Revolution Growth’s Steve Murray: Insights From A Veteran Tech Investor
11.20.19
Interviews

In this episode, we chat with Steve Murray, a Managing Partner at Revolution Growth, which is a late stage growth fund that invests in private companies around the country.  The fund has nearly $1 billion in assets under management and is an integral part to the Revolution platform founded by Steve Case and Ted Leonsis.

Steve joined the Revolution Growth team as a partner in 2016 bringing over 25 years of experience with high growth technology businesses. He joined Revolution from SoftBank where he worked for nearly 20 years with some of the most important technology companies of our generation including Yahoo, Etrade, GeoCities, Ziff Davis, GSI Commerce, Buzzfeed, Fitbit, xAd, Kabbage and many others.

In our conversation you’ll hear about how the tech landscape has changed over the years, what Steve looks for in a good investment opportunity and how the Revolution platform and its Rise of The Rest initiative is having an impact across the country.

We hope you enjoy the show.

(Hear the full conversation with Steve on iTunes or Podcasts.com)

RJ: Steve, thanks so much for taking the time, really appreciate you joining us for this conversation.  Maybe what we could do to kick off is hear a little bit about your background.

Steve: Sure, thanks for having me.  I’ve been an investor in technology–based businesses for coming on 25 years now.  I started my career back in the early 90s with Deloitte and was an auditor and moved from there to SoftBank in the late 90s.  I joined SoftBank in 1996, stayed there for 20 years and got to sit on the front row of the commercial development of the internet: our first investment was Yahoo and it went through to Geocities and Etrade and a whole bunch of others.  And as I was leaving my time there it was Alibaba, so there were lots of things in between.  I lived through the internet bubble bursting in the late 90s and then the growth of lots of different forms of internet communication and commerce and the like.  And then four years ago, I joined Revolution Growth as the managing partner of their growth fund.

And we’ll head into Revolution, but before we do that, I’ve seen a lot of interviews with Masa, obviously our prior podcast was with Ramzi who’s at SoftBank now.  But in those early days, back in the 90s it really seemed like the way to pinpoint and hone in on a great investment opportunity was to find out how big the opportunity could turn into it.  What were some of the things from that experience that you think was a key insight into investing?

I had the opportunity to learn a lot over the years and continue to.  One of the things that I learned from Masa and SoftBank was the idea around betting into real big macro trends.  If you looked at where SoftBank did some of its best investments and some of its best work, it was during the growth of the dialup internet, and there were a whole bunch of investments that we made around that trend.  Then it was broadband internet and higher speeds, so it was about video and connectivity.  And then it was about the mobile internet and all the different services and activities that enabled enterprises and consumers.  So certainly, from SoftBank I appreciated the discipline around trying to predict and study and learn from the big macro trends that are happening in the marketplace.  But trying to aggressively invest into those opportunities before they are completely mainstream; that’s really the art and the science of what we tried to do when we were doing venture investing.

And over the past few decades you’ve probably seen how the venture community has evolved and the number of various investment groups and venture capital firms popping up.  How is Revolution Growth different than other venture capital and growth equity firms out there?

Revolution is a different firm for a couple of reasons.  One is that we have three different pools of capital, one for seed stage investments called the Rise of the Rest Seed Fund, one for early or stage investments called Revolution Ventures and then one for growth opportunities called Revolution Growth.  Within the Revolution platform we have three distinct pools of capital managed by three different groups of people that can really address the capital needs of an entrepreneur’s journey at the appropriate time and stage of their life.

The other thing that’s unique about Revolution is how we spend our time to help our companies.  As an example, the firm is physically located in Washington, D.C. and we spend a lot of time and have built some internal resources around regulatory and policy related matters.  Increasingly, we’re finding technology-based companies, particularly those that are disrupting big industries like financial services or healthcare or food storage are having to deal with proactive and reactive regulatory and policy related matters.  So that’s an area that we spend a lot of time with our companies and try to help them navigate those waters proactively.

And how has your personal approach to investing evolved over time since. It seems like you have close to three decades seeing how the tech landscape has evolved, how has your personal approach evolved alongside?

Hopefully it’s gotten a little bit smarter every year, a little bit more attuned to what’s going on; I guess time will be the judge of that.  But I think in essence, I’ve learned to focus on the handful of things on the upfront analysis of an investment opportunity that my experience has suggested is the most important for success.  So things like what is the quality of the founding team, and particularly the founding CEO or the CEO if it’s not the founder.  Why did the person start the business, what is their vision for the business, does it match with not only my vision for the business but the firm’s vision for the business?  If those two are incongruent, that’s generally not a good thing.  If they’re in sync, that usually is helpful.

To understand the path that the business has been on, none of these businesses go, at least in my experience, straight up and to the right every year or every day.  It’s crucial to understand how they’ve dealt with adversity along the way. Have they been able to adjust the team and the strategy in a way that has allowed them to be successful?

And I’d say thirdly, it’s really to try to understand the market in which they operate.  Because, again, we invest in companies, even at the growth stage where we’re really not investing in the business that exists today, although of course that’s what we have to make our assessment on, but what the business can become.  So how is the landscape under which they are operating changing, are their competitive factors getting better or worse?  Are the tailwinds in the industry that they are participating in, are they getting stronger or are they starting to wane?  Are we at the beginning of that market cycle or the end?  So those are the things that dictate my personal investing style­–everyone’s a little different.  And as I’ve said, I’ve hopefully learned some things along the way and gotten a little bit better at them.

And what companies in your portfolio are you most excited about and why?

It’s a tough question.  We spend a lot of time with our companies, both on the upfront analysis and then once we get involved.  So, we lead our deals – we actually sit on the board of all of our companies and we try to help them.  It’s hard, you know, I have three sons, so if somebody asked me who’s my favorite son, it would be a hard question to answer.  Some of the ones that I spend the most time with right now, I really am enjoying, I enjoy all of them.  I even enjoy the ones that aren’t going well because I find I learn a lot and you learn a lot about the people there.  And sometimes those are the most interesting ones to work on.  But the ones right now that I’m really excited about, I’d say one is DraftKings, which is a company I’m going to see later today.  They combine sort of three things that I’m passionate about which is sports and media and technology—all in a really interesting game and service for customers.  They operate in a very complicated and changing regulatory environment.  The company has a dynamic young CEO and a founding team that is really smart and hardworking and committed and really enjoys what they’re doing.  And so that’s a company that I really like working with and I really am excited about.

I’d say another one that I get to spend a fair bit of time on is a very different type of company—Tempus in Chicago.  Tempus is using molecular and clinical data at scale to really bring on precision medicine.  It’s a very data centric business using massive amounts of data, taking advantage of trends around decreasing costs of sequencing patients.  As well as the decreasing costs and more availability of natural language of processing capabilities in order to ingest clinical data and make it searchable and usable.  And they’re combining those two to really allow patients–cancer patients initially, but more disease types over time­–to have more precise therapeutic solutions to their disease challenges.  That’s one that’s taking on a really big challenge, addressing it through the use of some very sophisticated data, and taking advantage of positive trends in the marketplace—back to some of our key investment themes.  And finally, Tempus has a talented and committed founder and entrepreneur, Eric Lefkofsky who is super smart, committed to the vision and the mission of the business, really believes that this endeavor that he has taken on, and he’s created multiple successful companies already, that this one is going to do wonderful things for the world.  So that is one we’re really proud of at Revolution and I’m really excited about spending time with.

I’d say the third one that comes to mind is one that’s in the same space as another company currently in the news for not great reasons. Convene is run by a first-time founder and entrepreneur who’s built a really great business around hospitality in the commercial real estate sector.  They offer meeting space and flexible office space, and when you say flexible office space these days, you are getting painted with the WeWork brush. So it’s really interesting to see Convene, a business that has operated, in a disciplined fashion, has embraced change, has driven great results at its unit level, has happy customers, and is growing really fast.  Convene is an interesting and great company to work with, with a great management team. It’s interesting to see how they are dealing with the challenge that got created for them that they really had nothing to do with – all the issues around WeWork and the perceptions now that are being painted across any of the players in that industry.  So it’s great to see Ryan Simonetti who’s the CEO and his team rallying around this as an opportunity, again, back to trends, there’s no doubt that there’ll be a much higher percentage of commercial real estate in the years to come that will be operated under a flexible work environment.  There’s no question that that is something that enterprises really value and appreciate and want to have.  There’s no question that the products Convene are creating are really useful and valuable products.  And Convene now looks at this as a short-term blip because the world has decided that for the time being these are not as desirable models as they were six months ago and this has an opportunity to perhaps grow faster, pick up some market share while remaining disciplined, knowing that perhaps for the near term, the equity and debt markets for them may be challenging because of things outside of their control.  So again, that’s an interesting one to work with, one that has a great future and potential and one that I get to spend a lot of time with.

This whole area of how people work today and how companies set up their work environments between fixed location and commuting versus remote versus flexible, I think is very top of mind, especially for both leaders of big companies as well as emerging growth companies.  But it sounds like from what you are seeing there is this kind of positive trend toward more flexible workspaces.  Do you see that growing dramatically in the years to come?

Every study that I’ve seen says that right now that number is low single digits so about 3-5 percent of commercial real estate is operated under that kind of flexible working arrangement.  And in 5 to 10 years from now the estimates I’ve seen is somewhere between high teens and mid-20 percent.  So I think there is a huge opportunity for growth­ – it makes total sense for companies. I think many companies will continue to want to own and operate their HQ.  But as more companies are thinking about: Do they really want a team within their own organization managing facilities and leases and buying equipment and keeping the internet running for some of the satellite like offices or secondary facilities where maybe they need 20 people this year and that might grow to 30 next year?  If you think about the world that we live in now, companies signing 10-year leases for a fixed amount of space when you really don’t know what your workforce is going to be, where they’re going to be, how often they’re going to be in the office, how much space they need.  It really doesn’t make any sense and I think solutions like the one Convene provides are much more amenable, to not just start-ups, but really enterprises which is where Convene has always been focused.

And you had mentioned that Ryan was a first time founder.  It’s sometimes more difficult to gauge probability of success with new founders, although that’s the predominant type of founder when you’re in the venture world.  But what are some of the key traits that you think backable first time founders have?

Well, the successful ones, but I guess sometimes, even the unsuccessful ones, you really look for whether they have a firm point of view about how they want to develop the organization.  Have they been able to attract and retain quality people on their executive team other than maybe their founders?  For us, looking at the growth stage businesses, that’s a real test because oftentimes the folks that got you there are not the folks that are going to get you to where you need to be.  They might have been the right team to get you from 0 to 10, or from 10 to 20, but they very well may not be the right team. That doesn’t mean they have to go away but the team needs to be augmented in order to get to 50 or 100 or 200 million dollars of revenue.  So a big part of it is the point of view on the market, the point of view on the team, their ability to develop the team and how they have been able to plan.  In the growth stage, to be the CEO and be effective and successful, you have to adequately plan.  How are you getting information?  How have you set up the discipline within the organization to encourage accurate planning?  Because the risks of poor planning go up over time because you’re deploying bigger resources across the organization with less immediate knowledge of what’s happening as you might have had when the company was much smaller.  So those are the things that I really like to focus on, frankly, whether it’s a first time CEO or a multi-time CEO.

And what do you think about the growth investing environment today.  How has the overall macro picture changed and do you have any insights on where you think capital for private companies is moving towards?  Or is it just more of a gradual evolution?

There’s no question that there are a few undeniable facts.  One is that the amount of time that companies are staying private has extended.  By definition, the amount of money that they’re raising as private companies has increased.  So that has created opportunities at the later stage and what used to be a private company’s life is now the middle stage of the company’s life.  We find that the definition of a growth stage company means very different things to very different people: entrepreneurs, investors, LPs, and everybody else.  At Revolution Growth, we look at a growth stage company as one that has product market fit, that maybe has 20 or 30 million dollars of revenue, and that is growing fast.  Where the entrepreneurs and the management team and the investors are all excited about the next phase of growth and want to put some fuel on the fire to grow even faster, that’s what we plot out and where we participate.

But there are obviously two, sometimes, three rounds later than that, oftentimes these days those companies may still be private companies.  And those are where SoftBank is putting in hundreds of millions of dollars and crossover firms that are more well known as mutual funds, like Fidelity and Wellington and T Rowe Price, might be investing. Many years ago, those companies would have been public companies and it feels on some level appropriate for those types of firms with those types of capital bases to invest in that stage.  Folks like us that are private equity investors and really venture growth investors need to remain disciplined to make sure that we’re investing in companies that still have plenty of growth left in them and that really are hitting the knee of their curve on growth.  So we have to be careful that we’re making sure we don’t go too early, but frankly, also too late because there’s still a lot of private investment dollars to get invested in these businesses well past where we would call it the right entry point.

So the fact that there’s new funds popping up and just seemingly more capital available, that you don’t feel that there’s necessarily an oversupply of capital for the number of private company opportunities out there?

I’ve heard and read that a lot.  I can tell you about what we see every day and this has been consistent since I’ve been doing this, which is the best opportunity seems to always be competitive with a handful of folks.  And companies that are really struggling, that don’t seem to have direction seems to eventually go away.  I would say there’s clearly more capital chasing after some of these deals than there used to be, which probably has led to, certainly in many instances, prices beyond what we would pay.  That’s probably the most common reason for us to walk away from an opportunity that we otherwise like, its price.  And that’s more common than it was years ago and has to do with the number of funds out there chasing those opportunities.

But it’s always been a competitive environment; great entrepreneurs always have choices as to who they want to work with.  I think the smartest ones always choose their lead in their next round based on a balance of things, including price and terms.  But it’s also other things: What can they do for the company?  Will they be good board members?  Will they stay with the company through thick and thin?  What is the portfolio that they have put together?  And can those portfolio companies be helpful to theirs?  There are a lot of different factors that go into it, but there’s no question that there’s been some price appreciation in a number of the best opportunities or what looked like the best opportunities.  And we saw this a little bit in the late 90s where companies in some instances were being priced in the private round as if they’re going to have nearly perfect execution for the next two years which is very hard.

As we wind down the conversation here maybe one thing we could expand on that you had mentioned earlier is the Rise of the Rest Fund, it seems like that’s making waves. It certainly received some attention out in the media., and it sounds like it’s set up to have some tremendous impact.  Would love to hear a little bit more about the Rise of the Rest philosophy.

The Rise of the Rest is a fund but it’s also a platform, there’s well documented bus tours that Steve Case, Revolution Chairman and CEO, has been on for a number of years, and they do several of them a year and go to a bunch of cities and rally both public and private constituents in the various cities and try to inspire them to build an entrepreneurial ecosystem within their communities.  The basis of Rise of the Rest is the notion that entrepreneurial instincts and ideas and people are evenly distributed, but capital is not.  Most of the capital has been invested in venture stage businesses in Northern California, some in New York and some in Boston, but those three places get a lot of the attention and money.

And the Rise of the Rest thesis is that’s not where 70 or 80 percent of good ideas come from, there’s no question there’s great ideas and great schools and great reasons for those areas to be successful.  But there are also lots of other places across the country where there can and should and frankly, needs to be technology-based entrepreneurship and there’s great benefits to those communities to make that happen.  So the real driving force behind the Rise of the Rest is to be the catalyst for that change.  And some of that change has happened and is happening in places like Nashville and Columbus and the like.  Some of it has already happened in places like Chicago and Atlanta and others where they now have thriving ecosystems and incubators and accelerator programs and investors that go there regularly and some that are now based there.  And bigger, strategic companies think about those areas as areas that they need to pay attention to, so that’s really what Rise of the Rest is all about and their mission.

Out of personal curiosity, I noticed you were a competitive swimmer in your younger days.  For those in the audience that have kids, I actually have this conversation with some of my friends as well, about how sports can really impact kids in particular and even into the older years, obviously college and an even post college.  But how did swimming impact you overall?  I’m sure it’s played a role in some way.

We could do another separate 45-minute conversation about kids and sports and the benefits and, frankly, some of the pitfalls.  I have three teenage sons, one who’s in college and two that are in high school and they’re all very active athletically.  I’ve had the opportunity to coach some of their teams as they’ve grown up.  But for me, sports was a big part of my life growing up, I think the competitive side of sports is great and the fact that sports is sort of a meritocracy – you don’t get to win the race because you grow up on one side of the tracks or the other.  You get to win a race because you either have talent or you have hard work or it’s usually some combination of both.

Swimming was one of my sports, it happened to be the one that I did in college.  Swimming tends to be a little bit more individual driven, although there were certainly some team aspects to it, my favorite part of swimming was always being in the relays.  The other sports that I did, basketball and soccer was much more team driven.  My kids play ice hockey and lacrosse and they’re actually sailors, but the ice hockey is a team sport that I really enjoy.  Everybody on the team has to contribute, it’s not just the five kids that play that start out, that have to contribute for the team to win. First line, second line, and the third line all have to play their role and contribute and work hard and know what needs to be accomplished.

So I think there’s great value to be driven from sports, it’s been a big part of my life. I continue to like and watch a lot of sports and have been blessed to participate as a coach with my kids.

Steve, thank you so much for taking the time, I know our audience will find this very insightful.

Thanks very much for having me, I appreciate you doing it.

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