[Video] Investor Talk: What a Series A Investor Wants To See

Investor Talk: What a Series A Investor Wants To See

Santi Subotovsky, Emergence Capital 

Santi Subotovsky is General Partner at Emergence Capital, one of the most well known VC firms focused on enterprise cloud having invested in the likes of Zoom.

Emergence traditionally invests in Series A companies so we sat Santi down to ask him what founders should be thinking about when approaching Series A investors, from timing, to the metrics these investors will be looking for.

00:38 – How investors spot early talent
04:28 – When founders should approach Series A investors
05:51 – KPIs Series A investors are looking for

Don’t miss the chance to hear from more experts like Santi at the many tech startup events at Founders Floor in San Jose.

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Video Transcript

Matt Day (Host):
In regards to Emergence Capital, you guys have invested in a lot of great founders and companies. A lot of those founders were individuals that people didn’t know about prior to that. I’m just going to go off on a little bit of a list here so that the folks in the audience know some of those. Emergence invested in Yammer with David Sacks, Aaron Levie: Box.net, Eric Yuan: Zoom, Salesforce.com, obviously with Marc Benioff. That’s a heck of a list. How do you guys spot early talent like that? And early? I know it’s a loaded question, but these names that we all know about now I’m not saying they were nobodies before, but nobody really knew about them before.

Santi Subotovsky:
I think the way we cheat is by being focused. We just do one thing, and we try to do it really well. That’s what any company should do early on. That’s do one thing and be the best at that. Define your own turf rather than, “Oh, I’m going to boil the ocean.” Because that’s going to be really hard. For us, focusing on that software as a service early on allowed us to see every company in that space. When you see every company in the space, you develop that pattern recognition that enables you to pick the best. Hopefully, you’re going to be right about the category so that the best company in that category is going to make it. But our strategy has always been to focus, talk to every company in the categories that we deem interesting, and then pick the best company.

Picking the best company is not picking the best metrics or the best logo, it’s all about the founding team and the culture, at least for us. We spend a lot of time with the teams. We try to understand what makes them tick. Why are they doing what they’re doing? If they’re just doing it because they want to make money, it’s probably not the right motivation. It’s a very long journey. It takes a lot of work, it takes a lot of time. You need to love what you’re doing in order to make it work. That’s what we’re trying to understand as we spend time with entrepreneurs.

Whenever I decide to partner with an entrepreneur, I try to get to the bottom of it. Even if this doesn’t work out, are you going to be happy about the journey? Because the odds are against all of us. If you think about all the companies that get started, the majority don’t make it. If you start with that, and you’re still going to feel great even if you don’t make it, then you should do it. If not, just get a job somewhere else.

Matt Day (Host):
You guys, absolutely the godfather of SaaS in regards to VC firms and you guys really moved into that early. You guys also invested in Series A and beyond, maybe a little bit in C.

Santi Subotovsky:
We’re super focused on series A. Out of each fund, now we’re investing out of our fourth fund. We will probably invest in about 19 to 21 companies. Not more than that. For that to work, we need to be very focused. We invest in about five to seven new companies a year. Again, very focused.  First, we need good ownership in those companies given the stage that we invest in. And we need those companies to be at a stage where the product face has already been validated. We call it early revenue. We don’t invest pre-product-market fit. That’s not what we’re great at. Our DNA is not going to be able to help those companies figure out product-market fit. What we’ve done over and over again is help companies scale sales and marketing. That’s what we love doing. That’s where we have a pattern recognition. That’s where we have our network.

When we invest in a company like Zoom, very early stage, early revenue, we know what to look for. We know the type of people that they need to hire. We know how to talk about pricing, how to talk about ICP, Ideal Customer Profile. That’s what we love to do.

Matt Day (Host):
Got you. So really, a good time for companies who are fundraising now, maybe in the audience and others is to know when to approach you is maybe when they’re ready to raise a series A or maybe after they’ve raised that seed round for themselves and they’re really meeting some milestones they need to hit, and they’re starting to get some metrics that are going to make them get closer to that series A realm, that’s a good time to maybe reach out to you guys get maybe on your radar at least?

Santi Subotovsky:
Yeah, I think reaching out to series A investors or series B investors super early on, when you still don’t have that early product-market fit is going to waste a lot of your time. Because from my point of view, I’m going to take meetings with all of you, because  I want to learn. I just want to make sure that I know what’s out there. But for you guys, it’s going to be a waste of time if you do that with Emergence, with other firms. Once you raise that seed round, you should focus on getting to that early product-market fit. Once you feel that you have something figured out and you’re on a great trajectory, that’s when you start building relationships. Not right before raising a Series A, but somewhere in between. Because at the end of the day, if you’re going to end up raising a series A round from an investor, you’re going to be partnering with that investor for seven to ten years. You don’t want it to be like a speed dating three-week process where you need to commit to someone for the next seven to ten years.

Matt Day (Host):
What are some of those KPI metrics that you like to see in startups that are SaaS-focused, but more importantly, what do these businesses need to focus on themself from a KPI point of view to be able to build a high-growth business and to get to the point where they can be tantalizing enough to be able to go and potentially get an investment from Series A investors. What are those KPIs?

Santi Subotovsky:
Given our stage, what we focus on is customer adoption. Customer adoption is not just, you have six customers, two customers, ten, a hundred. It’s like, I’m going to call a few of your customers, what I want to hear is, “If you turn this off, I’m going to quit my job and switch industries. You can’t turn this off.” When we hear that customer love from one, two, five or ten customers, that’s what gets, because that shows us that there’s early product-market fit. Now we need to get more of those customers.

Matt Day (Host):
Some of those acronyms that get thrown around in the SaaS world that startups absolutely have to start monitoring it and optimizing. Maybe we can walk through some of those and maybe you can help the audience understand what those acronyms mean and maybe what some of the metrics need to be associate with those, like MRR, ARR, churn, LTV. These are all sometimes crazy metrics, but the reality is they’re super important once you get to that point where you’re looking to build a really big business and fight for series A funding.

Santi Subotovsky:
There are too many metrics to focus on. There are very few that really matter. For us, the ones that really matter are churn, and engagement. Because you might have low churn, but if you’re signing up annual contracts and none of those contracts have come to the point where they need to renew, your churn is going to be zero. That doesn’t mean that people are using your product. That’s why engagement is a great complement to that churn metric. Because if you sold someone an annual contract and they’re not using it, guess what? They’re going to churn. It’s just that it hasn’t happened yet. For us, those metrics matter a lot.

Then as you start scaling, we try to focus a little bit on what we call sales efficiency. The way we measure sales efficiency is by looking at how much money do you need to spend in sales and marketing to get a new dollar of annual recovering revenue. You put in a dollar, how much do you get out in that first year? In the early days of software as a service, people were spending between $2 and $4 to get a new dollar of ACV. That meant that you had to wait at least two to four years, if not more, to get repaid your customer acquisition cost. That’s because a lot of it was push, was field sales, so it was very expensive. Now with networks and viral products like Dropbox or even Zoom, you can see companies spending 60 cents or 50 cents to get a new dollar of ACV.