How do you define your investment style?
We consider ourselves to be active investors with our growth acuity fund as very seldom we take complete control of a company. We are not a buyer firm which acquires management control and board directors but is typically a significant but minority investor.
How do you define yourself as an active investor?-It is when you talk to one of our portfolio company’s CEO years after we have made the investment and ask them who the most influential active member of your board of directors was. We trust that their answer is “person from the NewSpring is.”
We are there to help our portfolio companies both during their diligence period and after investment. We help them analyze their capital structure and optimize that between investment acuity and debt. Also, we assist them in identifying operational improvement; it could be gross margin improvement, rationalizing their cost structure to identify a commission plan for their salespeople, or identifying new and different lines of business both now and in the future.
What is your strategy to differentiate between the opportunities that you see?
At NewSpring Capital, we have a specific investment strategy that we follow which is called the “three M strategy— Management, Market, and Business Model.” There are bullets under each one of the major categories. This strategy gives all of us a common vocabulary or language to talk about one deal versus another deal. For instance, if real estate is all about location, then venture capital is all about management.
We are looking for people who have deep domain expertise, someone who is not a first time CEO. The reason being they know the gauge and routine about running these companies. The best indication for us towards a leader is the one who attracts followers (they have brought one or more people with them from other companies they used to work with).
Coming to market opportunities, we are targeting the large markets that are growing at nice rates. But these markets tend to be a fragmented market. Because the fragmentation provides a number of key advantages to us; there could be many interesting companies that we can acquire and also brings in good opportunities down the road.
And lastly, with the business model, we tend to apply quarter five forces looking for companies that have high recurring revenues, growth margin, and capital fishing paces of attracting new customers in today’s SaaS world.
Could you shed some light on your role post investment?
We typically take an active role in the audit and compensation aspect of that board which gives us a particular view of the compensation play. We look at the numbers from an audit perspective because we view that money drives results. During our diligence period which runs between 45 and 90 days, the team which is working on a particular deal will spend time thinking about how the first 90 to 120 days of the company in question would look like -things they want to make sure is in place whether it is a new CRO, commission plan, or work around the rationalization of their growth margin. We will put together specific goals and objectives that we want to accomplish in the first 90 to 120 days and then we hold ourselves accountable to that.
Lastly, we refer to ourselves as a value creation team; people who are not direct employees of NewSpring but who have particular domain expertise in marketing, sales, IT infrastructure, finance, and HR. We refer them to a particular company and help that company to do better in what they are doing or help them identify opportunities.
How do you think your current portfolio of companies has benefited most from your guidance?
One such use case is, we are convinced that this industry spends far too much time thinking about just revenue growth and not on “profitable revenue growth.” And when we invested in one of our portfolio company, we commissioned all their salespeople on revenue growth. But in this particular company revenue, A had an 80 percent margin on it, and revenue B had a 40 percent margin. So, we helped that CEO to redevelop their revenue plans, so they commissioned their salespeople on margin dollars and not on revenue dollars. In the next two years, the company started selling far more of the 80 and 40 percent margin business in 18 months.
What would be the single piece of advice that you could impart to the budding entrepreneurs?
One should understand the power of social media and channel it towards their growth. Try to find a way to make a warm connection with the funding source. Use platforms such as LinkedIn to build good connections. If you are just sending a business plan, there are chances that it may get lost in the pile of emails. So if you are (someone who is trying to get on the top of the pile) thinking of making a warm introduction to NewSpring capital, anyone who relates to the company, be it an investment banker, lawyer, accountant, or insurance broker— will get you much further than just a blank call.