The Business Behind Growth Equity
On this episode:
Conor and Alex chat with Sean Cantwell, founder and managing partner of Boston-based growth equity firm Volition Capital. Sean provides insight into the process of raising capital from limited partners (LPs) for a new fund and factors of differentiation for investment firms. We also discuss the key metrics and qualities Sean looks for when making new investments and Volition Capital’s stake in the growing low-code/no-code technology space.
Interview Recap:
5 Quick Bites
Reading list: Grit: The Power of Passion and Perseverance by Angela Duckworth, Creating Innovators by Tony Wagner, anything by Malcolm Gladwell. Pro tip: Stuck in small talk? Chat about your fav books and podcasts!
Skill or topic you’re interested in developing? Golfing and CrossFit
How do you stay up to date with the latest developments in your industry? TermSheet by Lucinda Shen (https://fortune.com/newsletter/termsheet), Axios Pro Rata (https://www.axios.com/newsletters/axios-pro-rata)
Qualities of CEOs you admire? Responsible, transparent, trustworthy, visionary, detail oriented
What industry would you be interested in starting a company in? Low-code software
Who are Volition Capital’s customers?
Limited partners (LPs). They give capital to Volition Capital to invest with, and are happy with strong returns.
Entrepreneurs, who are given the money. Volition Capital serves them by establishing trust - entrepreneurs like to take money from people who really believe in their cause!
It’s a circular cycle: if entrepreneurs trust the source of their funding, they will manage risk and reward well, generating high returns which makes the LPs happy and trusting of the entrepreneur.
How did Volition Capital start out?
Sean’s path with Volition Capital mirrors an entrepreneur’s journey, which is why the company is able to form such strong connections with entrepreneurs today.
When he first started the company, they were unknown to the LP world and asking investors to have faith and take a bet on them, just like an entrepreneur would.
He had to find a way to convey his conviction to his investors and get them to believe in him - just like an entrepreneur.
He had to be intentional about allocating capital efficiently to the right places, just like an entrepreneur.
As their success grew, they attracted more investors, just like entrepreneurs when they become successful.
What strategies do different firms on the buy-side establish to differentiate themselves?
Positioning yourself as an industry expert, e. g. healthcare growth investors, technology growth investors. If this is successful, firms can build internal capabilities that allow them to be more successful and attract more LPs.
Focusing on a specific stage - LPs are looking at different asset classes.
Pitching your network. This is the least effective method since everyone uses it.
The bottom line is still delivering strong returns - if that’s not happening, you won’t attract any LPs no matter how attractive your other qualities are!
What do you look for when deciding to make an investment?
Product
Market: big markets are usually better.
Management: should be equally strategic and visionary.
Other metrics include growth, capital efficiency (less money, the better), retention
How concentrated is your portfolio structure at Volition Capital?
Pretty concentrated: 10 - 15 companies per fund. Every company in the portfolio plays an important and meaningful role. Here are some more investment criteria Sean takes into consideration:
No lost capital (aka not losing money). A good indicator of this is if a company is scaled without having to raise a large sum of money.
Every single investment should have the potential to generate a 5x return. In other words, one single company should be able to turn the entire fund into a high performing fund on its own.
Sean and his team believe that each investment should be meaningful and impactful, which is why they have strict selection criteria, allowing them to invest in companies they fully support and believe in.
As Warren Buffett put it, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Can you explain the low-code tech trend?
Low-code software is becoming more popular among companies because it enables non techy people to easily create applications to automate workflows.
Companies currently spend a lot of money on internal and external IT operations. Low-code software is attractive because it costs less and can be delivered faster.
Say what?
Enterprise Resource Planning (ERP): Subscription software services that companies pay for to help manage business operations such as accounting, supply chain and project management. They make day to day operations smoother and easier.
Limited Partners (LPs): Individuals/organizations who contribute capital to investment funds. Unlike GPs, LPs don’t make any investment decisions - they just provide the capital. They also have limited debt in the company, up to how much they contribute. Some examples of LPs are university endowments, high net worth individuals and pension funds.
Annual Recurring Revenue (ARR): A company’s revenue estimate for 1 year using data from a smaller time frame. For example, if a company makes $1000 revenue in 1 month, their ARR would be $1000 * 12 = $12,000. A common metric is a quarter * 4. This is useful when a company is at an early stage and they don’t have consistent revenues yet.
Cohort Analysis: Allows companies to understand their retention & growth and predict future user behavior by tracking specific groups of users (cohorts) to understand their engagement during a specific time period. This allows companies to understand their retention & growth and predict future user behavior.
5X return (equity multiple): For every $1 investment you put in = $5 return you get out. Unlike IRR, the equity multiple does not take the time value of money (and thus the life span of the investment) into consideration. The goal for investors is to have a high equity multiple and high IRR.
Fun fact: Sean and his team invented this cool process called “teach-ins” at Volition Capital: during presentations, presenters will offer a deep dive into a niche/trendy topic that is relevant to their presentation to promote continuous learning. How fun would it be to learn about autonomous drones during a meeting?
Takeaway Quote: “I think we’re living in a very interesting moment in history, where there is massive technology adoption and massive disruption of old lien industries, so there’s lot of value to be created across a number of various industries and asset classes” (50:15)
To learn more about Sean and his work, visit https://www.volitioncapital.com/.
