Going for growth? Cardinal is seeking scaling Irish start-ups to invest in

22 Jul 2021

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John Dolan tells us what Cardinal Ireland Partners is looking for in its next investment.

Last year, Cardinal Capital launched its latest investment fund, putting €250m on the table for Irish companies.

The Cardinal Ireland Partners (CIP) fund is somewhat unique in its focus on investable companies coming out of the island of Ireland.

“I think it’s the largest fund dedicated to investing in Irish companies,” said Cardinal’s managing director of private equity, John Dolan.

‘Founders should reward themselves for the hard yards they’ve done in the early years’

I spoke to Dolan just as a previous Cardinal investment had taken the next big step in its business journey.

The Carlyle Cardinal Ireland (CCI) fund, the predecessor of CIP, backed Derry start-up Learning Pool in 2016. Five years of steady growth and several acquisitions later, Learning Pool was sold to Marlin Equity Partners and set out its stall for further expansion.

The Learning Pool investment is a prime example of what can come from growth capital investment from Cardinal. A late-stage fund as opposed to seed or venture, CIP is looking for proven tech businesses with paying customers.

“Typically, what that means in our world is revenues of €5m-plus and [businesses that] are profitable already and are looking to accelerate their growth journey,” Dolan explained.

Growth capital can help companies emerging from their early stages to put that pedal to the metal. Dolan said Cardinal’s support is particularly useful when it comes to moving into new geographies or embarking on an acquisition strategy, and the seasoned investor finds it “really refreshing” to see a change in the attitude of entrepreneurs when it comes to the latter.

These days, Irish businesses are as likely to be a buyer as to be bought.

“Historically, Irish companies used to get to a certain size and then a US or an international buyer would come and they’d sell out, because that was the way founders and entrepreneurs would get liquidity and money themselves. You can understand it,” said Dolan.

“But if you look at the recent times, acquisitions become a core part of how to grow. And Irish companies have gotten braver about making international acquisitions.”

Returning to the Learning Pool example, the Northern Ireland edtech company started an avaricious acquisition strategy within three months of its CCI investment. It went on to make four acquisitions in as many years, include a significant US company that created huge value for the business.

The evolution of an entrepreneur

This kind of growth requires confidence and an evolution of the entrepreneur. And if a founder is willing to go for growth in this way, each international acquisition could be another step closer to billion-plus unicorn status.

“I think to do that, you need an investment partner similar to ourselves, who has got size and is prepared to put money to work in terms of those acquisitions,” said Dolan.

“It’s very hard if you’re the main shareholder and you’re trying to do acquisitions. You’re constantly putting risk on the table and you’re half of the mindset of protecting the value you’ve built up already.”

Cardinal addresses this entrepreneurial crossroads by providing both support and a payoff at a crucial moment for both the company’s and the entrepreneur’s growth.

“We’d be very open when we invest in companies for founders or entrepreneurs to take some money off the table,” said Dolan.

“In the past, selling out in full was the way you got rewarded or took some cash out. The idea now – and I’ve always been supportive of this – is when we’re investing, the entrepreneurs or founders should reward themselves for the hard yards they’ve done in the early years.”

Coming in as an investment partner at this stage also has the benefit of helping shift an entrepreneur’s mindset on taking risk.

“It allows them to detach themselves personally from the business when they’re making decisions because they’re able to pay off their mortgage and debts and things like that. Then they’re making decisions in the future more around what’s the best thing for the company as opposed to themselves. So their ambition and their risk tolerance tends to go up on the back of that.”

This, said Dolan, is “exactly what growth investing is about”.

‘I’d always be a fan of technology companies not being shy of changing funds as part of your growth journey’

With two decades of investing and advising in Irish technology companies behind him, Dolan has seen this evolution first-hand.

“When I started investing 20 years ago, there was a thing around wanting the entrepreneur and the founder to be all in, because that was going to get them out of bed early and motivated. But the reality is they’re all hugely driven and motivated already.”

Before Cardinal, he was a partner with Investec Ventures and counts himself “lucky enough” to have worked with companies such as AMCS, Brite:Bill and newly anointed Irish unicorn Fenergo.

Dolan was on the board of Fenergo in the early days, having been among the first to take a chance on the Irish fintech.

“We were faced with pretty significant strategic decisions very early on and I think we got the core ones right, particularly about going to the US,” he said. “And, you know, Marc [Murphy, Fenergo founder and CEO] has gone on and built a billion-plus business out of Dublin, so it’s huge credit to him.”

What Cardinal wants

One of Dolan’s most recent investments with the CIP fund is Luzern Solutions. With about 70 people working out of Blanchardstown in Dublin, Luzern provides e-commerce services to major international clients such as Nestlé, Philips and Bayer.

“The e-commerce space is growing at such a pace, there’s no limit on where you can take some of those businesses,” said Dolan.

Luzern and Learning Pool set the template for what Cardinal is looking for in its next investments: the right companies in the right sectors. And the right sectors for growth capital are those on an upward trajectory – e-commerce and edtech being just two examples.

Software solutions and tech-enabled services are of prime interest, but Dolan said that Cardinal is “very much open to chatting to all entrepreneurs or founders about what their growth plans might be and whether that involves taking in new capital”. And those promising companies that fit the brief can expect an investment of €10m to €40m.

Being a uniquely Irish-focused fund also comes with one caveat to suit the closeness of Ireland’s connections. “Where you’re in much bigger geographies, typically they’ll switch out management teams if it isn’t working out. In Ireland, you just don’t want to be in that position because the reputation you have with management teams and founders is really important.”

This means Dolan has to ensure that selected investments have the right management team already in place. What he looks for are “really motivated and ambitious teams that are really interested in going on that great journey”.

Thankfully, though, he doesn’t see the focus of the CIP fund as a limitation. “The Irish technology sector has gone from strength to strength over the last 20 years since I’ve been investing and advising in the space,” he said.

He also finds the Irish investment ecosystem has matured in tandem, and that perhaps needs to be acknowledged by those seeking investment.

“Irish investors are as experienced and as good as any I’ve come across … I think that’s a message that sometimes gets lost when entrepreneurs and founders are thinking, ‘I need to go to the US and get a certain type of money.’ Actually, the investment community in Ireland is very sophisticated at this point, I would say, and often has some different attributes. I would describe it as very founder-friendly.”

And with a full menu of Irish investment options available – from seed funding to early-stage, venture funds and growth capital – there’s no reason why more unicorns can’t follow from Ireland. But Dolan said they need to pick and mix their investment partners along that journey.

“Understand who’s the right investor to be talking to at the right stage,” he said. “I’d always be a fan of technology companies not being shy of changing funds as part of your growth journey.”

For example, in the case of Fenergo, when Investec left, New York VC firm Insight Partners came in. And in this case and many others, an Irish fund can turn out to be a bridge to US funding. “They take a lot of comfort from having seen an institutional investor like Cardinal already invested in the business. And they know it’s going to have certain levels of governance and discipline and management,” said Dolan.

Elaine Burke is the host of For Tech’s Sake, a co-production from Silicon Republic and The HeadStuff Podcast Network. She was previously the editor of Silicon Republic.