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VC10X - VENTURE CAPITAL PODCAST

Venture Capitalists (VCs) & Angel Investors share their investing thesis, screening process, value-add, exits, and more. Hosted by Prashant Choubey (@ChoubeySahab)

  • venture-capital
  • early-stage-investing
  • united-states

Investing in the growing Austin Startup Ecosystem w/ Morgan Flager, Managing Partner at Silverton partners

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Morgan has over 25 years of experience as a venture investor and technology executive. He joined Silverton in 2006 and has sponsored 24 investments and realized 11 acquisitions and two IPO’s. He currently sits on the boards of multiple portfolio companies. Prior to Silverton, Morgan worked with FTV Capital in San Francisco, where he focused on growth investments in software and financial technology. Morgan started his career at Ingrian Networks (acquired by SafeNet) and Kintana (acquired by Mercury Interactive Corp.).

We talk about:

  1. Morgan’s story and how he started investing?
  2. Early Days at Silverton Partners
  3. State of Venture Capital 20 Years Back
  4. What are you looking for in early stage companies?
  5. What does early Product Market Fit look like?
  6. How do you conduct due diligence?
  7. Responsibilities as a board member
  8. Startup Ecosystem in Austin, Texas
  9. What needs to change in the VC ecosystem?
  10. Interesting sectors for Silverton Partners
  11. Rapid Fire Round

Morgan’s story and how he started investing?

I was born in Santa Cruz, California, and definitely didn't grow up with the ambition to be a venture capitalist or get into technology. Got lucky enough to go to Stanford for undergrad and just being there. I was there in the late 90s, which is obviously the tech run up and it was hard not to get caught up in that. Being right in the heart of Silicon Valley.

So immediately got interested in that. Actually started a company while I was at school that we ended up selling to HP and then joined another group of Stanford folks who started another company called Kintana that also had a successful outcome. So started out being an entrepreneur. Loved it. And then one of my investors actually in that third company that I was involved with called Ingrian Networks, suggested, have you ever thought of getting into VC? And I hadn't, but going to Stanford, I knew some folks that were in VC and I knew some other folks I can network into and so I went through that process. Pretty much everybody told me, hey, it's great, if you get the opportunity to do it, you should definitely do it.

This was 2004. So back then VC looked a little different, like fund sizes were smaller, check sizes were smaller, but it was definitely something that was going on in the Valley. Not as much elsewhere as it is now, but still going on elsewhere as well. So I got that invitation and I felt lucky to have it and just ended up deciding to cross over and try my hand at investing. And I was like, hey, I'll do this for a couple of years and if I like it, I'll keep going, and if not, I'll go back to being an entrepreneur. I loved it and still going strong with it 25 years in.

Early Days at Silverton Partners

The early days were primarily myself and Bill Wood, and I can't take credit for raising the first fund because Bill basically did most of that. He had started Awesome Ventures back in ‘84. So at that point I had three years of investing track record, which really for the most part isn't enough to raise capital, certainly not from the folks that we raised it from initially, which were kind of, I would say kind of the best of the best institutional investors.

So part of the attraction for me leaving San Francisco or California to come down to Austin was the fact that Bill had already started that process and it looked like that was going to be successful and that was kind of hitching on, quite frankly, to a lot of the work that he already done. So we raised the fund shortly after I joined and the thesis for us really was early-stage investing. So seed Series A and predominantly seed and then focusing on Central Texas. Like really being close to the entrepreneurs. Building a relationship with them. Being able to help more with recruiting and some other things just because certainly at that time people were hiring mainly in the area that the firm was headquartered in.

Having relationships in that area just made it easier for us to bring in the right people. So, yeah, we just kind of got started and have been very lucky over the past, I guess it's been 17 or 18 years now to have some of the better outcomes in Texas to produce really strong returns for our investors and kind of been able to keep it going in a productive way since then. 

State of Venture Capital 20 Years Back

I'd say in the very early days, like 2006 through 2008, the rounds were a little bit bigger. It did take more effort for software startups to get off the ground. There wasn't as much open source, and the development languages and frameworks were kind of a bit more cumbersome than they are now. And so the companies just needed more capital to make progress and get to the milestones for subsequent funding.

I'd say we almost pioneered and not that I want to take credit for it, but we're certainly on the forefront of kind of more of a lean startup methodology where we were putting in less money, having more of an MVP like product approach, and then continuing on with funding as those milestones were achieved and trying to get companies to market with much less capital.

And I think what that allowed us to do was a couple of things. One, it allowed us to get involved earlier. So a lot of the companies that we're investing in still today, but certainly back then, we're pre product or pre revenue. And a lot of the traditional venture firms, they wanted to see something that kind of view was like, it's angels and other folks that are going to fund it and get it to a revenue stage and then we're going to kind of take it from there. We didn't really see it that way.

So we were at that point writing sometimes as low as 250K checks or 500K checks, even though we had a reasonable size fund to kind of get those projects off the ground, partly because the valuations were attractive to that level. But more than anything else in Central Texas at that point, there wasn't really a huge angel community. Soit was like if we didn't do it, it probably wasn't going to happen.

And we wanted to see those stories advanced and see those entrepreneurs have a shot and so we kind of stepped in and did it. And the fact that we were able to do it low dollars meant that we didn't have to put a ton of cash capital at risk initially. But then we could later as the company succeeded and we got lucky or good or whatever you want to call it. And most of them succeeded and we ended up kind of following on a bunch of those investments and proving out those stories. But we were at that point one of the few firms that was institutional that was writing really early small amounts of capital to kind of help get these things going. 

What are you looking for in early stage companies?

So I would say probably what we do is pre revenue. I mean, they may have some like a 25K pilot or a 50K pilot or something like that, but I kind of really put that in the bucket of pre revenue and then most of what we do that early product market fit. So kind of in revenue, that's kind of the bulk of what we do. And then occasionally we'll find projects where the entrepreneurs bootstrap them themselves or raise a small amount of April money but got material into business and they might have a couple of million dollars or so in revenue and we're kind of leaving the first institutional round. And all those are really a fit for our strategy.

These days we're writing checks from a million bucks up to about ten in that initial financing and then we can go up to 20 or so over the life of a company. I'd say on average we probably are more like eight to ten over the life of the company, but we can certainly go a lot higher if we want to. 

What does early Product Market Fit look like?

We're growth investors, so in pretty much all cases, the numbers are growing. The things we're looking for first and foremost is team and we look for a few things with the founder. We're hopeful that they have domain expertise. It's not always required, but having that is important. Operating in a smaller company and kind of having seen that wheel turn over a few times is also important. More than anything else, though, it's the vision and passion that kind of gets us excited.

And the vision is one thing, but being able to have a bit of charisma so that they can get others to kind of follow in their footsteps and leave that company is something that not everyone has. Like, some people have a great idea, they just can't get others to follow them. And that's kind of like, in some cases a failure mode. So that's something we look for.

And then I'd say self awareness is also something that's super important to us and I think it's mainly around as a leader, you're never going to be good at or the best at everything, right? And so you kind of need to know what you're great at, you need to know where you have kind of shortcomings. And admitting that doesn't mean that we're just going to be terrible at that as a company or this is an area where I need help, like I need to hire somebody or I need to solicit advice or expertise.

And we just find that folks that they're not aware of where they need help ends up becoming a failure mode because they don't know that whatever, they're not great at sales or they're not great at engineering, so they don't address those requirements. And if you don't address it, then it's a problem. If you're aware of it, then you can fix it and go from there. So that's kind of a part of our process as well.

And we've been lucky enough to work with a great set of founders that maybe weren't the best of everything, but were pretty darn good and knew what they needed to change or to augment to be successful. And we've been helpful to them hopefully in that process of bringing the right folks in to compliment them. 

How do you conduct due diligence?

I break it into two buckets and it's also different by stage. We're investing pretty early, so we do a ton of due diligence on the team itself because if it's a pre revenue or product company, there's not a lot to look at on the business side other than the team and the market and validating some of the thesis around that. So we certainly do that. And diligence has really broken up into like pre-term sheet. We're still trying to figure this out and then kind of post term sheet, more confirmatory diligence on the confirmatory side, it's really just making sure that things are as advertised. The company was incorporated right. You don't have any litigation issues, that kind of thing.

We do that because you have to be diligent and you have to kind of check the boxes. But what's really important is kind of the front end. And so for us, it's like references on the team to the extent we can get smart on the market through talking to customers, talking to analysts, doing our own research, bringing in experts, we spend a lot of time there. If they do have customers, we do spend a bunch of time not only talking to the folks they give us, but networking into other folks that kind of smell and look like those customers and getting their perspective to kind of get a feel for the value prop and that sort of thing. Those are the main areas.

We actually look at the business model and forecast as well. But obviously for early stage companies, there are a lot of assumptions there and so it's more talking to the team, understanding the assumptions, understanding where they're coming from there and having a point of view on whether we agree or don't agree with those assumptions. 

Responsibilities as a board member

Our choice is typically to want a board seat. It's not something that we have in 100% of the cases, but certainly the vast majority of cases we do. We like to lead the financing. And a lot of it is we think we can be helpful and we want to be involved at that level. We're not passive investors. And in terms of responsibilities, the primary one, I think people can kind of get confused sometimes as to what the role of a board member is. But I think it's pretty simple. It's basically to help make the company successful, full stop.

People think, oh, we're here to protect our interests as investors. Our job is to keep the CEO in line or figure all that stuff out. Not really. It's really about making the company successful. And for us, coming into the stage, we're coming in, our interests are pretty aligned with the founder. We're only going to win if the company ultimately has a successful outcome and that sort of thing. So I think that's pretty simple in terms of how we specifically do that. I think the biggest advantage that I or some other venture person hopefully has is we've seen a lot of gamefilm. I've been part of like 20 plus exits, 100 plus financing, so I've just seen that a lot. And what comes with that is like making a ton of mistakes.

And so the biggest value that I could add to a board is like helping you not make mistakes that I probably already made or I've seen someone make. And so that could come in the form of recruiting, hiring the right person, knowing when to hire the person. It could be a business model error where it's like, hey, I've seen this play out at scale and it doesn't work. There's knowledge around how to scale a business and when to hit the gas. And again, a lot of the times we've hit the gas at the wrong time and it's broken. So we're just trying to help the company not make that mistake again.

And I think as a board member, if we can do that, if we can relay our knowledge in a way that's helpful, then we're doing our job and we're helping the company be successful. 

Startup Ecosystem in Austin, Texas

I think Austin has gotten a lot better for entrepreneurs. If I could summarize it in the simplest way possible, before Silverton got started, it was more or less like one kind of VC shop town. Like, Awesome Ventures was here. They had a dominant position in this market. If you didn't get funded by them, chances are you weren't getting funded. And that isn't a great environment for entrepreneurs because VCs make mistakes all the time, right? Like, if they pass on your business, the assumption might be, oh, well, it's not a good business. But the other quite likely outcome is like, they were just wrong. And if you only have one at bat, that sucks.

Somebody else could limit your business that might be wrong. So if you fast forward to today, we got started in 2006, so we provided another option to folks like Silverton Partners did. I think we did a good job of that. Awesome Venture is also doing a bunch of things. So they were doing later stage financing, they were doing buyout and growth equity. And so they weren't as focused on early stage as we were, which I think was helpful to those folks where we were meeting the capital needs of what they had.

As an early stage founder, if you startup today, you got Next Coast and Live Oak and ATX Feed, and then you have newer folks like HBC and folks that have moved to town. So lots more options for entrepreneurs to go to which I could have the perspective, oh, well, that's competition and that isn't great for Silverton. But I have the exact opposite approach. Silverton is going to win. If Austin has a very healthy ecosystem and entrepreneurs want to come here, and that means them wanting to come here as a function of, like, you can get funded, there's tons of talent, there's lots going on, and I think that this market has that now. So I'd say 95% of what's going on has been better, has made it better for entrepreneurs and a richer ecosystem for us. And I'm super bullish on the go forward for awesome as well.

What needs to change in the VC ecosystem?

Every seven or eight years, it feels like folks forget about sustainable growth and they just start funding growth at all costs and destroying valuation frameworks and destroying capital problems. And companies have these really, I would say unhealthy for the most part, cycles, where they just hire a ton of people and the underlying unit economics don't work.

Eventually that ends poorly and the whole system kind of has an issue which is kind of more or less what we're kind of going through now, and it creates a really tough period for entrepreneurs. And in that lead up to that, you're kind of training entrepreneurs in the wrong things, which is kind of like, hey, whatever I can do to grow revenue and raise the highest valuation and raise the most money, that's kind of what's rewarded. And then that whole thing needs to be reset. And that's a painful process.

So I'd rather want that folks didn't forget about sustainable growth every, whatever, six, eight years or whatever it happens to be, and kind of continue to focus on that and be a little bit more responsible for the capital that they're putting to work.

Interesting sectors for Silverton Partners

So historically, we've done a ton in B2B software. Like, broadly speaking, we still love that segment. I still think that's the majority of where we'll put capital to work might be 56% of where our capital goes, specifically within B2B software, which obviously, like a huge segment. We've done a ton in security, identity management, supply chain logistics, etc.

And beyond that, we've also funded and are big fans of, like, Marketplace businesses, whether those are like B to B, Marketplaces or B, two C. So we've done some crazy and interesting things there. We've funded a company called SquareFoot, which is now Storable, which is like hotels.com for self storage. So really love Marketplaces.

And then the newer area. And when I say newer, it's really something we've been spending time in for like, two or three years, but we're super excited about going forward. It's healthtech. In some cases this is a Marketplace, in some cases it's software. But it's just such a big industry. And in order for us to really move forward as a society, take cost out of that and provide better healthcare, we need to get better at that. And it's a big market, and that's starting to happen. And we'd love to be on the forefront of helping fund entrepreneurs that are affecting change there. And so that's another pretty active area for us. 

Rapid Fire Round

What are the sectors and regions you invest in?

So we're pretty much all across the US with a focus on Austin.

What stage you typically invest in?

Pre-seed/seed and occasionally series A, but predominantly pre-seed and seed.

What's the typical check size?

$1 to $10 million.

Where can founders pitch you?

My email is morgan@silvertonpartners.com, and then obviously, I have LinkedIn profile and receive stuff there. There is a way to just generically submit stuff on the Silverton website, but I do respond to direct emails and I just try to be as comprehensive in terms of metrics and presentations and stuff in there as possible. So I have a little bit more context for your business, but I do check that.

Where can our listeners follow you?

So I'm at @Mflager on Twitter have LinkedIn, and then for Silverton, which is part me and part everybody else, you can go to our website and sign up for the newsletter and that will kind of keep you abreast of things we're doing and some of the things that are going on within the portfolio.


Silverton website: https://www.silvertonpartners.com/

Follow Morgan on LinkedIn: https://www.linkedin.com/in/mflager/

Follow Morgan on Twitter: https://twitter.com/mflager

Hosted by Prashant Choubey- https://twitter.com/ChoubeySahab

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