VC Office Hours With Shasta Ventures Associate Kenn So

Virtual at Home 2020. So doing it from the comfort of your office or your home, taking it a little bit virtual this year, and I appreciate you guys being here with us. We are here with Ken So from Shasta Ventures. He is going to be our next speaker for you guys to talk with and engage with. I'm going to have him go to the next slide so we can go over some of the housekeeping items. Just so you know, this is a 30-minute session. We wanted to keep it interactive. We encourage you to keep your cameras on. Your mic should already be muted. If they are not and I need to, I will do that. Please feel free to get involved in the conversation. To do that, we ask that you click the participant button in the bottom banner, and then once the participant window pops up on the right-hand— bottom right-hand side, you'll have to click raise hand. Then Ken will be able to call on you once it's time for Q&A. The chat function of this Webinar is not going to be open, so the only way to get your questions answered will be able to raise your hand. Another thing to note is these sessions are recorded. This one is actually also on livestream, so you'll be able to catch yourself later or check it out at a future time. So without further ado, I'm going to pass it over to Ken and let him kick it off.

Awesome. Thank you, Caitlin. Hey everyone, thanks for spending time this morning. So the way I'd like to structure this conversation is probably more on the Q&A side. I was also asked to maybe provide a seed topic or set of questions to kind of tackle through. But I just want to spend the first few minutes just introducing myself as well as what Shasta Ventures is. And that kind of ties into the topic, probably the seed topic I want to talk about. And so Shasta Ventures, quick intro, early-stage VC based out in the Bay Area, focused on B2B software. Started off investing in consumer hardware and B2B software, but right now what we're really excited are data-driven companies in the B2B space. So on the right-hand side, you'll see a bunch of logos, just a sprinkling of the companies we're very fortunate to partner with. So you have the likes of Appios, Vora, Anaplan, who've done very well now in the public markets. And now you have AppSheet, who's in the low-code, no-code, and now part of Google. Then you have Highspot and LeanData, who's now really kind of trying to redefine the way we do sales. And then we also have Darwin AI, who's really on the forefront of understanding how to explain and more efficiently build deep learning models. So kind of going through next, um, we won't spend too much time of this on this, but this is how we kind of think about broadly B2B software space. Obviously there's, there's a lot more granularity to how we really think about it, but in the high level it's applications, infrastructure, and security. And where we're really excited about moving forward is really broadly about quote unquote AI. It's a very widely used term, but really it's about data-driven features or products that are able to build smart features that are core to the value add. For example, right, we have on the applications, the example here will be Siebel, Salesforce, which are more on the sales tech. Siebel more on-prem, Salesforce on the cloud. And what Highspot does, is that in large enterprises, a big problem is just understanding where to find the right content to serve or give it to potential customers. Because in large enterprises, you have marketing departments generating tons of different collateral and content. You have different versions of PowerPoint, of videos, of brochures, of one-pagers for different use cases, different pain points, different types of customers in different industries and departments. And what Highspot does is very intelligently uses the data to surface the right content for the right opportunity. Because you can imagine a salesperson going into a folder and there's probably thousands of different versions of a deck, and that probably takes you 30, 40 minutes to sort through historically. So that's the kind of companies we really like to invest in, those pushing the boundaries of what AI can do. And now where we invest in, and this really ties into the topic, seed topic later on, is where we focus on. This is at the Series A stage. Like I said, we're early stage investor, but doesn't mean we don't invest in seed or slightly above A. We do plenty of seed investments as well, but really the sweet spot is in Series A, quote unquote. And what we really mind by Series A is early signs of product market fit. And this is like whether in terms of bit of traction, definitely post-revenue. But we also see signs of some sort of repeatability when it comes to customers buying for the same purpose and so on. But this is the main topic for later on. I mean, for the next slide, which is about how do we really define early product-market fit for Series A. So the context of this discussion is really more about what it means for B2B software or SaaS and not so much consumer. Just given the focus of Forfund, we often hear about the nuances, like the $1 million ARR benchmark that companies have to meet to raise a strong Series A, but there's a lot of nuances to it and there are different levels to it. So we can think of like $1 million ARR benchmark as level 0, and you have level 1, level 2, and maybe even level 3 of how VCs tend to think about what early product market fit means. And to kind of not spend too much time on it and leave it more time for Q&A. For level 1, for example, let's think about what market your company or the product is in. So on one end you have very well-defined markets like CRM, and these are more mature categories. And so the expectation is that not so much 1 million ARR, but above 1 million ARR, maybe 2, maybe 3, maybe 4, because In some sense, it's easier to sell in a well-defined market, and here are some reasons. One is that your buyers and your users already know what the core features are, so you don't need to educate them. You don't need to spend time upfront educating the market and your users. Second is also that there's already a budget line item for that category. So they don't need to— your buyers, your customers don't need to go through different management approvals to convince other people to buy into it. So in some sense, scaling and selling is easier in a well-defined market versus, say, if you're trying to do a new category, you're building a totally new business, a soft— business software category, say, in machine learning governance and machine learning monitoring. Here, the pain point is not as well-defined. You still have to educate the customers. You have to learn yourself what the pain points are themselves. So it's harder to sell. So the expectation is maybe towards $1 million or maybe less than $1 million ARR. So that's one dimension to think about early product market fit and kind of like how VCs think or how I think about what early product market fit means. And there are different other more nuances and considerations. For example, what's the go-to-market model? What's the sense of repeatability based on the due diligence? So there are different nuances and levels to it. And, but you know, if this is of interest, we can probably tackle it in the Q&A portion. But I'll leave it at that and leave the floor open for questions.

Anyone have any questions, or should we go into— let Ken speak some more? Oh, it looks like we have one. They're slowly popping up. Okay, um, let me see, how do I allow people to So you just want, Miriam, if you just wanna go first, you should be able to automatically unmute you. Yeah, hey. Hey, Ken, thanks a lot for the insights. Just for context, I'm a founder of a no-code platform that helps non-tech founders and startups build web apps without writing code. So very similar to AppSheet, but in a bit different market. So my question is really around, I assume you of course are enthusiastic about no-code space and generally you like the space so far. And the question is, which stage did you invest in AppSheet and what is the main reason for you to invest?

Yeah, so we invested actually at the Series A stage. Great signs of traction. And I think the usual reasons that we would typically invest in a Series A, one is great traction from both the revenue side as well as in terms of usage. And usage meaning how many apps are being developed on the platform, how much more often they're using it, but also on the revenue side, we're seeing what we call net retention growth, like companies who are— current customers are just kept on increasing their usage and hence the amount they're paying for it. Second is that the product is really, really good. It's so well reviewed across different platforms, but also based on the customers we've talked to. And Probably third is that Praveen, the CEO, is, is just an amazing person that we really wanted to work with. He's the type of founder who is very specific about the type of VCs he wants to work with, and we're very fortunate that he decided to partner with us. He's a very strong product CEO that we've known for a long while. So those are some reasons why I invested in AppSheet.

Thanks, Alex.

Oh, and then, Caitlin, do I— I can't seem to unmute people, so—

Oh no, no, if you just say their name, it automatically does.

Oh, okay. Um, Dima Bol from StealthMail.

Yes, hi Ken, my name is Dima. Uh, I'm a CEO of StealthMail, um, email privacy and security, uh, SaaS, B2B SaaS. We are raising a seed round and one of my questions is, what are you guys looking for, for the companies that are post-product, that do have enterprise clients, but apparently are not $1 million in ARR and how do you look and how do you define the product-market fit for those type of situations where you already have enterprise clients that are using and paying the money?

Yep. Yep. I think that's tricky, and probably this is where we go into the other nuances. One is, is there a sense of repeatability in your customers? For example, you maybe don't reach $1 million AR, but say you have 30, 40 customers who are buying it for this one or two or three same use cases. So that shows that different types, different customers are resonating with the value prop. Of your product repeatedly. So it's not like you have one customer contributing 80-90% of your ARR, but you have some sense of repeatability. So it's not only repeatability from the why customers are buying you, but also an inkling of repeatability from the go-to-market side. Is it that— so go-to-market side, I think one area where we like to see it is that it's not All of the sales are not founder-driven. It's increasingly becoming more like you have a salesperson that's able to execute by themselves on reaching out to customers and closing transactions. And some sense of repeatability there in terms of what messaging, what kind of outreach you're going through. Because then once we go into Series A investors, they can already see like, okay, there is some sort of thing there instead of one-off customers that are buying for one-off reasons or because of one-off connections with the salesperson.

Right, right. Meaning that in this particular case, if there is a channel partner who is reselling your product and is doing that successfully, or at least a certain, certain success, that might be an indication for the market fit even below the $1 million ARR, right?

Yep, yep, that's right, that's right. Um, there are a couple more dimensions to it, um, just very quickly, is maybe, um Are your current customers growing as well even though they're through channel partners? Are they growing by themselves year over year or month over month in terms of usage and in terms of, or in terms of the amount that they're paying you, right?

Thank you, amazing answer.

I appreciate it. Great.

Um, next one will be Andre at Hi Ken, thanks for, for the time to share with us. I just have one question in regards to timing, um, and, and it relates to your last slide, which is, um, I'm on the, the security space, uh, and we are creating a new category that we're calling location behavioral biometrics, applying location data for removing friction from authentication processes. And we just hit the $1 million ARR, and we aren't sure if we should go out and raise now or if we should wait a few more months because we are estimating that probably by December we might reach somewhere between 3 to 4. So I want to hear your perspective if we should wait with we should go now?

Yeah, I think one, if you can achieve growth and not run out of cash, go just push out the fundraising really. I think one, it's better for, really it's not so much better for the VCs themselves, but it's really better for you as founders, wherein you'll be able to prove to VCs that you have something there. So one, it makes the sales process, the fundraising process easier for you. Saves much more time and focus on the business. But also the second point, I think maybe on the more the financial side, is that you'll be able to raise at much better terms, which is better for you, of course, as the founder. So I think general rule is for founders is push it off as much as possible so that you get the best terms for yourself.

Perfect, thank you.

And then the next one is, uh, Shelley at Trellis.

Hi. Oh yeah, okay. So, uh, thank you. I'm liking your answers so far. I was interested in what you have to offer, uh, founders. I'm kind of in the situation as the person who last spoke in that we're probably going to push off fundraising because we're doing really well at generating revenue, it's my preferred thing to focus my time on, but I am interested in how to build relationships early on so that when we need or want money to scale more quickly, we can do that. So my first part of the question is, how do you engage early with companies so that you're there when they're ready to fundraise? And the second part of the question has to be answered first, I guess, which is, do you— have you done any govtech companies. Our market is we sell to government and nonprofits software that helps them deliver social services more efficiently to the public, you know, which is really important in times of COVID but normal times as well. And so I'm just wondering about your experience in that and whether you have anything to offer founders in that space.

Right, right. So the clarification of the first question, is it more like how do found— how should founders engage VCs early on, or how will— how do I or VCs engage companies early on?

It's how do we as founders engage with you if you seem like a nice type of investor to have, but we're not really ready to raise money now. You want to make sure we have a relationship at some point in the future, and how do you accept those kind of relationship-building things?

Yeah, I think one is there's different ways to reach out to VCs, cold, warm intros, cold email, and so on and so forth. So I think that's all well said. I think it's more about the messaging of like, hey, we're building something. We're not yet looking to fundraise, but we'd love to get your feedback and thoughts as we prepare to fundraise in the next 6 to 12 months. So you don't post it as like you want to fundraise immediately, but as a sort of feedback mechanism. So it's a much lower barrier for VCs to just engage with you because VCs are generally very curious to learn what people are building, whether they're fundraising or not. So I think that's a good way to frame it as like feedback. And it's very common for that to happen because a lot of companies that VCs invest in tend to be relationships wherein they've known the founders or team for a while. Not always, there's always a large chunk of like, it's very cold relationships at the start, But that's a good way to start of like, hey, what do you think of this? That's one. And then on the second part, govtech, I would say not as much. We've had a few hardware-ish companies that sold to the government, but generally we haven't really been too active on companies that sell to the government. And I think that's a thing wherein the go-to-market motion for government is different from, say, generally when you're selling to other private businesses. Process, right? Because government has a certain set of procurement laws that they have to follow through, sets of procedures that it's always competitive. So it's not that we don't have— we have zero experience, but we have, I say, less relevant experience than, say, a classic B2B SaaS.

Great, thank you.

Um, great. I think the next one is all is merchant. Thank you, Ken. I wanted to find out, so I'm a CEO of Woolish, I could say, wellness marketplace for moms. And what do you think about marketplaces as well as key things that investors look for early on? That's important. Yeah, I think this is interesting. Um, so I'm not— I haven't really looked into marketplace as much So just gonna, gonna speak from kind of indirect experience rather than direct experience of really looking into marketplaces. So I think one is marketplace for moms, right? What do they, I guess, what's being transacted on that market? So moms looking for wellness providers in their area, local. Okay. Service providers. Correct. Gotcha. Gotcha. So I think a couple of things. One is very, very high level. This is a tricky part because of acquiring customers. We'd like to see— it is tricky. We'd like to see CAC to decrease over time, but the reality is that most often CAC increases as you get to these kind of mass market, not the early adopters type of users. But if you're able to show that CAC is actually decreasing, that's that's an amazing sign because one, it shows that despite, uh, conceptually it should cost more to acquire more customers as you reach more of the market, you're able to show it is decreasing. So one is that you're doing a really great job of optimizing of how you're reaching and acquiring these customers. So that's one, that's an amazing sign. Second is that even though you're say your cost of acquisition is increasing, that's okay, and that's kind of conceptually normal, but you're able to show that your average transaction value also increases as well. So it's not like you're spending more to acquire these customers, but you're all— and then not increasing your top line, but that you're able to show there's equivalent increase in terms of percentage for your transaction value or take rate. And, or even what would be amazing is that it grows even more than how much your cost of acquisition grows. And I can probably go into a bit more detail on those, but those are the ones top of mind. And happy to dig in further if you want to go. No, that's good. I appreciate that. Gotcha, gotcha. So we'll probably skip to other questions, but we, we can go back into it if we have more time. Um, so appreciate the question. So like, it's, it's cursory unfortunately, like I didn't have as much direct experience, but hope that was helpful. Yep. Thank you, Ken. Next one is Sanjay at Nachonacho.com. Love the name.

Thanks for taking the call. So we are a marketplace as well. We're marketplace for B2B SaaS. So buyers are SMBs. We help them first of all, manage and consolidate all the subscriptions in one company-wide account by using virtual credit cards. And secondly, help them buy new software at significant discounts, 10 to 30% discounts. And our sellers are SaaS vendors, all sizes, everybody from Amazon to early-stage SaaS startups. So I think you already answered some of my questions about the marketplace. My other question was that, is it fair game that if we believe that some of the portfolio, your portfolio companies would be good partners for us to work with, to get them, for them to use us as a new user acquisition channel, is it fair game to reach out to you guys and ask for introductions to your portfolio companies?

Yeah, I think the best way is from, not sure how it's done, but probably you could just reach out to me via email or LinkedIn. I think Caitlin might have, or Saastr team might have my contact and we can carry the conversation from there to see which of the portfolio companies makes sense makes sense to do an intro and partner with.

Sounds good, thank you.

And next one is Adam Grayson.

Mute toggling back and forth. Hey, Ken, appreciate it. So I'm the CEO of a— no, now it's telling me I'm muted. Am I unmuted?

Yeah, you're unmuted. You're unmuted. Thanks.

So I'm the CEO of a data privacy company. So we're pretty early. We've done a pre-seed angel round and built an MVP from there. So we're looking forward a quarter or two to our first institutional raise seed round. So what is it that sort of tickles your spidey sense on early-stage companies to take that leap of faith that's earlier than your sweet spot? Is it really really team? Is it the sector? Is it early traction? Kind of what are those big markers for you?

Yeah. The real answer is that it depends. Like there's a lot of different factors that goes to any deal. But I think from historical experience, it tends to be a couple for Shasta. And this changes over time, not only for Shasta, but for different VCs. One of the areas that we— for a lot of our seed companies, they tend to be one, either entrepreneurs we've known for a long time and they've built successful businesses before. And then the second category would be brilliant researchers or some sort of scientists who's really world-class and is building the next big thing. And just needs funding and guidance at the seed stage. So that's, that's two. And then the third tends to be like just a catch-all wherein we're really just open to anything and anyone. But I think in this kind of bucket, which kind of applies to a lot of VCs, is that one, is it a warm connection? But I think more importantly is, are you building something that the VCs I think is really exciting. And this is where it's really more about the product in the space. Actually, sorry, not more about the product in the space, but it's more about you being able to find the VC who is really excited about this space. Because one thing that goes on the VC's mindset is that the less they know about the space, the higher the perceived risk. So if you're able to find the VC who really knows the space, either track VCs, what they post about, tweet, LinkedIn, and so on, and they are super active in this space, one is that they'll immediately know what you want to build and what your vision is. And second is the perceived risk is lower as well.

Great, thank you.

And then the next one.

Just about 4 minutes left. So, and there's one more question left, so if we can get that one out, we'll be perfect.

Awesome. Abir.

Hi, uh, thank you for a really great presentation. My company Lexdoc is a legal technology company that is focused on internal affairs and legal operations, but it's also a marketplace connecting businesses with attorneys. Right now we notice that in the market where we are, a lot of businesses are not investing in new software or new processes. They're just trying to save because of COVID and its consequences. Have you noticed any trends that work for some of your portfolio companies where they have been doing business development successfully?

I think that's, that's a great question. I think the answer is still out there because I think we're still trying to understand the different implications. I think the first few months of the pandemic for the end customers or for software companies is like, okay, what's going to happen and how do we change? And then the next step is that, okay, now that we have a better sense of what's going to happen to our business, how do we adjust our own expenses to match with that reality? So I think very much so that businesses are still trying to cut costs, to be honest, because I think this pandemic is lasting longer than we expected initially, unfortunately. So some of the business development practices we've seen work tends to be more flexing on the payment side. And so there are two things, two things. One is flexing on what the contract terms are, and the second is being hyper-focused and super concise on the value-add and the messaging, which tends to be more focused on cost savings as well. So when we talk about the first part, it may be kind of semi-obvious is that the end customers are trying to save costs as much as possible. So what we've seen is that companies, and some of our portfolio companies, is offering a couple of levers to alleviate that. One is delaying the payment. So instead of paying in 30 days, you pay in 90, 120 days. But also is that you're trying to provide discounts for longer-term commitments. Instead of providing the usual 10-15% annual discount, you're going to provide maybe 20-25% discount annually in addition to longer payment terms. So that's one. But I think on the marketing side, it's really about being super concise on the value-add. So when you send an email, cold email to someone, it's really about, okay, this is what we do. And this will save you X dollars or X percentage, and we can set you up very quickly for this. So those are the two things we've kind of seen so far, but, you know, I think that's a great question that everyone's kind of tackling, tackling right now to see what's the best BD practices for this post-pandemic world.

It's definitely a challenge, and we're all playing a guessing game. This is not something that we anticipated. And as you grow, you hit this block and you don't necessarily have a roadmap to go around it. So I was just curious about how your portfolio companies are dealing with it and if there's any tips that we could steal.

Right, right. And then Caitlin, I want to be sensitive to the timing. It's 1 minute to top of the hour.

Yeah, we are going to have to cut it off at this point. Point, but I really appreciate you guys coming. I appreciate your time, Ken. I appreciate the questions and the engagement. Don't forget that we've got a couple other sessions going on today, and we fully kick off tomorrow. If you guys aren't registered and haven't picked out your sessions yet, make sure to do so today. Again, thank you, Ken, very much.

Thanks everyone for coming, and great questions.

Talk later.