20VC Zoom From Series A to IPO, How VCs Can Provide CEOs with Additional Leverage and Why The Negative Effects of Signalling Are Very Real with Santi Subotovsky, General Partner @ Emergence Capital

In this episode of the 20 Minute VC, host Harry Stebbings interviews Santi Subotovsky, a General Partner at Emergence Capital, renowned for its focus on enterprise and SaaS investments, including successes like Salesforce and Zoom. Subotovsky shares his journey from founding a SaaS e-learning company in Argentina to becoming a venture capitalist, overcoming biases in the industry, and the importance of the "immigrant advantage" in identifying unique opportunities like Zoom. He stresses the value of building genuine relationships with founders and their teams, and the significance of investing in companies that are not only great but also the right fit. Subotovsky's commitment to intentional investment and his hands-on approach with portfolio companies reflect Emergence Capital's strategy of concentrated, early-stage investing, where the firm becomes deeply involved in the companies they back.

• Harry Stebbings introduces the episode of "20 minutes VC" and invites listeners to connect with him on Instagram.
• Harry expresses his admiration for the guest, Santi Subotovsky, highlighting his reputation as a genuine and kind individual.
• Santi Subotovsky is introduced as a general partner at Emergence Capital, a venture firm known for its enterprise and SaaS investments.

"We are back for another week in the world of the 20 minutes VC with me, Harry Stebbings and I answer all messages on Instagram."

This quote is Harry Stebbings welcoming listeners to a new episode and encouraging them to reach out to him on Instagram for feedback or thoughts on the show.

• Santi Subotovsky's successful deals and his role at Emergence Capital are highlighted.
• Santi's entrepreneurial background, including founding an e-learning SaaS company in Argentina, is mentioned.
• Harry thanks individuals from Clearbank, Top Hat, and Zoom for their question suggestions for the episode.

"And so with that, I'm so excited to welcome Santi Subatovsky to the hot seat today."

Harry Stebbings expresses excitement about having Santi Subotovsky on the show, acknowledging his positive reputation and successful track record in venture capital.

• Harry gives shoutouts to companies like Multiple, Brex, and Pilot for their services in branding, corporate cards, and bookkeeping, respectively.
• He emphasizes the importance of these companies in supporting startups and venture capital operations.

"And when we set up stride vc, they were the first call we made to help us get our story straight."

Harry Stebbings shares his personal experience with the company Multiple, highlighting their role in helping his VC firm establish its brand story.

• Santi shares his unconventional path into venture capital, starting with his struggle to find a job in Argentina and founding his own tech company.
• He discusses his involvement with Endeavor and his first exposure to Silicon Valley and venture capital.
• Santi reveals the challenges he faced due to his background and the biases in the venture capital industry, which he used as motivation to prove people wrong.

"I moved here in 2010, determined to get into venture."

Santi Subotovsky explains his determination to join the venture capital industry after realizing its potential to help him build better companies.

• Santi discusses the three phases of his decision-making process to stay in venture capital: enjoying the job, assessing his aptitude, and finding the right platform for his career.
• He expresses his love for working with entrepreneurs and the sales nature of the venture capital job.
• Santi finds a perfect fit with Emergence Capital due to its focus, care, and startup-like operation.

"I failed miserably at leaving because it's been nine years and I'm still doing this now."

Santi humorously notes his initial intention to learn from venture capital and then leave to start another company, but he ended up staying much longer due to his passion for the work.

• Santi reflects on the biggest hurdle he faced: the lack of diversity in venture capital and direct biases against him.
• He shares his commitment to not applying such biases and judging people based on who they are rather than their appearance or background.

"So for me, I took that as a learning opportunity, and I also took it as a commitment not to applying those biases when I was going to build my next company."

Santi Subotovsky discusses how he used the biases he faced as a learning experience and a commitment to evaluate people fairly in his professional journey.

• Santi identifies his "immigrant advantage" as his x-factor, stemming from his diverse experiences and background in Argentina.
• He believes that his unique perspective and exposure to different challenges give him an edge in the venture capital industry.

"I think I have something that is not a skill, but it's almost like a condition. And I call it the immigrant advantage."

Santi Subotovsky defines his unique advantage in the venture capital world, which he attributes to his immigrant background and the diverse challenges he has encountered.## Exposure to Different Cultures

• Santi Subotovsky's exposure to different cultures broadened his perspective.
• He credits this perspective for his ability to recognize the potential in Zoom early on.
• Santi had a personal need for better communication tools to stay in touch with friends and family in Argentina.
• His frustration with existing technology led him to appreciate Zoom's superior quality.

"So that opened my mind to see the world with a different lens." "I wanted to stay in touch with my friends and family in Argentina, and I couldn't find any technology that allowed me to have a conversation."

These quotes highlight Santi's personal need for effective communication tools and how it influenced his investment decisions, demonstrating the impact of personal experiences on professional choices.

• Eric Yuan's obsession with customer experience was a key factor in Zoom's success.
• Santi admired Eric's focus on the right customers, valuation, and executives, rather than just chasing the best deals.
• Eric's approach to product demos, avoiding pitches, and focusing on functionality impressed Santi.

"So Eric has always been incredibly obsessed with customers." "He's always focused on finding the right customer, the right valuation, the right executive."

These quotes emphasize Eric Yuan's customer-centric approach and his prioritization of strategic business decisions, which Santi views as critical components of Zoom's success.

• Santi believes in being available to entrepreneurs, committing to respond within a few hours.
• He prioritizes relationship building with the entire executive team, not just CEOs.
• His morning routine involves addressing messages from executives and CEOs first.
• Santi's time is dedicated to the needs of the companies he works with.

"My time is their time." "I spend a lot of time building relationship with the executive team."

These quotes reflect Santi's dedication to the companies he invests in and his belief in the importance of supporting the broader executive team, not just the CEO.

• Santi makes regular visits to portfolio companies to maintain relationships.
• He schedules meetings with various executives to understand their priorities and challenges.
• Santi uses direct questions to identify areas where he can assist executives.
• He keeps a list of priorities for each company and ensures that meetings are scheduled to address them.

"I make it a priority to drive down to San Jose at least once a month and catch up with Eric." "If you don't schedule it, it won't happen."

Santi details his proactive approach to maintaining relationships with portfolio company executives, emphasizing the importance of regular, scheduled interactions.

• Santi's view of board meetings evolved from seeing them as bureaucratic to opportunities for alignment.
• He believes most effective work with companies happens outside of board meetings.
• Board meetings are used to confirm that everyone is focused on the company's top priorities.

"Those board meetings are great opportunities to align everyone, but most of the work gets done outside of board meetings."

This quote reveals Santi's realization that the true value of board meetings lies in aligning the team, with the real work being done in one-on-one interactions.

• Santi questions the common venture capital approach of diversification.
• He advocates for a focused approach, similar to the advice given to portfolio companies.
• Emergence's strategy is to excel in a specific area, which Santi believes leads to greater success.
• The firm's targeted approach is preferred by their Limited Partners (LPs), who can diversify their investments themselves.

"We're just going to focus, we're going to operate like a company, and we're going to be the best at this." "We don't need to be in every great deal. We just need to make sure that the deals we're in are great."

These quotes capture Santi's philosophy on venture capital, emphasizing the importance of focus and excellence in a specific niche rather than diversification across sectors.

• Santi acknowledges the overlap between consumer businesses and SaaS due to the consumerization trend.
• He distinguishes SaaS by its focus on solving business problems.
• Successful companies cater to the consumer within a business setting, with IT considerations being secondary.

"The most successful companies are catering the consumer within a business setting and then the IT organization is an afterthought they build for it later on."

This quote reflects Santi's observation of the shifting dynamics in SaaS, where the emphasis has moved towards user experience before addressing enterprise IT requirements.## Enterprise Focus and End User Delight

• The current trend in enterprise software requires building products that not only delight the end user but also solve real business problems.
• Delighting the end user alone is not sufficient for building a true enterprise company; solving a business problem is essential for securing larger enterprise contracts.

"So now that changed and you need to build and delight that end user. But you need to make sure that you're solving a real business problem because that's how you're going to get to the bigger, more enterprise contracts and that's how you're going to get it to embrace your solution."

The quote emphasizes the shift in enterprise software development towards user-centric design while highlighting the necessity of addressing core business issues to achieve significant enterprise adoption.

• Emergence invests in 5 to 7 new companies per year, leading to highly concentrated portfolios and deep partnerships with each company.
• Concentrated investments allow the firm to become almost part of the team of the companies they invest in.
• The firm's strategy focuses on making every company they invest in great, rather than being in every great company.
• The firm typically has about 20 to 22 companies per fund, and the intentional partnership approach extends through good times and learning times.

"The entire firm is focused on the same category. So then when we make an investment and we partner with a team, our entire firm is going to dive in, help them set the right strategy, the right recruiting processes, helping bring in the right people."

This quote illustrates Emergence's collaborative approach, where the entire firm dedicates its resources to support the strategic and operational needs of their portfolio companies.

• Emergence's analysis of 15 years of data shows that most returns come from the first and second checks written to a company.
• The firm's strategy has evolved from participating in every funding round to being selective and focusing on early-stage investments.
• Emergence aims to partner with the right founders and help companies find subsequent investors who are the best fit for their growth stage.

"We're going to be incredibly concentrated early on, and then we're going to help those companies find the right partners to support them along the way."

This quote explains Emergence's investment philosophy, highlighting a shift from continuous investment to strategic early-stage concentration and subsequent partnership facilitation.

• Multi-stage funds that invest at seed stage but do not follow on can create a negative signal for companies trying to raise subsequent funding.
• Emergence believes in allowing portfolio companies to find the right investor for each stage rather than committing to follow on through IPO, which could cause potential issues.

"A lot of entrepreneurs underestimate the negative effect of signaling they raise from this multistage fund."

The quote addresses the potential negative implications for companies that receive initial funding from multi-stage funds but do not receive follow-on investments, which can be interpreted as a lack of confidence by other potential investors.

• Emergence focuses on ownership and the right deal for entrepreneurs rather than just the best price or deal terms.
• The firm has guidelines for investments but prioritizes unanimous enthusiasm over strict adherence to preset processes.
• Stretching beyond the comfort zone in terms of price can indicate strong conviction in an entrepreneur's potential.

"We want to make sure that when we're investing, we're not checking boxes and following a preset process."

This quote conveys Emergence's flexible investment approach, which values collective excitement over rigid investment criteria when partnering with entrepreneurs.

• The trend of compressed fundraising timelines is concerning as it may not allow sufficient time for building relationships and due diligence.
• Experienced entrepreneurs and advisors tend to focus on building relationships and finding the right partners, while less experienced ones may rush the process.

"It's like getting married after meeting someone online for two weeks, chatting, and then the next thing you do is you get married."

The quote draws a parallel between rushed fundraising and hasty marriages, suggesting that both can lead to problematic outcomes due to a lack of proper relationship building.

• The future of venture capital is expected to change, with different types of capital available for various entrepreneurial needs.
• Venture capital will likely be disrupted by alternatives like Clearbank, which offers non-dilutive funding for specific business needs, leading to a more diverse funding landscape.

"I see the future of venture changing a lot, and I see it changing not just towards this huge fund and a lot of early stage seed funds."

Santi Subotovsky predicts significant changes in the venture capital industry, anticipating a shift away from traditional fund structures towards more varied and specialized funding options for entrepreneurs.## Evolution of Venture Capital

• Venture capital is not disappearing but evolving to meet different needs at various business stages.
• Initially, it should fund discovery and product development during the risk-taking phase.
• As a business model proves successful, entrepreneurs should have access to different capital types.
• The future will see a more segmented approach to funding, similar to the diversity in SaaS applications.

"Venture capital should be used for discovery, for product development early on, when you're taking a risk, then when the model is working out, you should be able to access a different type of capital."

This quote emphasizes the traditional role of venture capital in early stages of a business and suggests a shift towards specialized capital for later stages.

• Agreeing with the concept of unbundling funding mechanisms into distinct elements.
• Funding could be separated into pure capital, guidance in scaling businesses, and structural compliance, among others.
• This unbundling reflects a tailored approach to meet specific entrepreneurial needs.

"So would you actually agree with naval, who always says about the unbundling, so to speak, of the funding mechanism, into funding itself in pure capital guidance itself, in terms of Santi's wisdom in scaling fast businesses?"

This quote explores the idea of breaking down the funding process into more focused components, which the speaker agrees with.

• Recommends "Candide" by Voltaire for its lessons on optimism and resilience.
• Believes the book is particularly relevant for entrepreneurs facing challenges.
• "Candide" is a short, insightful read that offers new perspectives with each reading.

"The book that I recommend a lot of the entrepreneurs that I work with to read is candid by Voltaire."

Santi suggests "Candide" for its valuable insights on overcoming adversity, a common experience for entrepreneurs.

• Mentors can be pivotal in one's career, especially in challenging industries like venture capital.
• Alex Mendez's support was transformational for Santi, teaching him the value of helping others without expecting anything in return.
• The importance of mentorship and generosity in professional development is highlighted.

"There was one person who helped me out, Alex Mendez, who's now a dear friend, mentor, and the founder of Storm Ventures."

This quote recounts a personal story of how mentorship and support from Alex Mendez were key to Santi's success and personal growth.

• Believes that the next big innovations will disrupt everyday productivity tools that have remained unchanged for decades.
• Contrary to popular focus on trendy technologies, there is value in improving fundamental tools like email and CRM.
• Predicts significant changes in leading companies providing basic productivity software.

"I believe that in the next ten years, we're going to see a lot of the leading companies in those categories disrupted by new generations of companies that are rebuilding the entire stack, taking into account how the world works."

Santi shares his belief that there is untapped potential in reinventing core productivity tools, contrary to the Silicon Valley trend of chasing the latest tech fads.

• Reflects on a missed opportunity with Cloudflare and the learning experience it provided.
• Emphasizes the importance of conviction in venture capital decisions.
• Acknowledges the continual growth and success of Cloudflare, despite not partnering with them.

"So, the biggest myth that I've had is when I first joined emergence, one of my good friends and classmates, Matthew Prince and Michelle, were getting started with Cloudflare."

This quote reveals a past investment decision that didn't go as hoped, illustrating the challenges of venture capital and the importance of learning from such experiences.

• Company culture is not just about talking values but also about hiring people who genuinely care and are intentional about culture.
• Eric from Zoom exemplifies this approach by hiring for cultural fit and long-term vision rather than just credentials.
• The authenticity of company culture is crucial for success.

"Eric follows through, works incredibly hard, has a very long term vision, and doesn't care about being told it can be done."

This quote highlights Eric's commitment to building a genuine company culture at Zoom and how it has contributed to the company's success.

• Discusses investment in OpenPap, a next-gen access control company.
• Personal frustration with traditional access methods led to interest in the company.
• Believes in the founders' long-term vision and potential to disrupt the industry.
• Foresees a future where mobile phones replace access cards.

"So I can talk about OpenPap. It's a next gen access control company, and this also came from my own personal frustration."

Santi shares his enthusiasm for OpenPap, a company that addresses a personal pain point and has the potential to revolutionize access control.

• Appreciates the positive feedback received from founders about working with venture capitalists.
• The response from founders indicates a successful and supportive relationship.
• The conversation concludes with gratitude for the shared experiences and lessons.

"As I said, it was phenomenal hearing back from every single founder I emailed."

This quote signifies the importance of maintaining good relationships with founders and the positive impact it has on a venture capitalist's reputation.