Jeff Clavier, Founder and Managing Partner of SoftTech VC, estimates that he’s heard about 10,000 pitches in his life. Ask him what makes the best ones stand out and he’ll tell you: data. Recently Jeff joined our CEO, Robert J. Moore, for a Q&A webinar, Raising Venture Capital with Data. It’s worth watching all 53 minutes of the recording, or you can take the shortcut and catch some of the highlights here.
Full Disclosure: SoftTech VC is an investor in RJMetrics.
Choosing Where to Invest
On an annual basis SoftTech VC hears several thousand pitches, closing only about 20 of them. One of the most surprising data points that Jeff shared speaks to the importance of a strong network: over 9 years and the 143 closed deals SoftTech VC has made, there are 0 that came without an introduction.
How Founders Should Look at Data
Obviously, data is fundamental to what VCs are doing. The challenge for both investors and founders is that in early-stage companies there can be very little data to look at. Jeff shared a few things investors are always looking for:
- Cohorts: cohorts reveal patterns and, even with minimal data, can show the viability of a product or service.
- Data Intelligence: more than reams of data, investors are looking for data-understanding. The founder has a vision, a product, a plan, and part of that plan should include how they will test what is working and not working. The founders need to demonstrate that they understand data principles and know how to use data to make informed decisions.
Cohort analysis is a way of of looking at how customer segments behave during the same periods of their lifecycle, and it continues to be the gold standard of metrics in the VC world. Aggregate numbers can be deceptive for early-stage companies. Jeff’s advice is to focus on making sure that you’re trending in the right direction. Can you attract and retain new users as well as your early adopters? Lump everyone together and you’ll make very different decisions than looking at how different groups (cohorts) are behaving.
When to Get Serious about Data
Even in the earliest stages of raising capital, it’s not too early to start looking at data. Jeff Clavier believes that founders should gather data before writing the first line of code. Every company needs to have a vision of how it will drive usage and this can be tested easily with simple tools like landing pages or surveys. These initial data sets will prove the ability to push people toward the product being built.
At seed stage, investors mostly want to see that founders are asking the right questions and building “data sensors” into the product that will help them find the answers. Then, at Series A, investors will be looking for some answers those questions.
The challenge for new companies is that acquisition is a blank slate. They lack any established campaigns. At the beginning founders simply need to try a bunch of different things – SEM, LinkedIn, Facebook – and start measuring the retention and customer lifetime value of those groups. This is not the time to put all your acquisition eggs in one basket.
Jeff warned that one of the problems early-stage companies will run into is that they “exhaust their buckets.” They’ll get their first 1,000 users one way, the next 10,000 another way, and then it will take a whole new technique to get to a million. This is normal, but founders should be prepared for how they will be testing and changing campaigns based on what their acquisition data is telling them.
Engagement metrics examine how people use a project or service. Engagement metrics are particularly important for companies that don’t have a revenue model.
Back in 2004 Jeff passed on LinkedIn, a fledgling company with no monetization plan. These days, Jeff is more comfortable with these types of companies that rely on the network effect. In these situations he’s looking for founders that are smart about their engagement metrics. His recommendation is that these founders should be aiming to assign a value to different actions – what’s a message worth? A sign-up? A tweet? A connection? A pin? Once you understand how these actions impact longer-term adoption you can begin assigning value to them and deciphering how they would work in a paid environment.
Retention and Churn
Churn has long been a favorite metric of subscription businesses and is now gaining popularity among a more diverse set of companies. Churn and retention metrics both work on the understanding that acquisition is difficult. Retention is always the goal, because once a customer churns you have either lost that revenue source or need to pay acquisition money to get them back.
In the time that Jeff has been in the VC world, he’s seen levels of data-savviness among founders improving. There was a time when most founders didn’t know what cohort analysis was, and today it’s considered standard procedure. The good news is that there are also tools out there that make it very easy to track critical metrics through every stage of a company’s growth. If you’re currently looking for investors or are interested in improving the data-capabilities of your startup, get in touch. We love helping companies make data-driven decisions.