Thursday, January 3, 2019
Reflections on 2018: Jeb Spencer, TVC Capital
During the holiday season, our tradition over the last few years has been to post reflections on the past year and some predictions from Southern California's technology industry. As we close out our contributions for the end of 2018, here's Jeb Spencer of TVC Capital.
What was the biggest lesson you learned this year?
Two big lessons in 2018.
Technology investing is the best job in the world, but it can be fraught with failure. Most of us have spent our lives not failing and feeling pretty lousy when we do fail. Once you make enough technology investments, as we have over the last decade, failure at multiple levels will increase and sometimes it feels as if these failures are often sudden, surprising and multiplicative. Whether it is not achieving company goals, hiring the wrong people or failing to execute on strategy or product roadmap, staying positive, intellectually honest and agile in the face of turmoil is critical.
As a lifelong baseball fan, I understand games of failure and the importance of moving on in a positive way after you do strike out. There are at least ten players in the baseball Hall of Fame who spent their careers failing to get a hit close to three out of four times they got up to bat. These players didn't let their failures get them down, they dusted themselves off and got ready for the next at bat. I'm always reminded of the Babe Ruth quote that I have in my office: “Never let the fear of striking out get in your way.” You just must “keep truckin' on.”
Secondly, as a lifelong Republican, the rancor that has been coming out of Washington beginning with the acceptance speech has been so troubling to me. I've always believed in Ronald Reagan's vision of our country as a globally inspiring “shining city on the hill,” and an optimistic view of what we can all achieve together, not apart. I started thinking about some of the people I know who I admire, respect and love the most and how they achieve their goals. What I realized in 2018 was that these people use kindness, empathy, logic and reason to achieve the outcomes they desire. Good leaders should not need a hammer to achieve their mission. There is a better way and it begins with kindness.
I plan to try to put both of these lessons together in 2019. I think my ten active portfolio company CEOs and my colleagues at TVC will appreciate the evolving approach. I'm trying to leave the hammer in the toolbox.
What was the biggest news for your company in 2018?
2018 was a great year for TVC Capital and we were able to get our fourth growth equity fund closed, taking our assets under management to close to $400 million. We welcomed back our key institutional investors, brought on new institutional investors and with this new fund we promoted several team members to larger roles including the promotion of Mykel Sprinkles to Partner. We were also able to add quite a few new employees who are already making their presence known at TVC and will have an impact for many years to come.
My long-time business partner, Steve Hamerslag and I are so grateful for our people at TVC, the CEOs, management teams and employees at our portfolio companies and for our investors for their dedication, commitment and steadfast support. We are so excited to have done 25 deals, many in the SoCal area, with many more to come.
Are there any technology innovations, gadgets, devices, software, that you found most interesting in 2018?
Things seem to be moving faster in technology than ever before. Industries are being shaken up by technology and SaaS companies at an incomparable rate. This period seems to be characterized by hyper “creative destruction” (Schumpeter) with robotics, AI and other advanced technologies having yet to be fully understood disruptive effects. It truly is the Fourth Industrial Revolution.
The disruption is being led by companies that understand the importance of putting the customer first, a trend I always thought began in the US a long time ago with the entry of Lexus into the US car market. Lexus upended the US car market with vehicles that were light years ahead of the junk Detroit was producing. Remember the exploding Ford Pinto? Lexus studied customers in the US and predicted that car buyers had just had it with clunky US cars. We wanted a better experience, not a car that exploded when hit from behind.
Technology companies such as Amazon, Uber, Netflix, Rocket Mortgage and many others have studied what bothers customers the most and built their businesses around trying to attract customers by eliminating annoyance and inconvenience. They have put the customer first and anticipated customer need and then deployed advanced technologies to change the overall experience. We were excited to invest in El Segundo based Smart Action in 2018, a company using AI and natural language processing to improve the initial call center experience for customers.
This focus on customer experience is a trend that accelerated rapidly in 2018 and one that shows no sign of slowing in 2019.
Finally, what's your prediction on what will be most important thing for the technology industry in the coming year?
It's been a long few years for value-oriented tech investors and those of us focused on adhering to many of Charlie Munger's rules on investing including “avoiding the folly of the crowd.” We went through a period in the late summer of 2018 when every SaaS company with whom we spoke that was growing at 50% or more a year wanted to be valued at a 10x multiple on revenue. Not all of these companies are changing the world mind you, in fact a few looked like Pinto's (before Ford moved the gas tank).
Private software valuations have been moving in lock step with public markets for years and the recent public market correction should help us return to a bit more normal environment where there is greater equilibrium and where we can actually make money again being a value-oriented growth equity investor. This overall correction will also cause investor money to flow less freely than it has over the last five years. This belt tightening will have an impact on companies struggling to find their niche with a continued increase in dollars going to the winners. This will be a rude wakening to those companies that do not understand the altered landscape. Do we really need 5,000 venture funded ad/marketing tech companies selling into the same customers? I doubt it.
And yes, I've been predicting this trend for many years, so maybe I'll be right this time. Just maybe.
Jeb Spencer is the Co-Founder and Managing Partner of TVC Capital, a growth equity firm focused on the investment in and acquisition of business critical software companies.