Jim Andelman of Bonfire Ventures joins Nick to discuss 85% Graduation from Seed to Series A, SaaS Metric Mastery, The Right Time to Stop Founder-Led Sales, and Advice for Emerging Managers. In this episode we cover:
The entry point for a seed investor.
The importance of being overweight on the first round.
How do you respond to a correction in valuation?
Knowing when to relax constraints in venture.
How much does it cost to build a sales team?
The right time to transition from founder-led sales to sales leader.
Evaluating the margin profile of a business.
The host of The Full Ratchet is Nick Moran, General Partner of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area. To learn more about New Stack Ventures by visiting our Website and LinkedIn and be sure to follow us on Twitter.
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Transcribed with AI: 0:18 Jim Andelman joins us today from Santa Monica. Jim is Co- Founder and managing director at Bonfire Ventures. Bonfire is a seed stage investor in b2b SaaS. Jim has led the seed round in each of TaxJar, Invoca, Mountain, and Boulevard amongst many others. Jim, it’s a pleasure, sir. Welcome to the show. 0:39 Nick, thanks so much. 0:41 Yes, sir. Walk us through your background and your path to venture. 0:44 My entire career has been in and around b2b software. And I am almost embarrassed to admit I’m in my 24th year of venture capital. Interestingly, I year last episode was that was Jenny left quarter freestyle. We graduated the same year from the same school. But let’s see, I joined a consulting firm that was a Bain and Company spin off focused on application of technology to drive strategic advantage, great initial experience, like my first day was filling out peppered paperwork. My second day I was on site with clients. And I was on site kind of full time for the next four years that forced me sort of to mature and develop professionally really quickly, I had a buddy who was at BCG, and he moved over to Bain Capital during private equity. And that looked like a really good mix of skills that was a good fit for me consulting was I liked the analytics, and I liked the visibility, but you didn’t get to actually do anything, you kind of made recommendations and then hope that people listen to them. And as you had kind of more success, which I did, I stopped getting to do the part that I loved, which was doing the work, which was running my hands through the dirt, you know, you’re successful as a strategy consultant, and you get promoted. And your job is to manage teams and sell engagements. And I didn’t really like doing either of those things. So I sort of charted a path to private equity, went back to business school with with the plan to transition there. And that was 95 to 97, which were the first internet IPOs, like eBay and two others that no one had ever heard of called, called Zoom in the globe, but they were big deals at the time. And that looked much more interesting to me sort of emerging growth innovation than you know, than widget companies and financial engineering. So I sort of shifted focus to chart a path to venture capital, I joined a boutique investment bank called Alex Brown that at the time was at the time, Goldman Sachs, Morgan Stanley, Merrill Lynch, and a lot did not do tech IPOs unless you were unless it was, you know, EMC or Microsoft doing secondaries and convertible note financing and the tech IPOs. At the time, a software company could go public at 20 million in rev very different than it is today. And so those companies were much earlier stage and it was a it was a less remunerative business. And I joined this. And so there were four great firms called The Four Horsemen, a Hambrecht and Quist Minh, GM, Robertson Stephens and Alex Brown, doing equity, private placements for software companies. So helping VC back software companies raised their last round of venture capital before they went public. And it was kind of a interesting consultative feeder product to the IPO for the investm ent bank. And with micro the 3:16 What were the valuation ranges at that point, Jim? 3:18 Oh, gosh, those were like series ds of companies doing 20 million in revenue, and the valuation was maybe 100 million bucks with the hope that when they went public, they’d go public at 250. Right. And that, and that crossover investor would get, you know, a 2x in in a couple of years, which is a great thing for a public market investor. 3:40 Times have changed a bit, Jim. Oh, yeah, tremendously. 3:42 And so in 99, there was a huge boom. And you know, there were there was a lot of demand for my skill set. So I had the good fortune to just sort of answer Headhunter calls and was entertaining, you know, for different VC offers and joined a growth stage firm newly raised called Broadview Capital Partners to lead software investing at a at a newly raised $250 million fund. So, you know, good skill set match, but mostly good. The trick was getting it to stick. So I you know, I was there for four years. great learning experience for those VC funds get their performance is tracked by vintage year. Right? It wouldn’t be fair to compare one for fund that had its investment period during a downturn versus a different one that just had a 10 year bull market. And the 99 vintage year is probably like the worst in recorded history, because prices were super high. 4:32 21 is fast on its heels, Jim. 4:34 Yeah, it gives you perspective,like there were literally companies that were multibillion dollar public companies that had single digit millions in revenue that lost 99% of their value in two months. penstock we were doing, I was doing follow on financings in companies that were registered to go public already, that then ceased to exist. That was one so it was a great learning experience and I While in San Francisco, I met a girl. And she was from Southern California. And it was a package deal. And so that’s how I ended up down in Southern California. And, I would say stumbled upon what I thought was a really, really compelling investment. This was back in 2004 2005. And LA was on a really nice upswing, and that was before. Now these terms before AWS, you know, before Twilio, before stripe, before even the concept of of the lean startup popularised by by Eric Ries and Steve Blank, you know, at the time you had, what you had was the LAMP stack, which was the open source movement, LAMP stack was Linux, Apache, MySQL PHP, enabled, you know, founders with technical competence to make a lot of progress with a lot less money early on in the company formation. And so that was really what I saw those two things, which was Southern California was on a nice upswing, and there was this class of companies that could do a lot more with less. And I founded a firm called Brain con Venture Partners, that was one of the earliest seed funds or micro VCs, we didn’t even know what to call ourselves at the time. And in 2016, I effectively merged that practice with a friend of mine, a buddy of mine, my most frequent co investor, Mark Mullen had his own firm called Double M partners. We were both in the same geography, both focused on b2b software, both with the same entry point, both with small funds, so not surprised, and we enjoyed working together and spending time together. So not surprisingly, from 2012 to 2016, we were each other’s most frequent co investor. And in end of 2016, we made it official launch bonfire Ventures is essentially as a merger of the two firms. And we’ve been doing it together now for coming on six years. And we’ve raised three core funds and two growth funds opportunity funds, we are now up to we’re adding our the eighth person on our team at the end of this month. And so the thesis of joining forces was that we could, you know, sort of do more together and play a bigger role in the ecosystem and deliver more value to portfolio companies. And that is that’s bearing fruit. You know, my first fund was 25 million, which was a great starter fund, our most recent core fund is 230 million, and I Oh, sorry, no. 168 230 is combined with doing that that growth fund, and I never thought we’d have a fund that big. So I’m, I’m grateful that the the path has worked out as it has, 7:21 What a story, Jim, and we’re, you know, we’re so pleased to finally have you on the show here. And in here more about bonfire. It’s, you know, a firm that has often mentioned in the emerging circles and you know, has had pretty persistent top decile returns and really excited to kind of talk through the thesis here today. So 160 some odd million in the core vehicle, can you give us quick broad strokes on portfolio construction there and check size, sphere oriented. 7:49 Sure, we have always been a low volume, high conviction, active supportive investor, and probably more so than your average Seed Fund. We have five people on the investment team, three partners, two principals, the partners get to make two, maybe three new investments a year, the principals get to make one new investment because they also support us on the existing on our portfolio. And so that’s sort of, you know, eight to 10 new new logos per year for a five person team, which is a very modest pace for a seed investor. What that translate to translates to over a three year investment period is about you know, 25 to 30 companies. And we’ve been remarkably consistent on that front, my, my 2015 Fund had 23 companies, our 2017 fund, had 27 companies, our 2020 fund 28 companies and writing we’re incrementally adding resources along the way. And at our newest Fund, which we activated just in the middle of last year, we’ll have you know, 20 to 30 companies. 8:45 Very good. And you are SAS investors. Can you kind of give us the thesis in your words? 8:51 Yeah, so 100% b2b software, and I use that phrase b2b software with intentionality. And it’s, it’s a nuance that is, I think, lost on many most people equate that to enterprise. But we probably do more in SMB than in enterprise these days. If you you know, software has been dramatically dramatically democratised and the addressable markets have exploded mostly because of mobile phones and ubiquitous broadband. And so that has, you know, one of the areas where, where I in particular have a an affinity and a focus is sort of SMB vertical software examples in the portfolio Boulevard for salons, Ciao for restaurants, etc. And you know that that is very different than enterprise software sold to, you know, global 2000 CIOs, anyway, b2b software, software based product 100% of our portfolio is a software based product and a business buyer. And underneath that umbrella sort of anything is fair game that the entire team has, you know, spent each of us have spent our entire careers in and around b2b software. And our goal is to be, you know, the very best investor the most valuable, the most helpful, the most supportive investor that a b2b software founder can choose with our sort of low volume high conviction approach, you know, there is a there is a higher cost to being wrong than your average seed investor. And so our entry point skews a little later than your average seed investor. Most of our sweet spot is companies that have already recruited initial team already built initial product already landed initial customers. And empirically, you know that somewhere between kind of 30k MRR and a million and MRR, depending upon where the series A bar is in at any particular time. So it 10:36 MRR there or ARR Jim sorry, 10:39 I switched Yeah, call it call it in in ARR, call it 300k to a million probably got it. Right now in this climate, the series, a bar has moved up to one and a half to two. So that enables us to move up a little bit and get a little more validation. And that’s kind of, you know, we can talk about what’s going on in the seed market right now. But that’s kind of been our response over the last and during, you know, during 20 and 21, when it was super frothy, and you had you know, Tiger and insight doing seed rounds, you know, we were we were kind of forced to go a little earlier. And we had a higher percentage of pre revenue, we still do pre revenue, but we’re really are what we’re really best at is engaging with those companies that believe they have enough, a strong enough problem solution pair enough product market fit that it’s time to start investing of a new in go to market. And so that’s different than you know, than a than a pre product company that whose primary task over this next investment cycle is to build and that has really enabled our model, that sort of lower volume high conviction where we can, you know, put more eggs in fewer baskets, because we get that degree of validation around product market fit by being able to talk to actual customers arm’s length, paying real revenue for the solution, right, and what we want to hear is, you’d have to pry it out of my cold dead hand, and there are you know, 100,000, just like me, who are idiots if they’re not using this. So that’s really 12:02 what we do is is there an ownership target at entry, I wish there weren’t 12:07 right, it would be nice to be infinitely flexible, and, and, and fit any, you know, hole in a puzzle that that a talented founder has the reality is ownership matters. Because, you know, that’s the day that’s how you that’s how you drive. That’s one of the ways key ways you drive fund performance. And we are a firm that is disciplined in that regard. So the I you know, empirically 2015 fund average ownership and entry was was nine and a half percent, each fund has gotten a little bigger, and therefore, you know, we try to keep the same financing structure and and write a slightly bigger check and, and get a little more ownership, I think the average right now is about 12 and a half percent and interpret and we reserve more than 50% for follow on back to your portfolio construction model. But the goal is the is the Goldilocks amount for follow on. Right not not so much that we’re not buying options, right? There it is, it is an approach in venture capital, right a small check at Cedar precede, see how the company goes and decide whether you want to lean in or not. And you know, that kind of, I think that’s financially makes sense. It forces the investor and the founder to be a little arm’s length from each other, because you might be on the opposite side of the table. At the next financing. Our goal is to be the most aligned investor with a founding team over the entire lifecycle of the business. So we want to be overweighted on the very first round. And as a lead investor, it’s important to show support for companies that you believe in. And so it’s important to have reserves and to deploy reserves and we’re kind of designed to do you know, invest that seed do our pro rata series A maybe do a runway extender in between if if we see opportunity with the founder for you know, real value creation, if they have a little more runway, we call those sort of the pre emptive second seed and then do our pro rata A and then you know, sort of participate at B but in decreasing amount. And the goal you know, the idea is it’s intentional, we take dilution right along with the founders, and again that maximises our alignment with them and their ability to, to seek out our advice and and recognise that it’s that it’s unbiased. 14:17 It’s interesting, you know, over the past year and a half, two years, we’ve seen what what I’ve seen is kind of a shift to more concentrated models and faster deployment amongst early stage VCs. And, and now I’m seeing the reverse, we close, we lead three deals in in December. And I’ve seen in each of those deals, large investors have their check size once we got to January and we got to final close, and we may be seeing, you know, some VC shifting back to the the more options, more diversification model, you know, amidst the environment. 14:51 Yeah, there’s, you know, that is an approach to risk mitigation. If you’re if you’re if you’re fearful, fearful. That’s something you do. We’ve been doing this a long time. We know what you We know what the profile is, that’s in our sweet spot, we’re kind of dollar cost averaging, we did not really increase our pace during the heady years, and we are not reducing our pace during during tighter years. You know, one of the big lessons like if I could, after the last downturn, the 2008 downturn, the global financial crisis, you know, 2009 2010 2011 was an incredible time to be investing, we got like repeat serial entrepreneurs that have 4 million pre write, who could go for 18 months with 2 million bucks or a million and a half dollars. And, you know, if, if I could go back in time and write twice as many checks, make, you know, add twice as many companies to the, to that portfolio, you know, I’d be I’d be on my private island in the Bahamas right now. I’m joking a little bit, I’d still be doing this and or maybe the Channel Islands. Yeah, the but it was a great time to be investing. And I think today is a great time to be investing as well, I think the challenge back then, was no VC knew how much capital their existing portfolio was going to need to stay alive. Right. It’s like, if you have a bunch of starving kids that you’re afraid are starving, like, you’re not going to adopt more and, and no one knew when they were going to be able to raise their next fund. Because we’d had gone a long stretch without DPI without actual cash on cash returns, that were attractive to the LP community. That’s different than today. Right? Today, I think the funds that are performing will continue to get support from their LPs, because they have distributed so much capital to them over the last few, which I think enables us to be more bold, during this, this this little bit of a downturn here. 16:34 You know, I want to talk SAS because I’ve got a captive audience with you here. But But before we do, we, you know, when we discuss what we’re currently seeing in the seed market, you know, much of the 2022 data is in and we haven’t really seen the valuations that seed correspondingly, correspondingly drop, you know, with the the later rounds, even Series A. And, you know, what are you seeing whether it’s anecdotal, or in the in the rounds, you’ve completed our expectations trending down? Are those valuations kind of hitting their resistance? Yeah, so 17:06 we’re probably looking at the same day. And what we saw is like, you know, every other stage had had evaluation correction and see didn’t and, you know, and everyone’s scratching their head and saying, Gosh, you know, why is that? Does that make the you know, and how do I respond to it, I, there’s probably some some skew in the data, because the, what gets defined or caught by by the definition, or the bucket of series, seed can be so broad. So for example, our response to this current market has been to engage most with those companies that have the most validation. So our average ARR and entry between our quarterback COVID Fund, which was deployed 2021, and 22, are first half of 22, versus our newest Fund, which is just the last six months now, the the average Arr, at initial, they’re all still called series seed, but the average ARR has doubled. And the evaluation has actually gone up average valuation has gone up a little bit, but it certainly hasn’t doubled. It’s gone up maybe 10%. So what may be hidden in that data is, is that all is not apples to apples, right? It may be that in a tighter market, there’s more concern about follow on financing risk. So investors are less willing to participate in a smaller round. And so if it’s a bigger if the average round is a bigger round, odds are it’s going to have a higher valuation just because of the way the dilution math works. And it’s logical, because it gives the company more runway and more time to grow into a higher valuation. So you know, be mindful of the data. Right, that said, it is absolutely true that at least in the beginning of 2022, a response from the larger firms that was was concerned that the valuation that they’re at their target rounds, right series, ABCD, we’re going to be sticky were weren’t falling as fast as they were in the public markets. Because because you don’t have, you know, a daily mark to market. You know, every every good company almost that in 2021, right. The financing environment was so great was so strong, and so attractive, and so advantageous to grow stage companies and their founders, that, you know, anyone who was smart raised a big round, and therefore, they didn’t need to raise them. 2022 And so and I think you know, Doug pepper, who’s a good friend and iconic who was on with you mentioned that in his interview, which is like, people just aren’t doing financings that sort of like, well, if, you know, if you don’t need to sell your home and the prices aren’t good, you just don’t. And so the market just just sees a reduction in volume. And the only deals they get done are maybe the price insensitive ones which hides the true nature of the decline. Anyway, those firms maybe didn’t like the pricing in their in their stages. They certainly liked the pricing at seed in absolute terms, right? If you’re and this is something Tiger did early on, and insight did early on in 2020. To most those two firms most in most pronounced fashion, you know, they can get 25% ownership bid seed, and and it’s a de minimis amount of money for them. And so that was kind of skewing the seed market in the in the first half of this year. And we’ve seen that trail off, which I think is a good thing, I think those firms may be recognised that, you know, logo count gets cumbersome, because if you’re writing small checks that are basically call options, right, you end up with a lot of them if all else equal deploying the same amount of capital. And that just gets hard to keep hard to keep track 20:26 100% q3, we let a deal for a founder that came from a very large venture firm, and we called his boss. And he said, you know, a quarter ago, I would have led this deal and taken the whole thing, not anymore, right. And 20:42 so and then I would say, also at seed stage, you know, there are a lot of seed fund managers, who, you know, are talented and smart and wonderful people, but have never seen a down market and have been reasonably conditioned to think that a 30 post is a perfectly good price at seed. And so now they’re seeing a 20 post, and they think it’s like a fair deal. And they’ve never been in an environment where the average was four. And I’m not saying it’ll ever get back to four, fundamentally, addressable markets for software are much bigger, proven outcomes are much bigger. And the unfortunately, right human resources, which are the main thing that software companies spend money on his people, right, are fortunately or unfortunately, they’re more expensive today than they were 10 years ago, by a lot. And so, you know, the same company that might have had, you know, an average, all in headcount cost of 140k, you know, 10 years ago, now, it’s over 200. And, you know, that necessitates more capital, all else equal for a given amount of runway? Yeah, it’s 21:43 bit tricky at the moment, right, because we have valuations are dropping, but prices are, well, inflation has been flat, the media is not really covering it that way. But it’s been flat for a couple of months, the effects of inflation from last year are still being felt. And so we’ve got expectations of higher salaries, despite, you know, the austerity measures and whatnot, there’s still there’s a need for people to have more spending power. And that’s kind of working, you know, the the round sizes here, right, round sizes, kind of promotion, evaluation, and evaluation drops, the round sizes also dropped, companies are trying to extend runway, but that bumps up against, you know, the, the the overhead in the business and in the salary expectations of engineers and, and other folks absolutely 22:31 agree, you know, the counter argument is, like, it’s a good thing, we’re, you know, we’re, we’re, if employees can command higher salaries, they are enjoying a higher quality of living, and especially now where they can kind of live anywhere, you know, they’re not stuck living in in on the peninsula, which is, you know, one of the most expensive places to live. And, and when I say that, I mean, the Bay Area, you know, it’s, it’s, it is the reason, frankly, that we are able to justify being a seed fund at $168 million, right? I never, I never thought that I would ever be managing the fund that was bigger than a million, like, even if I could, I figured I would just cut it off there. I also didn’t envision having an eight person team. So the amount of effort and capital to deploy per person hasn’t really changed, right. But it is, I’m finding it quite beneficial to have a little extra degrees of freedom in terms of the cheque size we write, such that we can stretch for quality. And we can make sure that helped make sure that that companies are not structurally underfunded for the task at hand. I would say one, you know, one of the big lessons for me, over my career in venture is knowing when to relax constraints. I’ve I think earlier on in my venture career, right, I had my own my own firm and my own fund kind of earlier than I thought I would. And it’s hard to find mentorship when you’re one of the first seed funds, and in retrospect, I was probably a little too disciplined on price and a little too dogmatic on my role. I’ll give you two great, great or horrible anti portfolio examples depending upon your point of view. Let’s see. First one was a company called Mind Body, they make software for yoga and pilates studios, fitness, etc. They’re based on the central coast here in Southern California in San Luis Obispo, right in my backyard. I was the very first VC to give them that when they were at just knocking on a million in ARR. And I don’t imagine that the Rick and Robert would mind me sharing the founders, you know, their ask was a 12. Pre which in retrospect for a millionaire, ours very reasonable. You know, in my defence at the time, Salesforce was trading at 4.4, I offered nine they came back and countered with 10. And I held firm at nine and lost the deal and I’m an idiot because that business sold, I actually went public and then sold the VISTA for 1.9 billion and will eventually go public. So lesson learned when you when you I’m good at developing the conviction that I want this to be in my portfolio. This is a this is this is these are founders and this is a company that I want to be on the journey with for the next you know, maybe maybe 14 years and if you’re so The lesson for me is if I develop that degree of conviction, like, don’t lose it on 10% on price. So that’s that’s that that has ended that has helped me be a little more flexible, trust my instincts when I develop conviction and and make sure I don’t lose out on those, you know it no self inflicted wounds. Another one was. With that, 25:21 I’m going to ask you to save the other one. I’m gonna ask you about that later. Great. And another question. And we’ve talked around SAS quite a bit here. I want to jump to that. And maybe a good starter question is, you know, SAS is even vertical SAS is a massive category, you know, how do you break it down and segment the opportunity. So ours is more 25:40 sort of the Founder Collective approach, which is like, you know, show up with a prepared mind, but the universe of founders is going to be better at recognising compelling opportunities that are targeted there and markets than we ever are. So we are less thematic than your average firm or more open, but very strict, you know, that it can only be within that with under that, you know, b2b software umbrella. So, you know, that’s why that’s why I say b2b software and not SAS, for example, because a lot of our businesses are transaction based. A lot of our businesses are used to trace some of our businesses are subscription based, you know, some of them are volume based, we do look for a high degree of recurrence in the revenue stream, we love growing perpetuity is layered and growing layered on top of growing perpetuity. So we don’t invest really, unless we see the existence of good potential for net dollar retention above 100%, we want every single customer cohort to be a growing perpetuity, you know, then you can add customers linearly or flat and still grow geometrically, which is, you know, which is really the fundamental value driver for for venture backed businesses is growth. So it’s a lot easier to grow, it’s a lot easier, fill your bucket faster, if your bucket automatically magically fills itself to some degree, as opposed to, you know, it’s hard to it’s hard to raise the level of water in a bucket, if the leaks get bigger as your as your bucket gets bigger. 27:09 100%. You know, you had mentioned earlier that you’re doing a lot of investing in SMB based software. And, you know, a tricky thing that we grapple with here is, you know, when you look at a CVS annual contract values and sales cycles, particularly when you’re targeting smaller customers than enterprise, this has been a challenge, there’s this tension, you know, is every conversion going to be sizable enough? Can they convert fast enough? And then do you deploy sales or marketing? Right when ACV is are exceptionally small, you have to do marketing, and they have have to be at a certain level in order to justify the cost of a Salesforce, how do you think about this? 27:50 You are 100%? Right? Right. It’s like kind of kind of you give me an ACV and annual contract value or an average customer value for a year. And I can tell you what your go to market strategy needs to be more can be what you can afford, and the lower your ACV the more it needs, the cheaper your customer acquisition cost needs to be and the more you need to rely on word of mouth network effect, right all the things we’re now calling plg inbound marketing, right and and perhaps the customer acquisition job looks a little bit more like consumer, there is real comfort in those businesses that have a high enough ACV that you can control your own destiny. Right. My partner Brett, you know, calls it calls it the quota Selina the quota rep slog, which, you know, the bad news is it is a slog, right, which is okay, if you rely mostly on outbound, right, the way you grow your business, as you add reps, you get them ramped, they, you know, they have a certain quota, they hit a certain, you know, you have a certain quota capacity, your sales team, you know, hits a certain certain realisation of that quota. And the way you grow as you add more, and that is a slog, especially in enterprise enterprise, where you can have a nine month ramp and a nine month sales cycle. And that means your new reps like might not, you know, draw first blood until 15 months in and how do you know they’re good or not? Right? It’s a it’s a big investment in this and it’s capital efficient. You know, on the flip side, one of my greatest successes to date has been a company called Tax jar a tax jar is now a part of stripe was acquired by stripe in 2021. They make software for calculation reporting an auto filing of state sales tax, every internet seller now needs to pay sales tax in, you know, meets it understand the sales tax laws in 10,000 different jurisdictions, the United States alone to know what they should be charging and what they should be remitting to those geographies in which includes municipalities, not just states. The bad news is it’s super super complicated. The good news is it’s just math and rules. So it’s a great solution to apply software to self love it when I invested initially at when I led the seed round there wonderful, amazing founders who are now LPS in our latest fund. They had 1000 VSP, very small business customers, mostly Amazon sellers, paying And 15 bucks a month, right? And they had a five person team. So like, there’s no way you can do an iota of direct sales. Right? If you have if you’re, you know, and the good news is they showed they demonstrated before I even needed before I even wrote a check that they could do that at scale that they could acquire them, activate them and provision. And so yes, the go to market to your original question, the go to market needs to match the ACB. And one of the big challenge can be in SMB software, SMB vertical software, it’s just sort of the the, the potential limitations of the addressable market, like I’m a firm believer that every distinct vertical across the business landscape, we’ll have, you know, kind of operating software that is built just for right that can be that can be service Titan, for the trades, Procore for construction management, at folio for property management, these are also companies, by the way, Boulevard Chow now, you know, there will be there. I’m aware of one for optometrists right. And the concern is that’s just too small a market. So we, you know, that was what I really liked the founder, I really liked the value prop. You know, there were only 20,000, maybe independent optometrists in the country. And they’re, and they’re GPV, their gross processing volume, right, the amount of aggregate revenue they pull in is just not that huge. And so that was, that was a tough one to get to yes, on. Another one was independent pet stores. But those are great businesses, for founders to kind of Bootstrap or just, you know, angel money and stay lean. And there will be a solution for every single one, our job is to figure out, you know, find the founders that are targeting the ones with the approach, that’s big E. So you know, there’s no free lunch, right? Like, every single, every single customer acquisition strategy is hard. And it’s gotten harder. And you know, the most the most successful founders are the ones that are, that are, you know, creative and come up with, with novel approaches. One of the things we look for I mentioned, we look for, you know, net dollar retention over 100%. Another thing we look for is software that connects constituents in a value chain. So that can be a business and its customers. It can be a business and its vendors, it can be a business and its partners, because then you have sort of that natural you met, you can have that natural viral coefficient and a network effect, which the definition of network effect is right that the value to each node is is is higher as more nodes are added to the network. And those are things we look for as well, because of that. One unfair advantage you can get in customer acquisition, get more inbound, more organic, more referral, and also software that is used by multiple constituents, especially across business boundaries, right, company boundaries are harder to rip out. Because once because you have less, you know, the it’s a joint decision making process. And inertia is a powerful force that you want to use employ for the benefit of your portfolio companies instead of against them. So those are two things that we look for, to help solve for that issue you talked about, 32:54 but boats are not just about keeping competition out there about keeping customers in. Yeah, Jim, what would you say is a decent directionally a decent guideline around minimum ACV threshold to warrant a sales driven motion? Great question. 33:09 It really depends upon your, the configuration of your sales team. So I’ll answer sort of the lowest extreme when I engaged with mind body, one of the two co founders, Robert was running sales, and he had sort of a, they were in San Luis Obispo. They hired, you know, English majors with nice phone voice right out of Cal Poly. They had a bed and Evolent little boiler room and they were doing outbound calling with fresh college grads, and their ACV was 1200 bucks at the time. It was 100 bucks a month. And and they made that work and they were sufficiently capital efficient. We’ve got a company in the portfolio that’s relatively new that is doing phenomenally well called top line Pro that builds digital presence for Home Service Pros, landscapers, painters, plumbers, etc, very small businesses, and they are in the same ballpark of of average price. And they they are doing successful outbound by using scalable tools to engage with the with those customers, and relatively junior reps to close deals. So they don’t have the typical SDR BDR a distinction, they just have inside sales. And they look more like SDR is that close. So I would say that’s kind of the floor. Now both of those companies right mind body proved that they march their ACV up from 1200 bucks to over 3000 by adding additional products in particular payments in that case. And when we started with top line Pro, their average price was sub 70. And now it’s north of 100. And the goal is to again, be a you know, one of the nice things about SMD software is or I say I would say important dynamics is that these customers do not have IT departments. They cannot stitch together disparate solutions to create a coherent whole that works together. If they find a software vendor that they trust, that does a good job for them. delivers value, they will want to buy more from that vendor. And therefore there’s a great opportunity for expansion and Boulevard has done a great job with that they started with online scheduling, they added POS, they added payments, they you know, they’ve added marketing and you know, it is a it is a big MVP is the problem, right? There’s a lot of surface area to the solution. And so these companies that are scaling and winning need to build kind of outsized dev teams, because the opportunity there exists to do common common kind of everything for that SMB customer, everything from CRM, to you know, short of accounting, right? Everything can integrate with QuickBooks, but you know, CRM, payments, operations, logistics, fulfilment, etc. 35:41 Perfect, certainly must help with that net dollar retention metric that you mentioned earlier. Jim, curious, you know, there’s there’s differing viewpoints on founder led sales, what do you think is the right time for a founder to transition, you know, sales to a sales leader, assuming that, you know, the founder is driving sales at the point that you’ve 35:59 engaged? Yeah, it’s a great question. Usually, it we’re still in the mode of founder based sales when we when we initial and, you know, one of our another one of our criteria is, you know, is a character, a founder, who has a charismatic leader who can sell fundamentally, the job of a startup founder is very much selling, right. And it’s selling in different. It’s not just selling customers, it’s selling investors, it’s, you know, it’s convincing people to do on natural things on for the benefit of the startup, right? Like come work for that startup, give money to that startup, lend to that startup, give payment terms to that startup buy from that startup partner with that startup, and, and those are all selling jobs. And so, you know, founders have to, they don’t have to like it, they have to embrace it. And they have to recognise that it’s part of their job early. And I think, you know, a common failure mode is a company gets funding, the founder hates selling, they’re excited to hand it off to someone, they hire a head of sales, and they say, it’s your job now, and they don’t do enough to enable that new sales leader, they assume that oh, that person is super professional seller, they’re going to do it better than me, I can I can go focus on product or other things, recruiting etc. And, you know, there is there should be no one who knows the product and the value prop and can communicate it to target profile customers better than a founder. And it requires intentionality, and investment in time and effort to transfer that knowledge and that understanding and, and the manner in which you engage successfully with prospects to that sales leader so that they can then not only do it themselves, if if you’re expecting that, but also sort of, you know, impart that to the folks that they that they hire when they build a team. So, to your original question, it’s important for a founder to figure out how to sell first and get, you know, a sufficiently attractive demo to close conversion, there’s no magic, there’s no, there’s no single number that works there depends upon your, your, your lead velocity and your conversion from lead to demo, right. But we do like to see it more as unequivocally better, right, if, if a founder or a team is demoing a product a lot and getting, you know, only 10% conversion of the of the folks that they showed the solution to they’re either doing a poor job targeting, or their value prop is weak, and you know, one is more flexible than the other. But neither is good, we get really excited when we see you know, founder base selling with a convert with a demo to close conversion rate north of 50%. And it should be it should be kind of artificially high early on. Because early on, you don’t have a demand gen function that is generating a lot of opportunities. And therefore, you know, the few, the few, the fewer that you engage with should be more within your target profile. So you should expect that to go down, right? But so it’s important for a founder to figure out how to talk to talk with prospects to get them to convert, it’s important then for that founder to demonstrate that they can get a couple of reps to perform independent of them. Right, it doesn’t mean they’re out of sales, they’re still in sales, they’re running sales, but hopefully those you know, those two reps can operate independently and close deals. And probably I would say that’s the time when you start when you should hire your sales leader, which is you know, you’ve got at least two reps that are productive and it’s working. And you’re and you have the resources and you’re ready to go to four or six or eight because you’re not going to get a good sales leader to come and just manage those two people. You have to be ready, have the resources and the conviction that did work right to start scaling that team or else Or else the person you want isn’t going to take the job. 39:50 What would you say is the more common mistake selecting the wrong sales leader and or sales folks, you know, SDRs BDR is AES For the handoff and the onboarding and the training and you know, that whole process of arming your team with everything they need, I think 40:08 that this is an absolutely understandable and, and issue that I have sympathy for the startup is the founders baby, right? They’ve they’ve they’ve invested their you know, their life into the success of this business. And they are often reluctant to pull the trigger, right like that Perfection is the enemy of good and is the enemy of speed. And you know, it is it is not uncommon for it to be the third head of sales, that is the one that works. And it’s not necessarily the fault of the first two. It’s just like you got, you know, it’s like, you got to you got to learn what you’re hiring for what the right characteristics are. And you have to learn how to activate that and help them be successful. And so sometimes it’s sometimes it’s, it’s not the right person, sometimes it’s just, the organisation wasn’t ready to enable that person to succeed. And that same person would have succeeded if they were the third instead of the first. So it’s, it’s hard to isolate variables, I think more often than not, certainly, it can be the wrong person, you know, salespeople and sales leaders are good at selling, and they’re good at selling themselves. And so you have to have sort of a specially tuned bullshit metre, I think when you’re hiring when you’re hiring sales leaders, hiring reps is a you know, a sort of lower stakes issue. Like if they don’t work out, you know, no harm, no foul, 90 days, if you don’t think they’re going to make it. And you know, what I, what I encourage teams there is, don’t hire one and put all your eggs in that basket, hire two at a time expect that one isn’t going to work out and don’t be too dogmatic about a profile, because you haven’t done it yet. And you don’t know oftentimes, the some of the very best sellers at some of our portfolio companies have had very unusual or alternative or an obvious backgrounds, we have, we have a wonderful company in the portfolio called Posty, run by a good friend named Dave Fink. And his number one seller is a guy that ran a kid’s camp and you know, has nothing to do with what they do. But he’s he’s self motivated. He’s a great listener, he’s got it. He’s got he’s, he’s good at consultative, he’s good at keeping a lot of balls in the air. And he’s just the right person. And he’s, you know, and he’s thriving in this role. So I would say be open minded with respect to background hire for integrity, character, competence, drive, not necessarily for resume, but probably most important is invest the time and energy to help them be as successful as they can be. Jim, 42:35 you mentioned earlier that there can be some models that might be a little more customer success oriented? Or in some cases, maybe there’s a service component, or maybe some extra hosting or DevOps. Right. And so margin profile for a business might not be as high as standard venture capitalist is looking for. Right? How do you, I guess the first question is, would you consider investing in businesses with, you know, optimal margin profile? And, you know, how do you evaluate that in in and underwriting? 43:08 Yeah, great question. There is a, there is a spectrum of gross margins and software based businesses. Increasingly, if you think about, you know, the talk around sort of systems of intelligence, people buying outcomes, rather than a business productivity app, there can be a real cost of goods. If you think about it, like every, every business that has ml or AI in it, all of a sudden needs an incremental team, not just the incremental compute, and sort of, yes, but like, you know, your software development team may be completely distinct from your MLA, it. And so that makes those businesses less capital efficient, it can make give those businesses a lower gross margin, I think apples to apples, a way to think about the business is on a gross margin basis. So we think about like, it’s not a gap term, but we think about net revenue. If there’s a, you know, let’s say, Groupon, for example, when this is a while ago, now, when they went public, they tried to try to count their revenue as the gross, right. And it was the SEC that said, Oh, that’s not going to work. No, you have you have a pass through to your merchants, you need to recognise your revenue on a net basis. The smart investor does that even if the company is not doing it yet. Right. And then you have apples to apples, you have sort of the universal translator of like, what is the, you know, what is the contribution in dollars? Right? It’s a little different than than gross margin, because I put all the people costs, you know, kind of below the line. But is there a fundamental cost to delivering the service that can be that can be people if it’s if there are people involved in the fulfilment of, you know, the outcome for the customer, the delivery of the product or the service, but so that’s, that’s, in our opinion, a good way to think about and there, you know, there are, I think where investors have gotten tripped up in some places is where they treated low margin revenue, like software revenue, and you know, it works well for a while because it’s, you know, gosh, if you’re a grower Let’s restore. It’s really easy to show big revenue numbers. Right? But if you’re a 3% margin business, right, is it you? Should you be? Should you be applying a 10? Or a 2010? Or a 20x? Multiple on the gross? And the answer is, of course not. And so it’s important to be aware of that be cognizant of that, we do look for businesses, we would be nice to be able to invest, and do what we do at seed, without consideration of the mentality of the follow on capital. The good news here is that every op, you know, that so many opportunities are so much bigger than they ever have been in the past. And therefore, if you’re pursuing a big opportunity, it makes sense to go for it, right. And if you know, earn capital at sufficiently attractive terms, and deploy that capital in NPB, positive ways, right in ways that, that increase the value of the enterprise net of the dilution you take from taking on that capital. And so we’re forced to think about sort of the follow on capital and we add seed, right, we have an investment scorecard and a rubric that looks at the company through a series a lens, and says, Do we believe this company with a runway we provide will have a high high probability of succeeding and raising Series A, the ends is not the series A it’s just a means. But it’s a prerequisite to get to the ends right. Now, that said, some of our greatest successes, got profitable with series seed and never needed to raise any more money. Tax jar is a good example, I lead their series seed, it was a $3 million round, they used one, they used to have it, they never touched the last million, they got profitable. And they never raised primary, again, they raised dancing from inside partners, before they sold mostly for risk mitigation and to you know, into and for marketing, so that I’m not saying you have to be on the you know, on the VC treadmill, but more often than not every market opportunity that is compelling, will attract competitors. And, and capitalism is a is a tool to wield in that in that competitive race. So there are there are no short there is a shortage of VCs, I think it follow on that, that can process that those you know those those non software gross margins and and so what we what we usually end up doing is encouraging the teams to express their company on a net revenue basis, even though it’s a non GAAP measure. So mountain digital is a good example. They’re one of the leaders and connected to a achieved unicorn status. And in 2021, they raised $120 million round from from BlackRock and fidelity I led their Series A, which today would be called the series seed back in 2011. And there is a media cost, right, because they sell connected TV advertising, sort of the living room quality advertising that you get on streaming services, and they made a switch along the way and said, Okay, we’re going to, we’re going to remove the media spend from our income statement, and just recognise the net. And they elected to do that. Because they, because it increased the gross margin. And because it even though it was a lower number, they knew it was more understandable to the investor community, that they’d get a higher multiple on that. And, by the way, if they eventually maybe want to go public, like the SEC is going to force them to do it anyway. So why not? Why not do it earlier, rip the band aid off early, instead of seeing your revenue, you know, cut by 40% later. 48:19 Now, let’s save your VCs the extra time to run the calculation themselves. Because that investment Investment Committee I’m sure they’re all doing it. Yeah, exactly. And then Jim, you know, as you talk about this series, a readiness and making sure that at the point you invest, these companies will have the runway in the metrics and the progress required to raise probably at tier one series A or, you know, we’ve talked about some of the key metrics, a lead velocity and net dollar retention, arr growth rates, etc. What are some of the less obvious things that are important for a company to reach that attractive series A level? 48:59 Yeah, great question. I think that I think that one of the, I think founders tend to be over fixated on the metrics and under appreciate institutional readiness, the series A investor who is going to invest, you know, a 1015 $20 million wants to give that money to a team that is ready to go and create value with it. And so, before series A ideally, right you can you get the business configured in such a fashion, the organisation configured in such a fashion that it’s ready to hit the ground running, when it gets that money. So, one of the things we encourage is, you know, hire at least one strong, experienced functional leader before series, right that can be depending upon what the founding team has and doesn’t have, right it can be any of the major roles, it can be head of sales, it can be head of marketing, it can be head of CES, it can be Head of ng can be head of product, but like hire at least one of those to prove that you can do it. Right one to prove that you can do it and to to show that that person is because it is, again, it is an absolute prerequisite to success building, building a team of functional leaders that is stronger than you’d have found. And so you know, show that you can do it. And that’s hard. Right? I’m not saying it’s easy, because it’s much easier to get funded, and then be able to talk about the funding and the pitch to that. But you need to, you know, but startups are hard if they were easy, everyone would be rich. And and that’s one of the important things to accomplish. 50:36 You talked about skills that the founding team may have in skills they might not have, and they might have to hire for Jim, how do you feel about giving really hard advice? I’m sure you are, I imagine you sit on a number of boards. And you work with many different founders with many different strengths. Let’s say you’re working with an exceptionally bright founder, but they’ve got a blind spot. And whether they’d like to admit it or not, it’s severe enough to put the company at risk. You know, how do you approach a situation like that and give some difficult feedback? 51:06 Great question. I we mostly take board seats, we are usually a founders first lead investor, we’re usually a founders first board outside board member. And oftentimes, you know, until Series A, we’re the only VC who’s kind of paying attention, not always, we we love to syndicate, and we are super appreciative of high quality, active precede investors. But I’ve served on about 40 boards of software companies, and it takes a long time to pattern match in this business. So I you know, I think it was just a few years ago that I finally shed the imposter syndrome and felt like I knew what I was doing. And you know, the fun thing about this business is you get to be a doer your whole career, and you see new stuff every if and if and if that didn’t happen, I you know, I’d be bored. You know, this business keeps me young and keeps me curious and keeps me engaged. My style. My personal style is very much to make suggestions and give advice to a fault. I don’t mandate anything or say you must or you should I say have you thought about next one, I don’t I don’t know or think that I have all the answers. Every business is unique. Sometimes I’m pretty sure because I’ve seen, you know, mistakes been made before or I’ve made them myself. And you know, and hopefully founders benefit from that. I think the most important thing is to establish trust, and to learn how to kind of deliver bad news, Grace, you know, one of your questions, which is the toward the end of the thing that I’ll answer now is, was Who else should be on this podcast early on in my in my career, there was a there was a group of seed fund managers organised by a guy named Stuart Allsop who was a who wasn’t any a partner who then started his own firm called Allsop Louis. And you know, this, this seed fund, a micro VC see thing was brand new, and we’re all figuring it out as we went. And I was fortunate to be included in this list that met, you know, this group that met, you know, once or twice a year and talked about the state of things, right, there was no collusion on deals, it was really about how do you build a firm that looks like this, rather than looks like Sequoia or Excel or, and one of the participants, there’s guy named John Callahan, who’s one of the founders of True Ventures, and he just has such an amazing style, really unassuming, really thoughtful, really optimistic, and really thought provoking. And, you know, so sort of, like, for a while I went through life, like, you know, asking myself, you know, what would John Callahan do, and, and it’s that it’s that, you know, it’s, it’s developing that genuine, supportive style that helps people keep from putting their guard up. Right, the hardest conversations are, you know, I’m not sure you’re scaling with the job, or I’m not sure, you know, your, your favourite employee is scaling with the job, or I’m not sure that you know, that the business is building more value than it’s destroying. Right, we’ve got a business right now that, you know, that burned 10 million in 22. And grew negligibly. Right. So that’s like an infinite burn multiple, like, something needs to be different. And it’s really, you know, it’s it’s a very much take the take the approach of overarching objectives, right, we are aligned, we want this business to be successful. We want, I want you to be successful. And here’s something that I think is inhibiting your success, the business’s success, how can we sell for it? I have some ideas. Hopefully, you have some ideas to let’s talk about. Sometimes, sometimes I have, you know, different, you know, different people have different styles I have I have a partner, who is that both my partners are much more direct than I am. And that’s super valuable many, many times. And, you know, I think it’s been really helpful for everyone for us to be working together. In some cases. I’ve helped them to be a little less of a hand grenade in a boardroom. And they’ve helped me to be a little more directive. And you know, there are different situations that require different approaches. There’s no one size fits all perfect. 1:04:03 Jim, do you have any habits, tactics or techniques that are a secret weapon 1:04:06 a, I don’t know if this qualifies, I think that even when it’s a grind, even when it’s tough, I am able to really keep perspective and be really grateful that that I do what I do for a living with the people who I do it and so blessed to you know, spend my time engaging with talented, smart people doing creative and new things. And so, you know, I don’t take myself too seriously. I’m usually smiling. I’m usually cracking jokes, and I think that’s a little bit of a superpower. Because there are a lot of VCs out there that sort of are a little too serious. And founders feel like they’re trying to lord over them and I very much have sort of a you know, a service and a servant mentality. 1:04:49 But in Jim, any final words of advice and maybe we’ll do this on the VC fund manager side, right? There’s a lot of emerging VC fund managers and many of which You’re going through their first downturn. And, you know, trying to navigate this, this whole process, you’ve been at this over 20 years and have had, you know, a lot of successes along the way. Any any advice for those 1:05:11 folks? Yeah, somehow I don’t know if it’s a good thing or a bad thing. Somehow, I’ve managed to stay an emerging manager for like, 15 years, though I was I wasn’t the last at the LA tech conference, I was on it for emerged managers. So I felt like I’d finally arrived, it’s tough out there. Man, I do think that there are a lot of seed fund managers, who maybe were put in business during really boom times, and were deploying capital really quickly, and are worried about how long their capital is going to last and whether they’re going to be able to raise the next fund. And, you know, my advice is be patient and stay active, you know, stay alive long enough to allow good things to happen by first, between my first fund and my second fund, I went six years. And that was on purpose, because I knew that, you know, I was engaging at the earliest stage of company lifecycle. And I knew it would take longer for those companies to actually show objective business progress that got that got dramatically shortened over the last couple of years, when everything, everything succeeded and everything got funded six months after the last round, you know, we’re going to return to the grind, we’re going to return to what’s more normal and normal is not is hard and has failure and has struggles. And, you know, I think that I think the emerging manager and the seed fund managers that are going to succeed are going to be the, you know, like the founders, you look for the ones that will not be denied, that will do whatever it takes, just to stay alive, and to stay active and to stay engaged. And you know, existence is a prerequisite for success. So continue to exist, and maybe that means write smaller checks. Maybe that means reduce your your pace, adjust your style a little bit so that you can extend your runway as a manager and and again, give you know, give the portfolio time to mature and for good things to happen. 1:06:58 And finally, here, Jim, what is the best way for listeners to connect with you and follow along with bonfire? 1:07:03 Oh, absolutely. Follow me on Twitter. I’m competing with my partner’s to have the most followers at Jim Mandel. Yeah. And and I try to answer every email. It’s it’s I don’t always succeed, but I try to answer every email and it’s Jim at bonfire vc.com. 1:07:16 Okay, well, there it is. The man is Jim Andelman. The firm is bonfire. You know, this is a firm where 85% of the portfolio companies have hit their Series A, and they’ve done this. They’ve done this while being the number three ranked firm in the founders choice rankings of 1000s, just behind USB and Bowery. Jim, this has been a huge pleasure. Thanks so much for the time in the day so much I really enjoyed it. 1:07:43 All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email, let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same accomplishment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening Transcribed by https://otter.ai