121. Customer-centric Startup Investing Down Under, Part 1 (Niki Scevak)

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Niki Scevak of Blackbird Ventures joins Nick to discuss Customer-centric Startup Investing Down Under, Part 1. We will address questions including:

  • To start off… in your estimation, what are the key factors that make a startup investable?
  • What are your thoughts on a company like Box? At the seed stage the team didn’t seem to have domain expertise, it doesn’t look like a passion project and they were going after a completely different customer set than what they eventually had success with. How would you assess companies like this at Blackbird?
  • You’ve written before about how you look specifically for startups w/ happy customers who come back again and again. Can you expand on why this is such a key focus area?
  • How do you think about early customers, the innovators/early adopters so to speak, vs. the early and late majority… and if those innovators are going to be representative of the mass market?
  • What role does the degree of homogeneity of the customer base play in your assessment of whether an early product can cross the chasm?
  • What are some of the customer-centric metrics that you are looking for when reviewing startups?
  • Do you have a bias toward sales-driven or marketing-driven startups? If so, what’s the bias and why?
  • Do you invest any companies that do not have a SaaS business model? Why or why not?

Guest Links:

*Please excuse any errors in the below transcript

Nick: Today we welcome #Niki Scevak, Managing Director of #Blackbird Ventures. #Blackbird, a leading VC firm in Australia, most recently closed a $200 Million fund. Prior to launching #Blackbird, #Niki founded #Startmate, one of Australia’s top accelerators, and also was an entrepreneur having founded US based real estate startup #Homethinking. #Niki, thanks so much for the time and welcome to the program.


Niki: Pleasure to be here.


Nick: Yeah. Can you start out by walking through your background and sort of your path to startup investing?


Niki: Yeah. I started two software companies immediately when I started university and, and almost that was the, the, the university degree that I got was for the, the learnings of the startup rather than the degree I took. And sort of knew that was the, the path in life for me. Then I lived in New York for a little over 5 years and, and started another company, #Homethinking, which was not a great success but, but not a failure either, and, and sort of ended up as a, a small business on the web or a little Italian restaurant kind of success. And then moved back to Australia to, to get married, to have kids. And was thinking about what I was doing next. And, and what struck me when I moved back to Sydney was the founders of startups here were, you know, just as good and if not better than the majority of founders I had met in, in New York and in San Fransisco. And also that Australia had produced such a wonderful set of companies that had grown to be globally the best in what they did and had raised zero capital and, and also sort of gotten zero help. I think the magic of Silicon Valley is where founders will build companies, then, you know, invest their time and capital into the, the next generation. And, and that was completely absent in Australia. And, and so all of those ingredients led to forming #Startmate and, and then forming #Blackbird.


Nick: Yeah, and can you tell me a little bit more about the #Blackbird story, sort of the, the motivation for starting the firm and, and also your focus areas?


Niki: Yeah, I mean, it was a pretty simple paradox of there were a great number of Australian, successful Australian startups, and, and not a great number of successful Australian investors in those startups. So, you know, the, the companies like #Atlassian and #Campaign Monitor and #Boxwood, #99designs, #Freelancer #Halfbrick Studios, #RetailMeNot, all of these great companies. And nearly all of them had raised zero seed capital, zero Series A capital. Most of them had raised growth equity very much later in their lives, you know, 8 -10 years after they started. But you had a set of companies that were, you know, globally the best in what they did. And, and just very little people focused on funding those companies at the early stages. So that opportunity was the prompt. But as I said the, the essential ingredient of #Blackbird really is this sense of founders helping other founders. And the founders of all of those successful companies investing their capital and their time to help out the next generation. So, #Blackbird, we started four and a half years ago. And the fist fund was a $30 Million fund. And the majority of that capital that was raised was from those founders, like the founders of #Atlassian and #Campaign Monitor and #Aconex and #Redbubble and so forth, who invested their own capital but also their own time to help out the next generation.


Nick: I did not even realize that #Atlassian was Australian based. We talked about it


Niki: Yeah


Nick: in detail very recently with #Ethan Kurzweil of #Bessemer. We, we had a, an episode on Developer Platforms, but I had no idea that it was, it was down under.


Niki: Yeah, and, you know, that almost is, was the original investment hypothesis for, for #Blackbird was to invest in these kinds of companies that could be global from day 1, where the customers of the companies had no idea or didn’t care that the company was in Australia. That very much is a theme amongst all sort of those early Australian success stories, and the ones that, that inspired us to, to begin #Blackbird.


Nick: Awesome. Well, just to start off, you know, at a high level, in your estimation, what are some of the key factors that make a startup investable?


Niki: I think it’s always, you know, the, the combination of the, the team, the market and the product. But, you know, that, that’s sort of too high level to be useful to, to anyone. What I sort of think through is the, I call it the, the two *. So why does someone give a * about what they’re doing and can they get * done. So I think on the, on the theme side, what life story has led the founder to create the, the startup and, and, you know, what observations from prior work experiences or prior life experiences led the person to a problem and, and, and, you know, why are they going to spend their, their entire life on the company. And, you know, at #Blackbird we very much look for people who are doing their last work. So I don’t, you know, we, we certainly have a, an anti-preference to those who have an exit strategy or those who are sort of putting together a, a kind of logical argument as to why something is, is a good business. So, you know, China is a big country and if I get 1% of China, I will, you know, be rich. The, the sort of truly great companies don’t tend to be found on those kind of logic trees. The great companies are found by the, the people who are doing their last work and who truly care about the, the problem and the customers that they’re, they’re serving.


Nick: Yep. If I see another deck with an entrepreneur saying that they plan to capture 1% of some $100 Billion market, it’s going to make me crazy.


Niki: Exactly.


Nick: And so, how do you sort of unpack that? How do you get at, you know, these, these two *, is it just spending time with the founder and understanding their story? Or, you know, do you have a process for that?


Niki: Yeah, absolutely. It’s, it’s getting to know that, that, that person and their story. And, and, you know, it really is, I think obvious, you know, when you meet someone, you know, the passion they have for something and, you know, how they’ve spent their life to date, getting to know the choices they’ve made. And I think in the early stage investment, the product is, is the team slide. So, you know, the team slide isn’t, you know, too logos or faces with all the famous companies that they worked for. The team slide is expressed in the product itself and the choices they’ve made. So what have they obviously how they design the product. But more importantly, what have they left out, what is the kind of the unique insights into the problem that they have. You know, particularly, a few years ago when originally founding #Blackbird, there was a great number of SaaS companies in, in Australia. And they were founded on this principle of selling to the worker rather than selling essentially to the, to the CIOs. So how do you sell to large companies all around the world without a sales force. And, you know, a number of the companies had made that choice to build themselves in a very particular kind of way without sales people. And with the product being the, the lead sales person in, in essence, with the 30 day free trial. And then the actual -worker or the person who has to use the software, the developer or the product manager or the marketing manager or the HR manager, whatever person would pay hundreds of dollars a month with their credit card. And, you know, hundreds or thousands of those small decisions will be made inside a large company and that would add up to kind of your traditional large pot of gold that, you know, more traditional enterprise software companies would have got to by going to the CIO, by having lots of meetings and a long sales process with steak dinners and golf games and 12 or 18 months. And, you know, then the big pot of gold at the end of the rainbow. So even, it’s sort of these, you look for these unique insights into the problem that are very, very detailed and then at a deep level, it’s not a high level thing, but it’s strong opinions around seemingly small details. But those, you know, small details are, are what the magic of, of, of why you invest.


Nick: You know, we had #Mamoon Hamid on the program sometime ago, and he mentioned an investment in #Box and #Aaron Levie. And I, I recall him talking about how it wasn’t much of a passion project. It was a pain point and it was a frustration making file sharing and file storage much more seamless. But it wasn’t, you know, this huge passion project. And also #Aaron wasn’t coming from a, a deep background of domain expertise. He didn’t have a, a ton of experience, you know, working in, in this type of market. How would you guys think about that and analyze that? Is it something that you would look at or is it something that would not be of interest to you, you know, assuming you don’t have the benefit of hindsight?


Niki: Yeah. The, the details are important. I think even in #Box’s case, the original hypothesis was around a consumer product rather than an enterprise product. And so, you know, saying, you would say yes for the reasons of the consumer product. And then being right for the reasons of the enterprise product, like, you know, essentially, you know, that’s not luck. But it’s hardly sort of a, you know, making a decision with the initial hypothesis turning out to be true. And that happens all the time with startups. I think in the case of someone like #Aaron, and you may have to watch a few kind of videos or speeches and, and to realize that he, he’s someone with this kind of unquenchable thirst for knowledge. And I think, you know, the, the most interesting thing for me about investing in startups is kind of the thin line between amateur and professional or the thin line between learner driver and formula 1 driver. And you look for these kinds of people who are on such a steep learning curve of knowledge. And, and, you’re not investing in great management teams, you’re investing in the potential for that person to turn into a, a great CEO. And I think, you know, the, the personality at least of folks like #Aaron that, that’s, you know, what gets the investors like us excited. Whether the, the market or whether we would have made an investment in #Box at the very early stage when it was predicated on consumer file sharing, you know, I don’t know, probably we wouldn’t have had the foresight to, to do that. But, you know, everyone will be successful in their own different ways.


Nick: Right. So talking about customers is one of my favorite subjects. And I know that you’ve written many times about how you’re looking for startups with happy customers who come back again and again. Can you explain why this is such a key focus area for, for #Blackbird?


Niki: Yeah, I, I think it’s, it’s not only related to #Blackbird or startups. I, I really truly believe that, you know, if you had to summarize the definition of the business, it would be the number of happy customers that come back time and time again. I think that truly is the definition of a business. If you have that, you have a business. You don’t have that, you don’t have a business. Or, you know, something that’s sustainable and, and doable over the long term. I think, you know, particularly when evaluating something in the early stages and, and paying the valuations that you do that are non-financially related at that point. What you’re really looking for is the strong forward predictors of success. And there, there is no stronger forward predictor of success than a deeply engaged user that, that really, really loves the product. And yes, hopefully they, they pay for the product. But even if they don’t pay for the product, like a really deep engagement, a really frequent return rate. Those are the, the true predictors that you have a strong foundation for a business. And something for, you know, kind of think of it as a strong kind of concrete foundation on which, you know, that you can build a skyscraper. If you don’t have that then you don’t have the, a business. And, you know, even stories like, you know, some of the, the businesses that shot out of the gates in e-commerce or daily deals and, and so on, you can, you can have a wonderful kind of vertical revenue chart. But it all kind of catches up to you because it’s not built on the strong foundation of really happy customers that, that come back time and time again. And so I think it’s also related to a great essay by #Peter Thiel in his book, Zero is One, is, is how do you create a sort of small monopoly, how do you get a small number of people to just to care so deeply about you. And I think again if you have a very large share of a very small market, again that, that sort of plays into the kind of forward predictor of success where something that’s very kind of narrow but very deep is, is the only kind of way to build a starting position. I don’t think if you have thousands of people that, that kind of may like you a little bit, you know, that kind of equates to nothing in the long term. But if you have a tiny amount of people that love you, you know, I think that equates to something in the long term, whether that something is a good small business or a good large business, you know, that’s, that what time ends up deciding.


Nick: So, I think this is pretty relevant for the next question here. And I actually asked #Steve Blank this when he was on the program. But, #Niki, how do you think about sort of early customers, the innovators and the early adopters so to speak, versus the early and late majority, and if those innovators are going to be representative of the mass market?


Niki: I think generally they are. I think the difference is obviously the point in which that they’re willing to, to kind of jump into the pool. And, you know, the innovators or the early adopters, you know, very much buy into the, the future vision of the company rather than the kind of the present version of the company. And, you know, certainly if someone is willing to buy a, you know, really embarrassing version of the product when it is in the early days, you know, lots more people will buy a good version of the product. So I think again, you know, some people are willing to say yes, you know, a lot earlier. I think some people are willing to say yes without social proof of others having already said yes and some products with network effects become more valuable over time. So again, you know, you need a certain scale of the, of the network to be valuable enough for the, the later adopters to say yes. But in general I would say the early adopters are very much a kind of forward predictor. But it does take a lot to, to fully kind of cross the chasm and, and to fully get onboard all of the, the late adopters with the product.


Nick: Is there something to be said for sort of the homogeneity of the target market? You know, I was just looking at a deck yesterday for a, a bright young entrepreneur that’s got a really cool product with good traction. But he’s targeting SMBs and basically the entire basket of SMBs. And from my perspective it was just SMBs are already kind of a fickle group. And then he also just has incredible heterogeneity across all these different types of SMBs with, with different sets of problems. So, is there something to be said when you’re looking at sort of the, the early adopters and the innovators? You know, are they in a homogeneous sort of customer target market in which they’re going to share some of the same need profiles as, as later adopters?


Niki: Yeah. I would even, you know, question the initial premise of, of saying that small to medium businesses are a valid target market. I think, you know, a small to medium business means, you know, the cafe down the road, or my dentist or, you know, #Blackbird itself is a small business. So I think when, you know, you have a, a market segment that’s just defined by how many employees a company has, like it, it turns out to be, you know, this kind of false category. I think, you know, if, if the, the market segmentation was a little more fine tuned and, and, you know, this is a product for dentists or venture capital firms, then I think then the analysis is, is a little bit more useful. And, and whether, you know, early adopter dentists are indicative of the whole dentist market, you can sort of make a, a better decision. Or, you know, something like cafes where you have an extremely high turn rate of businesses going out of business itself. And again, it might turn out to be that, you know, that market isn’t, isn’t a very attractive one.


Nick: Sure. So, #Niki, what are some of the customer centric metrics that you guys are looking at when reviewing startups?


Niki: As I said, I think, you know, in, in general it’s just all around engagement and, and, and the, the love that the customer has for the product. And so, you know, NPS scores in SaaS obviously it’s upgrade revenue and hopefully low turn. It’s sort of anything that gets to if the customer has x problem, what percentage of the time did they use that product to solve that problem. And, you know, so I think it’s all kind of percentage metrics. It’s not absolute metrics. So it’s, if 80% of the time they’re using this to solve a particular problem, that’s a really great thing. If the percentage of, you know, you only have a 100 users but, you know, 90% of them love you, that, that is something that you look for. That is a very positive thing, rather than, you know, if you have a million users and 10% of them love you. It’s almost like the, the earlier case where a hundred users would be better than the million users. And so I think any kind of metrics that indicate love of the product and engagement, that’s almost entirely what we look for in the early stages.


Nick: Do you guys have a bias towards sales driven versus marketing driven startups? And if so, what’s the bias and why?


Niki: Yeah, I would say probably the opposite. So a bias towards the, the marketing driven rather than the sales driven. I think, you know, marketing driven kind of means product driven. So the, the product is the, is the chief sales person. And the free trial is the, the, the sales cycle if you will. I think ultimately that, that’s a more scaleable way of building a company. But I think it’s also a very much harder or higher bar of quality that’s required when you compete on that level. And I think that that kind of again is a forward predictor of the durability of the, the company and the, the market and the product if, you know, the, the charm of the salesperson, which I think absolutely is valid and does work, is not distorting the, the early. It’s almost like you have a very clean measurement of the market and the product if there’s no salesperson in the beginning. And many of the companies, you know, for the first say a million dollars in IRR, if they can grow without a salesperson, like that’s a great measure of long term durable success. It doesn’t mean they don’t have to have sales people and they, and they won’t add sales people as times goes on, or they won’t add people who take self sign up installations and of companies and, and try to spread that throughout organization or. Or even, you know, adding an enterprise sales force. But it’s sort of all in the later steps of the sequence. So beginning steps of the sequence are very, you know, we, we very much prefer the kind of marketing driven rather than the sales driven.


Nick: Sure. And then, do you guys invest in companies that do not have a SaaS business model? And why or why not?


Niki: Yeah, absolutely. It just turned out that I think when we founded #Blackbird there was just this purple patch of great SeaS founders who were forming companies, you know, 3 to 4 years ago. And then that’s continued through to today. So I think #Blackbird very much has been built on, on, on a heart of SaaS companies. But over time we’ve, we’ve certainly invested in, in many more things. So another area Australia has kind of over indexed on is global marketplaces. So marketplaces where both sides of the market can be anywhere in the world. So, you know, the, the opposite of that would be say #Craigslist or #Uber, where it really matter that both sides of the market are in a particular city or a particular area. Global marketplaces are marketplaces like #99designs, where the companies can be anywhere in the world, and the designers can be anywhere in the world. And #Freelancer and #Upwork and #Envato and, and, and so on and so forth. And, you know, one example of that is a company called #Bugcrowd, in which companies are putting up their infrastructure and a group of friendly hackers are uncovering vulnerabilities. And, and so the companies are all around the world like #Tesla and #MasterCard and #J P Morgan. And the, the friendly hackers are all around the world from the US, the UK, Pakistan, Russia, you know, the Ukraine, everywhere around the world. And so #Bugcrowd acts as this mechanism that, you know, the, the person did uncover a vulnerability. That, that vulnerability was real and then the, the person is rewarded with cash and, and, and reputation points. And then I would say that that more and more of our interest is geared towards robotics. And I think robotics is, is a great kind of umbrella term for things like complete automation of things like transportation. So driver-less cars being a robot, you know, warehouse automation, you know, anywhere from, you know, in Australia we have companies that are automatically picking apples from apple trees. There’s a completely automated tomato farm in South Australia. So I think robotics is very interesting in that it’s allowing kind of if you think of #Marc Andreessen’s software eating the world thesis. Software kind of ate the world of virtual problems in the beginning. And I think now with robotic software it can eat the world of any kind of physical problem as well because of the advances in all of these sensor and electronics that kind of went into the smart phone. And because there’s billions of them being made, all the cost curve and everything came way down. We’re in sort of a stage where, you know, robotics can reinvent a lot of businesses. Like even if you think about a lot of the on-demands economy startups where you kind of push a button and something turns up. And, you know, those tend, the unit economics of those businesses turn out to be pretty ordinary. Well, you know, if you took away the, the sort of human labor side of the market which the economics didn’t add up to, and you replaced it with sort of automated robots, then perhaps, you know, those businesses make sense. So if you had robots delivering groceries or robots delivering food or, you know, washing your clothes or giving you a haircut or whatever it might be. You know, I think robotics is, will unlock a new set of businesses that I’m really excited about.


Nick: Possibilities in the future are amazing.


Niki: Absolutely.