Information Venture Partners is a Canadian firm that invests exclusively in B2B FinTechRead more...
Wildcat finances companies in the "traction gap," after initial product and before there's traction
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.
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.
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.
Katherine Barr is a Founding Partner at Wildcat Venture Partners.
Barr is a Founding Board and Charter Member as well as former Co-Chair of the C100, the leading Canadian technology entrepreneur association in North America, and is a member of the Advisory Council on Economic Growth for Canada’s Minister of Finance. She is also an Advisor for the Creative Destruction Lab (CDL) West, and is an Emmy Noether Council Member at the Perimeter Institute, one of the world’s leading institutes of theoretical physics.
Barr was previously a Senior Negotiator at Vantage Partners for global technology companies such as IBM, Cisco, Applied Materials, and HP on their deals with customers, partners, and service providers, a Senior Product Manager at HSA, and a Senior Marketing Manager at ACCESS.
VatorNews: What is your investment philosophy or methodology?
Katherine Barr: We are an early stage technology venture firm. These days, that means a lot of different things to different people.
A specific way to describe our investment philosophy is that we look for companies that are in what we call the "traction gap." That is the go-to-market stage for companies in between what we call "IPR," or initial product release, and MVT, which is minimum viable traction. We did a lot of research on this and saw that for companies between seed stage and Series B, only about 23 percent or so of them make it though the traction gap. The traction gap is a tough and risky time for companies figuring out how to go-to-market effectively and efficiently and getting to material traction out the back end, where other firms are going to be interested in investing.
When we looked at our portfolio companies, we saw that nearly 80 percent had made it through the traction gap because we we all have experience as former operators who have been in venture for a long time, and were able to work with and support them through this gap. Specifically, there are four key areas where we support with our companies in getting effectively and efficiently through the traction gap, depending on where the companies need the most help: product, revenue, company systems and team.
Product tends to be the least risky. Usually the founding teams are quite good technologists, and we just need to make sure that the platforms are going to be highly scalable. Revenue or refining the business model, is often where the less experienced teams in particular can struggle without support or guidance. Trying to actually build product market fit, and a sustainable, scalable business model around that is critical for companies to figure out during the traction gap.
Internal company systems refer to making sure that entrepreneurs are setting their companies up internally to scale effectively. Many entrepreneurs realize too late that they don't have scalable systems, whether it's finance or HR for example, and that can really hinder companies as they're growing quickly.
And then team; we do a lot of work on team building, because we have seen the movie so many times now, on the operating side and on the venture side. We help with who you should be hiring on your executive team, when to hire them, and how do it effectively in a quickly growing company. There’s real art and science to it and entrepreneurs can often struggle with this, especially the less experienced ones. We will sometimes hear, "Oh, I don't have the time for this right now, I'll get to it later." Or, "Oh, but these other people have been so loyal to me and they've compromised so much and they've worked so hard that I don't want to hurt them or lose them by bringing someone over them." Those are all common themes that we hear, but, invariably, on the other side of hiring the right executive in the right role at the right time, the CEOs always say, "Thank goodness. I have so much more leverage now I can actually do my job as the CEO. This made all the difference in the world." If they handle it properly then the team is happy too, because they see how having experienced executives in key functional roles really benefits the company.
VN: What do you like to invest in? What are your categories of interest?
KB: We invest in early stage companies at the intersection of disruptive technologies and inefficient markets with a lot of trapped value, including healthcare, education, finance, consumer services, marketing, etc. Some of the key disruptive technologies we look for include: machine learning, artificial intelligence, predictive analytics, robotics, Internet of Things, and AR/VR.
We're always looking five to 10 years out; we can't be investing in the now, we've got to be investing in the future.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
KB: I have a company called WorkFusion in New York that's a machine learning platform for enterprise tasks. It automates a lot of rote and repetitive enterprise work, first in banking, now they're moving into insurance, and healthcare will be next. These are really big problems, and the platform that they've built can literally save their enterprise customers hundreds of millions of dollars a year. You can think of it like next generation BPO, business process outsourcing, where humans are freed up to do the more interesting, non-repetitive work and the machines take care of the rote, repetitive work. We believe that where the future of a lot of these industries lies.
Another investment is BuildDirect, a company up in Vancouver that's a platform for heavyweight home improvement products. They leverage machine learning technology to help with predictive analytics for suppliers in terms of what types of products to make in what amounts and which warehouses to deliver them to across North America. They've built a smart e-commerce system with recommendations for customers and a highly efficient logistics system, which are powered by machine learning.
Another company of mine, called Key Concierge, is a concierge as a service company. They leverage machine learning technologies to automate what are traditionally highly manual concierge services. They help to identify for a particular type of traveler, at a particular location, at a particular time of year, what types of things that person is going to want, and then automate these services in as personalized and efficient a way as possible.
Ticketfly is another investment I was involved with, which was bought by Pandora for half a billion in 2015. That company was a lot of fun to work with. They helped to build a next generation integrated ticketing platform, where it wasn't just about selling tickets transactionally, it was about helping their venue and promoter customers to better run their businesses by providing an integrated CRM predictive analytics system around event planning, more effectively reaching interested consumers and offering automated in-venue services. It was a really exciting company and we're happy that it's part of the Pandora family now.
Another company that I'm currently working with is Ruby Ribbon, which is a women's social selling shapewear company. This company is growing incredibly quickly and the CEO, Anna Zornosa, is an amazing entrepreneur. I love that they're changing the lives of a lot of women by enabling them to run their own businesses as stylists, and they are also changing women’s lives through the products they create. These shapewear products not only help women feel wonderful and beautiful, but they also help cancer survivors, from a comfort perspective. Often, women who have had mastectomies have trouble finding undergarments or shapewear that are comfortable, and Ruby Ribbon's products are so comfortable, and fit to the shape of a woman's body so nicely, without any wires or uncomfortable material, that a lot of cancer survivors are using them for both comfort and for the look. This what not something that was planned by the company but happened organically and we started to hear about it from the stylists. This is a really inspiring company that we believe is going to be hugely successful.
VN: What do you look for in companies that you put money in? What are the most important qualities?
KB: First, it's got to fit with the areas of investment focus that we have. We believe in thesis focused investing because this enables us to identify and proactively go after the companies that we believe are the leaders in those categories. It also means that we become subject matter experts in our areas so we can help our entrepreneurs more and better diligence companies.
The market opportunity itself has to be huge. We typically are looking for opportunities that can be $1 billion or more, with the potential to be a 10x return or greater. Other questions we ask include: is the timing for this right now? What are the specific tailwinds that are driving this particular opportunity? Is this something that's going to fit with the venture window, with the potential for a material exit in the next five to seven years?
We also do a lot of diligence on why this is the right entrepreneur to go after a particular opportunity. Is he or she bold? Do they have a strong vision and do they really understand the market opportunity? Have they worked in it, and are they a subject matter expert? And then along with that, do they have the ability to implement? You can't have the vision without the ability to implement, and you can't just be an operator without the vision for what you're going to build. We want entrepreneurs who are really good at team building, fundraising, who are good at selling to their customers, who are really good at building a strong ecosystem around them to scale a company quickly.
We also look for entrepreneurs who wants to partner with us. We have found that the best entrepreneurs we've worked with are ones that don't want to be told what to do but they also don't go and only do what they think should be done either. They listen to market data, customer data, investors and advisors, synthesize the information, and then go and do what they believe is best, while iterating along the way based on data. It's a real partnership and iterative process that we look for and believe works best in venture.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
KB: Each of us makes one to two investments a year, so we don't spray and pray, and we don't invest in hundreds of companies a year. It's a very thoughtful, informed process that we go through, and that we want the entrepreneur to go through as well.
On average, we've known the entrepreneurs we invest in for about six months or so before we invest. If it's a seed investment, it's often an entrepreneur who's either known to us or is a deep subject matter expert in a particular area, where we'll back them with specific goals and objectives in mind. If those are hit then we'll typically lead the Series A. We tend to want to spend material time with the entrepreneur, getting to know him or her, understanding the company and the market opportunity. That's why we like to get in before the company is actually fundraising and why we're very thesis focused. We want to proactively find the entrepreneurs and build a relationship so that we can get involved in a financing round with enough time to have fully vetted the opportunity and shown that we do what we say we’re going to do.
We meet entrepreneurs in multiple ways. We go to industry events. We all have extensive ecosystems and networks, because we've all been in the industry for so long, on both the operating and venture sides. And since we're very thesis focused, we have specific areas that we're looking for the thought leader companies in, and people we know in those particular areas refer high impact companies to us.
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?
KB: This goes back to the traction gap. We define it more as the stages in the traction gap, versus a seed or Series A or Series B, because investment rounds are all over the map these days.
I'll walk you though the different steps in the traction gap. We will release specific metrics against each of these steps through our Traction Gap Institute in the near future.
First, there is the idea stage and the go-to-product stage which typically overlaps with seed investments. The traction gap really begins at IPR, which is initial product release, and that's when the first publicly deployed product iteration is available. Next is MVP, which is minimum viable product, and there's a product released with minimal customer validation metrics.
Following that, which is a critical milestone that a lot of entrepreneurs miss, or don't do effectively or efficiently enough, is MVR, minimum viable repeatability. This is when the entrepreneur has a solution grade product, a business model and some sort of repeatable sales, marketing or distribution strategy. Entrepreneurs sometimes think that any revenue is good revenue, but it's really critical at this stage to figure out the repeatability in your business. Why is $1 in going to create $3 or $5 or $8 or $10 in an efficient and repeatable way, versus one off customer product offerings or even worse, non-repeatable services? I find that I spend a lot of time working on exactly this with my companies, really refining repeatability and scalability in their businesses.
The final metric is MVT, which is minimum viable traction, and refers to repeatability plus a few quarters of growth to show that it is actually sustainable. Companies are then teed up really nicely for a follow-on round of financing beyond that point.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
KB: I grew up in farm in rural Canada and then I came down to Stanford and went through the Management Science and Engineering graduate program. I helped to run the E-Challenge competition, run by BASES, the Business Association of Stanford Entrepreneurial Students (it used to be Engineering) and fell in love with this world of entrepreneurship and venture.
I then worked on the operating side for a while, in marketing, product development and management, and I also worked as a negotiator for a firm called Vantage Partners, which is a spin-out of the Harvard Negotiation Project, where I got to work directly with the authors of the book Getting To Yes. I strongly recommend this book; it is life changing, both personally and professionally. I did a lot of negotiation work in the high tech sector, with companies including HP, IBM, Cisco and Applied Materials. I was traveling around the world at the time on various negotiation projects and it was a former professor of mine at Stanford who introduced me to venture. I didn't have a lifelong plan of becoming a venture investor, but I've been doing it for about 10 years now. It's exciting, it's fun, it’s a lot of work, and I love it.
VN: What do you like best about being a VC? What makes you excited?
KB: I truly love working with the entrepreneurs who are making a dent in the world. They are so motivated, so inspiring, and work so hard to really make a difference in the world. I also enjoy the variety of the work, getting to work with different entrepreneurs going after a variety of very large market opportunities.
VN: What is the size of your current fund?
KB: The current fund is $60 million.
VN: What is the investment range?
KB: Our investment range is typically a few hundred thousand to single digit millions for the initial investment, up to high single digit millions total from us.
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?
KB: Ownership certainly matters. Since we work closely with our companies there is a massive opportunity cost to each investment we make because it means there are fewer additional companies we can work with. The earlier we invest, the more ownership we want to balance out the risk and effort required. So, if we're working with a company at the idea stage then we typically want close to 30 percent. The further out you go, the ownership expectation drops, to 20 percent, or so, for a Series A, for example.
VN: Where is the firm currently in the investing cycle of its current fund?
KB: We are going to be raising our next fund later this year, but we haven't set a target for that yet. We still have runway in our current fund.
VN: What percentage of your fund is set aside for follow-on capital?
KB: We set aside around 40 percent.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
KB: If I had to loosely overlay the traction gap, I'd say it's late seed to Early B.
VN: In a typical year how many startups do you invest in?
KB: The total for our fund will be about 24 companies. That results in six to eight investments a year or one to two investments per partner per year.
VN: Is there anything else you think I should know about you or the firm?
KB: I didn't appreciate until the past couple of years just how unique the four of us are. The Wildcat Founding Partners are myself, Bill Ericson, Bryan Stolle and Bruce Cleveland, and we have all spent a decade or more on the operating side, and then a decade or more on the venture side. The fact that we're experienced operators, so have been on the entrepreneur side, and also really understand how venture works is extremely valuable, because there's so much that we have all seen in starting and growing early stage companies.
The traction gap came out of all of our joint experience, and all of our lessons learned, and we put it into a framework to really help entrepreneurs understand how to much more efficiently and effectively get through this traction gap stage of a company’s lifecycle. We have also been very successful in our investment track records to date. Over the past few years, we’ve created greater than $1 billion in liquidity for our investors, and we recently found out that we're a top decile fund performer, so we're very excited about that.
Another thing I'd say about our team is that not only do we have the experience, but we always strive to be constructively candid. What you see is what you get with us. We do what we say we're going to do and we want to work with entrepreneurs who are candid, who want to partner with us, and also do what they say they were going to do. We try to operate in a trustworthy and accountable manner, and support our entrepreneurs in building game-changing companies.
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