This year’s economic downturn has forced many entrepreneurs to stop and reevaluate how (and if) they will pursue their startup dreams. But innovators—don’t give up hope just yet. For the right idea backed by the right team and marketing strategy, there is still venture capital (VC) money to be had, according to Eric Engineer, Venture Partner at S3 Ventures, the largest VC focused on Texas.
In our latest podcast episode of Lay of the Brand, Eric takes a pulse of the overall business-to-business (B2B) technology market and shares his unique insights into how PR and marketing professionals can navigate today’s landscape to successfully capture the attention of venture capitalist decision makers.
Here are highlights of our conversation.
Click below to listen to the podcast or visit layofthebrand.com.
Peter Jacobs, Lay of the Brand: Eric, to start, could you give us some background on S3 Ventures and tell us a little bit about yourself also?
Eric Engineer, S3 Ventures: We're the largest venture capital firm focused on Texas. We've been around 14 years. We manage closing in on $600 million of assets under management. We're unique in that we’re backed by a single multi billionaire family, so it's a pretty unique model. We have one limited partner that has funded us over those 14 years, and that really provides a lot of flexibility when you think about the fact that we don't have to go fundraising every few years. We can focus on our portfolio and on meeting great entrepreneurs. It also means that the size of our funds and the age of our funds are not limited in any way. We can extend them as needed, and that provides also more flexibility to do what's right by the founders that we work with.
We’re never doing unnatural things like having to sell prematurely or run out of cash for certain investors. In terms of stages, we do seed A and B rounds. That means we can write a $250K check into a convertible note. We can write a $3 to $5 million check into leading a series A and we can also write a $10 million check to lead a Series B.
In all cases, we'd like to follow on for the life of a company and in some cases, when you know companies that are going to pre IPO, and have larger growth rounds, our limited partner will come in and write some checks as well. We can really support a company from the very early days, all the way to when it grows really large.
In terms of sectors, we believe in Texas entrepreneurs and the market here, so we're pretty broad in terms of sectors. About two thirds of our investments, the 40 something investments that we've made, have been in the B2B software space, but we've also done some consumer digital experiences and some healthcare technology, which includes consumer medical devices as well as healthcare IT. If there's software in it, that's probably the secret sauce for us, but we look at things kind of that maybe have software components
Peter Jacobs: And what's your background?
Eric Engineer: I joined the firm about two years ago. Prior to that I was CEO at one of the portfolio companies. There's a company called Invodo, that was pioneering the use of video e-commerce. We take it for granted today that every product that we shop online for has a video of some sort, a feature benefit or demonstration. That was not the case 10 years ago.
When (Invodo) was founded, YouTube was just being bought by Google and retailers were trying to figure out how to get a video on one page, let alone hundreds or thousands of pages in their catalog. So we built a technology platform for delivering those videos, measuring the impact that it has on things like sales and returns, and then over time, we actually added highly scalable video production capabilities.
Think of a big warehouse with multiple studios where Home Depot, Toys R Us, JCPenney, big retailers used to send us truckloads of product, and we used to produce it high quality, high scale as part of a full solution for them.
I was running that company prior to joining [S3 Ventures], and before that, I was at another venture capital firm. I went to business school, I worked at Microsoft for a while in product management and I worked at a startup called Trilogy Software in Austin. I have a computer science background, so I've been technical by nature.
Peter Jacobs: So you've really seen this industry from pretty much every angle, haven't you?
Eric Engineer: Yeah. Both sides of the table, I guess.
Peter Jacobs: So tell us, Eric, how are VC investment strategies adjusting to the changes in the market thanks to COVID. What's changed about how you're doing things?
Eric Engineer: I think strategically, when you think about venture capital, investing is a long term proposition. Most of these funds are structured as 10 year vehicles and are really thinking about long time horizons. We still believe that the fundamental themes that we've always been investing in, like digital transformation of large enterprises, consumer digital trends, adoption, continues to accelerate, those things still remain true, and in fact, are being accelerated in a lot of cases by COVID.
At the end of the day, a lot of companies, especially B2B companies, are selling to customers that may be adversely impacted. Financially, they might be going out of business in certain sectors. They might be just cutting back on their budgets, or distracted.
We've definitely seen situations where sales may slow down or pause during this period, but in other cases, they've accelerated and we have companies that are growing much faster than we expected prior to the pandemic. I wouldn't say it's really changed our strategy. It is definitely starting to impact how we start to meet entrepreneurs and develop relationships and partner with them, but overall, I think it is, in some ways, it’s business as usual.
We've continued to make investments throughout this period, but we have to adjust to the fact that we can't meet people in person.
Peter Jacobs: Has your pace of investment slowed, or has it even sped up?
Eric Engineer: The first few months, March, April, May timeframe, when everything was starting to hit the economy and people's lives, we definitely slowed down in the sense that we started to focus on our existing portfolio, to help them navigate the uncertainty. There were government programs like the Paycheck Protection Program or PPP, that all of these small companies had to figure out, “Is this something I can take or should take?” There were pretty dynamic rules changing by the hour it seemed.
We had to figure all of that out and be helpful to our portfolio companies as they made those decisions, and then they also had to make the decisions around, “What does the rest of the year look like? Should I make some cuts or furloughs to be able to extend my cash runway because I don't know what sales are gonna look like and how much or when I’ll be able to go raise another round?” We had those difficult conversations. In some cases, we had companies have to make difficult choices around layoffs and other things and others, they were actually seeing things accelerating and they made investment decisions.
We spent a lot of time internally focused those first few months. Then, as the summer progressed, and we all got used to Zoom and things like that, and re-engaging with companies, we started to get into our normal routines of meeting lots of companies. In fact, I would say we actually have started in some ways meeting more, because it's easier to set up a meeting through Zoom then all of the time that it takes to do coffee meetings. You can stack them back to back a little bit more efficiently, and so we've continued to have those conversations and we've actually made two investments over the summer.
So things are starting to pick up again and I feel pretty good about it. Like I said, there are certain verticals that are growing faster and so there's a lot of excitement around certain areas that we continue to look at.
Peter Jacobs: Is working remotely over Zoom something that you see sticking with, even after we start reopening more and getting back to face-to-face?
Eric Engineer: I think there's just a general comfort level on both sides with everyone just with a video call. I remember, pre-COVID the default was a phone call or a conference call — all audio with maybe some screenshare. I think that is something that will change.
I think video calls will be the default mechanism, especially for the introductory meetings, “getting to know you” type of thing. I think you can get some of that upfront with the video call and then the second or third meetings may become the ones that become face-to-face.
I would say that, what we don't get in all of this is, at least not at S3, there's a period, probably in the later stages of diligence, where we do sometimes a full day or a three quarter day meeting where our entire partnership usually goes to the offices of a company and gets to meet most of the management team, walk the halls, get a sense of the culture, get a sense of the energy level and how things are done.
To just get a feel for not only the environment, but also the way that the executive team interacts with each other, and how they communicate. We don't get as much of that in a virtual environment. You get a little bit of that (over Zoom), but it's not the same, and so I hope that we can get back to that. I do think that's something that is missing.
We used to also go out to dinner with the founders and get to know them on a social and personal level, and understand their style, their background, and how we might work well together going forward. Investing is very much like dating before you get married. These are sometimes decade long relationships and you're trying to understand if you're compatible at a personal level as well. That is something that is also no longer viable right now, so we've been trying to find the equivalent way of doing that over Zoom, like a Zoom happy hour or Zoom coffee, or something like that to just get to know the individuals. I'm hoping that that will return, as well.
Peter Jacobs: What makes a good investment? Has anything changed about that and has this opened up some opportunities that you might not have looked at before?
Eric Engineer: I would say that our strategy hasn't changed too much. When we think about what makes for a good investment, all those things still hold true in terms of a great team, a product that is solving a real pain point in a very large market, and some evidence of traction, that gives us a sense of what stage the business is.
Is that a stage that we are ready to invest in, or something that we have to wait to see a little bit more evidence? All of that remains true. It's just now that there's different dynamics in different markets. In some markets those trends have accelerated, and we might get more excited about those markets. Then other ones where there might be more uncertainty.
If you're selling into restaurants or bars, or retail generally, there's still a lot of uncertainty or real estate, and there's just a lot of things that there might be some challenges because those verticals or those industries are going through so much change, you might say, “Now's a great time to invest because of that change” or you may say, “hey, you know what, we don't know what the future holds. We may have to hold off.” It's no different than what we've always done in terms of how we analyze things, but maybe just the individual facts within those markets may be different now.
I would also say that because it's not clear what the fundraising environment might look like, a year from now, I'd say the conventional wisdom seems to be now you raise a little bit more. Maybe you get 24 months versus 18 months. I would also say there's a little bit more comfort with distributed teams than before. You know, the kind of prototypical, having a bunch of people in a small room together, working together, creating that energy is maybe in some ways ideal, but that's not the reality of today with a lot of successful startups that have been purely remote businesses.
I think it's making all of us, at least in our team, a little bit more comfortable with some of those distributed concepts, but we just don't know what the future holds. We don't know if six months from now, a year from now, if there are some negatives to that, that we have to figure out.
Peter Jacobs: What verticals are looking most attractive to you right now?
Eric Engineer: What we’re finding is we have had companies in our portfolio where their sales have tripled, compared to what they planned in January, pre-COVID, like three times their plan. We also had a company get bought over the summer by DocuSign and I think maybe some of that acceleration of that acquisition may have been due to COVID.
The reason I mentioned those things is because what's really exciting to see is a lot of digitization of certain workflows or ways companies engage with customers, or the way they do training, or the way that they collaborate, the way healthcare is delivered, all of these things, the digitization of certain industries or certain parts of business is just accelerating.
Things that people were saying, “I'll maybe try to do in the next two years,” they have to do now or they were forced to do now. That's huge, right? That totally changes things — when you think about a startup and every month counts, you're raising money for the next 12-18 months and are trying to hit certain milestones and if suddenly things get pulled forward, even by six months, that's huge in our business.
So we find that, if the customer base that they're selling into is still solid, if you're selling into healthcare, probably right now, or into other technology businesses or into financial services, those all look pretty vibrant, so you don't have that risk that your customers can't afford you.
Peter Jacobs: How are early stage companies getting on your radar?
Eric Engineer: I would say what has gone away right now is we don't have all the entrepreneur startup events, whether it's happy hours or panels and other things, or even these big summits or annual get togethers that a lot of cities put together — those things have been postponed or gone all virtual.
In either case, the ability to just network, while there are some ways to enable that virtually, and I'm seeing some really creative ways of doing that, it's still not the same. Frankly, it doesn't really get us there. There are some matchmaking things where investors get matched with startups, which still work well virtually and I'm grateful that people are still doing that. We can continue to meet people those ways, but the “I'm just going to meet someone at a happy hour,” that doesn't happen anymore.
Anything that's digital still works really well and in some ways might be working better. LinkedIn is tried and true. I'm still pretty responsive on LinkedIn. I just ask that people when they add me, they actually add some context in their invite of why they're reaching out. If it's just a regular add, I'm probably not gonna respond unless it looks interesting; context always helps.
I think reaching out through digital channels is still fine. In some ways, because there's less travel, I'd say investors may have a little bit more time, if you think about it. They're not commuting every day, and they're not getting on planes to go to board meetings and things like that. There may be fewer coffee meetings, so less time in the car. So just more time to maybe “Yeah, let's schedule a 15 minute quick intro, or 30 minute quick intro, even if it's not very clear, whether it's a fit or not.” Then, there are always junior people in all of these firms whose entire job is to find new investments, so I think that's still very healthy and people are still accessible. It's just in the digital realm now.
Peter Jacobs: Since these channels are limited, how can companies seeking VC investments actually stand out from their competition? Is there anything that makes them jump out to you?
Eric Engineer: If we get referred from a trusted source, whether that is a law firm around town that works with early stage startups — some of the partners there are very trustworthy individuals that know how to show us businesses that they think are of high quality, so we always take those meetings, just out of those relationships.
It can be other folks in the ecosystem that refer us to business. It could be an angel investor, or it could be another seed fund. Those warm introductions, always kind of take precedence, I would say. Then, if it's clear that a company has a very unique team that is having very unique traction in a big market, and can demonstrate that or communicate that to us very succinctly, that's important.
It could be also through our team that does a little bit of outbound efforts in the sense that they are looking at funding announcements in the press, or other articles that might be written, or anything that pops up through visual channels, like in LinkedIn — they're on the lookout for things that look interesting. If you're able to communicate your story broadly, maybe it's through digital channels or through referrals. We get wind of things that way.
Peter Jacobs: Are there things that the marketing and PR folks at these early stage companies shouldn't do to get your attention?
Eric Engineer: I think gimmicky things, I wouldn't. I would focus on real metrics. One of the things that I think can lead to disappointment is focusing on vanity metrics or exaggerating things just to get the meaning. Whether that's marketing or in the CEOs outreach in the email.
Expectations are everything. If I come into a meeting with certain expectations, and then I find out that the revenue level isn’t really what I thought it was, or this big customer you said you had is really like a proof of concept, all those kinds of things are downers. I came in hoping or, thinking that it's something and it's not that, that doesn't really make for a successful first meeting.
Much better I would say is transparency and being very clear that “okay, this is where we are, this is the stage that we're at.” We're used to things being messy, we're used to things being not perfect and still early in terms of traction. That's not a bad thing. It's just where you are, and that's fine.
The big thing for us is revenue for instance, recurring revenue is important to a lot of the SaaS businesses, but you'll find that sometimes people will lump in the one-time services revenue in this number, as a headline number. Then you deconstruct and it's not really at the stage that the proclaimed; (it’s a) one time pilot revenue or proof of concepts with the big companies that really, you've talked to one guy once. Even though it's important to talk about those things and show traction, exaggerating it doesn't help anything.
Peter Jacobs: What’s changed about messaging for these companies when they're getting started with you or once they've ramped up? What can marketing and PR do to help build the relationship with you, and also expand out into the market?
Eric Engineer: The funding announcements and stuff like that are helpful. Even if you do a seed round with angels or things like that, making sure that you're at least being picked up by some of the lists that announce things is good because it gets on our radar. The most important thing is to just have traction.
I wouldn't have my marketing people focused on my investor relations. What I would have them do is just make sure that you’re winning customers and that they're happy, and in some way their customers are then amplifying and supporting your marketing, so you are growing faster, and you have happy customers.
A lot of what we do as part of our diligence is to talk to customers or potential prospects —people who you've not mentioned, that we think are in your market and say, “Have you heard of this company before?” What about your website? If the website doesn't tell the story very clearly when we're doing that diligence, then we might get some bad signals.
When you think about early stage business, generally this is not about investor outreach, but more generally, what the role of marketing is in those early days. Really, I think more about the product. If you're going to have marketing people and marketing skill sets, (and) it might even be the CEO or the head of product doing this, it's really product marketing. It's being able to very clearly articulate the messaging for the different personas and segments, and being able to have a very clear position.
That's important for fundraising, too. If you're not able to communicate as the CEO, what is that clear, unique position? What is that unique way of seeing the world and the opportunity that no one else has seen and how you're addressing it, whether it's through the product and or the go to market. If you can't very clearly articulate that to an investor then I think it's going tobe be challenging to fundraise.
One of the things I would also say is, don't take your sales deck and think that's your pitch deck. The pitch deck, the investor is a different audience. If you as a founder don’t have that skill set, I would lean on people on your team or your advisory group, your board, who could help you articulate and tell that story very clearly, succinctly. That's a big role that is not outward facing. It's not something that you might see on social, but it's an important role that that kind of marketing type executive plays in the early days.
Peter Jacobs: Any last thoughts or takeaways for us?
Eric Engineer: I would just emphasize that in today's world — where we can't meet face to face all the time, and we don't have the opportunity to have a lot of those social interactions as part of this, almost like a mating ritual that happens over a six month or 12 month period before we make an investment sometimes — it's important that those meetings, especially during meetings that are part of a diligence process, should not just be about, “Let's just run through the deck.” It's about getting to know each other.
I would actually space out the meetings, even if they're 30 minute meetings to make sure that the first five minutes are a little bit of chitchat, you’re small talk. You get to know each other. You get a sense of who the other person is and you can find ways to connect with the individuals at the beginning of these meetings and take the time to do the intros. Those are things that naturally happen in face to face meetings that sometimes get left out in the Zoom meeting.