Differential invests in B2B data technology startups using AI and machine learningRead more...
Cassaday was promoted to Partner at the firm at the end of January
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.
Jake Cassaday is a Partner at Relay Ventures.
Cassaday's background in product management and marketing provides a strong understanding of rapid product development and go-to market strategy. He supports deal sourcing, due diligence, and portfolio management at Relay.
Prior to joining Relay, he was actively involved in the startup and venture community during his time at the Rotman School of Management MBA program as a member of the Creative Destruction Lab (CDL), and as VP of the Rotman Entrepreneurship and Venture Capital Association. Previous to Rotman, Cassaday managed product development and marketing as a Global Brand Manager for tech brands at Spin Master.
He was promoted to Partner at the end of January.
VatorNews: What is your investment philosophy or methodology?
Jake Cassaday: It’s important to state that we’re an early stage investor, so for us that means we really do seed and Series A. Focusing on a startup’s team is something you’re going to hear from the majority of early stage investors, and at Relay we do place a great amount of emphasis on team at this stage, including a team’s unique, competitive advantage in a market. At this early stage it almost always comes down to a team’s ability to execute, regardless of many different product and market dynamics that might be at play. So, as far as philosophy, we are laser focused on trying to uncover what it is about a team that’s going to give them some type of unique advantage in a market to overcome the challenges to scaling businesses.
We’re investing throughout North America; we have offices in Toronto, San Francisco and Menlo Park. The majority of our investments cluster around our offices in California and Toronto but we’re investing across the continent.
VN: What's your investment thesis and categories/stage of interest?
JC: Relay recently had our tenth anniversary; when we first got started, we had a focus on mobile tech, but the meaning of what that focus is has naturally shifted and evolved quite a bit over the years. It was originally about helping to bolster what was, in 2008, a very nascent mobile ecosystem, so all the different players that were going to pop up around the initial proliferation of the mobile device. As mobile has become ubiquitous, our focus has shifted alongside that market evolution, toward the proliferation of the mobile sensor bed and how that gave life to IoT. Now we’re really focused on AI powered software for the connected world in the sectors of: transportation/mobility, real estate tech, fintech/commerce, and sports/media/entertainment. We have also have a significant portfolio of companies in edtech, consumer healthcare and IoT.
As a natural extension of our four key segments, I’ve been spending a lot of time thinking about real estate technology, notably marked by our investment in a company called Alate Partners, which is a real estate technology company that we incubated with Dream Unlimited, one of Canada’s leading real estate companies.. It’s all about building, buying and investing in real estate technology, so that’s a big focus. I’m also spending a lot of time looking at sports tech and entertainment. This is an extension of our focus on IoT and really about understanding the data that can come off sensors and how that can be leveraged inside sports and analytics. We also have an investment in theScore, which is giving us insight into what’s happening on the sports entertainment side as well.
VN: What's the big macro trend you're betting on?
JC: Data is really at the core of every new investment we’re making. What we’re realizing is that having access to unique and proprietary data is going to continue to be a significant value driver for most great companies moving forward. What we’re seeing is that meaningful machine learning businesses today are less and less about the algorithms that they’re running, which are really becoming commodities, and it’s much more about the data that they’re leveraging and their access to proprietary data. A continued focus on data, complemented by an ability to process that data at the edge, through both processor innovation and 5G, is a macro trend that we foresee will flow through the majority of our investment decisions for the foreseeable future.
VN: What is the size of your current fund and how many investments do you typically make in a year?
JC: We’re operating out of our $150 million fourth fund right now, and we have $600 million under management. The number of investments flows, and there’s no strict guideline of how many investments we’re making at particular stages throughout a year. But I’d say we’re roughly doing two to four new Series A deals in a year and five to seven seed deals. That’s where I’ve seen things in the last couple of years.
I’d also say that, at this stage of our fund, we are also interested in making some opportunistic, later stage investments, where we have some kind of unique access to a company that’s scaled in one of our focus areas. We do reserve the ability to get involved in a later stage deals and we’re actively looking at a few right now. It’s of interest, for sure, to get in Series B or Series C deal type opportunity at this stage.
VN: How much is that in dollar amount for you?
JC: Typically, no matter if we get started at the seed or Series A, we notionally reserve up to $15 million for each individual investment; that’s the typical reserves for an individual company. If we’re starting at a seed, we’re looking at checks of $500,000 to $1.5 million at the high end. For Series A and beyond, the size of deal would be $5 million to $12 million.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
JC: It really depends on a few things. Unfortunately, there isn’t a very distinct answer I can give you here, but it’s dictated by the stage of the company and the business model. We do a lot of SaaS, so if we’re looking at a company that’s a vertical SaaS business it’s a little more straightforward to benchmark. Typically we’re seeing anywhere from $25,000 to $75,000 in MRR for the seed and north of $150,000 MRR for the Series A.
In any case, we look to satisfy three key criteria when making a new investment:
- Predictability: is there an identified customer profile such that we can predict with certainty that customers of the same profile will buy?
- Repeatability: will customers buy again / renew?
- Scalability: can the operation be scaled profitably?
If it’s an opportunity that might be a little less straightforward to benchmark, at the Series A we’re looking for indications of product market fit. We want to see if the company is beginning to develop an understanding for the science of customer acquisition, for the dollars they’re putting into marketing channels, what’s the expected result.are they ng. It’s really just a matter of if we can quantitatively say that there’s a pull in the market for the product? And do they have a methodology for scaling that business? Obviously, at the Series A, we’re really just looking for indications, we’re not expecting significant scale at this stage.
VN: What other signals do you look for? Team, product, macro market?
JC: Everybody says team, but it’s a fact; experience and data suggest that the team is paramount at this stage. Of course, there are other things that we’re looking at. Having a unique, unfair advantage building into that market is essential. What type of technical differentiation are they building into the product that’s giving them some significant advantage over competitors or creating some type of moat around what they’re doing that creates a lead in the market? We definitely want to see some aspect of the product that we believe is technical differentiation, and we certainly favor companies that we believe are building something that’s objectively hard to build. So, there’s a lot of focus on the actual engineering team’s ability to create something.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
JC: It is changing. There are a couple of market forces that we definitely see affecting the valuations and the round sizes at this stage. For one, there is an increasingly large amount of capital that is accessible to entrepreneurs, so the Series A, more so than the seed, has become quite competitive and that competition has driven up valuations. It’s also given funds the ability to offer amounts that are greater than what the company had maybe set out to raise in the first place. In turn, because founders are focused on dilution, that’s also driving up valuations. So, the competition at the Series A stage is causing firms to place higher values on businesses and larger round size is further exacerbating that.
Something else that we’re seeing is that you don’t necessarily see friends and family then angel and then seed; we’re seeing seed split into three different buckets in a few cases. Not every company is doing this but you see a lot of instances where companies are raising a pre-seed and a seed and then a seed plus or a post-seed. So, what’s happening is that companies, prior to a Series A, are raising rounds of financing on increasing valuations and getting to proof points that might be more indicative of Series B type deals, and that market force is, again, putting upward pressure on the valuations that we’re seeing at Series A. So, more access to capital at both seed and Series A and companies staying at a seed stage longer, with more capital, before they go out and raise their Series A, are pushing valuations upwards, for sure.
I think the risk is that you raise on these types of valuations at a Series A, when maybe the value is exceeding the traction that you have in market or the benchmarks that people typically associate to your traction and what the value should be at that level. What can happen is that companies go and raise a Series A at a high value and aren’t able to get to typical Series B proof points. In other words, they’re having to grow into the value that they’re given at Series A, and it can cause some less than ideal circumstance at Series B if companies aren’t able to get to those Series B proof points. Later stage investors need to be laser focused on the benchmarks they’re seeing across the portfolio, and across the investment opportunities they’re seeing; if companies aren’t at the MRR level that they want to see for a Series B, then you might see flat rounds, you might see down rounds. I’ve certainly had conversations with entrepreneurs about being careful with driving up value early because if you don’t grow into it, you can’t rely on getting credit for things that you might be getting credit for early. Maybe it’s a very unique application in machine learning or you have an experienced team, those things are going to continue to provide value but it might catch up with you later on if you’re not able to deliver on the traction that investors are looking to see at the Series B and C.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
JC: One of our unique positions in the market right now is that we’re not a seed and done type investor. A lot of seed investors, that’s their game; they do seed investment and they sort of harvest those over time. For us, we treat seed as really a proprietary deal flow for Series A. What that means is that we can invest at the seed stage but then we invest throughout the life cycle of the business, and we can actually maintain ownership in companies long term. One of the things we’ve really excelled at is picking great seed companies, obviously very early in their life cycle, and then doubling down on those opportunities at the Series A and on.
I can point to some companies in the portfolio where we did the seed and have have invested in every round since; companies like Ecobee, Mojio, PubNub,TouchBistro, 7shifts and Greenlight are all examples of early seed deals that we did and then doubled down in the Series A. That’s something that is unique to us, to some extent. We’re obviously not the only ones in the market deploying this strategy but it’s something that I think we’ve proven we’re good at, being a very strong partner early in a company’s life cycle, in those formative years. We help them with really foundational aspects of company building, be it processes and hiring and governance and getting them ready for Series A. Being that long-term capital partner is not only providing us with those Series A opportunities but providing long term investment returns as well.
We also differentiate ourselves to our LPs with our broad geographic coverage and industry focus.
VN: Venture is a two-way street, and VCs also need to show entrepreneurs why they should take money from them. How do you differentiate your fund to entrepreneurs?
JC: This is very much a relationship business and when you’re making seed investments you’re entering into what the data says is a 10-plus year relationship with either the founder or the investment partner. So, you really need to be able to provide a value add and real differentiation to an entrepreneur, so that’s something we are certainly cognizant of.
For us, because we are doing a lot of seed transactions and working with companies so early on in their life cycle, I can truly say that, in the case of a number of our companies, we really are able to quickly establish rapport and trust with our entrepreneurs. We understand that there are pitfalls and that there are challenges at this stage, we can help break down some of these barriers. allowed us to establish a -our. We always encourage perspective companies, those that we’re looking at investing in and those that are looking to take capital from us, to have these conversations with founders in our portfolio. A lot of the time companies will ask an investor for five CEOs that they can call; we typically say, ‘You’re welcome to call anybody’ and we stand by that. Just being an open minded, transparent and trustworthy partner early on, and making that a core part of our DNA, not only helps us in our relationships with our portfolio founders but it bleeds into how we attract new entrepreneurs as well.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
JC: We recently did a Series A into a company called Blue J Legal, based here in Toronto. Blue J is in the legaltech market and leverages machine learning to help lawyers and accountants with tax law and employment law. What is exciting about the company is what I was explaining earlier about data; this is a company where the machine learning that they’re leveraging is impressive but, what really allows the company to have such a powerful product in the market, is their focus on the data. They’ve got a significant legal research team that is helping to curate and clean and tag so much case law that it has, in turn, created this extremely proprietary data set and it’s allowing the product to continue to add significant value, and increasing value over time, to its customers.
Two years ago, we did a seed investment in 7shifts, which is based in Saskatoon, Canada. 7shifts is shift scheduling software for the restaurant industry and we just closed a $10 million Series A. This is one where, again, the fact that they’re working with many thousands of restaurants is great, but the fact that they also have over 250,000 restaurant workers using the app every single day, the data that they’re sitting on, in terms of how to help restaurants forecast their labor needs, and also move labor around and do resource management, has become extremely valuable to their restaurant partners.
I’m also very close to a company that we backed in Portland, OR called Circle, which is an IoT device that allows families to take control of the internet. It picks up on all the different connected devices in the house and allows parents to create profiles around each device so they can do screen time management and parental controls. It works on anything from an iPhone to an Android device to tablets to gaming consoles, so this is really about creating a narrative in the home around what healthy internet behavior and activity should look like. there’s an extremely strong sentiment in the market that we’re becoming increasingly addicted to our devices and no one is more affected by ths than our youth. That’s one I’ve very much, as a new dad, bought into the vision and impact that this company can make and I’m very excited about the traction and the momentum they have in the market.
VN: What are some lessons you learned?
JC: It’s more art than science. Particularly at the early stage, this is very much about trying to uncover what drives entrepreneurs more than anything else. Going back to some of the things that I said earlier - determining why an entrepreneur has that unfair advantage in a market, or why they have founder market fit, so it’s a little bit of the softer stuff. Then it’s really being able to understand market dynamics and trying to pave a path towards understanding a role that a business can play in a very competitive market is quite challenging. It’s an extremely fun industry to be a part of. It’s one that, if you’re not a constant learning curve, you’re probably doing something wrong.
My default is always to have a profound amount of respect for the entrepreneur that’s on the other side of the table because they’re the ones that are taking on this risk and building something because they felt so compelled to do so. It’s really, how do you start to unpack every different opportunity and provide a framework that allows you to weigh these against each other, and how to be selective and how to pick the companies that you believe will have the biggest impact long term.
VN: What excites you the most about your position as VC?
JC: It’s really what I was saying about being on a constant learning curve. When you’re not laser focused on one independent sector or vertical, you can apply similar frameworks and similar baseline, horizontal understandings of markets. I’m able to go really deep on edtech, healthtech, and real estate, and other focus areas we have as a fund. The subject matter keeps me intensely interested in what I’m doing because you have to continue to learn and adapt and depend on the fact that the knowledge you’re gaining in each independent vertical is helping you understand the next one and the next one.
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