2014 was undeniably a productive year for Scale…but it’s in our DNA to regularly ask ourselves, “Can we do better?” Particularly when the market is as competitive — and potentially frothy — as it is now. The first thing we do is go back to our principles. While our job is to buy low and sell high on behalf of our limited partners, the real value is created by the fundamental high growth generated by our portfolio companies. That is why we spend our energy looking at company go-to-market strategies, customer traction and sales productivity rather than stock prices. A transformative category leader with skilled execution in a growing sector will be able to exit successfully in almost any market.
We’ve had the good fortune to invest in and partner with a number of best-in-class entrepreneurs who strategically grew their startups into dominant market leaders.These are teams that begin with an understanding of how to consistently delight their customers in large and globally expanding markets. The Scale model is to complement that vision with the experience and knowledge we’ve developed after 15+ years helping early-in-revenue enterprise software companies successfully grow.
In 2015, we’re “productizing” that scaling expertise to make it more accessible to entrepreneurs. The ScaleVP team is doing that by investing in our own best-in-class “Scaler,” Dale Chang, who joined us this month as VP of Portfolio Operations. Dale has incredible depth of knowledge on how to successfully scale market-leading software companies.Dale formerly was a partner with the Alexander Group, the premier independent group for sales execution in Silicon Valley. Our team and our portfolio companies are lining up outside Dale’s door to tap into his expertise and network. Given our focus on investing in companies early in their commercial lives, our ability to help them travel up that learning curve and execute quickly can make a difference between dominating a market and being the runner up.
As my partner Rory notes in a recent blog post , “… our objective is to compress the sales learning curve and … the whole scaling process in our portfolio. We don’t mind paying to learn an expensive lesson once, but we see no value for us, or for our CEOs, in having multiple companies pay for the same lesson.“
Dale is the most recent in a string of strategic hires and promotions we made this past year to help us accelerate our own growth. Cack Wilhelm and Rose Yuan joined us in the summer, and in the early fall, Ariel Tseitlin was promoted to Partner and Susan Liu was promoted to Senior Associate. And we continued to expand our network of successful operating executives with our most recent Executive-in-Residence, Bill Burns, who shared his expertise in the security issues that are increasingly plaguing large companies and governments, and helped us run a recent survey of Chief Information Security Officers (CISOs). His insight helped refine our approach to investing in the security sector. This collaboration resulted in our September investment in Agari.
Today’s momentum is built on a series of recent successes. We were thrilled to see the teams at BrightRoll, Everyday Health, Hubspot, Healogics & Jaspersoft realize strong exits in 2014 and congratulate Box on its successful IPO last week, the first large tech IPO for 2015.
It is a great time to exit, but a tricky time to invest given the high-priced environment. Our experience with more than 20 companies who have scaled successfully has improved our deal flow significantly, both in quantity and quality. It also gives us increasing confidence based on the common patterns we find in early-stage companies who are best positioned to lead in their markets and achieve successful exits. We continued to be disciplined about investing, selecting real gems to add to our Fund IV portfolio last year. These include:
We have never felt better about how the Scale team and our portfolio companies are performing – everyone is firing on all cylinders – but we remain attentive to the market forces around us. The venture industry raised more capital last year than it did in the previous seven years. Given our long-held beliefs about the dangers of an oversupply of capital, that puts us on our guard. That oversupply coupled with high private valuations means our investing, and that being done by our portfolio companies, need to take into account that enterprise valuations will return to normal levels sooner rather than later. At that stage, there will likely be a greater gap between the best companies and the merely good companies. This is why we have sharpened our team, our focus and our execution. Our eyes remain fixed on working with transformative companies that can be positioned to scale successfully for years to come.
In a business like venture capital, it’s all about people and how they work together as a team. That’s why I am thrilled to announce some new members of our team & two promotions!
Cack Wilhelm has joined us as Principal, with a focus on cloud infrastructure investments. Cack was with us last summer before finishing her MBA at the University of Chicago Booth School of Business. During her summer here at ScaleVP, Cack focused on the twin themes of business processes being automated by algorithms and big data being analyzed for insight. Cack draws from her recent experience in tech sales at Hadoop company, Cloudera and before that, at Oracle. Her technology, sales and startup background is a perfect addition to our infrastructure team and our portfolio.
Cack is also a dedicated runner, racing professionally for Nike for two years at the 5,000m distance and competing in track & field and cross-country while an undergraduate at Princeton. She already has visions of us competing in corporate challenges so expect to see more of us on the track!
Next up, Rose Yuan joins us as Associate. Most recently Rose was an analyst with J.P. Morgan Chase in technology banking where she worked as part of the advisory team on the sale of ScaleVP portfolio company, ExactTarget to Salesforce. Rose will work with us on investments across the portfolio in the SaaS, Cloud and Mobile sectors.
And while we are excited about the new members of our team, we continue to invest in our existing team and are proud when they succeed, since they represent the future of our business.
Ariel Tseitlin has been promoted to Partner. He joined us almost a year ago from Netflix where he was Director of Cloud Solutions. Ariel has been a great addition to the team getting involved in all aspects of the business from joining portfolio boards, to working with Andy Vitus on further evolving our IT sector focus, and even recruiting an EIR for Scale. He has sourced a number of interesting new companies so expect us to be announcing a new investment with Ariel as the ScaleVP lead sometime soon.
I am also proud to announce that we have promoted Susan Liu to Senior Associate. Susan has become a key member of our investment team, working closely with our SaaS team on the sourcing and evaluation of deals. She has worked on a number of ScaleVP investments including Bill.com, Bizible, DemandBase and particularly WalkMe, which she sourced directly at an industry conference.
Finally, congrats to EIR Bill Burns who recently accepted the new CISO position at Informatica. Ariel introduced us to Bill who had been the Director of Information Security at Netflix. Bill was our most recent EIR, spearheading a research project where he examined the priorities for 100 CISOs, what innovations they’re focused on, and how they are planning to help businesses take smart risks. He hosted weekly brown bag lunches to educate us on the inner workings of information security organizations and keep us all informed on what he was learning from the contacts he has made through his work with the ISSA CISO Forum and RSA. The result from his research was insightful and continues to shape our investment thesis around security. As is always the case, our EIRs remain part of our network. Last week, Bill joined Ariel & Cack in co-hosting a roundtable dinner to talk about security with some of our closest IT relationships. Thanks, Bill, we wish you well!
It has been a great year to invest in our future at ScaleVP. Not only have we been adding a handful of exciting new deals to our portfolio, we have been active in making the most important investments that we can make – great additions to our team. We are very pleased to announce that Ariel Tseitlin has joined ScaleVP from Netflix where he was the Director of Cloud Solutions. As a Venture Partner, Ariel will join Andy Vitus in building our cloud computing portfolio which has been a focus area for ScaleVP for some time. Andy met Ariel over a ScaleVP dinner he hosted this summer at the OSCON open source conference and walked away impressed with Ariel’s depth of knowledge, which would be hard to match given his role at Netflix, and with the sense that he would be a good fit with the ScaleVP team.
Netflix is one of the industry’s pioneers in building a modern distributed service, making the bold choice to run entirely on a public cloud infrastructure. Not only have they led the industry in innovation but have done so in an open and transparent way to help others following a similar path. Ariel’s team created and released into the open source community many components of the NetflixOSS Cloud Platform that have enabled Netflix to build and operate a highly available, scalable and resilient system. Some of the more widely covered components include what is now famously known as the “Simian Army”, including the Chaos Monkey, which is technology that creates actual failures to ensure the systems running the Netflix streaming service remain resilient and reliable. Ariel speaks regularly, and will continue to, on trends and best practices within this market.
ScaleVP believes that this trend from traditional owned data centers to a shared “Infrastructure-as-a-Service” (IaaS) is a fundamental shift in computing architecture that will provide multiple investing opportunities and is still in its early phases. ScaleVP is looking to invest in more companies that are poised to take advantage of this shift and even help accelerate it. Recent cloud-related investments we have made include Boundary, PubNub and Datastax. That was the reason we focused on adding a best-in-class cloud operating executive like Ariel to our team.
Prior to Netflix, Ariel was VP of Technology and Products at Sungevity and before that was the Founder & CEO of CTOWorks, a software consultancy helping early-stage entrepreneurs deliver their first product to market. Earlier in his career, Ariel held senior management positions at Siebel Systems and Oracle. Ariel holds a bachelor’s degree in Computer Science from UC Berkeley and an MBA with honors from the Wharton School of Business at the University of Pennsylvania which he attended at on nights and weekends and where he got bit by the investing bug, making him a perfect fit for us.
Please join us in welcoming Ariel to the ScaleVP team!
One of the least intuitive aspects of a startup is knowing when and how to spend money in the pursuit of success. The answer is nuanced.
The first mistake startups often make is “premature scaling” meaning spending money before a company can use it productively. This was documented with some academic research by the Startup Genome, which should be required reading for any entrepreneur. Companies that spend money before being ready to scale will likely waste that money.
Read more of Kate’s thoughts on to when to scale at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
Never underestimate the power of a great collaboration!
At ScaleVP one of the things we care most about is collaborating with entrepreneurs about how to successfully scale their businesses to become the dominant providers in their sectors. When it comes to finding and helping the best companies grow, experienced hands are incredibly valuable. When that comes in the form of a technology leader we know well and enjoy collaborating with, it is even better.
We are thrilled to announce that one of our favorite collaborators, Zack Urlocker, has returned to ScaleVP as an Executive-in-Residence (EIR). Zack is helping us evaluate new investments and is also working one-on-one with a number of ScaleVP’s entrepreneurs on how and when to scale their commercial efforts. We met Zack at MySQL where he ran marketing, engineering and product before the company was sold to Sun. Zack joined us as an EIR in 2011 and focused on evaluating the early applications for Big Data and the development of NoSQL databases that eventually led to our recent investments in Datastax and Datasift. Zack subsequently joined Zendesk as Chief Operating Officer where he grew the customer base 6 fold and the user base 9 fold – to over 200 million users. Zack returns to ScaleVP with significant hands on experience transitioning companies from product introduction to market leadership. It’s a perfect match for our investing focus and a great addition to the conversation around the ScaleVP table. As he shared last week at RedMonk’s Monktoberfest conference for entrepreneurs, “scaling is an art not a science …but it can be mastered if treated like a discipline.”
I am also pleased to share that we have added a new Associate, Gregory Silva, to our investment team. Gregory was most recently an analyst with Piper Jaffrey & Co, helping evaluate the technology landscape and strategic alternatives for growth technology companies. Given his strength in following tech trends, he has hit the ground running. Gregory is busy evaluating a number of new companies and sectors within our focus areas and is a great addition to our team.
Welcome Zack and Gregory to the ScaleVP team…great people times two!
You want to launch a new company, but where do you start? Most entrepreneurs logically focus on product design and engineering first, but I urge you to think again and start with marketing instead. How do you start with marketing when you don’t have a product yet, you ask?
“Big M” Marketing, which means listening to your customers, begins well before you’ve even started your company. You want to hear their needs, issues, aspirations and problems so you can make your product the best fit possible. You probably reach those customers through your own network, and the goal of this outreach is to listen and learn. What is their pain point? How are they addressing it now? Is your idea a better solution? Be customer-centric from the start.
Read more of Kate’s thoughts on to effectively market your startup at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
Given our name, we’re biased, but the ScaleVP partners think the scaling phase of a startup is as important as the product you have built. Our experience with hyper-growth companies that achieved multi-billion dollar outcomes — Omniture andExactTarget, as well as a new crop behind those — has colored our thinking.
Read more of Kate’s thoughts on to effectively scale your startup mentor at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
Mentors can be very powerful allies in your business career but perhaps not in the way they are classically portrayed. I have never had just one mentor — I have had many of them, and they form an ever-changing “Composite Mentor” for me. Many of them might even be surprised that I think of them as mentors since I don’t formally put a name to the relationship I have with them.
Read more of Kate’s thoughts finding a startup mentor at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
ScaleVP closed our latest fund, Scale Venture Partners IV, L.P., last week and not exactly in the way we had envisioned….we raised more and more quickly than any of us would have expected. While we are confident about our strategy (enough to double our GP commit in this new fund), we also assumed that it would realistically take us 6-12 months to finish. We published our PPM in early February targeting $250M, the same size as our current Fund III. We were pleased to announce that Fund IV closed last Friday, May 3rd at the hard cap of $300M.
We understand that a successful fundraise is not our primary goal but rather to generate great returns for our investors. But this milestone makes me sit back and ask, why? Isn’t capital only going to firms that are now into their tenth fund or more? Having listened to our investors, I have a few observations about the venture fundraising environment that impacts us all.
Of course, the ticket to the ball is to deliver cash returns to your LPs. ScaleVP pursues investments in early-in-revenue technology companies just beginning to scale. We are pleased to see this strategy yielding consistent exits, including the recent ExactTarget IPO and the sale of Vitrue to Oracle , and we have a great crop of companies yet to go, including RingCentral, BrightRoll, Box, Docusign and Hubspot .
But while good returns are necessary, they are not sufficient…so what were the other elements at play here?
First, despite our performance and our interest in putting slightly more dollars to work per deal, we targeted the same size fund that we had before, and set a hard cap that was only 20% above that target. That size limit and consistency appealed to investors who have seen other firms increase their fund size, sometimes significantly, once they have achieved success. This brings four questions to mind for the LP: Can the team profitably deploy a significantly larger amount of capital? Will they need to hire a lot of people I haven’t met yet? Are they doubling the size of their funds for the fees? Is there an alignment of interests? By keeping to a similar fund size, we took these questions off the table.
Second, we benefited from the interest in smaller, newer managers. LPs know that, while they want to stay with the proven names, performance is not 100% persistent. In fact, to maintain returns, they need to selectively refresh their portfolio with a handful of next generation funds, which is why peers like First Round, Foundry, Shasta, Spark, True, and Union Square have also been successful at attracting capital.
Third, we further benefited from a broad investing trend (consistent with our own) of LPs building portfolios that are sufficiently diverse but also relatively concentrated. They expect that “buying the index” in venture by spreading small amounts of capital across many names will not get them the multiples they require out of a high risk, high return venture portfolio. When our LPs started our early Fund IV conversations by announcing that they were pruning their portfolios and investing more per manager, we cringed, fully expecting to hear that we might be cut next. We were fortunate that instead, we had a number of investors who, having watched us through our prior funds, wanted to increase their allocation, and in a handful of cases, more than double it.
Finally, LPs want to do a lot of due diligence and want to have the time to do it. If they are going to be selective and invest in larger increments, their investing decisions get a lot of scrutiny by their investment committees, as they should. That focus on detailed due diligence included our returning investors, who started from scratch by doing on- and off-list reference calls, site visits, increased organizational & compliance due diligence in addition to a detailed review of the numbers.
Well, how did we accommodate that level of due diligence in 92 days?
The answer is advice I got when we raised for the first time…never stop communicating with investors, even if you are not fundraising. It starts by staying in regular touch with your existing investors, and not just at annual meetings or advisory board calls. See them or call them one-on-one as often as you can. Connect with them when there is good news, and more importantly, connect with them when there is bad news. We are in a long-term, high-risk business, and LPs are investing in us on a blind pool basis. The more they understand your decision-making and team dynamics, the more insight and confidence they have in your partnership. We stress the “partner” in the term “limited partner” and are incredibly grateful to have them, in turn, be so supportive of us.
Take the time to get to know prospective partners early. The best time to start that process is right after you close your last fund, when you clearly are not fundraising. With this new fund, we were able to add a handful of new investors, who had been following us for at least 5 years, and who we met with at least annually. Over that time, they not only got to know our team, they talked to our co-investors and even met some of the CEOs in our portfolio – and on an “off-list” basis, so they knew they were getting the straight scoop. Just like when we invest, they want to know a team over time to see if they do what they say they will do. For our new Fund IV LPs, the last 92 days was the end of a multi-year process, not the beginning.
The Scale Venture Partners team is fully aware that the most important focus for us is not to raise the capital for our next fund, but to deploy it profitably on behalf of the pension funds, foundations, family offices and other institutions who have entrusted us with their confidence and their capital. We will be working hard over the next 3-4 years to make sure that our LPs’ decision to invest in ScaleVP was a good one. It is the heart of what we do, and our efforts are fully focused on finding the best management teams in the highest growth markets to meet that goal.
There is no one formula for product pricing, although it will be one of the most important decisions you will make. As with anything in business, you need to start with a deep understanding of your customers and what they value.
Read more of Kate’s thoughts on setting a price for your startup product or service at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.