity clinics, right? That you were buying with pretty low EBITDA, when you see the opportunity, I have sort of two questions maybe if you could maybe tackle. One is, when you were looking at those, were you looking at synergies precisely before acquisitions so you are certain what you can improve after so there is a plan prior to acquisition? That’s question number one.
Question number two about the same sort of hospitals. Those usually come in just general if you look at the hospitals with some baggage. Bad producing hospitals and not bad producing because they want to, right? There’s usually, aside from just operational inefficiencies, some cultural background, can you speak of those two topics maybe?
Yeah, absolutely. On the first, we got really good at kind of identifying where the opportunities were to improve prior to acquisition. We may not be able to pencil it out to the penny but we would know is it a revenue issue, is it a cost to get sold issue, is it a staffing issue?
We were very careful not to buy hospitals where occupancy cost were too high, where you would have to you know, potentially grow into it, this fixed cost can be challenging to overcome. We got really excited if we would see a hospital that was at a very low ATC. To us, that was maybe an indicator that the quality of the medicine probably wasn’t as modern as it should be and with over time, maybe, hiring and some more progressive doctors, you would see kind of a bump in terms of just like the mix of services being offered so that was a value unlock.
We would get excited when we’d see a hospital with really high cost of goods sold. Typically, there’s some mismanagement there, it could be a pricing exercise, it could be just leveraging kind of the contracted pricing we had with our vendor-partners or it could be just kind of putting it in a place and so much better inventory management, system and protocol. Those are kind of value unlocks that we looked for.
As we kind of moved on, we would start to use some tools like VetSuccess, like Vetco. have to do more detailed analysis and kind of like get more granular data that was fine with those synergy opportunities were. We were just always looking for ways to innovate.
I think because of our kind of financing sources, we had to really kind of get creative and clever and we didn’t have unlimited capital to just go out and bye-bye-bye, so I think we did try and kind of figured out ways to get better, get smarter and at the end, I think it paid off. Ivan, you have to remind me your second question.
The second one was on the culture.
Cultural baggage. So did you have to at some point come in and really do sort of clean up and replace people and how did you go about that?
Yeah, so that’s the hardest thing, due diligence ahead of time. You know, often times you’ll meet the seller, maybe meet like one other person on the team but they typically like to try and keep the transaction as quiet as possible, so you really don’t know what you’re walking into. For us building the relationship with that selling doctor was incredibly important knowing that you might have to replace some people at some point.
You know our goal was to hopefully maintain the entire team but obviously that’s hard to achieve in every outcome. For us, we really wanted to really kind of have that good relationship with the doctor so that way if they said to me, we’d have to make changes, you know we could get them on board with those changes and try and minimize the disruption but culture is really important no doubt. We try to build our PetWell culture so that it was really positive, really strong, there’d be a lot of alignment but we wanted to create enough space for each hospital to kind of maintain their legacy culture too.
You know, it’s not like we didn’t rebrand the hospital to PetWell. We didn’t ask everybody across the platform to like wear the same set of scrubs for instance. It’s funny, I remember our core has been in Texas but then we expanded into seven other states and our first hospital in Portland, Oregon is very different, you know in urban Portland than it would be in a suburb in Houston or Dallas, and we just said, “Look, I mean things that we were doing in Houston and Dallas just aren’t going to fly here, so why force something onto somebody just for the sake of doing it?” We just again, are open-minded about that.
That’s pretty smart too because we do see a lot of the consolidators have a heavy regional focus, and as someone in Dallas that lived in Seattle in a year, my cowboy boots did not fit in very well up there, so you definitely
You get beat up for that there
Nobody messes the man in cowboy boots alright? You put in your boots and
Yeah, I had to buy and I’m in Houston so I know.
There you go but yeah, it’s a different look. They had to be vegan cowboy boots in Seattle.
But one of the things you were talking about all the capital flooding in, sort of the overall abundance of that, were there any particular things that if you were, you guys obviously have had a great partnership and acquisition by NVA, which I know we’re going to ask you some questions about in a moment here but was there something about that capital coming in and the way other people have done it that maybe you would adjust going back or if you were to say, “Hey, I’m going to do this whole thing over again, starting fresh today,” that you would differently with your capital structure or not change?
No, look, I think we’re eight years smarter now than when we started. You know for us, we had a really detailed business plan. I think it was a 40-page memo that we put together and for the most part it was right. You know, we missed on a couple of things just like our ability to buy real estate. You know we thought everybody will want to lease it to us.
But I definitely think that kind of having done it once, the second time around would be a lot easier and we would scale a lot much faster and we would definitely, you know, align the capital structure kind of with that in mind but when you are doing it for the first time and you know your investors are friends and family and you don’t want any kind of awkward Thanksgiving, Christmas dinners of like, “Hey, we need more money because we got to pay back the bank” you know that was a heavy influence on how we kind of manage the business the first time around.
That’s why Ivan and I stay. Ivan and I have never met in person, just through Zoom actually. It’s despite the time though we’ve been working together. It’s if we ever got awkward, I can just lose Internet connection so it’s a good way to do it there.
Aside from the capital structure and the aggressiveness of how you would go what – looking back, what would you do different? You were starting tomorrow with consolidation, what would you do different?
I do think we would acquire faster; you know? I think we just know now like which hospitals are really attractive and which ones to go after. I would say the two areas that we’d probably like under-indexed, were kind of marketing capabilities and also like on the bis-dev side, you know me and my partner did a lot of it ourselves. We started bringing some people onto the team, which was really beneficial but that was only in the last couple of years. I think just kind of building out that side of the business more to scale up faster would make sense.
Now, what’s next? NVA obviously was a good family, you guys went through due diligence, and what is next inside of NVA? What opportunities for the consolidator who reaches a certain point and wants to exit? What does it look like with NVA? What was the choice why NVA and what are the next steps?
Yes, so we’ve gotten to know the NVA team pretty well for the last few years and I’d say, you know for us, there is a tremendous amount of cultural alignment there. I think that’s you know, like the classic business school case of like eminent, the reason why MNA fails is because of culture issues. We felt like we checked that box right away and I think it gave them confidence too to partner with us and I would say, so it’s been three or four months now since the transactions closed and you know the partnership is probably even stronger now than when we first started.
Of course, there’s going to be some hiccups here and there but it is a very kind of – it is a very open and welcoming team, you know, that is kind of their culture is also kind of pillared by like transparency and authenticity just like ours was and so you know, we’ve been kind of be able to work through any issues that have popped up really quickly and you know I think even when we first started eight years ago, you know you kind of have VCA at one end of the spectrum and NVA on the other end of the spectrum and you know as you’re trying to build your business, you look to who the leaders in your industry are.
We just felt more comfortable with kind of going to the NVA route, so you know I think from that perspective like it’s always been kind of a nice natural fit and when we look at the different opportunities we had, we just felt like instead of having to compete with NVA on deals, we’d rather just join forces with them. You know as an organization, they’ve got a much bigger bank account than PetWell had and you know, there’s a lot of things that we’ve learned that we can share with NVA and kind of make that combined organization stronger and you know they’re growing like a rocket ship and so it’s just fun to kind of be part of that, continue to be a part of that journey.
Another question related to that, as the coming in partner because your role was mostly operational in PetWell, right? You’re coming in, there’s a strong team, they have operator’s rule. Do you fit into that or is there flexibility provided to you or what is your role as a co-founder of consolidation going into another consolidation?
Both my partner and I, we’ve kind of move out of the day to day operations of running the business and have kind of like plugged our network into their platform and that’s going really well and they have – the amount of resources they have, have taken us like 10 years to build and develop so I mean like it’s a net win for our hospitals and for our team for sure.
And then where David and I plug in is just helping them out whenever we can. You know we’re kind of utility player, so help them out thinking through things like innovation, some of the tools that we use that maybe they’re familiar with, maybe they’re not and just kind of share and kind of how we got utility out of them and then also on the business development side too, where we can – they have a BD machine, that is probably the biggest and best in the industry but if we can play a role and be a reference or leverage our context to win more deals, you know that’s what we’re trying to do.
That’s awesome. David, I would love to talk more but we promised our listeners for a 20-minute episode so I am hoping we can get you back on here because there are so many topics that we can cover with you and hopefully we can have you back but we have two questions that we ask at the end. One of them is, is there a book or TED Talk or a YouTube video that inspired you where you find interesting to recommend to the listeners?
Yeah, I love Malcolm Gladwell’s books and podcast but I think Outliers is a really good one, so you know I definitely – it’s an oldie but a goodie.
We’re not scared of those, yep.
Then the second question we ask, do you know anybody in the industry who would be also interesting to invite here and share their experience with our audience?
Yeah, so there is a gentleman named Trey Cutler, who’s an attorney prior to being in the industry, he was a partner at a big law firm in Dallas and then his father-in-law started rolling up hospitals and he went in the house to be the general council. Eventually, they sold and he just hung a shingle.
Trey has been part of this industry for a couple of decades now and he did all of our legal work on acquisitions and represents a lot of individual sellers to better selling to new associates or another kind of corporate consolidator groups and I think he has a very interesting perspective of how the industry has evolved over time and has a lot of kind of real-time market experience. Trey had become a really good friend and I think he would be an interesting guest to have on your show.
Awesome, well we’ll reach out and if you can maybe shoot him a message just having to say that we’re going to be contacting that would be great.
I just wanted to say I know we didn’t get a chance to dive too much into Roo, which is another great thing you have going on but if people want to look at that, they can visit your website, roo.vet so I wanted to make sure we got some info in there as a little teaser for some other great things you have going on.
Well maybe we should add a couple of words on what Roo is, so David, can you just give us a little?
Yes, so Roo is the first online marketplace that’s connecting hospitals with veterinarians and technicians and it provides a way for people to kind of on a very flexible basis kind of pick and choose the schedule that they want. Today, it’s in Texas and we’ve recently expanded into Southern California and excited to kind of expand more nationwide in the coming months and years.
That’s awesome, being a vet and doing local work for a long time I think that this is a great opportunity for the vets to get that business organized but also for the clinics that are now struggling with finding the vets because we have more pets than vets these days. That’s definitely a great project and good luck to you with that one as well.
As always, you know we appreciate having guests, David, again like Ivan said, thank you for joining us. We look forward to maybe having you back on the show again to pick your brain some more, and Ivan, thanks for having me as well today.
All right, look forward to doing it again.