E277:Why the Best GPs Refuse to Raise More Capital

Why is the hardest discipline in growth equity not finding great companies but refusing to grow past the point where returns break? In this episode, I talk with Deepak Sindwani, Co-Founder and Managing Partner of Wavecrest Growth Partners, about why fund size discipline, culture, and integrity matter more than optics in building a great investment firm. Deepak explains why Wavecrest capped Fund III at $450M despite excess demand, how staying in the sub-$50M equity check range preserves alpha, and why being a true growth partner — not a financial engineer — creates better outcomes for founders and investors alike.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Deepak, I've been very excited to chat. Welcome to the How and Dust Podcast.

• 0:03Speaker 01

  Thanks so much, David, for having me. Great to be here.

• 0:06Speaker 00

  So last year, you raised your third fund $450 million and you did it in four months. Given that it was a relatively easy raise, why not raise more capital?

• 0:17Speaker 01

  So from our standpoint, we really believe in a consistent approach to investing. And we started the firm actually having come from larger firms, Bank Capital and Invest Equity Partners, intentionally to come down market. We used to be in the mid-market. We used to invest kind of $50 to $150 million equity check per deal. And so part of creating Wavecrest was being in the lower middle market, the sub $50 million equity check market. And so when you think about our overall strategy, which we'll get into, we need to, we want to maintain that discipline, which means your fund size is limited. Otherwise, if either your check size grows or you end up in a different strategy.

• 0:57Speaker 01

  So from our standpoint, obviously, we're grateful for the interest from our existing investors and new investors that enabled us to get it done quickly, as you mentioned. But the focus and the name of the game was always stay on strategy. And the reason for that is we believe that our end of the market, in growth equity at least, is the, is kind of the sweet spot, is where the superior risk adjusted returns are.

• 1:20Speaker 00

  I know you'll probably reflexively say no, but wasn't there a temptation to make the fund bigger? You get essentially 20% of those management fees guaranteed.

• 1:28Speaker 01

  Look, there's always a temptation and, you know, we, we'll give you the exact number, but you know, there was a multiple on the amount we closed of interest even towards the end, even the existing investors or in the new investors who came in, wanted to do more. And so again, grateful for that interest. I had the opportunity to upsize the fund. I think a couple of things. One, we're very focused on do what you say, say what you do. That's the approach we take with entrepreneurs. That's the approach we take with our investors as well. And we started with a $400 million target and $450 million cap. I think what happens oftentimes in PE is people start with a target of X and they end up with a target of 2X or a cap of 2X. And, you know, from our standpoint, that would have been disingenuous with the strategy.

• 2:12Speaker 01

  So again, always a temptation as we've seen in PE, successful lower middle market funds can be in the middle market if they want to be and move up and be the billion dollar fund size. Again, we have a little bit of a unique history because we came from those billion dollar funds. You know, obviously we were trying to balance what makes sense for the long-term strategy. We do want to grow and I think that's important for our internal team, our next generation who we're mentoring up. But at the same time, we don't want to get out of the strategies. Our word is our bond. So we wanted to stay at 450.

• 2:41Speaker 00

  Casual observers may say, what the hell are you talking about 450 million dollar fund? We could do the math. It's a lot of money. What they fail to realize is when you have a 450 million dollar fund, every person's aspirations is to look for funds that are slightly more successful, just like human beings. They, they get this big bonus, they buy, put a down payment into a new neighborhood and now their peers are all twice, three times as rich. They do that again, they keep on. So they think people, it's very sneaky and people think that they're always going to be comparing themselves to their original peer group. But this kind of sneakily adds up to.

• 3:13Speaker 01

  You know, to your point, some folks have a keeping up with the Joneses approach and there is a, let me chase the next milestone, the next milestone. And certainly we're growing. So again, it's, it's something that's, we're appreciative of and it's part of our strategy and it's part of hopefully taking care of our team in the right way. But I think there's limits to growth. I mean, the big challenge is there's a breakpoint in our view in growth equity where above 50 million dollar equity, check the market gets somewhere between five and 10x more competitive. We just don't want to be past that breakpoint. And so you do the math. If you only want 10 to 12 positions in a fund, your fund size kind of caps out at five or 600 million. And so we don't want to have a venture spread of portfolio companies of 25 companies.

• 3:56Speaker 01

  We don't want to have a $5 million investment and a $75 million investment. We're pretty focused on, on average, say a, you know, 25, 30 million dollar investment with some range on it. And we're pretty focused on a relatively concentrated portfolio construction. So, you know, what falls out of that is, you know, the, the, the team that we need to build and the size of the fund. And, you know, again, the goal here is, you know, with a straight face, you know, consistent, you know, three to four X, you know, gross fund level returns. Which is something, you know, we're doing with fund one and two, and we want to continue to do and not kind of revert to the mean.

• 4:30Speaker 00

  It's not necessarily that you don't want a bigger fund size, it's that you don't want it at the expense of returns and your integrity.

• 4:37Speaker 01

  Yeah, it's strategy. I mean, look, the other big thing above 50 million is most of the deals become banked. 90% of our deal flow today is direct sourced. So, you know, again, we came from Bain and Vista, we came from places where there we were used to more bank deals. Frankly, you know, and maybe it's a little bit selfish, it's just not that fun. You know, there's, you participate in an auction, you don't get access to management, it's hard to differentiate and really, you know, have that intimate relationship which we, you know, would love to have with our founders. So it's just a different thing.

• 5:08Speaker 00

  What are the second order effects of having a $450 million fund?

• 5:11Speaker 01

  It just cleared a billion of AUM and so for whatever reason that round number helps in terms of marketing. So certainly the second order effect as relates to marketing to entrepreneurs and marketing to talent for us is improved. We also obviously have more resources to do that now. And so I think those are very important. I think the other second order effect, which is key to our strategy, is our growth operations team. Our approach to investing, I know we haven't gotten there, is to be a very collaborative partner with these, you know, bootstrap founder-led companies. And that means helping them think through investments they want to make after we invest in sales, marketing, customer success, thinking about their pricing, bringing more analytics

• 5:52Speaker 01

  and a financial, strategic financial lens into the company. And so that's what we try to do in a collaborative way, also bringing more talent into the company. So having more fees, having, having the ability to have a dedicated team of four, soon to be five in growth operations is a definite important impact of size.

• 6:12Speaker 00

  And you look for treasure hunters and you yourself consider yourself a treasure hunter. What does that mean?

• 6:18Speaker 01

  It's very interesting. I view, you know, in the continuum of private markets investing, on the one hand, on the early stage side, you have venture capital, great strategy, higher loss ratio, higher risk, but much higher alpha. And, you know, I actually came from that area and my partner did too earlier in our careers. On the other end of the spectrum, you have buyout, where you're buying, you know, companies typically at an EBITDA multiple with, with leverage, with debt. And, you know, there's probably less alpha, right? But probably less downside as well, given, you know, these are businesses that have been profitable, hopefully for many years. In the middle, you have growth equity and that's where we sit.

• 7:01Speaker 01

  And we're kind of a hybrid between the two growth, growthy companies, maybe not as growthful as venture, but usually more growthy than buyout companies. But in addition, profitable, like buyout companies. So if you think about it, we're really looking for the best of both worlds. The companies that are growing really nicely, in our case, 20 to 100% a year typically average about 50% a year. And they're profitable. So these founders, basically every year, they're compounding the value of their company at some rate, 30, 50%. And what we have to do is try to find them, which is, which is kind of the game, if I might say it, of growth equity, is to get in front of these founders to find them wherever they are.

• 7:47Speaker 01

  And, and you know, in many cases, they don't want to be found, or maybe they haven't invested in marketing, or their website isn't the greatest, or there isn't a lot of publicly available information on them. And so that's what I mean by treasure hunting. Going back to your question is, we are looking for, in some ways, the diamonds in the rough, or the diamonds that are kind of underneath the leaf. And they're not in your typical tech cities. They're not in New York and San Francisco. You know, we have companies in Syracuse, New York, and in Montreal, in San Antonio, Texas, in Bethesda, Maryland, you know, Amsterdam. So we've got businesses across the North America as well as, you know, Western Europe

• 8:30Speaker 01

  that have kind of taken what I'd say is the road less traveled. And, you know, we're intersecting with them at a point where they're growing nicely. And, and that's really the whole, you know, that's really the sourcing motion in growth equity.

• 8:45Speaker 00

  In college, my junior year in 2007, I got to Shadow Jay Jordan, who I think at the time, if I'm remembering correctly, had a $3 billion buyout firm. This was in 2000. This was a large one. And I was at his, at his corner office and I was this kind of googly eyed undergrad business student. I love business. I love the whole concept and I was sitting while he was signing documents and I asked him a question like, are you passionate about what, what you do? And he was just signing. He's like, look at how passionate I am signing these documents. And although I'm not sure if he intended it or not, it was actually a really interesting lesson in that even the people that are most successful, most passionate, aren't necessarily literally passionate about every little thing that they do, which at the point I maybe may have even thought.

• 9:30Speaker 00

  At the same time, I, I still have a hard time grasping how growth equity investors, buyout investors, investing in quote unquote, regular companies can be so motivated about, about that career choice and about that type of investing. What is it that motivates you? Or is it just that you have to go in and do the job and it's not about motivation?

• 9:51Speaker 01

  No, it's a hundred percent about motivation. It's a hundred percent about passion. I mean, Wavecrest started as a passion project for myself and my co-founder. Comes down to, we really love helping build, you know, growth software companies, growth B2B tech companies. That's, that's the fundamental thing. We, we think it's really fun to help companies go from five to 50 million of revenue. And when you think about that, it's, why do we like it? One, we're curious about new technologies. Two, we like to see the, a lot of large, we invest in a lot of vertical areas that you, you would not necessarily consider. Innovation hotbeds, real estate, automotive, maritime, these, these kind of what, large multi-billion and trillion dollar industries

• 10:36Speaker 01

  that, you know, maybe haven't had as much innovation. So seeing that innovation is, is number two. Number three, maybe the most important is, we love helping founders who've kind of put their blood, sweat and tears into something. To kind of take it to the next level. And at the end of the day, this is their dream. You know, we, we're the coach. We're the capital partner. We named the firm Growth Partners instead of Equity Capital because we really want to be their partner. We want to collaborate with them. And it's really about what makes it fun is seeing their success and seeing them kind of change their status in life and kind of achieve their goals. Because at the end of the day, most of these founders that haven't taken the Silicon Valley Venture Route

• 11:21Speaker 01

  have been, they're usually subject matter experts in their verticals. They've built their business over a five, 10-year period typically. It wasn't an overnight sensation. They've stared over the ravine. They've had their moment of doubt and they've gotten to a place they have and they're growing and they're profitable now. And now that we intersect with them and they say, I built this business on my back to five or 10 or 15 million. And I'm really excited about it and I want to go to 50 million or 30 million or 100 million, whatever their goal is. And we align on that and we say, let's both bring skillsets to the table. You in your subject matter area, us hopefully in growth software and B2B. Us more on the go-to-market side.

• 12:04Speaker 01

  And let's put those things together and hopefully we can help you get there. And we can hopefully help you de-risk that next five years. That's the whole really value prop for the entrepreneur.

• 12:12Speaker 00

  And the key distinction there is you're not buying a company with 10 million revenue, 5 million costs, and you're trying to decrease their cost 50 basis points a year. You're actually helping them grow. You're having a real catalyst event for the company, which is exciting. And also you seem to be filtering around the people. So if it was just a business, if it was a business run by AI, would you have the same passion for it? Or is it the people that bring most of the passion?

• 12:41Speaker 01

  If you go back to your first point, yeah, I mean, the goal is growth. The whole strategy is around optimizing growth and growing the business in a responsible way. Not a, hey, let's burn 25 million a year way. A responsible way to get the business to multiples of its size. And it could be, by the way, organic growth and organic. We do do add-on acquisitions. We've done over 30 as a firm since we started across the portfolio. We're not a roll-up shop, but we think there are synergistic add-ons you can do. But yeah, I mean, look, AI, we view as a productivity enhancer for these companies as well as a productivity enhancer for their customer. We don't view it as a either or. We think it's a transformational technology across many, many industries.

• 13:25Speaker 01

  That's going to really help the construction contractor or the transportation manager to really just do their job more efficiently. And, and so the way we view it is if this further enables those entrepreneurs to accelerate their vision and to serve their customers, then that's great. And that's kind of how we think about it.

• 13:41Speaker 00

  How important is for you to like the team versus the business when it comes to this motivation? I'm really trying to understand how people in growth equity and buyouts really get motivated. Is it about you don't necessarily want to help assholes become successful? We all have our day jobs. We all have to do the 20% of stuff we don't want to do. I'm sure you have deals like that, but on the average, are you really looking for the people that you just intrinsically like to help?

• 14:07Speaker 01

  A hundred percent. I mean, look, part of the reason you start any company is one, you're passionate about it. But two, part of the passion for us was to build a culture that we were excited and proud about. And part of that culture is the no asshole policy, both in terms of the people at Wavecrest, but also the people we work with. So, look, we, we all can pick and choose who we work with. At Wavecrest, our view is I'd rather make money with people and have fun with them together versus the and or, I mean, sorry, the and over the or. So from our standpoint, I think it's possible. Maybe it means that there are certain, certain companies, certain founders we want back or people who don't want to work with us because they want a different style of investor or different, you know? That's okay. I mean, from our standpoint, life's too short and that was part of why we started this around 10 years ago.

• 14:53Speaker 00

  And, and is the no asshole policy a luxury that you've given yourself? Or does it also have a higher expected value in that you find yourself working incremental time? Your team is more energized. Which one is it?

• 15:05Speaker 01

  I think it's the latter. I mean, look, I think that. You know, the folks we've brought into Wavecrest, you know, we have a, you know, 18, 19 kind of passionate Wavecresters. They all, we think you can have it both ways. They're a high, high degree of talent and performance and folks who are kind and collaborative and helpful and, you know, entrepreneurial and, and, you know, don't have some ego and don't throw elbows. So that's part and parcel with what we wanted to build. I mean, there's many ways, there may, you know, huge PE firms that have been built in other ways that we respect. But from a culture perspective, this is the culture we want. We think we can be as successful, you know, without having shark elbows.

• 15:46Speaker 00

  Last time we chatted, you characterized your business as selling capital to people who don't need it. How do you get businesses that don't need your capital to take your capital?

• 15:55Speaker 01

  It's a few key things. And this is the funny part of our business that when you talk to limited partners, they sometimes, you know, don't fully grasp because it's not just about valuations. For these folks, envision yourself as a founder. You own, say, 50, 60, 70% of your company. You've been building it for seven years. You've gotten it to 10 million of recurring revenue. You're in a good spot. You're growing 50% a year. You're profitable. Those are the companies we seek. Those are the companies we meet with every single day. The founders we meet with every single day. They have choices. They have choices in investors. They have choices to not do anything. And, you know, in many cases, they don't do anything. They, they, they meet with different folks like us.

• 16:40Speaker 01

  They consider it. They think about it. So if you're in that really positive position where you're growing that fast, you're profitable, you're master of your own destiny, then the only reason that you should want to bring in a partner is for a few reasons. One, you are self-aware and you, as all human beings are, we all have blind spots and you realize that I don't know everything and that this is the largest company I've ever run and I don't know what it looks like at 20 million. I don't know what it looks like at 50 million. Why don't I have a partner who's seen what it looks like at those sizes and it can help me get there? And maybe what we like to say, de-risk that path from 10 to 50. And so that would be one reason. Another reason is, you know, maybe, you know, I've

• 17:23Speaker 01

  You know, leverage my life and, and, and put, you know, money on my credit card to fund this business. And I don't own my house and my kids are getting older and they're going to college. And, you know, it's the whole classic investment diversification issue. I've got 99% of my net worth locked up in this illiquid stock that I don't know when, if ever, it's going to be liquid. And so I want to diversify personally, and that's an important thing. Now, our style of investing is we want to see the founders roll a majority of our equity. On average, they roll 75, 80% with us. That's, that's what we mean by true growth partnership together is we're building the business together. They clearly believe that the best years of the company are ahead of them. However, you can have your cake and eat it too.

• 18:05Speaker 01

  And, and so they, you know, they, they can take a few million out and, you know, put it aside and maybe breathe a little bit easier. Maybe their spouse will breathe a little bit easier. Um, but we think that, you know, personal part of it is key. In other cases, there are maybe investors seven years ago who, angel investors, the doctor and the lawyer around the corner, who gave them 50K to get off the ground. And those investors have done right by them and they feel, uh, like they want to provide a return to those investors or a partial return to those investors. So that's another reason. Another reason may be, um, you know, I want to buy another product company or a smaller competitor. That's an ankle biter. Uh, and I need capital that I couldn't get from the bank or do on my own.

• 18:47Speaker 01

  Oh, there's a, there's a number of reasons, you know, obviously going on the offense with more sales and marketing is another reason. There's a lot of reasons why founders who are profitable would say, um, hey, you know, I'd love, I'd love to do this. And there are plenty to your point where we meet them in 2021 and we meet them again in 2022 and meet them again in 2023. And then we invest in 2025. That's actually happening right now with a company that we're closing a deal on is, you know, things didn't line up. And it wasn't because we didn't like them and they didn't like us, but there were a lot of other things that were, you know, being contemplated. So, um, our investment style, which is again, very different than venture and buyout,

• 19:27Speaker 01

  is to build long-term relationships with lots of entrepreneurs that we really like and, and get to really build a relationship with them. So it's that typically we've known them for six to 12 months on average before we invest.

• 19:39Speaker 00

  It's one of the biggest luxury of any business is when the deals are big enough that you could spend time with the customers, or in this case, the portfolio companies, that you're able to efficiently provide value and build a relationship.

• 19:53Speaker 01

  It's the most fun part of what I do, working with these entrepreneurs, talking to them. You know, every day is a puzzle. Every day is a different growth challenge. You know, whether it's hiring, whether it's upgrading, whether it's a customer issue. Look, we're not as deep as these founders. They're the experts in their fields. We're not operators like them. We've all had some operating experience in the past, but we're not in the day-to-day trenches. So there's a lot of humility that goes into that. But we've seen, you know, our, our, our advantage compared to a single entrepreneur is we've seen the movie 30 or 35 times. So hopefully there's some pattern recognition. Hopefully there's some framework. Hopefully there's some, you know, value we can add as it relates to not reinventing the wheel and providing some, you know,

• 20:36Speaker 01

  strategic guidance or, you know, even tactical guidance on, you know. And that's why we, we build relationships, the foundation of everything. It's, you know, from back to Human Relationships 101 is trusting relationships. I'm going to trust you if I'm going to listen to your advice. And, you know, our, our goal, whether we own a majority or minority, is to have, you know, a trusting relationship where there's mutual respect and influence.

• 21:01Speaker 00

  Ben Horowitz has this concept of earned secrets, the secrets you get within a business for hustling and grinding for a long time enough. I think you can actually apply that on an industry basis. So you could have an earned secret of scaling businesses from five to 50 million. Doesn't mean that you know every single portfolio company and their which are better than the founder, but you see the pattern matching itself becomes an earned secret.

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• 22:03Speaker 01

  Yeah, we've built these things called Wavecrest Growth Levers. Because we see consistent, what I call, problems of growth. As companies go from five or 10 to 25 or 50 million. How do I scale my sales team from three reps to 15 reps? You know, what are the right comp plans? How do I think about customer health scores? How should I think about demand gen practices that maybe I didn't use? How should I think about executive, you know, comp issues? How should I think about, you know, the overall, you know, org design? You know, there's a number of areas. We have 25, what we call frameworks, our growth levers. They're effectively best practices. And to your point, the goal is to provide that knowledge base in a transferable way to the next set of entrepreneurs.

• 22:49Speaker 01

  And it's been very, very effective. We don't, they're not one size fits all. That's very different from how we view the world versus, say, some certain buyout firms. We don't jam it down their throat. We say, here's a framework for marketing, or here's a framework for, you know, customer org, you know, customer success org design. Should we have account managers or not? And so then it becomes a dialogue and a whiteboard session on how do we, you know, create the right system for this specific company? And our growth ops team, in addition to the deal folks, are looking at that with the CEO or the founder.

• 23:22David Weisburd?

  Because that's what's the fun part of your job. You get to whiteboard, they go out and execute, and you get to do this all day long with different founders.

• 23:28Speaker 01

  It's a super fun job. I mean, look, it's, I get to satisfy my ADHD every single day. Because I get to meet two or three companies a day that I know nothing about. You know, fluid mechanics, software, you know, something that's esoteric. In addition, I get to work with, you know, a number of entrepreneurs who I respect and enjoy and participate at your point at 20,000 feet. We're also helping these companies prepare to exit and hopefully getting some of these entrepreneurs to, you know, the pot of gold that they envisioned, you know, five, 10, 15 years ago.

• 24:02Speaker 00

  It's like the dream MBA job. Every MBA wants to graduate and be the head of strategy. I'm like, that's not a thing at a startup, just whiteboarding. You got to find another way to, to, to find that role. You get to meet these founders six to 12 months. Oftentimes, I'm guessing years as well. Is there a golden ratio to how much value add you want to give? Or do you just open up the Komodo thinking that the most, the most value add, the more value add you give, the more likely they are to, to partner with you in the future?

• 24:29Speaker 01

  You're talking about before we invest?

• 24:31Speaker 00

  Yeah.

• 24:32Speaker 01

  It's a great question. We don't open the full kit and kaboodle, right? I mean, it's part of sales, uh, salesmanship and I think any industry. We, uh, what I'd say, we, we get to know them. We introduce them to our growth ops team, our talent team. We talk about two or three things that we, uh, think might make sense for them. Look, we don't want to be presumptuous as well.

• 24:56Speaker 01

  That's a key part. I mean, again, humility is a key part of our culture. And so we don't go in and say, we, we, we know what would be great for your business and we know exactly what you should do. We don't. And so through an iterative process of meeting with the founder and asking them, what are your key issues and what are your friction points? And if you, you know, why do you, how do you think you could grow faster? And oh, have you thought about this? It's a dialogue that allows us to potentially plug them into two, three, four points of value. Maybe it's a new VP of Sales. Maybe it's someone who could help them, um, to better articulate ROI for their customers. Maybe it's, you know, a strategy around retention that they haven't thought of or something around analytics. And so with each situation, maybe it's a new customer where we have a connect, connection,

• 25:40Speaker 01

  and we can open a door and we can, we can help them. And we can also see how they sell and, and how they service that customer. So it's different in each situation. It's bespoke, but the goal is really get to know them, show them a little bit of what we do and, um, you know, it obviously helps build the relationship.

• 25:56Speaker 00

  It's the Jason Freed build half a product, not build a half ass product. So you want a full kind of mini product that you could give to the portfolio company. So you could show them from start to finish, you could execute. I've been thinking a lot about I'm preparing and trying to get to Alex Carr from Palantir. And I've been reading a lot about what they did. And one of the things that they did that's most interesting is they would compete against the large consulting firms. And they would come in on Friday and pitch against the large consulting firms. And then the large consulting firms would come in on Monday and they'd realize that Palantir had sent a team of three or four engineers onsite to the customer, working on a project over the weekend. And they had already won their business. There's something extremely powerful of actually giving a small piece of the product, especially when you are able to complete a process.

• 26:39Speaker 00

  And the effective value on that, the investment from Palantir for three days must be, you know, minute versus kind of the size of the business.

• 26:47Speaker 01

  I completely agree. I mean, show these entrepreneurs a slice of Wavecrest. That's the goal, right? And what I mean by that is in every facet, culture, which is extremely important to them. Again, these people do not want to work with people that they don't like. Why would I do that? I don't need this. I don't need this headache. So it's a combination of culture, strategy and value add and knowledge of the industry. And hopefully along the way, we write these pretty detailed investment themes that we share around the specific verticals that we go after. So if it's, you know, in insuretech and we're looking at a business serving, you know, carriers, we have a point of view. And so you get into a relatively educated discussion with these entrepreneurs.

• 27:32Speaker 01

  And hopefully there's some nugget around market knowledge we can share as well, or a competitor, you know, some movement in the industry.

• 27:38Speaker 00

  Out of 100 points of how you win deals, how much does it have to do with your current portfolio and the references that come from that portfolio?

• 27:45Speaker 01

  It's an important part. I would say, you know, probably 50 or 60 points. I mean, reputation, integrity are critical as an investor. As you know, the old adage says you can, you know, takes decades to build it up and 10 minutes to destroy it. So we're very, very focused on being good, you know, good stewards to our investors and also to the entrepreneurs and reputation matters. That being said, and certainly the precedents that we've invested, if we invested in a, you know, commercial real estate software company and we're looking at a commercial real estate software company, they care about that. But I think as much matters again is the EQ that you bring to the table and the relationship you build and. The candor that you can have with an entrepreneur.

• 28:27Speaker 01

  Because what you're almost simulating is, in many cases, they don't have a formal board or they don't have, you know, a professional board. So you're simulating, what is it going to be like when we work together? And we may own 27% of the company and they own, you know, 60% of the company and the employees own the rest, or, you know, we own 52% of the company and they own 38. I mean, it doesn't really matter. How are we going to work together? And are you open to my ideas and am I open to your ideas? And can we debate and discuss? And can we each understand what we each bring to the table? And so a reputation is, I think, very important on the way in. And then I think it's about, you know, the tangible value and the insights as well

• 29:12Speaker 01

  as the, you know, the relationship and EQ.

• 29:15Speaker 00

  The reason I ask that is, my sense is that the more important the transaction, if this is their first institutional money or they're selling a majority control of the business, you're going to assume that they're going to get more or less perfect information. The gulf between your actual reputation and what people believe your reputation is, is it's going to be extremely thin.

• 29:31Speaker 01

  Look, we encourage our founders and entrepreneurs and CEOs to do diligence on us. An open book, open kimono. Call whoever you want. You want references from us, do the same. In many cases, again, we were not buying 90% of these companies. Even in a majority transaction, it's 50 to 70% typically. In minority, it can be 15 to 50%. It's a partnership. So if you're the founder and you're rolling 75% of your equity with us, you want to know how we're going to behave if, you know, you miss three quarters or, you know, we need to make a 45-degree left turn. And so that's what we're evaluating and that's what they're evaluating. And it's a, it's going both ways during the, during the dating process.

• 30:10Speaker 00

  Our most underrated advice and references is check the companies that were not up into the right. Everyone's happy when you're up into the right, even the biggest.

• 30:17Speaker 01

  How they behave.

• 30:18Speaker 00

  Be a good partner.

• 30:19Speaker 01

  How did they behave?

• 30:20Speaker 00

  You run personality test when you assess talent, which is a little bit unusual. What are your go-to personality tests?

• 30:26Speaker 01

  So we use three different tests. We use one, which isn't necessarily a personality test, it's an aptitude test called the CCAT, which really is testing for math, logic and spatial reasoning skills. It's giving us a sense of how smart someone is in a couple of different areas. This is for, you know, hiring at Wavecrest and in some cases for our CEOs that we bring in. The second one is one called the EPP, which is very specific to personality on a qualitative basis. It quantifies these very different qualitative areas, competitiveness, stress level, you know, areas that, you know, and it's on a continuum. So how does someone deal with situations and, and goal orientation? Are they going to be there through the finish line? Or are they someone who kind of gives up, you know, three quarters of the way through?

• 31:10Speaker 01

  And so it gives us the sense of, I mean, it's not perfect, obviously, but it's a, it's a, it's a reading on, you know, how someone stacks up in some of these areas. And then the last one is a modification of the Myers-Briggs scale, which is basically trying to understand what motivates somebody and also how to manage them. You know, are they someone who leads with empathy? Do they lead with their thinking brain? And, and kind of they need to really think and process and, and evaluate for a long time. Are they someone who leads with, you know, their social skills? So there's a specific test that we like to use that is surprisingly accurate around what it's like to work with somebody. And then we try to see, are we a good fit?

• 31:55Speaker 01

  It's funny, you know, four, five years ago, actually, five years ago during COVID, we were looking at a business and a CEO founder. We were getting to know him. We liked each other, you know, and, and he actually said, I'm going to send you my test, you send me yours. And we traded them and, and, and he said to me, yeah, I guessed what your profile was going to be like and I was right. And he said, we would work well together. And, and he was a big believer. And so that was a, a turning point for me five years ago. And by the way, the, the company went on, we didn't invest for a couple of reasons. You know, it was a mistake and the company went on to do great things. And they sold the business to a public company. And I, and I texted and chatted with him after and congratulated him. And, you know, we stayed in touch, but.

• 32:37Speaker 01

  Anyway, it's just an example of it in action.

• 32:41Speaker 00

  If you could go back a decade ago, when you had left Bain Capital and started Wavecrest, what is one piece of advice you would have given a younger Deepak that would have either accelerated your career or helped you avoid mistakes?

• 32:52Speaker 01

  Starting a private equity firm is, I think, one of the hardest businesses to start because you don't have to just convince once one investor or just start writing the code or building the business. There's no business unless there's capital. You have to convince 10 investors or 20 investors to give you the money in this blind pool structure locked up for 10 years. That's not an easy thing to do. That can be made easier in two ways that I learned from watching some of my successful peers. One is, had I, I'm super happy and grateful for my co-founder, but we didn't work together at Bain Capital, where I came from, and he was from Vista. We were friends and we had a lot of mutual respect and deep alignment

• 33:36Speaker 01

  in our investment strategy, but we had to work together. And so I think limited partners, when they look at emerging managers and they look at two folks from different firms, they view that as more risk, rightly or wrongly.

• 33:45Speaker 00

  Do you think that's there?

• 33:47Speaker 01

  I don't, but it doesn't matter what I think. I mean, it's in their mind, if it's quote unquote a lift out, two folks leave Bain Capital or another large firm or three people, it's quote unquote cleaner. Oh, there's a track record of working together. These people may not like each other, but they have the same business card. And so there's a greater credibility provided to that group. So that would have been easier had we done it. Again, I'm grateful for my partner. I think having different approaches to the problem actually is a massive advantage for us versus having kind of come from the same training. The other one is, and this would have accelerated our fundraise, is if we add an anchor investor. New funds, private equity funds, start with a large family office or a fund of funds or some sovereign wealth group will give them their first 25 or 50 million. We didn't have that.

• 34:31Speaker 01

  And so those two things would have accelerated the road. You know, we had effectively bootstrap our way into existence, which was kind of interesting and ironic, given that the type of founders that we go and seek.

• 34:41Speaker 00

  Not a rhetorical question, but given how it ended up, is that now a strength of the firm that you bootstrapped? Or would you have rather gotten the anchor, scaled faster, recruited better? Do you see that as a strength or a weakness in retrospect?

• 34:54Speaker 01

  I view it as a strength that, you know, we had to grit our way through. And, and I think it provides us the alignment and humility that a lot of our entrepreneurs have had to face. You know, again, you know, we had moments where is this going to work? Right? We, we thought about that. And, you know, there were a lot of Robert Frost moments, you know, divergent paths and which one are we going to choose? And we had some anchor offers towards the end of fund one that we turned down for various reasons. Would my hair be less gray right now? Potentially I would have, you know, maybe kept, you know, there were stressful moments.

• 35:27Speaker 01

  But, you know, I do think it, it makes us grateful and, and, and helps us to appreciate, given that the road we tread. And it would, it could have been cleaner and perfect, but frankly, that's not been my life. To be honest, like I, I didn't take the perfect path when I was 22 or 24 or, you know, 28 and, and, or 35. And so it's, you know, I don't know. I mean, no one likes to go through pain, but the flip side is it's one of those things that helps define who we are.

• 35:57Speaker 00

  It's actually changed my thinking on this recently. I had just interviewed Larson Johnson, two-time Olympic medalist, turned Navy SEAL, went through the crazy Navy SEAL training, then became a VC, went to Anderson Horowitz, was then anchored by Anderson Horowitz and Lightspeed where he's at. Just succeed in every path of the way. And he's really gotten my thinking around to pursuing things just because they're hard, like running a marathon. I always thought it was absurd. If you think about your kids and you want them to be formidable, you want them to be antifragile. You want them to go through hard things just for their own sake, because you want them to be antifragile. Why not put that to yourself? Why not build that anti-fragility in yourself? And I think that's kind of a paradox. Nobody really thinks about building in themselves. They only see it through the lens of their kids. And I think it also applies to ourselves.

• 36:41Speaker 01

  I think you're absolutely right. I mean, without struggle, I mean, it's, it's, how do you compare, you know, glory to, you know, the struggle if you haven't seen the other side of the tracks? And this happens, it's funny. We invest in some entrepreneurs that they went from zero to 10 million of revenue in four or five years without raising money. And everything's going swimmingly great. And then every single company I've been a part of and doing this 23 years, there's a bump in the road. There's some kind of bump in the road. There's a customer churn, there's a product outage, there's, you know, a key executive leaves, a co-founder issue, and there's a bump in the road. And to your point, you know, preparing for that, it's hard to do, but it inevitably happens.

• 37:25Speaker 01

  And so I think it's how they deal with that adversity that really helps define the success of the company.

• 37:33Speaker 00

  It's so predictable that there's a bump in the road. There's a fund, permanent capital. They have these crazy 30-year funds. I just interviewed them last week, Brent, to be sure. And they don't put leverage on their companies. They're much smaller companies because they know that these bumps will happen. Then during that year, they'll have 10 years of progress. So it's so predictable. It's not only predictable, looking backwards, actually a real strategy looking forwards.

• 37:53Speaker 01

  Yeah, I agree. I mean, to your point, you know, the only thing I know is that there will be a bump.

• 37:59Speaker 00

  Well, Deepak, this has been absolute masterclass in growth equity, building a fund and an amazing career. Thanks so much for jumping on the podcast. Looking forward to continue this conversation live.

• 38:07Speaker 01

  It's been, it's been super fun and a real pleasure. Thanks so much, David.

• 38:10Speaker 00

  Thank you, Deepak.

• 38:11David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week.