1 — Tell us about the origins of Frontier Capital and your decision to focus on technology firms outside the major tech centers.
When we launched Frontier in 1999, it was right in the middle of the dot-com craze. As a small, first-time fund ($45 million) we saw an opportunity in between venture and more mature buyouts, which were prevalent in our area with LBOs of older businesses. Growth equity for more tech-enabled businesses was very much in its early days. We chose it as our focus and we’ve been refining that strategy for 16 years. We’ve spent our careers in these flyover or emerging tech markets. We started off focusing on the Southeast and Mid-Atlantic. [More recently] we’ve opened up more of a national footprint. Our skill set and personality fit those markets really well. Those markets have a little less hype than major technology centers in Silicon Valley or Boston. They’re more relationship-based, which works well for us.
2 — Frontier coined a method called the smart growth approach. Could you provide a bit of color on that?
It means being aggressive but not reckless, being very thoughtful and measured about investments, about building a business incrementally instead of trying to get there in a year or two. I’m not being critical of the West Coast model; it’s just a different model. These are not winner-take-all investments with short windows of opportunity to revolutionize an industry. These are companies that are more focused on execution and they tend to be less sexy b-to-b, software and tech-enabled service businesses.
3 — Walk us through a recent exit, how it performed and how Frontier created value.
The last company we exited, Social Solutions, a Baltimore-based software company, makes performance management software for nonprofits. It’s a great example of an attractive growth asset that we helped position as more of an industry leader. We invested in 2009 with a large minority stake. We helped them pivot to a recurring-revenue, subscription-based model, or SaaS.
We helped recruit a new CEO, CFO and sales executive. [We also helped them] expand their market from private non-profits to include government agencies and other public-sector non-profits. They grew their recurring revenue by about 40 percent annually. We sold it to Vista Equity’s Vista Foundation Fund in 2014 and made 5x our money.
4 — How does your location in Charlotte, North Carolina, affect working with potential portfolio companies and recruiting?
For us, it helps not being from a major tech hub in our markets. [Prospective portfolio companies] view us as having just as much expertise as someone from Boston, San Francisco or New York, but we’re from a market like theirs. Charlotte is also an emerging tech market and that’s a huge positive for us. Plus the quality and cost of living here is very positive. We have a major airport hub that gives us the reach to have a national footprint. We also get a lot of talent for our firm from Wells Fargo, Bank of America, and other banks that have a huge presence here. Charlotte has a strong private equity and investment banking community that’s sort of under the radar.
5 — What challenges and opportunities does Frontier see in the current financial market environment? Has it led to better prices?
It seems like valuations and deal velocity have cooled a bit.
We still see great opportunity to bring our playbook to the table for lower-middle-market, sub-$100 million enterprise-value businesses. That market has been less frothy. We like to say we have an all-weather strategy because we don’t just issue debt and we’re not chasing as sexy a company. We’ve made four investments from Fund IV in 2015 and we expect the same pace in 2016.
Edited by Steve Gelsi
Photo of Richard Maclean courtesy Frontier Capital