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Meet Erik Rannala, Managing Partner at Mucker Capital
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.
Prior to founding MuckerLab, Rannala was most recently at Harrison Metal Capital where he and partner Michael Dearing led one of the first seed-stage focused "Micro VC" firms in Silicon Valley.
Before Harrison Metal, Rannala served as global vice president of product management and strategy at TripAdvisor, the largest travel community site on the Web, and he spent over four years at eBay, where he held a variety of positions, including leadership of eBay’s premium features business.
Previously, Rannala held leadership roles at MVP.com, where he was the online sporting goods retailer’s first marketing employee, and at Accenture, where he advised Fortune 500 retail, communications, and consumer products clients on strategy, operations and technology engagements. He was also an early member of Accenture’s first practice group dedicated to Internet strategy and development in the mid-1990’s.
Rannala earlier served at the Domestic Policy Council in the White House, where he worked on issues such as equal employment opportunity and Native American affairs. He holds a BS from the University of Delaware and an MBA from Duke University.
VatorNews: What is your investment philosophy or methodology?
Erik Rannala: We are seed stage investors, and we invest very early in a company's lifeycycle. We are the first institutional investor the company has, or one of them, but often the first and only. That's one dimension of how we qualify, and view, our place in the ecosystem.
Another way we do that is by investing in Internet software-enabled businesses. We don't do biotech, medical devices, or hardware. No clean or green stuff, we are just focused on software.
The third thing is that we're based in LA, so were pretty focused on SoCal as an ecosystem. The majority of our investments are here. If it's outside of SoCal, we want to have a good reason to invest, like we know the founders well, it's good fit for us, or there are extenuating circumstances.
When you think of LA, you obviously think of Hollywood and the entertainment industry, but that's only about 8 percent of GDP. We are a large, diversified economy and one that is not contained to one domain of expertise. In Silicon Valley, companies are changing industries and domains where they have no expertise. We have distruptive businesses here, and we have experience here.
LA a lot more than a digital media town or adtech town, because of the diversity of that experience. For example, SpaceX is here, because we have a legacy of aerospace. We also have enterprise software, plenty of media related stuff, but it's a whole lot broader than that. We've invested in a lot of SaaS, network security and fraud detection, e-commerce, FinTech. It's a really broad diversity, so there's no LA-type company. It really is all over the map because it's a very large diversified market. We have a tech labor force the same size of Silicon Valley, but we've gone beyond core industries in LA.
VN: What do you like to invest in? What are your categories of interest?
ER: A big reason we only do software is my partner and I spent our entire careers on Internet related stuff. Our entire careers we've been building products, scaling them, so we invested in those types of companies. Its what we know, and what we feel comfortable investing in.
Beyond that, software is transforming every industry, so its also a fruitful, active place to invest. A lot of what's happening, the transformation, is because of software, and a lot of software is Internet-enabled and network connected. There's a lot of disruption and transformation, and a lot of new industries being created as a result of software.
There's so many new businesses and products being created, and it just so happens to be what we are experts in.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
ER: We've invested pretty broadly in software. We've done SaaS, like with ServiceTitan, which is a vertical SaaS business for trade industries, like plumbers and electricians, who run their entire business. One trend in SaaS, whereas it started broad, with horizontal solutions, over time, as it got more functional with SalesForce, now we're starting to get vertical CRM, and industry specific SaaS. It's an interesting opportunity and it's growing very fast.
ServiceTitan is not a household name, but it has big, interesting customers, and it raised a pretty large $20 million round from Bessemer.
A newer company is Kangarootime. That's also a SaaS vertical, focused on early childhood education and daycare. It's still very early relative to ServiceTitan, but it's doing great, and its going to start growing very quickly. It's like another ServiceTitan, in the sense that's its a really interesting business.
Also, The Black Tux, an online tuxedo rental service. It's a great business. The tuxedo rentals category is worth billions but it was 100 percent offline, so this is software changing the category. Nobody was doing this. They were going into a category where there was no software. It was fragmented, in mom and pop shops, and had bad customer experience, so they came in and built an excellent customer experience.
Fitting isn't as hard as I would have thought. All you need are need basic measurements, like waist, jacket, inseam, and most people already have that info. They also collect other measurements, and once the customers gets it they can send it out get altrations, or can overnight a new one.
They grown really fast. They raised a large Series B, and are also doing eight-figure revenue run rate.
We also invested in Retention Science, a big data platform for e-commerce and retail that helps companies use data to better retain and reactivate customers. There's an old adage, that it's cheaper to keep customers than to get a new ones. Basically, it is a lot cheaper, and there's a lot of money spent on customer acquisition, but not on retention. They use the retailer's own data, along with third party data and machine learning algorithms, to individualize on a customer by customer basis. They also have fantastic clients, including large retailers.
VN: What do you look for in companies that you put money in? What are the most important qualities?
ER: Team and market are the two most important things. Without a good team you can't execute on something. Lots of people have really great ideas, but never execute on them.
With market opportunity or size, it comes down to the economics of how funds work. We are a minority shareholder, investing early. The average mortality rate is 40 to 50 percent who don't make it. The dynamics of how venture works is that companies have to be addressing large market opportunities, so they can scale the business to a size where the return on investment is successful. They have to generate good returns to offset losses.
There's no magic number, but a good rule of thumb is that is has to be at least a $1 billion opportunity that is addressable by the company. Even if they aren't a leader, they can still get to a significant revenue run rate, and that ownership stake will be worth a lot.
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?
ER: With seed investments I like to see data. Even if it's very early, I still want to see that companies are running customer acquisition experiments, to get early insights into how customers are using the service, and how expensive it is to acquire them.
At the accelerator stage the huge difference is that it's just an idea, and hasn't done anything, but I want to see they've got a prototype, and some sense of what the cost of acquisition is. Even if it's still very early, they should have started to do a lot experiments. I want to see they weren't waiting for someone to invest before they do the work. You can run experiments for hundreds of dollars.
So we're always looking for data. It doesn't mean massive traction, we just want to see that mindset in every entrepreneur.
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?
ER: I think the nomenclature has changed, but seed rounds are in the $1 million to $2 million range. If you hit $3 million it's still A, even if it's the first round and you call it a seed.
VN: What are the attributes of a company getting a Series A?
ER: I think the bar has gone up in the last six months, and the sentiment has changed. Every stage, seed, A, B, what investors are looking for to get an investment, and this is a natural part of the cyclical nature of the business, goes up and down. It's been going up for several years, at some point it had to level off or come back down. We've seen the beginnings of that the last few months.
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?
ER: I think it depends on the definition of a bubble. I'm not sure it's a "capital B" bubble like in 1999. More like the natural cycle of this business. One could call the top of the cycle a bubble, with a "small b," but not a true economic bubble. It's more just that markets go up and markets go down. We were on the up side and and now it has either leveled off or it's coming back down. It was not a big bubble like 1999 for sure. The only certainly is change, and so the market has turned.
VN: If we're in a bubble, how does that affect your investing?
ER: New companies we're investing in now, it will be a different late stage market when they get there. Companies we invested in previously, some have gotten there, it does affect them.
A lot of people say, 'Great companies always raise money.' It might affect valuations and terms, but the best companies plot a course toward independence or self sufficiency. Companies that can't do that just have to figure out how to finance the business.
I think it does affect how we invest. Companies that can raise capital in down markets; that speaks to the strength of the business and the commitment to quality of the entrepreneur.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
ER: Becoming a VC happened serendipitously. Immediately before starting Mucker four years ago, I spent my career in business strategy. I was at Harrison Metal, but before that I did operating type jobs. At TripAdvisor I was VP of product, so I led product and strategy globally. Before that I was at eBay from the early to mid 00s, where I led the premium business, and add-on revenue. There were a bucket of features I was responsible for. Before that, I started MVP.com in the first boom, or bubble, of the late 90s. And before that I started as a software developer at Accenture. I started as in software development, then switched to product and marketing, and then rode that up and down.
I went to business school, and ended up at eBay, which was one of the few Internet companies hat really thrived through the downturn. I was lucky to land at eBay when it was growing rapidly. I left in 2006, along with a bunch of people when there was a regime change, so I went to TripAdvisor. Michael Dearing was teaching at Stanford, and angel investing, and we reconnected. His investing ramped up, morphing into a fund, called Harrison Metal, and that's how I got into investing.
I really liked the seed stage, and realized there was a SoCal gap in the market. There was no institutional backing, and I thought that was crazy, so I started Mucker with William Hsu, another eBay colleague.
VN: What do you like best about being a VC? What makes you excited?
ER: We love helping entrepreneurs build businesses and products. I'm lucky I can make a living doing this. It's a real job, but in a way it's a hobby we love doing. We've ended up helping entrepreneurs who are not even in our portfolio.
We have the opportunity to meet lots of entrepreneurs, and work with portfolio companies on a bunch of different products.
Seed stage is nice, since it is the early formative stages of companies, where they are at their initial go to market. That's one of the most exciting parts of building a business.
VN: What is the size of your current fund?
ER: It's a $45 million fund.
VN: What is the investment range?
ER: Our initial checks for seed are in the $750,000 range. In the accelerator stage, it's under $100.000. $25,000 to $100,000.
Over the life of a company, we target to invest a couple of million. It really varies, and depends on valuations and circumstances. We make follow-ons on an individual basis, round by round.
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?
ER: We dont have hard and fast rules, but our target ownership is 10 percent.
VN: Where is the firm currently in the investing cycle of its current fund?
ER: We closed this fund a few months ago, so it's pretty early.
VN: What percentage of your fund is set aside for follow-on capital?
ER: We reserve a majority, so over 50 percent.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
ER: Our focus is on seed and pre-seed. We are not doing initial investments at Series A.
VN: In a typical year how many startups do you invest in?
ER: We invest in about seven to 10 seed companies a year. Our Accelerator, MuckerLab, works with 10 companies a year in our annual cohort. So, in all, around 15 to 20.
VN: Is there anything else you think I should know about you or the firm?
ER: I really like to be hands on, and involved with companies, and very operationally focused in tactical way. I work closely with companies on the nuts and bolts, day to day, issues. We have weekly working sessions, where we get into the tactical weeds of the business. We focus on product and go to market. That's the way we like to work with companies and try to add value.
We also have a network of several hundred people who are advisers, and who give expertise to the companies.
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