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Ripple Ventures is a Toronto-based firm that invests in B2B SaaS startups
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.
Cohen is an entrepreneur and venture capitalist focused on early-stage technology. He has been involved with some great companies but his first investment in Turnstyle Solutions as the founding investor influenced him the most. From the early days at Turnstyle, Cohen helped bring an idea to life and watched his initial investment turn into a 50 person company that was eventually acquired by a US public company in 2017.
He knows the risk entrepreneurs take when starting a company, and he understands what helps them succeed at the earliest stage. Cohen has hands-on experience in selling enterprise SaaS solutions to the top financial institutions globally. He sees the importance of working with trusted advisors and partners early to help scale a business faster. Finally, he knows what helps add value to a company in the beginning and what is just for show.
Cohen founded Ripple Ventures in 2018 to help entrepreneurs and start-ups learn from his experiences while giving them more than just capital to succeed. With its 'Operators-First' approach, Ripple works with companies every day not just every quarter. That is why it opened 'The Tank', its incubator space to offer start-ups a turnkey office space to scale their businesses with advisors and mentors surrounding them every day to help them succeed.
VatorNews: What is your investment philosophy or methodology?
Matt Cohen: Ripple Ventures is a founder-focused, operator-first, investment fund that is focused on B2B SaaS startups. It really came from my first experience in building and starting my own startup with two friends with very limited capital and limited resources; I saw that small, little decisions could change the traction of a company dramatically. It led me to believing in the ripple effect actually taking place.
With Ripple Ventures, we focus exclusively on early stage startups. We're founder-focused investors who work alongside founders every day, not just every quarter. We're essentially an extension of the founders' management teams. We also like to build a community of hardworking, entrepreneurial organizations and individuals that can support each other within the Ripple platform.
VN: You said you like to invest in B2B SaaS. Why is that an exciting opportunity right now? Why is that a space that you're so interested in?
MC: I have a background as an operator in B2B SaaS, working in selling large enterprise SaaS software to financial institutions. But we have always had this thesis that the movement to digitization and the cloud and workflow automation software was going to take the next five to 10 years. That has been accelerated due to COVID, but we still think there's a huge market opportunity. And so, we've been investing in an early stage pre-seed to early Series A B2B SaaS companies, with a specific focus on workflow automation and data and analytics platforms.
VN: What verticals do you invest in?
MC: We're generalist when it comes to industry; we'll do everything from healthcare to e-commerce to logistics, construction, education. As long as the B2B SaaS tools are either taking a legacy solution and turning it into a faster workflow automation tool, or taking massive amounts of data and distilling it down to decision making and recommendations to make your business more efficient, those are tools we want to support.
VN: What's exciting within those specific verticals that you mentioned?
MC: In e-commerce we've seen everything become similar to Amazon: instant delivery, instant pay, instant communication. So, we're very excited about everything that supports the growth of e-commerce in the infrastructure layer. Logistics and supply chain has been a huge area of focus, given COVID and the reinsuring of supply chains. So, we're really excited about more and more mid-market enterprise customers getting access to the tools that Amazon has built in-house to make themselves more efficient and to keep up with that demand from consumers. And then, lastly, obviously healthtech, because the pandemic has broadened everyone's eyes to how broken the healthcare system is and how telemedicine just scratches the surface of what healthtech really means. When you can connect diagnostics and recommendations and information directly to a patient, instead of having to rely on the physical offline world, to service your healthcare needs, that's what we're excited about.
VN: What's the big macro trend you're betting on?
MC: There's a couple things that we're excited about: one is, as I mentioned before, healthtech. Telemedicine, as I just mentioned, is just scratching the surface on the use cases, with diagnostics and health tracking devices being a huge trend that we believe will continue, along with mental and physical health tools on the rise. Our investments in companies like OnCall Health, which offers virtual health care services out of the box for any health organization, while integrating with medical records, diagnostic tools, things like that, is a really big macro trend that we are continually betting on.
The second one is the creator economy and the rise of freelance workers, especially in this remote world. We believe that the tools that will support these creators and these freelance workers to create their own content, and distribute and monetize it in the future, is not going away. We're excited to support companies building that infrastructure.
VN: When you say creators, what exactly does that mean?
MC: It can be anyone that creates their own content, from educational content to entertainment content to podcasting or YouTube videos, as well as anything that allows you to convert a message over a medium that wasn't created in-house.
VN: What is the size of your current fund and how many investments do you typically make in a year?
MC: We have about $25 million under management, spread across two funds and a couple of SPVs. Our first fund was $10 million; that started in 2018, and we made 10 investments. It's a top 5% performing 2018 vintage fund. We have another second fund which is also $10 million; that's investing in seven investments spread over around 12 to 18 months, and that's larger checks with a more concentrated portfolio.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
MC: Our first fund was fully pre-seed and seed, so we were writing $500,000 to $1 million dollar checks. Our second fund, we're writing $1 to $2 million checks with companies that are at the seed plus or early Series A level, so with $500,000 ARR or more. We do still plan to invest in pre-seed which is MVP, early traction with customers, limited revenue all the way up to companies doing $50,000 MRR or more.
VN: So it sounds like you do have some numbers that you actually want to see in order to invest, even though you’re investing early.
MC: With our second fund, we do want to see a product that's live in the market, with customers that we can talk to and also ones that are paying for it. That means something in the range of $40,000 to $50,000 MRR is where we're looking for companies to have traction for us to be interested. If the company is close to product market fit, but they haven't really turned on their sales engine, there's other metrics we look towards with user growth and utilization that can show 10 to 20% month-over-month growth when they do end up turning on that sales machine.
VN: What do you want to see from the team when you first meet them that makes you want to invest in them?
MC: First off, entrepreneurs who've come to a large market with a problem that they've personally faced, and had to come up with a back of the envelope solution for it, without any resources supporting them, is something we're interested in. So, they've discovered a problem that already has a predefined market, and they came up with an initial prototype or idea to solve it with. However, we look for teams who are constantly iterating on that initial product at speeds based on the feedback which they're getting from potential customers or clients and adjusting their solution to meet those market demands. In order to demonstrate that, we look for founders that have a strong amount of grit and determination to move through those blockers and those “nos” to overcome the hardships and failures that all founders and startups face. So, having a sense of humility and willingness to learn and keep on pushing forward to find success is something we look for in those teams.
VN: The way it's been described to me by a few VCs that I talked to is that they have to have the conviction in their idea but the ability to be flexible enough to change it.
MC: You want to have a vision of what the future will look like, but you have to have humility in how you're going to bring the future into the present. Take the feedback you're getting, a lot of it being negative feedback, and try to bring the market into your vision.
VN: I think there was a lot of concern early on during COVID that companies would have a hard time raising money, and that did happen at first, but then I believe 2020 was a record breaking year for investments. So, where are companies now in terms of their valuation?
MC: In the beginning of COVID, when we launched our second fund, we were very conservative, trying to find companies that were doing $500,000 to several million in ARR, and we were seeing valuations priced somewhere between five to seven, even eight times ARR, which was pretty reasonable for companies that were growing 10% month-over-month. However, valuations have skyrocketed, along with public market valuations, where companies are now being priced at anywhere from 25 to 40 times ARR, all the way up into the hundreds.
So, valuations have definitely gotten out of whack on some spectrum, but what actually is more interesting is the level of capital that is being poured into these companies who don't necessarily know what to do with it, and that's actually more concerning to me than the valuations. When a company is only looking for $10 million, and they end up getting $100 million, that's a lot of pressure for founders to figure out how to use that capital and what bets to make, but it also puts a lot of pressure on the earlier investors because they're now at the bottom of that waterfall stack. That means the company needs to sell for at least $100 million, because last money in is first money out in a downside scenario. And so, keeping up with that pressure to maintain valuation and growth, let's say at 20% month over month, is scarier than the valuations that the companies are getting, in my opinion.
VN: When those companies are raising rounds at huge valuations, more money than they need, more money than they know what to do with, what happens when they go to raise that Series A, and they haven't reached that level that they would need to justify that valuation and that that funding that they received?
MC: There's definitely a scenario where there's down rounds but I'm more concerned about the companies that are taking on too much capital that those investors that came in last are going to control what direction the company ends up going, which we've seen with the SoftBanks of the world before, with their investments in WeWork and Wag and stuff. So, what we're looking for are founders who are being disciplined in how much capital they actually need versus how much capital the investors want to give them. Irrespective of the valuation, we're instructing companies to evaluate how much capital they need to get to the next hurdle or the next level of sales velocity and product utilization to hit those targets. If the targets are set too high, it's going to be very hard to backfill those valuations and then you have a lot more problems to deal with.
VN: Is them taking too much money something you didn't have to worry about before but now you have to talk to them about it? Is that a conversation you've only had to have more recently?
MC: Absolutely. We've recently closed a Series A where the valuation was getting too high and we actually capped it and we went with a lower valuation term sheet with a better quality investor, with a more reasonable amount of capital injection, which we thought was the right thing to do, rather than just optimizing for pure valuation with potentially the wrong partner.
VN: The way I've seen it described is that, because VCs had so much capital from last year basically leftover that they were pouring more money into companies now than they ever have before. Is that a temporary problem or is that going to be a long term problem?
MC: It's going to be an ebb and flow problem. It's not going to go away but it's also not going to keep at the same speed at which it has been for the last year. You have to remember, a lot of the funds that were raised in the last couple years also were seeing incredible amounts of liquidity coming back into the funds through distributions of IPOs that were made on investments made in 2014 and 2015. So, there's a combination of new funds being raised, a lot of capital being raised through distributions, and public market IPOs. And so, for them to make 100 bets with $20 million each is not really that crazy based on the capital they've raised, and the capital they've received back from investments they made five or six years ago. If that cycle continues, we'll see a lot more of the same for the foreseeable future.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
MC: A lot of our LPs are extremely excited about what we’ve been able to accomplish with a limited amount of capital in our first fund. We went out and set out a pretty strong expectation that we were going to lead 100% of our deals and we were going to be concentrated with strong ownership going into Series A and future rounds, and we've been able to do that with our fund almost at 2x MOIC in just two and a half years with some liquidity already returning back capital.
We've also launched the Ripple Group, which is an asset group made up of three entities: Ripple Ventures, which is our venture fund; Ripple Developments, which is our real estate development fund; and Ripple Capital, which is our later stage, pre-IPO, and emerging manager fund to fund entity. So, all of our Ripple LPS get access to a variety of opportunities under multiple assets under one umbrella, which is really exciting for our LPs to come to Ripple and see that they can get access to venture capital, private equity and real estate.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
MC: The market has definitely shifted to more of a price taker, rather than a price setter, for venture funds. We lead with an operator first approach; we lead most of our rounds and we dig in early and we dig in deep alongside our founders. When you're a lead investor, your job is to, one, find the company, convince them to take your money, run the entire due diligence process, and then bring the investors around the table to join the round. We do all of that for the founders, so we're not just saying, "Hey, if you end up finding a lead investor, you can count on me to write a $250,000 check." We put our money in first, we can help them run the process and then also work alongside the founders every day.
The other thing we try to get our future founders to do is to speak with other founders in our portfolio, even before they start to engage with us, to validate that what we say and what we do is true. Ripple Ventures is always committed to helping the founders every step of the way, whether it's through late night phone calls or pre-board meeting preparations, we get into the weeds with our founders every single day. We're not just a financial investment partner, we're an extension of your operating and management team, and we also have a mentorship and expertise group of advisors, former founders and venture partners who work alongside our founders day to day to help with specific tasks like sales, product marketing and M&A opportunities.
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?
MC: That's like asking me to pick my favorite child but I would say one company that always sticks out is Voiceflow, which we discovered in early 2018. They were originally called Storyflow and they were focused on initially making children's stories for the Alexa devices. At the time, when we led the investment in their pre-seed round, we had a strong amount of conviction, predominantly because the team was so incredible, and the market was, in our opinion, still growing, and still coming of age. It was very new to a lot of businesses but it was definitely showing a lot of hobbyist potential and community.
We led the investment in 2018 and a lot of people shook their heads at that investment, including our own investors, saying, “What are we doing investing in children's stories on Alexa devices?” However, we stuck to our guns and we brought the company into our incubator space, we worked alongside them every single day, brought around a ton of support, helped them through some early M&A opportunities, and then eventually got them to their seed round which was led by True Ventures. We've allowed the company to continue to execute on their vision of being the leader in the conversational design space, and we now we've been able to bring in investors like Google, Amazon, True Ventures and a brand new fund that we're excited to announce soon that just led their Series A round. That's been a really exciting investment for us to follow.
Another investment of ours that we're excited about is a company called Apteo out of New York, a company that initially started off in the alternative data space for capital markets and finance. They recently pivoted to e-commerce, where they've been able to launch an incredibly powerful product to allow e-commerce merchants to segment their customers automatically and integrate it into their email campaigns with a click of a button to target their customers better for repeat purchases through their ecommerce stores. The speed at which that company has been able to pivot and launch a brand new product in only a few months and see amazing growth has been an incredible journey to watch.
The other one is OnCall Health. We were the first investor in 2018 when they were just a mental health telemedicine company. We helped the company shift its focus to mid-market and enterprise use cases in virtual care. Watching them go through the growth they saw in the pandemic, with 4x their revenue, and then land an amazing Series A investment from Base10 Partners, has been an incredible journey. The company is just getting started. Making a bet early in telemedicine, before the pandemic, and then watching the company accelerate tremendously through that period, has been really exciting as well.
VN: What are some lessons you learned?
MC: Before starting Ripple Ventures, I was working on Wall Street down in New York for a Canadian bank called RBC on the merger arm and hedge fund side of the business. During the last crisis in 2008 and 2009, I got to see a lot of the ups and downs in the public markets, but I never really understood how private companies became public, or even got started. So, I ended up starting a tech company with two friends called Turnstyle Solutions, where I wrote the first check to get the company started and help that company get off the ground. The company was struggling to raise capital from venture funds early on because there really weren't many Canadian venture funds at that time in 2012 or 2013, so watching that company trying to grow with limited resources and support around them helped me understand how you can build a successful startup without money, but with more hustle, determination and grit. The company was eventually sold to Yelp in 2017. Watching that journey made me want to be a part of more startups and be a part of their early stages when they needed help, besides money.
Some of the lessons from that experience made me realize that money doesn't solve all problems, and that the people you start the company with are also not the people that you finish the company with. Those are some things I learned from my time at Turnstyle Solutions. Also, it's really important that you determine at the early stages if you're hiring makers versus managers. Managers are great at certain stages of the company, but hiring people who can actually get their hands dirty and build product and drive early sales traction, even if they don't have management expertise, are more valuable in the early stages then managers are sometimes.
VN: You can teach those people to be managers, but you can't teach managers to be makers. Is that what you mean?
MC: Yes, that's often the case. Once you've reached the management level it's oftentimes you don't want to go back to being in the trenches being a maker.
VN: What excites you the most about your position as VC?
MC: I feel very fortunate to be in the position I am to start my own venture fund with no experience in private equity or venture capital. I didn't go to an Ivy League school, I didn't really grow up with a broad network of entrepreneurs around me. So, I just feel fortunate to be in the position and have investors that have supported me to do this full time. I also really feel fortunate to be able to help people succeed and grow and build their dreams into real life; watching the ripple effect take shape over these last few years has been incredible for me to experience and be a part of, while also being an enabler of opportunity. I feel lucky to be in the position I'm in, but also to help entrepreneurs navigate the crazy world of entrepreneurship and startups is something that I'm very proud of.
Lastly, we're not just looking to build a fund: we're looking to build a platform and a franchise, and in doing so, we've launched the RippleX platform, which encompasses our fellowship program and our Tank Talks podcast, our Ripple retreat, things like that. We're building a community and giving back to students from diverse backgrounds, underprivileged youth, to learn about becoming a venture founder or a venture funder, through our RippleX Fellowship program. That's what really excites me as well.
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Joined Vator onI founded Ripple Ventures in 2018 to help entrepreneurs and start-ups learn from my experiences while giving them more than just capital to succeed. With our 'Operators-First' approach, we work with companies every day not just every quarter.