Why Some VC Investments Work Out, and Some Don’t. What I’ve Learned.

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So as an investor, I was fortunate to have a strong start.? My first investments ended up performing quite well.? Investment #1, Pipedrive, ended up acquired by Vista for $1.5 Billion.? Investment #2, Algolia, is worth $2.2 Billion today and a strong IPO candidate for 2023 and beyond.? Investment #3, Talkdesk, is worth $10 Billion.? Investment #4 was part of Greenhouse, acquired for $800m+.? And Investment #6 was Salesloft, acquired by Vista for $2.3 Billion.

But as time goes by, you see the patterns.? What works, and what doesn’t.? And why.? And as more time goes by, they haven’t all worked out.

So a few things that didn’t work out for me at least:

• Momentum Investing.? This is piggy-backing on someone else’s hot investment, without being 100% sure on your own it’s the right one to make.? This has been a total negative strategy for me.? I’ve only done one material investment like this, but 3 tiny ones as experiments haven’t done much, either.? There are ways to make this strategy work.? But for me at least, I’ve learned make your own momentum.
• CEO of bit of a b.s. artist.? The above billion+ exits, the CEOs were all quite different.? Some caring, some a bit less so.? Some very transparent, some guarded.? Some sales-y, some very technical.? But all were honest.? What they did share, was true.? By contrast, every CEO I invested in that fudged the numbers … none are really going to go big.
• CEO good at sales, but CTO not that great.? This was a bet I made a few times, and I learned.? A CEO that is great at sales can often brute force things even to $10m, $15m ARR or more.? But if the product isn’t great, it catches up to you.? A truly great CTO, though, makes sure it doesn’t really catch up to you.? So now I try to only invest in Great CEO + Great CTO combos.

This edition of the SaaStr Insider is sponsored by?DevRev.

And a few things stand out in the “ok, but not great” exits:

• CEO not better than me.? Only other founders will truly get this, but being a CEO is hard.? Really hard.? If you aren’t a better CEO than me, it rarely leads to a big outcome.? But if you had the same traction I did, but are a better CEO … you can build a unicorn.? You really can in SaaS.
• CEO who couldn’t control burn rate.? Some CEOs just can’t get the burn rate under control.? Personally, I haven’t seen a great outcome here.? It’s one thing to let a high burn rate slide for a few months, but some CEOs literally don’t think there is anything they can do to make their cash last.? The best ones just find a way.
• Not really SaaS.? I’ve tried experimenting in investing in startups that have SaaS elements but aren’t really SaaS.? So far, no big successes here, either.? That’s likely on me.? I do understand SaaS.? But maybe I don’t really understand other things with recurring revenue nearly as well.

And a few things that happen even at the best of startups, that don’t, in the end, stop you from building a unicorn or better:

• A really, really rough year. ?Almost every top investment I’ve made has had 1 year of slow or rough growth.
• Bigger, better-funded competitors. ?The best founders recruit the best teams, which doesn’t always completely overcome better-funded startups. ?But it does mean they can’t be stopped.
• Slow in the early days. ?All my top investments (Talkdesk, Algolia, Salesloft, Gorgias, Pipedrive, etc) had no or little revenue in the early days. ?We don’t all hit $1m+ ARR by month 12. ?In fact, most of us don’t. ?It took UiPath 10 years to get to $1m ARR!!

Now, if you have enough strong outcomes, the smaller ones don’t really matter that much.? But I’ve learned to stick to the plan.? Invest in SaaS companies with great CEOs + CTOs with a smidge of traction. That maybe the others … overlook.

This edition of the SaaStr Insider is sponsored by A-lign.