Checking Boxes: Our Investment Thesis & Parameters

This is part 2 of a 5-part series. If you haven’t done so already, you can read the first post here.

Very often when we meet founders, whether they are pitching their company for investment or just asking for our insight during one of one of our mentor program meetings, they ask what would make them a “sure venture capital investment opportunity”. The short answer we give is that there is no such thing, because every single VC firm has different investment theses/parameters. One perspective we can offer is the overview below of our own strategy.

Solving High Pain-Point Problems in Existing Markets & Workflows

When we founded Laconia, we set out to build a fund that leverages our strengths as former entrepreneurs and operators. While some of the specific parameters have been tweaked, our core thesis remains the same as it was on day one.

On a broad level, we invest in the next stage of legacy industry digitization. While some investors are most excited about frontier tech & the creation of new industries, we have lasered in on companies using technology to solve high pain-point problems and inefficiencies within existing markets and workflows. We still see massive opportunity in traditional sectors, as they transition from pen & paper processes to digital solutions, from fragmented digital solutions (e.g. Excel spreadsheets & in-house tools) to better workflow platforms, from workflow platforms to AI-powered analytical systems, and so on. As technology evolves, new business use-cases emerge, creating an endless loop of investment opportunities.

To be clear, we are not investing in incremental solutions. Much of our analysis of companies’ potential is through the lens of a founder. As an investor managing a portfolio, you have multiple shots at success.  As an entrepreneur, you place your bet on one shot, typically for a minimum of 5 years. The quick mental model in evaluating the size of an opportunity is “Would I join this company?” If the answer is yes, then we would consider the investment opportunity.

Late Seed B2B SaaS in Northeast Major Markets

To dive into the specifics, we invest in late seed-stage B2B software companies based in New York, Boston, Philly, and DC. We typically write checks of $250,000 - $1,000,000 in companies with at least $25,000 in monthly recurring revenue (MRR), typically raising a round of $1.5-3 million. We do not invest in convertible notes or SAFEs; priced equity rounds only. More on the rationale for that in our capital strategy blog here.

These parameters are very specific and chosen deliberately with the following considerations in mind:

  • Capital efficiency:

    • Asset value potential: Our <$1 million investment amounts are best utilized in capital-efficient firms that can reach profitable growth before/after their Series A round. While we’d be happy to find “unicorns” (companies with $1 billion+ valuations), we actively aim for the $100-250 million M&A exit market. As we all know, the more money is raised, the higher the bar is for an exit. We are cognizant not only of our own equity stakes but also our founders’: we want them to be in the strongest position for their best possible personal outcome rather than pricing themselves out of most feasible exit options.

    • Early B2B traction: Typically, B2B companies are more capital efficient (at least in the early stages) than B2C ones, which typically require significant upfront capital for user acquisition before activating any revenue models. We like to see revenue, market feedback, and customer engagement metrics before investing, making B2B the obvious fit.

    • Software scalability: Though we are typically sector-agnostic, we do focus on software & avoid capital-intensive segments such as energy, agriculture, most hardware products, and two-sided marketplace models with high capital requirements for “chicken or egg” user acquisition models.

  • Downside risk protection:

    • Active support: We build concentrated portfolios driven by strong conviction and and high support. Unlike some VCs with a more diversified strategy, we do not expect just one company to drive fund returns. A benefit of this approach is that we are intensely committed to all of our portfolio companies; we don’t write off & walk away from them when they hit a rough patch. This focused strategy and  downside risk consideration drive our investment parameters.

    • B2B inevitability: As with capital efficiency, B2B models provide more downside risk protection than B2C ones. While many B2C companies rely on customers’ (somewhat unpredictable and fickle) tastes, B2B problems and solutions are typically objectively definable, identifiable, and quantifiable. In most cases, you can put a number to how much time and/or money is wasted by or allocated toward solving a given business inefficiency. Additionally, solutions to high pain-point problems typically have an “inevitability” to them. As just one example, AutoFi connects car dealers & lenders to enable the purchase & financing of vehicles instantly online from home, a solution that is undoubtedly bound to exist.

    • Late seed validation: Our $25k-75k MRR parameter is a proxy for a certain level of traction. We like to see product stickiness, high retention, and exceptional evidence of market demand (“land & expand” within existing customers, increasing contract sizes, even potentially preliminary acquisition offers). This stage focus enables us to gauge whether a product is a “must have” or “nice to have”.

    • NY, Boston, Philly, DC proximity: Our geographic concentration allows us to build stronger relationships with our founders and take on a more active in-person role when needed. Our active investor approach requires us to be within arms’ reach, whether it’s to advise on restructuring a sales team, interview executive candidates, or just grab a drink after a long and grueling week. From a portfolio perspective, we’ve found that the major metros have vast talent pools and diverse industries, providing more than enough deal flow to fill our pipe without having to travel far.

  • Alignment with Laconia’s strengths

    • Core team expertise: This is probably the most important point. We stick to what we’re good at. Our operational experience lends itself most strongly to late seed B2B companies, as we’ve spent most of our careers as early stage operators in B2B technology companies. While there are many investors looking at the B2B SaaS space, we specialize in this and only this, bringing deep expertise in B2B sales, marketing, and business development that moves the needle on getting seed startups to Series A and beyond.

    • Network value: Additionally, our LP relationships and extended networks are a strong fit for B2B as well, enabling us to open doors to customer intros as soon as we dive into due diligence.

We hope this overview provides some insight into our thinking. Next up, we’ll dive into the entrepreneur profile we seek. Until then, let us know if you have any feedback here or on Twitter — @jsilverman22, @djarcara, @geri_kirilova, @dleect.