What Did I Learn From the First VC Check I Ever Wrote?

In 2007, when deals were much slower, I became a VC 12 year ago. After the acquisition of my second startup, Salesforce.com had just made me VP, Products. When I was trying figure out my role in the VC industry, I decided to focus on companies that built highly technical products that solve business problems.

Just as I was starting to get the hang of things, the stock market plunged and venture capital almost shut down for nearly one year. It was a good thing because it gave me the space and time I needed to meet tons of founders, VCs, and to perfect my craft.

My first check was written just 10 years ago in a company called Invoca. Scott Hilleboe, HIG Growth Partners announced a $56 million funding. This was an opportunity to reflect on the lessons learned over the past 10 years.

1. VC is a long-term investment

While some businesses become overnight success stories, few are able to move up the ranks quickly. Invoca now has 10s of millions of recurring revenue and is growing at > 75% annually. However, it took 3 years to build the technology and get our first enterprise clients. Today, we serve large clients such as Dish Networks and Dignity Health as well as startups like Gusto, MakeSpace, and many other huge clients. However, I can't disclose the names of any clients, but we do partner with Google, Adobe and Salesforce.

Our Upfront partners have had the opportunity to invest in 18 companies that have exceeded $1 billion. The average tenure of investments that reach this size is over 10 years. It took us time to sell our position at Kyriba for over $1 billion. The industry was able to support this company because it had scale, technology that could be trusted, and committed customers.

2. 2. Ownership matters

Upfront invests in companies that we have meaningful ownership of and focuses our attention on those companies. Not only do we have Series A funds that are able to write $500k - $15 million first checks, but we also have three growth fund. We have invested $50 million in some of our most successful deals, so we can support entrepreneurs as they grow their businesses. Invoca was the first company to lead both the seed and A rounds. We didn't wait around for anyone else to invest more capital. Accel was the B leader, Morgan Stanley was the C and HIG the D. Our ownership has increased over the years.

There is something to be said about the strange dance I do with LPs until it comes time to send actual cash money. You can make a lot more money if you invest early and then withdraw in the 3 subsequent rounds. VCs may have different strategies and views on this. Some prefer to buy cheaply and show a large multiple. When we are confident that we have a winning hand, we prefer to invest more capital. This helps entrepreneurs succeed and generates more financial returns for our investors. One example is that we were in the Ring seed round and were followed in the A B C D and D. Jamie wanted to increase his funding so we were able to also lean into the E round. The final check was > 420% IRR.

3. 3. Cash Money

VCs are ultimately measured by sending cash back to those who have funded us. While our industry has achieved great paper markups in the past, LPs ultimately want money.

Although we sold our Kyriba position for more than $1 billion, it generated virtually no income when we invested. It was a long-term investment that we followed and which we continued to do at the same level as Invoca today. We were able to return hundreds and millions of dollars, as well as 2x the amount from one fund when we sold our Kyriba position. Many of you may not have heard of Invoca, and I'm sure you haven't either. It's okay, they love their customers, their revenues speak volumes, and we're perfectly fine backing some plumbing that helps businesses online work better.

We have generated cash proceeds of $533 million over the last 2.5 years (more to come in year end). This has been possible through early conviction, following winners, keeping ownership, and being patient, long-term capital partner.

4. 4.

Asking younger VC partners for their advice about the sector, I emphasize that I look for companies with intellectual property (IP) that is easily defendable. Although it is possible to duplicate everything if Amazon or Google were to invest all their resources, I am referring to technology that is difficult to replicate, requires years of knowledge and is highly valuable once adopted.

Invoca is an example. We handle millions of calls per month for customers looking to make sales calls and drive calls to call centers. This is important. It is important to note that there are many businesses with complex or large "considered purchases", which have higher close rates by phone than via a web form.

Here's the "aha" moment. When you think about why Google is so valuable, it's this. Google can determine the "purchase intent" for customers by entering a search query in the search bar. Google can statistically validate your likelihood of buying more baby products if you search for "baby stroller" in the search bar. This is partly based upon the keywords you use and partly based on what websites you visit (your clickstream). The call center has even more power thanks to Invoca. They can see if you visited their website or a competitor's website before the call. We also allow them to access real-time data. Invoca evaluates the query for the sales rep in real time and uses AI to predict your needs (after the call). If you call to upgrade your phone but don't get a response, we can help the company retarget you via Facebook. Or if we receive a complaint about a product, we can feed you into their retention marketing program.

Our machine learning capabilities have improved over the past 10 years serving the largest US enterprise clients. The value of our IP is growing exponentially as a result of this experience. While competitors may be able to put "AI" on websites, we know they cannot match our benchmarks due to the volume of advantages we have built.

As you scale, Defensible IP is extremely valuable.

Dish discusses the Invoca's largest customer in this video. He talks about how they increased conversions by 15x (no typo).

5. Some teams create, others scale (some do both).

These days, there is a lot of focus on founders and whether or not they should remain at the top. This is an emotive topic because the media can't nuance well.

I have learned that sometimes you need to engage with the CEOs/Founders to find out if they are the right person to scale your company.

Invoca was founded by Jason Spievak, who is an incredible innovator and has been part three highly successful businesses that have grown from startups to extremely valuable. After many years, we had a conversation about whether he believed he was the right person for Invoca's next stage. He reflected on the process over six months and concluded that he wasn’t. He was part of the decision-making process that led to Gregg Johnson becoming the CEO.

Jason helped Apeel Science to get off the ground. He assisted the CEO and Founder in raising all his initial VC money, and also helped him build the executive team. Jason has two valuable equity positions, and has raised an early-stage seed capital. The company is now valued as Invoca ( latest round raised >$70million).

Gregg was a colleague and friend of mine at Salesforce.com, where he worked with the group that builds products for marketers. He knew this area well before joining.

Jason was a creator who saw opportunities in markets that other people missed. Gregg was built for scaling large companies and building the team and processes to support it.

My friend, and co-founder of Invoca Colin Kelley, has done both. While he was the one who built the technology and the telecoms infrastructure necessary to create a large enterprise software company, he is still Invoca's CTO.

Some can do both. It's not just for those with the best skills. Helping people discover their talents and passions is an important part of the job.

Summary

The tech sector is often praised for its "overnight successes", but in reality, the greatest successes have been built over long periods of time and with many ups and downs as well as lateral moves.

It is a fact that it takes many years to create defensible IP and large teams of dedicated staff to market, sell, and service clients.

Venture is easy to want to follow yesterday's trend and fund what you read in the press. But if you don't have funding, it's probably too late.