Buyers and Builders
00:00:31 · Mikk, Cyrus Hessabi
[00:00:31] S0: You've operated at the intersection of VC AI and now micro cap private equity at Shore Capital Partners. You've done a lot. Where did it all start? Let's start from there. [00:00:42] S1: Yeah, that sounds good. I mean, can go as far back as as you'd like, but I'd say kind of my profile has a mixture of lots of things, and they're opposites in some ways. I was an engineer by training, aerospace engineer, and then I worked in a sales organization at Salesforce. You know, engineering is a very kind of traditional, stereotypically slow moving environment, and of course Salesforce was kind of software and tech and the pioneer of SaaS business model as well. Thereafter, well, it was the business school chapter, and that was basically the transition into more of an investing type of role for me. I spent some time in venture capital, more traditional venture at first, at the first fund I worked at. And then then OpenOcean, as you mentioned, was a bit of a hybrid, where it's indeed kind of a venture FUD, but the strategy was very much a bridge between what one might call small or micro cap PE, maybe even ETA and of course Ventures. Happy to go into all of this. [00:01:45] S0: Yeah, let's start from the OpenOcean. Let's start from the beginning. How did it all got started and from which point you started building out this, like, roll up structure?
00:01:59 · Cyrus Hessabi
[00:01:59] S1: Yeah. Of course. Absolutely. So it started in my head before... Like, I I was thinking about this before OpenOcean per se. I mean, I think, to be honest, the idea of software or technology for the traditional economy, the idea of bridging has been something that I've thought about for a long time. Honestly, as far back as my first job, was thinking, why is it that, you know, I'm learning about building aircraft. It's one of the most magnificent feats of engineering. But then you go into major aerospace manufacturers, and it seems like workflows are very clunky, sometimes post its and paper and pen based. And why is it that this whole travel of the economy is just working differently to what I might expect from my humble view as a young worker. So it traces back all the way to that, to be honest. And then in my first year in VC, one thing that came across to me was that it seems like there is some sort of, maybe some sort of like drift from the core mission of venture investing, which is backing new businesses that have a right to win vis a vis incumbents. And so I started thinking, actually, there's a huge piece of the economy, the majority of the economy, in fact, that is completely untouched or hasn't benefited that much from any advance in technology. A mixture of, you know, culture, demographics, know, adoption, maybe structural barriers to entry, regulatory barriers to entry, we can discuss all of these things. We're gonna realize, you know, maybe my time is best spent thinking, how do we modernize? How do we reinvent some of these industries that have been kind of operating in the same way for decades, if not centuries, especially given that there is now this kind of, if I may say, AI revolution, which provides an opportunity to rethink how some of these workflows are done. I think that was that was the base of it. And to the point on venture, because some people say, is this a venture business or not? I think there is... It's a spectrum. And I think one side of the spectrum is a fit with venture. And I would say that side, the question that we can ask, you know, I'm happy to discuss is is around how much transformation are you bringing to the industry? Is this rethinking the base benchmarks about how much it costs to deliver a certain service, what the steps are needed to get through a certain workflow.
00:04:25 · Cyrus Hessabi, Mikk
So yeah, that's kind of how it happened. And then the final thing I'd say is OpenOcean is a fund whose history is rooted in data infrastructure and data systems. The founders RevMySQL, which is a famous open source database business, and then MariaDB. And one thing that came to my mind as well is the biggest one of the biggest challenges with, you know, these AI roll ups and the case when they are roll ups. I mean, I guess the challenge with any sort of AI system is its underlying data infrastructure, you know, just speaking very high level and simple terms. I think it was a very good fit with OpenOcean because of that, you know, that kind of angle focused on businesses whose right to win is driven in part by their underlying data access and data infrastructure. [00:05:13] S0: Cyrus, explain me breaching. You mentioned that a few times, What it means how to Bridging.
00:05:20 · Cyrus Hessabi
[00:05:20] S1: Yeah. Think, I mean, we can go into personal philosophy as well, but I feel like I'm kind of a bridge because my background spans so many different kind of worlds. I feel like my role over time has been to bridge a little bit, you know, be the technical guy on the sales team or be someone with operating experience in investing, you know, VC first, and now I'm working with Shore, which is a private equity firm. So the... I think I think as a result, I've kind of ended up thinking in in ways that kind of involve taking, you know, various pieces of various worlds and try to find out the world in between that that can leverage the best of both. And I think the bridging here in this topic of AI enabled services is bridging the two key things I would say is, one is the kind of comfort with J curve returns profiles of VC. We're focused on tech and technological change and technological moats, right, at being on the beating edge of tech and how this can impact future dollar value of the business or the workflow. And on the other hand, looking at PE in two ways: one, in the sense of looking at industries that have hitherto been completely outside of the VC purview, like a call center, a plumbing business. Think about other labor intensive businesses that you'd never imagine a venture capital investment committee discussing per se, as well as the cash flow discipline. So making sure at the end you're delivering a service, the service has to be high quality. It can't just be an approach whereby you are hacking in a garage if I take a Silicon Valley stereotype. The business has to work and deliver outcomes from day one, and it has to deliver cash also from day one because you're going to borrow some money to fund your acquisitions and you will have debt, and therefore you will have to, you know, reimburse that debt over time. So I think mixing those two, execution discipline with technological optimism and was a way to produce, you know, not necessarily a new asset class, but a new way of thinking about the world and unlocking opportunities that were otherwise outside of both, you know, both of the previews across from one end to the other of private markets investing. Each could say to the other, oh, this is for you, not for me.
00:07:36 · Mikk
[00:07:36] S0: Hey, a quick pause from the podcast. If you love the kind of stories we talk about on Buyers and Builders, be it someone building AI enabled services, AI prolapse or just acquirers acquiring, operating companies, you will love today's sponsor, which is CapitalBad. And this is the place where you can participate. You will discover vetted searchers, real acquisition opportunities, and you can almost access deals you won't find anywhere else. And it's investing in the backbone of the economy pretty much. If you believe in backing builders instead of maybe betting on startups, go check out capitalbad.com, register, start looking at deals. The smallest investment is $25,000 So far they've done eight acquisitions, so you will like it. Again, capitalbat.com. I'll put the link in the description as well. And now back to the episode. Now, can you explain me the AI enabled services? Because we have here very simple people. The people buying and running manufacturing businesses, HVAC, home services, roofing. So AI enabled services, it could mean something which many people don't know, number one. And number two, like, what were you doing at OpenOcean, like on day to day basis? Were some specific investments or acquisitions? You mentioned ECA. Yeah, cover it all, please.
00:09:03 · Cyrus Hessabi
[00:09:03] S1: Absolutely. Absolutely. So let's start just with a simple definition of AI enabled services. The meaning there is basically to say, here's your services business, a call center, an accountant, a legal house. I'm providing property management services. Service economy is 60, 70% of GDV. It's basically all around us. Some services businesses are more desk based. Some services businesses are, of course, more manual. Some services are more, quote, quote, white color or, quote, blue color. You know, think about how you spend your day. Everyone's providing you a service on the on the high street, basically, unless they're selling, you know, a a tool or something physical, the rest is service. AI enabled services is to say, okay. Now if we make the base assumption that there is a potential evolution going on with the democratization of AI, the drop in the marginal cost of compute and so on, maybe there's a way to rethink the way that people do their jobs. Maybe if I'm a service provider, maybe if I'm an accountant, more of my time is gonna be spent on strategizing for my customer, less about, like, actually fighting the individual returns. What does that mean for the business? Maybe the business can now generate more money because the accountant can spend more time on value creating activities, reduce their burnout because there's burnout as huge issue in accounting, you know, focus on more like customer, like direct customer interfacing work, so therefore improve customer satisfaction. I think there's a ways, and this can be done through improving or changing the underlying cost structure, changing the underlying mode of operations of these types of businesses. And so the AI enabled services piece is less, I'm a services business, and I bought some software, or like some AI enabled software, and now I'm in an AI enabled service. It's more, I am starting the services business. If I just landed on Earth today, and I thought from first principles, how do I deliver this business? And in my toolbox are a whole set of kind of AI enabled tools that I can now use to deliver the service better, then this is an AI enabled service. And I think the final way I put it to make it simple is it's basically flipping on its head the idea that there there... There's two ways you can run this digital transformation process going on. Either you're... I'm at Salesforce.