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Hi friends 👋,

Happy Thursday!

As someone who uses Tegus whenever I begin researching a new company to write about, I’m really excited to bring you the first inside look at the company ever written.

It’s clear from talking to the team, and from looking at the numbers, that this is a special company that is going to be around for a long time. It’s also the perfect company to study right now, in a market that once again values free cash flow, strategic chops, and smart capital allocation.

This essay is a Sponsored Deep Dive. As a testament to my genuine love of the product, I traded an equivalent amount of the deep dive rate for free access to Tegus for a year. You can read more about how I choose which companies to do deep dives on, and how I write them here.

Let’s get to it.

Tegus: The Outsiders

It feels almost disrespectful to call Tegus a unicorn. Too fluffy. 

Sure, the five-year-old company has all the markings of the mythical creature: 

• $3+ billion valuation as of its Series B in November 2021 (it’s since raised another round at an undisclosed valuation) 

• 195% year-over-year ARR growth off of a very meaningful base

• Over 2,500 customers

• Nearly 700 employees

The company’s Series A, led by the Investment Group of Santa Barbara at a $4.5 million post-money valuation, is already one of the best venture investments I’ve come across. IGSB’s $1.5 million investment is already worth around $1 billion on paper, assuming they still hold that entire position. That’s good for a ~350% IRR as of the company’s last announced round in November 2021. 

If those numbers belonged to nearly any other company, you would have heard about them on Twitter. There would be cover stories written, highlighting brother co-founders Tom and Mike Elnick. 

Instead, this is the first time the Tegus story has really been told publicly. This is what you get when you search “Elnick” in Spotify podcasts:

If you’re a religious Invest Like the Best listener like I am, you’ve known about Tegus for a few years, but besides a few targeted ads, Tom and Mike have eschewed the spotlight in favor of a maniacal focus on finding genuine product market fit (PMF) with an intentionally narrow set of users. 

They’ve “gone slow to go fast.” Which makes sense, because unlike the typical unicorn founders, Tom and Mike aren’t coders, they’re distance runners. And their discipline, patience, and pacing shine through in every aspect of the business. 

Tegus is building the modern investment research platform for fundamental private and public market investors, starting with a novel twist on the classic expert call model, and expanding into adjacent opportunities by listening intently to customers. 

Yes yes, every company says that they listen to customers, but as Tegus CFO Bob Casey put it, “If the CEO’s calendar is indicative of what’s most valuable in an organization, Tom and Mike’s calendars overwhelmingly point to customer obsession.” Before emailing me on Sunday, Casey checked Tom and Mike’s calendars for the week, and counted 14 customer calls between Monday morning and Wednesday afternoon. Casey himself has 20 customer meetings lined up when he’s in NYC next week.  

That’s just one of many anecdotes that hint at Tegus’ unique approach. Learn how Tegus got here, and how it thinks and behaves today, and you’ll realize that it’s different than the typical Silicon Valley success story. 

For one thing, the company is free cash flow positive, and has been for years, even before it was cool. It’s also built for the long-term, with an eye towards doing this for decades that comes through in every decision the company makes. Tom and Mike have studied Hamilton Helmer’s 7 Powers and Will Thorndike’s The Outsiders more than anyone besides maybe Ben and David at Acquired, and they’ve put the lessons to work:  

• 7 Powers: building a business with sustainable differentiation, which leveraged counter positioning in the early days and enjoys scale economies today

• The Outsiders: smart capital allocation, as evidenced by the facts that, in just five years, the company has already done a share buyback and three acquisitions, including BamSEC and Canalyst 

Tegus is a business that combines the pace of a startup with the maturity of a more established company. It reminds me of the companies that fintwit loves, the ones you haven’t heard a lot about that are just spitting off cash, allocating capital wisely, with strong management teams at the helm. With markets turning, profitability and sound strategy back in vogue, and real, recurring, defensible revenue at a premium, Tegus is the perfect company for entrepreneurs and investors alike to study. 

So let’s study Tegus. Today, we’ll pull back the curtains to cover:

• The Course to Tegus

• Modernizing Investment Research 

• The Tegus Business Model 

• The Outsiders: Fundraising, Buybacks, and Acquisitions

When I asked Mike what he was hoping readers get out of this piece, he told me: 

For a long time, we’ve been very misunderstood, and we’ve been thrilled to be misunderstood. 10 out of 10 times we would have chosen to be under the radar. But now we have 2,500 customers, and we can’t skirt through the rest of the company’s life without telling our story.

🫡 It’s time to tell the Tegus story. 

The Course to Tegus

Tom and Mike Elnick grew up on Long Island with chips on their shoulders. 

“We were so competitive with each other,” Mike told me, “because we wanted to prove our doubters wrong through our own competitive process.” 

The result was, as the first in their family to go away to college, they ended up at an Ivy, Brown University, where they ran track and cross country. Mike went shorter, running the 800, and Tom went longer, to the 5k. They met in the middle racing the mile, where Tom bested Mike with a PR of 4:08 to his brother’s 4:12. 

Whether they ran because of who they were, or whether running shaped them into who they are, the sport’s footprint is all over the brothers and the company they’ve built. “There’s this notion of ‘you gotta keep on training,’” Tom explained. “You can have a bad race, but you still have to put in your 70 miles every week.” 

After school, Tom and Mike split for the first time. Tom went to work for Overbrook Management, a value oriented long/short hedge fund, as an Analyst. Mike went to expert network startup AlphaSights as one of its earliest employees. In those roles, they saw the inefficiencies of the investment research process from both sides, and it bugged them. 

Not enough to start a company – they were risk-averse – but enough to start asking around. When they asked other investors about their research process, they’d get agreement that the process wasn’t as smooth as it could be, followed inevitably by a: “But that’s just the way it is.” 

As competitive people, hearing “but that’s just the way it is” over and over again lit a fire and pushed them, hesitantly, into entrepreneurship. On September 11, 2015, Tom and Mike quit their respective jobs and teamed up once again, not to start a company necessarily, but to talk to as many investors about their process as possible to see if there might be a way to change the way it just was. 

Modernizing Investment Research

There are many different ways to invest: quant funds, macro funds, event-driven funds, high-frequency funds, all flavors of funds. Tom and Mike were focused on speaking with investors at funds doing fundamental research, those trying to understand the businesses in which they invest more deeply than anyone else in order to develop a differentiated view on their value. As examples, current Tegus customers include ShawSpring Partners, Thrive Capital, Octahedron, Accel, Mission Holdings, Redpoint, O’Shaughnessy Asset Management, and IGSB, all funds whose investors I respect for their insightfulness. 

A lot of inputs inform those funds’ views, but generally, there are three core elements that all fundamental investors focus on: 

1. Qualitative Research: understanding how the business works

2. Previous Performance: using company filings to understand a business’ financials

3. Models: building models to analyze a business under various scenarios and assumptions

The existing process – which uses a mix of Bloomberg, CapIQ, FactSet, GLG, AlphaSights, Edgar, S&P Global, and a menagerie of other data sources – works well enough to elicit “that’s just the way it works” responses, but it’s time consuming and expensive. Analysts at investment funds are among the highest-paid professionals in the world, and they can spend up to two-thirds of their time finding, aggregating, and manipulating data. That leaves less time for analysis and creativity, the things that actually justify the big bucks. 

So when Tom and Mike set out to figure out what was wrong with the process, they focused on what they believed the biggest mismatch was between how valuable something was and how painful it was to access. That mismatch was the largest in primary research, so they started by focusing on that gap first. They also loved that it was probably the hardest thing to tackle; no one who studies this space had been able to build a disruptor. 

Primary research, tracking people down and asking them questions, could take a week or more between finding the right person to talk to, setting up a call, having the call, taking notes, and synthesizing them. Plus, the incumbents left a lot of room for improvement, as Mike saw first hand at AlphaSights. 

The expert calls business has been around for a long time. As Byrne Hobart wrote in Tegus and the Research Stack: 

Depending on how you count, it might be one of the oldest forms of financial research: if you're trying to understand what a company does, or what's happening to it right now, track down someone who knows and ask them. Phil Fisher was doing this in the 1930s and writing about it in the 1950s, and Joseph de la Vega writes about looking for rumors and insights on the Dutch East India Company. 

Today, it’s a lucrative business. When GLG filed to go public in October 2021 (it pulled the IPO in March 2022), it stated in its S-1 that the company did $589 million in revenue and $34.1 million in net income in 2020. 

Typically, the way it works is that an investor wants to speak with someone with knowledge on a particular company or industry, say a recently former executive at a telecom company. They contact a firm like GLG, and GLG matches them with an expert. The expert charges GLG something like $300 per hour for their time, GLG charges the investor something like $1,000 per hour, the two parties connect, and GLG pockets a cool $700 per hour. (Numbers purely illustrative.) 

That’s a lot of money for an hour, but these calls often help funds make decisions on investments in the tens or hundreds of millions of dollars, and expert calls are viewed as a cost of doing business. What’s often more painful is how long it can take to get the information you want – often a week or more. In a business in which time is literally money, that’s too long. 

The Elnicks identified primary research as the hardest problem with the greatest potential gains, and they set to work figuring out how to capture those gains. They started by asking a question: 

How do you modernize and streamline the information in peoples’ minds on-demand?

You could survey experts and charge investors to access their responses. Or maybe you could create a marketplace where experts sign up and investors message them directly. Those options could speed the process up, but they would do so at the cost of quality and customization. 

Instead of coming up with the answer themselves, Mike and Tom started with the problem that they wanted to solve, then they hit the pavement, speaking with as many fundamental investors as they possibly could. They spent 18 months talking to potential customers before launching the first product.

In the earliest calls, they just wanted to understand the pain points. People said that the process wasn’t perfect, but it was fine, it’s just the way it was. “Sure, it’s expensive, but we’re a hedge fund. Sure, they take a while to schedule, but these are experts, they’re busy.” 

So they focused in on a specific idea: what if we could get customers to generate content themselves, structure the data they generate, and then charge everyone a subscription fee to access the growing treasure trove of information? 

With that reframing, the pushback got more specific. Some investors, believing that the information they gleaned from the questions they asked was proprietary, didn’t feel comfortable sharing transcripts of their calls on the platform. Then one investor said, “I’d be interested in doing this, but I’d need a lag time.” Tom and Mike asked him how much lag time he’d need, and he said two weeks. So they went back to other investors and asked if they’d feel comfortable with a two-week lag time, and many of them said yes. 

Through this process, they tweaked and iterated the details until it formed a clear outline of the product. Then, they went back and met with more customers. The goal was to discover an “Over My Dead Body Product”: a product so useful to customers that if someone threatened to take it away, that’s how they’d respond. 

Then one day, on one of those exploratory calls, they found something close. An investor told the Elnicks, “Send us something to sign. We’ll pay you when you launch, and we’ll start doing calls now to build up the library.” 

That was huge. Getting people to nod along in agreement is one thing. Getting them to loop in their ops and legal teams to hash out and sign a contract, before a single line of code had been written, was another. 

Without building a product, Tegus had started to find product-market fit. That defined an approach the company uses to this day: Sell-Design-Build.

Over the next six weeks, 40 customers signed up. 

So what were they signing up for? What model emerged from those hundreds of conversations? 

As one investor they spoke to told them, “Go study Costco, because this is the Costco model.” 

The Tegus Business Model

The unlock was simple in retrospect: instead of charging investors a markup on every expert call and keeping them siloed, like an expensive matchmaking service, Tegus charges investors a subscription fee to access the platform, and then lets them book expert calls at cost. 

On the surface, it’s the Costco model: sell the product at breakeven, make money on the membership. 

To read more about Tegus’ product, business model, and strategy, including its recent acquisitions…

Continue Reading Online

To give you a taste for the quality of the conversations on the platform, Tegus has opened up a free version of one of its most popular, on AWS: Access It Here.

If you want to try Tegus for yourself, sign up with this special Not Boring link for a free trial:

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Thanks to Dan for editing, and to Mike, Tom, Bob, and Jacinta for working with me on the piece!

We’ll be back in your inbox with the Weekly Dose of Optimism tomorrow morning!

Thanks for reading,

Packy