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Investor Spotlight: Frontier Capital Focused on Business Services

10/12/2007

CHARLOTTE, NC—Founded in 1999, Frontier Capital not only weathered the new century’s economic downturn, seven of its 17 investments exited quite profitably, placing Frontier among the top ten percent of U.S. venture funds.

Co-managing partner Andrew Lindner tells TechJournal South, “We made our first investment in the first quarter of 2000 and had to survive that major downturn of 2000-2001. But from that first fund, we kept our powder dry, deployed it conservatively, and worked hard to support our portfolio companies when they needed it.”

Frontier, which just raised its over-subscribed second fund, Frontier Fund II, of $115 million, focuses on business services firms that need growth capital. Both the sector, which remains a hot investment area, and the stage, companies with recurring revenue that need money to ramp up, helped Frontier and its portfolio companies “weather storms,” Linder says.

“When we invest in a company burning money it’s a strategic move into a curve of accelerated growth,” he says. That’s as opposed to early stage investments in which venture capitalists take a chance on funding an idea as entrepreneurs attempt to find a market for what they’re selling.

Growth capital provides flexibility
“Recurring revenue companies are natural candidates for growth capital,” says Lindner’s partner and co-managing director Richard Maclean. “They have natural limits on how quickly they can grow with organic cash flow. They get to $5 million to $10 million in revenue and can either hire people one at a time or raise growth capital and fill out their team.”

The influx of capital also allows the companies to be more flexible in pricing their services than they can be while bootstrapping, Maclean adds.

Frontier focused on the business services and outsourcing sector from its inception. “We recognized that opportunity in this region (the Southeast and Midwest),” says Maclean. “When we started, no one was really doing it. They’re capital efficient businesses, but historically haven’t had a lot of funding opportunities for growth.

Lindner says business services is a growing sector because more and more government agencies and commercial firms outsource specific functions and roles to third parties such as Frontier’s portfolio companies.

Charlotte a great location
Frontier is the only growth stage venture fund currently operating from Charlotte, which Maclean notes, “has historically been more of a banking town than an entrepreneurial town. It’s changing rapidly, though. We have successful companies here spinning out others.”

Two things in particular helped Frontier’s business, says Lindner. “Charlotte isn’t known for breakout new technologies, but there is plenty of tech talent to staff these service businesses.” He points out that services firms also do not require as much capital to get up and running and to a point where they need growth capital.

Lindner says Charlotte “Is a great location from which to cover this region. We have easy access to Raleigh and Atlanta and there are direct flights to anywhere you want to go.”

Partner Capital
Lindner says Frontier primarily “looks for good businesses. They need the kind of economic model that makes good money for a company good at what it does in a big enough market to build a large enough business to generate good returns.”

Maclean adds, “We look for a founder or CEO who really wants help beyond just capital. We look for someone coachable who wants a true partnership and does not think they have it all figured out.”


That’s evident from the fund’s most recent $6.5 million investment in M3 Technology Group. CEO Michael Byrnes told TechJournal South that the expansion capital “is partner money,” in which Frontier’s expertise in the business services space is as prized as the capital investment.

Frontier provides resources
“We’re not just another ATM machine,” says Lindner. “We have Ed Crutchfield, former Chairman and CEO of First Union Corporation, Don Telage, former CEO of Network Solutions, and other CEOs we’re able to bring in to mentor theses founders and executives and other resources we bring to them.”

Maclean says that an entrepreneur, founder or CEO with “just looking for money,” raises a major red flag for Frontier. “We want to make sure we’re on the same page and have a founder and/or CEO who is easy to work with.”

Frontier’s offices are located in Charlotte’s Southend, where former cotton mills and warehouses have been restored into retail outlets, restaurants and office complexes. Since Sullivan’s Steakhouse is right next door, “We spend a lot of time there,” says Maclean.

By: Allan Maurer
TechJournal South

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