In this episode of "The 20 Minute VC," host Harry Stebbings interviews Alex Clayton, a partner at Spark Capital's growth fund, known for his insightful S-1 breakdowns and a former ATP World tennis tour player. Clayton discusses his journey from investment banking at Goldman Sachs to venture capital, highlighting his tenure at Redpoint Ventures where he honed a data-driven investment approach. They delve into the nuances of sourcing and evaluating growth-stage companies, emphasizing the importance of product velocity, market depth, and customer-centric metrics like net dollar retention. Clayton shares insights on the competitive landscape, the role of capital as a temporary competitive advantage, and the rigorous process of preparing for an IPO. The conversation also touches on the extended period of privatization in tech and the potential of markets like public cloud, which remains largely untapped.
"We are back for another week in the world of the 20 minutes VC with me, Harry Stebbings."
This quote introduces the podcast and the host, setting the stage for the discussion to follow.
"I'm thrilled to welcome with that Alex Clayton, partner at Spark Capital's growth Fund."
Harry Stebbings expresses his excitement about having Alex Clayton on the show, indicating the guest's significance.
"Before we dive into the show, state a lot of what we do on the 20 minutes VC is talk to experts, pick the brains of founders and investors who tell us which trends to watch out for, offer tips on fundraising, and teach us how to excel at any company stage."
Harry outlines the purpose of the podcast, which is to gather insights from experts in the venture capital field.
"My first day on the job, I was actually staffed on the Yelp IPO and that became a big part of my life."
Alex Clayton recounts his entry into the venture industry, highlighting the impact of working on the Yelp IPO.
"I went to Redpoint Ventures post Goldman and their growth fund and then I was there for three years. And I've been at Spark for almost three years as well."
This quote outlines Alex's career trajectory, leading to his current position at Spark Capital.
"I think the biggest takeaway I learned from him was just learning how to be a data-driven investor, particularly in enterprise software."
This quote emphasizes the significance of data in making investment decisions, a lesson Alex learned at Redpoint Ventures.
"So I guess sourcing, definitely my favorite part of the job. I think as a growth investor, your ability to source and get in the best companies is what sets investors apart."
Alex Clayton explains why sourcing is crucial in the venture capital industry and a part of the job he particularly enjoys.
"We're looking for themes as well as looking for growth. So if you're an early stage SaaS company, you can't really hide. If you're growing fast, people can check your LinkedIn headcount, see how fast you're hired on the website, what type of people."
This quote details the opportunistic approach to sourcing, using growth indicators such as hiring trends to identify promising companies.
"Then there's the thematic side, and we certainly have some areas that we're really excited about here."
Alex Clayton introduces the thematic aspect of sourcing, where Spark Capital focuses on specific areas of interest within the industry.## Network Driven vs. Thesis Driven Investing
"At the end of the day, the ability to both find a company early and figure out if this is going to be a winner or market that's probably more important where, hey, I don't have the luxury as a growth investor to wake up and say, hey, I have a thesis about emergency response software and I can go spend three months doing that."
The quote explains that growth investors, unlike early-stage investors, cannot afford to spend extended periods developing a thesis about a potential market because they must respond to existing market trends and opportunities.
"In growth, I feel like we sometimes tend to build relationships with founders over many years."
This quote highlights the long-term relationship-building approach that growth-stage investors like Clayton take with founders, contrasting with the more immediate transactional interactions at earlier stages.
"I think for founders, they shouldn't always be raising, but they should only typically meet with investors if they're going to actually give them tangible business value."
The quote advises founders to be strategic in their investor interactions, focusing on meetings that offer practical benefits beyond just funding.
"At the very high level, there's the total market... then it's the serve market... And then there's the market depth."
This quote breaks down the concept of market size into three distinct categories, each representing different levels of potential customer reach and revenue for a company.
"They basically do and encompass every business process for these businesses. And they weren't just taking spend from products and industry. They're taking spend away from horizontal marketing software vendors, fleet tracking software, call tracking software."
The quote explains how ServiceTitan managed to capture a larger market share by providing an all-in-one solution that appealed to customers who would otherwise use multiple separate products.
"You have to invest in companies that in some ways are creating or thinking about a market in a different way."
This quote emphasizes the forward-thinking approach required when investing in companies, suggesting that investors should look for those that have the potential to redefine or create new markets.
"We can take a bet on where we think the market is moving and bet on a team in a product, but we usually don't invest in a market that just does not exist in any way today."
The quote reflects Clayton's approach to market timing risk, indicating a willingness to invest in emerging markets with potential but avoiding markets that are entirely non-existent.## Competitive Analysis in Markets
"If there's no competition, it's not really a large, interesting market. I don't think there's any free lunch in B, two B or SaaS anymore."
This quote emphasizes that competition is inherent in significant markets, especially in B2B and SaaS, indicating that any successful company must outperform several competitors.
"Talking to customers is, to me, the most important thing."
Alex Clayton highlights the importance of customer feedback in assessing a product's market fit and value, suggesting that investor decisions are influenced by customer satisfaction and product perception.
"It's certainly a competitive advantage, but I think it's only temporary."
Alex Clayton acknowledges that while capital injections can provide a competitive edge, they are not a long-term solution for success, as companies must ultimately demonstrate financial viability and growth to public market investors.
"The companies that continue to build and get really big and stay ahead is the ones that have a ton of product velocity over time."
Alex Clayton stresses the importance of continuous product development and innovation as a driving force for companies to grow and maintain market leadership.
"We track every product announcement they do, and then when we really get in the nitty gritty of it during a fundraising process, we want to look at their product, their historical product roadmaps and how far, how much they've executed on those."
Alex Clayton describes the process of evaluating a company's product velocity by monitoring their product development activities and customer satisfaction with the evolution of the product.
"The best products are things that customers just can't afford to live without."
Alex Clayton explains that products that are critical to a customer's business are the most attractive for investment, as they represent a significant value proposition and are essential for the continuity of the business.
"I think you want to have at least 75% of your ramp reps at 100% a quota. That's amazing. That would be awesome."
Alex Clayton provides a benchmark for sales performance, indicating that a high percentage of sales representatives meeting their quotas is a strong indicator of a company's health and potential for growth.## Burn Rate and Capital Efficiency Ratio
If you take net new ARR divided by net burn, if that number is one, you probably want to keep going and spending at the current rate.
This quote emphasizes the importance of balancing new revenue against the rate of cash burn to sustain a company's growth without overspending.
Related, I think, on a net expansion or net dollar retention, which is kind of the North Star number that we focus on. You want to be 130% plus, no, I totally agree.
This quote highlights that achieving an NDR of over 130% is a goal for SaaS companies, signifying healthy growth through existing customer expansion.
Here are some of the high level metrics and sort of medians of these businesses. You had to be around about 15 years, you're about 200 million plus in ARR growing around 40%, have 75% GAAP gross margins, are losing money, have at least 120% net dollar expansion rate, sell a 30k product per year on average, have about 1000 people and have raised $300 million from venture and growth investors and have burned about 200 million of it at IPO last year, those companies, they sold about $250,000,000 of stock at a valuation around 2 billion.
This quote provides a detailed breakdown of the typical profile of a SaaS company at the time of its IPO, including age, financials, and operational size.
It's an interesting topic. Always these 100 million dollar rounds that seem to be happening or announcing almost every week used to be ipos. [...] We're really still kind of in the second inning here.
This quote discusses the shift from early IPOs to larger private funding rounds, suggesting that while the path to going public is longer, the market opportunity justifies the extended timeline.
I'm not as good as I used to be, but I think competing training in sports teaches you great skills. You learn how to win and lose competition, perseverance, preparation. It's great.
This quote reflects on how sports experience can translate into key skills for venture investing, such as resilience and strategic planning.
Indisputably knowing how to build a cap table, but fortunately we have Carta that does that for us.
This quote acknowledges the importance of understanding cap tables in venture capital and the role of tools like Carta in streamlining financial management.
I think if for SaaS companies moving fast and breaking things, you can't break things for your customers, you don't get many opportunities. You've got to deliver a great customer experience from the onset.
This quote challenges the popular startup advice of moving fast at the expense of quality, emphasizing the importance of reliability and customer satisfaction in SaaS.
We work as a team here at Spark, but I would say braze. It's an incredible team and product in the marketing automation space.
This quote explains why Braze was an attractive investment for Spark, citing the team's capabilities and the product's market potential.