Woody Marshall, General Partner at TCV
Investing in a growth company requires a view that a business can be fundamentally profitable over an extended time horizon. But in some cases, public-market investors simply don’t have the patience to see a business blossom.
That’s according to Woody Marshall, General Partner at Menlo Park-Based TCV, an asset manager that has invested over $13 billion in high-growth public and private companies across the technology sector. Since its founding in 1995, TCV has also guided CEOs through more than 120 IPOs and strategic sales. Current portfolio companies include Netflix, Inc., Spotify Technology S.A., Peloton Interactive, Inc., Electronic Arts, Inc., and Zillow Group, Inc., among others.
“It starts with exceptional entrepreneurs,” Mr. Marshall said in a wide-ranging interview with IPO Edge. “We are backing companies that aren’t making short-term decisions about profitability. They’re thinking much more about maximizing the experience for customers.”
Asked about the recent choppy performance of many technology IPOs such as Peloton, which broke well below its offer price but has since recovered, Mr. Marshall said that some investors in public companies are often unwilling to tolerate unprofitable ventures for very long. “Private investors still have patience,” he said. “What you need to believe is that there’s a fundamentally profitable model and you can take a long-term perspective. In those cases, we may be happy to see companies investing in research and development or sales and marketing.”
TCV prefers to bet on companies that have more than just good ideas; they also need to have proven to resonate with customers. “Importantly, we always look for companies that have already demonstrated consumer acceptance,” Mr. Marshall said. “And we want companies that we think are going to be leaders in big markets.”
“We are growth investors, backing companies after product/market fit has been established,” he said. “Our capital is then used to accelerate investments in growth across the board.”
One example of such an investment is online real-estate database Zillow, where TCV was one of the fist institutional investors. “Zillow had some initial success and was looking for a growth partner to gain broader traction and scale,” Mr. Marshall said. “TCV’s founding General Partner, Jay Hoag, joined the company’s board of directors in 2005, and we’ve been supporting Zillow through multiple phases of growth.”
Mr. Marshall emphasized that the technology sector has had a very strong performance in the years since TCV was founded. “We are growth investors in technology, which has been a good place to be,” he said. “That market, since we got into it 25 years ago, has grown 50-fold. It’s a true growth industry even in downturns; tech may slow sometimes but it keeps growing.”
As for the exit process, Mr. Marshall believes there is great potential in direct listings, even though companies such as Spotify and Slack have had a mixed performance since their shares began trading.
One major advantage of a direct listing is a company’s ability to issue formal forecasts. That differs from the regular-way IPO process, which is challenging because investors have to guess what real projections are, often forcing them to call analysts at underwriting banks and read between the lines. “You’re not going through the game of telephone that happens with an IPO,” Mr. Marshall said. “Having the company give specific guidance makes the market more efficient.”
Another shortcoming in the normal IPO process: so-called lockup agreements that prevent insiders from selling, generally for six months. “Lockup restrictions are another issue with IPOs because they cause the float to be very small and the trading becomes artificial,” Mr. Marshall said. “With a direct listing, the price discovery is more efficient because it’s open season: the shares are there to be bought and sold. Without volume restriction, the invisible hand will lead you to an equilibrium price and get you there faster. We think there’s huge value in that.”
Mr. Marshall also pointed out that Slack’s underperformance may be the result of broader investor sentiment rather than the direct-listing process. Indeed, its shares have traded roughly in line with other software-as-a-service (SaaS) companies since going public. “If you look at Slack, the decline since its direct listing has all been multiple compression, which has occurred across that sector,” he said.
Some parties, notably investment bankers, may not want to see a shift away from the traditional IPO process because it’s highly lucrative to them. “Investment banks are paid as advisors, so their fee is similar to an M&A fee,” Mr. Marshall said. “It’s not based on the offering size. They’re compensated but not as well-compensated as in an IPO.”
When it comes to selecting potential portfolio companies, TCV focuses first and foremost on leadership. “A CEO needs to be able to empower one’s team and be intellectually honest,” Mr. Marshall said. “We also love people who can move quickly. We were Facebook investors and Mark Zuckerberg is famous for saying ‘move fast and break things.’”
Mr. Marshall said he also admires leaders who know how to take risks without being reckless. “We mean take risks and if you make a mistake learn quickly and move on,” he said. “A good example would be Reed Hastings, the CEO of Netflix, where the company went into a market, figured out what he thought was needed, some things worked, some didn’t, then figured out what was truly needed faster than anyone.”
TCV also values CEOs who are able to predict structural shifts and play the long game. “Reed built up a big DVD business, saw that streaming was the future and aggressively pivoted the company,” Mr. Marshall said. “Doing so while being a public company is remarkable.”
As for board directors, TCV looks for members who have a strong sense of good corporate governance. “A great example would be Spotify when it was still private and put on Ted Sarandos, who oversees content at Netflix. They also got an audit committee chairman who came from Disney. So that’s a microcosm of folks who have the time and the right expertise,” Mr. Marshall said. “We also prefer members who aren’t on 20 different boards so they can actually participate.”
TCV offers companies more than just money. It also provides advice based on knowledge it has accumulated through extensive experience.
“We help companies make decisions around growth,” Mr. Marshall said. “A lot of it is about strategy and tactics in helping our companies scale. We help find executives and employees who can take companies to the next level.”
Mr. Marshall believes that TCV helps bring the very best out of senior management at its portfolio companies. “We recently asked one of our portfolio companies ‘what do we do well for you? and the response was ‘you help us see what ‘great’ looks like,’” he said.
One good example of how TCV helped a portfolio company was introducing Barry McCarthy, now known as the godfather of direct listings, to Spotify. “Barry was an advisor to TCV and a year after we invested in Spotify he joined the company as CFO,” Mr. Marshall said. “That’s a microcosm of what we’re trying to do. Being part of TCV is a value proposition.”
TCV itself has evolved over the years as it raised increasingly large funds. Most recent was this year with TCV X, which was a new record at $3.2 billion.
“As we’ve gotten bigger, we have scaled in a number of ways. We have now a marketing side, for instance,” Mr. Marshall said. “We also have a whole value creation team with ex-operators who work with portfolio companies. Then we have folks who can be fundamental experts.”
John Jannarone, Editor-in-Chief