CIBC Innovation Banking Podcast

John Raeder [00:00:00] On our Bow River Capital team, we have roughly 80 plus years of operational experience. Investment managers that are former founders, CEOs and C-level officers of their own SaaS and technology businesses. 

Michael Hainsworth [00:00:18] Hello, I'm Michael Hainsworth. The CIBC Innovation Banking Podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. In the world today, it's tough to raise capital. So how do those who hold the purse strings view the road ahead? John Raeder has seen it all. As vice chairman and head of software investments at Bow River Capital in Denver, Raeder is a proven software investor, private equity fund manager and serial entrepreneur. He's been through ups and downs before from the dot-com bust to the 2008 financial crisis and everything in between and beyond. And the high interest rate, low investor interest environment in which we find ourselves today may be unique. But he tells me it's not new. 

John Raeder [00:01:15] I began my career in cloud based computing software as a service SaaS businesses back in the nineties and ultimately started my own firm in the late nineties. Not the best time to begin your career as an entrepreneur, given that the dot-com implosion was looming, but I learned a terrific amount of operational detail, learned a lot about myself during the toughest times during and post the nuclear winter. 

Michael Hainsworth [00:01:47] Tell me about that experience, because you once said that you developed an outlook that was steeped in paranoia and fear around operational frailty as a result. 

John Raeder [00:01:57] That's a fair point. I have been a CEO of a startup, so I'm not an overly optimistic, wild eyed CEO who's always thinking the grass is greener and things will always end up with fantastic outcomes. So given my view that there was no option B during that early stage of my first CEO role, I created a series of sensitivities, both intellectually and from a budgeting standpoint of worst case scenarios, Draconian models. Survived a number of macro backdrops and also just the frailties of early stage companies that are focused on rapidly growing. 

Michael Hainsworth [00:02:45] And as you've evolved from a software CEO to an investor within that industry, what do you see as the key differentiator for you and Bow River Capital? 

John Raeder [00:02:59] I started my investment career with an SPV called Raider Venture Fund in my late twenties. I had my first board assignment at that point and worked for a recurring revenue model business called that FRX software. That fund over two decades and over, nearly 30 investments produced 67 percent returns on an annualized basis and over five times multiple on invested capital with great predictability, institutionalized the framework through Bow River Capital. So I brought over my investment team and investment philosophy five years ago in 2018, launched the Maiden Fund, which was our Software Growth Equity One Fund at Bow River Capital, which was oversubscribed and 160 million in AUM. 

Michael Hainsworth [00:03:55] Tell me more about that and the role that the dot-com bust played in helping you build the skill set that's required for Bow River Capital. Because, you know, whether you're facing massive headwinds or the wind is at your back, a business must be pressure tested to thrive in tough market conditions, including recessionary times at which we find ourselves at a crossroads right now. How do you pressure test a business? 

John Raeder [00:04:21] Good question. We take a very conservative approach to the diligencing we we do, and as this first institutional, largest institutional capital in aligning with bootstrap founders, it typically takes us a couple of years to build those relationships. So it starts with, I would say, a long term relationship building outlook, concurrently, doing deep diligence, pressure testing the business against macro recessionary times, and ultimately aligning our culture with the founders and management teams of those companies we really partner with. And then deconstructing the operating plans and business models such that we can apply our 340 page proven playbook to rapidly accelerate that business. 

Michael Hainsworth [00:05:15] When you pressure test a business, what role does the customer of that business play in the decision you make? How deep of a dive do you get into the customer experience? 

John Raeder [00:05:26] Very deeply. On our Bow River Capital team, we have roughly 80 plus years of operational experience. Investor managers that are former founders, CEOs and C-level officers of their own SaaS and technology businesses. And so ultimately we investigate and auger into these companies that have, through a very different lens than our other private equity and venture capital peers. 

Michael Hainsworth [00:05:56] In the current PE investing climate, M&A volumes have contracted by up to 70 percent over the past 12 to 18 months. Your second growth equity fund has $600 million in dry powder; are you currently investing, and if so, into what type of companies? 

John Raeder [00:06:10] As I often say, you can often and always fix poor performing companies, but you can't fix bad industries. And so we spend a lot of time investigating, analyzing thematic industries that we'll invest in. We've tended to make a cluster of investments in human capital management HR-type companies where we can further improve or maybe even aspirationally perfect the way staffers and employees execute on their day to day jobs in businesses. So fintech is an area of great opportunity of operational efficiencies, as is businesses with any type or pool or investment in engineering quality assurance, so SaaS platforms that can further create better performance operating efficiencies and better cost structure monitoring are businesses that we will continue to invest in. We like construction tech. These mission critical applications across these subsector industries are areas that we find to be particularly interesting in good and recessionary times. 

Michael Hainsworth [00:07:26] So what areas are you passing on in real time? 

John Raeder [00:07:29] We have avoided investments in health care technology and health care I.T. Whilst we see enormous addressable market and plenty of efficiencies that are obvious to all consumers/patients, the adoption curve of those technologies by medical services firms, hospitals, doctors and medical staffers seem to be less predictable. So we've avoided investments in the health care I.T. space, but we see in the real time massive opportunities in the lower middle market. There continues to be a significant capital gap and as a result we manage currently 765 million. So we remain very constructive to bootstrap founders and tech entrepreneurs that are currently looking for capital and they may be supported by the banks and non-banks and even the venture community that are not engaging like they were in the go-go era or the dot-com era or even, you know, in the 2020, 2021 rebound. 

Michael Hainsworth [00:08:36] That significant capital gap in the lower middle market is where John sees opportunities to invest. In the last 12 months, five of Rader's seven software-as-a-service businesses are growing subscription revenues at 100 percent. Whether one is facing massive headwinds or supportive tailwinds, John points out that businesses are always being pressure tested to thrive in very tough market conditions and recessionary times. And that test is a significant one for the C-suite of companies with an enterprise value of 20 to 60 million dollars. Lower middle market companies are often seen as less developed at the management level. John helps level up those companies. 

John Raeder [00:09:20] Bootstrap founders who may be terrific product visionaries who may not have ever seen a big winner created, also may not fully appreciate what an A-player looks like across multiple functional roles. So as an operationally centric growth equity fund and partner, we'll come in and be extremely transparent with those founders and CEOs and operating teams around where we see opportunity to invest in their people and the scaffolding needed to go scale a business from, as you referenced, five to ten million or so up to 25 to 50 million. In nearly all cases, we will top grade the sales leadership to an A-player that have built and scaled multiple companies in the SaaS world in prior. And we will typically invest heavily in their go to market motion, which includes their sales force, their demand gen levers and other marketing investment opportunities that will help grow bookings by roughly 50 to 100 percent during our entire whole period. 

Michael Hainsworth [00:10:38] You've told me in the past that you can't brand your way to growth. I can imagine there's some significant differences in the competencies required to start a business versus to scale a business. 

John Raeder [00:10:51] That's well said. By way of the startup skills and competencies, it's an enormously tough challenge to go build a business from zero to five million. But if you can reach five million, which we as a conservative investor invest in companies that are at or near positive cash flow, our ability to take that, the core foundational elements of that business and scale it by five fold or greater is something we can do across those thematic targets that we've analyzed. And so it's less about, kind of, catching lightning in a bottle. We wouldn't brand by way of TV commercials or, you know, kind of public marketing or print advertising. We would spend zero on those elements for growth, and we would allocate roughly 40 percent of our primary capital for sales and marketing acceleration. Roughly the same amount for innovation and product led growth. And then we'll systematize those businesses with the same actual SaaS tools and systems we use and deploy in all of our businesses to manage customer success, our reference ability, the interactions of our customers/end user with our application workflows in analytics. All that being said, we put a significant amount of capital into those companies to drive the surge acceleration of these businesses from roughly five to ten million up to 15 to 50 million. 

Michael Hainsworth [00:12:40] Accelerating a business by throwing more money at it is easy in the good times. Not so in the hard times. John tells me that founders may need to make changes to their strategies in this high interest rate environment. It's times like this when a founder needs to lean on the expertise of their investors. And Bow River offers exactly that. So what's the post-COVID investment environment look like to John? 

John Raeder [00:13:08] Well, we've been constructive during and post-COVID. Obviously, we've got 600 million in dry powder. I've mentioned that we will invest time and energy on the road, face to face like we did during COVID, to build relationships with bootstrapped founders and management teams. We haven't changed our knitting by way of our investment philosophy for over two decades, and we believe that in good times and bad, with these businesses we invest in and our expertise, we can outperform and really decouple the execution and performance of these companies from public market and large company results and valuations as a result of that diligence, as a result of our investment philosophy. We're able to produce top one percent or better returns against our peer group. 

Michael Hainsworth [00:14:04] Now you say that you haven't changed your knitting, but do founders need to change theirs when it comes to their approach to landing funding during the uncertain times of high interest rates, slowing economies, concerns about recession? Do they need to change their knitting? 

John Raeder [00:14:21] Well, I would say the macro backdrop has forced them to change in some respects. And this always comes down to mostly individual founders and tech CEOs. But I would say that our founders that are highly referenceable are more sensitive to partnering versus just capital that comes on the balance sheet. So capital that actually can help grow businesses, help address product roadmap being complexities, and certainly create a very solid operating plan and budgets no matter what the macro economy looks like for these bootstrapped founders to realize their dreams of building category killers or big winners within their particular SaaS industry. And so we find entrepreneurs respect the operational prowess that Bow River Capital Software Growth Equity Team brings to the table. They respect the amount of capital and the skin in the game, both by way of time and capital and energy we invest in the businesses, and it would be very typical for us to be full time alongside our management teams, post our investment for roughly six to 12 months at the investment team level as we build out the foundation and infrastructure of these new portfolio companies so that they're immediately creating value and growth from day one of our investment. 

Michael Hainsworth [00:16:06] You raised a greater than expected 605 million for that second software growth fund. How did you beat the 500 dollar million target? 

John Raeder [00:16:15] It really boils down to three distinguishable merits to our strategy and team. The first, our investment team of operators and their prowess of being a primary investors and terrific stewards of capital is very differentiated. So the second obvious distinguisher for us was our velocity of capital and our recirculation period of approximately 30 to 36 months. And ultimately, that strategy is very differentiated when a typical venture hold period is is eight to ten years plus, and the typical private equity hold period is six to ten years. So we're significantly less than half that period. And the third is just our returns are in the top one percent or greater. And when you have those three distinguishers and the returns of crystallized exits to tell your story around, which is a pretty simple, straightforward story, and ultimately we had many new investors globally and institutionally come in to support us where our largest investor increased their commitment from just over 25 million to roughly 117 million. We never would let grass grow, so to speak, on our current progress and results to date, we wake up every day feeling the enormous pressure of managing a significant amount of institutional capital. And I've got the right team and we've got Bow River with significant financial support, all the compliance, SCC regulatory support, all the strategic guidance and certainly the fundraising engine to allow us the capacity at the investment team level to go do what we love doing and do what we do best, which is to rapidly scale these system of record, mission critical SaaS companies and businesses for bootstrap founders and the dreams they have of building big winners. 

Michael Hainsworth [00:18:31] The uncertain economic environment and environment for financing SMBs remains a challenge for founders. But Bow River Capital has shown that with the right financing partner, companies can flourish. While John Raeder has 600 million dollars in investable capital for the next three years, he'll continue to look for companies that want to work with their investors and look to repeat the returns of his first fund that weren't just in the top decile, but the top ten of all tech funds in the United States. 

Michael Hainsworth [00:19:06] This has been the CIBC Innovation Banking Podcast, where we learn the secrets to innovation economy success from the entrepreneurs who are paving the way for the future. I'm Michael Hainsworth. Thanks for listening.