Michael Treskow, Partner at Eight Roads Ventures, a global Venture firm with $4 Billion under management, joins Alex Theuma on this episode of The SaaS Revolution Show to talk about what VCs look for when investing in SaaS Startups. Michael provides great insights into the mind of a VC, the key pillars for investment making decisions, the metrics he looks for and more.
Alex Theuma: Welcome to the SaaS Revolution Show. I’m your host Alex Theuma.
And super excited to be joined today by a guest of whom that we’re trying to get inside the mind of, inside the mind of a VC in particular. What we’re looking to see is what does a VC look for when investing in SaaS startups?
Whose mind are we looking at? Well, I’d like to introduce Michael Treskow, a partner at Eight Roads Ventures. Welcome to the show, Michael.
Michael Treskow: Hey, Alex. Thanks for having me.
Alex Theuma:Tell us a little bit about who is Michael Treskow?
Michael Treskow: Yeah, happy to. So let me start with the personal stuff. I’m Russian originally. I grew up in Germany. I then moved to the States for college and stayed there. I lived and worked in the U.S. for about 12, 13 years and then moved back to London from San Francisco about 4 years ago.
I really focus on technology investing. I spent about 6 years in a firm called Warburg Pincus in the U.S., in New York and in San Francisco doing cross-stage investing in technology companies. I then spent about 3 years at Accel in London doing the same thing in Europe and now recently joined Eight Roads.
Alex Theuma: It seems certainly you’ve travelled the globe there in your young life.
Michael Treskow: That’s right.
Alex Theuma: As you said, you’ve been at Warburg Pincus. You’ve had 3 years at the very well-known Accel partners. And now you’re at Eight Roads Ventures.
Tell us about Eight Roads Ventures? Who are they? What stage do Eight Roads invest in? Why did you join Eight Roads after Accel? And tell us about some of the SaaS companies that you’ve invested in?
Michael Treskow: Yeah. Eight Roads is a global venture firm. We have offices in London, and I also have colleagues in India, China, Japan and the U.S. We’re, across all of us, we manage about $4 billion investing in technology. I think that in itself is an interesting differentiation point if you think about Europe, because I think we’re hoping to help entrepreneurs both in terms of scaling internationally that fits the model or at least have access to a global community of entrepreneurs to learn from what might have worked for other people in other countries.
I think in terms of the focus, in Europe we really focus on what we call scale-up opportunities. These are technology companies that have built a product, they have found product-market fit and are now in varying stages of scaling their go-to-market. This is ultimately where we want to be helpful with which, to me, is sort of the question. How do you get from a great product and a great team and maybe a handful of customers to a really large, financially successful company? Which I think is not a travelled one and where we’re hoping to help.
We do that really in Europe across all verticals including consumer enterprise and FinTech, and then SaaS clearly is a big focus for us.
Some of the portfolio companies that we have are companies like Recurly, which helps companies with recurring billing, GoodData, which is a BI player. Manthan Software, Ping Identity, and companies like Neo Technology, which is a database provider. It may not be SaaS in the technical definition but has a recurring business model which, to me, is probably the more important part.
Alex Theuma: Why did you join Eight Roads after Accel?
Michael Treskow: I think for me it was sort of a pretty exciting opportunity to join a friend of mine, Davor Hebel, who’s a partner here, and also do something a little bit more entrepreneurial and really help build the franchise in Europe, which I find very exciting.
Throughout your career, Warburg, Accel and Eight Roads, what SaaS investments have you been involved in? Some that we may know, some that we might not know. And can you tell us why in particular did you invest in those companies?
Michael Treskow: Interesting one. I think a couple of the companies I was involved with are, for example Shift Technology, which does fraud monitoring for insurance companies. That’s a French SaaS business. Or Qubit software, which is a London business that does personalisation for websites. Or Packlink in Spain, which helps SMEs with their shipping. And so they provide a SaaS platform for a person who needs to help them with shipping.
You know, all of them what I think have in common is sort of this old team-product-market framework that we think about where I think I was excited about the people there have thought and have built a really interesting, compelling product that solved a customer need. And, on the market side, where I thought it was a really large opportunity to build a compelling company.
I think they have all that in common. We can talk about individual ones in detail, if you like, but that’s kind of how I thought about it.
Alex Theuma: Let’s look at, just going a little bit deeper, into Qubit. We’re talking about team, product, and market. Can you kind of elaborate on that? What was great about the team particularly in that case, the product and the market, which then led to that investment? Which I think was with Accel, right?
Michael Treskow: Yeah, that’s right. So on the team side, these are really experienced entrepreneurs, a lot of them previously from Google who understood this base from their perspective. One of the things that we’re looking at is subject matter expertise. It’s just really helpful when you’re building a solution that you’ve had that problem in the past and your really understand the intricacies of it beyond sort of saying I think there is a problem that needs solving. Because, in the end, the devil is always into details and so having personal experience with the topic helps a tremendous amount.
And on the product, I think what we saw is a relative and typical playbook where the company ultimately provides personalisation software for websites that helps websites deliver the right content to visitors. When I or you visit a website, they understand a little bit more about who you are and the content that you see is actually things that might interest you, eCommerce being the perfect use case.
And I think what we saw there is that this is by no means a new category but one where the incumbents are legacy players, like Adobe who have had a product out in the market for 10-plus years and where the technology stack was just somewhat dated and where since a lot of innovation has happened. And so you just now had an opportunity to build a better product using latest technology and insights and solve a customer need that was increasingly moving away from available solutions.
I think we see that a good amount in SaaS where, because you have a more agile and real time way of addressing customer needs, your product ends up being superior to a legacy provider that maybe use the license model and was a premise where they just cannot improve the product quickly enough to keep up with innovation. So I think that was certainly the case here as well.
Then last but not least, it is a large market where if I told you that people are increasingly consuming information and content online, you probably would not disagree with that statement. And it just becomes more and more of a need for companies to make sure that the content that you’re presented with really reflects your interests.
Alex Theuma: Thanks for that more detailed look at the Qubit investment. Out of interest, what was the value and stage of that investment in particular?
Michael Treskow: We invested I think it was the third round, I believe. I’m actually looking up what is publicly available. So it was a $26 million round in 2014.
Alex Theuma: You’ve talked about team-product-market. These are three of the pillars that you’re looking at when investing in technology and, in this particular case, in SaaS. What else do you look for when investing in a SaaS company? Is it just these three things?
Michael Treskow: Yes. Fundamentally, the big three things still apply and that’s what ultimately, I think, drives the decision. So how good is the team? What product have they built? How attractive is the market?
And then you go a little bit further in and look at the specific companies. I think you have the category questions that need to be answered with regards to the market dynamics and to what extent they create an opportunity. You need to understand things like go-to-market and who’s the target customer and to what extent there is alignment. And then there are all these SaaS-specific metrics that are just really helpful in understanding how the company is going to grow.
Alex Theuma: And specifically on those metrics, which metrics are key for you in your decision making process? Are there kind of set metrics that every SaaS company must have for Michael Treskow and for Eight Roads Ventures to invest in or is it different depending on the company that you’re looking at?
Michael Treskow: I think it very much depends. I think holistically, we still think about what problem are you trying to solve, what is the solution, how much is the solution better than the existing solutions, and to what extent are you able to actually win the opportunity ahead of you? That’s our very goal.
I think on the metrics level, the beauty of a SaaS business is that they are relatively well understood. These are recurring models where you have a lot of metrics out there and you can benchmark yourselves.
And so fundamentally, what we think about is sort of the main question is sort of this customer lifetime value to customer acquisition cost equation. That’s one of them. And ultimately, it means what return are you getting under your investment. So if it costs you $10 to acquire a customer, how much are you getting from this customer over its lifetime? So that’s certainly one big metric that we’re focused on.
And again, these numbers are all relatively comparable again across the company. So I think the rule of thumb there is anything above 3x starts becoming interesting. Anything below, you need to really understand why that’s lower and there are ways to change that.
And you can drill into the individual components of that equation, sort of the customer lifetime value versus the customer acquisition cost. So on the lifetime value, it’s really what is the size of your customer, what is the retention rate, and then what is the gross margin you’re getting from that. So for those three components again, you can analyse them and benchmark them and understand to what extent the company is doing better or worse there.
I think in general, if I had to highlight something, that is probably the retention points. I think mathematically, if you’re losing a significant portion of your customers or revenues every year, you have to acquire more and more new customers just to stand still. Right? So I think that’s one important metric that I certainly look at, which also indicates ultimately how good the solution is in solving a particular problem.
So if you have a great product, that is you need to differentiate it and customers love it, typically churn shouldn’t be high or, in some cases, negative because customers are actually buying more and more of the product. So that’s certainly one aspect that we look a lot at.
I think another point here on the equation is the marketing breakeven point. So how many months does it cost you to recoup your initial investment? So you could say our CLTV to CAC ratio is above 3, so that’s great. But if it takes you 20 years to get to that point from a cash flow perspective, that’s not very attractive.
So ideally again, the rule of thumb here is that if you can recoup your marketing spend or customer acquisition cost within 12 months you’re in pretty good shape, because that means that the money comes back into the company relatively quickly and your funding is not as high. So I think those are sort of around that ratio are some of the things that we look for.
But that’s ultimately the question on an individual level. So you’re saying if I acquire a customer for X and in return I get Y in terms of customer lifetime value, that ratio is attractive. That’s a positive. And then the other question becomes, well, how scalable is that model? So are you actually able to repeat that process with a large enough number of customers, in which case you have an attractive business.
And there we sort of drill into the individual details around the sales cycle. How long does it take, and whom it is that you’re targeting in terms of your customer audience, and what your sales method is. Like are you doing enterprise sale that is in person? Are you doing inside sales on the phone? Is it something that you can actually do online, etc., etc.? So a bit of a lengthy answer to your question, but all of these things play a role.
Alex Theuma: Absolutely. Moving from metrics back to one of these core pillars, the team, so when we use Qubit as an example, they were experienced founders. They were ex-Google. That always helps, right? What else beyond experience are you looking for in founders and in the founding team? It would be interesting to hear about that.
Michael Treskow: I think subject matter expertise, as I mentioned, is great and is really helpful. I think passion is very important. You really want to get the sense that the founder or founders are excited about what they’re doing and that they’re going to do everything possible to make the company a success, and that ultimately their energy is infectious and attracts others to them.
One of the things that we’re always asking ourselves is to what extent will these people be able to attract a team, and ideally will be able to hire people who are better than them? And if you’re not very excited about what you’re doing and if you don’t have a big vision, it may not be easy for you to really attract other members to your team. I think that’s pretty key.
And then another thing that we’re looking for is ultimately differentiated insight about the market or the business model. Typically, these are spaces where other people have tried succeeding before, where there are incumbents, and where the market works in a particular fashion. And the question to us is what has this founder understood or recognised that might not be obvious to others? And what is this differentiated insight that is going to allow them to succeed?
Ideally, I want to come out of a meeting and say, wow, I’ve learned something today that I didn’t know before. And there’s tons of things that I don’t know, but in the particular market that we talked about in the presentation that there was something I came away with and I said, oh, that’s interesting. That is something that was not obvious to me and it seems it’s not obvious to others in this space, and I think that’s an interesting angle for the company to take to succeed here.
Alex Theuma: Do you ever invest in solo founders? If so, well, we don’t need to say who, but why. If not, why?
Michael Treskow: The short answer is yes. We don’t have any hard rules about that. I think ultimately it is more difficult. We talked earlier about the importance of attracting a team and hiring people who are better than you. If you have a co-founder or are two, you’ve already made progress on the path to building a team, and so that’s tremendously helpful.
Ideally, you have… there’s a lot of decision making under uncertainty that happen when you’re building a company. And when there are no right or wrong answers, a lot of it is about having someone whom you trust and respect with whom you can have debates about the direction that you want to take and decisions you have to make.
Certainly, at some point, an investor in a board hopefully takes on that role of a sparring partner, but especially in the beginning I think it’s just much easier to have somebody you trust and respect sit next to you and work with you through these issues. So I think that certainly makes life easier for co-founders.
That being said, there are plenty of examples of solo founders who have done just as well. So I think it’s a case-by-case decision probably.
Alex Theuma: Moving onto mistakes that you’ve seen whether it’s through pitch decks or just in meetings with founders, it’s always interesting to learn from mistakes of others. You’ve probably received thousands upon thousands of pitch decks. What are the common mistakes that you see within some of the pitch decks that you look at that you’re kind of happy to share?
Michael Treskow: Let me turn that around and not speak about mistakes but about things that I like to see in a pitch deck.
Alex Theuma: Sure. Go for it.
Michael Treskow: Maybe people if they’re missing those pages or topics, this might be a hint.
I think it’s really important to spend enough time on the team and really flesh out the backgrounds and gain credibility. So I think it’s tremendously helpful upfront if you have expertise in the market and if you have experience to just say it upfront. Because that’s ultimately going to give more weight to the story that you tell.
And then we ultimately invest in early-stage companies where, in the end, it is all about the team. So understanding who these people are as early as possible is very helpful.
I think when it comes to the market, it is helpful to have a realistic view of how big the market is, who the competitors are, and what the existing solutions are. And so not mentioning competitors is probably not very helpful because most markets do have them. And if there are no competitors that actually opens up the bigger question about why not. Oftentimes it’s much easier to explain the opportunity when there are competitors in the market already.
And when it comes to the market size, I think it’s helpful to have sort of the relevant, applicable market. So when it comes to SaaS companies, saying how large the aggregate market spend is on SaaS is probably not particularly relevant. What’s more relevant is how much do customers spend on a solution in your particular vertical that you would be looking to replace and where you’re similar to. If the numbers are overly inflated, they lose a little bit meaning with that.
And then the same thing with forecasts. I think there are a lot of benchmarks out there for how quickly companies grow, especially in SaaS, how profitable they can become. It’s probably a good idea to take a look at that and, if it turns out that your forecasts would make you a record-breaking company in any single metric by a factor of 10x, it puts a lot of pressure to actually convince investors that that is going to be the case.
I think those are some of the things.
Alex Theuma: And what about, I mean, you can say or highlight mistakes or things as well that you like to see within the first meetings with founders. This can be beyond the actual pitch deck and presentation. What are the kind of things that you are just kind of like absolute no-nos in a first meeting and some of the things that actually you really do want to see?
Michael Treskow: I think some of it is just it starts with, when it comes to in-person meetings, plenty of strength. If you’re good at presentations maybe you don’t need a deck. But typically it is helpful to have a deck. So I think I would definitely use that as a guideline. Sometimes also to manage investors I will have all sorts of questions and try to go on all sorts of tangents, and having a deck with you is sort of a good way to bring me back to the conversation.
I think starting with what I would call basic principles, start high-level macro and go down to the micro, is typically how I like to think about it. It’s sort of I would really try to explain what the problem is you’re trying to solve and why your solution is differentiated and ultimately customers will be excited about that. That is ultimately a little bit of the hook together with the market size. So sort of saying it’s a large problem that we’re solving and this is why the solution is relevant and customers will be excited about it.
I’m in the beginning sort of either not getting it or do get it, but even worse, just I’m not excited about it, everything else is not very relevant afterwards. I think I would really spend a good amount of time laying that out, that foundation because then you’ve answered the why and then you can build up the how from there, and so it becomes significantly easier.
Then the other point, again, I think beyond the team that is hopefully going to be in the room, it’s the product. So I think whenever possible, I would spend some time on the product and maybe even do a little demo and really convince an investor of the strength of the product and that you’re taking it seriously because that is ultimately table stakes.
The market has to be large and the problem significant. But then if your product is not differentiated, everything else doesn’t really matter. Execution, etc., all of that is built on top of the product.
I think those are some of the things that some of the more exciting meetings had in common for me.
Alex Theuma: Thanks for that, Michael. And well, we’ve got time for one final question now.
To close off, what advice can you give to founders that are listening that are looking to maybe raise seed or Series A in 2017?
Michael Treskow: I mean, I think in particular in SaaS, we’re very fortunate in having access to some greater resources out there in terms of what could the models look like, what KPIs and metrics people should focus on. So I would say there is little excuse to not be prepared at this point.
I would spend as much time as possible out there reading things that Jason Lemkin writes or David Skok and talking to people to really be able to present your company in a way that is understandable and highlights its strengths. And also if some of the metrics are not quite there yet, gives entrepreneurs the opportunity to explain how they’re going to get there.
I think that’s really what I would say. And then try to find investors that you think are going to be excited about the particular project and where you have alignment in terms of what success is going to mean. I think that’s another important part. If you, as an investor, are looking for later-stage opportunities, you may not be as excited to hear from a seed company and vice versa. And if you, as a VC, are known to take very big bets on companies that can be worth multiple billion dollars that it might not be a good fit for a founder who has different ambitions for their company. So I think it’s just doing the research both on the investors’ end and the metrics that they want to see.
Alex Theuma: Great advice there, Michael. All makes a ton of sense. I think it’s overall some really, really great insights into the mind of a VC. Hopefully, those that are listening can take a lot away from this and apply this to their fundraising if they are indeed fundraising in 2017.
On that note, Michael Treskow, partner at Eight Roads Ventures, I want to say thank you very much for being a great guest on the show today.
Michael Treskow: Awesome. Thank you for having me.