Josh Stein

Partner at DFJ

THIS CHAT HAPPENED ON January 26, 2017

Discussion

Josh Stein@dfjjosh · DFJ
Hi, I’m Josh Stein. I’m a partner at DFJ, a VC firm that invests in extraordinary entrepreneurs who set out to change the world. I focus on enterprise and consumer software and services companies, and some of my current board responsibilities include Box, Chartbeat, LaunchDarkly, LendKey, Periscope Data, SugarCRM, and Talkdesk. I’m thrilled to be here, and look forward to your questions!
Jason M. Lemkin@jasonlk · SaaStr
What's the "bar" in SaaS today? How has the bar to get funded gone up since you wrote the first check into Box (if at all)?
Josh Stein@dfjjosh · DFJ
@jasonlk if we're talking about early stage funding, I think the bar has actually gone down considerably. With a credible team of 3-4 people, a reasonable idea and a basic MVP, I think it has never been easier to raise seed capital for a SaaS company due to the robust ecosystem of seed investors, whether you're talking about incubators like YC, Techstars & 500 Startups; or super-angel/micro-VC funds like SoftTechVC, Homebrew, Cowboy or the Saastr Fund (!!). And I think that also extends to then getting the business going and growing to ~$1M ARR. All the enabling platforms are so mature and easy to access. To launch a service you have AWS for compute/hosting, Twilio for communications, Stripe for payments, etc. Initial customers can usually be found pretty easily via @ProductHunt, Google and Facebook ads, any of the many marketing automation and lead generation platforms. Thanks in large part to your own efforts on Quora, even the knowledge needed to scale companies is easier to find than ever. All that said, I think the bar to raise later capital has gone up and the challenges of scaling to a larger ($100M+ ARR) company have become harder. 10-15 years ago, startups were competing with much slower, legacy vendors. Today, Salesforce, Google and Microsoft are all considerably more agile and even more entrenched their respective markets. It seems to me that there are less greenfield, horizontal opportunities available, at least until we see another major platform change (like on-prem to cloud or desktop to mobile). I would guess there are 100+ SaaS companies in the industry today that are $20-50M in revenues. I'd also guess <20% of them reach IPO scale and only another 30% end up as a good M&A. I think we may see a good number of companies get "stuck" in the middle stages, at least for a while.
Philip Kuklis@philipkuklis · Co-Founder, Hubble
Hi Josh, as a partner at DFJ, what would you say is the best way for founders to get a hold of you? And how important are warm introductions in your opinion?
Josh Stein@dfjjosh · DFJ
@philipkuklis the best intro is always going to be from another founder that we work with, especially one that has worked with you in some capacity in the past. If one of our founders/CEOs tells me "I worked with this person, they're amazing and they've got a great idea" that's a 100% going to meet. Connections through service providers like attorneys or other investors, especially your seed investors who have backed you with $$, are great. Failing all that, can just email me josh at dfj.com but it really isn't that hard to find a warmer connection with a bit of effort.
Sven van der Zee@svenvd_zee · Haven't found the next big thing yet
Is their a minimum age of founders you would invest in?
Josh Stein@dfjjosh · DFJ
@svenvd_zee I think it would be hard to invest in someone <18 yrs old for a variety of reasons but we've had great success backing founders in their early 20s and very late teens. Most of the biggest tech companies were actually founded when the founders were in their 20s. The variance is higher with a younger founder and I'd guess the "batting average" (defined as money-making investments/total investments) peaks with an early 30s founder but the slugging percentage (adjusting for the size of the outcome) is probably higher in the 20s, driven heavily by a small number of very large outcomes.
Ben Tossell@bentossell · Community Lead, Product Hunt
What are your top 5 tips for first time founders
Josh Stein@dfjjosh · DFJ
@bentossell 1) Surround yourself with advisors and mentors, and then use them liberally for advice. Few problems or challenges are "new" and talking to someone who has seen what did and didn't work before is invaluable. 2) Have a co-founder that you trust completely, be equal partners in economics but also be clear in decision making (two in a box for CEO doesn't work). Having someone in the struggle, locking arms together with you day to day is critical. 3) Find an experienced and committed investor to partner with. I think one negative consequence of less concentrated seed rounds has been that investors aren't as close to the company. Some of my best investments were Series A/Seeds where DFJ did the whole round and was the only outside BOD member for the first year (Box, SugarCRM, etc) 4) Pick a vision which inspires people beyond making money. Startups are *hard* and it helps if you, your employees and their family/friends care about what you're doing on a personal level. Elon Musk is the master of this - Tesla is about saving the world from fossil fuels, SpaceX is about going to Mars. That mission inspires people to put in their best, day after day, and also inspires investors. DFJ's motto: #thinkbig 5) Listen to everyone but after you've heard lots of input, trust your gut and don't be afraid to think different. It's the only way to upend and disrupt an industry. And why younger founders often do better - they don't know all the reasons why something can't be done.
Marius Chawa@mariuschawa
What are your top 3 things a one person non-technical founder should accomplish before seeking funding from you?
Josh Stein@dfjjosh · DFJ
@mariuschawa great question! The first thing would be to understand the spec of any investor you're approaching: DFJ's venture fund, where I spend most of my time, is looking to write $2-10M first checks (we make exceptions on both sides but that's the normal range). That usually translates to a company with at least a small team (5-6) people, a functioning product (even if beta) and some early customers or users. On a more personal level, I think it is usually a good idea to have worked at another startup prior to being a founder yourself. You learn so much, so quickly, in a startup - usually by making mistakes. Always great when a founder has had a chance to make those mistakes (and get the learnings) on another company's dime vs. doing things the first time at their own company. YMMV and many exceptions here though - some of the biggest companies were first time founders (Facebook, Box, Google) so certainly not a hard and fast rule.
Leigh Anne Miller@leighanne3000 · Director, Content Exerience at EdCast
Josh, I'm working on security a bit these days. How much up front work do you see in pitches with respect to data security? Do people discuss the issue or punt to a comment like they will partner with a company like Netskope?
Josh Stein@dfjjosh · DFJ
@leighanne3000 it doesn't come up all that much in pitches, I think we assume that companies will figure that part out and they also benefit to a large degree from the protections put in place by the platforms like AWS, Box and Twilio. But as I type this I find myself thinking "maybe we should be asking about that more" :)
Leigh Anne Miller@leighanne3000 · Director, Content Exerience at EdCast
@dfjjosh ha haa! Agreed! Will help you craft questions. Will loop in superwoman Jamie Barnett https://www.linkedin.com/in/jami....
Brennan McEachran@i_am_brennan · CEO, Co-founder
What's the fastest way to totally blow it in a meeting with you?
Josh Stein@dfjjosh · DFJ
@i_am_brennan the number one job of a founder is to inspire others to rally to their flag and join their mission. Both capital and labor have so many opportunities they can work on - why yours? The best founders can walk into a room, command your attention and make you walk you thinking "I HAVE to invest in her." If you can't do that in the first 10-15 minutes, that's an easy "no" no matter how good the idea looks on paper or how strong your background might be. If you can't communicate the vision in a compelling way, you're not going to succeed at a startup CEO. In which case, my advice would be to find a person that can to be your co-founder. Many of the best founder pairings have been this way actually - Jobs/Wozniak being the canonical example.
Aaryan Ramzan@aaryanramzan · Oomo 3D Immersive Earbuds
Hi, Josh. I have a portable movie theater surround sound system that you can carry in your pocket called Oomo. Anyway I can send you one to review? Not for any investment, just for a review to get the word out. I launch on Kickstarter in a week. Thank you.
Josh Stein@dfjjosh · DFJ
@aaryanramzan sure, although I'm not totally sure why you'd want to have a portable surround sound system? Is it a headset?
Aaryan Ramzan@aaryanramzan · Oomo 3D Immersive Earbuds
@dfjjosh - Yes Josh. Earbuds. You'll have the experience of being in a movie theater but my saying it and you experiencing it are two different things. How do I send them to you?
Aaryan Ramzan@aaryanramzan · Oomo 3D Immersive Earbuds
@dfjjosh - And thank you.
Josh Stein@dfjjosh · DFJ
@aaryanramzan cool, email me josh at dfj.com and we'll figure out the logistics.
Aaryan Ramzan@aaryanramzan · Oomo 3D Immersive Earbuds
@dfjjosh Thank you. Appreciate it.
Emily Hodgins@ems_hodge · Community and Marketing, Product Hunt
Hi Josh thanks for joining us today. What's your top piece of advice to a first time founder looking for initial investment?
Josh Stein@dfjjosh · DFJ
@ems_hodge thanks for having me! I'd encourage that founder to ask themselves "do i have conviction that i want to spend the next 10 years of my life working mono-manically on this business?" That may sound like a high bar but once you raise capital, you're putting your reputation on the line - both with the investors who are backing you but more importantly with the employees and customers who will join you. It's a big commitment and you shouldn't enter it lightly or if you're not consumed by the mission. I speak from a bit of personal experience here. Back in 1999, I started a company, brought in a couple co-founders, signed up some alpha users and went to talk to investors to raise a seed round. A SF-based VC (not DFJ) gave me a termsheet for $5M but as I slept on it that night I realized I wasn't fully committed to the vision, it wasn't my passion. I turned it down and told them why. They were surprised but (1) offered me a job and (2) told me I could apply the termsheet to any other idea. I took a couple months, came up with the idea for another company (ViaFone) and they co-led my Series A. Turning that first offer down was one of the best decisions I've made in my career, as I wasn't passionate enough about the first one to last through the ups and downs that would have followed.
Jose Garay@joselfgaray · Founder @ Jovid
Hi Josh! Question from an international entrepreneur (Spain): what would you rank as the best way to find early funds in the US angel/vc ecosystem? Accelerators like YC/500st?
Josh Stein@dfjjosh · DFJ
@joselfgaray I'm a big fan of YC, 500Startups and Techstars, especially for international entrepreneurs, as they not only provide you with initial capital but much more importantly with advice via mentors and a strong network of classmates, alumni and all of the funds that work with them on a regular basis. I wasn't clear from your question if you were thinking about staying in Spain or coming here to the US to start the business. Both can work and I think it depends quite a lot on where you think your customers will be. Many things are easier in the US, especially here in Silicon Valley, especially access to talent and capital - but the costs of doing business are also much higher. I've seen some companies effectively do a two-country strategy, most typically with engineering in the home country and sales/GTM here in the US. Tiago Paiva @ Talkdesk is a great example of this and would be a good person to ask for advice.
Jose Garay@joselfgaray · Founder @ Jovid
@dfjjosh Thanks a lot for the advice Josh! Sorry I didn't mention that, I was thinking of taking whole team to the US (right now 5 people). As for those accelerators and the metrics that they take into account (wether it's users or revenue), is it better to focus on our home market and show home metrics or would you advice to find some traction in the US market?
Josh Stein@dfjjosh · DFJ
@joselfgaray great, thanks for clarifying. I think the key thing is for the traction to be representative of and aligned with your longer term strategy. So if you're planning to continue to focus on customers in Spain, having customers in Spain is a proof point. But if you're planning for a US-focused business (or a global one), showing that you can sign customers in the US (or just beyond Spain) would be a great proof point. In all cases, investors will be looking for signs that valid the hypothesis of the business. I use a three stage model to think about SaaS companies myself, which corresponds roughly to the funding rounds: First Round: show you can build a product, not just custom code for a customer. Metric here is "dozens" of customers using your product for roughly the same use case, for roughly the same price Second Round: show you can scale an initial GTM org, build a funnel, close deals. Metric here is scaling to ~$1M+ ARR and having initial sales efficiency metrics. Third Round and beyond: here it is all about scaling your GTM. If you're over $10M ARR, you're looking for metrics to be staying consistent as you hit the gas on growth. if you can show investors, reliably, that you can put $XXM in the top of the machine and get $XXXM in ARR out the end, you'll have them lining out the door to give you money
Jose Garay@joselfgaray · Founder @ Jovid
@dfjjosh thanks again Josh. This is very valuable advice. We're not actually Saas (we're a jobs marketplace, so we're consumer on the candidates' side and B2B on recruiters') but I can see how your model would translate for our case. The trouble we're finding in nailing B2B early testers in the US is that we have no network there (that's why I also feel accelerators would be very valuable) and while finding "champions" in companies through Linkedin is working out OK here in Spain, nobody listens to us overseas. But I'm sure we'll find the way!
Tyler Lunceford@tylerdlunceford · Office of the CEO - Apttus
Josh - what are your top 3-5 evaluation points when screening an early stage (seed or series A) investment opportunity? Founder success, traction, market opp, potential for capital efficiency, etc...
Leigh Anne Miller@leighanne3000 · Director, Content Exerience at EdCast
@tylerdlunceford good question - lots of discussion on the "top 5" for investors... https://www.entrepreneur.com/art...
Josh Stein@dfjjosh · DFJ
@tylerdlunceford the normal debate in venture is whether you should be betting on people or markets (both clearly important but some investors think one or the other is the dominant driver). At DFJ, we lean towards backing people who inspire us with their vision and conviction and look to do that in markets that we think are large (or, if new, have the potential to be large) and where there is some trend or platform shift that will be a rising tide for the disruptor. In 2005-2010, for example, there was a clear shift from on-premise to SaaS/cloud that favored new vendors like Salesforce and SugarCRM over incumbents like Siebel. That was true not just in CRM but in really every application category. Today, we're seeing a similar effect with machine intelligence driving disruption across a range of industries. So I'd say: (1) compelling, visionary founder(s); (2) large TAM; (3) some strong story around a trend or shift for "why now"; (4) evidence of traction; (5) having attracted one or more experienced executives to the team (you'll need them to scale, shows you can get them).
Tyler Lunceford@tylerdlunceford · Office of the CEO - Apttus
@leighanne3000 good article but it's focused on what the entrepreneur should include in a pitch. I'm more interested in what Josh and team do on the back end for DD
Tyler Lunceford@tylerdlunceford · Office of the CEO - Apttus
@dfjjosh Point 5 of attracting experienced execs is interesting - is this core to Series B onward, or does this even play a factor in seed/series A rounds as well? Thanks for the comments Josh!
Josh Stein@dfjjosh · DFJ
@tylerdlunceford critical for the Series B but if you have at least 1 in the Series A that's a great positive sign.
Mary Devincenzi@mary_devincenzi · Public Relations
Hi Josh, what do you see as the biggest hurdles enterprise startups will face in 2017?
Josh Stein@dfjjosh · DFJ
@mary_devincenzi following up on the earlier answer to @jasonlk, I think it has never been easier to get to $1M or even $10M in ARR but I also think it may be getting harder to get to $100M+. Part of the reason for this is structural - a number of the larger incumbents have done a fantastic job keeping their cultures aggressive and hungry and they can bring huge resources to bear in competing for customers. But I think even more of it has to do with the fact that getting to $100M isn't just doing 10x of what got you to $10M. Nearly every company I've worked with hits some wall on their initial GTM model and needs to adapt and evolve to keep scaling - for example, replacing or supplementing an inbound-driven fast-close model with a more field oriented, outbound, longer sales cycle team to get the bigger $ accounts. Don't get me wrong: it's a GREAT time to start a SaaS company and there are any number of great opportunities out there. But it will be a long and hard journey and companies that want to go all the way will need to re-invent themselves internally several times along the way. Aaron Levie at Box is the single greatest example of this that I've seen - both in his personal evolution as a leader and customer champion but also in leading the org through multiple evolutions of the GTM model.
Jacqueline von Tesmar@jacqvon · Community, Product Hunt ✌️😻
What are the main things you look for in a founder when making an investment decision?
Josh Stein@dfjjosh · DFJ
@jacqvon intelligence, drive/hunger and an ability to communicate a compelling vision with clarity, such that you walk away feeling inspired.
Bryan Edelman@beedelma · Games Futurist, Crowd.Game Co-Founder
Happy Thursday, Josh! -- What is your stance on game-centric experiential marketing at live events? How do you believe this will factor into consumer behavior in the next 3-5 years? How have you and DFJ approached investments in the interactive game industry in general?
Josh Stein@dfjjosh · DFJ
@beedelma I'm not familiar with game-centric marketing, how do you mean? sounds interesting though
Bryan Edelman@beedelma · Games Futurist, Crowd.Game Co-Founder
@dfjjosh My bad, might've worded it weirdly. Using interactive video games as ways to engage audiences with brands.
Josh Stein@dfjjosh · DFJ
@beedelma ok I understand what you mean now. I think its an interesting idea. Not sure about live events but I do think we're going to see a lot of game-centric marketing in VR and AR (which could be at live events). Brands are really going to struggle as audience attention continues to fragment and become harder to find across more platforms. They're going to have to evolve or die.
Bryan Edelman@beedelma · Games Futurist, Crowd.Game Co-Founder
@dfjjosh Thanks, Josh. And historically, how has DFJ approached investments in the interactive entertainment industry?
Emily Hodgins@ems_hodge · Community and Marketing, Product Hunt
What's the most important thing for you when investing in a company - is it the founder, the team, the idea /product?
Josh Stein@dfjjosh · DFJ
@ems_hodge I'm a founder first investor myself but the magic happens when you have a driven, brilliant founder, who can attract a talented team, going after a market that is ripe for disruption due to some external trend (like onprem to cloud or desktop to mobile).