Last month Joe Knowles, Principal at Smedvig, joined Tech Nation for an ‘ask me anything’ session with their Founders Network. Over Zoom Lauren, who heads up the network, and Joe answered questions from Founders on everything from the impact of Covid-19 to pivoting your business and the key metrics to understand at Series A. Check out an overview of the conversation below:
Tell us a bit more about Smedvig’s approach around Covid-19?
We made it clear at the beginning of lockdown that we wouldn’t be looking into new investments during this period and this was for three main reasons. Firstly, we wanted to dedicate all our time to working with our portfolio to help navigate this crisis. Our model is to work with a small number of companies, which means that at times like this we can fully support them. Secondly, we wanted to understand the potential cash need across our portfolio and to make sure we had the necessary reserves to support our companies through this. So it didn’t feel like the right time to deploy new money. Thirdly, it’s an uncertain time which makes it difficult to assess risk when looking at new investments. So we wanted to leave it a bit longer to see how things start to pan out in the macro environment. Now we’re through the first phase and we’ve stabilised our portfolio, we’re starting to look at commercial and M&A opportunities for them. Whilst it is still too early to do new deals, we are beginning to re-engage with businesses that we know well and are excited about, with a view to hopefully being able to do new deals in Q4 if the environment continues to improve.
Has there been any change in what you look for in a company due to Covid-19?
Firstly, whenever there’s a downturn you tend to see investors becoming more focused on cash burn and cash runway. This increases the need to demonstrate unit economics that work and a route to profitability relatively soon if needed. You see this at all levels from Private Equity to VC. Where we invest, at series A & B, I think there’s much less willingness to take a leap of faith on unit economics that do not currently work. Secondly, we’ve had to be disciplined about focusing on the long term and not getting distracted by the immediate ups and downs, particularly if companies and sectors are doing well on a short-term basis in the current climate but will probably revert to baseline performance in the medium term. Similarly, we have had to be creative when looking at strong companies in markets that are temporarily suffering, but we ultimately believe to have long term potential.
What constructive shifts do you see in the next 12–24 months because of Covid-19?
I heard a good soundbite recently: investing is not about predicting the future; it’s about being good at observing changes happening in the present. The biggest shift we are all observing right now is the move to remote working and the secondary effects this is having on transport, real estate, leisure and retail. One of the shifts I am seeing and am excited about is the heightened focus on the environment. There’s been much less travel and consumption generally over the last few months and people are noticing the impact this is having on our cities. I am hoping this will accelerate behavioural change at the individual, corporate, and government level. But I could be being a bit optimistic and we’ll all be straight back to ‘normal’ in the next few months!
How much do Smedvig look to invest?
The official answer is £2–15m, but the reality is mainly split into two types of investment. At Series A we’d look to do around £5m of a £6m to £10m round, where ARR might be say £1–3m. Then at Series B, we typically invest around £8m into a round that could be £10 to £20m, with businesses that have £3–10m ARR. To be honest, we haven’t done a £2m investment in a long time. As we look to lead rounds and there’s usually another investor by the time companies get to Series A, it’s usually around £4m where we start investing.
Do you partner with other VCs?
We don’t need to or look to syndicate, but we are open to working with other investors if necessary. We only lead rounds, but almost always they’ll be existing investors who want to do their pro-rata. The question is do you bring in another new investor? If we have conviction about the business, then we are keen to do as much of the round as possible. But we are open to new co-investors if the management team think they have some strategic value that is different to what we bring. This could be a US investor or a strategic corporate investor for example.
If a founder came to you raising £1.5m, would you go back to them and say raise £5m and we’ll lead the round?
This is very much a Silicon Valley mindset, but we are seeing more of it in Europe now. We are more founder led, so it’s not something we’ve done. The way it manifests with us is more subtle. As we only do a few deals a year we spend a lot of time building relationships with founders and meeting up with business that we like. With most of our investments we’ve been speaking to the teams at least 18–24 months before we actually invest. During those conversations we will discuss fundraising plans, so it would be in those discussions that we would potentially influence the founders thinking on how much to raise.
What do you view as most important, focusing on dominating an industry and getting good traction with a clear monetisation model, or focussing on short term revenue and profit?
It’s a bit of a philosophical one to be honest. At seed stage, you focus more on long term vision. At Series A/B cash burns are higher and so we need to have some sense of how that will pan out in the medium term. Whilst we still need to focus on longer term potential, we’re unlikely to back a business with unit economics that actively don’t work today and thus the cash need is unknown and potentially large. We all know the economics will change as the business evolves, but we need to see that they at least work where the business is today. In terms of getting the balance right, it depends on the size of the opportunity. If you believe there’s a huge market and a potentially defensible position, then you will be more willing to throw lots of money at it because ultimately there’s a big prize and economic return. Most of the big success stories that you hear about fit this model. If your market and business is set up to achieve that outcome then that’s great, but there are lots of interesting markets that can’t support lots of money going in but will still achieve a good result with the right level of carefully managed investment. It’s important to be honest with yourself. I think there’s a lot pressure on founders to always pitch the potential for a massive outcome. But you can have a great result for everyone in a medium sized market with some defensibility and competition. You just have to manage your cash efficiently so that the amount of money going in is commensurate with the kind of outcomes you can expect.
What metrics stand out at Series A and what are the KPI’s founders can focus on to prove long term success?
At Smedvig, we’re all ex-strategy consultants, so we have a great bias for detailed metrics and numbers. It’s actually something I’ve been pushing for us to move away from slightly as I think you can take false comfort from early stage numbers. At Series A, I think it’s all about making sure you truly have and understand product market fit and then using the investment to start going to market. In terms of what we look for with metrics, it’s all about demonstrating consistent use cases. Can you articulate what the problem is? Who it’s important to and why you’re differentiated? Have you got data on lots of customers that fit your profile, with repeat buying, high NPS and low churn? If all of that’s true then you might be lucky and start to have quick CAC payback and high lifetime value.
As a founder how do you know you’re doing things at roughly the time?
Good question — it’s an art. It’s about being ruthlessly focussed on understanding your customers and trying to piece together data to validate your understanding. You must challenge yourself to truly understand product market fit. You need to be in the detail of your pipeline conversion, trends in your market and understanding why you win or lose different opportunities. There’s a great First Minute article that looks at a customer survey that asks, ‘how disappointed would you be if you didn’t have this product?’ I think that’s the crucial question here. You need to spend time wallowing around in customer data before jumping into the sales process and scaling. Ask yourself, have I properly understood our customer segments and product market fit? Once you know that you have and you can validate it, then you can move into the acceleration phase, but make sure you continue to review product market fit as you scale.
Do you have any advice on getting in touch with you?
We’re always keen to hear from Founders and we like to get out in the ecosystem as much as possible by attending events and demo days and hosting office hours to meet as many great businesses as we can. We also have a Typeform on our website and we’re all reachable on LinkedIn. We always respond to every enquiry we get, even if the business isn’t right for us. Interestingly, we often get asked if founders should stay in touch with VCs they like in between rounds and the answer for us is always, yes. This is mainly because VC’s have a complicated pipeline to manage. Running at a deal takes up most of your time. So if I spoke to you at seed stage and I think your business is really interesting, if you approach me again when I’m in the process of doing another deal, unfortunately I won’t have the headspace and time to look at the opportunity properly, even though I really like the business. The benefit of having conversations throughout your journey is so that the VC knows when you’re looking to raise and they can adjust their pipeline to make sure they’ve got space to run hard at the opportunity. I think this reason isn’t talked about that often, but it’s important to be aware of.