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Editor's note: Our Splash Health, Wellness and Wearables event is coming up on March 23 in San Francisco. We'll have Mario Schlosser (Founder & CEO of Oscar Health), Brian Singerman (Partner, Founders Fund), Steve Jurvetson (Draper Fisher Jurvetson), J. Craig Venter (Human Longevity), Lynne Chou (Partner, Kleiner Perkins), Michael Dixon (Sequoia Capital), Patrick Chung (Xfund), Check out the full lineup and register for tickets before they jump! If you’re a healthcare startup and you’re interested in being part of our competition, learn more and register here.
Also, vote for your favorite healthcare startup before February 16! Vote here!
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
In this edition of "Meet the VC," we interview Patrick Mathieson, Partner at Toba Capital.
Patrick has been a partner at Toba Capital since 2014. He invests mostly in software-as-a-service businesses and currently sits on the board of directors at Toba portfolio companies FloQast, NurseGrid, PatientPop, SKUPOS, and Transifex.
VatorNews: Tell us a bit about your background. What led you to the venture capital world?
Patrick Mathieson: I first got started in the technology industry in 2008 during a summer internship at an enterprise software company called KACE Networks. Dell acquired our company in early 2010, and one thing after another led me to work at Dell at around the same time the company acquired Quest Software (ticker: QSFT). Several of the former Quest executives broke off to start Toba Capital in late 2012 and I joined a couple years after that. I've been in venture for close to three years.
VN: What is your investment philosophy or methodology?
PM: I mostly try to find talented and dynamic entrepreneurs, and listen to why they have (or have not yet, but will) hit on something that has a chance to be huge. Then we look at the other side—at the customers: Is this an urgent problem? Do people want to pay to solve it? Who's the buyer and what are his/her incentives? Does this product address those needs? Does it go beyond merely addressing them, and actually delight the customer? When we're already excited by the team, and then the market shows real enthusiasm for the company's approach, there's kind of a magic moment where we say "Whoa, holy crap!" and the founder goes "I know, dude, it's crazy" and by that point both sides are pretty fired up to get a deal done. That's not the entirety of our approach but those are some significant pieces.
I should point out that founder-to-market investing is very different than the type of investing where you pick specific sectors or themes and then seek out companies that fit in those boxes. Other investors are fantastic at doing that, but it's usually not our approach. While there is certainly value in investors having a point of view a priori, my belief is that one of the worst things VCs can do is discard investment opportunities because they "don't like the space." Most of our best deals have been those where an exciting founder pointed us in the direction of a market that looked stale or murky and said, "Let me show you where the real opportunity is here."
VN: What do you like to invest in (categories of interest)?
PM: We focus on enterprise software, infrastructure, and business applications. Lately most of our investments have been in SaaS businesses.
VN: What do you like to invest in (important qualities for companies)?
PM: Many of our portfolio entrepreneurs (and many of our partners) are what you could call the "classic" or "old school" entrepreneurs: the kid who started the lemonade stand; the person who fears salaried work more than death; the buccaneer with Carnegie and Rockefeller biographies on his/her shelf who would be building companies and creating all sorts of enterprises regardless of the industry or time period. Many of our founders have interesting and bizarre backstories. To me, the smoldering desire to build things and be adventurous is a more important founder characteristic than any unique aptitude for technology—but I know that other investors feel completely the opposite, and that's cool too. The nice thing is that there's lots of room for different strategies and approaches in venture capital. Fortunately, these "classic entrepreneur" types tend to like working with Toba just as much as we like working with them.
Another thing I should point out is that very good companies tend to be quite unorthodox. Or weird. Almost all of our best portfolio investments had at least one significant attribute that would be a dealbreaker for a large percentage of VCs. When companies do things differently from their peers or the standard startup approach, then it invites the question of "why did you do that?", and great entrepreneurs will readily explain the rationale behind those decisions. When they have good reasons for breaking from the herd, that's a good sign that you're speaking with somebody who has courage and thoughtfulness.
One thing I've noticed is that our strongest portfolio founder-CEOs tend not to read a lot of articles online written by founders or VCs. It's easier to design your business from first principles if you don't even know what a "normal" company is supposed to look like.
If I had to summarize all of the above, I'd say we are opportunistic investors who seek creative entrepreneurs running weird companies in the B2B space.
VN: 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 of a seed round vs a Series A round?
PM: In B2B, I would generally think a "seed" round is capital used for isolating a whisper of market need, and seeing if the thing you've built to solve that need is a thing that other people want to buy. And a "Series A" is capital meant to take you from "hey, lots of people want this, and some of them are buying" to having a machine that reliably turns inputs (customer acquisition costs) into outputs (gross margins) at an attractive rate. If you can do that, then you've justified the existence of a "Series B" round, because your inputs-to-outputs machine has been validated. That is, should you choose to go down the path of additional fundraising.
VN: How long does it take between meeting the startup and making the investment? How do you conduct your due diligence?
PM: In a perfect world, we'll get to know the entrepreneur long before he/she needs to fundraise. Our most recent investment was about 10 months from "nice to meet you!" to wire transfer. Other times it can be very quick—probably a month at shortest. It all depends. I think one of the best things entrepreneurs can do here is to identify a very short list of ideal investors and spend up to a year getting close to them. Entrepreneur-investor partnerships can last over a decade, so it's rather short-sighted to abbreviate the getting-to-know-you process if you can avoid it. You want to find someone that you'd be excited to work with the rest of your career.
VN: What is the size of your current fund? And where is the firm currently in the investing cycle?
PM: Our fund is "evergreen" which means that it recycles exit proceeds and re-invests them into new companies. This means that it has no "end date" or "cycle" but is never-ending, like a hydra or immortal jellyfish. It also means that we're always investing. Our total investments to date have been around $500 million.
VN: What is the investment range? How much do you put into each startup?
PM: 90% of the time our check size is between $1 million and $10 million.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20 percent or 30 percent of a round?
VN: What series do you typically invest in? Are they typically Seed, Post Seed, or Series A?
PM: Series A is probably our most frequent round, but we do all sorts of stages and deal types. We prefer investing in companies before they are household names.
VN: In a typical year how many startups do you invest in?
PM: We added six new companies to the portfolio last year.
VN: What do you like best about being a VC?
PM: Two things. The first is probably how everybody responds to this question: That VC is all about people and relationships, and that investors are in a great position to meet captivating people and work with them for a long time.
The second is that the scorecard for investing is "pure": Either your investments make money, or they don't. You either get invited to work with great companies, or you don't. Luck does play a huge role, but at the end of X years of investing you have some pretty ironclad feedback about whether you've done a good job or not. I'd take that over an "annual review" any day.
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