Tony Tjan in a MiniLuxe nail salon. He expects the chain to double in size this year
John Hamel remembers the precise moment it hit him. Driving through his hometown of Revere, Massachusetts, on a warm summer day in 2005, he noticed a nail salon to his left. He drove a little farther and saw another, then another. With each one he grew more excited. This could be it: Nail salons! Right under our noses!
His only concern was that his colleagues at the Boston-based Cue Ball Group might laugh at him. Hamel and CEO Tony Tjan had been looking intently for a business to start, even flying to Hong Kong and Tokyo to check out the possibilities. Lately they had focussed their attention on identifying a business that could be, in their words, ‘Starbucked’. By that they meant a fragmented industry offering a product or a service that a new company could improve upon and start charging premium prices for—as Starbucks had done with coffee.
But Hamel’s partners did not laugh. And in March 2007, after extensive research, they launched a new company, MiniLuxe, opening its first salon in nearby Newton Centre. Like the subsequent MiniLuxe shops—there are now 12 and counting—it was brightly lit, immaculately clean and mercifully free of the noxious fumes endemic to such establishments. For “an unparalleled focus on hygiene, cleanliness, and quality”, the partners believed, customers would pay $19 for a manicure, as opposed to $13 in the corner salon or $30 in a spa.
Nine years later, MiniLuxe continues to hone its model and its support systems, but it long ago proved the concept: Its salons have all been profitable, and its growth potential appears large. But there’s another side to the MiniLuxe story, and it has to do with Cue Ball, which wasn’t even a year old when Hamel had his revelation in Revere. At the same time they were searching for a business to Starbuck, the founders were also trying to figure out Cue Ball, which was essentially an empty holding company controlled by a handful of smart friends. They had talked vaguely about creating a “mini-Berkshire Hathaway”, patterned after Warren Buffett’s conglomerate. Once they had MiniLuxe up and running, they hoped it would serve as a platform to build on.
But to build what? They knew only that they wanted to work with good people and interesting business ideas. As it turned out, Cue Ball eventually morphed into one of the most unusual venture capital firms in America. For one thing, it’s relatively small, with just 12 employees and a portfolio of 21 companies (six others have been sold). For another, Cue Ball doesn’t charge its investors the usual percentage of assets under management as a fee. Instead, Cue Ball’s management expenses come out of profits. That is, Cue Ball gets paid the same way its limited partners do. As for its own assets under management, Tjan won’t reveal the exact size except to say that it’s about $200 million and that the fund manages cash flow to make sure it always has $100 million in “dry powder”, ready to be put to work.
Most interestingly, decisions about buying and selling portfolio companies aren’t driven by artificial timelines. Investors commit their funds indefinitely, and the entrepreneurs who receive the capital manage their companies as they see fit with the goal of building long-term value. The Cue Ball partners believe that, over time, they can generate better returns this way. Whether or not they can, it’s a radically different way to fund and build startups—and an instructive small-business story in and of itself.
Ten years before Facebook, Cue Ball came together in a dining hall at Harvard College. Hamel and Tjan, both class of 1994, lived in Winthrop House, an undergraduate residence where they also took meals. The talk often turned to business, even though they were both biology majors who seemed headed toward careers in medicine.
As sons of immigrant parents—Hamel’s from Italy, Tjan’s from Indonesia—they had a common bond, but they’d taken different routes to Harvard. Hamel had grown up in blue-collar Revere. His parents owned a travel agency in Boston’s Italian North End. He went to public school until the eighth grade and then entered an all-boys Catholic college preparatory school. He was the only student from his class to be accepted at Harvard.
Tjan was born in Montreal, where his parents had emigrated from Taiwan and where his father was completing his residency in ear-nose-and-throat surgery. After a year or so, the family moved to Newfoundland. There, by the age of 13, Tjan was selling computers. At 14, he was leasing billing systems to doctors’ offices. At 15, he entered boarding school in Toronto, where—even before beginning classes—he hawked picture frames. At 16, a friend introduced him to the sketchy multilevel marketing company Nu Skin, where Tjan managed a squad of adults. The most important lessons he learnt through it all had to do with people. He developed a knack for collecting them, especially mentors.
After Harvard, Hamel returned to his high school and taught for two years before moving on to a business and technology consulting firm. Tjan went to work at McKinsey & Co in Toronto. In early 1996, he started ZEFER, an internet advisory company and app developer that grew to almost 1,000 employees and beyond $100 million in revenue—all while Tjan was earning his Harvard MBA—before being hit hard by the dotcom crash of 2001. Eventually the company’s assets were sold to NEC.
Image: Jamel Toppin for Forbes
John Hamel suspected the nail salon industry could be ‘Starbucked’
Throughout this period, he continued to find mentors, including Dick Harrington, president and CEO of the Thomson Corp, whom Tjan advised. He became increasingly convinced that success in business boiled down to one factor: Human capital. If you had the right people with the right vision, provided them with the right support and allowed them to pursue their goals, there was no limit to what could be accomplished. Many of his friends shared that belief, and in the mid-2000s three agreed to team up with Tjan to start Cue Ball. Hamel was one. Another was Dick Harrington, who came on as chairman and general partner. They were joined by Mats Lederhausen, former head of global strategy at McDonald’s, whom Tjan knew from a World Economic Forum event and whose passion was purpose-driven businesses. Cue Ball, Lederhausen decided, fit the bill.
So, it turned out, did MiniLuxe. As Hamel and Tjan learnt more and more about nail salons, they realised they had an opportunity not only to ‘Starbuck an industry’ but also to serve as a refuge for people who worked in it. Most of the nail technicians MiniLuxe hired would come from the thousands of small independent salons, or ‘chop shops’, around the country. The vast majority of those shops used nail treatment products containing chemicals some believe to be responsible for elevated rates of cancer, birth defects, skin disease and respiratory ailments among salon employees. And the industry was rife with exploitative labour practices. “We were trying to disrupt an industry nobody had thought of disrupting,” says Hamel, “and what’s come out of it is a business that’s a perfect fit for what Cue Ball is all about.” It was also a model for the type of business Cue Ball wanted to invest in.
ShapeUp is another prototypical example. Rajiv Kumar and a partner started it while they were enrolled in Brown Medical School. They later dropped out, thinking they could help more people with a wellness programme than they could by practising medicine. When they returned to school, they hired a CEO to run the company while they completed their degrees. That CEO introduced Kumar to Tony Tjan in the summer of 2010.
By this time, Cue Ball had decided to invest in like-minded entrepreneurs rather than spin out businesses itself. And ShapeUp fit the criteria. Sales were booming, and the company, which provides software as a service to businesses that believe employee wellness is worth paying for, was growing 35-40 percent per year. Kumar had interviewed numerous venture capital (VC) firms. From the start, he was drawn to Tjan and his colleagues. “My impression was that these were incredibly sharp individuals who collectively had a wealth of business experience I did not have, and they saw the promise of ShapeUp and could connect viscerally with the purpose of our company,” Kumar says. “They didn’t simply see an opportunity to make a lot of money.”
And there was something else that struck him about Cue Ball. “They seemed to be interested in investing in people, as opposed to companies and business models. I looked at their portfolio and said, ‘Wow. You’ve got a burger company, a nail salon company, a fashion and design business, and here we are in health and wellness’. It took me a moment to figure out how we would fit in, but then I realised that we fit in on mission, purpose and the fact that we are good people, or so I like to think.”
Cue Ball and health care-based VC firm Excel Venture Management invested $8 million of equity financing in 2010 and 2011; Cue Ball added $5 million more three years later. Most important, they made the equity investments without even discussing an exit plan. Kumar aspires to build a company that can survive, thrive and remain independent long after his departure, whether it be voluntary or feet first. “We have never had any pressure from either of our venture capital funds to sell the business on any arbitrary timeline,” says Kumar.
That’s generally the case with the companies in Cue Ball’s portfolio, and it isn’t just because Tjan, Hamel, Harrington and Lederhausen are nice guys. Rather it reflects their conviction that you will do more good in the world—and over time earn better returns—if you value human capital first. From the beginning they raised money from investors who shared that view or were at least willing to take a chance on it. “I was intrigued by what Tony had built in terms of a team and a network, what he calls the Cue Ball Collective,” says Brian Chu, a wealth investor whose firm manages endowment assets. “He’s very high-energy and very mission-oriented, and I think that combination speaks even to some of the grizzled or cynical investment giants in his network.”
Cue Ball Capital has an unconventional investment structure. It’s a so-called evergreen fund—one without a fixed lifetime. There are a few others—notably, General Atlantic and Sutter Hill—but they constitute a tiny minority of all private equity and VC funds. At certain agreed-upon intervals—in Cue Ball’s case, every five years—a window opens during which a limited partner can withdraw all or part of its capital, based on the intrinsic value of the fund’s holdings, as determined periodically by the fund’s management working with outside accountants and auditors.
Obviously, investors need a great deal of trust in the evergreen fund’s management, not only to make good investments but also to value them correctly as time goes along. Of course, investors in traditional VC funds also have to trust the management to make good investments, but they earn their returns when the portfolio companies are sold and the fund is liquidated. To that extent, the time limit on funds makes life simpler for the limited partners, who know how long their capital will be tied up and can rely on the market to determine their returns. But that same time limit creates obstacles for the portfolio companies, which may be one reason such a small percentage of venture-backed startups ultimately succeed.
Chu, for example, had no trouble understanding why an evergreen fund was crucial to Cue Ball’s plans. The example of MiniLuxe made that clear. “I think it’s got huge potential,” he says. “But it’s taken nine years to get this far. Now suppose it was getting its funding from a typical fund that you and I were running. We’d have a three- to five-year investment period before we started harvesting. We probably would have just stopped investing and shut the thing down. We wouldn’t have given it enough time to develop at its own pace.
“Or take the opposite situation. Let’s say MiniLuxe was growing very fast, and the rollout is going great. We’re up to 40 stores. Now we look at it and say, ‘We’ve got to post a number. We’ve got to show our investors how good we are’. So we flip it to another private equity firm, and maybe the company triples its size again. In the big picture, our decision to sell makes no sense. If you have a company you believe in and it’s working, you shouldn’t sell it. You should keep it. Like Buffett says, ‘When I buy a company, I own it forever’.”
So far, so good. It’s still early to judge how Cue Ball is doing, but Tjan expects MiniLuxe to double in size this year, and its mature stores are hitting $1,000 in sales per square foot. All but two of the portfolio companies, he says, have had strong year-over-year revenue growth. Of the six companies that have been sold, there was at least one loser, but Tjan says that the winners have returned “multiples of original capital invested”.
On an unseasonably warm day in November, Tony Tjan is sitting with a couple of colleagues in the meeting room of Cue Ball’s small suite of offices overlooking Faneuil Hall Marketplace in Boston. They’re putting together a list of names in connection with a new Cue Ball project that, for the time being, Tjan is calling “The Good People Initiative”. Ultimately it will be a book and a media portal.
The project is a sequel to an earlier book, Heart, Smarts, Guts, and Luck, which grew out of a set of videotaped interviews Tjan had done with entrepreneurs. Now he is investigating a subject that has intrigued him all his life, namely, what is it that makes great people great? This is not an academic question for him. His purpose in life, he says, is to be with and work with great people to try and do great things. The spirit of that quest imbues Cue Ball and seems to have a magnetic effect on people who come in contact with it.
Take Tony Pino, who now does business development for MiniLuxe. He’d been working for Cue Ball in one capacity or another since the summer of 2008, when he was between his sophomore and junior years at Harvard. The following summer, he worked for Blackstone, while he applied—with Tjan’s help—to Harvard Business School. He was accepted but elected to defer. By then he had turned down job offers from Blackstone, McKinsey, Boston Consulting Group, Bessemer Venture Partners and Insight Venture Partners. Tjan eventually called with an offer that paid far less than any of the others. Pino took it. “Three reasons,” he says. “I saw Tony and John as the type of men I wanted to be. Second, I really felt that I would learn more at Cue Ball. And the third thing is, I like the work.”
Or consider the session Cue Ball runs every year at Harvard Business School during recruiting season. It’s billed as a “non-recruiting recruiting event” and geared as much toward career counselling as it is to finding new employees or interns. It has become one of the most popular of such sessions at the school. In 2014, the turnout was so large that students sat on the floor and in the aisles. An administrator warned that this was a violation of the fire code, and the students had to be moved.
Whether the company succeeds in revolutionising the venture capital business remains to be seen, but it is already displaying some special qualities that few VC firms, if any, can match. Call it mojo. Tjan thinks it has something to do with size. “So many aspects of this firm have a boutique-like flavour,” he says. “I’m talking about the magic and the spirit that you find in some small organisations.” He doesn’t want to lose it. “We want to institutionalise the boutique as we grow, without making the boutique into an institution.”