Viewpoint: Funding gaps threaten Denver’s growth companies

Serial entrepreneur Steve Case of AOL fame hits the road every year to shine a light via his “Rise of the Rest Road Trip” on a persistent problem: a shortage of capital for startups in emerging technology communities outside traditional tech hubs.

Case’s October stop in Denver – one of five cities on this year’s tour – showcased the plight of entrepreneurs located outside of Silicon Valley and the nation’s other major tech hubs, who often have a tougher time obtaining financial backing.

But lack of capital isn’t just a problem for startups. Hundreds of established growth-stage companies here in Denver also require access to capital to fuel growth by enhancing existing products and services, adding capabilities through acquisition, or a combination of both.

The 2016 “Innovation That Matters” report by the U.S. Chamber of Commerce pinpoints the funding gap as a challenge for Denver. Among 25 cities considered top drivers of the nation’s digital economy, Denver ranked No. 14 in total investment and IPOs.

This should matter to everyone who calls Denver home. The tiny startups that made their pitch and won a $100,000 check from Case on this year’s tour – including Denver’s Flytedesk – are exciting because of their promising potential, even though their economic impact largely has yet to be felt.

Growth-stage companies, by contrast, already are significant contributors to the local economy, and finding the capital they need can be a game changer in their ability to innovate, tap their unrealized growth potential, retain and attract top talent, and survive the next economic downturn.

These are rapidly growing companies with a proven business model, a large addressable market and an outstanding management team with a demonstrated ability to execute on a strategy, and need a partner with the capital and expertise to help them cement or achieve market leadership.

And there are a lot of them. Frontier Capital, a growth equity firm that partners with software and tech-enabled business services companies, may be tracking 20-25 growth-stage companies in Denver at any given time as potential candidates for investment.

An educated guess – based on the experience of investing in emerging technology hubs like Denver since 1999 – is that there may be 100 or more growth companies in the Mile High City that are nearing an inflection point where the need for outside capital becomes critical.

A casual observer might wonder why more investors haven’t taken to Denver, which the U.S. Chamber ranked No. 3 on its overall readiness to capitalize on the shift to a digital economy – thanks to its quality of life, young, educated workers, vibrant culture and an ecosystem that supports innovation.

Denver decidedly is not Silicon Valley or New York or Boston, where the big dogs of private equity invest most of their cash. If you’re looking for that sexy billion-dollar “unicorn” with technology that will change the world and pay investors handsomely come IPO time, you might not find it here.

On the other hand, Denver offers investors plenty of opportunity to partner with you might call “high growth/low hype” companies – typically B2B companies selling products or services into an enterprise, and often with a stable, recurring and fast-growing revenue base.

These are companies where the founders and early investors may be looking for a payday after many years of hard work building a successful business – and where an accomplished management team wants a partner that will help them forge a strategy to take the business to the next level.

Such partnerships are based more on smart growth rather than a “swing-for-the-fences” approach.

While Denver may lack a deep pool of these potential home-run venture opportunities, it is fortunate to have an abundance of very attractive growth-stage companies playing a critical role in driving the local economy.

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A tech entrepreneur’s guide to next-stage capital

The Business Journals ( 10, 2016- Let’s face it: Most technology companies weren’t started to make the founders rich.

Sure, compensation is part of the equation, but the driving force behind most tech startups is the desire to create an environment where ideas can thrive and potential is limitless.

So what happens when that potential is suddenly constrained by a lack of resources, when insufficient infrastructure gets in the way of imagination?

The answer is usually an infusion of capital. But more and more tech companies are learning that the size of the check is not as important as the partner behind the investment.

What’s needed is a valued-added investment partner who can help chart a clear plan of how that money can best be used. More than just a source of cash, such a partner can leverage their experience navigating other mid-stage companies through the evolution from mature start-up to market leader by addressing some of the issues that typically keep good companies from becoming great.

Leadership team is top priority

One of the first things a growth-minded investor will do is help assess the current management team for any gaps or shortcomings. Not to establish control or eliminate “dead wood,” but to make sure the team is equipped with the tools needed to guide the company through its next phase of growth.

Key backers, like growth equity firms, should be able to help you find C-level executives to help relieve some of your burden. That’s so you can focus on what you do best: High-level operational tasks, strategy development and relationship building.

You might, for instance, need to hire a chief financial officer or a chief operating officer to take over the day-to-day running of your company. Well-connected investors can also help you anticipate areas where you will soon need to staff proactively, placing key executives in operations critical to accelerated growth.

For example, at NetDocuments, a Salt Lake City provider of cloud-based document and email management for law firms, one of their first moves after a growth equity investment was to round out the company’s leadership team with the addition of its first vice president of sales. This laser focus on an area of tremendous need allowed the company to realize explosive growth: The company’s sales grew by 50 percent the following year and revenue increased by 40 percent.

Road map for success 

Another challenge for some mid-stage companies is their ability to create a focused vision of what success looks like. This lack of clear objectives often results in a fuzzy business strategy. As Alice said to the Cheshire Cat: “If you don’t know where you are going, any road will get you there.”

The involvement of a third-party investment partner can help an organization define a strategy based on scalable business practices focused on creating long-term value. That starts with the recognition that not all business is good business – a sound strategy requires identifying boundaries of what you will and won’t do, and aligning the “will do’s” with aggressive goals.

For instance, while many entrepreneurial businesses put the most focus on top-line or total revenue, a strategic investor can help a growth-stage company understand the importance of such variables as annual recurring revenue, churn rates and customer acquisition cost, all of which drive real value in the marketplace. As a result, a company may end up focusing on a different customer segment or restructuring its sales model, including incentive plans, to capitalize on new opportunities that are better aligned with the chosen strategy.

Such was the case for Denver-based InteliSecure, which provides cybersecurity services to enterprises and large healthcare systems. Rather than becoming a broad, generic service provider, the company focused on its core recurring-revenue business, and reduced the scope of it services, which produced measurable outcomes that created more stickiness with its customers. As a result, the company increased its core revenue by 50 percent in 2015, and 2016 is on a similar trajectory.

Accountability is key

Just as important as defining the strategy is identifying the key performance metrics that can help accelerate growth. Metrics aren’t always the top priority for busy founder/CEOs, but a growth investment partner can help define the right metrics that drive value. Among them: Sales bookings, sales efficiency ratios, net promoter scores, customer retention, annual recurring revenue goals, and gross margins.

A metrics-driven approach adds visibility and structure to sustainable growth. And that long-term success — not a short-term cash bonanza — is what drives most entrepreneurs in the first place.

Joel Lanik, Contributing Writer, is a partner focusing on software and tech-enabled services investments for Frontier Capital, a growth-oriented private equity firm based in Charlotte, North Carolina.

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Frontier Capital’s Richard Maclean says Charlotte’s tech scene is on the rise

TECHFLASH – Mar 1, 2016, 12:56pm EST

Richard Maclean is optimistic about Charlotte’s tech scene. The city’s entrepreneurial ecosystem is growing up, and Maclean thinks the Queen City can hold its own against markets like Denver, Atlanta, Dallas and Salt Lake City.

Maclean, managing partner at Frontier Capital, points to a few “really big” tech success stories in the area.

“I think we have at least a half dozen of those (success stories), which proves you can do it here,” Maclean told me.

Frontier Capital is a Charlotte-based private equity firm that invests in lower middle-market software and technology-enabled business-services companies, usually with $10 million to $20 million in revenue.

Today, Frontier is about a third of the way through a $390 million fund they closed last year. So far the firm has used capital from that fund to invest in tech companies in Arizona, Indiana, Utah and Texas.

“We are big on these fly-over, tier two markets,” Maclean says. “We are not investing in San Francisco or Boston.”

I sat down with Maclean in Frontier Capital’s new offices in uptown to talk about Charlotte’s tech scene, why he is feeling optimistic and how the Queen City compares to other markets. Here are excerpts from the conversation, (edited for brevity and clarity):

Where are the companies Frontier Capital invests in?

Our focus is in the Midwest, Southeast and western U.S. Those markets are different. They typically have companies that are more bootstrapped versus raising $100 million for a big idea. They are a little more block-and-tackle markets where the companies and the leadership teams are more focused on execution versus revolution. B-to-B businesses that are good businesses, but not as sexy as some of the higher profile fundings that you read about in Silicon Valley and the other major tech markets.

What do you think of Charlotte’s tech scene?

We have a little window into that world. I think Charlotte has lagged a little bit, but is getting much better. If you look at Charlotte, there are some really big tech success stories, but they just don’t seem to get the attention. Peak 10, LendingTree and AvidXchange — those are some really great companies. I think the Charlotte market has been so dominated by financial services and real estate that the tech companies have played second or third fiddle. I think they are catching up. A lot of young people historically moved here to work for the banks, and I think that is changing. They are moving here to work in the tech scene, which is really good. Look at what they are doing at the Music Factory with AvidXchange — it’s fantastic.

Why focus on the fly over markets?

We grew up in one of those markets here in Charlotte. We think those markets are more relationship-based and you’ve got this cultural fit and alignment with founding teams in those markets. We felt like we had more of an advantage in those markets than in Silicon Valley or Boston. Our story resonates more in those markets.

Have you invested much in North Carolina companies?

We have. We were investors in a couple North Carolina companies. Peak 10, a company here called Cash Cycle Solutions and a software company in Raleigh called Accipiter.

What stood out about Peak 10?

We were early investors in Peak 10. Everything we do is B-to-B, so we really like recurring revenue businesses that are selling a sticky solution. We liked their business model. Peak 10 also had a focus selling data center services in tier two markets. They didn’t build centers in New York or DC — they were in Nashville, Louisville, Tampa and Charlotte. We liked that and we loved the team there. We had no idea how big it would be.

Why are you optimistic about Charlotte’s tech ecosystem?

I think it’s the talent. And look at these successes at the bigger companies — I feel like they are going to start spinning out executives from tech companies to start their own businesses. If we were looking to move a software company, Charlotte would be completely at the top of that list.

Do you see similarities between Charlotte and the other markets you invest in?

I think Charlotte and Dallas are really similar, and Atlanta. If we were competing with someone about where you would want to move a software company to grow it, you compete with all those – Denver, Salt Lake City, Dallas and Atlanta. Charlotte is now starting to be in that consideration. I think we can hold our own against any of those markets.

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Frontier Capital Invests in Electronic Commerce, Inc.

Frontier Capital, a growth equity firm focused on established software and technology-enabled business services companies, today announced a $40 million majority growth investment in Electronic Commerce, Inc. (ECI). This investment represents the first from Frontier’s $390 million Fund IV, L.P. and the fifth recent investment in HCM-focused companies.

ECI, based in Elkhart, Indiana, offers a cloud-based, fully unified human capital management (HCM) platform for the entire employee lifecycle. For more information, refer to Frontier Capital’s press release.