Finding jewels where the others don’t look

In the summer, Technology Crossover Ventures announced a $2.5 billion ninth fund with the intent to follow a now well-honed investment strategy of looking where many other firms don’t.

The 21-year-old firm positions itself as a growth-stage investor ready to back companies on the brink of scaling with revenue of $30 million to $50 million or more.

“We’re not typically investing in later rounds of venture-backed companies,” said Founding General Partner Jay Hoag. “Most of what we do is find bootstrapped companies that are off the beaten path in other parts of the country: St. Louis, Atlanta, etc.”

The typical capital deployment is between $50 million and $200 million.

With the new money in his pocket, Hoag says he’s looking favorably at this year’s IPO market and holding out hope for a stream of solid, bread-and-butter companies to take the public offering plunge.

He adds that one key to TCV’s present strategy, which led to 2016 exits of Dollar Shave Club and Sitecore, is hard to overlook: seek companies in places with less deal competition.

VCJ recently had the opportunity to speak with Hoag. An edited version of the conversation follows.

Q: A lot of GPs are looking more favorably at the 2017 IPO market. Will 2017 produce a better year for venture backed IPOs?

A: It absolutely will be a better year.

I am focused just on the technology slice. There are two ways for investors to exit private companies. Well, three ways. One is to shut them down. That’s not a good way.

Second, is M&A. M&A has been a good, robust market.

Then there is taking them public. The IPO numbers have been pathetic. This will be, in 2016, the second lowest year I think in recorded history for tech IPOs. It depends on who counts. In 2009, the post financial crisis year, there were eight to 10, depending on who is keeping track. It will be high teens [for 2016].

Those are really moderate numbers. So I expect, barring some cataclysmic external event, much more robust numbers in 2017.

Q: What makes you think so?

A: A benign stock market backdrop. Demand from buyers is there. I think there has been a shortage of supply in part because conventional wisdom has been not to go public.

The passage of time helps two things. One is companies continue to grow. You get bigger and bigger and therefore more able to go public. The second is that as time goes on, ultimately, investors need liquidity.

Q: Unicorns, such as Snap, appear to be looking at public offerings. Do you think a Snap deal or another similar deal will matter in setting the stage for 2017?

A: It matters for them. I’m not of the belief that a single company triggers an avalanche. Those really unique companies are really unique.

What the IPO market needs to have more significant numbers of is bread-and-butter companies: SaaS companies, other Internet companies.

The numbers can’t get much lower. I am optimistic. There are lots of live discussions going on.

Q: Technology fundamentals appear strong. But valuations have been under pressure. Did the tech bubble fully deflate in 2016?

A: The fundamentals of technology are awesome. It is the only industry that is growing on a secular basis.

As really smart technologists develop better, faster, cheaper devices, other smart people come up with great ideas to layer on top of them. So that always is a tailwind for the industry. The psychology side, there was a pretty robust, call it, bubble mostly in private technology investing in 2014 and 2015.

I think it’s been deflating. But it’s different than a burst, different in a number of ways. In the Internet bubble, everything boomed, private companies, public companies, big ugly slow technology companies, young fast rapidly growing public companies. It was kind of an insane time.

When it blew off, it was kind of like a big super nova exploding. This is different. I think 2016 has been an adjustment year for mostly the private markets. But not a kind of blood-in-the-streets. More of a deflating, hopefully heading back to normalcy. Although who knows what normalcy is.

Q: It doesn’t seem as if the adjustment has been evenly applied. Don’t we still see big money deals?

A: With the deflation of the bubble, capital is becoming scarcer. It is being allocated in a more discerning way. But great companies are able to raise quite a bit of money at very healthy valuations.

The deflation really comes more in not great companies that struggle to raise capital, who have been burning lots of capital. I expect you’ll see a lot of pain from that. Cause a lot of things, perhaps, got funded that may not have been worthy of funding.

Q: How are you seeing entrepreneurs react to the changes in the market? I imagine a lot of younger people haven’t lived through up and down cycles.

A: There are a lot of people in the technology ecosystem who have not gone through tough times. Either economic tough times or funding tough times, etc.

I’d just like to remind people, a down round isn’t some sort of disease. If you need to raise money, and it’s down 20 percent from what you raised money at two years ago, you should pretty quickly get over it and take the money. All it’s doing is re-shuffling the split of who owns what part of the company.

There is nothing magical about the valuation you raised at two years ago. When I say that to younger entrepreneurs, it doesn’t always resonate.

Q: The venture ecosystem has seen a massive inflow of non-traditional money. Do you worry about the volume of this capital?

A: Absolutely. It worries me because I think the people providing all that money are expecting really good returns. I suspect on average they won’t see it.

Q: A lot of your portfolio is out of the Bay Area. What are the most interesting markets you are looking at now?

A: We have done multiple investments in Chicago, in Seattle, in Texas, in New York, in Boston. Actually, quite active in L.A., as well.

What’s changed over the last 10 or 20 years is because technology has gotten better, faster, cheaper, it is more assessable by companies outside of Silicon Valley. It is very easy to start an Internet company where ever your want.

Secondarily, we tend to find competition can be less intense. That hopefully results in better returns for us.

Photo of Jay Hoag, founding general partner of Technology Crossover Ventures, courtesy of the firm.