By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: Where does the name 'Technology Crossover Ventures' come from?
Jay Hoag: The majority of what we do at TCV is a result of my 12 years at Chancellor Capital. While at Chancellor both Rick Kimball and I thought about starting a company, and as such we quit our jobs at the end of 1994 and went out to raise a fund. Some folks from Robertson Stephens (which doesn't exist anymore) provided us with an office and helped us raise our first fund in June of 1995, which totaled approximately $100 million. The charter was primarily late stage private and following those private companies into the public market, which is where the crossover in our name comes from. It refers to crossing over the IPO line.
Angel Mehta: It's amazing to me that given the time you got started, you didn't feel compelled to go after early stage deals. After all, this was around the time that Netscape went out right? I would have thought that any venture investor getting started at that time would have wanted to jump on the bandwagon…
Jay Hoag: I'm a big believer in sticking with what you know. At Chancellor we had enormous returns from late-stage deals, for instance with companies like Sybase and Intuit. So that was really my mindset from the beginning.
Angel Mehta: Does the fact that technology is so much bigger as an industry now make it more or less difficult to find good investments?
Jay Hoag: Technology has pervaded every aspect of society at this point… the universe is much, much bigger, you're right. My sense is that it's always easier to invest when nobody else really cares. It means the company can stay a lot more focused without worrying about a group of me-too competitors arriving on the scene. Today, many areas get significantly over-funded. In 1991, for example, the entire venture industry raised $1.9 billion. Compared to today's world, that's a staggeringly low number.
Angel Mehta: There are a couple of companies within your portfolio that I was interested in… Altiris and InPhonic…. could you tell me a bit about them?
Jay Hoag: Sure. Altiris had an opportunity using web-based technologies to automate many IT tasks. This company appealed to us because they had a very strong sales and marketing culture… a sales execution culture, if you will. We felt that doing an early stage systems management company in the industry would be challenging and so those elements favoured a company like Altiris. Their products provide very quick payback, at a relatively low price, so we invested when they were heading towards $60 million a year and have now been involved with Altiris for about 2½ years.
In the case of InPhonic, the good news is that there aren't a lot of companies like InPhonic out there. They are by far the leader in enabling on-line buying and activations of cell phones and additional services. Our view was that there are tens of thousands of outlets… physical stores, where you can go and buy cell phones in the off-line world, and that on-line over time could be a much better way to select phones, select rate plans and capture an increasing portion of the wireless market… similar to Expedia capturing and taking the travel business, prompting thousands of travel agents to move on-line.
Angel Mehta: Do you think that the people-side of the equation is less an issue when you're backing a late stage deal?
Jay Hoag: No. As a late stage investor, you're absolutely backing a CEO… you're backing the management team. In fact, my sense is that in early stage investments, what you're really betting on is the technology, or a market… the CEO issue comes much later.
Angel Mehta: We're always looking for a formula that allows us to select the best CEO's… how do you go about doing it? What qualities are most important?
Jay Hoag: Common sense dictates that the best way to identify a great CEO is to look at their track record. Of course, we pay a lot of attention to that, however judging a CEO and other executives comes down to, in most cases, a gut-level call. Yes, we want people with tremendous passion and insight. But that doesn't guarantee anything.
Angel Mehta: I've seen plenty of candidates fake a passion for something just to get the offer…
Jay Hoag: Right. You see people with 20 years experience at a large technology company who has failed as CEOs and then you see an individual who doesn't really have much of a resume, succeed as a CEO. All you have to rely on is gut. Also, my view is, it's not about pedigree. CEO's are all smart and driven. So what? It's still kind of qualitative… a gut check on whether this person is a winner. If we ever have any ethical questions about a CEO or any executive, we won't touch them. Life is too short.
Angel Mehta: Do you ever get concerned about a CEO or executive that is 'too successful'? In other words, they've already had a few financial homeruns… participated in big liquidity events… is it ever a concern that they won't be as motivated because they don't need the money?
Jay Hoag: No. I don't think that a lot of people in my world wake up with money as their primary concern. With success comes financial reward, but I think most good entrepreneurs are driven because they want to build a big business - period. To me, it's what somebody's made of - not what their bank account looks like.
Angel Mehta: How much weight does formal business training carry with you? Or business education from a good school? Is it more appealing to have a CEO with an MBA from Harvard or Princeton or whatever? Would it make a difference all those things being equal?
Jay Hoag: I don't know if I had a Harvard MBA CEO in my last decade of investing. So the answer is no, plain and simple.
Angel Mehta: Let's talk about some macro-economic issues as they relate to software. Has the growth potential in this market evaporated? A lot of industry 'outsiders' - analysts, investment bankers, etc. - seem to think it is and point to the consolidation as a sign of that.
Jay Hoag: Well, when you say 'evaporated'… I mean, a lot of outsiders, as you call them, will say that kind of thing because you have earnings disappointments from public companies and those outsiders are measuring a specific quarter relative to Wall Street expectations. Wall Street is not necessarily informed about the specific issues of the business, or the software industry at large. So their expectations aren't necessarily relevant to the fundamental health of the business.
That said, I agree that there are challenges for the industry - particularly for application vendors. Buyers are much tougher and more informed than they were 5 years ago and it doesn't appear that there's a massive next-generation wave of products being released to the market, which often can be a growth driver. So overall, yes, I agree that we're going to have more modest growth over the next 5 years.
Angel Mehta: How do you think being a late-stage investor is different from being an early stage investor in terms of the actual competencies / experiences of the job?
Jay Hoag: I think that there's actually a mixed perception that somehow with late stage investing, we sit around and clip coupons all day whereas in early stage, everybody's shouldering the weight and making big decisions. Clearly the companies are more formed by the time we get involved, but there are many key management team decisions: are there important strategic partnerships to both introduce and work?… What are the other hiring issues confronting the business?… How you round out the Board? There are some late stage company CEOs that I speak with every day. We are very active with the companies we invest in… in fact, we're often the largest outside shareholder! We can't afford to NOT be involved!
Jay Hoag is a Founding General Partner of TCV, has been a venture capitalist and technology investor for over 22 years. Jay's technology sector focus includes: eCommerce, Software, and Services. Prior to TCV, Jay was a Managing Director at Chancellor Capital Management where he spent over 12 years as a technology focused venture capitalist and fund manager. From 1988 to 1994, he grew the public technology asset base from $20 million to over $250 million and generated industry-leading performance. For article feedback, you can contact Jay at: jhoag@tcv.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
