Homebrew’s first fund focuses on what we’re calling the “Bottom Up Economy.” The Bottom Up Economy thesis states that as technology becomes more affordable, flexible and accessible, many industries that have not benefitted from or been impacted by technology historically will finally do so Software is eating the world in many cases but also enabling the world in others. Accordingly, we spend a great deal of time getting to know entrepreneurs and companies building software solutions that disrupt industries or enable the existing industry players to compete more effectively. And we’ve already invested in companies serving several different areas, including legal services, mental health, logistics, communications, financial services and commercial construction. Given our focus on vertically oriented software, I wanted to share a little bit about the attributes we like to see in those startups.
Teams with a unique POV: As my partner, Hunter Walk, has written, we’re excited by teams that aredisrupting industries with love (and just enough greed :) ). Teams that have experience in the domain tend to have a strong POV about what’s broken and how to fix it. But often times the most unique insight can come from teams outside of their target industry who are approaching things with fresh eyes. So we prefer to work with teams that can demonstrate domain expertise without the stagnation of assuming status quo is just the “way things are done”. What’s critical is that the teams we invest in have an insight that many others either have not seen or don’t agree with.
Distribution focus: We tend not to invest in software companies that are 100% dependent on selling into theC-level via a direct salesforce. Instead, we prefer a bottom-up entry point via individuals or teams within the enterprise or small business. The startups that intrigue us have a well-articulated plan for how to get distribution of their software in the industry they are targeting, and most often that includes a strong likelihood for organic or viral growth. No matter how slick and easy-to-use your software is,if you build it they probably won’t come.
Long-term advantage: Nearly all software is replicable, so we look for companies that are likely to have long-term differentiation, ideally via customer or data network effects. Network effects mean that the value of the software grows as more people use it either because it allows them to interact with more people in the context of their work or it helps collect and aggregate data that informs and improves their work. The strongest network effects enable customers to benefit from product usage that occurs even outside of their companies (i.e. industry-wide).
Acute pain: VCs are notorious for categorizing things as an aspirin versus a vitamin or need-to-have versus nice-to-have. But there is a good reason for this. Unless software is helping addressing an acute pain or delivering value that can’t be ignored, it likely can’t attract the attention it needs to be used or purchased given the limited time of people and budgets of companies. We like to see software that is addressing what is likely to be one of the top 3 hair-on-fire issues. This kind of software has a better chance of drawing attention and dollars.
Widespread pain: In addition to the pain being acute, the pain needs to be felt by a lot of people. This is important because companies need to be able to reach “venture scale”, usage and revenue that allows for a company to be valued many times higher than the value at which a VC firm invests. For Homebrew, our goal is to invest in companies where we can see a path to returning the value of our entire fund ($35 million) from an investment in that company. Both the total dollars invested and the price of investment have an impact on that math, but it generally means that we need to believe that the company can eventually generate $100 million in annual revenue. That kind of scale requires a widespread feeling of acute pain.
Painless path to first dollar: It’s obviously easier to get someone to use something that is free than it is to get him or her to pay for something. So we like to see products that are likely to have a painless path to the first dollar payment. It becomes much easier to extract more economic value once the customer is convinced to pay for something because at that point she clearly sees some value in the product that is greater than what she is paying. This typically means that there is a single person who has three characteristics: 1) she feels the acute pain personally 2) she has the budget needed to buy (can just put it on her company credit card) and 3) she can pilot the product easily (self-service sign-up, no IT involvement).
While we don’t have hard and fast rules or a checklist approach to evaluating investments, we always think about the criteria above when looking at opportunities in vertical software. If you’re taking a vertically focused approach and have a story to tell that fits with our preferences and approach, don’t hesitate to get introduced to us or to reach out directly.