Today, Dallas-based Cypress Growth Capital has announced the close of its second fund (read here). Managing Director Barton Goodwin, who co-founded the firm along with Ed Mello, answered our questions about the new investment vehicle, their model and strategy, and shared some interesting thoughts with us.
FinSMEs: Hi Barton, thank you for joining us. First, what’s your background?
Barton: Most of my career has actually been spend not in Finance, but in IT Consulting. I spent 16 years at Computer Sciences Corporation, where I was one of eight Managing Partners in their commercial consulting practice. Prior to that, I spent nine years at (what is now) Accenture. I also worked for a SaaS startup, and then co-founded an advisory firm, focused on helping young companies with top-line revenue growth. It was there that we saw first hand that many successful entrepreneurs in the Southwestern US need additional sources and options for getting the necessary growth capital to fuel their businesses.
FinSMEs: What’s Cypress Growth Capital?
Barton: Cypress Growth Capital is an alternative investment firm, headquartered in Dallas, Tx. Ed Mello and I co-founded the firm in 2010. We believe we are the largest and most active royalty-based growth capital firm in the United States. We raised our first fund in 2010, and finished deployment at the end of last year, investing in 12 companies. We have just closed our second fund, this time for $50M, and have begun deployment.
FinSMEs: What’s your focus and investment strategy?
Barton: We invest $1 million to $5 million in software and technology-enabled business services companies located in the Southwest with annual revenues typically between $3M and $20M. Using our royalty-based growth capital approach, entrepreneurs are able to secure significant investments into their businesses while minimizing loss of equity or control.
FinSMEs: Royalty-based growth capital…what is it?
Barton: As an alternative to equity, we provide the investment in return for a percentage of future revenues. Payments fluctuate in conjunction with the cash performance of the business. There is no set interest rate or timeframe – once the total payments reaches an agreed-upon cap, the obligation is completed. There are few covenants, allowing a company to be more aggressive with their growth strategies. So, even though it is technically a debt instrument, it carries “patient capital” characteristics typically associated with equity.
FinSMEs: Let’s speak about entrepreneurs. What do you like to see in them before investing?…and what don’t you want to see?
Barton: We like entrepreneurs who are aggressive, but are interested in maintaining healthy financials while they grow. We also like to see leaders who are able to attract and retain a vibrant team around them – “one-person bands” can only grow so far.
FinSMEs: Speak about some trends…fintech, IoT, virtual reality, etc. Which one do you bet on?
Barton: Well, with our model we perhaps don’t have to bet on companies as much as some others. We wait until the company is doing well, both market-wise and financially, prior to providing them with significant capital to move to the next level. We do focus cross-industry on SaaS-based companies, not only from a trend point of view, but also because they are a particularly good fit for our form of investment: healthy gross margins, and exit potential that encourages entrepreneurs to retain as much of their equity as possible.
FinSMEs: Dallas…what can you tell me about the entreprenerial/startup ecosystem?
Barton: Dallas is vibrant – there seems to be no shortage of entrepreneurs here, as well as in our other main geographic focus areas: Austin, Houston, and Denver. Startup incubators are launching, seemingly every month, and angel investors and business executives in the cities seem genuinely eager to provide mentorship. And for good reason: it is very rewarding to work with bright entrepreneurs, especially when they begin to take off. We’re in a great spot.