In this insightful episode of the Scaling X podcast series, hosted by Mark Healy, Sumeru Managing Partner Kyle Ryland shares the unique distinction between private equity and growth capital investments.
Ryland reveals what Sumeru Equity Partners searches for in founders and the importance of company culture.
Table of Contents
- Intro to Sumeru Scaling X Podcast
- Meet Kyle from Sumeru
- What was your unique value proposition in the early days of Sumeru?
- When is the best time to invest capital and other resources?
- What qualities do you look for in a company when deciding to invest?
- How can you remove risks while still giving a company room to grow?
- Growth Capital Versus Private Equity
- Experience, Advice, and Accumulated Wisdom
- What are some red flags when considering investing in a company?
- Importance of Company Culture
- Looking Back
Intro to Sumeru Scaling X Podcast
Mark Healy (00:28):
Hello and welcome to Sumeru’s Scaling X podcast. We’re all about growth here on Scaling X. We dig deep into life’s essential questions, including this one: How do you scale a growth-stage company without losing its soul?
We’re talking to Sumeru Managing Director Kyle Ryland, who spun off Sumeru from Silver Lake partners in 2014. Kyle has been an expert advisor to a number of successful companies over the past few decades.
He’s here to talk about what he looks for in a growth-stage company and what he tries to avoid. Plus, he explains the entrepreneurial impulse that led to the founding of Sumeru in the first place. I don’t know about you, but I’m ready to hear an origin story.
Kyle, welcome to Scaling X.
Meet Kyle from Sumeru
Kyle Ryland (01:10):
Hi, Mark. Thanks for having me.
Mark Healy (01:13):
Sumeru broke off from Silver Lake Partners in 2014, and I’m sure that’s a complicated story. I don’t want to oversimplify it, but you were one of the architects of that move. Why did it make sense to move away from Silver Lake at that point?
Kyle Ryland (01:33):
We back entrepreneurs, and we wanted to be entrepreneurial ourselves. We felt that by being independent, we could exercise our entrepreneurial muscles even more than we could by being part of another firm.
It’s really been terrific. It’s allowed us to shape the firm in really interesting and powerful ways. It’s brought the team together, and I think it has made us better investors and a better partner to the entrepreneurs because now we’re entrepreneurs as well.
Mark Healy (02:03):
Who was the first partner you worked with?
Kyle Ryland (02:07):
When we spun out and created this independent firm, we set up a new fund at the same time. We had an existing fund and we actually took that with us and continued to manage that portfolio.
Then we set up a new fund, our so-called “Fund 2,” and some of the earlier investments in that fund. They’ve all been super successful: A real estate software business called Buildium® Property Management, Fintech, a software business called Kyriba, and a fleet management and telematics software business called Azuga — all backed by really interesting entrepreneurial teams and founders bringing independence and innovation.
Our new role as a separate firm with a little more creativity and flexibility gave us a real edge in convincing those founders that we were the best partner.
What was your unique value proposition in the early days of Sumeru?
Mark Healy (03:13):
When you think back on those early conversations with that group of founders, what was the value proposition? What were you offering?
Kyle Ryland (03:23):
I think it’s a very interesting combination of bringing the best of a very active, operationally engaged partner with a growth mindset with a very substantial capital base. We saw an unmet need in the market.
We saw traditional private equity firms that were making investments with more of a cashflow-focused mindset, focused on the balance sheet, cost structure, and the things that can be important in certain types of businesses.
We saw minority growth equity investors as terrific firms, but they were frankly pretty passive and weren’t able to bring a set of tools to really help the founders and the entrepreneurs grow and scale these businesses.
We put together a team and a strategy that does both.
We obviously bring substantial amounts of capital to help our companies grow and scale, but we also engage in a very powerful way and bring a set of best practices that our team has developed for more than a decade to really help these entrepreneurs grow and scale.
Capital is a commodity in today’s environment. That’s why one of our taglines is: Operating at the intersection of people and technology.
Our business is really about people at the end of the day. The capital is secondary, and the skills that we have are very unique.
Constructing a firm and a team that was independent and brought that package in a powerful way to these founder entrepreneurs is what we wanted to concentrate on; the value proposition. That really resonated with all the companies I mentioned and many more.
Mark Healy (05:07):
In a lot of private equity situations, prior to that, you either got the capital but didn’t really get the support, or you got the support but you didn’t really get the capital.
Kyle Ryland (05:17):
That’s right. We actually don’t define what we do as private equity. We’re a growth capital firm, but we’re not a passive minority investor that is going to come to four board meetings a year and cheer from the bleacher seats.
We want to be engaged. We want to help. We’ve got deep skills. We’ve got a lot of experience. We’ve got a set of best practices that are really powerful in the performance improvement that they can help our management teams drive.
We want to find situations where those capabilities are really valued and we can engage in the right way.
Product is just one of the areas in which we have a tremendous depth and skillset and we can go deep. Product leadership is critical to what we look for, and those skills that we have really resonate because most of the founders that we work with had the original vision for the product.
They conceived it. They often even implemented it.
Having a partner who has that growth-first, product-oriented mindset and skills — that’s viewed as really valuable by all the great partners that we have in our portfolio.
Mark Healy (06:27):
Doesn’t every founder have a growth mindset?
Kyle Ryland (06:30):
Not necessarily. You know, many of our founders have bootstrapped their businesses and that’s terrific. They’ve grown and scaled them, but they’ve done it without raising much outside capital, so they have to think very carefully about how they manage with some constraints around capital for the business.
We can de-risk that a little bit by saying, “Let’s capitalize the business for even stronger growth. Let’s take some risks, albeit calculated ones, in the right areas. And let’s see if working together, we can actually accelerate what you’ve been able to accomplish on your own.”
Capital’s a part of that, but the other parts are the people, skills, and methodologies that we bring in. All of these best practices are around go-to-market, the product, the organization, and scalability of infrastructure.
When is the best time to invest capital and other resources?
Mark Healy (07:26):
At what stage in a company’s life is that kind of investment most advantageous?
Kyle Ryland (07:34):
It is after they have reached a certain low level of scale, product-market fit, and maturity. What I mean is the product-market fit is clearly demonstrated. They have customers. They have real revenues. They have some diversification.
They’ve de-risked some of the questions: Is there a market for the product? Will customers buy it? Can we get enough to have a diversified customer set?
Typically that means they have an annual recurring revenue basis of at least 10 to 15 million. That number can go up substantially from there, but we tend to find that once they get into that size range, a lot of those attributes I just mentioned exist.
Then it’s a function of how you scale from 10 or 15 million of annualized recurring revenue to 50, and then to 100, and then to 200.
What do you need to have in place in terms of your organization? Your strategy resource? That’s where we really engage and help in a very powerful way.
Mark Healy (08:44):
A company wouldn’t get to 10 or 15 million ARR if the product didn’t have potential.
Kyle Ryland (08:51):
That’s right. We’re not speculating on early-stage investments. We’re not in the moonshot business. We’re looking for entrepreneurs who’ve grown and scaled to that level of revenue.
Typically, organizationally it will depend, but they tend to have 50 to 100 employees; maybe a little more.
What qualities do you look for in a company when deciding to invest?
Mark Healy (09:16):
What do you look for in that size company, and, more particularly, what do you look for that some of your colleagues don’t look for?
Kyle Ryland (09:24):
We start with product leadership. We are looking for companies that have very strong products, typically #1 or #2 in their category. We’re okay with challengers, but we want to see a product that’s absolutely top-notch. That’s fundamental to our strategy.
History has told us that great products in great markets with good teams are the winning formula. But pro leadership is really important. We’re not interested in backing products that aren’t very high quality and don’t have a very strong potential — team is second.
Most of our investments are made in companies where founders are very actively involved. They’re typically the largest shareholders.
We like that partnership. We like that alignment. We want to see them be heavily invested in the business. We’re willing to have them de-risk a little bit. It takes some money off the table because that can be valuable to them and important to the success of the company.
The second piece that we look for is, typically, that the founder had the original vision for the product. They understand their market really well. They often saw an unmet need, had the vision, and then brought together a team to implement that vision.
Product leadership, a strong founder who we can partner with very well, and an attractive market usually already exist in most of the opportunities that we look at because the founder had a vision that identified an unmet need.
These markets are growing rapidly. So there’s a lot of wind at our back, and it’s really more of a function of how we help them scale than how we help them navigate it and pivot to new markets. They might be constrained by market size or something. That’s rarely the case in investments that we would make.
How can you remove risks while still giving a company room to grow?
Mark Healy (11:26):
You’ve used the word de-risk a few times, and it’s starting to make sense how de-risking, taking some of the risks off the table, ideally anyway, enables good judgment. Is your role sort of psychologically allowing people the space to grow the company responsibly and make the right decisions?
Kyle Ryland (11:48):
Yeah. Some of it’s a function of capital, so providing some liquidity helps them de-risk on a personal basis. That can be when you’ve put your blood, sweat and tears — and your entire net worth — into something for a decade or more. Being able to put something aside for your family can be really important.
We found that to be a valuable thing we can do and good for the business, too. But it’s not about de-risking from a financial perspective. It’s really about helping them scale without the same risk; in fact, at higher rates without the same risk that they may have to take on if they’re trying to do it themselves.
How do we bring in a set of best practices that we’ve developed over decades to help them actually grow at a faster rate with less risk?
How do we help them enter new markets, perhaps internationally, with an experienced team that we have that has done it before?
Organizational structure. Incentive structures. They may want to start to pursue some add-on acquisitions at some point. We’ve got a lot of experience with that. That can be a very scary thing for a founder entrepreneur, particularly one who hasn’t done it before. We can help de-risk that.
It’s not a function of slowing down the growth of the business and running it differently from a P and L perspective. How can we actually grow the business faster, but do it by taking less risk because we know what good looks like?
We’ve got a great set of best practices we can bring in. We can get this done in a way that presents less risk to you, less risk to the company, and less risk to the employees and the other stakeholders.
Growth Capital Versus Private Equity
Mark Healy (13:31):
The words “private equity,” especially together, have a bad rap. When you talk about growth capital versus private equity, is that just branding?
Kyle Ryland (13:46):
Not at all. Actually, it’s quite differentiated in several ways. As I mentioned before, we’re what we call a “growth-first investor.”
If you actually look at the typical organic growth rates of companies in our portfolio, they’re very high. They don’t look anything like what you might find in a private equity portfolio. These are growth rates of 30%, 40%, 50%, 60%, 70% — and they’re doing that organically, without a lot of add-ons and trying and manufacturing growth.
We build a strategy around that. That’s the “growth” part from a capital perspective, which is the “capital” piece of growth capital.
We have a very flexible approach. We’ll make some large investments where we might take more than 50% ownership, but we also do a lot of deals where we are a minority investor with a sizable stake in terms of a shareholder in the business.
We’re active and we’re engaged. It’s not the passive traditional growth equity playbook that we’re pursuing. It’s certainly not the large-scale control, lots of financial engineering, and leverage approach that you would see in the private equity world.
Experience, Advice, and Accumulated Wisdom
Mark Healy (15:04):
What you’re bringing is more operational management, product, actual advice, and experience. The team at Sumeru has good experience and you’re there to share it. You have this accumulated wisdom. Am I getting the value?
Kyle Ryland (15:23):
That’s absolutely right. We have all the financial skills that you would expect that we should have, but we don’t view those as differentiated. We view those as table stakes.
Where we really earn our stripes and differentiate is in the operating areas that you mentioned. That’s where we add value. That’s how we create really interesting outcomes for founders, entrepreneurs, employees, and our investors.
What are some red flags when considering investing in a company?
Mark Healy (15:53):
We talked a little bit about what you look for in a company, but what are some red flags that you’ve seen over the years that have proved to be worth paying attention to and paying heed to?
Kyle Ryland (16:07):
That’s a great question. I’ll start with the people’s side of the equation.
Integrity is really important. What we do is very engaged, and we need to do that with somebody who has a very high level of integrity, is very self-aware, and is interested in engaging.
Sometimes we think we’re very good at finding that package of qualities, but occasionally, we find folks who don’t have those qualities. Those are investments we’re not interested in making. It’s just too hard with the wrong partnership to be successful, in our opinion.
One category I spoke about, product leadership, is really important. We do a lot of work through a very experienced team that we have to assess.
Occasionally, we find that those products are not as strong as they appear on the surface and that there’s a tremendous amount of work required to essentially rewrite the entire technology stack. That’s not a great fit for us. That’s really important.
It doesn’t mean that the product has to be perfect. There always are things that can be improved. We’re very successful at helping our management teams understand that and make those improvements, but fatal flaws on the product side are tough for us to work with.
Those are two big ones that I would highlight that are absolutely critical.
Importance of Company Culture
Mark Healy (17:39):
How important is culture to a company’s success?
Kyle Ryland (17:43):
It’s critical. We try to spend a lot of time assessing company culture.
The founders are the culture carriers of the companies that we invest in. We get a lot of that through our interaction with the founders, but we do like to spend time with other people in the organization to really understand and hear from their perspective.
In addition to that perspective, growing and scaling these businesses for management teams is hard. It’s exciting, and it’s fun, but it’s also hard. We can do a lot to help, as I said, de-risk that, but you’ve got to have the right culture, collaboration, self-awareness, excitement, and ambition at the organization to be able to make that successful.
We’ll bring the ingredients, but they need to be wrapped in a culture that is going to allow us to accomplish what we need to and do it in a way that – we talked about integrity earlier – we all feel very good about.
It’s not just the quality of the people and the company, but the impact that the organization is having internally and externally. It’s the community. It’s stakeholders. That’s really important to us as well.
Mark Healy (19:03):
Think back to the years when you were first leaving Silver Lake and first had the idea that you guys could create something that was more growth-minded, more nimble, more entrepreneurial.
In looking back at the companies you’ve invested in and the partnerships you’ve fostered, have you followed through on the promise?
Kyle Ryland (19:28):
I think we have. The best testament to that is the companies we’ve invested in, the endorsements from the founders, the quality team that we have, and the great investors that we have backing us. Obviously, the performance that we’re delivering is really strong as well.
I feel very good about what we’ve delivered. We feel very good that the firm that we’ve created is doing something unique and will continue to do so.
We’re investing aggressively to stay ahead of the curve on that and make sure that what we bring – whether it’s our portfolio companies, investors, or employees – is meaningful, differentiated, focused on excellence, and driving top returns, but also doing it in a responsible way and in a way that is also fun.
That’s important to us culturally, as a firm and with our management teams as well. Doing so in a way that we can all feel proud of what we’re helping our companies accomplish and what we’re delivering to is really important to investors.
Marky Healy (20:42):
Yeah, scaling a company should be fun, right?
Kyle Ryland (20:45):
Yeah. It’s a lot of fun. That’s why we do what we do.
Mark Healy (20:50):
Kyle, I’m going to thank you for your time. As always, I’m going to invite you to come back to talk more about anything you want to talk about on the investment front and what you see as to how you define a promising company and what growth is all about.
Thank you very much for your time. I appreciate it. I hope you will come back and talk to us again.
Kyle Ryland (21:12):
I would love to. Thanks for having me, Mark.