Volition Capital, a Boston-based growth equity firm, just closed its third fund with $250 million in capital commitments. It’s a sizable step up from the firm’s previous fund, which closed with $170 million in 2013.
You can understand why its investors might be enthusiastic about the six-year-old firm, which says it just added a dozen new backers to its roster. It focuses on software, enterprise and consumer internet applications, tech-enabled services, and mobile companies that are already seeing annual revenue of between $5 million and $25 million, and annual revenue growth of between 25 percent and 100 percent. Those happen to be companies that financial buyers in particular like right now.
We talked with Larry Cheng, one of the firm’s four managing partners, to learn a bit more.
TC: Volition was formed when all of Fidelity Ventures, save two partners, decided to leave the fold and form an independent firm. What have been your biggest exits since doing that?
LC:  Our biggest exits have been iPipeline’s sale to Thoma Bravo, and PingID, sold to Vista Equity Partners.
[Ed: iPipeline is an insurance software firm that was founded in 1995; it sold to Thoma Bravo, a private equity firm, in August of last year. Terms of the deal were not disclosed. PingID, a firm that was founded in 2002 and manages employees’ digital identities, was acquired by the private equity firm Vista Equity Partners in June. Again, terms weren’t disclosed, though The Information has reported that the price was $600 million. PingID was founded in 2002.]
TC: What are some of your newest consumer and enterprise bets?
LC:  We’ve backed the pet specialty retailer Chewy.com and the online personalized men’s clothing retailer Bombfell in the consumer e-commerce space. In the SaaS world, some of our newest investments are [customer intelligence startup] Pramata, [customer communications management software company] Prinova, and Assent Compliance [ a company whose software helps organizations with their compliance strategies].
TC: Is there anything that interests Volition now that it wasn’t focused on several years ago in terms of sector?
LC: We’ve done more e-commerce investing over the last few years than we did several years ago.
TC: Do you have any concerns about this still-sluggish IPO market or do you expect most of your exits to come through acquisitions anyway?
LC: Most exits come through M&A. Financial buyers are as aggressive if not more aggressive than strategic buyers, though I’m not sure if that is sustainable.
TC: Why is that? I think a lot of people are still confused about why these private equity firms are suddenly snatching up so many software companies.
LC: Boy, that’s a longer conversation.  Access to debt is critical to some of these financial transactions.  Whereas strategic buyers can gain value through “synergized” operations, financial buyers can gain value through the impact of debt and leverage on the transaction, so that’s impacting things.
Additionally, a lot of these financial buyers like to acquire software companies because they are strongly recurring, and if your goal changes from revenue growth to driving EBITDA, there’s usually a lot of inefficiencies that they can take out of the business.
TC: You said you’re not sure if this trend is sustainable. What do you see happening?
LC: What will end it?  I don’t know, but it’s a good trend for those of us who are investing at the smaller end of the market because they’ve become a great exit path for us.
