- Happy with the new office now? - I like the new office. The office is great. It's really nice. It's good to not spend
your entire working life in the same office. In and of itself, there's
a reason to switch, and only switching up four
floor is a zero commute change but lots of environment
change, it's a win-win. - It looks so nice, yeah. It's actually, gonna be really fun. We're here to talk
about investment thesis. I think it's something I've heard a lot. Didn't really quite
understood what it meant until I worked a little
bit inside of a VC firm. It seemed like every VC shop has one. It's what guides their
philosophy in investing. It seems there's a lot of
different parameters about that. What I love about Scale
is that we seem to have a very well defined one
as far as I can tell compared to other VC's I've
worked with and it seems to be very well defined along
three or four different axis' that I can detect. Maybe I'm wrong about that. A lot of it is just - what I'm observing.
- Let's see what you got. The first thing we seem
to be very disciplined about is the stage we invest in. From an entrepreneur
standpoint I might see that as like some people do
seed, some people do growth, some people do late stage,
and Scale has a very clear sense of the window
they should invest in. - Sure, and yeah. First of all I think you
are right about every firm. Any good investment firm, in my view, will invariably have an
internal language that they use to communicate with each other
about possible investments with some degree of
precision, but obviously if you're running bonds it's
a totally different language, but you have to have that. It's an indication that you
though about the thing enough to have a fairly precise
and fine-grained sense of what you're looking for. Yeah, that's true of any investment shop. - But you see some firms
that have a very wide investment thesis. They do a lot of different bets on a lot of different things. - But that is the, the
language of the investment thesis will encompass that. We are deliberately and
consciously deciding to not put a lot of barriers on
ourselves, we just do this. That could be the statement. We believe it comes from... Our referendum are come
from a belief statement. We believe that we get the best results when we don't encumber people
with process or discipline. Whatever it is, it has to
have a shared philosophy. What's really hard in any
partnership is if you don't have a shared philosophy
and different people are doing different things,
if one person is making, trying to hit singles and
doubles, and the other person is hitting home runs,
then one of the other, those two people would be
pissed off with the other. If the home run guy hits he'll be like "I'm making all the money here" and if he misses, the
singles and doubles guy is saying "I'm carrying this guy again". It doesn't work so you have
to have a common language. For Scale, you're exactly right. We invest in, if you think
of the continuum from early to late, we invest
precisely in the middle. What we're looking for is
early product market fit. We're no longer taking product
risk but we like to take a lot of business risk. We like to take execution
and scaling risk. The typical scale deal is
doing one or two million dollars in trailing revenue. It's acquired from early
customers, typically the CEO's, the salesperson, maybe one or two reps. You've got that early customer traction, but you're a long way from a predictable, repeatable scalable model, and that's what we underwrite getting to. - So it's not even about the
size of the check you write or the position you take. Sometimes I've heard that be a factor. It's really just about the risk profile-- - Totally. I think so some extent,
you don't want to do a two million dollar runway
deal for 2% ownership because you're gonna put in a lot of work if you're committed to
your companies and you're not gonna get paid for it. We do want to get meaningful
ownership targets, but we start first and
foremost with stage. I always stay stage is
the proxy word for risk. It really is. What kind of risk do you
underwrite is another way of saying what are you
competent in understanding? Early stage investors are
fundamentally underwriting product risk and frankly,
to some extent, team risk. Mid-stage investors are
underwriting good market execution risk, sales
and marketing execution, and late stage investors
are usually underwriting evaluation risk, whether
they know it or not. The company works, it's
clearly worth a lot of money, is it worth more or less
than you pay for it? If you look at the failure
modes of each of those three stages, it goes to
failure to underwrite, understand that risk correctly. We're all about
understanding business risk, but good market execution
risk, because that's where the dollars go. - And that makes sense. I see that also guides
other thing that makes up the investment thesis,
which is how you evaluate companies that apply. We talked about this a little
bit with Dale and Susan in other videos, but how
does that work for you? How do you think that
your investment thesis guides you to evaluate
companies one way or another? - Sure, I think we always say
we're looking for two things. It's big picture trends
and near-end traction. The big picture trends is
a way of saying we have to believe this can become a big company. There's simply no point in
investing in a two million dollar company that can
grow 15% year on year. It will never matter. You're investing in companies
that are going to become 100 million dollars plus
in revenue base case, so you gotta have the
big trends that are going to push it from two to a hundred. 50 X growth. That's the first thing you have to have, which is big picture,
long-term trends pushing in your favor. The second one is almost
the opposite of that, near-end traction. What we're saying is if you're
an early stage investor, you're looking for the big picture trends that are going to happen in the future, but we're looking for
the big picture trends that are happening right
now, and the way you see that is actual traction. You see customer's
buying, you see customers getting excited, you see renewals, you see some evidence
that the market is saying now is the time where you can get it. Big picture trends and near-end traction. - It seems like you also look a lot at that ability to execute trades-- - Well I was going to say exactly that because someone always says the way off is between management and market. The reality is, practically
speaking, near-end execution, near-end traction is a
proxy for management. How well are they executing, if the market is here, the time is now, how well are they executing? It's not a perfect
guide because frequently we're backing first on entrepreneurs. At various stages in my
career as an investor, I've had at various times
some of the youngest publicly held CEO's or
CEO/CFO teams on the Nasdaq or on the NYFC so we're backing
people in their first job. It's not always enough
to say I'm going to check the manager with experience. How do you calibrate a first-time CEO? Yes, you can try and
calibrate the intangibles, do I like him, do I think he's a winner, but you know what I've learned? That companies that execute
well in the near term on average continue to
execute, and companies that let you down on the near
term let you down forever. I really calibrate off
these teams' execution. That near-end traction, do they
do what they say they'll do? Do they get the growth they say they will? Do they understand their business? That to me is the best proxy. It's the only proxy you have
of whether a 200 million revenue company can go all the way. - Right, that makes sense. I guess that also says a little bit about the next part of the
investment thesis, which is how do you manage the
investment once you've made it? It seems like some VC's try
to be relatively hands off although that's rare
these days and people have different ways in which
they like to partner and add value so to speak,
with their investment once they've made the play. How do you think about that
for scale, for example? - Sure, and I've blogged about this. I have a very, I won't
say rigid but I have a very clear of what I'm gonna do and what I'm gonna help with and
what I'm actually gonna do. What is the job of Venture board member? It's an odd job, I always
tell the CEO because the CEO will ask this. What's your value at other than money? It depends on how cynical
I'm feeling that day. First of all I often
start with the money has a lot of value too, let's
not start with that. That's just me being
difficult, but what I really then say is this. I ask them what are you
looking for in a Venture board member and what
should you be looking for? What I say to them is "I have four jobs "as a Venture board member". The definition of a job
is if you don't do it, it doesn't get done. It's not an assist. Helping with introductions is something I wanna do but it's not my job. The fourth things I always tell my CEO's, first, I'm going to be
able to have a partial vote as a board member in hiring and
firing and compensating you. The first question is hiring
and firing your board member, your CEO, that's a big decision. You should understand, Mr.
CEO, how I approach that. When I want to back you,
when I want to replace you, how I would handle that situation. That's the big job. The second big job that
the board member does is finance the company. Obviously when you're doing the new deal, you're financing the company. The real question for you as a CEO is will this investor be
there when times are hard? Will he write a check when
not everyone is willing to write a check? Does he have the gumption
to support the company when times are tough? That's the second thing
you've got to calibrate with a Venture investor. The third thing, and it's very obvious is, agreement on the broad
strategic direction. I always say broad strategic direction. What you don't want is
someone to get in the weeds of your go-to market
execution, unless they're some kind of functional
expert, but the typical VC after five years in the Venture business is a functional expert in nothing. Everything they knew is
now five or 10 years old. I have to agree with the
broad strategic direction. If the CEO is building
a B2B play and I want it to be a consumer company,
those would be the kind of things you need to hash out. If the CEO thinks this
product applies best to the enterprise and I
want to do an S&B play, and if the CEO thinks now
is the time to execute aggressively, and I think now is the time to be circumspect, those
are the kind of strategic alignments you have to
hash out in advance. Then the last thing you
have to do as a board member is elect when to sell
the company and when not to sell the company. Both of those in different
ways can be a hard decision. If you step back, those are four big jobs, all of which a board member has to do under U.S. corporate law,
none of which the board member can effectively delegate to anyone else. What I always say to my CEO's is this, I can give you a whole
bunch of value ad schtick on top of that, but if you
hire two or three Venture board members who do that job
well, you're halfway home. If you take on board
some investors who don't do that job well, then no matter
how many good introductions they made, you could well be screwed. They might terminate
you for silly reasons. To take the other extreme,
they might not say to you "We need a better CEO" and
that might just devalue your investment, and both have happened. I'm sure the first CEO
of Ebay is pretty happy that they hired Meg Whitman and he made five or 10 billion dollars. It's not a bad outcome. I'm equally sure that the guys at Google are really happy they took,
and the guys at Amazon, Jeff Bezos and Amazon took it all the way. It's never an obvious
decision, which is why being very careful about
the people that you are allowing have a vote in making that decision is so important. - That makes complete sense. The last thing, and
maybe to finish quickly, is this idea of where
you do your investments. I think maybe Scale's a
bit more narrow in this than the average company, but I've heard a really well thought
out reasoning for that. Maybe we can talk about that for a while. - Well I said we focus primarily
on Enterprise software. By Enterprise, I hate the
word, because intents implied, big company, we focus on B2B software. Software being sold to
businesses to either help them grow revenue or to
help them cut expenses, and to be more efficient and
to deliver customer delight. Sometimes because of that
we get the look through to the end consumer,
because what you're seeing more and more is many of
the success of the software companies selling to these B2B businesses is in large part a function
of how successful they are in selling to their consumers. You see that demand, which
is not a Scale company but we looked at it
foolishly and didn't do it, and they get paid in a percentage of GMV. Their customers are the
retailers but you're effectively betting on their success to
touch that consumer trend, but we fundamentally invest in businesses, software companies and
technology companies that are selling to businesses
to help them exceed. - And why do you do that? - You gotta pick something you're good at. It's just that simple. I think that the ability to do all things is given to very few of us. I think there are about
two thirds of the number of wins above a billion dollars
or above 100 million dollars in the entire Venture Technologies stack come from enterprise software. As I'm sure you realized, the one third that come from consumer, 10 to an average, there were less of them
but they tend to be larger because consumer tends
to be a winner-takes-all, while enterprise software tends to be more of an oligopoly, there's
two or three winners. Over the last 10 years, roughly 130 exits above a billion dollars
and roughly two thirds of them are enterprise
software and roughly one third of them are consumer, with sub %10 being everything else in the noise. We think there's a lot
of opportunity there. We can be successful
there, it's what we know, it's what we're good at. - That makes a lot of sense. Thank you so much. - You're welcome.
