20VC The Best Determinant Of Product Market Fit & Why Prior Experience Is Not Required For Founder Success with Neeraj Agrawal, General Partner @ Battery Ventures

In a comprehensive discussion on "20 minutes VC," host Terry Stebings and guest Niraj Agrawal, General Partner at Battery Ventures, delve into the dynamics of venture capital in the SaaS industry. Agrawal shares his journey from an accidental entry into venture capital to investing in high-growth companies like Marketo and Sprinkler. He emphasizes the importance of market and team over technology and deal structure when assessing investment opportunities. The conversation explores the nuances of market timing, the impact of founders' age, and the challenges of hiring key executives, particularly in sales leadership. Agrawal also offers insights on the ideal market being nascent but with rapid growth potential, and the critical nature of customer pain points in validating product-market fit. Additionally, he reflects on missed investment opportunities, learning from the anti-portfolio, and the value of perseverance and adaptability for founders navigating the highs and lows of startup growth.

• Host Terry Stebings announces a partnership with Jason Lempkin to create the official Sasta podcast.
• The focus of the week's podcast is on Software as a Service (SaaS).
• Guest Niraj Agrawal, General Partner at Battery Ventures, joins the show to discuss SaaS and Internet companies.
• Niraj Agrawal has a history of successful investments in companies that have gone public.
• The podcast is sponsored by Lisa, an online mattress company, and Mattermark, which provides data and analysis.

Welcome back to another sterling week on the 20 minutes VC with your host Terry Stebings, who you can find on Snapchat at H Stebbings.

This quote introduces the host of the podcast, Terry Stebings, and sets the stage for the episode's focus on SaaS.

And joining us for this deep dive, I'm so thrilled to welcome the experts from battery Ventures and more specifically joining me today we have Niraj Agrawal, general partner at Battery Ventures where he focuses on SaaS and Internet companies across all stages.

This quote introduces the guest, Niraj Agrawal, and his expertise in SaaS and Internet companies.

• Niraj Agrawal has been with Battery Ventures for 16 years.
• He entered venture capital accidentally, with a computer science background and experience in product management and streaming media.
• Agrawal's original plan was to work in video on the Internet post-business school but decided to try venture capital when approached by Battery Ventures.
• He has stayed in venture capital because of the variety and intellectual excitement it offers.
• Agrawal enjoys learning about different market segments and making predictions about their trends.
• He values working with entrepreneurs and finds their visions and drive inspiring.

Sure, I've been at battery now 16 years. Seems like an amazingly long time. I actually got into venture somewhat accidentally...

This quote provides background information on how Niraj Agrawal started his career in venture capital.

Yeah, there are a few things that I think are pretty exciting about the VC career path...

Agrawal explains what he finds exciting about working in venture capital, such as the variety and the entrepreneurs he gets to work with.

• Niraj Agrawal uses a framework to evaluate potential investments, focusing on market, team, technology, and the deal itself.
• He has learned that the market and the team are the most crucial factors.
• There is a debate in the venture industry about whether the market or the team is more important.
• Some argue that good founders can figure things out, while others believe starting with a good market is essential.

At a high level? I tend to use a pretty similar framework...

Agrawal describes his framework for evaluating investments, emphasizing the importance of market and team.

• Assessing markets is challenging because they can be open-ended and grow unexpectedly, as seen with ephemeral messaging before Snapchat.
• Agrawal finds that presentations claiming a market is worth ten or twenty billion dollars are less convincing.
• Understanding and predicting market trends is a key part of venture capital.

It's a great question. So on markets, a lot of people will come to us and have this presentation about how this market is a ten or $20 billion market...

Agrawal discusses the challenges of market analysis and the skepticism he has towards large market size claims without proper justification.## Ideal Market Curve

• Terry Stebings discusses the concept of the ideal market curve, where a market is close to zero today but expected to grow exponentially in a short period.
• The importance of timing in entering a market is emphasized, as being too early or too late can lead to failure or difficulty in catching up.
• The rapid growth phase and reaching an inflection point within 6 to 18 months is considered ideal.
• Neeraj Agrawal contrasts consumer and enterprise markets, noting a preference for investing in new, greenfield markets, with occasional investments in replacement markets.

"In the ideal world, what you're looking for is actually a market that might be close to zero today. And that's going to be like 500,000,003 years from now."

This quote outlines the concept of an ideal market that is currently small but projected to grow significantly in the near future.

"Thinking about the trends that allow for a new market are really important on the consumer side. As you said, there's some differences on the enterprise side, which is where I spend my time."

Neeraj Agrawal highlights the importance of understanding market trends, especially the differences between consumer and enterprise markets.

• Neeraj Agrawal reflects on the changing demographics of enterprise founders, noting a shift towards younger entrepreneurs.
• He attributes the ability of young founders to start enterprises earlier in their careers to the vast amount of knowledge available online.
• Neeraj discusses the importance of perseverance and the ability to go "all in" on a startup, regardless of the founder's prior experience.
• The notion that naivety can be beneficial, as it may lead to not seeing problems that more experienced individuals might perceive as obstacles, is introduced.

"Definitely. I'd say when I first started at battery, the typical founder... would be somebody like David Acharya at Blade Logic, maybe 34 years old at the time, had some enterprise experience."

Neeraj Agrawal shares his observation on the typical profile of enterprise founders when he began his career, noting their age and experience.

"Prior experience is not required for success."

This quote emphasizes that while experience can be helpful, it is not a necessity for success in founding a startup.

• Neeraj Agrawal discusses the emotional rollercoaster of startup life, with highs and lows often occurring within short timeframes.
• He stresses the need for founders to have the fortitude to handle the intense fluctuations and to continue pursuing opportunities despite setbacks.
• The misconception that startup growth is linear and without significant challenges is dispelled.

"I think of it as the highs are incredibly high and the lows are very low, and sometimes they happen in the same day and sometimes in the same hour of the same day."

This quote describes the extreme emotional highs and lows that founders experience, sometimes in rapid succession.

• Terry Stebings and Neeraj Agrawal discuss the benefits of having a co-founder to share the entrepreneurial journey.
• Neeraj highlights the loneliness of being a founder CEO and the value of a co-founder as a confidante.
• He also acknowledges the success of companies with varying numbers of co-founders, suggesting there is no one-size-fits-all approach.

"In the ideal world, you would have one co-founder. So that you have a person to go to."

Neeraj Agrawal suggests that having a single co-founder can provide essential support and companionship for a founder CEO.

• Neeraj Agrawal advises founders, particularly younger ones, to be open to hiring executives early in the company's lifecycle.
• The importance of leadership in a startup's growth is emphasized, with the recommendation to invest in a strong executive team as soon as feasible.
• The concept that "A people tend to hire other A people" is introduced, advocating for the early recruitment of high-caliber executives.

"My advice to founders is it's okay to go to invest in leadership early in a company's cycle."

Neeraj Agrawal encourages founders to prioritize hiring experienced executives early on to build a strong leadership team.## Executive Recruitment and Company Growth

• The right executive for a company's early growth may not be suitable for later stages.
• Companies with a revenue of 1-2 million are common, making it harder to stand out when recruiting top executives.
• A company is more likely to attract an amazing executive at 10 million in revenue and even more likely at 20 million.

"If a company only has a million or 2 million in revenue, there's just hundreds of companies like that. And so if you want to land that amazing executive, you have a greater shot at getting that person at 10 million. You probably have a better shot at getting that person at 20 million."

This quote highlights the competitive nature of recruiting top executives for companies with low revenue and how increasing revenue can improve the chances of attracting high-caliber leadership.

• There is a debate over the importance of a company's team versus quantifiable metrics like ARR, MRR, and churn.
• Some venture capitalists focus heavily on financial milestones, while others consider a mix of factors including the team's characteristics.

"And we said there were four, there and that slightly seems to kind of contradict a large sector of enterprise vc mindsets who invest on quantifiable metrics of can you hit 10 million ARR by year two and don't seem to place so much emphasis on the team."

This quote discusses the tension between focusing on financial metrics versus team characteristics when evaluating a company's potential for investment.

• Investors often get involved at different stages of a company's revenue growth.
• Battery Ventures invests across various stages, from early revenue to pre-IPO.
• Understanding the market and customer pain points is crucial for investment decisions.

"There's three kind of stages that people tend to get involved. There's this 1 million in recurring revenue stage that a lot of investors invest in. There's this kind of five to $10 million stage and then there's really everything from 20 to IPO."

Neeraj Agrawal explains the different revenue stages at which investors tend to get involved, indicating the diversity of investment opportunities and strategies.

• Determining the priority level of a customer's pain point is key to understanding product-market fit.
• Asking customers how they would justify the product to their boss can reveal the importance and urgency of the pain point.

"If you're addressing something that's pain point number three, four or five on somebody's list, they just never get around to it."

Neeraj Agrawal emphasizes that solutions addressing lower-priority pain points are less likely to be adopted by customers, highlighting the importance of targeting top pain points.

• Witnessing a startup's growth from seed stage to IPO is highly satisfying for investors.
• Founders are often driven by a mission to change the world, not just financial gain.
• Companies that reach critical mass can have a significant impact on the world.

"It's incredibly satisfying. You hope as an investor that you make some investments that reach real critical mass."

Neeraj Agrawal expresses the fulfillment he feels when his investments in startups lead to significant growth and success.

• Recruiting, especially sales leadership, is a common issue during rapid growth.
• The right sales leader can be crucial, and a poor choice can have long-term negative effects.

"The one that we see is kind of a common issue is really around sales leadership."

Neeraj Agrawal identifies sales leadership as a frequent challenge for growing companies, suggesting the importance of effective recruitment in this area.

• Founders should seek guidance from trusted CEO coaches, chairmen, or VC investors when hiring executives.
• Experience in assessing executive leadership is valuable during the recruitment process.

"I think for founders it's really good to have either a CEO coach or chairman that they can trust to help them assess executive leadership."

Neeraj Agrawal advises founders on the importance of having experienced advisors to assist with hiring decisions, particularly for crucial roles like sales leadership.

• Making tough decisions often involves choosing the more challenging option.
• Reflecting on past decisions can provide insight into one's career path and growth.

"Whenever you have a tough decision in your career to make, always go for the harder one."

Neeraj Agrawal shares his perspective on career decision-making, suggesting that opting for the more difficult choice can lead to greater rewards.## Decision to Sell a Company

• The complexity of deciding to sell a company for a substantial amount versus the potential for greater success.
• The example given is an $800 million sale to Resmed, highlighting the dilemma between a guaranteed good result and the risk for more.

announced a sale of the company to Resmed for $800 million. That's a really tough decision when you can walk away from what obviously would be a good investment or a good result to being willing to risk it to get to something greater than that.

This quote discusses the challenging decision-making process involved in selling a company and weighing the guaranteed success against the potential for achieving something even larger.

• The concept of the anti-portfolio as a collection of missed investment opportunities.
• Reflecting on the lessons learned from not investing in successful companies like Kayak.

Oh, God, there's so many companies that I've missed, and I learn a lot from each one.

This quote introduces the idea of the anti-portfolio and the speaker's recognition of missed opportunities as learning experiences.

• The regret of not investing in Kayak during its Series B funding.
• The initial concern was Kayak's unit economics and the uncertainty of scaling.
• Recognizing the importance of a strong team and product which led to Kayak's success without initial investment.

I would say there's a company kayak. We spent some time looking at their series b. We ultimately decided to not move forward because at that point in their journey, their unit economics weren't such that they were acquiring traffic for free.

This quote explains the speaker's missed opportunity with Kayak, highlighting the initial hesitation due to the company's economic model at the time of consideration.

• The experience of not moving forward with an investment in Salesforce.
• The realization that the terms and structure of a deal should not override the conviction in an investment thesis.
• The importance of focusing on the potential of the investment rather than the specifics of the deal terms.

Ultimately, we decided not to move forward because we couldn't get the right structure or downside protection that we were looking for.

This quote describes the decision-making process behind not investing in Salesforce and the lesson learned about not letting deal terms interfere with investment conviction.

• Admiration for Doug Leone of Sequoia for his continued drive and dedication to his work.
• The anecdote of Doug Leone's commitment to an investment, demonstrating his hustle and dedication to success.

What I loved about that story is even though he was so successful, he was still so hungry and really just a wonderful role model of someone who didn't get caught up in his success and is still just hustling to do whatever he thinks makes sense for his investors.

This quote highlights the speaker's respect for Doug Leone, focusing on his work ethic and humility despite immense success.

• The speaker's preference for Brad Feld's writing on professional and personal topics.
• The mention of Jason Lemkin as another favorite in the industry.

Well, as I mentioned, I'm a big fan of Brad Feld's writing.

This quote indicates the speaker's admiration for Brad Feld's writing and the value he finds in Feld's insights on various topics.

• The recent investment in Pendo IO, a product success company based in Raleigh, North Carolina.
• The rationale behind the investment is the shift from gut-driven to data-driven product management, mirroring transformations in the marketing function.

We believe the same thing is now happening in product management, where it's historically been a gut driven field. But now we believe more and more data will infuse the product management process and Pendo is really championing that.

The quote explains the reasoning for investing in Pendo IO, emphasizing the trend towards data-driven decision-making in product management as a significant factor.

• The announcement of the official SaaS podcast co-hosted by Jason Lampkin.
• The anticipation for the upcoming episode featuring Logan Bartlett from Battery.
• The invitation to follow the host on social media and sign up for the newsletter for updates.

And to celebrate the success and release of the official SAS to podcast brought to you by Jason Lampkin and I, the SaaS fund does not stop here on the 20 minutes vc and with it being battery week, neither does the participation from battery.

This quote promotes the new SaaS podcast and encourages listeners to engage with the content through various platforms.

• The host's personal endorsement of Lisa Mattress, highlighting the online shopping experience and delivery convenience.
• The design of the mattress, which includes memory foam and latex foam for cooling effects.
• A promotional offer for listeners and the mention of a 100-night trial.

First, it was a fully online shopping experience, which meant I did not have to traips around a showroom feeling terribly awkward perching on a bed.

This quote serves as a personal testimonial for Lisa Mattress, emphasizing the ease and comfort of the buying process and the product's features.