Letter #216: Kyle Ryland (2022)
Silverlake Managing Director and Sumeru Founding Managing Partner | What Capital Can Mean to a Growth-Stage Company
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Today’s letter is the transcript of an interview with Kyle Ryland. In this interview, Kyle shares why he spun out Sumeru from Silver Lake, their first partner, the value proposition they offered companies, private equity vs growth capital, the growth mindset, what stage in a company’s life is growth capital most advantageous, what he looks for in companies that some of his colleagues don’t, how he thinks about derisking opportunities, red flags worth paying attention to, the importance of culture to a company’s success, whether Sumeru has followed through on adding value over time, and more.
Kyle Ryland is the Founding Partner and Managing Partner of Sumeru, which he spun out from Silver Lake. Prior to spinning out of Silver Lake, Kyle was a Managing Director and Founding Partner of Silver Lake Sumeru, which was formed when Silver Lake acquired Shah Capital Partners, where Kyle was a Senior Partner. Before joining Shah, Kyle was a Managing Director and Head of Global Technology at Lehman Brothers. He started his finance career at Robertson Stephens, which he left as a Vice President.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
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Transcript
Host: Hello, and welcome to Sumeru Scaling X, the podcast that's all about growth. Here on Scaling X, we dig deep into life's essential questions, including this one: How do you scale a growth stage company without losing its soul? Today we're talking to Sumeru Managing Director Kyle Ryland, who spun off Sumeru from Silver Lake Partners in 2014. Kyle has been an expert advisor to a number of successful companies over the past few decades, and he's here to talk about what he looks for in a growth stage company and what he tries to avoid. Plus, he explains the entrepreneurial impulse that led to the founding of Sumeru in the first place. I don't know about you, but I'm ready to hear an origin story. Kyle, welcome to Scaling X.
Kyle Ryland: Hi Mark, thanks for having me.
Host: One of the things that I've been wondering--Sumeru kind of broke off from Silver Lake Partners in 2014. And I'm sure that that's a complicated story and I don't want to over oversimplify it, but you were one of the architects of that move. Why did it make sense to move away from Silverlake at that point?
Kyle Ryland: We back entrepreneurs, and we wanted to be entrepreneurial ourself. We felt that by being independent, we could exercise our entrepreneurial muscles even more than we could being a part of another firm. And it's really been terrific. It's allowed us to shape the firm in really interesting and powerful ways. It's brought the team together, and I think it has made us a better investor and a better partner to the entrepreneurs, because now we're an entrepreneur as well.
Host: What was the first partner that you worked with?
Kyle Ryland: So when we spun out and created this independent firm, we set up a new fund at the same time. We had an existing fund, and we actually took that with us and continued to manage that portfolio. And then we set up a new fund, which is our so called Fund II, and some of the earlier investments in that fund-- they've all been super successful, but a real estate software business called Buildium, a treasury management and fintech software business called Kyriba, a fleet management and telematics software business called Azuga. All backed by really interesting entrepreneurial teams and founders, and bringing that independence, that innovation, and our new role as a separate firm, with little more creativity and flexibility, I think gave us a real edge in convincing those founders that we were the best partner.
Host: When you think back on on those early conversations with that group of founders, what was the value proposition? What were you offering?
Kyle Ryland: I think it's a very interesting combination of bringing the best of a very active, operationally engaged partner, with a growth mindset, with a very substantial capital base. And so we saw an unmet need in the market because what we saw was there were traditional private equity firms that were making investments with more of a cashflow-focused mindset, focused on the balance sheet and cost structure, and all those sorts of things--that can be important in certain types of businesses. And then we saw minority growth equity investors, terrific firms, but frankly, pretty passive and weren't able to bring a set of tools to really help the founders and the entrepreneurs grow and scale these businesses. So we put together a team and a strategy that does both. We obviously bring substantial amounts of capital to help our our companies grow and scale, but we also engage in a very powerful way and bring a set of best practices that our team has developed over more than a decade to really help these entrepreneurs grow and scale. Because capital is a commodity in today's environment. That's why one of our taglines is operating "at the intersection of people and technology." So our business is really about people at the end of the day. The capital is secondary, and the skills that we have, we think are very unique. And so constructing a firm and a team that was independent and brought that package in a powerful way to these founder entrepreneurs, that's what we wanted to concentrate on. That was the value proposition, and that really resonated with all the companies that I mentioned, and many more.
Host: In a lot of private equity situations prior to that, you either got the capital but didn't really get the support, or you got the support, but you didn't really get the capital.
Kyle Ryland: That's right. And we don't define what we do actually as private equity, we're a growth capital firm. But we're not a passive minority investor that is going to come to four board meetings a year and cheer from from the bleacher seats. We want to be engaged, we want to help, we've got deep skills, we've got a lot of experience, we've got a set of best practices that are really powerful in performance improvement that they can help our management teams drive. And so we want to find situations where those capabilities are really valued, and we can engage in the right way. Product is just one of the areas that we have tremendous depth and skillset in. We can go deep, and product leadership is critical to what we look for. And those skills that we have there really resonate, because most of the founders that we work with, they had the original vision for the product, they conceived it, they often even implemented it--and having a partner who has that growth-first, product-oriented mindset and skillset that's viewed as really valuable by all the great partners that we have in our portfolio.
Host: Doesn't every founder have a growth mindset?
Kyle Ryland: Not necessarily. Many of our founders have bootstrapped their businesses, and and that's terrific. And they've grown and scaled them, but they've done it without raising much outside capital. And so they have to think very carefully about how they manage with some constraints around capital for the business. We can de-risk that a little bit by saying let's capitalize the business for even stronger growth. Let's take some some risks, albeit calculated ones in the right areas, and let's see if, working together, we can actually accelerate what you've been able to accomplish on your own. Capital is a part of that, but the other part of that is the people and the skills and the methodologies that we bring, and all these best practices around go to market, around product, around organization, around scalability of infrastructure.
Host: At what stage in a company's life is that kind of investment most advantageous?
Kyle Ryland: It is after they have reached a certain level of scale and product market fit and maturity. And what I mean by that is the product market fit is clearly demonstrated, they have customers, they have real revenues, they have some diversification. And so they've de risked some of the questions around is there a market for the product? Will customers buy it? Can we get enough to have a diversified customer set? And typically, that means they have, on an annual recurring revenue basis, at least 10-15mn of annualized recurring revenue. That number can go up substantially from there, but we tend to find that once they get into that size range, a lot of those attributes I just mentioned exist. And then it's a function of how do you scale from 10mn or 15mn of annualized recurring revenue to 50mn, and then to 100mn, and then to 200mn? And what do you need to have in place in terms of your organization, your strategy, your resources--that's where we really engage and help in a very powerful way.
Host: Yeah, because a company wouldn't get to 10mn or 15mn ARR if the product didn't have potential.
Kyle Ryland: That's right. So we're not speculating on early stage investments, we're not in the moonshot business. We're looking for entrepreneurs who've grown and scaled to that level of revenue, typically. Organizationally, it will depend, but they tend to have 50-100 employees, maybe a little bit more.
Host: What do you look for in that size company? And more particularly, what do you look for that some of your colleagues don't look for?
Kyle Ryland: So, we start with product leadership. We are looking for companies that have very strong products, typically number one or number two in their category. We're okay with challengers, but we want to see a product that's absolutely top notch. And that's fundamental to our strategy. Our history has told us that great products in great markets with good teams are the winning formula. But product leadership is really important. So we're not interested in backing products that aren't very high quality and don't have very strong potential. Team is second. Most of our investments are made in companies where founders are very actively involved, they're typically the largest shareholders. And we really liked that partnership, we like that alignment, we want to see them be heavily invested in the business, we're willing to have them de risk a little bit and take some money off the table, because that can be valuable to them and important to the success of the company. And so the second piece that we look for is typically that founder, and that founder usually had the original vision for the product, because they understand their market really well. And so they often saw an unmet need, had the vision, and then brought together a team to implement that. So product leadership, strong founder who we can partner with very well, and then attractive market, but that usually exists already in most of the opportunities that we look at, because the founder had that vision, identified an unmet need. These markets are growing rapidly, so there's a lot of wind at our back, and it's really more a function of how do we help them scale than how do we help them navigate and pivot to new markets because they might be constrained by market size or something. That's rarely the case in investments that we would make.
Host: You've used the word derisk a few times, and it's starting to make sense how derisking, taking some of the risk off the table, ideally, anyway, enables good judgment. Is your role sort of psychologically allowing people the space to grow the company and responsibly and make the right decisions?
Kyle Ryland: Yeah, no. Some of it's a function of capital, so providing some liquidity helps them derisk on a personal basis. That that can be--when you've put your blood, sweat, and tears and your entire net worth into something for a decade or more, being able to put something aside for your family can be really important. And we found that to be a valuable thing that that we can do and good for the business too. But it's not about derisking from a financial perspective, so much Mark, it's really about helping them scale without the same risk, and in fact, at higher rates, without the same risk that they may have to take on if they're trying to do it themselves. So how do we bring in a set of best practices that we've developed over decades to help them actually grow at a faster rate with less risk? How do we help them enter new markets, perhaps internationally, with an experienced team that we have that has done it before. Organizational structure, incentive structures. They may want to start to pursue some add on acquisitions at some point. We've got a lot of experience with that. That can be a very scary thing for a founder entrepreneur, particularly one who hasn't done it before. We can help derisk that. It's not a function of slowing down the growth of the business and running it differently from the P&L perspective. It's, Okay, how can how can we actually grow the business faster, but do it by taking less risk because we know what good looks like, we've got a great set of best practices we can bring in, we can get this done in a way that presents less risk to you, less risk to the company, and less risk to the employees and the other stakeholders.
Host: So the words private equity, especially together, get a bad rap, or have a bad rap, I should say. Now, when you talk about growth capital versus private equity, is that just branding?
Kyle Ryland: No, no, not at all, actually. It's quite differentiated in several ways. One is, as I mentioned before, we're what we call a growth-first investor. And so if you actually look at the typical organic growth rates of companies in our portfolio, they're very high. They don't look anything like what you might find in a private equity portfolio. These are growth rates of 30, 40, 50, 60, 70%. And they're doing that organically, so without a lot of add-on M&A to try and manufacture growth--and we built a strategy around that. And so that's the growth part. From a capital perspective, which is the capital piece of growth capital, we have a very flexible approach. We'll make some large scale investments where we might take more than 50% ownership, but we also do a lot of deals where we are a minority investor, but we're a sizable stake in terms of shareholder in the business and we're active and we're engaged. It's not the passive traditional growth equity playbook that we're pursuing, and it's certainly not the large scale control, lots of financial engineering and leverage approach that you would see in the private equity world.
Host: What you're bringing is more operational management, product, actual advice and experience. I mean, the the team at Sumeru has good experience, and you're there to share it. And you've this accumulated wisdom. Am I getting the value?
Kyle Ryland: Yeah, no, that's that's absolutely right. I mean, we have all the financial skills that you would expect that we should have. But we don't view those as differentiated. We view those as table stakes, and where we really earn our stripes and differentiator in the operating areas that you mentioned. That's where we add value, that's how we create really interesting outcomes for founder entrepreneurs, employees, and our investors as well.
Host: When you look at a company, we talked a little bit about what you look for in a company, but what are some red flags that you've seen over the years that have proved to be worth paying attention to and paying heed to?
Kyle Ryland: Oh, yeah, that's a great question. I'll start with the people side of the equation. Integrity is really important. What we do is very, very engaged. And we need to do that with somebody who has a very high level of integrity, is very self aware, and is interested in engaging. And sometimes we think we're very good at finding that package of qualities, but occasionally, we find folks who don't have those qualities. And those are investments we're not interested in making. Because it's just too hard with a wrong partnership to be successful, in our opinion. So I'd say that's one category. I spoke about product leadership--that's really important. And so we do a lot of work through a very experienced team that we have to assess that. And occasionally, we find that those products are not as strong as they appear on the surface, and that there's a tremendous amount of work required to essentially rewrite the entire technology stack. That's not a great fit for us. And so that's really important. It doesn't mean that the product has to be perfect--there always are things that can be improved, and we're, I think, very successful at helping our management teams understand that and make those improvements. But fatal flaws on the product side are tough for us to work with. So those are two big ones that I would highlight that are absolutely critical to us.
Host: How important is culture to a company’s success?
Kyle Ryland: It's critical. We try and spend a lot of time assessing culture. The founders are the culture carriers of the companies that we invest in. And so we get a lot of that through our interaction with the founders. But we do like to spend time with other people in the organization to really understand and hear that from their perspective, in addition to the founder's perspective. Growing and scaling these businesses for management teams is hard. It's exciting, and it's fun, but it's also--it's hard. And we can do a lot to help, as I said, derisk that. But you've got to have the right culture and collaboration and self awareness and excitement and ambition at the organization to be able to make that successful. So we'll bring the ingredients, but those need to be wrapped in a culture that is going to allow us to accomplish what we need to do. And do it in a way that I talked about, integrity, earlier, that we all feel very good about. It's not just the quality of the people in the company, but the impact that the organization is having internally and externally, its community, its stakeholders, that's really important to us as well.
Host: When you think back to the years when you were first leaving Silverlake, or you first had the idea that you guys could create something that was more growth minded, more nimble, more entrepreneurial. In looking back at what you've--and the companies you've invested in, and the partnerships you've sort of fostered--have you followed through on the promise?
Kyle Ryland: I think we have. Look, the best testament to that are the companies we've invested in, the endorsements from the founders, the quality team that we have, and the great investors that we have backing us. And obviously the performance that we're delivering, which is really strong as well. So I feel very good about what we've delivered on, we feel very good that the firm that we've created is doing something unique and will continue to, and we're investing aggressively to stay ahead of the curve on that and make sure that what we bring to--whether it's our portfolio companies, or our investors, or own employees--is meaningful, is differentiated, is focused on excellence and driving top returns, but also doing it in a way that is responsible, doing it in a way that is also fun. That's important to us, culturally as a firm, and with our management teams as well. And doing it in a way that we can all feel proud of what we're helping our companies accomplish and what we're delivering to really important investors.
Host: Yeah, scaling a company should be fun, right?
Kyle Ryland: Yeah. It's a lot of fun. That's why we do what we do.
Host: Kyle, I'm going to thank you for your time, as always. I'm going to invite you to come back to talk more about anything you want to talk about, and the investment front, and what you see as how you define a promising company and what growth is all about. So thank you very much for your time, I appreciate it. I hope you'll come back and talk to us again.
Kyle Ryland: I'd love to. Thanks for having me, Mark.
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Thanks Kevin. Insightful as always!
Thanks Kevin. Insightful as always!