GGV Capital: Scaling The Top SMB SaaS Companies (Workshop Wednesday)

people in. Welcome everyone. Welcome, welcome, welcome. Hello, welcome back to Workshop Wednesday. Thank you for joining us. We'll give it just a moment for people to join. Alright. Happy Workshop Wednesday. You all know it is my favorite day of the week. Thank you for coming back week after week. We are so excited about this session today and can't wait to get started. As you are joining, feel free to put in the chat where you are tuning in from. Love to see how global this community is, and I am sure our friends from GGV Capital would love to see too. All right. See people. Texas, California, London, New York. Thank you all for joining. All right. Thank you so much, and welcome to another Workshop Wednesday. We're so happy to see you this week. We are here every Wednesday, week after week, sharing interactive sessions, and this is no different. Today we have two different presenters we are so excited to have join us from GGV Capital. We have Jeff Richards, Managing Director, and Tiffany Luck, Partner. Thank you so much for joining us, guys.

Thanks for having us.

Thank you.

Of course. We will be discussing scaling the top SMB SaaS companies What It Takes with GDB Capital. Again, these sessions are super interactive, so put questions in the chat. I think we are going to have a lot of them today, so make sure you get those questions in early so you are sure that they are answered. I hate when the sessions— we run tight on time here, and I want to make sure all of your questions are answered. So if you have a question, put it in the chat sooner rather than later. All right, with that, let's get to know Jeff and Tiffany a little bit better. We do have some quickfire questions for them. The first question is, what is one of your favorite investments you or the firm made in 2022? And let's see if they have the same one or some different ones.

Why don't you go first?

Okay, like I said earlier, it's hard to have a favorite, but at least you've now narrowed it down to a year. So, um, you know, it's, it's I'll just think of actually our first investment from 2022. We invested in a company called Pinwheel based in New York with Kurt Lin, amazing founder, and Pinwheel is a payroll connectivity API. We spend a lot of time on API-first investing. So Pinwheel is really helping bring financial fairness through its products to everyone and enabling everyone to build in a payroll connectivity to their application. So Love Kurt, love what he's doing. I'll have that as my answer.

That's a good answer. I was wearing my Pinwheel sweatshirt yesterday.

Me too, great sweatshirt.

I'm gonna cheat and we made a follow-on investment in an existing portfolio company that's in the S&P space called Brightwheel. And one of the reasons it's one of my favorite investments is we first met Dave when the company had 7 employees and no revenue. This was in 2017. And 5, 6 years later, the company is approaching $100 million of ARR, hundreds of employees and serving tens of thousands of SMB merchants all over the country and frankly all over the world. So really amazing company, amazing and inspiring founder, very mission-driven, trying to help parents and kids get off to a great start in early education and just a really inspiring company to be part of.

Okay, so not the same answer but both ended in wheel, so we're getting close to the same answer. Okay, what has most surprised you about venture capital this year?

Okay, you first. Oh, me? Okay. I think the thing that probably surprised me the most, and it shouldn't because I've been in Silicon Valley since 1995 and been here for 15 years now, was just how long it took for the private market to adjust to the public market. The public market in tech started to come down in November, December of '21, and really dropped pretty precipitously in the first quarter of '22. We knew it would take time for that to settle into the private market, and it did. And I would say for the most part, we didn't really start seeing private companies adjust fundraising and valuation asks until Q3 or Q4. And now you're sort of seeing a more normal market. And by the way, I should add, we really believe we are in a normal market today. '21 was sort of an aberration. And so the great news for founders that are building today is you're raising in a normal market. You're raising in a market where there's plenty of venture capital available. It just took time for the market to adjust. And I think we're in a much healthier fundraising market today than we were 9 months ago.

Yes, uh, totally agree with that. I would say, um, not to bring us back to a couple weeks ago, but, um, you know, really, really surprised, you know, after everything that happened with SVB and, you know, a lot of the different banking news, how the VC community really rallied together. Um, you know, there's a lot of change over a really short period of time, and I think the VC community, the founder community, operators, like everyone rallied together to figure out how to best act quickly and obviously, first of all, make sure people were going to get paid the following week. And so we worked with a lot of different firms and now we're still working to talk through Treasury cash management, best practices. So a bright spot in all of that was, I think, the quick response that everyone had.

Yeah. With recent SVB news, this question Was a little bit of a layup there, but all right. Who is one of your favorite co-investors? This will be funny to see if you have the same answer.

Okay, I have one very top of mind, um, which we talked about recently. Um, I'm gonna say O1 Advisors, which is Dick Koslow and Adam Bain, um, previously from Twitter. And we've co-invested with them in several companies, and honestly, they're just super helpful. They both have They were both executives at Twitter. And so have real experience like operating large complex businesses and are really, really hands-on with the founders, helping them again through like this reset, thinking through different models. And I think have just been enormously helpful and really wonderful co-investors.

That is a good answer. I would second that answer. I would also add, we tend to be really collaborative. We love to work with firms that we compete with. We work with lots of seed funds or later stage funds. Tiffany and I, just given our focus in SMB, we love to focus and work with other investors that understand the SMB tech economy. It is very different than traditional enterprise software. And so a short list of firms there, Bessemer's been a great co-investor with us, Addition, Iconiq, Lightspeed. So a number of folks that have developed a focus in that area like we have as well, because we do believe it's a very unique an important category, but the characteristics of how you build an SMB tech company are very different than how you build a traditional enterprise software business. And so we love to work with people that understand that.

Great. And a lot of the companies listed are current or past Workshop Wednesdays. Just a quick shout out there. All right. But with that, I will let you both take over. Take it away.

Okay. Great to see everyone. Definitely put questions in the chat. You know, we love questions, we love interaction. So, you know, please, please let us know anything that's on your mind. So maybe one good way to start is actually something Jeff just said, which is when you're building an SMB tech company, you really do think about it differently than building an enterprise company. And we get this question a lot, like, why do you guys talk about it as SMB tech? Isn't it just enterprise software? And so, you know, really what we're talking about today is how to capture this massive market opportunity that exists selling into small businesses. And so when we say SMB tech, it's really, you know, your primary product packaging, way you go to market is geared toward serving small business owners. You know, you may eventually move upmarket, but you really have an offering that's suited to SMB. And we think that the way you set up a very successful SMB tech company looks a lot different than setting up large enterprise companies, especially in the early days. So we'll talk through some of the things that we see and some of the things we're super excited about. So maybe just to start, you guys may have seen these stats, but always surprised at just how large the SMB segment is and how important it is to our global economy. So, over 400 million SMBs worldwide. That's more than 90% of businesses. It accounts for more than 50% of jobs. So a huge contributor to employment and also a huge contributor to global GDP, so 40 to 50% of GDP. So, you know, obviously SMBs are critical to our ecosystem, and we're really excited now that we've seen over really the past decade plus a big wave in terms of software companies serving these SMBs and bringing them kind of, you know, into the modern era, digitizing, helping them streamline, automate their businesses. And I think SMBs have especially been, you know, very open to adopting it, building on a modern tech stack, you know, and kind of propelling themselves forward. As a result of that, we have now seen a lot of value created in this space. And I would say it's still pretty early. So we actually see a ton of growth ahead. But now we have a lot of great public company examples of large SMB tech businesses. Intuit probably being one of the first movers and actually the largest in terms of market cap, but a lot of amazing other companies, Bill.com or Bill now, Square, which we were lucky to be an investor in pre-IPO, now Block, HubSpot, Monday, Shopify, list goes on. So these are just a few examples of the many, you know, few examples of the many SMB tech companies that are public. In aggregate, that market cap's about $400 billion, which is almost double from a few years ago in 2018 when we first started tracking this. And then this doesn't even account for all the tens of billions that are private in the private markets. No, actually billion. So used to be trillion before the market collapsed.

$400 million would not be a very large market cap for all these companies, but $400 billion.

Yeah. And again, kind of like in the height of when multiples were at their peak, this actually, this group almost neared a trillion. So a lot of value there and a lot more opportunity ahead.

So one of the questions that we get a lot from folks that are outside of the SMB tech market is why, why now? Why is this happening now? And we built this slide and Tiffany and I wrote an article about this a few years ago. We probably need to update it. It's on LinkedIn. You can find it if you type in Jeff Richards, Tiffany Luck, SMB tech. But if you sort of wind back the clock, AWS launched in '05, '06, the iPhone and App Store launched in '08, kind of '08, '09, '10. And then at that same time, Stripe and Braintree launched integrating payments. You also had the rise of social media and what those things did, and they all kind of came together at the same time, and obviously cloud computing and mobile are big macro trends. But what they did was they, for the first time, if you wind back the clock sort of pre-2010, most SMBs didn't even have— most small businesses didn't even have a computer in their store or their restaurant. They might have had a point-of-sale system, but that was it. They didn't have any reason to have a computer because their point-of-sale wasn't based on a PC. It was a dedicated system for point-of-sale. A lot of them didn't even have internet access in their store. So crazy as that sounds today, 15 years later, but really the iPhone changed all of that. Suddenly people were walking into their store, the restaurant with this this portable computer in their pocket and realizing that these apps were very powerful and could do a lot of things to help them run their business. Integrating payments was huge because it meant that the software applications that were supplying those merchants could now integrate payments and billing and other fintech solutions into that ecosystem. And it wasn't happening prior to that. And then the rise of social media was important because if you go back, for those of us that were old enough to be in the technology industry prior to the iPhone and social media, the way that you reached a customer was literally you called them or you walked up to their store and tried to sell them something. There was no— LinkedIn was small. There was no Facebook. There was no Twitter. There was no Instagram. You had to email somebody, but that was considered pretty invasive. And so it was very hard to reach a small business and you couldn't really do it in a cost-effective way to sell them. Your CAC to acquire that $100 a month user would've been out of control and the whole economic model for this industry didn't work. So back to what Tiffany said, if you go back to pre-2010, the OG of this industry was kind of Intuit. They were the only company that really figured out how to serve small businesses with a basic accounting and tax product. And then Jack at Square, Zendesk, you know, some of these other companies started to penetrate that market segment and e-commerce, Shopify, HubSpot, and others. And so what you've seen over the last decade is this whole market expand and grow and become the $400 billion category that it is today. APIs, the rise of APIs, companies like Twilio. Tiffany mentioned Pinwheel, the company that we've invested in, but making it really easy for software vendors to connect with each other and provide solutions to these small businesses. And then of course, the topic du jour of the market today is AI. And one of the challenges you have in selling technology to small businesses is typically the user is not super tech savvy. You don't have a CTO in a 10-person company. Or even a VP of technology or even somebody managing your IT. And so getting people to adopt technology is hard. Well, AI is going to introduce a whole set of we can do this for you functions, whether it's billing and payment, marketing, outreach to customers, customer care, you're gonna see AI enable a lot of the functionality that's important for small business and lower the cost to train and get the users to be able to use these technologies. So We think AI is gonna be a tremendous accelerator of solutions for small business and will increase the adoption rate for SMBs, which today, you know, many of our companies that are selling SMB tech are selling into companies that are still doing things, believe it or not, without technology. They're doing it with pen and paper, they're using Excel or Google Sheets or whatever it is they might've started with. And then you've got, we had a record number of small businesses start in the post-COVID economy. So in the last 2.5 years, the US government recorded 10 million new business applications. So we have businesses transitioning from pen and paper, we have the folks who've been adopting technology for the last decade, and now we have these 10 million new businesses that are coming into the market, and most of them are going to be built on some sort of technology stack. And we think that's a really great opportunity for, for the SMB tech economy.

Yeah, and I think, like, I missed— no, to that point, I mean, when you're talking about adoption, I think You know, it's not that COVID created this, but I do think that COVID accelerated a lot of adoption. And, you know, especially for those moving from, you know, pen and paper or manual processes to now leveraging software, there's really no going back. You know, no one's turning off of their software to go back to pen and paper. And so I do think like the mentality has stayed and the mentality around, you know, new businesses that are being opened and launched companies who are, you know, grew through COVID. It's just we've really seen a shift, I think, in terms of the small business owners' attitudes around let me run my business on software, right? They're very much like software is a core part of how I run the business, you know, and helps them again with everything, right? From, well, as Jeff mentioned, like accounting and billings and payment, kind of back office and front office. And so I think like that trend will only accelerate And we'll just see, you know, a small business like any other business run, you know, completely on software. So impressive to say.

The post-COVID thing too is important because to Tiffany's point, a small business owner is a consumer, right? So the person that walks into the local Verizon or AT&T store and gets an iPhone can be a business owner and they're using that for business. And so what you're seeing, you know, for example, Toast launched a bunch of new technologies during COVID to help merchants enable ordering on the web or via mobile, giving you the option to scan a QR code to get the menu. Seems really simple, but restaurants weren't doing that pre-COVID, or even just to pay at your table, right? How many of us have now had the experience of paying at our table? That experience, by the way, was prevalent in Asia and Europe for a decade. For whatever reason, it had never caught on in the US. But if you're an individual consumer that owns a restaurant and you go eat at a restaurant that has that functionality, you go back to your restaurant and say, "Gosh, I need that too." And so we've seen a whole wave of adoption around digital technologies. We're an investor in a company in New York called Slice. It's a digital front end for the pizza industry. Huge adoption curve during COVID and those merchants have now become much more dependent on mobile and web ordering. And the consumer has learned that that's a better way to order as well. So to Tiffany's point, that was a huge accelerator, obviously benefited a lot of public companies, benefiting a lot of the private technology companies that are serving these SMBs as well.

Yeah, so good news for us as consumers as well, a better experience. Okay, so I think a lot of the meat of this is, I don't know if many of you are building companies for SMBs now, but one question we get asked a lot, when you are starting or what really creates an SMB tech winner, And what are the key elements? So this by no means is comprehensive. There's a lot that goes into building a company.

A lot of subpoints.

Yeah, exactly. A lot of subpoints. And obviously building a company is complex, but I think like in terms of the real difference we see between how SMB tech companies are set up and how enterprise software companies are set up, those selling to Fortune 500 and above, It really comes down to 3 things. It's an efficient go-to-market, and we'll dive into each of these a little bit more. A commitment to customer success, you know, both through onboarding and ongoing, you know, collaboration with your customers. And then really also product strategy, and, you know, product strategy that's going to help you drive strong net dollar retention and help you grow your existing customer base. We do see that with SMBs, you know, it is a little more than enterprise, I'd say. You know, you do have some more churn, you've got some business volatility in terms of businesses going out of business, customers going out of business. And so, you know, we do expect to see some churn within the SMB segment. That being said, you can still create a very strong SMB tech company, you know, 'cause you have, especially if you've got multiple products where your customers are growing with you. We see these three things, I think when we meet with SMB tech companies and chat with founders building in this space, like we often focus on these three areas. Again, obviously, you know, it's important to build a great team and all the other things that come along with really great company building, but kind of as it relates to SMB relative to enterprise, we think these are—

I would just, let me just add.

Yeah.

If I were to add a fourth bullet, patience.

Yes, that's a good one.

SMB tech companies take a long time to build. And one of the things that we learned early on in investing in a number of these companies is, you know, not everything works out of the box. SMBs are hard to predict, their buyer behavior is hard to predict. They can be cyclical based on the economy. They have a whole host of different buyer behaviors than your typical Fortune 1000 company does. And so we have a lot of founders in the SMB tech business that are really mission-driven, they're committed for the long haul. And I think it's important for boards and founders to realize it is a long game. These businesses are not built overnight. In the enterprise software industry, you're going out and maybe selling a half a million dollar customer, you sell 5 of those in a quarter and it's a great quarter. In SMB tech, you're trying to gather hundreds and then thousands of these little tiny merchants and get them to pay you $50 or $100 or $200 a month. It's not easy. And a lot of the components that go into building a great SMB tech business, these 3 bullets, take time to build. And so if you look at some— I mentioned this company Slice, which is a fairly large company today. They announced publicly that they're over $100 million in ARR, but, you know, Ilya's been building that company for over 12 years. So if you're going to get into SMB tech, you know, my advice is be passionate about the customer you're serving, be passionate about the problem you're solving, And be patient, because it's a long journey.

That is a very good bullet. We're going to add it. I think that's a good one. Also, Jeff didn't wear his shirt today, but he does have a shirt that says "Go long." I do, that's right. And it's a good mentality to have when building for SMBs. Okay, so we'll just dive into a few of these, I think maybe in a little more detail. What does efficient go-to-market mean in our minds in terms of approaching SMBs. Now, obviously it can mean a lot of things and there are a lot of different ways to go to market. I think one thing, and Shopify is a good example, we'll walk through this in a second, but one thing that we think about a lot with SMBs is just making sure you're actually touching enough people. You've got a massive top of funnel and you're kind of, you're spending enough time or resources kind of both from a cost and person perspective as it relates to where you are in the funnel. So for example, you know, Shopify does a great job of this. If any of us— I don't know if anyone here has a Shopify store, but if anyone's thinking about, you know, creating anything, right? We just began designing t-shirts, mostly for GGV. But for example, if Jeff were going to launch a t-shirt company, you know, he could very quickly open up a Shopify store. And they do a great job where it's very self-serve, right? So anyone could open a Shopify store You kind of like, you know, go in, go through the process, and then they're really just touching you. You're not getting actually kind of one-on-one calls or you're not getting demos. They're really just touching you with marketing materials, emails, etc. Once you kind of self-select through the funnel and, you know, launch your store, you know, running your store, kind of hitting certain volumes, then, you know, you have different options in terms of different levels of support. But I think one thing to think about and one one thing that we talk about with the vision go-to-market. It doesn't make sense if you're trying to reach 850,000 merchants, you're not going to have, you know, an AE or an SDR reach out to 850,000 people. So how can you attract that group, right? Whether that's through community building, that's always a big one we see with SMB merchants. Especially I think if it's vertical specific, you know, how can you get the right marketing materials out there? How can you actually educate SMB merchants around what others are doing, best practices, especially for those who may be new to launching a business. Or I think Brightwell does a really great job of this around, you know, early education. And, you know, really making sure that you kind of have your bases covered so that you're really casting a wide net. And, you know, having anyone who may be interested in this product kind of find you. Now, this may sound actually in conflict with something I'm about to say, but I think a second important step is also focusing on your ICP early. So for those who you are going to have a higher touch with, right, where you are going to have, you know, either a sales-assisted inbound motion, or you're actually going to outbound to businesses, I think being really core and tight around who that ICP is, I mean, making sure again that you're kind of using your precious resources in the best way possible, you know, to reach out to those who are likely to convert, who are likely to be great customers, is also important. So I think we see usually, especially in the early days, like a good mix of both of these. Again, depends on the product you're building, depends on what you're, what you're exactly optimizing for, the price point of your product, you know, ease of use of product and implementation time, things like that. But I would say, you know, kind of a broad spectrum of go-to-market. And really, again, kind of thinking about the unit economics of each motion to make sure they make sense, not only at, you know, kind of the top level, but accounting for what will be inevitable churn. Because again, like with SMB, we always see some churn. I'd say, you know, best in class, we see something around 1% monthly churn, you know, kind of on the, on the higher end of churn, you know, it's sometimes up to 2% or north of 2% per month. So your motion needs to build in the fact that like you're going to have some people drop out and just make sure that the unit economics work for that.

Yeah, I think somebody asked a question, how important are channel partners in SMB? And, you know, in our experience, there are certain ecosystems, e-commerce is one where there is an existing channel ecosystem. There are a lot of small boutique firms that do website design, for example. And so both Shopify and BigCommerce, who are the two main players in this space, they do a lot of work with channel partners because that ecosystem is large and a lot of small businesses and mid-sized businesses turn to those, those web development firms to build their websites. Having said that, most of the markets that SMB tech companies are going after don't have super strong channel models set up. So there isn't a lot of channel partner activity early on. Second thing I'd add is there isn't a lot of money to go around, right? If you're, if you're only generating $100 or $200 a month in revenue from your customers, there isn't a lot to give to other players in that ecosystem to bring you new customers. Whereas if you think about like an enterprise software company that might work with a large SI and get them 20% of the, of the deal value on a $500,000 deal with an 80% gross margin, I've got some dollars to work with. In SMB tech, what you generally see is companies selling at a much smaller price point. In many cases, a number of the companies we've mentioned have an integrated model between software marketplace and fintech. And so the margins can be lower than a pure software business with 80%. So I have not seen a lot of examples. I can't think of any off the top of my head where channel partners played a really critical role in the first $10, $20, $30, $40, $50 million of ARR for an SMB tech business. Most of the time, it's Go it alone. And in fact, one of the ways— Tiffany mentioned that earlier— one of the ways you drive net dollar retention with SMBs is you offer them additional features and products and services. It sometimes is through raising price, but most SMBs are pretty price sensitive. And so what you see is companies going in— we have a company called Homebase. You know, Homebase started with a core product, it added a second product, added a third product, added a fourth product. And so what you see is that customer wanting to buy more products from the same vendor, and that's how you increase net dollar retention. but you're not giving those product opportunities to a channel partner. You're creating them and offering them yourself. So I never want to say like holistically channel partners are not the model, but you generally don't see it in the early days of SMB tech companies.

Yep. I think that's, that's absolutely right. Um, okay. You wanna talk about customer success?

Yeah. I think, look, this is, um, this is important in any technology company, but it's incredibly important, uh, in the SMB space. And it's really hard because you're dealing in most cases, you're dealing with this large fragmented customer base that has different challenges. Some of them are well-run, some of them are not well-run, some of them are tech-savvy, some are not tech-savvy, some have 5 employees, some have 35 employees. Customer success is hard, and it never, it never is not hard. We're on the boards of several companies that are well north of $100 million, some are public. It's always hard. And so, and you're trying to build automation in so that you can have a low cost to serve these relatively low ASP customers. You're trying to— this is— I made the point earlier, maybe AI. This is an area where AI can be valuable, right? Helping customers quickly troubleshoot. But one of the things that's most important with the first bullet point you see here is onboarding. One of the challenges we had with an SMB tech company that Tiffany and I are involved in is, you know, in the early days we had much higher churn than we thought we should have, and we couldn't really figure out why. And when we dug into it, what the company realized was a lot of customers were never really going live. They were signing up, they were paying for the product, but they were so busy running their small business that they never took the time to actually go live. And so, you know, fortunately this was when the company was maybe $10 or $15 million ARR and we figured it out and solved that problem. But you have to remember, most small businesses are not super, as I mentioned earlier, they're not super tech savvy. And so if you think you're putting a really easy-to-use product in front of them, they'll simply onboard and be successful on their own. It usually doesn't work that way. And so driving, driving that onboarding process, building a community of folks that are already customers that can help them learn how to be successful, learn how to use the product, and then really driving that adoption, driving engagement, making sure that they're successful with the product. There are a lot of tools now that help you monitor not only customer happiness with things like NPS, but look at very clearly what are the functions and features that those customers are using. So Toast has done an amazing job with this. Really one of the better SMB tech companies in the last 5 to 10 years. That company now today is a, I think, $7 or $8, $9 billion company, but really took on the restaurant industry and providing a whole host of automated solutions. And as I mentioned during COVID added a bunch of things that their customers needed to serve their customers when the market shift to more of a digital ordering model, and then have successfully driven a lot of fintech into that. Relationship as well. Toast today, I believe more than half the revenue comes from, from fintech solutions as well. So super important. Onboarding is really important, really hard. We think of customer success as dealing with customers once they're onboarded, but you've got to focus on making a great onboarding experience and getting the right executives inside of your company that own that capability as well.

Yeah, and I always love this graphic, like with the you know, kind of happy employees, happy guests, restaurant success. You know, it kind of depends on the product. But like SMB is really unique in the sense that obviously you're— you have to delight the SMB owner, because they're the ones who own the software budget, you know, they're the ones who are going to make the decision of whether to stick or not. But it really helps if you also, you know, if you're— if your product also delights the customers, right. And I think like, you know, we're always thinking we look at SMB tech companies like, is this mission critical? Or like, is this really, you know, going to drive value for the business owners? And if something you have is driving value for the business owner's customers and helping them grow their business or helping them, you know, again, kind of delight the customers, you know, it's really hard to, really hard to rip that out, right? And so you end up having really sticky customers, really great retention. And I think that that's just a good way to think about it. So love this topic.

Your point I always love the Brightwheel, Brightwheel example.

Oh yes.

Your customer has a customer, right? And in many cases, your customer has a lot of customers. So you're not only thinking about your customer or the SMB's experience, but what is the experience that they're providing to their customer? This Toast example is a great one. Another one is Brightwheel where, you know, we have, they have tens of thousands of merchants who then have tens of thousands, if not hundreds of thousands of parents that are using their mobile app to have a great experience with that merchant. And so the company is very focused not only on the SMB customer, but also on the end parent experience. Super important.

Yeah. As a child whose daughter goes to a school with Brightwheel, if they took away— and I got photos during the day— if they took away Brightwheel, like, the parents would be, you know, it would be a massive chaos.

I want to pause. I know, I know I saw a number of questions pop up. Is there Do you want to take a minute and answer some questions before we go on to the next slide? We don't have them in front of us.

Yeah, we're welcome. You are welcome to dive into any questions you want.

Yeah, we don't have—

first question, I can moderate. Okay, do not worry. First question, if Ajay, you want to ask aloud.

Sure. Can you hear me?

Yes.

Okay, Tiffany and Jeff, thank you very much for a very insightful presentation. I had an opportunity to be in a business to compare and contrast both enterprise and SMB because of an acquisition. Two questions from you, unrelated. One is, in general, do you see any differences in terms of what percentage of revenue do SMBs spend on tech versus enterprise? And even if you don't know about enterprise, like in general, what percentage of revenue they spend on tech? And then second unrelated question, the perception at least is that SMBs are much more volatile, like, you know, they may have a bad business quarter or a bad business year, or they may go out of business, or uneven employee volatility at these companies. Given that, what kind of pressures do you see on NDR? And what advice do you have for companies to then financially and operationally model specifically for SMB given these pressures on NDR?

Yes.

We could spend a couple hours just on that question.

That's true.

That's a good question. Yeah.

Maybe I'll just answer the first, then you can talk about volatility for a second. We don't have a direct percentage, but what I would say is, and Jeff mentioned, SMBs are price sensitive. For them, it really is coming out of their P&L. And so I would say they're not going to have Unlike sometimes when you see an enterprise, you'll have a company that's going through and they have 10 HR software products, right? And they're like, oh wow, we've got in general 40 software products across the company. Um, with SMB owners, you know, it's a few. I would say it's a handful, and it's really mission-critical software that they're using. Um, it's really not nice-to-haves. It's like, is this going to drive value for me and my business? If so, happy to invest in it. If not, I'm not going to add it on to my stack. And so like, that's why when we think about, I think that customer success is so important. It really is like for those business owners, like they need to see like demonstrable, I would say value/ROI with all of their software buying decisions. And then to Jess's point earlier on, there's not a lot of money to go around. I think we do tend to see like SMBs would love to have kind of one or two things. They don't want to buy and manage, you know, 10 to 20 different software providers. And that's why there is a lot of opportunity for SMB tech companies to add more products on, you know, be kind of the everything for their customer. And that helps them, you know, drive that MDR as well. So the business owner feels like they've got one or a handful of software companies they rely on. And, you know, again, it is valuable for them. So therefore, they're, they're happy to spend. But I would say it's not just Oh, this looks cool. Let me, you know, let me add it into my, to my cost structure.

Yeah, it's such an important point because if you work, if you work in a Fortune 1000 company, there's a budget for technology, you're spending money from a budget. If you run an S, if you run a small business, $100 a month of software is coming out of your pocket. And so the decision framework is very focused on how much value is that specifically creating for me in a, you know, can I see the value? Am I seeing sales? Am I seeing revenue? Am I seeing more efficiency among my team? So I think that the bar, you know, even though the bar is very high in large enterprise because you have CTOs and procurement organizations and all these people that are vetting software, the bar is super high in the SMB for just like, show me the money, show me the value because it's coming out of my pocket if I'm buying software. To Tiffany's point, a lot of folks have realized in the last decade, in the last 5 years, really the last couple of years since COVID that it does generate additional revenue, it generates profits, and it can make their employees more effective. But it's hard. Those dollars are not easy to get. And then I would say that the second question about volatility, the general rule of thumb in small business historically has been that 20% of businesses in the US go out of business every year. So you sort of— people always would say, oh, in SMB tech, we assume 20% churn because you just can't fight that trend. And to some extent, that's true. We certainly see that in the early days of a company as they're building their pipeline, building their funnel of customers. What we tend to see over time though, is as they get better and bigger and more well-known, they figure out better what their ICP is, they're better at filtering out customers that aren't well run or can't financially afford their software, we do see churn go down below 20%. And it's hard, it takes time. I think it's very hard to do in the early days, but as you scale the business, you can get into a mode where you're sort of self-selecting in the better merchants. And one of the things that we've seen across a number of companies is when those merchants adopt multiple products from our company, they churn at a much lower rate. So the reason being really two things. One, they're obviously using more products, which makes it harder to move off of your software. But the second thing is you're getting the better merchants. The better, more well-run merchants are adopting more of your software and more of the offering. And we've certainly seen that at a number of companies, including ones where they're offering both software and fintech. So somebody who says, yeah, I love the software, but I'm going to keep billing my customers, you know, with paper and pen, Probably not a great merchant. But somebody who says, "Yeah, I'm buying the software and man, I would love to be doing electronic billing and payment, invoicing, etc." Probably a more well-run merchant. Their whole business is probably more well-run than somebody that's not doing that. And so you get this nice sort of self-fulfilling prophecy as the brand gets bigger, the ICP gets more focused, the company becomes better able to say no, for example, to customers that can't pay upfront. So a lot of companies get sucked into this model of doing 90-day free trials. It's great, but a lot of those companies doing the quote-unquote free trial, they're not even companies. I mean, one of the things you see, Shopify doesn't release churn numbers, but a very, very, very high percentage of the people that set up a Shopify store never really do much with it. So the churn number looks really high, but the reality is they weren't really a core ICP target in the SMB, the S of SMB. That customer, as you get bigger and your brand gets bigger and better, you're better able to create better fish ladders and gates to make sure that the people coming in are higher quality merchants. Because that's one of the big challenges is you do get folks that just don't run their business very well. Thank you. I think you've given a ton of really, really good dots to connect. Thank you. The other thing, by the way, I would say on cyclicality, it's really interesting because we're dealing with this across the board right now. As we try to predict what's going to happen in the US economy over the next 12 months, which we can't do, But if you think about what's happening with the banking system in the US, with the regional banking system potentially tightening credit, it should have a negative impact on small business. And so we're talking with each of our SMB tech companies, trying to understand how that might impact them. It varies widely. Some are not cyclical, right? They're in a category where people, you know, go to therapy, they take their kids to school. Like, people don't pull their kids out of school because the economy goes into a recession. But do people spend less money at a high-end restaurant? Maybe. Do they spend less money on high-end services that they were spending money on 12 months ago? Maybe. And so just trying to understand cyclicality in SMB is not— it varies widely by vertical would be the way I'd say that. Thanks. Thanks a lot.

Great. I'm going to go through one more question and then we can finish up and save the rest for the end if that works for you guys. Um, the next question: given the acceleration in tech dependency driven by several macro conditions over the last few years, how will the current affect fundraising and/or valuations?

I think, um, okay, this is a long, long question too, um, long, longer conversation, uh, and I have to give the caveat that, you know, I was a founder in 1999-2000 when the dot-com crash happened, so I felt the pain of that. I joined GGB in 2008, right before the great financial crisis. And now we're here navigating the current waters. I think everybody in our industry always says there's always money available for good companies, and that is true. There's a record amount of— when I got into venture capital in 2008, the US venture capital market was about $30 billion a year. Today, it's $100 billion. There is plenty of money available for good companies. The challenge is, I would say two things. One, calibrating the money that's available with reasonable valuations, burn rates, et cetera. That, as I mentioned earlier, has taken some time to kind of settle out. Tiffany mentioned, you know, if you take that aggregate value of the companies that are public in the SMB space, it was $1 trillion 2 years ago. Now it's $400 billion. So it's fair to think that a company in the private space that was an SMB tech that was worth $100 2 years ago is now worth $40. They're highly correlated. And investors, when they invest in a company, are doing a projection out of what that company may be worth in 7 to 10 years. So they are taking that into consideration. So you just have to calibrate burn rate, financial model, profitability, et cetera, valuation, and then there's plenty of capital available. And then I think people are looking for founders that have navigated the choppy waters. We want people that are resilient. We're involved in companies where when COVID hit, they lost 30%, 40% of the revenue in 30 days. And it was brutal. It was extremely painful. It was really challenging. They then just went through the SVB crisis. That was brutal and really challenging. But you know what? It's building stronger, more resilient companies. And I'm really optimistic about the outlook for the founders that have navigated all these choppy waters. I think they're going to build better, stronger companies. Than the prior generation. So we are, you know, I can speak for us and I know some of the firms we mentioned earlier, we're actively looking to deploy capital into SMB tech companies. We will do it consistently throughout this year because we know it's a long game. The companies we invest in today won't be going public until 10 years from now, probably. So we're not, you know, yes, we could have some choppy economic cycles in the US over the next 6 to 12 months, just given everything that's going on, but we're investing in the long run. And so we're looking for those founders that are mission-driven, they're resilient, they've got a good financial head on their shoulders. It doesn't have to be perfect, right? As we mentioned earlier, these SMB tech companies take a lot of time to build. And so one of the things we say to founders when we meet them is it's okay if it's not perfect today. We just want to understand how you're thinking about scaling it and how, you know, gross margin and NDR and all these different pieces of the puzzle. We just want to understand how you're thinking about it. It doesn't have to be perfect today. Plenty of money available, but you got to have adjusted to the market. The worst thing you can do as a founder, the way I always describe it is if you're sitting on the beach and it's 80 degrees out and you're sitting there with a bathing suit, putting on your SPF 30 or 50 or whatever it is you wear, and all of a sudden it starts hailing, don't sit there and pretend that it's still 80 degrees out. There were a lot of people who were still running their company last year like it was 2021. It was 80 degrees and it started hailing, and the smart founders adjusted, uh, you know, recast their business model, made the changes they need to make, and now they're, they're running a great business. They feel very good about where they are and the outlook for the company, and they're ready for whatever may come their way. Long-winded answer. You give your—

yeah, yeah, I'll give a short answer. Um, you know, I think like one thing is, you know, actually building the company is the game, not fundraising. Um, and you know, obviously you will probably need to raise money in order to to play that first game. But I think like not really focusing on valuation, like don't have that be your, your North Star. Build, focus on the fundamentals of building a great business and the rest will take care of itself. Because as Jeff said, like there's always money for well-run amazing companies with potential. And so I think like, you know, we've really seen founders just head down, like focusing on again, like how can I drive efficiency? How can I, build a strong lasting company and resilient company. And the one other piece that I think is tied to that is actually like, how can you get the team also aligned on that? So how do you get your team focused on the fundamentals? Because in 2021, it was easy, you had all these great milestones, right? You were announcing new funding rounds all the time and just all of these exciting things. And in 2022 and now it's been tough macro headlines, a lot of uncertainty. And so how can you really like get the team that you have rallied around what you're doing? And so it's focusing on the fundamentals, focusing on the small wins around those fundamentals, right? Like you have great customer wins, or what are some, you know, how are you delighting your customers? I think a lot of our SMB tech companies when they start board meetings actually talk about a real-life customer and how they've helped that customer. And it really like brings to life what you're doing.

So that's great. Good point.

I think that's always important too.

Great. It seems like that the long run shirt would be really useful for investors.

I usually wear it. I usually wear it. Today I wore Founders and Leaders, which This is our, our community, our entrepreneur community with more than 1,000 founders in it that we run with our portfolio companies. But next time I'll wear the Go Long shirt.

Okay, um, for everyone else who still has questions, we will try to get to as many as possible, but do want to let them run through the rest of their presentation. So just hold tight, I will come back to you.

We'll do that quickly so we have time for questions.

Yeah, I think we just have 2 slides left. Um, and actually, ironically, we've now talked about this slide a lot throughout, um, but this is how important it is. So maybe I'll just touch on, you know, this is actually going toward that product strategy that's going to help you drive MRR over time. And, you know, starting with one product, kind of understanding your customers' needs, what they're asking for, and then figuring out what other products to layer on over time. And I mentioned, you know, because gross churn, you kind of just expect that gross churn is going to be higher than it would be if you were selling to large enterprises. So you want to make sure that you have a product that's going to let your best customers self-select and let those customers grow with you. And so often with SMB tech, we do see kind of the trifecta or, you know, the coming together of SaaS plus fintech plus marketplace. And, you know, that is one kind of formula that we see work really well for a lot of SMB tech companies, you know, which helps expand ACV, expand, NDR over time. You know, and I would say like NDR for even if you've got gross churn of 1% a month, you know, a lot of the best SMB tech companies still have net dollar retention north of 110%. So they're actually kind of, you know, obviously filling that gap and then growing on top of that. And that's again with this multiple product strategy. I always like the HubSpot example. You know, this is actually more of like of different SaaS modules. So not the fintech SaaS marketplace example, um, but I think HubSpot's an incredible example of this, which is if you look at HubSpot at IPO, they really only had a marketing product, um, and now today they've actually expanded into 5 different areas and, um, and actually have stayed really true to focusing on that SMB customer versus moving up market. And so it shows, I mean, uh, that you really can build a large— there's a huge opportunity within SMB, you can build a very large, very valuable, kind of sustainable company over time. And HubSpot's a great example of just kind of layering on additional products based on what their customers needed. And so, you know, not to go back, but like kind of just tying it back to customer success, um, you know, if you, if you have that good relationship with your customer, if you know what your customer needs, if you're— if you've got good dialogue, and again, it can come in a variety of different ways, I think you can anticipate their needs and figure out like what is going to be the next best product for them. And then you, you will be there to offer it instead of having them go and buy, you know, an additional software vendor. Anything you'd like to add?

Great company, incredible CEO, Yamini. HubSpot NDR is 115%, for those wondering. Okay, you want me to wrap up? Okay, all right, all right. So obviously you can tell Tiffany and I are bullish on the SMB opportunity. We will invest in many more companies in the sector. We're working on one right now. I think the point that I made earlier, we made earlier about well-run companies, one of the things that investors dig in on is how scalable is your acquisition model? It's hard to prove that in the early days, but for example, one of the things that I loved when we invested in Brightwheel 6 years ago was they've already had 10,000 merchants using his software for free. Now we had to solve the question of, can we actually charge them for it? But he clearly had product-market fit and had folks that really wanted to use his software. So getting those early signals early on and seeing a lot of customers come in and demand the product is a good thing. The point about KYC your customer base, hard in the early days, because you want to take everybody. As you scale the business, getting more effective at figuring out who the best customers are and scaling with them. And as I mentioned, as they buy more products, you tend to figure out who the best customers are, and they also churn less. Tiffany touched on go-to-market. And the last one that I'd say we're really excited about, and still in the early days of, is this whole notion of building community. There are incredible communities of people in these verticals, in these SMB categories that want to talk to and learn from each other. And I think we're just in the early days of scratching the surface of really creating the power around those communities. It's starting to happen. And historically in the SMB community, it happened on a regional basis with things like Lions Clubs and Rotaries. But there is a ton of demand here, and I personally, and I know Tiffany shares this, we're really excited about that opportunity and encouraging our companies to try and crack the code. But it's not easy and it's not obvious.

Great. Okay. If you want to stop sharing your slides, feel free to. We're going to make this conversational, and we have a ton of questions and a ton of people really excited to ask them. So I'm going to try to get through as many as possible. Addie, if you want to unmute yourself and ask your question.

Yeah, great timing because it was about moving upmarket from SMB and it feels like most large companies have to go into that upmarket. And how do you decide the right time, scale of the company to start to sell upmarket, whatever you define that as, you know, not necessarily Fortune 500, but still much bigger companies? Can we take that? Yeah, I think I mean, I would sort of challenge that notion. I think historically that was the case. Salesforce is probably a good example. I mean, in the early days of Salesforce, most of their customers were SMBs and then they moved upmarket and now we think of them as more of an enterprise software company. But just given the technology adoption among these market categories over the last decade, I think that's changed. So you see companies that are being built, Square, for example, they tried to move upmarket, they tried to have Starbucks as a customer, it didn't work. Went back to SMB. RingCentral today is still largely SMB. Even companies like Shopify, the majority of the revenue still comes from SMB. So I think that was historically the mantra going back, certainly going back to 2010. Before that, no VC would even fund an SMB company. But I think people have proven that these markets are bigger than people think and you can actually build in that category. And then I would just say the biggest challenge that I have seen for companies that are doing that or have done that, it's a different skillset. And so when you take somebody that has built a high-velocity flywheel, acquire, onboard, manage, et cetera, and tell them to go start selling $200K deals, it's just a different business. I always use the analogy of In-N-Out Burger. We're lucky to live in California where we've In-N-Out Burger. They don't sell anything but burgers. They don't sell salads, they don't sell chicken, and you know what you're getting. It's a great experience. I think that focus is a superpower. And so certainly if any of the SMB tech companies that I'm involved with came to me and said, hey, we really need to go upmarket, I would say, gosh, are we already at a billion of ARR? Because I think we can get there, at least $100 million. I wouldn't even start having that conversation until you're over $100 million. Yeah, thanks. Thank you for that answer. I appreciate you challenging the notion because a lot of people do report, hey, here are all our over $100K customers and things like that in some of their public reporting. So it's the same thing we get, you know, to be involved in a number of companies where they ask us, when should we go international? You know, go outside the US and one company I'm involved in, I said, guys, last time I checked the US market, if you were doing a billion of revenue, you wouldn't even be 1% of the market. So why don't we focus here and do that really well before we start putting people in Europe and Japan and elsewhere.

All right. And yeah, no one wants an In-N-Out Burger salad. The next question is from Anup, if you want to unmute yourself and ask.

Sure. Thanks so much. Thanks so much for the session. A lot of useful information that we can actually practically apply to our business. And also thanks to SaaStrap. Wednesday has become my new favorite day of the week. Before I get to my question, just some background. So we are a company who have already raised Series A and are on a path to Series B by the end of the year. My question is more on ICP. We have 4 different factors that we include in our ICP checklist. What's your view on we compromising on some of the checklist parameters to favor it— to favor growth in the short term over ICP adherence?

I think it's going to come down to like, how efficient is the go-to-market? And then what are you seeing on the back end of that, right? So it's not just, you might be able to get more customers faster if you kind of relax the ICP. But do they stay? Do they grow? You know, do the unit economics for that customer base make sense? You know, and one thing that's helpful, I think, around— and then actually, like, how, you know, how penetrated are you within the ICP? You know, do you feel like you've really tapped out and you need to expand? Or are you still really only 1%? And therefore, you know, you have plenty of room to run. And one way I always think about it is like, you know, if you, if you hired a new SDR, and you describe to them your ICP, could they find that person, right? Like, you want it to actually be specific. And I think like, when you're thinking about, you know, kind of ramping the team and describing ICP or go-to-market, you know, to your your team? Does it make sense? Is it tight? And so I think there are a lot of benefits to keeping it small. Again, like depends on the stage of the company. Don't know your specifics. But I would say at Series A, we generally see a very tight, well-defined ICP, give it room to run through the economics out, and then very slowly kind of test outside of that, right? See how the unit economics work. You might find out that like ICP plus XYZ also turns out to be great, and you're going to expand into that. And so I think it's a matter of efficient go-to-market, but then also you kind of have the customer retention and good unit economics to back that up.

Yeah, in my experience, most companies have a very loosely defined ICP in the early days and try to pull it back later on because they realize they're all over the map. So I personally err on the side of a tighter, you know, a narrower vision of who that target customer is in the early days. I think it just causes— the more you expand it early on, the more headaches it creates. Yeah. Which is hard because then the sales team says, gosh, we brought you these amazing customers and you won't take them in. And you're like, I know they're amazing customers, but in 6 months they're going to churn. And so they're not amazing customers. Thank you so much.

Yeah, but Anoop, you're amazing. Thank you for saying that this is your favorite day of the week. I always say it's mine. Um, I know it is 11, so we have about 3 more questions for people that are on the line. Would you mind holding, like, answering those 3 questions? Do we have time?

I think we can do one more. We actually have another Zoom we have to jump to, um, for a company, so I want to be mindful of their time.

Okay, totally fair. I'm so sorry, everyone. I do—

by the way, Tiff and I are both on Twitter, so look us up on Twitter, ask us the questions on Twitter. We're very good at responding.

Great. Okay, perfect. Um, we will look up those Twitter handles too. But just last question, I'm sorry, I do do them in order, so I'm so sorry if I did not get to you. Um, but Suda, if you want to ask your question.

Yeah, sure. Jeff, like, like you all said, SMB tech takes about 10 years to mature, right? So having the longevity is the key to succeed in this business, which also means the business had to be frugal in order to sustain that long. So my question to you is, how much budget do you allocate for CS? How much budget do we allocate for CS? Yeah. So I think back to Tiffany's question, point earlier about efficient go-to-market, I mean, it's got to, you know, what you don't want to do is allocate a whole bunch of capital to acquisition, and then nothing to success. That's a recipe for disaster. We've seen that play out. And I would say, look, one of the downsides of the venture capital model is a lot of times companies raise a bunch of money, and they start just dumping it into go-to-market because it drives top topline growth and topline growth. You know, people go, oh, this is amazing company, and they fund it and they put more money into it. It becomes a self-fulfilling prophecy. But then you wake up and you realize churn is too high, people don't actually love the product, and we're doing a terrible job of servicing our customers. So I, again, back to one of the reasons why we love the market we're in right now. Founders can take the time to build the right kind of company, allocate the right resources to each of those functions. By the way, product's important, engineering's important, finance is important, And we lost some of that in the go-go days of 2021. So hopefully we're into a mode today where you can allocate an appropriate level of resources to CS. The other thing I would say is, we're also into a mode where there are really talented people to run that function. 10 years ago, there was nobody with any experience running CS for SMBs, right? But now you have people that are spinning out of Zendesk and Shopify, and you know, there's now a wealth of talent out there that you can go get at the manager, director, VP level that is really— we're seeing it today in the recruiting pipelines for our companies. It wasn't there 5 years ago. So I would encourage you guys, and in particular today, you know, with the public companies' valuations coming way down, the unicorn valuations coming way down, there's never been a better time for Series A, B, and C companies to recruit that talent. And I think you can go out and find them.

Yeah, 100%. No, I think that's exactly right. Um, so thank you, Suda, and thank you, Caitlin, for having us. Yeah, thank you.

Yeah, thank you for joining.

Yeah, we love, we love all the engagement and enthusiasm, and Wednesday is our new favorite day as well.

So awesome. Okay, glad we're all aligned on that. I hope I just put your Twitter handles in the chat so people can ask questions. If they are incorrect, please flag. Um, don't want to be sending random people tech questions.

Live and LuckTM.

Okay, TM and JRichLive. I registered it morning on my phone and didn't realize it was gonna stick for 13 years. So here we are.

Perfect. We all have been there, the screen names for sure. I was Caitlin Harp Sex 3 for forever. So totally understand. But thank you so much everyone for joining. Sorry, we did not get to all of your questions. We do have those two Twitters in the chat so you can ask questions there. We really appreciate you coming. And thank you again, Jeff and Tiffany. I know this took up quite a bit of your time, and we really appreciate it. Come back next week. We will have another great session. Cannot wait to see you and get those questions ready again. All right, bye everyone.