Bobby Ocampo says there is no secret to raising a fund quickly. “99% of it comes down to performance,” he said.
Ocampo is co-founder and managing partner of Blueprint Equity, a San Diego early growth equity firm that invests in high-growth vertical software and AI companies. Blueprint raised its third fund, a $333 million vehicle, in January, in just 12 days. That is a rare feat at a time when distributions are at an all-time low and investors can afford to wait.
In this edition of the ABF Journal podcast, Ocampo talks with Editor in Chief Rita Garwood about a market that is splitting between brand names and specialists, with the middle “getting crushed.” He explains why realized liquidity has overtaken paper returns, why he expects many funds to wind down quietly and what investors want before they commit to a 10-year fund. He also discusses what the pressure on sponsors means for asset-based lenders and shares his best advice for managers trying to raise capital now.
The conversation has been edited lightly for clarity.
Rita Garwood: Before we get started with our conversation, can you give our audience a quick introduction to Blueprint Equity and what you do in your role?
Bobby Ocampo: Sure. We’re what we call an early growth equity fund, and I can go into what that means. We’re investing out of our third fund, which we raised in January of this year. It’s a $333 million vehicle, and we make $5 million to $20 million initial investments into generally high-growth, vertical-specific software and AI businesses.
We fit in between venture and private equity, meaning we’re not looking to invest in moonshots and hope they become trillion-dollar outcomes. It would be great, but that doesn’t have to happen for us to do well. On the flip side, we’re also not looking just to make 2 times our money and a 10% to 15% net internal rate of return, like a private equity firm would. Those are typically bigger, more mature businesses that are profitable, and you optimize them and make them a little bit better. We’re looking for more upside.
Our businesses tend to be $1 million to $7 million in revenue, doubling or tripling year over year. They might be the emerging market leader in some vertical, but not the market leader yet. With our capital, we try to help unlock their potential to become the new guard. We have a team of 21, we’re based in San Diego, and we’re fortunate to be doing what we’re doing.
Garwood: I’ve heard that you focus on founder-led companies, enterprise software that’s business-to-business, and tech-enabled service companies. What drew you to that niche in particular, and how has your strategy evolved since you launched the business?
Ocampo: It’s a great question. This is where my co-founder came from, another fund called Mainsail Partners. Through them, and through other firms that were doing early on what we do now, we recognized that they were smaller funds that could invest at the stage where we believe companies need the most help. That’s the zone where we focus.
It’s our contention that if a business is doing well and getting up to $10 million, $20 million, $30 million in revenue, by that point it has become almost more of a private equity play. Everyone has seen it, everyone is looking at it, and there’s only so much you can do to make it better outside of maybe making acquisitions.
It’s in the infancy of the business, when it’s still raw and growing fast, that we believe we can create the most impact. We can also identify and partner with businesses that most firms don’t, or don’t want to, or can’t get into for a number of reasons. One, it’s a lot of work to find these companies when they’re really young. Two, a lot of the funds that started where we operate now did what every other general partner would do: You’re successful early on with some strategy, and a lot of money gets thrown at you to grow. We’ve resisted that urge. It’s not our dream or aspiration to become a trillion-dollar fund.
Mostly every other fund that started where we started has grown to be much bigger, and with that you’re not able to cut the kind of check you could cut early on. An entrepreneur is not going to want to assume the kind of dilution you need, in the form of ownership, to satisfy your check size. If you’re a fund of our size, $100 million, $200 million, $300 million, $400 million, whatever it is, and you now have a billion-dollar fund, even if you made a $5 million to $10 million investment and returned 10 times on $5 million, that’s a $50 million return to a billion-dollar fund. It does nothing for you. You’d have to do that 50 times to be a 2.5-times fund, which is also not good.
So we believe that helping companies at the stage where they need the most help, and partnering with a fund size like ours, is the magic sweet spot. We can still generate venture-like returns with growth private equity downside. It was a mix of things, just seeing what the market was doing and trying to be different.
On sectors, it was pretty easy. We saw what really didn’t work out and what we don’t believe works well. For example, we’re not consumer investors. Consumer is very hard to do. Consumers are fickle, you need a billion dollars just to get the eyeballs you need, and gross margins are very poor. The multiples are just not interesting unless you’re one of the very few companies that happen to make it. So we don’t do anything in consumer, and we don’t do anything in medical devices or anything that requires FDA approval. It’s just not what we know or what we do.
We’ve had success focusing on certain verticals where we can own that market and do it capital efficiently. That’s what we cater to best, and it has translated into the most success for us.
Garwood: Going back to the fund you recently closed, you said it was $333 million and that it closed in just 12 days, which is notable in this market. What do you think resonated with limited partners (LPs) on the fund?
Ocampo: I get this question a lot, and there are way smarter people than me out there. There’s no secret. There might be some edges that general partners (GPs) like me have, where one might be able to fundraise a little better than another, but 99% of it comes down to performance. I could maybe fly out more, visit more or do a better job of tracking our LPs, whatever it is. All of that might make a 1% difference. The big driver of the speed of a fundraise is tied to our returns, and that’s it. It’s just: Are we investing in great companies?
In the absence of distributions, which we have been able to generate in a really tough environment, are you showing operational lift in terms of growth? That’s what LPs are looking for. We had the performance, and we had distributions, but if you took all of that away, are our companies growing? That was the driver.
It’s different if you’re a Thrive [Capital] or an Andreessen [Horowitz], raising $5 billion, $10 billion, $15 billion funds. That takes a lot of time to move a ship that big. For us, as a niche manager, it’s 100% tied to performance. If your performance is strong, your strategy is consistent, and you’re not raising a fund you’ve outgrown or one that doesn’t represent your strategy, you’re going to be able to do it very quickly. That’s my contention, and hopefully we’ll be in that camp for a long time.
Garwood: You’ve said you’ve seen pullback in just about every asset class and every type of vehicle. What does that look like from where you sit, and how is it changing the way you raise capital today?
Ocampo: It’s a great question. I was talking to another GP earlier today, and they were saying we just have to be a lot more creative. We’ve been fortunate to be able to raise blind pool funds. But what’s becoming the flavor of the month, or the week or the day, is raising special purpose vehicles (SPVs), letting LPs pick from a menu: “Oh, you like that company? They’re going to raise growth capital. Would you like to participate in that?” It might be an SPV where your fees are discounted. It’s something to keep the momentum going, not necessarily to keep the lights on. LPs now have their pick of the litter of what to invest in.
Distributions are at an all-time low, so unless you have amazing performance, your fundraise is going to be a very long process. You have to do something creative and new. I think giving LPs the opportunity to partner with us in different ways, other than a blind pool fund, has become more popular. That’s a great way right now of staying in business, funding companies and showing operational improvement or growth.
If I had to name one thing I learned when we were raising our fund, it’s that you have to keep the momentum going. That means deploying dollars, showing lift, showing markups, showing distributions. The last thing you want is to be raising a blind pool fund for two years and have nothing to show for it in the interim.
I’d advise any GP: You have to do something. Otherwise, LPs will say, “I’m going to wait a year or two, and whoever survives is the one I’ll back.” They have no rush to be the early anchor in anything because they don’t have to be. They can just sit around and wait. It’s tough for new GPs, but I get it. As an LP, you have all the leverage right now.
Garwood: You’ve also described a divide between the haves and the have-nots among GPs. In your opinion, what separates them in practice? Is it track record and the brands they’re funding, or is it something else?
Ocampo: I think it’s twofold. It’s a barbell. One side is the five or 10 brand names. As a brand name, you’re in early on the top two or three companies, you have a large fund, and you have the cachet to raise it. Performance has been fine, but you’re investing more in an index than in the kind of returns that pop. When you’re a $10 billion or $20 billion fund, it’s really hard to return even 2 or 3 times. So there’s the fear of missing out: “I have to get into that fund because they’re a brand, they’ve done reasonably well and I know they’re not going to miss.”
The flip side of the barbell, which is what we try to be, is the true specialist raising a fund that fits their strategy. It’s the middle that I think is dying off and will die off quickly. That’s being a generalist with an average, mediocre track record, raising several hundred million, if not little billions of dollars, with average median performance and without a clear-cut reason to win. Even people like me could say we have reasons to win, but you have to go and prove it. I think that missing middle is going to be gone.
It comes down to performance. If you’re not one of those brands, you have to quickly show why you deserve to win, and how being smaller and nimble lets you beat others because of what you’re doing. I think everything in between is going to get crushed. It is getting crushed. People like me have to ask ourselves all the time what makes us special and different, why we win and how to continue to evolve in this market, because it has changed a lot.
Garwood: I want to talk about distributions to paid-in capital, or DPI. It has become a central measure for LPs recently. Why has the focus shifted from paper returns to realized liquidity, and what does it mean for managers who haven’t been able to exit?
Ocampo: It’s really hard. Not to toot my own horn, but the advantage of being where we are is that you have multiple exit points. That’s very different from venture, where if you have a good business that’s doing well, which is one of very few, you have to go long on it. Of the 30 companies you back, 25 to 28 are going to be zeros or a loss of capital, and you might have one or two that return the fund many times over, hopefully, if you’re doing a good job. You can’t sell midstream if that is your model. You have a grand slam and a whole bunch of strikeouts.
For us, what we’ve been able to do is have checkpoints. The business has done well, and the entrepreneur may want to pursue a minority or majority recap with the next stage of private equity or growth equity. That’s a really nice checkpoint. But to answer your question, it’s really hard, and this is why things like continuation vehicles (CVs) are in vogue. We’re all looking for ways to generate liquidity back to our investors, because every two, three, four years I’m out trying to raise a fund. You might get away with it for one cycle: “It’s young, it’s been two or three years, nothing to show for it.” But a lot of GPs are two, three cycles deep, and they’re looking at a 2019, 2020, 2021 vintage fund with little liquidity. It’s very hard. They have to do something for their investors if they want them to re-up.
It’s really tough right now. Later-stage firms have an even bigger problem because their buyers are especially frozen, and those buyers are the firms that take companies public. You’re seeing nothing go public. So what are they going to do? Are they going to be especially picky and choosy? Probably. And if they do a deal, they’re probably going to buy it on the cheap. Three, four, five years ago, you bought it not on the cheap. So even if a company has doubled since you invested, or more, the next buyer is buying it for half of what you paid for it. It’s a really tough environment.
I don’t have any way to fix that. What will help open it up is hopefully a couple of these companies going public and performing well. I’m not just talking about Anthropic and OpenAI. I’m talking about private equity-backed companies with good cash flow that are growing nicely. How are those going to do? I look at a company like [Entrata — name as transcribed; please confirm], which is going to be one of many that serve as the barometer of how all of lower middle market private equity is going to think about liquidity in the public market.
I have no secret recipe to make it better. I think it’s going to open up, because ultimately we are paid to put money to work, and my later-stage peers are paid to put money to work. They can’t just sit on it. The dam has to open at some point, and I think it will in the next six to 12 months.
Garwood: With DPI, how do you demonstrate performance to LPs when the exit market is slow? Are there ways to show progress beyond waiting for a sale or an initial public offering?
Ocampo: There are two things in the absence of distributions. One is the performance of the company. If I invested when it was $5 million in revenue and now it’s $25 million in revenue three years later, that’s a pretty good barometer. If that happens, I’ll do my public comparables work to justify, or not justify, how the company should be valued now. So even though it’s a paper markup, I can point to what the public market has done and to the performance of the business, and hopefully I’m justified in marking an investment up or down.
The other is that if I’m not getting liquidity but a later-stage firm wants to invest, then I would mark to where they invest. We have a few companies going through that process right now, where we really like the business and don’t intend to sell. We invested at X, and a new investor wants to invest at 3X. Great. If an LP can point to another credible institution coming in and pricing the investment at 3 times or 4 times what we invested at, that’s certainly a positive fact pattern they can take to their committee. I think those two things matter, but more the latter.
Garwood: You’ve said it’s easier to generate alpha as a smaller firm. Why is that, and how do you keep that advantage as you raise larger funds?
Ocampo: In our early funds, when we were much smaller, we only had to be right on one or two investments, and I looked really good. Now that we’re four times the size, it takes a little more than one or two. The number of platform investments we’ve made in each fund has tripled. In our first fund, we invested in, call it, seven or eight companies. In our second fund, we invested in 19. So you hope my hit rate stays the same going from eight to 19 companies. That’s really it. The hit rate stays the same, and the check size stays the same, so I’m not looking for bigger deals.
Also, with a bigger fund, we now have the ability to double or triple down on a winner, more so than we could in our first fund, when we didn’t have the capital to do that. Even if we had a company that tripled or quadrupled in a year or two, more often than not another firm would come in and say, “I’ll do the next round,” and you could mark it up. That’s great, but we now have the ability to do that ourselves instead of getting diluted early. We intend to go longer on our companies.
So those are the two things. Do you believe our hit rates can stay the same? And are we going to be right on the double down when we think we have a winner? Should we let it run for a while before looking for an exit?
Garwood: Beyond returns, what else are LPs asking for? Is it specialization, operating resources, something else before they commit?
Ocampo: That’s part of it, too. The big question we get a lot is why we win. I’d say we have 21 people for a $300 million-ish fund, which is highly atypical. A comparable $300 million fund probably has 30% to 40% of that team size. That’s a big difference.
Second, of our 21 people, five or six are in value creation. We believe we have the resources of a large private equity firm, and we can provide these value-add services to portfolio companies at the stage when they need the most help. As I said earlier, if you’re at $20 million, $30 million, $40 million in revenue and it’s going great, what a private equity firm can provide to that portfolio company is all pretty similar from fund to fund. What’s atypical is being able to provide that kind of support early on, when the company is really young, which we also believe in a lot.
Third, tied to the second, we don’t charge our portfolio companies for this access. That’s very different from most private equity firms, where it’s, “I’ll let you talk to my people, and they’ll come in and do the work for you, but I’m going to charge you a monitoring fee or a percent of revenue.” We don’t believe that’s in the spirit of partnership, so it comes straight out of our management fee.
Those are the three things LPs really like, and they’re why we win. One, we focus at a stage where it’s hard to access and source investment opportunities. Two, we support companies when we believe they need the most help. And three, who can beat us? We believe there are funds that maybe can on a one-off basis, but when you look at the numbers, maybe one out of 10 deals we might not see or hear about, and eight or nine out of 10 we should outcompete. We do, based on the math, the numbers, the people and the process we have.
LPs are looking for that edge more now than ever. What is our right to win? Performance is a large driver, but the next question is, these are 10-year commitments, so how are you going to be the winner for the next 10 years? People are especially focused on that right now. It’s more forward-looking than backward-looking.
Garwood: Talking about forward-looking, let’s talk about the market and what you’re seeing and what you expect to see. You’ve described the recent improvement in private equity as a temporary, one-time event, with the best funds happening to raise at the same time. What leads you to that view?
Ocampo: It’s more anecdotal than data driven. We talk to a lot of our peers, later stage and earlier stage, and we observe that the fundraising timelines and processes for the brand-name, cachet funds are different. They’re still long when you’re raising $10 billion or whatever it is, but it’s a much tougher environment. The longer it takes for distributions to get back into the market, the harder it’s going to be for pretty much every GP trying to raise money. There are special situations like ours, and we see it happen, but it’s very much the exception rather than the rule.
It’s anecdotal, but I bet if you stripped out the 10 funds that did it quickly, 990 of the other 1,000 are stuck in this mode of, “I’m going to have to prove it. I’m going to have to show distributions to my investors. I’m going to have to take a while,” because even raising a fund in a year or two is special. It’s very hard. Call it a thousand: 10, or 1%, might be able to do it quickly, and maybe 10% might be able to do it at all. It’s that other 90%. Call it half of those are going to drop off for all the reasons I mentioned, performance and all that. But that other 35%, that’s the one I’m really interested to see how it goes. [Check figures: the percentages as transcribed don’t add up; please confirm with Ocampo.]
They might have the track record, they might be a good fund, but what happens if it’s just not quite good enough? Is that other 35% going to fall to the 50% that are just going to die off? I don’t know, but I think we’re in for a lot of consolidation, or not even consolidation. I think these funds are just going to go away. They’re doing it quietly right now, but we’re trying like heck not to be one of those.
Garwood: If it is a temporary situation, what do you think would need to change for the market to see lasting improvement? A stronger IPO market? More mergers and acquisitions? Something else?
Ocampo: I think it’s both: a stronger IPO market and more mergers and acquisitions. Even in the absence of a stronger IPO market, it would have to be a lot more activity from private equity firm to private equity firm, lower middle market private equity buying from growth equity firms. That whole part is very quiet right now. It’s as quiet as I’ve seen it in the eight or nine years of Blueprint. I’d love for Anthropic and all of them to do great, but that doesn’t have much of an impact on what we do. It’s more an XYZ private equity firm buying a portfolio company of a growth equity firm, and that happening in much higher volume. It’s not really happening right now.
Garwood: You mentioned that a lot of those funds are quietly going away. A lot of funds right now are past their typical vintage. Are those the ones you have your eye on as quietly disappearing, and what happens to the funds if exits don’t pick up?
Ocampo: I think they’re just quietly wound down. It’s happening, and I’m not surprised. There are articles that talk about it, but it’s very much more the rule than the exception. Most investment funds have five years to invest and five years to harvest, with 10-year fund lives. A lot of funds are raising extensions. They’re in year six, seven or eight, and they want a little more rope to make investments. I’m seeing that play out a lot. Unless there are terrific outcomes in years eight, nine and 10 of these funds, which I don’t think is likely, they’re just going to be wound down, and that’s it.
Hopefully I’m not one of them, but investors are going to have to find something new or retire, because it’s tough. I think we’re going to see a whole lot of that, and maybe it’ll become public over the next one to three years, because it’s happening quietly right now.
Garwood: A lot of members of the ABF Journal audience are asset-based lenders or specialty finance professionals. How do conditions in the private equity market, such as the delayed exits and everything we’ve been talking about today, along with tighter fundraising, affect the lending environment for sponsor-backed companies?
Ocampo: If you’re a lender, you have to question the resilience of a lot of these businesses now more than ever. Before, annual recurring revenue with strong retention was pretty much bulletproof. Now, if I’m a lender, I have to think really hard about the resiliency of the company, more so than what the retention figures are telling me. That’s an important component, but why is this business resilient, and why does it have a strong moat in the age of software and AI?
If I’m a lender, I’m thinking really hard about that. Part of it is doing the qualitative work and asking whether you feel good about it, and part of it is what the retention story tells you. If you feel good about both, I still think it’s a pretty opportune time to be a lender, because the market has certainly changed. That said, you don’t want to be on the wrong side of it, and if you are, I think it’s going to hurt a lot. Just like LPs are especially picky right now with funds, lenders can be especially picky, too.
If you do find a vein with positive fruit, so to speak, I would be doubling down on that, because the market has gotten a lot tighter. If I’m a GP and I need to secure that financing, my options are limited. As a lender, you can approach me with terms that are very different from two, three years ago.
Garwood: Along those lines, do you see opportunities for private credit or asset-based lenders to play a larger role in your portfolio companies’ financing, especially while exits are delayed?
Ocampo: I think so. Where a lot of lenders could play a really good role for us, and do now, is when we’re in a middle ground where we like the business and would fund it more, but there’s contention around what the valuation should be. With that tension come lenders who can provide a kind of gap. I get it. Entrepreneurs are very optimistic about their business and what it should be valued at. We come in, and sure, we believe in some of it, but there’s likely a reality where we say, “Here’s where we think it is, and here’s where you think it is.”
If that gap is too large, then instead of taking on dilution, this is where venture debt and what you’re talking about come into play. They provide added working capital in the event the company needs to draw on it to get through, versus taking on what the entrepreneur views as expensive equity. We’ve done it many times, and it serves a need. We’re typically the first money in, so entrepreneurs are already reluctant to take on any dilution, and this is where lending comes into play as a backstop. I do believe it will fill a great need for our companies. Several of our companies definitely have it in place, and we have great partners, and hopefully we will for a long time.
Garwood: We’re almost out of time, but I have one final question for you. If you could give one piece of advice to managers who are trying to raise a fund in today’s environment, what would it be?
Ocampo: It might be two parts, and I know I’ve been rambling on. One is that you have to put points on the board. That doesn’t necessarily mean fundraising and raising a lot of money. It means showing traction in the form of dollars deployed. Do you have an anchor who’s willing to backstop you to do two deals? Are you raising two SPVs for your first two deals? Do something that keeps it going, because you don’t want to be the one trying to raise a blind pool fund for two years when you could have raised three SPVs. “I have these three deals, and two of them are marked up. I don’t have a blind pool fund, but I have great traction to show people that most people can’t.”
So the number one thing is to keep the lights on and keep the plane in the air and moving. When we were starting our fund, we were so [transcript unclear: “in Amerwood”; please confirm with Ocampo] trying to raise a blind pool fund. Now it’s, whatever it takes, just go and do it. I think most GPs aren’t able to do that, and if you’re able to, I think that’s going to translate into success. I’d be more focused on that now than on “I just want to raise a trillion-dollar fund because I believe I’m better and I can.”
The honest answer is, as I said earlier, most GPs are smart, and they might have a great track record. As an LP, they don’t care, because you, as a new fund, have not done it under your own banner, and there are thousands of people just like you. LPs have every advantage in just waiting. But if you’re showing momentum, very few of those thousand GPs are able to do that. That’s the number one differentiator.