Growth Equity vs. PE vs. VC: What Founders Need to Know Part 1 with Stew Campbell

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0:45M &A is hard enough. Dealroom gives you the structure, automation, and visibility to do it right without blowing your budget. Check it out at dealroom.net or tap the link in the episode description. Here's to the deal. I'm Kisan Patel and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:25Hello and welcome to the M &A Science Podcast. This podcast is part of a mission to rethink how M &A is done. The old school, double-led approach, it's dead. Firelet M &A is all about strategy, alignment, and efficiency, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We uncover what truly works in M &A by learning directly from the best. I'm your host, Kisan Patel, founder and CEO at Dealroom and chief scientist at M &A Science. Joining me today is Stu Campbell, partner at TCG, a leading growth equity firm focused on investments in consumer brands, media, sports, and culture.

2:10TCG specializes in helping consumer-facing companies scale, offering not just capital, but also deep expertise in strategic growth, operational scaling, and founder-led businesses. Stu has a wealth of experience from his time at Norwest Venture Partners and now at TCG, where he supports high-growth businesses on the journey from founder-led startups to market leaders. Today, we're going to talk about how growth equity differs from other investment models, the role of boards in scaling founder-led businesses, how to build strong value-driven partnerships that ensure long-term success. Stu, thanks for making it happen here.

2:50I appreciate it. I live in New York. We're at VRC's office. Anybody wants a valuation, I appreciate them for giving us a nice office suite to work out of. I appreciate making the trip over here. I know you're visiting from the Bay Area. Yeah, thank you for having me. Pleasure to be here. Can we kick things off a little bit about your background? Absolutely. It's a winding story to get to growth equity, as you'd imagine. I grew up in South Jersey, distinct from North Jersey, so go birds, found myself in Idaho. So I spent my high school years in Idaho and then made my way down to Stanford. The Idaho part of the journey is interesting and important only because it added another layer of geography and culture and dimension.

3:25And the two states of which I grew up in really had an influence as to how I now think about working with companies and working with founders and working with different platforms. Undergrad at Stanford, had a little bit of a choice whether to take the banking route or the consulting route. Coming out of undergrad, chose consulting, so had the pleasure of working with companies at the ground level. My uncle famously said, what do you know as a 22-year-old about helping companies? And I remarked, I don't, but I know how to gather the data, analyze it, and work with folks much older and smarter than me in order to go help those companies.

3:57Popped my head up to figure out what was going to be next and found growth equity. It was an asset class that spoke to me. It's about working directly with founders. It's working with companies that have tremendous growth ahead of them, but you're still rolling up your sleeves. And it's still, it's an entrepreneurial venture along with the founder. 15 plus years later, still doing it, happily doing it. It's just an absolute privilege. Full career investor. At this point, at this point it is. It's been such a blessing and a pleasure. It's the most humbling job because every day I get to work with the very best of the founders and the companies that have made it through this glacial process that over 5, 10, 15, even 20 years, at the end of that, they have a company that's growing, that has enough market to go tackle, has a level of scale, and I have the chance to go meet them.

4:44That puts me on my toes. Humbly puts me on my heels sometimes because they're just such impressive founders. And then we have to figure out a way to sell them capital, which is a kind of bizarre way of thinking about investing. They're profitable. They're doing great. And yet we think that we can help and make two plus two equals five. And that is just a fun, fascinating, sometimes frustrating journey and work environment. I'm excited to have a fun conversation with you. Be frank, my perspective on career investors slowly shifted, starting with our mutual friend, Jason Mironov. He's a good one.

5:16We had a challenging conversation. Anybody listening, highly recommend listening to that podcast. And I realized there's some smart savvy investors out there that make actual difference. Let's see what we can come into in this conversation. Absolutely. We talked about the board before and that was my skepticism because again, I'm going to use our company's example since it's easy. I don't have to worry about anybody suing me. But we're a bootstrap company, about 50 people, 10 million AR run rate. One of the beauties I always take pride in is that we have a one single person board over here. That was one of the things as soon as you start talking to investors, that's one of the luring things that pops up.

5:52It's, I got to create a board and then I got to report to the board and give all these updates and stuff like that. I'd love to hear from you about the role of the board. How does that come in play and how does that evolve? To level set a little bit, growth equity, I define it as equal parts growth and private equity. So growth is just about futuresing and accelerating what's already going so well. Finding the investment in people, the investment in infrastructure and technology, international expansion, whatever is going to be in front of a company, supporting that growth. Not necessarily with a venture mindset, but with a growth mindset.

6:27The private equity part of the definition of growth equity is the healthy respect for P &L, the strategic direction of the company, positioning for sale, the use of capital markets and debt. When you merge those two, you find growth equity in the middle. Those founders that have those growth equity businesses or available businesses, to set the stage, those founders are typically around a dining room table. This office may be the boardroom. there often isn't even a board. It's a family member, some friends that give advice, maybe a couple of seasoned entrepreneurs that have been along on the journey.

7:00That's what we're stepping into. As a growth equity firm, TCG, we work with those founders and go into those family rooms and sit around those dining room tables. And that's the start of the board. To go from that to a succession-like 15-person board where everyone flips the binder to that tab and saying, let's report on this part of the business. There is a lot of business building that goes with it, but there's also a lot of board building. And what that tenor and tone and infrastructure looks like for the board is super important. A couple of hallmarks. First, the board should not, from my point of view, be a reporting mechanism.

7:34In the end, it's how to govern the company. It's how to make strategic choices for the company. The board should serve the company. And to do that, we find that setting up the board and how it's used in terms of both the composition of the board and its uses in terms of meetings is super important to support the founder. For instance, board meetings, I find it great when we actually never talk about the P &L. If it's a strategy offsite every three months, and we're constantly talking about how to improve the business, and we cover the financials on a monthly basis with a short hour-long call over Zoom, I'd rather spend that time in person saying, what are we going to go do to push this business and go uncover challenges and opportunities rather than serve in a reporting function?

8:12The composition we can talk about in terms of the people around that board table, but the use of the board to take it from what was a dining room table to eventually a much more formal structure, we have to accommodate the founder and work with them. I'm curious, like how, because when you start off and I'm reflecting on my personal experience with having an advisory board and that's evolved quite a bit over the years, just company grows, your needs change. We start formalizing the business operationally and realize like we need more of the functional type of expertise to put on the advisory board and we start moving people around.

8:43Is that something similar with the board? What type of guidance and is there a difference that you'd expect between advisory board? We and I don't have much ego. And when we come into a business, it's who can we surround the founder with at that table to give the best advice, often in diligence in that dating process, which I'm sure we'll get to with the founder. The question will come up, who do you want sitting around you? And go play wishlist on LinkedIn and say, who would you most want to sit across from you and help you answer those questions? Because we're not going anywhere. We'll be here.

9:13We'll be there in support. But if that independent board member can serve in my seat or serve alongside me, that's all the better. Then setting up a mechanism where the CEO has access to the board, but also access to those independent board members independent of me. They can be a sounding board. They can be a venting mechanism if necessary. They can be an alternative communication channel outside of a regular monthly board cadence. So that's a very important part about setting up an organization. The flip side, I talk to other CEOs and maybe they're struggling or they have more of an opposing view of the board where it's a challenge for them.

9:50Have you seen that? How does that play out? Oh, absolutely. There are always going to be challenging situations. There are going to be disagreements. There are rarely ever any votes, if you will. It's a disagreement of opinion. It's a disagreement of strategy, maybe of personnel. But it's really not two opposing forces like the succession example. There's no votes up, down, and abstaining. It's really a collaborative effort where discussion happens and maybe solutions are enunciated and eventually ratified and worked on and worked through. But yeah, sometimes there'll be disagreements within timing as it relates to an exit.

10:22That's exacerbated sometimes when you have different interest levels based on different investors. We can talk about that later in terms of when you have different timeframes involved. Sometimes there'll be fundamental strategy questions that you have to work through. And then sometimes it's an era of crisis. We can talk about COVID, which was our version of the Great Recession. The GFC that I watched as much more senior leaders when I was an associate at Spectrum, I saw them navigate the GFC with some amazing deft. We then had COVID. There were disagreements how to respond to an existential crisis that was changing, frankly, every week.

10:55But yeah, that friction exists. But if it's collaborative and if you've done your work up front with that founder, when you get to those tough points because you know that they're coming, It's solution-minded, it's pragmatic, and it's in a forum and in a manner in which there's fundamental trust. You haven't sold me on getting a board for our business. Can you give me an example of when the board led to some big game-changing moves for a company? A recent example. I'm involved in a great brand called Epic Gardening. So if you are an aspiring gardener or a relatively well-versed gardener, you've probably come across Kevin and his brand.

11:29And they own a category from a content perspective. They command great attention. They're just an absolute resource when it comes to educating for all parts of gardening, which in a lot of ways is like wine buying and any other education where as a consumer, you're a little bit overwhelmed with the wealth of information that you need to actually be a proficient gardener. The board has increasingly helped the company think through M &A as the right to win. Because once you own the content and the ability to speak authentically and in a meaningful way to those consumers, when you recommend something or you then have that commerce and those products that sit behind that very recommendation, it makes it all the better.

12:05And it makes it for an easy path. We've really leaned in to help them with, here are some acquisitions of products and of certain categories that at the bottom of that customer journey, when they've learned, they started to build their gardening plan and now they say, okay, I'm ready to start transacting and start really building it. We become the transactor and the commerce engine of choice. That strategy is something that TCG uniquely can go help with and can really help the company lean into. They may have found acquisitions, but it's a part of the board strategy and the board-led strategy that we can both help educate them on and orient them to, and then go support them in those very efforts.

12:40It's a way of getting leverage from your investor to go tackle a strategy that may have been a little more difficult on your own. It's a great aspect of how we can get involved. As a second example, that was playing offense in Epic Gardening, going and seizing a relatively fragmented category with lots of available opportunities on the M &A side. We also played offense, but in a more defensive manner at a brand called SmartSign that I was invested in. It's here in Brooklyn, just a terrific platform selling customized signs, labels, and tags. You don't really think you know the product until you start looking around a given restaurant or a warehouse or an office building.

13:14And then you see all the signage. And we saw an opportunity post-investment to say, we want to help you lean into an M &A strategy, start working with some of the vendors that supply all that aforementioned signs, labels, and tags. And we can help you lean into that, help buy some of them, help better get more tightly integrated. And it turns out in that process during COVID and then all of this, the strain that happened in the years coming after COVID, owning your own supply chain, it gave the company quite a few advantages over its competition in terms of sourcing, pricing, speed of delivery.

13:45These are good examples of pushing on organic and even strategically enhancing the organic growth. This is where my ears get a little more perked up because I feel like the vision for this business is get to that point when we can be an M &A platform and grow through acquisitions, see a lot of market opportunities for it. And I can sense that our peripheral is pretty narrow just because you have your day in, day out of your business and you look around left and right and you can see what the market is. But then there's like a broader view where it's hard to get that grab on what are some of the other pieces that you may not be thinking about.

14:20And that's where I would send some interest in having a partner that has that sort of muscle around M &A strategy and can help start market mapping things with a bit of a broader scope and start bringing those like example you had of how to think about an acquisition strategy in a little different way that may not have been the exact same way you thought about it. Absolutely. And there's many catalysts and we can maybe get into this as to why a founder of a 10 million of ARR rate platform would consider outside capital. So acquisition and biting off something much bigger and having a partner in crime to go do that could be one of those catalysts.

14:54They're the equity source and the funding source for that acquisition. But you can also use that catalyst a moment in time to say, hey, I'm going to de-risk a little bit. I'm going to take some chips off the table using this partner to not only give me some liquidity and some peace of mind, but then also help me with this acquisition. It's a little bit, not sure if you find yourself in Vegas, but your stack of chips grows. And at some point, if somebody was slipping some of those chips into your back pocket, you could keep playing. Whether or not you consciously knew it, you would de-risk and know that your night was fine as you kept playing.

15:27Whether it's an acquisition being a catalyst, a big international push, or frankly, just time and the amount of equity value that you created in said poker chips, those all can be very good catalysts. And having a partner in crime and a true like-minded partner to go tackle that next set of challenges while you have those chips in your back pocket ends up becoming a pretty good setup. I got a bunch of B firms reaching out all the time. It's like a blur. Do you have your own folder? I do now. Subfolder of interest investors? I have a good pitch folder and a bad pitch folder. I'm curious about this part because now you start thinking about, hey, you should start dating.

16:01I start taking some of the calls, trying to learn about the firms and some are structured funds. There's some evergreen funds out there. You're starting to see some strategic do some of these type of deals. It gets interesting, but it goes back to like, hey, if that partner together, all of a sudden, we're going to go twice the distance in the coming five years. Now we're talking something that's beyond just the money, sophisticated investors. I'm getting tuned to that. Like, hey, there's good, the network you've mentioned, like, hey, I can surround that founder with these right people. I understand the value of that.

16:32I understand the sophistication investors. They give you a whole view. Like they really understand the market where it's going, help you with the strategy, understand value. So it's like that partnership could, we're going to run two times further twice as fast. I'm putting value on that, but put yourself in my shoe. I want to start understanding the reputation around that and then their actual ability to do that. And I feel like it's just hard. You're going to hit on all sides. You got like independent sponsors that want to get your time. It's noisy. And I can appreciate that. I'll date myself, but back in 2008, despite us being in the middle of the GFC, there were other growth equity firms, but you can count them on probably two hands that were really going after founder-owned businesses.

17:12The sourcing, you would find yourself in a relatively smaller pond. We did a count a couple of years back, 75 growth equity firms, probably a few more this year than last year. And that number keeps growing. And because the model works, identifying founder-owned businesses, developing a relationship and investing, success has bred more success. There's going to be more firms that look a lot like the TA and summits that started the model way back in the day. What I encourage founders with when I ask about that subfolder is when you do a little bit of reputation work and you figure out, okay, these are the more qualified firms.

17:45I tell both founders and then our own associates within the associate program, be a consultant. And to founders, I say, use them as a resource. Your time is precious. The associate wants to get to know you, get to know you, the business, and somewhat qualify you to make sure that you're hitting some of the themes, some of the levels of scale that would be good for that person's firm and potentially investment parameters. but they're asking time of you. I always ask the associates, come with a perspective, give something to the founder relative to just a give and take. Tell me about TCG. Tell me about your firm.

18:16Offer up what you've been doing. We just did a benchmarking study. We'd love to share what we found. I was just at this conference that I didn't see you up. You should have been there. I would love to share what I learned. We have some good insight as to what happened to this other relatively well-known transaction. We'd love to share more. Any of those perspectives can be very very good for a founder. And then you're giving and then have a little bit more of a right to ask a little bit something. Plus, it also qualifies to you that the interest is real and that the category knowledge and expertise is also there if they're offering something that's genuine and actually hits right.

18:46It also helps on the qualification process. They can actually create value. Our mutual friend, Jason, does an incredibly good job of this. He does. I don't know. Sometimes I wonder why does he talk to me? But I asked for some advice on certain things. He's more than happy to do it. He lent me his office to go do events. He's coached me through putting a CEO on our advisory board that had some special terms to put in together to make it happen. Nothing but good things to say about TA. I think you're right about that. Can you sort of at least invest in the relationship to figure out if they're accretive to how they approach working with you?

19:18And I would encourage you to push any member of the firm that you then have some time with to help as they can and almost serve as a consultant, as an advisor of the company while you're in that dating process. It takes six months at the very fastest to really chase after transaction. More often than not, it's two, three years. I've gone as long as six years. In that process, it's incumbent upon that forward-minded growth equity to show their value so that they can be invited into a business. Use the associate for the market knowledge. Ask for introductions on the recruiting side if you're looking for a very specific C-level executive or advisor and see who the network of the partner has.

19:53If you want certain introductions on an acquisition idea. Say, hey, have you met with that company? I'd love to get to know them. Use the whole firm before you ever consider partnering with them and let us prove our value because we're confident we will. And then when that time makes itself apparent, you should probably consider a transaction. I've had this three-year relationship with a firm and I've done X, Y, and Z. That's a perfect preview as to what they're going to be like as a partner. It's incumbent on us to put in that work. Yeah, they tracked your history, built a rapport. I like that.

20:22I'm a little more blunt. I'm like, build us some pipeline and then we'll keep talking. On customer sales introductions. Yeah, absolutely. Get us some of your portfolios. How come you're not a customer? Your first investment should be becoming a customer. What are we doing here? Absolutely. Within consumer land, we often will try the product. We will go talk to buyers. We will go figure out some level of customer product fit and have an opinion or an introduction that goes along with it, similar to a customer introduction. But I like that. It's stepping back and just even taking the time to get the market knowledge.

20:52For a founder, what I'm realizing, I brought a COO in and I'm less in the day-to-day and more working on the business, it's a lot of work to really figure out the market. It's a different view of talking to the customers, the different view where you look at the landscape. You guys do that day in, day out. So if I can pick up Intel from that perspective of what have you already done in our market? How do you think about it? Where do you see it going? That would be really valuable. And then those introductions you mentioned as well. Absolutely. And doing that all before you transact gives you that much more perspective.

21:20What about relationship flow? I'm fortunate I get this podcast. yes, I got to go jump to partner level conversations. But a lot of these firms, you're at associate, then at some point they give you VP. I guess how important is it to get partner level engagement? To me, that's like, I kind of want to know what the culture is like at the partner level because that's what gets me excited about working with the company. But then it's nice to know that even the associates of VPs are smart. Yeah, absolutely. So there's two perspectives there. One is the harsh reality of growth equity based on the time needed to work with an entrepreneur.

21:52And then the number of frogs that have to go kiss. There's a volume part of the equation in which finding really talented, hungry young individuals that know that category, that know who we should be talking to and help connect dots for the rest of the partnership. It's a model that works. And while it feels sometimes like you're speaking to a young person, you'd rather be talking to a founder. we invest a ton of time in those associates and make them an extension of us so that I have implicit trust as they're speaking with founders that know that in the background, that communication flow of, Hey, I talked to that company and that company, and that one's really differentiated itself.

22:25That's going on in real time. It's just really an extension of resources. The second bit is that certainly at TCG, we're all sourcing. We're all trying to get to the founder into the right situation. We do some very heavy thematic based sourcing where we have sessions trying to figure out based on aggregate knowledge of where do we think the world is going and where should we be investing based on that? What themes are interesting in the short run, the medium, the long run? And let's go invest and let's go ideate against those. And that's a partnership among associates at the junior level, mid-level and partner level.