Ep. 3 - Why Vertical SaaS Is Becoming the System of Action

Guest: Chris Fountain, Operating Partner at Frontier Growth & AQL Growth

In this episode, we explore why vertical SaaS companies are evolving from systems of record into AI-enabled systems of action.

Christopher Fountain, operating partner at Frontier Growth and AQL Growth, joins ProPEllant to unpack what makes vertical SaaS such an attractive category for growth equity investors. We discuss why deep domain expertise, proprietary workflows, customer data, and market focus can create compounding advantages for software companies serving specific industries.

Chris also shares how growth equity firms can support founders without overstepping, especially when investing as a minority partner. From market mapping and ideal customer profile development to leadership hiring and product management maturity, this conversation focuses on the infrastructure SaaS companies need to sustain predictable, scalable growth.

Key takeaways:

• Why vertical SaaS remains compelling for growth equity investors
• How systems of record are becoming systems of action
• Why AI may strengthen, not weaken, the best vertical SaaS moats
• How operating partners can support founders without running the company
• What leadership gaps often emerge as SaaS companies scale from $4M to $20M ARR

Transcript

[00:00:04] Ken Lempit: Welcome to ProPEllant, a podcast that helps private equity operating partners and SaaS leaders accelerate growth and drive enterprise value creation.

Our guest today is Christopher Fountain, operating partner at Frontier Growth. A growth equity firm focused on investing in vertical SaaS companies, typically in the four to $20 million ARR stage. Hey, before we jump into the episode, Chris, tell us a little bit about yourself, your background, and the work you're doing at Frontier.

And I understand there's also a next evolution of Frontier being rebranded as AQL Growth.

[00:00:43] Christopher Fountain: Happy to talk about it, Ken, and thank you for having the opportunity to speak with you this morning. Really appreciate that. So, by way of background, I've been at Frontier for eight years as an operating partner, a lead operating partner. And I'll describe what I do in that role. After I kind of walk through my background a bit more.

Prior to Frontier, I had the pleasure of running growth-stage software companies, all B2B growth-stage software companies serving a variety of industries. And I always say that I was fortunate to work with some great people along my career and learned a lot from those great people.

 My roots actually go, if you go way back, started in the go to market side of software. So right out of college, I went into the software industry. A much different industry at that time, much smaller. And have had a blessed career in software. And joining Frontier has been really exciting because at Frontier, I have the opportunity to work with some phenomenal founders of growth-stage software companies.

I always say that I'd be a better CEO today than I was in my last CEO gig because I've had the pleasure of watching some really great CEOs and founders do to build great companies. In terms of the evolution, so Frontier, let me talk about Frontier for a minute. Frontier, I've been here eight years. 

As you mentioned, we invest in growth-stage vertical B2B SaaS software companies. Those companies, the targets are systems of record. So they, they're core operating platforms for the businesses they serve. And we've, we've had a great track record. The next fund will be rebranded, as you mentioned, under AQL Growth.

And the entire team at AQL Growth is coming from Frontier. And we will, we will continue to work with our Frontier companies 'cause we've got lots of investments that are still ongoing. But new investments will be made by AQL Growth. And so it's an exciting evolution of the firm, and fortunately, we'll be working with the same great people under the new brand.

And the strategy basically over the, Frontier's been around over 26 years. Over those 26 years, that strategy has evolved and been fine-tuned, and we are taking that highly refined strategy into AQL Growth. And we're very bullish about what we've got to offer founders and CEOs.

[00:02:45] Ken Lempit: Yeah, I think the positioning in vertical SaaS is really important, right? The as you said two things that I think are really important, vertical SaaS and also system of record. So these are important systems that are going to stick around for a while and have some protection. By being vertically oriented, there's a lot of workflow and business logic in these systems, right?

[00:03:06] Christopher Fountain: That's right. We talk about systems of record these days need to become systems of action. And so when we're evaluating investments, and even the current investments, these companies are all leaning in heavily into Gentech AI. AI is basically the way work will be done, a lot of mundane administrative work, will be done in the future. 

So the high-value work, where you need a human, can be where humans focus their efforts. The view we have is that a core system of record has every right to be and needs to be, urgently needs to become the system of action, and we help companies actually make that migration.

Most companies are on that journey. We can help accelerate that journey and help de-risk that journey because that's where the market's headed. And frankly, it's an exciting time to be in software. It's moving faster than ever.

[00:03:50] Ken Lempit: Yeah, I think it's a great positioning for you guys as well. In a Substack I wrote recently about how to, how moats are generated for software companies, it was proprietary data, proprietary workflows, were two of the six pillars in that Substack. I think it's really important to have a reason to survive and thrive on the back of the move to Agentic operating.

[00:04:14] Christopher Fountain: People think that with AI you can rebuild all this software with credible speed and replace these systems that have been established now for years in markets. And in the vertical world, the deep domain expertise, like you said, the proprietary data sets, the domain knowledge, the compliance complexities the fringe elements of the workflow,

all those things create compounding points of differentiation and moats, compounding moats. You've gotta lean in hard. You've gotta be that system of action to be the long-term winner.

[00:04:42] Ken Lempit: And I think customers for these solutions are looking to be led, and at the stage you invest in, those companies really need to position themselves more broadly, as, you know, a system of the future, you know, a disruptive solution. 

Credible, but disruptive solution.

Digging into your background a little bit, you described it a bit that you weren't really on a traditional path necessarily to becoming an operating partner.

Can you dig in for us a little bit on how your experience as a PE-backed CEO shapes how you support founders today and what do operators maybe misunderstand about that kind of transition?

[00:05:19] Christopher Fountain: Great question, Ken. And it's serendipitous that I'm an operating partner today. Just over eight years ago, I got a call from a retained search firm for a CEO job at a company where Frontier had just invested. And I had met Frontier initially in 2014, late 2014, and I really liked the style, I liked the people. When they called me for the CEO job in 2018, I said, well, I'm not, I'm not really interested in that particular job, but I had talked to Frontier years ago and like the people and I, at that time, I understood Frontier would be building an operating partner program, any chance that's something that the firm might be interested in instead of me being a CEO?

And I flew to Charlotte, where we're headquartered, and met with the partners, and they did have an opening, and, and voila, I, you know, became an operating partner at Frontier, and I've been there eight years. So it's, it is kind of an interesting story how I got there. It's not a traditional path, and I'm not sure what the traditional path is, frankly, but I'm in it now, and I love it.

I think what I bring to the table is, you know, prior to that, the last eight years I was an operator, and I was an operator in growth-stage businesses that were backed by private equity and venture capital. In my last CEO job, I had the pleasure to work with some great operating partners, and I learned how an operating partner works. 

And the, the best ones I think appreciate the fact, I call myself a supporting cast member. I'm there to help our CEOs and founders, and I, I refer to myself serving at their pleasure. If I can't help them, then what am I there for? I'm not there to tell them how to do their job. I'm not there to run the company. I'm there literally to help them be as successful as possible, because if our founders and CEOs are successful, we're gonna be successful with our investment.

And we, we talk about at Frontier and AQL Growth, we're very people first. And we, we pride ourselves on the level of empathy we bring to the table. We're not smarter than anybody else. We have lots of experiences. We bring additional gray matter to the table, arms and legs, and we just wanna be part of the conversation, but we're not making decisions for these CEOs.

They run the companies. I'm hypersensitive to that, having been a CEO of a private equity-backed company where I had an operating partner, and again, I had the pleasure to work with some great operating partners. The last thing I wanna do is create any confusion about my role, and I'm highly respectful of these founders and CEOs because what they do is amazing.

[00:07:37] Ken Lempit: Yeah, it's the advisor, consultant role is a really interesting place to be. I try to be a little self-deprecating when I get in those positions and I say to most folks, the beauty of having 30, 40 years experience in the business is I've made plenty of mistakes so I can maybe help you avoid a few.

And I think that's a little disarming and gives you permission to be uh, more of a close advisor. Just admitting your own failures and learning. 

[00:08:05] Christopher Fountain: There's certainly plenty of failures and mistakes in my past that I've made that's totally genuine. And so, humility's a big part of how we operate as well. And that's certainly, I've learned a lot from the failures along the way. And I think you'll learn more actually, from challenging times than you do from the good times.

I, I've never run a company that's been up and to the right every single quarter for years. I wish I had, but I can't make that claim. Fortunately, they've all done well, but it hasn't been a straight line.

[00:08:30] Ken Lempit: Absolutely. Yeah. Some of the, one of my favorite speeches of all time is Roger Federer's commencement speech to Dartmouth, where he talks about his success, and I think the statistic was something like he only won 52% of the games he ever played as a professional, and it's 52 or 54%. And I think the point to take away in this context is, decision making is like playing tennis or other sports where you know, you have to be, you have to realize you're gonna die a thousand deaths.

But you have to keep coming back, right? So you make a decision, hope it's the right one. If it's not, you learn from it, and you go and make another decision. So, 

[00:09:10] Christopher Fountain: Yeah, we're big on iterating quickly. So in these days, with all the automation and the technology that's available when you're running a software business, the feedback loops are very, very short. And so the key is to be committed to looking at the data. Feed success, Starve failure. And don't be afraid to admit, admit failure.

It's totally fine. It's part of building companies.

[00:09:29] Ken Lempit: Absolutely. One of the things we discussed at the outset here is that you're really focused on vertical SaaS, and I'd like you to elaborate, please, on what makes vertical software companies such an attractive investment category, and how does that change the way you evaluate and scale companies together with your founders?

[00:09:48] Christopher Fountain: Yep. Absolutely. So, we are very intentional about this vertical orientation. There are great horizontal software companies out there. Those tend to be less capital efficient just because they've got to try to address a very large, diverse customer set. The beauty of vertically focused SaaS software companies is it's very easy to identify who your best customers are, your ideal customer profile, if you will. And that customer profile,

we don't need markets that are billions of dollars in size. We're very comfortable with markets that are a 100, 200, 300, $400 million in size. We believe if you establish, create a lot of value for a customer set inside a vertical, you will have the right to capture more and more wallet share and there will be natural adjacencies.

And we've got many examples in our portfolio where we've seen that come true. So there's a capital efficiency dimension to it. With the vertical orientation, what you get is you get a high degree of domain expertise. You can really create well differentiated value for that for your customers.

And you can do that again in a capital-efficient manner. It's easy to figure out who your targets are, what's important to them. So it, it can inform your go-to-market strategy, your product strategy, your resource allocation strategy, and ultimately allows you to go deeper and deeper.

And in every vertical, there are nuances that the average person can't understand until they've been in that vertical for an extended period of time. And our founders are deep domain experts.

[00:11:07] Ken Lempit: How does that figure into the scaling of these companies? Is there a playbook that you run, sort of a context that you set with founders?

[00:11:16] Christopher Fountain: Private equity firms have a lot of different styles. Our style is not to be too prescriptive, but we do have kind of plays we run. The, what we do during diligence, we formulate a strategy, a list of potential value creation initiatives, and we present that shortly after we close on a new deal to the founder and her or his executive team.

And basically, maybe four or five things that we'll say, these are some near-term value creation opportunities that we saw through diligence. What do you think? And we let them pick and choose. I don't think we can put number one and number three, number four to work now. Let's put the other ones in the parking lot.

We're totally fine with that. One of the things that typically is foundational, that every one of these founders typically grabs onto, is this idea of really understanding their market. And that starts with what we call a market map. Which is a very robust analysis of current customers, markets. It informs the high-fidelity ideal customer profile. 

And once you know that ideal customer profile, that will inform your business strategy, including your go-to-market strategy, your product strategy, your customer success strategy, et cetera. So that, again, we don't force it on companies, but it's a typical foundational thing we do, which is collect the data, work with the company.

We don't do it, we do it with the company. We do a tremendous amount of market research during diligence. So we take that data, we take company data, we create a rubric, a very detailed market map, and then use that data to say, okay, look, this particular customer. And by the way, the goal is identify that ideal customer and that's defined as the customer that's going to create the greatest lifetime value.

And in order for that customer to create great lifetime value and a reasonable cost of acquisition. So that means you've gotta have differentiated product and a disproportionate right to win. That customer, you can create real differentiated value for that customer in that they're gonna stick around.

They're gonna buy more product from you over time because you've got a unique value proposition that, that they appreciate. And that's where you get the lifetime value. So how much does it cost to acquire the customer? Is that reasonable? High win rates easy to identify, et cetera, lower competitive intensity.

And then are they gonna stick around over the long term? So all the retention metrics are things we analyze.

[00:13:24] Ken Lempit: So it sounds like you get pretty deeply involved here, and yet we also discussed before it's sort of a supporting cast role. And I guess a question I have is how do you balance having a hands-on role in value creation without overstepping on these founders, especially some of them, this might be their first relationship with institutional capital, right?

[00:13:47] Christopher Fountain: That's true. Most of our companies, they may have seed money they raised from friends and family, but they're largely bootstrap. They don't have other institutional money in most cases. It's a great question. So one thing I always explicitly make a point about is that, look, I don't run the company, you run the company.

I, I have the same conversation with them that I'm having with you about the supporting cast member role. And I say, if, I may serve up ideas and, I'd like you to listen and hear the idea out, but it may not be a good idea. You have a lot more context than I have about your business.

And it's your right to say, Hey, let's go a little bit further, let's go left instead of straight ahead or what have you. The key is there's a dialogue and the respect. The foundation to all this is trust, empathy, and an appreciation of what my role is relative to their role.

 Another example, we get involved at a lot in talent acquisition. A lot of these companies don't have a CFO when we invest, and at some point they need to go hire a CFO. We make it very clear no matter how much we love a candidate, we're never gonna say, go hire this CFO.

The CEO has ultimate decision-making authority over any executive hire. We are a resource to interview candidates, identify strengths and weaknesses. At the end of the day, we can't tell them not to hire or hire a candidate, no matter how much we like them or don't like them.

[00:14:57] Ken Lempit: I don't think we covered the fact that, I think as growth equity primarily, this is not often a majority stake. Is that right?

[00:15:05] Christopher Fountain: That's correct. We have some majority investments, but these days we're doing mainly large minority. But we want to meet the founder where he or she is. So if they're looking to sell 20% of their company, we're happy with a 20% stake. What we want to do is invest in great companies and back great founders. And we're not hung up on this, the position that the control, we don't need control.

We don't even seek that these days. All we're interested in doing is paying a fair price and getting a reasonable stake in the company so that we can realize, you know our objectives. 

[00:15:32] Ken Lempit: I just thought that was important to bring forward

[00:15:34] Christopher Fountain: Yeah, I'm glad you mentioned that. Yeah, it's very important.

[00:15:36] Ken Lempit: This kind of collaborative relationship might not be what founders traditionally think about when they sell their whole company into a private equity deal. So.

[00:15:45] Christopher Fountain: Definitely a different. Even though when we did majority deals, we still operated the same way. At the end of the day, we're not running these companies and we've got to be respectful of the people that are. But the minority position obviously kind of makes that point even clearer.

[00:15:58] Ken Lempit: Yeah, and I want to kind of follow up on the talent side of the equation. The stage that you're investing in this 4 to $20 million ARR range there's gotta be some common gaps you see in leadership teams. And how do you prioritize what to fix first in a value creation plan?

[00:16:16] Christopher Fountain: So a lot of it's not fixing. It's just, these are growth, they're all growth companies when we invest. They're all great companies. They've got product-market fit. They're on their way. They've got hundreds of customers, certainly several dozen, but typically a hundred plus customers where they've clearly demonstrated value.

And so they're not, we're not fixing anything. What we're doing is helping them create a foundation for sustaining high growth. When you're small, growing 50, 80, a 100 percent year over year is a lot easier than when you get larger. And, so what we seek to do is help those teams create the infrastructure to support highly predictable, repeatable, scalable growth.

Because it gets just, it just gets harder as you sign on more customers, as you try to double the company. Doubling when you're 2 million is different than doubling when you're 5 million and doubling when you're 10 million. Much different proposition. 

So we're not fixing, we're kind of helping them put the infrastructure in place to support that scale as they sustain high growth. 'Cause growth gets hard, it's hard to sustain really high growth. The other thing I want to mention, Ken, is we are not hung up on profitability. We are hung up on kind of fiscally responsible investments.

 But most of our companies when we invest, are not profitable and we don't seek to make them profitable. We're all about growth. That's where the premium is. And again, growth with some guardrails. We don't want crazy, we don't wanna spend $5 to get a dollar. But we know when you're building the businesses at this stage, you got to be willing to make investments, and that may mean negative EBITDA for some period of time, which is totally fine by us.

[00:17:38] Ken Lempit: Understood. And just to circle back here, I think the point of the question was about maybe at the smaller end of the range you invest, like where are the leadership teams frequently thin? You mentioned might be the first time they hire a CFO as they get on a faster growth trajectory.

Are there other places that you see founders needing to build out teams? Like is there a pattern match here that you see frequently?

[00:18:04] Christopher Fountain: There is. A lot of founders are, are basically the head of product. They've figured out something that where they can bring a product to market to, to create points of differentiation and value for customers. And they are the, the product strategist as well as the CEO. But again, as you scale and want to do more with larger engineering teams, larger product teams, et cetera, another common hire that, that may or may not be in place when we invest, is a formal leader over product management.

And product management is super critical these days with the fast-moving pace of software. So that is another area, oftentimes, where we bring somebody in that knows how to help keep the trains on schedule. 'Cause complexity grows as you expand the team, the product team, and the engineering team.

So that's another area. Sometimes it may just be helping to build even the middle management layer in the company. And one of the things we're big on is leadership training. We offer our portfolio companies leadership training, not only for the C-suite, but also for the middle management teams.

And we know that in order to again, scale these businesses, you got to have great leaders up and down the teams.

[00:19:03] Ken Lempit: Yeah. It's really interesting the point about, peeling off some of the responsibilities from the founder. I remember I, I watched live a panel discussion. There were five founders talking about growing their software businesses and two of them were the head of sales, head of marketing, head of product, and the others had really only one role.

And it was interesting 'cause it seemed to me as an audience member, the founders who had shed a lot of the initial responsibility for everything, were on much firmer footing actually to grow faster just from their own description in the panel discussion.

[00:19:39] Christopher Fountain: Right, right. Well, look, the founders are they build these things from out of thin air, these companies and they are doing lots of different things functionally. So, the talent dimension to what we do is always tailored because you've got to look at where you've got current people in place and where you might need to augment talent.

And so, every functional area there may be opportunities. Different companies are at different stages. Like I mentioned, a lot of founders are the product strategist and sometimes there's a co-founding team with a CTO and a CEO, and the CTO's kind of product brain as well. And maybe the, this very common that founders out in front of prospects and in front of the market doing a lot of the sales and market and kind of branding.

And you need to kind of build people, bring people in to, to focus on that, to help the founder. 'Cause look, running the company, it's hard. And you see that to build that team out so that founder can continue to kind of look around corners.

[00:20:25] Ken Lempit: Totally. I want to go back to another thing you touched on very briefly. And kind of frame it in terms of the different flavors of capital. And from your perspective, what should founders understand about choosing an investment partner at this stage of growth beyond just the dollars? And I know we've sort of skipped on this topic a couple of times, right?

We've touched on it a few times, but you know, if you had the opportunity to give somebody a short bit of advice on how to pick the right kind of capital for a young company. How would you advise them to go about that?

[00:20:58] Christopher Fountain: Money's a commodity, right? Capital's a commodity. Ultimate commodity, I guess. And there are lots of sources of capital. But I think when you bring money in from an investor, you are committing to a partnership. I always say we've got OPM, we're custodians for OPM, other people's money and we've got fiduciary duties.

And they invest in Frontier because they believe in what we've done and what we can do and what we've continued to do, et cetera. And now AQL Growth, as I mentioned. So when a founder's looking at the various firms, they've got to really understand the operating style, and not just through what we at a AQL would say, but what would our founders say?

We always encourage prospective investees, I guess, to really check us out, do the diligence on us. We've done NPS surveys of our founder CEOs to make sure we're doing a good job taking care of them and being good partners, and we take a lot of pride in that.

So, I would encourage them to vet, to talk to other founders who have raised money from the growth equity firm. The other thing that's super critical is making sure there's alignment around the vision. If one investor is very focused on trying to improve EBITDA and you believe in this massive growth opportunity, and that's not where you should be focused, make sure your future equity partner is actually aligned on that point.

So there should be deep discussions about how the founder, CEO, and their co-founders view the opportunity and what the uses of capital will be, and that the investor sees it the same way. And that should be an in-depth conversation and maybe a conversation that takes place over dinner, over in meetings, over an extended period of time.

Because if you don't have alignment, you're gonna run into some challenges early on.

[00:22:26] Ken Lempit: Wrapping up our episode here, I think we covered some great topics. It was a nice discussion. If a founder listening thinks they might be a good fit for AQL Growth, what should they have in place for you, and then what's the best place for them to learn more or connect with AQL Growth?

[00:22:43] Christopher Fountain: With these companies at the stage where we invest, we don't expect them to have all this wonderful reporting and data that they can just hand over. So what's really important when they approach us is, just be highly transparent and willing to exchange information once we've kind of gotten through the initial courting process.

But we don't expect data to be in pristine condition. What we do expect is that, hey, there's a willingness to be open and to share information. So come to us with that kind of approach. We love that. In terms of how to reach us the website is aqlgrowth.com, just aqlgrowth.com, and you can find me on LinkedIn under Christopher Fountain.

We love chatting with founders. We would appreciate any opportunities to, to look at your companies. And again, Ken, thank you very much for this opportunity.

[00:23:26] Ken Lempit: Well, thank you Chris. It was a great conversation. I hope there's value for folks that are listening. My company, Austin Lawrence Group, is an advertising and demand generation agency focused on, you know, young software companies as well. And if anybody listening could use some help in driving revenue business strategy, would love to hear from you.

I'm on LinkedIn/in/kenlempit and my company austinlawrence.com. And if Chris hasn't convinced you that you should subscribe to the ProPEllant podcast. I don't know what will, but please join us in the future. Really appreciate it, Chris. Thanks so much.

[00:24:02] Christopher Fountain: Thank you, Ken.