Money for the Middle Stage: Part 2 of a Conversation with Scale Venture Partners
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product? What is the price point? We put that all under the moniker of helping them achieve velocity and repeatability. For different companies, there might be different answers.
X: Do you tranche your investments, dependent on whether your companies get these experiments right?
RO: You don’t see that kind of tranching. If you trust the company enough to give them the money, you probably trust them to use it wisely. You might see a tranche [withhheld until] something like an FDA approval, but if you are tranching for sales and marketing success, you wind up making a bunch of people feel like they’re going to lose their jobs unless they keep it above a certain number. That is not the way to do business. You want to give them the runway to know they have time to just go out and do it. Otherwise, you’d be trying to replace board governance with money governance. You should just go on the board, iterate fast on what’s working, and kill fast what’s not working.
X: So if all goes well, you end up handing off your companies to growth-capital investors for the final push.
RO: By the time you get to the last round, you know that all it’s going to take to get bigger is capital. When Scale invests, a company might have two sales reps and the CEO and 20 customers. We fund them and two or three years later they have 20 reps and they’re doing $20 million in revenue and they’ve started to become profitable, and they’re at the stage where they’d like to have 50 reps and get to $60 million and then go public.
X: What kinds of companies do you consciously not invest in?
RO: When it’s going to be capital-intensive prior to knowing if you have a product, that’s tough. A new solar panel manufacturing process is going to cost $100 million and you won’t know if it works until you’re done. Those are not businesses we invest in. We wish good luck to those who do, but there is a plenty big market for us within infotech, where we finance the scale-up round. There isn’t anything that I want to know badly enough that I’m willing to pay $100 million to find out. The reality is that most of the really big wins in technology are capital efficient, because the real genius is the guy who figures out when the “objective conditions,” as the Marxists would say, are right and it will only take a small number of components to build a system and ride it all the way. Apple was not cash-consumptive early on, nor were Microsoft or Oracle or Google. The beauty of IT is that if you operate in an infrastructure area and you pay attention and get the timing right, you don’t have to push the rock up the hill alone. You can take advantage of the trends.
KM: We believe that markets drive outcomes in this business. You can take a mediocre company and make it better, but that is not where the big wins come from. Just as we are trying to get our companies up the inflection curve, we are trying to pick markets that are at an inflection point. We do studies of different markets and then do outbound calling. We might be tracking every company in a sector, and we’ll stay in touch to see who is breaking through to our phase, the scaling phase, and then identify who will be the winner and who may not.