The opportunity set for SaaS is on the rise. The original SaaS model that revolutionized software is now enabling SMB and vertical SaaS companies to evolve from tool companies to market makers. Pioneers of these new SaaS models not only provide a tech platform to service providers, but also strengthen their position by extending into marketplaces. When these providers aggregate enough supply, they leverage their data and mindshare advantages to create two-sided marketplaces that enjoy powerful network effects. The result is a much stronger financial profile, deeper moats, and a significantly larger TAM.
TCV recently hosted an offsite focused on emerging trends that we believe are dramatically expanding the opportunity set and economic strength of vertical and SMB SaaS companies.
We were fortunate to have Brian Rothenberg as a speaker. Before joining a leading new early stage venture firm Defy as a Partner, Brian was on the leadership team that took Eventbrite from startup through IPO – while evolving the company from a SaaS platform for event venues to a marketplace for live experiences.
In this conversation with John Burke, EVP at TCV, Brian explains the steps and structures necessary to accomplish this strategic transformation and reach scale. He also offers priceless tips on timing and managing relationships with original SaaS clients that leaders can apply as they focus on dramatically expanding their addressable markets.
To talk about SaaS opportunities and get a copy of the presentation, please contact John Burke or Katja Gagen at TCV.
We believe that many SMB and vertical SaaS companies are starting to exhibit platform characteristics. Some of these companies are beginning to build consumer and supplier networks that are dramatically expanding the SaaS model.
Toast is a pioneer in the space, powering restaurants of all sizes with a technology platform that helps them streamline operations, increase revenue and deliver amazing guest experiences. No one lights up a room on these topics more than Tim Barash, Chief Business Officer and CFO at Toast. I’m also excited to welcome Tim as an Executive Advisor to TCV, where he will be working with TCV portfolio companies and helping us to assess new opportunities.
Dave: Tim, welcome to TCV, and thanks so much for spending time to share your thoughts with us!
Tim: I am excited to be a part of the team — it’s been great to
meet with some of the founders of this incredible new class of companies,
changing the rules of what has traditionally been considered SaaS.
Dave: Tell us about Toast. What is the company today, what’s its mission, and where is it going?
Tim:Toast is a company that is transforming the hospitality industry
with an end-to-end platform, extending from a core commerce engine into guest
experience, employee engagement, and financial services. Our mission is to
empower the restaurant community to delight guests, do what they love, and
thrive. We as Toasters are very passionate about bringing this mission to life
for our customers. We launched our core offering in 2013 to the first few
restaurants and today are serving tens of thousands of customers while still
growing over 100%, with over 1,600 employees globally. It’s been a wild ride
these past five years and it’s a really fun space with a creative and diverse
Dave: You and I recently hosted an offsite on “SaaS as a Platform.” Why is Toast a platform to its restaurant customers? If you’re the CEO of a SaaS company, how do you know that you are or could be a platform?
Tim: Toast really extends all the way from
the front of house to the back of the house, bringing restaurants into the 21st
century with a cloud and mobility-first operating system, including hardware such
as self-ordering kiosks and handhelds for order & pay-at-the-table and
guest feedback. We’ve evolved from this core system of record into other high-value
offerings, including payment processing, payroll & employee management
software, credit and consumer-facing apps, and we’ve had great feedback from
our customer base that they want us to continue to solve more problems for them
between our first-party offerings and our deep partner network.
think being the Platform or System of Record generally means you
have the most mindshare and time spent on your system relative to others the
same user may have. As important is where the data
resides; in the restaurant vertical, the core data sets are menus, orders,
guest data, and employee data, whereas other verticals like doctor’s offices
might be more around scheduling, billing/invoicing, and insurance connectors. If the key personas are logging in
multiple times per day and using your tool as the system of record for their
most important data, it’s likely there are multiple platform opportunities to
exploit to make their lives even easier.
Let’s first talk about payments. Generically the opportunity in payments is for
SaaS companies to start monetizing flow through GMV. Why is this good for your
customers, the end merchant, and your customer’s customer, the merchant’s
Tim: A lot of companies are starting to integrate payments
mostly because it creates a much smoother, simpler experience for the merchant.
It starts with onboarding and spans ongoing support and easy reconciliation of
transactions and payments through the same software. Small businesses generally
do not like having to deal with multiple vendors when they can use one holistic
solution for what they are trying to get done.
What’s really compelling is what you
can do for the merchant and the end user once you have payments integrated by capturing
more data. An example is identifying the end user and better understand buying
patterns and be able to help small businesses market to their customers in a
more targeted and automated way.
There’s also very significant margin
enhancement if you can get payments right, which can fuel higher investment
levels in areas like Customer Success and R&D to deliver even more customer
value by displacing a horizontal payments vendor.
I know you could hold a master class on just payments, but quickly what are
three tips for getting started? Should you make them mandatory, or an option?
Tim: Understanding your strengths and weaknesses as a team here
is important — you can get started with a referral partnership or go full bore
and become a payment facilitator and handle all the risk, underwriting, and
merchant-facing tech. It really depends on the available talent, domain
knowledge, and capital access to get something off the ground. Once you’ve
decided what to go with, here are three tips:
Build a dedicated team that
understands your payments space at a deep level — there can be a lot of new
complexity across product, tech, risk/underwriting, pricing, go-to-market
strategy, and customer success that may look and feel different from your
existing business. Make sure at least 1-2 people are coming in with real
payments or fintech experience. Card-present vs. eCommerce experience will
likely be something to think about here.
Resist the urge to over-monetize or
make pricing overly complex — traditionally there have been some bad actors in
the payments world and, as a result, a lot of these companies have low NPS and
very high churn — great SaaS companies have the opposite, so don’t tempt fate
for a few extra basis points.
If you are doing anything other than
an arms-length referral partnership, you should be taking payments-specific
risk, fraud, and security very seriously.
Dave: Ok, so once you’ve launched payments, how would you extend next? I know it depends, so maybe talk about where you would go if you were a front office offering and a back-office offering. Or better yet, what is the prioritization framework for the different offerings?
Tim: I think the prioritization framework begins with mission —
why does your company exist and what are the biggest problems in your industry
that you have an unfair right to help solve? As an example, Toast is the source
of lots of employee data and we kept hearing from our customers that, in the
current macro environment, labor was their biggest concern, so we had both the
market need and the natural entry point to get deeper into payroll and employee
On back-of-office solutions it’s
likely things like payments, credit, payroll, insurance, and B2B/vendor
marketplaces can be interesting depending on the platform and vertical. For
front-of-house it’s likely more about CRM, marketing tools, loyalty programs,
other commerce touchpoints, and the holy grail of leveraging supply of SMB’s to
create a two-sided consumer marketplace. That said, there
aren’t many companies that have made the B2B2C transition, yet it can be a tremendous value creator.
Credit is a big step change because it involves a balance sheet and
underwriting to risk. What is your take?
Tim: I think this really depends on the execution muscle of your
company — if you’ve already gone deep on something like payments, you may have
some experience on the fraud and underwriting side, but getting into credit ups
the ante in a big way. You need to feel confident you have some really strong
players on data science, finance, and risk to go after this yourself. Starting
with a partnership with a Kabbage, Fundbox, or OnDeck could be a way to dip the
toe in the water before putting your capital at risk or trying to attract
outside investors to supply the capital for a credit offering.
If you are going after this
yourself, you will almost definitely want to find outside capital to offload
most of the risk and balance sheet implications of a credit business, both for
optics reasons with investors and because your capital is better put to use
hiring engineering, sales, etc. than lending to your customers.
Dave: How about payroll? Big dollars given the per employee model. How do you know there’s real demand for payroll? Given the 50-state nature, would you do this in-house, partner, or buy?
Tim: If I think about this space, the only software business
that didn’t have HCM/HRIS at its core that’s done this really well is Intuit,
though Square is also starting to gain traction in their new offerings. Payroll/HCM
is its own beast with its own ecosystem of products from worker’s comp and
healthcare to newer technology offerings like same-day pay and employee
management solutions. Similar to payments, capital, marketplaces, and other
platform plays, the decision on whether to extend is all about whether you have
a natural right to play. For Toast, we have restaurant employees clocking in
and out every day on our platform, and managers/owners running staffing reports
and approving hours before downloading the data and uploading to a payroll/HCM
solution. This made it a pretty natural move to solve this disjointed
experience for our customers.
If you’ve got the natural right to
play, demand is probably dependent on the complexity in your vertical — if
your customers only have 1-5 employees and not a lot of complexity around time
and attendance, they may be using an offering from Intuit through their
accounting package, or Gusto, or some other inexpensive and easy solution,
making it more difficult to displace.
In terms of build/partner/buy, this
could be a long slog to build, because of all the regulatory/compliance
elements. Depending on your scale, partnering is likely the best way to enter
into the space and learn this side of the business. Just be careful as one of
the reasons to get into payroll/HCM is that it’s a fairly sticky product.
Ok, let’s get into the next-level network effects for SaaS companies. Most two-level
networks tend to be “Big B to small B” in a buyer/supplier relationship. TCV invested
in three of them over the years. To give the theme a plug — Ariba in
procurement, CCC in the auto industry, and Avetta in supplier information management and
compliance. You sell into large company buyers and help them connect more efficiently
to smaller/SMB consumers. Winning into the big buyers gives you a strong value
proposition to small suppliers and gaining more suppliers in your network makes
you even more attractive to the big buyers. It’s a virtuous cycle.
every SaaS company, particularly vertical and SMB providers, can look to
leverage consumer, employee, and supplier networks. What’s your take?
Tim: It’s a really exciting play that is starting to develop in
SaaS. If done correctly, it can be a game changer in helping SMBs get the scale
advantages of larger enterprises and change their businesses for the better.
Let’s take supplier networks first. Who is doing a good job getting into the
Tim: I think you just hit a few of the strong players earlier. What
CCC has done with the auto parts marketplace is really exciting and a playbook
that could be run by a lot of SaaS platforms in other verticals, especially
something like construction or home services. I’ve seen a lot of startups try
to create the supplier marketplaces in industries such as dental offices,
restaurants, and others, but the standalone model can be difficult because they
aren’t starting with one side of the marketplace already built up — that’s what’s
so exciting about these platform opportunities for existing SaaS companies.
How about employees?
Tim: There are lot of interesting companies out there. For
example, SnagAjob and ZipRecruiter are working on building out the marketplace.
I think ZipRecruiter has been a really interesting story as they did leverage
existing relationship with employers to create their marketplace. Over time, I
think we will see a lot more of these models. There have been a few entrants
into the “LinkedIn of hourly workers” space, and time will tell if something
like that will be created or if more mindshare will go to vertical-specific
SaaS/Employee Network plays. It’s interesting to think about the marginal
utility of a horizontal employee network, certainly there are some generalists
in this employee population but also a lot of specialization in specific trades
Consumers is probably where the big dollars are. Marketplaces regularly capture
10-40% of GMV to deliver consumers. How
can SaaS companies partake of the consumer opportunity?
Tim: I think it heavily depends on how valuable the supply side
of the marketplace is. There are verticals including food, certain home
services, hotels, etc. where quality and user-specific preference is going to
really matter. If you have really compelling supply (especially if it is hard
to access online), you can get real leverage in building out a consumer
marketplace. If it’s something like transportation, it may be harder to have
any real edge against a standalone marketplace startup.
If you are in a position to
capitalize on a consumer network, I think creating a separate team to go after
that opportunity in a big way is likely the right way to go as so many parts of
the business will be different than your core SaaS team is used to working on. You
want the unfair advantage of owning supply without a handicap of having a team
that hasn’t built a consumer business before.
Well Tim, I know we could go on for hours on this topic. Thanks so much for
taking the time today, and great to have you as part of the TCV team. I’m
excited to work with you.
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post above are that of the author and do not necessarily reflect those of TCMI,
Inc. or its affiliates (“TCV”). This blog post is not an offer to sell or
the solicitation of an offer to purchase an interest in any private fund
managed or sponsored by TCV or any of the securities of any company
discussed. The TCV portfolio companies identified above, if any, are not
necessarily representative of all TCV investments, and no assumption should be
made that the investments identified were or will be profitable. For a complete
list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this
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ZipRecruiter is one of the few companies that have been able to extend into consumer demand. We were fortunate to have Co-Founder and CEO Ian Siegel join us and share his thoughts on ZipRecruiter’s journey.
Dave: So maybe to kick us off, tell us a little bit about yourself and ZipRecruiter.
Ian: Sure. ZipRecruiter is an online employment marketplace that I co-founded in 2010. Based in LA, we use Artificial Intelligence (AI) to actively connect people to their next great opportunity. We’ve helped over 1.8 million businesses of all sizes (from SMBs to Fortune 500 companies) with their hiring needs. Tens of thousands of businesses use us every month to find their next great hires and millions of job seekers search for jobs on ZipRecruiter on a monthly basis.
Dave: We’ve been talking to each other for a while, and your first demand side offering was allowing employers to use your distribution software application. And if they weren’t getting applicants fast enough, they could push a “boost” button and get more applicant flow. That was a recruiting facing experience. Explain what’s going on in the background.
Ian: We distribute job postings to more than 1,200 sources. That includes
job boards, aggregators, talent communities, social networks, etc. We send jobs
to online destinations where talent may be congregating and then we pay those
sources on a per-click basis for the traffic they can deliver to us. And then
there’s TrafficBoost, our own job promotion product. Employers can buy a
“Boost” and get more quality candidates faster.
Dave: Great. So, you have this distribution software, and then the “boost button” which is like performance media buying for lack of a better description. And then you started your own candidate profiles. How does that work?
Ian: Good question. The tricky thing about our category is that it
represents a point-in-time need. One of the things you need to contemplate when
you have consumers, for example, in restaurant reservations or looking for a
job, is that they need you for a moment, and then they’re theoretically going
to go away. You have to start thinking about what you can do to get a data
lock. What are the things you could add to your service? That means they don’t
just use you this time but there’s an advantage to using you in subsequent
visits or a subsequent need for that service.
We started moving from résumés to profiles.
Imagine you are a nurse: You come to our site and upload a résumé. We’ve become
very good at enriching résumés and identifying the single skills that employers
are really looking for—for example, a nursing license number turns out to be
the only thing you need in your profile to be inundated with interest from
hospitals and healthcare providers. As a result, you are persistently being
found by new employers who can give you subsequent offers.
Our theory is that job seekers never want to
miss a great opportunity that’s coming through. There’s this misnomer about the
job search category which is that there’s an active and a passive job seeker
profile. The reality is that a person who is eagerly full-time searching for
work represents only about 12% of the total job-seeking population. The other
88% are people who are somewhere between dissatisfied and happy at their
current job but are willing to learn more about new opportunities.
Dave:So, basically, you’ve gotten the consumer applicant to engage with you, which is quite different, right? You’re running essentially a SaaS business, and then you have to build a consumer business on top of it?
Ian: After two years in, we realized that, no matter how many cool features
we put into our product, employers were (and are still) using us for one thing:
access to job seekers. The more people we have on ZipRecruiter, the more
employers we attract, the more new jobs we have, and the more people we get.
It’s a virtuous circle.
And so suddenly, we’re not just in the
employer business: We’re also in the job seeker business.
Dave:So how did you go and do this?
Ian: When our aided brand awareness peaked in the U.S., it became much more
important to make sure that job seekers also knew about us. Which is why most
of our engineers are now working on some form of search algorithm or search
interface. We are deeply thoughtful about focusing on job seekers because,
fundamentally, we sell to them.
Dave:Okay. You made the switch, which was tricky since you recognized that you potentially competed with some of your suppliers, and you had to go all in on brand. Or not just brand, but a switch from a business to a consumer business brand.
Ian: It’s always harder to get the buyer than the seller. If you have the
buyers, the sellers will come to you. To get to that next level in our
category, it’s important to be first and top of mind. When someone decides
they’re ready to look for a job, you want to be synonymous with job seeking so
they go straight to ZipRecruiter to look for work.
Dave:How do you balance ongoing management of your product teams and the focus of the organization between both customer groups? Because in reality, you still need to maintain some amount of excitement and engagement around the recruiters while you’re sort of shifting to job seekers. How are you thinking about that?
Ian: It’s such a good question. Let me take you through an exercise that
was a real-world problem we had in our business. All of you are hiring
managers, right? Would you like it if someone submitted a résumé to you, and
ZipRecruiter corrected the grammar? The underlying question is “Do you consider
spelling errors and grammatical errors a signal that tells you something’s up?”
Ian: Right, signal. If I ask that question to the job seekers, they really
don’t like typos. That’s a real-world problem I’m faced with. Who is our
customer? The answer is nuanced and depends on the situation. How did we decide
who that customer was? In that particular example, we did not correct their
spelling and grammar.
Another example: We are the number one-rated
job search app on both iOS and Android. How did we become number one? With one
simple feature: We tell job seekers when an employer looks at their
application. That’s it. The number one thing job seekers hate more than
anything is what they call the “résumé black hole”, i.e. when they apply to a
job and never hear anything back. In this case, we made the choice for the
benefit of the job seeker.
Dave: What about the team? Was it a separate build? Was there significant change since this is a very different business?
Ian: Our product team members were all revenue-focused, which is to say
employer-focused. So, we decided to split the team and have one subteam
focusing on job seekers and the other subteam focusing on employers. We made a
significant investment to support the job seeker subteam and, in some areas, we
have multi-year timelines because you can either play to make money or you can
play to win. And to win in our category, you need liquidity. You can’t have a
marketplace without some form of elite brand recognition and differentiation.
Dave: Absolutely, great point to end with. Thanks so much Ian!
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are those of the speakers and do not necessarily reflect those of TCMI, Inc. or
its affiliates (“TCV”). TCV has not verified the accuracy of any statements by
the speakers and disclaims any responsibility therefor. This interview is not
an offer to sell or the solicitation of an offer to purchase an interest in any
private fund managed or sponsored by TCV or any of the securities of any
company discussed. The TCV portfolio companies identified, if any, are not
necessarily representative of all TCV investments and no assumption should be
made that the investments identified were or will be profitable. For a complete
list of TCV investments, please visit www.tcv.com/all-companies. For
additional important disclaimers, please see “Informational Purposes Only” in
Creating revolutionary technology for hotels has historically been a slog but lately we’re seeing a change in fate for hotel software companies due to increased investment in the space. One of the biggest investors in hospitality tech is Menlo Park based TCV, the growth equity firm that has invested in breakout companies like Sojern and SiteMinder within hotel tech. TCV has also made major investments in the broader hospitality and travel space such as: Airbnb, TripAdvisor, HomeAway, Expedia, Orbitz, SeatGeek and Toast.
TCV is one of the largest names in the world of technology investing with a successful track record in the massive hospitality and travel vertical. Vertical market software is an extremely hot investment theme right now.
“The easy opportunities for disrupting old-line industries are drying up. Now, many of the up-and-coming start-ups that may become the next unicorns have names like Benchling and Blend. And they largely focus on software for specific industries.” New York Times
Long time TCV investor and former SiteMinder CFO John Burke is excited about the opportunities within the vertical market software. John and his team have identified a trend within a sub investment theme that they’ve coined: “SaaS as a Network”. Here’s how they describe the concept.
“When a SaaS provider starts serving a high enough density of merchants, they can leverage that strength to build two-sided marketplaces with the merchant’s customers, suppliers, and employees.”
David Yuan, TCV General Partner
The general hypothesis is that once vertical market software companies achieve scale with regards to their core products they can always bolt on new point solution functionality but would be wise to focus on a much bigger opportunity. Specifically, TCV believes that these software companies can create two-sided marketplaces that connect their users to new channels of customers, suppliers and employees. Back in February, Hotel Tech Report identified the explosion of marketplaces as one of the 5 biggest tech trends at ITB Berlin, a trend that mirror’s TCV’s investment thesis. Of all the software companies creating marketplaces in hospitality, TCV’s portfolio company SiteMinder has the largest scale to date.
Last year SiteMinder threw its hat in the ring with the launch of SiteMinder Exchange aimed at “breaking down the industry’s notorious integration barriers, connecting hotel systems and applications through smart and simple connectivity.”
“The reality is that few industries are as fragmented as hospitality particularly at the PMS level. There has always been demand for many of the new applications, but innovation has been stifled by lack of connectivity and the sales model makes the economics challenging. Some of these barriers are starting to be broken down by SiteMinder and others which I think can unlock a lot of innovation for the industry. But this is a hard problem and it’s a complicated space with lots of moving pieces so that makes it challenging.”
John Burke, TCV Executive Vice President
SiteMinder’s Exchange marketplace is aimed at allowing other applications to access the firm’s broad user base consisting of more than 30,000 hotels worldwide. Most of those hotels are using SiteMinder’s highly popular channel manager which connects hotel inventory to 3rd party distribution channels as well as other products within the firm’s broader guest acquisition platform such as a rate intelligence tool and an online booking engine. The firm is betting that it can add value for users by allowing them to try more hotel tech applications with ease and in turn create new business opportunities for those suppliers.
We sat down with Burke to discuss his views on hotel tech, the future for platforms like SiteMinder Exchange and highlight the most cutting edge developments happening right now within the hotel space.
How did you get into venture investing?
I’ve been in and around venture since 2011. I started my career with EY in their audit and transaction advisory teams. Getting into venture was a bit of good timing and persistence. The TCV team were looking for an immediate hire and decided to take a chance. I was with TCV from 2011 to 2014 as part of the B2B software team. As I thought about what was next for me, I was drawn to the experiences and mentorship of the TCV Venture Partners (e.g. former senior operating executives such as Erik Blachford). The tech market at that time had been heating up with a few high-profile IPOs. It was my belief that the next wave of great investors was not going to be able to rely on multiple expansion or financial engineering. I believed the best investors over the next 10 years would need to be partners driving actual business growth.
That brought me to SiteMinder down in Sydney, Australia. TCV had just led the Series B investment in the company, and the fundamentals of the business were remarkable. On top of that, they were ramping up for aggressive growth across Europe, SE Asia and were about to launch in the U.S. which I thought would be great experience. I was also excited to work with Mike Ford and the entire SiteMinder team. Mike is a special entrepreneur who is not only very smart and a product visionary, but also authentic and humble. I joined SiteMinder initially in an analytics role and then for the next 3.5 years as CFO. For family reasons, we decided to move back to the U.S. last year, where I reconnected with TCV and rejoined the team. I continue to spend a lot of time in the hospitality and vertical software space and TCV just led an investment in Toast, an exciting next-generation restaurant platform.
Tell us about TCV.
TCV was founded in 1995 as a $100M venture fund and today has raised over $15 billion across 10 funds, focusing exclusively on technology companies. We recently began investing out of TCV X, a $3 billion fund. TCV looks to partner with companies that have potential for a sustained category leadership position and are looking to succeed at an even greater scale. This typically means that a company has been growing for several years — with a history of customer trust and engagement and a business model that is reflective of the value they provide. We are flexible on transaction type with experience in public and private markets and are comfortable in minority or majority positions. Over the past 24 years, we’ve had more than 60 IPOs in our portfolio and have worked with some of the largest franchises in technology including ExactTarget, Facebook, Netflix, GoDaddy and Spotify.
At this point, I’ve talked with many investors in the space which helps me appreciate how the various funds are different. For TCV, I think it’s the depth of industry knowledge and a growth mindset. We have close to 100 team members now and our investment team focuses every day on technology and goes deep in verticals and sub-verticals. When we identify a compelling technology trend, we take the time to thoroughly understand the underlying drivers, business model, and competitive environment. Having a developed perspective means we can have much more meaningful conversations about a company’s business and growth opportunities and are positioned to be a better thought partner for the executive teams as they drive towards expansion and category leadership. We’re not afraid to make bold bets especially when we have conviction on category leadership and to do whatever it takes to help companies reshape industries.
Can you talk about TCV’s view on hotel tech and its SiteMinder investment?
Travel and Hospitality has been a core focus of TCV for well over a decade. In addition to SiteMinder, the active portfolio companies we are working with include Airbnb, TripAdvisor, Sojern, Tour Radar, and Klook. Previously we were investors in Expedia, HomeAway, Orbitz, and Travelport, among others.
For SiteMinder, TCV led the Series B round and we have continued to stay active with the company as the lead director since then. Two of my partners David Yuan (General Partner) and Erik Blachford (Venture Partner) continue to serve on the Board of Directors.
SiteMinder has an incredible history, where is the company today?
SiteMinder is a hotel guest acquisition platform that connects hotels to future guests, so hoteliers can go back to doing what they love. It’s trusted by more than 30,000 hotels of all sizes, across 160 countries and has helped generate more than 87 million reservations worth over US$28 billion in revenue for hotels each year.
SiteMinder is based in Australia, how did you come across the investment?
It was a team effort. Back in 2011 to 2013 we spent a bunch of time mapping out the ecosystem for online travel and hospitality attending industry shows like HITEC and Phocuswright. Ultimately, we identified the channel management sector as promising albeit a lesser known segment in the category. Our view at the time was that online travel was increasingly complicated and in flux with new players vying for hotel distribution. Independent hotels were harder to aggregate but would also allow these same middlemen an ability to offer differentiated supply that was higher margin. Channel management became interesting because it aggregated and provided connectivity to this supply. We thought this was a hard problem particularly to do in a cost-effective way but when executed it could be highly strategic given the long-tail nature of both hotel supply and PMS. From there we focused on the best product and category leader which led us to SiteMinder. One of my colleagues got us an introduction to Mike Ford through an employee. We then got on the 14-hour flight over to Sydney and created a deal.
What’s one piece of advice you have for hotel tech entrepreneurs when raising capital?
Test the investors. Anyone can look at metrics, but make sure you push them on the nuances of your positioning and make sure they understand the depth of your industry and strategic implications of the various alternatives. Mike did this to us in a big way when we pursued SiteMinder and it always stuck with me.
One pitfall I’ve seen is entrepreneurs who get ahead of themselves with regards to the amount of capital raised or valuation and focus on those items vs. choosing the right partner. This can have implications down the road. I would say to raise what you need and what strategically makes sense given your market and opportunity. And focus as much time and energy as you can on the partner. In addition to the strategic perspective which is table stakes, I tend to think entrepreneurs should focus on investors with candor (to drive constructive feedback delivered in the right way) and humility (it’s all about the team and this also makes it more fun).
How do you think the hotel technology space will change over the next 5-years?
It’s a great time to be in hotel technology given how dynamic this market is. I think we are still early in the growth journey for hotel software. In my mind, there is no doubt that software will continue to play a larger and larger role in the next 5 years and continue to reshape the industry and guest and operator experience. We have also been spending a bunch of time on a thesis we are excited about, called “SaaS as a Platform and SaaS as a Network,” which is around the continued extension of the SaaS business model and platform companies leveraging their position in creating marketplaces with employees, suppliers, or customers. I think this trend has many opportunities in travel.
For hotels specifically, I think data, connectivity, and personalization will only increase in importance. Tools like SiteMinder Exchange, which is a data layer connecting PMS with applications and demand channels, can be a big part of this and drive innovation.
I also think there will continue to be more dominant global players with companies like Ctrip continuing global expansion and Google, Facebook/Instagram, and TripAdvisor starting to see momentum on their new models. The lines in the accommodation industry will continue to blur as Airbnb ramps up their investment and focus on hotels as well.
I also feel labor management will matter more, and there will be new innovative ways to tackle this challenge. This is something we’ve seen in the retail vertical which I think will also make its way to the travel industry.
People often say that the hotel industry is a bit slow to adopt technology. Do you agree?
I agree. But I don’t think it’s been driven by the lack of interest or desire. Hoteliers care deeply about guest experiences and the ones that I’ve spent time with often always go above and beyond what’s expected. The reality is that few industries are as fragmented as hospitality particularly at the PMS level. There has always been demand for many of the new applications, but innovation has been stifled by lack of connectivity and the sales model makes the economics challenging. Some of these barriers are starting to be broken down by SiteMinder and others which I think can unlock a lot of innovation for the industry. But this is a hard problem and it’s a complicated space with lots of moving pieces so that makes it challenging.R
If you were leaving venture capital tomorrow and forced to start a hotel technology company — what would it be?
That’s a tough one. Part of working in an operator role at SiteMinder helped me realize how hard it is to be an entrepreneur and scale a company. This only deepened my respect for what they do. I’m a big believer that you need to follow your heart, so I’d want to align it to something I am passionate about. Maybe I’d do something connecting hotels/travel and yoga which is something I’ve come to enjoy. And being a CFO and travelling a lot, I also think the opportunities in corporate travel remain significant.
What is the most interesting or surprising thing that you’ve learned from investing in hotel tech?
Not too much is surprising me at this point. It feels like there is never a dull day in hotel tech! One thing I did notice about some of the larger players in the space is that they serve hospitality, but at their core they are surprisingly not hospitable. One of my partners recently did a podcast with the former CMO at Airbnb and Coca-Cola and he talked about authenticity as an enduring and compounding competitive advantage. I think this is something that will matter more and more. I think it will eventually catch up with those companies who forget that, especially in hospitality tech.
What is the best book you’ve read lately and why?
“The Outsiders” by Will Thorndike. I read it a couple of years ago and it continues to stand out to me. The book profiles eight understated CEOs who took a different approach to corporate management. These “outsider” CEOs often didn’t have the charisma that society has conditioned us to expect and were often in their position for the first time. Humble, unassuming and often frugal, they shied away from advisors and the hottest new management trends, instead focusing on a pragmatic and a disciplined approach to capital allocation which drove extraordinary returns. I found myself getting lost in each of their stories and admiring their independent thinking and patience to wait for the right opportunity. “Shoe Dog” and “Limping on Water” are two others I enjoyed.
What is one thing that most people don’t know about you?
I love yoga and meditation.
For all the startups that might want to pitch in TCV’s office, what can you tell them about your investment criteria?
We recently began investing out of TCV X, a $3 billion fund, so the opportunities we pursue are typically between $30–300M. We tend to be flexible on all other aspects of a transaction type and focus on category leadership potential and growth. I really enjoy spending time with entrepreneurs and would love for folks to reach out even if they are a bit early. Companies can scale quickly so we would love to start a relationship well in advance.
The views and opinions expressed in the post above are that
of the author and do not necessarily reflect those of TCMI, Inc. or its
affiliates (“TCV”). This post is not an offer to sell or the solicitation
of an offer to purchase an interest in any private fund managed or sponsored by
TCV or any of the securities of any company discussed. This post is
intended solely for prospective portfolio companies and their agents regarding
TCV’s potential financing capabilities. The TCV portfolio companies identified above,
if any, are not necessarily representative of all TCV investments, and no
assumption should be made that the investments identified were or will be
profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For
additional important disclaimers regarding this document, please see
We believe innovation and great entrepreneurs are everywhere. We’ve been fortunate to back some important technology franchises that were built outside of Silicon Valley. In particular, there’s a strong emerging software ecosystem coming out of Australia and New Zealand. We count two category leaders — SiteMinder in hotel management and Xero, a global leader in accounting software — in the TCV portfolio.
TCV GP David Yuan recently had a chance to chat with Rod Drury, Founder of Xero, about his take on building a business from the region. Rod and his team have created and scaled a massive SaaS platform for small businesses around the world that’s made Xero the largest tech company coming out of New Zealand.
really packs in the lessons for growing companies, including:
The advantages of a small home market
How to build a global team and business from day one
Why Xero IPO’ed first and then scaled the business worldwide
How to make the journey its own reward
this and a lot more, settle back and click play.
FRAMINGHAM, Mass., April 25, 2019 /PRNewswire/ — Rave Mobile Safety (Rave), the leading provider of critical communication and data platform solutions trusted to save lives, today announced it has received a significant investment from TCV, one of the largest growth equity firms backing private and public technology companies. The investment and expertise from TCV will help Rave fuel its product innovation and growth plans and position the company to continue to build on its market-leading portfolio of communication solutions deployed by top education and healthcare institutions, enterprises, and state and local public safety agencies.
“Today is a wonderful milestone for Rave and a testament to the tremendous results our customers have seen using the technology that they helped design to improve the safety of those they protect,” said Todd Piett, President and CEO of Rave Mobile Safety. “TCV has a history of investing in category-redefining companies and their partnership reaffirms our innovation track record, market-leading customer retention and the rising demand for holistic crisis and emergency management solutions. This investment will fast-track our vision for the business, and we’re eager to step into this next chapter of our company’s history.”
Since its inception in 1995, TCV has raised over $15 billion across 10 funds and invested over $11 billion in leading technology companies including Netflix, Facebook, Expedia, Spotify, Airbnb, GoDaddy, and Zillow. TCV also brings significant software buyout experience, having partnered with leading vertical market software companies, including ETQ, IQMS, Watermark, SMT, CCC, and Avetta.
“The Rave platform is unique in that it helps effortlessly bring together the various entities involved in citizen safety. We were impressed with Rave’s stellar customer base across multiple industries and steady product innovation in a market that is ripe for disruption,” said Kapil Venkatachalam, General Partner at TCV. “Rave will be able to leverage a broad range of TCV’s resources, including our deep sector knowledge and network of advisors to capitalize on growth opportunities in present and untapped market segments.”
“Today’s safety leaders are utilizing innovative technology to prepare better, respond faster, and communicate more effectively,” said Bob Burke, Venture Partner at TCV. “We are delighted to partner with an experienced executive management team and help shape the company’s expansion following on Rave’s 10 years of consecutive double-digit growth.”
Rave has over 5,000 customers deployed in the United States. The City of Chicago, Washington D.C. Schools, the City of Cincinnati, Iowa State University and City of Virginia Beach are some of the 1,100 customers added during the past year. Thousands of agencies and institutions across law enforcement, 9-1-1, state and local emergency management agencies, corporations, healthcare organizations, K–12 districts, colleges and universities depend on Rave’s solutions.
“The community in Virginia Beach has to not only account for the safety of our 450,000-plus citizens, but also for the millions of visitors who travel to our shores each year,” added Stephen Williams, Director – Emergency Communications Citizen Services for the City of Virginia Beach. “We recently upgraded to the Rave Mobile Safety platform from a legacy system because of Rave’s robust Mass Notification feature set and ability to deliver critical information to 9-1-1. Rave gives us that advantage and the peace of mind that comes from knowing we can shorten response times and handle spikes in activity during our busy tourist season.”
Shea & Company served as financial advisor to TCV. Raymond James & Associates acted as exclusive financial advisor to Rave Mobile Safety.
About Rave Mobile Safety Rave Mobile Safety, a trusted safety software partner, provides the leading critical communication and data platform trusted to help save lives. Used by leading education and healthcare institutions, enterprises and state and local public safety agencies, the award-winning Rave platform including Rave Alert™, Rave 911 Suite™, Rave Panic Button™, Rave Guardian™, Rave Prepare™ and Rave Eyewitness™ SwiftK12™ and Swift911™ protects millions of individuals. Rave Mobile Safety is headquartered in Framingham, Mass. For more information, please visit https://www.ravemobilesafety.com/.
About TCV Founded in 1995, TCV provides capital to growth-stage private and public companies in the technology industry. TCV has invested over $11 billion in leading technology companies and has helped guide CEOs through more than 120 IPOs and strategic acquisitions.
TCV’s software investments include Alarm.com, Altiris, Ariba, Avalara, ExactTarget, ETQ, FinancialForce, Genesys, IQMS, OSIsoft, Sitecore, SMT, and Splunk. TCV is headquartered in Menlo Park, California, with offices in New York and London. For more information about TCV, including a complete list of TCV investments, please visit http://www.tcv.com.
SOURCE Rave Mobile Safety
Rave Mobile Safety Phone: 888-605-7164 PR@ravemobilesafety.com
NEW YORK, March 13, 2019 /PRNewswire/ — Leading instructional content platform, Newsela, announced today a $50 million C investment from growth equity firm TCV, who has a history of backing successful content platforms, including Netflix and Spotify. Newsela will use these funds to accelerate its rapidly expanding footprint in schools across the country. With over 20M students and 1.8M teachers on the platform, Newsela is now being used in 90% of U.S. schools.
Newsela sources and curates rich, engaging digital content from hundreds of partners, making it accessible and personalized to student interests. Teachers rely on Newsela as a trusted source to help them move past lecturing and deliver a more modern social learning approach that fosters deeper connections with every student in the classroom, piques their curiosity, and enables discussion.
The investment from TCV will also fuel expansion of Newsela’s new Custom Collections offering, allowing districts to customize materials that match their unique curriculum standards.
“At TCV, we focus on finding transformative EdTech companies, and Newsela has proven to be a tool that boosts learning outcomes,” said Woody Marshall, General Partner at TCV. “Our investment will help extend the platform and make it more accessible and even more valuable to students, teachers, and administrators. We are especially excited by the great engagement and feedback that Newsela already has with their users.”
As part of the transaction, Woody Marshall, a General Partner at TCV, has joined Newsela’s Board of Directors.
“Today’s digital-savvy kids have unprecedented access to content they care about. But in the classroom, they’re often limited to textbooks and other outdated, inflexible materials that aren’t engaging. Most teachers resort to piecing together content found in web searches, which is not sustainable. This lack of relevant, safe, reliable and accessible materials has created a massive engagement gap in our schools. The future of education lies in closing this gap,” said Matthew Gross, CEO of Newsela.
“With high-speed broadband now ubiquitous and 1:1 computing (a non-shared laptop available to every student) the norm in classrooms, school districts are actively seeking solutions to this problem. They’re increasingly choosing Newsela to provide safe, trusted, accessible and engaging content and assessments, while giving teachers the freedom to personalize for their students’ interests and needs. With this investment from TCV, we will scale efforts to help districts turn their technology infrastructure into quantifiable results that improve learning outcomes.”
For more information about Newsela or to join the team, visit Newsela.com.
Newsela is an Instructional Content Platform that combines engaging, leveled content with integrated formative assessments and insights to supercharge engagement and learning in every subject. Students and teachers use Newsela to find digital content from 100+ of the best sources—from National Geographic to NASA, Biography.com to Encyclopedia Britannica, the Washington Post to the Wichita Eagle. Content is instructionalized to meet students where they are, with interactive tools and analytics to take them where they want to go. Newsela has become an essential solution for schools and districts, with a presence in over 90% of U.S. K-12 schools. Newsela is the content platform for the connected classroom. www.newsela.com
Founded in 1995, TCV provides capital to growth-stage private and public companies in the technology industry. Since inception, TCV has invested over $11 billion in leading technology companies and has helped guide CEOs through more than 115 IPOs and strategic acquisitions. TCV’s investments include Airbnb, Altiris, AxiomSL, Believe, Dollar Shave Club, EmbanetCompass, EtQ, ExactTarget, Expedia, Facebook, Fandango, GoDaddy, HomeAway, LinkedIn, Netflix, OSIsoft, Rent the Runway, Sitecore, Splunk, Sportradar, Spotify, TourRadar, Varsity Tutors, WorldRemit and Zillow. TCV is headquartered in Menlo Park, California, with offices in New York and London. For more information about TCV, including a complete list of TCV investments, visit https://www.tcv.com/.
It began over dinner.
Nancy and Randy Flamm, who worked for competing suppliers of materials to small
manufacturing companies, were out with a shared customer who wished that his
factory had the kind of MRP and ERP software that large manufacturers had. Randy
sensed opportunity: As production manager at a small manufacturer in the early
1980s, he had written his own software for inventory and scheduling. In short
order the Flamms quit their jobs, took a second mortgage on their house in Los
Angeles, and launched IQMS.
They had 100 customers
within a year.
The innovations came quickly.
Randy converted his software to the newly introduced Windows platform, creating
one of the first Oracle-based client-server programs for small manufacturers.
Then he connected the application to factory equipment so that the machines
automatically sent operating information to a data warehouse. Next, he linked
the warehouse to back-office financial and human resource systems for the
industry’s first end-to-end solution. He changed the whole game by delivering
comprehensive views of factory performance in real time.
Now IQMS enabled small
factories to do what the big ones did: monitor operations moment by moment
around the clock, adopt lean principles, organize just-in-time supply chains, cut
downtime with proactive maintenance, and determine production cycles and unit
costs within minutes and cents.
With growth came both challenges
and opportunities. The Flamms had moved IQMS to Paso Robles, a wine region midway
between Los Angeles and San Francisco, which made them one of the handful of
high-tech companies near mid-state universities such as California Polytechnic
University (“Cal Poly”). But then Silicon Valley began attracting talent from those
schools, and the Flamms had to get creative with their recruiting. One tactic
was doing interviews on local talk radio, encouraging parents and grandparents
to tell college-age kids that Paso Robles had its own high-tech employer.
Meanwhile Randy was the
company’s CEO, CTO, and software designer, and nearly everybody in the company
reported to him. Nancy, the controller, pulled in her brother and his wife to
run sales and marketing. When the Flamm’s babysitter Shannon Holloway showed
interest in IQMS, they discovered she had management talent and hired her, too.
At the 20-year mark, IQMS
had annual revenue of $35 million, no debt, a strong competitive position – and
the Flamms were turning down dozens of investor inquiries each year. When they
decided to recapitalize in 2014, one company stood out. “TCV was heads above
everybody else,” Randy Flamm says. “We spoke the same language, and everything
they ever said was exactly what happened.”
“IQMS caught our
attention well before we invested, because of our experience with other founders
who achieved the same kind of technological and competitive breakthrough,”
explains Jake Reynolds, general partner at TCV who led the investment with
fellow general partner Kapil Venkatachalam. “We weren’t worried that they had
taken little or no outside investment, because that meant they were going to judge
us based on what we could do for their business, not the size of our check.”
TCV presented a roadmap
for moving IQMS toward cloud-based, SaaS solutions that generated revenue from
subscriptions rather than licenses. TCV also advocated for tools to surround
the company’s customer-focused products with stronger support and professional
services, and for increasing speed by building out the software architecture to
a true multi-tenant solution. Significant investments in all these areas would
take several years to accomplish but prove decisive for scaling the company.
Just as importantly, TCV
had abundant experience with transitioning founder-led, family-run companies to
experienced manage teams. That’s why everyone was delighted when Gary Nemmers,
formerly COO of HighJump Software, agreed to become IQMS’ new CEO in 2015. Nemmers
was a veteran of other founder-led businesses, and he had helped grow and scale
multiple businesses and prepare companies like HighJump for its successful exit
via acquisition. “The first time I met Randy and Nancy, we clicked, and I knew
it in my gut that the time of the transition was right,” Nemmers recalls, and
that was the beginning of IQMS’ next phase of rapid and sustainable growth.
Respectful of IQMS’s
close-knit culture, Nemmers worked closely with TCV and brought in seasoned
veterans to take leadership positions the company had never staffed before, including
Matt Ouska as CFO, Dan Radunz as CTO, and Cheri Williams as SVP of professional
services. Under Nemmers’ leadership, the team formalized and aligned the
company’s core business processes so they could accelerate product management
and development, serve more customers, and scale more efficiently than in the
past. They also established an office near San Francisco to increase the
company’s accessible pool of software talent.
“Our mantra was ‘people,
processes, playbook’,” says Nemmers of his first year leading IQMS. “Once we
added a few key people, we could bring in strong processes across the entire
firm and establish playbooks to do things in a consistent, repeatable way.” As
for working with private equity, his advice to other CEOs is equally clear.
“You listen to and align with your board and your investors. At the same time, you
follow what has made you successful in the past because that’s why they hired
you to run the company.”
IQMS flourished and
significantly increased its customer base. Growth was not always smooth, but
TCV had Nemmers’ back. “License revenue is inherently lumpy,” he points out,
“so sometimes revenue was a rollercoaster. We’d crush our plan one quarter and
miss the next, but we had a plan and knew how to execute. The board was super
helpful in thinking long-term and strategically versus focusing on quarter-to-quarter
swings. They were great sounding boards.”
With a broader and deeper
solution set plugged into a professional marketing engine, IQMS emerged as one
of the top software providers for small and medium-sized manufacturers around
the world. The company naturally started attracting attention from the strategic
players in the ecosystem. “We knew that IQMS offered the best route for enterprise
software providers who wanted to expand into the SMB space,” Nemmers points out,
“so we played from strength. It wasn’t just the enterprise players evaluating
IQMS, it was also us looking for an ideal fit.”
Dassault Systèmes of
France stood out for exactly that reason, and Nemmers seized an opportunity to kickstart
the conversation. During a visit to Europe, he picked up the phone and called
Philippe Charles, SVP of manufacturing and supply chain for Dassault. “I told
him I was in Zurich and a whole day had opened up on my calendar,” Nemmers
recounts. “He said ‘Give me five minutes.’ Then he called back with an invitation
to meet him and his team in Paris, and that was the beginning of the great
relationship we built with Dassault over the next year and a half that led to
Nemmers and his team had carefully and strategically grown the business and poured energy into building relationships with customers, serving 1,000 manufacturers located primarily in the U.S. whose 2,000 manufacturing facilities in 20 countries produce for the automotive, industrial equipment, medical device, consumer goods, and consumer packaged goods industries. The core MES and ERP platform could be expanded with more than 20 additional modules including CRM and payroll, all integrated in a single database.
“Dassault is a strategic
vendor for enterprise manufacturers and was looking for a way to get into the SMB
segment,” explains Venkatachalam. “Initially we talked about channel
partnerships, but we had a feeling the discussion would pivot toward something more
strategic.” Nemmers worked with TCV to conduct a robust M&A process that
included more than 20 strategic vendors and investment firms. Dassault won the
deal and completed the acquisition in early 2019.
The two companies already
share around 600 customers, who use both IQMS solutions and Dassault’s
SolidWorks platform to run their factories. From this foundation, IQMS can
market to over 55,000 SolidWorks customers and Dassault can now address the
world’s estimated 250,000 SMB manufacturers. Even the timing is perfect,
because so many SMB manufacturers are now replacing legacy software that is
reaching end-of-life. Randy and Nancy Flamm are happily ensconced on their
ranch near the Pacific coast, while Nemmers guides his team and IQMS through
its integration with Dassault and onward toward even greater success.
Tell us about your firm. What makes TCV different?
CEOs and Founders tell us how TCV stands out for them: the depth of our knowledge in their particular industry and technology. When we identify a compelling technology trend, we take the time to thoroughly understand the underlying drivers, business model, and competitive environment. Having a developed perspective means we can have much more meaningful conversations about a company’s business and growth opportunities.
Where did the firm’s name come from?
We were founded in 1995 and were originally named Technology Crossover Ventures. “Crossover” means that we’re equally comfortable making both private and public investments, and that we help companies evolve from private to public ownership. Many CEOs appreciate a firm who can be a capital partner at multiple stages of their company’s evolution. For example, we invested multiple times in Netflix as a private company, and continued to support them as an investor after their IPO. Our original investment in the company was 20 years ago, and we continue to be investors today. Over the past 24 years, we’ve had more than 60 IPOs in our portfolio and we bring that experience to every new investment.
What defines your portfolio?
We look to partner with companies that have already established a leadership position in their market and are looking to succeed at an even greater scale. This typically means that a company has been growing for several years – with a history of delighting customers, an economic model that is reflective of the value they provide, and an opportunity to scale the business in the future.
How is the firm different today than when you first started?
Today’s technology market is much bigger than it was in 1995, and today TCV is also much bigger than in 1995. During the past 24 years, we’ve invested in hundreds of companies and evaluated thousands more, so our knowledge base, experience, and network has expanded dramatically. Because of that, we’re in a better position today to help companies scale smarter and faster.
Why is TCV a part of NVCA?
We are a collaborative firm, so being part of our own industry association is a natural fit. TCV was a founding member of the NVCA Growth Equity Group (GEG). Through our direct involvement on NVCA committees and task forces, we have witnessed first-hand how the NVCA works as an advocate for entrepreneurs as well as investors.
Tell us about the current VC landscape in your geography/region.
We have offices in Menlo Park, NYC, and London. While our geographic focus has generally been focused on companies headquartered in North America and Europe, most of our portfolio companies are – or are seeking to be – global leaders regardless of where “home base” is. Today, executives are building great companies everywhere, not just in the traditional technology hubs like the Bay Area, Boston, or New York. So we’re increasingly focused on finding the best companies regardless of where they are located.
What’s ahead for your firm in 2019?
Looking outward, we see more great technology companies and talented entrepreneurs than ever before. We recently began investing out of TCV X, a $3 billion fund, and are excited about the portfolio we’re assembling for that fund. Looking inward, we’re focused on making TCV an even better platform for the world’s best technology investors. We continue to grow our organization and provide a compelling career path for investors who can partner with the world’s best technology companies and deliver exceptional returns for our Limited Partners.
Describe your firm’s culture in 5 words or less
“Helping others succeed.” Internally, this means each of us are accountable for the success of the entire TCV team, and each of us are expected to actively support our colleagues. Externally, we all have the ability – and responsibility – to bring the capabilities of the entire firm to our portfolio companies and give them the best TCV has to offer.
Founded in 1995, TCV provides capital to growth-stage private and public companies in the technology industry. Since inception, TCV has invested over $10 billion in leading technology companies and has helped guide CEOs through more than 115 IPOs and strategic acquisitions. TCV’s investments include Airbnb, AxiomSL, Dollar Shave Club, EmbanetCompass, ExactTarget, Facebook, Fandango, GoDaddy, LinkedIn, Netflix, Rent the Runway, Splunk, Spotify, Varsity Tutors, and Zillow. TCV is headquartered in Menlo Park, California, with offices in New York and London. For more information about TCV, including a complete list of TCV investments, visit www.tcv.com.
The views and opinions
expressed in the post above are that of the author and do not necessarily
reflect those of TCMI, Inc. or its affiliates (“TCV”). This post is not an
offer to sell or the solicitation of an offer to purchase an interest in any
private fund managed or sponsored by TCV or any of the securities of any
company discussed. The TCV portfolio companies identified above, if any,
are not necessarily representative of all TCV investments, and no assumption
should be made that the investments identified were or will be profitable. For
a complete list of TCV investments, please visit www.tcv.com/all-companies/. For
additional important disclaimers regarding this document, please see
McCarty and his partners built an innovative software company that transformed
the quality standards movement. Glenn recently sat down with TCV General
Venkatachalam to talk about the early days of the company and
deciding to sell it 25 years later. He also shares advice for founder CEOs of
technology companies looking to scale their business and what to expect if they
decide to go down the private equity path. Key topics include:
ETQ’s origins and early pivots
How to assess your buyout options and find the right partners
Preparing for success in the due diligence process
How to bring your team on board
The Early Days…
Kapil Venkatachalam: How would you describe
what ETQ does?
Glenn McCarty: Most people today know ETQ
as a provider of a quality management software platform that automates the
process of organizing operating data for managing compliance and quality
improvement across a variety of industries, including automotive, healthcare,
pharma, energy, food and beverage, and chemicals. It’s designed to layer onto a
company’s existing processes while opening up much better visibility into
opportunities for increasing quality and competitive advantage.
Kapil Venkatachalam:I’d love to hear more about the roots of
the company…the cocktail-napkin story. As I understand it, you were a consultant
rather than a technologist when you launched ETQ.
Glenn McCarty: Technically, I was an
auditor. In the 1980s the U.S. had gotten behind the curve for manufacturing
quality. The rest of the world was pushing ahead with ISO 9000, an
international standard for improving manufacturing processes, as a way to
improve product quality. It was becoming hard for U.S. companies to sell
products in Europe and Asia that didn’t come from factories with ISO 9000
Kapil Venkatachalam: How did this lead to
the formation of ETQ?
Glenn McCarty: I was working as a
quality engineer for Underwriters Laboratories in the U.S., and I was getting bored
with testing hairdryers. ISO 9000 was the big international trend in
manufacturing at the time. So I joined a group that was doing ISO 9000 audits.
giving failing grades to tons of manufacturers, because their processes just
didn’t measure up to the standard. We would get together with other auditors
after work and feel terrible. I was a 20-something quality auditor sitting in a
boardroom of a large company and telling the executive team all the quality issues
Kapil Venkatachalam: Did you see the vision for ETQ
given the demand and had it figured out from that point on?
even close. We started a consulting firm, because we saw that the big
accounting/consulting firms did not offer services to address ISO 9000. So we
pioneered that market. The thing is, we were able to help a lot of companies
achieve ISO 9000 certification, but then they struggled to maintain it. American
manufacturing was heavily oriented toward inspections and testing, while ISO
9000 focuses much more on process management with continuous improvement.
Pivoting to Software
Venkatachalam: What led you to
pivot from consulting to software?
McCarty: Two things. First, we knew from our auditing and
consulting experience that every company was different. They really valued the
processes they had developed to become successful, but there was so much
variation from company to company. While consulting was a great business that
filled a need, it was not scalable — we had to start over with every company
to learn their business. The other issue was that to maintain ISO 9000, U.S.
companies had to collect tons more information about their processes than they
were ever used to and capable of. It was a serious data management problem.
Venkatachalam: And this was decades before what we now call the “digital
McCarty: Exactly. No one was offering software focused
in this area.
Kapil Venkatachalam: What did you initially
envision for the product?
Glenn McCarty: We knew there was a need
for something more versatile than the document management systems of the time,
which had some nascent workflow capabilities. Companies needed real
workflow-based systems to lead their operating personnel through the process, track/capture
their process data, to capture their decisions. So we decided to develop
technology to track everything: all the
training records, audit findings, document approvals and revisions, different
corrective actions or non-conformances that went on in a factory.
When we made
the software, the first epiphany was that we had to develop software that could
be configurable, not customizable. And it all came from our auditing/consulting
days, knowing that companies have distinct processes. They had to be able to
layer the software over their own processes.
Assessing the Private Equity Route
Kapil Venkatachalam: When did you start
thinking about an exit? What drove that decision?
Glenn McCarty: Things were going well
for us, growth was high, and the profits were great relatively speaking to
where we came from – we started in a basement. And we said, “Let’s
continue growing this, we can do this.” We kept our heads down and kept
hitting our targets. As a founder, you think there are no limits to growth. And
while I still believe that’s true, I began to realize that home-grown leadership
had its limitations. That’s simply reality. I began to wonder what was out
Kapil Venkatachalam: How did you put that realization into action?
Glenn McCarty: The truth is, we used to get letters from
various companies saying they were interested in investing in us or acquiring
us. We didn’t even respond to them. Then one of our competitors was bought by a
large company. I called that company up and said, “Hey, why did you buy our
competitor? We’re stronger than them, we’re bigger than them, we’re better than
them.” They said, “Well, you wouldn’t talk to us.” That’s when we
started to explore our options to bring on a partner.
Kapil Venkatachalam:Did you have a framework to evaluate
Glenn McCarty: We didn’t have much of a
framework, but we did have some goals. The main goal was to maximize the value
and the potential of the business. That, for us, meant we wanted two things in
our partner. One was keeping ETQ intact as a business. We had seen scenarios where
competitors were bought by a platform company and integrated into another model.
We didn’t want that. The other key aspect for the partner was to bring a lot
more than money. To maximize the value and potential of the business, we needed
a partner with domain expertise, someone who could understand what we built and
take it to the next level.
Kapil Venkatachalam:What about a good fit in terms of culture?
Glenn McCarty: Really important.
Working with like-minded people, who see things the way you do, makes
everything easier. That realization came quickly, after we began meeting with
potential investors. A lot of them had their standard approach, and we were
supposed to just fit into it. For example, there were the folks that said,
“When we buy you, we’ll keep you folks as the executive management team.
We want to come to board meetings and have you report to us on how great you’re
Kapil Venkatachalam:Was that appealing?
Glenn McCarty: When we asked, “How are you going to help
us with our products, with sales and marketing?” they said, “Well, we know
people.” And I said, “No, that’s not going to work.” Then we had other
people say, “We’re going to send you back to “school.” You’re going to
have to do this our way.”
engineer and went to many years of school before I graduated. The last thing I
wanted was to change everything we had built and stood for. What we were
hearing was either status quo or a reeducation program, but our main goal was
to maximize value and potential. We
recognized that we needed a partner who offered value creation via a true
partnership. Once that came into focus
our next steps became clear. I would
advise founders to seek a partner who can think about your business and your
goals the way you do and bring in improvement and new sources of value. Because
you’re going to be talking about that value, and working on that, side by side,
for months to come.
Kapil Venkatachalam:Once you knew what type of partner could offer
the right fit in terms of your objectives and culture, you headed into the
private equity journey. In hindsight, what lessons would you offer to other
people who are thinking about taking this journey?
Glenn McCarty: In retrospect, the most
important thing is to prepare. Like everything else in life, luck favors the
people who are ready for it. You have to think ahead about what buyers want, so
you don’t wind up doing fire drills down the line because you weren’t prepared.
You want to show them a smooth-running business with a ton of potential.
Kapil Venkatachalam:What are the keys to good preparation?
Glenn McCarty: I would say there are two things. First,
surround yourself with good advisors. You are not in the business of selling companies,
so get people who are experienced. Your cousin, your sole proprietary
accountant or lawyer, the people on your softball team might say he or she can
advise you, but it’s unlikely. The reason it’s unlikely is, if they were
experts in buying and selling companies then they would be doing that for a
living. You don’t ask your CFO to write code, because that’s not what she/he
Kapil Venkatachalam:Also, no one expert or firm is going to
be the best at everything.
Glenn McCarty: That’s right, you want experts in each area of
financials, taxes, legal, and so on. And this gets us to the other big thing
about preparation: you have to get your management team ready. In most cases,
they are going to be the ones working with your expert advisors, and then with
the experts from the acquiring company. As the CEO you are relying on your
management team to raise the bar to meet the due diligence level. You need to
make sure that the right people on your team are aware of what’s coming their
way and connect them with the right coaches, so they can be prepared in terms
of their time, their systems, and whatever information they are going to have
Kapil Venkatachalam:What are some of the points you might
use to differentiate buyers?
Glenn McCarty: You want to know how many founder-owned
companies the potential partner has acquired in the past. How many of those
companies did the buyer scale up successfully? What is their expertise in sales
and marketing or product development? How many other companies in their
portfolio could become customers or business partners for you? You want to know
all these things, because the potential buyers are doing exactly the same
analysis of your company.
Kapil Venkatachalam:Let’s dig a little deeper here and talk
through the different areas of preparation for the due diligence process.
Glenn McCarty: The first thing to realize is that it’s going
to be time-consuming. It’s easy to think that you already have your house in
order, because your business is humming along. But the buyers have a completely
different perspective. They will require you to participate in a due diligence
process to demonstrate your companies past and future potential.
Kapil Venkatachalam:Explain why financial systems matter,
along with the numbers.
Glenn McCarty: In hindsight, while you might think the world
of your business and its strategic value, at the end of the day the objective
measures of success are financial. If you think you are headed for private
equity, you may want to invest in better financial systems first. If you do not
have a CFO, you might want to seriously consider bringing one on even though
you only have one to three years to go before exiting. One of the benefits is that your financial
advisors won’t have to work so hard to explain your financials. They are going
to spend some time at this no matter what, but better systems speed it up.
Kapil Venkatachalam:Many founders are aware of the need for
strong financials, but they are surprised by the amount of purely legal work
that also has to get done.
Glenn McCarty: We had not realized that our contracts with
customers and suppliers would be scrutinized. You have to prepare an amazing
number of documents for a transaction. So yes, you need good legal advice and
some leverage for document creation, and it should be from a firm that
specializes in the type of transaction you are doing. Even with support from an
outside legal firm, your General Counsel will be spending a huge amount of time
on a transaction, so you have to make plans for them to continue with the
business operations while the transaction process is in play.
Kapil Venkatachalam:So now you have your advisors lined up.
They’re all experts. But the people on your team may not be experienced in the
process ahead. What do you tell them? How do you prepare them?
Glenn McCarty: First, it’s important to understand the
implications of what you are asking. In our case, we had a lot of long-term
employees who had worked their way into senior management, so they had never
seen this process somewhere else. In that situation, you have to ease them into
the whole idea, bring them into your thinking, and get them aligned before you
start explaining what they’re going to have to do.
Kapil Venkatachalam:Is this an area where you can get
Glenn McCarty: I think you have to get them involved, because
they know the drill and probably most of your team doesn’t. They can provide
education about the process before it starts and coaching all the way through
it. You need this because the same employees you are asking to help you sell
the company are also running it. No matter how you look at it, this is an ask
that is an additional task to their day job. The danger of distraction is
there. You need your team to be on top of the due diligence process, while also
making sure the ship doesn’t lose speed or direction.
Kapil Venkatachalam:That’s great, thanks, Glenn. My final
question is about the takeaways for founders who may be looking at these
options. What’s your advice in a nutshell?
Glenn McCarty: Private equity firms provide an interesting
alternative to help you maximize the potential of what you have already built.
That said, you have to take the time to find the right firm for you – whose
values, experience, and vision are aligned with yours. As we discussed earlier,
you have to prepare your team for the journey before you lead them on it. And
finally, recognize the value of good advisors. They are worth the money because
they bring you the right partners and prepare you for a successful partnership.
Selling your business is both exhausting and exhilarating, and I am grateful
for all the support I received.
Kapil Venkatachalam:Thanks so much, Glenn.
The views and opinions
expressed in the transcript above are those of the speakers and do not
necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). This
transcript is not an offer to sell or the solicitation of an offer to purchase
an interest in any private fund managed or sponsored by TCV or any of the
securities of any company discussed. TCV has not verified the accuracy of
any statements by the speakers and disclaims any responsibility
therefor. The TCV portfolio companies identified above, if any, are not
necessarily representative of all TCV investments, and no assumption should be
made that the investments identified were or will be profitable. For a complete
list of TCV investments, please visit www.tcv.com/all-companies/. For additional important
disclaimers regarding this document, please see “Informational Purposes Only” in