Jay Hoag - Keys to Successful Growth Investing - [Invest Like the Best, EP.429]

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1:23 To learn more, visit psum.vc. Mm. My guest today is Jay Hook. Jay is the co-founder of Technology Crossover Ventures, known as TCV, which pioneered the growth investing category and has backed legendary companies. Like Spotify.

1:39 Netflix. Expedia and many others over three decades. Jay explains how macro factors like regulation have become unexpectedly central to technology investing. He offers his contrarian take on today's market. Arguing that consumer internet represents significant opportunity while most investors chase SaaS and AI deals.

1:57 We discuss investing in new technology versus commercialization. TCV's evolution from cold calling to AI powered sourcing of 11 million companies. and their three person unanimous investment committee structure. Please enjoy my conversation with Jay Hook. So Jay, we last did this four years ago, which is crazy to imagine how quickly that four years has passed. That was a strange world and a strange market. We're in another interesting time today. I'm curious to start how today's market conditions Feel the most different to you.

2:28 Then the market of the rest of your investing career. What feels most distinctive about today? Yeah, I mentioned yeah, we did this, I think, in September of twenty twenty one, and as a long time Chicago Cubs fan, I'm quite superstitious. So I'm sure it didn't cause the tech reset in twenty twenty two, but let's hope that will not have a recurrence. Let's see. What's Different. There's always parallels and similarities to

2:52 prior periods of time. I guess what is different is Particularly as technology has gotten so big over Now the thirty years of T C V and the forty three years of my career. The focus on macro, which is not something I spent a lot of time focusing on really is different. So

3:10 Regulation of tech. How do terrorists impact Global trade. All those issues which Really were never part of the lexicon or focus for technology.

3:21 Pretty new. I think it's very difficult to figure out. A lot of people are talking Greater authority about That which I think they know very little, that includes myself.

3:32 That's certainly something that's quite different. What feels most opportune about this market, where do you think that there's the most opportunity to earn strong returns, making new investments? Starting today. The world has shifted so strongly in the last Several years

3:49 And again, I'm leaving Covet out for the moment because that's such a Unusual time. Where I think as you've Think about technology investors, huge focus on SaaS. Huge focus on all things AI.

4:02 And huge de emphasis of consumer based internet businesses. And so I think that's actually a pretty interesting opportunity where one can be contrarian and We continue to see interesting private opportunities that I think most of the world's not focused on. I was talking to a founder actually building something new in consumer today. There's a heavy AI angle to it, but nonetheless consumer. And he made an interesting observation, which was how hard it was for him.

4:26 to go find venture investors. Who are great. who primarily focus on consumer. It's almost like a dying breed of people, exactly to your point. Maybe you could describe why you think that is and what about consumer is interesting today because it does seem like a lot of the big consumer businesses started fifteen, twenty years ago and have just dominated ever since. And there seems to be less white space, but maybe you think differently.

4:49 I don't think necessarily it's less white space,'cause you could argue the the big, enormous internet franchises, consumer internet franchises that have emerged. Are playing on the opportunity set of Five billion plus smartphone users. Incredibly engaged audiences across Gaming or

5:07 music or entertainment or other Media. And Just incredible consumer engagement with those devices and therefore I should create enormous opportunities for new consumer based franchises.

5:19 It's always been hard to break through a virtual shelf space concept. So I'm not saying it's easy to build consumer businesses. I think the fundamental reason why So many people are not focused on it is because of money chases momentum. Or follows perceived momentum.

5:37 At the risk of And so possibly like Seven year olds playing soccer, the ball goes over there, everybody goes over there. And so I think as far as SAS and AI, it's super shiny. Super interesting. That's where everybody's focused. And

5:51 I just have a hard time believing there are not going to be any new Consumer. Internet businesses founded and built over the next ten or twenty years. I'd love to hear you talk about the difference between investing in new technology versus investing in commercialization, something you already mentioned a little bit. As a growth investor, of course, things are working at that point typically. So things have become commercialized. But it seems like the tech is really still being built.

6:13 now and it's changing really, really fast. What have you learned about that? Difference. Many super interesting technologies have taken

6:23 Far longer. Two. Reach commercial scale from a revenue and monetization standpoint? than predicted would be examples of recent Vintage and autonomous were

6:34 Yeah. Pure technologists. It was ready for prime time. Five, seven years ago. Now appears to just be that.

6:42 A R and V R generally great. Opportunity set. But still really looking for commercialization. To мі, that's the lesson. to keep in mind

6:53 that it's the applicability of technology, not just the availability of it. And like defensibility. What is a monetization model? How Big and defensible can it be.

7:05 How can you build an enduring franchise? Not just have the hot tool of the day. If you think across all thirty years of T C V is there a most common type of what I'll call fool's gold investment that you've encountered, a pattern that you see over and over again that You think of as an exciting investing

7:22 Crap. As a technology investor. Technologists And as long as it feeds into technology investors. There is a

7:31 Often overestimating the near term. on your way to underestimating the long term. And That's just something to be

7:40 And the other thing I think we talked about last time. I was going back through any of the most valuable tick companies in the world today. Are they exceptions to this statement? I don't think they are. Yeah.

7:52 Every area. And every great company goes through a desert of disillusionment. In investors' minds where It was great, and then all of a sudden there's people are casting dispersions on the sustainability of it. You think about

8:04 Apple. Apple was left for dead. In two thousand. Apple and Microsoft the two companies worth three trillion dollars today. Microsoft from investor lens.

8:14 Wandered in that desert for more than a decade. And that's just worth keeping in mind. It will not be up and to the right in a linear fashion. For the vast majority of these companies. I'd love to hear you opine on the public versus private market. dynamics today which are very, very different from

8:32 Most of your T C V's history. And it seems really important. You're a crossover investor. You're maybe the first major crossover investor, which has now become a popular style. But it seems like with the dynamics of private companies staying private for much longer, much more liquid private markets. People preferring the state of being private to being public.

8:51 there's a permanent shift that's happened. Do you think that that's true? Do you think that that's healthy? I'm not sure it's a Permanent shift. I'll get into the reason. For that in a minute.

9:01 Everything is bigger. Given that it is T C V's thirtieth year. Actually technically it's June twenty third. It's our thirty year anniversary. I went back and looked at some stats just to give you the scale difference. Higher

9:15 Venture industry in nineteen ninety four raised four billion dollars. Today That's a small fun for some which is pretty staggering. In terms of market cap. At the end of

9:27 nineteen ninety four, the Nasdaq was at seven hundred and fifty one. Today it's north of seventeen thousand, so that's about a twenty three X. Increasing the Nasdaq value. And I didn't have it from ninety four, but in nineteen ninety one

9:40 As you looked at the large public technology companies, there were thirty one companies north of a billion dollars. Another thirteen companies between five hundred million and a billion. That was large tech back then. And I mentioned today there are six companies north of a trillion. So in addition to Microsoft and Apple I mentioned.

9:58 Nvidia is it two point eight. Trillion. Amazon and Google at two trillion, pretty staggering. And then Facebook slash meta at one point five trillion. So that's Dramatically different. market values than thirty years ago.

10:10 Today's market Puzzles me for At least one reason. I understand It's

10:17 standard to say oh companies want to stay Private longer, et cetera. I think that's true in some cases, although that was pre Google going public, that was also the concern they were staying private too long. And I understand if companies have specific things they want to invest in.

10:33 Under the Cloak of private being private. Are they going public? But I'm old school and then I believe The vast majority of the best companies

10:42 Will benefit by being public. Over the long run. The discipline of being public. These days you can manage the guidance expectations, however you want, including not providing guidance.

10:53 It provides a public currency, it provides a fully liquid Stock for all your employees on a persistent basis over time. I'm totally puzzled as to why the technology IPO market It's just so morabundant.

11:05 We're now in our fourth year of pathetic numbers overall. So maybe I'm missing something, but Even in mediocre years historically, there were fifty or sixty US based tech IPOs. So I I hearken for those years. And part of their explanation for it is I think there is a lot of private capital

11:22 In general. And real estate and credit and private equity. And elsewhere, but certainly focused on tech. And to some extent that is creating liquidity. For the best companies, but not all companies.

11:35 The tender offers at Stripe and others. But When you say it's a permanent shift, I guess my question back as well. If you're investing billions of dollars into a private company today in some of those transactions. That capital needs a return someday.

11:51 So are you assuming that there will be a robust private liquidity market in the future? Or that that capital will need an IPO market in the future. 'Cause at some level I think some of the values now are beyond the scale where they can get acquired rationally. Where you see more opportunity between public and private today because if you just think about

12:11 The supply demand dynamics of capital itself. Like you said, there's tons of of demand for striped shares on private markets. I'm curious between the two where you operate and you're totally flexible between them. Are you seeing more or less opportunity in one versus the other today? We're not totally flexible. The C and T C B is crossover.

12:31 But I Tend to think we're more One of the early players in growth distinct from early stage venture and Private equity. certain characteristics of growth that we

12:42 Found attractive and continue to find attractive. We will Hold. our private investments as they go public. The best ones for a long period of time. That's an economically driven decision. We may take

12:54 One times our money out, but The best companies over time, like a Netflix, Spotify, et cetera, compounded High rates. for a long period of time. So we're being hopefully economically selfish by retaining our stake.

13:06 And then we will selectively and opportunistically deploy capital publicly. The Netflix pipe and twenty eleven being a great example.

13:14 Or just situations where Our view is if this is a private company, it's at a compelling value. And there might have been a dislocating event. But we're trying to get actively involved and treated as if it was private. And ignore the day to day.

13:28 All the trading. So that's a little bit of a long answer. In today's world. I don't think of it as quite as much as public or private. I think of Yeah. Very much as a

13:38 Company selection. criterion where we have a very private market, very bifurcated public market. Tech's always been A world where there are haves and have nots. A true category of leaders in a segment.

13:51 Yeah. Very robust. Multiples and long term. Value. And a lot of other companies.

13:57 Don't get robust multiples and don't necessarily generate a lot of long term value. Be they private or public. What is it about growth that you still find attractive? And I know that was a key part of the early DNA, but fast forward thirty years, what is still interesting to you about that category specifically? So the original pitch, which remains true today, I think And everything was a lot smaller as I mentioned venture.

14:19 Venture was a lot smaller. Private equity is a lot smaller in ninety five. KKR others were still. Tiny enterprises. And growth didn't really exist.

14:29 Wasn't viewed as a separate category. The way think about it is early stage venture will invest in to some extent science projects meaning undeveloped technology. That They have to

14:41 Develop a product or service and prove that it works. And it's cost effective and then start to ramp. The monetization of the business. And inherent in that model is The successful ones can generate fifty or a hundred X return.

14:55 And return an entire fund. But I think inherent in the early stage model is very high loss rates. So it could be thirty percent, fifty percent. For a senior early stage fun. Successful ones is all Baking the model, you can end up with great funds.

15:08 At the other end. Large private equity I tend to think of And of course they Invest across all swaths of the economy, not just tech. They tend to be

15:18 much bigger businesses, more Slow growing. And the way to generate returns could be through The faster use of leverage, it could be through cost cutting, it could be through lots of different acquisitions and consolidations. And the best of those firms also

15:33 Generate. good returns, but I think. much more through financial measures than otherwise. And In a world where rates went down for

15:44 ten years, fifteen years, that was a huge Tailwind. I'm not a forecast of interest rate, so I can't say whether it'll be a head win or not, but I think that was a huge tailwind. Growth sits in between and the original virtues we're investing after

15:58 That's algae risk has been eliminated. So a product or service is available. Consumers are touching it. Or enterprises that are touching it or small businesses are touching it. And our job then is to evaluate the rate of market adoption and then help.

16:12 For those companies. The benefit of growth is You're typically investing in a decent sized business. That hopefully means hopefully senior in the structure.

16:22 Your risk of principal loss is quite low. And then if you're fortunate to stumble into the Expedia or Netflix or Spotify or Revolute in Europe or others.

16:35 you're generating returns from very rapid growth. Ends up about half our businesses were profitable the time we invest. I for not, but the compound effect of top line growth. And very high incremental operating margins.

16:49 Amaz. ultimately earnings are growing a lot faster. And that's how we generate our growth. Very little leverage. All based on company building and growth in a great product.

16:59 I found that this sort of game to be the most fun when you have the least competition. And when you started, like you said, growth wasn't really its own category. And so you had less competition. Today there's lots of growth investors. Can you describe what the competitive dynamic feels like with other investors.

17:17 When you find a company that you really like. How is that? Changed and how do you manage it? It does ebb and flow. I mean, back in ninety five when we started, as you might imagine, it wasn't just that there was not much interest in growth. There actually wasn't that much interest in technology. So now it obviously is obvious to everyone, but

17:33 People viewed it as a tiny prize. As Technology returns have been robust, money follows. That's just seems to be how capitalism works. And so there are a lot of Growth investors.

17:46 Many of them built very successful Farms. Some have gone From success and growth to Really scaling assets and becoming much more private equity like big buyout funds, et cetera.

17:59 And that's not bad. That's just different. And Many have gone from being Purely focus on a tech vertical. to other categories of growth, be it retail.

18:11 Healthcare, I mean healthcare to IT, just hospitals, et cetera. We've made the decision to stay I'd say relatively small, although first one was a hundred million, our last one was three billion. So it's relative. But really just stay focused on technology because we think it's the greatest industry and it also requires

18:29 Tremendous amount of expertise. To be able to execute against. Yes, competition's increased. But I'd say in the last.

18:37 Four years. Actually Decreased. If you harken back to last time. I was here. Everybody had entered.

18:44 technology and growth investing in twenty twenty one and that led to its own challenges. for a lot of the capital that was deployed during that period of time. Many early stage funds doing growth. Many public funds doing growth, many private equity funds doing growth.

18:58 And Some will be successful, but a lot may not. I tend to think firms generally have a center of gravity. Yeah you can Think about collecting assets across

19:08 Lots of different vehicles. But you have to make sure each Of the disciplines you're exercising. are great. Otherwise you you won't continue to get capital.

19:18 I suspect that A number of folks have retrenched. Based upon. Having Deployed a lot of capital in twenty twenty one, but not necessarily having a great return associated with that.

19:28 I'd love to talk about the history of the business. You mentioned thirty year anniversary is coming up. The life expectancy of new investment firms is definitely less than thirty years. It's hard to build an enduring investment franchise. If you think back on that time. What are the key moments or filters that you went through that allowed you to not just survive, but scale and thrive across three decades because that's quite unusual. It's interesting to reflect on it. We are

19:54 act of participants And uh Our industry. To me, all of the credit and

20:01 Blood, sweat, and tears, so to speak, goes to The founders who are As we've talked about before. They have to be a little crazy to become a founder. And I think it requires unbelievable sacrifice on their part.

20:14 You can't be a Founder of what will be a great Technology franchise. and do it part time and have a great work life balance is often gets banted about. It's impossible. As I reflect back on when Rick Campbell and myself started

20:28 T C D. We quit our jobs in ninety four. We are on that boundary journey as well. Like it's worked out great. But

20:36 I was thinking about First of all, it's a little bit of a shock to be sitting here celebrating thirty years. We did a few more good things than Mistakes we made, so we're able to do that. People backed our first fund and continued to invest as we built the firm.

20:50 Which is Awesome. But it requires a lot of resilience because In my investing career have been through so many crises. Like a company founder, you have to be ready to deal with adversity.

21:01 Thinking you don't know what you're doing? I was reflecting. Personally. You were to say, Well

21:08 go back to that time period. So it's great that our bet on technology Paid off. It's great that our focus on growth paid off. And the third thing we talked about is being a long term patient investor in the best companies. Yeah, the last requires.

21:21 being invested in the best company. So there's a little hard work, but a lot of luck involved in that too. But I was Sitting here today, a lot older, thirty years older, obviously. When I quit my job, I was thirty five. And we closed our first phone, I had just turned thirty six. We had

21:37 A son who was turning three, a son who was turning four. And my wife is expecting our Daughter. We had just moved to Palo Alto. And we're starting a new fun. I'm trying to think if there are any other They say like there are four or five main life stresses. You did them all one. Just like just get it all on the table. In hindsight, it made no sense. Yeah.

21:56 But Thankfully it worked out. What were the keys? I'm gonna mix my sporting metaphors. Batting average business, you can't hit a thousand.

22:04 But you have to Be a decent hair. Or Using basketball example. Stuff Curry.

22:10 And in the news after the games they won last night. Greatest three point shooter. of all time, greatest scorer of all time. He only makes forty two and a half percent of his three point shots. Now, as an investor, you have to be over

22:22 Fifty percent. But it's still not you're not gonna be perfect. So part of it is you have to be Willing to take some level of risk, no matter how much diligence you do. And then from a Managing the firm standpoint.

22:33 We try not to repeat our mistakes. Either as a Managing the firm or Investing but Probably made every mistake in the books because we talk a lot about obviously Netflix and Spotify and others, but it's also

22:44 We had plenty of bad investments. Investments that didn't work out well. And then also in hindsight ones where Wait. Sit around and say, Well, I'm not sure what we were thinking on that one, particularly in the internet bubble days. But it comes down to

22:58 Internal talent. And I think last time we talked about Reed Hastings and the concept of stunning colleagues and the fact that a Great investors, not thirty or forty percent. Better than uh. Typical investor.

23:09 Similar a great engineers, not thirty to forty percent. Better than a average engineer. That's an order of magnitude. That's been the focus on the internal side, people side. We've had an enormous number of people over that.

23:21 thirty year period of time contribute to T C V so I've gone on to Greatness to other firms as well. I'd love to do a little bit of how the firm works type questions and try to categorize them in the normal life cycle of an investing firm of this type, which I would say is see the company, know it exists, and start digging in. pick which ones you want to invest in, win those investment, be a good salesperson and then support them. Maybe sell is the last criteria, which is relevant because you hold for so long. So maybe we'll go in order. What have you learned about the sourcing side of the business?

23:52 What does great look like? Versus good or something. Mm-hmm. In making sure you see all the right businesses and engage them at the right time. So that's one

24:02 Area where there's been Many iterations I think for the industry. And then for us See if I can walk through it. There's also a sector overlay because

24:13 We go to market in different sectors, so consumer Application software, infrastructure software in Europe. Or big suctors. But way back in the day. Well before T C V

24:23 There were outbound deal sourcing. Factories. T A Associates being a classic one and then some of the folks Spun out. Start summit.

24:31 It was phone. It was cold calling. To try to build a database of interesting companies. Whatever financial metrics. They could.

24:39 And then sort through all that. And No. Chase X number of investment opportunities. We Started building that core in

24:48 T C V in nineteen ninety nine,'cause originally it was Rick and myself and we were doing everything. Yeah. We knew some venture guys and calling it a sourcing effort sounded much more grandiose than it actually was. We went with that people driven. Hordes of associates. They would come in and commit to three years and then

25:04 Sometimes go off to business school and come back or go off to a portfolio company and come back or just go off to Another firm or another company. But Going back about

25:14 Twelve years. One of our associates Said we need to Automate this. It move from phone work to

25:22 Email work to lots of scouring of the web and going to trade shows and all this other stuff. And so we have a data intelligence group that And I'll stumble on some of the metrics. That is the front end of our sourcing effort. And there's actually AI applied.

25:38 Here. Where We have Massive number of data sources tracking Employee growth.

25:44 App downloads. various product usage measures And it's ingested. I think Something like eleven million technology companies, many of whom are really, really tiny, obviously, at this point.

25:55 That is ingested and analyzed. We score companies. And that In addition to all the Inbound.

26:03 Leads we get from benefit of our thirty years. If Reed Hastings sends a note saying you should check XYZ company out, we're gonna check it out. But the data intelligence group is uh Automated tool.

26:15 It just has applied to sourcing. means we don't have to hire a thousand associates to go out. And try to scour the world. It's a tool where we're much better. As humans. Allocating our time and prioritizing.

26:27 Certain companies over others. If we have a list, you're aware of all these companies, and then you start engaging the ones that seem the most interesting. What is the process like the actual internal investment process like at T C V Are individual investors allowed to just pick what they want? Is there some sort of Committee process, walk us through the actual process of selecting

26:47 investments and I realize we'd probably have to coup this answer with how you win them. because they're interrelated and you're building the relationship with the company as you evaluate it. But maybe talk us through the nuts and bolts of how that actually works inside T. Meets at least weekly. Often more. That is where all that data as well as an existing pipeline opportunities

27:09 Is discussed and Near term priorities, long term priorities. Company XYZ, we've had a tough time breaking into How can we leverage our extended network? To get in.

27:20 And that's where the initial sorting out process. Comms. We also have a weekly global pipe. meeting where all of us professionals are involved where we're bubbling all that stuff up to where

27:31 What might be actionable in the next six to twelve months. The reason I say six to twelve months, there's thousands of financing that happen all the time. But What we're really trying to do is get to know these companies over an extended period of time. and be working today on what might be a twenty twenty six investment. 'Cause a young company is not yet in the growth stage.

27:51 That's part of there by design. X number of things get through the sector screening process and get presented to Yeah. Say let's move forward with these, let's not move forward with those. And then we actually have a three person final investment committee.

28:07 It has to be unanimous on investment. It is unanimous. At the end it's you and two others, presumably, that have to say yes on every single thing that you do. And how many is that a year typically? How many new investments would you make? We have a velocity fund which is invest in expansion stage companies and the growth fund, which is

28:23 Big fund. We might Typically invest in six to ten a year. You start with Tracking eleven million companies in an automated fashion down to

28:32 Six to ten. How many do you think you like barely say no to a year? What is right outside that six to ten. Meaning like It's on the line. You're excited about the company probably at this stage. If you invest in six to ten, how many are on the cutting room floor right before That final approval.

28:49 I couldn't cite your actual percentage, but it it should B A reasonable Robust number. Which may sound crazy, but

28:57 Early stage investor, I'll use AI as an example. But also just in general. If an early stage investor will have many more But investments in a given fund. In part because they want to have as many chips on the

29:12 Betting table as possible. to get that one or two that really will pay off big. Missing. A significant portion of those, I think, for an early stage venture fund. In any given vintage.

29:23 Maybe Really problematic. As a growth investor, we tend to run pretty concentrated. So our typical fund might be twenty To twenty five investments. And so we really

29:34 Have to have conviction. And we are Focused on doing all that work ahead of time to say this is the one in this category. So we're not betting on two or three. players in a given segment. So

29:46 It should be hard to get to A full yes. And there should be a bunch of We're not sure and then they end up being those. Can you describe the taste of the three people?

29:57 that are on that final committee. Like if you had to describe how the taste is different between the three of you. How would you summarize it? I would say The similarity is Rigor.

30:07 The differences Th degrees of Aggressive or conservative very practitioner. So it's actually a good mix. Where do you fall on that spectrum?

30:16 Strangely More on the Aggressive side as it Not taking Unverified bets, but

30:25 I'm not Turn off if it's different. Non consensus is Good. Again.

30:32 A quadrant. Non consensus. Right, wrong. If you're wrong and non consensus, that's really bad. But You're right. It's often where the excess returns are.

30:40 Of course. The world can come to an end. And all the current macro stuff could be a decade of Unpleasantness in the world. But

30:50 Many of the companies I mentioned earlier. They showed an ability to grow through any and all environments. You look at churn rates for some of these subscription services during recessions, you can't See any difference? So I have a firm believer in

31:03 The best quality technology companies One may at different points in time have to be aggressive on Valuation. Pay more? But it will be a long term win.

31:14 So that's where the aggressiveness comes in, as opposed to thinking, Well In actually this should sell at X times revenues because that's where the median SaaS company has sold over the last decade. What's it like holding a company like Spotify or Netflix for a very long period of time? It's easy to talk about those two because they're unbelievable company CEOs. Like we know all this in hindsight.

31:36 But Certainly there's been periods, if you study those companies' history, when tons of people or most people doubted them where they had challenges that they had to overcome. You said earlier, existential challenges often, but just maybe to pick one and tell the story of What it's like actually holding something like that. Not just the fun part, which is great return. They're both huge companies, but the challenging parts of holding something like that.

31:59 Netflix was challenging. There's a very challenging financing in Two thousand and one that we led. So it's not just Challenging.

32:07 Staying with it publicly, but that predated the IPO. What made it challenging? Netflix. Founded in ninety eight. It was enabled because instead of a VHS tape, which is heavy.

32:19 A D V D? Can be male cost effectively if you're a first class male. But the original model was You rent one, return it. And the union economics on that were not attracted. So subscription

32:31 was what unlocked to ultimate profitability. But company filed to go public in two thousand. Market melted down. It went down sixty percent twice. That's not very fun.

32:42 And there was a Financed in two thousand one. Day myself. Where We had a discussion and

32:49 Shu supporter. With read and conveyed, we will provide the financing, but I'm not sure how to Price it. Series A through E had been open to the right.

32:58 And so he went camist The marketplace. To see who what the price of Netflix was. And there was no equity provider. Zero. We did a

33:08 Restructuring financing. In two thousand one. In order to get Them through. to the other side of profitability and free cash flow positive. And then they went public in two thousand and two. Although traded

33:19 Down for a while and trade sideways for like six years. Well that was the tough Why are you staying with this company? was part of the discussion at the time.

33:27 I think One of the benefits of experience is We invest in these twenty, twenty five companies in a fund and hopefully they're all The next Netflix or Spotify. But after some period of time you realize well they aren't.

33:40 But which ones have that decade or multi decade growth. really gonna be A dominant player. And

33:48 We go through that sorting process. So what's the challenge of holding? When they go through periods of material Revaluation of the public market. You get second guest.

33:58 Uh to buzzoom. And sometimes you're second guess yourself, like oh. The correction in twenty twenty two, people like Why hadn't she sold everything and everything in twenty twenty one? Well If you could predict

34:09 when the market's going to sell off. That'd be a productive discussion to have, but One can predict that. Public scrutiny and second guessing can make it hard. But that's really

34:21 Kind of. It and It's obviously proved to be really rewarding. Now. Fun life's also mean you can't own it forever.

34:30 Netflix market cap. Friday was four hundred eighty. And At the time the IPO T C V owned forty three percent. Forty three percent of that would be a much bigger number.

34:40 And Uh what we realize. Does that make you wonder if the whole structure is wrong? If all of the returns come from a couple companies Should funds be set up to not

34:51 Have to sell. I don't think that the structure's wrong'cause we entered into a contract with our limited partners and so We abide by it. It's always easy to look back. Hindsight just perfectly crystal clear.

35:04 But I think That is why some have explored Sequoia or Sutter Hill or others explored kind of the permanent capital. Evergreen like vehicles. Did you ever consider that?

35:14 No. Well no. I just think the financial structure is Great as it is. Not broke, don't fix it.

35:22 GP. We have a European waterfall structure. So once we return all the limited partner capital, then we start Getting our carried interest. And once we do that And we're distributing.

35:32 We can choose to obtain the Spotify or Netflix shares. As it relates to our own financial If you think about this interesting question of should Or does the investment firm itself

35:44 have lots of enterprise value. KKR and Blackstone, all these things are publicly traded huge, huge companies. Whereas some investment partnerships explicitly target that the thing doesn't really have any value that this ephemeral thing that partnership that may dissolve. They don't plan to sell any of it.

36:01 How do you think about that question? Which it seems like is important for every investment firm to answer about itself. What personally think about I've never been motivated to let's go. Globally dominate.

36:14 And I I'm I'm a only a casual observer or students say of a blackstone. I think they had a very simplifying organizational assumption which was They were on a path. To go public. And to maximise the public value.

36:28 They would go from being a buyout shop. Two A smorgus board of financial service offerings. Offer that in a very compelling way to the largest LPs in the world.

36:39 And credit and Find the funds and And That seems to have worked out superbly for them.

36:48 For me, that level of scrutiny and visibility is not appealing. So it's not something we've really ever contemplated. The alternative too is sometimes people sell a piece of the GP But that's mostly my casual analysis of it.

37:02 Front loading. economics that you would otherwise get. Yeah. How do you think about setting the firm up? for the circumstance where someone else leads it other than you, succession. Success in planet is John Dorn. He's twenty years younger.

37:15 Than I am. This is a lot. Uh plan on having an active role, but he's running the day to day He's actually moving to the valley. He lives in London with his family in July.

37:26 And so if I get hit by a bus, that's one level of succession planning. I'm very careful around buses. I don't envision going anywhere, but that's Very simple. It's always twenty years. It always seems to be a twenty year gap. That's the magic number for the younger partner. We talked about stunning colleagues earlier. Well, okay, then that's question is how do you identify?

37:44 Not just being brilliant. It's just Are they a good investor? I mean. Good investor.

37:50 You somewhere in your twenties, you're maybe trying to figure things out, and then you invest a certain number of companies when you're thirty and then mentioned when we start T C V S thirty six. It's a long term business. Again, disasters can be Very short term measure, but It's really hard to know if somebody's a great investor.

38:07 Except for the passage of time. Does anything feel broken to you about the investing world and system today. It could be anything in the triangle of GPs, LPs, companies. Anything at all. Is there anything that you would change about

38:21 The way the system itself works today. In a strange way I Wish The AI enthusiasm hadn't

38:31 Distract everybody, meaning This may be a bit of a dinosaur approach. This is really great business. It's also really hard business. I think there's a whole bunch of players

38:41 Think it's easy. And I invest in these ten companies, they all were marked up and Oh, it's great. And a lot if you think about it. Global financial crisis was a big reset in oh eight, oh nine, not so much for tech, but for the financial system.

38:55 And With the exception of twenty twenty two. It had only been up into the right for many people who were then ten, twelve, fourteen years into the business. There still might be a lot of pain to be felt. From some of the investments made during that period of time.

39:09 And there hasn't been a day of reckoning. And a lot of Ambassadors have Jump in the A bandwagon, not necessarily saying pay no attention to stuff over here. Or an AI shop.

39:19 But I worried a little bit about some of the twenty twenty, twenty twenty one. Capital, which is enormous sum. Being By and large broken capital.

39:28 I used to describe when the internet bubble happened. Venture returns went like this. Adventure egos went rhythmically. And then bubble burst and returns to this.

39:40 And he goes for a lot of people in the best business didn't come down. Success says many fathers. Bill here is an orphan. I wish there was a little bit more modesty. In our business.

39:50 Any advice that you would give to a young investor, maybe thirty years old or something, having made some investments, cresting into that period you talked about earlier. that wants to go launch a firm today based on the thirty years of success that you've had at T C V. Do it if you love it. Don't do it'cause you think it's gonna be financially rewarding. It can be, but success has to precede that.

40:11 If you add people do it in a measured way and only add exceptional people. We have a had a lot of exceptional people. We also I've had periods of time where we expanded too quickly. Go try to find a segment that

40:25 Is relatively unexploited. And therefore maybe has to be a little more contrarian. Which also then means the foundation's gonna be harder. But don't follow the herd. Anything else that we haven't touched on across our two conversations that you feel like is an important ingredient in your

40:40 Story, personal or professional. I went to high school in a small town of Wisconsin. We did an aptitude test. Uh my best industry to go into is agriculture. Yeah, but going off to college, et cetera. But I was a huge John Wooden disciple.

40:53 Long time coach of UCLA. And his Current success is something I try to live by. Is you need to have your own definition of success, not somebody else's. And that success is a peace of mind, which is a direct result.

41:06 Of the self satisfaction of knowing you've done the best. Become the best. You were capable of becoming. So to me That's the artificial I try to hold myself up to, and maybe that's why I don't

41:16 Sleep that well in the morning'cause I want to get up and continue to try to be as best I can. The one other Personal angle. And a Netflix story which has never gotten

41:27 Much airtime. Thank God I paid attention to my first aid training as a kid. Think it was in two thousand and two. end up having to do the Heimlich maneuver. And read.

41:38 So If value add is you save the life of a CEO. He had a piece of meat. couldn't get the slides with two of us in a conference room. So But

41:48 Pay attention to your first aid class in the coming. Say a little bit more about John Wooden. So that pyramid that you described. You can pick which spot in the pyramid you think is hardest, or you've seen people struggle with the most, or you've seen be uncommon for people to actually pursue Say more about your interest in him and how you actually do the thing. That he advocates. Yeah.

42:08 It's building blocks that lead up to definite success. And he had some Funny lines like Be quick, but don't hurry to this day. Youngster, I aspired to play in the NBA. The preparedness was one of his key things. Unfortunately, I lacked athletic ability. My career lasted fifteen minutes in college tryouts when a guy with cut off shorts lasted longer than I did.

42:33 Reinforced that it wasn't gonna be an NBA player. And My senior year high school I was point guard on my team in sectional finals. guarded an individual named Bill Hanslick. who was averaging twenty five points a game.

42:45 Went on to play for Notre Dame, which I think where you went. Yeah. And then the Denver Nuggets. And uh I like to joke that I was trying so hard. 'cause I was always working hard and pretty savvy on the court. I defended Bill Hanslick.

42:58 And I held him the ten points over his season average. So he scored thirty five of them. That's what greatness looks like. That's not to be my path. But drama's a Ethics and preparation and hard work. Or all part of the pyramid. Jay, so fun to do this with you. Congrats on 30 years. Quite an achievement and accomplishment. Incredible companies built along the way. Thanks so much for your time. Thank you. Always a pleasure.

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