Mark Sherman of Titanium Ventures talks about the changes in the Venture Capital and the startup industry over the last 20 years. He also shares insights on how the firm is dealing with the impact of current market conditions and how data science and creating value for portfolio companies are key. Below are key excerpts from the podcast.
What are the biggest changes in Venture Capital you have experienced throughout the last 20 plus years?
Well, I think the obvious answer to that is just that there’s different technology cycles. So AI is very hot now. We’ve had cloud. We’ve had mobile. We’ve had web. We’ve had a lot of different trends. But ultimately, venture is all about consuming innovation and consuming new ideas.
How we see the venture industry evolving in the next 20 years: I think there’s going to be two major shifts that you need to be front footed on in order to succeed as a venture investing platform going forward. And those two shifts center on how you source and what your investment process is.
And then secondly, how you add value to the portfolio companies that you’ve invested in. And we’ve had two big calls that are very important. One is around data science. And so for the last five and a half years, we’ve been embedding more and more data science into our investment process.
CEOs and founders have the luxury of choosing which firms they can work with. And so you have to have more special value add that you can deliver. And in our case, we generate revenue for our portfolio companies.
And it’s a very hard dollar benefit. And 99% of venture firms can’t generate revenue for their portfolio companies. And we can.
We focus on series A’s and B’s. And so our whole data science footprint is geared towards tracking seed and series A companies. And it’s interesting because data science doesn’t really work at the raw startup level.
As companies start to grow a little bit and have more people and have more web traffic and have more revenues, they start to emit signals that you can track digitally.
And we’ve 35, 36 different data sets that we’ve been nurturing and collecting and cleaning for, you know, in some cases, five and a half years now that we have a bunch of scoring and algorithms on top that sniff for signals of momentum.
The method behind the madness is we’re really good at investing in companies when they’re just starting to get the feeling of product market fit. And that product market fit generally is coming after they’ve had some customer interactions that are revenue bearing, and we can understand how close they are to getting to a cookie cutter customer relationship that means they can scale to $100 million in revenue and beyond.
How much do you have to follow the trend to also be a successful investor?
I think ultimately you have to be a great student of these trends to understand whether they will make for good investments because the trends are understanding the technology shifts, understanding how they satisfy the customer needs, and understanding how big those needs are over time.
AI is a very interesting one because artificial intelligence has been around for decades.
Many of the portfolio companies have been using artificial intelligence on their marketing automation side. Many of the portfolio companies, particularly in cyber, have been using machine learning and artificial intelligence to identify phishing and malware and ransomware attacks for probably a decade.
In some markets, AI is going to have many multiples in terms of impact relative to traditional software and digital related technologies.
I think a lot of the value will be driven around proprietary data sets. And so interestingly, I think that a number of the startups that are laying people off, those people may end up in large, more traditional Fortune 500 global 2000 companies because some of these companies have been around for decades, if not centuries.
And oftentimes they have large data sets that have been less well explored. And so the opportunity could be, you know, Barclays or McKinsey or Walmart in terms of applying AI technologies to their data sets.
So I just happened to see recently that the chief operating officer of Barclays was talking about the layoffs at Metta and Google and other technology related companies and saying that they were really excited about it because it created opportunities for them to bring in really interesting talent to create the next generation of banking.
And then Walmart, I saw a senior vice president around strategic technology was talking about how they’re using AI technologies in their e-commerce ordering process and how if you’ve ordered diapers for a baby, they track the last order time relative to this order time because potentially the sizing could be different and so they could recommend, you know, X degrees bigger, it’s more likely you’ll need the next size up so that they have, you know, a better customer experience and then lower costs in terms of having less returns because they get the baby’s diaper sizing right.
I don’t really worry about the layoffs because I think that this technology is gonna be, you know, pervasive and is gonna need to be consumed by lots of different people and big traditional people just as much as, you know, interesting emerging startups as well.
I think with a number of our portfolio companies, you know, we’re working through what the environment means and encouraging themselves to be geared conservatively when we have interest rates that are high and going higher as of yesterday.
And inflation is still not totally under control. It creates the opportunity for recession and sort of slows down. And so I think some of our companies have been seeing, you know, stretching out of sales cycles, budgets being cut, renewals being, you know, downsized.
And so we’re kind of working through those with a number of our portfolio companies. And, you know, what that means in English is, you know, looking towards, you know, some rationalization and some cutting of headcount just to make sure that they have enough cash to do well, you know, for the long term.
And so, you know, we’ve had companies that have laid off 3% of their employees. We’ve had companies that laid off 10%, you know, and some that have laid off 20% just to make sure that they’re well prepared for, you know, getting through a relatively cautious environment over the next six, 12, 18 months.
And I think climate is a big one and, you know, we’ve invested in a company there that’s gone from, you know, zero to 20 to 25% of all the proposals for solar in the US over the last two years. And so, you know, while I think, you know, a number of our companies are being cautious in our environment, I think it’s important to, you know, highlight and amplify, you know, actually a number of our companies are doing quite well and are, you know, beating plan and doubling down and, you know, increasing their spend because they’re seeing just tremendously positive change in this environment.
So I think there’s two elements to your question. One is just practical. You know, 65% to 80% of the spend of the companies that we work with are people related. And so I think just as a practical matter, you have to be very thoughtful about who’s on the team, are they the right people for the long term, and if there’s any kind of question as to whether Mark or Fabian or whomever is, you think you have to be respectfully ruthless about that dynamic.
So that’s sort of the first piece. The second piece is ultimately our companies are built on innovation and built on new ideas. And so ultimately, I think what it comes down to is betting and betting right on new product innovations.
And I think what tends to happen in times like these is rather than having three or four major product initiatives in terms of how you’re improving or evolving your product, you may turn that down to one or two just because you just don’t have as much resources to devote to new ideas.
What kind of growth rates are you looking for when you’re currently looking for a company that’s moving from series A to series B and you want to invest in series B?
I think in the end, we’re looking for as much growth as we can get capital efficiently. And so we look very carefully at what the growth rate is. And obviously we would love 100% or more in terms of growth.
But I think the key question is, are they trending towards something attractive from a Rule of 40 perspective? And Rule of 40, so everybody’s on the same page, is the growth rate of the company subtracting the loss from an EBITDA margin perspective.
If a company has a number of 40, so meaning that they’re growing at 100% year -over -year, but losing 60% from an EBITDA margin perspective, 100 less 60 equals 40, if it’s that number or more, we typically view that very positively in terms of where things are.
I think we’ve entered into a time where because interest rates are increasing and because capital is becoming less free flowing, the ability to generate that growth while not losing tons of money is becoming more and more important.
I think ultimately, step one is to invest in people that have an amazing perspective about a specific space. And so there’s just no substitute for getting that right upfront. And then I think to your question, counterbalancing that with a little bit of testing is a good thing.
In the end, I think there’s no substitute for trial ballooning your product ideas with innovative customers. And I think if you’re a young company and you have 50 customers, you probably have five that you have a good sense that these people really know where the market is going.
Like most things in life, I think if you can test things and trial things and check in with some degree of frequency, that helps you to be more capital efficient than less or be more right than wrong.
Our job is to try to find the best products in technology leaders in the world. We show them the best ideas and then we keep kind of a weekly rhythm in terms of where we think some of the trends and themes are bubbling up.
I’ve almost embraced it and just said, let me find as many smart people in a specific area and try to leverage what they know to try to make the best decision for all of us. And so we have a ton of advisors and friends of Titanium Ventures that we work with on a weekly if not daily basis that we’re always looking at emerging technologies.
By the same token, we can connect them to entrepreneurs who are always looking for wisdom in specific spaces. So like, the chief operating officer of the XYZ sector who built a company and took it public and then sold it may have some really interesting wisdom for some of these companies.
Ultimately it comes down to realizing that there are a lot of really smart people and if you can gear them towards identifying new and interesting ideas and getting those, I think the key is to try to find people that are super smart in areas. That actually can contribute something to the emerging companies themselves and so can impart some wisdom and at the same time, you can kind of get a read of product needs, customer needs, etc.
