A Fortnight in Venture Capital: Day 3

Morning

As we enter December, the thought of work quietening down seems a distant aspiration as the days get busier rather than anything else. Today is no different, proceedings kicking off with a veritable avalanche of emails from yesterday afternoon. Time to pull our workings together into a digestible due diligence report for the investment committee’s review. Spend a few hours charting all of the key financials and operational metrics while listening to the futurethinkers podcasts I have been inching through over 2016. I’m up to the future of marketing (episode 12), which is both excellent, but also reminds me of what slow progress I am making!

For those interested, this particular DD report covers a relatively mature SaaS business. Alongside a range of qualitative measures below are a few of the more important data points we consider. There is far, far better literature elsewhere so I will avoid lengthy explanations.

1. Revenue growth by month historically. We look for a split between any one-off and recurring revenues and then to build each month’s ending MRR position: Starting + New + Upgrade — Churned — Downgrade. From this we can calculate a quick ratio which makes comparisons across businesses and illustrating high level trends particularly easy.
2. Sales and Marketing Spend. In light of point 1, we look to track revenue improvements in light of customer acquisition spend — the magic number metric normally does the trick here.
3. You guessed it, the above two points lead us to an LTV:CAC analysis which is that golden metric SaaS businesses like to throw about.
4. We look for cohort analyses where possible. Important to see churn profiles overtime, but also improvements with product dev across the cohorts. Looking for both revenue and user cohorts.
5. Customer numbers and splits by product type, geography or customer size (or any other relevant segmentation). Important to differentiate between logos and users if applicable. Also important for ARPU (which of course leads to LTV)
6. Time to recover CAC — we use this as a proxy for the capital efficiency of the business.
7. Sales funnel metrics such as onboarding conversions, trial period conversions, digital efficiency and more.
8. Engagement Data. The more the better. We like to track feature usage over time — illustrating how our users interact with the product month on month.
9. Financial forecasts. We take forecasts with a grain of salt and normally create our own modelling that supports a particular investment thesis.
10. Valuation — we run various methodologies and cross check to all the standard industry benchmarks.

The key takeaway: we track trends not datapoints. This might seem self-evident but the amount of investor decks or presentations we receive with single point estimates is still astounding. While the above list may feel particularly onerous on the founder, and slightly contrary to our positioning of backing founders first and foremost, much of our insight is garnered through the data gathering exercise itself. In our view, any CEO or founder should have the above readily available. These are the tools with which they can manipulate their business after all. Founders that “don’t track churn” ( :/ ) or have never tracked usage of Feature XXX are less compelling than those that have robust dashboards and can talk to the numbers ad nauseum. Given the freely available tools there should be no excuse.

Through the compilation of our report we normally send relatively open ended questions to founders in the hope that they can detail a level of analysis that surpasses our expectation. The best founders understand the inner workings of their clients and have developed “golden milestones” they look to reach to cement a particular outcome. For example, “once a business adds 10 employees to the platform their churn drops to x% and product usage triples” or “if the customer interacts with someone on our success team they onboard x% faster and their ARPU is x% higher”.

Late morning there’s an update call to check in with a client. We discuss the capital strategy for the business going forward and at what point the business is stymying growth to preserve equity. As a rule of thumb, raising 18 months runway generally finds a happy medium.

Afternoon

The afternoon brings a pitch from someone within our network working on their second startup. Exceptional story. The team can articulate their value proposition concisely and clearly, is completely upfront about the challenges and have that hard to pin quality: they are backable. I can’t stress enough our preference towards investing in lines I mentioned in a previous post (we have a clear confirmation bias I guess) and the entire tone of conversation is supportive and interested, rather than cynical and interrogative. This is a business squarely in our fund’s cross hairs solving a genuine pain point for B2B clientelle within a industry only just embarking on widespread digitisation. Pattern recognition is one of the clear value adds a VC investor can apply across their portfolio and for this business the playbook of Siteminder, Rezdy, Shippit, Deputy and others will be directly applicable. We fundamentally disagree on valuation, but may be able to shape a creative structure to get a deal across the line. Another DD process looming.

As with any good pitch, the meeting goes way overtime and involves a lengthy debrief internally. All of our $25m under management has potentially unbounded opportunity cost, so we treat our investment decisions with care. This opportunity cost is something I prefer to not think too much about…

Evening

I’m running late for another demo day. If you’ve been following along to date, you’ll note this is the second such event for the week. These can be a real time suck, but we owe it to our investors to eat free canapes and drink beer…

This time it’s a foreign government showcasing a handful of their finest startups to Aussie investors. I’m running late but hear pitches from a:

• P2P lender
• Chinese payment gateway
• Sharemarket research and analysis platform
• SaaS product for snapchat marketing analytics
• White label app for telcos to monetise the mobile lock screen
• Safety and asset protection software for oil & gas, marine and mining industries
• SaaS product to streamline video review and approval for corporates
• Data extraction technology
• Medical device providing imaging and informatics for wounds

Was worth the couple of hours.

I head home to my inbox responding to an afternoon’s worth of requests that, as usual, are all urgent. The housemates are firing up Planet Earth which at this time of day is a necessary priority.

ciao.