Nancy Zevenbergen, founder, Zevenbergen Capital Investments
Photograph by Kyle Johnson
Nancy Zevenbergen isn’t a household name among mutual fund investors—though she should be. Zevenbergen Capital Investments, the Seattle-based firm she founded in 1987, runs three mutual funds, all of which rank in the top 1% or 2% of large growth funds.
The largest, the $1.4 billion Virtus Zevenbergen Innovative Growth Stock (ticker: SAGAX), has returned an average of 16.4% a year over the past 15 years—four percentage points a year more than the Russell 1000 Growth index, on average, and 5.5 percentage points more than its category; Virtus Investment Partners has a 20% stake in the firm. The $112 million Zevenbergen Growth (ZVNBX) and its more concentrated sibling, the $167 million Zevenbergen Genea fund (ZVGNX), have equally impressive track records.
Much of that outperformance has come in the past several years as longtime holdings, including Tesla (TSLA), Shopify (SHOP), and MercadoLibre (MELI) have taken flight—giving credence to Zevenbergen’s long-held investment philosophy. The best way to build wealth, she says, is to invest in founder-led firms early, stick with a concentrated portfolio, and hang on even when the road gets bumpy. “People underestimate the length and duration of these really exceptional growth companies,” she says.
Zevenbergen, 61, was working as a portfolio manager in the trust department of a regional bank when two unrelated events inspired her to strike out on her own. First, Microsoft (MSFT) went public in 1986. “Back then your large institutions, your banks, your trust departments, were very value biased, so they weren’t interested,” she says. “I thought it was a missed opportunity.”
Around that time, Zevenbergen had her second child and realized that, after factoring for the cost of child care, quitting her job to start her own firm was a break-even endeavor. “I worked in the basement with my husband, who had his construction business. One of my first clients met me at the dining room table, and is still my client today,” she says. Zevenbergen spoke with Barron’s about founder-led firms, the lack of women leading technology firms, and what she’s excited about now. An edited version of our conversation follows.
Barron’s: Tell us how you invest.
Nancy Zevenbergen: We are looking first and foremost for revenue growth. We target what I perceive to be a pretty low hurdle at 15%, but we’re truly looking for companies with 30%, 40%, 50% growth. We’re willing to invest in companies that are not profitable, but there must be a clear time frame for achieving profitability.
On Top of Its Game
- Zevenbergen Capital Investments’ largest fund has returned
16.4%
a year over the past 15 years, well outpacing its peers.
We also like founder-led teams. About 75% of our holdings are founder-led or they have a high-ranking position. It would probably be more except for health sciences, which is challenging because the cost of development makes it harder for a founder to maintain a controlling interest.
What’s the appeal of founder-led companies?
When you have a founder who’s got a vision or a wild idea, if they don’t have a controlling interest, it is difficult to execute. Take Jeff Bezos, who was criticized because he initially didn’t make Amazon.com [AMZN] shareholders any money—but he built an amazing business. He was able to do that because he had a controlling interest.
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You’ve seen the same thing with Elon Musk at Tesla. He had a dream, and he got no industry support, just disdain. Now he’s obviously been able to build an electric car, and people are buying them around the world. He has software for autonomous driving and he has batteries that he may end up selling to the old auto industry because they can’t catch up. It’s more than just a car company; it’s potentially a component company, a software company, and an energy company.
It’s contrary to where a lot of governance is going, [which is] toward more-diversified boards and less controlling interest, but I really like it. I think it was a CFO of one of these companies who described how they think as “better, better, never done,” and you see that over and over again with these founder-led companies.
There aren’t many asset managers in Seattle, yet it’s a hub of innovation. Is your location an advantage?
“ The first product is never the final product, and the path toward huge returns isn’t always straight. ”
It’s a huge advantage, but in Seattle, we were initially all about timber and natural resources. Then it was airplanes with Boeing [BA], and then you get Microsoft and it begets more start-ups. This is an incredibly adaptive community, and not just in business. Consumers here tend to be curious and willing to try new things. Seattle is an amazing place, and it’s shocking to me that there aren’t more growth managers here.
More than half of your team are women. Was that intentional?
It wasn’t, but my initial hires were women. Maybe men didn’t want to work for me. Now we are closer to 50/50, and I want a place where all people can put their best foot forward. To be a successful growth manager, you have to be able to see what can happen versus what can’t happen. You want a culture and people who think that way and are willing to look at something when the world says no.
I go back to Netflix [NFLX]. When they started streaming it was so clunky and slow. But the first product is never the final product, and the path toward huge returns isn’t always straight. Again, better, better, never done.
How has the pandemic changed your portfolio?
At the beginning of Covid-19 we exited some names and focused on names we knew could continue to grow. The crisis ended up helping many of our companies, and it prompted us to look at new ones. Zoom was a service we were using. Zoom Video Communications [ZM] came public in 2019 and we didn’t own it, but when Covid hit we took a closer look. We were using a lot of different services, and hands-down, Zoom was the better product. It’s also a founder-led company. When they got criticized for security concerns in April, we listened to management about their efforts to rectify the problem, and bought more.
What’s the growth story for Zoom?
At first, Zoom was a band-aid to get us through the crisis, but it’s changed. We are at the point where we’re doing video calls as the first method of contact, and it will probably replace those flights we used to take to New York for a 45-minute presentation.
Zoom can get people to sign up, but can they convert those folks to paying subscribers? Does it become a de facto requirement in every business that every employee has a [subscription]?
What did you sell early on in the pandemic?
Pluralsight [PS], which is an on-demand training for technology skill development. The company’s high cash burn and the discretionary nature of the product reduced our confidence in its ability to manage through a potentially protracted economic downturn. We elected to reallocate to ideas that have better visibility, more “mission critical” solutions, or adequate capital cushions, such as Veeva Systems [VEEV], Coupa Software [COUP], and RingCentral [RNG].
What do you think of the current class of early growth companies?
Finally we have a new-issue market. They are big enough or they have visibility to use us as a capital raise. It’s that playground where we can find the next long-term growth companies.
Can you share some examples?
We have Lemonade [LMND], which went public last July. While insurance seems boring as all get-out, Lemonade provides a fresh, technology-first approach. They focus on providing their customers, who are typically young apartment dwellers, a way to apply for renter’s insurance on their cell phones. Their growth opportunity is taking that client to when they become a buyer, and sell home insurance, maybe pet insurance, all on the phone.
Another one is GoodRx Holdings [GDRX]. I actually used the service before we bought the stock. The company is addressing the dysfunction of pharmaceutical prices by letting consumers search for the lowest prices and redeem coupons. [The company makes money by referring customers to retail pharmacies.] The stock hit a wall in November when Amazon announced its pharmacy, but we listened to management talk about the distinction. GoodRx isn’t a pharmacy. It’s about price discovery.
One more is Unity Software [U], which is a creative-design software platform, primarily used by videogame developers. Gaming represents a huge addressable opportunity, but we’re especially excited about the potential of Unity expanding into nongaming design applications, such as manufacturing, engineering, and media and entertainment, where we will likely see more adoption of video and 3-D interactive content.
Lemonade has top-line growth forecasted at more than 50% for 2022 and 2023. GoodRx is 25% to 35% growth. Unity is 25% to 35%. These numbers are phenomenal, considering that this is an environment where you haven’t had great economic growth.
How do you distinguish the visionaries from the charlatans?
Every investor can listen to management speak on a quarterly basis. Listen to them talk about what hurdles they faced and what they see ahead. [Notice] if they’re not delivering on their objectives. That’s what allows you to decide whether to ride through a bump or maybe even invest more.
You are a woman-run firm, but your investment universe is dominated by companies founded by, and run by, men. What’s your take?
This is a problem, and the venture capital world knows it’s a problem. First of all, women are not getting funded on the private side. We tend to see women entrepreneurs in areas like digital retail, for example, but in the tech world it’s a desert. We’re still playing catch-up to a trend that is a hundred years in the making.
Thanks, Nancy.
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