Jörnow was previously VP of Mobile at King Digital, and now invests heavily in gaming startupsRead more...
Matthews was a co-founder of Webmail.us, which was sold to Rackspace in 2007
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.
Pat Matthews is founder and CEO at Active Capital.
Before founding Active Capital, Matthews was a co-founder of Webmail.us, which grew to $10 million in sales before being sold to Rackspace in 2007. He spent six year at Racker and made dozens of startup investments as an angel investor.
VatorNews: What is your investment philosophy or methodology?
Pat Matthews: I’m really an entrepreneur turned investor. I live in Texas now but I’m from Virginia, and I went to school at Virginia Tech during the height of the dot-com boom. I got there in ‘95 and met some really smart, engineering-oriented friends and we ended up dropping out of school to chase our dot-com dreams. Of course, we launched our first business in March of 2000 and the Nasdaq and the whole dot-com world crashed one month later. But we were young and willing to keep iterating on the business, so we ultimately pivoted from a consumer-facing dot-com to a business-facing enterprise software company.
We made that transition over a couple of years and ended up building a B2B SaaS company for email hosting software. This was pre-Gmail, when businesses were still running their own email servers, still having trouble with email reliability and getting email on mobile devices like Palm Pilots and all those archaic things. We really focused on becoming the best email hosting provider in the world, and we built a really valuable company. We got to $10 million in annual recurring revenue, and we ended up selling the business to Rackspace, which at the time was the perennial web hosting cloud and emerging cloud computing player in the space. My whole team and I joined, and I was an executive on the senior leadership at Rackspace for six years. I ran everything software-as-a-service and even the software side of hosting and all the cloud-computing-oriented businesses. My entrepreneurial days were amazing but my executive years at Rackspace were equally as amazing, and I got to see a whole different scale of business. I had thousands of people in my organization and we were going up against Amazon; it was a very exciting time on the internet with the cloud computing wars. We won some stuff, we lost some stuff, but it was awesome overall.
Ultimately, Rackspace became a big company and I ended up leaving at $1.5 billion in revenue. I went back to my roots of figuring out what I wanted to do next and spending time in the startup world. Rackspace had given me such a lens into the startup world because, back then, every startup started at Rackspace. Today, almost everyone starts at AWS, but back in the day you’d start at Rackspace. I had a huge purview into the startup world even though I was an executive in a big company, so I started angel investing. I angel invested all over the place. I was not as focused as I am today, but I learned a lot, built up a great portfolio and invested in a lot of great companies and founders. I had a lot of fun but, more than anything, it shaped what I want to do with the rest of life, which is what I’m doing now.
All of that has shaped what I’m doing today. Active Capital is a $20 million fund and we are designed to lead seed rounds for early-stage B2B SaaS companies. I decided to get the firm and the thesis focused on investing in the types of companies that I’ve been a part of my whole career. That’s where my greatest strengths are, that’s where I have the most credibility, that’s where I’m able to have the most influence with the companies I invest in. More than anything, I’m just spending the rest of my career focused on what I know best.
VN: What are your categories of interest?
PM: B2B SaaS is a very wide category, but I like that on purpose; I’m really attracted to founders building amazing software businesses. I’m relatively open to what problems they’re trying to solve, so I don’t focus on marketing tech or government tech or whatever tech. All the basics that you’ll hear from any VC—like, ‘Is there a market for what they’re doing? Is this the team to build it?’—of course I look for that, but I really like to invest in pure-play B2B SaaS companies. I invest in a stage where I want the founders to be leading the company; it’s such an instinctual stage of business, so I very much want to invest in founders.
We’re pretty geographically agnostic as well. We haven’t done anything outside of the U.S., but we’ve invested all over the U.S. and we look for opportunities where we can go in early and be the lead investor. We will invest in very small pre-seed rounds, all the way up to larger $1 million to $1.5 million rounds. If the seed starts to become multiple millions of dollars, it ends up being too big for us, and that goes against the grain of how I think seed rounds should go anyway, so we tend to check out of those. In a nutshell, that’s what we do and that’s how it was all shaped.
Another thing is that, when I look back to the business I built and sold to Rackspace, we never raised a lot of capital. Actually, that was one of our saving graces because if we had raised millions and millions of dollars too early, we would have died with every other dot-com. So, in many ways, the fact that we didn’t raise a bunch of money helped us avoid the young entrepreneur pitfalls of scaling up a cost structure too quickly, and then, ultimately, if you don’t catch fire right away you pretty much burn out. So, I look for early-stage companies that have made a lot of progress without a lot of capital.
VN: What is the opportunity you see in the B2B SaaS space?
PM: I think there’s opportunity everywhere. Every industry, every type of company out there, every workflow within every type of company is being reshaped by software today. I’m very happy to invest in software niches; at the macro level we will invest in HR tech, marketing tech, sales tech. We’ll invest in all of these different categories, but I would double click on that and say we’ll invest in founders that are going very deep in specific use cases within those categories.
One great example is a company in Austin called Pingboard. They’re a B2B SaaS company at a high level; at the next level down, they’re an HR tech company. They are laser focused on building beautiful org charts for businesses. If you think about every dynamic company out there, where the people landscape is changing rapidly, they're always trying to map and visualize what the organization looks like today. Then they're also trying to figure out what the organization will look like in the future. Any executive today that’s going to a board meeting next week, who’s trying to put together a lay of the land for their backyard, what do they do? They quickly pull out an old version of Visio or Excel or PowerPoint, and some of them will even draw it on paper. But Pingboard makes it easy to map the entire organization and even drill down into employee-level details, with a photo of the individual and what they do and what their previous jobs were. Then it provides leaders within the company, from the CEO to VPs to divisional managers to front line managers, the ability to plan the future of their organizations as well.
They’ve got a lot of great traction, and some of the biggest logos in the world are signing up with them every month. If you go to Workday or a lot of these other multi-zillion dollar HR tech companies, they’ve all got some kind of org chart component, but they’re all really bad. Pingboard has realized that this is a great area that every business needs and they’re going to drill down and become the best in the world at it. I love that, and we’ve got a bunch of those kinds of companies.
VN: How many investments do you typically make in a year?
PM: We will end up with 15 to 20 core investments in the fund. When I say core investment, we are designed to be the $500,000 check in the $1 million seed round. Then we save half about the fund to follow on with some of our winners that go onto raise more money after that. Whether that’s a second seed round or a Series A where we get to take our pro rata, we save about half the fund for opportunities that emerge out of the portfolio. We also take a small portion and we’re willing to write really, really small checks into companies at the pre-seed level.
Ideally, our hope is that most of the $500,000 checks we write are in companies that we have some kind of established relationship with because we invested in them really early. So, while we will end up with 15 to 20 core deals, where we write $500,000 checks or greater, we’ll also end up with 15 to 20 companies that we wrote much smaller checks into.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
PM: I love companies that are doing $25,000 in monthly recurring revenue but, more importantly, that are growing really fast. In fact, that makes the $25,000 number pretty flexible because what I would really look for is demonstrated, repeated growth on a monthly basis. So, even if a company is doing $12,000, but they went from $1,000 to $5,000 to $12,000, that will make me want to take a second look.
Part of the deal is that, at such an early stage, you’re really betting on the founder’s ability to connect with the market. That’s how I think about it. To me, the market traction is the best indication of if they are able to do that, so I don’t think the numbers need to get super big. I just want to see that they’re fast growing and beyond just signing up their network of friends. Like, if they went through TechStars, I want to see that it’s more than all the TechStars companies using it. I want to see a little bit beyond that, but I can invest in something small as long as it’s growing.
VN: What other signals do you look for? Team, product, macro market?
PM: Building off what I said earlier about the team, I really like small teams that can make a lot of progress without a lot of capital. Sometimes saying 'the team' means, do I like them? Do they have the right resume or pedigree or whatever? To me, I want to know that I can work with them. They don’t necessarily have to be my best friends, but I want to know that I can work with them and they have demonstrated their ability to get things done.
Really, I want to see capital fuel investment in the business and not just invest in a science project. I’m just not a science project guy; I want to help build companies and I think great companies produce amazing outcomes for shareholders, the founders, the community. So, I want to invest in companies. That’s who I am, that’s what I’ve spent my entire career doing and I want to know that they’re going to be good stewards of the capital. I struggle with companies that raise tons and tons of money and put themselves on the venture capital treadmill, and then they just can’t make a lot of progress with it.
I want to be able to understand the market. If everything goes right, can this be a really successful outcome for the company, the founders, and us as the investors? Do I believe that the product matches with the market opportunity? I love founders that have really good product sense. Market, product, team, traction, capital efficiency, those are the basics.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
PM: I am valuation conscious. I don’t know that I’m purely driven by valuation, though, unless it feels like it’s way outside of bounds.
Valuations have gotten crazy, but I feel like that is location specific. In Silicon Valley and San Francisco, valuations have gone through the roof, but I don’t necessarily feel like that’s the case everywhere. So, instead of going to San Francisco and trying to find all the companies with the lowest valuations, I spend time all across the country, and in cities across America, trying to figure out who is doing what. The reality is that I find most valuations outside the Valley to be somewhat reasonable. Every now and again I find there to be outliers that I’m just not interested in.
One situation I see quite a bit, that I tend to stay away from, is when there is a previously successful founder that can then go into the market with a new concept and a PowerPoint deck and raise a round at a big valuation. While I do respect wisdom quite a bit, I tend to not invest in those. Those go against the grain of what I like to do. I don’t believe that valuations are super crazy outside of the Valley, so I tend to stay away from the Valley and from the exceptions to that.
VN: Does that mean that if a company had already raised money from Silicon Valley, that would stop you from investing in them?
PM: Hundreds of companies are starting every day. I know that everybody wants to get on the next hot thing but, to me, if it doesn’t feel right, I’m not going to do it. You have to have some sort of thesis and fund strategy relative to your fund size.
Here’s how I would look at it: company XYZ has all this Silicon Valley money, why do they need my money? Why do they need my $500,000? It doesn’t mean I wouldn’t co-invest in a round with a good Silicon Valley VC that I respect, but, if a company has gone and raised $3 million in the Valley, and then, a year later, they’re trying to raise another bridge round or a second seed round, and all that money in the Valley doesn’t want to pile in again, that smells funny to me. I don’t want to get caught with the adverse selection type of deals, and that’s why I look for companies that are sort of new from the get-go and have not raised a ton of capital.
If a company has raised $2 million from wherever, Silicon Valley or anywhere, and let’s say they grow and they’re doing awesome and the revenue is off the charts and everything is up and to the right, they don’t need my $500,000 check. The reality is I don’t actually see that situation unless the company is struggling, and then my $500,000 wouldn’t help them anyway.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
PM: There are a couple of things I would say about our firm. Number one, we look mostly outside the Valley. For some people that’s appealing, for some people that’s not, but I’m just a big believer, and a lot of this is shaped by my own background, that some of the world’s great companies are going to be built far outside Silicon Valley over the next 10 or 20 years. In fact, I think the majority of the world’s great software companies are going to be built outside the Valley. I don’t even think that’s a secret anymore; I even saw Sam Altman the other day having a big tweet storm about how he basically agrees, which is totally new thinking coming from anybody who’s in the Valley. So, I look outside the Valley; I’m based outside the Valley. If you think about all the seed funds that are out there today, you’re looking outside of the Valley and you’re already heavily differentiated.
Number two, we are very focused on B2B SaaS, which is not just a random thing. SaaS is, I believe, the greatest business model in the world. We’re very focused on B2B and real businesses, but also it matches up with our background.
The third point is that we are entrepreneurs turned investors. So, a lot of my LPs like my story of walking in the shoes of the types of companies and founders that we’re trying to attract to the fund. In a world where a lot of VCs are fast talking, intimidating finance people, my background and approach is a little bit different and what I’m investing in very much aligns with what I have built in the past. We’re trying to build a brand around this idea of Active Capital being backed by B2B entrepreneurs.
Also, the fact that we’re designed to lead. Most seed funds out there are actually designed to follow and act like a super angel group more than anything. So, even though we’re a small fund, we negotiate terms with the founders, we’re the ones that take the early board seats, I have a whole playbook that I run with every company in our portfolio. I do monthly business reviews with them, I’m on text-message-level relationships and conversations with them. As a former CEO, founder, entrepreneur and executive myself, all of their problems, challenges, and opportunities resonate with me, and they all buy into the fact that I bring contextually relevant advice to the table. The more that I can build trust with entrepreneurs who want to come to me with their problems and opportunities, the more that I can truly make small a difference. Those are all the points that I like to walk my LPs through.
Granted, I didn’t raise any institutional money, I didn’t raise any fund-to-fund money; almost all of my money is from founders and entrepreneurs and executives and people I’ve worked with over the years. The majority of people that I raise money from are not getting pitched by venture capitalists every day. I have spent my entire career building companies in Virginia and Texas, so the networks that I built are not people that Sequoia are calling on every day or the next San Francisco, Homebrew-type of seed fund. My LPs are just not very connected to those kinds of people, so they’re not necessarily getting VC pitches every day. So, my pitch to my investors was much more along the lines of, ‘Hey, if you want exposure to this asset class, you should invest in a fund like mine, as opposed to making individual, direct deals yourself.’ Most of my investors are the types of people who would just be angel investors instead, more so than differentiating between Active Capital and Homebrew or Initialized Capital or one of those guys.
Over time, I’m hopeful that I can attract some fund-to-funds or institutional types of investors, and the differentiation will become clearer to LPs. Our messaging and differentiation are very clear to the entrepreneur, which is really what I’m focused on at first. Then, ultimately, I want to build a successful fund or two, and then the numbers will tell the story to more institutional investors. That’s the strategy. But, if you’re building a B2B SaaS company today, if you took a poll I think most B2B SaaS founders would rather raise early money from a B2B SaaS-focused fund, led by entrepreneurs that have built highly successful B2B SaaS companies in the past, versus either getting it from a more institutional type fund, or, on the other end, raising it from 25 different angels investors. So, in our little corner of the world, we have carved out a strategy that very much talks to the entrepreneur building today’s B2B SaaS company.
VN: Venture is a two-way street, and VCs have to sell themselves to entrepreneurs as well. How do you differentiate your fund to entrepreneurs?
PM: As you can imagine, I see deals of all types in the industry, but I’m trying to brand Active Capital as the leading seed fund for B2B SaaS founders. I don’t know anybody else doing that. I’m pretty familiar with many of the seed funds but if you are building a B2B SaaS company, especially if you’re outside of Silicon Valley, I don’t know how many other B2B SaaS-focused funds, run by B2B SaaS-focused entrepreneurs, who have built great companies and had great outcomes, and are not just willing to invest outside of the Valley but prefer it, I just don’t know how many of those there are. That set of ingredients is highly differentiated.
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?
PM: There is a company called Altru, which is a New York City-based company. They have built a software platform that helps big companies humanize their employer brand. I love the founders; they’re scrappy and really smart, they went through TechStars. I like companies that spend the time and the focus going through incubators; they don’t always have to, but maybe half of our investments have.
If you think about big companies today, one of the biggest things that companies have to do is attract and retain great employees. Our country and our world are in a war for talent. If you think about how much money big companies spend building their core brand, and then how much they spend recruiting for employees, it’s gazillions of dollars going to these things. But what a lot of companies don’t spend a lot of time or money on is how they build their employee brand. How do they build a brand around what it’s like to work for their company? In fact, I would argue that the way that most people learn about this is through third parties like Glassdoor and places where you just get hammered.
So, Altru has built a video-based Q&A platform so that companies can engage their everyday employees around what it’s like to work at this company. They can go really deep. It’s a little bit like a video-based Quora for your employees that gets exposed to the world. They’re landing some of the biggest companies out there who are buying into this notion that we need to humanize and elevate what it’s like to work at a company.
There’s also a company in Kansas City that I really like, Super Dispatch. They have built a software platform for carriers and brokers in the car hauling industry. At a very macro level, they build trucking software, but they build it very specific to trucks that carry cars. It’s very nichified, but very powerful software and a very successful company. I was introduced to Beck, the founder, by another seed stage VC firm and so I got the intro from a trusted source. When I met the founder, I immediately loved what he was doing; I love entrepreneurs that know how to focus just enough. There’s a lot of money pouring into everything automotive and trucking, both at the car level, the back-office-software level, the carrier and broker levels, but I really liked how Super Dispatch was focused. I also love companies that are focused and really dominating a niche, but you can start to imagine that, if everything goes right, they can go beyond that niche as well, and I definitely feel that with Super Dispatch.
When I met them, they had bootstrapped the company to $50,000 a month in revenue, and when I say bootstrapped, I mean they hadn’t raised a dollar, so we were the first money into the company. I like the founder, I can see myself working with him, but I also felt like he was the guy with the credentials to build this company and I love the progress that he had made without raising any capital. So it really hits on most of the bullet points that I talked about earlier.
There’s a local company here in San Antonio called FunnelAI. They’re one of the fastest growing companies in our portfolio right now and what they do is help connect retailers with potential customers, based on their social activity. When I say social, it’s way beyond Facebook and Twitter. It’s a really cool company; they’re using AI to help understand intent, and not just someone tweeting, ‘I want to buy a car,’ since that’s pretty obvious. They are leveraging AI to get to the next level of intent with specific customers. One of the things I like about them is this is a company whose technology can ultimately apply to several different industries, but today they are 100 percent focused on the automotive retail industry, so basically car dealers. They’ve gone an inch wide and a mile deep on this one category and the traction and growth is incredible as a result. I love the founders. Also, they’re cash flow positive because they are growing faster than they’re spending, which is crazy in tech. It’s just a great company.
Another thing I’ll say about the kind of companies I invest in, FunnelAI is an 'AI company,' but I am not an investor in technologies. I’m an investor in product companies that apply technologies to solve a customer problem. It’s not that investing in technologies is a bad thing, but I’m just much more of an outcomes-based investor than a technology-based investor. I love the fact that they’re leveraging AI to get to this next level of customer intent that happens to be really valuable to these retailers that want to connect with them. But I’m not investing in them because AI is cool or hot or whatever.
VN: What are some lessons you learned?
PM: A big one is finding the right level of portfolio diversification in your investing practices. A lot of people like to think they can pick the world’s next best company and, even when I look at my angel investment portfolio, some of my biggest winners are going to be my biggest surprises. Building a great business is hard, and not everybody is able to do it since markets change and dynamics happen. It’s hard to find what the right level is, but I’ll tell you that when I went out to my potential investors to raise money for this fund, this was one of my big selling points that I really believed in. I don’t think your average, high-network individual should be out there in two, three, four early stage internet software companies. It’s not a winning strategy, so finding the right level of diversification is really important.
For me, focusing on what I know is really powerful. It doesn’t mean that I would make only bad investments in something I don’t know but I’ll tell you that, through my angel days, I would do a lot of B2B stuff and I would do a lot of B2C as well. And I realized the deals I would get on the B2C side were not as good. I was not viewed as being as credible as I am in the B2B world. The best B2C entrepreneurs are not necessarily coming my way and also, when companies hit challenging times, I wasn’t as able to influence them, either because I didn’t have the right answers or I didn’t have the right credibility with the founders even if I had the answers. So, I’m just focusing on what I know.
VN: What excites you the most about your position as VC?
PM: I love working with founders, I love helping founders create amazing companies. I also love helping coach founders and CEOs. There’s a very big difference between being able to get a company off the ground and truly being able to lead it over the long term, and founders need a lot of help getting from point A to point Z. Very few make the leap but the ones that do and can successfully do it create the most valuable companies. There will be times when the founder is maybe not the one to run the company forever, but having the founders have positive engagement in the company can also be something that adds a lot of value and success to the business. So, for me, I love to work with founders, I love working with creative people, I love leveraging my experience to help them navigate the ebbs and flows of creating a company. That’s what drives me every day.
I’ve seen it work well and I’ve seen great tech companies get built. Growth companies, especially in companies that are built right, can have such impact on employees, on the founders, on the shareholders, on the communities, so I love playing a small part in all that and helping the founder achieve their ambition.
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