Jeffrey Silverman and David Arcara started Laconia in 2014
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.
Jeffrey Silverman and David Arcara are the co-founders and co-Managing Directors of Laconia Capital Group.
During his career, Silverman has over 25 years of experience working in the media and technology space for companies such as CBS-TV, Cover Concepts, DoubleClick and Integrated Color Solutions, where he was involved in all aspects of business operations, including developing strategic plans, running day-to-day operations, and exploring private market funding alternatives.
He received a Bachelor of Science from Tulane University and is a member of the President’s Advisory Council. He is a New York Angels member, Chairman of the New York City-Southern NY Chapter of Multiple Sclerosis, Board of Trustees member at Project Morry. He is also the Co-Founder and Chairman of the Connecticut grassroots environmental non-profit, Friends of the Lake and Founder of Civics Unplugged, a new nonprofit committed to empowering young people with an understanding of their roles and responsibilities as citizens, allowing them to participate fully and contribute positively to our society and world.
Arcara has over 20 years of experience as an entrepreneur and general manager of young high-growth and turnaround media and marketing businesses, both digital and traditional. He has raised, either as lead entrepreneur or as part of the founding team, nearly $100 million dollars of angel and venture funding. In 2010, Arcara founded Rubber Soul Ventures to contribute his personal capital and operational expertise to emerging digital technology companies and entrepreneurs. He was also the co-founder of TalkSix, a consumer-facing interactive streaming video start-up with a significant B-to-B component.
He is a member of New York Angels, as well as Harvard Business School Angels. He is a graduate of the University of Colorado, Boulder, where he earned a BA in Philosophy, and holds his MBA from Harvard Business School.
VatorNews: What is your investment philosophy or methodology?
Jeffrey Silverman: I'll start with how Laconia came to be.
David and I were both entrepreneurs, senior executives, for the last 30 years. We have very similar backgrounds in media and technology. Around seven or eight years ago, as I was stepping down from my company, and David was stepping away from his last company, we both had done probably a dozen angel investments over those years, and both had independently joined New York Angels, without knowing each other. We both joined for the same reason, which was, "We made these angel investment deals, we don't know what we're doing, so we'll join this group and maybe get smarter about it." Ironically, during the first meeting we sat next to each other,started talking, and realized we had the same philosophy and professional background and our kids went to the same school.
Long story short, we started looking at deals together. When I joined New York Angels, a number of my friends and former colleagues had said, "If you see anything interesting, let us know and we'll invest alongside you." As somebody who does not like to work alone and prefers to collaborate, I said, "Every two or three months, 10 to 12 of us should get together and I'll bring in the two or three companies that I like. We'll have dinner, I’ll present, and the group can decide if we want to go in." I did that for six to nine months. Then, David started joining those groups and we did 15 to 20 investments. For some of the investments we set up a special purpose vehicle; for others, we wrote individual checks.
I would say that in about the middle 2014, the group said, "Jeff, are you going to go back to work as a senior executive at a company or will you continue doing this?" I said, "I really love what I'm doing," so they said, "You really should professionalize this, because this is great but you're not taking any fee, you're not really taking any carry, this is just a series of one-offs." I said, "Well, I don't want to do it alone," and then David shot his hand up and said, "Why don't we have breakfast tomorrow?" So we sat in a diner the next day and we both came to same conclusion, that our skills were very complementary, but we also didn't want to do just another VC fund. So what we proceeded to do was to say, "What do we we really like about angel investing, and what benefits does a venture firm bring to the table?" We decided that we were going to try to create a new type of venture fund that was a community-driven venture fund, yet, at the same time, the managing directors, David and I, had the final vote. We wanted to pull together our portfolio companies, our LPs, and our personal and business networks.
David Arcara: The angel experience informed much of this because we enjoyed and benefited from the inherently transparent and collegial process of investing within an angel group. We weren't seeing that kind of community and peer-led process within the institutional venture capital world, and we thought that there was a place for that in the VC ecosystem and that was interesting for us to create. At the same time, we manage Laconia at an institutional level of professionalism, and Jeff and I take the responsibility of fiduciaries upon ourselves. We don't push that down to our limited partners. We solicit our limited partners in an open and, frankly, aggressive way, for their feedback, for their advice, for their connections. We really utilize them and reach out to them. We have some unusual features, we think, for a venture firm in terms of what our limited partners see in terms of the sausage-making, whether it's being very involved with reviewing the process of deal memo creation or evaluating companies’ products. They're welcome to sit in on pitches, on anything that we do, and they can see our calendars electronically in real time. We really pride ourselves on bringing a maximum level of transparency to the venture process.
JS: We look at them as an extension of our fund. Besides the generous money that they've placed into the fund, the men and women we have in our fund are smart people. Why would we not want to leverage their knowledge, their network, and their resources, to help make wiser investment decisions? Or, once we've made those decisions, to be able to help our portfolio companies grow and be successful by leveraging their assets? We bring them together twice a year with our portfolio companies for dinners and updates. They talk to our portfolio companies, and the companies have direct access to them.
One quick example of how this works is we invested in a company called AutoFi. It was a little bit earlier than we like to do. They presented at one of our early dinners, and every one of our LPs came up to us and said, "Why'd you only invest X amount?" We gave our reasoning, and they said, "We think you're crazy; we really think is a great opportunity. It's too bad you didn't invest more." So we called back the founder two days later, and we said, "Listen, I know the deal closed three months ago, but is there an opportunity? You guys have been really responsive to us, it's really a partnership, we'll have no problem finding additional money for you guys." And we did that, and it's been a very successful investment to date, and our LPs continue to remind us that our stake is bigger in that company because of them.
VN: What do you like to invest in? What are your categories of interest?
DA: Our focus is business to business. Jeff and I like the capital efficiencies that can be found in business to business solutions. We have a primary focus on SaaS workflow solutions. There is an enormous amount of workflow problems across all industries that have not been updated to modern SaaS, cloud-based digital technology, and you'd be surprise at how many are still stuck in the world of manual processes and Excel spreadsheets. We have found that there's a wonderful opportunity in that sector.
We tend to be vertically agnostic, but we are exclusively software-focused; we don't invest in hardware companies.
JS: We don't invest in markets that are trying to be developed, but we invest in marketplaces that are looking for more efficiencies. So, AutoFi, for example, is an auto loan processing workflow. Auto loans are already an established market, but what they're providing to the marketplace is efficiency. We invested in a company called Homer Logistics. They are a B2B, urban last mile delivery service. That's been going on for a while, and the market's getting bigger, but they provide efficiency to it that no one else does.
We've invested in a business called SportsRecruits, which is a LinkedIn for high school athletes. You're able to post your athletic reel, your transcripts, etc., and it sits on top of the college database for every college and college coach, in every sport, across the country. You're able to filter what kind of colleges you’re looking for and, like LinkedIn, you're able to see what colleges and coaches are visiting your profile and when their showcases are. That type of recruiting has been going on for decades, and this technology provides a much more efficient process for it.
DA: The products that we're looking at are solving problems whose solutions have inevitability, so it's not an issue as to whether or not there will be a solution, it’s about identifying the right team that can solve it. It reduces a lot of the market risk from our perspective.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
DA: Right now, we're very happy with all of our babies. We love all our children equally, and they're all going in the right direction, which is good.
We just recently closed on a company called Spotfront, which enables e-commerce companies to monetize their landing pages for products. Think of it as virtual shelf space. This takes place on Amazon in a proprietary way, but there hasn’t been a platform for non-Amazon retailers. Amazon alone does $1 billion or more in revenue from this service, and in the brick and mortar world, monetizing shelf space and slotting is a $30 billion industry. Spotfront's created a platform that enables the bidding and delivery for this process for any e-commerce retailer. That activity was inevitable and we think that we've discovered a highly talented and exceptional founding team. It's a business that we're excited about, and, again, it's creating efficiencies within a market that is nascent but already exists.
We have a company called Content Raven, which is an enterprise SaaS platform for large cap companies that need a totally secure cross-platform content delivery system. Be it video, text, audio, in any form, on any device, in a fully secure environment with full burgeoning capability and usage analytics. That did not exist until Content Raven came around. Again, this is a huge problem and you'd be amazed at how many large companies, which have hundreds of sales people going through continuous sales training, have the materials delivered in the form of printed paper. Not secure, hard to control, hard to determine who's using what and at what pace. It's an enormous problem within large corporations. Content Raven takes care of these training needs internally and externally, by the way. So it's quite an exciting business.
Another one of our companies is called ChannelEyes. It's solving the problem of managing large, enterprise, third-party sales forces. It sits on and integrates with Salesforce, but allows for a very accessible, high-degree customization, which within Salsesforce itself is difficult for the unique problems that managers of third-party sales forces have. ChannelEyes, using some sophisticated data science, provides management, not just CRM, but a full battery of analytics around the customer relationship problem.
VN: What do you look for in companies that you put money in? What are the most important qualities?
DA: The entrepreneurs are the most critical component for any VC in making decisions. For us, we are looking for founders who have a very deep understanding of the market they're trying to serve, an intense customer focus, and an understanding that serving customers is priority one. If you get that right, everything else falls into place.
We like founders who are intimate with the details of their business. We love it when we are talking about a P&L that's up on a projector, and the entrepreneur never has to look at the numbers and knows them cold off the top of their head. We like entrepreneurs who are confident but not cocky, who know how to listen, want to learn, seek advice, and are proactive in that way.
JS: We want entrepreneurs who are looking to a build business, not a personal brand. Most of our entrepreneurs, people have never heard of them. They're not going to appear at conferences, they're not going to be on speaking panels, because they're too busy building their business, and they know the balance.
DA: We're not looking for self-promoters. We want guys who are all in; they're entrepreneurs, operators, by passion and trade.
JS: I'm trying to say this in a nice way. Being an entrepreneur is one of the hardest jobs in the world. You will find entrepreneurs who will, all of the sudden, raise $2.5 million from a few VCs and they’re getting their ass kissed, taken out for dinners, and asked to speak on panels, and they get caught up in the spotlight. At the end of day, they haven't done anything yet. They've raised money but haven't built a business, and they, either consciously or subconsciously, get caught up in building their own brand and becoming a minor celebrity. We really don't find that sexy. We're not attracted to that. We find sexy the entrepreneurs who can build a really good business and are focused on that. That should be their focus; that should be what they hang their hat on.
DA: At the end of the day, Mark Zuckerberg or Elon Musk, these guys are known because they built amazing, sustainable companies. They became the stars because of the substance behind them. We like to use the analogy that it's kind of like Hollywood. Everyone’s got stars in their eyes, and that's wonderful, and if you become a movie star then that's terrific, good for you. That may or may not happen, there's a lot that's random, but what you can be is a working actor. What you can be is a working entrepreneur, a career entrepreneur. You can see it as a craft and a calling, and you can be dedicated to doing that for 25, 30 years of your life. We're looking for people who understand that. If you become a star through that process, terrific, that's great, we're not going to get in the way, but we want entrepreneurs who understand what this is really about, to understand that building a business is a process. It's, frankly, a lot of drudgery to build and execute a successful company. It's painful. We joke but the one common denominator we see among successful entrepreneurs isn't that they’re all high energy and charismatic, or however we may characterize that; what they really have in common is masochism, and the ability to endure a lot of pain.
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?
JS: When we sat down at that diner and discussed what we wanted to build Laconia into, along with being a transparent and community-driven fund, it was also about the thesis and what stage we wanted to enter. David and I looked at ourselves in the mirror, and asked, "What are we really good at? Where do we want to focus our strength?"
We're looking at companies that are located in Boston, New York, Philadelphia or D.C. We are looking at companies that doing $25,000 to $75,000 monthly recurring revenue. We are sector-agnostic, as long as we can understand it and are able to provide some insight or access or context into it. For those reasons, we're not going to go into medical equipment or bleeding edge AI. We look at AI as an element in every tech stack now; the technology itself is not a standalone investment for us.
We both come from a sales, marketing, and operations background, so we want to see some customers. We want to start to identify what the importance of APIs are and what they need to know. How’s the pipeline growing month to month? What's the length of sale? Is it getting shorter as you get better at it? Is onboarding getting shorter as you get better at it and develop a better process around it? How active are your customer bases? Are they using the workflow every day? How many seats are being used every day? So, we get really into those pieces, and we do need that $25,000 to $75,000 MRR to be able to ask those questions and get some initial baseline numbers. Most of the time, when we're going through due diligence, these are the conversations we're having with the entrepreneur, and that's where we can flesh out if they are really someone who wants to provide these answers. If they don't have the answers yet, that's okay, but these are the answers they're going to need for the Series A.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
DA: We find our companies through our network. We are out there, meeting people to build the network. We look at everything that comes over transom, though we've never pulled the trigger on anything that came in that way, but we do look at it legitimately. I think there's almost a self-filtering process through which the best entrepreneurs know how to work the inside a little bit; they know how to get some access to a warm referral, rather than, "Hey, I'm on LinkedIn, look at my company." We looked at all of those, too, but we've never found anything that gets us excited.
The actual due diligence, in terms of doing the work of tech review and business analysis, typically takes about four weeks. The bigger issue for us is getting to know the entrepreneur. It's why we like to meet companies before they reach the inflection point that Laconia likes to invest in so we can spend a lot of time with them. If a deal is near capacity, and we are invited to join the syndicate, and it's going to close in two weeks, if we haven’t gotten to know the entrepreneur, then we will pass pretty much every time because we need to build the relationship. These investments are most likely going to be four- or five-year tours of duty. It's a marriage. We don't just write checks, we really do take an active role in our companies, and we want to be there for entrepreneurs, so getting to know them and building a trusting relationship is really important. So, typically from the time we get introduced to company to when we close is a minimum of three months.
JS: That time is not us dragging it out: rather, it’s working with the founders to strategically structure the round. I'll give you an example: on Tuesday night, at 11:45 p.m. I got a phone call from one of our entrepreneurs. He had just finished a board meeting later that afternoon at which a couple of issues had come up, and he needed to bounce some stuff off me. I was out to dinner with another one of our entrepreneurs from 6 to 11 o'clock last night, going over his upcoming board meeting in two weeks. We're very accessible to them. So, as we develop these relationships throughout the process, we do our own due diligence, check all our boxes, and help the founders by making introductions to potential customers, fueling their sales, as well as to other VCs to fill the rest of the round. All of this takes time.
DA: If you look at both our current portfolio companies, as well as companies we passed on, the majority, if not all, would say the time spent with us was not a waste. They probably got some customers through us, they got new investor introductions, many of them have learned more about the relationship of capital as a strategic lever, as it related to building and running a business. We coach them on everything from what a cap table should look like, to what a proper P&L pro forma should look like. It's a learning process and I don't think we’ve ever wasted anyone's time, regardless of the outcome.
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?
JS: From a revenue perspective, they've got to be around $125,000 MRR for a B2B Series A but that's the easy part. I think what Series A investors really look at is, how developed is their sales channel? Is their pricing firmed up? Do they truly know who their customer prospect is? Is it a spray and pray methodology, or do they really know who they're going after, how to target them, how to get them into the pipe or funnel, how to move them through the funnel, and how to close them? By the time you're at an A, you really have to have that process, not 100 percent perfect, but pretty much identified, and you have to show examples of it working. You've got to show, obviously, a market fit.
DA: We're very, very revenue-focused. We think that, at least on the East Coast, that's what will get folk's attention. So we want to the revenue machine working. It doesn't have to have every feature and bell and whistle, but a repeatable sales process that gives you a nice spike on the revenue side is key. For every dollar spent on sales and marketing, you have to know that you're going to earn X back.
I do think that with regards to some of the more inflated Series As that you mentioned, we see little less of that on the East Coast, as rounds here tend to be a little smaller, particularly in our segment. We're not looking at majorly disruptive companies with $100 million capital requirements that are going to be worth $5 billion within the next five years in an IPO. The economics, the capital requirements, and efficiencies are different for us.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
JS: I will tell you that if you told my wife 23 years ago that she was marrying someone who was going to be a venture capitalist at the age of 50, she would have started laughing hysterically. So, no, this was never in the cards.
I grew up in Boston. I've lived in New York for over 25 years, I've got three great children and a dog. If I don't mention the dog, then my middle child yells at me. I went to school down at Tulane University and majored in history. I moved to New York right after college and got into TV ad sales. I then headed up to Boston about a year later when I got the opportunity to sell for the CBS affiliate. I did that for about three years, and then wanted to come back to New York. Two of my friends up in Boston had started an in-school advertising company, and they asked me if I wanted to come and open up the New York office. So I moved back to New York and opened up the office and did that for a number of years, and then I wanted to go back into media, and in talking to a lot of people, I said, "What should I do?" and they said, "You should get into this Internet thing. It's like getting into TV when it was black and white." This was in 1996. I interviewed at a number of places, and I accepted a job at DoubleClick. I spent five years there at multiple senior-level positions, then left to take over an early stage software company. I ran that for six years, and then stepped down and started doing angel investing for a little bit, then started Laconia Capital Group.
DA: I too never dreamt that I would be a venture capitalist. When we were both starting out in business, venture capital wasn't something that people even never knew existed. It certainly didn't exist in its current form.
I went to the University of Colorado Boulder. I was a philosophy major, and I had a real love for pop culture, and I thought that television seemed pretty cool so, like Jeff, I went and became a TV account executive, selling international TV spot time. I did that and figured I needed to maybe get a little more formal business training, so I was fortunate enough to be accepted to Harvard Business School and got my MBA. I went back to TV for about a year, and then started learning about the radio industry and market and went off and made some money. Over the course of about six years in 1990s, I built a small radio group which I eventually sold to Clear Channel Communications.
After selling that in 1998, some friends of mine were starting one of the first ad networks called UGO Networks. They needed someone to help them run that business and build that company, so I joined them, and that was a successful and interesting time to be in the Internet. I also started a branded content company which, ultimately, relaunched at Random House.
I was at Random for about a year and half, then went to run another Internet publishing company and then went off to start another startup. That was 2008 or 2009 and I not able to raise the kind of capital I wanted from the venture capital community. No hard feelings; in fact, it was one of the best things that ever happened because it was at that point that I said, "I've been pretty fortunate with some exits," and I had some runway, personally, so I started to think, "Maybe I really do want to move to the capital side of the ecosystem." So getting into VC was very intentional once I made up my mind to do so. Then I joined New York Angels, and I understood VC from the sell side, so it was familiar, and then the thought was, "Can I generate dealflow? Can I be competent at it?" Of course, all the answers were yes, and Jeff told you about the journey from our meeting to today. It's been really the high point of my career.
JS: Mine too. It's one of the best relationships I've ever had.
DA: That is true. We like coming to work and hanging out with each other.
JS: I would say that one other thing that's very interesting: we've seen a lot of VC funds work like law offices, where each partner has his/her book of business. Maybe it's the size of our fund, maybe it's David’s and my personalities, but there’s not a deal that we will not do together. The deal might come through me, or through David, but once it's in and one of us has vetted it, we then tag team it. I trust his judgment, his insights, and vice versa. I can't imagine coming to him and saying, "I want to sell you on this deal." I shouldn't have to sell him on the deal; if he or I can't get comfortable with it, then we're not doing it, and we don't need to get to a vote because, through the due diligence process, we know where each of us stands.
DA: We're very collaborative in our approach together. We've joked that we're Lennon and McCartney here.
VN: What do you like best about being a VC? What makes you excited?
JS: For myself, it's working with David and our associate Geri and our partner David Lee. The team we have is amazing. I love the ability to learn about a new business almost every single day. We learned about the wash-and-fold/dry cleaning business, we've learned about the logistics business when it comes to events and shipping ports, we've learned about logistics when it comes to restaurant delivery. With SportsRecruits, it was the high school recruiting process. So, every day, whether we invest in a company or not, I'm learning about a new business. I love that aspect of it.
I love feeding off the energy of the entrepreneurs. I'm 51 years old --though I consider myself to be a very young, and some would say immature, 51-year-old -- but to have these 20-something-year-old women and men come into this office with these great dreams, this tremendous amount of energy and drive, and feel that I can help them in some way accomplish their dream, is just really rewarding.
At the end of the day, we like the operational aspect. We love rolling our sleeves up and helping them, whether it's with business development and networking, or trying to understand their technology roadmap and what that has to look like, or how to prioritize their business or what their next hiring is going to be, how they're going to handle their employee reviews. Nothing is too small or too big for us to not want to work with them on. No day is the exact same.
DA: It's a real privilege to come into the office every day and be exposed to so many new technologies and ideas. This whole world of entrepreneurialism is so dynamic, and with the energy and passion that entrepreneurs bring, you're surrounded by optimism all the time. It's a wonderful way to spend your days.
We're building a financial services firm that's really exciting, so we are entrepreneurs as well. We have a vision that will continue to unfold and be revealed over the next X number of years, because it leverages off of, and goes beyond, the immediate fund. Building this company is very exciting from an entrepreneurial standpoint.
VN: What is the size of your current fund?
JS: The current fund is $5 million, and the next fund will be $15 million to $25 million.
VN: What is the investment range?
JS: When we start to pull together a round, we're writing checks of $250,000 to $500,000 out of this current fund. Out of our next fund it will be $500,000 to $1 million.
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?
DA: We don't have a hard and fast number. With this first fund, it works out to around 3 percent to 5 percent; in the second fund, it will probably be closer to 5 percent to 10 percent. That's fine, we're not going for control; we don't see it as a necessity to have 25 percent or 30 percent of a company.
JS: We're also looking to invest in companies that are not capital intensive. One of our companies has only a raised a couple million dollars and they're doing great. We're looking for companies that are going to exit between $50 million and $250 million. We want at which companies, upon exit, the entrepreneurs do really well. We want to do well also, but we want to do well with them. To exit the company and have the entrepreneurs do just okay is not a great feeling, and I guess that's the entrepreneur in us.
DA: We've sat on other side of the table, and we're very, very sensitive to entrepreneurial well-being.
VN: Where is the firm currently in the investing cycle of its current fund?
JS: We have more gunpowder left in the first fund, and we've been out marketing the second fund for the last three months. We just sent out executable documents for our first close, which will beat the end of September, and we're more than halfway there.
VN: What percentage of your fund is set aside for follow-on capital?
DA: It will wind up being around 35 to 40 percent.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
DA: Our fund is a late seed-stage fund. We have a very disciplined approach, where we will come in only at the late seed-stage extension. We will then also participate in and help garner the A round.
VN: In a typical year how many startups do you invest in?
DA: We like to do three to five. That's pretty much been our pace.
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Joined Vator onFounder and Managing Director of Laconia Capital Group, an early stage venture capital firm investing in late seed stage B2B SaaS Northeast companies . Invest in startups solving immediate efficiency problems in markets, marketplaces and workflows.