Interview: Charbel Zreik, managing principal Manifestation Capital, Part 2

My editor lost Internet yesterday causing the Tuesday essay to be delayed. It will be released later this week. In the meantime here is part two of last week’s interview.

My guest today is Charbel Zreik, managing principal Manifestation Capital. In 2012 Charbel founded a search fund, purchased DCI (a hospitality-focused telecom company), successfully turned it around, scaled it to a national footprint and then sold it. He now advises entrepreneurs attempting to scale similar sized businesses. This is Part 2 of the interview where we talk about DCI and how he turned around and scaled the business. Yesterday we explored Charbel’s career and path to CEO.

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Transcript

Edward: This is part two of my interview with Charbel Zreik. Today, we're going to dive into his experience as CEO of DCI. Charbel, can you start by explaining what DCI does or what they did?

Charbel: Yeah. DCI—when I acquired them—went into hotels around the country and put in telecommunication systems. They put in the phone systems that managed all the phones in the room—including putting all the phones in your room, but also they put on the telephony that managed the call center, the software that managed the call center where the calls came in to make reservations and things like that.

At the time, they had just started doing WiFi management. Going in and putting in all the access points to transmit the Wi-Fi, to design the WiFi system, and what’s going to get perfect WiFi coverage in a hotel. As well as take the calls from the hotel guests when they couldn't connect to the WiFi system so that it's remote monitoring of the system and remote help desk support.

Edward: Was DCI a commodity then? I assumed that you didn't have a monopoly on this business all across the US. What did hotels do, that you weren’t using you?

Charbel: Yeah, we did not have a monopoly at all. Mostly they had other service providers like us. But sometimes they had local guys—just random Joe Doe, two men in a van that went around and did IT support for the local hotel. Yeah, we had local competitors. There were 10 or 20 other national competitors like us doing the same thing. And in the rare situation, they had their internal IT guys doing it.

Edward: What made you different from the other 10 or 20 other companies doing what you guys are doing?

Charbel: At the end of the day Ed, it was two things. One was just service. Literally, the reputation that we had around jumping through hoops and being able to contact the owners at DCI in the middle of the night when things went wrong to make sure that you weren't getting some random person in a call center, but you were getting the highest level of expertise to solve your problems. That was one thing.

The second thing was that we did more than one thing. Yeah, we were just starting out on WiFi at the time. But when we did the telecommunication system and the WiFi system, they really liked that because it was one throw to choke and it wasn't having to go to multiple places. Because these systems ultimately were interdependent on each other.

Edward: Most of your competitors were doing one of the two?

Charbel: Most of the competitors, exactly.

Edward: If you’re a hotel, you’d have a WiFi provider, you’d have a telephony provider, and you guys come in and replace them both?

Charbel: Exactly, and sometimes, when one went down it was the fault of the other. To troubleshoot it, you'd have to go through the process with the first vendor, and then they'd be like, hey, we can't find anything. Our system is saying it's the other vendor that's down. You're going back and forth between the two to try to figure it out.

Edward: What did you see when you made the acquisition? What was the opportunity there that you thought you could buy it and make it worth more than what you bought it for?

Charbel: There were probably three things that I would point to, Ed. One was the fact that they were just starting up in WiFi, and I saw WiFI as critical and central to the success of the user experience at any hotel. We all know that anecdotally. It’s really important to have great reliable internet access at a hotel for a guest because that was a growing part. I was like, okay, if we could take that part and really scale it, we can have a much more valuable asset, number one.

Number two is I saw six owners who were technical geeks. They were very skilled in their technical trade, and they had two guys outselling. I thought that we could come in and slap on a sales and marketing engine, attach it to this great technical know-how, and really scale the company from there.

The third thing I saw was phones were a dying technology in hotels, no one was using the phone in the room anymore. But there was an emerging technology, which was taking these phone systems and making them remote, making them hosted—putting them in a call center. You’re deploying these voice systems at a fraction of the cost. Because even though people weren't using them, they were still important and necessary for 911 regulation and other reasons. Bringing in this hosted voice concept was something that I saw that was emerging in the industry that I thought we could really take advantage of.

Edward: How is the company getting new clients? You talked about a sales team. There were two sales guys. Was it all inside sales? They would just call hotels and ask if they wanted the service?

Charbel: Pretty much. That was the main thing they were doing. They were working one hotel at a time. One relationship with a general manager or IT director at a time. The head sales guy, who was super talented at the company actually, was also forming a lot of partnerships with, for example, the guys that did the original construction or the cabling that pulled the original cables for the technology in the hotel. Those guys will pull them in on a project, and then likewise, he would pull them in on his projects.

There's a lot of different components in a hotel. There’s the mini-fridge, there’s the in-room controls, there’s the audio-visual. There’s a lot of different components. He was really in the middle of that ecosystem and would count on a lot of cost referrals to happen.

Edward: How many of your new clients then were new hotels versus finding an existing hotel to switch over to you as a service provider?

Charbel: It was probably 20-80. 20% were new hotels and 80% were us gaining market share by infiltrating the market. That’s just sheer numbers. The hotel supply only shifts between 2% and 4% every year. By definition, there were just not that many new builds every year. We were capturing more than our fair share of new builds. But still, as a percentage of our own business, shifting existing properties was probably closer to 80% of it.

Edward: How do you get someone to switch then? If I'm a hotel and I have telephony—assuming it's working and the WiFi is working—why would I switch? Or is that the opportunity? You jump in when something goes wrong.

Charbel: Yeah, you hit the nail on the head, Ed. You got to stay around. Have a great reputation. And when something goes wrong or the contract is expiring—a lot of times it were contracts, especially on the WiFi side, there were three-year contracts—you would come in and build that relationship. Or if you're doing telephony already, a big part of the opportunity for us is going to the guys where we do telephony and say, hey, when is your WiFi contract expiring? Why don’t you give that to us in addition to the telephony and just have one less vendor to manage? So that was part of the value proposition.

The other part was you’re always looking to do something new and innovative no matter how small it was. On the WiFi side, there was much more room to innovate. We were fortunate enough to team up with some more innovative brands along the way. Those customers pushed us to innovate.

For example, Kimpton was one of our customers, and they were really paying a lot of attention to the user experience. When a guest walked in from one Kimpton to the other, they wanted to recognize the device and say, hey, welcome back, good to see you. Because you're a loyal customer, here's level two free access of 15 megabytes for you. That's for free because of your loyalty to Kimpton. We're doing some innovative things like that. That helped differentiate us and helped us win some new customers.

Edward: Before you were there, there was no marketing function at all. You planned to build a marketing function. Did you actually build one? Is marketing important?

Charbel: You really bring out my humility here because I never actually got around to building one. That, I would say, held this back from really turbocharging our growth. I really focused on sales and I grew that team from 2 or 3 people to 17 people by the time I left. It was a really strong emphasis on sales and creating multiple departments within sales, account manager, and things like that.

I always had one of the more junior salespeople also contributing on the marketing front and trying to do that. We have a baseline marketing function. We went to a lot of tradeshows, spent money on the in-person type of marketing events. But we never had a marketing machine that could make our cold calls a little warmer.

By the time we're reaching out to totally new customers, they would have seen our brand, they would have gotten a pamphlet from us, they would have seen our newsletter. We never really had that. That was going to be the next step that I never really got around to before selling.

Edward: It's hard when you try to build something new like that. It takes a while to build, and not only does it take a while to build, once it's built, the impact of that is also spread out over a long period of time. If you're in a place where you're planning to hold the business for five or even eight years, unless you do that right away, it's hard to see the return on that investment in the time that you want to sell.

Charbel: Totally right on. I ended up signing that company in a little bit under four years. It ended up happening much faster than we thought. I felt like the low hanging fruit early on was really all about sales. Especially because these guys were going out to one hotel at a time, and one of the major things that I did was go to the national brands. Walk into Marriott Corporate or walk into Starwood Corporate and really start working more closely on that corporate level, and doing everything that needs to be done in order to accelerate traction at the corporate level.

They had a couple of corporate accounts when I came in, but a place like Marriott, for example, that demands so much of a company in terms of its infrastructure and its processes, they did not have the whereabouts to get into before I got into the company. Really doing that major account management, I felt like it was a lower hanging fruit then gearing up our marketing function.

What's interesting is when we were acquired, our acquirer combined us with a company that does TV for hospitality. Now they have a phone, WiFi, and TV all in one, but those guys had really tuned up their marketing function. And then when you talk to their sales team, their life was so much easier than my sales team. My sales team was working so much harder without a marketing function than those guys that had a really well-honed marketing function. All their initial calls we're that much easier.

Edward: I believe it. It's one of those things where it's hard to see until you have the contrast happening right in front of you. Because we have built a marketing organization, three years later your sales team had it much easier, but they wouldn't remember three years earlier when they had it hard.

Charbel: It's so true, man. It's so true. It's one of these interesting things. And I, myself was a victim to that type of thinking. It was very hard for me with all the urgency that I was feeling. With a quarter to quarter targets to hit, it was hard for me to really think of a longer-term strategic initiative like marketing. Sales just feel a little more controlled. How many people did you get out in front of? How did the conversations go? It just feels a little bit more controllable. But when I finally saw it, I was like wow, okay, now I really understand the importance of marketing.

Edward: A fast feedback cycle, you also know whether you’re doing it right or not. If you hire a bad salesperson, you're going to know pretty quickly. If you're doing bad marketing, you may not know for quarters and quarters and quarters that it's actually bad. It all depends on how well the person spins it—who tells the story rather than how effective they are.

Charbel: Yeah, that's a great point, too.

Edward: So much of what you were doing, the execution was important. It was less about having the perfect strategy and more about executing really well, and that relies on having really good people. In a business like yours where you're not like a Facebook or a Google, you're not even a Verizon—you're selling telephony to hotels. It's almost the opposite of a sexy business. How do you attract really top talent that you need to succeed in a company like that and have awesome execution?

Charbel: Definitely one of my top three challenges. If not the top challenge. It’s very difficult. And on top of that, we were located on Long Island—nothing against the Island. There's a lot of wonderful things about it, but it's a tough place to pull. It’s not New York City. You couldn't live in New York City and work out of our office. It was just too far. It was a challenge. It really came down to, I really, really believed in the vision of the company. I had a very clear vision to be the number one converged network provider of IT services to the hospitality industry in North America.

My vision was very clear. I knew what that meant in numbers every year all the way through year five. I knew what that would likely mean in terms of an exit. I would just paint that vision and I incentivize my top managers with equity. I'd be able to also dial it back to an exact dollar number that person would get if this vision became a reality.

That's really what I would do. I would talk to these great talented senior managers and I would share with them my excitement, my vision, why we were poised to really do well on this market, and what that would mean for the company, for the investors, but also for them personally. I think that really helped us to get a couple of players that made ultimately a lot of difference.

Edward: A lot of what you’re doing—it was this awesome, awesome execution—was very similar to what a McKinsey turnaround process would look like. Was there anything that was not in the traditional McKinsey turnaround playbook that you used to be really successful and turn this thing around?

Charbel: Yeah, absolutely. I think there were a lot of grassroots things that I had to do that we would have never talked about at McKinsey. For one, I stepped into a culture that was very insular, very close-knit. Getting the allegiance of the people inside the company was very challenging. It took a combination of, for one, I gave equity down one notch to about the next 15 or 20 employees. That's something that not only McKinsey wouldn't do. My board was like, hey, you're crazy. What are you doing? Why are you getting so many people on the company equity? We never do this. We give like two or three people equity and that's it.

But I was in a company that had a lot of talented people. I felt like it was important for me to really let them know that this is, I'm coming in, I'm going to demand more of them, but it's not just going to be about me. The return is going to be for all of us. Spreading that equity down the chain, even though it was very much unique and unpopular with my investors, I think ultimately helped me be successful.

I also just formed very personalized relationships and understood individuals’ motivations. My top sales guy was a very talented guy and was producing amazingly well when I came in. But I got to know him and I got to really build a lot of trust between the two of us. I got to know him, his quirks, and the things that drove him really well. I just developed every year a custom incentive plan for him. Like literally given his personal situation. Was he buying a house, was he not buying a house? What worries you moving through the time?

I was able to triple his productivity, and he was already producing at an amazing level. That's because we formed such a close partnership, trusted each other, and I was able to tweak the incentives in a very personal way. That's something else that comes to mind.

Another thing was just being very entrepreneurial and going with your gut. I remember, soon after I came into the company, I had a call with Marriott who we’re trying to win as an account. I remember the guy at Marriott, this brash guy from Boston literally yelling at me, being like, Charbel, I don't care about McKinsey or Wharton. I don't know what you think you're doing here. I don't care about any of that. At the end of the day, you've got a shitty product. I'm not going to put it in my hotels. Call me back when you got a better product. Click.

Within two months of that phone call, that guy at Marriott was on my team. He had quit Marriott, he was working for me, he was incentivized with equity around building that new product that he had wanted to build. Doing things like that—you're not going to find in a book—it's just the opportunity comes your way, you have to recognize it, and you have to go with your gut and move quickly.

Edward: That's amazing. You managed to call him back and offer him a job?

Charbel: I managed to call him back, have very careful conversations around his interest in working with me, and then I had to figure out how I pull it off without pissing off Marriott. It was a very fine dance between interviewing him, screening him, and making sure he's the right person for the job. Then allowing Marriott to be part of the decision and to give me the blessing on me hiring him, and really just do the dance around that to make everyone feel like we're doing the right thing and not screwing someone who ultimately became a very important customer for us.

Edward: Charbel, this has been fantastic. Really, really impressed with what you built there and the fact that you turned around and sold it in four years. Before you go, can you tell me about your quake book? The book that really changed the way you think about the world?

Charbel: Sure. There's been a few of those. But for me, the really, really influential book on me was the book written by Eckhart Tolle called A New Earth. That book, in some ways, talks about a lot of the things that we talked about with regard to meditation. But really puts the onus on one, to become aware of this precondition mental state that we’re in of the fact that our mind tends to run rampant most of the time.

There's a lot of benefit and power that could be obtained by coming into your body, coming into the present moment, coming really into a fully integrated power of being, if you will. I really had that message solidified in me through Eckhart Tolle's A New Earth. He also wrote The Power of Now, which is more popular and has a very similar message. But for me, A New Earth was really his masterpiece that made a big influence on me.

Edward: Thank you so much for your time today. This has been fantastic.

Charbel: Thanks so much, Ed. I have a lot of fun. Appreciate it.