My Thoughts on Launching FlexPoint Capital

FlexPoint CapitalIt has been about two weeks since FlexPoint Capital announced its launch. I’ve found the launch to be invigorating. I find myself wanting to share the sense of purpose behind FlexPoint Capital with anyone willing to listen. But, I can’t possibly reach everyone I know one-on-one; hence this post.

I started FlexPoint Capital with a point of view on what it will take for FlexPoint to be successful.

Start modestly And with a BHAG

Starting modestly (and alone) is humbling and really good. For now, FlexPoint Capital is just me and a big hairy audacious goal (BHAG). As we wrote in FlexPoint’s introductory blog post, FlexPoint sets out with a clear sense of purpose and a BHAG to build a world-class growth equity firm. What does it mean to be world-class? For me, being world class means:

  • Consistently Producing Top Quartile Returns: Consistency is the key. How we produce those returns matters too. We seek lower loss ratios than venture and comparable IRRs.
  • Succeeding Beyond My Tenure: I may have founded FlexPoint Capital, but FlexPoint’s purpose is bigger and longer-lasting than I am. If the firm doesn’t excel beyond my tenure, I will consider the firm to have missed an objective.
  • Be Held in High Regard:  I launched FlexPoint with a public statement of our values. To be world-class, the entrepreneurs, capital providers, and others in our ecosystem must feel we’ve lived them.

I’m going on record as saying that all three of the accomplishments above are required to be considered world-class. Note that nowhere in this definition of success does it say that FlexPoint has a stated objective to raise $[insert fund size] by [insert date]. We do not believe that success in gathering assets is, in and of itself, a goal to be achieved. FlexPoint will not compromise achievement of the objectives above in favor of gathering assets.

pursue a Durable Investment STRATEGY anD Stay True to it

FlexPoint Capital’s investment strategy is to invest in growth-stage technology-enabled service businesses. FlexPoint’s investment thesis didn’t come to me yesterday; I’ve been honing it for years. It is a reflection my cumulative experience and input I’ve sought and received. The thesis will continue to grow and evolve as the firm does, but the core of the thesis is non-negotiable.

My prior firm went through no less than two major changes in investment focus – forced by changing market conditions – including changes in both stage and sector. Each time, gaps emerged between the firm’s skills and resources, and what was required to be successful. The firm powered through it, because it had a capable and committed team that was also malleable. But there is no denying that the changes in investment focus created significant difficulties.

I’ve come to believe that a compelling, executable and durable investment focus is required to be successful. FlexPoint’s investment focus is designed accordingly.

  • Compelling: Because technology-enabled services businesses are value-creation machines and the lower-middle market that FlexPoint serves is chronically underserved.
  • Executable: Because FlexPoint is purpose-built to execute on the strategy. All of the firm’s efforts are aligned with a single purpose. The lower-middle market that FlexPoint intends to serve is a target rich environment. Nearly every successful, large growth equity firm started in the lower-middle market. FlexPoint intends to stay true to the lower-middle market in the hopes of doing it well forever.
  • Durable: Because the term, “technology enabled service“, describes a value-delivery model, not a vertical market or sector. Sector’s wax and wane; and when they do the attractiveness of investing in them changes dramatically. FlexPoint’s focus on a value-delivery model, rather than a sector, mitigates this risk. There will always be attractive technology-enabled service investment opportunities, because they are found in nearly every sector of our economy that is a consumer of technology.

 Start with Non-Negotiable Values

Every organization has values, whether stated or not. FlexPoint has taken the approach of publicly stating its values from the start. FlexPoint’s team is responsible for delivering on the values, which is why Our Values are found at the bottom of our team page. One of three elements of our definition of success hinges on whether the entrepreneurs we back and the investors who support us believe we have lived up to our values.

FlexPoint’s values are non-negotiable; they are enduring. If you ever feel we’re not living up to our values, we expect to hear from you.

Put Systems in Place to develop an information advantage

FlexPoint already has implemented tools and technologies that many more well-established firms don’t yet have. We have already implemented a CRM. We already have a CRM-linked deal-log. Our CRM is integrated into our communications infrastructure and email marketing platform. Our decision to implement these tools and technologies should tell you two things about FlexPoint’s approach: 1) We’re consumers of the very types of technology-enabled services in which we’re passionate investors; and 2) We recognize that putting this information infrastructure in place starts the process of developing the firm’s knowledge assets.

FlexPoint’s BHAG is to build a world-class firm. World-class firms develop an informational advantage over their peers. Technology and information are the enablers for FlexPoint to develop a knowledge advantage.

Closing

The support and words of encouragement I’ve received since announcing the launch of FlexPoint are humbling and heartwarming. I receive them as confirmation that I am pursuing a path that is authentic to who I am and compelling. Of FlexPoint’s path, I know only the point of departure and the destination; to be a world-class growth equity firm. All of the points in between are wonderfully unknowable aspects of the journey. I’m excited to learn what unfolds. Regardless of where the path leads, I’m personally committed to the FlexPoint’s purpose.

Our Purpose: Support the next generation of technology-enabled services market leaders with growth equity capital.

My Thoughts on Launching FlexPoint Capital

Kindred Disciplines: Growth Equity and Growth Hacking


growth equity and growth hackingGrowth hacking is now a mainstream term in tech circles, particularly those that are consumer-focused. Growth hacking definitions abound, but generally emphasize a data driven, creative and flexibly opportunistic approach to customer acquisition. Many would argue that growth hacking is simply a new term for an old concept – marketing. While the functions, tools and skills require for growth hacking may be essentially the same as “marketing”, the psychology and mission of growth hacking feel totally different to me. When I hear “marketing”, I think soft, fuzzy, ambiguous, and cost center. When I hear “growth hacking”, I think maniacal focus on growth, scrappy, data driven, tech/tool savvy, and…

Kindred Disciplines: Growth Equity and Growth Hacking

We Sell the Ultimate Commodity – Money

venture-capital-adLast week I participated in a panel discussion at Denver University organized by Maclyn (Mac) Clouse. Mac is a long-time educator and supporter Denver’s entrepreneurial community. I was joined by Peter Adams, Executive Director of the Rockies Venture Club. Mac’s setup for the discussion was “dangerous” because he offered both Peter and I the opportunity to speak for 15 minutes (thankfully without slides) about the angel, venture capital and growth equity investing landscape. No-one who knows me would ever give me that air time…

Peter led off and did an great job talking about the angel investing landscape and the do’s and don’ts of approaching angel investors. Peter is the co-author of Venture Capital

We Sell the Ultimate Commodity – Money

Founder Liquidity and Growth Equity

Founder LiquidityI’m seeing more and more growth equity financings come to market with an over-sized component of the financing allocated to existing shareholder liquidity. I’ve seen enough of these transactions to consider it as a trend and to wonder what is motivating it.

Founder Liquidity in Context

Whereas liquidity isn’t typically a feature of venture financings, it is  often – but not always – a feature of growth equity financings. A modicum of liquidity for key management team members or founders can act as lubricant for a growth equity investment, particularly where the management team founded and has successfully bootstrapped a successful business.

Founder Liquidity and Growth Equity

Finding harmony between advice and self-interest

advice and self-interestI just wrapped one of those calls where I had the opportunity to give advice to an entrepreneur that runs counter to my short-term interests. In this case, it is a story of a first-time entrepreneur who has built a $7 million revenue business and is wrestling with the decision whether to take growth capital or sell the business. He owns the vast majority of the company and he has a fair offer from a strategic buyer that emerged during the course of his exploring financing alternatives.

After meeting yesterday (our third meeting or so), I committed to outlining how a growth equity investor would structure an investment transaction for his business.

Finding harmony between advice and self-interest

What is an entrepreneur to do when restrictive covenants become restrictive

Restrictive Covenants - HandcuffsRestrictive covenants are standard features of venture capital, growth equity and private equity transactions although each investor type has its own standards. Restrictive covenants are the actions a company cannot take without investor approval. A short list of typical restrictive covenants includes:

What is an entrepreneur to do when restrictive covenants become restrictive

Basics of Unit Economics Analysis

When an investment passes our first-screen at Meritage Funds, the first deep-dive we typically do is on the unit economics of the business. Unit economics are the fundamental financial building blocks of a business. If you can pin down the unit economics, you can determine contribution margins, break-even points and perform ROI calculations all of which can help to determine whether a Company’s economic engine works. Without an understanding of unit economics, predicting whether a business can be profitable in the long-term is all guess-work.

Basics of Unit Economics Analysis

Growth Equity Investors are Hedgehogs; VCs are Foxes

Growth equity is increasingly being recognized as an investing discipline that is separate and distinct from venture capital. That being the case, how does one distinguish between a venture capitalist and a growth equity investor. In my mind, growth equity investors are hedgehogs; venture capitalists are foxes. Allow me to explain.

Growth Equity Investors are Hedgehogs; VCs are Foxes

After the honeymoon

Earlier this week, I participated in a panel discussion organized by Holland & Hart, a Denver-based law firm that has a strong practice area working with entrepreneurial growth-stage businesses. The topic of the panel was “After the Honeymoon”, focusing on investor/entrepreneur relationship dynamics in the critical period following the closing of an investment or acquisition transaction. Also on the panel with me were Matt Hicks of Excellere Partners and Flint Seaton, CFO of Accellos, an Accel-KKR backed business.

After the honeymoon

Introducing Digital Fortress

Today, my Partners and I at Meritage Funds announced that we’ve established a new platform in the data center colocation market. Headquartered in Seattle, WA, Digital Fortress operates nearly 50,000 square feet of data center colocation space, focused on delivering high-power density installations to enterprise customers. A  Meritage Funds blog post announcing the investment has much more on our thesis and goals for the investment.

Introducing Digital Fortress