The interview below is part of a series from McGuireWoods that features interviews with C-suite leadership of private equity-backed portfolio companies. To recommend a leader for a future interview, email Holly Buckley at hbuckley@mcguirewoods.com.
Q: What advice would you give to a founder CEO when evaluating potential partner investors?
David Stern: If I were a founder CEO looking for a partner for a next financing round or my first round, I would ask potential partner investors, "How are you different from other private equity companies?" They all say they are different and are looking for a good management team to invest in. But I would be looking for how much value an investor can add, more than just the cash. Can this private equity firm provide expertise in areas I don't have?
First, identify what your investor will bring that is unique and will help your company find even greater success. Every investor will say they invest in a leadership team and will help you reach success. But the real question is will they really invest in your success or will they be a constant burden of additional accountability?
We are lucky that Warburg Pincus is our investor. Warburg has invested tremendously in what they call their "value creation interlock" or VCI. Rather than being a passive partner or an overly intrusive partner, Warburg has created an internal group of consultants who are experienced executive specialists across the leadership spectrum. They provide a chief executive officer specialist, chief technology officer specialist, chief product officer specialist, etc., all of whom have held these positions at similar, fast-growing companies. They act as no-cost, highly available consultants to everyone on our leadership team.
These specialists act as consultants, but they don't get in our hair and tell us what to do. In most cases, they are so good and so bright that they really help people solve their problems. This has made my job as the CEO so much easier. Not only do I have great leaders, but those great leaders are regularly interlocking with world-class experts.
If the firm you are considering has these experts, interview them. Don't just speak with the partners. Find out what the experts are going to bring to the table. Make sure they are world-class experts who will bring additional value beyond the expertise already present in your executive team. Also, check to see if they are going to charge you for these experts and their services. If they are going to charge you a la carte for that expertise, you might consider hiring consulting firms instead.
Second, does the investor know your industry? Again, we chose well in that Warburg Pincus has also invested in three very similar medical electronic record companies in adjacent verticals within ambulatory healthcare. This means that not only does the investor know our industry well, but we have built-in collaborative relationships for every executive team member with these closely related but noncompetitive companies.
The reality is that the partners you deal with regularly from private equity firms are really smart, but they often have a single-dimensional focus. That is, they think of your company as a way to generate money and they are good in helping you think about how to strategize within your vertical. However, for the most part, they have never run a company. With Warburg, having all these executives who have run different aspects of companies has been a tremendous resource.
Third, how does the investor make its money? Everyone makes money on the exit, but are they taxing the company’s cash flow as it goes along? I would be wary of a private equity firm that charged an ongoing management fee to the company. These fees can easily exceed $500,000 per year, and often the firms that charge these fees do not add any more value than firms that do not charge these fees.
Q: What characteristics do you look for in leaders within your organization?
DS: I use a rubric from author Patrick Lencioni, which he calls the "ideal team player." Ideal team players possess three qualities: They are humble, hungry and smart. The book "The Ideal Team Player" includes interview questions that help you answer the following: Is that person humble? Are they hungry? And are they smart? By smart, Lencioni is referring to people smarts.
You want to make sure you have an extraordinary, competent leader. That's a given. But if you can put together a leadership team that's humble, hungry and has good people smarts, it can really help your company. We use this rubric as a filter for all employees — especially leaders.
Q: What was the best advice you ever received about running a business successfully and who did it come from?
DS: I was talking to another CEO and I asked him what he thought was the secret to his success. His answer: "Stay in your lane."
What he meant is keep the company in its lane. Understand what your company does, stay with what it does best and don't try to do a lot of different things. This is much like the Hedgehog Concept developed in "Good to Great" by Jim Collins. Know the one thing you're really good at and do what you can to be the best in the world at that one thing.
You want to avoid the "good enough" principle that has you doing things where you can only be average or okay. Only do things where you can be world class.
Q: What guiding principles do you follow at Experity?
DS: This builds on my previous answer. As a founder and CEO, one of the guiding principles for me has always been about not being a good or great company but being a world-class company. This meant we needed to do things differently from everyone around us.
With that said, this doesn't mean we didn't emulate ideas from other companies. But to be truly great, we needed to figure out what would truly differentiate us. So, we came up with what we call the "Experity Success System." This takes ideas from various businesses and business gurus along with some of our original ideas and puts them all together to make our operations system. We make sure every single team and team member within the company follows this system.
For example, the company sets one or two priority-one goals (POGs) and every team then decides the No. 1 contribution that team can make to the company POG and specifies a numerical target as a team POG. Then the team selects one to three new measurable habits that it must develop and measure every day to drive the team POG results.
Rarely can a company become great by hiring only outstanding employees, although every company does strive to hire the best people available. However, I believe solid processes in a company can enable average yet highly engaged employees to achieve astounding results.
What makes Experity great is not the fact that we hire amazingly great people, although we do have some amazing people. It’s not just that we have a great strategy and we stay in our lane. When we have humble, hungry, smart teammates who lock into our operations system and embrace it, we consistently achieve great results from folks who aren't necessarily superstars.
About David Stern
David Stern, M.D., is the chief executive officer of Experity, Inc., a merger of DocuTAP and Practice Velocity. Experity serves more than 4,500 urgent care centers with electronic medical services software, revenue cycle services, patient engagement software, consulting and teleradiology services. Experity is a Warburg Pincus portfolio company and has been named a Great Game All Star Champion company. Stern founded Practice Velocity in 2002. He is a graduate of Jefferson Medical College and is board-certified in internal medicine. He has received the Lifetime Membership Award and the Lifetime Achievement Award from the Urgent Care Association.
