Q&A with Dave Welsh, head of TMT growth investing at KKR

Dave Welsh is head of TMT Growth Investing at KKR. The firm raised its debut tech-growth fund, KKR Next Generation Technology Growth Fund, in 2016 with $714 million for TMT growth equity investments in North America, Europe and Israel. Dave agreed to sit down with Buyouts for a chat about the market and how the fund is going so far.

Why this separate fund specifically for tech growth?

There had been a legacy of KKR doing more traditional buyout work in tech, if you go back 25, 30 years. About 10 years ago, we started doing more growth-type buyouts, names like GoDaddy and Internet Brands.

And there was this notion that if we were going to really go down that path, and felt like that was a big future driver for the larger buyout part of our firm, it made sense to think about extending the platform into a bit earlier in company stages. And the next question was: There’s a lot of money out there, a lot of firms being started; why would we be better?

Inside of KKR, we did feel like we needed to have a separate fund and a team that was really dedicated to this asset class independently because there are a lot of differences in sourcing and the way that you think about deal involvement and prosecution from a minority growth equity perspective [versus] a larger buyout.

If you’re going to be successful in growth equity for the long haul, what are some of the key attributes that you need to have?

One is consistent access to capital, which KKR has been pretty good at proving we can do over the years. You need to have a branding event for the companies that you’re investing into, and you need to be able to show some real, tangible value that you can add to these businesses from an operating perspective. And then you’ve got be a good partner to work with; you need to be very collaborative. As I talked to everybody at KKR, I thought all four of those things were really resonant here.

How deployed is the fund at this point?

We’re about 70 percent committed.

Is the fund made up of KKR balance-sheet capital, along with commitments from external LPs?

Yes. We originally had done some investing, predating me, off of the balance sheet. I wouldn’t call it quite a trial-and-error period, but we were trying different things, led by people from the other groups inside of KKR. We did some earlier-stage things than we might now. We did a couple things in some industries that are a little different than what we’re focusing on, and it was sort of a honing process over a couple years.

Most everything that we have done post-the-fund fits into some fairly more prescriptive guidelines. Some of the stuff we did earlier, MagicLeap for instance, is very different than what we would do out of the fund now, just from a scope and type-of-company perspective.

One of the things I didn’t mention about why us and why we’re different is access to our whole portfolio for some of these growth-stage companies. It really has mattered. I forget sometimes that we employ nearly a million people, and the IT spend of our portfolio is $9 [billion] or $10 billion. Giving those smaller, growing businesses access to that type of potential spend is often pretty compelling.

How big is the team?

We have eight of us here in the U.S., right now all based out of Menlo Park, and we have five over in Europe that are covering right now mostly Europe and Israel. We certainly are leveraging some of our colleagues in Asia to decide whether or not we want to make some investments in Asia. We haven’t yet, but we’ve made a good set of investments both in the U.S. and Europe/Israel.

What is KKR’s approach to the asset class in the current climate?

Valuations in the late-stage venture and growth area the last few years have been high by traditional metrics, or anything else. Part of it is because of where we are on the stock market, and part of it is because there’s been a lot of capital.

So we want to be aggressive but also disciplined. If we like a business, we want to really try to go after it hard, but we kind of cross-current that with, we don’t want to just let valuations run away and chase them.

The entrepreneurs and the investors that are looking to add a partner like us often aren’t the ones that are just trying to top-tick absolutely on valuation because they’ll say, “Whether we get 100 today or 120 today is a lot less relevant as to whether we sell it for 500 or a billion five years from now.”

That mentality helps keep valuations for our deals down, but we also think it’s important almost philosophically. You’re really looking to build for the long haul, so maximizing on short-term dollars is less important.

What are the sectors you’re looking at?

We’ve been spending a fair amount of time in and around security, regulatory, compliance, risk management, everything that has to do with what you’re seeing in the news about exposure of more data and information.

We’ve spent a fair amount of time in vertically oriented software areas, looking at automotive, industrial, travel, real estate, various industries of that type and solutions that are particularly targeted for those markets. We’ve been looking in the disaggregated development environment of software applications now, the Docker and Kubernetes [platforms].

What are some operational improvements you can provide inside companies?

With a lot of companies that we’re dealing with, particularly on the enterprise side, pricing for instance is often a big question. So we have people on our Capstone team [KKR’s dedicated operations group] who are pricing experts and have actually put together workshops on how to think about frameworks for doing best pricing.

Another might be supply-chain management, or best practices in HR, or hiring. We’ve had about five or six of these modules that we’ve developed with Capstone to help people with.

How many investments out of the fund?

Eight, [including] one in travel, GetYourGuide over in Europe, and one in transportation, Lyft here in the U.S.

Do you have a feeling about investing alongside other growth firms?

We’d be open-minded. We don’t do that as much, mostly because it often is that the company only needs a single new investor, although we actually did it on our last investment, ForgeRock, [an identity- and access-management company] in San Francisco. Accel had been an early investor, but it was a new investment for their growth fund.

We came in together because we knew them well. Based on my background with Accel, we thought the business and the opportunity was big enough that a couple of new capital pockets made a lot of sense, and we each brought a different set of attributes that we thought would be beneficial to the business over time.

Action Item: Read more about KKR’s TMT investing here: https://bit.ly/2raJqC9

Photo of Dave Welsh courtesy of KKR