Our firm is increasingly being recognized for our differentiated approach that enables identifying next-generation innovative businesses earlier in their lifecycles—and, at times, embracing these emerging leaders well ahead of traditional growth managers.
We developed our eight investment criteria (see graphic below) to provide a disciplined framework for our team to identify and analyze next-generation leaders that can add value over time. The investment criteria are used in evaluating potential investments during our team’s research process.
Our investment criteria are supported by three pillars, or drivers, of investible opportunities. We search for A) Attractive Industries (criteria #1-3), B) Leading Businesses (criteria #4-7), and C) Logical Valuations (criterion #8). In our experience, if you find an attractive industry that grows at above-average rates over multiple years and identify and own the leading company capturing much of this growth—plus you pay a price (valuation) that allows returns to correlate strongly with the growth—you increase the odds of adding value over time.
The eight investment criteria are also by design forward-looking and not backward-looking. Traditional growth managers typically start with “growth screens” which filter for companies that have sustained strong growth over the past five to ten years. We believe this is a recipe for embracing past leaders and is inherently both backward-looking and late. Our eight investment criteria have, at their core, a focus on root causes of future growth. We search for forward-looking drivers, including identifying important innovations earlier in their adoption curve and secular trends or evolutionary shifts that play out over time. Our goal is to find quality innovative businesses earlier in this multi-year growth path. As we like to say, you only get paid on future growth, not past growth. 
Attractive Industries (Criteria #1-3)
We search for growth industries that are earlier in their lifecycles, and we look specifically for those industries that are being driven by important innovations, ones that are clearly undergoing an evolutionary shift from an old-gen to a next-generation offering (Criterion #1).
A critical part of our analysis is identifying innovations that are going mainstream and simultaneously avoiding innovations that are too early in development or are being hyped—ones that don’t pass our technical and business model feasibility tests. Important innovations that encompass a superior product, service, and/or business model—what we refer to as next-generation offerings—can create multi-year growth opportunities.
We also have a strong preference for large market opportunities with room for growth (Criterion #2). That last phrase, “with room for growth,” is a key element in embracing industries earlier. We assess the potential out-year size of the market opportunity using a conservatively estimated total addressable market (TAM), and compare that to the current market size to figure out how much room for expansion may exist to the future. Ultimately, you need to have both a large market and low penetration within that market to drive future growth.
We also look for industries that are less competitive with an attractive industry structure (Criterion #3). Competitive dynamics can change over time, so we focus on industries evolving down a path of more limited competition, often driven by structural barriers to new entrants. We call this evolutionary path the “Opoly” path: one that supports a monopoly, duopoly, or oligopoly industry structure. When we assess the unit economics for a potential holding, we also review whether an industry will support a path to profitability, attractive margins, and efficient growth over time (strong top and bottom-line results). By contrast, highly competitive industries do not create these dynamics because a large number of competitors drives down margins, leading to commoditization. Let’s touch briefly on a few examples in our portfolios to bring this to life.
CyberArk is a relatively new holding in the portfolio, with a focus area that we believe is a good example of an attractive industry. CyberArk, in many ways, pioneered the privileged access management (PAM) industry, which provides cybersecurity products for protecting a company’s most important users, such as system administrators, database experts, key engineers, and others. CyberArk has used its dominant position in PAM to expand into important adjacencies, creating a larger suite or platform of offerings across the critical identity security management space. This industry is attractive given its large size, and CyberArk’s suite of offerings now addresses a TAM of $50 billion. CyberArk’s targeted PAM and identity security industry segments are also growing rapidly, driven by a rising strategic importance of locking down IT security for key employees to reduce breaches and ransomware risk. The rise of machine identities is further expanding the market size, and both human and machine identity management has substantial room for growth. Lastly, CyberArk has built the leading platform for enterprise and mid-sized companies given its strong reputation, advanced capabilities, and unique broad suite. The PAM and identity management cybersecurity spaces are oligopolies, with only a few competitors. Our research indicates that CyberArk is the standout leader (e.g., Gartner Magic Quadrant) in this attractive oligopoly.
Affirm Holdings is another new holding in an industry we believe is both attractive and early in its growth lifecycle. Affirm is a pioneer in the buy-now, pay-later (BNPL) payments and lending industry. In essence, this form of payment is a type of installment loan that allows consumers to purchase items (often online at checkout) and pay for them over time. The BNPL loan industry is in its infancy and growing rapidly—driving $60 billion of annual gross merchandise value (GMV) in spend versus $1 trillion in e-commerce spend and over $7 trillion in core US retail sales.1 Consumers, especially the younger demographic, are increasingly shunning credit cards (which have late fees and high compounding interest charges) and opting for the perceived transparency, safety, and low/no fee structure of BNPL loans. The BNPL industry is also a natural oligopoly with a few scaled leaders; in fact, Affirm has about a third of the market in the key US market. A testament to this industry structure is the recent news that Apple exited the market and shut down its own BNPL offering, while partnering with Affirm. In addition to Apple, Affirm has strong partnerships with Shopify and Amazon.
Leading Businesses (Criteria #4-7)
While finding attractive industries is important, it is equally critical to identify the industry leaders. We fundamentally believe that the future industry leader is likely to be the company with the strongest innovation pipeline and next-generation offerings (Criterion #4). While this criterion may, at times, favor larger companies with established leadership positions, it can also highlight the potential for emerging leaders to “out-innovate” less innovative companies and become future leaders. Thus, we focus on the strength of each competitor’s innovation pipeline and assess whether these can maintain leadership positions (e.g., Amazon in e-commerce) or displace less innovative industry leaders (e.g., Affirm BNPL versus traditional credit cards).
We also look for businesses with economic “moats” that protect their market positions, though we increasingly believe that relying on one competitive advantage is not enough. Rather, leading businesses build multiple layers of competitive advantage (Criterion #5), which is a key element of sustaining a leadership position and profitable growth over time. We look for competitive advantages such as patents, scale advantages, distribution advantages, strong brands, and the powerful technology advantages of network effects, switching costs, and lock-in. The presence of multiple advantages may allow the emerging leader to have pricing power and capture substantial economics as the industry scales up over time.
We also look for businesses with strong business models and financial positions (Criterion #6). In our assessment of leading innovators, we build financial models and assess various scenarios for how core drivers could scale up over time as well as whether the margin and return path is potentially attractive. This criterion is a key element of how we define “quality” for a business, as, ultimately, innovation must drive attractive unit economics and long-term free cash flow over time.
The last element we seek in a leading business is an exceptional talent base and a positive, unique culture (Criterion #7). In our experience, companies are either “talent magnets” or “talent repellents.” We search for emerging leaders that have an ability to attract the best engineers, marketers, executives, and other employees, which is truly the foundation for a successful leading business. And, in an intellectual property-driven economy, this is becoming more so with each passing year.
Krystal Biotech is a good example of an emerging leader in the biopharma space with a unique gene therapy biotechnology platform for treating serious and rare skin diseases. The company has harnessed the HSV-1 virus to deliver genes to skin cells, a technique that was validated with the FDA approval of Krystal’s Vyjuvek (which treats dystrophic epidermolysis bullosa, or DEB, a very serious and deadly skin blistering disease). Vyjuvek is the only treatment that addresses the underlying genetic cause of DEB, and thus has a de facto monopoly. Through insights from our research, including calls with dermatologists and other experts, we see a gene therapy platform that presents a broad innovation pipeline protected by multiple layers of competitive advantage. Krystal’s gene therapy platform is being studied for other rare skin diseases as well as for delivering genes within the lung (early clinical data has been positive for efficacy and safety, to date). Its treatment modality has multiple competitive advantages based on its unique platform, patents, strong clinical data, and FDA approval and reimbursement. Together, the profile of Vyjuvek (monopoly, effective treatment for deadly rare disease) confers a strong business model exhibiting pricing power, high gross margins, and solid profitability. Lastly, the company has a strong culture of innovation and is considered one of the few true leaders in the field of gene therapy.
We believe Roblox, a new holding, is a good example of an industry leader with attractive qualities. Roblox pioneered the social gaming space with its eponymous platform of over 300 million users across over 20 million games and experiences. Roblox has a deep innovation pipeline that has kept it at the forefront of social gaming, including expanding into new genres, from basic simulation-style games to first-person shooters, sports, horror, and adventure games. It pioneered the use of microtransactions within its games through its “currency,” called Robux, which users purchase with real currency to buy items within games. The Roblox gaming platform is powered by a strong network effect and has surpassed many of its competitors due to its strong and growing user community, demonstrating strong engagement and user-generated content. It also has a robust professional developer community which is increasingly using its advanced gaming engine and AI tools for game and experience development. In short, Roblox has multiple competitive advantages deriving from network effects, platform-based advantages, and strong branding and market awareness. Together, its growing user community is driving 20%+ revenue growth with attractive and growing margins, after having flipped to profitability in recent quarters.
Logical Valuations (Criterion #8)
We seek out investments with a logical valuation based on long-term drivers and economics of the business (Criterion #8). This last criterion focuses on a stock’s valuation, weighing the growth opportunity versus what is embedded in the current valuation. Great innovative businesses can sometimes be poor investments if their future growth is already discounted. As such, it is critical to assess the return potential of an investment alongside its growth potential.
In essence, we respect and employ key elements of both the growth and value philosophies. While we tend to start on the growth side of the equation, we don’t skip the value step. After all, the only way to benefit from a next-generation leader is to buy a stock that has the potential to be rewarded by its future growth prospects. We have always done both and, having gone through the last bear market, we have further enhanced our valuation discipline.
All four examples of emerging leaders described above—CyberArk, Affirm, Krystal Biotech, and Roblox—are profitable and growing businesses that meet the first seven criteria. We also believe they meet our eighth criterion, with logical valuations that support attractive potential return profiles.
During our process, we build financial models for each of our holdings, which form a foundation for applying multiple valuation tools used to assess the attractiveness of each stock’s valuation. We use a combination of multiples-based metrics and estimated long-term internal rates of return (IRR). We seek returns that are attractive relative to the risk profile of each business, with higher hurdle rates for earlier-stage companies. We will also modulate portfolio weights based on current multiples (relative to standard deviation statistics) and our current estimated IRR.
We sometimes find that next-generation emerging leaders “fly below the radar” of many active growth managers for various reasons like market cap or liquidity restrictions. In our opinion, Krystal Biotech is a good example of this dynamic, with the stock currently valued at a forward price/earnings multiple of approximately 24X despite being highly profitable (32% net margins) and growing its top line by well over 30% per year.
The Power of the Criteria: Combining Strategic and Quantitative Elements
Finding next-generation leading businesses is not an easy task, but it is one that we fundamentally believe can add value over the long term. While the markets have favored the Mag 7 and generally shied away from emerging companies further down the market-cap spectrum, we believe this dynamic is changing. Our investment criteria—focused on attractive industries, leading businesses, and logical valuations—assist our team in finding next-generation leaders. Coupled with a disciplined process and a small, collaborative, and tight-knit investment team, we believe we are well positioned to continue uncovering underappreciated innovations and quality innovative businesses.
1 Source: William Blair report Jan. 2025
