CIBC Innovation Banking Podcast

[00:00:00] Deven So, I just think that these in-person communications, I think people see it in their personal relationships as well, where you see people's body language and frankly, you have a little bit of unrelated chitchat to soften the conversation can really be dramatically more impactful than doing a session on Zoom. 

[00:00:21] Michael Hello, I'm Michael Hainsworth. The CIBC Innovation Banking podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. How do you accelerate software revenue growth and profits post-pandemic? As every startup entrepreneur and growth stage enterprise CEO knows, it's all about scaling up the company and that typically requires a cash infusion. And that's where Deven Parekh comes in. He's the Managing Director at Insight Partners and has been with the firm for more than 22 years. Buddy Media was acquired by Salesforce and Media Mind was sold DG Fast Channel after the IPO. The global investor, with fingers in pies in Europe, Israel, China, India and Latin America, says he's looking for the best software companies globally. So how do you define that? And where is he looking today? 

[00:01:21] Deven Yes, it's been interesting because obviously COVID stopped all of us from traveling. And one would have thought that would have meant that we were going to look at deals that were closer and closer to where we were. And interestingly, the opposite has happened. So while we'll continue to do deals that are close to us, you know, my last call today was with a company in Africa. Over the last two years, we've done over 15 deals in India, which we had not really done pre-COVID. We've done a deal in the Philippines. We've done a deal in Indonesia. So I think what COVID really did is, because we communicate with everybody by Zoom, whether you're 10,000 miles away or 50 miles away, that it actually ends up being the same experience. That's just kind of an interesting trend that happened during COVID that I never would have predicted. That being said, what do the best companies have? What are the common characteristics? You know, that really hasn't changed. That hasn't really changed because of COVID. One we're looking for very large markets. That's probably the most important thing that we look for were primarily investing at kind of the mid to growth stage, but increasingly going earlier as well. But whether you go into growth stage, you're going at an early stage, having a large market to go after is really important. The second thing we look for is a moat from a technology standpoint that what the company is doing is hard to do and it's hard to replicate. That makes it harder for competitors to replicate what it is you're doing. The third we look for is momentum, that customers are actually buying the product and buying more of it. We like to joke the dogs are eating the dog food. You know, fourth, and these aren't meant to be an order, is great teams. Fundamentally, we're looking for great management teams, great founders who truly have a passion for the problem that they're solving. You don't always get all of them, but when you do it, it's really special. 

[00:03:17] Michael Tell me about that technology mode. How do you know whether or not any given company you're looking to invest in has a moat wide enough to stave off the competition? 

[00:03:26] Deven Well, look, you never know. You never know for sure. That's why it's venture. If it was easy, everybody would be doing it. But I think that we obviously spend a lot of time talking to customers. That's probably some of the most important diligence that we do. We have a team that actually assesses the technology and can kind of make some judgments about how difficult it is. You know, the thing that we probably don't put a lot of value in is, you know, patents and things like that. I mean, we think there's always a different way to get to the same problem. So we don't put a lot of stock in that, we put stock in is fundamentally how difficult is the problem to solve and how easy would it be for somebody else to solve it now. Sometimes what you'll find in a saying vertical solution is there's not just enough to understand the technology, but you also have to understand the vertical. There's a lot of process around a vertical and understanding how it operates in order to put that into the application. So sometimes the intellectual property isn't just in so-called code. It can also be in the complexity of a process. Sometimes people think a moat is just how many lines of code. But that's not always the case. You can have a lot of lines of code, and not necessrily have it be difficult to replicate. You know, sometimes it's the complexity of the code, but oftentimes it's the complexity of the process that you're solving and understanding the industry dynamics can be just as important as lines of code. 

[00:04:50] Michael You've been quoted as saying that you like to be flexible in a deal that you build for any given startup. How do you determine what the best deal actually looks like? 

[00:04:59] Deven Well, generally they'll tell you. You know, I think when we say that we want to be flexible, what we need is we don't have a fixed view of what a deal that Insight does has to look like. Meaning we do minority deals, we do majority deals. We don't have a set ownership percentage that we have to own. You know, we own as little as three or four percent of companies, and we are as much as 100 percent of companies. What we want to do is want to find the best companies in the most interesting markets with the best teams and partner with them in a way that makes sense for them. 

[00:05:34] Michael So does that make you a growth at any price kind of guy? 

[00:05:39] Deven No. I mean, obviously there's been a lot of talk about valuation and obviously there's been a lot of volatility in the markets. You know, we have a line internally that one of my partners says, you know, we never overpay. Companies just missed our numbers. And we kind of say it jokingly but really, what is embedded in that comment is that when something is growing at a very fast rate, 100 percent or north, you can pay, and look, I never like to say you can pay any price, but you can pay a pretty high price and make that math work because the multiple's literally halving every year. So if you paid X times revenue, next year point five times revenue, the year after, that was point two five times revenue. So people always ask about price, but really, what they should ask me about is what's a sustainable growth rate. And where we've been right about sustainable growth rate, price really didn't matter, and where you're wrong about a sustainable growth rate, you probably didn't buy cheap enough. And so for us, it's really about understanding, and that's why big markets matter because you can compound in a big market for a very long time. It's harder in a much smaller market to compound at a high growth rate and sometimes in a rising market, all multiples get pulled up even for companies that are in more limited markets. But you'd much rather pay the higher price for something that's a significantly larger market where you have the chance of compounding for a long time. 

[00:06:59] Michael So then what of that is a sustainable growth rate? We've seen remarkable growth for certain segments of the space courtesy of COVID. The enhanced digitalization that companies have had to do over the course of the last two years or so has really juiced the numbers on a lot of companies that provide that capability. But is it something that is sustainable post-COVID? Do you have to throw out your thinking on what constitutes sustainable growth rate pre versus post COVID? 

[00:07:28] Deven Look, there are certainly certain companies that had an almost unnatural, you know, acceleration because of COVID. The best enterprise example of that would probably be Zoom. You know, the best consumer example of that might be Peloton. I'm not saying the best example but examples everyone's heard of. And in both cases, the growth rate of those businesses has declined pretty significantly since COVID has subsided. I won't say that COVID has gone, but since COVID has subsided. What we saw is that there are very few companies that has that type of acceleration, right, where it was almost because all of a sudden behavior switched overnight and it's switching back relatively quickly. Well, most companies saw, particularly ones around collaboration and certain other tools that helped companies be able to work in a COVID environment, is we saw an acceleration of growth, but I think what you're seeing in a lot of those cases is, let me return to work. The software applications that allow for remote collaboration probably including Zoom, are still going to be relevant because most firms are going back to a hybrid environment, not to a five-day-a week work week. And the five-day-a-week work week in the office is probably moving towards extinction, and we can debate whether that's good or not, but that's happening. And so that's going to force continued investment in tools around collaboration now. Is it the extreme growth, you know, that you had? No. But are companies going to have to continue to invest in tools like that? Yes. And so what we think is that the positive benefit of COVID, the technology growth, is that I think companies realize that they're going to continue to need to have those types of tools. And if you look at kind of so-called non-tech companies, you know, consumer companies, they understand that having a really strong digital channel is critically important. You know, Wal-Mart probably put five years of investment into a year. So did that boost the spending of a bunch of companies? Sure. But does Wal-Mart fundamentally view their digital channel is probably even more important than they viewed it pre-COVID. Yes. Is that going to lead to continued strong investment in their digital efforts? Yes. And I think you're seeing that across lots of industries. 

[00:09:50] Michael Parekh knows the secret to a great investible startup. And despite the worst health crisis in 100 years, he's witnessed what he calls the fastest deployment of capital in our history. And he doesn't remember a time in his career when he had quality companies growing at these rates. Some sectors are seeing five years' worth of digitalization in a month. And while he admits the bubble of demand isn't likely to re-inflate to the same degree, the long-term trends remain intact. This is great news for any company looking to scale up to meet demand. But what's Parekh secret to helping a company scale up? 

[00:10:27] Deven So one of the things about Insight that I think makes us unique is that we have- the largest number of employees is not actually on our investment team. The largest group of employees is in a group called Insight Onsite, which is our kind of operations value add-team. What my partner Hillary Gosher has built is a, think of a software organization and think about every functional area within a software organization, finance, sales, marketing, product, pricing. We have a team within Insight that focuses on that area. And what do they do? What they do is they find all the best practices in that area, both inside our portfolio and outside our portfolio. And frankly, the things that don't work and codify them and then really shares that across our portfolio. We do a lot around customer introductions for our portfolio companies. So we do a lot around talent recruitment for our portfolio companies. And we have teams that do each one of these areas. So what we say to people is we're not just capital, you know, we're capital plus all of this. So we believe we can be competitive on valuation, but then we can offer you this full suite of services that we think is pretty unique in the venture industry. 

[00:11:42] Michael You mentioned customer engagement as well as employee retention. How have your relationships with your companies evolved or changed because of COVID? It's not like just walking into the office and sitting down with the CEO anymore. 

[00:11:58] Deven No, and I think that's been one of the more, you know, challenging things about COVID. I just yesterday visited the CEO of a company one of our portfolio companies is looking to acquire. And he made a funny comment to me. He was like, my existing investors never met me. And you're looking to acquire me and you've met me before my existing investor who's looking to sell me has ever met me. And it was just like an interesting moment, kind of a sign of the COVID times. I'm sure, by the way, I've got companies in my portfolio that have that same kind of dynamic. And I think that we won't know for years what the impact of that is. But I think that there are things that you learn in person that you never learn, sometimes people say to me, my wife sometimes asked me, like, would Zoom like, why do you even have to go to board meetings anymore? And I said, "Well, it's really not the board meeting, it's sometimes it's the dinner before the board meeting or the, you know, the drinks after the board meeting when you kind of have the casual conversation where you really learn things." And I think that one of the things that we miss by kind of selling deals on Zoom and closing deals on Zoom is that kind of personal relationship where you have to have a reservoir of goodwill that gets tested at some point in every company. Every company has a challenge. And I think not having that kind of level of personal relationship will create risks. Now most of these deals for all of us are relatively new, and so we haven't had to go through those challenges. But I think when we do, something will have been missed by not having been able to forge that same level of personal relationship. And I'm excited that I'm now, well, we're back in the mode of starting to meet, you know, companies in person again. And I have to say it's very energizing. 

[00:13:46] Michael Tell me how that goes down when that personal relationship is, as you called it, challenged. 

[00:13:53] Deven Well, you're always in a company. In almost every company, you're going to have a situation where there's a bump in the road. And that bump could be because of a business problem. It could be because of a market issue that affects the performance of the company. And more often than not, there's some management challenge, you know, in the business and sometimes that can create friction between, you know, investors and the company. And I think that my experience has been when you, by the way, this applies internally as well as a firm, right? One of the things I've noticed is the ability to walk into somebody's office and talk through, you know, a disagreement on a deal or a disagreement on an approach or on a hiring decision, that doesn't go as well on email and text. At another portfolio company where, you know, I thought there was a bit of a disconnect between the management team and the board and I would have ended up having a dinner with the management team, and in 15 minutes, we kind of resolved this supposed disagreement, which probably just wasn't really a disagreement. I just think people were talking past each other because they not met in-person, you know, in over 18 months. So I just think that these in-person communications, I think people see it in their personal relationships as well. That these in-person communications where you see people's body language and frankly, you have a little bit of unrelated chitchat to soften the conversation, can really be dramatically more impactful than doing a session on Zoom. 

[00:15:28] Michael You once told me that you don't remember a time in your career when you had the quality of companies growing at the rates they're growing today during Corona Apocalypse 2020, 2021, 2022. What is it about the quality? Why is it that in this weird environment in which we've been in for more than two years now, that's when you find the highest quality companies? 

[00:15:51] Deven It's a great question. I don't necessarily know that I know the answer, but what I can say is that the friction, you know, in some ways to raise a company has never been lower, right? The ability to raise capital. The ability to use cloud and other third-party solutions to get a company up and running very quickly. The ability to frankly remote hire and not have to be dependent on having talent be exactly where you're located. All of these things kind of unlock value and a confluence of all of that, plus, I think recognition every year by a broader and broader set of companies that they're going to have to increase their investment in software, which is bringing more dollars into the industry. You put all of that into a soup and cook it, and I think you end up with a lot of really interesting companies. 

[00:16:44] Michael Do you think of, say, 10 years from now when we look back at COVID-19 that you'll be able to say you've never seen a boom quite like this? 

[00:16:54] Deven I really don't know, because I think I don't know if that's going to end up being true. I think this ends up being a catalyst for investment for other reasons too, right. You also took the friction out of the investment process. It used to be before you close an investment, you had to fly to see the company and then you took him out to dinner. And it was just a process, when you can do all of that in a Zoom, it's totally different. So it's hard to know exactly what it is about this time that led to this activity. These are some of the things, these are some of the ingredients I think that were contributors, for sure. But who knows what's next? Who knows what's going to happen next? And so I never like to say yes, this will be the this will end up having been the best time. By the way, valuations were also really high. So maybe we'll also look back and say, well, prices were high at that time as well. So I'm not one to predict that we can't have better times ahead. 

[00:17:47] Michael As countries worldwide cautiously lift COVID related protocols, the question becomes where do the deep pocketed investors like Insight Partners deploy cash next? Parekh finds it's easier to invest in Canada than getting on a plane for a trip across the pond to the continent. He credits tax incentives dating back two decades that are still paying dividends today. But while Parekh's eyeing opportunities in Canada, he is willing to get on a plane. Maybe if it lands him in India again. Well, with that in mind, I see that it looks like you've done more investing in Asia during COVID than you did before COVID. To what do you attribute that and what does that investment trajectory look like post-COVID? 

[00:18:33] Deven Well, that's true, what you just said. In your case is really particularly around India. You know, I think some of that came out of a focus on, it wasn't necessarily waking up and saying COVID hit, we should go invest in India, that really wasn't the way it happened. You know, there are a couple of new markets that we're focused on. Fintech being one of them. And one of the observations that we had is we started kind of looking at the fintech market is that we thought some of the most interesting innovation was happening outside of the U.S. We spent a lot of our time in fintech looking at companies in international markets, global markets because their banking systems were not as evolved. And so the ability for the fintech industry to disrupt next-generation financial services we thought was greater. India ended up being one of those markets where, you know, we saw a lot of opportunity in fintech. And then for the first time, one of the things we also saw the last few years in India is that historically, you know, India had been very strong in services, but they weren't necessarily strong in creating local intellectual property-based companies that were then selling globally. But the development talent in India has always been very, very strong. And you know, what's happened over the last five to six years is you have a lot of software businesses being built in India with that exceptional engineering talent, and they're being built in ways that make sense to export globally. So we now have some pretty interesting investments of companies that were started in India. Oftentimes development is still in India, but they've now really become global companies. So I think again, the world is getting flatter when it comes to software. So what is an Indian company now or what is a Latin-American company? And sometimes it just means that a company was started there, but then they went after global markets. So I think we'll continue to see opportunities and in India, I think will continue to be active there. And you know, we've made our first few investments in Africa. And will that end up turning into more? I don't know. But there are so many of these markets where, you know, financial markets and software markets are still less mature than they are in other parts of the world. But the need for them is no less. And so we think that there's a lot of opportunity for tech adoption growth in those markets. 

[00:20:52] Michael Let's come back home because you've said investing in Canada is easier than getting on a plane and traveling to Europe. What role has government played in making Canada an attractive place to invest? 

[00:21:02] Deven Well, you know, Canada historically and I don't know exactly how it works today, but I remember when I joined Insight back in 2000, Canada had put tax credits in place to encourage there to be more software development in Canada. And generally, these were global companies who were getting tax incentives to put development talent in Canada. So I know a bunch of our portfolio companies did that. But what happens when you do that is you create an ecosystem of talent. Those companies exit. People leave. They form new companies. Where do they form those companies? You know oftentimes where they live. Where is that? In that case Canada. And so now you know, you're seeing, you know, for example, just in our database, we're tracking over 6,000 companies in Canada in our space. 

[00:21:52] Michael 6,000 companies in Canada alone?

[00:21:54] Deven 6,000 companies. Yeah. So that if I may guess, I don't have the data from, you know, 10 years ago or 15 years ago. Suffice to say, it was a lot less. How much of that you can ascribe to some of the incentive systems that the government put in place? I don't know. I just don't have enough of the facts to be able to answer that. But I think any government that is putting incentives in place to encourage more R&D to happen in their local market are likely going to reap dividends from. 

[00:22:26] Michael You've said that industries that people perceive to be highly digital are not, and we're in the early stages of a multi-decade digital transformation. Where do you see the most opportunity for value creation? 

[00:22:38] Deven Even in industries where they are viewed as highly software intensive industries are highly dependent on software, the need for investment is really, really high. And then I think there are other industries where people don't realize how much software is in them. The best one is really the automotive industry. Most people don't realize the average car today has more software code than the average plane. Now we're seeing the downsides of that because is that software sitting on? We're sitting on chips. And where are those chips coming from? Well, they're coming from other parts of the world. 

[00:23:12] Michael They're not coming from anywhere right now. 

[00:23:13] Deven Right. They're coming from anywhere right now. That chip supply has been disrupted, and that's really had a huge impact on, you know, on the supply chain. You know, my own view is I don't think you can find an industry where the percentage, you know, the percentage of value over the next five years, the software percentage of value is not going up. It almost has to. And so I think that's what makes this such an exciting time that it doesn't really matter which industry you pick. The industries that people don't at all perceive as software have a lot of software, and that software component is only going to continue to increase. So I think that the most exciting thing about what we do as software investors is that there's a 10 to 20 year really strong secular growth rate that we're going to see. Which is another reason why I think we continue to see a lot of companies growing. 

[00:24:12] Michael I had seen a number that suggested that only one out of every four application workloads are currently done in the cloud, that most software is still run on individual machines and that SaaS spend will quadruple over the next 10 years. 

[00:24:27] Deven Yeah, there's so many different reports out on this. And if you take the most conservative report, you take the most aggressive report, they're all talking about tremendous growth, right? And I think that what's happened is in the world we live in software and technology companies, yeah, most of them are using the cloud already. And cloud also needs to get defined in more than one way. Right. There's the public cloud, but there's also private cloud, right, where companies can still use a cloud application, but it's effectively their own cloud, so they're not kind of co-mingling data. I think there's still a tremendous amount of growth in cloud adoption over the course of the next, again, 10 to 20 years. So the growth rate and generally, people have always underestimated growth rate in software. If you go back and look at how big people thought Salesforce.com could get 15 years ago, they were off by an order of magnitude. And one of the reasons for that was what cloud software did by bringing the price point down, by bringing implementation time down, making the software more easily implementable. It significantly increased the market size of the number of people who would use that software. And we're continuing to see that happen across so many vertical and horizontal applications. 

[00:25:52] Michael For the start-up entrepreneur, if there was one takeaway, you wanted them to leave with this conversation, what would it be? 

[00:26:00] Deven You know, I think it's a pick a problem you're really passionate about. You know, the temptation sometimes in markets like this, which you know can be frothy is "Let me go pick the thing that is hot right now." You know, whether that's, you know, Web3 today or, you know, it was AI or ML a year ago. But you know, my advice would be that, you know, markets get hot, markets get cold. But if you actually focus on a problem that you're really passionate about, you're more likely to really solve it. And you're more likely to build a really big business. And while there will be money that gets made in AI and ML. There'll be money that they'll get paid in Web3 and money will get paid in SaaS applications. Money always gets made in application to solve a really difficult pain point at scale. And if you pick something that you're really passionate about or know something about and you stick with it and you don't worry about what the hot thing of the day is or hot thing of the week is, you know, that's probably the best road to success. Because I think oftentimes we find that, you know, companies are pitching themselves as something that they're really not because that's what they think investors want to hear. But fundamentally solve a pain point, get customers to buy your product, get them want to buy more your product. That's the road to success. It's so simple, and yet many people don't follow it. 

[00:27:23] Michael Fascinating stuff. Thank you so much for your time and insight. 

[00:27:25] Deven Thank you. 

[00:27:27] Michael Deven Parekh is the Managing Director of Insight Partners. Accelerating software revenue growth as we come out on the other side of COVID-19 requires you already have a product-market-fit and are engaging in best practices for sales, marketing, finance and strategy. Focus on customer engagement and employee retention. Once we can confidently start taking potential clients out to dinner again, that tight sales pitch honed over the pandemic will pay dividends. And if you can sign them up to a recurring revenue model through a subscription, you may just get Parekh knocking on your door. I'm Michael Hainsworth. Thanks for listening.