Through the years, GrowthCap has had the opportunity to sit down and speak with a select group of top performing private company growth investors. Emerging from our conversations was a set of key themes, which, although not a silver bullet, seems to hold some predictive power for achieving success in growth equity. We’ll examine these key themes below.
People-First Approach. It is perhaps the most consistent and important focus of the successful investor. People are at the core of success, whether that be the people behind an investment fund or the people at a prospective portfolio company.
“It’s all about the management and finding CEOs that have the propensity to surround themselves with really good people. That’s the real differentiator of success for businesses in my experience. I think that that hasn’t changed one bit in the 30 years I’ve been a professional investor.” – David Warnock, Camden Partners
“Our team. The average tenure of our investment team is 10 or 12 years. Andrew and I are the managing partners, and we’ve got two additional partners in the business, Michael Ramich and Joel Lanik. The four of us have been together over all four funds.” – Richard Maclean, Frontier
“If I’m not blown away by a person I can’t invest. I’m at a stage in my life where life is too short for bad relationships. I have to have a passion for the idea and a passion for the CEO, or else I can’t make the effort involved in building a company.” – Harry Weller, NEA
“The second core tenet is that we really believe that life is short and you should get to choose who you work with…We take that philosophy externally and then internally where we recruit folks to the team who are low ego, who are humble, who are driven and smart, but also who can approach a bootstrapped entrepreneur in Cincinnati or Kansas City, or Nashville, and have a real eye-to-eye, heart-to-heart conversation. And we do so in a way so that the entrepreneurs want to work with us. That’s ultimately our businesses. We trade on a reputation.” – Vinay Kashyap, Mainsail
“Management is obviously critically important to our decision to invest and to the outcome of the business. We’re the kind of guys that like to go to an investment feeling this is the management team that can take a business from this point all the way to the finish line. I like to see a team that is thoughtful, that really has a good understanding of their strengths, but also their weaknesses…” – Brian Rich, Catalyst Investors
Play to Your Strengths. Great investors know where their value-add ends. In conjunction with a people-first approach, successful investors add value where needed in an effort to unlock the inherent potential within their portfolio company’s management teams.
“The good news of being in this business for a long period of time is that you gain the experience of how to be a really good investor, and a really good board member. It’s a delicate balance between understanding where you can add value in assisting the company directly, versus where you can afford your management teams the creativity, accountability, and responsibility to own the decisions that they make.” – Brian Murphy, NewSpring Capital
“We are on the board of all of our equity investments and are helpful strategically and operationally, particularly on topics such as tuck-in M&A, partnerships, sales and marketing, and recruiting… Our goal is to partner with the most capable and knowledgeable management teams. We want to support them where we can be most helpful while not getting in their way.” – Daniel Kim, Bregal Sagemount
“From a structure point of view, we are investing in preferred stock, are on the board and are very active at the board level—though we believe management should be involved in the day-to-day operations—not us. We use our network to build the board with independent members in addition to ourselves, work with management to help build out the team, focus the strategy and overall set them up for success.” – John Stobo, ABS Capital
Patience, Consistency, and Discipline. Unlike the public markets, investing in private companies is a game of delayed gratification. Those that find success are consistent and disciplined in their approach. They focus on building sustainable value over the long-term. They allocate resources to provide support to portfolio companies rather than overextending themselves across too many investments. They create a plan and they stick to it.
“Over the past 21 years Trident has lived through several economic cycles. Trident’s a true partner to its portfolio companies in good times and bad times. Many investors are looking for a quick flip—that’s not us.” – Gus Alberelli, Trident Capital (Now Sunstone Partners)
“As an LP, you want to be consistently investing in what you consider to be top-of-class investors over time and assume that the top-of-class investors will know how to modulate their investing appropriately. If I was an LP, rather than trying to speculate whether we are near the top or not, I would be consistently putting dollars to work across all cycles. I should do that when things are going well, and frankly, should be doing that even if things start to turn down, because investing in funds that get raised during down cycles are often the absolute best funds to be in.” – Dave Welsh, KKR
“The nice part of our business and our end of the market is that we only make four new investments a year. Four new platform investments a year. Each partner makes one investment. That allows you to sit back and take your time and wait for the right pitch and wait for not only the right company, but the right entrepreneur, someone that you genuinely want to form a five, six, seven-year relationship with. That kind of patience, which I think other much larger funds may not have, especially from a capital deployment perspective.” – Vinay Kashyap, Mainsail
“We have a very overlapping LP base across our funds, and while we’re targeting a great IRR and to sell companies in a short period of time, I could put you in touch with five or six CEOs where we have been involved with the company for 10 years and it just wasn’t time to sell. We waited with them, we helped them change strategy and we found the time where the rate of value creation was at its peak.” – Carter McNabb, River Cities Capital Funds
Transparency and Humility. Investments aren’t always a cakewalk – markets shift, customers change, and growth can stall. It’s important to find an investor that can best position a company for success. However, it’s equally important to have an investor that will be supportive and productive even through tough times. In an industry that has a time and resource bias for the best performing portfolio companies, the mark of a great investment partner is one that will stay the course.
“I would encourage CEOs and founders to contact other CEOs &/or board directors of companies that a private equity firm has worked with to get a better sense of what they are actually like during good times and bad times before partnering.” – Gus Alberelli, Trident Capital (Now Sunstone Partners)
“…the other thing I’d like to say is that I like to tell CEOs when they ask us that question to go to our website where we list out all of our previous investments, for good or for bad. Call anyone that you like because what is equally as important as what we do to help the upside is how we behave when things get tough, and that’s what people generally don’t like to talk about. For a CEO who is deciding on where their capital is going to come from, I think it’s really important.”– Brian Rich, Catalyst Investors
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