Five Questions with Alpine Investors’ Mark Strauch on small-market approach to software investing

Mark Strauch is a partner at Alpine Investors and a chairman of Alpine SG, the firm’s vertical SaaS aggregation platform. In a recent interview, Strauch told PE Hub sister title Buyouts how the lower middle-market PE firm sources deals in the software space and how it trains the next generation of senior leaders.

1. How does Alpine source deals in today’s environment?

At Alpine, we have heavily invested in the sourcing side of our business. We are trying to maximize the number of opportunities we see and we spend a great deal of time on the research side to map out different software markets that we like. Just on the team side, we have right around 15 people just focused on origination. When it comes to opportunities in software, there is a gap in the market, because certain companies often get overlooked by investors. There is a new cohort of software businesses that have emerged that are not appropriate for VC-backing and they are, in many cases, too small for a traditional PE. But they are good businesses in vertical niches. This gap has created thousands of companies in need of funding or in need of partnership, and this has created a lot of opportunities for us.

2. What’s your approach to investing in this so-called “software gap”?

Two and a half years ago, Alpine saw an opportunity to invest in bootstrap vertical software-as-a-service companies that haven’t taken any VC funding. We created a company called ASG, exclusively funded by Alpine, to directly serve the need of those founders. It’s a new sort of SaaS company—it buys and builds fast growing vertical software businesses under one umbrella. Think of Alpine as a parent and one way we invest in software businesses is through ASG, another—directly through Alpine. The ASG focus is primarily on bootstrap SaaS, while Alpine gets involved in security software, infrastructure software, call center software, among others. At ASG, we allow those companies to operate independently in the markets that they service, but let them share a financial backbone with ASG.

3. What kind of advantage does this structure give you in investing?

One example of how this is beneficial is that we are able to save over $1 million in cloud security alone. Investing in cloud security as a single company is expensive. But the scale that ASG has across 21 companies makes it possible. Those types of services, like a cloud security one, are a welcome addition to founders that are focused on growing their businesses and don’t typically have access to these kinds of services.

4. What is one thing that makes Alpine stand out in its approach?

Most PE firms, when they look at companies, they look at management. We are happy to honor that too, but that’s not something we see as a non-adjustable part of the deal. Often, we are happy to let the founder pursue other initiatives and select a new leader for the business. A bootstrap founder can be different, he or she may have different needs: They may want to go on the board, maybe he or she wants to go back to building new products or focus on customers, or maybe they even want to exit all together. And I think a lot of firms have developed a dogma that prevents them from supporting these ideas. We liberate a bootstrap founder to do those things if they want to.

5. How do you find right leaders to run those businesses?

You can’t very well liberate the founder unless you spent years and years training CEOs. We’ve built a CEO In Residence program and a program called CEO In Training. When we find opportunities that we are serious about chasing, we use those programs to source appropriate leadership. With the CEO in Residence, we hire experienced CEOs that run companies in similar space where we look to acquire and then put them through an Alpine training program.

And with CEO in Training, we are bringing people from top business schools where they have a great track record but not necessarily a lot of experience. We also put them through an Alpine executive training and then place them at companies in senior roles where they report to CEOs of these companies. You have to have those types of programs in order to make those types of deals possible.

Action Item: Contact Mark Strauch at mstrauch@alpineinvestors.com.

Update: The story was updated to clarify that the gap in software investing has created more companies in need of funding, which has created opportunities for Alpine Investors.