March 13, 2018
Ep. #43, Startup Partnerships with Ellen Chisa and John Kodumal
In episode 43 of To Be Continuous, Edith and Paul are joined by Ellen Chisa, Paul's co-founder and CEO of Dark, as well as John Kodumal CTO...
Heavybit Managing Director Tom Drummond moderates a panel featuring venture capitalists Ethan Kurzweil of Bessemer, Scott Raney of Redpoint, and Martin Casado of Andreessen Horowitz. Learn about the current capital supply in venture, why founders need to be cautious about capital deployment, the changing nomenclature of round titles, and the key metrics VCs look at to help make investment decisions.
Startup craze is in full gear. Between IPOs picking back up, a growing roster of billion-dollar ‘unicorns’, valuations increasing, larger rounds, and enthusiasm in the investment community, there’s a lot of energy around entrepreneurship. So, what does this mean?
According to a recent PitchBook report, VC vehicles have received more than $19 billion in commitments through June 2017. As a result of this record high VC funding, there’s an equally enormous amount of money going into the startup ecosystem.
There is a massive oversupply of capital and people are desperate to put it to work. As for entrepreneurs, it’s a really great time to raise capital. – Scott Raney
The fact that there is so much money available to be deployed is as clear a sign as any that technology, unlike any force before, will power the next wave of global growth. Every industry, from FinTech to Medical to Transportation is feeling these disruptive forces and our panelists agree, VCs armed with record levels of capital is an enormous opportunity for the next world-changing ideas to come to life.
Martin Casado says “there’s a reason money is going into venture. The market is growing massively, and for the first time we can say that technology is working. It’s going after every major industry on the planet and we’re not just talking about the 4 trillion IT budget, we’re talking about all businesses. [Venture capital] is a great market for money to go into.”
Funds looking to deploy more money for roughly the same amount of output is making venture capitalist’s jobs harder. As a result, VCs are broadening their scope beyond typical sectors and investment areas.
Technology is disrupting more and more things, so it behooves you to be more creative…In a way, investing in new technologies and industries is a way around the competition. – Ethan Kurzweil
Regardless of increasing competition, the overall sentiment amongst the panelists is that it’s never been a more exciting time to be a VC.
“I’d much rather be competing for businesses that I think have the chance to change the world than the alternative” says Scott.
Median round size for early stage deals has increased almost 40% in the past 2 years. In the panelists opinion, this is simultaneously a concern and a wonderful opportunity. In one sense, money can allow for faster time to market, but it can also lead to a lack of discipline on the part of over-capitalized teams.
“Companies are measured on financial metrics, irrespective of how much money they’ve raised” says Ethan, “money can be a catalyst for faster growth, and that’s great you should spend it all day long. But when you get more money earlier, the discipline around how that money gets spent, changes. It’s human nature, it’s the psychology of scarcity.”
On the importance of keeping a close eye on operating costs, Martin makes it clear that “if you do the dance, at some point you will have to pay the piper.”
In regards to the evolving names for funding rounds, we’re seeing lots of companies in the industry who are raising ‘Seed Primes’, ‘Second Seeds’, and other creative bridge rounds. The panel unanimously agreed that traditional naming of rounds was always an artificial construct, but investor expectations relative to funding haven’t changed much.
As companies progress from Seed to Series A to Series B, operational metrics become more and more important to investors. As much as things like founding team, management, and the market are important, VCs do want to see the numbers. Tom asks the panelists about the key metrics they look at to help make investment decisions. As in many things, the answer to this question depends on a number of business specific factors. However, there is agreement on two evaluation strategies:
Almost every company is focused on growth over monetization, but at some point every company needs to make money. As a result, there are important numbers around monetization that play a role in an investor’s decision.
Typical metrics include a look inside how much a company is spending on marketing and sales initiatives and how much they are getting in return. VCs also pay close attention to churn, or “stickiness of customers,” product usage and revenue.
Founders should want the activity that they put into selling the product to come back to them in terms of how many customers are acquired and how long they stick around. – Ethan Kurzweil
With developers garnering unprecedented spending power, it’s clear that building products and communities that developers love is instrumental to success. Working with our 39 members, we have seen again and again just how important this developer adoption is to monetization at scale, and our panelists suggest it’s a significant factor in their investing decisions too.
If you’re going after developers, it’s about winning over hearts and minds. It doesn’t matter what numbers you have if you haven’t done that. – Scott Raney
Thanks for reading, we hope this panel provided you with new insight into the world of B2B SaaS & Dev Co Investment. Sign up for Heavybit Updates if you’d like to get other developer focused content and event invites directly in your inbox.