 From the CUBE studios in Palo Alto in Boston, connecting with thought leaders all around the world, this is a CUBE Conversation. Hi everybody, this is Dave Vellante. And as you know, I've been running a CXO series in this COVID economy. And as we go into the post-isolation world, really want to focus and expand our scope and really look at startups. And of course, we're going to look at startups, let's follow the money. And I want to start with the investor. Mark Robers is here. He's a managing director at Stage 2 Capital. He's a professor at the Harvard Business School, former CRO over at HubSpot. Mark, great to see you. Thanks for coming on. Yeah, you bet, Dave. Thanks for having me. So I love looking at your career a little bit and your LinkedIn and following some of your videos. I love the fact that you did and now you teach and you're also applying it with Stage 2 Capital. Tell us a little bit more about both your career and Stage 2. Yeah, I mean, a lot of it's a bit serendipitous, especially the last 10 years, but I've always had this learn-do-teach framework in mind as I go through the decades of my career. Like you're probably like 80% learning in your 20s, early 30s, and 20% doing. And then I think my 30s was leading the HubSpot sales team a lot of doing, a little bit of teaching, kind of hopping into different schools, et cetera, and also doing a lot of some writing. So now like teaching, I think investing kind of falls into that too, where you've got this amazing opportunity to meet the next generation of extraordinary entrepreneurs and engage with them. So yeah, that has been my career. Dave, I've been a passionate entrepreneur since 22 and then the last one I did was HubSpot and that led to just an opportunity to build out one of the first sales teams in a complete inside environment, which opened up the doors for a data-driven mindset and all this innovation that led to a book that led to recruitment on HBS's standpoint to like come and teach that stuff, which was such a humbling honor to pursue. And that led to me meeting my co-founder, Jpo, of State Your Capital who was at Bessemer to essentially start the first VC fund running back by sales and marketing leaders, which was his vision, but when he proposed it to me, addressed a pretty sizable void that I saw in the entrepreneur ecosystem that I thought could make a substantial impact to the success rate of startups. Great, I want to talk a little bit about how you guys compete and what's different there, but I've read some of your work, looked at some of your videos and we can bring that into the conversation, but I think you've got some real forward thinking, for example, on the best path to the upper right, being the XY axis on growth and adoption, do you go for hyper growth or do you go for adoption, how you align sales and marketing, how you compensate salespeople? I think you've got some leading edge thinking on that that I'd love for you to bring into the conversation, but let's start with stage two. I mean, how do you compete with the big guys? What's different about stage two capital? Yeah, I mean, first and foremost, we're a bunch of sales and marketing exacts. I mean, our backing is 100 plus CROs, VPs of marketing, CMOs from the public companies. I mean, Dropbox, LinkedIn, Oracle, Salesforce, SurveyMonkey, Lyft, Asana, I mean, just pick a unicorn, we probably have some representation from it. So that's a big part of how we compete is most of the time when a rocket ship startup is about to build the sales team, one of our LPs gets a call and because of that, we get a call, right? And so we're just deep in helping, first off, assess the potential and risks of a startup in their current go-to-market design and then really stepping in, not just with capital, but a lot of know-how in terms of how to best develop this go-to-market for their particular context. So that's a big part of our differentiation. I don't think we've ever lost a deal that we try to get into for that reason, just because we come at the right stage that's right for our value prop. I'd say, Dave, the biggest sort of difference in our investing theme, and this really comes out of like, post-hubspot, in addition to teaching at HBS, I did parachute into a different startup every quarter for one day where you can kind of like, assess their go-to-market, looking for like, what is the underlying consistency of those series A businesses that become unicorns versus those that flatline? And if I, you know, I've now written like 50 pages on it, which I, you know, we can highlight to the crew, but the underlying cliff notes is really the avoidance of a premature focus on top-line revenue growth and an acute focus early on on customer attention. And I think like, for those of you who, you know, who run in that early stage venture community these days, and especially in Silicon Valley, there's this like triple, triple, double, double notion of like year one, triple revenue, year two, triple revenue, year three, double revenue, year four, double revenue, it's kind of evolved to be like the holy grail of what your objective should be. And I do think like, there's a fraction of companies that are ready for that and a large amount of them that should they pursue that path will lead to failure. And so we take a heavy lens toward world-class customer attention as a prerequisite to any sort of triple, triple, double, double blitz-scaling type model. So let me ask you a couple of questions there. So it sounds like your LPs are heavily, not only heavily and financially invested, but also are very active. I mean, is that a fair, how active are the LPs in reality? I mean, they're busy people, they're software operators, do they really get involved in businesses? Absolutely. I mean, any half of our deals that we did in fund one came from the LPs. So we get half of our funnel comes from LPs, okay? So it's always like source, pick, win, support. That's like what basically a VC does. And our LPs are involved in every piece of that. Any deal that we do will bring in four or five of our LPs to help us with diligence that they have particular expertise in. So we did an insure tech company in Q4, one of our LPs runs the insurance practice at Workday. And this particular play is selling into big insurance companies. He was externally helpful to understand that domain. Post-investment, we always bring in four or five LPs to go deeper than I can on a particular topic. So one of our plays is about to stand up in account-based marketing capability. So we brought in the CMO, a former CMO at Rapid 7 and the CMO at Unisys, both of which who have stood up like account-based marketing practices much more deeply than I could. You know, of course, like we take the time to get to know our LPs and understand both their skills and experiences as well as their willingness to help. We have Jay Simon who's the president of Atlassian. He doesn't have like hours every quarter. He's running a 50 billion dollar company, right? So we have Brian Halligan, the CEO of HubSpot, right? Like he's running a 10 billion dollar company now. So we just get deal flow from them. And maybe like an event once or two, twice a year. I would say like 10 to 20% of our LPs are like that. I would say 60% of them are active operators who are like, you know what, I just missed the early days. And if I could be active with one or two companies a quarter, I would love that. And I would say like a quarter of them are like semi-retired. And they're like, they're choosing between helping our company and being on the boat or the golf course. So this is kind of a new model. Do you see having a different philosophy where you want to have a higher success rate? I mean, of course, everybody wants to have a, you know, about a thousand. But I wonder if you could address that. Yeah, I don't think it, I'm not advocating slower growth, but just healthier growth. And it's just like an extra, like it's really not different than sort of the blitz scaling oriented San Francisco, V.C. Okay, so, you know, I would say when we were doing startups in the 90s, early 2000s, before the lean startup, we would have this idea and build it in a room for a year and then sell it in parallel, basically sell vaporware. And Eric Reese and the lean startup changed all that. Like he introduced MVPs and pivots and agile development. And we quickly moved to a model of like, yeah, when you have this idea, it's not like you're really learning, keep the team small, keep the burn low, pivot, pivot, pivot, stay agile and find product market fit. And once you do that scale, I would say even like West Coast Blitz Scaling oriented VCs agree with that. My only take is we're not being scientifically rigorous on that transition point. Like the, go ask like 10 VCs or 10 entrepreneurs, what's product market fit? And you'll get 10 different answers. And you'll get answers like when you have lots of sales. I just profoundly disagree with that. And I think revenue and sales has very little to do with product market fit. That's like message market fit. Like selling ice to Eskimos. If I can sell ice to Eskimos, it doesn't mean that product market fit. The Eskimos didn't need the ice. It just means I was good at like pitching it, right? You know, other folks talk about like having a workable product in a big market. It's just too qualitative, right? So that's all I'm advocating is that, I think almost all entrepreneurs and investors agree there's this incubation rapid learning stage. And then there's a thing called product market fit where we switched to rapid scale. And all I'm advocating is like more science and rigor to understanding some sequences that need to be checked off and a little bit more science and rigor on what is the optimal pace of scale. Cause when it comes to scale like pretty much 50 out of 50 times when I talked to a series A company, they have like 15 employees, two sales reps that got to like 2 million in revenue. They raised an 8 million dollar around in series A and they hired 12 sales people the next month. You know, and Dave, you and your brother, you know, who runs a large sales team can like, can really understand how that's gonna failure almost all the time. Like it's just to be able to like absorb 10 reps in a month, being a 50, it's just like, who even does all those interviews? Who onboarded them? Who manages them? How do we feed them with the man? These are some of the things that I just think warrant more data and science to drive the decisions on when and how fast to scale. Mark, what is the key indicator then of product market fit? Is it adoption? Is it renewal rates? Yeah, it's retention in my opinion, right? So the very simple framework that I requires, you're ready to scale when you have product market and go to market fit. And let's be extremely, you know, precise and rigorous on the definitions. So product market fit for me, the best metric is retention. You know, that essentially means someone not only purchased your offering, but experienced your offering. And after that experience decided to repurchase, whether they buy more from you or they renew or whatever it is. Now, the problem with it is in many, like in the world we live in, it's like the retention rate of the customers we acquire this quarter is not evident for a year, right? And we don't have a year to learn, like we don't have a year to wait and see. So what we have to do is come up with a leading indicator to customer attention. And that's something that I just hope we see more entrepreneurs talking about in their product market fit journey and more investors asking about is what is your leading indicator to customer attention? Cause when that gets checked off, then I believe you have product market fit. Okay, so there's some documentation on some unicorns that have like flirted with this. I think Silicon Valley calls it the aha moment. That's great. Just like what? So like Slack, an example, like the format I like to use for the leading indicator of customer attention is P% of customers do E event in T time. Okay, so it basically boils it down to those three variables P, E, T. So if we bring that to life and humanize it, 70% of the customers we sign up, this is Slack, 70% of the customers we sign up send 2000 team messages in 30 days. If that happens, we have product market fit. I like that a lot more than getting to a million in revenue or like having a workable product in a big market. Dropbox, 85% of customers share one file in one hour. Okay, HubSpot, I know this is the case. 75% of customers use five or more of the 25 features in the platform within 60 days. Okay, P% and E event do E event in T time. So if we can just format that and look at that through customer cohorts, we often get visibility into true product market fit within weeks, if not like a month or two, and it's scientifically, or data driven in terms of its foundation. Love it. And then of course you can align sales compensation with that retention. You've talked a lot about that in some of your work. I want to get into some of the things that stage two was doing. You invest in SaaS companies. If I understand it quickly, it's not necessarily early stage. You're looking for companies that have sort of achieved some degree of revenue and now need some operational help in scaling. Is that correct? Yeah, so it's a little bit broader than SaaS. Any sort of like B2B software, any software company that's building the scaling through a sales team. I mean, look at our backers and look at my background. That's what we have experience in. So not really any consumer plays. And yeah, I mean, we're not, we have a couple of product LPs. We have a couple of CFO type LPs. We have a couple of like talent HR LPs, but most of us should go to market. So we don't, you know, there's awesome seed funds out there that help people set up their product and engineering team and go from zero to one in terms of the MVP and find product market fit, right? We like to come in right after that, right? So it's usually like between the seed and the A, usually the revenues between half a million and 1.5 million. And of course, we put an extraordinary premium on customer retention, okay? Whereas I think most of our peers put an extraordinary premium on top line revenue growth, we put an extraordinary premium on retention. So if I find a 700,000 dollar business that, you know, has whatever 50, 70 customers, you know, depending on their ticket size and has like north of 90% lower retention, that's super excited. Even if they're only growing like 60%, it's super exciting. And what's the typical size of investments? Do you typically take board seats or not? Yeah, we typically put in like between like seven or a K and 1.5 million in the first check and then have like larger amounts for follow-on. So on the A and the B, you know, we try not to take board seats to be honest with you, but instead be board observers. It's a little bit selfish in terms of our fund scale. Like the general counsel from other venture capitalists is of course, like the board seat is there for proper governance in terms of like having some control over expenditures and acquisition, conversations, et cetera, or decisions. But a lot of people who have experienced with boards know that they're very like easy and like time efficient when the company's going well and they're a ton of work when the company's not going well. And it really hurts the scale, especially on a smaller fund like us. So we do like to have board observers seats and we go to most of the board meetings so that our voice is heard. But as long as there's another fund in there that, you know, has, you know, world-class track record in terms of, you know, holding proper governance at the board level, you know, we prefer to defer to them on that. All right, so the COVID lockdown hit really in earnest in March. Of course, we all saw the Sequoia memo, the Black Swan memo, you were, I think at HubSpot when you remember the rest in peace, good times memo came out very sort of negative, put a pall over the industry's, you know, stop spending. But there was some other good advice in there. You know, me to sort of go too hard on that. But it was generally a negative sentiment. What was your advice to your portfolio companies when COVID hit? What were you telling them? Yeah, I summarized this in our lead blog article. We kicked off our blog, which is partially related to COVID in April, you know, which kind of summarized these tips. So yes, you are correct, Dave. I was running sales at HubSpot in 08 when we had our last sort of major economic, you know, destabilization. And I was freaking out, you know, like, you know, at the time, we're still young, like 20, 30 reps and numbers to chase. And I was actually, after that year, looking back, we were very fortunate that we had a value prop that was very recession proof. We were selling to the small business community who at the time was cutting everything except new ways to generate sales. And we happened to have the answer to that and it happened to work, right? So it showed me that like, there's different levels of being recession proof. And we all, you know, we accelerated the raise of our second fund for stage two with the anticipation that there would be a recession, which, you know, in the venture world, some of the best things you could do is close a fund and then go into a recession. Because, you know, there's more deals out there, the valuations are lower and it's much easier to understand nice to have versus must have value props. So the common theme I saw in talking to my peers who looked back in the O1 crisis as well as the O8 crisis a year later was not making a bolder decision to reorient their company in the current times. And usually on the go-to-market, that's two factors, the ICP, who you're selling to, ideal customer profile and the CVP, what your message is, what's your customer value prop. And that was really, you know, in addition to just stabilizing cash positions and putting some plans in there, that was the biggest thing we pushed our portfolio on was almost like going through the exercise, like it's so hard as a human to have put like nine months into a significant investment, leading up to COVID. And now the outcome of that investment is no longer relevant. And it's so hard to let that go. You know what I mean? So, but you have to, you have to. And it's, and that's everything from like, you spent two years learning how to sell to this one persona. And now that persona is like, Jim's retail and travel companies. Like you've got to let that go. You know what I mean? And like, and you know, it's just like, so that's really what we had to push folks on was just, you know, talking to founders and basically saying this weekend, you know, get into some, a great headspace and like, pretend like you were parachuted into your company as a fresh CEO today and look around and appreciate the world and what it is. What is this world? What are the buyers talking about? Which markets are hot? Which markets are not? Look at the assets that you have. Look at your product, look at your staff, look at your partners, look at your customer base and come up with a strategy from the ground up based on that and forget about everything you've done in the last year. Right? And so that's really what we pushed hard on. And in some cases, people just like jump right on it. It was awesome. We had a residential real estate company that within two weeks stood up a virtual open house module that sold like hotcakes. That was fantastic execution. And we had other folks that we had of like three meetings with the push them deep enough to go more boldly. But that was really the underlying pattern that I saw in past recessions and something I pushed the portfolio on is just being very bold on your pivots. Right, so I wanted to ask you how your portfolio companies are doing. I imagine you saw some looked at this opportunity as a tailwind. You mentioned the virtual open house. Maybe we're exposed, revenue exposure to hard hit industries and others kind of in the middle. How are your portfolio companies doing? Yeah, it's strong. I'm trying to figure out like, of course I'm going to say that but I'm trying to figure out like how to provide quant to just demonstrate that. We were fortunate that we had no one and this was just dumb luck. I mean, we had no one exclusively selling to like travel or restaurants or stuff. That's just bad luck if you were and we're fortunate that we got a little lucky there. We put a big, obviously we had put a big premium and customer attention and that we always looked through our session proof lens at all our investments. So I think that helped. But yeah, I mean, we've had, first off we made one investment post COVID. That was the last investment on our first fund and that particular company, March, April, May their results were 20% higher than any month in history. So that was a very, those are the types of deals we're seeing now. It's like you literally find some deals that are accelerating since COVID and you really just have to assess if it's permanent or temporary, but that one was exciting. We have a title of mallison company that's just like really accelerating post COVID. Again, luck in terms of just their alignment with the new world we're living in. And then, geez, I mean, we've had I think four term sheets for markups in our portfolio since March. So I think that's a good sign. We only made 11 investments and four of them either have verbal or submitted term sheets on markups. So again, I feel like the portfolio's doing quite well and I'm just trying to provide some quantitative measures so it doesn't feel like a political answer. So thank you for that, but now how have you or have you changed your thesis post COVID? Do you feel like your approach was sort of geared toward this post COVID environment? What changes have you made? A little bit, like I think in any bull market, generally speaking, there's just gonna be a lot of like triple, triple, double, double blitz scaling, huge focus on top line revenue growth. And in any down in market, there's gonna be a lot of focus on customer attention, you and economics. Now we've always invested in the latter. So that doesn't change much. There's a couple of things that have changed. Number one, we do look for acceleration post COVID. Now that obviously we were not, we weren't that lens didn't exist pre COVID. So in addition to like great retention, selling through a sales team, around the half million to a million revenue, we wanna see acceleration since COVID and we will do diligence to understand if that's a permanent or a temporary advantage. I would say like markets like San Francisco, I think become more attractive in post COVID. There's just like San Francisco has some magic happening. There's some VC funds that avoid it because it's too expensive. There's some VC funds that only invest in San Francisco because there's magic happening. We've always just been, we have two portfolio companies there that have done well. Like we look at it and if it's too expensive, we have to avoid it, but we do agree that there's magic happening. I did look at a company last week, it's sort of Dave, they're 300K in revenue and their last valuation was 300 million. So why is San Francisco more attractive, Mark? Well, I mean, and those happened in Boston too. We looked at it in Boston. I thought you were gonna tell me that valuations were down and that's all. Well here, here's the GLI. Sometimes they do, sometimes they don't. And this is one, but in general, I think like they have come down and honestly, the other thing that's happened is good entrepreneurs that weren't raising or now raising. So like a market like that, I think becomes more attractive. The other thing that I think that happens is you're sort of following strategies different. Okay, so there is some statistical evidence that obviously we're coming out of a bear market, a bullish market in both the public and the private equities. And there's been a lot of talk about valuations and the private sector is just outrageous. And so we're fortunate that we come in at this like post seed pre-A where it's not as impacted. It is, but not as, or hasn't been, but because there's so many more multi-billion dollar funds that have to deploy 30 to 50 million per investment, there's a lot of heating up that's happened at that stage. Okay, and so pre-COVID, we would have taken advantage of that by taking either all or some of our money off the table in these follow on growth rounds. As an example, we had a company that we made an investment with around 30 million in valuation and 18 months later, they had a term sheet for 500. So that's a pretty good return in 18 months. And that's an expensive, so that's like, wow, we probably, even though we're super bullish on the company, we may want to take off a two X position and take advantage of these secondaries. And the other thing that happens here, as you pointed out, Dave, is like, risk is not, it doesn't become de-risk with later rounds. Like these big billion dollar funds come in, they put pressure on very aggressive strategic moves that sometimes kills companies and completely outside of our control. So it's not that we're not bullish on the company, it's just that there's new sets of risks that are outside of the scope of our work. And so that's probably like a lesser opportunity post COVID. And we have to think longer term and have more patient capital as we navigate the next year or so of the economy. Yeah, so we got a wrap, but I want to better understand the relationship between the public markets, you've seen the NASDAQ up, which is just unbelievable when you look at what's happening in the main street and the relationship between the public markets and the private markets. Are you saying they're sort of tracking but not really identical? I mean, what's the relationship? Okay, so there's like hundreds, there's thousands of people that are better than that at me, like the kind of like anecdotal thoughts that I, or the anecdotal like kind of narrative that I've heard in past recessions and actually saw too was the private market, when the public market dropped, took nine months roughly for the private market to correct. Okay, so there was a lag. And so there's some arguments that that would happen here, but this is just a weird situation, right? Of like the market, even though we're going through societal, crazy uncertainty, turmoil and tremendous tragedy, the markets did drop, but they're pretty hot right now specifically in tech. And so there's a number of schools of thoughts there that like some people claim that tech is like the utilities companies of the 80s, whereas just a necessity and it's always going to be there regardless of the economy. Some people argue that what's happened with COVID and remote workplace have made, accelerated the adoption of tech, the inevitable adoption. And others could argue that like, the worst is still the cop. Yeah, and of course you've got the Fed injecting so much liquidity into the system, low interest rates. Mark, last question. Give me a pro tip for entrepreneurs. I would say like, we've talked a lot about this methodology with, you know, customer attention, you know, at, you know, not really focusing their line everything there as opposed to top line revenue growth initially. I think that the extension I do at this point is like, you know, do your diligence on your investors and what their thoughts are on your future growth plans to see if they're aligned. Cause that becomes like, I think a lot of entrepreneurs when they dig into this work, they do want to operate around it, but that becomes that much harder when you have investors that think a different way. So I would just, you know, just always keep in mind that, you know, I know it's so hard to raise money, but you know, do the diligence on your investors to understand what, you know, what they'd like to see in the next two years and how it's aligned with your own vision. Mark, it's really great having you on. I'd love to have you back and as this thing progresses and see how it all shakes out, really a pleasure. Thanks for coming on. No, thanks, Dave. I appreciate you having me on. And thank you everybody for watching. This is Dave Vellante for theCUBE. We'll see you next time.