Saltwater Capital — Investing through the partner equity model

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After making 10 investments ranging from $25k to $1.4m, we’re rapidly self-analyzing and iterating to identify the kind of investments we’d like to focus on. We wanted to outline what we’ve learned and make clear where we will now focus. First, we approach everything with a ‘student of the game’ mentality. We’re always learning, and as we’ve invested, we’ve been reminded of how much adventure exists in growing a business. In our experience, learning and adventure is a winning combination.

To grow a business the quality of the founders and leadership teams is critical, but our experience has shown that the structure of the relationship is also very important. So we started investing, we’ve found great partners to share in this adventure, and we explored a number of different investment models.

First, we tried…

Angel / Seed — we’re not excited about a ‘spray and pray’ strategy, and while we love helping (and will continue to help) early founders, the tiny minority positions aren’t as motivating for us. We will continue to make angel investments into truly special technology companies, but it will not be our primary focus.

Series A/B — we’re less excited about this stage because of high valuations due to the amount of investment capital flowing into tech. We’d like to focus on rational economics and core value investing principles. We’ve made a few great investments in this category so far, but it will not be our focus going forward.

Private Equity — we’re not interested in using high leverage or cutting jobs to extract value. This approach simply doesn’t resonate with us. While the financial engineering of this approach is fascinating, it is not how we roll and will not be our focus.

Then we found…

Partner Equity — we’re very excited about a long-term partnership model because we believe it best aligns us and the founders/owners of the businesses we invest in. It gives our portfolio companies full autonomy while allowing them to benefit from our experiences, relationships, and capital. For a founder/CEO, knowing that their investors won’t require an “exit” on an arbitrary timeline is very valuable. We are clear and transparent up front with our expectations and believe we can offer the best long-term home for many businesses. Simply put, we want alignment and empowerment, with a focus on growth.

In this “partner equity” structure, we are open to buying out founders and/or early investors. We’d like founders to retain 10–30% of the equity in the business — but if a full buyout is their goal it will be considered. We believe that alignment leads to great outcomes for both Saltwater and founders.

When we’ve shared this model, people often reference Warren Buffett’s, Berkshire Hathaway; or the “holding company” approach. We have friends that have successfully operated with this model and we believe it best suits us.

Saltwater is focused on making majority investments in, or full acquisitions of, small, profitable, technology businesses. To reiterate a key point, we would love to continue to work with the founder/leadership team as partners for the long-term.

Our Current Investment Criteria:

  • Software; online or app based

  • Profitable; or break-even w/ longer history

  • Small; <$3M revenue

We invest only our own capital, which gives us the freedom to make the best long-term decision — always. We’d hope to own the companies we invest in forever. If your business fits the bill, we would, of course, look forward to hearing about your company: investment@saltwater.com

In this ongoing learning process, I’m confident we’ll continue to evaluate and evolve our approach. But we’re confident that a partnership equity approach which means — put people first, show respect to a company’s history, and optimize its future growth and earning potential — will be a winning approach over the long-term.

Ryan GravesComment