QA With TA Associates CEO Kevin Landry

Kevin Landry joined TA Associates in 1968 becoming a general partner in 1972, managing partner in 1982 and CEO upon incorporation. He is a member of the firm?s executive committee and serves on the board of directors of DTK Holdings Inc. (Datek Online), The Island ECN, SBA Communications Corp. and Standex International Corp. He has served as a director of Alex. Brown Inc., Biogen NV, Continental Cablevision Inc., Keystone Group Inc. and the NVCA.

He received a BA degree in Economics from Harvard University in 1966 and an MBA degree from the Wharton School of Finance in 1968.

Since the economy recently took a turn for the worse, a number of prominent private equity professionals have either chosen to retire from the business or take a far less active role. Is that something you?ve given any consideration to?

No? I?m not going to be at this forever but I don?t have any immediate plans. I?ve announced to my investors ? those who have asked ? that I?m here full-time through the investment of this fund.

I?m not worried about TA. We had a partner meeting a few weeks ago and sort of took a look out at the next fund and the fund after that and who we knew would be here and what we thought about the young people coming up. We decided that we felt very good about the horsepower we had in place.

When you do leave, are there any unfulfilled dreams that you look forward to pursuing?

None. I love this business. What could be nicer than coming in here every day and working on interesting problems with a bunch of bright thoughtful people. I don?t have any desire to teach; I don?t have any desire to play golf. This is nirvana.

At some point you?ve got to get out of the way and give other people a chance, but it?s not that I?m going to something else, there?s nothing better to go to.

Are you surprised that some of your peers ? such as founders of Crosspoint and Summit ? have decided to hang them up?

I know some of those people made a ton of money and probably decided to retire. I think they made those decisions before it was obvious that times were getting a lot tougher.

When people leave, they obviously have to be replaced. In a 1990 interview you said that one of the keys for maintaining above-average returns is to employ good motivated people.

How do you think, if at all, the pool of prospective employees has changed since you said that?

I?m not sure a lot has changed. I think there?s still a lot of good people out there.

As private equity funds have increased in size and increased in overrides there?ve been a lot of new incentives available to be used to recruit new people.

Such as?

As funds get bigger in size and overrides increase, you have more to pass around. So you use that to both maintain and motivate your existing people, as well as to recruit some new people.

We just recruited someone from Deutsche Banc Alex. Brown ? a fellow by the name of Phil Reuppel ? who came in as a principal, so he?s an owner and participates in the override. He had been an analyst covering the storage sector.

One of the hiring trends recently has been to bring in operating guys to complement financial guys. Is TA doing that?

I would say we?ve been looking more for technical know-how and knowledge and comfort with technology, as opposed to operating skills. I?d also say we have a continuous debate here about whether we should bring in people who have a financial bacground or people who have a technology background, and then just teach them the other.

It is sometimes difficult to find someone with a technology background who has the selling skills and some of the personality skills that we?re looking for in this business, but I think you can find people with both.

At this point, internally who?s winning that debate at TA and which side do you fall on?

I probably fall on the technology side. I think technology is very important to us and we have a lot of fine people here so I?d probably prefer to look on that side.

In the end you have a candidate in front of you and you decide on that candidate. It?s like the football draft when you want a left tackle but you end up taking the best available athlete, and that happens here as well.

Say you do bring in a technology guy, do you consider it part of your job to teach them the business?

I would say less so today. That was probably true 70?s and 80?s when I would travel a lot on airplanes and spend a lot more time with the younger people, which is when I would really find the time to chat about the business.

I am certainly doing less of that today because we?re now divided into four teams and those teams are each run by team leaders and I?d say that teaching certain parts of the business is one of their responsibilities. We do all work together on deals, though, and all learn from one another.

Have you sensed any sort of generational conflicts between partners at TA?

Yes I would say I sensed that about two or three years ago, but less so today.

Our strategy is investing in profitable companies, and that strategy got very difficult in the late 1990?s when the prices of profitable deals went way up and there was increased competition from more money in private equity and more competition in the mergers and IPO markets.

At the same time, you saw that the guys doing early-stage investing in start-ups were having spectacular success. So there was a question of whether or not we should desert our tried-and-true strategy and make more investments in start-ups, which is what the younger people wanted to do because all of their friends were doing it. There was also a lot of Internet envy.

So I wouldn?t necessarily say there was stress in the organization, but there were definitely differences between the generations with the younger people finding early-stage and Internet deals more appealing than did the older members of the team.

How did you resolve that situation?

We said, first we understand that the Internet is important to us. Technology is 60% to 70% of what we do here and you can?t be in technology anymore without being in the Internet. So the first thing we did was make an effort to find some nice profitable Internet companies like Datek and The Island and one called Q Up Systems Inc. and then said, we will look at some earlier-stage deals but find some with models that have good management, a proven product, a cutomer base they can sell to over and over again… and find as many of the things we?re looking for in profitable companies as we can, except for that last element of profits.

We started to nibble at some of those, and told people who wanted to do those things that they could look at things like that. And then I think we probably moved a little more in that direction in early 2000 than I would have liked and now we?ve swung back.

If you look at all the money we?ve put out in the last three years, 87% of it went into profitable companies and 13% into these earlier stage deals. And if you look at the 32 years before it was probably just 5% into earlier stage. Did we move? Yes. But we moved at the margin, it wasn?t a dramatic shift in the strategy.

You weren?t alone in moving toward start-up deals. Do you think that now ? with different economic conditions ? we might see the pendulum swing a bit with early-stage firms looking to do more late-stage deals?

I think we will but it isn?t happening so far. I?ve been talking to some of those firms we used to see as competition back in the early 90?s, those firms who used to do everything from early-stage to late-stage investing. And then as we moved into the 90?s they shifted almost entirely into early-stage and they seem content for the time being with staying there.

They seem to feel that you take a lot of risk in any stage so you better make sure you can pay for it, so it?s best to get in early and cheap? or so the theory goes.

Do you think that some of the younger generation will leave the VC world as the economy continues to slide?

No, not if they?re any good at the business. I think they?ll have the sense to realize things go in cycles. I think someone coming into the business today is going to be in a better position that someone who came in two years ago because those guys weren?t partners, they didn?t participate in the big upsides. When the next cycle comes, though, the people getting in today will be ready to be partners and participate in the upside.

No one is out there saying technology is dead. It may be down but it?s not out for the count. We?ve seen these cycles before, although this one is different in that it?s tougher and narrower in just a few sectors ? and there it?s very severe ? but it?s not forever.

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