If the best way to create the future is to build it, then the best way to understand a possible future is to listen to those who invest in it. Gartner interviewed several leaders at TCV to better understand their views on the future of high technology and high-tech providers. The views expressed below represent TCV’s view on its operations and the future. These opinions are TCV’s own and independent of Gartner positions. Throughout the interviews, the following themes emerged regarding the forces and factors driving technology investments and future success:
- Top-line revenue growth has replaced cost efficiency as the primary job for technology — it is now Job. 1.
- Insight is the source of effective strategies for achieving growth through differentiation and specialization.
- The pace of change is accelerating across the frontiers of technology, including how rapidly companies and consumers adopt it — and few competitive advantages are as decisive as speed.
- Technology architectures are in the midst of a generational change that is driven by more than the cloud or Hyperscalers.
TCV has invested in these insights, focusing on companies with the technological potential to support rapid, substantial growth in large, untapped markets. Figure 1 shows the ideas and connections TCV leaders described as the future of high tech.
Figure 1. TCV’s Perspective on Technology-Accelerated Growth
Growth Is Job 1 for Technology
“When you cut through all of the jargon and acronyms, the biggest difference for software and tech over the past five years has been in supporting growth,” says McAdam, who contrasts the growth imperative with technology’s prior jobs of taking costs out or getting cheaper computing power.
“Technology has created operating leverage via business process automation. Now technology’s value rests in driving top-line growth.” This changes the nature of technology, how it is valued, and what it does, according to McAdam.
“Growth is the uber premise when we think about disruptive technology solutions and the digitization of everything that drives our investment themes,” McAdam explains. “Consider CFOs. It used to be that an old-school CFO would be cost-oriented and say yes if the solution saved money and drove EPS. CFOs of today still care about this, but not as much as they care about taking market share from the competition. The clearest way a tech company can get a multibillion-dollar market cap — one that is 10, 20, 30 times revenue, is to provide a product that allows customers to transform their businesses and grow faster than the competition.”
Building for Scale and Speed
Applying technology in support of revenue growth requires TCV to work with companies on their go-to-market (GTM) strategy. TCV uses the ratio of revenue growth to sales and marketing expense (see Figure 2a) to identify points of friction and efficiency.
Figure 2. TCV’s Sales and Marketing Ratio
The calculation indicates how much new growth the company is achieving for every dollar spent on sales and marketing. If the ratio is 50 cents every $1 spent on sales and marketing generates 50 cents in new growth. The lower the ratio, the more opportunity there is to increase efficiency or effectiveness.
Figure 3 illustrates how the sales and marketing ratio can visually depict the performance of a company’s sales and marketing efforts. (Note these ranges are for illustration only; typical ratios vary by industry.)
Figure 3. Illustrations of Sales to Marketing Ratio
TCV is using technology in a number of ways to move the needle:
- Implementing analytics and diagnostics to identify growth obstacles, and documented strategies to better orchestrate key GTM practices across sales and marketing.
- Facilitating forums and collaboration where leaders share ideas and best practices and road-test ideas with other executives.
- Leveraging GTM practices that are based on best practices within the portfolio and providing other TCV companies with ready-to-programs to speed time to value.
TCV’s head of Marketing, Katja Gagen, added: “We see companies using technology to optimize their go-to-market capabilities. This can range from publishing thought leadership on growing sales pipeline or refining their messaging. The difference with technology is that companies can actively benchmark themselves against industry best practices.”
Blending Human Insight with Analytics to Identify Growth Potential
“We track nearly 10 million companies in our database,” notes Tim McAdam, a general partner at TCV. “We then do a deeper analysis of 2,000 to 3,000 candidates per year in order to select 12 to 15 companies in which to invest.” This puts our information on prospective companies into an analytic engine running proprietary algorithms created from the firm’s domain knowledge, sector expertise and 26 years of investment insights.
The result for each candidate is much like a credit score — a snapshot of investment worthiness that guides subsequent analysis and decision making. As McAdam explains, “Any given result is statistically valid because of the high number of other companies we have ranked against the same set of metrics. It’s an empirically driven assessment of the company’s areas of strength and needs for improvement.”
TCV uses this information to differentiate each of its portfolio company’s situation and connect it with experienced people and resources in support of the company’s success. McAdam compares TCV’s role to that of a coach, “we recognize that the founders of our portfolio companies are deeply invested in their firms. We seek to provide advice for them with humility, intellectual honesty and insight, with an eye toward finding solutions that move them forward.”
Matt Robinson, a TCV principal, explains that “high-tech architectures shift about every decade. Today, the increasing importance of speed, extensible solutions and consumption-based business models is the driver of evolution in architectures and infrastructure. If my technology is designed to drive your top-line growth, then your growth becomes my growth,” Robinson explains. “Our architectures and infrastructures need to be seamlessly integrated together.” Thus, the business case for architecture evolution is at least as important as the technical innovation from cloud and Hyperscalers.
TCV does not see the future as one of consolidation around a few large well-capitalized companies — either Hyperscalers or so-called digital giants. “It is an old argument to think that everything will consolidate,” McAdam notes. “That view makes sense only if companies stop finding new ways to grow.” While he believes that Hyperscalers are important, he sees their role as “more of a channel to a stream of future technology-intensive growth and innovation rather than a competitor in the application/solution space.”
Gartner subscribers can see the full published case study at: Case Study: The Future of High Tech and Generative Providers (TCV).