How Enterprise SaaS Startups Should Fundraise

WEBVTT 1 00:00:06.340 --> 00:00:13.380 very few people on planet Earth have the necessary skill sets to be founders 2 00:00:13.380 --> 00:00:18.440 of the companies that are developing that kind of software. Welcome to the 3 00:00:18.440 --> 00:00:22.900 revenue Siris on the B two B growth show. I'm your host, John Rissman, 4 00:00:22.910 --> 00:00:28.730 founder and sales coach at Early Revenue. So let's get going today. I'm 5 00:00:28.730 --> 00:00:35.360 here with Alex Rubalcaba, who is the co founder and managing partner at Stage 6 00:00:35.370 --> 00:00:39.320 Venture Partners. Welcome, Alex. Great to be here. John. Thank you for having 7 00:00:39.320 --> 00:00:45.940 me. Absolutely. Soto level set for our guests. Our guests are CEOs, revenue 8 00:00:45.940 --> 00:00:50.800 leaders and venture firms. And our purpose is to provide early stage tech 9 00:00:50.800 --> 00:00:55.410 founders and their sales leaders insights and best practices on two 10 00:00:55.410 --> 00:01:00.790 topics that are top of mind for most leaders. The how twos Off growing early 11 00:01:00.790 --> 00:01:05.720 state sales and fundraising. So, once again, thanks for being here, Alex. Why 12 00:01:05.720 --> 00:01:08.730 don't you tell us a little bit about your background? So we know who we're 13 00:01:08.730 --> 00:01:14.420 talking about today? Absolutely. So I founded my firm stage about five years 14 00:01:14.420 --> 00:01:19.380 ago. The firm invests in enterprise software startups, always at the seed 15 00:01:19.380 --> 00:01:23.650 level. So the first round of institutional capital that a startup is 16 00:01:23.660 --> 00:01:29.110 raising I focus on software companies. They're solving hard technical problems 17 00:01:29.120 --> 00:01:33.020 almost always at the application layer in a diverse set of industries, 18 00:01:33.030 --> 00:01:38.370 including, but not limited to things like e commerce, software, tools, 19 00:01:38.380 --> 00:01:43.050 healthcare and life sciences, and industrial and aerospace applications. 20 00:01:43.140 --> 00:01:49.510 I'm based in Los Angeles, where I lived all my life, and I started out out of 21 00:01:49.510 --> 00:01:53.200 college as an analyst at another venture firm here in town, called 22 00:01:53.210 --> 00:01:57.460 Anthem Venture Partners, which is still around and going strong, worked there 23 00:01:57.460 --> 00:02:02.760 for a number of years out of college and then left venture in early stage 24 00:02:02.760 --> 00:02:08.759 investing for a number of years and spent that time doing mostly investing 25 00:02:08.759 --> 00:02:13.430 in public markets, running a long, short, special situations oriented 26 00:02:13.430 --> 00:02:17.660 hedge fund. After a while, though, I decided that my true passion was back 27 00:02:17.670 --> 00:02:22.510 in venture capital and working with startups. When you buy companies on the 28 00:02:22.520 --> 00:02:25.460 New York Stock Exchange or the NASDAQ, they don't know who you are. They don't 29 00:02:25.460 --> 00:02:29.790 care that you own them, whereas in, uh, in startups, it's a little different. 30 00:02:29.790 --> 00:02:33.930 And I decided that that was where my interests lie. Awesome. And so when did 31 00:02:33.930 --> 00:02:41.870 you found stage what year? 2015 2015 So for founders that air listening, What's 32 00:02:41.870 --> 00:02:46.610 the approximate size of the fund? I'm currently investing out of my fund? 33 00:02:46.610 --> 00:02:52.610 Three, which is a $25 million fund? Awesome. And so for those that air in 34 00:02:52.610 --> 00:02:56.400 that early stage, that air they're hearing you perhaps the first time. 35 00:02:56.400 --> 00:03:00.940 What are the characteristics of an ideal start up for your fund? I'm 36 00:03:00.940 --> 00:03:04.960 looking down the list of those that you invested in, and it is. It is just an 37 00:03:04.960 --> 00:03:11.400 array from three D content management. Thio Customers, Success for law 38 00:03:11.400 --> 00:03:17.840 enforcement, Thio Data for Aerospace, Safer Drone deployments, Secure 39 00:03:17.840 --> 00:03:24.600 research platforms, sales support and the customer service Ai. Yeah, So what 40 00:03:24.610 --> 00:03:30.780 all of those things have in common is that they are software startups that 41 00:03:30.780 --> 00:03:36.390 are solving hard business problems that had never been able to be solved with 42 00:03:36.390 --> 00:03:42.150 software before they are taking cutting edge technology often apply, often 43 00:03:42.150 --> 00:03:46.320 applying artificial intelligence or machine learning and unlocking new 44 00:03:46.320 --> 00:03:51.860 capabilities. Many of the companies that you mentioned are also special in 45 00:03:51.860 --> 00:03:57.970 the sense that very few people on planet Earth have the necessary skill 46 00:03:57.970 --> 00:04:02.170 sets to be founders of the companies that are developing that kind of 47 00:04:02.170 --> 00:04:08.600 software, and many of my companies have very little to zero competition. They 48 00:04:08.600 --> 00:04:13.470 don't have other venture funded or other types of software companies that 49 00:04:13.480 --> 00:04:16.600 are competing with them for the attention of customers. And they 50 00:04:16.600 --> 00:04:20.070 actually have a different challenge when it comes to sales. And when it 51 00:04:20.070 --> 00:04:25.860 comes Thio entering a new market, which is, they have to convince buyers, too, 52 00:04:26.440 --> 00:04:30.350 trust software for the first time to solve a problem that they have always 53 00:04:30.350 --> 00:04:37.600 had. And that's a very unique risk profile it is. So is there a theme that 54 00:04:37.600 --> 00:04:40.930 permeates each of those? How are they going about? Because that's a very 55 00:04:40.930 --> 00:04:44.130 difficult conversation, right? Everybody has an innovative platform, 56 00:04:44.140 --> 00:04:48.910 but summer innovative in markets where there are someone to the left, someone 57 00:04:48.910 --> 00:04:54.440 to the right of them. How are are there themes that they're utilizing, Um, that 58 00:04:54.440 --> 00:04:58.320 you've been able to kind of notice the signal through the noise there? Yeah, 59 00:04:58.320 --> 00:05:02.510 there. There are a few things that tend to be important for companies like that. 60 00:05:02.520 --> 00:05:08.050 Number one is that you have to go directly to your customer. I think the 61 00:05:08.050 --> 00:05:13.980 supplies for most early stage companies, but nobody other than your company can 62 00:05:13.980 --> 00:05:18.750 sell your product, especially when it's a new product and you're creating a new 63 00:05:18.750 --> 00:05:23.500 category, no one else knows what to call you. Yet there often isn't a name 64 00:05:23.500 --> 00:05:27.840 for what this product is called. You know, we all know what customer 65 00:05:27.840 --> 00:05:31.630 relationship management software is today, and most buyers know what that 66 00:05:31.630 --> 00:05:36.590 is and know that they should probably have that. And they might think about 67 00:05:36.590 --> 00:05:39.620 Salesforce in one or two other companies when they think about that, 68 00:05:39.620 --> 00:05:45.030 but that that's already in people's minds. When you think about a company 69 00:05:45.030 --> 00:05:48.350 you mentioned, my customer service software company for law enforcement, 70 00:05:48.360 --> 00:05:52.160 Spider tech Spider Tech has created a completely new category. There is 71 00:05:52.160 --> 00:05:59.430 nobody else who does what Spider Tech does. There is no. In fact, we know 72 00:05:59.430 --> 00:06:04.240 there's no one who does it because they have won all of their contracts either 73 00:06:04.250 --> 00:06:08.470 on sole source contracting with government agencies, which is a hard 74 00:06:08.470 --> 00:06:13.560 thing to get the right to do yes or through our FPs. And when Spider Tech 75 00:06:13.560 --> 00:06:18.170 has gone through an RFP to win a customer award, no one else has ever 76 00:06:18.170 --> 00:06:24.540 answered the RFP. That's amazing, but how interesting. So when it comes to 77 00:06:24.540 --> 00:06:28.850 these investments, obviously you're looking for pretty unique solutions. 78 00:06:28.850 --> 00:06:32.480 And the risk profile is certainly is very different, one of the criteria or 79 00:06:32.480 --> 00:06:37.790 the metrics that you see when deciding on on investment at that early of a 80 00:06:37.790 --> 00:06:43.260 stage, Yes. So the critical part of that question that you just asked is at 81 00:06:43.260 --> 00:06:49.360 that early of a stage, because when I'm investing, a typical company is two 82 00:06:49.360 --> 00:06:55.080 founders, maybe and maybe two or three additional employees, and the company 83 00:06:55.080 --> 00:07:00.860 has been around for about a year. Usually at the time that I invest. They 84 00:07:00.870 --> 00:07:06.170 have received less than $1 million of invested capital, often far less than 85 00:07:06.170 --> 00:07:11.780 that, almost always from friends and family and angel investors. From time 86 00:07:11.780 --> 00:07:16.260 to time, they will have gone through an accelerator like Techstars, and 87 00:07:16.740 --> 00:07:22.090 everything is early. Everything is in the process of being formed, and some 88 00:07:22.090 --> 00:07:26.420 of the companies have no revenue at the time that I invest. Some have a handful 89 00:07:26.420 --> 00:07:31.420 of early pilots or customers, and so when I'm looking at these companies and 90 00:07:31.420 --> 00:07:36.200 when I'm evaluating among the many thousands that I see in a given year 91 00:07:36.200 --> 00:07:43.310 old, I'll see about 1400 startups that pitch me. I have to look at a bunch of 92 00:07:43.310 --> 00:07:48.100 questions, and I sort of distill it down to two sets of three questions. 93 00:07:48.110 --> 00:07:53.400 The top level questions are why you? Why now and why us? Why you is about 94 00:07:53.400 --> 00:07:57.880 why is this founder uniquely credible? Why now is a question about why is now 95 00:07:57.880 --> 00:08:02.980 the right time to be building this company and solving this problem using 96 00:08:02.980 --> 00:08:07.430 software? Why us is a question about why am I and why is my firm the right 97 00:08:07.430 --> 00:08:11.770 investor for this company? And then the second set of questions is basically a 98 00:08:11.770 --> 00:08:16.670 more detailed set about the Y. You question about the founder because the 99 00:08:16.670 --> 00:08:21.010 founder is the most important thing when evaluating a company like this and 100 00:08:21.020 --> 00:08:26.340 that set of questions is all about the three primary risks that a startup that 101 00:08:26.340 --> 00:08:31.810 young faces and that is, can you ship? Can you sell? Can you hire and it comes 102 00:08:31.810 --> 00:08:36.440 down to in this person in this team, ship software quickly, inexpensively 103 00:08:36.440 --> 00:08:42.890 and iterate as necessary. Can they sell? Can they convince somebody who is not 104 00:08:42.890 --> 00:08:47.150 their mother or their mother in law to pay them real money for the software? 105 00:08:47.540 --> 00:08:53.110 And can they hire? Can they convince really high quality people to quit jobs 106 00:08:53.120 --> 00:08:58.150 at big, prestigious companies that impress their friends and relatives to 107 00:08:58.150 --> 00:09:01.880 come work for a start up that nobody has ever heard of, often for a pay cut. 108 00:09:01.890 --> 00:09:05.900 Yes, I would say the majority of the time it's It's with a pay cut, right? 109 00:09:05.910 --> 00:09:13.770 So when you get these guys on, as as a portfolio company, how is it that I 110 00:09:13.770 --> 00:09:18.310 mean one of the tough parts? Right? Shipping? Typically for tech founders, 111 00:09:18.320 --> 00:09:21.170 that's what they're focused on, a typical focused on products. So getting 112 00:09:21.170 --> 00:09:25.670 out there and selling it unless you're unique. I like Mark Bernstein is 113 00:09:25.670 --> 00:09:30.990 usually a challenge, but they are typically founder. So how are you 114 00:09:30.990 --> 00:09:35.810 contributing to figuring out that early, uh, repeatable sale? How are you 115 00:09:35.810 --> 00:09:41.070 helping them? If it all with early stage sale, that's a That's a tough 116 00:09:41.080 --> 00:09:45.950 That's a tough thing. It is a tough thing, and a lot of the assessment and 117 00:09:45.950 --> 00:09:52.120 a lot of the plan depends on a few criteria about the product. Number one. 118 00:09:52.120 --> 00:09:57.260 What is the annual contract value? I tend to invest in high priced software 119 00:09:57.260 --> 00:10:01.550 so you will not see me investing in a lot of companies where the product cost 120 00:10:01.550 --> 00:10:05.660 $10 a month for user. Probably kind of part and parcel with enterprise 121 00:10:05.660 --> 00:10:08.730 software, right, if that's where you're investing. Yeah, there are a lot of 122 00:10:08.730 --> 00:10:14.750 really good bottoms up product led growth companies out there. But usually 123 00:10:14.740 --> 00:10:19.950 the difference between software companies that monetize like that is 124 00:10:20.440 --> 00:10:26.400 down to very small features. And there tends to be a lot of competition and a 125 00:10:26.400 --> 00:10:29.600 lot of new entrance at the seed stage. You know, there are 1000 companies that 126 00:10:29.600 --> 00:10:34.200 are trying to make incremental improvement over slack or zoom, and I 127 00:10:34.200 --> 00:10:39.330 find it very hard to decide super early on which of those air going to break 128 00:10:39.330 --> 00:10:44.020 out. So I didn't know if the companies that have annual contract values above 129 00:10:44.020 --> 00:10:50.940 10,000 per customer and I have a big cluster in the 10 to $40,000 range that 130 00:10:50.940 --> 00:10:56.680 generally sell through inside sales efforts, and I have a big cluster that 131 00:10:56.690 --> 00:11:02.040 are at annual contract values of over 100,000, which tend to have more of an 132 00:11:02.040 --> 00:11:07.890 outside sales model that would require in any year other than 2020 putting 133 00:11:07.900 --> 00:11:13.470 people on airplanes. Thio, go visit and sell person one day that will come back, 134 00:11:13.470 --> 00:11:16.760 of course. So a lot of it depends on those kind of questions, and a lot of 135 00:11:16.760 --> 00:11:20.640 it depends on the complexity of a deployment. You know, do we need to 136 00:11:20.640 --> 00:11:25.590 integrate with existing systems of any kind? Are their data assets that need 137 00:11:25.590 --> 00:11:30.720 to be loaded into the product in order for the product to have value how Maney 138 00:11:30.720 --> 00:11:37.440 users is required at an enterprise customer in order for that enterprise 139 00:11:37.450 --> 00:11:40.930 to receive value from the product? And when you think through those questions, 140 00:11:40.930 --> 00:11:44.770 you start to think, Okay, does outbound work here, or does it have to be some 141 00:11:44.770 --> 00:11:50.870 sort of a relationship based legion process? How much is required in pilots? 142 00:11:50.870 --> 00:11:56.550 What kind of discounts need too early customers? Those are all the questions 143 00:11:56.550 --> 00:12:02.390 that one figures out as you're you're entering sales for the first time, so 144 00:12:02.390 --> 00:12:04.850 you're helping them with their go to market model. You're helping them 145 00:12:04.850 --> 00:12:10.930 figure out the cadence and all of the associate ID processes that you'd have 146 00:12:10.930 --> 00:12:17.890 to go through in order to form that foundation. Then, from there, you know, 147 00:12:17.890 --> 00:12:22.640 it's it's a matter of getting out there and having conversations, right? So 148 00:12:22.640 --> 00:12:28.060 what about it looks like and it feels like you're gathering learnings from 149 00:12:28.060 --> 00:12:33.640 these from me that you're investing. And how much time do you invest? Do you 150 00:12:33.640 --> 00:12:38.150 allocate for guidance and coaching? You're probably learning a ton from 151 00:12:38.150 --> 00:12:43.950 these other early stage innovative companies. How are you applying that to, 152 00:12:43.960 --> 00:12:48.640 uh, the new founders that you bring on board? One of the great things about 153 00:12:48.650 --> 00:12:52.050 specializing on Lee an enterprise software is that there are 154 00:12:52.060 --> 00:12:57.360 commonalities across the companies that I invest in. And it's something that 155 00:12:57.370 --> 00:13:03.090 does allow for cross pollination. Azan Example. You You interviewed Mark 156 00:13:03.090 --> 00:13:09.480 Bernstein from Balto A. I the other day, and Balto has an outstanding customer 157 00:13:09.480 --> 00:13:13.790 success leader guy named Tyler Wonderlic, who has put in place um, 158 00:13:13.790 --> 00:13:20.330 really great processes and tools at Balto. And I recently put Tyler in 159 00:13:20.330 --> 00:13:25.060 touch with one of my earlier stage startups that is figuring out customer 160 00:13:25.060 --> 00:13:31.010 success for the first time and was able thio make the introduction and allow 161 00:13:31.010 --> 00:13:34.650 one of my companies that has really good tools to share those kind of tools 162 00:13:34.650 --> 00:13:37.990 with another company in the portfolio. And stuff like that happens all the 163 00:13:37.990 --> 00:13:42.100 time. I have a slack channel for my founders that allows them to ask 164 00:13:42.100 --> 00:13:47.700 questions of each other and Thio pose questions and talk about problems 165 00:13:47.710 --> 00:13:51.710 without me needing to be the bottleneck and the go between for them, and that 166 00:13:51.710 --> 00:13:56.140 has enabled a lot of collaboration and a lot of working together. That's very 167 00:13:56.140 --> 00:14:01.630 clever. When you come to a point where you found somewhere you begin a 168 00:14:01.630 --> 00:14:06.070 dialogue and there's answers. What's a typical cycle? Duration from initial 169 00:14:06.070 --> 00:14:12.480 conversation to term sheet? Usually that process involves an initial 170 00:14:12.480 --> 00:14:17.000 conversation used to be mostly in person meetings and its most bloom 171 00:14:17.000 --> 00:14:24.840 these days and the process that involves my taking time to spend with 172 00:14:25.340 --> 00:14:30.710 all of the other founders, not just the person who is leading fundraising. It's 173 00:14:30.710 --> 00:14:34.810 often the case that they designate this, that a startup team will designate the 174 00:14:34.810 --> 00:14:38.980 CEO, too. Handle all the fundraising, and I think it's important to get to 175 00:14:38.980 --> 00:14:43.320 know the other founders. Justus. Well, as I'm getting to know the person who's 176 00:14:43.330 --> 00:14:49.190 taking point on the deal e like to research competition, I get demos of 177 00:14:49.190 --> 00:14:54.650 products. I often am contacting people in my network who could be potential 178 00:14:54.650 --> 00:14:59.940 customers to meet with a startup and to give me their view as a buyer. I'm 179 00:14:59.940 --> 00:15:04.190 lucky that I'm lucky to have as investors and limited partners in my 180 00:15:04.190 --> 00:15:08.910 fund a number of people who operate substantial businesses, who are also 181 00:15:08.910 --> 00:15:14.730 very eager early adopters a tech and I get to get the benefit of their 182 00:15:14.730 --> 00:15:20.400 expertise and their perspective from their companies, and I then want to 183 00:15:20.400 --> 00:15:24.580 speak usually with customers or prospect of customers at the end of the 184 00:15:24.580 --> 00:15:29.910 process from the start of itself. And that whole process usually takes 4 to 7 185 00:15:29.910 --> 00:15:36.060 weeks to go through it. Usually, the end point is a term sheet. Often I end 186 00:15:36.060 --> 00:15:41.740 up interested in companies that other VCs, or not paying much attention to I, 187 00:15:41.750 --> 00:15:46.250 for whatever reason, make my decisions almost entirely independently. And I 188 00:15:46.260 --> 00:15:51.910 rarely if ever, find myself in competitive situations where other 189 00:15:51.910 --> 00:15:58.540 investors are chasing a deal, and that also ends up with an interesting side 190 00:15:58.540 --> 00:16:05.400 effect, which is I write checks of 300 to $500,000 or so in two companies that 191 00:16:05.400 --> 00:16:09.800 are raising anywhere from 1 to 3 million. So that means that I'm not the 192 00:16:09.800 --> 00:16:14.570 entire round and there need to be other investors alongside me, and if I often 193 00:16:14.580 --> 00:16:21.670 getting to conviction with a startup that is not having a lot of other BC's. 194 00:16:21.670 --> 00:16:24.870 Pay attention to them the moment I assign a term sheet. I didn't have to 195 00:16:24.870 --> 00:16:29.480 go out to my network and find other investors for the company, and that 196 00:16:29.480 --> 00:16:33.720 often takes a few weeks to put together. But usually it works out pretty well. 197 00:16:33.730 --> 00:16:38.820 There are a lot of folks out there who are inclined to take a more detailed 198 00:16:38.820 --> 00:16:44.790 look at something. Once a lead is in one, Price has agreed to and deals to, 199 00:16:44.800 --> 00:16:49.870 ah, lot faster. Once all of that has been put in place, that's a great 200 00:16:49.870 --> 00:16:55.220 process. It's great information for those listeners out there. And frankly, 201 00:16:55.220 --> 00:17:02.180 that's a pretty quick cycle. Like 47 weeks is lightning compared toa others 202 00:17:02.190 --> 00:17:06.460 that are out there, which is great. It doesn't need to take much longer than 203 00:17:06.460 --> 00:17:10.329 that. You know, if I shouldn't write, it really shouldn't. But you're right. 204 00:17:10.339 --> 00:17:13.770 Yeah, if I'm on the fence about something, it's probably something I 205 00:17:13.770 --> 00:17:19.849 just need. Thio politely thank the founders about and move on. And maybe 206 00:17:19.849 --> 00:17:23.089 that company is a little too early, and I end up looking at them again in six 207 00:17:23.089 --> 00:17:25.740 months when they have made some progress and getting really excited 208 00:17:25.740 --> 00:17:30.150 about it, then about 40% of the investments that I make fit that 209 00:17:30.150 --> 00:17:34.530 pattern where I meet them. There's not enough to go on yet at the moment that 210 00:17:34.530 --> 00:17:38.990 I meet them. But I like the founders. I am interested in the problem that they 211 00:17:38.990 --> 00:17:43.730 are solving, and I encourage them to stay in touch with me. And six months 212 00:17:43.730 --> 00:17:48.040 or nine months later, they've hired a few people. Some of the logos in their 213 00:17:48.040 --> 00:17:51.910 pipeline have turned into real customers. All of a sudden, there's 214 00:17:51.920 --> 00:17:57.110 something tangible for me to dig into and to research. And I can often make a 215 00:17:57.110 --> 00:18:01.540 decision very quickly in a situation like that where I've had the benefit of 216 00:18:01.550 --> 00:18:06.320 having met somebody in the past, and I can see over time the progress that 217 00:18:06.320 --> 00:18:10.640 they have made against the goals that they had when I first met them. So yeah, 218 00:18:10.650 --> 00:18:13.290 that's often how it works. And again, if you're if you're thinking about it. 219 00:18:13.290 --> 00:18:17.660 If you're not sure, you save the precious few slots that you have to 220 00:18:17.660 --> 00:18:21.510 invest in any given year in the year old. Invest in six or seven or eight 221 00:18:21.510 --> 00:18:25.650 companies. You save that for the ones that just like grip you, that just 222 00:18:25.650 --> 00:18:30.200 grippy by the throat and that you can't stop thinking about of the way you 223 00:18:30.200 --> 00:18:34.480 describe that. If you grip you by the throat, yeah, because you really can't 224 00:18:34.480 --> 00:18:38.270 get it off your mind, right? You're excited. You kind of feel it. You have 225 00:18:38.270 --> 00:18:42.020 a sense for it. Not only does the analysis start to add up, but you have 226 00:18:42.020 --> 00:18:47.870 a feel for it, right? And that's that z exciting stuff. So probably plenty of 227 00:18:47.870 --> 00:18:52.060 examples here. But what's a recent achievement that you're really proud of? 228 00:18:52.060 --> 00:18:55.210 Whether it waas, you know someone got acquired, whether it's growth or 229 00:18:55.210 --> 00:18:59.630 success, a new raise? Let's see. I mentioned my portfolio companies Spider 230 00:18:59.630 --> 00:19:04.590 Tech, which makes automated communication tools for police 231 00:19:04.590 --> 00:19:10.120 departments. And that company found itself in a very unusual and unexpected 232 00:19:10.120 --> 00:19:15.920 situation this year when a number of its early customers started using the 233 00:19:15.920 --> 00:19:20.620 product to communicate with citizens about Cove it in about the lockdowns 234 00:19:20.620 --> 00:19:24.840 that were happening in March and about the public health emergency that we 235 00:19:24.840 --> 00:19:31.100 were all facing and the product was not built with that kind of a use case ever 236 00:19:31.100 --> 00:19:34.850 in mind. But it turned out to be perfect for that. And it turned out 237 00:19:34.860 --> 00:19:40.760 that it helps customers police departments in a time of real need. And 238 00:19:41.050 --> 00:19:47.180 as a result of that, almost every police Department that was in spider 239 00:19:47.180 --> 00:19:53.060 text late stage pipeline in the spring of this year converted into a sale 240 00:19:53.070 --> 00:19:58.010 within a matter of weeks and telling the government as you know, some very 241 00:19:58.010 --> 00:20:02.350 long sales cycles. And there are people who have expectations and biases about 242 00:20:02.350 --> 00:20:07.260 that. But when something like that happens, all of that all of those 243 00:20:07.260 --> 00:20:11.500 concerns. All of those stereotypes about government sale cycles evaporate 244 00:20:11.510 --> 00:20:16.230 and police departments around the country bought spider tech in Mass in 245 00:20:16.230 --> 00:20:19.430 order to be able to communicate with their citizens. And it became an 246 00:20:19.430 --> 00:20:25.840 important public safety tool in a completely new E. What great timing. 247 00:20:25.840 --> 00:20:30.430 And you so no wonder you're proud of that because talk about being able to 248 00:20:30.430 --> 00:20:35.640 provide a public service, and it wasn't in it wasn't intended or designed that 249 00:20:35.640 --> 00:20:40.780 way, but they were able to figure it out, which that's just wonderful. So So 250 00:20:40.780 --> 00:20:45.060 I'll ask you an interesting one now. So what is something, Um, if you're 251 00:20:45.060 --> 00:20:50.480 thinking about founders of early stage companies that everyone should either 252 00:20:50.490 --> 00:20:57.400 start doing or stop doing, and you can pick any category you want there. When 253 00:20:57.400 --> 00:21:03.540 it comes to things that they shouldn't do, they shouldn't hire anyone to help 254 00:21:03.540 --> 00:21:08.660 them raise funding. That's perfectly appropriate to hire, you know, an 255 00:21:08.660 --> 00:21:12.860 investment banker or advisor or someone. If you are raising a $300 million 256 00:21:12.860 --> 00:21:18.260 private equity round or something like that, and for the fees that you will 257 00:21:18.260 --> 00:21:22.730 pay on a $300 million deal, you could get a very capable person stand firm to 258 00:21:22.730 --> 00:21:26.690 help you. I would submit that if you're raising $2 million and maybe paying a 259 00:21:26.690 --> 00:21:33.130 7% successfully for that, you might not be getting the world's top talent. And 260 00:21:33.140 --> 00:21:39.230 I think founders need to take on that process themselves. And I see too many 261 00:21:39.230 --> 00:21:46.040 people relying on third parties for access to capital. You don't need that. 262 00:21:46.040 --> 00:21:50.320 You can assemble a list of potential investors who are a good fit for you 263 00:21:50.330 --> 00:21:55.980 yourself, with a simple few hours of research on crunch base, and most good 264 00:21:55.980 --> 00:22:03.340 investors do read well written cold emails. I closed the deal yesterday. 265 00:22:03.350 --> 00:22:06.990 Not yesterday. Today's Friday a week ago. I closed the deal on Friday of 266 00:22:06.990 --> 00:22:13.190 last week that started with a cold email from the founder, and I led that 267 00:22:13.190 --> 00:22:18.220 seed round in the company. And the seed Rin was wildly oversubscribed. Maybe 268 00:22:18.220 --> 00:22:23.050 five or six X over subscribed. Everybody e wanted it on that deal, and 269 00:22:23.050 --> 00:22:27.220 that started with a cold email, and the next deal that I'm hopefully going to 270 00:22:27.220 --> 00:22:32.100 be the leading that could be closing in about a month also started with a cold 271 00:22:32.100 --> 00:22:37.950 email. Amazing other things to stop doing. Don't outsource your core 272 00:22:37.950 --> 00:22:42.700 functions. I would argue that, you know, it's perfectly fine to outsource your 273 00:22:42.700 --> 00:22:46.970 book keeping. You know, the bookkeeping for early stage software companies is 274 00:22:47.040 --> 00:22:52.470 pretty straightforward. Anyone who has done this and knows how to do air. Our 275 00:22:52.480 --> 00:22:56.190 subscription math can produce a good set of books for you don't need a CFO, 276 00:22:56.190 --> 00:22:59.740 you know, when I see a founding team and one of the founders is the CFO, I 277 00:22:59.740 --> 00:23:05.500 wonder, what does that person do all day, right. Not managing a finance 278 00:23:05.500 --> 00:23:13.840 department in the tiny company, and yet I also see companies that outsource the 279 00:23:13.840 --> 00:23:19.080 building of their technology to a Dev shop, and I have maximalist views 280 00:23:19.090 --> 00:23:23.630 against that. And what I mean by that is the very best thing that could 281 00:23:23.630 --> 00:23:28.030 happen. The very best thing that can happen when you hire a dev shop eyes 282 00:23:28.030 --> 00:23:30.880 also just about the worst thing that can happen and that is that they 283 00:23:30.880 --> 00:23:36.660 deliver the product to you on time, on budget and on spec, and people say, 284 00:23:36.660 --> 00:23:39.520 Well, that's that's a good thing. Is an Internet actually, that's a bad thing. 285 00:23:39.520 --> 00:23:44.470 And the reason that that's a bad thing is that when you get that, you then put 286 00:23:44.470 --> 00:23:48.680 it in the hands of your customers. And in almost every case of a of a 287 00:23:48.680 --> 00:23:53.340 successful software company that I have ever worked with, the customers end up 288 00:23:53.340 --> 00:24:00.060 using your products in a way that founder not anticipate right and that 289 00:24:00.340 --> 00:24:06.490 all emerging behavior often triggers an awareness of the need to completely 290 00:24:06.490 --> 00:24:11.670 reorient the product, to elevate features and capabilities that were 291 00:24:12.040 --> 00:24:19.150 thought incidental and to throw away or deprecate other products. Other aspects 292 00:24:19.150 --> 00:24:24.140 of the product that people thought were the core use case. When that happens, 293 00:24:24.140 --> 00:24:28.810 you often have a short window of time to react thio, the behavior that you're 294 00:24:28.810 --> 00:24:31.860 observing among your customers and the direct feedback that they're giving to 295 00:24:31.860 --> 00:24:36.670 you. And you need thio iterate quickly. You need to cycle quickly, and Deb 296 00:24:36.670 --> 00:24:40.310 shops just aren't capable of doing that. What, what what is capable of doing 297 00:24:40.310 --> 00:24:45.520 that is a small, highly productive founding team of developers and 298 00:24:45.520 --> 00:24:49.870 engineers who are on your payroll, who are direct employees of you who have 299 00:24:49.870 --> 00:24:54.790 stock options and meaningful ownership in your company and Dev. Shops don't do 300 00:24:54.790 --> 00:24:59.240 that. Deaf shops are very effective. If an insurance company wants to launch a 301 00:24:59.240 --> 00:25:05.050 mobile app or something like that, where the company is stable, the needs 302 00:25:05.050 --> 00:25:08.410 air clear. The technology risk isn't all that high. It's just a matter of 303 00:25:08.410 --> 00:25:13.450 getting it done. And it's a matter of it's a matter of fact that the customer 304 00:25:13.450 --> 00:25:16.320 doesn't have it software capabilities of their own because they're an 305 00:25:16.320 --> 00:25:20.970 insurance company. There's a role to play in a valuable service that those 306 00:25:20.970 --> 00:25:26.500 kinds of companies offer. But I don't think that they offer a valuable 307 00:25:26.500 --> 00:25:31.470 service for the earliest stage startups, and that that certainly makes a being a 308 00:25:31.470 --> 00:25:34.890 core function. Curious what your thoughts are about marketing agencies 309 00:25:34.890 --> 00:25:39.400 providing kind of outsourced support or the demand generation companies that 310 00:25:39.400 --> 00:25:43.870 are out there in an early stage scenario, it depends on the complexity 311 00:25:43.870 --> 00:25:49.750 of the product. If it's a relatively simple product that can simply be 312 00:25:49.760 --> 00:25:54.970 downloaded and installed in, the user can start working on it. Then that can 313 00:25:54.970 --> 00:26:01.650 work if it needs explanation, integration or data ingestion. It's 314 00:26:01.650 --> 00:26:07.130 very hard for an agency to be helpful with that at the earliest stage at 315 00:26:07.130 --> 00:26:10.970 getting from, you know, zero to a couple million dollars in annual 316 00:26:10.970 --> 00:26:15.810 recurring revenue. Almost all of my companies that have been successful at 317 00:26:15.810 --> 00:26:20.040 that figured out how to get to customers at scale on their own. 318 00:26:20.050 --> 00:26:26.030 Awesome. Some. Another question, then, about sort of the how cove it is 319 00:26:26.030 --> 00:26:30.880 impacting many startups. They're having to think through this whole notion of 320 00:26:30.880 --> 00:26:33.690 remote selling. No one's getting on planes. No one's doing face to face 321 00:26:33.690 --> 00:26:38.630 meetings anymore. How have you noticed that start up teams that you're working 322 00:26:38.630 --> 00:26:42.940 with are managing without face to face? And without that interaction, I'll tell 323 00:26:42.940 --> 00:26:46.710 you something that surprised me That, but that I have now heard from multiple 324 00:26:46.710 --> 00:26:51.030 companies in my portfolio is that they're having to re sell their product 325 00:26:51.030 --> 00:26:55.600 to their existing customers because a lot of their customers have been under 326 00:26:55.600 --> 00:27:00.880 so much stress in their own businesses that they have had to go through 327 00:27:00.880 --> 00:27:05.530 layoffs and reductions in force, such that everyone who bought the product a 328 00:27:05.530 --> 00:27:10.280 year ago is no longer with the company. Ah, lot of execs are gone, a lot of 329 00:27:10.280 --> 00:27:16.090 major purchasers are gone, and I have multiple portfolio companies that are 330 00:27:16.090 --> 00:27:21.540 charging customers monthly where the person who authorized the purchase is 331 00:27:21.540 --> 00:27:26.860 no longer on the payroll of the company and where the my my software startups 332 00:27:26.870 --> 00:27:33.490 are scrambling to build new relationships with existing customers 333 00:27:33.490 --> 00:27:38.860 so that when renewals come up that they are not turning, That's a really, uh, 334 00:27:39.240 --> 00:27:44.610 unusual circumstance right now. Maybe not so unusual everyone. It appears to 335 00:27:44.610 --> 00:27:47.490 me that everyone that I've been talking to that has any customer base has been 336 00:27:47.490 --> 00:27:52.080 focused on customer success, meaning get back. And if you're not already, 337 00:27:52.090 --> 00:27:55.870 get back in front of that customer and make sure that they're they're 338 00:27:55.870 --> 00:28:01.540 achieving impact and value regularly. And if you're doing that, you discover 339 00:28:01.540 --> 00:28:05.850 along the way I think what you mentioned, which is bodies are going to 340 00:28:05.850 --> 00:28:08.220 change. They're gonna be layoffs. They're gonna be shifts. They're gonna 341 00:28:08.220 --> 00:28:12.220 be organizations. Um, they're gonna be cutbacks. Um, they're gonna be budget 342 00:28:12.220 --> 00:28:18.440 slashes. And so unless your core essential to that business, it's gonna 343 00:28:18.440 --> 00:28:24.020 be tough justified. And part of that is reselling. That's a and that's a tough 344 00:28:24.020 --> 00:28:29.600 thing for sure, it's even tougher because it's not face to face. Exactly. 345 00:28:29.600 --> 00:28:33.450 And and with everything not being face to face, especially for high ticket 346 00:28:33.450 --> 00:28:40.510 software, a lot of the steps that sales teams are accustomed to going through 347 00:28:40.520 --> 00:28:46.950 in their sales motions are having to be rethought and adjusted. And so 348 00:28:48.240 --> 00:28:53.300 pilots are different than they used to be. In terms of timelines, deployments 349 00:28:53.300 --> 00:28:57.190 and integrations are different. Contracting and budgeting are different, 350 00:28:57.200 --> 00:29:01.900 and a lot of buyers have had to adjust their processes to get comfortable 351 00:29:01.900 --> 00:29:05.750 paying often six figures buying software from companies where they have 352 00:29:05.750 --> 00:29:08.770 not met anyone in person, where they have not gone through their traditional 353 00:29:09.140 --> 00:29:13.590 purchasing checklists, and where they're having to adapt all of that 354 00:29:13.600 --> 00:29:18.460 online for the first time. What I have seen that distinguishes companies that 355 00:29:18.460 --> 00:29:23.790 are making that transition successfully is that they're investing into digital 356 00:29:23.790 --> 00:29:30.480 assets and into content marketing in order to help their champions inside 357 00:29:30.490 --> 00:29:35.340 their customer organizations make the sale on their behalf internally to 358 00:29:35.350 --> 00:29:40.260 other buyers into gatekeepers within the company. And so you need really 359 00:29:40.260 --> 00:29:45.710 well documented contracts, often with some sort of explanation of things you 360 00:29:45.710 --> 00:29:50.680 know, using simple Loom videos to explain things in M s A. Agreements so 361 00:29:50.680 --> 00:29:55.450 that your buyer can take that to the legal department and show them this is 362 00:29:55.450 --> 00:29:59.620 why the contract is this way, uh, investing more into content marketing 363 00:29:59.620 --> 00:30:03.190 so that they can so that a buyer could go to their boss and say, Here's a 364 00:30:03.190 --> 00:30:06.410 three minute video about why we need this product and why it's important. 365 00:30:06.410 --> 00:30:09.710 And here's a case study about how another customer is using it. Those 366 00:30:09.710 --> 00:30:14.490 kinds of tools and collateral have always been important when it comes to 367 00:30:14.490 --> 00:30:19.460 selling software. But when they become your only tools, you have to invest 368 00:30:19.470 --> 00:30:23.510 even more into them and get them even more right than you did before. I heard 369 00:30:23.510 --> 00:30:28.450 a marketer using an interesting term Ah, success bridge, right? You've used a 370 00:30:28.450 --> 00:30:32.200 certain milestone. You're trying to get that person or that organization to the 371 00:30:32.200 --> 00:30:37.110 next milestone or the next step in the relationship. And if you can identify 372 00:30:37.110 --> 00:30:41.220 what are the challenges they face internally, build some form of success 373 00:30:41.220 --> 00:30:46.730 bridge to enable them? Thio more easily migrate to that next step. I think it's 374 00:30:46.740 --> 00:30:50.410 and that's done typically through content, because it's typically that 375 00:30:50.420 --> 00:30:54.130 those things that are happening, the background or asynchronous you're not 376 00:30:54.140 --> 00:30:58.400 part of those meetings. You're not part of that discussion, that analysis. So 377 00:30:58.400 --> 00:31:02.570 it's necessary that you try and support them in any way possible. It's 378 00:31:02.570 --> 00:31:07.120 typically with content. Yeah, and success. Bridges are a great term for 379 00:31:07.120 --> 00:31:12.060 that. And one of the most effective types of success bridge that a software 380 00:31:12.060 --> 00:31:18.070 company can build is eliminating steps, eliminating steps in the deployment of 381 00:31:18.070 --> 00:31:24.490 a product and a customer getting its first value out of a product and 382 00:31:24.490 --> 00:31:29.440 eliminating steps in the sale of the product and eliminating steps in 383 00:31:29.450 --> 00:31:35.660 spreading the product throughout an organization. And the companies that 384 00:31:35.660 --> 00:31:39.390 have adapted best to covert are the ones who have looked at every single 385 00:31:39.400 --> 00:31:46.390 aspect of their product of their sales motion of everything and taken out the 386 00:31:46.390 --> 00:31:52.560 steps that are not necessary. Thio get the customers value earlier and so true, 387 00:31:52.940 --> 00:31:57.610 and it got me wondering about your investing. It's such an early stage. 388 00:31:57.620 --> 00:32:02.710 Have you seen any of your portfolio companies go through a significant 389 00:32:02.720 --> 00:32:09.270 pivot as they were working through the early stages that they're in? So I you 390 00:32:09.270 --> 00:32:12.490 know, I'm a seed investor. I usually invest in companies that are a year old 391 00:32:12.490 --> 00:32:17.370 and that have fewer than 10 employees and zero or often just a few $100,000 392 00:32:17.380 --> 00:32:22.480 in revenue. At the time that I invest, 100% of the companies that I have ever 393 00:32:22.480 --> 00:32:28.700 invested in have pivoted substantially and seriously before I invested in 394 00:32:28.700 --> 00:32:33.150 there. See ground, every single one does it. You know, Mike Tyson said that 395 00:32:33.150 --> 00:32:36.820 everybody's got a plan until they get punched in the mouth. And I think about 396 00:32:36.820 --> 00:32:42.470 that in ah lot in terms of people's assumptions about their product and 397 00:32:42.480 --> 00:32:46.580 assumptions about their technology and their market. And even in the earliest 398 00:32:46.580 --> 00:32:52.220 stages, you have to pivot, and you have to react to what your customers air 399 00:32:52.220 --> 00:32:56.450 telling you. And so I cannot think of a company that has not pivoted that I 400 00:32:56.450 --> 00:33:00.040 haven't invested in that did not pivot before I invested them. Every single 401 00:33:00.040 --> 00:33:05.850 one has. Every single one has done so. Meaningful numbers of time, times after 402 00:33:05.850 --> 00:33:10.210 I invested and the ones that move quickest to make those decisions most 403 00:33:10.210 --> 00:33:16.210 effectively are the ones that do the best. So 11 or two final questions. So 404 00:33:16.220 --> 00:33:20.460 are there any you've probably seen enough of them talking to the number of 405 00:33:20.470 --> 00:33:24.950 early stage startups? What are the landmines that they step on? The 406 00:33:24.960 --> 00:33:28.960 threatened their existence that you might suggest, Hey, avoid that if it 407 00:33:28.960 --> 00:33:31.550 all possible or anything that people are doing out there that you've seen. 408 00:33:31.940 --> 00:33:37.040 There are so many because the default state of a new technology company is 409 00:33:37.040 --> 00:33:43.830 dead and the attrition rates are so high, just as a to put some numbers 410 00:33:43.830 --> 00:33:48.230 around that I recently was looking through my startup database of all of 411 00:33:48.230 --> 00:33:52.940 the companies that pitched me and I looked at the 2016 cohort. I looked at 412 00:33:52.940 --> 00:33:58.070 the court of companies that pitched me four years ago, and I wanted to see 413 00:33:58.070 --> 00:34:01.390 which ones are still around. And what are the outcomes for the ones that are 414 00:34:01.390 --> 00:34:07.790 not still around? And these air rough estimates. But they're directionally 415 00:34:07.790 --> 00:34:13.020 correct, I would say 90% of the companies that pitched me in 2016 are 416 00:34:13.020 --> 00:34:19.590 no longer around and did not have a good outcome. But roughly 90% about 3% 417 00:34:19.600 --> 00:34:25.020 did not receive any institutional funding that I can identify, but have 418 00:34:25.060 --> 00:34:31.820 managed to grow in the absence of funding and build successful businesses 419 00:34:31.820 --> 00:34:35.420 where they're active and serving customers. And they are employing a lot 420 00:34:35.420 --> 00:34:40.719 of people in doing well. About 3% have had some kind of an acquisition 421 00:34:40.730 --> 00:34:46.139 subsequent to 2016. That looks like it was a good outcome for everybody 422 00:34:46.139 --> 00:34:49.870 involved. That might be, for example, a company getting a million dollars of 423 00:34:49.870 --> 00:34:53.960 investment and then selling for $25 million. Like the investors probably 424 00:34:53.960 --> 00:34:58.060 made money. The founders probably made money. The employee stock options 425 00:34:58.060 --> 00:35:02.010 probably ended up being valuable for everybody involved with the deal like 426 00:35:02.010 --> 00:35:08.190 that. And about 3% of the companies appear to have raised venture capital 427 00:35:08.200 --> 00:35:13.500 from other firms and are still in business and doing well. And then, you 428 00:35:13.500 --> 00:35:16.580 know, that's the company that pitched me just four years ago. That was not 429 00:35:16.590 --> 00:35:21.650 all that long ago, and yet very few raise venture funding. Very few are 430 00:35:21.660 --> 00:35:26.720 still around today, And that's just the nature of investing in startups and 431 00:35:26.730 --> 00:35:30.890 starting startups that air pre product market fit The attrition rate is very 432 00:35:30.890 --> 00:35:34.580 high. You know, you can think about those David Attenborough nature videos 433 00:35:34.580 --> 00:35:41.070 where you see a turtle laying eggs on the beach and, uh, the turtles hatch 434 00:35:41.070 --> 00:35:45.750 and they have to make their mad dash from the beach down. Thio the ocean 435 00:35:45.750 --> 00:35:50.610 while they're being attacked by birds and snakes and every creature under the 436 00:35:50.610 --> 00:35:54.990 sun that wants a quick meal. And startups are kind of like those poor 437 00:35:54.990 --> 00:36:00.700 turtles making the poor dash to the water so true. And what great insights? 438 00:36:00.710 --> 00:36:06.320 Because there are plenty of companies out there early stage that I hear from 439 00:36:06.320 --> 00:36:10.970 often that air listening that that want advice. And so, gosh, what a great 440 00:36:10.970 --> 00:36:14.520 resource. So this has has been great to learn about you. It's been great to 441 00:36:14.520 --> 00:36:19.650 learn about your work at stage, and I just wish you continued success with 442 00:36:19.650 --> 00:36:22.490 what you're doing. I think it's a great thing, thank you very much. It was 443 00:36:22.490 --> 00:36:27.060 great to be here, Alex. Tell us what's the best way to connect with you? If 444 00:36:27.060 --> 00:36:31.530 there's interest in reaching out. Yeah, so people can follow me on Twitter. My 445 00:36:31.540 --> 00:36:37.840 firm account of Stage VP and my personal account is at the Alex 446 00:36:37.840 --> 00:36:43.140 Rubalcaba and for founders who want to get in touch with me. The very best way, 447 00:36:43.140 --> 00:36:48.110 of course, is to find someone who knows me like an existing founder to make an 448 00:36:48.110 --> 00:36:51.620 intro. The reason that that it's so valuable is because people who know me 449 00:36:51.620 --> 00:36:55.580 what I invested will often know whether you are a good fit for me and can't 450 00:36:55.580 --> 00:36:58.780 give you advice and say, You know what? You're not the kind of company Alex 451 00:36:58.790 --> 00:37:01.700 likes. You know, you're you're doing something in cannabis, and Alex doesn't 452 00:37:01.700 --> 00:37:05.930 invest in cannabis. Or you should pitch this other venture firm. You know, 453 00:37:05.940 --> 00:37:10.640 don't pitch Alex. You know, we'd stuff go pitch new dog. And so that's one of 454 00:37:10.640 --> 00:37:15.500 the reasons why referrals are valuable because it saves the founders time and 455 00:37:15.510 --> 00:37:20.890 the investors, and it worked. It enables better matches on then, if you 456 00:37:20.890 --> 00:37:24.460 know you don't have an introductory path to me, a really well crafted cold 457 00:37:24.460 --> 00:37:29.210 email does get my attention, and it does lead to build Thio. Two deals 458 00:37:29.210 --> 00:37:33.860 getting done as the deal that happened just last week is great evidence of 459 00:37:34.230 --> 00:37:39.970 that's fantastic, and we'll certainly take your advice there. So thanks to 460 00:37:39.970 --> 00:37:43.590 everyone for listening to this episode of the revenue Siris on the B two B 461 00:37:43.600 --> 00:37:47.870 growth show, I'm your host John Grisman, founder and sales coach at Early 462 00:37:47.870 --> 00:37:50.550 Revenue. Until next time I'm out. 463 00:37:53.530 --> 00:37:57.370 Are you an early stage tech founder that's frustrated by limited sales? Do 464 00:37:57.370 --> 00:38:00.590 you like the time to dedicate to a traditional sales training program? 465 00:38:00.600 --> 00:38:04.380 John Crispin's early revenue sales program helps early stage founders 466 00:38:04.390 --> 00:38:08.170 accelerate sales. In large accounts, he's built a playbook that transfers 467 00:38:08.170 --> 00:38:11.590 what he's learned as a founder and sales later into a condensed, easy to 468 00:38:11.590 --> 00:38:15.290 implement program. If you're ready to increase your start of sales capacity, 469 00:38:15.330 --> 00:38:18.660 visit early revenue dot com to get started today.