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Dave is the Founder of Tidemark. He has 20+ years of experience in investing, advising, and building technology companies. In this episode, Dave and Stuart discuss the difference between technology companies in 1999 vs. 2021, how technology in accounting has been developing, and why Dave chooses to work with B2B software companies. Dave also talks about his passion for venture capital, and what the future holds for him and his company.
Join Stuart McLeod as he interviews the world's top accounting leaders to understand their story, how they operate, their goals, mission, and top advice to help you run your accounting firm.
Stuart McLeod 00:00:05.922 [music] Hi, I'm Stuart McLeod, CEO and co-founder of Karbon. Welcome to the Accounting Leaders podcast, the show where I go behind the scenes with the world's top accounting leaders. [music] I'd love to kick off and ask how you got into VC. After college and everything, was that always your path, or did you fall into it, or did it find you? How did all that sort of-- what was the early career of Dave Yuan?
Dave Yuan 00:00:36.313 Gosh. No, not at all. I went to college thinking I want to be a marine biologist.
Stuart McLeod 00:00:40.601 Oh, wow. [laughter]
Dave Yuan 00:00:41.295 I was a big John Steinbeck fan, and Ed Ricketts was kind of my hero. And so I went to college wanting to be a marine biologist and came across a guy named Terry Burnham who was a PhD student in economics. Actually had been in the army, had started a biotech company and worked as an investment banker. This guy was my hero. And he was a good athlete. He used to come to my rugby games and just really took me under his wing. And so that kind of got me on the business path. And I would say compared to people today, I was incredibly naïve about what business was and what the different possibilities were. I was really fortunate to, my first job out of college, go to a management consulting firm called Bain in San Francisco, actually. This was not only an incredible professional experience but also an amazing personal experience. I think half of our wedding party-- my wife also was a-- half of our wedding party were Bainies. But anyway. So got into business and then actually got into management consulting. Did my two years there and was actually going to go back to Boston to go to B.I.G. Capital, but decided to get involved in the tech scene and just got roped into startups. Anyway. So the path to venture capital, to answer your question directly, was completely circuitous and random. I was fortunate. The startup I joined, we sold to a company called CMGI, which no longer exists. It was a big company back then. Anyway, so after we sold, pretty soon, I realized I didn't want to be part of a big company. And I called up a good friend of mine, Amit Shah, and he told me about this thing called venture capital. [laughter] And I was like, "What's that?" And he told me about it. Sounded interesting. This was '99, and the VC market was going through its first growth phase. And VCs just wanted a warm body, and I was a warm body. And so I was really fortunate to get a job and start investing in 2000 right in time to catch a bunch of falling knives. So it was all quite random, Stuart. [laughter] But it's worked out and it's been really fun.
Stuart McLeod 00:02:36.035 What were some of those early companies that you sort of got involved with? And looking back, how has the industry changed and evolved? What's the same? What's massively different?
Dave Yuan 00:02:46.932 Oh, it's all different, Stuart. [laughter] So I started investing in 2000. That's right when the first dotcom hit. And for people who weren't around then - I know a lot of people weren't - it was really acute in San Francisco. Right? It felt like the world imploded right in San Francisco. So it felt like we were [laughter]-- it was all on us, and it was really quite depressing. So, look, I would say that my first tour of duty in venture capital was for about three years. I would say half of it was actually working out companies that had failed. I was fortunate to invest in a number of companies; a business called ProfitLogic that Oracle bought. I actually didn't invest in VMware, but our firm did. And I got to know Diane Green, and I worked with her a bit there, and a couple of other companies that actually went on to some reasonable success. But I think probably the most important part of that experience is seeing what can go wrong and what happens when the music stops. Right? A lot of the stuff that was happening in '99 probably isn't that different than some parts of 2021. So it was a great experience. I was pretty convinced that during portions of time, you could make money investing in tech. [laughter] And so it was good to see some fear [at least?] in that degree. But yeah, it was totally different. Back then, a 5 to 7 million-dollar investment was a big deal. It was a big deal. And so when I ended up going to TCV and investing the checks that we do, I was quite scared for the first year. [laughter] I was like, "This is a lot of money to put in one company." So yeah, it's totally different. It's totally different. I feel old, Stewart. You're making me feel like talking like the old days--
Stuart McLeod 00:04:15.197 Oh, no, no, no. No, that's wise and experienced, Dave. Not old. And let's talk a bit about, you said sort of '99 is feeling a little bit like '21. What are the-- well, let's call it pattern matching because that's what the industry does, right? What are you seeing that perhaps is a bit concerning for you?
Dave Yuan 00:04:33.678 Let me pull apart in two ways. It's easy to jump on 2021 given what happened in the public markets. I would say it's very different than '99 in the sense that the companies that are in technology are a couple of orders of magnitude bigger. Their opportunities are much bigger because this market compounds. And their business models potentially are quite a bit stronger. Right? If you think about the old-school license and software model of 20 years ago versus the consumption model, the [bombs up?] PLG consumption models today, there's no comparison. Right? The TAMs are again, two orders of magnitude bigger. The businesses can be that much more profitable, that much higher growth. I would say the things that are similar between 1999 and 2021 is a little bit of lack of perspective. Right? We're on a big sine curve. Certainly, we're on a cycle now that the shape of the curve may not be as neat as a sine curve, but we are an ebb and flow cycle. And technology is an aspirational field. So at times, the capital markets get ahead of themselves, and at times they pull back. And so that's just part of the cycle of things. I think overall, the trajectory is upward, and this is the best industry to invest in, the best industry to build a company in. But I think what is similar is, candidly, in '99, people lost perspective on some of the longer-term trends. I think in parts of 2021, people lost perspective on the longer-term trends of a couple of things. One, what makes a valuable company? Big TAM, competitive products, efficient distribution, and long-term economic growth. Right? Long-term economic growth. And people started growing at all costs, and people thought that valuation levels were the measure of a company, not product success, not commercial success, not industry success. And so I think those things are very similar to '99. But a little recession and things correct pretty quickly. So I think it's fine. It's just yeah, having seen it a couple of times, I think it's three times now, there is a pattern to [the exterior?].
Stuart McLeod 00:06:42.212 Experience counts. And what was your journey to B2B SaaS, in particular? What were some of those initial companies that took you down that path which is probably the Tidemark specialty now, at least? [laughter]
Dave Yuan 00:06:56.534 Yeah. I've been really lucky, Stuart. I've had a number of great founders take chances on me. And I think probably the first deal where a founder said, "Hey, Dave, I want you to be on my board and I want you to lead," - which is a big deal as a young person going through the ranks, and there's a lot of both internal and external issues and barriers for you to get to that place - it was a guy named Scott Dorsey, who was a founder and CEO of ExactTarget. And he took a chance on me, and that's been incredible. He's still a friend today who is an investor in Tidemark. Another guy, Arshad Matin, actually, he was a CEO of a company called SMT, where that was my first real board. And so he put up with my junior enthusiasm and some of the nonsense that comes with being on a board for the first time. So he's now running a company called Avetta where I'm on the board again, and I'm really grateful to him, likewise. David Williams, founder and CEO of Merkle. He was running that business for 25 years before he brought us on as the first outside board member. And I really was a principal at the time. I was competing with the heads of technology of some very large competitors. And despite a lower title - and I was probably five, six, seven years younger than my competitors - he took a chance on me. And so I think that happens every day, right? Even you, most recently, you took a chance on us. Right? So I think it's kind of all these things where you got to earn it every day, and you're just really grateful to CEOs that are willing to take you on as a partner and trust that you'll help accelerate their business and support their business and support their vision.
Stuart McLeod 00:08:31.132 Obviously, venture capital can apply to anywhere in technology, in particular. And a lot of-- I've got to know you pretty well. I can kind of see why B2B is very day one. But tell me, Dave, in your own words, why not consumer? Why not sort of sexy advertising? Why not the hims and the hers of the world? Why B2B SaaS? And why boring old accounting? How did we get here? [laughter]
Dave Yuan 00:08:58.068 Yeah, for sure. Let's talk about those. Those are two separate things. So, first of all, I have done about a third B2C. So we were fortunate to be big investors in Facebook and LinkedIn and ByteDance and Rover and Klook, and some great business-- Rover, some great businesses on that side. Maybe just a couple of distinctions. First is we have invested about, I don't know, a third of our capital, and I've invested, historically, a third of my capital B2C. So Facebook, LinkedIn, ByteDance, Rover, Klook, LegalZoom-- LegalZoom is kind of SMB B2C as well (David refers to investments he made while he was at TCV). So I have done that. But I did find myself gravitating to B2B because of the rationality of the business models, right? When you sell a product to a business consumer, it's pretty straightforward in terms of what a value proposition is. It's help a company grow. It's help someone do something more efficiently. It's help a company have insight into a business. And so there's a lot more logic. And if you look at the B2C companies I've invested in, a lot of times it's been a platform company where there's inherent network effect and logic to the business versus more of a, sort of, consumer fancy piece, which is, for me, harder to grok, and I'm just not as good at it, and probably can be a little less interested in it.
Dave Yuan 00:10:14.709 On the B2B side, it is awesome. I love business. That's one of the reasons why I'm an investor, is I love pulling apart businesses, and I love how technology applied to business can really accelerate and expand both the TAM, the growth, and the franchise of that business. And so I think it's just logical for me to invest in software companies that do that. Right? If you think about what Karbon can do for its accounting customers and the accounts clients, it's magic, right? There's always for small business, I've found, and we've been fortunate to invest in a lot of small businesses, there's always the scene of the owner of a small business doing their work from the beach. Right? That's winning, right? It's the flexibility. It's being able to do your work on your terms. And I love the fact that Karbon, you have this Triage product where you can be the primary source of the company. You can be the founder and sell the business but then engage with the clients and have your team engaged with the clients as well. And it just gives you kind of leverage in a way that's magical. The whole task management piece, right? You're creating order to a really maybe otherwise chaotic environment. That's super cool.
Dave Yuan 00:11:20.853 And so that type of empowerment is why I invest in B2B. And then obviously, these are some of the best business models on the planet. I can talk about that all day. Now, I think you also asked about accountants. And it's kind of weird. I've now invested in Xero and now Karbon. And I guess there's probably two answers of why I invest in software companies selling to accountants. The first is, this may be not an obvious statement, but I actually really have a deep belief and respect for accounting. Right? Financials aren't everything, right? But financials are the scoreboard, in my opinion. They're a short-term scoreboard, and you have to look beyond the financial results. But they are a scoreboard. And I view accountants as being the referees of making sure there's integrity to the score. And in how you represent your financials, it tells you a lot about the business. And again, it comes back to this educational experience where in business school, I happened to take a forensic accounting class from, [this woman who was?]-- lights out, this professor would have been probably the most successful short hedge-fund investor out there. She could look at a set of accounting statements and see fraud. She's [crosstalk]--
Stuart McLeod 00:12:29.142 Wow. [laughter]
Dave Yuan 00:12:29.645 And so I've always had a high degree of respect for accountants. Now, as I've gotten a little bit smarter and have been more experienced about SMB, and we've invested now in over 10 vertical SaaS and SMB companies, I realize the role that accountants play for their clients. And in small business, accountants are the coaches, right? Because they are the scoreboard. And oftentimes, a lot of small businesses are heads down in their business, running their restaurants, running the retail store. They have an intuitive flow of what's going on in their business, but they actually don't have a true thoughtful scoreboard. Accountants can be actually a great adviser to say, "This is actually how your business is actually performing. Have you thought about these two or three things that will accelerate or make your business more profitable?" And as I've had the fortune to work with guys like Dan Wernikoff and Chris at Toast, and Sankar at LegalZoom-- oh, sorry, not LegalZoom, at SiteMinder, I've realized that this isn't just like an anecdote. This is a pattern where the best small businesses do work with accountants. And so I love the idea of providing software, particularly to accountants that serve small businesses because that's one way of really supporting the small business community. If you take a step way back and you think about why does America work, and-- I'm rambling a little bit here. But why does America work? It's social mobility. The [inaudible] to social mobility are education and entrepreneurship. And education is super expensive. It's become harder and harder for the average family or the immigrant family to access. And so small business is the lifeblood. And so I love this idea of investing in software companies that help accountants to serve small businesses.
Stuart McLeod 00:14:08.287 There is something elegant around the relationship, right, of accountants and their clients. The one thing that comes across on this podcast when I interview accountants and just talking to, well, probably thousands of them now, maybe tens of thousands, the common theme and the reason people go into accounting is because they're attracted to this idea of helping clients - and clients become friends over their life journey - to just do better. Just play that little role around helping that person achieve whatever it is that they're setting out to achieve. It doesn't have to be world-beating, but it just has to be satisfying to that client. And well, I personally draw a lot of satisfaction in our little role in that relationship, too. [laughter]
Dave Yuan 00:15:01.095 I invest the way I do. Right? I could have been a public market investor, or I could have been a kind of low-growth buyout investor. And I chose to do this for investing, which is-- my aspiration is there's a point like-- the major team runs their businesses and they drive the heart of the business and 99% of the value. But my hope is there's one point in time where it's a nudge, it's an idea, it's a resource, it's a person that we can change the arc a bit. And so, yeah, I totally resonate with that. I think with the accountants, too, they have to go through so much in terms of data collection and a lot of the manual stuff that gets in the way of doing, my sense of having spoken to accountants as well, like the real joinder work. And so again, this idea of software taking away some of the drudgery and actually, some of the cost structure so that they can provide advice and do it in a cost-efficient way for their clients. I think that's really awesome.
Stuart McLeod 00:16:00.474 Yeah. Just allowing them to do what it is that they enjoy and trying to remove as much of everything else as possible. So speaking of accountants, your first investment in the industry was Xero. Why don't you tell us a little bit about how that came about, Dave?
Dave Yuan 00:16:15.037 So it's interesting. Do you want the two-minute answer, or do you want the 10-minute answer?
Stuart McLeod 00:16:21.311 No, the 10-minute answer, definitely. I mean, Rod is an interesting guy to work with, right?
Dave Yuan 00:16:24.813 10-minute answer. All right. Rod is an interesting guy. So Xero was one of these businesses that went public very early. They went public just right after they got revenue. And it used to be reinvested publicly at times, but mainly privately. And so in general, I thought of Xero as, "We're not necessarily going to invest, but gosh, they're doing something really interesting." This was back in the day. This is probably about 15 years ago, maybe 12 to 15 years ago, where the concept of software having great design and being user-driven, right, the buyer is the user, and then the user buys on a credit card, was a new concept. And Xero, this company at New Zealand was them and this other company called SolarWinds, and a couple of other companies have-- SurveyMonkey is a good example of this. This is still a rare currency. So I was like, "I got to learn about these guys." And so I got on a plane to New Zealand and got to know Rod and Chris Teeling and spent some time with them. And they were kind enough to host me in Wellington. They didn't necessarily need any money. I wasn't planning on investing. It was just ideas like just the joy of learning about their company, the joy of them sharing their company. It was like, "Awesome."
Dave Yuan 00:17:37.910 And so what I came to really respect is, for some reason, there's something in the water. And I know New Zealand is different from Australia, so I'm not comparing the two. [laughter] But there's something about that region, and partly, it's two-- well, let me get to why I think this is happening in a second. But there's something about this region where there's a lot of great design-driven product-led software companies that are expanding global. Right? Karbon is a great example of that. I don't think it's the water. I think it's the fact that two things; there wasn't a lot of venture capital at the time. So the Darwin is in effect. So the companies that were successful were product-led and design-oriented, and the user is the buyer, so and so forth. And the second is that these are relatively smaller markets, and so you need to go global day one. And so I came to really respect this [class of?] company. And so I started going to Raglan. I invested in SiteMinder, looked at a bunch of companies like Canva. I should have invested in. And so what occurred is I happened to be in New Zealand again actually on a surf trip. And I was in sort of my favorite spot in the world, Raglan, New Zealand. And so I asked Rod to get together. It turns out the day before I was meeting Rod, I took-- my surf then, my [inaudible] straight to my eyebrow, put my eyebrow up, and literally gashed it up. And so blood was flowing down my face as I was paddling back into shore. People were just horrified [crosstalk]--
Stuart McLeod 00:18:59.803 [laughter] They would have been thinking, "Shark."
Dave Yuan 00:18:59.905 And so I got this doctor to stitch me up-- yeah, totally. Yeah, it's just, "Shark in the water." So I waited for 15 minutes. In the US, it would take me like six hours. It took 15 minutes. Great doctor. Puts nine stitches in me, charges me, I think it was 17 Kiwi dollars--
Stuart McLeod 00:19:16.295 [laughter] About 2 US dollars. [laughter]
Dave Yuan 00:19:16.871 --so like $12, US. It was amazing. I love the socialized medical experience. [laughter] But anyway, so I actually [inaudible] for two or three years. I show up at this office, and there's nine stitches across my brow. And as you can tell, I'm kind of an expressive guy. And I'm talking about ideas again, and these little drops of blood were coming out of the stitches, running down my nose, down onto my white notebook, [laughter] and Rod was cool with it. Rod is a big surfer. Had a paddling board [inaudible] himself. He was cool with it. But that was this foundation meeting. But anyway, I got reconnected with Rod, and thereafter, actually one of their big insiders was looking for liquidity. And so they reached out to-- fortunately, they reached out to me. We actually went over the wall and got into it and we did a PIPE. And so we were very fortunate to invest in, and that's how I got to know Sankar who now runs SiteMinder. Sankar was the CFO and COO at the time. And it's just been a really--
Stuart McLeod 00:20:13.208 CFO. Yeah, I get it.
Dave Yuan 00:20:16.435 Yes. It's just been a really nice relationship. They would always drop by when they were in the Bay Area about once a quarter, and I would drop by there. And they got involved in a number of events. And so yeah. Yeah, it's been a-- it's a hallmark of a company. It's a great platform. It shows the opportunity for Karbon. And Rod is a great entrepreneur. It's been a joy to get to know him.
Stuart McLeod 00:20:36.989 There's a couple of things in there that certainly resonate with our journey, and particularly the lack of money. I mean, Rod, when he was 2006, they listed that business. And you say well, there was not much venture capital, and there was literally not a single dollar in New Zealand available to Rod to launch that business. And it was done out of necessity. He had to list. And he tells the joke about he got to 100 customers and that was what was in his prospectus. And 98 of them were his family, right? And his brother signed up twice. [laughter] And it was hard going. But I don't know if you ever spent any time with Philip Fierlinger, who is [laughter]-- usually Australians say he's a septic tank. He's a Yank, but a well-known designer in New Zealand. He's lived in New Zealand for 25 years or longer, I think. And he tells some interesting stories around what Xero was before it was called Xero. It was Accounting 2.0 or something, which luckily, they found their way through that.
Stuart McLeod 00:21:43.544 And a lot of the design-led-- I guess it was product-led growth before that was even a concept. But it was certainly design-led product development. And it was really a very strong aspect of the culture about how product was built and that it started in the designer's pencil or perhaps pixel. And yeah, Philip will happily take a lot of the credit, I think, for that initial stance, I guess, is probably the best way of putting it, and the understanding of how, I guess, the consumer was more or less a consumer in the traditional sense, not a business. Because it was so small, it was you buy your accounting with your cornflakes, so yeah. Right? And then SurveyMonkey and these other-- Mailchimp recently sold to Intuit. Intuit doesn't get out of bed anymore for deals less than 5 billion or something, right? So a lot of these small business platforms grew up around the same time. And I think it'd be fair to say that Xero sort of had a fair bit of influence in the prosumer, really, that prosumer market.
Dave Yuan 00:23:01.516 I feel blessed. I mean, I think we're all fortunate for the times that we live in and the influences and nudges that we get. And Xero is definitely one of it. I feel blessed to be part of that time. And then now today, if you think about what these small business platforms can be, right, we spend a lot of time writing about-- built out this Vertical SaaS Knowledge Project. And I think what the world started to recognize is that you can start with one application that is, through our discussions, design-led, user-purchased. And the benefit for having a user be the buyer is that you can continue to add value. You can really add value. If you occupy the right-- and we use the language control points. If you can occupy the right spot, then you can cross-sell a whole number of different, both software products, but then also financial services, and other types of services. And then over time, what we're seeing with some companies that are really on the frontier is that you get to not only sell to your merchant customers but your customers' customers and your merchant customers' employees and their suppliers. And so the world hated small business software probably two years ago, right, because-- that started 20 years ago because--
Stuart McLeod 00:24:13.497 Yeah. Yeah.
Dave Yuan 00:24:14.492 Yeah. Customers were too small, they churn a lot, and they won't pay high prices. Now what we're seeing is actually, you can make quite a bit of money by selling to these small businesses and really making their lives easier, help them do well, then benefit monetarily from that. So I think Xero is one of the pioneers. And I'm excited about where this can go because I think we're still kind of in the middle of it.
Stuart McLeod 00:24:39.344 And Box, Dropbox are probably the other two most well-known in that space. In terms of accounting technology in general, there was probably a time, say 10 years ago where there was a fair bit of, I guess, talk or noise around AI and ML taking the job of the bookkeeper and really taking a lot of that lower value - and I don't mean that in a derogatory sense. I mean that in how much you can charge for it sense - work away from the person, from the bookkeeper, and from the people that typically do the books. That certainly hasn't happened. And I wonder, the transition or the big movements in accounting was really taking-- the last one, I reckon, was the transition from desktop to online GL, and therefore the integrations and the ecosystems that could grow around that. And I reckon there's been a massive amount of innovation since then. Where do you agree, and where do you think, perhaps, the biggest areas for innovation in, say, small business - let's keep it broad - or accounting, might come from in the next 5 to 10 years?
Dave Yuan 00:25:55.522 I think back to this notion that technology is aspirational, right? You always lead to the five-year outcome. And I think most people don't realize it's pretty rocky from here to the five years. And so I think it's the same thing here, right? Bookkeeping, if you think about what the core of bookkeeping is, there's a lot of documents, many of which aren't digital. It's a matching problem, right? And so inherently, I think it's a very challenging problem. I've looked at matching problems across a number of different industries, enterprise, mid-market, SMB. And the technology is advancing very fast, but it's not there. Right? If you can't have 100%-- stakes are high enough in bookkeeping, right? If the inputs are wrong, the outputs are wrong. Stakes are high enough where you can't have 100% quality assurance. And so I do think it's technology augmentation rather than replacement. The thing where I see sort of the matching technology, where it's AI or ML or various different things, I think where it goes in small business, at least-- and we can talk about enterprise somewhat differently. But in small business, I think it does get vertical. There's a real benefit when you're building for one end consumer, one industry. Right? The use cases dramatically decrease. The language decreases. Right? The tacks-on is a lot easier to build.
Dave Yuan 00:27:11.898 And so I think you're going to see verticalization of these solutions. You're also going to see them with integration to upstream data sources. So, for example, a lot of this data that you need is actually in your point of sale even before it hits the GL. And so why take it from the point of sale, flex around with it, scope it into horizontal GL, and then get it to somewhere else, right, in the bookkeeping or wherever? That doesn't make sense. And so I think there's going to be a lot more connections between the doing of the product, the taxes, or whatever the output is with the input data. It'll most likely to be verticalized. There's obviously always going to be a horizontal GL, but there might be thin verticalized layers on top of a GL where-- a GL is kind of a system of record in the closet, right? That thing will spit out your taxes, but you do all this massaging into the thing to do your taxes. But you really run your business in a different system of engagement. So I think that's what's-- that's going to happen. At the enterprise level, for more standardized processes, there are some really cool process mining technologies that are coming out that look at a wide range of processes, not just booking in a data collection. And I think you might see some of those types of technologies apply to these types of problems over time. But I think that'll take a while, and it'll be mainly focused around treasury and payment flows rather than reporting like taxes. But yeah, it's pretty exciting. On the one hand, I do think it's not a replacement, it's an augmentation. But on the other hand, there are some pretty interesting stuff forwards in the core technology right now.
Stuart McLeod 00:28:52.121 Yeah. I think COVID has only brought more investment into these vertical SaaS tech companies and highlighted the importance of the small business to the economy. And particularly, small businesses have had a rough time of it through COVID, particularly in hospitality and retail and food and the likes. So there is investment coming in, and I think there are smart people that are building technologies for these types of businesses. And government, on the whole, has kind of been pretty supportive of these industries. I mean, accountants became the distributor of funds during COVID, and then they became therapists since, and had to do a whole lot of other stuff during their normal day job. Right? But yeah, I think you're right. The commoditization of the general ledger has been happening for a while. And this is something that I worry about or think about occasionally as a vertical SaaS builder, is you can only sort of chop up your end user so much [laughter] before you reduce your TAM down to virtually nothing. Right? So just the amount of software, the amount of vertical SaaS software gets more competitive over time. I mean, I think in accounting, we're kind of a bit lucky because it's so unsexy that not many people go to YC and go, "Oh, now I'm going to build a sales tax software for accountants in Tennessee." It just doesn't happen. Right? And I think globally, small business software is in a pretty good spot.
Dave Yuan 00:30:18.682 Yeah, I think that's right. There's real power to it. And yeah, I totally agree with you. And vertical is actually reasonably large, and they're great buyers because they're rational buyers and they're very ROI-based. And I think you can provide a lot of automation. So you can actually get pretty deep with these markets as well.
Stuart McLeod 00:30:35.829 Occasionally, I get jealous of these guys that are building for developer tools or something. That there's 10,000 new developers every day, and I reckon we haven't had 10,000 net new accountants in the last 10 years, right? [laughter] But anyway, that's okay. We'll keep at it.
Dave Yuan 00:30:51.232 Therein is the opportunity for solving it.
Stuart McLeod 00:30:53.189 Yeah. Yup. Yup. Yeah, exactly. But you started Tidemark around a year ago. You were investing with TCV for a long time. What was the-- for branching out on Dave 1,3.0, and what's the thesis behind Tidemark? And you've got a good little team going. Tell me about that journey.
Dave Yuan 00:31:13.386 Yeah. So I was at TCV for about 15 years, maybe closer to 16, actually. And maybe at the high level for the same reasons that you left Xero to go start Karbon. I had a great experience in TCV. I'm still very friendly with the team there. But I wanted to put my mark on the sort of small kind of growth equity market. And I think the hallmarks of Tidemark really are-- there's a couple of different lenses to it. There's the organizational model, which is we're focused on getting better as a firm and serving entrepreneurs better, and making better investment decisions. We're not focused on getting bigger. Now, our funds might get bigger over time, but that's not the emphasis. You can make a lot of money at our scale, and we're really focused-- all of our efforts are about getting better, not bigger. And that's a little different than a lot of growth equity platforms that have just stacked up AUM over time. And where that becomes real is around the strategy around people. We want a small group of very high-performing investors and operators. And so what we trade for redundancy and internal competition, which sometimes leads to performance, we get for, hopefully, commitment and lots of career opportunity. And so that's a little bit of a different formula. There's a whole cultural benefit to that type of approach versus, again, building a larger firm that has a lot of redundancy and internal competition, which does lead to performance at times. And it's a pretty well-understood model, and it's been successful, but we chose to do something differently.
Dave Yuan 00:32:44.002 The second piece is we feel very strongly that we want to try and contribute to the community. So part of it is our foundation. We have this model where you have 10% of our carry to the foundation that gives to causes that are aligned to areas that [we invest in?]. And part of it is also providing our thoughts and our perspectives and case studies of success and our network to the community in the form of this Vertical SaaS Knowledge Project around building a vertical SaaS company. We have Avanish Sahai who built out Salesforce's ecosystem, ServiceNow, is on the board of HubSpot to do this, as well as Google. He was working at Google most recently before he retired. All these platform ecosystem strategies, right? So there's a bunch of series of thought and knowledge that we're trying to give to the tech community that we invest in. The final piece is we believe that we need to bring a community of talent to the companies that we invest in. So we have these 35 fellows which are C-level executives who've run either the entire company or functions of some of the most innovative and scaled organizations out there. I mentioned a few of them already: Dan Wernikoff, Sankar, Chris at Toast. But it's guys like Jonathan Mildenhall who used to be the CMO of Airbnb, Alex Schultz, the CMO of Facebook, David McJannet, CEO of HashiCorp. A pretty long list. Actually, Anton Hanebrink who runs corp dev and corp strat at Intuit. He actually led the Mailchimp deal.
Dave Yuan 00:34:12.746 So the idea is that we got to show up with capital. Hopefully, we can contribute to ideas and pattern matching as we described. And then we have [inaudible], this community of great operators and executives that can serve on boards for us, that can be advisors to our companies like the case with some of the folks that are starting to work with Karbon, and be more than just an investment firm. So that's the general thesis. And yeah, we're one year in. We're getting good product-market fit. [laughter] Companies like Karbon are willing to work with us, which is a great sign. But we have a lot to build. And so this is a, I don't know, 10 to 20-year journey. And then the team that is here, they'll kick me out at a certain point in time, probably, I don't know, 5, 10 years from now. And they'll take it from here and take it from yeah, 10, 20-year journey or 30, 40, 100-year-old journey or whatever it is. But that's what we're trying to do at Tidemark.
Stuart McLeod 00:35:05.167 You talk around sort of, I guess, quality over quantity in terms of both size of the business and number of deals and the companies that you work with. What's kind of your ideal model for what Tidemark looks like in, say, five years?
Dave Yuan 00:35:19.056 I think we're still learning, right? We're still learning about what makes a great firm. But I do think the core components will be the same, right, which is we've got to make great decisions. We have to execute on the core business. We have to have something to offer the world in terms of perspective or pattern recognition on these industries we invest in. Otherwise, we're just capital and probably cheap capital, right? And so I think we'll continue investing in various different forms of trying to bring that to life, whether it's content, ideas, people. And then I think that as a business can grow, we're not here to just-- that's not the objective function, is to grow as a fund, but I think that naturally grows, and I think the best people are attracted by growth. And so I think we'll grow as a fund. I'm also really excited about what the foundation can be. Yeah, the foundation, the mandate is to give to or support causes that are aligned to the areas we invest in. So if we're going to invest in Karbon and Toast and LegalZoom, CCC that sells software to empower small businesses, well, then we ought to also support main street businesses with various different not-for-profit programs. That's an example. There's three general areas that we invest in. There's three areas that we'll try and support. That foundation will use capital to support organizations where the objective function isn't profit, but its impact. But they use technology to scale and they use business to scale. And specifically with business, I mean earned income model. So it's not 100% philanthropy. Our belief is that these impact organizations can actually have a much higher multiplier effect and really scale and broaden their impact if they leverage business concepts. And so that foundation is supporting these not-for-profit organizations that kind of look a lot like tech companies. And so what the foundation can do, how it can support these organizations might actually look a lot like Tidemark, the growth equity firm. And so I'm really excited about what that can be. We got to go kill it on the growth equity side first and [crosstalk]--
Stuart McLeod 00:37:18.464 Yeah, we got to make some money. [laughter]
Dave Yuan 00:37:18.855 --[crosstalk] find successful because I think-- we got to make some money. Yeah, we did seed the foundation with a reasonably large initial-- yeah, so they're in business already. But in order for that to get big, we got to go win on the growth equity side. So we got to do that first. But I'm excited to see what the foundation will be 10 years from now.
Stuart McLeod 00:37:36.247 How many people in the foundation? It's just a little sort of a start-up, I guess, at the moment? [laughter]
Dave Yuan 00:37:42.185 Yeah. Right now, we have one person running it. And look, a foundation doesn't have to be-- it should be pretty lean. It can be. It will never be a massive organization. But I hope our capital will have a good impact. I think that if you dream a big dream, the nice part is hopefully, if we're successful as a growth-equity firm, then other private-equity firms might look at this model as a path to success, and we can have people emulate that model. Right? Our small, well, growth-equity fund can hopefully make some of the biggest firms in the world donate 10% of their carry. And look, I think at some point in time, given returns to capital or given the outsized rents that private equity firms have garnered, we will be held to account.
Stuart McLeod 00:38:58.081 Perhaps the tide is starting to turn a little bit, maybe, but the Silicon Valley perception has probably deteriorated over the last couple of years in terms of its-- I wouldn't say greed, but the amount that it gives back is probably not as much as it can be. And San Francisco is probably the prime example of that during COVID, right? It's sort of like to turn a bit disastrous in its homelessness and the way that its restaurants, the vibe of the liveliness of downtown. And it's just dramatically different to pre-COVID. And there's a lot of work to be done in the technology center of the world to make it a vibrant city again.
Dave Yuan 00:39:40.491 Yeah, look, I mean, the Valley has had this two-decade tailwind. And the returns to capital, the returns to intellectual property and the software and internet and tech space have been incredibly high. And it stands to reason that the Valley should probably give back. Other tech centers should give back. That's how it works. The industry has benefited incredibly greatly. And so what we're doing is not a massive scale yet, and it maybe never will be. But yeah, that was one of the-- you asked why I decided to go do something new. I mean, again, we got to go-- one is growth-equity first, but then some of these longer-term impacts and-- not to get too fancy about it, but legacy could be really interesting. So I'm excited to see what happens. It should be fun.
Stuart McLeod 00:40:25.488 No, definitely. If Karbon can help with some return on equity, then we're excited about the impact that we can have down the track. So let's finish off by talking about our relationship and-- our burgeoning relationship, and the thesis that you and the colleagues at Tidemark had around Karbon. And what do you see in the long term for us, and more broadly, the impact on the accounting and accountants that we can influence?
Dave Yuan 00:40:55.787 Yeah. I would say those two questions are intrinsically linked. So our framework for vertical SaaS, not to plug it again, but is you need to win the market and occupy what we call the control point. If you do that, you can cross over a whole bunch of things, and then you can transform the industry by getting your merchant customers and their customers, their employees or supplier on one piece of software workflow. And you can do a whole bunch of great things. Right? And so when we look at Karbon, Karbon is the natural control point for a number of reasons. First, you manage the most scarce resource, right? You manage people's time. Right? You manage their relationship with clients. Right? Pretty soon, you'll manage their money in terms of invoicing. And so you're in the best spot. We've looked at a lot of accounting software, and we chose Karbon because of what your products do for your customers. I think the second piece as a reflection of that is your customers spend a lot of time in your product. Right? That engagement is incredibly invaluable because the more engagement you have, the more value you can offer your customers. Right? You can really help them. You can help with those magical moments to get their job done efficiently, to serve their customers, to really help their customers thrive because of their input, and get through the drudgery much faster. Right? So the engagement is super important.
Dave Yuan 00:42:17.388 The final piece is more nuts and bolts on operations. That's what drives winning, is on the product side, really strong design, the leading product. The NPS from customers is off the charts; some of the highest NPSs that we've done from a service standpoint. And customers want more. This isn't like, "Hey, we're going to sell a bunch of products. Hey, we're going to--" versus customers are demanding for things to make their lives easier, to do their work better, faster, cheaper, more effectively, and help their clients. On the sales side, you guys do a great job of really engaging customers in an efficient way and in a way where there's high satisfaction, as I mentioned. And I think there's a lot of room to scale there. And so from a company standpoint, we're really excited to get in this part of the company's inflection point. So that's the here and now. And if we scale, right, if you serve a lot of accountants, then you have a lot of different ways to help your accountants engage with their customers. And by doing that, you can transform the industry. Right? If you talk about helping your accountants directly engage with their clients to better understand the financial system without all this manual drudgery that we were talking about around bookkeeping and the extraction of data and information, that is super interesting. Right? You can be an enabling platform for how accountants engage with SMBs and get back to this viewpoint that the best companies work with accountants. The small businesses work with accountants. You can scale in a new way. So I think that the industry impact can be quite broad.
Stuart McLeod 00:43:51.205 I really appreciate the view. And I don't know if I shared this with you, but I remember when we spoke last August and you asked me how could you deploy-- I don't know. It was a lot of money. It was 20, 30, 40, 50 million or something. And I'm like, "Dave, I've got no idea. We barely spent that money over the last seven years, let alone all in one go," right? [laughter] So you've really expanded my thinking and afforded-- given me the confidence and given us the confidence of our capacity and our ability to build software that's meaningful and impactful for the market. And we've got to make money. We've got to be successful. We get all that. But the foundation that I think that we built over the last, sort of, six, seven years has really enabled us to be able to now grow fast. And it's a little bit scary sometimes going through more than a million a month. Two years ago, we were lucky to go through 10K a month. So it's a big transition for us. And there's speed bumps along the way, but I think we're moving pretty rapidly to a position where we've got great bench depth in our leadership team. And all we need to do is simple and as complex as it is to build on that foundation that we spent sort of that six, seven years building, but also getting the experience of the 15 years prior in all our various journeys. And I want to really thank you for showing faith in us and giving us the capacity to do this and coming on the journey with us. We really appreciate it. [laughter]
Dave Yuan 00:45:24.165 Yeah. Look, you guys built an amazing business, and I'm honored to be a small part of the go forward. And the people that you want to give money to are people like yourselves that really built a business with very little for the first seven years and have seen some hard times. Right? So you're going to be very careful about how you deploy it. And this next stage, I think, is going to take us all a little bit out of our comfort zone to really push to see what the limits of this business can be. But I think the ceiling's really high here. I think you'll build some great products that will help your customers thrive. So I'm really excited for it.
Stuart McLeod 00:45:57.729 Dave Yuan of Tidemark, thank you for joining me this morning my time, this afternoon your time, on the Accounting Leaders podcast. It's been an absolute pleasure and privilege to spend this hour with you. And again, we really appreciate you and everybody, the team at Tidemark. [laughter]
Dave Yuan 00:46:15.829 Yeah, I appreciate it. All right. Thanks so much, Stuart.
Stuart McLeod 00:46:23.863 [music] Thanks for listening to this episode. If you found this discussion interesting, fun, you'll find lots more to help you run a successful accounting firm at Karbon Magazine. There are more than 1,000 free resources there including guides, articles, templates, webinars, and more. Just head to karbonhq.com/resources. [music] I'd also love it if you could leave us a five-star review wherever you listen to this podcast. Let us know you like this session. We'll be able to keep bringing you more guests for you to learn from and get inspired by. Thanks for joining, and see you on the next episode of the Accounting Leaders podcast.