Episode Transcript
Speaker 1 00:00:12 Hey everyone. You know, as we enter the fall and we're coming up on the HR tech season, I had a very interesting interview with Nari Ansari, who's one of the senior partners at TCV Ventures, which is a venture capital company, and TCV has a lot of experience. They invested in Airbnb and LinkedIn by dance, Expedia, Facebook, I mean, they've really hit a whole bunch of home runs. And nari and I talked about the HR tech market. And so I wanted you to hear our conversation. There's a lot of lessons in here. I won't repeat them in the preview, but take a listen to this and then read the notes and you'll hear some things that I know will matter to you as a buyer, as an investor, or as an entrepreneur and tech leader. Thanks a lot. Well, NARI, why don't you tell us what you do and your role, and then I'll talk a little bit about my role, but why don't you start?
Speaker 2 00:01:08 Sure, absolutely. So I'm a general partner at at T C V T C V. We are later stage growth equity technology investment firm. We've been around for 26 years now. So good track record across both software and, and internet investing in that timeframe really globally, which is, which has been great, particularly as there's been more and more technology companies that have come out of different geographic theaters within HR technology. We've been very active, we're investors in LinkedIn previously we're investors in Perceptyx and the enterprise employee experience side. We're investors in HireVue in the enterprise pre-hire recruitment, SaaS sides. We are a part owner of the largest job board in Poland, uh, group of prac sui. So I have been fairly prolific in the category over the years, and generally it's part and parcel with the T C V investment philosophy. That's technology is transforming everything. And so we want to be partners to those management teams that are driving those later stage companies to achieve global success as they, uh, go on their journey.
Speaker 1 00:02:12 I'm an industry analyst and I talk to a lot of these vendors and startups and the buyers. And one of the things that's been amazing to me in the last two or three years is the growth rate of the market and the amount of money that's being thrown in. Are you guys seeing the same thing? Just more competition, more investment everywhere in in the whole domain?
Speaker 2 00:02:34 Certainly it's sort of a byproduct of success. If you think about some of the most significant public offerings and other types of liquidity events that have occurred, they have occurred within the talent domain. When I think of, you know, the workdays and the pay coms and the Sibos and the then the Indeeds and the LinkedIn acquisition by Microsoft, it's just been sort of hit after hit, which I think frankly reflects that. It's just such a massive mar I mean it's all of the employees.
Speaker 1 00:03:04 There's 2 billion employees around the world, <laugh>
Speaker 2 00:03:07 And the, you know, the systems to manage them and the different processes associated with that have been, have been seeking automation, seeking efficiency, seeking effectiveness. And so the spend is there. The, the, the contours of the market size are, are enormous. And when you have a backdrop like that, investment dollars will follow. But to your point, it has felt like particularly over the, yeah, last year or so, it's, it's certainly reached a fever pitch.
Speaker 1 00:03:31 You must be getting dozens and dozens of proposals all the time from startups and small companies. What do you guys look for in a team company product that you think could turn into the next LinkedIn or the next whatever?
Speaker 2 00:03:46 Yeah, it's a, it's a great question. You know, our, our approach as later stage investors is we typically get involved when companies hit sort of eight figures or so in a r r or, or revenue in ours is really about how they, you know, go from eight figures in revenue to nine and 10 figures on revenue and that scale up story that they embark upon. But the themes are largely the same, which is, I think of it very simply as sort of tech team and tam. And so you're thinking about product with regards to their technology. What is the value proposition? How do they serve the clients? What are they doing for those clients in that context, where is the client delight? Where is the customer delight? And then where is the sources of sustainable differentiation and IP of that sort? And then the team is this a team that's product-centric, has experienced scaling businesses, has a vision associated with where they want to go. And then, you know, we talked about a little bit about the TAM in terms of the total addressable market generally within this category, which again, has drawn quite a bit of interest and investment. These are massive, massive markets that we are talking about. And so they don't necessarily tend to be market size constrained, but as you get higher and higher valuations, you have to think of ultimately what the size of the prize is. And so that does come into consideration, particularly as a later stage investor.
Speaker 1 00:05:00 One of the things I run into when I talk to a lot of mid-size companies is there's usually a management team evolution somewhere in the tens of millions where the founding team usually doesn't make it to the next level. Not always, but sometimes. What's been your experience with the management teams? Cuz you're getting them right during this transition period where they might be a small to medium sized company to grow into a very large company.
Speaker 2 00:05:24 Yeah, it's, it's a great question and it's evolution. We've seen probably 200 plus times across the, uh, across the portfolio. And, and every situation is, is unique as you get larger. What I kind of always say to my company is, particularly as I think about recurring revenue growth businesses is good news today is a record. We've never been as big as we are today. Even better news, tomorrow's gonna be a new record as well each day. Each record brings with it different challenges and, and different opportunities. But the good news is as you, as you get bigger, you can afford better talent, you have more resources. And so I think it's really incumbent upon the CEOs and the entrepreneurs to think through at every strata of scale, do they have the right folks on their teams to go and execute? And sometimes it's moving different pieces around. Sometimes it's moving some folks out who have done a great job but aren't necessarily gonna be part of the story going forward and bringing, bringing in others. So it's a natural evolution for a lot of these companies. But it, it's all part and parcel at the fact that as you get bigger, the challenges and opportunities are different and require typically a different set of skills.
Speaker 1 00:06:34 One of the things that I have noticed tends to trip up a lot of these software companies as they get bigger is they start with a problem and they become really good at this part of the solution they do. And maybe they develop an incredibly good brand. You know, HireVue is a perfect example. They kind of invented the video interviewing pre-hire market, and then they pick up speed and then a whole bunch of other people copy it. And all of a sudden you're like, well, do we wanna just be a bigger version of that? Or do we need to get into this other stuff? And then all sorts of weird things can happen. What's been your experience with scaling? Do you have an opinion or do you help companies with that particular scenario of keep doing what you're doing as long as you can and become as big as you are or cross pollinate yourself into all these other adjacent markets?
Speaker 2 00:07:25 It's a great question and we have these types of conversations all, all the time at a board and, and, and a strategic level. I would say TCVs experience generally is that our very best companies do a precious few things extremely well. And so there is merit to focus being the focus. And I think, you know, we have seen companies in this space where, you know, they may have had strategic crossroads. iSims I think is a great example, that there was a period where they maybe thought about getting into broader talent management and they said, no, no, no, we're we're gonna double down on pre-hire. I think ZipRecruiter thought about maybe they go into kind of that, you know, Paylocity benefits, uh, world, and they said, no, we're gonna, we're gonna, we're gonna double down and and, and stick to this. So I think, I think focus is, the focus is an important part that, you know, one of the things that that's actually comes with success is that your clients may distract you because they love you and they'll say, gosh, you've done so well at solving this for me.
Speaker 2 00:08:22 Could you also help me with that? And you, you know, as an entrepreneur you're like, well, I'm not gonna turn down revenue and I'm not gonna say no to a client, but as you scale, I've often found that the path from eight figures in revenue and nine figures in revenue, it's as important what you say no to as what you say yes to. And generally speaking, again to the earlier point, these markets are so large that you're not necessarily saturating yourself to where you need to look at other things. So I think some of those things you have to think through what makes sense, what's adjacent, what's got industrial logic to it versus, you know, spreading yourself too thin. Cause that can have real problems.
Speaker 1 00:08:56 One of the scenarios that also comes up a lot, and I had this in my life, is keep growing versus sell. Maybe we should take more money and become 10 times bigger, or there's these other guys over here that really want us and we can just become a part of them. How do you help companies with that scenario?
Speaker 2 00:09:12 That's always a, a tricky situation. Maybe sort of one of those champagne problems to think through. I think when we've had those types of discussions as shareholder bases, boards and investors and management teams, it's really around sort of what, what do we believe to be the optimizing outcome for, for the company? What is the runway in front of it? And so one, one of the things that we've been fortunate to do as TCV as an investor is we've been known for our patients and following our companies into the public sphere and continuing to work with them as public companies, not necessarily needing to seek out liquidity events on a stopwatch basis. And again, if you feel like you can compound your growth rate for many, many years at high rates on which a lot of companies have in in these markets, then selling can be done pretty prematurely.
Speaker 2 00:10:00 And we've seen all sorts of strange things happen right to this extent where, you know, Qualtrics gets acquired by SAP and then gets spun back out, Saba goes private, does bunch of acquisitions get subsumed within Cornerstone and then is now going to be taken private by Clear Lake? And so, yeah, you know what's been strange the last few years is that the end is not necessarily at the end in, in some, in some of these, in some of these cases. And so it's, uh, there's no right, there's no right answers. And again, ultimately there are clearing prices for pretty much every asset. And so it just sort of depends on what that price is. But it's been an interesting thing to think through particularly. And these are conversations that you have when, you know, asset prices seem to be going up and up and up. And so you ask yourself, well, you know, what would LinkedIn be worth today? Or, you know, what would, you know, what would x, y, Z company, what would success factors be worth today? What would tole be worth today? It's a tricky question to to think through. The market sizes are just getting bigger and bigger. The problems are just getting more and more complicated. And so it feels like the outcomes for the category leaders are becoming larger and larger.
Speaker 1 00:11:03 What do you think are the hot spaces for the next year or two from your company's perspective, your investment philosophies?
Speaker 2 00:11:11 I think it's been really fascinating. One of the things that I feel is, is breeding a lot of opportunities is if I think about the 2008, 2009 crisis, that was really one where CEOs grabbed their CFOs and said, you're in, you're in the foxhole with me until this thing is over. And when I think about the last 18 months, I really think it's been one where enterprises, the CEOs have grabbed their CHROs and said, you're in the foxhole with me. Mm-hmm. <affirmative> until, until this thing is over. You know, these CHROs have had to take on what I would describe as internal public health responsibilities, things they weren't necessarily prepared for. There's been, uh, a significant amount of issues associated with social justice D N I initiatives. You have remote work working mothers children doing online learning. You have kind of, uh, polarizing views on return to the office or the vaccinated versus the unvaccinated.
Speaker 2 00:11:57 So like the problems have just gotten much more textured over the last, uh, 18 months. And I think that C H R O role, which, you know, decades past may have been a little bit more administrative or compliance related, has become much more strategic and mm-hmm. <affirmative> operational, which I think breeds new opportunities. When I think about, you know, the transiency and the employee base and what it means for pre-hire technology, that's a huge opportunity. When I think of upskilling and re-skilling, and I know you've done a lot of work in, in that world, that I think is also a significant opportunity. Employee experience, I think continues to have more and more facets to it that are more and more complicated as well. Those are three that come to mind, sort of pre-hire in the wake of defragging of supply and demand mm-hmm. <affirmative> with remote work and then re-skilling upskilling knowledge work and what that means. And then employee experience. And again, you know, treating the employee as a critical constituent,
Speaker 1 00:12:53 Look at companies that are probably 10 million or more a r r already. So your space is not every startup, it's the company's already well along
Speaker 2 00:13:02 Round do they have the ability to, to reach for the mantle of category leadership within their sector.
Speaker 1 00:13:08 There's another question I had for you, which sort of boggles my mind. I think there used to be a philosophy that you wouldn't take too much money in each round because you don't wanna dilute yourself too much. So the company goes in small chunks, and lately it seems like the opposite has happened. There have been massive, you know, SoftBank throws 200 million at this company, a hundred million at that company, 200 million at this company. I talked to the c e O of Articulate who got over a billion dollars of i I think cash, I don't know. But why do you think there's all of a sudden these massive investments going on in these mid-stage companies? Or is that not true?
Speaker 2 00:13:47 No, I, I think, I think the phenomenon is one I live every day and they, uh, it's, it's a fascinating one to, to think through. I know in your, in, in your prior podcast you talked a little bit about, hey, look, in a interest rate zero environment, there's gonna be much more risk capital that's out there looking for a home. And so that has a Abu factor in terms of what it does to valuations and round sizes. And I think if you looked at seed series A, B, C, D, pre i p o, all rounds have, are higher, are are higher from a size standpoint than they were years ago. And I think it's really just incumbent on the entrepreneurs to think through, you know, it's about speed versus dilution. How do you do that trade off between speed versus dilution? And I think as valuations have gotten higher, the dilution element tends to be lower.
Speaker 2 00:14:35 And so you see a lot of companies with pretty significant capital war chest, and I think they're gonna be using a lot of those for acquisitions of smaller companies, which we're already seeing. And so there, there's gonna be a little bit of economic Darwinism where the ones that have raised these massive rounds are in a position to clean up some of the smaller businesses that haven't necessarily may not have the, for the journey in addition to investing in organic growth initiatives as well. But I don't see the, these round sizes phenomenon, I don't see that abetting anytime soon because you have, you know about I think 2 trillion of dry powder in private equity and venture and crossover fund coffers. And so that tends to have a lift element to all aspects of private investing.
Speaker 1 00:15:19 Okay. One more question that, that I would love to hear your thoughts on. So I'm sure occasionally one of your investments goes sideways and didn't quite execute the way you were hoping for whatever reason it may be. What, what is your, if you have such a thing, what is your general advice when that happens? Every company's different, but is it, do you sell the company? Do you replace the management team? Do you put more money into it and try to bring it, bring it back on track again? Or is it just a case by case basis?
Speaker 2 00:15:49 Yeah, I'd say generally, uh, a couple of things. Each situation is unique, and I'd say this sort of is focused on these later stage businesses where they've established product market. And so if you're in the early stage and you, you may ultimately figure out that there is no product market fit. And so that's, that's a different set of challenges. But generally speaking, when we have situations where companies are underperforming their potential, it's usually three reasons typically. I mean, they're not mutually exclusive. It's product, it's market or, or it's execution. And so if the world is moved away from your product or your product's not keeping pace with other types of innovation, that's usually an area where, you know, in enhanced investment, you know, renewed, focused on r and d, coming up with innovative new offerings that can, you know, that doesn't happen overnight, but that can really mm-hmm.
Speaker 2 00:16:36 <affirmative>, uh, reinvigorate the business if the market has fundamentally changed. I think that's, that's an exogenous factor, right? That's, that's tricky where you may not necessarily be able to pivot to another market or this side of the pool where it was warm is now cold and now you need to go to another side of the pool. That could be, that could be pretty tricky. But, you know, for most of the software companies that, that we've invested in, usually there's nothing exogenous that can totally upset your apple cart. Now I, if you look at some of these other countries, like what's happening in the Chinese tech market, there is some things that can happen exogenously that can affect your business. But again, most software companies in North America and Europe, they tend to be, I would say governors of their own destiny. Yeah. And then the last piece is execution, and again, goes back to the earlier point around the things that are required to operate and be successful at different parts of scale. And that's where, you know, you can't think about different members and, and bringing additional e executives and resources. And if, if you think about those three elements, generally speaking again for later stage businesses, once they've crossed the Rubicon of product market fit, you can get things stable and then succeeding again.
Speaker 1 00:17:47 You know, one thing that I've seen in my experience as an analyst is all of those obviously are very, very important, but because the HR domain is so big, every part of it has many, many players. There are no vendors, very few that have the market to themselves for very long. So I always noticed that the sales and marketing strength ends up winning in the end <laugh>. I don't know how you feel about that, but I've seen so many incredibly good products where they just never got it into the market because they could never quite figure out how to position or sell it well, and people never found it.
Speaker 2 00:18:24 Yeah, it's critical. I mean, I think we've seen companies be successful with, I would say relatively undifferentiated offerings. Mm-hmm. <affirmative>, but good enough. And then incredible sales and marketing acumen. I think pay is is a great example where, you know, they've, they've figured out how to be, uh, better than ADP on a few different dimensions, but just from a sales and marketing standpoint absolutely. Conducting a symphony. And so it's, right, it's a crowded market. Some of these things all look like each other relative to when, when it comes to the buyer's perspective. And so who has that rinse and repeat model from a go-to-market standpoint can be the, the, the distinguishing factor between success and failure. And it's, it's a, it's a fact of life. It's a fact of life. Yeah.
Speaker 1 00:19:10 Yeah. Great.
Speaker 2 00:19:11 I, I'd love to know what, what, what gets, you know, I, I gave you my three a, what gets me excited. Yeah, yeah. Where, where, where do you think as an analyst that investors should be, you know, perk in their ears up? It's on the early stage?
Speaker 1 00:19:23 Well, I think so I agree with you. The areas of employee experience are massive and that's so new. They're gonna be all sorts of tools and platforms and systems to make that easier. And the learning and skilling and corporate training market is just blossoming with opportunities. And the hot new companies are more AI enabled, more skills based and accommodate this creator market. This, this idea of creator platform for HR where employees build content for each other, HR and managers build content for employees that's untapped. I do believe there's sort of a TikTok of HR space out there where, because companies don't want to go out and buy an e r p, Oracles a p workday and then try to get it to do everything they want it to do because it's too expensive. They want something simple and easy to use, that it's on top of it.
Speaker 1 00:20:13 So there's a lot of opportunity there. And recruiting is becoming so data and AI based, I think there's kind of a generation of vendors that are gonna be platform vendors and data vendors. Mm-hmm. <affirmative> that have davi about external job market or skills or industry data. And their systems are just gonna run faster and better than the sort of naked software tools. You know, I was talking to a company, the biggest tech companies in the world are all data companies. Google is a data company, LinkedIn is a data company. Uh, you know, Microsoft to some degree not so much, but is becoming a data company. So just building software is great, but then how do you make your software even more powerful with the data in the market or the data in your customers? And the companies are starting to figure that out. And I do believe that the technology's a very important part of this and the market fit, but the sales and marketing to me is always the magic.
Speaker 1 00:21:12 Hmm. I, I really, because the HR buyers are, you know, not really technology buyers, they, they know enough about it that, you know, they want it to work, but they'll tend to buy from a provider they've heard of or a salesperson they trust, or a vendor that has a good brand and then they won't pay as much attention to the features. So even though I would imagine in it, the buyers are more savvy about technological advancement, I think in hr, marketing and sales is just critical. And a lot of the vendors are not as good at it as they could be. And they learn, you know, if they're doing it. So that's another thing I always look for.
Speaker 2 00:21:50 I think one of the other things you mentioned in the prior podcast was around the value of services and sort of that, yeah.
Speaker 1 00:21:57 What do you guys, you know, all these, all these startup guys are deathly afraid of services cuz they think it's gonna mess up their valuation. But, but I think great software companies have good professional services teams. They really, or, or very, you know, hands-on support teams that really get to know how their products are being used.
Speaker 2 00:22:14 I think it's critical personally, particularly if you're serving the large enterprise and sort of understanding their idiosyncrasies and the complexities that they have. And so, you know, services can take on a lot of different forms. It could be actually the implementation, it could be configuration, it could be data migration, it could be consulting and, and other things. In the recruitment side there's sort of media and, and yeah. Media elements to it as well. So, and I, I, I frankly don't see it as that dirty word that some, some folks, you know, cast aspersions on it. Cause I think it can, you know, and what I thought about it was sort of that relationship, that trusted relationship with the buyer. Yes. You know, the HR buyer may not have all the, you know, the feature functionality, techno wizardry and fastness, but they know when they're being treated well. Cause that services piece may be the difference between them being successful with the technology or not being successful with the technology. And that's something that, you know, smaller companies as they scale, they shouldn't, that they shouldn't lose sight of.
Speaker 1 00:23:12 No, I agree. And the services team, whoever they are, give you incredibly valuable product feedback that you do not get from salespeople.
Speaker 2 00:23:19 Totally. So <laugh> Abso absolutely. Yeah. Absolutely.
Speaker 1 00:23:24 Great. Okay, NARI, thank you. This is great.
Speaker 2 00:23:26 It was fun, Josh. Yeah,
Speaker 1 00:23:27 I look forward to working together and talking about stuff like this whenever.
