VC Office Hours With Staley Capital Principal Trey Chandler

a lot different, especially for later-stage companies, than it was 6, 12 months ago. Also, what you need in a partner in terms of growth-first venture and how to talk through expectations of investors from that perspective, what metrics are really important, or what parts of your team should you have built at various stages of the company. So really happy to open it up and just want to keep this conversational and We'll see where the conversation goes. So I think maybe we'll start with some questions or comments. Ross, your hand is raised. Hey, Trey.

Ross here from London.

Nice.

My question's a little bit different because I'm not fundraising right now.

Sure.

So what I do is I create tools and processes to help early-stage founders raise capital. And I'm really interested, Trey, to know how you use data to make investment decisions. So kind of fitting into your topic here about what metrics are important. Um, so here's my question. Do you have a process internally to quantitatively evaluate your deals and startups, or is it still quite qualitative? And if you do have quantitative evaluation techniques, what are they?

Yeah, we do have quantitative valuation techniques. I think it'd be a stretch to say it goes as far as we have like a, you know, a GV-style score, right, where we're boiling everything down into a single metric that represents how we feel about a business. I think one of the beauties of being at a stage where we are, a little later stage in the game, is there is more data. When you're kind of true seed investor or pre-seed investor, so much of it is about, do you have good feelings about a team? Are the references really strong? Is it a really big market? And do you like the vision? Whereas with us, when you're at least $5 million of revenue, we have several years of operating history. And I think looking at things like the actual customer churn and retention over an extended period of time, especially for SaaS businesses that are maybe signing multi-year contracts, or at least year-long contracts, and looking at what those metrics look like, as opposed to, oh, it's an abbreviated history. So I know I'm— the answer is there are a lot of smaller quantitative things we look at to get to, A, whether we want to invest in a business, and B, how we value it. I think that the key things there are basically vetting the financial projections with historical data. It's like, what are the key assumptions, and have those things happened historically? Obviously, there's room for improvement in a lot of areas as a business scales, but often we see things where it's a big jump and there's not a lot of rationale for it. So I think that that's the big thing for us is using data to vet financial assumptions. There are still a lot of qualitative processes, right? Getting comfortable with founders and feeling like, you know, running references on them personally and feeling comfortable with them, that's important. Other members of the team, talking to customers, which is a thing that we can do at our stage that you can't maybe do earlier, are really important. So we don't want to completely get rid of the qualitative aspects, but, you know, being a later-stage investor, seeing actual customer data is really important, both in terms of financial data and usage data. To the extent it makes sense for a business.

Thank you.

Thanks, great answer.

Yeah, so Sushil, I hope I'm saying that right. I think you're still on mute, so—

Hi. Oh.

Hi.

Hey, there you go.

Nope.

CEO of Build Booster. It's a SaaS platform that vertically integrates the construction industry all the way from material manufacturers to the builders. So I have two questions. First question is that when we partner with a VC, what kind of network and infrastructure we bring. So it's a bootstrap business and we have enough resources to sustain ourselves. So we are looking for a VC who can bring us to the next level, help us scale the business. I want to understand what kind of typical things that VCs bring to the table. Then the second question I have is I got approached by a VC, actually they are a VC wing of a company that has a competitor product. Large company has a product which is competing in one of the spaces that we are in and they have a venture capital arm, they approach approached me. So how do I navigate that?

Yeah, I know this is a really good question because I think there is, uh, there's kind of two aspects of like how VCs or equity providers in general can add value. And one of those simply is, I mean, the money, right? I mean, there's a factor there in the sense where, you know, if you can spend on things you couldn't, um, couldn't otherwise, that could be very valuable. But Hopefully you want to find a partner that's better than that. And I think looking at VCs that either, you know, have a lot of specific experience in your sector can be helpful because the network is— can be both customers. So I know for us, you know, we have a team of operating partners that are kind of people who are later stage of their career in specific industries, right? We have a guy who was former head of consumer card at Amex, another person who was a retail IT consultant at PricewaterhouseCoopers and IBM. And these are areas where we spend time and, you know, even pre-investment and early investment, you know, we're leveraging them to make customer intros. And that can be very helpful. And I think that's one thing where, you know, a good VC should be helpful is just literally making customer intros that could lead to accelerated sales processes. Maybe these are customers you might've gotten to eventually, but at a smaller scale, it's harder to get that conversation and often, they're being introduced at a more senior level. Also, building out your team, having a network of people, I think the earlier you are, the less full your team is. When people are coming in at our stage, often, we want to back founders, there's usually a great CEO and a great CTO that we're really comfortable with, but maybe you don't have yet a real CMO, or maybe you need a general counsel or a CFO. Are these pieces that that maybe don't make sense to hire at your stage of the business. It may not be financially rational to have a CFO if you're a $4 million business, a real CFO, maybe some of that title. But over time, using the VC's network to build in, to fill out that team, not replace the team, but to supplement and kind of scale up that part of the business can be super helpful. So I mean, those are two areas in addition to this pattern recognition of seeing a lot of businesses trusted advisors is areas where I think VCs can add value and where you want to be testing a little bit before signing up for a multi-year partnership. Do you really have this network? Can you make some intros for me now? Doing these things ahead of an actual investment is a good way to prove that they'll keep coming after the investment's made. Then to your second question, I think that's a really tough one, especially with a competitive process— competitive a truly competitive product. I mean, for me, I think that'd be a little tough simply because the information that they would have, I think kind of you need to be careful about what information rights you would be giving that VC that's a corporate venture arm of somebody that has a truly competitive project, product. You don't want them to be basically stealing information from you or monitoring how big you are. I think Businesses in the same industry can be very helpful and similar to VCs and even more value-added than VCs in terms of making the right connections within an industry that might be difficult for you to get at an early stage. But a true competitor, that'd be somewhat difficult for me. I think the other thing is the devil's in the details and the terms, right? What you don't wanna do is have any sort of right of first refusal. They could hurt you at an ultimate exit, because it could discourage other players in the space from bidding on the company, right? So if you have someone who wants to be an investor, and it could be a potential acquirer down the road, that's a good thing to have, especially if they can add value on the leg, get to know you better, and could be the ultimate exit. But you do need to be careful on the legal end that they don't have rights that discourage other people from ultimately bidding, because they don't— nobody wants to be a the stalking horse bid is setting the price for their competitor, right? So those are some things I'd be looking out for. I mean, certainly it's a cost benefit of how much value can they add, but be careful with what you're sharing and what it is down the road, but there are plenty of corporate venture arms that are very good partners.

Great, thank you.

How about Christian?

Great, hey, CEO of Facility Health. Question on growth equity and venture. So you as a growth equity fund, how do you differentiate yourself with the venture funds? And the follow-on is, why do companies that get term sheets from you really like you and go with you? So one question from your view and the other one from a company perspective.

Yeah, so I mean, I think in terms of how we differentiate growth equity versus venture, the key is, is really the return profile that we're looking for. And that narrows down into the type of company that we're looking for. We have our own investors that we have to make happy and do what we tell them that we're going to do. And for us being a growth equity firm, we're trying to get a 3x multiple on every deal. And maybe the bad deals, we might get our money back with a little bit of a small return, and the best deals are going to be mid to high single digits, and we have a much lower beta. It looks more like a— an even distribution return curve around a 3x. And that's important in terms of the amount of risk we're willing to take around a business. That's why I gave these examples of, we want repeatable business models, we want referenceable customers, we do look a lot more at performance, historical performance data. And some of it comes out in the terms. We like to be the last round of capital in or the next round of capital in, so we sit relatively high in the cap structure. So even in a in a bad situation, we can hopefully at least get our money back. Whereas a true VC is less concerned about having zeros, and they're more about, we want to be in that one business that's going to get us a 50x, right? It's like they're totally OK with bimodal outcomes, and allows them to take more risk and get more reward for it. So I think that helps us navigate how comfortable we are with the stage of the investment, and also It's a conversation I have with many founders like a backer like this, because look, your entire net worth is often tied up in your business. You're obviously risk tolerant as an entrepreneur, but the other factor is, if a business is going not as well as we initially hoped, we're not going to give up on it. It's really important that we don't have zeros. We're not going to spend all our time focusing on our winners. Actually, we probably spend more time focusing on our I don't want to say losers, but our laggards— to try to get them so it is a good outcome for everyone because we are more focused on an even distribution of our returns. So I hope that's helpful in terms of differentiating a little bit. I know the growth equity handle is one that it means a lot of different things to different people right now in terms of stage. Like, it can be everything from, like, we'll go down to $5 million companies, and other growth firms say, like, well, we want to be investing in businesses 12 months before an IPO, right? So But I think there is a commonality there in terms of what the return expectation for our own investors look like. And then on the second question, I think it does go back a little bit to, well, part of the answer to that question and also Sushil's question. And I mean, we like to think we can be value added in making those customer intros. The best return deal we've ever had, we made a big customer intro that became their largest customer before we actually did the investment. So that's how we won the deal, right? So that's really important to us to be able to make those customer intros. And we want to be, you know, we don't want to be in CEOs' hair. We don't want to be, we don't pretend to be the operators that want to be, you know, at the company every day and bothersome, but we do want to be a big resource. So it's that balance of the relationship of, you know, being present and being active, but not being too demanding. But at the same time, I do think it's the network and making the introductions and helping navigate tough times, and we'll even step into tough negotiations with a seller or with a customer if we need to. Just being a resource, I think, is really important. But also, I mean, the network is what differentiates us to some degree beyond our money and making those customer intros.

Thanks.

So, Ephraim?

Yes, hi. First of all, thank you so much for doing this. I'm CMO of a company called Zipline. We're kind of in the digital adoption platform space. We don't really love that name, but we just recently got written up in a report, in the Everest Report, about digital adoption platforms. So I guess we're in that space. [FOREIGN LANGUAGE] What do you think is the best thing that companies do on this, and what is the biggest mistake that companies do on this?

Hey Ace, could you repeat that? You broke up a little bit there on the question.

Oh, I'm sorry. What is the best thing that you think companies do on pitch decks, and what do you think is the biggest mistake that companies make on pitch decks?

Oh, that's an interesting one. You know, we see a lot. I mean, I think one thing for businesses at our stage, and maybe this is a little different for earlier stage businesses, I think having an ownership of the numbers in a way that is believable is really important because it gives us the impression of a management team that, okay, these would be good partners. They have control of their business. I think a mistake we often see is a business that, let's say it's $10 million revenue, right in our sweet spot. It's grown, you know, a solid 20, 30% for the last several years. I mean, showing us something that's gonna be, oh, well, we're gonna triple this year, I guess the upside is enticing, but from the financial perspective, I think that is one thing that is tough is just like we want to, at our stage, because of where we are, we want to see a business that has ownership over the numbers and it is showing us something that is really attractive, but also, it does not imply like, oh, we are going to quadruple our headcount in the next 12 months or something that would just be practically very difficult for most companies. I think that is a mistake that people make. I think that the best thing, and like, this is another mistake, is like, CEOs, entrepreneurs, if you can't explain very crisply what it is you do in the sense like, how do your customers value and measure the ROI of your solution, that's a mistake for us. And companies that can do that well, it often means their salespeople can do that well in conversations. Right? So how do your customers measure ROI? I mean, too many buzzwords in terms of— and not actually telling a VC or an equity provider, you know, what problem you're actually solving for your customers, that can be a mistake. And I think conversely, it's the other way around. Like, if you can explain in 3 sentences exactly what problem you're solving in very simple terms for your customers, that That is appealing, especially for us, I think. There are certainly other things that stakes in big parts, but it really is, it is on the business model side, it is just simplicity is better in terms of explaining it. Then on the financial side, it is being able to back that up and believability, I think, is just passing the basic sniff test.

Thank you so much, Trey.

Yeah.

Sanjay? How much of your deal flow comes from other VCs through your network of other VCs who have invested in prior rounds versus a direct intro of any kind?

Yeah, so that's interesting. I'd say, I don't know, maybe a third. In terms of other VCs, like, that is an important part of network. We don't track necessarily— we do track where our deal flow comes from in general, but I'm not sure we track, or I don't have the numbers handy on VCs versus other contacts. There are a lot of industry contacts that we use. It's probably— I think the easiest way to break it down is kind of a third, a third, a third. At our stage, you do see deals from investment bankers. We're not snobs when it comes to, you know, a lot of firms don't want to look at investment banker deal flow because they think it's too competitive, but We're happy to look at deals. We think more deal flow is just generally better, and we're happy to get it from that source. And frankly, a lot of bankers, for stuff that is too early for them, but they have a good relationship, it's good to keep those relationships so that we see the things that are just referrals from that group of people as well, similar to other VCs. So I'd say that's a third. Probably other VCs and other parts of our network, like our team of operating partners, is very important there. In terms of sending us a lot of intros. So it's adding value with the companies, but also introducing us to companies. And then I think the last one is we spend a lot of time, more so prior to COVID obviously, but going to things like conferences and trade shows and just being in cities and cold outreach. We're not one of the larger firms that has a team of 20 24-year-olds that man the phones all day and make cold outreach, but we do try to do that in a concentrated way around going to trade shows in sectors that we find very interesting and meeting companies where they are. That's an important part as well. So I know I'm not answering that in a hard and fast data-driven way, which maybe I should, but I'd say about the rough breakdown of a third, a third, a third, general network referrals, which includes other VCs that we've worked with before or Noel, a third of investment banker deal flow. A lot of those, frankly, are advanced less far in the pipeline. And then a third is outreach around investment themes that we are spending a lot of time on or going to trade shows in industries that we find interesting and just our own research.

So is it fair to say that by the time the companies, the startups get to you, or by the time you engage startups, they already have either hired an investment banker or have built a long-term relationship with an investment banker already?

No, I, I didn't mean to mislead you there. I think occasionally they have hired an investment banker, especially the larger end of our deal flow, or if, uh, just from a revenue perspective, or if there's some sort of secondary component. Because just the economics around the investment banker relationship— if you're a $12 million revenue company looking to raise $10 million, it often doesn't make sense for either party, uh, because it's much work for the banker to raise that money is to sell the business. But if there's something that's, you know, $40 million of revenue, and there's a secondary component where they're selling part of the business, either an earlier stage investor or an active founder or something like that, those are more likely to have an investment banker. But I mean, often companies have some sort of relationship, but certainly not anything formal or anything signed up. But I don't know, we do get a lot of deal flow there, but I think it's unfair to say that most of the businesses, especially at the lower half of our revenue range, have any sort of formal relationship. But, you know, they have a network too, right?

Hey there, Trey.

I'm gonna pipe in real quick and let us know that we have about 2 minutes left. So if you want to take one more question, that would be fantastic.

I'm looking. Anyone else have a question? That's, uh, feel free to raise your hand. I think I've already— unless, uh, I see a couple that I've already answered, but maybe have another question.

Thank you, perfect. Well, thank you so much for your time. And guys, just as we noted, this has been live streamed and on our YouTube, so you'll be able to go back and take a look. Another session is kicking off in about 3 minutes, and we appreciate everyone being here and taking the time this morning. I know it's early for some of you and late for others. And Trey, thank you so much. For helping us kick off Annual at Home.

Yeah, I really appreciate it, and thanks for, thanks for setting it up. And if anyone wants to chat further, I think my email was in the, uh, in the presentation, or feel free to find me on LinkedIn. Happy to chat one-on-one as well. Thanks, thanks for coming, everyone.

Thank you, guys.