• TCV on the Market, the Competition, and Taking Bankers’ Advice with a Grain of Salt

    Screen Shot 2016-08-20 at 4.52.59 PMTechnology Crossover Ventures has become a major investing powerhouse over its 22-year-old history by funding relatively undiscovered but mature companies; buying sizable stakes in later-stage, venture backed companies; and acquiring positions in publicly traded tech companies that TCV sees as undervalued.

    The firm, which is headquartered in Palo Alto, has done so well that it just wrapped up its ninth fund with a cool $2.5 billion. It also now features offices in New York (opened in 2005) and in London (opened in 2011).

    Late last week, over coffee at a San Francisco bistro, I sat down with TCV’s founding general partner, Jay Hoag, and general partner Woody Marshall, to talk about some of the firm’s latest hits, which include recently acquired Dollar Shave Club and LinkedIn, some of whose shares TCV acquired in February when they plummeted more than 40 percent.

    We also talked about why mutual fund companies (with which TCV sometimes competes on deals) don’t make great private company shareholders, and what can be the bad advice of investment bankers, who are largely telling companies to wait until 2017 to go public. Our chat, edited for length, follows.

    TC: You’ve invested roughly $700 million in Europe since opening an office in London, including deals in Spotify and World Remit. That’s a lot of capital.

    JH: In London and Berlin and the Scandinavian countries, there was lots of activity we were seeing, and we thought it better to see it from quasi-local office.

    WM: In Europe, [the investors on the ground are] very much early stage or buyouts or else guys who may call themselves growth equity investors but are really doing growth-buyout deals with a lot of debt. In terms of minority investments that startups can spend on product and sales and tech and marketing, we don’t have a lot of [competition].

    TC: What about other U.S firms? Doesn’t Insight Venture Partners do a lot of deals in Europe?

    WM: Insight does everything globally out of one office in New York. We’re pretty active, so we don’t necessarily like to be a tourist. We like to be part of the local community, so we felt like it was important to plant our flag in the ground and hire local people.

    TC: One of your more recent investments was in Believe Digital, a Paris-based next-generation music label. What does that deal tell us about your style?

    WM: It’s a growing, profitable business that’s already achieved significant scale with hundreds of employees. Our co-investors are two little French funds, and we were the largest and only investor in the financing we did, which is pretty typical. Also, the company has been around long enough that some of the funds will be thinking about selling some of their stock going forward. Most of our deals are a mix of primary and secondary stakes.

    TC: Five of your portfolio companies have been sold this year, including the data marketing firm Merkle, which just sold a majority stake to Dentsu. You also invested in LinkedIn, which turned out nicely for you. 

    JH: We didn’t see that [Microsoft acquisition] coming; it was a nice surprise. But if you’re going to deploy a dollar, why wouldn’t you look at a public company as well as private companies and assess, “Well, this appears fully valued, but this other one is discounted by 70 percent,” as long as you have the right insight. And the public markets tend to overreact on a quarterly basis.

    TC: Why aren’t more venture funds investing in discounted publicly traded companies, especially given that so many of them got socked earlier this year? My understanding is that most firms aren’t restricted from doing these deals here and there.

    JH: Generally, it’s  because the [universities and endowments and other] sources of capital for all of us want to think of us as being in discrete [buckets]. Either it’s, “I’m in investing in a private manager” or “I’m investing in a public manager.” So it’s not an easy sell.

    WM: It’s also hard. A lot of times you don’t have access to perfect information. It’s a different process. But your private activity informs your public activity and vice versa. Even when we aren’t looking to deploy money in the public market, we probably spend more time listening to quarterly conference calls than most private investors, because when you’re thinking about diligence, that’s some of the best information out there. You can spend a gazillion dollars for [repackaged intelligence] or just go online and look at whatever calls you want. All that great trend and customer data is there.


    TC: You mentioned that you buy a mix of primary and secondary stakes. Can you talk about some of the discounts you’re seeing?

    WM: Off of what? It depends on the last round and the structure of the last round. A lot of people have said, “Stay away from unicorns.” But there are a lot of great companies out there that are looking to raise money. Maybe [their last round was] lavish [so the price is now] maybe a little bit up or down, but in the meantime, the business has materially executed since that last round. So even though the [valuation is] similar, your multiple is half because the business has doubled. You have to look at these opportunities on a relative basis.

    TC: Mutual funds have gotten into your business in recent years. I still see them popping up here and there in late-stage deals.

    WM: Sometimes we don’t see anybody. Sometimes, if there’s a more formal process, we do. One deal we looked at earlier this year, we thought the discount was appropriate, and one of the T Rowes or Fidelitys did a flat round. But you’re generally seeing less aggressive behavior from the Baillie Giffords and the BlackRocks. You’re definitely seeing people pulling back and reevaluating the bets they’ve already made. 

    TC: Reevaluating and literally re-valuing — and publicly — which I think has surprised some of the companies these managers have backed.

    JH: If we hear a company is talking with T Rowe and Fidelity and BlackRock, I understand why. The company probably wants a high price and a quick process. But we [know we] should probably spend our time elsewhere. Full stop.

    [Mutual funds] are buying [private stakes] so they can have lower costs at the IPO price, etc. But the moment [their portfolio companies] underperform their competitors, that activity stops. These private investments have to have a return associated with them. If they’re buying high and selling low, that’s not good.

    TC: Could you see action being taken against any of these managers?

    JH: Mutual fund and hedge fund guys have been sued in the past over valuations. Even if it’s just 5 percent of your activity, with [people on Main Street] going in and out of your fund, your [net asset value] is a very important measure. These investors are buying in, assuming the valuations [they are paying at any single moment in time] are correct.

    WM: Some of these guys, they have deep pockets but they get those alligator arms sometimes. And management teams are starting to say, “I got it.”

    Much more here.

  • The Muse Raises $10 Million (and Turns Away $10 Million)

    Kathryn MinshewThe Muse, a 3.5-year-old New York-based career site that offers job opportunities, advice, skill-building courses, and video profiles meant to show what it’s like to work at different companies, has just raised $10 million in Series A funding from Aspect Ventures, DBL Partners and QED Investors.

    Co-founder and CEO Kathryn Minshew says the platform, which is largely used by millennials – 65 percent of them women and more than 50 percent nonwhite — could easily have raised $20 million.

    We talked yesterday about the fast-growing, 33-person company — and what happened out on the fundraising trail. Our chat has been edited for length.

    You founded the Muse with two other women, Alex Cavoulacos and Melissa McCreery. How did you come together?

    We met while working at McKinsey, during my first first week on the job in the fall of 2008. Lehman had just fallen. There was a lot of upheaval. Even though McKinsey was a great educational experience, I realized I didn’t want to be a consultant. The three of us kept talking about what it would be like if you could get advice on your career and see inside companies before applying and we finally thought: maybe we should just start [our own career site].

    You say it’s taken off like gangbusters.

    It started off as a very basic content career site in September 2011, but we’d attracted 70,000 people to it in the third month. It wasn’t impressive looking, but based on that user growth, Y Combinator accepted us into its winter program and by the following summer, we had 100,000 people on the site each month. Now, 3.5 million people are visiting each month.

    Most are millennials. Our average user is 29, compared with LinkedIn, whose average user is 47. Sixty-five percent of our users are female, compared with LinkedIn, whose users are 55 percent male.

    Why is that?

    We think it’s partly because LinkedIn is more of a transactional networking tool; it isn’t a place where users feel like someone is looking out for their career.

    How is The Muse making money?

    The vast majority comes from recruiting; we now 300 companies listing jobs and corporate profiles on the site. Generally, companies are measuring their ROI by how may hires they’re making, how aware people are of their brands, and how many people engage with their materials, which we put together in part by sending a videographer into every company’s offices. We want users to see authentic, quality materials about what these workplaces are like. [Companies] just pay to sign up, and we take care of everything.

    What about content?

    We have a small amount of revenue that comes through content marketing. Our users are generally very willing to take our recommendations around career-related products and services, but we want to make sure anything sponsored is noted and that we don’t work with partners that we don’t think are relevant or up to our standards. Trust is an important part of our brand.

    What are some ways that you’re using all the data you’re collecting?

    We can tell that people who are interested in certain companies will probably like other types of companies that wouldn’t be obvious from the [mandate] and size of those companies. We can pull out when someone is open to looking for a job because what they’re clicking on and reading starts to change [and we can personalize the experience for them].

    The data is useful for employers, too. They want to be able to compare their recruiting efforts to other companies, so if they say, “We didn’t see as many applications for this role as we wanted to,” we can tell them, “We can see 1,000 people clicked on that role and 40 people applied. That conversion is substantially lower than your close competitor; maybe there’s something in the job description that isn’t communicating what you want it to.”

    How many markets is The Muse operating in currently?

    We’re actively serving jobs in eight markets right now, including New York, San Francisco, L.A., Chicago, D.C., and Boston. But we’re launching soon in Atlanta, Austin, and Houston, and we get nice – and angry – requests from Portland, Raleigh-Durham and other places asking why we aren’t there yet, so we’re investing heavily in expanding the number of cities we serve.

    How was fundraising?

    Even though the market is very good right now, you never know how it’s going to receive your particular company. But it was fun – even a bit crazy. The market is a little insane. People were aggressively pushing us to do things that didn’t make sense. I had to go to a lot of people who I really like and who would probably be very valuable and useful and say, “We’re not going to raise $20 million.”

  • Big Data Hasn’t Hit CEO Searches But It’s Coming, Says Jon Holman

    people-pie-chart“People analytics,” applying predictive analytics to people’s careers, is here to stay. Perhaps the most recent indicator is LinkedIn’s brand-new acquisition of venture-backed Bright for $120 million — its biggest acquisition to date.

    Bright uses machine-learning algorithms to recommend particular roles to job seekers. But plenty of other companies have sprung up with formulas to help with the hiring process. Evolv, a San Francisco startup, uses data science to advise companies on hiring and managing hourly workers. Knack, in Palo Alto, Ca., uses computer games to test cognitive skills, working memory, and risk aversion. And San Francisco-based Gildhelps companies find software engineers.

    Jon Holman, a renowned recruiter who has been placing VCs and CEOs at Silicon Valley startups for more than 30 years, thinks big data will eventually impact CEO searches, as well. (“Hopefully, I’ll be retired by then,” jokes Holman.) We talked Friday; our chat has been edited for length.

    What’s one interesting example of how companies are using this science?

    Take Marriott, the big hotel chain. It has a game that it uses, sort of like “FarmVille,” to hire kitchen managers. They have hundreds, if not thousands, of [these employees], so they’re trying to predict whether someone will be good at the job through this game, which requires them to keep six things in their head at the same time and moves faster as it progresses.

    It seems like most startups using analytics or gamification are still targeting hourly workers. Is that true?

    For now, these startups are largely peddling their technologies to companies like Walmart that are looking to reduce turnover by 1 percent, which is a huge cost savings. But that’s changing. More [companies] will say, “Geez, that worked so well here, let’s start to apply it to students in management training programs.” Then, “Let’s try this with mid-level executives and product managers and accounting managers and sales executives.” And it will work its way up the food chain. It’s hard to imagine that it won’t happen.

    Will it reach the corner office?

    I think so. It hasn’t come to CEO searches yet because the numbers aren’t big enough. No one is hiring lots of CEOs, so there’s no easy way to gather the right kind of data.

    What would be a good starting point for a startup willing to try?

    Well, when it comes to hiring CEOs, it all comes down to reference checks. No one has interviewed more senior execs than I have, and it’s impossible to know based on an interview if someone is honest, if they work hard, if they get along with other people. Any senior exec knows how to answer questions about their collaborative style. In fact, 98 percent of the people I interview make perfectly credible presentations.

    Ultimately, you get the data you need by talking with the people they’ve worked with – not just the names that they give you but four or five others they didn’t. And you do that because most people will be 10 percent more positive about the person than they really feel, and they probably won’t tell you if the person is an alcoholic or has harassed someone in the workplace because they know that person won’t be hired.

    Is there a way to institutionalize the types of questions you ask?

    I’m not sure how to incorporate it into a software system, but the secret to reference checking is not to let people get away with generalizations. You’ll hear of someone, “Jon was really nice to work with.” You then have to ask that person: “How many bosses have you had?” If they’ve had 11, you say, “Obviously, you’ve liked some more than others. Was Jon the best boss you’ve ever worked for and if not, what differentiates him from the best boss?”

    You force [the references] to do forced ranking, to come up with something that’s less good about someone they thought highly of. You’re forcing them into conversations about negatives. That’s the secret to reference checks.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

StrictlyVC on Twitter