20 VC 009 Red Flags, Saas and becoming a VC with Joe Floyd

Summary Notes


In episode nine of the 20 minutes VC, Harry Stebings interviews Joe Floyd, principal at Emergence Capital Partners, who shares insights on breaking into the venture capital industry. Floyd emphasizes the importance of networking and the brute force method of contacting VCs to secure opportunities. He advises aspiring VCs to acquire concrete skills through jobs in investment banking or strategic consulting before entering the VC world. Floyd also discusses investment criteria, highlighting the significance of team dynamics, unique go-to-market strategies, and early sales metrics in assessing startups. He underscores the balance between team strength and market potential, with an emphasis on the team's proven expertise and cohesion. Additionally, Floyd recommends essential readings for entrepreneurs, such as "The Lean Startup" and "Predictable Revenue," to build a solid sales and marketing foundation.

Summary Notes

Introduction to Joe Floyd and Emergence Capital Partners

  • Joe Floyd is a principal at Emergence Capital Partners.
  • His prior experience includes working in American Capital's technology group.
  • Joe was involved in investments with HomeAway and People Media.

Joe Floyd joins us. Joe is principal at Emergence Capital Partners, and prior to Emergence, Joe worked in American Capital's technology group, where he focused on fast growing Internet companies. At American Capital, Joe was involved in their investment with HomeAway and People Media.

The quote introduces Joe Floyd and his professional background, highlighting his experience in investing in technology companies and his role at Emergence Capital Partners.

Joe Floyd's Perspective on Role Models

  • Joe Floyd believes in the importance of providing alternative heroes to children besides pop culture figures like Justin Bieber.

If you don't want your kid to worship Justin Bieber, like you should give him another hero.

This quote reflects Joe Floyd's opinion on the influence of role models on children and suggests the need for presenting them with diverse figures to admire.

Venture Capital Industry Attraction

  • Joe Floyd describes Silicon Valley's unique energy as a hub for technology and entrepreneurship.
  • His interest in stocks and investing from a young age led him naturally to venture capital.

And I think when you're here, the entire energy, it's almost like New York for finance is the same as Silicon Valley for tech. It's just the energy of all the entrepreneurs permeates every part of life.

The quote captures Joe Floyd's impression of Silicon Valley's vibrant entrepreneurial environment and its comparison to New York's financial scene, explaining his draw towards venture capital.

Joe Floyd's Career Path

  • Joe Floyd did not start in venture capital; he worked in tech investment banking after college.
  • His experience in finance set him up for his involvement with startups.
  • Working with friends on a mobile app project got him hooked on the startup ecosystem.

No, I worked in investment banking, in tech investment banking for two years straight out of college. And it was a tough job, but it was a really good way to learn the blocking and tackling of finance.

This quote details Joe Floyd's initial career steps in investment banking and how it provided him with a solid foundation in finance, which was beneficial for his later venture into startups and venture capital.

Getting Into the Venture Capital Industry

  • Joe Floyd describes two main paths into venture capital: starting a successful company or working up through the junior ranks.
  • He emphasizes the competitive nature of the industry, comparing the number of venture capitalists to professional footballers.
  • Networking and reaching out to venture capitalists was key to his entry into the field.
  • He improved his approach with each meeting, tailoring his pitches to the interests of the investors he met with.

It's pretty much brute force. So the way I look at it is you have two ways of getting in. One, you can start a company, take it public, sell it for billions of dollars, and then become a venture capitalist, and that's a very hard route.

This quote outlines the challenging nature of entering the venture capital industry and the two primary pathways one might take, highlighting the difficulty and competitiveness of the field.

Someone told me the stat that there are less venture capital investors than there are professional footballers.

The quote provides a striking statistic to illustrate the exclusivity and competitive nature of the venture capital industry.

I contacted probably 100 venture capitalists and I just sent them blind emails and it was kind of like, hey, I noticed we went to the same university, or, hey, I noticed that we worked for the same bank a long time ago, or whatever, and just tried to get the 30 minutes coffee meeting.

This quote demonstrates Joe Floyd's proactive approach to breaking into the venture capital industry, using networking and commonalities to secure meetings with potential mentors or employers.

Career Advice for Graduates

  • Graduates should seek jobs that provide concrete skills.
  • Venture capital (VC) jobs are more about networking and connecting people, lacking concrete skills.
  • Jobs in investment banking, strategic consulting, or big tech companies like Google are recommended for foundational skills and networking.

"Yes, but I would say if you're coming straight out of university, the best thing you can possibly do for yourself is to take a job that's going to give you more concrete skills."

This quote emphasizes the importance of acquiring tangible skills early in one's career, suggesting that venture capital may not be the best initial path due to its focus on interpersonal skills rather than technical or business skills.

Transitioning to Venture Capital

  • Joining a big industry player provides foundational skills and networking opportunities.
  • Building a network of engineers and product managers can be advantageous for future ventures.
  • Many entrepreneurs funded by Emergence come from notable enterprise companies.

"Yeah, because if you look at the entrepreneurs that we fund here at emergence, primarily, a lot of them come out of the same few, you know, because we do enterprise, it's kind of slightly tilted towards some of those enterprise names."

The quote highlights the trend that successful entrepreneurs often have experience at major enterprise companies, suggesting that working at such companies can be a strategic move for those aiming to enter the venture capital space.

Investment Criteria in Startups

  • Emergence looks for "x factors" in teams, such as long-term collaboration, market expertise, and technical proficiency.
  • A unique go-to-market strategy is also critical.
  • Zenefits is cited as an example of a company with a unique market approach.

"So the answer is going to be a little tilted towards enterprise because that's all I focus on. But we look for, we call x factors and team is definitely one of them."

This quote explains that while the speaker's perspective is biased towards enterprise due to their focus area, the team's experience and the presence of unique factors are essential criteria in their investment decisions.

Preferences in Startup Founding Teams

  • Data suggests that startups with multiple founders have a higher likelihood of positive outcomes.
  • Multiple founders can provide balance, motivation, and better decision-making.
  • More founders can also mean a push for earlier exits due to differing financial satisfaction levels among them.

"I think if you look at the data, multiple founders generally increases the likelihood of a positive outcome."

The quote indicates that statistically, startups with multiple founders tend to be more successful, which may influence investment decisions. However, it also implies that there are complexities involved with having a larger founding team.

Equity and Return Considerations

  • Having more founders can dilute equity and make financial returns less attractive.
  • Differing exit goals among founders can lead to premature company sales.

"It also forces people to take earlier exits. Because if you have three people and one of them really wants to quit, because 100 million is a perfectly acceptable sale price for them, even if they're only getting 20 of it, they're perfectly happy with that."

The quote discusses the challenges that can arise from having multiple founders, particularly when it comes to aligning exit strategies and the impact on the company's longevity and investor returns.

Investment Criteria and Excitement Factors

  • Joe Floyd invests at the series A stage, focusing on companies that demonstrate product-market fit.
  • Early sales and marketing metrics, alongside financial data, are crucial to assess a company's potential.
  • Joe gets excited by companies that have tested and proven early sales strategies and customer acquisition strategies.

Well, we invested the series a stage, which means that we look for companies that already have product market fit. And that usually means they have some sales metrics, some early sales and marketing metrics. And so for me, being a finance person, that's the area of the company that can get me most excited. If somebody has figured out and been testing on kind of early sales strategies and customer acquisition strategies, and they've got the numbers to prove it, there's nothing more exciting to me than that.

This quote explains that Joe Floyd finds excitement in companies at the series A stage that have clear evidence of product-market fit, as indicated by their sales and marketing performance.

Financial Backing and Revenue Indicators

  • Minimal financial backing is required if a company has successfully identified cost-effective customer acquisition strategies.
  • Demonstrating a clear path to conversion and customer lifetime value, even with modest revenue, can be compelling.

It's not much. It doesn't have to be much. In fact, a lot of it can know. Hey, we figured out that we can target people on Facebook for this price, get them to come to our website and funnel through to conversion at these rates. And when they convert, we have a customer lifetime value of x. If you can figure out the beginnings of that, and you may only have five hundred k of revenue, that could be really exciting.

Joe Floyd emphasizes that even with limited revenue, if a company has a solid understanding of their customer acquisition costs and lifetime value, it can be very attractive to investors.

Red Flags and Investment Diligence

  • Venture capitalists initially seek to "dream the dream" rather than focus on red flags.
  • During due diligence, the focus shifts to identifying and understanding the most significant red flags.
  • Red flags typically fall into four categories: team, traction, total available market (TAM), and industry trends.

What I always tell people is, in first meetings, as a venture capitalist, you're trying to dream the dream. The red flags are everywhere. You can find hundreds of reasons not to make an investment. You have what you're looking for. Yeah. What you're looking for is that one reason to make the investment in diligence. Once I've decided that I like a team and I like the idea they're going after it, then, yeah, I'm going to go look at the biggest red flags and they always fall into kind of one of four buckets. I mean, effectively, we're looking for the four t's. Strong team, good traction, big Tam, which is total available market size, and strong industry trends. Trends that are going to be tailwinds.

Joe Floyd explains that while initial meetings with potential investments are about envisioning success, due diligence is about critically evaluating significant concerns, which are categorized into team, traction, TAM, and industry trends.

Balancing Strengths and Weaknesses

  • Investing decisions are not solely based on ticking all boxes but rather on assessing the combination of a company's strengths and weaknesses.
  • An amazing team can be a decisive factor for investment, regardless of the project.
  • The size of the market alone is not enough to guarantee investment; the overall balance of factors is considered.

Really? It's all about strengths and weaknesses. So if a team is amazing, I don't care what they're doing, I'm going to back them. And just because a market is huge doesn't necessarily mean that I would back somebody. So it really depends on what those strengths and weaknesses are and how they combine.

This quote highlights the importance of evaluating the overall balance of a company's strengths and weaknesses, with a particular emphasis on the quality of the team, when making investment decisions.

Personal Definition of Success

  • Joe Floyd's definition of success is influenced by his parents' story, particularly his mother's journey from China to the United States and her achievements.
  • He finds inspiration in his mother's ability to overcome significant obstacles and achieve success.

Well, my parents, but that's probably not the answer you're looking for, that's absolutely fine. I think it's just an incredible story. My mom was born in China and she moved to the US in 1967, I think with nothing more than two suitcases. And she put herself through college, became a doctor. I view that as inspirational, as incredible compared to what? I, I mean, I grew up in a middle class family in San Diego. Like, I had a pretty darn good life. So anything I accomplish just pales in comparison to starting from literally nothing. Escaping communism.

Joe Floyd shares his personal story of success, highlighting his mother's journey and achievements as a source of inspiration and a benchmark for success.

  • Joe Floyd recommends "The Lean Startup" for all entrepreneurs.
  • For those in the SaaS industry, he suggests "Predictable Revenue" for its foundational insights into business growth.

There's a bunch. I think every entrepreneur should read the lean startup, and I think everyone in SaaS should read predictable revenue.

In this quote, Joe Floyd provides his book recommendations for aspiring entrepreneurs, emphasizing the value of these books in providing essential knowledge for starting and growing a business.

Building Sales and Marketing in SaaS Companies

  • Many SaaS companies are capable of building great products with minimal funding.
  • Entrepreneurs often focus on product development but struggle with creating effective sales and marketing strategies.
  • Emphasizing the importance of sales and marketing can help entrepreneurs think about these aspects early on.

"And I feel like for most SaaS companies, people are capable of building great products now on very little money. And so you get a lot of entrepreneurs who are very product focused, who see needs and they're trying to solve them. And then where they fall down is a little bit on building the sales and marketing engine."

This quote highlights the common issue where SaaS entrepreneurs excel in product development but lack the skills or focus to build a robust sales and marketing organization, which is crucial for business success.

Behavioral Economics for Entrepreneurs

  • Behavioral economics is a valuable field for entrepreneurs, providing insights into irrational decision-making.
  • Entrepreneurs can use principles from behavioral economics to guide customers towards beneficial decisions.
  • Recommended readings include "Thinking, Fast and Slow" and "Nudge."

"I find it just an incredibly interesting area. And I think every entrepreneur should read books like thinking fast and slow and nudge."

Joe Floyd suggests that understanding behavioral economics is essential for entrepreneurs, as it helps in understanding and influencing customer behavior.

Quick Fire Round Responses


  • Joe Floyd recommends buying Amazon stock.
  • Believes Amazon's cloud business is undervalued and the company has long-term viability.

"Buy. Long term, it's going to be around for a very long time. And I feel like the whole cloud business is completely undervalued."

Joe Floyd expresses confidence in Amazon's long-term presence in the market and the potential growth of its cloud business.

Tech Bubble

  • Acknowledges the existence of a tech bubble based on current valuations and investment activities.
  • Compares the 2014 venture capital environment to the dot-com bubble of 2000.

"If you just look at valuations and you look at round sizes and you look at the sheer dollar amount of money raised by venture capitalists and deployed by venture capitalists in 2014, it's approaching the levels we saw in 2000."

Joe Floyd indicates that the scale of investments and valuations in the tech industry in 2014 is reminiscent of the dot-com bubble, suggesting a possible tech bubble.

Future of Tesla

  • Predicts that other automakers like BMW and Audi will catch up to Tesla.
  • Tesla will remain competitive but will be one of several players in the electric vehicle market.
  • Tesla's battery technology and its applications outside of cars are considered promising.

"I think that Tesla will eventually get that $40,000 kind of BMW competitor, but I think they're just going to be one of five or six dogs in the fight."

Joe Floyd anticipates that Tesla will face increased competition from established car manufacturers but will still be able to hold its own in the market.

Tesla's Business Focus

  • Speculates on whether Tesla might focus on battery technology over car manufacturing in the future.
  • Believes that Tesla will continue to make cars alongside other ventures.
  • Compares a potential major shift in Tesla's business strategy to IBM's divestiture of its laptop division.

"I don't know, because I feel like they've got a stake in the ground with cars and I think they will do more than cars, but I think that they'll probably always do cars."

Joe Floyd expresses his view that Tesla has established itself in the car industry and, despite potential diversification, is likely to continue producing vehicles.

Conclusion and Resources

  • Harry Stebings thanks Joe Floyd for the discussion and provides information on where to find resources mentioned in the show.
  • Harry promotes the podcast's social media accounts and website.

"Now for all the resources mentioned in today's show, head on over to www.thetwentyminutevc.com, where you can find all the resources."

Harry Stebings directs listeners to the podcast's website for additional resources, concluding the episode and promoting engagement with the podcast's online presence.

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