Richard Maclean and Andrew Lindner, Co-founders of growth equity firm Frontier Capital, discuss the firm’s founding and core strategy of growth investing over the past two decades as well as their recipe for success in partnering with their portfolio companies.
RJ: Richard and Andrew, thank you again for joining us. Perhaps we could kick off with some brief introductions on yourselves and Frontier Capital.
Andrew: Frontier Capital is a growth equity firm based in Charlotte, North Carolina. Richard and I co-founded and launched the firm in 1999. We’ve known each other for 24 years, cut our teeth together at the predecessor to Bank of America investment banking and got back together to start Frontier. We’re currently investing out of our fourth fund, a $390 million fund which we closed in March of 2015. We’ve been exclusively focused on the growth equity space since inception.
RJ: That’s fantastic. Could you speak about the key attributes you look for in companies that you target?
Richard:We are looking for lower middle market, high-growth tech companies with revenues of $5M to $30M that are leveraging recurring revenue based business models. All of our companies are B2B, so they’re all focused on selling software or tech-enabled business service solutions to middle market or large enterprise buyers.
RJ: And do you tend to focus on companies in proximity to the Southeast or are you nationwide?
Richard: We’re definitely nationwide but we focus primarily on some of the emerging tech centers such as Denver, Dallas, Salt Lake City, Chicago and Atlanta. I think that’s an interesting differentiator for us. We’re headquartered in Charlotte, but we have a national focus on tech growth companies in these high-growth, low-hype markets. We’ve been in a lot of these markets for the past 10 or 15 years, really getting to know the growth companies in each area. We’ve built a nice national franchise, and many companies in these smaller markets look at us as packing the same punch and capability as some of the investment firms out of San Francisco, New York, and Boston. Also being in the smaller market ourselves, we’re a much better cultural fit with these smaller market companies.
RJ: Can you shed some light on how you differentiate once you make an investment? What’s your level of involvement with the companies that you partner with?
Andrew: We’ve spent 16 years working with these high growth companies, typically in a minority position. This lends itself to some differentiation in both the sourcing and knowhow on partnering with those companies going forward and ultimately exiting the businesses. We have four areas that we emphasize as part of our post investment value creation process.
The first is talent. A growth company at this stage, call it $10 to $15 million of revenue, has usually been bootstrapped or angel-backed, and one of the reasons they’re bringing us on board is to help them bolster their management team and bring in some additional talent to take the company to the next level. We were early adopters of the philosophy of running our own internal talent pool of A-players that are specific to the type of companies in which we invest. Then we turn the talent model upside down, and rather than wait for an open position to surface, we proactively place those A-players in the portfolio.
The next is go-to-market. These businesses have often times have been relatively opportunistic with their go-to-market strategy at this stage, but they’re solicitous of some help in defining a strategy that can scale. This requires identifying and drawing the boundaries of what we will and won’t do, and how to organize a truly institutional sales force to go after a bigger opportunity. Not all business is good business. The ability to clearly define a target market of customers and structuring a sales model that enables you to successfully engage, close and maintain those customer relationships is key to achieving scale and to creating long term value. In addition to having clarity around your target market you must also have a sales plan that appropriately motivates and incentivizes your now growing sales team to achieve and exceed goals.
The third thing we focus on is metrics and priorities. Our portfolio companies are often so busy just executing on what’s in front of them that they don’t take the time to determine metrics to help them prioritize what they should focus on to get them to the next level. As part of our diligence and kick-off plan, we help them pause to identify metrics that address what the management team and Frontier really needs to focus on to drive value. Honing in on key drivers and indicators of success like sales efficiency ratios, implementation throughput, gross margin and net promoter scores are just a few examples of metrics that we are often times focusing on with our teams.
Lastly we add significant value in a company’s exit preparation and awareness. Often times companies are really good at what they’re doing, but they do so very quietly. We like to broadcast it. We believe that raising the profile for our portfolio companies in both the capital markets and the world of potential strategic acquirers begins early on in the relationship. Seeding conversations with key industry players and analysts where we have long standing relationships provides these teams with the ability to share their story on a much larger stage positioning them on the radar of potential future buyers.
RJ: Is there a company in your portfolio that showcases all of the above elements that you’d like to highlight?
Andrew: We recently exited Social Solutions, a software company based in Baltimore that sells performance management and case management software to non-profits and the funders of those non-profits. This was a company with under $10 million of revenue at the time we invested. We put money on the balance sheet to allow them to make a pivot from a partially recurring to a fully recurring revenue model. This capital and our expertise helped them make the pivot, figure out pricing strategies, and institutionalize their sales organization.
We then put those four pillars we mentioned to work. We helped source talent for the business. We helped them establish a go-to-market strategy that included going after public sector funders versus an exclusive focus on the non-profits themselves. We established the metrics around ARR (Annual Recurring Revenue), bookings, retention, all the things we needed to become a legitimate leader in their market. We then helped raise their awareness among both the capital markets and their industry. Consequently, people realized theirs was a much, much bigger market than originally thought. Towards the end of our investment, the company had grown by about 400% and increased enterprise value by about 500%. We had been courting some bigger growth equity or software investors that we knew could take it to the next level, and we ultimately were able to orchestrate a sale of the business and a negotiated transaction to a larger private equity firm, which has picked up where we left off.
RJ: That’s a great example that exemplifies your value-add and focus on an optimal outcome. Is there anything else that you’d like to highlight about your firm?
Richard: 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.
Andrew: Exactly. We didn’t spin out of separate firms and pull together separate track records. You asked earlier if we focus on our backyard in the Southeast, and while that is where we originally focused and honed our trade, we have grown into a national firm over the years. While our geographic reach has changed over the years, our focus has not. Together, we have executed as a team for 16 years and have never wavered from this growth capital strategy. I think that our culture and focus is what really resonates with the companies we talk to who are doing the same thing in their business.
RJ: We think so too. We speak to the universe of growth equity firms, and having people that have worked together for a long time is truly something you don’t see across all firms. Congrats on all of the success to date and thanks again for connecting.
Andrew and Richard: Thanks so much.
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