Sramana Mitra: Within B2B SaaS, do you have a preference between selling to enterprises versus selling to small businesses?
George Spencer: I’ve invested in the past in both and made money on both. My diligence is understanding how you’re going to be able to build a distribution channel based on the price points that you’re able to sell your software for. I’ve worked with SPS Commerce that was selling outbound telemarketing salesforce. I can work with both small businesses that make $100 a month per customer all the way to companies taking in $5 million a year from some customers.
Sramana Mitra: Across the companies that you have invested in both from this fund as well as your general experience, can you share a few examples and give us a flavor of when you went into the deal, what did you see? What is it that made you decide to invest in this particular set of companies? Give us some case studies so we understand how you think about investments.
George Spencer: I almost try to do a mini McKinsey kind of analysis on every deal I end up investing in. I’m trying to understand how hard is the product to build and how difficult would it be to copy. What I’m looking at is early stage and somebody who’s a leader in the vertical or the horizontal that they’re in. The second thing that I’m trying to figure out is how important a product is this to a potential customer. That has to do with the economic return and how important it is strategically to a customer. Then we roll from there.
In 80% of the cases since 2001 when I started working on the strategy, almost every company has had to make a major mid-course correction in its evolution. I don’t think you can get it all right the first time. The industry has changed. The biggest example of that is a company called Border Free that started life as a company called E4X, which has just relocated from Tel Aviv to New York when I invested in it.
The solution was essentially a foreign exchange solution which allowed you to shop on an international website and buy goods in your own currency. We got that to about $500,000 a month and just stalled out. Every year, we were losing our biggest customer. We were able to refill the tank but not a lot better.
We ultimately shifted that business to a company called Borderfree, which became an international e-commerce platform with that core currency conversion technology, which was the key economic engine in the product that we were selling. We went from nothing to close to $700 million of recurring retail revenue which equated to about $70 million of software revenue. The company went public and was ultimately sold.