Mamoon Hamid (Social+Capital) - Why Sh*t Really Gets Funded

Mamun, I know you've got a ton of incredible recurring revenue investments, so please speak.

Just a brief introduction. I helped co found Social Capital about three and a half years ago. We invest across healthcare, education and financial services as well as enterprise and I lead our enterprise practice at Social Capital. So I'm going to talk about one thing and one thing only, which is this right here since he's taking all the nuggets here. But seriously, I'm going to talk about MRR and Churn and before I do that, I'd like to spend some time just showcasing our portfolio of enterprise investments and how we just generally think about the enterprise investment landscape and the way the framework is laid out. It's the end user higher up the stack and the infrastructure and the CIO further down the stack. And at the top of the stack we look at software that every single employee at a company gets to use inside to be more productive. It's email, it's calendar, it's all kinds of tools like box yammer, Slack, Cloudon, things that you know well. So we love end user centric horizontal plays like that and we've heavily invested across those areas. Other areas that we really like are vertically. So what are tools that individuals inside of an organization, a marketer, a salesperson, a recruiter, an engineer, a product manager use on a daily basis to get their work done? It's almost like what are the tools that they open up first thing in the morning and spend most of their time during a given day? That's the other thing we look at and we love those kinds of businesses. So we're actually, we love tracking DAUs for our SaaS, companies that fall into that bucket. So it's companies like Clearside that salespeople use, or Intercom that a lot of marketers use, or Slack or Replicon that a lot of people in HR use. So we really like companies that address applications catered towards the individual contributor. So as you go further down the stack, it's less about the end user and it's more about the cio. So so with the proliferation of all these applications at the top end of the stack, there's issues with security and control. CIOs have lost control over all of these sanctioned as well as unsanctioned apps. And so in order to address that we've invested in security and control companies like Netscope and OneLogin. And here it's more about sort of reining in some of that control and bringing some of that power back to the CIO. And in some places called shadow it. But we've made a few bets here as well because I think it's super important to address the needs of the CIO as these BYOA and BYOD happens. And then as there's an explosion of data in the stack above, you need to make better decisions. There's analytics and bi, and the last layer is the data infrastructure that's used to build all these software apps that are above. So that's sort of the general framework that we use. So when do we invest in these companies? And a simple way of breaking it out is really just there's no revenue, there's a little bit of revenue and there's a lot of revenue and a lot of revenue for early stage investors is relative. But we look at pre revenue companies, we look at companies with less than 2 million of revenue run rate and companies of more than 10 million dollar run rate. And as we think about where we invest, we really think about, we come in with this prepared mind approach which is, you know, where's the white space? Where are the great opportunities to build very interesting large sustainable standalone companies that can one day go public? So and the way we form our views are by talking to a lot of entrepreneurs, talking to our portfolio companies and just thinking about where the world is going to be headed. And we continually evolve on that in our thesis areas. But really when we're investing in a pre revenue company, we're talking about investing in a stellar team and investing in a target market where we have a lot of conviction. And so that's typically a seed stage company where we're investing a million dollars. It can be a series a company where we're investing a bit more because we know the entrepreneur and we have super conviction around the target market. The next bucket over is you have all of the characteristics from the left, but also you have early product market fit and the potential of a category winning company. And here we actually look for customer validation and we spend a lot of time talking to customers. In a lot of cases actually customers end up being portfolio companies of ours or people that we know. So we can really credibly assess the veracity of the customer feedback. And then to the right we're looking for companies that are where the business is compounding it's rapidly growing, it's a clear category winner and it has a clear path to being a unicorn or a decacorn. Decacorn. Yeah, that's right. So let's look at how we map our portfolio to this structure. And as you see a Lot of it's in the super early stage where we've seeded or done series A's quite a bit of companies also in that middle category where there's a little bit of revenue. But it's really indication of like these companies are really gonna be the leaders. And then to the right are companies that were. They're already the leaders in their category and they have the potential of being a unicorn. And this is actually where we first invested in these companies. The first check was written when the revenue scale was like this. And as you know, many of these companies have moved on to become much bigger. So now we're going to play a fun game of guess the company. So this is a company that was started in 2005, 6, but it really morphed to being an enterprise software company in 2007. And we invested in 2008 and the beginning of 2008, and it took them 39 months to get to 10 million of ARR. Any guesses? I'll keep going. So think about it. All right. Can I guess? No. Okay. Because you know the company hint. The next company launched in 2009 or launched their enterprise product in 2009. We invested in 2010. It took them 33 months to get to 10 million of AR. Finally, third company is company launched in 2014. We invested in 2014 and took him 11 months to get to 10 million in ARR. So now I'll take guesses. Okay, I heard slack. Other guesses hint all three of the company CEOs have been here will be here today. Box. I heard box. All right. I think I heard box. Slack and yammer. There we go. Okay. All right. So these are amazing companies. Amazing, amazing companies. And they're unicorns. They'll be Decacorns. And point is that enterprise software companies are growing faster than ever. All right? They're growing at unprecedented rates. The universe for who you can sell your software to has increased dramatically over the last five years. Everybody's adopting cloud software. The mom and pop is the SMB is the enterprises. So you've got used to be hundreds of thousands of enterprise software users. It's millions. 10 millions. So now that the market size is so massive, you're seeing companies grow this rapidly, which again you should ask yourself, is my company going this rapidly and how do I stand out in a crowd like this of overachievers? So the next few slides, I'm going to talk about how you can stand out and I'll talk about some of the last few investments that we've Made at social capital in the enterprise space. The first company is Greenhouse. You saw Daniel here up on stage a couple hours ago. It's an HR recruiting software platform. We had spent a lot of time looking at the HR software space for the last several years, never really pulled the trigger. But we heard a lot of our friends, a lot of portfolio companies, entrepreneurs saying, hey, you know, software in this general category sucks, you know, like. And at some point we actually even gave up on the category. But then Jason about two years ago mentioned that we should meet with these guys from New York, Greenhouse, and we did. And we actually sent them straight over to a couple of high growth companies that were actually having problems with their recruiting software. And they very quickly validated like, this is exactly what we want to see and if it was more mature, we'd buy it right now. And we wrote an insta check of a million dollars in the seed round. And that was about two years ago. We saw growth happening a couple quarters in companies like Uber, Airbnb, Pinterest, adopted Greenhouse. And we're like, this is going. So we actually preempted a series A and decided to invest in Greenhouse Elite around. And that was about nine months ago. And since then the company has three X'd in revenue. So, you know, it's turned out pretty nicely. Long ways to go. The next company here is a company called Intercom. How many of you know Intercom? Raise of hand Yeah, I think every SaaS entrepreneur should know about Intercom because I think it's a great tool for every SaaS entrepreneur to use for their own product. It's a snippet of JavaScript. You add it to your site and you can instantaneously start observing, supporting, engaging with your customers. Awesome tool. And exactly how I heard about it was through a bunch of entrepreneurs who were saying, hey, let me pull up Intercom for you, show you the stats in there. And I remember this one entrepreneur Jesse Lam from Dispatch. Jesse, are you here? If you're not, thanks for referring Intercom. I asked him, hey, can you introduce me to Owen at Intercom, the CEO? I was like, absolutely. So met Owen from Intercom, fell in love with him, fell in love with the product, the vision, because the notion that a customer is a customer is a customer. You know, you have one customer record that you use for marketing, for selling to them, supporting them to do customer success made a lot of sense. So this unified longitudinal view of a customer made a ton of sense to me because I'd invested in CRM companies and marketing automation companies. And customer success software companies where there were siloed data sets and different applications had the same data all over again. And here you've got a unified view. So love Intercom. We invested in the Series A and the company's 20x since we've invested about two years ago. So this is all about word of mouth, people talking about your product and saying how much they love it. The next investment company that you guys I think all know slack here I think are the lessons learned from Yammer really helped we were. You saw the stats of conversion rates and the growth of Yammer. This has all that times three on both growth and conversion rates and so unheard of engagement and monetization and which spells it's one of the fastest. It is the fastest SaaS business ever. And we invested right before this company took off. We were able to look at a month's or two months worth of data and really make a judgment call on this early data to invest because we had never seen metrics like these before. And since the investment in Q1 of 2014, the company has 10 x'd on all metrics. So these are examples of companies that we've invested in. Here's an example of one that we didn't invest in. So here, nice looking chart. But underneath the chart is really some of the issues. There's crazy gross Churn. Churn that is super high. Like this is a company that sells into SMBs where we expect churn to be way below 3%. Actually ideally close to 2% and it's way high. So this actually doesn't tell a complete story. So let me just add net Churn, which is the churn that includes expansion revenue and even that's not so great. We want it to be below zero. And here it's still mostly above zero. So how do we react? This is how we react. Yep. So run for the hills. But let's just peel the onion back a little bit more. Look at the MRR and how it's barely being. It's outpacing canceled mrr. Barely though. And what's happening here is they're selling but then they're also losing just as much. So like every single sale that's being made is being negated by people who are unhappy with their product. So this company has a product problem. Customers don't either know how to use their product or they're unhappy with the product actually. And there's some people who actually do like the product and are expanding their use of the product. So this is the expansion is actually the only thing that is keeping this company afloat. So really important takeaways here and something that we sort of really dwell on inside of our firm is this notion of above the line, net new MRR and below the line, net new mrr. And we've coined a term called the quick ratio, the SAS quick ratio. It comes, it's a derivative from accounting. It's an accounting term which measures assets and liabilities and we apply it to sas. So it's like what's the MRR that's added and it's above the line and you divide the error that's lost or MRR that's lost that's below the line and you just do a quick ratio. And so there are two examples here of companies. One on the left is a company that we, the two companies that we did not invest in. And to the right are two companies that we invested in. And so here's the quick math and this is what it looks like. Companies on the right, 4 or above. Company on the left, less than 4, simple pass invest. It's not always that simple. But you know, we try to use data as much as we can to make good decisions. And this here's a way of making some good decisions. We still don't know though. All right, so what's the recap and what's the good and the bad here? You know, you want to try to get product market fit, get to 1 mill an ARR. If you're a super early stage startup, you want to see your MRR grow quarter over quarter. If you don't grow month over month, it's not the end of the world. But if your MRR is declining quarter over quarter, it means that you're not presumably getting better at selling. You're not getting word of mouth, you're not getting raving customers. You know, a lot of the companies that we've invested in grew to that 1 million, that 2, 3 million, 5 million purely on word of mouth and no sales and marketing. So that's super important to have efficiency early on and get the product market fit right. It's just really good hygiene. And then that quick ratio thing, you know, that maintain a quick ratio of greater than 4 aspirational what to watch out for that low quick ratio churn being too high and new sales that are not working. And then I think net new MRR declining is terrible again. It's like you need to go back to the drawing board and see what's going on with your sales or your product. Because something is off there. And because of all this, maybe you're just not growing fast enough to get to that $1 million of ARR. So here, just very high level takeaways. There's a lot more to it. But just if you can think about some of these things and use it as a framework, I think it'd be helpful to all of you. So let me just sort of sum it all up and look at a company that's eight years out. And the line on the top is a beautiful hockey stick line with really nice gross churn and really nice negative churn, which I think is achievable for companies. And at the bottom line, the blue line is one where it's high churn, high gross churn and not so great negative churn or net churn. And it's a $500 million difference over a period of eight years. And if there's one takeaway from the Box IPO roadshow I just sort of impart is that if box stops selling today to new customers and just focus on growing their existing customer base, they will be a billion dollar business in 2020. And I think Aaron may have even talked about it earlier today, is how do you sell better to your existing customers, the customers who may already be happy and how do you keep them happy and grow and the typical land and expand model, which is so beautiful in sas. So if there's one thing I want you to take away from this presentation, That's it. So don't churn and burn. All right, thank you very much. Please, if you have any questions, email me or Andy, one of my colleagues who helped me put together this presentation. We good? Yeah. Awesome.

Thank you very much. Thank you, Jason.