Dan Martell - Investing In SaaS Enabled Marketplaces with Christoph @ PointNine.com - Escape Velocity Show #41

00:00:00.000 I think you have to think about whether the free plan will

00:00:04.720 attract the right users.

00:00:19.760 Christoph, thanks so much for coming on, sharing your wisdom.

00:00:22.880 Appreciate you.

00:00:23.720 Thanks for having me.

00:00:25.600 I've read a lot of your blog posts on freemium, SaaS,

00:00:28.200 unicorns, all this fun stuff.

00:00:31.560 You're an investor, 0.9.

00:00:33.880 You've got an incredible portfolio type form, Algolia.

00:00:37.500 I mean, who are some other folks that you've invested in?

00:00:40.320 Thanks for that.

00:00:41.560 Contentful is maybe a company that you've heard about.

00:00:44.220 For sure.

00:00:44.600 Gekoboard, which is one of my still angel investment days

00:00:48.760 prior to 0.9.

00:00:50.620 Or Zendesk is probably one of the most well-known ones.

00:00:54.480 And then somewhat outside of SaaS,

00:00:57.000 There are a couple of companies like Delivery Hero or Revolut

00:01:00.920 that were very happy investors.

00:01:02.700 And how do you get in these deals?

00:01:04.440 How did you discover the Algolia, the Typeforms, the Zendesk? 0.99

00:01:08.100 Is it the European side of it, or is it relationships?

00:01:13.200 I mean, how do you get access to deals for you?

00:01:16.460 I think it has changed a bit over time.

00:01:18.900 So I think my answer is probably somewhat different for,

00:01:23.200 let's say, the first couple of years of investing,

00:01:26.860 which is like the period of time between 2008 to 2012, 2013.

00:01:34.040 There's no clear cut, obviously.

00:01:35.640 And then the years after that.

00:01:38.020 So when we started this, first me as an angel investor in about 2008

00:01:43.340 and then with 0.9 a few years later,

00:01:47.080 there was so little capital available,

00:01:50.540 at least outside of the hotspots like Silicon Valley,

00:01:54.940 maybe New York or London, that many times there was no competition at all for these companies.

00:02:03.260 We were finding companies and talking to companies and either we were the only investor,

00:02:11.820 the only serious investor they had ever talked to at that time, or they have talked to investors

00:02:16.940 but got lots of rejections. It was a really, really tough time to raise money in 2008 and

00:02:24.540 in 2009, 2010, especially in Europe.

00:02:29.240 I think in Europe, probably you had two factors coming together.

00:02:33.020 One, there was never an ecosystem of venture capital

00:02:36.780 comparable to the Bay Area.

00:02:38.760 And then you had the impact of the financial crisis

00:02:41.440 of the end of 2008.

00:02:45.760 Disintegrated.

00:02:46.700 Exactly.

00:02:47.340 So that was really, really hard to raise,

00:02:51.100 even for companies like Zendesk.

00:02:53.100 I'm happy to talk about that.

00:02:54.540 in a minute, but to get back to the second part of the question, how do we do this today?

00:03:03.220 I think today it's much less frequent that we talk to a company and they are the only

00:03:10.600 investor they've ever talked to, which is also, to be honest, it's much healthier if

00:03:14.980 there is a ecosystem.

00:03:15.980 Yeah, I mean, that's the signaling.

00:03:17.300 There's something wrong with the founder if they haven't talked to other investors.

00:03:20.300 Right, so that would be very unusual today.

00:03:24.440 But I think we still have very good access,

00:03:27.900 how you called it, because meanwhile we have a portfolio,

00:03:32.240 we have built up a reputation, we get referrals,

00:03:36.220 and so while in the very early days

00:03:39.140 it was very much just us finding companies

00:03:42.540 and emailing them out of the blue,

00:03:45.840 this is how I found Zendesk and Clio

00:03:49.100 and many other companies.

00:03:50.120 You just cold emailed them?

00:03:51.420 Yes.

00:03:52.260 Dude, I love the hustle.

00:03:53.220 Most entrepreneurs don't realize investors have to raise their own fund.

00:03:57.580 They're their own entrepreneurs, and you go and get your own deals.

00:04:01.620 That's cool.

00:04:02.660 Yeah, I don't know.

00:04:03.460 If there was any doubt, investors actually work.

00:04:06.580 They work, yeah.

00:04:08.060 I don't know if anybody still has that perception of VCs on the golf court.

00:04:14.640 I don't know.

00:04:15.120 Maybe that's not even a cliche anymore, but if it ever was a reality,

00:04:21.980 that's definitely not what we see today. And there are actually some funny stories around

00:04:27.260 some of these outbound emails, like some of them went into a spam folder and email again. And

00:04:34.700 some cases that actually led to investments that we're very happy with today.

00:04:39.180 So where was the Zendesk? I believe you can talk about it because they're obviously

00:04:42.860 far along. What did that, what did they look like when you first met them?

00:04:47.720 It was really, really early.

00:04:50.000 It was already at the lowest time.

00:04:52.480 Like less than 2 million AR?

00:04:54.060 Oh, it was much, much less.

00:04:55.540 It was 50K MR.

00:04:58.680 No, no, no, no, no, no.

00:04:59.700 Less.

00:05:00.060 It was, I think, 7K MRR.

00:05:03.520 So like less than 100K ARR.

00:05:07.080 Wow.

00:05:07.740 So that was really, really early.

00:05:09.000 I think they had 70 customers each paying about $80.

00:05:14.220 So 6, 7K MRR.

00:05:16.280 It was really, really early.

00:05:18.560 And it was the founders, three founders, and one employee

00:05:24.800 and a couple of freelancers.

00:05:28.100 The founders were operating out of one of the co-founders,

00:05:32.480 Alexander's Loft, out of Copenhagen.

00:05:34.400 There was not even a real office, and some freelancers.

00:05:39.000 And that was the stage of the company.

00:05:42.000 Now, I know that for Zendesk, moving to the Valley or the Bay

00:05:47.780 Area was, they're the ones that people point to.

00:05:50.500 If you're European, you have to do that. 1.00

00:05:52.000 I feel like it's happening less.

00:05:53.300 I mean, obviously, there's other companies

00:05:56.520 that do both, like an intercom that's

00:05:58.120 both in the Valley and in Dublin.

00:06:02.440 If you can remember back those conversations,

00:06:05.640 from the investor's point of view,

00:06:08.760 What was your feedback for them from your perspective?

00:06:11.940 Yeah, I think at that time, in like 2009 or end of 2008, beginning of 2009, I think

00:06:20.080 there was no other choice.

00:06:21.560 So at that time, the company didn't manage to raise a Series A here in Europe.

00:06:28.040 So I remember really those meetings.

00:06:30.320 I went to a lot of meetings with Mikkel to the VCs who existed at that time.

00:06:36.380 And they would have been at scale to a certain degree at that point.

00:06:39.000 It wasn't huge scale.

00:06:41.120 So I wouldn't blame anybody for not jumping on that because I think it wasn't obvious.

00:06:48.680 I think today they would get funded.

00:06:51.780 There's more data points too, right?

00:06:53.360 Because like an $80 a month customer back then, there wasn't a lot of companies look like, right?

00:06:59.280 And it was just a totally different world, right?

00:07:02.240 You didn't have the role models of companies that

00:07:05.900 got to significant scale selling to SMBs.

00:07:08.720 Because at least at that time, Zendesk was mostly about SMBs.

00:07:12.260 Meanwhile, they went quite a bit upmarket.

00:07:15.200 But there was a lot of resistance because of the SMB angle.

00:07:20.140 And it was really like, how are you

00:07:22.640 going to acquire all these customers?

00:07:25.280 And even the cloud was not a no-brainer yet.

00:07:29.120 I mean, there was already like Salesforce

00:07:31.400 And a couple of other companies that paved the way.

00:07:34.960 But if you look at the entire cloud spend, how it has changed in those somewhat more than 10 years, it's pretty incredible.

00:07:42.540 Or if you look at the market cap, it was really a totally different world.

00:07:47.600 And at that time, I think there was pretty much no choice rather than moving to the U.S., mainly for money, like the most immediate driver, and then for talent.

00:08:00.360 And I think the money reason is gone today, which is good.

00:08:05.120 So if you are a SaaS company and you want to raise a Series A or a Series B or even a Series C, you can do that in Europe.

00:08:12.880 You still don't have nearly as many options.

00:08:14.820 With European investors or stay in Europe and raise from the Bay?

00:08:19.060 Both.

00:08:19.580 I think if the company ticks the boxes, I mean, this is maybe a bit oversimplistic,

00:08:26.460 But if it's a company that has some traction and is on to something, they get an increasing amount of attention from U.S. investors, for sure.

00:08:36.160 And there are also a lot more European investors during those times.

00:08:41.440 So I think the money reason has pretty much gone.

00:08:45.780 Does it mean that it couldn't be beneficial because you have a lot more investors?

00:08:50.000 Maybe you have more really experienced investors.

00:08:52.580 But it's not like you have to move to the U.S. because there is simply no money here.

00:08:58.580 The other big question or the other big driver, like talent, is something which we keep thinking about a lot every single day.

00:09:07.520 How can our SaaS companies, when they need to hire an experienced VP of sales or experienced VP of marketing or product or any of these key areas,

00:09:18.660 What are the chances of finding them in Europe versus finding somebody in the U.S.?

00:09:24.540 And I think that often is a driver for European companies to make the move.

00:09:30.940 Obviously, there are other reasons, like it's the biggest software market.

00:09:34.960 If it's, let's say, an API like Contentful or Algolia, then you probably want to be where most of the action is.

00:09:43.600 and where the ecosystem, the strongest ecosystem of customers, partners,

00:09:48.660 like where the other components of the modern tech stack,

00:09:52.800 like Stripe, Twilio, all of these companies,

00:09:55.960 where all either are from the Bay Area

00:09:58.680 or at least have a very strong presence there.

00:10:01.260 So I think it's still not an equal or a level,

00:10:08.900 I don't know what's the right way to put this,

00:10:10.560 It's not an equal playing field for US companies

00:10:15.300 and their European counterparts.

00:10:17.260 I think in some ways, European companies

00:10:19.600 are still at a disadvantage, because you

00:10:22.180 don't have this huge amount of role models

00:10:26.460 that you have in the Bay Area, where you have Slack, Dropbox.

00:10:29.940 Now, all these great companies, I mean,

00:10:33.080 obviously, it's incredibly hard and expensive

00:10:36.040 to hire from these companies.

00:10:37.380 So there might even be a little bit of a grass

00:10:40.320 is greener on the other side element

00:10:41.920 because all founders that I talk to

00:10:43.980 who are in the Bay Area

00:10:45.080 complain, and rightly so, 1.00

00:10:47.680 about the difficulty of hiring

00:10:50.380 and keeping people

00:10:51.460 and then engineers get

00:10:53.280 unbelievable salaries

00:10:54.640 from Google and Facebook.

00:10:56.560 So I think that's the other side

00:10:59.340 of the coin there.

00:11:01.100 But I think on balance,

00:11:04.840 I would still prefer to be

00:11:06.600 in an ecosystem

00:11:07.500 where you have a huge talent pool

00:11:09.660 even if it's very hard to compete

00:11:12.400 compared to being somewhere

00:11:15.260 where you just don't have that level of experience.

00:11:21.020 But I think maybe just to the last point on that,

00:11:23.860 fortunately, maybe for European companies

00:11:26.880 and for us, this is not something

00:11:28.920 that most companies, I think,

00:11:31.560 have to worry about in the early days.

00:11:33.940 I think it's more when you get into scaling,

00:11:36.640 which is why it's not like we invest in a company

00:11:38.980 and then we immediately discuss, hey, you have to move to the US.

00:11:41.600 So I think it's something that becomes more and more important over time,

00:11:48.080 usually driven by having the need to upgrade the management team

00:11:54.040 or get additional talent.

00:11:55.480 So scaling.

00:11:56.260 You have some time to figure it out.

00:11:57.960 Totally.

00:11:58.680 One of the things I love about you is that you blog quite a bit, Christoph,

00:12:02.000 and I think you've been doing it for a while, right?

00:12:03.760 How long have you been blogging for?

00:12:05.940 I think I would have to check,

00:12:07.920 But I think my first Hello World blog post is probably

00:12:12.240 from 2005 or something on blogspot.com.

00:12:17.160 It's still there.

00:12:17.940 It looks like a dinosaur.

00:12:21.660 You're not going to win design awards,

00:12:22.920 but you're still actively blogging a few times a year.

00:12:26.820 And from an investor point of view,

00:12:29.760 people are always talking about adding value.

00:12:31.880 What is your value add?

00:12:33.480 What do you think other portfolio companies would say,

00:12:36.780 Krzysztof adds value in these areas from your perspective.

00:12:39.780 Yeah.

00:12:41.040 I mean, I'm hoping that I'm adding value

00:12:44.100 by being just a good sparrings partner,

00:12:47.600 whether that's by being a formal board member or not.

00:12:51.240 In the early days, it really doesn't matter that much.

00:12:54.400 So you usually don't have these very formal board meetings.

00:12:57.120 Yeah, there's no challenges, big conflicts early days.

00:12:59.940 So yeah.

00:13:00.600 It's more around just being in pretty much contact,

00:13:05.580 like almost on a daily basis, and maybe

00:13:07.980 having somewhat more scheduled update meetings or calls

00:13:14.320 every couple of weeks.

00:13:15.900 And so I think it's about the personal interactions

00:13:19.560 where I try to transmit some of the learnings that I've made

00:13:26.480 personally as a founder.

00:13:28.080 And you're a two-time founder.

00:13:29.260 So I mean, you've got real operational experience

00:13:31.440 to bring to the table.

00:13:33.060 I would say yes, on the one hand.

00:13:35.160 On the other hand, I would also say that knowledge is somewhat outdated, probably.

00:13:39.820 I think the knowledge that I gained by being an investor in so many SaaS companies over

00:13:47.500 the last 10 years is probably more relevant.

00:13:49.900 I think maybe it helps that I have been a founder myself.

00:13:55.260 I think it helps in terms of the empathy. 0.98

00:13:57.280 And I really have a lot of understanding for all the shit you go through as an entrepreneur. 0.92

00:14:02.300 and I've seen the other side of having to raise venture capital and maybe like the difficulty 0.98

00:14:09.500 in understanding terms and stuff like that. So I think it helps me in terms of just the

00:14:14.580 like understanding that but in terms of like solving specific problems whether that's in

00:14:20.480 terms of the sales funnel or marketing or hiring. I think like the more recent experience

00:14:24.820 is probably more relevant.

00:14:28.160 And in addition to being good sparrings partners,

00:14:33.160 or mentors, or board members, or however you want to put it,

00:14:36.640 I think meanwhile, our portfolio companies

00:14:39.860 get a lot of value from the other 0.9 portfolio companies.

00:14:43.580 And do you guys organize like CEO summits?

00:14:45.940 Or how do you create that value?

00:14:49.240 Yeah, absolutely.

00:14:49.940 So we started this and pretty much almost everything that we did was not a result of a huge master plan.

00:14:59.320 Just like when I wrote my first blog post, I had no idea where this would lead me to.

00:15:06.300 And so I think seven or eight years ago, we thought it would be cool to bring together the founders of our, at that time, still pretty small portfolio into one room.

00:15:17.860 And so we organized a meetup for the founders of all of our SaaS companies in San Francisco.

00:15:25.100 And I think maybe we had 30, 40 people there, mostly from the portfolio, some outside experts, some other investors.

00:15:33.580 And that was a huge success because, again, at that time, there was no SaaS stock.

00:15:39.100 There was no Saster.

00:15:40.460 You didn't have all these opportunities to learn from your peers.

00:15:46.340 So people really like that opportunity

00:15:48.940 to learn from each other.

00:15:51.300 When I raised capital for my company, Clarity,

00:15:54.380 that was one of the requirements.

00:15:56.280 When I put the final cap table together,

00:15:58.100 I said, all I ask from you is intros to investors

00:16:01.580 for my next round, and that you invite me to a dinner

00:16:05.180 two or three times a year with other portfolio.

00:16:07.560 Because that is the, I don't know, for relationships.

00:16:11.040 And talking to another peer, your investor,

00:16:14.320 I always felt like they're a little biased, right?

00:16:17.200 Like they sit on your board, you want to be open,

00:16:19.660 but how much can you really share?

00:16:20.860 But to another peer that's going through it the same journey,

00:16:24.360 or even a year or two ahead of you, is so much value.

00:16:26.680 The fact that you guys did that is,

00:16:29.460 because I had to beg for it.

00:16:30.700 Really?

00:16:31.200 Oh, yeah.

00:16:32.040 Some of them are like, wow, you're

00:16:33.880 asking for some real work.

00:16:34.960 And I'm like, yeah.

00:16:36.400 And I think it's more common with bigger investors,

00:16:39.940 but you guys are a $75 million fund.

00:16:41.920 Yeah.

00:16:42.420 So that's really cool to hear that you've

00:16:43.840 You've been doing this for seven years.

00:16:45.140 So I mean, it's also, I mean, it's a lot of work,

00:16:47.000 but it's also a lot of fun and, like, the excitement

00:16:50.340 that you can feel.

00:16:51.380 And you bring in other investors that

00:16:53.400 might lead future rounds.

00:16:55.060 We did that a couple of times.

00:16:58.180 And I think it was great to give our portfolio companies

00:17:00.920 the, like, the exposure, right?

00:17:02.860 And then probably also, like, some competitive pressure,

00:17:06.200 because, like, these later stage investors also

00:17:08.400 see, well, they're not alone here.

00:17:10.480 So I think that was helpful at the time.

00:17:12.600 Does it change the conversation?

00:17:14.160 What we did in the last year is we made it more private

00:17:17.420 because we got the feedback.

00:17:20.240 As you said, what people really appreciate the most

00:17:23.400 is being together with other founders

00:17:25.460 where you can talk about all your war stories and your concerns

00:17:31.820 and you don't want to have other investors in the room.

00:17:34.960 So maybe we'll do that.

00:17:37.000 And then one dinner with the investors.

00:17:38.660 We might do that as well.

00:17:40.420 But really the biggest benefit that we see is really bringing people together, letting them learn from each other, bringing in, like, some experts on certain topics.

00:17:52.720 And, yeah, that's been hugely valuable for our portfolio companies and ultimately for us as well.

00:18:02.440 That's cool.

00:18:02.880 One of the things I'm going to say, I mean, it's totally random, but it's worth saying.

00:18:06.880 I analyzed 1,250 B2B SaaS sites to kind of create a design pattern for what I call the authority site.

00:18:14.060 If you're building a site, you need these five pages, et cetera.

00:18:16.360 One of my favorite, literally favorite companies' websites I ever came across to this day, still to this day, is Algolia.

00:18:23.860 Oh, really?

00:18:24.380 It's just the most concise.

00:18:26.320 For what they do, it is clear.

00:18:29.280 It's concise.

00:18:30.180 It has a customer reference.

00:18:31.300 It's beautiful.

00:18:31.780 They have solutions.

00:18:33.280 I don't know who's running marketing there.

00:18:35.040 I don't even know who the founders are.

00:18:36.540 But obviously, you saw something in them.

00:18:39.120 Like, what is it about that team?

00:18:41.540 Because to me, if I see something like that,

00:18:43.240 obviously, there's some clear thinking.

00:18:46.280 What was it about that team that made you

00:18:48.400 excited about investing in them?

00:18:50.540 Yeah.

00:18:51.040 I mean, meanwhile, you're right.

00:18:52.660 They have a very good management team.

00:18:55.020 Also, they have a great board, like later stage investors,

00:18:58.440 an independent board member.

00:19:00.460 So they get a lot of great advice,

00:19:03.400 and it's a very strong team today.

00:19:05.700 When we invested, it was really just the two founders,

00:19:10.100 Nicolas and Julien, both from France.

00:19:14.080 Yes, they started out of Paris.

00:19:16.780 Meanwhile, they have a dual set up

00:19:18.940 with Paris and San Francisco.

00:19:20.840 Paris, mostly product and engineering.

00:19:23.860 San Francisco, mostly the commercial part.

00:19:27.360 And I mean, these two guys are just unbelievably smart.

00:19:32.900 Wasn't it a pivot now that I think about it?

00:19:34.900 Was it like an on-premise, on-server?

00:19:37.820 Or maybe it still works that way.

00:19:38.960 There was a slight change.

00:19:40.340 I think in the beginning, it was mostly

00:19:44.180 like the original pitch was quite heavy on,

00:19:46.880 we become the best search provider for mobile apps.

00:19:49.860 That's what it is, mobile apps, yeah.

00:19:51.700 And then it became a lot more than that.

00:19:56.460 I wouldn't say it's been a pivot.

00:19:59.560 It's just an extension of what they're doing.

00:20:00.140 But it's been a huge extension.

00:20:03.300 And I think none of them has a marketing background

00:20:07.020 or has significant commercial experience.

00:20:10.980 They are both trained engineers with a lot of highly relevant specific experience.

00:20:18.440 They were at a search company before that.

00:20:21.360 But I think they're just so smart that they figure it out

00:20:25.200 and that they learn quickly and find the right people

00:20:29.200 in areas where they need the support.

00:20:31.440 I agree.

00:20:33.040 You've talked about the four things,

00:20:34.460 I think, that companies need or get from freemium.

00:20:37.800 Unpack that for people, because I know it's a,

00:20:40.540 I remember, I think it was Heaton Shaw and I were arguing.

00:20:42.300 He's saying in the future, every SaaS product

00:20:45.360 will have a freemium alternative.

00:20:47.540 I'm not sure I'm there.

00:20:50.160 And maybe he's changed his view on this

00:20:51.500 is about three years ago, but what

00:20:52.640 What are your thoughts on freemium as a strategy?

00:20:57.640 Yeah, definitely that's a good topic to talk about.

00:21:01.520 I think freemium can be fantastic.

00:21:05.360 There's no question about that.

00:21:06.800 There are a lot of companies, and maybe most famously

00:21:11.320 Dropbox or Slack, where freemium has been

00:21:15.520 a huge driver of their success.

00:21:18.260 But I think at the same time, it's not for everybody.

00:21:21.340 So I think you really have to look at the details

00:21:26.540 and consider a couple of factors to determine

00:21:28.800 if freemium is, let's say, worth a shot for you.

00:21:32.900 At some point, I think if you think it could be right,

00:21:35.320 you probably have to try it.

00:21:36.280 Because it's hard to guess what will happen.

00:21:39.460 What is the impact on your sign-up rate,

00:21:42.240 on your conversion rate, all of that.

00:21:45.340 I think it has a huge impact.

00:21:48.620 But I think when I look at companies that we meet or just products that I look at,

00:21:57.340 I think maybe somewhat too many companies think they have to have a free product.

00:22:02.880 I think generally there is a tendency among founders to underprice.

00:22:10.460 And it's maybe somewhat related to that.

00:22:12.800 And I guess the reason is that most people who start a SaaS company have a product or tech background.

00:22:18.620 because as a business person, you're useless in the beginning, right?

00:22:22.540 You can't do anything.

00:22:23.240 In the beginning, you need people who build the product.

00:22:26.740 But those people are generally not the ones who have sold to enterprises before

00:22:32.560 or who enjoy that part.

00:22:34.860 So I think the ideal is always in the beginning, that dream,

00:22:38.300 you get the product, you put it online, it's self-service,

00:22:41.440 never have to talk to any customers.

00:22:42.940 I think that doesn't work.

00:22:44.100 But that maybe explains why there is quite a strong, I don't know if it's a bias or at least a preference towards a self-service, free trial, high-velocity model, and why maybe there aren't that many companies that start with an enterprise offering.

00:23:04.020 I mean, I think there are other reasons for that, too, around just how hard it is.

00:23:07.880 So do you think every mid-market B2B SaaS should have a free, freemium version?

00:23:14.280 I think not every one.

00:23:15.900 I think it depends on the company.

00:23:17.360 What needs to be true?

00:23:17.820 Yeah, I think there are some factors

00:23:20.120 that make you a more or less likely success.

00:23:23.100 Like market size, I'm assuming, right?

00:23:25.060 That could be one.

00:23:26.340 And also, I mean, simply maybe starting with your costs.

00:23:30.080 Like what's your cost structure?

00:23:31.740 Like do you have a 95% margin?

00:23:34.280 And it's maybe OK.

00:23:36.180 But if you maybe have-

00:23:37.100 You have a big storage.

00:23:38.120 Exactly.

00:23:38.520 If you have significant costs related to bandwidth or API usage or I don't know if it's something with machine learning and you process a lot of data.

00:23:50.160 So I think then it can become very costly because the moment you have a free plan, I think you have to assume that 95% of your users will be fine with that, which can then become a huge burden.

00:24:04.580 On the other hand, it's also what you want.

00:24:06.560 If you have a free plan, you probably

00:24:09.680 do it because you want to broaden the funnel.

00:24:12.620 So you want all these users, but you just

00:24:15.800 have to think about, can I actually support them?

00:24:17.420 And is the free plan a real product?

00:24:20.320 Because that's the other thing.

00:24:21.300 I feel like sometimes people do freemium,

00:24:22.980 but it's really just a watered-down version

00:24:24.860 of their first plan.

00:24:27.060 And it's not enough to actually wow the customer.

00:24:31.460 You know what I mean?

00:24:32.660 MailChimp, great value.

00:24:34.560 I mean, it's the free line's really high.

00:24:36.720 Like, you could use Mailchimp, get a lot of value from it,

00:24:38.600 never pay them a cent.

00:24:40.120 And the ROI for them is, you're going to tell other people.

00:24:42.800 Right.

00:24:43.300 And you're going to.

00:24:43.800 And I think there is a big trade-off here, right?

00:24:45.860 Like, if you offer, like, too much,

00:24:48.320 then you cannibalize your paying plans.

00:24:52.260 If you don't offer enough, then it's maybe not even enough

00:24:55.100 to get customers to the wow.

00:24:57.780 And I think the reason why it works so well for Mailchimp

00:25:01.060 is another of these big factors.

00:25:03.560 And this is do you have any kind of virality or referral loop built into the product, which MailChimp does?

00:25:09.720 Because in the free plan, every email says powered by MailChimp or you have like you have some kind of signature.

00:25:19.540 Yeah, some branding.

00:25:20.540 Yeah, yeah.

00:25:21.160 I think that is an incredibly strong reason why you should consider that.

00:25:27.060 And another example is Typeform from our portfolio.

00:25:31.120 Oh, my gosh.

00:25:31.740 Typeform.

00:25:32.140 What a great, great product.

00:25:34.160 Yes, absolutely.

00:25:35.300 And they, too, have this built-in referral mechanism

00:25:39.040 because, like, surveys and forms, they are shared.

00:25:42.640 If you're on a free version,

00:25:44.460 there is some branding or call to action, get your own form.

00:25:48.340 And because of that, it makes a lot of sense

00:25:50.660 that you want to have as many users using the product,

00:25:53.860 sharing their type forms with as many users as possible.

00:25:58.360 But if we were talking about a company

00:26:01.100 that has like has none of this like no referral loops like and no idea how they could add one

00:26:08.700 then i think it would be much less obvious that freemium would work for them and then maybe the

00:26:14.240 last thing to add is i think you have to think about whether the free plan will attract the

00:26:21.060 right users like because if you think that would upgrade yes let either upgrade um refer or refer

00:26:27.900 They have to do something of value, right?

00:26:30.020 If they just keep using your product for free forever,

00:26:33.680 that's not great.

00:26:35.020 I mean, so I think you have to think about really a,

00:26:40.580 you have to have some hypothesis

00:26:41.900 and not just offer it for free because everybody does.

00:26:45.240 And there could be very, very good and valid hypothesis,

00:26:49.100 which you can then test.

00:26:51.560 So I don't want to discourage people away from freemium,

00:26:55.980 But I think it's not obvious.

00:26:58.140 I think you have to think through that.

00:27:00.240 Totally.

00:27:00.740 And it's such a big infrastructure piece

00:27:02.820 to change your backend code to support it.

00:27:04.820 I know Michael Litt from Vidyard just went through it.

00:27:07.000 And that was a big bet at their scale.

00:27:09.960 Most people start and go up market for them to come down.

00:27:12.860 It was really cool to see.

00:27:15.820 Typeform, where, I mean, without talking

00:27:18.540 about inside their business, but I've always

00:27:21.420 perceived as a customer.

00:27:22.360 I'm a paying customer for years now.

00:27:24.660 Are they a venture-backed company?

00:27:26.420 I know you're an investor.

00:27:27.200 They are, yes.

00:27:27.840 OK, so have they raised, what's the total capital

00:27:30.560 that they've publicly?

00:27:32.740 They, I'm not sure if they.

00:27:34.660 Because it doesn't feel like a lot?

00:27:35.960 The amount, it's kind of relative.

00:27:38.900 They have raised millions or in the low tens of millions,

00:27:42.820 but they haven't raised hundreds of millions.

00:27:44.660 So we let their original very early seed round,

00:27:49.740 and then they raised another somewhat bigger seed round,

00:27:53.460 and an A and a B. So it's a properly funded company.

00:28:00.120 But they are obviously not as old or big as, let's say,

00:28:05.720 like SurveyMonkey or other companies in that space.

00:28:09.320 It's crazy.

00:28:10.020 I mean, I remember when the product came out.

00:28:11.940 You can tell there's some really great product minds behind it.

00:28:14.740 How many companies in your portfolio are freemium?

00:28:18.620 I don't know the number off the top of my head.

00:28:21.580 Do you have two or three or something?

00:28:23.080 I think almost everybody has a free trial.

00:28:27.400 And I think that makes perfect sense.

00:28:29.380 I couldn't find a reason why you wouldn't do that. 0.99

00:28:32.680 Well, if your product sucked. 0.99

00:28:33.880 Right, yeah. 0.99

00:28:34.980 Maybe that's the company that we try to avoid.

00:28:37.960 Yeah, yeah, yeah.

00:28:40.460 If a true freemium is, does Typeform have freemium?

00:28:46.800 Typeform does, and for them it works because of the virality,

00:28:50.800 because they also want just to get the brand out

00:28:53.420 and they want to get customer feedback

00:28:55.100 from as many users as possible.

00:28:58.760 Zendesk?

00:28:59.820 Zendesk.

00:29:00.560 I think they might still have a, like...

00:29:05.840 Yeah, but it's buried, maybe.

00:29:07.240 It's like FreshBooks or BaseCats.

00:29:09.180 There's a free version, but we don't even talk about it.

00:29:10.980 I think they might still have one,

00:29:12.480 and I think they are very generous

00:29:13.720 in terms of startup programs

00:29:15.980 and, I don't know, maybe educational licenses

00:29:18.320 and things like that.

00:29:19.920 But I think freemium is not a huge driver

00:29:22.620 of the business that way.

00:29:25.260 And what do you see as the trend in the seed stage?

00:29:31.180 Because I mean, it's frigging seeds

00:29:32.520 are now multimillion dollar seeds.

00:29:34.760 And it's like, is that really an A or is that a B?

00:29:37.320 What are you seeing?

00:29:38.220 And then on the flip side, there's a ton of debt.

00:29:40.920 New, I don't know what you call those,

00:29:44.680 financial instruments.

00:29:45.720 Essentially, they're just creative.

00:29:47.420 like you've got all these RBFs, revenue-based financing

00:29:49.960 companies, how do you see the future of N,

00:29:54.000 the predictability of SaaS?

00:29:55.300 So there's more data points and metrics

00:29:57.020 to be able to kind of create some level of a trend line

00:29:59.460 of projections.

00:30:01.040 What do you see changing over the next,

00:30:04.580 and I'm going to throw in another characteristic

00:30:06.600 of even the marketing potentially softening up,

00:30:09.700 where do you see funding for SaaS companies going?

00:30:13.640 Yeah.

00:30:13.880 And it's hard to always, hard to predict anything, right?

00:30:18.700 It's like I was going to say especially about the future,

00:30:21.600 but that's kind of like an old joke.

00:30:23.000 But I think it's especially hard to predict anything about,

00:30:27.600 like, let's say the next few years,

00:30:29.580 because I have no idea if the stock market tanks tomorrow

00:30:33.040 and has all kinds of implications.

00:30:35.220 So I have, like, no idea about that.

00:30:38.220 And maybe nobody has.

00:30:39.540 Nobody does.

00:30:39.960 Even Bump said don't try to predict.

00:30:41.680 you'd have. I think in the long term, like 10 years, I'm super bullish about SaaS. Lots of

00:30:49.960 reasons, I think, why that make me bullish. And because the industry has grown up, there is a lot

00:30:58.820 more available now in terms of financing options, including what you were alluding to, like venture

00:31:05.740 debt or credit lines because the model has become like more understood so um i think now it's pretty

00:31:15.020 clear that if a company for example has no churn yeah even maybe like like positive attention like

00:31:21.980 negative churn then this is a very very solid company yeah it's fundable so you can probably

00:31:29.260 Yeah, lend you some money.

00:31:30.840 Exactly.

00:31:31.360 Like if you have that and if you have a certain scale,

00:31:35.440 maybe just a million or a few million in ARR,

00:31:38.080 you can probably get some money from a bank.

00:31:42.200 And if they are smart, I think they

00:31:44.160 will monitor your SaaS metrics for their risk modeling

00:31:48.920 and so on.

00:31:49.580 And I think we're starting to see that.

00:31:53.560 Yeah.

00:31:53.800 Does Europe have some of these lighter capitals

00:31:58.300 or Scaleworks, or do they have our revenue-based financing

00:32:01.840 companies that are starting to look at SaaS in Europe?

00:32:06.340 I do know that Silicon Valley Bank is quite active here

00:32:09.340 as well, and there are maybe a few others.

00:32:14.820 It's still early days.

00:32:15.820 It's still quite early.

00:32:16.880 It's really interesting.

00:32:17.860 These things tend to, I think, still like they

00:32:21.900 are made in the US area, and then it takes some time

00:32:24.920 to kind of propagate.

00:32:26.620 But it's just fun for me to think

00:32:27.820 of non-dilutive capital options, even between rounds,

00:32:31.900 to just allow them to get to the next level of scale.

00:32:36.060 And then there are some new ones like NDVC, which

00:32:40.240 is allowing you to buy back your investors.

00:32:44.380 It's neat to see how they're slicing and dicing

00:32:47.560 the financial tooling available to founders, especially

00:32:50.920 in the SaaS space.

00:32:52.000 Is your thesis, you mentioned some non-SaaS companies,

00:32:55.900 Is 0.9's focus right now mostly SaaS,

00:33:00.220 or what is your thesis from an investment point of view?

00:33:03.260 So we have two big and almost equally important areas for us.

00:33:09.460 One is B2B SaaS, and the other one is B2B marketplaces.

00:33:13.260 So B2B is kind of what holds them together.

00:33:16.360 And there are some companies that have actually both.

00:33:20.340 We call them the SaaS-enabled marketplaces,

00:33:24.620 or you might also have a marketplace-enabled SaaS.

00:33:27.420 So a SaaS-enabled marketplace is something which,

00:33:32.320 or what we mean by this is, let's say,

00:33:36.240 maybe a company like MindBody to not pick one from our portfolio

00:33:41.200 for a change where the value proposition

00:33:45.180 that you get as a customer of MindBody is twofold.

00:33:49.220 One, you get customers because there is a marketplace.

00:33:51.680 Huge.

00:33:52.000 But you also get tools to serve those customers.

00:33:57.540 And we have some companies in our portfolio, like Eversports, for example,

00:34:02.880 which is a somewhat similar model, different types of sports, different geographies,

00:34:08.820 where if you are a tennis court provider, for example,

00:34:13.180 you can go to Eversports both to get new business, but also to get the tools to manage that.

00:34:19.040 What are other examples of that?

00:34:20.400 Because that's an interesting one, right?

00:34:21.560 Because you think marketplaces, even like Airbnb or Etsy,

00:34:26.560 they have the tooling, but it's to drive the marketplace

00:34:28.800 liquidity.

00:34:30.960 And I think there was a few in the salon space that was, 0.53

00:34:37.500 I forget her name.

00:34:38.400 She had one where it was the tools for the salon, 0.83

00:34:40.820 but also the marketplace.

00:34:44.700 It's fascinating.

00:34:45.560 Is there any other ones that people might know about?

00:34:47.520 There's definitely one in the salon space called Style Seat.

00:34:51.240 Which I know because we're an investor in that wonderful company.

00:34:54.540 That's one of your companies?

00:34:55.380 Yes.

00:34:55.660 Oh, great.

00:34:56.880 Melody.

00:34:57.460 Melody, yes.

00:34:58.300 Melody.

00:34:58.860 And this was interesting.

00:35:00.960 Like, when we invested, I think it was SaaS.

00:35:06.700 Yeah, SaaS.

00:35:07.460 One came first before the other. 0.56

00:35:08.860 Not quite sure if it's the other one, but it's super synergistic now.

00:35:13.840 And we've also seen this from the other way,

00:35:20.020 from the other direction

00:35:22.220 where a company

00:35:24.080 starts with a

00:35:25.840 SaaS and

00:35:28.260 adds

00:35:28.920 revenue-generating tools

00:35:32.420 and maybe eventually even leads.

00:35:35.280 Clio is an

00:35:36.400 example maybe.

00:35:38.920 They started to be a productivity

00:35:40.780 tool like

00:35:41.600 practice management,

00:35:43.960 manage your issues,

00:35:46.560 your matters as a lawyer,

00:35:48.160 or it's a practice management for small law firms.

00:35:52.320 And over time, they realized that this is great,

00:35:57.580 and lawyers love it.

00:35:59.160 They save, I think, an average of an unbelievable,

00:36:01.840 like, I think, eight hours per week or something,

00:36:04.440 which is huge if you have billable hours.

00:36:07.540 But actually, what a lot of the lawyers told them was, well,

00:36:11.920 this is great, but we have an even bigger need,

00:36:14.260 and that's to get new customers.

00:36:15.720 And they're horrible marketers.

00:36:17.400 And so that led Clio to develop revenue-generating tools

00:36:22.400 around marketing automation or call tracking CRM-type features.

00:36:27.680 So I think it's cool to see companies

00:36:31.900 who leverage both a marketplace and SaaS,

00:36:34.800 because then it becomes just super, super sticky.

00:36:37.580 Well, it's interesting, because if you have a marketplace

00:36:40.500 that people use, you've got to build the tooling

00:36:44.600 so there's liquidity.

00:36:45.540 So they're building the tool set.

00:36:46.740 And then it's like, OK, well, some people

00:36:48.780 don't actually need the supply or the demand side.

00:36:51.780 They just want the tooling.

00:36:54.860 It's a really neat way to leverage the same code base,

00:36:57.360 essentially, and monetize it in a different way.

00:36:59.920 It does sound distracting.

00:37:01.740 Like, do you feel like, because I built a Marketplace Clarity

00:37:04.800 and I did a SaaS Flowtown.

00:37:06.760 I mean, doing a Marketplace on its own

00:37:08.980 is like having twins.

00:37:09.980 Like, it's hard.

00:37:11.100 How do you suggest to a founder to think

00:37:14.540 through prioritization around doing those.

00:37:17.020 I think that's a great point,

00:37:18.340 and I think you can't do both in the beginning.

00:37:21.020 I think that's, at least I haven't seen it.

00:37:23.100 I don't know if there are cases.

00:37:24.160 I thought these companies were doing both,

00:37:25.500 and I was super impressed.

00:37:26.560 I think it takes time,

00:37:28.860 and I think you have to be clear on that path.

00:37:34.620 So, for example,

00:37:37.260 there is a company in our portfolio called Dog Planner,

00:37:41.200 which you can use as a patient to find doctors.

00:37:46.960 And for doctors, it's a lead gen.

00:37:49.020 And for doctors, it's now also a SaaS tool.

00:37:52.140 Like a practice management?

00:37:53.000 Yes, exactly.

00:37:54.480 But I think if they had tried to build all of this at once,

00:37:59.780 that wouldn't have worked.

00:38:03.100 And you can also leverage the strength of the different parts.

00:38:09.080 like for example

00:38:10.640 it's much easier to sell new business

00:38:13.680 over the phone

00:38:14.480 so there is also this idea of

00:38:16.760 come for the lead or for the marketplace

00:38:18.960 and stay for the SaaS

00:38:20.460 so this is

00:38:22.820 or I think there is a

00:38:24.500 company I talked to recently called

00:38:26.680 Cabbage from the

00:38:28.840 US where

00:38:30.800 I was surprised to hear how effective

00:38:33.220 they have been to

00:38:35.060 sell their product to huge amounts

00:38:37.160 of SMBs in the US

00:38:39.060 Because they started primarily as a financing tool.

00:38:41.560 Exactly.

00:38:42.180 So marketplace.

00:38:43.800 Exactly.

00:38:44.700 But now it's becoming more of a SaaS.

00:38:47.040 Exactly.

00:38:47.580 And the reason I think why they've been so successful

00:38:50.220 is that early on, they focused on that loan, which

00:38:55.460 is a pretty simple sell, right?

00:38:57.120 Transaction, yeah.

00:38:58.240 You need money as an SMB because you have to pay your bills.

00:39:01.780 Cash flow.

00:39:02.580 Has that money.

00:39:03.480 So that's much easier than trying

00:39:06.780 to sell practice management over the phone

00:39:09.780 where somebody needs to do a lot of change.

00:39:13.300 So I think it's really interesting.

00:39:14.980 And what has Cabbage created as a SaaS tool set?

00:39:17.520 What's their tool and what's their offer?

00:39:18.880 Yeah.

00:39:19.260 So I'm not super close to the company,

00:39:21.200 but we're not an investor.

00:39:22.740 But the way I understood it,

00:39:23.820 it was like around everything around cash flow management.

00:39:26.300 Okay, that's fair.

00:39:27.040 Like understanding, getting transparency into your business.

00:39:31.580 Could be like accounting and all of that.

00:39:33.640 And I think if they had started with that tool,

00:39:37.140 I think they wouldn't have been able to get to,

00:39:39.360 I don't know, how many hundreds of thousands of customers.

00:39:42.320 Interesting.

00:39:43.500 So really strong product hook.

00:39:45.140 Gets them to distribution, leverage that distribution.

00:39:48.160 It's almost like an add-on.

00:39:49.140 It's like saying, let's monetize it

00:39:50.480 through a different tool set.

00:39:52.520 Everybody thinks being an investor sounds like super fun.

00:39:55.720 You talk to smart people.

00:39:56.780 You give them money.

00:39:59.080 To do it well is really tough.

00:40:01.060 And you seem to have done it really well.

00:40:03.040 Great portfolio.

00:40:04.960 Who have you had to become, Christophe,

00:40:06.620 to succeed at doing this over the last,

00:40:12.160 since you've started?

00:40:13.000 Like personal journey, just looking inward.

00:40:15.880 What things, what characteristics, what mindset,

00:40:19.160 what beliefs did you need to kind of, yeah, just who

00:40:25.160 did you need to become to be successful as an investor?

00:40:29.960 That's a good question.

00:40:31.200 I think I've never heard that question or at least phrased that way.

00:40:36.360 And I mean, I think, first of all, it's still early for us.

00:40:39.460 So we're really proud of what the founders in companies like Typeform and Algolia and Zendesk, of course, and many others have achieved.

00:40:50.840 And that we've been able to play a small role in the journeys of these companies.

00:40:56.440 So we're definitely super happy about that.

00:40:58.600 But at the same time, it still feels like 0.9 is a startup, too, right?

00:41:05.800 So it's not like we've, it's not mission accomplished or anywhere close.

00:41:11.280 Especially because if you invest as a seed investor, as you know, it takes at minimum five to seven years to build a significant company.

00:41:20.700 than to see success in a couple of companies

00:41:24.820 at a couple of years,

00:41:26.620 to see success over a couple of funds.

00:41:28.780 They're basically booked until your retirement.

00:41:31.360 10, 15 years, yeah, yeah, yeah.

00:41:32.300 So it's a hugely long-term game,

00:41:35.740 and the feedback cycles are very, very long,

00:41:39.520 so very, very hard to learn from your mistakes

00:41:42.920 because you don't sometimes know

00:41:44.840 if it's been a mistake until many years later.

00:41:47.600 That's fascinating.

00:41:48.280 um to to your question about like what what did it take me i i don't i don't know if i have a great

00:41:59.240 answer to that um i enjoyed i enjoy this job really like i think every day or almost every day

00:42:06.600 um i i think maybe the maybe the the few times where maybe like the very very few days that i

00:42:15.480 I don't enjoy, or maybe when there are conflicts resolved

00:42:19.660 with later stage investors, or when

00:42:22.580 I saw your blog post about founders

00:42:24.300 shouldn't let the new investors clear out the cap table.

00:42:27.160 Yeah, I think those are exactly those.

00:42:28.620 Unfortunately, those things happen very, very rarely.

00:42:32.580 But when are you basically loyalty conflicts?

00:42:36.120 Are you thinking that like, so there's

00:42:39.320 these rare situations where things get emotional,

00:42:43.860 and where maybe you thought this should be a good relationship

00:42:48.140 and you're disappointed by someone personally.

00:42:50.080 I think that's tough.

00:42:53.640 But it's incredibly exciting to see new ideas,

00:42:58.880 new companies every day to work with incredibly talented people.

00:43:05.240 And we have the luxury of choosing who we can work with,

00:43:09.820 both in our team at Point9

00:43:11.980 and the companies that we

00:43:13.800 invest in, the LPs

00:43:15.840 we take money from. So this is

00:43:17.520 a pretty incredible

00:43:19.740 privilege.

00:43:21.740 So I think, yes,

00:43:23.900 we definitely work

00:43:25.740 hard, but I think we're not working

00:43:27.760 as hard as a CEO, I have to admit as well.

00:43:30.500 I mean, we're

00:43:31.060 just looking back at when

00:43:33.740 I was a founding

00:43:35.040 CEO, I think

00:43:37.700 like

00:43:38.600 I mean

00:43:39.980 there is a lot of pressure for

00:43:42.620 us too like when a deal gets

00:43:44.520 hot or when there is 0.97

00:43:46.020 some shit happening at a portfolio company which is 0.98

00:43:48.880 pretty much daily 0.99

00:43:50.140 but I think it's still different

00:43:51.920 from being the CEO

00:43:54.300 of a company and you have a team in Asia

00:43:56.660 and a team in the US and a team in Europe

00:43:58.600 and you have to be

00:44:00.120 on high alert like 24

00:44:02.640 by 7 and at least

00:44:04.780 at a small company you're basically

00:44:06.540 the guy who needs to fix it

00:44:08.340 when the website goes down at any day

00:44:11.220 or when the release is late.

00:44:12.900 So I have a huge respect for all founders

00:44:17.560 who managed to survive that and scale that from zero

00:44:23.640 all the way to tens of millions of AR or more.

00:44:26.860 Where do people find you online, Christoph?

00:44:29.320 Sorry, can I hit it again?

00:44:30.140 Where do people find you online?

00:44:32.100 They can Google us if you want it a bit easier.

00:44:35.600 Our .9 website is .9cap.com, and we have a Medium channel where we, as a team, put out our thoughts and blog posts.

00:44:49.020 And then there is still my old blog, which is a somewhat cryptic Blogspot address, but I have the domain theangelvc.net.

00:45:00.840 So if you go there, you're redirected to christophe.blogspot.com or whatever it is.

00:45:05.980 That's awesome.

00:45:06.640 Thank you so much for coming on.

00:45:07.900 Thank you, Dan.

00:45:08.480 Appreciate it.

00:45:09.340 Thanks for watching this episode of Escape Velocity.

00:45:12.540 Be sure to like and subscribe and leave a comment with your biggest insight from our conversation.

00:45:18.020 Be sure to check out the next episode.

Dan Martell - November 19, 2020

Investing In SaaS Enabled Marketplaces with Christoph @ PointNine.com - Escape Velocity Show #41

Episode Stats

Summary

Transcript