Ivy Exec recently interviewed Andrew Clapp, Founder and Managing Partner of Arctaris Capital Partners
Arctaris is a middle market debt firm with $35M AUM providing “Royalty-Based” financing solutions that are non-dilutive to a company’s shareholders.
- What led you to found Arctaris?
In 2009, my partner, Rick Waldo, and I saw capital reluctant to invest during the recession and investors were telling us that they no longer felt comfortable relying solely on M&A to exit their investment and finally obtain a return on investment. So we adapted a royalty structure that addressed that concern as well as the biggest one voiced by Companies: they didn’t want to suffer the dilution of ownership at the valuations being offered then. We developed a royalty-like security that appealed to both investors and companies then and very much does so today.
- How so?
The debt portion associated with our investment is amortizing, so investors don’t have to wait the 5 years or more for the company to be acquired to receive their return. Companies also love our security as it usually doesn’t require them to give up any equity or warrants.
- What do you look for in management of a company that you fund?
First, we focus on mid-stage companies that are profitable and growing, so we look for mature and experienced managers. Growth also means challenges and that creates problems that sometimes means a change in personnel is needed. While we initially look for companies that have most of their team on board, we also recognize that they’ll need to bring in experienced executives in sales, finance, technology, and quite often a new CEO.
One company we’re currently looking at investing in told me last week that they expect to hire a CEO next summer. That’s unusual and refreshing to hear as most company founders see themselves as remaining as CEO indefinitely, and resist passing the baton to a more experienced executive. We encourage this when a company reaches a certain level, and so do most funds. Knowing where to find a CEO is always a challenge.
- Who decides when a change is needed?
Usually the CEO but quite often the board of directors is involved in that decision, especially when the Company is underperforming. I have a friend that was CFO for an early stage company who was given severance to find his next position as the fund decided to wind the company down. He interviewed for a number of positions and said that 2/3rds of the time the position was ultimately filled by someone that a board member of the company personally knew.
Fund investors who sit on a company’s board can be a good touchpoint for position openings.
- What Differentiates Arctaris From The Competition?
We are one of a very few organizations offering mezzanine-royalty security financing, which is appealing because it typically involves in no ownership dilution. My colleague, Riley Rodgers, has modeled this so we can simultaneously compare two types of royalty financing, traditional mezzanine financing plus warrants, bank financing, and equity financing. This allows us to come up with the ideal mix and show the impact on cash flow and other ratios that lenders and investors typically follow.
- What are some of the biggest challenges in your sector?
As a capital source, the challenge is that today’s market is competitive; banks have become more aggressive in their lending since the last recession. There is growing demand for a capital provider that takes the time to understand the needs of a business and is able to tailor a solution that incorporates a mix of low-cost bank debt, mid-priced mezzanine or royalty capital, and if needed, includes a layer of equity. A company typically has to approach many capital providers and its a struggle to integrate them, often leading to proposals that contain more of the ‘expensive’ capital than they need or want. Integrating different types of capital is the unmet challenge that the industry needs to do a better job with. It’s time to move from “he who has the gold, ‘rules’”, to “he who has the need, ‘defines.’”
That’s what we are trying to facilitate . . . helping a Company come up with a funding mix that minimizes its average cost of capital and minimizing the dilution of equity.
- What gets you excited to come in to work every morning?
I like the challenge of solving a company’s growth capital needs and coming up with an optimal capital solution. One ‘size’ doesn’t fit all, and it takes a certain amount of crafting to arrive at the best funding solution. Doing this is professionally very satisfying to me.