The Importance of Being an Active Investor
How do you define your investment style?
We consider ourselves to be active investors within our growth equity fund. As an active investor, the goal is to be an influential and impactful Board member. Anything from helping a portfolio company analyze their capital structure, identifying operational improvements or a commission plan for their salespeople, to 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, we have a specific investment strategy that we follow, called the Three M (Management, Market, and Business Model) philosophy, which informs how we invest across all our strategies. This strategy gives all of us a common vocabulary to talk about one deal versus another.
For instance, if real estate is all about location, then growth equity is all about management. We are looking for leaders who have deep domain expertise, someone who is not a first time CEO, as they know about running these companies and what it takes to succeed. One of the best characteristics of a quality leader is one who attracts followers; someone who may have brought one or more people with them from other companies where they used to work. This willingness to follow a leader to another company demonstrates loyalty and speaks volumes to that leader’s ability to manage people.
At NewSpring, we have a specific investment strategy that we follow which is called the “Three M philosophy— Management, Market, and Business Model
As for markets, we pursue industries that are large and growing. These markets tend to be fragmented, which provides a number of key advantages, such as interesting acquisition targets that could bring in good opportunities down the road.
And lastly, with the business model, we focus on businesses that consistently deliver value to customers on a foundation that is scalable and capital-efficient.
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 often drives results. During our diligence period, which runs between 45 and 90 days, the team that is working on a particular deal will spend time thinking about what that first 90 to 120 days of the company in question would look like. We will put together specific goals and objectives that we want to accomplish during this time and then hold ourselves accountable to meeting those goals.
Lastly, we also leverage a value creation team comprised of 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 to help that company improve their operations and proactively identify opportunities.
How do you think your current portfolio of companies has benefited most from your guidance?
Our approach is to focus on profitable revenue growth. I recall one example where we helped a portfolio company transition their sales commission plan from one based on revenue growth to one based on margin dollars. This produced remarkable results in that the company grew their gross margins quite significantly and made the transition to profitability in less than 18 months.
What would be the single piece of advice that you could impart to the budding entrepreneurs?
The best piece of advice for budding entrepreneurs is to initiate a warm connection with a funding source by leveraging mutual relationships. Investors receive thousands of emails from entrepreneurs looking to make an introduction and unfortunately, it’s impossible to review them all. Therefore, it’s critical for entrepreneurs to find different ways to stand out in the crowd. For example, if an entrepreneur has a business colleague who has worked with NewSpring in the past, we would encourage that person to assist with the introduction as we are much more likely to respond. Social media platforms, such as LinkedIn, can be a great way to identify mutual connections and initiate a productive conversation.