After hearing dozens of company pitches over the last week or so, I noticed a common theme with how CEOs told the story of their business. They typically expended great energy explaining what their company’s product or service does. They will talk about features and functionality that no other player in the market has. Where appropriate, they will dive into a demo to show exactly how their product is such a game changer. While this is important, in some respects, I think it is putting the cart before the horse.
Personally speaking, I think a good story for a business starts with the problem that is being solved. It’s hard to fall in love with a product, if you don’t believe it solves a big problem. A problem worth solving is one that is a high priority issue for the one experiencing it. It is a problem that is experienced to a similarly high degree, by a large and common constituency. It is also a problem that people are willing to pay, and sometimes pay substantially, to resolve.
In every company pitch, the CEO will try to tell me what the company does. But, you may be surprised that in many pitches, the CEO may neglect to really spend time articulating the problem their company solves. Sometimes when I ask very directly what problem it is that they solve, the response will be a description of product functionality, not in fact a problem. This to me is a telltale sign that the company was started to create functionality, not necessarily to solve an important problem.
If we were ever to get into due diligence on a company, we will likely spend as much time validating the magnitude and priority of the problem the company solves as we do on the merits of the product. If we love your product, but are unconvinced on the problem it solves – we are unlikely to get across the finish line on an investment. The reality is a company can control how a product evolves and develops. But, the problem is what it is – so choosing the right problem to solve is critical for the ultimate success of any business.
So my simple advice is that when you tell the story of your business, start with the problem. If you convince people of the problem your company is trying to solve, you have laid the foundation for them to love what your company does.
Following up on my prior post, “What Is Tag Management”, this second post will be specifically about why Volition Capital invested in enterprise tag management leader, Ensighten. Often when we announce a new investment, like we did with Ensighten last week, people ask me why we invested. Hopefully this post will serve to help answer that question. Let me emphasize that for any investment, the management team and the people behind the company is the most important factor. That being said, I will start with some other key factors on why we invested and end with the most important one, the team.
#1: Clear Competitive Separation and Market Leadership
When a new market emerges that we think will be a high growth and strategic market, like tag management, we want to invest in the market leader. While the term “market leader” is easily thrown around in marketing collateral, we use it sparingly when it comes to our investment decisions. Our analysis on whether Ensighten is the market leader in tag management rests on a number of objective measures.
The first sets of measures are financially oriented. Is Ensighten the largest and fastest growing tag management vendor? Yes and yes. We are very confident that Ensighten is the largest independent tag management vendor in the market based on revenue. The revenue difference between Ensighten and the next largest player in the market is quite substantial. We also believe that Ensighten is the fastest growing company in the market in terms of revenue growth. These size and growth characteristics combined suggests that Ensighten is scaling aggressively and expanding its lead over the competition.
A second key measure of leadership is competitive win-rate. When Ensighten goes up against its competitors in a sale process, they win 90%+ of the time. This is an astonishingly high win-rate. After talking to dozens of blue-chip, brand name customers who tested Ensighten against its competitors in proof-of-concepts (POC), we think Ensighten is winning because of superior technology. I will expand on the technology later, but a 90%+ win rate is a clear indicator of competitive separation.
A third important measure of market leadership is customer retention. Ensighten has a near 100% customer retention rate. This means that once Ensighten wins a customer, they almost always keep the customer. This level of retention indicates that the value the customer receives is extremely high. When you combine these attributes: largest company, fastest growing, 90%+ win rate, and near 100% customer retention – we think Ensighten has both established and is extending its leadership position in the tag management market. That’s a great dynamic to invest behind.
#2: High Customer Value – Must-Have Product
We talked to dozens of Ensighten’s blue-chip enterprise customers including Microsoft, Sony, Seagate, Symantec, United, Dell, and many others. Typically, Ensighten’s buyer comes from the marketing organization of these companies. The customers communicated to us, both with their words and their tone, that in no uncertain terms, the value they are receiving from Ensighten is exceptionally high. We think of value as the differential between how much pain the customer experiences from a problem and the delight of the customer when that problem is remediated. On both measures, Ensighten’s customers measured exceptionally high.
In their own words, the key problem marketing organizations have before deploying Ensighten is a fundamental inability to do their job. As I discussed in greater detail in my prior post, “What is Tag Management”, if adding, changing, fixing, or deleting a tag requires dependencies on IT release cycles that can run in intervals of many months – marketing is completely hamstrung. They can’t modify website analytics with ease. They can’t test different ad networks or tailor their website with ease. They can’t deploy and customize important customer centric apps like chat, voice of the customer, and recommendation engines without substantial dependencies on IT. They just can’t do their job. When marketers describe this pain point – it’s very clear in their tone that the problem is debilitating.
On the flipside, when customers describe what life is like after deploying Ensighten’s tag management system (TMS), the joy in their tone is obvious. It was clear to me that the dozens of customers we spoke with were smiling ear-to-ear on the other end of the phone when they talked about Ensighten’s value. That’s rare in customer references. Often times customers will say nice things to be polite to their vendors, but their tone will be more muted. In Ensighten’s case, the customers were raving fans. The reason is that Ensighten’s TMS gave these marketers unprecedented agility and control not to just do their job, but importantly, to do their job well.
#3: World-Class Technology
We spent an extraordinary amount of time evaluating Ensighten’s technology because the tag management space is noisy. Our conclusion is that tag management is one market where the distinction between complexity in servicing basic tag management needs and enterprise-scale tag management needs is dramatic. This market will evolve to be the tale of two worlds. We believe that low-end tag management is a relatively easy technical proposition and will be commoditized quickly. Conversely, we also believe that supporting the complexity and scale of large enterprise tag management deployments is one of the hardest engineering problems we have seen.
From inception, Ensighten has had four philosophical pillars underpinning all technology development. 1. All Ensighten products must be able to be delivered through a single line of code. 2. The platform must support all tag-based applications. 3. The platform must support any device (e.g. PC, smartphone, tablet, kiosk, ATM, etc.). 4. Everything must enhance page performance. First of all, this is an outlandish vision in many respects. Many would have said at the outset that it couldn’t be done. To those who would try, there would have been hundreds, if not thousands, of engineering decisions along the way where it would have been simpler to relax these constraints to get to market more easily and quickly. But, Ensighten pulled together a team with both the technical genius and discipline to architect the solution that stayed true to these principles.
Adherence to these principles is why Ensighten now stands in the position of having the only tag management solution that can truly meet the needs of any and every enterprise-scale customer. This is why Ensighten wins over 90%+ of the time against its competitors. Ensighten’s entire platform was designed from the ground up with rigid adherence to principles that would ultimately prove to be critical to servicing enterprise-scale deployments. After the conclusion of an exhaustive technical diligence process, we sat back and just said, “Wow.” It became clear that Ensighten has a brilliant technical team that cares deeply about their engineering – and the biggest beneficiary of that is their customers.
#4: Large Strategic Market Whose Time Is Now
A year ago, not many people knew much about tag management. We believe that a year from now, tag management will be known as one of the most strategic and important enabling technologies in digital marketing. While Ensighten aims to be the enterprise leader in this market, we believe that thousands of companies large and small will be deploying some form of tag management in the years to come. Large enterprises in particular will have to deploy an enterprise scale tag management system (TMS) like Ensighten just to be competitive. Not having a TMS will soon be an unacceptable position for any enterprise whose web and digital properties are mission critical.
Tag management will become a critical part of web infrastructure as it sits between a company’s digital properties and potentially every third party application that interacts with those properties. This position will be very strategic as the TMS will have potentially unparalleled visibility into the activity and data of a company’s digital properties. Therefore, we expect the tag management market to evolve as quickly and as pervasively as the web analytics market. We anticipate consolidation early in the lifecycle of the market, but also believe there is room for one or two significant independent companies – a position we expect Ensighten to occupy.
#5: Talented and Trustworthy Management Team
Let me finish this post with where my interest in Ensighten all started, the management team. Specifically, I connected with Josh Manion, founder and CEO, the first time in August 2011. He was kind enough to return the cold call of an associate who was in his first month on the job (related post: What Happens After The Associate Cold Call). I met with Josh five times before we seriously engaged in discussions on an investment. Josh is unique – home schooled through high school, chess champion, MIT grad, and grew up in a small town in Wisconsin. The first thing I came to appreciate about Josh is an alignment of values. He’s a nice guy. He’s trustworthy. He’s a grounded and decent person. He’s got old-school values which I respect. The second thing I came to appreciate about Josh is he’s just inordinately smart. The third thing I liked about Josh is he’s deeply competitive and wants to win. Don’t be fooled by him being a nice guy – he wants to dominate.
As I got to know the rest of the management team, I could see Josh’s characteristics throughout the team – off-the-charts intelligence, good people, and fiercely competitive. They also happen to be real domain experts in the field of tag management and passionate about the problem they are solving. At the end of the day, it was our confidence in the team that was the deciding factor on our investment.
So, there you have it – that’s why Volition Capital invested in Ensighten. Needless to say, we’re excited to be involved and honored to be part of the team.
This week we announced Volition’s newest investment in enterprise tag management leader, Ensighten. I couldn’t be more excited to be involved with the company and to join their Board of Directors. I was sitting down to write a post about why we invested in Ensighten, but after some thought, I realized it would probably be best to first write this post to explain what tag management is for those who don’t live it every day. My next post, therefore, will be about why we invested in Ensighten.
So, what is tag management? Let’s set the stage for the problem.
For many companies, their website is a mission critical part of their business. Hence, to get the most functionality and intelligence from their websites - the webpages themselves interface with many different best-of-breed third party applications. You may not realize it, but when you visit a reasonably sophisticated webpage today, it’s probable that many different third-party applications are loading on that page because of your visit. Some of these applications are visible to you as the end user. Examples of these are ad networks, recommendation engines, video platforms, chat applications, social network plug-ins, re-targeting platforms and feedback engines. Some of these applications are not as visible to you as an end user. Examples of these are web analytics applications, a/b testing platforms, content optimization engines, audience measurement applications, affiliate networks and marketing automation systems.
The way these applications interface with a company’s webpage is typically through a tag. Think of a tag as a little program that is inserted into the html code of that webpage. When the webpage loads, the tag fires, and the application runs. That tag contains the instructions for how that third-party application will operate on that particular webpage for that particular user. For a web analytics platform, it could define what specific parts of the webpage to measure. For an ad network, it could contain instructions on what type of ad unit to run. For a feedback engine, it could set the parameters for what type of feedback module to render. For an a/b testing platform, it could set the algorithms for how different tests will run. Simple enough.
Here’s where it starts to get complicated.
First of all, the tag for a single application can take many different forms. For example, if you want a different ad unit on one webpage versus another, it could necessitate a different tag even if the ad is delivered from the same ad network. If you want the web analytics platform to pull different data from different webpages, which is often the case, that could require different tags. In short, tailoring any application creates many different variants of tags from any single vendor. So, the first complication is there are many different tags, within a single application vendor.
The second complication is that sophisticated websites have lots of different tag-based applications running. In our conversations with Ensighten’s enterprise customers, they may have 10-50 different tag-based applications on any single webpage. The volume of tags is driven by two things. First, companies want best of breed functionality on their websites across all application categories. Secondly, they may be testing different application vendors within each application category. So, that adds even more complexity to the equation.
The third complication is volume. A single website can have hundreds of thousands, if not millions, of webpages. If a tag for a single application needs to be placed on every page, that can be hundreds of thousands of tags on hundreds of thousands of webpages for a single application. Not only can companies have websites with lots of webpages, they may in fact have lots of different websites. Many large enterprises have different web properties with distinct domains often in many different geographies. Some enterprises have hundreds, if not thousands, of distinct web properties. That obviously multiplies the volume problem. Then throw on top of all those websites and all of those webpages – tons of web traffic.
Therein lies the complexity: (lots of tags) x (lots of tag-based applications) x (lots of websites) x (lots of webpages) x (lots of traffic) = millions of tags firing every day to users like you and me from a single company’s web properties. And, I won’t even start talking about other platforms like mobile and flash at this point.
That sets the context, now what’s the problem?
The problem occurs when you want to change, delete, add, fix or reconfigure a tag. Think of a typical marketing analytics or optimization organization at a large enterprise. They’re sitting on top of this sea of potentially millions of tags firing every day as users interact with their web properties. Let’s say they need to change a single tag. Maybe they want to run a different ad unit or capture slightly different analytics data. Because that tag sits in the html code of the webpage, marketing must convince IT that the single change should be in the cue of the next release cycle for the website. If they are successful in that, which is an if, then they must wait until the next IT release cycle for the website which could potentially be many months away. Think about that, it could take months to make a single and simple change to one solitary tag.
In reality, large enterprises need to change tags all of the time. Tags can be programmed improperly, so they need to be fixed. The website itself could change which could necessitate a change to a tag. Maybe they were testing an application on part of the website, and now want to roll it out to other parts of the site. Maybe they want to take down an application or deploy a new one. There are reasons why enterprises need to engage with their tags and their tag-based applications in a dynamic way. But the current model of being beholden to the IT release cycle brings marketing agility to a halt.
That’s where Ensighten comes in.
Ensighten turns the entire methodology for managing tags upside down through its Tag Management System (TMS). They start by placing a single line of code in the header of the website:
That’s it, one single line of code. That code interfaces with Ensighten’s cloud-based TMS every time a user views a webpage. The magic of Ensighten’s TMS is it enables marketing organizations to manage all of their tags without ever touching the code of the website. That means they can now fix, change, add, delete, and reconfigure any and all tags in Ensighten’s TMS right there in the cloud without ever engaging with IT – and those changes will render on the webpage as if the tag was hard-coded onto the page itself. It bears repeating, Ensighten enables this flexibility for any tag-based application. Enterprises now have ultimate flexibility to try different applications, configure existing ones differently, and remove underperforming applications with complete ease. What could take months, if not years to do, can now be done in a days with Ensighten’s TMS. We talked with many of Ensighten’s blue-chip clients like Microsoft, Sony, Symantec, United, Dell, Seagate and several others – and the feedback was very consistent with this sentiment:
“For me to get a new tag added to the site or change an existing one, it would take 4-5 months. In order to get that tag changed, I would have to go through IT, log a defect, get in a release cycle, fight and claw. I was at the mercy of our bureaucratic IT processes. This is one of the best things we’ve ever done. I can go in and change tags within a day. If I need to add something new, I can add it within a day. It has made my life much easier. I am in control of my own destiny.” – Fortune 500 Ensighten customer.
Hopefully that gives you a window into what tag management is and what Ensighten does. I could go into how Ensighten does it, but that would be a longer post. But, let me just say that what sounds simple required some really brilliant technical minds to come together to create. We think the problem of tag management will be a pervasive problem. We think the tag management market will quickly accelerate to be one of the most prominent sectors of the web because the problem is unavoidable. And, we know that Ensighten has a significant lead in the market. But, I shouldn’t get ahead of myself. Now that you know what tag management is, my next post will be about why we invested in Ensighten.
Every venture-backed CEO wants “A” players at every executive position.
“A” players are executives that are 10x more productive than their peers. They are equally excellent strategically and operationally. They are equally capable at rolling up their sleeves or leading others. They thrive – with or without direction. They are big picture and detailed. They are the perfect mix of confidence and humility. They fit into any team culture, thrive under any leadership style, and raise the game of everyone around them, while befriending them all at the same time. Best of all, they miraculously fit within your pay scale, and you can retain them despite brutal competition for their services. “A” players are perfect – except for one small issue – as defined here, they don’t really exist.
In reality, all human beings have strengths and weaknesses. There are certain support structures and cultures within which we will thrive, and others in which we will not. It’s the rare person who is a persistent “A” player across any and all circumstances. A more realistic assessment is that many of us are “B” players who could perform like the “A” player in certain environments and perhaps even function like “C” players in other environments. We are profoundly influenced by co-workers, firm cultures, leadership styles and roles – rather than completely set apart from them. We are not robotic in the execution of our talents.
Therein lies one of the most important roles of the CEO. Many CEOs come with the emphasis that they’re trying to hire “A” players at every role. It’s an admirable goal, but may have a misplaced emphasis. The supposed “A” player arrives and 6 months later they are functioning like a “C+” player. The natural conclusion is that it was a hiring mistake – stoke up the recruiting engine and go out looking for that “A” player again. This might still be the right answer, but it may miss an important point.
The point is that a CEO’s job is to build a championship team, and that may be distinctly different than building a team of champions. A CEO’s job, when it comes to human capital, is to create the environment which will get the best out of people. Some of that is around hiring the right people. But, there are important elements to the equation that are completely distinct from hiring. There are important ingredients like firm culture, organizational structure, leadership style, delineation of roles, team dynamics, development, and others – which can be the difference between the same person functioning like an “A” player or a “C” player.
While I am loathe to use overused sports analogies – this dynamic shows itself very clearly in sports. It is not uncommon at all for a player of average historical performance to change teams – with a different system, different set of teammates, different culture, etc. – and to perform like an All-Star (e.g. Patriots’ WR Wes Welker). And, it is not uncommon at all for an All-Star to change teams – and perform like a mediocre player for the exact same reasons (e.g. Red Sox OF Carl Crawford). This dynamic plays itself out just as frequently in the corporate world.
Therefore, it is important for leaders of companies to not only hire excellent people, but to create a culture and system where the people they hire can and are likely to excel. For whether an executive becomes an “A” player may have as much dependency on the talents of that executive as it does the leader they’re working for and the environment they’re working within.
I believe this could be a true statement by the end of 2011 if it was Groupon’s intent to do so (which it may not be).
It’s very simple math. Many industry sources put the number of Groupon sales reps at 3,000+. The high end of the range is 4,000.
A typical rep using an auto-dialer will probably call 250–300 companies a day. You have to use an auto-dialer to get those kinds of numbers, which I have to presume Groupon uses.
Usually of those calls, the rep connects with a live person 40–50 times per day. Most of the calls result in a short conversation leading to a hang-up, but that’s the life of an inside sales rep.
Figure that there are 225 business days in a year when you subtract out weekends and holidays.
So the math is: 3,000 reps x 40 connects/day x 225 business days = 27 million businesses called.
According to business databases like Cortera and the US Census, there are about 27 million business establishments in the United States. This is a generous number as only about 7.4 million businesses have payroll – but either way you look at it Groupon could very well call every company in the US this year, if they wanted to.
Volition Capital announced a $10M investment in Globaltranz this week. We couldn’t be more excited about the investment so I thought I’d share a little bit about why. Globaltranz enables small businesses to go online to comparison shop and procure freight capacity – most notably trucking and other modes of transport. It is somewhat analogous to how consumers use Expedia or Orbitz for airline travel, but in Globaltranz’s case, the end customers are businesses that are procuring freight. Next time you’re driving on the road, look around at the trucks on the road – Globaltranz probably had a hand in putting cargo on that truck.
The value proposition is very simple. Globaltranz offers more selection and better rates to small businesses that ship goods. In tougher economic times, the ability to save money on non-core functions like shipping is really valuable to small businesses. On the flip-side, Globaltranz offers freight carriers (e.g. trucking companies) a low cost way to reach the small business customer. It’s too expensive for carriers to sell small businesses direct, yet they certainly value additional volume given the fixed-cost nature of their business. The value is very clear to all parties which is probably why the company is growing so aggressively.
Globaltranz represents exactly the kind of company that Volition loves to invest in. They are high growth: ~100% year-over-year growth for a number of years in a row. They have a sizable and diversified revenue base. They are bootstrapped: having never raised any institutional capital throughout the company’s history. They are led by an experienced and dedicated management team. And they have aspirations for greatness: their stated goal is $1 billion in revenue which given the size of this market is attainable. They have accomplished a lot without any investment, and it is our hope that through our partnership and capital, the company will achieve even greater heights going forward.
Needless to say, we are very pleased to be the first institutional investor in Globaltranz.
The investment thesis for G5 is pretty simple. 100% of mid-size businesses would love to have an online presence that consistently generates high quality, low cost leads – and 99% of mid-size businesses don’t know how to do it. To achieve the goal you need to be expert in website design, search engine optimization, search engine marketing, and multi-channel lead management. And, perhaps most importantly, you need to understand how all of these areas interrelate specifically in your industry. G5 fills that gap in certain large verticals where they have domain expertise – like self-storage, multi-family housing, and senior living. The thousands of mid-size businesses that have become G5 customers have their website and marketing efforts outsourced to and managed by G5, and they see the impact immediately in terms of low cost, high quality leads.
The wide disparity in results between using G5 and doing it yourself has led to a highly recurring, bootstrapped business which is right down the sweet spot of Volition Capital’s investment focus:
- High growth & solid revenue base: 20 consecutive quarters of record revenue.
- Capital efficient & founder-owned: They have never taken any outside capital or debt.
- Under-served geographic area: Beautiful (and hard-to-get-to) Bend, OR
- Volition Capital investment: First and last institutional capital, active Board involvement
One attribute of G5 which is key to all of our investments is we want to see the team have an “aspiration for greatness”. Every Volition portfolio company needs to have both a proven business and breakout potential. The latter starts with the management team thinking big – which is certainly the case here. The number of mid-size businesses that could benefit from using the G5 platform is not just thousands, or tens of thousands – but potentially hundreds of thousands if not eventually millions. The first-generation “local search” vendors adjacent to this space have a narrow/weak offering and poor value proposition – which is readily obvious given their high customer churn rates and lack of profitability. G5’s intensely loyal customer base and strong financial performance demonstrates that they are doing things both differently and better. We believe G5 represents the next-generation in local marketing solutions and couldn’t be more proud to partner with them.
Silicon Valley Bank came out with a report today, called Dialing Down, that puts some data around the commonly held belief that better returns come from smaller funds. In this case – conventional wisdom is clearly true. Their fundamental conclusion is that venture capital funds are getting smaller – and that’s a good thing because it’s the small funds that generate outsized returns. The most compelling statistic compared the returns of large funds versus small funds (large funds being defined as above the median size for their vintage year). The result:
- 2% of large funds returned 2.0x or better.
- 48% of small funds returned 2.0x or better.
Volition Capital is committed to a small fund model precisely for this reason. But, why is it more likely for a small fund to succeed? I think there are a number of reasons – some more obvious than others.
1. The law of large numbers. Take a typical large VC firm with a $750M fund that averages 20% ownership in each portfolio company. For that fund to return a 3x, the portfolio has to be worth over $11 billion. And that is before accounting for fees and carry. A good fund is lucky to have one billion dollar company, but 11 of them? Not likely.
2. Small fund GPs are more aligned with their LPs. It’s pretty simple really: small fund GPs make their money from carry whereas large fund GPs make their money from fees. Large fund GPs still want to generate carry, but they don’t have to in order to create wealth. Small fund GPs need to make great investments to generate wealth. Who do you think is more hungry and will work harder to find and make those great investments?
3. Small funds are more focused. When you have a small fund, you can’t make every investment under the sun. You can’t be a late stage & early stage & PE, tech & cleantech & healthcare, US & Europe & India & China… fund. You don’t have a lot of capital to deploy so you get razor focused and develop the culture, methodologies, domain knowledge, and accountability – around a specific type of deal. You get good at something – and that makes better returns more likely.
4. Small fund GPs like each other more, probably. If you could start a firm, are there 10–15 people you would be willing to call “partner”? Someone you’re willing to bet your career on, whom you trust implicitly, whom you don’t have to ask and you know they will do the right thing? Are there even 10–15 people that you’d want to spend 50–70 hours per week with every week making joint decisions? Unlikely. Since large funds have grown their partnerships – the resulting 10–15 partners are more likely to just work together rather than be true partners at the core. Small fund partnerships don’t have the pressure to grow the partnership making it easier to preserve the “partner” in partnership.
That all being said – there are some great larger funds out there and I’m fortunate to have worked at some of them. As the stats show, 2% of large funds did well. It’s harder, but it can be done. But as the stats also show, your odds are much better with a small fund.
There are really three general asset classes in private equity: buyouts, growth equity, and venture capital. So why is growth equity the best risk/reward among the three in my estimation?
1. The downside protection of leveraged buyouts is exaggerated. The lure is that LBO firms are buying highly profitable companies with consistent cash flows, levering up the balance sheet, and ultimately trading the business while covering the debt for multiples on its equity. The challenge with the model is that the equity of the LBO firm is not the senior security on the cap table. Clearly, the debt is senior. Every LBO investment is a bad quarter away, a tripped covenant away, or a bad economic cycle away from being under water from an equity perspective. That’s the reason so many LBOs of all different sizes and shapes have been written off completely during this down cycle. As it turns out, despite the perceived safety in leveraged buyouts, in reality, there is little room for error. The loss ratios in LBO portfolios are higher than one might think.
2. The upside potential of venture capital is exaggerated. By venture capital, I mean traditional early stage venture capital. Firstly, the large venture funds run into the law of large numbers – no matter how good you are, turning a good multiple on a large fund is hard especially when you have modest ownership levels in your portfolio. Secondly, traditional venture models justify their investments based on upside scenarios (i.e. swinging for the fences). The reality is the vast preponderance of venture-backed exits are at modest outcomes so often times the investment case is divorced from the reality of where exits tend to take place. That’s why venture capital has become more dependent on bubbles to make the math work. Thirdly, venture-backed companies often take multiple rounds of financing thereby diluting both the ownership and governance of the early investors. Finally, venture investments are often done at the very early stages of a business’ lifecycle where the risks are high and little is proven. It’s a high risk asset class with moderate reward potential at the fund level.
3. So, why is growth equity such a great risk/reward in comparison? Growth equity doesn’t run into the problem that LBOs have being junior on the cap table to the debt. These are mostly non-levered equity only investments thereby making sure the investment is senior on the cap table. Growth equity investments are traditionally done in companies that haven’t taken prior institutional investment and don’t require future institutional investment. Therefore, the problem traditional venture firms have of diluted ownership and governance generally does not apply. In addition, growth investments are traditionally made at a point in time when strong financial growth is proven in the business – this removes much of the early stage concept risk. Finally, growth equity investments are, to state the obvious, growth companies. So, they have tremendous upside potential, but the investment case is not dependent on the upside scenario happening like is often the case in venture.
There will be winners in all three asset classes for sure. And for full disclosure, Volition Capital is building its franchise in growth equity. Nonetheless, I’ve seen winners and losers in my career in all three asset classes, and in my opinion, the best risk-adjusted asset class of the bunch is growth equity.