Interview with Jeb Spencer, TVC Capital

Story by Benjamin F. Kuo


Last week, El Segundo-based Accordent Technologies, a developer of webcasting and presentation services and software, was acquired by Polycom, in a $50M deal. The firm's investor was San Diego-based TVC Capital, which invested only $4M in total in Accordent before it was acquired. We chatted with Jeb Spencer, Managing Partner at TVC, to understand the firm's strategy and how the investment worked out.

Jeb, thanks for the time today. It was interesting to see the acquisition of Accordent - it seems unusual to have only put in $4M in to a company in so many years, and yet you had a good exit?

Jeb Spencer: The goal at TVC Capital is to do exactly this. We invest in and acquire software companies that are in somewhat niche markets, that often times the big venture capital firms have passed over, because the total available market for those companies is only $100 to $200 million. The market was probably $100 million or less when we first looked at Accordent. Our goal is to invest in these companies, which are probably never going to be $200 million revenue companies, but where we feel we can see a path to get from $3 to $7M in revenues to $25 to $30M in revenue over some period of time, and where the likely exit is through a large public company.

That's been our philosophy and focus for the last seven years. The outcome on Accordent was exactly what we had pitched to our investors. We find these niche software firms, with very attractive financials--in this case, 92 to 93 percent gross margins-- where we can see a path to helping the firm rapidly scale their revenue run rate, to make them interesting. We're also looking for more of the bootstrapped approach from our companies. Accordent had been bootstrapped for five years before we met them. They had been slowly building their technology and growing customers, and it was a very much break-even type of business.

When did you invest in the firm?

Jeb Spencer: When we first met Accordent, they were doing less than $1M in revenue, and were located a block from the beach in Hermosa Beach, but we were amazed at the number of customers they already had acquired. They were big names--Fortune 500 customers. We spent time talking with them over the next 18 months, because they fell below our $3M revenue threshold for investment. Around the 2006 timeframe, they hit $3M, and we saw the unique position that they could occupy in the industry. They kept building really great functionality into the platform, and they were always ahead of the market, and always able to anticipate what customers wanted next.

Even as their competitors kept getting big, gigantic fundings--something like $20 to $30 million--they kept focus, stayed conservative, and went as long as they could on that $4M in investment. They had 100 percent focus on having the most depth and breadth of functionality of any of their competitors. Though we saw lots of noise from the well-funded folks coming into the market with a ton of enterprise sales reps, and even though that slowed down the sales cycle time, ultimately, when the buyer makes a decision, they choose the app with the best functionality and the one with 99 percent customer satisfaction. We felt we could win against extremely well funded companies by just having the best product out there, which is what Accordent was able to do.

Talk more about your philosophy of investments?

Jeb Spencer: When we first started doing this, we were working with the guys at Relational Investors in San Diego, David Batchelder and Ralph Whitworth. They're a $10 billion fund -- activist value investors. Being in that atmosphere of a value-based approach helped shape our thinking on technology investing. My partner Steve and I thought we'd do something different than everyone else was doing. We believed that in the pure venture market, it's hard to compete. If we're up against a Kleiner Perkins term sheet, or a Draper Fisher Jurvetson term sheet, the company is going to go with the big name, even if our valuation is higher. But, there is a sector of the market, software companies doing $3 to $7 million in revenues, in niche markets, that is generally ignored. These companies don't traditionally get venture capital. However, they've built good, core businesses, and we've found that if you can get their revenue tracking toward $25M, public companies start to get interested in acquiring. We have also found, for companies doing $10M in revenue, there is a short period of time you'll have the opportunity to get above market multiples. Interestingly enough, we've begun to see exits earlier then we expected, revenues in the $10M to $15M range. We think what we're doing is relatively unique, because there are not many firms focused on this segment of the market, these niche companies. So, we try to spend our time finding small software companies which really do have the best functionality and are continually ahead of customer need, which is incredibly hard to do. We raised our fund in 2006 to follow this exact model.

Are you still investing out of that fund?

Jeb Spencer: We've still got around 25 percent of our 2007 fund. There are probably two more deals in this fund, and we have four deals still active.

Did you anticipate the $4M in Accordent would take you this far?

Jeb Spencer: I guess it's the same with all of our deals. We're rarely involved in another round. That small amount of money is usually good enough to get the company on track to achieving the $25M run rate. Most of our investments and acquisitions have originally been bootstrapped. We're coming in with founders used to running their company at break even or better. When we gave Accordent $4M, they were able to make it last for quite a few years. They were very careful, and spent a lot of time making sure every dollar we spent would yield $2 to $3 in revenues. That's the position we take with most of our investments, and we make sure we're aligned with the founding team. The team knows their company is in a niche market, that they'll never get to $1 billion in revenue alone, and that it will be difficult to get to $100M--but they know that once they get to $25M, they are going to be attractive to public buyers. What Polycom will be able to do with Accordent will be incredible, and the synergies are pretty amazing. Polycom will be able to insert Accordent into every single one of their installations globally. Companies using Polycom are using video to communicate globally on a regular basis and Polycom had nothing to capture, store, archive, or make searchable all those thousand hours of content their customers were creating every day.



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