January 7, 2013
Interviewed by: David Snow
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What It’s Like to Be a Growth Company

Many private equity and venture capital firms target “growth companies.” What are these, and how can an entrepreneur recognize when their company has reached this critical stage?

Chris Masto, Senior Managing Director at FFLJeffrey Bunder, Global Private Equity Leader for EY; and Deepak Sindwani, a Partner at Bain Capital Ventures, share expert insights in the first of a three-part thought-leadership series called “Igniting Growth and Innovation: Private Capital and Entrepreneurs.”

Many private equity and venture capital firms target “growth companies.” What are these, and how can an entrepreneur recognize when their company has reached this critical stage?

Chris Masto, Senior Managing Director at FFLJeffrey Bunder, Global Private Equity Leader for EY; and Deepak Sindwani, a Partner at Bain Capital Ventures, share expert insights in the first of a three-part thought-leadership series called “Igniting Growth and Innovation: Private Capital and Entrepreneurs.”

David Snow, Privcap: We are joined today by Chris Masto of FFL, Jeff Bunder of Ernst & Young, and Deepak Sindwani of Bain Capital Ventures. Gentlemen, welcome to Privcap today.

We are talking all about growth companies and how they overlap with growth capital. It’s a fascinating topic. But why don’t we start by sort of setting the stage and asking: What is a growth-stage company, and how does it differ from, say, a start-up or a later-stage company? Maybe starting with Deepak, since your firm, Bain Capital Ventures, invests across a spectrum of companies, but including what you define as the growth stage. How would you define that? And what is unique to companies at that stage?


Deepak Sindwani, Bain Capital Ventures: It’s a very good question. I think that different firms cut it in different ways. Our view is a growth-stage company kind of achieves that moniker when they have a proven business model. And they understand, if I invest $1, I’m going to get $5 back over a certain period of time. So from our perspective, it’s really about: Is the company operating on its own, doing its thing organically, where if we added more fuel to the fire, we could just do it faster? And so that’s how we define growth.

Snow: Chris, your firm, FFL, invests in growth-stage as well as later-stage companies. How would an entrepreneur who started a company know when that company had reached the growth era?

Chris Masto, FFL: It’s an interesting question to try to think about generically. I guess you could simplistically say, companies go through stages of launch, growth, and then being mature. I think the best entrepreneurs are probably always focused on growth and trying to find it, even when they have moved into a somewhat more mature phase of their company. And most of the time, we are working with established businesses, but we’re really looking for opportunities where we nonetheless see a lot of growth ahead.

The characteristics that sort of lead you to have a strong growth opportunity going forward, regardless of how far you’ve come, often start with the market that you’re in. And so we try to spend our time in markets that we think have strong growth characteristics to kind of set the fundamental tailwinds for a company to grow. And then you’re looking for companies with a strong position in their market, so that they can grow at least as fast as the market.

Occasionally we’ll get involved in companies that may be in markets that aren’t particularly high-growth. But because the companies are, in our view, so well positioned with something that is really differentiated as a product or service, or their capabilities in the way they manage the company is superior to others in their industry, that they can continue to drive strong growth—even when the market may not have much growth in it.


Snow: Jeff, do you agree? As you look across your client base, do you agree with these definitions of when you know when you’re at the growth stage?


Jeffrey Bunder, Ernst & Young: Essentially there’s been a movement around venture and growth capital. And you’ve got a number of players now, both from venture side and private equity, looking for businesses. And those lines are blurred a bit. So we’re certainly seeing some differentiation, if you will, in terms of how funds are looking at businesses and opportunities around growth capital versus venture.

Snow: Is that a function of the changing private capital markets, or a function of the changing business landscape in which these companies exist?

Bunder: The interesting thing is, it’s a change in the investing side. Venture has probably invested throughout, whether it be start-ups and then later-stage investments. I think private equity is starting more and more to dip down into this growth capital market. The interesting analogy is when you look overseas at a lot of the bigger funds, most of the investing in the emerging markets is growth capital investing.

I don’t necessarily think that that’s being sort of transported from emerging markets back into the U.S. But certainly if you look at the private equity funds, there’s certainly now a history of investing in growth capital. It just happens to be overseas. In some ways, that model has been proven overseas. And now I think firms are more comfortable investing in the growth capital space. But it’s still, to me, pretty uncertain in terms of where you would draw the line. I just think it unfortunately means a lot more competition for businesses these days.

Sindwani: I would agree with that. Some firms think that growth is 10% to 15% annual top-line improvement. And others, like ourselves, kind of view it more in the 25%, 30%, or north. And obviously it depends on business size. If it’s $100 million business growing at 100%, it’s often difficult. Obviously it’s nice, but it may be a $10 million business growing at 100% a year. So it’s interesting.

The other thing I think that makes it somewhat confusing is, there are certain growth equity firms that only focus on founder liquidity situations in bootstrap businesses that have never raised money, where there are others—and there are exceptions to every rule, I think, in every firm, where they’re more real, kind of venture follow-on type investments, where a business might have already raised $50 or $100 million and is looking for a $50 million investment. They fit the growth criteria. And both, I think, by different firms, are considered growth capital.

Snow: I’d like to talk a bit about the things that a company that reaches the growth stage, however you define it, might need, in addition to capital from a possibly private equity partner. What are some unique challenges that a entrepreneur might face once they have that, let’s say, high-class problem of getting to a point where things are starting to take up some momentum, they’ve started to hire some people, growth is starting to accelerate? What, again, are some high-class problems that they might have that they might need help from a private equity firm dealing with?


Sindwani: The cliché term “growing pains” was coined for a reason. And that’s because I think what we’ve often found—and we’re gonna potentially look at businesses in their earlier stage of their life cycle—is oftentimes you need the founder and the entrepreneur up front to drive the initial vision, the spark, the creativity to work those hours and evangelize. And there’s definitely a skill set there that is unmatched and will always be a part of growth businesses.

But at some point, when maybe a company transitions to a phase where it’s about “I’ve figured out what my business model is—how do I scale it?” I think that’s a very interesting time for the business. And I think that has its own set of challenges.

A couple of things that we would point to, I think, that growth companies often need to really be focused on are: Do I have the right team on the field? Do I have the right athletes in each position? Do they understand what their roles are? Have they taken a business from $10 million to $100, or from $100 to $1 billion? And do they understand what that means in terms of the team management, in terms of the customer management, and obviously the processes that are involved?

So team is one. The second one is just the company scalability, as it relates to back-office systems, as it relates to the operations and procedures, even things like human resources and managing that properly. Those are two—I mean, there are several others, but I think those are two of the key things when you think about scaling a business that founders I think oftentimes need help.


Snow: Jeff, do you agree? What are some signs of growing pains that a growth-stage company might have that an earlier-stage or a later-stage company might not?


Bunder: As Deepak was saying, it goes back to, do you have professional management? And not necessarily you’d have a CEO, potentially, or a founder who’s an entrepreneur, and he has the vision, and there’s innovation. But the flip side is, what about all the functions within the company that need to be developed alongside as the company’s growing? And there’s less sophistication around that, less experience around that, and it’s vitally important as companies move to the next stage. They don’t necessarily have that background, in many cases. Or their view is, “We’ve handled it, and we’re a small company—we don’t need that sophistication.”

Snow: “I’ve got a vision. Why do I need some CEO to help me out?”


Bunder: Right. “We don’t necessarily need this. It’s added expense. It’s taking away from what we do well, and our focus.” And I think, look, there’s a point there where, as the company scales, it starts going through these growing pains, and the strain is there on the business. But I don’t necessarily think, in a lot of ways, the founders are appreciating that that’s happening. And it potentially creates a situation where there are obstacles to growth at that point.

Masto: I agree with everything both of these guys have said. The only thoughts I’d have to add is that one other area I guess we often find is an area of opportunity to kind of help out in would-be strategy and thinking more for the long term. And as companies are going through rapid growth and dealing with all the immediate challenges of running their business and focusing on making this quarter or making this year, there’s often not a process of really stepping back and kind of rechecking what’s the long-term plan. Where do we want to be in three years or five years? What are the threats to us being able to do that? What are the things we need to do to maximize our chances of success?

We find that area of strategic planning and looking out over the long term is an area where young companies can often—or not-so-young entrepreneurial companies—use some help, and where an outside perspective is really valuable to be able to bring to the table.

Snow: Please discuss Ernst & Young’s history of working with growth-stage companies.

Bunder: We’ve had a long history. Some of the household names now that are public, well-established companies were formerly small-growth businesses that we’ve serviced all along the spectrum of growth. And it’s certainly an area that we focused on. We call it an entrepreneurship.

It’s a focus on working alongside businesses as they look to grow and need that level of assistance and support and advice. We’ve been there for these companies and worked alongside these companies. It’s pretty fulfilling, because you end up seeing a business that may have started in someone’s garage that ultimately, over a number years, has moved to become a major player in a market, achieved public-company status. Working alongside those companies is something we value tremendously.

Privcap: What unique challenges do growth-stage companies face?

 Bunder: Companies that are in the growth stage are perpetually changing. And I think what we’ve seen historically is, these companies are not necessarily best in class in terms of governance, best in class in terms of operations or finance, and need assistance.

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