The typical companies we invest in are not explosive high-profile start-ups with Web 2.0-type logos. They tend to grow as fast as their cash generation (and the market they're in) allows. And so they don't often get the big headlines when they're acquired. At the same time, we don't get to juice our returns with piles of cheap debt financing, as the buyout funds do more or less easily depending on market conditions.
No, the Growth Equity industry depends entirely on -- you guessed it -- growth. Chances are that the annual returns on a growth equity fund will be roughly equal to the median revenue growth CAGR across the portfolio. If the fund manager is able to "expand the multiples" as well (in other words "buy low, sell high"), he can do even better.
We always had a theory that capital-efficient businesses -- those built by bootstrappers -- were better than their venture-funded peers at growing faster than the market. So we were delighted to find five of our portfolio companies named in the Inc. 500/5000 list of America's fastest-growing private companies, based on overall revenue growth over a 3-year period:
- AcademixDirect (639% growth): performance-based marketing to the post-secondary education market.
- Revolution Prep (305% growth): test preparation and online education company for the K12 market.
- IntelePeer (302% growth): communication-as-a-service platform and VoiP peering network that enables carriers, service providers, and enterprises to build communication services in the cloud.
- Schoolwires (248% growth): platform for social communication, community-management and productivity application used by the K-12 education market.
- Recommind (219% growth): data management platform for the corporate, legal and eDiscovery markets.
With growth rates like that, I think we're getting the better of the two worlds: less technology risk than venture, less refinancing or covenant risk than buyouts. So far so good.