20 VC 009: Red Flags, Saas and becoming a VC with Joe Floyd

On today's show I am hugely excited to welcome Joe Floyd to the hotseat. Joe is Principal at Emergence Capital Partners. His expertise in building cloud startups has evolved over 10 years of advising and investing in startups. Prior to Emergence, Joe worked in American Capital's technology group where he focused on fast growing internet companies. At American Capital Joe was involved in their investments with the likes of PeopleMedia and HomeAway. Items Mentioned In Today's Show The Lean Startup by Eric Ries Predictable Revenue: Turn Your Business Into a Sales Machine with the $100 Million Best Practices of Salesforce.com Thinking Fast and Slow by Daniel Kahneman Nudge: Improving Decisions About Health, Wealth and Happiness

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Harry Stebbings?

  This is Harry Stebbings and welcome to episode nine of the 20 Minute VC. In this episode, Joe Floyd joins us. Joe is principal at Emergence Capital Partners and prior to Emergence, Joe worked in American Capital's Technology Group, where he focused on fast-growing internet companies. At American Capital, Joe was involved in their investment with HomeAway and People Media. Here is a little snippet of today's show.

• 0:28Speaker 01

  If you don't want your kid to worship Justin Bieber, like, you should give him another hero.

• 0:31Harry Stebbings?

  But before we jump on into the interview, would you like the chance to win all the books mentioned in the first 10 episodes of the 20 Minute VC and the opportunity to pitch to one of the venture capitalists interviewed? If so, all you have to do is head on over to iTunes and leave a review and then email harry@thetwenty minute vc.com with the name that you left the review on under iTunes. Enough from me, it's time for the interview.

• 1:03Speaker 02

  You have now arrived at your destination.

• 1:07Harry Stebbings?

  Joe, can you tell us a little bit about yourself and why you made the foray into the venture capital industry?

• 1:14Speaker 01

  Sure. I, uh, so I live in San Francisco, live and I work in Silicon Valley. And I think when you're here, the entire energy, it's almost like New York for finance is the same as Silicon Valley for tech. It's just the energy of all the entrepreneurs permeates every part of life. And so, you know, there being, I think when you're here, you just want to be a part of it, whether it's starting a company, working for a company or funding companies.

• 1:43Speaker 01

  And for me, I always had an interest in stocks and investing growing up and, you know, venture capital was kind of a natural extension of that.

• 1:51Harry Stebbings?

  Okay, and, and so being a VC was your first job out of uni, was it?

• 1:56Speaker 01

  No, I worked in investment banking, in tech investment banking for two years straight out of college and it was a... It was a tough job, but it was a really good way to learn the blocking and tackling of finance. And it's what set me up to do a startup immediately afterwards. I worked with a couple of friends from Berkeley. Engineering and we kind of cobbled together a mobile app and I was just helping advising advising them. That's what got me hooked on. On being involved with startups and then I've been a venture investor ever since.

• 2:27Harry Stebbings?

  And what would you say is the best way to get into the VC industry?

• 2:31Speaker 01

  It's it's pretty much brute force. So you you the way I look at it is you have you have two ways of getting in. One, you can start a company. Take it public, sell it for billions of dollars and then become a venture capitalist. And that's that's a very hard route.

• 2:45Harry Stebbings?

  Yeah, okay.

• 2:46Speaker 01

  The and the second one is is.

• 2:48Harry Stebbings?

  I'm glad there's a second.

• 2:51Speaker 01

  Uh yeah, it's coming up through the junior ranks, which is kind of what I did, which is a really a brute force method because there are only so many. Seats available. Um someone told me this stat that there are less. Venture capital investors um than there are professional footballers.

• 3:07Harry Stebbings?

  Wow.

• 3:08Speaker 01

  So it's it's a pretty hard job to get. And so it really just becomes. Networking your way in and just I contacted probably. A hundred uh venture capitalists. And I just sent them blind emails and it was kind of like, hey, you know, I noticed we went to the same university or hey, I noticed. That we we worked for the same bank a long time ago or whatever. And just try to get the the thirty minute coffee meeting and at every coffee meeting I I had here are the the hottest companies that I see in the valley right now. And with every meeting, I kind of hone that list better and better. And try to target the list to the investor and to the stage they like to the end to their target focus.

• 3:47Speaker 01

  And eventually, some of them said, hey, you know, actually, we're we're thinking about hiring and I kind of got into a couple of interview processes and. Luckily, I latched on with one and and that was kind of the the start, but it took a ton of meetings.

• 4:01Harry Stebbings?

  So if you were to advise a a graduate coming out of university, you'd say look for commonalities with you and VCs. So like alumni. Is that is that what you'd suggest?

• 4:12Speaker 01

  Yes, but I would say if you're coming straight out of university, the best thing you can possibly do for yourself is is to to take a more, to take a job that's gonna give you more more concrete skills. I hate to say it, like, the venture job doesn't really have a lot of concrete skills. It is a, it is a job, it's a, it's a people job. You're effectively going out, meeting people, and connecting people. Those are the two job functions you have. Um, and so, taking a job like investment banking, or strategic consulting, or working for a big tech company like Google, will provide you the foundational skills, as well as give you that first toehold of a network.

• 4:50Harry Stebbings?

  So you think it'd be better to join a big player in the industry and then move into it?

• 4:56Speaker 01

  Yeah, because if you look at, if you look at the, the entrepreneurs that we fund here at Emergence, you know, primarily, a lot of them come out of the same few companies: Salesforce, Facebook, Google, Oracle. I mean, there's a few, you know, because we do enterprises, kind of slightly tilted towards some of those enterprise names, but so if you work for one of those companies, and you build a network of engineers and product managers and VPs, like, they're the, they're the people who are gonna be starting companies.

• 5:21Harry Stebbings?

  So when you invest in a, in a startup, is that the most important aspect that you look for, an experienced and, um, uh, well, a good, not, well, a, a team that's got a great background, be it at Google, at Yahoo, or, or is it the product, or is it, what would you say is the most important aspect?

• 5:42Speaker 01

  So, uh, the answer's gonna be a little tilted towards enterprise, because that's all, that's all I focus on, but we look for, we call X-factors, and team is definitely one of them. If a team has worked together for a long time, and they've demonstrated expertise of a particular market, and, you know, technical proficiency, then that can be a very strong indicator for us. Um, but there are a couple of other ones. I mean, another one is go-to-market strategy, having some unique method of attacking the market that other people haven't figured out yet. And I think Zenefits would be a perfect example of that. You know, they're, they get paid from the commission through the insurance broker, so they can give their software away for free, and no one else figured that out. So they had an automatic leg up. So it's not just team, it could be, could be sales and marketing, go-to-market, it could be, um,

• 6:28Speaker 01

  could be some technical proficiency that no one else has achieved.

• 6:33Harry Stebbings?

  And when investing, do you prefer a founder or founders plural? Do you have a preference?

• 6:39Speaker 01

  That's an interesting question. Um, I think if you look at the data, multiple founders generally increases the likelihood of a positive outcome.

• 6:46Harry Stebbings?

  Why do you think that is?

• 6:48Speaker 01

  I think it's because people balance each other out and they also drive each other forward. It's much harder to quit when you've got two other buddies that you're in the trenches with. Uh, and then also when you have decisions being made, um, with the point of view of three people that can work well together. I think you generally arrive at higher quality, um, decisions.

• 7:08Harry Stebbings?

  Okay.

• 7:08Speaker 01

  Now, the flip side is, and this is something that a lot of people don't think about, from an equity perspective, especially from a returns perspective. Having more founders, uh, makes the, the outcome less attractive. Um, it also forces people to take earlier exits. Because if you have three people and one of them really wants to quit because a hundred million is a perfectly acceptable. Sale price for them, even if they're only getting twenty of it, they're perfectly happy with that. It's much more likely that they're gonna hit the exit button and that causes the whole company to fall apart or stop.

• 7:41Harry Stebbings?

  And can you think of a, a recent pitch that you've seen or experienced? And, and you've been really excited by the prospects that the company has shown and how, how have they got you excited?

• 7:55Speaker 01

  Well, we, we invested in the series A stage, which means that we, we look for companies that already have product market fit. And that usually means they have some sales metrics, some early sales and marketing metrics. And so for me, being a, a finance person, that's the area of the company that can get me most excited. If somebody has figured out and been testing on kind of early sales strategies and customer acquisition strategies.

• 8:23Speaker 01

  And they've got the numbers to prove it, there's nothing, nothing more exciting to me than that.

• 8:27Harry Stebbings?

  Okay, so you do need the financial backing?

• 8:30Speaker 01

  It's not much, it doesn't have to be much. In fact, a lot of it can be, you know, hey, we figured out that we can. Target people on Facebook for this price, get them to come to our website and funnel through to conversion at these rates. And when they convert, you know, we have a customer lifetime value of X. Like if you can figure out the beginnings of that. And you may only have five hundred K of revenue, like that could be really exciting.

• 8:54Harry Stebbings?

  Absolutely, and are there are there any red flags then? Um, in when you invest in a company, are there any things that make you worry when someone pitches something to you, be it a too small a market? Or an unstable team or?

• 9:10Speaker 01

  I mean, I think I think the red, what I what I always tell you, what I always tell people is in in first meetings. As a venture capitalist, you're trying to dream the dream, like you you, the red flags are everywhere. You could you could you can find, you can find hundreds of reasons not to make an investment.

• 9:28Speaker 01

  Yeah, what you're looking for is that one reason to make the investment. And and so, you know, in diligence, once I've decided that I like a team, I like the idea they're going after it, then yeah, I'm gonna go look at the biggest red flags. And they always fall in the kind of one of four buckets. I mean, effectively, we're looking for uh the four Ts, strong team, good traction. Um, good big TAM, which is total available market size, and strong industry trends, trends that are gonna be tailwinds.

• 9:54Harry Stebbings?

  Okay.

• 9:57Speaker 01

  If you had a red flag in any one of those four, you would probably wanna make sure that you overcame it, but for the most, for that first meeting, you're just trying to dream the dream.

• 10:05Harry Stebbings?

  If they have three out of four, is that is that satisfactory or do you need all four, really?

• 10:10Speaker 01

  It's all, it's it, it's all about, yeah, strengths and weaknesses. So if a if a team is amazing, I don't care what they're doing, like I'm gonna back them.

• 10:19Harry Stebbings?

  Okay.

• 10:20Speaker 01

  And just because a market is huge doesn't necessarily mean that I would back somebody. So it really depends on. On what those strengths and weaknesses are and how they combine.

• 10:29Harry Stebbings?

  Now, talking about success and amazing teams, when when you think of success, who's the first person that comes to mind?

• 10:38Speaker 01

  Well, my parents, but that's probably not the answer you're looking for.

• 10:41Harry Stebbings?

  Now, that's absolutely fine. Why would you say your parents?

• 10:44Speaker 01

  Uh, I think it's just an incredible story. My mom was born in China and she moved. To the US in nineteen sixty seven, I think, with nothing more than two suitcases. And she put herself through college, became a doctor, like I just, I view that as.

• 11:03Harry Stebbings?

  Inspirational.

• 11:04Speaker 01

  As incredible compared to what I, I mean, I grew up in a middle-class family in San Diego, like I had a pretty darn good life. So anything I accomplished. Just pales in comparison to. Starting from, from literally nothing, escaping communism.

• 11:17Harry Stebbings?

  Yeah, that's quite something to trump.

• 11:21Speaker 01

  Yeah.

• 11:22Harry Stebbings?

  And, and are there any books then that you would recommend to an aspiring entrepreneur? Do you have any that you read in your early days that really were transformative for you? Or that got you interested in the industry?

• 11:35Speaker 01

  So I think there, I mean, there's, there's a bunch. I mean, I think every startup, every entrepreneur should read the lean, the lean startup.

• 11:41Harry Stebbings?

  Yeah.

• 11:42Speaker 01

  Um, and I think everyone in SaaS should read Predictable Revenue.

• 11:46Harry Stebbings?

  Okay, and why do you say predictable revenue?

• 11:49Speaker 01

  I think it just lays out the basics of building a sales and marketing organization. And I feel like for most SaaS companies, um, people, people are capable of building great products now on very little money. And so you get a lot of entrepreneurs who are very product focused, who see needs and they're trying to solve them. And then where they fall down is a little bit on building the sales and marketing engine.

• 12:11Harry Stebbings?

  Absolutely.

• 12:12Speaker 01

  And so I think this just lays the basics and gets people thinking about it early. And gets people all in the same terminology. And I think that's incredibly helpful.

• 12:23Speaker 01

  The, you know, I, I personally find behavioral economics, that was my undergraduate degree. I find it just an incredibly interesting area. And I think every entrepreneur should read,

• 12:37Speaker 01

  you know, books like Thinking Fast and Slow and, um, Nudge. I mean, just fantastic books that get people thinking about the individual decisions that people make and why they're not necessarily rational and why you as an entrepreneur can, how you as an entrepreneur can exploit that to,

• 12:57Speaker 01

  you know, to help, to help, I guess, funnel people into the decisions that you think that will ultimately help them perform better. So.

• 13:06Harry Stebbings?

  And all of these books can be found in the show notes, by the way. Um, well, thank you so much for sharing that with us. And is it okay with you if we move on to a quickfire round?

• 13:16Speaker 01

  Sure.

• 13:16Harry Stebbings?

  Where I say a word or a statement and you give your immediate thoughts?

• 13:19Speaker 01

  Oh, that could get me in trouble.

• 13:21Harry Stebbings?

  Yeah, good luck. Um, okay, Amazon, buy or sell?

• 13:26Speaker 01

  Oh, buy. Long term, it's gonna be around for a very long time. And I think, I feel like the whole cloud business is completely under, uh, undervalued.

• 13:34Harry Stebbings?

  Okay. Uh, tech bubble, is it happening? Is it not happening?

• 13:38Speaker 01

  Yep.

• 13:40Harry Stebbings?

  It is. Why do you say it is?

• 13:42Speaker 01

  If you just look at valuations and you look at round sizes and you look at the sheer dollar amount of money raised by venture capitalists and deployed by venture capitalists in 2014, it's approaching the levels we saw in 2000. Um, you look at the public, public tech, tech company, uh, valuations. I mean, they're, they're pretty rich.

• 14:02Harry Stebbings?

  Yeah, absolutely. Okay. And then the future of Tesla, will it achieve its mass market desires?

• 14:12Speaker 01

  I think what you're going to wind up having is companies like BMW and Audi are going to catch up. Tesla has kind of that one to two year lead and I mean, you see it with companies with a car like the I eight coming out. I mean, other car companies are going to be able to do this. So I think that, I think that Tesla will eventually get that forty or fifty thousand dollar kind of BMW competitor, but I think they're just going to be one of five or six dogs in the fight.

• 14:38Harry Stebbings?

  Absolutely.

• 14:39Speaker 01

  I think, I think what Tesla, interesting is as a battery technology company and the, the other aspects that they can plug that into could be pretty, it could be, could be pretty interesting.

• 14:51Harry Stebbings?

  Do you think they might branch off into just that compartment and allow Audi and the other big car manufacturers to, to take their place in the car industry?

• 15:01Speaker 01

  I don't know. I, I, I feel like they've got a stake in the ground with cars and I think they're, I think they will do more than cars, but I think that they'll probably always do cars.

• 15:11Harry Stebbings?

  Absolutely.

• 15:12Speaker 01

  It'd kind of be like IBM, like they'd have to, somebody would have to effectively, like they, they just have to make a burn the ships mentality and sell, sell off, you know, laptop division and move on.

• 15:23Harry Stebbings?

  Absolutely.

• 15:24Speaker 01

  It'd be a pretty big moment.

• 15:25Harry Stebbings?

  Well, thank you so much for coming on the show, Joe. I've hugely enjoyed chatting with you.

• 15:30Speaker 01

  Cool. Sorry, I, I ramble.

• 15:32Harry Stebbings?

  No, it's absolutely fine. It's, it was fantastic. Thank you.

• 15:36Speaker 01

  Great.

• 15:37Harry Stebbings?

  Now, for all the resources mentioned in today's show, head on over to www dot the twenty minute VC dot com where you can find all the resources and please do like us on Instagram at the twenty minute VC and on Twitter at twenty minute VC. Thank you so much and we can't wait to see you in the next episode.