Inside Laconia

Welcome to the Family: Managing Laconia's Portfolio

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

The whirlwind of 2018 has caused a brief blogging hiatus on our end, and we’re happy to finally finish this blog series on our story, thesis, and investment process. With a now fully deployed first fund and a budding second fund of four portfolio companies to date, we have re-thought much of how we onboard, engage, and support our family of founders. Though a lot of our efforts will be upgraded after the new year (announcements coming in 2019!), we’re excited to share the foundation of our community management.

Our last blog ended at the point of closing the deal. Here’s what happens after the money is wired.

Onboarding

The most important part of our post-funding onboarding meeting with the CEO is sparked by this key question:

What didn’t you tell us before we invested that we should know, and what did we overlook in our due diligence process that we should have asked?

To date, we have never heard anything that we didn’t already at least suspect, but we have found that this question teases out the topics that are currently top-of-mind.

We also use these meetings to discuss use of proceeds. While this topic is discussed throughout the fundraising process, it’s helpful to concretely go through the 6-12-month plan once the funding is a reality.

Lastly, part of the meeting is dedicated to housekeeping:

  • Best practices on running Board meetings and managing Board relationships

  • Discussion on filling independent Board seats

  • Investor communication/reporting guidelines & examples, including expectations for monthly updates & financial statements

Managing the dynamics of a successful post-investment relationship is not rocket science, but it  requires some figuring out - we try to make the transition as seamless as possible for our founders so they can focus on what really matters: building their businesses.

Support

Given our high conviction, high concentration portfolio strategy (7 companies in Fund I and 12-14 companies expected in Fund II), we devote a significant amount of our time to portfolio support. We firmly believe that if you invest in the right people, provide the appropriate support structures, and prioritize quality over quantity, you can fundamentally change early stage success rates.

For the first ~18 months post-investment, we are on-call 24/7 for founders, proving an extra set of hands across sales team structure, key hires, enterprise business development, future fundraising, and everything in between. We tend to take Board or Board observer seats, further amplifying our commitment. From finding independent Board members to interviewing key executives and everything in between, we are in the trenches as much or as little as founders ask us to be.

As our companies grow into and beyond Series A rounds, our role evolves into more of a consigliere - though we may be less involved on a daily or weekly basis, we remain a sounding board and network resource over the lifetime of the investment.

Community

All of the events and community initiatives we do at Laconia are highly bespoke, curated, and scrappy :) Without diving into the nitty gritty, below are a few ways we drive connection among our founders:

  • A portfolio-wide founder listserv, allowing founders to share announcements, questions, and ideas with each other

  • An annual summer camp retreat

  • A semi-annual Cocktails & Conversation dinner bringing together our LPs, founders, and a keynote guest speaker

  • Functional founder roundtables on highly requested topics (HR/hiring, scaling sales infrastructure, PR/marketing)

  • Curated industry-specific dinners uniting founders, investors, and senior industry executives

As we wrap up this blog series, we hope it has provided some transparency into our venture process and thinking, thus expanding access to this world to founders who are not necessarily already in the inner circles. We couldn’t be more excited to dive into 2019 and continue building our tight-knit, collaborative community.

As always, please reach out to us with any questions or feedback here or on Twitter - @jsilverman22, @djarcara, @geri_kirilova, @dleect.

Diving In: What You Can Expect in the Investment Process

This is part 4 of a 5-part series. If you haven’t done so already, you can read the first three posts here, here, and here.

Navigating the fundraising process is often one of the most frustrating parts of running a startup. It can be slow, opaque, misleading, and even contentious. We at Laconia do everything we can to make the experience not just relatively painless but also productive for founders. Regardless of the final investment decision, we hope each of the founders diving in with us take away something useful from the work itself.

VCs are not all the same, so what you see below may or may not apply to any other firms. The short story is that we focus on operations, leverage our community, and build a strong partnership over the course of the process. In more detail, here’s what you can expect from us:


Discovery

The objective of the first one or two meetings is to determine whether this opportunity is a mutual fit. Because we make investment decisions by consensus and place a huge emphasis on relationship-building, you will typically meet our whole  investment team (David, Jeffrey, and Geri; interns too if they are around) within our first two meetings. Here are the questions we aim to answer in these discovery sessions:

  • Does your company fit our investment thesis in terms of stage, geography, and sector focus? More on our focus in blog #2. As a side note, occasionally we meet impressive founders who, for whatever reason, do not quite fit our investment scope. In those cases, we are happy to make introductions to VC friends and colleagues who may be a better fit.

  • Do we bring value beside capital to the table? We only make 3-5 investments per year and work side by side with our entrepreneurs in the first 12-18 months post-investment. We want to make sure that we are able to open doors for you and provide the operational support that you need at your current stage.

  • Do we get along? Investing is a long haul relationship, so we have to be able to work together.

Due diligence

If we are all in agreement that the answers to the above are “yes”, we will move into our formal due diligence process. We break the DD process into the three main stages below:

  • Stage 1 is centered on the operations of your business & your thinking around it. Across 1-3 working sessions, we will cover the following:

    • Financial statements (historical & projected)

      • This part is fairly standard: revenues (especially monthly recurring), costs, margins, growth assumptions, revenue concentration, and so on. Having an intuitive and easy-to-follow model greatly works in your favor.

    • Sales, marketing, and distribution

      • Sales & marketing strategy as a lever for revenue acceleration

        • As former operators and entrepreneurs, we dive into all of the assumptions surrounding your sales process to determine what actually drives your numbers. We go into these meetings with the understanding that you know your business best and that we are here to offer insight and suggestions based on our vantage point. A sample of questions is below:

          • How are you segmenting and prioritizing your customers?

            • How do you define product/market fit?

            • What are the components of your sales cycle, and what drives results at various stages of your sales funnel?

            • Is your pricing model right?

            • How is your sales team structured?

            • What will enable you to go from x% to y% market share?

            • How can you meaningfully and efficiently scale your sales efforts?

      • Market size with supporting market research

        • True market size numbers are hard to come by. We are not looking for a top-down data point for “total IT spend in X industry”. Segment your market fully and calculate every sales dollar you could feasibly close based on total number of potential customers and total revenue you could generate. Do this both for your current products as well as for future product development/market opportunities. In conducting this analysis, we are looking both for downside protection with regard to your current in-market product as well as the “big vision” that funding and growth would enable.

    • Competition

      • Clearly map out your market position and unique value proposition relative to your competition. We often find that competitive sets are not fully identified.

    • Capital structure: cap table, copies of convertible notes, debt, etc.

      • Far too often, we meet late seed-stage founders with multiple layers of stacked notes and limited understanding of everyone’s true stake. We will work with you on cleaning up your cap table, understanding the founders’ ownership, adjusting the option pool, and conducting scenario analysis for current/future rounds. Our top priorities are ensuring that founders are probably incentivized & that the company is as attractive as possible for future investors.

      • This topic includes discussion of current round terms. Are you raising the right amount based on your operating plan? What are the milestones you need to reach to trigger your next financing event? Does the valuation you want make sense given the stage of your company, and how does it align with your projected growth trajectory? (More on capital strategy here).

  • Stage 2: Once we have gotten comfortable with the above, we will start including others into the process as well. We will reach out to our LP base, comprised predominantly of family offices and high net worth individuals, to leverage their expertise and networks. We almost always get 3-5 responses with potential customer introductions that simultaneously give us real market insight and provide you with sales leads. While conducting these calls, we will make a few more document requests on:

    • Customer information: top customers, churned customers, etc.

    • Product development: roadmap, development costs, execution risks

    • Management

    • References: customers, existing investors, potential target co-investors

      • We will hold off on calling any of your customers until the very end. Toward the end of this second stage, we will begin putting together the investment syndicate. We do not invest as the sole institutional VC.

  • Stage 3: This is the home stretch! The final items are tech due diligence, customer reference calls, and some more checklist documents.

    • Tech due diligence: infrastructure, tech stack, security, tools, etc.

      • For each tech due diligence call, we bring in one of our portfolio CTOs to lead. This approach allows us to leverage their expertise and also introduce founding teams to each other, which is key to the Laconia community we are building. As our focus is on applications of technology for high pain-point B2B problems, we often are not taking on significant risk with cutting-edge technology.

    • Terms & investor syndicate

      • The timing varies a bit case by case, but typically we will formally issue a term sheet post tech due diligence . We increasingly prefer leading, and we are open to co-leading or following if that makes the most sense for a given company. If we have not yet finalized the syndicate, we will focus all of our efforts on that now.

    • Reference calls: senior executive team & customer reference calls

    • Legal & tax documents: trademarks, litigation, tax returns, incorporation docs, etc.

While this may all seem overwhelming on paper, it is a highly collaborative and engaging process. The most important parts for us are deeply getting to know founders and building lasting relationships with them and the co-investors in the round. We can make an investment decision in as little as a few weeks, but seeing founders execute and showing them the way we work are critical to setting a strong relationship foundation. Most of all, we enjoy rolling our sleeves up side by side with founders and leveraging the growing Laconia community. 

Some final tips on managing your investment process if you are still awake:

  • Create a target VC list that makes sense for your company. Make sure a VC’s fund size makes sense for the company you are building (e.g. a $1b fund will have no interest in a company planning a $100 million M&A exit) and that its investment velocity aligns with what you need (e.g. a fund that writes 2-3 checks per week will not be providing the deep dives and hands-on support described above).

  • Prepare a deal room with your deck & the docs listed above prior to beginning your fundraising process.

  • Treat fundraising as a sales process. Identify your prospects, move them through the funnel, and close them.

  • Do your diligence, too. Call a VC’s existing portfolio founders and find out what they do, not only when things are going well but especially when they are not.

Next & final blog in this series will be on what it’s like to be in the Laconia family. What can you expect from our onboarding, community, and ongoing support? Keep an eye out. In the meantime, let us know if you have any feedback here or on Twitter - @jsilverman22, @djarcara, @geri_kirilova, @dleect.

Who You Are: The Entrepreneurs We Seek

This is part 3 of a 5-part series. If you haven’t done so already, you can read the first two posts here and here.

The more our portfolio grows, the more convinced we become that in the early stages of a company, the founders are most of the bet. We consider our portfolio an extension of our core values of transparency, collaboration, and community. So, when evaluating potential investment opportunities, we benchmark the founders against our existing portfolio entrepreneurs.

While there is no “one size fits all”, we’ve found certain commonalities in successful founders. Below are the core characteristics we search for:

  • Deep business acumen & attention to detail: We love when founders know the key numbers of their business without having to check spreadsheets or reference materials. This attentiveness demonstrates a strong grasp on their business. At the pre-Series A stages, it’s crucial for the CEO to understand all functional divisions, especially business strategy and how it connects to capital strategy.

  • Sales ability: We have an admitted soft spot for founders with strong sales skills in the early days. Founders aren’t required to have direct sales management experience, but we do expect them to have a deep understanding of customer segments and needs, go-to-market strategy, and customer acquisition models to close initial deals and begin the iteration process around determining eventual sales structure. If the founders can’t sell, we’re not buying.

  • Transparency & collaboration: In order for our partnership and the Laconia community to work, founders’ core values must align with ours. We search for entrepreneurs who are open to feedback and discussion, don’t hesitate to ask questions, and demonstrate coach-ability, and over-communicate. These characteristics enable us to build strong and lasting relationships. As one example, one founder shared so much with us during due diligence about his father’s role as a trusted advisor to the company that we were curious to meet him ourselves - and we are so glad we did. This openness resulted in a much deeper understanding of the company's history and, ultimately, a stronger partnership.

  • Humility, confidence & focus: We search for founders who are hands-on and heads-down, interested in building a business, not growing their personal brands at the expense of business focus. You most likely will not find any of our founders on a TechCrunch stage. There is no aggrandized ego involved in their process of growing a scalable, sustainable business, just pure drive.

  • Self-awareness: Often in a first meeting, we ask founders, “What keeps you up at night?” In the answers, we look for people who strive to  understand their strengths and weaknesses and try to know what they don’t know. One of our founders, for instance, could not have been more direct with us when he told us “I know how to build this business, but raising capital is a whole other ball game.”  We could work with that and help compensate immediately.

  • Integrity: This one is pretty simple. We believe that bad behavior is bad for business. Who you are personally is who you are professionally. The way you treat waiters, receptionists, and VC interns is indicative of the way you treat your vendors, customers, and employees. Honesty and respect are of utmost importance.

  • Diversity: Consistently finding diverse founding teams within our late seed-stage B2B SaaS focus area is an ongoing challenge for us. The research that diversity drives stronger business returns is comprehensive, compelling, and central to our investment activity. Currently 23% of our founders are of underrepresented demographics, and we are committed to improving this number. We actively make ourselves more accessible to founders outside of our existing networks through our mentor meetings program, on-site office hours at incubators and accelerators, and involvement with & mentorship at minority-focused organizations such as Monarq. This commitment flows down to our companies as well. We are always open to suggestions on how we can better support diverse founders.

At the end of the day, every investment we make is, first and foremost, based upon partnership. Our trust in our founders’ ethos - and their trust in us - is paramount.

Our next two posts will spill the beans on what you can expect from us during the investment process and as part of our portfolio. How do we hold up to our end of the bargain? Stay tuned. In the meantime, let us know if you have any feedback here or on Twitter - @jsilverman22@djarcara@geri_kirilova@dleect.

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.

Laconia’s Story: Who We Are & Why We Do This

Holding true to our core values of transparency, collaboration, and community, one of the things we’ve decided to do this year is publicly share our story, thesis, and process. We hope to demystify venture capital’s insularity and enable founders to more easily access and navigate the venture world. We are therefore publishing the following posts over the next few weeks:

  1. Laconia’s Story: Who We Are & Why We Do This (this blog)

  2. Checking Boxes: Our Investment Thesis & Parameters

  3. Who You Are: The Entrepreneurs We Seek

  4. Diving In: What to Expect in the Investment Process

  5. Welcome to the Family: Managing Laconia’s Portfolio

So, how did we get here?

My co-founder David Arcara  and I met after living parallel lives for decades. Both of us came up through the ranks in sales, marketing, and management roles, eventually founding, running, and selling multiple media & tech companies. Much of this involved raising money.

Intrigued by the other side of the venture capital table, we had both begun to angel invest, eventually crossing paths in 2010 as members of the New York Angels. During the next 18 months as our friendship grew, we spent more and more time co-investing together and with others, until we reached the point of “What’s next? Where can we go with this?”

We knew we loved working with founders and supporting the next generation of tech companies, and our operational skill set matched the seed/ Series A stage. However, the last thing we wanted to do was start another typical venture firm. We wanted to create a fund that brought together the best practices of angel investing with the best practices of institutional venture capital; a fund we would want to invest in!

In our eyes, that meant leveraging not only our LPs’ capital but their knowledge and network, while also providing operational experience to our portfolio companies during their critical early development stage. David and I summed this up into our stated core values of transparency, collaboration, and community. Thus emerged Laconia.  The Laconia vision was, and is, to combine our core values with institutional-level infrastructure, due diligence, and governance to drive better returns and build better businesses.

We are now three years into this journey, and Laconia has been excitedly growing.  A year ago, we brought on our first full-time team hire, Geri Kirilova, and institutionalized a rotating intensive internship program, leveraging many complementary skills and allowing Laconia to stay lean while quickly executing on our vision. And, of course, we have just launched Fund II.

David, Geri, and I consider ourselves entrepreneurs, and Laconia is our startup. We are small and scrappy, constantly iterating as we fine-tune our strategy. Our first fund was a beta test of our thesis and process (see next blogs), and our second fund builds upon the first.

Our entrepreneurial eyes are always open for future opportunities, as reflected by our 2017 launch of Laconia Venture Asset Management with our newest partner, David Lee (a story for another day).

Here are a handful of examples & outcomes of our core values in our day-to-day work.

Transparency

  • We provide straightforward & honest feedback to founders, whether in mentor meetings or during our investment process. No founder should ever leave a meeting with us wondering what we thought.

  • We give our LPs access to our investment deal room including appropriate due diligence materials and our workday calendars. In turn, our LPs bring us tremendous industry expertise and network contacts to strengthen our portfolio and due diligence. In one instance, LP feedback was so instrumental to our process that we decided to triple our investment allocation into one of our portfolio companies.

  • When co-investing with other VCs, we fully share our due diligence materials, helping all involved parties make the most informed decision.

Collaboration

  • Internally within Laconia, David, Geri & I operate by consensus. We do not have separate books of business.

  • Externally, our entrepreneur and board meetings are working sessions where we hold CEOs accountable without playing “gotcha”. We always work side by side with our founders and co-investors as partners.

Community

  • We host bi-annual dinners that unite our LPs and founders. On more than one occasion, these dinners have resulted in LPs making additional intros for founders that have resulted in long-term clients.

  • We host tight-knit unique VC events that strengthen connections among fellow investors. One of these dinners sparked a working relationship with an attending VC that we later introduced to one of our LVAM clients, who ended up investing in their new fund.

  • We organize functional roundtables, workshops, and offsites for our portfolio executives, building the Laconia family.

Next week, we’ll dive into our investment thesis & parameters. In the meantime, let us know if you have any feedback here or on Twitter - @jsilverman22, @djarcara, @geri_kirilova, @dleect.