The Berkshire Hathaway of Growth Equity, SGE’s Aspiration

ben-and-josh2.pngWhat sets Susquehanna Growth Equity (“SGE”) apart from other investors is their flexibility when dealing with entrepreneurs, which in large part is driven by their unique proprietary funding source – the founders of Susquehanna International Group.   The vast majority of growth equity firms are beholden to a finite fund life, meaning there is pressure to exit each investment within a set time frame.  With SGE, they can think and act more long term and more creatively, which is perhaps how the aspiration to become the Berkshire Hathaway of growth equity came to be.

In this episode, we chat with SGE’s Ben Weinberg and Josh Elser who focus primarily on direct private company investments in the software space. We cover quite a bit of ground in this conversation, from the genesis of Susquehanna International Group, now a global financial powerhouse, and the entrepreneurial mindset that drives the organization, to the founding of the growth equity practice, and to the current dynamics at play in the growth equity market.

(Hear the full conversation with Ben and Josh on iTunes or

RJ: Ben and Josh, thanks so much for joining me today, can we start off with a little bit of background on yourselves as well as on the firm?  It might even be helpful to give background to the overall Susquehanna International Group for context.

Josh:  First of all thank you for inviting us, RJ, we really appreciate it, we’re excited to talk with you.  Susquehanna International Group is a really fascinating story, it’s a bootstrap business here in Bala Cynwyd just outside of Philadelphia.  It’s a company that’s been grown over 30 plus years now and unlike many of its peers in the financial services world, is still owned entirely by its original founders, who started the business out of college.

They found interesting ways to apply their skillsets; they started out in the world of poker and horse betting and what they found was that the financial services markets worked very similarly to the other games they were playing where you’re making decisions with limited information and you’re playing the odds.  They realized they could apply that to matching buyers and sellers of derivatives.  And back then it was a manual business, 30 plus years ago and they realized that spreads would compress over time.  They needed to do more in volume and they realized that technology was going to be the driver of their business.

And they were one of the successful firms able to invest and they invested a lot of money, a lot of people, a lot of time and effort into technology.  And what it did for them is it transformed their business, they became a huge winner in that market.  And as the spreads compressed they made it up in volume and it became a huge company, 2,500 people, and they were very successful entrepreneurs.

And so why is that relevant?  It’s relevant to us because number one, Susquehanna Growth Equity, we invest their money and we don’t fundraise.  This has trickle down effects, it affects everything from how we spend our time, the pressures on entrepreneurs, the types of deals we can do, it’s really a defining characteristic for us, not only that, we’re backed by founders, which is unusual in this world.  It’s really been a great partnership over the last 13 years now that we’ve been working with them.  It’s really one of our main differentiating factors.

Ben:  I’ll just build on that a little bit, I think what that means is the founders of Susquehanna are still very engaged in their business and they’ve built their category leader and what’s been a market characterized by very long term sustained growth.  I think that’s really what we’re looking for.  And our business is, finding companies with strong and, in the vast majority of cases, founder led teams that are in markets thinking of long term growth.  We are built to have that kind of patience, we’re not investing out of a fund where we have retirees, pensioners and others that are investing in us, so we are money on money oriented as opposed to IRR oriented as a firm.

RJ: It’s fascinating how the founders of Susquehanna International Group decided to get into growth equity investing.  When your organization is throwing off a substantial amount of cash you can decide how to allocate that capital.  You can allocate it back into your business; you can obviously take it personally and decide how you want to manage that money.  Or you could do something like set up a private equity operation within or tangential to your existing business.  Would be curious to hear more into the thought process of the founders if there’s more color to it.

Josh:  Yeah.  It’s a great question.  One of the things we talk a lot about within Susquehanna is the way that the founders think.  They hire all these people, a lot of people out of school and they know that people have great ideas; it’s not always people who have the longest tenure there.

And so what they’ve gotten really good at doing is giving people within their organization an opportunity to essentially be an entrepreneur to try a new investment strategy, try a new type of trade and they give them the capital to do so because they understand risk and they understand how to take risk.  And what happens is, the ones that are successful, they’re almost like seed funding these groups within Susquehanna, if they’re successful then they give them more money and they grow and they hire people and if they’re unsuccessful, then they go, it doesn’t work out.

So, you know, they’ve been doing this for a long time within their core business and some of those groups have grown into the largest … we call them pods within Susquehanna.  And they’ve also done this with different investment strategies like ours, they have groups that invest in China; they have groups that do debt versus equity.  One of the things they really figured out is, you know, let people who know their domain, their strategy, focus on that versus, a lot of family offices kind of get tied up where they have the same investors doing multiple strategies.  All we do is invest in growth stage technology software and data companies, that’s all we do, so it helps the lanes clear.

Ben:  And to your point RJ, it is very entrepreneurial, these are first generation entrepreneurs and I think that if we had a CIO and hired a CIO from other large asset managers they’d probably think about the world in a different way.  But I think it’s a matter of finding great strategies, finding great businesses and I can’t speak for the overall grandmaster behind the asset allocation, but I think it’s very true to an entrepreneurial vision here.

RJ: I think this is a good lead into how each of you found your way to Susquehanna or maybe they found you.

Ben: I’ve been at Susquehanna now for the past five years.  I actually have the misfortune of having graduated from undergrad and business school, running headlong into a recession from undergrad in 2000, went to Wall Street in time to see a lot of carnage there.  I was at Solomon Brothers in a Latin American franchise and later in their TMT franchise before going to business school in 2006.  And then graduated there in 2008 headlong into my job at Element Partners a month before closing their $600 million fund and three weeks before the Lehman Brothers, so headlong into the second calamity of the 21st century.

Josh:  That was great timing.

Ben:  So it was great timing and it certainly impacts how you look at the world.  But Element Partners was my first time in the buy side; it was a technology oriented fund that actually focused more in industrial end markets.  And that framed how I looked at the world when I went from Element Partners and joined here in 13/14 I brought a focus on vertical markets.  The vertical markets, the view was kind of more generally oriented towards what I call slow adopting highly fragmented markets and looking at the adoption of new technologies in these segments.  So that’s trucking, supply chain, deep back office inside the enterprise; we made investments in a company called OrderMyGear which brings technology and the Shopify generation to mom and pop decorators and embroiderers.  So finding nooks and crannies and sizeable nooks and crannies where technology has not been adopted and can find accelerated adoption where you have the right kind of simple and low friction solutions.  Certainly that’s a concept that we’ve been able to replicate across a number of markets and taking that within vertical software as well as horizontally across, financial, HR and other horizontal models, areas where that same formula is present.

Josh:  And I’ve got a less interesting story I think.  So, I grew up in Pittsburgh, actually I wanted to be a doctor when I grew up and I think my parents were really excited about that.  And I think they were actually pretty disappointed when I went to finance, can’t blame them, but I think that changed when they saw my first paycheck.  But I actually got started out investing in real estate and so not technology but started fund investing in buying residential properties, renting them out.  It was back in 2005/2006 and it was actually whenever technology started invading the prop techs base and is an inspiration for where I spend a lot of my time.

I joined Susquehanna as an intern out of Yale and that was in 2010.  And I’ve been here ever since, so going from intern to analyst to associate to be the director and I’ve seen the firm over many years, the different stages, how it’s changed and grown.  So that’s my background, starting out in investing and in real estate, seeing the opportunity for technology and I’ve spent a lot of time in prop tech as well as HR tech, a couple of other areas.  I think it’s interesting to have that background, investing in that asset class without the technology background, sort of an inspiration for going into this world.

RJ: It would be great to hear your thoughts on how you think your firm has been able to succeed in a really competitive environment?

Josh:  Yeah, it’s a great question.  And I think it really goes back to our founder, Amir Goldman who started the group 13 years ago and he developed an investment thesis with a couple of different bullet points.  What’s really interesting is we actually went back and revisited it as recently as a few months ago and maybe one or two things have changed here over the years.  But for the most part the original thesis stands pretty true.

I mean we look at capitalization, recurring revenue businesses with defensible models and good retention.  And I think that one of the big differentiation points for us is the way that we are set up because number one, you can be a really good picker of companies.  We like to think that we’re choosing entrepreneurs to back and in some ways we are, but you also have to remember the entrepreneurs are really choosing us.

And we think that that’s where we kind of have an edge because of the way we structured, because of the types of entrepreneurs that choose us are the ones that don’t want to be tied to a specific timeline, they haven’t necessarily raised a lot of capital.  They appreciate the flexibility, and to be honest, a lot of the entrepreneurs we’re backing have shunned traditional growth equity because of all the strings that are attached.  I would say that there is a certain class of entrepreneurs who think a little differently who have been choosing us and we think that they have outperformed.

Ben:  We are selling commodities, the most commoditized thing is capital and the question of who can bring the best terms.  But even so I think founders today in the growth equity world, especially when you’re pitching, the deals that we’re pitching, which are minority deals, it’s not only bringing capital on the best terms but also the person who you’re going to sit across the table from for an indefinite period of time, are they going to let you do the things you want to do?  Are they going to, you know, what kind of pressures are they going to place on you?  And I think that what we bring is I think just a pretty different culture.

I’ve been in the traditional LP based private equity model and this one here.  One of my mentors always said that, “Private equity firms aren’t firms, they’re confederacies.”  It’s a confederation of individual partners doing what they want to do and they get into a room once a week and duke it out and the strongest person ultimately gets what they want.  And I think that’s a pretty dysfunctional view of the world but I think that I wouldn’t be repeating it if I didn’t think there was more than a grain of truth to it.

I think that you need to have a real binding cultural strength, tradition to bring a firm together.  And I think in many ways having the success of Susquehanna to look to and founder like success compounding after 30 years and then now for us in over 50 companies and still being 85 plus percent founder led.  We know what we’re looking for, we know what we’re not looking for and I think that allows us to differentiate for like Josh said, the founders who are looking for a partner.  It’s not going to fit for everyone but we believe there’s enough out there to keep us busy.

RJ: How much rests on that entrepreneur or founder when you’re assessing a company?

Ben:  It’s not so much the founder personally, like when you get into a room you’re going to have a reaction to them one way or the other.  But I think it’s more the fingerprints of the decisions that that founder has made, how they have built their business, how they’ve funded their business, the types of people they’ve brought in and the strategic decisions they’ve made.  I think that’s ultimately where the rubber meets the road.  I do think much like any business out there, any investment firm, we have our heat map of what makes a solid investment.  I think that it’s that history of decision making, finding founders are going to be capital efficient, who are going to be aggressive when the time is called for is going to be humble.

But I think getting in the room, the interpersonal dynamics and finding somebody who’s very humble and who is able to reason through the successes and the challenges they have had and also be realistic and optimistic about what’s before them, what’s before their business.  At the end of the day we’re all optimists and we all think we’re great but greatness doesn’t allow you to build buildings, it’s great teams.  I think that it’s those kinds of soft skills we’re looking for when we’re in the room.  I think there are both external and internal – triangulation steps that you’ve got to get as you form a view.

Josh:  There are obviously entrepreneurs and founders we think and we’re just like wow, it does really fit with the way we think about the world and the people we probably would follow to the end of the world.  Like a Ken Lin from Credit Karma, I mean there are entrepreneurs where we spend time with them and it does feel like we know, and we do the work around the business, what they’re building, but the entrepreneurs are really strong.  Yes, the other interesting question which was, are there times you know it’s not a fit.  I think that’s true, I mean I think we all walk into a room and know pretty quickly it’s not going to be a fit.  And I’m sure it’s vice versa, I’m sure that sometimes we walk in, we’re not the right people.  You hear the cliché all the time, it’s a marriage and hopefully we’re rowing in the same boat in the same direction for many years, so that fit does matter.

RJ: How do you think about the growth equity universe, is it big enough where you can have many firms out there competing for deals? 

Ben:  I wish I could translate it into a total carrying capacity of AUM that can sustainably be deployed into this sector but I think there is a share shifting happening out there.  You’ve got enormous enterprise value that’s encrusted in traditional services companies, that is being transferred into the software world.  And for every dollar, maybe 50 cents of the dollars of that enterprise value will be transferred into the software world.

I’m talking more about, you know, the word processing body shop that’s across the street from me in the building on City Avenue here in Philadelphia and there are thousands of those firms in the United States and around the world.  And there’s a huge amount of enterprise value that’s going to be created in making those firms a lot more efficient in what they do and really just changing the structure of how those firms execute what they do on a day-to-day basis.

If we take the deals that we were looking at in 2012 and the deals we’re looking at today, at the end of the day the companies look very similar.  They are $30 million revenue businesses, $20 or 30 million revenue businesses that in 2012 were looking for a 15% liquidity round and looking for a little bit of primary capital so they could go and take their next turn and today that same business is looking for a 75% recapitalization.

I think that the private equity universe has gotten much more comfortable investing deeming maturity at a much lower stage than they were a number of years ago.  And part of that’s born of the fact they have a lot more money burning a hole in their pockets and part of it’s a realization that a $20 million company is not as fragile as a $20 million services business that had eight customers.

So I think maturity happens at a very different point than it used to.  And so there’s a lot of enterprise value that’s been created in technology businesses and entrepreneurs that say, “Boy, at $40 million of value, I’m good.  I don’t need to have $200 million of value in my pocket.”  And I think it’s appropriate in many ways from a risk sharing perspective for that value to be held in institutional hands as opposed to individual hands.  I think we’ve seen a lot of it, and you probably have a clear sense of the AUM created or invested behind growth strategies has been staggering.  I’m not convinced that we’re wildly oversaturated.

Josh:  Software is taking share, the deals are bigger, there’s lots of dollars up for grabs.  The other dynamic here is companies are staying private longer.  And a lot of the equity value accretion is happening in the private markets, not in the public markets.  You can debate over why it’s happening, whether it’s overregulation or whatever happened.  But there are half the number of companies than there were 15 years ago.

So now you have all these companies that are taking share from traditional industries moving it towards a software business model.  And they’re able to stay private and get access to capital as they grow, instead of going public when they’re $30 million, they stay private until they’re $300 million, $500 million of revenue.  All that value is being created and it’s accruing to the investors and the owners and the management team members rather than the public markets.  So I think that’s opened up a lot of space as well.

RJ: Maybe we can close out with what each of you is most focused on and excited about in the near term and future

Josh:  Real estate is one of the verticals I’m spending a lot of time in, investments in Boomtown, Buildout, one that we’ll be announcing here in a couple of weeks.  Everyone points and says, yeah, obviously it’s the largest asset class in the world, it’s worth more than all the stocks and bonds combined, 3½ trillion contributed to the US GDP in a year, it’s a huge market and it’s attracting investors too.  I think there was $10 billion last year invested in prop tech companies globally.  So it’s an area that really attracts a lot of people, there’s obvious reasons why, it’s a huge market.  But it’s one of the last to adopt technology and software is taking market share from other markets, like there’s no exception here in real estate.

So we’re spending a lot of time there, the world is changing for everyone in real estate, project management, facilities management, workflow tools, marketplace and listings, like just across the board, marketing technology, access to data and analytics.  It’s transforming life for the whole lifecycle from owners to brokers to tenants to contractors.  We’re interested in digitizing workflows and increasing transparency in that world.

Ben:  For me vertical software is an area of great focus and looking at.  As we’ve gone from the Salesforce’s IPO in 2003 and we’re taking over huge segments of corporate workflows, the world of new software innovation has gotten more and more finely sliced.  And so I still think that within those fine slices we’ve got enormous opportunities for not just software but payments and supply chain applications. I think that finding these are able to integrate elements of the supply chain, elements of financial technology and core functional software.

They continue to be really interesting opportunities and interesting unexpected opportunities in those areas.  I’d say the second place coming from outside the deal perspective I think that I’m spending time focusing is around this question of as we, SGE scale, I think we try to think of ourselves as a firm, we articulate values, and our operating mindset is distinct from many other investors out there.  I think as we get bigger and we have gotten bigger, investing $100-150 million, a handful of years ago, and now investing $200-300 plus million a year.  There’s a question of how we build and scale in a way that’s culturally consistent for us, making sure that we continue to enable founders and build around our teams and continue to get that message out being, the high aspiration, becoming the Berkshire Hathaway of this world.

RJ: I think the entrepreneurs and CEOs in our audience will appreciate the flexibility in how you invest – not being confined to the typical constraints of a PE firm or a formalized fund.  This has been great, I really appreciate it – you have a different model in terms of the way you invest and can work with and partner with companies.  We always like it when we have the opportunity to share folks like you and what you do with our audience.  Really appreciate the time, Ben and Josh, and look forward to chatting some more.

Ben:  Thank you for everything you do and thanks for having us today, appreciate it.

Josh:  Thanks very much.


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