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The Stage Model: A Conversation with Stage Founder Dan Frydenlund

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In a recent virtual interview, Stage Founder Dan Frydenlund talked about the strategies and guiding values that make Stage unique. He also gave his perspective on the current moment and what he’s excited about for the future.

Interviewer: So Dan, tell us a little about your background in the industry.

Absolutely. Well I came out of undergrad with a degree in finance and was initially looking at public accounting but quickly decided that wasn’t for me. I ended up at Boston Communications working with entrepreneurs to build cellular and paging systems, which put me on a path for being an entrepreneur from day one. From there, my career spanned large telecoms and private equity, and I spent a lot of that time working abroad for firms in South America and later Europe.

During the 1999 and 2000 internet bubble, I was running a private equity firm for a billionaire, and it taught me a lot about reconstructing during economic shifts. He had about 17 different tech investments, all of which were financed directly through the fund. It had a liquidity issue due to the internet bubble burst and my job became trying to keep a billionaire from having to file bankruptcy on his portfolio. I spent the next three years taking the portfolio from losing cash to generating cash and finding exits to companies who truly didn’t have any available.

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It was an amazing experience that taught me how to take a company that’s failing or in a situation where they can no longer attain funds and find solutions for them to break even and eventually exit. I later became managing director of the Sturm Group, which was a $500 million private equity firm with about 17 technology investments. All of this led me to the place of deciding to found my own company in 2009.

“Our hands-on approach at Stage allows us to provide a level of oversight and involvement that other firms simply can’t match, and it also means we can move much, much faster.”

Interviewer: Talk a little about what sets Stage apart from other investors in this space.

As a private equity firm, we’re vastly different from VC in that we’re not just the money guys. We’re much more than that. We focus on companies that are facing challenges and that require more involvement than traditional VC is set up to provide. We do that by attaining control of the company through an M&A deal—so we acquire the company with the goal of flipping it, so to speak, and setting it up for a profitable exit, which is typically a sale to another company. So that’s how we differ from VC.

We’re also very different from your typical private equity firm in that most PEs focus on mature companies with long investment horizons. Stage, on the other hand, is primarily focused on early-stage companies and shorter horizons. In our experience, tough turnarounds are not done by committee or by people in boardrooms who meet every few months. They’re done by people with boots on the ground. Our hands-on approach at Stage allows us to provide a level of oversight and involvement that other firms simply can’t match, and it also means we can move much, much faster.

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Interviewer: In addition to Stage Fund, Stage also offers Stage Restructuring as a service to independent companies. What makes it different from other restructuring services people might be familiar with? 

Stage Restructuring is the arm of our business that falls outside of M&A. Basically, companies will hire us to help them right the ship in exchange for payment or for minor interest in the company. The difference between Stage Restructuring and a typical financial analyst or financial advisor is that we actually do the hands-on, hard work. We don’t just put together a glossy PowerPoint presentation and hand it to the company. We actually insert ourselves with operating executives, as well as myself, to actually go make the changes happen. 

We certainly do a very thorough top to bottom analysis, get buy-in by the stakeholders, both debt and equity. Then we go ahead and execute on the plan. Most of these financial advisors present a beautifully written report that says, “Go do this.” And then they leave after they’ve taken their fee. We go to that next level and actually do the work to restructure the company, get it to a point where it’s sustainable and where the stakeholders are satisfied.

“The beauty of our model is that it allows the company to access our funds and grow again very quickly. We don’t have to put CEOs and teams out there on the fundraising trail. We have the capital to quickly invest and hit a growth curve that we’re looking for.“

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Interviewer: Stage typically focuses on distressed and orphaned companies. What are the circumstances you typically see among companies who fall into that category?

The vast majority are very similar. They have a VC that’s pushing them to grow exponentially to fit with venture expectations, and they’re encouraged to spend and hire quickly to fuel that growth. They have all kinds of resources that are grossly heavier than they need to be at that phase. I use the analogy they’re set up to be a Mercedes-Benz and they really need the structure of a Toyota. 

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We see it time and time again. An entrepreneur goes out to raise $50 million bucks, and they want to put that to work. So they’re buying everything, the best quality. They’re hiring the greatest talent. And before you know it, the company isn’t growing as fast as the venture folks want it to, and now they’ve got an unsustainable platform. They’ve got people on payroll that they just can’t afford any longer. 

This leads to a situation where the company is calling their VC for more money, and the VCs just don’t pick up the phone anymore because they’ve fallen out of the winner’s circle. These are good solid companies that were just pushed so hard and so long to hit those levels of top-line revenue that they never got a real chance.

Interviewer: Talk a little bit how Stage can step and execute turnarounds for companies who fall into this distressed category.

Stage can step in with our operations team and quickly fill that funding void, start fixing those cash flow problems and get them to profitability fast. We start by dividing the company into several different areas. One is obviously the human capital side, because that’s usually 80% of the cash burn of these companies. We really look to see who is ultimately very important to take this company to that next level and who isn’t. We look at every aspect of the business that way. 

Once the company hits its milestone of cash flow breakeven, we go to profitability. That’s when the funds kick in and allow the company the necessary capital. And it’s not a long process. The beauty of our model is that it allows the company to access our funds and grow again very quickly. We don’t have to put CEOs and teams out there on the fundraising trail. We have the capital to quickly invest and hit a growth curve that we’re looking for.

”We’re the go-to team for our particular asset class, which is companies that have had $20-50 million invested in it, or about $3-5 million in revenue. They need to be reset, restructured, and then start to hit those milestones of $10-20 million in ARR with consistent opportunities going forward, and we’re set up to do that beautifully.”

Interviewer: Do you find that companies are resistant to these changes? How do you typically manage expectations in those early days when you’re making difficult decisions?

What I’ve found over the last 25 or almost 30 years of doing this is that you can survive with a lot less. It’s a mindset, and some CEOs get it and are willing to change and others aren’t. Some say, “Hey, you know what? I prefer the venture model. I’ll go off and find another VC because really what I want is for somebody to write me another big check and let me drive forward on my own.”

We do want things done the “Stage way.” Everyone goes through the 100-day plan. This is something that I’ve developed over many years and certainly from my experience at Sturm and Gores. We go through the same rigorous process for every investment in the first 100 days. It’s about, “What can we do with less?”

It’s brutal work, and it is tough. You’re playing with people’s lives. But the way we look at it is that the company has to survive. For me, it’s never been about how many jobs I cut. It’s how many jobs I save at the end of the day, and those are difficult situations. But we look under every rock for any savings that we can. We adjust expectations on travel and entertainment. Can we really afford the 10 people in customer success? Can we do it with 3?

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Interviewer: You’ve bought almost 30 companies. What are the characteristics that you look for that indicate that there’s a chance for turnaround and success?

First you have to figure out, “Do they have a product or a service that people want?” Then you have to figure out, “Do they have customers, and are the customers happy? Do the customers want more of the software or service that they’re providing?” The goal is to identify a situation where I know there’s a strong product or service but where certain structural or financial issues are limiting their progress. In these situations, the company often can’t grow further with their customers because their capitalization is wrong. They may be orphaned, or they may have over-leveraged the business and therefore the banker is getting worried. But that doesn’t mean the fundamental business isn’t sound.

For example, we used GreatHorn for our cybersecurity and our email security before we bought the company. So we already knew that the service worked. It was funded by a handful of incredible venture capitalists in firms that I do business with quite often. It fell out of the winner’s circle because it wasn’t going to return a 10X, but the truth is a 2X, a 3X, or a 5X is still a fabulous return.

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”We do want things done the ‘Stage way.’ Everyone goes through the 100-day plan. This is something that I’ve developed over many years and certainly from my experience at Sturm and Gores. We go through the same rigorous process for every investment in the first 100 days. It’s about, ‘What can we do with less?’”

Interviewer: That’s a great example. Are there any other case studies or success stories that you feel proud of that highlight Stage’s core strengths?

Well the one that basically put me on the map was I acquired a software and hardware company in the RFID industry based out of Denver. It was funded by several different companies and had a significant debt position with a major bank. It had a great product. It was world class in many ways. But it had been pushed to grow way faster than it was capitalized for. When it didn’t hit those growth levels and trajectory, the venture firms basically said, “No more. We can’t fund it.” So the banker was sitting there with an unfunded company with a serious debt load.

First, I sat down with the venture capitalists to reset the cap table. They stayed in the company for a small ownership percentage. I took control and continued to fund the business while working with the senior lenders to give them confidence that I would get them whole. That’s what started it all. We had a very successful exit and sold to a much larger player. The bankers were happy. They got fully paid, and we made money. So it proved the value of the Stage model.

Fast forward 10 years later, now with the pool of capital in Fund I, Fund II, and what will be Fund III, this allows us to work even faster. It took me 5 years from acquisition to exit in those early days. By today’s standards that is far, far too long. Once I met Kristen Morgan [current CEO] and then we brought in Ingrid, we looked at what we could change and evolve in our model to make it better.

“The money we are able to raise makes it possible to take a big chunk of that debt, pay it off, get the company capitalized properly, and then exit in around 2 years.”

Interviewer: Could you tell us a little more about how Stage has evolved since it was founded in 2009?

The main difference is we’re able to move faster because of the capital we’ve been able to raise. This allows us to reduce debt immediately, instead of trying to use the company’s cash flow to service the debt over 5 years and then paying it off.  It also gives us the ability to really step on the sales and marketing engines.

The money we are able to raise makes it possible to take a big chunk of that debt, pay it off, get the company capitalized properly, and then exit in around 2 years. The same amount of work and structure goes into companies we work with now as when we started. We just have more capital firepower to move faster and secure returns for investors faster.

Interviewer: You work with two other General Partners and a team of experts. Talk a little about how you all come together and what parts of the process you gravitate towards.

Since partnering with Krista and Ingrid, I get to focus on not only what I really enjoy, but what I’m actually good at. I know exactly what Krista’s good at, and I know exactly what Ingrid’s good at, and I’m not good at those things. What I am good at is demanding performance and focusing on a profitable company. 

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I typically take the chairman role of every investment we do, and I’m hands on for the first 100 days to make adjustments and change the cultural feel of the company. No longer do you have an absentee venture capitalist that wrote you a check and is looking for a report. You’ve got somebody in your office now that owns roughly 80% of the company. And I want to work with you, and I want to see this company hit the milestones that they’re capable of.

My approach is just to be relentless on cost control, relentless on growth opportunities, and to know the power of “no.” When a CEO comes and says, “I need another one million dollars, because I want to hire this marketing firm,” I start with “no” and then we work through the process to see if it really makes sense. So I get to leverage the 30 years that I’ve been doing this, and frankly I don’t have to do the stuff I don’t want to do anymore. So it’s been a great shift over the last three or four years now since the partnership has expanded.

“No longer do you have an absentee venture capitalist that wrote you a check and is looking for a report. You’ve got somebody in your office now that owns roughly 80% of the company. And I want to work with you, and I want to see this company hit the milestones that they’re capable of.”

Interviewer: Stage is unique in the industry in that it’s majority female-led. Talk a little bit about how that came to be and your perspective on that.

I was raised by a very strong mother and so I come by it naturally. I’ve run into some incredible female leaders, be it from the entrepreneurial side and the investment side. So I just gravitate towards that. It’s not that I set out for Stage to be female-majority run. It just happened to work out exactly the way it should. 

Meeting Krista, she’s a powerhouse. I set myself out to find a partner, and it just so happened that I was helping Krista with her fintech business and saw the tenacity, the “no quit” in her. Frankly, I wasn’t seeing that out there a lot. What I needed was somebody who was going to roll up their sleeves, and I saw that in Krista. So what we do now is look first and foremost for the brightest talent. But also I would be happy to see more women in this organization because I think our dynamic works very well that way. It’s also been very important to me that there’s no inequality in compensation. You’re paid for the job you do, and you’re paid equally.

Interviewer: How do you see Stage developing 5 and 10 years from now?

We’ve got some very successful and exciting exits ahead of us as we look to launch Fund 3. You don’t raise a third fund unless you have shown that you can realize the whole lifecycle, which is finding and sourcing companies, buying companies, then restructuring and selling those companies. Now, we’ve been out there long enough with these two funds that we’re seeing exits.

The plan is to leverage that to continue to raise another fund, probably slightly larger than Fund 2. And I see a focused approach to Fund 3, 4, 5, and so on. I’m more proud of what we are now than we’ve ever been and that took a lot. I had to find the right people to surround my concept and model with, and it’s worked. It’s been very hard but so, so rewarding. I’m approaching 60, and right now I’ve got no quit in me. But at some point I’ll need to get out of the way and let the others take it forward.

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Interviewer: Lastly, what’s your perspective on the current moment and how the Stage model fits into the larger investment picture right now? 

Our pipeline and funnel are stronger than they’ve ever been. We’ve built a company that is not only exciting in good financial times, but is even more exciting in times of uncertainty like we’re in now, when capital is hard to come by. So our model is just fantastic, and I see a strong future for it now and years to come. 

We did the work. We have the right relationships with not only the equity side but also the lending sources out there. We’re the go-to team for our particular asset class, which is companies that have had $20-50 million invested in it, or about $3-5 million in revenue. They need to be reset, restructured, and then start to hit those milestones of $10-20 million in ARR with consistent opportunities going forward, and we’re set up to do that beautifully. So it’s just a really exciting time.

1 thought on “The Stage Model: A Conversation with Stage Founder Dan Frydenlund”

  1. Stage Fund has a proven business model for early mid-market businesses that have “good bones” but need a reset. Congrats to Dan and the team for continued success.

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