Injecting Operating DNA into Investment Strategy

December 18, 2018
4 Minutes
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In SaaS businesses, operating results are earned every single day; and good businesses are made, not found. Writing here about building organizations, learning from the experience, and appreciating the ride.

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As I shared in my initial post for this blog, my decision to start Lock 8 Partners was driven by some long-held views, along with a number of more recent experiences and observations. This post picks up on the latter, and attempts to lay out some of the thinking behind founding this business. Specifically, the following observations and takeaways have been central to Lock 8’s strategy and approach.

  1. More Capital than Investment Candidates: Since early 2017, I helped evaluate a half dozen or so prospective investments and initially reviewed scores of others. And yet nothing I worked on resulted in an eventual investment. Deals were halted for many good reasons, but the majority came back to one central dynamic: there were many investors and vast capital pursuing a relatively small number of companies that were judged to be the most attractive investment targets. The end result was — and remains — that it is objectively very difficult to find and invest in great companies.
  2. Search as Competitive Necessity: To mitigate this challenge, rational and intelligent investors have spent years and significant resources developing highly sophisticated sourcing operations. They employ accomplished people, world class systems, and finely tuned strategies, all in a concerted effort to be the first to find the very best companies as destinations for their investment capital. Being very good at finding businesses for investment is no longer a competitive advantage for exceptional investors, it is inarguably a competitive necessity.
  3. The Other 9X%: With such tight filters in place, it is inevitable that investors elect to pass over the overwhelming majority of companies they see. But I found that a company failing to meet investors’ stringent search criteria didn’t necessarily mean that business was unattractive. Quite the contrary. In my consulting capacity, I looked at dozens of interesting companies that were simply early in their life-cycle, or hadn’t experienced stratospheric growth, or had some other characteristic that limited their appeal to a broad swath of more traditional investors. These are good businesses; they simply are in need of something that helps brings out their full potential. And there are many of them.
  4. The Missing Operating Piece: Over the past year+, I have thoroughly enjoyed serving in an active Exec Chair role — facilitating strategic discussions / decisions and advising on operating matters, but ultimately leaving the critical execution to those with far more domain expertise and intimacy in that particular business. What was especially gratifying in this role was the sense that the specific challenges and opportunities companies were experiencing were often new versions of old themes that I had seen in past lives. I found that I possessed mental models for understanding these issues, language for explaining them, and tools to address and capitalize on them. I was struck by the thought that twenty years of operating experience could be broadly applied to many SaaS businesses. And, it occurred to me that operating expertise might just be the critical component to navigating some of the above-mentioned investing challenges that I had witnessed.
  5. Over time, these thoughts took root and led to a series of questions, including:
  • What if the emphasis of investing became as much about building out world-class operations in good companies as it was about focusing resources on finding and transacting with seemingly flawless ones?
  • What would it look like to inject deep operating DNA into a small-scale company investment strategy and how could that expertise be injected into businesses in a seamless, additive way?
  • How would expertise in addressing operating challenges increase the population of prospective companies an investor could confidently target?
  • How might such a system scale over multiple businesses and how best to prove this approach?

The more I investigated these and other questions, the more urgency and energy I felt around answering them. As I have sought to do so over recent months, I have gained ever-increasing conviction about this as an investment model; and I believe a unique value-generating opportunity exists at this moment and juncture.

I plan to dedicate many future posts to further outlining these ideas, describing my efforts to understand them, relating their practical application, documenting my experiences in this pursuit, and sharing lessons learned along the way. I hope these will be helpful to all readers, but most specifically for operators who are working tirelessly to build successful SaaS businesses.

Thanks for reading and please come back for future posts.

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