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.

The Undervalued and Overlooked Skills I Learned Interning with the Laconia Crew

It takes serious guts to be a venture capitalist. One must be willing to take enormous risks for uncertain returns. It’s definitely not a stable, clear-cut path. Perhaps this was what drew me to entrepreneurship and venture capital. The idea that you can make it big or lose it all is unnerving but fascinating to me.

I was first introduced to Laconia Capital Group by Peter Wiener, a former manager whom I had worked with at Bank of America Merrill Lynch. Laconia Capital Group’s venture capital funds focus on late seed B2B SaaS startups in the Northeastern US with monthly recurring revenues of at least $25,000. Going into the internship, I did not know what to expect. I knew that I wanted to learn more about the business and how venture capitalists evaluated startups, but that was it.

Four months later, I can say that, without a doubt, my internship at Laconia has been nothing short of a phenomenal experience. I have learned so much from Jeff, David, DLee, and Geri. I sat in on pitch meetings, portfolio company strategy calls, and partners’ meetings. I crafted market research for portfolio companies. I wrote investment memos for potential deals. I even helped source potential deals. In fact, the internship never felt like work. Rather, it was more like attending office hours with three extremely intelligent and business savvy professors and one brilliant TA. I probably ask David on average 15 questions a day. Thanks for being super patient and answering all my random questions, David.

As my internship concludes, I have begun to reflect on everything I have learned during my time here. One thing I have realized is that many times, students and working professionals focus too intently on gaining hard, technical skills and overlook the softer skills. There is nothing wrong with learning how to program if you aspire to be a software engineer or learning how to design circuits if you plan to be an electrical engineer. While it is nice to have technical skills, they are not a necessity in the venture capital world or the broader business world. Instead, people should focus more on learning and developing soft skills. These are the skills that become more useful and essential in life. There are three soft skills that I learned and developed over the past few months.

Writing

Writing is arguably one of the most important skills to have for any career. It is a way to solidify intangible thoughts and ideas that someone has in his or her head. The process of writing things down can also help identify fallacies in the ideas. Writing is essential to communicating one’s thoughts. Someone can have the next billion-dollar idea, but if he cannot convey that idea to others, then it is meaningless like a check that cannot be cashed.

At Laconia, writing is viewed in the highest regard like how Michelin star chefs view their cooking appliances. Whether it’s responding to emails, crafting investment memos, or writing LP letters, both syntax and grammar are important. At Laconia, I was able to become a better writer and to learn proper business writing, which is very different from academic writing.

Relationship Management

Business is built around relationships. In venture capital, successful relationship management can differentiate the professionals from the amateurs. In today’s Facebook Messenger and Instagram society, it is easy to keep in touch, but it is also easy to lose the personal touch. Now more than ever, successful relationship management is critical. It doesn’t take much to stay connected. A follow-up email after an initial meeting or an occasional update is all it takes. As Jeff says, “Follow-up emails should always be sent out within 24 hours.”

Laconia has a seamless relationship management process that I was able to learn and absorb. No email is left unread. No request is left unanswered. No call is left unreturned.

Critical Thinking

As Laconia went into due diligence with two startups, I was assigned to write investment memos about the companies. Investment memos are essentially Laconia’s version of McKinsey Insights but with more detail and research. Writing investment memos taught me to think critically and holistically about different startups, their value propositions, market fit, competitors, and exit potential. The ability to think critically about any topic or issue is a vital skill. Whether someone is a venture capitalist or an entrepreneur, he or she will face a wide swath of problems with various learning curves. It is impossible to prepare for each problem, so it is important to be able to think outside the box and approach each problem with an unique perspective.

There is a Chinese proverb that says, “It is better to walk 10,000 miles than to read 10,000 books.” Most classes that students take are not applicable to the real world. School provides students with a foundation, an academic framework of thought. However, it is up to that student to build upon and expand that foundation. Internships are a great opportunity to gain that practical experience. Speaking from experience, I have learned so much from the Laconia internship that I would not have learned at Columbia. Yes, I learned about the B2B SaaS market. Yes, I learned how to construct financial models and read cap tables. But more importantly, I also learned valuable and overlooked soft skills that will stick with me forever. These are the skills that will help me in my future endeavors.

Tony Zheng is a junior at Columbia University studying computer science and psychology with an interest in entrepreneurship, artificial intelligence, and renewable energy. He is involved with the Columbia Organization of Rising Entrepreneurs and is an avid camper and reader.

This NYC Startup Fully Automates Vendor Marketing in E-Commerce

Spotfront is an automated vendor marketing platform that gives retailers the ability to generate revenue by providing brands with tools to promote their products. The Spotfront SaaS solution, PromoteIQ, provides a significant revenue gain to the retailer over traditional ad network monetization. The 5-year-old company is growing rapidly and their PromoteIQ platform is already used by a number of leading retailers including Overstock and B&H Photo.

Read the full article here

Chasing the Money: Making Capital a Strategy

Over the past 9 months, we have screened thousands of companies, had introductory meetings with about 200 founders, and conducted deep due diligence on about a dozen. Whether we’re doing a full dive into a company’s history, projections, and vision, or just having a quick chat about short-term goals, one topic that almost always comes up is the alignment of entrepreneurs’ operating strategy with a thoughtful and defined capital strategy.

We have been repeatedly surprised by how few entrepreneurs see capital as a strategic activity. Raising money for the vast majority of entrepreneurs we encounter (even some really excellent operators) is a glorified form of securing what may be referred to as allowance money. VCs are pseudo-parents, there for the asking in order to get cash in one’s pocket!

But, venture capital functions so very differently from merely being money in the bank. And trouble will brew if it’s not seen in its full utility.

The benefits of a sound capital strategy are numerous. For one, disciplined management of optimal cash resources allows founders to foresee operating pitfalls that may have otherwise gone unnoticed for months. This attention to strategy and capital needs provides founders with the tools to adapt and make adjustments in a timely manner. Beyond merely ensuring the survival of the company, a sound capital strategy maximizes a company’s leverage in subsequent financings. Planned and controlled runway is a strength that will be rewarded in higher valuations and dollars raised. A position of strength and operating integrity will be created through an optimal capital strategy.

While the benefits of an optimal capital strategy may be somewhat obvious, the mechanics of actually building it are less so. Let’s start with the numbers. Operating a startup is like navigating through a jungle Tarzan-style. The entrepreneur swings from one milestone vine to another in order to progress toward scale and sustainability. Swinging too far or not far enough is dangerous.

As such, clearly defined milestones must inform the raise amount. In nearly all cases, the amount of capital raised should lead to either the next round of financing or profitability within a given time frame. A raise amount should not merely allow for X months of runway. To determine this optimal round amount, build a financial model that granularly accounts for the drivers and variables of both revenue streams and costs, making sure to factor in some leeway/optionality. It is often helpful to have 2-3 different scenarios modeled with varying round amounts, hiring plans, and sales projections to truly understand what can be ramped up or slowed down. Use this information to raise optimal cash that tightly supports the execution vision in month-to-month detail.

After mastering these numbers, the next earnest consideration is the investment partners. Much has been written on the topic of choosing “value-add investors”, but the point remains: as hard, long, and disheartening as fundraising may be, putting in the sweat to secure VCs and strategic investors that contribute their networks and expertise to your company is immeasurably more worthwhile than settling for the low-hanging fruit of funding simply for the sake of moving on. Choose your partners wisely. Do your due diligence. As we always tell the founders we meet with, ask a VC’s portfolio companies what working with them is like, not just when things are going well but especially when they aren’t. A strong investor network, in combination with a solid Board of Directors (more on that in our next blog), can make or break a company.

In addition to the right partners and the right capital, founders also need to be mindful of capital structure itself. Some of the elements to keep in mind are below:

  •  Number of investors (both individuals and entities) -- having a cluttered cap table with dozens of investors can become a logistical nightmare regarding updates, information requests, and general communication. While the diversity of perspectives that comes with a varied investor base is valuable, there is an inflection point after which the utility of numbers begins to decline.

  •  Investment vehicles -- venture rounds can come in all shapes and permutations, with combinations of notes, SAFEs, preferred equity, common stock, etc. Though notes are often touted as being simpler to structure and execute, this is not necessarily true for early stage rounds; term sheets are quite vanilla and can be done comparably quickly and inexpensively. For everyone’s benefit, keep structure as simple as possible. Particularly avoid stacked notes with varying caps that reduce transparency for both founders and investors alike. Fred Wilson’s post on Convertible and Safe Notes adds additional color.

  •  Terms -- in line with the previous bullet, again, keep terms as simple as possible. Atypical preferences, ratchets, etc. have no place in early stage financings. Brad Feld’s timeless Term Sheet Series is a fantastic resource for those unsure of what to expect or avoid.

Often, we use a “clean cap table” as a proxy for a deliberate capital structure: if the above is done correctly, a neat cap table will reflect it. If prior financings were suboptimal and unnecessarily complex, a new round is the perfect time to reset the overall strategic direction, as a mess of a cap table is often a deterrent of future investment interest.

Finally, make sure that the capital strategy leaves the founders with enough skin in the game to want to play. Nothing makes us as investors more miserable than seeing founders crammed down into a miniscule amount of equity that will require nothing short of a miraculous exit for the venture to have been worth their while.

Applying strategic thought to capital, rather than treating it as a temporary, painful and necessary evil, will pay off in building a sustainable venture. With some luck, you may even find the ordeal rewarding.