In this episode of "20 minutes VC," host Harry Stebbings interviews Scott Rainey, a partner at Redpoint Ventures, a prominent multistage fund with significant industry influence through investments in companies like Twilio and Stripe. Rainey discusses the venture capital landscape, emphasizing the importance of sustainable investing levels and the shift toward more selective funding, with investors favoring companies showing early traction or scalability. He also addresses the challenges of investing in new sectors, the pitfalls of bridge rounds, and the need to set realistic milestones for startups. Rainey advocates for a venture capital approach that values substance over hype and the importance of supporting entrepreneurs through the moral commitment made upon initial investment.
"I'm thrilled to welcome Scott Rainey to the show." "Scott is a partner at Redpoint Ventures, one of the valley's leading multistage funds."
These quotes introduce Scott Rainey and his significant role at Redpoint Ventures, setting the stage for the discussion about his experiences and perspectives in venture capital.
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These quotes explain the functions and benefits of the Eight smart mattress and Full Contact, highlighting how they contribute to personal productivity and efficient contact management.
"I got a headhunter call many years ago and it was always something that I was intrigued by." "I had a chance to meet the Redpoint team and really fell in love with them."
These quotes detail Scott Rainey's initial interest in venture capital and his decision to join Redpoint Ventures, emphasizing his passion for the field and the team at Redpoint.
"I think it's dangerous to try to apply too many lessons from the past to the market of today." "You can see when there are hype cycles building."
These quotes reflect Scott Rainey's perspective on the evolving nature of startups and the venture capital market, as well as the importance of adapting to current conditions while being aware of historical patterns.
"VC funding is down six quarters in a row, and that's a good thing." "We're going from an unsustainable level investing to something that's more sustainable."
These quotes explain the recent trends in venture capital funding, with a decrease in investment seen as a move towards more sustainable levels after a period of rapid growth, influenced by technological advancements and market expansion.## Slowdown in Company Formation
"I also think, though, we're seeing a slowdown in company formation and creation. I think entrepreneurs are looking at the landscape and realizing it's harder to find white space right now because there are so many companies out there, it's hard to find opportunities that are truly disruptive."
The quote emphasizes the current trend of entrepreneurial hesitation due to market saturation, which is causing a slowdown in the creation of new companies.
"Absolutely, I'm sure, has always been an industry of the haves and have nots."
This quote highlights the inherent inequality within the venture capital industry, suggesting a divide between companies that can easily raise funds and those that cannot.
"Yeah, and like I said before, we look at the number of deals, we were down 22% last year, but in terms of dollars, we were only down 11%."
The quote provides statistics on recent investment trends, showing a reduction in the number of deals but a less significant decrease in investment dollars, suggesting a more selective investment approach.
"So I think there's really two profiles of companies that have found it more easy or still find it very easy to raise money."
This quote identifies the two types of companies that are successfully raising funds: those with proven traction and those that are large, late-stage businesses.
"The companies that are finding it more difficult are classic, traditional series A companies."
The quote points out the specific challenges faced by Series A companies in securing investment due to their early stage and unproven market fit.
"I do think, however, that the problem is sometimes it allows a lack of discipline to creep into those businesses."
This quote expresses concern that staying private can sometimes lead to a lack of discipline, contrasting with the accountability that comes with being a public company.
"I think there's two times you see bridges used."
The quote describes the two scenarios in which bridge rounds are used: as a support mechanism for struggling companies or as an opportunity for investors and successful companies to prepare for a better financing round.
"Do you get concerned when you see VCs enter into these previously unknown markets where kind of software knowledge and domain knowledge on all the traditional software skills isn't maybe so applicable..."
This quote raises the issue of venture capitalists investing in markets where their traditional expertise may not be directly applicable, potentially leading to concerns about their ability to make informed investment decisions.## Venture Capital Movement into Frontier Tech
"There's a whole bunch of traditional software investors that are making their way into that space, including myself and Redpoint, spending a lot of time there."
This quote highlights the trend of traditional software investors, like Harry Stebbings and Redpoint, exploring investments in frontier technologies.
"But the reality is if you just go back and look at clean tech as an example, where set of software investors and maybe networking investors made their way into the clean tech industry and started investing in supporting capital intensive and operational complex businesses that where scale was the key ingredient to success and obviously did not see nearly the kind of success that the industry hoped that we would see in that sector."
Scott Rainey compares the current trend to the past movement into clean tech, suggesting caution due to the complex nature of these investments and the importance of industry-specific knowledge.
"And so the result is that I think later stage investors are less likely to take these risks that assume that growth will take care of all these problems."
Scott Rainey explains that later-stage investors are now less willing to assume that growth alone will solve a company's financial issues, indicating a shift towards more cautious investment strategies.
"We have found that unanimity is a bad thing in venture capital, that a lot of the best ideas are the ones that are the most controversial."
Scott Rainey discusses the belief that the best investment opportunities often come from controversial ideas, which is why Redpoint does not require unanimous agreement for investments.
"But I do think there are times where it probably would make sense. And these things we've experimented with to have somebody independent, somebody that hasn't been involved with the company, to come in every once in a while and take a look to make sure that we're making good financial decisions for our investors on these follow ons."
Scott Rainey suggests that for follow-on investments, bringing in an independent party to review the investment could be beneficial to ensure that the financial decisions are sound.
"Part of that is just the communication you have with the team and how you approach the milestones that you're going to set for the company."
Scott Rainey emphasizes the importance of communication and milestones in assessing whether to continue investing in a company during subsequent funding rounds.
"But there is one other thing that gets introduced at that point. And that point is that once we invest in the company, we've signed a moral contract with that entrepreneur, that we are going to support them, that we're going to be there for them."
Scott Rainey speaks to the moral obligation Redpoint feels toward entrepreneurs they invest in, highlighting their commitment to support beyond just financial investment.
"At the end of series A, you should have been able to demonstrate that you have a product that resonates, that solves a big problem and that customers are buying it to a certain degree."
Scott Rainey outlines the expectations for a Series A enterprise SaaS company, focusing on product-market fit as a crucial milestone.
"At the end of a series B investment. What I generally like to see is, hey, you've hired and started to scale your go to market team and unit economics are working in a really compelling way."
Scott Rainey describes the goals for a Series B enterprise SaaS company, including the development of the go-to-market team and positive unit economics.## Product Market Fit and Investment Criteria
"We will look at MRR growth. We will look at whether or not there has been churn, and we'll also look at growth on existing accounts." "But more importantly, what we'll try to do is draw some conclusions based on, for instance, the nature of the customers that you're getting."
The quote highlights the specific metrics that investors consider when assessing product market fit, such as monthly recurring revenue (MRR) growth, churn, and growth in existing accounts, while also stressing the importance of understanding the customer base.
"That repeatability is absolutely essential in the early stages of these companies because it's really the path to profitable scalability."
This quote underlines the critical nature of having a repeatable sales process for early-stage companies, which is a key factor for achieving profitable scalability and attracting investment.
"No. And maybe that's not the answer you're looking for, but it's not, because honestly, I think that, as we said, every situation is different."
The quote indicates that there is no fixed MRR growth rate that investors look for in Series A enterprises, as every investment situation is unique.
"If we're seeing repeatability, but maybe not kind of steady, consistent growth month over month. But we're starting to see the signs that this is really resonating with a certain set of buyers and a message that's beginning to resonate that's far more interesting and far more valuable to me as an investor than company that's grown 15% month over month."
This quote emphasizes that repeatability and resonance with a specific buyer segment are more valuable to an investor than a fixed MRR growth rate, such as 15% month over month.
"I'd say it was my first failure, the first company that went out of business, and it kind of released me from the idea that you're going to be perfect and allowed me to start to take more risk as an investor."
The quote reflects on a personal inflection point where an initial failure led to a shift in mindset towards embracing risk in investment decisions.
"I'd like to get rid of a lot of the noise and the fluff around the space where I just get back to substance."
This quote expresses a preference for substance over superficiality in the venture capital and startup ecosystem.
"I just finished reading border run by Bruce Springsteen, and I'm a huge Bruce Springsteen fan."
The quote shares a personal favorite book, providing a glimpse into the speaker's interests and inspirations.
"That's tomtungus.com, of course."
This quote reveals the speaker's preferred industry blog, indicating a valued resource for venture capital insights.
"If you're walking through hell, keep walking, Winston Churchill."
The quote cites a favorite inspirational quote, reflecting a philosophy of perseverance.
"Eight is a sleep innovation company with their latest product, the eight smart mattress." "With full contact, they provide the ability to organize your contacts, gain rich insights into them, and therefore build deep relationships."
These quotes serve as endorsements for specific products, highlighting their features and benefits as perceived by the speaker.