Q&A with Technology Crossover Ventures General Partner Woody Marshall
When HomeAway announced that it had raised $250 million in private financing led by Technology Crossover Ventures, the eyebrows raised. First, the company has been around for about ten years and is already profitable. Second, many in the tech industry had been assuming that venture funding would be tight. Third -- $250 million? So we chatted with General Partner Woody Marshall about this investment and his view on where VCs are going in the financial crisis.
BNET: The first obvious question: Why invest that much? Woody Marshall: I think there's a couple of things. The company didn't need a dollar. It's a very large, very profitable, very fast-growing business, and I think they are using the capital pretty strategically. They're cleaning up their balance sheet. The company had done some strategic acquisitions. They want to look at interesting, opportunistic ways to accelerate the business. Across many industries, some of the market leading companies, the big, profitable strong branded companies, will benefit probably in a greater percentage share than others. In some markets, consolidations will be a by-product of the environment.
It's not that they have ten acquisitions that they are going to do. They're waiting to see how the market develops. The only other thing the company mentioned was they paid down what little amount of debt they had. They have what is arguably one of the strongest balance sheets in the Internet business.
BENT: How was the deal structured? Was it all funded, or is the funding in parts? WM: Two-fifty was funded.
BNET: There are rumors that the company is buying back shares from initial investors and from employees. Any truth to that? WM: We're not commenting on that. There are a lot of things you can read on the web, and I wouldn't put a lot of confidence in many.
BNET: One of the big conversations in high tech centers on venture capital and what kind of money will be available. How is Technology Crossover Ventures approaching investments? WM: It is a growth equity technology investment, which means we're going to invest in companies with more than $20 million gross revenues. If you look at our portfolio, it's full of very strong consumer brands â€" Netflix, eHarmony. We've done well in the travel space with Orbitz and Expedia. Some of the themes we've been focusing on for many years have started to accelerate over the last few years. I joined after 13 years at Trident Capital. I worked with one of my partners on the HomeAway investment. [HomeAway] didn't go out to raise money. A number of firms have reached out because it is a wonderful company. They have an eBay-like marketplace with a very strong market position in a fragmented market with lots of interested renters and lots of interested listers. The management team really is a very understated, very experienced, very determined group. For us it was a very simple investment decision.
BNET: With far less risk than a start-up? WM: The early stage venture guys take significant market and execution risks. The later you get, you take less market risk, but you take more macro risk with the economy and you take execution risk. If the team doesn't execute properly, the business may not reach its potential. They have the been-there-done-that management team.
BNET: What do you see as the VC reaction to the current economic trials? WM: The general perspective is either run away and put your money under a mattress or shovel it out the back of the bus. The venture capital industry will obviously be affected like other parts of the economy, but when a venture capitalist makes an investment, the time arising is anywhere from time to ten years. Shocks to the system, which are important and should be considered, should not define the strategy of whether to make or not make an investment. You need to match the economic environment, the business model, and the financing strategy. Those three are interconnected. In a period where things are ebullient, you can spend a lot of money because there is a lot of money out there. But when all those things contract, your math problem changes. If you're in a public company, you're thinking about your next quarter. If you're in a venture backed company, you're thinking about your 2009, 2010, and 2011 plan. All the stories about the venture capital companies talking to their investments is no different from what corporate America is doing. It's just a little more newsworthy.
BNET: There have been some criticisms â€" with some validity, I think â€" that VC firms had not been warning companies before not to blow their cash. Why didn't VCs bring up the issue with their investments before now? WM: I would make the argument that a lot of companies did behave that way [conserving cash]. How many venture funded companies are there and how many are winding up on Mike Arrington's dead pool on TechCrunch? [Note: Arrington criticized the latest HomeAway investment.] Not many companies get money and throw it out the back of the bus. Some do. A lot of companies I've been involved with have not spent money in careless ways. One thing about Internet businesses now, if you have a consumer leveraged business, or any business that can acquire customers on the web, leveraging Google among others, it's a math problem. My business model works if I can acquire a company for X [amount]. Many businesses are spending money if they can be productive though web customer acquisitions. When the economic environment changes, the algorithms change. Look at the performance of credit card companies. Shocks to the economic system change the underlying business model. People just have to adapt to them. If you're looking for a five to eight year business opportunity, this is just one of the factor s you're going to consider in making your decision. Whether there's a lot of capital out there is another question.
BNET: Is there? WM: t's too early to tell. We raised the funds about a year ago. I know there are a lot of firms out there that have adequate capital to make investments. But you can read the press. A lot of institutional investors have invested in areas that are tight on liquidity.
BNET: So the question of whether liquid capital is available? WM: The institutional investors are under unprecedented conditions in terms of all the asset classes they've invested in. After the dot com bubble, institutional money went out of the venture market. I think that in any alternative asset class, not liquid stuff, there is less money to invest just because people have taken the big losses. There is less money to invest in an asset class, and that should be a great opportunity for the remaining participants in that asset class. It's the law of supply and demand. There will be more opportunities to invest in great companies because there's less capital out there. We're not at that point; I think we're 12 to 18 months out from there. It's just a lifecycle. If there's going to be a shakeout in capital, it's going to take 12 to 18 months. The macro trends while having some
BNET: Sounds like VCs will drive more advantageous deals. WM: Venture capitalists and entrepreneurs find that even ground that benefits both parties. Obviously in a riskier time, you have to adjust your return profile. The only other point that all of venture capital land has to deal with is how long will it take for the IPO market or strategic acquirers to come back. If I had a crystal ball that told me that, I wouldn't need a day job. I don't think it's going to be in 09. I think 09 is going to be another tough year. We're going to look for market leading companies with great management teams and durable competitive positions, not really ephemeral. The spirit of entrepreneurism, the drive to innovate â€" that is why in the long term there will be a venture capital business.
BNET: So, do you think things will look up again in 2010? WM: I don't know.