Start-up Society #78: Toba Capital

Keeping the American Dream Alive

Welcome to the 78th edition of Start-up Society! This blog highlights some of the most exciting start-ups in the country striving to keep the American Dream alive.

Make sure you check out the previous issue, if you have not already, here.

This week, we are doing a podcast and article double feature for our second installment of Meet the Investor featuring Patrick Mathieson, Partner at Toba Capital.

For the full conversation, tap into the podcast here!

Intro

I have been here for ~7.5 years. Toba Capital is a Southern California-based, primarily B2B software-focused VC firm. We invest across multiple stages. Pre-seed on the very early end and sometimes more growth and pre-IPO rounds on the late end. Most commonly, we get involved at the Series A stage as the lead investor. We invest between $70 and $100 million per year, exclusively into technology companies and mostly software companies although that has broadened over time. We have offices in Los Angeles and Newport Beach.

Path to VC

Two ways to get into VC: the front door and the back door. I got in through the back door, I happened to know the right person at the right time. It is the back door because it is really out of your control. I went to the University of Michigan for undergrad as a business major. I was fascinated by all things business, but I was not a hardcore technologist. I worked at a startup out of college for a couple of years and learned enterprise software. I was a Business Analyst, Financial Analyst, and also a Product Manager at this enterprise IT company. I supported a bunch of executives, and a number of them are now incidentally at FloQast. A person that I worked with, who was a mentor of mine, was a Partner at Toba Capital and focusing on enterprise software investing. They wanted to hire an Associate and they thought of me. If VC is the goal, you may want to point yourself towards startups and/or high-growth technology companies and become part of that ecosystem. Then maybe the VC route will happen for you down the line.

Going through the front door could mean working in banking or consulting or alternatively working at a very prominent startup (e.g. Stripe, Dropbox, Facebook, etc.). Point yourself towards the high-growth domain and let opportunities come your way.

When to raise capital

Never too early to start the conversation. Some of the best conversations we have at Toba are with people just starting their companies or thinking about starting their companies, and want to sanity-check their idea and ensure it is fundable down the road. Whether it is advisors or investors, and most definitely customers and employees, pulling people into your orbit is a key part of building a business.

The best companies may bootstrap for years, but they have 3–5 powerhouse investors that are advisors to the company. If you spend a little time every week working on that, it will compound and you will have an army of people with you on the journey. As far as when to raise, that question is secondary to how do you find people to buy into your mission, if you can do that you will have capital waiting for you.

Favorite Portfolio Company

There is no favorite, but FloQast might be executing the best right now. Every time I talk to CEO Mike Whitmire he is more and more relaxed. They are all my favorite but FloQast is having itself a year. Sometimes the startups that come out of the gate the fastest are not the ones that finish the fastest. A lot of companies that exploded on the scene fastest burned out early. Other companies, like FloQast, did not put up record numbers in year one but got better and better every year and are now flying.

The investment that got away

Right when I was joining Toba, a really good friend of mine became the first or second non-technical hire at Zoom. Before they had raised any money, he had brought it up to me. I was brand new at Toba and could not tell a good company from a bad. I knew we had a couple of other similar teleconference investments in the portfolio, so I thought it was not interesting. If I had made that investment I would be retired by now.

Identifying a good company

Depends on stage. There are quantitative and qualitative measures. For a mid-stage SaaS company, you can look at SaaS metrics such as growth rate, revenue growth persistence, net revenue retention, CAC payback, LTV/CAC, etc. For early-stage, a lot of it has to do with founder attributes. Does this team have an edge that shows they will overcome the odds and execute? This is why it is important for the investor to observe the entrepreneur over a long period of time. If you observe performance and execution over time this is a great indicator of someone to invest in.

Why SoCal?

The Toba Capital founding team came out of Orange County-based Quest Software. The executive leadership team from that company were the ones that founded Toba and many of them continue to operate Toba today. A lot of the early bets that we made were with people that came out of Quest.

LA is a more recent phenomenon and distinct from OC in that it is having its own moment in B2B SaaS. The companies coming out of Los Angeles are getting better and better. We had roots in OC and extended up into LA and have key anchors like FloQast within the ecosystem. It is a privilege to participate in the LA ecosystem. There are great startups and also great VCs in this area that we often partner with.

Post-COVID Era

You are not going to get much great macro thinking from me. I am very much a bottoms-up company-oriented thinker. From being on the boards of these companies and observing the last 18–24 months, after that COVID pause there was a rocketing ahead of many companies including FloQast and Boulevard — an LA-based business management and payment processing platform for salons and spas. Their entire clientele was shut down for 6 months during the pandemic and they still tripled in client count last year because many businesses used the pandemic as an opportunity to upgrade and modernize their infrastructure. Toast is another great example as they are now looking like the greatest SaaS IPO in recent memory serving the restaurant market.

Do you serve a clientele that is using this opportunity to digitize, modernize, and upgrade or do you serve a clientele that is going to get eradicated? Boulevard serviced the luxury salon and spa market that turned the crisis into an opportunity to benefit themselves. The winners became more winners and the losers became extinct. If you are serving a clientele that is going to be robust and respond well to shocks like this you will be in good shape.

Why Toba?

We like to lead with relationships. I want to be able to offer a relationship and trust over time, and point to an ability to work well with each other over a long period. I always counsel entrepreneurs to think very carefully about relationships with their investors.

Toba has an evergreen fund structure. While a typical fund will raise a bunch of capital and have ten years to deploy it and then also receive all the returns from it. That can cause distortions to companies because if you are a company that is 8 years in the journey and have not exited yet, you may feel pressure from the VC to sell that company. Toba does not have that incentive. Our incentive is to invest in founders and stick with them for a very long time. We invested in FloQast eight years ago. If we had to get out of that investment in two years we would be making a colossal mistake, I would like to stay invested in FloQast for 20 years. We are only focused on long-term value creation and therefore we are a more relaxed partner and not going to push you to do something that has ulterior motives. We are aligned with founders. While we may not always be industry experts we are easy to work with and can provide multi-stage capital which often makes us a preferred partner choice.

Whenever possible we like to help with recruiting, and we do this in-house. We spend a lot of time placing executives at companies through our personal networks. We have been very successful doing this in Los Angles and remote work is going to make it easier for us to do this across other geographies. This is especially the case with our LA portfolio companies and we are super proud of that!

Thank you for reading this article! Feel free to leave a comment, clap, and follow. Stay tuned for next week’s write-up, posted every Monday at 5 AM ET.

Authored by Arteen Zahiri, Rumeer Keshwani, Thane Wharton, Hooman Dadkho, and Julian Ramcharan