Episode 57: Sean Cantwell of Volition Capital on
Growing Portcos by Building the Operations Function

Episode Transcript  

 Shiv: Alright, Sean, welcome to the show. How's it going?

Sean: It's going well, thanks. Appreciate you having me on, Shiv.

Shiv: Yeah, excited to have you on. So why don't we start with your background and volition and then we'll take it from there.

Sean: Okay, so let's see. You know, my entry point into private equity, 2001, moved to Boston, joined a firm Summit Partners, who along with TA Associates in the 80s really created the category that is now referred to as growth equity. Very formative experience, was there for a few years, went to business school at Harvard, and afterwards was really looking for a firm where I could leverage my experiences but perhaps join a smaller firm, more of an upstart type operation where I could, you maybe take on a little bit more responsibility early in my career. So I joined Fidelity Ventures, an in-house venture and growth stage investing effort within Fidelity Investments owned by the shareholders of Fidelity. And I ended up getting even more than I bargained for in terms of opportunity to take on responsibility. So much so that I met my now co-founders, Roger and Larry, and we spun out and launched Volition Capital in 2010. Fast forward 14 years, we're currently investing from our fifth fund to $675 million investment vehicle. The focus remains very consistent with our roots and that is partnering with principally bootstrap capital efficient technology companies that have achieved a certain level of revenue scale, you know, for a software company that's typically, you know, kind of 5 million or approaching 5 million and recognize there's an opportunity to really go for it and raise capital, bring in some of the resources that goes along with capital and make those investments to really grab market share scale aggressively. The focus remains the same. We just have more capital, more resources, bigger team, so we can do more of that. And that's really the goal. And I'd say today, as we sit here in kind of the back half of 2024, we're really looking to make a lot of investments to position ourselves well for the next 14 years.

Shiv: And what is the ideal profile of a company that you're trying to invest into? What does it look like? in terms of revenue or stage, just help me understand.

Sean: Now Shiv, I know you're focused on SaaS, so I'll direct my answers more in that direction. But I will say just as a framing, we're probably two thirds of our focus would be on SaaS, businesses, traditional kind of application SaaS. One third internet-enabled business models, and we're organized in teams along those lines. From a SaaS standpoint, as I mentioned, from a revenue scale perspective, we want to see a broad base of referenceable customers. We want to see a history, we want to see evidence of renewal cycles. We want to understand our customers really getting value from this offering. Of course, retention is a good proxy for that. I mentioned, know, bootstrap, capital efficiency, you know, it's a little bit subjective to a degree. Really, we're looking for companies that have accomplished a lot without raising huge sums of money. So it's you know, demonstrated ability to accomplish a lot on a shoestring budget. That gives us more confidence writing a check of 10, 20, 30, $40 million and handing it over to an entrepreneur that has already, you know, shown an ability to generate a return on limited resources. I'd say on the SaaS side, it leans more enterprise. It leans more B2B in nature. and we have to think that there is an opportunity to build a meaningful category defining company. so just because a company has been capital efficient or bootstrapped in the early days, by no means are we looking for companies that are taking a conservative posture. It's more go for a big outcome, but do it in a responsible.

Shiv: Are you hoping to be the first check into a business or at least the first significant check that a founder or an entrepreneur takes on?

Sean: That is usually the case, yes. First kind of meaningful institutional round.

Shiv: Yeah, and then I guess it's a bit different from your background, right? You mentioned some folks that you started your career with like Summit and TA and they're actually pretty big partners of ours. But those are focused on very late stage companies, companies that have gone through stages of evolution, often north of a hundred million in revenue. And here we're talking about companies that I would say that are often sub 20 million, even sub 10 million. Is that fair?

Sean: That is absolutely the case. It's also worth noting, by the way, the Summit and TA of 2024 is very different than the summit in TA of 1984 or 1994 or 2000. The opportunity to focus on companies of this size and stage in this segment, it's a perpetual one. And there are many firms that have come before us with a focus not that dissimilar, had success, raise larger funds, move up market, raise larger funds, move up market. So in the case of Summit, obviously very big firm, large funds writing very meaningful checks. We are not competitors with them.

Shiv: Right. And so how do you look at generating a return from these kinds of investments? There's a lot of VCs or early stage investors around. So what differentiates your approach or how you look at value creation inside these companies?

Sean: Yeah, so I'd say there's a self-selection process that happens in both directions. Because these are companies that usually haven't raised a large institutional round of financing, I think that first hurdle is convincing a founder that there are positive reasons to partner with an outside third party and in some ways try to demystify some of the concerns that might be associated with giving up control or some element of control, I use air quotes there. So there's very much like a relationship element to what we're doing. Key to success in this category, you have to have a good sourcing initiative. We're focused on still quite young companies and new companies are started every single day. So the market size, if you will, is quite large. So we spend a lot of time and effort trying to identify and develop relationships with these entrepreneurs. When we make an investment, we're very much viewing this as a partnership and we want to be viewed as a business partner. So I think trust is an element. Relationship is an element. Capital certainly is an element. Every entrepreneur likes to say that valuation is not the priority. Valuation always matters. We have to pay a fair price for these assets and certainly happy to do that. And then it's really like an exhibited track record of helping entrepreneurs and companies of a similar size and stage. I'll just say generically, you know, companies that are five to 10 million of ARR that are trying to get to 50 or a hundred. We now, after having done this for 14 years, have a long track record of companies that have walked that path. That has a lot of appeal. And then, you know, I mentioned today, we're really trying to build some of these operational resources and position ourselves for the next 14 years. So not only are you going to get a good partner and a trusted sounding board around the table, but also a library of resources that can be leveraged to help you from an operational standpoint. So we have one of our former portfolio company CEOs, Pete Lamson. He came in, he's our COO and head of portfolio operations. We had our first CEO and CFO leadership summit a couple of weeks ago. I could talk more about that if you want. And then, we also launched what we call Volition Edge, which is a repository of resources, best practices, contacts, networks, in order to help you on that path.

Shiv: Yeah, talk about the ops side first. And I'd love to hear about this Edge platform because we're seeing a lot of PE investors build out ops teams. Now I can tell you like when we started this firm five years ago, the thesis behind me starting the company was that PE firms did not have big ops teams and marketing was one of those overlooked areas. So they would look at us as an external marketing ops partner. And now what we're seeing is the hiring of a lot of generalists into like this head of portfolio operations or managing partner of operations type of roles. And they are building a network of providers, almost like a Rolodex or a tool in their toolbox that they can call on based on the needs of a company because the deal teams are actually just focusing on sourcing and closing deals. And now you kind of have a person internally focused on that. So talk about how you see that function evolving inside your firm and like long-term, like are you hoping to become like a Vista that has a ton of resources? Or is it more of this having a partner network that the operating partners rely on? Excuse me.

Sean: Yeah, I'd say our goal is to have the right strategy and approach for the segment of the market we plan. The constant is the segment of the market we plan. So I think there's a natural evolution of firms. You if you go back to our first firm, our first fund, excuse me, $170 million. We have a small team, limited resources. The support that a portfolio company would get was largely limited to the person who led that investment and sits on the board. That works early on because you have a small portfolio. You can devote a lot of time and attention to each individual company. And it's also a necessity because you just don't have the resources to have internal operations. As you evolve, I'd say we walk that journey that you kind of alluded to where we say, okay, we have a bigger fund, we more resources. We can invest in operational support. What is that most obvious area that every company we invest in needs? Talent, number one, right? So we've built out a talent and recruiting function so that when you take an investment from Volition, you have access to our talent team and they can be a resource either directly leading executive searches or providing support and helping you assess talent or structure, things of that nature. When I mentioned bringing in Pete as our COO of, of, and head of portfolio operations, it's kind of like that hub and spoke model that you alluded to, right? Where we are the aggregator of information, best practices, resources, but then can also, you also connect you to folks who are best in class in marketing in your case, in pricing and packaging in another case and on and on. I think it's unlikely. So do we have aspirations to be Vista equity? No. But I think we will certainly continue to walk on that path of expanding our resources. Our goal is just to have impact, right? We want to have top performing funds. We want the entrepreneurs we work with to have life changing outcomes and anything we can do to provide assistance on that journey within reason, we're going to do it. I'd say the one other distinction that's worth making is most of the time we are minority investors. So we're not buyout investors. We usually do not have a controlling position in the companies we invest in. So it is very much a partnership. And the founder and the CEO is calling the shots. So we want to bring to bear resources that are useful, but by no means is it a mandate. They are available and we have the perfect scorecard on whether they're valuable. And that's just based on our people using them or not. So far so good, I think we're having positive results, but the market, our portfolio company will tell us if we're on the right path.

Shiv: Yeah. How do you balance this need to build out like an internal ops team and expertise and getting the right amount of support to your founders and entrepreneurs with just operating an efficient fund? And I'll just give a small story. I spoke to the head of portfolio ops for a massive fund yesterday, about over $40 billion in assets under management. And they had leaned the route of Vista for a while, and trying to build a very large ops team. And in that conversation, he said that they're actually reverting to more of having some leaders internally that head up operations and having more of this hub and spoke type of model. And so we've seen both models work. Like Insight is another example where they have a large ops team as well. And so how do you balance that and just unveil the curtain a little bit on your side of like, what are some considerations when you're deciding do we have one person in ops or five people in ops? And how do you balance that with the other priorities of the fund or the firm?

Sean: Yeah. So, you know, we have a finite budget. Our business model, like every other firm out there is, you know, management fees and carry. So you start with the management fees. We have to hire an investment team. We have to be able to go out, find companies, meet them, develop relationships, diligence them, provide post investment support just from an investment team standpoint. As you grow in scale, you have more resources. But I think we're taking more of the crawl, walk, run approach. I don't think you'll ever see us where you have an operations team that is the same size as our investment team. It just doesn't make practical sense for our segment of the market. I think we can get a lot of leverage from a smaller team that is sharing best practices across these companies, aggregating those resources, and enabling folks to tap into those resources as needed. I don't think this is like a build it and they will come type situation for our segment of the market, but rather build a capability, provide that to the portfolio, see if it is used, consumed, valued, measurable. And if so, we'll invest more in those categories. So talent is one of those first initiative I mentioned. We built and added to that team. So I think it'll kind of grow at a more measured pace. I think just you made a passing comment earlier, generalist versus specialist. I'm a believer that you need specialists, right? And it's not realistic for Volition to have a full roster of specialists. I think we will have a smaller team of generalists that can then top tap into specialists, kind of masters of their domain in different functional areas.

Shiv: Yeah, I think that kind of a model allows funds of all sizes to be able to support their portfolio companies while at the same time staying lean enough so you're not burning too much capital in the operations of the firm more so than the investing. That's great. You mentioned something earlier, the Volition Edge platform or whatever, where you're sharing some of these files. Help me understand that and what your approach there is.

Sean: Yeah, so Pete to his credit, you know, in six short months, Pete just by way of background, he was CEO of one of our portfolio companies, Jazz HR. That company was acquired as part of a PE roll-up, now branded under the name Employ, of which there are several sub brands. 

Shiv: Employ was actually a client of ours, we worked on Jazz. It's fun.

Sean: Okay, so in the HR tech space, so Pete was kind of CEO of that combined entity under a PE ownership. He has seen, you know, multiple stages at multiple companies. He's been at multiple private companies. He's been an executive officer at a public company. And he comes at this with a lens of having seen a lot and being able to hopefully productize, if you will, some of those capabilities that he found incredibly valuable as a PE-backed CEO. There's some really easy low-hanging fruit type things like, hey, company takes capital from us. They've never had a board before. They don't know what a board deck looks like. So there's a whole folder of just templates of different documents that could be useful, spreadsheets on how to really manage and monitor and track KPIs for a SaaS business, how to understand sales and marketing efficiencies. So kind of roster of just templates that are there as resources for people to leverage. But then also like best practices across a few different, we're calling them centers of excellence. So strategic planning. That's a common one. A lot of times, you know, now all of a sudden companies have a big balance sheet with a lot of cash. They've never had that before. And now they have a venture investor on the board that's looking for a return. A lot of times, executives are looking for some help and assistance on how to think through that annual planning process. So there's a center of excellence and a lot of content around that. Managing the financing, sales and marketing talent, those are current centers of excellence. So each is a repository of white papers, presentations, podcasts, videos that are resources for entrepreneurs. And then, going back to this kind of hub and spoke model. In any of these categories, we want to really bring to bear a roster of resources, consultants, that if you wanted to go deep in pricing, that's a common one that comes up with SaaS companies. Are we pricing our product in the most effective way? Well, we could share some best practices, but you might want to get more tactical about that. And it's going to make sense to engage a third party on that. And we can really broker those introductions. I can't tell you how many times I'm on 10 plus boards right now, countless number of times in a day or a week do I get asked, hey, can you intro me to some accounting firms? Can you intro me to some law firms? Can you intro me to some commercial real estate brokers? And if I'm getting asked that question, everyone on the team is getting asked that question. So really consolidating those resources and creating kind of like a Volition portfolio intranet for all of these executives to tap into.

Shiv: Yeah, I think that's such a great opportunity for all PE investors to have, just to be able to share resources. Like we get asked this all the time, given our expertise in marketing, like, do you have a good website agency? Do you have a good paid media agency? 

Sean: Exactly.

Shiv: And it's all referral based, like somebody that you can actually trust that's making that recommendation is way more valuable than finding somebody like that you've met cold and are trying to evaluate if it's the right kind of fit.

Sean: Yeah, and it's an opportunity to just save people some time and effort.

Shiv: For sure, for sure. What about like internal training or you mentioned talent and that's about obviously getting the right folks in the door, but especially at the stage of companies that you're investing in, you don't have like a fully flushed out executive team inside most companies that are fully at the maturity level that you'd have inside of a larger business. So what kind of work or effort is being put into educate or train those folks to level up in their careers?

Sean: Yeah, so that's probably something we should put on the roadmap, candidly. I think you're right in your assessment. We're usually investing almost always in entrepreneurs who, you know, they're in the biggest job they've ever had running the biggest company they've ever seen every single day. They've been pretty capital efficient. And as a result, you usually have one, maybe two founders wearing multiple hats. They know that doesn't scale. It obviously doesn't scale. So step one is just really having a conversation about like, are those high impact executive hires that need to be made? And then assisting them with that in our talent team will help them map that out. I think, you know, when an entrepreneur takes a round of capital, that's usually a moment for introspection, you know, from that executive and understanding what are their capabilities? What are their aspirations? What role do they want to play in the company going forward? And we certainly will have a lot of conversations to that end. We have seen entrepreneurs scale from nothing to over a billion in revenue. And then there's other entrepreneurs that maybe get from zero to 20 and say, gosh, I really like that early stage element of the business. Let's bring in a CEO from the outside that has helped a company get from 20 to 100. I think in the former case, that need to kind of develop and evolve and supplement your skills is a required element. The best CEOs I've been around, interestingly, are voracious readers and consumers of management books, autobiographies, biographies, business books that cover a variety of topics. I mean, it's pretty consistent with the entrepreneurial nature that gets you into this crazy life in the first place. You don't know what you're doing. You just see opportunity and you take the leap and you go for it. And I think entrepreneurs are good at kind of figuring out that path as they go. But professional development, that's not a capability, you know, kind of we actively provide today, but that's, you know, worth some discussion.

Shiv: Yeah, we're seeing more of that in private equity firms. Like we're seeing more and more of PE firms hold like annual CEO summits or annual revenue summits. And even we launched our own first training program a couple of weeks ago and we promoted it through contacting PE firms and saying, do you have any marketers I want to level up into being a CMO, send them to our program. And we got a bunch of sales through just that channel directly because they want that. They want more training and stuff like that. it's stuff that I think PE firms are starting to think about more, but it's still earlier days where they haven't fully built all the processes and systems to make it like an ongoing thing that they consistently invest into, but it's becoming more prevalent from what we've seen.

Sean: You know, I probably undersold what we're doing on that front because we did just have our CEO leadership summit a couple of weeks ago, which was our first ever. And it was incredibly well received. I mean, we had a full agenda covering topics around strategic planning, around recruiting talent, team building. What we witnessed, and I think the takeaway just based on the feedback from entrepreneurs, the piece that was valued the most was just the ability to get all the portfolio companies together in a room. Being a CEO of a venture-funded company is a lonely job. And I think people really benefited from even just some of the informal impromptu conversations during the breaks. And a lot of relationships were made that I think will be kind of mutually beneficial going forward. So we certainly want to build upon that. The first one, I think, it can always be better and it will be better, but I think we did a decent job with the first one and we're going to look to build up.

Shiv: Yeah, that is uniformly what I hear whenever I go to one of those things is people value meeting each other. The content is good, but it's like meeting each other and learning from each other or talking about a side topic over here, I think, or something else over there. It's like, that really is what adds the value. And then there's recurring value to that relationship because now you have a colleague, I guess, that you can ping as things come up in the future as well. So I think your instinct there is right, is that having more of those natural conversations is key to adding some value, which it's harder to spot like this. It's very hard to say that conversation is worth this much in actual dollar value or returns, but it's actually helping those businesses grow and also helping the CEOs feel less alone. 

Do you, how much of the work that you guys are doing like in terms of connecting the portfolio together is focused beyond the CEOs? Cause you know, you have leadership teams like the CFO or the CMO or the revenue leader, like they're just as pivotal to the success of the organization. So I'm just trying to understand, do you have aspirations to do similar things for those types of functions as well?

Sean: Yeah, you know, Volition Edge, which is the kind of portal and platform I referenced is accessible by, you know, kind of the entirety of the management team. And there is content in there that speaks to each of those functional leads. We're also trying to really connect the leaders of functional areas across companies. You know, we're doing that through, you know, kind of curated Slack channels on a variety of different topics, marketing, finance, sales, customer success, et cetera, where, you know, folks that are fulfilling a similar role in different companies can convene and really kind of share ideas, best practices. That was one of the topics that came up in conversation, but that was kind of already in the works, and then really doing like a series of webinars throughout the course of the year where people can come in and discuss topics that are really relevant to their functional area. So absolutely, we're in the infancy of really what we're trying to build here, but some of those capabilities exist and we wanna build on those.

Shiv: Yeah, totally. I want to reference, I was reading up on some of the content you put out and I know you have a podcast as well, but one of the articles that you've written on the website is just about founders coming back to fundamentals in 2024. Just tell me a little bit more about that. And obviously you wrote this article at the end of 2023. So as this year has evolved, like how have you seen your company succeed or fail or where have you seen founders focusing on the fundamentals really drive value for their companies?

Sean: Yeah, well, think, I mean, the game has just changed over the last couple of years. We all, entrepreneurs, investors, we operate against the backdrop of you know, 2020, 2021, interest rates are super low. Capital availability is through the roof. I think intellectually, entrepreneurs recognize that capital efficiency, however you want to define that is the right way to run a company. But when someone's knocking on your door and offering to give you $20 million at a really high valuation, it's hard to say. You say yes, now you have this money on the balance sheet and you have an investor around the table who's looking to generate a three to five X return on that money that came in at a high price. That sometimes encourages risk taking that might be pursued not necessarily in the most risk adjusted way, which can lead to growth, but sometimes it's kind of sloppy or transient growth. It's not durable. You know, in the aftermath of the market correction, and by the way, you know, 2023, 2024 is not really any different than 2010 or 2001 or 2002. I've seen this movie before. History repeats itself. Now all of a sudden capital is more expensive. Guess what? Every investor on the planet is saying, get profitable, extend your runway, manage your cash. Instead of, you know, three years prior, people were saying just get as big as you can and then raise that next round of financing. So that just forces entrepreneurs to focus on different things and fundamentals comes back in vogue. You know, now efficiency metrics, which might have been overlooked a little bit. You know, what's your gross retention, net retention, logo retention, what's the payback period, what's the lifetime value relative to the customer acquisition costs, all these things. There's like a tighter scrutiny, and the understanding that you really have a scalable business. If you really want to strip that down and get to the root of it, you’ve got to have a good product delivering value to your customers. You can't fake that. And that's really the foundation of everything, is built upon that. So now in 2024, I would tell you that we get on a call with an entrepreneur and they are giving our pitch for us, right? They are already, in most cases, managing towards profitability and really trying to drive profitable growth. So when I say fundamentals, I'm really talking about profitable growth as opposed to growth at all costs.

Shiv: Have you seen, given that you're investing in the earlier stage, like have you seen some of the investments that you made a few years back? Like, have you seen their valuations kind of come down or how have you navigated that uncertainty as interest rates have gone up and valuations have come down, especially given the stage that you're at and then you kind of have to at some point count on these founders exiting, I would imagine, for your fund to kind of pay out. So how have you handled that?

Sean: Yeah, so valuation environments fluctuate for sure. Private markets are different than public markets. So let me just say that the private market does not mark the market every single day like public comps do. There's no perfect proxy for where private market valuations are, but we often look to the public markets as a baseline. And if you look at the revenue multiple of SaaS companies leading up to 2020, then you look at it from 2020 to 2022, 2023. I mean, there was a massive spike. Now it's back down to normalized levels. What are normalized levels? You know, for kind of a top quartile growth profitability, SaaS business, probably high single digits. At the peak, you were seeing 15 times revenue, sometimes even 20 times revenue. So that has rationalized. We're investing in companies that are usually young enough and growing fast enough that those multiples get bought down over time through growth. Right. I'd start by saying we didn't really put a lot of money out the door at peak market multiples, right? Because we try to take a longer term view of what is a reasonable, sustainable valuation of a business. So it's not like we made a lot of investments and now we're sitting here saying, gosh, this thing's underwater. I think the combination of being disciplined on entry price, combined with the fact that we're investing in high growth companies, those two things have kind of neutralized themselves. You're right, we need to generate a return for our investors over some time horizon. And we're no different than any other private equity venture from that regard.

Shiv: So how have you or how do you looking forward now, what kind of characteristics are you looking at for companies that you're investing in to make sure that you're hedging for some of that uncertainty in the market, right? How do you...

Sean: Yeah, well, mean, the easiest way is just control your destiny. So I don't care where we are in the economic cycle. When we write a check, there is an understanding that the company's raising money in order to invest. And there's an expectation that that investment is going to lead to scale. We also always go into those investments with the understanding, and we have very explicit candid conversations with management that the capital on the balance sheet should get the company back to great even for profitability so that there is no requirement to ever raise incremental capital. That's the goal, right? The beauty of recurring revenue SaaS businesses is that you have an annuity. Assuming you have a good product and customers like your product and they renew, you have an annuity stream in terms of a fairly predictable revenue stream where you can flex up and down on the levels of investment in order to get back to breakeven if need be. So that's really the mindset. And there's a lot of conversations with entrepreneurs about this. If, boy, things did not go the way we expected, and now all of a sudden we have a burn rate that's higher than we'd like, and we have a cash runway that is shorter than we'd like, instead of just saying, well, let's go raise the next round of financing to cover the losses, no. It's, let's turn the dials and get profitable. So that's really the mindset. And so much of this, you know, I talk about relationship, trust, partnership. You want to get into business with people who have a shared view on how to build a business. And that's a two-way selection process. I talk about self-selection. That's us to them and them to us. So we have lot of these conversations about what's the right philosophical way to really try and grow a business and drive shareholding.

Shiv: Right. Yeah. I think that alignment is key. And I think a lot of what you said about vetting the businesses upfront and select appropriately is one of the keys to success, especially, especially now. So with that said, if there are founders listening that might be interested in working with you, how would they learn more about you and what Volition does?

Sean: Yeah, you know, volitioncapital.com is the front door to Volition. I think there's a decent amount of content in there that tells the story not only of our approach, but the types of companies we invest in. I do have a podcast, as you mentioned. It is not as well established or popular as yours, Shiv, but I can dream that one day I'll get to that level. And then reach out to us. There's, you know, kind of contact me information on the website. There's room to submit, you know, pitch decks, company overviews, things of that nature. We also are always coming to a town near you. You know, as part of our investment prospecting, we don't sit back and wait for companies to come to us. We pick up the phone, we call companies, we send a lot of emails, we get on planes and we go visit entrepreneurs. And a lot of times that's well in advance of a fundraising. So we're really just trying to build relationships with good entrepreneurs, interesting companies in new and exciting markets. And I have been doing this long enough now to know that all good companies with big ambitions, regardless of how they capitalize those companies in the early days, eventually they do something. So we just want to be in the discussion when those companies choose to raise capital. So entrepreneurs can reach out to us, but more likely than not, we'll get to you before you get to us.

Shiv: That's awesome. And so we'll be sure to link all of that in the show notes along with the website, the podcast and everything else. But with that said, Sean, thanks a lot for coming on and sharing your wisdom. I thought there's a lot of great insights for the audience to take away from it. So I appreciate you doing this.

Sean: Thanks for having me on, Shiv.