Episode 76: Richard Erickson and Stan Bikulege of Lightview Capital on
Scaling Founder-Led B2B Services Businesses 

Episode Transcript  

 Shiv: All right, Richard and Stan, welcome to the show. How's it going?

Richard: Great, how are you, Shiv?

Shiv: Excited to have you on. So Richard, why don't we start with you? Why don't you introduce yourself and Lightview and let's take it from there.

Richard: Great. So I'm co-founder here at Lightview. We founded the firm 13 years ago. My business partner and I have been investing together for almost 25 years. And our core focus is on investing in what we would characterize as the lower middle market. That's businesses typically that are between three and $10 million of EBITDA. They are founder owned and bootstrapped so there is not institutional capital typically in these businesses. And they are typically focused in providing a B2B type of service slash solution to a corporate entity with a meaningful portion of the revenue in highly recurring or reoccurring revenue that gives us comfort around the visibility of the business forward. We invest geographically all over North America, so that's the US and Canada, in terms of where our businesses are based. And we're focused on finding entrepreneurs and operators that have a vision to grow a bigger business alongside us and typically are rolling a meaningful equity stake with us for the second bite of the apple for which we look to create meaningful value enhancement for them in additional liquidity they're getting on the upfront transaction.

Shiv: Awesome. And Stan, in terms of your role, where are you focused?

Stan: Yeah. And thanks for having us on. So I'm a principal on our investment team. And you know, really when you look across our team at Lightview, everyone on the investment team is kind of involved from sourcing to exit. And so each one of us are responsible for owning, you know, different sectors and subsectors within our core four verticals that we execute transactions in, which we can dig into that in a little bit. And then really owning that whole process from the thesis ideation, building it out, cold calling founders, working with brokers, different folks that can bring deals to the table and then all the way through diligence, deal execution, value creation and exit. so I've been with Lightview for over five years at this point and kind of play that role with a number of other folks on our investment team.

Shiv: And in terms of the types of companies you're investing in, maybe Richard, you can take this one, talk about the businesses because you're more focused on the services side, right? So talk about those focus areas. And how are you vetting these companies to figure out if they're quality assets to go after, especially if they've been bootstrapped and founder led?

Richard: Yeah. So as I mentioned previously, we tend to be focused on B2B oriented businesses. So the solution set that they're providing is to a corporate buyer typically. It is generally some form of outsourced service or solution. And thematically, you know, what we look for in that is businesses that have very strong revenue retention in their business model. I'd say the average Lightview company has between 90 and 125% same-store sale net revenue retention, which is for us a really important parameter in addition to the normal things like profitability and gross margin profile and team. But what we want to see is that the customers are really valuing the solution offering that they're providing in the form of retained revenue year over year, quarter over quarter. And so we tend to do a lot of work around that upfront, provided that the company hits some of the other key things that we look at. I'd say, you know, the gross margins of our businesses are averaging between 35 and 75%, depending on how much software content and tech enablement has been put into the solution set that they use and they're typically dropping EBITDA margins in the double digit to 30% plus in what they do. So those are some of the key criteria we think about and look at. Stan can talk a little bit about some of the sectors that we focus on.

Stan: Yeah. And to Richard's point, everything from a business model perspective hits those, you know, KPIs and characteristics across our four core buckets. Those are IT services, compliance services, marketing services, and facility and industrial services. And obviously within some of those, there's a bunch of different, you know, ways and derivatives that, you know, you can focus on. But for us, in your, you know, in your question, Shiv, as it relates to how do we kind of flush these deals out? It really starts with the sector thesis ideation and making sure that, you know, based on what we've seen in the market, transactions that have been completed and the types of businesses we're going to be going after in those sectors, you know, do they check the boxes of what makes a quote unquote, you know, Lightview deal? And if there's sectors that, you know, our team doesn't get buy in on because, you know, it doesn't meet those boxes, well then it's not an area we spend time in and it allows our team to kind of efficiently, you know, review the hundreds of deals that we, you know, look at on a yearly basis and fleshing out what is a fit.

Shiv: Yeah. And you mentioned the piece about the same-store sales or just the retention side. How important is that? Because especially in the business services segment, a lot of firms are project-based or retainer-based type of revenue and can have phenomenal gross margins and EBITDA margin profiles. And so sometimes you kind of have to trade off one for the other. So how do you evaluate assets where maybe it's not as much recurring, but maybe reoccurring revenue but they have the characteristics of being high margin businesses?

Richard: Yeah, I'll take that. Look, I mean, I don't think we'd invest in a pure project based business, Shiv, you know, using your example. What we want to see is while it may not be, quote, subscription revenue in true contractually recurring revenue, we do want to see the buyer behavior indicate that it is a very sticky service offering and they are buying somewhat consistently quarter to quarter, year over year, and it's not hugely lumpy. So if the business has those characteristics, I think we can get comfortable with it of not having contractionally recurring revenue, but we will want to see consistency in the nature of the revenue at the customer level.

Shiv: And what are some other characteristics that you're looking for? Maybe Stan, you can take this one beyond that recurring revenue side.

Stan: Yeah. So, know, as Rich mentioned with that recurring at revenue, like understanding what the revenue retention is, like that's the kind of piece we just hit on. But then similarly to it, obviously we're looking at growth. We are looking at what is the consistency of, you know, the revenue month over month as it relates to seasonality in a business. You know, the table stakes stuff like gross margins, EBITDA margins, you know, those things we're focused on. But what we really like to do during our diligence process, not just for our diligence, but also to show the value we can kind of bring to the companies that we partner with, is try to look at their customer metrics, the line of business profitability metrics, their forward revenue visibility, backlog and pipeline in a way that a lot of them haven't looked at it historically. So that A, we can hopefully shed some insights into their business to them as we think about our value creation levers, but then B, make sure that we're understanding, hey, are there certain lines of businesses that are driving the growth or the profitability? And then obviously in all these businesses in the lower middle market, there's a focus on customer concentration and finding the right balance of, they may have had a couple of key customers that have helped them grow over time and really those take a higher percentage of the revenue. But what does that concentration look like from a business risk profile? What does it look like based on you know, forward visibility and growth projections of the company and getting a good, you know, balance of both the historical performance, but the future that we're buying into.

Shiv: Yeah, that makes a lot of sense. And as you kind of have these types of businesses across those four sectors, you mentioned, what in terms of as a firm, where are the places where you think you bring the most value or what's your approach to value creation that helps these businesses grow faster once they've received investment or capital from you?

Richard: Yeah. There are kind of two vectors typically for us. There's the organic growth vector and accelerating the growth of the business itself. And then there's M&A. I'll take organic growth and maybe Stan can take M&A. But in the case of organic growth, one of the things that I think differentiates us is the fact that the team here in most cases had operating roles in businesses of the types that we're investing in and understood as an operator what it takes to grow those businesses. So oftentimes we'll be coming into the business and seeing that the sales model needs to be enhanced. There has not been a lot done in digital marketing enhancement, you know, for online customer acquisition. There may be an ingredient missing in the management team in and around business development that needs to be added. All of those things are typically things that we tackle as part of the investment strategy and what we're doing. Setting up a Hunter Farmer sales model is pretty common for us in many of these businesses. Whereas previously they oftentimes had a generalist kind of sales organization. So there isn't one size fits all. We're not coming at it with a completely prescriptive playbook. But the playbook is relatively consistent in evaluating what is the sales and marketing strategy, how can we enhance it, what other offerings can be added to the business that maybe the business has not taken advantage of that are faster growing or have the opportunity to create more recurring revenue. Those are all things that we look to do. And the end result is typically we are doubling the organic growth rate of the businesses that we invest in.

Shiv: And how do you do that? Tell me more specifically, I know you touched on some things like sales model and digital marketing, but Stan, maybe you can answer this. It's like operationally, how involved are you getting and often what are the most common areas that you're investing into and maybe some more details around those areas.

Stan: Yeah, happy to and maybe to put it a little bit in perspective, we're targeting, you know, one to two ish kind of platform investments a year. And so for us, it's really about, you know, all the things we've talked about that we're identifying during diligence on the business characteristic side, but also understanding the fit with the companies and the teams that we're partnering with. And that's really important because we are hands on, you know, we're not coming in and running the day to day of the business. But we're working closely with our team across these five value creation buckets of basically making the business more KPI driven, sales and marketing, which I'll circle back to your question there, helping augment the management team, executing on corporate development, and then really positioning the business and doing some of these broader transformative initiatives. And so an important point to that with our approach is, as Rich mentioned, a lot of operational background across the team. And then also as part of that, we have a vast network and a network we continue to build of operating partners that have expertise in these businesses sectors that we're sourcing in. And so we're leveraging our experience with retired or semi-retired executives, folks that can be value add to the board to really understand, the management teams kind of understand, hey, here's some of the mistakes we've made in the past. How can we help you guys really set up? What is the right sales and marketing model? Like Rich mentioned, for a lot of folks, it ends up being a hunter-farmer model, with hunters going after new logos and farmers mining existing. But that's not the same for every industry, and we look to kind of tailor those five value creation buckets appropriately.

Shiv: And in terms of the companies, because you're investing in founder led businesses and you're also expecting them to roll over a chunk of their equity here, a lot of PE firms will kind of just do a full buyout and be very prescriptive or a top down approach of what needs to be done. Culturally, how are you managing transformations or value creation planning in those instances, Richard? Because the founder is still involved in a key stakeholder in the process.

Richard: Yeah, look, as part of our diligence process, we're laying out the three to five year plan of where we want to take the business. And it's really important that the founder that we're partnering with buys into that vision and understands what that vision is prior to, you know, getting married, if you will, together. So I think, you know, Shiv, the way we address that is, by being very communicative, direct and open around where we see the opportunity and ensuring that there's alignment with that owner founder around where we're going to take the business and then working collaboratively with them post investment to achieve it. And look, there are different situations in these businesses in which oftentimes the founder may realize they've taken the business in the skill set that they have as far as they think they can in doing, you know, in being the CEO just using that as an example. This isn't always the case, but sometimes. And we want to give that founder the opportunity to do what they think they do best to add value to the business. We've had founders that said, look, I just want to focus on sales and marketing. Please take everything related to the back office away from me. And I think I can double the productivity of our sales organization. We love that. That's great, you know, and we want to help facilitate that as part of our investment process to ensure the people on the team are getting their best use in terms of where they can drive the most value. And ideally, you know, we're collectively checking our egos at the door, if you will, to ensure that that alignment's there to maximize that value.

Shiv: And when you're kind of coming in, I get the point where, let's say a founder might have a certain focus area, maybe they're leading sales or go to market or product or what have you. But on your side, you guys are a fairly small firm, right? And you mentioned using operating advisors and folks like that. So how are you getting deeply involved and where are you leveraging those folks and what does that model look like? Are you putting them in a fractional capacity? Are you taking companies through a framework that you've built, like what's your approach there?

Richard: Yeah, I would say that over the past five years, we've built out a meaningful operating advisor network in the sectors that we invest in. So these are executives that have had successful outcomes in the sectors that we're focused on. And we will typically engage them in a number of capacities. They can be advisors, they can be board members. They're oftentimes involved in the diligence process with us and then becoming an advisor or board member thereafter. And in certain cases, they can become an executive in the company if the fit is correct.

Shiv: Right, right. And on the team side with the firm, Stan, maybe this is for you, what have you done to standardize or share best practices across the portfolio? Because it might be that portfolio company A over here is doing something very well that portfolio company B could learn from.

Stan: Yeah, no great question. If you look at kind of how we allocate our portfolio across the firm, you'll see that, you know, across each portfolio company, it's a mix of the kind of different levels of folks on our side. So we have kind of that partner, the VP principal, you know, associate analyst type of role. We have all three folks on kind of each company. And for each one, it's the folks who did the diligence, close the deal, etc. So we learn a lot about the business obviously and diligence and lay out that value creation plan. And then we can kind of hit the ground running. But then the way we kind of share best practices across the firm is, you we have kind of a nice mix of the folks involved in each company. So that A, it continues to focus on the professional and career development of, you know, the folks on our team. But then also B, you know, you can kind of start to see different initiatives or issues or whatever it is that we're running into across the portfolio. And then we have a standardized kind of weekly meeting on the pipeline. We have our investment committee meetings. We kind of have our standard blocking and tackling meetings where we discuss what's going on across the portfolio as a team so that people understand the different initiatives. And we oftentimes try to leverage. And you know, what I might be doing on portfolio company A and one of my colleagues are doing on B. So we get the benefit of kind of scale across the portfolio with shared advisors, third party vendors, systems, those types of things.

Shiv: Where do you guys see, and that's helpful. I guess one question that jumps to mind as you're saying that is, where do you guys see the biggest areas of weakness inside the portfolio, especially with the types of companies you're investing in, service-based, like it's more in some of these sectors where I would imagine sales and relationships as the main go-to-market driver. So where do you see the opportunity areas or areas of weakness or places where these companies need to actually build sophistication to build a better business to get you to the type of outcomes.

Richard: Yeah, good question. I would say there are a couple of areas that are pretty consistent. One is, generally, we are looking much more forward in the business in terms of where we're going to take it and how we're going to predict where the business is going in creating a much more sophisticated forecasting process that has historically been in the business. Oftentimes in these bootstrap founder owned businesses, they've been run for cash. It's been more of a look back than a look forward. And what we have the opportunity to do is help them really look forward and have the headlights of where is the business need to go and where is it going and how can we tell what road it should be taking to get there. We spent a lot of time on that in helping the companies to do that. The second thing is, because the balance sheets of the company are typically the founder's personal net worth, they've not had capital to do corporate development and M&A. And I think we're helpful in establishing the criteria for M&A and add-ons that can either enhance the service offerings of the business by expanding them or geographic expansion, and providing the expertise to help navigate that, identify those targets, reach out and connect with those targets and qualify them while the management team is running the business. And then at the point that we identify something that we think is actionable, engage them.

Stan: Yeah, to piggyback off that a little bit, because I know we talked about this as one of our kind of five core buckets of value creation earlier. You know, a lot of times, as Rich mentioned, a lot of the companies we invest in haven't done M&A before, or if they have, it's been at a much smaller scale. And so out of the gate, we kind of teach them, you know, the Lightview way, if you will, from a corporate development perspective, and help them, you know, do diligence, negotiate the legal docs and the terms, handle the financing piece while they're focused on fleshing out the strategic cultural fit and working on integration. And so it allows us to kind of dual track those growth initiatives, but then it also gets the team kind of to a point when we exit that they have a self-sustaining M&A playbook and understanding what the best practices are in doing those.

Shiv: Yeah, I want to touch on something you mentioned on the forecasting side and running for cash. What are some of the ways - I totally get it, I mean, I run a bootstrap business. Cash is always top of mind. You think about runway and prioritizing that. So I get why founders think that the way that they do, but as, an institutional investor coming in, how are you going about changing that culture beyond the forecast? Because there's still the actual running of the business that needs to be prioritized. Is it infusion of capital or is it that you're finding ways to accelerate organic growth? Or how are you going about changing that culture in particular?

Richard: Yeah, I mean, look, there are cases where we're certainly adding cash to the balance sheet to support the business and growth initiatives. But I would say in most cases, it's really focused on enhancing the business operationally, enhancing the sales and marketing capacity and capability to convert customers that ultimately generates more cash and more profitability for the business that we can then continue to invest into the business.

Shiv: Right, and on the sales and marketing side in particular, are you hiring more folks? Is it that the businesses are more founder-led? What are the opportunity areas that you're seeing inside those specific areas?

Richard: Yeah, sure. So we've had businesses that had little or no online presence in what they were doing previous to us getting there, helping them to understand how SEO, SEM, other digital marketing techniques can have an impact in creating qualified opportunities that can then be converted to revenue more quickly. It's also objective evaluations of the sales organization itself and identifying are there things that can be done to optimize it, whether that's enhancing the talent, whether that's creating a more qualified process to identify what the ideal customer profile is. Those are things we spend a lot of time thinking about for our companies.

Stan: And one term you'll hear one of our operating advisors use a lot is crawl, walk, run. And it's, obviously a common term, but you know, when you think about whether it's sales and marketing or, you know, forecasting, we are investing in the company and adding, you know, different folks to the management team or to those, to those, you know, groups based upon what the company has and kind of the, the capacity they have to take on additional hires. But we do it in a way that's kind of, you know, controlled so that we're allowing the company to learn by doing and investing without, you know, over investing out of the gate and making, you know, too many hires or something along those lines. So that's kind of controlled aggressive growth that the business is able to sustain.

Shiv: Yeah, and what do you think is preventing founders from doing this before you guys are coming in? Is it purely just not having access to enough capital or is it that there's a gap in how professionalized the firm is operating?

Richard: Yeah, look, I mean, I think it could be both of those things. I think one thing that is helpful when we come in as a private equity owner is there is an understanding from people that or personnel that are now joining the team that there will be an exit in the business. In the context of, you know, we're investors typically with three to seven year holds, you know, our job is to create value over that period of time and create a successful exit. Well, the talent that is attracted to that opportunity could be different, you know, candidly than talent that may be coming into a founder-owned business where they can't necessarily see a time frame for liquidity and personal enhancement of their own wealth.

Shiv: Mm-hmm. Yeah, I totally get that. I think founders have to kind of balance all these different needs at the same time while continuing to fund the business. So I can totally see a partner like you coming in and supporting that. In terms of the decision making and see, because I think one thing you said earlier is that you're setting a three to five year plan for the business as you're coming in before you decide to make the investment and making sure you're aligned. How much of the founder's vision is being factored into that? And obviously I would assume the plan is for the founder to see that vision through. So I'm just curious what that process looks like.

Richard: Yeah, I think I used the word collaborative earlier and it truly is. So if we don't have alignment with the founder around their vision and our vision, this is not going to work. So really important that as part of the process of getting to know the founder, we're aligned around where they see the opportunity and where we may see opportunity that they haven't seen before, but now, understand it because we've helped to educate them around that and that they're excited about that opportunity. If that alignment's not there, we're not moving forward. You know, it just won't make sense.

Shiv: Mm-hmm. Mm-hmm. Yeah, totally understand that and there's a ton of founders that listen to this podcast. So as we're kind of coming up on close here if they're listening and looking for a firm to kind of partner with, what is the best way to kind of get a hold of you guys and in terms of their other firms that are maybe founder-friendly? What really distinguishes Lightview and what you guys can bring to the table for them?

Richard: Yeah, look, I think first of all, we're all on kind of seven by 24 here. So our email and cell phone numbers are on the website and, you know, feel free to reach out to us. But second, secondarily, look, I think we have a lot of experience doing this. You know, we've created 26 platforms to date, successfully exited 22 of them through my partner and my career in private equity. And I think the balance of having that operating experience as an operator, not just as an investor coupled with the investment expertise, I think is a differentiator. We're not all about financial engineering. We're about helping to really enhance the value of the business through operational excellence, improvement in terms of their go-to-market. Improvement in terms of their scale and their forward visibility. Those are all things that are paramount to creating the outcome that we want and they want to see over that hold period.

Shiv: Yeah, that's awesome. And we'll be sure to include all of that in the show notes and the links to the website and all of that as well. And with that said, Stan and Richard, thanks for coming on and sharing your wisdom. I thought there was a lot of great takeaways, especially for firms that are investing in B2B services companies. I think there's a lot to learn from that. So I appreciate you doing this.

Richard: Thanks Shiv, it was great to spend time with you.

Stan: Thanks for having us. Enjoyed it.