Q&A: Investor Andrew Lindner of Frontier Capital talks Atlanta, investing, new fund

June 30, 2016

AndrewOn June 21, Atlanta Business Chronicle’s Phil W. Hudson sat down with Andrew Lindner.

Lindner is co-founder and managing director of Charlotte, N.C.-based Frontier Capital, a private equity firm that invests in later-stage software and tech-enabled business services companies.

Currently, Frontier is investing out of $390 million Fund IV, putting more than $28 million to work with investments in seven Atlanta companies — Ryla, eVerifile, Anodyne, Digital Envoy, Gazelle, Quickparts and SecureWorks.

Atlanta Business Chronicle: How active is entrepreneurial activity in Atlanta?

Andrew Lindner: It’s pretty steady. From our perspective, it felt like things had slowed down a little bit over the last couple of years. I felt like some of the early-stage capital had dried up four or five years ago, but with Georgia Tech and a relatively active angel [investors] community — it feels like it’s booming again. So, entrepreneurial activity feels like it’s on the rise.

ABC: Is Atlanta an active market for M&A [mergers and acquisitions] activity?

AL: M&A activity across the board is healthy. The M&A activity you’re seeing now — the robustness in the M&A markets — it’s a little bit of a different profile company but there’s still the occasional outlier. The public markets were driving M&A activity last boom and now a lot of what’s driving M&A activity is cheap and widely available debt. As a result, I think the profile of the type of technology companies that we invest in and are experiencing a healthy M&A outcome are cash flowing businesses. In other words, companies that are good candidates for debt because they can be leveraged up with very healthy multiples. As a result, the same software or health management companies — things that we typically invest in — may have been a really attractive-pure-revenue target that had a healthy burn is a much tougher sale now than in the past. Now, the companies that have crossed that chasm to producing meaningful EBITDA [earnings before interest, tax, depreciation and amortization] is an extremely healthy M&A market. It’s sort of the tale of two cities a little bit. Those high-growth technology assets that are cash flowing is the tale of one city and the tale of the other is the M&A market started to cool a little bit for cash flow negative businesses.

The best thing to do is to have a bright line around profitability and I believe some of it has to do with leveragability. A financial buyer can typically leverage up that asset. Even strategic buyers — public ones in particular — are more concerned with dilution of earnings. They don’t want to have to write a big check for a company and immediately have to write a second check to fund the burn on the way to profitability.

ABC: Do you consider Atlanta to be a fly-over market?

AL: Atlanta isn’t Boston, New York, San Francisco or L.A., so it’s not a big money center like you have on the coasts. We’re not big on the “fly-over” moniker. Atlanta is a great market for us because of tech. We basically avoid San Francisco, Boston and New York even Austin, Texas to some extent. We gravitate more towards low-hype/high-growth markets. Others have other names for it but an Atlanta, Dallas, Salt Lake City, Denver, Phoenix, Charlotte and the mid-Atlantic states are great high-growth markets for us that are lower hype markets, meaning the companies that are very early stage are not raising tons and tons of money — they seem to promote more capital efficient type businesses and business models, which appeal to us, and they’re a better match for what we call smart growth – aggressive but measured growth with a relatively shallow J-curve while being mindful of not getting caught in a U-curve or L-curve.

Atlanta is in the company of those other markets I mentioned. They’re highly entrepreneurial, have a lot of growth, have friendly business environments and aren’t saturated with early-stage VC and the mentality to raise as much capital as you can and burn, burn, burn your way to exit.

ABC: How does Atlanta’s health-care information technology scene fare to other markets in the country?

AL: You have great infrastructure here. Emory has a lot of clinical experience and data, while Georgia Tech has all of the analytics and technology.

One of the biggest trends in health care that we are investing into is consumerism in health care. The individual who is actually utilizing the health care services has historically been disconnected from the payment of that service and even the evaluation of that service. There’s no Amazon for health care. The big trend right now in employer-sponsored health care, which is where we spend a lot of our time, is a shifting of the responsibility to the employee/patient/member/consumer. You see employers adopting a lot of tools because they’re trying to enable the consumer to get more involved in their actual health care like price transparency, telemedicine, wellness, high deductible plans, HSA administrations. For the employer to push the responsibility down to the consumer, they need to put these tools in the hands of the consumers to do it.

One thing that strikes me is that some of the more successful health engagement tools that are being used by consumers have been started by folks who don’t come out of health care but come out of consumer markets. The reason being is the hardest part of this whole equation is getting the consumer to actually engage and use it. Once they use it, the benefits are myriad to everyone.

Atlanta has a great tradition in consumer-oriented businesses with Delta (NYSE: DAL). Coke (NYSE: KO), Home Depot (NYSE: HD) and UPS (NYSE: UPS). It feels like that DNA here is the right kind of DNA to be driving these consumer-oriented health management tools. Atlanta is really well poised to benefit from that big trend in health care information technology. Atlanta has a lot of executives and individuals who have figured out that consumer-engagement equation and it feels like that’s going to put Atlanta in good stead with respect to that movement in health care to more consumerism.

ABC: Are you raising a new fund?

AL: Not currently. We are investing out of our Fund IV, which is a $390 million fund. We’ve made five investments in the new fund and we’re a little over half deployed.

ABC: Do you plan on raising a new fund anytime soon?

AL: Not this year. We are likely to be in the market mid to late next year for our Fund V.

ABC: Are you looking at any Atlanta investments?

AL: We are always looking for Atlanta investments. We don’t have anything on the cusp of closing right now but it does feel like activity has picked up, particularly around health management and vertically oriented SaaS (software as a service) businesses. For example, in the real estate vertical there is a very successful company here called Commissions Inc. that we took a hard look at. We’re big on these vertically oriented or vertically facing SaaS businesses and Atlanta seems to have a lot of them. We’re not on the eve of investing in any Atlanta companies but we have at least one active portfolio company here and we’ve made seven investments historically here in Atlanta. We’ve successfully exited all of those businesses except for eVerifile, which is an ongoing investment.

ABC: Do you have any friends in Atlanta’s venture capital scene?

AL: Yeah, Alan Taetle at Noro-Moseley.

ABC: Are there any recent success stories from Atlanta that caught your eye?

AL: Qgenda, which is a physician scheduling software, is one that we didn’t invest in but would have liked to. It was just funded by a West Coast investor [Francisco Partners] that is traditionally more of a buyout firm or later stage [investor].

It feels like the target has moved in front of the gun for some of the automation of the health system activities. The gun — the technology and solutions — has been there for a long time but there hasn’t been a real focus on them until now. The reimbursement model is being turned upside down from fee-for-service to more outcomes based. They’re suddenly having to scramble to adopt new technologies to report what those outcomes are, to become more efficient and provide better patient satisfaction. Some are new and some are not so new.

ABC: Do you consistently invest in Atlanta companies?

AL: Our investing in Atlanta sort of comes in waves and it feels like the opportunities here come in waves too. I’d say what starts the wave is earlier-stage investment. So, when there is an active early-stage/angel network in Atlanta, it really does create that wave for more growth capital stage companies like us and it feels like that’s starting to come back, which is a good leading indicator to growth capital assets that we invest in and ultimately successful outcomes which is what we try to produce out of those companies.

Phil W. Hudson is a music, sports and finance reporter. Click here to follow him on Twitter and here to follow him on Facebook.