20VC SoftTech VC's Andy McLoughlin on The Series A Crunch, Maximising Runway and Minimising Burn and For Startups

Summary Notes


In the latest episode of "20 minutes VC," host Harry Stebbings catches up with Andy McLaughlin, a partner at Softtech VC, who shares insights from his journey from co-founding Huddle to becoming a prominent VC and angel investor with successes like Buffer and Postmates. McLaughlin discusses the evolving landscape of seed funding, the challenges of Series A rounds, and the strategic importance of managing burn rates and fundraising timing. He emphasizes the value of high-quality VC support in navigating growth and the potential advantages for strong companies during economic downturns. McLaughling also touches on his investment interests, including B2B SaaS, developer tools, and government tech, while acknowledging the upcoming challenges in the macro tech environment.

Summary Notes

Introduction to Andy McLaughlin

  • Andy McLaughlin is a partner at Softtech VC.
  • He focuses on B2B SaaS, developer tools, and mobile applications.
  • Co-founded Huddle, a well-known European technology startup.
  • Andy has an extensive angel investment portfolio, including Buffer, Intercom, Pipedrive, Postmates, and Secret Escapes.
  • Joined Softtech VC after stepping back from an executive role at Huddle.

"Andy McLaughlin, partner at Softtech VC, where he primarily invests in B to B SaaS developer tools and mobile applications."

This quote introduces Andy McLaughlin and his investment focus at Softtech VC, highlighting his expertise in B2B SaaS, developer tools, and mobile applications.

Andy McLaughlin's Background and Entrepreneurship Journey

  • Describes himself as a "massive nerd" with an inevitable future in tech.
  • First job post-university was running online systems for a telco at 21.
  • Moved to consultancy, implementing business process and document management systems.
  • Founded Huddle in 2006 with Alastair Mitchell, expanding to offices in San Francisco, Washington DC, and London.
  • Huddle has raised approximately $85 million in venture capital.
  • Transitioned from Huddle to VC due to love for early-stage startups and desire to work on diverse projects.

"I then went to work for a consultancy putting in business process and document management systems, and that's what really gave me the idea for a company called Huddle that I founded in 2006."

Andy discusses his career trajectory leading to the founding of Huddle, a company that has raised significant venture capital and expanded internationally.

Transition from Entrepreneur to Venture Capitalist

  • Felt he was getting in the way at Huddle as it grew beyond 150 people.
  • Believes that founders should step back if they're no longer the best fit for the company's stage.
  • Enjoys working with multiple companies on various aspects like product, fundraising, hiring, strategy, and pricing.
  • Joined Softtech VC to align with his passion for early-stage companies and diverse challenges.

"When a company gets past 150 people and starts getting up towards 200, they don't really need the kind of hustler founder there anymore."

This quote explains Andy's reasoning for leaving Huddle, recognizing the need for different leadership as a company scales.

The Evolution of Seed Funding

  • Seed funding has increased in size, with pre-seed and seed rounds becoming more substantial.
  • Seed rounds now resemble the size of Series A rounds from a few years ago.
  • Series A rounds are now significantly larger, reflecting the growth in funding stages.

"Seed rounds have really gotten a lot bigger in the last three or four years, to the point now where you have a precede round."

Andy describes the changing landscape of seed funding, indicating that the investment amounts have grown over time.

The Series A Crunch

  • Observes a disproportionate increase in seed funding compared to Series A funding.
  • The criteria for Series A funding vary widely and can depend on the team, product potential, or revenue traction.
  • Some companies can raise Series A without revenue, while others may have substantial earnings.

"There's four times as much seed funding as there ever has been before, but it's the same amount of Series A funding."

Andy provides insight into the current state of venture funding, highlighting the disparity between seed and Series A funding availability.## Series A Funding Criteria

  • Series A investors look for potential market leaders in large markets.
  • Signals of potential success include experienced founders or significant early revenue traction.
  • Struggles in fundraising may result in lower valuations or smaller rounds.

"The thing that series ABCs are looking for are companies that have the potential to be the winners, or one of the winners in a very large market, and they're looking for signals that can point towards that being there."

This quote highlights the primary focus of Series A investors, which is identifying companies with the potential to dominate a large market, using various success indicators.

Fundraising Challenges

  • Companies may face difficulties in raising funds, leading to lower-priced or smaller funding rounds.
  • Some companies may not be able to raise funds at all.

"There will be a lot of companies who want to go out and raise funding who struggle."

The quote emphasizes the reality that not all companies will successfully raise funds, indicating a competitive and challenging fundraising environment.

Seed Plus and Bridge Rounds

  • Seed Plus or bridge rounds are common in London to prepare for a successful Series A.
  • These rounds are considered if investors believe in the company's need for more time and resources.
  • Quality of investors matters for future success.

"We have companies who we have bridged ahead of an A. And we'll generally do that if we're great believers in what they're doing."

This quote explains that additional funding rounds before Series A may be provided to companies that investors strongly believe in, to position them for a successful future funding round.

Red Flags in Follow-on Rounds

  • C Prime or second seed rounds for non-portfolio companies can be a red flag.
  • These rounds might indicate a failed attempt at raising a Series A.
  • Each deal is assessed on its own merits, but the bar is higher.

"But we would look at every deal on its own merits, and whilst that would be one of the red flag that would be raised, it certainly wouldn't mean that we'd never do it."

The quote acknowledges that while certain funding patterns can be concerning, investors still evaluate each opportunity individually, although with increased scrutiny.

Runway Length Post-Funding

  • Companies are advised to aim for more than the standard 18 months of runway.
  • Having a longer runway, like 24 months, is beneficial due to the increasing difficulty of Series A rounds.
  • Longer runways allow companies to improve their metrics and stand out to investors.

"Really plan on having 24 months worth because with Series A is getting harder to do."

The quote suggests that companies should secure a longer financial runway to navigate the tougher Series A landscape and improve their attractiveness to investors.

Timing of Fundraising

  • Founders should start fundraising with at least six months of runway left.
  • Waiting too long can lead to reduced leverage and potentially unfavorable valuations.

"Six months is the right time to do it. I think if you leave it much less than that, you begin to get into a situation where if it drags out, you could run out of money."

This quote advises founders on the optimal timing to begin fundraising efforts to avoid cash shortages and maintain negotiation leverage.

The Downside of Party Rounds

  • Party rounds without a lead investor can complicate future fundraising.
  • A strong syndicate lead can provide additional support and runway if needed.
  • Companies with dispersed small investors may struggle to raise additional funds.

"The great thing about when you have a strong syndicate lead... then you have somebody there with deep pockets who can actually provide more Runway for the company."

The quote emphasizes the advantage of having a committed lead investor who can support the company financially during challenging times.

The Value of Follow-on Investments

  • Seed investors' willingness to participate in follow-on rounds is a significant value add.
  • Lack of follow-on investment from seed investors may be perceived negatively by Series A funds.

"If there was a startup going out for their series A and we didn't participate, that would look really bad."

The quote implies that seed investors' continued support through follow-on investments is crucial and that their absence in subsequent rounds might cast doubt on the company's prospects.## Value Adds of Follow-On Funding

  • The quality of the VC brand is a proxy for the company's quality.
  • Good quality firms offer extensive networks for introductions to follow-on firms and strategic support.
  • Firms can provide additional funding to extend the company's runway if necessary.

"The quality of the vcs you bring on board is some kind of proxy for the quality of the company."

This quote emphasizes the perceived correlation between the reputation of a venture capital firm and the potential success of the company they invest in.

"They can help you with not only introductions and warm introductions, or reading very warm introductions to great follow on firms, the series A or B or whatever around, but they also can help with hiring legal stuff, and help with pricing and help with all the kind of strategic stuff that young companies tend to need."

This quote outlines the practical support VC firms can provide, including networking, hiring, legal assistance, and strategic planning.

"If you find yourself running low on cash and the business is performing well, but not well enough to do the series a, and we believe then firms like ours are able to kind of dip into the larger firms that we have and help extend the Runway."

The speaker explains that VC firms can provide additional funding to help a company continue operating until it is ready for a larger funding round.

Managing Burn and Fundraising

  • Companies should raise funds when they are ready, not just because of an impending financial storm.
  • Companies without an unfair advantage or significant benchmarks met may waste time fundraising.
  • Reducing burn may involve cutting costs in sales, marketing, and non-essential company perks.
  • Focus should be on building the product and generating sales.

"I think you go out to raise around when you're ready to raise, because there's no point going out to raise a series a if you're kind of well short of the kind of expected benchmarks."

The speaker advises that companies should only seek to raise funds when they have met certain performance benchmarks or have a unique advantage.

"What you have to do is look at your business and just say, where's the fat that we can begin to cut into?"

This quote suggests that companies should critically assess their expenditures to identify areas where they can reduce costs.

"If you're not building and you're not selling, then what the f are you doing?"

This quote, attributed to Larry Ellison, highlights the necessity of focusing on product development and sales as the primary business activities.

Macro Tech Environment

  • Raising funding is more challenging in a downturn, but great companies can still succeed.
  • Downturns offer access to better talent and cheaper resources.
  • Some companies may struggle due to high valuations or uncontrolled costs.

"Great companies always do well in downturns. Great companies can always raise funding."

The speaker conveys optimism for strong companies, suggesting they have the resilience to prosper even in difficult economic times.

"The tourists who are just doing this because tech was sexy will go back and do whatever they were doing before."

This quote indicates that less committed entrepreneurs may exit the tech industry during downturns, leaving more opportunities for dedicated founders.

"There will be casualties and there will be good companies who, for whatever reason, struggle to raise that next round."

The speaker acknowledges that not all companies will navigate the downturn successfully, with some facing difficulties in fundraising.

Softtech's Fund Five

  • Fund Five will focus on B2B and SaaS investments, particularly in vertical solutions for untapped markets.
  • Emphasis on blue-collar SaaS, government tech, and developer tools.
  • The fund will continue investing in horizontal web and mobile SaaS platforms.

"About half of the fund will be deployed into b two B and SaaS, which is great for me because that's kind of my area of specialty."

The speaker reveals that a significant portion of the new fund will be allocated to areas aligning with their expertise.

"Building tools and services for them is really exciting."

This quote reflects the speaker's enthusiasm for developing software that improves the productivity of non-knowledge workers.

"Government tech is important and exciting as well. I think it's an area that's been kind of pretty overlooked in the past because selling to governments is hard, it's expensive, but there are a bunch of initiatives in the US government and in the UK government that makes it increasingly easy to sell."

The speaker identifies government technology as a key investment area, noting recent initiatives that facilitate selling to government entities.## Developer Tool Adoption

  • Developer tools are gaining interest and adoption can follow different models.
  • Grassroots adoption spreads virally within an organization, moving quickly and organically.
  • Top-down adoption is essential for significant revenue, often involving enterprise solutions.
  • GitHub exemplifies a hybrid model, with grassroots adoption alongside a profitable enterprise offering.

"Grassroots is great because it can just spread like wildfire inside an organization. It can move from to very virally."

This quote highlights the rapid and organic spread of developer tools through grassroots adoption within companies.

"But I think to make real revenue you need to be kind of selling top down."

This quote emphasizes the necessity of top-down sales approaches for substantial revenue generation in the context of developer tools.

"So GitHub is a great example of this GitHub being adopted on community projects, being adopted by small businesses all over the world."

GitHub is cited as a key example of a developer tool that has successfully combined grassroots and top-down adoption strategies.

Reading Preferences and Influences

  • Andy McLaughlin shares his favorite books and the reasons behind his preferences.
  • "The New York Trilogy" is a favored fiction book, associated with a memorable and relaxing vacation.
  • "Hatching Twitter" by Nick Bilton is a non-fiction favorite, notable for its compelling storytelling and impactful quotes.

"So my favorite fiction book is a book called the New York trilogy, which I read while I was on holiday in France."

Andy McLaughlin's favorite fiction book is "The New York Trilogy," which he associates with a positive and relaxing personal experience.

"I really enjoyed recently the hashing Twitter by Nick Bilton, a remarkable story about a company that managed to do well despite everything going wrong."

"Hatching Twitter" is praised for its narrative of a company succeeding amidst challenges, with memorable quotes enhancing its impact.

The Challenging Aspects of Being a VC

  • The role of a venture capitalist requires rapid expertise in various companies and industries.
  • A significant part of the job involves evaluating a large number of companies but investing in a very small percentage.
  • Making quick decisions and having to say no to many potential investments are difficult but necessary aspects of the role.

"The fact you have to become an Insta expert on companies and spaces that you knew a thing about."

This quote describes the challenge of needing to quickly become knowledgeable about new companies and sectors in venture capital.

"You have to be able to make a very quick decision about whether something is interesting from a market standpoint."

Venture capitalists must swiftly assess the market viability and potential of a company, which is a demanding aspect of their job.

Daily Technology and Media Consumption

  • Andy McLaughlin relies on Spotify for his daily music consumption, highlighting a shift away from physical media.
  • Sonos is appreciated for its ability to create a pleasant home environment through music.
  • The Medium newsletter is a go-to source for a broad range of topics and insights.

"Spotify. Apart from vinyl, which is kind of like a weird, weird thing. I haven't bought physical media music. I haven't bought a CD in forever."

Andy McLaughlin discusses his use of Spotify as his primary music platform, indicating a move away from physical media.

"But I listen to hours of music every single day."

Music is an integral part of Andy McLaughlin's daily routine, underscoring the importance of streaming services like Spotify.

Venture Capital Insights and Admiration

  • Josh Hannah of Matrix Partners is the most respected investor by Andy McLaughlin for his intelligence, straightforwardness, and support.
  • The qualities of a good venture capitalist include being smart, honest, and helpful to founders.

"Josh is a GP at Matrix Partners, has always been for me kind of like the know great VC, former operator, wicked smart, literally both physically and metaphorically."

Andy McLaughlin praises Josh Hannah for his intelligence and effectiveness as a venture capitalist.

"A brain the size of the planet and really nice guy, complete straight shooter, doesn't mess you around."

This quote highlights Josh Hannah's intelligence and integrity, qualities that Andy McLaughlin admires in a venture capitalist.

Recent Investment Decisions

  • Captain 401, a paperless 401k provider for small businesses, is the most recent public investment.
  • The investment was driven by the opportunity to disrupt a market dominated by outdated incumbents and address a critical savings crisis in the U.S.

"So the most recently investment that was public was a business called Captain 401, which we announced early this week, which is a paperless 15 minutes 401k provider for small businesses."

The quote introduces Captain 401 as the latest investment, emphasizing its innovative approach to retirement savings.

"Now there is like this looming Cris in the US where people are not saving for their future."

Andy McLaughlin identifies a significant societal issue in the U.S.—the lack of savings for retirement—which Captain 401 aims to address.

Podcast Promotion and Sponsorship

  • The 20 Minute VC podcast offers a newsletter and social media engagement to keep listeners updated.
  • Wonder Capital is mentioned as a sponsor, highlighting the investment opportunities in the solar market they provide.

"And if you're loving the 20 minutes VC, then head over to the site@twentyminutevc.com all in letters and sign up for our newsletter so you never have to miss an episode or update."

Harry Stebbings encourages listeners to subscribe to the podcast's newsletter for updates and episode notifications.

"Today's episode was brought to you by the awesome team at Wonder Capital, the online investing platform that allows you to take advantage of the 1600% growth in the solar market."

The sponsorship by Wonder Capital is acknowledged, showcasing their platform for investing in solar energy projects.

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