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