Not So Private Equity

S1 E6: AJ Dye – Iron Gate Capital

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In this week’s episode of Not So Private Equity, we welcome AJ Dye, Partner at Iron Gate Capital. AJ joins us to discuss Iron Gate Capital’s deal-by-deal model and how it offers them an edge.


The Not So Private Equity Podcast is co-hosted by Ken Kanara and Steven Haug. Steven leads this week’s episode.



Steven Haug: Hey y’all, this is Steven Haug, cohost of Not So Private Equity. We have a great discussion ahead of us today. Before we dive in, I want to thank our sponsor ECA Partners. ECA is an executive search and on-demand consulting firm specializing in low and mid-market private equity. To learn more about ECA’s services you can reach them through their website, eca-partners.com.

Now, I’m very excited to introduce our guest, AJ Dye. AJ is a partner at Iron Gate Capital. AJ, welcome to Not So Private Equity.


AJ Dye: Thanks, Steven. I appreciate you having me.


Steven Haug: Of course. Let’s start at the beginning. How did you get into private equity?


AJ Dye: I started my career, a Colorado native. I grew up here, where, right out of undergrad, I went and did investment banking at a small boutique here in Denver. I really learned the skill set there. We were focused solely on casino deals, which is an interesting way to learn that skill set. It’s not that hard to model a casino business, right? It’s, “How many slot machines do you have?,” and “How much do they make per day?,” and “What do you have to spend to get people in the door?” Then, pivoting, I went to business school and decided I wanted to change gears and get more into private equity and venture, and I started the venture/PE path there. Out of business school I did corporate venture capital and M&A for a large Taiwanese firm called Delta Electronics. I spent a lot of time there where we were making investments and doing M&A here in the US. I basically ran the group there. Then, I joined Iron Gate about three-and-a-half years ago, where I met my two partners, having co-invested with them on a couple different deals. We got to know each other in the trenches, developed a strong relationship, and decided we wanted to work together. That happened about three-and-a-half years ago.


Steven Haug: Before Iron Gate, you mentioned you were doing corporate venture deals. Does that mean you were working with a strategic, we would say, a larger corporation?


AJ Dye: Correct.


Steven Haug: Then helping them to grow that organization by identifying smaller businesses or technologies that you would then help that corporation acquire, right?


AJ Dye: Yes. We were investing off the balance sheet. Delta is about a $30 billion business and one of the largest power electronics manufacturers in the world. It was a bit interesting. Every one of those major, corporate venture efforts, everybody does it a little bit differently. Some folks are just focused on financial return, for others it’s highly strategic. We were the former, and actually, it was interesting because the more strategic it was, I found it was harder to get deals done. For example, if there was a new motor or power electronics technology that we were looking at, it happened often that anytime we’d have an engineer look at it, they say, “Oh no, we can build that in six months,” and kill the deal. Whereas the deals we did end up doing, one was an on-demand lawn care business that was actually acquired a couple of months ago. Those are easier because there was less noise. We were investing off the balance sheet to try and earn additional returns and if there was value-add along the way, that’s great.


Steven Haug: The non-strategic deals were easy to evaluate because it’s just a numbers play, right? “This business makes money. If we buy it, we’ll make more money.” The strategic ones, lots of other things to consider, “Can we build this instead of buy it?, What is the synergy going to be?” Interesting. Then, you moved over to Iron Gate. Can you tell us about that transition in more detail, because you came in fairly early on.


AJ Dye: I had co-invested with each one of my now partners when I was a Delta, both for good and for bad. One deal is actually still in our portfolio. We first met like ten years ago, working on that. My partner Ryan and I were in the boardroom together and worked really closely and developed a great relationship. Both him and my other partner Doug have been tremendous mentors for me. I feel very fortunate. Then, the other company ended up going bankrupt, so we’ve seen each other in good times and in bad. I think that’s where the depth of the relationship really took hold. We got to see each other when our backs were against the wall, when times were tough. We had talked about working together for a long time and over three years ago we decided the time was right.


Steven Haug: There are lots of different flavors of private equity firms out there. Can you tell us a bit more about Iron Gate Capital? How you do deals, how you structure fundraising, those sort of things?


AJ Dye: Yes, you bet. We’re a little bit of a unique animal in the private equity world. We do everything on a deal-by-deal model, meaning we don’t have a fund. For every investment we make we form a special purpose vehicle that’s a specific entity created to invest in that company. Then, as we do follow-on rounds, we add to that SPV. That uniqueness, I think, comes out in a couple different ways. One is that there’s more flexibility in our view, in that model. We’re not constrained by a fund. We don’t have capital deployment requirements. We don’t have to force capital on our companies. If we want to raise one round and that gets us to what we all agree upon is success, terrific. If we want to go big, raise a lot of money and try to dominate a particular vertical, that’s great too. We can do that as well. Then, the other thing is we think the deal-by-deal model aligns us really nicely with the management teams and founders we work with because zeros are more impactful to us. We don’t have the diversification of the fund so every deal has to be a winner. We think that creates great alignment with the founders who are all-in on those companies. They don’t have a portfolio, we do. We feel that aligns us nicely to success and then we’re going to do everything we can to make sure that the outcome is positive.


Steven Haug: Do you think that the relationship you’re able to generate with your portfolio companies because of the deal-by-deal nature of your firm allows you to compete against other private equity firms that might be courting those companies?


AJ Dye: Yes, I hope so. I think, if you were to ask our founders in our portfolio why they chose us, I think that’s probably one of the reasons. For example, the more venture capital deals we do, the Series A, Series B type deals, if we’re alongside a larger VC fund that’s kind of playing the power law game and trying to invest in unicorn after unicorn, then if it doesn’t work, it goes to zero and they let it go. That’s not a good fit for us. Those kind of binary outcomes don’t really work well for us. I think, with a lot of founders, if it’s their baby that they don’t want to let go to zero, hopefully they choose us for that reason.

The other piece is that we’re pretty value-add. We’re pretty hands on. We get really engaged. We’re always on the board. I’m the lead director on two of our companies. My partner Ryan is the lead director on three of his. We’re actively engaged. We’re active in governance and we take all that stuff pretty seriously.


Steven Haug: Tell me more about the role that you play, first at the private equity firm itself at Iron Gate, and then the way that you involve yourself with portfolio companies.


AJ Dye: Within the firm, our two managing partners are doing the bulk of the firm management. My job, primarily, revolves around finding new investment opportunities and then helping those companies grow and scale. That’s what we spend the bulk of our time doing. But in terms of value-add, I think we really leverage our LP’s. The other piece of the model that makes us unique is we work with about 60 family offices who are almost exclusively first generation wealth or founders, operators, entrepreneurs themselves. They like our model because they can see and touch each deal, and they’re often actively involved in due diligence. As you can imagine, when you go and syndicate a new deal for every investment you make, we have to fundraise from 60 LP’s every time we want to make an investment. That firms up our thesis but it is also incredibly helpful to have a couple of those LP’s on the phone saying, “I know this space, I have expertise, I’ve validated these key risks. I’m going to write a check into this deal, and here’s why.” As you can imagine, that goes a long way. We’re always actively involving them in our diligence process and I think that shines through the relationship going forward. Oftentimes we have them sitting in board observer seats, as advisors, etcetera, and we try to bring the full horsepower of the network whenever we can.


Steven Haug: AJ, let me know if I’m wrong about this, but it sounds to me like you’re blurring the lines between private equity and venture capital, as well as blurring the lines between operating partner and LP’s.


AJ Dye: Yes, that’s an interesting way to think about it. I think you’re right. In the stage at which we invest, avoiding zeros is important to us. What that means is stage-wise, product-market fit is very important to us. We’re looking for companies where we say, “Okay, this is a category leader. This is execution risk. This company just needs resources and more great people around the table to go build and scale. Those deals are hard to find in the Series A stage. But, to the extent that we can bring all of our LP’s to the table in an active role, I think you’re right, and hopefully that’s what makes us unique.


Steven Haug: Tell us a bit more about the types of businesses that Iron Gate is most interested in.


AJ Dye: We look for, primarily, technology companies or tech-enabled services companies. The first thing, when I’m looking at a deal, is what is the pain point that this product or solution is solving, and are they doing it in a unique way? We have found that type of product market fit is just an incredibly strong foundation from which to build a business. To take it even further, we spend time on things like ideal customer profile and what does that mean, because it’s about being capital-efficient in the way you build and scale these businesses. Those types of solutions also tend to lead their categories. As an example, one of the deals that I lead for us is called Fetch Package, it’s in Austin, TX. They do package delivery for apartments. We really don’t have a direct competitor at this point. We’re competing with lockers and package rooms. It’s interesting, the growth there has been tremendous. We don’t spend a lot of time talking about sales, we talk about other stuff around unit economics and how to build a business. I think revenue is the oxygen for companies to the extent that they can go find, attract, and acquire customers relatively easily, it makes everything else lower friction.


Steven Haug: How many companies are in your portfolio?


AJ Dye: Today we have eight on the technology side and we’re adding one more as we speak.


Steven Haug: Okay. How’s deal flow been lately?


AJ Dye: It’s been interesting. I think deal flow has been okay. I think a lot of companies that are out fundraising right now in this environment are doing so a bit defensively, so the bar is higher right now given the capital markets. It’s not easy, but there are always good companies to partner with and we’re fortunate we just found one recently.


Steven Haug: Can you tell us about any deals in particular? I’d love to hear some stories about either an acquisition or a portfolio company that you’re working with.


AJ Dye: Yes, sure. The most recent Series A we did was a deal I led for us last year with a company in Columbus, OH called Share Mobility. They do workforce transportation for large enterprises. Primarily it’s often for industrial or manufacturing businesses in rural areas that are struggling to find and retain talent and employees. Think about maybe a food manufacturing plant in a remote location where they have 100 or 200 open jobs that they just cannot fill. Oftentimes for folks in those roles, transportation is a barrier for them, and our solution helps solve that. It’s effectively like an on demand shuttle for employees. What it does is it takes that transportation barrier off the table and it’s also a way for those employers to retain those employees much more effectively. In this particular environment, as you can imagine, with unemployment where it is, it’s a massive pain point. One of the customers we talked to is a Tier 1 automotive OEM in Ohio. They were having such a hard time finding talent that they were flying people in from Texas, putting them up in a hotel, and then we were driving them to work. I’ll never forget, when we were talking to the guy he said, “It’s like putting duct tape on the Titanic.” It’s always interesting to hear stuff like that in a customer call and in due diligence. That’s the most recent deal we’ve done.


Steven Haug: That is interesting. We have heard, of course, ECA, we’re in the talent space, and just the lengths that companies are having to go through to keep folks on board. We’ve even heard situations where companies will pay everyone who works with a new employee, whether it’s a manager or the person standing next to them on the line, they get a bonus for every 30 days or something, that that new employee stays with the company. Lots of pain points out there, and the company you acquired sounds like it’s an interesting solution.

Iron Gate focuses mostly in tech and tech-enabled services, is that an asset heavy business? Do you own buses or shuttles with that company?


AJ Dye: With that one, one of the reasons we like it is that it’s asset light. We partner with third party operators. They’re the ones that actually provide the transportation, but then they use our routing platform to navigate.


Steven Haug: With Iron Gate, as you mentioned, you really can’t stomach any losses, right? You can’t have any zeros, which leads me to think that you’re fairly involved with the portfolio companies–helping them grow because you have a lot at stake with each of the portfolio companies. Is that the case, and if so, can you tell us a bit more about how you work with your port cos?


AJ Dye: You bet. We are pretty actively involved and we spend a lot of time supporting difficult strategic decisions. I think we’re a pretty good partner. The way we use it and the way we talk about it internally is that we’re in the huddle with our management teams. We spend a lot of time working on go-to-market efforts. We have a ton of really great enterprise sales. There are LP’s in our group that are world class enterprise sales folks. You name the job function, we know somebody who’s done it and is great at it. We’re pretty actively involved in the governance side and helping make sure that risk management is something that folks are thinking about. Then, we’re doing a lot of the other kind of standard stuff I think you would expect. We’re making customer introductions, we’re helping recruit talent, we’re doing all of those things that that we think can move the needle for our companies.


Steven Haug: Given how involved you are the portfolio companies, does it make it difficult to scale your portfolio since every new company you bring in, if you want to continue being hands-on, you’re stretched thinner at that point?


AJ Dye: Yes. It’s a good question. I don’t think we’ve experienced that quite yet because we’re not really a high volume shop. We’re only doing one or two new deals a year and so that’s enough velocity for us partners to manage. I think there is definitely a ceiling where we’re less effective. I think it’s probably around five or six board seats, is what we found. That’s about the threshold at where you can still show up and add value and be present. Much beyond that I think it gets a little harder in our model.


Steven Haug: Is there anything else our audience should know about Iron Gate Capital?


AJ Dye: No, I think the only thing is that if there are founders in the audience that are listening that their companies are in that three to ten million revenue range and they’re looking for a Series A or Series B lead or co-lead capital partner, and they’ve got a unique solution, we’d love to chat with them.


Steven Haug: Of course, AJ. I appreciate you mentioning that. It’s been a pleasure having you on the podcast here. Thanks so much for joining us.


AJ Dye: Thanks, Steven. Thanks for having me.



Connect with AJ on LinkedIn and visit irongatecapital.com for more information.



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