"What Series A Investors Look For" - Matt Cohler, Benchmark, Roger Lee, Battery Ventures

We do marketplace investments. If you're looking for seed stage capital, I personally focus on marketplaces, consumer businesses, and pretty much anything that involves some level of social psychology. That's pretty broad. We're here to talk a little bit about investing in marketplaces, so I'll let these guys introduce themselves, and then we'll get started.

Those of you who have not, it's an amazing place. Everybody, my name is Roger Lee and I work at Battery Ventures. First, I want to thank Dan and everybody else that put this together. We've been talking internally about doing an event like this for a while, so really appreciate you guys doing all the work. This is a non-trivial amount of energy that goes into this, so thanks to all you guys for making this happen. Excited that this is the inaugural of what will hopefully be an annual get-together going forward. Battery Ventures is a stage-agnostic firm, which means we invest across the spectrum. We do seed investing, we also do Series A, which we're going to talk about today, but we'll also invest in companies at the later stages as well. We're very active in marketplaces.

So I just thought we'd start off with a pretty general level-setting question: when a company comes in to meet with you guys, you meet a new entrepreneur, how do you know that they're operating a marketplace versus a different type of network? Because there's a lot of things that are disguised as marketplaces, and also marketplaces that are disguised as other things.

Another thing: you can build a very powerful network effect in doing that, but not all these things are actually transactionalized. I think a lot of times you end up in a situation where you have a proxy for that where you aren't fully transactionalized. We can come back to that and talk about it more, but one of the things that can correlate with that, not always the case but sometimes, is something which is actually an aggregation service rather than a true marketplace where people are doing business with one another within the context of this environment. The opposite of those things is when you start to see that this feels like it's living and breathing and it's not being artificially propped up. Ultimately, the last thing I'll say is I think the real litmus test is if you're the place very early on. We were lucky to be the Series A investors at eBay at Benchmark long before I got there, but I've heard a lot of stories about this. Early on, they built their business on the back of this fish tackle collectibles vertical. There's this PEZ dispenser story, but that's urban legend; it's about the fish tackle collectibles. Early on, if you were nerding out on duck decoys, fish tackle collectibles, it pretty early and quickly became the place where you go to get that stuff. That was obvious and organic and not forced. That was something really interesting and alive. I think that same thing applies to a kind of space where two or more parties aggregate together to execute some transaction that would be either very hard or impossible in the offline world. We have a framework we use internally for our Series A investments, knowing that they're not fully mature and still experimenting and learning, but it's good to have a framework to assess where they fit in this landscape. First and foremost, we look at market size. Even if you're starting at fish tackle, if you apply this to a broader set of verticals, how big is this TAM? How big can this market be? Ideally, it's a category that, if this actually takes hold, there's 50 billion or more of total GMV spent in this category that the marketplace can somehow capture. Second, we look at fragmentation. We always bias towards marketplaces that are highly fragmented on both the supply and demand side.

The way Matt described, and we can spend more time describing exactly what growth efficiency is. Andre commented a little bit about it, but in our mind, it's a matter of how efficient is your growth and how scalable can it be. There are a bunch of variables that come into that around your acquisition costs, the durability of the buyers and the suppliers, how frequently they're engaging, what your contribution margins look like. We can go into those specific KPIs later if you want. We think a lot about shadow markets: is there the ability to create new use cases that just didn't exist before? Uber is a classic example. It started as a taxi service or black car service, but fundamentally changed transportation. People don't buy cars anymore; they don't need to. Finally, there are the network effects that come into play. There's always a wide range in network effects.

When we look at all those variables together as a framework, we try to come to an assessment for whether or not this is a good Series A investment for us. I'm happy to double-click on any specific one of those to give folks a clearer sense of the KPIs and how we map different companies against those criteria.

All right, let me double-click on one. You talked about this shadow market idea, which I think dovetails in a really interesting way with another thing to talk about, which is TAM. To use the Uber example, from really early on, we were also lucky enough to be the Series A at Uber at Benchmark. I remember we were talking about the company, and I'm sure everybody considered this question. There was, of course, this early days at Facebook, other than if you were as visionary an entrepreneur as Mark is, to come in and say, 'Oh yeah, the market for this is like every person on earth is going to use this thing.' When it's being used by kids at Ivy League colleges, give me a break. So we did our own analysis on that in terms of what could potentially be for something like Uber. I don't think any of us advocated that it could be all point-to-point private transportation, but I do remember we used proxies like the parking market. We said, 'Look at all the disposable effects that consumers put into parking. Maybe there's a substitute market here where it's not just taxis, but it's that money that has been driving your own car around.'

Yeah, at Floodgate, what we try to focus on, even at the seed stage, preparing for meeting you guys and getting Series A and beyond financing, is to basically try to hack value before you hack growth. Pumped-up numbers mean absolutely nothing. He's like, 'I don't know what story you have.' So at Floodgate, we have a nickname for Matt. I'm not sure if it's a common nickname, but the nickname is the Cohort Whisperer. To that end, how do you guys think about the raw quantitative assessment of a new company? How are you looking? Because you just mentioned the cohort of the most addicted users. How do you guys think about that assessment?