Private equity hasn't been reimagined in the same vein as software for a long time. We are a firm believer in Marc Andreessen's thesis that tech eats the world - we're really keen on that. The other part of this is that technology DNA is fundamental in the 2020s.
That's the opening gambit from Corey Tollefson, partner at new private equity firm, Arcspring. I wouldn't normally find myself interviewing a partner from a private equity firm, given diginomica's focus is less about funding mechanisms, and more about practical outcomes and advice for companies. However, the background to how Arcspring came to be formed is interesting for those embedded in the enterprise technology world - and its ambitions are closely aligned.
The history is long, so I won't go into all the details, but Arcspring has been created and is being led by a number of well known ex-Oracle and ex-Infor executives. Corey Tollefson, Duncan Angove, Simon Angove and Jordan Lamb have a history for building and scaling successful software companies, either within micro-verticals (such as retail) or as distinct business units at one of the two aforementioned vendor giants.
Tollefson, Duncan Angove and Lamb all previously were involved with the stellar turnaround job done at Infor, which took it from a flailing enterprise software vendor to a growing SaaS company that eventually got acquired by Koch Industries. Ex-Infor CEO Charles Phillips is also an investor and mentor to Arcspring.
In other words, the people involved here have a strong track record and it's worth listening to what they have planned. And it seems that the lessons they learned in enterprise tech are now being applied to private equity - in that they want to disrupt PE in a similar way. This is partly being done by identifying companies that are ripe for tech change, partly through helping those companies find strong technology leaders, and partly through implementing a design thinking playbook at each investment. Tollefson is confident:
Most PE firms have never operated a company before and they certainly don't have the technology background or technology and business acumen that we do.
Sleepy micro-vertical companies
So, what is Arcspring's approach? Well, Tollefson explained that it isn't looking to try and create ‘the next Uber'. Instead, Arcspring looks at where VC money is being directed and takes inspiration from sleepy companies in that market. He said:
We don't believe it's capital efficient or timeline efficient to try to create an Uber again, I think Uber was like a unicorn that just kind of happened. I think what you're gonna see are companies like us that if we really want to create an Uber, we're going to buy the taxi service and we're going to digitally transform it from the inside out.
But Uber isn't necessarily the best example of what Arcspring may be eyeing as an opportunity. It's approach is to partner with other PE firms that have a distinct micro-vertical focus - whether that be finance, retail, agriculture, manufacturing - and bring in the technology expertise and leadership that it has to offer. Tollefson explained:
We looked at private equity and what we found is there are micro vertical PE firms out there that know nothing about machine learning, they know nothing about AI, mobile, IoT, two way marketplaces, FinTech, blockchain, network effects They know none of that, so they bring us in as a co-sponsor, similar to what Golden Gate did a few years ago.
We're looking for existing businesses that are sleepy, maybe boring, and they don't trade in huge multiples. Our intention is to buy their core business, transform it through the lens of technology, and then we want to pivot it to reflect software valuations. So we want these companies to be asset light, high margin. a good moat around their business, with sticky recurring revenues, and we want to pivot them and transform them.
Arcspring is targeting lower to mid-market companies, where it will typically write a cheque for $15 million to $25 million in equity, and then might put on two or three times that in debt if the opportunity is there.
As one example of how Arcspring can bring value to the table, Tollefson described a meeting with a potential portfolio company just a few weeks ago. The company in question was developing its own proprietary software, but built on top of the Salesforce platform, and was having challenges in achieving what it desired. The problem was that no one at the company really knew anyone at Salesforce to help. Within 60 seconds Tollefson had the lead engineer at Salesforce on the phone talking the company through its problems in real time.
That's just one example, because as you can imagine, over the years we know all these people - whether it's engineering or sales or delivery or customer care. So, the origin story really is, we wanted to do this because frankly, the thought of operating another company...we just felt like we've already done that. We wanted to influence as many portfolio companies as we could, and the best way to do that is to get into private equity.
And rather than just financially engineer things, we're creating value creation playbooks for each and every portfolio company.
A true partnership
Arcspring is pitching itself as a different kind of private equity firm. It isn't here to strip out costs at companies and make a profitable sale to another firm - it wants to see growth in its investments. Tollefson said that the aim is to guide its portfolio companies to an outcome, without micromanaging them. Arcspring provides its investment firms with a playbook and holds them accountable, sometimes placing technology leaders from industry into the company, and then works alongside them to drive change. He said:
This isn't like a quarterly phone call, we have a partner assigned to each of our portfolio companies and we literally have phone calls every single day with them.
For years we've been creating software applications that people have run, but we've never had a financial interest in it. Think about how aligned our outcomes are when you actually put an equity check into the company that you're trying to put software in.
Because of regulations around private equity, Tollefson couldn't give me any names of some of the companies that Arcspring is working with just yet (although this should change by the Spring). However, he did give one example of a firm that works in the automotive space, which almost operates as a recruitment provider to manufacturers of electric vehicles.
Tollefson explained how the company has created its own software for hiring and placing gig workers in this market. Arcspring sees opportunity here to take that software, spin it out into its own company, and put in a CEO that has a technology background. He said:
What we found is that they've accidentally created an industrial gig platform and what you're looking at there is a next gen software company.
Arcspring also identifies opportunities by looking at second and third order consequences. It's website states: "We spend a lot of time understanding emerging technology and the impact it will have on business but we spend even more time asking ‘then what?'".
For example, Tollefson explained that whilst large investments may be directed at electric vehicle stock, Arcspring would be more interested in the ripple effect from that - such as the batteries market (second order consequence). It believes this allows for it to more accurately predict areas of investment while managing risk.
However, the key message Tollefson wants to get out there is that Arcspring isn't looking to write a cheque and walk away from its investments, hoping for the best. It is tightly focusing on the principles of ‘customer success'. He said:
I know it's a bit better in the SaaS industry now, but let's be real with ourselves. The fact that you signed a customer for three years means you can figure out a lot of stuff over that period to get them happy. We are, however, completely aligned with outcomes. Not only are you going to take the software that we create and scope together, but we are writing a $20 million cheque to make sure you're successful.
I can't think of a model that's more economically, culturally, politically, spiritually aligned than the model that we're bringing to the table.
Again I keep harping on about this, but in private equity there hasn't been a lot of emphasis on growth. There has been a lot of emphasis on buying companies, pulling out costs and then selling them off to another private equity firm. So we want to grow these businesses through the lens of software and tech.
I really admired some of the work that the people involved in Arcspring did at Infor over the last decade. When most industry watchers had brushed the company aside, they managed to turn it into a successful, growing, profitable SaaS company. This is what these people have done for most of their adult careers, so I think it would be foolish to brush them aside. However, as ever, the proof is in the pudding and we will need to wait a bit to get insight into how these deals are going. I will definitely be following up with Arcspring later this year to find out more.