Founder Focused Growth Investing: Serent Capital’s Kevin Frick

In this episode we speak with Kevin Frick, co-founder and partner of CERRAN Capital, a leading lower-middle market private equity firm focused on investing in high-growth service and technology businesses. CERRAN's portfolio includes more than 60 founder-led industry-changing companies that a partners with, who are scaling up by using CERRAN's toolkit of growth resources. Kevin has a long track record of working with CEOs and their management teams to help their companies achieve their full potential and is engaged on topics of strategy, organization, sales and account management, marketing and lead generation, product road mapping, pricing, operations and mergers and acquisitions. Prior to co-founding CERRAN, Kevin was a partner at McKinsey Company, where he led McKinsey's West Coast private equity practice. He has worked with over 100 companies in a counseling capacity with an exceptional track record of helping management teams achieve bottom-line improvements. I'm your host RJ Lumber. We hope you enjoy the show. If you like the episode, click the subscribe. Kevin, thank you so much for taking the time to chat with us today. It's a delight to be with you. My pleasure looking forward to the conversation. So I've known CERRAN's for quite some time. I remember actually when you launched in that 2008 time frame and I thought it made a whole lot of sense for someone with your background to start a fund given you were at that time leading McKinsey's West Coast practice and private equity helping crack me if I'm wrong. You were helping firms both identify investment as well as help them scale. So with love to kind of kick off with CERRAN, I guess you can give an overview, but then also build in that evolution of your transition into the industry. Sure. Yeah, why don't I start by giving just a little bit of chronological background. So coming out of business school, I did join McKinsey and I was there for approximately 10 years. I ended up running as you noted the West Coast private equity practice. I had dual accountability also for the technology private equity practice on a global basis. In that capacity, I worked with roughly 30 different private equity and growth equity investors and we worked a lot on due diligence, business due diligence, and we worked a lot with portfolio companies to help them hopefully achieve the investment plans. And that was a time in the industry when there's a lot more capital coming in and the historical basis of competition from the 80s and 90s and early 2000s, which tended to either be unsourcing, particularly for growth investing or on financial engineering, which is more on the value side. Most of those were getting diminished. And so this concept of being a value I had invested started to become very popular. Remains popular today is probably hard to find private equity or growth equity. Websites that doesn't include the words value added investor. But like a lot of entrepreneurs, I saw how other firms were doing it and I thought to myself, well, there's a better way to do this. And in parallel with that, my co-founder, who I met in business school, and was also at McKinsey Refugee, he left to run a company and had scaled a business from a few million dollars to ultimately going public and creating between one and two billion dollars when he left the board. And so he had a single deep experience in building companies and I'd work with a bunch. And we had very similar philosophies about what we wanted to create. And specifically, like we wanted to invest in found-room businesses that had already reached some scale whereby they had achieved great product market fits. They had happy customers. They had a business model that was working because they were all bootstrap businesses. They didn't have the luxury of burning cash, so to speak. And so they needed a business model that worked. And our view was those businesses that figured out so many different things that are the ingredients of building a phenomenal company and what we could bring is insight into how to scale those businesses. And that leveraged David's experience being an operator and doing that. And then my experience working across a number of companies helping them grow and scale. And so with that in late '07, we went to raise the fund. And as you noted, closed it in early '08. In fact, we just had our 15-year anniversary get together here a few weeks ago. Fantastic. And one of the things in private equity that's well known, a lot of the investors come from some of the top schools, MBA programs, undergrad programs. One thing unique about Stanford that I noticed early on, and it still kind of remains true to this day is you have an inordinate number of RJ Miller scholars. Tell us about the scholarship program. Yeah. So RJ Miller scholars at Stanford, it's a designation that you see if you're in the top 10% of the class. And I laugh a little bit because Stanford also really downplays grades. And grades typically aren't released to recruiters, and it's considered somewhat uncouth to ask classmates how they're doing with their academics, and so forth. And so nobody really knows exactly where you rank in the class until graduation day. And then you find out during the graduation ceremony whether or not you qualified for it or not. And so the fact that we happen to have so many RJ Miller scholars is somewhat cool. And told in the sense that at the time we made the offers, we didn't know that the folks were going to achieve that status. It came to light after we made the offers and they've accepted them. And so if anything, maybe it just suggests we have some selection criteria in the front end that seems to favor folks who are doing well academically. But I laugh because it certainly wasn't thrown up that way. It's just kind of a little bit of an accident in history, but a happy accident. You know, the other thing I noticed was 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, I'd say, at a modest fund size, but then you've gradually increased along the way. Yeah. And to put a little bit of numbers around our first fund with $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 fundraisers 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. And so 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. And part of the reason for that is because the initial equity check sizes that we've been riding have basically gone up by more or less the rate of inflation. And that's allowed us to stay in our space and really build deep intellectual property around the ways that we help found our own businesses grow and scale. And so that is one component of the growth. There has been inflationary growth, I would say, on the equity check sizes. The other drivers just been, we've continued to grow and scale our organization. And so 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. And that's the pretty high headcount for our level of assets. And it's high because we put a lot of investment in 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. And so we have built out the organization that's allowed us to stay true to the investment strategy of investing in and bootstrap businesses. And so 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. That's why the fund size has been increasing. 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 talked 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? Yeah, 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 steering it back in 2007, the first thing we wrote down were the values of the firm that we wanted to help build. And there were five values. Those five values are still the same five values that the firm embraces today. And they have served as the backbone for the culture. And 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 a framework. And so it's a very values driven firm. How do we maintain that? I think it actually goes both direction. 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, like what we're really doing is the structured interview target around entrepreneurialism, development, partnership, and so forth. us 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 harness 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 of their joining, and in that dinner, we basically cover the history of the firm and the valuable firm, and so we'll spend two to three hours just walking through those two things, giving examples, taking questions about anything's around. So that's another example, and then third example is an investment committee every week. The first thing we actually do is we give that MVP awards, is what we call it for the firm members who exemplify the values of the firm. And so it's something that we deeply embrace, and that helps us grow in 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, "God, once time's retiring, the other ones moved to Austin, like, what's going on, and things gonna be okay?" And I'm sure we sounded naive, but our response was, yeah, I actually think things are gonna be great, and we've had that degree of conviction for a number of reasons, but one of which was the culture and value of the firm is so strong, we just felt like that was gonna be the glue that was gonna 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, were seamlessly across one another. We all embrace the core values, we cross-staff, we genuinely operate as one firm, and you can do those kind of things if you have a strong culture, which is really 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. I watched the overview video on your website, and I really like the focus and emphasis on supporting founders. So one could perceive that as like, yeah, that's what they're supposed to say, because they're investing behind these founders, but it really did seem like 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? Backing founders is what we do today, and a grad of a passion that both David and I had for entrepreneurs. I think it was rooted not surprisingly to our past. We grew up in Ireland at the point of the Irish economy is 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 the RV capital of the world. That's a whole suffered story, but it's a very entrepreneurial place, not least to which is 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 and the Center 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 the 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 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 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, just a knock on the fact is amazing. And that's just with regard to the employees and the folks who earn a paycheck from these companies, they found to start it. But they're also delivering tremendous value to the customers and their clients. And there's a reason why companies grow successfully because they're creating great value for the clients. And so when you start to think about like 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. Like, 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 it's the motor to drive this. Along these lines, how do you approach ESG? You know, obviously it's like somewhat integrated into what you do on a day-to-day basis. But yeah, are there other initiatives that you might also support? Yeah, for us within the ESG, the Ashes is arguably the most important environmental with technology business is not brunch and center. Governance is something I think it's just kind of second in nature. And it springs forth out of our values. I think we are boys very cautious about the fact that we often are representing either our investors or we have co-investors in the former role of our shareholders. We've got management team members. And so on the governance side, I think it just naturally flows out of our values. On the social side, I think that's the place that we put the most emphasis. And particularly giving technology businesses are such a talent driven game. I mean, to put in perspective, we have six people on our human capital game. And a big part of what they do is help find the executive talent for portfolio companies. Last year, to put in perspective, they put over 80 executives into the 45 companies supporting what he is in that effort. And on that dimension, given how important talent is, it's extremely important that we find the best people to work in the companies that were fostering an environment that allows people to thrive, that encourages diversity of thought and experience, and really does correct for cognitive bias. We all develop cognitive bias for good reason. Like we couldn't possibly analyze every single decision down to the as detail we need to use role to thumb. And there's a lot of value in role to thumb, but there's disadvantage and the disadvantages in this context are when your cognitive bias is leading you to make a bad decision because you're making assumptions before you've actually taken the time to truly understand for example, the candidate in a recruiting process. Or you're not thinking through to my development perspective, am I giving developed in a format that works as a receiver? Maybe because of my background, I like to get really direct feedback. And that's what works for me, but maybe somebody else has a different way that they like to get feedback because of their upbringing or something else. And so I think it's really important. Like if we're going to have extremely successful companies, we need the best talent and then put together an environment that allows people to unleash that talent. And I think rooting out cognitive bias is exceptionally important to allow all that to happen. And so that's a social piece. It's a piece of we really help influence. It starts obviously within the four walls of parents, but then radiate out from that or other companies. Got it. We're coming up on time. I like to end a conversation with a couple questions. One is, can you tell us about a person who has had a profound influence on you and your life? Man, it's a long list. I will pick one, but I look back over time. And I'm only here because of the folks who have been around me and helped me grow as a professional and at the person. I'll pick my father in part because as a kid, he really encouraged a couple of different attributes, but I think it served me well over time. One of which was entrepreneurialism. He was on us early about, oh, you should go start a business. You should go do this. You want me to talk to the person at the YMCA and see if like they'll let you open up shushing thing. And I'm like, no, dad, I don't want to do the same sort of thing. But just like encouraging that spirit of entrepreneurialism was really something that over time has been exceptionally valuable to me. And then the other attribute that I'll call out is just, you've got to put the time in. You got to put the effort in to get to the outcomes that you want. And we, you know, as kids, I had a job since those 10 years old. And by the time I graduated in college, I had almost two years of work experience and real work. Like, for example, coming on my senior high school, I sent out 35 letters to local businesses. And I got one response from somebody who was willing to take a high school graduate and then let him have a job for the summer and an RD lab testing sensors that went into automotive engines. And so it was just that instilling that work ethic of, you got to earn what you get. And also those entrepreneurial life and take some risks, go after things, have a passion for what you do. And so I'm really grateful to my father for that. Last question. Can you tell us about a cause charity or other endeavor that you're passionate about? Yeah, I have a cause that has profoundly affected my life through how it affected another's life. And in particular, I had gotten married for years at a college to Michelle. And Michelle, unfortunately, not long after got married, struck with my logic and sympholo, my alitis, also known as chronic fatigue syndrome, it was tragic actually. And it has been tragic how it affected her life. And she went from, you know, great students, hopefully going to law school, very motivated to, unfortunately, very impaired. And frankly, has a hard time leaving the house and engaging productive lay. And we had been married for over two years. And so that also deeply affected our marriage. It was eye opening for me because I had always had the good fortune of having great health and being highly productive, being surrounded by other folks who are typically in that situation. And you don't often come across folks whose health has been deeply impaired in that way, just in the normal course. And partly because they're invisible because they are not out socializing. They're at home suffering. And so I had been on the board of solve in ETF S initiative probably a decade ago and had been involved with the Bateman Horn Center. which is another organization focused on that. I'll plan to documentary, focus on the disease. And it's one of those things that doesn't get enough attention, even though it affects a fair number of people. And since it affected me and I'm positioned to have an impact, it has been some place that I have had a passion around and try to make a difference. Well, Kevin, thank you for sharing that and highlighting those charities. And also, thank you for taking the time to chat with us. Today, I know our audience will find this very insightful. My pleasure, RJ. It's been a pleasure. Thank you for having me.