The Investor's Perspective on Founding a Startup
In episode 68 of Pit Stops to Podium, we sit down with David Hornik, Founding Partner of Lobby Capital and experienced venture capitalist, to discuss "The Investor's Perspective on Founding a Startup". David shares his insights on the venture landscape, offering advice to entrepreneurs on building a successful startup. We also discuss the challenges and rewards of supporting a one-person startup, as well as strategies for building a strong team.
With a focus on enterprise applications and infrastructure software, fintech, and consumer-facing software and services, David draws on his years of experience investing in information technology companies to provide valuable perspectives and actionable advice for aspiring entrepreneurs. Join us as we explore the mindset and strategies needed to succeed in the competitive world of startups.
If you’re ready to learn from one of the best, then buckle up and hold on!
Venture Capital Landscape and Trends
The current fundraising environment is very poor. Although this has happened before (e.g. 2000, 2008), most current entrepreneurs, and many investors, have not experienced this type of situation. To be successful in it, you need to have a very clear plan of how you're going to get to cash-positive. This environment has also caused many early stage companies to buck the long-standing belief that growth is more important than profitability.
Investing in Early Stage Startups
Sometimes it may not be clear if a company will be a good investment, and you may have to place a higher weight on how practical you think the product is, or how high the demand for it could potentially get, as opposed to whether or not they're currently growing.
In deciding whether or not to invest in early stage companies, a best practice is to consider the product and assess where the company is, think about how the product is different, and look at how the product is being sold.
"When I invested in Bill.com they had some customers, but it wasn't growing quickly. That was more a bet on, 'I think this is an important area'"
Net Revenue Retention is THE Metric
There is a single metric that will answer, "Does this product have product market fit?", and that is net revenue retention. If you have more than 100% net revenue retention, then you have a product that is compelling to a company as they are spending more in year two than they spent in year one.
However, if you do not grow new customers while you're growing your net, old customers, you'll run out. When you over-index towards net revenue retention, it knocks the equation out of balance because you don't have enough top-of-funnel and you don't have enough net new.
Connect with David
Brendan: Hey everyone welcome to Pit Stops to Podium the RevPartners podcast where we talk to execs who've competed and won in taking companies from high growth to high scale, my name is Brendan Tolleson and I serve as the co-founder and CEO of Revpartners and I'm delighted to have with me today David Hornik for this episode of Pit Stops to Podium. Welcome, David.
David: Hey thanks for having me.
Brendan: Absolutely, well for those who may not know who David is David is a founding partner of Lobby Capital um and Dave this is an opportunity for you to give a little bit of background on who Lobby Capital is um so I made a kind of elevator pitch but more importantly what I'd love to do is kind of the origin story of how you got to Lobby Capital so what led you to start it?
David: Yeah I mean that could be an hour in its own but suffice it to say I grew up in a house with a dad who has a very early computer scientist had computers in my basement I went off to college I got a degree in computer music which uh qualified me to go to law school I went to law school and was a lawyer for a period of time and I returned to Silicon Valley uh in 1997 when the internet was exploding and I was a lawyer representing startups and I loved it I thought startups were amazing and I was completely addicted and I was going to board meetings and helping companies to succeed in in a really amazing period of time in technology and after one of those board meetings I heard the fateful words 'hey David have you ever thought about the Venture business?' and it was from a guy named Dave Marquardt who was one of the most successful Venture investors ever he was the only private investor in Microsoft and sat on that board for 33 years and he had sat in board meetings where I had you know shot off my mouth about things that had nothing to do with the law like growth and sales uh and so he was very kind and we had a a four-month courtship before he said why don't you join us so I joined this firm August Capital in 2000 and for 20 years was investing in August in early stage software companies uh we were we uh I came in when August was investing its third fund and so August 3 4 5 6 7 in 20 years and when we finished investing August 7 uh I sat down with my partner Eric and said so are we raising August 8 or do we want to do something different and we decided that now we had built this amazing conference called the lobby conference it's this sort of uh unconference where really thoughtful execs come together uh for a few days and sit around on bean bag chairs and talk about the stuff that matters to them and that conference is called the lobby conference and we thought you know what let's just lean into the fact that our community comes together at these events to talk about how to be successful and help each other be successful let's call it Lobby Capital so we raised a new fund as Lobby Capital so I am a first-time fund uh razor and uh and we're busy investing in it it in you know late seed and series a software companies and it's in many ways the same as I've been doing forever which is the most fun part.
Brendan: That's great um well familiar with the lobby conference is it's an amazing Network and amazing community and I think you uh are humble enough not to share some of the the wins you've had and they will get into that as we get a big idea um but David before we kind of get into things that you look for what do you think about Investments um we do have a tradition here at Pit Stops to Podium to get to know our guests outside of work because at the end of the day we're human beings not human doers you have a very interesting background in terms of music and law but what are some things that you and passions Hobbies interests that uh our audience should know?
David: Yeah I mean that's I I have kind of three outside of the office you know Foci if you will um I am an art fanatic uh my wife and I are just lovers of Contemporary Art and we spend a huge amount of time uh enjoying art and that's given me the opportunity to to do things I would have never guessed I sit on the board of the Smithsonian American Art Museum which is amazing as I helped launch a new uh Museum in San Francisco called the ICASF where my wife and I both are on that board so I spent a lot of time with art and just think artists are amazing that they can create such beauty and so that's that's fantastic who's the uh Who's the artist behind you yeah this is an artist named Zay Palito who was um from Brazil and my wife got to know Zay's work literally on Instagram and uh his career is just exploding because his work is just so beautiful so um the other one of the other legs in the stool is that I spend a lot of time uh in lgbtq rights I've been on the board of glad one of the leading uh gay rights and queer rights organizations in the country for a lot of years I was on the board for seven years I timed off the board and then I uh rejoined the board so I really think that uh you know gay rights are a very lgbtqai rights are a really important thing in in the Civil Rights path of this country and every every country and so um I devote a lot of time and energy to that and the last thing is I'm fanatical about uh Broadway I think Broadway is just an amazing art form and I've had the really fun Fortune to be able to be a teeny tiny producer in a bunch of great Broadway shows the most recent of you haven't seen it is called Kimberly Akimbo and it's on Broadway now and I think it's going to win the best musical Tony because it's so amazingly uh it's both hilariously funny and completely heartbreaking and it's hard to do both of those things.
Brendan: So how did you get into that?
David: Yeah I mean it is it two paths my oldest son is an aspiring Broadway composer and so he and I you know sort of obsessed over that art form in lots of ways he's now uh in his late 20s and and and working and running around Broadway so that's exciting yeah and the other is that I became very good friends with the um the composer of Avenue Q a guy named Jeff Marks who's just an incredibly brilliant composer and a lovely character and I had the great Fortune of uh investing in his show Avenue Q and then got to know other folks and I and I just realized like oh if you reach out to people about the shows that you see that you think are amazing they're very happy to let you help be part of that part of that um path and so over the last handful of years I've um I've invested in eight amazing shows and they've and it's been really fun they've been quite varied from the from plays like slave play and uh The Inheritance to musicals like Kimberly Akimbo now and Avenue Q and um and others so it's been it's really fun and and I'm just glad that I got an opportunity to help bring this stuff to the planet because um because it should exist um I don't invest in art I love art I buy it I have no I don't like the market the economic Market um but it's a super interesting topic.
Brendan: So let's do that I love how you would educate me quite a bit while you're gonna educate me regardless but even that's a whole new world uh well let's transition a little bit into David so first of all thank you for sharing the passions that you have uh it's always fun to get to know our guests outside of work because that really kind of shows really who you are um and so but let's get into you know kind of the day-to-day from a work perspective you've had the fortune of uh seeing some home runs I'm sure you've seen some failures too but there's there's signals of success and failure along the road and um certainly with what's been going on the market there is a heightened emphasis on making sure you understand what are the right things right signals and and what to avoid um so let me let's start here just let's start with the trends maybe that you're seeing just in general when you think of the macro view of what's going on in in the VC space and software um make from your perspective explain what what you're seeing uh and what people should be mindful of?
David: Well what I'm seeing is the worst fundraising environment in almost forever and I mean I hate to be there's no other way to put it.
Brendan: We'll start with the good part.
David: The good part is well there is a good there is a good part because I've seen this right I saw 2000 a really challenge Market we saw again in 2008 a very in challenge Market we're now marching through it in 2023. it's not like this is the first time it's happened it's just that by and large it's the first time any given entrepreneur has experienced it and at the moment it's the first time a whole lot of investors have experienced it and so in those instances two things are true cash is King and revenue is the greatest thing on the planet Earth you know because there's nothing better than not needing to raise money and the best way to not need to raise money is make more than you spend so um so it's a very challenging time and you need to have a very clear picture of how are you going to get to cash positive and how is each dollar gonna turn into more dollars and uh and I think that the Venture Community is very focused on that in ways that we have not been at all for the last more than a decade so it's really off-putting because two years ago if you said I'm really focused on profitability the investor would say why like that's not in any way interesting all you should be focused on is how you grow faster.
Brendan: Yeah like rationalization is a curse word.
David: Yeah no exactly I don't want to hear that I just want you to grow grow go go go you know that's not true anymore and it also used to be that oh I have X amount of money in the bank but I can always raise new more money that's not true at all anymore so that's the biggest challenge now here's the good news the good news is and I invest in very early stage companies right I fund companies when they're 10 people or 12 people they're early they're they're demonstrating product Market fit they're selling their first stuff and so you've got nowhere to go but up right it's not a market problem it's can you convince someone to do this thing problem and that in a lot of ways is better in a market like this because there's just not a lot of competition it's not like there are a million people trying everything it's not a lot of noise the the people who are doing it are really focused because you have to really mean it to build a company in this environment it's not fun it's hard and it's but the companies are you know I think all of my great companies have come out of tough times like this when I funded Splunk it was three guys with a really interesting idea and I didn't say like oh this is a terrible time to raise money and you'll never raise it I said wow if you could build a search engine at the time for log files now for machine data if you could build a search engine for machine data that'd be amazing and the conversation could you do it you know and then they said yeah yeah we could do it took a long time to build it and then it was like okay can you sell it but by the time we were really selling and getting out there the market had come around right and our big challenge was to get public before Facebook that was our goal like just before Facebook sucks every dollar out of the market let's get Splunk public and that went fantastically and and I'd say that each of my companies has had this has ridden through these challenging markets and those markets have made them stronger and better um so it is hard and it's and and there will be companies that go out of business mine included um but in the long run it's just a bump you know it's not it's not your whole story.
Brendan: Yeah I think it's easy to get um kind of tunnel vision narrow Focus but to your point nothing's new Under the Sun uh and these things happen um and let's dive in a little bit into what you were just describing though because you know cash is King yes um and that's really impacting a lot of these well mature and young companies candidly I mean mature you're seeing layoffs every day there seems to be a headline um and some of these early stage companies just don't have the runway to survive but when you're looking at that early stage like series a it to your point of using a splunk I like the Splunk example uh at that point it is more of an idea you're making a bet on an idea or the entrepreneur or the person versus hey we have this growth engine and we're going after I mean sometimes that's true but it seems like more often than not it's more of a thesis as the people um and so how do you like as you're starting to kind of I don't know if you're making adjustments but how is that changing the way you think through that uh hey I'm gonna write a check or I'm not for that type of company?
David: Yeah I mean Splunk wasn't bit of an outlier for me I typically do series a Investments so uh Fastly is a good example Fastly had gone out they'd raised some seed money they said we're gonna build this you know content distribution engine that will be differentiated and by the time they came to me they had a dozen great customers including Twitter which was spending a lot of money and so I was able to then call the customers and say why are you using this thing like why would you know it's very risky to work with a with a startup in particular on your content why would you use this and they would tell me the stories of how differentiated it was why it was that they couldn't use the optimize of this world to do the things they wanted to do they really only could use fastly and after a set of those conversations then the question I have to ask is are there more of these right is Twitter somehow unique as you know as Wikia unique or is it in fact uh a perfect example of what's happening in the rest of the market and I'm gonna invest money and they're going to then build a sales team and build a marketing engine and find a lot more twitters and you know so I have some signal and it just depends when I invested in bill.com they had some customers but it wasn't growing quickly and so that was more a bet on I think this is an important area I think that over time small businesses will understand that it would be much better to pay your bills electronically than trying to write checks right so in each instance you kind of look at where they are and you look at the product and you look at how it's different and you look at how they're selling it and you say huh I bet you if I were to give you 10 million dollars seven million dollars 12 million dollars whatever it is that you could then go demonstrate that this is replicable that you can go from a dozen customers to hundreds of customers that as a consumer business you can go from thousands and tens and thousands tens of thousands of users to millions of users right that's my bet and so you have some signal but then you have to extrapolate from there and that's kind of the fun part and you know most of the time it turns out it doesn't work out that's just how Venture is certainly series a venture but some of the time you know you put money in it turns out that there are lots of customers and they're very happy to pay and you build big business.
Brendan: Yes if I heard you right it's you gotta believe in the idea um you have to see not just you have to see the opportunity in the market and it sounds like there's an element of hey I'm going to do some interviewing and understand like why customer the customers that I do have what's the value um and then is there is there a path to that's right a scale it's against too early but like is there a path to replicate um that use case with the the with whatever product or differentiation they have 100?
David: I mean if I were a later stage investor I never have this metric but to my mind there's basically a single metric that will answer is this does this product have product Market fit and that is net revenue retention right at the end of the day it may not solve everything but if you have more than 100 net revenue retention then you have a product that is compelling to a company they are spending more in year two than they spent in year one yeah yeah the whole story yeah the Audi Rank and uh the CEO of HubSpot I mean that's like that is the metric uh and it's kind of now we're seeing that over and over especially to your point about cash and revenue um that is the North Star metric at this point in time and I mean think about it right you get to day one of the year and let's say you're a little-ish company and you've you've made 10 million dollars last year and you need and you want to grow even 100 I'm gonna grow 100 if you have no net revenue retention above 100 then you have to grow 10 million dollars the next year in brand new business if you have a hundred and fifty percent net revenue retention you've delivered half of the growth you need for that next year you've got 15 million bucks in the bank now you have to deliver that next five and the following year you're at 30 before you've even opened the door yeah that's amazing that's such a gift.
Brendan: What do you think, this is probably too broad a question, but if you're gonna think through hey yeah hey I agree net revenue retention is the North Star metric uh what are outside of like the product I think well those are things people can control but from a sales and marketing perspective like how does that CMO how does that VP of sales how do they make that the rally cry for the organization or for their Department rather well here's why it is the North Star metric but here's how you can completely screw it up.
Brendan: Right which is it's of course true that net revenue retention is unbelievably valuable and for sure you can wildly influence your sales team to to impact net revenue retention by compensating them for dollars grown yeah and if you're a if you're a salesperson it is way easier most of the time to get more dollars out of folks who already believe in your product than it is to get new people to believe in your product so sales people love that great you want to compensate me for getting this hundred thousand dollar customer to be 150 000 customer I'll do that every day of the week the problem is that if you do not grow new customers while you're growing your net old customers you're you'll run out it's not possible right at some point you can't increase 50 year over year on customers that have been doing that for four years five years six years so you need to incent your sales people to bring in new customers as much as you need some system to make sure that you have happy customers are spending more money and I think that what I what I have seen more often than not is when you when when you over index towards net revenue retention it ends up messing up the equation because you don't have enough top of funnel and you don't have enough net new so even though I think net revenue retention is the metric uh I think that the focus of any sales team has to be new customers and networking retention is product driven growth right it has to be that product is so amazing that you use it more right people who downloaded Splunk and were using it as for as sysops to figure out what was going on when they're when their systems were going down used it more because suddenly someone was doing compliance said how do you know that information say oh I have this thing called Splunk well can I use it yeah sure use it it wasn't I'm gonna call up and say Hey you know compliance people your sysops people are using Splunk because if you said to a compliance person check out what your sysops people are using they'd say look I don't care what they're using now but when you discovered that they had this data's magic data that you didn't have you were like how'd you get that you know yeah well every great company has a little bit of that where you know you use it and then you realize oh I should use this some more but what you really need is a lot more of those customers having that realization not driving the customers you have to spend more money.
Brendan: Yeah I think it makes sense say hey that's to your point the north side metric like we're all and rallied around this is what we need to be accomplishing but at the same time don't like depending on what you are in the department there are things that you still need to be measured on and be held accountable for because then you will get completely distracted I mean one of the things that we've looked at is do we create like hey right sales team you do have a responsibility for retention um because if you're closing the wrong type of deals just to get to your number we are going to see churn so like there is an element or you need to be held accountable for that but to your point your can be heavily skewed towards bookings because we need to continue to generate that Revenue to allow us to have on the back end that increase.
David: And and by the way cost of acquisition is also hugely important right it turns out if you could get amazing net revenue retention but if a customer doesn't pay back for three years okay great you hold on to them for 10 years they're profitable customers but you know how much money you need to to be able to get that flywheel going and right now that's not a thing that's happening so you know number two metric is time to pay back right if you have if you have a day one payback and a 200 net revenue retention you're the greatest business
Brendan: Anybody that has that profile reach out to David
David: Email me at Hornik@lobby.vc
Brendan: Uh well David thanks on board I really enjoyed the conversation um kind of our final lap question too I think you kind of just alluded to it but if if we do have companies and our individuals that want to engage with you or with Lobby um what is the next step they can take?
David: Yeah feel free to email me I have uh I have made the foolish but but I believe correct decision that I answer whatever email I get and if you have something you're wrestling through or you have an amazing company you want to help me take a look at just email me.
Brendan: Well David thanks for your insights we really do appreciate your contribution and uh have a great weekend.
David: Thanks so much, loved it.