Growth Equity vs. PE vs. VC: What Founders Need to Know Part 1 with Stew Campbell

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Foreign.

Welcome to the M and A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school double Ed approach instead, fire led M and A is all about strategy, alignment and efficiency, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We uncover what truly works in M and A by learning directly from the best. I'm your host Kisan Patel, Founder and CEO at Dealroom and chief scientist at M&A Science. Joining me today is Stu Campbell, partner at TCG, a leading growth equity firm focused on investments in consumer brands, media, sports and culture. TCG specializes in helping consumer facing companies scale, offering not just capital but also deep expertise in strategic growth, operational scaling and founder led businesses. Stu has a wealth of experience from his time at Norwest Venture Partners and now at TCG where he supports high growth businesses on the journey from founder led startups to market leaders. Today we're going to talk about how growth equity differs from other investment models, the role of boards in scaling founder led businesses, how to build strong value driven partnerships that ensure long term success. Stu, thanks for making it happen here. I appreciate it. I'm in New York, we're at VRC's office. Anybody wants evaluation, I appreciate them for giving us a nice office suite to work out of. I appreciate Making the trip over here. I know you're visiting from the Bay Area.

Yeah, thank you for having me. Pleasure to be here.

Can we kick things off a little bit about your background?

Absolutely. It's a winding story to get to growth equity, as you'd imagine. I grew up in South Jersey, distinct from North Jersey, so go birds. Found myself in Idaho. So I spent my high school years in Idaho and then made my way down to Stanford. The Idaho part of the journey is interesting and important only because it added another layer of geography and culture and dimension. And the two states of which I grew up in really had an influence as to how I now think about working with companies and working with founders and working with different platforms. Undergrad at Stanford had a little bit of a choice whether to take the banking route or the consulting route. Coming out of undergrad chose consulting, so had the pleasure of working with companies at the ground level. My uncle famously said, what do you know as a 22 year old about helping companies? And I don't. But I know how to gather the data, analyze it, and work with folks much older and smarter than me in order to go help those companies. Popped my head up to figure out what was going to be next and found growth equity. It was an asset class that spoke to me. It's about working directly with founders. It's working with companies that have tremendous growth ahead of them, but you're still rolling up your sleeves and it's an entrepreneurial venture along with the founder. Fifteen plus years later, still doing it, happily doing it. It's just an absolute privilege, full career.

Investor working with founder at this point.

It is, it's been such a blessing and a pleasure. It's the most humbling job because every day I get to work with the very best of the founders and the companies that have made it through this glacial process that over 5, 10, 15, even 20 years, at the end of that, they have a company that's growing, that has enough market to go tackle, has a level of scale, and I have the chance to go meet them. That puts me on my toes, humbly, puts me on my heels sometimes because they're just such impressive founders and then we have to figure out a way to sell them capital, which is a big kind of bizarre way of thinking about investing. They're profitable, they're doing great, and yet we think that we can help and make two plus two equals five. And that is just a fun, fascinating, sometimes frustrating journey and work environment.

I'm excited to have a fun conversation with you. Be frank, my Perspective on career investors slowly shifted, starting with our mutual friend Jason Meirnoff.

He's a good one.

We had a challenging conversation. Anybody listening Highly recommend listening to that podcast. And I realized like, there's some smart, savvy investors out there that make actual difference. Let's see what we can come into in this conversation.

Absolutely.

We talked about the board before and that was my skepticism because again, we're. I'm going to use our company as an example since it's easy. I don't have to worry about anybody suing me. But we're a bootstrap company, about 50 people, 10 million ARR run rate. One of the beauties I always take pride in is that we have a one single person board over here. Yeah, that was one of the things. As soon as you start talking to investors, that's one of the alluring things that pops up. It's I gotta create a board and then I gotta report to the board and give all these updates and stuff like that. I'd love to hear from you about the role of the board. How does that come and play and how does that evolve to level set.

A little bit Growth equity. I define it as equal parts growth and private equity. So growth is just about butressing and accelerating what's already going so well. Finding the investment in people, the investment in infrastructure and technology, international expansion, whatever is going to be in front of a company supporting that growth. Not necessarily with a venture mindset, but with a growth mindset. The private equity part of the definition of growth equity is the healthy respect for P and L, the strategic direction of the company, positioning for sale, the use of capital markets and debt. When you merge those two, you find growth equity in the middle. Those founders that have those growth equity businesses or available businesses to set the stage. Those founders are typically around a dining room table. This office may be the boardroom. There often isn't even a board. It's a family member, some friends that give advice, maybe a couple of seasoned entrepreneurs that have been along on the journey. That's what we're stepping into as a growth equity firm. Tcg. We work with those founders and go into those family rooms and sit around those dining room tables and that's the start of the board to go from that to a succession like 15 person board where everyone flips the binder to that tab and saying, let's report on this part of the business. There is a lot of business building that goes with it, but there's also a lot of board building and what that tenor and tone and infrastructure looks like for the board is super important. A couple of. First, the board should not, from my point of view, be a reporting mechanism. In the end, it's how to govern the company. It's how to make strategic choices for the company. The board should serve the company. And to do that we find that setting up the board and how it's used in terms of both the composition of the board and its uses in terms of meetings is super important to support the founder, for instance, board meetings. I find it great when we actually never talk about the P and L. It fits a strategy off site every three months and we're constantly talking about how to improve the business and we cover the financials on a monthly basis with a short hour long call over zoom. I'd rather spend that time in person saying what are we going to go do to push this business and go uncover challenges and opportunities rather than serving a reporting function. The composition we can talk about in terms of the people around that board table. But the use of the board to take it from what was a dining room table to eventually a much more formal structure. We have to accommodate the founder and work with them.

I say I'm curious because when you start off and I'm reflecting on my personal experience with having an advisory board and that's evolved quite a bit over the years, just company grows, your needs change. We start formalizing the business operationally and realize we need more of the functional type of expertise to put on the advisory board and we start moving people around. Is that something similar with the board, like what type of guidance and is there a difference that you would expect between advisory board?

We and I don't have much ego and when we come into a business, it's who can we surround the founder with at that table to give the best advice? Often in diligence. In that dating process, which I'm sure we'll get to with the founder, the question will come up, who do you want sitting around you and go play wishlist on LinkedIn and say who would you most want to sit across from you and help you answer those questions? Because we're not going anywhere. We'll be here, we'll be there in support. But if that independent board member can serve in my seat or serve alongside me, that's all the better. Then setting up a mechanism where the CEO has access to the board but also access those independent board members independent of me. They can be a sounding board, they can be a venting mechanism if necessary. They can be an alternative communication Channel outside of our regular monthly board cadence. So that's a. It's just a very important part about setting up an organization.

The flip side, when I talk to other CEOs and maybe they're struggling or they have more of an opposing view of the board where it's a challenge for them. Have you seen that? How does that play out?

Oh, absolutely. There are always going to be challenging situations. There are going to be disagreements. There are rarely ever any votes, if you will. It's a disagreement of opinion, it's a disagreement over strategy, maybe a personnel, but it's really not two opposing forces. Like the succession example, there's no votes up, down and abstaining. It's really a collaborative effort where discussion happens and maybe solutions are enunciated and eventually ratified and worked on and worked through. But yeah, sometimes there'll be disagreements within timing as it relates to an exit that's exacerbated. Sometimes when you have different interest levels based on different investors, we can talk about that later. In terms of when you have different timeframes involved, sometimes there'll be fundamental strategy questions that you have to work through. And then sometimes it's an era of crisis. We can talk about COVID which was our version of the Great Recession. The GFC that I watched as much more senior leaders when I was an associate Spectrum. I saw them navigate the GFC with some amazing deft. We then had Covid. There were disagreements how to respond to an existential crisis that was changing, frankly every week. But yeah, that friction exists. But if it's collaborative and if you've done your work upfront with that founder, when you get to those tough points because you know that they're coming, it's solution minded, it's pragmatic and it's in a forum and in a manner which there's fundamental trust.

Okay, you haven't sold me on getting a board for our business. Can you give me an example of like when the board led to some big game changing moves for a company?

A recent example, I'm involved in a great brand called Epic Gardening. So if you are an aspiring gardener or a relatively well versed gardener, you've probably come across Kevin and his brand and they own a category. From a content perspective, they command great attention. They're just an absolute resource when it comes to educating for all parts of gardening, which in a lot of ways is like wine buying and any other education where as a consumer you're a little bit overwhelmed with the wealth of information that you need to actually be A proficient gardener. The board has increasingly helped the company think through M and A as the right to win. Because once you own the content and the ability to speak authentically and in a meaningful way to those consumers, when you recommend something or you then have that commerce and those products that sit behind that very recommendation, it makes it all the better and it makes it for an easy path we've really leaned in to help them with. Here are some acquisitions of products and of certain categories that at the bottom of that customer journey, when they've learned they started to build their gardening plan and now they say, okay, I'm ready to start transacting and start really building it, we become the transactor and the commerce engine of choice. That strategy is something that TCG uniquely can go help with and can really help the company lean into. They may have found acquisitions, but it's a part of the board strategy and the board led strategy that we can both help educate them on and orient them to and then go support them in those very efforts. It's a way of getting leverage from your investor to go tackle a strategy that may have been a little more difficult on your own. It's a great aspect of how we can get involved. As a second example, that was playing offense in Epic Gardening, going and seizing a relatively fragmented category with lots of available opportunities on the M and A side. We also played offense, but in a more defensive manner at a brand called SmartSign that I was invested in. It's here in Brooklyn, just a terrific platform selling customized signs, labels and tags. You don't really think you know the product until you start looking around a given restaurant or a warehouse or an office building and then you see all the signage. And we saw an opportunity post investment to say we want to help you lean into an M and A strategy. Start working with some of the vendors that supply all that aforementioned signs, labels and tags and we can help you lean into that, help buy some of them, help better get more tightly integrated. And it turns out in that process, during COVID and then all this, the strain that happened in the years coming after Covid, owning your own supply chain, that gave the company quite a few advantages over its competition in terms of sourcing, pricing, speed of delivery.

These are good examples of pushing non organic and even strategically enhancing the organic growth. This is where my ears get a little more perked up because I feel like the vision for this business is get to that point when we can be an M and A platform and grow through acquisitions. I see a lot of market opportunities for it. And I can sense that our peripheral is pretty narrow just because you have your day in day out of your business and you look around left and right and you can see what the market is. But then there's like a broader view where it's hard to get that grab on. What are some of the other pieces that you may not be thinking about? And that's where I would sense some interest in having a partner that has that sort of muscle around M and a strategy and can help start market mapping things with a bit of a broader scope and start bringing those like example you had. Of course, how to think about an acquisition strategy in a little different way that may not have been the exact same way you thought about it.

Absolutely. And there's many catalysts and we can maybe get into this as to why a founder of a 10 million of ARR great platform would consider outside capital acquisition and biting off something much bigger and having a partner in crime to go do that could be one of those catalysts. They're the equity source and the funding source for that acquisition. But you can also use that catalyst a moment in time to say, hey, I'm going to de risk a little bit. I'm going to take some chips off the table using this partner to not only give me some liquidity and some peace of mind, but then also help me with this acquisition. It's a little bit not sure if you find yourself in Vegas, but your stack of chips grows. And at some point, if somebody was slipping some of those chips into your back pocket, you could keep playing. Whether or not you consciously knew it. You would de risk and know that your night was fine as you kept playing. Whether it's an acquisition being a catalyst, a big international push, or frankly just time and the amount of equity value that you created in said poker chips, those all can be very good catalysts. And having a partner in crime and a true like minded partner to go tackle that next set of challenges while you have those chips in your back pocket ends up becoming a pretty good setup.

I get a bunch of B firms reaching out all the time. It's like a blur.

Do you have your own folder?

I do now.

Sub folder of interest.

I have a good pitch folder and a bad pitch folder. I'm curious about this part because now you start thinking about, hey, you should start dating. I start taking some of the calls, trying to learn about the firms and some are structured funds. There's some evergreen funds out there. You're starting to see some strategic do some of these Type of deals. It gets interesting, but it goes back to like, hey, if that partner together, all of a sudden we're going to go twice the distance in the coming five years. Now we're talking something that's beyond just the money. Sophisticated investors, I'm getting tuned to that, like, hey, there's good. The network you've mentioned, like, hey, I can surround that founder with these right people. I understand the value of that. I understand the sophistication of the investor. They give you a whole view like they really understand the market, where it's going, help you with the strategy, understand value. So it's like that partnership could, we're going to run two, two times further or twice as fast. I'm putting value in that. But put yourself in my shoe. I want to start understanding there's reputation around that and then their actual ability to do that. And I feel like it's just hard. You're getting hit on all sides. You got like independent sponsors that want to get your time.

Yeah, it's noisy and I can appreciate that. I'll date myself. But back in 2008, despite us being in the middle of the GFC, there were other growth equity firms. But you count them on probably two hands that were really going after founder owned businesses. The sourcing, you would find yourself in a relatively smaller pond. We did a count a couple years back. 75 growth equity firms, probably a few more this year than last year. And that number keeps growing. And because the model works, identifying founder owned businesses, developing a relationship and investing success has bred more success, there's going to be more firms that look a lot like the TA and summits that started the model way back in the day. What I encourage founders with when I ask about that subfolder is when you do a little bit of reputation work and you figure out, okay, these are the more qualified firms. I tell both founders and then our own associates within the associate program, be a consultant and to founders I say use them as a resource. Your time is precious. The associate wants to get to know you, get to know you, the business and somewhat qualify you to make sure that you're hitting some of the themes, some of the levels of scale that would be good for that person's firm and potentially investment parameters. But they're asking time of you. I always ask the associates come with a perspective, give something to the founder relative to just a give and take. Tell me about tcg. Tell me about your firm. Offer up what you've been doing. We just did a benchmarking study. We'd love to share what we found. I was just at this conference that I didn't see you up. You should have been there. I would love to share what I learned. We have some good insight as to what happened in this other relatively well known transaction. We'd love to share more. Any of those perspectives can be very good for a founder and then you're giving and then have a little bit more of a right to ask a little bit something. Plus it also qualifies to you that the interest is real and that the category knowledge and expertise is also there. If they're offering something that's genuine and actually hits right, that also helps on the qualification process.

They can actually create value. Our mutual friend Jason does an incredibly good job of this.

He does.

I don't know. Sometimes I wonder why does he talk to me? But I asked for some advice on certain things. He's more than happy to do it. He's lending me his office to go do events. He's coached me through putting a CEO on our advisory board that had some special terms to put in together to make it happen. Nothing but good things to say about ta. I think you're right about that. Can you sort of at least invest in the relationship to figure out if they're accretive to how they approach working with you?

And I would encourage you to push any member of the firm that you then have some time with to help as they can and almost serve as a consultant as an advisor of the company while you're in that dating process. It takes six months at the very fastest to really chase after transaction more often not it's two, three years. I've gone as long as six years in that process. It's incumbent upon that forward minded growth equity to show their value so that they can be invited into a business. Use the associate for the market knowledge. Ask for introductions on the recruiting side if you're looking for a very specific C level executive or advisor and see who the network of the partner has. If you want certain introductions on an acquisition idea, say hey, have you met with that company? I'd love to get to know them. Use the whole firm before you ever consider partnering with the firm and let us prove our value because we're confident we will. And then when that time makes itself apparent, you should probably consider a transaction. I've had this three year relationship with a firm and I've done X, Y and Z. That's a perfect preview as to what they're going to be like as a partner. It's Incumbent on us to put in that work.

Yeah. They tracked your history, built a rapport. I like that. I'm a little more blunt. I'm like, build us some pipeline, then.

We'Ll keep talking on customer sales introductions. Yeah, absolutely.

Get us some of your portfolios or how come you're not a customer. Your first investment should be becoming a customer. What are we doing here?

Absolutely. Within consumer land, we often will try the product. We will go talk to buyers, we will go figure out some level of customer product fit and have an opinion or an instruction that goes along with it. Similar to a customer instruction.

But I like that it was stepping back and just even taking the time to get the market knowledge for a founder. What I'm realizing I brought a COO in and I'm less in the day to day and more working on the business. That's a lot of work to really figure out the market. It's a different view of talking to the customers. Different view where you look at the landscape you guys do that day in, day out. So if I can pick up intel from that perspective of what have you already done in our market, how do you think about it? Where do you see it going? That would be really valuable. And then those introductions you mentioned as well.

Absolutely. And doing that all before you transact gives you that much more perspective.

What about relationship flow? Unfortunately, I get this podcast, I got to go jump to partner level conversations. But a lot of these firms you're at associate, then at some point they give you vp, I guess. How important is it to get partner level engagement? To me, that's like I kind of want to know what their culture is like at the partner level because that's what gets me excited about working with the company. But then it's nice to know that even the associates of VPs are smart.

Yeah, absolutely. So there's two perspectives there. One is the harsh reality of growth equity based on the time needed to work with an entrepreneur. And then the number of frogs that have to go kiss. There's a volume part of the equation in which finding really talented, hungry young individuals that know that category, that know who we should be talking to and help connect dots for the rest of the partnership. It's a model that works. And while it feels sometimes like you're speaking to a young person, you'd rather be talking to a founder. We invest a ton of time in those associates and make them an extension of us. So that I have implicit trust as their speaking with founders that know that in the background that communication flow of hey, I talked to that company and that company and that one's really differentiated itself. That's going on in real time. It's just really an extension of resources. The second bit is that certainly at tcg, we're all sourcing. We're all trying to get to the found into the right situation. We do some very heavy thematic based sourcing where we have sessions trying to figure out based on aggregate knowledge of where do we think the world is going and where should we be investing based on that, what themes are interesting in the short run, the medium and the long run, and let's go invest and let's go ideate against those. And that's a partnership among associates at the junior level, mid level and partner level. And then we're all working to get conversations and we're all sitting in the background. There's a full firm effort. I wish I could source more. I love it. I love connecting with founders. And so the associate program and the inbox that is full view that and the quality and the depth of that email as an extension of kind of maybe how the firm is thinking about positioning itself to potentially help you.

I want to come back and expand more on that. I want to conclude the boardroom part specifically now that we kind of understand, you know, say we found the right partner and as you look at building the board, what are the dynamics that really make that board successful?

I would kind of split the board dynamics into making sure that there is a rhythm and a data flow and just a set of infrastructure that takes the company from maybe that dining room table is something in which these new interested partners that you've brought in, whether investors or independent board members, all have the same right level of information and have it readily available. So there's a certain cadence and a certain infrastructure that it's a little bit of a growing and a stepstone for those founders and for those teams to go from ad hoc reporting sometimes to much more a formal structure. The more important part is how do you structure those conversations? I talked about the quarterly board meetings being more strategy off sites. It's making sure that when a founder and a CEO approaches a board meeting, whether it's a monthly, big quarterly board meeting that's in person, there's a North Star that's part of that board meeting. We are going to focus all the conversations and strategy on this North Star. It could be a challenge, it could be an opportunity, it could be an M and a topic, whatever is most top of mind. And then having the board aligned early on Both materials, thought process and conversations. So that when you show up, it's a little bit of that Amazon effect that when everyone shows up in that boardroom. We've all done our reading focused on the North Star and it's a targeted, high intensity conversation to help that CEO. Yes. The purpose of the board is to govern the CEO and to make decisions on behalf of the company and its shareholders. In practicality, I view the board as in a serving mechanism to the CEO and his or her management team to help them make the best decisions. So there's two different roles. The first in the growth equity realm, you almost can skip over in practicality because we're so focused on beautiful growth and surrounding that CEO with the right resources.

Having that defined North Star seems to be like a clutch element that everyone in the board is aligned around that they know this is what we're trying to do to help the company get there. What's an example of that for us? I'll tell you what it is. It is right now we do incredibly well selling the corporate development. You're listening to this in your corporate development, not using deal room. So you're missing out. Private equity is our next big market. We have a very small piece of private equity and I just see huge growth for us potentially there because the exact same model would apply well to private equity. That's kind of what I see as the North Star for the next two, three years.

A couple of examples. It could be a category we want to focus this entire discussion on. How do we best position ourselves to dominate wholesale? Yes, we're going to be talking about D2C efforts and maybe direct to consumer efforts or retail or sourcing. But if the next big leg of growth for our consumer brand is in wholesale, we may have to relate all those back to how do we best support our wholesale partners. The north star may be 2026 infrastructure. So what are we doing from a hiring perspective to make sure that we're ready for this next leg up of growth? So whatever we're talking about across channel product opportunity, it's with this 2026 infrastructure in mind. As you get closer to potentially a sale transaction and an exit event, the North Star may be some requisite level of EBITDA margin that we really think if we can get this to 25 points of EBITDA margin, that will be the right level of scale to optimize for a sale. We've had four, five, six years together. Now's the chance to really focus on getting that ready to take to market. So it can shift across a number of them. It can be as blunt as just people. It can be as specific as wholesale. In any case, if the board members are able to consistently flip back to that front page and realize we're still talking about 2026, even though we're talking about 2025, direct to consumer planning, that ends up being the right rhythm.

We talked about this before. You get a board that matures and you have multiple investors on that board with different competing agendas, timelines. I'm sure you've seen that happen.

I have. Fortunately, most of my investments have been into bootstrap founder owned companies. In that dating process, you set up the transaction, the incentives and the expectations the right way, everybody's focused on the same exit and you set up an equity pool. They have their rolled equity, so they basically a proverbial second bite of the apple where they have a chunk of equity may still be controlled. If they sold some minority stake, those incentives are pretty well aligned where we're all going to shoot for the same outcome. When you have multiple stage investors, depending on the timing and the size of investment that sits between those investment rounds, it can put pressure. Especially if a company's not really chasing the high flying IPO and is working towards some level of sale that will have differing effects on those investors, it can create some conversations. I've been fortunate to only have a few of those. But for all of the opportunities of being a growth or a venture investor at the earlier stage and going and finding opportunities that can meaningfully move a fund performance, the challenge of being in that sort of a setup is that you do work with other investors and you have to find alignment. You have to spend as much time with the other investors as you do with the founder. So that's their own challenge that comes with that opportunity.

That's what I'm wondering, like how do you navigate that? If you're the founder, how are you going to navigate? All of a sudden the board matures and now you got some conflicting opinions on the strategy because they got different investment timeline horizons.

Again, I don't have a great wealth of experience in dealing with that. But from both the fund perspective and the founder perspective, the institutional relationships between those investors and how much they've worked together and then on the deals when we've worked together, how have they worked out? In the same way that as you start to vet firms, you should diligence their portfolio and their outcomes. If you are going to have multiple investors on board, figuring out where that Venn diagram And overlap is and how those businesses went and talk to those execs. Very important.

You mentioned earlier this growth equity versus growth capital versus private equity. Let's break that down.

Venture, you're taking quite a bit of risk, quite a bit of opportunity that goes with it. These are capital, super high valuation capital. Consumptive businesses.

20X on revenue.

Yeah. Capital if there's revenue capital, consumptive businesses in which there's an idea, maybe there's product market fit, maybe the product's running. But that seed Series A, A1, you know, the numbers keep growing. But that first 10, 15, $20 million of venture is really to go take something to market and to invest very much into people well ahead of any rational revenue or let alone EBITDA multiple. But with that great risk comes great reward. Growth capital sits after I define as venture. Growth capital is taking a winner and trying to make it an absolute winner. Those are the series B or series C rounds that you hear about. They're still consumptive, they're still cash burning models and consumptive models, but chasing growth. The growth capital bet is one that we see enough and can feel enough within the business and the momentum that we feel that our 30, 50, $100 million bet, even if it's consumptive on a capital basis, will pay large dividends because that reward outweighs whatever risk there would be. Again, those are consumptive. Go to the far end. Private equity. You can have multiple flavors. You can have middle market, lower middle market, bulge bracket. But each of those businesses are well established. They are ebitda positive. They're 5, 10% growers. They're in mature markets as mature businesses. And it's very much on operational control and operational fine tuning. That is part of their organic plan. And then often there's an M and A path because they're usually of the scale in which they can go absorb smaller businesses to find inorganic growth. Growth equity, like I said, sits squarely in the middle with the backdrop of a founder owned business typically, or at least like institutional owned business. It creates quite the combination of both growth and profitability.

You had VC growth capital, I skipped.

Growth equity and then went to private equity. Private equity, depending on the scale of the asset, has reached a level of maturity. We can discuss what the right growth lever is, but 5 to 10% top and bottom line growth. But growth equity has this responsibility to go butreous 15, 20, 40, 50% growth rates and go seize an opportunity because those markets are young.

That's where you see that square in the middle between growth capital and private equity equity.

And because these are founder owned businesses, they've had to have had a really healthy respect for profitability because they bootstrapped themselves up. They may have reinvested a good amount of their own profits, but they've grown into that market with that requisite growth rate and that opportunity in front of them while doing so profitably. That's a fascinating and really powerful combination.

Okay, so vc, high risk, taking a bet at pre market fit. You got growth capital and that's really trying to. Here's something that's already proven.

Gas on the fire.

Putting gas on the fire still pretty early.

It can be early. Any of the lettered rounds between B and F are some version of a growth capital round that has taken a proven winner. And trying to make it that much bigger.

We'll jump to private equity. More mature businesses. 5, 10% growth buy and build. Buy those things.

Then there's our growth equity that sits in the middle, kind of squarely in the middle of all of those models.

It's growth companies and there's still the M and A opportunity to accelerate it. But you're still pushing on growth. Now let's talk minority recap versus buyout. Where's the appetite between these models in terms of.

At tcg, we're open to either. And it's really solving for what a founder and his or her team needs most. There's some bias in a super fast growing platform that there's a little bit of a signaling effect. If you have a 150% grower or 100% grower and you're profitable and now's the time to sell 100%. What do you know that I don't know in terms of asymmetric info? There's a little bit of a bias towards a minority round where there's that much growth and that much pie left to go grab. Let's support you in a minority fashion. And can be liquidity, can be growth capital. That recap is perfectly fine. As businesses mature, as founders mature, then control opportunities come up. Personally and on behalf of TCG, we love when founders roll meaningfully and there's 30% of their potential liquidity that they leave back in the company and then work with us to go grow that 30% to three, four times that amount when we eventually sell.

My sort of goal is that in a couple years we get to 20 million ARR. 25 million ARR. And then we recap the business. A minority recap where it's 30% off, let's say roughly 2/3 primary and one third secondary.

Okay.

Is that reasonable thinking for someone like me? And because again, like all these firms, they have a different appetite. Some are more accommodating, obviously, but some are definitely like more buyout. Okay. Based on size, we would want to buy it out and then flip it around where it's the founder's got 30% and give me the other side of the table. And thinking around that.

Absolutely. Part of that vetting and then eventually dating process is to really suss out if that minority deal is your prerogative to really push them on that and say you say you're open to minority. Which of those logos were minority deals? We talked about this category.

Can I ask, for example, terms?

You could ask for terms. You can certainly ask for which of those logos were minority deals. We had a great conversation against your investment in my.

I want to see their term sheets. Get you to share the term sheets.

At the right point. You can always ask for guiding terms or what are some third rails or some absolutes that you engage with on a minority basis. So there's a number of terms and a number of minority protections and provisions. Asking for those as guiding principles may be helpful. Some firms will not do all common deals. They will have to have some level of structure to sit above you, especially if they're giving you liquidity. Vetting that early and finding comfort or discomfort is probably important. There's an element of redemption which if you're in control of the board and I've given you X amount of capital, we have to have a mechanism to go generate a return from that. So five, six, seven years, at some point I should have the right to put that back to the company and force you to go do something. Now, in practicality, that doesn't happen all that often. Either companies work or they don't, and if they work, they're finding a great sale. But it needs to be structured that. So at the right point, you can absolutely ask investors what are some guiding principles for your minority deals. Taking a step back from that, it's great to have a founder that has some of that perspective coming into the conversation because it really helps with that vetting process. So oftentimes a founder will ignore a number of emails, not really engage with any investor, and then the volume increases because of accolades because of publishing some list or some speaking event and notoriety and relative fame within your category increase to the point where you're then inundated. And if that just happens to collide with when you're ready to go transact. That's an overwhelming situation. You have just dozens and dozens of interested investors and how do you go vet through that? So establishing what you'd be looking for an investor and what you'd be looking for in a deal and starting to have some of those vetting conversations if you can approach that decision point of, okay, now I'm ready. But Here are the 10 firms that I've enjoyed having conversations with. Let's go start to create a little bit of a March Madness bracket among those 10. That's a perfectly good way to do it.

I like this. So being upfront, so it's not so much of, oh, I got to think through do I take majority of this? And that you should know, have some sense of what you want in terms of capital requirement. That's where I think bring in anywhere from 30 to 50 million of primary capital to go do acquisitions. That's where we're actually building a pipeline. But then taking 10, $20 million off the table just to be able to get a nice place here in Manhattan, maybe someone there.

And it's the sourcing team's responsibility and it's a little bit of your opportunity to figure out which firms could be really good partners based on category, expertise and resources and everything else if your personal goals change. What we really even talked about is you think you want a minority deal. You believe you do, and very well should and could happen. But things change and life happens. And I've seen far too many times founders have a perspective of I will only do this. I will absolutely only do this. Then things have happened and the relationships that have been started can lead to much better and faster conversations because that minority interest could turn into a control deal. Something happened. You found a new pursuit. You wanted to move. There was a bunch of friction within the team and you needed really a good thought partner to help think through something. There's any number of reasons that if you siphon down too early or don't engage investors at all, you could leave yourself trapped later on with some relative indecision.

Ideally get in profile at least a sense. But that's having a good partnership. That something does come up that can help support you and facilitate restructuring that capitalization for you.

Yeah, having those relationships early so that when you need to or want to go pursue a transaction, it makes it such a better and more well vetted process to hang up for sale sign on your front lawn and say, my software company is now for sale. I'm moving on. I have no More interest, that's perfectly fine. And there's plenty of companies that do that. And then it's really just who has the most strategic value and willingness to pay. And you know that you're moving on or not, but you're most likely moving on and you're selling the asset to somebody else. Any notion of I'm going to be an ongoing owner of this business and have 30%, 70% of. Creating that dating process of firms is just such an important way because you're going to be together for five, six, seven years. And so spending as much time early as possible is just such a beneficial process.

Being upfront and saying, hey, this is what I'm looking to do. Minority recap. Get to 25 million ARR. And I can be upfront about that.

Absolutely. And just say, those are my goals. I would love to start a relationship. Here's where I would love to learn from you. This is what I'm comfortable sharing at this point. Put them to work. They would love nothing more. And I would love nothing more than a founder to come to me and say, I'm aiming for a late 2026 or 2027 opportunity. This is what I see happening. I would love to start a relationship focused on A, B, and C. I would love to invest in that time because I get a chance to spend more time with you. Because when I bought deals and talk about how to vet them, it's founder and team. Founder and team. And the third reason is founder and team. The markets will change, the products will change. Challenges and opportunities will be unexpected relative to your underwriting case. But founders and their teams sit 1, 2, and 3. If I have an opportunity to spend more time and you get benefit from it, it's great.

That's a good way to see how you look at it from the investor perspective. So it's basically what you're looking for.

Absolutely. It truly is dating. And I say that. I tend to overuse cliches and idioms to some degree, but it really is a dating process for me.

I'm transparent. Every time I get a chance, somebody I know like you, I give dump all the quarterly updates and saying, hey, this is where we did. And I like it because I'm like, we have nothing to hide. We are freaking proud of the direction that we're going right now. For a while, I used to do a quarterly call and put everybody. They didn't have time to talk to everybody, so I put everybody in a quarterly call.

That's great.

They liked it. It's kind of networking for them. But you don't get as much of the relationship building and they feel like you kind of have some. The people that bug the hell out of you are independent sponsors and they're trying to buy you for 1x revenue or something weird like that. There's that but you want to build a relationship and now I'm starting to get it. Starting to build the list of here's firms I really admire. Starting to categorize it too. Stu of here's like the TA Associates which is like huge firm. Like it's going to be a while before we get a check and especially trying to do a minority recap. We got to go get up there. So I'm realizing that here's some aspiration good friends to have. But then what's the next tier down Firm you're at previously like Norwest, maybe they're getting closer to the check size. There's a little bit of that where you got to size it. Where's the sweet spot? And then being upfront, do they have appetite for minority recap Now I want to get more vetting and competition part of it because I thought that was interesting when you mentioned can you get it down to 10 and make it competitive? Teach me how to do that.

The easy first answer about that for sale sign is just to hire a banker and sell it. And I love working with bankers and plenty of great relationships for a control transaction in which you want to sell 80, 90%. That can be a great forcing mechanism because it forces that competition because now you've engaged banker X and they're going to be running a process on your behalf if that's not your prerogative and there's such meaningful role or a minority deal. And I'd argue that in that case a banker can be helpful. But you can also probably try to tackle it yourself. To me there's a walk then run stage of diligence but also a vetting on both sides which is if you have a certain idea of a transaction in mind, you can share a certain amount of information. It's 4, 5, 6 bullet points worth of stuff and it's probably what may or may be in your quarterly reviews and send that and then send it with an expectation of here's what I'm willing to send, here's the time I'm willing to spend with you and here's what I'd like to see that comes out of it. And it could be an ioi, an indication of interest of just you've vetted it with your IC you're interested, there's more work to be done, but based on the six things that we've seen and our work in the category, this is how we'd see value. And you could ask for term sheets, non binding, a couple pages long and use those to force a couple groups off each other.

You basically run your own process.

You can run your own process. What sits behind that first few things? You can either pre prepare as if you were running your own banked process, a data room ready, or you could just prime your team and tell them like this may be coming. What you should be ready for is that the groups that see that first round of information or that think that there's something really to go do are not going to play by the rules you set out April 15th the IDES of April. I'd love to see a first term sheet. The right group that you've been dating for a while that really knows you and finally has an opportunity and knows and have seen you perform over time, will see that opportunity and will make it awkward for you because they're going to come full throated ready to try to transact, throw some hard elbows against the other firms in a not so competitive way and try to really go lock up a deal with you. Now if that's what you're ready for and you've done enough of that pre work, you're then in a position to say, I know Stu really well. I've had three great years for him. He's been waiting for this. He finally got some information. He now knows I'm ready to think about something. He's ready to rock.

We're going to split this episode up. Look for the Part two coming soon. I gotta ask, what's the craziest thing you've seen in M and A?

There was one CEO that had that sort of a roundtable and shared and then did a what he wanted to do as a grand reveal alongside a potential bid process. All in one spot, all with the interested investors in person. He was intending to have a pull back the curtain event, reveal his company, ask for term sheets and in a relative live setting among qualified investors. It was a fascinating process to watch how it played out. Didn't actually end up in a transaction, but it worked really well.

Or really bad.

More of the latter, but it was a it worked.

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