Dave Yuan, Founder and General Partner of growth equity firm Tidemark, invests in technology companies. He believes that investing in accounting tech companies like Karbon can help small businesses succeed.
Tidemark is a growth equity firm purpose-built to help companies win and scale. It is powered by a community of investors, entrepreneurs, and operators who are energized by ideas, a love of competition, and the drive to give back. Tidemark gives 10% of their profits to the Tidemark Foundation to support the communities they serve.
According to Dave, more industry verticals will develop in the coming years (and so will vertical software).
Dave Yuan never imagined he’d be a venture capitalist, but friends he met along the way turned out to be great influences on his path to investing.
In San Francisco during the dot-com boom, Dave calls his path into VC “completely circuitous and random.”
“[A friend] told me about this thing called venture capital. It sounded interesting. It was 1999. The VC market was going through its first growth phase and venture firms just needed a warm body. And I was a warm body. I was really fortunate to get a job and start investing in 2000, just in time to catch a bunch of falling knives,” Dave jokes.
Now having founded his own growth equity fund, Tidemark, Dave led a Series B investment in Karbon. This isn’t his first foray into accounting tech investment—and for good reason. Dave loves that accountants work intimately with small business owners, which he considers a way to support the small business community.
“Why does America work? Social mobility. The two elements of social mobility are education and entrepreneurship. Education is super expensive. It's becoming harder for the average family or the immigrant family to access it,” Dave explains.
“Small business is the lifeblood [of America]. I love this idea of investing in software companies that serve accountants who serve small businesses.”
Dave shares more with Karbon Co-Founder and CEO Stuart McLeod on episode 37 of the Accounting Leaders Podcast, including his background in venture capital, the current landscape of accounting tech, his reasoning behind investing in Karbon, and the future of Tidemark.
Dave’s first serious entry into venture investing was during the dot-com boom.
“It was totally different back then,” Dave says of the 2000s investment scene. “A $5-7 million investment was a big deal. When I ended up going to TCV later in 2005, and investing the checks that we did, I was quite scared for the first year. That's a lot of money to put in one company.”
Dave expresses gratitude for all the companies that “took a chance” on him by putting him on their boards early on. Over time, he developed a particular passion for B2B tech companies.
“When you sell a product to a business consumer, it’s pretty straightforward in terms of what the value proposition is. It's helping a company grow itself and do something more efficiently,” Dave says. “If you look at the B2C companies I've invested in, it's been more up-platform companies where there's an inherent network effect and logic to the business versus more of a consumer fancy piece.”
Stuart asks Dave whether the speculation that 2021 was like 1999 from an investment standpoint is accurate:
“I would say the thing that is similar between 1999 and 2021 is a lack of perspective. We're on a big sine curve. 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 it's just part of the cycle. Overall, the trajectory is upward.”
By 2006, Dave had his eye on a startup out of New Zealand: Xero. Although Xero wasn’t looking for an investment at that time, he wanted to start a relationship anyway.
Dave recognized something unique about Xero: the ability to scale globally through product-led growth. This is a trend he’s seen from many Australian and New Zealand companies, and Dave thinks the reason is twofold.
“There wasn't a lot of venture capital [when Xero started] so there was the Darwin effect. The companies that were successful were product-led and design-oriented. The second [reason behind Australian and New Zealand companies’ growth] is that these are relatively smaller markets, so you need to go global from day one,” he explains.
When Dave started Tidemark in 2021, he wanted to steer its investment portfolio toward backing emerging category leaders. A company in accounting tech that caught his eye was Karbon. Like Xero, Karbon provides a great solution to its users, though the user base and solutions differ.
Karbon also fits Dave’s requirements for a vertical SaaS company in that it occupies what he calls the “control point.” He defines this point using three major criteria:
Workflow 'gravity': Karbon helps its users automate key workflows that help them manage their time and relationships with their clients.
User engagement: As a result, user engagement with Karbon is exceptionally high— most Karbon customers report having the majority of their employees in Karbon all day, everyday.
Customer love: Karbon has a high level of user satisfaction, with even more potential to scale.
“If we scale and you serve a lot of accountants, then you have a lot of different ways to help your accountants engage with their clients,” Dave tells Stuart on the podcast. “And by doing that, you can transform the industry. You can be an enablement platform for how accountants engage with SMBs.”
Dave believes that there’s a massive opportunity for AI, machine learning and automation in accounting. But rather than serving as a replacement, AI will help augment human accountants. It can eliminate some of the drudgery, allowing accountants to focus on what they love, which is often advising small businesses.
Dave also sees another trend on the horizon: more vertical software.
According to Dave, we are only just seeing the beginning of what's to come with vertical SaaS (Software as a Service). The true frontier for vertical SaaS organizations is extending their reach beyond their customers to serve their customers' customers, suppliers and employees. To do that, the journey involves winning their category, expanding their offerings, and extending through the value chain.
Recommended reading: The 7 essential divisions of a scalable accounting firm
When starting Tidemark, Dave wanted the firm to grow for quality, not quantity.
“We're focused on getting better as a firm—serving entrepreneurs better and making better investment decisions. We're not focused on getting bigger. Our funds might get bigger over time, but that's not the emphasis,” he says.
Tidemark doesn’t just want to help businesses grow through strategic investment. Seasoned leadership is also crucial to scaling successfully—which is why Dave has recruited around over 30 executives from the broader tech industry to help advise the companies in Tidemark’s portfolio.
It was also important to Dave that some aspect of giving back be woven into Tidemark’s fabric.
“We want to try and contribute to the community. We have this model where we give 10% of our profits to causes that align to areas we invest in,” Dave says of Tidemark’s foundation.
Since Karbon supports accountants who serve small businesses, some of that focus will be on ‘Main Street’ businesses with not-for-profit impacts, particularly those where the funds will have a broad reach and multiplying effect.
At the end of the day, Dave’s ethos on venture capital is holistic. His 20+ years of industry experience allow him to spot trends and make investments that push the envelope. By helping tech companies across a variety of fields grow, Tidemark supports different industries and contributes to a thriving economy. And with Tidemark’s foundation, he can more directly serve the community.
Dave hopes that in the next five years, Tidemark will grow organically as a fund and continue offering capital and expertise to back it up.
Dave ends the interview by giving Stuart a compliment on Karbon, as well as a peek at what’s ahead:
“You guys built an amazing business, and I'm honored to be a small part of a cohort of people that want to give you money. This next stage is going to take us all a little bit out of our comfort zone to really push to see what the limits of the business can be.”
No matter what challenges are ahead for Karbon, Tidemark is sure to help still the waters for smooth sailing.