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Business Management

No sharks here: a tech venture capitalist opens up

Like lawyers, estate agents and, yes, journalists, venture capitalists have an image problem. The ‘shark’ comparisons have stuck around for a long time even if today’s VCs have often been well-known entrepreneurs with long records in providing counsel to founders of new technology firms: think of Marc Andreessen at Andreessen Horowitz, Vinod Khosla at Khosla Ventures and many, many others.

Outside of Silicon Valley’s insiders VCs remain too little known - mysterious figures subject to prejudice. Lots of people have had their say but to better understand the life of a VC I spoke to one: John Rosenberg, general partner at TCV. TCV is an 80-person VC and “growth equity” (that is, it doesn’t just invest in startups) firm that has raised almost $10bn over its lifetime for a model that sees it take (usually minority) stakes in a range of tech and tech-related sectors. The company has offices in Palo Alto, New York and London and its portfolio includes Electronic Arts, Netflix, Spotify, GoDaddy and Facebook.

So what does a VC do for a living?

Rosenberg, an American who lives in London, told me TCV seeks the best technology companies that will grow “very significantly” over a seven-to-ten-year period. TCV’s 45 investment professionals focus on 60 to 70 themes across four broad sectors with dedicated teams for internet/digital/ e-commerce, technology-enabled business services, software and infrastructure. The aim, naturally enough, is to spot the next big winners and thousands of organisations are filtered for TCV to make eight to 15 investments per year.

“We identify opportunities through very intensive research, we attend shows, have meetings, identify really compelling trends within those categories and introduce ourselves to outstanding companies that can ‘over-index’ towards growth,” Rosenberg says.

TCV will then “tear apart” the business model of a prospect to mitigate long-term financing and/or technology risks. Rosenberg says the company is “very comfortable investing in unprofitable companies” but is of course looking for companies with the best chances of growing big profits and rewarding TCV’s investment with an eventual surplus.

What makes a good investment professional?

“It’s a combination of a really strong analytical skill set coupled with a commercial sensibility and ability to build relationships and convey knowledge to help those companies compete in a hypercompetitive market. You need to have a love of technology and love living in this market. Also, you have to see where the ball is going as opposed to where it’s been.”

Despite this, Rosenberg says there are “no lines at all” in determining what size of organisation TCV will stake a claim in.

“We’re so laser-focused on the technology markets that we preserve quite a bit of flexibility [on size],” he says. “That’s critically important: ultimately we want to partner with the best technology companies that can generate outsize returns.”

Predicting success

It might be a company operating in a growing market, one that has a superior product or some other form of differentiation, he says. If there were a formula then of course you’d bottle it but, even if metrics and KPIs to analyse portfolios have been honed, that’s not the case, sadly. Instead it’s a combination of diligence, insight and developing an extra sense.

“When we see it, we know it,” Rosenberg says. “Pattern recognition is an enormous part of our job but a lot of this as much art as it is science.”

Of course there are some obvious tell-tale signs of likely success and opportunities to invest in the projects of serial winning founders and leaders are welcomed.

“We love the opportunity to reinvest in successful entrepreneurs in our portfolios or repeat-CEOs. Where the opportunity presents itself, that’s great. We’ve seen them in the trenches.”

Boom time

With the possible (relative) exception of the first dotcom boom, there’s never been so much VC funding sloshing around. That must make it difficult to find winners, I suggest.

“There’s a tremendous amount of capital right now chasing investment opportunities and a lot of ‘forward leaning’ [bullishness] that makes it even more pronounced. We try to do it with a human element; it’s a partnership and when we invest we hope they view themselves as stewards of human capital. But yes, it’s very hard – everybody’s money is green.”

And what of those allegations that VCs are sharks in the water, seeking quick returns on investment at all costs, like ruthless money-lenders? Rosenberg dead-bats this, saying “every industry has the same set of dynamics and VC is no different”. He also notes the fact that VCs like TCV tend to be in there for the long term rather than seekers of ‘quick wins’.

Rosenberg says he entered the sector after university because it appeared exciting and in fact that time was close to the peak of inflated expectations in May 2000 as AOL and Time Warner were fatefully combining. Lessons learned?

“I had this sense that it was really exciting and interesting and I was a consumer of these new technologies so I was really drawn to it.”

No bubble trouble

However, he doesn’t see the same bubble effect replaying itself now, despite the sky-high valuations of unicorns and big investments.

“The bigger thing is re-grounding yourself on the question: is ‘Is this a fundamentally profitable business model?’ A lot of initial dotcoms failed because it was a lot more expensive to run a business then and they had fundamental problems that were not going to get solved.”

Even now of course, there are no guarantees of success, no matter how strong the due diligence undertaken.

“Look, markets change: they become more competitive, complex… Demand cycles change and a business you thought had a long runway doesn’t.”

But he maintains that this is a heck of a time to be in the tech world, pointing to relationships such as three London-headquartered companies, music streaming pioneer Spotify, cloud contact centre firm NewVoiceMedia [interview here] and WorldRemit, seeking to disrupt the ancient world of money transfers and part of an opportunity to take online transfers to 30% of the market rather than 5% today.

As those companies - and Rosenberg’s city of residence suggest - VCs no longer predominantly prowl Silicon Valley.

“It was a very logical move to open an office here,” Rosenberg says. “The tech markets are not just North American. The maturation of the internet has enabled great companies to sprout up anywhere and it’s just a natural evolution.”

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Martin Veitch

Martin Veitch is Contributing Editor for IDG Connect

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