GrowthCap: How Catalyst discovers and evaluates opportunities

: Brian, thanks again for taking the time here. Maybe we can start off with some background on your firm and then a little more background on you in particular.

Brian: Sure. We are coming up on our 15th year. We started Catalyst in 2000 with our first Fund, Fund I. I was previously the founder and president of TD Capital (USA), which was Toronto Dominion Bank’s merchant banking operation in the United States. That was in the mid-1990’s prior to the formation of Catalyst. Several of my colleagues here at Catalyst also come from Toronto Dominion, and then others come from other spots. We were founded in the growth equity space, but it wasn’t really called that at the time. Our style of investing was the same then as it is now, by and large, which is being a growth equity manager. And we are now investing out of our Fund III, which is a vintage 2011 fund. We’re about halfway through that. We’ve had a good and consistent track record over the years. As growth equity investors, we do minority as well as majority ownership investments.

RJ: Could you talk a little bit more about the team you have now and how long you’ve been together, and then as a follow-on to that, the sectors you focus on?

Brian: Our partnership has had no turnover at the partner level. The firm was founded by myself, Ryan McNally, and Chris Shipman, and there are two additional partners, Tyler Newton and Todd Clapp, who actually grew up through the ranks, starting as associates and working themselves up to be full partners in the firm. And then our sixth partner, Gene Wolfson, joined us in 2008. Below the partner level we have analysts, associates, and now just recently appointed a Vice President, Susan Bihler. So the total firm has a head count of 15.

In terms of sectors of interest, we would broadly say that we focus on technology-enabled services. That’s a big sweeping term that means a lot of different things to different people, but going back to our roots as media and telecommunications investors, we tend to focus on software businesses that are recurring revenues oriented, generally selling to SMB’s (small and medium-sized businesses). We also focus on technology businesses in the advertising ecosystem. The last leg to the stool would be going back to our roots in telecommunications where we have a distinctive knowledge, which includes things like cell towers, data centers, web hosting, and then also a little more unique is our background in wireless spectrum, where we’ve had a lot of experience and really strong returns in.

RJ: One of the areas that the CEOs we speak with hone in on specifically is how a given private equity firm will interact with a management team. How do you approach partnering with CEOs and management teams?

Brian: We’re a little different I think. First of all, if you look at all 32 deals that we’ve done since our inception, with a couple exceptions, they’ve all been done without an intermediary, just by us finding the investment opportunity through what I would call our Catalyst Network, which includes our Operating Partners, our Catalyst Entrepreneurs, and then a lot of fundamental industry research which turns into investment themes for us. We take that work, create market maps, and spend a lot of time on outbound calling efforts to meet these businesses, either directly, or through their existing investors which are typically venture capital firms. We’ll go to industry conferences, we’ll be speakers at those conferences, and we’ll post our research on our website and blog where we’re talking about our point of view on market maps of companies. And once we invest, in addition to our capital, we are active board members. We have a thing that we’ve been doing for some time, which we call the Catalyst Way. We try to be constructive with the businesses and partner with the management teams to help them through the growth stage of their companies by helping them think through their key hires and their expansions into other geographic markets as well as voice our thoughts at both the audit committee and compensation committees. All of the things that help management and owners, which are typically one and the same, really dramatically accelerate the growth of their business to the next stage.

RJ: Thanks, that’s very helpful. Are there particular cases or portfolio companies with great outcomes that you would like to highlight?

Brian: That’s a question that guys like me love to get, because we love to talk about our winners and what our value-add was.

RJ: Yeah, I’m teeing it up for you.

Brian: Teeing it up very brilliantly. Before I break into my stories about that, the other thing I’d like to say is that I like to tell CEOs when they ask us that question to go to our website where we list out all of our previous investments, for good or for bad. Call anyone that you like because what is equally as important as what we do to help the upside is how we behave when things get tough, and that’s what people generally don’t like to talk about. For a CEO who is deciding on where their capital is going to come from, I think it’s really important.

So to answer your question, I can think of several examples. Probably a good recent one is a company called MINDBODY, which is in our Fund II, and we’ve been working on it for coming up on 5 years. We invested in them when they were relatively small, and today they’re poised to eventually go public. They are the leaders in their space, which is in the health and wellness space. They’re the leader in scheduling and management for yoga studios, Pilates, gyms, and anything in the health and wellness space. The company has experienced 5 year growth over 50%. It’s just a really nice company. My two colleagues, Tyler and Ryan, have been involved at the board level since the inception of our investment. If you were to ask Rick Stollmeyer, the CEO, or Bob Murphy, the co-founder, they would just go through all of the stuff that we’ve been helpful in partnering with them, including helping them raise additional capital, helping them make decisions regarding their key employees, areas of expansion, and helping them with their analysis on how best to spend their money and maximize the lifetime value of their customers.

RJ: Excellent. As you meet with management teams, what are the qualities that you look for, or how do you evaluate management versus the business model versus market dynamics? Obviously, there’s a full mix of things you consider when you evaluate a business, but maybe you could spend a little more time on what you look for in management.

Brian: Well, management is obviously critically important to our decision to invest and to the outcome of the business. We’re the kind of guys that like to go to an investment feeling this is the management team that can take a business from this point all the way to the finish line. I like to see a team that is thoughtful, that really has a good understanding of their strengths, but also their weaknesses, and one where they approach the introduction to guys like us and the whole fundraising process as the beginning of a partnership as opposed as another deal to do. We like to get to know our teams. We’ll sometimes meet teams a year or more in advance before they’re even thinking about fundraising just so that we can get to know them a little bit and they can get to know us, and we can hear what they have to say at the initial point of introduction, and then see how things really turn out over a period of time.

It also happens, but it is rarer, that we get introduced to a company at the time of fundraising and then kind of make a split decision. And if we are making a split decision right after the introduction, it’s typically because we have already done the market map on the industry and we have a point of view about where that company sits within the market map. And so, I would say we look for nuances, because by the time companies find us in the growth stage, they’re all successful. They’ve been through previous rounds of financing with other venture guys, or have just organically grown their businesses. So they’re all successful companies, so you get into nuances about how a CEO presents him or herself: do they give members of their team opportunities to speak if they’re in the meeting? Are they presenting themselves in a thoughtful and rational way? If you get involved with negotiating a deal, how do they conduct themselves throughout the negotiation? I think it’s all of those things.

RJ: That’s really insightful. Maybe just to close out, it would be helpful if you could share with us any particular niches or certain sectors that you’re paying close attention to or areas that really excite you.

Brian: Right, so you’re asking for the secret sauce recipe.

Well look, I think that the typical manager at this point says we like software-as-a-service or healthcare IT. That’s great, but everyone likes those verticals, because they’re great areas and companies have gone public with huge valuations and there’s tremendous market opportunity. The problem of course is that a) there is too much capital invested in those verticals now and b) prices have increased, responding to the level of interest in the space. So of course we’re interested in those kinds of things and we have a lot of those types of businesses in our portfolios, but we’ve been spending our time more on the verticals that are growing up, going from super high growth and a less definable market size, to going into the meatier part of the growth curve where we think we can pick up these companies maybe that are a little further away from the radar screen of other growth managers but where we feel like we’re increasingly comfortable and confident of the total market size.

So I would talk about verticals like machine-to-machine, which we’ve been looking at for about five years and it hasn’t really been ready for prime time, but maybe now we’re on the cusp of it. Alternative energy businesses, where there have typically been a lot of venture investments, are starting to look interesting to guys like us. Solar distribution, for example, could be interesting. How do you actually put the panels on people’s homes, and turn it into a business? Verticals in the health and wellness space are also interesting because it’s visible to the consumer and to businesses who want their employees to be healthier. There’s a lot of sub verticals there, like wearable devices and things of that sort.

RJ: Great. Thank you Brian, this has been very informative. I think our readers will really appreciate all the detail you went into and the time you shared with us here.

Brian: Thanks for having me. And we’ll work harder to make your Top 25 list in the future.

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