With a background in operating roles at Portal Software and McAfee, as well as investing roles at Partech Ventures and Adams Street Partners, Dave Welsh brings a wealth of knowledge to his current role as KKR’s Head of TMT Growth Equity.  As Dave explains throughout our conversation, KKR’s focus is different than other growth equity investors.  With a preference for long-term partnerships over quick exits, KKR leverages its global footprint and deep operating expertise across geographies to help drive sustainable growth for its portfolio companies.  In addition to his thoughts on the current state of the growth equity market, Dave provides his perspective on where the market could be heading next and how investors across asset classes can best position themselves for continued success.

(Hear the full conversation with Dave on iTunes at the GrowthCap Insights page or click Dave Welsh Episode)

RJ:  Dave, thanks so much for joining us for this conversation.  Maybe what you could do to kick things off is to give a little bit of background on yourself, up to and including your current position with KKR?

Thanks, RJ and Peter for having me.  I joined KKR two years ago.  My background goes back to the mid 90s.  I was an executive at an Accel portfolio company in the internet infrastructure space.  The company ended up going public in the late 90s and was the second largest return in Accel history outside of Facebook.  The company was called Portal Software.  It was ultimately sold to Oracle and is now a large part of the Oracle software stack.

I went from there into private equity.  I took a role with an individual from General Atlantic Partners (Glenn Solomon who is now at GGV Capital).  We were helping BNP Paribas, the French bank that had a venture arm in the US called Partech Ventures, in starting its growth equity investing effort.  Glenn was leading the effort and recruited me to come there around 2000.  I was there from 2000 to 2007, which was an interesting time as you can imagine.  I saw the the crash happen and worked through a couple of tough years from a macro perspective, but it was a great time to learn the business.

In 2006, Partech decided to go back to its early stage venture capital roots.  When I left Partech, a personal and professional friend of mine named Dave DeWalt, who later became the CEO of FireEye, was taking over McAfee and recruited me as a Chief Strategy Officer.  I was the Chief Strategy Officer at McAfee from 2007 to 2008 and decided relatively quickly that I wanted to get back in investing.  I left McAfee in 2008 to join Adams Street Partners, which is a large fund of funds out of Chicago.  At the time, Adams Street was starting a direct growth equity effort on the West Coast and I joined to help build the team.  I was in that role until 2016 when I joined KKR to help build the firm’s growth equity platform.

RJ:  Great, thanks for that background.  You’ve been around the space for some time.  Maybe we could jump right into what you’re focused on now and talk about some of the key characteristics you look for in an opportunity at KKR.  Perhaps we could also talk about how KKR’s focus is similar and different from your previous investing roles?

We’re looking for a few things that are quite common:  big markets, very compelling solutions, and great management teams.  Those things have been consistent across all of my investing roles.  At KKR, we’re looking for a little more; we’re looking for companies that have aspirations to be very large global enterprises.  I’m looking slightly later stage than I was in my previous roles, ideally for companies that have multiple tens of millions in revenue and are starting to scale.  Both the existing investors and existing management team have aspirations to make something quite a bit bigger.  We’re not looking for things where there’s a straight line to an acquisition or a quick IPO, but rather something where the company can expand quite significantly from where they are currently. As a global private equity firm, KKR can leverage its resources to help portfolio companies in the quest to grow substantially.

To summarize, there are commonalities between KKR and other investors: great management teams, good markets, good products.  However, there is an added piece at KKR which is large, global opportunities and existing investors and management that have the motivation and desire to take advantage of those over the long term.

RJ:  We speak to various CEOs daily and I know it’s difficult for them to navigate the landscape if they haven’t been through a capital raising process before.  I’ve also spoken to growth equity investors who are probably less prevalent or have an investment style that is less well known than venture capital.  I had a chance to read your blog about getting the most from your growth equity investors (available here) and it seems that KKR offers its portfolio companies certain advantages, in part due to the firm’s deep network and extensive experience.  If you wouldn’t mind, maybe we could spend some time talking about how KKR is different in its approach to working with portfolio companies?

It’s why I’m here.  I was happy in my previous role and I thought to myself initially, “Why go someplace else? Why go to a place that’s starting another growth equity platform?”  The world has more than a couple of them.  Ultimately, the reason I did it was because I do think that KKR has unique attributes that it brings to the table.  I really think we’re differentiated.  One of those characteristics, as I had mentioned previously, is our large global footprint.  That comes in a couple of different ways.  We’ve got a very large enterprise portfolio from our private equity side, over 100 large enterprise companies that we own through the buyout portion of our business.  Those provide excellent connections to some of these growing companies, both in terms of potential partnerships or customers relationships.  Equally as important is the access to other executives.  We have forums where we help facilitate discussions among our portfolio.  That includes our growth portfolio, which allows some of the smaller companies to have access to the larger enterprise side of KKR to answer a lot of the “growth questions.”

The other piece is our global footprint.  We have offices across 16 countries and groups within each of those offices that are focused on operations and facilitating market expansion for our portfolio.  A big piece of what we do for all of our companies, including the growth portfolio, is to help navigate where and how operations can expand internationally while utilizing on-the-ground resources for assistance.  We have a fairly large operations group called Capstone.  It’s close to 60 executives that are generally former McKinsey, Bain, and BCG Consultants that work with our portfolio on lots of different scaling issues.  This includes things like go-to-market, supply chain, channels, and compensation among others.  We utilize them in different, but nevertheless effective ways within both our growth portfolio and PE portfolio.  I say different because we have to be mindful that some of our growth investments are for businesses that are still relatively small from a resource perspective.  We can’t drop too much on them too quickly with our operations group.  We do it in bite-sized ways so that they can take advantage of the resources as they continue to evolve.

The other thing that we have that’s pretty unique to the growth equity world is a very large capital markets group that places several billion dollars a year in debt and equity financing.  We have them work with our growth portfolio companies to discuss financing alternatives as they continue to mature.  They have expertise in thinking through what the market is looking for if a company is contemplating an IPO or a debt placement and can ultimately even help from an execution standpoint.  Those are just a few of the things that are different about our platform compared to other growth equity firms.  It’s how we can add differentiated value to the portfolio companies we invest in.

RJ: Yeah, that’s truly unique.  It is a comprehensive platform.  I was curious if you often find that companies can “graduate” from the growth fund to the private equity fund or another pocket of capital within KKR?  It seems like you can offer both the initial capital and the advisory on capital markets, as well as possibly even additional funding from another capital source within KKR.

Yeah, that’s right.  One of the concepts we have is that we want to be the financing and strategic partner for these portfolio companies across a very long-term relationship.  As you mentioned, it’s something where we really hope that no matter what their financing needs—whether through us directly or by facilitation with partners that we have—that we can be there to help portfolio companies through all the stages of financing after an initial investment.

RJ:  What do you see as the more interesting investment trends currently?  Maybe we can take this first by vertical.  What are some of the interesting trends that you see in the TMT space that you’re most focused on?

We’re very focused on the software sector, generally.  We break that down into different areas.  We’ve spent a lot of time the last couple of years in places like security software, DevOps, vertical software, and analytics.  Broadly speaking, we look a lot at B2B software and in particular places where there are good recurring revenue models.  We have also done, both here and in Europe, some larger scale consumer internet investing.  Two examples include Lyft here in the US and then a travel business called GetYourGuide in Europe.  We continue to look at the consumer internet sector.

Beyond that we’re opportunistic in the other places that we look.  We’re looking for what we think are very well established, scaled businesses that have shown good product-market fit.  On the one hand we want to be top down and looking at things from a thematic perspective.  But on the other side, we’re trying to be opportunistic. As good businesses come up in other tech-related sub industries, we certainly look at those as well.  Categorically, we’ve not done a lot in the hardware or components area.  That’s a space for us that has still been a little bit off the path.  However, we continue to consider whether places like that will be something we will do long term.

RJ:  That’s a great investment in Lyft.  I actually knew John Zimmer during his Cornell days.  He was a very talented guy.  I remember when he was first telling me about the idea for Lyft.  At that time, the business was focused on carpooling.  He had a vision of helping people get from home to college and was very focused on the environmental impact of having too many cars on the road.   It’s interesting to see how his initial idea evolved, but no surprise that he’s still doing extremely well with the business.

There’s actually an interesting combination story there.  He and Logan, the present CEO of the business, had the same idea at the same time on polar opposite ends of the country.  Logan was at UC Santa Barbara while John was at Cornell.  They frankly had almost the identical idea.  I won’t go through the whole story, but it’s endearing how they ultimately came together to share in their mission and then become close friends, business partners, and visionaries in the process.

RJ:  Switching gears a little bit and talking about the growth equity space in general, you have worked in the industry for some time and have seen things from both from a macro perspective at Adams Street and a micro perspective in prior investing roles.  How have you seen the industry evolve over time?  Where do you think it is headed?

It has gone from something that was unformed and, frankly, many didn’t even know there was a growth equity space in the way that we’ve now categorized things.  It’s now a normal and naturally defined part of the industry, which makes sense.  If you look at the landscape and what early stage venture capitalists are good at and where they really add value, it’s quite a bit different than what people in later stage growth equity do.  It started with some early stage firms playing up-market and some hedge funds or cross-over firms coming down-market.  Now it is becoming well established, meaning there is a group of firms where growth equity is their focus and growth equity is what they do.  It has matured into a real industry over the last 10 years.  I think it is here to stay and I think that is a good and necessary part of the overall ecosystem as companies mature from start-ups all the way through to public entities and beyond.

Where we are in the cycle is obviously a much tougher question.  I think it’s probably safe to say we’re somewhere closer to the top of a cycle rather than a bottom.  Whether we are topping out and exactly what the timeframe is, that speculation is always difficult to guess at.  What I can say is that we, as a group and as a firm, are preparing ourselves for some element of a downturn in the cycle over the next couple of years.  What does that mean?  It just means (a) backing businesses that we think can persevere if there are cyclical downturns and (b) being prepared in the event of a cyclical downturn to revisit businesses that we’ve known and liked that maybe we steered away from because valuations had gotten ahead of themselves.  If there is a downturn in valuations, correcting into something a little bit closer to historical norms, we’d be ready to jump in and invest in those opportunities.  I don’t try to guess exactly when that’s going to be because that’s always a tough thing to do.  But I do think we’re confident that the market is closer to the top than not and we’re getting ready for what it might look like on the other side.

RJ:  Got it.  If you’re an LP right now, do you sit tight and hold off on putting money back into the growth equity space or do you just shift what you’re focusing on within growth equity? 

Here’s the way my colleagues at Adams Street talked about things and I think this is right.  I don’t think as an LP you should ever try to time markets.  As an LP, you want to be consistently investing in what you consider to be top-of-class investors over time and assume that the top-of-class investors will know how to modulate their investing appropriately.  If I was an LP, rather than trying to speculate whether we are near the top or not, I would be consistently putting dollars to work across all cycles.  I should do that when things are going well, and frankly, should be doing that even if things start to turn down, because investing in funds that get raised during down cycles are often the absolute best funds to be in.  If I was an LP, I would focus a little less on where we are in a cycle or whether a category is overfunded and rather be diversified from a time and firm perspective while remaining consistent.  Timing private equity markets in any of the categories is really, really hard.  That’s the best advice that I give to LPs.  If you’re going to create a program, create a consistent program and stay with it.

RJ: That’s great and very helpful.  We’ve got a good number of family offices as well as institutional LPs in our audience and that will be insightful for them.  Cambridge Associates puts out data analyzing different investing segments, like LBO or buyout shops versus growth equity versus venture capital.  It seems that growth equity has been outperforming.  Do you think that continues?

Over the long haul the performance of each of those categories has its cycles and its ups and downs.  Whether over a 10 or 15-year period growth equity outperforms the two other asset classes, I don’t know. I think it will be close, I think they’ll all be within a fairly bounded range.  The thing that’s more interesting to me is the variability inside each asset class.  If you look at VC broadly, the first quartile versus the third and fourth quartile, the variability is very high.  Whereas in growth equity the variability between the first quartile and the other quartiles is quite a bit more bounded.  In private equity the variability is even less.  It goes to this notion of, whatever the category, picking a set of names that you have faith in and who you think are going to be market leaders and sticking with them.  It’s particularly true as you go up or down the risk curve.  Clearly the variability is greater the earlier that you go in the asset class.  It’s a long-winded way of saying, I’m not sure across all of those.  I could try to speculate on who is going to have better long-term returns.  I think they’ll be, as categorical classes, fairly close.  I think if you segment it out, you’d see a lot of variability as you went early and less and less as you went into growth equity, and ultimately into private equity.

RJ:  That’s a very good point.  In aggregate, if you take each of those segments, they tend to all hover around the same return level.  However, within each class there can be dramatic differences, particularly on the venture capital side.  Dave, this has been great.  Really appreciate the time you took with us.  I know this is going to be very insightful for our audience.  Before we sign off, anything that I may have left out that you wanted to mention?

I’m happy to have done it, I think it’s great.  I think you’re bringing in really good questions about cycles and timing.  As I already mentioned on the LP side, in general the philosophy that I would have is be consistent and just make sure that you don’t get too up in the ups and too down in the downs.  That’s the way people have done well in this asset class over the long term.  That’s the way that I think about things and would encourage others that are in the space to think about them too.

RJ:  Excellent.  Thanks so much, Dave.

Yeah, you bet.  Thanks, guys.

Hear the full conversation with Dave on iTunes at the GrowthCap Insights page.