Episode 11: How to Pivot and Scale Your Business
Graceada Partners co-founders Joe and Ryan talk about how they scaled their business gradually and pivoted their offerings over the years.
Joe Muratore:
So often, we hear about entrepreneurs who have a big exit or a company that went public or somebody that just crushed it. Some of our guests are that way, and it's really easy to think like, "Oh, that person had a great idea and they just crushed it and they made a bunch of money." That does happen, but that's extremely rare. If you're thinking of starting business, step one is break free from your job. Step one is somehow, some way, get a client or enough of something that you can be reliant on that client.
Speaker 2:
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Joe Muratore:
Today, we're going to talk about an interesting idea, which is finding your compelling mission, especially in business. This is also a discussion about pivoting our business away from being a service provider towards being an owner. But I want to dig in today into the why. There's a lot of cool things about owning a business and owning buildings and being an owner versus a service provider, but most importantly, I believe, and we're going to talk about a much greater sense of mission and importance in what we're doing. Any thoughts on that?
Ryan Swehla:
Well, when you say owner versus a service provider, what do you mean by that?
Joe Muratore:
In one of our earlier discussions, I talked about rich dad, poor dad, and a key idea in that is the idea of the ESBI, the employee, the self-employed, the business owner and the investor. And what we're going to talk about today is sort of the growth in entrepreneurship of a business and one way to start in this theory is you start out as an employee. You work for someone else. Maybe someday you have an idea of being self-employed and you start a business, but you're working all day every day and if you stopped, that business wouldn't exist. You're self-employed, you own your job. At some point, you begin to scale and you become a business owner. That means the processes and the people and the team begin to work, even when you're not working.
Joe Muratore:
At that point, you begin to scale beyond that. There's a next step beyond that, which is an investor where your capital, in addition to people, are working even when you're not working. So we certainly have gone through that journey from just barely getting started to now applying our own capital and certainly applying the capital of others to accomplish our mission and also building a team so that on every single day, capital and people are working to accomplish the mission of our company and the vision we have.
Ryan Swehla:
Yeah. I remember when we started off. It was you and me in an office.
Joe Muratore:
Yeah.
Ryan Swehla:
I think we had separate desks, but that was about it. And then we hired one employee and slowly over time, our business had centered around doing brokerage and property management, so being a service provider for others, either helping people buy and sell commercial properties or manage their commercial properties. And I remember a progression over time started recognizing that most of our clients were based in LA or San Francisco or other parts of the country and they owned some large commercial asset in our area. And it was amazing how reliant they were on us to be able to make their property valuable or retain the value of their property. And when we started recognizing that we're the ones creating the value for these people, it became self-evident that we needed to figure out how to be able to apply our own capital to properties.
Joe Muratore:
Yeah, there's a tremendous inefficiency in being a third-party service provider. When we had management listings and brokerage listings, we had 20 or 30 different customers. All were successful, they own buildings, and all had strong ideas about how things should operate and how we should operate and what we should be doing and how their building should be doing and sometimes those ideas were congruent with our beliefs for adding value to those buildings and sometimes they weren't. But it was challenging to always be thinking, "Well, what's this client thinking? What's this client thinking? Have I added enough value there and have I added enough value there?" And when we began investing in 2013, 2014 and so on to today, slowly, something magical started to happen.
Joe Muratore:
We became a 20th of our client base and then a 10th and then an eighth. Today, we're half, I don't know. But I wake up every morning, I think I know what we should work on. And given that we're a very important client in our business, that gives great clarity of focus and we're able to move faster and there's less friction in navigating personalities and priorities and multiple clients. There's great clarity and in that, there's a great joy.
Ryan Swehla:
Yeah, I agree. I remember the first property that we invested in, which was a small bar restaurant and residents in San Leandro, downtown San Leandro, and what's interesting is that first investment was $300,000, I think the equity portion, might've been a hundred thousand dollars, and we did it with some friends and family. And it's amazing how much of my thought that occupied. Because all of a sudden, instead of working on other people's projects, I'm working on my own project. And it brings such a greater sense of focus and clarity that we wanted to continue to do the same.
Joe Muratore:
When challenged, when you have a lot of clients and you know decisions need to be made, you spend a large part of your day thinking about how to approach that client, getting them on the phone. Maybe they're part of a committee. Maybe they own the building in a trust with five people and you think you should add a tenant or you think you should do a improvement or you think you should build a new entrance or change the color of the building. That's a multi-week process. That's probably four hours of time. There's a lot of drag and inefficiency in that.
Joe Muratore:
When we own buildings, and as we own buildings, especially in my role, I drive up to a building, I'm very familiar with the plan of this building. I'm very familiar with the budget for this building. I'm very familiar with the tenants and the goals and where we are in our process. And if an entrance needs to be built, I'm able to make that decision and it gets built and that can be a 10 minute decision that could normally take weeks. And when you operate in that way, you can scale much faster. I love that.
Speaker 2:
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Ryan Swehla:
What advice do you have for people that are in their business right now, being a service provider and making that conversion to where they're actually investing within their business?
Joe Muratore:
There's lots of pivots on this journey and get to the next pivot. So often we hear about entrepreneurs who have a big exit or a company that went public or somebody that just crushed it. Some of our guests are that way. And it's really easy to think like, "Oh, that person had a great idea and they just crushed it and they made a bunch of money." That does happen, but that's extremely rare. It's much easier to break it into small sign posts. It's impossible to get clarity between here and 10 years from now. It's very, very difficult to do. There's so many variables. So I would encourage entrepreneurs, step one, break free. If you're thinking of starting business, step one is break free from your job. Step one is somehow, some way, get a client or enough of something that you can be reliant on that client.
Joe Muratore:
The second step to that is diversify your client base. Oh, you only have one client? Get two, get three, get five. The third step is pare back your clients. Of those five, two of them shouldn't be your clients and they're sucking up all your time. It's this Pareto Principle, the 80-20 rule. Get to that 20% that are really good, maybe fire three, and you keep two. And then you build back up to five, but it's a better five. Now fire another three and keep two. And do that a few times. Do that for a couple of years, build something. Now here's a really key pivot, apply capital. Build a moat around what you're doing. We often say, "What got you to here won't get you to there." And there's a piece of comfort in like, "Okay, I've got five, 10, 20 really good clients."
Joe Muratore:
Question, how will you become your client? What if you became one of your clients some way, somehow? And then what if you became the same as two or five or eight? Because if you could get to where there's 50 or 75 or a hundred percent of your client base, somehow, now you can do anything you want. Now the world can be yours because you can scale in a way that you can scale to any piece you want because your business will scale with you. And as we sit today, that's the opportunity we set in front of us is we don't have the clutter of lots and lots of clients. We have the clarity of our own mission that we believe in and we've invited investors, we've invited tenants, we've invited vendors and team members to get on board with a very important vision that we take very seriously. And there's great buy-in to that and there's been great success and there's tremendous trajectory in these next five, 10, 20 years.
Ryan Swehla:
Yeah. And I think of also the focus of our team. When our team is at a property, if someone's inspecting a property or meeting a vendor at the property and they know it's a property that we own, good, bad, or otherwise, there's a higher level of care. There's a higher level of focus. There's a higher level of passion around that because they know it's ours. It's not just a third party relationship. And that yields tremendous results when it comes to our ability to invest because the people that are a part of our team, they have an active involvement in the outcome.
Joe Muratore:
I recently read that you can gauge your happiness or satisfaction in life according to the size or the quality of your mission. And I wake up with a tremendous sense of mission, and I know you do too and that adds a surprising level of fulfillment. Sometimes people think that in business, you can't have a high level of fulfillment, but there is great fulfillment in what we're doing and what we're building. We've also donated to a lot of great things in our town and done a little bit of philanthropy and charitable work. And that adds to the mission too, and adds additional joy.
Ryan Swehla:
Yeah, back to your point about the company being the mission. We have such a tremendous opportunity to influence our community just in the actual work we do. I think people get focused on that mission and doing good and charitable work happens as a appendage or a side activity from what you do every day. But I would certainly argue that what we do every day in our business has abilities to impact our community, to make the world a better place. Certainly in the industry we're in, I think that's true for any business, but in our industry, we're dealing with physical space. We're dealing with buildings and our ability to know that the assets that we own are just a little bit better, just a little bit nicer, just a little bit more maintained, brings a level of joy that's unrelated to the financial benefit of that.
Joe Muratore:
Yeah. One last good point and then let's talk about some of the negatives here. I'll lead us in that way. But there's a virtuous cycle to what we're doing in that in our community, we buy buildings that need improvement. They're unhealthy for some reason, the tenant culture is bad or there's a high level of vacancy or the building needs repairs. When we're done with the building, it's always better. The tenants are happy, the buildings is repaired, it's nice, it looks great. Our investors are happy. We're happy it. And we built good relationships and we haven't created damage anywhere along that cycle. And as we do that, that goes to the next thing. There's a piece of reputation that when we put an offer in on a building, it's like, "Oh, these guys are great to work with. They bring a team. They bring capital. They're reasonable guys. They're great to work with." And that makes our job easier and easier and easier and easier on this virtuous cycle.
Joe Muratore:
We get better deals. And sometimes people go with us, even if we're at a lower price, because certainty of close and desirability of working with this buyer. I don't want to miss the point, let's talk about this for a second. We pivoted towards ownership, not necessarily just because of all these wonderful things. A lot of it was we were struggling and the truth is, 70% of businesses go out of business in the first five years, something like that. And of those that make it to the first five years, 70% go out of business in the next five years. Business as dangerous. And part of the reason we kept pivoting is we didn't want to go out of business and we kept trying to find that rare air, that piece of space, where we could create enough value and there's a lack enough of competition that that was a place we could find a stronghold.
Joe Muratore:
Ultimately, what we found was that in our geography, there weren't enough people putting their hands up to say, "I'm willing to be an owner here." Our competition to them was service providers, great brokerage firms, management firms, and we fought against them, but nobody was putting their hand up and saying, "I'm willing to apply capital and sign my name on that line and believe in what we can accomplish here." And we did that. And even still, our competition's pretty scarce. Yeah. Any thoughts on that?
Ryan Swehla:
And you mentioned, I think, earlier building a moat and that's one of the best ways to do it is identifying holes in the market. We can look back and think we're overnight geniuses, but at the end of the day, part of this entrepreneurial journey is stumbling into opportunity, but identifying it as opportunity. So when our management clients were consistently based out of the area, for the most part, that was a little bit of an aha. Okay, well, so the ones who are owning the properties don't actually live here, but the ones who are providing the service to the property, they're based here. And being able to, in whatever business a person is in, being able to identify where those opportunities are, where there's a hole that can be filled, because once you fill that hole, now it's very difficult for someone else to come in and try and do the same thing because they've got direct competition versus when you move into a space that is lacking competition. It's like homesteading.
Joe Muratore:
Yeah. Competition isn't quickly built. It's often easy to think that, "Well, maybe someone will just come into our market and do the stuff we're doing and we'd compete head to head." But the truth is, it took us 12 years to get to these chairs and there were a lot of lessons learned along the way and we learned them differently. And those two things, our ability to make decisions together, as we've talked about a lot, has made a big difference. Prior to this meeting, we were analyzing a property and we each had very different ideas and I think we walked away both a little bit sharper. But my point in this is that character is a big deal, resolve and grit are a big deal, experience is a big deal, vision and future and purpose and having a noble mission and believing in where you're going, all those are big deals and those are not achieved easily or quickly. They're built over time.
Ryan Swehla:
And we didn't recognize the joy that we would find until we were there. So I think an important thing to reflect on is being able to search for that space where you find that joy, because it makes the challenge of business so much more rewarding and fulfilling.
Speaker 2:
Thank you for listening to Durable Value, an investors podcast, where we demystify commercial real estate with safe, sound, investment strategies, to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit graceadapartners.com, where you'll find more information, investors' tools, case studies, and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodiq, with intro music by Ian Post. Thanks again for listening and we'll see you next time.