Letter #148: Christian Jensen (2022)
Dragoneer Co-Head of Private Investments & Partner | Tech Investing: Creative Solutions
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Today’s letter is the transcript of a panel Dragoneer Partner and Co-head of Private Investments Christian Jensen spoke on in 2022. In it, he discusses his views on what happens with growth, growth as a category, biggest learnings as a firm, B2B SaaS and thematic investing, culture and staying motivated, and the state of venture.
This was a particularly illuminating panel discussion not only because it paved the way for Marc to speak at this same event the following year, but because when paired with Marc’s talk, we are able to piece together an idea of Dragoneer’s investment philosophy. In fact, I created a Dragoneer-style checklist based solely on these two talks. And while I typically don’t share my own learnings so you can come to your own conclusions, people found my IGSB takeaways valuable (which proved to be spot on) and asked that I do it more. With this newsletter potentially coming to a close, I figured why not?
As such, here’s the checklist:
Dragoneer Investment Checklist
Is this a great business?
Is business model beautiful?
Is there sustainable differentiation?
Is there a deep, sustainable moat?
Does the company have a superior and robust economic model?
Is it capital efficient?
Does it have efficient growth?
Does it have healthy unit economics?
Does it have high margins?
Is it profitable?
Can it generate lots of free cash flow?
Are we buying at a great price?
Is the company trading at a reasonable price/multiple?
Is there a margin of safety?
Is it an attractive time to buy?
What’s the market missing? Are they misunderstanding something?
What are the supply/demand dynamics? (ie post-IPO lock-up expiration)
What stage is the company? (late-stage private, early-stage publics)
Can we structure the equity?
Can we analyze it?
Do we know it darn well?
Fundamentals first, but do we understand how the effects of macro/trends?
Do we understand the “un-understood?”
How much conviction do we have?
Are we willing and able to make a concentrated bet?
What’s the state of the market?
How big is the market?
Is the market growing? How big can it get?
Is the sector/stage hot or cold? (markets are volatile)
What stage of a cycle are we in?
Is the team strong?
Are they superheroes?
Does the team have commercial intuition and are they commercially savvy?
Are the leaders great salespeople?
Is the team very charismatic?
Does the team have product knowledge/intuition?
Does the team have product-building skills?
Can they figure things out?
How much do they own?
What level of coaching do they need?
Do the leaders have the ability to have candid conversations?
Are they trustworthy, transparent, and open?
Now, please remember that this isn’t an official Dragoneer checklist. But if you happen to work at Dragoneer or know anyone there, please reach out! I’d love to compare notes.
Christian Jensen is a Partner at Dragoneer Investment Group and Co-Head of Private Investments alongside Dragoneer's founder Marc Stad. At Dragoneer, Christian focuses on software, financial services, and consumer, and has led investments into companies including Datadog (DDOG), NuBank (NU), Snowflake (SNOW), Slack (WORK), UiPath (PATH), Procore (PCOR), and ServiceTitan. Prior to joining Dragoneer in 2016, Christian was a Principal at Accel Partners, where he focused on growth stage tech companies, helping invest in companies such as AirWatch, Code42, and Invoca. Christian started his career an Associate at AEA Holdings and Aetos Capital, where he focused on expanding its capabilities geographically and across investment strategies.
I hope you enjoy this talk as much as I did! It really helped me better understand Dragoneer’s approach to investing (as articulated above). I’ve also been following Christian’s work since his time at Accel, so it’s been fun seeing him evolve as an investor as he refines his investment approach and philosophy.
(Transcript and any errors are mine.)
Related Resources
Transcript
On What Happens With Growth
Ibrahim Ajami: But the growth funds, maybe Dragoneer, you've been around for 10 years. You were sort of one of the first, or one of the leading growth funds, growth. What happens now with growth? And what is the future of Dragoneer? And if you were to build on Rajeev's point that it wasn't just growth tech--actually, he said that he's the one that created the growth category. Do you agree with that? You know, tell us a little bit about your position there.
Christian Jensen: I’ll defer to your creation of the growth category.
Rajeev Misra: I never said that. We’ve disrupted growth.
Christian Jensen: So yeah, it's a good question. What happens from here? Where does the world of growth go? There's been such a pendulum swing. Pre 2020, I'd say things were in a more rational world. Capital was at least somewhat rational. There was more focus on unit economics and capital efficiency. And through 2021, during this COVID moment, in part because people saw such opportunities to go capture, and capital was so abundant, growth at all costs became the norm for a lot of companies. And I think what we're seeing now, of course, that that's sort of an unsustainable reality. And so a lot of folks are retrenching, getting back more dialed in in terms of capital efficiency, growth efficiency, unit economics, stuff that we've always cared about, and prioritized. But I think it's getting into a much more healthy zone, and, frankly, these growth businesses that have healthy unit economics and sustainable differentiation, this will be a good moment for them. So we're optimistic about the next five or 10 years.
On Growth as a Category
Ibrahim Ajami: Christian, you and I were talking about this yesterday. High growth, very exciting high growth, is now in the same category as average to low growth. Investors are not giving premium to high growth. What does an investor like you, at Dragoneer, an investor at Coatue do, in a world where high growth and low growth are in the same category?
Christian Jensen: Yeah, it's interesting to see. We've always been interested in these growth businesses, and the sort of consistency across market environments has always been a focus on deep, sustainable moats and unit economics. So that has never changed. But what we saw in this sort of pre-COVID era, if you could call it that, was that hypergrowth was relatively undervalued. We thought it was actually really attract--really interesting, that you'd find some of these businesses that—
Ibrahim Ajami: Pre-COVID, Pre-COVID.
Christian Jensen: Pre-COVID, yeah. That was very... the sort of Snowflakes of the world, and Datadogs, and from companies like this, as private companies were in a really interesting place. And the world hadn't placed 150x multiples on high growth businesses. Then, during COVID, it seesawed. And the premium placed on growth got pretty wild. And now it's coming back. And so the places that seem more interesting for us at the moment might be some of the higher growth businesses that might be sort of available at more rational prices, but in particular, in the public markets right now, where valuations have corrected, there's actually an open market. A lot of the private, sort of regular way, mid-to-late stage growth and crossover, there's not a lot going on. So in the private markets, there's actually some structured type investments, more equity exposed, that are helping bridge the gap for some really good companies. They just raised money at slightly high prices previously, and this can help bridge the gap for them. But great companies are open minded to that, at times, and...
Ibrahim Ajami: They weren't open-minded a year ago.
Christian Jensen: Excuse me?
Ibrahim Ajami: They weren't open minded about these structures a year ago.
Christian Jensen: It was a different world a year ago. So the public stocks, we think are probably the most interesting, in that area.
On Biggest Learnings as a Firm
Ibrahim Ajami: Christian, for you, share with us the biggest learning, some of the biggest learnings, as a firm, as Dragoneer, with founders, and what does a Dragoneer founder today look like into the future?
Christian Jensen: Yeah, I think that some of the best folks we've worked with over time, we've always felt that there's sort of two--that they can wear two hats. They're--commercial intuition, great salespeople, very charismatic, those are some some of the defining qualities on the one hand. And the very best are able to marry that in the same brain with product knowledge. And oftentimes even engineering backgrounds where they've built the product from their own hands. And so that, in many ways, has always been what we've looked for. Who are these people who are so commercially savvy, and also have that wonderful product intuition and product-building skill. I think the thing that's become even more important, this sort of latest cycle is, is essentially trust and transparency and openness. And so much the importance of what we can talk about with them in the relationship... point with founders is being honest with them as they should be with us. And sharing candid direct feedback. And I think that a lot of what characterized the sort of investor-founder relationships of the last two years were insufficiently candid conversations with management teams that allowed them to persist in what they thought was right and what they were being rewarded for.
Ibrahim Ajami: Driven by too much capital in the system and everybody chasing the right founders, hence this dynamic that… but you didn’t answer my learning question--what's the learning? What's the big learning from Dragoneer? What are the mistakes you did as Dragoneer that you can share with us?
Christian Jensen: I think probably it goes back to some of the--
Philippe Laffont: Hey, I answer that question? No, I'm kidding.
Christian Jensen: Yeah. Can I punt this back to the other end? No, I think it really comes back to that. And to Rajeev's point, a lot of these founders are young, and they weren't even out of college yet the last time the world was really hard. And I think some of them were over influenced by, frankly, the rewards and the reflexive cycle of growth at all costs to raise at huge multiples and very fast times. And I think some folks need to sort of reset from that. And I think that some of the folks who were most captivating and most charismatic were the ones who were most able to sort of lean into some of the growth excesses. And so it's been a learning.
On B2B SaaS and Thematic Investing
Ibrahim Ajami: Dragoneer, you folks have made some good returns on B2B SaaS companies. Is that still a focus area for you? What are you looking for? Give us a little more color. Interesting things you're looking at and looking for in the next couple of years.
Christian Jensen: Yeah, I mean, we think of ourselves as generalists and most of what we do is sort of mid-to-late stage private or what we think of as early stage publics. And we're really not thematic investors, we don't really think of what are the trends that we like and try and find companies that are consistent with those trends. We sort of invert the process and try and find great companies and validate that the winds of innovation are at their back and they're not fighting against all this progress. And so, yeah, software has been, at times, about half of what we do. Consumer internet and marketplaces like that have been a significant part of things. But we love software. Vertical software in particular has been an area that's been a positive surprise... for example, ServiceTitan on the private side, Procore on the public side, PointClickCare on the private side, and they're disrupting things like construction and skilled nursing homes and the home trades and it's sort of this endless world of niches that have turned out to be surprisingly large. And I think people will keep finding new ones. And we don't know what they will be, we don't know what industries will give birth to these great companies.
Ibrahim Ajami: Why does a founder—why does a great founder choose Dragoneer? I mean, you're saying great companies—we all want great companies. Why do they choose you?
Christian Jensen: Yeah, at different times it's been different things. And I'd say, every investment we've ever made has felt like its own unique backflip. How do you find--is it a special personal connection? Is it a strategic partner that we've brought into a transaction? At times we've brought in Salesforce or Tencent or Paypal or Twilio. We can bring folks like that in as strategic partners to transactions. Sometimes it's been having flexible capital. They might have a valuation they're trying to live up to and we can do something creative with them. It might be people who we bring to the table who can sit on the board or be helpful to the business. So I can't say there's a consistent pattern. Each deal is its own unique...
Ibrahim Ajami: But the point that Philippe was making around people connection and having that chemistry is very important.
Christian Jensen: It's huge. That's the business.
On Culture and Staying Motivated
Ibrahim Ajami: You guys are--I think, I'm gonna--let me make this statement. You are at this sort of cusp now, you have about five funds, you're a successful firm, you've been around for 10 years, Marc's built a very impressive culture at Dragoneer. How do you stay relevant and make sure you don't lose that passion as you get bigger, as you're more successful? As you get wealthier, how do you how do you keep that fire going for the next 10 years?
Christian Jensen: It's a good question. One of the things that Philippe said just now that has really resonated is trying to think like an emerging manager. And I think it comes down to--so much of the business seems to just be flat out hard work. It's just hustle. And some of it is trying to be smart, trying to different--and some of the things we've worked on with Philippe have just been us working really hard together. And maybe some of it's smarts, but the vast majority sometimes is just working hard. And I think having a culture where you recruit people who spike on attitude and work ethic--of course have to cross the bar intelligence-wise and commercial intuition and skillset and that sort of thing, but attitude and work ethic go a long way. And it's just got to be core to the whole culture of things.
On the State of Venture
Ibrahim Ajami: Okay, there's another question, people are starting to send questions. How many of the 1300 unicorns will disappear over the next three years? I don't know, Philippe, you mentioned the unicorns, want to take a guess?
Philippe Laffont: Yeah.
Ibrahim Ajami: 80%?
Philippe Laffont: Well, if you look at the public markets, let me ask a question to the audience. How many companies do you think they are that have a market cap in technology of greater than $1tn?
Someone: Two?
Philippe Laffont: Close. There's actually four, right. And then how many companies are there between let's say, $100bn and $1tn, there's about 40. And then there's about, maybe 300-400 that matter, and everything else is tiny. So there's about maybe 10% of companies that represent 80-90% of the market cap. So thinking about just the unicorns, but almost in terms of market cap, I think the unicorns is a $2-$3tn today. I would venture maybe there's 40 or so that will really, really matter. And then the rest will be really small or go together. So it's gonna be a Darwinian couple of years to figure out how this all plays out.
Ibrahim Ajami: Any views from you, Christian, on that?
Christian Jensen: Yeah, I think that's frankly a pretty good way of thinking about it. A lot of these were experiments, and some will work better than others. Some were fundamentally sound all the way through, but I think a lot were experiments that will need to find a home somehow, or downsize, or find some way to persist.
Wrap-up
If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.
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