Jay Hoag - Keys to Successful Growth Investing - [Invest Like the Best, EP.429]

0:00The best operators have a relentless focus on leverage, finding ways to multiply their impact rather than just working harder. But here's what I see happening in finance teams everywhere. Brilliant people getting buried in expense management busy work. If you think about it, you become a finance leader because you love strategic work. Modeling scenarios, optimizing capital allocation, finding the insights that actually move the business forward. But instead, you're chasing receipts and categorizing transactions. It's the opposite of leverage. This is exactly why I'm so bullish on what the team at Ramp has built.

0:28Kareem and Eric understood that every minute spent on manual expense management is a minute stolen from high leverage work. So they automated all of it. Automatic categorization, receipt matching, spending controls that actually work. I love the network effect that this creates. When finance teams at companies like Shopify and Stripe automate the mundane stuff, they free up cycles to think bigger, to ask bigger questions, spot patterns others miss, and make the kind of strategic bets that separate great companies from good ones. The math is simple. Get your time back, focus on what matters. Check out ramp.com slash invest and see what happens when you eliminate the busy work.

1:01Long-time listeners of this show will know that AlphaSense is the market intelligence platform I've admired for years. It gives institutional investors access to over 500 million premium sources, from company filings and broker research to news, trade journals, and more. Plus over 200 ,000 expert calls covering the world's most important companies and industries, all of it in one platform so investment teams can move faster, go deeper, and make high conviction decisions with confidence. I'm excited to join AlphaSense at their inaugural Alpha Summit 2025 this October in Brooklyn. I'll be on stage alongside leaders from UBS, Wells Fargo, Accenture, Google, Stripes Group, the Carlyle Group, and more to talk about how AI is reshaping investment research and decision making.

1:41Alpha Summit is about showing the real workflows and strategies that top firms are using today. The event features an incredible lineup of industry-leading keynote speakers over three days. You'll hear from these industry leaders, connect with peers across finance and corporate strategy, and be part of the conversations you won't find elsewhere. Join me at Alpha Summit 2025, October 6th through 8th at the Refinery at domino. To register and to see a complete list of speakers and the full agenda, go to alphasense.com slash invest. In asset management, growth often depends on customization. It's the nature of the beast in our industry, and I know having experienced the problem firsthand as an active manager, it's a competitive differentiator to tailor products and services to clients' preferences.

2:20Those of us growing our businesses always want to say yes to customers. It means delivering a tailored portfolio, a tailored report, or a tailored expectation for service. Saying yes leads to growth, and it also leads to customization and a big trade-off. The more you grow, the more complexity you absorb. The more you say yes, the harder it is to scale efficiently and consistently. That's where Ridgeline comes in. Ridgeline automates customization. It gives assay managers the ability to deliver personalized experiences at scale without adding headcount, manual work, or operational risk. Having been an early design partner myself, I saw firsthand the power of taking an entirely clean sheet of paper to building the system we've all been waiting for.

2:58a front-to-back platform that combines all of a firm's core functions on a single dataset. It's how leading firms stop choosing between growth and efficiency and start saying yes to both. I believe the best firms will be built on Ridgeline as their operating system. I also believe there'll be a leading case study in combining the power of systems of record and AI. If you haven't spent time with them yet, I urge you to see what Ridgeline might unlock for your business.

3:23Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts at joincolossus.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum.

3:59This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. My guest today is Jay Hogue. Jay is the co-founder of Technology Crossover Ventures, known as TCV, which pioneered the growth investing category and has backed legendary companies like Spotify, Netflix, Expedia, and many others over three decades. Jay explains how macro factors like regulation have become unexpectedly central to technology investing. He offers his contrarian take on today's market, arguing that consumer internet represents significant opportunity while most investors chase SaaS and AI deals.

4:45We discuss investing in new technology versus commercialization, TCV's evolution from cold calling to AI-powered sourcing of 11 million companies, and the three-person unanimous Investment Committee structure. Please enjoy my conversation with Jay Hoke. So Jay, we last did this four years ago, which is crazy to imagine how quickly that four years has passed. That was a strange world and a strange market. We're in another interesting time today. I'm curious to start how today's market conditions feel the most different to you than the market of the rest of your investing career. What feels most distinctive about today?

5:22Yeah, I mentioned, yeah, we did this, I think, in September of 2021. And as a longtime Chicago Cubs fan, I'm quite superstitious. So I'm sure it didn't cause the tech reset in 2022, but let's hope that we'll not have a recurrence. Let's see what's different. There's always parallels and similarities to prior periods of time. I guess what is different is particularly as technology has gotten so big over now the 30 years of TCV and 43 years of my career. The focus on macro, which is not something I spend a lot of time focusing on, really is different. So regulation of tech, how do tariffs impact global trade, all those issues, which really were never part of the lexicon or focus for technology, is probably something that's pretty new.

6:10I think it's very difficult to figure out. A lot of people are talking greater authority about that, which I think they know very little, that includes myself. That's certainly something that's quite different. What feels most opportune about this market? Where do you think that there's the most opportunity to earn strong returns, making new investments starting today? The world has shifted so strongly in the last several years. And again, I'm leaving COVID out for the moment because that was such an unusual time. where I think as you think about technology investors, huge focus on SaaS, huge focus on all things AI, and huge de-emphasis of consumer-based internet businesses.

6:54And so I think that's actually a pretty interesting opportunity where one can be contrarian and we continue to see interesting private opportunities that I think most of the world's not focused on. I was talking to a founder actually building something new in consumer today. There's a heavy AI angle to it, but nonetheless consumer. And he made an interesting observation, which was how hard it was for him to go find venture investors who are great, who primarily focus on consumer. It's almost like a dying breed of people, exactly to your point. If you could describe why you think that is and what about consumer is interesting today.

7:28Because it does seem like a lot of the big consumer businesses started 15, 20 years ago and have just dominated ever since. And there seems to be less white space, but maybe you think differently. I don't think necessarily it's less white space because you could argue that the big, enormous internet franchises, consumer internet franchises that have emerged are playing on the opportunity set of 5 billion plus smartphone users, incredibly engaged audiences across gaming or music or entertainment or other media. And just incredible consumer engagement with those devices. And therefore, that should create enormous opportunities for new consumer-based franchises.

8:07It's always been hard to break through a virtual shelf space concept. So I'm not saying it's easy to build consumer businesses. But I think the fundamental reason why so many people are not focused on it is because of money chases momentum or follows perceived momentum at the risk of insult. Possibly like seven-year-olds playing soccer, the ball goes over there, everybody goes over there. And so I think as far as SaaS and AI, it's super shiny, super interesting. That's where everybody's focused. And I just have a hard time believing there are not going to be any new consumer internet businesses founded and built over the next 10 or 20 years.

8:47I'd love to hear you talk about the difference between investing in new technology versus investing in commercialization, something you already mentioned a little bit. As a growth investor, of course, things are working at that point, typically. So things have become commercialized. But it seems like the tech is really still being built now and it's changing really, really fast. What have you learned about that difference? Many super interesting technologies have taken far longer to reach commercial scale from a revenue and monetization standpoint than predicted. Would be examples of recent vintage autonomous vehicles where the pure technologists said it was ready for prime time five, seven years ago.

9:28Now appears to just be that. AR and VR, generally great opportunity set, but still really looking for commercialization. To me, that's the lesson to keep in mind that it's the applicability of technology, not just the availability of it. And when I get into defensibility, what is an monetization model? How big and defensible can it be? How can you build an enduring franchise, not just have the hot tool of the day? If you think across all 30 years of TCV, is there a most common type of what I'll call fool's gold investment that you've encountered, a pattern that you see over and over again that you think of as an exciting investing trap?

10:11As a technology investor, technologists, and sometimes it feeds into technology investors, there is a often overestimating the near term on your way to underestimating the long term. And that's just something to be careful of. And the other thing I think we talked about last time, I was going back through any of the most valuable tech companies in the world today. Are they exceptions to this statement? I don't think they are. that every area and every great company goes through a desert of disillusionment in investors' minds where it was great, and then all of a sudden, people are casting dispersions on the sustainability of it.

10:51You think about Apple. Apple was left for dead in 2000. Apple and Microsoft, the two companies worth$3 trillion today. Microsoft, from an investor lens, wandered in that desert for more than a decade. And that's just worth keeping in mind. It will not be up and to the right in a linear fashion for the vast majority of these companies. I'd love to hear you opine on the public versus private market dynamics today, which are very, very different from most of your TCVs history. And it seems really important. You're a crossover investor. You're maybe the first major crossover investor, which has now become a popular style.

11:29But it seems like with the dynamics of private companies staying private for much longer, much more liquid private markets, people preferring the state of being private to being public. There's a permanent shift that's happened. Do you think that that's true? Do you think that that's healthy? I'm not sure it's a permanent shift. I'll get into the reasons for that in a minute. Everything is bigger. It's given that it is TCV's 30th year. Actually, technically, it's June 23rd is our 30-year anniversary. I went back and looked at some stats just to give you scale difference. The entire venture industry in 1994 raised$4 billion.

12:07Today, that's a small fund for some, which is pretty staggering. In terms of market cap, at the end of 1994, the NASDAQ was at 751. Today, it's north of 17 ,000. So that's about a 23x increase in the NASDAQ value. And I didn't have it from 94, but in 1991, as you looked at the large public technology companies, there were 31 companies north of a billion dollars and another 13 companies between 500 million and a billion. That was large tech back then. And I mentioned today there are six companies north of a trillion. So in addition to Microsoft and Apple, I mentioned NVIDIA is at 2.8 trillion, Amazon and Google at 2 trillion, pretty staggering.

12:51And then Facebook slash Meta at 1.5 trillion. So that's dramatically different market values than 30 years ago. Today's market puzzles me for at least one reason. I understand it's standard to say, oh, companies want to stay private longer, et cetera. I think that's true in some cases, although that was pre-Google going public. That was also the concern they were staying private too long. And I understand if companies have specific things they want to invest in under the cloak of being private, probably going public. But I'm old school in that I believe the vast majority of the best companies will benefit by being public over the long run.

13:33The discipline of being public, these days you can manage the guidance expectations however you want, including not providing guidance. It provides a public currency. It provides a fully liquid stock for all your employees on a persistent basis over time. I'm totally puzzled as to why the technology IPO market is just so moribund. We're now in our fourth year of pathetic numbers overall. So maybe I'm missing something. But even in mediocre years, historically, there were 50 or 60 US-based tech IPOs. So I hearken for those years. And part of the explanation for it is I think there is a lot of private capital in general, in real estate and credit and private equity and elsewhere, but certainly focused on tech.

14:17And to some extent, that is creating liquidity for the best companies, but not all companies, the tender offers at Stripe and others. But when you say it's a permanent shift, I guess my question back is, well, if you're investing billions of dollars into a private company today in some of those transactions, that capital needs a return someday. So are you assuming that there will be a robust private liquidity market in the future, or that that capital will need an IPO market in the future. Because at some level, I think some of the values now are beyond the scale where they can get acquired rationally.

14:54Were you seeing more opportunity between public and private today? Because if you just think about the supply demand dynamics of capital itself, like you said, there's tons of demand for Stripe shares in private markets. I'm curious, between the two, were you operating? You're totally flexible between them. Are you seeing more or less opportunity in one versus the other today? We're not totally flexible. The C and TCB is crossover, but I tend to think we're more one of the early players in growth, distinct from early stage venture and private equity. Certain characteristics of growth that we found attractive and continue to find attractive.

15:32We will hold our private investments as they go public, the best ones for a long period of time. That's an economically driven decision. We may take one times our money out, but the best companies over time, like Netflix, Spotify, et cetera, compounded high rates for a long period of time. So we're being hopefully economically selfish by retaining our stake. And then we will selectively and opportunistically deploy capital publicly, the Netflix pipe in 2011 being a great example, or just situations where our view is, if this is a private company, is at a compelling value. And there might have been a dislocating event, but we're trying to get actively involved and treat it as if it was private and ignore the day-to-day public trading.

16:17So that's a little bit of a long answer. In today's world, I don't think of it as quite as much as public or private. I think of it very much as a company selection criterion where we have a very private market, very bifurcated public market. Tech's always been a world where there are haves and have nots. The true category of leaders in a segment get very robust multiples and long term value. And a lot of other companies don't get robust multiples and don't necessarily generate a lot of long term value, be it a private or public. What is it about growth that you still find attractive? And I know that was a key part of the early DNA.

16:55But fast forward 30 years, what is still interesting to you about that category specifically? So the original pitch, which remains true today, I think, and everything was a lot smaller, as I mentioned, venture. Venture was a lot smaller. Private equity is a lot smaller in 95. Think about KKR. Others were still tiny enterprises. And growth didn't really exist. It was infused as a separate category. The way I think about it is early stage venture will invest in, to some extent, science projects, meaning undeveloped technology that they have to develop a product or service and prove that it works and it's cost effective and then start to ramp the monetization of the business.

17:37And inherent in that model is the successful ones can generate 50 or 100x return and return an entire fund. But I think inherent in the early stage model is very high loss rates. So it could be 30%, 50 % for a seed or early stage fund. Successful ones, it's all baked in the model. You can end up with great funds. At the other end, large private equity, I tend to think of, and of course, they invest across all swaths of the economy, not just tech. They tend to be much bigger businesses, more slow growing. And the way to generate returns could be through the facile use of leverage. It could be through cost cutting.

18:15It could be through lots of different acquisitions and consolidations. And the best of those firms also generate good returns. But I think much more through financial measures than otherwise. And in a world where rates went down for 10 years, 15 years, that was a huge tailwind. I'm not a forecaster of interest rates, so I can't say whether it'll be a headwind or not. But I think that was a huge tailwind. Growth sits in between. And the original virtues, we're investing after the technology risk has been eliminated. So a product or service is available. Consumers are touching it, or enterprises are touching it, or small businesses are touching it.

18:56And our job then is to evaluate the rate of market adoption and then help grow those companies. The benefit of growth is you're typically investing in a decent-sized business that hopefully means, hopefully senior in the structure. your risk of principal loss is quite low. And then if you're fortunate to stumble into the Expedia or Netflix or Spotify or Revolut in Europe or others, you're generating returns from very rapid growth. Ends up about half our businesses were profitable at the time we invest, half are not. But the compound effect of top-line growth and very high incremental operating margins It means ultimately earnings are growing a lot faster.

19:40And that's how we generate our growth. Very little leverage, all based on company building and growth and a great product. I found that this sort of game to be the most fun when you have the least competition. And when you started, like you said, growth wasn't really its own category. And so you had less competition. Today, there's lots of growth investors. Can you describe what the competitive dynamic feels like with other investors when you find a company that you really like? How has that changed and how do you manage it? It does ebb and flow. I mean, back in 95 when we started, as you might imagine, it wasn't just that there was not much interest in growth.

20:16There actually wasn't that much interest in technology. So now it obviously is obvious to everyone, but people view it as a tiny prize. As technology returns have been robust, money follows. That just seems to be how capitalism works. And so there are a lot of growth investors. many of them built very successful firms. Some have gone from success and growth to really scaling assets and becoming much more private equity-like, big buyout funds, et cetera. And that's not bad. That's just different. And many have gone from being purely focused on the tech vertical to other categories of growth, be it retail, healthcare.

20:59I mean, healthcare to IT, just hospitals, et cetera. We've made the decision to stay, I'd say, relatively small, although first fund was$100 million and our last fund was$3 billion, so it's relative. But really just stay focused on technology because we think it's the greatest industry and it also requires a tremendous amount of expertise to be able to execute against. Yes, competition's increased, but I'd say in the last four years, it's actually decreased. If you harken back to last time I was here, everybody had entered technology and growth investing in 2021. And that led to its own challenges for a lot of the capital that was deployed during that period of time.

21:39Many early stage funds doing growth, many public funds doing growth, many private equity funds doing growth. And some will be successful, but a lot may not. I tend to think firms generally have a center of gravity. You can think about collecting assets across lots of different vehicles, but you have to make sure each of the disciplines you're exercising are great. Otherwise, you won't continue to get capital. I suspect that a number of folks have retrenched based upon having deployed a lot of capital in 2021, but not necessarily having a great return associated with that. I'd love to talk about the history of the business.

22:18You mentioned 30-year anniversary is coming up. the life expectancy of new investment firms is definitely less than 30 years. It's hard to build an enduring investment franchise. If you think back on that time, what are the key moments or filters that you went through that allowed you to not just survive, but scale and thrive across three decades? Because that's quite unusual. It's interesting to reflect on it. We are active participants in our industry, but to me, all of the credit and blood, sweat, and tears, so to speak, goes to the founders who are, as we've spoken about before, they have to be a little crazy to become a founder.

22:58And I think it requires unbelievable sacrifice on their part. You can't be a founder of what will be a great technology franchise and do it part-time and have a great work-life balance, as often gets bantied about, is impossible. As I reflect back on when Rick Campbell and myself started TCB, we quit our jobs in 94. We are on that founder journey as well. I'm not going to word it's worked out great, but I was thinking about, first of all, it's a little bit of a shock to be sitting here celebrating 30 years. We did a few more good things than mistakes we made, so we were able to do that. People backed our first fund and continue to invest as we built the firm, which is awesome.

23:40But it requires a lot of resilience because in my investing career, I've been through so many crises. Like a company founder, you have to be ready to deal with adversity, to deal with people thinking you don't know what you're doing. I was reflecting personally, if you were to say, well, go back to that time period. So it's great that our bet on technology paid off. It's great that our focus on growth paid off. And the third thing we talked about is being a long-term patient investor in the best companies. The last requires being invested in the best companies. So there's a little hard work, but a lot of luck involved in that too.

24:14But I was sitting here today, a lot older, 30 years older, obviously. When I quit my job, I was 35 and we closed our first fund. I had just turned 36. We had a son who was turning three, a son who was turning four. and my wife is expecting our daughter. We had just moved to Palo Alto and we're starting a new fund. I'm trying to think if there are any other, they say like there are four or five main life stresses. You did them all at once. Just like, let's get it all on the table. In hindsight, it made no sense. Yeah. But thankfully it worked out. What were the keys? I'm going to mix my sporting metaphors.

24:50Batting average business, you can't hit a thousand, but you have to be a decent hitter. Or using basketball example, example, Steph Curry, in the news after the game said we won last night, greatest three-point shooter of all time, greatest scorer of all time. It only makes 42.5 % of his three-point shots. Now, as an investor, you have to be over 50%, but it's still not, you're not going to be perfect. So part of it is you have to be willing to take some level of risk, no matter how much diligence you do. And then from a managing the firm standpoint, we try not to repeat our mistakes, either as a managing the firm or investing, but probably made every mistake in the books because we talk a lot about obviously Netflix and Spotify and others, but it's also, we had plenty of bad investments.

25:34Investments that didn't work out well. And then also in hindsight, ones where we sit around and say, well, I'm not sure what we were thinking on that one, particularly in the internet bubble days, but it comes down to internal talent. And I think last time we talked about Reed Hastings and the concept of stunning colleagues and the fact that a great investor is not 30 or 40 % better than a typical investor. Similar, a great engineer is not 30 or 40 % better than an average engineer. It's an order of magnitude. That's been the focus on the internal side, people side. We've had an enormous number of people over that 30-year period of time contribute to TCV.