Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Mackey Craven of OpenView Venture Partners was recorded in January 2018.
Mackey Craven, Partner at OpenView Venture Partners, discusses what Series A VCs are looking for in the realm of software investments. We talk at length about the Series A gap from the perspective of a fund that focuses on Series A and beyond.
Sramana Mitra: Tell us about your investing focus. Let’s get to know OpenView. How big is the fund? What sized investments do you like to make?
Mackey Craven: I’m a Partner at OpenView. We’re a Boston-based venture capital firm. We’re investing out of our fifth fund which is just under $300 million. Overall, we’ve got about a billion dollars under management. We typically focus on a couple of dimensions. One is, we invest exclusively in software companies defined as B2B software companies. Two is, we invest in a pretty specific stage in a company’s lifecycle.
I feel like many venture capitalists use the word stage to mean something like a revenue run rate or letter on a round. I mean none of those things. I think of it much more operationally in terms of where the company is in bringing its product to customers and finding repeatable value proposition and perhaps beginning to put the foundations in place from a go-to market perspective, team perspective, and process perspective to, hopefully, be a large and enduring business.
Aside from the core investing team, we have an operations group that is actually larger than our investment team that works with these expansion stage software companies in two operational areas that are critical for scale. One is around talent. We hired about 300 people directly into the portfolio over the last three and a half years. The other is building that go-to market. Given that we think about the stage that we invest not directly related to letter on the round or check size, it varies.
We’ve made initial investments as small as $4 million to as large as $25 million. You typically find that we’re leading Series As and Series Bs although occasionally we’ve done Series C. It’s also important to note that that check size is not necessarily related to the round. Our largest initial investment was in a bootstrapped business that had grown quite quickly to several millions in revenue.
Sramana Mitra: Let’s double-click down on some of the stage points that you’ve made. Let’s say you’re looking at a $4 million Series A. What do you look for? What metrics are you looking for? For simplicity’s sake, let’s talk about a SaaS type of investment. Let’s talk in MRR and ARR terms. What are you looking at for a company to qualify for a $4 million to $5 million Series A.
Mackey Craven: It’s probably worth saying briefly that quantitative metrics are absolutely a piece but are only a piece of the story. We’re looking for outstanding founders, differentiated technologies, and market opportunities that are large enough to support substantial business.
Zooming in on the quantitative metrics, we’re certainly looking for businesses that often have a million dollars in ARR. We’ve invested in businesses that have less than that. We’ve certainly invested in businesses that have more. Often those companies are growing at a relatively rapid clip. Usually, well over 100% year over year although that’s also a function of their ability to invest in the business.
Bootstrapped businesses that might be growing at the lower end of that spectrum will look differently than when we think of businesses that have raised $1 million to $3 million in seed capital that they’ve had the opportunity to put to work. We certainly look at that. We look at unit economics which we tend to pay more attention more than the growth rate. Payback period is ideally less than 18 months.
The single metric that we look at more closely more than any other is the idea of net negative churn. If you’re acquiring a dollar in MRR or ARR today, does that shrink to 90 cents in a year? Then how much of that is driven by the company, or is just the very nature of the product? The reason we focus on that is one, it does tend to be more of a function of customers’ interaction with products than it really is a function of operational activity in the business.
The second, and partially because of that, it happens to be more stable across different scales. Having a net negative churn allows for a high growth and better profitability.