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I’m here with Casey Allen, the founder of the Enterprise Rising Conference. Casey who is Enterprise Rising for
Casey Allen 0:09
Enterprise Rising’s tagline is 100%, enterprise SAS, 100% Midwest and 100% startups. So if any of those click with you listener and sounds intriguing, or better yet, two or three of them click with you, then this is going to be for you. And if you’re an investor, over 50% of the room are startups that are live with revenue, if you’re a founder, all of the speakers are successful founders or active investors. Nobody hand wavy nobody wasting your time. And all the talks are hyper actionable.
Jay Clouse 0:37
How is Enterprise Rising different this year?
Casey Allen 0:40
If you’ve ever attended an online event, you know, networking sucks, slack and discord really just don’t cut it. So we have custom built for Enterprise Rising 2020 an online platform that’s like startup masterclass, meets the Sims, where every attendee has an avatar, you’re in a building, you’re sitting in chairs, you’re sitting in couches, you’re having real video chats with people next to you. So what we done is we’ve recreated an actual virtual environment where networking happens just like it does in real life.
Jay Clouse 1:05
Casey, when is Enterprise Rising? And how can people get involved?
Casey Allen 1:09
Enterprise Rising is the end of October, the 20th and 21st is two full days is all online. So you can dip in and out for as much or as little as you want. Go to Enterpriserising.co. That’s Enterpriserising.co. And you can use discount code Upside to score 20% off as many tickets as you want. So discount code Upside at Enterpriserising.co. All the details are there, the entire conference is online, it’s going to be a great time.
Einar Vollset 1:37
We looked at the revenue growth of about 500 b2b SaaS businesses over four or five years. And we looked at like, what’s the ratio between like starting MRR versus ending MRR, whatever that was typically up to five years, I mean, found is a very clear power law. They’re like, out of the 500 that are like four or five companies that do incredibly well like they are, you know, 3000 times. As largest they were at the start.
Jay Clouse 2:02
The startup investment landscape is changing. and world class companies are being built outside of Silicon Valley. We find them, talk with them and discuss the upside of investing in them. Welcome to Upside.
Hello, hello, hello and welcome to the Upside podcast, the first podcast finding upside outside of Silicon Valley. I’m Jay Clouse, and I’m accompanied by my co host, Mr. Former Fantasy Commissioner himself. Eric Hornung.
Eric Hornung 2:42
You know, the worst excuse in the world is Jay.
Jay Clouse 2:44
I can’t wait to hear what this is.
Eric Hornung 2:46
I’m too busy.And I hate when people use the I’m too busy excuse this year. I’m using it. I’m pulling it out and I am just too busy to run a fantasy league.
Jay Clouse 2:59
I feel like the commissioner position is a mostly thankless job.
Eric Hornung 3:03
It’s mostly thankless and people don’t really understand how much work goes in, especially around draft time. Once the season gets rolling, depending on how good of a commissioner you want to be like a great commissioner would send out a weekly update and have jokes and link to stuff and you know, that would be like a great commissioner. I was never that I think I got like two or three weeks in one year, and I was like, this is so much work, but around draft time, especially if your league has like some rotating spots where people are in one year out the next whatever dude is so much work, because it’s not like it at the office where you’re like, Oh, yeah, everyone has nine to five free, I can look at your calendars and we can figure out a time for all of us to meet even if it’s inconvenient. Everybody always has an issue with everything. There is no time that someone doesn’t have an issue with something you do.
Jay Clouse 3:51
I think there are times when people don’t really have an issue, but somebody creates an issue because they feel like there needs to be at least one issue.
Eric Hornung 3:57
Yeah, exactly. There’s just always an issue. Oh, we’re gonna do 9pm on Tuesday night. Does anyone have anything going on? Well, not really. But I like to be in bed by 9:30. All right, come on, like do we need or like this year it’s nice because so many things are canceled that people have more free time. So I’m sure it’ll be easier to schedule. But we always have like, a softball on Tuesdays and Jimmy has volleyball on Wednesdays, and good luck working around that.
Jay Clouse 4:26
Are you in any other leagues? See, this is the only league that I’m really counting on happening this year. And so I need it. I need it.
Eric Hornung 4:33
Yeah, you you texted me a week ago and said, get your stuff together, commissioner. And I said, I need to get my stuff off of my plate to another commissioner. So that’s what I did. But yeah, I’m gonna be in two other leagues. Most likely one of them doesn’t feel like it’s gonna start, but one of them already has a draft date set.
Jay Clouse 4:51
But this has to be like the most intricate and interesting, right?
Eric Hornung 4:55
I just feel like it’s different. It’s an auction draft. There’s not a standard amount of people on the bench there’s not a standard amount of starters,
Jay Clouse 5:03
Eric Hornung 5:04
Two quarterbacks, there’s a lot of flex. I think it really means that you have to know football to do well in this league. And we’ve seen when people don’t know football like me last year when I thought I had time and didn’t or me this year when I can’t name a single like starting skill position set besides the browns, it’s going to be an ugly year for me. I’m telling you that.
Jay Clouse 5:23
Well I thank you for your service as commissioner and everything you did to help this one league go as well as it could. Similar to our friends at Ethos who help people live the one life they have to live the best way they can.
Eric Hornung 5:34
And you know what, usually playing fantasy football makes my life a lot better. So it makes sense. But I do also like that, like our guests today our league Jay the Jay the league that we play in is a little bit different than the competition.
Jay Clouse 5:49
That’s right. Today we’re having a bit of a part two episode which I’m excited about. We’re talking with Einar Vollset the general partner at TinySeed. TinySeed is a year long remote accelerator designed for early stage SAS founders, we spoke with Rob Walling, the other co founder and partner of TinySeed a little over a year ago. Now TinySeed has gone through their first batch of accelerator companies. It’ll be exciting to dig in with Einer to hear a little bit about how that went, and what they learned in the process.
Eric Hornung 6:21
What are my fantasy football draft strategies Jay for the longest time and you tried to copy me on this I think one year is to draft undervalued wide receivers like Jarvis Landry perfect example. Dude gets drafted 25th overall and produces at 11th overall every single year, and he’s got some upside where it could be a top five guy if he has a year where he goes off. I feel like that’s a lot like TinySeed. They’re looking at undervalued companies who have upside potential.
Jay Clouse 6:49
They’re also looking at companies that have lower downside potential similar to your friend Jarvis Landry.
Eric Hornung 6:57
Oh, in fantasy football terms high ceiling high floor players love it.
Jay Clouse 7:02
Well, when we talked with Rob, we we talked about wanting to get a little bit more into the model and the math side of things, Eric. So today, it’s finally happening. This is your chance. You can ask all those questions at Vayner.
Eric Hornung 7:15
Let’s do it.
Jay Clouse 7:16
We’d love to hear what you think about this episode as you listen. Reach out to us on Twitter @UpsideFM or email us email@example.com
Eric Hornung 7:24
And we will get to this interview right after this. Let’s bring in Rob McDonald, a partner at Taft Stettinius and Hollister to teach us about private placements and fundraising. Taft is a law firm known for assisting entrepreneurs across the Heartland. And as a quick reminder, the following remarks by Taft attorneys are for informational purposes only and are not legal advice. This information is not intended to create and receipt of it does not constitute an attorney client relationship. No person or organization should act upon this information without first seeking professional console. Rob, you are becoming a regular on the podcast, our third co host.
Rob McDonald 8:04
Yeah. It’s great to be back excited we’re able to get through all that legal ease.
Eric Hornung 8:09
Oh, I know. You gotta love a good disclaimer.
Rob McDonald 8:11
Jay Clouse 8:11
And speaking of legal ease is an important part of every fundraising negotiation is the term sheets. What are the most important terms for an entrepreneur to be aware of when raising capital?
Rob McDonald 8:22
Obviously, valuation and amount raised are two of the most important terms. These two terms combined will define how much of the company will be sold. However, with liquidation preferences, dividends, and other rights tied securities, percentage of ownership alone could be misleading. So it is important to fully understand the economic terms and how they play out in the long run. Beyond the economic terms, the founders will also want to pay particularly close attention to what I call the power terms, who votes on what, who holds what board seats, etc. It’s easy to lose sight of the power dynamics is founded or too focused on the economics. Lastly, I encourage founders to look at deal costs. Someone does require all kinds of terms that costs the company money, sometimes for good reason. Things like keyman insurance, for travel fees, legal fees for investors, etc. It is worth tracking how much the transaction will cost to complete top to bottom.
Jay Clouse 9:14
Awesome. If people want to learn more about Taft or yourself, where should they go? They should go to www.Tafflaw.com, or my Twitter @RWM.
Einar welcome to the show.
Einar Vollset 9:30
Thank you. Very good to be here.
Jay Clouse 9:32
It’s it’s great to kind of loop back on the TinySeed story a year after talking with Rob. And so I’d love to hear from your perspective, how you and Rob began talking about TinySeed to remind us of the origin story and also just get your perspective.
Einar Vollset 9:46
So I’ve known Rob since pretty much since he started Microcode like this is coming up on 10 years ago now. So this was right after I did YC in 2009, winter 2009 and sort of was very much in and around that Silicon Valley startup, you know, go bigger or bust, you know, back in, I guess 2009, 2010 sort of timeframe. And sort of was aware of Rob and what he was doing at the time with his book. And with this sort of approach, which I thought was refreshing and new and sort of got connected into that community. And I think I’ve been to every microcosm, other than the very first one, sort of the one of the conferences that that I always make sure to go to. Yeah, we connected through the years there. And really what happened was, I got pulled into doing after I sold my last business was back in 2016. I got pulled into doing sort of the private equity world. So that side of things, which is, I think, at least for most people who live in Silicon Valley, and probably a lot of other people, it’s sort of a sort of an opaque black box type situation. But I got pulled into it doing initially doing due diligence and then started to do some, some buy side deals. So basically finding companies and introducing companies to private equity firms, and then eventually got started doing that. More the sell side. So people would just contact me from the Microsoft community and from the YC community saying, Hey, we have this offer just came in cold. What do you think? Is this a good offer? And initially, I would just tell them, you know, it’s sounds good or no, this is a terrible offer, you should go, you know, get a better one. But then started doing the sell side stuff. And people actually just asked me said they were thinking about selling, would you mind running the process for us? You seem to know what you’re doing. So I did that side of things, and really, through that found sort of understood how sort of middle market private equity, it sort of moved down market enough that, you know, if you had a business that was worth more was doing more than about a million ARR there were a lot of more and more buyers. So it’s a really prices that come up and competition among buyers to come up. And so, I guess 2018 I want to say I’m not sure actually, no, we’re at Microcolumn. Robert just sort of exited draft after the acquisition. And I just pitched him I said, you know, to me, it seems to me like there’s a there’s a hole in the funding market, that sort of in necessity. similar type poll that you know, YC in first round failed back in 2005, 2006. And then it turned out that Robert been thinking very much the same thing. And it was sort of fortuitous timing, I think if I’d hit him with it, like a year before, he’d still, you know, he was embroiled in still working on the drip post acquisition, he’s probably pretty burned out. By the time he was, you know, he was weak. So I swept in and I was like, you know, this is what we should do. And he was very much like, Listen, like, I’d love to do this. I want to support the founders, like I really think that there’s a there’s a hole in the market here, like for him because like, there are some bootstrapper extremists around who are like, you should never take any kind of money and like often what I found with these people is that they have a wife who’s a doctor or makes a ton of money or like they already have a bunch of money and then it’s easy, but the risk for a lot of people if you’re just a consultant getting by how much risk do you want to take on like you still have mortgage, you still have kids? So he very much came at it from like, support the founder side versus I’m a bit more mercenary. I just thought it was a good investment type scenario and So he was interested in doing that. But he the one thing he said was I don’t want to do any fundraising. He said, If you do all the fundraising, then sure we’ll do it. And I think part of his was that he didn’t really believe that, you know, there was enough investor interest. And then once we started to, once, once we once he realized that was real, then it became real pretty quickly. Actually, it was sort of a, I think we talked in May that year, April, May. And then we sort of had had start opened up applications, I guess it was in January or February, something like that. The year after.
Eric Hornung 13:31
You mentioned this hole in the funding market. And for our listeners who aren’t maybe familiar, what exactly is that hole?
Einar Vollset 13:39
So the way that I think about how YC fit in is kind of instructive because YC is very much like they when they came on the scene in 2005, 2006. If you wanted to start a like a tech startup, then it was very much like you sort of had to have a business plan. It was like a bonus to have an MBA, you know from Harvard, and like you probably had to have some rich friends to you know, dude give you $250,000 and then you know it cost a lot of money is this a sort of pre AWS and all that sort of things, it was just expensive to get started. And so what YC did was like no, like, if you just have smart nerds and smart, you know, hackers and give them just a little bit of money, like when I did it, I think we got 20,000 30,000 something like that. And you know, I went through the same cohort as Airbnb and they got the same money as everyone else. And that was the sort of filled that market and said, like, Listen, you don’t need like fancy business plans and all this spending on infrastructure and like buying a server rack before you do all this stuff, you could just go out build it launch, a very quickly go to market and I think obviously they’ve proven pretty, pretty successful. The one thing that sort of the hole in the market I think that we’re trying to fail, because more like in part because of the success of YC it became a dominant investment structure to use like a safe typically like say YC is a little bit more sophisticated that but conceptually what they do is they just basically give you an uncapped safe and say, you know, because it because they’re in their model, like what they’re doing is sort of unicorn decking con hunting. So it doesn’t really matter, like if they don’t capture all the value. But the problem with that is that the way that the the venture investment environment is changed is that there’s more and more capital coming into the market, but they’re chasing fewer and fewer deals. So these things get higher and higher valuations and you know, higher valuations. And then there’s more cash chasing fewer and fewer deals. And so it ends up being that capital concentrates in a very small number of these types of businesses, like, typically, like a good example is Sam Altman, who’s who actually know a little bit he put a piece out in I guess, February, January, February, like how to invest in startups and his his shtick was like, you should try not invest in anything that couldn’t be like a $10 billion business. So no longer is unicorn enough. It has to be a death record. And what that means from the kind of businesses that we support is like if you come in and say, Hey, you know what I would love to do I’d like to build a business you know, a SaaS business senate selling to builders and I’d be perfectly happy with 100 million dollar exit. They’re just gonna laugh you out of the room on Sand Hill Road like they’re just it just because it doesn’t make any sense. nobody’s doing that. So what we were trying to do is to say, okay, given specifically the nature of these b2b SaaS businesses, like they’re capital efficient, they typically inflect to being cashflow positive at about somewhere between one and 3 million arr they have gross margins and 90% they have net margins of you know, can have net margins or 50% or above in some cases, can you come up with an investment structure such that there’s a balance between founder friendliness in that there’s capital coming to them and you’re not taking advantage of them, but also investor friendliness to the point where like, an investor makes sufficient return that they’re gonna want to keep reinvesting because I think a lot of the time now what happens and I see this, you know, particularly around where I live, which is near Silicon Valley, I people put together a deck and then they look at it and says there’s no unicorn a deck of cards in this deck, so let’s just slap a couple Have a couple of slides towards the end that says this is I would take over the world. And sometimes that works. But is that great for the investor? If they do like an uncapped, safe? Probably not, you know. So you need to find that balance between investor and founder friendliness to really like, divert capital into this into this market. And because fundamentally, we think that there can be, you know, we’re looking to buy hundreds of companies a year eventually. And we think there are thousands and thousands of these kind of businesses around the world that could be built.
Eric Hornung 17:27
The Silicon Valley model became that way, or, as I understand it became that way, because there’s this kind of notion that all these businesses are going to fail when you look at and that means one of them is going to kind of return your fund, you know, three, you’re going to fail, we’re going to break even three, you’re going to two to five x and one’s going to return the fund.
Einar Vollset 17:46
Correct. The power law.
Eric Hornung 17:49
Yeah. So when you look at TinySeed’s style, micro comp style companies, how’s that same distribution workout?
Einar Vollset 17:57
So it’s actually quite similar like it’s if you look at it distribution of outcomes even in this space, then you will still find that if you have a big enough sample, there will be some companies that really take off like a rocket ship. And I think it’s a mistake to go into venture investing even at the start of the industry and the size and where the area we space and not be playing, and not understand the power law because I think that’s, uh, you know, the fact of the matter is like, we have some data in our investment memo that shows that we got access to partly because we do the, you know, state of independent SAS and all this stuff, where we looked at like the revenue growth of about 500 b2b SaaS businesses over four or five years. And we looked at like, what’s the ratio between like starting MRR versus ending MRR or whatever that was typically up to five years, I mean, found is a very clear power law. They’re like, out of the 500 that are like four or five companies that do incredibly well, like they are, you know, 3000 times as large as they were at the start. Versus, you know, there’s a bunch in the middle that do pretty well and like, you can get you know good returns from them. But to deny the fact that that you’re still in the power law environment, I think is setting yourself up for failure.
Eric Hornung 19:08
Is that power law environment? So on the upside, I understand that there’s still going to be some of the breakout. What about on the downside? Are there as many more or less failures in a given sample?
Einar Vollset 19:20
So I think there are many less many fewer failures. I think, as a founder, if you’re gonna go into space, like what am i chances of success, you’re better off going in and like building a b2b SaaS business because once it gets some kind of attraction, you know, you’re probably worth something, which is not true for say, a home Pet Grooming service. If you get a b2b SaaS business and it goes north of a million ARR you can sell it for, you know, revenue multiples effectively. And usually those kind of outcomes are, at least if you haven’t completely diluted yourself through a bunch of you know, venture rounds. Then you know, the kind of outcomes you can have, even if you have, you know, 1-2 million ARR b2b SaaS business you know, is life changing for the founder versus, you know, I see some of these venture backed stuff and like, you know, businesses shut down and implode, even though they’re doing 10 million in revenue, because they’re just geared differently. So the geared and set up in a way where it’s like, if you don’t get to 100 million, you’re worthless. Whereas I think in the space, we operate, both for founders and for investors, there is sort of this middle sort of, you know, thick tail of businesses that will do pretty well. Now, whether that’s the what we don’t really know is whether the failure rate is significantly low enough that those mid level hits in and of themselves are like, venture return. And by that, I mean fund level. So you know, sort of a truth, say, three x plus type environment that we don’t know. But certainly we think it’s important to when you are investing in the space to be able to do it, basically make enough bets and do it with a vehicle that means you have a higher chance of capturing some of those higher growth companies. And again, it boils down to like, sort of valuation too, right. So if you have an exit, that’s 100 million And then you invested at a million prey. Well, that’s 100 x. So that’s just as good as if you invested at 10 million pre. And it’s a billion dollar company, like it doesn’t matter. Like there is entry price, exit price sort of venture, whatever.
Jay Clouse 21:14
So Rob told you that he’s interested, but you’ve got to do the fundraising. So you you do these stats, and you go out and do the fundraising? What was that process like? And were you surprised by how, how much easier or more difficult that it was?
Einar Vollset 21:27
So the first so this is our we’re just right now raising our second fund. And we can be public about the fact that we’re fundraising because we’re doing what’s called a 506c offering, the first one we didn’t, so we had to sort of be quiet about it. And it was just like connecting with people and like discreetly asking around, but that was actually easier than I thought. And I think to a large degree that was because of, you know, Rob’s network and sort of the people in and around Microcalls. You know, we tapped some of my sort of private equity contacts and some of the stuff I’ve been through on the m&a side discretion capital. But really what was surprised was having enthusiastic people were about being part of it, because they were like, yes, someone finally needs to do this. Like, it’s bullshit that like, it’s always, you know, Silicon Valley boom or bust, there’s got to be something different here, like come on. So that was actually reasonably easy. Our first fund was, you know, it’s a small as effectively, you know, a prototype fund, we raised about four and a half million. But we were able to do that in three to three months, three, maybe four months, and took a bunch of smaller checks, and we’re happy with it. This time around is it’s been part in part, it’s been even easier because because my well known we have a bit of a track record. And you know, you know, part of the thing we were doing with fund one was to understand, like, do we get enough quality deal flow and do we have enough pricing power and are we capturing sort of the full spectrum of possible growth companies so one of the biggest downside in this you know, if you’re doing this kind of investing is I think is if you don’t have access to the to the full spectrum of deal flow, like you may think you see a lot of deals, but if all you see are the top say 80% You’re probably not going to do very well, you need to be able to access the full 100% of the deal flow. And I think we’ve, we have some early signs that that we’re able to do that. And so that’s helped tremendously in terms of our fundraising for fund, too.
Eric Hornung 23:11
How do you filter when you have 100% of the deal flow?
Einar Vollset 23:15
Yeah, I don’t mean 100%. Like, I mean, like, I don’t mean to say we say all deals in the world, what I mean is, like, of all the possible b2b SaaS companies that want to raise money, like the quality is from the full spectrum is what I mean, rather than, like, we get all the deal flow, but it’s like it can be tricky, like, and I’m, I’m 110% sure that we decline to invest in some very high quality companies that will really regret later. In part like, just to give you an idea, like we had, in total over the two applications, we had 1500 plus applications, the first first round, we had about 700 or 800. And then you know about 150 that was in our sweet spot of like three to say 15,000 MRR and the second time around, we had slightly fewer applications, but we had about twice the amount of what we would consider to be quality applications. So we had about 300 of those, like, we were just out of money. You know, the last time we invested in the last batch was 13 companies, and then we’re, you know, completely out of cash, which is why we started with fundraising fund too. But I just I sort of eyeballing it, like, there’s probably another 50 companies we would have liked to have funded if we had the infrastructure to support them and the cash to back them just out of that last sort of application batch. In terms of what we look at, like, you know, there’s obviously some pattern matching and things like we see with with things that have worked in the past. It being b2b SaaS, there’s just some some basic metrics that we always look at, like, very obviously, we look at revenue, like are you growing? Are you declining? What’s going on there? Like, what’s your customer acquisition cost? Your LTV, obviously turns important, but some of it is just like we look at it and it’s like, well, your pricing is probably way off, but that’s a reasonably easy fix. You know, some people don’t realize like, it’s surprising how many founders are like, okay, like we have a, you know, an enterprise type sales cycles. It takes six months and three demos and You know, a lot of time and jumping through hoops and maybe custom docks and stuff, and then they charge 50 bucks a month. And we’re like, No, you should be charging 5000? Probably. So yeah, but it’s it’s not easy. We don’t have a magical formula. I wish we did like, with the datasets that we have, I’ve spent a bunch of time looking at like, Are there metrics that you can sort of look at and say, yeah, this company is definitely like worth investable. Like, it’s going to succeed. But I haven’t found one or the landing some really obvious ones, like a company that’s growing quickly is probably going to keep growing quickly for a while. Which doesn’t exactly take a you know, a PhD in stats to figure out so.
Jay Clouse 25:37
I think in you knows better, but I think part of the YC model is yeah, we get them early, we put money in but we’re helping them fill up their next round, like upon graduation of YC true. Is there an analogue for TinySeed like after TinySeed ? Is there a step that you’re really trying to set them up to take or are you trying to get them to a point where they don’t need more investment?
Einar Vollset 25:57
The ladder? Yeah. So we think we think of the successful companies, there’ll be some there’s a 10 to 20% range that will decide we need, this is actually a bigger opportunity than we thought. So maybe they actually step on the more traditional venture train and go and raise a series seed or series A or whatever afterwards. But really, the goal is like after the one year sort of remote accelerator, that you’re in a position where you don’t have to raise any more money, like and this this boils down to like the kind of companies we invest in, we only really invest in in SaaS, and mostly b2b SaaS. And because they’re so capital efficient, we believe once you get to a certain stage, your future is sort of up to you and like you have much more optionality than you would do with a with a more traditional sort of YC type company where like, it doesn’t matter how well you’re doing, you’re still gonna need money. So you’re sort of, you’re kind of like dependent upon like investment trends and the macro economy at that point, which a lot of these companies just aren’t
Jay Clouse 26:50
The LPS that back the initial TinySeed fund and maybe even looking at this fund. Are they also investing in traditional venture capital and this is just a new bucket or is this a different type of investor entirely.
Einar Vollset 27:02
It’s a mix. So there’s some certainly that are, are in traditional venture, there are a big portion who are sort of angel investors, actually. And I hope my LPs Don’t mind me saying that sometimes they’re like frustrated angel investors because they’ve like, they’ve written some checks left and right, but it just, it just hasn’t worked out. And I think for that group, really what resonates is the fact that bar, part of our analysis shows that you’re probabilistically you’re not going to do well until you have a big enough portfolio. Like I I fundamentally don’t think any Angel Angel investors do really well, unless they have a sufficiently sized portfolio and that’s hard for people to do because they don’t get the deal flow. They don’t have the dice pricing power. And then you know, if you’re looking to put a quarter million, a half a million, something like that into into tech to get exposure in tech, it’s hard to do that in you know, write big enough checks so that you know, people will actually take your investment and, you know, get it diversified enough so that you’re able to capture this effectively that this power law of life Type distribution that I’m talking about.
Jay Clouse 28:01
What about the founders themselves when you’re talking about them and interviewing them for this opportunity? Have you experienced any difference in how b2b SaaS founders think in question, taking on investment versus a traditional YC type of startup founder?
Einar Vollset 28:16
Yeah, there’s sometimes often just a little bit more humble and value optionality in a way that I don’t think a lot of YC founders do, like, at least a younger kind, like, and this is, again, like goes down to the kinds of companies that you’re the kind of outcome that the investor is looking for, and that the founder believes that they will have so a lot of YC founders, they come Gung Ho and they believe that Yeah, I’m the next Mark Zuckerberg, like that’s, it’s boom or bust, like I’m gonna be famous. Versus, and and, you know, that’s great for YC. And for those kind of venture investors, that’s what you want. You want like a really aggressive founder who’s like, I’m gonna go balls to the wall and just go for it, versus a lot of people that come to us in some cases they’ve had offers from YC and turned it down because without Like they’re like, you know, it might be bigger, and I might change my mind. But if I can sell for 50 million bucks in two, three years, I’m super happy. And like, you’re like the only investment vehicle where that you would celebrate that alongside alongside us, like, I got a call from a YC founder, oh, a year ago, maybe a little bit more. And they were doing about a million arr. And they gotten an offer. And she called me up and she’s like, I’m gonna just want to know, like, you know, you’re an m&a guy, like, what, this is a good offer. And the government offer for $30 million for their business. And I was like, yeah, that’s 30 times revenue. That’s, that’s a, that’s a great price. But their investors were upset. Like, I actually looked at, like, I know, someone who’s invested in that fund. And like, the investor update was like, yeah, we really need to like make sure that the investor, the founders that we’re investing with, like align for the long term. It’s how they frame it, which I’m like, that’s kind of sad. Like, I’d rather be in a position where I’m like, yeah, are you sold for 30 million bucks, excellent, everyone’s happy, which is sort of what we’re trying to do.
Eric Hornung 30:05
So you mentioned earlier that you have 13 companies in a cohort. Where does, let’s say, company 14, 15, 16, 17? They get turned down for TinySeed, where do they go for funding?
Einar Vollset 30:16
It’s a good question. I mean, I think I do you think there’s a hole in the market there? Like I certainly I think there’s, there are angel investors who will invest for sure. Like, and we see that and we have people come in and they’re interested alongside and but I like specifically, like, if you’re in that space, I don’t know that there’s a lot of really great opportunities that do exactly what we do. In terms of preserving that optionality. I think, to be fair, there’s an awful lot of capital sloshing around right now. You know, there’s like, there seems to be an accelerator or three in every single city, and they there’s some money there. And I think in some cases, that’s where they get capital from. And I think at some cases, they just keep bootstrapping. They’re like, Okay, well, we can get it but I’m still gonna keep growing this thing. To be honest, like probably most of the most of the capital that goes to support these kind of companies are you know personal capital versus that’s your your wife working or or something like that
Eric Hornung 31:09
TinySeed is so focused on b2b SaaS, do you think that this model can work in other verticals like e commerce or media or something else that’s hyper focused?
Einar Vollset 31:18
I don’t know. So in order for the for the work you do need, there’s a couple of things you need, you need to not to have a very capital efficient, potentially very capital efficient business, you need to have great margins. And you need to have a market for sort of mid level successes. And if all those things can add the potential for like really outlier type winners really to get like, there’s a difference between being a top a well performing fund and being like a really great fund. And that’s basically having the existence of outliers in one of them. And I think if you are an environment where you can find all those things, then certainly I think that that makes sense. I can’t really speak to specifics as it relates to you know, e commerce or some of those things because I don’t know them that well.
Eric Hornung 31:59
Well were looking at the size of this opportunity, you mentioned 4 million for fund one, you’re raising fund two. Can this be like a billion dollar fund? By fund three, four or five?
Einar Vollset 32:08
Yeah, I think so. I mean, so we’re raising for fund too. We’re targeting 35 to 50. So you know, 10 X on fund two. I think the the goal is to expand horizontally, I guess. So, you know, running cohorts based in European timezone wanting it sort of APAC timezone. So we envisage that this will be sort of a franchise that invests in hundreds of companies a year across sort of across the world, just because like, it’s the nature of the beast and b2b sounds like you can only really be one Facebook, but like, dental software in the UK is going to be different than dental software in Canada. And it’s just, you know, there’s just a big a big market and either of those environments, but is this is this exactly the same kind of software that works in Canada, that’s going to work as well in the UK? Probably not partly because of regulatory things and foibles and whatnot. So, so I think yeah, I think the opportunity is, is of that size eventually.
Jay Clouse 33:04
Do you guys ever go scouting for a company within a thesis that you have actively?
Einar Vollset 33:09
No. People come to us basically.
Jay Clouse 33:11
And I guess my last question then is if somebody is interested in getting involved in TinySeed, like, what is the mark of a good investor into an opportunity like this? What do they need to have be true? Or what kind of mindset do they need to have?
Einar Vollset 33:23
But patience is one of them. Sometimes we get investors who are like, yeah, there’s a dividend portion to your thing, like, Am I gonna start seeing cash flows in 18 months? I have to dissuade them of this. I’m like, No, we’re an early stage investor. And you probably won’t see any kind of capital back for like three to five years. I think the ideal investor is somebody who, you know, maybe have thought about or at least have sort of dabbled a little bit in some of the tech investing, maybe realizing that like, they haven’t had the greatest return, but they still want that exposure to sort of early stage b2b SaaS, like fundamentally, fundamentally what we’re trying to do on the investors side is to provide like a broad index into the earliest stage of b2b SaaS. And if that is something that resonates, then you know, they should get in touch because we’re, we’re fundraising currently.
Jay Clouse 34:11
And how do they do that? How do they get in touch?
Einar Vollset 34:13
Go to TinySeed.com/invest. And that’s you fill out that form and I get back to you pretty quickly.
Jay Clouse 34:19
Awesome. Is there anything we didn’t ask that we should have asked that you wish we would have asked?
Einar Vollset 34:23
How’s fund one going?
Jay Clouse 34:25
That’s a great question. So you’re going into the second quarter? How is fund one going?
Einar Vollset 34:30
Fund one is going really well, the way that I think about fund one is that it answered a bunch of questions around some of the uncertainties you have going in and being main one being, can you access the full spectrum of these, the performance of these kinds of companies? Because it’s one thing to say, Okay, here’s 500 companies and I do some analysis and I say if I index into all these companies, you’ll do great. But then the question is as a as a fund, are you able to access that full spectrum? And I think we have very early we have early indications That that yes, we can do that we’ve had, we’ve had at least at least one company that sort of is taking off like a rocket ship.
Eric Hornung 35:09
Holy opportunity Jay, we just spoke with a Einar. And, man, this whole space. Just I just love it.
Jay Clouse 35:17
You love a good SaaS company.
Eric Hornung 35:18
I love a good SaaS company. I love a good, just SaaS opportunity. I love the fact that they got 1500 applications, and I’ve taken 26 companies that’s from an investment returns perspective, that is that just there’s a massive opportunity here for a lot more players in the space.
Jay Clouse 35:35
Do you think that’ll happen? Why don’t we see more of it.
Eric Hornung 35:38
Probably has to do with LP commitments, I would guess. I think that it takes forever for people to embrace new, especially in the financing space. So when you’re used to the venture capital model, and it’s taken you 30 years to get used to the venture capital model and there’s a Sequoia that everybody can point to to say look You can be great. In venture capital like Sequoia, it’s a lot easier for an LP to just like, there’s heuristics there. Or when KKR like, it was hard for them to raise money, I’m sure at the beginning or Blackstone or anybody in like the early 80s, except for the debt. So I think it’s just hard to get people to commit money to new ways of investing. And you need to find the right audience.
Jay Clouse 36:24
Do you think it becomes harder in a day and age like we’re in right now, where things just feel really confusing, given the market still seems good right now?
Eric Hornung 36:33
I think it’s non correlated.
Jay Clouse 36:35
Non correlated, not related.
Eric Hornung 36:37
Jay Clouse 36:37
Yeah. I mean, I love what they’re doing, I think. I mean, I’m not the math guy. But even you know, when we talked to rob, it just seemed like well, it seems like there’s a lot of space here for somebody to do something to our to our intro conversation. high ceiling, high floor. It feels like a lot of these companies have a high floor and maybe the ceiling isn’t as high on average, but it seems there’s a model there to make work work that doesn’t matter. Just dropped a bunch of Jarvis Landry’s
Eric Hornung 37:04
Are back to the beginning back to Jarvis Landry fantasy football, nice little tie in there. I think our friend Tyler Tringas, from Earnest Capital has this idea that he stole from someone else I forget, he gives it a site. So I’m not outing him here. But it’s the deployment phase of SaaS. And I think that there are a lot of businesses and I see as in my full time job as well. That will be just great businesses that do $1 to $5 million of profit a year. And those businesses are going to sell in the future for a good amount of money. It’s going to make those founders rich, and right now, there’s no great way to fund those businesses. I was actually kind of surprised in our conversation with aner that they still look for that kind of rocket ship potential. And businesses. I thought it would be less of that model coming into this interview. So that was definitely Something that I was like, Oh, you still need these massive winners to make the investment return even though you have less losers. And I thought that was interesting.
Jay Clouse 38:09
The nuance there is, it didn’t sound like they were only investing in companies where they could see where that was going to be true. They just kind of expect that following their own model of investment, it will be true for some very small number of them. But that’s not like a filter, the way that VC is kind of a filter.
Eric Hornung 38:31
Yeah, hundred percent. They’re not saying, Oh, this isn’t a billion dollar market, get out. But it still needs to have these kind of larger. I don’t know, I just thought it was interesting to think about, because when I thought about the model, and I think we talked about this with Rob, there’s this ideal idea in VC that you’re going to hit a few singles and doubles and then you’re going to look at us, we got fantasy football. I got a baseball metaphor coming in here. And then you’re going to hit one home run that’s going to make the fund not and it sounds like that math. is still kind of the case in this space where you still need to hit a home run or so maybe it’s a triple. Maybe it’s not a pure home run. But there’s less outs, I guess.
Jay Clouse 39:11
Eric Hornung 39:12
More doubles. I love doubles. One of my favorite seasons of Jose Ramirez he just was knocking in doubles left and right. So it’s an Indian’s player for the audience who may not be attuned to the MLB.
Jay Clouse 39:25
Well, let’s touch down this episode here.
Eric Hornung 39:28
Yeah, killing it. Yeah, that was a slam dunk.
Jay Clouse 39:30
Very meta episode here. By the way, recording a part two interview on TinySeed , a firm that invested in SquadCast using Squad Cast to record this this bit of audio. We’ll hear what you think about TinySeed and their model. You can tweet at us @UpsideFM or email us firstname.lastname@example.org to hear more. Thanks for listening and we’ll talk to you next week. That’s all for this week. Thanks for listening. We’d love to hear your thoughts on today’s guest. So shoot us an email at email@example.com or find us on Twitter at upside FM. We’ll be back here next week at the same time talking to another founder and our quest to find upside outside of Silicon Valley. If you or someone you know would make a good guess for our show, please email us or find us on Twitter and let us know. If you love our show. Please leave us a review on iTunes. That goes a long way in helping us spread the word and continue to help bring high quality guests to the show. Eric and I decided there are a couple things we wanted to share with you at the end of the podcast. And so here we go. Eric Hornung and Jay Clouse are the founding parties of the upside podcast. At the time of this recording. We do not own equity or other financial interest in the companies which appear on this show. All opinions expressed by podcast participants are solely their own opinion and do not reflect the opinions of Duffin Phelps LLC and its affiliates under collective LLC and its affiliates or any entity which employ us. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. We have not considered yourself Specific financial situation nor provided any investment advice on the show. Thanks for listening and we’ll talk to you next week.
Interview begins: 9:28
Einar Vollset is a General Partner at TinySeed.
TinySeed is a year-long, remote accelerator designed for early-stage SaaS founders.
He is also a YC-alum, former Cornell CS Professor, and the founder of Discretion Capital, a tech-focused M&A investment bank. He sold his first startup to Google in 2010 and exited his most recent in 2016.
Listen to our interview with Rob Walling: https://upside.fm/rob-walling-tinyseed/
- Hole in the funding market 13:31
- Downside 19:08
- Fundraising process 21:14
- TinySeed and VC 26:50
- TinySeed focusing ong b2b SaaS 31:09
- Getting involved with TinySeed 33:11
This episode is sponsored by Enterprise Rising Conference.
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