Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Vanessa Larco is Partner at New Enterprise Associates (NEA). She joined NEA as a Partner in 2016 and focuses on enterprise SaaS and consumer investing. She is passionate about well-designed products and services that enable people to be more productive and fulfilled at work and at home. Prior to joining NEA, she was the Director of Product Management at Box where she worked on building the next generation of productivity apps across web and mobile.
I fell into it. I’d never really thought about going into VС. My background is in product, I went to School for Computer Science at Georgia Tech. I thought I meant to be a software developer. When I was interviewing for internships at Microsoft, they recommended me to look for a PM position there, told me about the role and what it entailed, I thought it would be the perfect fit for me. During my internship, I really fell in love with the role of the PM. That’s the career I embarked on after college. I loved it! I’ve never wanted to do anything but helping teams that build software. So, this shift into venture was very unexpected. I knew one of the GP in NEA for many years, and every time I was looking for a new role or thinking about or thought that I should be looking for my next opportunity, I’ve asked his opinion as a kind of my informal mentor, who has a very unique perspective on companies and opportunities, or what they look for while recruiting their portfolio companies. That was a really great relationships and high trust for many years. When my 3 years at Box were coming up, he reached out to see what am I going to do next and what am I thinking about my career in this junction, and it was a perfect time to meet with him. After a several months talking through the things I enjoy doing in Box and discussing what I like about building software, exploring what other companies are doing and what VCs think about it, he ultimately posed the question about joining NEA and going to venture. It took a little bit of thinking through for me about the role and what’s the skills that I developed in project management I can bring over if I want to go to venture. I realized that a lot of skills I already have can be useful, and with an incredible support from NEA team, I felt like I can try something different. So far I really enjoy it!
It’s really hard. All the startups are unusual for all the reasons that make startups viable – they try to capitalise an opportunity nobody had seen before. It’s hard to say which one is the most exciting, or most different, or the most challenging the status quo. Between seed and Series B or С I’ve worked with over 12 teams we’ve invested. I haven’t invested in frontier technologies, some really interesting things, like National defence, or Satellites, or SpaceTech, or FoodTech, only in Consumer and Enterprise Software. Still they are all very interesting and run by incredible teams.
I would say that I see about 1000 projects, either individual pitches, presentations during the demo days I attended or the stuff forwarded to me. About 2 companies a week get an hour call from me, that makes a 100 a year. We invest in about 2 of them per year, at most.
It’s really easy to rely on scouts and angel investors for deal flow. Building the relationships and network is really important, it’s a key part of ecosystem. But I also think that you’re then depending on someone else’s filter. So, about 25% come from this valuable channel, but I also personally scout for companies. There are some areas I’m really excited about, and I’ve built up a market map, I’ve reached the experts in the fields and asked questions, like what companies are you using for solving problems, which gave me a list of companies to look for, to talk with the founders. So in 50% I’m reaching out, I call the founders, because I’ve heard about them from their customers while making my research. In the rest of the cases founders find me themselves through LinkedIn, or Twitter, or email. Those cases are, usually, very compelling and need several meanings to decide.
I have to have a connection and understanding of the problem they are trying to solve. I know most investors don’t operate this way, but I just feel like I have to believe in the problem they are solving, and I have to believe in the solution they’re putting forward. You work with those companies, especially at the early stages, so closely, and being intimately familiar with the problem they’re solving is a big advantage. You sit side by side with the founders, you help them to recruit candidates and later new investors – you have to be able to speak passionately about the business they’re going after. So, for me a personal connection and a personal interest are really important. There is a lot of great companies in the spheres I don’t know very much about or building up products I don’t really understand. They are great investments, just not for me. Another important issue is a chemistry between you and the team. When you join a board you are going to be there all the way through, until some sort of exit, – it may take 4 years or 12. You need this chemistry to spend those time with founders, because it is a significant portion of your life. You have to have similar views on the world, especially in terms of prioritising, building and treating teams, fundraising, and managing finances. The third thing I’m looking at is obviously a product, as I’m a product person. Before I invest I have to play with a product, I have to believe that it is of a high quality, I have to believe that there’s a real strong focus on the customers and their needs and those people will love using it. And that the products keeps improving over the time. Finally it is what customers are saying about the product, does it actually resonate with them, how good is a customer support. References on the product and references on the team are critical for me.
You know, all the companies I’ve invested in, started for me with “Wow, I want to use it!” I think when you see the customer’s love, if it’s really high in NPS, if a demo makes so much sense and the world really needs it, the user really yearned for this kind of the new technology they has made it possible to have. In every company where I joined the board or invested in there was a moment when I said this “Wow!”
I spend about 75% of my time on enterprise SaaS. I’m looking a lot on HR Tech, because, while I was in product, I was surprised at how much of my time I spent on HR topics, like building teams, hiring and managing people’s careers, promoting and mentoring others. Now, working with my portfolio companies, we spend a lot of time on these topics too, thinking about the culture of the companies we are building. I read a ton of articles on organisational behaviour and research, I’m fascinated with building of organizations and teams, so I’m personally really excited about HR Tech and what it can enable. I also spend a lot of time in Sales enablement technology, because, when you’re building a product, you should figure out how to get it into the hands of your customer and make a customer reach you out. Obviously, I’m interested in Product management tech, anything that helps you build software efficiently and beautifully. Recently I’m looking at software for finance teams. COVID-19 became an exciting experience, because suddenly your finance team is taking the leadership role in helping companies to figure out how to survive the storm: they have to put a lot of control in place, to do a lot of planning and scenario mapping. There are a lot of tools for that. Of course, it is also Collaboration and Productivity technologies. I spent 3 years at Box thinking about how teams collaborate. The rest of my time I spend on Consumer technologies. I really like FinTech, these are some of the products I’ve been using myself. After graduating from the college I realised that my financial literacy wasn’t a top notch, so I’ve started using products that help me to manage personal finances and build wealth. Recently, as a mother of a two year old, I became very interested in Parenting Tech and FemTech, in Fertility, Health and Wellness for women, especially post-partum. As you see, I prefer to spend time on things I’m personally interested in.
Series A is my ideal spot, but I’ve done seed and Series B as well.
I am geography agnostic. I’m in 2 boards in Atlanta, I think, Atlanta is a fantastic place to build a software business. I’m on board with a company in Toronto, in a company in Brazil… I think that if you have an amazing entrepreneur and they have access to incredible talents, it doesn’t really matter where they are.
Technically, we can get a deal done in 2 weeks, I don’t love that, personally. I feel like being under pressure, because a company pitched 20 VC funds, got 5 termshits and now is just choosing the best proposal. I think, it’s transactional, while the relationships you build over the years are not transactional. I try to meet founders as early as I can, before we are going to invest, on a seed or pre-seed stage, get to know them, how they view the opportunities, watch how they manage challenges, and a half-year or a year later, if the things have proven being true, they are making the progress and hitting their milestones, the conversation about raising that round will be easy. In the process I will get to know their business or customers, understand the processes backwards and forwards, get the references on the founding team and customers, so I can go into it with a really high conviction that this is a team I’m ready to spend a next decade of my life working with. That’s my ideal process.
All of them!
It depend on the stage. It is very closely correlated with the risk. If we are investing in something that doesn’t have revenue and whose customers haven’t proven that they need it, anywhere between 25% and 30% make sense. We have the ideas, we help to form a team – our role is more active. In the Series A, when they have revenue, traction, have some customers, you see that the opportunities start shaping up. At that point we’re looking for 20-25% of the company. At the Series B they are scaling revenue, there is a clear product-market fit, increasing efficiency of the sales process – we are looking for 15-ish percent. At Series С it is more like 10%, and from there on it is more 5%.
You want them to be experts in their space, to have deep knowledge about the area they are tackling, to build this before somewhere else as an internal tool or internal project. Maybe, they’ve been in an adjacent market or they’ve worked at some big incumbent focusing on this problem. I mean, they’ve seen this problem, were thinking about the solution for a while and now the’re going to start a company. They have to have some unusual view into the opportunity they’re going after. I also look at their ability to recruit. You want them to be able to recruit investors, to be able to recruit talents in order to have the best team around them, to be able to recruit customers and partners – to have the ability to get people on board, to get people to believe in the things they believe. They have to be persistent and tenacious, always trying to find a way around an obstacle. You want them to be honest and transparent, because you have to build a very high trust relationships with them: they should give you a real assessment of what’s going on and a level-headed view on what they are going to do about the opportunities and challenges. I personally like to work with very detail-oriented founders who understand every detail in the cash flow, the product, their customers. I’m very attracted to such an unusual attention to detail.
Yes. Every case is different, of course, but there is always a CEO who you work with the majority of the time. Even if they have co-founders, you still work with one person, who is the major engine.
I don’t know them personally. I think the personality of entrepreneur has changed over the time and generations. There are entrepreneurs focused on sales, those focused more on product design and those focused on technology. You just want to match the personality with what it takes to win at the particular case. If you’re doing DeepTech product aiming developers, you want a highly technical CEO. If the CEO in such a company is focused only on sales, it doesn’t inspire me much. If you’re selling consumer product but are good only in enterprise sales, that’s a mismatch too. The skill have to match the company you’re building.
If a founder misrepresents or exagregates something that we catch during due diligence, it’s all over for me. Trust is one of the key parts of getting off a relationships, and the minute that trust is eroded is the non-starter for me. Other red flag is a really high burn without any justification around it. It’s okay to burn lots of capital depending on a type of company you’re building or your product, but in some situations it doesn’t make sense. And if you cannot explain how you’re using capital, what strategy you’re choosing and why, that’s a red flag for me, too.
Not really. There was a company I was excited about, but the term shit we gave them was too low and we lost it to another VC. The company just blow out of the water, and I should have given them much better term shit. It’s a lot of this kind of situations in my repertoire when I know I should have given more to win the bid and I’m devastated that they are not in our portfolio.
There’s a lot od direct-to-consumer e-commerce businesses with the products that are fantastic and I love the product and use them, but I don’t see them in our portfolio. We are a really big fund, so the type of exits we need is rather large for us to be able to make it for our economics to work. A lot of the times when I like the space and the product, but it is obvious that the size of return on exits is below our expectations, I don’t invest. It’s always heartbreaking when it happens.
I can’t meet people in person and, as I mentioned, I like to know people well. It doesn’t matter where they are in the world, I still would like to go travel and see them, meet the team, get the non-verbal cues about the culture of the company. That’s gone. I’m trying to figure out how to substitute that, how I can get to feel the folks I’m going to work with. So, it’s taking longer to get deals done and many-many more conversations. We also have to think through what are the capital needs of these businesses in order to support them in times of uncertainty, and we survey them under a microscope to understand what they really need. We are not sure that the access to capital will look like in the next 12 to 18 months and need to be much more cautious in that area. Also, as other VC firms, we’re trying to figure out what’s next, what kind of behaviours are going to change for good and what new opportunities is that create. So, we changed a little bit several things – how we evaluate the companies, what types of companies we look at and our diligence became more thorough when we look at the financials and the projected capital requirements.
There are some businesses that suffered a lot, some of them won’t survive, some will have a flat year of growth. Some will come from it even stronger that before. There are companies that experience tremendous growth. Fundamentally, in times of behavioral change in a big way for consumers, there’s a whole new set of opportunities.
I have recency bias, for sure. I am really impressed with Twilio. And, before I continue, I should add that I’ve worked there. I think that they really proved the power of bottoms-up adoption and demonstrated that developers do have purchasing power, so you can build a huge business out of developers’ products. It was fascinating to watch them pioneering this business model. Now we see so many great API companies and platforms being built that target developers. It’s impressive to watch, and I’m sure that we will see many more incredible products coming from this company. I’m also a huge fan of their leadership. I think it is one of the defining companies in Tech space. Another company (and I’m biased here too) is Robinhood. It is an incredible company that really change financial landscape for retail investors. They pioneered that no commission structure and change the whole landscape in such a short amount of time, making the whole host of other consumer FinTech companies that came out of there. I’m really excited about all the changes in the financial products that the consumers are getting the opportunity to adopt. Talking about something that I have not been involved with, Slack is very interesting to watch. It wasn’t an innovative idea! We had IRC, we had Google Hangouts and all the different chat products. But they’ve built such a beautiful product, it had so many cool integrations, and shortcuts, and Easter eggs, so the developer teams adopted it, and PMs, and designers, and marketing and sales – everyone. One of the coolest things was the announcement that you only pay for your active seeds, I thought, “Men! So many SaaS companies make money off of the seeds that never get activated! If others developers adopt this model, it will change the landscape completely: they will create product for the viral adoption.“ Of course, seed pricing is not new, but the active seed pricing is new. Chats are not new, but panels, hashtags and emojis and other cool stuff add value. There were so many small details that were just so delightful and differentiated the product. It wasn’t just one killer feature. It was great to watch this company growing and dominating, being adopted by not just tech companies, but by companies in all kinds of industries.
I love venture! I feel incredibly lucky and privileged to get to do what I do every day. The truth is I don’t know how good I’m in this business yet. I hope, I am, and I hope the companies I’ve invested in will have fantastic outcomes. If they do, I would love to see myself in venture for the rest of my career. But if I’m not good in venture, I would like to go back to products. I think about project management all the time, I advise companies on products and help them to recruit product people, I spend time with their product managers – I love building products. If I’ll have to leave venture, I would happily go back to building products.
Don’t lose focus. It’s so hard because you get so many opinions from people around, like founders, sales, investors, even your competitors doing different things, and you doubt yourself all the time. Just keep your focus, and if you have questions, if you’re genuinely concerned that you should choose a different direction or explore something different, do research, enumerate things out to make a decision. Time is most precious resource, don’t waste it. Don’t be afraid of hard trade-offs. When capital is flowing through easily and you just have almost unlimited access to it, it’s easy to not have to prioritise, hire more people, build side products, try everything etc., you just avoid to make trade-offs. But it is very hard to battle multiple fronts, and team doesn’t feel happy and fulfilled making different products. COVID-19 was an interesting experience, because it made people get back to important things, helped to make hard decisions. Don’t forget that your customers is the most important thing as well as your team that you build to serve those customers. If your team is not happy, it cannot be productive, so your customers won’t be happy either.
So you’re saying my first favorite iis San Francisco, yes? I was born and raised in Miami, my family is South American, my native language is Spanish. Miami is my home, where I can be myself and speak my native tongue all day. There is nothing like going back home.