How can your tech startup attract investors in today’s uncertain environment? On this episode of the podcast, I am talking with Mark Sherman.
Mark is a Managing Partner of Titanium Ventures, which is a venture capital firm in San Francisco, CA with a strong track record. As we talk about on this episode, Titanium Ventures uses data science and quantitative analysis when analyzing investment opportunities. Mark talks about what he and his partners look for in a technology startup. One thing they like to see is a passion for the business. Mark shares other key factors during our discussion.
He also talks about how companies can make their pitch stand out to investors and make a good impression. Mark and I also discuss his thoughts on what he expects with funding trends on the coming year.
I know you will enjoy this conversation with Mark and leave with some insights on how to position your company to improve the chances of getting funding.
Steve Sponseller 00:40
One of the things that Mark and I talk about is the way that Titanium Ventures uses data science and quantitative analysis when analyzing investment opportunities.
Mark Sherman 03:04
The winds of change really started to happen in the fall of 2022. And then the energy around technology just started to become blown by almost gale force winds.
I ended up running the software banking business which took Siebel and BEA and many other Quest companies public. And from there, I went to Battery Ventures, which was one of my clients and was a GP for 10 years and led the investment in Coupa, which I invested in at $20 million free money valuation and they’re getting bought right now at $8 billion.
I ended up going to Titanium Ventures where I run the venture business and we backed 90 companies. 17 of those have generated unicorn-like milestones.
Steve Sponseller 04:53
What sort of particular types of technology or industries or businesses that Titanium Ventures invest in or that you kind of specialize in?
Mark Sherman 05:08
Yeah, so stage -wise, we typically invest in Series A and Series B companies, significantly $1 million to $10 million in revenue. And our goal is to help them get to $100 million in revenue and beyond.
It’s mostly probably 80% plus in the US. We’ll make investments in Australia, parts of Asia, Israel, etc. And then sector -wise, most of what we do is enterprise -driven, around our classic themes, I would say things that we’ve invested in the past around cloud, cyber, SaaS, some communications and networking -oriented businesses.
We do a little bit of consumer, primarily around sports and gaming.
We’ve been spending more energy around FinTech, logistics tech, some climate tech, and a bunch of companies in and around that generate AI, business, which is a big theme in the venture market right now.
Steve Sponseller 06:38
You talk about how you use data science and data analysis as part of your evaluation process.
Mark Sherman 07:06
I would say that 90% of inter firms don’t really use data science as part of their investment process significantly, maybe 10% do.
We use it primarily around sourcing new investments and around making investment decisions. On the sourcing side, we evaluate everything that comes into our firm using data science. We’re looking at things like web traffic, product ratings, team ratings, employment growth…
It enables us to score investments which gives us a proxy to say hey, this is something that we should spend some time on.
On the investment decision side, we track the financials of our portfolio companies and many of the companies that we spend time with deeply on the investing pipeline side.
We’ve developed a bunch of metrics of about, 200 metrics and about 200 companies that give us a sense of revenue growth, LTV, to CAC, recurring revenues. So net revenue retention and then operating statistics, how much they spend in sales and marketing relative revenues.
The rule of 40 would be another thing that we look at, it gives us a way to benchmark the company’s relative to many of their peers and gives us just another tool of many to do analytics on the companies.
It basically allows us to take lots of data, some structured, some unstructured, simplify it and then give us some benchmarks and tools to make decisions a lot more quickly, more efficiently and more data driven than maybe 10 years ago or so.
Steve Sponseller 09:36
It helps you maybe set some thresholds where if certain scoring parameters are up to this level, let’s continue the process, but others that just are too far off from what you would want, you can kind of filter them out fairly quickly and easily.
Mark Sherman 10:04
We’re in an intensely human business and it helps us to do the numerical structure pieces of our business a lot more efficiently. We can spend time talking to the management teams about their vision for the future, their product roadmaps, their ability to differentiate relative to competition, longer term.
Ultimately we’re making a judgment as to what we think their ability to execute is. This data science enables us to spend more time on that and make better investment decisions.
So about 45% of our investments come inbound, meaning, an entrepreneur or a venture friend calls us, 40% of it’s outbound.
About 15% of it is sourced by the data science team, meaning that there are interesting metrics or aspects of the business that we think are pretty cool.
Data science doesn’t really care whether it’s a cyber company or a cloud company. It just thinks that the momentum of that company relative to everything else, the hundreds of thousands of other companies that we’re tracking is much better and much more significant.
My partner, Marcus Bartram, who leads our cyber area is back crowd strike and all zero and whatnot, knew that cyber insurance was an area that was bubbling up and that he should pay attention to it.
About four years ago our data science guys grabbed him by the collar and said, hey, there’s a company called Corvus bubbling up and we liked it particularly relative to the 28 other companies that were in that space.
I should really spend some time with Phil Edmondson, who’s the CEO of Corvus.
We then did our data science work, then our CIA, MI6, FBI work, massage work in terms of doing our due diligence and ultimately led to an investment in the company where we led their series B a year later or so, insight led their series C and the company’s been executing super tremendously in the last four years.
What it’s looking for at the most simple levels is momentum. Then it’s looking for momentum of those companies relative to other companies that are in their categories and then relative to other generic companies overall.
It highlights companies that we should focus on.
We use it as a tool internally to say to investors, hey, here are some companies that have been bubbling up in the C level or the series A level that we should pay attention to so that we can think about investing in their series B.
Steve Sponseller 14:10
Analyzing the data, what are some of the key things you’re looking for? What should they be doing to attract your attention or attract other VC’s attention?
Mark Sherman 14:39
Somebody who’s authentically passionate around the area that you’re going after. And then the second is to build a great product in and around those areas.
We do a lot of other work around, competitive differentiation, market size, financials, the valuation of the company, the prospects for long -term liquidity and those types of things.
We invest in a fair number of companies that have grade A institutions behind them, Harvard and Penn and Stanford and MIT graduates are in a fair number of our companies.
But there are lots of other companies in our portfolio that the graduates came from lesser well -known institutions. We have a fair number of people from the Facebooks, the Amazons, the Googles, the Microsofts of the world.
In the end, somebody who’s passionate about innovation, building, creating, that ability or capabilities, you can test for and see over time in their background.
A super high quality, interesting, innovative product – that’s something that we can, you know, really test for and see.
Steve Sponseller 17:04
What do you look for to see or to confirm that somebody’s really passionate about their business, their product, their industry?
Mark Sherman 17:20
It’s usually a little bit more of an interview / interpersonal interactions over a bunch of weeks or months where you just get a feeling for the person in terms of how good they are at building things.
We also look for them to be at interesting companies over time and be a real contributor.
We can background check people pretty easily through lots of our networks just to see.
So a lot of interviewing and a lot of back channel diligence ultimately deals with that. And then the product, it depends a bit on the product itself on where it fits in the ecosystem but for more enterprise products, we can talk to existing customers.
We oftentimes like to introduce the company to new prospects just to see how well it does relative to the other priorities that are competing for the dollars and the attention that are out there.
Many people can get a product sold to a couple of friends and family from days of Christmas past but coming to the Donovo Conversations Cold really gives you kind of a flavor for how the company will perform longer term as it’s going from 10 customers to 100 and 100 to 1 ,000.
You get kind of a feeling in terms of its probability to execute on those types of plans.
Steve Sponseller 19:33
The human element of it, where data science isn’t there yet. It’s crunching the numbers, but then that’s where you come in and the rest of your team to help.
Mark Sherman 19:45
We can use quick tools, like Glassdoor, G2 Crowd or Gartner or the Apple Store and the Play Store for rating systems. And that gives you a quick cut.
What I love most about the work that I do is helping entrepreneurs solve problems.
They’re builders, creators, innovators, you know, technologists, people that can oftentimes see around corners in how the world is going to be. They want to meet new customers, and we try to help them generate revenue.
The third thing would be helping them find layers of financing to fuel their further growth. Product roadmaps, market strategy, et cetera.
Working with these people, I just really enjoy because they’re passionate, enthusiastic, interesting, thoughtful, smart, creative. And just being around that energy, I find infectious.
Steve Sponseller 21:55
What do you think we’re going to see in the coming year or so?
Mark Sherman 22:30
Yeah, I think the plan is unpredictability, volatility, and chaos. And so I don’t think that it’s going to be an easy year to predict exactly where the economy is going to go. I think it will also be a little bit tricky to predict exactly which sectors are going to be doing better or worse.
One of the things that we’re looking for as we back companies is that the people are nimble, thoughtful, creative, and can pivot pretty quickly because we have a lot of question marks today around geopolitics, the economy, recessions, interest rates, inflation, energy prices.
I do think there are some sectors that we’re pretty excited about and we think will do well in lands of unpredictability, chaos, and volatility.
Cybers, an area where we’ve made about 12-14 investments. Cloud Noxons, Imperium, in the least privileged security space. Mobile security space has done very nicely for us.
We just made our first formal climate tech investment. And we think climate is going to continue to be just an enormous challenge. Bruce Usher, who’s a business school professor at Columbia Business School, just wrote a book called Investing in the Area of Climate Change.
It underscores lots of the big trends in where it’s going. Where the software industry and the AI and machine learning industries intersect with climate is a rich fertile ground for companies bubbling up.
Artificial intelligence and machine learning are redoing all types of businesses.
Pretty much all of our cyber companies do some sort of AI or machine learning. We have a spectrum company named Coheer, which essentially maps a user’s radio signal similar to the way Google maps the world.
That enables you to increase the amount of spectrum that mobile operators can use through their radio networks. Marketing analytics, Singular is a mobile user acquisition company that we have that’s using tons of AI and ML.
I think cyber, climate tech, and where artificial intelligence and machine learning touch different subsectors of the software industry, we think are going to be the big themes for the next year.
Steve Sponseller 26:21
And you mentioned that there’s $300 billion in dry powder available to VCs.
Can you first define what dry powder is? And how do you think that may help with getting things back to whatever our next normal is going to be in this world?
Mark Sherman 26:50
Yeah, so dry powder is large foundations, endowments, pension plans, so like Harvard or the Rockefeller for a foundation or General Motors pension plan, gives venture firms like Titanium Ventures money, and then we deploy it and invest it in other companies, such as the ones that I mentioned earlier.
We just raised a $350 million fund and we’ve invested a little over $100 million of that fund thus far, so 350 less than 100 is 250, and that would be the amount of dry powder that we have to invest.
So it’s the amount of capital where we have available to its best. And if you take that for the venture industry overall and add up all the different funds, how much capital they’ve gotten, they’ve received from the endowments and foundations and how much they’ve deployed, the amount that’s available is $300 billion, which is a pretty big number.
All the trends of software change in the world, digital technologies, artificial intelligence and machine learning technologies are changing the world, those are all very fundamental and will create trillions of dollars of opportunity over the next five or 10 years.
So people are gonna want to invest those $300 billion of dry powder in emerging companies that they think are interesting so that they can earn great returns. And so while the Ukraine and energy prices and inflation and interest rates keep them up at night, in the morning, the reason why they wanna you know, deploy some of that dry powder is because they’re meeting entrepreneurs, CyberGRX or Cohere or Singular in our portfolio, all of which have tremendous opportunities in cyber.
When the market started to head towards recession in 2022, people became a lot more cautious in terms of their deployment rates because they saw the multiples that public investors were paying for software companies was compressing.
They had raised a lot of money in 2021. And so they had some resources to basically wait for a while. And then secondly, they didn’t really like the prices that they were seeing in the marketplace.
So many of the companies were looking to grow and put up more milestones, then maybe re-approach the market next year, where they can continue to make progress and raise at a same valuation or a higher valuation that they had raised before.
The markets shift from growth to capital efficiency. And those are just fancy terms for ultimately revenue growth. Capital efficiency is basically just seeing how you invest the dollars that you are using and how much can you really generate?
The rule of 40 takes revenue growth and then adds to it the EBITDA margin of a company. And most of our companies are typically losing money. And so a company that might be growing at 100% may have an EBITDA margin of minus 60%.
And so when you add those two together, you get to 40. And people think that there’s sort of a magical element around the level of 40 such that if the number you get to is greater than 40, then it’s a reasonably capital efficient company.
If the number that you get to is less than 40, so 10 or 20 or even negative, then people are not deploying the capital very efficiently. Whereas in 2022 people care very much about how much are you losing relative to the revenue growth that you’re generating.
Steve Sponseller 33:22
What’s ahead for you and the rest of the team at Titanium Ventures over the coming year?
Mark Sherman 33:33
We’re looking to do another eight or 10 investments in 2023. We’re thrilled that well over 50% of our companies have more than two years of capital. There’s basically a third that has between one and two years. And then there’s a smaller amount, about a sixth, that has less than 12 months of capital.
The ones that are in this sixth category, we’re spending a lot of energy on just to make sure that they’ve got processes to either raise money on the debt side or raise money through equity raises.
And ultimately, we’ll get back to a time where there’s mergers and acquisitions and there will be IPOs again and whatnot.
