20VC The Radical Changes In Public Market Expectations, The Right Way To Assess Valuation & What It Means To Be A Disciplined & Diligent Investor with Randy Glein, Partner @ DFJ Growth

In this episode of "20 Minutes VC," host Harry Stebbings interviews Randy Gline, co-founder and partner at DFJ Growth, a firm specializing in growth-stage investing. Gline shares insights from his diverse background as an engineer, operating executive, entrepreneur, and investor, emphasizing the importance of market validation and rapid scaling for growth-stage companies. He discusses the evolution of public market expectations, noting that companies now stay private longer, requiring more maturity for IPOs. Gline also highlights the significance of team quality and market size in investment decisions, while touching on recent trends like private equity firms buying out tech companies and the emergence of secondary markets for liquidity. The conversation also includes Gline's recent investment in Unity Technologies, a leading platform for game development with a strong position in the burgeoning VR and AR markets.

• Harry Stebbings hosts the 20 Minute VC podcast.
• The episode is part of a special feature week on growth stage investing.
• Harry introduces Randy Gline, a co-founder and partner at DFJ Growth.
• Randy's investments include Twitter, Tumblr, SpaceX, and Tesla, among others.
• Randy was previously CFO at Feedburner and a business development executive at DirecTV.
• He has been recognized on the Forbes Midas List and the New York Times CB Insights list.

You are listening to the 20 minutes vc with your host Harry Stebbings at H Stepbings with two b's on Snapchat and this intro is recorded live from San Francisco.

This quote introduces the podcast and the host, Harry Stebbings, providing context for the episode's focus on growth stage investing.

• Randy Gline has a diverse career path, including roles as an engineer, operating executive, entrepreneur, and investor.
• His focus has been on technology-driven businesses and market transformation through technological innovation.
• Randy began his career as an engineer at Hughes Aircraft Company.
• He transitioned from a technologist to an entrepreneur through his involvement with DirecTV and XM radio.

Over the past 25 years or so, I've gained experience as an engineer, an operating executive, an entrepreneur, and of course an investor.

Randy explains his multifaceted career experience, which has contributed to his success as a venture capitalist.

• Randy's early career in strategic investing groups at Hughes New Ventures and Tribune Ventures involved evaluating opportunities in large markets with disruptive technologies.
• These groups had a strategic fit dimension, considering how corporate backing could uniquely assist companies.
• Randy learned discipline and diligence in investing but not fund management, which he later learned at DFJ.

Both of those groups pursued their respective investment strategies by emphasizing the same things that we emphasize as more financially or institutionally motivated venture capitalists.

Randy compares his early investment strategies to his current approach, highlighting the consistency in seeking transformative opportunities in large markets.

• Being disciplined and diligent involves being theme-driven and forward-thinking.
• It requires assessing timing, business models, markets, growth rates, and the people involved.
• Randy emphasizes the importance of applying experience and analytic approaches to investing.

I think it means being theme driven, being conscious of the way the world is changing through new technologies, new sources of innovation.

This quote defines what Randy considers to be the qualities of a disciplined and diligent investor in the context of growth stage investing.## Disciplined Approach to Partnering with Visionary Entrepreneurs

• Randy Gline emphasizes the importance of a disciplined approach to building, growing, and creating sustainable businesses.
• This approach involves balancing the passions and dreams of entrepreneurs with the practicalities of business health and value building.
• It's about creating businesses that can endure over long periods and address real market needs.

"But to have an approach, when I say disciplined, where I wouldn't say it's so methodical per se, although it can be, but it's really trying to think within the boundaries of how to build a business, how to grow a business, how to create a business that's healthy and is building value, while at the same time is pursuing these passions and these dreams of the entrepreneur, but kind of wrapping that all up into a package for something that can be sustainable over long periods of times, that addresses real needs in the market."

The quote highlights the balance between systematic business development and the entrepreneurial spirit, aiming for long-term sustainability and market relevance.

• Randy Gline discusses how moving to DFJ allowed him to think more broadly about technology's impact and market opportunities.
• The transition sharpened his focus on investment horizons, the importance of generating returns, and considering liquidity for investors.

"If it did, at least at DFJ, I would say it actually opened up some grand possibilities for me, because DFJ has a heritage, I would say, of investing in some true forward looking, patient, but very broadly across technology today, you know, we talk about three main sectors."

The quote reflects on how Randy's move to DFJ expanded his investment opportunities and allowed for a broader perspective on technology sectors.

"Because in this business, when you're trying to generate returns, both cash on cash return multiple, which we tend to focus on, but also IRR, which a lot of institutional lps focus on, really does start to hone your senses towards particular time frames and time horizons at which you're trying to build value and also find exit opportunities or find liquidity for your investors."

This quote explains the focus on specific financial metrics and time horizons that guide investment decisions and strategies for value creation and liquidity events.

• Public market investors now seek more maturity and predictability from companies, contrasting with past expectations.
• DFJ Growth was created to address the trend of companies staying private longer and reaching higher valuations before IPO.
• The practice focuses on the scaling phase of business, helping companies grow from tens of millions to hundreds of millions in revenue.

"So public market investors, I think today, are more willing to give up growth and alpha in terms of the return profile in exchange for lower risk associated with less mature companies."

The quote indicates a shift in public market investors' priorities, favoring stability over high growth in newer companies.

"Since 2010, it's nearly 160 ipos. And the median market cap at IPO is a billion dollars across all of those ipos."

This quote provides data to illustrate the significant increase in valuation expectations for companies at the time of their IPO compared to the past.

• Randy Gline sees extended privatization as a healthy trend, allowing companies to focus on long-term strategy and hypergrowth without public market pressures.
• The growth stage of private markets has segmented, with DFJ Growth focusing on early growth, while other investors target later stages for higher growth potential.

"We actually think having companies stay private longer is very healthy because you're not on that quarterly treadmill and you're able to really pursue hypergrowth and navigate the challenges of going through that hypergrowth without being in the public market and having to do that kind of quarterly grind and focus on short term results."

The quote expresses the belief that staying private benefits companies by allowing them to prioritize growth and long-term strategy over short-term public market demands.

"It also gives them a little bit of an edge, if you will, because the public markets have largely consolidated."

This quote suggests that late-stage private investment can offer an advantage to certain investors due to the consolidated nature of public markets and the potential for preferential access to IPOs and information.

• Randy Gline acknowledges the importance of liquidity for LPs, especially with the trend of companies staying private longer.
• DFJ Growth's strategy was built on the recognition of this trend, aiming to align investment practices with the evolving private market dynamics.

"I would actually say that for us, in particular, DFJ growth, so specifically to our growth strategy, we identified this trend more than a decade ago, and it really became the foundation for our growth funds and for our growth strategy."

The quote indicates that DFJ Growth was strategically designed to address the trend of extended privatization and its implications for liquidity.## Market Opportunity for Growth Stage Investing

• The extended timeframe required for companies to go public has created a niche for growth stage investing.
• DFJ Growth targets companies with a 3 to 6-year horizon to IPO, which is shorter than the traditional 8 to 10 years.
• Early stage funds still have opportunities for returns through mergers and acquisitions (M&A).
• Growth stage specialization has emerged due to longer durations before companies reach the public market.

"I think has opened up a market opportunity that we think is both healthy for companies to get funded privately through that hypergrowth stage, but also has given us an opportunity to create a strategy like DFJ growth."

This quote explains that the longer path to IPO for companies has led to a new market opportunity for private funding during their hypergrowth phase and the development of specialized strategies like DFJ Growth.

• New liquidity options in private markets have emerged beyond traditional strategic acquisitions and IPOs.
• Private equity firms are now entering the technology markets as buyers, allowing early stage investors to gain liquidity sooner.
• Secondary markets have developed for certain high-profile companies, offering early investors a chance to exit without waiting for an IPO or acquisition.

"The other thing that's happened is there are some new opportunities for liquidity in the private markets that didn't exist ten and 15 and 20 years ago."

This quote highlights the emergence of new liquidity opportunities for investors in private markets, which were not present in the past decades.

• DFJ Growth focuses on companies with market and product validation, which are in the hypergrowth phase.
• Companies targeted are typically emerging category leaders with the potential to deliver venture-like returns within a 3 to 6-year timeframe.
• Key metrics for investment include a minimum annualized revenue or bookings run rate, typically in the low tens of millions.
• Rapid growth into large market opportunities and sustainable product differentiation are also critical factors.

"We look for really, I would say several metrics, but two that are really important to us. Obviously, the scale of the business... And then do they have rapid growth into large market opportunities."

This quote outlines the primary metrics DFJ Growth looks for when investing in companies, emphasizing the importance of business scale and rapid growth in large markets.

• Besides validation and growth phase, the reasonableness of the company's price is a key discussion point in investment decisions.
• DFJ Growth assesses whether the valuation is reasonable in relation to the company's potential scale and future market or M&A valuations.
• The goal is to determine if the investment can yield target returns in a normalized valuation environment, despite paying a premium for hypergrowth companies.

"But the other thing we talk about consistently is this a fair and reasonable price to pay for the company?"

This quote indicates that discussions on whether the investment price is fair and reasonable are a consistent part of DFJ Growth's decision-making process.

• Nicholas Negroponti's "Being Digital" is cited as a seminal book for Randy Gline's career, predicting the digital era and the internet's impact.
• J.R.R. Tolkien's works are mentioned as a personal favorite, with admiration for Tolkien's creativity.

"Probably the seminal book for my career is a book titled Being Digital. It was written by Nicholas Negroponti in the mid 90s."

This quote reveals the book that had a significant influence on Randy Gline's career, highlighting its foresight into the digital age.## Challenges in Venture Capital

• Venture capital is considered a hard business due to its multidimensional nature.
• Success requires passion for the businesses backed and a disciplined approach to investment selection.
• Building a team that can effectively partner with visionary entrepreneurs is a major challenge at DFJ and DFJ Growth.
• DFJ Growth focuses on teamwork and collaboration rather than operating in silos.

"I think across the board, folks I know would say this is a hard business because it's so multidimensional."

This quote emphasizes the complexity of venture capital as a field that requires understanding various aspects of business and investment.

"Providing an environment for our team that rewards great instincts and judgment, but also teamwork and collaboration."

Randy Gline stresses the importance of fostering an environment that values both individual skills and collective effort within their venture capital firm.

• The size and state of the market are critical for growth-stage investing.
• A qualified and visionary team is essential for capitalizing on market opportunities.
• While the market creates opportunity, a company's success depends on its team's ability to utilize that opportunity.

"The degree of success as a company, I believe, is largely based on taking advantage of that market. Opportunity depends largely on the team of people that are part of that business."

Randy Gline counters the idea that markets alone determine outcomes by highlighting the role of a capable team in leveraging market opportunities for success.

• Randy Gline sources most of his news from Twitter and occasionally from Reddit for edgier content.
• He has two favorite venture capital blogs by Brad Feld and Fred Wilson, which he has followed for over a decade.

"Most of my news comes from Twitter. And when I want something a little more edgy, I go to Reddit."

This quote reveals Randy Gline's preferred platforms for staying informed about news and industry trends.

"I've been reading their blogs religiously for more than a decade."

Randy Gline expresses his long-term commitment to following the insights of fellow venture capitalists through their blogs.

• Randy Gline experienced both the low of the Cubs' loss in 2003 and the high of their win in 2016.
• The victory in 2016 was a moment of pure joy and relief for him and his family, lifting a dark cloud for all Chicagoans.
• The Cubs' win was particularly significant for Randy Gline as a former Chicago resident.

"It was an amazing thing for me and our family because we moved here to Silicon Valley from Chicago about ten years ago."

This quote connects Randy Gline's personal history with the significance of the Cubs' victory, reflecting the emotional impact of the event on him and his family.

"And now the curse is over for all Chicagoans, a dark cloud's been lifted."

Randy Gline describes the collective sense of relief and joy among Chicagoans following the Cubs' historic win.

• Unity Technologies is at the forefront of computing and entertainment trends.
• Unity's development platform is widely used by developers for creating 2D and 3D games.
• The investment was driven by Unity's potential in virtual reality (VR) and augmented reality (AR), where they have a significant market share.

"Unity has a leading development platform for publishing and developing two D and three D electronic and mobile games."

Randy Gline highlights Unity Technologies' prominence in the game development industry as a key factor in the investment decision.

"They've built a big, sizable business already there. But what got us super excited is the fact that Unity's core engine and development platform is perfectly suited for the next generation of computing and computing interfaces, namely virtual reality and augmented reality."

The quote explains the strategic reasoning behind DFJ Growth's investment in Unity Technologies, focusing on the company's strong position to capitalize on emerging technologies like VR and AR.