Transforming Animal Health – A Veteran’s Path From VC To Founder With Dan Espinal, Part 2

 

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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 2

Right Team

As a very successful founder, you’ve learned a lot of lessons. If you could go back in time and be a VC again, or in the future if you decide to do that, and I know you make a lot of different types of investments, if you were to put on the VC hat, knowing what you know as a very successful operator and business builder, what would you do differently? How would you be a better VC? What lessons can you teach other VCs?

The framework we’ve always used is the size of the market and how much it is growing. What’s the product market fit? Where is it on that journey? What are the reasons to believe it’s going to be faster, better, or cheaper? We used to use our heuristic. It had to be an order of magnitude faster, better, and/or cheaper. Does it have the right team?

What I’ve underweighted in the past but would be way overweight is it doesn’t have the right team because the right team’s act is going to figure it out. For me, that’s the biggest learning. It’s so funny. Doing super early-stage investing, most of the stuff never ends up working. Some stuff works and it works big to operating a terrestrial tangible business, it’s like taking care of cats and dogs. It couldn’t be farther away. I remember when I left VC. I was like, “I want to sell things I know people want to buy.”

As I’ve grown, it gives me joy. You don’t have to be good at these crazy things to create a tremendous amount of value. That’s the red herring that a lot of operators and investors go after. They’re chasing the shiny object. You have to be the best at the basics. That’s 98% of what you do every day. Do you get up in the morning? Do you work out? Do you do the things you know you have to do to be successful? If you’re not, how do you do those things? As an operator, that’s the thing I’ve learned. It’s not rocket science. It’s humility but mostly discipline.

Advice For Founders

I’ve got a couple of thoughts to sum up what I’ve learned. It is super simple. One is to solve a problem and be helpful.  Don’t invent the product because you think some idiot is going to buy it. Invent the product because it’s solving for a real need. It’s providing something that needs to be there that isn’t there yet. In other words, it’s a product that’s helpful to society. That’s my first thing. You know that there’s going to be demand for it over the long-term because you’re adding value. You could call that solving a problem, being helpful, or adding value. That’s number one.

 

 

Number two that you nail is to be resourceful. Figure it out because things are going to change and there’s no training that’s going to teach you how to build an innovative company with millions of variables and decisions you’re going to have to make. Number two is to be able to be resourceful, adaptable, and flexible in your thinking. Ultimately, be very resourceful and figure it out. It’s that simple.

Last but not least for successful founders is to never quit. 99.99% of people always quit when it gets hard and 0.01% don’t quit. Those are the people that you want to be. Those are the people who wind up achieving these great things that everybody wants to emulate but they don’t realize that those people went through the same thing as the unsuccessful people who have handled it differently.

It’s a beautiful lesson to whoever might be reading this. At the end of the day, you are the commander of your destiny. You come up with a million reasons why it’s not going your way. There are things that are out of your control but to add value, be durable and gritty. Those are all within your control. I love the way you framed it. A way I like to think about it is I’m in an industry where many veterinarians and caregivers are called to a different calling. They’re doing it not necessary for financial outcomes. The value rubric in their mind is care.

If you take a step back, the way I communicate with them is at the end of the day, the profitability of a business is correlated with the value you’re creating. Profit is a proxy for value. On this “be resourceful” hits to the theme we’re talking about around innovation. If you think about it, the only thing that’s constant is change. The world is changing all around us.

Our ability to survive as humans is contingent on our ability to innovate faster than the world changes around us. For me, innovation is about survival and it’s the survival of humanity. The world’s going to get warmer. Maybe we’re causing it or not. Who knows? We have to survive and figure out either to get to Mars, figure out a way to survive in these extreme temperatures or slow the change down. I don’t know. If we can’t figure out how to innovate faster, we’re gone.

When you go through hard things, whether you’re cycling in the Italian Alps, climbing a mountain, being in the military, building a company, or whatever it is, that’s an opportunity to figure out who you are and you have a choice in that. You’re not going to die when you get hungry. You probably have to wait 14 or 21 days to die. I hear people saying, “I’m so starving. I can’t handle it.” I’m guilty of that, too. If I take a step back, I’m not going to die. Can I hold this feeling lightly? What am I learning about myself? There’s information.

The profitability of a business is correlated with the value you are creating. Share on X

We have a lot more control over our destinies than we realize in the sense that we are two things. We are what we think about and we are some of the decisions we make. Both of those are in our control. If there are things outside your control, then you shouldn’t trouble yourself worrying about it. In other words, think positively and then make good decisions. You’re probably going to end up where you want to be.

That compounds.

I think a lot about this idea of path dependence. When I talk to younger people in a mentoring capacity, they’ll often say, “What do I need to do to be successful 20 years from now?” It all starts with making good decisions early. There are paths you can go down that are impossible to dig out of or very hard. You can think of it even in the simple context of working at an investment bank. You show up in the analyst class on day one. You’re a bunch of 22-year-old analysts, fresh out of undergrad. Those that screw up, in the beginning, don’t get the same opportunities as those that perform well in that first week, month, or quarter.

Those who perform well initially get the choice assignments, get handed more responsibility, and get to work with better senior bankers, for instance. That compounds over time. Two years down the road, the person who did well on day one might be going to work for a top-tier private equity firm. The person who screwed up on day one or early on might be out of the business. Even if they were more talented or potentially harder working than the other person, it won’t matter because many things are path-dependent, like in a career, but more so than other areas of life.

Investor And Operator

I didn’t want to talk about having been on both sides of the investor and the operator equation. What I’ve come to appreciate is the dynamic. In people’s natural dispositions, they don’t like others to hold them accountable and I get it. It’s uncomfortable but fundamentally, that’s the purpose of the board you design. As far as I’m concerned, the function of the board is to hire, fire, and compensate the CEO. That’s what the board is designed to do.

Private equity firms, in particular, get attracted to the notion of operational engineering. There may be some places to add value there but you have to be careful if you’re coming from a world of never having operated an operating company, even if you’ve seen a lot of them. The example I like to use is the Titanic and the captain. Every pattern that the captain recognized was what led to its downfall. It’s very different in certain environments. You’ve got to be open, curious, and sensitive to that. I’d be careful as an investor to get too deep into the operation.

If you don’t like what you see, get a new CEO and do that quickly. What I wish I had known as a CEO that I’ve come to learn over time, and it didn’t matter because I haven’t been fired yet as a founder, is what the business needs might be different at different points in its maturity than what I’m able to give or what I want to give frankly.

 

What has drawn me, and I imagine many other entrepreneurs like yourself to be entrepreneurial may not be the same things that it needs when it hits that step of function improvement. What I’m appreciating is the attraction to do the hard things and the willingness to learn and grow. That’s for me anyway served. I’m curious about when I tap out or when it makes sense but I wish I’d known that at the beginning.

It’s one thing to know in your head, and it’s another thing to know in your heart. For any entrepreneur who’s thinking about building a business, just because you made the business, you don’t control the business. The business has your fingerprints like a child. You don’t control your children. I have three of them. I’m learning that in the hard way. It’s hard and beautiful at the same time.

Sports And Investing

Remind me, what sports did you play growing up?

I played hockey and lacrosse. I’m glad you asked because I started to play hockey with my son. When he started the season, he was the worst on the team because he started a little bit later than some of the other crazy hockey parents had their kids start. He’s playing every single day after we are done playing him and I play on the ice at night after the fact. I realized my 30 years of playing hockey wasn’t about me going to the Olympics, playing in the NHL, or whatever childhood fantasy or parental fantasy you have for your kids that you project on them.

It was about being able to invest in the relationships that matter to me and find meaning in them. On the ice, I imagine that we’re up in Maine, so it’s cold here. We have an outdoor rank under the lights in the winter. I almost cried thinking about seeing myself playing with my son when he was a dad. My love language is playing, going to the gym, and having fun. That’s how I express connectedness. It’s been awesome.

The reason I was curious is because I was thinking about my upbringing. I played basketball. I was a point guard for years and was pretty good. This idea of not being able to control outcomes is very similar to being a good point guard. You can have a lot of influence on the game. You know where everybody’s supposed to be. You know the playbook. You’ve got the ability to heavily influence the outcome but there are too many things outside of your control. You cannot control whether you’re going to win or lose the game and how it’s going to turn out but you can shape and influence it immensely.

That’s why I was thinking people who have played sports oftentimes make better leaders, CEOs, or managers because they intuitively understand that. Even if they’ve never articulated it or thought about it and how it relates to business, they’re used to being able to influence and lead others by example sometimes and sometimes by other means but they know that there are so many other factors at work and people they have to rely on to get the outcome that they want.

Sometimes, the biggest naysayer is yourself. Share on X

I couldn’t agree more. I was a goalie in hockey. Back on a ten-year-old, everybody’s watching you. I can’t win the game or score a goal. I could but I don’t know any goalies who scored a goal other than maybe an empty net. Even then, I figured a handful of times in the thousands of games of which I’m aware. To your point, you can influence it.

The ability to deal with the stress you must have dealt with as a point guard and me as a goalie has to have influenced our ability to lead under pressure and stress. There are so many lessons in sports that can influence our ability to manage teams, manage risk, have the desire to win and understand what execution and discipline look like. It’s an incredibly valuable lesson.

Tying that back to investing, the founders who are most successful are those who have a demonstrated footprint of success in tough situations. That could be athletes, military veterans, or diverse founders, whether women or people of color who don’t necessarily have the same access or support. They’ve had to overcome so much to get to their current position.

Two-thirds of American presidents or something like that either lost a parent or somebody close to them in their life. In other words, to your point, people have gone through something hard and that is a prerequisite for success to be comfortable in the hard situation and do what you need to do. To build a company, change an industry, and build a fund is way harder than you could ever imagine. It’ll have you questioning yourself or your worth at some point.

The way I think about it is I’m not doing it for anyone else. I’m seeing if I can do it for myself. I want to know how far I can go. I don’t give a thing what people say about me, quite frankly. I don’t know if you’ve seen this Deion Sanders clip on Instagram. That’s hilarious. He’s like, “Look at me. What about me?” It makes you think I give a crap. “What do you think about me?”

That’s how founders need to be. You have to go out and say, “I’m going to do this because I believe in it.” I don’t care how many doubters are. There’s going to be many more doubters and many more noes than yeses. I think about all the noes I’ve gotten in my life since I’ve built out ARI. I probably get 99 noes for every yes. I’ll tell you, I’d rather get a hard no than a maybe or a fake. I don’t even mind getting a no. The way about it is the work doesn’t even start until I hear no.

It was back in the day. There was a very good bond salesman. I don’t remember who it was. He said, “I don’t even start working until the client says no, and then I start working on them.” I thought, “That’s a good way to think about it.” A lot of people hear no and shut down. They’re like, “I’m going to go home with my tail between my legs.”

 

If you ever go back to when we were younger and single and you go out to a bar, there are always guys in the group who, when they hear a no, are done for the night. They’re like, “I’m going home.” They tap out. They can’t hear no. They’re weak. There are guys who are like, “I’m going to talk to every girl in here until I get a yes.” That’s an analogy for success in life. You’re going to hear so many noes and it could be for any reason. There’s no reason to even think about why you’re getting the no a lot of the time. Sometimes it’s good to contemplate why so you can improve potentially but a lot of times, it’s a no for some reason. It has nothing to do with you.

In that being, I love that. The work doesn’t start until you hear a no. For me, the biggest naysayer could be yourself. “I can’t do this. My heart rate is way too high. Lactic acid is burning.” It’s a 99.9% chance you are not going to die. You can keep doing that when you’re on the Peloton, riding, running, or building a company. Have you ever seen 14 Peaks?

Yeah.

I got three fillings, Zack. One of them fell out and the dentist thought it was a good idea to do them all. I was like, “Let’s go.” It’s been a while for me. I laid down there and watched 14 Peaks while this was happening. He’s talking to the team about going up K2, which was demoralized. Everybody at that camp tried to get there and then came back. The weather was changing and nobody believed it. He’s like, “We’re going to do it.” Everybody’s like, “When you think you’re crapped, you’re 45% crapped. You’re not really a crap.” Honestly, the more you can appreciate that, the better

Venture Debt

I didn’t want to talk about venture debt for a minute, too, as an asset class. I like to drink wine. I talked to some vendors. With some of the best wines, they restrict the amount of water that goes to the trees. They’re like, “No. You’re going to kill it.” When you restrict the resource, and it’s like what we’re talking about with building companies, this is a way and an approach to build a better, more disciplined company that appreciates the value of cashflow.

When money is zero, you will produce bad outcomes. If I were a venture investor, I would almost want the company to have debt on the balance sheet because then it would have automatic accountability. Venture debt is an asset class. Debt is generally earlier in the cycle of business for us. We did it through a regional bank. It was still free money, so it doesn’t count. We would have been better off if there was an actual element of accountability. We would have to make better operational decisions as we go.

Move away from over-waiting on the growth of your business to properly over-waiting on the value of cash flow each day. Share on X

Implementing that discipline earlier in the business is better. Otherwise, it’s not a business. It’s a project. Until you are cashflow positive, you are not a viable going concern, full stop. Maybe you could be but the deceiver in me went to that place. “I can cut costs whenever I want.” It turns out it’s hard to cut costs because you have to let go of relationships that you have. “What are they going to think? They’re my friends.” No. Can you control the cost now? To your point, it’s a journey like, “No. It’s at some point in the future.” BS. Can you do it now?

It’s nice when you’ve got a story and the potential for disruption for a massive industry. That’s 1 in 100,000 maybe. If those are the businesses you’re funding, that’s a problem. I would not be surprised to see this next cohort of early-stage companies that need venture financing to take more of an open view of debt. First of all, it’s less expensive in many cases. Second, as an operator, it implements institutes a tremendous amount of discipline.

It’s not just about yourself being disciplined. As a leader of a business, you have to get the whole team to do what you need them to do. If you know that the boats are burning in the Caribbean, there’s one way back home. You got to go through Tenochtitlan. There are a lot of aspects. There’s one way. That’s a huge proponent of it to the extent you can combine it with equity to the extent businesses need it even better. It’ll be a much more meaningful part of businesses, particularly as we move away from over-waiting on growth to properly waiting on the value of cashflow.

That’s a much better fit for businesses that are producing revenue and cashflow. It’s not a good fit for the historical growth focus, high cash burning, and you want to be unicorns. Those are good for equity investors who are like, “I know 95% to 99% of these are going to be zeros or something close to that but I’m going to make 100 bets and a couple of them are going to turn out big hopefully.”

Those types of companies are not a good fit for debt, as you know, but a lot of people get it twisted. The capital markets have been so accommodating for fundraising that they distorted people’s perceptions of what an optimal capital structure looks like for all types of companies, particularly startups. That’s starting to come back to reality in a sense but it’s taking some time.

One of the things I’m thinking a lot about is why do founders not understand debt, given that it can be so helpful to them in terms of financing their company and holding them accountable but also getting a much cheaper and much less dilutive capital. As a founder, the last thing you want to do is sell equity, especially when you think you’ve made it and it’s going to be worth a lot, but they are still very hesitant about that. Part of that is maybe the messaging from VCs. I’m curious what you think. Why do more founders not understand debt and its benefits?

A lot of founders aren’t super financially oriented. The good ones are. Warren Buffett said accounting and finance are the languages of business. If you don’t understand that, you’re going to have a hard time optimizing for the desired outcomes but there’s a certain group that don’t understand that. It’s scary as well. People don’t want to be held accountable. If you have to make a payment every month, there’s accountability.

 

There’s this historical notion that debt is scary. To your point, if you believe the value of your equity is going to be a lot greater in the future, why wouldn’t you? Why would you sell equity, control, and preference? You get accountability in a different way. You get somebody who thinks they can operate your business a lot of times.

For me, being curious and open about capital markets and innovation is important. Some of the traditional notions are being tested. Some of the BDCs have been some of the best-performing asset classes from an investor perspective with limited risk. It’s a vehicle that, on both sides, ought to get more legs in the not-too-distant future. To answer your question directly, people don’t understand it super well. It’s not traditionally used. People are questioning a lot about what we thought to be true in the last few years.

One of the things that I like to do, which is a great test that equity investors should think about, is when you’re talking to a founder and they say, “Debt at 15% interest is very expensive.” I said, Based on your projections, the amount of value that I’m going to save you, in other words, the cash that’s going to remain in your pocket, if you even reach your base case projections, is going to be 25 times whatever you paid interest.” They’re like, “I’d still rather do equity.”

To me, that’s a sign that I’m glad I wouldn’t lend to that person or company anyway. Ultimately, their projections are BS. They’re good at fundraising but don’t have any confidence in their ability to get to where they’re telling you they’re going to get to. If you truly believe you’re going to make this company long-term successful, you would never sell as much equity as you’re selling ever.

A lot of times, too, with equity, and I’ll say it for the folks who are good at raising funds, there’s a lot of private equity providers, dime a dozen. A lot of what I’ve seen with the tactics to win deals often juice it for the founder. There are more options and equity up so you can take some off the table. They’re usually spiffing the founder to differentiate themselves. You look for a founder who’s maybe not been paying to get a market salary or under a lot of pressure. That also creates unnatural short-term decisions. That’s another dynamic at play as well.

Accessing Innovation

I appreciate having you on. I love the way you think about the world. I’m glad you’re sharing that with us. I want to ask you in terms of your parting thoughts. What do you think investors should think about investing in innovation over the next years, given your history as a founder, a VC, and an all-around thoughtful person? How should they be thinking about accessing innovation as an asset class?

Founders must learn to determine how to solve things that are no longer serving them. Share on X

It’s a great question that can manifest itself in a bunch of different ways. The question I would be asking is, “What are the biggest problems that are out there that we know we can solve? What is no longer serving us?” Try to find that asymmetry. It’s not going to be in the Delta 1 effect. It might not even be in the Delta 2 effect. It’s the second and third-order effects where the most information exists. What’s changing at an accelerating or decelerating rate?

In other words, the productive power of an individual is accelerated asymmetrically by virtue of mobile wireless communications and internet technologies. We’re going to go through the third leg here with AI. The average knowledge worker is going to be a lot more productive. That’s the theme from my lens to watch. Another one for me is how big healthcare is in a trillion-dollar market. What’s changing that’s going to afford people the ability to be stewards of their healthcare, live longer and happier, and have more meaningful lives?

I go to commercial healthcare where the traditional medical system is not serving people nor was it designed to make us live longer. It was designed to prevent us from dying. What innovations are coming in the second biggest market in the entire world that’s going to change? That’s another place, for what it’s worth, that I’m super compelled by.

The last area I’ll talk about is how business models are changing where the fundamental cost structure of delivering a service is changing by virtue of what’s available and emerging like AI. We talked about tangible terrestrial businesses where the fundamental cost structure changes dramatically vis a vis what’s been the darling maybe with these toll-collecting multi-sided platforms that have been the beneficiaries of at least the first and the second leg of better connectivity and information transfer.

Episode Wrap-up

All great thoughts. Dan, thanks again for coming on.

It’s good to hear your voice, Zack. It’s good to connect. I appreciate the time.

Sure thing. Thanks, everybody, for reading. See you next time.

 

Important Links

• Zack Ellison on LinkedIn
• Applied Real Intelligence (A.R.I.)
• 7 in 7 Show with Zack Ellison on Apple
• 7 in 7 Show with Zack Ellison on Spotify
• 7 in 7 Show with Zack Ellison on YouTube
• 7 in 7 Show with Zack Ellison on Amazon Music
• Dan Espinal on LinkedIn
• Rarebreed Veterinary Partners
• Founders Podcast
• 7 in 7 Show Disclaimer

 

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