Today, we launch Workhorse Capital. We start modestly, with humility, but with big aspirations.
We subscribe to Jim Collins’ Hedgehog Concept, based on Isaiah Berlin’s parable of the Hedgehog and the Fox. The story of the Hedgehog and the Fox comes from a quote fragment attributed to the Greek poet Archilochus:
The fox knows many things, but the hedgehog knows one big thing.
Long-story short… the fox is cunning, sly, creative, and out to get the hedgehog. The hedgehog is, by contrast, mundane, plodding, un-inspiring and looks like easy prey. However, every time the fox attacks the hedgehog, the hedgehog responds consistently and effectively by turning into an impenetrable ball of quills. The fox is turned away every time. No matter the tactic used by the fox, the hedgehog “wins”.
Hedgehogs aren’t the most electrifying of animals. They certainly don’t have the broad repertoire of physical and cunning attributes possessed by foxes. However, hedgehogs do turn into an impenetrable ball of quills really, really well. The success of the hedgehog stems from the fact that the hedgehog is built with purpose.
Like the modest hedgehog, Workhorse Capital is purpose-built to do one-thing and to do it really well. In our case, Workhorse Capital is purpose-built to support the next generation of great technology-enabled service market leaders with growth equity capital.
We observe that every one of the successful entrepreneurs with whom we’ve had the honor of working shares a unifying but frequently overlooked trait: They pursued their work with an infectious and unyielding sense of purpose. A sense of purpose doesn’t guarantee success, but, in our estimation, success cannot be achieved without it.
Our purpose is to use capital as a catalyst to help the entrepreneurs we finance achieve their purpose. In the process, we aim for a lofty goal; to build a world class growth equity firm.
Our Hedgehog Concept
The Hedgehog Concept suggests that the truly great companies are those that have a deep understanding of the intersection of three concentric circles represented by three questions:
What Are You Passionate About?
We’re passionate about supporting tech-enabled services entrepreneurs in achieving the purpose they have set their business to. We do not believe that companies are hollow vessels. We believe they are the instrument through which entrepreneurs achieve their dreams. We only invest in companies where we believe in the entrepreneur’s purpose as passionately as the entrepreneur believes.
What Can You Be Best in World At?
We believe we can be best in world supporting the creation of economic value from growth stage technology-enabled services businesses. We’re committed to working with businesses that are between $5 and $20 million in revenue with equity checks between $3 and $15 million. We have observe that most every growth equity firm starts by becoming successful in this segment, but is eventually lured away by the opportunity to increase assets under management by raising larger and larger funds. Ultimately, the overwhelming pull of gathering assets causes growth equity fund managers to vacate the very segment in which they enjoyed their initial success. In the process, they lose touch with what made them successful.
We are uncompromising in our intention to be best in the world working in our defined stage and segment; forever. We do not aspire to go “up-market” and raise a $500 million fund, ever. We would not recognize ourselves if we did.
What is Your Economic Engine?
Companies in which we invest create value by converting invested capital into capital efficient revenue growth. As a result, our economic engine, which we refer to as the Revenue Yield Ratio, relates revenue growth to entry valuation and invested capital.
We target a Revenue Yield Ratio in excess of 1x; so that every dollar of pre-money valuation and equity capital invested translates into at least one dollar of increase in annual recurring revenue over the life of the investment. If we don’t believe an investment prospect can increase revenue by 1x the sum of the pre-money valuation and the equity capital we expect to invest, we won’t make the investment.
Because the businesses in which we invest typically exit on a multiple of revenue, the value creation impact of the Revenue Yield Ratio is magnified by the exit revenue multiple.
Our economic engine reflects our belief that value creation is the result of a balance between three inter-related factors: revenue growth, entry-valuation and capital efficiency.
We begin the journey knowing only our point of departure (a humble beginning) and our destination; the aspiration to build a world class growth equity firm. In Collins-speak, this is our BHAG (Big Hairy Audacious Goal). What the journey has in store between departure and destination we shall see.
We hope you share our sense of purpose, our passion for technology-enabled service businesses, and our awe and appreciation for entrepreneurs. Whether you are an entrepreneur, an advisor or capital provider to tech-enabled services businesses, we hope that our work and purpose inspires you to walk more than a few steps of the journey along side us.