FTV Capital, a growth equity firm specializing in FinTech and enterprise technology, recently closed on its 11th investment in 2020 — marking a firm record on an annual basis. PE Hub (virtually) sat down with Brad Bernstein, managing partner, to discuss FTV’s approach to investing through covid, the firm’s DNA of backing bootstrap businesses, and its evolution from venture capital to growth equity.
How has FTV evolved in recent years?
The very early days of FTV we were a little more venture-focused because the first fund was $200 million — back at the time of the internet boom. But what we’ve realized is that our network and our value proposition is best at helping companies that are already proven.
If we find a company that’s already convinced Wells Fargo or Bank of America that they are the best solution — we can go to our “friends” at those firms and validate their story and validate their value proposition. What we’ve realized is: we’re less differentiated at figuring out whether the idea is a good idea. We’re better at taking something that’s working and expanding that.
We really think that we’ve been able to distinguish ourselves by benefits of our model of getting those slightly more mature companies — where they are more durable, they can survive the financial crisis, they can survive the pandemic, but they can also generate high growth.
Our average portfolio company is growing across all the funds right now at around 40 percent a year over the last three years. So, obviously, this is going to generate results for our investors.
Have you gone up in check size as FTV has continued to raise larger funds?
If you think about the average portfolio of 15 to 20 companies per fund, what you’ll find is that we went from $40 million per average check to $50 million per check to $60 million per average check. It’s pretty reasonable, especially as valuations are increasing generally as well. The idea here is to always stay below $100 million, to really stay in this market where proprietary deals can be identified, where you can build relationships with a management team overtime.
How does FTV differentiate through its sourcing strategy?
FTV was founded on the idea of investing in the intersection of financial services and technology innovation with a network of strategic advisors, which initially were our investors. Over time we evolved it into a very rich network that we call our Global Partner Network. That network has informed our business model. We are trying to listen to that network as to where their pain points are, where the opportunities are, what do they need, and then go out and find companies that are innovating, that are adding value, that could be relevant.
Over time we’ve built a sourcing engine, which obviously includes a lot of people. But we’ve built a proprietary technology platform and have been able to extract a wide range of datasets that we integrate into our CRM, into our software, so we can track the progression of every company in our universe and really make sure we’re touching on all companies that are emerging. So each year we are touching around 9,000 companies to look at 400 to 500 deals a year to find the best five to 10 deals that we’re going to do. And that whole system is another key element of how we do what we do.
What are some themes within FinTech and Tech you’re focused on?
One area that we were tracking since last year is pet insurance, which is the fastest growing insurance market as a category. We identified a tech-enabled pet insurance company in the UK that was growing at over 100 percent a year: Bought By Many. And, interestingly, covid accelerated the company’s growth because people are home with pets; they are caring about their pets or even getting a second pet.
We’ve been very active on the front end of wealth management with investments like InvestCloud and Riskalyze. This year, we invested in a company, Docupace, and we brought in an investor from our network to run it.
Docupace digitizes the client onboarding experience in wealth management and they are the leader in the market. We think that’s going to be a critical part of what people need to do to be competitive in wealth management. Obviously, with covid, digitizing this experience is critical because you can no longer sit in front of the client and get them to sign all their documents and manage the paper files.
We’ve been active in healthcare. This summer we invested in a company called Six Degrees Health, which is a really disrupting healthcare pricing provider for self-insured businesses — giving them the power to negotiate claims in a much more effective way.
We are about to do something exciting in the e-commerce payment space.
Where do you see FTV in the next 10 years?
When I think about the next 10 years, we really want to do more of the same. We’ve continued to be very successful internationally and I think you’ll see more success and more expansion internationally. We think our strategy is still very relevant both slightly downmarket and slightly upmarket. So I think we will continue to think [about] how we can serve entrepreneurs across our ecosystem — who needs less money, slightly more money, and internationally.
We have a lot of lessons learned from the early days of our firm when we dealt with some VC stage companies. One is the importance of emphasizing downside protection, which is building the infrastructure, building the resiliency, focus on cash management, cost efficiency, really digging into the unit economics and making sure that we are capitalizing our businesses.
If you look across our portfolio you’ll see that we use very little debt and we try to be conservative in how we capitalize the businesses. As a result, we make sure that our companies almost never get into trouble and are able to withstand bumps in the road. I think it’s a very important mindset that helps our companies to get to their ultimate goal.
Action Item: Check out FTV’s recent form ADV.
This report has been edited for clarity.