All startup companies want to develop their businesses effectively. However, funding can be a hindrance for some who want to scale. Alex Rubalcava, General Partner and co-Founder of Stage Venture Partners, gives more information about their company and shares their passion for investing in a startup, particularly in enterprise software. Alex shares why and how they filter companies that approach them for potential funding with their three “why” criteria and three “can” questions. Find out what those questions and how you can stand out from the crowd of startups out there.
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Can You Sell? with Alex Rubalcava
Our guest is Alex Rubalcava, who is a General Partner and Cofounder of Stage Venture Partners. With experience in both public equity and venture capital investing, Alex has been a professional investor since 2002. He started his career as an analyst at Anthem Venture Partners, which is a leading venture capital firm in Santa Monica. While Alex worked at Anthem, the firm backed startups such as TrueCar, Myspace and Android. After Anthem, Alex launched a long/short equity fund where he ran for nearly ten years. In addition to his investing work, Alex was an active board member at several nonprofit organizations in Los Angeles. He was appointed by Mayor James Hahn to the LA Animal Services Commission. Later, he served on the board of KIPP LA Schools and South Central Scholars. He serves on the board of stage portfolio companies Sightline Maps, Balto Software and WhiteFox Defense Technologies. He graduated from Harvard in 2002. Alex, welcome to the show.
John, it’s great to be here.
What I love to do is to ask you to take us as far back as you want. It could be childhood, high school, college, whatever it was that led you into this passion for investing in startups.
I did not know what a VC was or what startups were when I was growing up. All I knew was that I didn’t want to be a doctor or a lawyer. Those were two things that did not appeal to me. I tried a lot of things while I was in high school and college. I worked selling t-shirts by the side of a road in a motorcycle rally. I busted tables, worked at an advertising agency, in a real estate development firm and a couple of startups. This is all before I was 21. I discovered investing around that time when I got an internship at a venture capital firm. Ever since then, I’ve worked in finance. I think that the idea of helping to finance growth companies is tremendously exciting and I’ve been doing that for my career ever since.
When you were at Harvard, your focus was on government, was it not?
I did study government to college. It was a major that was somewhat relevant but not terribly so. I took a lot of classes in the History of Science, which was a unique major at Harvard that had I known about it when I started as a freshman, I probably should have majored in that.
You have three criteria that you ask someone who comes in to pitch you for potential funding. Would you walk us through those three why questions?
To give a little context, I’ll tell you a little bit about what we do at our firm. We are a seed venture capital firm investing in enterprise software startups. What that means is that we’re investing in companies that are very young, usually one to two years old. Often, they have fewer than ten employees. Sometimes they have a product in the market, sometimes they don’t have yet. Almost always, they are approaching us looking to raise their first institutional funding. They may have had funding from friends, family and Angel investors prior to approaching us but they have almost always raised less than a million dollars. They’re now looking to raise that first $1 million to $3 million of institutional capital.
That’s who they are when they get to us. When they do, we have to filter through the vast set of companies that are pitching on us. To give you a little bit of an idea of the volume, we had about 1,300 new companies approach us, we approached or that somehow got into our database. We met with 500 of them. We did serious work on about 75 and we wrote checks to seven companies in 2018. 1,300 down to seven. These questions that we’re going to go through are how we filter from 1,300 down to seven. The three whys: why you, why now and why us. Why you is a question about the founder. Why are you uniquely capable of building the company that you are building? Why are you uniquely credible? We use the word like credible or capable deliberately because those words are open-ended. You can earn credibility from prior work experience. Maybe you founded a startup before, maybe you are a senior executive at a high growth startup or maybe you earn that because you’re one of the best technologists in the world.
There’s evidence of the fact that you know more about a particular area than other people do. Maybe you have vertical expertise. Maybe you know more about drone defense than anybody else in the world. We try not to be prescriptive when it comes to the type of expertise that we are seeking out. Rather, we try to be open-minded and to recognize that world-class credibility comes in different forms but somebody on the founding team has to be world-class at something. We will then hire around that person’s skills. We don’t look for well-rounded individuals. We look for pointy individuals and we built a well-rounded team around them. We look for pointy people. People who if you graphed their capabilities, they would be no better than anybody else at large numbers of things but at something important for growing their company, they’re one of the best people in the world.Why you, why now, and why us? Can you hire, ship, and sell? Click To Tweet
In terms of why now, we believe that time matters a tremendous amount when it comes to starting and growing in a company. If somebody comes to us and pitches a company, a product or an idea and it could have been built using the techniques and the tools that were available years ago, our interest fades very rapidly. It’s the kind of thing where our belief is there’s so much capital out there, there’s so much entrepreneurial energy that if something was possible years ago, it was tried years ago. Something meaningful has to have changed in order for it to be worth trying again. The why now question is all about where’s the world now? What are our customer’s demands and expectations? Where is the technology in the world now? Is there something recent and important that has changed that will enable customers’ expectations and the capability to build something to be met in the middle?
The example I always use is Airbnb. If the economy hadn’t been bad back in 2008, people wouldn’t have been opened to renting out a room or their entire home to strangers. There was a time that people were so hungry for a solution, if they were losing their jobs or fear of that. They were open to that idea. Had that happen before, the technology wouldn’t have been available anyway for people to be looking like that. The timing was key to their success. You’ve done over 23 of these investments and to go back to that math, I’m fascinated by that. The strategy is the investors invest in 1% of the pitches they hear. That resilience and tenacity that it takes to be a founder seeking funding.
I don’t think people understand the numbers. It’s not to dissuade anybody but if you want to be an actor, you can’t let those numbers dissuade you either. You talk to 1,300 companies, meet with 500, do due diligence in 75 and write checks for seven. That’s even less than 1%. These questions that you’re sharing are helping people, not just getting the 1% club but even the smaller club. If you wouldn’t mind, pick one of your favorites. If it’s possible, companies that are on your website. I’m particularly fascinated by the WhiteFox Drone Defense but anyone you want that you can give an example of the why now.
In the case of WhiteFox, no one needed drone defense years ago because there was not a large consumer market of drones. Nobody was flying around $800 unmanned aerial vehicles. You can go on Amazon and buy any number of consumer drones for $800, some of which can lift a fair amount of payload, fly over any fence and any wall in the world. For owners of sensitive property, whether that is a nuclear power plant, a military base, a stadium, an oil pipeline or anything like that, it used to be sufficient to put up a twenty-foot wall. Maybe put a few cameras along the wall to monitor your wall and your perimeter. If your perimeter extends from that twenty-foot wall up to 20,000 feet into the air and you now have to protect the air column above you, as much as you protected the ground access to your facility before.
A customer need was created there by the availability of these new drone technologies and the need for a solution was recognized immediately by a number of operators. We met with people who have guns that will shoot RF radiation at a drone to try to jam it. We met with people who will send other drones to intercept a hostile drone and throw nets at it. We’ve met with people who are training hawks and falcons to go intercept the drones. For a variety of reasons, we didn’t think any of those solutions were truly robust. When we met WhiteFox, which was founded by a 21-year old college dropout named Luke Fox, we found a company that had what we believe is the only truly scalable solution in the market.
That also speaks to one of the key things I want to get your opinion on is what’s your secret sauce? Without competition, in my opinion, and what I’ve heard from other investors like you, it means there’s no market. Clearly, there are a lot of other alternatives out there but they have the best. Would you agree that that’s important that there has to be some competition for the market to be something that the why now could kick us in?
Some of our companies don’t have meaningful competition. We have a company called SPIDR Tech that developed software to help police departments communicate more effectively with their citizens. Imagine if you had vandalism at your home, the police department sent you a text message and an email immediately upon logging your case and said, “Here’s your case number.” Forty-eight hours later, they sent you another one with the contact info and the bio of the detective who was assigned to your case. A week or two later when a suspect had been identified, you got a notification and when that suspect was arrested, you got a further notification.
That chain of communication is almost identical to the chain of communications that you get when you order something from Amazon or a pizza. If you were not a cop yourself, you might not have seen that market opportunity. More importantly, you might not have the credibility to be able to go to a police chief and sell this product to them. The company that we invested in SPIDR Tech is founded by two former cops Elon Kaiserman and Rahul Sidhu. They recognized an opportunity that no one else had. We added their seed around 2017 alongside other investors, including Google and we have yet to encounter a competitor.
That’s very unique because usually if someone is the first to market and they’re growing, that spurs competition. Somebody’s always trying to do it cheaper and give somebody an alternative. That’s fascinating that it hasn’t spurred any competition. I’m sure they’re making the most of it because that’s pretty rare. The third question which goes to the due diligence on the part of the founder that’s coming to pitch you. A lot of people somehow don’t take the time to do this and it’s obviously a problem, especially when they’re going to get asked a certain question.
Why us and that’s one reason why our ratio of deals that we do to ones that we don’t is deceptively stringent. In the sense that we pass on a lot of investments that we’re pretty sure are going to get funded by other good investors, but we would not offer anything to the company besides capital. We also get a lot of proposals and requests for capital that are not well targeted for us. If you look on our website, you will see that we invest exclusively in enterprise software companies. It shouldn’t be a surprise that the number one category of new deals that approach us are enterprise software companies.Try to be open-minded and recognize that world-class credibility comes in different forms. Click To Tweet
To me, it is still surprising that the number two category is companies doing all manner of things with cannabis. We have never funded a cannabis-related company. We are not going to. We are not the smart money there. There are plenty of other people who are the smart money there and yet for some reason, a lot of people doing cannabis deals reach out to us. If any of you are doing cannabis deals, please do not reach out to us. I know nothing about your market. I’m the wrong guy for you but there are plenty of people out there who are the right investor for you.
Let’s say somebody in emerging software technology specifically for B2B, not B2C, you’re very targeted. You have a portfolio that gives very specific examples. You’ve mentioned a few of them and they get to this level of the 75 where you’re doing the due diligence on. You also shared with me there’s another level within the why you that said, if you almost will, I call it double clicking on that with some more dropdown questions. Let’s talk about what those are.
When it comes to investing in a startup, the most important consideration for us at all times is our assessment of the quality of the founder and his or her team. In particular, there is an enormous number of things that can go wrong with the startup, almost all related to the founder. Those questions are often related to speed and execution. The way that we assess the founders when it comes to speed and execution is a set of three questions. Can you ship? Can you sell? Can you hire? Can you ship is about can you deliver a 1.0 product in a workable condition that is valuable to a customer? Ideally, a third party customer who is not your mother or a mother-in-law that’s willing to pay real money for. Can you do that earlier rather than later?
A lot of people come to us asking for money to build out their 1.0 product. Maybe they have no progress on that and assume that we are interested in funding companies that don’t even have a line of code written. Plenty of people get to us were for $50,000 or $100,000 worth of angel capital invested in the company. They’ve developed a product that beats all their competitors and has already been adopted by major companies. Obviously, it gets our attention when someone comes to us having already accomplished that.
It’s way beyond the minimal viable product if you’ve got someone paying you.
I’ll call the first few customers evidence of a minimal viable product but not much more than that. That’s all that’s needed at the stage at which we invest. When we see a company that has been able to ship a product on very little capital that gives us a degree of confidence that when we increase the amount of capital that the company has to work with, that product development will continue to happen on time, on budget. They’ll continue to innovate in an efficient and timely manner. The money will not be spent in endless revisions and refactoring of code bases. When it comes to the second question, can you sell? We are often investing in companies that are selling high ticket software. We tend to have two buckets of companies.
We have companies that are selling software over the phone and email, which means inside sales or something between $10,000 and $40,000 a year. We then have a group of companies that are selling software at much higher prices, around $100,000 a year and up where you have to put somebody on a plane to go sell that software. Regardless of which type of software you’re selling, there needs to be some evidence that the founders and/or some early members of the team are capable of selling the product and they have some idea about where customer leads come from. They have some idea as to what their conversion rates and their sales cycles look like and they have some idea as to what the payback period looks like on that customer acquisition. Not all of that needs to be figured out, when you’re a seed investor you are not necessarily a metrics-based investor in the way that a Series B investors would do, but we are looking for evidence that people are on the way to figuring that stuff out.
This is my world that I love talking about, which is selling and it all starts with a good elevator pitch to even get on the radar. You have to be able to sell yourself and your vision to potential clients but also to potential investors so that they can easily understand who you help and what problems you solve. That’s the first big hurdle that a lot of technical people in particular struggle with. They get into the technology and not the basics of who they help and what problem they solve. Do you ever look for the team to have some marketing plan in place of what their strategy is to generate the leads and all that?
If you don’t know where to acquire your customers, you’re going to play all around and spend money without discipline trying to figure that out.
If you’re selling expensive $40,000, $100,000 software, what kind of training is there going on for the salespeople? How you are teaching them to sell it in a way that they can handle objections that they’re going to get because every sale has an objection.Something meaningful has to have changed for it to be worth trying again. Click To Tweet
One example that we see a lot of startups have an idea that they will be able to sell through a channel because they have seen large companies sell through a channel. If you’re IBM and you have documentation, products that are twenty years old, channels of value-added resellers and the like give me a good way of getting the product to the market. That does not work for a new product. That does not work for a new company.
They want proof of concept. I’m a Cofounder at QuantmRE. We’ve raised some money. We built some products and we are helping homeowners get cash for the equity in their home. We’ve had some initial conversations with, for example, Home Depot who we could send them clients to use that money to remodel but before they become a partner, they want to see thousands and thousands of people using this that they can interview before they would want to do anything big. If you’re only starting in one state, like Uber did before you grow and they’re national. You need to figure out how you’re going to do it without channel partners is what I took away from what you said.
The early good market is entirely the responsibility of the startup. Maybe when you’re at $10 million or $100 million in annual revenue, you can start to think about what a channel strategy would look like, what a platform would look like or any other ways of going to market.
It helps you scale but you need to know where that first hundred thousand customers are going to come from without it.
You need to know where those leads are coming from, how you identify them, how you qualify them, how you moved them through the process. Software for the most part, especially expensive software is sold, not bought. Low-cost software is often purchased and is adopted in a viral way. Things like Zoom is a great example of a company like that but higher ticket software is much more of a consultative sale.
You’ve asked the founder, the why you has been answered as well as the why now and why us but you’re into the weeds with them saying, “Can you ship? Can you sell?” The final question, which I think is key.
Can you hire? The hardest thing for any company is to assemble a great team. You have to convince people who are rock stars at their job, who are probably earning a lot of money, with highly secure jobs, are on track for promotions and are working for companies that their friends from college and their in-laws recognize prestigious jobs, to then come and join you at a startup that nobody has ever heard of. Working out of a random garage or a co-working space with no perks, with no prestige that typically comes from a career and to be in the weeds with you on a tough journey. That is not an easy sale, it’s not easy to convince people to do, especially in a market like California, where there are tons of great startups hiring. You have to stand out from the crowd of all the other startups out there. It is not an insignificant challenge.
Do you have a story of someone that your company has invested in that did make a great hire that made you feel, “They really have this down?”
There are so many to choose from. I don’t even know where I would start but of all the companies in our portfolio, WhiteFox Technologies, our drone defense company, has shown the most interesting ability to hire. They have multiple people who have been presidents and CEOs of companies before working on the team. Luke and his team have been able to recruit all of those people because everybody sees the size of the market, the urgency of the problem and the quality of WhiteFox’s solution.
It has to do with the vision being explained in such a way that people can see it, understand it and want to be a part of it. It’s an emotional decision as well as a logical one in my experience. You’ve certainly given us a lot of valuable content. The why you, why now, why us and if you’re in that next category, how do you get into that less than 1% club? You better have some good answers on can you ship, can you sell and can you hire? Are there any last thoughts you want to leave us with, Alex?The hardest thing for any company is to assemble a great team. Click To Tweet
If any of you are pursuing highly technical enterprise software product and are looking for a seed investor to please reach out. We’re pretty easy to find. My email is Alex@StageVP.com and we’d be happy to hear from people.
I can’t thank you enough for sharing your criteria and your wisdom. Congratulations on all your success.
Thanks, John. It’s great to be here with you.
- Alex Rubalcava
- Stage Venture Partners
- Anthem Venture Partners
- Sightline Maps
- Balto Software
- WhiteFox Defense Technologies
- SPIDR Tech
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