Sramana Mitra: It also gives you a flavor of how good a product it is. Is the product really meeting the needs of the customers? I think churn is a very good indicator of that.
Mackey Craven: Coming back again, it really doesn’t have to do with revenue scale. It has to do with validating that repeatable value proposition. Aside from conversations with customers, that quantitative metric often speaks strongly about that point.
Sramana Mitra: I’m going to switch the question to another quantitative myth that comes up all the time in early stage financing, which is TAM. Let me phrase the question slightly differently. At the beginning of 2018, lots of stuff have already been built.
Often, we are seeing lots of niche opportunities, and not necessarily these multi-billion TAM opportunities. There could be $200 million to $300 million opportunities that are perfectly fine companies that can be built with $1 million to $5 million in investment up to $10 million to $15 million in revenue and perhaps exited without too much investment.
Some VCs, out of hand, discard these kinds of opportunities. They’re just not interested in engaging. Then, there are some who are acknowledging that we are in a different stage of the technology cycle. These opportunities are perfectly fine opportunities for making money. Where do you fit in this continuum?
Mackey Craven: We certainly see a large number of smaller niche opportunities, whether they’re vertically based or carving out segments of a market building product. I’m not sure that we’re seeing fewer multi-billion opportunities than we have before. I do think that we’re at a very interesting moment in the technology cycle, particularly with the application of machine intelligence solutions that will affect every area of existing category of software and build new ones.
Put a pin on that for a second. For horizontal applications, you are looking at multi-billion dollar TAMs. Think companies that can be large and enduring. For vertical software applications, there tend to be network effects. Often best-of-breed applications in a vertical software market can take 60% market share as opposed to horizontal markets where a leader might only be a able to take 20% to 30% marketshare.
While the overall market size is smaller, the ultimate revenue opportunity of the company could be similar. In those cases, we’re absolutely excited to make those investments. We have made many vertical software investments. One of our companies that has gone public started out selling learning management systems into higher education and expanded from there.
When we made the investment, it was a vertical software market. We’re excited about them. We’ve had success in them. Ultimately, I want to invest in companies that have similarly ambitious revenue scale opportunities whether or not their overall markets are the same size.
Sramana Mitra: Excellent. What about geography?
Mackey Craven: The way we think about geography has less to do with where our company is headquartered than where its customer base is today. While the world is becoming global and technology is having a very strong impact on that, whether you look at the cloud’s capability to allow folks to build software businesses anywhere where there’s talent to the ubiquity of internet access allowing delivery of what historically has been a relatively heavy-weight enterprise software.
We see companies being founded everywhere. North America is still the largest single homogeneous software market in the world. No matter where our company is founded, we find that we can be most helpful when those companies are focused on building out North American customer base as a primary emphasis. We certainly invested in many companies in the United States.
We’ve also made investments north of the border in Canada. We’ve made investments in Europe, Israel, and Australia. The commonality across these is ultimately, they’re looking to build the core of their business in North America or the United States.