20VC Why It Is Good Company Funding Has Been Down 6 Quarters In A Row, Why Unanimity Does Not Work In VC DecisionMaking & Why It Is Dangerous To Be A Spreadsheet Investor with Scott Raney, Partner @ Redpoint Ventures

Summary Notes


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.

Summary Notes

Introduction to the Podcast and Guest

  • Harry Stebbings is the host of the 20 minutes VC podcast.
  • Scott Rainey is a partner at Redpoint Ventures, a leading multistage fund in Silicon Valley.
  • Redpoint Ventures has made over 434 investments, with close to $4 billion in assets under management and 136 IPOs and M&A.
  • Scott Rainey has a background in new products at Northpoint Communications and consulting at Bain & Company.
  • Tom Tungas and Ryan Sarver are credited for introducing Scott Rainey to the show.

"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.

Sponsorship and Product Promotion

  • Harry Stebbings promotes Eight, a sleep innovation company with a smart mattress product.
  • Eight's smart mattress includes a sensor cover that provides sleep quality data and a daily sleep report.
  • The mattress was developed using feedback from over 10,000 people to optimize materials for the best sleep.
  • Full Contact is another product promoted for contact management, offering features like duplicate contact merging and business card transcription.
  • Harry Stebbings uses the products he promotes to enhance productivity and contact management.

"Eight is a sleep innovation company with their latest product, the eight smart mattress, being a bed that literally tells you how well you slept last night." "Full Contact is keeping 20 VC team on top form."

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.

Scott Rainey's Entry into Venture Capital

  • Scott Rainey was approached by a headhunter and became intrigued by venture capital.
  • After a series of interviews, he joined the Redpoint team and committed to the venture capital industry early in his career.
  • Scott Rainey has experienced the ups and downs of the industry and finds it incredibly rewarding.

"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.

Market Cycles and Perspectives

  • Scott Rainey believes that learning from market cycles is valuable but cautions against applying past lessons too rigidly to the current market.
  • He notes that it is cheaper to start a company today, which changes the dynamics of fundraising during downturns.
  • Rainey acknowledges that recognizing hype cycles and irrational behavior in the investment community is beneficial.

"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.

Current Venture Capital Climate

  • VC funding has been down for six consecutive quarters, which Scott Rainey views as a positive correction.
  • In 2016, the number of deals decreased by 22%, and dollars invested were down by 11% compared to 2015.
  • AWS and cloud computing, along with the smartphone revolution, have transformed company costs and expanded markets.
  • From 2007 to mid-2015, there was a significant increase in early-stage investments and Series A and B investments.
  • The decline in investing since mid-2015 is seen as a move from unsustainable to sustainable levels, despite still being higher than in 2006.

"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

  • Entrepreneurs are currently hesitant to start new ventures due to a crowded market.
  • There is a perceived lack of "white space" or unique, disruptive opportunities.
  • Awaiting a market shakeout to reveal new opportunities.

"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.

Venture Capital Dynamics

  • The venture capital industry is divided between successful companies and those struggling.
  • The discussion revolves around why it is easy for some companies to raise funds while others struggle.

"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.

  • There was a decrease in the number of deals but only a modest drop in the total dollars invested.
  • Investors are concentrating their funds into fewer, more promising companies.
  • Venture capital as an industry is still attracting investment, indicating ongoing enthusiasm for startups.

"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.

Profiles of Successful Fundraising

  • Companies with solid early traction and product-market fit find it easier to raise funds.
  • Companies that are scaling and demonstrating revenue growth are attractive to investors.
  • Late-stage companies with significant revenue and viable business models continue to raise substantial funds.

"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.

Challenges for Series A Companies

  • Traditional Series A companies face difficulties in raising capital.
  • These companies often have compelling ideas but lack demonstrated product-market fit.
  • Investors are hesitant to fund speculative business models that are not near profitability.

"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.

Extended Period of Privatization

  • Staying private allows companies to pursue larger opportunities and sustain growth.
  • Remaining private can lead to a lack of discipline without the scrutiny of being a public company.
  • There is a balance between the benefits of growth and the need for corporate discipline.

"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.

The Role of Bridge Rounds

  • Bridge rounds can be a sign of difficulty in raising capital or a strategic move to reach key milestones.
  • They are often seen as a last resort and may indicate a lack of investor confidence.
  • However, they can be beneficial when used opportunistically for companies nearing significant achievements.

"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.

Venture Capitalists in New Markets

  • Concerns arise when venture capitalists venture into unfamiliar industries.
  • The application of traditional software knowledge may not translate to industries like genomics or consumer products.
  • There is less concern for companies like The Honest Company due to industry expertise.

"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

  • Traditional software investors, including Harry Stebbings and Redpoint, are increasingly moving into frontier tech spaces by following AI and ML trends.
  • This shift parallels the previous movement of software investors into the clean tech industry, which resulted in less success than anticipated due to the capital intensity and operational complexity of the businesses.
  • Scott Rainey expresses concern that without proper industry context, investors reading a few blogs and then investing in frontier tech could experience significant losses.

"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.

Future Fundraising Risk

  • Investors have become more cautious about future fundraising risks after being burned by speculative business models in recent years.
  • Speculative growth without profitability has often failed to resolve business problems, leading to a more conservative approach from later-stage investors.
  • Companies with poor unit economics or gross margins are now considered risky investments, as they may require significant additional funding to reach profitability, which is increasingly difficult to secure.

"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.

Investment Decision-Making Process

  • Redpoint's investment decision process is focused on joining companies that have the potential to be significant and industry-defining.
  • The firm does not require unanimity for investment decisions; convincing just one other partner is sufficient.
  • For follow-on investments, the decision-making process remains the same, but there is consideration for independent evaluations to ensure sound financial decisions.

"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.

Balancing Stubbornness and Vision in Follow-On Investments

  • The balance between stubbornness and pursuing a company's vision is managed through clear communication and setting milestones with the team.
  • Milestones are established to demonstrate progress and set the company up for success, including attracting external investors.
  • When companies fail to meet milestones, the decision-making process reverts to first principles, evaluating if the company is still on track to achieve its goals.
  • Redpoint values the moral contract with entrepreneurs and considers it important to support them, even though support may not be unconditional.

"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.

Meaningful Milestones in Enterprise SaaS

  • Milestones for enterprise SaaS companies vary by investment stage, with product-market fit being a key indicator at the end of a Series A round.
  • By the end of a Series B round, a successful enterprise SaaS company should have scaled its go-to-market team and demonstrated compelling unit economics.

"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

  • Discusses the significance of product market fit for Series A funding and investment decisions.
  • Evaluates various metrics such as MRR growth, bookings growth, churn, and growth in existing accounts.
  • Emphasizes the importance of a diverse customer base and repeatability in the sales process for scalability and investment appeal.

"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.

MRR Growth as an Investment Metric

  • Discusses the relevance of MRR growth rates for Series A enterprise investments.
  • Points out that there is no set MRR growth percentage that defines appeal for investment.
  • Suggests that signs of repeatability and resonance with buyers are more significant than consistent MRR growth.

"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.

Personal Insights and Preferences

  • Shares personal insights, including the impact of the first failed investment on risk-taking.
  • Expresses a desire to focus on substance over noise in the venture capital and startup space.
  • Highlights the importance of experience in maintaining clarity and vision amidst industry hype.

"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.

Industry Resources and Inspiration

  • Discusses favorite book, blog, and quote, providing insight into personal sources of inspiration and information.
  • Mentions recent investment in Hashicorp and the reasons behind it, highlighting the potential of cloud computing.

"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.

Promotional Mentions

  • Endorses products and services such as Eight Sleep and Full Contact, sharing personal recommendations and promo codes.

"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.

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