PALO ALTO, Calif. – One Sunday in the fall of 1994, Rick Kimball sat down to breakfast at Max’s Cafe in Burlingame, Calif., with his good friend, Jay Hoag. Hours later, at the very same table, with after-dinner drinks in hand, the plan for Technology Crossover Ventures had been mapped out, and both men had summoned the courage to leave the safety and financial security of their current jobs.
On Dec. 31, 1994, Hoag left Chancellor Capital Management, and Kimball left his post as managing director at Montgomery Securities, after spending a decade covering telecommunications and data communications as both a venture capitalist and analyst. A few days later Technology Crossover Ventures was formed, and judging by the firm’s impressive track record, their gamble is definitely paying off.
Hits, and a Miss That Really Hurts
During his 16-year career as a venture capitalist and technology investor, Kimball has certainly experienced his fair share of memorable deals. Beginning in his pre-TCV days, some of the deals that stand out in his mind include FORE Systems, acquired by The General Electric Company PLC in 1999; ChipCom, acquired by 3Com in 1995; and StrataCom Inc., acquired in April 1996 by Cisco Systems Inc. for $4 billion, which at the time was a record-breaking deal in Silicon Valley and one of the biggest computer-industry-related acquisitions. “Until the Internet hit and companies like Netscape hit, those three deals were among the top performing IPOs of the decade,” he says. “Now I’m sure they are a little bit further down the list.”
TCV deals that are close to Kimball’s heart include Copper Mountains Network Inc. and Alteon WebSystems Inc., which have been “phenomenal successes,” as well as Xylan Corp., another “big success” in his opinion.
Kimball’s past successes help ease the pain of some of the deals he missed. “The one that hurts the most would be Cerent Corp. When we took a look at the company, it wasn’t in the right stage, it wasn’t yet shipping, so there was some risk,” he says. “Then they started shipping and got Cisco’s interest – it was end game.” Cerent was sold to Cisco Systems last year in a deal valued at $7 billion, making it the largest tech acquisition of 1999.
Not Your Father’s VC Firm
Technology Crossover Ventures isn’t your typical venture capital firm. For one thing, TCV sought to establish a new model for Internet investing by combining the best of venture capital and public market investing. That model seems to be working just fine, if you consider that the firm started with a $100 million fund in 1995, and recently closed its fourth fund, the $1.6 billion Technology Crossover Ventures IV. In fact, TCV’s latest fund has the distinction of being the largest technology fund ever raised by a private venture firm, according to Venture Economics and the National Venture Capital Association. So what’s the investment philosophy behind the firm’s achievements? “Our philosophy is to invest in great companies and the returns simply follow,” says Kimball.
Keeping pace at Internet speed is not posing any problems for TCV. Over the past five years, the firm has invested in more than 100 portfolio companies-15 of which held initial public offerings in 1999, including Alteon WebSystems Inc., Ariba Technologies Inc., Copper Mountain Networks Inc., iVillage Inc. and Viant Corp.
Kimball attributes the firm’s more than tenfold growth in fund size to the exploding quantity, and quality, of opportunities driven by the Internet. Kimball also notes, “the amount of capital required to ramp up the businesses has gone up exponentially. Infrastructure companies, for example, used to take about five years to get to $100 million in sales and bookings, now the hot ones can get there in one to two years. That’s the trade-off, to ramp a business that fast requires capital.”
For its latest fund, Kimball is hopeful the impact of the recent stock market corrections will create enormous opportunities for TCV. “There are many companies on the late-stage side that were ready to go public, or about ready to go public,” he says. “With the market window coming down they need capital or financing. Our job is to figure out which of those companies are the great ones and get our capital to work in them.”
“The recent market corrections have forced everyone in the venture business to be much more careful about financing risk than they had over the past three or four years,” Kimball notes. “In other words, we’ve all been guilty of being involved with companies where spending has been excessive, and where the focus on profitability was just not there when it should have been. We’ve grown a bit sloppy about it because there has always been another financing that we could do at a higher pricing, or an initial public offering, so it hasn’t mattered. I think we are going back to an environment where old-fashioned financing risk matters.”
While the firm’s first three funds combined investing in the public and private markets, TCV IV will solely invest in private companies, and the TCV Franchise Fund, launched in December 1999, will focus on public Internet companies. Kimball says the reasoning behind the public and private investing model is that once you get very deep into industry sectors there can be great companies with various risk/reward profiles all along the spectrum, and many of those can be public. “Returns just don’t disappear the day a company goes public. In fact, if you found a great company, IRRs on public market purchases are better than on the private side,” he says. “We’re sitting here with a tremendous knowledge base, we know our companies very well, we know our sectors very well and if we can earn venture capital-like returns in the public market, we think that’s a good business to be in.”
When asked about the future outlook in the VC market, Kimball says, “there has definitely been a sea change, but I think the market will come back, the IPO window will open, we are already seeing deals getting out. We are going to see lots of carnage and lots of unfunded companies.”
Moving at Internet speed doesn’t leave Kimball with too much free time, but when afforded the opportunity, he likes to spend time playing with his children, taking in his daughter’s soccer and basketball games, as well as the occasional round of golf.
Education: Cum Laude from Dartmouth College with an A.B. in History; M.B.A. with an emphasis in finance from the University of Chicago.
Career Path: Bank of New York, 1978-1981; A.G. Becker, 1983-1984; Montgomery Securities, 1984-1994; Technology Crossover Ventures, 1995-Present.
Family: Wife, Kathryn; Children, Jaclyn, 6, and Ryan, 19 months.
Favorite Book: The Killer Angels by Michael Shaara.
Currently Reading: Goodnight Moon (to son).
Favorite Movie: The Great Escape
Last Movie Seen: The Best of Elmo
Favorite Web site: Kimball Genealogy
Favorite Travel Spot: Maui
Most Admired Historical Figure: Winston Churchill
Favorite Quote: “If the British Empire shall last for one thousand years, men will say, this was their finest hour” – Winston Churchill.