Arcadea Group - Permanent Capital Investing in Vertical SaaS - [Art of Investing, EP.14] - Joys of Compounding Recap
Podcast: Joys of Compounding
Published: 2024-03-04
Duration: 5832
Guests: Daniel Eisen, Paul Yancich
What Happened
Arcadea Group co-founders Daniel Eisen and Paul Yancich have built a firm that invests in vertical market software companies using permanent capital. They were deeply influenced by their experience working under Mark Leonard at Constellation Software, known for its remarkable 44.3% IRR since its 2006 IPO. Constellation Software succeeded by identifying value in vertical market software businesses often overlooked by traditional venture capitalists due to their smaller market sizes.
Daniel Eisen and Paul Yancich have structured Arcadea as a company rather than a fund, allowing for indefinite capital investment without the pressure of short-term exits. This structure is inspired by their commitment to long-term ownership and growth orientation, aiming to be the best long-term home for high-quality vertical software businesses. Arcadea targets smaller, real vertical markets that venture-backed companies often ignore, focusing on organic growth and capital efficiency.
The company's investment philosophy is shaped by key influences like Nicholas Nassim Taleb's 'Anti-Fragile,' which emphasizes optionality and resilient decision-making, and Ben Horowitz's 'The Hard Thing About Hard Things,' which provides insights into challenging business decisions. Arcadea's approach is also informed by the concept of 'renter vs. owner,' emphasizing the importance of deep involvement and accountability in business operations.
Arcadea's portfolio includes 11 businesses across four industry verticals, focusing on high organic growth and modern technology. The company believes in the long-term potential of vertical market software, even as debates continue about potential increased competition and margin pressures. Arcadea's team is committed to staying in a steep learning curve and creating meaningful work environments for growth-oriented businesses.
Paul Yancich's diverse background, including operating roles and a degree in religion, contributes to his broad perspective on business and finance. He initially misunderstood 'iBanking' as internet-related, but eventually found his niche in growth equity, focusing on software investments. Alongside Daniel Eisen, he emphasizes the importance of practical business knowledge and a solid foundational team.
Daniel Eisen's career path was shaped by early failures in securing desired co-op jobs, which instilled a drive to prove himself. His interest in investing was sparked by an uncle's involvement in the field, leading to an internship at Prudential Equity Group. Both founders value operating experience in developing a successful investment career, with their partnership based on shared values and a high level of conviction.
Key Insights
- Arcadea Group leverages permanent capital to invest in vertical market software companies, allowing for long-term ownership without the pressure of short-term exits. This approach is inspired by their experience at Constellation Software, which achieved a 44.3% IRR since 2006.
- The success of Constellation Software is attributed to its ability to identify value in smaller vertical market software businesses, often overlooked by traditional venture capitalists. This strategy resulted in a remarkable 449-fold increase compared to the S&P 500's 4.2 times growth over the same period.
- Arcadea emphasizes growth orientation and capital efficiency, focusing on businesses that can achieve significant organic growth. They use the 'Rule of 50' to measure capital efficiency, combining organic revenue growth and profit margin, and support businesses growing at 50-80% annually.
- Key influences on Arcadea's investment philosophy include Nicholas Nassim Taleb's 'Anti-Fragile,' which emphasizes optionality and resilient decision-making, and Ben Horowitz's 'The Hard Thing About Hard Things,' which provides insights into handling difficult business decisions.