Arrowroot, with TA pedigree, deploys most of Fund III, looks to SaaS opportunity

Arrowroot Capital is starting to think about its next fund, with the majority of its third growth-equity pool now invested.

“As we deploy Fund III, our eyes are turning towards Fund IV, as we’re seeing the number of opportunities accelerating in vertical SaaS,” Founder and Managing Partner Matthew Safaii told VCJ affiliate Buyouts.

Fund III closed in November with more than $177 million. “It’s a pretty quick pace, but we had three deals warehoused for that fund before the first close,” he said.

The Santa Monica, California, firm recently led a $15 million Series C round in KeyedIn, the Minneapolis producer of cloud ERP and project-management software.

“It’s a next-gen product built by the same individuals that built Epicor [Software], which was a large exit in the same space,” Safaii said. In 2016 KKR acquired Epicor from Apax Partners in a deal valued at $3.3 billion, according to Bloomberg.

Arrowroot also led an investment in Denver customer-analytics company ClickFox, which raised a reported $38 million.

The capital for both investments will scale sales and marketing and develop products, as well as serving existing customers. Arrowroot is also “looking at add-ons globally,” he said.

As for the firm itself, “we’re growing and hiring and building out our investment side and our strategic-resources group, which is our value-add operational team,” Safaii said.

The strategic-resources group, which partners with the management teams of portfolio companies, is headed by Clem O’Donnell, “the founding CTO of WageWorks, one of the first SaaS platforms.” O’Donnell focuses on tech and operations.

Other executives in the resources group include Mara Lamoureux Edgar, like Safaii formerly of TA Associates. She directs human capital, including recruiting for portfolio companies. Chuck Haling leads sales and marketing, having previously been VP of sales at enterprise SaaS company VelocityEHS.

Safaii launched Arrowroot in January 2014 to target the small end of the B2B software market. Partner Kareem El Sawy joined later that year from OpenGate in Los Angeles. Since then, Arrowroot has completed 14 platform investments and a total of 23 transactions, including M&A and follow-ons. The firm invests between $5 million and $25 million in growth and acquisition capital per deal.

Arrowroot defines growth equity as investing in companies that don’t need money but have decided to raise it to accelerate growth. “All of our deals could not take the capital; they just wouldn’t grow as fast,” he says. “But they believe [that with] this capital, shareholder value will increase, for them and in total.”

Arrowroot is tracking 10,000 to 20,000 enterprise-software companies, Safaii said.

“Still the biggest competitors to all of them are Excel, email attachments and business know-how,” he said. “Every business process out there is converting into a more automated SaaS platform. Software eating the world is a megatrend that we’re still in the early innings of.”

This report has been updated with more information about Arrowroot’s team and investment pace.

Action Item: Check out Arrowroot’s Form ADV: https://bit.ly/2jOxsK7

Photo of the Santa Monica Pier courtesy Zarnell/iStock/Getty Images