The below excerpt was provided by RJ Lumba, Managing Partner of GrowthCap and host of the Growth Investor podcast. He interviewed Kevin Frick, Co-Founder and Partner of Serent Capital, a leading lower-middle market private equity firm focused on investing in high growth service and technology businesses.
RJ: Almost in sequence, you were on, I’d say, an accelerating cadence to closing funds and in increasing amounts. It’s almost like you had mapped it out and you executed it to perfection. I’m sure I’m overstating it, but tell us about your approach because you started off at a modest fund size, but then you’ve gradually increased along the way.
Kevin: To put a little bit of numbers around, our first fund was $250 million in size, and the fund we’re investing out of today is $1.1 billion, and that’s over a 15-year period. Each one of our fund raises has increased the fund size by approximately 40 to 50%. Believe it or not, in private equity, at least for those who are not capital constrained, that’s considered good discipline. We’ve actually tried to be very thoughtful about not raising too much capital because we really like our strategy, and we think our strategy over time has become very differentiated.
I think our ability to deliver to founders our value proposition, helping them grow and scale the businesses, is better today than it’s ever been. Part of the reason for that is because the initial equity check sizes that we’ve been writing have basically gone up by more or less the rate of inflation, and that’s allowed us to stay in our space and build deep intellectual property around the ways that we help founder-owned businesses grow and scale. That is one component of the growth. There has been inflationary growth, I would say, on the equity check sizes.
The other driver has just been we’ve continued to grow and scale our organization. In fund one, I think by the end of fund one, we had somewhere between 12 and 15 people, and today we have roughly 80 people. That’s a pretty high headcount for our level of assets, and it’s high because we put a lot of investment finding great businesses. We have roughly 15 people on our business development team. We have a very big in-house growth team of roughly 25 people, and then, of course, the investing team, administrative team.
We have built up the organization. That’s allowed us to stay true to the investment strategy of investing in bootstrap businesses. Even though the funds have scaled from $250 to $1.1 billion, adjusted for headcount and inflation, actually, it’s barely nudged at all. Those are the two main drivers as to why the fund size has been increasing.
RJ: I imagine it’s incredibly difficult to find the right people to join your firm to preserve the culture that you’re trying to build. I talk to other GPs about this quite frequently on firm culture. How do you approach firm culture? What are the key drivers to ensuring that your culture is sustainable and evolving in a positive way?
Kevin: Our culture is very strongly rooted in our firm values. When David and I sat down to write the initial business plan such as it was for Serent back in 2007, the first thing we wrote down were the values of the firm that we wanted to help build. There were five values. Those five values are still the same five values that the firm embraces today. They have served as the backbone of the culture. That really serves more broadly as just the heartbeat for the firm.
It allows us to operate extremely effectively and efficiently because we know how our colleagues will respond in different situations because it’s a very values-driven decision-making framework. So it’s a very values-driven firm. How do we maintain that? I think it actually goes both directions. I do think part of it is the people you bring into the firm and then the values also help perpetuate the firm’s core even as it grows.
So let me explain what I mean by each of those. So on the recruiting side, we use those five values as part of our recruiting process. When we say a quote-unquote fit interview, what we’re really doing is the structured interview targeted around entrepreneurialism, development, partnership, and so forth across five values and trying to pull out from the candidates, where have they demonstrated entrepreneurship in their background?
That doesn’t mean they started a company, but where did they ask for forgiveness versus permission sort of thing? They lean into opportunities. They go and capture them. They go at things aggressively, and that’s a behavior we really like because that’s a tough thing to teach people, but if somebody embodies it, it’s really powerful when harnessed the right way. So that’s part of how we recruit.
When we onboard, as another example, we have a partner dinner for everybody who joins in the first 90 days that they’re joining, and in that dinner, we basically cover the history of the firm and the value of the firm, and so we’ll spend two to three hours just walking through those two things, giving examples, taking questions, batting things around. So that’s another example, and then the third example is an investment committee every week. The first thing we actually do is we give out MVP awards, is what we call it, for the firm members who exemplify the value of the firm, and so it’s something that we deeply embrace, and that helps us grow and scale.
I remember when we raised our fourth fund. That was not long after my co-founder David had announced his retirement, and it wasn’t long after I had moved to Austin to start our second office, and the LPs, the main question we got was, gosh, one’s retiring, the other one’s moving to Austin, like, what’s going on? Is things going to be okay? And I’m sure we sounded naive, but our response was, yeah, I actually think things are going to be great, and we’ve had that degree of conviction for a number of reasons, but one of which was the culture and values of the firm is so strong, we just felt like that was going to be the glue that was going to keep the firm operating at an extremely high level, and now four and a half years later, that’s proven to be true.
The two offices, for example, work seamlessly across one another. We all embrace the core values. We cross staff. We genuinely operate as one firm, and you can do those kinds of things if you have a strong culture, which is rooted in strong values, and so I actually think the values have helped us scale in a way and helped us keep true to the North Star, which for us is defined by those values.
RJ: I watched the overview video on your website, and I really liked the focus and emphasis on supporting founders. So one could perceive that as like, oh, yeah, that’s what they’re supposed to say because they’re investing behind these founders, but it really did seem authentic, and you relayed that to us in this conversation. Can you tell us a little bit more about that focus on founders, and then how you do help them create value for their companies?
Kevin: Backing founders is what we do today, and it grew out of a passion that both David and I had for entrepreneurs. I think it was rooted, not surprisingly, into our past. David grew up in Ireland at a point where the Irish economy was actually doing pretty poorly, and so people who could start businesses and create jobs were well regarded.
I grew up in a small industrial town called Elkhart, Indiana, which is known as RV Capital of the World. That’s a whole separate story, but it’s a very entrepreneurial place, not least to which does RV industry goes through cycles, and there’s up cycles and down cycles, and so there’s this conflict business creation aspect to that. And so we’ve always had a passion around entrepreneurs.
It’s also partly why both of us chose to go to business school at Stanford in the center of Silicon Valley in the late 90s when the internet was just taking off. And so it’s always been a passion. I think entrepreneurs and founders are really the heroes of society and don’t get enough credit. It’s hard to go out and take a risk and put your family on the line and your financial well-being on the line and go create something from nothing. And particularly the Bootstrap founders who we back, they didn’t have the benefit of somebody writing them a check for a million dollars.
Most of them started on credit cards or maybe they had one customer who was willing to take a risk that they could build something of value, and that’s where it started. And from that, we now in our active portfolio, we have 45 companies that employ thousands and thousands of people, and I think it’s approaching 10,000 people. And that’s just awesome, right? Think about all the meals that that’s bought. Think about all the education that’s funded, all the children that that’s helped educate.
And that’s just with regard to the employees and the folks who earn a paycheck from these companies they found or started, but they’re also delivering tremendous value to their customers and their clients. And there’s a reason why companies grow successfully because they’re creating great value for their clients. And so when you start to think about the concentric circles of impact that the founders create, it’s awesome.
And I love playing a small role in it. I feel like we’re very lucky and it’s really inspirational. We talk about it all the time at firm events. For example, in the holiday lunch recently, a speech was given and somebody got up and spent five minutes just talking about the mission of helping Bootstrap founders build really big, meaningful businesses and the motor that drives this.