Precursor Ventures’ Charles Hudson on ‘the conversation no one has during an upmarket’

For pre-seed startups, precarious times are baseline until they secure their first customer, first hire and first check. But no matter how built-in turbulence might be for a pre-seed founder, we’re entering a period where stresses are amplified and outlooks are unpredictable.

In light of the new market conditions, a harder fundraising market and slower expected growth, Charles Hudson (founder and general partner of Precursor Ventures) is urging his portfolio companies to reassess their futures with a refreshingly human question: “Are you excited and prepared to run this company for the next two years?

If not, you might want to do something else. Why? Because if a super early-stage company manages to survive the COVID-19 era, making it out the other end, it’s not clear that they’ll be venture-ready when markets recover. As Hudson put it, “there’s never been a better time to maybe fold.” That’s because, he explained, startups that merely survive won’t be judged merely against their peers that also survived; they will also compete with brand-new startups for capital and companies that didn’t need to hunker down during lean times.

It’s possible to make it through, but it won’t be an easy path.

TechCrunch spoke with Hudson earlier this week as part of our ongoing Extra Crunch Live series that brings leading founders and investors to our (virtual) stage. Between our editors and journalists and the best questions from the audience, we’re working with guests to understand the new world that we find ourselves in. That we’re hosting these events virtually instead of in-person is testament to our changed reality.

But the chat was far from all gloom; Hudson is bullish on a number of things. Niche publications with subscription economics? Yes. Social services targeting particular audiences? Yep! Precursor is still cutting checks into net-new deals, and while it’s wrapping up its second main fund and first opportunity fund, the firm is also raising a new, larger capital pool.

The conversation ran the full hour we had set aside for it, meaning we had to condense some later discussions about fintech and the new trade-off between growth and profit, but we did get to diversity in venture and startups in the future, and what impact a recession might have on both (it’s a bigger possible impact than you’re considering).

Hit the jump for the best Hudson takeaways and the full audio recording from the session. Head here if you need Extra Crunch access; there are some trials for just a few bucks, so everyone can access the chat. Let’s go!

Raising a fund in the COVID-19 era

Seed investors favor enterprise over consumer for first time this decade

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

It’s the second to last day of 2019, meaning we’re very nearly out of time this year; our space for repretrospection is quickly coming to a close. Before we do run out of hours, however, I wanted to peek at some data that former Kleiner Perkins investor and Packagd founder Eric Feng recently compiled.

Feng dug into the changing ratio between enterprise-focused Seed deals and consumer-oriented Seed investments over the past decade or so, including 2019. The consumer-enterprise split, a loose divide that cleaves the startup world into two somewhat-neat buckets, has flipped. Feng’s data details a change in the majority, with startups selling to other companies raising more Seed deals than upstarts trying to build a customer base amongst folks like ourselves in 2019.

The change matters. As we continue to explore new unicorn creation (quick) and the pace of unicorn exits (comparatively slow), it’s also worth keeping an eye on the other end of the startup lifecycle. After all, what happens with Seed deals today will turn into changes to the unicorn market in years to come.

Let’s peek at a key chart from Feng, talk about Seed deal volume more generally, and close by positing a few reasons (only one of which is Snap’s IPO) as to why the market has changed as much as it has for the earliest stage of startup investing.

Changes

Feng’s piece, which you can read here, tracks the investment patterns of startup accelerator Y Combinator against its market. We care more about total deal volume, but I can’t recommend the dataset enough if you have the time.

Concerning the universe of Seed deals, here’s Feng’s key chart:

Chart via Eric Feng / Medium

As you can see, the chart shows that in the pre-2008 era, Seed deals were amply skewed towards consumer-focused Seed investments. A new normal was found after the 2008 crisis, with just a smidge under 75% of Seed deals focused on selling to the masses for nearly a decade.

In 2016, however, a new trend emerged: a gradual decline in consumer Seed deals and a shift towards enterprise investments.

This became more pronounced in 2017, sharper in 2018, and by 2019 fewer than half of Seed deals focused on consumers. Now, more than half are targeting other companies as their future customer base. (Y Combinator, as Feng notes, got there first, making a majority of investments into enterprise startups since 2010, with just a few outlying classes.)

This flip comes as Seed deals sit at the 5,000-per-quarter mark. As Crunchbase News published as Q3 2019 ended, global Seed volume is strong:

So, we’re seeing a healthy number of deals as the consumer-enterprise ratio changes. This means that the change to more enterprise deals as a portion of all Seed investments isn’t predicated on their number holding steady while Seed deals dried up. Instead, enterprise deals are taking a rising share while volume appears healthy.

Now we get to the fun stuff; why is this happening?

Blame SaaS

As with many trends long in the making, there is no single reason why Seed investors have changed up their investing patterns. Instead, there are likely a myriad that added up to the eventual change. I’m going to ping a number of Seed investors this week to get some more input for us to chew on, but there are some obvious candidates that we can discuss today.

In no particular order, here are a few:

  • Snap’s IPO: Snap went public in early 2017 at $17 per share. Its equity quickly spiked to into the high 20s. By July of that same year, Snap slipped under its IPO price. Its high-growth, high-spend model was under attack by both high costs and slim gross margins. Snap then went into a multi-year purgatory before returning to form — somewhat — in 2019. It’s not great for a category’s investment pace if one of its most prominent companies stumble very publicly, especially for Seed investors who make the riskiest bets in venture.

Startup Benchmarks

All Good to Great companies began the process of finding a path to greatness by confronting the brutal facts about the reality of their business. When you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident.”

— Jim Collins, author of Good to Great

I joked the other day that some of the best fairytales are written in Excel. Forecasting is sometimes done by dragging the mouse based on many assumptions, because it’s hard to predict the future.

One question that keeps coming up when speaking with early stage entrepreneurs when it comes to funding, is what metrics the company needs to hit to raise seed/series A/B etc:

  • What’s a good conversion rate?
  • What should our MRR growth be?
  • Is my churn rate below the category average?

While there isn’t a single magic number or set formula, understanding industry benchmarks can be really helpful to keep a finger on the pulse to measure the health of the company and make more informed forecasts. Benchmarks are typically specific to stage/business model/geo.

In this post I’ll focus on benchmarking resources for seed and series A in the following three categories:

  • SaaS
  • B2C / Consumer apps
  • Deep tech

The following table from Rob Go at NextView Ventures is a great start to help answer the question of what traction/milestones are needed to raise seed and series A (US focus).

Source: Rob Go on Medium

It’s important to mention that benchmarks alone can’t guarantee funding. Investors look beyond top line metrics to assess other important factors. In Rob Go’s words:

For seed and Series A deals, investors will also need to see a high-potential team with founder/market fit, a large and attractive market opportunity, and a business model with increasing returns to scale. Top-line metrics are indicators of success, not the one bar to clear to raise funding for your startup.

Rob Go: How Much Traction Do You Really Need to Raise a Seed or Series A Round?

Software as a Service (Saas) benchmarks

In SaaS the main benchmarks being measured are revenue growth, sales efficiency (unit economics), churn and burn rate. One of my favourite resources for SaaS benchmarking is The SaaS Napkin by Point Nine Capital. If nothing else, for its simplicity (back of the napkin) but also for the fund’s commitment to keep updating the metrics since 2016. You can read more about the methodology here and download a high res PDF here.

Source: The SaaS Napkin

Other interesting SaaS benchmarking tools/figures:

Example of Baremetrics revenue per user benchmarks

Consumer apps and services

The main B2C benchmarks have to do with traction: growth in user acquisition, user retention/churn, monetisation, as well as the effectiveness of consumer marketing + virality. 500 Startups created a helpful primer on key B2C metrics.

B2C benchmarks tend to be specific to the type of service or business model. eCommerce is different than free consumer apps, games are on a league of their own, etc. With the explosion in DTC products (see my post on VC Cafe), they probably deserve a category of benchmarks on their own.

Andrew Chen is a partner at Andreessen Horowitz consumer team, and I particularly enjoyed his series of tweets and LinkedIn posts on ‘what good looks like in consumer tech’.

For example, this post on 10 magic metrics indicating a consumer tech startup probably has product/market fit

  1. cohort retention curves that flatten (stickiness)
  2. actives/reg > 25% (validates TAM). power user curve showing a smile — with a big concentration of engaged users (you grow out from this strong core)
  3. viral factor >0.5 (enough to amplify other channels)
  4. dau/mau > 50% (it’s part of a daily habit)
  5. market-by-market (or logo-by-logo, if SaaS) comparison where denser/older networks have higher engagement over time (network effects)
  6. D1/D7/D30 that exceeds 60/30/15 (daily frequency)
  7. revenue or activity expansion on a *per user* basis over time — indicates deeper engagement / habit formation
  8. >60% organic acquisition with real scale (better to have zero CAC)
  9. For subscription, >65% annual retention (paying users are sticking)
  10. >4x annual growth rate across topline metrics

Other resources on B2C benchmarks:

Benchmarks for deep tech startups

Deep tech is harder to measure/compare, especially in the early stage. Deep tech startups can take a risk on market timing, which means that there’s less traction to evaluate and more emphasis is put on the team and the defensibility of the IP. Part of the challenge in deep tech is getting to revenue and scaling it. There’s a slower adoption curve than SaaS or consumer, and often requires market education and selling services to enter the market.

Other resources for benchmarking deep tech startups:

Startup Benchmarks

All Good to Great companies began the process of finding a path to greatness by confronting the brutal facts about the reality of their business. When you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident.”

— Jim Collins, author of Good to Great

I joked the other day that some of the best fairytales are written in Excel. Forecasting is sometimes done by dragging the mouse based on many assumptions, because it’s hard to predict the future.

One question that keeps coming up when speaking with early stage entrepreneurs when it comes to funding, is what metrics the company needs to hit to raise seed/series A/B etc:

  • What’s a good conversion rate?
  • What should our MRR growth be?
  • Is my churn rate below the category average?

While there isn’t a single magic number or set formula, understanding industry benchmarks can be really helpful to keep a finger on the pulse to measure the health of the company and make more informed forecasts. Benchmarks are typically specific to stage/business model/geo.

In this post I’ll focus on benchmarking resources for seed and series A in the following three categories:

  • SaaS
  • B2C / Consumer apps
  • Deep tech

The following table from Rob Go at NextView Ventures is a great start to help answer the question of what traction/milestones are needed to raise seed and series A (US focus).

Source: Rob Go on Medium

It’s important to mention that benchmarks alone can’t guarantee funding. Investors look beyond top line metrics to assess other important factors. In Rob Go’s words:

For seed and Series A deals, investors will also need to see a high-potential team with founder/market fit, a large and attractive market opportunity, and a business model with increasing returns to scale. Top-line metrics are indicators of success, not the one bar to clear to raise funding for your startup.

Rob Go: How Much Traction Do You Really Need to Raise a Seed or Series A Round?

Software as a Service (Saas) benchmarks

In SaaS the main benchmarks being measured are revenue growth, sales efficiency (unit economics), churn and burn rate. One of my favourite resources for SaaS benchmarking is The SaaS Napkin by Point Nine Capital. If nothing else, for its simplicity (back of the napkin) but also for the fund’s commitment to keep updating the metrics since 2016. You can read more about the methodology here and download a high res PDF here.

Source: The SaaS Napkin

Other interesting SaaS benchmarking tools/figures:

Example of Baremetrics revenue per user benchmarks

Consumer apps and services

The main B2C benchmarks have to do with traction: growth in user acquisition, user retention/churn, monetisation, as well as the effectiveness of consumer marketing + virality. 500 Startups created a helpful primer on key B2C metrics.

B2C benchmarks tend to be specific to the type of service or business model. eCommerce is different than free consumer apps, games are on a league of their own, etc. With the explosion in DTC products (see my post on VC Cafe), they probably deserve a category of benchmarks on their own.

Andrew Chen is a partner at Andreessen Horowitz consumer team, and I particularly enjoyed his series of tweets and LinkedIn posts on ‘what good looks like in consumer tech’.

For example, this post on 10 magic metrics indicating a consumer tech startup probably has product/market fit

  1. cohort retention curves that flatten (stickiness)
  2. actives/reg > 25% (validates TAM). power user curve showing a smile — with a big concentration of engaged users (you grow out from this strong core)
  3. viral factor >0.5 (enough to amplify other channels)
  4. dau/mau > 50% (it’s part of a daily habit)
  5. market-by-market (or logo-by-logo, if SaaS) comparison where denser/older networks have higher engagement over time (network effects)
  6. D1/D7/D30 that exceeds 60/30/15 (daily frequency)
  7. revenue or activity expansion on a *per user* basis over time — indicates deeper engagement / habit formation
  8. >60% organic acquisition with real scale (better to have zero CAC)
  9. For subscription, >65% annual retention (paying users are sticking)
  10. >4x annual growth rate across topline metrics

Other resources on B2C benchmarks:

Benchmarks for deep tech startups

Deep tech is harder to measure/compare, especially in the early stage. Deep tech startups can take a risk on market timing, which means that there’s less traction to evaluate and more emphasis is put on the team and the defensibility of the IP. Part of the challenge in deep tech is getting to revenue and scaling it. There’s a slower adoption curve than SaaS or consumer, and often requires market education and selling services to enter the market.

Other resources for benchmarking deep tech startups:

‘Google You Owe Us’ claimants aren’t giving up on UK Safari workaround suit

Lawyers behind a UK class-action style compensation litigation against Google for privacy violations have filed an appeal against a recent High Court ruling blocking the proceeding.

In October Mr Justice Warby ruled the case could not proceed on legal grounds, finding the claimants had not demonstrated a basis for bringing a compensation claim.

The case relates to the so called ‘Safari workaround’ Google used between 2011 and 2012 to override iPhone privacy settings and track users without consent.

The civil legal action — whose claimants refer to themselves as ‘Google You Owe Us’ — was filed last year by one named iPhone user, Richard Lloyd, the former director of consumer group, Which?, seeking to represent millions of UK users whose Safari settings the complaint alleges were similarly ignored by Google, via a representative legal action.

Lawyers for the claimants argued that sensitive personal data such as iPhone users’ political affiliation, sexual orientation, financial situation and more had been gathered by Google and used for targeted advertising without their consent.

Google You Owe Us proposed the sum of £750 per claimant for the company’s improper use of people’s data — which could result in a bill of up to £3BN (based on the suit’s intent to represent ~4.4 million UK iPhone users).

However UK law requires claimants demonstrate they suffered damage as a result of violation of the relevant data protection rules.

And in his October ruling Justice Warby found that the “bare facts pleaded in this case” were not “individualised” — hence he saw no case for damages.

He also ruled against the case proceeding on another legal point, related to defining a class for the case — finding “the essential requirements for a representative action are absent” because he said individuals in the group do not have the “same interest” in the claim.

Lodging its appeal today in the Court of Appeal, Google You Owe us described the High Court judgement as disappointing, and said it highlights the barriers that remain for consumers seeking to use collective actions as a route to redress in England and Wales.

In the US, meanwhile, Google settled with the FTC over a similar cookie tracking issue back in 2012 — agreeing to pay $22.5M in that instance.

Countering Justice Warby’s earlier suggestion that affected class members in the UK case did not care about their data being taken without permission, Google You Owe Us said, on the contrary, affected class members have continued to show their support for the case on Facebook — noting that more than 20,000 have signed up for case updates.

For the appeal, the legal team will argue that the High Court judgment was incorrect in stating the class had not suffered damage within the meaning of the UK’s Data Protection Act, and that the class had not all suffered in the same way as a result of the data breach.

Commenting in a statement, Lloyd said:

Google’s business model is based on using personal data to target adverts to consumers and they must ask permission before using this data. The court accepted that people did not give Google permission to use their data in this case, yet slammed the door shut on holding Google to account.

By appealing this decision, we want to give affected consumers the opportunity to get the compensation they are owed and show that collective actions offer a clear route to justice for data protection claims.

We’ve reached out to Google for comment.