This venture-backed startup has quietly bought more than 80 mom-and-pop shops

Teamshares is a low-flying, Brooklyn-based startup with big ambitions to capitalize on an opportunity in plain sight: that of small businesses without a succession plan.

It’s not a small market. According to the U.S. Small Business Administration, small businesses represent 99.7% of U.S. employer firms and 64% of private-sector jobs. Meanwhile, just 15% or so of small business owners pass along their company to a family member, with many others simply closing up shop at some point.

With an aging population in the U.S., Teamshares is betting this market will grow even bigger, which is why since 2018, it has snapped up 84 small businesses from retiring owners. These owners like its pitch. Though Teamshares says that it sometimes pays below market price for a company, it installs a new president that it trains, and grants 10% of the business’s stock to its employees. Moreover, it promises to increase those employees’ ownership to 80% within 20 years. It sounds almost valiant, like when KKR bought out a door company in 2015 and promised every employee a payout of at least $15,000 if the company met its targets when sold. When in 2022, KKR sold the company for 10 times what it paid, its 800 employees saw a payout of $360 million.

But Teamshares isn’t in the private equity business. It’s a fintech company that has raised $245 million in venture capital to date, including from QED Investors, Spark Capital, Union Square Ventures, Inspired Capital, Khosla Ventures and Slow Ventures. It has also secured another $150 million in debt.

Those backers aren’t funding Teamshares so that it can grow and re-sell the businesses it acquires. In fact, according to co-founder and CEO Michael Brown, Teamshares doesn’t want to sell the companies it is buying — ever. The plan instead is to generate revenue from a growing array of fintech products that it sells to the businesses it buys. Think insurance, think credit cards. If everything goes as planned, Teamshares will eventually replace the majority of vendors these companies use — and become a brand known to many others outside of its immediate sphere. Certainly, it’s among the more unique fintech models this reporter can recall. More below, edited for length.

TechCrunch: Other than some exceptions like KKR, which is focused in part on employee ownership because owners tend to be better employees, I don’t know of another venture-backed company doing what you’re doing. How did you settle on this broader idea?

Michael Brown:  I spent the first seven years of my career in investment banking. And that’s where I met Alex Eu and Kevin Shiba, the other two founders. Kevin decided he wanted to join the tech industry very early [and joined the] coding bootcamp General Assembly; Alex and I went and bought one, and then eventually eight, small businesses. We transitioned from being financial spreadsheet people to being operators and later entrepreneurs; learning how to operate a businesses informs [our work] today.

How did you exit those businesses?

We still own the ones in Canada; they’re running themselves today. There’s a president, a vice president. They’re just sort of like a dormant legacy business, but they’ve started the employee ownership journey, too, and that’s continuing on.

You make money off those businesses through dividends? Is this how you’ll make money at Teamshares?

How Teamshares makes money is we buy businesses, we dilute ourselves voluntarily to get employee ownership jump-started. We [carve out] 10% for all the employees and an additional 5% for [a president who we hire to run each business], and that stock is a gift — it’s earned over time through service.

From a financial standpoint, we’re [structured] just like Berkshire Hathaway, so if we buy a business with $5 million in revenue, then that becomes our revenue the next day. We profit from the profits of the business that was acquired, proportionate to our ownership, and we sell our stock back over time to the companies until it becomes 80% employee owned. We also have new revenue streams that we’ve just started launching. We built a neobank, we’re soon to launch credit cards, and we’re building an insurance business as well, so there’s a secondary layer of financial products that will basically replace the vendors that the companies used to use.

These products are going to be available exclusively to Teamshares companies or you start there and expand out?

The hope is the latter. We only build something if a product doesn’t exist for our exact use case, which is some combination of really traditional small business or employee ownership. And there’s not a lot of stuff [out there]. When we set out, we didn’t think we’d build a neobank, but there just wasn’t something that existed to our satisfaction, in part because small businesses still unfortunately receive a lot of checks. But the hope would be that in the future — let’s call it in the next five years — we could scale up and open these products up and have small businesses generally get to know Teamshares.

What do the companies you’ve acquired so far have in common?

Where we have commonality in the companies is around employee ownership, financial education, the president program and financial infrastructure. So, we’re audited by KPMG, for example, and we help these companies go from mom-and-pop accounting to having real financial infrastructure and being able to produce statement financials every month that are in accordance with GAAP. But we really believe in the companies [operating as] independently as possible. We provide support, and we work closely with the presidents. But we don’t think that it’s a good idea to try and integrate all the companies.

So you aren’t trying to roll up similar companies, or swaths or similar companies?

There are some exceptions where, for example, we’ve been buying pizza shops in a state back east, and those are being integrated to create one larger company that’s going to create more employee ownership wealth than could a standalone set of pizza shops. We’re doing this again in pool maintenance, where a lot of the businesses are really [small] and actually [buying] a first one that’s small but big enough to support the cost of a president, and then you can add smaller ones. So there’s a roll-up-esque element of certain companies we work with, but in general, we think these are really high quality businesses that can operate fairly independently and we actually make a very devout customer promise that the companies are going to become 80%, employee owned, or never for sale again.

What’s your investing criteria?

There are over 40 specific industries [represented in Teamshares’ current portfolio], but they really fall into about six categories, which are business services, consumer services, distribution, manufacturing, restaurants, and retail. So they’re all traditional businesses that are, on average, 30 years old, with annual revenue of between $2 million and $10 million generally.

We have a belief that employee ownership works in every industry, and our actual final decision — amongst the 70,000 leads we get every year — is all done on a case-by-case basis. But we start off by filtering the companies on what we call our structural criteria. So is it a true retirement sale? Are the owners of that age? Are there two or more managers? Is there low customer concentration? Do the earnings show up on the tax returns?

You’re planning to sell these companies your products. Are there other ways the companies in the Teamshares ecosystem can work together?

Absolutely. We’re now getting to the size where we’re starting to organize the companies, around industry groups. So there’s talk of the restaurant companies all kind of banding together [toward the goal of] common purchasing. The presidents [sometimes] share knowledge about what’s the best sort of ERP system and other software to use? Then there’s other things that don’t make sense for us to build but we can arrange large, corporate vendor partnerships. So, for example, you know, lots of these companies need vehicles, so having a national account with one of the major vehicle lessors is going to make sense.

You mentioned Berkshire Hathaway early on. Is that what you aspire to build? Do you want Teamshares to go public?

The most probable outcome is we go public, but there are ways to stay private, too. We do not plan to ever sell Teamshares, we would want it to be independent.

In terms of the Berkshire Hathaway piece, we subscribe to a lot of their philosophy about being very long-term minded and being pretty efficient in our underwriting and keeping things simple. But we’re not a one-for-one translation of the model. Their model is to have the permanent ownership forever, whereas our model has employee ownership as a twist, so we’re actually foregoing some amount of future growth by making employee ownership happen. And we believe that’s the right thing to do. And we believe the companies will be bigger and better for it.

Also Berkshire Hathaway can only buy companies that already have a CEO in place, whereas that’s not a luxury you can have in small business. We realized we had to build up a new generation of people, generally in their 30s and 40s, who were ready for something more entrepreneurial and ready for something really mission aligned. And so we recruit people from some really great companies –McKinsey, USAA, Tesla and Amazon — and train them to run these small businesses.

How many employees do you have, and how big is your tech team?

We have about 140 people altogether, and a 70-person tech team, so we’ve closed seven companies a month with two people. We’ve created a lot of leverage through building a lot of software for ourselves and for the companies.

source https://techcrunch.com/2023/08/24/this-venture-backed-startup-has-quietly-bought-more-than-80-mom-and-pop-shops/