193. SaaS Acceleration, Sales Savvy Founders & the Rise of Tech-Enabled Services (Michael Cardamone)

193. SaaS Acceleration, Sales Savvy Founders & the Rise of Tech-Enabled Services (Michael Cardamone)
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Michael Cardamone of Acceleprise joins Nick to discuss SaaS Acceleration, Sales Savvy Founders & the Rise of Tech-Enabled Services.. In this episode, we cover:

  • What is Aaron Levie like to work for?
  • Backstory and path to Acceleprise
  • When you started Acceleprise a lot of folks told you not to — the world doesn’t need another accelerator. Why did you proceed?
  • Why an Accelerator and not a traditional VC fund?
  • Check size then and now?
  • The biggest criticism of accelerators that I’m hearing from investors is that accelerators admit companies that need a lot of help and can’t figure things out on their own — and those are not the companies that one wants to invest in. What’s your response to these folks?
  • You’ve mentioned your interest in working w/ founders that have a “willingness to sell.” How specifically do you develop the sell-skills of founders that are willing but green w/regards to sales.
  • What are some the best demand-gen techniques that you use?
  • Talk to us about how you think through pricing models and strategies at early-stage SaaS businesses
  • ACV initial vs. expansion rev opportunity
  • Lemkin.. TAM… initial traction in SOM/Beachhead niche market is most important. Any company that gets traction here can find a $1B market. Agree, disagree?
  • We talk a lot, on this show, about either why SF is the best place to build a company or why any place but SF is the best place to build a company. You’ve done both — Objectively, can you break down the biggest advantages to building in the valley vs. the advantages to building outside?
  • Let’s talk a bit about pedigree — most investors have simple heuristics here. If the founder didn’t study at a Stanford/Ivy level institution… pass. If the founder didn’t work for a FAANG tech company or fast-growing private tech company… pass. At New Stack, we like to say we’re in the business of exceptions (deals that have all the right ingredients for success — except these optics of provenance). Michael, where do you stand on pedigree and how do you define it?
  • What percentage of the companies in the cohort to you invest in at completion?
  • In terms of measuring success — what key metric do you measure that you’re most proud of?
  • Over the past few years, what trends or major changes have you seen with regards to SaaS that founders and investors should be aware of?
  • Tech-enabled services – a real trend or not? Venture fundable?
  • There has been some recent issues in the Tech space with employee options — what have you witnessed and what would you like to see change?

Guest Links:

Key Takeaways:

  1. Michael began Acceleprise because he saw the opportunity to have a meaningful impact on many companies, while still getting a reasonable amount of equity, rolling up your sleeves and getting involved with founders from very early days.
  2. It’s important to set yourself up to get lucky and take certain risks to give yourself a chance in this industry. What’s helped Michael throughout his career is figuring out how to leverage that luck and execute it well, in order to catapult himself to the next level. 
  3. Starting an accelerator was the best happy medium for Michael, of being able to invest but also getting the opportunity to be very hands on with founders. He also knew the size fund he’d be able to raise would be more conducive to the accelerator strategy than a more traditional venture fund.
  4. At the time, Michael was very new to investing, therefore his strategy was to build a highly diversified portfolio, writing relatively small checks. 
  5. He found that the best way for him to build a diversified portfolio was through an accelerator model because if you can truly provide a lot of value to your startups, the accelerator model lends itself to being able to gain a good amount of equity relative to the amount of cash you’re putting in.
  6. At Acceleprise their main focus is helping companies with go to market strategies, sales and intros to customers. 
  7. In general with accelerators, you often won’t get highly successful repeat founders, which can often de-risk the investment, however that doesn’t necessarily mean you can’t get impressive founders.
  8. It’s important that founders have clarity of vision around how their market is going to evolve and how they can grow the market opportunity over time, even if they’re going after a much smaller subset of the market initially.
  9. Being that San Francisco is expensive and highly competitive for talent, Michael advises his companies to take a hybrid approach. He believes that if companies can at least tap into the Silicon Valley network to extract knowledge and specific learnings from that ecosystem, it can be very helpful in the long run. 
  10. Michael’s opinion on pedigree is that it should not be defined by what school a founder went to or what company they previously worked for. He believes that this mindset has contributed to the the lack of diversity in the industry.
  11. From a pedigree standpoint, Michael looks for founders with a proven track record of success and overcoming adversity, a deep understanding of the problem and the market, and being able to talk about it with conviction and clarity.
  12. An interesting trend that Michael has recently noticed is a number of SaaS companies are actually building the services businesses from the ground up with tech and are tech enabled, instead of selling software to the incumbents.
  13. Early employees at companies make a huge difference on the success or failure of the company, therefore they should be rewarded.  Michael predicts that in the next 5 years or so we will see an increase in transparency and flexibility around how and when employees have to buy options. 

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet

0:23
Welcome back to TFR today Michael Cardamone joins us Michael is the managing director at Excel APPRISE, which invests in early stage SaaS companies and provides a four month program on introductions to customers, investors and mentors that should help accelerate these businesses to the next level. In today’s interview, we discuss what it’s like to work with the founder of box Aaron Levie why Michael launched an accelerator instead of a traditional venture fund. What he says the pundits that claim accelerator companies cannot figure it out on their own, and thus are not fundable. We talked about the ways that Excel apprised train sales skills and helps with demand gen. We discuss pricing strategy for early stage startups. Whether it’s more important to have a large tam or strong traction in a small niche. And we wrap up with trends in SAS, as well as changes that Michael has witnessed in the category and his thoughts on what’s next. Here’s the interview with Michael Cardamone of Excel APPRISE.

My Michael Cardamone joins us today from New York City. Michael is the managing director at Excel APPRISE seller prize is an SF in New York City based b2b SaaS accelerator with investments in agreement grow lens, PIO and story among others. Previous to excel a prize Michael was an early employee on the BD team at box and lead BD and partner marketing at academics direct. Michael, welcome to the program.

1:59
Thanks for having me. I’ve been a big fan for a while for sure. Yeah, yeah. I

2:03
appreciate you making the time. So what was it like working for Aaron Levie

2:06
it was pretty incredible. He’s He’s as high energy as he is. And publicly facing I would say when I first joined, he wasn’t nearly as polished as he is. Now. He’s had a lot of coaching along the way. But he was, you know, just incredibly smart. incredibly high energy. Very passionate about what they were doing. So it was it was a great experience.

2:25
Do you think you have a a shared sort of hustle philosophy as Aaron now with your own startup, which is, you know, the accelerator?

2:34
Yeah, I mean, I certainly think you know, we have fairly different personalities, like I think he’s just like naturally wired, like, add like, things faster than he can talk, you know, just really kind of quick witted and everything but I would say you know, different personalities, but very similarly driven, motivated, work hard. I think we just have a much more like kind of even keel steady, but yeah, have had to hustle to get Excel prizes off the ground for sure. Love it.

3:05
Love it. Yeah, I remember talking quite some time ago, years ago, actually, probably four years ago with Moon Ahmed, who of course, was at social capital is now at Kleiner. But talking with him about Aaron, and how he met Aaron super early on with box and was just kind of blown away. And yeah, you know,

3:24
I had to get I still remember just a quick anecdote on an errand which I think is just like, a glimpse into you know, his personality and how funny he was. But when I went to go interview with box, I was coming from New York, I was in business school at Columbia, like everyone wore suits. I went out to interview it was my, like, one of my first interviews out in San Francisco at a tech company, and I wore a suit to the interview. And I go walk into the room with Aaron and he literally a made me take my tie off and be asked me if I was going to the prom. Nothing like starting off the interview on the right foot. Love it. I was thoroughly embarrassed.

4:03
That’s awesome. Okay, so can you give us like, you know, the short version of your backstory and sort of the path to XL price? Yeah,

4:10
so from upstate New York, like I said, went to business school in New York, wanting to move out to San Francisco and get into tech was interviewing with a lot of different companies, both big tech companies, startups, and just really ended up really liking box, not because I thought they would be this big public company someday. It was more just like it was a fun culture, starting with Aaron. You know, they were just they had a lot of ambition. They were very hungry. They were a young team. And frankly, they were giving me more responsibility than I probably deserved at the time. So I ended up going to box which was you know, quite a lucky break. There were about 25 people at the time. And so ended up there spend time there then ended up getting recruited over to another startup ACTA extract that a friend of mine had invested in and was on the board of end up going there and we grew that company and about 25 million revenue they were more on the ed tech space. And then in 2014, started really getting the itch to want to get into investing and venture. And so was consulting to some startups and advising had had done a couple of angel investments was interviewing with some venture firms. And a couple of things happen were like, really, you know, I ended up getting this like itch to start my own accelerator. One was, in one of my interviews, I was talking to one of the partners, I was talking about my background, and he stopped me afterwards. He was like, great, you were early at a high growth company and you went to a good business school, you’re literally a dime a dozen of people interviewing for venture jobs, like, figure out a different way to be to stand out and be differentiated. Yeah. And I was like, Yeah, you’re 100%. Right. And it was a good wake up call. And then around the same time, actually, this is like, kind of, you know, maybe a little cheesy, but I saw Jim Collins speak was the author of good degree. Yeah. And he was talking about, like, how you if you work hard, and you put yourself in good positions to get lucky, like most people will actually get lucky breaks once or twice in their career. And the people who are incredibly successful are the ones who can leverage that luck, the best. And it like clicked with me. I’m like, Look, I got lucky being at Box. Like, there’s no way around that I got lucky. And I, you know, not just like having that experience, but also the network I built because of that. And so I was like, why don’t I start my own fund, which was probably a terrible idea, basically no investing experience. And so I, when I decided I got like hell bent on doing that. I started socializing with people in my network about the idea of doing a SAS focused accelerator, I felt like it would be a good opportunity where with a small fund, you could have a meaningful impact on a lot of companies still get a lot of equity. And really, you know, scratch the operating itch of like being involved from very early days with the founders and really rolling up your sleeves. And so started looking around at doing a SAS focused accelerator, there were like two or three in the country that existed. One was Excel uprising DC got connected to the guys who were running that but they were running it part time, they were all had started their own companies, which have been pretty successful. And they were thinking of not doing a second fund. So I ended up licensing their brand, they supported me in the beginning, but raised a separate separate fund in San Francisco, and was able to just get a bunch of people to buy into it probably sooner than they should have given I had very little investing experience. So innovating people like Nick Mata from the CEO of Gainsight. And my old boss at Box Karen Appleton was the seventh employee there. And Rowan Trollope, who’s the CEO of five, nine now teens was CEOs or like a lot of people who were founders early employees are exactly like that first generation of sass companies pulled together a small three and a half million dollar fund, which you know, was a grind and took over a year to do for even that small but fun just to test the concept. And so now here we are kind of fast forward almost five years later, and we’re, you know, on our 11th cohort and San Francisco third in New York now we’ve invested in over 100 companies and kind of off to the races.

7:45
Well done, my friend. It’s quite a story. Although you’re a Columbia guy, I went to UVA, I think it was Thomas Jefferson that said, he’s a great believer in luck. And he finds the harder he works, the more he has of it. Yes.

8:00
Yeah, I mean, I’m a big proponent of like, you have to set yourself up to get lucky and take certain risks to give yourself a chance. But I the thing that Jim Collins had said, really has stuck with me throughout my career, like, you really need to then figure out how to leverage that lock and execute really well to like, really, catapult yourself.

8:19
So Michael, we both heard the pundants say, the world doesn’t need another accelerator. Right? Yeah. And I know when you started Excel APPRISE a lot of folks told you not to, why’d you proceed?

8:33
Yeah, I mean, so a lot of people told me not to, it was really, so I’m an identical twin. I’m a very competitive person. And it was, it was like, I had this obsession that I that I needed to do this. And I felt like an accelerator was the best kind of happy medium of being able to invest, but also being able to be very hands on with founders. And I also felt like the size fund I’d be able to raise would be more conducive to the accelerator strategy than a more traditional venture fund. And so I decided to do it, despite getting a lot of feedback from people telling me not to start an accelerator, there were plenty of accelerators, it’s going to be really hard. It’s a lot of like, very operationally intensive for a relatively small financial return because of the font size. And there were a lot of reasons not to do it. But it was just something I was very passionate about and really wanted to want it to prove people wrong. And so I decided to pursue it anyway.

9:28
So was it the the cheque size and the need for diversification that that drove the accelerator versus traditional VC fund? Yeah. So

9:37
I think being an early investor, and this goes back to like, I was very early, early in my career messing I’d made like one or two angel investments I was I was new to investing I had a lot to learn. And so in my mind, like if you have a lot to learn as an investor, it’s hard to go out and have the strategy of being, you know, having a concentrated portfolio just because it’s like, you end up with a lot less data points to Learn from that scenario. So I felt like I needed a highly diversified portfolio. And it was good. So therefore it was gonna be relatively small checks. And then I felt like you know, the best way to do that was through an accelerator model. Because if you can truly provide a lot of value to these companies, then obviously, you know, the accelerator model lends itself to be being able to get a good amount of equity relative to the amount of cash you’re putting in. So I felt like it was a good place to start and lended itself best to like what I was most interested in.

10:31
Got it in, can you give us a sense for check size as well as funds, then? And now?

10:36
Yeah, so we do. The first one was three and a half million, I think the first cohort, back in 2014, we did 30k for 5%. And then after that, we switched it to 50k. For 5% is kind of our standard deal. The second fund was 7 million, just over 7 million. And we’re closing on our third fund now, which I think will be, you know, somewhere between seven and 10 million, and then also raising a separate $25 million seed fund on top of the accelerator. Got

11:05
it. Got it. So Michael, you know, one of the biggest criticisms of accelerators actually just heard a VC saying this the other day, he basically said that accelerators are trying to help out companies to you know, figure things out, companies that can’t figure it out on their own. And you were saying that those are not the companies that he wants to invest in, you know, the founders that can’t figure it out? What’s your response to these folks? Yeah,

11:32
I mean, I think that’s a reasonable argument look like the accelerator in most accelerators, you’re not going to get repeat founders who have started and built a company and had, you know, reasonable success, like those people don’t go to accelerators. And that’s fine. And so there’s like some of that kind of selection bias. But that doesn’t mean you can’t get people who are have had impressive track records of success previously in their career, in whatever field they were doing, but are new to starting a startup. So many of those people have gone on to build successful companies like that profile person. And those people can benefit a lot from an accelerator like us specifically, we focus a lot on helping companies with go to market and sales and interest to customers like that’s where really where we double down. So we get a lot of founders who, you know, they’re really smart, they’ve had a lot of great operating experience at various different companies, but maybe their product and engineering, lead and they’ve never sold before. And so they want help selling and commercializing and, you know, building out sales processes that are scalable and repeatable, like they, that doesn’t make them a less impressive person or potentially less likely to be successful. It just means like, it’s a skill set that’s missing in their in their skill set. And we can help them achieve that. And so I think, in general, like accelerators, you often don’t get highly successful repeat founders, which, you know, obviously, de risks and investment a little bit, but I don’t think that means you can’t get impressive people

13:00
agree. And let’s talk about that a bit that the sales aspect, so I know that you you like working with people that have a willingness to sell, even if they don’t have the capability clearly based on what you just said, so how do you you know, specifically help develop those cell skills for founders that are willing, but but maybe a bit green? Yeah,

13:21
so we sort of act like a VP of Sales for companies in the program. So we will work with them on really identifying and honing in on Who’s your ideal customer profile, we then we actually will build out like lead lists for them, we’ll help them set up kind of outbound email campaigns and drip campaigns. And then we can start to test the messaging and see like, how is their conversion from like, you know, certain demand gen techniques to a demo call or an intro call? And how does that compare to other companies in our portfolio, that have similar deal sizes, or have sold into similar similar types of companies? And then we’ll do like pipeline reviews once a week of like, okay, who’s in your pipeline? How do we help you? Like what tips can we give you to help move things faster through the pipeline or create more urgency, and then we have them record sales calls. And we do like coaching around how to improve the sales calls and everything. And then on top of that, we do a lot of like, we leverage our network to make customer intros, as well so that we can get direct feedback from those people in our network to help them tweak the messaging and tweak the sales process and everything. So we get really in the weeds on on sales and really try to coach the founders to, to get good at sales and feel comfortable around it. Because I just think it’s incredibly important for founders to be selling the end of the day, like they need to sell to recruit they need to sell to fundraise and they sell to get customers. And I think it’s the wrong approach when founders say like, I’m just gonna build a product and hire a sales team without having sold the first five to 10 customers themselves. Got it. Yeah,

14:51
yeah. What are some of the sort of what are some of the best lead gen or demand gen techniques that that you use when working with founders?

14:59
It It’s different for every company. But you know, a lot of the things we do are, you know, even little hacks like things like duck soup, where it’ll, it’ll like automatically kind of click on LinkedIn profiles of like the type of customer you’re going after. And then you can like surface, you know, see who clicks back and looks at your profile and surface content to them. So are like follow up with them after they do that. So little like hacks like that. And then, you know, more high level are generally is like really trying to target what we call like Lighthouse customers. So it’s like people who are thought leaders in whatever industry you’re in, like the people who are speaking at conferences, or on podcasts, or, you know, whatever else, because if you can get them to tip, then usually you can leverage leverage that you know, that person or that brand to then, you know, build credibility to get into other companies. So, really just like thinking about how can you be very strategic about who your first customers are, and how you get in front of them in a way that isn’t, you know, the same as everyone else. Basically,

15:56
Michael, talk to us a little bit about, you know, how you think through pricing models and strategies at early stage SAS businesses, pricing

16:06
is one of them, as you think about go to market pricing is one of those topics that always comes up and every founder we work with, kind of struggles to think through pricing. And we ultimately find that almost almost every company, under prices in the early days versus what they can get, because, you know, for very rational reasons, like they’re scared, they’re gonna lose the deal, or they just want to get some early traction. And so thinking about pricing, like one of the things that I do just as like a quick kind of back of the envelope calculation is like, if you really think about how you can scale an inside sales model, with like, AES, you typically want to be able to see a is booking like, at least 3x, if not 4x, they’re all in comp in ARR in a year. So if you think about like an AE making 100k, like you want them to make 400k in a year in ARR, booked Arr, and then backing into your pricing based on like what feels reasonable for an AE to be able to sell in a year. So like, if it’s a 40k ACV? Like they need to sell 10 of those. So about one a month like given your sales cycle, does that feel reasonable? Given like what you’ve experienced with the founders trying to sell like, does that feel reasonable? And I think that’s always like a good gut check. And it’s amazing. Like, you’ll, you’ll have people come in and be like, yeah, it’s a 15k CV, but it takes like two months to sell, and like they’re slow moving, and it takes a lot of meetings, like, that’s gonna be really hard to work. So then you need to really look at a are you underpricing it or be can you get more penetration into that customer and grow a CVS over time. But I think that’s like a good, good way to gut check pricing in the early days, you know, before you have a lot of information and a lot of feedback from customers.

17:45
Got it? And on that latter point, how do you think about sort of initial basket size or initial revenue per customer, you know, ACV levels versus, you know, expansion opportunities, and you know, how to phase those in over time?

18:01
Yeah, so I think it just needs to be a clear story around how you get there. So a good example is one of our companies Indio, which is selling software into commercial insurance companies, they’re now at like Series B stage. But their ACV is were really low in the early days, but there was like a clear story of like, look, we’re going to our wedge into solving this one problem with our customers. But there are like 10. Other things we can do once we get get in the door with those where they’re using legacy software that we think we can replace over time. And they’ve been able to like consistently just continue to build our features to be, you know, have like parody of features with the legacy big incumbents and increase ACBS over time because of it. But that was one where like, it was hard to see the math work on an inside sales team. But they’ve built out a big inside sales team with low ACV is and then have been able to execute well on building out the correct features, getting feedback from customers to understand how they go deeper into the customer and get ACBS over time, and it’s worked really well for them.

19:04
How about, you know, related to that? How do you think about, you know, some versus Tam. I saw just a tweet, probably last week from Jason Lemkin, that was something, you know, I’m paraphrasing here, but it was something to the effect of give me any business that can build out, you know, a strong beachhead with a really niche market. And I can show you the path to like a huge business. So he was basically saying he doesn’t need to see crazy tam numbers early. He just wants to see really strong, you know, initial traction, you know, how do you guys think about that, both when you’re, I guess vetting perspectives to get into the cohort, as well as when you’re working with companies progressing through it?

19:51
Yeah, I mean, I agree with them. So I actually worked part time with with Jason just as like a venture partner for the Sasser fund. Mostly so I could learn from him as an investor and just you know, he’s built an amazing community and business around faster. And so one of the things that I’ve talked to him about, and he talks about and we talked about internally is, is it’s, you know, I think that that can work. But I think the key is like, we would want to make sure the founder understands how it expands and what the revenue opportunities are over time. Like, we want founders who can tell us like, here’s how my markets going to evolve over the next five to 10 years. And here’s how we’ll win. We’re going after this market initially, but like, these are the other opportunities that we see Long Term versus, you know, a founder who’s very narrowly focused on on one piece of it, but then hasn’t really thought about how they expand from there, expand the market opportunity from there, I think that becomes more challenging. Like, obviously, we can think through that. And we can come up with ideas around it. But I really, I think it’s important that founders have that clarity of vision around how their market is going to evolve, and how they can grow the market opportunity over time, even if they’re going after a much smaller subset of the market initially.

21:02
Got it. Got it. You’re working with companies on the East Coast, on the West Coast, in the heartland as well, companies going through the accelerator, and we talk a lot on the show about, you know, whether it’s better to build in San Francisco, there’s a lot of investors that think it’s, you know, the best place in the world to build a company, we featured a number of investors that think that any place but SF is the best place to build a company. I think Jeff Clavia was recently on the program saying that it’s more expensive to build a startup now than it was 10 years ago, despite all the tools and the efficiencies that have been created, talent has just become egregious ly expensive, you know, in the Greater Bay Area. I know that you’ve done both, right. You’ve worked with companies building inside and outside, I was hoping maybe you can objectively break down. Maybe the biggest advantages to building in the valley versus the biggest advantage is building outside.

21:57
Yeah, so I think the the one thing about San Francisco that I still feel like is missing from a lot of other places where we talk to companies is that like, you just swing for the fences mentality. And like, I think it’s good for founders to be pragmatic and think about, like how to build sustainable companies. But at the same time, like I think you really need like every investor is looking for outsized returns and outsides companies and you really need to think big, to get people excited to recruit top talent, and having that ambition, and that like swing for the fences mentality makes a big difference. I think in like being able to recruit the right people and fundraising, like just, for example, I was talking to a company yesterday from the Midwest, and they’re like, Yeah, you know, we’re thinking about raising like a 500k, seed round, and then, you know, we’ll see how it goes. And then we’ll like, and like that, that’s fine, maybe they don’t need to raise more than 500k, maybe they can be very capital efficient. But taking a really smart team with a great idea and getting them at least exposed to San Francisco and like the skill sets of like, Hey, I’ve scaled the company from one to 100 million in revenue. Like, here’s what it looks like here are the things are growing pains are gonna go through, like that skill set is rampant around San Francisco, and not so in a lot of other ecosystems. And then just the mindset of like, really thinking big and going forward. And being able to, like, speak to that, I think is important. So I take this hybrid view of like, clearly, San Francisco is crazy expensive. It’s highly competitive for talent. But I think if companies can at least tap into that network to like, suck out the knowledge and kind of the learnings from that ecosystem, I think that’s helpful. Like I think completely avoiding the Bay Area is not the greatest idea, if you like, really have big ambitions. And that doesn’t mean you need an office there. But I think it means like spending some time there talking to investors from the Bay Area talking to like, you know, people who have, you know, operators who have been in these high growth companies out there, because I just think the mindset is very different. Having spent eight and a half years out there before I moved back to the East Coast, have you ever

24:03
suggested to a company to either, you know, move to the Bay Area, or New York or vice versa, suggested to a company to move outside of one of those cities.

24:14
So I’ve never suggested to a company that they move their entire company to the Bay Area. But I have suggested to companies that they build out at least a small team in the Bay Area, if they’re selling into a lot of other tech companies, and they’re just like a concentration of customers there. And if they have investors from the Bay Area, I think it can be helpful. And yeah, I’ve definitely suggested to companies in the Bay Area that they should at least consider building a function of their team outside the Bay Area. So either like building out a tech team somewhere else where it’s a lot less expensive, and they can get, you know, more of monopoly on on great talent, I think makes sense. But yeah, I think which is why you’re seeing this like macro trend of more and more remote work is I think you’re gonna see people wearing You know, see companies have offices in a lot of different locations to optimize for talent flow and skill sets and where customers are located.

25:07
Got it? Got it. So let’s in light of sort of this talking point here, let’s touch on pedigree. You know, I know, many investors have these simple heuristics. If a founder didn’t study at, you know, Stanford or Ivy level institution, they pass if a founder didn’t work for a thing, tech company, or a fast growing private company pass at new stack, you know, I’m based in Chicago, we like to say that, you know, we’re in the business of exceptions. So deals that have all the right ingredients for success, except the sort of optics of provenance. Michael, where do you stand on on pedigree? And, you know, how do you define it?

25:48
Yeah, so I, I don’t think pedigree should be defined by what school they went to, or what company they work for. Because I think that’s what has like, somewhat gotten us into trouble around the lack of diversity in the industry. I think instead, it’s what’s much more important is like, have they shown a track record of being successful in whatever they were doing, and overcoming adversity. And then you’re looking for more nuanced things that I think are indicative of, of like a founders ability to be successful. And one of these is like one thing that Jason Lemkin actually always talked about, with me, and I think he talks about it publicly is like, the concept of notion of like, what I work for the founder. And if you really boil that down, it’s really about like, do you think the founder is going to be able to get really good people to work with them, which is a function of like, How well can they talk with clarity and conviction about what they’re building? And where they’re going? And how the markets evolving? Like I talked about before? And then like, do they seem obsessed with the business? Like, you know, and that’s a hard thing to suss out, like, how do you know if someone’s like obsessed with the business? They can say they’re obsessed, but like, how do you really look for that, you know, little things I look for I think are important are like, your response times on emails, like how quickly are they responding to things that are important? Because I think it’s like an indication that they’re always thinking about it. Can they talk in like, very granular detail about their pipeline and their contracts and their contract sizes? And like their customers? Like, if they can’t, that’s a bit of a red flag for me, like as the CEO, you should be obsessing at the early stages about like, who’s in your pipeline? Who’s your biggest contract? How did that happen? Like, how do you win this deal? what customers are you talking to right now? Like, if you’re not, if you don’t know that, stuff like that, that can be a red flag. So I think that’s one thing that we look for. And then the other is just like, you know, do you have the right skill sets and background for what you’re building? Like, you may not come from a brand name? Fun. But if you come from a specific industry, and you’re solving a problem for that specific industry, and you know, the industry really well, I think that’s probably more important than did you go to Stanford or wherever else? So yeah, those are the things that we look for and care about, from a pedigree standpoint, it’s just more about a track record of success and overcoming adversity. And then, you know, deeply understanding the problem and the market you’re going after, and being able to talk about it with clarity, and conviction.

28:08
Love those love those points. I think those are super valuable for, for founders and investors alike. I know, I was just talking to my team the other day. And some of the final questions we asked before we make an investment, because we have a deal flow team, and they’re running their own deals. But a final question I asked to everybody on my team who’s sponsoring a deal is, would you go work for this founder, if you work in here, right? Would you invest, you know, 50k of your own net worth in this founder, if you had it, for instance? And so some of those questions, I think, reveal the degree to which one is convicted? Both, you know, the deal sponsor in our team as well as, as the founder themselves. Yeah,

28:51
I think those are great questions.

28:52
Michael, what percentage of companies, you know, going through the cohort? Are you guys investing in completion?

29:00
Out of our second fund, we reserved some of that some of that 7 million went towards following on and some of the companies, I think it’s, you know, we’re probably investing in about a third of the companies and follow on, part of the rationale for raising the seed fund is, you know, being able to invest larger dollar amounts in a subset of the company is versus what we’ve been doing, because a lot of our follow on investments right now are still in the relatively small side, like 50 to 150 range. But yes, probably about a third of the companies right now, in

29:28
terms of measuring success, you know, if you had to pick one key metric that you’re most proud of, what would you highlight, I

29:36
would say NPS score of the founders going through the program. So like I said, for an accelerator, the the only way you can be successful as an accelerator is if you truly drive value for companies. And so that’s been like a core KPI for our team from the beginning is like, do founders have an amazing experience with the program did they feel Like it was worth it and when they recommend other founders to the program, we’ve consistently had very high NPS scores. I think the last year the last like five cohorts or so we’re averaging between eight and nine MPs. And so that’s a stat that I’m like incredibly proud of we’re we track we’re like, maniacal about that and talk about it all the time. And, you know, even have some comp tied to it. Like it’s it’s a hugely important stat for us. And I think like one of the most important things we can do, because none of this works. If that’s not, if that’s a hi, how

30:29
have you maybe adjusted or changed the program based on NPS feedback? Yeah.

30:35
So in the beginning, when I first started, it was just me for the first few years and I was running around like crazy trying to do everything, like find companies and like leverage my network. And I can

30:43
relate Michael, I can.

30:46
I think one of the things I realized was like, I tried to do everything for them, I tried to be like, amazing at everything, and probably was mediocre at all of it. And so what I realized is like, look, where can we actually move the needle for these companies at this stage, and it was two things. One is sales revenue. And one is fundraising. Fundraising is obviously highly correlated to sales. So it was probably like late in fun one where I where I made a decision of like, let’s really double down on go to market, I brought in a partner who was someone I had wanted to hire for a long time, she was like one of our top sales mentors. She’s one of the best people I’ve ever met at coaching people how to sell her last name is literally sales. She was like born to do this. And so like I brought her in, she’s got a VP of sales of five different companies. She’s consulted to a lot of like, seed stage and series A stage companies on on sales that brought her in, and like we collectively really doubled down on, let’s focus on go to market, let’s make these, these founders amazing at selling. Let’s help them accelerate growth, accelerate revenue, get in front of more customers faster, close bigger deals, and then that will then be pretty highly correlated to helping them with fundraising. And I think once we did that, and really, really focused on that is when NPS scores start getting higher, because you know, if you’re a founder, and in the early days, like an intro to a customer is the fastest way to your heart. Like, that’s what, that’s what moves the needle. For you. That’s what you care about. It’s non dilutive capital, like, Yo, you know, companies fail, because they don’t have customers that not necessarily because they run out of capital. You know, that was the decision point that we made. And I think that’s what’s led to like being able to really improve it. And, you know, we also get, we do exit interviews with every company coming out and ask for feedback. And we constantly are iterating and trying to improve the program. And but I think that was like the big difference maker right there.

32:43
Love it. Love it. You know, I was teaching a course to a group of about 40 founders yesterday, of course, on how to raise capital. One of the little anecdotes that I give folks at one point in the presentation is this interview that was done with both Warren Buffett and Bill Gates, and the interviewer asked them, you know, if you had to, in one word, summarize your key to success, what would it be? And the two of them answered at the exact same time with the exact same word. Do you by chance, know what it was? Now, focus, focus, focus, and make sense. I mean, I think it’s so critical. And I just see a lot of folks missing the mark. I mean, whether it be founders were investors, right? There’s, there’s so many investors now that are trying to be Andreessen or trying to be first round, trying to do platform, you know, they’re hiring platform folks. And so people are doing well. So you gotta give him a lot of credit. But some people are trying to be everything to everyone, you know, with talent, help with tech stack help with marketing, help with sales, help with fundraising, et cetera, et cetera. And, you know, I asked founders in my portfolio, how is it? And the response is usually not, it’s bad. But the response is also not. It’s great. It’s, it’s usually it’s fine. Yeah. And I like your model of, you know, having a superpower around those two things, instead of, you know, being mediocre at 10 things. Yeah. Over the past few years, have you seen any trends or, or major changes with regards to SAS that founders and investors should be aware of?

34:18
No, you know, obviously, there’s just a lot more SAS companies, although I think we’re still in the early days of a lot of industries fully kind of shifting over to that. But I do think there’s like this, you’re seeing a little bit of fatigue around the number of SaaS applications there are, which then makes it harder and harder to rise above the noise. And you’ll I think you’ll see some companies where they’re, they’re starting to like pare back on the number of sass companies. So really being able to prove ROI is important. So I think you’re seeing some of that some of those sort of trends. I think another interesting one, we’ve seen a number of companies that instead of selling software to the incumbents, like they’re actually just building the services businesses that are like built from the ground knocked with tech and our tech enabled. So like flex ports, obviously a really good one in freight forwarding, which I’m fortunate enough to bend an angel investor in, but like compass and real estate, you know, we invested recently in one that’s that’s building out like a scrap metal brokerage business that’s like tech enabled and kind of doing it much more efficiently than others. So I think there’s a bit of a trend in that I’m curious to see what other industries we see that in, but there’s, there’s a lot of those. Now, I think it’d be interesting if there’s like one in construction, like, tech enabled general contractor or something that, yes, businesses

35:34
that are starting as services, businesses that are tech enabled, and they’re, they’re building out traction that way in, you know, with the goal of becoming more of a product or tech company over time. Yeah,

35:46
although I don’t think they ever have the goal of fully being a tech company, I think it’s, it’s like, you know, if you look at Flexport, as an example, they’re a fully licensed freight forwarder, working with brands to import products in and they basically just like, we’re gonna build technology to do it better, faster and more efficiently, and in some cases, cheaper than most of the incumbents in the space. But they’re at the end of the day, like they’re a services company that is just leveraging technology, and like automating more and more over time and building technology to make them better and more efficient over time. But their goal is just to be we want to be the best freight forwarder in the world for our brands. And it’s like a bake off, like they can go to brands and say, you know, try importing products, some of your products with us versus your old freight forwarder and see what happens. And, you know, a lot of the early growth FlexWare was, was just like, from my understanding, at least from the outside looking in was, you know, they would just go and do bait these bake offs and just win every time, which was a great model. And so I think you’ll see that and other like this one in the scrap metal industry, you know, he the founder was building out a scrap metal business, but also is younger and kind of tech savvy and was was like, hey, I can do this better and more efficiently and build out software to do that. And so he, you know, launched a tech enabled kind of scrap metal brokerage company, which, you know, we really one of the reasons we really liked, it is like the intersection of people who understand the scrap metal industry and have the wherewithal and ambition to build like a tech venture scale type business is probably pretty low, which creates some barriers to entry there. And it’s the same similar dynamics of what I saw in Flexport, in the early days of like, hey, look, you use this, this broker to move your scrap metal to sell your scrap metal to like, pick it up at the scrap yard and like, you know, ship it to where whoever’s buying it, why not test using us, and then we’re going to just build out product and technology around those processes to make it as efficient and transparent, and, you know, inexpensive as possible. And I think they have a huge opportunity ahead of them because of that.

37:58
Is there like a clever acronym or descriptor for these businesses in the industry now? Or is it just tech enabled services?

38:04
Yeah, I don’t know if there is yet I’m sure someone will come up with one soon.

38:08
You know, Michael, there’s been some recent issues in the tech space with regards to employee options. What have you witnessed? And what would you like to see change? Yeah,

38:19
obviously, the, there was that big issue with top towel, and I saw a tweet recently of someone who was an early employee at WeWork. But, you know, she was young and naive and didn’t know any better and, you know, probably should have gotten equity and didn’t, which is, you know, unfortunate to see. And even looking back on my experiences, like I had no idea what I was asking for, or looking for when I was getting equity in box. And even and then when I became even did know, a little bit more going back and abstract and negotiating my comp there. I literally had to ask, like, 10 times to get to understand like, you, what percent of the company is this actually, like how much and preferred shares is sitting on top of this? Like, what are different scenarios look like? It’s just amazing to me how hard it was to get that information out out of them. And then the concept of like, you have to buy your shares three months afterwards, you know, some people don’t have the cash flow to do that, like I I bought my back shares and bought my academics or ex tears, but I was kind of fortunate that I had some liquidity to be able to do that. But some people, some people don’t. And so and that feels unfair to me, like if you work somewhere for three or four years, and the constraint is cash to be able to buy your options. You know, obviously there’s funds that have popped up that like help fund that and stuff, but it’s still not a huge industry. And I think going back to Flexport I think they were one of the first companies I saw where they put an unlimited time on it like you don’t have to buy them three months after leaving the company, which I think is like a trend you’ll see more and more of and I think would be a good thing. And then I think the I saw this recent YC batch actually there’s a company called compound that’s helping into like, make sense of employee equity. Like I think there should be more and more of that I think companies need to be much more transparent around. What does the equity mean? And how does it work? Like, what are different scenarios on like what it could be worth someday? I think you will, you will see five years from now much more transparency around that much more flexibility around how people and when people have to buy options, which I think will be a good thing for the industry, because, you know, I’m biased, having been an early employee at a company, but I think early employees, at companies, you know, make a huge difference on the success or failure of a company and they should be rewarded for that.

40:37
What’s a fair sort of vesting, Cliff, and duration?

40:43
I think the one year Cliff four year vesting is reasonable, you could make an argument that it could be even longer, I don’t think it needs to be shorter. I think the bigger issue is just if you leave the company, how much time do you have to buy your options? And in most cases, at least historically, it was like three months, I think you’ll see that continue to get pushed out. I think, you know, I don’t think every company will go to indefinite and you know, maybe that doesn’t make sense. But I think it might make sense to push out longer to more like a year or two years.

41:14
Michael, if we could cover any topic here on the program, What topic do you think we should address? And who would you like to hear speak about it?

41:22
That’s a good question. You know, obviously, I’m a big fan of Jason Lemkin being in the SAS space and having worked with him a bit. So you know, I think he has the some of the most authentic and really helpful, and tactical content around building SAS companies. So that’s always interesting to me. I’d be curious to hear other people who run accelerators on so obviously, there’s YC, but like, you know, even, you know, seeing like sauce from Angel pad, and they’ve had a lot of success, I would say, more under the radar than yc, but have consistently had great performance. So someone like that would be really interesting to say, awesome.

41:59
What investor has influenced you most and why?

42:04
So, Jason, have you worked with him, I think has had a lot of influence. But I would say two other people that I really admire one, one of which I know and one I don’t know, but admire him from afar is one is Aiden Sangkat. From Felicis. I just think like, yeah, man, his track record is unreal, how good how early he invests. And just like felices, to me is like such a one of the top seed funds in San Francisco and like, the market with probably the most seed funds anywhere by far, and he didn’t start it that long ago and started with a very modest sized fund and his just crushed it. So I have a lot of admiration for him. And then I think another one is, is Leo Beloved’s from Susa. Their first fund is amazing, like they were in Flexport, and Robin Hood and Ella and I think Leo is just such a genuinely good person puts out an amazing content. And again, like Susa has went from, you know, a brand new fun not that long ago to one that I think is like one of the better seed funds in San Francisco and, and he’s just such like a humble and, you know, good person that I just have a lot of admiration for how he’s built Susa how they’ve built it, but I know him personally. I just what they’ve done. So those would be two. I would I would mention, Leo is

43:23
the best. Yeah, we’ve we’ve actually featured Leo twice and fairly recently, earlier this year had in paradise, fantastic investors. All right, just to wrap up here. What’s the best way for listeners to connect with you?

43:35
Yeah, just email is Mike Edexcel prize that VC or on Twitter is just mg carnavon.

43:41
Well, Michael, I really appreciate you sharing the time. I know that. With a four month old you’re probably not getting much sleep.

43:49
He’s had he’s had a rough few nights in a row. Oh, no. over caffeinated right now.

43:54
Oh, no, no, I just I just got back from a long vacation with my my wife and son. And so I am readjusting to work life but I know it gets busy, especially with little ones. So I appreciate you carving out the time. Ya

44:06
know, likewise, appreciate you having me on the show.

44:13
That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us