Thinking through tech investing: early growth vs. growth vs. buyout
Currently on the banking side covering tech, and I'm planning to move into tech investing long term. As recruiting ramps up this cycle, I'm trying to think through which category of investing makes sense for me long term.
As I see it there are three distinct buckets:
1. Early growth (Coatue, ICONIQ, GC, etc.) writing primary capital into high growth companies before profitability
2. Hybrid tier/Growth (TA, Advent, GA, etc.) that move fluidly between growth investing and buyout
3. Traditional buyout (TB, FP, SLP, Vista)
One thing that makes early growth interesting to me is that it's often the only way to invest in the future category leaders. By the time a company is profitable enough to be buyout viable, it's already too expensive, and the hybrid/buyout shops are priced out. Curious whether people think that dynamic is real or overstated?
Here's my actual question. Tech buyout has always been framed as the prestige default, but with multiple compression and fewer clean take-private setups, is that concept still there, or is it fading? Does the hybrid tier end up being the smarter long-term seat since those firms aren't forced to choose one lane? Is the early growth buzz short term or the only way to invest in the best companies? Will buyout shops rebound once hype fades like post .com especially since they have a ton of commitments now?
I also want to ask/push on something everyone repeats. The common line is that moving from growth to buyout is basically impossible, but moving from buyout to growth is fine. Is that actually still true?
In general, I'm curious if people are seeing shifts in how these firms are positioning themselves now of days? How are the TBs of the world changing their strategy?
bump, great Qs
bumping as well
Buyouts has several headwinds both structurally and practically in terms of the lagging nature of fundraising. Venture will continue do very well given power laws and the ultimate fact that there remain far more capital chasing top companies than the other way around. Actual early stage growth benefits from power laws, growth buyouts not as much. Opportunistic type firms has a ton of space to play across the spectrum, but those are rare and many are just practically PE shops.
I am not a tech buyout doomer and nobody can predict the future. However, given fundraising is a lagging indicator and the past funds for all tech funds are going to be bad, not a good near and medium term outlook. On the venture point, all the top private companies can basically access 10-20x of the capital they raise at the minimum, so firms with top reputations simply will always outperform the others. This has always been the case and is going to be more pronounced as there is more capital around than before.
while latest tech buyout vintages will underperform relative to the past, I think the underperformance is a bit overstated. Performance will be OK - 1.5-1.7x TVPIs - not the 2.5x+ TVPIs pre '21. Top funds will continue to raise as a result of brand name
Congrats on Vista IR.
You’re missing a big & important bucket here of VC. Can categorize that further with pre-Seed through pre-IPO. But lots of tech VCs that are multi-stage. Would consider that route as well depending on the type of work you like. If more of a model monkey, buyout / growth buyout make most sense. If you prefer taking tons of founder intro calls and lighter modeling, earlier you go the more of that you get.
Would note that basically impossible to go to buyout after going to venture but imo buyout sucks in terms of the work and upside potential.
I agree it's harder to go from early stage / growth to buyout than vice versa. If you wanted to max out optionality, I'd still go for buyout. But I would double check the deal velocity as some of these places - e.g. I know that some of the very large ones like SLP and TB give you 1 rep every 2-3 years which is too little to really build out your knowledge in the early years. I would almost try to go for the "baby fund" in a tech specialist vs. the main one. One thing that is really important but that people don't quite grasp at the junior levels is the extent to which your TAM narrows at the very large end. There just aren't that many $1-4bn assets in tech of quality matching the specific quirks of your IC that you have a shot of winning in any given year - esp. in Europe, but also an issue in the US of course. The "baby fund" addresses some of this TAM constraint.
And I'd also check how many portcos you're expected to cover, because I suspect that number is very large for e.g. Vista (famously behind on selling stuff) or Vitruvian, which leaves less time for new deals. This is esp. frustrating if it's working for the older funds where you don't have carry / are unlikely to make carry.
I always chuckle when I see TA in the growth bucket. It's been at least 10 years that those guys have been actual growth. What they do is a lot of buy-and-build, i.e. pull together lots of random companies in a holdco that's loosely held together by a supposed sector thesis. Organic growth is anemic, very rarely in the teens, while they do a fair amount of cost cutting. Please be a good buyer and don't ever make the mistake of looking under the hood and how it's held together with bubble gum and twigs... Like I shudder to think of what's actually happening e.g. in Aptean.
Could not agree more on TA - crazy to me that they still have the "growth" reputation
Whats your view on the outlook of tech buyouts / growth buyouts? vs. going into venture
Skillsets are wildly different imho. Venture continues to be a very hit driven business, where much of the returns still accrue to relatively few, relatively established firms with a very quirky hiring approach. I would still go for buyout and/or growth ahead of VC, and establish your own VC portfolio on the side if you'd like with small angel checks. If you enjoy it, leverage that down the line to move into VC.
I've not moved into VC but have a portfolio of about 10 or so investments, most of them 4-5 figures only. I've one unicorn which I invested in their seed round in August 2021 - a couple of months ago it raised its Series D at $1bn+ valuation. I'm part of a syndicate so it's not like I found the deal but I'm proud of myself for selecting amongst the many we receive. Very stupidly passed on Ant at $60bn when they sent it in the syndicate last year... Dumbass
It sounds like you aren’t perfectly sure what you want to do long-term (which is entirely okay), so echoing some other people on this thread and would say go to buyout. Starting at a shop like the aforementioned names (Thoma, SLP, Vista, FP) will leave all doors wide open, and a career in investing is a long-term game (aside from hedge funds of course)
Not saying I entirely disagree with any of the commentary regarding structural headwinds on tech buyout, but doing an associate stint and beyond at any of these places will set you up very well
The hardest part is getting a job at any of these places, lol
Read more and ask former Vista employees on Vista post 2021. Firms with high levels of voluntarily turnover are generally not great. Absolutely on the downtrend. Still very large fund size and reputation for now, but not going to be nearly as strong of an experience as the other top firms (SLP, TB, Hg, FP, etc.) or even some of the strong tech specialist UMM firms.
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