There has been a big debate over the last few years over whether the Series A crunch is real or not.
What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give more and more money to young companies looking to make it big.
But just who are these funds and venture capitalists that run then? What kind of investments do they like making, and how do they seem themselves in the VC landscape?
We've been highlighting members of the community to find out.
Francis has 25 years of experience working with consumer driven companies. Since 2004, he has been a managing director at Shasta Ventures where his investment focus is technology-enabled consumer companies. Previously, he spent ten years in marketing and management positions including serving as a partner at Ram Group Marketing Management, and as a marketing manager at Johnson & Johnson on the Tylenol brand.
Francis earned his MBA from the Kellogg School of Management at Northwestern University. He also holds a Bachelor of Arts in Economics from Northwestern University.
VatorNews: What do you like to invest in? What are your categories of interest?
Tod Francis: As a firm, we are a focused fund, with a focus on early stage, Series A or early Series B. Specifically, as a firm, we focus on the consumer space, the software space, and connected devices between the two.
Personally I invest in the consumer space, where tech can enhance the end user experience. That includes e-commerce, networking, marketplaces, mobile, where tech enables consumers and suppliers to have better experiences.
On the software side, we like software service companies, and we have a strong interest in connected devices.
Every consumer category is going to be changed with personal technology, and a particular driving force is mobile with location-based information, so we think everything we do will evolve with this new generation. We think that its a really exciting time for large industries and categories to be improved and distrupted by new technology.
VN: What would you say are the top 5 investments you have been a part of? What stood out about those investments in particular?
TF: From a firm standpoint the most significant is Nest. That's a great example of a great team using new technology to change an existing consumer industry. They are not changing consumer behavior dramatically, but developing a new product to change an existing need. They have a top notch team that helps improve the experience.
Nest showcases what Shasta looks to do.
Nextdoor was another really strong team. They use technology to connect neighbors and communities, acting as a social network for neighborhoods.
What we're excited about there is the potential to be the communication platform for every neighborhood in America and beyond, so you can see what products and services your neighbors recommend. There's a strong commerce opportunity.
Facebook is for friends and family, LinkedIn is for work, and Nextdoor is for your neighborhood, where you'd talk about very different things than on Facebook. You're not going to say, 'I need a new roofer, who is the best one in the area?' on Facebook, and on Nextdoor you're not going to post about your vacation. They have distinct consumer use cases. They are focused on building out neighborhoods, and when they decided to bring commerce into it, it's going to be completely natural. It will be largely commerce oriented, helping neighbors find a good handyman, plumber or babysitter.
Doctor on Demand was also a really strong team, using mobile and video to bring real doctors visit into the palm of our hand.
They are addressing major pain points, such as getting to the doctor, scheduling and waiting for a five minute visit. The company enables you to use the app, and within 30 seconds get you talking to a doctor, one on one. They are fully able to diagnose symptoms and prescribe medicine. It's a better doctors visit than going to the office because they are completely focused on you during visit.
It is disruptive for the consumer to get healthcare immediately, and its great for the doctor because it allows them to make incremental income from office rather than running a large clinic. They are a younger company, but they are very disruptive.
VN: What do you look for in company's that you put money in? What are the most important qualities?
TF: The team is most important, but also if the technology can disrupt and bring better customer experience. We ask, why is this relevant today?
We also want to know if the category is large enough. If they wind up winning is there a prize at the end of the day?
On a secondary level, we look at the network effect, and the way they can grow in an unnatural manner. Besides buying a customer, what is the organic growth opportunity? Can they grow naturally above marketing program? Because its hard to buy your way to a big business. Is there a business model opportunity if they acquire the customer?
I've also come to realize that you can go into a hugely competitive market, as long as you have something innovative and disruptive. We look for an indication of how large the market is, and if there are all new tech players. We are not as concerned about the large established players.
When we look at categories, and the opportunity to disrupt, and the nature of the existing players, we ask if a startup be more innovative.
Having said that, a lot of companies that are very successful were not the first one. Google and Facebook at the best examples. So is Uber. It's not black or white, it's about the dynamics and whats the unique angle that this company has relative to the industry.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
TF: My background is all in consumer products, that’s where I worked my whole career. I did brand marketing at Johnson and Johnson. I was there for the poisoning incident and I saw how they managed that incident and I was very impressed.
I came in venture capital in 1993. At the time Trinity was one of the few that did consumer oriented investing, like Starbucks and PF Changs.
The Internet exploded up and then exploded down, and no one wanted to touch the Internet space in 2001. So I said, 'Do I change my practice area and leave consumer or leave the firm?' I had to leave to continue to pursue my interest in consumer and Internet investing. The whole industry was hesitant on the consumer space, but we started Shasta from scratch to put investments behind companies that would improve end user experiences in consumer and software sectors.
VN: What is the size of your current fund?
TF: We started 10 years ago and now we're on our fourth fund, which is $300 million.
VN: What is the investment range? How much do you put into each startup?
We typically enter a company with $3 million to $8 million up front, and up to $15 million to $20 million in overtime.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
TF: It depends on the stage and the dynamics of a round .Our model was 20% ownership for $3 million to $6 million in the Series A, but the markets have changed so we don’t always get that. It depends on how much they are raising and how well they can adapt to new markets.
VN: Where is the firm currently in the investing cycle of its current fund?
TF: We just raised our Shasta 4 fund, so we are at the beginning of a two and a half to three year cycle. We just started eight months ago.
VN: What percentage of your fund is set aside for follow-on capital?
TF: It goes on a company by company basis, what the dynamics of each company are, what the future capital need to are going to be.
Typically the initial investment is 50%, and we an save equal amount for follow on investment over time. So if we go in with a $6 million investment, and we do two more rounds, on average we reserve $6 million to $7 million.
VN: In a typical year how many startups do you invest in?
TF: Between 10 to 14 companies per year across the firm.
VN: Is there anything else you think I should know about you or the firm?
TF: The thing we haven’t talked about is how we work with entrepreneurs in today’s market environment. Because we operate on a more selective approach and do a smaller number of investments, we like to have close relationships with our founders. We want to be very accessible, and build a support system for them to be successful. We want to be very accessible, and build a support system. It's important to those who we invest behind to be more intimate, more manageable and have a closer relationship. We can do that since we have as many companies in our portfolio.
That, along with our focus, is part of a deliberate strategy. Entrepreneurs want investors who spend their time in their sectors, so we do just software services, consumer and connected devices. If you hurt your knee you want to see a knee doctor. We feel the same way about entrepreneurs; they want to go to people who spend their time in that space, so we do just software services, consumer and connected devices.