Editor’s note: Steven Dunne is a Senior Partner at Frog Capital, a UK-based growth equity firm that helps purpose-led European software companies scale up. Prior to joining Frog, Steven served in executive finance roles at Syscap and Arvato Credit Solutions. He currently heads Frog’s portfolio function, using his previous experience to act as the operating partner for finance and to mentor portfolio CFOs.

Can you tell us about your background and your path to joining Frog Capital?

I started my career as a chartered accountant and investment banker before deciding that I wanted to get more actively involved in supporting companies. That decision led me to a role as portfolio director at a mid-market private equity firm called Livingbridge, where I got to learn about the various tools portfolio managers can use to influence the businesses they invest in. Eventually I went on to work as the CFO at two different companies (the first a portfolio company at Livingbridge) that were successfully sold. They were both fantastic learning experiences because they spanned periods of tremendous growth as well as considerable challenges, not least of which was navigating the global financial crisis.

After that, I’d intended to find a new CFO position when I met Mike Reid, the Founding Partner at Frog Capital. He sold me on his vision for Frog, which he saw as meeting a need in the market for growth-stage capital combined with substantive value-add expertise to maximize our portfolio companies’ chances of success. Given my background it was a natural fit, so I joined as Senior Partner and Head of Portfolio in 2015.

What can you tell us about Frog’s investment thesis and how it’s unique from other firms?

As I mentioned, we’re dedicated growth-stage investors, which is unusual here in Europe since so many VCs invest at the early stage or grow beyond growth stage. We’re also focused on investing in disruptive companies with a clear social purpose that are having a real positive impact on society. To date, that has included companies solving problems in health and safety, employee engagement, and rehabilitation, but we’re not exclusive to those areas. We’re happy to look at businesses in any vertical provided they’re benefitting end users and society as a whole. Ultimately, what it comes down to for us is investing in companies that we can be proud of.

We also often find ourselves looking at sectors that are less popular and require a bit more time to truly understand. The Health and Safety sector is a great example. Today it’s a hot area thanks to Covid, but back when we first invested before the pandemic, it was a pretty unloved vertical. In general, our approach of going after less sought after and less understood verticals has worked out in our favor because it allowed us to build relationships and win deals without having to outbid the competition.

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We’re also focused on investing in disruptive companies with a clear social purpose that are having a real positive impact on society.

Another important differentiator for us is the value-add services we provide across an array of operational areas like finance, sales, marketing, and tech to help increase our portfolio companies’ chances of success. Using our scale-up methodology, we support companies from the time of our very first meeting through to the day we exit the deal. As part of that work, we might partner with companies on things like sales effectiveness, applied analysis, sustainability, team composition, and funding structure, amongst others. Our goal in doing so is to help make sure that the business is on track, creating a lot of value, and having a positive impact. As the companies we invest in scale up over time, our hope is for them to reach the point where they’re doing even more good than when we first invested in them.

Can you tell us about a couple of Frog’s recent investments that illustrate this focus on purpose-driven investing?

Sure, one company that I’d call out is Clue Software, which is a good example of where we’ve identified a niche that isn’t well known but that we think will become incredibly important. The company provides investigation software that allows law enforcement agencies to identify fraud and corruption. It’s also increasingly being used by other organizations, including sports leagues and enterprises, to spot trends that might be indicative of harassment, discriminatory behavior, or even corruption. Clue is basically creating a market for a technically sophisticated and effective approach to identifying these types of issues on an ongoing basis.

A lot of Clue’s clients use its product to get help with a particular issue only to then realize that it’s something that they should be using all the time. Sports leagues are a good example of that, many of which now use Clue to identify and prevent problems like match fixing before they can become reputational issues. Meanwhile large corporations are also using Clue to identify behaviors that they find antisocial. Ultimately, we see a range of ways to use this kind of technology to help make a positive social impact that goes well beyond Clue’s law enforcement roots.

Interesting. What other companies can you tell us about?

A German digital rehabilitation business called Caspar Health comes to mind. As you may be aware, Germany has some of the best rehabilitation processes in the world. It’s invested in more than 1,000 rehabilitation clinics across the country, which in theory should provide a tremendous service to anyone there who’s recovering from a major surgery. The reality, however, is that these clinics are in hard-to-get-to places — generally outside of where people actually live. That means that for the vast majority of people they’re inconvenient to the point that they either don’t use them or don’t follow through and complete their full course of treatment. That’s particularly true for people who don’t have a car, can’t easily get time off work, or have some other disadvantage.

Caspar solves this issue by providing effective rehabilitation services online. Since people can access those services remotely, the completion rates of their rehabilitation courses are higher than at the brick-and-mortar clinics by a factor of ten. Not only does Caspar save the government a lot of money since it reduces the number of people who need additional surgeries, it also addresses the previous imbalance that existed by giving everyone the same access to high-quality rehabilitation services. 

Given Frog’s views on purpose-driven investing, is it safe to say you think that technology is the key to solving many of the big issues facing society today?

No, not necessarily. Technology can definitely help solve lots of problems, but it can also create them. Just think of all of the algorithms out there that have been created on biased or unrepresentative datasets. To give you just one example of why that matters, it’s the reason why seatbelts are primarily designed to accommodate white men rather than the population at large.

Any tool is only as good as the people who are using it and their understanding of the impact it’s having. For that reason, we look at technology from an agnostic point of view. Rather than assume that all technology is good, we always question whether it actually is and what impact it’s having. We also look at whether that impact is benefitting everyone and not just one particular group, and whether it will be sustainable over the long term.

ESG is becoming an increasingly important topic for investors everywhere. What are European investors’ priorities and how do they differ from their American counterparts?

A lot of the ESG thinking in Europe is around environmental issues and driven by the EU’s Sustainable Finance Disclosure Regulation. That means most investors focus their attention on the bits of ESG that are easiest to quantify, such as the environmental impact of CO2 emissions. While that’s great in theory, in practice it means that other issues like biodiversity don’t get the same attention. Plus, it creates a scenario where investors pursue companies that have smaller carbon footprints under the pretense that they’re doing something good, when in reality they’re just chasing the same deals as everyone else. The fact that software companies have a low environmental impact shouldn’t be seen as a positive. It should be a baseline expectation. 

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We’re also focused on investing in disruptive companies with a clear social purpose that are having a real positive impact on society.

We look at ESG as a roadmap. No matter where our companies start, we want to see them get better. If one of our company’s has a low carbon footprint already, the first question we’ll ask is what else are they doing to improve it? More importantly, what are they doing about their supply chain, their customers, and the other areas that they may not be directly responsible for but that they can certainly influence? 

In comparison to the United States, there’s much less focus on diversity and inclusion. Hopefully that will change as more US LPs enter the market. We’re also trying to lead that transformation post-investment by encouraging our portfolio companies to adopt better social practices and improve around issues like diversity and inclusion. Here it’s not about simply ticking a box. It’s about making sure the companies we invest in have an actual strategy in place to create more diversity throughout the organization, that will ultimately come through at the leadership level.

How do you see the current market environment shifting minds in terms of where investors are putting their capital and how entrepreneurs are running their businesses?  

We obviously went through a big spike in valuation multiples over the past couple of years. But what I think a lot of people don’t fully appreciate is that in Europe we’re now back at 2019 levels. So it’s really just a return to normality in the current environment. Admittedly, many early stage  investors are feeling a lot of pain right now if they bought hot companies at those high valuations. Meanwhile, other investors — those that have always focused on fundamentals and that have avoided the hot markets by choice — are in a much better position. So, it’s a bifurcated market right now. 

One of the biggest issues some companies are facing is the ego of their own founders. Some are reluctant to accept the realities of the current market and the fact that they may need to take a down round to get the funding they need to survive. That’s a painful lesson that some founders have been slow to learn if they’re still holding on to year-old valuations that are simply no longer realistic. It’s been a reality check for a lot of people and one that’s shifted the conversation so that there’s a much greater focus on fundamentals, how you get to profitability, and how you create value in a business long term.

Thanks, Steven, we appreciate it!