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5 Things I Need To See Before Making A VC Investment: Alexander Niehenke, Partner at Scale Venture Partners

“Venture is very much about first and second derivatives, not absolutes. As an investor, growth trumps everything, so it is critical to identify the metric of value creation and then measure traction.”
I had the pleasure to interview Alexander Niehenke. Alexander is a Partner at Scale Venture Partners, a Silicon Valley-based venture capital firm focused on early-to-mid stage software companies looking to scale. He is on the Board of Directors at KeepTruckin and has been involved with the firm’s investments in Bill.com, DroneDeploy, Forter, Demandbase, PeopleMatter, and Sailthru.

Tell me about your investment focus.

At Scale Venture Partners, I focus on application software with a particular passion for vertical specific solutions. The largest opportunity in the next decade for software is taking cloud solutions and customizing them to satisfy the needs of industry-specific customers. I’m particularly excited about opportunities in financial technology, insurance, real estate, and construction, and have invested in retail, drones, and transportation.

What’s your “backstory”? How did you get to where you are today?

My passion for business comes from my father, who bootstrapped various entrepreneurial endeavors throughout my life. After school, I started working with early and growth stage internet and software companies in an advisory capacity. I quickly realized that I wanted longer-standing relationships with the entrepreneurs, so I started investing in the companies we were advising. I used that experience to transition to a full-time venture role and subsequently joined Scale Venture Partners five years ago.

Tell me a story about one of your most successful investments. What was its lesson?

In 2010, I met three young founders who were high school friends and had started a sports website. I was initially dismissive, partially because this wasn’t an uncommon idea, but took the meeting as a favor to an existing investor. It turned out that this group of founders had come across something really novel. Their approach to creating (sports) content was unlike anything I had seen before, and I realized that it was the start to a really large business. The company, Bleacher Report, ended up getting acquired by Turner and is a household name today. It’s a constant reminder for me to be receptive to new ideas (even those I might have been unsure about at first), and to have a child-like curiosity and enthusiasm for every new company I get a chance to meet.

Can you share a story of a VC funding failure of yours or investment that didn’t work out as you’d expected? What was its lesson?

Managing hyper-growth and success can be just as difficult as managing failure. The timelines are intense, the expectations are high, and the information is often only partial. There was one company we back several years ago that was very successful out of the gate, but ran into some issues a couple years down the line. Given market demand, the company moved upmarket too quickly. We stopped iterating on our core product and strengths, over-expanded on product breadth based on customer demand, and ultimately lost the core of what made us initially successful. While the company was able to gain decent scale and exit, the experience was a lesson in not letting initial success distract us from our vision and market.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn?

While I have turned down some phenomenal outcomes, I generally don’t regret those. It’s the companies that I never had a chance to meet, to evaluate, and build a relationship with that keep me on my toes. I like competing and am confident that I will win more than I loose, but I hate finding out about a great company after everyone else and missing the opportunity. When this happens, it’s usually because I’ve been dismissive about a company, market, or trend without having the critical information. This is why the Bleacher Report experience is so important for me.

Which person or company do you most admire and why?

In business, I admire longevity and authenticity. Businesses and their leaders like Herb Kelleher of Southwest, John Bogle of Vanguard, and Warren Buffett at Berkshire Hathaway spark an admiration for me. In technology, the pace of change has disrupted so many companies that longevity is rare. Likewise, the rise to massive influence means that founding teams often depart too quickly, which places the soul — or authenticity — of the company at risk of disappearing. Salesforce is an example of a company doing it right. Marc Benioff’s ongoing tenacity is fascinating.

In venture, I most admire the funds that have established credibility over decades, both by delivering robust returns for their investors and treating entrepreneurs with respect.

What are your 5 things you need to see before making a VC investment, and why? Please share a story or example for each of the 5 things.

1 — Market. I always like when entrepreneurs start by explaining the market scope and dynamics. This naturally also segways into understanding the size of the opportunity. When I invested in Prosper, I knew that the incumbents (credit cards and banks) had left massive amounts of the market open to a new entrant and that there was immense customer frustration, making it easier for a new product to succeed.

2 — Product. As an investor, you don’t have to use the product, but you truly have to believe that it’s best. Two great ways to get to know a product are to read customer reviews and talk to customers. In the case of KeepTruckin, their mobile application gets close to five stars in all of the app stores, whereas competitors barely garner three stars. Talking to customers further reinforced what I had read — so many of their customers adopted the product due to user love.

3 — Business Model. I firmly believe that many companies fail because they don’t have the right business model for the market or product. In the case of our portfolio company DroneDeploy, we felt that a freemium model was the best way to address the horizontal and nascent needs of drone operators who wanted a mapping and surveying solution. If we had chosen to sell to enterprise exclusively day one, we would have wasted a lot of money while that segment of the market matured.

4 — Traction. Venture is very much about first and second derivatives, not absolutes. As an investor, growth trumps everything, so it is critical to identify the metric of value creation and then measure traction. Questions I ask include: Is the company growing? How fast? Is that growth accelerating? For example, my colleague Andy Vitus invested in JFrog, which is in a market I have less expertise in, but the company’s traction was so compelling that it was easy for me to support his investment thesis.

5 — Team. A lot of investors will emphasize the importance of identifying and backing “the best” teams. That approach may have some merit, but the entrepreneur and investor relationship is demanding and can last many years, sometimes into the decades. I make sure that I have chemistry with the team and can see myself working collaboratively for many years before I choose to invest in a company. When entrepreneurs are too pushy, arrogant, erratic, or difficult during diligence, I feel it’s a sneak-peek of what the relationship will be like later. When that happens, I always choose to pass — no matter how great the opportunity or team. Nobody needs more headaches in their life.

Yitzi: If you could have lunch with anyone in the world, who would it be and why?

I’m quite content having lunch with my wife.


Originally published at www.huffingtonpost.com on December 6, 2017.

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