Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Willard previously worked at Coupons.com, Practice Fusion, Atlassian, NextCard and Boeing
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 money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
For 14 years prior to Subtraction Capital, Willard was a product, design, marketing, and analytics executive at tech startups including Coupons.com, Practice Fusion, Atlassian, and NextCard.
He has been mentoring and managing people in the tech space since 1999. For seven years before that he was an Aerodynamics Engineer for Boeing.
Willard has an MS in Manufacturing Systems Engineering from Stanford University, and a BS in Aerospace Engineering from Iowa State University.
VatorNews: What is your investment philosophy or methodology?
Paul Willard: We are neoclassical in our approach, in that, in the early days of venture, it was about venture capital firms making concentrated investments in a small number of companies and spending a lot of time actively with them. We like that approach for us. In our operating careers, we enjoyed forming lifelong relationships with the people in the teams that we were part of and we look at this as a continuation. If we went out and made very small investments in 100 companies we would not be able to spend significant time with these tremendous people. This approach also leverages our operating careers best.
We are independent thinkers. This is aided by the fact that we are engineers, and like to analytically construct from fundamentals. For example, I have a forest fire analogy about what sectors are about to become opportune. The trees that burn the hottest in a forest fire will determine where the fire spreads next. So sectors that are transformed today will necessarily fuel the nearby sectors in the next wave. We trace changing sectors like a mechanical design based on what the Subtraction Capital family feels is working on the ground today.
We act on our conviction. We have both changed sectors and disciplines repeatedly in our operating careers based on beliefs we held about where we could be impactful. I call it vertical hopping. And we have developed the confidence to tune into as well as benefit from our intuition as a result.
We are relentless. We worked as operators at tech companies for nearly 15 years. Startups are hard, and to grow fast you have to wake up each day and push harder than you did the day before even though it might not seem possible. Doing this as part of a family is what leads to the rich enduring relationships that we believe will fuel our firm’s success.
VN: What do you like to invest in? What are your categories of interest?
PW: We like enterprise software. We tend to invest in verticals similar to ones that we worked in during our operating careers, probably for several reasons. Our networks are richer there so we probably see higher quality referrals. Our operating backgrounds are more useful to the companies so they are more interested in having us as part of their team. And we know enough about the space from having worked around it to have a constructive understanding of the markets. Fortunately, we were both vertical hoppers, so we have a range of markets that we like. We both worked in Fin tech and Health tech, Jason worked in big data, and Paul worked in digital marketing and the aircraft industry. So we can cover off a lot of ground.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
PW: It’s like asking me who my favorite sister is, they are all family. And they are at different stages, so just because one is further along doesn’t mean that it is moving faster or that it will be bigger or smaller over the long run. We are so thankful that our whole family is doing so well. So I usually mention a couple companies that have raised 2 rounds of funding since we initially joined their team.
One of those is eShares. eShares does digital cap table management, 409a’s, everything you need to manage equity ownership of private companies like tech startups, small business partnerships, and family businesses. Every private company should use it, because it is better, faster, and less expensive than the old paper way of doing these things. Henry Ward is an amazing founder. His conviction, tenacity, and smarts are all off the charts. He is taking a big, very difficult challenge, deconstructing it into pieces, and executing relentlessly piece by piece.
Another is PokitDok. Pokitdok is making all digital health data accessible to every company in a modern, cloud based API including insurance eligibility, pricing, claims and scheduling. Lisa Maki and Ted Tanner are savvy, veteran operators. They are ambitious and it is important to them to have broad impact on a very meaningful space. Their fearlessness taking down challenge after challenge is so impressive.
VN: What do you look for in companies that you put money in? What are the most important qualities?
PW: Quite simply, we invest in companies that we would like to work for. We are not going to be employees there, that's not the goal here, but, putting that filter on, and saying, 'If I stopped working at Subtraction Capital tomorrow, would I be thrilled to be joining this company.’ There is a lot that goes into choosing a company you work at.
First and foremost is the team. Will you be happy every morning that you are spending the day with them? Are you going to enjoy this relationship for the rest of your lives? Are your team mates capable? Startups are huge team efforts. Are they just stubborn enough, appropriately stubborn? Do they have enough passion and conviction to push through hard things, but enough pragmatism to adjust their view where the market tells them it is wrong. Do they want me on their team? Desire needs to be two ways before you accept a job offer.
The market is also important. First and foremost, is it something that you care deeply about? Is it big enough that success will be meaningful? The exact form of the market is not always clear at the start, so is there enough dry powder in the area so that as it clears up it can be something big? Will it be defensible once you acquire the market?
Finally, we need to believe there will be solid development velocity. It is a huge determinant in the resiliency of a tech startup and this is very important to the success of the company.
The easiest way for me to get a feel for all of these things is to simply go work with the company for a half day. No decks, just log into the regular analytics, look at product backlogs, develop a financial model together, whatever is highest priority. I try to add value while we work together. There is no better way to get to know what it will be like to work with people than to just do it. For the companies too, they have a very good understanding of how we think, approach and interact with them once we have worked together. It is really the best way to start a family relationship for me.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
PW: We are not dogmatic about things like this. They are just so contextual to a business model, market and strategy. In general we are both analytical and quantitative. We look at things like first and second derivatives of growth. We like cohorts and segmentation analysis. We like to see market size and definition refine. But applied appropriately to the context of the company including the stage. As a methodology, we like to start at the next round of funding and work backwards. Then revise as you get real data to fill in along the way. We favor building reasonably conservatively and when possible building in controls so that critical parameters like runway and net burn can be adjusted based on results.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes to get that Seed round? Since it's a "Seed" does it imply that a company doesn't have to be that far along?
PW: There's a spectrum is the first thing that I would say. Some people are going after a $400,000 seed round very early, before they have much traction. Some people are going after a $3 million seed round, although I'm seeing less and less of that recently. If you're going after the $3 million round, you're going to have more traction and more real product in the marketplace, or a really proven team where there's high confidence that you're going to get that initial traction and you're going to have the kind of development velocity needed.
Seed rounds became a great value as baseline infrastructure got better, faster, and cheaper. Products like AWS, Github, jquery, Optimizely, and Outbound.io and on and on have made it so that you can get as much traction as an A round company did a decade ago for one fourth the time and cost. This value attracted more capital in seed and early stage and the institutional early stage investing that is prevalent today. So the market is adjusting constantly based on this value balanced with the supply of capital.
VN: What are the attributes of a company getting a Series A?
PW: Product-market fit can be demonstrated by happy customers in a valuable market. A management team capable of scaling is assembling. The business is ready to scale, with a good idea how to deploy capital as things grow forward. A cohesive culture is in place that supports the mission and culture of the company.
I also believe that the Series A crunch is absolutely real. You can build a company with metrics and the kind of traction that would have you as a slam dunk Series A 10 years ago, and it might not get you there today. Jason wrote a blog post called, 'A Rising Tide Lifts All Boats,' and it was based on that same premise that you're going to a capital market for Series A with more competitors than ever.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble?
PW: There was over supply for a while but we are seeing it correct now. That has been catalyzed by public market valuations of comparables falling as well as a lack of liquidity in late stage secondary. A macro drop may accentuate the correction more.
VN: If we're in a bubble, how does that affect your investing?
PW: I mentioned earlier that relatively high valuations in late stage are correcting. I also mentioned that I have been seeing Seed valuations backing down. Also, at the stage that we are investing, our investment cycle is longer than a valuation cycle like this. Both Jason and I have worked through two of these cycles, so we are pretty disciplined about investing in real value creation that is less sensitive to shorter term market volatility.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
PW: I went to Iowa State University in the late 1980s and got a Bachelor's Degree in aerospace engineering. After 7 years as an aerodynamics engineer at Boeing, I got my Masters degree at Stanford in Manufacturing Systems engineering at the height of internet 1.0. After 14 years as a product, design and very quantitative marketer I felt like I was having too much fun on nights and weekends helping friends get their startups going, so I wanted that to be my day job. Subtraction Capital was a great way to make that a reality.
VN: What do you like best about being a VC? What makes you excited?
PW: The Subtraction Capital family is amazing. I feel so fortunate to get to work closely with so many teams full of really talented people. Working hard and winning with family day in and day out is the best job I have ever had. I have also always really enjoyed mentoring and the VC role includes a lot of coaching and sharing my experiences that scratches that itch. Like anyone that has worked for so many startups for so many years, I have made gobs of really terrific mistakes that I learned from. And I love sharing that with the family so that they can make better ones and we can all learn even more together.
VN: What is your investment range?
PW: At the seed stage we like to initially invest around $600,000 and at series A we like to initially invest around $1.5 million.
VN: Is there a typical percent that you want from a round? For instance, do you need to get to 20% or 30% ownership?
PW: We are not dogmatic about an ownership target.
VN: What percentage of your fund is set aside for follow-on capital?
PW: We reserved 2/3 of the fund to follow on
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
PW: We invest from Seed to Series A.
VN: In a typical year how many startups do you invest in?
PW: In order to maximize the network value creation, we want to keep the family really close, so we want to add about 3 companies each per year, or 6 for the fund.
VN: Is there anything else you think I should know about you or the firm?
PW: We look at every relationship as a lifelong journey together. It is a really fun journey, but it will also be hard and frustrating at times. We are looking for people that want to travel and win with us. To join our family. And our firm’s success depends absolutely on their winning, so we will fight relentlessly with them.
I am one of the cohosts of the Agile Marketing Meetup. It is a free meetup in San Francisco each month where I try to get someone to share very practical experience. I also film the speakers. People can find the rsvp link as well as see videos of prior speakers at sfagilemarketing.com.
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