Love at First Site

Yesterday I joined my fifth board and my first for Crosslink.

Years ago I had just received a term sheet for Series A venture capital and went looking for a looking for a bank.   My accounting firm suggested we consider a certain banker at Summit Bank (New Jersey).  I came home that evening to my little rented house, called my friend Steve, and declared I had just had lunch with the perfect woman for me.   We have been married for 21 years. When you know, you know.

My partner Gary Hromadko and I met with a small SaaS company about six weeks ago.  (I will keep the specifics out, as they have not yet announced the funding.) Not knowing what to expect, we sat down and began to listen.

What unfolded was a crystalline and complete story.  The whole package was so clear and compelling, I walked out of that meeting 90 minutes later with a sense of déjà vu. We had just met the perfect deal for us.  When you know, you know. 

So what was it that rang such an obvious and compelling chord?  I can easily enumerate the points.

Greenfield Opportunity
SaaS is a platform shift in the delivery of software.  Every bozo vc knows that by now.  And we all know that existing product markets always get replicated on new platforms, resulting in new businesses built in the ashes of old ones.  Saleforce.com is built in the ashes of Seibel.  Netsuite is trying to build itself in the ashes of SAP or Quickbooks.  This one was a SaaS version of a category that was multi-billions in annual enterprise software revenues, and there is no clear leader in the SaaS version of the category, yet.

Experience and Domain Knowledge
The founders had strong credentials (both business and academic) with a record of real achievement in exactly this product category.  They knew who the customers would be, why they would buy, and why a SaaS version would be appealing.  They also recruited strong, experienced marketing and sales executives whose experience and approach to the job were context-appropriate.  The sales strategy is the right one for the business and the VP of Sales has deep experience with exactly this kind of sales process.

Clear and Simple Product and Roadmap
The product demo was short (10 minutes) and drove home all the key points.  The key success factors were well established in the earlier part of the pitch, making it very easy to see how the product met those market requirements, and why the scheduled future releases amplified the core story and did not take the company in a new direction.  The product can become a franchise.

We Came Prepared
We knew what we were looking for.  As a firm, we have been developing a SaaS practice for some time.  While we were looking at this company, Gary was finalizing our investment in OpSource, which was announced about two weeks ago.  We also are investors in Omniture, which has blossomed into a franchise in SaaS web analytics, and several other smaller SaaS companies.  I had come close to two other SaaS investments earlier in the year.  So by the time we showed up, we had a clear idea of what quality looks like, how to value it, and how to assess it. 

Our diligence confirmed our instincts.  Not only did the team check out as we expected, the customers raved about the product.   When we asked customers about switching, we uniformly heard the “from my cold, dead hands” response.

Why am telling you all this? It is not to puff up the Company. This is part of why I left the company specifics out of the story.   The truth of this business is that it is often one of love at first sight, or never to be loved.  It is rarely the case that the second or third impression is the one that charms.  Probabilities asymptote to zero, not to one. Test yourselves against the first three points, because this is the simple set of criteria most investors use.  Test your audience against the fourth.  Are you talking to someone prepared to appreciate the opportunity you are presenting?

I think we went from first meeting to term sheet in about 10 days. It did take me a little longer than that to get married after that first lunch.  She needed to do a lot more diligence than I did.  When you know, you know.

P.S. August 14, 2007.  And now you know, too.  

Comments

[s]

Super. All I want to know is, everything else remaining the same, what if the team had not been quite there? Would you try to fix that, or just walk?

[Peter Rip]

Great question. It's not really a matter of "there" or "not there." It's a matter of alignment on what needs to be done. If I thought the team needed some changes / additions, I'd ask the founders / CEOs if they shared the same POV. If not, I'd walk, but so should they. If we agreed, there's probably a lot of good work to do.

[s]

Thanks so much. I am worried sick about building the right team. This SaaS startup is outstanding in so many ways, but will cause upheaval. I feel like I'm driving with the parking brake on.

[Andy Blackstone]

I agree with the "when you know, you know" (I had the same experience when I met my wife... took three weeks to convince her we should get married - now 22 years ago).

I'd add to the team part that the team that's perfect as you start will probably not be perfect as you grow. I think this is more true of sales, marketing and CEO than it is for technical troops. So, this will be a continuing "when you know" experience, not a one-time shot. (She's wife #3).

[Andrew Fife]

Peter:

maybe its because I'm not married, but I think the value of "gut instincts" is overblown. I wrote about it last year here:

http://tinyurl.com/29k3w8

-Andrew

[Peter Rip]

Andrew- "Gut" isn't luck.

'Chance favors the prepared mind.'

-Louis Pasteur

We came prepared.

[Jason Wood]

Peter,

Looking forward to hearing about the company when it comes out from stealth mode.

This is a great example of where venture investing differs so much from public equity investing. I wish it were "when you know, you know" but alas it's not.

[cb]

Peter,

Great blog, lots of sound advice, and very thought provoking. Problem I have in all this is getting past the inefficiencies of trying to find the right fit between business model, stage, and industry/sector focus of the VC and the company.

You were plain lucky to have met your wife in the time and place you did. Same with the SaaS company. You're preperation/receptiveness aside, seems to me that there is too much left to chance. Kismet and fate are not business processes.

As an entrepreneur, you need to be in right place and time to even get the opportunity to make the pitch.

What is the most efficient way to achieve the match and not waste time? My fundamental question...

[Peter Rip]

cb -

We found them because we knew we wanted to be in this category. But your point is it looks random from the entrepreneur POV. It needn't be. Look at companies in the prior generation of your industry - who were the investors that backed the winning companies? Start with them. Look at your customers or partners -- who backed them? Look at your competitors -- eliminate *their* investors from your list. It is the adjacent investors who will be most prepared for your pitch.

Go further. Look at the target list and see who hasn't done a deal in this category in the last 2-3 years. They may be ripe. Avoid ones whose last investment in the category was in the last technology cycle -- they are likely to be done mining this tract of land. I feel that way about Electronic Design Automation. Made money once. Lost money once. Am now convinced it is not a good place to be investing. Others feel much the same about [pick one] Enterprise software, middleware, RFID, development tools, etc. etc.

ABOVE ALL treat this like a sales process. Build a list of qualifying criteria, identify suspects based on the criteria, and weed done to a few high likelihood buyers. Don't spray.

[cb]

Peter:

I couldn't agree more and thank you for your response. It's certanily an exercise in market segmentation when you get right down to it. My point is that the market segmentation is dynamic, more like an exchange. Buyers who were there before may not be there now (to your point). A solution, so buyers and sellers can move through the segmentation to meet efficiently (especially for earlier stage companies) would seem to be a winning value prop for some company that can solve the problem.

For the money side it's less of an issue than for the entrepreneurs. I always wonder how many great ideas and companies have just died for the lack of the one connection that was one degree of seperation away.

Thanks again for the blog...many great take-aways.

[s]

Peter, any thoughts on (SaaS) NetSuite losing so much money? They're almost ten years old. I couldn't get to the bottom of it, but wondered if there was some abstract parallel between the online storage concept, and the SaaS concept - that it looks sooo good, but never seems to make any money.
You know, Christensen reminded me that man's early attempts at flight were associated with feathers : since birds have feathers and birds fly, if you put enough feathers on then maybe you can fly. Maybe that's the deal with SaaS. JUST because you put a software application on the web and users don't have to buy, install, or update, that doesn't mean it will succeed. EVEN IF it's the type of application that everyone already uses and they're not competing with nonconsumption. It's possible you invested in something that will be a big success, but not just because it's SaaS. Looks like there's something more going on and you could tell.

[DW]

Very interesting company Peter. I'm certainly a believer in SaaS based BI for the SMB market.

In 2004 I regretfully shuttered my own start-up after a long struggle to raise capital. Our slogan was "Finally, an INTELLIGENT approach to Business Intelligence". We were one of the first to attempt the hosted approach to BI, unfortunately the financial market wasn't quite ready to listen.

The WHEN is just as important as the KNOWING.