Mark Roberge’s different view of tech company investment pays off in a crisis
In the business world, an unpredictable event with potentially severe consequences is known as a “black swan.” One tech investment firm – Sequoia Capital – characterized the COVID-19 global pandemic as precisely this kind of event in 2020.
“It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained,” the Sequoia team wrote in early March. “It will take even longer for the global economy to recover its footing.”
However, within this sobering assessment can also be found a lesson in history. When a global financial crisis in 2008 resulted in massive corporate layoffs, stock market crashes and emergency bailouts, Sequoia published a similar message to its portfolio of companies, later referenced by TechCrunch founder Michael Arrington as a “56 Slide Presentation of Doom.”
From the ashes of 2008, a set of vibrant new companies emerged including Square Inc., Airbnb Inc,, Uber Inc., Pinterest Inc., and Slack Inc. The more significant message now, as then, was to take a fresh, realistic view of the new landscape and be bold in your pivots.
“It’s so hard as a human to put nine months into a significant investment leading up to COVID-19 and now the outcome of that investment is no longer relevant,” said Mark Roberge (pictured), managing director at Stage 2 Capital and a senior lecturer at the Harvard Business School. “Pretend you were parachuted into your company as a fresh CEO today, look around and appreciate the world and what it is. Come up with a strategy from the ground up based on that and forget about the last year.”
Roberge spoke with Dave Vellante, chief analyst at SiliconANGLE sister market research firm Wikibon and co-host of SiliconANGLE Media’s livestreaming studio theCUBE. It’s the first installment of Startup Insights, a series that focuses on how investors and entrepreneurs navigate market challenges inside the technology industry. They discussed Roberge’s career in the tech industry, his unusual approach to investing and advice for entrepreneurs looking to raise capital in today’s market.
Surviving 2008 and COVID-19
Roberge’s advice for startup entrepreneurs comes from personal experience. In 2008, he was the senior vice president of worldwide sales for HubSpot, a developer of sales and marketing software products.
“I was freaking out,” Roberge recalled. “We were selling to the small business community which was cutting everything except new ways to generate sales. We happened to have the answer to that, and it happened to work.”
Fast forward to the current situation and Roberge’s investment firm finds itself in an equally fortunate position. Stage 2 Capital is not in the consumer market, preferring companies in the B2B space.
“We had no one selling exclusively to travel or restaurants,” Roberge said. “We got a little lucky there. You literally are finding some deals that are accelerating since COVID-19 and you just have to assess if it’s permanent or temporary.”
As new deals begin to accelerate post-virus, Stage 2 will apply an investment philosophy which is different from many venture capital firms. Investors often want to see early revenue as a sign that a startup company is gaining traction in the marketplace, tripling in the first two years and then doubling as the company matures.
“In Silicon Valley, there’s this triple-triple, double-double notion,” Roberge said. “It’s evolved as the holy grail of what your objective should be. There’s a fraction of companies that are ready for that and, should they pursue that path, it will lead to failure.”
Instead, Stage 2 Capital’s managers analyzed the factors which led privately held startup companies to become “unicorns,” technology firms with valuations over $1 billion. They noticed a common trait among businesses which ultimately became successful.
“What is the underlying consistency of those Series A businesses that become unicorns, versus those that flatline?” Roberge asked. “It’s the avoidance of a premature focus on top line revenue growth and an acute focus early on customer retention.”
Finding the right fit
A key indicator of retention is when someone not only purchased an offering, but kept coming back for more. This early focus on retention is what led Roberge and his colleagues to focus on identifying what many VCs refer to as “product-market fit.” Startup companies are ready to scale when product-market and go-to-market fit are comfortably reached.
Rather than rely on intuition to determine success in this area, Roberge uses an actual formula: percent of customers to event in time.
“For HubStop, it was 75% of customers using five or more of the 25 features on the platform within 60 days,” Roberge explained. “We often get visibility into true product-market fit within weeks if not a month or two, and it’s scientifically data driven in terms of the foundation. I like that a lot more than getting to a million in revenue.”
Stage 2 Capital will generally make an initial investment in the $700,000 to $1.5 million range and then increase its stake with a larger amount in a subsequent round, according to Roberge. Although it is not unusual for investors to claim a seat on the board of a company they have funded, the firm prefers a different approach.
“We try not to take board seats, to be honest with you, but instead be board observers,” Roberge said. “A lot of people who’ve had experience with boards know they’re very easy and time efficient when the company is going well and they’re a ton of work when the company is not going well.”
What advice would Roberge offer to startup founders when they are considering whether to accept an investment offer from his firm or others?
“Do your due diligence on your investors and what their thoughts are on your future growth plans to see if they are aligned,” Roberge said. “It becomes that much harder if you have investors that think a different way.”
Here’s the complete video interview, the latest in the continuing Startup Insights series and one of many CUBE Conversations from SiliconANGLE and theCUBE:
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