Asurion：50X 第二季——（50X，S2）

Today, we're dropping a special episode in the Invest Like the Best feed. 50X is back, a fan favorite series from Will Thorndike and the team at Compounding Labs. Will's book, The Outsiders, is one of the best business and investing books that you'll ever read. You'll hear him continuing his work in the hosting chair as he looks in detail at investments that have appreciated at least 50-fold. Season Two features Asurion. Colossus is excited to partner with Will as he sits down with the management and investors behind this legendary investment. We kick off this special drop with a short interview that I did with Will on everything he learned studying this business, followed by the full three-part series. Make sure to subscribe to 50X in your preferred podcast player and look out for Will's upcoming interviews on Joys of Compounding, where he goes into even more behind-the-scenes detail. So, Will, I thought ahead of the release of 50X on Asurion—which is an investment that is one of the most remarkable in history, and people will love the story when they hear about it—that we should record this to hear you reflect on it a little bit. You've been a big part of this investment journey, too, even though you're the Virgil in the 50X context. You, too, have been a key investor in the business over the long period of time. Maybe you could just give us your overview of your personal experience with this company and with this investment.

1. The Original Asurion Investment

Asurion was an extremely early investment for me. I made it very early in the first stage of the private equity firm I was involved with building, Housatonic Partners, at a time when we were making our investments on a deal-by-deal basis, which is an important detail because it meant we were making them out of a serial LLC structure which had no fund life. So we had the structural luxury of being able to hold these investments for long periods of time, and we made 8 investments that way. That investment turns 30 in July of this year.

Wow. Okay, keep going.

That's very far back for me, and it's a remarkable story. The way I would frame it is that this investment was originally made out of a search fund in the very early days of search funds. This was deal number 5 or 6, maybe 7, in the history of search, so it was the super-early days. If you looked at all of the search companies that have been bought in the ensuing years, there are hundreds of them. That number, in fact, is closing in quickly on 1,000.

If you were going to score them, we use a very simple metric for scoring growth equity transactions generally, but search fund transactions specifically. We call it the power ratio, which is very simply the trailing revenue growth rate divided by the EBITDA multiple paid. It turns out that metric is surprisingly predictive over time, and we're basically looking for a ratio there of 2X to 3X. Just to frame that, core private equity would score under 1 on average, around 0.75X. So 2X to 3X is attractive and interesting.

In the history of search, if you go back and look at the original Asurion transaction, it would be in the top 1% ever in power ratio, scoring north of 10X. So it was a remarkable company. It was growing very fast, and we bought it at a low multiple. It was growing north of 50% revenue-wise, and we bought it at around 5 times EBITDA. In this business, EBITDA and free cash flow are actually pretty close.

So it was exceptional in that dimension, and it was sitting in front of this amazing, high-probability, secularly growing TAM market—basically, the growth in cellular penetration. The investment was made, as we said, in the middle of 1995. There were 27 million cellular customers at that point in time. In the podcast, we cover the first dozen years of the history at Asurion, and as you'll see, that's typically for us in pretty good detail.

By the end of that period, there were 250 million, so there was 10X market growth. The business itself had exceptional economic characteristics. Again, we look at 3 criteria in core search, as we call it, in growth buyouts. We like a consistent pattern of recurring revenue, a consistent pattern of repeat revenue, organic revenue growth, as we're talking about, and capital efficiency.

Across those 3 dimensions, the original company—the original business at Asurion, which was known at the time as Road Rescue, Inc., a totally different name—scored very high. It was just a very good business sitting in front of a high-growth market. The point I would make at a high level is that, given those circumstances, I think anybody would have generated pretty exceptional returns over time.

That being said, if you look at what the CEO there, Kevin Tuil, achieved over the ensuing dozen years we cover in the podcast, and really over the broader 30 years, that would be a top 1% outcome. If you could take the best team of CEOs from anywhere, you would take Kevin, who was a graduate of Stanford Business School, and that is extraordinary. So they were dealt an extraordinary hand, but they also played it pretty uniquely well, and that's the story we work to unpack in typically deep detail in the podcast.

It's impossible to be totally precise about it because it's not a publicly traded business, but rough justice: what kind of a multiple of money did the investment represent from the beginning through to today?

It's not precise. The podcast is 50X. It's in the zip code of 100X—50X.

100—

Yeah.

50X. Got it.

And TransDigm—we made the first one—is now around 50X. I'm going to frame that, yeah.

Yeah. Pretty incredible. If you think about that kind of multiple of money, I think most people intuit that that's only available as a seed investor in Uber or something like that. It's a very venture-like power-law outcome from a business that you said you bought for 5 times EBITDA, 5 times free cash flow, really. What does that teach you about the trope that that kind of return should and does come from the world of power-law technology investing versus ho-hum search fund private equity?

2. Duration Drives Returns

Yeah, I think the key variable in that, obviously, is duration. It's interesting: if you go through the story, there's this fascinating period where, about 3 years into the investment, there was an opportunity to sell it at a seemingly gaudy multiple of invested capital, a double-digit net MOIC to investors. And there was a decision made at that time not to sell it and to hold it. Really, everything subsequently stems from that pivotal decision.

We unpack it in detail. It was extraordinary for a group of investors. At this point, the investors were very sophisticated, many of them professional investors, but not funds in the early days. They were individual investors investing their own capital. But they made a conscious decision not to sell at a 12X MOIC 3 years in. I think it would be hard for many boards sitting around the table today to turn that down, but it ended up sowing the seeds for everything that followed.

If you think about everything you've learned across those 30 years watching the business get built and expand, aside from just the pure power of duration—which I know is one of the key things you personally care about and focus on, and I don't mean to make light of that amazing lesson and advantage—what other things did Asurion teach you that were distinct to it, maybe things that you wouldn't have learned, or didn't learn, from other companies you've been involved with?

3. Resource Allocation Creates Outperformance

Going back to that thing, Pat, it's a great question. If you say, “Okay, well, they were dealt this amazing circumstance, but they had this outperformance, this top 1% outcome—why?” I think it's really a story of resource allocation. That's the way I would think about it. I think there are 3 types of resources where a company under Kevin's leadership had a differentiated approach.

I'm not going to start with the one that you would expect me to start with, which is capital allocation. I think, actually, I would start with human resources and talent, and the company from very early on had a distinctive approach to talent. Kevin, as a CEO, allocated more of his time to talent than almost any early-career CEO I've spent time with.

He was on that from early on, proactively looking for and engaged in the truffle hunt of finding top talent for the company. This was from the first 24 to 36 months. In addition, the company was relentless in continually upgrading its talent. This is something we get into in some detail in the podcast, but that's also code for replacing people who are no longer capable of growing in their roles, given the very rapid growth of the company.

That was part of it: a very conscious approach to managing talent over time. The second piece is time allocation. I would drill down to CEO time allocation, and I would say that, to this day, if you go to Kevin's desk, he's got one of the little yellow stickies on it with his top 3 priorities. He's just a laser beam as it relates to his own personal time allocation, specifically using that Eisenhower Matrix framework.

The important, non-urgent bucket is where he spends most of his time and has from the very early days in the company. So I think on those 2 dimensions, there's a difference. Then, capital-allocation-wise, if you look at it, there's an amazing organic engine underneath this company over time. But there were critical junctures where the actual long-term MOIC was driven by different capital-allocation decisions.

The 2 best examples of that are that they made 2 acquisitions subsequent to the original acquisition that effectively got the business into the handset-insurance business and bulletproofed its position there in an interesting way. Those were exceptional acquisitions that were proactively sourced after years of proactive work, and many teams would not have gotten to those acquisitions, let alone been able to do them in the way that they were processed here.

And then, secondly, in the pretty early days, the company was an active acquirer of its own shares—something that's pretty rare in private companies. It's actually not that easy to do, but the company bought in pretty meaningful amounts of its stock over time. This was something it had learned from a key board member here and podcast participant, Irv Grousbeck, whose own company, Continental Cablevision, had repurchased shares privately. But at about year 4, and again about 3 years later, it bought in almost 20% of its shares privately, and it continued to do so in the years post-2007, to the point where it's a very meaningful long-term contributor to the net MOIC. All of those decisions and actions were unusual.

What did it teach you about business moats, sustainable competitive advantage, and the cultivation of those things? Any company that earns that kind of return—the world's a smart place. It knows where there's money being made. That doesn't seem to have affected Asurion's ability to compound free cash flow per share. What is it about its moat that has been so powerful?

Yeah, I think the company evolved this really unique B2B2C model. It did an exceptional job delivering service for its clients, the ultimate clients, and for its key cellular carrier partners. In both cases, it built really deep relationships through excellent execution, a very metric-driven approach, constantly driving NPS excellence, and then consistent, extraordinary quality of its people over time.

There were private equity investors who got involved after the 2007 transaction that we sort of closed the podcast with, and a number of them have commented that, in interacting with the team post-investment, people 3 and 4 levels down could have run other portfolio companies of theirs. Again, going back to Kevin's focus on that from the early days.

Can you say 2 words each about Irv and Kevin, both what kind of people they are and what they've taught you?

So Irv is the crispest individual I've ever interacted with in a life or business context, and I mean that in the best sense: he has a genius for distilling to its essence core business ideas and broader life advice. He's like a distillation machine.

And Kevin is a unique combination of kindness—he's from Canada and he's a delightful person—but with laser-beam intensity underneath it. It's so well disguised, but it's there, and deeply present. So I think there would be some overlap in the strengths of those 2, and that's the reason they had such a wonderful and long partnership. You know, Irv was effectively the lead director until 24 months ago at Asurion, from the earliest days. And Kevin actually started as a case writer for Irv at Stanford Business School after he graduated, so there was a relationship that predates the Asurion company acquisition.

Final question before we get to the episode, which everyone's going to love: What is your personal favorite part about the entire Asurion story?

I honestly think, Patrick, it's the decision that we touched on earlier not to sell the company at 12x net MOIC to investors 3-ish years in. We do unpack that in much more detail in the podcast, but that was a pivotal moment. Highly countercultural.

Well, I've listened to this twice now. I think it's one of the most interesting business case studies anyone will ever encounter, and it has the added benefit of being one that's not widely known, because the sort of access and depth that you and your team have created are what make that possible. So thank you for doing this for all of us. So many lessons to learn, and I hope everyone enjoys.

Welcome to FiftyX. I'm your host, Will Thorndike, author of The Outsiders and a co-founder at Compounding Labs. FiftyX aims to dissect the anatomy of investments that have appreciated at least fifty fold. We dive into each investment's origins, evolution, and eventual outcome, exploring key themes around long-term value creation, ranging from operations, capital allocation and culture, to pivotal purchase and sale decisions. We track the often circuitous route to exceptional long-term returns and study how that rarest of investment commodities, conviction, gets created, maintained, threatened, and sometimes lost. To access proprietary research and exclusive materials, please visit fiftyxpodcast.com. FiftyX is produced by Compounding Labs in collaboration with Colossus. Compounding Labs is an investment partnership focused on building long-duration, serial acquisition holding companies. Distinct from a traditional private equity firm, we intend to hold assets for decades and operate with a lean and slightly feisty culture. We are actively looking for exceptionally talented individuals to join our team. If our countercultural ethos resonates with you, please visit compoundinglabs.com to learn more.

All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts and podcast guests may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

So today we're going to do a deep dive on a company you may never have heard of. It's called Asurion, and we're delighted to be here this morning with its co-founder and current chairman, Kevin Taweel. Asurion actually has several claims to fame. Measured by MOIC—multiple of invested capital, a metric we obviously care deeply about on this podcast—I believe it is both the best search-fund investment ever and the best institutional private-equity deal, period.

The company, which was originally called Road Rescue, Inc., turns 28 years old in July. And for investors who held their investment for the entire holding period, their MOIC is well into the thousands. To put a finer point on that, a dollar invested in the original purchase of Road Rescue in 1995 has grown at a compound annual rate of over 61% through the most recent transaction in 2021, translating into an MOIC north of 5,275x.

Interestingly, and very unusually for us at 50X, it is a story where the predominant source of value creation came from organic growth, although that's a little bit deceptive, as we'll see. Importantly, there have been 2 constant presences throughout that entire period: Kevin and a deeply talented lead director named Irv Grousbeck. We are incredibly fortunate and grateful to have them as our guests on this episode of 50X.

Okay, now, full disclosure: I am both an original investor in Asurion and a close, longtime friend of both Kevin's and Irv's, which doesn't mean, of course, I won't be actively grilling them Merrick Garland-style on this podcast. Anyway, Kevin, we're delighted to have you here. Thank you for coming.

Kevin Tuil

Thank you, Will. I'm excited to be here.

Excellent. Let's dive in. So if you don't mind, let's maybe start with a little bit of your background pre-Asurion.

4. Kevin Finds His Entrepreneurial Roots

So I grew up in Prince Edward Island, Canada, a small province on the East Coast, maybe 120,000 people, and I grew up working in my dad's grocery store. We had maybe the predominant grocery store where everybody in the community came and shopped every week, and I'd be packing bags and filling shelves. And that was probably where I first got to understand this idea of entrepreneurship, of working for oneself.

Not that I saw it in a great light, because I saw my father coming home from work at 5:00, tired. He'd have dinner with us and go back to work till 10:00 at night, and he worked 6 days a week. So it was sort of all I knew. I knew other friends had jobs working in the government or different businesses, and they didn't necessarily appeal to me any more, or certainly not more than what my dad did at the time.

Athletics was a big part of my life. Of course, hockey. I'm Canadian. It's in the blood, it's in the water. I also played soccer competitively.

What position in hockey?

I was a defenseman. All 5'8" of me. I was not a large defenseman, but—

It was the Bobby Orr era.

It was. You had to be fast, have good vision, and, yeah, Bobby Orr was the superstar then.

But soccer was really my passion. I started playing when I was 12 and immediately took to it. It was a growing sport then in Canada, and certainly in North America generally. And I feel like I learned a lot of lessons through my experiences playing soccer, both as a player and being coached by amazing coaches along the way. So, a lot of lessons learned.

I ended up playing for my high school team, local club teams, our provincial Canada Games team, and it was also an important thread through university because it was one of the key reasons I ended up going to McGill University. McGill had just won 2 back-to-back national championships, so that was, yeah, exciting for me.

I was a walk-on player in 1983, and I made the team, and that was just a huge—I don't know if I'd say huge accomplishment, but I had grown up in this small pond, and I was this big fish in a small pond. Then I had come to Montreal and McGill, and nobody knew me, nobody even knew who I was. So to sort of make it on my own without a reputation behind me was super exciting and exhilarating. I spent 5 years there at McGill taking a mechanical engineering degree.

What position in soccer, by the way?

I was a center midfielder. I'm not sure I played defense or offense particularly well, but I was able to distribute the ball quite effectively.

Actually, my first year at McGill was spectacular and truly formative for me, not just from an athletic perspective, but from a mindset and business perspective. I still remember these moments regularly. So McGill had just come off 2 national championship titles, and we were clearly the No. 1 favorite coming into the 1983 season.

I didn’t start the first game, but when I got my shot—I think it was in the second game—I became a starter immediately. It was exciting. But what was truly different was the sense on the team that we couldn’t lose. It was in the air, and I’d never felt like that before. You would see it.

There was one time we were playing one of our rivals in our home stadium, and we were down by 2 goals with maybe 8 minutes left in the game, but nobody was stressed. Sure enough, our center back—I think he was from the Dominican Republic—was not a particularly talented scorer, but he came up and got the first goal. We tied it and won it in overtime.

It was really remarkable to be part of that group of people who had that sense of invincibility, that sense that we could overcome any obstacle. Unfortunately, in the national final, we lost in penalty kicks at the very end. It was during a snowstorm in Sudbury, Ontario.

Not that you remember it or anything.

Every single moment of it. It’s one of those things that you never forget. Interestingly, my son plays lacrosse for Duke University, and he made it to the national final this past year. I haven’t told him yet that he’ll remember that for a long time, but he’s got 2 more years to make that up with a national championship.

Rectify.

Yeah. Yeah, and then you’ll probably forget about the losses, too.

Okay, so post-McGill.

Post-McGill, I went on to work at Salomon Brothers as a financial analyst in the 2-year program. That was fun. Fun may not be the right word. It was sport to work these young men and women as hard as they could.

This is like the Michael Lewis era at Salomon Brothers, right?

Liar’s Poker was published when I was an analyst there. It was truly emblematic of the culture at Salomon Brothers. I was not on the trading floor. I was in the building next to it, but the culture permeated the entire organization.

It was very fast, loose, and macho. There weren’t a lot of guardrails or controls in place there at the time. It was an education for me in what I really didn’t want. It was the first time I actually worked for somebody else, and the cultures at investment banks can be challenging, period, but it was particularly challenging at Salomon Brothers in the late ’80s.

Not only did they have a culture where they would chew up employees as much as they could or use them as much as they could, but they weren’t really into developing, nurturing, or building a real culture. It was really all about driving near-term results.

It was also a time when Wall Street was declining precipitously. You were coming into a recession. Drexel blew up in the middle of it, and you had people being laid off. During my second year there, the mergers and acquisitions group probably contracted to about half its original size in less than a year.

You got to see all that happening to the point where, when I was being interviewed upon my exit, en route to Stanford Business School, I remember the managing director asking if I’d consider coming back after business school. I just wasn’t expecting that question, and I answered honestly and naively. I said, “Well, I suppose if I don’t have any other offers, I’d come back.”

It was intuitive. It was just like, “No.” It was a reaction. I would never want to work in that culture if I didn’t have to, but I learned a lot, that’s for sure.

The thing I take away most from that era was the importance of getting it right, of doing work at a high level and checking your work, making sure it’s perfect. I took that with me out of that experience.

And so then you go to Stanford, to the GSB.

I went to the GSB. Lovely. Like a lot of Stanford Business School graduates, I had the time of my life. It was certainly not overly taxing. I met a lot of people who have become my lifelong friends—people you work with, invest with, sit on boards with, are friends with, and raise kids with.

Of the things you get out of an education, probably the most important was a core group of people that you end up spending the next 30 years with, and that was fantastic. I also got the opportunity to work as a case writer. I call it my third year of business school.

Talk about how you ended up doing the case-writing thing, what that job entailed, and maybe when you first heard about what the heck a search fund was. Because, Kevin, when you and I were in business school in 1992, I think there had been 5 of them raised to that point.

Yeah. There weren’t a lot at that point. It was certainly Jim Southern, David Dodson, and a couple of others. The search fund was sort of in the background during our 2 years of business school. I hadn’t really focused on it a lot.

When you went to be a case writer, did you know then you wanted to search?

Absolutely not. I was more in the camp of wanting to start a company. I wrote about this in my business school application—the desire to be an entrepreneur. I certainly saw my father working in the store during summers while I was at university at McGill.

Basically, I was my own boss. I was teaching soccer schools or soccer clinics throughout Prince Edward Island. I had the opportunity to be my own boss, and I even started McGill Classmates, a small consulting firm, during one of the summers. This idea of starting a company and being an entrepreneur goes back to the beginning.

When I was in my second year of business school, along with a handful of other classmates, we’d get together every Monday or Tuesday, and we’d bat ideas back and forth. We’d brainstorm, trying to come up with some company that individually or as a group we could start, and I struggled to find the right idea—what would make sense.

Interestingly, this was in ’91 or ’92. Had we been coming out of business school maybe 5 or 6 years later, at the dawn of the internet, where eyeballs were everything, I’m glad we didn’t, because I think any one of our dumb ideas then could’ve gotten funded, as they all ultimately got funded 5 or 6 years later.

I took the job as a case writer, Patrick, because I had no other offers. I may have interviewed for 1 consulting firm, maybe 1 or 2 other types of jobs, but I didn’t get the offers. Then it was getting late in the year, and my then-girlfriend suggested I apply for this case-writing job.

Spoiler alert: Our story arc is about to intersect with Irv Grousbeck. The job was to be a case writer for 3 professors: Irv Grousbeck, Jim Collins, the author of Built to Last and Good to Great, and Bill Lazier, another wonderful professor and friend who has passed away and was a great influence in my life.

They had interviewed a number of candidates. They had offers out to 2 of those candidates for 1 position, and those 2 candidates were holding out for better offers elsewhere. I came in on a Friday afternoon and interviewed with all 3 of them. They made me an offer that night, I think, and I accepted before the other 2 could accept. So at least I had my job. I had my stable $40,000-a-year job.

I didn’t really know what I was getting into, Patrick. It was more of a stopgap. While I was doing my work, I could think of ideas to start a business. It was about that time, because I knew Irv had really been the godfather of the search fund, or the mastermind behind it, that I started thinking about the search fund as a plan B if I couldn’t find a company to buy.

Fascinating. At what point did you make the decision to go down that path? How did those 2 things merge together?

About halfway through my year as a case writer. I used to say it was the best job I ever had. Running Asurion is actually a little bit better, but it was fantastic. I got to work, on average, an hour a day with Irv, Jim, or Bill. I was learning about businesses, management, and leadership, and it was like an intensive course—or almost an intensive third year of an MBA—which was better than the other 2 combined.

It obviously gave me some time to think about starting a business and gave me some time to reflect on that. I still wasn’t making much progress on that front, and about halfway through, I decided it was time to pivot to plan B, which was doing a search fund.

I thought, “Oh, gosh, it’s not going to be as good,” because I wanted it to be my company. I wanted this to have my fingerprints all over it from the start. What I know now but didn’t realize then is that when you buy a company through a search fund, your fingerprints are going to be all over it from the start. If not from day 1, certainly within a couple of months.

You are the person that the culture is going to be built around, so the fear I had about not being able to get that out of the search fund was unfounded.

You decide to do it. You go down the path. You raise the capital, right? Nontrivial in that era. Still sort of a novelty.

I think I raised a little over $200,000 in 8, 9, or 10 increments. I started looking in the healthcare industry. Jim Ellis took over as case writer about the time I raised the fund, and so he was officing at Stanford.

He was your successor.

He was my successor as a case writer, and then my eventual partner here at Road Rescue. While Jim moved into my office, I didn’t move very far. I just found an empty office and started my search out of that empty office.

I didn’t really tell anybody. I felt like I’d just keep my head down and nobody would figure it out. Eventually somebody figured it out, and they kicked me out after about 6 months. But it was important because I got a chance to spend time with Jim every day. I was helping him get up to speed on case writing. Jim saw what I was doing, and it eventually led to a partnership between Jim and me.

Near the end of his year of writing cases was about the time that I had surfaced 2 potential transactions, and Jim and I talked about them.

We decided we were going to do this together: I would pursue one transaction, he would pursue the other, and if one fell apart, that person would come back to the other transaction. Or if we both ended up buying these companies, then we'd share some equity in each one, or at least that was the idea.

Had he raised his fund at that point?

5. Finding Road Rescue

No, he actually hadn't raised the search fund. We leveraged my search fund. We started doing diligence on each of the companies. Mine was a small HMO based in Miami that focused on the Cuban community there, and Jim had Road Rescue, a small motor club or roadside assistance company based in Houston.

We did diligence on each. Just as Jim was about to start raising money for the acquisition of Road Rescue, my target fell through. It wasn't that the seller had misgivings. The reason it fell through was that I went to Miami with one of my investors, Bill, and we spent half a day with the seller. Then we went out to Joe's Stone Crabs in Miami.

Bill was very impressed with the seller, so much so that later that evening, when he and I conferred about the transaction, his opinion immediately was, “No, let's run away from this deal. This guy is super talented. He knows this space really well. He knows the community. He has been part of it for a long time. If he's leaving, I don't want to be stepping into his shoes.” There wasn't necessarily something amiss, but you'll never live up to that. It's going to be too difficult.

We walked away from that, and I think the next day Jim and I met up just before he was about to start fundraising. We met at a Chinese restaurant in Menlo Park, and before the appetizers hit the table, we resolved who got what equity—it was 50/50—and that we were going to leave the next day to start fundraising together. It was instantaneous.

When you say fundraising, do you mean for the transaction?

For the Road Rescue transaction. We were looking for, I think, a purchase price of around $8–8.5 million, and we generated that with $2 million in equity, $2 million in subordinated debt, all from investors, and then some senior debt on top of that. That was an interesting experience, going out to raise money for Road Rescue.

Talk about what that was like. It was a little different from search fund deals prior to that point.

I think we were sold out in 24 hours. It was almost instantaneous. Jim and I knew it was a potentially good transaction and a good company, but we didn't have a lot of experience looking at companies. I don't think we realized how good it was.

This, while small, was showing meteoric growth, had recurring revenue, was profitable, had low capital intensity, and had simple operations. It's like you hit the jackpot. Our investors got that right away. They took as much as they could. Like I said, I think we sold out in less than 24 hours, and we had to end up carving people back.

Importantly, I and the other investors wanted Irv to be part of that transaction. He was not in the search, so we went to all our investors who had the right, and all were very willing to pare back their ownership stakes to allow Irv to come in. Irv was not only going to come in as an investor; he was going to sit on our board. Here we are 28 years later, and Irv is still our stalwart on the Asurion board.

Some quick data on Road Rescue and that transaction. An important point is that you guys bought all of that. The multiple that you paid was 4.5 times trailing EBITDA for a business whose revenue had grown 90% in the prior year. Pausing on that, that's extraordinary.

If you took the year before that, it didn't grow as fast. It grew at 33%. So you average those two, that's like 65% growth, pretty conservatively, and you paid less than 5 times EBITDA for it. We use this metric now in the world of search, the power ratio, as a way of evaluating transactions: the organic revenue growth rate divided by the EBITDA multiple.

A typical private equity deal would have a metric of less than 1x, like 0.75. A good search fund deal would be a lot better than that. It would be 2–3x, which is a lot. You and Jim were at sort of 15x—literally the highest power ratio in history. So it is not surprising that it got that sort of response from investors.

We did a lot of things right over time, but clearly we were really lucky. I mean, to find this company that was leveraging growth in the wireless industry because they sold their product through wireless carriers—and there may have been, at the time in 1995, maybe 10 million wireless subscribers in the U.S., which was going to go to 300 million—that was really lucky. The dynamics at play were important and difficult to replicate, I think.

The CEO of the company had a small stake in it, and his father owned the majority of it. So he was basically living under the thumb of his father. He had been running it for a few years, not too long, but was ready to stop working for his dad. This was a big payday for him personally. It would have been a few million dollars to him and several more million to his father, but in their world, that was a grand slam home run, and we caught them at absolutely the right time.

Clearly, no auction was involved, and there was no deep process. Just to give some math on that, the trailing revenue was $5.9 million, and trailing EBITDA was $1.5 million. You guys put out a deck where you projected what the next 5 years would be like. The deck called for $15 million of revenue by the year 2000, 5 years out. So that's 17% growth and $3.7 million of EBITDA.

You assumed a little bit of multiple expansion, kind of a crazy assumption. You said you'd get to 5.8 times EBITDA. All that got to a 37% IRR.

We may have been a little aggressive.

Okay, so 17% revenue growth was the core assumption there. So you bought the company?

We bought it, yeah. The actual process had its twists and turns, though. Probably the most interesting part of getting the transaction done was that, for 2 months, Jim and I sat in the office next to the seller, working with him and waiting to get the largest contract, GTE Wireless, renewed. We weren't going to sign the contract unless that contract got renewed.

We were very earnest and very cheap. We shared a hotel room at the Embassy Suites. It was super entertaining. I'd say, “Jim, just give me 10 minutes to fall asleep first, because you snore like heck.” But we would get up every day, and it was like Groundhog Day. We'd try to help the seller prepare for his negotiations.

I do believe proper preparation for important events, whether it's a contract renewal or a difficult conversation, is so critical, and Jim and I may have gone overkill on this one. We actually wrote a tome. It was, “Here are the main contract terms. Here's your position, Ray”—the seller's name—“and then here's what we expect GTE will say. This should be your response.” It was sort of a back-and-forth, and it was probably 60 pages.

We handed it to Ray and asked him to review it in preparation for his contract. We would actually review it with him, and it was probably overkill, but it was important to us. We needed to get that contract signed to get the deal closed. It happened, and sure enough, 2 months later, in July of 1995, we got the deal closed.

Very cool. One last thing to mention is that I've been back through the materials, obviously preparing to talk with you about all this stuff, and the PPM you guys wrote for the deal goes straight to the Irv training as case writers. It's just excellent. I would still recommend that as a model for people going down this path to look at. It also applies to the early board decks, which were very crisp.

So maybe talk about buying the company and relocating—you and Jim did that.

We moved to Houston, Texas.

Overnight, you went from Stanford MBAs to CEOs. Talk a little bit about the first 100 days in the new role.

It was eye-opening, to say the least. Spending those 2 months sitting next to Ray, we got a chance to get a sense of the organization and got to know the people. So it wasn't quite as hard a cut, but now we were in charge. There was some element of, “What do you do? What do you do now?”

We were really lucky. We had this amazing board of directors. Honestly, I still marvel at how talented a board we were able to pull together for such a small company and for Jim and me. We had Irv, Joel Peterson, Bob Oster, Bill Egan, David Dodds, and Bill Manley. Four of them were operators, Bill Manley was an investor, but all had tremendous experience and were willing to support us and give us advice at every turn.

It was more of an advisory board than a governance board. We had them to call on, which was helpful. I recall the first few months involved a lot of asking questions and a lot of just observing: What do you do? We were trying to understand the business, which was number one, and really getting to know the managers.

Importantly, I thought we wanted to follow the money. How does this really work? Are people really paying us? Are we really sending out checks? So we would literally sign every check. Because our business was roadside assistance, we would send a tow truck in some town out to support or help one of our customers. They would send us an invoice, and we would pay thousands of $50 checks to them. We'd have to sign them.

You guys signed all the checks—thousands of checks. How long did you do that for?

We probably did that for 6 months, and then we handed it off to our new CFO, who we hired a little bit later. Jim and I were both happy to do it, just so we understood the business. As we got to know the managers, we learned in business school that it's good to delegate.

We attempted to do so. We quickly found that it didn’t work very well. We were trying to manage by objectives: set up objectives, have a scorecard, and measure people against it over time. That didn’t work.

What the team the seller built was used to was executing orders. The seller would tell specific leaders what to do, and they would go do it, but once they were done, that was it. They didn’t know what to do then. The idea of setting goals, empowering them to achieve those goals, and having scorecards to manage them along the way quickly led us to realize that the team that was there was not going to be the team that was going to be with us, certainly not in the medium term and not in the near term either. I think within a year, most of the team, if not all of it, was entirely replaced.

What do you remember about the first year?

6. The Wireless Growth Engine

Jim and I saw this engine that was growing rapidly, and we had this sense that a land grab may not be exactly the right term, but it was a sense of, once we got in and realized, “Oh, this is big and growing,” we knew that we wanted to spend most of our time on the revenue side.

To the extent that we had 200% of our time—100% each—we probably allocated about 150% of that 200% to revenue growth. Jim was entirely focused on either landing new accounts or managing our existing clients to drive more subscribers through their customer base, and I was about 50% focused on that, working with existing clients, and 50% on operations.

That meant that we knew by commission, which is the right way to do it, that we were taking a risk on the operations side. Was the call center open? Were calls being taken? Were customers happy? Were they being supported and aided on the side of the road appropriately or not? We were counting on the people we had in place to manage that and ensure that it happened.

One of the things we did to make sure that the operations were up and running was to set our alarm clocks in the middle of the night. I would set mine for 1:00 and 5:00, and Jim would set his for 3:00 and 7:00 a.m. We would wake up and, while still in bed, call the 800 number to make sure somebody picked it up.

At that time, while we were 24/7, 24/7 meant 3 people in a couple of cubicles in a small room in Houston, Texas. It wasn’t much of a failsafe or a plan B. Occasionally, things would happen. One time, somebody threw a brick through the window at our call center, and the police were called, so the call center was down. Jim and I rushed down in the middle of the night, and sure enough, the police presence in Houston in the mid-’90s was incredible. We were there in probably 5 minutes, the police had the place surrounded in probably 2 or 3 minutes, and everything was cleared out. It was fine, but our call center was down for an hour or 2.

Put us in that room. What was it like being in that first office in Houston?

Jim and I had offices adjacent to one another. Our assistant, Tanya, was out in the other room. We had to make sure that she didn’t bring her weapon, her Glock 9, into the office. We asked her to keep that outside.

By the way, when we ultimately had to terminate Tanya, Jim and I rock-paper-scissored to decide who was going to fire her. Fortunately, I won, and Jim had to do it. It was exhilarating. It was really fun working with a partner.

We interacted continuously. We probably didn’t even need the wall between us. I think we effectively separated our responsibilities, and I think that’s important, but we were always looking to the other for advice. “Hey, I’m thinking about doing this. What do you think? Can I get your input on this?” There’s a lot of energy and excitement in that.

I got to make the decision in the areas of my responsibility, and the same was true for Jim. We wanted the other to be involved and engaged with it. On strategic matters, Jim and I would come together and make the decision together. There may have been 3 instances in our whole time together where we disagreed, and then we were like, “Okay, we’ve got 2 co-CEOs. How do we handle that?”

We would pick a board member—it was usually Irv—and Jim and I would either meet face-to-face or on the phone with Irv. We were actually pretty good about this: I would defend Jim’s position, and Jim would defend my position. We didn’t want Irv to know who felt what. Inevitably, in every case, instead of picking A or B, Irv had a third alternative that was so much better. It was fun.

Changing out the team was challenging, right? We were early on in our first conversations with people about how to terminate them and performance-manage them. A lot of the conversations that Irv teaches at Stanford—in Managing Growing Enterprises or Conversations in Management—we were living in real time.

I remember Jim and I had made the decision to terminate one of our regional managers, and Jim called him up and said, “Hey, we’re coming to San Antonio tomorrow and would like to have a conversation.” It had been 3 or 4 months, and we’d never been there. He said, “Okay, I will see you tomorrow.”

We hung up the phone, and he called back maybe an hour later. He said, “My wife and I were planning on looking at boats later today and thinking about buying one. Should I delay that until after our conversation?” Jim had to respond, “Yeah, why don’t you hold off on that? We’ll talk about it tomorrow.”

We were learning our way through how to have these conversations. He clearly knew there was so much we did wrong there. Obviously, he had been sitting in place for months, probably realizing he wasn’t doing a good job, and we were letting that drag out. Instead of just showing up and having the conversation, we had this pre-conversation, which led to an effective termination without a termination. He had to wait 24 hours to hear it.

We were making our mistakes, and yet the company was still growing. One of the geniuses of the search fund is that if you buy a company that is growing, or at least stable and profitable, it can withstand the mistakes the young, new entrepreneurs will inevitably make.

Probably the biggest mistake we made, Patrick, was that while we saw wireless was growing, we thought we were in the roadside assistance business. We defined ourselves as a roadside assistance company, and this had a meaningful impact on what we did, how we resourced, and where we allocated our time.

About 6 months or a year in, we decided, “Look, we’ve got this great channel of distribution, wireless. There are probably other channels of distribution. Why not sell roadside assistance to automotive manufacturers, insurance companies, and credit card companies?” We knew you could access roadside assistance directly through those channels as well.

Jim and I built a sales force. We started going after those channels of distribution with perhaps half a dozen people and a leader. It took us about a year to realize that this was a mistake. We were effective at getting in to talk to the companies, and we were even able to bid on some RFPs—General Motors, I recall vividly.

The big difference between these other channels of distribution and the wireless channel was that it was a cost center. Roadside assistance was a cost center. It was something that these channels gave away for free, and they would try to squeeze the providers so they could minimize the cost of that loyalty benefit they were offering.

Whereas for roadside assistance, the wireless carriers marked it up and made a healthy profit. They were comfortable growing that, and we could make money at it. With the other new channels of distribution, it was very low-margin business.

We finally figured it out. It took us a while, and then we backtracked. To our credit, we made some hard decisions and let go of that entire team.

And this is year 2?

This was probably year 2 or year 3, maybe 1997 or 1998. We decided, “Hold on. While we were undertaking all this folly over here with new distribution channels, the core was still growing: roadside assistance to the wireless industry.”

We thought, “Let’s continue to lean into that.” This was our first lesson on the concept of focusing on the core and getting more juice out of the core business. We refocused on the core and started looking at other products and services we could sell into wireless.

You guys put out a paper around that time. If you look at the growth characteristics of that core market, they’re just extraordinary, right? You can increase your penetration of existing customers, you can sell new accounts, and meanwhile, the overall market is growing. People are signing up for more phones. When you started, cellular penetration in the U.S. was 32%.

I think it might have been even lower than that, Patrick. I think by 2000 it was 30%, so we got the ride even a little bit earlier than that.

When did you and Jim decide to move back to the Bay Area?

I think we moved back a year from the day we started. We started in July 1995, and we moved back in July 1996.

Jim and I hadn’t really contemplated it. The topic was brought up by Irv. Irv was close to the company and still is, but he saw that we were traveling a lot. Jim, in particular, was traveling for client meetings and new business development. I was on the road as well for client meetings and for going out to our different offices.

He felt like we would be happier and that it would be more sustainable for us as leaders in the long term to relocate back to the Bay Area, where we wanted to be and where both our spouses had jobs. Because while we were traveling, so were our spouses.

They were traveling. They're both consultants and traveling 4 days a week. So he saw the stress it was putting on the system and thought that, even though it would potentially be better for us to be located in Houston, it would be more sustainable long term for us to leave. It didn't take him mentioning it twice for us to get out of there. We were happy to leave.

In the first 2, 3, 4 years, having read through those board decks recently, I would describe it as what my daughter would call a hot mess, right? There was a consistent pattern of you guys growing above budget in subscriber and revenue count, which, as you said, was what you were focused on. That was the driver of revenue, and that was exceeding plan. SG&A would be a little bit over, and EBITDA would be a little bit short. There were a lot of moving parts going on.

The key point in that is that never once across that period of time did the company grow subscribers less than 50% a year, and that was pure organic—all roadside assistance, right? In the middle of all that came a bid. It's an interesting moment before all this where CUC, I think it was, came in and bid. This was 1997, 2 years in. They bid $60 million, which was 15 times MOIC. How did you and Jim and the board process that? That would still, by the way, be a top 5% outcome.

Can I address your comment about us being a hot mess during that period of time first? “Mess” is a little strong.

Oh, no, no, no. You're right. You're right.

This was quintessential. Irv doesn't need to say a lot to make a point, one of his great strengths. So in that time period, the first 2 years, he saw what was going on. He read the decks. He saw us overperforming on revenue and underperforming on margin, and he paused during the board meeting and said something to the effect of, “So, Jim and Kevin, do I have this right? It feels like you're overperforming on all the uncontrollable items and underperforming on all the controllable items.” I don't think there was any response needed for that.

Got it.

Message received. That will never be forgotten and will be retold again and again.

Going back to CUC, we got an offer from CUC, which were high flyers at that time. I don't think they had merged with HFS at that point in time, and this was before the principals at CUC all went to jail. It was sort of incredible. Was that 15 times? It would've been in 2 years, and we were proud. That's the way to describe it. It was like, “Wow, this is real. Somebody will actually pay a lot of money for this.”

It was more of an LOI offering. They hadn't gone into diligence, so we didn't know if they really would've paid that. But the conversation at the board meeting was absolutely enlightening. Jim and I were just spectators. We were listening. We presented the offer to people the board knew. To hear the various opinions expressed on how to look at this and evaluate it felt like I was in a classroom, learning and absorbing all this great experience.

One of our board members had a long history and was very, very successful at transactions. He was a proponent of selling. He was like, “Look, you just can't beat it. This is 15 times your money in 2 years. You put a big win—not just a small win, a big win—on your résumé. You go out and you and Jim go at it again, and you go find another company, and you set the bar, and your reputation is established. It'll be a win for the investors and everyone.” That made a lot of sense to Jim and me.

Then one of our other board members, Irv, had a different view. He started with, “How do you feel?” He asked Jim and me some questions: “How do you feel about the company? How do you feel about the prospects for Road Rescue over the next 5 years? Do you think it's going to grow? Do you enjoy what you're doing?” He made the case that if you have confidence in the runway ahead of you—and at this time we did—then you should consider that.

While there were pockets of competition from AAA sprouting up, we did have confidence in the growth, and it was tough not to, given how fast we were growing and how fast the wireless industry was growing. Irv said, “Look, if you're confident and you enjoy what you're doing, then do you really want to sell now, pay half of what you get in taxes to Uncle Sam, and then you guys have to go out and find another?” It's not easy to find the Road Rescues of the world. They're few and far between.

That point of view ended up carrying the day. Jim and I, of course, made the decision, but it gave us a chance to really evaluate how committed we were to this company and the industry. In a sense, we emotionally doubled down after that.

It's worth mentioning that Irv built his career as the co-CEO of one of the 2 best-run cable companies, a company called Continental Cablevision, that he and his partner ran for 30 years. So Irv had some direct experience with similar situations that informed his views as a board member, investor, partner, and friend.

I think both of them came at it from the experiences they had.

Okay. Well, let's maybe talk about handset insurance.

My favorite topic.

Yeah, good topic. How that evolved as a business for you guys, how you got the M&A hat back on, and maybe talk a little bit about the Merrimac piece.

7. Handset Insurance Takes Over

Once we decided we were going to focus on wireless, we looked at doubling down in that space, building out our client services team and sales team to sell into more wireless carriers. But we also looked at other products that we could potentially sell through that same channel of distribution because it is such an amazing channel of distribution.

At the time, if you went into any wireless handset store, you would see a couple of brochures on the desk when you were waiting to buy your handset or set up your wireless plan. One was roadside assistance for $3 a month, and right next to it, everywhere, was cell phone insurance for $3 a month. So, of course, we'd be mystery shopping and training in these stores all the time, and you literally looked at the pamphlet and read it. I was like, “Hold on. Cell phone insurance. That seems to be more closely aligned with wireless than roadside assistance. Hmm. I might want to be in that business.”

We would've never found cell phone insurance were we not in the business. But because we were, we got to see it, and from the outside it may seem like a big move. It's an entirely different product. Why would you consider this as an acquisition? But once you're in the industry, you realize that the person you pitch to at the wireless carrier is the same marketing manager. It's a value-added services marketing manager within the wireless company. So the person you're selling to is the exact same person.

The financial orientation of the products was identical. They were both insurance-esque, so a customer would pay $3 a month, billed on their cell phone bill, and the risk of how many times somebody would break a phone or use the service was borne by us. Operationally, they were very similar. Somebody had a problem, they would call a call center. We would either send a phone or send a tow truck. They were almost identical businesses.

We got conviction pretty quickly that we wanted to be in this business, so we pursued both a buy-and-build strategy. We knew that our biggest client, GTE, was looking for a provider of cell phone insurance, so we started bidding on it because we had a seat at the table because of our relationship. At the same time, we started talking to the 3 players in the industry that provided cell phone insurance.

There were 3 small players at the time: The Merrimac Group, Lock/Line, and Signal. Before that RFP concluded, we were able to move down the path with The Merrimac Group and close that transaction, and that's what really launched us into the cell phone insurance industry.

Talk a little bit, if you don't mind, about that deal. How did that come together?

It was based in Nashville. Two partners, former insurance agents with one of the big firms—I think Marsh & McLennan—started it. They were in the insurance industry and saw others doing it, this niche in cell phone insurance. Their growth profile looked not dissimilar to what Road Rescue did 4 or 5 years earlier.

So you've got this business that may have been doing $4 or $5 million of revenue and a little over $1 million of EBITDA, but was adding wireless subscribers hand over fist, much like Roadside was. So it was like going back in time a little bit. But they were insurance agents. They had never run or scaled a business, so they were running at the limit of their capacity and ability.

We hit them at the right time. They were ready to cash out, if you will. It had a nice run. They'd been agents for a while, and now this would give them plenty of money for retirement.

You approached them, right? So given that, this was a proprietary direct approach.

Proprietary direct. We actually approached all 3, and we tried to hold simultaneous conversations with all 3. This one progressed more quickly, so we focused on it.

I recall the transaction negotiations. We were at the Union Station Hotel in downtown Nashville. I remember we had 2 hotel rooms. The 4 of us were negotiating in one, and they came to us with their final offer: “The price is $8 million,” I think it was, or something around there, “and not a penny less.” And Jim and I looked at each other and said, “Look, we're going to have to think about this.” So we retired to our room, and we had this little squishy basketball that we were playing with, throwing it back and forth.

Our first question was, “How long do you think we have to hang out in here before it’s okay to go back in and say yes?” We had experience with roadside assistance, so we had some idea. We knew that the acquisition of the Merrimack Group could be a really good transaction, à la roadside assistance. Turns out, it was 10X that. We didn’t know that, but we knew it was going to be good.

But once we got inside and under the covers and spent a few months in the organization, you’re like, “Oh, hold on, there’s a lot more here than we thought.”

How many minutes did you give them?

20 minutes.

20 minutes, okay.

That’s the lesson: 20 minutes, no less than that. We ended up buying, I think, at 6 times EBITDA. It was growing so fast, I think the multiple on a run-rate basis was a lot lower than that.

The numbers we’ve got for that were exactly what you said, Kevin: a little over $4 million of revenue, $1.2 million of EBITDA, and subscriber growth of 60%, right? So, very similar to the growth rate at Road Rescue initially. You guys paid, on a run-rate basis, 4.5 times EBITDA for that. That doesn’t even include the fact that some of it was paid over time, and you could probably discount that if you wanted to. It ended up, at that time, at about 18% of enterprise value.

That’s an important point, the 18%. While Jim and I had confidence, our board didn’t have the same level of confidence. There’s this element of when you’re, particularly when you’re doing acquisitions: you never want to bet the farm. You don’t want this to be, “If the acquisition doesn’t go the way you think, then it takes the whole thing down.” My rule of thumb there is a maximum of 20% to 25% of enterprise value. I will deviate from that by exception.

We’re going to get to that, by the way, but yes, go ahead.

I remember one of our board members thought this was the stupidest idea in the world. It was like, “Who would buy insurance for their cell phones?” At the time, you may recall, cell phones were sort of free. They were given away as part of your wireless plan if you signed up for a contract. He was like, “Why would you do this? This is stupid.”

We had confidence. We didn’t know for sure, but we also knew that because the roadside assistance business at that point was so much bigger, it wouldn’t have killed us if things didn’t go as we expected.

You financed it all with debt and cash off the balance sheet. No equity required.

Correct. Nothing required.

That’s an important point that we haven’t really touched on, which is that the business, in addition to rapid growth, had exceptional economic characteristics, right? Crazy-high returns on tangible capital, well over 100% on that metric. A simple way to think about that is that for a dollar of EBITDA, typically at least half of it, and often more, turned into free cash flow for you guys. All of that growth you could finance internally.

Yes, with cash flow or debt. We didn’t have a ton of working capital that was required to grow the business. Not a lot of PP&E. We inherited that structure. It was certainly wind in our sails, if you will.

The acquisition closes. Talk a little bit about the integration, how quickly you guys brought that on stream, and then we’ll talk a little bit about capital allocation.

That was an exciting time. We were no longer traveling to Houston; we were traveling to Nashville to get this up and running. There was a big aha within a month or two because, in round numbers, the customer paid $3 a month for this insurance, and you gave $0.50 to the carrier as a billing collection fee. Then $2.50 of that would go to the underwriter who managed everything. The Merrimack Group only got $0.50 of that $2.50.

The other $2 went to the underwriter to pay for claims, the logistics of getting those phones to the customers, and the profits that they would get, even though the Merrimac Group managed the $2.50. Whoa, hold on. We’re managing it. We know everything. We know the economics of this. We know the risk.

We understand the risk better than anybody else, better than the underwriters themselves, because we actually see it in real time. The first move we made, which changed everything, was, “No, no, no. We capture the $2.50, and that becomes our revenue, not the $0.50.” We didn’t know that before.

We brought in an insurance expert who quickly told us, “No, no, no, you don’t need the insurance company. You can rent their licenses.” Immediately, instead of them taking the risk and controlling all that, we took that on, and we rented their insurance license for a few percentage points, maybe 5% at that point, and now it’s a lot less. That gave us control of everything, and now we were like, “Okay, yeah, game on.”

Now we get the underwriting profits immediately because we’ll take that out. But then it opens up the world for us to better manage the claims distribution process and, ultimately, the repair of those phones.

Step 1 was to get control of the entire premium and take over the underwriting profits. Step 2 was to become the logistics provider. Instead of having a third party, FedEx or UPS, not just handle delivery but manage the warehouses and all that, we created our own.

We started our own warehouse, and this way we would ensure that the customer got served, if not the next day, the day after, which was an important customer-service metric. We were also able to do that a lot less expensively than those third-party logistics providers.

The final step of vertical integration, well, was the repair of cell phones. Probably a majority of the time, when a phone had a problem, it was damaged and not lost or stolen, so there was still value in those phones. We started the process of getting those old devices back, refurbishing them, and making them like new.

We would always replace the plastics on the outside, so you were never touching old stuff, but we’d reuse the internal parts. We could, in turn, save a lot of money in that process while getting the customer into the same handset that they had damaged originally.

Those 3 steps led us to control the customer experience, keep the price down for consumers, and increase the profitability of the program for our carrier partners.

How long do you think it took you guys to get to the point where you were fully in vertical-integration mode?

That took about 3 or 4 years. Step 1 took about a year. Getting into the distribution business started about a year after we were in it, and that just scaled. We were in it right away, but it was a room the size of a closet.

Over the next years, we gradually took more and more from the third party and created our own logistics center, so that took a little over a year. Then, once we had the logistics center, we carved out a space and started repairing phones there.

It evolved over time, but it really took about 3 or 4 years to get fully into it. Then we just perfected it. We scaled it and perfected it, and ultimately we had operations in Hong Kong and China. Now we’ve consolidated them all in the Philippines, including a lot of our logistics and repair operation.

Again, the linchpin for all this is the Merrimack acquisition, with a $7.3 million purchase price.

Road Rescue got us in the game, and the Merrimac Group was really the main engine. While we stayed in the roadside assistance business, it was clear that handset protection was the engine after a couple of years. We intentionally diverted resources to it—time and attention—and that became competitive quickly as well.

Probably around the 2007–2008 timeframe, roadside assistance went away, but it’s all been about cell phone insurance since 2001.

The headline for Asurion is phenomenal organic growth over time, but the selected M&A activities have added enormous value across the whole hold period, with Merrimac front and center in that, and one other we’ll get to—a very unique feature of the company’s history over time.

There was one capital-allocation event in those early years where, in 1989, you guys had the cash generation you were talking about, Kevin, and decided to do a share repurchase, something that’s pretty unusual in private companies. Can you talk a little bit about that early repurchase, how it came about, or anything you remember about it?

There’s always this debate over whether you do a dividend or a share repurchase, and Irv was instrumental in our learning on this dimension.

It was a big part of the Continental playbook over time.

It’s almost always the right tool to use. As long as you can value it fairly, it allows individual investors to make a decision: Do you want liquidity or not at this price? Are you a buyer, a seller, or a holder? That’s versus a dividend, where you’re force-feeding somebody money that they may or may not want.

Sure, intuitively you think, “Oh, yes, give me a dividend. That sounds great.” But as the recipient of that, what do I do with that? Can I redeploy that in the same place? Do I want to redeploy that?

That was our first introduction to balance-sheet management, if you will, from Irv. It was a good lesson: the importance and impact—although I’m not sure we fully appreciated it at the time—of a share repurchase over a dividend.

Yes, that’s extremely well laid out. Basically, this is the first step down the path for the company, right? 1998, 1999—it’s very early days—and you guys invest $12.5 million, all financed by debt, and buy 10% of the company.

The IRR math on that transaction is rather good: 41% IRR over 22 years and an MOIC of 275x. That's just the power of doing that early, and it's very rare in private equity. It basically never happens in private equity. It's very rare even in search.

Kevin, we touched on this a little bit as we were talking about the share repurchase, but the business is generating all this cash. Can you talk a little bit about the use of leverage in the very early days and how you guys thought about that?

I think it was an important consideration and driver of returns, obviously. When we did the original Road Rescue deal, I'd say we used leverage to the maximum extent possible. So we went out and got as much senior debt as we could. In fact, the investor capital that we raised, we structured partially as debt and partially as equity in order to drive the highest returns to shareholders.

As you look over the next couple of years, as we came to the Merrimac deal, of course, we were using leverage, the lowest cost of capital out there. We were going to use that at every turn, whether it was cash on the balance sheet or cash that we could generate from raising debt. We always had that mindset from the start of responsibly using the lowest cost of capital available to us, and debt was part of that. At times, it was more available than at others, but we had that as part of our ethos.

Interestingly, you saw our leverage ratios decline from the initial transaction up until the Merrimac transaction, and we just didn't have a use for that. So you think about what's the highest and best use of that, and you'd reinvest it in the operations to the extent that you really believed in the return on investment you were going to get from that. And we did. We were investing as much as we could.

Number two would be acquisitions, and there was nothing available to us. Number three would be returning capital to shareholders, ideally in a share repurchase and, secondarily, in the form of a dividend. In those early years, we didn't really think about the latter too much. Obviously, we did that small transaction, returning 10% of capital through a share repurchase.

We would really come back to leverage, mainly, at least in those first few years, either for an acquisition or in conjunction with an equity recap that we happened to undertake. The first one of those was really in 2001, when TA came onto the cap table.

Okay, TA is a good segue, so let's talk in a minute about that transaction, sort of the first material transaction for the company. But before we do that, I just want to stop and give a snapshot of the business in the year 2000, just after the Merrimac deal closed in '99.

You'll remember that in the original PPM document, the base case was $15 million of revenue and $3.7 million of EBITDA. The year 2000 actual numbers for the company, which, of course, included Merrimac at this point, were $135 million in revenue, a 63% compound annual growth rate since closing, and $27 million in EBITDA, right at a 20% margin.

So that's pretty substantial value creation by any metric, along any measure. The subscriber count grew about 8x over that period of time. That's now come to fruition in the business, and you guys made a decision to explore a transaction and offer some liquidity to shareholders. Can you talk a little bit about that?

We had seen meteoric growth, and we were excited by it, but at the same time, we took it all in stride. Maybe we were a little overconfident because, with the Merrimac transaction, things were a little more challenging. We now had 2 companies. Jim and I were stretched. The management team wasn't as strong as we would have liked it, and so there was some element of Jim and me just seeing the risk here.

I was like, "Hold on. This is great," but neither Jim nor I had taken anything out at this point, and we were both interested in some financial security. We conferred with the board and had conversations about whether we could buy back as many shares as we wanted, or as many as were desired, with just debt. We couldn't do that, so we opened it up to an equity process, and that generated some interest.

In particular, the highest bidder was TA Associates. While investors were interested in liquidity, I think it was really Jim and me driving it—the need for financial security. The board thought that was a good idea. Having management hold on too tight is never a good idea, and they understood that from the early days. Allowing us to let some air out of the balloon and give us some financial security, they thought, and we agreed, would help us be better managers.

The TA transaction was once again a situation where Jim and I were back in the classroom. He and I were nominally negotiating it. We were the front men, but really there were people behind each of us pulling the strings. On our side, it was really Bill Egan and Irv Grousbeck who were negotiating through us with TA. Irv's company had previously had TA as an investor, and Bill had been a partner with the folks at TA. So they all knew each other very well, and I'm sure there was baggage from each of their pasts that was being handled through surrogates—Jim and me.

On the other side, Jim and I were dealing with Jeff Chambers and Richard Thaler, who were wonderful, but they weren't really in the control seat either. It was Kevin Lander and Andrews McClain behind them. So it was an interesting negotiation.

At the end of the day, we had what I call the Irv factor, in the sense that when we said no to something, they knew it wasn't us, and they weren't really negotiating with us. They knew it was coming from Irv: "We understand what that means." No meant no.

They came in with a term sheet that had a high price, but it had a number of conditions. They wanted control over major operating decisions, including the budget and key hires. They wanted to take the company public, registration rights, and a preference, along with a couple of other items. Without getting into too much detail, basically, we came back at the advice of Irv and Bill and just said no to all of them.

The insight for us—which, again, Jim and I, in the classroom, being the students—was that TA is in the business of investing in great companies. If we have confidence in the company and we don't need the capital because it's all secondary, then we've got all the power.

While we ultimately acceded to some minor rights for TA, at the end of the day, they basically came in with the same security as all common. I think—happily so in the end. And honestly, I think if you looked at the history of TA Associates, that transaction not being preferred is a wild outlier, thanks to the quality of the business. It was absolutely common for investments to be preferred and to have a coupon, and they got neither of those.

Jeff Chambers ended up joining the board and was a wonderful fit. I think board dynamics are always incredibly important, and he got a chance to shine early on because, soon after TA invested, we missed our numbers. It was really the first time we'd missed our numbers, and I think the next 2 quarters were challenging.

Jeff was as cool as a cucumber. He may have been sweating behind the scenes, but he was consistent and supportive, and we made our way through it. Everything turned out fine for TA, but he was tested early on, that's for sure.

And Jeff is great. The quick math on that transaction was that they paid a valuation of $225 million. They bought $60 million worth of stock at that valuation, so they ended up owning a little over 25% of the company. All of it was secondary, as you said, Kevin—significantly, none of it was preferred.

The IRR for selling shareholders from the original search group over 5.5 years was an MOIC of 41x and an IRR of 102%. So that's a reasonable start, and we'll return to get into what followed from that start, but I think that's a good place to cut things. So thanks for your time, Kevin.

Perfect.

Kevin, in our last conversation, we talked about the first 5 years of Asurion's history, from the acquisition of Road Rescue in 1995 to TA coming in as a director in very early 2001. To put some numbers around that, you started with $8.5 million of revenue and $1.2 million in EBITDA, coming entirely from the roadside assistance business.

In 2000, you had $78 million in revenue and $25 million in EBITDA, with around 35% of that coming from handset insurance. So we're now officially in the TA era, early 2001, and it just seems as though that early '01–'02 era represents a step-function change for the company—a lot of transformation. Maybe a place to start, Kevin, if you don't mind, is with the actual renaming of the company. How did all that come about?

The story of our names is an amusing one, if anything. When we bought the company in 1995, we bought Road Rescue, Inc. In the marketplace, we were known as Mr. Rescue, but it was Road Rescue, Inc.

When we bought the Merrimack Group, we merged the 2 companies together. It was 1 holding company, and we came up with the very creative name Road Rescue Merrimack. It clearly didn't roll off the tongue. It was a pretty straightforward process.

We realized that it was not a long-term name. It's entirely unrelated to TA's investment, but we did need to come up with a name that represented who we are and who we wanted to be. We hired a marketing firm, and they helped lead us through a process. Asurion was the winner of that process.

There were a handful of others that were similar-sounding, but the idea of assure, assurance, to protect, resonated with us. That was also a time when URLs were difficult to find.

So we were pretty happy to land on Asurion, and it stuck. We've been excited to continue with that name ever since.

Let's maybe talk a little bit about the senior management team and the overhaul there. Maybe go back, touch on Gerald, and we can go forward from there.

8. Hiring 10X Leaders

The hiring of Gerald Rusk was a seminal moment for me personally. It was where I truly found, or saw, the power of hiring a 10X person. Our previous CFO was a talented CFO who filled the role at the time. But when we transitioned him out and Gerald into that spot, Gerald didn't come from a CFO background, but you could tell he had the same hunger that Jim and I had.

I want to say it's rare, this sense of, “I just want to win.” Today I call them drivers and stewards. You want drivers to just accelerate the business and take it further. You don't have to push them. These people are excited to win, grow, and succeed, and others are content to manage, report, and be custodians and trustees, if you will.

When you interview somebody and you see it in their past—these examples of overachievement, of attaining high levels in whatever they do, the sense of wanting to win—we saw that in Gerald. The impact on the organization was immediate and surprising because he was our first big hire. He not only took on finance and handled that almost instantaneously, he took on parts of operations. He took on information technology at the time.

He took us to places from a strategic perspective that we probably wouldn't have gone otherwise, because Jim and I really saw him as a true partner as we moved on from roadside assistance into handset protection. That was a big wow moment for us.

Along the same lines of the importance of 10X-type managers was the hiring of Brett. Jim wanted to wind down his day-to-day activity within Asurion, and he was moving on to teaching at Stanford. Jim and I went out to look for a chief operating officer—someone essentially who would report to me and help get the trains running on time.

I think before that, Jim and I were good doers. We knew what to do. We were actually pretty competent. We were good salespeople. We could get the basics done, but we weren't necessarily skilled at managing, driving, or inspiring a team. We went out looking for someone who had done that before because we were growing and scaling quite rapidly.

Finding Brett was lucky. We were introduced through a mutual friend. He and I and Jim hit it off right away, and we realized, given his experience at West Point and running a couple of other companies in the past, that he had the skills we wanted and needed to grow our business.

Where did he come from? Who was the referral, and what were a couple of the things he did before you ran across him?

He was introduced to us by Bill Lazier. Bill was a professor at Stanford. He's one of the 3 people I worked for as a case writer when I finished my MBA there, and a dear friend. It turns out he and Brett were close. They had a relationship, I think it was through his son-in-law.

Brett had graduated from Stanford a few years before me. We reached out to our investor base and our network, looking for people who fit this profile, and Bill connected us. We hit it off right away.

Brett's background was West Point. He did 5 years after West Point in the Army. He did not finish top of his class. He finished number 2 at West Point, a point which I continually give him a hard time about. He had a couple of really senior leadership positions. I think he was the chief operating officer at Risk Management Solutions, and then he was the CEO of another small software startup that had just recently been acquired by Excite@Home, if you remember that company from the way-back machine.

We just caught each other at the right time, and he came on board. We were looking, as I said, for a COO. We were never going to get him with that title, so Jim and I were super flexible on titles, and he took the CEO title. I had already had the chairman title, and that was really the beginning of another amazing partnership of mine.

Was he a board member from the outset?

Yes. We brought him onto the board right away. What he brought right away were leadership skills in terms of managing a team that Jim and I—but particularly I—got a chance to learn from over the next several years.

He and I were partners, and we would talk every day, multiple times a day, much like Jim and I had. We were giving each other advice. It was a great opportunity for me to watch him, learn from him, and eventually improve myself along the way.

If I think about where he was really strong, it was inspiring and leading a team. It was focus on the customer. He really understood what the customer experience was and drove that through the entire organization. One of his superpowers is relationship management.

Beyond being just a great leader, he is one of the best client relationship-management people on the planet. There are some great stories about how he built relationships over time, which are amusing.

First of all, it's kind of amazing if you think about it: you going from one super-close, productive partnership with Jim almost seamlessly overnight to one with Brett. Talk a little bit about some of the mechanics of that. What time did you guys get started?

It is true. I lucked out. I feel very lucky to have had a handful of great partnerships over the years. It's so much more fun to do it with somebody.

I think about the relationship that Jim and I had and the relationship that Brett and I had. 2 things stand out the most about each of those relationships, and they were common to both: we talked all the time, and we reached out to one another all the time.

The second thing was that we pulled the others in. With Jim and me, or Brett and me, we were always looking to the other for advice and help, as opposed to pushing the other person away and saying, “Hey, this is my sandbox. You stay out,” type of thing.

But Brett took his military training and applied it to Asurion. I thought I was an early riser, getting going at 7 in the morning. Sure enough, Brett started earlier. He probably got up at 4:00 or 4:30 every morning and was in the office by 5:00.

It sets a tone. People see that. They see somebody getting in early, working hard, and dedicating their time to this adventure we were on, and it's infectious. He did it, and so I was there too. That sort of permeated through the management team.

Can you talk a little bit about culture as you guys were building it, and hiring and talent management as you and Brett and the team began to build off of that together as a partnership?

It certainly started with Jim, Gerald, and me, and then continued with Brett, Gerald, and me. The term we use to define the culture of Asurion is “divine discontent,” and it's a term that was coined by David Kirk, a former McKinsey consultant. Before that, he was the captain of the New Zealand All Blacks, the world-champion rugby team. He wrote this paper on high-performing teams, and he described his experience with the All Blacks.

Gerald actually read the article and brought it into my office. I'll never forget. He said, “This may not be who we are today, but it's who we certainly aspire to be.”

What that means—divine discontent—is this idea that you've got a team of people who are incredibly talented, you're really excited to be around and interacting with one another, and together you set really high goals, a high bar, a high objective for yourself. You work like heck, and you go achieve those goals.

Once you're done, you don't rest. You do a postmortem. You look at what you did. Can you do better? What were the mistakes? Because there were always mistakes. How do you improve upon those?

There may be competition along the way, but you're really not so much focused on the competition. You want to use those as opportunities to get better, to actually improve yourself. When you reach those goals, you put up bigger goals, and you just keep going.

That sort of drive and excitement really permeated the culture of the organization. The people saw that we talked about it, and the management all knew it. Even today, you can ask managers all the way down the organization. I think people certainly understand divine discontent. I think they hopefully practice it.

We're a bigger organization. I know that isn't as broad or widespread as it once was, but that core of divine discontent is certainly still there.

It reminds me a little bit of that story about, in the early days, arriving at core values and the definition of fun, and you and Brett working through that. Can you go through that story a bit?

We hired a third party and brought together a broad cross-section of our senior team with the objective of defining Asurion's core values. It was a process in which we were broken up into groups, and those groups would work together for a period of time. We'd have their ideas, and we'd come back. It was interesting how this sort of merged.

People were voting on it, so there was some sense of, “Oh, we're going to vote on our core values,” which, with the benefit of hindsight, was probably not the way to go because they are what they are. It's not like what you think they are, necessarily.

We went through the process. One core value that emerged on many people's lists was the idea of fun, or the core value of fun. We want to have fun in what we do and enjoy it. We want to be excited by it.

While a number of groups put it there, it just didn't feel right. I was like, “I'm not sure that fun is what we're trying to do.” Then one of our longstanding employees, a gentleman named Rodney Schlosser, who had been with us for a long time, raised his hand and said—while we were talking about fun—“Look, this is not fun.

That’s not the right word. It’s winning. Winning is fun. We want to win. Let’s not sugarcoat this or try to put a different face on than what it really is. We’re here to win.

There was a bit of an aha moment there: yes, it connects with divine discontent. It’s interesting how the true core value actually does emerge. It’s about who you are, not the name you might put on it. It was interesting how that just emerged from the process.

There was also an honesty in your culture, specifically as it related to people finding their long-term roles and how you thought about giving feedback to people.

One of the things we did well over time was maintain a strong discipline around talent management. We recognized we were on a rocket ship. We had a team that was driving, in some cases holding on because it was growing so quickly. We knew intuitively that people who were in those seats were not necessarily going to be people who could take us to the next level. One of the things we did really well was be honest with ourselves and with our team about the roles they were playing now and whether they would be in those seats in the next couple of years.

It turns out we ended up switching over the entire management team about 3 times over the course of 7 years. It was mostly proactive, in the sense that we knew the people in the roles couldn’t take us to the next level. Sometimes we obviously made personnel mistakes where we had the wrong person in the wrong seat and had to address that, but we were pretty rigorous about it.

I’d give us pretty high marks because when you hire into a role, chances are you’ve got maybe a 50/50 chance of actually making a great hire. I think it’s as important, if not more important, to correct that mistake as quickly as possible. That really did allow us to take full advantage of the opportunity because the industry was growing so fast.

We had opportunities both domestically and internationally, and we were integrating vertically in the value chain. So much had to be done that it was critical for us to get the right people in the right seats during that period of time, or we wouldn’t have taken nearly as much advantage of the opportunity we had.

Those are not easy conversations. What lessons did you learn about handling them?

The best advice I’d have, and what I try to do, is be consistent and constant in your feedback and have an open dialogue with your team members, so there’s not a lot of ambiguity between how you think he or she is performing and how he or she thinks they are performing. Having those constant conversations makes the ultimate conversation around “It’s time to leave” a lot easier, because you almost arrive at it at the same place and at the same time.

You have to be honest with yourself and with those people, and have the courage to actually do that, because those are difficult conversations. We avoid them. We don’t like having them. But it’s the right thing to do. It’s your job.

It also helps the employee, because if they’re not performing, they need to know. Otherwise, they have no chance of redirecting or addressing that. As long as you’re having those conversations on a regular basis, it helps you hold your feet to the fire in taking these actions that should be taken on a timely basis.

The other thing that was helpful—and this is particularly helpful when having a partner—is holding each other accountable. If it’s just you, then it’s easy to push something off or allow somebody to stay in a spot, thinking he or she may improve over time.

In this case, we were partners and effectively operated as partners, so being able to hold each other accountable for our team was really helpful. If you don’t have that person, then having a board member, an executive coach, or a mentor really is helpful in prompting you to see clearly what’s happening.

Did you and Brett ever disagree as you were sorting through that?

We rarely disagreed. One of the things I liked about our relationship was that we didn’t get stuck in a specific point of view or position. I think both of us were pretty good about allowing the data, the information, or new information to change our minds. We may have had differences in small areas now and then, but we would allow the person who really had key authority over that domain to make the decision.

I think only once there was a time—it was about a specific individual—when we disagreed on whether to keep this person or not. That went on for 6 months. It was a situation where I thought this person needed to exit the company, and Brett wasn’t quite there yet.

Kevin Tuil

We managed that by continuing to converse about it. It took, I think, 6 months longer than it should have. Eventually, that person did exit the company. The way we ran the company, if one of us really believed that somebody needed to exit, it had to happen, because once that person has lost the confidence of one of us, it’s ultimately not going to work out.

We worked our way through that slowly and carefully, because you want to be careful when you’re protecting an important relationship. You want to do what’s right for the company, but the working relationship that he and I had together was instrumental to how we operated as a company. Doing that well could take the company in a positive direction or a negative direction.

A related thing is this idea of lack of hierarchy. I think it was around 2005, something like that, when the company added 50% more employees in a single year. How did you keep hierarchy from creeping in?

Kevin Tuil

You do the best you can. Of course, it’s going to seep into any organization. You try to model it as best you can. Having a low ego or being humble was an important part of the ethos of Asurion: you’re setting high goals together, working together to reach those goals, but also being open to constructive criticism.

When you do those postmortems to get better, it does take people letting their guard down and being comfortable having constructive criticism directed their way. That does help from a hierarchy perspective.

In growing companies, managers’ and leaders’ sets of responsibilities get divided all the time. Seeing that a senior leader, as the company grows, might have a section of his or her responsibilities cleaved out and given to somebody else—not under them, but beside them—can create challenging conversations. People feel like you’re taking responsibility away from them, but it’s necessary in a growing enterprise to have great people focused in key areas, particularly as the scale underneath it is increasing at the same time.

That was how we thought about the example we tried to make. One of the mechanisms we used to help promote that was a mechanism we called Power of 10. It’s an exercise in focus and prioritization, but it helps people see that this is not about hierarchy.

What we would do every so often was use it for a really important event. It could be a contract renewal, going after a new client, some other negotiation, a supply chain problem, or an operational glitch. We would pull together a handful—maybe a half dozen people—who had knowledge and something to contribute to that problem or issue.

It didn’t have to be the CEO or the head of that client. It could be somebody lower down in the organization who actually had the details and understood the issue at a deeper level. We would bring that group together for focused periods of time, call it 2- to 3-hour increments, maybe do it 2 or 3 times, and have prep material in advance to allow people to think about these issues.

I know it sounds simple, but it’s wildly effective at getting a handful of the right people, at whatever level in the organization, focused on a problem—not worried about the meeting that came before or the meeting they were going to next. We found that in every instance, we would come up with alternatives that individually we never would have gotten to. It was a powerful mechanism. We still use it today.

Can you talk a little bit about organizational mobility as a principle for top talent?

Kevin Tuil

We believed the best way to develop your people was to give them a wide range of responsibilities across the organization, and in particular for your high-potential leaders, those you want to continue to rise up in the organization.

I will tell you, it’s really easy for them to rise up in their functional area. But giving them cross-functional experiences, allowing them to meet other people and network within the company, has a much greater long-term impact on the business.

In fact, when you look at our executive committee, I think the average tenure may be approaching 10 years, and some have been there 15 to 20 years. It’s a long-tenure group of people.

Across a breadth of roles.

T.A. Taweel

Across a breadth of roles, yes.

Compensation. Can you talk a little bit about equity compensation and how you’ve evolved your approach? You started out as a search fund, right? A rigid model to that. How did the company’s approach to equity compensation evolve over time as you were bringing in these A-players?

Kevin Tuil

This is where we benefited early on from having a tremendous board of advisors and directors who could help us think about these types of issues. While it is certainly important from a shareholder-return perspective to shepherd equity very carefully, part of the ethos early on was that you need to reward the management team and have them aligned with the shareholder base. That meant distributing options as a key part of the management incentive plan.

And that was built in early on as part of our compensation structure. It certainly was for Jim and me. In order to attract the very best people, like the Gerald Risks of the world, and pull them out of their current roles at a much lower salary, we needed to use equity and the promise of that as a key factor in bringing them in and attracting other important leaders to the organization.

It connected to being able to get great people, really, because when you're a small company, you're getting these really talented people to come work for a small roadside assistance company in Houston, Texas, or a cell phone insurance company in Nashville. Why would they do that? Well, you've actually got a great story because you get to be part of this leadership team as opposed to being a cog in the wheel in a large company. You get to be part of a leadership team, in on the decision-making, and we've got this great vision that we've laid out.

To the extent we work hard and reach those goals, you can not only be part of that, but be rewarded by it as well. We tried to push this as far down in the organization as we could, and it had fits and starts over time, but we ended up pushing it all the way down to the manager level. So those people who come in right after business school, in particular, get slugs of equity right away.

When did that happen? When did that push deeper into the organization occur? Was that a T.A.- and Brett-era thing?

Kevin Tuil

It was really a T.A.- and Brett-era thing. We believed in it and certainly needed equity to hire the key senior managers. But once Brett came on board around the 2001–2002 timeframe, I think we were much more rigorous in our thinking about how to drive that down further in the organization and get people at the VP, director, and manager levels aligned toward these goals.

Another interesting aspect of our compensation, Patrick, was this idea of full potential. Consistent with divine discontent and reaching for those goals, we have a fair bonus plan that people would strive for, obviously. But we'd always have this supercharged bonus plan for hitting full potential because we didn't want to be that company that put out low targets and beat them.

By the way, in any organization, that's sort of the natural state, or people will tend toward that as you get more and more people, because it's easier. Everybody wants to hit their goals, so you set a lower one, and if you beat it, nobody asks questions. That's the road to mediocrity, honestly. Then you're just maintaining. You're not really pushing yourself.

So we'd always have this full-potential bonus that was something that was stretch-oriented. We would never really hit it all, but I can tell you it helped get us well beyond the reasonable plan we put in place and well toward the full potential of what we could be. You saw it in the results. The growth from 2001 to 2007 was incredible.

And, super roughly, where did that kick in?

Kevin Tuil

If the budget was 100, then the full potential was really unbounded, but think about 150. The bonus would accelerate after 100. As a rule of thumb, for every dollar above hitting that plan, management would get a third of all the dollars that we made in that year. So an outsized portion of that pool over budget came to the management team, and it was an incredible motivator to really achieve full potential.

How did you guys think about providing liquidity to shareholders and management owners?

Kevin Tuil

It's an important consideration, particularly as a private company, and we never really had a desire to be a public company and still don't. That said, if you're a private company and you're incenting people with equity, you do need to find ways to provide liquidity not only to your employees, which is important, but to your shareholders as well over time.

We'd endeavor to have some sort of liquidity event every couple of years. What we found, particularly with our management team, was that equity incentives really worked, but if they don't see liquidity within a 3-year period, then the value of that incentive actually tends to start declining because they're wondering, “Is this really of value? Is this really here?” Having some level of consistency and a track record of liquidity events is actually important to maintain the value of that incentive.

So we would have either a debt recap or a debt-and-equity recap, or sometimes dividends along the way. A lot of shareholders did well by Asurion, but I will tell you, Will, the thing that feels really good is having that conversation with the director-level person who may have made a few hundred thousand dollars on a recapitalization where they sold some of their equity, and they're set up for retirement. They put their kids through college. To be able to have that kind of impact on your employees' lives is really gratifying.

Can you touch, Kevin, on the Compassion Forward program that you guys started?

The Compassion Forward Project is a philanthropic organization that we created internally at Asurion. It involved giving by Asurion employees in support of Asurion employees. We wanted, like most organizations, to be part of the ethos of giving back and helping the community.

We happened upon it. One of our mid-level managers came up with this concept of Compassion Forward, and we realized we had 23,000 employees, many of whom were hourly employees. If they have a traumatic, problematic, or big issue in their lives, they might not have the money to pay for it. It could be additional health care costs for that person or somebody in their family. It could be a death in the family and simply being able to bury them. There are events in people's lives where they just need financial help.

So we created this fund, and the company seeded it. Eventually, employees could deduct money from their paychecks and put it into the fund. Then it was managed by a group of managers who received applications from people who had issues, and we would donate money to these individuals on a regular basis. It's really helpful.

We've got thousands of employees in the Philippines, and whenever there's a hurricane there, a lot of people are displaced, put out of their homes, and have to rebuild their lives. We use the Compassion Forward fund for that as well. So it really helps build community and connection within the Asurion network. It's something we think is pretty innovative and helps tie that team feeling together.

We try to promulgate this to companies. We've got an evangelist who will go out to other companies and describe Compassion Forward and how it works, with the hopes that other companies do this as well.

That's very cool. All right, so shifting gears for a minute, going back to that 2001 period, one of the trends during that period was industry consolidation, right? Could you touch on that a little bit? Basically, that's taking the customer-concentration issue, which is central to the business, and, if anything, extending it and emphasizing it. Could you just talk a little bit about that trend?

We benefited greatly from being attached to the wireless industry, obviously. The number of customers with wireless handsets grew from 10 million when we started, I think, in 1995, to ultimately over 300 million. When we started out, there were scores and scores of wireless companies. They were set up almost by MSA. But like a lot of industries like that, it consolidated really, really quickly.

I think certainly by 2000, the top 3 to 5 carriers would own 70% to 85% of the market. So it was clear back in the early 2000s that we were going to be in a consolidating industry. That's just really the way it had to be for the economies of scale to work for them, which meant customer relationship management was going to be critical.

It was always important, by the way, to be working with the acquiring company, because if Company A acquired Company B, then the vendors and partners of Company A would tend to win out as well. That worked largely in our favor in the early 2000s. But we knew then that it was a concentrated industry, and we really did 2 key things.

One was to focus on client relationship management: keep them close and keep them happy. Two was to diversify. So we're always searching for growth outside of the wireless industry or in different areas of the wireless industry in order to lower the risk that comes with concentration.

As it turns out, working within a concentrated industry can be a good thing. It allows you to focus, and if you've got a great product and you've done a good job of managing the client relationship so that they view you, your company, and your product as strategically important to them—which was one of, again, back to Brett's superpowers, one of the things he was able to do for us—then you embed yourself in that organization and are able to continue to grow along with it. We've been successful at doing that over a long period of time in a consolidated industry.

As it relates to Brett's time managing that increasing, already high customer-concentration piece, how did that affect the way he spent his time as CEO?

At least a third of his time, if not more, was spent on client relationship management. I can say the same for myself. It was important for us to get to know the most senior levels of our clients. If you're successful at doing that, then you have a seat at the table to pitch them new ideas and to help continue to grow with them and evolve your product suite with them in a way that's more difficult to do when you're down at the mid-levels.

We were effective at doing that over time. There's a great story of Brett wanting to meet the then-CEO of our largest carrier partner, and he was very strategic about it.

He found out through that CEO’s assistant that the CEO liked to work out at 5:00 in the morning whenever he was traveling for these conferences. So Brett, who really didn’t work out as much before this, started working out, shockingly, at 5:00 in the morning. He would meet the CEO, and they’d be the only two people in the gym. He’d be there on successive days in a row, and they’d get to talking and get to know each other. That’s how it started.

It’s very creative. It’s thoughtful. The time he spent to figure that out was critically important. As important, if not more important, is what you say now that you’ve got the audience. What do you have to contribute? Brett was always prepared, so he knew how to position our product to make it strategically important to the wireless carriers. It was really all about providing amazing customer service, driving loyalty, reducing churn for them, and generating revenue. Given our place in the industry, we were able to do that in spades for these carriers and become a really important strategic partner with them.

When you look back at that period, it seems like there was at least one period very early on where there was some risk, some scariness, which related to that early claims-process system implementation around 2004. Can you talk a little bit about what that was like? The company’s growing super fast, but within that, you got a kerfuffle.

We’ve had a few of those. I certainly remember the claims system failing. That almost brought us down. I think we were down for 2 weeks and doing things manually. In the early days, particularly in a concentrated industry, a few bad moves can derail the entire system.

As a manager, you want to be taking risk out of the system wherever you can. The claims system problem was just self-inflicted. We made the classic mistake of moving from an old system to a new system without the ability to fall back if things didn’t go well. It was as basic as that. The new system didn’t work. Everything went manual for about 2 weeks. It was all hands on deck: every manager, every person in the organization.

How did you guys personally deal with that?

We were in the call center, helping people literally on the phones and taking claims. Everybody knew what to do. Certainly, we were making sure that the IT system was getting worked on in the background. We were there with our sleeves rolled up. We had to be there, and it was a tense time because we were getting calls from our clients just saying to us, “Hey, what’s going on?”

We needed to be taking care of these customers, who were used to very short hold times and very short cycle times in terms of getting their claims processed. Now they go from minutes to days, and you get some angry customers. But we worked our way through it. We had built up a reservoir of goodwill with our clients such that we were able to manage our way through that. I can tell you, we’ve not made that mistake again.

Can you talk a little bit about the approach over the years you guys have had to testing and learning new products?

As I look back over the course of time with Asurion, you can see this nice curve where things have gone up and to the right. We made some good strategic moves along the way. It’s funny: people ask, “Did you envision all this? Did you have this strategy from the outset?” The answer is absolutely not. I call what we’ve done “strategy by experimentation.”

We were in the flow. We attached ourselves to a great industry. While we knew directionally where we wanted to go, for the most part, we didn’t know exactly what was going to win or not. So you’re always placing bets. You’re always placing not an infinite number, but a handful of bets, and you want to execute those bets well. Importantly, you double down on the ones that work, and you kill the ones that don’t. We’ve had a number over the years that have not worked. Fortunately, enough of the bets have worked along the way.

I think of that not just in products, but in acquisitions. When we bought the Merrimac Group, that was a small bet in a new product through the same channel of distribution. It wasn’t betting the farm. Through the course of the early 2000s, we were betting in another way to diversify, with other products sold through the wireless channel.

We developed a product called PayAsure, which was to help carriers attract credit-challenged customers, whom they weren’t bringing on at that time. It was really a little before the prepaid era. We had another business called Asurion Managed Wireless, where we would take over the management of all of the handsets for an enterprise. There would be life-cycle management, as well as tracking of those devices. We got them up and running. We stood them up. Both of those turned out, for different reasons, not to work out, so we shut them down.

But others along the way were successful. In addition to handset protection, we made little bets in integrating into the value chain, whether it was getting into the reverse-logistics or repair business. Once we found that those worked, we were able to grow. We have a long history of just testing and learning.

Patrick O’Shaughnessy

That’s an almost perfect segue, I think. We’re going to return to the M&A topic, which we’ve touched on before, and this is a large, 800-pound bet. Let’s shift and talk a little bit about Lock/Line and how that unfolded over time, maybe from the earliest days when you guys came across the company.

9. The LockLine Bet

Yeah. Lock/Line was in our sights right from 1999, when we started looking at handset protection. There were 3 players. We ended up buying the Merrimac Group, but we talked to Lock/Line. We saw it there, and Signal was out there as well.

Once we completed the acquisition of the Merrimac Group in 1999, we never lost focus on the others, and we reinitiated conversations with Lock/Line subsequently, in 2002. They were owned by an insurance agency in Kansas City. We put in a bid. They took themselves to auction, and we thought we had a generous offer. They were telling us that there were other bidders. We didn’t believe them. We were wrong.

Another Kansas City-based company ended up buying them for maybe 10% more than we were offering. It was such a disappointment to have that slip through our fingers, and we could have easily paid that and more. I think we were obstinate and overly confident in our position that we were the logical buyer of this. Who else would buy this? It turns out we were wrong about that. So that went away. We reengaged with them 2 years later.

Patrick O’Shaughnessy

The buyer who prevailed in that process before—strategic or financial buyer?

Somewhere in between. It was a company called DST Systems. They’re also based in Kansas City. They had a history of investing in companies outside of their core business. They weren’t a private-equity financial buyer. Essentially, that’s what they were doing in this case, because there were no obvious synergies between what Lock/Line did and what DST did.

For that reason, we thought we could pull it out again at a much higher price than what they paid for it. The conversation started, and it was clear that I was not going to make headway with the CEO of DST Systems.

Patrick O’Shaughnessy

How would you summarize why?

Different generation. The CEO was older. He was certainly well established in the Kansas City community and known somewhat nationally, and in some ways, I was beneath his station.

So we brought in the big guns. We brought in Irv from the board and our general counsel, consigliere, and amazing attorney, Dick Floer, from Good & Proctor. He, Irv, and the DST Systems CEO were all of similar age and stature, and that helped us get in the door.

I think it played to their ego, which was a factor. It got us to the table, where we started the discussions, and there were some long negotiations. It came to a head in 2006, when we were able to bring it all together in a transaction where we bought Lock/Line largely for stock, and DST ended up owning almost a third of the company.

Patrick O’Shaughnessy

Explain the location wrinkle.

One of the great things about Lock/Line is that we were in the industry together. We probably knew as much about them as they knew about themselves. There was such great value to be created by putting the 2 companies together because we could take their business model, apply ours to it, and create tremendous value. We had this vertically integrated approach, and we could increase their EBITDA X-fold almost on day 1.

We wanted this to happen because we knew value was going to get created. That said, it was a stock deal. We were marrying these people, and DST would have 2 board seats and a third of the company. Negotiations during that time are always challenging, but they were fraught a little bit by the fact that you’re negotiating with one another, but you’re also seeing how the other person is treating you along the way because you’re going to be partners.

Right at the last minute, at the 11th hour, we were about to sign the deal, and, lo and behold, a wrinkle emerged. The seller wanted to ensure that we maintained a presence in Kansas City—a physical presence—for a long period of time because it was important to him that jobs stay in the community.

This was going to have an impact on the synergies because we had imagined contracting materially. So we went back into our own room and thought about it. It became clear that the loss of that synergy wasn’t going to be enough to derail the deal in any way. But how we were being treated along the way didn’t feel good, so I reached out to Irv and got advice from him.

He wisely said, “Look, now you know at least who you’re dealing with, and this is somebody you’re going to have to deal with for the next several years. Are you sure you want to go through with it?”

I didn’t even hesitate.

I can endure a lot of pain if the value is there, and we just knew the value was going to be there. That's why we were willing to stretch in terms of the size of this deal as a percentage of our enterprise value, and we were marrying this organization. I knew there were going to be challenges with it, but I felt like we'd figure that out in the future, and let's create value in the near term. And lo and behold, we went ahead and closed the deal, and fortunately both things came true.

We created a lot of value, and the marriage was fraught. It didn't work out very well.

Patrick O’Shaughnessy

Quick math on that is enterprise value is just over $400 million—$408 million. DST takes that all in stock, a little over a third of the company. So, a big, chunky bet, valuing their business at about 50% of the company's enterprise value beforehand, right?

So that's a big bet. As a multiple of cash flow, that's around 10 times trailing EBITDA and about 7.5 times the projected EBITDA for next year. But that's before synergies, which even after Kansas City are gigantic here. If you factor those in, the multiple paid is sort of 6 to 6.5 times EBITDA, just to frame all that. Can you talk a little bit about the integration process and how that went?

That went shockingly smoothly. We had a couple of months before close to line that up, and this was a big deal. We hired some advisors and experts at Bain, and they helped us with the merger and integration process and how to manage that, because we hadn't really done anything this big before. Probably the most important element of that integration being successful was getting aligned with their CEO, Chuck Laub.

So Chuck came with the company. He had led the company, and he was going to come in and partner with Brett and me as really a troika in terms of managing the business, and he was all in. Once his management team saw that he was in, we were aligned. Everything else fell into place. It made all the other decisions easier, and we knew how we were going to integrate these 2 companies. It was going to happen on day 1.

So, the day the deal closed, we had the org chart set out. We brought in every manager one-on-one, right? Chuck and I spoke to each of them individually: "You're in this slot. You're in this slot. You're in this slot." A few people didn't have slots, and those were tougher conversations, but we made them. So we got the org structure done on day 1, and it took a couple of weeks, but we got alignment on the approach we were going to take.

Part of it was operational, which wasn't as important, but it was really about client management and getting aligned on that. Basically, the big win was taking their client base, converting it to our business model, and doing that sequentially. That served to generate increasing amounts of EBITDA over the next few years.

Patrick O’Shaughnessy

Just to be super rough, I mean, this is inexact, but if you looked at the value creation from that again, enterprise value paid was roughly $400 million. EBITDA created from that was probably 2 times that amount at minimum. So, really glad that deal happened. Would that be fair to say, Kevin?

It was a pretty seminal transaction for us. We would've loved to have been able to purchase a company for $200 million a few years earlier and gotten these synergies sooner, but it was a huge win for the shareholders, the company, and I think for customers and the carriers, because we became a stronger partner to the carriers and were able to offer more services over time.

Patrick O’Shaughnessy

All right, so let's skip to capital allocation in the TA period here. If you look at the data for the first 4 or 5 years after Jeff and TA make the investment, leverage is pretty negligible, pretty low across that period of time. Is that fair to say?

It is fair to say, yeah.

Patrick O’Shaughnessy

And the business is just generating so much cash, it's able to fund its growth, that you guys were focused elsewhere. So the first thing that happens after a long period of time is there's a dividend recap transaction in kind of the middle of 2006, almost exactly 5 years into TA's ownership. It's a big, $750 million dividend recap financed entirely with debt. It takes leverage overnight to just over 4 times EBITDA—4.1 times. Do you remember all that?

It was our first large transaction since TA, and in the preceding 3 or 4 years, our focus was so much on just holding on, scaling, and managing this business that not a lot of time and attention had been put into optimizing the balance sheet. Along the way, with the benefit of hindsight, we should've been doing some share repurchases. That would've gotten people liquidity, and those transactions are highly accretive to remaining shareholders.

I think there were 2 reasons. One, we were really focused on the core business, and it was growing really fast. But two, nobody wanted to sell. It's not like there was a desire among shareholders in this timeframe to sell, because everybody saw what was going on, so they were excited to be part of it. Even more so when we closed the Lock/Line transaction earlier that year, in 2006.

Then we fast-forward and get through that. Still, nobody wants to sell shares, but they recognize that we've got plenty of capacity on the balance sheet here to lever up and get some returns back to shareholders. That's when we did a pretty big dividend. I think it was a little over a third of our enterprise value at the time, and we basically ended up paying out a $750 million dividend to our shareholders.

On the share repurchase front, there's one other event. It was kind of midway through October 2004. You guys bought in about $25 million worth of stock, which was about 6% of shares outstanding, right? So that first one in '99 that we talked about was about 10%, but this was another 6%. Returns on that piece have also been pretty extraordinary: a 70-times multiple of invested capital and a 56% IRR over 17 years. That was definitely worth doing.

That's the thumbnail summary on capital allocation in the TA period. The next event is 2007, the equity recap. Can you talk a little bit about the timing for that and how you guys thought about that point in time?

There were 2 reasons we ended up doing the transaction. The market was incredibly frothy, and this was leading up to the financial crisis. Our timing couldn't have been better, honestly. TA was 6 years into its transaction, so from its perspective, it was, "All right, we've been in. This has been a nice ride for us. Let us take our chips off the table."

So there was some interest there, and then you combine that with the market being incredibly strong at the time. It was a topic of discussion. What really drove it from my perspective was that it gave us an opportunity to get DST liquidity, and that's a euphemism for getting them off the cap table. The marriage didn't work. As I said, we created a lot of value with the merger of Asurion and Lock/Line, but the board dynamics were challenging.

I didn't get along with their 2 board members. There was constant friction there. Other board members didn't get along with them, and I just knew this was going to be better in the longer term if we got them liquidity and got the chance to move them off the board. It was really those factors coming together, and we decided to run a process.

I remember going through it. This is how frothy times were: we were interviewing private equity firms. We would go out and see if we'd even let them into the process. It was certainly a heady time. We were walking into conference rooms, and the first thing some of these partners would say to us was, "Just name your price. I'll pay whatever." Certainly, that felt great. It felt validating.

The process ended with us picking 1 party to negotiate with, 1 winner, if you will. It was the highest price, and we wanted to negotiate some of the terms. Then, once we finished negotiating the terms with that private equity firm, we told them, "Look, you've got the lead, and we're going to give you this much allocation, but I'm going to take the same deal and give it to the other 2 finalists and give them the option to join the party."

Here's why: we didn't want 1 private equity firm controlling our direction. It was important to us that we had a group of people around the table who were ultimately looking out for the best interest of the company long term, and not necessarily 1 particular fund. So we ended up negotiating originally with Madison Dearborn, but we brought Welsh Carson and Providence Equity into the deal.

Throughout this, interestingly, Irv was in the background saying, "This is a really frothy market. I would encourage you to work as fast as you can. Get through this process." His words couldn't have been more prescient, because our debt deal that went along with the equity was the second-to-last deal to close in early July 2007. I think 1 debt deal closed the next day, and then the window shut for quarters and quarters. I don't even know. It was certainly over a year while the window was shut, and we managed to get that transaction done.

That turned out to be a pretty seminal transaction for us for a number of reasons.

It's really impossible to overstate how rare that cap table is. If you look at the final ownership post-transaction, the original investors and management team continued to own 40% of the company. Madison Dearborn owns 22%, Providence Equity owns 22%, and Welsh Carson owns 11%.

So the private equity group collectively—the club, so to speak—controls 55%, but just barely, and DST continued to own 6%. Those sorts of transactions, those club transactions, are very common in venture capital.

They're very uncommon in private equity, so definitely a mark of the times. A few other points around that, just bringing the information together. The total enterprise value for that 2007 transaction was $4.1 billion, with a $3.4 billion equity value, and TA exited its position entirely.

For TA, that gave them an even 12X return on their original $60 million investment, or just over a 49% IRR. A lot of the original search fund investors ended up exiting in 2007. Not all of them, but a healthy chunk of them did. If you look at their IRR math from the original 1995 transaction through 2007, that's a 468X outcome and a 72%—actually slightly better—IRR, so a reasonably good outcome.

If you look at the TA period and just look at the operating math, it's kind of interesting where revenues go from just over $110 million when they joined to just over $1.2 billion. So it's 10X growth in revenue. EBITDA goes from 30 to just over 300. Again, 10X growth in EBITDA, 10X growth in revenue, so that's a pretty good 6-year period of time.

We certainly had a good run during that period, that's for sure. That was a pretty good run.

Thank you, Kevin, for your time and what an incredible story. Thanks so much for sharing. As I mentioned before, there have been 2 constants at Asurion over the last 28 years: co-founder, CEO, and chairman Kevin Taweel, whom we met last time, and Irv Grousbeck, a lead board member and investor since the original acquisition.

10. The Continental Playbook

Irv's had 2 distinct careers. First, he was the co-founder, with his partner Amos Hostetter, of Continental Cablevision, a pioneering cable television company, where he was the president of Continental from 1964 to 1980 and remained a director, serving as chairman for a time after that.

Just to take a minute on Continental, basically everyone in the cable television business in the 1960s, '70s, and '80s did well. However, there are 2 records that stand out, 1 public and 1 private. The public one belonged to John Malone at a company called TCI. The other one was lesser-known and belonged to Irv and his partner Amos at Continental. The company had a reputation as the best-run in the industry, and it also had phenomenal returns.

The company, as I mentioned, was founded in 1964, and its IRR over the ensuing 35 years was over 30%, with total multiples of invested capital for shareholders who held their stock of over 5,000X. Again, not too bad. By the way, when Irv and I first spoke about this podcast, I told him about 50X, and he jokingly mentioned that the title was kind of wimpy. After all, he had been involved with 2 companies that are around 100 times 50X. Again, that's a pretty reasonable background for this podcast.

Anyway, following Continental, Irv became a professor, first at Harvard Business School and, since 1986, at Stanford Business School, where he has been one of the most acclaimed teachers for over 30 years. He is the co-founder of the Center for Entrepreneurial Studies, which now accounts for almost half of the courses in the second-year curriculum at Stanford.

On a personal note, Irv has been a key adviser to me for the last 30-plus years. I would describe him as my personal board of directors, which is a very elite group, as Irv is the only member, and it meets once a year at his house, typically in New Hampshire. I can say that, on several occasions, that advice has been pivotal for me and my career decisions.

It's also worth noting, in an early echo of this podcast, that Kevin Taweel and I audited Irv's classes at Stanford in 1992 due to low lottery numbers, which prevented us from gaining normal entry. All right, Irv, thanks very much for joining us, and let's dive in.

Well, thank you for those kind words, some of which are deserved, and almost all of which are accurate. I just want to point out that the Continental returns don't hold a candle to the Asurion returns.

It's a pretty rarefied zip code. If you don't mind, Irv, let's start with a little bit of your background from the early days before you became a professor, maybe starting with how you and Amos found your way into cable television after your initial search.

We were friends and fraternity brothers from Amherst College. I graduated from HBS in 1960, and he graduated in 1961. He's 2 and a half years younger than I am. We were conducting separate searches for a company to start or buy and comparing notes with each other.

He was working then for an individual investor in Boston, and I was a case writer at Harvard Business School. This was during the period from 1962 to 1964. The investor for whom he worked had made a modest investment in the cable television system in Keene, New Hampshire. It's through that connection that I first heard about cable.

Just prior to that, we decided to start working together as partners rather than comparing notes as friends. In retrospect, it was the most ridiculous search, with no framework at all, despite our education and alleged intelligence. We looked at plastic inflatable toys, indoor tennis centers, and residential fuel oil. It was just a matter of what we could find that might be interesting.

When he heard about cable television, it turned out that there was a company called Spencer-Kennedy Laboratories, which was about a mile from Harvard Business School, and they made electronics for the then-nascent cable industry. It was hardly an industry. There were just pockets of activity where the terrain was mountainous, in places like Pennsylvania and Oregon.

A fellow named Bob Brooks, who was a vice president of Spencer-Kennedy Laboratories, took us under his wing, partly because he was a nice person and partly, I suspect, because he thought that if our crazy idea of starting a company ever materialized, maybe he could sell us some electronics equipment—amplifiers, specifically. So he helped us understand the industry.

He told us a few states to look at, which included North and South Carolina and Ohio, where we eventually ended up, as well as some other states. We took to doing an analysis of the propagation of television stations and population pockets. We'd get a map and take a protractor, and we'd apply a circle on that map as to what the Grade A coverage and the Grade B coverage of the television broadcast stations were, and we would look for places where there were opportunities.

We eliminated North and South Carolina. Finally, Amos and I decided that I would go to Ohio, and we would split the cost, which was important to me since I had no money, and I would make a little foray out to Ohio. There were some cities we had targeted out there to take a look at and really see what the lay of the land was.

While we're on that, Irv, do you mind just telling the story of Tiffin and those first systems and how they arose from that?

I went to some promising cities that we had uncovered. One of them was Mansfield, Ohio. In my infinite wisdom, or lack thereof, I decided, "No, there's an awful lot of what we called free signal, meaning available broadcast signal off-air. No, I don't think so." Of course, since then, someone else came in and built a wildly successful system in Mansfield, Ohio, so that's boat number 1 we missed.

Then I drove to Lima, Ohio, where there was a cable system under construction, and then I went to Findlay, Ohio. Lima, Findlay, Tiffin, and Fostoria, where we ended up, were all in northwestern Ohio, south of Toledo, near the Indiana border.

Findlay had a franchise process that had already been started. A franchise means just a local ordinance that gives you the right to cross a general easement over the right-of-way to hang your cables and electronics. They hadn't granted anybody one there yet, but there was one in process.

Then I went up the road to Tiffin and Fostoria, Ohio, which were in the range of 12 miles apart, maybe 14, and together they aggregated a population of 40,000. We started the franchise process in Tiffin and Fostoria by hiring local lawyers and making our case that we had half an idea what we would do, which was not true either. We had an idea, but we were a little lacking in the execution department.

I think we'll come back to Continental at different points along the way here, but maybe let's talk a little bit about Kevin and Jim Ellis, how you came across them as case writers, and how they came together as partners.

I was interviewing in, I think, the spring or maybe the winter of 1992, the year that you graduated as well, Patrick. I was interviewing people who had applied for case writer, and some of them had been in my class. As you mentioned earlier, Kevin had not been in my class, but he showed up and said, "I want this job."

My recollection, which could be retrofitting history, is that he said, "I want this job because I need this job and I don't have another job, and I think I'd be good at it, and I think I might want to be an entrepreneur." Something along those lines. Fortuitously, I hired him, and he became a case writer from 1992 to 1993.

Then Jim Ellis, as you mentioned, took that role. He graduated in 1993 and took that role from 1993 to 1994. Of course, I don't know when they first met each other or how they became acquainted, but by the time Jim had taken over and was partway through his 1-year term, he and Kevin were well acquainted.

Do you remember the story of how they found Road Rescue?

I do. I'm not the one to tell it, but I'll tell you, my recollections are that, like Amos and me, they were coordinating their efforts but separately looking for something to buy, and they had studied the towing industry.

Kevin wasn't as enthusiastic about the towing business and towing-related businesses as Jim was. Jim persevered, and Kevin showed up one day and said, "I found a business I think I might want to buy. It's a physician's practice in Miami, Florida, and it serves the Hispanic community, and the doctor who's willing to sell it to me for a reasonable price is Hispanic himself, so everything's conducted in Spanish."

Sometime later, Kevin came back and said, "Well, wait, I don't know that I want to do that." He said, "I talked to one of my prospective investors, Bill Egan, and his first question was, 'Do you speak Spanish?' When I had to confess that I didn't speak Spanish, Bill said, 'You might have a pretty uphill fight figuring out how to buy and operate that company.'" He said, "That turned the tide with me." Maybe there were other steps that intervened, but then he and Jim reunited.

And Road Rescue, as I understand it, was an offshoot of learning about the towing industry. That opportunity came up in connection with their examination of towing.

At that time, it was an offshoot that was growing very rapidly. The typical search deals, as I recall it at those very early days, were generally targeting more stable businesses.

Right.

Businesses that could, quote unquote, “go once more around the track.”

Exactly.

Yeah, and Road Rescue obviously was a completely different kettle of fish.

I remember my question to Kevin was, “But wait, most people belong to AAA, and then when you buy a new car, if you do, you get free roadside assistance. Why are they going to pay you for that?” He and Jim had a list of reasons why that was going to happen, which included better service, broader service offerings, and so forth.

In any event, I was not part of their search fund, either of their search funds, which they then combined. I was not an investor. They just were talking to me from time to time about what was going on.

Can you talk a little bit, Irv, about how you came to invest?

My recollection is they pursued the acquisition of capital to buy Road Rescue, and they came back and said, “We’re $300,000 short. Would you want to put in $300,000?” I said, “You know, really, that’s not good for me. It doesn’t really work.” And they said, “Well, what would work?”

Their capital structure, as you well know, was half debt and half equity. I said, “Well, if that $300,000 would be divided $150,000 and $150,000”—I said, “I’d really like to get $500,000 of equity, but that doesn’t sound like it works, so I’ll help you find the other $300,000.”

They came back a while later and they said, “We’ve decided there’s room for you to put in the amount that you specified, and will you join the board?” I said, “Sure, I’d be glad to,” and that sounds fine to me, even though I was extremely skeptical of the whole business.

I thought these two people were AAA people, and that’s really what I was investing in. But I thought their idea was close to crazy: They were going to provide services to wireless-industry customers that nobody knew much about at that time, and they were going to provide the same service for a fee that was being offered for nothing. I thought, “Boy, these guys are going to have to wave a magic wand to do anything.” I’ll put my ante into the middle of the table and see what happens.

As Kevin and Jim describe it, the minute that they knew you were on the board, all the other search investors were very comfortable carving their investment back to accommodate you at that level. And one of those investors was a guy named Paul Ferri, who’s the founder of a very well-known and respected venture capital partnership, Matrix Partners, and who is, I believe, a longtime friend of yours.

Do you mind telling the story of his investment in that company and Road Rescue?

Yes, Paul and I were longtime friends. We were neighbors and lived about a mile apart in Weston. We had gotten to know each other. I was not an investor with him, but we were good friends, and we talked a lot. I had a lot of regard for him.

This sounds a little self-promotional, but my understanding of the story is that Kevin and Jim sent him a FedEx package full of their PPM and arranged a meeting with him. They went to Boston to meet with him. I don’t know if this is true or not, but they got there, and there was the package, unopened, on his desk.

They thought, “Oh no, this is terrible. This is just going to be a courtesy meeting.” And Paul said, “Well, okay, give me your story.” They gave him the story, and then he said, “Who do you have for investors?” They gave him the list of investors, which at that point included me.

Then he said, “Well, is Grousbeck going to be on the board?” And they said, “Yes.” And he said, “I’m in.” That’s what I heard. I don’t know if that’s apocryphal or true.

That is verbatim Kevin and Jim’s version, too. Paul once told me that Asurion was maybe the best return, the best investment he’d ever made, partly because of the returns and partly because you had been involved, and he’d never had to go to a board meeting, which, of course, he liked very much.

I mean, anybody involved with Asurion has never touched those returns in anything else they did, I’m fully confident, so we’re all in the same fortunate boat.

Exactly. So Kevin and Jim buy the company, and, Irv, can you talk a little bit about that board coming together? You were front and center in that, obviously, and effectively the chairman, at least in Kevin and Jim’s mind and, I think, in the minds of the other investors, although the search doesn’t use that term.

Bill Egan, Bob Oster, Joel Peterson, and David Dodson were the others. Can you talk a little bit about that group and what made it an effective board?

Well, first of all, the size. I love smaller boards for small, growing companies. Why populate it with 8 or 10 people when you can have 5 or so, plus the principals? It’s so much easier to manage and schedule, have discussions and impromptu conversations as needed, and get things done.

Secondly, when you look at those 4 individuals, they were all experienced in some respect. David Dodson was the youngest, but he had bought a company and operated it successfully. It produced good returns, and he had learned a lot about the on-the-ground operation of a company that was in the alarm business in Texas, so he had operating skills.

Obviously, Joel Peterson is a highly accomplished person, as is Bill Egan. Bob Oster had a lot of experience as well operating companies. I think he was just beginning his record of investing in smaller enterprises, but he had a very practical turn of mind and was a no-nonsense person who said what he thought, and often it made a lot of sense.

But they were people who really cared about trying to help Kevin and Jim build a good company. They weren’t all about themselves and their backgrounds and, “Oh, I’ve seen this before.” There was no conversation like that. It was all people just trying to pitch in and help.

Pretty early on, the company had an opportunity to sell itself at what would then have been a big multiple of capital—a double-digit multiple of the equity invested—to a company that no longer exists called CUC. What was the discussion like at the board level in sorting through the decision of whether or not to pursue that?

I have a general recollection that there were different points of view based on the backgrounds of the individuals. We all tend to speak from where we’ve been to some degree. I think part of the art of advice is trying to get outside that frame of reference and listen and think about things and be helpful to people irrespective of where you’ve been. I don’t mean to pontificate, but I do think that’s helpful to people.

But I didn’t do that. I spoke from where I’d been, and Joel Peterson was an advocate for where he’d been. He’s a world-class person with an unbelievably successful track record in a transactional business, which was real estate.

His position, as I remember it, was, “Wow, somebody’s offering you…” Was it $75 million or $100 million? “You’re really just getting started, and somebody thinks you’ve got something here. Sell. Take your profits. You’ll have investors for life. The world will be your oyster. You’ll be investable as entrepreneurs. You’ll have plenty of other opportunities.”

My point of view was different. I wasn’t saying you shouldn’t sell. I was saying that the way I would make the decision is to think about what the runway was for you and the business ahead, what the risks were of that path, and make a conscious decision as to whether you want to stay on that runway and path for the foreseeable future or not.

If you see the opportunity, there’s tremendous advantage in accrual of value. If you see your way clear, it’s not going to be that easy to find another venture, and you’ll pay tax and have less to invest, and so forth. So I guess I was subtly in favor, but not strongly in favor. I was just in favor of analyzing the situation and not simply taking a price that would’ve been an amazing return, although over a very short period of time.

As Kevin and Jim described it, that was a very healthy conversation, and ultimately, of course, that perspective prevailed. Shortly thereafter, there came an opportunity to buy Merrimack, which really had the potential to transform the business beyond just roadside assistance.

But again, that was, as I understand it, something that was not unanimously supported at the board level. Do you remember that transaction and how it all unfolded?

My recollection is that they had already built insurance into their offering to customers. They simply contracted for that insurance with an existing company, and they felt that the premiums being paid were higher than necessary for the risk that was being taken.

So then they had a chance to acquire what would become a captive insurance company, and I remember some board members saying, “That’s a bad idea because you’ll be valued like an insurance company if you own an insurance company, and that’s a totally different valuation metric than you’re hoping for.”

But I think the perception of Kevin and Jim, which some of us supported, was that we’re not turning ourselves into an insurance company. We need an insurer, and it would be better not to have to pay the stepped-up value to an outside insurer if we have an opportunity to attractively acquire a small-sized company.

And the company, of course, did that. That was a launchpad moment. If you go back and look at the old board decks, which I’ve done for this podcast, you see in those early days, before TA got involved, in the pure search period, this very consistent pattern of the company hitting revenue and subscriber-count targets, which were very aggressive, but generally falling short—some years actually quite a bit short—of EBITDA targets.

EBITDA, of course, was growing very nicely, but not necessarily on budget. Talking to Kevin and Jim, it seems like that was a reflection of how they were allocating their time. Even with some of this operational messiness, Kevin and Jim were miles ahead of the original forecast they had used to raise the capital.

In their original base case, Kevin and Jim expected revenue to grow from $8.5 million when they bought the company in 1995 to $15 million in 2000, a compound annual growth rate of 12%. In reality, revenue grew from $8.5 million to $52 million, a compound growth rate of 43%, and EBITDA grew from $1.2 million to over $25 million, a compound growth rate of over 84%. At this point, Kevin and Jim want to take some chips off the table and end up selling 28.5% of the business to TA Associates. What do you remember from that transaction and how it evolved?

Jeff Chambers—I had known him before that. He was the lead person for TA. I don't believe there was any kind of major price negotiation. I think that there had been a price established and maybe agreed to, but some additional conditions were requested on the part of TA.

I think over time, as they were resisted by management, TA came around and decided to invest on the same terms as the rest of the equity instead of having some preferential terms. Jeff joined the board, of course, and was invaluable over the next few years.

That's exactly right. I believe the terms—in that they had no preferred security or special governance rights—were highly unusual for TA at the time. Quite clearly, Irv, that was attributable to your involvement with both Kevin and Jim, I will say. It was a very good outcome for the existing shareholders, for sure.

At Continental, we'd had an original involvement with TA many years prior to that, but obviously not with Jeff Chambers. So maybe some of that was in the deep background, but I don't remember any specific conversations in which I was involved at all. I can't imagine that I was anything other than a validator for the company.

Maybe this is a good time to talk a little bit about the building of the team at Asurion, right around the time of the TA transaction. Do you mind talking a little bit about that?

It had become clear that with Jim Ellis's departure a couple of years earlier, in the late '90s, I think, the rate at which they were growing meant they were really thin at the top level, despite Kevin's enormous talents, his energy level, and his good judgment. They needed more help at the top, and part of that was operational, but part of that was also recruiting. It seemed to me there were 2 significant shortfalls, both arising from a lack of top-management breadth.

It's sort of a unique thing as you look back on it, for Kevin to be able to transition between partnerships at the highest level relatively seamlessly and effectively. Obviously, it started with Jim, the original partner and co-founder, and then evolved pretty quickly to a similar relationship with Brett. Is that a fair assessment?

Yeah, and it's continued in the current years as well. Kevin is amazingly skillful along many dimensions, but certainly one of them is that he's the best kind of conflict avoider. He knows where he wants the company to go, but—and this is my view from outside—he's very graceful in his assertions and very respectful of other people he's working with, and there's no top-down sense to it.

Although it's clear that Kevin's in charge, has the tiller firmly in his hand, and is directing the company, it's all done in a very elegant fashion. That's really stood him in wonderful stead, and it's a quality that a lot of people don't have.

Irv, as you look at Asurion and compare it to other companies you've been involved with from a culture, management, talent-attraction, and talent-building perspective, how would you compare Asurion to other companies more generally? What dimensions does it stand out on in your mind?

They say one of the hardest jobs of great managers is to terminate ahead of the curve. It's hard enough to hire ahead of the curve, but it's really hard to terminate ahead of the curve. In terms of the managers they hired, they were unafraid to say they had made a mistake.

That's a very subtle point, and it's not talked about in management literature to any degree that I've seen. Not that I'm a comprehensive reader of management literature, because I'm not. People just don't talk about it, and the reason is obvious: It's unpleasant. Who wants to talk about letting somebody else go?

But it's so essential. The biggest thing that stands out to me is the absence of deadwood at Asurion versus other companies where managers are inclined to be kinder to people and reposition them elsewhere. That's how fat builds up in companies.

Walking the line between being careful about this and being ruthless is not that easy. But they found a way not to be ruthless, but to really make performance-oriented decisions, coach where they could, and then not spend time working on what they considered to be lost causes. That's probably the single biggest difference I see in their management style.

Do you mind talking a little bit about Brett as a member of the team and CEO, and his role in building the company?

I don't have a real inside look into how he and Kevin divided things up and how they worked together. I know that the chemistry and mutual respect between them is very deep. It remains so to the present day, despite their changing roles.

They're both really smart. They work hard. They're honest. They have low egos, and they have different skills to some degree. I think Kevin is a little broader-brush, and Brett is perhaps just a little more detail-oriented, which doesn't suggest at all that he doesn't have an enormous intellect, because Brett does have an enormous intellect.

It has nothing to do with intellectual capability. It has to do with orientation and how you think about things, and how much of your time you spend on broad-gauge issues, strategic issues, and financing issues, as opposed to how you make the trains run on time. Brett had a special talent for attracting people who could get the trains to run on time.

I might skip for a minute to capital allocation. I was going to talk about the company's share repurchases, and I think your fingerprints may be on this. One of the interesting things about the early days of the company is that it made 2 share repurchases early on.

The first was in 1999, before TA got involved, when it bought in 10% of total shares outstanding through a leveraged-financed buyback. Then, once TA was on board, they did a second buyback in 2004 of a little over 6%.

The returns from those 2 buybacks, by the way, are just extraordinary. That first one is 41x over 20-plus years, and the second one is over 50x over almost 20 years. Can you talk a little bit about repurchasing shares in private companies, which is something that you guys did at Continental over the years? It's pretty unusual, but it's something that has been part of Asurion's playbook from early on.

Yeah, we did it at Continental because both Amos and I thought it was a good place to invest. We had some free capital that was generated from time to time, and we wanted to be sure to invest it in the land grab—to use your phrase earlier in a different context—because the cable business was indeed a land grab for a long period of time. But we also wanted to invest it in our own company.

It served 2 purposes: one, to allow us to put capital to work, and the other, to offer liquidity to people who wanted it. It was, of course, optional. People could take us up on the opportunity or not, and we tried to price it as fairly as we possibly could at Continental.

That point of view, I'm sure, bled over into my conversations with Kevin because I think it's attractive. By the way, back at Continental, for one second, one of our major institutional investors was unalterably opposed to having us repurchase shares. We had a terrible time convincing that person that it was a good use of capital.

“No, you should be expanding. Look at all the opportunity,” and so forth. So one of those investors wasn't thrilled with what we did. But even then, in 2001 and thereafter, it seemed to be a very attractive use of any free capital you could scrape up, because who wouldn't want to invest in Asurion at that time?

At least that was my point of view, with all of the opportunity that lay ahead for them and the quality of their management. It just seemed like they were in a real sweet spot.

Would you mind, Irv, talking a little bit about the Lock/Line deal and how that came about? That was one you were very specifically involved in, as Kevin tells the story, with Dick Flor. Would you mind talking a little bit about that?

Kevin and Brett were talking about Lock/Line, and then nothing happened. It would come up a year or so later, and nothing happened. It seemed to me it was a few years that they had wanted to acquire Lock/Line and had been unable to.

Then what I remember is that they came to a board meeting in whenever it was, and they said, “We just can't connect with this guy. He's impossible. We haven't been able to do any good at all.”

So I think I remember going to Kevin after the board meeting and saying, “Do you want me to take a crack at this guy?” I didn't know him. He lived in Kansas City and was running a small- to medium-sized public company, of which Lock/Line was a part. Kevin said, “Well, sure, go ahead.”

I said, “Well, if I'm going to do that, I'm going to drag my friend Dick Flor, who's just an unbelievable individual.

I want to go out there with him, because one of my great talents is getting out of the way of smart people, and I knew that if I went out there with Dick Flor, I wouldn't have to talk too much.

Would you mind doing just a quick summary of Dick Flor?

Dick Flor and Bill Egan are both alums of the same college. Dick Flor went to Harvard Law School. He was a partner at Sullivan & Worcester in Boston, and he had one of the best minds of anybody I've ever come across. He was absolutely brilliant, yet he was the most pleasant, self-effacing, practical, easygoing person in the world.

So Dick and I went out to Kansas City, and we made an appointment with the fellow who was head of the parent company of Lock/Line, and Dick proceeded to charm this person—absolutely charm him. It turns out the person who was the CEO was a Horton graduate. Dick knew a bunch of people from Harvard. Dick found ways to establish connections with him, and he started out grumpy and ended up smiling. I think that might've been the first time he'd smiled in quite some time.

That began a process which resulted, a few months later, in this person agreeing to a deal in principle—not fully signed, but to a term sheet, as I recall—which was attractive for Asurion. I had picked up the ball from that first meeting and started working with the guy along with Dick. We were trying to work on general terms, and I would check with Kevin, and then I would talk to this guy.

I remember, in my infinite wisdom, saying to Kevin before they closed, “Are you sure you wanna be in business with this guy?” He was a dangerous cocktail of smart and nasty, to my eye. Not overtly nasty, but just sharp. Smart as a whip, though, and just not the kind of director they had, and he and his CFO were gonna join Asurion as board members.

I said, “Kevin, you should obviously do what you wanna do. I'm just wondering—these people are really tough apples.” Kevin said, “I know. We'll just have to live with them.” And, of course, that was a great decision. I'm not sure what decision I would've made, but I did have reservations having dealt with the guy over a period of a few months, as I remember.

It's funny, as you mention that, Irv, Kevin tells a story about how, late in the negotiations, that CEO came back and said, “We need our team to be able to stay in Kansas City.” At the very 11th hour, that directly affected some of the economies and so forth that we were gonna get by combining the 2 operations. Do you remember that piece of it?

I remember last-minute demands. I didn't remember what they were. I do remember one funny story about them, which is the first board meeting that they came to at Asurion.

I try to be early to meetings, but it seems to me this meeting I was maybe barely on time, or a minute or 2 late or something. Here were all the legacy Asurion board members sitting on one side and both ends of a big oval table, and here were these 2 guys over on the side by themselves, getting settled in their chairs.

I walked in and thought, “Oh, this is really awkward.” So I asked them if I could sit between them. I did, and I just felt that there was a chill to begin with in the very first board meeting, which we really didn't want. I don't mean that in a self-laudatory way, but I have a distinct recollection that I sat between them at the first board meeting.

Broke the ice a little bit.

Yeah.

Yeah, interesting. That transaction was large. The total consideration was about 50% of the company's enterprise value beforehand. Fortunately, it was wildly accretive, being able to combine those 2 operations and really grow that business.

A $408 million valuation paid is less than half the EBITDA that Asurion now enjoys from that book of business, so definitely worth doing. Not too much after that, there was the 2007 transaction, which I think TA was driving. They wanted some liquidity. They'd been in it 6 years or so, and it was the dawn of the private equity groups getting involved.

The timing was extraordinarily good. That was a bull time in the market. Kevin credits you for being absolutely right about that timing and optimizing around it. Do you remember that transaction and how it unfolded, and maybe specifically the piece that allowed the company to end up without a dominant single private equity owner, which, of course, is unusual in a transaction like that?

I don't, and I appreciate Kevin's compliment, but I have no recollection of being market-prescient.

He's very clear on that, by the way.

How can anybody be market-prescient? What I remember about that is maybe not all of it. How many was it? 4 or 5 who came in?

3 major ones, and maybe a 4th.

I remember them separately wanting to talk with me, and Kevin saying, “Will you meet with XYZ?”

“Well, sure. Of course, I'd be glad to.”

And they said, “Well, what's going on in this company anyway? It's been private for a long time. When's it gonna be public? How are we gonna get out? The valuations are pretty rich. We're buying from an informed seller.”

I said, “I don't know. I think they have runway ahead. They've got great management.”

They said, “Are you selling?”

And I said, “No, I'm not selling.”

That was at the center of it. If I wasn't gonna be there, it wasn't because of me; it was because of the signal that unloading a bunch of my stock would've sent.

Irv, maybe this is a good time to revisit the board topic, right? Obviously, after that transaction, the board changes pretty significantly. The private equity owners are front and center in that. Can you talk a little bit about board effectiveness since that time and maybe how you'd compare the very different board groups?

You referred a couple of minutes ago to the fact that there was no one dominant investor. However, my impression is that they do act as a group on occasion, and they're loosely referred to at Asurion as the sponsors. The players in the sponsor group do change over time.

I wouldn't say it's just people with a series of minority investments. There is coordination among them. They do confer fairly regularly. I would say it kind of straddles the line between having sold control and not having sold control.

I think there are times when, to my eye, they seem to exercise their collective power, and other times when they didn't. They're all high-quality entities over the years and have all done well.

I remember having a conversation with Kevin at the time, just prior to the closing, and saying, “Wow, you know, you're selling 55% to this group of people, and there have to be some changes. Their agendas and yours won't always match.”

He said, “Yeah, I know. I understand. I think this is the right thing to do.”

Now, back to your original question: How have the board dynamics changed? My perception since that time, in the last 16 years or so, is that there's a leader of that group of people, that loose confederation of people. It happens to be CPP now because they're the largest shareholder.

But there's a presence there from people who all came in at the same time, were all acquainted with each other, and bought the same security at the same price. It used to be people sitting around the table with no control—just the control that management had by dint of its execution and all of the value it had created.

Since then, I think there's a little bit more evidence of the respective agendas of the sponsors present in board conversations.

And if you looked just at value creation, help to management on the part of the boards, and you were gonna compare those 2 groups—the initial group, which I would say would include Jeff Chambers, and the post-2007 group—again, with the lens of who can be most helpful to management in building a company, how would you compare those 2?

I'll try to do that, but I would say at the outset that, in a way, it's an unfair comparison because management needed more help before 2007 than they did after.

The main way in which the sponsors have been helpful is the contacts that they have as a group and the collective experience they bring as a result of having invested in so many companies. The contacts are unalloyed benefits. No question that they know somebody somewhere almost whenever you need them or wherever you need them.

The part about the advisory role, I do see differing agendas at play from time to time. There's an inherent conflict of interest between serving one's own shareholders and serving the shareholders of the company on whose board you sit. I do see those conflicting agendas at play fairly often, and I see sometimes that decisions are made in favor of one's own agenda.

An example of that is I heard a comment actually during a board meeting some years ago from one of those sponsors or institutional investors to the effect of, “Gosh, we really don't want you to branch out into that area. We have enough investment in that area. We think of you as an XYZ company, and we want you to stay there and keep doing what you're doing. You're doing a great job.”

I found that difficult. I think that just is the cost of doing business with them. There's nothing improper about it. There's nothing hidden or nefarious in any way. They're quality people and smart, and they're all successful. But sometimes the best interests of Asurion are not always served in those conversations.

Very interesting. Okay, I'm gonna shift topics, if that's okay. Would you mind talking a little bit about how you thought about managing your own investment in the company over time across the series of transactions?

It's the same advice I gave them when they were thinking of selling for $75 million or whatever the number was in the beginning. If you see a runway ahead and you feel okay about the risks, why not stay and play? It was a concentration for me, but it was a tolerable concentration.

And since I'm opportunistic by nature, I thought there was a lot more bread to bake, and I was disinclined to be a seller despite the various opportunities. I admire Kevin tremendously, and the job he's done has been off the charts, as you have said. I was thrilled to be an investor and along for the ride, and grateful that I was lucky enough to be there.

Actually, despite my own fecklessness in the beginning, I got lucky, and they decided to allow me in under the tent. Lucky me. So shut up, be a good person, and try to contribute. And by the way, who wants to sell? What am I going to do with the capital? Pay a big tax on it and then figure out what to do with it next? It probably won't be as good as Asurion.

Two more questions, Irv. They're both a little bit wider-ranging. At a high level, are there any lessons you'd pull out of Kevin's experience running Asurion, or the Asurion team more generally, for future CEOs and aspiring CEOs?

Nothing compares to winning from the high road, and that's what they've done. They've stuck with very high ethical standards. They hire smart people. They make changes where necessary. They treat their people generously. They treat their customers with respect. And everybody that I've ever seen Kevin interact with, he's treated with respect.

Another is that you can't overpay for good management. There's no such thing. You also can't overpay for a great acquisition, which they worried a little bit about with Lock/Line. But it had such a growth trajectory and was so accretive that who even remembers the price unless you're looking back at the records? I think that's true as well: You can't overpay for good management. You can't overpay for a great company.

I think a mistake that a lot of us make is, "Oh boy, that price—price for that, whatever it is, that's just too much. I can't bring myself to spend that much money." Of course, the way to look at it is not today, but tomorrow. And tomorrow, do I really know whether I spent 15% more or not to buy something great? So that's certainly one of the takeaways.

Okay, my last question. I'm going to return to a topic we hit earlier. So, Irv, you've been involved in 2 companies that were participating in exceptionally fast-moving streams, Continental and Asurion. How would you, at a high level, compare those 2 companies?

Well, the similarities are that both companies had founders' personalities and weren't afraid to use aggressive leverage techniques against a predictable background. By leveraging up, you're not taking nearly so much risk as you are with a more volatile underlying P&L. That's certainly one.

Another similarity is trying to attract and retain top talent. It took us a while to wake up to that. We hired bottom talent for a while and paid dearly for it because the mistakes we made in getting that company started are too numerous to mention. The first key engineering person we hired was not satisfactory. We turned on our first systems, and we had to turn them off for 3 weeks. Customers were supposedly paying, and we said, "Whoops, we have some more work to do on our system," and we thought it was going to be a few days. It was 3 weeks, and that was all because the person we hired was a very bad choice.

We were both in our late 20s—or I was 30 by then—and there was just bad judgment. Should have known better, but didn't. One of the things that both companies did do in their later years is try to attract and retain top talent and be willing to pay them in terms of both equity and current comp in ways that made it hard for them to leave.

Ways in which the companies are different are that Asurion is far larger: 21,000 employees now. We had, I don't know, very few thousand employees when the company was sold after 32 years. It was sold in 1996. So, in a sense, we were much more capital-intensive. That's also something to watch out for if you're an MBA student, you're told, but there are times it's a good thing because the structure of the industry being capital-intensive made it an unregulated monopoly, in effect. And if you could raise the capital, which we were able to do, you enjoyed some of the benefits of no competition.

I guess other things were that we guarded our ability to make decisions very carefully. That's why I was concerned about the 55% ownership. I don't think that's affected Asurion in a major way, but at the fringes, it has had an impact. Amos and I together for the first 16 years, and then Amos alone for the last 16 years running that company, were able to run it the way we wanted to run it, making the judgments that we wanted to make within reason.

We didn't have people with other agendas. We had people questioning the decision-making and the strategy, which they should as board members, but not with other agendas. The iron filings were all closely aligned. That's not currently true with Asurion, but Asurion has so far exceeded Continental's performance that they must be doing an awful lot of things right.

All right. Well, Irv, thank you so much for taking the time to do this. It's wonderful to see you, and a very fun conversation. Thanks very much.

Well, thank you very much for including me. I'm very flattered, and I'm thrilled that you're doing this. I know a lot of people will benefit.