Transforming Animal Health – A Veteran’s Path From VC To Founder With Dan Espinal, Part 1

 

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Welcome to another episode of The 7 in 7 Show with Zack Ellison, which features full length interviews with the world’s leading investors in innovation.

Episode 8 of Season 2 features Dan Espinal, the Co-Founder and CEO of Rarebreed Veterinary Partners, a thriving community of veterinary hospitals whose goal is to deliver exceptional patient care, outstanding client service, and an amazing employee experience.

Rarebreed Veterinary Partners was founded in 2018 to reimagine the veterinary experience. With over 120 locations across the Northeast, Florida, and Virginia, Rarebreed is committed to universal training to sustain wellness, inclusion, and belonging in the workplace.

Before co-founding Rarebreed, Dan headed IDEXX Laboratories’ in-house chemistry business and Corporate Development and Strategy team. There, he led and executed global acquisitions, managed the annual strategic planning process and structured complex partnerships to serve as the technology for new companion animal diagnostic pillars.

During his career, Dan also worked as a venture capital investor at Allied Minds plc, focusing on internet and communication technologies. And he was a management strategy consultant at JSA Partners (formerly AT Kearney), a mergers and acquisitions and strategy consultancy in Boston.

Dan is a combat veteran and Airborne Ranger-qualified infantry officer with service time as a combat advisor embedded with the Afghan National Civil Order Police.

He holds a Master of Business Administration from Massachusetts Institute of Technology (Sloan School of Business) and a Bachelor of Arts in Economics and International Relations from Tufts University.

An active triathlete, he resides in Cape Elizabeth, Maine, with his wife, three children, and his dog, Boomer.

In this episode, Zack Ellison and Dan Espinal discuss:

1. Why startup founders make better VCs.
2. Learning from entrepreneurial mistakes.
3. Decision-making under pressure.
4. The influence of sports and military service on leadership.
5. How venture debt helps startups through increased accountability.
6. Developing a resilient mindset to succeed as a founder.
7. AI’s Impact on the Future of Work.

Transforming Animal Health – A Veteran’s Path From VC To Founder With Dan Espinal, Part 1

Career Background

In this episode, I have with me, my good friend, Dan Espinal, who’s the Cofounder and CEO of Rarebreed Veterinary Partners. Dan has quite an extensive background doing many things over the years. Dan, I’d love to hear your story and help share with the audience how you got here.

As it relates to animal health, the first profound interaction I had with animals was overseas as a commander of an embedded training team in Afghanistan. I was an infantry officer in 2008 and commanded ten US soldiers. We were fully embedded with about 150 Afghans. I got to observe the relationship between locals and local dogs, which is a stark contrast to the way we engage with the local canines. There was no mutual understanding of shared value.

Meanwhile, for us, we gave them names and shelter. More importantly, they made us feel like we were at home. I realized then that the more we understand the way our minds work, the more value we’ll see in the human-animal bond. Not only that but I do believe you can measure the affluence of a society by how it treats its companion animals. As a business, I love these underlying fundamentals where demand outweighs supply. This was one that’s always been near and dear to my heart.

Fast forward a little bit, back in the US, I was in management consulting for a spinoff. I went to business school at MIT Sloan, specializing in financial engineering there. I thought I wanted to be a Wall Street trader. That’s where we met if you remember. I did a short stint in capital markets, the sales and trading desk at Deutsche Bank. I was on a rates derivative desk and quickly realized that maybe that wasn’t for me right then. I wanted the ability to create value and be the master of my destiny.

What I didn’t figure out at the time and that I figured out later on is that I wanted to be an entrepreneur but I didn’t know it yet. It might have influenced the classes I took at Sloan for sure. Fast forward a little bit more, my first job out of MIT was at a venture firm. We were investing in early-stage technologies, primarily focused, given my military background, on spinouts from research universities and government labs. We’re looking at detecting Series A and Series B seed investing, and not much beyond that. That was an incredible experience.

 

 

My focus areas were cyber security, mobile wireless communications, and satellites. A few of the companies that we funded are still around and doing well like Federated Wireless, which Google is an investor there. Also, HawkEye 360, which gives mobile wires and communication intelligence to different agencies and other commercial applications run by a good friend who’s the CEO. We had an IPO event there and sold one of our cyber security companies.

I learned a lot about what to think about from a thematic perspective. What are the ingredients for success? We have plenty of failures in there too. It’s probably more failures than successes. After doing that for a little bit, I ended up managing one of our portfolio companies. Somebody had the idea that maybe I could be an operator. I showed up at a biotech company. Not only did I know nothing about being a CEO or general manager but I didn’t know a lot about biotech at the time either. I found both incredibly gratifying.

I candidly found my calling by getting different groups of people and professionals to row towards a common objective in tandem. That’s what I wanted to do and created value by doing that. We had that for a couple of years. We built a good business and a company called IDEXX Laboratories came around. IDEXX is an S&P 500 and NASDAQ 100 company. It’s been a Wall Street darling for many years. I got the role of managing their M&A strategy team. It’s corporate development function and strategy.

I love animal health as a business. It’s an incredible business model with a great management team. I love Portland, Maine as well, which is where I am, along with my wife, our three kids, and my dog Boomer. I have funny stories about that too but we won’t go there. I found my way to animal health. We were buying reference labs around the world to reinforce the anecdotes that I had learned overseas. That was my first roll-up. We were building an interconnected system of labs to deliver laboratory diagnostics for veterinary clinics.

We’re also buying licensing next-generation diagnostic solutions. We’re looking in the halls of human medicine to see what solutions we could curate for animal health needs. We had a whole strategy around that. We were also buying software companies. We are probably one of the bigger acquisitors of software companies in animal health, which is an extension of what I’ve been doing in the venture world. We were managing the corporate strategy agenda. We got a unique perspective on this category in particular at a time when a lot of venture growth P dollars were flowing into the space in different parts of the sector.

Fast forward a little bit more, I moved over to our chemistry division. It was about a quarter of IDEXX’s revenue at the time. It was about $600 million business unit but about 50% of it is free cashflow. It’s a critical unit. That’s probably one of the best business models I’ve ever seen. It has a super sticky ability to capture price and is easily extensible with not a lot of competition, providing a tremendous amount of value for its clients, end users, pets, and their owners.

That was my first interaction with the state of corporate veterinary medicine. People like to use the heuristic, which is about ten years behind human medicine. That’s probably generous. My co-founder Sean and I identified an opportunity here. We said, “If we could unleash the productive power of the providers, create a business model that people wanted to be a part of, and use that systematically, we would have an easier time recruiting and we would win.”

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That was the first time when I said, “I’ve got an opportunity to build an exciting business that could revolutionize an industry, bring along investors, and create tremendous value for all stakeholders,” and so Rarebreed was born. In 2018, I left. It took about 6 months to raise about $5.5 million there in the first round, which sounds like nothing. We raised structures across credit facilities.

There was a small regional bank. There’s a lot of brain damage but it was worth it. It ended up giving us creative capital to get the deals done that we needed to get done. We closed all of that, caught Q1 of 2019, and bought our first practice in Connecticut in June. The rest is history. We’ve gone through probably 6 or 7 financing events and some change of control events.

To give people a context, how much do you think you’ve raised in aggregate roughly?

It’s probably about equity capital, $900 million or so. On the debt side, we’re continuing to rethink how we engage there and get some active stuff. We have a couple of $100 million on the credit side, which you might argue we’re over-equitize but at this point in the market, it’s a good time to be that from our lens. We have about 3,000 employees in 130 locations from Florida to Maine. We’re building an integrated model in veterinary care, bringing together specialty, emergency, and general practices, continuing to buy aggressively, and also building.

This is a super creative way we found to grow if you’ve got the capabilities to manage hospitals and grow them organically. It’s much more cost-effective to build and buy at least with prices. For us, we live at the intersection of being an employer of choice. Any multisite healthcare business is contingent on the productive power of its providers. That’s number one for us. The second is this idea of the modernization of animal health. We’re finding that younger consumers and consumers, in general, are expecting the same level of medical care for their pets as they are for themselves. That’s been a massive tailwind for us.

We’re a leader there. A lot of that comes from our days in the diagnostic world at IDEXX. Beyond that, we’re integrating technology for a more elegant client experience. This is where a lot of the real work is happening. That’s in a nutshell. Beyond that, we’re actively investing in a number of different multisite healthcare businesses, helping entrepreneurs build their dreams and be active in real estate and a number of other places. I’m super excited to have this conversation but that’s me in a nutshell.

Becoming A Founder

Take a half step back to when you decided to become a founder and you realized that was your passion and calling. When did that happen? As you started to get into entrepreneurship, how did your training in the military come into play?

People tend to want autonomy, control, and empowerment but the more of that you have, the more comfortable you have to be in uncertainty and risk. There’s another founder-entrepreneur, a fellow soldier, who said, “Once you’ve been shot at or somebody’s tried to blow you up, it’s hard to get you scared.” That’s true. The truth is we’re all vulnerable and some things are scary but there’s a place for people who can accept and manage that risk and do that effectively.

 

The other key learning from the Army days is it’s hard to get people to do what you want them to do if you don’t know how to lead them or manage them. It turns out we’re pretty simple animals. No pun intended. There’s an old saying, “Make sure your soldiers are fed, get paid on time with the right amount, and get to read their mail. They’ll do anything for you.” A lot of those lessons carry through to what I do as a CEO and founder.

Ultimately, anybody can come up with a spreadsheet. You can change a couple of variables here and there and get the outcome you want. It’s the part that a lot of investors get wrong and the good investors appreciate how valuable this but it’s not the chemistry of the system that’s challenging. The molecules and atoms are going to do what you need them to do when applied with the right forces. The challenging part is biology, getting the people to do what you need them to do. That’s the art and science of building a business of being an entrepreneur.

You hit on a couple of key themes that I talk about a lot and that we’ve talked about offline. One of them is being comfortable with being uncomfortable. As a founder, you are wearing risk 24/7. Until you’ve been a founder and been in that situation, it’s hard to appreciate how uncomfortable it is. The only way to survive is to get used to it. It’s like everything. It’s scary and difficult at first but once you’ve done it enough, it becomes easy.

It’s like anything in life, driving, lifting weights, or writing a paper. They all become easier over time. It might be hard in the beginning but to me, that’s one of the key things I’ve learned as a business builder myself. Be willing to do what others won’t do. You almost have to always be a contrarian. If you’re starting something innovative, the definition of that is that nothing has come before it in the sense that it’s innovative because it’s new. You have to be thinking differently.

To start with a contrarian mindset, you have to be willing to take a risk 24/7 and then get comfortable with it. You have to be a great leader, to your point. To me, there are a lot of ingredients that are necessary. Part of the reason why most startups fail is because very few people have all those characteristics or they can’t find people to complement them to have the skills that they don’t have.

Those are all great points. We all know we have to do it. If you eat more than you burn, you’re going to get fatter. If you don’t sleep, you’re going to be tired. We know, generally speaking, what the right decisions are. The question is, can we be comfortable making them? It turns out we can take a lot of pain without changing. You hit the nail on the head. The more comfortable you can become being uncomfortable, that’s where the growth is. It’s well said.

Attraction To Growth

Let’s shift gears a bit. In terms of the bigger picture and the innovation economy in venture capital land and startup land, what are some of the themes that you’re seeing and thinking about that are important?

It’s such an interesting time. We’re feeling this across all different types of asset classes but overnight almost. It felt like there was this huge attraction to growth that was heavily weighted. That’s gone from everybody caring about growth to the only thing everybody cares about is cashflow. The pendulum swings but from my lens, it’s the natural biases towards growth.

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I listened to Elon Musk’s book. It’s his biography by Walter Isaacson. It was talking about how Wall Street was valuing Tesla more than GM, which had made a $10 billion profit. Meanwhile, Tesla had lost $2 billion. It’s wildly out of whack. That theme generally holds true. This comes in ebbs and flows but we tend to overweight the disruptive power of something new and underweight systems that are far more durable than people appreciate.

I see this all the time. As a young CEO, I was afraid to let go of somebody who was underperforming. “Let’s give him a chance and move him somewhere else.” What I’ve learned is that the quicker I can make that decision that I already know I have to make, the better off we’re going to be in that whole doomsday scenario, “Everything’s going to fall apart because I like that person.” That’s a story in my head. Human systems in particular are a lot more durable.

From an innovation economy perspective, I see the world value in cashflow over growth to state something of the obvious. One of the best operators I know is probably the CEO of IDEXX. When I was there, there was a guy named Jon Ayers. He had a framework for innovation and never spent more than 5% of revenue. That’s for a massive S&P 500 company.

The point is there is a place to continue to learn and grow but you don’t have a viable going concern unless you have a cashflow positive business. That is not a self-sufficient entity. If you need capital markets to run your business, you are not a viable business concern yet. That’s okay but the faster you can get there, the better off you’ll be.

I did a marathon. The Sugarloaf Marathon is one of the fastest Boston qualifiers. It’s a super fun run. There’s some uphill but then there’s a ton of downhill. I got my fastest time and was super pumped about that. The bad part was I had to train. We went up North to ski at Sugarloaf and I got a place up there. I had to train on these logging roads in the winter. Talk about doing hard things, that sucked. It was miserable roads with nothing. There’s nowhere to go to the bathroom. It’s just blistering cold and ice everywhere.

The good part about it was I got to listen to a lot of podcasts. One of the ones that I love is Founders. I kept hearing this common theme with guys like Carnegie, Rothschild, and Rockefeller. The theme I came away with as an operator of businesses is at the end of the day, the only thing you can control is your costs. That’s the only thing you have true power of, what you spend every day.

There are a lot of hard things in entrepreneurship. It’s hard to let go of your friend or demote. Whatever decision you have to make, you’re no longer paying someone or something to do something for you. The more comfortable you can get with managing that side of the question, the closer you are to viability. Another theme in innovation that is interesting to me is AI. There’s a bigger piece for that as it relates to my realm, which I broadly call multisite healthcare and provider-led businesses.

My hypothesis is that the owners of brick-and-mortar are going to benefit asymmetrically over the short to medium run. That’s one big theme as you automate functions that are marginally a value-add. One of the critical failure points in our hospital system is answering the phones. We owe it to our team to make sure that we’re incentivizing and training them appropriately. The truth is all nonadministrative support costs dilute the margin. The ROI of every dollar you spend is questionable. That’s a great place where I believe AI and other machine technologies will benefit the owners of hospitals and provider-led businesses.

 

Artificial Intelligence

I want to dig into this because this is a theme I’ve talked about previously in the show. A lot of people have brought up AI because it’s very topical. I have a couple of friends in Davos and every conversation is about AI. It doesn’t matter who you are. If you’re running countries or sweeping floors, you’re talking about AI because it’s going to impact you in some way.

My view remains that it’s not good from an investment perspective to try to chase direct investments in companies that specialize in AI. That’s going to be dominated by the behemoths. The Microsofts of the world have so many resources and hundreds of billions that they can put behind us over time. I don’t think there’s anybody that’s going to come along and independently at a much smaller scale do something better than they can do. The opportunity lies in finding businesses that will disproportionately benefit by using AI, which they can harness very cheaply in many cases, to reduce costs in repetitive or non-core functions.

It’s low-value but necessary functions around data or many other things. That’s where the smart investors should be looking and maybe some are. Most people I found are not. They chase the shiny object and they’re going to lose their shirts like they always do. The folks who are tuned in to where there’s long-term value are saying, “Where are there sustainable, durable business models that already work, can harness AI, and improve their operating margins immensely overnight?”

A lot of their competitors won’t because they’re too big, slow, or anchored to what they did in the past to adapt. If you’re flexible, agile, nimble, and willing to take that next step into utilizing AI, you’re going to have a massive competitive advantage. We already see it in the financial industry where I am. I can compete against firms that are 500 times bigger in terms of assets and blow them out of the water. It takes them 3 years to do what I can do in 3 hours. I’m not exaggerating.

I agree. This is one of those areas and there are plenty of others. The way I like to describe it is it’s not a good strategy if you’re in the continental Army to fight the British in a traditional European-style war head-on. You’re probably going to lose. They’re better trained and have better weapons. If you can figure out a way to fight asymmetrically, that’s the arbitrage. For me as an operator, what are the non-value add costs at our table stakes that have gone away because the friction is reduced? We have thinking animals.

There’s this whole other, “What enables decision support and client experience?” It’s both of those but the first wave that I’m seeing, which starts to change the business directly, is the cost reduction side. We have the infrastructure and connectedness to pass along information. Where are the humans in the loop slowing it down that are adding low-value costs? There’s a bunch of places we can go from that perspective. I’m salivating like, “I want to be an asset owner, full stop.”

Here’s a question for you about AI. There’s been a lot of consultants or thought leaders, so to speak, that have said that AI is going to hurt the white-collar or the senior people more than the blue-collar or mid-level people. Do you believe in that? I think quite the opposite. Most of the senior people are still going to be there but all the middle managers are going to be gone.

There’s going to be a lot fewer junior people. Anything that’s what I call basic, mechanical, or very process-driven is going to be automated away. All the people that you see at banks, for instance, that sit in the back and middle office, and even some of the “producers” on the front lines are going to be irrelevant pretty quickly. I’m curious what your take is.

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Like spreadsheets or mobile phones, it’s going to make the productive power of each individual greater, which means the bias is going to be fewer of them but better ones. That’s at the lower level. I’m thinking of an investment bank, a consulting firm, operations at an S&P 500 company, or an associated fund. The productive power of the knowledge worker is going to increase asymmetrically.

Not just as an operator and I’m biased but the highest ROI positions are the most senior ones. The reason for that is you’ve got to perform two critical functions. One is you’ve got to set a vision and a strategy. You’ve got to build an accountability framework and a team. You’ve got to make sure you have money and manage your stakeholders. To do that well, the best strategies are not by the ones who can come up with the best answers. That fundamentally is what AI does.

It’s the best, at least in its manifestation and it may change over time. That’s the doomsday scenario. Assume for a minute that this is the status quo. The best managers and leaders ask the best questions. As far as I can see, that is not something that NLP or generative AI can do yet. What are the right questions to ask to get the organization to answer the highest priority questions to yield the highest ROI? We’re not there yet. That’s the critical function of senior management.

That’s a massive delta I see between a C-level executive and even a VP or director. A director typically lacks the global perspective and the financial acumen. That part can be trained but it’s the ability to ask the right questions versus being directed and executing the question that’s being asked or the answer that’s provided. That will differentiate the great company from the okay ones from my lens.

Senior leaders who are good are very forward-looking. They have to be, to remain at the forefront. I don’t know if AI will get better. I’m sure it will but it’s very good at being backward-looking. It’s not as good at creative thinking, forward-looking thinking, and innovative thinking. That’s where the best leaders are. That’s why they’re going to still have a place.

Innovation

On the innovation topic, there’s one other theme that is germane and I’d love to mention it. It’s related to this idea of multisite healthcare and the owners of brick and mortar. As I think about it, the owners of the terrestrial, tangible businesses that are going to benefit think the most, which is interesting. Those have been the ones that have suffered the most in the last several years. You’ve got wage inflation, which hasn’t kept up with your ability to pass through price or value. The beneficiaries of the last several years by virtue of mobile wireless communication technology and the internet have been these switchboard multisided business models that are winner-take-all that are charging a toll.

Spotify doesn’t do anything. You get a subscription. Maybe it picks a couple of good songs that I wouldn’t have known about or can figure out what I might like but that feels like it’s becoming a commodity. Uber and Airbnb are great business models. They are asset-light very profitable and scalable. Those have been the darlings over the years but that’s about to change. That’s my strong hypothesis. The terrestrial businesses that are creating something like a service or product are going to be the beneficiaries from my lens.

A lot of people have gotten anchored to this idea that to be a great startup, you have to be in a winner-take-all market and maybe be the second or third. There’s no room for others. That’s where there are a lot of misconceptions. I remember I was talking to a person about ARI’s venture debt opportunities fund. This was years ago. Venture debt continues to gain recognition and people start to understand it better.

 

For the most part, 95% of institutional investors have no idea how it works. Most founders don’t either. I remember this guy saying, “How are you going to compete with SVB as if there’s no room for more than one capital provider in the market?” I said to them, “Do you even know how many regional banks, savings and loan institutions, and private lenders there are in the US? They’re not staying out of the market because they’re worried about if they can compete with JPMorgan.”

That’s what gives me hope. There’s more opportunity in arbitrage than we could ever hope. In a similar vein, there’s something I’ve learned and I’m probably somewhat guilty of it too, to be honest with you. I’m self-aware. The one who is the arbiter of capital or the acquirer is always smarter than the acquiree. It’s important for capital allocators, LPs, investors, and honestly, acquirers of businesses to appreciate, “How can I approach this from a position of curiosity? What can I learn?” The one who can do that is going to be the one that wins.

What I’ve learned about being an entrepreneur is it is a humbling exercise. You get things wrong all the time. It’s not your ability necessarily to get things right more often than wrong but what can you learn from what you did get wrong is going to make you better tomorrow. That’s a massive lesson going back to the other topic we talked about. That’s where I see a lot of entrepreneurs fail. They can’t get away from this notion that they have to be right.

I want to hit on two things that you said that are critical. We are the sum of the totality of our decisions. In other words, how successful we are in life is based on all the decisions we’ve made today.

We make 14,000 every day.

I always say that the long run is a series of short runs. People say, “I want to do this in the long run but that’s a long-run move so I’m not going to do anything with the short run.” It doesn’t make any sense logically because the long run is a series of short runs. To get to a destination, you have to take one step after another to get there. You don’t magically float there on Aladdin’s carpet.

Episode Wrap-up

I love that. On that point, one of my favorite quotes somebody told me is, “Yesterday is history. Tomorrow is a mystery. Today is all you got.” If you take a step back and think about that for a second, the only thing I have at all in the whole universe is this moment right here. To your point, tomorrow is an aggregation of what compounds today. Every day could be your last day. That’s the journey of an entrepreneur and founder too.

We talked a little bit about investing and how to think about that. The key ingredient for my perspective, having sat on both sides as a VC and an entrepreneur is who do you have at the helm? From my lens, that is the number one indicator of success or failure. You can pick a highly competitive business or a not-super-competitive business where you’re the first mover. At the end of the day, it doesn’t matter.

Can the person you have at the helm set a strategy and a vision? Can they build a team and a culture? Can they manage their stakeholders? Can they build an accountability framework? Can they make sure they have the capital to run the business? That is hard to do. That’s the thing that’s going to indicate success or failure. You’ve got to find somebody who’s going to do it or die trying.

 

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• Dan Espinal on LinkedIn
• Rarebreed Veterinary Partners
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About Dan Espinal

Building Rarebreed Veterinary Partners, an independent network of veterinary practices committed to delivering an exceptional work experience to veterinary medical team.

Previously ran IDEXX (NASDAQ: IDXX) Corporate Development & Strategy team whose mandate it is to lead and execute global acquisitions, manage the annual strategic planning process and structure complex partnerships that will serve as the technology for new diagnostic pillars.

Before IDEXX, I was a private equity & venture capital investor at Allied Minds, Plc (LSE: ALM) where I focused on internet and communication technologies. Before joining Allied Minds, I was a management strategy consultant at JSA Partners (formerly AT Kearney), a boutique M&A and strategy consultancy in Boston, MA, providing aerospace and defense companies with market entry, competitive strategy, acquisitions and investment decision support, and advisory services.

I am a combat veteran and airborne-ranger qualified infantry officer with service time as a combat advisor embedded with the Afghan National Civil Order Police where I led over 150 combat patrols in southeastern Afghanistan. Before service time in support of Operation Enduring Freedom, I spent time as an executive officer of the 173rd Long Range Surveillance Detachment (Airborne) and as an infantry platoon leader.

I hold an MBA from the Massachusetts Institute of Technology, Sloan School of Business and a BA in Economics and International Relations from Tufts University. I am a husband and the proud father of four, two of the human and two of the canine species.

I am an active runner, road cyclist and swimmer with a triathlon hobby.

expertise: general management, corporate development, negotiations, deal structuring, management, strategy, acquisitions, divestitures, equity Investments, complex partnerships, venture capital, private equity, business development, growth equity, technology evaluation, financial modeling, licensing, due diligence, financial planning, and analysis, integration planning and leadership