VC Office Hours With Mainsail Partners VPs KC Kanoff and Jason Thorn

basis, but welcome to SAS-TER Annual at Home 2020. We're glad that you guys are with us, and we're glad that you're taking part in these sessions and this networking. So let me introduce Mainsail Partners. This is Casey Canoff and Jason Thorne, both VPs at Mainsail Partners, and they're here to join us today to answer some of your questions. But first, let me go over some housekeeping. So if you don't mind going next, Jason. As some of you have heard already, this is an interactive session. Please, we encourage you to keep your cameras on. It's about 30 minutes long. Even though your cameras are on, your audio is going to be muted until called on. All chat is shut down. However, we again encourage interaction, so please click the participant button in the bottom banner, and then on the right-hand side, you can raise your hand. That is how Casey and Jason will be able to call on you to get those questions. And last but not least, just so you know, these sessions are recorded and this one itself is actually being livestreamed, so you'll be able to catch yourself on YouTube post the event, or even if you want to send it out to family members now, it's going live. So without further ado, I am going to kick it over to Jason and Casey and let them take it away.

Awesome. Thanks, Caitlin. Really nice to meet everybody and thanks everybody for joining our office hours this morning. We're really excited to be a part of the SASTR event. And excited to meet all of you. And we do hope this is interactive, and so feel free to interrupt and raise, raise your hand as we go through the presentation, and we'll also have time at the end to talk through any, any questions that anybody has. But yeah, thanks again for joining, and I'll kick us off here, and then I'll pass it to Casey to talk a little bit about our operating team and how we work with companies. I'll be kind of giving an overview of Mainsail as a firm and the types of companies that we partner with. So, so we— the two themes that I think I want you to walk away with and the things to think about as we're walking through this presentation. One is that we are incredibly focused as a firm. We have a very specific profile of company and founders that we partner with. And kind of stage of companies on a growth curve. And we'll talk about that. And then the other is that we try to be very value-added partners. We believe we're investing in the best companies in the world. And so to do that, we know that we need to provide more than just financial capital. We need to provide resources and intellectual capital as well to enable us to be value-added partners. And be able to invest in some of the best companies in the world. So we are, to talk about our focus, we invest in high-growth, B2B, bootstrap, founder-run software companies with somewhere between $4 and $20 million of recurring revenue at the time of our investment. So as you can imagine, and as you guys know, those companies are incredibly difficult to build and they're not a dime a dozen, they're very tough to find. But when we find them, we get incredibly excited because we believe a company that fits that profile has the opportunity to grow to $50 or $100 million of recurring revenue in a short time with building the right resources and infrastructure within the company to support that growth. And so we are— if you look across our portfolio, all the companies we invest in fit that profile. We don't have an industry that we focus on specifically. We think that profile, there's a lot of similarities. There's similar opportunities and challenges that come up for a company on the journey from $5 to $10 million of recurring revenue to $50 to $100 million of recurring revenue. And so that's really what we built our firm around. And then we love capital-efficient bootstrap businesses. And we've really built our firm around thesis that the founders of bootstrap capital-efficient businesses, that we could really be strong partners to them by adding a little bit of capital and a lot of resources to help those companies grow. As a firm, we've been around for about 15 years. We're currently investing out of our 5th fund. We've raised $531 million within the last year. We plan to invest that in about 10 to 15 companies. So we keep a pretty limited portfolio. We've made 50 investments across our history. We only have about 10 to 15. We've actually got, I think, 14 today. And we think that's a big part of how we're able to be value-added partners because we have a very limited group of companies that we've partnered with. And so we can spend a lot more time and resources behind each of the companies that we invest in. We've got 4 investment partners and each one sits on somewhere between 2 to 4 boards. So somewhat different from what you'll see at other investment firms where, where partners are sitting on a much higher number of boards. We've got 40 professionals across our team and we've got a slide where we'll talk about how the team is segmented. But what's interesting to note there is about half of those are on the operations team. So we've invested heavily in building the operating resources to help companies grow. And then culture is something I think is incredibly important to us. We sometimes joke that we're the coolest private equity firm in the country, which we say tongue in cheek, but we think, we try to live up to that. We try to be really strong partners, not just financially, but we wanna have fun with the companies that we invest in and be supportive of the cultures that you guys have built at your companies. So these are some of our more recent investments. SourceScrub is an investment we completed last year, and it is an info services company focused on the financial services market. Fullbay and Aspire are both vertical core software platforms. So Fullbay is the core software being used by heavy-duty truck repair, service providers, and Aspire is the core software being used by landscaping providers. We, we, and PestRoutes is also a core vertical platform focused on pest control companies. We've made some investments in healthcare IT as well. FairWarning is a, is a platform that's used for data security within the hospital market. Bio-Optronics is another example there that's used by clinical trial organizations and ParaHealth is an intelligence platform that's used by the ER departments within hospitals. And then you can see a number of other investments here. Some are more on the enterprise space. So G-Treasury is the software that's used by a treasury management department within a larger enterprise. CenturyOne similarly is used on the development side by, by enterprises. And so the— and then, and then we also have a bunch of experience in payments as well. Nexus is an AP platform used within commercial real estate. But what you'll see, the commonality here is not so much the industries that the companies are in, but the profile of the companies and what, what opportunities there are within each of these companies to grow from $10 to $50 million or more of recurring revenue in a short time. And it really goes back to being capital efficient, bootstrap, founder-run, and high growth, with some level or close to some level of profitability. So this is our team. But as you can see, we've got about 40 people. We were founded by Gavin and Jason, who both came out of Summit Partners. And then they've built the team over the past 15 years with a real eye towards culture. So everyone we hire and every member of the team, we think about is this somebody that could work well with a bootstrap founder. And then the other thing to note here is just the split between the operating team and the investment team. So you can see we've really built out the operations team and really try to be a value-added partner. And I'll pass it over to Casey now, who'll dive more into the operating side of our firm.

Awesome. Thanks, Jason. Great. So as Jason mentioned, we kind of split between our investment team and our operating team. So our operations team is really built centered around how to help B2B software companies grow. We've organized the team by functional expertise. And so we have, for example, a head of sales and marketing, a head of product, a head of customer success, and then kind of our CFO doubles as a, head of finance, CFO mentor to the rest of our portfolio companies. And then we have an in-house talent team that really helps with recruiting and identifying candidates for our portfolio companies where, you know, they may have a gap in one of those areas and are looking to make a key hire. And part to what Jason M. Lemkin was talking about before, I'd say our investment approach is really what allows us to do this and to be kind of more hands-on with our portfolio companies and giving people kind of the time and space to invest in these key areas. I'd say maybe, Jason, to flip to the next slide. So we also— these are kind of a few ways that we've kind of run projects with our portfolio companies in kind of key areas where we've looked to add value. So our kind of our team will help with anything on the sales and marketing side from the lead to close process, market segmentation, lead scoring, how to kind of design your sales org. So as you're scaling your business, kind of what are the key hires needed in what position. From the product side, kind of whether it's strategic research and analysis, doing pricing optimization, kind of rapid prototyping and testing to kind of help leverage our resources internally in, uh, very much in partnership with your team. On the customer success side, we've kind of helped specific companies with figuring out kind of a customer success score, like a health score for your customer success team, kind of trying to figure out how to segment customer bases to reduce churn or find different ways that you can drive upsells within your customer base. And then on the finance side, it's primarily focused on kind of KPIs, reporting, and then of course helping with banking relationships, with capital raising, and kind of capital strategy for the business. I think one kind of good example of a project we would do is we also have kind of a few people that I'd say are like our ex-Bain consultants SWOT team, and they would help kind of lead a specific strategic project for one of our portfolio companies. So that could range from, you know, what other verticals to go enter into and how much will that cost, and kind of what is the product functionality that needs to be built in in order to go do that. And so what the team will help do is just identifying those markets, market sizing them, and then helping to work with the team to rank them based on what are the most attractive opportunities. And so some of it is kind of just looking more broadly of kind of helping to set strategic direction, but ultimately, you know, our whole operations team is very much opt-in. I'd say for the most part, our portfolio companies do opt-in, but it's very much on a, you know, as-needed basis or kind of what a portfolio company is kind of looking to do and how they want to leverage our internal team. So I think that for the most part wraps it up on our end, but we're happy to jump into questions and on kind of any areas you guys want to— want to dive into. We're excited to be here.

[FOREIGN LANGUAGE] We have a question here from Sanjay, and if you don't mind taking that one, guys, I'm going to unmute him.

Absolutely.

Hey guys, Jason, Casey, thanks for the presentation. I noticed on your— so we're a B2B SaaS marketplace called Nacho Nacho. I noticed in your On your website, if you look at your portfolio, most of your companies seem to be in verticals. They're not horizontal, they're very specific industry verticals. Is that a conscious decision or just the way it turned out to be?

It's a little bit of both. I'll kick that off, Casey, and feel free to fill in behind me. It's a little bit of both. So we love vertical software. We think there's a lot of aspects of a vertical SaaS platform that are highly attractive. You have high barriers to entry. You have the ability to dramatically expand ACV within a customer because you become core to what the, the customer is using for their software package. And so you can add in new modules or features or payments and dramatically expand your ACV. And so we like we like vertical software. I think also what's driven us more in that direction is that we do focus on partnering with capital-efficient bootstrap businesses. And a lot of times on, in an enterprise, more horizontal play where there's a bigger market, it sometimes takes more capital to grow. And so it lends itself more to burning more money early in a company's life cycle. And so that's driven us a little bit in that direction as well. But we have made a number of horizontal, or investments in horizontal software companies, and we get really excited about those. We think there's a, like G-Treasury is one, where it's the treasury management software used across a variety of verticals. And again, I think what we're looking for is capital efficiency, and then strong barriers from competition. And so, there's a lot of opportunities that we've seen on the horizontal side that have those that have got us really excited.

And I just chime in with just two— I was just going to add two quick things. I think what we found with, for example, like G-Treasury or CenturyOne that are horizontal software companies, they're selling into a specific person within a software company. So G-Treasury is selling directly into the Treasury Department, for example. CenturyOne is selling into DBAs. And so I think when we found selling to a specific person. We've found, uh, cap— highly capital-efficient business models there. And then I'd say on the marketplace side, um, we've definitely evaluated quite a few. And I think when you can see them working and they're capital-efficient, we'll get really excited. On the flip side, I think sometimes in a marketplace, um, if the supply-demand is off, right, you have to spend to make sure it's in balance, and then you get more of the network marketplace effects. And I think when we see that will get really excited, but we found in certain ones where we've evaluated them that if it's out of sync, that you, you know, have to spend more money in order to get it back into balance.

Thank you. I've got a follow-up question. So we are a marketplace where our buyers are SMBs and our sellers are SaaS vendors. So is it fair game to reach out to you if our interest was to get in touch with your portfolio companies as potential partners?

Yeah, yeah, absolutely.

Yeah, definitely.

We love that. And that brings up a great point, Sanjay, and something we really pride ourselves on is we, we really look to develop relationships with entrepreneurs for sometimes up to years prior to making an investment. I think the longest period from when we first met an entrepreneur to when we made an investment in their company was 5 years. But we typically will very often see it over a year that we're really building that relationship. And we don't just want to be passive in building that relationship. We try to be very active. So our operations team does a lot of work with companies that we haven't even invested in yet. And we put out a lot of literature and we try to leverage some of our learnings from our existing portfolio to share with entrepreneurs so we can be helpful even before or even if we don't end up making an investment. And partnerships is a great way that we do that. We often find a lot of synergy between the entrepreneurs that we're speaking with and the companies that we're currently invested in. And so we love when opportunities like that come up and when entrepreneurs reach out and see ways that they could get value out of or put value into or both our existing portfolio. Thank you.

I don't want to butcher this name, so I apologize in advance, but Sushil, I think you're the next one up. Sushil?

Yeah, it's correct. You pronounced it correctly, Caitlin. Thank you.

Awesome.

Thank you, Jason. So, uh, I looked at your slide and I had a few based on your slide, which is, uh, interesting to our software because we are a platform that vertically integrates the construction industry. So all the way from, uh, manufacturers for products, uh, construction products, all the way to the builders. And our company is called Build Booster. So, uh The question that I had are, you know, you help your partners build their teams. So one of the things was your sales thing. So my question, specific question there is compensation plans. Like how do we motivate the right salespeople at the lower end? What kind of incentives do typically, you know, are given to these sales reps? Because the revenues are recurring, you cannot give them a big chunk ahead for a deal. So that's my first question. The second question is the pricing strategy. You know, how in our platform, it's a vertically integrated platform that's integrating a lot of stakeholders, and there are some stakeholders that would be willing to pay less, some of them would be willing to pay more. So any, any tips on the pricing strategies would help. And the third question that I have is So the, the companies that you partner with and the ones that say they are very impressive to you that you rejected, what, what, what are the things that somebody lost at the last point where they were almost there, they were very impressive, but you decided to go with somebody else?

Yeah, great question, Casey. Maybe I'll take the first two and then pass it over to you for the, for the third one. So I think on sales compensation plans, we— and this is, you know, kind of more general in nature, so for every specific company I think it varies— but we target 2 to 3 times quota over their full on-target earnings as a good benchmark for compensation plan. So if their quota is somewhere in the million-dollar range, their on-target earnings would be half or a third of that. Full with commission. And so that's just a general rule that we look to. And then on pricing, I think it comes down to really segmenting the customer base and understanding where you're providing value and the best way to extract value back from the customers. And so it sounds like you've got a number of different constituents within the marketplace that are all using it in different ways and getting different types of value. And so it'd be interesting to think about that. I think with a marketplace as well, it's— you're probably thinking through how do you build— you get scale and value just from having a larger marketplace and more users. And so do you want to charge all of the users, or are there certain buckets of users that you allow to access the platform for free in order to create some sort of flywheel effect? And, and so yeah, we'd be happy to talk in more detail, uh, Sushil, as you're thinking about these these different topics as they come up, we could learn a little bit more about what you're looking at and maybe provide some more specific thoughts around some of the pricing strategies that you're thinking through.

Thank you, Jason M. Lemkin.

Yeah, and I think on your, on your last question, I think for the most part we have a pretty tightly knit team, and so we're all, you know, again, 4 investment partners that are making the decisions kind of at the start. Through the process. And so, you know, I'd say it's more rare that it comes down to that last moment where you're kind of fully through diligence and, you know, the deal doesn't go through. I'd say kind of early on where, you know, potentially things can come up is if kind of the initial data, it actually, it turns out different from kind of what the initial screen was as we kind of go layers deeper. And some of the data, for example, doesn't check out of where we kind of thought it was going to. So I'd say that's primarily it, but we tend— we have kind of check-ins weekly with our investment team as we're going through diligence to kind of help avoid those points of we kind of get to the last mile and, you know, something comes as a surprise to someone. We're kind of very synced because we're a small team. We're able to do that. I don't know, Jason M. Lemkin, if kind of any other tidbits to add on that point.

Great.

Yeah, no, yeah, that's right. I mean, I think we get to know entrepreneurs for a while before making an investment or before kind of moving towards an offer, and not all the time, but usually. And so we usually have a really good feel for the business and the team, and so we don't see a lot of deals or later stage kind of once we've made an offer fall apart because we're— we already know the team really well and they know us really well. And so we've got good alignment on what a transaction would look like and a partnership would look like between us and them.

Thank you.

Hey guys, I am chiming in here because we have about 5 minutes left and we have 2 questions. So Shelley and Dima, I want to get to you guys. And so Dima, you're first. And if I'm mispronouncing your name, I apologize again.

No worries.

Thank you.

My name is Dima. I'm CEO of Stealthmail. It's an email privacy and security solution.

We're also targeting the healthcare sector.

And I had a question. You mentioned you had a portfolio company in the cybersecurity space that is currently serving the healthcare sector.

What is the most efficient channel right now for them to acquire clients?

And what would you recommend?

Yeah, great question. Let me try to answer it and then I can pass it to Casey as well. I think the, um, their— what they've been really focused on is building an outbound model. They're selling into hospitals, so the platform allows hospitals to track access to the data within their systems to look for anomalies, to see if people are accessing the data that they shouldn't be or accessing it in a in a way that they shouldn't be or at a time that they shouldn't be. And so they've really been— what we've been working with them on is building a highly efficient outbound sales process. So sales enablement through the— to kind of leverage that behind the sales effort and then selling directly in the hospitals.

And I'd say just to add, I think one thing is to, you know, where you can find different channel partnerships, we've seen be a really efficient way, especially for bootstrapped businesses, to kind of go one-to-many. And so if there's a way kind of within a network of hospitals going one-to-many as well, coupled with as well going one-to-one, that can be an efficient way to acquire customers.

Thank you, guys. Appreciate it.

It looks like we have one more question and three more minutes. So if we could get to Shelley and then close out for the day.

Hi, thank you. Nice to meet you guys. I'm with Trellis, and we sell to government and nonprofits software that helps distribute information about social services, which, of course, during COVID is probably one of the most critical needs of society. My question was, I love the model that you have, B2B verticals and enterprise B2B, and I'm just wondering if you have any thoughts about govtech, what you've seen in govtech. People, a lot of investors shy away because it seems like long sales cycles, but enterprise sales, whether it's IBM or some other type, are pretty similar, and I just was wondering if you had any thoughts, insights, opinions.

Yeah, maybe I can start with this one. We've made an investment, so we're investors in a business called Forensic Logic, which sells into state and local government and police departments, and they're kind of the, the core system for those departments. I think we've had pretty good success so far, but the long sales cycles is definitely something I'd say we're wary of where we've seen, I guess what we've seen there is there's coupled with the long sales cycle is where you can get also shorter sales cycles. So what I was describing a little bit with partnerships and kind of being able to form a partnership with someone in the space in order to go one-to-many of kind of having a hunting license versus having to go one-on-one with each police department, we found to be just, it takes longer. I think what we've found, which was what, on the flip side, what we've liked about that space is that the renewal rates are really strong. And there's also, at times, there can be a land and expand model. And so I think, yeah, I'd say we're kind of in between on that, is that we've made investments in the space that we're excited about, But we also, you know, would look at kind of everything together.

Have you seen anyone that you've talked to get selling through threshold purchases, which is below the pricing threshold where they don't need the RFPs and the sales go faster as part of their land and expand?

In our investment, we haven't. It's primarily more through RFPs or kind of they need city council or different approval processes. But I would say that, you know, the shorter sales cycle, as you're describing there, that would be something we'd definitely be really interested in.

Okay, thank you so much.

Well, thank you guys, and thank you for joining us. Thank you, Casey and Jason, for taking the time and kicking us off today. I hope to see you guys in some more sessions, and again, thank you, and hopefully you guys can connect with Jason and Casey on LinkedIn or other places so they can answer any questions that are outstanding. Thanks again, guys. Have a good rest of SASUR Annual at home. Take care.

Thank you guys for joining.

Thanks, Kaitlyn. Thanks, everybody.